Herbalife

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Herbalife, Ltd.

Type	Public (NYSE: HLF)
Founded	Los Angeles, CA (1980)
Headquarters	Los Angeles, CA
Key people	Michael O. Johnson, Chief Executive Officer Brett R. Chapman, General Counsel and Corporate Secretary Richard P. Goudis, Chief Financial Officer Y. Steve Henig, Ph.D., Chief Scientific Officer Paul E. Noack, Chief Strategic Officer
Industry	Nutrition & Skin Care products
Products	Weight management, nutritional supplements, personal care
Website	www.herbalife.com

Founded in 1980, Herbalife International (NYSE: HLF) is a company that sells weight-loss, nutrition and skin-care products by multi-level marketing, also known as network marketing.

1 Company history
2 Product overview
- 2.1 Health Concerns
3 Business methods and controversy
- 3.1 Crazy Fox Infomercials
- 3.2 Current Litigation
4 Sports sponsorships
5 Nutrition Advisory Board
6 References
7 External links

[edit] Company history

In February 1980, Mark Hughes began selling the original Herbalife weight loss product from the trunk of his car. By 1982, Herbalife had reached $2,000,000 in sales and opened a distributorship in Canada, its first outside of the United States. In 1986 Herbalife became a publicly traded company via NASDAQ. Independent distributors' personal vehicles could be seen on the street, decorated by decals bearing the mysterious slogan "Lose weight now, ask me how!". In 1994 Mark Hughes started the Herbalife Family Foundation, a charity dedicated to helping children. The organization receives donations from Herbalife itself as well as individuals within and outside the company. The Herbalife Family Foundation has donated more than $6.5 million to children's causes worldwide. In 1996 Herbalife reached $1,000,000,000 in annual sales.

In 2000, Hughes died at the age of 44 from an overdose of alcohol and doxepin after a four-day drinking binge.^[1]^[2] The company has continued to grow after his death.

In 2003, Michael O. Johnson joined Herbalife as CEO following a 17-year career with The Walt Disney Company, most recently as president of Walt Disney International. On December 16 2004 the company had an initial public offering on the NYSE of 14,500,000 common shares at $14/share. 2004 net sales were reported as $1.3 billion. In April 2005, the company celebrated its 25th anniversary with a four-day event attended by 35,000 Herbalife Independent Distributors from around the world. In August 2005, Dr. Steve Henig joined the company as Chief Scientific Officer, responsible for product research and development.

The company is headquartered in Los Angeles, California and employs 3500 worldwide. Products are distributed in 65 countries through a network that Herbalife claims contains 1.5 million independent distributors.

[edit] Product overview

Herbalife's product offering includes weight-management products such as Formula 1 Nutritional Shake Mix, a meal-replacement shake and one of the first products introduced by the company. Other nutritional products offered by Herbalife range from dietary supplements made from vitamins, minerals and herbs to personal care products emphasizing nutritional and herbal ingredients, such as aloe vera and vitamin C.

As of 2005, it is not immediately clear what method Herbalife's weight loss products employ^{[citation needed]}, although the nutritional ingredients are listed on the product. Recent advertisements indicate that the current philosophy is one of meal replacement via diet shakes, and nutritional supplements.

Proponents claim that the Herbalife strategy is aligned with health industry recommendations for safe weight control, eating a balanced diet, low-energy food with regular exercises, and that their nutritional and weight management line of products facilitate this through macronutrient and micronutrient food formulas.

Herbalife provides testimonials from health professionals as part of their marketing campaign. Some of the products are vegetarian, some are even kosher or halal, being certified by independent assessors. The products neither conform the fairtrade guidelines, nor does the company guarantee that the products were manufactured without animal testing.

[edit] Health Concerns

Some of the original Herbalife weight loss products contained the active ingredient Ma Huang or Sida cordifolia, two herbs containing ephedrine alkaloids. Adverse reactions involving the company's Thermojetics original green tablets were recorded by the U.S. Food and Drug Administration and Herbalife subsequently stopped using ephedrine in its products in the face of rising insurance premiums.^[3]^[4] The U.S. FDA banned supplements containing ephedra in 2004.^[5]

In its annual report (SEC Form 10-K) Herbalife declares that all of its products are manufactured by outside companies, except for a small amount of products manufactured in its own manufacturing facility in China. The major suppliers include NBTY (Nature’s Bounty), Fine Foods (Italy), PharmaChem Labs and JB Labs which together account for more than 40% of its product purchases in 2006. ^[6] In addition Herbalife declared in its annual report 2005 that the Company’s research and development is primarily performed by outside consultants and that 2005 Herbalife did not incurred any material R&D costs.

[edit] Business methods and controversy

Supporters and merchants involved with Herbalife contend that it is a genuine and profitable multi-level marketing business opportunity. Critics of Herbalife contended (in 1985) that it was a Pyramid scheme^[7] and that the company did not make enough effort to curb abuses by individual distributors. Herbalife is a member of the Direct Selling Association in most countries in which it operates.

In its filings with the U.S. Securities and Exchange Commission (SEC), company management specifically noted problems with inappropriate business practices many years ago, their subsequent long-lasting effects and the need to avoid any repetition. Herbalife's September 2006 quarterly report to the SEC describes a distributor network that is relatively easy to enter and exit, financially, by comparison with those of many other network marketing companies. The company tracks distributor retention by annually "re-qualifying" active distributors; most recently, 41.5% of distributors were still active after twelve months, up from 39.7% a year before. Company management considers the number and retention of distributors a key parameter and tracks it closely in financial reports. As of early 2006, the company had over 240,000 qualified distributors around the world, up 21% over the previous year; over 80% of these distributors were outside North America.^[8] The company reports the difference between the listed retail price and the actual amount distributors pay the company as "distributor allowances"; in the third calendar quarter of 2006, these allowances totaled $368 million. Assuming distributors always sold their product at listed prices, this amount spread over the qualified distributors would amount to an average "allowance" of about $500 per distributor per month. The company also paid out $109 million that quarter in "royalty overrides" – basically commissions and bonuses – to qualifying distributors.

In April 2006, the U.S. Federal Trade Commission proposed new rules to regulate all sellers of "business opportunities" in the United States. Under the proposed rules, sellers such as Herbalife would be required to (i) implement a seven day waiting period before entering into an agreement with new distributors, (ii) provide prospective distributors with substantial written information regarding the business opportunity, including: the earnings experience of other distributors, contact data for new distributors in their area, cancellation or refund policies and requests within the prior two years, certain legal actions against the company, its affiliated companies and officials. In its quarterly report, the Herbalife notes "if implemented in its original form, would negatively impact our U.S. business". Many other publicly-traded network marketing stocks have since suffered, based on investor expectations the new rules would go through as proposed, substantially choking company profits^[9]; Herbalife's stock, however, has fully recovered since the initial announcement.

Herbalife's Scientific Advisory Board is chaired by David Heber, M.D. Ph.D, F.A.C.P., F.A.C.N., who is professor of medicine and public health and the founding director of the Center for Human Nutrition in the Department of Medicine at UCLA. According to a 2004 Forbes article, Dr. Heber joined the board at roughly the same time Herbalife made a $3 million donation to establish the Mark Hughes Cellular & Molecular Nutrition Laboratory at his Center for Human Nutrition, leading to criticism of Heber's actions as an inappropriate conflict of interest.

Louis J. Ignarro, Ph.D., a Nobel Laureate in Medicine and Distinguished Professor of Pharmacology at the UCLA School of Medicine, is also a member of Herbalife's Scientific Advisory Board. Ignarro worked with Herbalife to develop Niteworks, a dietary supplement designed to boost the body's own production of nitric oxide, and later became a member of the company's Scientific Advisory Board. Ignarro endorsed this product in exchange for a royalty agreement reported to have earned his consulting firm over $1 million in the first 12 months. Ignarro also promoted Niteworks' ingredients in the prestigious Proceedings of the National Academy of Sciences, without disclosing his financial interest to the publication. After Ignarro's ties to Herbalife were revealed, the journal issued a correction to the article, citing Ignarro's undisclosed "conflict of interest". Ignarro also stars as the primary speaker in a one-hour Herbalife promotional video for Niteworks.

[edit] Crazy Fox Infomercials

As of April 2008, a series of commercials featuring a large animated red fox advertising home-based business opportunities have been running on US television stations. The advertisements typically feature a series of testimonials from actors playing individuals who have made sums of money between $5,000 USD and $15,000 USD per month as a result of participating in an undescribed business program. The viewer is advised to visit a website of the format crazyfox(arbitrary number).com or (arbitrary number)crazyfox.com; all of these domains redirect to the same site at crazyfox.com^[10]. The site contains a form where the user can provide their personal information and pay a fee to receive a "success kit"; the kit is an hour-long video with no information as to how the individual will earn money. Within a few days, the person ordering the kit is contacted by telephone or e-mail to invest additional money to participate in the Herbalife MLM program. ^[11]

[edit] Current Litigation

In a routine financial report filed with the U.S. Securities and Exchange Commission in mid-2006, Herbalife management identified two pending lawsuits significant enough to warrant notifiying their investors:

In a California class action suit, Minton v. Herbalife International, et al, the plaintiff is "challenging the marketing practices of certain Herbalife International independent distributors and Herbalife International under various state laws prohibiting "endless chain schemes", insufficient disclosure in assisted marketing plans, unfair and deceptive business practices, and fraud and deceit".
In a West Virginia class action suit, Mey v. Herbalife International, Inc., et al, the plaintiffs allege that some "telemarketing practices of certain Herbalife International distributors violate the Telephone Consumer Protection Act, or TCPA, and seeks to hold Herbalife International vicariously liable for the practices of these distributors. More specifically, the plaintiffs' complaint alleges that several of Herbalife International's distributors used pre-recorded telephone messages and autodialers to contact prospective customers in violation of the TCPA's prohibition of such practices".

Herbalife managements insists they have meritorious defences in both cases and that in the West Virginia case, any such distributor actions also went against Herbalife's own policies. Management also contends that any adverse legal outcomes Herbalife might suffer would not significantly affect their financial condition, particularly since they have already set aside an amount that they "believe represents the likely outcome of the resolution of these disputes".

[edit] Sports sponsorships

Herbalife and its nutritional products sponsor a number of sports events, venues and athletes. Herbalife is the sponsor of and Official Nutritional Advisor to the AVP Pro Beach Volleyball Tour for the seasons 2005 through 2007. Herbalife’s Liftoff is the official drink of the tour and also sponsors AVP athletes Elaine Youngs and Rachel Wacholder.

Herbalife was the Presenting Sponsor of the 2005 & 2006 JPMorgan Chase Open WTA tennis tournament. In addition, this year the company became the Official Nutrition Company and Shirt Sponsor of the Los Angeles Galaxy and the Tour of California bicycle road race.^[12]

Herbalife is the Official Nutrition Sponsor of the Michelob ULTRA London Triathlon, Nautica Malibu Triathlon, the Thai Airways International Laguna Phuket Triathlon, and triathletes Olly Freeman and Erika Aklufi. Herbalife’s current CEO, Michael O. Johnson, is a fitness enthusiast and a participant in triathlon competitions.^[13]

In January, 2008, Herbalife signed a four-year contract to become a major sponsor for the American Youth Soccer Organization (AYSO). In addition to funding delivered directly to AYSO at the national level, each of the roughly 1100 AYSO regions electing to display a small Herbalife logo on their region's uniforms will receive additional money.^[14]