AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2002
REGISTRATION NO. 333-101188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
WH INTERMEDIATE HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
<Table>
CAYMAN ISLANDS 5122
(State or other jurisdiction of incorporation (Primary Standard Industrial
or Classification Code Number)
organization)
CAYMAN ISLANDS 98-0379050
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or
organization)
</Table>
P.O. BOX 309GT
UGLAND HOUSE, SOUTH CHURCH STREET
GRAND CAYMAN, CAYMAN ISLANDS
(310) 410-9600**
(Address, including ZIP code and telephone number, including area code of
registrant's principal executive offices)
---------------------
VICKI TUCHMAN
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
TEL: (310) 410-9600
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
---------------------
HERBALIFE INTERNATIONAL, INC.*
(Exact name of registrant as specified in its charter)
<Table>
NEVADA 5122
(State or other jurisdiction (Primary Standard Industrial
of organization) Classification Code Number)
NEVADA 22-2695420
(State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
</Table>
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
TEL: (310) 410-9600
(Address, including ZIP code, and telephone number, including area code of
registrant's principal executive offices)
---------------------
VICKI TUCHMAN
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
TEL: (310) 410-9600
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF CORRESPONDENCE TO:
<Table>
BRUCE J. RADER, ESQ. PHILIP L. COLBRAN, ESQ.
CHADBOURNE & PARKE LLP CHADBOURNE & PARKE LLP
30 ROCKEFELLER PLAZA 30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112 NEW YORK, NEW YORK 10112
TEL.: (212) 408-5100 TEL.: (212) 408-5100
</Table>
---------------------
*The co-registrants listed on the next page are also included in this Form
S-4 Registration Statement as additional registrants. The co-registrants
(including WH Intermediate Holdings Ltd.) are the direct and indirect
subsidiaries or holding companies of the registrant and are guarantors of the
Notes to be registered hereby.
**c/o Principal Financial Officer of Herbalife International, Inc.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: as soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED NOTE(1) PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
11 3/4% Series B Senior Subordinated Notes
due July 15, 2010.......................... $165,000,000 100% $165,000,000 $15,180
Guarantees of 11 3/4% Series B Senior
Subordinated Notes due July 15, 2010(2).... N/A N/A N/A N/A(3)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
(2) All subsidiary guarantors are direct or indirect wholly-owned subsidiaries
of Herbalife International, Inc.
(3) Pursuant to Rule 457(n) under the Securities Act, no separate fee is payable
with respect to the guarantees of the notes.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------
STATE OR OTHER JURISDICTION IRS EMPLOYER
OF INCORPORATION OR IDENTIFICATION
NAME ORGANIZATION NUMBER
- ---------------------------------------------------------------------------------------------------
Herbalife International Do Brasil Ltda. Brazil n/a
(also incorporated in Delaware) (52-1951822)
- ---------------------------------------------------------------------------------------------------
Herbalife (UK) Limited England n/a
- ---------------------------------------------------------------------------------------------------
Herbalife Europe Limited England n/a
- ---------------------------------------------------------------------------------------------------
Herbalife International Finland OY Finland n/a
- ---------------------------------------------------------------------------------------------------
Herbalife International of Israel (1990) Israel n/a
Ltd.
- ---------------------------------------------------------------------------------------------------
Herbalife of Japan K.K. Japan n/a
- ---------------------------------------------------------------------------------------------------
Herbalife Internacional de Mexico, S.A. de Mexico n/a
C.V.
- ---------------------------------------------------------------------------------------------------
Herbalife Products de Mexico, S.A. de C.V. Mexico n/a
- ---------------------------------------------------------------------------------------------------
Herbalife Sweden Aktiebolag Sweden n/a
- ---------------------------------------------------------------------------------------------------
Herbalife China, LLC Delaware 95-4732025
- ---------------------------------------------------------------------------------------------------
Herbalife International of America, Inc. California 95-3954565
- ---------------------------------------------------------------------------------------------------
Herbalife International Communications, Inc. California 95-4520868
- ---------------------------------------------------------------------------------------------------
Herbalife International Distribution, Inc. California 95-4475193
- ---------------------------------------------------------------------------------------------------
Herbalife International of Europe, Inc. California 95-4459069
- ---------------------------------------------------------------------------------------------------
Herbalife Taiwan, Inc. California 95-4534645
- ---------------------------------------------------------------------------------------------------
Herbalife International (Thailand) Ltd. California 95-4594371
- ---------------------------------------------------------------------------------------------------
WH Luxembourg CM S.a.R.L. Luxembourg n/a
- ---------------------------------------------------------------------------------------------------
WH Luxembourg Intermediate Holdings S.a.R.L. Luxembourg n/a
- ---------------------------------------------------------------------------------------------------
WH Luxembourg Holdings S.a.R.L. Luxembourg 98-0379866
- ---------------------------------------------------------------------------------------------------
</Table>
The address of the agent for service for each of the additional registrants
is c/o Herbalife International, Inc., 1800 Century Park East, Los Angeles,
California 90067, telephone (310) 410-9600. The primary standard industrial
classification number for each of the additional registrants is 5122.
PROSPECTUS
$165,000,000
HERBALIFE INTERNATIONAL, INC.
Offer to Exchange All Outstanding Unregistered 11 3/4% Series A Senior
Subordinated
Notes due 2010 for 11 3/4% Series B Senior Subordinated Notes due 2010
which have been registered under the Securities Act of 1933
---------------------
We are offering to exchange all of our outstanding unregistered 11 3/4%
Series A Senior Subordinated Notes due 2010 for our registered 11 3/4% Series B
Senior Subordinated Notes due 2010. In this prospectus, we will call the
original notes the Series A Notes and the registered notes the Series B Notes.
The Series A Notes were issued on June 27, 2002. The terms of the Series B Notes
are substantially identical to the terms of the Series A Notes, except that we
have registered the Series B Notes with the Securities and Exchange Commission,
which we will refer to as the SEC. Because we have registered the Series B
Notes, the Series B Notes will not be subject to transfer restrictions and will
not be entitled to registration rights. The Series A Notes and Series B Notes
are collectively referred to in this prospectus as the Notes.
THE SERIES B NOTES
- The Series B Notes will mature on July 15, 2010.
- We will pay interest on the Series B Notes in cash semiannually in
arrears on January 15 and July 15 of each year starting on January 15,
2003.
- We may redeem any or all of the Series B Notes at any time on or after
July 15, 2006 at a redemption price equal to 105.875% of the principal
amount of the Series B Notes declining ratably to par, plus accrued and
unpaid interest. In addition, prior to July 15, 2005, we may redeem up to
35% of the Series B Notes with the net proceeds of any qualified equity
offering at a redemption price equal to 111.75% of the principal amount
plus accrued and unpaid interest, if any.
- The Series B Notes are general unsecured senior subordinated obligations
and will be subordinated to all of our senior debt.
- The Series B Notes will not be listed on any national securities
exchange.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 22 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND
WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
The date of this prospectus is December 20, 2002.
TABLE OF CONTENTS
<Table>
Prospectus Summary.......................................... 1
Summary Unaudited Pro Forma and Historical Consolidated
Financial Data............................................ 19
Risk Factors................................................ 22
The Acquisition............................................. 31
Use of Proceeds............................................. 33
Capitalization.............................................. 34
Selected Consolidated Historical Financial Data............. 35
Unaudited Pro Forma Condensed Consolidated Statements of
Operations................................................ 38
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 46
Business.................................................... 56
Management.................................................. 73
Principal Shareholders...................................... 89
Certain Relationships and Related Transactions.............. 91
The Exchange Offer.......................................... 96
Description of Senior Credit Facilities..................... 104
Description of Notes........................................ 106
Form and Transfer of the Notes.............................. 150
United States Federal Income Tax Consequences............... 155
ERISA Considerations........................................ 158
Plan of Distribution........................................ 161
Validity of the Securities.................................. 162
Experts..................................................... 162
Where You Can Find More Information......................... 162
Index to Consolidated Financial Statements.................. F-1
Independent Auditors' Report................................ F-2
</Table>
---------------------
You may not transfer or resell the Series B Notes except as permitted under
the Securities Act and applicable state securities laws.
You should rely only on the information contained in this document or any
supplement. We have not authorized anyone to provide you with any information
that is different. If you receive any unauthorized information, you must not
rely on it. You should disregard anything we said in an earlier document that is
inconsistent with what is in our prospectus.
You should not assume that the information in this prospectus or any
supplement or any of the information incorporated by reference in this
prospectus or any supplement is current as of any date other than the date on
the front page of this prospectus.
This document is not an offer to sell nor is it seeking an offer to buy
these securities in any state or jurisdiction where the offer or sale is not
permitted.
---------------------
ADDITIONAL INFORMATION
For more information on Herbalife and the availability of other documents
concerning Herbalife that have been filed with the SEC, see "Where You Can Find
More Information" starting on page 162.
i
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact are "forward-looking statements" for purposes of federal and
state securities laws, including any projections of earnings, revenue or other
financial items; any statements of the plans, strategies and objectives of
management for future operation; any statements concerning proposed new services
or developments; any statements regarding future economic conditions or
performance; any statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements may include the
words "may," "will," "estimate," "intend," "continue," "believe," "expect" or
"anticipate" and other similar words.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to inherent risks and
uncertainties, such as those disclosed in this prospectus. Important factors
that could cause our actual results, performance and achievements, or industry
results to differ materially from estimates or projections contained in
forward-looking statements include, among others, the following:
- our relationships with our distributors;
- regulatory matters governing our products and network marketing system;
- adverse publicity associated with our products or network marketing
organization;
- product liability claims;
- our reliance on outside manufacturers;
- risks associated with operating internationally, including foreign
exchange risks;
- product concentration;
- dependence on increased penetration of existing markets;
- the competitive nature of our business;
- our substantial indebtedness; and
- our ability to generate sufficient cash.
Additional factors that could cause actual results to differ materially
from the forward-looking statements are set forth in this prospectus, including
under the headings, "Prospectus Summary," "The Acquisition," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and in our "Summary Unaudited Pro Forma and Historical
Consolidated Financial Data" and the related notes. All subsequent written and
oral forward-looking statements attributable to us, or persons acting on our
behalf, are expressly qualified in their entirety by the cautionary statements.
We do not intend, and undertake no obligation, to update any forward-looking
statement.
MARKET DATA
Market data and other statistical information used throughout this
prospectus are based on independent industry publications, government
publications, reports by market research firms or other published independent
sources and on our good faith estimates, which are derived from our review of
internal surveys and independent sources. Although we believe that these sources
are reliable, we have not independently verified the information and cannot
guarantee its accuracy or completeness.
ii
PROSPECTUS SUMMARY
In this prospectus, unless otherwise noted, the words "Company,"
"Herbalife," "we," "our," "ours" and "us" refer to Herbalife International, Inc.
("Herbalife") and its subsidiaries for periods through July 31, 2002 and to WH
Intermediate Holdings Ltd. ("WH Intermediate Holdings") and its subsidiaries for
periods subsequent to July 31, 2002. In addition, "Predecessor" refers to
Herbalife and its subsidiaries for periods through July 31, 2002 and "Successor"
refers to WH Intermediate Holdings and its subsidiaries for periods subsequent
to July 31, 2002. The following summary contains basic information about us and
the exchange offer. It does not contain all of the information that is important
to you. For a more complete understanding of our business and financial status
and the Series B Notes that we are offering, you should read carefully this
entire prospectus and other documents that we will refer you to. For a
discussion of factors to be considered before participating in this exchange
offer, see "Risk Factors." For the definitions of some of the terms used
throughout this prospectus, see "Description of Notes."
THE EXCHANGE OFFER
In contemplation of the merger described below under "-- Recent
Developments," on June 27, 2002, WH Acquisition Corp. ("WH Acquisition")
completed a private offering of $165,000,000 of the Series A Notes. In
connection with that offering, WH Acquisition entered into a registration rights
agreement with the initial purchaser of the Series A Notes in which it agreed,
among other things, to deliver this prospectus and to complete this exchange
offer within 210 days of the consummation of the acquisition of the Company by
WH Holdings (Cayman Islands) Ltd. ("WH Holdings"). The obligations of WH
Acquisition under the Series A Notes and the registration rights agreement were
assumed by Herbalife upon the consummation of the merger. You are entitled to
exchange in this exchange offer Series A Notes that you hold for Series B Notes
with substantially identical terms. You should read the discussion under the
headings "Summary of the Terms of the Series B Notes" beginning on page 17 and
"Description of Notes" beginning on page 106 for further information regarding
the Series B Notes.
- Subject to customary conditions, which we may waive, the exchange offer
is not conditioned upon a minimum aggregate principal amount of Series A
Notes being tendered.
- Our offer to exchange Series A Notes for Series B Notes will be open
until 5:00 p.m., New York City time, on January 24, 2003, unless we
extend the expiration date.
- You should also carefully review the procedures for tendering the Series
A Notes beginning on page 99 of this prospectus.
- You may withdraw your tenders of Series A Notes at any time prior to the
expiration of the exchange offer.
- If you fail to tender your Series A Notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- The exchange of Series A Notes for Series B Notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
We believe that the Series B Notes that will be issued in this exchange
offer may be resold by you without compliance with the registration and
prospectus delivery provisions of the Securities Act, if you can make the
representations in the fifth paragraph under "The Exchange Offer -- Exchange
Terms" on page 96 below. We cannot guarantee that the SEC would make a similar
decision about this exchange offer. If our belief is wrong, or if you cannot
truthfully make the representations mentioned above, and you transfer any Series
B Note issued to you in the exchange offer without meeting the registration and
prospectus delivery requirements of the Securities Act, or without an exemption
from such requirements, you could incur liability under the Securities Act. We
are not indemnifying you for any such liability. You should read the discussion
under the headings "Summary of the Terms of the Exchange Offer" beginning on
page 14 and "The Exchange Offer" beginning on page 96 for further information
regarding this exchange offer and resale of the Series B Notes.
1
RECENT DEVELOPMENTS
On July 31, 2002, we were acquired by investment funds managed by Whitney &
Co., LLC ("Whitney") and Golden Gate Private Equity, Inc. ("Golden Gate,"
together with Whitney, the "equity sponsors"), in conjunction with selected
members of our distributor organization and senior management, in accordance
with the terms of a merger agreement, entered into on April 10, 2002. Pursuant
to the merger agreement, each stockholder of Herbalife International, Inc.
received $19.50 in cash for each share of common stock owned by such
stockholder. The merger was consummated on July 31, 2002. As a result of the
merger, Herbalife International, Inc.'s common stock was delisted from the
NASDAQ National Market and we are now privately owned.
In connection with the merger, we and our affiliates consummated certain
related financing transactions, including the issuance by WH Acquisition on June
27, 2002 of $165.0 million of the Series A Notes, the issuance by WH Holdings on
July 31, 2002 of $38.0 million of senior notes and the entering into by
Herbalife on July 31, 2002 of senior credit facilities in the amount of $205.0
million. See "-- The Acquisition and Related Financing Transactions."
Selected members of our distributor organization and senior management have
purchased shares of the 12% Series A Cumulative Convertible Preferred Shares of
WH Holdings. As a result, selected members of our senior management own
approximately 1.52% of WH Holdings and selected distributors of Herbalife own
approximately 11.44% of the outstanding equity of WH Holdings. In connection
with the issuance of the preferred shares, WH Holdings has entered into a
shareholders' agreement, setting forth rights of shareholders under that
agreement and limitations on their ability to dispose of their equity interests,
and a registration rights agreement with participating distributors and senior
management, Whitney V, L.P. and CCG Investments (BVI), L.P. and each of their
respective affiliates. The shares of Herbalife are 99.9% owned by WH Luxembourg
Intermediate Holdings S.a.R.L., an indirect wholly-owned subsidiary of WH
Holdings and 0.1% owned by WH Intermediate Holdings, a direct wholly-owned
subsidiary of WH Holdings.
Subsequent to the merger, neither Frank Tirelli, former President and Chief
Executive Officer, nor Doug Sages, former Executive Vice President, Chief
Administrative Officer and Chief Financial Officer are employed by the Company,
effective as of September 19, 2002. We have not entered into separation
arrangements with Messrs. Tirelli and Sages as of this time. In connection with
the management reorganization, Carol Hannah and Brian Kane were appointed
Co-Presidents.
THE COMPANY
Herbalife, founded in 1980, is a worldwide marketer of weight management
products, nutritional supplements, and personal care products that support our
customers' wellness and healthy lifestyles. We market and sell these products
through a global network marketing organization comprised of over one million
independent distributors in 55 countries. Throughout our 22-year operating
history, the high quality of our products and the effectiveness of our network
marketing organization have been the primary drivers of our growth and
geographic expansion and have made Herbalife a brand name recognized worldwide.
For the twelve months ended September 30, 2002, our retail sales were $1.8
billion. For the twelve months ended September 30, 2002, our adjusted EBITDA was
$139.4 million (historical) and $135.3 million (on a pro forma basis).
We focus on delivering a complete wellness program and way of life to our
customers through our diverse product portfolio. Our products are designed to
appeal to the growing number of consumers who seek to live a healthy lifestyle.
We group our products into two broad categories: inner nutrition, which consists
of weight management products and nutritional supplements; and outer nutrition,
which represents personal care products. We currently market approximately 570
products as well as literature and promotional materials designed to support our
distributors' marketing efforts. Our products are often sold in programs, which
are comprised of a series of related products designed to achieve a common
wellness or health result, simplify weight management and nutrition for our
consumers and maximize our distributors' cross-selling opportunities.
2
INNER NUTRITION
- WEIGHT MANAGEMENT PRODUCTS. We believe that our products have helped
millions of people manage their weight safely and effectively for 22
years. Among the products we offer are meal replacement products, herbal
appetite suppressants and a variety of healthy snacks designed to provide
nutritional support between meals. Our best-selling Formula 1 meal
replacement product has been part of our basic weight management program
for 22 years and has generated 22% of our retail sales over the past
three years. For the year ended December 31, 2001, $707.9 million or
42.7% of our retail sales were derived from weight management products.
- NUTRITIONAL SUPPLEMENTS. We market numerous dietary and nutritional
supplements designed to meet our customers' specific nutritional needs.
Our nutritional supplements are designed to focus on the specific
lifestages and lifestyles of our customers. Each of these supplements
contains high-quality herbs, vitamins, minerals and other natural
ingredients. We offer a wide selection of dietary and nutritional
supplements, including basic vitamins and minerals such as vitamin C (and
related anti-oxidants) and calcium, as well as herbal supplements such as
echinacea, ginseng, melatonin and ginkgo biloba. For the year ended
December 31, 2001, $744.6 million or 45.0% of our retail sales were
derived from nutritional supplements.
OUTER NUTRITION
- PERSONAL CARE PRODUCTS. Our personal care products complement our inner
nutrition products to improve the appearance of our customers' body, skin
and hair. These products include soaps and skin cleansers, moisturizers
and lotions, shampoos and conditioners, hair styling products and a
selection of colognes for men and women. Our personal care products,
which provide outer nutrition for the skin and body and preservation of
youthful appearance, are designed to make our customers look and feel
their best. For the year ended December 31, 2001, $178.2 million or 10.8%
of our retail sales were derived from personal care products.
Our products are distributed through a global network marketing
organization comprised of over one million independent distributors in 55
countries. We believe that the direct-selling distribution channel is ideally
suited to selling our products, because sales of wellness and weight management
products are strengthened by ongoing personal contact between retail consumers
and distributors. We encourage our distributors to use our products and
communicate their results to retail customers, which provides first-hand
testimonial proof of product effectiveness. As a result, we believe our best
distributors are consumers of our products.
We seek to provide our distributors attractive and flexible career
opportunities by selling our high-quality products. Our distributors have the
opportunity to earn significant income and receive non-financial rewards
designed to motivate and recognize individual achievement. As a result, we
believe the business opportunity provided by 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
part-time employment opportunities. Our distributors, who are independent
contractors, earn income on their own sales and can also earn royalties and
bonuses on sales made by the distributors in their downline organizations. We
believe our network marketing system also provides an attractive business
opportunity relative to other network marketing companies, particularly because
we maintain an industry leading payout ratio and offer high-quality products.
COMPANY HISTORY
Herbalife was founded in 1980 by entrepreneur Mark Hughes, as part of his
search for safe and effective alternatives to weight management solutions then
in the market. We began to use the direct selling channel in the early days of
Herbalife. Our distributor base grew quickly, by increasing penetration in the
United States and by expanding abroad. Throughout the 1980's, we began
operations in other English-speaking countries such as Canada, the United
Kingdom, Australia and New Zealand, and subsequently entered several of our
larger international markets including Mexico (1989), Germany (1991), Italy
(1992), Japan (1993) and
3
South Korea (1996). In conjunction with our entry into new markets, we expanded
our product portfolio with new product introductions to our inner nutrition
category and introduced our personal care product line in 1995.
Brian L. Kane and Carol Hannah were appointed Co-Presidents as part of a
management reorganization in September 2002. Ms. Hannah has been with Herbalife
for almost 18 years and worked closely with Mr. Hughes for many years until his
untimely death in May 2000. Ms. Hannah previously held the position of Executive
Vice President, Sales, with responsibility for managing distributor
relationships. Mr. Kane has been with Herbalife for almost 10 years, most
recently serving as the Chief Operating Officer with responsibility for global
operations. He will continue to perform those duties. William D. Lowe, Senior
Vice President, Finance and Treasury, has been with Herbalife for almost 5
years. As part of the recent management reorganization, he will have
responsibility for all financial operations, pricing and strategic planning.
Mr. Kane and Ms. Hannah continue to operate under their existing contracts
and are paid annual salaries of $660,000 and $712,500, respectively. For a
detailed description of our employment arrangements with our senior management
team see "Management -- Employment Contracts and Termination of Employment."
THE INDUSTRY
WELLNESS AND PERSONAL CARE MARKETS
We compete primarily in the wellness industry with our inner nutrition
products and in the personal care industry with our outer nutrition products.
According to Euromonitor, these markets are substantial in size, representing an
estimated $33.5 billion and $175.4 billion of worldwide sales in 2000,
respectively. We believe these markets represent significant business
opportunities for us given our focus on high-quality products and our
distributors' personal interaction with consumers of our products. According to
Euromonitor, these worldwide markets are expected to continue to grow:
- The global nutrition and well-being market is expected to grow to $38.4
billion in 2004; and
- The worldwide market for personal care and cosmetic products is expected
to grow to $212.5 billion in 2005.
We are capitalizing on demographic trends in our market driving demand for
health-related products and increasing the emphasis on healthier lifestyles. The
global markets for our products are expected to continue to experience strong
growth due to a number of factors, including:
- The aging "baby boom" generation worldwide, which is driving long-term
demand for health maintenance products;
- Increasing incidence of obesity and greater awareness of the associated
health risks; and
- The U.S. Surgeon General released a report in December 2001 stating that
61% of Americans were overweight or obese in 1999.
- According to the U.S. Center for Disease Control and Prevention, obesity
is the second largest preventable cause of death in the United States,
behind smoking.
- According to the World Health Organization, the number of obese adults
worldwide has increased from 200 million in 1995 to over 300 million in
2000, an increase of approximately 50%. In addition, the World Health
Organization estimates that approximately 1.2 billion people worldwide
are overweight.
- Increasing acceptance of herbal and dietary supplements influenced by
increasing scientific evidence and media focus about the efficacy of
nutritional supplements.
- Newsday Magazine reported that from 1990-1997 there was a 380% increase
in vitamin usage and a 130% increase in the use of herbal supplements.
4
- The U.S. Congress established the National Center for Complementary and
Alternative Medicine (NCCAM) in 1998 to evaluate the safety and efficacy
of complementary and alternative medicine, which includes herbal
remedies and food supplements.
- The Journal of the American Medical Association reported in 1998 that
over 64% of U.S. medical schools offered elective courses in
complimentary and alternative medicine or included complimentary and
alternative medicine topics in required courses.
DIRECT SELLING
Direct selling as a distribution channel has proven to be extremely
effective for sales of inner and outer wellness products and has exhibited
strong historical growth. The World Federation of Direct Selling Associations
estimates the following statistics about the direct selling channel:
- Wellness and personal care products represented approximately 43% of
total worldwide direct selling sales in 2000;
- The worldwide direct-sales channel exceeded $82.2 billion of sales in
2000, up from just over $33.3 billion in 1988, representing a compound
annual growth rate of 7.8%; and
- The global direct-selling sales force grew to 38.7 million in 2000, up
from 8.5 million in 1988, representing a compound annual growth rate of
13.5%.
COMPETITIVE STRENGTHS
RECOGNIZED BRAND NAME. Our success is largely due to the strength of the
Herbalife brand name, which has been built through consistently offering
high-quality products and an attractive business opportunity for our
distributors. Our specially-designed formulations and high-quality products,
combined with our reputation built over 22 years in the industry, set us apart
from the competition and contribute significantly to the recognition of the
Herbalife brand name. We believe that our recognized brand name has contributed
significantly to our ability to expand our business into new markets and add
distributors to our network marketing organization and will enhance our ability
to further penetrate our existing markets.
HIGH-QUALITY, ESTABLISHED PRODUCT PORTFOLIO. We sell high-quality products
containing natural ingredients that appeal to consumer demand for products that
contribute to a natural and healthy lifestyle. Our products have demonstrated
long-term consumer appeal: of our $1.7 billion in 2001 retail sales, $1.4
billion, or 85%, were derived from products that have been in our product
portfolio since 1996 or earlier. We derive new product ideas from a number of
sources, including trade publications, scientific and health journals, our
executives, staff, consultants and outside parties. In general, we maintain a
second-mover strategy with respect to new product offerings, often introducing
our own unique formulations of products similar to those successfully offered by
others in the market. In addition to reducing research and development costs,
this strategy dramatically reduces the risk of failed product introductions.
EFFECTIVE DISTRIBUTION CHANNEL. We have used the direct selling method for
selling our products since we began operations in February 1980. We believe the
direct sales model is the most attractive way to sell wellness and weight
management products because sales of such products are strengthened by ongoing
personal contact between retail consumers and distributors. This personal
contact enhances (i) the education of consumers in the weight management and
nutrition markets and (ii) the motivation of consumers to begin and maintain
weight management programs for healthy living. Many of our distributors are
users of our products themselves, which we believe enhances sales of our weight
management and wellness products by providing first-hand testimonial proof of
product effectiveness. We believe we provide a highly attractive business
opportunity to our distributors, particularly because we maintain an industry
leading payout ratio and offer high-quality products.
PRODUCT AND MARKET DIVERSIFICATION. We offer approximately 570 products
across our three primary product segments. For the fiscal year ended December
31, 2001, 42.7% of our retail sales were in weight management products, 45.0% in
nutritional supplements, 10.8% in personal care products and the remaining
5
1.5% in literature and promotional materials. Additionally, the geographic
diversity of our markets mitigates our financial exposure to any particular
market. For the fiscal year ended December 31, 2001, 37.5% of our retail sales
were in the Americas, 27.7% in Europe and 34.8% in Asia/Pacific Rim.
SCALABLE AND PROFITABLE BUSINESS MODEL. We believe our business model is
attractive due to our significant and sustained profitability and our ability to
scale to new markets and more distributors. We require no company-employed sales
force to market and sell our products and our distributor compensation varies
directly with sales. Additionally, our systems and infrastructure are capable of
handling significant growth in our worldwide distributor base with relatively
little incremental cost. Lastly, our distributors bear the majority of our
consumer marketing expenses, and supervisors who are themselves independent
distributors sponsor and coordinate a large share of distributor recruiting and
training initiatives. Our global direct-selling model offers several advantages
over traditional retailing methods, including (i) the absence of a high
fixed-cost infrastructure, (ii) incentives for distributors to develop a
downline organization of other individuals selling product and (iii) greater
personalized care and follow-up for our consumers.
STRONG CASH FLOW GENERATION. Our business model generates strong free cash
flow, which is primarily a result of (i) positive working capital generated by
distributors paying for products before or at the time of receiving them from
us, (ii) low capital expenditure requirements, principally related to systems
and infrastructure upgrades and maintenance of our distribution facilities and
equipment and (iii) steady profitability due to our scalable business model. We
believe the combination of our strong EBITDA, positive working capital and low
capital expenditure requirements will continue to result in significant free
cash flow generation.
EXPERIENCED MANAGEMENT TEAM. Since 1992, our senior management team has
grown annual retail sales from $405.1 million to $1.7 billion for the fiscal
year ended 2001, achieved strong cash flow and effectively managed our global
operations. Carol Hannah and Brian L. Kane were recently appointed
Co-Presidents. Both of Ms. Hannah and Mr. Kane are long term members of the
management team at Herbalife and have been integral to our recent successes. As
part of the recent management reorganization, William D. Lowe, Senior Vice
President, Finance and Treasury, will have responsibility for all financial
operations, pricing and strategic planning. For a detailed description of our
employment arrangements with our senior management team, see
"Management -- Employment Contracts and Termination of Employment."
EQUITY PARTICIPATION BY DISTRIBUTORS AND MANAGEMENT. Selected members of
Herbalife's distributor organization and senior management have purchased equity
interests in WH Holdings alongside the equity sponsors. In addition, selected
members of management will have the opportunity to participate in our equity
through option grants by WH Holdings under a newly established stock option
plan. We believe this equity ownership will provide additional incentive to
Herbalife's distributors and management. For further information regarding
management and distributors' participation, see "-- Recent Developments."
BUSINESS STRATEGY
Our business strategy is comprised of the following principal elements:
INCREASE MARKET PENETRATION. Historically, we focused on expanding our
network marketing organization to new countries and focused less on internal
growth within our existing markets. While this strategy achieved rapid initial
sales growth, it did not always achieve sustainable sales levels. As a result,
we have re-evaluated our country sales strategy and are refining sales and
marketing initiatives to place a greater emphasis on increased penetration of
these markets. In certain instances we may increase the availability of our
existing products in those markets where we currently offer only a small
percentage of our full product line. We believe this will drive sales growth
through increased penetration in each of our country markets around the world.
INCREASE DISTRIBUTOR PRODUCTIVITY AND RETENTION. We recognize that in
addition to high-quality products and a rewarding distributor compensation plan,
the success of our business depends on the support and training of our
distributors. We are strengthening our distributor support services by enhancing
customer service capabilities at our call centers, offering greater
business-building opportunities through the Internet,
6
creating new business support initiatives and offering enriched reward
recognition programs. To further enhance distributor productivity and improve
retention, we are developing new educational training programs aimed at
assisting distributors with their sales, marketing and recruiting techniques.
Extensive training opportunities enable distributors to not only develop
invaluable business-building and leadership skills, but also to become experts
in our products and offer customers sound advice on weight management, nutrition
and personal care. By placing a top priority on training, we build credibility
among our distributors and further establish Herbalife as an industry leader.
INCREASE BRAND RECOGNITION IN WEIGHT MANAGEMENT AND WELLNESS MARKETS. Our
underlying initiative is to continue to expand our reputation as an industry
leading company focused on weight management, complete wellness and a healthier
way of life. We are well positioned to take advantage of current worldwide
consumer trends indicating that individuals are turning more and more to
nutritional supplements for weight management, fitness and age-related health
concerns. The core of this strategy is accomplished through the rationalizing of
our approximately 570 products around a central wellness platform -- with core
product groups built around various life stages (for example, "Healthy
Children," "Healthy Men," "Healthy Women," and "Healthy Aging").
IMPROVE SUPPLY CHAIN MANAGEMENT. Prior to 2001, we purchased primarily all
of our weight management and nutritional supplement products from a single
supplier. In 2000, we reevaluated our product supply strategy and began
purchasing products from multiple suppliers. Our new supply chain management
strategy is focused on several key objectives, including: (i) production of the
highest quality products practicable, (ii) reduction in total inventory levels,
and (iii) reduction in product manufacturing costs. We are accomplishing these
objectives through the diversification of our supplier base to multiple
companies around the world. Purchasing from multiple suppliers and increased
supplier competition has enabled us to maintain product quality and lower
product costs. The geographic diversification of supply amongst several
manufacturers has also resulted in significantly lower inventory levels. In each
of the last nine quarters, we have achieved a consistent decline in inventory
levels from $115.8 million at June 30, 2000 to $56.7 million at September 30,
2002, and our gross profit as a percentage of retail sales has improved from
46.4% to 48.3% over this period. We expect to further reduce our inventory
levels.
IMPROVE MARGINS THROUGH EXPENSE MANAGEMENT. During the past year, we began
to implement certain product manufacturing and other sustainable expense
reduction initiatives that have already resulted in significant improvements in
financial performance. Our management team remains committed to realizing
additional savings through further reduction of corporate expenses and
implementing of the above initiatives. Through these initiatives and our
improvement in sales, we have improved our adjusted EBITDA from $30.4 million
(7.2% of retail sales) in the third quarter of 2001 to $38.0 million (8.6% of
retail sales) in the third quarter of 2002. We believe the combination of
reduced production costs, reductions in corporate spending and lower inventory
will continue to enhance profitability and cash flow.
7
THE ACQUISITION AND RELATED FINANCINGS
THE MERGER
On July 31, 2002, the merger and related financing transactions were
consummated (including the release from escrow of the net proceeds from the June
27, 2002 sale of the Series A Notes). Since the consummation of the acquisition
and related financing transactions, the equity sponsors and selected members of
Herbalife's distributor organization and senior management have owned all of the
equity of WH Holdings. In addition, warrants to purchase preferred shares of WH
Holdings were issued in connection with the sale of the senior notes. See
"Certain Agreements Relating to the Acquisition -- Securities Purchase
Agreement." As a result of the acquisition and related financing transactions,
WH Holdings indirectly owns 100% of the outstanding common stock of Herbalife.
The aggregate acquisition consideration was $706.6 million (inclusive of
change in control payments and Herbalife's advisory fees and expenses). Upon
consummation of the merger, each public stockholder of Herbalife received $19.50
in cash for each share of common stock owned. The holder of each outstanding
option to purchase Herbalife common stock received an amount in cash equal to
the excess of $19.50 over the exercise price of such option. Net of aggregate
proceeds received by Herbalife from the exercise of options, the merger
consideration paid to the stockholders and option holders of Herbalife was
approximately $682.3 million.
In connection with the merger, we and our affiliates consummated certain
related financing transactions, including the issuance by WH Acquisition on June
27, 2002 of $165.0 million of the Series A Notes (issued at 98.716% of par) due
July 15, 2010 (which Notes were assumed by Herbalife upon the consummation of
the merger) and the issuance by WH Holdings on July 31, 2002 of $38.0 million of
15.5% senior notes due July 15, 2011. The net proceeds from the sale of the
Series A Notes were placed in escrow pending consummation of the merger. On July
31, 2002, the escrowed net proceeds were released to fund a portion of the
acquisition. From the proceeds of the sale of the senior notes, approximately
$12.5 million has been escrowed to pay cash interest on the senior notes for
approximately 2 1/2 years. See "Certain Agreements Relating to the
Acquisition -- Securities Purchase Agreement." In addition, on July 31, 2002, we
entered into a credit agreement with various lenders, including Whitney Private
Debt Fund, L.P., and UBS AG, Stamford Branch, as administrative agent, which
provides for a term loan in the amount of $180.0 million and a revolving credit
facility in the amount of $25.0 million. The Series A Notes and the senior
credit facilities are guaranteed by the following entities which we will
describe in this prospectus as "guarantors," which term will also include any
future guarantors as described in this prospectus:
- Herbalife International Do Brasil Ltda.;
- Herbalife (UK) Limited;
- Herbalife Europe Limited;
- Herbalife International Finland OY;
- Herbalife International of Israel (1990) Ltd.;
- Herbalife of Japan K.K.;
- Herbalife Internacional de Mexico, S.A. de C.V.;
- Herbalife Products de Mexico, S.A. de C.V.;
- Herbalife Sweden Aktiebolag;
- Herbalife China, LLC;
- Herbalife International of America, Inc.;
- Herbalife International Communications, Inc.;
- Herbalife International Distribution, Inc.;
- Herbalife International of Europe, Inc.;
- Herbalife Taiwan, Inc.;
- Herbalife International (Thailand) Ltd.;
- WH Luxembourg CM S.a.R.L.;
- WH Luxembourg Intermediate Holdings S.a.R.L.;
- WH Luxembourg Holdings S.a.R.L.; and
- WH Intermediate Holdings Ltd.
8
The senior credit facilities are also guaranteed by WH Holdings. The
obligations under the senior credit facilities are secured by (i) first priority
pledges of (A) all of the stock of the guarantors and (B) 65% of the equity
interests of the foreign subsidiaries of Herbalife that are not guarantors,
other than the following subsidiaries:
- HIIP Investment Co., LLC;
- Herbalife Foreign Sales Corporation;
- Importadora Y Distribuidora Herbalife International de Chile Limitada;
- Herbalife International Greece S.A.;
- Herbalife Hungary Trading, Limited;
- PT Herbalife Indonesia;
- Herbalife International SBN.BHD;
- HBL International Maroc SARL;
- Herbalife International Products N.V.;
- Herbalife International Holdings, Inc.;
- Herbalife International, S.A.;
- Herbalife Domincana, S.A.; and
- Herbalife Del Ecuador, S.A.;
and (ii) security interests in and liens on all accounts receivable, inventory
and other property and assets of WH Holdings and the guarantors (other than the
escrow account for interest on the senior notes described above).
SOURCES AND USES
The acquisition was financed through:
- gross proceeds of $162.9 million from the sale of the Series A Notes
(face value of $165.0 million);
- borrowings of $180.0 million under the $205.0 million senior credit
facilities;
- contribution of net proceeds of $24.0 million by WH Holdings from the
sale of its senior notes (face value of $38.0 million);
- contribution by the equity sponsors and selected members of Herbalife's
distributor organization and senior management of $176.0 million from the
sale of preferred shares by WH Holdings; and
- use of available cash balances of Herbalife of approximately $228.4
million, of which $4.6 million was used to repurchase Herbalife's
minority interest in its Japanese subsidiary, Herbalife of Japan K.K.
("Herbalife of Japan"), which payment was made in May 2002, $6.7 million
was used to repay existing debt and $217.1 million was used to finance
the acquisition and pay related fees and expenses.
The following table summarizes the sources and uses of funds for the
acquisition and related financing transactions.
9
<Table>
<Caption>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
SOURCES OF FUNDS
Cash on hand(1)........................................... $228.4
Senior credit facilities:
Term loan facility..................................... 180.0
Series A Notes(2)......................................... 162.9
WH Holdings, equity investment through issuance of the
senior notes(3)........................................ 24.0
Cash from sale of preferred shares of WH Holdings......... 176.0
------
Total sources.......................................... $771.3
======
</Table>
<Table>
<Caption>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
USES OF FUNDS
Acquisition consideration(4).............................. $706.6
Acquisition of minority interest(5)....................... 4.6
Repayment of existing debt................................ 6.7
Fees and expenses......................................... 53.4
------
Total uses............................................. $771.3
======
</Table>
- ---------------
(1) Reflects cash that Herbalife had available on the acquisition closing date
to consummate the acquisition. $228.4 million of Herbalife's available cash
was used in the acquisition and related financing transactions. The use of
$228.4 million of Herbalife's available cash included (i) $4.6 million
required to repurchase Herbalife's minority interest in its Japanese
subsidiary, Herbalife of Japan, which was completed in May 2002, (ii) $6.7
million to repay existing debt and (iii) $217.1 million to fund the
acquisition consideration and pay related fees and expenses.
(2) The aggregate principal amount of the Series A Notes is $165.0 million
(which notes were issued at 98.716% of par, or gross proceeds of $162.9
million).
(3) The principal amount of the senior notes was $38.0 million of which
approximately $12.5 million was used to fund approximately 2 1/2 years of
interest into escrow on the senior notes and approximately $1.5 million was
used to pay the fees related to the issuance of the senior notes and the
remainder (i.e., approximately $24.0 million) was contributed to equity by
WH Holdings to consummate the acquisition.
(4) Total aggregate acquisition consideration consists of:
<Table>
Merger consideration (net of aggregate proceeds received by
Herbalife from the exercise of options)................... $682.3
Change of control payments.................................. 7.6
Herbalife's advisory fees and expenses...................... 16.7
------
Total acquisition consideration............................. $706.6
======
</Table>
(5) As required in the merger agreement, Herbalife completed the acquisition of
the minority interest in its Japanese subsidiary, Herbalife of Japan, in
early May 2002 and the payment was made at that time.
10
THE EQUITY SPONSORS
WHITNEY & CO., LLC
Whitney & Co., LLC is an affiliate of Whitney & Co. which was established
in 1946 by the industrialist and philanthropist, John Hay Whitney, as one of the
first U.S. venture capital firms pioneering the development of the private
equity industry. Today, the firm remains a private partnership owned by the
investing professionals and its main activity is to provide private equity and
debt capital for middle market growth buyouts. Whitney manages approximately $5
billion of assets for major endowments, foundations and pension plans, and the
firm is currently investing its fifth outside equity fund, Whitney V, L.P., a
$1.1 billion fund, and its third private mezzanine debt fund. Whitney investment
activities are focused on market leading companies that are poised for growth in
a number of industries including healthcare and consumer products. Whitney is
located in Stamford, Connecticut with an office in San Francisco and other
professionals or affiliates in London, Tokyo and Hong Kong.
GOLDEN GATE PRIVATE EQUITY, INC.
Golden Gate Private Equity, Inc. is a San Francisco-based private equity
investment firm with approximately $700 million of capital under management.
Golden Gate is dedicated to partnering with world class management teams to
invest in change-intensive, growth businesses. They target investments of up to
$100 million in situations where there is a demonstrable opportunity to
significantly enhance a company's value. The principals of Golden Gate have a
long and successful history of investing with management partners across a wide
range of industries and transaction types, including leveraged buyouts, and
recapitalizations, corporate divestitures and spin-offs, build-ups and venture
stage investing. Additionally, the principals of Golden Gate draw on their
strong consulting heritage at Bain & Company in their investment approach.
11
CORPORATE STRUCTURE
The following chart summarizes the current organizational structure of WH
Holdings and its subsidiaries, which represents the intermediate stage of the
holding company restructuring, and their respective principal debt and other
obligations. See "Capitalization," "Description of Notes," "Description of
Senior Credit Facilities," "Certain Relationships and Related Transactions," and
"The Acquisition."
(FLOWCHART)
12
The following chart summarizes the final organizational structure of WH
Holdings and its subsidiaries, after giving effect to the proposed holding
company restructuring, which we expect to complete on or about December 31,
2002.
[CORPORATE STRUCTURE CHART]
- ---------------
(1) Since the consummation of the acquisition and related financing
transactions, investment funds managed by Whitney and Golden Gate, as well
as selected members of our distributor organization and senior management
have owned all of the outstanding capital stock of WH Holdings. In addition,
warrants to purchase preferred shares of WH Holdings were issued in
connection with the sale of senior notes. See "Certain Agreements Relating
to the Acquisition -- Securities Purchase Agreement."
(2) WH Luxembourg CM S.a.R.L. is expected to enter into contracts with
third-party manufacturers for Herbalife's products and perform other
operational functions.
13
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer............ We are offering to exchange up to $165,000,000
principal amount of the Series A Notes for up
to $165,000,000 principal amount of the Series
B Notes. As of the date of this prospectus,
Series A Notes representing $165,000,000
aggregate principal amount are outstanding. The
Series B Notes will evidence the same debt as
the Series A Notes, and the Series A Notes and
the Series B Notes will be governed by the same
indenture.
The Series B Notes are described in detail
under the heading "Description of Notes"
beginning on page 106 of this prospectus.
Resale........................ We believe that you can resell and transfer the
Series B Notes without registering them under
the Securities Act and delivering a prospectus,
if you can make the representations that appear
below under the heading "-- Procedures for
Tendering the Series A Notes." But, our belief
is based on interpretations of the SEC for
other exchange offers that the SEC expressed in
some of its no-action letters to other issuers
in exchange offers like ours.
We cannot guarantee that the SEC would make a
similar decision about this exchange offer. If
our belief is wrong, or if you cannot
truthfully make the representations mentioned
above, and you transfer any Series B Note
issued to you in the exchange offer without
meeting the registration and prospectus
delivery requirements of the Securities Act, or
without an exemption from such requirements,
you could incur liability under the Securities
Act. We are not indemnifying you for any such
liability.
A broker-dealer can only resell or transfer the
Series B Notes if it will deliver a prospectus.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, January 24, 2003 or a later
date and time if we extend it.
Withdrawal.................... You may withdraw the tender of any Series A
Notes pursuant to the exchange offer at any
time prior to the expiration date. We will
return, as promptly as practicable after the
expiration or termination of the exchange
offer, any Series A Notes not accepted for
exchange for any reason without expense to you.
Interest on the Notes......... Interest on the Series B Notes will accrue from
the date of the original issuance of the Series
A Notes or from the date of the last payment of
interest on the Series A Notes, whichever is
later. No additional interest will be paid on
Series A Notes tendered and accepted for
exchange.
Conditions to the Exchange
Offer......................... The exchange offer is not subject to any
conditions other than that it does not violate
applicable law or any applicable interpretation
of the staff of the SEC. We reserve the right
to waive any defects, irregularities or
conditions to exchange as to particular Series
A Notes. See "The Exchange Offer -- Conditions
of the Exchange Offer" beginning on page 96 of
this prospectus.
Procedures for Tendering
Series A Notes................ If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal in accordance with
14
the instructions in the letter of transmittal,
and deliver the letter of transmittal, along
with the Series A Notes and any other required
documentation, to the exchange agent. By
executing the letter of transmittal, you will
represent to us that, among other things:
- any Series B Notes that you receive will
be acquired in the ordinary course of
your business,
- you are not participating, and you have
no arrangement or understanding with any
person to participate, in the
distribution of the Series B Notes,
- you are not our "affiliate", as defined
in Rule 405 of the Securities Act or a
broker-dealer tendering Series A Notes
acquired directly from us, and
- if you are not a broker-dealer, you will
also be representing that you are not
engaged in and do not intend to engage
in a distribution of the Series B Notes.
Each broker-dealer receiving Series B Notes for
its own account in exchange for Series A Notes
must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
the Series B Notes. The letter of transmittal
states that, by making this acknowledgement and
by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. A broker-dealer who acquired
the Series A Notes for its own account as a
result of market-making or other trading
activities may use this prospectus for an offer
to resell, resale or other transfer of the
Series B Notes.
We will accept for exchange any and all Series
A Notes which are properly tendered (and not
withdrawn) in the exchange offer prior to the
expiration date. The Series B Notes issued
pursuant to the exchange offer will be
delivered promptly following the expiration
date. See "The Exchange Offer -- Acceptance of
Series A Notes for Exchange" beginning on page
98 of this prospectus.
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose Series A
Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender such Series A
Notes in the exchange offer, please contact the
registered holder as soon as possible and
instruct them to tender your Series A Notes on
your behalf and comply with our instructions
set forth elsewhere in this prospectus.
Guaranteed Delivery
Procedures.................... If you cannot meet the expiration date
deadline, or you cannot deliver your Series A
Notes, the letter of transmittal or any other
documentation on time, then you must surrender
your Series A Notes according to the guaranteed
delivery procedures set forth under "The
Exchange Offer -- Procedures for Tendering
Series A Notes -- Guaranteed Delivery"
beginning on page 99 of this prospectus.
15
Registration Rights
Agreement..................... We sold the Series A Notes on June 27, 2002, to
the initial purchaser in a transaction that was
exempt from the registration requirements of
the Securities Act. In connection with the
sale, we entered into a registration rights
agreement with the initial purchaser which
grants the holders of the Series A Notes
specified exchange and registration rights.
This exchange offer satisfies those rights,
which terminate upon consummation of the
exchange offer. You will not be entitled to any
exchange or registration rights with respect to
the Series B Notes.
Effect of Not Tendering....... Series A Notes that are not tendered or that
are tendered but not accepted will, following
the completion of the exchange offer, continue
to be subject to the existing restrictions upon
transfer thereof. We will have no further
obligation to provide for the registration
under the Securities Act of such Series A
Notes.
Neither the Nevada Revised Statutes nor the
indenture relating to the Notes gives you any
appraisal or dissenters' rights or any other
right to seek monetary damages in court if you
do not participate in the exchange offer.
U.S. Federal Income Tax
Considerations................ We believe the exchange of Series A Notes for
Series B Notes pursuant to the exchange offer
will not constitute a sale or an exchange for
federal income tax purposes. See "United States
Federal Income Tax Consequences" beginning on
page 155 of this prospectus.
Use of Proceeds............... We will not receive any proceeds from the
exchange of Notes pursuant to the exchange
offer.
Exchange Agent................ We have appointed The Bank of New York as the
exchange agent for the exchange offer. The Bank
of New York also serves as the trustee under
the indenture for the Notes. The mailing
address and telephone number of the exchange
agent are The Bank of New York, Reorganization
Section, 101 Barclay Street-7E, New York, New
York 10286, Attention: Bernard Arsenec, (212)
815-5098. See "The Exchange Offer -- Exchange
Agent" beginning on page 103 of this
prospectus.
16
SUMMARY OF THE TERMS OF THE SERIES B NOTES
The form and terms of the Series B Notes are substantially the same as the
form and terms of the Series A Notes, except that the Series B Notes are
registered under the Securities Act. As a result, the Series B Notes will not
bear legends restricting their transfer and will not contain the registration
rights contained in the Series A Notes.
Issuer........................ Herbalife International, Inc., a Nevada
corporation.
Notes Offered................. $165,000,000 aggregate principal amount of
11 3/4% Series B Senior Subordinated Notes due
July 15, 2010. The Series B Notes are general
unsecured senior subordinated obligations and
subordinated to all our senior debt.
Maturity Date................. July 15, 2010.
Interest...................... The Notes will bear interest at the rate of
11 3/4% per year. Interest on the Series B
Notes will accrue from the date of the original
issuance of the Series A Notes or from the date
of the last payment of interest on the Series A
Notes, whichever is later. Interest on the
Notes is payable semiannually in arrears, on
the fifteenth calendar day of each January and
July (or if that day is not a business day,
then the next succeeding business day),
commencing on January 15, 2003. A business day
is a day on which banks are not required or
authorized to close in the City of New York.
The Series A Notes were issued on June 27, 2002
and interest on the Notes started accruing as
of June 27, 2002.
Ranking....................... The Notes and the guarantees are general
unsecured senior subordinated obligations and
will rank:
- junior to all of the existing and future
senior indebtedness of Herbalife
International, Inc. and the guarantors,
including our new senior credit
facilities;
- equally with any of the existing and
future senior subordinated indebtedness
of Herbalife International, Inc. and the
guarantors; and
- senior to all of the existing and future
subordinated indebtedness of Herbalife
International, Inc. and the guarantors.
The Notes will be effectively subordinated to
all existing and future indebtedness and other
liabilities of the subsidiaries of WH
Intermediate Holdings and Herbalife that are
not guarantors of the Notes.
As of October 31, 2002, the Notes and the
guarantees rank junior to the approximately
$178.5 million of senior indebtedness
(including $2.6 million of capital leases).
Guarantees.................... The guarantors jointly and severally, fully and
unconditionally (subject to applicable
fraudulent conveyance or local law) guarantee
the Notes on a senior subordinated basis.
All future subsidiaries of WH Intermediate
Holdings that become a guarantor under our
senior credit facilities will guarantee the
Notes on a senior subordinated basis on the
date such subsidiary becomes a guarantor under
our senior credit facilities.
17
These guarantees will be general unsecured
senior subordinated obligations of the
guarantors and will be subordinated to all of
the senior indebtedness of the guarantors and
will be effectively subordinated to all
existing and future indebtedness and other
liabilities of the subsidiaries of WH
Intermediate Holdings and Herbalife that are
not guarantors of the Notes.
Optional Redemption........... We may redeem the Notes, in whole or in part,
on or after July 15, 2006 at the redemption
prices set forth in this prospectus.
In addition, prior to July 15, 2005, we may
redeem up to 35% of the Notes with the net cash
proceeds of one or more qualified equity
offerings if at least 65% of the aggregate
principal amount of the Notes remain
outstanding. See "Description of
Notes -- Optional Redemption" for more
information.
Change of Control............. Upon a change of control, you may require us to
repurchase all or a portion of your Notes at
101% of their principal amount, plus accrued
and unpaid interest, if any, to the repurchase
date.
Certain Covenants............. The indenture governing the Notes contains
covenants that limit WH Intermediate Holdings'
and its subsidiaries' ability to, among other
things:
- pay dividends, redeem capital stock and
make other restricted payments and
investments;
- incur additional debt or issue preferred
stock;
- allow the imposition of dividend or
other distribution restrictions on our
subsidiaries;
- create liens on assets;
- engage in transactions with affiliates;
and
- merge, consolidate or sell all or
substantially all of our assets and the
assets of our subsidiaries.
All of these limitations are subject to
important exceptions and qualifications
described under "Description of
Notes -- Certain Covenants."
FEDERAL INCOME TAX CONSEQUENCES
See "United States Federal Income Tax Consequences" starting on page 155 of
this prospectus.
ADDITIONAL INFORMATION
Herbalife's principal executive offices are located at 1800 Century Park
East, Los Angeles, California 90067. Herbalife's telephone number is (310)
410-9600.
18
SUMMARY UNAUDITED PRO FORMA AND
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain of our historical financial data. We
have derived the summary historical consolidated financial data as of December
31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 from
our audited financial statements and the related notes included elsewhere in
this prospectus. The summary historical consolidated financial data as of
December 31, 1997, 1998 and 1999 and for the years ended December 31, 1997 and
1998 have been derived from our audited financial statements for such years,
which are not included in this prospectus. We have derived the summary
historical consolidated financial data as of and for the nine months ended
September 30, 2001, as of and for the seven months ended July 31, 2002 and as of
and for the two months ended September 30, 2002 from our unaudited consolidated
financial statements and the related notes included elsewhere in this
prospectus. The table also contains summary unaudited pro forma financial
information derived from the financial information set forth under "Unaudited
Pro Forma Condensed Consolidated Financial Statements" included elsewhere in
this prospectus. The unaudited pro forma condensed consolidated financial data
do not purport to present our actual financial position or results of operations
had the merger and related financing transactions actually occurred on the date
specified. The summary unaudited pro forma and historical financial data set
forth below are not necessarily indicative of the results of future operations
and should be read in conjunction with our audited consolidated financial
statements, the selected consolidated historical financial data and the
unaudited pro forma condensed consolidated financial statements and, in each
case, the related notes included elsewhere in this prospectus, the discussion
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the historical consolidated financial statements
and accompanying notes included elsewhere in this prospectus.
19
<Table>
<Caption>
HISTORICAL
----------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- SEPTEMBER 30, JANUARY 1 TO
1997 1998 1999 2000 2001 2001 JULY 31, 2002
---------- ---------- ---------- ---------- ---------- ------------- -------------
(PREDECESSOR) (SUCCESSOR)
----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OPERATIONS:
Retail sales............. $1,490,693 $1,644,837 $1,793,508 $1,764,851 $1,656,168 $1,237,417 $1,047,690
Net sales................ 884,865 980,197 1,098,885 1,085,484 1,020,130 762,370 644,188
Gross profit............. 667,197 733,988 833,976 816,492 778,608 580,672 503,635
Operating Income(1)...... 85,985 78,330 92,573 60,941 68,775 52,157 14,304
Net Income(1)............ 54,667 48,498 56,923 36,919 42,588 32,631 9,212
OTHER FINANCIAL DATA:
Retail sales change (as
reported)............... 24.2% 10.3% 9.0% (1.6)% (6.2)% (7.8)% 9.9%
Retail sales change (in
local currency)......... 33.0% 16.3% 6.4% 0.1% (0.7)% (2.0)% 11.4%
EBITDA(2)................ $ 96,951 $ 94,131 $ 106,574 $ 86,132 $ 86,831 $ 65,217 $ 80,734
Adjusted EBITDA(3)....... -- -- -- -- 103,117 74,505 84,771
Adjusted EBITDA
margin(4)............... -- -- -- -- 6.2% 6.0% 8.1%
Depreciation and
amortization............ $ 10,966 $ 15,801 $ 14,001 $ 15,693 $ 18,056 13,060 11,722
Capital
expenditures(5)......... 15,832 19,864 32,607 25,383 14,751 10,673 6,799
Ratio of earnings to
fixed charges(6)........ 16.8 10.6 11.5 8.1 8.6 9.7 4.4
Net cash provided by
(used in):
operating activities.... 56,190 57,413 95,414 46,141 95,465 79,321 37,901
investing activities.... (17,989) 7,879 (43,517) (49,968) (16,366) (11,403) 18,995
financing activities.... (42,089) (46,131) (16,041) (14,079) (3,456) 407 (35,292)
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities.............. $ 122,707 $ 105,907 $ 139,443 $ 140,250 $ 201,181 $ 195,290 $ 203,087
Receivables, net......... 46,021 44,471 30,326 24,600 27,609 26,338 31,601
Inventories.............. 71,583 88,138 101,557 99,332 72,208 78,501 60,864
Total working
capital(7).............. 125,986 120,623 133,137 145,211 177,813 174,271 199,394
Total assets............. 314,580 348,183 415,819 416,937 470,335 465,376 501,867
Total debt............... 4,115 4,996 8,380 8,417 10,612 11,571 8,991
Stockholders' equity..... 154,733 163,811 206,602 222,401 260,916 253,412 279,528
RATIOS AND PRO FORMA
DATA(8)
Cash interest
expense(9).............. -- -- -- -- -- -- --
Ratio of total debt to
adjusted EBITDA......... -- -- -- -- -- -- --
Ratio of adjusted EBITDA
to cash interest
expense................. -- -- -- -- -- -- --
<Caption>
HISTORICAL PRO FORMA
------------- -------------
TWELVE MONTHS
AUGUST 1 TO ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2002
------------- -------------
(SUCCESSOR)
OPERATIONS:
Retail sales............. $ 285,800 $1,752,241
Net sales................ 176,175 1,078,123
Gross profit............. 138,030 839,601
Operating Income(1)...... 22,311 100,117
Net Income(1)............ 5,814 37,677
OTHER FINANCIAL DATA:
Retail sales change (as
reported)............... 0.7% --
Retail sales change (in
local currency)......... (0.5)% --
EBITDA(2)................ $ 26,063 124,244
Adjusted EBITDA(3)....... 26,063 135,279
Adjusted EBITDA
margin(4)............... 9.1% 7.7%
Depreciation and
amortization............ 3,752 24,127
Capital
expenditures(5)......... 1,886 12,763
Ratio of earnings to
fixed charges(6)........ 1.7
Net cash provided by
(used in):
operating activities.... 16,716
investing activities.... (652,811)
financing activities.... 511,533
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities.............. $ 77,154 --
Receivables, net......... 30,106 --
Inventories.............. 56,651 --
Total working
capital(7).............. 6,359 --
Total assets............. 872,790 --
Total debt............... 341,519 --
Stockholders' equity..... 197,470 --
RATIOS AND PRO FORMA
DATA(8)
Cash interest
expense(9).............. 30,303
Ratio of total debt to
adjusted EBITDA......... 2.5x
Ratio of adjusted EBITDA
to cash interest
expense................. 4.5x
</Table>
- ---------------
(1) Operating income and net income for the fiscal year ended December 31, 2000
include a one-time pre-tax charge of $9.5 million relating to fees and
expenses in connection with the termination of a proposed buy-out
transaction by Mark Hughes, founder and Chief Executive Officer of Herbalife
at that time. Operating income and net income for the seven months ended
July 31, 2002 include a one time charge of $54.7 million relating to fees
and expenses in connection with the merger.
(2) EBITDA represents net income plus minority interest, income taxes, net
interest expense, depreciation and amortization and transaction expenses. We
present EBITDA because management believes it provides useful information
regarding a company's ability to service and/or incur debt. You should not
consider EBITDA in isolation from or as a substitute for net income, cash
flows from operating activities and other consolidated income or cash flow
statement data prepared in accordance with accounting principles generally
accepted in the United States or as a measure of profitability or liquidity.
EBITDA, as presented, may not be comparable to similarly titled measures
reported by other companies.
20
(3) Adjusted EBITDA is calculated by adding to EBITDA certain items of expense
that we believe are not indicative of our future operating performance.
These items consist of:
<Table>
<Caption>
HISTORICAL PRO FORMA
------------------------------------------------------------ -------------
NINE MONTHS
ENDED TWELVE MONTHS
YEAR ENDED SEPTEMBER 30 AUGUST 1, TO ENDED
DECEMBER 31, ------------- JANUARY 1 TO SEPTEMBER 30, SEPTEMBER 30,
2001 2001 JULY 31, 2002 2002 2002
------------ ------------- ------------- ------------- -------------
(PREDECESSOR)
-------------------------------------------- (SUCCESSOR)
(DOLLARS IN THOUSANDS)
EBITDA....................... $ 86,831 $ 65,217 $80,734 $26,063 $124,244
Severance and other employee
related expenses(a)........ 9,898 3,208 3,973 10,663
Product costs under previous
supply agreements(b)....... 5,666 5,666
Other(c)..................... 722 414 64 372
-------- ------------- ------- ------- --------
Adjusted EBITDA.............. $103,117 $ 74,505 $84,771 $26,063 $135,279
======== ============= ======= ======= ========
</Table>
(a) In the year ended December 31, 2001, the nine months ended September
30, 2001 and the seven months ended July 31, 2002, we incurred
approximately $9.9 million, $3.2 million and $4.0 million,
respectively, of severance costs related to changes in senior
management. Additionally, we replaced certain key executives at lower
salary levels.
(b) On December 31, 2000, Herbalife's long-term contract with its primary
supplier expired. In 2001, Herbalife entered into new supply contracts
which have resulted in product cost savings. Product costs under the
new supply contracts would have resulted in savings of $5.7 million for
the year ended December 31, 2001 and the nine months ended September
30, 2001, respectively. We anticipate that the costs savings will
continue on a go forward basis.
(c) During the year ended December 31, 2001 and the nine months ended
September 30, 2001, we incurred costs of $466,000 and $222,000,
respectively, related to specific legal and professional fees, not
expected to recur. In addition, during the year ended December 31,
2001, the nine months ended September 30, 2001 and the seven months
ended July 31, 2002, Herbalife contributed services to the Herbalife
Family Foundation costing $256,000, $192,000 and $64,000, respectively.
We do not plan to continue to contribute such services on a go forward
basis.
(4) Adjusted EBITDA margin represents adjusted EBITDA as a percentage of retail
sales.
(5) Includes acquisitions of property from capitalized leases of $2.7 million,
$0.8 million, $1.9 million, $0.4 million and $3.8 million for 1997, 1998,
1999, 2000 and 2001, respectively, and $3.5 million, $2.1 million and zero
for the nine months ended September 30, 2001, the seven months ended July
31, 2002 and the two months ended September 30, 2002, respectively, and $2.4
million for the twelve months ended September 30, 2002.
(6) In calculating ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense (which includes amortization of deferred financing costs)
and one-third of rental expense, representing that portion of rental expense
deemed to be attributable to interest.
(7) Includes cash, cash equivalents and marketable securities.
(8) Adjusted to reflect the acquisition and the issuance of $165.0 million of
the Notes, borrowings of $180.0 million under the senior credit facilities,
the contribution of $24.0 million from the issuance of WH Holdings' senior
notes and the use of $228.4 million of Herbalife's available cash.
(9) Represents pro forma cash interest expense on the Notes, senior credit
facilities and capital lease obligations.
21
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before deciding to surrender your
Series A Notes in exchange for Series B Notes pursuant to this exchange offer.
These risks apply to both the Series A Notes and the Series B Notes. The risks
described below are not the only ones we face. Other risks, including those that
we do not currently consider material or may not currently anticipate, may
impair our business. In preparing this document, we have made assumptions and
projections. We generally use words like "expect," "believe" and "intend" to
indicate these assumptions and projections, as we explain in "Disclosure
Regarding Forward Looking Statements" on page (ii). Our assumptions and
projections could be wrong for many reasons, including the reasons discussed in
this section. We do not promise to notify you if we learn that our assumptions
and projections in this prospectus are wrong.
RISKS RELATED TO OUR BUSINESS
OUR FAILURE TO MAINTAIN OUR DISTRIBUTOR RELATIONSHIPS COULD ADVERSELY AFFECT OUR
BUSINESS.
We distribute our products through independent distributors, and we depend
upon them directly for substantially all of our sales. Accordingly, our success
depends in significant part upon our ability to attract, retain and motivate a
large base of distributors. As a result of our network marketing system and our
international sponsorship program, the distributor organization headed by a
relatively small number of key distributors is responsible for a significant
percentage of total retail sales, including, in many cases, retail sales in
several different countries. Prior to the merger, some of our distributors
indicated that they disapproved of the terms of the merger. There can be no
assurances that the merger and related financing transactions will not adversely
impact our relationships with existing distributors or impair our ability to
attract new distributors. The loss of a significant number of distributors,
including any key distributors, could materially adversely affect sales of our
products and could impair our ability to attract new distributors. Moreover, the
replacement of distributors could be difficult because, in our efforts to
attract and retain distributors, we compete with other network marketing
organizations, including those in the weight management product, dietary and
nutritional supplement, and personal care and cosmetic product industries. Our
distributors may terminate their services to us at any time.
In addition, adverse publicity and regulatory action relating to us, our
products or our operations, including our network marketing system, has had, and
could again have, a negative effect on our ability to attract, motivate and
retain distributors. In the mid-1980s, our products and marketing system became
the subject of regulatory scrutiny in the United States, resulting in large part
from claims and representations made about our products by our distributors,
including impermissible therapeutic claims. The resulting adverse publicity
caused a rapid, substantial loss of distributors in the United States and a
corresponding reduction in sales beginning in 1985. We expect that negative
publicity or regulatory action will, from time to time, continue to adversely
affect our business in particular markets and may adversely affect our business
in general.
REGULATORY MATTERS GOVERNING OUR INDUSTRY COULD HAVE A SIGNIFICANT NEGATIVE
EFFECT ON OUR BUSINESS.
In both our U.S. and foreign markets, we are affected by extensive laws,
governmental regulations, administrative determinations, court decisions and
similar constraints. Such laws, regulations and other constraints may exist at
the federal, state or local levels in the United States and at all levels of
government in foreign jurisdictions.
PRODUCT REGULATIONS. The formulation, manufacturing, packaging, labeling,
distribution, importation, sale and storage of our products are subject to
extensive regulation by various federal agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission (the "FTC"), the Consumer
Product Safety Commission and the United States Department of Agriculture and by
various agencies of the states, localities and foreign countries in which our
products are manufactured, distributed and sold. Failure by us or our
distributors to comply with those regulations could lead to the imposition of
significant penalties or claims and could materially adversely affect our
business. In addition, the adoption of new regulations or
22
changes in the interpretations of existing regulations may result in significant
compliance costs or discontinuation of product sales and may adversely affect
the marketing of our products, resulting in significant loss of sales revenues.
For example, while most of our products are classified as foods or dietary
supplements and therefore not subject to pre-market regulatory approval in the
United States, the FDA has in the past proposed a more restrictive pre-market
regulatory system. Our business is therefore subject to the potential costs and
other disadvantages of such enhanced regulation.
EPHEDRINE-CONTAINING PRODUCTS. One of the ingredients in our
Thermojetics(R) original green herbal tablet is a Chinese herb, Ma Huang, which
contains naturally-occurring ephedrine in small quantities. Also, two other
products that we offer, Thermojetics(R) green (Refresh) tablets and
Thermojetics(R) gold tablets, contain sida cordifolia, another botanical source
of naturally-occurring ephedrine. Ephedrine products have been the subject of
adverse publicity and regulatory scrutiny in the United States and other
countries relating to alleged harmful effects, including the deaths of several
individuals. 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 herbal tablet. We have not received any
communications from the FDA with regard to these reports but we are defendants
in five legal actions, including three wrongful death suits, seeking to link the
ingestion of Thermojetics(R) original green herbal tablets with subsequent
medical problems. We cannot assure you that more claims will not be made which
could adversely affect our business. In addition, we cannot assure you that the
withdrawal of our products that currently contain ephedrine would not have a
material adverse effect on sales of any other products within the
Thermojetics(R) Weight Management Program in the United States, which includes a
significant portion of our weight management products (9.4% of our retail sales
in 2001), even though these products do not contain ephedrine. Currently, we
offer the Thermojetics(R) original green and gold herbal tablets only in the
United States, except in those states in which regulations may prohibit or
restrict the sale of the product. The Thermojetics(R) original green tablets,
the Thermojetics(R) green (Refresh) tablets and Thermojetics(R) gold tablets
amounted to approximately $51.5 million, or 3.1% of our retail sales in 2001.
PRODUCT CLAIMS, ADVERTISING AND DISTRIBUTOR ACTIVITIES. Our failure to
comply with FTC or state regulations, or with regulations in foreign markets
that cover our 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, may result in enforcement actions and imposition of
penalties or otherwise materially and adversely affect the distribution and sale
of our products. Distributor activities in our existing markets that violate
applicable governmental laws or regulations could result in governmental or
private actions against us in markets where we operate. For example, as a
response to complaints from local regulators in some of our markets, we imposed
a ban in March 2002 on our distributors' inappropriate use of outdoor signage.
We cannot assure you as to the effect such ban will have. Given the size of our
distributor force, we cannot assure that our distributors will comply with
applicable legal requirements.
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. We are subject to the risk that, in one or
more markets, our marketing system could be found not to be in compliance with
applicable regulations. The failure of our network marketing system to comply
with such regulations could have a material adverse effect on our business in a
particular market or in general.
We are also subject to the risk of private party challenges to the legality
of our network marketing system. The multi-level marketing programs of other
companies have been successfully challenged in the past, and in a recent
lawsuit, an allegation was made challenging the legality of our network
marketing system. 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, or
in proceedings not involving us directly but which challenge the legality of
multi-level marketing systems, could have a material adverse effect on our
business.
23
TRANSFER PRICING AND SIMILAR REGULATIONS. In many countries, including the
United States, we are subject to transfer pricing and other tax regulations
designed to ensure that appropriate levels of income are reported as earned by
our U.S. or local entities and are taxed accordingly. In addition, our
operations are subject to regulations designed to ensure that appropriate levels
of customs duties are assessed on the importation of our products. We currently
are 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. Ultimate resolution of these matters may take
several years, and the outcome is uncertain.
TAXATION RELATING TO DISTRIBUTORS. Our distributors are subject to
taxation, and in some instances legislation or governmental agencies impose an
obligation on us to collect the taxes, such as value added taxes, and maintain
appropriate records. In addition, we are subject to the risk in some
jurisdictions of being responsible for social security and similar taxes with
respect to our distributors.
OTHER REGULATIONS. We also are subject to a variety of other regulations
in various foreign markets, including regulations pertaining to employment and
severance pay requirements, import/export regulations and antitrust issues. Our
failure to comply, or assertions that we fail to comply, with these regulations
could have a material adverse effect on our business in a particular market or
in general.
To the extent we decide to commence or expand operations in additional
countries, government regulations in those countries may prevent or delay entry
into or expansion of operations in those markets. In addition, our ability to
sustain satisfactory levels of sales in our markets is dependent in significant
part on our ability to introduce additional products into the markets. However,
government regulations in both our domestic and international markets can delay
or prevent the introduction, or require the reformulation or withdrawal, of some
of our products. See "Business -- Regulation -- Products."
BECAUSE OF OUR DEPENDENCE UPON CONSUMER PERCEPTIONS, ADVERSE PUBLICITY
ASSOCIATED WITH HARMFUL EFFECTS RESULTING FROM THE CONSUMPTION OF OUR PRODUCTS,
OR ANY SIMILAR PRODUCTS DISTRIBUTED BY OTHER COMPANIES, COULD HAVE A MATERIAL
ADVERSE EFFECT ON US.
Because we are highly dependent upon consumers' perception of the safety
and quality of our products as well as similar products distributed by other
companies, we could be adversely affected if any of our products or any similar
products distributed by other companies prove to be, or are asserted to be,
harmful to consumers. Also, because of our dependence upon consumer perceptions,
any adverse publicity associated with illness or other adverse effects resulting
from consumers' use or misuse of our products or any similar products
distributed by other companies could have a material adverse impact on us.
Adverse publicity could also negatively affect our ability to attract, motivate
and retain distributors. See "Business -- Regulation -- Products."
PRODUCT LIABILITY CLAIMS COULD HURT OUR BUSINESS.
Our products consist of herbs, vitamins and minerals and other ingredients
that are classified as foods or dietary supplements and are not subject to
pre-market regulatory approval in the United States. We do not conduct or
sponsor clinical studies of our products. As a marketer of dietary and
nutritional supplements and other products that are ingested by consumers or
applied to their bodies, we have been and may again be subjected to various
product liability claims, including that: (i) our products contain contaminants;
(ii) our products include inadequate instructions as to their uses; or (iii) our
products include inadequate warnings concerning side effects and interactions
with other substances. It is possible that widespread product liability claims
and the resulting adverse publicity could negatively affect our business; that
our product liability insurance may fail to cover future product liability
claims so we could be required to pay substantial monetary damages which could
harm our business; and that we may become required to pay higher premiums and
accept higher deductibles in order to secure adequate insurance coverage in the
future.
24
WE DO NOT MANUFACTURE OUR OWN PRODUCTS SO WE MUST RELY ON INDEPENDENT THIRD
PARTIES FOR THE MANUFACTURE AND SUPPLY OF OUR PRODUCTS.
All of our products are manufactured by outside companies, except for a
small amount of products manufactured in our own manufacturing facility in
China. There is no assurance that these outside manufacturers will continue to
reliably supply products to us at the level of quality we require. In the event
any of our third-party manufacturers were to become unable or unwilling to
continue to provide the products in required volumes and quality levels, we
would be required to identify and obtain acceptable replacement manufacturing
sources. There is no assurance that we will be able to obtain alternative
manufacturing sources on a timely basis. An extended interruption in the supply
of our products, like the Formula 1 meal replacement product, would result in
loss of sales. In addition, any actual or perceived degradation of product
quality as a result of our reliance on third party manufacturers may have an
adverse effect on sales or result in increased product returns and buybacks.
OUR FOREIGN OPERATIONS ARE EXPOSED TO RISKS ASSOCIATED WITH FOREIGN REGULATIONS,
EXCHANGE RATE FLUCTUATIONS, TRADE RESTRICTIONS AND POLITICAL, ECONOMIC AND
SOCIAL INSTABILITY.
A foreign government may impose trade or foreign exchange restrictions or
increased tariffs, which could adversely affect our operations. We also are
exposed to risks associated with foreign currency fluctuations. For instance,
our purchases from suppliers are generally made in U.S. Dollars while our sales
to distributors are generally made in local currencies. Accordingly,
strengthening of the U.S. Dollar versus a foreign currency could have a negative
impact on us. Although we engage in transactions to protect against risks
associated with foreign currency fluctuations, we cannot be certain any hedging
activity will effectively reduce our exchange rate exposure. Our operations in
some markets also may be adversely affected by political, economic and social
instability in foreign countries. As we continue to focus on expanding our
existing international operations, these and other risks associated with
international operations may increase.
A LARGE PORTION OF OUR RETAIL SALES IS CONCENTRATED IN A SMALL NUMBER OF
COUNTRIES.
Our earnings in future periods may be susceptible to various risks because
of the concentration of our retail sales in a small number of countries. Of the
53 countries in which we operated as of December 31, 2001, the United States,
Japan, South Korea, Italy, Mexico and Germany accounted for 26.7%, 18.4%, 6.9%,
6.4%, 5.9% and 4.7%, respectively, or 69.0% in the aggregate, of our total
retail sales. As a result, our performance is dependent upon economic conditions
and consumer demand for our products in these six countries. For the fiscal year
ended December 31, 2001, retail sales in Japan declined to 18.4% of our total
retail sales from 23.1% during the prior year due to weak consumer demand and
competition.
ONE OF OUR PRODUCTS CONSTITUTES A SIGNIFICANT PORTION OF OUR RETAIL SALES.
Our Formula 1 meal replacement product constitutes a significant portion of
our retail sales, accounting for 21.7% in 2001, 21.8% in 2000, 22.2% in 1999,
22.0% in 1998 and 19.8% in 1997. If consumer demand for this product decreases
significantly or we cease offering this product without a suitable replacement,
our operations could be materially adversely affected.
OUR ABILITY TO GROW IN THE FUTURE WILL BE MORE DEPENDENT ON INCREASED
PENETRATION OF EXISTING MARKETS THAN NEW MARKET OPENINGS, RELATIVE TO PAST
YEARS; AS A RESULT, OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
SUCCESSFULLY INCREASE EXISTING MARKET PENETRATION.
We have historically grown our company principally by entering into new
markets. Because we have already succeeded in entering into the most attractive
markets for our products and distribution system, an increasingly important part
of our strategy for continued growth is to increase the number and range of our
products available in our existing markets. In addition, our growth will depend
upon improved training and other activities that enhance distributor retention
in our markets. We cannot assure you that our efforts to increase our market
penetration in our existing markets will be successful.
25
In addition, our success has been, and will continue to be, significantly
dependent on our ability to manage rapid growth through expansions and
enhancements of our worldwide personnel and management, order processing and
fulfillment, inventory and shipping systems and other aspects of operations.
From time to time, we have experienced out-of-stock situations with respect to
some products. As we continue to expand our operations, the ability to manage
this growth will represent an increasing challenge.
THE HIGH LEVEL OF COMPETITION IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR
BUSINESS.
The business of marketing weight management products, dietary and
nutritional supplements, and personal care and cosmetic products is highly
competitive. This market segment includes numerous manufacturers, distributors,
marketers, retailers and physicians that actively compete for the business of
consumers both in the United States and abroad. The market is highly sensitive
to the introduction of new products or weight management plans, including
various prescription drugs, which may rapidly capture a significant share of the
market. While we own the proprietary rights to substantially all of our weight
management products and dietary and nutritional supplements, we cannot be sure
that another company will not replicate one of our products. In addition, we
anticipate that we will be subject to increasing competition in the future from
sellers that utilize electronic commerce. We cannot be sure of the impact of
electronic commerce or that it will not adversely affect our business.
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.
TERRORIST ATTACKS OR ACTS OF WAR MAY SERIOUSLY HARM OUR BUSINESS.
Terrorist attacks or acts of war may cause damage or disruption to our
company, our employees, our facilities and our customers, which could impact our
revenues, costs and expenses, and financial condition. The terrorist attacks
that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties, some of
which may materially adversely affect our business, results of operations, and
financial condition. The potential for future terrorist attacks, the national
and international responses to terrorist attacks, and other acts of war or
hostility have created many economic and political uncertainties, which could
materially adversely affect our business, results of operations, and financial
condition in ways that we currently cannot predict.
A GENERAL ECONOMIC DOWNTURN MAY REDUCE OUR REVENUES.
Worldwide economic conditions may affect demand for our products. Consumer
purchases of our products may decline during recessionary periods and also may
decline at other times when disposable income is lower.
26
RISKS RELATED TO THE NOTES
OUR SUBSTANTIAL AMOUNT OF DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
In connection with the consummation of the acquisition and related
financing transactions, we have incurred a substantial amount of debt which may
have important consequences for us. For example, it may:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing to fund working capital,
capital expenditures and other general corporate requirements;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the availability of
our cash flow for other purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt;
- make it difficult for us to meet our debt service requirements if we
experience a substantial decrease in our net operating cash flows or an
increase in our expenses; and
- restrict our ability to pay dividends to WH Holdings, so that WH Holdings
can pay its debt service obligations on its senior notes, the failure of
which may create an event of default under its senior notes, which if not
cured or waived, would have a material adverse effect on us.
YOUR RIGHT TO RECEIVE PAYMENT ON THE NOTES AND THE GUARANTEES IS JUNIOR TO ALL
OF OUR AND THE GUARANTORS' SENIOR DEBT.
The Notes are general unsecured obligations, junior in right of payment to
all of the existing and future senior debt of Herbalife International, Inc. and
the guarantors, including obligations under our senior credit facilities. The
Notes are not secured by any of our or the guarantors' assets, and as such are
effectively subordinated to any secured debt that we or the guarantors have now,
including all of the borrowings under our senior credit facilities, or may incur
in the future to the extent of the value of the assets securing that debt. In
addition, the Notes will be effectively subordinated to all existing and future
indebtedness of WH Intermediate Holdings and Herbalife that do not guarantee the
Notes.
In the event that we or a guarantor is declared bankrupt, becomes insolvent
or is liquidated or reorganized, any debt that ranks ahead of the Notes and the
guarantees will be entitled to be paid in full from our assets or the assets of
the guarantors, as applicable, before any payment may be made with respect to
the Notes or the affected guarantees. In any of the foregoing events, we cannot
assure you that we would have sufficient assets to pay amounts due on the Notes.
As a result, holders of the Notes may receive less, proportionally, than the
holders of debt senior to the Notes and the guarantees. The subordination
provisions of the indenture governing the Notes also provide that we can make no
payment to you during the continuance of payment defaults on our senior debt,
and payments to you may be suspended for a period of up to 179 days if a
nonpayment default exists under our senior debt.
As of October 31, 2002, the Notes and the guarantees rank junior to
approximately $178.5 million of senior indebtedness (including $2.6 million of
capital leases). In addition, the indenture governing the Notes and the credit
agreement governing our senior credit facilities permit, subject to specified
limitations, the incurrence of additional debt, some or all of which may be
senior debt.
27
TO MAKE PAYMENTS ON OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH; OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our debt, including the Notes, and to fund
planned capital expenditures will depend on our ability to generate cash in the
future. This, to some extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us in an amount
sufficient to enable us to pay interest and principal on our debt, including the
Notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our debt on or before maturity. We cannot assure you that we will be
able to refinance any of our debt on commercially reasonable terms or at all.
OUR ABILITY TO REPAY THE NOTES AND OUR OTHER DEBT DEPENDS ON CASH FLOW FROM OUR
SUBSIDIARIES.
We are a holding company. Our only material assets are our ownership
interests in our subsidiaries. Consequently, we depend on distributions or other
inter-company transfers of funds from our subsidiaries to meet our debt service
and other obligations, including with respect to the Notes. Our non-guarantor
subsidiaries are not obligated to make funds available to us for payment on the
Notes. We cannot assure you that the operating results of our subsidiaries will
be sufficient to enable us to make payments on the Notes.
THE COVENANTS IN THE NOTES AND OUR SENIOR CREDIT FACILITIES LIMIT OUR DISCRETION
WITH RESPECT TO CERTAIN BUSINESS MATTERS.
The Notes and our senior credit facilities contain numerous financial and
operating covenants that restrict our ability to, among other things:
- pay dividends, redeem capital stock and make other restricted payments
and investments;
- incur additional debt or issue preferred stock;
- allow the imposition of dividend or other distribution restrictions on
our subsidiaries;
- create liens on our assets;
- engage in transactions with affiliates; and
- merge, consolidate or sell all or substantially all of our assets and the
assets of our subsidiaries.
Our ability to comply with these covenants may be affected by events beyond
our control, including prevailing economic, financial and industry conditions.
Failure to comply with these covenants could result in a default under the Notes
and/or the senior credit facilities, causing all amounts thereunder to become
due and payable. In addition, the terms of the senior credit facilities contain
financial ratios that we are required to meet.
THE ABILITY OF SOME OF OUR FOREIGN SUBSIDIARIES TO GUARANTEE THE NOTES MAY BE
RESTRICTED BY LOCAL LAW AND CONSEQUENTLY, LIMIT YOUR POTENTIAL RECOVERY.
Local laws governing some of our foreign subsidiaries may restrict the
ability of those foreign subsidiaries from issuing a guarantee. In addition, to
the extent that local law permits a foreign subsidiary to issue a guarantee, the
foreign guarantor may be limited in its ability to pay interest, dividends,
distributions, loans or advances to their holding company in some circumstances.
For example, some foreign subsidiaries could be subject to restrictions on
dividends or repatriations of earnings under applicable local law, monetary
transfer restrictions and foreign currency exchange regulations in the
jurisdictions in which these foreign subsidiaries operate. In addition, foreign
subsidiaries may be subject to fraudulent transfer or conveyance laws in the
jurisdictions in which they operate. In any of the foregoing events, we cannot
assure you that we would have sufficient assets to pay amounts due on the Notes.
As a result, you may receive less, proportionately, than holders of debt senior
to the Notes.
28
ISSUANCE OF THE NOTES AND THE GUARANTEES BY OUR DOMESTIC SUBSIDIARIES MAY BE
SUBJECT TO FRAUDULENT CONVEYANCE LAWS.
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance, if at the time the issuer
of the Notes incurred the debt evidenced by the Notes, or a domestic subsidiary
guarantor incurred the debt evidenced by its guarantee, as the case may be, it
either:
- incurred the debt with the intent to hinder, delay or defraud creditors;
or
- received less than reasonably equivalent value or fair consideration for
incurring the debt; and
- was insolvent at the time of the incurrence;
- was rendered insolvent by reason of the incurrence (and the application
of the proceeds thereof);
- was engaged or was about to engage in a business or transaction for
which its remaining assets constituted unreasonably small capital to
carry on its business; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay the debts as they matured;
then, in each case, a court of competent jurisdiction could (i) avoid (i.e.,
cancel) in whole or in part, the Notes or the guarantee of such subsidiary
guarantor, as the case may be, and direct the repayment of any amounts paid
thereunder, (ii) subordinate the Notes or the guarantees of such subsidiary
guarantor, as the case may be, to our obligations to other existing and future
creditors or (iii) take other actions detrimental to the noteholders.
A court would likely find that neither we nor any subsidiary guarantor
received reasonably equivalent value or fair consideration for incurring our
respective obligations under the Notes and guarantees unless we or the
subsidiary benefited directly or indirectly from the Notes' issuance. In other
instances, courts have found that an issuer did not receive reasonably
equivalent value or fair consideration if the proceeds of the issuance were paid
to the issuer's shareholders, although we cannot predict how a court would rule
in this case.
The test for determining solvency for purposes of the foregoing will vary
depending on the law of the jurisdiction being applied. In general, a court
would consider an entity insolvent either if the sum of its existing debts
exceeds the fair value of all its property, or if its assets' present fair
saleable value is less than the amount required to pay the probable liability on
its existing debts as they become due. For this analysis, "debts" includes
contingent and unliquidated debts.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE A CHANGE OF
CONTROL OFFER REQUIRED BY THE INDENTURE GOVERNING THE NOTES.
Upon the occurrence of specific change of control events, we will be
required to offer to repurchase all outstanding Notes at 101% of their principal
amount. It is possible that we will not have sufficient funds at the time of the
change of control to repurchase the Notes or that restrictions in our other debt
agreements will not allow the repurchases. If we are unable to repurchase the
Notes upon a change of control, we would be in default under the indenture
governing the Notes, which could cause acceleration of our other debt. In
addition, some important corporate events, such as leveraged recapitalizations
that would increase the level of our debt, would not necessarily constitute a
"Change of Control" under the indenture governing the Notes.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE SERIES B
NOTES AND YOU MAY HAVE TO HOLD THE SERIES B NOTES INDEFINITELY.
The Series B Notes are a new issue of securities for which there currently
is no trading market. As a result, we cannot provide any assurances that a
market will develop for the Series B Notes or that you will be able to sell your
Series B Notes. Accordingly, you may be required to bear the financial risk of
an investment in the Series B Notes for an indefinite period of time. If any of
the Series B Notes are traded after their initial issuance, they may trade at a
discount from their initial offering price. Future trading prices of the Series
B Notes will depend on many factors, including prevailing interest rates, the
market for similar securities,
29
general economic conditions and our financial condition, performance and
prospects. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial fluctuations in the prices
of non-investment grade securities.
We do not intend to apply for listing or quotation of the Series B Notes.
THE MARKET VALUE OF THE SERIES B NOTES COULD BE MATERIALLY ADVERSELY AFFECTED IF
ONLY A LIMITED NUMBER OF SERIES B NOTES ARE AVAILABLE FOR TRADING.
To the extent that a large amount of the Series A Notes are not tendered or
are tendered and not accepted in the exchange offer, the trading market for the
Series B Notes could be materially adversely affected. Generally, a limited
amount, or "float," of a security could result in less demand to purchase such
security and, as a result, could result in lower prices for such security. We
cannot assure you that a sufficient number of Series A Notes will be exchanged
for Series B Notes so that this does not occur.
IF YOU DO NOT PROPERLY TENDER YOUR SERIES A NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED SERIES A NOTES AND YOUR ABILITY TO TRANSFER SERIES A NOTES WILL BE
ADVERSELY AFFECTED.
We will only issue Series B Notes in exchange for Series A Notes that are
timely received by the exchange agent together with all required documents,
including a properly completed and signed letter of transmittal, or are
surrendered pursuant to the guaranteed delivery procedures set forth below.
Therefore, you should allow sufficient time to ensure timely delivery of the
Series A Notes and you should carefully follow the instructions on how to tender
your Series A Notes. Neither we nor the exchange agent are required to tell you
of any defects or irregularities with respect to your tender of the Series A
Notes. If you do not tender your Series A Notes or if we do not accept your
Series A Notes because you did not tender your Series A Notes properly, then,
after we consummate the exchange offer, you may continue to hold Series A Notes
that are subject to the existing transfer restrictions. After the exchange offer
is consummated, if you continue to hold any Series A Notes, you may have
difficulty selling them because there will be fewer Series A Notes outstanding.
30
THE ACQUISITION
THE MERGER
On July 31, 2002, the merger and related financing transactions were
consummated (including the release from escrow of the net proceeds from the June
27, 2002 sale of the Series A Notes). Since the consummation of the acquisition
and related financing transactions, the equity sponsors and selected members of
Herbalife's distributor organization and senior management have owned all of the
equity of WH Holdings. In addition, warrants to purchase preferred shares of WH
Holdings were issued in connection with the sale of the senior notes. See
"Certain Agreements Relating to the Acquisition -- Securities Purchase
Agreement." As a result of the acquisition and related financing transactions,
WH Holdings indirectly owns 100% of the outstanding common stock of Herbalife.
The aggregate acquisition consideration was $706.6 million (inclusive of
change in control payments and Herbalife's advisory fees and expenses). Upon
consummation of the merger, each public stockholder of Herbalife received $19.50
in cash for each share of common stock owned. The holder of each outstanding
option to purchase Herbalife common stock received an amount in cash equal to
the excess of $19.50 over the exercise price of such option. Net of aggregate
proceeds received by Herbalife from the exercise of options, the merger
consideration paid to the stockholders and option holders of Herbalife was
approximately $682.3 million.
In connection with the closing of the merger, on July 31, 2002, Herbalife
entered into a new credit agreement with various lenders, including Whitney
Private Debt Fund, L.P., and UBS AG, Stamford Branch, as administrative agent,
under which the lenders, subject to certain conditions, provided Herbalife with
senior credit facilities in an amount equal to $205.0 million. The senior credit
facilities consist of (i) a senior secured revolving credit facility in the
aggregate principal amount of $25.0 million and (ii) a senior secured term loan
in the aggregate principal amount of $180.0 million. The senior credit
facilities are described in more detail in "Description of Senior Secured
Facilities."
Upon the consummation of the merger, the net proceeds of approximately
$154.1 million from the issuance of Series A Notes were released from escrow to
finance a portion of the acquisition.
WH Holdings issued senior notes in an aggregate principal amount of $38.0
million on July 31, 2002. WH Holdings contributed $24.0 million of the net
proceeds from the sale of the senior notes to finance a portion of the
acquisition. Additionally, approximately $12.5 million was used to fund
approximately 2 1/2 years of interest into escrow on the senior notes and
approximately $1.5 million was used to pay the fees related to the issuance of
the senior notes. The senior notes bear interest at 15.5%, of which 12.5% is
payable in cash (payable quarterly in arrears) and 3.0% is payable quarterly in
cash or in-kind through the issuance of additional senior notes. The senior
notes are general unsecured obligations of WH Holdings (other than the escrow
account for interest on the senior notes described above). In connection with
the issuance of the senior notes, the purchasers of the senior notes received
warrants to purchase approximately 2.0% of the preferred shares of WH Holdings.
See "Certain Agreements Relating to the Acquisition -- Securities Purchase
Agreement."
SOURCES AND USES
The acquisition was financed through:
- gross proceeds of $162.9 million from the sale of the Series A Notes
(face value of $165.0 million);
- borrowings of $180.0 million under the $205.0 million senior credit
facilities;
- contribution of net proceeds of $24.0 million by WH Holdings from the
sale of its senior notes (face value of $38.0 million);
- contribution by the equity sponsors and selected members of Herbalife's
distributor organization and senior management of $176.0 million from the
sale of preferred shares by WH Holdings; and
31
- use of available cash balances of Herbalife of approximately $228.4
million, of which $4.6 million was used to repurchase Herbalife's
minority interest in its Japanese subsidiary, Herbalife of Japan, which
payment was made in May 2002, $6.7 million was used to repay existing
debt and $217.1 million was used to finance the acquisition and pay
related fees and expenses.
The following table summarizes the sources and uses of funds for the
acquisition and related financing transactions.
<Table>
<Caption>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
SOURCES OF FUNDS
Cash on hand(1)........................................... $228.4
Senior credit facilities:
Term loan facility..................................... 180.0
Series A Notes(2)......................................... 162.9
WH Holdings, equity investment through issuance of the
senior notes(3)........................................ 24.0
Cash from sale of preferred shares of WH Holdings......... 176.0
------
Total sources.......................................... $771.3
======
</Table>
<Table>
<Caption>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
USES OF FUNDS
Acquisition consideration(4).............................. $706.6
Acquisition of minority interest(5)....................... 4.6
Repayment of existing debt................................ 6.7
Fees and expenses......................................... 53.4
------
Total uses............................................. $771.3
======
</Table>
- ---------------
(1) Reflects cash that Herbalife had available on the acquisition closing date
to consummate the acquisition. $228.4 million of Herbalife's available cash
was used in the acquisition and related financing transactions. The use of
$228.4 million of Herbalife's available cash included (i) $4.6 million
required to repurchase Herbalife's minority interest in its Japanese
subsidiary, Herbalife of Japan, which was completed in May 2002, (ii) $6.7
million to repay existing debt and (iii) $217.1 million to fund the
acquisition consideration and pay related fees and expenses.
(2) The aggregate principal amount of the Series A Notes is $165.0 million
(which notes were issued at 98.716% of par, or gross proceeds of $162.9
million).
(3) The principal amount of the senior notes was $38.0 million of which
approximately $12.5 million was used to fund approximately 2 1/2 years of
interest into escrow on the senior notes and approximately $1.5 million was
used to pay the fees related to the issuance of the senior notes and the
remainder (i.e., approximately $24.0 million) was contributed to equity by
WH Holdings to consummate the acquisition.
(4) Total aggregate acquisition consideration consists of:
<Table>
Merger consideration (net of aggregate proceeds received by
Herbalife from the exercise of options)................... $682.3
Change of control payments.................................. 7.6
Herbalife's advisory fees and expenses...................... 16.7
------
Total acquisition consideration............................. $706.6
======
</Table>
(5) As required in the merger agreement, Herbalife completed the acquisition of
the minority interest in its Japanese subsidiary, Herbalife of Japan, in
early May 2002.
32
USE OF PROCEEDS
This exchange offer is intended to satisfy certain obligations of Herbalife
under our registration rights agreement. We will not receive any proceeds from
the issuance of the Series B Notes. The proceeds from the offering of the Series
A Notes, together with funds from the related financing transactions and
Herbalife's available cash, were used to consummate the acquisition (including
the repurchase of the minority interest in our Japanese subsidiary, refinancing
of certain indebtedness of Herbalife and paying related fees and expenses).
We have agreed to pay for the expenses of the exchange offer. In exchange
for issuing the Series B Notes as contemplated in this prospectus, we will
receive Series A Notes in the same principal amount. The form and terms of the
Series B Notes are identical in all material respects to the form and terms of
the Series A Notes, except as described below under the heading "The Exchange
Offer -- Terms of the Exchange Offer." The Series A Notes surrendered in
exchange for the Series B Notes will be retired and cancelled and cannot be
reissued. Accordingly, issuance of the Series B Notes will not result in any
increase in our outstanding debt.
33
CAPITALIZATION
The following table sets forth the unaudited cash and cash equivalents of
WH Intermediate Holdings and capitalization as of September 30, 2002. You should
read this table in conjunction with the "Use of Proceeds," "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Selected Consolidated Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and our consolidated financial statements and
related notes included elsewhere in this prospectus.
<Table>
<Caption>
ACTUAL(1)
-----------
(UNAUDITED)
(DOLLARS IN
MILLIONS)
Cash, cash equivalents and marketable securities............ $ 77.2
======
Debt:
Other debt................................................ $ 3.6
Senior credit facility:
Revolving credit facility(2)........................... --
Term loan facility..................................... 175.0
Series A Notes............................................ 162.9
------
Total debt................................................ 341.5
Total equity(3)............................................. 197.5
------
Total capitalization...................................... $539.0
======
</Table>
- ---------------
(1) Represents the historical capitalization of WH Intermediate Holdings as of
September 30, 2002.
(2) As of September 30, 2002, the revolving credit facility was undrawn and
provided for borrowings of up to $25.0 million.
(3) Represents $176.0 million contributed from the equity sponsors and selected
members of Herbalife's distributor organization and senior management and
$24.0 million of net proceeds contributed from WH Holdings from the issuance
and sale of its senior notes plus $4.7 million of net income and other
comprehensive loss of the Successor, net of $7.2 million of expenses
relating to the merger and financing activities of WH Holdings, which were
assumed as a liability by WH Intermediate Holdings.
34
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth certain of our historical financial data. We
have derived the selected historical consolidated financial data as of December
31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 from
our audited financial statements and the related notes included elsewhere in
this prospectus. The selected historical consolidated financial data as of
December 31, 1997, 1998 and 1999 and for the years ended December 31, 1997 and
1998 have been derived from our audited financial statements for such years,
which are not included in this prospectus. We have derived the selected
historical consolidated financial data as of and for the nine months ended
September 30, 2001, as of and for the seven months ended July 31, 2002 and as of
and for the two months ended September 30, 2002 from our unaudited consolidated
financial statements and the related notes included elsewhere in this
prospectus. In the opinion of our management, our unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our financial
position, the results of our operations and cash flows. The results of
operations for the seven months ended July 31, 2002 and the two months ended
September 30, 2002, are not necessarily indicative of the operating results to
be expected for the full fiscal year. The selected consolidated historical
financial data set forth below are not necessarily indicative of the results of
future operations and should be read in conjunction with the discussion under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the historical consolidated financial statements and
accompanying notes included elsewhere in this prospectus.
<Table>
<Caption>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED JANUARY 1 TO
-------------------------------------------------------------- SEPTEMBER 30, JULY 31,
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ------------- ------------
(PREDECESSOR)
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OPERATIONS:
Retail sales........... $1,490,693 $1,644,837 $1,793,508 $1,764,851 $1,656,168 $1,237,417 $1,047,690
Less -- distributor
allowances on product
purchases............ 708,241 778,195 837,283 820,723 774,513 578,570 492,997
Handling and freight
income............... 102,413 113,555 142,660 141,356 138,475 103,523 89,495
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net sales.............. 884,865 980,197 1,098,885 1,085,484 1,020,130 762,370 644,188
Cost of sales.......... 217,668 246,209 264,909 268,992 241,522 181,698 140,553
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........... 667,197 733,988 833,976 816,492 778,608 580,672 503,635
Royalty overrides...... 318,882 345,200 397,143 382,322 355,225 266,777 227,233
Marketing, distribution
and administrative
expenses............. 262,330 310,458 344,260 363,731 354,608 261,738 207,390
Buy-out transaction
expenses(1).......... -- -- -- 9,498 -- -- 54,708
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....... 85,985 78,330 92,573 60,941 68,775 52,157 14,304
Interest income
(expense), net....... 4,535 2,533 1,750 2,354 3,413 3,059 1,364
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes and minority
interest............. 90,520 80,863 94,323 63,295 72,188 55,216 15,668
Income taxes........... 34,850 31,132 36,314 25,318 28,875 22,086 6,267
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest............. 55,670 49,731 58,009 37,977 43,313 33,130 9,401
Minority interest...... 1,003 1,233 1,086 1,058 725 499 189
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 54,667 $ 48,498 $ 56,923 $ 36,919 $ 42,588 $ 32,631 $ 9,212
========== ========== ========== ========== ========== ========== ==========
<Caption>
AUGUST 1 TO
SEPTEMBER 30,
2002
-------------
(SUCCESSOR)
OPERATIONS:
Retail sales........... $285,800
Less -- distributor
allowances on product
purchases............ 134,126
Handling and freight
income............... 24,501
--------
Net sales.............. 176,175
Cost of sales.......... 38,145
--------
Gross profit........... 138,030
Royalty overrides...... 61,789
Marketing, distribution
and administrative
expenses............. 53,930
Buy-out transaction
expenses(1).......... --
--------
Operating income....... 22,311
Interest income
(expense), net....... (12,622)
--------
Income before income
taxes and minority
interest............. 9,689
Income taxes........... 3,875
--------
Income before minority
interest............. 5,814
Minority interest...... --
--------
Net income............. $ 5,814
========
</Table>
35
<Table>
<Caption>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED JANUARY 1 TO
-------------------------------------------------------------- SEPTEMBER 30, JULY 31,
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ------------- ------------
(PREDECESSOR)
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(2).............. $ 96,951 $ 94,131 $ 106,574 $ 86,132 $ 86,831 $ 65,217 $ 80,734
Net cash provided by
(used in):
operating
activities......... 56,190 57,413 95,414 46,141 95,465 79,321 37,901
investing
activities......... (17,989) 7,879 (43,517) (49,968) (16,366) (11,403) 18,995
financing
activities......... (42,089) (46,131) (16,041) (14,079) (3,456) 407 (35,292)
Depreciation and
amortization......... 10,966 15,801 14,001 15,693 18,056 13,060 11,722
Capital
expenditures(3)...... 15,832 19,864 32,607 25,383 14,751 10,673 6,799
Ratio of earnings to
fixed charges(4)..... 16.8 10.6 11.5 8.1 8.6 9.7 4.4
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities........... $ 122,707 $ 105,907 $ 139,443 $ 140,250 $ 201,181 $ 195,290 $ 203,087
Receivables, net....... 46,021 44,471 30,326 24,600 27,609 26,338 31,601
Inventories............ 71,583 88,138 101,557 99,332 72,208 78,501 60,864
Total working
capital(5)........... 125,986 120,623 133,137 145,211 177,813 174,271 199,394
Total assets........... 314,580 348,183 415,819 416,937 470,335 465,376 501,867
Total debt............. 4,115 4,996 8,380 8,417 10,612 11,571 8,991
Stockholders' equity... 154,733 163,811 206,602 222,401 260,916 253,412 279,528
<Caption>
AUGUST 1 TO
SEPTEMBER 30,
2002
-------------
(SUCCESSOR)
OTHER FINANCIAL DATA:
EBITDA(2).............. $ 26,063
Net cash provided by
(used in):
operating
activities......... 16,716
investing
activities......... (652,811)
financing
activities......... 511,533
Depreciation and
amortization......... 3,752
Capital
expenditures(3)...... 1,886
Ratio of earnings to
fixed charges(4)..... 1.7
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities........... $ 77,154
Receivables, net....... 30,106
Inventories............ 56,651
Total working
capital(5)........... 6,359
Total assets........... 872,790
Total debt............. 341,519
Stockholders' equity... 197,470
</Table>
- ---------------
(1) The 2000 expense represents a one-time charge relating to fees and expenses
in connection with the termination of a proposed buy-out transaction by Mark
Hughes, our founder and Chief Executive Officer at that time. The 2002
expense represents advisory fees and expenses in connection with the merger
and related financing transactions.
(2) EBITDA represents net income plus minority interest, income taxes, net
interest expense, depreciation and amortization and transaction expenses. We
present EBITDA because management believes it provides useful information
regarding a company's ability to service and/or incur debt. You should not
consider EBITDA in isolation from or as a substitute for net income, cash
flows from operating activities and other consolidated income or cash flow
statement data prepared in accordance with accounting principles generally
accepted in the United States or as a measure of profitability or liquidity.
EBITDA is calculated as follows:
<Table>
<Caption>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED JANUARY 1 TO
-------------------------------------------------------------- SEPTEMBER 30, JULY 31,
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ------------- ------------
(PREDECESSOR)
---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Net income............. $ 54,667 $ 48,498 $ 56,923 $ 36,919 $ 42,588 $ 32,631 $ 9,212
Minority interest...... 1,003 1,233 1,086 1,058 725 499 189
Income taxes........... 34,850 31,132 36,314 25,318 28,875 22,086 6,267
Interest (income)
expense, net......... (4,535) (2,533) (1,750) (2,354) (3,413) (3,059) (1,364)
Depreciation and
amortization......... 10,966 15,801 14,001 15,693 18,056 13,060 11,722
Transaction expenses... -- -- -- 9,498 -- -- 54,708
---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA................. $ 96,951 $ 94,131 $ 106,574 $ 86,132 $ 86,831 $ 65,217 $ 80,734
========== ========== ========== ========== ========== ========== ==========
<Caption>
AUGUST 1 TO
SEPTEMBER 30,
2002
-------------
(SUCCESSOR)
Net income............. $ 5,814
Minority interest......
Income taxes........... 3,875
Interest (income)
expense, net......... 12,622
Depreciation and
amortization......... 3,752
Transaction expenses... --
--------
EBITDA................. $ 26,063
========
</Table>
36
- ---------------
(3) Includes acquisitions of property from capitalized leases of $2.7 million,
$0.8 million, $1.9 million, $0.4 million and $3.8 million for 1997, 1998,
1999, 2000 and 2001, respectively, and $3.5 million, $2.1 million and zero
for the nine months ended September 30, 2001, the seven months ended July
31, 2002 and the two months ended September 30, 2002, respectively, and $2.4
million for the twelve months ended September 30, 2002.
(4) In calculating ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense (which includes amortization of deferred financing costs)
and one-third of rental expense representing that portion of rental expense
deemed to be attributable to interest.
(5) Includes cash, cash equivalents and marketable securities.
37
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations (the "pro forma statements of operations") are based on the
historical financial statements of Herbalife through July 31, 2002 and WH
Intermediate Holdings from August 1, 2002 through September 30, 2002, included
elsewhere herein, adjusted to give effect to the following: (i) the receipt of
proceeds from the offering of the Notes and the borrowings under the senior
credit facilities (including the term loan facility and the revolving credit
facility); (ii) receipt of proceeds from the equity sponsors and selected
members of our distributor organization and senior management and the receipt of
net proceeds of the issuance and sale of senior notes of WH Holdings; (iii) the
use of Herbalife's available cash to finance a portion of the acquisition; (iv)
the acquisition of all issued and outstanding shares of Herbalife's common stock
(the "acquisition"); (v) the settlement of outstanding stock options; (vi) the
merger of WH Acquisition with and into Herbalife (the "merger") and (vii) the
payment of fees and expenses related to the aforementioned. All of the
aforementioned items (i) to (vii) are collectively referred to herein as the
"Transactions."
The pro forma statements of operations for the twelve months ended
September 30, 2002 has been included to reflect the recent changes in our
business. Within the twelve months ended September 30, 2002, Herbalife
reorganized its management team, focused on increasing sales within existing
markets, and instituted cost-cutting initiatives in corporate functions and
international distribution centers. Additionally, on December 31, 2000
Herbalife's long-term contract with its primary supplier expired and Herbalife
entered into contracts with multiple suppliers, resulting in our realization of
product cost savings, the benefit of which did not fully impact earnings until
the third quarter of 2001.
The pro forma statements of operations were prepared to illustrate the
estimated effects of the Transactions. The pro forma statements of operations
for the fiscal year ended December 31, 2001 and the nine months ended September
30, 2001 and September 30, 2002 give effect to the Transactions as if the
Transactions had occurred as of January 1, 2001. Information for the twelve
months ended September 30, 2002, represents the sum of the amounts set forth in
the pro forma statements of operations for the fiscal year ended December 31,
2001 and the amounts set forth in the pro forma statements of operations for the
nine months ended September 30, 2002, less the amounts set forth in the
unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2001. The pro forma adjustments are based upon
available information and certain assumptions that we believe are reasonable.
The pro forma statements of operations do not purport to represent what our
results of operations would actually have been had the Transactions in fact
occurred as of such date or to project our results of operations. The pro forma
statements of operations should be read in conjunction with the historical
combined financial statements of the Company and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
The acquisition was accounted for as a purchase in accordance with SFAS No.
141, "Business Combinations." Accordingly, the acquired assets and liabilities
have been recorded at fair value. The total purchase price was allocated to the
acquired assets and assumed liabilities based upon estimates of their respective
fair values as of the closing date, using valuations and other studies that have
substantially been finalized. The final allocation of the purchase cost and the
resulting effect on income from operations may differ significantly from the pro
forma amounts included herein.
38
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
DECEMBER 31, PRO FORMA
2001 ADJUSTMENTS PRO FORMA
------------ ----------- ----------
(DOLLARS IN THOUSANDS)
Retail sales.......................................... $1,656,168 $1,656,168
Less -- distributor allowances on product sales....... 774,513 774,513
Handling and freight income........................... 138,475 138,475
---------- ----------
Net sales............................................. 1,020,130 1,020,130
Cost of sales......................................... 241,522 241,522
Royalty overrides..................................... 355,225 355,225
Marketing, distribution, and administrative
expenses............................................ 354,608 $ 8,527 (2) 363,135
Interest (income) expense, net........................ (3,413) 40,142 (4) 36,729
---------- -------- ----------
Income before income taxes and minority interest...... 72,188 (48,669) 23,519
Income taxes.......................................... 28,875 (19,467)(5) 9,408
---------- -------- ----------
Income before minority interest....................... 43,313 (29,202) 14,111
Minority interest..................................... 725 (725)(6) --
---------- -------- ----------
Net income............................................ $ 42,588 $(28,477) $ 14,111
========== ======== ==========
</Table>
39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
SEPTEMBER 30, PRO FORMA
2001 ADJUSTMENTS PRO FORMA
------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Retail sales......................................... $1,237,417 $1,237,417
Less -- distributor allowances on product sales...... 578,570 578,570
Handling and freight income.......................... 103,523 103,523
---------- ----------
Net sales............................................ 762,370 762,370
Cost of sales........................................ 181,698 181,698
Royalty overrides.................................... 266,777 266,777
Marketing, distribution, and administrative
expenses........................................... 261,738 $ 6,395(2) 268,133
Interest (income) expense, net....................... (3,059) 29,375(4) 26,316
---------- -------- ----------
Income before income taxes and minority interest..... 55,216 (35,770) 19,446
Income taxes......................................... 22,086 (14,308)(5) 7,778
---------- -------- ----------
Income before minority interest...................... 33,130 (21,462) 11,668
Minority interest.................................... 499 (499)(6) --
---------- -------- ----------
Net income........................................... $ 32,631 $(20,963) $ 11,668
========== ======== ==========
</Table>
40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
AUGUST 1 TO
JANUARY 1 TO SEPTEMBER 30, JANUARY 1 TO
JULY 31, 2002 2002 SEPTEMBER 30, PRO FORMA
(PREDECESSOR) (SUCCESSOR) 2002 ADJUSTMENTS PRO FORMA
------------- ------------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Retail sales................ $1,047,690 $285,800 $1,333,490 $1,333,490
Less -- distributor
allowances on product
sales..................... 492,997 134,126 627,123 627,123
Handling and freight
income.................... 89,495 24,501 113,996 113,996
---------- -------- ---------- ----------
Net sales................... 644,188 176,175 820,363 820,363
Cost of sales............... 140,553 38,145 178,698 178,698
Royalty overrides........... 227,233 61,789 289,022 289,022
Marketing, distribution, and
administrative expenses
(including merger
transaction expenses)..... 207,390 53,930 261,320 $ 5,692(2) 267,012
Merger transaction
expenses.................. 54,708 54,708 (54,708)(3) --
Interest (income) expense,
net....................... (1,364) 12,622 11,258 15,649(4) 26,907
---------- -------- ---------- -------- ----------
Income before income taxes
and minority interest..... 15,668 9,689 25,357 33,367 58,724
Income taxes................ 6,267 3,875 10,142 13,348(5) 23,490
---------- -------- ---------- -------- ----------
Income before minority
interest.................. 9,401 5,814 15,215 20,019 35,234
Minority interest........... 189 189 (189)(6) --
---------- -------- ---------- -------- ----------
Net income.................. $ 9,212 $ 5,814 $ 15,026 $ 20,208 $ 35,234
========== ======== ========== ======== ==========
</Table>
41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2002
<Table>
<Caption>
SEPTEMBER 30, PRO FORMA
2002 ADJUSTMENTS PRO FORMA
------------- ----------- ----------
(DOLLARS IN THOUSANDS)
Retail sales.......................................... $1,752,241 $1,752,241
Less -- distributor allowances on product sales....... 823,066 823,066
Handling and freight income........................... 148,948 148,948
---------- ----------
Net sales............................................. 1,078,123 1,078,123
Cost of sales......................................... 238,522 238,522
Royalty overrides..................................... 377,470 377,470
Marketing, distribution, and administrative
expenses............................................ 354,190 $ 7,824(2) 362,014
Merger transaction expenses........................... 54,708 (54,708)(3) --
Interest (income) expense, net........................ 10,904 26,416(4) 37,320
---------- -------- ----------
Income before income taxes and minority interest...... 42,329 20,468 62,797
Income taxes.......................................... 16,931 8,189(5) 25,120
---------- -------- ----------
Income before minority interest....................... 25,398 12,279 37,677
Minority interest..................................... 415 (415)(6) --
---------- -------- ----------
Net income............................................ $ 24,983 $ 12,694 $ 37,677
========== ======== ==========
</Table>
42
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(1) Purchase Price Allocation: The Acquisition was accounted for as a
purchase. The purchase price of approximately $651.5 million includes $643.3
million in cash, $7.6 million of change in control payments and a $650,000
settlement of minority shareholder litigation. The acquired assets and
liabilities have been recorded at fair value. The total purchase price was
allocated to the acquired assets and assumed liabilities based upon estimates of
their respective fair values as of the closing date, using valuations and other
studies that have substantially been finalized. The final allocation of the
purchase cost and resulting effect on income from operations may differ from the
preliminary amounts included herein. The following table summarizes the
estimated fair values of the assets acquired and the liabilities assumed at the
date of acquisition (dollars in thousands):
<Table>
<Caption>
AT JULY 31,
2002
-----------
Current assets.............................................. $ 388,671
Property, plant and equipment............................... 51,752
Marketing Franchise......................................... 180,000
Trademark and Tradename..................................... 130,000
Product certifications and other intangible assets.......... 7,400
Goodwill.................................................... 208,350
Other long term assets...................................... 42,723
----------
Total assets acquired....................................... $1,008,896
Current liabilities......................................... $ 192,750
Other non-current liabilities............................... 35,907
Long term debt.............................................. 1,157
Deferred income taxes....................................... 127,539
----------
Total liabilities assumed................................... $ 357,353
----------
Net assets acquired......................................... $ 651,543
----------
</Table>
(2) Marketing, Distribution and Administrative Expenses: Reflects the
amortization of intangible assets over their useful lives and the payment of a
monitoring fee to the equity sponsors.
The trademark and marketing franchise intangible assets have indefinite
lives and as such, will not be amortized but will be periodically tested for
impairment. The product certifications intangible asset will be amortized over
its estimated useful life of 2 years.
The equity sponsors will charge Herbalife a monitoring fee for management
and consulting services provided. The monitoring fee will be charged on an
hourly basis for actual activities conducted and will not be less than $2.5
million but will not exceed $5.0 million on an annual basis. Herbalife will not
be obligated to pay the management fee (i) if the payment would result in a
default under the credit agreement, although the fee will accrue until the
default is cured or waived, (ii) until such time that Herbalife achieve a
trailing twelve month Adjusted EBITDA equal to or greater than $125.8 million.
43
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS -- (CONTINUED)
The pro forma adjustments to marketing, distribution and administrative
expenses are:
<Table>
<Caption>
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
------------ -------------------- -------------
2001 2001 2002 2002
------------ -------- -------- -------------
(DOLLARS IN THOUSANDS)
Pro forma amortization of intangible
assets................................. $3,700 $2,775 $2,775 $3,700
Monitoring Fee........................... 5,000 3,750 3,750 5,000
Elimination of historical monitoring
fee.................................... 833 833
Elimination of historical goodwill
amortization........................... 173 130 -- 43
------ ------ ------ ------
Pro forma adjustment to marketing,
distribution and administrative
expenses............................... $8,527 $6,395 $5,692 $7,824
====== ====== ====== ======
</Table>
(3) Merger Expenses: Represents the fees and expenses incurred in
connection with the merger and related financing transactions.
(4) Interest (Income) Expense, Net: The pro forma adjustments to interest
(income) expense are based on the amounts borrowed and the rates in effect at
the closing of the Transactions:
<Table>
<Caption>
TWELVE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED SEPTEMBER 30, SEPTEMBER 30,
------------ -------------------- -------------
2001 2001 2002 2002
------------ -------- --------- -------------
(DOLLARS IN THOUSANDS)
Senior subordinated notes and term loan
facility............................. $29,900 $22,425 $ 22,425 $ 29,900
Amortization of debt issuance costs,
note discount and other.............. 7,964 6,030 5,568 7,502
------- ------- -------- --------
Pro forma interest expense............. 37,864 28,455 27,993 37,402
Elimination of historical interest
income (expense), net................ 2,278 920 (12,344) (10,986)
------- ------- -------- --------
Pro forma adjustment to interest
expense, net......................... $40,142 $29,375 $ 15,649 $ 26,416
======= ======= ======== ========
</Table>
Estimated fees and expenses of $41.5 million were incurred related to the
debt financings. Debt financing costs related to the senior subordinated notes
will be amortized on a straight line basis, which approximates the interest
method, over the term of the notes of 8 years. The debt financing costs related
to the term loan facility will be amortized using the effective interest rate
method.
The senior subordinated notes were issued at a discount of $2.1 million.
The discount will be amortized using the effective interest rate method.
An increase or decrease of 0.125% in the interest rate of the term loan
facility would change the annual pro forma interest expense by $225,000.
(5) Income Taxes: We estimate that our effective tax rate resulting from
the Transactions will be 40% (excluding the effects of future non-recurring
transactions).
(6) Minority Interest Buyback: Represents the elimination of the minority
interest related to Herbalife's Japanese subsidiary which was acquired prior to
the closing of the Transactions in accordance with the merger agreement.
44
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS -- (CONTINUED)
PRO FORMA EBITDA AND PRO FORMA ADJUSTED EBITDA
Pro forma EBITDA is defined as net income before minority interest, net
interest (income) expense, income tax expense, depreciation and amortization
based on the pro forma statements of operations. The calculation of pro forma
EBITDA is not based on accounting principles generally accepted in the United
States of America ("U.S. GAAP"). Herbalife believes that pro forma EBITDA
provides useful information regarding Herbalife's ability to service debt but
should not be considered in isolation or as a substitute for the consolidated
statement of income or cash flow data prepared in accordance with U.S. GAAP and
included elsewhere herein or as a measure of Herbalife's operating performance,
profitability or liquidity. Pro forma EBITDA, as presented, is not necessarily
comparable to other similarly titled captions of other companies due to
differences and methods of calculation.
Pro forma adjusted EBITDA reflects the elimination of certain non-recurring
items that affected 2001 and 2002 amounts. Pro forma EBITDA and adjusted pro
forma EBITDA are set forth below:
<Table>
<Caption>
TWELVE
MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------ ------------------ -------------
2001 2001 2002 2002
------------ ------- -------- -------------
(DOLLARS IN THOUSANDS)
Pro forma net income.................... $14,111 $11,668 $ 35,234 $ 37,677
EBITDA adjustments:
Interest expense, net................... 36,729 26,316 26,907 37,320
Income taxes............................ 9,408 7,778 23,490 25,120
Depreciation and amortization........... 21,583 15,705 18,249 24,127
------- ------- -------- --------
Pro forma EBITDA........................ $81,831 $61,467 $103,880 $124,244
Non-recurring items:
Severance and other employee related
expenses(a)........................... 9,898 3,208 3,973 10,663
Product costs under previous supply
agreements(b)......................... 5,666 5,666 -- --
Other(c)................................ 722 414 64 372
------- ------- -------- --------
Total non-recurring items............... 16,286 9,288 4,037 11,035
------- ------- -------- --------
Pro forma Adjusted EBITDA............... $98,117 $70,755 $107,917 $135,279
======= ======= ======== ========
</Table>
- ---------------
(a) In the year ended December 31, 2001 and the nine months ended September 30,
2001 and September 30, 2002, Herbalife incurred approximately $9.9 million,
$3.2 million and $4.0 million, respectively, of severance costs related to
changes in senior management. Additionally, Herbalife replaced certain key
executives at lower salary levels.
(b) On December 31, 2000, Herbalife's long-term contract with its primary
supplier expired. In 2001, Herbalife entered into new supply contracts which
have resulted in product cost savings. Product costs under the new supply
contracts would have resulted in savings of $5.7 million and $5.7 million
for the year ended December 31, 2001 and the nine months ended September 30,
2001. We anticipate that the costs savings will continue on a go forward
basis.
(c) During the year ended December 31, 2001 and the nine months ended September
30, 2001, Herbalife incurred costs of $466,000 and $222,000, respectively,
related to specific legal and professional fees, not expected to recur. In
addition, during the year ended December 31, 2001 and for the nine months
ended September 30, 2001 and 2002, Herbalife contributed services to the
Herbalife Family Foundation costing $256,000, $192,000 and $64,000
respectively. Herbalife does not plan to continue to contribute such
services on a go forward basis.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Historical Financial Data," "Unaudited Consolidated
Financial Statements" and the related notes and our consolidated financial
statements and related notes, each included elsewhere in this prospectus.
GENERAL
We are a worldwide marketer of weight management products, nutritional
supplements, and personal care products that support our customers' wellness and
healthy lifestyles. We market and sell these products through a global network
marketing organization comprised of over one million independent distributors in
55 countries.
Retail sales represent the gross sales amounts reflected on our invoices to
our distributors. We do not receive the amount reported as retail sales, and we
do not monitor the actual retail prices charged for our products. 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; and handling and
freight income. Distributor allowances as a percentage of sales may vary by
country depending upon regulatory restrictions that limit or otherwise restrict
distributor 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 to these importers. Gross profit consists of net sales less cost of sales,
consisting of the prices we pay to our manufacturers for products and costs
related to product shipments, duties and tariffs, freight expenses relating to
shipment of products to distributors and importers and similar expenses.
Royalty overrides, currently consisting of (i) royalty overrides and
bonuses, which total approximately 15% and 7%, respectively, of the suggested
retail sales prices of products earned by qualifying distributors on sales
within their distributor organizations, (ii) the 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 (iii) other one-time incentive cash
bonuses to qualifying distributors. These payments generally represent
compensation to distributions for the development and retention of the
distributor sales organizations. Because of local country regulatory
constraints, we may be required to modify our typical distributor incentive
plans as described above. Consequently, the total distributor discount
percentage may vary over time. We also offer reduced distributor allowances and
pay reduced royalty overrides with respect to certain products worldwide.
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 compensation
is 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 are used as 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 and
adding the handling and freight income. 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 literature and promotional materials, for which there are no distributor
allowances and increased sales of product on which we offer reduced distributor
allowances.
Marketing, distribution and administrative expenses represent our operating
expenses, components of which include labor and benefits, sales events,
professional fees, travel and entertainment, advertising, occupancy costs,
communication costs, bank fees, depreciation and amortization, foreign exchange
fees and other miscellaneous operating expenses.
46
Most of our sales outside the United States are made in the respective
local currencies. In preparing our financial statements, we translate revenues
into U.S. Dollars using average exchange rates. Additionally, the majority of
our purchases from our suppliers generally are made in U.S. Dollars, while sales
to distributors generally are made in local currencies. Consequently, a
strengthening of the U.S. Dollar versus a foreign currency can have a negative
impact on our reported sales and operating margins and can generate transaction
losses on intercompany transactions. Throughout the last five years, foreign
currency exchange have fluctuated significantly. From time to time, we enter
into foreign exchange forward contracts and option contracts to mitigate our
foreign currency exchange risk.
RESULTS OF OPERATIONS
<Table>
<Caption>
2002 QUARTER 2002 QUARTER 2001 2002
----------------------------- ------------- ------------- ------------------------------
JULY 1 AUGUST 1 TOTAL FOR THE QUARTER JANUARY 1 AUGUST 1
TO TO QUARTER ENDED ENDED TO TO
JULY 31 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 JULY 31 SEPTEMBER 30
------------- ------------- ------------- ------------- -------------- -------------
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
Retail sales......... $156,220,000 $ 285,800,000 $ 442,020,000 $424,317,000 $1,047,690,000 $ 285,800,000
Distributor
allowances on
product purchases... (73,335,000) (134,126,000) (207,461,000) (198,557,000) (492,997,000) (134,126,000)
Handling & freight
income.............. 13,521,000 24,501,000 38,022,000 35,827,000 89,495,000 24,501,000
------------ ------------- ------------- ------------- -------------- -------------
Net sales............ 96,406,000 176,175,000 272,581,000 261,587,000 644,188,000 176,175,000
Cost of sales........ 20,747,000 38,145,000 58,892,000 60,232,000 140,553,000 38,145,000
------------ ------------- ------------- ------------- -------------- -------------
Gross Profit......... 75,659,000 138,030,000 213,689,000 201,355,000 503,635,000 138,030,000
Royalty overrides.... 33,862,000 61,789,000 95,651,000 90,251,000 227,233,000 61,789,000
Marketing,
distribution &
administrative
expenses............ 31,642,000 53,930,000 85,572,000 88,161,000 207,390,000 53,930,000
Merger transaction
expenses............ 50,673,000 -- 50,673,000 -- 54,708,000 --
Interest expenses
(income) -- net..... (335,000) 12,622,000 12,287,000 (664,000) (1,364,000) 12,622,000
------------ ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes and
minority
interest.......... (40,183,000) 9,689,000 (30,494,000) 23,607,000 15,668,000 9,689,000
Income taxes......... (16,074,000) 3,875,000 (12,199,000) 9,443,000 6,267,000 3,875,000
------------ ------------- ------------- ------------- -------------- -------------
Income (loss) before
minority
interest.......... (24,109,000) 5,814,000 (18,295,000) 14,164,000 9,401,000 5,814,000
Minority interest.... -- -- -- 138,000 189,000 --
------------ ------------- ------------- ------------- -------------- -------------
NET INCOME (LOSS).... (24,109,000) 5,814,000 (18,295,000) 14,026,000 9,212,000 5,814,000
============ ============= ============= ============= ============== =============
<Caption>
NINE MONTHS NINE MONTHS
2002 2001
-------------- --------------
TOTAL FOR THE
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------- --------------
(PREDECESSOR)
Retail sales......... $1,333,490,000 $1,237,417,000
Distributor
allowances on
product purchases... (627,123,000) (578,570,000)
Handling & freight
income.............. 113,996,000 103,523,000
-------------- --------------
Net sales............ 820,363,000 762,370,000
Cost of sales........ 178,698,000 181,698,000
-------------- --------------
Gross Profit......... 641,665,000 580,672,000
Royalty overrides.... 289,022,000 266,777,000
Marketing,
distribution &
administrative
expenses............ 261,320,000 261,738,000
Merger transaction
expenses............ 54,708,000 (3,059,000)
Interest expenses
(income) -- net..... 11,258,000 (3,059,000)
-------------- --------------
Income (loss) before
income taxes and
minority
interest.......... 25,357,000 55,216,000
Income taxes......... 10,142,000 22,086,000
-------------- --------------
Income (loss) before
minority
interest.......... 15,215,000 33,130,000
Minority interest.... 189,000 499,000
-------------- --------------
NET INCOME (LOSS).... 15,026,000 32,631,000
============== ==============
</Table>
Our results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors, including our ability to attract and retain new
distributors, further penetrate existing markets and introduce additional and
new products into our markets.
As a result of the merger, the unaudited financial statements consist of
financial information from the Predecessor and the Successor. For the purposes
of management's discussion and analysis of financial condition and results of
operations, (i) financial information for the Predecessor and Successor have
been combined where applicable to compare quarter and year to date information
and (ii) the terms "we", "us" or "our" refers to Herbalife International, Inc.
and subsidiaries for periods through July 31, 2002 and to WH Intermediate
Holdings and subsidiaries for periods subsequent to July 31, 2002.
47
THIRD QUARTER 2002 COMPARED TO THIRD QUARTER 2001
RETAIL SALES. Retail sales for the three months and nine months ended
September 30, 2002 increased 4.2% and 7.8% to $442.0 million and $1,333.5
million, respectively, as compared to sales of $424.3 million and $1,237.4
million for the corresponding periods in 2001.
RETAIL SALES BY REGION
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ------------------------------------------
% CHANGE IN % CHANGE IN
% LOCAL % LOCAL
2002 2001 CHANGE CURRENCY 2002 2001 CHANGE CURRENCY
------ ------ ------ ----------- -------- -------- ------ -----------
(DOLLARS IN MILLIONS)
Asia/Pacific Rim........... $134.9 $152.6 (11.6)% (14.8)% $ 403.9 $ 424.9 (4.9)% (0.8)%
Europe..................... 140.4 112.8 24.5% 15.1% 408.0 340.1 20.0% 21.3%
The Americas............... 166.7 158.9 4.9% 9.5% 521.6 472.4 10.4% 12.0%
------ ------ -------- --------
Total Retail Sales......... $442.0 $424.3 4.2% 2.3% $1,333.5 $1,237.4 7.8% 10.2%
====== ====== ======== ========
</Table>
Retail sales in Asia/Pacific Rim decreased $17.7 million and $21.0 million,
or 11.6% and 4.9%, for the three months and nine months ended September 30,
2002, respectively, as compared to the same periods in 2001. The decline was
primarily due to a year-over-year decline in Japan, partially offset by
increases in Australia, Taiwan and Thailand. In local currency, retail sales for
Asia/Pacific Rim decreased by 14.8% and 0.8% for the three months and nine
months ended September 30, 2002, respectively, as compared to the same periods
in 2001. Japan and South Korea continued to be the two most significant
countries in the region. They contributed 65% and 66%, respectively, of the
region's retail sales for the three months and nine months ended September 30,
2002. Retail sales in Japan decreased $18.0 million and $45.9 million, or 23.3%
and 20.2%, for the three months and nine months ended September 30, 2002,
respectively, as compared to the same periods in 2001. Japan sales continued to
be impacted by a sluggish economy and strong competition. Retail sales in South
Korea decreased $6.3 million and increased $2.9 million, or 18.5% and 3.5%, for
the three months and nine months ended September 30, 2002, respectively, as
compared to the same periods in 2001.
Retail sales in Europe increased $27.6 million and $67.9 million, or 24.5%
and 20.0%, for the three months and nine months ended September 30, 2002,
respectively, as compared to the same periods in 2001. The increase reflected
strong product demand in the region. In local currency, retail sales in Europe
increased 15.1% and 21.3% for the three months and nine months ended September
30, 2002, respectively, as compared to the same periods in 2001. Germany and
Italy continued to be the two most significant countries in the region. They
contributed 37% and 38%, respectively, of the region's retail sales for the
three months and nine months ended September 30, 2002. Retail sales in Germany
increased $6.4 million and $20.2 million, or 32.2% and 35.0%, for the three
months and nine months ended September 30, 2002, respectively, as compared to
the same periods in 2001. The sales increase in Germany was partly due to the
strong local distributor leadership and positive sales momentum. Retail sales in
Italy decreased $0.1 million and $5.9 million, or 0.4% and 7.3%, for the three
months and nine months ended September 30, 2002, respectively, as compared to
the same periods in 2001. Italy's lower than expected performance is in part due
to a divided distributor leadership.
Retail sales in The Americas increased $7.8 million and $49.2 million, or
4.9% and 10.4%, for the three months and nine months ended September 30, 2002,
respectively, as compared to the same period in 2001. In local currency, retail
sales in The Americas increased 9.5% and 12.0% for the three months and nine
months ended September 30, 2002, respectively, as compared to the same periods
in 2001. The United States and Mexico continued to be the two most significant
countries in the region. They contributed 87% and 88%, respectively, of the
region's retail sales for the three and nine months ended September 30, 2002.
Retail sales in the United States increased $4.3 million and $35.4 million, or
3.8% and 10.4%, for the three months and nine months ended September 30, 2002,
respectively, as compared to the same periods in 2001. Well-organized
distributor sales meetings and a broad distributor leadership contributed to the
sales increase in the United States. Retail sales in Mexico also increased by
$0.9 million and $8.5 million, or 3.4% and 11.6%, for the three months and nine
months ended September 30, 2002, respectively, as compared to the same periods
48
in 2001. Mexico is benefiting from strategically located distribution centers
around the country providing easy and quick access to our products in addition
to strong local leadership and stable local economy.
RETAIL SALES BY PRODUCT
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------- ---------------------------------
2002 2001 % CHANGE 2002 2001 % CHANGE
------ ------ -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
Inner Nutrition:
Dietary and Nutritional
Supplements.................... $200.4 $193.3 3.7% $ 604.2 $ 551.7 9.5%
Weight Management................. 196.0 182.7 7.3% 581.5 531.8 9.3%
Outer Nutrition:
Personal Care Products............ 42.2 41.3 2.2% 134.4 128.5 4.6%
Literature, Promotional and Other... 16.2 16.6 (2.4)% 48.9 51.8 (5.6)%
Returns and Refunds................. (12.8) (9.6) 33.3% (35.5) (26.4) 34.5%
------ ------ -------- --------
Total.......................... $442.0 $424.3 4.2% $1,333.5 $1,237.4 7.8%
====== ====== ======== ========
</Table>
For the three months and nine months ended September 30, 2002, retail sales
of the inner and outer nutrition segments increased as compared to the same
periods in 2001. The increases were partially offset by a slight decrease in
retail sales of the literature, promotional and other and an increase in returns
and refunds.
Returns and refunds increased $3.2 million and $9.1 million for the three
months and nine months ended September 30, 2002, respectively. At the end of
2001 and at the beginning of 2002 we revised the buyback policies by instituting
a restocking fee and stopping the refund of packaging and handling. The changes
have resulted in a stabilization of the total number of new returns and refunds
in the second and third quarter of 2002. South Korea, because of its unique
consumer protection laws, continues to have the most returns and refunds. For
the nine months ended September 30, 2002, South Korea accounted for
approximately 34% of total returns and refunds while the US and Japan accounted
for 29% and 13%, respectively.
GROSS PROFIT. Gross profit was $213.7 million and $641.7 million for the
three months and nine months ended September 30, 2002, respectively, compared to
$201.4 million and $580.7 million in the same periods of 2001. As a percentage
of retail sales, gross profit for the three months and nine months ended
September 30, 2002 increased from 47.5% to 48.3% and 46.9% to 48.1%,
respectively, as compared to the same period in 2001. The increase in gross
profit reflected the realization of product cost savings attributed to new
supply contracts initiated in 2001 and a reduction in inventory provision for
slow moving and anticipated obsolescence when comparing 2002 periods to 2001
periods.
Royalty overrides as a percentage of retail sales were 21.6% and 21.7% for
the three months and nine months ended September 30, 2002, respectively, as
compared to 21.3% and 21.6% for the same periods in 2001. The ratio varies
slightly from period to period primarily due to a change in the mix of products
and countries because full royalty overrides are not paid on certain products or
in certain countries.
MARKETING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES. Marketing,
distribution and administrative expenses as a percentage of retail sales were
19.4% and 19.6% for the three months and nine months ended September 30, 2002,
respectively, as compared to 20.8% and 21.2% in the same periods in 2001. For
the three months and nine months ended September 30, 2002, these expenses
decreased $2.6 million and $0.4 million to $85.6 million and $261.3 million from
$88.2 million and $261.7 million, respectively, in the same periods in 2001. The
higher third quarter expenses in 2001 were due to charges of $2.2 million for
severance and $3.6 million for non-income tax contingencies for various tax
audits.
TRANSACTION EXPENSES. In the third quarter of 2002, we recorded $11.7
million relating to fees and $39.0 million of stock option expenses in
connection with the merger transaction.
INCOME TAXES. Income taxes were negative $12.2 million and $10.1 million
for the three months and nine months ended September 30, 2002 as compared to
$9.4 million and $22.1 million for the same periods of
49
2001. As a percentage of pre-tax income, the estimated annual effective income
tax rate was 40% for both the 2002 and 2001 periods.
FOREIGN CURRENCY FLUCTUATIONS. Currency fluctuations had a favorable
effect of $1.7 million and an unfavorable effect of $0.8 million on net income
for the three and nine months ended September 30, 2002 when recalculating
current year net income using last year's foreign exchange rates. For the three
months ended September 30, 2002, the regional effects were $1.2 million
unfavorable in the Americas, $0.9 million favorable in the Pacific Rim, and $2.0
million favorable in Europe. For the nine months ended September 30, 2002, the
regional effects were $1.3 million unfavorable in the Americas, $0.9 million
unfavorable in the Pacific Rim, and $1.4 million favorable in Europe.
NET INCOME. Net loss for the three months ended September 30, 2002 was
$18.3 million and net income for the nine months ended September 30, 2002 was
$15.0 million compared to net income of $14.0 million and $32.6 million for the
same periods in 2001. Excluding the impact of merger transaction expenses, net
income for the three months and nine months ended September 30, 2002 would have
been $12.1 million and $47.9 million. Net income excluding the impact of merger
transaction expenses for the nine months ended September 30, 2002 increased
principally because of a 7.8% increase in retail sales and a 1.2% increase in
gross profit as a percentage of retail sales.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
RETAIL SALES. Retail sales for year ended December 31, 2001 decreased 6.2%
to $1,656.2 million, as compared to retail sales of $1,764.9 million in the
prior year. In local currency, retail sales decreased by 0.7% as compared to the
prior year.
RETAIL SALES BY REGION. Retail sales in The Americas increased $4.4
million, or 0.7%, in 2001 as compared to the prior year. In local currency,
retail sales for the Americas increased by 2.3%. The increase in the region's
retail sales was primarily due to increases in Mexico of $23.1 million, or
30.7%, as compared to the prior year. Partially offsetting the increase in
Mexico were retail sales decreases in Brazil and the United States of $12.0
million and $11.4 million, or 27.5% and 2.5%, respectively, as compared to the
prior year.
Retail sales in Europe increased $38.3 million, or 9.1%, in 2001 as
compared to the prior year. In local currency, retail sales for Europe increased
13.7%. The increase in the region's retail sales was primarily due to sales
increases in Germany, Netherlands and Russia of $8.8 million, $10.8 million and
$15.1 million, or 12.7%, 34.3% and 46.2%, respectively, as compared to the prior
year.
Retail sales in Asia/Pacific Rim decreased $151.4 million, or 20.8%, during
2001 as compared to the prior year. In local currency, retail sales for
Asia/Pacific Rim decreased by 11.7%. The region's decrease in retail sales in
2001 was primarily due to sales decreases in Japan and India of $102.4 million
and $37.5 million, or 25.2% and 80.7%, respectively, as compared to the prior
year. In local currency, retail sales in Japan decreased 15.7%, primarily due to
volume declines resulting from a decrease of consumer demand and increased
competition. The decline in India reflects an initial period of rapid growth in
its first year of operation followed by a decline to a more sustainable sales
level.
RETAIL SALES BY PRODUCT. Retail sales of weight management products,
nutritional supplements and personal care products decreased 4.6%, 3.4% and
11.2% respectively, in 2001, as compared to the prior year. The decreases were
primarily due to the unfavorable impact from a stronger U.S. Dollar, the volume
decline in Japan, and other factors identified in the geographical segments
previously discussed. The discontinuation of certain personal care products also
contributed to the decrease in retail sales of personal care products. Product
returns of all product segments are included in the literature, promotional and
other category. Sales within the literature, promotional and other category
decreased by 49.8% in 2001, as compared to the prior year, and the decrease was
primarily due to an increase in product returns.
GROSS PROFIT. Gross profit of $778.6 million for 2001 was $37.9 million,
or 4.6%, lower than gross profit of $816.5 million in the prior year. As a
percentage of retail sales, gross profit for 2001 as compared to the same period
in the prior year increased from 46.3% to 47.0%. The increase in gross profit as
a percentage of retail sales was primarily due to product cost savings
attributed to new supply contracts initiated in 2001.
50
MARKETING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES. Marketing,
distribution and administrative expenses, as a percentage of retail sales, were
21.4% for 2001 as compared to 20.6% for 2000. These expenses for the same
periods decreased 2.5% to $354.6 million from $363.7 million in the prior year.
The decrease was due to cost cutting initiatives in corporate functions and
international distribution centers and favorable impact on expenses due to a
stronger U.S. Dollar. Included in the 2001 expenses were $0.5 million in
transaction losses related to foreign currency fluctuations, charges of $9.4
million in severance and related expenses and $9.3 million for sales tax and
other non-income tax contingencies. Included in the 2000 expenses were $7.7
million in transaction losses related to foreign currency fluctuations,
partially offset by a $5 million gain related to a key-man life insurance
policy.
BUY-OUT TRANSACTION EXPENSES. In 2000, we recorded a one-time charge of
$9.5 million relating to fees and expenses in connection with the termination of
a proposed buy-out transaction by Mark Hughes, our founder and Chief Executive
Officer at that time.
FOREIGN CURRENCY FLUCTUATIONS. The effect of unfavorable foreign currency
fluctuations on Herbalife's net income was $9.5 million and was mainly due to
the Japanese Yen and the Korean Won. The Japanese Yen and the Korean Won
weakened against the U.S. Dollar in 2001, as compared to the exchange rates in
effect during 2000. The effect of foreign currency changes of this nature in
countries other than Japan and South Korea was not material to our operations.
INCOME TAXES. Income taxes of $28.9 million for 2001 increased from $25.3
million in the prior year. As a percentage of pre-tax income, the estimated
annual effective income tax rate was 40% for both 2000 and 2001. During 2001, we
restructured certain of our operations resulting in the United States performing
additional functions for some of the foreign affiliates. In addition, U.S.
expenses associated with both foreign and domestic activities decreased from
2000 to 2001. As a result, the percentage of worldwide income reported as
domestic increased to 69.2% in 2001 from 22.4% in 2000.
NET INCOME. Net income for 2001 increased 15.4% to $42.6 million from
$36.9 million reported in the prior year, despite the 6.2% decrease in retail
sales. The increase was primarily due to the one-time charge relating to the
terminated buyout transaction in 2000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
RETAIL SALES. Retail sales for year ended December 31, 2000 decreased 1.6%
to $1,764.9 million, as compared to retail sales of $1,793.5 million in the
prior year. The decrease was primarily due to a volume decline in Japan and the
unfavorable impact from a stronger U.S. Dollar as compared to the European
currencies, partially offset by sales increases in the United States, Mexico and
India, which opened in November 1999. In local currency, retail sales increased
by 0.1% as compared to the prior year.
RETAIL SALES BY REGION. Retail sales in the Americas increased $74.5
million, or 13.8%, in 2000 as compared to the prior year. There were no
significant currency fluctuations in the region. The region's sales growth was
primarily due to retail sales increases in the United States of $37.0 million,
or 8.9%, and in Mexico of $30.4 million, or 67.8%.
Retail sales in Europe decreased $48.2 million, or 10.3%, in 2000 as
compared to the prior year. In local currency, retail sales for Europe increased
1.7%. The decrease in the region's retail sales was mainly due to the
unfavorable effect of currency translation in the region. Partially offsetting
the decrease was a retail sales increase in Germany of $5.3 million, or 8.3%. In
local currency, retail sales in Italy decreased by 2.5% and retail sales in
Germany increased by 25.8%.
Retail sales in Asia/Pacific Rim decreased $55.0 million, or 7.0%, during
2000 as compared to the prior year. In local currency, retail sales for
Asia/Pacific Rim decreased by 10.0%. The region's decrease in retail sales in
2000 was primarily due to decreases in Japan of $111.5 million, or 21.5%,
compared to the prior year. In local currency, retail sales in Japan decreased
25.2%, primarily due to the result of weak consumer demand and competition.
Partially offsetting the decrease were retail sales increases in India, Taiwan
and Hong Kong of $41.5 million, $12.5 million and $7.1 million, respectively, as
compared to the prior year. Within these markets, we began to initiate actions
which we believe would have an impact on the declining sales trends.
51
RETAIL SALES BY PRODUCT. Retail sales of weight management products and
personal care increased 0.2% and 1.3%, respectively, in 2000, as compared to the
prior year. Retail sales of nutritional supplements decreased by 4.5%, as
compared to the prior year. The increase in weight management product sales was
primarily due to the introduction of the Thermojetics(R) HPLC program in the
Americas. Personal care product sales increased primarily due to new product
introductions in Asia/Pacific Rim region. Nutritional supplement sales declined
primarily due to a sales decline in Japan and the unfavorable impact from the
weakening European currency as described above. Prior year amounts for retail
sales by product line have been reclassified to conform to current year
presentation.
GROSS PROFIT. Gross profit of $816.5 million for 2000 was $17.5 million,
or 2.1%, lower than gross profit of $834.0 million in the prior year. As a
percentage of retail sales, gross profit for 2000 as compared to the same period
in the prior year decreased from 46.5% to 46.3%.
MARKETING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES. Marketing,
distribution and administrative expenses, as a percentage of retail sales, were
20.6% for 2000 as compared to 19.2% for the same period in 1999. These expenses
for the same periods increased 5.6% to $363.7 million from $344.3 million in the
prior year. The increase includes the effect of our continuing investment in
corporate and operational support and enhanced product distribution
capabilities. Partially offsetting the increases was a gain related to a key-man
life insurance policy of $5 million and a decrease in total executive
compensation.
BUY-OUT TRANSACTION EXPENSES. In 2000, we recorded a one-time charge of
$9.5 million relating to fees and expenses in connection with the termination of
a proposed buy-out transaction by Mark Hughes, our founder and Chief Executive
Officer at that time.
FOREIGN CURRENCY FLUCTUATIONS. The Japanese Yen and the Korean Won
strengthened against the U.S. Dollar during 2000, as compared to the exchange
rates in effect during 1999. The favorable effect of the stronger Japanese Yen
and Korean Won on our net income was approximately $4.7 million. Most of the
European currencies weakened against the U.S. Dollar as compared to the exchange
rates in effect during 1999. The effect of foreign currency changes of this
nature in countries other than Japan, South Korea and Europe was not material to
our operations.
INCOME TAXES. Income taxes of $25.3 million for 2000 decreased from $36.3
million in 1999. As a percentage of pre-tax income, income taxes increased to
40% in 2000 from 38.5% in 1999. For the year ended December 31, 2000, a majority
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 the United States, it is generally subject to foreign
withholding taxes, which increases our effective income tax rate. The foreign
income is subject to U.S. income taxes. Foreign tax credits help reduce the
United States tax on that income.
NET INCOME. Net income for 2000 decreased 35.1% to $36.9 million from
$56.9 million reported in 1999. The decrease was primarily due to: (i) decreases
in retail sales, (ii) increase in marketing, distribution and administration
expenses and (iii) the one time pre-tax charge of $9.5 million related to the
terminated proposed buy-out transaction. Excluding the one-time charge, net
income for 2000 would have been $42.6 million.
LIQUIDITY AND CAPITAL RESOURCES
We have historically met our working capital and capital expenditure
requirements, including funding for expansion of operations, through net cash
flows provided by operating activities. Our principal source of liquidity is its
operating cash flows. A substantial decrease in sales of our products would
reduce the availability of funds.
For the nine months ended September 30, 2002, net cash provided by
operating activities was $54.6 million comprised of net income of $15.0 million,
non-cash adjustments to net income of $25.9 million, and changes in operating
assets and liabilities of $13.7 million. The change in operating assets and
liabilities was mainly due to a decrease in inventory of $14.6 million offset by
a $18.8 million increase in prepaid expenses and other current assets.
52
Capital expenditures including capital leases for the nine months ended
September 30, 2002 were $8.7 million compared to $10.7 million for the same
period in 2001. The majority of the 2002 expenditures resulted from investment
in management information systems, office facilities and equipment in the United
States. The 2001 capital expenditures reflect higher spending primarily due to
the development of a new distributor payment system, which was completed in
September of 2001.
As of September 30, 2002, we had $6.4 million in working capital. Cash and
cash equivalents and marketable securities were $77.2 million at September 30,
2002, compared to $201.2 million at December 31, 2001. In connection with the
merger, we used $217.1 million to finance the merger and pay related fees and
expenses. Our remaining cash of approximately $76 million on September 30, 2002,
in addition to liquidity provided from future operating cash flows and a
revolving credit facility of $25 million, are expected to be sufficient to meet
our working capital requirements for the foreseeable future.
In connection with the merger, WH Intermediate Holdings and its affiliates
consummated certain related financing transactions, including the issuance of
the Notes in the amount of $165.0 million, and the entering into of the Senior
Credit Facility, consisting of a term loan in the amount of $180 million and a
revolving credit facility in the amount of $25 million. For further discussion
of the related financings, see "Note 4, Long Term Debt" in the consolidated
financial statements of WH Intermediate Holdings included herein.
As of September 30, 2002, we had additional credit facilities of $6.8
million, which supported letters of credit and guarantees.
Historically, we have not been subjected to material price increases by its
suppliers. In 2001, our implementation of multiple source suppliers resulted in
price decreases. We believe that in the event of price increases, it has the
ability to respond to a portion of any price increases by raising the price of
its products. The majority of our purchases from our suppliers generally are
made in U.S. Dollars, while sales to its distributors generally are made in
local currencies. Consequently, strengthening of the U.S. Dollar versus a
foreign currency can have a negative impact on operating margins and can
generate transaction losses on intercompany transactions.
For a discussion of certain contingencies that may impact liquidity and
capital resources, see Note 5 in the notes to consolidated financial statements
of Herbalife International, Inc. included herein.
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. Also, see "Note 8, Derivative
Instruments and Hedging Activities" in the consolidated financial statements of
WH Intermediate Holdings included herein.
FOREIGN EXCHANGE RISK. We enter into foreign exchange derivatives in the
ordinary course of business primarily to reduce exposure to currency
fluctuations attributable to intercompany transactions and translation of local
currency revenue. Most of these foreign exchange contracts are designated for
forecasted transactions.
We purchase average rate put options, which give us the right, but not the
obligation, to sell foreign currency at a specified exchange rate ("strike
rate"). These contracts provide protection in the event the foreign currency
weakens beyond the option strike rate. In some instances, we sell (write)
foreign currency call options to finance the purchase of put options, which
gives the counterparty the right, but not the obligation, to buy foreign
currency from us at a specified strike rate. These contracts serve to limit the
benefit we would otherwise derive from strengthening of the foreign currency
beyond the strike rate. Such written call options are only entered into
contemporaneously with purchased put options. The fair value of option contracts
is based on third-party bank quotes.
53
<Table>
<Caption>
AVERAGE STRIKE
FOREIGN CURRENCY COVERAGE PRICE FAIR VALUE MATURITY DATE
- ---------------- ----------- -------------- ---------- -------------
Purchased Puts (Company may sell
Yen/Buy USD)......................... $30,000,000 117.35-120.53 $ 818,000 Oct-Dec 2002
Written Puts (Company may sell Yen/Buy
USD)................................. $15,000,000 120.21-120.53 $(271,000) Oct-Dec 2002
Written Calls (Counterparty may Buy
Yen/Sell USD)........................ $15,000,000 114.50 $ (15,000) Oct-Dec 2002
</Table>
Foreign exchange forward contracts are occasionally used to hedge advances
between subsidiaries and bank loans denominated in currencies other than their
local currency. The objective of these contracts is to neutralize the impact of
foreign currency movements on the subsidiary's operating results. The fair value
of forward contracts is based on third-party bank quotes.
The table below describes the forward contracts that were outstanding at
September 30, 2002.
<Table>
<Caption>
CONTRACT FORWARD MATURITY
FOREIGN CURRENCY DATE POSITION DATE CONTRACT RATE FAIR VALUE
- ---------------- -------- ----------- -------- ------------- -----------
Buy USD/Sell BRL.................. 9/5/02 $ 1,000,000 10/7/02 3.1375 $ 1,161,000
Buy USD/Sell MXP.................. 9/17/02 $10,600,000 10/3/02 10.0025 $10,824,000
</Table>
We periodically utilize bank debt at certain foreign subsidiaries to reduce
the impact of foreign currency movements on the subsidiary's operating results.
All foreign subsidiaries, excluding those operating in hyper-inflationary
environments, designate their local currencies as their functional currency. At
September 30, 2002, the total amount of foreign subsidiary cash was $48.7
million, of which $6.1 million was invested in U.S. Dollars. At September 30,
2002 the cash balances in Japan and South Korea were $10.6 million and $7.3
million, respectively.
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. We do not use derivative instruments to hedge its
investment portfolio.
Our cash equivalents and short-term investments at September 30, 2002 are
$1.2 million, invested in high-quality marketable securities.
The table below presents principal cash flows and interest rates by
maturity dates and the fair values of our borrowings as of September 30, 2002.
Fair values for fixed rate borrowings have been determined based on recent
market trade values. The fair values for variable rate borrowings approximate
their carrying value. Variable interest rates disclosed represent the rates on
the borrowings at September 30, 2002. Interest rate risk related to our capital
leases is not significant.
<Table>
<Caption>
EXPECTED MATURITY DATE
------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
--------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Long-term Debt Fixed
Rate.................. -- -- -- -- -- 162,949,000 162,949,000 146,654,000
Average Interest Rate... 12.00%
Variable Rate........... 7,500,000 30,000,000 30,000,000 30,000,000 30,000,000 47,500,000 175,000,000 175,000,000
Average Interest Rate... 5.8% 5.8% 5.8% 5.8% 5.8% 5.8%
</Table>
CRITICAL ACCOUNTING ESTIMATES
Our accounting policies are described in "Note 2, Summary of Significant
Accounting Policies" in the consolidated financial statements of Herbalife
International, Inc. included herein. We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
U.S., which require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the year. Actual results could differ from those
estimates. We consider the
54
following policies to be most critical in understanding the judgments that are
involved in preparing our financial statements and the uncertainties that could
impact its results of operations, financial condition and cash flows.
Allowances for product returns are provided at the time the product is
shipped. This accrual is based upon historic trends and experience. If the
actual product returns differ from past experience, changes in the allowances
are made.
We write down our inventory to provide for estimated obsolete or unsalable
inventory based on assumptions about future demand for our products and market
conditions. If future demand and market conditions are less favorable than our
assumptions, additional inventory write-downs could be required. Likewise,
favorable future demand and market conditions could positively impact future
operating results if written-off inventory is sold.
Contingencies are accounted for in accordance with SFAS No. 5, "Accounting
for Contingencies." SFAS No. 5 requires that we record an estimated loss from a
loss contingency when information available prior to issuance of our financial
statements indicates that it is probable that an asset has been impaired or a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as legal and income tax matters requires us to use judgment. Many of these
legal and tax contingencies can take years to be resolved. Generally, as the
time period increases over which the uncertainties are resolved, the likelihood
of changes to the estimate of the ultimate outcome increases. However, an
adverse outcome in these matters could have a material impact on our financial
condition and operating results.
Deferred income tax assets have been established for net operating loss
carryforwards of certain foreign subsidiaries and reduced by a valuation
allowance. The net operating loss carryforwards expire in varying amounts over a
future period of time. Realization of the income tax carryforwards are dependent
on generating sufficient taxable income prior to expiration of the
carryforwards. Although realization is not assured, we believe it is more likely
than not that the net carrying value of the income tax carryforwards will be
realized. The amount of the income tax carryforwards that is considered
realizable, however, could change if estimates of future taxable income during
the carryforward period are adjusted.
55
BUSINESS
GENERAL
We are a worldwide marketer of weight management products, nutritional
supplements, and personal care products that support our customers' wellness and
healthy lifestyles. We market and sell these products through a global network
marketing organization comprised of over one million independent distributors in
55 countries. Throughout our 22-year operating history, the high quality of our
products and the effectiveness of our network marketing organization have been
the primary drivers of our growth and geographic expansion. For the twelve
months ended September 30, 2002, our retail sales and adjusted EBITDA were $1.8
billion and $139.4 million, respectively.
COMPANY HISTORY
Herbalife was founded in 1980 by entrepreneur Mark Hughes, as part of his
search for safe and effective alternatives to weight management solutions then
in the market. We began to use the direct selling channel in the early days of
Herbalife. Our distributor base grew quickly, by increasing penetration in the
United States and by expanding abroad. Throughout the 1980's, we began
operations in other English-speaking countries such as Canada, the United
Kingdom, Australia and New Zealand, and subsequently entered several of our
larger international markets including Mexico (1989), Germany (1991), Italy
(1992), Japan (1993) and South Korea (1996). In conjunction with our entry into
new markets, we expanded our product portfolio with new product introductions to
our inner nutrition category and introduced our personal care product line in
1995.
Brian L. Kane and Carol Hannah were appointed Co-Presidents as part of a
management reorganization in September 2002. Ms. Hannah has been an officer of
Herbalife for almost 18 years and worked closely with Mr. Hughes for many years
until his untimely death in May 2000. Ms. Hannah previously held the position of
Executive Vice President, Sales, with responsibility for managing distributor
relationships. Mr. Kane has been with Herbalife for almost 10 years, most
recently serving as the Chief Operating Officer with responsibility for global
operations. He will continue to perform those duties. As part of the recent
management reorganization, William D. Lowe, Senior Vice President, Finance and
Treasury, will have responsibility for all financial operations, pricing and
strategic planning.
BUSINESS STRATEGY
Our business strategy is comprised of the following principal elements:
INCREASE MARKET PENETRATION. Historically, we focused on expanding our
network marketing organization to new countries and focused less on internal
growth within our existing markets. While this strategy achieved rapid initial
sales growth, it did not always achieve sustainable sales levels. As a result,
we have re-evaluated our country sales strategy and are refining sales and
marketing initiatives to place a greater emphasis on increased penetration of
these markets. In certain instances we may increase the availability of our
existing products in those markets where we currently offer only a small
percentage of our full product line. We believe this will drive sales growth
through increased penetration in each of our country markets around the world.
INCREASE DISTRIBUTOR PRODUCTIVITY AND RETENTION. We recognize that in
addition to high-quality products and a rewarding distributor compensation plan,
the success of our business depends on the support and training of our
distributors. We are strengthening our distributor support services by enhancing
customer service capabilities at our call centers, offering greater
business-building opportunities through the Internet, creating new business
support initiatives and offering enriched reward recognition programs. To
further enhance distributor productivity and improve retention, we are
developing new educational training programs aimed at assisting distributors
with their sales, marketing and recruiting techniques. Extensive training
opportunities enable distributors to not only develop invaluable
business-building and leadership skills, but also to become experts in our
products and offer customers sound advice on weight management, nutrition and
personal care. By placing a top priority on training, we build credibility among
our distributors and further establish Herbalife as an industry leader.
56
INCREASE BRAND RECOGNITION IN WEIGHT MANAGEMENT AND WELLNESS MARKETS. Our
underlying initiative is to continue to expand our reputation as an industry
leading company focused on weight management, complete wellness and a healthier
way of life. We are well positioned to take advantage of current worldwide
consumer trends indicating that individuals are turning more and more to
nutritional supplements for weight management, fitness and age-related health
concerns. The core of this strategy is accomplished through the rationalizing of
our approximately 570 products around a central wellness platform -- with core
product groups built around various life stages (for example, "Healthy
Children," "Healthy Men," "Healthy Women," and "Healthy Aging").
IMPROVE SUPPLY CHAIN MANAGEMENT. Prior to 2001, we purchased primarily all
of our weight management and nutritional supplement products from a single
supplier. In 2000, we reevaluated our product supply strategy and began
purchasing products from multiple suppliers. Our new supply chain management
strategy is focused on several key objectives, including: (i) production of the
highest quality products practicable, (ii) reduction in total inventory levels,
and (iii) reduction in product manufacturing costs. We are accomplishing these
objectives through the diversification of our supplier base to multiple
companies around the world. Purchasing from multiple suppliers and increased
supplier competition has enabled us to maintain product quality and lower
product costs. The geographic diversification of supply amongst several
manufacturers has also resulted in significantly lower inventory levels. In each
of the last nine quarters, we have achieved a consistent decline in inventory
levels from $115.8 million at June 30, 2000 to $56.7 million at September 30,
2002, and our gross profit as a percentage of retail sales has improved from
46.4% to 48.3% over this period. We expect to further reduce our inventory
levels.
IMPROVE MARGINS THROUGH EXPENSE MANAGEMENT. During the past year, we began
to implement certain product manufacturing and other sustainable expense
reduction initiatives that have already resulted in significant improvements in
financial performance. Our new management team is focused on realizing
additional savings through further reduction of corporate expenses and continued
focus on the implementation of the above initiatives. Through these initiatives
and our improvement in sales, we have improved our adjusted EBITDA from $30.4
million (7.2% of retail sales) in the third quarter of 2001 to $38.0 million
(8.6% of retail sales) in the third quarter of 2002. We believe the combination
of reduced production costs, reductions in corporate spending and lower
inventory will continue to enhance profitability and cash flow.
PRODUCT OVERVIEW
We focus on delivering a complete wellness program and way of life to our
customers through our diverse product portfolio. Our products are designed to
appeal to the growing number of consumers who seek to live a healthy lifestyle.
We group our products into two broad categories: inner nutrition, which consists
of weight management and nutritional supplements and outer nutrition, which
represents personal care products. We currently market approximately 570
products as well as literature and promotional materials designed to support our
distributors. Our products are often sold in programs, which are comprised of a
series of related products designed to achieve a common wellness or health
result, simplify weight management and nutrition for our consumers and maximize
our distributors' cross-selling opportunities. While our growth strategy
includes the introduction of new products, we have not been dependent on new
product introductions for sales growth.
57
The following chart summarizes our retail sales information by product
category during the indicated periods.
<Table>
<Caption>
PRODUCT SALES BY CATEGORY YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 2000 2001
------------------- ------------------- -------------------
RETAIL PERCENT RETAIL PERCENT RETAIL PERCENT
SALES OF SALES SALES OF SALES SALES OF SALES
-------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
PRODUCT CATEGORY
INNER NUTRITION:
Weight Management.................. $ 741.0 41.3% $ 742.3 42.1% $ 707.9 42.7%
Nutritional Supplements............ 807.8 45.0 771.2 43.7 744.6 45.0
OUTER NUTRITION:
Personal Care Products............. 198.1 11.1 200.6 11.4 178.2 10.8
OTHER PRODUCTS:
Literature, Promotional and
Other(1)........................ 46.6 2.6 50.8 2.8 25.5 1.5
-------- ----- -------- ----- -------- -----
Total........................... $1,793.5 100.0% $1,764.9 100.0% $1,656.2 100.0%
======== ===== ======== ===== ======== =====
</Table>
- ---------------
(1) All product returns are netted against the literature, promotional and other
category. See "-- Product Return and Buy-Back Policies."
INNER NUTRITION
WEIGHT MANAGEMENT PRODUCTS. We believe that our products have helped
millions of people manage their weight safely and effectively for 22 years by
providing our customers with numerous weight management products. Among the
products we offer are meal replacement products, herbal appetite suppressants
and a variety of healthy snacks designed to provide nutritional support between
meals. These products include the following: (i) Formula 1 meal replacement
product, a protein powder in four different flavors designed as a meal
replacement; (ii) the four Thermojetics(R) weight management tablets (green
ephedra-free, beige, yellow and total control) used as part of the weight
management program; and (iii) Thermojetics(R) Herbal Concentrate, an herbal
beverage blended from five natural botanicals, now offered in three different
flavors. In December 1999, we introduced a new alternative Thermojetics(R)
program, named the Thermojetics(R) HPLC Program, which is comprised of snack
bars, the Thermojetics(R) Gold Herbal Supplement Tablets and shakes, soup and
drink mixes. Recently, we introduced a low carb bread mix, low carb dessert mix
and low carb soy nuts. Most recently, in October 2002, we introduced Total
Control(R) weight management tablets, an ephedra-free product in the U.S. For
the year ended December 31, 2001, $707.9 million or 42.7% of our retail sales
were derived from weight management products.
NUTRITIONAL SUPPLEMENTS. We market numerous dietary and nutritional
supplements designed to meet our customers' specific nutritional needs. Each of
these supplements contains high-quality herbs, vitamins, minerals and other
natural ingredients and focuses on the specific lifestages and lifestyles of our
customers, including females, males, children, the elderly, athletes and others.
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 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. For the year ended December 31, 2001, $744.6 million or
45.0% of our retail sales were derived from nutritional supplements.
58
OUTER NUTRITION
PERSONAL CARE PRODUCTS. Rich in botanical compounds, these products are
marketed to protect, nourish, smooth, camouflage, improve and soothe the body,
skin and hair of our customers. They provide both cosmetic enhancement and outer
nutrition for the skin and body and preservation of youthful appearance and are
designed to make customers look and feel their best. We market most of our
personal care product line under the name Dermajetics(R). This line consists of
skin care products such as: Radiant CTM Daily Skin Booster; The Skin Survival
Kit, consisting of a day and night moisturizer, a deep cleaning facial mask and
a hydrating eye gel; Nature's Mirror(R)consisting of a cleanser, toner and
moisturizer for each of three different skin types; and several specialty care
products, including Skin Activator(TM); Ocean Currents(R), consisting of five
bath products; the Acne Treatment System, consisting of four products; and
AromaVie(R), consisting of three aromatic soaps and oils. Other specialty
personal care products include Herbal Aloe Gel and Lotion, Soothing Spray,
Cleansing Bars, Body Wash, Super APR (Arthritis Pain Relief) and Body Buffing
and Toning Cream. For the year ended December 31, 2001, $178.2 million or 10.8%
of our retail sales were derived from personal care products.
OTHER PRODUCTS
LITERATURE, PROMOTIONAL AND OTHER. We also sell literature and promotional
materials, including sales aids, informational videotapes and cassette
recordings. In addition, we sell distributor kits (called "International
Business Packs") at a worldwide average cost of approximately $60 per kit, which
an individual must purchase in order to become a distributor (except in South
Korea, where there is no charge for a distributor kit). Sales of distributor
kits are not subject to distributor allowances and royalty overrides. For the
year ended December 31, 2001, $25.5 million or 1.5% of the our retail sales were
derived from literature and promotional materials.
PRODUCT MANUFACTURING AND DEVELOPMENT
As part of our focus on delivering a complete wellness program and way of
life to our customers, we will continue to explore and develop 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. We will continue to be assisted in this review
process by our Medical Advisory Board. In general, we maintain a second-mover
strategy with respect to new product offerings, often introducing our own unique
formulations of products successfully offered by others in the market. Since our
products consist of herbs, vitamins, minerals and other ingredients that we
regard as safe when taken as suggested by us, we do not conduct clinical studies
of our products. However, 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.
All of our products are manufactured by outside companies, with the
exception of products distributed in and sourced from China where we have our
own manufacturing facility. For a number of years, a substantial majority of
weight management products and nutritional supplements were manufactured and
sold to us by a single supplier. However, beginning in 2001, we have diversified
our weight management products and nutritional supplements sourcing to multiple
manufacturers. We have established excellent relationships with these
manufacturers and obtained improvements in supply services, product quality and
product delivery. We own the proprietary rights to substantially all of our
weight management products and dietary and nutritional supplements.
PRODUCT RETURN AND BUY-BACK POLICIES
In most markets, our products include a customer satisfaction guarantee.
Under this guarantee, within 30 days of purchase, any customer who is not
satisfied with an Herbalife product for any reason may return it or any unused
portion of it to the distributor from whom it was purchased for a full refund
from the distributor or credit toward the purchase of another Herbalife product.
If they return the products to us on a timely basis,
59
distributors may obtain replacements from us for such returned products. In
addition, in most jurisdictions, we maintain a buy-back program, pursuant to
which we will repurchase products sold to a distributor provided that the
distributor resigns as an Herbalife distributor, returns the product in
marketable condition within twelve months of original purchase and meets certain
documentation and other requirements. We believe this buy-back policy addresses
a number of the regulatory compliance issues pertaining to network marketing
systems.
Historically, product returns and buy-backs have not been significant.
Product returns and buy-backs approximated 1.2%, 1.7% and 2.0% in 1999, 2000 and
2001, respectively. At the end of 2001 and at the beginning of 2002, we revised
buy-back policies by instituting a restocking fee and stopping the refund of
packaging and handling. The changes have resulted in a stabilization of the
total number of new returns and refunds in the second and third quarter of 2002.
South Korea, because of its unique consumer protection laws, continues to have
the most returns and refunds. For the nine months ended September 30, 2002,
South Korea accounted for approximately 34% of total returns and refunds while
the U.S. and Japan accounted for 29% and 13%, respectively.
NETWORK MARKETING SYSTEM
GENERAL. Our products are distributed through a global network marketing
organization comprised of over one million independent distributors in 55
countries as of September 30, 2002, except in China where our sales are
regulated to be conducted on a wholesale basis to local retailers. Included in
the number of active distributors as of February 2002 are distributors and
supervisors whose distributorships were terminated subsequent to January 31,
2002 but who may have renewed, or in the future may renew, their
distributorships. This is consistent with our established internal policies and
past practices.
We believe that the direct-selling distribution channel is ideally suited
to selling our products, because sales of wellness and weight management
products are strengthened by ongoing personal contact between retail consumers
and distributors. This personal contact enhances (i) the education of consumers
in the weight management and nutrition markets and (ii) the motivation of
consumers to begin and maintain weight management programs for healthy living.
In addition, many distributors use Herbalife's products themselves providing
first-hand testimonial proof of product effectiveness, which serves as a
powerful sales tool. We encourage our distributors to use our products and to
communicate their results to their retail customers.
We seek to provide our distributors attractive and flexible career
opportunities by selling our high-quality products. Our distributors have the
opportunity to earn significant income and receive non-financial rewards
designed to motivate and recognize individual achievement. As a result, we
believe the business opportunity provided by 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
non-conventional, part-time employment opportunities. Our distributors, who are
independent contractors, earn income on their own sales and can also earn
royalties and bonuses on sales made by the distributors in their downline
organizations. We believe our network marketing system also provides an
attractive business opportunity relative to other network marketing companies,
particularly because we maintain an industry leading payout ratio and offer
high-quality products.
STRUCTURE OF THE NETWORK MARKETING SYSTEM. To become a distributor, a
person must be sponsored by an existing distributor, except in China where no
sponsorship is allowed, 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. China has its own unique
qualifying program. Volume points are point values assigned to each of our
products that are equal in all countries and are based on the suggested retail
price of U.S. products. 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
60
their organizations. Supervisors contribute significantly to our sales and some
key supervisors who have attained the highest levels 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,*
-----------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
Approximate number of supervisors.... 139,000 147,000 160,000 165,000 172,000
</Table>
- ---------------
* 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.
DISTRIBUTOR EARNINGS. Distributor earnings are derived from several
sources. First, distributors may earn profits by purchasing our products at
wholesale prices, which are discounted 25% to 50% from suggested retail prices,
depending on the distributors' level within our distributor network, and selling
our products to retail customers or to other distributors. Second, distributors
who sponsor other distributors and establish their own downline organizations
may earn (i) royalty overrides, 15% of product retail sales in the aggregate,
(ii) production bonuses, 7% of product retail sales in the aggregate and (iii)
President's Team bonus, 1% of product retail sales. Our total pay-out on
products subject to distributor royalty overrides ("payout ratio") is currently
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 other bonuses. In China, distributors are limited to earn profits from
retailing our products by purchasing our products with discounts and rebates up
to 50% of suggested retail price.
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.
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. The President's
Team members have, under certain conditions, the opportunity to participate in
the President's Team Bonus, which for 2001 consisted of a total available awards
package of approximately one percent of our 2001 total product retail sales, or
approximately $16.0 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 offer 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 is an automatic monthly shipment
program that enables our junior distributors to obtain an extra 10% distributor
allowance over the standard 25%. 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 at which point the distributor allowance increases to 50%.
61
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. This
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. Sponsor distributors in this program earn the same
level of royalty overrides and bonuses on sales that they would receive if both
distributors resided in the same country.
DISTRIBUTOR TRAINING. We conduct over 25,000 training sessions annually on
local, regional and global levels to educate and motivate our distributors. In
addition to these training sessions, we have our own "Herbalife Broadcast
Network" that we presently use to provide distributors continual training and
information. The Herbalife Broadcast Network can be seen on the DISH Network
satellite television service. We use the Herbalife Broadcast Network to provide
our distributors with the most current product and marketing information.
GEOGRAPHIC PRESENCE
The following chart sets forth the markets in which we currently operate,
the number of countries open in such markets as of September 30, 2002 and retail
sales information by region during the past three fiscal years.
<Table>
<Caption>
PERCENT OF NUMBER OF
TOTAL COUNTRIES
RETAIL OPEN AS OF
YEAR ENDED DECEMBER 31, SALES SEPTEMBER 30,
------------------------------ ---------- -------------
1999 2000 2001 2001 2002
-------- -------- -------- ---------- -------------
(DOLLARS IN MILLIONS)
GEOGRAPHIC REGION
Americas........................ $ 541.3 $ 615.8 $ 620.2 37.5% 11
Europe.......................... 469.4 421.2 459.5 27.7 33
Asia/Pacific Rim................ 782.8 727.9 576.5 34.8 11
-------- -------- -------- ----- --
Total........................... $1,793.5 $1,764.9 $1,656.2 100.0% 55
======== ======== ======== ===== ==
</Table>
We conduct business in 55 countries located in The Americas, Europe and
Asia/Pacific Rim. Retail sales in those regions represented 37.5%, 27.7% and
34.8%, respectively, of our total retail sales in 2001. The countries in which
we currently operate represent approximately 71% of the world's total
population.
Historically a significant portion of our sales have been from a few large
countries. In 2001 our top six countries, consisting of the United States,
Japan, South Korea, Mexico, Italy and Germany, accounted for approximately 69%
of total retail sales. Over the most recent five years, the top six countries of
each year have gone from representing approximately 77% of retail sales in 1997
to 69% of retail sales in 2001, primarily as a result of opening new countries.
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. To the extent we determine to open new markets in the
future, we will continue to seek to minimize the impact on distributor focus in
existing markets and to ensure that adequate distributor support services and
other Herbalife systems are in place to support growth.
62
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. 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.
Our business strategy will include placing greater emphasis on sustaining
and increasing sales levels in our existing markets, particularly where we have
experienced declines in sales after an initial period of growth. We will seek
greater market penetration in our markets by refining sales, marketing and
recruiting initiatives and by increasing the availability of our existing
products in those markets where we currently offer only a small percentage of
our full product line. See "Business -- Business Strategy."
OPERATIONS
Our global distribution system features centralized distribution and
telephone ordering systems coupled with convenient storefront distributor
service centers. Distribution and service centers are conveniently located and
attractively designed in order to encourage local distributors to meet and
network with each other and learn more about our products, marketing system and
upcoming events. Our major distribution warehouses have been automated with
"pick-to-light" picking systems which consistently deliver over 99.5% order
accuracy and handling systems that provide for inspection of every shipment
before it is sent to delivery. We have central sales ordering facilities for
answering and processing telephone orders. Operators at such centers are capable
of conversing in multiple languages.
Our weight management products, nutritional supplements, and some personal
care products are distributed to foreign markets either from the facilities of
our manufacturers or from our Los Angeles and Venray, Netherlands distribution
centers. Products are distributed in the United States market from our Los
Angeles distribution center or from our Memphis distribution center. Products
are generally transported by truck, cargo ship or plane to our international
markets and are warehoused in either one of our foreign distribution centers or
a contracted third party warehouse and distribution center. After arrival of the
products in a foreign market, distributors purchase the products from the local
distribution center or the associated sales center. Our personal care products
and color cosmetics are predominantly manufactured in Europe and the United
States. The products manufactured in Europe are shipped to a centralized
warehouse facility, from which delivery by truck, ship or plane to other
international markets occurs.
MANAGEMENT INFORMATION, INTERNET AND TELECOMMUNICATION SYSTEMS
In order to facilitate our continued growth and support distributor
activities, we continually upgrade our management information, internet and
telecommunication systems. These systems include: (i) a centralized host
computer located in Southern California, which is linked to our international
markets through a dedicated wide area network that provides on-line, real-time
computer connectivity and access; (ii) local area networks of personal computers
within our markets, serving our regional administrative staffs; (iii) an
international e-mail system through which our employees communicate; (iv) a
standardized Northern Telecom Meridian telecommunication system in most of our
markets; (v) fully integrated Oracle supply chain management system that has
been installed in our distribution centers; and (vi) internet websites to
provide a variety of online services for distributors (status of qualifications,
meeting announcements, product information, application forms, educational
materials and, in the United States, sales ordering capabilities). These systems
are designed to provide financial and operating data for management, timely and
accurate product ordering, royalty override payment processing, inventory
management and detailed distributor records. We intend to continue to invest in
our systems in order to strengthen our operating platform.
REGULATION
GENERAL. In both our United States and foreign markets, we are affected by
extensive laws, governmental regulations, administrative determinations, court
decisions and similar constraints. Such laws, regulations
63
and other constraints may exist at the federal, state or local levels in the
United States and at all levels of government in foreign jurisdictions,
including regulations pertaining to: (i) the formulation, manufacturing,
packaging, labeling, distribution, importation, sale and storage of our
products; (ii) 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; (iii) our network marketing system; (iv) transfer
pricing and similar regulations that affect the level of U.S. and foreign
taxable income and customs duties; and (v) taxation of distributors (which in
some instances may impose an obligation on us to collect the taxes and maintain
appropriate records).
PRODUCTS. The formulation, manufacturing, packaging, storing, labeling,
promotion, advertising, distribution and sale of our products are subject to
regulation by various governmental agencies, including (i) the FDA, (ii) the
FTC, (iii) the Consumer Product Safety Commission ("CPSC"), (iv) the United
States Department of Agriculture ("USDA"), (v) the Environmental Protection
Agency ("EPA"), and (vi) 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 over-the-counter ("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 structure/function 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 or conventional foods 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: (i) the identification of dietary supplements and their nutrition and
ingredient labeling; (ii) the terminology to be used for nutrient content
claims, health content claims, and statements of nutritional support; (iii)
labeling requirements for dietary supplements for which high potency and
antioxidant claims are made; (iv) notification procedures for statements on
dietary supplements; and (v) 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, which we did.
In addition, we are required to continue our ongoing program of securing
substantiation of our structure/function 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 structure/function 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
64
disease claim). The new final rule describes how the FDA will distinguish
disease claims from structure/ function claims. In February 2001, the FDA issued
a notice requesting comments on the types of information that should be included
in a guidance on applying the regulations on statements made for dietary
supplements concerning the effect of a dietary supplement on the structure or
function of the body. No guidance document has been issued to date, and we have
continued our ongoing efforts to ensure that our dietary supplement product
labeling complies with the requirements of the Structure/Function final rule,
which became effective in February of 2000.
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 tablets is a Chinese herb, Ma Huang, which contains naturally
occurring ephedrine alkaloids 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
tablets 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 FDA has on record a small number of reports of anecdotal adverse
reactions allegedly resulting from the ingestion of Ma Huang contained in our
Thermojetics(R) original green tablet. We have received two redacted anecdotal
adverse reports from the FDA, which have been investigated to the fullest extent
possible. 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 five legal actions (including
three wrongful death cases) seeking to link the ingestion of Thermojetics(R)
original green tablets with subsequent medical problems. We believe that we have
substantial defenses to these actions and that the matters will not have a
material financial impact on us. 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
attacks, strokes, seizures, psychosis and death. We do not market our Ma Huang
product with any claims referred to in the FDA statement.
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 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. In
April 2000, the FDA issued a partial withdrawal of the June 1997 proposal,
because of concerns about the factual basis for the proposal. No new proposals
on ephedrine alkaloids have
65
been issued by the agency, nor have the portions of the 1997 proposal which were
not withdrawn been the subject of a final rule.
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, due to
decreasing consumer demand and increased regulatory scrutiny, we made the
decision to discontinue sale of all ephedra containing products by December 31,
2002.
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 except in those states in which regulations may
prohibit or restrict the sale of the products, and Thermojetics(R) green
(Refresh) tablets are also offered in Japan and Russia. 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 seven 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. This 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.
The withdrawal of our products that currently contain ephedrine could have
a material adverse effect on sales of 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 1999, 2000 and 2001, retail sales of our weight
management products in the United States constituted 9.8%, 11.2% and 12.2%,
respectively, of our retail sales. The Thermojetics(R) original green tablets,
Thermojetics(R) green (Refresh) tablets and Thermojetics(R) gold tablets
amounted to approximately $51.5 million, or 3.1% of our retail sales in 2001.
As a result of increased regulatory scrutiny of products that contain
ephedrine alkaloids, as well as publicity of private litigation involving
alleged adverse health effects resulting from the use of such products, product
liability insurance covering such products has become very difficult to obtain.
Premiums for our product liability insurance were $2.5 million in 2002 for
coverage of $37.5 million with a self insured risk of $7.5 million. The current
coverage expires on March 31, 2003.
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 eight nutritionally balanced high-protein products that are also low in
carbohydrates, is called the Thermojetics(R) HPLC Program. The FDA has not
authorized the use of a low carbohydrate claim on the label of individual food
products, and therefore we have not made such a claim on the label of any of the
eight products that together comprise our Thermojetics(R) HPLC 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 weight
management program. In addition, we are exploring other alternatives which do
not involve specifically describing the program as low in carbohydrates.
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.
66
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 or nutritional 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, or comparable
foreign agencies, 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: (i) representations concerning our products; (ii) income
representations made by us and/or distributors; (iii) public media
advertisements, which in foreign markets may require prior approval by
regulators; and (iv) 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. As a response to complaints from local regulators in
some of our markets, we imposed a ban in March 2002 on our distributors'
inappropriate use of outdoor signage. We cannot assure you as to the effect such
ban will have. 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: (i) the
reformulation of some products not able to be reformulated; (ii) imposition of
additional record keeping requirements; (iii) expanded documentation of the
properties of some products; (iv) expanded or different labeling; and (v)
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
67
1986 pursuant to the settlement of an action instituted by the California
Attorney General, the State Health Director and the Santa Cruz County District
Attorney. We consented to the entry of this injunction without in any way
admitting the allegations of the complaint. The injunction prevents us and our
officers and directors from making specified claims in future advertising of our
products and 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 ingredients that have
been genetically modified ("GM"). In some markets, the possibility of health
risks thought to be associated with GM ingredients has prompted proposed or
actual governmental regulation. Some of our products contain ingredients that
would be or might be classified as having been genetically modified. We cannot
anticipate the extent to which regulations in our markets will restrict the use
of GM ingredients in our products or the impact of any regulations on our
business in those markets. In response to any applicable regulations, we would,
where practicable, attempt to reformulate our products to satisfy the
regulations. We believe, based upon currently available information, that
compliance with regulatory requirements in this area should not have a material
adverse effect on us or our business. However, because publicity and
governmental scrutiny of GM ingredients is a relatively new and evolving area,
there can be no assurance in this regard. If a significant number of our
products were found to be genetically modified and regulations in our markets
significantly restricted the use of GM ingredients in our products, our business
could be materially adversely affected.
In addition, in certain of our markets there has been recent adverse
publicity concerning infection of bovine products and by-products by Bovine
Spongiform Encephalopathy ("BSE"), which may cause what is commonly referred to
as mad cow disease. Certain of our products contain bovine products and/or by-
products. We are not aware of any infection or contamination of any of our
products by BSE. Should any such infection or contamination be detected, it
could have a material adverse effect on our business. Further, even if no such
infection or contamination is detected, adverse publicity concerning the BSE
risk, or governmental or regulatory developments aimed at combating the risk of
BSE contamination by regulating bovine products and/or by-products, could have a
material adverse effect on our business.
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
organization's 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.
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 without addressing the merits
of the allegations. 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.
68
We and certain of our distributors have been named as defendants in a
purported class action lawsuit filed in the U.S. District Court for the Central
District of California (Jacobs v. Herbalife International, Inc., et al.). The
lawsuit was filed on February 19, 2002. The complaint alleges that specified
marketing plans employed by the distributor defendants are illegal, and that we
have permitted the use of these marketing plans and/or failed to supervise the
distributors' conduct to prevent violations of law by them. The complaint does
not challenge the legality of Herbalife's marketing system. The complaint seeks
to state causes of action under RICO and various state and other federal laws.
The complaint was dismissed with leave to amend, the deadline for which is set
as January 2, 2003. We believe that we have meritorious defenses to the
allegations contained in the lawsuit. However, an adverse result in this
litigation could have a material adverse effect on our financial condition and
operating results.
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: (i) require us to make modifications to our network marketing system,
(ii) result in negative publicity or (iii) 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 reported as earned by
our U.S. or local entities and are taxed accordingly. In addition, our
operations are subject to regulations designed to ensure that appropriate levels
of customs duties are assessed on the importation of our products.
Although we believe that we are in substantial compliance with all
applicable regulations and restrictions, we are subject to the risk that
governmental authorities could audit our transfer pricing and related practices
and assert that additional taxes are owed. For example, we are currently subject
to pending or proposed audits that are at various levels of review, assessment
or appeal in a number of jurisdictions involving transfer pricing issues, income
taxes, duties, value added taxes, withholding taxes and related interest and
penalties in material amounts. In some circumstances, additional taxes, interest
and penalties have been assessed, and we will be required to litigate to reverse
the assessments. We and our tax advisors believe that there are substantial
defenses to the allegations that additional taxes are owing, and we are
vigorously defending the additional proposed taxes. The ultimate resolution of
these matters may take several years, and the outcome is uncertain.
In the event that the audits or assessments are concluded adversely to us,
we may or may not be able to offset or mitigate the consolidated effect of
foreign income tax assessments through the use of U.S. foreign tax credits. In
the past we have utilized the majority of our foreign tax credits in the year in
which they arise with the unused amount carried forward. Because the laws and
regulations governing U.S. foreign tax credits are complex and subject to
periodic legislative amendment, we cannot be sure that we would in fact be able
to take advantage of any foreign tax credits in the future. As a result, adverse
outcomes in these matters could have a material impact on our financial
condition and operating results.
OTHER REGULATIONS. We also are subject to a variety of other regulations
in various foreign markets, including regulations pertaining to social security
assessments, employment and severance pay requirements, import/export
regulations and antitrust issues. As an example, in many markets, we are
substantially restricted in the amount and types of rules and termination
criteria that we can impose on distributors without having to pay social
security assessments on behalf of the distributors and without incurring
severance obligations to terminated distributors. In some countries, we may be
subject to these obligations in any event.
Our failure to comply with these regulations could have a material adverse
effect on our business in a particular market or in general. Assertions that we
failed to comply with regulations or the effect of adverse regulations in one
market could adversely affect us in other markets as well by causing increased
regulatory scrutiny in those other markets or as a result of the negative
publicity generated in those other markets.
69
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.
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. Although we devote considerable resources to maintaining our
compliance with regulatory constraints in each of our markets, we cannot be sure
that (i) we would be found to be in full compliance with applicable regulations
in all of our markets at any given time or (ii) 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, Thermojetics, Dermajetics, and
have several other trademarks and tradenames registered in connection with our
products and operations. Our trademark registrations are issued through the
United States Patent and Trademark Office and in comparable agencies in the
foreign countries. We consider our trademarks and tradenames to be an important
factor in our business. We also take care in protecting the intellectual
property rights of our proprietary formulas.
70
COMPETITION
The business of marketing weight management products, nutritional
supplements, and personal care products is highly competitive. This market
segment includes numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers both in the
United States and abroad. The market is highly sensitive to the introduction of
new products or weight management plans, including various prescription drugs
that may rapidly capture a significant share of the market. As a result, our
ability to remain competitive depends in part upon the successful introduction
of new products. In addition, we anticipate that we will be subject to
increasing competition in the future from sellers that utilize electronic
commerce. We cannot be sure of the impact of electronic commerce or that it will
not adversely affect our business.
We are subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management products, nutritional supplements, and personal care
products, as well as other types of products. Some of our competitors are
substantially larger than we are, and have available considerably greater
financial resources than we have. Our ability to remain competitive depends, in
significant part, on our success in recruiting and retaining distributors
through an attractive compensation plan and other incentives. We believe that
our production bonus program, international sponsorship program and other
compensation and incentive programs provide our distributors with significant
earning potential. However, we cannot be sure that our programs for recruitment
and retention of distributors will be successful.
EMPLOYEES
As of September 30, 2002, we had 2,336 full-time employees. These numbers
do not include our distributors, who generally are independent contractors
rather than our employees. Except for some employees in Mexico and in some
European countries, none of our employees are members of any labor union, and we
have never experienced any business interruption as a result of any labor
disputes.
PROPERTIES
We lease all of our physical properties located in the United States. Our
executive offices, located in Century City, California, include approximately
120,000 square feet of general office space under lease arrangements expiring in
February 2006. We lease an aggregate of approximately 160,000 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 2006 and August 2006, respectively. In Venray, Netherlands,
we lease our European centralized warehouse of approximately 175,000 square
feet. The lease expires in June 2004. We also lease warehouse, manufacturing
plant and office space in a majority of our other geographic areas of operation.
We believe that our existing facilities are adequate to meet our current
requirements and that comparable space is readily available at each of these
locations.
LEGAL PROCEEDINGS
We are from time to time engaged in routine litigation. We regularly review
all pending litigation matters in which we are involved and establish reserves
deemed appropriate by management for these litigation matters. However, some of
these matters are material and an adverse outcome in these matters could have a
material impact on our financial condition and operating results.
In September 2000, a putative class action lawsuit was filed in the
District Court, Clark County, Nevada (Tharp v. Herbalife International, Inc., et
al.). A second putative class action lawsuit was filed in the same court in
August 2001 (Brown v. Herbalife International Inc., et al.). The Tharp lawsuit
alleges breaches of fiduciary obligations by our directors and its majority
stockholder in connection with the adoption by us of the Preferred Share
Purchase Rights Plan and the rejection of a purported offer by a third party to
acquire a controlling interest in us. The Brown lawsuit similarly alleges
breaches of fiduciary obligations in connection
71
with an alleged rejection of an offer from a third party to purchase us. The
plaintiffs in the lawsuits request (1) an order compelling the defendants to
take steps to seek a sale of us, (2) an order enjoining the defendants in
office, (3) unspecified damages, and (4) other relief. We have reached an oral
settlement to pay plaintiff's legal fees of $190,000 and our insurance company
has agreed to pay 50% of the settlement amount. The settlement remains subject
to documentation and court approval for which a hearing date has not yet been
set.
In addition, on or about April 12, 2002, Harbor Finance Partners, allegedly
an Herbalife stockholder, filed a purported class action against us in the
District Court of Clark County in the State of Nevada, naming Herbalife, our
board of directors and one former director as defendants and alleging a claim of
breach of fiduciary duty arising out of the announced merger transaction between
Herbalife and WH Holdings. The District Court gave final approval to a
settlement on November 1, 2002 providing for the payment of Plaintiff's legal
fees of $650,000, which is included in our financial statements. Payments
pursuant to the settlement were made in early November 2002.
We and certain of our distributors have been named as defendants in a
purported class action lawsuit filed in the U.S. District Court for the Central
District of California (Jacobs v. Herbalife International, Inc., et al.). The
lawsuit was filed on February 19, 2002. The complaint alleges that specified
marketing plans employed by the distributor defendants are illegal, and that we
have permitted the use of these marketing plans and/or failed to supervise our
distributors' conduct to prevent violations of law by them. The complaint does
not challenge the legality of our marketing system. The complaint seeks to state
causes of action under RICO and various state and other federal laws. The
complaint was dismissed with leave to amend, the deadline for which is set as
January 2, 2003. We believe that we have meritorious defenses to the allegations
contained in the lawsuit. However, an adverse result in this litigation could
have a material adverse effect on our financial condition and operating results.
As a marketer of dietary and nutritional supplements and other products
that are ingested by consumers or applied to their bodies, we have been and are
currently subjected to various product liability claims. Although the effects of
these claims to date have not been material to us, it is possible that current
and future product liability claims could have a material adverse impact on our
financial condition and operating results given the higher level of self
insurance we have accepted. We currently maintain product liability insurance
with a deductible of $7.5 million.
Certain of our subsidiaries have been subject to tax audits by governmental
authorities in their respective countries. In certain of these tax audits,
governmental authorities are proposing that significant amounts of additional
taxes and related interest and penalties are due. We and our tax advisors
believe that there are substantial defenses to the allegations that additional
taxes are owing, and we are vigorously contesting the additional proposed taxes
and related charges. These matters may take several years to resolve, and we
cannot be sure of their ultimate resolution. However, an adverse outcome in
these matters could have a material adverse impact on our financial condition
and operating results.
72
MANAGEMENT
Biographical information follows for each person who presently serves as a
director and/or an executive officer of Herbalife (ages are as of September 30,
2002).
<Table>
<Caption>
NAME AGE POSITION WITH HERBALIFE
- ---- --- -----------------------
Peter M. Castleman(4)(5).................. 46 Director, Chairman of the board,
Co-Chairman of executive committee
Jesse Rogers(1)(4)(5)..................... 45 Director, Chairman of compensation
committee, Co-Chairman of executive
committee
Prescott Ashe(2).......................... 35 Director
Henry S. Burdick(1)(4).................... 60 Director, Chairman of product committee
Ken Diekroeger(1)......................... 39 Director
James H. Fordyce(1)(2)(5)................. 43 Director, Chairman of finance/audit
committee
John C. Hockin(2)(3)(4)................... 32 Director
Stefan L. Kaluzny(2)(3)(5)................ 35 Director, Chairman of information
technology committee
Charles L. Orr(2)(3)...................... 59 Director
Steven E. Rodgers(1)...................... 31 Director
Brian L. Kane............................. 56 Co-President
Carol Hannah.............................. 53 Co-President
William D. Lowe........................... 53 Senior Vice President, Finance and
Treasury
</Table>
- ---------------
(1) Member of our compensation committee.
(2) Member of our finance/audit committee.
(3) Member of our information technology committee.
(4) Member of our product committee.
(5) Member of our executive committee.
Peter M. Castleman is the Chairman and Managing Partner of Whitney & Co.,
LLC, a position that he has held for more than a decade. Prior to joining
Whitney over fifteen years ago, Mr. Castleman was with Morgan Stanley & Co. and
prior to that with J.P. Morgan & Co., Inc. Mr. Castleman received his MBA from
Harvard Business School and his undergraduate degree from Duke University. Mr.
Castleman is currently a director of several companies, including Aramiska,
B.V., Aqua-Chem, Inc., and EMC Holdings, LLC. He was previously a director of
numerous other companies including, The North Face, Inc., Advance Paradigm, Eon
Labs Inc., and Pharamex, Inc.
Jesse Rogers is a Managing Director of Golden Gate Capital, a San
Francisco-based private equity investment firm with approximately $700 million
of capital under management. Prior to joining Golden Gate Capital, Mr. Rogers
was a partner at Bain & Company for over ten years, where he served as the West
Coast head of the consumer products practice and founded Bain & Company's
worldwide Private Equity Group. Mr. Rogers received his MBA from Harvard
Business School and his Bachelor of Arts from Stanford University. He is
currently a director of several private companies and previously served as a
director of Beringer Wine Estates and Bain & Company.
Prescott Ashe is a Managing Director of Golden Gate Capital. Prior to
joining Golden Gate Capital, Mr. Ashe was an investment professional at Bain
Capital, which he initially joined in 1991. Prior to Bain Capital, Mr. Ashe was
a consultant at Bain & Company. Mr. Ashe received his JD from Stanford Law
School and his Bachelor of Science in Business Administration from the
University of California at Berkeley. He is currently a director of Dynamic
Details Incorporated and Integrated Circuit Systems, Inc., as well as several
private companies.
73
Henry S. Burdick was the co-founder of Pharmavite Corporation, makers of
nature-made vitamins and the number one branded line of vitamins in the U.S. Mr.
Burdick served in various positions at Pharmavite Corporation from 1971 to 1996,
including as Chairman, CEO and President. In June 1996, Mr. Burdick became
Chairman and CEO of Pharmanex Inc., a nutraceutical company that was funded by
Whitney, the Pritzker family, Chase, Chemical and Fidelity, and was later sold
to Nu Skin Enterprises in October 1998. Mr. Burdick was on the board of Crystal
Geyser Water Company until January 2002 and is currently an investor in Crystal
Geyser Water Company.
Ken Diekroeger is a Managing Director of Golden Gate Capital. From 1996 to
2000, Mr. Diekroeger was a managing director and partner with American
Industrial Partners. Earlier in his career, Mr. Diekroeger was a consultant at
Bain & Company. Mr. Diekroeger received his MBA from Stanford University and his
Bachelor of Science in Industrial Engineering from Stanford University. He is
currently a director of Stanadyne Automotive Corporation and several private
companies.
James H. Fordyce is a partner with Whitney & Co., LLC. Prior to joining
Whitney, Mr. Fordyce was with Heller Financial and prior to that with Chemical
Bank. Mr. Fordyce received his MBA from Fordham University and his undergraduate
degree from Lake Forest College. Mr. Fordyce currently is a director of several
private companies.
John C. Hockin is a partner with Whitney & Co., LLC and a founding member
of Whitney's San Francisco office. Prior to joining Whitney, Mr. Hockin was with
Morgan Stanley & Co., Release Software and J&J Lids, a company he co-founded and
successfully sold. Mr. Hockin received his MBA from Stanford Business School,
and his undergraduate degree from Yale University. Mr. Hockin is currently a
director of numerous companies, including ClearSource, Inc., Medem, Inc., Global
Sight, Inc. and Wavelink Corporation.
Stefan L. Kaluzny is a Principal of Golden Gate Capital. Prior to joining
Golden Gate Capital, Mr. Kaluzny was the founder and Chief Executive Officer of
Delray Farms, a $100 million specialty foods retailer. Prior to Delray Farms,
Mr. Kaluzny was a consultant at Bain & Company. Mr. Kaluzny received his MBA
from Harvard Business School and his Bachelor of Arts from Yale University.
Charles L. Orr is a corporate board member and advisor to companies
operating in the e-commerce, financial services and direct selling industries.
From 1993 through 2000, Mr. Orr was President and CEO of Shaklee Corporation
which included the brand names of Harry and David, Jackson and Perkins, and
Shaklee. His prior business affiliations include CIGNA, Continental Insurance,
Federated Investors, RCA Computer Systems, Southwestern Life and Xerox. Mr. Orr
received his MBA from the University of Connecticut and Bachelor of Arts from
Wesleyan University. He is currently a Director of the Direct Selling Education
Foundation and serves as an advisor to several private companies.
Steven E. Rodgers is a partner with Whitney & Co., LLC where he leads
Whitney's investments in the healthcare industry. Prior to joining Whitney, Mr.
Rodgers was with Tiger Management, and prior to that, Alex. Brown & Sons
Incorporated. Mr. Rodgers received his MBA from Stanford University and his
undergraduate degree from Dartmouth College. Mr. Rodgers is currently a director
of numerous companies including, HealthMarket, Inc., Symbion, Inc., and SCIREX
Corporation.
Brian L. Kane joined Herbalife in May 1993 as Vice President of European
Operations. In 1995, Dr. Kane became a Senior Vice President -- Worldwide
Distribution and in June 2000 he was appointed as Executive Vice President and
Chief Operating Officer. Dr. Kane was appointed Co-President in September 2002.
Dr. Kane received his Bachelor of Science and Ph.D. in Chemistry from Birmingham
University in England, and is a Fellow of the Institute of Marketing (UK). Dr.
Kane began his career with Proctor & Gamble and subsequently held senior
management positions in health care and consumer products with Richardson-Vicks,
Hobson plc and Bristol-Myers Squibb.
Carol Hannah joined Herbalife in November 1984 and currently is
Co-President. Previously she held the position of Executive Vice President,
Sales. Ms. Hannah has served in various positions, with primary responsibilities
in providing sales and training support for Herbalife's independent
distributors. In May 1996, she was promoted to Executive Vice President, Sales
Operations and Distributor Services, and in July 2000 to
74
Executive Vice President, Sales, holding that position until September 2002,
when she was appointed to her current position. Prior to joining Herbalife, Ms.
Hannah held management positions in the retail apparel and catalog industry.
William D. Lowe joined Herbalife in March 1998 as Treasurer and Vice
President and was appointed Senior Vice President, Finance and Treasury, in
January 2000. In May 2001, Mr. Lowe became the head of Treasury, International
Expansion and the Controller's Office. In September 2002, Mr. Lowe's
responsibilities were expanded to include financial planning, product pricing
and travel. Mr. Lowe started his career with Mobil Corporation and for 23 years
held senior management positions responsible for foreign exchange risk
management, cash and banking, project financings, mergers and acquisitions,
asset sales and employee benefits in New York, Tokyo, London, and Fairfax,
Virginia. Mr. Lowe received his Bachelor of Arts in Economics from Georgetown
University and his MBA in Finance and International Business from Columbia
University.
DIRECTOR COMPENSATION
Herbalife will reimburse members of the board of directors for any
out-of-pocket expenses incurred by them in connection with services provided in
such capacity. In addition, Herbalife will compensate independent members of the
board of directors for services provided in such capacity, including by way of
an option plan. Each independent director will receive $25,000 per year for his
services, plus $5,000 per board meeting attended and $2,500 for each committee
meeting attended. In addition, directors performing special functions for the
board may be separately compensated.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation of Herbalife's Chief Executive Officer and each of the
four other most highly compensated executive officers of Herbalife
(collectively, the "Named Executive Officers") for the fiscal years ended
December 31, 1999, 2000 and 2001.
<Table>
<Caption>
LONG-TERM COMPENSATION
-------------------------------------
AWARDS
ANNUAL COMPENSATION ------------------------
-------------------------------------- SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING PAYOUTS ALL OTHER
BONUS COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) ($)(2) AWARD(S)($) SARS(#) PAYOUTS($) ($)(3)
- --------------------------- ---- ---------- ---------- ------------ ----------- ---------- ---------- ------------
Francis X. Tirelli(5)
(joined November 2001)... 2001 $ 151,384 $ 150,000 $ 10,000 -- 500,000 $ 1,477(4)
President and Chief
Executive Officer
Christopher Pair(6)
(resigned October
2001).................... 2001 $ 825,253 $ 300,000 $150,000 -- -- -- $4,831,226(7)
Former President and 2000 1,000,000 1,588,600 180,000 -- -- -- 517,859
Chief Executive Officer 1999 1,000,000 1,838,000 115,000 -- 129,439 -- 406,295
Robert A. Sandler(8)....... 2001 $ 860,000 $ 792,000 $ 60,000 -- -- -- $ 259,654(9)
Executive Vice President 2000 860,000 531,000 60,000 -- -- -- 192,440
And General Counsel 1999 800,000 643,998 60,000 -- -- -- 140,875
Timothy Gerrity(10)
(resigned December
2001).................... 2001 $ 752,500 -- $ 60,000 -- -- $3,341,102(11)
Former Executive Vice 2000 752,500 531,000 60,000 -- -- 152,856
President And Chief
Financial Officer 1999 700,000 966,000 60,000 -- -- 148,210
Brian Kane(12)............. 2001 $ 700,000 $ 792,000 $ 60,000 -- -- -- $ 393,155(13)
Executive Vice President, 2000 546,875 289,686 60,000 -- -- -- 148,092
Chief Operating Officer 1999 450,000 100,000 60,000 -- -- -- 74,290
Carol Hannah(12)........... 2001 $ 752,500 $ 792,000 $ 60,000 -- -- -- $ 476,305(14)
Executive Vice
President -- Sales 2000 752,500 568,625 60,000 -- -- -- 135,294
1999 700,000 450,000 60,000 -- -- -- 117,567
</Table>
- ---------------
(1) Except for the 2001 sign-on bonus for Mr. Tirelli, the 2001, 2000 and 1999
amounts reflect bonuses earned under the 1994 Performance-Based Annual
Incentive Compensation Plan.
75
(2) Amounts shown represent payments for non-accountable expense reimbursement
allowances and the aggregate of other payments or benefits that do not
individually exceed 25% of the total perquisite or personal benefits for
Messrs. Tirelli, Pair, Sandler, Gerrity, Kane and Ms. Hannah. For 2001, the
amounts with respect to the non-accountable expense reimbursement
allowances were $10,000, $150,000, $60,000, $60,000, $60,000 and $60,000
for Messrs. Tirelli, Pair, Sandler, Gerrity and Kane and Ms. Hannah,
respectively.
(3) For 2001, these amounts represent payments under the Executive Long Term
Disability Plan, Executive Life Insurance Plan, the Supplemental Executive
Retirement Plan, the Herbalife International Employees 401(k) Profit
Sharing Plan and Trust, the Executive Medical Plan, the Deferred
Compensation Plan, interest earned on the Deferred Compensation Plan in
excess of 120% of the Federal long term rate, private use of a
Company-owned car, housing allowance, vacation pay-out and separation
payments.
(4) Mr. Tirelli's amount represents $247 from the Executive Long Term
Disability Plan and $1,230 from the Executive Medical Plan.
(5) Effective September 19, 2002, Mr. Tirelli is no longer President and Chief
Executive Officer.
(6) For additional information regarding amounts paid to Mr. Pair under a
separation and general release agreement between the Company and Mr. Pair,
see "-- Employment Contracts and Termination of Employment."
(7) Mr. Pair's amount includes $2,960 from the Executive Long Term Disability
Plan, $205,318 from the Executive Life Insurance Plan, $1,152,957 from the
Supplemental Executive Retirement Plan, $5,100 from the 401(k)
Tax-Sheltered Savings Plan, $42,468 from the Executive Medical Plan,
$169,231 from the Deferred Compensation Plan, $30,964 from interest earned
on the Deferred Compensation Plan in excess of 120% of the federal long
term rate, $543,945 from vacation pay-out, and $2,678,283 from a separation
payment.
(8) Effective May 17, 2002, Mr. Sandler is no longer Executive Vice President
and General Counsel.
(9) Mr. Sandler's amount includes $2,960 from the Executive Long Term
Disability Plan, $5,783 from the Executive Life Insurance Plan, $5,100 from
the 401(k) Tax-Sheltered Savings Plan, $10,551 from the Executive Medical
Plan, $129,000 from the Deferred Compensation Plan, $61,110 from interest
earned on the Deferred Compensation Plan in excess of 120% of the federal
long term rate, and $45,150 from vacation pay-out.
(10) For additional information regarding amounts paid to Mr. Gerrity under a
separation and general release agreement between the Company and Mr.
Gerrity, see "-- Employment Contracts and Termination of Employment."
(11) Mr. Gerrity's amount includes $2,960 from the Executive Long Term
Disability Plan, $7,314 from the Executive Life Insurance Plan, $1,010,219
from the Supplemental Executive Retirement Plan, $5,100 from the 401(k)
Tax-Sheltered Savings Plan, $16,907 from the Executive Medical Plan,
$112,875 from the Deferred Compensation Plan, $124,453 from interest earned
on the Deferred Compensation Plan in excess of 120% of the federal long
term rate, $444,221 from vacation pay-out, and $1,617,053 from a separation
payment.
(12) Effective September 19, 2002, Mr. Kane and Ms. Hannah have been serving as
Co-Presidents.
(13) Mr. Kane's amount includes $2,960 from the Executive Long Term Disability
Plan, $5,100 from the 401(k) Tax-Sheltered Savings Plan, $10,551 from the
Executive Medical Plan, $109,038 from the Deferred Compensation Plan,
$58,431 from interest earned on the Deferred Compensation Plan in excess of
120% of the federal long term rate, and $60,109 from vacation pay-out. Mr.
Kane's private use of a Company owned car and housing allowance in the
amounts of $26,966 and $120,000, respectively, are also included in this
figure.
(14) Ms. Hannah's amount includes $2,960 from the Executive Long Term Disability
Plan, $4,930 from the Executive Life Insurance Plan, $5,100 from the 401(k)
Tax-Sheltered Savings Plan, $10,551 from the Executive Medical Plan,
$112,875 from the Deferred Compensation Plan, $102,229 from interest
76
earned on the Deferred Compensation Plan in excess of 120% of the federal
long term rate, and $237,660 from vacation pay-out.
OPTION GRANTS IN LAST FISCAL YEAR. No stock appreciation rights ("SARs")
or options to purchase shares of Class A Common Stock ("Class A Stock Options")
were granted during the fiscal year ended December 31, 2001 to the Named
Executive Officers. The following table contains information concerning options
to purchase shares of Class B Common Stock ("Class B Stock Options") granted in
2001 to each of the Named Executive Officers. The per share exercise price of
all options described below represents the fair market value of the Company's
Common Stock on the grant date.
<Table>
<Caption>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR SHARE(1) DATE VALUE($)(2)
- ---- ---------- ------------- --------- ---------- -----------
Francis X. Tirelli
Class A.......................... -- -- -- -- --
Class B.......................... 500,000 100% $11.30 11/1/2011 $1,570,041
Christopher Pair
Class A.......................... -- -- -- -- --
Class B.......................... -- -- -- -- --
Robert A. Sandler
Class A.......................... -- -- -- -- --
Class B.......................... -- -- -- -- --
Timothy Gerrity
Class A.......................... -- -- -- -- --
Class B.......................... -- -- -- -- --
Brian L. Kane
Class A.......................... -- -- -- -- --
Class B.......................... -- -- -- -- --
Carol Hannah
Class A.......................... -- -- -- -- --
Class B.......................... -- -- -- -- --
</Table>
- ---------------
(1) Represents the closing price of the Common Stock of Herbalife International,
Inc. on the Nasdaq National Market on the date of grant.
(2) In accordance with the rules of the SEC, 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: 56.67% price volatility;
2.92% risk free rate of return; 6.5% dividend yield and options exercise
averaging 3.0 year term. We did not make any adjustment for
non-transferability or risk of forfeiture.
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 of Herbalife International, Inc. acquired upon exercise of Class
A Stock Options and Class B Stock Options in 2001 and (2) unexercised options to
purchase shares of Class A Common Stock or Class B Common Stock that were
granted in prior years.
77
<Table>
<Caption>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Francis X. Tirelli
Class A............. -- -- -- -- -- --
Class B............. -- -- 13,889 486,111 $ 26,250 $918,750
Christopher Pair
Class A............. 84,857 $468,835 -- -- -- --
Class B............. 25,000 $150,000 365,492 79,624 $2,140,577 $522,732
Robert A. Sandler
Class A............. -- -- 57,771 5,875 $ 359,336 $ 36,543
Class B............. -- -- 133,166 23,501 $ 874,235 $154,284
Timothy Gerrity
Class A............. -- -- 81,666 3,334 $ 516,556 $ 20,737
Class B............. -- -- 223,333 46,667 $1,466,181 $306,369
Brian Kane
Class A............. -- -- 31,250 1,667 $ 202,709 $ 10,369
Class B............. -- -- 68,000 3,334 $ 446,420 $ 21,888
Carol Hannah
Class A............. 11,667 $116,087 82,300 3,334 $ 516,729 $ 20,737
Class B............. 23,333 $216,764 216,999 46,667 $1,424,598 $306,369
</Table>
- ---------------
(1) Represents the difference between the market price of Common Stock on
December 31, 2001 and the exercise price of the options.
COMPENSATION COMMITTEE
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, our compensation committee consisted of Messrs. Hall, Miner
and Glassman, who resigned as directors upon the consummation of the merger.
COMPENSATION COMMITTEE REPORT
The Company's executive compensation programs are administered by the
Compensation Committee and, to the extent summarized below, the Company's Chief
Executive Officer.
The compensation policy of the Company is designed to motivate the overall
success of the Company by:
- Attracting, retaining and rewarding highly qualified and productive
individuals;
- Delivering a significant portion of compensation through
performance-based incentives;
- Directly relating incentive compensation to overall Company and
individual performance; and,
- Encouraging executive stock ownership to align the interests of
management with those of shareholders.
BASE SALARY AND ANNUAL INCENTIVE COMPENSATION. Mr. Tirelli's base salary
was established through negotiations between him and the Compensation Committee.
See the Summary Compensation Table under "Compensation of Directors and
Executive Officers -- Executive Compensation." Base salaries for each of the
other Named Executive Officers were established through negotiations between Mr.
Tirelli's predecessor and each such Named Executive Officer. See "-- Employment
Contracts, Termination of Employment and Change in Control Arrangements."
Mr. Pair's annual salary and target incentive compensation for 2001 was
established under a new employment agreement entered into in 2000, including an
incentive compensation arrangement consistent with prior years. In setting Mr.
Tirelli's annual salary for 2001, and awarding him a sign-on bonus of $150,000,
78
which bonus was paid to him on January 2, 2002, the Compensation Committee
considered Mr. Tirelli's many years of expertise as a senior financial executive
and his knowledge of and experience with respect to the Company's business.
Because Mr. Tirelli's employment with the Company did not begin until November
1, 2001, the Compensation Committee did not award him target incentive
compensation for 2001.
During 2001, the Compensation Committee utilized an earnings per share
formula to establish target awards under the 1994 Plan for all participants.
With respect to Mr. Pair, in addition to the earnings per share formula, the
Compensation Committee utilized sales-based formulas. All awards under the 1994
Plan were subject to maximum award amounts in the case of each participant and
the discretionary authority of the Compensation Committee to reduce awards in
the case of certain Named Executive Officers. See "-- Description of Benefit
Plans -- 1994 Performance-Based Annual Incentive Compensation Plan." The Company
met the earnings per share and sales thresholds for 2001 and, as a result,
bonuses were earned by all Named Executive Officers who were participants in the
1994 Plan for the past fiscal year, with the exception of Messrs. Pair and
Gerrity, whose employment relationships with the Company terminated during 2001.
LONG-TERM INCENTIVE PLANS. Executives of the Company are encouraged to own
shares of the Common Stock, thereby aligning the interests of management with
those of shareholders and tying a significant portion of executive compensation
to long-term market performance. The vesting schedules for stock options are set
by the Compensation Committee. In particular, under his Employment Agreement,
Mr. Tirelli was awarded options to acquire 500,000 shares of Herbalife Class B
Common Stock. Mr. Tirelli's options vest in equal monthly installments over a
period of three years. All options granted to executive officers have had an
exercise price equal to 100% of fair market value on the date of grant.
TAX ISSUES. For 2002 and later years, the Compensation Committee intends
to continue to seek to structure executive compensation arrangements to maximize
the deductibility of Named Executive Officer compensation under applicable
federal and state income tax laws, including the Omnibus Budget Reconciliation
Act of 1993, while also taking into account the need to provide appropriate
incentives to the Company's key executives. However, no assurance can be given
that the Company will preserve, or will seek to preserve, the deductibility of
all executive compensation.
COMPENSATION COMMITTEE
Edward J. Hall
Christopher M. Miner
Jeffrey Glassman
April 30, 2002
DESCRIPTION OF BENEFIT PLANS
BENEFIT PLANS FOLLOWING THE MERGER
WH HOLDINGS EXECUTIVE OPTION PLAN. WH Holdings has established a stock
option plan that provides for the grant of options to purchase common shares of
WH Holdings to any executive officer of Herbalife following the merger.
Approximately 15.5% of the share capital of WH Holdings as of the closing of the
merger is available for grant under the option plan. The option plan is
administered by the compensation committee.
Options granted under the option plan would, unless otherwise provided in
the option grant, become exercisable in equal quarterly installments over a
period of five years from the date of the applicable grant. The options would
expire 10 years after the date of grant. Upon termination of employment for any
reason, the unvested options would expire.
79
Following termination of employment, under certain circumstances, the
equity sponsors, or, if the equity sponsors decline to so purchase, WH Holdings
may repurchase common shares acquired upon exercise of options.
WH HOLDINGS INDEPENDENT DIRECTORS STOCK OPTION PLAN. WH Holdings has
established an independent directors stock option plan that provides for the
grant of options to purchase common shares of WH Holdings to independent
directors of WH Holdings. Independent directors are individuals who are neither
employees of WH Holdings or any of its affiliates nor designated as directors by
the affiliates of WH Holdings or its distributors.
BENEFIT PLANS PRIOR TO THE MERGER
1994 PERFORMANCE-BASED ANNUAL INCENTIVE COMPENSATION PLAN. The purpose of
the 1994 Performance-Based Annual Incentive Compensation Plan (the "1994 Plan")
is to provide additional compensation as an incentive to certain key executives
and consultants to attain specified performance objectives of Herbalife and its
subsidiary and affiliated corporations and to ensure the continued availability
of their full-time or part-time services to Herbalife. Specifically, the
individuals entitled to participate in the 1994 Plan are those executive
officers and consultants of Herbalife determined by the committee administering
the 1994 Plan.
The 1994 Plan was adopted in 1994 and amended and restated in 1996 and
1997; each such amendment was approved by our stockholders. The 1994 Plan was
further amended by the board in 1999. The 1994 Plan was amended, restated and
approved in 2001.
The 1994 Plan is administered by the compensation committee of the board of
directors, which consists of two or more board members who are "outside
directors" under Section 162(m) of the Code and "non-employee directors" within
the meaning of Rule 16b-3 under the Exchange Act.
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
based upon an objective computation formula of the actual performance of
Herbalife relative to pre-established performance goals. The performance goal or
goals included in the formula for each award period are selected by the
compensation committee from among the following performance measures: level of
retail sales (in the aggregate or for a particular category or categories of
retail sales); net cash flow; net income; operating income; earnings per share;
return on sales; reduction in expenditure levels for a particular category or
categories of expenses versus a prior period; return on total capital; return on
equity; and increase in the Common Stock price over a specified time period.
The compensation committee determines the performance measure or measures,
the performance goal or goals and all computations included within each formula,
each of which may be different for different award periods or for different
participants within a single award period. The compensation committee does not
have the discretion to increase any award to an amount in excess of that
determined in accordance with the 1994 Plan and the formula applicable to a
particular award period. However, the compensation committee, may, in its
discretion, (i) designate in advance a maximum dollar award for any award period
with respect to any participant, and/or (ii) designate in advance that certain
other incentive award payments (under the 1994 Plan or otherwise) made to a
participant will be deducted from award amounts otherwise earned under the 1994
Plan and/or (iii) decrease any award under the 1994 Plan. Notwithstanding
anything in the 1994 Plan to the contrary, no participant is entitled to earn in
excess of $10 million under the 1994 Plan with respect to any single calendar
year.
Award periods under the 1994 Plan may be quarters, calendar years or such
other periods as the compensation committee may designate. The compensation
committee designates all award periods, performance measures, performance goals
and other aspects of each formula. The compensation committee must designate all
performance measures, performance goals and other aspects of each formula not
later than the date on which 25% of the award period has elapsed. In no case,
however, can the compensation committee make such a designation later than 90
days after the beginning of an award period.
To be entitled to receive a full award with respect to an award period, a
participant must generally continue to be employed by Herbalife or rendering
services to Herbalife on the last day of the award period. If
80
a participant's employment with Herbalife terminates during an award period, he
will generally receive a prorated award 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 when it sets the performance goals for
the performance period. The proration formula may provide, however, that if a
participant dies or becomes disabled during an award period, he or his
designated beneficiaries will receive the entire amount of the award he would
have received if he had continued in employment until the end of the award
period and the performance goals had been satisfied.
No award can be paid (except in the case of a participant's death or
disability) unless the compensation committee certifies that the objective
performance goal or goals for the award have been satisfied and that the amount
of the award is no greater than that dictated by the formula for the applicable
award period. The compensation committee makes such determinations by means of
written resolutions of the compensation committee that are maintained in the
records of Herbalife.
Awards pursuant to the 1994 Plan may be made, at the discretion of the
compensation committee, in cash, through the issuance of shares of Class A
Common Stock or Class B Common Stock, or through a combination of any of the
foregoing methods. The total number of shares of Common Stock that may be issued
under the 1994 Plan in any fiscal year of Herbalife, and the total number of
shares of Common Stock that may be issued under the 1994 Plan in any fiscal year
of Herbalife to any single participant, may not exceed 5% of the number of
issued and outstanding shares of Common Stock at the beginning of the prior
fiscal year.
Awards under the 1994 Plan are subject to withholding for applicable
employment and income taxes. 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 such 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 comparable term. Each such advance is evidenced by a promissory note
executed by the participant and delivered to the Company.
The 1994 Plan was terminated on July 31, 2002.
1991 OPTION PLAN. The purpose of the Amended and Restated 1991 Stock
Option Plan (the "Option Plan") is to secure for Herbalife and its stockholders
the benefits arising from stock ownership by key employees, directors,
consultants and other persons selected by the compensation committee, which
administers the Option Plan. As of December 31, 2001, approximately 150 persons
were eligible to participate in the Option Plan.
The Option Plan was amended and restated in 1996. The amendment and
restatement of the Option Plan was approved by Herbalife's shareholders at
Herbalife's 1996 Annual Meeting.
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 compensation 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 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 Herbalife's 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 capital stock must
equal 110% of the fair market value of Herbalife's Common Stock. The exercise
price of a non-qualified option need not be equal to the fair market value of
Herbalife's Common Stock at the date of grant, but may be granted with any
81
exercise price that is not less than 85% of fair market value at the time the
option is granted, as the compensation committee may determine.
The Option Plan was terminated by our board of directors upon the
consummation of the merger.
DEFERRED COMPENSATION PLANS. We maintain two 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; and
(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. The Management Plan and the Senior
Executive Plan are referred to as the "Deferred Compensation Plans." The
Deferred Compensation Plans were amended and restated effective January 1, 2001.
The Deferred Compensation Plans are unfunded and their benefits are paid
from general assets of Herbalife, except that Herbalife has contributed amounts
to a "rabbi trust" whose assets will be used to pay benefits if Herbalife
remains solvent, but can be reached by creditors of Herbalife if Herbalife
becomes 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"). Herbalife makes matching
contributions on behalf of each participant in the Senior Executive Plan
("Herbalife Matching Contributions"). Before January 1, 2002, the Herbalife
Matching Contributions were 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 was an Executive Vice President,
(2) 12.5% of the participant's annual base salary in the case of a participant
who was a Senior Vice President, and (3) 10% (or such greater percentage, not to
exceed 15%, that the Deferred compensation committee may have determined 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 could
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 equaled or exceeded 10% of such designated participant's
annual base salary. The compensation committee designated Mr. Pair to receive
the enhanced Herbalife Matching Contributions. In connection with a separation
and general release agreement between Mr. Pair and Herbalife, Mr. Pair received
a payment under the Deferred Compensation Plan and, as a result, is not entitled
to any further payments under this plan. For more information regarding payments
made to Mr. Pair under this separation and general release agreement, see
"-- Employment Contracts and Termination of Employment." Effective January 1,
2002, the Senior Executive Plan was amended to provide that the amount of the
Herbalife Matching Contributions is to be determined by the Company in its
discretion.
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 the Company to actually acquire or hold any
investment fund or other assets to fund the Deferred Compensation Plans. The
entire interest of each participant in a Deferred Compensation Plan is always
fully vested and 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 and the Herbalife
Matching Contributions attributable thereto plus earnings 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 Herbalife.
82
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 was amended in October 2000. The Retirement Plan is unfunded and
its benefits are paid from general assets of Herbalife, except that Herbalife
has contributed amounts to a "rabbi trust" whose assets will be used to pay
benefits if Herbalife remains solvent, but can be reached by creditors of
Herbalife if Herbalife becomes 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 2.00% 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 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. Under the Retirement Plan, Herbalife may, in its discretion,
credit a participant with additional years of service as of a participant's date
of hire or date of participation in the Retirement Plan. An employee whose
employment with the Company terminates before he or she reaches his or her 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. 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. If a participant's
employment is terminated for cause, the administrator of the Retirement Plan has
the discretion to reduce his or her vested benefit to zero. In all other cases,
a participant's interest will vest as follows:
<Table>
<Caption>
VESTED
YEARS OF PARTICIPATION IN PLAN PERCENTAGE
- ------------------------------ ----------
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.
83
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
- ------------ -------- -------- -------- -------- --------
$ 125,000 ....................... $ 37,500 $ 50,000 $ 50,000 $ 50,000 $ 50,000
150,000 ....................... 45,000 60,000 60,000 60,000 60,000
175,000 ....................... 52,500 70,000 70,000 70,000 70,000
200,000 ....................... 60,000 80,000 80,000 80,000 80,000
225,000 ....................... 67,500 90,000 90,000 90,000 90,000
250,000 ....................... 75,000 100,000 100,000 100,000 100,000
275,000 ....................... 82,500 110,000 110,000 110,000 110,000
300,000 ....................... 90,000 120,000 120,000 120,000 120,000
400,000 ....................... 120,000 160,000 160,000 160,000 160,000
500,000 ....................... 150,000 200,000 200,000 200,000 200,000
600,000 ....................... 180,000 240,000 240,000 240,000 240,000
700,000 ....................... 210,000 280,000 280,000 280,000 280,000
800,000 ....................... 240,000 320,000 320,000 320,000 320,000
900,000 ....................... 270,000 360,000 360,000 360,000 360,000
1,000,000 ....................... 300,000 400,000 400,000 400,000 400,000
1,100,000 ....................... 330,000 440,000 440,000 440,000 440,000
1,200,000 ....................... 360,000 480,000 480,000 480,000 480,000
</Table>
Messrs. Tirelli, Sandler, Kane and Ms. Hannah have 0, 5, 8, and 17 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." In connection with separation and general release agreements between
the Company and Messrs. Pair and Gerrity, Messrs. Pair and Gerrity each received
a payment under the Retirement Plan and, as a result, are not entitled to any
further payments under this plan. For more information regarding payments made
to Messrs. Pair and Gerrity under these separation and general release
agreements, see "-- Employment Contracts and Termination of Employment."
The Retirement Plan will be terminated as of December 31, 2002.
401(K) PROFIT SHARING PLAN. Herbalife maintains 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 $11,000 per year, as adjusted after
2002) or $12,000 in the case of those participants over 50 years of age for
investment in mutual funds held by the 401(k) Plan's trust. Herbalife makes
contributions to the 401(k) Plan in an amount equal to 3% of the earnings of
each employee who elects to defer 2% or more of his or her earnings. 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 Herbalife's contributions
and earnings of the trust fund attributable to the Company's contributions until
he or she completes three years of service with Herbalife, and the employee is
not fully vested in Herbalife's contributions and earnings of the trust fund
attributable to Herbalife's contributions until he or she has completed five
years of service with Herbalife. To comply with changes in the law, the Plan
will be amended, effective January 1, 2002, to provide that an employee is 20%
vested after two years of service, and 40% vested after three years of service.
However, an employee becomes fully vested in Herbalife's contributions and
earnings of the trust fund attributable to Herbalife's 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 Herbalife. An
employee may not
84
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
Herbalife.
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 or employee's employment by Herbalife. The
Executive Medical Plan provides coverage of medical expenses incurred beyond
Herbalife's basic plan. For the fiscal year ended December 31, 2001, the
Executive Medical Plan's cost to Herbalife was approximately $92,258.
The Executive Medical Plan will be terminated as of December 31, 2002.
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 Herbalife. For the fiscal year ended December 31, 2001, the Executive
Long-Term Disability Plan's cost to Herbalife was approximately $15,047.
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 the Company's basic plan. Premiums are paid by
Herbalife. For the fiscal year ended December 31, 2001, the Executive Life
Insurance Plan's cost to Herbalife was approximately $223,346.
The Executive Life Insurance Plan will be terminated as of December 31,
2002.
EXECUTIVE RETENTION PLAN. Effective as of March 15, 2001, Herbalife
adopted the Herbalife 2001 Executive Retention Plan (the "Executive Retention
Plan"). The purpose of the Executive Retention Plan is to provide financial
incentives for a select group of management and highly compensated employees of
Herbalife and its subsidiaries to continue to provide services to Herbalife and
its subsidiaries during the critical period immediately before and immediately
after certain Change in Control events. The participants in the Executive
Retention Plan are a select group of management and highly compensated employees
who are designated by the administrative committee of the Executive Retention
Plan (the "Administrative Committee"). The Administrative Committee is appointed
by Herbalife's Board. At present, the Administrative Committee has designated
Mr. Kane, Ms. Hannah and five other senior executives to participate in the
Executive Retention Plan.
A participant becomes eligible to receive a benefit under the Executive
Retention Plan if he or she is employed by Herbalife or its subsidiaries 90 days
before a "Change in Control" occurs, and either (a) stays employed by Herbalife
or its subsidiaries during the period beginning 90 days before the Change in
Control occurs and ending six months after the Change in Control occurs, or (b)
dies, retires, becomes disabled or has his or her employment involuntarily
terminated, during the period beginning 90 days before the Change in Control
occurs and ending six months after the Change in Control occurs. For purposes of
the Executive Retention Plan, a "Change in Control" includes (i) the acquisition
by any person or group (excluding the Estate of Mark Hughes, the Mark Hughes
Family Trust, or any persons or entities who receive distributions of securities
of Herbalife from such estate or trust) of more than 50% of the combined voting
power of Herbalife, (ii) the ceasing of the existing directors as of Herbalife's
2000 annual shareholders meeting to constitute more than 50% of the number of
authorized directors of Herbalife, except to the extent that new directors were
approved by a vote of at least 50% of the existing directors, (iii) a merger,
consolidation, or reorganization of Herbalife, or a sale or other disposition of
all or substantially all of Herbalife's assets, if, as a result of such a
transaction, the persons who were shareholders of Herbalife immediately before
the transaction do not own at least 50% of the combined voting power of the
entities surviving or resulting from such transaction, or of the purchaser of
such assets, (iv) the filing of a bankruptcy petition by or against Herbalife,
the making by Herbalife of a general assignment for the benefit of creditors, or
the appointment on behalf of Herbalife of a receiver, liquidator, trustee, or
similar person. A transaction described in clauses (i), (ii), or (iii) of the
preceding sentence, however, shall not constitute a "Change in Control" if, in
connection with the transaction, Herbalife's board of directors terminates
Herbalife's Share Purchase Rights Plan, amends the Share Purchase Rights Plan to
exempt the transaction from the application of the Share Purchase Rights Plan,
or redeems the rights issued under the Share Purchase Rights Plan. As a result,
any Change in Control transaction described
85
in clauses (i)--(iii) above that is negotiated with or approved by the board
will generally not result in the payment of any benefits pursuant to the
Executive Retention Plan. On April 10, 2002, Herbalife's Board of Directors
amended the Share Purchase Rights Plan so that the proposed merger transaction
by and among Herbalife, WH Holdings and WH Acquisition Corp. shall not be deemed
to be a Change in Control under the Executive Retention Plan. Thus, the
consummation of the merger will not result in the payment of any benefits
pursuant to the Executive Retention Plan.
Herbalife has established the Herbalife 2001 Executive Retention Trust to
provide benefits under the Executive Retention Plan. The Executive Retention
Trust is an irrevocable trust established with an institutional trustee. The
Administrative Committee of the Executive Retention Plan will establish an
individual account in the Executive Retention Trust for each participant in the
Executive Retention Plan. Until the occurrence of a Change in Control, the
Administrative Committee will control the investment of the assets in the
Executive Retention Trust, and will determine the allocation of the assets of
the Executive Retention Trust to the individual accounts of participants. Each
participant who qualifies for a benefit under the Executive Retention Plan will
receive a lump sum benefit equal to the dollar amount in his or her individual
account in the Executive Retention Trust. The benefit shall be paid within 90
days after the participant qualifies for the benefit. If a participant's
employment with Herbalife or its subsidiaries terminates before the participant
qualifies for a benefit under the Executive Retention Plan, the participant's
account in the Executive Retention Trust will revert to Herbalife. A
participant's benefit under the Executive Retention Plan will be reduced,
however, if the reduction is necessary to maximize the amount that the
participant would retain after payment of federal and state income taxes and
excise taxes under Section 4999 of the Code. As of September 30, 2002, the value
of the assets in the Executive Retention Trust was $7,481,000.
The Executive Retention Plan was frozen upon the consummation of the
merger.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
Herbalife has entered into executive employment agreements (each, an
"employment agreement") with each of Brian L. Kane and Carol Hannah (the
"executives"). The employment agreements with Mr. Kane and Ms. Hannah became
effective as of August 20, 2000. The employment agreements for each of Mr. Kane
and Ms. Hannah are for a three year term expiring in August 2003.
Under the terms of each employment agreement, in addition to his or her
annual salary, each executive officer is entitled to participate in incentive
compensation plans on the same basis as other comparable level executives. Each
executive officer is also entitled to certain other benefits paid for by
Herbalife, including, among other things, an automobile allowance and
participation in various benefit plans.
Under the terms of each employment agreement, if, at any time during the
term of the employment agreement, (i) Herbalife terminates the executive's
employment without cause (as defined in such agreement) or (ii) the executive
terminates his or her employment for good reason (as defined in such agreement),
Herbalife must pay the executive (in addition to all accrued base salary, bonus,
benefits and other amounts the executive is entitled to) base salary and target
bonus for the balance of the term (as defined in such agreement) plus one
additional year of base salary and target bonus. The executive is also entitled
to receive all other benefits for a period of two years following the
termination. If the executive (i) dies or (ii) becomes disabled at any time
during the term of the employment agreement, upon the death or disability of the
executive (as defined in such agreement), Herbalife must pay the executive or
his or her beneficiaries or estate (in addition to all accrued base salary,
bonus, benefits and other amounts the executive is entitled to) executive's base
salary and target bonus for the balance of the year plus one additional year of
base salary and target bonus.
In the event the executive's employment is terminated by Herbalife without
cause, all stock option entitlements and agreements shall continue in full force
and effect and stock options shall vest pursuant to the executive's vesting
schedules as if the executive's employment had not been terminated. In the event
of the executive's termination for any other reason, all unvested options will
terminate upon the effective date of such termination.
86
Mr. Kane is engaged as Co-President of Herbalife. For his services, Mr.
Kane is entitled to receive an annual salary of $660,000. Ms. Hannah is engaged
as Co-President of Herbalife. For her services, Ms. Hannah is entitled to
receive an annual salary of $712,500.
Subsequent to the merger, Mr. Tirelli, former President and Chief Executive
Officer is no longer employed by the Company, effective as of September 19,
2002. We have not entered into a separation arrangement with Mr. Tirelli as of
this time. We have entered into separation and general release agreements with
each of Christopher Pair, Timothy Gerrity and Robert A. Sandler. The separation
and general release agreement with Mr. Pair (the "Pair Separation Agreement")
became effective on October 19, 2001, the separation and general release
agreement with Mr. Gerrity (the "Gerrity Separation Agreement") became effective
on December 31, 2001, and the separation and general release agreement with Mr.
Sandler (the "Sandler Separation Agreement") became effective on May 17, 2002.
Under the Pair Separation Agreement, Mr. Pair was entitled to receive the
following payments: (i) $547,975, which was paid to him on October 22, 2001,
(ii) $1,140,000, which was paid to him on October 22, 2001, (iii) eight separate
quarterly payments, each in the amount of $201,500, which commenced on November
1, 2001 and (iv) a final payment of $248,000, to be paid simultaneously with the
last quarterly payment of $201,500. In addition, under this agreement, Herbalife
paid Mr. Pair the $1,152,957 he was entitled to under Herbalife's Senior
Executive Retirement Plan, as well as the $1,639,645 he was entitled to under
the Company's Senior Executive Deferred Compensation Plan. All payments made to
Mr. Pair under this agreement are to be made less applicable withholding
requirements. The Pair Separation Agreement further provides that Mr. Pair is
entitled to exercise his vested stock options for 90 days following the date of
such agreement and that his unvested options will continue to be outstanding
until September 1, 2002 and will accelerate under certain circumstances. Under
this agreement, Mr. Pair transferred all of his interests in Herbalife of Japan
to Herbalife.
Under the Gerrity Separation Agreement, Mr. Gerrity was entitled to receive
the following payments: (i) $381,443, which was paid to him on January 2, 2002
and (ii) four separate quarterly payments, each in the amount of $400,000,
commencing on June 30, 2002. In addition, under this agreement, Herbalife paid
Mr. Gerrity the $1,010,219 he was entitled to under Herbalife's Senior Executive
Retirement Plan, as well as the $3,052,169 he was entitled to under Herbalife's
Senior Executive Deferred Compensation Plan. All payments made to Mr. Gerrity
under this agreement are to be made less applicable withholding requirements.
The Gerrity Separation Agreement further provides that Mr. Gerrity is entitled
to exercise his vested stock options for 90 days following the date of such
agreement and that his unvested options will continue to be outstanding until
December 31, 2002 and will accelerate under certain circumstances. Under this
agreement, Mr. Gerrity transferred all of his interests in Herbalife of Japan to
Herbalife.
Under the Sandler Separation Agreement, Mr. Sandler was entitled to receive
the following payments: (i) $2.6 million for severance less applicable tax
withholdings, (ii) $113,174 under the Supplemental Executive Retirement Plan,
less applicable tax withholdings, (iii) $1.9 million under the Deferred
Compensation Plan, less applicable tax withholdings and (iv) $176,924 payout of
accrued, unused vacation, less applicable tax withholdings.
On May 20, 2002, Herbalife and Mr. Sandler entered into an agreement for
retention of legal services whereby Mr. Sandler will be retained as an
independent contractor for a 36-month period beginning May 20, 2002. Under this
agreement, Mr. Sandler will provide Herbalife with legal advice and perform such
legal services as Herbalife may request from time to time. In consideration for
the legal services to be provided by Mr. Sandler, Herbalife will pay Mr. Sandler
a total consulting fee of $1.0 million.
CHANGE IN CONTROL PLAN
Pursuant to the agreements in place prior to the signing of the merger
agreement, and subject to reduction in the event of payment by Herbalife of
severance payments, if any, made to such persons before consummation of the
merger, upon consummation of the merger, Messrs. Kane and Klein and Ms. Hannah
each received change in control payments (after making necessary adjustments for
purposes of Section 280G
87
and 4999 of the Internal Revenue Code of 1986, as amended (the "Code")) in the
amounts of $2.2 million, $2.2 million and $3.2 million, respectively.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Herbalife International, Inc.'s bylaws provide that, except to the extent
expressly prohibited by the Nevada Revised Statutes, we must indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of Herbalife International, Inc., by reason of the fact that he is or was a
director, officer, employee or agent of Herbalife International, Inc., or is or
was serving at the request of Herbalife International, Inc. as a director,
officer, employee or agent of another corporation, against expenses, including
attorneys' fees, judgment, fines and amount paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interest of Herbalife International, Inc., and, with
respect to a criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interest of Herbalife International, Inc., and that,
with respect to any criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to managers, officers or persons controlling us pursuant to the
foregoing, we have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
88
PRINCIPAL SHAREHOLDERS
All of the shares of Herbalife are 99.9% owned by WH Luxembourg
Intermediate Holdings S.a.R.L., an indirect wholly-owned subsidiary of WH
Holdings and 0.1% owned by WH Intermediate Holdings, a direct wholly-owned
subsidiary of WH Holdings. The following table shows the beneficial ownership of
preferred shares of WH Holdings, and thus the indirect beneficial ownership of
the equity interest of Herbalife, held by (i) each of WH Holdings' and
Herbalife's directors and director nominees, (ii) each of the Named Executive
Officers of Herbalife, (iii) all directors and executive officers as a group and
(iv) each person or entity known to us to beneficially own more than five
percent (5%) of the preferred shares of WH Holdings outstanding.
<Table>
<Caption>
PERCENTAGE
OWNERSHIP ON A
NUMBER OF FULLY DILUTED
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES BASIS(1)
- ------------------------------------ ---------- --------------
Whitney V, L.P. ............................................ 47,741,351 46.8 %
Whitney Strategic Partners V, L.P. ......................... 418,534 0.4 %
Whitney Private Debt Fund, L.P.(2)*......................... 805,585 0.8 %
WH Investments Ltd.(3)*..................................... 6,312,843 6.2 %
Green River Offshore Fund Ltd.(4)*.......................... 85,929 0.1 %
Total.................................................. 55,364,242 53.4 %
CCG Investments (BVI), L.P. ................................ 27,827,358 27.3 %
CCG Associates -- QP, LLC................................... 1,398,853 1.4 %
CCG Associates -- AI, LLC................................... 130,067 0.1 %
CCG Investment Fund -- AI, LP............................... 372,797 0.4 %
CCG AV, LLC -- Series C..................................... 918,003 0.9 %
CCG AV, LLC -- Series E..................................... 715,922 0.7 %
CCG CI, LLC................................................. 54,867 0.1 %
Total.................................................. 31,417,867 30.8 %
Peter M. Castleman(5)*...................................... 55,364,242 55.2 %
James H. Fordyce*........................................... -- --
John C. Hockin(5)*.......................................... 55,364,242 55.2 %
Steven E. Rodgers(5)*....................................... 55,364,242 55.2 %
Jesse Rogers(6)**........................................... 31,417,867 30.7 %
Prescott Ashe(6)**.......................................... 31,417,867 30.7 %
Ken Diekroeger**............................................ -- --
Stefan L. Kaluzny**......................................... -- --
Brian L. Kane***............................................ 284,091 0.3 %
Carol Hannah***............................................. 568,182 0.6 %
Charles L. Orr***........................................... 14,205 0.01%
Henry S. Burdick............................................ -- --
Leslie Stanford(7)***....................................... 2,272,728 2.2 %
All Directors and Executive Officers as a Group (14
persons)(8)............................................... 90,091,769 88.3 %
========== =====
</Table>
- ---------------
* c/o Whitney & Co., LLC, 177 Broad Street, Stamford, Connecticut 06901.
** c/o Golden Gate Private Equity, Inc., One Embarcadero Center, 33rd Floor,
San Francisco, California 94111.
*** c/o Herbalife International, Inc., 1800 Century Park East, Los Angeles,
California 90067.
(1) Applicable percentage of ownership as of October 31, 2002 is based upon
100,000,000 preferred shares outstanding and warrants for 2,040,816
preferred shares. Beneficial ownership is determined in accor-
89
dance with the rules of the SEC, and includes voting and investment power with
respect to shares. Unless otherwise indicated below, to the knowledge of
Herbalife, all persons listed below have sole voting and investment power with
respect to their preferred shares, except to the extent authority is shared
by spouses under applicable law and to the extent provided in the
shareholders' agreement. See "Certain Relationships and Related
Transactions -- Certain Agreements Relating to the
Acquisition -- Shareholders' Agreement." Pursuant to the rules of the SEC,
the number of preferred shares deemed outstanding includes shares issuable
pursuant to options or warrants held by the respective person or group
which may be exercised within 60 days of December 31, 2002. This
calculation assumes the conversion of preferred shares into common shares.
(2) Includes warrants to purchase preferred shares at an exercise price of $0.01
per share, which are exercisable within 60 days of December 31, 2002.
(3) WH Investments Ltd. is a Cayman company beneficially owned by Whitney V,
L.P. and Whitney Strategic Partners V, L.P.(the "Whitney Entities"). WH
Investments Ltd. holds preferred shares which will be available for sale
either to certain distributors, directors or members of management, or to WH
Holdings for subsequent sale to certain distributors, directors or members
of management, at subsequent closings. To the extent that such shares are
not sold, they will be distributed pro rata to the beneficial owners of WH
Investments Ltd.
(4) Includes warrants to purchase shares at an exercise price of $0.01 per
share, which are exercisable within 60 days of December 31, 2002.
(5) Represents shares beneficially owned by the Whitney Entities and Whitney
Private Debt Fund, L.P. Messrs. Castleman, Rodgers and Hockin are managing
members of the entities that are the general partners of the Whitney
Entities and Whitney Private Debt Fund, L.P. Accordingly, they may be deemed
to share beneficial ownership of such shares. Each of Messrs. Castleman,
Rodgers and Hockin disclaims beneficial ownership of all shares owned by the
Whitney Entities and Whitney Private Debt Fund, L.P., except to the extent
of his pecuniary interest in the Whitney Entities and Whitney Private Debt
Fund, L.P.
(6) Represents shares beneficially owned by CCG Investments (BVI), L.P., CCG
Associates -- QP, LLC, CCG Associates -- AI, LLC, CCG Investment Fund -- AI,
LP, CCG AV, LLC -- Series C, CCG AV, LLC -- Series E and CCG CI, LLC (the
"Golden Gate Entities"). Messrs. Rogers and Ashe are managing members of the
entities that are general partners of the Golden Gate Entities. Accordingly,
they may be deemed to share beneficial ownership of such shares. Each of
Messrs. Rogers and Ashe disclaim beneficial ownership of all shares owned by
the Golden Gate Entities, except to the extent of his pecuniary interest in
the Golden Gate Entities.
(7) Represents shares beneficially owned by Leslie Stanford through Blueline
Capital, LLC. Leslie Stanford was nominated by the distributors to the WH
Holdings' board of directors and her appointment is effective as of December
20, 2002.
(8) Includes the preferred shares described above relating to current executive
officers and directors plus an additional 170,454 preferred shares held by
one other executive officer.
90
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BUYOUT OF MINORITY INTEREST IN HERBALIFE OF JAPAN
In 1996, Herbalife began to seek regulatory approvals to make an initial
public offering of shares of Herbalife of Japan. On December 30, 1996, in
preparation for the possible offering, Herbalife sold shares representing
approximately 7.0% of Herbalife of Japan to some of its directors and executive
officers, as well as to resident managers of Herbalife of Japan for an aggregate
of approximately $4.6 million, as an incentive for increased efforts to
facilitate the operation of the Herbalife of Japan business and the success of
the offering (the "Japan minority shares"). In early May 2002, Herbalife
repurchased the Japan minority shares for an aggregate of approximately $4.0
million and a cash dividend of approximately $0.6 million.
CERTAIN AGREEMENTS RELATING TO THE ACQUISITION
SUBSCRIPTION AGREEMENTS
In connection with the preferred shares financing, selected members of our
distributor organization and senior management were offered the opportunity to
purchase the 12% Series A Cumulative Convertible Preferred Shares of WH
Holdings. The price paid by participating members of our distributor
organization was the same as that paid by the equity sponsors. The subscription
agreements contained customary representations, warranties and covenants.
SHAREHOLDERS' AGREEMENT
In connection with the subscription for the purchase of preferred shares,
participating members of our distributor organization and senior management are
required to become party to a shareholders' agreement entered into by the equity
sponsors and WH Holdings (the "shareholders' agreement"). This agreement
restricts the ability of the shareholders to freely transfer preferred shares
and common shares held by them following the merger (other than to the
transferor's family members, other shareholders and the equity sponsors). The
equity sponsors and their transferees have also entered into an institutional
shareholders' agreement which contains substantially similar restrictions to the
shareholders' agreement relating to transfers by the equity sponsors and their
transferees.
The equity sponsors also have preemptive rights, and co-sale and
bring-along rights on shares owned by other shareholders. The other shareholders
have preemptive rights, and pro rata tag-along rights on certain sales of shares
by the equity sponsors which will reduce the equity sponsors' holdings below a
threshold.
If a distributor shareholder is terminated, unless such distributor sells
its shares to another distributor, WH Holdings shall have the right to
repurchase such shares. If a shareholder that is a member of senior management
is terminated, first the equity sponsors, then WH Holdings shall have the right
to repurchase such shares before such terminated shareholder can sell its shares
to third parties. Also, under the shareholders' agreement, the shareholders will
agree to vote in favor of the election of the following designees to WH
Holdings' board of directors:
- Four (4) nominees designated by Whitney V, L.P.;
- Four (4) nominees designated by CCG Investments (BVI), L.P.;
- Herbalife's Chief Executive Officer;
- Two (2) independent nominees acceptable to Whitney V, L.P. and CCG
Investments (BVI), L.P.; and
- Up to two (2) nominees designated by distributor shareholders.
If the distributors own at least 11,000,000 preferred shares, they may
designate one nominee to the board of directors of WH Holdings. If the
distributors own more than 11,000,000 but less than 16,500,000 preferred shares,
they may also select one non-voting observer to attend all meetings of the board
of directors of
91
WH Holdings. If the distributors own 16,500,000 or more preferred shares, they
may designate two nominees. The nominees of the distributors shall be elected by
a plurality of votes cast by the distributor shareholders.
In the event an equity sponsor does not have a designee serving on the
board of directors for any reason, one person designated by such equity sponsor
will be permitted to attend as an observer at all meetings of the board of
directors. As of October 31, 2002, the distributors owned 11.44% of our equity,
and have the right to designate one nominee and one non-voting observer to the
board of directors of WH Holdings. At a shareholders meeting held on December 4,
2002, the distributors nominated Leslie Stanford for election to the board of
directors of WH Holdings and Markus Lehman was nominated as a non-voting
observer to the board of directors of WH Holdings. The appointments are
effective as of December 20, 2002.
REGISTRATION RIGHTS AGREEMENT
Members of our distributor organization and senior management holding
preferred shares will also be party to a registration rights agreement between
the equity sponsors and WH Holdings (the "WH Holdings registration rights
agreement"). Under the WH Holdings registration rights agreement, the equity
sponsors have the ability, in certain circumstances, to cause WH Holdings to
register equity securities and to participate in registrations by WH Holdings of
its equity securities. Upon an initial public offering, if the equity sponsors
shall include their shares for registration, the other shareholders may also
participate pro rata.
In addition to an initial public offering, if WH Holdings at any time
proposes to register any of its securities under the Securities Act for sale to
the public, in certain circumstances shareholders may require WH Holdings to
include their shares in the securities to be covered by the registration
statement. Such registration rights will be subject to customary limitations
specified in the WH Holdings registration rights agreement.
AMENDED AND RESTATED SHARE REPURCHASE AGREEMENT
WH Holdings and WH Investments Ltd. entered into an amended and restated
share repurchase agreement dated as of October 31, 2002, which enables WH
Holdings to purchase shares from WH Investments Ltd. to sell to distributors,
directors and members of management at subsequent closings.
AGREEMENT OF ASSIGNMENT
In connection with a share purchase agreement, WH Investments Ltd.
transferred preferred shares to the Golden Gate Entities. The Golden Gate
Entities, WH Investments Ltd. and WH Holdings entered into an agreement of
assignment under which the Golden Gate entities agreed to assume certain
obligations under the amended and restated share repurchase agreement with
respect to the sale of preferred shares at subsequent closings.
INDEMNITY AGREEMENT
In connection with the purchase of preferred shares, WH Holdings and WH
Acquisition entered into an indemnity agreement with the equity sponsors
pursuant to which WH Holdings and Herbalife (as successor-in-interest to WH
Acquisition) agreed to indemnify the equity sponsors for losses and claims
resulting from, arising out of or any way related to the merger, including
existing litigation. Whitney has been sued in San Francisco by Rosemont
Associates and Joseph Urso for $20 million in a suit alleging breach of
contract, breach of covenants of good faith and fair dealing, quantum meruit and
other causes of action arising out of the sale of Herbalife to Whitney and
others. Whitney believes it has meritorious defenses to the suit and is
vigorously contesting it.
92
SECURITIES PURCHASE AGREEMENT
WH Holdings, GarMark Partners, L.P. ("GarMark") and Whitney Private Debt
Fund, L.P. ("Whitney Private Debt") entered into a securities purchase agreement
pursuant to which GarMark and Whitney Private Debt purchased the senior notes
and warrants. Whitney Private Debt is an affiliate of certain of the equity
sponsors. Whitney Private Debt purchased $15.0 million in principal amount of
the senior notes and received warrants for 805,585 preferred shares of WH
Holdings. In addition, Whitney Private Debt was paid a transaction fee of 3.5%
of the principal amount of the senior notes it purchased and a drawdown fee of
$225,000. On November 27, 2002, Green River Offshore Fund Ltd., an affiliate of
Whitney, purchased $1.6 million in principal amount of the senior notes from
GarMark and received warrants for 85,929 preferred shares of WH Holdings from
GarMark. Each holder of $10 million or more of senior notes (subject to certain
exceptions) may designate one observer to the board of directors of WH Holdings
to attend each meeting of the board and committees of the board. The securities
purchase agreement also contains customary representations, warranties,
covenants and provisions relating to prepayment and default.
AGREEMENTS WITH THE EQUITY SPONSORS
In connection with the acquisition, we have entered into various agreements
with the equity sponsors. Pursuant to the monitoring fee agreement entered into
in connection with the acquisition, Whitney & Co., LLC and GGC Administration,
LLC, an affiliate of CCG Investments (BVI), L.P., will conduct certain
activities related to such parties' and its affiliates' investments in WH
Holdings. In consideration of those services, Herbalife will pay to Whitney &
Co., LLC and GGC Administration, LLC, quarterly, fees for monitoring services
rendered (determined on an hourly basis), and such obligations shall be
guaranteed by WH Holdings. Such monitoring fees will be at least $2.5 million
per annum, but will not exceed an aggregate of $5.0 million per annum, divided
between Whitney & Co., LLC and GGC Administration, LLC at a ratio of 65% to 35%,
respectively. In no event will any such monitoring fees be earned or paid until
Herbalife's adjusted EBITDA (as defined in the monitoring fee agreement), for
the first trailing twelve month period ending on any calendar quarter following
the date of the consummation of the merger, exceeds $125.8 million (and such
payment shall continue annually thereafter once such initial threshold is met).
Herbalife will also agree to reimburse Whitney & Co., LLC and GGC
Administration, LLC for their reasonable out-of-pocket expenses and pay
additional transaction fees to them in the event WH Holdings and/or any of its
subsidiaries completes add-on acquisitions, divestitures, a transaction
resulting in a change of control (as defined therein) or financing involving WH
Holdings and/or any of its subsidiaries, and such obligations shall be
guaranteed by WH Holdings. WH Holdings and its subsidiaries will also provide
customary joint and several indemnification to Whitney & Co., LLC and GGC
Administration, LLC. In connection with the structuring and implementation of
the acquisition of Herbalife and related financing transactions, we paid the
equity sponsors fees in the aggregate of $17.5 million. The equity sponsors were
also reimbursed $5.0 million for their out-of-pocket expenses in connection with
the merger and related financing transactions. In addition, Whitney & Co., LLC
was paid fees of $645,000 in connection with providing a bridge commitment to WH
Acquisition to finance a portion of the acquisition, which bridge facility was
not utilized and has been terminated. Also, in connection with the Senior Credit
Facility, Whitney Private Debt Fund, L.P. lent $5.0 million of the $180 million
term loan to Herbalife.
WH HOLDINGS EXECUTIVE OPTION PLAN
WH Holdings has established a stock option plan that provides for the grant
of options to purchase common shares of WH Holdings to any executive officer of
Herbalife following the merger. The option plan is administered by a committee
appointed by the board of directors of WH Holdings. Upon conversion of the
options into common shares of WH Holdings, the executive officers of Herbalife
will be required to enter into a shareholders' agreement and a registration
rights agreement with WH Holdings. See "Management -- Description of Benefit
Plans."
93
WH HOLDINGS INDEPENDENT DIRECTORS STOCK OPTION PLAN
WH Holdings has established an independent directors stock option plan that
provides for the grant of options to purchase common shares of WH Holdings to
independent directors of WH Holdings. Independent directors are individuals who
are neither employees of WH Holdings or any of its affiliates nor designated as
directors by the affiliates of WH Holdings or its distributors.
DESCRIPTION OF PREFERRED SHARES
Members of our distributor organization became equity investors in WH
Holdings. This investment was made through the purchase of shares of 12% Series
A Cumulative Convertible Preferred Shares, having an aggregate liquidation
preference equal to the aggregate original price of the preferred shares, plus
accrued and unpaid dividends thereon. The preferred shares were issued in a
private transaction not subject to the registration requirements of the
Securities Act or the securities regulations under any other jurisdiction.
LIQUIDATION PREFERENCE. Holders of the preferred shares have a preference
equal to the purchase price per preferred share plus accrued and unpaid
dividends thereon and will also participate with the common shares in available
assets.
MATURITY. The preferred shares will not have a maturity date.
DIVIDENDS. Each of WH Holdings preferred shares is entitled to receive
cash dividends at a rate per annum equal to 12% of the original issue price.
Unpaid dividends will compound on a quarterly basis. All dividends are
cumulative from the date of issuance, whether or not earned or declared. Upon
automatic conversion of the preferred shares, accrued and unpaid dividends shall
be paid by WH Holdings, at the election of WH Holdings, in cash or in common
shares. The Notes and the senior credit facilities restrict the payment of cash
dividends by WH Intermediate Holdings and its subsidiaries to WH Holdings.
VOTING. The holders of preferred shares shall be entitled to vote on all
matters submitted to WH Holding's shareholders for a vote, together with the
holders of common shares, all voting together as a single class.
RANKING. The preferred shares will rank senior to all other capital stock.
CONVERSION. The preferred shares shall automatically convert on the
earlier of (x) an IPO and (y) a merger or sale or other change of control of WH
Holdings. Each preferred share will convert into a unit consisting of (i) the
right to receive cash equal to the original issue price per preferred share and
(ii) one common share subject to anti-dilution adjustment.
ANTI-DILUTION. The preferred shares will have customary anti-dilution
adjustments for structural changes and certain preemptive rights with respect to
dilutive equity issuances.
OTHER RIGHTS OR RESTRICTIONS. Preferred shares issued to distributors will
be subject to repurchase rights, restrictions on transfer, bring-along rights
and will benefit from the registration rights and tag-along rights described
elsewhere herein.
94
OTHERS
Frank P. Morse and Robert A. Sandler, two former senior executives of
Herbalife, are minority shareholders in B.L.I. Holdings, In., a holding company
for two of our suppliers of personal care products. Total purchases from B.L.I.
Holdings, Inc. and its subsidiaries were $919,000 for the seven months ended
July 31, 2002, $199,000 for the two months ended September 30, 2002, and
$241,000 for the nine months ended September 30, 2001.
Subsequent to the merger, Douglas G. Sages, former Executive Vice
President, Chief Administrative Officer and Chief Financial Officer is no longer
employed by the Company, effective as of September 19, 2002. We have not entered
into a separation arrangement with Mr. Sages as of this time.
95
THE EXCHANGE OFFER
EXCHANGE TERMS
We sold the Series A Notes on June 27, 2002, to the initial purchaser
pursuant to a purchase agreement. The initial purchaser subsequently sold the
private notes to
- "qualified institutional buyers" ("QIBs"), as defined in Rule 144A under
the Securities Act, in reliance on Rule 144A; and to
- persons in offshore transactions in reliance on Regulation S under the
Securities Act.
As a condition to the initial sale of the Series A Notes, Herbalife and the
initial purchaser entered into a registration rights agreement. Pursuant to the
registration rights agreement, we agreed to:
- file with the SEC by November 13, 2002, a registration statement under
the Securities Act with respect to the Series B Notes, and
- use our reasonable best efforts to cause the registration statement to
become effective under the Securities Act on or before January 27, 2003.
We agreed to issue and exchange the Series B Notes for all Series A Notes
properly surrendered and not withdrawn before the expiration of the exchange
offer. A copy of the registration rights agreement has been filed as an exhibit
to the registration statement which includes this prospectus. The registration
statement is intended to satisfy some of our obligations under the registration
rights agreement and the purchase agreement.
Series A Notes in an aggregate principal amount of $165,000,000 are
currently issued and outstanding. The maximum aggregate principal amount of
Series B Notes that will be issued in exchange for Series A Notes is
$165,000,000. The terms of the Series B Notes and the Series A Notes are
substantially the same in all material respects, except that the Series B Notes
will be freely transferable by the holders except as provided in this
prospectus. See "Description of Notes."
The Series B Notes will bear interest at a rate of 11 3/4% per year,
payable semiannually on January 15 and July 15 of each year, beginning on
January 15, 2003. Holders of Series B Notes will receive interest from the date
of the original issuance of the Series A Notes or from the date of the last
payment of interest on the Series A Notes, whichever is later. Holders of Series
B Notes will not receive any interest on Series A Notes tendered and accepted
for exchange. In order to exchange your Series A Notes for transferable Series B
Notes in the exchange offer, you will be required to make the following
representations, which are included in the letter of transmittal:
- any Series B Notes that you receive will be acquired in the ordinary
course of your business;
- you are not participating, and have no arrangement or understanding with
any person to participate, in the distribution of the Series B Notes;
- you are not our "affiliate," as defined in Rule 405 of the Securities
Act, or a broker-dealer tendering Series A Notes acquired directly from
us; and
- if you are not a broker-dealer, that you are not engaged in and do not
intend to engage in the distribution of the Series B Notes.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any Series A Notes
properly tendered in the exchange offer, and the exchange agent will deliver the
Series B Notes promptly after the expiration date of the exchange offer.
If you tender your Series A Notes, you will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of the Series A Notes
in connection with the exchange offer. We will pay all charges, expenses and
transfer taxes in connection with the exchange offer, other than the taxes
described below under "Transfer Taxes."
96
WE MAKE NO RECOMMENDATION TO YOU AS TO WHETHER YOU SHOULD TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF YOUR EXISTING SERIES A NOTES INTO THIS
EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE THIS
RECOMMENDATION. YOU MUST MAKE YOUR OWN DECISION WHETHER TO TENDER INTO THIS
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SERIES A NOTES TO TENDER
AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH
YOUR ADVISORS, IF ANY, BASED ON YOUR FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The exchange offer expires at 5:00 p.m., New York City time, on January 24,
2003 (the "expiration date"), unless we extend the exchange offer, in which case
the expiration date will be the latest date and time to which we extend the
exchange offer.
In order to extend the exchange offer, we will:
- notify the exchange agent of any extension by oral or written notice; and
- issue a press release or other public announcement which will include
disclosure of the approximate number of private notes deposited; such
press release or announcement would be issued prior to 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
We expressly reserve the right, so long as applicable law allows:
- to delay our acceptance of Series A Notes for exchange;
- to terminate the exchange offer if any of the conditions set forth under
"-- Conditions of the Exchange Offer" beginning on page 102 exist;
- to waive any condition to the exchange offer;
- to amend any of the terms of the exchange offer; and
- to extend the expiration date and retain all Series A Notes tendered in
the exchange offer, subject to your right to withdraw your tendered
Series A Notes as described under "-- Withdrawal of Tenders."
Any waiver or amendment to the exchange offer will apply to all Series A
Notes tendered, regardless of when or in what order the Series A Notes were
tendered. If the exchange offer is amended in a manner that we think constitutes
a material change, or if we waive a material condition of the exchange offer, we
will promptly disclose the amendment or waiver by means of a prospectus
supplement that will be distributed to the registered holders of the Series A
Notes, and we will extend the exchange offer to the extent required by Rule
14e-1 under the Exchange Act.
We will promptly follow any delay in acceptance, termination, extension or
amendment by oral or written notice of the event to the exchange agent, followed
promptly by oral or written notice to the registered holders. Should we choose
to delay, extend, amend or terminate the exchange offer, we will have no
obligation to publish, advertise or otherwise communicate this announcement,
other than by making a timely release to an appropriate news agency.
In the event we terminate the exchange offer, all Series A Notes previously
tendered and not accepted for payment will be returned promptly to the tendering
holders.
In the event that the exchange offer is withdrawn or otherwise not
completed, Series B Notes will not be given to holders of Series A Notes who
have validly tendered their Series A Notes.
RESALE OF SERIES B NOTES
Based on interpretations of the SEC staff set forth in no action letters
issued to third parties, we believe that Series B Notes issued under the
exchange offer in exchange for Series A Notes may be offered for resale,
97
resold and otherwise transferred by you without compliance with the registration
and prospectus delivery requirements of the Securities Act, if:
- you are acquiring Series B Notes in the ordinary course of your business;
- you are not participating, and have no arrangement or understanding with
any person to participate, in the distribution of the Series B Notes;
- you are not a broker-dealer who purchased Series A Notes directly from us
for resale pursuant to Rule 144A or any other available exemption under
the Securities Act; and
- you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act.
However, we have not asked the SEC to consider this particular exchange
offer in the context of a no-action letter. Therefore, you cannot be sure that
the SEC will treat it in the same way it has treated other exchange offers in
the past.
If you tender Series A Notes in the exchange offer with the intention of
participating in any manner in a distribution of the Series B Notes:
- you cannot rely on those interpretations by the SEC staff, and
- you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered
by an effective registration statement containing the selling security
holder information required by Item 507 or 508, as applicable, of
Regulation S-K.
Only broker-dealers that acquired the Series A Notes as a result of
market-making activities or other trading activities may participate in the
exchange offer. Each broker-dealer that receives Series B Notes for its own
account in exchange for Series A Notes, where such Series A Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the Series B Notes. Please read the section captioned "Plan
of Distribution" beginning on page 161 for more details regarding the transfer
of Series B Notes.
ACCEPTANCE OF SERIES A NOTES FOR EXCHANGE
We will accept for exchange Series A Notes validly tendered pursuant to the
exchange offer, or defectively tendered, if such defect has been waived by us,
after the later of: (1) the expiration date of the exchange offer and (2) the
satisfaction or waiver of the conditions specified below under "Conditions of
the Exchange Offer." We will not accept Series A Notes for exchange subsequent
to the expiration date of the exchange offer. Tenders of Series A Notes will be
accepted only in minimum denominations equal to $100,000 or integral multiples
of $1,000 in excess thereof.
We expressly reserve the right, in our sole discretion, to:
- delay acceptance for exchange of Series A Notes tendered under the
exchange offer, subject to Rule 14e-1 under the Exchange Act, which
requires that an offeror pay the consideration offered or return the
securities deposited by or on behalf of the holders promptly after the
termination or withdrawal of a tender offer, or
- terminate the exchange offer and not accept for exchange any Series A
Notes not theretofore accepted for exchange, if any of the conditions set
forth below under "-- Conditions of the Exchange Offer" have not been
satisfied or waived by us or in order to comply in whole or in part with
any applicable law. In all cases, Series B Notes will be issued only
after timely receipt by the exchange agent of certificates representing
Series A Notes, or confirmation of book-entry transfer, a properly
completed and duly executed letter of transmittal, or a manually signed
facsimile thereof, and any other required documents. For purposes of the
exchange offer, we will be deemed to have accepted for exchange validly
tendered Series A Notes, or defectively tendered Series A Notes with
respect to which we have waived such defect, if, as and when we give
oral, confirmed in writing, or written notice to the exchange
98
agent. Promptly after the expiration date, we will deposit the Series B
Notes with the exchange agent, who will act as agent for the tendering
holders for the purpose of receiving the Series B Notes and transmitting
them to the holders. The exchange agent will deliver the Series B Notes
to holders of Series A Notes accepted for exchange after the exchange
agent receives the Series B Notes.
If, for any reason, we delay acceptance for exchange of validly tendered
Series A Notes or we are unable to accept for exchange validly tendered Series A
Notes, then the exchange agent may, nevertheless, on our behalf, retain tendered
Series A Notes, without prejudice to our rights described under "-- Expiration
Date; Extensions; Termination; Amendments" beginning on page 97, "-- Conditions
of the Exchange Offer" beginning on page 102 and "-- Withdrawal of Tenders"
beginning on page 102, subject to Rule 14e-1 under the Exchange Act, which
requires that an offeror pay the consideration offered or return the securities
deposited by or on behalf of the holders thereof promptly after the termination
or withdrawal of a tender offer.
If any tendered Series A Notes are not accepted for exchange for any
reason, or if certificates are submitted evidencing more Series A Notes than
those that are tendered, certificates evidencing Series A Notes that are not
exchanged will be returned, without expense, to the tendering holder, or, in the
case of Series A Notes tendered by book-entry transfer into the exchange agent's
account at a book-entry transfer facility under the procedure set forth under
"-- Procedures for Tendering Series A Notes -- Book-Entry Transfer" beginning on
page 100, such Series A Notes will be credited to the account maintained at such
book-entry transfer facility from which such Series A Notes were delivered,
unless otherwise requested by such holder under "Special Delivery Instructions"
in the letter of transmittal, promptly following the exchange date or the
termination of the exchange offer.
Tendering holders of Series A Notes exchanged in the exchange offer will
not be obligated to pay brokerage commissions or transfer taxes with respect to
the exchange of their Series A Notes other than as described in "Transfer Taxes"
beginning on page 102 or in Instruction 7 to the letter of transmittal. We will
pay all other charges and expenses in connection with the exchange offer.
PROCEDURES FOR TENDERING SERIES A NOTES
Any beneficial owner whose Series A Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee or held through
a book-entry transfer facility and who wishes to tender Series A Notes should
contact such registered holder promptly and instruct such registered holder to
tender Series A Notes on such beneficial owner's behalf.
Tender of Series A Notes Held Through Depository Trust. The exchange agent
and Depository Trust have confirmed that the exchange offer is eligible for the
Depository Trust automated tender offer program. Accordingly, Depository Trust
participants may electronically transmit their acceptance of the exchange offer
by causing Depository Trust to transfer Series A Notes to the exchange agent in
accordance with Depository Trust's automated tender offer program procedures for
transfer. Depository Trust will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by Depository Trust,
received by the exchange agent and forming part of the book-entry confirmation,
which states that Depository Trust has received an express acknowledgment from
the participant in Depository Trust tendering Series A Notes that are the
subject of that book-entry confirmation that the participant has received and
agrees to be bound by the terms of the letter of transmittal, and that we may
enforce such agreement against such participant. In the case of an agent's
message relating to guaranteed delivery, the term means a message transmitted by
Depository Trust and received by the exchange agent which states that Depository
Trust has received an express acknowledgment from the participant in Depository
Trust tendering Series A Notes that they have received and agree to be bound by
the notice of guaranteed delivery.
Tender of Series A Notes Held in Certificated Form. For a holder to
validly tender Series A Notes held in certificated form:
- the exchange agent must receive at its address set forth in this
prospectus a properly completed and validly executed letter of
transmittal, or a manually signed facsimile thereof, together with any
99
signature guarantees and any other documents required by the instructions
to the letter of transmittal, and
- the exchange agent must receive certificates for tendered Series A Notes
at such address, or such Series A Notes must be transferred pursuant to
the procedures for book-entry transfer described above. A confirmation of
such book-entry transfer must be received by the exchange agent prior to
the expiration date of the exchange offer. A holder who desires to tender
Series A Notes and who cannot comply with the procedures set forth herein
for tender on a timely basis or whose Series A Notes are not immediately
available must comply with the procedures for guaranteed delivery set
forth below.
LETTERS OF TRANSMITTAL AND SERIES A NOTES SHOULD BE SENT ONLY TO THE
EXCHANGE AGENT, AND NOT TO US OR TO ANY BOOK-ENTRY TRANSFER FACILITY.
THE METHOD OF DELIVERY OF SERIES A NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER TENDERING SERIES A NOTES. DELIVERY OF SUCH DOCUMENTS WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY
MAIL, WE SUGGEST THAT THE HOLDER USE PROPERTY INSURED, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE
OF THE EXPIRATION DATE OF THE EXCHANGE OFFER TO PERMIT DELIVERY TO THE EXCHANGE
AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE, CONDITIONAL OR CONTINGENT TENDERS OF
SERIES A NOTES WILL BE ACCEPTED.
Signature Guarantee. Signatures on the letter of transmittal must be
guaranteed by an eligible institution unless:
- the letter of transmittal is signed by the registered holder of the
Series A Notes tendered therewith, or by a participant in one of the
book-entry transfer facilities whose name appears on a security position
listing it as the owner of those Series A Notes, or if any Series A Notes
for principal amounts not tendered are to be issued directly to the
holder, or, if tendered by a participant in one of the book-entry
transfer facilities, any Series A Notes for principal amounts not
tendered or not accepted for exchange are to be credited to the
participant's account at the book-entry transfer facility, and neither
the "Special Issuance Instructions" nor the "Special Delivery
Instructions" box on the letter of transmittal has been completed, or
- the Series A Notes are tendered for the account of an eligible
institution.
An eligible institution is a firm that is a participant in the Security
Transfer Agents Medallion program or the Stock Exchange Medallion program, which
is generally a member of a registered national securities exchange, a member of
the National Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office in the United States.
Book-Entry Transfer. The exchange agent will seek to establish a new
account or utilize an existing account with respect to the Series A Notes at
Depository Trust promptly after the date of this prospectus. Any financial
institution that is a participant in the book-entry transfer facility system and
whose name appears on a security position listing it as the owner of the Series
A Notes may make book-entry delivery of Series A Notes by causing the book-entry
transfer facility to transfer such Series A Notes into the exchange agent's
account. HOWEVER, ALTHOUGH DELIVERY OF SERIES A NOTES MAY BE EFFECTED THROUGH
BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT A BOOK-ENTRY TRANSFER
FACILITY, A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL, OR A
MANUALLY SIGNED FACSIMILE THEREOF, MUST BE RECEIVED BY THE EXCHANGE AGENT AT ONE
OF ITS ADDRESSES SET FORTH IN THIS PROSPECTUS ON OR PRIOR TO THE EXPIRATION DATE
OF THE EXCHANGE OFFER, OR ELSE THE GUARANTEED DELIVERY PROCEDURES DESCRIBED
BELOW MUST BE COMPLIED WITH. The confirmation of a book-entry transfer of Series
A Notes into the exchange agent's account at a book-entry transfer facility is
referred to in this prospectus as a "book-entry confirmation." Delivery of
documents to the book-entry transfer facility in accordance with that book-entry
transfer facility's procedures does not constitute delivery to the exchange
agent.
100
Guaranteed Delivery. If you wish to tender your Series A Notes and:
(1) certificates representing your Series A Notes are not lost but are
not immediately available,
(2) time will not permit your letter of transmittal, certificates
representing your Series A Notes and all other required documents to reach
the exchange agent on or prior to the expiration date of the exchange
offer, or
(3) the procedures for book-entry transfer cannot be completed on or
prior to the expiration date of the exchange offer, you may nevertheless
tender if all of the following are complied with:
- your tender is made by or through an eligible institution;
- on or prior to the expiration date of the exchange offer, the exchange
agent has received from the eligible institution a properly completed
and validly executed notice of guaranteed delivery, by manually signed
facsimile transmission, mail or hand delivery, in substantially the
form provided with this prospectus. The notice of guaranteed delivery
must:
(a) set forth your name and address, the registered number(s) of
your Series A Notes and the principal amount of Series A Notes tendered;
(b) state that the tender is being made thereby;
(c) guarantee that, within three New York Stock Exchange trading
days after the date of the notice of guaranteed delivery, the letter of
transmittal or facsimile thereof properly completed and validly
executed, together with certificates representing the Series A Notes, or
a book-entry confirmation, and any other documents required by the
letter of transmittal and the instructions thereto, will be deposited by
the eligible institution with the exchange agent; and
(d) the exchange agent receives the properly completed and validly
executed letter of transmittal or facsimile thereof with any required
signature guarantees, together with certificates for all Series A Notes
in proper form for transfer, or a book-entry confirmation, and any other
required documents, within three New York Stock Exchange trading days
after the date of the notice of guaranteed delivery.
Other Matters. Series B Notes will be issued in exchange for Series A
Notes accepted for exchange only after timely receipt by the exchange agent of:
- certificates for (or a timely book-entry confirmation with respect to)
your Series A Notes,
- a properly completed and duly executed letter of transmittal or facsimile
thereof with any required signature guarantees, or, in the case of a
book-entry transfer, an agent's message, and
- any other documents required by the letter of transmittal.
We will determine, in our sole discretion, all questions as to the form of
all documents, validity, eligibility, including time of receipt, and acceptance
of all tenders of Series A Notes. Our determination will be final and binding on
all parties. ALTERNATIVELY, CONDITIONAL OR CONTINGENT TENDERS OF SERIES A NOTES
WILL NOT BE CONSIDERED VALID. We reserve the absolute right to reject any or all
tenders of Series A Notes that are not in proper form or the acceptance of
which, in our opinion, would be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular Series A Notes.
Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding.
Any defect or irregularity in connection with tenders of Series A Notes
must be cured within the time we determine, unless waived by us. We will not
consider the tender of Series A Notes to have been validly made until all
defects and irregularities have been waived by us or cured. Neither we, the
exchange agent, or any other person will be under any duty to give notice of any
defects or irregularities in tenders of Series A Notes, or will incur any
liability to holders for failure to give any such notice.
101
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender of Series A Notes at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at one of
the addresses set forth below under "-- Exchange Agent" on page 103, or
- you must comply with the appropriate procedures of Depository Trust's
automated tender offer program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the Series A Notes to be
withdrawn, and
- identify the Series A Notes to be withdrawn, including the principal
amount of the Series A Notes.
If Series A Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at Depository Trust to be credited with the
withdrawn Series A Notes and otherwise comply with the procedures of Depository
Trust.
We will determine all questions as to validity, form, eligibility and time
of receipt of any withdrawal notices. Our determination will be final and
binding on all parties. We will deem any Series A Notes so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer.
Any Series A Notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of Series A Notes tendered by book-entry transfer into
the exchange agent's account at Depository Trust according to the procedures
described above, such Series A Notes will be credited to an account maintained
with Depository Trust for the Series A Notes. This return or crediting will take
place as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. You may retender properly withdrawn Series A
Notes by following one of the procedures described under "-- Procedures for
Tendering Series A Notes" beginning on page 99 at any time on or prior to the
expiration date.
CONDITIONS OF THE EXCHANGE OFFER
We may terminate, waive any conditions to or amend the exchange offer or,
subject to Rule 14e-1 under the Exchange Act which requires that an offeror pay
the consideration offered or return the securities deposited by or on behalf of
the holders thereof promptly after the termination or withdrawal of the exchange
offer, postpone the acceptance for exchange of Series A Notes so tendered if, on
or prior to the expiration date of the exchange offer, we determine that the
exchange offer would violate applicable law or any applicable interpretation of
the staff of the SEC. We reserve the right to waive any defects, irregularities
or conditions of surrender as to particular Series A Notes.
TRANSFER TAXES
We will pay all transfer taxes applicable to the transfer and exchange of
Series A Notes pursuant to the exchange offer. If, however:
- delivery of the Series B Notes and/or certificates for Series A Notes for
principal amounts not exchanged, are to be made to any person other than
the record holder of the Series A Notes tendered;
- tendered certificates for Series A Notes are recorded in the name of any
person other than the person signing any letter of transmittal; or
- a transfer tax is imposed for any reason other than the transfer and
exchange of Series A Notes to us or our order,
102
the amount of any such transfer taxes, whether imposed on the record holder or
any other person, will be payable by the tendering holder prior to the issuance
of the Series B Notes.
CONSEQUENCES OF FAILING TO EXCHANGE
If you do not exchange your Series A Notes for Series B Notes in the
exchange offer, you will remain subject to the restrictions on transfer of the
Series A Notes:
- as set forth in the legend printed on the bonds as a consequence of the
issuance of the Series A Notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise set forth in the memorandum distributed in connection with the
private offering of the Series A Notes.
In general, you may not offer or sell the Series A Notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the Series A Notes under the Securities Act.
ACCOUNTING TREATMENT
The Series B Notes will be recorded at the same carrying value as the
Series A Notes, as reflected in our accounting records on the date of the
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes upon the consummation of the exchange offer. We will amortize the
expenses of the exchange offer over the term of the Series B Notes.
EXCHANGE AGENT
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus, the letter of transmittal or any other
documents to the exchange agent. You should send certificates for Series A
Notes, letters of transmittal and any other required documents to the exchange
agent addressed as follows:
The Bank of New York
<Table>
By Overnight, By Mail: By Hand in New York:
Registered or Certified Mail The Bank of New York The Bank of New York
or Overnight Courier: 101 Barclay Street 101 Barclay Street
The Bank of New York Floor 21 West Floor 21 West
Reorganization Section New York, New York 10286 Corporate Trust Services
101 Barclay Street-7E Reorganization Section Window
New York, New York 10286 Attn: Bernard Arsenec Ground Level
Attn: Bernard Arsenec Attn: Bernard Arsenec
By Facsimile: Reorganization Section
(for eligible institutions
only)
(212) 298-1915
Confirm by telephone:
(212) 815-5098
</Table>
103
DESCRIPTION OF SENIOR CREDIT FACILITIES
At the closing of the acquisition, we entered into senior credit facilities
with various lenders, including Whitney Private Debt Fund, L.P., and UBS AG,
Stamford Branch as administrative agent. Set forth below is a summary of the
terms of the senior credit facilities.
The senior credit facilities consist of (i) a senior term loan in the
aggregate principal amount of $180.0 million and (ii) a senior revolving credit
facility in the aggregate principal amount of $25.0 million. We borrowed $180.0
million under the senior credit facilities to provide a portion of the proceeds
required to consummate the merger and will borrow amounts to provide for working
capital and general corporate needs after the consummation of the merger. The
term loan will mature on June 30, 2008. The revolving credit facility is
available until July 31, 2007.
The Series A Notes and the senior credit facilities are guaranteed by the
guarantors. The senior credit facilities are also guaranteed by WH Holdings. The
obligations under the senior credit facilities are secured by (i) first priority
pledges of (A) all of the stock of the guarantors, and (B) 65% of the equity
interests of the foreign subsidiaries of Herbalife that are not guarantors other
than the following subsidiaries:
- HIIP Investment Co., LLC;
- Herbalife Foreign Sales Corporation;
- Importadora Y Distribuidora Herbalife International de Chile Limitada;
- Herbalife International Greece S.A.;
- Herbalife Hungary Trading, Limited;
- PT Herbalife Indonesia;
- Herbalife International SBN.BHD;
- HBL International Maroc SARL;
- Herbalife International Products N.V.;
- Herbalife International Holdings, Inc.;
- Herbalife International, S.A.;
- Herbalife Domincana, S.A.; and
- Herbalife Del Ecuador, S.A.;
and (ii) security interests in and liens on all accounts receivable, inventory
and other property and assets of WH Holdings and the guarantors (other than the
escrow account for interest on the senior notes described above).
All amounts outstanding under our senior credit facilities bear interest,
at our option, subject to certain limitations, as follows:
(i) with respect to our senior secured revolving credit facility: at
the base rate plus 2.75% per annum or at the reserve adjusted LIBOR Rate
plus 3.75% per annum; and
(ii) with respect to amounts outstanding under our senior secured term
loan facility: at the base rate plus 3.00% per annum or at the reserve
adjusted LIBOR Rate plus 4.00% per annum.
The applicable margin for the revolving loans under the senior credit facilities
is subject to adjustment based upon our consolidated total leverage ratio. The
base rate is a fluctuating interest rate equal to the higher of (a) UBS' prime
rate or (b) the Federal Funds Effective Rate plus 0.5%. We also pay customary
administration fees and expenses and commitment fees of 0.50% per annum on the
unused portion of the revolving credit facility.
Prior to the maturity date, we expect that funds borrowed under the
revolving credit facility may be borrowed, repaid and reborrowed.
104
We may prepay borrowings under the senior credit facilities in whole or in
part, in minimum amounts and subject to certain other conditions set forth in
the credit agreement. Subject to specified exceptions, we are required to make
mandatory prepayments to the lenders from:
- 100% of the net cash proceeds from certain asset sales;
- 100% of the net cash proceeds from certain new debt issuances;
- 50% of the net cash proceeds from certain equity issuances;
- 100% of insurance recoveries in excess of amounts applied within an
agreed period of time; and
- 50% of our excess cash flow.
In addition, the senior credit facilities contain various covenants,
including, without limitation, financial covenants as well as restrictions on
our ability to:
- make investments;
- engage in transactions with affiliates;
- repurchase or prepay debt;
- terminate or materially amend material contracts;
- incur other indebtedness or issue certain types of equity;
- create liens on our assets;
- sell our assets; and
- pay dividends on our capital stock.
The senior credit facilities also include customary indemnities and events
of default, including a change of control, as defined in the senior credit
facilities.
We have entered into an amendment and waiver to the senior credit
facilities which provides that we will optionally prepay $40 million of the term
loans on December 30, 2002 (following which payment, $135 million of term loans
will remain outstanding). As a result of making such prepayments (and thereby
eliminating the next two quarterly payments and reducing quarterly payments
thereafter), the next scheduled amortization payment will be made on June 30,
2003, in the amount of approximately $2.2 million and all payments thereafter
will be made in the amount of approximately $6.5 million on a quarterly basis,
except for the final payment due on June 30, 2008 in the amount of $8.7 million.
These prepayments will also satisfy our obligation to make an excess cash flow
prepayment in April 2003 (with respect to the fiscal year 2002). Additionally,
the credit agreement amendment will allow us to repurchase up to $25.0 million
in principal amount of the Notes provided we meet an agreed upon leverage ratio.
105
DESCRIPTION OF NOTES
On June 27, 2002, WH Acquisition, a Nevada corporation, issued the Series A
Notes. The Series A Notes were issued pursuant to an indenture (the "Indenture")
dated as of June 27, 2002 by and among WH Acquisition, as issuer, WH
Intermediate Holdings, a Cayman Islands company, Luxembourg Holdings, a
Luxembourg company, Luxembourg Intermediate Holdings, a Luxembourg company,
Luxembourg CM, a Luxembourg company, as Guarantors, and The Bank of New York, as
trustee (the "Trustee"). The Indenture will also govern the terms and conditions
relating to the Series B Notes.
Pursuant to the Agreement and Plan of Merger, dated as of April 10, 2002,
by and among Holdings, WH Acquisition, and Herbalife International, Inc., WH
Acquisition merged with and into Herbalife International, Inc., with Herbalife
International, Inc. as the surviving corporation (the "Merger"). Upon
consummation of the Merger, Herbalife International, Inc. assumed WH
Acquisition's obligations under the Indenture and caused its subsidiaries to
become Guarantors and to execute supplemental indentures to the extent required
by the Indenture. See "The Acquisition."
The following descriptions of certain provisions of the Indenture and the
Registration Rights Agreement dated as of June 27, 2002 by and among WH
Acquisition, Parent, Luxembourg Holdings, Luxembourg Intermediate Holdings,
Luxembourg CM and the Initial Purchaser (the "Registration Rights Agreement")
are summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Indenture and the
Registration Rights Agreement. Upon consummation of the Merger, Herbalife
International, Inc. assumed WH Acquisition's obligations under the Registration
Rights Agreement and caused its subsidiaries that are required to become
Guarantors under the Indenture to become party to the Registration Rights
Agreement.
You can find the definitions of certain capitalized terms in this section
under the subheading "-- Certain Definitions." For purposes of this section,
references to "Company" or "we," "our," or "us" include only Herbalife
International, Inc. and its successors in accordance with the terms of the
Indenture and, except pursuant to the terms of the Guarantees, not our
Subsidiaries or the Subsidiaries of Herbalife International, Inc. For purposes
of this section, references to "Parent" means only WH Intermediate Holdings and
its successors in accordance with the terms of the Indenture and, except
pursuant to the terms of the Guarantees, not Parent's Subsidiaries.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "TIA"). The Notes are subject to all such terms, and holders of
Notes are referred to the Indenture and the TIA for a statement thereof. A copy
of the form of the Indenture is available from the Trustee upon request.
The following description is a summary of the material provisions of the
Indenture. It does not restate the Indenture in its entirety. We urge you to
read the Indenture because the Indenture, and not this description, defines your
rights as a holder of the Notes.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The Notes are:
- our unsecured, senior subordinated obligations;
- ranked junior in right of payment to all of our existing and future
Senior Debt;
- ranked senior in right of payment to all of our existing and future
Subordinated Indebtedness; and
- unconditionally guaranteed by the Guarantors on a senior subordinated
basis.
The Notes are issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof.
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The term "Subsidiaries" as used in this Description of Notes does not
include Unrestricted Subsidiaries. As of the Issue Date, none of our
subsidiaries or any subsidiaries of our Parent were Unrestricted Subsidiaries.
On a pro forma basis, after giving effect to the Merger, the Parent does not
have any Unrestricted Subsidiaries. However, under certain circumstances, the
Parent will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the Indenture.
THE GUARANTEES
The Notes are jointly and severally, irrevocably, fully and
unconditionally, guaranteed (the "Guarantees") on a senior subordinated basis by
Parent, Luxembourg Holdings, Luxembourg Intermediate Holdings, Luxembourg CM and
each of Parent's present and future Subsidiaries and each of our present and
future Subsidiaries (the "Guarantors") that guarantee any Indebtedness under the
Credit Agreement. The obligations of each Guarantor under its Guarantee,
however, are limited in a manner intended to avoid it being deemed a fraudulent
conveyance under applicable law. The term "Subsidiaries" as used in this
Description of Notes, however, does not include Unrestricted Subsidiaries. See
"Certain Bankruptcy Limitations; Non-Guarantor Subsidiaries" below.
PRINCIPAL, MATURITY AND INTEREST; ADDITIONAL NOTES
On the Issue Date, we initially issued Notes with a maximum aggregate
principal amount of $165.0 million. The Indenture provides, in addition to the
Notes being issued on the Issue Date, for the issuance of additional Notes
having identical terms and conditions to the Notes offered hereby (the
"Additional Notes"), subject to compliance with the terms of the Indenture,
including the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock." Any such Additional Notes would be issued on the
same terms as the Notes offered hereby and would constitute part of the same
series of securities as the Notes and would vote together as one series on all
matters. All references to Notes herein includes the Additional Notes, except as
stated otherwise.
The Notes will mature on July 15, 2010. The Notes bear interest at 11 3/4%
per annum from June 27, 2002 or from the most recent date to which interest has
been paid or provided for (the "Interest Payment Date"), payable semi-annually
in arrears on January 15 and July 15 of each year, commencing January 15, 2003,
to the Persons in whose names such Notes are registered at the close of business
on the January 1 or July 1 immediately preceding such Interest Payment Date.
Interest is calculated on the basis of a 360-day year consisting of twelve
30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
Principal of, premium, if any, and interest (and Liquidated Damages, if
any) on the Notes is payable, and the Notes may be presented for registration of
transfer or exchange, at our office or agency maintained for such purpose, which
office or agency shall be maintained in the Borough of Manhattan, The City of
New York. Except as set forth below, at our option, payment of interest may be
made by check mailed to the holders of the Notes (the "Holders") at the
addresses set forth upon our registry books. (See "Form and Transfer of the
Notes -- Book-Entry Procedures -- Same Day Settlement and Payment"). No service
charge will be made for any registration of transfer or exchange of Notes, but
we may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by us, our office or agency will be the corporate trust office of the Trustee
presently located at the office of the Trustee in the Borough of Manhattan, The
City of New York.
SUBORDINATION
The Notes and the Guarantees are our and the Guarantors' general, unsecured
obligations, respectively, contractually subordinated in right of payment to all
of our Senior Debt and the Senior Debt of the Guarantors, as applicable. This
effectively means that holders of Senior Debt must be paid in full before any
amounts are paid to the Holders of the Notes in the event a bankruptcy or
insolvency proceeding is
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commenced by or against us and that holders of Senior Debt can block payments to
the Holders of the Notes in the event of a default by us on such Senior Debt,
all as more fully described below.
As of September 30, 2002, we had outstanding an aggregate of approximately
$178.6 million of Senior Debt (all of which Indebtedness is secured), no
Indebtedness that ranks equal to the Notes and no Indebtedness subordinate to
the Notes in right of payment.
The rights of Holders are effectively subordinated to all existing and
future indebtedness and preferred stock of our subsidiaries and, with respect to
the Parent's Guarantee, the Parent's subsidiaries (other than the Company) that
are not Guarantors.
We may not and the Guarantors may not, make payment (by setoff or
otherwise), as applicable, on account of any Obligation in respect of the Notes,
including the principal of, premium, if any, or interest on the Notes or
Liquidated Damages, or on account of the redemption provisions of the Notes
(including any repurchases of Notes), for cash or property (other than Junior
Securities):
(1) upon the maturity of any of our Senior Debt or any Senior Debt of
such Guarantor by lapse of time, acceleration (unless waived) or otherwise,
unless and until all principal of, premium, if any, and the interest on
such Senior Debt are first paid in full in cash or Cash Equivalents (or
such payment is duly provided for), or
(2) in the event of default in the payment of any principal of,
premium, if any, or interest on our Senior Debt or Senior Debt of such
Guarantor, as applicable, when it becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise
(a "Payment Default"), unless and until such Payment Default has been cured
or waived or otherwise has ceased to exist.
Upon (1) the happening of an event of default other than a Payment Default
that permits the holders of Senior Debt to declare such Senior Debt to be due
and payable and (2) written notice of such event of default given to us by the
representative under the Credit Agreement or, if no Indebtedness under the
Credit Agreement is then outstanding, the holders of an aggregate of at least
$25.0 million principal amount outstanding of any other Senior Debt or their
representative (a "Payment Notice"), then, unless and until such event of
default has been cured or waived or otherwise has ceased to exist, no payment
(by setoff or otherwise) may be made by us or on our behalf or by or on the
behalf of any Guarantor which is an obligor under such Senior Debt on account of
any Obligation in respect of the Notes, including the principal of, premium, if
any, or interest on the Notes, (including any repurchases of any of the Notes),
or on account of the redemption provisions of the Notes (or Liquidated Damages),
in any such case, other than payments made with Junior Securities.
Notwithstanding the foregoing, unless the Senior Debt in respect of which such
event of default exists has been declared due and payable in its entirety within
179 days after the Payment Notice is delivered as set forth above (the "Payment
Blockage Period") (and such declaration has not been rescinded or waived), at
the end of the Payment Blockage Period, we shall and the Guarantors shall be
required to pay all sums not previously paid to the Holders of the Notes during
the Payment Blockage Period due to the foregoing prohibitions and to resume all
other payments as and when due on the Notes.
Any number of Payment Notices may be given; provided, however, that:
(1) not more than one Payment Notice shall be given within a period of any
360 consecutive days, and
(2) no non-payment default that existed upon the date of such Payment
Notice or the commencement of such Payment Blockage Period shall be made the
basis for the commencement of any other Payment Blockage Period (for purposes of
this provision, any subsequent action, or any subsequent breach of any financial
covenant for a period commencing after the expiration of such Payment Blockage
Period that, in either case, would give rise to a new event of default, even
though it is an event that would also have been a separate breach pursuant to
any provision under which a prior event of default previously existed, shall
constitute a new event of default for this purpose).
Upon any distribution of our assets or any Guarantor's assets upon any
dissolution, winding up, total or partial liquidation or reorganization of us or
a Guarantor, whether voluntary or involuntary, in bankruptcy,
108
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshaling of assets or liabilities:
(1) the holders of all of our or such Guarantor's Senior Debt, as
applicable, will first be entitled to receive payment in full in cash or
Cash Equivalents (or have such payment duly provided for) before the
Holders are entitled to receive any payment on account of any Obligation in
respect of the Notes, including the principal of, premium, if any, and
interest on the Notes (or Liquidated Damages) (other than Junior
Securities); and
(2) any payment or distribution of our or such Guarantor's assets of
any kind or character from any source, whether in cash, property or
securities (other than Junior Securities) to which the Holders or the
Trustee on behalf of the Holders would be entitled (by setoff or
otherwise), except for the subordination provisions contained in the
Indenture, will be paid by the liquidating trustee or agent or other Person
making such a payment or distribution directly to the holders of such
Senior Debt or their representative to the extent necessary to make payment
in full (or have such payment duly provided for) on all such Senior Debt
remaining unpaid, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of our or any Guarantor's assets (other than Junior Securities)
shall be received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of such Senior Debt remaining unpaid or
unprovided for or to their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Debt may have been issued, ratably according to the aggregate
principal amounts remaining unpaid on account of such Senior Debt held or
represented by each, for application to the payment of all such Senior Debt
remaining unpaid, to the extent necessary to pay or to provide for the payment
of all such Senior Debt in full in cash or Cash Equivalents after giving effect
to any concurrent payment or distribution to the holders of such Senior Debt.
No provision contained in the Indenture or the Notes affects our obligation
or the obligation of the Guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest or if applicable,
Liquidated Damages on the Notes. The subordination provisions of the Indenture
and the Notes do not prevent the occurrence of any Default or Event of Default
under the Indenture or limit the rights of the Trustee or any Holder to pursue
any other rights or remedies with respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of our creditors or a marshaling of
our assets and liabilities, Holders of the Notes may receive ratably less than
other creditors.
Certain Bankruptcy Limitations; Non-Guarantor Subsidiaries. We are a
holding company, conducting substantially all of our business through
Subsidiaries. Our Obligations with respect to the Notes are guaranteed by all of
the Parent's Subsidiaries and our Subsidiaries, other than the Non-Guarantor
Subsidiaries, and are not guaranteed by any Unrestricted Subsidiaries, which
subsidiaries are not guarantors of the Notes. See "Risk Factors."
Holders of the Notes are direct creditors of each Guarantor by virtue of
its Guarantee. Nonetheless, in the event of the bankruptcy or financial
difficulty of a Guarantor, such Guarantor's obligations under its Guarantee may
be subject to review and avoidance under state, federal fraudulent transfer laws
or other applicable foreign laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Guarantor
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its Guarantee exceeds the economic benefits
it receives in the offering of the Notes. The obligations of each Guarantor
under its Guarantee is limited in a manner intended to cause it not to be a
fraudulent conveyance under applicable law, although no assurance
109
can be given that a court would give the Holder the benefit of such provision.
See "Risk Factors -- The ability of some of our foreign subsidiaries to
guarantee the Notes may be restricted by local law and consequently, limit your
potential recovery" and "Risk Factors -- Issuance of the Notes and the
guarantees by the domestic subsidiaries may be subject to fraudulent conveyance
laws."
If the obligations of a Guarantor under its Guarantee were avoided, Holders
of Notes would have to look to any remaining Guarantors for payment. There can
be no assurance in that event that such assets would suffice to pay the
outstanding principal and interest on the Notes.
We conduct certain of our operations through Non-Guarantor Subsidiaries.
Accordingly, our ability to meet our cash obligations may in part depend upon
the ability of such Non-Guarantor Subsidiaries and any future Non-Guarantor
Subsidiaries to make cash distributions to us and the Guarantors. Furthermore,
any right we have or the Guarantors have to receive the assets of any such
Non-Guarantor Subsidiary upon such Non-Guarantor Subsidiary's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in the distribution of the proceeds of those assets) effectively
will be subordinated to the claims of such Non-Guarantor Subsidiary's creditors
(including trade creditors) and holders of its preferred stock, except to the
extent that we or the Guarantors are recognized as creditors or preferred
stockholders of such Non-Guarantor Subsidiary, in which case our claims or the
claims of the Guarantors would still be subordinate to any indebtedness or
preferred stock of such Non-Guarantor Subsidiaries.
NO SINKING FUND OR MANDATORY REDEMPTIONS
As the merger occurred on July 31, 2002, the Notes will not have the
benefit of any sinking fund and we will not be required to make any mandatory
redemption payments with respect to the Notes.
OPTIONAL REDEMPTION
We do not have the right to redeem any Notes prior to July 15, 2006 (other
than out of the Net Cash Proceeds of any Qualified Equity Offering, as described
in the next following paragraph).
At any time on or after July 15, 2006 we may redeem the Notes for cash at
our option, in whole or in part, upon not less than 30 days nor more than 60
days notice to each Holder of Notes, at the following redemption prices
(expressed as percentages of the principal amount) if redeemed during the
12-month period commencing July 15 of the years indicated below, in each case
together with accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of redemption of the Notes ("Redemption Date"):
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2006........................................................ 105.875%
2007........................................................ 102.938%
2008 and thereafter......................................... 100.000%
</Table>
At any time or from time to time on or prior to July 15, 2005, upon one or
more Qualified Equity Offerings, up to 35% of the aggregate principal amount of
the Notes issued pursuant to the Indenture may be redeemed at our option within
90 days of such Qualified Equity Offering, on not less than 30 days, but not
more than 60 days, notice to each Holder of the Notes to be redeemed, with cash
received by us from the Net Cash Proceeds of such Qualified Equity Offering, at
a redemption price equal to 111.75% of principal, together with accrued and
unpaid interest and Liquidated Damages, if any, thereon to the Redemption Date;
provided, however, that immediately following such redemption not less than 65%
of the aggregate principal amount of the Notes originally issued pursuant to the
Indenture on the Issue Date remain outstanding.
If the Redemption Date hereunder is on or after an interest record date
("Record Date") on which the Holders of record have a right to receive the
corresponding Interest due and Liquidated Damages, if any, and on or before the
associated Interest Payment Date, any accrued and unpaid interest and Liquidated
Damages, if any, due on such Interest Payment Date will be paid to the Person in
whose name a Note is registered at the close of business on such Record Date.
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SELECTION AND NOTICE
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of our registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a new Note or Notes in a principal
amount equal to the unredeemed portion thereof will be issued. On and after the
date of redemption, interest will cease to accrue on the Notes or portions
thereof called for redemption, unless we default in the payment thereof.
REPURCHASE AT THE OPTION OF HOLDERS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such Holder's option,
pursuant to an offer (subject only to conditions required by applicable law, if
any) by us (the "Change of Control Offer"), to require us to repurchase all or
any part of such Holder's Notes (provided, that the principal amount of such
Notes must be $1,000 or an integral multiple thereof) on a date (the "Change of
Control Purchase Date") that is no later than 45 Business Days after the
occurrence of such Change of Control, at a cash price equal to 101% of the
principal amount thereof (the "Change of Control Purchase Price"), together with
accrued and unpaid interest and Liquidated Damages, if any, to the Change of
Control Purchase Date.
The Change of Control Offer shall be made within 20 Business Days following
a Change of Control and shall remain open for 20 Business Days following its
commencement or such other period as may be required by applicable law (the
"Change of Control Offer Period"). Upon expiration of the Change of Control
Offer Period, we shall promptly purchase all Notes properly tendered in response
to the Change of Control Offer.
As used herein, a "Change of Control" means:
(1) prior to consummation of an Initial Public Offering, the
Principals and their Related Parties shall cease to beneficially own at
least 51% of the voting power of the Voting Equity Interests of the Parent;
(2) the Parent shall cease to beneficially own at least 80% of the
voting power of the Voting Equity Interests of the Company;
(3) following the consummation of an Initial Public Offering, (A) any
merger or consolidation of the Parent or the Company with or into any
Person or any sale, transfer or other conveyance, whether direct or
indirect, of all or substantially all of the assets of the Parent or the
Company, respectively, on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction(s), any "person" (including any group that is deemed to be a
"person") (other than the Principals and their Related Parties, or, in the
case of the Company, the Parent or any Wholly-Owned Subsidiary of the
Parent) is or becomes the "beneficial owner," directly or indirectly, of
more than 35% of voting power of the aggregate Voting Equity Interests of
the transferee(s) or surviving entity or entities, (B) any "person"
(including any group that is deemed to be a "person") (other than the
Principals and their Related Parties, or, in the case of the Company, the
Parent or any Wholly-Owned Subsidiary of the Parent) is or becomes the
"beneficial owner," directly or indirectly, of more than 35% of the voting
power of the aggregate Voting Equity Interests of the Company or the
Parent, or (C) the Continuing Directors cease for any reason to constitute
a majority of the Parent's Board of Directors then in office.
As used in this covenant, "person" (including any group that is deemed to
be a "person") has the meaning given by Sections 13(d) of the Exchange Act,
whether or not applicable.
111
Notwithstanding the foregoing, we are not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by us, including any requirements to repay in full all Indebtedness under
the Credit Agreement, any Senior Debt or Senior Debt of any Guarantor or obtains
the consents of such lenders to such Change of Control Offer as set forth in the
following paragraph of this Section, and purchases all Notes validly tendered
and not withdrawn under such Change of Control Offer.
The Indenture provides that, prior to the commencement of a Change of
Control Offer, but in any event within 30 days following any Change of Control,
we will:
(1)(a) repay in full and terminate all commitments under Indebtedness
under the Credit Agreement and all other Senior Debt the terms of which
require repayment upon a Change of Control or (b) offer to repay in full
and terminate all commitments under all Indebtedness under the Credit
Agreement and all such other Senior Debt and repay the Indebtedness owed to
each lender which has accepted such offer in full, or
(2) obtain the requisite consents under the Credit Agreement and all
such other Senior Debt to permit the repurchase of the Notes as provided
herein.
Our failure to comply with the preceding sentence shall constitute an Event
of Default described in clause (3) under "Events of Default" below.
On or before the Change of Control Purchase Date, we will:
(1) accept for payment Notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
(2) deposit with the paying agent for us (the "Paying Agent") cash
sufficient to pay the Change of Control Purchase Price (together with
accrued and unpaid interest and Liquidated Damages, if any) of all Notes so
tendered, and
(3) deliver to the Trustee the Notes so accepted together with an
Officers' Certificate listing the Notes or portions thereof being purchased
by us.
The Paying Agent promptly will pay the Holders of Notes so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest and Liquidated Damages, if any) and the Trustee promptly will
authenticate and deliver to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered. Any Notes not so accepted will
be delivered promptly by us to the Holder thereof. We publicly will announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of us, and, thus, the removal of incumbent management.
The phrase "all or substantially all" of a Person's assets will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred. In addition, no assurances can be given that we will be
able to acquire Notes tendered upon the occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, our compliance or
compliance by any of the Guarantors with such laws and regulations shall not in
and of itself cause a breach of their obligations under such covenant.
112
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the Person in whose name a Note is
registered at the close of business on such Record Date.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER FROM EXCESS CASH FLOW
The Indenture provides that if the Parent has Excess Cash Flow for any
fiscal year, then no later than the 140th day following the end of each fiscal
year, the Parent shall apply an amount equal to 50% of the Excess Cash Flow for
such fiscal year: (1) first, to the extent the Parent elects (or is required by
the terms of any Indebtedness), to prepay, repay, redeem or purchase (and
permanently reduce the commitments thereunder) Senior Debt of the Company or the
Guarantors with such percentage of Excess Cash Flow; and (2) second, to the
extent of the balance of such percentage of Excess Cash Flow after application
in accordance with clause (1) (the amount of such unapplied percentage, the
"Excess Cash Flow Amount"), to make an offer (the "Excess Cash Flow Offer") to
the holders of the Notes and such other Indebtedness ranking on a parity with
the Notes and with similar provisions requiring us to purchase such Indebtedness
from our Excess Cash Flow to purchase, on a pro rata basis in proportion to the
respective principal amounts (or accreted values, in the case of Indebtedness
issued with original issue discount) of the Notes and such other Indebtedness
then outstanding, Notes at a purchase price in cash equal to 100% of the
principal amount (or accreted value in the case of Indebtedness issued with
original issue discount) of the Notes or such other Indebtedness to be purchased
(the "Excess Cash Flow Purchase Price"), together with accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date fixed for the
purchase of the Notes pursuant to such Excess Cash Flow Offer, in accordance
with the terms of the Indenture; provided, however, that in connection with any
prepayment, repayment or purchase of Debt pursuant to clause (1) above, the
Company or such Guarantor shall permanently retire such Debt and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased; and provided, further,
that no Excess Cash Flow Offer shall be required to be made if the Parent's
Leverage Ratio is less than 2.50 to 1.0 on the last day of such fiscal year.
The Excess Cash Flow Offer will be required to remain open for 20 Business
Days following its commencement. Upon the expiration of that period, the Parent
promptly (and in any case, within 3 Business Days following such expiration)
will apply the Excess Cash Flow Offer Amount plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the purchase of all Indebtedness
validly tendered pursuant to an Excess Cash Flow Offer for the Excess Cash
Purchase Price. If the aggregate principal amount of Indebtedness tendered
pursuant to an Excess Cash Flow Offer exceeds the Excess Cash Flow Offer Amount
with respect thereto, the Parent will purchase such Indebtedness, or portions
thereof tendered, pro rata or by such other method as may be required by law. If
the aggregate amount of Notes and such other pari passu Indebtedness tendered
pursuant to any Excess Cash Flow Offer is less than the Excess Cash Flow Offer
Amount, the Company and the Guarantors may use any remaining Excess Cash Flow
Amount for any purposes not prohibited by the Indentures. The Parent will not be
required to make an Excess Cash Flow Offer to purchase Notes pursuant to this
covenant if the available cumulative Excess Cash Flow after the application of
Excess Cash Flow in accordance with clause (1) of the previous paragraph is less
than $5.0 million; provided, that any such lesser amount of Excess Cash Flow (if
positive) will be added to the Excess Cash Flow for each subsequent fiscal year
until an Excess Cash Flow Offer is made.
Any Excess Cash Flow Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, our compliance with
such laws and regulations shall not in and of itself cause a breach of our
obligations under such covenant.
SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that we will not and the Parent will not, and
neither we nor Parent will permit any of our Subsidiaries nor will Parent permit
any of its Subsidiaries to, in one or a series of related transactions,
113
convey, sell, transfer, assign or otherwise dispose of, directly or indirectly,
any of their property, business or assets, including by merger or consolidation
(in the case of a Subsidiary of the Company or the Parent), and including any
sale or other transfer or issuance of any Equity Interests of any Subsidiary of
the Company or, of the Parent, whether by the Company, the Guarantor or the
Parent or through the issuance, sale or transfer of Equity Interests by a
Subsidiary of the Company or Parent and including any sale and leaseback
transaction (any of the foregoing, an "Asset Sale"), unless:
(1) with respect to any Asset Sale or related series of Asset Sales
involving securities, property or assets with an aggregate fair market
value in excess of $1.0 million, at least 75% of the total consideration
for such Asset Sale or series of related Asset Sales consists of cash or
Cash Equivalents;
(2) the Parent determines in good faith that the Company, the Parent
or such Subsidiary, as applicable, receives, as applicable, fair market
value for such Asset Sale; and
(3) if the value of the assets being disposed of in such Asset Sale or
series of Asset Sales with an aggregate fair market value (as determined in
good faith by the Board of Directors) is at least $10.0 million, the Board
of Directors shall have received a written opinion of a nationally
recognized investment banking firm (or, if pertaining to a matter for which
such investment banking firms do not customarily render such opinions, an
appraisal or valuation firm of national reputation in the United States) to
the effect that such Asset Sale or series of Asset Sales is fair, from a
financial point of view, to the Parent or Such Subsidiary and the Company
shall have deliver a copy of such opinion to the Trustee promptly following
the consummation of such Asset Sale or series of Asset Sales.
For purposes of (1) above, total consideration received means the total
consideration received for such Asset Sales minus the amount of (a) Senior Debt
assumed by a transferee in an Asset Sale; provided, that the Company and all of
the Guarantors and all of the Subsidiaries of the Company and the Parent are
fully released from obligations in connection therewith, and (b) property that
within 30 days of such Asset Sale is converted into cash or Cash Equivalents;
provided, that such cash and Cash Equivalents shall be treated as Net Cash
Proceeds attributable to the original Asset Sale for which such property was
received.
The Indenture provides that within 360 days following such Asset Sale, the
Net Cash Proceeds therefrom (the "Asset Sale Amount") are:
(a) invested in Related Business Assets and property (except in
connection with the acquisition of a Person that becomes a Subsidiary of
the Company or the Parent and which immediately becomes a Guarantor in a
Related Business) other than notes, bonds, obligation and securities, or
make Permitted Investments pursuant to and in accordance with clauses (f)
and (g) of the definition thereof which in the good faith reasonable
judgment of our Board of Directors will immediately constitute or be a part
of a Related Business of the Parent, the Company or such Subsidiary (if it
continues to be a Subsidiary) immediately following such transaction, or
(b) used to retire Senior Debt and, to permanently reduce (in the case
of Senior Debt that is not such Purchase Money Indebtedness) the amount of
such Indebtedness outstanding on the date the Merger is consummated or
permitted pursuant to paragraph (b) or (c), as applicable, of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" (including, in the case of a revolver or similar arrangement
that makes credit available, permanently reducing the commitment by such
amount), or
(c) applied to the optional redemption of the Notes in accordance with
the terms of the Indenture and our other Indebtedness ranking on a parity
with the Notes and with similar provisions requiring us to redeem such
Indebtedness with the proceeds from such Asset Sale, pro rata in proportion
to the respective principal amounts (or accreted values in the case of
Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness then outstanding,
except that, in the case of each of the provisions of clauses (a) and (b), only
proceeds from an Asset Sale of assets or capital stock of a Non-Guarantor
Foreign Subsidiary may be invested in or used to retire Indebtedness of a
Non-Guarantor Subsidiary. Pending the final application of any Net Cash
Proceeds, the
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Company may temporarily reduce revolving credit borrowings or otherwise invest
the Net Cash Proceeds in any manner that is not prohibited by the Indenture.
The accumulated Net Cash Proceeds from Asset Sales not applied as set forth
in (a), (b) or (c) of the preceding paragraph shall constitute Excess Proceeds.
Within 30 days after the date that the amount of Excess Proceeds exceeds $15.0
million, the Company shall apply the Excess Proceeds (the "Asset Sale Offer
Amount") to the repurchase of the Notes and such other Indebtedness ranking on a
parity with the Notes and with similar provisions requiring us to make an offer
to purchase such Indebtedness with the proceeds from such Asset Sale pursuant to
a cash offer (subject only to conditions required by applicable law, if any)
(pro rata in proportion to the respective principal amounts (or accreted values
in the case of Indebtedness issued with an original issue discount) of the Notes
and such other Indebtedness then outstanding) (the "Asset Sale Offer") at a
purchase price of 100% of the principal amount (or accreted value in the case of
Indebtedness issued with an original issue discount) (the "Asset Sale Offer
Price") together with accrued and unpaid interest and Liquidated Damages, if
any, to the date of payment. Each Asset Sale Offer shall remain open for 20
Business Days following its commencement (the "Asset Sale Offer Period").
Upon expiration of the Asset Sale Offer Period, we shall apply the Asset
Sale Offer Amount plus an amount equal to accrued and unpaid interest and
Liquidated Damages, if any, to the purchase of all Indebtedness properly
tendered in accordance with the provisions hereof (on a pro rata basis if the
Asset Sale Offer Amount is insufficient to purchase all Indebtedness so
tendered) at the Asset Sale Offer Price (together with accrued interest and
Liquidated Damages, if any). To the extent that the aggregate amount of Notes
and such other pari passu Indebtedness tendered pursuant to an Asset Sale Offer
is less than the Asset Sale Offer Amount, we may use any remaining Net Cash
Proceeds in any manner not otherwise prohibited by the Indenture and following
the consummation of each Asset Sale Offer the Excess Proceeds amount shall be
reset to zero.
Notwithstanding, and without complying with, the provisions of this
covenant:
(1) the Company, the Parent and the Subsidiaries of the Company and
the Parent may, in the ordinary course of business, (a) convey, sell,
transfer, assign or otherwise dispose of inventory and other assets
acquired and held for resale in the ordinary course of business and (b)
liquidate Cash Equivalents;
(2) the Company, the Parent and the Subsidiaries of the Company and
the Parent may convey, sell, transfer, assign or otherwise dispose of all
or substantially all of its assets pursuant to and in accordance with the
covenant "Limitation on Merger, Sale or Consolidation;"
(3) the Company, the Parent and the Subsidiaries of the Company and
the Parent may convey, sell, transfer, assign or otherwise dispose of
assets to the Company or any Guarantor;
(4) the Company, the Parent and the Subsidiaries of the Company and
the Parent may settle, release or surrender tort or other litigation claims
in the ordinary course of business or grant Liens (and permit foreclosure
thereon) not prohibited by the Indenture;
(5) Non-Guarantor Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of assets to us, any of the Guarantors, or any other
Non-Guarantor Subsidiary;
(6) the Company, the Parent and the Subsidiaries of the Company and
the Parent may make Permitted Investments pursuant to and in accordance
with clauses (f), (g), and (h) and Restricted Investments under "Limitation
on Restricted Payments;"
(7) the Company, the Parent and the Subsidiaries of the Company and
the Parent may incur Liens (and the disposition of assets related to such
Liens by the secured party pursuant to a foreclosure) that are not
prohibited by the Indenture; and
(8) Subsidiaries of the Company and the Parent may issue Equity
Interests of such Subsidiary upon conversion of, or in exchange for, other
outstanding securities of such Subsidiary the issuance of which was not
prohibited by the Indenture.
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All Net Cash Proceeds from an Event of Loss (other than the proceeds of any
business interruption insurance) shall be reinvested or used as otherwise
provided above in clauses 1(a) or 1(b) of the first paragraph of this covenant.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this paragraph, our
compliance or the compliance of any of our subsidiaries with such laws and
regulations shall not in and of itself cause a breach of our obligations under
such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages,
if any) due on such Interest Payment Date will be paid to the Person in whose
name a Note is registered at the close of business on such Record Date.
CERTAIN COVENANTS
The Indenture contains certain covenants that, among other things, restrict
our ability and the ability of the Guarantors and their Subsidiaries to borrow
money, grant liens, pay dividends on or repurchase capital stock, make
investments and sell assets or enter into mergers or consolidations. The
following summary of certain covenants of the Indenture are summaries only, do
not purport to be complete and are qualified in their entirety by reference to
all of the provisions of the Indenture. We urge you to read the Indenture
because the Indenture, and not this description, details your rights as a holder
of the Notes.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth in this covenant, we will
not and the Parent will not, and neither we nor the Parent will permit any
Subsidiary of the Company or the Parent to, directly or indirectly, issue,
assume, guaranty, incur, become directly or indirectly liable with respect to
(including as a result of an Acquisition), or otherwise become responsible for,
contingently or otherwise (individually and collectively, to "incur" or, as
appropriate, an "incurrence"), any Indebtedness (including Disqualified Capital
Stock and Acquired Indebtedness), other than Permitted Indebtedness.
Notwithstanding the foregoing if:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro
forma basis to, such incurrence of Indebtedness, and
(2) on the date of such incurrence (the "Incurrence Date"), (x) the
Parent's Consolidated Coverage Ratio for the Reference Period immediately
preceding the Incurrence Date, after giving effect on a pro forma basis to
such incurrence of such Indebtedness and, to the extent set forth in the
definition of Consolidated Coverage Ratio the use of proceeds thereof,
would be at least 2.25 to 1.0, if the Indebtedness is incurred on or prior
to July 1, 2004, or would be at least 2.50 to 1.0 if the Indebtedness is
incurred thereafter (in each case, the "Debt Incurrence Ratio") and (y) the
Parent's Leverage Ratio does not exceed the Applicable Leverage Ratio,
then we and the Guarantors may incur such Indebtedness (including Disqualified
Capital Stock). In addition, the foregoing limitations of the first paragraph of
this covenant will not prohibit:
(a) our incurrence or the incurrence by any Guarantor of Purchase
Money Indebtedness; provided, that
(1) the aggregate amount of such Indebtedness incurred and
outstanding at any time pursuant to this paragraph (a) (plus any
Refinancing Indebtedness issued to retire, defease, refinance, replace
or refund such Indebtedness) shall not exceed $15.0 million (or the
equivalent thereof, at the time of incurrence, in the applicable foreign
currency), and
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(2) in each case, such Indebtedness shall not constitute more than
100% of our cost or the cost to such Guarantor (determined in accordance
with GAAP in good faith by our Board of Directors), as applicable, of
the property so purchased, constructed, improved or leased;
(b) if no Event of Default shall have occurred and be continuing, our
incurrence or the incurrence by any Subsidiary of the Parent or the Company
of Indebtedness in an aggregate amount incurred and outstanding at any time
pursuant to this paragraph (b) (plus any Refinancing Indebtedness incurred
to retire, defease, refinance, replace or refund such Indebtedness) of up
to $25.0 million (or the equivalent thereof, at the time of incurrence, in
the applicable foreign currencies), minus the amount of any Indebtedness
(other than Permitted Indebtedness) of any Non-Guarantor Subsidiaries then
outstanding, and
(c) our incurrence or the incurrence by any Guarantor of Indebtedness
pursuant to the Credit Agreement in an aggregate amount incurred and
outstanding at any time pursuant to this paragraph I, without regard to the
notional amount of any Interest Swap or Hedging Obligations relating
thereto that constitute Permitted Indebtedness pursuant to clause (f) of
the definition thereof, (plus any Refinancing Indebtedness incurred to
retire, defease, refinance, replace or refund such Indebtedness) of up to
$205.0 million (or the equivalent thereof at the time of incurrence in the
applicable foreign currency), minus the amount of any such Indebtedness (1)
retired with the Net Cash Proceeds from any Asset Sale applied to
permanently reduce the outstanding amounts or the commitments with respect
to such Indebtedness pursuant to clause (b) of the second paragraph of the
covenant "Sale of Assets and Subsidiary Stock," (2) assumed by a transferee
in an Asset Sale and (3) the aggregate amount of all mandatory principal
payments and prepayments in respect of term loans thereunder (excluding any
such payments to the extent refinanced at the time of payment under a
replacement or refinancing thereof) actually made; provided, that, this
clause (3) shall not reduce the aggregate amount of Indebtedness available
to be incurred and outstanding by the Company and the Guarantors pursuant
to this clause (c) below $35.0 million.
Indebtedness (including Disqualified Capital Stock) of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company or the
Parent (including upon designation of any subsidiary or other Person as a
Subsidiary of the Company or the Parent) or is merged with or into or
consolidated with the Company or the Parent or a Subsidiary of the Company or
the Parent shall be deemed to have been incurred at the time such Person becomes
or is designated a Subsidiary of the Company or the Parent or is merged with or
into or consolidated with the Company or the Parent or a Subsidiary of the
Company or the Parent.
Notwithstanding any other provision of this covenant, but only to avoid
duplication, a guarantee of our Indebtedness or of the Indebtedness of another
Guarantor incurred in accordance with the terms of the Indenture (other than
Indebtedness incurred pursuant to clause (a) hereof) issued at the time such
Indebtedness was incurred or if later at the time the guarantor thereof became a
Subsidiary of the Company or the Parent will not constitute a separate
incurrence, or amount outstanding, of Indebtedness. Upon each incurrence we may
designate pursuant to which provision of this covenant such Indebtedness is
being incurred and we may subdivide an amount of Indebtedness and designate more
than one provision pursuant to which such amount of Indebtedness is being
incurred and such Indebtedness shall not be deemed to have been incurred or
outstanding under any other provision of this covenant, except as stated
otherwise in the foregoing provisions.
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LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that we will not and the Parent will not, and the
Parent will not permit any Subsidiary of the Company or the Parent to, directly
or indirectly, make any Restricted Payment if, after giving effect to such
Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be
continuing,
(2) the Parent is not permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock," or
(3) the aggregate amount of all Restricted Payments made by Herbalife
International, Inc. and its Subsidiaries, the Company, the Parent and the
Subsidiaries of the Company and the Parent, as applicable, including after
giving effect to such proposed Restricted Payment, on and after the Issue
Date, would exceed, without duplication, the sum of:
(a) 50% of the Parent's aggregate Consolidated Net Income for the
period (taken as one accounting period), commencing on the first day of
the first full fiscal quarter commencing after the Issue Date, to and
including the last day of the fiscal quarter ended immediately prior to
the date of each such calculation for which the Parent's consolidated
financial statements are required to be delivered to the Trustee or, if
sooner, filed with the SEC (the "Commission") (or, in the event
Consolidated Net Income for such period is a deficit, then minus 100% of
such deficit); provided, that, solely for purposes of determining the
Parent's aggregate Consolidated Net Income for purposes of this clause
(a) after the consummation of the Merger, the aggregate Parent's
Consolidated Net Income shall be determined from the first day of the
first full fiscal quarter commencing after the Issue Date after giving
pro forma effect to the Merger and the Related Financing Transactions as
if the Merger and the Related Financing Transactions had occurred on the
first day of such full fiscal quarter, plus
(b) the aggregate Net Cash Proceeds received by us from a Capital
Contribution or from the sale of our Qualified Capital Stock (other than
(i) to the Parent or to a Subsidiary of the Company or the Parent, (ii)
to the extent applied in connection with a Qualified Exchange or a
Permitted Investment pursuant to clause (e) of the definition thereof,
and (iii) Net Cash proceeds received by us from a Capital Contribution
or from the sale of our Qualified Capital Stock or from a Capital
Contribution in connection with the Merger and Related Financing
Transactions, or, (iv) to avoid duplication, otherwise given credit for
in any provision of the following paragraph), after the Issue Date, plus
(c) except in each case, in order to avoid duplication, to the
extent any such payment or proceeds have been included in the
calculation of Consolidated Net Income, an amount equal to the net
reduction in Investments (other than returns of or from Permitted
Investments) in any Person resulting from cash distributions on or cash
repayments of any Investments, including payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
distributions or other transfers of assets, in each case to the Company
or any Guarantor or from the Net Cash Proceeds from the sale of any such
Investment or from redesignations of Unrestricted Subsidiaries as
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Guarantor in such Person,
including, if applicable, such Unrestricted Subsidiary, less the cost of
disposition, plus
(d) $7.5 million.
The foregoing clause (3) of the immediately preceding paragraph, however,
will not prohibit;
(A) payments of up to an aggregate of $2.5 million in Monitoring Fees
to the Principals and their Related Parties in any twelve month period
pursuant to the Monitoring Services Agreements plus reasonable
out-of-pocket expenses.
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The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit:
(B) payments of cash dividends to Holdings for repurchases of Capital
Stock from our employees, distributors or directors (or their heirs or
estates) or employees or directors (or their heirs or estates) of, Parent
or any Subsidiary of the Company or the Parent upon the death, disability
or termination of employment (or termination of distribution, in the case
of a distributor) in an aggregate amount to all employees or directors (or
their heirs or estates) not to exceed $5.0 million in the aggregate on and
after the Issue Date, provided such repurchases are made with the proceeds
of such dividends within three Business Days of the payment of such
dividends, or
(C) provided that (x) prior to declaration and disbursement of a Tax
Amounts Payment, Parent delivers to the Trustee an Officer's Certificate
(i) certifying that the Tax Amounts CPA has made the determinations
required to be made by the Tax Amounts CPA pursuant to the Indenture and
(y) setting forth in reasonable detail the basis for the determination of
the Tax Amounts Payment, then, with respect to each Tax Determination Year,
the disbursement of a Tax Amounts Payment following the close of such Tax
Determination Year.
The foregoing clauses (1), (2) and (3) of the immediately preceding
paragraph will not prohibit:
(D) any dividend, distribution or other payments by any Subsidiary of
the Company or the Parent on its Equity Interests that is paid pro rata to
all holders of such Equity Interests,
(E) a Qualified Exchange,
(F) the payment of any dividend on Qualified Capital Stock within 60
days after the date of its declaration if such dividend could have been
made on the date of such declaration in compliance with the foregoing
provisions, and
(G) Investments made as a result of a Subsidiary of the Parent or the
Company becoming a Non-Guarantor Subsidiary as a result of the release of
the Guarantee of such Subsidiary in accordance with the provisions
described below under the caption "Release of Guarantors," and
(H) Restricted Investments by the Company or any Guarantor, without
duplication, in Herbalife Korea Co. Ltd. for the purposes of cash
collateralizing or otherwise securing Herbalife Korea Co. Ltd.'s
obligations in respect of the Korean Consumer Refund Guarantee; provided
that (i) the proceeds of any such Restricted Investment are immediately
deposited into a bank account and used solely for the purposes of cash
collateralizing or otherwise securing Herbalife Korea Co. Ltd.'s
obligations in respect of the Korean Consumer Refund Guarantee and (ii) to
the extent cash deposits securing the Korean Consumer Refund Guarantee are
no longer required, the Parent shall cause Herbalife Korea Co. Ltd. to
immediately repay the Company or the Guarantor that made such Restricted
Investment such amount.
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (A), (B), (D), and (F), (G) and (H) (but not pursuant to clauses (C) or
(E)) of the immediately preceding sentence, however, will be counted as
Restricted Payments made for purposes of the calculation of the aggregate amount
of Restricted Payments available to be made referred to in clause (3) of the
first paragraph under the heading "-- Limitation on Restricted Payments;"
provided, however, that if there is a Final Determination in respect of any
particular Tax Determination Year for which a Tax Amounts Payment has been
disbursed pursuant to the foregoing clause (C), the Final Determination Amount
related thereto (other than interest and penalties) will be counted as a
Restricted Payment made for purposes of the calculation of such aggregate
Restricted Payments from and after the date such Final Determination is made.
For purposes of this covenant, the amount of any Restricted Payment made or
returned, if other than in cash, shall be the fair market value thereof, as
determined in the good faith reasonable judgment of our Board of Directors, at
the time made or returned, as applicable. Additionally, within 5 days of each
Restricted Payment in excess of $250,000 that is not a Restricted Investment, we
shall deliver an Officers' Certificate to the Trustee describing in reasonable
detail the nature of such Restricted Payment, stating the amount of such
Restricted Payment, stating in reasonable detail the provisions of the Indenture
pursuant to which such
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Restricted Payment was made and certifying that such Restricted Payment was made
in compliance with the terms of the Indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that we will not and the Parent will not, and
neither we nor the Parent will permit any Subsidiary of the Company or the
Parent to, directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary of the Company or the
Guarantors to pay dividends or make other distributions to or on behalf of, or
to pay any obligation to or on behalf of, or otherwise to transfer assets or
property to or on behalf of, or make or pay loans or advances to or on behalf
of, the Company, the Parent or any Subsidiary of the Company or the Parent,
except:
(1) restrictions imposed by the Notes or the Indenture or by our other
Indebtedness (which may also be guaranteed by the Guarantors) ranking pari
passu in right of payment with the Notes or the Guarantees, as applicable;
provided, that such restrictions are no more restrictive taken as a whole
than those imposed by the Indenture and the Notes,
(2) restrictions imposed by applicable law,
(3) existing restrictions under Existing Indebtedness (as in effect on
the Issue Date),
(4) restrictions under any Acquired Indebtedness not incurred in
violation of the Indenture or any agreement (including any Equity Interest)
relating to any property, asset, or business acquired by the Company, the
Parent or any Subsidiary of the Company or the Parent, which restrictions
in each case existed at the time of acquisition, were not put in place in
connection with or in anticipation of such acquisition and are not
applicable to any Person, other than the Person acquired, or to any
property, asset or business, other than the property, assets and business
so acquired,
(5) any restriction imposed by Indebtedness incurred under the Credit
Agreement or other Senior Debt incurred pursuant to the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock;" provided, that such restriction or requirement is no more
restrictive taken as a whole than that imposed by the Credit Agreement as
of the consummation of the Merger,
(6) any restriction imposed by Indebtedness incurred by Non-Guarantor
Subsidiaries incurred pursuant to the covenant "Limitation on Incurrence of
Additional Indebtedness,"
(7) restrictions with respect solely to any Subsidiary of the Company
or the Parent imposed pursuant to a binding agreement which has been
entered into for the sale or disposition of all of the Equity Interests or
assets of such Subsidiary; provided, that such restrictions apply solely to
the Equity Interests or assets of such Subsidiary which are being sold,
(8) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (1), (3) or (4) or
this clause (8) of this paragraph that are not more restrictive taken as a
whole than those being replaced and do not apply to any other Person or
assets than those that would have been covered by the restrictions in the
Indebtedness so refinanced or replaced, and
(9) customary provisions with respect to the disposition or
distribution of assets in joint venture agreements and other similar
agreements relating solely to the assets subject to such agreement.
Notwithstanding the foregoing, (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice shall not be prohibited by this
covenant and (b) any asset subject to a Lien which is not prohibited to exist
with respect to such asset pursuant to the terms of the Indenture may be subject
to customary restrictions on the transfer or disposition thereof pursuant to
such Lien.
LIMITATIONS ON LAYERING INDEBTEDNESS
The Indenture provides that we will not and the Parent will not, and
neither we nor the Parent will permit any Subsidiary of the Company or the
Parent to, directly or indirectly, incur, or suffer to exist any
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Indebtedness that is contractually subordinate in right of payment to any of our
other Indebtedness or any other Indebtedness of a Guarantor unless, by its
terms, such Indebtedness is contractually subordinate in right of payment to, or
ranks pari passu with, the Notes or the Guarantee, as applicable.
LIMITATION ON LIENS SECURING INDEBTEDNESS
We will not and the Parent will not, and neither we nor the Parent will
permit any Subsidiary of the Company or the Parent to, create, incur, assume or
suffer to exist any Lien of any kind, other than Permitted Liens, upon any of
their respective assets now owned or acquired on or after the date of the
Indenture or upon any income or profits therefrom securing any of our
Indebtedness or any Indebtedness of any Guarantor other than Indebtedness
pursuant to Senior Debt, unless we and the Parent provide, and cause the
Subsidiaries of the Company and the Parent to provide, concurrently therewith,
that the Notes and the applicable Guarantees are equally and ratably so secured;
provided that if such Indebtedness is Subordinated Indebtedness, the Lien
securing such Subordinated Indebtedness shall be contractually subordinate and
junior to the Lien securing the Notes (and any related applicable Guarantees)
with the same relative priority as such Subordinated Indebtedness shall have
with respect to the Notes (and any related applicable Guarantees).
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that we and the Parent will not and will not let any
Subsidiary of the Company or the Parent, on or after the Issue Date, enter into
or suffer to exist any contract, agreement, arrangement or transaction with any
Affiliate (an "Affiliate Transaction"), or any series of related Affiliate
Transactions, (other than Exempted Affiliate Transactions), (1) unless it is
determined that the terms of such Affiliate Transaction are fair and reasonable
to us, and no less favorable to us than could have been obtained in an arm's
length transaction with a non-Affiliate, and (2) if involving consideration to
either party in excess of $5.0 million, unless such Affiliate Transaction(s) has
been approved by a majority of the members of our Board of Directors that are
disinterested in such transaction, if there are any directors who are so
disinterested, and (3) if involving consideration to either party in excess of
$10.0 million, or $7.5 million if there are no disinterested directors for such
transaction, unless, in addition we, prior to the consummation thereof, obtain a
written favorable opinion as to the fairness of such transaction to us and the
Parent from a financial point of view from an independent investment banking
firm of national reputation in the United States or, if pertaining to a matter
for which such investment banking firms do not customarily render such opinions,
an appraisal or valuation firm of national reputation in the United States.
Within 5 days of any Affiliate Transaction(s) involving consideration to either
party of $5.0 million or more (other than Exempted Affiliate Transactions), the
Company shall deliver to the Trustee an Officers' Certificate addressed to the
Trustee certifying that such Affiliate Transaction (or Transactions) complied
with clause (1), (2), and (3), as applicable.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that we will not consolidate with or merge with or
into another Person or, directly or indirectly, sell, lease, convey or transfer
all or substantially all of our assets (such amounts to be computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons or adopt a plan
of liquidation, unless:
(1) either (a) we are the continuing entity or (b) the resulting,
surviving or transferee entity is a corporation organized under the laws of
the United States, any state thereof or the District of Columbia and
expressly assumes by supplemental indenture all of our obligations in
connection with the Notes and the Indenture;
(2) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction;
(3) unless such transaction is solely the merger of us and one of our
previously existing Wholly-Owned Subsidiaries which is also a Guarantor for
the purpose of reincorporation into another jurisdiction and which
transaction is not for the purpose of evading this provision and not in
connection with any other transaction, immediately after giving effect to
such transaction on a pro forma basis, the consolidated
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resulting, surviving or transferee entity would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock;" and
(4) each Guarantor shall have by amendment to its Guarantee, if
necessary, confirmed in writing that its Guarantee shall apply to the
obligations of the Company or the surviving entity in accordance with the
Notes and the Indenture.
Upon any consolidation or merger in accordance with the foregoing, the
successor corporation formed by such consolidation or into which we are merged
shall succeed to and (except in the case of a lease or a sale of less than all
of our assets) be substituted for, and may exercise every right and power of,
the Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease or a sale of less than all of our assets) we shall be released from the
obligations under the Notes and the Indenture except with respect to any
obligations that arise from, or are related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, our interest in which constitutes all or substantially all of
our properties and assets, shall be deemed to be the transfer of all or
substantially all of our properties and assets.
LIMITATION ON MERGER, SALE OR CONSOLIDATION OF PARENT
The Indenture provides that the Parent will not consolidate with or merge
with or into another Person, other than the Company or, directly or indirectly,
sell, lease, convey or transfer all or substantially all of the Parent's assets
(such amounts to be computed on a consolidated basis), whether in a single
transaction or a series of related transactions, to another Person (other than
the Company) or group of affiliated Persons or adopt a plan of liquidation,
unless:
(1) either (a) the Parent is the continuing entity or (b) the
resulting, surviving or transferee entity is a corporation organized under
the laws of the United States, any state thereof or the District of
Columbia or any member country of the European Union and expressly assumes
by supplemental indenture all of the Parent's obligations in connection
with the Notes and the Indenture;
(2) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction;
(3) unless such transaction is solely the merger of the Parent and one
of the Parent's previously existing Wholly-Owned Subsidiaries which is also
a Guarantor for the purpose of reincorporation into another jurisdiction
and which transaction is not for the purpose of evading this provision and
not in connection with any other transaction, immediately after giving
effect to such transaction on a pro forma basis, the consolidated
resulting, surviving or transferee entity would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Debt Incurrence Ratio set forth in the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock;" and
(4) each Guarantor shall have by amendment to its Guarantee, if
necessary, confirmed in writing that its Guarantee shall apply to the
obligations of the Company or the surviving entity in accordance with the
Notes and the Indenture.
Upon any consolidation or merger in accordance with the foregoing, the
successor corporation formed by such consolidation or into which the Parent is
merged shall succeed to and (except in the case of a lease or a sale of less
than all of the Parent's assets) be substituted for, and may exercise every
right and power of, the Parent under the Indenture with the same effect as if
such successor corporation had been named therein as the Parent, and (except in
the case of a lease or a sale of less than all of the Parent's assets) the
Parent shall be released from the obligations under the Notes and the Indenture
except with respect to any obligations that arise from, or are related to, such
transaction.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Parent's interest in which constitutes all or
substantially all of the Parent's properties and assets, shall be deemed to be
the transfer of all or substantially all of the Parent's properties and assets.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither the Company, the Parent nor any
Subsidiary of the Company or the Parent will directly or indirectly engage to
any substantial extent in any line or lines of business activity other than that
which, in the reasonable good faith judgment of our Board of Directors, is a
Related Business.
FUTURE GUARANTORS
The Indenture permits the Parent to cause any Subsidiary of the Parent or
the Company to become a Guarantor by guaranteeing all principal, premium, if
any, and interest on the Notes on a senior subordinated basis in accordance with
the terms of the Indenture. The Indenture provides that the Parent and the
Company will cause all present and future Subsidiaries of the Parent and the
Company that guarantee any Indebtedness under the Credit Agreement to jointly
and severally, irrevocably and unconditionally, guarantee all principal,
premium, if any, and interest on the Notes on a senior subordinated basis on or
prior to the time such Subsidiaries guarantee any Indebtedness under the Credit
Agreement. The term Subsidiary does not include Unrestricted Subsidiaries.
Notwithstanding anything herein or in the Indenture to the contrary, if any
Subsidiary of the Company or the Parent (including Non-Guarantor Subsidiaries)
that is not a Guarantor guarantees any of the Company's Indebtedness or any
Indebtedness of any Guarantor, or the Company or the Parent or any Subsidiary of
the Company or the Parent, individually or collectively, pledges more than 66%
of the Voting Equity Interests of a Subsidiary that is not a Guarantor
(including Non-Guarantor Subsidiaries) of the Company or any Guarantor to a
lender to secure our Indebtedness (other than Indebtedness under the Credit
Agreement) or any Indebtedness of any Guarantor (other than Indebtedness under
the Credit Agreement), then such Subsidiary must become a Guarantor.
RELEASE OF GUARANTORS
The Indenture provides that no Guarantor will consolidate or merge with or
into (whether or not such Guarantor is the surviving Person) another Person
unless: (1) subject to the provisions of the following paragraph and the other
provisions of the Indenture, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such Person shall
guarantee, on a senior subordinated basis, all of such Guarantor's obligations
under such Guarantor's Guarantee on the terms set forth in the Indenture; and
(2) immediately before and immediately after giving effect to such transaction
on a pro forma basis, no Default or Event of Default shall have occurred or be
continuing. The provisions of the covenant shall not apply to the merger of any
Guarantors with and into each other or with or into us.
Upon the sale or disposition (including by merger or stock purchase) of a
Guarantor (other than a sale or disposition of Parent, which shall be governed
by the covenant described above under the caption "Limitation on Merger, Sale or
Consolidation of Parent") (as an entirety) to an entity which is not and is not
required to become a Guarantor, or the designation of a Subsidiary to become an
Unrestricted Subsidiary, which transaction is otherwise in compliance with the
Indenture (including, without limitation, the provisions of the covenant
"Limitations on Sale of Assets, and Subsidiary Stock"), such Guarantor will be
deemed released from its obligations under its Guarantee of the Notes; provided,
however, that any such termination shall occur only to the extent that all
obligations of such Guarantor under all of its guarantees of, and under all of
its pledges of assets or other security interests which secure, any Indebtedness
of the Company or the Parent or any Indebtedness of any other Subsidiary of the
Company and the Parent shall also terminate upon such release, sale or transfer
and none of its Equity Interests are pledged for the benefit of any holder of
any Indebtedness of the Company or the Parent or any Indebtedness of any
Subsidiary of the Company or the Parent.
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The Indenture provides that, if, at any time when there is Indebtedness
outstanding under the Original Credit Agreement, the guarantee of all of the
Indebtedness under the Original Credit Agreement of any of the Guarantors, other
than the Parent, is released pursuant to the terms of the Original Credit
Agreement, the Parent may cause such Guarantor to be released from its
obligations under its Guarantee of the Notes; provided, however, that any such
termination shall occur only to the extent that all obligations of such
Guarantor under all of its guarantees of, and under all of its pledges of assets
or other security interests which secure, any of Indebtedness of the Company or
the Parent or any Indebtedness of any other Guarantor shall also terminate upon
such release, sale or transfer and none of its Equity Interests are pledged for
the benefit of any holder of any Indebtedness (other than Indebtedness under the
Original Credit Agreement) of the Company or the Parent or any Indebtedness
(other than Indebtedness under the Original Credit Agreement) of any Guarantor;
provided, further, that, the Parent may not cause a release of any Guarantor
from its obligations under its Guarantee of the Notes pursuant to the provisions
of this paragraph as a result of a release of such Guarantor's guarantee of
Indebtedness under the Original Credit Agreement in connection with the payment
of all or substantially all of the Indebtedness outstanding under the Original
Credit Agreement at such time.
The Indenture provides that if at any time there is no Indebtedness
outstanding under the Original Credit Agreement and (A) any Foreign Subsidiary
of the Company that has not become domesticated into the United States (i) has
guaranteed the Notes and (ii) the Parent Group would incur a tax liability, as
determined on a consolidated basis, materially greater than the tax liability
that would be incurred by the Parent Group, determined on a consolidated basis,
had no such Guarantee been incurred, or (B) the Guarantee of any Foreign
Subsidiary of the Parent becomes illegal under applicable law and such Foreign
Subsidiary delivers an Opinion of Counsel to the Trustee to such effect, then,
in each case, the Parent may cause such Foreign Subsidiary to be released from
its Guarantee in accordance with the provisions of the Indenture; provided,
however, that any such release shall occur only to the extent that all
obligations of such Guarantor under all of its guarantees of, and under all of
its pledges of assets or other security interests which secure, any of
Indebtedness of the Company or the Parent or any Indebtedness of any other
Subsidiary of the Company and the Parent shall also terminate upon such release,
sale or transfer and none of its Equity Interests are pledged for the benefit of
any holder of any Indebtedness of the Company or the Parent or any Indebtedness
of any Subsidiary of the Company or the Parent.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company, the Parent and each of the
Subsidiaries of the Company and the Parent from being required to register as an
"investment company" (as that term is defined in the Investment Company Act of
1940, as amended), or from otherwise becoming subject to regulation under the
Investment Company Act.
REPORTS
The Indenture provides that, after consummation of the Merger, whether or
not the Company or Parent are subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company and Parent will deliver to the
Trustee and, to each Holder, within 5 days after the Company and Parent are or
would have been (if the Company or Parent were subject to such reporting
obligations) required to file such with the Commission, annual and quarterly
financial statements substantially equivalent to financial statements that would
have been included in reports filed with the Commission, if the Company and
Parent were subject to the requirements of Section 13 or 15(d) of the Exchange
Act, including, with respect to annual information only, a report thereon by our
certified independent public accountants as such would be required in such
reports to the Commission, and, in each case, together with a management's
discussion and analysis of financial condition and results of operations which
would be so required and, unless the Commission will not accept such reports,
file with the Commission the annual, quarterly and other reports which it is or
would have been required to file with the Commission.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an "Event of Default" as:
(1) our failure to pay any installment of interest (or Liquidated
Damages, if any) on the Notes as and when the same becomes due and payable
and the continuance of any such failure for 30 days,
(2) our failure to pay all or any part of the principal, or premium,
if any, on the Notes when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise, including, without
limitation, payment of the Change of Control Purchase Price, the Asset Sale
Offer Price or the Excess Cash Flow Purchase Price, on Notes validly
tendered and not properly withdrawn pursuant to a Change of Control Offer,
Asset Sale Offer or Excess Cash Flow Offer, as applicable,
(3) our failure or the failure by the Parent or any Subsidiary of the
Company or the Parent to observe or perform any other covenant or agreement
contained in the Notes or the Indenture and, except for the provisions
under "Repurchase of Notes at the Option of the Holder Upon a Change of
Control," "Repurchase of Notes at the Option of the Holder From Excess Cash
Flow," and "Limitation on Merger, Sale or Consolidation," the continuance
of such failure for a period of 30 days after written notice is given to us
by the Trustee or to us and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes outstanding,
(4) our failure to report the occurrence of a Default under any
covenant contained in the Notes or the Indenture and the continuance of
such failure for a period of 30 days after management of the Company or the
Parent, exercising reasonable diligence, becomes aware thereof,
(5) certain events of bankruptcy, insolvency or reorganization in
respect of the Company, the Parent or any Significant Subsidiary of the
Company or the Parent,
(6) a default in our Indebtedness or Indebtedness of the Parent or any
Subsidiary of the Company or the Parent with an aggregate amount
outstanding in excess of $5.0 million (a) resulting from the failure to pay
principal at maturity or (b) as a result of which the maturity of such
Indebtedness has been accelerated prior to its stated maturity,
(7) final unsatisfied judgments not covered by insurance aggregating
in excess of $15.0 million, at any one time rendered against us, the Parent
or any Subsidiary of the Company or the Parent and not stayed, bonded or
discharged within 60 days,
(8) the Guarantee of Parent ceases to be in full force and effect or
becomes unenforceable or invalid or is declared null and void (other than
in accordance with the terms of the Guarantee and the Indenture) or Parent
denies or disaffirms its Obligations under its Guarantee; and
(9) any Guarantee of a Guarantor that is a Significant Subsidiary
ceases to be in full force and effect or becomes unenforceable or invalid
or is declared null and void (other than in accordance with the terms of
the Guarantee and the Indenture) or any Guarantor (other than Parent)
denies or disaffirms its Obligations under its Guarantee.
The Indenture provides that if a Default occurs and is continuing, the
Trustee must, within 90 days after receipt of notice of such Default, give to
the Holders notice of such Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (5) above relating to us or any of our Significant
Subsidiaries,) then in every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Notes then outstanding, by
notice in writing to us (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, determined as set forth
below, and accrued interest (and Liquidated Damages, if any) thereon to be due
and payable immediately; provided, however, that if any Senior Debt is
outstanding pursuant to the Credit Agreement, upon a declaration of such
acceleration, such principal and interest shall be due and payable upon the
earlier of (x) the fifth Business Day after sending us and the representative
such written notice, unless such Event of Default is cured or waived prior to
such date and (y) the date of acceleration of any Senior Debt under the Credit
Agreement. In the
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event a declaration of acceleration resulting from an Event of Default described
in clause (6) above with respect to any Senior Debt has occurred and is
continuing, such declaration of acceleration shall be automatically annulled if
such default is cured or waived or the holders of the Indebtedness which is the
subject of such default have rescinded their declaration of acceleration in
respect of such Indebtedness within 30 days thereof and the Trustee has received
written notice of such cure, waiver or rescission and no other Event of Default
described in clause (6) above has occurred that has not been cured or waived
within 30 days of the declaration of such acceleration in respect of such
Indebtedness. If an Event of Default specified in clause (5), above, relating to
the Company, the Parent or any Significant Subsidiaries occurs, all principal
and accrued interest (and Liquidated Damages, if any) thereon will be
immediately due and payable on all outstanding Notes without any declaration or
other act on the part of the Trustee or the Holders. The Holders of a majority
in aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal of, premium, if any, and interest on the Notes which have become
due solely by such acceleration have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any Default, except a Default
in the payment of principal of or interest on any Note not yet cured or a
Default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable security or
indemnity.
Subject to all provisions of the Indenture and applicable law, the Holders
of a majority in aggregate principal amount of the Notes at the time outstanding
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that we may, at our option, elect to discharge our
obligations and the Guarantors' obligations with respect to the outstanding
Notes ("Legal Defeasance"). If Legal Defeasance occurs, we shall be deemed to
have paid and discharged all amounts owed under the Notes, and the Indenture
shall cease to be of further effect as to the Notes and Guarantees, except that:
(1) holders will be entitled to receive timely payments for the
principal of, premium, if any, and interest (and Liquidated Damages, if
any) on the Notes, solely from the funds deposited for that purpose (as
explained below);
(2) our obligations will continue with respect to the issuance of
temporary Notes, the registration of Notes, and the replacement of
mutilated, destroyed, lost or stolen Notes;
(3) the Trustee will retain its rights, powers, duties, and
immunities, and we will retain our obligations in connection therewith; and
(4) other Legal Defeasance provisions of the Indenture will remain in
effect.
In addition, we may, at our option and at any time, elect to cause the
release of our obligations and the Guarantors' with respect to most of the
covenants in the Indenture (except as described otherwise therein) ("Covenant
Defeasance"). If Covenant Defeasance occurs, certain events (not including
non-payment and bankruptcy, receivership, rehabilitation and insolvency events)
relating to the Company, the Parent or any Significant Subsidiary of the Company
or the Parent described under "Events of Default" will no longer constitute
Events of Default with respect to the Notes. We may exercise Legal Defeasance
regardless of whether we previously exercised Covenant Defeasance.
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In order to exercise either Legal Defeasance or Covenant Defeasance (each,
a "Defeasance"):
(1) we must irrevocably deposit with the Trustee, in trust, for the
benefit of Holders of the Notes, U.S. legal tender, U.S. Government
Obligations or a combination thereof, in amounts that will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
Notes on the stated date for payment or any redemption date thereof, and
the Trustee must have, for the benefit of Holders of the Notes, a valid,
perfected, exclusive security interest in the trust;
(2) in the case of Legal Defeasance, we must deliver to the Trustee an
opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that:
(A) we have received from, or there has been published by the
Internal Revenue Service, a ruling or
(B) since the date of the Indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that Holders of Notes will not recognize
income, gain or loss for federal income tax purposes as a result of the
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if the
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we must deliver to the Trustee
an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that Holders of Notes will not recognize income, gain or
loss for federal income tax purposes as a result of the Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if the Defeasance had not
occurred;
(4) no Default or Event of Default may have occurred and be continuing
on the date of the deposit. In addition, no Event of Default relating to
bankruptcy or insolvency may occur at any time from the date of the deposit
to the 91st calendar day thereafter;
(5) the Defeasance may not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which we or any of the Guarantors are a party or by which we
or any of the Guarantors are bound;
(6) we must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by us with the intent to hinder, delay or
defraud any other of our creditors; and
(7) we must deliver to the Trustee an Officers' Certificate confirming
the satisfaction of conditions in clauses (1) through (6) above, and an
opinion of counsel confirming the satisfaction of the conditions in clauses
(1) (with respect to the validity and perfection of the security interest),
(2), (3) and (5) above.
The Defeasance will be effective on the earlier of (i) the 91st day after
the deposit, and (ii) the day on which all the conditions above have been
satisfied.
If the amount deposited with the Trustee to effect a Covenant Defeasance is
insufficient to pay the principal of, premium, if any, and interest on the Notes
when due, or if any court enters an order directing the repayment of the deposit
to us or otherwise making the deposit unavailable to make payments under the
Notes when due, then (so long as the insufficiency exists or the order remains
in effect) our and the Guarantors' obligations under the Indenture and the Notes
will be revived, and the Defeasance will be deemed not to have occurred.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting us, the Guarantors and the
Trustee to enter into a supplemental indenture for certain limited purposes
without the consent of the Holders. With the consent of
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the Holders of not less than a majority in aggregate principal amount of the
Notes at the time outstanding, we, the Guarantors and the Trustee are permitted
to amend or supplement the Indenture or any supplemental indenture or modify the
rights of the Holders; provided, that no such modification may, without the
consent of each Holder affected thereby:
(1) change the Stated Maturity on any Note, or reduce the principal
amount thereof or the rate (or extend the time for payment) of interest
thereon or any premium payable upon the redemption thereof at our option,
or change the city of payment where, or the coin or currency in which, any
Note or any premium or the interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption at our option, on or
after the Redemption Date), or after an Asset Sale or Change of Control has
occurred reduce the Change of Control Purchase Price or the Asset Sale
Offer Price with respect to the corresponding Asset Sale or Change of
Control or alter the provisions (including the defined terms used therein)
regarding our right to redeem the Notes as a right, or at our option in a
manner adverse to the Holders, or
(2) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indenture,
(3) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Note affected thereby, or
(4) release the Guarantee of Parent.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York including,
without limitation, Sections 5-1401 and 5-1402 of the New York General
Obligations Law and New York Civil Practice Laws and Rules 327(b).
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any liability in respect of our
obligations or the obligations of the Guarantors under the Indenture or the
Notes solely by reason of his or its status as such stockholder, employee,
officer or director, except that this provision shall in no way limit the
obligation of any Guarantor pursuant to any guarantee of the Notes.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness (including Disqualified Capital
Stock) of any Person existing at the time such Person becomes a Subsidiary of
the Company or the Parent, including by designation, or is merged or
consolidated into or with the Company or the Parent or a Subsidiary of the
Company or the Parent.
"Acquisition" means the purchase or other acquisition of any Person or all
or substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise; provided, that with respect to ownership interest in the Company
and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting
power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to possess control.
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"Applicable Leverage Ratio" means, (1) with respect to any Incurrence Date
on or prior to December 31, 2002, 4.00 to 1.0, (2) with respect to any
Incurrence Date after December 31, 2002 and on or prior to December 31, 2003,
3.50 to 1.0, (3) with respect to any Incurrence Date after December 31, 2003 and
on or prior to December 31, 2004, 3.00 to 1.0, and (4) with respect to any
Incurrence Date after December 31, 2004, 2.50 to 1.0.
"Applicable Tax Rate" means, in respect of any particular Tax Determination
Year, a percentage equal to the highest marginal United States federal income
tax rate applicable to an individual in respect of such Tax Determination Year
as determined by the Tax Amounts CPA.
"Asset Disposition" means (a) any conveyance, sale, lease, sublease,
assignment, transfer or other disposition (including by way of merger or
consolidation and including any sale and leaseback transaction) of any property
(including stock of any of Parent's Subsidiaries by the holder thereof) by
Parent or any of its Subsidiaries to any person other than Holdings and its
Subsidiaries party to the Credit Agreement (other than sales and other
dispositions of inventory in the ordinary course of business) and (b) any
issuance or sale by any Subsidiary of Parent of its Equity Interests to any
person other than Holdings and its Subsidiaries party to the Credit Agreement.
"Attributable Indebtedness" means, when used with respect to any sale and
leaseback transaction, as at the time of determination, the present value
(discounted at a rate equivalent to the Company's then-current weighted-average
cost of funds for borrowed money as at the time of determination, compounded on
a semi-annual basis) of the total obligations of the lessee for rental payments
during the remaining term of the lease included in any such sale and leaseback
transaction.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (1) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (2) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable.
"Board of Directors" means, with respect to any Person, the board of
directors (or if such Person is not a corporation, the equivalent board of
managers or members or body performing similar functions for such Person) of
such Person or any committee of the Board of Directors of such Person
authorized, with respect to any particular matter, to exercise the power of the
board of directors of such Person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Contribution" means any contribution to the equity of the Company
from the Parent or Holdings for which no consideration other than the issuance
of Qualified Capital Stock is given.
"Capital Expenditures" means, with respect to any person, for any period,
the aggregate of all expenditures of such person and its Consolidated
Subsidiaries for the acquisition of fixed or capital assets which should be
capitalized under GAAP on a consolidated balance sheet of such person and its
Consolidated Subsidiaries. Notwithstanding the foregoing, Capital Expenditures
shall not include (i) expenditures with Proceeds from Asset Dispositions (other
than through leases), to the extent such expenditures do not exceed the book
value of such assets, and (ii) expenditures of Proceeds from a Casualty Event.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
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"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means:
(1) securities issued or directly and fully guaranteed or insured by
the United States of America or any agency or instrumentality thereof
(provided, that the full faith and credit of the United States of America
is pledged in support thereof),
(2) demand deposits, time deposits and certificates of deposit and
commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess
of $500 million,
(3) commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc.,
(4) repurchase obligations having terms not more than seven days, with
institutions meeting the criteria set forth in clause (2) above, for direct
obligations issued by or fully guaranteed by the United States of America
(provided, that the full faith and credit of the United States of America
is pledged in support thereof), having, on the date of purchase thereof, a
fair market value of at least 100% of the amount of repurchase obligations,
(5) interests in money market or mutual funds all of whose assets are
invested in assets or securities of the type described in clauses (1)
through (4) above,
(6) with respect to Investments by any Foreign Subsidiary, any demand
deposit account,
(7) direct investments in tax exempt obligations of any state of the
United States of America, or any municipality of any such state, in each
case rated "AA" or better by Standard & Poor's Rating Service, "Aa2" or
better by Moody's Investor Service, Inc. or an equivalent rating by any
other credit rating agency of recognized national standing, provided that
such obligations mature within six months from the date of acquisition
thereof, and
(8) investments in mutual funds or variable rate notes that invest in
tax exempt obligations of the types described in clause (7) above,
and in the case of each of (1) and (2) maturing within one year after the date
of acquisition.
"Casualty Event" means, with respect to any property (including Real
Property) of any person, any loss of title with respect to such property or any
loss of or damage to or destruction of, or any condemnation or other taking
(including by any Governmental Authority) of, such property for which such
person or any of its subsidiaries receives insurance proceeds or proceeds of a
condemnation award or other compensation. "Casualty Event" includes any taking
of all or any part of any Real Property of any person or any part thereof, in or
by condemnation or other eminent domain proceedings pursuant to any law, or by
reason of the temporary requisition of the use or occupancy of all or any part
of any Real Property of any person or any part thereof by any Governmental
Authority, civil or military.
"CL Obligations" of any person means the obligations of such person to pay
rent or other amounts under any lease of (or other arrangement conveying the
right to use) real or personal property, or a combination thereof, which
obligations are required to be classified and accounted for as capital leases on
a balance sheet of such person under GAAP, and the amount of such obligations
shall be the capitalized amount thereof determined in accordance with GAAP.
"CNI" means, with respect to any person for any period, the consolidated
net after tax income of such person and its Consolidated Subsidiaries determined
in accordance with GAAP, reduced by the amount of any Tax Amounts Payment made
during such period, but excluding in any event (a) net earnings or loss of any
other person (other than a Subsidiary of Holdings) in which such person or any
of its Consolidated
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Subsidiaries has an ownership interest, except (in the case of any such net
earnings) to the extent such net earnings shall have actually been received by
such person or any of its Consolidated Subsidiaries (subject to the limitation
in clause (b) below) in the form of cash distributions, (b) any portion of the
net earnings of any of such person's Consolidated Subsidiaries that is
unavailable for payment of dividends to such person or any other of its
Consolidated Subsidiaries by reason of the provisions of any agreement or
applicable law or regulation, and (c) the income (or loss) of any other person
accrued prior to the date it becomes a Subsidiary of such person or any of its
Consolidated Subsidiaries or is merged into or consolidated with such person or
any of its Consolidated Subsidiaries or that other person's assets are acquired
by such person or its Consolidated Subsidiaries (other than pursuant to the
Merger).
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Cash Flow" means, with respect to any person for any period,
CNI for such period, adjusted, in each case only to the extent (and in the same
proportion) deducted in determining CNI (and with respect to the portion of CNI
attributable to any Subsidiary of Parent only to the extent a corresponding
amount would be permitted at the date of determination to be distributed to the
Company by such Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Subsidiary or its stockholders), by (x) adding thereto (i) the amount of
Consolidated Interest Expense, (ii) provision for taxes based on income, (iii)
any Tax Amounts Payment made during such period, (iv) amortization, (v)
depreciation, (vi) all other noncash items subtracted in determining CNI
(including, without limitation, any noncash compensation charge arising from any
grant of stock, stock options or other equity-based awards of such Person or any
of its Subsidiaries and noncash losses or charges related to impairment of
goodwill and other intangible assets and excluding any noncash charge that
results in an accrual of a reserve for cash charges in any future period) for
such period, (vii) nonrecurring expenses and charges of the Company and
Herbalife International, Inc., related to the Merger and Merger Financing
Transactions; and (y) subtracting therefrom (i) dividends paid to Holdings for
the purpose of paying its operating expenses incurred in the ordinary course of
business and other corporate overhead costs and expenses (including legal and
accounting expenses and similar expenses) and (ii) the aggregate amount of all
noncash items, determined on a consolidated basis, to the extent such items were
added in determining CNI for such period.
"Consolidation" means, with respect to the Company or the Parent, the
consolidation of the accounts of the Subsidiaries with those of the Company or
the Parent, as applicable, all in accordance with GAAP; provided, that
"consolidation" will not include consolidation of the accounts of any
Unrestricted Subsidiary with the accounts of the Company or the Parent. The term
"consolidated" has a correlative meaning to the foregoing.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided, that for purposes of
such calculation:
(1) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of the Reference Period,
(2) transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period,
(3) the incurrence of any Indebtedness (including issuance of any
Disqualified Capital Stock) during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction
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Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) (other than Indebtedness incurred
under any revolving credit facility) shall be assumed to have occurred on
the first day of the Reference Period, and
(4) the Consolidated Fixed Charges of such Person attributable to
interest on any Indebtedness or dividends on any Disqualified Capital Stock
bearing a floating interest (or dividend) rate shall be computed on a pro
forma basis as if the average rate in effect from the beginning of the
Reference Period to the Transaction Date had been the applicable rate for
the entire period, unless such Person or any of its Subsidiaries is a party
to an Interest Swap or Hedging Obligation (which shall remain in effect for
the 12-month period immediately following the Transaction Date) that has
the effect of fixing the interest rate on the date of computation, in which
case such rate (whether higher or lower) shall be used.
"Consolidated Current Assets" means, with respect to any person as at any
date of determination, the total assets of such person and its Consolidated
Subsidiaries that may properly be classified as current assets on a consolidated
balance sheet of such person and its Consolidated Subsidiaries in accordance
with GAAP.
"Consolidated Current Liabilities" means, with respect to any person as at
any date of determination, the total liabilities of such person and its
Consolidated Subsidiaries that may properly be classified as current liabilities
(other than the current portion of any loans outstanding under the Credit
Agreement or CL Obligations) on a consolidated balance sheet of such person and
its Consolidated Subsidiaries in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of
(1) Consolidated income tax expense,
(2) any Tax Amounts Payments made by such Person during such period,
(3) Consolidated depreciation and amortization expense,
(4) Consolidated Fixed Charges,
(5) non-cash charges relating to employee benefit or other management
compensation plans of such Person or any of its Consolidated Subsidiaries
or any non-cash compensation charge arising from any grant of stock, stock
options or other equity-based awards of such Person or any of its
Subsidiaries (excluding in each case any non-cash charge to the extent that
it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense incurred in a prior
period),
(6) non-cash losses or charges related to impairment of goodwill and
other intangible assets, and
(7) for purposes of determining the Parent's Consolidated Coverage
Ratio and the Parent's Leverage Ratio for any Reference Period that
includes the date upon which the Merger was consummated, nonrecurring
expenses and charges of the Company and Herbalife International, Inc.,
related to the Merger and Related Financing Transactions.
Less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to non-cash
charges that were added back in determining Consolidated EBITDA for such period
or any prior period; provided, that consolidated income tax expense and
depreciation and amortization of a Subsidiary that is a less than Wholly-Owned
Subsidiary shall only be added to the extent of the equity interest of the
Company in such Subsidiary.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of:
(a) interest expensed or capitalized, paid, accrued, or scheduled to
be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and
its Consolidated Subsidiaries during such period, including (1) original
issue discount and non-cash interest payments or accruals on any
Indebtedness, (2) the interest portion of all deferred
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payment obligations, and (3) all commissions, discounts and other fees and
charges owed with respect to bankers' acceptances and letters of credit
financings and currency and Interest Swap and Hedging Obligations, in each
case to the extent attributable to such period, and
(b) the amount of dividends accrued or payable (or guaranteed) by such
Person or any of its Consolidated Subsidiaries in respect of Preferred
Stock (other than by Subsidiaries of such Person to such Person or such
Person's Wholly-Owned Subsidiaries).
For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or a
Subsidiary of such Person of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Interest Expense" means, with respect to any person for any
period, the total consolidated interest expense of such person and its
Consolidated Subsidiaries for such period (calculated without regard to any
limitations on the payment thereof and including commitment fees,
letter-of-credit fees and net amounts payable under Interest Rate Protection
Agreements) determined in accordance with GAAP plus, without duplication, (a)
the portion of CL Obligations of such person and its Consolidated Subsidiaries
representing the interest factor for such period, (b) imputed interest on
Attributable Indebtedness, (c) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any person (other than the Company
or a Wholly Owned Subsidiary of the Company) in connection with Indebtedness
incurred by such plan or trust, (d) all interest payable with respect to
discontinued operations, and (e) imputed interest on SL Obligations.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
reduced by the amount of any Tax Amounts Payments made during such period and
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication):
(a) all gains (but not losses) which are either extraordinary (as
determined in accordance with GAAP) or are nonrecurring (including any gain
from the sale or other disposition of assets outside the ordinary course of
business or from the issuance or sale of any capital stock),
(b) the net income, if positive, of any Person, other than a
Consolidated Subsidiary, in which such Person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a
Consolidated Subsidiary of such Person during such period, but in any case
not in excess of such Person's pro rata share of such Person's net income
for such period,
(c) the net income, if positive, of any of such Person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the
terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary, and
(d) solely for purposes of the covenant described above under the
caption "Limitation or Restricted Payments" and to avoid duplication, any
Monitoring Fees (or any comparable fees, reimbursements or payments of
out-of-pocket expenses) paid by the Company or the Parent.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"Contingent Obligation" means, as to any person, any obligation of such
person guaranteeing or intended to guarantee any Debt, leases, dividends or
other obligations ("primary obligations") of any other person (the "primary
obligor") in any manner, whether directly or indirectly, including any
obligation of such person, whether or not contingent, (a) to purchase any such
primary obligation or any property constituting direct or
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indirect security therefor; (b) to advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor; (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation; or (d) otherwise to assure or hold harmless the holder of such
primary obligation against loss in respect thereof; provided, however, that the
term "Contingent Obligation" shall not include (w) endorsements of instruments
for deposit or collection in the ordinary course of business, (x) any product
warranties issued on products by Parent or any of its Subsidiaries in the
ordinary course of business, (y) any obligation to buy back products in the
ordinary course of business made pursuant to the buyback policy of Parent and
its Subsidiaries or pursuant to applicable Requirements of Law, and (z) any
operating lease guarantees (other than in respect of SL Obligations) executed by
Parent, Luxembourg Holdings, Luxembourg Intermediate Holdings, Luxembourg CM or
the Company in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Contingent Obligation
is made (or, if less, the maximum amount of such primary obligation for which
such person may be liable pursuant to the terms of the instrument evidencing
such Contingent Obligation) or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such person is
required to perform thereunder) as determined by such person in good faith.
"Continuing Director" means during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved, including new directors designated in or provided for in an agreement
regarding the merger, consolidation or sale, transfer or other conveyance, of
all or substantially all of the assets of the Company or the Parent, if such
agreement was approved by a vote of such majority of directors).
"Credit Agreement" means the credit agreement dated on or prior to the date
the Merger is consummated as part of the Related Financing Transactions, by and
among the Parent, Herbalife International, Inc. (or WH Acquisition), Holdings,
certain Subsidiaries of Holdings, certain financial institutions and UBS AG
Stamford Branch, as agent, providing for a term loan facility and a revolving
credit facility, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith (such credit
agreement, the "Original Credit Agreement,") as such credit agreement and/or
related documents may be amended, restated, supplemented, renewed, replaced or
otherwise modified from time to time whether or not with the same agent,
trustee, representative lenders or holders, and, subject to the proviso to the
next succeeding sentence, irrespective of any changes in the terms and
conditions thereof. Without limiting the generality of the foregoing, the term
"Credit Agreement" shall include agreements in respect of Interest Swap and
Hedging Obligations with lenders (or Affiliates thereof) party to the Credit
Agreement and shall also include any amendment, amendment and restatement,
renewal, extension, restructuring, supplement or modification to any Credit
Agreement and all refundings, refinancings and replacements of any Credit
Agreement, including any credit agreement:
(1) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
(2) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of the Company and its
Subsidiaries and their respective successors and assigns,
(3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder; provided, that on the date such
Indebtedness is incurred it would not be prohibited by the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock," or
(4) otherwise altering the terms and conditions thereof in a manner
not expressly prohibited by the terms of the Indenture.
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"Debt" of any person means, without duplication, (a) all obligations of
such person for borrowed money; (b) all obligations of such person evidenced by
bonds, debentures, notes or similar instruments; (c) all obligations of such
person upon which interest charges are customarily paid or accrued; (d) all
obligations of such person under conditional sale or other title retention
agreements relating to property purchased by such person; (e) all obligations of
such person issued or assumed as the deferred purchase price of property or
services (excluding trade accounts payable incurred in the ordinary course of
business on normal trade terms and not overdue by more than 90 days or, if
overdue for more than 90 days, as to which a dispute exists and adequate
reserves in conformity with GAAP have been established); (f) all Debt of others
secured by (or for which the holder of such Debt has an existing right,
contingent or otherwise, to be secured by) any Encumberance on property owned or
acquired by such person, whether or not the obligations secured thereby have
been assumed; (g) all CL Obligations, PM Obligations and SL Obligations of such
person; (h) all obligations of such person in respect of Hedging Agreements;
provided that, the amount of Debt of the type referred to in this clause (h) of
any person shall be zero unless and until such Debt shall be terminated, in
which case the amount of such Debt shall be the then termination payment due
thereunder by such person; (i) all obligations of such person as an account
party in respect of letters of credit, letters of guaranty and bankers'
acceptances; (j) all Attributable Debt of such person; and (k) all Contingent
Obligations of such person in respect of Debt or obligations of others of the
kinds referred to in clauses (a) through (j) above. The Debt of any Person shall
include the Debt of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as a
result of such person's ownership interest in or other relationship with such
entity, except to the extent that the terms of such Debt provide that such
Person is not liable therefor.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Capital Stock" means with respect to the Parent, (a) Equity
Interests of the Parent that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time or both would be, required to be redeemed or
repurchased including at the option of the holder thereof by the Parent or any
of its Subsidiaries or the Company, in whole or in part, on or prior to 91 days
following the Stated Maturity of the Notes and (b) any Equity Interests of the
Company or of any Subsidiary of the Parent other than any common equity with no
preferences, privileges, and no redemption or repayment provisions.
Notwithstanding the foregoing, any Equity Interests that would constitute
Disqualified Capital Stock solely because the holders thereof have the right to
require the Parent or Company to repurchase such Equity Interests upon the
occurrence of a change of control or an asset sale shall not constitute
Disqualified Capital Stock if the terms of such Equity Interests provide that
the Parent or Company may not repurchase or redeem any such Equity Interests
pursuant to such provisions prior to the Company's purchase of the Notes as are
required to be purchased pursuant to the provisions of the Indenture as
described under "Repurchase at the Option of Holders."
"Encumberance" means, with respect to any property, (a) any mortgage, deed
of trust, lien, pledge, encumbrance, claim, charge, assignment, hypothecation,
security interest or encumbrance of any kind, any other type of preferential
arrangement in respect of such property or any filing of any financing statement
under the UCC or any other similar notice of lien under any similar notice or
recording statute of any Governmental Authority, including any easement,
right-of-way or other encumbrance on title to Real Property, in each of the
foregoing cases whether voluntary or imposed by law, and any agreement to give
any of the foregoing; (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such property; and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Equity Financing" means the initial cash equity investment in Holdings by
the Principals and their Affiliates and selected co-investors on or prior to the
date the Merger is consummated, in an amount not less than $176.0 million, and
the concurrent or subsequent cash equity investment in Holdings by certain
distributors and management on or after the date the Merger is consummated.
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"Equity Interests" means Capital Stock or partnership, participation or
membership interests and all warrants, options or other rights to acquire
Capital Stock or partnership, participation or membership interests (but
excluding any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership, participation or membership interests).
"Event of Loss" means, with respect to any property or asset, any (1) loss,
destruction or damage of such property or asset or (2) any condemnation, seizure
or taking, by exercise of the power of eminent domain or otherwise, of such
property or asset, or confiscation or requisition of the use of such property or
asset.
"Excess Cash Flow" means, for any fiscal year of Parent, the sum, without
duplication, of
(a) Consolidated Cash Flow of Parent for such fiscal year; plus
(b) extraordinary net cash gains or net cash gains from sales of
assets, if any, during such fiscal year not included in CNI; plus
(c) reductions to noncash working capital of Parent and its
Consolidated Subsidiaries for such fiscal year (i.e., the decrease, if any,
in Consolidated Current Assets minus Consolidated Current Liabilities from
the beginning to the end of such fiscal year); minus
(d) the amount of any cash income taxes payable by Parent and its
Consolidated Subsidiaries with respect to such fiscal year and any Tax
Amounts Payments made by the Parent and its Consolidated Subsidiaries
during such fiscal year; minus
(e) Consolidated Interest Expense of Parent, to the extent paid in
cash during such fiscal year; minus
(f) Capital Expenditures of Parent during such fiscal year, to the
extent funded from internally generated funds; minus
(g) permanent repayments of Debt made by Parent and its Consolidated
Subsidiaries during such fiscal year (including payments of principal in
respect of revolving loans to the extent there is an equivalent reduction
in the revolving commitments under the Credit Agreement); but only to the
extent such repayments do not occur in connection with a refinancing of all
or any portion of the loans under the Credit Facility, if any; minus
(h) extraordinary cash losses from the sale of assets during such
fiscal year and not included in Parent's CNI; minus
(i) additions to noncash working capital of Parent and its
Consolidated Subsidiaries for such fiscal year (i.e., the increase, if any,
in Consolidated Current Assets minus Consolidated Current Liabilities from
the beginning to the end of such fiscal year);
provided that, with respect to Parent's fiscal year 2002 only, for the purposes
of this definition of "Excess Cash Flow", each of the foregoing shall be
calculated for the period from and including the date the Merger is consummated
through and including the last day of Parent's fiscal year 2002.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempted Affiliate Transaction" means (a) customary employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) dividends permitted under
the terms of the covenant discussed above under "Limitation on Restricted
Payments" above and payable, in form and amount, on a pro rata basis to all
holders of common stock of the Company, (c) transactions solely between or among
the Company and the Guarantors and any Consolidated Subsidiaries of the Company
or the Guarantors or solely among Consolidated Subsidiaries of the Company or
the Guarantors, (d) payment of Monitoring Fees pursuant to the Monitoring
Services Agreements, (e) payment of any Tax Amounts Payments that are not
prohibited by the covenant described above under the caption "Limitation on
Restricted Payments," (f) the Monitoring Services Agreements, substantially in
the form attached as an exhibit to the Indenture, (g) Capital Contributions to
the Company or any sale of Capital Stock (other than Disqualified Capital Stock)
of the Company to an Affiliate, (h) payment of
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reasonable directors' fees to Persons who are not otherwise Affiliates of the
Company or the Parent and customary indemnification and insurance agreements in
favor of directors, regardless of affiliation with the Company or the Parent,
and (i) payments to Affiliates as part of the Merger Consideration and Related
Costs that were disclosed in the Offering Memorandum.
"Existing Indebtedness" means Indebtedness of Herbalife International, Inc.
and its Subsidiaries (other than Indebtedness under the Credit Facility) in
existence on the Issue Date, reduced to the extent such amounts are repaid,
refinanced or retired.
"Final Determination" means a final "determination" as defined under
section 1313 of the Code or a similar determination under state, local, or
foreign law.
"Final Determination Amount" means, in respect of any particular Tax
Determination Year, any additional taxes, interest, and penalties resulting from
a Final Determination and arising from or attributable to amounts paid or
accrued pursuant to the Intercompany Service Agreement.
"Foreign Subsidiary" means any Subsidiary of the Company which (i) is not
organized under the laws of the United States, any state thereof or the District
of Columbia and (ii) conducts substantially all of its business operations
outside the United States of America.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the FASB or in such other statements by such other entity as
approved by a significant segment of the accounting profession in the United
States as in effect at the time.
"Governmental Authority" means any federal, state, local or foreign court
or governmental agency, authority, instrumentality or regulatory body.
"Guarantor" means the Parent and each present and future Subsidiary of
Parent or the Company that at the time are guarantors of the Notes in accordance
with the Indenture.
"Hedging Agreement" means any Interest Rate Protection Agreement, foreign
currency exchange agreement, commodity price protection agreement or other
interest or currency exchange rate or commodity price hedging arrangement.
"Holdings" means WH Holdings (Cayman Islands) Ltd., a company incorporated
under the laws of the Cayman Islands.
"Holdings CFC Group" means Holdings and the members of the Parent CFC
Group.
"Indebtedness" of any Person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of such
Person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such Person in accordance
with GAAP, (1) in respect of borrowed money (whether or not the recourse of
the lender is to the whole of the assets of such Person or only to a
portion thereof), (2) evidenced by bonds, notes, debentures or similar
instruments, (3) representing the balance deferred and unpaid of the
purchase price of any property or services, except those incurred in the
ordinary course of its business that would constitute ordinarily a trade
payable to trade creditors;
(b) all liabilities and obligations, contingent or otherwise, of such
Person (1) evidenced by bankers' acceptances or similar instruments issued
or accepted by banks, (2) relating to any Capitalized Lease Obligation, or
(3) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit;
(c) all net obligations of such Person under Interest Swap and Hedging
Obligations;
(d) all liabilities and obligations of others of the kind described in
the preceding clause (a), (b) or (c) that such Person has guaranteed or
provided credit support or that is otherwise its legal liability or which
are secured by any assets or property of such Person;
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(e) any and all deferrals, renewals, extensions, refinancing and
refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c) or (d), or this clause (e), whether or not between or
among the same parties; and
(f) all Disqualified Capital Stock of such Person (measured at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends).
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the Fair Market Value of such Disqualified
Capital Stock, such Fair Market Value to be determined in good faith by the
board of directors of the issuer (or managing general partner of the issuer) of
such Disqualified Capital Stock.
The amount of any Indebtedness outstanding as of any date shall be (1) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, but the accretion of original issue discount in accordance with
the original terms of Indebtedness issued with an original issue discount will
not be deemed to be an incurrence and (2) the principal amount thereof, in the
case of any other Indebtedness.
"Initial Public Offering" means an underwritten public offering of common
stock of the Parent in which gross proceeds to the Parent are at least $50.0
million.
"Intercompany Service Agreement" means a service agreement (or, if more
than one service agreement is entered into, the aggregate of all such service
agreements) entered into by and among an Intercompany Service Provider and one
or more members of the Parent Group, the pricing of which is determined on an
arm's-length basis and in compliance with the "best method rule" and the
"documentation requirements" under sections 482 and 6662 of the Code and the
Treasury regulations promulgated thereunder.
"Intercompany Service Provider" means any member of the Parent CFC Group
that is obligated to render services pursuant to the Intercompany Service
Agreement.
"Intercompany Service Receipts" means, in respect of any Tax Determination
Year, amounts received or receivable by the Intercompany Service Provider from
members of the Parent Group in respect of services provided by the Intercompany
Service Provider to such members pursuant to an Intercompany Service Agreement.
"Intercompany Service Subpart F Income" means, in respect of any Tax
Determination Year, (i) the subpart F income of any member of the Holdings CFC
Group for such year as determined under section 951(a)(1)(A) of the Code and
(ii) the amount of earnings of any member of the Holdings CFC Group for such
year as determined under section 951(a)(1)(B) of the Code in respect of any
section 956 amount that, in the case of each of the immediately preceding
clauses (i) and (ii) and without duplication, arises from or is attributable to
Intercompany Service Receipts (or the distribution, payment, or transfer of
receipts by such member to another member of the Holdings CFC Group).
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
similar agreement or arrangement designed to protect Holdings or its
Subsidiaries against fluctuations in interest rates and not entered into for
speculation.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
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"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or
otherwise) by such Person (whether for cash, property, services, securities
or otherwise) of Equity Interests, capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other Person or any agreement to make any such
acquisition;
(b) the making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other Person (including the purchase of
property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or
any commitment to make any such advance, loan or extension (but excluding
accounts receivable, endorsements for collection or deposits arising in the
ordinary course of business);
(c) other than guarantees of Indebtedness of the Company or any
Guarantor to the extent permitted by the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock," the entering
into by such Person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of
such other Person;
(d) the making of any capital contribution by such Person to such
other Person;
(e) the designation by the Board of Directors of the Company of any
Person to be an Unrestricted Subsidiary; and
(f) a Subsidiary of the Parent or the Company that is a Guarantor
becoming a Non-Guarantor Subsidiary as a result of the release of the
Guarantee of such Subsidiary in accordance with the provisions described
above under the caption "Release of Guarantors."
The Company and the Parent, without duplication, shall be deemed to make an
Investment in an amount equal to the fair market value of the net assets of any
subsidiary of the Company or the Parent (or, if neither the Company nor any of
its Subsidiaries has theretofore made an Investment in such subsidiary, in an
amount equal to the Investments being made), at the time that such subsidiary is
designated an Unrestricted Subsidiary, and any property transferred to an
Unrestricted Subsidiary from the Company, the Parent or a Subsidiary of the
Company or the Parent shall be deemed an Investment valued at its fair market
value at the time of such transfer. The Company and the Parent, without
duplication, shall be deemed to make an Investment in an amount equal to the
fair market value of the net assets of any Subsidiary of the Company or the
Parent that is a Guarantor (or, if neither the Company nor any of its
Subsidiaries has theretofore made an Investment in such subsidiary, in an amount
equal to the Investments being made) at the time that such Subsidiary becomes a
Non-Guarantor Subsidiary as a result of the release of the Guarantee of such
Subsidiary in accordance with the provisions described above under the caption
"Release of Guarantors." The Company and the Parent shall be deemed to have made
an Investment in a Person that is or was required to be a Guarantor if, upon the
issuance, sale or other disposition of any portion of the Company's or the
Guarantor's ownership in the Capital Stock of such Person, such Person ceases to
be a Guarantor. The fair market value of each Investment shall be measured at
the time made or returned, as applicable.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Junior Security" means any Qualified Capital Stock and any Indebtedness of
the Company or a Guarantor, as applicable, that is contractually subordinated in
right of payment to Senior Debt (or any securities issued in exchange for Senior
Debt) at least to the same extent as the Notes or the Guarantee, as applicable,
and has no scheduled installment of principal due, by redemption, sinking fund
payment or otherwise, on or prior to the Stated Maturity of the Notes; provided,
that in the case of subordination in respect of Senior Debt under the Credit
Agreement, "Junior Security" shall mean any Qualified Capital Stock and any
Indebtedness of the Company or the Guarantor, as applicable, that:
(1) has a final maturity date occurring after the final maturity date
of, all Senior Debt outstanding under the Credit Agreement on the date of
issuance of such Qualified Capital Stock or Indebtedness,
(2) is unsecured,
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(3) has an Average Life longer than the security for which such
Qualified Capital Stock or Indebtedness is being exchanged, and
(4) by their terms or by law are subordinated to Senior Debt
outstanding under the Credit Agreement (and any securities issued in
exchange for such Senior Debt outstanding under the Credit Agreement) on
the date of issuance of such Qualified Capital Stock or Indebtedness at
least to the same extent as the Notes.
"Korean Consumer Refund Guarantee" means the guarantee or letter of credit
issued to any applicable Korean Governmental Authority as required to comply
with the consumer refund laws of Korea, together with any supporting obligations
in respect thereof.
"Leverage Ratio" on any date of determination (the "Determination Date")
means the ratio, on a pro forma basis, of (a) the aggregate amount of
Indebtedness of the Parent and its Subsidiaries on a consolidated basis
determined in accordance with GAAP to (b) the aggregate amount of Consolidated
EBITDA of the Parent attributable to continuing operations and business
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of) for the Reference Period; provided, that for
purposes of calculating Consolidated EBITDA for this definition: (1)
Acquisitions which occurred during the Reference Period or subsequent to the
Reference Period and on or prior to the Determination Date shall be assumed to
have occurred on the first day of the Reference Period, (2) transactions giving
rise to the need to calculate the Leverage Ratio shall be assumed to have
occurred on the first day of the Reference Period, (3) the incurrence of any
Indebtedness (including issuance of any Disqualified Capital Stock) during the
Reference Period or subsequent to the Reference Period and on or prior to the
Determination Date (and the application of the proceeds therefrom to the extent
used to refinance or retire other Indebtedness) (other than Indebtedness
incurred under any revolving credit facility) shall be assumed to have occurred
on the first day of the Reference Period, (4) the Consolidated Fixed Charges of
such Person attributable to interest on any Indebtedness or dividends on any
Disqualified Capital Stock bearing a floating interest (or dividend) rate shall
be computed on a pro forma basis as if the average rate in effect from the
beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used,
and (5) for any Reference Period that includes any date on or prior to December
31, 2002, one-time charges or expenses of the Parent and its Subsidiaries
related to severance or to the termination of employment of employees of the
Parent and its Subsidiaries, to the extent such charges relate to cash paid to
such terminated employee, in each case, to the extent such charges or expenses
reduced the Consolidated EBITDA of the Parent.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Liquidated Damages" means all liquidated damages then owing pursuant to
the Registration Rights Agreement.
"Luxembourg Holdings" means WH Luxembourg Holdings S.a.R.L., a Luxembourg
company.
"Luxembourg Intermediate Holdings" means WH Luxembourg Intermediate
Holdings S.a.R.L., a Luxembourg company.
"Luxembourg CM" means WH Luxembourg CM S.a.R.L., a Luxembourg company.
"Merger" the merger of WH Acquisition Corp., a Nevada corporation, with and
into Herbalife International, Inc., a Nevada corporation, pursuant to the Merger
Agreement.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
April 10, 2002, by and among Holdings, a Cayman Islands company, WH Acquisition
Corp., a Nevada corporation and Herbalife International, Inc., a Nevada
corporation, as in effect on the Issue Date, without giving effect to any
amendment thereto or waiver thereof after the Issue Date.
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"Merger Consideration and Related Costs" means:
(1) the cash consideration for the Merger payable by us to holders of
Herbalife International, Inc.'s common stock and options to purchase common
stock pursuant to the Merger Agreement as described in the Offering
Memorandum;
(2) payment of obligations of Subsidiaries of Herbalife International,
Inc. that are guaranteed by Herbalife International, Inc. and payable in
connection with the Merger, as described in the Offering Memorandum; and
(3) all fees and expenses related to the foregoing and payable in
connection with the Merger, as described in the Offering Memorandum.
"Merger Financing Transactions" means the issuance of the Notes and the
Equity Financing in connection with the consummation of the Merger.
"Monitoring Fees" means payments to Whitney & Co., LLC or GGC
Administration, LLC pursuant to the Monitoring Services Agreements.
"Monitoring Services Agreements" means those certain separate monitoring
fee agreements among (i) Holdings, the Company and Whitney & Co., LLC and (ii)
Holdings, the Company and GGC Administration, LLC, substantially in the form
attached as an exhibit to the Indenture, without giving effect to any amendment
thereto or waiver thereof.
"Ownership Interest" means, with respect to any person, any and all shares,
interests, participations or other equivalents, including membership interests
(however designated, whether voting or non-voting), of capital of such person,
including, if such person is a partnership, partnership interests (whether
general or limited) and any other interest (other than an interest constituting
Indebtedness) or participation that confers on a person the right to receive a
share of the profits and losses of, or distributions of assets of, such
partnership, whether outstanding on the date hereof or issued after the Issue
Date.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale, or Capital Contribution in
respect of Qualified Capital Stock and by the Company, the Parent and the
Subsidiaries of the Company or the Parent in respect of an Asset Sale plus, in
the case of an issuance of Qualified Capital Stock upon any exercise, exchange
or conversion of securities (including options, warrants, rights and convertible
or exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary), expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company, the Parent or any Subsidiary of the Company or the Parent in connection
with such Asset Sale in the taxable year that such sale is consummated or in the
immediately succeeding taxable year, the computation of which shall take into
account the reduction in tax liability resulting from any available operating
losses and net operating loss carryovers, tax credits and tax credit
carryforwards, and similar tax attributes.
"Non-Guarantor Subsidiary" means any Subsidiary of the Parent, including
any Subsidiary of the Company, that has not guaranteed the Obligations under the
Notes and the Indenture or that has been released from its obligations under its
Guarantee of the Notes in accordance with the terms of the Indenture.
"Notice of Deficiency" means a notice of deficiency as described under
section 6212 of the Code or a similar notice under state, local, or foreign law.
"Obligation" means any principal, premium or interest payment, or monetary
penalty, or damages, due by the Company or any Guarantor under the terms of the
Notes or the Indenture, including any Liquidated Damages due pursuant to the
terms of the Registration Rights Agreement.
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"Offering Memorandum" means the Offering Memorandum, dated June 21, 2002,
relating to the offer and sale of the Notes on the Issue Date.
"Officers' Certificate" means the officers' certificate to be delivered
upon the occurrence of certain events as set forth in the Indenture.
"Parent" means WH Intermediate Holdings, Ltd.
"Parent CFC Group" means Parent and any direct or indirect Subsidiary of
Parent other than the Company and any direct or indirect Subsidiary of the
Company.
"Parent Group" means Parent and its Subsidiaries.
"Parent Group Tax Savings Amount" means, in respect of any Tax
Determination Year, the excess of (x) the tax liability incurred by the Parent
Group for such Tax Determination Year as determined as if no Intercompany
Service Agreement had been entered into by and among Intercompany Service
Provider and any Subsidiary of the Parent Group over (y) the actual tax
liability incurred by the Parent Group for such Tax Determination Year (as
determined on a basis consistent with any Final Determination in respect of any
previous Tax Determination Year), which liability shall take into account any
taxes that have been, or will be, incurred by the Parent Group in connection
with the making of a Tax Amounts Payment in respect of such Tax Determination
Year. If, in respect of any Tax Determination Year, Parent or any Subsidiary of
the Parent Group has received a Notice of Deficiency, in respect of which there
has been no Final Determination, related to any item arising from or
attributable to amounts paid or accrued pursuant to the Intercompany Service
Agreement, the Parent Group Tax Savings Amount shall be determined on a basis
consistent with such Notice of Deficiency except to the extent that, based on
the advice of the Tax Amounts CPA, the Company reasonably determines that, more
likely than not, the Parent or such Subsidiary will prevail on the merits in
connection with contesting such Notice of Deficiency.
"Permitted Indebtedness" means that:
(a) the Company and the Guarantors may incur Indebtedness evidenced by
the Notes and the Guarantees (including the Series B Notes and the
Guarantees in respect thereof) issued pursuant to the Indenture up to the
amounts being issued on the Issue Date less any amounts repaid or retired
(and not including any Additional Notes);
(b) the Company and its Subsidiaries may incur Refinancing
Indebtedness with respect to any Existing Indebtedness or, the Company and
the Guarantors, as applicable, may incur Refinancing Indebtedness with
respect to any Indebtedness (including Disqualified Capital Stock),
described in clause (a) or incurred pursuant to the Debt Incurrence Ratio
test of the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock," or which was refinanced pursuant to this
clause (b);
(c) the Company, the Guarantors and the Subsidiaries of the Company
and the Parent may incur Indebtedness solely in respect of bankers
acceptances, letters of credit and performance bonds (to the extent that
such incurrence does not result in the incurrence of any obligation to
repay any obligation relating to borrowed money or other Indebtedness), all
in the ordinary course of business in accordance with customary industry
practices, in amounts and for the purposes customary in the Company's
industry; provided, that the aggregate principal amount outstanding of such
Indebtedness (including any Refinancing Indebtedness and any other
Indebtedness issued to retire, refinance, refund, defease or replace such
Indebtedness) shall at no time exceed $1.0 million;
(d) the Company may incur Indebtedness owed to (borrowed from) any
Guarantor, and any Guarantor may incur Indebtedness owed to (borrowed from)
any other Guarantor or the Company; provided, that in the case of
Indebtedness of the Company, such obligations shall be unsecured and
contractually subordinated in all respects to the Company's obligations
pursuant to the Notes and any event that causes such Guarantor no longer to
be a Guarantor (including by designation to be an Unrestricted Subsidiary)
shall be deemed to be a new incurrence by such issuer of such Indebtedness
and
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any guarantor thereof respectively subject to the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Stock;"
(e) the Company and the Guarantors may incur Indebtedness owed to
(borrowed from) any Non-Guarantor Subsidiary and any Non-Guarantor
Subsidiary may incur Indebtedness owed to (borrowed from) any other
Non-Guarantor Subsidiary; provided, that in the case of Indebtedness of the
Company or the Guarantors, such obligations shall be unsecured and
contractually subordinated in all respects to the Company's obligations
pursuant to the Notes or the Guarantor's obligations pursuant to its
Guarantee and any event that causes such Non-Guarantor Subsidiary to no
longer be a Non-Guarantor Subsidiary (other than by becoming a Guarantor)
shall be deemed to be a new incurrence by such issuer of such Indebtedness
and any guarantor thereof subject to the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Stock;"
(f) the Company and the Guarantors may incur Interest Swap and Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the Indenture to be outstanding or any
receivable or liability the payment of which is determined by reference to
a foreign currency; provided, that the notional amount of any such Interest
Swap and Hedging Obligation does not exceed the principal amount of
Indebtedness to which such Interest Swap and Hedging Obligation relates;
(g) the Company and its Subsidiaries may incur the Existing
Indebtedness;
(h) any Non-Guarantor Subsidiary may incur Indebtedness owed to
(borrowed from) the Parent, the Company or any Guarantor; provided, that
the Investment in the form of the loan is not prohibited at the time of
incurrence by the covenant described above under the caption "Limitation on
Restricted Payments;" and
(i) Indebtedness in respect of the Korean Consumer Refund Guarantee.
"Permitted Investment" means:
(a) any Investment in any of the Notes;
(b) any Investment in Cash Equivalents;
(c) intercompany notes to the extent permitted under clause (d) or (e)
of the definition of "Permitted Indebtedness;"
(d) any Investment by the Company, the Parent or any Subsidiary of the
Company or the Parent in a Person in a Related Business if as a result of
such Investment such Person immediately becomes a Subsidiary of the Company
or the Parent and becomes a Guarantor or such Person is immediately merged
with or into the Company or a Guarantor;
(e) any Investment in any Person in exchange for the Company's
Qualified Capital Stock or the Net Cash Proceeds of any substantially
concurrent sale of the Company's Qualified Capital Stock;
(f) Investment in other Persons, including Non-Guarantor Subsidiaries,
provided, that after giving pro forma effect to each such Investment, the
aggregate amount of all such Investments made on and after the Issue Date
pursuant to this clause (f) that are outstanding (after giving effect to
any such Investments that are returned to the Company or the Guarantor that
made such prior Investment, without restriction, in cash on or prior to the
date of any such calculation), but only up to the amount of the Investment
made under this clause (f) in such Person at any time does not in the
aggregate exceed $15.0 million (measured by the value attributed to the
Investment at the time made or returned, as applicable);
(g) Investments by Non-Guarantor Subsidiaries in other Non-Guarantor
Subsidiaries;
(h) any Investment by any Non-Guarantor Subsidiary in a Person in a
Related Business if as a result of such Investment such Person immediately
becomes a Non-Guarantor Subsidiary or a Guarantor or such Person becomes a
Non-Guarantor Subsidiary or a Guarantor;
143
(i) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "Repurchase
at the Option of Holders -- Asset Sales and Sales of Subsidiary Stock;"
(j) Investments in customers and suppliers in the ordinary course of
business and consistent with the Company's past practices that either (A)
generates accounts receivables, or (B) are accepted in settlement of
bonafide disputes;
(k) Investments in the form of advances to employees for travel,
relocation and like expenses, in each case, consistent with the Company's
past practices;
(l) Investments in the form of loans and advances not to exceed $2.5
million at any one time outstanding pursuant to this clause (l) to
employees, directors and distributors, of the Parent, the Company and the
Subsidiaries of the Parent for the purpose of funding the purchase of
Capital Stock of the Parent or Holdings by such employees, directors and
distributors.
"Permitted Lien" means:
(a) Liens existing on the Issue Date;
(b) statutory liens of carriers, warehousemen, mechanics, material
men, landlords, repairmen or other like Liens arising by operation of law
in the ordinary course of business provided that (1) the underlying
obligations are not overdue for a period of more than 30 days, or (2) such
Liens are being contested in good faith and by appropriate proceedings and
adequate reserves with respect thereto are maintained on the books of the
Company or the Parent in accordance with GAAP;
(c) Liens securing the performance of bids, trade contracts (other
than borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(d) Liens securing the Notes;
(e) Liens securing Indebtedness of a Person existing at the time such
Person becomes a Subsidiary or is merged with or into the Company, the
Parent or a Subsidiary of the Company or the Parent or Liens securing
Indebtedness incurred in connection with an Acquisition, provided, that
such Liens were in existence prior to the date of such acquisition, merger
or consolidation, were not incurred in anticipation thereof, and do not
extend to any other assets;
(f) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the Company,
the Parent or any Subsidiary of the Company or the Parent in the ordinary
course of business;
(g) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to
the Holders of the Notes than the terms of the Liens securing such
refinanced Indebtedness, and provided that the Indebtedness secured is not
increased and the Lien is not extended to any additional assets or property
that would not have been security for the Indebtedness refinanced;
(h) Liens securing Indebtedness incurred under Senior Debt in
accordance with the terms of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock"; and
(i) Liens securing Indebtedness of any Non-Guarantor Subsidiary
incurred in accordance with the provisions of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock").
"Person" or "person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, limited liability
company, unincorporated association, governmental regulatory entity, country,
state or political subdivision thereof, trust, municipality or other entity.
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"PM Obligation" means, for any person, the obligations of such person in
respect of Debt incurred for the purpose of financing all or any part of the
purchase price of any property (including Ownership Interests of any person) or
the cost of installation, construction or improvement of any property or assets
and any refinancing thereof; provided, however, that such Indebtedness is
incurred within 90 days after such acquisition of such property by such person.
"Preferred Stock" means any Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"Proceeds" means:
(a) with respect to any Asset Disposition, the cash proceeds received
by Holdings or any of its Subsidiaries party to the Credit Agreement
(including cash proceeds subsequently received (as and when received by
Holdings or any of its Subsidiaries party to the Credit Agreement) in
respect of noncash consideration initially received) net of (i) selling
expenses (including reasonable brokers' fees or commissions, legal fees,
transfer and similar taxes and the Company's reasonable and good faith
estimate of income, franchise, sales, and other applicable taxes required
to be paid by the Company or any of its respective Subsidiaries in
connection with such Asset Disposition in the taxable year that such sale
is consummated or in the immediately succeeding taxable year, the
computation of which shall take into account the reduction in tax liability
resulting from any available operating losses and net operating loss
carryovers, tax credits, and tax credit carry forwards, and similar tax
attributes; (ii) amounts escrowed or provided as a reserve, in accordance
with GAAP, against any liabilities under any indemnification obligations or
purchase price adjustment associated with such Asset Disposition (provided
that, to the extent and at the time any such amounts are released from such
escrow or reserve, such amounts shall constitute Proceeds); (iii) the
Company's good faith estimate of payments required to be made with respect
to unassumed liabilities relating to the assets sold within 90 days of such
Asset Disposition (provided that, to the extent such cash proceeds are not
used to make payments in respect of such unassumed liabilities within 90
days of such Asset Disposition, such cash proceeds shall constitute
Proceeds); and (iv) the principal amount, premium or penalty, if any,
interest and other amounts on any Debt for borrowed money that is secured
by a senior Encumbrance on the asset sold in such Asset Disposition and
that is repaid with such proceeds (other than any such Debt assumed by the
purchaser of such asset);
(b) with respect to any Casualty Event, the cash insurance proceeds,
condemnation awards and other compensation received in respect thereof, net
of all reasonable costs and expenses incurred in connection with the
collection of such proceeds, awards or other compensation in respect of
such Casualty Event.
"Pro Forma" or "pro forma" shall have the meaning set forth in Regulation
S-X of the Securities Act, unless otherwise specifically stated herein.
"Principals" means each of (1) Whitney V, L.P. and (2) CCG Investments
(BVI), L.P.
"Purchase Money Indebtedness" of any Person means any Indebtedness of such
Person to any seller or other Person incurred solely to finance the acquisition
(including in the case of a Capitalized Lease Obligation, the lease),
construction, installation or improvement of any after acquired real or personal
tangible property which, in the reasonable good faith judgment of the Board of
Directors of the Company, is directly related to a Related Business of the
Company and which is incurred substantially concurrent with such acquisition,
construction, installation or improvement and is secured only by the assets so
financed.
"Qualified Capital Stock" means any Capital Stock of the Parent that is not
Disqualified Capital Stock.
"Qualified Equity Offering" means, except in connection with the Merger and
Related Financing Transactions, (i) an underwritten public offering pursuant to
a registration statement filed with the Commission in accordance with the
Securities Act, of Qualified Capital Stock of the Parent, or (ii) an
unregistered offering of Qualified Capital Stock of Parent for cash resulting in
net proceeds to the Parent in excess of $50.0 million, or (iii) a Capital
Contribution to the Parent resulting in net cash proceeds in excess of $50.0
million.
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"Qualified Exchange" means:
(1) any legal defeasance, redemption, retirement, repurchase or other
acquisition of Capital Stock, or Indebtedness of the Parent or Company
issued on or after the Issue Date with the Net Cash Proceeds received by
the Parent or Company from the substantially concurrent sale of its
Qualified Capital Stock (other than to the Parent, the Company, or a
Subsidiary of the Company or the Parent) or, to the extent used to retire
Indebtedness (other than Disqualified Capital Stock) of the Parent or the
Company issued on or after the Issue Date, Refinancing Indebtedness of the
Parent or the Company, or
(2) any issuance of Qualified Capital Stock of the Parent or the
Company in exchange for any Capital Stock or Indebtedness of the Parent or
the Company issued on or after the Issue Date.
"Real Property" means, collectively, all right, title and interest
(including any leasehold estate) in and to any and all parcels of or interests
in real property owned, leased or operated by any person, whether by lease,
license or other means, together with, in each case, all easements,
hereditaments and appurtenances relating thereto, all improvements and
appurtenant fixtures and equipment, all general intangibles and contract rights
and other property and rights incidental to the ownership, lease or operation
thereof.
"Recourse Indebtedness" means Indebtedness (a) as to which either the
Company, the Parent or any Subsidiary of the Company or the Parent (1) provides
credit support of any kind (including any undertaking, agreement or instrument
that would constitute Indebtedness), (2) is directly or indirectly liable (as a
guarantor or otherwise), or (3) constitutes the lender, and (b) a default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company, the Parent or any Subsidiary of the Company or the Parent to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Reference Period" with regard to any Person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is to
be made pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness (including Disqualified
Capital Stock) (a) issued in exchange for, or the proceeds from the issuance and
sale of which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or in part,
or (b) constituting an amendment, modification or supplement to, or a deferral
or renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness (including Disqualified Capital Stock) in a principal amount or, in
the case of Disqualified Capital Stock, liquidation preference, not to exceed
(after deduction of reasonable and customary fees and expenses incurred in
connection with the Refinancing plus the amount of any premium paid in
connection with such Refinancing) the lesser of (1) the principal amount or, in
the case of Disqualified Capital Stock, liquidation preference, of the
Indebtedness (including Disqualified Capital Stock) so Refinanced and (2) if
such Indebtedness being Refinanced was issued with an original issue discount,
the accreted value thereof (as determined in accordance with GAAP) at the time
of such Refinancing; provided, that (A) such Refinancing Indebtedness shall only
be used to refinance outstanding Indebtedness (including Disqualified Capital
Stock) of such Person issuing such Refinancing Indebtedness, (B) such
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness (including Disqualified Capital Stock) to be so refinanced at the
time of such Refinancing and (y) in all respects, be no less contractually
subordinated or junior, if applicable, to the rights of Holders of the Notes
than was the Indebtedness (including Disqualified Capital Stock) to be
refinanced, (C) such Refinancing Indebtedness shall have a final stated maturity
or redemption date, as applicable, no earlier than the final stated maturity or
redemption date, as applicable, of the Indebtedness (including Disqualified
Capital Stock) to be so refinanced or, if sooner, 91 days after the Stated
Maturity of the Notes, and (D) such Refinancing Indebtedness shall be secured
(if secured) in a manner no more adverse to the Holders of the Notes than the
terms of the Liens (if any) securing such refinanced Indebtedness, including,
without limitation, the amount of Indebtedness secured shall not be increased.
146
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Issue Date, by and among the Company and the other parties named
on the signature pages thereof, as such agreement may be amended, modified or
supplemented from time to time.
"Related Business" means the business conducted (or proposed to be
conducted) by Herbalife International, Inc. and its Subsidiaries as of the Issue
Date and any and all businesses that in the good faith judgment of the Board of
Directors of the Company are materially related, ancillary or complementary
businesses.
"Related Business Asset" means assets that the Company determines will be
used in a Related Business.
"Related Financing Transactions" means the financing transactions in
connection with the consummation of the Merger as described in the Offering
Memorandum.
"Related Party" means, with respect to any of the Principals, any Person
who controls, is controlled by or is under common control with such Principal;
provided, that for purposes of this definition "control" means the beneficial
ownership of more than 80% of the total voting power of a Person normally
entitled to vote in the election of directors, managers or trustees, as
applicable of a Person.
"Requirements of Law" means, collectively, any and all requirements of any
Governmental Authority including any and all laws, ordinances, rules,
regulations or similar statutes or case law.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
"Restricted Payment" means, with respect to any Person:
(a) the declaration or payment of any dividend or other distribution
in respect of Equity Interests of such Person or any parent of such Person,
which, for purposes hereof expressly includes the payment of any Monitoring
Fees (or any comparable fees, reimbursements or payments of out-of-pocket
expenses) by such Person to any Person,
(b) any payment (except to the extent with Qualified Capital Stock) on
account of the purchase, redemption or other acquisition or retirement for
value of Equity Interests of such Person or any parent of such Person,
(c) other than with the proceeds from the substantially concurrent
sale of, or in exchange for, Refinancing Indebtedness any purchase,
redemption, or other acquisition or retirement for value of, any payment in
respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, prior to the scheduled
maturity, any scheduled repayment of principal, or scheduled sinking fund
payment, as the case may be, of such Indebtedness, and
(d) any Restricted Investment by such Person;
provided, however, that the term "Restricted Payment" does not include (1) any
dividend, distribution or other payment on or with respect to Equity Interests
of an issuer to the extent payable solely in shares of Qualified Capital Stock
of such issuer, or (2) any dividend, distribution or other payment to the
Company, or to any Guarantor, by the Company, any Subsidiary of the Company or
the Parent, or (3) any Investment in the Company or any Guarantor by the
Company, any Guarantor or any Subsidiary of the Company or the Parent; provided,
that the consideration for such Investment will be received by the Company or
any Guarantor, or (4) the repurchase of Equity Interests deemed to occur upon
the exercise of stock options if such Equity Interests represent a portion of
the exercise price thereof, or (5) the payment of the Merger Consideration and
Related Costs as described in the Offering Memorandum.
"Senior Debt" of the Company or any Guarantor means Indebtedness (including
any obligation in respect of the Credit Agreement, and interest, whether or not
allowable, accruing on Indebtedness incurred pursuant to the Credit Agreement
after the filing of a petition initiating any proceeding under any bankruptcy,
insolvency or similar law) of the Company or such Guarantor arising under the
Credit Agreement or that, by the terms of the instrument creating or evidencing
such Indebtedness, is expressly designated Senior Debt and
147
made senior in right of payment to the Notes or the applicable Guarantee;
provided, that in no event shall Senior Debt include (a) Indebtedness to any
Subsidiary of the Company or the Parent or any officer, director or employee of
the Company or the Parent or any Subsidiary of the Company or the Parent, (b)
Indebtedness incurred in violation of the terms of the Indenture; provided, that
Indebtedness under the Credit Agreement will not cease to be Senior Debt as a
result of this clause (b) if the lenders thereunder obtained a certificate from
an executive officer of the Company on the date such Indebtedness was incurred
certifying that the incurrence of such Indebtedness was not prohibited by the
Indenture, (c) Indebtedness to trade creditors, (d) Disqualified Capital Stock,
(e) Capitalized Lease Obligations, and (f) any liability for taxes owed or owing
by the Company or such Guarantor.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"SL Obligation" means the monetary obligation of a person under (a) a
so-called synthetic, off-balance sheet or tax retention lease, or (b) an
agreement for the use or possession of property creating obligations that do not
appear on the balance sheet of such person but which, upon the insolvency or
bankruptcy of such person, would be characterized as the indebtedness of such
person (without regard to accounting treatment).
"Stated Maturity," when used with respect to any Note, means July 15, 2010.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment by its terms or the terms of
any document or instrument or instrument relating thereto ("contractually") to
the Notes or such Guarantee, as applicable, in any respect.
"Subsidiary," with respect to any Person, means (1) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, and (2) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person, or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof has a majority ownership interest, or (3) a
partnership in which such Person or a Subsidiary of such Person is, at the time,
a general partner and in which such Person, directly or indirectly, at the date
of determination thereof has a majority ownership interest. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Company,
the Parent or of any Subsidiary of the Company or the Parent. Unless the context
requires otherwise, Subsidiary means each direct and indirect Subsidiary of the
Company and the Parent.
"Tax Amounts CPA" means PricewaterhouseCoopers L.L.P. or any other
certified public accounting firm of national reputation. The Tax Amounts CPA
shall reasonably determine for each Tax Determination Year, the Applicable Tax
Rate, the Final Determination Amount, Intercompany Service Receipts,
Intercompany Service Subpart F Income, Tax Amounts Payment and Parent Group Tax
Savings Amount.
"Tax Amounts Payment" means, in respect of any Tax Determination Year, an
amount payable to Tax Amounts Recipients equal to the lesser of (hereinafter
referred to as the "Initial Limitation") (A) the product of (x) the Applicable
Tax Rate and (y) the Intercompany Service Subpart F Income that is (or would be)
includible in the gross income of the Tax Amounts Recipients (assuming, for this
purpose, that each such Tax Amount Recipient is a "United States shareholder" as
defined in section 951(b) of the Code) for such year under section 951(a) of the
Code, (B) the Parent Group Tax Savings Amount for such year, (C) the product of
(x) 6% and (y) the sum of (i) Consolidated Net Income of the Parent Group for
such year, (ii) Consolidated income tax expense for the Parent Group for such
year, and (iii) Tax Amount Payments made to Tax Amounts Recipients during such
year, and (iv) in the case of the fiscal year ending December 31, 2002, the
non-recurring expenses and charges of the Company and Herbalife International,
Inc. related to the Merger and Related Financing Transactions, to the extent
such non-recurring expenses and charges of the Company and Herbalife
International, Inc. related to the merger and Related Financing Transactions
were treated as deductions for purposes of computing Consolidated Net Income for
such year or (D) $10 million. The Initial Limitation shall be reduced (but not
below zero) by any Final Determination Amount in respect of a previous Tax
Determination Year. A Final Determination Amount shall be applied to
148
reduce an Initial Limitation for the Tax Determination Year during which the
Final Determination in respect of such Final Determination Amount occurs. A
Final Determination Amount shall be deemed to be reduced to the extent that such
Final Determination Amount has been applied to reduce an Initial Limitation.
Thereafter, the remaining Final Determination Amount, if any, shall be applied
to reduce the Initial Limitation for each successive Tax Determination Year in
like fashion until such Final Determination Amount has been reduced to zero.
"Tax Amounts Recipient" means, in respect of any Tax Determination Year,
persons who hold capital stock of Holdings on December 31 of such year or, if
earlier, on the last day of such year that Holdings continues to be a
"controlled foreign corporation" as defined under section 957 of the Code.
"Tax Determination Year" means the calendar year (and, in the case of the
2002 calendar year, the relevant portion thereof) in respect of which a Tax
Amounts Recipient is (or would be) required to include in gross income under
section 951(a) of the Code his pro rata share of Intercompany Service Subpart F
Income (assuming for this purpose, that such Tax Amounts Recipient is a "United
States shareholder" as defined in Section 951(b) of the Code).
"UCC" means the Uniform Commercial Code as in effect from time to time in
the State of New York.
"Unrestricted Subsidiary" means any subsidiary of the Company or Parent
that does not directly, indirectly or beneficially own any Capital Stock of, and
Subordinated Indebtedness of, or own or hold any Lien on any property of, the
Company or the Parent or any other Subsidiary of the Company or Parent and that,
at the time of determination, shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company); provided, that such Subsidiary at the
time of such designation (a) has no Recourse Indebtedness; (b) is not party to
any agreement, contract, arrangement or understanding with the Company, Parent
or any Subsidiary of the Company or Parent unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company, Parent or such Subsidiary than those that might be obtained at the time
from Persons who are not Affiliates of the Company; (c) is a Person with respect
to which neither the Company, Parent nor any of Subsidiary of the Company or
Parent has any direct or indirect obligation (x) to subscribe for additional
Equity Interests or (y) to maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified levels of operating
results; and (d) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company, Parent or any Subsidiary of
the Company or Parent. The Board of Directors of the Company may designate any
Unrestricted Subsidiary to be a Subsidiary, provided, that (1) no Default or
Event of Default is existing or will occur as a consequence thereof and (2)
immediately after giving effect to such designation, on a pro forma basis, the
Parent could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Each such designation shall be
evidenced by filing with the Trustee a certified copy of the resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
"U.S. Government Obligations" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
"Voting Equity Interests" means Equity Interests which at the time are
entitled to vote in the election of, as applicable, directors, members or
partners generally.
"Wholly-Owned Subsidiary" means a Subsidiary all the Equity Interests of
which (other than directors' qualifying shares) are owned by the Parent or one
or more Wholly-Owned Subsidiaries of the Parent.
149
FORM AND TRANSFER OF THE NOTES
The Notes sold to qualified institutional buyers initially will be in the
form of one or more registered global notes without interest coupons
(collectively, the "U.S. Global Notes"). Upon issuance, the U.S. Global Notes
will be deposited with the Trustee, as custodian for The Depository Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or its
nominee for credit to the accounts of DTC's Direct and Indirect Participants (as
defined below). The Notes being offered and sold in offshore transactions in
reliance on Regulation S, if any, initially will be in the form of one or more
registered, global book-entry notes without interest coupons (the "Reg S Global
Notes"). The Reg S Global Notes will be deposited with the Trustee, as custodian
for DTC, in New York, New York and registered in the name of a nominee of DTC
for credit to the accounts of Direct Participants and Indirect Participants
(including the Euroclear System ("Euroclear") and Clearstream, Luxembourg
(formerly Cedelbank, "Clearstream, Luxembourg"). During the 40-day period
commencing on the day after the later of the offering and the Issue Date of the
Notes (the "40-Day Restricted Period"), Direct Participants and Indirect
Participants that hold a beneficial interest in the Reg S Global Notes will not
be able to transfer such interest to a person that takes delivery thereof in the
form of an interest in the U.S. Global Notes. After the 40-Day Restricted
Period, (i) beneficial interests in the Reg S Global Notes may be transferred to
a person that takes delivery in the form of an interest in the U.S. Global Notes
and (ii) beneficial interests in the U.S. Global Notes may be transferred to a
person that takes delivery in the form of an interest in the Reg S Global Notes,
provided, in each case, that the certification requirements described below are
complied with. See "-- Transfers of Interests in One Global Note for Interests
in Another Global Note." All registered global notes are referred to herein
collectively as "Global Notes."
Beneficial interests in all Global Notes and all Certificated Notes (as
defined below), if any, will be subject to certain restrictions on transfer and
will bear a restrictive legend as described under "Transfer Restrictions." In
addition, transfer of beneficial interests in any Global Notes will be subject
to the applicable rules and procedures of DTC and its Direct or Indirect
Participants (including, if applicable, those of Euroclear and Clearstream,
Luxembourg), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Participants. The Direct Participants include securities
brokers and dealers (including the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's system is
also available to other entities that clear through or maintain a direct or
indirect, custodial relationship with a Direct Participant (collectively, the
"Indirect Participants"), including Euroclear and Clearstream, Luxembourg. DTC
may hold securities beneficially owned by other persons only through the Direct
Participants or Indirect Participants and such other person's ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participant and/or Indirect Participant and not on the records maintained
by DTC.
DTC has advised us that, pursuant to DTC's procedures, (i) upon deposit of
the Global Notes, DTC will credit the accounts of the Direct Participants
designated by the initial purchasers with portions of the principal amount of
the Global Notes that have been allocated to them by the initial purchasers, and
(ii) DTC will maintain records of the ownership interests of such Direct
Participants in the Global Notes and the transfer of ownership interests by and
between Direct Participants. DTC will not maintain records of the ownership
150
interests of, or the transfer of ownership interests by and between, Indirect
Participants or other owners of beneficial interests in the Global Notes. Direct
Participants and Indirect Participants must maintain their own records of the
ownership interests of, and the transfer of ownership interests by and between,
Indirect Participants and other owners of beneficial interests in the Global
Notes.
Investors in the U.S. Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations that are Direct Participants in DTC. Investors in the Reg
S Global Notes may hold their interests therein directly through DTC if they are
Direct Participants in DTC, indirectly through organizations that have accounts
with Direct Participants, including Euroclear or Clearstream, Luxembourg, or
indirectly through organizations that are participants in Euroclear or
Clearstream, Luxembourg. Morgan Guaranty Trust Company of New York, Brussels
office is the operator and depository of Euroclear and Clearstream Banking S.A.
is the operator and depository of Clearstream, Luxembourg (each a "Nominee" of
Euroclear and Clearstream, Luxembourg, respectively). Therefore, they will each
be recorded on DTC's records as the holders of all ownership interests held by
them on behalf of Euroclear and Clearstream, Luxembourg, respectively. Euroclear
and Clearstream, Luxembourg must maintain on their own records the ownership
interests of, and transfers of ownership interests by and between, their own
customers' securities accounts. DTC will not maintain such records. All
ownership interests in any Global Notes, including those of customers'
securities accounts held through Euroclear or Clearstream, Luxembourg, may be
subject to the procedures and requirements of DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes see "-- Transfers of Interests
in Global Notes for Certificated Notes."
Except as described in "-- Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, we, the Guarantors and the Trustee will
treat the persons in whose names the Notes are registered (including Notes
represented by Global Notes) as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, Liquidated Damages, if any, and interest on Global Notes
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC or its nominee as the registered holder under the Indenture. Consequently,
neither we, the Guarantors, the Trustee nor any agent of ours, the Guarantors or
the Trustee has or will have any responsibility or liability for (i) any aspect
of DTC's records or any Direct Participant's or Indirect Participant's records
relating to or payments made on account of beneficial ownership interests in the
Global Notes or for maintaining, supervising or reviewing any of DTC's records
or any Direct Participant's or Indirect Participant's records relating to the
beneficial ownership interests in any Global Note or (ii) any other matter
relating to the actions and practices of DTC or any of its Direct Participants
or Indirect Participants.
DTC has advised us that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the Notes
is to credit the accounts of the relevant Direct Participants with such payment
on the payment date in amounts proportionate to such Direct Participant's
respective ownership interests in the Global Notes as shown on DTC's records.
Payments by Direct Participants and Indirect Participants to the beneficial
owners of the Notes will be governed by standing instructions and customary
practices between them and will not be the responsibility of DTC, the Trustee,
us or the Guarantors. None of we, the Guarantors or the Trustee will be liable
for any delay by DTC or its Direct Participants or Indirect Participants in
identifying the beneficial owners of the Notes, and we and the Trustee may
conclusively rely on
151
and will be protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or Clearstream, Luxembourg)
who hold an interest through a Direct Participant will be effected in accordance
with the procedures of such Direct Participant but generally will settle in
immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and Clearstream, Luxembourg
will be effected in the ordinary way in accordance with their respective rules
and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes described herein, crossmarket transfers between Direct Participants in
DTC, on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or Clearstream, Luxembourg, on the other hand, will be
effected by Euroclear's or Clearstream, Luxembourg's respective Nominee through
DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream,
Luxembourg; however, delivery of instructions relating to cross-market
transactions must be made directly to Euroclear or Clearstream, Luxembourg, as
the case may be, by the counterparty in accordance with the rules and procedures
of Euroclear or Clearstream, Luxembourg and within their established deadlines.
Indirect Participants who hold interests in the Notes through Euroclear and
Clearstream, Luxembourg may not deliver instructions directly to Euroclear's or
Clearstream Luxembourg's Nominee. Euroclear or Clearstream, Luxembourg will, if
the transaction meets its settlement requirements, deliver instructions to its
respective Nominee to deliver or receive interests on Euroclear's or
Clearstream, Luxembourg's behalf in the relevant Global Note in DTC, and make or
receive payment in accordance with normal procedures for same-day fund
settlement applicable to DTC.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or Clearstream,
Luxembourg purchasing an interest in a Global Note from a Direct Participant in
DTC will be credited, and any such crediting will be reported to Euroclear or
Clearstream, Luxembourg during the European business day immediately following
the settlement date of DTC in New York. Although recorded in DTC's accounting
records as of DTC's settlement date in New York, Euroclear and Clearstream,
Luxembourg customers will not have access to the cash amount credited to their
accounts as a result of a sale of an interest in a Reg S Global Note to a DTC
Participant until the European business day for Euroclear or Clearstream,
Luxembourg immediately following DTC's settlement date.
DTC has advised us that it will take any action permitted to be taken by a
holder of Notes only at the direction of one or more Direct Participants to
whose account interests in the Global Notes are credited and only in respect of
such portion of the aggregate principal amount of the Notes as to which such
Direct Participant or Direct Participants has or have given direction. However,
if there is an Event of Default under the Notes, DTC reserves the right to
exchange Global Notes (without the direction of one or more of its Direct
Participants) for legended Notes in certificated form, and to distribute such
certificated forms of Notes to its Direct Participants. See "-- Transfers of
Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and Clearstream, Luxembourg have agreed to the
foregoing procedures to facilitate transfers of interests in the Reg S Global
Notes and in the U.S. Global Notes among Direct Participants, including
Euroclear and Clearstream, Luxembourg, they are under no obligation to perform
or to continue to perform such procedures, and such procedures may be
discontinued at any time. None of we, the Guarantors, the Initial Purchasers or
the Trustee shall have any responsibility for the performance by DTC, Euroclear
or Clearstream, Luxembourg or their respective Direct and Indirect Participants
of their respective obligations under the rules and procedures governing any of
their operations.
The information in this section concerning DTC, Euroclear and Clearstream,
Luxembourg and their book-entry systems has been obtained from sources that we
believe to be reliable, but we take no responsibility for the accuracy thereof.
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TRANSFERS OF INTERESTS IN ONE GLOBAL NOTE FOR INTERESTS IN ANOTHER GLOBAL NOTE
Prior to the expiration of the 40-Day Restricted Period, a Direct or an
Indirect Participant who holds an interest in a Reg S Global Note will not be
permitted to transfer its interest to a U.S. Person who takes delivery in the
form of an interest in the U.S. Global Notes. After the expiration of the 40-Day
Restricted Period, a Direct or an Indirect Participant who holds an interest in
a Reg S Global Note will be permitted to transfer its interest to a U.S. Person
who takes delivery in the form of an interest in the U.S. Global Notes only upon
receipt by the Trustee of a written certification from the transferor to the
effect that such transfer is being made in accordance with the restrictions on
transfer set forth under "Transfer Restrictions" and set forth in the legend
printed on the Reg S Global Notes.
Prior to the expiration of the 40-Day Restricted Period, a Direct or an
Indirect Participant who holds an interest in a U.S. Global Note will not be
permitted to transfer its interest to any person that takes delivery in the form
of an interest in the Reg S Global Notes. After the expiration of the 40-Day
Restricted Period, a Direct or an Indirect Participant who holds an interest in
a U.S. Global Note will be permitted to transfer its interest to a person who
takes delivery in the form of an interest in the Reg S Global Notes only upon
receipt by the Trustee of a written certification from the transferor to the
effect that such transfer is being made in accordance with Rule 904 of
Regulation S.
Transfers involving an exchange of a beneficial interest in Reg S Global
Notes for a beneficial interest in U.S. Global Notes or vice versa will be
effected by DTC by means of an instruction originated by the Trustee through the
DTC's Deposit/Withdraw at Custodian (DWAC) system. Accordingly, in connection
with such transfer, appropriate adjustments will be made to reflect a decrease
in the principal amount of the one Global Note and a corresponding increase in
the principal amount of the other Global Note, as applicable. Any beneficial
interest in the one Global Note that is transferred to a person who takes
delivery in the form of the other Global Note will, upon transfer, cease to be
an interest in such first Global Note and become an interest in such other
Global Note and, accordingly, will thereafter be subject to all transfer
restrictions and other procedures applicable to beneficial interests in such
other Global Note for as long as it remains such an interest.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies us that it is unwilling or unable to continue as depositary for the
Global Notes and we thereupon fail to appoint a successor depositary within 90
days or (y) has ceased to be a clearing agency registered under the Exchange
Act, (ii) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of Certified Notes or (iii) upon the request of the Trustee
or Holders of a majority of the outstanding principal amount of the Notes, after
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, we will notify the Trustee in
writing that, upon surrender by the Direct and Indirect Participants of their
interest in such Global Note, Certificated Notes will be issued to each person
that such Direct and Indirect Participants and DTC identify as being the
beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in "Transfer Restrictions," unless we determine
otherwise in compliance with applicable law. None of we, the Guarantors or the
Trustee will be liable for any delay by the holder of any Global Note or DTC in
identifying the beneficial owners of Notes, and we and the Trustee may
conclusively rely on, and will be protected in relying on, instructions from the
holder of the Global Note or DTC for all purposes.
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TRANSFERS OF CERTIFICATED NOTES FOR INTERESTS IN GLOBAL NOTES
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate (and, in certain circumstances, an opinion
of counsel) confirming that, in connection with such transfer, it has complied
with the restrictions on transfer described under "Transfer Restrictions."
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, we will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available same day funds to the accounts specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address. We expect that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences to beneficial owners arising from the exchange offer and the
ownership and disposition of the Series B Notes. The discussion is based on
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), its
legislative history, judicial authority, current administrative rulings and
practice, and existing and proposed Treasury Regulations, all as in effect and
existing on the date hereof. Legislative, judicial or administrative changes or
interpretations after the date hereof could alter or modify the validity of the
statements and conclusions set forth below, may be retroactive and could
adversely affect a beneficial owner of the Notes.
The discussion which follows is intended as a descriptive summary only and
is not intended as tax advice to any particular investor. This summary is not a
complete analysis or listing of all potential U.S. federal income tax
consequences and does not address the effect of any U.S. gift, estate, state or
local tax law or foreign tax law on a potential investor in the Notes. The
actual tax consequences will vary depending upon the particular circumstances of
each prospective investor.
For purposes of this summary, a U.S. Holder is a beneficial owner of the
Series A Notes or the Series B Notes who is, for U.S. federal income tax
purposes:
- a citizen or resident of the U.S.;
- a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the U.S. or any state thereof,
including the District of Columbia;
- an estate the income of which is subject to U.S. federal income tax
regardless of its source; or
- a trust if a court within the U.S. is able to exercise primary
supervision over its administration and one or more U.S. persons have
authority to control all substantial decisions of the trust.
If a partnership (including an entity taxable as a partnership for U.S.
federal income tax purposes) holds the Series A Notes or the Series B Notes, the
tax consequences of a partner will generally depend upon the status of the
partner and upon the activities of the partnership. A prospective investor who
is a partner of a partnership holding the Series A Notes or the Series B Notes
should consult its own tax advisor. A "Non-U.S. Holder" is a beneficial owner of
the Series A Notes or the Series B Notes that is not a U.S. Holder.
This summary is generally limited to investors that will hold the Notes as
"capital assets" within the meaning of Section 1221 of the Code, whose
functional currency is the U.S. Dollar and who are investors who exchange the
Series A Notes for the Series B Notes in the exchange offer. This summary does
not address the tax treatment of investors that may be subject to special income
and withholding tax rules including, without limitation:
- insurance companies;
- tax-exempt organizations;
- pension funds;
- banks or other financial institutions;
- U.S. expatriates;
- holders subject to the alternative minimum tax;
- broker-dealers;
- dealers or traders in currencies or securities; and
- holders who hold the Notes as a hedge against currency risks, as a
position in a "straddle" for tax purposes, or as part of a conversion or
other integrated transaction.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE
UNITED STATES OR OTHER TAX CONSEQUENCES OF AN INVESTMENT IN THE NOTES, INCLUDING
THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of the Series A Notes for the Series B Notes pursuant to the
exchange offer will not constitute a taxable exchange for U.S. federal income
tax purposes. Accordingly, a holder of a Series A Note will not recognize gain
or loss on the receipt of a Series B Note pursuant to the exchange offer. A
holder's holding period for the Series B Notes will include the holding period
of the Series A Notes exchanged therefore and such holder's adjusted basis in
the Series B Notes received will equal the basis of the Series A Notes exchanged
therefore immediately before the exchange.
TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST
You will be subject to tax on any interest on your Series B Note as
ordinary income at the time you receive the interest or when it accrues,
depending on your method of accounting for tax purposes.
SALE, EXCHANGE, RETIREMENT OR OTHER DISPOSITION OF A NOTE
Your tax basis in your Note will generally be the cost of your Note.
Upon the sale, exchange, retirement or other disposition of a Note, you
will generally recognize gain or loss equal to the difference between the amount
realized on such disposition and your tax basis in your Note.
Gain or loss recognized on the sale, exchange, retirement or other
disposition of a Note generally will be capital gain or loss (except to the
extent attributable to accrued but unpaid interest). Net capital gains derived
with respect to capital assets held for more than one year are eligible for
reduced rates of taxation. Certain limitations exist on the deductibility of
capital losses by both corporations and individual taxpayers.
TAXATION OF NON-U.S. HOLDERS
PAYMENTS OF INTEREST
Subject to the discussion concerning backup withholding below, you
generally will not be subject to U.S. federal income tax on interest on the Note
if the interest qualifies as "portfolio interest". Interest that you receive on
the Notes will qualify as "portfolio interest" if: (i) you do not actually or
constructively own 10% or more of the total combined voting power of all our
classes of stock entitled to vote, (ii) you are not a controlled foreign
corporation that is related to us through stock ownership, (iii) you are not a
bank receiving the interest on a loan made in the ordinary course of your
business as a bank and (iv) you provide a certification to us, made under
penalties of perjury, that you are not a U.S. person and the certificate
provides the name and address of the beneficial holder of the Note.
If you receive payments of interest on a Note that are not "U.S. trade or
business income" and the interest does not qualify as portfolio interest, these
payments will be subject to withholding tax at a rate of 30% unless you are a
beneficiary of an income tax treaty that reduces or eliminates this withholding.
For purposes of this summary "U.S. trade or business income" is income or gain
that is (i) effectively connected with the conduct of a trade or business of the
non-U.S. Holder in the United States or (ii) attributable to a permanent
establishment or to a fixed base in the United States, if the non-U.S. Holder is
the beneficiary of an applicable income treaty that so provides.
If you receive payments of interest on a Note that are U.S. trade or
business income, these payments will not be subject to withholding. Instead, you
will be subject to tax on these payments at regular graduated U.S. federal
income tax rates. Corporate non-U.S. Holders who recognize U.S. trade or
business income on payments of interest on a Note will generally also be subject
to branch profits tax at a 30% rate on gain realized on these payments, unless
this tax is reduced or eliminated by an applicable income tax treaty.
If you wish to claim the benefits of an applicable income tax treaty that
reduces or eliminates the rate of withholding tax on interest payments on your
Notes or if you wish to claim exemption from withholding on payments of interest
because these payments are U.S. trade or business income, you must provide a
properly-
156
executed IRS Form W-8BEN or W-8ECI (or the appropriate successor forms) prior to
the payment of interest on your Note.
SALE, EXCHANGE, RETIREMENT OR OTHER DISPOSITION OF A NOTE
Generally, non-U.S. Holders will not be subject to U.S. federal income tax
on gain realized on a sale, exchange, retirement or other disposition of a Note.
However, non-U.S. Holders who are individuals and who are present for 183 days
or more in the year in which they sell, exchange, retire or otherwise dispose of
their Note and non-U.S. Holders who recognize U.S. trade or business income on a
sale, exchange, retirement or other disposition of their Note generally will be
subject to U.S. federal income tax on any gain realized. Gain or loss realized
on a disposition of a Note by a non-U.S. Holder will generally equal the
difference between the amount realized on the disposition and the non-U.S.
Holder's tax basis in the Note. A non-U.S. Holder's tax basis in a Note will
generally equal the cost of the Note to the non-U.S. Holder. Gain realized will
be capital gain or loss. Capital gains realized by non-corporate holders that
are U.S. trade or business income on property held for more than one year are
subject to reduced rates of taxation. The deductibility of capital losses is
subject to limitations.
Corporate non-U.S. Holders who recognize U.S. trade or business income on a
sale, exchange, retirement or other disposition of their Note will generally
also be subject to branch profits tax at a 30% rate on gain realized on
disposition of a Note, unless this tax is reduced or eliminated by an applicable
income tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Code generally requires annual "information reporting" to the IRS and
to each holder of a Note and "backup withholding" with respect to certain
payments on the Notes.
In general, if you are a non-corporate U.S. Holder, we and other payors are
required to report to the IRS all payments of principal, and interest on your
Note. In addition, we and other payors are required to report to the IRS any
payment of proceeds of the sale of your Note before maturity within the United
States. Additionally, backup withholding will apply to any payments, if you fail
to provide an accurate taxpayer identification number, or you are notified by
the IRS that you have failed to report all interest and dividends required to be
shown on your federal income tax returns.
A non-U.S. Holder generally will not be subject to information reporting
and backup withholding with respect to payments made by U.S. payors provided
that the non-U.S. Holder furnishes to the payor (i) an appropriate IRS Form W-8
BEN, or acceptable substitute form, upon which the holder certifies to its non-
U.S. status or (ii) other documentation upon which the payor may rely to treat
the payments as made to a non-U.S. person in accordance with U.S. Treasury
Regulations or the non-U.S. Holder otherwise establishes an exemption.
157
ERISA CONSIDERATIONS
If you intend to use plan assets to exchange for any of the Series B Notes
offered by this prospectus, you should consult with counsel on the potential
consequences of your investment under the fiduciary responsibility and
prohibited transaction provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and the prohibited transaction provisions of the
Code. If you intend to use governmental or church plan assets to exchange for
any of the Series B Notes, you should consult with counsel on the potential
consequences of your investment under similar provisions applicable under laws
governing governmental and church plans.
The following summary is based on the provisions of ERISA and the Code and
related guidance in effect as of the date of this prospectus. This summary does
not attempt to be a complete summary of these considerations. Future
legislation, court decisions, administrative regulations or other guidance will
change the requirements summarized in this section. Any of these changes could
be made retroactively and could apply to transactions entered into before the
change is enacted.
FIDUCIARY RESPONSIBILITIES
ERISA imposes requirements on (1) employee benefit plans subject to ERISA,
(2) entities whose underlying assets include employee benefit plan assets, for
example, collective investment funds and insurance company general accounts, and
(3) fiduciaries of employee benefit plans. Under ERISA, fiduciaries generally
include persons who exercise discretionary authority or control over plan
assets. Before using any employee benefit plan assets to exchange for any of the
Series B Notes offered in connection with this prospectus, you should determine
whether the investment:
(1) is permitted under the plan document and other instruments
governing the plan; and
(2) is appropriate for the plan in view of its overall investment
policy and the composition and diversification of its portfolio, taking
into account the limited liquidity of the Series B Notes.
You should consider all factors and circumstances of a particular
investment in the Notes, including, for example, the risk factors discussed in
"Risk Factors" and the fact that in the future there may not be a market in
which you will be able to sell or otherwise dispose of your interest in the
Series B Notes.
We are not making any representation that the exchange for Series B Notes
under a plan meets the fiduciary requirements for investment by plans generally
or any particular plan or that such an investment is appropriate for plans
generally or any particular plan.
PROHIBITED TRANSACTIONS
ERISA and the Code prohibit a wide range of transactions involving (1)
employee benefit plans and arrangements subject to ERISA and/or the Code, and
(2) persons who have specified relationships to the plans. These persons are
called "parties in interest" under ERISA and "disqualified persons" under the
Code. The transactions prohibited by ERISA and the Code are called "prohibited
transactions." If you are a party in interest or disqualified person who engages
in a prohibited transaction, you may be subject to excise taxes and other
penalties and liabilities under ERISA and/or the Code. As a result, if you are
considering using plan assets to exchange for any of the Series B Notes offered
by this prospectus, you should consider whether the investment might be a
prohibited transaction under ERISA and/or the Code.
Prohibited transactions may arise, for example, if the exchange under a
plan with respect to which we, or any of our affiliates, are a party in interest
or a disqualified person. Exemptions from the prohibited transaction provisions
of ERISA and the Code may apply depending in part on the type of plan fiduciary
making the decision to exchange and the circumstances under which such decision
is made. Some of these exemptions include:
(1) Prohibited transaction class exemption or "PTCE" exemptions 75-1
(relating to specified transactions involving employee benefit plans and
broker-dealers, reporting dealers and banks);
158
(2) PTCE 84-14 (relating to specified transactions directed by
independent qualified professional asset managers);
(3) PTCE 90-1 (relating to specified transactions involving insurance
company pooled separate accounts);
(4) PTCE 91-38 (relating to specified transactions by bank collective
investment funds);
(5) PTCE 95-60 (relating to specified transactions involving insurance
company general accounts); and
(6) PTCE 96-23 (relating to specified transactions directed by
in-house asset managers).
These exemptions do not, however, provide relief from the self-dealing
prohibitions under ERISA and the Code. In addition, there is no assurance that
any of these class exemptions or other exemption will be available with respect
to any particular transaction involving the exchange.
TREATMENT OF NOTES AS DEBT INSTRUMENTS
Some transactions involving our operation could give rise to prohibited
transactions under ERISA and the Code if our assets were deemed to be plan
assets. Pursuant to Department of Labor Regulations Section 2510.3-101 (which we
refer to as the "plan assets regulations"), in general, when a plan acquires an
"equity interest" in an entity such as Herbalife International, Inc., the plan's
assets include both the equity interest and an undivided interest in each of the
underlying assets of the entity unless exceptions set forth in the plan assets
regulations apply.
In general, an "equity interest" is defined under the plan assets
regulations as any interest in an entity other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. Although there is very little published authority concerning
the application of this definition, we believe that the Notes should be treated
as debt rather than equity interest under the plan assets regulations because
the Notes (1) should be treated as indebtedness under applicable local law and
debt, rather than equity, for United States tax purposes and (2) should not be
deemed to have any "substantial equity features." However, no assurance can be
given that the Notes will be treated as debt for purposes of ERISA. If the Notes
were to be treated as an equity interest under the plan assets regulations, the
purchase of the Notes using plan assets could cause our assets to become subject
to the fiduciary and prohibited transaction provisions of ERISA and the Code
unless investment in the Notes by "benefit plan investors" is not "significant,"
as determined under the plan assets regulations. We cannot assure you that the
criteria for this exception will be satisfied at any particular time and no
monitoring or other measures will be taken to determine whether such criteria
are met. This means that, if the Notes are treated as equity interests under the
plan asset regulations and investment in the Notes by benefit plan investors is
significant, our assets could be treated as the plan assets subject to ERISA and
a non-exempt prohibited transaction could arise in connection with our operating
activities.
Any insurance company proposing to invest assets of its general account in
the Notes should consider the implications of the U.S. Supreme Court's decision
in John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510
U.S. 86, 114 S. Ct. 517 (1993), which, in some circumstances, treats such
general account as including the assets of a plan that owns a policy or other
contract with such insurance company, as well as the effect of Section 401 of
ERISA, as interpreted by regulations issued by the Department of Labor.
GOVERNMENT AND CHURCH PLANS
Governmental plans and some church plans, while not subject to the
fiduciary responsibility provisions of ERISA or the prohibited transactions
provisions of ERISA or the Code, may be subject to state or other federal laws
that are very similar to the provisions of ERISA and the Code. If you are a
fiduciary of a governmental or church plan, you should consult with counsel
before purchasing any Notes offered for sale in connection with this prospectus.
159
FOREIGN INDICIA OF OWNERSHIP
ERISA also prohibits plan fiduciaries from maintaining the indicia of
ownership of any plan assets outside the jurisdiction of the United States
district courts except in specified cases. Before investing in any Note offered
for sale in connection with this prospectus, you should consider whether the
acquisition, holding or disposition of Notes would satisfy such indicia of
ownership rules.
REPRESENTATIONS AND WARRANTIES
If you acquire or accept Notes offered in connection with this prospectus,
you will be deemed to have represented and warranted that either:
(1) you have not used plan assets to acquire such Note; or
(2) your acquisition and holding of a Note (A) is exempt from the
prohibited transaction restrictions of ERISA and the Code under one or more
prohibited transaction class exemptions or does not constitute a prohibited
transaction under ERISA and the Code, and (B) meets the fiduciary
requirements of ERISA.
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PLAN OF DISTRIBUTION
We are not using any underwriters for this exchange offer. We are also
bearing the expenses of the exchange.
Based on interpretations by the staff of the SEC set forth in no action
letters issued to third parties, we believe that you may transfer Series B Notes
issued under the exchange offer in exchange for Series A Notes unless you are:
- our "affiliate" within the meaning of Rule 405 under the Securities Act;
- a broker-dealer that acquired Series A Notes directly from us; or
- a broker-dealer that acquired Series A Notes as a result of market-making
or other trading activities without compliance with the registration and
prospectus delivery provisions of the Securities Act;
provided that you acquire the Series B Notes in the ordinary course of your
business and you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of the Series B Notes. Broker-dealers receiving Series B Notes in the exchange
offer will be subject to a prospectus delivery requirement with respect to
resales of the Series B Notes.
To date, the staff of the SEC has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the Series
A Notes, with the prospectus contained in the exchange offer registration
statement.
Pursuant to the Registration Agreement, each broker-dealer that receives
Series B Notes for its own account pursuant to the exchange offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Series B Notes. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Series B Notes received in exchange for Series A Notes where such Series A Notes
were acquired as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the expiration
date, we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
March 5, 2003, all dealers effecting transactions in the Series B Notes may be
required to deliver a prospectus.
We will not receive any proceeds from any sale of Series B Notes by
broker-dealers. Series B Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Series B Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Series B Notes. Any broker-dealer
that resells Series B Notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such Series B Notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of Series B
Notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the Notes), other than
commissions or concessions of any brokers or dealers, and will indemnify the
holders of the Notes (including any broker-dealers) against specified
liabilities, including liabilities under the Securities Act.
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VALIDITY OF THE SECURITIES
The validity of the Series B Notes will be passed upon by our special
counsel, Chadbourne & Parke LLP, New York, New York. Certain legal matters with
respect to Nevada will be passed upon for us by Marshall Hill Cassas & de
Lipkau, Reno, Nevada. Certain legal matters with respect to California law will
be passed upon for us by Irell & Manella, Los Angeles, California. Certain legal
matters with respect to Delaware law will be passed upon for us by Morris,
Nichols, Arsht & Tunnell, Wilmington, Delaware. Certain legal matters with
respect to Cayman Islands law will be passed upon for us by Maples & Calder,
Grand Cayman, Cayman Islands. Certain legal matters with respect to Luxembourg
law will be passed upon for us by Bonn Schmitt Steichen, Luxembourg. Certain
legal matters with respect to Brazilian law will be passed upon for us by Corvo
Advogados, Sao Paulo, Brazil. Certain legal matters with respect to English law
will be passed upon for us by Chadbourne & Parke, a Multinational Partnership,
London, England. Certain legal matters with respect to Finnish law will be
passed upon for us by Hannes Snellman, Helsinki, Finland. Certain legal matters
with respect to Israeli law will be passed upon for us by Herzog, Fox & Neeman,
Tel Aviv, Israel. Certain legal matters with respect to Japanese law will be
passed upon for us by Tomotsune & Kimura, Tokyo, Japan. Certain legal matters
with respect to Mexican law will be passed upon for us by Bufete Carrillo
Gamboa, S.C., Mexico City, Mexico. Certain legal matters with respect to Swedish
law will be passed upon for us by Manneheimer Swartling, Stockholm, Sweden.
Certain partners of Chadbourne & Parke LLP own limited partnership interests in
Whitney Strategic Partners V, L.P., the fair market value of which in the
aggregate exceeds $60,000. Whitney Strategic Partners V, L.P. is a beneficial
owner of preferred shares of WH Holdings.
EXPERTS
The financial statements of Herbalife International, Inc. and subsidiaries
as of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001, included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of WH Intermediate Holdings Ltd. and subsidiaries
as of July 5, 2002 and for the period from May 23, 2002 (date of inception) to
July 5, 2002, included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We currently voluntarily file reports and other information under Section
15(d) of the Securities Exchange Act of 1934. The reports and other information
can be inspected and copied at the public reference facilities that the SEC
maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 or at their
facilities in New York and Chicago. Please call the SEC at (800) 732-0330 for
further information on the operation of the public reference rooms. The SEC also
maintains a website at http://www.sec.gov, which contains reports and other
information regarding registrants that file electronically with the SEC. We have
agreed that, whether or not we are required to do so by the rules and
regulations of the SEC, for so long as any of the Notes remain outstanding, we
will furnish to the holders of the Notes and file with the SEC, unless the SEC
will not accept the filing, all quarterly and annual financial information that
would be required to be contained in a filing with the SEC on Forms 10-Q and
10-K if we were required to file those forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report by our certified
independent accountants.
162
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
HERBALIFE INTERNATIONAL, INC. ----
Independent Auditors' Report for Herbalife International,
Inc. ..................................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
December 31, 2001......................................... F-3
Consolidated Statements of Income for the Years ended
December 31, 1999, 2000 and 2001.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years ended December 31, 1999, 2000 and 2001...... F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 2000 and 2001.......................... F-6
Notes to Consolidated Financial Statements for the Years
ended December 31, 1999, 2000 and 2001.................... F-7
WH INTERMEDIATE HOLDINGS LTD.
Independent Auditors' Report for WH Intermediate Holdings
Ltd. ..................................................... F-35
Consolidated Balance Sheet as of July 5, 2002............... F-36
Consolidated Statement of Operations for the Period ended
July 5, 2002.............................................. F-37
Consolidated Statement of Stockholder's Deficiency for the
Period ended July 5, 2002................................. F-38
Consolidated Statement of Cash Flows........................ F-39
Notes to Consolidated Financial Statements for the Period
ended July 5, 2002........................................ F-40
WH INTERMEDIATE HOLDINGS LTD.
Consolidated Balance Sheets as of December 31, 2001 and
September 30, 2002 (unaudited)............................ F-44
Consolidated Statements of Income for the one month period
ended July 31, 2002, the two month period ended September
30, 2002, the seven month period ended July 31, 2002, and
the three and nine month periods ended September 30, 2001
(unaudited)............................................... F-46
Consolidated Statements of Cash Flows for the seven month
period ended July 31, 2002, the two month period ended
September 30, 2002 and the nine month period ended
September 30, 2001 (unaudited)............................ F-47
Notes to Consolidated Financial Statements for the seven
months ended July 31, 2002, the two months ended September
30, 2002 and the nine months ended September 30, 2001
(unaudited)............................................... F-48
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Herbalife International, Inc.:
We have audited the accompanying consolidated balance sheets of Herbalife
International, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
2001, 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, 2001. 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 the Company as of December 31,
2000 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 19, 2002 (May 21, 2002 as to Note 11; November 11, 2002 as to Note 16)
F-2
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------------
NOTES 2000 2001
------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... 2 $110,336,000 $179,237,000
Marketable securities....................................... 2 29,914,000 21,944,000
Receivables, net of allowance for doubtful accounts of
$3,968,000 and $1,466,000 at December 31, 2000 and
December 31, 2001, respectively, including related party
receivables of $1,950,000 and $736,000 at December 31,
2000 and December 31, 2001, respectively.................. 2,6,8 24,600,000 27,609,000
Inventories................................................. 2,3 99,332,000 72,208,000
Prepaid expenses and other current assets................... 8,788,000 14,379,000
Deferred income taxes....................................... 2,13 28,459,000 27,741,000
------------ ------------
Total current assets.................................... 301,429,000 343,118,000
------------ ------------
PROPERTY at cost............................................ 2,5
Furniture and fixtures...................................... 18,585,000 18,900,000
Equipment................................................... 78,468,000 90,440,000
Leasehold improvements...................................... 29,646,000 32,393,000
------------ ------------
126,699,000 141,733,000
Less accumulated depreciation and amortization.............. (65,049,000) (81,026,000)
------------ ------------
61,650,000 60,707,000
------------ ------------
DEFERRED COMPENSATION ASSETS................................ 6,7 31,313,000 43,221,000
OTHER ASSETS including related party receivables of $91,000
at December 31, 2000...................................... 8 6,527,000 3,172,000
DEFERRED INCOME TAXES....................................... 2,13 13,077,000 16,831,000
GOODWILL net of accumulated amortization of $1,946,000 and
$2,119,000 at December 31, 2000 and December 31, 2001,
respectively.............................................. 2 2,941,000 3,286,000
------------ ------------
TOTAL................................................... $416,937,000 $470,335,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ 2 $ 18,791,000 $ 19,793,000
Royalty overrides........................................... 2 68,996,000 58,202,000
Accrued compensation........................................ 17,458,000 22,712,000
Accrued expenses............................................ 28,375,000 36,203,000
Dividends payable........................................... 4,372,000 4,720,000
Current portion of contracts payable and bank loans......... 4,5 7,013,000 9,395,000
Advance sales deposits...................................... 2 6,175,000 5,800,000
Income taxes payable........................................ 2,9,13 5,038,000 8,480,000
------------ ------------
Total current liabilities............................... 156,218,000 165,305,000
------------ ------------
NON-CURRENT LIABILITIES:
Contracts payable, net of current portion................... 4,5 1,404,000 1,217,000
Deferred compensation liability............................. 6,7 28,964,000 35,678,000
Other non-current liabilities............................... 5,732,000 5,548,000
------------ ------------
Total liabilities....................................... 192,318,000 207,748,000
------------ ------------
MINORITY INTEREST........................................... 2,8 2,218,000 1,671,000
------------ ------------
COMMITMENTS AND CONTINGENCIES............................... 5,6,7,9
STOCKHOLDERS' EQUITY:....................................... 10
Class A Common Stock, $0.01 par value; 33,333,333 shares
authorized, 10,150,666, and 11,212,696 shares issued and
outstanding at December 31, 2000 and December 31, 2001,
respectively.............................................. 102,000 112,000
Class B Common Stock, $0.01 par value; 66,666,667 shares
authorized, and 18,994,447 and 20,293,759 shares issued
and outstanding at December 31, 2000 and December 31,
2001, respectively........................................ 190,000 203,000
Paid-in capital in excess of par value...................... 58,860,000 77,717,000
Retained earnings........................................... 170,259,000 194,415,000
Accumulated other comprehensive loss........................ 2,12 (7,010,000) (11,531,000)
------------ ------------
Total stockholders' equity.............................. 222,401,000 260,916,000
------------ ------------
TOTAL................................................... $416,937,000 $470,335,000
============ ============
</Table>
See the accompanying notes to consolidated financial statements
F-3
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------
NOTES 1999 2000 2001
------ -------------- -------------- --------------
Retail sales.......................... 2 $1,793,508,000 $1,764,851,000 $1,656,168,000
Less -- distributor allowances on
product purchases................... 2 837,283,000 820,723,000 774,513,000
Handling and freight income........... 142,660,000 141,356,000 138,475,000
-------------- -------------- --------------
Net sales............................. 2 1,098,885,000 1,085,484,000 1,020,130,000
Cost of sales......................... 8 264,909,000 268,992,000 241,522,000
Royalty overrides..................... 2 397,143,000 382,322,000 355,225,000
Marketing, distribution and
administrative expenses............. 2,12 344,260,000 363,731,000 354,608,000
Buy-out transaction expenses.......... -- 9,498,000 --
Interest income -- net................ 1,750,000 2,354,000 3,413,000
-------------- -------------- --------------
Income before income taxes and
minority interest................... 94,323,000 63,295,000 72,188,000
Income taxes.......................... 2,9,13 36,314,000 25,318,000 28,875,000
-------------- -------------- --------------
Income before minority interest....... 58,009,000 37,977,000 43,313,000
Minority interest..................... 2,8 1,086,000 1,058,000 725,000
-------------- -------------- --------------
NET INCOME............................ $ 56,923,000 $ 36,919,000 $ 42,588,000
============== ============== ==============
EARNINGS PER SHARE.................... 2,10
Basic............................... $ 1.99 $ 1.28 $ 1.40
Diluted............................. $ 1.86 $ 1.22 $ 1.36
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic............................... 28,603,000 28,827,000 30,422,000
Dilutive effect of stock options.... 1,976,000 1,526,000 828,000
-------------- -------------- --------------
Diluted............................. 30,579,000 30,353,000 31,250,000
============== ============== ==============
</Table>
See the accompanying notes to consolidated financial statements
F-4
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
PAID IN ACCUMULATED
CAPITAL IN OTHER TOTAL
COMMON COMMON EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK A STOCK B PAR VALUE EARNINGS INCOME EQUITY INCOME
-------- -------- ----------- ------------ ------------- ------------- -------------
Balance at January 1, 1999..... $100,000 $186,000 $54,823,000 $110,941,000 $ (2,239,000) $163,811,000
Issuance of 21,831 shares of
Class A Common Stock and
46,663 Shares of Class B
Common Stock under the 1991
Stock Option Plan & other.... 1,000 469,000 (1,000) 469,000
Additional capital from tax
benefit of 1991 stock option
plan......................... 98,000 98,000
Net income..................... 56,923,000 56,923,000 $56,923,000
Translation adjustments........ 2,477,000 2,477,000 2,477,000
Unrealized loss on marketable
securities................... (25,000) (25,000) (25,000)
-----------
Total comprehensive income..... $59,375,000
===========
Cash dividends declared........ (17,151,000) (17,151,000)
-------- -------- ----------- ------------ ------------ ------------
Balance at December 31, 1999... $100,000 $187,000 $55,390,000 $150,712,000 $ 213,000 $206,602,000
Issuance of 148,328 shares of
Class A Common Stock and
344,711 Shares of Class B
Common Stock under the 1991
Stock Option Plan & other.... 2,000 3,000 3,403,000 (14,000) 3,394,000
Additional capital from tax
benefit of 1991 stock option
plan......................... 67,000 67,000
Net income..................... 36,919,000 36,919,000 $36,919,000
Translation adjustments........ (7,229,000) (7,229,000) (7,229,000)
Unrealized gain on marketable
securities................... 6,000 6,000 6,000
-----------
Total comprehensive income..... $29,696,000
===========
Cash dividends declared........ (17,358,000) (17,358,000)
-------- -------- ----------- ------------ ------------ ------------
Balance at December 31, 2000... $102,000 $190,000 $58,860,000 $170,259,000 $ (7,010,000) $222,401,000
Issuance of 1,061,859 shares of
Class A Common Stock and
1,298,965 Shares of Class B
Common Stock under the 1991
Stock Option Plan & other.... 10,000 13,000 17,434,000 10,000 17,467,000
Additional capital from tax
benefit of 1991 stock option
plan......................... 1,423,000 1,423,000
Net income..................... 42,588,000 42,588,000 $42,588,000
Translation adjustments........ (6,817,000) (6,817,000) (6,817,000)
Unrealized gain on marketable
securities................... 12,000 12,000 12,000
Cumulative effect of accounting
change....................... 909,000 909,000 909,000
Net change in derivative
instruments.................. 1,375,000 1,375,000 1,375,000
-----------
Total comprehensive income..... $38,067,000
===========
Cash dividends declared........ (18,442,000) (18,442,000)
-------- -------- ----------- ------------ ------------ ------------
Balance at December 31, 2001... $112,000 $203,000 $77,717,000 $194,415,000 $(11,531,000) $260,916,000
======== ======== =========== ============ ============ ============
</Table>
See the accompanying notes to consolidated financial statements
F-5
HERBALIFE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 56,923,000 $ 36,919,000 $ 42,588,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 14,001,000 15,693,000 18,056,000
Deferred income taxes....................................... (4,081,000) (8,889,000) (3,036,000)
Unrealized foreign exchange loss (gain)..................... (572,000) 2,702,000 383,000
Minority interest in earnings............................... 1,086,000 1,058,000 725,000
Other....................................................... 90,000 882,000 515,000
Changes in operating assets and liabilities:
Receivables................................................. 13,155,000 4,116,000 (3,867,000)
Inventories................................................. (12,003,000) (2,937,000) 24,154,000
Prepaid expenses and other current assets................... 6,635,000 (70,000) (5,542,000)
Accounts payable............................................ 7,401,000 (1,564,000) 2,135,000
Royalty overrides........................................... 5,832,000 7,809,000 (8,206,000)
Accrued expenses and accrued compensation................... 11,209,000 (8,675,000) 15,557,000
Advance sales deposits...................................... 948,000 (2,195,000) (163,000)
Income taxes payable........................................ (15,160,000) (478,000) 5,452,000
Deferred compensation liability............................. 9,950,000 1,770,000 6,714,000
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................................ 95,414,000 46,141,000 95,465,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property....................................... (30,743,000) (24,952,000) (10,940,000)
Proceeds from sale of property.............................. 65,000 149,000 145,000
Net changes in marketable securities........................ 3,998,000 (28,751,000) 7,981,000
Other assets................................................ (6,967,000) 6,970,000 (1,644,000)
Deferred compensation assets................................ (9,870,000) (3,384,000) (11,908,000)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES................................................ (43,517,000) (49,968,000) (16,366,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid.............................................. (17,148,000) (17,285,000) (18,094,000)
Distributions to minority interest.......................... (1,063,000) (1,452,000) (1,272,000)
Additions to bank loans and contracts payable............... 3,304,000 2,392,000 1,903,000
Principal payments on bank loans and contracts payable...... (1,603,000) (1,128,000) (3,460,000)
Exercise of stock options................................... 469,000 3,394,000 17,467,000
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......... (16,041,000) (14,079,000) (3,456,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS........................................ 1,703,000 (10,038,000) (6,742,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 37,559,000 (27,944,000) 68,901,000
CASH AND CASH EQUIVALENTS AT JANUARY 1...................... 100,721,000 138,280,000 110,336,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT PERIOD END..................... $138,280,000 $110,336,000 $179,237,000
============ ============ ============
CASH PAID DURING THE YEAR:
Interest Paid............................................... $ 1,812,000 $ 1,109,000 $ 1,079,000
============ ============ ============
Income Taxes Paid........................................... $ 47,428,000 $ 31,026,000 $ 28,693,000
============ ============ ============
NON-CASH ACTIVITIES:
Acquisitions of property from capital leases................ $ 1,864,000 $ 431,000 $ 3,811,000
============ ============ ============
</Table>
See the accompanying notes to consolidated financial statements
F-6
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
1. GENERAL
Herbalife International, Inc. and its subsidiaries ("the Company") market
weight management products, nutritional supplements and personal care 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, 2001, the Company conducted business in 53 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 loss on the accompanying consolidated balance
sheets. Transaction losses, which include the cost of forward exchange and
option contracts, were $7,417,000, $7,661,000 and $549,000 in the years ended
December 31, 1999, 2000 and 2001, respectively, and are included in marketing,
distribution and administrative expenses in the accompanying consolidated
statements of income.
FORWARD EXCHANGE CONTRACTS AND OPTION CONTRACTS
The Company enters into forward exchange contracts and option contracts in
managing its foreign exchange risk on sales to distributors, purchase
commitments denominated in foreign currencies, intercompany transactions and
bank loans. The Company does not use the contracts for trading purposes.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended and interpreted, established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated in a fair-value hedge, the
changes in the fair value of the derivative and the underlying hedged item are
recognized concurrently in earnings. If the derivative is designated in a
cash-flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ("OCI") and are recognized in the statement of
operations when the hedged item affects earnings. SFAS 133 defined new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value are
recognized concurrently in earnings. As of January 1, 2001, the Company recorded
a net gain of $909,000 ($545,000 net of tax) as a cumulative transition
adjustment to earnings. This adjustment relates to derivatives not designated as
hedges prior to adoption of SFAS 133, and represents the difference between the
carrying value and the fair value of such instruments at January 1, 2001.
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
F-7
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
MARKETABLE SECURITIES
The Company's marketable securities are classified as "available for sale."
Fluctuations in fair value are included in accumulated other comprehensive loss
on the accompanying consolidated balance sheets. 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. The Company believes that it provides adequate
allowances for receivables from its distributors.
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 maturities 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 is 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 approximate 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 (including computer
hardware and software) is computed on a straight-line basis over the estimated
useful lives of the related assets, which range from three to seven 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. Effective January 1, 2002, amortization of goodwill was discontinued. See
"Recently Issued Accounting Pronouncements."
Long-lived assets, including goodwill, 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. Measurement of
an impairment loss is based on the estimated fair market value of the asset.
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
F-8
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 of Japan to
certain directors, executive officers and resident managers of Herbalife of
Japan (see "Note 8, Transactions with Related Parties"). In 2001, the Company
repurchased some of these shares. The minority stockholders' interest in the
equity of Herbalife of Japan approximates 7%, 7% and 6.6% at December 31, 1999,
2000 and 2001, respectively.
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 plus handling and freight income. Sales, related royalty
overrides, and allowances for product returns are recorded when the merchandise
is shipped, in accordance with the Company's shipping terms. Advance sales
deposits represent prepaid orders for which the Company has not shipped the
merchandise.
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 the assumed exercise of stock options.
RECLASSIFICATIONS
Net sales
In the first quarter of 2001, the Company adopted the provisions of
Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," which requires that amounts billed to customers for
shipping and handling fees be classified as revenues. Reclassifications have
been made to increase net sales by $142,660,000 and $141,356,000 for the years
ended December 31, 1999 and December 31, 2000, respectively, to reflect
$119,779,000 and $117,259,000 of shipping and handling fees on sales of product,
previously reported as reductions to royalty overrides, and $22,881,000 and
$24,097,000 of freight charges previously reported as reductions of marketing,
distribution and administrative expenses.
Cost of sales
Beginning in the second quarter of 2001, cost of sales includes freight
expenses relating to delivery of products to distributors. The freight expenses
were previously included in marketing, distribution and administrative expenses.
There is no impact on net income. All periods presented have been reclassified
on a
F-9
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comparable basis. The amounts reclassified were $18,267,000 and $18,189,000 for
the years ended December 31, 1999 and December 31, 2000, respectively.
Other
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 PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141"),
"Business Combinations." SFAS 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a significant
impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. The Company
adopted SFAS No. 142 on January 1, 2002 and as a result, annual goodwill
amortization of $173,000 was discontinued. SFAS 142 also required the Company to
complete a transitional goodwill impairment test. The adoption of SFAS 142 did
not have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This new statement also supersedes certain aspects of
Accounting Principle Board Opinion 30 ("APB No. 30"), "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," with
regard to reporting the effects of a disposal of a segment of a business and
will require expected future operating losses from discontinued operations to be
reported in discontinued operations in the period incurred (rather than as of
the measurement date as presently required by APB No. 30). In addition, more
dispositions may qualify for discontinued operations treatment. The adoption of
SFAS 144 did not have a significant impact on the Company's financial
statements.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendors Products," which addresses the accounting for
consideration given by a vendor to a customer or a reseller of the vendors
products. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendors Products," which provides guidance on the income statement
classification of consideration from a vendor to a reseller in connection with
the reseller's purchase of the vendor's products or to promote sales of the
vendor's products. This new guidance
F-10
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provides that consideration from a vendor to a reseller is generally presumed to
be a reduction of the selling prices of the vendor's products, and, therefore,
should be characterized as a reduction of revenue when recognized in the
vendor's income statement. The Company provides distributors with discounts on
product purchases and classifies these discounts as a reduction of revenue. The
adoption of EITF Issue No. 00-25 and EITF Issue No. 01-09 did not have a
significant impact on the Company's financial statements.
3. INVENTORIES
Inventories consist primarily of finished goods available for resale and
can be categorized as follows:
<Table>
<Caption>
DECEMBER 31,
-------------------------
2000 2001
----------- -----------
Product.................................................... $89,932,000 $66,463,000
Literature................................................. 6,064,000 4,157,000
Promotional items.......................................... 3,336,000 1,588,000
----------- -----------
Total................................................. $99,332,000 $72,208,000
=========== ===========
</Table>
4. CONTRACTS PAYABLE AND BANK LOANS
Contracts payable and bank loans consist of the following:
<Table>
<Caption>
DECEMBER 31,
------------------------
2000 2001
---------- -----------
Capitalized leases, due in monthly installments through 2004
(Note 5).................................................. $2,388,000 $ 3,439,000
Bank loans and Contracts Payable............................ 6,029,000 7,173,000
---------- -----------
Total....................................................... 8,417,000 10,612,000
Less current portion........................................ 7,013,000 9,395,000
---------- -----------
Long-term portion........................................... $1,404,000 $ 1,217,000
========== ===========
</Table>
Annual scheduled payments of bank loans and contracts payable are:
$9,395,000 (2002), $1,054,000 (2003), and $163,000 (2004).
The Company has lines of credit (the "Lines of Credit") for use in Turkey
and India under separate agreements with two separate banks which provide for
unsecured borrowings of up to $8,000,000 and bear interest at LIBOR plus a
negotiated spread, which can vary depending on the currency in which the loan is
provided. Outstanding borrowings under the Lines of Credit were $4,682,000 at
December 31, 2000 and $6,566,000 at December 31, 2001, respectively. The Company
also had other borrowings of $1,347,000 at December 31, 2000 and $607,000 at
December 31, 2001.
As of December 31, 2001, the Company has $15.4 million of credit facilities
which supported letters of credit, guarantees and borrowings. As of December 31,
2001, the Company had $1.2 million of letters of credit, $2.7 million of
guarantees, and $6.6 million of borrowings outstanding.
5. LEASE OBLIGATIONS
The Company has warehouse and office facilities, furniture and fixtures and
equipment leases, which expire at various dates through 2010. Under the lease
agreements, the Company is also obligated to pay property taxes, insurance, and
maintenance costs.
F-11
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the leases contain renewal options. Future minimum rental
commitments for non-cancelable operating leases and capital leases at December
31, 2001 were as follows:
<Table>
<Caption>
OPERATING CAPITAL
----------- ----------
2002........................................................ $13,412,000 $2,385,000
2003........................................................ 11,037,000 1,102,000
2004........................................................ 7,995,000 167,000
2005........................................................ 6,640,000 --
2006........................................................ 2,606,000 --
Thereafter.................................................. 527,000 --
----------- ----------
Total....................................................... $42,217,000 3,654,000
===========
Less: Amounts included above representing interest.......... 215,000
==========
Present value of net minimum lease payments................. $3,439,000
==========
</Table>
Rental expense for the years ended December 31, 1999, 2000 and 2001 was
$18,339,000, $21,961,000 and $19,998,000, respectively.
Property under capital leases is included in property on the accompanying
consolidated balance sheets as follows:
<Table>
<Caption>
DECEMBER 31,
-------------------------
2000 2001
----------- -----------
Equipment.................................................. $ 8,559,000 $ 8,995,000
Less: accumulated amortization............................. (5,881,000) (5,124,000)
----------- -----------
Total...................................................... $ 2,678,000 $ 3,871,000
=========== ===========
</Table>
6. EMPLOYEE COMPENSATION PLANS
In addition to the stock option plan discussed in Note 10, the Company has
two incentive compensation plans: the 1992 Executive Incentive Compensation Plan
(the "1992 Plan") and the 1994 Performance-Based Annual Incentive Compensation
Plan (the "1994 Plan"). Under the 1992 Plan, a target percentage of earnings
before bonuses and income taxes may be awarded to officers, directors and key
employees, as determined by the Chief Executive Officer and Compensation
Committee of the Board of Directors, based on the attainment of certain
corporate and business objectives. No bonuses were awarded under this plan for
1999, 2000 or 2001.
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 are 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, 2000 and 2001 were
$16,165,000, $4,578,000 and $3,468,000, respectively.
In accordance with the 1994 Plan, the Company advanced targeted performance
bonus amounts to the participants. As of December 31, 2000 and 2001, the
remaining outstanding principal and accrued interest was $1,040,000 and
$331,000, 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)
F-12
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for two-year notes at the time of the advances. The rates for outstanding
advances ranged from 4.67% to 6.45% at December 31, 2000 and were 4.25% at
December 31, 2001.
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 five years. The Company contributed
$974,000, $1,167,000 and $1,344,000, for the years ended December 31, 1999, 2000
and 2001, 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 participants 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 Deferral Amount
is actually deferred. The deferred compensation expense net of participant
contributions was $2,488,000, $2,741,000 and $3,917,000, for 1999, 2000 and
2001, respectively. The long-term deferred compensation liability under the
deferred compensation plans was $24,435,000 and $29,941,000 at December 31, 2000
and 2001, respectively.
In 2001, the Company adopted an Executive Retention Plan. The purpose of
the Executive Retention Plan is to provide financial incentives for a select
group of management and highly compensated employees of the Company to continue
to provide services to the Company during the period immediately before and
immediately after a change in control, as defined.
The Company also established an Executive Retention Trust to provide
benefits under the Executive Retention Plan. The Executive Retention Trust is an
irrevocable trust established with an institutional trustee. The Administrative
Committee of the Executive Retention Plan will establish an individual account
in the Executive Retention Trust for each participant in the Executive Retention
Plan. Until the occurrence of a change in control, the Administrative Committee
will control the investment of the assets in the Executive Retention Trust, and
will determine the allocation of the assets of the Executive Retention Trust to
the individual accounts of participants. Each participant who qualifies for a
benefit under the Executive Retention Plan will receive a lump sum benefit equal
to the dollar amount in his or her individual account in the Executive Retention
Trust. The benefit shall be paid within 90 days after the participant qualifies
for the benefit. If a participant's employment with the Company terminates
before the participant qualifies for a benefit under the Executive Retention
Plan, the participant's account in the Executive Retention Trust will
F-13
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revert to the Company. A participant's benefit under the Executive Retention
Plan will be reduced if the amount would cause payment of federal excise tax.
The deferred compensation plans and the Supplemental Executive Retirement
Plan (See Note 7, "Retirement Plan") are unfunded and their benefits are paid
from the general assets of the Company, except that the Company has contributed
to a "rabbi trust" whose assets will be used to pay the benefits if the Company
remains solvent, but can be reached by the Company's creditors if the Company
becomes insolvent. The value of the assets in the "rabbi trust" was $31,313,000
and $35,964,000 as of December 31, 2000 and 2001, respectively. The Company has
also contributed to the Executive Retention Trust, which is an irrevocable
trust. This irrevocable trust's assets will be used to pay the benefits of the
Executive Retention Plan and are not intended to be reachable by the Company's
creditors. The value of the assets in the irrevocable trust was $7,257,000 as of
December 31, 2001.
Certain of the officers have agreements with the Company which provide for
payments in the event of a change in control ("Change in Control Payments"), as
defined by the agreements. The Change in Control Payments would generally be for
an amount equal to three times the officer's annual compensation level. However,
such Change in Control Payments cannot exceed an amount which would cause the
payment of federal excise tax.
In 2001, the Company adopted two Change in Control Plans for Senior
Management, a Change in Control Plan and a Management Employee Change in Control
Plan. In the event of a change in control, each eligible employee is entitled to
receive a severance payment three times such eligible employee's compensation.
Compensation is defined as the eligible employee's annual base salary in effect
immediately prior to the change in control plus for Senior Executives an amount
equal to his or her cash bonus received in the last full fiscal year prior to
the change in control. The change in control payment will be reduced to the
extent the Company is required to make severance payments to the eligible
employee under the Worker Adjustment and Retraining Notification Act, or other
severance arrangements between the eligible employee and the Company. The change
in control payment will also be reduced to the extent necessary to preserve the
Company's deduction for the change in control payment under the Internal Revenue
Code, and to prevent the eligible employee from being subject to an excise tax
on the change in control payment. Each eligible employee is also entitled to
receive health benefits coverage for a period up to three years following his or
her termination of employment. In consideration of the change in control
payment, each eligible employee is required to agree (1) to enter into a
separation and general release agreement with the Company, (2) not to use or
disclose confidential information of the Company and (3) not to solicit
employees and distributors of the Company for a two-year period.
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. The normal retirement benefit under the SERP
is 60 quarterly installment payments commencing at age 65, each of which equals
one-quarter of 2% 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
F-14
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 2000 2001
----------- ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year/inception............................ $ 9,029,000 $ 8,412,000 $ 11,140,000
Service cost................................ 1,214,000 1,010,000 1,363,000
Interest cost............................... 546,000 624,000 746,000
Amendments.................................. -- 1,285,000 --
Actuarial (gain) loss....................... (2,346,000) 1,767,000 (414,000)
Benefits paid............................... (31,000) (1,958,000) (1,401,000)
----------- ------------ ------------
Benefit obligation at end of year........... $ 8,412,000 $ 11,140,000 $ 11,434,000
=========== ============ ============
Funded status............................... $(8,412,000) $(11,140,000) $(11,434,000)
Unrecognized actuarial (gain) loss.......... (735,000) 1,001,000 587,000
Unrecognized prior service cost............. 4,696,000 5,610,000 5,110,000
----------- ------------ ------------
Net amount recognized....................... $(4,451,000) $ (4,529,000) $ (5,737,000)
=========== ============ ============
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability................... $(5,021,000) $ (7,872,000) $ (8,946,000)
Intangible asset............................ 570,000 3,343,000 3,209,000
----------- ------------ ------------
Net amount recognized....................... $(4,451,000) $ (4,529,000) $ (5,737,000)
=========== ============ ============
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
31
Discount rate............................... 7.5% 7.0% 7.0%
Rate of compensation increase............... 4.0% 4.0% 4.0%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................ $ 1,214,000 $ 1,010,000 $ 1,363,000
Interest cost............................... 546,000 624,000 746,000
Amortization of prior service cost.......... 371,000 371,000 499,000
Amortization of actuarial loss.............. 31,000 -- --
----------- ------------ ------------
Net periodic pension cost................... $ 2,162,000 $ 2,005,000 $ 2,608,000
=========== ============ ============
</Table>
8. TRANSACTIONS WITH RELATED PARTIES
In addition to advances described in Note 6, the Company has made
additional advances to certain officers. The aggregate outstanding principal and
accrued interest was $666,000 and $397,000 at December 31, 2000 and 2001,
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 ranged from 4.98% to 6.15% at December 31,
2000 and were 5.48% at December 31, 2001.
In December 1996, the Company sold an approximate 7% interest in Herbalife
of Japan, K.K., its Japanese subsidiary, to certain Company directors, executive
officers and resident managers of Herbalife of 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 were payable in 16 equal quarterly principal
and interest installments, through December 2001. The outstanding note
receivable balance was $335,000 and zero at December 31,
F-15
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 and 2001, respectively, and is included in receivables and other assets on
the accompanying consolidated balance sheets. 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 was deferred, and will be recognized
as the interest is sold to a third party. In 2001, a 0.5% interest in Herbalife
of Japan, K.K. was repurchased from an executive officer based upon a new
valuation performed by the same independent investment banking firm. The
minority interest in Herbalife of Japan, K.K. at December 31, 2001 was
approximately 6.6%.
The board of directors of Herbalife of Japan, K.K. and the Company have
initiated steps in Japan that are expected to result in the repurchase of the
minority interest in Herbalife of Japan, K.K. for cash. At the conclusion of
these steps, Herbalife of Japan, K.K. will again be a wholly-owned subsidiary of
the Company. The valuation of Herbalife of Japan, K.K. for purposes of the
repurchase will be based upon a valuation methodology identical to that used
when the minority interest was issued, and will be supported by a valuation
opinion issued by an independent investment banking firm. The repurchase remains
subject to various Japanese judicial and regulatory approvals.
In addition, the Company made a loan of $1,964,000 to its former Chief
Executive Officer, Mark Hughes, during 1999. Such loan, which accrued interest
at the rate of 4.62% per annum, was repaid during 2000.
On May 21, 2001, the estate of Mark Hughes ("Estate") exercised 1.9 million
stock options. A short-term full-recourse loan in the amount of $13,625,000 was
issued to the Estate to finance the exercise. The loan balance as of June 30,
2001 was $13,732,000 including interest at a rate of 7% per annum. The
receivable balance plus interest was fully paid on July 3, 2001.
Two senior executives of the Company are minority shareholders in B.L.I.
Holdings, Inc., a holding company for two of the Company's suppliers of personal
care products. Total purchases from B.L.I. Holdings, Inc. and its subsidiaries
was $495,000 for 2001.
9. CONTINGENCIES
The Company is from time to time engaged in routine litigation. The Company
regularly reviews all pending litigation matters in which it is involved and
establishes reserves deemed appropriate by management for these litigation
matters. However, some of these matters are material and an adverse outcome in
these matters could have a material impact on the Company's financial condition
and operating results.
In September 2000, a putative class action lawsuit was filed in the
District Court, Clark County, Nevada (Tharp v. Herbalife International, Inc., et
al.). A second putative class action lawsuit was filed in the same court in
August 2001 (Brown v. Herbalife International Inc., et al.). The Tharp lawsuit
alleges breaches of fiduciary obligations by the Company's directors and its
majority stockholder in connection with the adoption by the Company of the
Preferred Share Purchase Rights Plan and the rejection of a purported offer by a
third party to acquire a controlling interest in the Company. The Brown lawsuit
similarly alleges breaches of fiduciary obligations in connection with an
alleged rejection of an offer from a third party to purchase the Company. The
plaintiffs in the lawsuits request (i) an order compelling the defendants to
take steps to seek a sale of the Company, (ii) an order enjoining the defendants
in office, (iii) unspecified damages, and (iv) other relief. The Company has
reached an oral settlement to pay plaintiff's legal fees of $190,000 and the
Company's insurance company has agreed to pay 50% of the settlement amount. The
settlement remains subject to documentation and court approval for which a
hearing date has not yet been set.
In addition, on or about April 12, 2002, Harbor Finance Partners, allegedly
an Herbalife stockholder, filed a purported class action (which was amended on
June 13, 2002) against the Company in the District Court of Clark County in the
State of Nevada, naming the Company, its Board of Directors and one former
director as defendants ("Defendants") and alleging various breaches of fiduciary
duty arising out of the announced merger transaction between Herbalife and WH
Holdings, a subsidiary of Whitney & Co., LLC. The complaint was served on April
24, 2002. The defendants filed a motion to dismiss the case on May 14, 2002.
Plaintiff's
F-16
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
counsel has indicated that the plaintiff intends to seek expedited discovery and
to file a motion for some form of preliminary relief in connection with the
announced merger transaction. Herbalife and its Board of Directors deny the
allegations and intend to vigorously defend these charges in litigation.
However, an adverse result in this litigation could have a material adverse
effect on the Company's financial condition and operating results.
In August 2001, a lawsuit was filed by Michael Rosen, a former Executive
Vice President of the Company, in the Superior Court of the State of California
for the County of Los Angeles (Michael E. Rosen v. Herbalife International,
Inc., and Herbalife International of America, Inc.). The complaint alleged a
single cause of action for breach of an oral and implied contract for continued
employment and sought damages in excess of $15 million. The parties have reached
a settlement with respect to this lawsuit and certain related litigation. The
Company's liability had been provided for at December 31, 2001.
The Company and certain of its distributors have been named as defendants
in a purported class action lawsuit filed in the U.S. District Court for the
Central District of California (Jacobs v. Herbalife International, Inc., et al).
The lawsuit was filed on February 19, 2002. The complaint alleges that specified
marketing plans employed by the distributor defendants are illegal, and that the
Company has permitted the use of these marketing plans and/or failed to
supervise its distributor's conduct to prevent violations of law by them. The
complaint does not challenge the legality of Herbalife's marketing system. The
complaint seeks to state causes of action under RICO and various state and other
federal laws. The complaint was dismissed with leave to amend, the deadline for
which is set as January 2, 2003. The Company believes that it has meritorious
defenses to the allegations contained in the lawsuit. However, an adverse result
in this litigation could have a material adverse effect on the Company's
financial condition and operating results.
Certain of the Company's subsidiaries have been subject to tax audits by
governmental authorities in their respective countries. In certain of these tax
audits, governmental authorities are proposing that significant amounts of
additional taxes and related interest and penalties are due. The Company and its
tax advisors believe that there are substantial defenses to the allegations that
additional taxes are owing, and the Company is vigorously contesting the
additional proposed taxes and related charges. These matters may take several
years to resolve, and the Company cannot be sure of their ultimate resolution.
However, an adverse outcome in these matters could have a material impact on the
Company's financial condition and operating results.
10. STOCKHOLDERS' EQUITY
On July 27, 2000, the Company's Board of Directors adopted a Preferred
Share Purchase Rights Plan (the "Plan"), in order to encourage any person or
group interested in acquiring the Company to negotiate with the Board of
Directors of the Company prior to attempting an acquisition. Under the terms of
the Plan, which expires on August 21, 2010, the Company declared a dividend of
one Preferred Share Purchase Right (collectively, the "Rights"), for each
outstanding share of Class A Common Stock and Class B Common Stock held at the
close of business on August 21, 2000. Initially, the Rights are attached to the
Common Stock and not represented by separate certificates. The Rights will
become exercisable, if not earlier redeemed, only after a person or group (an
"Acquiring Person") has acquired, or announced a tender offer which would result
in a person or group acquiring, 15% or more of the Company's Class A Common
Stock or the combined classes of Common Stock. Initially, each Right will
entitle shareholders to buy one one-hundredth of a share of newly created Series
A Junior Participating Preferred Stock at an exercise price of $40.00. However,
if a person or group becomes an Acquiring Person, the Plan allows the Company's
shareholders to purchase, at an exercise price of $40.00 per Right, subject to
adjustment, Class B Common Stock of the Company having a market value at that
time of $80.00. The Company will generally be entitled to redeem the Rights at
$.01 per Right at any time until a person or group has become an Acquiring
Person. Until exercise, a Right holder, as such, has no rights as a shareholder.
Rights held by an Acquiring Person will become void and will not be exercisable
to purchase shares at the bargain price. In addition, under certain
F-17
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
circumstances involving the acquisition of the Company in a merger or other
business combination that has not been approved by the Board of Directors of the
Company, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at that time of twice the exercise price of the Rights.
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 grant date in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations ("APB 25").
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, 2001 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 they vest ratably over a maximum of 5 years in minimum annual
installments of 20%.
The Company accounts for stock option grants in accordance with APB 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," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated in the following
table:
<Table>
<Caption>
1999 2000 2001
----------- ----------- -----------
Net Income -- as reported..................... $56,923,000 $36,919,000 $42,588,000
Net Income -- pro forma....................... 47,944,000 34,014,000 41,378,000
Basic EPS -- as reported...................... 1.99 1.28 1.40
Basic EPS -- pro forma........................ 1.68 1.18 1.36
Diluted EPS -- as reported.................... 1.86 1.22 1.36
Diluted EPS -- pro forma...................... 1.59 1.13 1.33
</Table>
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 2000 2001
--------------------- ----------------- -------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
--------- --------- ------- ------- ------- ---------
Risk free interest rate..... 4.72% 5.21% N/A N/A N/A 2.92%
Expected option life........ 4.9 years 3.7 years N/A N/A N/A 3.0 years
Volatility.................. 60.65% 59.78% N/A N/A N/A 56.67%
Dividend yield.............. 4.70% 5.50% N/A N/A N/A 6.50%
</Table>
F-18
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option groups outstanding at December 31, 1999, 2000 and 2001 and related
option information follows:
<Table>
<Caption>
CLASS A STOCK CLASS B STOCK
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- -------------- ------------ --------------
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
2000
Outstanding at January 1.......... 2,218,000 $ 7.86 5,236,000 $ 6.66
Granted........................... -- -- -- --
Exercised......................... (149,000) 7.45 (345,000) 6.49
Canceled.......................... (41,000) 7.99 (267,000) 6.74
----------- ------ ------------ ------
Outstanding at December 31........ 2,028,000 $ 7.89 4,624,000 $ 6.67
====== ======
Available for grant at December
31.............................. 37,000 640,000
----------- ------------
Total reserved shares........ 2,065,000 5,264,000
=========== ============
Exercisable at December 31........ 1,807,000 $ 7.87 3,409,000 $ 6.63
=========== ====== ============ ======
Option prices per share
Granted......................... N/A N/A
Exercised....................... $0.88-$8.00 $ 0.88-$8.63
Weighted average fair value of
options granted during the
year............................ N/A N/A
</Table>
F-19
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
CLASS A STOCK CLASS B STOCK
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- -------------- ------------ --------------
2001
Outstanding at January 1.......... 2,028,000 $ 7.89 4,624,000 $ 6.67
Granted........................... -- -- 500,000 11.30
Exercised......................... (1,062,000) 7.89 (1,299,000) 6.52
Canceled.......................... (18,000) 8.00 (21,000) 6.74
----------- ------ ------------ ------
Outstanding at December 31........ 948,000 $ 7.88 3,804,000 $ 7.33
====== ======
Available for grant at December
31.............................. 55,000 161,000
----------- ------------
Total reserved shares........ 1,003,000 3,965,000
=========== ============
Exercisable at December 31........ 900,000 $ 7.87 2,739,000 $ 6.75
=========== ====== ============ ======
Option prices per share
Granted......................... N/A $ 11.30
Exercised....................... $7.38-$8.00 $ 6.63-$8.63
Weighted average fair value of
options granted during the
year............................ N/A 3.14
</Table>
The following table summarizes information regarding option groups
outstanding at December 31, 2001:
<Table>
<Caption>
WTD. AVG. WTD. WTD.
REMAINING AVG. AVG.
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES: OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------- ----------- ----------- -------- ----------- --------
CLASS A
$ 7.38............................ 170,000 3 Years $ 7.38 170,000 $ 7.38
$ 7.50............................ 25,000 3 Years $ 7.50 25,000 $ 7.50
$ 8.00............................ 752,000 5 Years $ 8.00 705,000 $ 8.00
$14.38............................ 1,000 7 Years $14.38 -- $ --
CLASS B
$ 6.63............................ 3,146,000 5 Years $ 6.63 2,585,000 $ 6.63
$ 8.63............................ 129,000 7 Years $ 8.63 129,000 $ 8.63
$ 8.88............................ 28,000 7 Years $ 8.88 11,000 $ 8.88
$11.30............................ 500,000 10 Years $11.30 14,000 $11.30
$11.63............................ 1,000 7 Years $11.63 -- $ --
</Table>
11. SEGMENT INFORMATION
The Company is a network marketing company that sells a wide range of
weight management products, dietary and nutritional supplements and personal
care products within one industry segment as defined under SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company's products are primarily manufactured by third-party providers and then
sold to independent distributors who sell Herbalife products to retail consumers
or other distributors.
The Company's chief operating decision makers review both geographic and
product line information.
F-20
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has operations throughout the world (53 countries as of
December 31, 2001) 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 No. 131, is prepared on the same basis as the consolidated financial
statements. In the first quarter of 2002, the Company's chief operating decision
makers began reviewing operating results for revised geographic segments, as
well as reviewing gross margin by product line. Segment disclosure information
has been updated to reflect these new measures for all periods presented.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(DOLLARS IN MILLIONS)
RETAIL SALES
United States........................................ $ 416.1 $ 453.0 $ 441.7
Japan................................................ 518.4 406.9 304.5
South Korea.......................................... 129.3 127.9 114.9
Mexico............................................... 44.8 75.2 98.3
German Group(1)...................................... 106.7 99.5 110.8
Italy................................................ 121.1 101.8 107.4
Others............................................... 457.1 500.6 478.6
-------- -------- --------
TOTAL RETAIL SALES..................................... $1,793.5 $1,764.9 $1,656.2
-------- -------- --------
NET SALES
United States........................................ $ 261.5 $ 284.4 $ 278.8
Japan................................................ 302.3 238.0 178.1
South Korea.......................................... 86.8 86.0 77.1
Mexico............................................... 27.1 45.4 59.1
German Group(1)...................................... 66.6 62.6 69.4
Italy................................................ 75.7 63.0 66.5
Others............................................... 278.9 306.1 291.1
-------- -------- --------
TOTAL NET SALES........................................ $1,098.9 $1,085.5 $1,020.1
-------- -------- --------
OPERATING MARGIN(2)
United States........................................ $ 86.9 $ 97.4 $ 111.9
Japan................................................ 140.1 117.2 86.3
South Korea.......................................... 44.5 47.2 42.6
Mexico............................................... 9.0 15.3 24.0
German Group(1)...................................... 26.5 22.8 25.3
Italy................................................ 32.8 24.7 25.4
Others............................................... 97.0 109.5 107.9
-------- -------- --------
TOTAL OPERATING MARGIN................................. $ 436.8 $ 434.1 $ 423.4
</Table>
F-21
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(DOLLARS IN MILLIONS)
-------- -------- --------
MARKETING, DISTRIBUTION AND ADMINISTRATIVE
EXPENSES(3).......................................... (344.3) (373.2) (354.6)
INTEREST INCOME, NET................................... 1.8 2.4 3.4
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST....... 94.3 63.3 72.2
INCOME TAXES........................................... (36.3) (25.3) (28.9)
MINORITY INTEREST...................................... (1.1) (1.1) (0.7)
-------- -------- --------
NET INCOME............................................. $ 56.9 $ 36.9 $ 42.6
======== ======== ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(DOLLARS IN MILLIONS)
RETAIL SALES BY PRODUCT LINE:
Inner Nutrition...................................... $1,548.8 $1,513.5 $1,452.5
Outer Nutrition...................................... 198.1 200.6 178.2
Literature........................................... 56.9 57.7 51.5
Other................................................ 18.0 21.1 15.7
Return and Refund.................................... (28.3) (28.0) (41.7)
-------- -------- --------
TOTAL RETAIL SALES..................................... $1,793.5 $1,764.9 $1,656.2
-------- -------- --------
DISTRIBUTOR ALLOWANCES................................. (837.3) (820.7) (774.5)
HANDLING AND FREIGHT INCOME............................ 142.7 141.3 138.4
-------- -------- --------
NET SALES.............................................. $1,098.9 $1,085.5 $1,020.1
-------- -------- --------
COST OF SALES
Inner Nutrition...................................... $ 140.9 $ 151.9 $ 146.4
Outer Nutrition...................................... 24.1 26.5 22.7
Literature........................................... 21.1 23.4 20.7
Freight, Duty and Other.............................. 78.8 67.2 51.7
-------- -------- --------
TOTAL COST OF SALES.................................... $ 264.9 $ 269.0 $ 241.5
-------- -------- --------
GROSS MARGIN........................................... $ 834.0 $ 816.5 $ 778.6
======== ======== ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
1999 2000 2001
------ ------ ------
(DOLLARS IN MILLIONS)
TOTAL ASSETS
United States............................................ $184.1 $195.2 $283.0
Japan.................................................... 66.7 51.5 32.6
South Korea.............................................. 41.6 28.3 23.0
Mexico................................................... 4.8 3.4 9.4
German Group(1).......................................... 13.5 7.7 9.1
Italy.................................................... 13.9 9.4 11.6
Others................................................... 91.2 121.4 101.6
------ ------ ------
TOTAL ASSETS............................................... $415.8 $416.9 $470.3
====== ====== ======
</Table>
F-22
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
1999 2000 2001
------ ------ ------
(DOLLARS IN MILLIONS)
CAPITAL EXPENDITURES
United States............................................. $24.2 $14.4 $11.5
Japan..................................................... 1.1 1.2 0.4
South Korea............................................... 1.1 1.1 0.1
Mexico.................................................... 0.2 0.7 0.2
German Group(1)........................................... 0.1 0.4 0.1
Italy..................................................... 0.1 0.4 --
Others.................................................... 5.8 7.2 2.5
----- ----- -----
TOTAL CAPITAL EXPENDITURES.................................. $32.6 $25.4 $14.8
===== ===== =====
</Table>
- ---------------
(1) German Group includes Germany, Austria and Switzerland.
(2) Operating Margin represents net sales less cost of sales and royalty
overrides.
(3) The year ended December 31, 2000 includes a one-time charge of $9.5 million
relating to fees and expenses in connection with the termination of a
proposed buy-out transaction by Mark Hughes, our founder and Chief Executive
Officer at that time.
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Statement of Financial Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," on
January 1, 2001. In accordance with the transition provisions of SFAS 133, the
Company recorded a cumulative-effect type adjustment of $621,000 (gain) in
earnings to recognize the fair value of all derivatives that were designated as
fair-value hedges. The Company also recorded a cumulative-effect type adjustment
of $621,000 (loss) in earnings to recognize the difference (attributable to the
hedged risks) between the carrying values and the fair values of related hedged
assets and liabilities. Additionally, the Company recorded a cumulative-effect
type adjustment of $909,000 ($545,000 net of tax) in accumulated other
comprehensive income to recognize the fair value of all derivatives that are
designated as cash flow hedges. This cumulative effect adjustment to other
comprehensive income was reclassified to earnings during the course of 2001.
The Company is exposed to foreign exchange risk relating to its
international business operations. As part of its overall strategy to manage the
level of exposure to the risk of foreign exchange on sales to distributors,
purchase commitments denominated in foreign currencies, intercompany
transactions and bank loans, the Company enters into forward exchange and option
contracts having maximum maturities of one year. On the date the Company enters
into a derivative contract, management designates the derivative as a hedge of
the identified exposure (fair value hedge or cash flow hedge). If a derivative
does not qualify in a hedging relationship, the derivative is recorded at fair
value and changes in its fair value are reported currently in earnings.
The Company designates certain derivatives as fair value hedges. For all
qualifying and highly effective fair value hedges, the changes in the fair value
of a derivative and the gain or loss on the hedged asset or liability relating
to the risk being hedged are recorded currently in earnings. These amounts are
recorded in marketing, distribution and administrative expenses and provide
offsets to one another.
The Company designates certain derivatives as cash flow hedges. For all
qualifying and highly effective cash flow hedges, the changes in the effective
portion of the fair value of the derivative are recorded in other
F-23
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income (OCI). At December 31, 2001, the Company anticipates
reclassifying $2,284,000 of gain reported in OCI to earnings within 12 months.
13. INCOME TAXES
The components of income before income taxes were:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 2000 2001
----------- ----------- -----------
Domestic...................................... $23,432,000 $14,198,000 $49,951,000
Foreign....................................... 70,891,000 49,097,000 22,237,000
----------- ----------- -----------
$94,323,000 $63,295,000 $72,188,000
=========== =========== ===========
</Table>
Income taxes are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
----------- ------------ -----------
CURRENT:
Foreign...................................... $33,999,000 $ 25,377,000 $17,745,000
Federal...................................... 3,910,000 7,289,000 12,021,000
State........................................ 2,486,000 1,541,000 2,145,000
DEFERRED:
Foreign...................................... 1,652,000 (10,455,000) 3,675,000
Federal...................................... (5,204,000) 1,541,000 (6,557,000)
State........................................ (529,000) 25,000 (154,000)
----------- ------------ -----------
$36,314,000 $ 25,318,000 $28,875,000
=========== ============ ===========
</Table>
F-24
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-------------------------
2000 2001
----------- -----------
DEFERRED INCOME TAX ASSETS:
Intercompany profit in inventory........................... $ 1,792,000 $ 6,308,000
Accruals not currently deductible.......................... 16,013,000 19,233,000
Accrued foreign withholding tax on unremitted earnings..... 2,141,000 1,453,000
Foreign tax credits and tax loss carryforwards of certain
foreign subsidiaries..................................... 7,256,000 6,858,000
Less valuation allowance................................... (1,226,000) (3,468,000)
Depreciation/amortization.................................. 773,000 16,000
Deferred compensation plan................................. 10,134,000 13,370,000
Accrued state income taxes................................. 149,000 --
Accrued vacation........................................... 2,213,000 1,883,000
Unrealized foreign exchange................................ 2,364,000 2,659,000
Other...................................................... 3,142,000 2,071,000
----------- -----------
$44,751,000 $50,383,000
----------- -----------
DEFERRED INCOME TAX LIABILITIES:
Intangible assets.......................................... $ 828,000 $ 795,000
Inventory deductibles...................................... 2,387,000 5,016,000
----------- -----------
$ 3,215,000 $ 5,811,000
----------- -----------
Net........................................................ $41,536,000 $44,572,000
=========== ===========
</Table>
At December 31, 2001, the Company's deferred income tax asset for net
operating loss carryforwards of certain foreign subsidiaries of $6,664,000 was
reduced by a valuation allowance of $3,468,000. The net operating loss
carryforwards expire in varying amounts between 2002 and 2009. 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 if
estimates of future taxable income during the carryforward period are reduced.
F-25
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax expense differs from the "expected" income tax expense by applying
the United States statutory rate of 35% as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
------------ ----------- -----------
Tax expense at United States statutory
rate....................................... $ 33,013,000 $22,153,000 $25,266,000
Increase (decrease) in tax resulting from:
Differences between U.S. and foreign tax
rates on foreign income, including
withholding taxes.......................... 9,603,000 5,981,000 7,131,000
U.S. tax (benefit) on foreign income net of
foreign tax credits........................ (10,914,000) 3,494,000 (7,876,000)
Increase (decrease) in valuation
allowances................................. 5,049,000 (5,621,000) 2,242,000
Life insurance proceeds...................... -- (1,750,000) --
State taxes, net of federal benefit.......... 1,616,000 966,000 1,234,000
Other........................................ (2,053,000) 95,000 878,000
------------ ----------- -----------
Total................................... $ 36,314,000 $25,318,000 $28,875,000
============ =========== ===========
</Table>
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $18,141,000 at December 31, 2001.
Deferred income taxes on these earnings have either not been provided as these
amounts have been reinvested in the foreign subsidiaries, or in certain
instances, it is expected that any additional taxes on the earnings of foreign
subsidiaries, if remitted, would be substantially offset by U.S. foreign tax
credits.
14. FINANCIAL INSTRUMENTS
Foreign exchange option contracts are used primarily to hedge
Yen-denominated and Mexican Peso-denominated intercompany sales made by
Herbalife International of America, Inc. to the Company's Japanese and Mexican
subsidiaries and to hedge Euro denominated sales made by Herbalife International
of Europe, Inc. to the Company's distributors. 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 that establish a net $5 million
limit on the amount of annual option premiums. The Company purchases average
rate put options, which give the Company the right, but not the obligation, to
sell foreign currency at a specified exchange rate ("strike rate"). These
contracts provide protection in the event the foreign currency weakens beyond
the option strike rate. In some instances, the Company sells (writes) foreign
currency call options to finance the purchase of put options, which gives the
counterparty the right, but not the obligation to buy foreign currency from the
Company at a specified strike rate. These contracts serve to limit the benefit
the Company would otherwise derive from strengthening of the foreign currency
beyond the strike rate. Such written call options are only entered into
contemporaneously with purchased put options. The fair value of option contracts
are based on third-party bank quotes.
F-26
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides information about the details of the Company's
option contracts:
<Table>
<Caption>
AVERAGE STRIKE
FOREIGN CURRENCY COVERAGE PRICE FAIR VALUE MATURITY DATE
- ---------------- ----------- --------------- ---------- --------------
AT DECEMBER 31, 2000
Purchased Puts (Company may
Sell Yen/Buy USD)
Japanese Yen................ $18,000,000 107.55 - 108.30 $ 909,000 Jan.-Mar. 2001
=========== ==========
Written Calls (Counterparty
may Buy Yen/Sell USD
Japanese Yen................ $18,000,000 104.10 - 104.60 $ 5,000 Jan.-Mar. 2001
=========== ==========
Purchased Puts (Company may
Sell Euro/Buy USD)
Euro........................ $ 5,328,000 0.8880 $ 1,000 Jan. 2001
Euro........................ 5,334,000 0.8890 16,000 Feb. 2001
----------- ----------
$10,662,000 $ 17,000
=========== ==========
AT DECEMBER 31, 2001
Purchased Puts (Company may
Sell Yen/Buy USD)
Japanese Yen................ $ 9,000,000 115.30 - 116.18 $1,022,000 Jan.-Mar. 2002
Japanese Yen................ 9,000,000 114.56 - 115.43 1,042,000 Apr.-Jun. 2002
----------- ----------
$18,000,000 $2,064,000
=========== ==========
Written Calls (Counterparty
may Buy Yen/Sell USD)
Japanese Yen................ $ 9,000,000 109.00 - 111.50 $ -- Jan.-Mar. 2002
Japanese Yen................ 9,000,000 109.00 - 111.50 (2,000) Apr.-Jun. 2002
----------- ----------
$18,000,000 $ (2,000)
=========== ==========
</Table>
Foreign exchange forward contracts are occasionally used to hedge
non-functional currency advances between subsidiaries and bank loans. The
Company also uses foreign exchange forward contracts to hedge non-functional
currency purchase commitments. The objective of these contracts is to reduce the
impact of foreign currency movements on the subsidiary's financial results. The
fair value of forward contracts is based on third-party bank quotes.
F-27
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below describes the forward contracts that were outstanding:
<Table>
<Caption>
FORWARD
FOREIGN CURRENCY CONTRACT DATE POSITION MATURITY DATE CONTRACT RATE FAIR VALUE
- ---------------- ------------- ---------- ------------- ------------- ----------
AT DECEMBER 31, 2000
Buy Deutsche Mark/Sell
USD.................. 9/11/2000 $1,070,000 Jan-Aug 2001 2.23-2.26 $1,156,000
Buy French Francs/Sell
USD.................. 9/11/2000 624,000 Jan-Jul 2001 7.5 - 7.56 674,000
Buy Italian Lire/Sell
USD.................. 9/11/2000 5,841,000 Jan-Aug 2001 2,216 - 2,235 6,325,000
Buy French Francs/Sell
British Pound........ 4/13/2000 1,533,000 3/30/2001 10.6874 1,568,000
Buy Italian Lire/Sell
British Pound........ 6/23/2000 1,473,000 6/15/2001 3,034 1,452,000
AT DECEMBER 31, 2001
Buy Israeli Shekel/Sell
British Pound........ 12/13/2001 $ 930,000 06/20/2002 6.1175 $ 897,000
Buy British Pound/Sell
Israel Shekel........ 12/17/2001 912,000 06/20/2002 6.2400 927,000
Buy US Dollar/Sell
British Pound........ 12/17/2001 956,000 06/20/2002 1.4428 950,000
Buy US Dollar/Sell
Indian Rupee......... 12/28/2001 1,864,000 11/29/2002 51.1400 1,851,000
</Table>
All foreign subsidiaries excluding those operating in hyper-inflationary
environments designate their local currencies as their functional currency. At
year end, the total amount of cash held by foreign subsidiaries primarily in
Japan and Korea was $69.2 million of which $11.2 million was maintained or
invested in U.S. Dollars.
15. QUARTERLY INFORMATION (UNAUDITED)
<Table>
<Caption>
2000 2001
------------ ------------
FIRST QUARTER ENDED MARCH 31
Retail sales............................................. $458,423,000 $399,668,000
Net sales................................................ 281,014,000 245,751,000
Gross profit(1).......................................... 213,453,000 185,695,000
Net income............................................... 5,929,000 8,561,000
Net income per common share:
Basic.................................................... $ 0.21 $ 0.29
Diluted.................................................. 0.19 0.29
Dividends per share...................................... 0.15 0.15
</Table>
F-28
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2000 2001
------------ ------------
SECOND QUARTER ENDED JUNE 30
Retail sales............................................. $441,235,000 $413,433,000
Net sales................................................ 272,120,000 255,032,000
Gross profit(1).......................................... 204,789,000 193,622,000
Net income............................................... 11,653,000 10,044,000
Net income per common share:
Basic.................................................... $ 0.41 $ 0.34
Diluted.................................................. 0.39 0.33
Dividends per share...................................... 0.15 0.15
THIRD QUARTER ENDED SEPTEMBER 30
Retail sales............................................. $442,001,000 $424,317,000
Net sales................................................ 271,876,000 261,587,000
Gross profit(1).......................................... 203,881,000 201,355,000
Net income............................................... 11,806,000 14,026,000
Net income per common share:
Basic.................................................... $ 0.41 $ 0.45
Diluted.................................................. 0.39 0.44
Dividends per share...................................... 0.15 0.15
FOURTH QUARTER ENDED DECEMBER 31
Retail sales............................................. $423,192,000 $418,750,000
Net sales................................................ 260,474,000 257,760,000
Gross profit(1).......................................... 194,369,000 197,936,000
Net income............................................... 7,531,000 9,957,000
Net income per common share:
Basic.................................................... $ 0.26 $ 0.32
Diluted.................................................. 0.25 0.31
Dividends per share...................................... 0.15 0.15
</Table>
- ---------------
(1) Gross profit consists of net sales less cost of sales.
16. SUPPLEMENTAL INFORMATION
The following condensed consolidated balance sheets, statements of
operations, and statements of cash flows have been presented as a result of the
merger between Herbalife International, Inc. and WH Acquisition, Inc. and
related financing transactions. Such financial statements have been segregated
between those entities that will guarantee the notes issued in connection with
the transaction ("Subsidiary Guarantors"), and those entities that will not
guarantee the notes ("Non-Guarantors"). The Guarantor entities are:
Herbalife International of America, Inc.
Herbalife International Communications, Inc.
Herbalife International Distribution, Inc.
Herbalife International of Europe, Inc.
Herbalife China, LLC
Herbalife International of Israel (1990) Ltd.
Herbalife of Japan K.K.
F-29
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Herbalife International (Thailand) Ltd.
Herbalife (UK) Limited
Herbalife Europe Limited
Herbalife International Finland OY
Herbalife International Do Brasil Ltda.
Herbalife Internacional de Mexico, S.A. de C.V.
Herbalife Products de Mexico, S.A. de C. V.
Herbalife Sweden Aktiebolag
Herbalife Taiwan, Inc.
Consolidating condensed statement of operation data for the years ended
December, 31, 2001, 2000 and 1999 is summarized as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales................... -- $877.8 $218.3 $(76.0) $1,020.1
Cost of sales............... -- 216.9 97.0 (72.4) 241.5
Royalty overrides........... -- 238.8 116.4 -- 355.2
Marketing, distribution and
administrative expenses... $ 0.4 281.2 73.0 -- 354.6
Equity in subsidiary
(income).................. (43.3) (0.8) -- 44.1 --
Buy-out transaction
expenses.................. -- -- -- -- --
Interest income -- net...... -- (3.4) -- -- (3.4)
Intercompany charges
(income).................. (6.4) 76.5 (70.0) (0.1) --
------ ------ ------ ------ --------
Income before income taxes
and minority interest..... 49.3 68.6 1.9 (47.6) 72.2
Income taxes................ 2.4 22.6 3.9 -- 28.9
------ ------ ------ ------ --------
Income before minority
interest.................. 46.9 46.0 (2.0) (47.6) 43.3
Minority interest........... -- 0.7 -- -- 0.7
------ ------ ------ ------ --------
NET INCOME.................. $ 46.9 $ 45.3 $ (2.0) $(47.6) $ 42.6
====== ====== ====== ====== ========
</Table>
F-30
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------
HERBALIFE SUBSIDIARY NON- TOTAL
INTERNATIONAL, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales....................... -- $891.6 $251.4 $(57.5) $1,085.5
Cost of sales................... -- 232.2 94.8 (58.0) 269.0
Royalty overrides............... -- 263.7 118.6 -- 382.3
Marketing, distribution and
administrative expenses....... $ 1.6 290.9 71.2 -- 363.7
Equity in subsidiary (income)... (37.3) (2.1) -- 39.4 --
Buy-out transaction expenses.... -- 9.5 -- -- 9.5
Interest income -- net.......... -- (1.4) (0.9) -- (2.3)
Intercompany charges (income)... (3.6) 62.0 (58.4) -- --
------ ------ ------ ------ --------
Income before income taxes and
minority interest............. 39.3 36.8 26.1 (38.9) 63.3
Income taxes.................... 0.8 10.7 13.8 -- 25.3
------ ------ ------ ------ --------
Income before minority
interest...................... 38.5 26.1 12.3 (38.9) 38.0
Minority interest............... -- 1.1 -- -- 1.1
------ ------ ------ ------ --------
NET INCOME...................... $ 38.5 $ 25.0 $ 12.3 $(38.9) $ 36.9
====== ====== ====== ====== ========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------
HERBALIFE SUBSIDIARY NON- TOTAL
INTERNATIONAL, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales....................... -- $918.9 $231.7 $(51.7) $1,098.9
Cost of sales................... -- 227.2 89.4 (51.7) 264.9
Royalty overrides............... -- 273.9 123.2 -- 397.1
Marketing, distribution and
administrative expenses....... $ (0.7) 286.9 58.1 -- 344.3
Equity in subsidiary (income)... (39.4) (1.3) -- 40.7 --
Buy-out transaction expenses.... -- -- -- -- --
Interest income -- net.......... -- (2.8) 1.0 -- (1.8)
Intercompany charges (income)... (30.7) 101.4 (70.7) -- --
------ ------ ------ ------ --------
Income before income taxes and
minority interest............. 70.8 33.6 30.7 (40.7) 94.4
Income taxes.................... 12.6 15.4 8.4 -- 36.4
------ ------ ------ ------ --------
Income before minority
interest...................... 58.2 18.2 22.3 (40.7) 58.0
Minority interest............... -- 1.1 -- -- 1.1
------ ------ ------ ------ --------
NET INCOME...................... $ 58.2 $ 17.1 $ 22.3 $(40.7) $ 56.9
====== ====== ====== ====== ========
</Table>
F-31
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidating condensed balance sheet data as of December 31, 2001 and 2000
is summarized as follows:
<Table>
<Caption>
AS OF DECEMBER 31, 2001
---------------------------------------------------------------------------
HERBALIFE SUBSIDIARY NON- TOTAL
INTERNATIONAL, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
CURRENT ASSETS
Cash and marketable
securities.................... $ 0.2 $ 167.3 $ 33.7 -- $201.2
Receivables..................... -- 21.1 6.5 -- 27.6
Intercompany receivables........ 184.9 (150.0) (34.9) -- --
Inventories..................... -- 57.6 20.7 $(6.1) 72.2
Other Current Assets............ -- 36.6 5.5 -- 42.1
------ ------- ------ ----- ------
Total current assets....... 185.1 132.6 31.5 (6.1) 343.1
------ ------- ------ ----- ------
PROPERTY, net................... -- 48.3 12.4 -- 60.7
OTHER NON-CURRENT ASSETS........ 0.9 60.0 7.0 (1.4) 66.5
------ ------- ------ ----- ------
TOTAL ASSETS.................... $186.0 $ 240.9 $ 50.9 (7.5) $470.3
====== ======= ====== ===== ======
CURRENT LIABILITIES:
Accounts payable................ -- $ 14.0 $ 5.8 -- $ 19.8
Royalty overrides............... -- 42.6 15.6 -- 58.2
Accrued compensation and
expenses...................... -- 45.1 13.8 -- 58.9
Other current liabilities....... 17.6 3.3 7.5 -- 28.4
------ ------- ------ ----- ------
Total current liabilities..... 17.6 105.0 42.7 -- 165.3
------ ------- ------ ----- ------
NON-CURRENT LIABILITIES......... 3.8 38.0 0.6 -- 42.4
MINORITY INTEREST............... -- 1.7 -- -- 1.7
STOCKHOLDERS' EQUITY............ 164.6 96.2 7.6 (7.5) 260.9
------ ------- ------ ----- ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY.......... $186.0 $ 240.9 $ 50.9 $(7.5) $470.3
====== ======= ====== ===== ======
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, 2000
---------------------------------------------------------------------------
HERBALIFE SUBSIDIARY NON- TOTAL
INTERNATIONAL, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
CURRENT ASSETS
Cash and marketable
securities.................... $ 0.2 $100.1 $ 40.0 -- $140.3
Receivables..................... 0.2 23.3 1.1 -- 24.6
Intercompany receivables........ 47.3 (23.1) (24.2) -- --
Inventories..................... -- 74.8 27.1 $ (2.6) 99.3
Other Current Assets............ -- 33.1 4.1 -- 37.2
------ ------ ------ ------ ------
Total current assets....... 47.7 208.2 48.1 (2.6) 301.4
------ ------ ------ ------ ------
PROPERTY, net................... -- 52.1 9.6 -- 61.7
</Table>
F-32
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AS OF DECEMBER 31, 2000
---------------------------------------------------------------------------
HERBALIFE SUBSIDIARY NON- TOTAL
INTERNATIONAL, INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------- ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
OTHER NON-CURRENT ASSETS........ 91.8 43.8 2.8 (84.6) 53.8
------ ------ ------ ------ ------
TOTAL ASSETS.................... $139.5 $304.1 $ 60.5 $(87.2) $416.9
====== ====== ====== ====== ======
CURRENT LIABILITIES:
Accounts payable................ -- $ 13.5 $ 5.3 -- $ 18.8
Royalty overrides............... -- 51.3 17.7 -- 69.0
Accrued compensation and
expenses...................... -- 32.3 13.5 -- 45.8
Other current liabilities....... $ 16.6 (0.3) 6.3 -- 22.6
------ ------ ------ ------ ------
Total current liabilities..... 16.6 96.8 42.8 -- 156.2
------ ------ ------ ------ ------
NON-CURRENT LIABILITIES......... 3.8 31.6 0.7 -- 36.1
MINORITY INTEREST............... -- 2.2 -- -- 2.2
STOCKHOLDERS' EQUITY............ 119.1 173.5 17.0 $(87.2) 222.4
------ ------ ------ ------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY.......... $139.5 $304.1 $ 60.5 $(87.2) $416.9
====== ====== ====== ====== ======
</Table>
Consolidating condensed statement of cash flows data for the years ended
December 31, 2001, 2000 and 1999:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
-------------------------------------------------------------------------------
NON-
HERBALIFE GUARANTOR GUARANTOR TOTAL
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by
(used in) operating
activities........... $ 46.3 $ 110.5 $ 10.1 $(71.4) $ 95.5
Net cash provided by
(used in) investing
activities........... (45.1) 89.9 (2.4) (58.8) (16.4)
Net cash provided by
(used in) financing
activities........... (1.2) (120.8) (11.7) 130.2 (3.5)
Effect of exchange rate
changes on cash...... -- (4.5) (2.2) -- (6.7)
------ ------- ------ ------ ------
Net increase (decrease)
in cash.............. -- 75.1 (6.2) -- 68.9
Cash at beginning of
period............... 0.2 70.2 39.9 -- 110.3
------ ------- ------ ------ ------
Cash at end of
period............... $ 0.2 $ 145.3 $ 33.7 $ -- $179.2
====== ======= ====== ====== ======
</Table>
F-33
HERBALIFE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------
NON-
HERBALIFE GUARANTOR GUARANTOR TOTAL
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used
in) operating
activities............... $ 17.7 $ 53.5 $ 12.0 $(37.1) $ 46.1
Net cash provided by (used
in) investing
activities............... (3.8) (43.9) (4.9) 2.6 (50.0)
Net cash provided by (used
in) financing
activities............... (13.7) (21.3) (12.9) 34.0 (13.9)
Effect of exchange rate
changes on cash.......... -- (5.1) (5.4) 0.5 (10.0)
------ ------ ------ ------ ------
Net increase (decrease) in
cash..................... 0.2 (16.8) (11.2) -- (27.8)
Cash at beginning of
period................... -- 86.9 51.2 -- 138.1
------ ------ ------ ------ ------
Cash at end of period...... $ 0.2 $ 70.1 $ 40.0 $ -- $110.3
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
NON-
HERBALIFE GUARANTOR GUARANTOR TOTAL
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used
in) operating
activities............... $ 17.2 $ 75.8 $25.0 $(22.6) $ 95.4
Net cash provided by (used
in) investing
activities............... -- (34.8) (1.6) (7.1) (43.5)
Net cash provided by (used
in) financing
activities............... (17.2) (20.5) (6.9) 28.6 (16.0)
Effect of exchange rate
changes on cash.......... -- 1.3 (0.7) 1.1 1.7
------ ------ ----- ------ ------
Net increase (decrease) in
cash..................... -- 21.8 15.8 -- 37.6
Cash at beginning of
period................... -- 65.3 35.4 -- 100.7
------ ------ ----- ------ ------
Cash at end of period...... $ -- $ 87.1 $51.2 $ -- $138.3
====== ====== ===== ====== ======
</Table>
17. SUBSEQUENT EVENT (UNAUDITED)
SALE OF THE COMPANY
On April 10, 2002, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement"), pursuant to which on July 31, 2002 WH Holdings (Cayman
Islands) Ltd., a Cayman Islands company ("Parent"), acquired the Company in a
merger transaction, with an aggregate purchase price of approximately $651.5
million.
F-34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of WH Intermediate Holdings Ltd.:
We have audited the accompanying consolidated balance sheet of WH
Intermediate Holdings Ltd. and subsidiaries (the "Company") as of July 5, 2002,
and the related consolidated statements of operations, stockholder's deficiency,
and cash flows for the period May 23, 2002 (date of inception) to July 5, 2002.
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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of July 5, 2002, and the
results of its operations and its cash flows for the period May 23, 2002 to July
5, 2002 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
October 30, 2002
F-35
WH INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
JULY 5, 2002
------------
ASSETS
Cash and Cash Equivalents................................. $154,163,000
Interest Receivable....................................... 48,000
Income Tax Receivable..................................... 608,000
------------
TOTAL CURRENT ASSETS...................................... 154,819,000
------------
Deferred Financing Costs (Note 3)......................... 28,467,000
------------
TOTAL ASSETS.............................................. $183,286,000
============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Due to Parent............................................. $ 37,000
Accrued Interest.......................................... 431,000
Accrued Deferred Financing Costs.......................... 20,985,000
------------
TOTAL CURRENT LIABILITIES................................. 21,453,000
------------
Long Term Debt, less unamortized discount (Note 3)........ 162,887,000
------------
TOTAL LIABILITIES......................................... 184,340,000
------------
STOCKHOLDER'S DEFICIENCY
Common stock
$1.00 par value, 50,000 shares authorized, 1 share issued
and outstanding........................................ --
Accumulated Deficit....................................... (1,054,000)
------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY............ $183,286,000
============
</Table>
See the accompanying notes to the consolidated financial statements.
F-36
WH INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<Table>
<Caption>
PERIOD
MAY 23, 2002
TO
JULY 5, 2002
------------
Interest Expense, net (Note 3)............................ $1,662,000
----------
LOSS BEFORE INCOME TAXES.................................. 1,662,000
----------
Income Tax Benefit........................................ (608,000)
----------
NET LOSS.................................................. $1,054,000
==========
</Table>
See the accompanying notes to the consolidated financial statements.
F-37
WH INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIENCY
<Table>
<Caption>
SHARES COMMON STOCK ACCUMULATED DEFICIT TOTAL
------ ------------ ------------------- -----------
Balance at May 23, 2002.................. -- -- -- --
Original issuance of common stock........ 1
Net Loss................................. $(1,054,000) $(1,054,000)
------ ------------ ----------- -----------
Balance at July 5, 2002.................. 1 $ -- $(1,054,000) $(1,054,000)
====== ============ =========== ===========
</Table>
See the accompanying notes to the consolidated financial statements.
F-38
W.H. INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
PERIOD
MAY 23, 2002 TO
JULY 5, 2002
---------------
OPERATING ACTIVITIES:
Net loss.................................................... $ (1,054,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation of deferred financing costs and debt
discount............................................... 1,279,000
Changes in operating assets and liabilities:
Increase in interest receivable........................ (48,000)
Increase in income tax receivable...................... (608,000)
Increase in accrued interest........................... 431,000
------------
Net cash provided by operating activities................... --
------------
FINANCING ACTIVITIES:
Amounts paid relating to deferred financing costs......... (8,755,000)
Amounts borrowed from Parent.............................. 37,000
Bonds issued, net of discount............................. 162,881,000
------------
Net cash provided by financing activities................... 154,163,000
------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 154,163,000
------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. --
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $154,163,000
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... --
Taxes.................................................. --
</Table>
See the accompanying notes to the consolidated financial statements.
F-39
WH INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MAY 23, 2002 TO JULY 5, 2002
1. ORGANIZATION
WH Intermediate Holdings Ltd., a Cayman Islands company (the "Parent"), and
its direct and indirect wholly owned subsidiaries, WH Luxembourg Holdings SaRL,
a Luxembourg unipersonal limited liability company ("Lux Holdings"), WH
Luxembourg Intermediate Holdings SaRL, a Luxembourg unipersonal limited
liability company ("Lux Intermediate"), WH Luxembourg CM SaRL, a Luxembourg
unipersonal limited liability company ("Lux CM"), and WH Acquisition Corp., a
Nevada corporation ("WH Acquisition"), were formed on behalf of Whitney & Co.
LLC ("Whitney") and Golden Gate Private Equity, Inc. ("Golden Gate"), in order
to acquire Herbalife International, Inc., a Nevada corporation, and its
subsidiaries, ("Herbalife"). The Parent and its subsidiaries are referred to
collectively herein as the Company.
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.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
3. DEBT
In connection with the merger, the Company and its affiliates consummated
certain related financing transactions, including the issuance by WH Acquisition
on June 27, 2002 of $165 million of 11 3/4% Senior Subordinated Notes (the
"Senior Subordinated Notes") issued at 98.716% of par, due July 15, 2010.
Interest is to be paid semiannually on January 15th and July 15th commencing on
January 15, 2003. In conjunction with this financing, the Company incurred $25.1
million of debt issuance costs, which are being amortized, on a straight-line
basis, which approximates the effective interest method, over the term of the
debt. The Senior Subordinated Notes are fully and unconditionally, jointly and
severally guaranteed by certain subsidiaries of the Company. The Senior
Subordinated Notes include customary covenants that restrict, among other
things, the ability to incur additional debt, pay dividends or make certain
other restricted payments, incur liens, merge or sell all or substantially all
of the assets, or enter into various transactions with affiliates.
In addition to the Senior Subordinated Notes, the Company was provided with
a bridge financing commitment which, as of July 5, 2002, was not drawn upon. The
Company incurred $4.7 million in fees related to the bridge financing, which are
being amortized on a straight-line basis, over the term of the commitment, which
expired on July 31, 2002.
F-40
WH INTERMEDIATE HOLDINGS LTD. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MAY 23, 2002 TO JULY 5, 2002
4. SUBSEQUENT EVENT -- FINANCING
In connection with the merger, Herbalife entered into a Credit Agreement
dated as of July 31, 2002 among Herbalife, as borrower, the guarantor parties
thereto, the lender party thereto and UBS AG, Stamford branch, as Administrative
Agent and Collateral Agent (the "Credit Agreement"), which provides for a term
loan amount of $180 million and a revolving credit facility in the amount of $25
million (collectively, the "Senior Credit Facility"). Repayments under the term
loan facility began on September 30, 2002 in the amount of $5.0 million, with
all other payments to be made in the amount of $7.5 million on a quarterly
basis, except for the final payment due on June 30, 2008 in the amount of $10.0
million. The revolving credit facility is available until July 31, 2007. The
term loan and the revolving credit facility bear interest, at the option of the
Company, at either the alternate base rate or the LIBOR rate plus in each case
an applicable margin. The base rate applicable margin for the term loan is
3.00%, while the LIBOR rate applicable margin is 4.00%. The base rate applicable
margin for the revolving credit facility is 2.75%, while the LIBOR rate
applicable margin is 3.75%. Per the terms of the Senior Credit Facility, on
October 30, 2002, the Company purchased a three year 5% LIBOR (three months)
interest rate cap covering $43.75 million of the outstanding bank term loan debt
under the Senior Credit Facility. In addition to the scheduled repayments,
Herbalife must prepay amounts due under the Senior Credit Facility with 50% of
its Excess Cash Flow (as defined in the Credit Agreement) as calculated on an
annual basis commencing 120 days after each fiscal year end.
The Senior Credit Facility is guaranteed by certain subsidiaries of the
Company. The obligations under the Senior Credit Facility are secured by (i)
first priority pledges of (A) all the stock of Herbalife and each of its direct
and indirect subsidiaries, other than certain foreign subsidiaries and (B) 65%
of the equity interests of certain foreign subsidiaries of Herbalife and (ii)
security interests in and liens on all accounts receivable, inventory and other
property and assets of Herbalife and certain of its direct and indirect
subsidiaries and affiliates. The Credit Facility includes customary covenants,
including maintenance of certain leverage, fixed charge coverage, and interest
coverage ratios, along with covenants that restrict, among other things, the
ability to incur additional debt, pay dividends or make certain other restricted
payments, and incur liens, merge or sell all or substantially all of the assets,
or enter into various transactions with affiliates.
5. SUBSEQUENT EVENT -- ACQUISITION
On July 31, 2002, WH Acquisition merged with and into Herbalife with
Herbalife being the surviving corporation. The merger was consummated pursuant
to the Agreement and Plan of Merger by and among WH Holdings (Cayman Islands)
Ltd., sole shareholder of the Parent and a Cayman Islands company ("WH
Holdings"), WH Acquisition and Herbalife entered into on April 10, 2002 (the
"Merger Agreement"). Each stockholder of Herbalife received $19.50 in cash for
each share of common stock. The holders of each outstanding option to purchase
Herbalife common stock received an amount in cash equal to the excess of $19.50
over the exercise price of such option. As a result of the merger, Herbalife was
delisted from the NASDAQ National Market.
The merger was undertaken to (i) provide the public stockholders of
Herbalife with cash for their shares of common stock, (ii) permit WH Holdings to
acquire ownership of Herbalife, (iii) incentivize continuing management by
allowing them to share in future earnings and growth of Herbalife through
investment in WH Holdings, (iv) provide key distributors of Herbalife an
opportunity to participate in future earnings and growth of Herbalife through
investment in WH Holdings and (v) allow the controlling stockholder of
Herbalife, the Mark Hughes Family Trust, to diversify its assets through an
orderly transfer of ownership of Herbalife to WH Holdings. The merger price per
share was determined by the Board of Directors of Herbalife, after receiving the
recommendation of a Special Committee of members of the Board who were not
affiliated with Herbalife or its controlling stockholder. The Board determined
that the merger price of $19.50 per share was fair, from a financial point of
view, to the stockholders unaffiliated with the controlling
F-41
stockholder and the option holders based on the opinion of two financial
advisors, as well as financial analyses which included historical share price
analysis, comparable company analysis, discounted cash flow and leveraged buyout
analysis, and other factors set forth in the proxy statement related to the
merger.
The merger has been accounted for as a purchase in accordance with SFAS No.
141, "Business Combinations."
The total purchase price of approximately $651.5 million was allocated to
the acquired assets and assumed liabilities based upon estimates of their
respective fair value as of the closing date using valuations and other studies
that have substantially been finalized. The final allocation of the purchase
cost may differ from the preliminary amounts included herein. The following
table summarizes the estimated fair values of the assets acquired and the
liabilities assumed at the date of acquisition (dollars in millions):
<Table>
<Caption>
AT JULY 31, 2002
----------------
Current assets.............................................. $ 388.7
Property.................................................... 51.8
Marketing franchise......................................... 180.0
Trademark and tradename..................................... 130.0
Product certification and other intangible assets........... 7.4
Goodwill.................................................... 208.4
Other long term assets...................................... 42.6
--------
Total assets acquired....................................... $1,008.9
Current liabilities......................................... $ 192.8
Other non-current liabilities............................... 35.9
Long term debt.............................................. 1.2
Deferred income tax......................................... 127.5
--------
Total liabilities assumed................................... $ 357.4
--------
Net assets acquired......................................... $ 651.5
--------
</Table>
In connection with the merger, Herbalife incurred transaction expenses and
stock option payments of approximately $54.7 million. In addition, the Company
incurred debt issuance costs of approximately $41.5 million.
The merger was financed through:
- gross proceeds of $162.9 million from sale of Senior Subordinated Notes
(as defined in Note 4 herein) (face value of $165.0 million);
- borrowing of $180.0 million under the $205.0 million Senior Credit
Facility (as defined in Note 4 herein);
- contribution of net proceeds of $24.0 million by WH Holdings from the
sale of its $38 million of 15.5% Senior Notes (the "Senior Notes") (face
value $38.0 million);
- contribution by Whitney, Golden Gate and selected members of Herbalife's
distributor organization and senior management of $176.0 million from the
sale of 12% Series A Cumulative Convertible Preferred Shares of WH
Holdings (the "Preferred Shares") by WH Holdings; and
- use of available cash balances of Herbalife of approximately $228.4
million, of which $4.6 million was used to repurchase Herbalife's
minority shares in its Japanese subsidiary (which payment was made during
the second quarter), $6.7 million was used to repay existing debt and
$217.1 million was used to finance the merger and pay related fees and
expenses.
F-42
In connection with the merger, WH Holdings contributed the proceeds from
the sale of the Preferred Shares and the sale of the Senior Notes, totaling
$200.0 million, to the Parent as capital. Immediately upon the consummation of
the merger, the Parent assumed indirectly through one of its subsidiaries the
liability of $7.2 million of expenses relating to the merger and related
financing transactions from WH Holdings, resulting in a net capital contribution
of $192.8 million.
F-43
WH INTERMEDIATE HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
(SUCCESSOR) (PREDECESSOR)
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 75,993,000 $179,237,000
Marketable securities..................................... 1,161,000 21,944,000
Receivables, including related party receivables of
$736,000 (2001)........................................ 30,106,000 27,609,000
Inventories............................................... 56,651,000 72,208,000
Prepaid expenses and other current assets................. 29,931,000 14,379,000
Deferred income taxes..................................... 20,432,000 27,741,000
------------ ------------
Total current assets........................................ 214,274,000 343,118,000
Property, at cost, net of accumulated depreciation and
amortization of $2,552,000 (2002) and $81,026,000
(2001).................................................... 50,560,000 60,707,000
Deferred compensation plan assets........................... 38,232,000 43,221,000
Other assets................................................ 4,463,000 2,922,000
Deferred income taxes....................................... -- 16,831,000
Deferred financing costs, net............................... 40,128,000 --
Marketing Franchise......................................... 180,000,000 --
Trademark and Tradename..................................... 130,000,000 --
Product Certification and other intangible assets, net of
accumulated amortization of $617,000 (2002)............... 6,783,000 250,000
Goodwill.................................................... 208,350,000 3,286,000
------------ ------------
TOTAL....................................................... $872,790,000 $470,335,000
============ ============
</Table>
See the accompanying notes to consolidated financial statements
F-44
WH INTERMEDIATE HOLDINGS LTD.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
(SUCCESSOR) (PREDECESSOR)
------------- -------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 23,528,000 $ 19,793,000
Royalty overrides......................................... 62,028,000 58,202,000
Accrued compensation...................................... 33,029,000 22,712,000
Accrued expenses.......................................... 45,402,000 36,203,000
Dividends payable......................................... -- 4,720,000
Current portion of long term debt......................... 32,574,000 9,395,000
Advance sales deposits.................................... 11,354,000 5,800,000
Income taxes payable...................................... -- 8,480,000
------------ ------------
Total current liabilities................................... 207,915,000 165,305,000
NON-CURRENT LIABILITIES:
Long term debt, net of current portion.................... 308,945,000 1,217,000
Deferred compensation..................................... 32,695,000 35,678,000
Deferred income taxes..................................... 123,688,000 --
Other non-current liabilities, including related party
payables of $417,000 (2002)............................ 2,077,000 5,548,000
------------ ------------
Total liabilities........................................... 675,320,000 207,748,000
------------ ------------
MINORITY INTEREST........................................... -- 1,671,000
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 par value, 50,000 shares authorized, 1
share issued and outstanding (September 30, 2002)...... -- --
Class A Common Stock, $0.01 par value; 33,333,333 shares
authorized, 11,212,696 shares issued and outstanding
(December 31, 2001).................................... -- 112,000
Class B Common Stock, $0.01 par value; 66,666,667 shares
authorized, 20,293,759 shares issued and outstanding
(December 31, 2001).................................... -- 203,000
Paid-in-capital in excess of par value.................... 192,776,000 77,717,000
Retained earnings......................................... 5,814,000 194,415,000
Accumulated other comprehensive loss...................... (1,120,000) (11,531,000)
------------ ------------
Total stockholders' equity.................................. 197,470,000 260,916,000
------------ ------------
TOTAL....................................................... $872,790,000 $470,335,000
============ ============
</Table>
See the accompanying notes to consolidated financial statements
F-45
WH INTERMEDIATE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
QUARTER NINE MONTHS
--------------------------------------------- --------------------------------------------------
2002 2001 2002 2001
----------------------------- ------------- ------------------------------ -----------------
JULY 1 AUGUST 1 QUARTER JANUARY 1 AUGUST 1 NINE MONTHS
TO TO ENDED TO TO ENDED
JULY 31 SEPTEMBER 30 SEPTEMBER 30 JULY 31 SEPTEMBER 30 SEPTEMBER 30
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------- ------------- ------------- -------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------- ------------- -----------------
Retail sales............. $156,220,000 $ 285,800,000 $424,317,000 $1,047,690,000 $ 285,800,000 $1,237,417,000
Distributor allowances
on product
purchases............ (73,335,000) (134,126,000) (198,557,000) (492,997,000) (134,126,000) (578,570,000)
Handling & freight
income............... 13,521,000 24,501,000 35,827,000 89,495,000 24,501,000 103,523,000
------------ ------------- ------------- -------------- ------------- --------------
Net sales................ 96,406,000 176,175,000 261,587,000 644,188,000 176,175,000 762,370,000
Cost of sales.......... 20,747,000 38,145,000 60,232,000 140,553,000 38,145,000 181,698,000
------------ ------------- ------------- -------------- ------------- --------------
Gross Profit............. 75,659,000 138,030,000 201,355,000 503,635,000 138,030,000 580,672,000
Royalty overrides...... 33,862,000 61,789,000 90,251,000 227,233,000 61,789,000 266,777,000
Marketing, distribution
& administrative
expenses............. 31,642,000 53,930,000 88,161,000 207,390,000 53,930,000 261,738,000
Merger transaction
expenses............. 50,673,000 -- -- 54,708,000 -- --
Interest expense
(income) -- net...... (335,000) 12,622,000 (664,000) (1,364,000) 12,622,000 (3,059,000)
------------ ------------- ------------- -------------- ------------- --------------
Income (loss) before
income taxes and
minority interest...... (40,183,000) 9,689,000 23,607,000 15,668,000 9,689,000 55,216,000
Income taxes........... (16,074,000) 3,875,000 9,443,000 6,267,000 3,875,000 22,086,000
------------ ------------- ------------- -------------- ------------- --------------
Income (loss) before
minority interest...... (24,109,000) 5,814,000 14,164,000 9,401,000 5,814,000 33,130,000
Minority interest...... -- -- 138,000 189,000 -- 499,000
------------ ------------- ------------- -------------- ------------- --------------
NET INCOME (LOSS)........ $(24,109,000) $ 5,814,000 $ 14,026,000 $ 9,212,000 $ 5,814,000 $ 32,631,000
============ ============= ============= ============== ============= ==============
</Table>
See the accompanying notes to consolidated financial statements
F-46
WH INTERMEDIATE HOLDINGS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
2002 2001
----------------------------- -------------
JANUARY 1 AUGUST 1 NINE MONTHS
TO TO ENDED
JULY 31 SEPTEMBER 30 SEPTEMBER 30
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 9,212,000 $ 5,814,000 $ 32,631,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 11,722,000 3,752,000 13,060,000
Amortization of deferred financing costs.................. -- 1,344,000 --
Deferred income taxes..................................... 3,186,000 896,000 (1,742,000)
Unrealized foreign exchange loss.......................... 2,448,000 (167,000) 1,774,000
Minority interest in earnings............................. 189,000 -- 499,000
Other..................................................... 2,338,000 149,000 1,079,000
Changes in operating assets and liabilities:
Receivables............................................. (11,712,000) 9,374,000 (2,888,000)
Inventories............................................. 11,462,000 3,110,000 17,688,000
Prepaid expenses and other current assets............... (14,107,000) (4,708,000) (2,428,000)
Accounts payable........................................ 14,831,000 (9,613,000) 5,169,000
Royalty overrides....................................... 3,948,000 49,000 (7,172,000)
Accrued expenses and accrued compensation............... 1,895,000 5,961,000 11,851,000
Advance sales deposits.................................. 3,230,000 2,132,000 1,114,000
Income taxes payable.................................... 718,000 146,000 2,440,000
Deferred compensation liability......................... (1,459,000) (1,523,000) 6,246,000
------------ ------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 37,901,000 16,716,000 79,321,000
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property................................... (4,741,000) (1,873,000) (7,179,000)
Proceeds from sale of property.......................... 191,000 49,000 127,000
Changes in marketable securities, net................... 20,691,000 105,000 7,890,000
Increase in other assets................................ (2,300,000) (33,000) (1,222,000)
Deferred compensation plan assets....................... 5,154,000 (166,000) (11,019,000)
Acquisition of Herbalife International, Inc............. -- (650,893,000) --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 18,995,000 (652,811,000) (11,403,000)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.......................................... (9,682,000) -- (13,405,000)
Distribution to and purchase of minority interest....... (4,598,000) -- (956,000)
Additions to bank loans................................. 29,000 -- 2,206,000
Principal payments on bank loans and contract
payables.............................................. (3,799,000) (10,433,000) (2,493,000)
Increase in deferred financing costs.................... (27,788,000) (13,693,000) --
Exercise of stock options............................... 10,546,000 -- 15,055,000
Equity contributions.................................... -- 200,000,000 --
Assumption of shareholder acquisition expense........... -- (7,223,000) --
Term loan and senior sub notes.......................... -- 342,882,000 --
------------ ------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (35,292,000) 511,533,000 407,000
------------ ------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 980,000 (1,266,000) (5,419,000)
------------ ------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 22,584,000 (125,828,000) 62,906,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 179,237,000 201,821,000 110,336,000
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $201,821,000 $ 75,993,000 $173,242,000
============ ============= ============
NON-CASH ACTIVITIES:
Acquisitions of property from capital leases.............. $ 2,058,000 $ 13,000 $ 3,494,000
============ ============= ============
</Table>
See the accompanying notes to consolidated financial statements
F-47
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
WH Intermediate Holdings Ltd., a Cayman Islands company (the "Parent"), and
its direct and indirect wholly owned subsidiaries, WH Luxembourg Holdings
S.a.R.L., a Luxembourg unipersonal limited liability company ("Lux Holdings"),
WH Luxembourg Intermediate Holdings S.a.R.L., a Luxembourg unipersonal limited
liability company ("Lux Intermediate"), WH Luxembourg CM S.a.R.L., a Luxembourg
unipersonal limited liability company ("Lux CM"), and WH Acquisition Corp., a
Nevada corporation ("WH Acquisition"), were formed on behalf of Whitney & Co.,
LLC ("Whitney") and Golden Gate Private Equity, Inc. ("Golden Gate"), in order
to acquire Herbalife International, Inc., a Nevada corporation, and its
subsidiaries, ("Herbalife" or "Predecessor"). The Parent and its subsidiaries
are referred to collectively herein as the Company.
On July 31, 2002, WH Acquisition merged with and into Herbalife with
Herbalife being the surviving corporation. The merger was consummated pursuant
to the Agreement and Plan of Merger by and among WH Holdings (Cayman Islands)
Ltd., sole shareholder of the Parent and a Cayman Islands company ("WH
Holdings"), WH Acquisition and Herbalife entered into on April 10, 2002 (the
"Merger Agreement"). Each stockholder of Herbalife received $19.50 in cash for
each share of common stock. The holders of each outstanding option to purchase
Herbalife common stock received an amount in cash equal to the excess of $19.50
over the exercise price of such option. As a result of the merger, Herbalife was
delisted from the NASDAQ National Market. The stock of Herbalife is no longer
publicly traded and, therefore, earnings per share calculations are no longer
included for financial statement presentation.
The merger was undertaken to (i) provide the public stockholders of
Herbalife with cash for their shares of common stock, (ii) permit WH Holdings to
acquire ownership of Herbalife, (iii) incentivize continuing management by
allowing them to share in future earnings and growth of Herbalife through
investment in WH Holdings, (iv) provide key distributors of Herbalife an
opportunity to participate in future earnings and growth of Herbalife through
investment in WH Holdings and (v) allow the controlling stockholder of
Herbalife, the Mark Hughes Family Trust, to diversify its assets through an
orderly transfer of ownership of Herbalife to WH Holdings. The merger price per
share was determined by the Board of Directors of Herbalife, after receiving the
recommendation of a Special Committee of members of the Board who were not
affiliated with Herbalife or its controlling stockholder. The Board determined
that the merger price of $19.50 per share was fair, from a financial point of
view, to the stockholders unaffiliated with the controlling stockholder and the
option holders based on the opinion of two financial advisors, as well as
financial analyses which included historical share price analysis, comparable
company analysis, discounted cash flow and leveraged buyout analysis, and other
factors set forth in the proxy statement related to the merger.
The merger has been accounted for as a purchase in accordance with SFAS No.
141, "Business Combinations." Accordingly, the acquired assets and liabilities
have been recorded at fair value. Because of this, different bases of accounting
have been used to prepare the Company and Predecessor consolidated financial
statements. In the future, the primary differences will relate to additional
interest expense on the new debt and depreciation and amortization of deferred
financing costs recorded at fair value at the date of the merger.
The total purchase price of approximately $651.5 million was allocated to
the acquired assets and assumed liabilities based upon estimates of their
respective fair value as of the closing date using valuations and other studies
that have substantially been finalized. The final allocation of the purchase
price may differ
F-48
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the preliminary amounts included herein. The following table summarizes the
estimated fair values of the assets acquired and the liabilities assumed at the
date of acquisition (dollars in millions):
<Table>
<Caption>
AT JULY 31, 2002
----------------
Current assets.............................................. $ 388.7
Property.................................................... 51.8
Marketing franchise......................................... 180.0
Trademark and tradename..................................... 130.0
Product certification and other intangible assets........... 7.4
Goodwill.................................................... 208.4
Other long term assets...................................... 42.6
--------
Total assets acquired....................................... $1,008.9
--------
Current liabilities......................................... $ 192.8
Other non-current liabilities............................... 35.9
Long term debt.............................................. 1.2
Deferred income tax......................................... 127.5
--------
Total liabilities assumed................................... $ 357.4
--------
Net assets acquired......................................... $ 651.5
--------
</Table>
In connection with the merger, the Predecessor incurred transaction
expenses and stock option payments of approximately $54.7 million, which have
been reflected in the Predecessor financial statements. In addition, the Company
incurred debt issuance costs of approximately $41.5 million, which have been
capitalized as deferred financing costs in the Company's consolidated balance
sheet.
The following pro forma results for the three and nine months ended
September 30, 2001 and September 30, 2002 are based on the historical financial
statements of the Predecessor, adjusted to give effect to the merger and related
financing transactions as if the transactions had occurred as of January 1, 2001
(in millions).
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
Net Sales.......................................... $272.6 $261.6 $820.4 $762.4
Net Income......................................... 12.6 6.8 35.2 11.7
</Table>
The merger was financed through:
- gross proceeds of $162.9 million from sale of Senior Subordinated Notes
(as defined in Note 4 herein) (face value of $165.0 million);
- borrowing of $180.0 million under the $205.0 million Senior Credit
Facility (as defined in Note 4 herein);
- contribution of net proceeds of $24.0 million by WH Holdings from the
sale of its $38 million of 15.5% Senior Notes (the "Senior Notes") (face
value $38.0 million);
- contribution by Whitney, Golden Gate and selected members of Herbalife's
distributor organization and senior management of $176.0 million from the
sale of 12% Series A Cumulative Convertible Preferred Shares of WH
Holdings (the "Preferred Shares") by WH Holdings; and
F-49
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- use of available cash balances of Herbalife of approximately $228.4
million, of which $4.6 million was used to repurchase Herbalife's
minority shares in its Japanese subsidiary (which payment was made during
the second quarter), $6.7 million was used to repay existing debt and
$217.1 million was used to finance the merger and pay related fees and
expenses.
In connection with the merger, WH Holdings contributed the proceeds from
the sale of the Preferred Shares and the sale of the Senior Notes, totaling
$200.0 million, to the Parent as capital. Immediately upon the consummation of
the merger, the Parent assumed indirectly through one of its subsidiaries the
liability of $7.2 million of expenses relating to the merger and related
financing transactions from WH Holdings, resulting in a net capital contribution
of $192.8 million.
2. BASIS OF PRESENTATION
The unaudited interim financial information of the Parent and its
subsidiaries (the "Successor") and of Herbalife and its subsidiaries have been
prepared in accordance with Article 10 of the Securities and Exchange
Commission's Regulation S-X. The Successor financial statements as of September
30, 2002 and for the two months ended September 30, 2002 include the Parent, and
all of its direct and indirect subsidiaries, including Herbalife from the date
of the merger. The Successor financial statements also include interest expense
and amortization of debt issuance costs incurred prior to the consummation of
the merger. In the opinion of management, the accompanying interim financial
information contains all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial statements as of
September 30, 2002 and for the one month period ended July 31, 2002, the two
month period ended September 30, 2002, the seven month period ended July 31,
2002 and the three and nine month periods ended September 30, 2001.
As a result of the merger and related financing transactions results prior
to the merger are not comparable with those subsequent to the merger.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," SFAS No.
144, "Accounting for the Impairment or Disposals of Long-Lived Assets," and
Emerging Issues Task Force ("EITF") Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products". The adoption of SFAS No. 142, SFAS No. 144, and EITF Issue No. 01-09
had no material impact on the Company's financial statements.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds or
amends, effective immediately upon adoption, several other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. In July
2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is currently evaluating the impact these pronouncements
will have on its consolidated statements.
F-50
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for the period beginning August 1,
2002 include the accounts of the Parent and its subsidiaries and for the periods
prior to August 1, 2002 include the accounts of Herbalife 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 loss on the accompanying consolidated balance
sheets.
Forward Exchange Contracts and Option Contracts
The Company enters into forward exchange contracts and option contracts in
managing its foreign exchange risk on sales to distributors, purchase
commitments denominated in foreign currencies, intercompany transactions and
bank loans. The Company does not use the contracts for trading purposes.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended and
interpreted, established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As of January 1, 2001, the Company
recorded a net gain of $909,000 ($545,000 net of tax) as a cumulative transition
adjustment to earnings. This adjustment relates to derivatives not designated as
hedges prior to adoption of SFAS No. 133, and represents the difference between
the carrying value and the fair value of such instruments at January 1, 2001.
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.
Marketable Securities
The Company's marketable securities are classified as "available for sale."
Fluctuations in fair value are included in accumulated other comprehensive loss
on the accompanying consolidated balance sheets. Marketable securities are
comprised primarily of tax-exempt municipal bonds.
Accounts Receivable
Accounts receivable consists 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 products 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. The Company believes that it provides adequate
allowances for receivables from its distributors.
F-51
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company has estimated the fair value of its financial instruments using
the following methods and assumptions:
The carrying amounts of cash and cash equivalents, receivables and
accounts payable approximate fair value due to the short-term maturities of
these instruments. Marketable securities are based on the quoted market
prices for these instruments. Foreign exchange contracts are based on
exchange rates at period 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 approximate 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 (including computer
hardware and software) is computed on a straight-line basis over the estimated
useful lives of the related assets, which range from three to seven 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 was being amortized over periods ranging from fifteen to forty
years. Effective January 1, 2002, amortization of goodwill was discontinued. See
"New Accounting Pronouncements." Intangible assets with definite lives are
amortized over the expected life, which is two years for the product
certification.
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. Measurement of an impairment loss
is based on the estimated fair market value of the asset.
Goodwill and intangible assets with indefinite lives are evaluated on an
annual basis for impairment, or more frequently if events or changes in
circumstances indicated that the asset might be impaired.
Income Taxes
Income tax expense includes income taxes payable for the current year and
the change in deferred income tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or income tax returns. A valuation allowance is recognized to reduce
the carrying value of deferred income tax assets if it is believed to be more
likely than not that a component of the deferred income tax assets will not be
realized.
Royalty Overrides
An independent distributor may earn commissions, called royalty overrides
or production bonuses, based on retail volume. Such commissions are based on the
retail sales volume of certain other members of the independent sales force who
are sponsored by the distributor.
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 plus handling and
F-52
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
freight income. Sales, related royalty overrides, and allowances for product
returns are recorded when the merchandise is shipped in accordance with the
Company's shipping terms. Advance sales deposits represent prepaid orders for
which the Company has not shipped the merchandise.
3. TRANSACTIONS WITH RELATED PARTIES
The Company has entered into agreements with Whitney and Golden Gate to pay
monitoring fees for their services and other fees and expenses. Under the
monitoring fee agreements, the Company is obligated to pay an annual amount of
up to $5.0 million, but not less than $2.5 million for an initial period of ten
years. Subject to the provisions in the Credit Agreement (as defined in Note 4
herein), such fees can be paid on a current basis with certain limitations and
any unpaid balance will accrue interest of a rate of 12% per annum. For the two
months ended September 30, 2002, the Company expensed monitoring fees in the
amount of $833,000 and capitalized debt related services and expenses in the
amount of $23.4 million. Also, in connection with the Senior Credit Facility
discussed below, Whitney Private Debt Fund, L.P. lent $5.0 million of the $180
million term loan to Herbalife.
In connection with the purchase of the Preferred Shares, WH Holdings and WH
Acquisition entered into an indemnity agreement with Whitney and Golden Gate,
pursuant to which WH Holdings and Herbalife (as successor-in-interest to WH
Acquisition) agreed to indemnify Whitney and Golden Gate for losses and claims
resulting from, arising out of or any way related to the merger, including
existing litigation. Whitney has been sued in San Francisco by Rosemont
Associates and Joseph Urso for $20 million in a suit alleging breach of
contract, breach of covenants of good faith and fair dealing, quantum meruit and
other causes of action arising out of the sale of Herbalife to Whitney and
others. Whitney believes it has meritorious defenses to the suit and is
vigorously contesting it.
Frank P. Morse and Robert A. Sandler, two former senior executives of the
Company, are minority shareholders in B.L.I. Holdings, Inc., a holding company
for two of the Company's suppliers of personal care products. Total purchases
from B.L.I. Holdings, Inc. and its subsidiaries were $919,000 for the seven
months ended July 31, 2002, $199,000 for the two months ended September 30,
2002, and $241,000 for the nine months ended September 30, 2001.
4. LONG TERM DEBT
In connection with the merger, the Parent and its affiliates consummated
certain related financing transactions, including the issuance by WH Acquisition
on June 27, 2002 of $165.0 million of 11 3/4% Senior Subordinated Notes (the
"Senior Subordinated Notes") issued at 98.716% of par, due July 15, 2010.
Interest is to be paid semiannually on January 15th and July 15th, commencing on
January 15, 2003. In conjunction with this financing, the Company incurred $25.1
million of debt issuance costs, which are being amortized, on a straight-line
basis, which approximates the effective interest method, over the term of the
debt.
In addition, Herbalife entered into a Credit Agreement dated as of July 31,
2002 among Herbalife, as borrower, the guarantors party thereto, the lenders
party thereto and UBS AG, Stamford Branch, as Administrative Agent and
Collateral Agent (the "Credit Agreement"), which provides for a term loan amount
of $180.0 million and a revolving credit facility in the amount of $25.0 million
(collectively, the "Senior Credit Facility"). Repayments under the term loan
facility began on September 30, 2002 in the amount of $5.0 million, with all
other payments to be made in the amount of $7.5 million on a quarterly basis,
except for the final payment due on June 30, 2008 in the amount of $10.0
million. The revolving credit facility is available until July 31, 2007. The
term loan and the revolving credit facility bear interest, at the option of the
Company, at either the alternate base rate or the LIBOR rate plus in each case
an applicable margin. The base rate applicable margin for the term loan is
3.00%, while the LIBOR rate applicable margin is 4.00%. As of September 30,
2002, the revolving credit facility had no amounts borrowed. As of September 30,
2002 the Company had selected the LIBOR rate based alternative with the
September 30, 2002 interest rate of 5.8%.
F-53
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The base rate applicable margin for the revolving credit facility is 2.75%,
while the LIBOR rate applicable margin is 3.75%. Per the terms of the Senior
Credit Facility, on October 30, 2002, the Company purchased a three year 5%
LIBOR (three months) interest rate cap covering $43.75 million of the
outstanding bank term loan debt under the Senior Credit Facility. In addition to
the scheduled repayments, Herbalife must prepay amounts due under the Senior
Credit Facility with 50% of its Excess Cash Flow (as defined in the Credit
Agreement) as calculated on an annual basis commencing 120 days after each
fiscal year end commencing December 31, 2002. In conjunction with this
financing, the Company incurred $16.4 million of debt issuance costs, which are
being amortized over the term of the debt using the effective interest method.
The Senior Subordinated Notes and the Senior Credit Facility are guaranteed
by the Guarantors (as defined in Note 10 herein). The Senior Credit Facility is
also guaranteed by WH Holdings. The obligations under the Senior Credit Facility
are secured by (i) first priority pledges of (A) all of the stock of the
Guarantors and (B) 65% of the equity interests of the foreign subsidiaries of
Herbalife that are not Guarantors other than HIIP Investment Co., LLC, Herbalife
Foreign Sales Corporation, Importadora Y Distribuidora Herbalife International
de Chile Limitada, Herbalife International Greece S.A., Herbalife Hungary
Trading, Limited, PT Herbalife Indonesia, Herbalife International SBN.BHD, HBL
International Maroc S.a.R.L, Herbalife International Products N.V., Herbalife
International Holdings, Inc., Herbalife International, S.A., Herbalife
Dominicana, S.A., and Herbalife Del Ecuador, S.A. and (ii) security interests in
and liens on all accounts receivable, inventory and other property and assets of
WH Holdings and the Guarantors (other than the escrow account for interest on
the Senior Notes).
The Senior Subordinated Notes and Senior Credit Facility include customary
covenants that restrict, among other things, the ability to incur additional
debt, pay dividends or make certain other restricted payments, incur liens,
merge or sell all or substantially all of the assets, or enter into various
transactions with affiliates. Additionally, the Senior Credit Facility includes
covenants relating to the maintenance of certain leverage, fixed charge
coverage, and interest coverage ratios.
Long term debt consisted of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Senior subordinated notes................................. $162,949,000 $ --
Borrowing under Senior Credit Facility.................... 175,000,000 --
Leases.................................................... 2,612,000 3,439,000
Other debt................................................ 958,000 7,173,000
------------ -----------
$341,519,000 $10,612,000
Less-current portion...................................... 32,574,000 9,395,000
------------ -----------
$308,945,000 $ 1,217,000
============ ===========
</Table>
5. CONTINGENCIES
The Company is from time to time engaged in routine litigation. The Company
regularly reviews all pending litigation matters in which it is involved and
establishes reserves deemed appropriate by management for these litigation
matters. However, some of these matters are material and an adverse outcome in
these matters could have a material impact on the Company's financial condition
and operating results.
F-54
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 2000, a putative class action lawsuit was filed in the
District Court, Clark County, Nevada (Tharp v. Herbalife International, Inc., et
al.). A second putative class action lawsuit was filed in the same court in
August 2001 (Brown v. Herbalife International Inc., et al.). The Tharp lawsuit
alleges breaches of fiduciary obligations by the Company's directors and its
majority stockholder in connection with the adoption by the Company of the
Preferred Share Purchase Rights Plan and the rejection of a purported offer by a
third party to acquire a controlling interest in the Company. The Brown lawsuit
similarly alleges breaches of fiduciary obligations in connection with an
alleged rejection of an offer from a third party to purchase the Company. The
plaintiffs in the lawsuits request (1) an order compelling the defendants to
take steps to seek a sale of the Company, (2) an order enjoining the defendants
in office, (3) unspecified damages, and (4) other relief. The Company has
reached an oral settlement agreement to pay plaintiff's legal fees of $190,000
and the Company's insurance company has agreed to pay 50% of the settlement
amount. The settlement remains subject to documentation and court approval for
which a hearing date has not yet been set.
In addition, on or about April 12, 2002, Harbor Finance Partners, allegedly
an Herbalife stockholder, filed a purported class action against Herbalife in
the District Court of Clark County in the State of Nevada, naming Herbalife, its
Board of Directors and one former director as defendants ("Defendants") and
alleging a claim of breach of fiduciary duty arising out of the announced merger
transaction between Herbalife and WH Holdings. The District Court gave final
approval to a settlement on November 1, 2002 providing for the payment of
Plaintiff's legal fees of $650,000, which is included in the Company's financial
statements. Payments pursuant to the settlement were made in early November
2002.
The Company and certain of its distributors have been named as defendants
in a purported class action lawsuit filed in the U.S. District Court for the
Central District of California (Jacobs v. Herbalife International, Inc., et
al.). The lawsuit was filed on February 19, 2002. The complaint alleges that
specified marketing plans employed by the distributor defendants are illegal,
and that the Company has permitted the use of these marketing plans and/or
failed to supervise its distributors' conduct to prevent violations of law by
them. The complaint does not challenge the legality of Herbalife's marketing
system. The complaint seeks to state causes of action under RICO and various
state and other federal laws. The complaint was dismissed with leave to amend,
the deadline for which is set as January 2, 2003. The Company believes that it
has meritorious defenses to the allegations contained in the lawsuit. However,
an adverse result in this litigation could have a material adverse effect on the
Company's financial condition and operating results.
As a marketer of dietary and nutritional supplements and other products
that are ingested by consumers or applied to their bodies, the Company has been
and is currently subjected to various product liability claims. Although the
effects of these claims to date have not been material to the Company, it is
possible that current and future product liability claims could have a material
adverse impact on the Company's financial condition and operating results given
the higher level of self insurance the Company has accepted. The Company
currently maintains product liability insurance with a deductible of $7.5
million.
Certain of the Company's subsidiaries have been subject to tax audits by
governmental authorities in their respective countries. In certain of these tax
audits, governmental authorities are proposing that significant amounts of
additional taxes and related interest and penalties are due. The Company and its
tax advisors believe that there are substantial defenses to the allegations that
additional taxes are owing, and the Company is vigorously contesting the
additional proposed taxes and related charges. These matters may take several
years to resolve, and the Company cannot be sure of their ultimate resolution.
However, an adverse outcome in these matters could have a material adverse
impact on the Company's financial condition and operating results.
F-55
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
<Table>
<Caption>
QUARTER NINE MONTHS
-------------------------------------------- --------------------------------------------
2002 2001 2002 2001
---------------------------- ------------- ---------------------------- -------------
JULY 1 AUGUST 1 QUARTER JANUARY 1 AUGUST 1 NINE MONTHS
TO TO ENDED TO TO ENDED
JULY 31 SEPTEMBER 30 SEPTEMBER 30 JULY 31 SEPTEMBER 30 SEPTEMBER 30
(PREDECESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
------------- ------------ ------------- ------------- ------------ -------------
Net income (loss)............ $(24,109,000) $5,814,000 $14,026,000 $9,212,000 $5,814,000 $32,631,000
Cumulative effect of
accounting change (SFAS No.
133)....................... -- -- -- -- -- 909,000
Net change on derivative
instruments................ (217,000) (38,000) (1,132,000) (2,023,000) (38,000) 5,000
Foreign currency translation
adjustment................. (916,000) (1,082,000) 64,000 1,428,000 (1,082,000) (4,636,000)
Unrealized gain on marketable
securities................. 22,000 -- 9,000 14,000 -- 24,000
------------ ---------- ----------- ---------- ---------- -----------
Comprehensive income
(loss)..................... $(25,220,000) $4,694,000 $12,967,000 $8,631,000 $4,694,000 $28,933,000
============ ========== =========== ========== ========== ===========
</Table>
The net change on derivative instruments represents the fair value changes
caused by marking to market these instruments on September 30, 2002. Foreign
currency translation adjustment measures the impact of converting primarily
foreign currency assets and liabilities into US dollars. Gains/(losses) on
marketable securities reflects the change in fair value of securities classified
as available for sale. For discussion of derivative instruments, see Note 8
herein.
7. SEGMENT INFORMATION
The Company is a network marketing company that sells a wide range of
weight management products, dietary and nutritional supplements and personal
care products within one industry as defined under SFAS No. 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.
The Company's chief operating decision makers review both geographic and
product line information.
The Company has operations throughout the world (55 countries as of
September 30, 2002) and is organized and managed by geographic areas.
Transactions between geographic segments generally represent export sales from
the United States to foreign operations. Information reviewed by the Company's
chief
F-56
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating decision makers on significant geographic segments, as defined under
SFAS No. 131, is prepared on the same basis as the consolidated financial
statements and is as follows:
FINANCIAL INFORMATION BY GEOGRAPHIC SEGMENTS
<Table>
<Caption>
QUARTER NINE MONTHS
------------------------------------------- -------------------------------------------
2002 2001 2002 2001
---------------------------- ------------ ---------------------------- ------------
JULY 1 TO AUGUST 1 TO QUARTER JANUARY 1 TO AUGUST 1 TO NINE MONTHS
JULY 31 SEPTEMBER 30 ENDED JULY 31 SEPTEMBER 30 ENDED
(PREDECESSOR) (SUCCESSOR) SEPTEMBER 30 (PREDECESSOR) (SUCCESSOR) SEPTEMBER 30
------------- ------------ ------------ ------------- ------------ ------------
TOTAL RETAIL SALES:
United States........... $ 41.9 $ 75.3 $112.9 $ 301.0 $ 75.3 $ 340.9
Japan................... 21.2 38.0 77.2 143.7 38.0 227.6
South Korea............. 10.9 16.9 34.2 69.6 16.9 83.7
Mexico.................. 10.2 17.8 27.1 63.8 17.8 73.2
German Group(1)......... 12.6 24.7 27.8 84.1 24.7 81.0
Italy................... 9.6 15.4 25.0 60.0 15.4 81.3
Others.................. 49.8 97.7 120.1 325.5 97.7 349.7
------ ------ ------ -------- ------ --------
Total retail sales... $156.2 $285.8 $424.3 $1,047.7 $285.8 $1,237.4
------ ------ ------ -------- ------ --------
NET SALES:
United States........... $ 26.2 $ 47.5 $ 71.5 $ 189.1 $ 47.5 $ 215.4
Japan................... 12.4 22.3 45.2 84.1 22.3 133.1
South Korea............. 7.7 11.9 22.8 46.8 11.9 56.0
Mexico.................. 6.1 10.6 16.3 38.3 10.6 44.0
German Group(1)......... 8.0 15.3 17.4 52.2 15.3 50.8
Italy................... 5.8 9.4 15.4 36.8 9.4 50.3
Others.................. 30.2 59.2 73.0 196.9 59.2 212.8
------ ------ ------ -------- ------ --------
Net sales............ $ 96.4 $176.2 $261.6 $ 644.2 $176.2 $ 762.4
------ ------ ------ -------- ------ --------
GROSS PROFIT:
United States........... $ 20.1 $ 35.1 $ 49.5 $ 143.1 $ 35.1 $ 152.6
Japan................... 10.3 18.7 37.6 71.0 18.7 113.3
South Korea............. 6.3 9.5 18.6 37.6 9.5 45.4
Mexico.................. 4.4 8.5 12.7 30.3 8.5 33.6
German Group(1)......... 6.5 12.3 15.1 41.1 12.3 39.1
Italy................... 4.9 8.1 14.0 30.0 8.1 39.5
Others.................. 23.2 45.8 53.9 150.5 45.8 157.2
------ ------ ------ -------- ------ --------
Gross Profit......... $ 75.7 $138.0 $201.4 $ 503.6 $138.0 $ 580.7
------ ------ ------ -------- ------ --------
OPERATING MARGIN(2):
United States........... $ 11.6 $ 18.9 $ 24.7 $ 79.5 $ 18.9 $ 76.0
Japan................... 5.6 10.3 20.7 39.5 10.3 64.2
South Korea............. 4.3 6.5 12.5 24.9 6.5 30.4
Mexico.................. 2.2 4.6 7.0 16.0 4.6 18.1
German Group(1)......... 3.2 7.0 9.1 21.5 7.0 21.2
Italy................... 2.8 4.8 8.6 16.9 4.8 22.2
Others.................. 12.1 24.1 28.4 78.1 24.1 81.7
------ ------ ------ -------- ------ --------
Total operating
margin............. $ 41.8 $ 76.2 $111.0 $ 276.4 $ 76.2 $ 313.8
------ ------ ------ -------- ------ --------
Marketing, distribution
& administrative
expenses............. 31.6 53.9 88.2 207.4 53.9 261.7
Merger transaction
expenses............. 50.7 -- -- 54.7 -- --
Interest expense net.... (0.3) 12.6 (0.7) (1.4) 12.6 (3.1)
</Table>
F-57
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
QUARTER NINE MONTHS
------------------------------------------- -------------------------------------------
2002 2001 2002 2001
---------------------------- ------------ ---------------------------- ------------
JULY 1 TO AUGUST 1 TO QUARTER JANUARY 1 TO AUGUST 1 TO NINE MONTHS
JULY 31 SEPTEMBER 30 ENDED JULY 31 SEPTEMBER 30 ENDED
(PREDECESSOR) (SUCCESSOR) SEPTEMBER 30 (PREDECESSOR) (SUCCESSOR) SEPTEMBER 30
------------- ------------ ------------ ------------- ------------ ------------
------ ------ ------ -------- ------ --------
Income before income
taxes and minority
interest............. (40.2) 9.7 23.5 15.7 9.7 55.2
Income taxes............ (16.1) 3.9 9.4 6.3 3.9 22.1
Minority interest....... -- -- 0.1 0.2 -- 0.5
------ ------ ------ -------- ------ --------
Net Income (loss)......... $(24.1) $ 5.8 $ 14.0 $ 9.2 $ 5.8 $ 32.6
====== ====== ====== ======== ====== ========
</Table>
- ---------------
(1) German Group includes the operations of Germany, Austria and Switzerland
(2) Operating margin represents gross profit less royalty overrides
FINANCIAL INFORMATION BY PRODUCT SEGMENTS
<Table>
<Caption>
QUARTER NINE MONTHS
------------------------------------------- -------------------------------------------
2002 2001 2002 2001
---------------------------- ------------ ---------------------------- ------------
JULY 1 TO AUGUST 1 TO QUARTER JANUARY 1 TO AUGUST 1 TO NINE MONTHS
JULY 31 SEPTEMBER 30 ENDED JULY 31 SEPTEMBER 30 ENDED
(PREDECESSOR) (SUCCESSOR) SEPTEMBER 30 (PREDECESSOR) (SUCCESSOR) SEPTEMBER 30
------------- ------------ ------------ ------------- ------------ ------------
RETAIL SALES BY PRODUCT
LINE ARE AS FOLLOWS:
Inner Nutrition......... $140.7 $ 255.7 $ 376.0 $ 930.0 $ 255.7 $1,083.5
Outer Nutrition......... 15.6 26.6 41.3 107.8 26.6 128.5
Literature.............. 4.1 7.9 13.2 28.8 7.9 39.8
Other................... 1.5 2.7 3.4 9.5 2.7 12.0
Return & refund......... (5.7) (7.1) (9.6) (28.4) (7.1) (26.4)
------ ------- ------- -------- ------- --------
Total Retail Sales... 156.2 285.8 424.3 1,047.7 285.8 1,237.4
Distributor Allowances.... (73.3) (134.1) (198.6) (493.0) (134.1) (578.6)
Handling and Freight
Income.................. 13.5 24.5 35.9 89.5 24.5 103.6
------ ------- ------- -------- ------- --------
Net Sales............ 96.4 176.2 261.6 644.2 176.2 762.4
COST OF SALES
Inner Nutrition......... 14.1 25.4 38.0 90.8 25.4 110.9
Outer Nutrition......... 1.3 2.7 5.0 12.0 2.7 16.1
Literature.............. 1.3 2.9 5.4 11.3 2.9 15.6
Freight, duty and
other................ 4.0 7.2 11.8 26.5 7.2 39.1
------ ------- ------- -------- ------- --------
Total Cost of
Sales.............. 20.7 38.2 60.2 140.6 38.2 181.7
------ ------- ------- -------- ------- --------
GROSS PROFIT.............. $ 75.7 $ 138.0 $ 201.4 $ 503.6 $ 138.0 $ 580.7
====== ======= ======= ======== ======= ========
</Table>
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
For discussion on derivatives and hedging activities, see Note 2 herein.
The Company designates certain derivatives as fair value hedges. For all
qualifying and highly effective fair value hedges, the changes in the fair value
of a derivative and the gain or loss on the hedged asset or
F-58
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability relating to the risk being hedged are recorded currently in earnings.
These amounts are recorded in marketing, distribution and administrative
expenses and provide offsets to one another.
The Company designates certain derivatives as cash flow hedges. For all
qualifying and highly effective cash flow hedges, the changes in the effective
portion of the fair value of the derivative are recorded in other comprehensive
income ("OCI"). At September 30, 2002, the net loss in OCI was $38,000. All OCI
amounts will be reclassified to earnings within 12 months.
9. RESTRUCTURING RESERVE
As of the date of the merger, the Company started to implement a plan to
reduce costs of the business and recorded a severance and restructuring accrual
as part of the cost of the merger. The accrued severance is for identified
employees including executives, corporate functions and administrative support.
There may be other employees identified for involuntary termination to complete
the plan and, if so, an additional amount of severance will be accrued and
goodwill will increase. Actions required by the plan of termination began
immediately after consummation of the transaction and the period of time to
complete the plan will not extend past 12 months after the merger date.
The following table summarizes the activity in the Company's restructuring
accrual:
<Table>
Accrual made as of July 31, 2002............................ $10.2
Payments made............................................... 3.1
-----
Balance at September 30, 2002............................... $ 7.1
=====
</Table>
10. SUPPLEMENTAL INFORMATION
The consolidated financial statement data, as of September 30, 2002 and the
two months ended September 30, 2002 has been aggregated by entities that
guarantee the Senior Subordinated Notes (the "Guarantors") and entities that do
not guarantee the Senior Subordinated Notes (the "Non-Guarantors"). The
Guarantors include the Parent, Lux Holdings, Lux Intermediate, Lux CM
(collectively, the "Parent Guarantors") and Herbalife's operating subsidiaries
in Brazil, Finland, Israel, Japan, Mexico, United Kingdom, U.S. (other than
Herbalife Investment Co., LLC), Sweden, Taiwan and Thailand (collectively, the
"Subsidiary Guarantors"). All other subsidiaries are Non-Guarantors.
F-59
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidating condensed statements of income for the periods of July 1 to
July 31, 2002, August 1 to September 30, 2002, quarter ended September 30, 2002
and nine months ended September 30, 2002 are summarized as follows:
<Table>
<Caption>
JULY 1 TO JULY 31, 2002 (IN MILLIONS)
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net sales........................... -- $82.4 $23.1 $(9.1) $ 96.4
Cost of sales....................... -- 18.7 10.8 (8.8) 20.7
Royalty overrides................... -- 20.6 13.3 -- 33.9
Marketing, distribution &
administrative expenses........... -- 24.2 7.4 -- 31.6
Merger transaction expenses......... $ 50.7 -- -- -- 50.7
Equity in Subsidiary (Income)
loss.............................. (5.9) -- -- 5.9 --
Interest expense -- net............. -- (0.3) -- -- (0.3)
Intercompany charges................ (1.1) 10.8 (9.7) -- --
------ ----- ----- ----- ------
Income before income taxes and
minority interest................. (43.7) 8.4 1.3 (6.2) (40.2)
Income taxes........................ (19.9) 3.0 0.8 -- (16.1)
------ ----- ----- ----- ------
Income before minority interest..... (23.8) 5.4 0.5 (6.2) (24.1)
Minority interest................... -- -- -- -- --
------ ----- ----- ----- ------
NET INCOME.......................... $(23.8) $ 5.4 $ 0.5 $(6.2) $(24.1)
====== ===== ===== ===== ======
</Table>
<Table>
<Caption>
AUGUST 1 TO SEPTEMBER 30, 2002 (IN MILLIONS)
-----------------------------------------------------------------------------------
HERBALIFE
PARENT INTERNATIONAL, SUBSIDIARY NON- TOTAL
GUARANTORS INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- -------------- ---------- ---------- ------------ ------------
Net sales..................... -- -- $150.8 $39.3 $(14.0) $176.1
Cost of sales................. -- -- 34.9 17.7 (14.5) 38.1
Royalty overrides............. -- -- 40.3 21.5 -- 61.8
Marketing, distribution &
administrative expenses..... -- $ 1.2 38.8 13.9 -- 53.9
Merger transaction expenses... -- -- -- -- -- --
Equity in Subsidiary (Income)
loss........................ $(5.5) (12.6) (0.2) -- 18.3 --
Interest expense -- net....... -- 12.7 (0.2) 0.1 -- 12.6
Intercompany charges.......... -- (2.0) 17.3 (15.3) -- --
----- ------ ------ ----- ------ ------
Income before income taxes and
minority interest........... 5.5 0.7 19.9 1.4 (17.8) 9.7
Income taxes.................. -- (4.8) 8.0 0.7 -- 3.9
----- ------ ------ ----- ------ ------
Income before minority
interest.................... 5.5 5.5 11.9 0.7 (17.8) 5.8
Minority interest............. -- -- -- -- -- --
----- ------ ------ ----- ------ ------
NET INCOME.................... $ 5.5 $ 5.5 $ 11.9 $ 0.7 $(17.8) $ 5.8
===== ====== ====== ===== ====== ======
</Table>
F-60
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
QUARTER ENDED SEPTEMBER 30, 2001
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net sales........................... -- $220.1 $ 59.1 $(17.6) $261.6
Cost of sales....................... -- 53.7 24.5 (18.0) 60.2
Royalty overrides................... -- 61.2 29.1 -- 90.3
Marketing, distribution &
administrative expenses........... $ 0.5 66.2 19.3 2.2 88.2
Merger transaction expenses......... -- -- -- -- --
Equity in Subsidiary (Income)
loss.............................. (13.1) 1.7 -- 11.4 --
Interest expense -- net............. -- (0.8) 0.1 -- (0.7)
Intercompany charges................ (2.3) 20.7 (18.4) -- --
------ ------ ------ ------ ------
Income before income taxes and
minority interest................. 14.9 17.4 4.5 (13.2) 23.6
Income taxes........................ 0.8 6.5 2.2 -- 9.5
------ ------ ------ ------ ------
Income before minority interest..... 14.1 10.9 2.3 (13.2) 14.1
Minority interest................... -- 0.1 -- -- 0.1
------ ------ ------ ------ ------
NET INCOME.......................... $ 14.1 $ 10.8 $ 2.3 $(13.2) $ 14.0
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
JANUARY 1 TO JULY 31, 2002 (IN MILLIONS)
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net sales........................... -- $551.3 $142.5 $(49.6) $644.2
Cost of sales....................... -- 128.1 63.2 (50.7) 140.6
Royalty overrides................... -- 147.3 79.9 -- 227.2
Marketing, distribution &
administrative expenses........... $ (0.8) 165.9 42.3 -- 207.4
Merger transaction expenses......... 54.7 -- -- -- 54.7
Equity in Subsidiary (Income)
loss.............................. (36.4) (0.5) -- 36.9 --
Interest expense -- net............. -- (1.8) 0.4 -- (1.4)
Intercompany charges................ (7.5) 62.9 (55.4) -- --
------ ------ ------ ------ ------
Income before income taxes and
minority interest................. (10.0) 49.4 12.1 (35.8) 15.7
Income taxes........................ (18.6) 19.9 5.0 -- 6.3
------ ------ ------ ------ ------
Income before minority interest..... 8.6 29.5 7.1 (35.8) 9.4
Minority interest................... -- 0.2 -- -- 0.2
------ ------ ------ ------ ------
NET INCOME.......................... $ 8.6 $ 29.3 $ 7.1 $(35.8) $ 9.2
====== ====== ====== ====== ======
</Table>
F-61
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001 (IN MILLIONS)
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net sales........................... -- $654.8 $162.8 $(55.2) $762.4
Cost of sales....................... -- 165.3 68.5 (52.1) 181.7
Royalty overrides................... -- 180.5 86.3 -- 266.8
Marketing, distribution &
administrative expenses........... $ 0.3 206.7 52.6 2.2 261.8
Merger transaction expenses......... -- -- -- -- --
Equity in Subsidiary (Income)
loss.............................. (39.8) -- -- 39.8 --
Interest expense -- net............. -- (3.2) 0.1 -- (3.1)
Intercompany charges................ 2.8 51.8 (54.5) (0.1) --
------ ------ ------ ------ ------
Income before income taxes and
minority interest................. 36.7 53.7 9.8 (45.0) 55.2
Income taxes........................ (1.2) 19.0 4.3 -- 22.1
------ ------ ------ ------ ------
Income before minority interest..... 37.9 34.7 5.5 (45.0) 33.1
Minority interest................... -- 0.5 -- -- 0.5
------ ------ ------ ------ ------
NET INCOME.......................... $ 37.9 $ 34.2 $ 5.5 $(45.0) $ 32.6
====== ====== ====== ====== ======
</Table>
Consolidating condensed balance sheet data as of September 30, 2002 and
December 31, 2001 are summarized as follows:
<Table>
<Caption>
SEPTEMBER 30, 2002 (IN MILLIONS)
-----------------------------------------------------------------------------------
HERBALIFE
PARENT INTERNATIONAL, SUBSIDIARY NON- TOTAL
GUARANTORS INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- -------------- ---------- ---------- ------------ ------------
CURRENT ASSETS:
Cash and marketable
securities.................. -- $ 0.3 $ 48.2 $ 28.7 -- $ 77.2
Receivables................... -- -- 20.4 9.7 -- 30.1
Intercompany receivables...... -- (8.0) 33.4 (25.4) -- --
Inventories................... -- -- 45.4 15.8 $ (4.6) 56.6
Other Current Assets.......... -- 5.2 41.2 3.9 -- 50.3
------ ------ ------ ------ ------- ------
Total current assets..... -- (2.5) 188.6 32.7 (4.6) 214.2
Property, net................. -- (2.2) 42.0 10.8 -- 50.6
OTHER NON-CURRENT ASSETS...... $198.3 567.2 59.0 3.4 (219.9) 608.0
------ ------ ------ ------ ------- ------
TOTAL ASSETS.................. $198.3 $562.5 $289.6 $ 46.9 $(224.5) $872.8
====== ====== ====== ====== ======= ======
CURRENT LIABILITIES:
Accounts Payable.............. -- -- $ 19.4 $ 4.1 -- $ 23.5
Royalties Overrides........... -- $ (2.0) 43.6 20.4 -- 62.0
Accrued compensation and
expenses.................... -- 6.3 55.5 16.7 -- 78.5
Other current liabilities..... -- 22.1 18.1 3.7 -- 43.9
------ ------ ------ ------ ------- ------
Total current
liabilities............ -- 26.4 136.6 44.9 -- 207.9
</Table>
F-62
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, 2002 (IN MILLIONS)
-----------------------------------------------------------------------------------
HERBALIFE
PARENT INTERNATIONAL, SUBSIDIARY NON- TOTAL
GUARANTORS INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- -------------- ---------- ---------- ------------ ------------
NON-CURRENT LIABILITIES....... -- 432.1 34.7 0.6 -- 467.4
MINORITY INTEREST............. -- -- -- -- -- --
STOCKHOLDERS' EQUITY.......... 198.3 104.0 118.3 1.4 $(224.5) 197.5
------ ------ ------ ------ ------- ------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY........ $198.3 $562.5 $289.6 $ 46.9 $(224.5) $872.8
====== ====== ====== ====== ======= ======
</Table>
<Table>
<Caption>
DECEMBER 31, 2001 (IN MILLIONS)
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
CURRENT ASSETS:
Cash and marketable securities...... $ 0.2 $ 167.3 $ 33.7 -- $201.2
Receivables......................... -- 21.1 6.5 -- 27.6
Intercompany receivables............ 184.9 (150.0) (34.9) -- --
Inventories......................... -- 57.6 20.7 $(6.1) 72.2
Other Current Assets................ -- 36.6 5.5 -- 42.1
------ ------- ------ ----- ------
Total current assets........... 185.1 132.6 31.5 (6.1) 343.1
Property, net....................... -- 48.3 12.4 -- 60.7
OTHER NON-CURRENT ASSETS............ 0.9 60.0 7.0 (1.4) 66.5
------ ------- ------ ----- ------
TOTAL ASSETS........................ $186.0 $ 240.9 $ 50.9 $(7.5) $470.3
====== ======= ====== ===== ======
CURRENT LIABILITIES:
Accounts Payable.................... -- $ 14.0 $ 5.8 -- $ 19.8
Royalties Overrides................. -- 42.6 15.6 -- 58.2
Accrued compensation and expenses... -- 45.1 13.8 -- 58.9
Other current liabilities........... $ 17.6 3.3 7.5 -- 28.4
------ ------- ------ ----- ------
Total current liabilities...... 17.6 105.0 42.7 -- 165.3
NON-CURRENT LIABILITIES............. 3.8 38.0 0.6 -- 42.4
MINORITY INTEREST................... -- 1.7 -- -- 1.7
STOCKHOLDERS' EQUITY................ 164.6 96.2 7.6 $(7.5) 260.9
------ ------- ------ ----- ------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY................ $186.0 $ 240.9 $ 50.9 $(7.5) $470.3
====== ======= ====== ===== ======
</Table>
F-63
WH INTERMEDIATE HOLDINGS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidating condensed statement of cash flows data for the periods of
January 1 to July 31, 2002, August 1 to September 30, 2002, and nine months
ended September 30, 2001 is summarized as follows:
<Table>
<Caption>
JANUARY 1 TO JULY 31, 2002
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $ 32.0 $ 46.9 $ (2.1) $(38.9) $ 37.9
Net cash provided by (used in)
investing activities.............. (10.5) 26.9 1.3 1.3 19.0
Net cash provided by (used in)
financing activities.............. (21.5) (40.4) (11.0) 37.6 (35.3)
Effect of exchange rate changes on
cash.............................. -- (0.6) 1.6 -- 1.0
Cash at beginning of period......... 0.2 145.3 33.7 -- 179.2
------ ------ ------ ------ ------
Cash at end of period............... $ 0.2 $178.1 $ 23.5 -- $201.8
====== ====== ====== ====== ======
</Table>
<Table>
<Caption>
AUGUST 1 TO SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------
HERBALIFE
PARENT INTERNATIONAL, SUBSIDIARY NON- TOTAL
GUARANTORS INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
---------- -------------- ---------- ---------- ------------ ------------
Net cash provided by (used in)
operating activities........ $ 5.6 $ 146.4 $(120.0) $10.6 $(25.9) $ 16.7
Net cash provided by (used in)
investing activities........ (5.5) (660.6) (8.0) (0.4) 21.7 (652.8)
Net cash provided by (used in)
financing activities........ -- 514.4 (2.4) (4.7) 4.2 511.5
Effect of exchange rate
changes on cash............. -- -- (0.8) (0.4) -- (1.2)
Cash at beginning of period... -- 0.2 178.1 23.5 -- 201.8
----- ------- ------- ----- ------ -------
Cash at end of period......... $ 0.1 $ 0.4 $ 46.9 $28.6 -- $ 76.0
===== ======= ======= ===== ====== =======
</Table>
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------------------------
HERBALIFE
INTERNATIONAL, SUBSIDIARY NON- TOTAL
INC. GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- ---------- ---------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $ 21.4 $ 89.4 $ 15.4 $(46.9) $ 79.3
Net cash provided by (used in)
investing activities.............. (23.5) (9.6) (2.1) 23.8 (11.4)
Net cash provided by (used in)
financing activities.............. 2.1 (14.4) (10.4) 23.1 0.4
Effect of exchange rate changes on
cash.............................. -- (4.1) (1.3) -- (5.4)
Cash at beginning of period......... 0.2 70.1 40.0 -- 110.3
------ ------ ------ ------ ------
Cash at end of period............... $ 0.2 $131.4 $ 41.6 -- $173.2
====== ====== ====== ====== ======
</Table>
F-64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THE NOTES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE NOTES IN ANY JURISDICTION WHERE THAT WOULD
NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES
MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY HAVE NOT
CHANGED SINCE THE DATE OF THIS PROSPECTUS.
UNTIL MARCH 5, 2003, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNUSED
ALLOTMENTS OR SUBSCRIPTIONS.
HERBALIFE INTERNATIONAL, INC.
$165,000,000
OFFER TO EXCHANGE ALL OUTSTANDING
11 3/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2010
FOR
11 3/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2010
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
-----------------
PROSPECTUS
-----------------
DECEMBER 20, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Herbalife International, Inc.'s bylaws provide that, except to the extent
expressly prohibited by the Nevada Revised Statutes, we must indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of Herbalife International, Inc., by reason of the fact that he is or was a
director, officer, employee or agent of Herbalife International, Inc., or is or
was serving at the request of Herbalife International, Inc. as a director,
officer, employee or agent of another corporation, against expenses, including
attorneys' fees, judgment, fines and amount paid in settlement actually and
reasonably incurred by him in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interest of Herbalife International, Inc., and, with
respect to a criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interest of Herbalife International, Inc., and that,
with respect to any criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to managers, officers or persons controlling us pursuant to the
foregoing, we have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
2 .1 Agreement and Plan of Merger, dated April 10, 2002, by and
among Herbalife International, Inc., WH Holdings (Cayman
Islands) Ltd. and WH Acquisition Corp. ..................... (11)
3 .1 Amended and Restated Articles of Incorporation of Herbalife
International, Inc. ........................................ (10)
3 .2 Bylaws of Herbalife International, Inc. .................... (1)
3 .3 Memorandum and Articles of Association of WH Intermediate
Holdings Ltd. .............................................. (11)
3 .4 Constitutional Document of WH Luxembourg Holdings
S.a.R.L. ................................................... (14)
3 .5 Constitutional Document of WH Luxembourg Intermediate
Holdings S.a.R.L. .......................................... (14)
3 .6 Constitutional Document of WH Luxembourg CM S.a.R.L. ....... (14)
3 .7 Articles of Incorporation of Herbalife International of
America, Inc. .............................................. (14)
3 .8 Certificate of Amendment of Articles of Incorporation of
Herbalife International of America, Inc. ................... (14)
3 .9 Certificate of Amendment of Articles of Incorporation of
Herbalife International of America, Inc. ................... (14)
3 .10 Certificate of Amendment of Articles of Incorporation dated
January 8, 1987 of Herbalife International of America,
Inc. ....................................................... (14)
3 .11 Bylaws of Herbalife International of America, Inc. ......... (14)
3 .12 Articles of Incorporation of Herbalife International
Communications, Inc. ....................................... (14)
3 .14 Bylaws of Herbalife International Communications, Inc. ..... (14)
3 .14 Articles of Incorporation of Herbalife International
Distribution, Inc. ......................................... (14)
3 .15 Bylaws of Herbalife International Distribution, Inc. ....... (14)
</Table>
II-1
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
3 .16 Articles of Incorporation of Herbalife International of
Europe, Inc. ............................................... (14)
3 .17 Bylaws of Herbalife International of Europe, Inc. .......... (14)
3 .18 Certificate of Incorporation of Herbalife International Do
Brasil Ltda. (Delaware)..................................... (15)
3 .19 Certificate of Amendment of Certificate of Incorporation of
Herbalife International Do Brasil Ltda. (Delaware).......... (15)
3 .20 Bylaws of Herbalife International Do Brasil Ltda.
(Delaware).................................................. (15)
3 .21 Amendment to Articles of Association of Herbalife
International Do Brasil Ltda. .............................. (15)
3 .22 Articles of Association of Herbalife International Do Brasil
Ltda. ...................................................... (15)
3 .23 Memorandum of Association Herbalife (UK) Limited............ (15)
3 .24 Articles of Association of Herbalife (UK) Limited........... (15)
3 .25 Memorandum of Association of Herbalife Europe Limited....... (15)
3 .26 Articles of Association of Herbalife Europe Limited......... (15)
3 .27 Deeds of Foundation of Herbalife International Finland OY... (15)
3 .28 Articles of Association of Herbalife International Finland
OY.......................................................... (15)
3 .29 Articles of Association of Herbalife International of Israel
(1990) Ltd. ................................................ (15)
3 .30 Memorandum of Association of Herbalife International of
Israel (1990) Ltd. ......................................... (15)
3 .31 Articles of Incorporation of Herbalife of Japan K.K. ....... (15)
3 .32 Restated Bylaws of Herbalife of Japan K.K. ................. (15)
3 .33 Bylaws and Articles of Incorporation of Herbalife
Internacional de Mexico, S.A. de C.V. ...................... (15)
3 .34 Copia Certificada of Herbalife Products de Mexico, S.A. de
C.V......................................................... (15)
3 .35 Articles of Association of Herbalife Sweden Aktiebolag...... (15)
3 .36 Limited Liability Company Agreement of Herbalife China,
LLC......................................................... (15)
3 .37 Amendment to Limited Liability Company Agreement of
Herbalife China, LLC(2)..................................... (15)
3 .38 Articles of Incorporation of Herbalife Taiwan, Inc. ........ (14)
3 .39 Bylaws of Herbalife Taiwan, Inc. ........................... (14)
3 .40 Certificate of Incorporation of Herbalife International
(Thailand) Ltd.............................................. (15)
3 .41 Bylaws of Herbalife International (Thailand) Ltd. .......... (14)
4 .1 Form of Class A Common Stock and Class B Common Stock
Certificates of Herbalife International, Inc. .............. (11)
4 .2 Indenture, dated as of June 27, 2002 between WH Acquisition
Corp., WH Intermediate Holdings Ltd., WH Luxembourg Holdings
SaRL, WH Luxembourg Intermediate Holdings SaRL, WH
Luxembourg CM SaRL and The Bank of New York as Trustee
governing 11 3/4% Senior Subordinated Notes due 2010........ (12)
5 .1 Opinion of Chadbourne & Parke LLP as to the legality of the
Series B Notes being registered hereby...................... (15)
5 .2 Opinion of Maples & Calder, Counsel to WH Intermediate
Holdings Ltd................................................
5 .3 Opinion of Marshall Hill Cassas & de Lipkau, counsel to
Herbalife International Inc................................. (15)
5 .4 Opinion of Bonn Schmitt Steichen, counsel to WH Luxembourg
Holdings S.a.R.L., WH Luxembourg Intermediate Holdings
S.a.R.L. and WH Luxembourg CM S.a.R.L....................... (15)
</Table>
II-2
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
5 .5 Opinion of Irell & Manella, counsel to Herbalife
International of America, Inc., Herbalife International
Communications Inc., Herbalife International Distribution,
Inc., Herbalife International of Europe, Inc., Herbalife
Taiwan, Inc. and Herbalife International (Thailand) Ltd..... (15)
5 .6 Opinion of Corvo Advogados, counsel to Herbalife
International Do Brasil Ltda................................ (15)
5 .7 Opinion of Chadbourne & Parke, a Multinational Partnership,
to Herbalife (UK) Limited and Herbalife Europe Limited...... (15)
5 .8 Opinion of Mr. Robin Potts, QC..............................
5 .9 Opinion of Hannes Snellman, counsel to Herbalife
International Finland OY.................................... (15)
5 .10 Opinion of Herzog, Fox & Neeman, counsel to Herbalife
International of Israel (1990) Ltd.......................... (15)
5 .11 Opinion of Tomotsune & Kimura counsel to Herbalife of Japan
K.K......................................................... (15)
5 .12 Opinion of Bufete Carrillo Gamboa, S.C., counsel to
Herbalife Internacional de Mexico, S.A. de C.V. and
Herbalife Products de Mexico, S.A. de C.V................... (15)
5 .13 Opinion of Mannheimer Swartling, counsel to Herbalife Sweden
Aktiebolag.................................................. (15)
5 .14 Opinion of Morris, Nichols, Arsht & Tunnell, counsel to
Herbalife China, LLC and Herbalife International Do Brasil
Ltda. (Delaware)............................................ (15)
8 .1 Opinion of Chadbourne & Parke LLP regarding tax matters..... (14)
9 .1 Shareholders' Agreement dated as of July 31, 2002, by and
among WH Holdings (Cayman Islands) Ltd., Whitney V, L.P.,
Whitney Strategic Partners V, L.P., WH Investments Ltd., CCG
Investments (BVI), L.P., CCG Associates, LLC, CCG
Associates -- AI, LLC, CCG Investment Fund -- AI, LP, CCG
AV, LLC -- Series C, CCG AV, LLC -- Series E, and certain
other persons............................................... (14)
9 .2 Institutional Shareholders' Agreement dated as of July 31,
2002, by and among WH Holdings (Cayman Islands) Ltd.,
Whitney V, L.P., Whitney Strategic Partners V, L.P., WH
Investments Ltd., CCG Investments (BVI), L.P., CCG
Associates-QP, LLC, CCG Associates-AI, LLC, CCG Investment
Fund-AI, LP, CCG AV, LLC-Series C, CCG AV, LLC-Series E, and
certain other persons....................................... (14)
10 .1 1991 Stock Option Plan of Herbalife International, Inc., as
amended..................................................... (4)
10 .2 1992 Executive Incentive Compensation Plan of Herbalife
International, Inc., as amended*............................ (1),(4)
10 .3 Form of Individual Participation Agreement relating to of
Herbalife International, Inc.'s Executive Compensation
Plan*....................................................... (1)
10 .4 Form of Indemnity Agreement between Herbalife International,
Inc. and certain officers and directors of the Company*..... (1)
10 .5 1994 Performance Based Annual Incentive Compensation Plan of
Herbalife International, Inc., as amended and restated in
1996*....................................................... (2),(4),(5)
10 .6 Office lease agreement between Herbalife International, Inc.
and State Teacher's Retirement System, dated July 20,
1995........................................................ (3)
10 .7 Senior Executive Deferred Compensation Plan of Herbalife
International, Inc., effective January 1, 1996, as
amended*.................................................... (3)
10 .8 Management Deferred Compensation Plan of Herbalife
International, Inc., effective January 1, 1996, as
amended*.................................................... (3)
10 .9 Master Trust Agreement between Herbalife International, Inc.
and Imperial Trust Company, Inc., effective January 1,
1996*....................................................... (3)
10 .10 401K Plan of Herbalife International, Inc., as amended*..... (3)
</Table>
II-3
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
10 .11 Supplemental Executive Retirement Plan of Herbalife
International, Inc.*........................................ (6)
10 .12 Credit Agreement between Herbalife International of America,
Inc. and First National Bank of Chicago, dated December 14,
1998........................................................ (7)
10 .13 Employment agreement, dated as of November 1, 2000, between
John Reynolds and Herbalife International, Inc. and
Herbalife International of America, Inc.*................... (8)
10 .14 Employment agreement, dated as of August 20, 2000, between
Carol Hannah and Herbalife International, Inc. and Herbalife
International of America, Inc.*............................. (8)
10 .15 Employment agreement, dated as of August 20, 2000 between
Brian Kane and Herbalife International, Inc. and Herbalife
International of America, Inc.*............................. (8)
10 .16 Senior Executive Change in Control Plan of Herbalife
International, Inc., effective June 29, 2000*............... (8)
10 .17 Management Employee Change in Control Plan of Herbalife
International, Inc., effective June 29, 2000*............... (8)
10 .18 Trust Agreement for Herbalife 2001 Executive Retention Plan,
effective March 15, 2001*................................... (9)
10 .19 2001 Executive Retention Plan of Herbalife International,
Inc., effective March 15, 2001.............................. (9)
10 .20 Employment agreement, dated as of August 20, 2000 between
Frank Morse and Herbalife International, Inc. and Herbalife
International of America, Inc.*............................. (10)
10 .21 Employment agreement, dated as of November 1, 2001 between
Francis X. Tirelli and Herbalife International, Inc. and
Herbalife International of America, Inc.*................... (10)
10 .22 Separation Agreement and General Release, dated December 31,
2001, between Timothy Gerrity and Herbalife International,
Inc. and Herbalife International of America, Inc.*#......... (10)
10 .23 Separation Agreement and General Release, dated October 19,
2001, between Christopher Pair and Herbalife International,
Inc. and Herbalife International of America, Inc.*#......... (10)
10 .24 Separation Agreement and General Release, dated as of May
17, 2002, between Robert A. Sandler and Herbalife
International, Inc. and Herbalife International of America,
Inc. and Clarification Re Paragraph 3(a) Of Separation and
General Release Agreement*#................................. (12)
10 .25 Agreement for retention of legal services, dated as of May
20, 2002, by and among Herbalife International, Inc.,
Herbalife International of America, Inc. and Robert
Sandler*.................................................... (12)
10 .26 Purchase Agreement, dated as of June 21, 2002, by and among
WH Acquisition Corp., Herbalife International, Inc., WH
Intermediate Holdings Ltd., WH Luxembourg Holdings SaRL, WH
Luxembourg Intermediate Holdings SaRL, WH Luxembourg CM SaRL
and UBS Warburg LLC......................................... (12)
10 .27 Registration Rights Agreement, dated as of June 27, 2002, by
and among WH Acquisition Corp., WH Intermediate Holdings
Ltd., WH Luxembourg Holdings SaRL, WH Luxembourg
Intermediate Holdings SaRL, WH Luxembourg CM SaRL and UBS
Warburg LLC................................................. (12)
10 .28 Credit Agreement, dated as of July 31, 2002, by and among
Herbalife International, Inc., WH Holdings (Cayman Islands)
Ltd., WH Intermediate Holdings Ltd., WH Luxembourg Holdings
SaRL, WH Luxembourg Intermediate Holdings SaRL, WH
Luxembourg CM SaRL and the Subsidiary Guarantors party
thereto, and certain lenders and agents named therein....... (12)
</Table>
II-4
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
10 .29 Security Agreement, dated as of July 31, 2002, by Herbalife
International, Inc., WH Holdings (Cayman Islands) Ltd., WH
Intermediate Holdings Ltd., WH Luxembourg Holdings SaRL, WH
Luxembourg Intermediate Holdings SaRL, WH Luxembourg CM SaRL
and the Subsidiary Guarantors party thereto in favor of UBS
AG, Stamford Branch, as Collateral Agent.................... (12)
10 .30 Amendment to Agreements of Distributorship, effective as of
July 31, 2002 made and entered into by Herbalife
International, Inc. for the benefit of all of Herbalife
International, Inc.'s existing and future independent
distributors that meet the requirements to become (or
remain) a distributor according to company policy........... (12)
10 .31 Monitoring Fee Agreement dated as of July 31, 2002, between
Herbalife International, Inc. and Whitney & Co., LLC........ (14)
10 .32 Monitoring Fee Agreement dated as of July 31, 2002, between
Herbalife International, Inc. and GGC Administration, LLC... (14)
10 .33 Indemnity Agreement dated as of July 31, 2002, by and among
WH Holdings (Cayman Islands) Ltd., WH Acquisition Corp.,
Whitney & Co., LLC, Whitney V, L.P., Whitney Strategic
Partners V, L.P., GGC Administration, L.L.C., Golden Gate
Private Equity, Inc., CCG Investments (BVI), L.P., CCG
Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV, LLC-
Series C, CCG AV, LLC-Series E, CCG Associates-QP, LLC and
WH Investments Ltd.......................................... (14)
10 .34 Independent Directors Stock Option Plan of WH Holdings
(Cayman Islands) Ltd........................................ (15)
10 .35 Form of Independent Directors Stock Option Agreement........ (15)
10 .36 Executive Officer Stock Option Plan of WH Holdings (Cayman
Islands) Ltd................................................ (15)
10 .37 Form of Non-Statutory Stock Option Agreement................ (15)
10 .38 Form of Incentive Stock Option Agreement.................... (15)
10 .39 Amendment No. 1 to Credit Agreement dated as of December 18,
2002, among Herbalife International, Inc., WH Holdings
(Cayman Islands) Ltd., WH Intermediate Holdings Ltd., WH
Luxembourg Holdings S.a.R.L., WH Luxembourg Intermediate
Holdings S.a.R.L., WH Luxembourg CM S.a.R.L. and each of the
Subsidiary Guarantors....................................... (15)
21 List of subsidiaries of WH Intermediate Holdings, Ltd....... (14)
23 .1 Consent of Deloitte & Touche................................ (15)
23 .2 Consent of Chadbourne & Parke LLP (included in Exhibit 5.1
and Exhibit 8.1 hereto)..................................... (15)
24 .1 Power of Attorney of WH Intermediate Holdings Ltd. ......... (14)
24 .2 Power of Attorney of Herbalife International, Inc. ......... (14)
24 .3 Power of Attorney of Herbalife International of America,
Inc. ....................................................... (14)
24 .4 Power of Attorney of Herbalife International Communications,
Inc. ....................................................... (14)
24 .5 Power of Attorney of Herbalife International Distribution,
Inc. ....................................................... (14)
24 .6 Power of Attorney of Herbalife International of Europe,
Inc. ....................................................... (14)
24 .7 Power of Attorney of Herbalife International Do Brasil
Ltda........................................................ (14)
24 .8 Power of Attorney of Herbalife International Do Brasil Ltda.
(Delaware) ................................................. (14)
24 .9 Power of Attorney of Herbalife (UK) Limited................. (14)
24 .10 Power of Attorney of Herbalife Europe Limited............... (14)
24 .11 Power of Attorney of Herbalife International Finland OY..... (14)
24 .12 Power of Attorney of Herbalife International of Israel
(1990) Ltd. ................................................ (14)
</Table>
II-5
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGENO./(FOOTNOTE)
- ------- ----------- ------------------
24 .13 Power of Attorney of Herbalife of Japan K.K. ............... (14)
24 .14 Power of Attorney of Herbalife Internacional de Mexico, S.A.
de C.V. .................................................... (14)
24 .15 Power of Attorney of Herbalife Products de Mexico, S.A. de
C.V. ....................................................... (14)
24 .16 Power of Attorney of Herbalife Sweden Aktiebolag............ (14)
24 .17 Power of Attorney of Herbalife China, LLC................... (14)
24 .18 Power of Attorney of Herbalife Taiwan, Inc. ................ (14)
24 .19 Power of Attorney of Herbalife International (Thailand)
Ltd. ....................................................... (14)
25 .1 Statement of Eligibility of Trustee......................... (14)
99 .1 -- Form of Letter of Transmittal for the 11 3/4% Senior
Subordinated Notes Due 2010................................. (14)
99 .2 -- Form of Notice of Guaranteed Delivery for the 11 3/4%
Senior Subordinated Notes Due 2010.......................... (14)
99 .3 -- Form of Letter to Holders................................ (14)
99 .4 -- Form of Letter to Clients................................ (14)
99 .5 -- Form of Letter to Registered Holders and Depositary Trust
Company Participants........................................ (14)
99 .6 -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9............................... (14)
99 .7 -- Form of Exchange Agent Agreement......................... (14)
99 .8 Certification pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002... (13)
99 .9 Certification pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002... (13)
</Table>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-66576) declared effective by the SEC on October 8, 1993.
(2) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1994 Annual Meeting of Stockholders.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Definitive Proxy Statement
relating to its 1996 Annual Meeting of Stockholders.
(5) Incorporated by reference to the Company's Definitive Proxy Statement
relating to the Special Shareholder Meeting held on December 11, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended September 30, 2000.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended March 31, 2001.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
(11) Incorporated by reference to the Company's Current Report on Form 8-K,
dated April 10, 2002.
II-6
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended June 30, 2002.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the three months ended September 30, 2002.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-4 (Reg. No. 333-10118), dated November 13, 2002.
(15) Filed herewith.
* Management contract or compensatory plan or arrangement filed in response
to Item 14(a)(3) of the instructions to Form 10-K.
# Certain portions of this exhibit have been omitted and filed separately
under an application for confidential treatment.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 (section 230.415 of this
chapter), will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) that, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(d) to respond to requests for information that is incorporated by
reference into this prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
II-7
(e) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
WH INTERMEDIATE HOLDINGS LTD.
By: /s/ STEVEN E. RODGERS
--------------------------------------
Name: Steven E. Rodgers
Title: President
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEVEN E. RODGERS Director and President and December 20, 2002
------------------------------------------------ Treasurer (Principal Executive
Steven E. Rodgers Officer, Principal Financial
Officer, Controller and
Principal Accounting Officer)
* Director and Secretary December 20, 2002
------------------------------------------------
John C. Hockin
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
------------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL, INC.
By: /s/ WILLIAM D. LOWE
--------------------------------------
Name: William D. Lowe
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Co-President December 20, 2002
------------------------------------------------ (Principal Executive Officer)
Brian L. Kane
* Co-President December 20, 2002
------------------------------------------------ (Principal Executive Officer)
Carol Hannah
/s/ WILLIAM D. LOWE Senior Vice President, Finance December 20, 2002
------------------------------------------------ and Treasury (Principal
William D. Lowe Financial Officer, Controller
and Principal Accounting
Officer)
* Director December 20, 2002
------------------------------------------------
James H. Fordyce
* Director December 20, 2002
------------------------------------------------
John C. Hockin
* Director December 20, 2002
------------------------------------------------
Steven E. Rodgers
* Director December 20, 2002
------------------------------------------------
Jesse Rogers
* Director December 20, 2002
------------------------------------------------
Prescott Ashe
* Director December 20, 2002
------------------------------------------------
Ken Diekroeger
* Director December 20, 2002
------------------------------------------------
Stefan L. Kaluzny
* Director December 20, 2002
------------------------------------------------
Charles L. Orr
</Table>
II-10
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board and December 20, 2002
------------------------------------------------ Director
Peter M. Castleman
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in Luxembourg, on December 20, 2002.
WH LUXEMBOURG HOLDINGS S.A.R.L.
By: /s/ FABRIZIO SUARIA
------------------------------------
Name: Fabrizio Suaria
Title: Manager
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FABRIZIO SUARIA Manager (Principal Executive December 20, 2002
- ----------------------------------- Officer, Principal Financial
Fabrizio Suaria Officer, Controller and Principal
Accounting Officer)
/s/ CHRISTOPHE THOMANN Manager December 20, 2002
- -----------------------------------
Christophe Thomann
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
- -----------------------------------
William D. Lowe
</Table>
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in Luxembourg, on December 20, 2002.
WH LUXEMBOURG HOLDINGS S.A.R.L.
By: /s/ FABRIZIO SUARIA
------------------------------------
Name: Fabrizio Suaria
Title: Manager
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FABRIZIO SUARIA Manager (Principal Executive December 20, 2002
- ----------------------------------- Officer, Principal Financial
Fabrizio Suaria Officer, Controller and Principal
Accounting Officer)
/s/ CHRISTOPHE THOMANN Manager December 20, 2002
- -----------------------------------
Christophe Thomann
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
- -----------------------------------
William D. Lowe
</Table>
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in Luxembourg, on December 20, 2002.
WH LUXEMBOURG HOLDINGS S.A.R.L.
By: /s/ FABRIZIO SUARIA
------------------------------------
Name: Fabrizio Suaria
Title: Manager
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FABRIZIO SUARIA Manager (Principal Executive December 20, 2002
- ----------------------------------- Officer, Principal Financial
Fabrizio Suaria Officer, Controller and Principal
Accounting Officer)
/s/ CHRISTOPHE THOMANN Manager December 20, 2002
- -----------------------------------
Christophe Thomann
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
- -----------------------------------
William D. Lowe
</Table>
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL OF AMERICA,
INC.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Co-President (Principal December 20, 2002
------------------------------------------------ Executive Officer)
Brian L. Kane
* Co-President (Principal December 20, 2002
------------------------------------------------ Executive Officer)
Carol Hannah
/s/ WILLIAM D. LOWE Senior Vice President, Finance December 20, 2002
------------------------------------------------ and Treasury (Principal
William D. Lowe Financial Officer, Controller
and Principal Accounting
Officer)
* Director December 20, 2002
------------------------------------------------
James H. Fordyce
* Director December 20, 2002
------------------------------------------------
John C. Hockin
* Director December 20, 2002
------------------------------------------------
Steven E. Rodgers
* Director December 20, 2002
------------------------------------------------
Jesse Rogers
* Director December 20, 2002
------------------------------------------------
Prescott Ashe
* Director December 20, 2002
------------------------------------------------
Ken Diekroeger
* Director December 20, 2002
------------------------------------------------
Stefan L. Kaluzny
</Table>
II-15
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director December 20, 2002
------------------------------------------------
Charles L. Orr
* Chairman of the Board and December 20, 2002
------------------------------------------------ Director
Peter M. Castleman
By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL
COMMUNICATIONS, INC.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
------------------------------------------------ Secretary (Principal Executive
Brian L. Kane Officer)
* Director December 20, 2002
------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
------------------------------------------------ (Principal Financial Officer,
William D. Lowe Controller and Chief Accounting
Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-17
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL DISTRIBUTION,
INC.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
------------------------------------------------ Secretary (Principal Executive
Brian L. Kane Officer)
* Director December 20, 2002
------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
------------------------------------------------ (Principal Financial Officer,
William D. Lowe Controller and Chief Accounting
Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-18
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL OF EUROPE,
INC.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
---------------------------------------------- Secretary (Principal Executive
Brian L. Kane Officer)
* Director December 20, 2002
----------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
---------------------------------------------- (Principal Financial Officer,
William D. Lowe Controller and Chief Accounting
Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-19
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL DO BRASIL
LTDA.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President of
Herbalife
International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Delegate Manager (Principal December 20, 2002
----------------------------------------------- Executive Officer, Principal
Sergio Gianechini Financial Officer, Controller
and Principal Accounting
Officer)
* Director December 20, 2002
-----------------------------------------------
James H. Fordyce
* Director December 20, 2002
-----------------------------------------------
John C. Hockin
* Director December 20, 2002
-----------------------------------------------
Steven E. Rodgers
* Director December 20, 2002
-----------------------------------------------
Jesse Rogers
* Director December 20, 2002
-----------------------------------------------
Prescott Ashe
* Director December 20, 2002
-----------------------------------------------
Ken Diekroeger
Director December 20, 2002
-----------------------------------------------
Stefan L. Kaluzny
* Director December 20, 2002
-----------------------------------------------
Charles L. Orr
</Table>
II-20
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director December 20, 2002
-----------------------------------------------
Peter M. Castleman
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
-----------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-21
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL DO BRASIL
LTDA.,
a Delaware Corporation
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
----------------------------------------------- Secretary (Principal Executive
Brian L. Kane Officer)
* Director December 20, 2002
-----------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
----------------------------------------------- (Principal Financial Officer,
William D. Lowe Controller and Principal
Accounting Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-22
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE (UK) LIMITED
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President of
Herbalife
International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and Managing December 20, 2002
----------------------------------------------------- Director (Principal
Richard Hobby Executive Officer,
Principal Financial
Officer, Controller and
Principal Accounting
Officer)
* Director December 20, 2002
-----------------------------------------------------
Christophe Thomann
/s/ WILLIAM D. LOWE Authorized U.S. December 20, 2002
----------------------------------------------------- Representative
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-23
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
Herbalife Europe Limited
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President
of Herbalife International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and Managing December 20, 2002
----------------------------------------------------- Director (Principal
Brian L. Kane Executive Officer,
Principal Financial
Officer, Controller and
Principal Accounting
Officer)
* Director December 20, 2002
-----------------------------------------------------
Christophe Thomann
/s/ WILLIAM D. LOWE Authorized U.S. December 20, 2002
----------------------------------------------------- Representative
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-24
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
Herbalife International Finland OY
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President
of Herbalife International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director (Principal December 20, 2002
----------------------------------------------------- Executive Officer,
Fabrizio Suaria Controller and Principal
Accounting Officer)
* Director December 20, 2002
-----------------------------------------------------
Tomasz Stanislawski
/s/ WILLIAM D. LOWE Authorized U.S. December 20, 2002
----------------------------------------------------- Representative
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-25
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
Herbalife International of Israel
(1990) Ltd.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President
of Herbalife International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President December 20, 2002
----------------------------------------------------- (Principal Executive
Brian L. Kane Officer, Principal
Financial Officer,
Controller and Chief
Accounting Officer)
* Director December 20, 2002
-----------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Authorized U.S. December 20, 2002
----------------------------------------------------- Representative
William D. Lowe
*By: /s/ WILLIAM D. LOWE
------------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-26
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE OF JAPAN K.K.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Statutory Auditor
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director December 20, 2002
-------------------------------------------
Brian L. Kane
/s/ WILLIAM D. LOWE Statutory Auditor (Principal December 20, 2002
------------------------------------------- Financial Officer, Controller
William D. Lowe and Principal Accounting
Officer)
* Director and Representative December 20, 2002
------------------------------------------- Director (Principal Executive
Joe Wojcik Officer)
* Director December 20, 2002
-------------------------------------------
John Purdy
Director December 20, 2002
-------------------------------------------
Margaret Snowden
* Director December 20, 2002
-------------------------------------------
Song Churl Park
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
------------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
---------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-27
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNACIONAL DE MEXICO, S.A.
DE C.V.
By: /s/ WILLIAM D. LOWE
-------------------------------------
Name: William D. Lowe
Title: Director
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and Chairman December 20, 2002
- ------------------------------------------------- (Principal Executive Officer)
Brian L. Kane
* Director December 20, 2002
- -------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Director and Secretary December 20, 2002
- ------------------------------------------------- (Principal Financial Officer,
William D. Lowe Controller and Principal
Accounting Officer)
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
- -------------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
-----------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-28
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE PRODUCTS DE MEXICO, S.A. DE
C.V.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Director
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and Chairman December 20, 2002
- ------------------------------------------ (Principal Executive Officer)
Brian L. Kane
* Director December 20, 2002
- ------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Director and Secretary December 20, 2002
- ------------------------------------------ (Principal Financial Officer,
William D. Lowe Controller and Principal
Accounting Officer)
/s/ WILLIAM D. LOWE Authorized U.S. Representative December 20, 2002
- ------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
--------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-29
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE SWEDEN AKTIEBOLAG
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President of
Herbalife International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director (Principal Executive December 20, 2002
- ------------------------------------------ Officer, Principal Financial
Fabrizio Sauria Officer, Controller and Principal
Accounting Officer)
Authorized U.S. Representative December 20, 2002
/s/ WILLIAM D. LOWE
- ------------------------------------------
William D. Lowe
*By: /s/ WILLIAM D. LOWE
--------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-30
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE CHINA, LLC
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Senior Vice President of
Herbalife International, Inc.
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Manager (Principal Executive December 20, 2002
------------------------------------------------ Officer, Principal Financial
Brian L. Kane Officer, Controller and
Principal Accounting Officer)
* Manager December 20, 2002
------------------------------------------------
John Purdy
* Manager December 20, 2002
------------------------------------------------
Joe Wojcik
* Manager December 20, 2002
------------------------------------------------
Bernard O'Brien
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-31
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE TAIWAN, INC.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
------------------------------------------------ Secretary (Principal Executive
Brian L. Kane Officer)
* Director December 20, 2002
------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
------------------------------------------------ (Principal Financial Officer,
William D. Lowe Controller and Chief Accounting
Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-32
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on December 20, 2002.
HERBALIFE INTERNATIONAL (THAILAND)
LTD.
By: /s/ WILLIAM D. LOWE
------------------------------------
Name: William D. Lowe
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933 this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Director and President and December 20, 2002
----------------------------------------------------- Secretary (Principal
Brian L. Kane Executive Officer)
* Director December 20, 2002
-----------------------------------------------------
Carol Hannah
/s/ WILLIAM D. LOWE Chief Financial Officer December 20, 2002
----------------------------------------------------- (Principal Financial
William D. Lowe Officer, Controller and
Principal Accounting
Officer)
*By: /s/ WILLIAM D. LOWE
------------------------------------------------
William D. Lowe
Attorney-in-Fact
</Table>
II-33
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ------------ -----------
3.18 Certificate of Incorporation of Herbalife International Do
Brasil Ltda. (Delaware)
3.19 Certificate of Amendment of Certificate of Incorporation of
Herbalife International Do Brasil Ltda. (Delaware)
3.20 Bylaws of Herbalife International Do Brasil Ltda. (Delaware)
3.21 Amendment to Articles of Association of Herbalife
International Do Brasil Ltda.
3.22 Articles of Association of Herbalife International Do Brasil
Ltda.
3.23 Memorandum of Association of Herbalife (UK) Limited
3.24 Articles of Association of Herbalife (UK) Limited
3.25 Memorandum of Association of Herbalife Europe Limited
3.26 Articles of Association of Herbalife Europe Limited
3.27 Deeds of Foundation of Herbalife International Finland OY
3.28 Articles of Association of Herbalife International Finland
OY
3.29 Articles of Association of Herbalife International of Israel
(1990) Ltd.
3.30 Memorandum of Association of Herbalife International of
Israel (1990) Ltd.
3.31 Articles of Incorporation of Herbalife of Japan K.K.
3.32 Restated Bylaws of Herbalife of Japan K.K.
3.33 Bylaws and Articles of Incorporation of Herbalife
Internacional de Mexico, S.A. de C.V.
3.34 Copia Certificada of Herbalife Products de Mexico, S.A. de
C.V.
3.35 Articles of Association of Herbalife Sweden Aktiebolag
3.36 Limited Liability Company Agreement of Herbalife China, LLC
3.37 Amendment to Limited Liability Company Agreement of
Herbalife China, LLC
3.40 Certificate of Incorporation of Herbalife International
(Thailand) Ltd.
5.1 Opinion of Chadbourne & Parke LLP as to the legality of the
Series B Notes being registered hereby
5.2 Opinion of Maples & Calder, counsel to WH Intermediate
Holdings Ltd.
5.3 Opinion of Marshall Hill Cassas & de Lipkau, counsel to
Herbalife International Inc.
5.4 Opinion of Bonn Schmitt Steichen, counsel to WH Luxembourg
Holdings S.a.R.L., WH Luxembourg Intermediate Holdings
S.a.R.L. and WH Luxembourg CM S.a.R.L.
5.5 Opinion of Irell & Manella, counsel to Herbalife
International of America, Inc., Herbalife International
Communications Inc., Herbalife International Distribution,
Inc., Herbalife International of Europe, Inc., Herbalife
Taiwan, Inc. and Herbalife International (Thailand) Ltd.
5.6 Opinion of Corvo Advogados, counsel to Herbalife
International Do Brasil Ltda.
5.7 Opinion of Chadbourne & Parke, a Multinational Partnership,
to Herbalife (UK) Limited and Herbalife Europe Limited
5.8 Opinion of Mr. Robin Potts, QC
5.9 Opinion of Hannes Snellman, counsel to Herbalife
International Finland OY
5.10 Opinion of Herzog, Fox & Neeman, counsel to Herbalife
International of Israel (1990) Ltd.
5.11 Opinion of Tomotsune & Kimura, counsel to Herbalife of Japan
K.K.
5.12 Opinion of Bufete Carrillo Gamboa, S.C., counsel to
Herbalife Internacional de Mexico, S.A. de C.V. and
Herbalife Products de Mexico, S.A. de C.V.
</Table>
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ------------ -----------
5.13 Opinion of Mannheimer Swartling, counsel to Herbalife Sweden
Aktiebolag
5.14 Opinion of Morris, Nichols, Arsht & Tunnell, counsel to
Herbalife China, LLC and Herbalife International Do Brasil
Ltda. (Delaware)
10.34 Independent Directors Stock Option Plan of WH Holdings
(Cayman Islands) Ltd.
10.35 Form of Independent Directors Stock Option Agreement
10.36 Executive Officer Stock Option Plan of WH Holdings (Cayman
Islands) Ltd.
10.37 Form of Non-Statutory Stock Option Agreement
10.38 Form of Incentive Stock Option Agreement
10.39 Amendment No. 1 to Credit Agreement dated as of December 18,
2002, among Herbalife International, Inc., WH Holdings
(Cayman Islands) Ltd., WH Intermediate Holdings Ltd., WH
Luxembourg Holdings S.a.R.L., WH Luxembourg Intermediate
Holdings S.a.R.L., WH Luxembourg CM S.a.R.L. and each of the
Subsidiary Guarantors
23.1 Consent of Deloitte & Touche
23.2 Consent of Chadbourne & Parke LLP (included in Exhibit 5.1)
</Table>