Herbalife Ltd. 2004 ANNUAL REPORT Dear Shareholders, We recently celebrated our 25th anniversary with record-breaking attendance at our Worldwide Extravaganza in Atlanta. More than 35,000 Herbalife Independent Distributors came together from all over the world. We introduced dynamic new products and new recruiting and branding tools. The enthusiastic reception rocked the Georgia Dome. For our distributors, this is the right time and the right place. They are part of a “new” Herbalife. We have momentum. We have renewed distributor confidence. A record number of distributors reached Supervisor level in 2004 and we had the largest increase ever for our high-level President's Team. Two new members joined our prestigious Chairman's Club. Our business opportunity is attracting people from all walks of life – from stay-at-home mothers seeking part- time income to Generation H, our entrepreneurial group of 20 to 30-year-olds. Our management team's commitment to improving distributor recruiting, retailing and retention resulted in a record-breaking year, with net sales reaching $1.3 billion, up 13 percent over last year, and operating income of $139 million, up 30 percent from last year. Europe, The Americas and Asia Pacific all recorded double-digit net sales growth. Our global footprint expanded as we opened Bolivia, our 59th country. The globalization of two key distributor programs, Total Plan and Nutrition Clubs, allows our distributors to tap into new markets and to expand within existing markets. Herbalife's initial public offering on the New York Stock Exchange and the concurrent recapitalization enabled us to lower our cost of debt and enhanced our image, which offers a prestigious recruiting tool for our distributors. We have made investments in key areas: technology, scientific research, manufacturing and product development to strengthen our offering. In 2004, under the guidance of our newly appointed Scientific Advisory Board, we launched ShapeWorks™, our premier weight-management program, and Garden 7™ – phytonutrients from fruits and vegetables offered in convenient daily packs. We introduced five key strategic initiatives to promote long-term growth: strategies for distributors, customers, products, China and our infrastructure. Our employees' enthusiasm and spirit supports our distributors and makes it fun, simple and magical. We are committed to the company vision of “Changing People's Lives” and to shared corporate values. We live these values every day. We give back to our communities. The Herbalife family of distributors, employees, and friends generously supports the Herbalife Family Foundation (HFF), which helps children at risk all over the world. HFF was quick to mobilize a worldwide effort for relief to tsunami victims. Herbalife was founded on a mission of changing people's lives by providing an opportunity to improve their health and financial well-being and on a basic philosophy: “Use, Wear, Talk” – use the product, wear the button and talk to people. As we enter our next quarter century, we are building on this strong foundation and will look to strengthen our position globally. We're just getting started. MICHAEL O. JOHNSON GREGORY L. PROBERT Chief Executive Officer Chief Operating Officer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) ፤ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 អ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number: 1-32381 HERBALIFE LTD. (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 98-0377871 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.) Organization) P.O. Box 309GT Ugland House, South Church Street Grand Cayman, Cayman Islands (Address of Principal Executive Offices) (Zip Code) (310) 410-9600* (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Shares, par value $0.002 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No អ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. អ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Ye s No ፤ There were 68,632,867 common shares outstanding as of March 7, 2005. The aggregate market value of the Registrant’s common shares held by non-affiliates was approximately $359.8 million as of March 7, 2005 based upon the last reported sales price on the New York Stock Exchange on that date. The Registrant’s common shares were not traded on June 30, 2004, the last day of the Registrant’s second fiscal quarter in 2004. DOCUMENTS INCORPORATED BY REFERENCE None * C/O Principal Financial and Accounting Officer of Herbalife International, Inc. TABLE OF CONTENTS Page Part I ITEM 1. BUSINESS .................................................... 2 ITEM 2. PROPERTIES .................................................. 38 ITEM 3. LEGAL PROCEEDINGS .......................................... 38 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........ 39 Part II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ................................................. 41 ITEM 6. SELECTED FINANCIAL DATA ..................................... 44 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. 46 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . 68 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............... 73 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ...................... 73 ITEM 9A. CONTROLS AND PROCEDURES ................................... 73 ITEM 9B. OTHER INFORMATION .......................................... 77 Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 77 ITEM 11. EXECUTIVE COMPENSATION .................................... 82 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............ 96 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............. 100 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................... 107 Part IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .................................................. 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................ 121 SIGNATURES .......................................................... 156 Forward Looking Statements This document contains ‘‘forward-looking statements.’’ All statements other than statements of historical fact are ‘‘forward-looking statements’’ for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words ‘‘may,’’ ‘‘will,’’ ‘‘estimate,’’ ‘‘intend,’’ ‘‘continue,’’ ‘‘believe,’’ ‘‘expect’’ or ‘‘anticipate’’ and other similar words. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward- looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this prospectus. Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in forward-looking statements include, among others, the following: • our relationships with, and our ability to influence the actions of, our distributors; • adverse publicity associated with our products or network marketing organization; • changing consumer preferences and demands; • the competitive nature of our business; • regulatory matters governing our products and network marketing program; • risks associated with operating internationally, including foreign exchange risks; • our dependence on increased penetration of existing markets; • contractual limitations on our ability to expand our business; • our