| Herbalife, Ltd. |
 |
| Type |
Public (NYSE: HLF) |
| Founded |
Los Angeles, CA (1980) |
| Headquarters |
Los Angeles, CA |
| Key people |
Michael O. Johnson, Chief Executive Officer
Gregory L. Probert, President and Chief Operating 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.
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 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 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 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.
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 in calories and taking regular exercise, 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 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]
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[6]
and that the company did not make enough effort to curb abuses by individual distributors.
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.[7] 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[8];
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.
Current Litigation
In a routine financial report filed with the U.S. Securities and Exchange Commission in mid-2006, Herbalife mangement 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".
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.[9]
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.[10]
References
- ^ Rundle, Rhonda L.. "Herbalife Returns to Spotlight", Wall Street Journal, 2007-02-23. Retrieved on
2007-04-11.
- ^ "Binge Led to Death of Herbalife Founder", New York Times, 2000-08-12. Retrieved on 2007-04-11.
- ^
Herbalife Ltd. (2005-03-14), "Form 10-K", United States Securities and Exchange
Commission: page 15, <http://www.sec.gov/Archives/edgar/data/1180262/000104746905006359/a2153305z10-k.htm#05WLA1071_1>
- ^ Evans, D.. "Herbalife, Other Ephedra Marketers Face Soaring Insurance
Rates", Bloomberg L.P., 2002-04-11.
- ^ Sales of Supplements Containing Ephedrine Alkaloids (Ephedra) Prohibited. U.S. Food and Drug Administration.
- ^ "Herbalife Sets More Layoffs", The New York Times,
1985-05-30.
- ^ [1]
- ^ [2]
- ^ [3]
- ^ [4]
External links
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