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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
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-32381
HERBALIFE LTD.
(Exact Name of Registrant as
Specified in Its Charter)
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Cayman Islands
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98-0377871
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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P.O. Box 309GT
Ugland House, South Church Street
Grand Cayman, Cayman Islands
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(Zip Code)
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(Address of Principal Executive
Offices)
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(213) 745-0500
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Shares, par value $0.002 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229,405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
There were 60,291,306 common shares outstanding as of
February 18, 2010. The aggregate market value of the
Registrants common shares held by non-affiliates was
approximately $1,732 million as of June 30, 2009,
based upon the last reported sales price on the New York Stock
Exchange on that date of $31.54.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement to
be filed with the Securities and Exchange Commission no later
than 120 days after the end of the Registrants fiscal
year ended December 31, 2009, are incorporated by reference
in Part III of this Annual Report on
Form 10-K.
FORWARD-LOOKING
STATEMENTS
This document contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. 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 any 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 or
incorporated by reference in our filings with the Securities and
Exchange Commission. Important factors that could cause our
actual results, performance and achievements, or industry
results to differ materially from estimates or projections
contained in our forward-looking statements include, among
others, the following:
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our relationship with, and our ability to influence the actions
of, our distributors;
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adverse publicity associated with our products or network
marketing organization;
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uncertainties relating to interpretation and enforcement of
recently enacted legislation in China governing direct selling;
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our inability to obtain the necessary licenses to expand our
direct selling business in China;
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adverse changes in the Chinese economy, Chinese legal system or
Chinese governmental policies;
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improper action by our employees or international distributors
in violation of applicable law;
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changing consumer preferences and demands;
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loss or departure of any member of our senior management team
which could negatively impact our distributor relations and
operating results;
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the competitive nature of our business;
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regulatory matters governing our products, including potential
governmental or regulatory actions concerning the safety or
efficacy of our products, and network marketing program
including the direct selling market in which we operate;
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third party legal challenges to our network marketing program;
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risks associated with operating internationally and the effect
of economic factors, including foreign exchange, inflation,
pricing and currency devaluation risks, especially in countries
such as Venezuela;
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our dependence on increased penetration of existing markets;
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contractual limitations on our ability to expand our business;
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our reliance on our information technology infrastructure and
outside manufacturers;
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the sufficiency of trademarks and other intellectual property
rights;
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product concentration;
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our reliance on our management team;
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uncertainties relating to the application of transfer pricing,
duties, value added taxes, and other tax regulations, and
changes thereto;
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changes in tax laws, treaties or regulations, or their
interpretation;
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taxation relating to our distributors;
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product liability claims;
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any collateral impact resulting from the ongoing worldwide
financial crisis, including the availability of
liquidity to us, our customers and our suppliers or the
willingness of our customers to purchase products in a
recessionary economic environment; and
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whether we will purchase any of our shares in the open markets
or otherwise.
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Additional factors that could cause actual results to differ
materially from our forward-looking statements are set forth in
this Annual Report on
Form 10-K,
including under the heading Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and in our
Consolidated Financial Statements and the related Notes.
Forward-looking statements in this Annual Report on
Form 10-K
speak only as of the date hereof, and forward-looking statements
in documents attached that are incorporated by reference speak
only as of the date of those documents. We do not undertake any
obligation to update or release any revisions to any
forward-looking statement or to report any events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events, except as required by law.
The
Company
Unless otherwise noted, the terms we,
our, us, Company and
Herbalife refer to Herbalife Ltd. and its
subsidiaries. Herbalife is a holding company, with substantially
all of its assets consisting of the capital stock of its
indirect, wholly-owned subsidiary, Herbalife International.
PART I
GENERAL
We are a global network marketing company that sells weight
management, nutritional supplement, energy, sports &
fitness products and personal care products. We were founded in
1980 by Mark Hughes. We pursue our mission of changing
peoples lives by providing a financially rewarding
business opportunity to distributors and quality products to
distributors and customers who seek a healthy lifestyle. We are
one of the largest network marketing companies in the world with
net sales of approximately $2.3 billion for the fiscal year
ended December 31, 2009. We sell our products in 72
countries through a network of approximately 2.0 million
independent distributors. In China, in order to comply with
local laws and regulations, we sell our products through retail
stores, sales representatives, sales employees and licensed
business providers. Licensed business providers are independent
service providers that operate their own business under Chinese
law as well as the conditions set forth by us to sell products
and provide services to our customers. We believe the quality of
our products and the effectiveness of our distribution network,
coupled with geographic expansion, have been the primary reasons
for our success throughout our
30-year
operating history.
We offer science-based products in four principal categories:
weight management, targeted nutrition, energy,
sports & fitness and Outer Nutrition. The weight
management product portfolio includes meal replacement shakes,
weight-loss enhancers, appetite suppressors and a variety of
healthy snacks. Our collection of targeted nutrition products
includes dietary supplements which contain vitamins, minerals
and natural ingredients that support total well-being and
long-term good health. The energy, sports & fitness
category includes energy and isotonic drinks to support a
healthy active lifestyle. Our Outer Nutrition products include
skin cleansers, moisturizers and lotions with antioxidants, as
well as anti-aging products. Weight management, targeted
nutrition, energy, sports & fitness and Outer
Nutrition accounted for 63.0%, 21.2%, 4.3% and 5.5% of our net
sales in fiscal year 2009, respectively.
We believe that the direct-selling channel is ideally suited to
marketing our products because sales of weight management,
nutrition and personal care products are strengthened by ongoing
personal contact between retail
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consumers and distributors. This personal contact may enhance
consumers nutritional and health education as well as
motivate consumers to begin and maintain wellness and weight
management programs. In addition, many of our distributors use
our products themselves, and can therefore provide first-hand
testimonials of the effectiveness of our products to consumers,
which often serve as a powerful sales tool.
We are focused on building and maintaining our distributor
network by offering financially rewarding and flexible career
opportunities through sales of quality, innovative and
efficacious products to health conscious consumers. We believe
the income opportunity provided by our network marketing program
appeals to a broad cross-section of people throughout the world,
particularly those seeking to supplement family income, start a
home business or pursue entrepreneurial, full and part-time,
employment opportunities. Our distributors, who are independent
contractors, can profit from selling our products and can also
earn royalties and bonuses on sales made by the other
distributors whom they recruit to join their sales organizations.
We enable distributors to maximize their potential by providing
a broad array of motivational, educational and support services.
We motivate our distributors through our performance-based
compensation plan, individual recognition, reward programs and
promotions, and participation in local, national and
international Company-sponsored sales events such as
Extravaganzas. We are committed to providing professionally
designed educational training materials that our distributors
can use to enhance recruitment and maximize their sales. We and
our distributor leadership conduct thousands of training
sessions each year throughout the world to educate and motivate
our distributors. These training events teach our distributors
not only how to develop invaluable business-building and
leadership skills, but also how to differentiate our products to
consumers. Our corporate-sponsored training events provide a
forum for distributors, who otherwise operate independently, to
share ideas with us and each other. In addition, we operate an
Internet-based Herbalife Broadcasting Network, which delivers
worldwide, educational, motivational and inspirational content,
including addresses from our Chief Executive Officer, to our
distributors. We further aid our distributors by generating
additional demand for our products through traditional marketing
and public relations activities, such as television ads,
sporting event sponsorships and endorsements.
Our
Competitive Strengths
We believe that our success stems from our ability to motivate
our distributor network through our marketing plan and provide
distributors with a unique go to market strategy that supports
sustainable daily consumption of our innovative and efficacious
products that appeal to consumer preferences for healthy
lifestyles. We have been able to achieve sustained and
profitable growth by capitalizing on the following competitive
strengths:
Distributor
Base
As of December 31, 2009, we had approximately
2.0 million distributors, which includes approximately
296,000 China sales representatives and employees. Collectively,
we refer to this group as distributors.
Approximately 481,000 of our 2.0 million distributors have
become sales leaders, which are comprised of approximately
431,000 sales leaders in the 71 countries where we use our
traditional marketing plan and approximately 50,000 China sales
employees and licensed business providers operating under our
China marketing plan. Collectively, we refer to this group as
sales leaders. We believe that the distributors who
have not attained the sales leader level can be segmented into
three general categories based on their product order patterns:
discount buyers, small retailers and potential sales leaders. We
define discount buyers as customers who have signed up as
distributors to enjoy a discount on their purchases; small
retailers as product users and sales people who generate modest
sales to friends and family; and potential sales leaders as
distributors who are proactively developing a business with the
intention of qualifying to become a sales leader. In 2009,
excluding China, distributor orders for these three general
categories were approximately 47%, 36% and 17%, respectively.
For the approximately 481,000 sales leaders in our organization,
the marketing plan encourages active participation in the
business including building down-line sales organizations of
their own, which can serve to increase their income and increase
our product sales. Sales leaders contribute significantly to our
sales.
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Product
Portfolio
We are committed to building distributor, customer and brand
loyalty by providing a diverse portfolio of health-oriented and
wellness products. The breadth of our product offerings enables
our distributors to sell a comprehensive package of products
designed to simplify weight management and nutrition. We
continue to introduce new products annually and rigorously
review, and if necessary, improve our product formulations,
based upon developments in nutrition science. We believe that
the longevity and variety in our product portfolio significantly
enhance our distributors abilities to build their
businesses.
Nutrition
Science-Based Product Development
We continue to emphasize and make investments in science-based
product development in the fields of weight management,
nutrition and personal care. We have a growing internal team of
scientists dedicated to continually evaluating opportunities to
enhance our existing products and to develop new science-based
products. These product development efforts are reviewed by
prominent doctors and world-renowned scientists who constitute
our Scientific Advisory Board and Nutrition Advisory Board. In
addition, we have provided donations to assist in the
establishment of the Mark Hughes Cellular and Molecular Lab at
UCLA, or the UCLA Lab, and we continue to rely on their
expertise. We believe that the UCLA Lab provides opportunities
for Herbalife to access cutting-edge science in botanical,
herbal and nutrition research. In 2007, Herbalife awarded a
research grant to the National Center for Natural Products
Research at the University of Mississippi School of Pharmacy, or
NCNPR. The grant will allow NCNPR scientists to identify and
study the biologically active chemicals found in botanicals,
which may be used in the development of future dietary
supplements and skin care products for Herbalife.
Scalable
Business Model
Our business model enables us to grow our business with only
moderate investment in our infrastructure and other fixed costs.
With the exception of our China business, we require no
Company-employed sales force to market and sell our products. We
incur no direct incremental cost to add a new distributor in our
existing markets, and our distributor compensation varies
directly with sales. In addition, our distributors bear the
majority of our consumer marketing expenses, and sales leaders
sponsor and coordinate a large share of distributor recruiting
and training initiatives. Furthermore, we can readily increase
production and distribution of our products as a result of our
numerous third party manufacturing relationships as well as our
global footprint of in-house distribution centers.
Geographic
Diversification
We have a proven ability to establish our network marketing
organization in new markets. Since our founding 30 years
ago, we have expanded our presence into 72 countries. While
sales within our local markets may fluctuate due to economic,
market and regulatory conditions, competitive pressures,
political and social instability or for Company-specific
reasons, we believe that our geographic diversity mitigates our
financial exposure to any particular market. We opened two new
markets during 2009 and our strategic plan includes a goal of
opening 6 new markets during 2010.
Experienced
Management Team
Our management team is led by Michael O. Johnson who became our
Chief Executive Officer after spending 17 years with The
Walt Disney Company, where he most recently served as President
of Walt Disney International. In 2007, he was named our
Chairman. Since joining our Company, Mr. Johnson has
assembled a team of experienced executives, including Desmond
Walsh, who began serving as President effective January 1,
2010 and previously served as our Companys Executive Vice
President, Worldwide Operations and Sales and formerly Senior
Vice President of the commercial division of DMX Music; Richard
Goudis, who began serving as Chief Operating Officer effective
January 1, 2010 and previously served as our Companys
Chief Financial Officer and formerly Chief Operating Officer of
Rexall Sundown, (a division of Royal Numico NV); John DeSimone,
who began serving as Chief Financial Officer effective
January 1, 2010 and previously served as our Companys
Senior Vice President Finance and formerly Chief
Financial Officer of Rexall Sundown; Brett R. Chapman, as
General Counsel and formerly Senior Vice President and Deputy
General Counsel of The Walt Disney Company; and Steve
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Henig, Ph.D., as Chief Scientific Officer with
responsibility for our product research and development, and
formerly Senior Vice President of Ocean Spray Cranberries, Inc.
Our
Business Strategy
We believe that our network marketing model is the most
effective way to sell our products. Our objective is to increase
the recruitment, retention, retailing and productivity of our
distributor base by pursuing the following strategic initiatives:
Major
Market Strategy
We look to optimize country operating models; further aligning
resources to fuel growth in high potential markets, develop
lower-cost models where appropriate and centralize key
functions. Expanding in China represents a significant growth
opportunity for us as we believe that China could become one of
the largest direct-selling markets in the world over the next
several years. To address this opportunity, we have assembled a
management team with direct selling experience, secured a
headquarters location in Shanghai, and expanded our
manufacturing capacity in our Suzhou, China factory. In 2007, we
received a direct selling license for the Jiangsu province. In
the third quarter of 2008 we received five additional direct
selling licenses. We also applied for five additional provincial
licenses in September 2008 and received approval in early July
2009. In addition, during 2009, we expanded our operations into
two new countries and in 2008, we opened five new countries. As
part of our long term strategy, we expect to continue to
identify and open untapped markets. Additionally, our strategy
includes further penetrating our existing markets and
globalizing distributor business methods which will improve the
balance of retailing, retention and recruiting in major markets.
The success of this approach has been validated by the improved
market penetration in key markets such as Brazil, the United
States, South Korea, Taiwan and Russia.
Product
Strategy
We are committed to providing our distributors with unique,
innovative products to help them increase sales and recruit new
distributors. Our product development is focused on four
principal categories: weight management; targeted nutrition;
energy, sports & fitness and Outer Nutrition that
capitalize on the mega trends of obesity and anti-aging. On an
ongoing basis, we will augment our product portfolio with
additional science-based products and, as appropriate, will
bundle products addressing similar health concerns into packages
and programs. We are establishing a core set of products that
will be available in key markets around the world. We also
introduced new upgraded formulations of existing products to
continue to improve the efficacy and product differentiation of
our product as compared to products that can be found on the
retail shelf. To better support distributors, we will expand our
product packaging to provide both individual serving sizes and
larger sizes of our top selling products. Additionally, each
year we plan to have mega launches of products
and/or
programs, coupled with our major events, to generate continued
excitement among our distributors, to add to our core set of
products and to support our distributor daily methods of
operation, or DMOs. These mega launches will
generally target specific market segments deemed strategic to
us, such as the recent introduction of our powered fiber and
aloe lines that support our focus on driving daily consumption.
To augment the personal testimonials of our distributors and to
provide them with independent validation of our product efficacy
we successfully completed two sponsored clinical studies in 2008
and one sponsored clinical study in 2009 in addition to other
clinical studies currently underway.
Distributor
Strategy
We continue to increase our investment in events and promotions,
both in absolute dollars and as a percent of net sales, as a
catalyst to help our distributors improve the effectiveness and
productivity of their businesses. We work with our distributor
leaders to globalize best-practice business methods to enable
our distributors to improve their penetration in existing
markets. We refer to these business methods as DMOs and they
include such methods as: Nutrition Clubs, Commercial Clubs,
Central Clubs, Weight Loss Challenge, The Total Plan, Wellness
Coach and Internet/Sampling. We also offer distributors
BizWorks, a business system which assists our distributors in
building their businesses more efficiently while better
servicing their existing customers. And finally, to increase
brand awareness among potential customers and distributors, we
have entered into numerous marketing alliances around
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the world, created Team Herbalife and rolled-out a
style guide and brand asset library so that our distributors
have access to the Herbalife brand logo for use in their
marketing efforts.
Infrastructure
Strategy
In 2003, we embarked upon a strategic initiative to
significantly upgrade our technology infrastructure throughout
the world. We are implementing an Oracle enterprise-wide
technology solution, with a scalable and stable open
architecture platform, to enhance our efficiency and
productivity as well as that of our distributors. In addition,
we are upgrading our Internet-based marketing and distributor
services platform with tools such as BizWorks, BizWorks 2.0 and
MyHerbalife.com and we have invested in business intelligence
tools to enable better analysis of our business. In 2008, we
successfully completed upgrades for the software application
tier of the Oracle platform with implementation across multiple
regions. In 2009, we completed the roll out of the Oracle
platform in all of our regions, except China. Additionally, in
August 2009, we purchased certain assets of Micelle
Laboratories, Inc., a Lake Forest, California contract
manufacturer of food and nutritional supplements. We purchased
these assets in order to strengthen our global manufacturing
capabilities. We continue to invest in our employees through a
comprehensive and global organizational development program as
well as a Wellness program which was initiated in the
U.S. during 2008.
Product
Overview
For 30 years, our products have been designed to help
distributors and customers from around the world lose weight,
improve their health and experience life-changing results. We
have built our heritage on developing unique formulas that blend
the best of nature with innovative techniques from nutrition
science, appealing to the growing base of consumers seeking
differentiated products and desiring a healthier lifestyle.
As of December 31, 2009, we marketed and sold 127 products
encompassing over 3,600 SKUs through our distributors and
currently have approximately 1,942 trademarks worldwide. We
group our products into four primary categories: weight
management, targeted nutrition, energy, sports &
fitness and Outer Nutrition. Our products are often sold as part
of a program, and therefore our portfolio is comprised of a
series of related products designed to simplify weight
management and nutrition for our consumers and maximize our
distributors cross-selling opportunities. These programs
target specific consumer market segments, such as women, men or
children, as well as weight-management customers and individuals
looking to enhance their overall well-being and support an
active, healthy lifestyle.
The following table summarizes our products by product category.
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Product Category
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Description
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Representative Products
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Weight Management
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(63.0% of 2009 net sales)
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Meal replacement, weight-loss enhancers and a variety of healthy
snacks
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Formula 1 Healthy Meal, Personalized Protein Powder, Total
Control®,
Protein Bars and Snacks
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Targeted Nutrition
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(21.2% of 2009 net sales)
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Dietary and nutritional supplements containing quality herbs,
vitamins, minerals and other natural ingredients
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Niteworks®,
Garden
7®
phytonutrient supplement, Best
Defense®
for improved immune system, Kids Line
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Energy, Sports & Fitness
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(4.3% of 2009 net sales)
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Products that support a healthy active lifestyle
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Liftoff®
energy drink,
H(3)Otm
hydration drink
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Outer Nutrition
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(5.5% of 2009 net sales)
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Skin cleansers, moisturizers, lotions, shampoos and conditioners
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Skin
Activator®
Anti-Aging line,
NouriFusion®
skin care line
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Literature, Promotional and Other Products
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(6.0% of 2009 net sales)
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Sales aids, informational audiotapes, CDs, DVDs and start-up kits
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International Business Packs, BizWorks
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Weight
Management
Weight Management is our largest product category representing
63.0% of our net sales for the year 2009. Formula 1, our
best-selling product, is a healthy meal with soy protein,
essential vitamins, minerals, herbs and nutrients that is
available in seven delicious flavors and can help support weight
management. It has been part of our basic weight management
program for 30 years and generated approximately 32% of our
retail sales for the year 2009. Personalized Protein Powder is a
soy and whey protein product developed to be added to Formula 1
to personalize a persons daily protein intake to help
achieve their desired weight and shape. Weight-loss enhancers,
including Total
Control®,
address specific challenges associated with dieting, such as
lack of energy, hunger and food craving, fluid retention,
decreased metabolism and digestive challenges, by building
energy, boosting metabolism, curbing appetite and helping to
promote weight loss. Healthy snacks are formulated to provide
between-meal nutrition and satisfaction. In 2008, we introduced
packettes in all 7 flavors in the U.S., as well as a packette
variety pack to support dietary supplement, or DS sampling and
lead generation efforts. We expanded the Formula 1 franchise by
introducing F1 Express Healthy Meal Bar in EMEA in 2009. In the
U.S., some key weight management products, Total Control, Snack
Defense and Cell-U-Loss were upgraded with more modern
formulations and stronger benefits.
Targeted
Nutrition
We market numerous dietary and nutritional supplements designed
to meet our customers specific nutritional needs. Each of
these supplements contains quality herbs, vitamins, minerals and
other natural ingredients and focuses on specific life stages of
our customers, including women, men, children and those with
health concerns, including heart health, healthy aging,
digestive health, or immune solutions.
Niteworks®
is a product developed in conjunction with Nobel Laureate in
Medicine, Dr. Louis Ignarro, that supports energy,
circulatory and vascular health and enhances blood flow to the
heart, brain and other vital organs. Garden
7®
is designed to provide the phytonutrient benefits of seven
servings of fruits and vegetables and has anti-oxidant and
health-boosting properties. Best
Defense®
is an effervescent drink that boosts immunity. In 2007, we
introduced a new Kids Line including shakes and improved
multivitamins which provide essential nutrition including
protein, fiber and 100% of key nutrients to meet growing
kids daily needs. In 2008, we re-launched the Digestive
Line and introduced two new products Herbal Aloe
Powder (Mango Accent and Aloe Accent flavors) and Active Fiber
Complex (Apple and Unflavored). In 2009, we further expanded our
successful Aloe line by introducing a popular Mango flavored
Aloe Concentrate while optimizing and reintroducing several of
our Targeted Nutrition products in the U.S. such as
Xtra-Cal Advanced, Joint Support Advanced, Tang Kuei Plus,
Schizandra Plus and RoseGuard.
Energy,
Sports & Fitness
We entered into the high growth energy drink category in 2005
with the introduction of
Liftoff®,
an innovative, effervescent energy drink containing a
proprietary blend of B-vitamins, guarana, ginseng, ginkgo and
caffeine to increase energy and improve mental clarity for
better performance throughout the day. In 2007, we launched
H3Otm
Fitness Drink to provide rapid hydration, sustained muscle
energy plus antioxidant protection for people living a healthy,
active lifestyle. In 2008, we expanded our product offerings in
the energy drink segment with the introduction of two new
flavors of Liftoff Tropical Fruit and Lemon Cola.
Outer
Nutrition
Our Outer Nutrition products complement our weight management
and targeted nutrition products and aim to improve the
appearance of the body, skin and hair. These products include
skin cleansers, toners, moisturizers and facial masks, shampoos
and conditioners, body-wash items and a selection of fragrances
for men and women.
NouriFusion®
Multivitamin skin care products are formulated with antioxidant
Vitamins A, C and E for a healthy, glowing complexion. In 2006,
we launched a full line of anti-aging products as an extension
of our successful Skin
Activator®
product, an advanced face cream that contains a
collagen-building Glucosamine Complex to reduce the appearance
of fine lines and wrinkles. In the past few years, we launched a
number of regional products to address local market needs
including a Soft Green Body Care line in Brazil in 2008, the
Whitening Serum under the NouriFusion brand in the Asia Pacific
region, and the Lively Fragrances perfume line in Brazil in 2009.
9
Literature,
Promotional and Other Products
We also sell literature and promotional materials, including
sales aids, informational audiotapes, videotapes, CDs and DVDs
designed to support our distributors marketing efforts, as
well as
start-up
kits called International Business Packs for new
distributors. In 2006, we introduced BizWorks, a customizable
retail website for our distributors to enhance the on-line
experience and improve their productivity.
Product
Development
We are committed to providing our distributors with unique,
innovative science-based products to help them increase
recruitment, retention and retailing. We believe this can be
best accomplished in part by introducing new products and by
upgrading, reformulating and repackaging existing product lines.
Our internal team of scientists and product developers
collaborate with our Nutrition Advisory Board and Scientific
Advisory Board to formulate, review and evaluate new product
ideas. Once a particular market opportunity has been identified,
our scientists along with our marketing and sales teams work
closely with distributors to effect a successful development and
launch of the product. Our research and development is performed
by in-house staff and outside consultants. For all periods
presented, research and development costs were expensed as
incurred and were not material.
A new product development process was deployed to accelerate the
introduction of new products and to improve the launch of
products. Cross-functional teams from Product Marketing, Product
Development, Sciences, Licensing, Manufacturing and Finance were
formed and assigned to major product initiatives.
The product development process is a stage-gate process based on
best in class practices in our industry. The process
consists of five stages: identification, feasibility assessment,
development, launch and learn. The project teams obtain
approvals from a corporate steering team comprised of key
executives in the Company. The process defines each
departments roles and responsibilities and sets clear
deliverables for each stage. It creates a succinct process from
the beginning of the development cycle to the end.
New product ideas are generated and narrowed down to high
potential ideas that fill our business needs and conform to our
overall strategy. We test the most promising ideas with
distributors and customers using a variety of qualitative and
quantitative tools. This testing is followed by a feasibility
assessment which includes a review of product and package
prototypes, product positioning and messaging, process design,
analysis of manufacturing issues and providing preliminary
financial projections of product sales. The next stage is the
development phase in which we finalize the formula, process,
manufacturing strategy, product positioning, pricing, labeling
and other related matters. The fourth stage is the launch phase
in which we prepare promotional and sales materials, complete
the supply chain plan, create product and financial forecasts,
and complete other final preparations for launch. After the
product is launched, we closely track sales performance and the
lessons learned so we can update and improve the product
development process. In addition, during the past three years,
we have significantly increased our investment in clinical
studies and in our science program to substantiate claims and
efficacy of our products.
We reorganized our technical team in 2009 for greater efficiency
in product development as well as to carry out related product
development strategies both globally and regionally. During
2009, we also added new talents to our technical and scientific
teams and additional resources to the Companys Nutrition
and Scientific Advisory Boards.
The Nutrition Advisory Board is headed by David
Heber, M.D., Ph.D., Professor of Medicine and Public
Health at the UCLA School of Medicine, Director of the UCLA
Center for Human Nutrition and Director of the UCLA Center for
Dietary Supplement Research in Botanicals. The Nutrition
Advisory Board has 20 members from 17 countries. It is comprised
of leading scientists and medical doctors who provide training
on product usage and give health-news updates through Herbalife
literature, the Internet and training events around the world.
Our Scientific Advisory Board is chaired by Dr. Heber and
has 10 members from 4 countries. Louis Ignarro, Ph.D.,
Distinguished Professor of Pharmacology at the UCLA School of
Medicine and Nobel Laureate in Medicine is also a member of the
Scientific Advisory Board.
We believe that it is important to maintain our relationships
with members of our Nutrition Advisory Board and Scientific
Advisory Board to recognize the time and effort that they expend
on our behalf. Each member of our Nutrition Advisory Board other
than Dr. Heber receives a monthly retainer of up to $5,000,
plus up to $3,000 for every day that they appear at a
non-southern California distributor event and up to $2,000 for
every day that they
10
need to travel to such events. Members of our Scientific
Advisory Board are compensated for their time and efforts in the
following manner: (1) eight members are paid an annual
retainer of $5,000 plus travel expenses,
(2) Dr. Ignarro receives no direct compensation from
us although we do pay a consulting firm, with which
Dr. Ignarro is affiliated, a royalty on sales of
Niteworks®,
certain healthy heart products, and other products
that we may mutually designate in the future that are, in each
case, sold with the aid of Dr. Ignarros consulting,
promotional or endorsement services, with such amounts totaling
$1.9 million, $2.1 million, and $1.9 million, in
2009, 2008, and 2007 respectively and (3) Dr. Heber
generally, other than a one time option grant in 2005, receives
no direct compensation from us although we do reimburse him for
travel expenses and we do pay to a consulting firm, with which
Dr. Heber is affiliated, a quarterly consulting fee of
$75,000. During 2009, a total of $300,000 was paid to the
consulting firm.
We also make contributions to the UCLA Lab. We have continually
invested in this lab since 2002 with total donations of
approximately $1.4 million which includes donations of lab
equipment and software. UCLA agreed that the donations would be
used for further research and education in the fields of weight
management and botanical dietary supplements. In addition, we
have made donations from time to time to UCLA to fund research
and educational programs. While our direct relationship with
UCLA involves clinical studies and research regarding botanical
ingredients, we intend to take full advantage of the expertise
at UCLA by committing to support research that will further our
understanding of the benefits of phytochemicals.
In 2009, we acquired certain assets of Micelle Laboratories, a
Lake Forest, California contract manufacturer of food and
nutritional supplements. The acquisition allows us to strengthen
our global manufacturing capabilities. Over the next year, we
plan to increase plant capacity and capability to produce
products for shipment throughout North America and several of
our international markets.
In 2009, we focused our development efforts on strengthening our
portfolio by optimizing certain key products in weight
management and targeted nutrition segments to better meet the
nutritional needs of our customers.
Regionally, our product development supported local needs for
new Outer Nutrition offerings including Soft Green and Lively
Fragrances lines in South America and NouriFusion Whitening
products in Asia Pacific as well as further globalization of
Heart Health, Digestive Health and single-serve Weight
Management products including a new Healthy Meal Replacement Bar
in EMEA.
We believe our focus on nutrition and botanical science and our
efforts at combining our internal research and development
efforts with the scientific expertise of our Scientific Advisory
Board, the educational skills of the Nutrition Advisory Board
and the resources of the UCLA Lab should result in meaningful
product introductions and give our distributors and consumers
increased confidence in our products.
Network
Marketing Program
General
Our products are distributed through a global network marketing
organization comprised of approximately 2.0 million
independent distributors in 72 countries, including in China
where, due to regulations, our sales are conducted through
Company operated retail stores, sales representatives, sales
employees and licensed business providers. In China, in the
areas where we have a direct selling license, our
representatives, licensed business providers and employees can
sell Herbalife product outside the retail establishments. In
addition to helping our distributors achieve physical health and
wellness through use of our products, we offer our distributors,
who are independent contractors, attractive income
opportunities. Distributors may earn income on their own sales
and can also earn royalties and bonuses on sales made by the
distributors in their sales organizations. We believe that our
products are particularly well-suited to the network marketing
distribution channel because sales of weight management and
health and wellness products are strengthened by ongoing
personal contact and coaching between retail consumers and
distributors. We believe our continued commitment to developing
innovative, science-based products will enhance our ability to
attract new distributors as well as increase the productivity
and retention of existing distributors. Furthermore, our
international sponsorship program, which permits distributors to
sponsor distributors in other countries where we are licensed to
do business and where we have obtained required product
approvals, provides a significant advantage to our distributors
in developing and growing their businesses. China has its own
unique marketing program.
11
On July 18, 2002, we entered into an agreement with our
distributors that no material changes adverse to the
distributors will be made to our marketing plan without their
consent and that we will continue to distribute Herbalife
products exclusively through our independent distributors. We
believe that this agreement has strengthened our relationship
with our existing distributors, improved our ability to recruit
new distributors and generally increased the long-term stability
of our business.
Structure
of the Network Marketing Program
To become a distributor in most markets, a person must be
sponsored by an existing distributor and must purchase an
International Business Pack. The International Business Pack, or
IBP, is a distributor kit available in local languages. The
product and literature contents in the kits vary slightly to
meet individual market needs. An example is the large size
U.S. IBP, which costs $87.95 and includes a canister of
Formula 1 shake mix, two bottles of nutritional supplements,
Herbal Concentrate (Tea),
Liftoff®
(an energy drink), and
Nourifusion®
(skin care) samples, along with a handy tote, booklets
describing us, our compensation plan and rules of conduct,
various training and promotional materials, distributor
applications and a product catalog. The smaller
U.S. version costs $54.95 and includes sample products, a
handy tote, and essentially the same print and promotional
materials as included in the larger kit version. To become a
sales leader, or qualify for a higher level, including the
Qualified Producer level introduced in October 2009,
distributors must achieve specified volumes of product sales or
earn certain amounts of royalty overrides during specified time
periods and must re-qualify for the levels once each year. To
attain sales leader status, a distributor generally must be
responsible for sales of products representing at least 4,000
volume points in one month or 2,500 volume points in two
consecutive months. An additional optional qualification,
introduced globally in October 2009, allows for a distributor to
achieve sales leader level by personally placing orders with
Herbalife that accumulate to 5,000 Volume Points within
12 months (of which a minimum of 3 months is
required). China has its own unique marketing program. Volume
points are point values assigned to each of our products that
are usually equal in all countries and are essentially based on
the suggested retail price of U.S. products. Sales leaders
may then attain higher levels, (consisting of the World Team,
the Global Expansion Team, the Millionaire Team, the
Presidents Team, the Chairmans Club and the Founders
Circle) and earn increasing amounts of royalty overrides based
on sales in their downline organizations and, for members of our
Global Expansion Team and above, earn production bonuses on
sales in their downline organizations.
The following table sets forth the number of our sales leaders
and sales leader retention rates as of re-qualification period:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the End of February
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|
|
Number of Sales Leaders
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|
|
Sales Leader Retention Rate
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|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
|
63,726
|
|
|
|
64,383
|
|
|
|
54,314
|
|
|
|
42.2
|
%
|
|
|
43.5
|
%
|
|
|
43.1
|
%
|
Mexico
|
|
|
50,099
|
|
|
|
60,685
|
|
|
|
61,781
|
|
|
|
45.2
|
%
|
|
|
44.4
|
%
|
|
|
55.1
|
%
|
South & Central America
|
|
|
67,876
|
|
|
|
67,808
|
|
|
|
52,204
|
|
|
|
32.2
|
%
|
|
|
34.7
|
%
|
|
|
33.2
|
%
|
EMEA
|
|
|
53,371
|
|
|
|
59,446
|
|
|
|
64,862
|
|
|
|
48.7
|
%
|
|
|
46.6
|
%
|
|
|
46.2
|
%
|
Asia Pacific (excluding China)
|
|
|
59,631
|
|
|
|
57,355
|
|
|
|
56,871
|
|
|
|
35.1
|
%
|
|
|
34.3
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales Leaders
|
|
|
294,703
|
|
|
|
309,677
|
|
|
|
290,032
|
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
|
|
42.5
|
%
|
China Sales Employees
|
|
|
29,684
|
|
|
|
25,294
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
324,387
|
|
|
|
334,971
|
|
|
|
298,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
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|
In February of each year, we remove from the rank of sales
leader those individuals who did not satisfy the sales leader
qualification requirements during the preceding twelve months.
Distributors who meet the sales leader requirements at any time
during the year are promoted to sales leader status at that
time, including any sales leaders who were removed, but who
subsequently re-qualified. For the latest twelve month
re-qualification period ending January 2010, approximately 43%
of our sales leaders re-qualified. Typically, distributors who
purchase our product for personal consumption or for short term
weight loss or income goals may stay with us for several months
to one year while sales leaders who have committed time and
effort to build a sales organization generally stay for
12
longer periods. We rely on certifications from the selling
distributors as to the amount and source of product sales to
other distributors which are not directly verifiable by us. For
sales leaders to re-qualify and retain their distributor
organization and associated earnings, they need to earn 4,000
volume points in one month or 2,500 volume points in each of two
consecutive months. In order to increase retailing of our
products, we have modified our re-qualification criteria to
provide that any distributor that earns at least 4,000 volume
points in any
12-month
period can re-qualify as a sales leader and retain a discount of
50% from suggested retail prices, but will forfeit their
distributor organization and associated earnings.
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 sales
organizations may earn (1) royalty overrides, up to 15% of
product retail sales in the aggregate, (2) production
bonuses, up to 7% of product retail sales in the aggregate and
(3) the Mark Hughes bonus, up to 1% of product retail sales
in the aggregate. Royalty overrides and bonuses together with
the distributor allowances represent the potential earnings to
distributors of up to approximately 73% of retail sales. Each
distributors success is dependent on two primary factors:
1) the time, effort and commitment a distributor puts into
his or her Herbalife business and 2) the product sales made
by a distributor and his or her sales organization.
Distributors, with the exception of China, earn the right to
receive royalty overrides upon attaining the level of sales
leader and above, and production bonuses upon attaining the
level of Global Expansion Team and above. Once a distributor
becomes a sales leader, 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
Presidents 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.
Many of our non-sales leader distributors join Herbalife to
obtain a 25% discount on our products and become a discount
consumer or have a part-time retail income goal in mind, and
this retail income is not tracked by the Company.
Under the regulations published by the Chinese Government,
direct selling companies are limited to the payment of gross
compensation to direct sellers of up to a maximum 30% of the
revenue they generate through their own sales of products to
consumers. We have incurred and will continue to incur
substantial ongoing additional costs relating to the inclusion
in the China business model of Company operated retail stores,
sales representatives, sales employees and licensed business
providers and Company provided training and certification
procedures for sales personnel, features not common elsewhere in
our traditional business model.
Distributor
Motivation and Training
We believe that motivation and training are key elements in
distributor success and that we and our distributor sales
leaders have established a consistent schedule of events to
support these needs. We and our distributor leadership conduct
thousands of training sessions annually on local, regional and
global levels to educate and motivate our distributors. Every
month, there are hundreds of
one-day
Success Training Seminars held throughout the world. Annually,
in each major territory or region, there is a
three-day
World Team School that focuses on product and business
development and is typically attended by 2,000 to 10,000
distributors. Additionally, once a year in each region, we host
an Extravaganza at which our distributors from the region can
come to learn about new products, expand their skills and
celebrate their success. In 2009, we held Extravaganzas in key
markets such as Brazil, Chile, Colombia, Panama, Korea, Russia,
Italy, Czech Republic, Mexico, China and the United States. In
addition to these training sessions, we have our own
Herbalife Broadcast Network on the Internet that we
use to provide distributors continual training and the most
current product and marketing information.
Distributor reward and recognition is a significant factor in
motivating our distributors. In 2009, 2008, and 2007 we invested
approximately $84.1 million, $89.6 million, and
$64.3 million, respectively, in regional and worldwide
events and promotions to motivate our distributors to achieve
and exceed both sales and recruiting goals.
13
Examples of our worldwide promotions are the
30th Anniversary Vacations and the Active World Team
Promotion. The 30th Anniversary Vacations offer incentives
for distributors to qualify to receive a vacation in Atlantis,
Bahamas, immediately following the 2010 Summit Meeting in
Orlando. The Active World Team Promotion provides cash and
recognition incentives to distributors who achieve all three
requirements for becoming a World Team Member and thus have
proven themselves adept at building a well-balanced business.
Geographic
Presence
As of December 31, 2009, we conducted business in 72
countries throughout the world. The following chart sets forth
the countries we currently operate in as of December 31,
2009, organized in the Companys six geographic regions,
and the year in which we commenced operations.
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Year
|
|
Country
|
|
Entered
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|
|
North America
|
|
|
|
|
USA
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|
|
1980
|
|
Canada
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|
|
1982
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|
Jamaica
|
|
|
1999
|
|
Mexico
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|
|
1989
|
|
South and Central America
|
|
|
|
|
Dominican Republic
|
|
|
1994
|
|
Venezuela
|
|
|
1994
|
|
Argentina
|
|
|
1994
|
|
Brazil
|
|
|
1995
|
|
Chile
|
|
|
1997
|
|
Panama
|
|
|
2000
|
|
Colombia
|
|
|
2001
|
|
Bolivia
|
|
|
2004
|
|
Costa Rica
|
|
|
2006
|
|
Peru
|
|
|
2006
|
|
El Salvador
|
|
|
2007
|
|
Ecuador
|
|
|
2008
|
|
Honduras
|
|
|
2008
|
|
Nicaragua
|
|
|
2008
|
|
Guatemala
|
|
|
2008
|
|
Paraguay
|
|
|
2009
|
|
Asia Pacific
|
|
|
|
|
Australia
|
|
|
1983
|
|
New Zealand
|
|
|
1988
|
|
Japan
|
|
|
1989
|
|
Hong Kong
|
|
|
1992
|
|
Philippines
|
|
|
1994
|
|
Taiwan
|
|
|
1995
|
|
South Korea
|
|
|
1996
|
|
Thailand
|
|
|
1997
|
|
Indonesia
|
|
|
1998
|
|
India
|
|
|
1999
|
|
Macau
|
|
|
2002
|
|
Singapore
|
|
|
2003
|
|
Malaysia
|
|
|
2006
|
|
Vietnam
|
|
|
2009
|
|
14
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
China
|
|
|
2001
|
|
EMEA
|
|
|
|
|
United Kingdom
|
|
|
1984
|
|
Spain
|
|
|
1989
|
|
Israel
|
|
|
1989
|
|
France
|
|
|
1990
|
|
Germany
|
|
|
1990
|
|
Portugal
|
|
|
1992
|
|
Czech Republic
|
|
|
1992
|
|
Italy
|
|
|
1992
|
|
Netherlands
|
|
|
1993
|
|
Belgium
|
|
|
1994
|
|
Poland
|
|
|
1994
|
|
Denmark
|
|
|
1994
|
|
Sweden
|
|
|
1994
|
|
Russia
|
|
|
1995
|
|
Austria
|
|
|
1995
|
|
Switzerland
|
|
|
1995
|
|
South Africa
|
|
|
1995
|
|
Norway
|
|
|
1995
|
|
Finland
|
|
|
1995
|
|
Greece
|
|
|
1996
|
|
Turkey
|
|
|
1998
|
|
Botswana
|
|
|
1998
|
|
Lesotho
|
|
|
1998
|
|
Namibia
|
|
|
1998
|
|
Swaziland
|
|
|
1998
|
|
Iceland
|
|
|
1999
|
|
Slovak Republic
|
|
|
1999
|
|
Cyprus
|
|
|
2000
|
|
Ireland
|
|
|
2000
|
|
Croatia
|
|
|
2001
|
|
Latvia
|
|
|
2002
|
|
Ukraine
|
|
|
2002
|
|
Estonia
|
|
|
2003
|
|
Lithuania
|
|
|
2003
|
|
Hungary
|
|
|
2005
|
|
Zambia
|
|
|
2007
|
|
Romania
|
|
|
2008
|
|
15
During the first quarter of 2009, we changed our geographic
regions, designating Mexico as its own region and combining
South America and Central America into a single region.
Historical information presented below relating to the
geographic regions has been reclassified to conform to the
current geographic presentation.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Net Sales
|
|
|
Percent of
|
|
|
Countries
|
|
|
|
Year Ended December 31,
|
|
|
Total Net Sales
|
|
|
December 31,
|
|
Geographic Region
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
529.0
|
|
|
$
|
496.9
|
|
|
$
|
438.7
|
|
|
|
22.8
|
%
|
|
|
3
|
|
Mexico
|
|
|
263.0
|
|
|
|
352.2
|
|
|
|
370.8
|
|
|
|
11.3
|
%
|
|
|
1
|
|
South & Central America
|
|
|
366.9
|
|
|
|
383.6
|
|
|
|
313.9
|
|
|
|
15.8
|
%
|
|
|
16
|
|
EMEA
|
|
|
504.2
|
|
|
|
570.7
|
|
|
|
567.7
|
|
|
|
21.7
|
%
|
|
|
37
|
|
Asia Pacific
|
|
|
509.2
|
|
|
|
410.8
|
|
|
|
378.7
|
|
|
|
21.9
|
%
|
|
|
14
|
|
China
|
|
|
152.3
|
|
|
|
145.0
|
|
|
|
76.0
|
|
|
|
6.5
|
%
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
2,324.6
|
|
|
$
|
2,359.2
|
|
|
$
|
2,145.8
|
|
|
|
100
|
%
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The top six countries worldwide represented approximately 59.4%,
58.0% and 56.1% of net sales in 2009, 2008, and 2007,
respectively, reflecting our broad geographical diversification.
After entering a new country, in many instances we experience an
initial period of rapid growth in sales as new distributors are
recruited, that is then followed by a decline in sales. We
believe that a significant factor affecting these markets is the
opening of other new markets within the same geographic region
or within the same or similar language or cultural bases. Some
distributors tend to focus their attention on the business
opportunities provided by these newer markets instead of
developing their established sales organizations in existing
markets to focus on driving deeper penetration. 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
decide 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 while
maintaining prior sales levels within the region.
Manufacturing
and Distribution
Many of our weight management, nutritional and personal care
products are manufactured for us by third party manufacturing
companies, with the exception of products distributed in and
sourced from China, where we have our own manufacturing facility
and several products are manufactured in our recently acquired
manufacturing facility in Lake Forest, California. We are
currently making modifications to our recently acquired
manufacturing facility in order to increase capability and
capacity, and upon completion of these modifications we expect
to increase self manufacturing for our worldwide demand. We own
proprietary formulations for substantially all of our weight
management products and dietary and nutritional supplements. We
source our products from multiple manufacturers, with our top
three suppliers accounting for approximately 44% of our product
purchases in 2009. In addition, many of our products can be made
available from a secondary vendor if necessary. We work closely
with our vendors in an effort to achieve the highest quality
standards and product availability. We also have our own quality
control labs in the U.S. and China at which we routinely
test products received from vendors. We have established
excellent relationships with our manufacturers and continue to
obtain improvements in product quality and product delivery.
Some of our key input materials such as soy and whey proteins,
fructose and packaging materials are subject to pricing
fluctuations driven by commodities pricing. We are confident
that we can offset potential cost increases of these materials
with our cost reduction program and, when necessary, by raising
the prices of our products.
In order to coordinate and manage the manufacturing of our
products, we utilize a significant demand planning and
forecasting process that is directly tied to our production
planning and purchasing systems. Using this sophisticated
planning software and process allows us to balance our inventory
levels to provide exceptional service to distributors while
minimizing working capital and inventory obsolescence.
16
Our global distribution system features centralized and
decentralized distribution and telephone ordering systems
coupled with storefront distributor service centers. Our major
distribution warehouses have automated
pick-to-light
systems which consistently deliver high order accuracy and
inspection of every shipment before it is sent to delivery.
Shipping and processing standards for orders placed are either
the same day or the following business day.
Our products are distributed to foreign markets either from the
facilities of our manufacturers or from our Los Angeles or
Venray, Netherlands distribution centers. Products are
distributed in the United States market from our Los Angeles
distribution center, our Memphis distribution center or from our
sales centers in Dallas, New York, Chicago, Phoenix and Tracy,
California. Products distributed globally 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 the products arrive in a foreign
market, distributors purchase the products from the local
distribution center or the associated sales center. Generally,
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.
Product
Return and Buy-Back Policies
In most markets, our products include a customer satisfaction
guarantee. Under this guarantee any customer who is not
satisfied with a Herbalife product for any reason may return it
or any unused portion of it within 30 days of purchase to
their 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, the distributor may obtain replacement product 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 generally 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, in that it offers monetary protection to distributors
who want to exit the business. Product returns and buy-back
expenses were approximately 0.5%, 0.8% and 1% of retail sales
for the years ended December 31, 2009, 2008 and 2007,
respectively. The decline in the product return and buy-back
percentage was primarily due to the global emphasis on DMOs,
which provide a more sustainable business foundation for our
distributors.
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: (1) a centralized host computer managed by
Hewlett Packard in Colorado Springs, which is linked to our
international markets through a dedicated wide area network that
provides on-line, real-time computer connectivity and access and
hosts our legacy operating systems and our new Oracle platform;
(2) local area networks of personal computers within our
markets, serving our regional administrative staffs; (3) an
international
e-mail
system through which our employees communicate; (4) a
standardized Northern Telecom Meridian telecommunication system
in most of our markets; and (5) Internet websites to
provide a variety of online services for distributors such as
status of qualifications, meeting announcements, product
information, application forms, educational materials and, in
select markets including the United States, sales ordering
capabilities. These systems are designed to provide, among other
things, 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 these 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 and other constraints exist at the federal,
state or local levels in the United States and at all levels of
government in foreign jurisdictions,
17
including regulations pertaining to: (1) the formulation,
manufacturing, packaging, labeling, distribution, importation,
sale and storage of our products; (2) product claims and
advertising, including direct claims and advertising by us, as
well as claims and advertising by distributors, for which we may
be held responsible; (3) our network marketing program;
(4) transfer pricing and similar regulations that affect
the level of U.S. and foreign taxable income and customs
duties; and (5) taxation of our independent distributors
(which in some instances may impose an obligation on us to
collect the taxes and maintain appropriate records).
Products
In the United States, the formulation, manufacturing, packaging,
storing, labeling, promotion, advertising, distribution and sale
of our products are subject to regulation by various
governmental agencies, including (1) the Food and Drug
Administration, or FDA, (2) the Federal Trade Commission,
or FTC, (3) the Consumer Product Safety Commission, or
CPSC, (4) the United States Department of Agriculture, or
USDA, (5) the Environmental Protection Agency, or EPA,
(6) the United States Postal Service, (7) United
States Customs and Border Protection, and (8) the Drug
Enforcement Administration. 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
over-the-counter,
or OTC, drugs, conventional foods, dietary supplements, and
cosmetics such as those distributed by us. FDA regulations
require us and our suppliers to meet relevant current good
manufacturing practice, or cGMP, regulations for the
preparation, packing and storage of foods and OTC drugs. On
June 25, 2007, the FDA published its final rule regulating
cGMPs for dietary supplements. The final rule became effective
August 24, 2007 and large companies such as Herbalife had
until June 2008 to achieve compliance. Herbalife initiated
enhancements, modifications and improvements to its
manufacturing and corporate quality processes and believes we
are compliant with the FDAs cGMP final rule with respect
to dietary supplements sold by Herbalife in the United States
that the Company produces at its Lake Forest, California and
Suzhou, China facilities and that are produced by contract
manufacturer NBTY. We have experienced increases in some product
costs as a result of the necessary increase in testing of raw
ingredients and finished products and compliance with higher
quality standards.
Most OTC drugs are subject to FDA Monographs that establish
labeling and composition requirements for these products. Those
of our products which are classified as OTC drugs must comply
with these Monographs, and our manufacturers must list all
products with the FDA and follow cGMP. Our cosmetic products are
regulated for safety by the FDA, which requires that ingredients
meet industry standards for non-allergenicity and non-toxicity.
Performance claims for cosmetics may not be
therapeutic.
The U.S. Dietary Supplement Health and Education Act of
1994, or DSHEA, revised the provisions of the Federal Food, Drug
and Cosmetic Act, or FFDCA, concerning the composition and
labeling of dietary supplements and, we believe, the revisions
are generally favorable to the dietary supplement industry. The
legislation created 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 or marketers of dietary
supplements in the United States and certain other jurisdictions
that make product performance claims, including structure or
function claims, must have substantiation in their possession
that the statements are truthful and not misleading. The
majority of the products marketed by us in the United States are
classified as conventional foods or dietary supplements under
the FFDCA. Internationally, the majority of products marketed by
us are classified as foods or food supplements.
In January 2000, the FDA issued a regulation 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 DSHEA. Under DSHEA, dietary supplement labeling may
bear structure or function claims, which are claims that the
products affect the structure or function of the body, without
prior FDA approval, but with notification to the FDA. They may
not bear a claim that they can prevent, treat, cure, mitigate or
diagnose disease (a disease claim). The regulation describes how
the FDA distinguishes disease claims from structure or function
claims. During 2004, the FDA issued guidance, paralleling an
earlier guidance from the FTC, defining a manufacturers
obligations to substantiate structure/function claims. The FDA
also issued a Structure/Function Claims Small Entity Compliance
Guide. In addition, the
18
agency permits companies to use FDA-approved full and qualified
health claims for products containing specific ingredients that
meet stated requirements.
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 regulatory action. A number of states
restricted the sale of dietary supplements containing botanical
sources of ephedrine alkaloids. As a result of these state
regulations, we stopped sales of dietary supplements containing
botanical sources of ephedrine alkaloids due to a shift in
consumer preference for ephedra free products and a
significant increase in products liability insurance premiums
for products containing botanical sources of ephedrine group
alkaloids. On December 31, 2002, we ceased sales of
Thermojetics®
original green herbal tablets containing ephedrine alkaloids
derived from Chinese Ma huang, as well as
Thermojetics®
green herbal tablets and
Thermojetics®
gold herbal tablets (the latter two containing the herb Sida
cordifolia which is another botanical source of ephedrine
alkaloids). On February 6, 2004, the FDA published a rule
finding that dietary supplements containing ephedrine alkaloids
present an unreasonable risk of illness or injury under
conditions of use recommended or suggested in the labeling of
the product, or, if no conditions of use are suggested in the
labeling, under ordinary conditions of use, and are therefore
adulterated.
The FDAs decision to ban ephedra triggered a significant
reaction by the national media, some of whom are calling for the
repeal or amendment of DSHEA. These media view supposed
weaknesses within DSHEA as the underlying reason why
ephedra was allowed to remain on the market. We have been
advised that DSHEA opponents in Congress may use this anti-DSHEA
momentum to advance new legislation during the
111th Congress to amend or repeal DSHEA. If this should
occur we believe that the DSHEA opponents may propose the
following: (1) premarket approval for safety and
effectiveness of dietary ingredients; (2) specific
premarket review of dietary ingredient stimulants that are being
used to replace ephedra; (3) reversal of the burden of
proof standard which now rests on the FDA; and (4) a
redefining of dietary ingredient to remove either
botanicals or selected classes of ingredients now treated as
dietary ingredients.
On December 22, 2007, a new law went into effect in the
United States mandating the reporting of all serious adverse
events occurring within the United States which involve dietary
supplements or OTC drugs. We believe that we are in full
compliance with this law having promulgated and implemented a
worldwide procedure governing adverse event identification,
investigation and reporting which is managed by our Scientific
Affairs department in collaboration with our Regulatory Affairs
department, our Medical Affairs department and our Distributor
Relations Call Centers. As a result of our receipt of adverse
event reports, we may from time to time elect, or be required,
to remove a product from a market, either temporarily or
permanently.
On June 25, 2007, the FDA published its final rule
regulating current good manufacturing practices, or cGMP, for
dietary supplements. This final rule became effective on
August 24, 2007. The final rule requires that companies
establish written procedures governing: (1) personnel,
(2) plant and equipment cleanliness, (3) lab and
testing, (4) packaging and labeling, and
(5) distribution. The FDA also required 100 percent
identity testing of all incoming raw materials, although an
interim final rule enables companies to petition for an
exemption from the 100 percent testing requirement if they
can demonstrate the existence of an appropriate statistical
sampling program. The new cGMPs will help ensure that dietary
supplements and dietary ingredients are not adulterated with
contaminants or impurities, and are labeled to accurately
reflect the active ingredients and other ingredients in the
products. We have evaluated the final cGMP rule with respect to
its potential impact upon the various contract manufacturers
that we use to manufacture our products, some of which might not
meet the new standards. It is important to note that the final
cGMP rule, in an effort to limit disruption, includes a
three-year phase-in for small businesses. This will mean that
some of our contract manufacturers will not be fully impacted by
the proposed regulation until at least 2010. However, the final
cGMP rule has resulted in additional costs. See
Item 1A Risk Factors for further
discussion regarding the recently promulgated cGMP regulations.
Some of the products marketed by us are considered conventional
foods and are currently labeled as such. Within the United
States, this category of products is subject to the Nutrition,
Labeling and Education Act, or 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. The ingredients added to conventional
foods must either be generally recognized as safe by experts, or
GRAS, or be approved as food additives under FDA regulations.
19
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 relevant countrys ministry of health or comparable
agency. Where a formal approval, license or certification is not
required, we nonetheless seek a favorable opinion of counsel
regarding our compliance with applicable laws. Prior to entering
a new market in which a formal approval, license or certificate
is required, we work extensively with local authorities in order
to obtain the requisite approvals. The approval process
generally requires us to present each product and product
ingredient to appropriate regulators and, in some instances,
arrange for testing of products by local technicians for
ingredient analysis. The approvals may be conditioned on
reformulation of our products, or may be unavailable with
respect to some products or some ingredients. Product
reformulation or the inability to introduce some products or
ingredients into a particular market may have an adverse effect
on sales. We must also comply with product labeling and
packaging regulations that vary from country to country. Our
failure to comply with these regulations can result in a product
being removed from sale in a particular market, either
temporarily or permanently.
In 2005, Herbalife voluntarily elected to withdraw its
Sesame & Herb tablet product from the Israeli market.
This product, which has been on the market since 1989, was sold
only in Israel. Herbalifes voluntary decision to withdraw
this product accompanied the initiation of a review by the
Israeli Ministry of Health of anecdotal case reports of
individuals having varying liver conditions when it was reported
that a small number of these individuals had consumed Herbalife
products. Herbalife scientists and medical doctors have closely
cooperated with the Ministry of Health to facilitate this
review. No regulatory action has been taken by the Israeli
Ministry of Health.
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
and against manufacturers of weight loss products generally for
false and misleading advertising of some of their products.
These enforcement actions have often 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, as well as the role of expert endorsers
and product clinical studies. 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. It is unclear whether the FTC will subject our
advertisements to increased surveillance to ensure compliance
with the principles set forth in its published advertising
guidance.
In Europe, where an EU Health Claim regulation is in effect, the
European Food Safety Authority, or EFSA, issued opinions
following its review of a number of proposed claims dossiers. If
accepted by the European Commission, the EFSAs opinions
could have a limiting effect on the use of certain
nutrition-specific claims made for our products. Such an outcome
could have an adverse effect on existing product
wellness, well-being and good for
you claims presently made on existing product labeling,
literature and advertising. Herbalife is currently seeking
regulatory support for its current product claims while
preparing for the possibility that based on limited acceptance
of our claims by EFSA we may be precluded from continued use of
such product claims.
In some countries, regulations applicable to the activities of
our distributors also may affect our business because in some
countries we are, or regulators may assert that we are,
responsible for our distributors conduct. In these
countries, regulators may request or require that we take steps
to ensure that our distributors comply with local regulations.
The types of regulated conduct include: (1) representations
concerning our products; (2) income representations made by
us and/or
distributors; (3) public media advertisements, which in
foreign markets may require prior approval by regulators; and
(4) sales of products in markets in which the products have
not been approved, licensed or certified for sale.
In some markets, it is possible that improper product claims by
distributors could result in our products being reviewed 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.
We are unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or
administrative orders, when and if promulgated, would have on
our business in the future.
They could, however, require: (1) the reformulation of some
products not capable of being reformulated; (2) imposition
of additional record keeping requirements; (3) expanded
documentation of the properties of some
20
products; (4) expanded or different labeling;
(5) additional scientific substantiation regarding product
ingredients, safety or usefulness;
and/or
(6) additional distributor compliance surveillance and
enforcement action by us.
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 issued in October 1986 pursuant to the settlement of
an action instituted by the California Attorney General, the
State Health Director and the Santa Cruz County District
Attorney. We consented to the entry of this injunction without
in 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 required 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.
Network
Marketing Program
Our network marketing program 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 our organization is based on sales of the
organizations products rather than investments in the
organization 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 program 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.
On April 12, 2006, the FTC, issued a notice of proposed
rulemaking which, if implemented in its originally proposed
form, would have regulated sellers of business
opportunities in the United States. As originally proposed
this rule would have applied to us and, if adopted in its
originally proposed form, could have adversely affected our
U.S. business. On March 18, 2008 the FTC issued a
revised proposed rule and, as indicated in the announcement
accompanying the proposed rule, the revised proposal does not
attempt to cover multilevel marketing companies such as
Herbalife. If the revised rule is implemented as it is now
proposed we believe that it would not significantly impact our
U.S. business. Based on information currently available, we
anticipate that the rule may become final within a year.
The FTC has approved revisions to its Guides Concerning the Use
of Endorsements and Testimonials in Advertising, or Guides,
which became effective on December 1, 2009. Although the
Guides are not binding, they explain how the FTC interprets
Section 5 of the FTC Acts prohibition on unfair or
deceptive acts or practices. Consequently, the FTC could bring a
Section 5 enforcement action based on practices that are
inconsistent with the Guides. Under the revised Guides,
advertisements that feature a consumer and convey his or her
atypical experience with a product or service will be required
to clearly disclose the results that consumers can generally
expect. In contrast to the 1980 version of the Guides, which
allowed advertisers to describe atypical results in a
testimonial as long as they included a disclaimer such as
results not typical, the revised Guides no longer
contain such a safe harbor. The revised Guides also add new
examples to illustrate the long-standing principle that
material connections between advertisers and
endorsers (such as payments or free products), connections that
consumers might not expect, must be disclosed. Herbalife is
reviewing the impact of the revised Guides as well as
modifications to its practices and rules regarding the practices
of its independent distributors that might be advisable with
regard to the revised Guides. However, it is possible that our
use, and that of our independent distributors, of testimonials
in the advertising and promotion of our products, including but
not limited to our weight management products and of our income
opportunity will be significantly impacted and therefore might
negatively impact our sales.
We also are subject to the risk of private party challenges to
the legality of our network marketing program. For example, in
Webster v. Omnitrition International, Inc., 79 F.3d
776 (9th Cir. 1996), the multi-level marketing program of
Omnitrition International, Inc., or Omnitrition, was
successfully challenged in a class action by Omnitrition
distributors who alleged that Omnitrition was operating an
illegal pyramid scheme in violation of
21
federal and state laws. We believe that our network marketing
program 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.
We are also subject to the risk of private party challenges to
the legality of our network marketing program. The multi-level
marketing programs of other companies have been successfully
challenged in the past, and in a current lawsuit, allegations
have been made challenging the legality of our network marketing
program in Belgium. Test Ankoop-Test Achat, a Belgian consumer
protection organization, sued Herbalife International Belgium,
S.V., or HIB, on August 26, 2004, alleging that HIB
violated Article 84 of the Belgian Fair Trade Practices Act
by engaging in pyramid selling, i.e., establishing a
network of professional or non-professional sales people who
hope to make a profit more through the expansion of that network
rather than through the sale of products to end-consumers. The
plaintiff is seeking a payment of 25,000 (equal to
approximately $36,500 as of December 31, 2009) per
purported violation as well as costs of the trial. For the year
ended December 31, 2009, our net sales in Belgium were
approximately $16.0 million. Currently, the lawsuit is in
the pleading stage. The plaintiffs filed their initial brief on
September 27, 2005. We filed a reply brief on May 9,
2006 and on December 9, 2008 plaintiffs filed a responsive
brief. There is no date yet for the oral hearings. An adverse
judicial determination with respect to our network marketing
program, or in proceedings not involving us directly but which
challenge the legality of multi-level marketing systems, in
Belgium or in any other market in which we operate, could
negatively impact our business. We believe that we have
meritorious defenses to the suit.
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 program. However, the regulatory
requirements concerning network marketing programs do not
include bright line rules and are inherently fact-based. An
adverse judicial determination with respect to our network
marketing program could have a material adverse effect on our
business. An adverse determination could: (1) require us to
make modifications to our network marketing program,
(2) result in negative publicity or (3) have a
negative impact on distributor morale. In addition, adverse
rulings by courts in any proceedings challenging the legality of
multi-level marketing systems, even in those not involving us
directly, could have a material adverse effect on our operations.
Transfer
Pricing and Similar Regulations
In many countries, including the United States, we are subject
to transfer pricing and other tax regulations designed to ensure
that appropriate levels of income are 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 appeal
or litigate to reverse the assessments. We have taken advice
from our tax advisors and believe that there are substantial
defenses to the allegations that additional taxes are owed, and
we are vigorously defending against the imposition of 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. Currently, we
anticipate utilizing 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.
22
Other
Regulations
We also are subject to a variety of other regulations in various
foreign markets, including regulations pertaining to social
security assessments, employment and severance pay requirements,
import/export regulations and antitrust issues. As an example,
in many markets, we are substantially restricted in the amount
and types of rules and termination criteria that we can impose
on distributors without having to pay social security
assessments on behalf of the distributors and without incurring
severance obligations to terminated distributors. In some
countries, we may be subject to these obligations in any event.
Our failure to comply with these regulations could have a
material adverse effect on our business in a particular market
or in general. Assertions that we failed to comply with
regulations or the effect of adverse regulations in one market
could adversely affect us in other markets as well by causing
increased regulatory scrutiny in those other markets or as a
result of the negative publicity generated in those other
markets.
Compliance
Procedures
As indicated above, Herbalife, our products and our network
marketing program 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 of Herbalifes rules 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 individuals 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 are, however, unable to monitor
our sales leaders 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 program, so that extensive adverse publicity about us,
our products or our network marketing program 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 (1) we would be found to be in full compliance with
applicable regulations in all of our markets at any given time
or (2) the regulatory authorities in one or more markets
will not assert, either retroactively or prospectively or both,
that our operations are not in full compliance. These assertions
or the effect of adverse regulations in one market could
negatively affect us in other markets as well by causing
increased regulatory scrutiny in those other markets or as a
result of the negative publicity generated in those other
markets. These assertions could have a material adverse
23
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 resources previously
devoted to such 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
and Proprietary Formulas
We use the umbrella trademarks Herbalife and the Tri-Leaf design
worldwide, and protect several other trademarks and trade names
related to our products and operations, such as
Niteworks®,
Nourifusion®,
and
Liftoff®.
Our trademark registrations are issued through the United States
Patent and Trademark Office, or USPTO, and comparable agencies
in the foreign countries. We consider our trademarks and trade
names to be an important factor in our business. We also take
care in protecting the intellectual property rights of our
proprietary formulas by restricting access to our formulas
within the Company to those persons or departments that require
access to them to perform their functions, and by requiring our
finished goods-suppliers and consultants to execute supply and
non-disclosure agreements that seek to contractually protect our
intellectual property rights. Disclosure of these formulas, in
redacted form, is also necessary to obtain sanitary
registrations in many countries. We also make efforts to protect
some unique formulations under patent law. For example, the
USPTO has granted patent no. 7,329,419 to our employee
inventors for the composition that related to an earlier
formulation of the U.S. Total
Control®
product formula. All rights in this patent have been assigned to
Herbalife. We strive to protect all new product developments as
the confidential trade secrets of the Company and its inventor
employees. However, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating
our proprietary rights.
Competition
The business of marketing weight management and nutrition
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 U.S. and abroad. The market is highly sensitive
to the introduction of new products or weight management plans,
including various prescriptions and over the counter 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 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.
24
Executive
Officers of the Registrant
The table sets forth certain information regarding each person
who serves as an executive officer of the Company.
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Officer
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Name
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Age
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Position with the Company
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Since
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Michael O. Johnson
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55
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Chief Executive Officer, Director,
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2003
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Chairman of the Board
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Desmond Walsh
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52
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President
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2008
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Richard Goudis
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48
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Chief Operating Officer
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2004
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Brett R. Chapman
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54
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General Counsel and Corporate Secretary
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2003
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John DeSimone
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43
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Chief Financial Officer
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2010
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Steve Henig Ph.D.
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67
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Chief Scientific Officer
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2005
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Michael O. Johnson is Chairman and Chief Executive
Officer of the Company. Mr. Johnson joined the Company in
April 2003 after 17 years with The Walt Disney Company,
where he most recently served as President of Walt Disney
International, and also served as President of Asia Pacific for
The Walt Disney Company and President of Buena Vista Home
Entertainment. Mr. Johnson has also previously served as a
publisher of Audio Times magazine, and has directed the
regional sales efforts of Warner Amex Satellite Entertainment
Company for three of its television channels, including MTV,
Nickelodeon and The Movie Channel. Mr. Johnson formerly
served as a director of Univision Communications, Inc., a
television company serving Spanish-speaking Americans and
currently serves on the Board of Regents for Loyola High School
of Los Angeles. Mr. Johnson received his Bachelor of Arts
in Political Science from Western State College.
Desmond Walsh is the President of the Company effective
January 1, 2010. Mr. Walsh joined the Company in
January 2004 as Senior Vice President, Worldwide Distributor
Sales and was promoted to Executive Vice President for Worldwide
Operations and Sales in April 2008. From 2001 to 2004,
Mr. Walsh served as the Senior Vice President of the
commercial division of DMX Music. Prior to DMX Music,
Mr. Walsh spent five years as Vice President and General
Manager of Supercomm, Inc., a subsidiary of the Walt Disney
Company. Mr. Walsh also previously served in management
positions at MovieQuik Systems, a division of The Southland
Corporation (now 7-Eleven) and at Commtron Corporation, a
leading consumer electronics and video distribution company.
Mr. Walsh received his Bachelor of Laws degree from the
University of London.
Richard Goudis is Chief Operating Officer of the Company
effective January 1, 2010. Mr. Goudis joined the
Company in June 2004 as Chief Financial Officer after serving as
the Chief Operating Officer of Rexall Sundown, a Nasdaq
100 company that was sold to Royal Numico in 2000, from
1998 to 2001. After the sale to Royal Numico, Mr. Goudis
had operations responsibility for all of Royal Numicos
U.S. investments, including General Nutrition Centers, or
GNC, Unicity International and Rexall Sundown. From 2002 to May
2004, Mr. Goudis was a partner at Flamingo Capital
Partners, a firm he founded in 2002. Mr. Goudis also
previously worked at Sunbeam Corporation and Pratt &
Whitney. Mr. Goudis graduated from the University of
Massachusetts with a degree in Accounting and he received his
MBA from Nova Southeastern University.
Brett R. Chapman is General Counsel and Corporate
Secretary of the Company. Mr. Chapman joined the Company in
October 2003 after spending thirteen years at The Walt Disney
Company, most recently as its Senior Vice President and Deputy
General Counsel, with responsibility for all legal matters
relating to Disneys Media Networks Group, including the
ABC Television Network, the companys cable properties
including The Disney Channel and ESPN, and Disneys radio
and internet businesses. Prior to working at The Walt Disney
Company, Mr. Chapman was an associate at the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP.
Mr. Chapman received his Bachelor of Science and Master of
Science in Business Administration from California State
University, Northridge and his Juris Doctorate from Southwestern
University School of Law.
John DeSimone is Chief Financial Officer of the Company
effective January 1, 2010. Mr. DeSimone joined the
Company in November 2007 as Senior Vice President
Finance and was promoted to the position of Senior Vice
President Finance & Distributor Operations
in December 2008. From June 2004 through October 2007,
Mr. DeSimone served as the Chief Executive Officer of
Mobile Ventures, LLC (formerly known as Autoware,
25
Inc.), an automotive aftermarket accessory distributor and
retailer. Prior to working at Mobile Ventures, LLC,
Mr. DeSimone previously served as the Controller, Vice
President of Finance and Chief Financial Officer of Rexall
Sundown, Inc., a multinational manufacturer and distributor of
nutritional supplements and sports nutrition products that was
publicly traded while Mr. DeSimone served as its Controller
and Vice President of Finance. Mr. DeSimone received his
Bachelor of Science in Business Administration, Accounting, from
Bryant College.
Steve Henig, Ph.D. is Chief Scientific
Officer of the Company. Dr. Henig joined the Company in
July 2005 after spending 6 years at Ocean Spray
Cranberries, Inc., as Senior Vice President, Technology and
Innovation with responsibility for the companys new
products program and medical research program. Prior to working
at Ocean Spray Cranberries, Inc. Dr. Henig served as Senior
Vice President, Technology and Marketing services at Con
Agras Grocery products. Dr. Henig holds a Ph.D. in
food science from Rutgers University, a M.S. in food and
biotechnology and a B.S. in chemical engineering from
Technion-Israel Institute of Technology.
Employees
As of December 31, 2009, we had approximately
4,100 employees. In China, as of December 31, 2009, we
also had labor contracts with approximately 50,000 employed
sales representatives. These numbers do not include our
distributors, who are independent contractors rather than
employees. Except for some employees in Mexico and in certain
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.
Available
Information
Our Internet website address is www.Herbalife.com. We
make available free of charge on our website our Annual Reports
on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, as soon as reasonably
practical after we file such material with, or furnish it to,
the Securities and Exchange Commission, or SEC. This information
is also available in print to any shareholder who requests it,
with any such requests addressed to Investor Relations,
800 West Olympic Blvd., Suite 406, Los Angeles, CA
90015. Certain of these documents may also be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, and other information regarding issuers that file
electronically with the SEC at www.sec.gov. We also make
available free of charge on our website our Corporate Governance
Guidelines, our Code of Business Conduct and Ethics, and the
Charters of our Audit Committee, Corporate Governance and
Nominating Committee, and Compensation Committee.
Item 1A.
RISK FACTORS
The
worldwide financial and economic crisis could
negatively impact our access to credit and the sales of our
products and could harm our financial condition and operating
results.
We are closely monitoring various aspects of the current
worldwide financial and economic crisis and its
potential impact on us, our liquidity, our access to capital,
our operations and our overall financial condition. While we
have historically met our funding needs utilizing cash flow from
operating activities and while we believe we will have
sufficient resources to meet current debt service obligations in
a timely manner, no assurances can be given that the current
overall downturn in the world economy will not significantly
adversely impact us and our business operations. We note
economic and financial markets are fluid and we cannot ensure
that there will not be in the near future a material adverse
deterioration in our sales or liquidity.
Our
failure to establish and maintain distributor relationships for
any reason could negatively impact sales of our products and
harm our financial condition and operating
results.
We distribute our products exclusively through approximately
2.0 million independent distributors, and we depend upon
them directly for substantially all of our sales. To increase
our revenue, we must increase the number of, or the productivity
of, our distributors. Accordingly, our success depends in
significant part upon our ability to recruit, retain and
motivate a large base of distributors. There is a high rate of
turnover among our distributors, which is a characteristic of
the network marketing business. The loss of a significant number
of distributors for any
26
reason could negatively impact sales of our products and could
impair our ability to attract new distributors. In our efforts
to attract and retain distributors, we compete with other
network marketing organizations, including those in the weight
management, dietary and nutritional supplement and personal care
and cosmetic product industries. Our operating results could be
harmed if our existing and new business opportunities and
products do not generate sufficient interest to retain existing
distributors and attract new distributors.
Our distributor organization has a high turnover rate, which is
a common characteristic found in the direct selling industry. In
light of this fact, we have our sales leaders re-qualify
annually in order to maintain a more accurate count of their
numbers. For the latest twelve month re-qualification period
ending January 2010, 43% of our sales leaders re-qualified.
Distributors who purchase our product for personal consumption
or for short-term income goals may stay with us for several
months to one year. Sales leaders who have committed time and
effort to build a sales organization will generally stay for
longer periods. Distributors have highly variable levels of
training, skills and capabilities. The turnover rate of our
distributors, and our operating results, can be adversely
impacted if we, and our senior distributor leadership, do not
provide the necessary mentoring, training and business support
tools for new distributors to become successful sales people in
a short period of time.
We estimate that, of our approximately 2.0 million
independent distributors, we had approximately 481,000 sales
leaders as of December 31, 2009. These sales leaders,
together with their downline sales organizations, account for
substantially all of our revenues. Our distributors, including
our sales leaders, may voluntarily terminate their distributor
agreements with us at any time. The loss of a group of leading
sales leaders, together with their downline sales organizations,
or the loss of a significant number of distributors for any
reason, could negatively impact sales of our products, impair
our ability to attract new distributors and harm our financial
condition and operating results.
Since
we cannot exert the same level of influence or control over our
independent distributors as we could were they our own
employees, our distributors could fail to comply with our
distributor policies and procedures, which could result in
claims against us that could harm our financial condition and
operating results.
Excluding our China sales employees, our distributors are
independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and
oversight as we would if distributors were our own employees. As
a result, there can be no assurance that our distributors will
participate in our marketing strategies or plans, accept our
introduction of new products, or comply with our distributor
policies and procedures.
Extensive federal, state and local laws regulate our business,
products and network marketing program. Because we have expanded
into foreign countries, our policies and procedures for our
independent distributors differ due to the different legal
requirements of each country in which we do business. While we
have implemented distributor policies and procedures designed to
govern distributor conduct and to protect the goodwill
associated with Herbalife trademarks and tradenames, it can be
difficult to enforce these policies and procedures because of
the large number of distributors and their independent status.
Violations by our independent distributors of applicable law or
of our policies and procedures in dealing with customers could
reflect negatively on our products and operations and harm our
business reputation. In addition, it is possible that a court
could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our independent
distributors.
Adverse
publicity associated with our products, ingredients or network
marketing program, or those of similar companies, could harm our
financial condition and operating results.
The size of our distribution force and the results of our
operations may be significantly affected by the publics
perception of the Company and similar companies. This perception
is dependent upon opinions concerning:
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the safety and quality of our products and ingredients;
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the safety and quality of similar products and ingredients
distributed by other companies;
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our distributors;
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our network marketing program; and
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the direct selling business generally.
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27
Adverse publicity concerning any actual or purported failure of
our Company or our independent distributors to comply with
applicable laws and regulations regarding product claims and
advertising, good manufacturing practices, the regulation of our
network marketing program, the licensing of our products for
sale in our target markets or other aspects of our business,
whether or not resulting in enforcement actions or the
imposition of penalties, could have an adverse effect on the
goodwill of our Company and could negatively affect our ability
to attract, motivate and retain distributors, which would
negatively impact our ability to generate revenue. We cannot
ensure that all distributors will comply with applicable legal
requirements relating to the advertising, labeling, licensing or
distribution of our products.
In addition, our distributors and consumers
perception of the safety and quality of our products and
ingredients as well as similar products and ingredients
distributed by other companies can be significantly influenced
by media attention, publicized scientific research or findings,
widespread product liability claims and other publicity
concerning our products or ingredients or similar products and
ingredients distributed by other companies. For example, in May
2008 public allegations were made that certain of our products
contain excessive amounts of lead thereby triggering disclosure
and labeling requirements under California Proposition 65. While
we have confidence in our products because they fall within the
FDA suggested guidelines for the amount of lead that consumers
can safely ingest and do not believe they trigger disclosure or
labeling requirements under California Proposition 65, negative
publicity such as this can disrupt our business. Adverse
publicity, whether or not accurate or resulting from
consumers use or misuse of our products, that associates
consumption of our products or ingredients or any similar
products or ingredients with illness or other adverse effects,
questions the benefits of our or similar products or claims that
any such products are ineffective, inappropriately labeled or
have inaccurate instructions as to their use, could lead to
lawsuits or other legal challenges and could negatively impact
our reputation, the market demand for our products, or our
general business.
From time to time we receive inquiries from government agencies
and third parties requesting information concerning our
products. We fully cooperate with these inquiries including,
when requested, by the submission of detailed technical dossiers
addressing product composition, manufacturing, process control,
quality assurance, and contaminant testing. We understand that
such materials are undergoing review by regulators in certain
markets. In the course of one such inquiry the Spanish Ministry
of Health elected to issue a press release, or communicado, to
inform the public of a then on-going inquiry and dialogue with
our Company. Upon completion of its review of Herbalife products
distributed in Spain, the Spanish Ministry of Health withdrew
its communicado in April 2009. We are confident in the safety of
our products when used as directed. However, there can be no
assurance that regulators in these or other markets will not
take actions that might delay or prevent the introduction of new
products, or require the reformulation or the temporary or
permanent withdrawal of certain of our existing products from
their markets.
Adverse publicity relating to us, our products or our
operations, including our network marketing program or the
attractiveness or viability of the financial opportunities
provided thereby, 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
program became the subject of regulatory scrutiny in the United
States, resulting in large part from claims and representations
made about our products by our independent 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
will, from time to time, continue to negatively impact our
business in particular markets.
Our
failure to appropriately respond to changing consumer
preferences and demand for new products or product enhancements
could significantly harm our distributor and customer
relationships and product sales and harm our financial condition
and operating results.
Our business is subject to changing consumer trends and
preferences, especially with respect to weight management
products. Our continued success depends in part on our ability
to anticipate and respond to these changes, and we may not
respond in a timely or commercially appropriate manner to such
changes. Furthermore, the nutritional supplement industry is
characterized by rapid and frequent changes in demand for
products and new product introductions and enhancements. Our
failure to accurately predict these trends could negatively
impact consumer opinion of our products, which in turn could
harm our customer and distributor relationships and cause
28
the loss of sales. The success of our new product offerings and
enhancements depends upon a number of factors, including our
ability to:
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accurately anticipate customer needs;
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innovate and develop new products or product enhancements that
meet these needs;
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successfully commercialize new products or product enhancements
in a timely manner;
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price our products competitively;
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manufacture and deliver our products in sufficient volumes and
in a timely manner; and
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differentiate our product offerings from those of our
competitors.
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If we do not introduce new products or make enhancements to meet
the changing needs of our customers in a timely manner, some of
our products could be rendered obsolete, which could negatively
impact our revenues, financial condition and operating results.
Due to
the high level of competition in our industry, we might fail to
retain our customers and distributors, which would harm our
financial condition and operating results.
The business of marketing weight management and nutrition
products is highly competitive and 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. These market segments include numerous
manufacturers, distributors, marketers, retailers and physicians
that actively compete for the business of consumers both in the
United States and abroad. In addition, we anticipate that we
will be subject to increasing competition in the future from
sellers that utilize electronic commerce. Some of these
competitors have longer operating histories, significantly
greater financial, technical, product development, marketing and
sales resources, greater name recognition, larger established
customer bases and better-developed distribution channels than
we do. Our present or future competitors may be able to develop
products that are comparable or superior to those we offer,
adapt more quickly than we do to new technologies, evolving
industry trends and standards or customer requirements, or
devote greater resources to the development, promotion and sale
of their products than we do. For example, if our competitors
develop other diet or weight loss treatments that prove to be
more effective than our products, demand for our products could
be reduced. Accordingly, we may not be able to compete
effectively in our markets and competition may intensify.
We are also 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
products as well as other types of products. We compete for
global customers and distributors with regard to weight
management, nutritional supplement and personal care products.
Our competitors include both direct selling companies such as
NuSkin Enterprises, Natures Sunshine, Alticor/Amway,
Melaleuca, Avon Products, Oriflame and Mary Kay, as well as
retail establishments such as Weight Watchers, Jenny Craig,
General Nutrition Centers, Wal-Mart and retail pharmacies.
In addition, because the industry in which we operate is not
particularly capital intensive or otherwise subject to high
barriers to entry, it is relatively easy for new competitors to
emerge who will compete with us for our distributors and
customers. In addition, the fact that our distributors may
easily enter and exit our network marketing program contributes
to the level of competition that we face. For example, a
distributor can enter or exit our network marketing system with
relative ease at any time without facing a significant
investment or loss of capital because (1) we have a low
upfront financial cost to become a Herbalife distributor,
(2) we do not require any specific amount of time to work
as a distributor, (3) we do not insist on any special
training to be a distributor and (4) we do not prohibit a
new distributor from working with another company. Our ability
to remain competitive therefore depends, in significant part, on
our success in recruiting and retaining distributors through an
attractive compensation plan, the maintenance of an attractive
product portfolio and other incentives. We cannot ensure that
our programs for recruitment and retention of distributors will
be successful and if they are not, our financial condition and
operating results would be harmed.
29
We are
affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar
constraints both domestically and abroad, and our failure or our
distributors failure to comply with these constraints
could lead to the imposition of significant penalties or claims,
which could harm our financial condition and operating
results.
In both domestic and foreign markets, the formulation,
manufacturing, packaging, labeling, distribution, importation,
exportation, licensing, sale and storage of our products 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. There
can be no assurance that we or our distributors are in
compliance with all of these regulations. Our failure or our
distributors failure to comply with these regulations or
new regulations could lead to the imposition of significant
penalties or claims and could negatively impact our business. In
addition, the adoption of new regulations or changes in the
interpretations of existing regulations may result in
significant compliance costs or discontinuation of product sales
and may negatively impact the marketing of our products,
resulting in significant loss of sales revenues.
In April 2006, the FTC issued a notice of proposed rulemaking
which, if implemented in its originally proposed form, would
have regulated all sellers of business opportunities
in the United States. As originally proposed this rule would
have applied to us and, if adopted in its originally proposed
form, could have adversely impacted our U.S. business. On
March 18, 2008, the FTC issued a revised proposed rule and,
as indicated in the announcement accompanying the proposed rule,
the revised proposal does not attempt to cover multilevel
marketing companies such as Herbalife. If the revised rule were
implemented as it is now proposed, we believe that it would not
significantly impact our U.S. business. Based on
information currently available, we anticipate that the rule may
become final within the year.
The FTC has approved revisions to its Guides Concerning the Use
of Endorsements and Testimonials in Advertising, or Guides,
which became effective on December 1, 2009. Although the
Guides are not binding, they explain how the FTC interprets
Section 5 of the FTC Acts prohibition on unfair or
deceptive acts or practices. Consequently, the FTC could bring a
Section 5 enforcement action based on practices that are
inconsistent with the Guides. Under the revised Guides,
advertisements that feature a consumer and convey his or her
atypical experience with a product or service will be required
to clearly disclose the results that consumers can generally
expect. In contrast to the 1980 version of the Guides, which
allowed advertisers to describe atypical results in a
testimonial as long as they included a disclaimer such as
results not typical, the revised Guides no longer
contain such a safe harbor. The revised Guides also add new
examples to illustrate the long-standing principle that
material connections between advertisers and
endorsers (such as payments or free products), connections that
consumers might not expect, must be disclosed. Herbalife is
reviewing the impact of the revised Guides as well as
modifications to its practices and rules regarding the practices
of its independent distributors that might be advisable with
regard to the revised Guides. However, it is possible that our
use, and that of our independent distributors, of testimonials
in the advertising and promotion of our products, including but
not limited to our weight management products and of our income
opportunity will be significantly impacted and therefore might
negatively impact our sales.
Governmental regulations in countries where we plan to commence
or expand operations may prevent or delay entry into 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 such markets.
However, governmental regulations in our markets, both domestic
and international, can delay or prevent the introduction, or
require the reformulation or withdrawal, of certain of our
products. For example, during the third quarter of 1995, we
received inquiries from certain governmental agencies within
Germany and Portugal regarding our product,
Thermojetics®
Instant Herbal Beverage, relating to the caffeine content of the
product and the status of the product as an instant
tea, which was disfavored by regulators, versus a
beverage. Although we initially suspended the
product sale in Germany and Portugal at the request of the
regulators, we successfully reintroduced it once regulatory
issues were satisfactorily resolved. In another example, during
the second quarter of 2008 the Spanish Ministry of Health issued
a press release, or communicado, informing the public of a then
on-going inquiry into the safety of our Companys products
sold in Spain. Upon completion of its review of Herbalife
products distributed in Spain, the Spanish Ministry of Health
withdrew its communicado. Any such regulatory action, whether or
not it
30
results in a final determination adverse to us, could create
negative publicity, with detrimental effects on the motivation
and recruitment of distributors and, consequently, on sales.
On June 25, 2007, the FDA published its final rule for
cGMPs affecting the manufacture, packing, and holding of dietary
supplements. The final rule requires identity testing on all
incoming dietary ingredients, but permits the use of
certificates of analysis or other documentation to verify the
reliability of the ingredient suppliers. On the same date the
FDA also published an interim final rule that outlined a
petition process for manufacturers to request an exemption to
the cGMP requirement for 100 percent identity testing of
specific dietary ingredients used in the processing of dietary
supplements. Under the interim final rule the manufacturer may
be exempted from the dietary ingredient testing requirement if
it can provide sufficient documentation that the reduced
frequency of testing requested would still ensure the identity
of the dietary ingredient. The final rule includes a phased-in
effective date based on the size of the manufacturer. The final
rule and the interim final rule became effective August 24,
2007. To limit any disruption for dietary supplements produced
by small businesses the final rule has a three year phase in for
small businesses. Firms that directly employ more than
500 full-time equivalent employees must have achieved
compliance with the new cGMPs by June 25, 2008, while firms
having between
20-500 full-time
equivalent employees must be compliant by 2009 and firms having
under 20 full-time equivalent employees must be compliant
by 2010. Herbalife initiated enhancements, modifications and
improvements to its manufacturing and corporate quality
processes and believes that it is compliant with the FDAs
cGMP final rule with respect to dietary supplements sold by
Herbalife in the United States that the Company produces at its
Lake Forest, California facility and its Suzhou, China facility
and that are produced by contract manufacturers. These rules
apply only to manufacturers and holders of finished products and
not to ingredient suppliers unless the ingredient supplier is
manufacturing a final dietary supplement. Due to the final cGMP
rules, we have experienced increases in some product costs as a
result of the necessary increase in testing of raw ingredients
and finished products and this may cause us to seek alternate
suppliers.
Our
network marketing program could be found to be not in compliance
with current or newly adopted laws or regulations in one or more
markets, which could prevent us from conducting our business in
these markets and harm our financial condition and operating
results.
Our network marketing program is subject to a number of federal
and state regulations administered by the FTC and various state
agencies in the United States as well as regulations on direct
selling in foreign markets administered by foreign agencies. We
are subject to the risk that, in one or more markets, our
network marketing program could be found not to be in compliance
with applicable law or regulations. Regulations applicable to
network marketing organizations generally are directed at
preventing fraudulent or deceptive schemes, often referred to as
pyramid or chain sales schemes, by
ensuring that product sales ultimately are made to consumers and
that advancement within an organization is based on sales of the
organizations products rather than investments in the
organization or other non-retail sales-related criteria. The
regulatory requirements concerning network marketing programs do
not include bright line rules and are inherently
fact-based, and thus, even in jurisdictions where we believe
that our network marketing program is in full compliance with
applicable laws or regulations governing network marketing
systems, we are subject to the risk that these laws or
regulations or the enforcement or interpretation of these laws
and regulations by governmental agencies or courts can change.
The failure of our network marketing program to comply with
current or newly adopted regulations could negatively impact 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 program. The multi-level
marketing programs of other companies have been successfully
challenged in the past and in a current lawsuit allegations have
been made challenging the legality of our network marketing
program in Belgium. Test Ankoop-Test Achat, a Belgian consumer
protection organization, sued Herbalife International Belgium,
S.V., or HIB, on August 26, 2004, alleging that HIB
violated Article 84 of the Belgian Fair Trade Practices Act
by engaging in pyramid selling, i.e., establishing a
network of professional or non-professional sales people who
hope to make a profit more through the expansion of that network
rather than through the sale of products to end-consumers. The
plaintiff is seeking a payment of 25,000 (equal to
approximately $36,500 as of December 31, 2009) per
purported violation as well as costs of the trial. For the year
ended December 31, 2009, our net sales in Belgium were
approximately $16.0 million. Currently, the lawsuit is in
the pleading stage. The plaintiffs filed their initial brief on
31
September 27, 2005 and on May 9, 2006 we filed a reply
brief. On December 9, 2008 plaintiffs filed a responsive
brief and on June 24, 2009 we filed a reply brief. There is
no date yet for the oral hearings. An adverse judicial
determination with respect to our network marketing program, or
in proceedings not involving us directly but which challenge the
legality of multi-level marketing systems, in Belgium or in any
other market in which we operate, could negatively impact our
business. We believe that we have meritorious defenses to the
suit.
On April 16, 2007 Herbalife International of America, Inc.
filed a Complaint in the United States District Court for the
Central District of California against certain former Herbalife
distributors who had left the Company to join a competitor. The
Complaint alleged breach of contract, misappropriation of trade
secrets, intentional interference with prospective economic
advantage, intentional interference with contract, unfair
competition, constructive trust and fraud and seeks monetary
damages, attorneys fees and injunctive relief.
(Herbalife International of America, Inc. v. Robert E.
Ford, et al) The court entered a Preliminary Injunction
against the defendants enjoining them from further use
and/or
misappropriation of the Companys trade secrets on
December 11, 2007. Defendants appealed the courts
entry of the Preliminary Injunction to the U.S. Court of
Appeals for the Ninth Circuit. That court affirmed, in relevant
part, the Preliminary Injunction. On December 3, 2007 the
defendants filed a counterclaim alleging that the Company had
engaged in unfair and deceptive business practices, intentional
and negligent interference with prospective economic advantage,
false advertising and that the Company was an endless chain
scheme in violation of California law and seeking restitution,
contract rescission and an injunction. Both sides engaged in
discovery and filed cross motions for Summary Judgment. On
August 25, 2009 the court granted partial summary judgment
for Herbalife on all of defendants claims except the claim
that the Company is an endless chain scheme which under
applicable law is a question of fact that can only be determined
at trial. The court denied defendants motion for Summary
Judgment on Herbalifes claims for misappropriation of
trade secrets and breach of contract. On December 4, 2009
the Court ordered mediation to occur on February 8, 2010
and set a schedule for Herbalifes motion for summary
judgment to dismiss the sole remaining counterclaim by the
defendants, with a hearing scheduled for March 9, 2010 if
all matters were not resolved before that date. The mediation
occurred but did not resolve any issues. No date has been set
for trial. The Company believes that there is merit to its
remaining claims for relief and have meritorious defenses to the
remaining counterclaim.
A
substantial portion of our business is conducted in foreign
markets, exposing us to the risks of trade or foreign exchange
restrictions, increased tariffs, foreign currency fluctuations
and similar risks associated with foreign
operations.
Approximately 80% of our net sales for the year ended
December 31, 2009, were generated outside the United
States, exposing our business to risks associated with foreign
operations. For example, a foreign government may impose trade
or foreign exchange restrictions or increased tariffs, which
could negatively impact our operations. We are also exposed to
risks associated with foreign currency fluctuations. For
instance, purchases from suppliers are generally made in
U.S. dollars while 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,
which could harm our financial condition and operating results.
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of our subsidiary in Venezuela, or Herbalife Venezuela, to
obtain U.S. dollars at the official foreign exchange rate.
The application and approval processes have been intermittently
delayed in recent periods and the timing and ability to obtain
U.S. dollars at the official exchange rate remains
uncertain. In certain instances, we have made appropriate
applications through the Venezuelan government and its Foreign
Exchange Commission, CADIVI, for approval to obtain
U.S. dollars to pay for imported products and an annual
dividend at the official exchange rate. In other instances, in
order to timely provide products to our distributors, we did not
register certain shipments with CADIVI, or non-CADIVI
registered, and instead used a legal parallel market mechanism
for payment. Unless our ability to obtain U.S. dollars at
the official foreign exchange rate is made more readily
available, the results of Herbalife Venezuelas operations
will be negatively impacted as it may need to obtain more
32
U.S. dollars from alternative sources where the exchange
rate is weaker than the official rate. Additionally, if we are
unable to import products at the official foreign exchange rate
in Venezuela, we may implement price increases and surcharges to
the selling price of our products to compensate for the
incremental cost of importation. This could adversely affect
sales volume in Venezuela.
Venezuelas inflation rate as measured using the blended
National Consumer Price Index and Consumer Price Index rate
exceeded the three-year cumulative inflation rate of 100% as of
December 31, 2009. Accordingly, effective January 1,
2010, Venezuela is considered a highly inflationary economy,
which will require Herbalife Venezuela to use the
U.S. dollar as their functional currency with foreign
currency gains and losses recorded to the consolidated statement
of income. In early January 2010, Venezuela announced an
official rate devaluation of the Venezuelan Bolivar Fuerte, or
Bolivar, to an official rate of 4.30 Bolivars per
U.S. dollar for non-essential items and 2.60 Bolivars per
U.S. dollar for essential items. These events will have a
negative impact to our earnings as further discussed in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Our
expansion in China is subject to general, as well as
industry-specific, economic, political and legal developments
and risks in China and requires that we utilize a different
business model from that which we use elsewhere in the
world.
Our expansion of operations into China is subject to risks and
uncertainties related to general economic, political and legal
developments in China, among other things. The Chinese
government exercises significant control over the Chinese
economy, including but not limited to controlling capital
investments, allocating resources, setting monetary policy,
controlling foreign exchange and monitoring foreign exchange
rates, implementing and overseeing tax regulations, providing
preferential treatment to certain industry segments or companies
and issuing necessary licenses to conduct business. Accordingly,
any adverse change in the Chinese economy, the Chinese legal
system or Chinese governmental, economic or other policies could
have a material adverse effect on our business in China and our
prospects generally.
In August 2005, China published regulations governing direct
selling (effective December 1, 2005) and prohibiting
pyramid promotional schemes (effective November 1, 2005),
and a number of administrative methods and proclamations were
issued in September 2005 and in September 2006. These
regulations require us to use a business model different from
that which we offer in other markets. To allow us to operate
under these regulations, we have created and introduced a model
specifically for China. In China, we have Company-operated
retail stores that sell through employed sales personnel to
customers and preferred customers. We provide training and
certification procedures for sales personnel in China. We have
non-employee sales representatives who sell through our retail
stores. Our sales representatives are also permitted by the
terms of our direct selling licenses to sell away from fixed
retail locations in the provinces of Jiangsu, Guangdong,
Shandong, Zhejiang (excluding Ningbo), Guizhou, Beijing, Fuijan,
Sichuan, Hubei, Shanxi, and Shanghai. Our direct selling license
for Shanghai will permit us to sell away from fixed retail
locations once our Shanghai outlet is inspected and confirmed by
the relevant authority. We have also engaged independent service
providers that meet both the requirements to operate their own
business under Chinese law as well as the conditions set forth
by Herbalife to sell products and provide services to Herbalife
customers. These features are not common to the business model
we employ elsewhere in the world, and based on the direct
selling licenses we have received and the terms of those which
we hope to receive in the future to conduct a direct selling
enterprise in China, our business model in China will continue
in some part to incorporate such features. The direct selling
regulations require us to apply for various approvals to conduct
a direct selling enterprise in China. The process for obtaining
the necessary licenses to conduct a direct selling business is
protracted and cumbersome and involves multiple layers of
Chinese governmental authorities and numerous governmental
employees at each layer. While direct selling licenses are
centrally issued, such licenses are generally valid only in the
jurisdictions within which related approvals have been obtained.
Such approvals are generally awarded on local and provincial
bases, and the approval process requires involvement with
multiple ministries at each level. Our participation and conduct
during the approval process is guided not only by distinct
Chinese practices and customs, but is also subject to applicable
laws of China and the other jurisdictions in which we operate
our business, including the U.S., and our internal code of
ethics. There is always a risk that in attempting to comply with
local customs and practices in China during the application
process or otherwise, we will fail to comply with requirements
applicable to us in China itself or in other jurisdictions, and
any such failure to comply with applicable
33
requirements could prevent us from obtaining the direct selling
licenses or related local or provincial approvals. Furthermore,
we rely on certain key personnel in China to assist us during
the approval process, and the loss of any such key personnel
could delay or hinder our ability to obtain licenses or related
approvals. For all of the above reasons, there can be no
assurance that we will obtain additional direct-selling
licenses, or obtain related approvals to expand into any or all
of the localities or provinces in China that are important to
our business. Our inability to obtain, retain, or renew any or
all of the licenses or related approvals that are required for
us to operate in China would negatively impact our business.
Additionally, although certain regulations have been published
with respect to obtaining such approvals, operating under such
approvals and otherwise conducting business in China, other
regulations are pending, and there is uncertainty regarding the
interpretation and enforcement of Chinese regulations. The
regulatory environment in China is evolving, and officials in
the Chinese government exercise broad discretion in deciding how
to interpret and apply regulations. We cannot be certain that
our business model will continue to be deemed by national or
local Chinese regulatory authorities to be compliant with any
such regulations. In the past, the Chinese government has
rigorously monitored the direct selling market in China, and has
taken serious action against companies that the government
believed were engaging in activities they regarded to be in
violation of applicable law, including shutting down their
businesses and imposing substantial fines. As a result, there
can be no guarantee that the Chinese governments current
or future interpretation and application of the existing and new
regulations will not negatively impact our business in China,
result in regulatory investigations or lead to fines or
penalties against us or our Chinese distributors.
Chinese regulations prevent persons who are not Chinese
nationals from engaging in direct selling in China. We cannot
guarantee that any of our distributors living outside of China
or any of our independent sales representatives or employed
sales management personnel in China have not engaged or will not
engage in activities that violate our policies in this market,
or that violate Chinese law or other applicable law, and
therefore result in regulatory action and adverse publicity.
China enacted a labor contract law which took effect
January 1, 2008 and on September 18, 2008 an
implementing regulation took effect. We have reviewed our
employment contracts and contractual relations with employees in
China, which include certain of our sales persons, and have made
such changes as we believed to be necessary or appropriate to
bring these contracts and contractual relations into compliance
with this new law and its implementing regulation. In addition,
we continue to monitor the situation to determine how this new
law and regulation will be implemented in practice. There is no
guarantee that the new law will not adversely impact us, force
us to change our treatment of our distributor employees, or
cause us to change our operating plan for China.
If our operations in China are successful, we may experience
rapid growth in China, and there can be no assurances that we
will be able to successfully manage rapid expansion of
manufacturing operations and a rapidly growing and dynamic sales
force. There also can be no assurances that we will not
experience difficulties in dealing with or taking employment
related actions (such as hiring, terminations and salary
administration, including social benefit payments) with respect
to our employed sales representatives, particularly given the
highly regulated nature of the employment relationship in China.
If we are unable to effectively manage such growth and expansion
of our retail stores, manufacturing operations or our employees,
our government relations may be compromised and our operations
in China may be harmed.
Our China business model, particularly with regard to sales
management responsibilities and remuneration, differs from our
traditional business model. There is a risk that such changes
and transitions may not be understood by our distributors or
employees, may be viewed negatively by our distributors or
employees, or may not be correctly utilized by our distributors
or employees. If that is the case, our business could be
negatively impacted.
If we
fail to further penetrate existing markets or successfully
expand our business into new markets, then the growth in sales
of our products, along with our operating results, could be
negatively impacted.
The success of our business is to a large extent contingent on
our ability to continue to grow by entering new markets and
further penetrating existing markets. Our ability to further
penetrate existing markets or to successfully expand our
business into additional countries in Eastern Europe, Southeast
Asia, South America or elsewhere, to the
34
extent we believe that we have identified attractive geographic
expansion opportunities in the future, is subject to numerous
factors, many of which are out of our control.
In addition, 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, which could negatively impact our business, financial
condition and results of operations. Also, our ability to
increase market penetration in certain countries may be limited
by the finite number of persons in a given country inclined to
pursue a direct selling business opportunity or consumers
willing to purchase Herbalife products. Moreover, our growth
will depend upon improved training and other activities that
enhance distributor retention in our markets. While we have
recently experienced significant growth in certain of our
markets, we cannot assure you that such growth levels will
continue in the immediate or long term future. Furthermore, our
efforts to support growth in such international markets could be
hampered to the extent that our infrastructure in such markets
is deficient when compared to our more developed markets, such
as the U.S. Therefore, we cannot assure you that our
general efforts to increase our market penetration and
distributor retention in existing markets will be successful. If
we are unable to continue to expand into new markets or further
penetrate existing markets, our operating results could suffer.
Our
contractual obligation to sell our products only through our
Herbalife distributor network and to refrain from changing
certain aspects of our marketing plan may limit our
growth.
We are a party to an agreement with our distributors that
provides assurances that a change in ownership will not
negatively affect certain aspects of their business. Through
this agreement, we committed to our distributors that we will
not sell Herbalife products through any distribution channel
other than our network of independent Herbalife distributors.
Thus, we are contractually prohibited from expanding our
business by selling Herbalife products through other
distribution channels that may be available to our competitors,
such as over the internet, through wholesale sales, by
establishing retail stores or through mail order systems. Since
this is an open-ended commitment, there can be no assurance that
we will be able to take advantage of innovative new distribution
channels that are developed in the future.
In addition, our agreement with our distributors provides that
we will not change certain aspects of our marketing plan without
the consent of a specified percentage of our distributors. For
example, our agreement with our distributors provides that we
may increase, but not decrease, the discount percentages
available to our distributors for the purchase of products or
the applicable royalty override percentages, including
roll-ups,
and production and other bonus percentages available to our
distributors at various qualification levels within our
distributor hierarchy. We may not modify the eligibility or
qualification criteria for these discounts, royalty overrides
and production and other bonuses unless we do so in a manner to
make eligibility
and/or
qualification easier than under the applicable criteria in
effect as of the date of the agreement. Our agreement with our
distributors further provides that we may not vary the criteria
for qualification for each distributor tier within our
distributor hierarchy, unless we do so in such a way so as to
make qualification easier.
Although we reserved the right to make these changes to our
marketing plan without the consent of our distributors in the
event that changes are required by applicable law or are
necessary in our reasonable business judgment to account for
specific local market or currency conditions to achieve a
reasonable profit on operations, there can be no assurance that
our agreement with our distributors will not restrict our
ability to adapt our marketing plan to the evolving requirements
of the markets in which we operate. As a result, our growth may
be limited.
We
depend on the integrity and reliability of our information
technology infrastructure, and any related inadequacies may
result in substantial interruptions to our
business.
Our ability to provide products and services to our distributors
depends on the performance and availability of our core
transactional systems. We upgraded our back office systems
globally to the Oracle Enterprise Suite which is supported by a
robust hardware and network infrastructure. The Oracle
Enterprise Suite is a scalable and stable solution that provides
a solid foundation upon which we are building our next
generation Distributor facing Internet toolset. While we
continue to invest in our information technology infrastructure,
there can be no assurance that there will not be any significant
interruptions to such systems or that the systems will be
adequate to meet all of our future business needs.
35
The most important aspect of our information technology
infrastructure is the system through which we record and track
distributor sales, volume points, royalty overrides, bonuses and
other incentives. We have encountered, and may encounter in the
future, errors in our software or our enterprise network, or
inadequacies in the software and services supplied by our
vendors, although to date none of these errors or inadequacies
has had a meaningful adverse impact on our business. Any such
errors or inadequacies that we may encounter in the future may
result in substantial interruptions to our services and may
damage our relationships with, or cause us to lose, our
distributors if the errors or inadequacies impair our ability to
track sales and pay royalty overrides, bonuses and other
incentives, which would harm our financial condition and
operating results. Such errors may be expensive or difficult to
correct in a timely manner, and we may have little or no control
over whether any inadequacies in software or services supplied
to us by third parties are corrected, if at all.
Since
we rely on independent third parties for the manufacture and
supply of certain of our products, if these third parties fail
to reliably supply products to us at required levels of quality,
then our financial condition and operating results would be
harmed.
The majority of our products are manufactured at third party
contract manufacturers, with the exception of our products sold
in China, which are manufactured in our Suzhou China facility,
and a small portion of our top selling products which are
manufactured in a recently acquired manufacturing facility
located in Lake Forest, California. It is the Companys
intention to expand the capacity of this recently acquired
manufacturing facility to produce products for additional
international markets. We cannot assure you that our outside
manufacturers will continue to reliably supply products to us at
the levels of quality, or the quantities, we require, especially
under the FDAs recently adopted cGMP regulations. While we
are not presently aware of any current liquidity issues with our
suppliers, we cannot assure you that they will not experience
financial hardship as a result of the current global financial
crisis.
Our supply contracts generally have a two-year term. Except for
force majeure events such as natural disasters and other acts of
God, and non-performance by Herbalife, our manufacturers
generally cannot unilaterally terminate these contracts. These
contracts can generally be extended by us at the end of the
relevant time period and we have exercised this right in the
past. Globally we have over 40 suppliers of our products. For
our major products, we have both primary and secondary
suppliers. Our major suppliers include Natures Bounty for
protein powders, Fine Foods (Italy) for protein powders and
nutritional supplements, Valentine Enterprises for protein
powders and PharmaChem Labs for teas and
Niteworks®.
In the event any of our third-party manufacturers were to become
unable or unwilling to continue to provide us with products in
required volumes and at suitable quality levels, we would be
required to identify and obtain acceptable replacement
manufacturing sources. There is no assurance that we would be
able to obtain alternative manufacturing sources on a timely
basis. An extended interruption in the supply of products would
result in the loss of sales. In addition, any actual or
perceived degradation of product quality as a result of reliance
on third party manufacturers may have an adverse effect on sales
or result in increased product returns and buybacks. Also, as we
experience ingredient and product price pressure in the areas of
soy, dairy products, plastics, and transportation reflecting
global economic trends, we believe that we have the ability to
mitigate some of these cost increases through improved
optimization of our supply chain coupled with select increases
in the retail prices of our products.
If we
fail to protect our trademarks and tradenames, then our ability
to compete could be negatively affected, which would harm our
financial condition and operating results.
The market for our products depends to a significant extent upon
the goodwill associated with our trademark and tradenames. We
own, or have licenses to use, the material trademark and trade
name rights used in connection with the packaging, marketing and
distribution of our products in the markets where those products
are sold. Therefore, trademark and trade name protection is
important to our business. Although most of our trademarks are
registered in the United States and in certain foreign countries
in which we operate, we may not be successful in asserting
trademark or trade name protection. In addition, the laws of
certain foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United
States. The loss or infringement of our trademarks or tradenames
could impair the goodwill associated with our brands and harm
our reputation, which would harm our financial condition and
operating results.
36
Unlike in most of the other markets in which we operate, limited
protection of intellectual property is available under Chinese
law. Accordingly, we face an increased risk in China that
unauthorized parties may attempt to copy or otherwise obtain or
use our trademarks, copyrights, product formulations or other
intellectual property. Further, since Chinese commercial law is
relatively undeveloped, we may have limited legal recourse in
the event we encounter significant difficulties with
intellectual property theft or infringement. As a result, we
cannot assure you that we will be able to adequately protect our
product formulations or other intellectual property.
We permit the limited use of our trademarks by our independent
distributors to assist them in the marketing of our products. It
is possible that doing so may increase the risk of unauthorized
use or misuse of our trademarks in markets where their
registration status differs from that asserted by our
independent distributors, or they may be used in association
with claims or products in a manner not permitted under
applicable laws and regulations. Were this to occur it is
possible that this could diminish the value of these marks or
otherwise impair our further use of these marks.
If our
distributors fail to comply with labeling laws, then our
financial condition and operating results would be
harmed.
Although the physical labeling of our products is not within the
control of our independent distributors, our distributors must
nevertheless advertise our products in compliance with the
extensive regulations that exist in certain jurisdictions, such
as the United States, which considers product advertising to be
labeling for regulatory purposes.
Our products are sold principally as foods, dietary supplements
and cosmetics and are subject to rigorous FDA and related legal
regimens limiting the types of therapeutic claims that can be
made for our products. The treatment or cure of disease, for
example, is not a permitted claim for these products. While we
train our distributors and attempt to monitor our
distributors marketing materials, we cannot ensure that
all such materials comply with applicable regulations, including
bans on therapeutic claims. If our distributors fail to comply
with these restrictions, then we and our distributors could be
subjected to claims, financial penalties, mandatory product
recalls or relabeling requirements, which could harm our
financial condition and operating results. Although we expect
that our responsibility for the actions of our independent
distributors in such an instance would be dependent on a
determination that we either controlled or condoned a
noncompliant advertising practice, there can be no assurance
that we could not be held vicariously liable for the actions of
our independent distributors.
If our
intellectual property is not adequate to provide us with a
competitive advantage or to prevent competitors from replicating
our products, or if we infringe the intellectual property rights
of others, then our financial condition and operating results
would be harmed.
Our future success and ability to compete depend upon our
ability to timely produce innovative products and product
enhancements that motivate our distributors and customers, which
we attempt to protect under a combination of copyright,
trademark and trade secret laws, confidentiality procedures and
contractual provisions. However, our products are generally not
patented domestically or abroad, and the legal protections
afforded by common law and contractual proprietary rights in our
products provide only limited protection and may be
time-consuming and expensive to enforce
and/or
maintain. Further, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating
our proprietary rights or from independently developing
non-infringing products that are competitive with, equivalent to
and/or
superior to our products.
Monitoring infringement
and/or
misappropriation of intellectual property can be difficult and
expensive, and we may not be able to detect any infringement or
misappropriation of our proprietary rights. Even if we do detect
infringement or misappropriation of our proprietary rights,
litigation to enforce these rights could cause us to divert
financial and other resources away from our business operations.
Further, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the
United States.
Additionally, third parties may claim that products we have
independently developed infringe upon their intellectual
property rights. For example, in a pending action in the
U.S. federal courts, the Adidas companies have alleged that
certain uses of Herbalifes Tri-Leaf device mark upon
sports apparel items infringe upon their own leaf mark
associated with such goods. We are contesting these claims and
do not believe that we are infringing on any
37
third party intellectual property rights. However, there can be
no assurance that one or more of our products will not be found
to infringe upon other third party intellectual property rights
in the future.
Since
one of our products constitutes a significant portion of our
retail sales, significant decreases in consumer demand for this
product or our failure to produce a suitable replacement should
we cease offering it would harm our financial condition and
operating results.
Our Formula 1 meal replacement product constitutes a significant
portion of our sales, accounting for approximately 32% of retail
sales for the fiscal years ended December 31, 2009 and
2008, and approximately 30% for fiscal year ended
December 31, 2007. If consumer demand for this product
decreases significantly or we cease offering this product
without a suitable replacement, then our financial condition and
operating results would be harmed.
If we
lose the services of members of our senior management team, then
our financial condition and operating results could be
harmed.
We depend on the continued services of our Chairman and Chief
Executive Officer, Michael O. Johnson, and our current senior
management team as they work closely with the senior distributor
leadership to create an environment of inspiration, motivation
and entrepreneurial business success. Although we have entered
into employment agreements with certain members of our senior
management team, and do not believe that any of them are
planning to leave or retire in the near term, we cannot assure
you that our senior managers will remain with us. The loss or
departure of any member of our senior management team could
adversely impact our distributor relations and operating
results. If any of these executives do not remain with us, our
business could suffer. Also, the loss of key personnel,
including our regional and country managers, could negatively
impact our ability to implement our business strategy, and our
continued success will also be dependent on our ability to
retain existing, and attract additional, qualified personnel to
meet our needs. We currently do not maintain key
person life insurance with respect to our senior
management team.
The
covenants in our existing indebtedness limit our discretion with
respect to certain business matters, which could limit our
ability to pursue certain strategic objectives and in turn harm
our financial condition and operating results.
Our credit facility contains numerous financial and operating
covenants that restrict our and our subsidiaries ability
to, among other things:
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pay dividends, redeem share capital or capital stock and make
other restricted payments and investments;
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incur additional debt or issue preferred shares;
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impose dividend or other distribution restrictions on our
subsidiaries;
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create liens on our and our subsidiaries assets;
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engage in transactions with affiliates;
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guarantee other indebtedness; and
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merge, consolidate or sell all or substantially all of our
assets and the assets of our subsidiaries.
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In addition, our credit facility requires us to meet certain
financial ratios and financial conditions. 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 causing all amounts to become due and payable under
our credit facility, which is secured by substantially all of
our assets, against which the lenders thereunder could proceed
to foreclose.
38
If we
do not comply with transfer pricing, customs duties, and similar
regulations, then we may be subjected to additional taxes,
duties, interest and penalties in material amounts, which could
harm our financial condition and operating
results.
As a multinational corporation, in many countries including the
United States we are subject to transfer pricing and other tax
regulations designed to ensure that our intercompany
transactions are consummated at prices that have not been
manipulated to produce a desired tax result, that appropriate
levels of income are reported as earned by our United States or
local entities, and that we are taxed appropriately on such
transactions. 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 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,
customs duties, value added taxes, withholding taxes, sales and
use and other taxes and related interest and penalties in
material amounts. For example, we are currently appealing tax
assessments in Spain and Brazil. In another matter, in Mexico,
we are awaiting a formal administrative assessment to start the
judicial appeals process. The likelihood and timing of any such
potential assessment is unknown as of the date hereof. The
Company believes that it has meritorious defenses. In some
circumstances, additional taxes, interest and penalties have
been assessed and we will be required to pay the assessments or
post surety, in order to challenge the assessments. The
imposition of new taxes, even pass-through taxes such as VAT,
could have an impact on our perceived product pricing and
therefore a potential negative impact on our business. We have
reserved in the consolidated financial statements an amount that
we believe represents the most likely outcome of the resolution
of these disputes, but if we are incorrect in our assessment we
may have to pay the full amount asserted which could potentially
be material. Ultimate resolution of these matters may take
several years, and the outcome is uncertain. If the United
States Internal Revenue Service or the taxing authorities of any
other jurisdiction were to successfully challenge our transfer
pricing practices or our positions regarding the payment of
income taxes, customs duties, value added taxes, withholding
taxes, sales and use, and other taxes, we could become subject
to higher taxes and our earnings would be adversely affected.
Changes
in tax laws, treaties or regulations, or their interpretation
could adversely affect us.
A change in applicable tax laws, treaties or regulations or
their interpretation could result in a higher effective tax rate
on our worldwide earnings and such change could be significant
to our financial results. Tax legislative proposals intending to
eliminate some perceived tax advantages of companies that have
legal domiciles outside the U.S. but have certain
U.S. connections have repeatedly been introduced in the
U.S. Congress. If these proposals are enacted, the result
would increase our effective tax rate and could have a material
adverse effect on the Companys financial condition and
results of operations.
We may
be held responsible for certain taxes or assessments relating to
the activities of our distributors, which could harm our
financial condition and operating results.
Our distributors are subject to taxation, and in some instances,
legislation or governmental agencies impose an obligation on us
to collect taxes, such as value added taxes, and to 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. In the event
that local laws and regulations or the interpretation of local
laws and regulations change to require us to treat our
independent distributors as employees, or that our distributors
are deemed by local regulatory authorities in one or more of the
jurisdictions in which we operate to be our employees rather
than independent contractors under existing laws and
interpretations, we may be held responsible for social security
and related taxes in those jurisdictions, plus any related
assessments and penalties, which could harm our financial
condition and operating results.
We may
incur material product liability claims, which could increase
our costs and harm our financial condition and operating
results.
Our products consist of vitamins, minerals and herbs and other
ingredients that are classified as foods or dietary supplements
and are not subject to pre-market regulatory approval in the
United States. Our products could contain contaminated
substances, and some of our products contain some ingredients
that do not have long histories of human consumption. We conduct
limited clinical studies on some key products but not all
products. Previously
39
unknown adverse reactions resulting from human consumption of
these ingredients could occur. 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 the products contain contaminants, the products
include inadequate instructions as to their uses, or the
products include inadequate warnings concerning side effects and
interactions with other substances. It is possible that
widespread product liability claims could increase our costs,
and adversely affect our revenues and operating income.
Moreover, liability claims arising from a serious adverse event
may increase our costs through higher insurance premiums and
deductibles, and may make it more difficult to secure adequate
insurance coverage in the future. In addition, our product
liability insurance may fail to cover future product liability
claims, thereby requiring us to pay substantial monetary damages
and adversely affecting our business. Finally, given the higher
level of self-insured retentions that we have accepted under our
current product liability insurance policies, which are as high
as approximately $10 million, in certain cases we may be
subject to the full amount of liability associated with any
injuries, which could be substantial.
Several years ago, a number of states restricted the sale of
dietary supplements containing botanical sources of ephedrine
alkaloids and on February 6, 2004, the FDA banned the use
of such ephedrine alkaloids. Until late 2002, we had sold
Thermojetics®
original green herbal tablets,
Thermojetics®
green herbal tablets and
Thermojetics®
gold herbal tablets, all of which contained ephedrine alkaloids.
Accordingly, we run the risk of product liability claims related
to the ingestion of ephedrine alkaloids contained in those
products. Currently, we have been named as a defendant in
product liability lawsuits seeking to link the ingestion of
certain of the aforementioned products to subsequent alleged
medical problems suffered by plaintiffs. Although we believe
that we have meritorious defenses to the allegations contained
in these lawsuits, and are vigorously defending these claims,
there can be no assurance that we will prevail in our defense of
any or all of these matters.
We are
subject to, among other things, requirements regarding the
effectiveness of internal controls over financial reporting. In
connection with these requirements, we conduct regular audits of
our business and operations. Our failure to identify or correct
deficiencies and areas of weakness in the course of these audits
could adversely affect our financial condition and operating
results.
We are required to comply with various corporate governance and
financial reporting requirements under the Sarbanes-Oxley Act of
2002, as well as new rules and regulations adopted by the SEC,
the Public Company Accounting Oversight Board and the New York
Stock Exchange. In particular, we are required to include
management and auditor reports on the effectiveness of internal
controls over financial reporting as part of our annual reports
on
Form 10-K,
pursuant to Section 404 of the Sarbanes-Oxley Act. We
expect to continue to spend significant amounts of time and
money on compliance with these rules. Our failure to correct any
noted weaknesses in internal controls over financial reporting
could result in the disclosure of material weaknesses which
could have a material adverse effect upon the market value of
our stock.
On a regular and on-going basis, we conduct audits through our
internal audit department of various aspects of our business and
operations. These internal audits are conducted to insure
compliance with our policies and to strengthen our operations
and related internal controls. The Audit Committee of our Board
of Directors regularly reviews the results of these internal
audits and, when appropriate, suggests remedial measures and
actions to correct noted deficiencies or strengthen areas of
weakness. There can be no assurance that these internal audits
will uncover all material deficiencies or areas of weakness in
our operations or internal controls. If left undetected and
uncorrected, such deficiencies and weaknesses could have a
material adverse effect on our financial condition and results
of operations.
From time to time, the results of these internal audits may
necessitate that we conduct further investigations into aspects
of our business or operations. In addition, our business
practices and operations may periodically be investigated by one
or more of the many governmental authorities with jurisdiction
over our worldwide operations. In the event that these
investigations produce unfavorable results, we may be subjected
to fines, penalties or loss of licenses or permits needed to
operate in certain jurisdictions, any one of which could have a
material adverse effect on our financial condition or operating
results.
40
Holders
of our common shares may face difficulties in protecting their
interests because we are incorporated under Cayman Islands
law.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association, by the Companies Law
(2009 Revision, as amended), or the Companies Law, and the
common law of the Cayman Islands. The rights of our shareholders
and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as under statutes or
judicial precedent in existence in jurisdictions in the United
States. Therefore, shareholders may have more difficulty in
protecting their interests in the face of actions by our
management or board of directors than would shareholders of a
corporation incorporated in a jurisdiction in the United States,
due to the comparatively less developed nature of Cayman Islands
law in this area.
Shareholders of Cayman Islands exempted companies such as
Herbalife have no general rights under Cayman Islands law to
inspect corporate records and accounts or to obtain copies of
lists of our shareholders. Our directors have discretion under
our articles of association to determine whether or not, and
under what conditions, our corporate records may be inspected by
our shareholders, but are not obliged to make them available to
our shareholders. This may make it more difficult for you to
obtain the information needed to establish any facts necessary
for a shareholder motion or to solicit proxies from other
shareholders in connection with a proxy contest.
A shareholder can bring a suit personally where its individual
rights have been, or are about to be, infringed. Where an action
is brought to redress any loss or damage suffered by us, we
would be the proper plaintiff, and a shareholder could not
ordinarily maintain an action on our behalf, except where it was
permitted by the courts of the Cayman Islands to proceed with a
derivative action. Our Cayman Islands counsel, Maples and
Calder, is not aware of any reported decisions in relation to a
derivative action brought in a Cayman Islands court. However,
based on English authorities, which would in all likelihood be
of persuasive authority in the Cayman Islands, a shareholder may
be permitted to bring a claim derivatively on the Companys
behalf, where:
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a company is acting or proposing to act illegally or outside the
scope of its corporate authority;
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the act complained of, although not acting outside the scope of
its corporate authority, could be effected only if authorized by
more than a simple majority vote; or
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those who control the company are perpetrating a fraud on
the minority.
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Provisions
of our articles of association and Cayman Islands corporate law
may impede a takeover or make it more difficult for shareholders
to change the direction or management of the Company, which
could reduce shareholders opportunity to influence
management of the Company.
Our articles of association permit our board of directors to
issue preference shares from time to time, with such rights and
preferences as they consider appropriate. Our board of directors
could authorize the issuance of preference shares with terms and
conditions and under circumstances that could have an effect of
discouraging a takeover or other transaction.
In addition, our articles of association contain certain other
provisions which could have an effect of discouraging a takeover
or other transaction or preventing or making it more difficult
for shareholders to change the direction or management of our
Company, including a classified board, the inability of
shareholders to act by written consent, a limitation on the
ability of shareholders to call special meetings of shareholders
and advance notice provisions. As a result, our shareholders may
have less input into the management of our Company than they
might otherwise have if these provisions were not included in
our articles of association.
The Cayman Islands have recently introduced provisions to the
Companies Law to facilitate mergers and consolidations between
Cayman Islands companies and non-Cayman Islands companies. These
provisions, contained within Part XVA of the Companies Law,
are broadly similar to the merger provisions as provided for
under Delaware Law.
There are however a number of important differences that could
impede a takeover. First, the thresholds for approval of the
merger plan by shareholders are higher. The thresholds are
(a) a shareholder resolution by majority in number
representing 75% in value of the shareholders voting together as
one class or (b) if the shares to be issued to each
shareholder in the consolidated or surviving company are to have
the same rights and economic value as the
41
shares held in the constituent company, a special resolution of
the shareholders (being
662/3%
of those present in person or by proxy and voting) voting
together as one class.
As it is not expected that the shares would have the same rights
and economic value following a takeover by way of merger, it is
expected that the first test is the one which would commonly
apply. This threshold essentially has three requirements:
a majority in number of the shareholders of the
Company must approve the transaction, such approving majority
must hold at least 75% in value of all the
outstanding shares and the shareholders must vote together as
one class.
Additionally, the consent of each holder of a fixed or floating
security interest (in essence a documented security interest as
opposed to one arising by operation of law) is required to be
obtained unless the Grand Court of the Cayman Islands waives
such requirement.
The merger provisions contained within Part XVA of the
Companies Law do contain shareholder appraisal rights similar to
those provided for under Delaware law. Such rights are limited
to a merger under Part XVA and do apply to schemes of
arrangement as discussed below.
The Companies Law also contains separate statutory provisions
that provide for the merger, reconstruction and amalgamation of
companies. Those are commonly referred to in the Cayman Islands
as schemes of arrangement.
The procedural and legal requirements necessary to consummate
these transactions are more rigorous and take longer to complete
than the procedures typically required to consummate a merger in
the United States. Under Cayman Islands law and practice, a
scheme of arrangement in relation to a solvent Cayman Islands
company must be approved at a shareholders meeting by a
majority of each class of the companys shareholders who
are present and voting (either in person or by proxy) at such
meeting. The shares voted in favor of the scheme of arrangement
must also represent at least 75% of the value of each relevant
class of the companys shareholders present and voting at
the meeting. The convening of these meetings and the terms of
the amalgamation must also be sanctioned by the Grand Court of
the Cayman Islands. Although there is no requirement to seek the
consent of the creditors of the parties involved in the scheme
of arrangement, the Grand Court typically seeks to ensure that
the creditors have consented to the transfer of their
liabilities to the surviving entity or that the scheme of
arrangement does not otherwise materially adversely affect
creditors interests. Furthermore, the court will only
approve a scheme of arrangement if it is satisfied that:
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the statutory provisions as to majority vote have been complied
with;
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the shareholders who voted at the meeting in question fairly
represent the relevant class of shareholders to which they
belong.
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the scheme of arrangement is such as a businessman would
reasonably approve; and
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the scheme of arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
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If the scheme of arrangement is approved, the dissenting
shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting
shareholders of U.S. corporations, providing rights to
receive payment in cash for the judicially determined value of
the shares.
In addition, if an offer by a third party to purchase shares in
us has been approved by the holders of at least 90% of our
outstanding shares (not including such a third party) pursuant
to an offer within a four-month period of making such an offer,
the purchaser may, during the two months following expiration of
the four-month period, require the holders of the remaining
shares to transfer their shares on the same terms on which the
purchaser acquired the first 90% of our outstanding shares. An
objection can be made to the Grand Court of the Cayman Islands,
but this is unlikely to succeed unless there is evidence of
fraud, bad faith, collusion or inequitable treatment of the
shareholders.
42
There
is uncertainty as to shareholders ability to enforce
certain foreign civil liabilities in the Cayman
Islands.
We are incorporated as an exempted company with limited
liability under the laws of the Cayman Islands. A material
portion of our assets are located outside of the United States.
As a result, it may be difficult for our shareholders to enforce
judgments against us or judgments obtained in U.S. courts
predicated upon the civil liability provisions of the federal
securities laws of the United States or any state of the United
States.
We have been advised by our Cayman Islands counsel, Maples and
Calder, that although there is no statutory enforcement in the
Cayman Islands of judgments obtained in the United States, the
courts of the Cayman Islands will based on the
principle that a judgment by a competent foreign court imposes
upon the judgment debtor an obligation to pay the sum for which
judgment has been given recognize and enforce a
foreign judgment of a court of competent jurisdiction if such
judgment is final, for a liquidated sum, not in respect of taxes
or a fine or penalty, is not inconsistent with a Cayman Islands
judgment in respect of the same matters, and was not obtained in
a manner, and is not of a kind, the enforcement of which is
contrary to the public policy of the Cayman Islands. There is
doubt, however, as to whether the Grand Court of the Cayman
Islands will (1) recognize or enforce judgments of
U.S. courts predicated upon the civil liability provisions
of the federal securities laws of the United States or any
state of the United States, or (2) in original actions
brought in the Cayman Islands, impose liabilities predicated
upon the civil liability provisions of the federal securities
laws of the United States or any state of the United States, on
the grounds that such provisions are penal in nature.
The Grand Court of the Cayman Islands may stay proceedings if
concurrent proceedings are being brought elsewhere.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
We lease all of our physical properties. During 2008, we
relocated many of our executive offices to the LA Live complex
in downtown Los Angeles, California, where we currently occupy
approximately 65,000 square feet under a lease expiring in
2018. We also lease approximately 316,000 square feet of
general office space in Torrance, California, with terms
expiring in 2016, for our North America and South America
regional headquarters, including some of our corporate support
functions. Additionally, we lease warehouse facilities in Los
Angeles, California and Memphis, Tennessee of approximately
82,000 square feet and 130,000 square feet,
respectively. The Los Angeles and Memphis lease agreements have
terms through June 2011 and December 2016, respectively. In Lake
Forest, California, we also lease warehouse, manufacturing plant
and office space of approximately 80,000 square feet under
a lease expiring in 2019 for which we have a renewal option. In
Venray, Netherlands, we lease our European centralized warehouse
of approximately 150,000 square feet under an arrangement
expiring in June 2020 for which we have a renewal option. In
Guadalajara, Mexico we lease approximately 82,000 square
feet of warehouse space with the term of the lease expiring in
January 2015. 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.
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Item 3.
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LEGAL
PROCEEDINGS
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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 when a probable loss
estimate can be made.
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. The effects of these claims to
date have not been material to the Company, and the reasonably
possible range of exposure on currently existing claims is not
material to the Company. The Company believes that it has
meritorious defenses
43
to the allegations contained in the lawsuits. The Company
currently maintains product liability insurance with an annual
deductible of $10 million.
On April 16, 2007, Herbalife International of America, Inc.
filed a Complaint in the United States District Court for the
Central District of California against certain former Herbalife
distributors who had left the Company to join a competitor. The
Complaint alleged breach of contract, misappropriation of trade
secrets, intentional interference with prospective economic
advantage, intentional interference with contract, unfair
competition, constructive trust and fraud and seeks monetary
damages, attorneys fees and injunctive relief.
(Herbalife International of America, Inc. v. Robert E.
Ford, et al) The court entered a Preliminary Injunction
against the defendants enjoining them from further use
and/or
misappropriation of the Companys trade secrets on
December 11, 2007. Defendants appealed the courts
entry of the Preliminary Injunction to the U.S. Court of
Appeals for the Ninth Circuit. That court affirmed, in relevant
part, the Preliminary Injunction. On December 3, 2007, the
defendants filed a counterclaim alleging that the Company had
engaged in unfair and deceptive business practices, intentional
and negligent interference with prospective economic advantage,
false advertising and that the Company was an endless chain
scheme in violation of California law and seeking restitution,
contract rescission and an injunction. Both sides engaged in
discovery and filed cross motions for Summary Judgment. On
August 25, 2009, the court granted partial summary judgment
for Herbalife on all of defendants claims except the claim
that the Company is an endless chain scheme which under
applicable law is a question of fact that can only be determined
at trial. The court denied defendants motion for Summary
Judgment on Herbalifes claims for misappropriation of
trade secrets and breach of contract. On December 4, 2009,
the Court ordered mediation to occur on February 8, 2010
and set a schedule for Herbalifes motion for summary
judgment to dismiss the sole remaining counterclaim by the
defendants, with a hearing scheduled for March 9, 2010 if
all matters were not resolved before that date. The mediation
occurred but did not resolve any issues. No date has been set
for trial. The Company believes that there is merit to its
remaining claims for relief and that it has meritorious defenses
to the remaining counterclaim.
Certain of the Companys 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 their allegations that additional taxes are owed, and the
Company is vigorously contesting the additional proposed taxes
and related charges.
These matters may take several years to resolve. While the
Company believes it has meritorious defenses, it cannot be sure
of their ultimate resolution. Although the Company has reserved
an amount that the Company believes represents the most likely
outcome of the resolution of these disputes, if the Company is
incorrect in the assessment the Company may have to record
additional expenses.
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Item 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
44
PART II
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Item 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Information
with Respect to our Common Shares
Our common shares are listed on the New York Stock Exchange, or
NYSE, and trade under the symbol HLF. The following
table sets forth the range of the high and low sales prices for
our common shares in each of the relevant fiscal quarters
presented, based upon quotations on the NYSE consolidated
transaction reporting system.
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2009
|
|
$
|
23.46
|
|
|
$
|
12.12
|
|
June 30, 2009
|
|
$
|
31.98
|
|
|
$
|
14.71
|
|
September 30, 2009
|
|
$
|
35.87
|
|
|
$
|
28.92
|
|
December 31, 2009
|
|
$
|
44.43
|
|
|
$
|
31.47
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2008
|
|
$
|
49.89
|
|
|
$
|
37.55
|
|
June 30, 2008
|
|
$
|
51.09
|
|
|
$
|
35.70
|
|
September 30, 2008
|
|
$
|
48.80
|
|
|
$
|
36.94
|
|
December 31, 2008
|
|
$
|
39.49
|
|
|
$
|
14.47
|
|
The market price of our common shares is subject to fluctuations
in response to variations in our quarterly operating results,
general trends in the market for our products and product
candidates, economic and currency exchange issues in the foreign
markets in which we operate as well as other factors, many of
which are not within our control. In addition, broad market
fluctuations, as well as general economic, business and
political conditions may adversely affect the market for our
common shares, regardless of our actual or projected performance.
The closing price of our common shares on February 18,
2010, was $40.90. The approximate number of holders of record of
our common shares as of February 18, 2010 was 903. This
number of holders of record does not represent the actual number
of beneficial owners of our common shares because shares are
frequently held in street name by securities dealers
and others for the benefit of individual owners who have the
right to vote their shares.
45
Performance
Graph
Our common shares began trading on the NYSE on December 16,
2004. Set forth below is information comparing the cumulative
total shareholder return and share price appreciation plus
dividends on our common shares with the cumulative total return
of the S&P 500 Index and a market weighted index of
publicly traded peers over the five year period ended
December 31, 2009. The graph assumes that $100 is invested
in each of our common shares, the S&P 500 Index and the
index of publicly traded peers on December 31, 2004 and
that all dividends were reinvested. The publicly traded
companies in the peer group are Avon Products, Inc.,
Natures Sunshine Products, Inc., Tupperware Corporation,
Nu Skin Enterprises Inc., USANA Health Sciences Inc., Weight
Watchers International, Inc. and Mannatech, Inc.
Comparison
of Cumulative Five Year Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
Herbalife Ltd.
|
|
|
$
|
100.00
|
|
|
|
$
|
200.12
|
|
|
|
$
|
247.14
|
|
|
|
$
|
251.48
|
|
|
|
$
|
138.83
|
|
|
|
$
|
268.44
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
104.91
|
|
|
|
$
|
121.48
|
|
|
|
$
|
128.16
|
|
|
|
$
|
80.74
|
|
|
|
$
|
102.11
|
|
Peer Index
|
|
|
$
|
100.00
|
|
|
|
$
|
84.71
|
|
|
|
$
|
96.73
|
|
|
|
$
|
107.56
|
|
|
|
$
|
69.20
|
|
|
|
$
|
98.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Information
with Respect to Dividends
During the second quarter of 2007, the Companys board of
directors adopted a regular quarterly cash dividend program.
Since, the adoption of the dividend program, the Companys
board of directors have authorized a $0.20 per common share
dividend each quarter. The aggregate amount of dividends paid
and declared during fiscal year 2009, 2008 and 2007 was
approximately $48.7 million, $50.7 million and
$41.5 million, respectively.
The declaration of future dividends is subject to the discretion
of the Companys board of directors and will depend upon
various factors, including the Companys net earnings,
financial condition, restrictions imposed by the Companys
credit agreement, cash requirements, future prospects and other
factors deemed relevant by the board of directors. For example,
the senior credit facility entered into on July 21, 2006,
as amended, permits payments of dividends as long as no default
or event of default exists and the sum of the amounts paid with
respect to dividends and share repurchases does not exceed the
sum of $450.0 million plus seventy five percent of
cumulative consolidated net income from the first quarter of
2007 to the last day of the quarter most recently ended prior to
the date of dividend. There is no guarantee that the board of
directors will not terminate the quarterly dividend program.
Information
with Respect to Securities Authorized for Issuance Under Equity
Compensation Plans
The following table sets forth as of December 31, 2009,
information with respect to (a) number of securities to be
issued upon exercise of outstanding options, warrants and
rights, (b) the weighted average exercise price of
outstanding options, warrants and rights and (c) the number
of securities remaining available for future issuance under
equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
in Column (a))(2)
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
8,061,337
|
|
|
$
|
24.84
|
|
|
|
1,828,106
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,061,337
|
|
|
$
|
24.84
|
|
|
|
1,828,106
|
|
|
|
|
(1) |
|
Consists of five plans: The WH Holdings (Cayman Islands) Ltd.
Stock Incentive Plan, the WH Holdings (Cayman Islands) Ltd.
Independent Directors Stock Incentive Plan, the Herbalife Ltd.
2004 Stock Incentive Plan, the Herbalife Ltd. 2005 Stock
Incentive Plan, and the Herbalife Ltd. Independent Directors
Deferred Compensation and Stock Unit Plan. In February 2008, a
shareholder approved Employee Stock Purchase Plan was
implemented. The terms of these plans are summarized in
Note 9, Share-Based Compensation, to the notes to
our consolidated financial statements. |
|
(2) |
|
Includes 960,807 common shares available for future issuance
under the shareholder approved Employee Stock Purchase Plan
which was implemented in February 2008. |
47
Information
with Respect to Purchases of Equity Securities by the
Issuer
On April 17, 2009, the Companys share repurchase
program adopted on April 18, 2007 expired pursuant to its
terms. On April 30, 2009, the Company announced that its
board of directors authorized a new program for the Company to
repurchase up to $300 million of Herbalife common shares
during the next two years, at such times and prices as
determined by the Companys management. As of
December 31, 2009, the approximate dollar value of shares
that could be repurchased under the Companys share
repurchase program was approximately $226.8 million.
The following is a summary of our repurchases of common shares
during the three months ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
that May Yet be
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
|
October 1 October 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
267,509,540
|
|
November 1 November 30
|
|
|
1,000,000
|
|
|
$
|
40.71
|
|
|
|
1,000,000
|
|
|
$
|
226,801,761
|
|
December 1 December 31
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
226,801,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,000,000
|
|
|
$
|
40.71
|
|
|
|
1,000,000
|
|
|
$
|
226,801,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The following table sets forth certain of our historical
financial data. We have derived the selected historical
consolidated financial data for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005 from our
audited financial statements and the related notes. Not all
periods shown below are discussed in this Annual Report on
Form 10-K.
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 Item 7 Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and the historical consolidated financial
statements and accompanying notes included elsewhere in this
document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,324,577
|
|
|
$
|
2,359,213
|
|
|
$
|
2,145,839
|
|
|
$
|
1,885,534
|
|
|
$
|
1,566,750
|
|
Cost of sales
|
|
|
493,134
|
|
|
|
458,396
|
|
|
|
438,382
|
|
|
|
380,338
|
|
|
|
315,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,831,443
|
|
|
|
1,900,817
|
|
|
|
1,707,457
|
|
|
|
1,505,196
|
|
|
|
1,251,004
|
|
Royalty overrides
|
|
|
761,501
|
|
|
|
796,718
|
|
|
|
760,110
|
|
|
|
675,245
|
|
|
|
555,665
|
|
Selling, general and administrative expenses(1)
|
|
|
773,911
|
|
|
|
771,847
|
|
|
|
634,190
|
|
|
|
573,005
|
|
|
|
476,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income(1)
|
|
|
296,031
|
|
|
|
332,252
|
|
|
|
313,157
|
|
|
|
256,946
|
|
|
|
219,071
|
|
Interest expense, net
|
|
|
5,103
|
|
|
|
13,222
|
|
|
|
10,573
|
|
|
|
39,541
|
|
|
|
43,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
290,928
|
|
|
|
319,030
|
|
|
|
302,584
|
|
|
|
217,405
|
|
|
|
175,147
|
|
Income taxes
|
|
|
87,582
|
|
|
|
97,840
|
|
|
|
111,133
|
|
|
|
74,266
|
|
|
|
82,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
203,346
|
|
|
$
|
221,190
|
|
|
$
|
191,451
|
|
|
$
|
143,139
|
|
|
$
|
93,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.32
|
|
|
$
|
3.47
|
|
|
$
|
2.75
|
|
|
$
|
2.02
|
|
|
$
|
1.35
|
|
Diluted
|
|
$
|
3.22
|
|
|
$
|
3.36
|
|
|
$
|
2.63
|
|
|
$
|
1.92
|
|
|
$
|
1.28
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,221
|
|
|
|
63,785
|
|
|
|
69,497
|
|
|
|
70,814
|
|
|
|
68,972
|
|
Diluted
|
|
|
63,097
|
|
|
|
65,769
|
|
|
|
72,714
|
|
|
|
74,509
|
|
|
|
72,491
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales(2)
|
|
$
|
3,690,061
|
|
|
$
|
3,811,159
|
|
|
$
|
3,511,003
|
|
|
$
|
3,100,205
|
|
|
$
|
2,575,716
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
285,056
|
|
|
|
272,988
|
|
|
|
270,811
|
|
|
|
184,447
|
|
|
|
143,352
|
|
Investing activities
|
|
|
(71,322
|
)
|
|
|
(84,964
|
)
|
|
|
(43,390
|
)
|
|
|
(66,808
|
)
|
|
|
(32,526
|
)
|
Financing activities
|
|
|
(213,327
|
)
|
|
|
(205,067
|
)
|
|
|
(203,511
|
)
|
|
|
(55,044
|
)
|
|
|
(225,890
|
)
|
Depreciation and amortization
|
|
|
62,437
|
|
|
|
48,732
|
|
|
|
35,115
|
|
|
|
29,995
|
|
|
|
35,436
|
|
Capital expenditures(3)
|
|
|
60,128
|
|
|
|
106,813
|
|
|
|
49,027
|
|
|
|
66,870
|
|
|
|
32,604
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
150,801
|
|
|
$
|
150,847
|
|
|
$
|
187,407
|
|
|
$
|
154,323
|
|
|
$
|
88,248
|
|
Receivables, net
|
|
|
76,958
|
|
|
|
70,002
|
|
|
|
58,729
|
|
|
|
51,758
|
|
|
|
37,266
|
|
Inventories
|
|
|
145,962
|
|
|
|
134,392
|
|
|
|
128,648
|
|
|
|
146,036
|
|
|
|
109,785
|
|
Total working capital
|
|
|
83,536
|
|
|
|
82,869
|
|
|
|
111,478
|
|
|
|
132,215
|
|
|
|
14,094
|
|
Total assets
|
|
|
1,146,050
|
|
|
|
1,121,318
|
|
|
|
1,067,243
|
|
|
|
1,016,933
|
|
|
|
837,801
|
|
Total debt
|
|
|
250,333
|
|
|
|
351,631
|
|
|
|
365,152
|
|
|
|
185,438
|
|
|
|
263,092
|
|
Shareholders equity(4)
|
|
|
359,311
|
|
|
|
241,731
|
|
|
|
182,244
|
|
|
|
353,890
|
|
|
|
168,888
|
|
Cash dividends per common share
|
|
|
0.80
|
|
|
|
0.80
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The years ended December 31, 2009, 2008, 2007, and 2006
include approximately $1.3 million, $6.7 million,
$5.8 million and $7.5 million of severance and related
expenses, respectively, associated with restructuring. |
|
(2) |
|
Retail sales represent the gross sales amount reflected on our
invoices to our distributors. We do not receive the full retail
sales amount. Product sales represent the actual
product purchase price paid to us by our distributors, after
giving effect to distributor discounts referred to as
distributor allowances, which total approximately
50% of suggested retail sales prices. Distributor allowances as
a percentage of sales may vary by country depending upon
regulatory restrictions that limit or otherwise restrict
distributor allowances. Net sales represents product
sales and handling and freight income. |
Retail sales data is referred to in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Our use of retail sales
reflect the fundamental role of retail sales in our
accounting systems, internal controls and operations, including
the basis upon which the distributors are being paid. In
addition, information in daily and monthly reports reviewed by
our management includes retail sales data.
The following represents the reconciliation of retail sales to
net sales for each of the periods set forth above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Retail sales
|
|
$
|
3,690,061
|
|
|
$
|
3,811,159
|
|
|
$
|
3,511,003
|
|
|
$
|
3,100,205
|
|
|
$
|
2,575,716
|
|
Distributor allowance
|
|
|
(1,696,444
|
)
|
|
|
(1,778,866
|
)
|
|
|
(1,658,569
|
)
|
|
|
(1,472,527
|
)
|
|
|
(1,225,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
1,993,617
|
|
|
|
2,032,293
|
|
|
|
1,852,434
|
|
|
|
1,627,678
|
|
|
|
1,350,275
|
|
Handling and freight income
|
|
|
330,960
|
|
|
|
326,920
|
|
|
|
293,405
|
|
|
|
257,856
|
|
|
|
216,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,324,577
|
|
|
$
|
2,359,213
|
|
|
$
|
2,145,839
|
|
|
$
|
1,885,534
|
|
|
$
|
1,566,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Includes acquisition of property from capitalized leases and
other long-term debt of $0.4 million, $18.2 million,
$7.1 million, $2.6 million, and $1.1 million for
the years ended December 31, 2009, 2008, 2007, 2006 and
2005, respectively. |
|
(4) |
|
During the years ended December 31, 2009, 2008 and 2007, we
paid an aggregate $48.7 million, $50.7 million and
$41.5 million in dividends, respectively, and repurchased
$73.2 million, $137.0 million and $365.8 million
of our common shares, respectively. During the years ended
December 31, 2006 and 2005, we did not declare any
dividends or repurchase any of our common shares. |
50
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis in
conjunction with Item 6 Selected Financial Data
and our consolidated financial statements and related notes,
each included elsewhere in this Annual Report on
Form 10-K.
Overview
We are a global network marketing company that sells weight
management products, nutritional supplements, energy,
sports & fitness products and personal care products.
We pursue our mission of changing peoples
lives by providing a financially rewarding business
opportunity to distributors and quality products to distributors
and their customers who seek a healthy lifestyle. We are one of
the largest network marketing companies in the world with net
sales of approximately $2.3 billion for the year ended
December 31, 2009. As of December 31, 2009, we sold
our products in 72 countries through a network of approximately
2.0 million independent distributors. In China, we sell our
products through retail stores, sales representatives, sales
employees and licensed business providers. We believe the
quality of our products and the effectiveness of our
distribution network, coupled with geographic expansion, have
been the primary reasons for our success throughout our
30-year
operating history.
Our products are grouped in four principal categories: weight
management, targeted nutrition, energy, sports &
fitness and Outer Nutrition, along with literature and
promotional items. Our products are often sold in programs that
are comprised of a series of related products and literature
designed to simplify weight management and nutrition for
consumers and maximize our distributors cross-selling
opportunities.
Industry-wide factors that affect us and our competitors include
the increasing prevalence of obesity and the aging of the
worldwide population, which are driving demand for nutrition and
wellness-related products along with the global increase in
under and unemployment which can affect the recruitment and
retention of distributors.
While we are closely monitoring the current global economic
crisis, the Company remains focused on the opportunities and
challenges in retailing of our products, recruiting and
retaining distributors, improving distributor productivity,
opening new markets, further penetrating existing markets
including China, the U.S., Brazil, Mexico and Russia,
globalizing successful distributor methods of operation such as
Nutrition Clubs and Weight Loss Challenges, introducing new
products and globalizing existing products, developing niche
market segments and further investing in our infrastructure.
Management remains intently focused on the Venezuela market and
especially the limited ability to repatriate cash at the
official exchange rate.
During the first quarter of 2009, we changed our geographic
regions, designating Mexico as its own region and combining
South America and Central America into a single region. These
changes in geographic regions were implemented to create growth
opportunities for distributors, support faster decision making
across the organization by reducing the number of layers of
management, improve the sharing of ideas and tools and
accelerate growth in high potential markets. Under the new
geographic regions, we report revenue from:
|
|
|
|
|
North America, which consists of the U.S., Canada and Jamaica;
|
|
|
|
Mexico;
|
|
|
|
South and Central America;
|
|
|
|
EMEA, which consists of Europe, the Middle East and Africa;
|
|
|
|
Asia Pacific (excluding China), which consists of Asia, New
Zealand and Australia; and
|
|
|
|
China.
|
Historical information presented in this Annual Report on
Form 10-K
relating to our geographic regions has been reclassified to
conform to our current geographic presentation.
51
Volume
Points by Geographic Region
A key non-financial measure we focus on is Volume Points on a
Royalty Basis, or Volume Points, which is essentially our
weighted unit measure of product sales volume. It is a useful
measure that we rely on as it excludes the impact of foreign
currency fluctuations and ignores the differences generated by
varying retail pricing across geographic markets. The Volume
Point measure, in the aggregate and in each region, can be a
measure of our sales volume as well as of sales volume trends.
In general, an increase in Volume Points in a particular
geographic region or country indicates an increase in our sales
volume which results in an increase in our local currency net
sales; a decrease in Volume Points in a particular geographic
region or country indicates a decrease in our sales volume,
which results in decreasing local currency net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Volume points in millions)
|
|
|
North America
|
|
|
779.9
|
|
|
|
750.4
|
|
|
|
3.9
|
%
|
|
|
750.4
|
|
|
|
680.9
|
|
|
|
10.2
|
%
|
Mexico
|
|
|
493.4
|
|
|
|
545.9
|
|
|
|
(9.6
|
)%
|
|
|
545.9
|
|
|
|
593.2
|
|
|
|
(8.0
|
)%
|
South & Central America
|
|
|
412.0
|
|
|
|
430.6
|
|
|
|
(4.3
|
)%
|
|
|
430.6
|
|
|
|
415.9
|
|
|
|
3.5
|
%
|
EMEA
|
|
|
466.4
|
|
|
|
497.1
|
|
|
|
(6.2
|
)%
|
|
|
497.1
|
|
|
|
529.7
|
|
|
|
(6.2
|
)%
|
Asia Pacific (excluding China)
|
|
|
570.7
|
|
|
|
438.7
|
|
|
|
30.1
|
%
|
|
|
438.7
|
|
|
|
404.0
|
|
|
|
8.6
|
%
|
China
|
|
|
115.3
|
|
|
|
115.9
|
|
|
|
(0.5
|
)%
|
|
|
115.9
|
|
|
|
64.4
|
|
|
|
80.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
2,837.7
|
|
|
|
2,778.6
|
|
|
|
2.1
|
%
|
|
|
2,778.6
|
|
|
|
2,688.1
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
New Sales Leaders by Geographic Region during the Reporting
Period
Another key non-financial measure on which we focus is the
number of distributors qualified as new sales leaders under our
compensation system. Excluding China, distributors qualify for
sales leader status based on their Volume Points. The changes in
the total number of sales leaders or changes in the productivity
of sales leaders may cause Volume Points to increase or
decrease. The fluctuation in the number of new sales leaders is
a general indicator of the level of distributor recruitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
North America
|
|
|
38,248
|
|
|
|
43,517
|
|
|
|
(12.1
|
)%
|
|
|
43,517
|
|
|
|
42,473
|
|
|
|
2.5
|
%
|
Mexico
|
|
|
21,826
|
|
|
|
26,046
|
|
|
|
(16.2
|
)%
|
|
|
26,046
|
|
|
|
32,845
|
|
|
|
(20.7
|
)%
|
South & Central America
|
|
|
29,052
|
|
|
|
45,416
|
|
|
|
(36.0
|
)%
|
|
|
45,416
|
|
|
|
47,371
|
|
|
|
(4.1
|
)%
|
EMEA
|
|
|
21,722
|
|
|
|
27,132
|
|
|
|
(19.9
|
)%
|
|
|
27,132
|
|
|
|
31,831
|
|
|
|
(14.8
|
)%
|
Asia Pacific (excluding China)
|
|
|
51,912
|
|
|
|
40,905
|
|
|
|
26.9
|
%
|
|
|
40,905
|
|
|
|
40,174
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New Sales Leaders
|
|
|
162,760
|
|
|
|
183,016
|
|
|
|
(11.1
|
)%
|
|
|
183,016
|
|
|
|
194,694
|
|
|
|
(6.0
|
)%
|
New China Sales Employees
|
|
|
23,003
|
|
|
|
26,262
|
|
|
|
(12.4
|
)%
|
|
|
26,262
|
|
|
|
15,365
|
|
|
|
70.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total New Sales Leaders
|
|
|
185,763
|
|
|
|
209,278
|
|
|
|
(11.2
|
)%
|
|
|
209,278
|
|
|
|
210,059
|
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Sales Leaders and Retention Rates by Geographic Region as of
Re-qualification Period
Our compensation system requires each sales leader to re-qualify
for such status each year, prior to February, in order to
maintain their 50% discount on product and be eligible to
receive royalty payments. In February of each year, we demote
from the rank of sales leader those distributors who did not
satisfy the re-qualification requirements
52
during the preceding twelve months. The re-qualification
requirement does not apply to new sales leaders (i.e. those who
became sales leaders subsequent to the January re-qualification
of the prior year).
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Leaders Statistics (Excluding China)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
January 1 total sales leaders
|
|
|
456.9
|
|
|
|
451.6
|
|
|
|
400.6
|
|
January & February new sales leaders
|
|
|
20.6
|
|
|
|
28.6
|
|
|
|
26.7
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(181.4
|
)
|
|
|
(167.7
|
)
|
|
|
(135.9
|
)
|
Other sales leaders (resigned, etc)
|
|
|
(1.4
|
)
|
|
|
(2.8
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of February total sales leaders
|
|
|
294.7
|
|
|
|
309.7
|
|
|
|
290.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The distributor statistics below further highlight the
calculation for retention.
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Leaders Retention (Excluding China)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Sales leaders needed to re-qualify
|
|
|
304.0
|
|
|
|
284.0
|
|
|
|
236.2
|
|
Demoted sales leaders (did not re-qualify)
|
|
|
(181.4
|
)
|
|
|
(167.7
|
)
|
|
|
(135.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total re-qualified
|
|
|
122.6
|
|
|
|
116.3
|
|
|
|
100.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention rate
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
|
|
42.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below reflects the number of sales leaders as of
February of the year indicated (subsequent to the annual
re-qualification date) and sales leader retention rate by year
and by region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Sales Leaders
|
|
|
Sales Leaders Retention Rate
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
North America
|
|
|
63,726
|
|
|
|
64,383
|
|
|
|
54,314
|
|
|
|
42.2
|
%
|
|
|
43.5
|
%
|
|
|
43.1
|
%
|
Mexico
|
|
|
50,099
|
|
|
|
60,685
|
|
|
|
61,781
|
|
|
|
45.2
|
%
|
|
|
44.4
|
%
|
|
|
55.1
|
%
|
South & Central America
|
|
|
67,876
|
|
|
|
67,808
|
|
|
|
52,204
|
|
|
|
32.2
|
%
|
|
|
34.7
|
%
|
|
|
33.2
|
%
|
EMEA
|
|
|
53,371
|
|
|
|
59,446
|
|
|
|
64,862
|
|
|
|
48.7
|
%
|
|
|
46.6
|
%
|
|
|
46.2
|
%
|
Asia Pacific (excluding China)
|
|
|
59,631
|
|
|
|
57,355
|
|
|
|
56,871
|
|
|
|
35.1
|
%
|
|
|
34.3
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales leaders
|
|
|
294,703
|
|
|
|
309,677
|
|
|
|
290,032
|
|
|
|
40.3
|
%
|
|
|
41.0
|
%
|
|
|
42.5
|
%
|
China Sales Employees
|
|
|
29,684
|
|
|
|
25,294
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
324,387
|
|
|
|
334,971
|
|
|
|
298,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of sales leaders by geographic region as of the
quarterly reporting dates will normally be higher than the
number of sales leaders by geographic region as of the
re-qualification period because sales leaders who do not
re-qualify during the relevant twelve-month period will be
deleted from the rank of sales leader the following February.
Since sales leaders purchase most of our products for resale to
other distributors and consumers, comparisons of sales leader
totals on a
year-to-year
basis are indicators of our recruitment and retention efforts in
different geographic regions.
The value of the average monthly purchase of Herbalife products
by our sales leaders has remained relatively constant over time.
Consequently, increases in our sales are driven by our retention
of sales leaders, our recruitment and retention of distributors
and by our distributors increased adoption of daily
consumption business methods.
We provide distributors with products, support materials,
training, special events and a competitive compensation program.
If a distributor wants to pursue the Herbalife business
opportunity, the distributor is responsible for growing his or
her business and personally pays for the sales activities
related to attracting new customers and recruiting distributors
by hosting events such as Herbalife Opportunity Meetings or
Success Training Seminars; by advertising Herbalifes
products; by purchasing and using promotional materials such as
t-shirts, buttons and caps; by utilizing and paying for direct
mail and print material such as brochures, flyers, catalogs,
business cards, posters and banners and telephone book listings;
by purchasing inventory for sale or use as samples; and by
training, mentoring and following up (in person or via the phone
or internet) with customers and recruits on how to use Herbalife
products
and/or
pursue the Herbalife business opportunity.
53
Presentation
Retail sales represent the gross sales
amounts on our invoices to distributors before distributor
allowances, as defined below, and net sales,
which reflect distribution allowances and handling and
freight income, represent what we collect and recognize as net
sales in our financial statements. We discuss retail sales
because of its fundamental role in our compensation systems,
internal controls and operations, including its role as the
basis upon which distributor discounts, royalties and bonuses
are awarded. In addition, it is used as the basis for certain
information included in daily and monthly reports reviewed by
our management. However, such a measure is not in accordance
with U.S. generally accepted accounting principles, or
U.S. GAAP. You should not consider retail sales in
isolation from, nor as a substitute for, net sales and other
consolidated income or cash flow statement data prepared in
accordance with U.S. GAAP, or as a measure of profitability
or liquidity. A reconciliation of net sales to retail sales is
presented below under Results of Operations.
Product sales represent the actual product
purchase price paid to us by our distributors, after giving
effect to distributor discounts referred to as distributor
allowances, which approximate 50% of retail sales prices.
Distributor allowances as a percentage of retail sales may vary
by country depending upon regulatory restrictions that limit or
otherwise restrict distributor allowances.
Our international operations have provided and will continue to
provide a significant portion of our total net sales. As a
result, total net sales will continue to be affected by changes
in the U.S. dollar against foreign currencies. In order to
provide a framework for assessing how our underlying businesses
performed excluding the effect of foreign currency fluctuations,
we compare the percent change in the net sales from one period
to another period in this Annual Report on Form 10K using
net sales in local currency disclosure. Such
net sales in local currency is not a U.S. generally
accepted accounting principles, or GAAP, financial measure. Net
sales in local currency removes from net sales in
U.S. dollars the impact of changes in exchange rates
between the U.S. dollar and the functional currencies of
our foreign subsidiaries, by translating the current period net
sales into U.S. dollars using the same foreign currency
exchange rates that were used to translate the net sales for the
previous period. We believe presenting net sales in local
currency basis is useful to investors because it allows a more
meaningful comparison of the net sales of our foreign operations
from period to period. However, net sales in local currency
measures should not be considered in isolation or as an
alternative to net sales in U.S. dollars measures that
reflect current period exchange rates, or to other financial
measures calculated and presented in accordance with GAAP.
Our gross profit consists of net sales less
cost of sales, which represents the prices we
pay to our raw material suppliers and manufacturers of our
products as well as costs related to product shipments, duties
and tariffs, freight expenses relating to shipment of products
to distributors and importers and similar expenses.
Royalty overrides are our most significant
expense and consist of:
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royalty overrides and production bonuses which total
approximately 15% and 7%, respectively, of the retail sales of
weight management, targeted nutrition, energy,
sports & fitness, Outer Nutrition and promotional
products;
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the Mark Hughes bonus payable to some of our most senior
distributors in the aggregate amount of up to 1% of retail sales
of weight management, targeted nutrition, energy,
sports & fitness and Outer Nutrition products; and
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other discretionary incentive cash bonuses to qualifying
distributors.
|
Royalty overrides are generally earned based on retail sales and
provide potential earnings to distributors of up to 23% of
retail sales or approximately 33% of our net sales. Royalty
overrides together with distributor allowances of up to 50%
represent the potential earnings to distributors of up to
approximately 73% of retail sales. The compensation to
distributors is generally for the development, retention and
improved productivity of their distributor sales organizations
and is paid to several levels of distributors on each sale. Due
to restrictions on direct selling in China, our full-time
employed sales representatives in China are compensated with
wages, bonuses and benefits and our licensed business providers
in China are compensated with service fees instead of the
distributor allowances and royalty overrides utilized in our
traditional marketing program used in our other five regions.
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.
54
Our operating margins consist of net sales
less cost of sales and royalty overrides.
Selling, general and administrative expenses
represent our operating expenses, components of which
include labor and benefits, sales events, professional fees,
travel and entertainment, distributor marketing, occupancy
costs, communication costs, bank fees, depreciation and
amortization, foreign exchange gains and losses and other
miscellaneous operating expenses.
Most of our sales to distributors 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. 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 rates
have fluctuated significantly. From time to time, we enter into
foreign exchange forward and option contracts to partially
mitigate our foreign currency exchange risk as discussed in
further detail in Item 7A Quantitative and
Qualitative Disclosures about Market Risk.
Summary
Financial Results
Net sales for the year ended December 31, 2009 decreased
1.5% to $2,324.6 million as compared to
$2,359.2 million in 2008. The decrease was primarily due to
the unfavorable impact of currency fluctuations of
$155.6 million. In local currency, net sales for the year
ended December 31, 2009 increased 5.1%, as compared to the
same period in 2008. For the year ended December 31, 2009,
net sales in U.S. dollars in our top ten countries
including the U.S., Brazil, Taiwan, China, Italy, South Korea,
Venezuela and Malaysia increased 7.4%, 12.2%, 28.0%, 5.0%, 5.2%,
56.9%, 6.9% and 30.8%, respectively, as compared to the same
period in 2008, while Mexico and Japan, decreased 25.3% and
14.5%, respectively, as compared to the same period in 2008. The
increase in net sales in most of our top markets was mainly due
to the successful conversions to daily consumption business
models, branding activities and increased distributor
recruiting. In Mexico, the negative impact of the Value Added
Tax, or VAT, that has been levied by the Mexican government on
the import and resale of certain nutrition products, which we
began collecting from our distributors during the third quarter
of 2008 contributed to the decline in net sales and distributor
and sales leader recruiting. In Japan, lower net sales were
mainly due to decline in distributor recruiting.
Net income for the year ended December 31, 2009 decreased
8.1% to $203.3 million, or $3.22 per diluted share,
compared to $221.2 million, or $3.36 per diluted share, for
the same period in 2008. The decrease was primarily driven by
currency related revenue declines, higher cost of goods sold,
depreciation expense, salaries and benefits, and advertising and
promotion expense, partially offset by lower professional fees,
sales event costs and interest expense and lower effective tax
rate.
Net income for the year ended December 31, 2009 included a
$12.2 million unfavorable after tax impact (net of
$6.6 million tax benefit) related to incremental U.S.
dollar cost of imports into Venezuela at the unfavorable
parallel market exchange rate rather than the official currency
exchange rate; a $0.9 million unfavorable after tax impact
(net of $0.4 million tax benefit) in connection with our
restructuring activities; and a $3.8 million net favorable
impact to income taxes from the expiration of certain statute of
limitations offset by a charge for an international income tax
audit settlement. Net income for the year ended
December 31, 2008 included a $4.8 million unfavorable
after tax impact related to restructuring activities (net of
$1.9 million tax benefit) and a $6.1 million valuation
allowance on deferred tax asset for deferred interest.
Results
of Operations
Our results of operations for the periods below are not
necessarily indicative of results of operations for future
periods, which depend upon numerous factors, including our
ability to recruit new distributors and retain existing
distributors, open new markets, further penetrate existing
markets, introduce new products and programs that will help our
distributors increase their retail efforts and develop niche
market segments.
55
The following table sets forth selected results of our
operations expressed as a percentage of net sales for the
periods indicated.
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Year Ended
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Year Ended
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Year Ended
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December 31,
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December 31,
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December 31,
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2009
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2008
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2007
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Operations:
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of sales
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21.2
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19.4
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20.4
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Gross profit
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78.8
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80.6
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79.6
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Royalty overrides(1)
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32.8
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33.8
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35.4
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Selling, general and administrative expenses(1)
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33.3
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32.7
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29.6
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Operating income
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12.7
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14.1
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14.6
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Interest expense, net
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0.2
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0.6
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0.5
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Income before income taxes
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12.5
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13.5
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14.1
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Income taxes
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3.8
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4.1
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5.2
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Net income
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8.7
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9.4
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8.9
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(1) |
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Compensation to our China sales employees and licensed business
providers is included in selling, general and administrative
expenses while distributor compensation for all other countries
is included in royalty overrides. |
Year
ended December 31, 2009 compared to year ended
December 31, 2008
Net
Sales
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
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Year Ended December 31,
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2009
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2008
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Handling &
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Handling &
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Change
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Retail
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Distributor
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Product
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Freight
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Net
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Retail
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Distributor
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Product
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Freight
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Net
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in Net
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Sales
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Allowance
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Sales
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Income
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Sales
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Sales
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Allowance
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Sales
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Income
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Sales
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Sales
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(Dollars in millions)
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North America
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$
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844.8
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$
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(403.1
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)
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$
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441.7
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$
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87.3
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$
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529.0
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$
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795.3
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$
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(379.2
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)
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$
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416.1
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$
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80.8
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$
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496.9
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6.5
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%
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Mexico
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431.5
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(210.3
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)
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221.2
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41.8
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263.0
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584.3
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(284.8
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)
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299.5
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52.7
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352.2
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(25.3
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)%
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South & Central America
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605.3
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(291.9
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)
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313.4
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53.5
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366.9
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665.9
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(332.9
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)
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333.0
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50.6
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383.6
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(4.4
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)%
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EMEA
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816.0
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(394.2
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)
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421.8
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82.4
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504.2
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927.7
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(449.1
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)
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478.6
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92.1
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570.7
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(11.7
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)%
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Asia Pacific
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825.3
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(382.1
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)
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443.2
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66.0
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509.2
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678.1
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(318.0
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)
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360.1
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50.7
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410.8
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24.0
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%
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China
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167.2
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(14.9
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)
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152.3
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152.3
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159.9
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(14.9
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)
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145.0
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145.0
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5.0
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%
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Worldwide
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$
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3,690.1
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$
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(1,696.5
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)
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|
$
|
1,993.6
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|
|
$
|
331.0
|
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|
$
|
2,324.6
|
|
|
$
|
3,811.2
|
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|
$
|
(1,778.9
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)
|
|
$
|
2,032.3
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|
$
|
326.9
|
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|
$
|
2,359.2
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|
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(1.5
|
)%
|
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Changes in net sales are directly associated with the recruiting
and retention of our distributor force, retailing of our
products, the quality and completeness of our product offerings
that the distributor force has to sell and the number of
countries in which we operate. Managements role, both
in-country and at the region and corporate level is to provide
distributors with a competitive and broad product line,
encourage strong teamwork and leadership among the
Chairmans Club and Presidents Team distributors and
offer leading edge business tools to make doing business with
Herbalife simple. Management uses the distributor marketing
program coupled with educational and motivational tools and
promotions to incentivize distributors to increase recruiting,
retention and retailing, which in turn affect net sales. Such
tools include Company sponsored sales events such as
Extravaganzas, Leadership Development Weekends and World Team
Schools where large groups of distributors gather, thus allowing
them to network with other distributors, learn recruiting,
retention and retailing techniques from our leading distributors
and become more familiar with how to market and sell our
products and business opportunities. Accordingly,
56
management believes that these development and motivation
programs increase the productivity of the sales leader network.
The expenses for such programs are included in selling, general
and administrative expenses. Sales are driven by several
factors, including the number and productivity of distributors
and sales leaders who continually build, educate and motivate
their respective distribution and sales organizations. We also
use event and non-event product promotions to motivate
distributors to increase recruiting, retention and retailing
activities. These promotions have prizes ranging from qualifying
for events to product prizes and vacations. The costs of these
promotions are included in selling, general and administrative
expenses.
The factors described above have helped distributors increase
their business, which in turn helps drive volume points in our
business, and thus, net sales. The discussion below of net sales
by geographic region further details some of the specific
drivers of growth of our business and causes of sales reductions
during the year ended December 31, 2009, as well as the
unique growth or contraction factors specific to certain
geographic regions or major countries. We believe that the
correct business foundation, coupled with ongoing training and
promotional initiatives, is required to increase recruiting and
retention of distributors and retailing of our products. This
correct business foundation includes strong country management
that works closely with the distributor leadership, actively
engaged and unified distributor leadership, a broad product line
that appeals to local consumer needs, a favorable regulatory
environment, a scalable and stable technology platform and an
attractive distributor marketing plan. Initiatives, such as
Success Training Seminars, Leadership Development Weekends,
Promotional Events and regional Extravaganzas are integral
components of developing a highly motivated and educated
distributor sales organization that will work toward increasing
the recruitment and retention of distributors.
We anticipate that our strategy will continue to include
creating and maintaining growth within existing markets, while
expanding into new markets. In addition, new ideas and Daily
Method of Operations, or DMOs, are being generated in many of
our regional markets and are globalized where applicable,
through the combined efforts of distributors, country management
or regional and corporate management. Examples of DMOs include
the Club concept in Mexico, Premium Herbalife Opportunity
Meetings in Korea, the Healthy Breakfast concept in Russia, and
the Internet/Sampling and Weight Loss Challenge in the
U.S. Managements strategy is to review the
applicability of expanding successful country initiatives
throughout a region, and where appropriate, financially support
the globalization of these initiatives.
North
America
The North America region reported net sales of
$529.0 million for the year ended December 31, 2009.
Net sales increased $32.1 million, or 6.5%, for the year
ended December 31, 2009 as compared to the same period in
2008. In local currency, net sales increased 6.7% for the year
ended December 31, 2009 as compared to the same period in
2008. The overall increase in the region was a result of net
sales growth in the U.S. of $35.3 million, or 7.4%, as
compared to the same period in 2008.
We continue to see the success of our distributors converting
their business focus toward a daily consumption business model,
especially the Nutrition Club DMO, and its extension into
Commercial Clubs and Central Clubs, along with the continued
development of the Weight Loss Challenge DMO. We also
implemented a 5% price increase in the U.S. in February
2009. In terms of volume, the mix of business in the
U.S. was 67% in the U.S. Latin market and 33% in the
General market for the year ended December 31, 2009.
In October 2009, the region hosted a U.S. Latin market and
General market Extravaganzas in Atlanta, GA. More than 14,000
distributors attended with 11,800 attending the U.S. Latin
market event and 2,800 attending the General market event. Also,
during 2009, the region hosted different events including a
Why Herbalife, Why Now? tour, a series of Leadership
Development Weekends, a Nutrition Club tour and a Recruiting
tour. In total more than 30,000 distributors attended these
events.
New sales leaders in the region decreased 12.1% for the year
ended December 31, 2009, as compared to the same period in
2008. Total sales leaders in the region decreased 2.2% as of
December 31, 2009 compared to December 31, 2008. New
sales leaders in the U.S. decreased 11.7% for the year
ended December 31, 2009, as compared to the same period in
2008.
57
We believe the fiscal year 2010 net sales in North America
should increase year over year primarily as a result of the
continuing transformation of our distributor business focus to a
daily consumption model. We expect a majority of the growth to
come from the U.S. Latin market.
Mexico
The Mexico region reported net sales of $263.0 million for
the year ended December 31, 2009. Net sales for the year
ended December 31, 2009, decreased $89.2 million, or
25.3%, as compared to the same period in 2008. In local
currency, net sales for the year ended December 31, 2009
decreased 8.9% as compared to the same period in 2008. The
fluctuation of foreign currency rates had an unfavorable impact
of $57.7 million on net sales for the year ended
December 31, 2009.
Net sales comparisons for 2009 versus 2008 were negatively
impacted by the collection of a VAT from our distributors that
has been levied by the Mexican government on the import and
resale of certain nutrition products. We began charging the VAT
to distributors in the third quarter of 2008. Distributors
previously paid 0% VAT on purchases of most of our nutrition
products. Because Nutrition Clubs are the predominant DMO in
Mexico, and are retail price-sensitive, the VAT increase has
caused our volumes to decline. For the year ended
December 31, 2008, this VAT increase affected approximately
58% of our sales volume in the region. For the first three
quarters of 2009 this VAT increase affected approximately 58% of
sales volume but for the fourth quarter of 2009, this VAT
increase affected only approximately 20% of our sales volume.
The reduced impact in the fourth quarter was due to the
introduction in October 2009 of several re-formulated nutrition
products which are not subject to the VAT charge that replaced
our existing products that were subject to the VAT. Through the
third quarter, net sales in local currency were 12.7% lower in
2009 on a
year-to-date
basis as compared to 2008. In the fourth quarter, local currency
net sales increased 8.2% compared to the same period in 2008 and
increased 1.2% sequentially compared to the third quarter of
2009. We believe that having these products available for sale
without the VAT charge has been a positive boost for our
Nutrition Club business and has contributed to the favorable
sales results in the fourth quarter of 2009.
New sales leaders in Mexico decreased 16.2% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales leaders in Mexico decreased 14.1% as of
December 31, 2009, compared to December 31, 2008.
In September 2009, Mexico hosted an Extravaganza with over
14,600 attendees. In addition, during 2009, Mexico also hosted a
motivational Global Expansion Team/Millionaire Team Retreat and
Active Sales Leader schools. Total combined attendance at these
two events was over 4,000 distributors.
We believe the fiscal year 2010 net sales in Mexico should
increase year over year due to the reformulated products which
are now being sold without the VAT charge as well as the
assumption of a slightly favorable currency.
South
and Central America
The South and Central America region reported net sales of
$366.9 million for the year ended December 31, 2009.
Net sales decreased $16.7 million or 4.4%, for the year
ended December 31, 2009, as compared to the same period in
2008. In local currency, net sales were relatively flat for the
year ended December 31, 2009, as compared to the same
period in 2008. The fluctuation of foreign currency rates had a
$17.3 million unfavorable impact on net sales for the year
ended December 31, 2009. The increase in local currency net
sales in the region for the year ended December 31, 2009
was attributable to sales growth in Brazil and Venezuela as well
as a full year of sales in Ecuador which was opened in the
fourth quarter of 2008. Offsetting these increases were sales
declines in Peru, Argentina, Bolivia, Chile, and Colombia.
In Brazil, the regions largest market, net sales increased
$18.5 million, or 12.2%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales increased 20.4% for the year ended
December 31, 2009, as compared to the same period in 2008.
The increase in local currency net sales was primarily a result
of distributors successfully transforming this market into a
more balanced mix of recruiting,
58
retailing and retention via the Nutrition Club and other daily
consumption based DMOs. The fluctuation of foreign currency
rates had a $12.5 million unfavorable impact on net sales
for the year ended December 31, 2009.
Venezuela, the regions second largest market, experienced
a net sales increase of $5.5 million, or 6.9%, for the year
ended December 31, 2009, as compared to the same period in
2008. The increase in sales for the year ended December 31,
2009, compared to 2008 primarily reflected lower sales in the
prior year due to the cumulative effect from price increases of
20% and 25% in January and May 2008, respectively. In October
2008, we instituted changes in non-resident distributor
compensation to address currency controls imposed by the
Venezuelan government. Also, in June 2009 we instituted a 10%
price increase along with further changes in non-resident
distributor compensation to adjust for inflation and currency
issues. Sales increased sequentially from the third to the
fourth quarter of 2009 by 14.9%. We expect to make ongoing
changes, as necessary, in pricing in Venezuela to mitigate the
impact of inflation, currency devaluations, and currency
restrictions.
New sales leaders in the region decreased 36.0% for the year
ended December 31, 2009, as compared to the same period in
2008. The decrease was driven by a decline in new sales leaders
in several markets including Argentina which decreased 72.8% for
the year ended December 31, 2009, as compared to the same
period in 2008; Peru, which decreased 61.0% for the year ended
December 31, 2009, as compared to the same period in 2008;
and Bolivia, which decreased 66.6% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales leaders in the region decreased 14.4% as of
December 31, 2009 compared to December 31, 2008. We
believe these decreases reflect current economic conditions
coupled with the transition, in several markets, to DMOs which
focus on daily consumption.
We believe the fiscal year 2010 net sales in South and
Central America should be relatively flat year over year. This
assumes the negative impact of remeasuring Venezuelas
local sales at the parallel market exchange rate during fiscal
year 2010, under high inflationary accounting rules, which is
63% less favorable than the official exchange rate that was used
to translate Venezuelas local sales in 2009. We expect the
decrease in Venezuela net sales to be largely offset by slightly
higher volume in other countries, price increases throughout the
region, and a more favorable currency environment than in 2009.
EMEA
The EMEA region reported net sales of $504.2 million for
the year ended December 31, 2009. Net sales decreased
$66.5 million, or 11.7%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales decreased 3.7% for the year ended
December 31, 2009, as compared to the same period in 2008.
The fluctuation of foreign currency rates had an unfavorable
impact on net sales of $45.5 million for the year ended
December 31, 2009.
Among the largest markets in the region, Italy, France and
Spain, net sales increased 5.2%, and decreased 24.3% and 29.1%,
respectively, for the year ended December 31, 2009, as
compared to the same period in 2008. In local currency, Italy
reported a net sales increase of 11.3% while France and Spain
reported net sales decreases of 19.3% and 25.0%, respectively,
for the year ended December 31, 2009, as compared to the
same period in 2008.
In Spain, we are beginning to see an improvement resulting from
the withdrawal of the Spanish Ministry of Health alert regarding
Herbalife products. This alert was withdrawn in April 2009
requiring no action by the Company. Although Spain local
currency net sales were down 25.0% for the full year 2009
compared to 2008, local currency net sales in the fourth quarter
of 2009 were 1.9% higher as compared to the same period in 2008.
In Russia, net sales decreased by 15.2% for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, however, net sales increased by 8.2% for the
year ended December 31, 2009, as compared to the same
period in 2008. The increase in local currency net sales was
primarily driven by the adoption of the Office Club concept
where all DMOs are carried out from a combined Office and
Commercial Nutrition Club location. Net sales in the Netherlands
decreased 7.5% for the year ended December 31, 2009, as
compared to the same period in 2008. In local currency, however,
net sales decreased only 2.0% for the year ended
December 31, 2009, as compared to the prior year period
reflecting a re-activated distributor base that is utilizing the
Wellness Evaluation and Healthy Breakfast DMOs. Net sales in
Portugal decreased 43.7% for the year ended December 31,
2009, as compared to the same period in 2008. However, in local
currency, Portugal net sales declined 40.6% for the year ended
December 31, 2009, as it continues to transition towards a
daily consumption model. We are beginning to see some
improvement
59
in Portugal as local currency net sales for the fourth quarter
of 2009 were down only 6.9% compared to the same period in 2008.
For the year ended December 31, 2009, new sales leaders for
the region decreased 19.9%. For the year ended December 31,
2009, the most significant decreases occurred in Spain,
Portugal, France, and the Commonwealth of Independent States of
Russia, or CIS countries, of 53.0%, 65.7%, 38.7% and 33.6%,
respectively. These declines were partially offset by increases
in Italy, Czech Republic, and Turkey where new sales leaders
increased 5.1%, 57.1%, and 12.5%, respectively. Total sales
leaders in the region decreased 12.5% as of December 31,
2009 compared to December 31, 2008.
In July 2009, EMEA held three regional Extravaganzas in Russia,
Italy, and the Czech Republic with approximate attendance of
2,400, 7,600, and 7,800, respectively. In October 2009, South
Africa held an Extravaganza with approximately 1,200 attendees.
We believe fiscal year 2010 net sales in EMEA should show
an increase year over year due primarily to higher volume and
selected price increases.
Asia
Pacific
The Asia Pacific region, which excludes China, reported net
sales of $509.2 million for the year ended
December 31, 2009. Net sales increased $98.4 million,
or 24.0%, for the year ended December 31, 2009, as compared
to the same period in 2008. In local currency, net sales
increased 32.7% for the year ended December 31, 2009, as
compared to the same period in 2008. The fluctuation of foreign
currency rates had an unfavorable impact of $36.0 million
on net sales for the year ended December 31, 2009. The
increase in net sales in Asia Pacific for the year ended
December 31, 2009, was primarily attributable to net sales
increases in three of our largest markets in the region, Taiwan,
South Korea and Malaysia, partially offset by a decrease in
Japan. The increase in net sales in India, one of our emerging
markets, also contributed to the increase in net sales in the
region.
Net sales in Taiwan, our largest market in the region, increased
$36.1 million, or 28.0%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales increased 34.3% for the year ended
December 31, 2009, as compared to the same period in 2008.
Adoption of the Nutrition Club DMO, in the form of Commercial
Clubs, continues to be a positive catalyst for growth in this
country. The fluctuation of foreign currency rates had an
unfavorable impact on net sales of $8.1 million for the
year ended December 31, 2009, as compared to the same
period in 2008.
Net sales in South Korea, our second largest market in the
region, increased $41.7 million, or 56.9%, for the year
ended December 31, 2009, as compared to the same period in
2008. In local currency, net sales increased 77.2% for the year
ended December 31, 2009, as compared to the same period in
2008. The increase in local currency net sales for the year
ended December 31, 2009 was primarily driven by the
adoption of the Nutrition Club DMO, in the form of Commercial
Clubs along with the Premium Herbalife Opportunity Meeting. The
fluctuation of foreign currency rates had an unfavorable impact
on net sales of $14.8 million for the year ended
December 31, 2009, as compared to the same period in 2008.
Net sales in Japan, our third largest market in the region,
decreased $9.7 million, or 14.5%, for the year ended
December 31, 2009, as compared to the same period in 2008.
In local currency, net sales decreased 10.6% for the year ended
December 31, 2009, as compared to the same period in 2008.
The decrease in local currency net sales for the year ended
December 31, 2009, was driven by a continuing decline in
distributor recruiting. The fluctuation of foreign currency
rates had an unfavorable impact on net sales of
$2.6 million for the year ended December 31, 2009, as
compared to the same period in 2008.
Net sales in Malaysia, our fourth largest market in the region,
increased $12.0 million, or 30.8%, for the year ended
December 31, 2009, as compared to the same period in 2008,
reflecting the continued success of the Road Show DMO, which has
generated positive distributor momentum and increased
recruiting. In local currency, net sales increased 39.2% for the
year ended December 31, 2009, as compared to the same
period in 2008. The fluctuation of foreign currency rates had an
unfavorable impact on net sales of $3.3 million for the
year ended December 31, 2009, as compared to the same
period in 2008.
60
Net sales in India increased $12.8 million, or 97.7%, for
the year ended December 31, 2009, as compared to the same
period in 2008. In local currency, net sales increased 117.8%
for the year ended December 31, 2009, as compared to the
same period in 2008. The increase in local currency net sales
for the year ended December 31, 2009, was driven by the
adoption of the Nutrition Club DMO. The number of clubs at
December 31, 2009 was 555 compared to 100 at
December 31, 2008. The fluctuation of foreign currency
rates had an unfavorable impact on net sales of
$2.6 million for the year ended December 31, 2009, as
compared to the same period in 2008.
In June, Korea hosted a regional Extravaganza with approximately
13,800 attendees. In September, Taiwan hosted an Asia-Pacific
regional University with attendance of approximately 11,000
distributors.
New sales leaders in the region increased 26.9% for the year
ended December 31, 2009, as compared to the same period in
2008. New sales leaders for India, Korea and Taiwan increased
112.4%, 71.8% and 19.8%, respectively, for the year ended
December 31, 2009 compared to the same period in 2008.
These increases were offset by declines in Japan and Philippines
of 57.0% and 10.5%, respectively, for the year ended
December 31, 2009 compared to the same period in 2008.
Total sales leaders in the region increased 15.0% as of
December 31, 2009 compared to December 31, 2008.
We believe the fiscal year 2010 net sales in Asia Pacific
should increase year over year due primarily to higher volume in
existing markets as well as the full year impact of Vietnam
(which was opened during the fourth quarter of 2009).
China
Net sales in China were $152.3 million for the year ended
December 31, 2009. Net sales increased $7.3 million,
or 5.0%, for the year ended December 31, 2009, as compared
to the same period in 2008. In local currency, net sales
increased 3.6% for the year ended December 31, 2009, as
compared to the same period in 2008. The fluctuation of foreign
currency rates had a favorable impact of $2.1 million on
net sales for the year ended December 31, 2009.
The current focus in China is to expand the Nutrition Club DMO
to enhance the retail focus and thereby increase the emphasis on
daily consumption methods of operation. As experienced in other
markets, such as Brazil, which have gone through a similar
transition, China has been experiencing a slow-down in sales
growth as service providers begin to build their nutrition club
business. We believe that the nutrition club concept is starting
to gain traction as witnessed by the growth in clubs over the
past year. While we believe the nutrition club DMO has
tremendous potential to expand throughout China and achieve
success similar to Taiwan and South Korea, we also realize that
the process is still in its early development stage and will
most likely build gradually over the next few years.
In early July 2009, Chinas Ministry of Commerce granted
five additional licenses for us to conduct direct-selling
business in the provinces of Fujian, ShanXi, Sichuan,
Hubei, and Shanghai. All licenses became effective immediately,
except Shanghai, which will be activated after we open our
service outlets. Additionally, our license for Beijing, which
was granted in July 2008 with the same condition as noted above
for Shanghai, is now active. We received our first
direct-selling license in China in March 2007 for the cities of
Suzhou and Nanjing in the Jiangsu province. An additional
license was granted in July of the same year to conduct business
throughout the entire Jiangsu province. In July 2008, we
received five additional licenses for the provinces of Beijing,
Guangdong, Shandong, Zhejiang and Guizhou. The 11 provinces in
which we now have direct-selling licenses represent an
addressable population of approximately 599 million. As of
December 31, 2009, we are operating 75 retail stores in 30
provinces in China.
New sales employees in China decreased 12.4% for the year ended
December 31, 2009, as compared to the same period in 2008.
Total sales employees in China increased 2.7% as of
December 31, 2009 compared to December 31, 2008.
We believe the fiscal year 2010 net sales in China should
increase year over year, primarily as a result of higher volume
due to continued adoption and expansion of nutrition clubs.
61
Sales by
Product Category
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Year Ended December 31,
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2009
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|
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2008
|
|
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|
|
|
|
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|
|
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Handling &
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Handling &
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% Change
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Retail
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|
Distributor
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Product
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|
|
Freight
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|
|
Net
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Retail
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|
|
Distributor
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Product
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Freight
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|
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Net
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in Net
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|
Sales
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Allowance
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|
Sales
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Income
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|
|
Sales
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Sales
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Allowance
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Sales
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Income
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Sales
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|
Sales
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|
|
|
(Dollars in millions)
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|
|
Weight Management
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|
$
|
2,392.2
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|
|
$
|
(1,142.0
|
)
|
|
$
|
1,250.2
|
|
|
$
|
214.6
|
|
|
$
|
1,464.8
|
|
|
$
|
2,469.9
|
|
|
$
|
(1,196.8
|
)
|
|
$
|
1,273.1
|
|
|
$
|
211.9
|
|
|
$
|
1,485.0
|
|
|
|
(1.4
|
)%
|
Targeted Nutrition
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|
|
806.3
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|
|
|
(384.9
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)
|
|
|
421.4
|
|
|
|
72.3
|
|
|
|
493.7
|
|
|
|
818.0
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|
|
|
(396.4
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)
|
|
|
421.6
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|
|
|
70.2
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|
|
|
491.8
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|
|
|
0.4
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%
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Energy, Sports and Fitness
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|
|
161.2
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|
|
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(77.0
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)
|
|
|
84.2
|
|
|
|
14.5
|
|
|
|
98.7
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|
|
|
165.6
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|
|
|
(80.2
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)
|
|
|
85.4
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|
|
|
14.2
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|
|
|
99.6
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|
|
|
(0.9
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)%
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Outer Nutrition
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|
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209.6
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|
|
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(100.1
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)
|
|
|
109.5
|
|
|
|
18.8
|
|
|
|
128.3
|
|
|
|
243.8
|
|
|
|
(118.1
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)
|
|
|
125.7
|
|
|
|
20.9
|
|
|
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146.6
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|
|
|
(12.5
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)%
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Literature, Promotional and Other
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|
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120.8
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7.5
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|
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|
128.3
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|
|
|
10.8
|
|
|
|
139.1
|
|
|
|
113.9
|
|
|
|
12.6
|
|
|
|
126.5
|
|
|
|
9.7
|
|
|
|
136.2
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
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|
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|
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|
|
Total
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|
$
|
3,690.1
|
|
|
$
|
(1,696.5
|
)
|
|
$
|
1,993.6
|
|
|
$
|
331.0
|
|
|
$
|
2,324.6
|
|
|
$
|
3,811.2
|
|
|
$
|
(1,778.9
|
)
|
|
$
|
2,032.3
|
|
|
$
|
326.9
|
|
|
$
|
2,359.2
|
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Net sales for Weight Management, Energy, Sports and Fitness and
Outer Nutrition products decreased for the year ended
December 31, 2009, as compared to the same period in 2008,
partially offset by an increase in Targeted Nutrition and
Literature, Promotional and Other product category for the year
ended December 31, 2009, as compared to the same period in
2008, mainly due to the factors described in the above
discussions of the individual geographic regions. In addition,
net sales for Outer Nutrition decreased in part due to the
distributor focus on DMOs that are centered towards Weight
Management products.
Gross
Profit
Gross profit was $1,831.4 million for the year ended
December 31, 2009, as compared to $1,900.8 million for
the same period in 2008. As a percentage of net sales, gross
profit for the year ended December 31, 2009 decreased to
78.8%, as compared to 80.6% for the same period in 2008. The
decrease was primarily due to the unfavorable impact from
currency fluctuations, changes in country mix, and the
unfavorable impact during 2009 of recognizing $18.8 million
incremental U.S. dollar cost of imports into Venezuela at
the unfavorable parallel market exchange rate rather than the
official currency exchange rate. Our gross profit is expected to
continue to be negatively impacted in future periods as our
Bolivar net sales will be remeasured to U.S. dollars at the
less favorable parallel market exchange rate under highly
inflationary accounting rules, based on the Companys
current specific facts and circumstances. See Liquidity and
Capital Resources Working Capital and Operating
Activities in this section for further discussion on
currency exchange rate issues in Venezuela. We believe that we
have the ability to partially mitigate certain of these cost
pressures through improved optimization of our supply chain
coupled with select increases in the retail prices of our
products.
Royalty
Overrides
Royalty overrides as a percentage of net sales was 32.8% for the
year ended December 31, 2009, as compared to 33.8% for the
same period in 2008. The decrease for the year ended
December 31, 2009, was primarily due to changes in country
mix and the increase in net sales in China where compensation to
our full-time sales employees and licensed business providers is
included in selling, general and administrative expenses as
opposed to royalty overrides where it is included for all other
distributors under our worldwide marketing plan. Generally, this
ratio varies slightly from period to period due to changes in
the mix of products and countries because full royalty overrides
are not paid on certain products and in certain countries. We
anticipate fluctuations in royalty overrides as a percent of net
sales reflecting the growth prospect of our China business
relative to that of our worldwide business.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
net sales was 33.3% for the year ended December 31, 2009,
as compared to 32.7% for the same period in 2008.
For the year ended December 31, 2009, selling, general and
administrative expenses increased $2.1 million to
$773.9 million compared to the same period in 2008. The
increase for the year ended December 31, 2009 included
$7.6 million in higher salaries and benefits, primarily
related to China sales employees and licensed business
62
providers; and $13.8 million in higher depreciation and
amortization expenses, related to the development of our
technology infrastructure and the expansion and relocation of
certain operations to new facilities. These increases were
offset by $6.9 million in lower professional fees;
$5.5 million in lower advertising, promotion costs and
distributor sales events primarily reflecting currency
fluctuations and location of events; $2.6 million in lower
bad debt expense; $2.6 million in lower litigation costs;
and $1.4 million in lower occupancy costs.
We expect 2010 selling, general and administrative expenses to
increase in absolute dollars over 2009 levels reflecting higher
China sales employee costs, increased depreciation, primarily
related to our global Oracle implementation, and various sales
growth initiatives, including distributor promotions. As a
result of these factors, selling, general and administrative
expenses as a percentage of net sales are expected to be above
2009 levels. Excluding China sales employee costs, we expect
selling, general and administrative expenses as a percentage of
net sales to be approximately equal to 2009 levels.
Net
Interest Expense
Net interest expense is as follows:
|
|
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|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net Interest Expense
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Interest expense
|
|
|
9.6
|
|
|
|
20.1
|
|
Interest income
|
|
|
(4.5
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
Total Net Interest Expense
|
|
$
|
5.1
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
The decrease in interest expense for the year ended
December 31, 2009 as compared to the same period in 2008
was primarily due to lower interest rates and lower average debt
balance in 2009 as compared to 2008. See Liquidity and
Capital Resources in this section for further
discussion on our senior secured credit facility.
Income
Taxes
Income taxes were $87.6 million for the year ended
December 31, 2009, as compared to $97.8 for the same period
in 2008. As a percentage of pre-tax income, the effective income
tax rate was 30.1% for the year ended December 31, 2009, as
compared to 30.7% for the same period in 2008. The decrease in
the effective tax rate for the year ended December 31,
2009, as compared to the same period in 2008, was primarily due
to a change in the operating effective rate reflecting changes
in the country mix, and a non-cash benefit of $4.9 million
due to the expiration of certain statute of limitations,
partially offset by a charge for an international income tax
audit settlement of $1.1 million.
Restructuring
Costs
As part of our restructurings, we recorded $1.3 million and
$6.7 million of professional fees, severance and related
costs for the year ended December 31, 2009 and 2008,
respectively. All such amounts were included in selling, general
and administrative expenses.
Year
ended December 31, 2008 compared to year ended
December 31, 2007
The discussion below for the years ended December 31, 2008
and 2007 have been revised from how it was previously disclosed
to conform it to the December 31, 2009 presentation in
connection with the restructuring of our geographic regions
during the first quarter of 2009, in which we designated Mexico
as a separate region and combined South America and Central
America into one region.
63
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
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|
Year Ended December 31,
|
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2008
|
|
|
2007
|
|
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Handling &
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Handling &
|
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Change
|
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|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Freight
|
|
|
Net
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Freight
|
|
|
Net
|
|
|
in Net
|
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Income
|
|
|
Sales
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Income
|
|
|
Sales
|
|
|
Sales
|
|
|
|
(Dollars in millions)
|
|
|
North America
|
|
$
|
795.3
|
|
|
$
|
(379.2
|
)
|
|
$
|
416.1
|
|
|
$
|
80.8
|
|
|
$
|
496.9
|
|
|
$
|
708.8
|
|
|
$
|
(338.3
|
)
|
|
$
|
370.5
|
|
|
$
|
68.2
|
|
|
$
|
438.7
|
|
|
|
13.3
|
%
|
Mexico
|
|
|
584.3
|
|
|
|
(284.8
|
)
|
|
|
299.5
|
|
|
|
52.7
|
|
|
|
352.2
|
|
|
|
623.9
|
|
|
|
(303.8
|
)
|
|
|
320.1
|
|
|
|
50.7
|
|
|
|
370.8
|
|
|
|
(5.0
|
)%
|
South & Central America
|
|
|
665.9
|
|
|
|
(332.9
|
)
|
|
|
333.0
|
|
|
|
50.6
|
|
|
|
383.6
|
|
|
|
546.6
|
|
|
|
(271.3
|
)
|
|
|
275.3
|
|
|
|
38.6
|
|
|
|
313.9
|
|
|
|
22.2
|
%
|
EMEA
|
|
|
927.7
|
|
|
|
(449.1
|
)
|
|
|
478.6
|
|
|
|
92.1
|
|
|
|
570.7
|
|
|
|
924.0
|
|
|
|
(445.5
|
)
|
|
|
478.5
|
|
|
|
89.2
|
|
|
|
567.7
|
|
|
|
0.5
|
%
|
Asia Pacific
|
|
|
678.1
|
|
|
|
(318.0
|
)
|
|
|
360.1
|
|
|
|
50.7
|
|
|
|
410.8
|
|
|
|
625.1
|
|
|
|
(293.1
|
)
|
|
|
332.0
|
|
|
|
46.7
|
|
|
|
378.7
|
|
|
|
8.5
|
%
|
China
|
|
|
159.9
|
|
|
|
(14.9
|
)
|
|
|
145.0
|
|
|
|
|
|
|
|
145.0
|
|
|
|
82.6
|
|
|
|
(6.6
|
)
|
|
|
76.0
|
|
|
|
|
|
|
|
76.0
|
|
|
|
90.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
3,811.2
|
|
|
$
|
(1,778.9
|
)
|
|
$
|
2,032.3
|
|
|
$
|
326.9
|
|
|
$
|
2,359.2
|
|
|
$
|
3,511.0
|
|
|
$
|
(1,658.6
|
)
|
|
$
|
1,852.4
|
|
|
$
|
293.4
|
|
|
$
|
2,145.8
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
The North America region reported net sales of
$496.9 million for the year ended December 31, 2008.
Net sales increased $58.2 million, or 13.3%, for the year
ended December 31, 2008, as compared to 2007. In local
currency, net sales increased by 13.2% for the year ended
December 31, 2008, as compared to 2007. The overall
increase was a result of net sales growth in the U.S. of
$58.6 million, or 14.0%, for the year ended
December 31, 2008, as compared to 2007.
The increase in net sales in North America was primarily due to
the continued success of our distributors converting their
business focus toward a daily consumption business model,
especially the Nutrition Club DMO, and its extension into
Commercial Clubs and Central Clubs, along with the recent
development of the Weight Loss Challenge DMO. In terms of
volume, the mix of business in the U.S. was 64% U.S. Latin
market and 36% General market for the year ended
December 31, 2008.
In October 2008, the region hosted an Extravaganza in Los
Angeles that was attended by over 13,000 distributors.
New sales leaders in the region increased 2.5% for the year
ended December 31, 2008, as compared to the same period in
2007. Total sales leaders in the region increased 10.1%. New
sales leader growth in the United States was 2.9% for the year
ended December 31, 2008, as compared to the same period in
2007.
Mexico
The Mexico region reported net sales of $352.2 million for
the year ended December 31, 2008. Net sales for the year
ended December 31, 2008 decreased $18.6 million, or
5.0%, as compared to 2007. In local currency, net sales for the
year ended December 31, 2008 decreased by 4.7%, as compared
to 2007. The fluctuation of foreign currency rates had an
unfavorable impact of $1.1 million on net sales for the
year ended December 31, 2008.
During the third quarter of 2008 we began collecting a Value
Added Tax, or VAT, from our distributors that has been levied by
the Mexican government on the import and resale of certain
products. Distributors previously paid 0% VAT on purchases of
most of our products. This VAT increase impacted approximately
58% of our volume in the Mexican market and because the
predominant DMO in Mexico is retail price-sensitive it has
caused our volumes to decline.
New sales leaders in Mexico decreased 20.7% for the year ended
December 31, 2008, as compared to the same period in 2007.
Total sales leader growth in the region decreased 10.7%.
In July 2008, the region hosted an Extravaganza in Mexico City
that was attended by over 15,000 distributors.
64
South
and Central America
The South and Central America region reported net sales of
$383.6 million for the year ended December 31, 2008.
Net sales increased $69.7 million or 22.2% for the year
ended December 31, 2008, as compared to 2007. In local
currency, net sales increased 18.1% for the year ended
December 31, 2008, as compared to the same period in 2007.
The fluctuation of foreign currency rates had a
$12.9 million favorable impact on net sales for the year
ended December 31, 2008. The increase in net sales in the
region was attributable to net sales increases in Venezuela,
Peru and Brazil, and partially offset by a decline in Argentina.
In Brazil, the regions largest market, net sales increased
$18.8 million, or 14.1%, for the year ended
December 31, 2008, as compared to the same period in 2007.
The increase in net sales was a result of successfully
transforming this market into a more balanced mix of recruiting,
retailing and retention via the Nutrition Club DMO. In addition,
the timing of the 2008 Extravaganza, which was held in July 2008
versus December 2007, created positive distributor momentum.
Favorable foreign currency fluctuations of $9.0 million
also contributed to the increase in net sales for the year ended
December 31, 2008.
Venezuela, the regions second largest market, experienced
net sales increase of $27.7 million or 53.2%, for the year
ended December 31, 2008 as compared to the same period in
2007; however, volumes slowed in the second half of the year as
a result of price increases of 20% and 25% in January and May
2008, respectively.
In addition to the Extravaganza held in Brazil, in February
2008, the South and Central America region also hosted
Extravaganza events in Argentina and Venezuela with over 20,000
distributors in attendance.
New sales leaders in the region decreased 4.1% for the year
ended December 31, 2008, as compared to the same period in
2007. For the year ended December 31, 2008, the decrease
was driven by declines in Argentina, Colombia and Brazil of
46.8%, 25.2% and 7.4%, respectively, as compared to the same
period in 2007. These declines were offset by increases in new
sales leader growth in Bolivia and Peru which increased 52.1%
and 23.3%, respectively, for the year ended December 31,
2008 as compared to the same period in 2007. Total sales leader
growth in the region increased 15.2%.
EMEA
The EMEA region reported net sales of $570.7 million for
the year ended December 31, 2008. Net sales increased
$3.0 million, or 0.5%, for the year ended December 31,
2008, as compared to 2007. In local currency, net sales
decreased 4.9% for the year ended December 31, 2008, as
compared to 2007. The fluctuation of foreign currency rates had
a favorable impact on net sales of $30.7 million for the
year ended December 31, 2008.
Among the largest markets in the region, Italy and France
reported net sales increases of 18.6% and 15.0%, respectively,
while Spain reported a net sales decrease of 14.0%, in each case
for the year ended December 31, 2008, as compared to the
same period in 2007. The increase in net sales for Italy and
France was driven by growth in Total Plan, Wellness Evaluations
and Healthy Breakfast DMOs. The decrease in net sales for Spain
reflects the impact of negative media reports in April 2008
relating to the Spanish Ministry of Health issuing a press
release regarding their on-going inquiry into the products that
we sell in Spain. Net sales increased in Russia by 37.9% for the
year ended December 31, 2008, as compared to the same
period in 2007 primarily driven by adoption of the Nutrition
Club concept in the form of a Breakfast Club DMO. Net sales in
the Netherlands increased 2.4% for the year ended
December 31, 2008, as compared to the same period in 2007
and reflect a re-activated distributor base that is utilizing
the Wellness Evaluation and Healthy Breakfast DMOs. These
increases were offset by declines in Germany and Portugal.
Germany net sales declined 22.0% for the year ended
December 31, 2008, as compared to the same period in 2007,
as it transitions to daily consumption models including
Nutrition Clubs and Wellness Evaluations. Portugal net sales
declined 47.7% for the year ended December 31, 2008, as
compared to the same period in 2007, due to weaker recruiting
efforts as this market, similar to Brazil in 2006, transitions
toward daily consumption methods.
For the year ended December 31, 2008, new sales leaders for
the region decreased 14.8%, with declines in Portugal, Germany
and Spain of 69.3%, 49.8% and 29.9%, respectively. These
declines were offset by increases in Russia, France and Italy,
where new sales leaders increased 43.9%, 14.7% and 13.4%,
respectively, for the year ended December 31, 2008. Total
sales leader growth in the region decreased 10.6%.
65
In June 2008, the EMEA region hosted an Extravaganza event in
Barcelona that had over 16,000 distributors in attendance.
Asia
Pacific
The Asia Pacific region, which excludes China, reported net
sales of $410.8 million for the year ended
December 31, 2008. Net sales increased $32.1 million,
or 8.5%, for the year ended December 31, 2008, as compared
to the same period in 2007. In local currency, net sales
increased 9.1% for the year ended December 31, 2008, as
compared to same period in 2007. The fluctuation of foreign
currency rates had an unfavorable impact of $2.3 million on
net sales for the year ended December 31, 2008. The
increase in net sales in Asia Pacific was primarily attributable
to increases in three of our largest markets in the region,
Taiwan, South Korea and Malaysia, partially offset by a decrease
in Japan.
Net sales in Taiwan, our largest market in the region, increased
$18.0 million, or 16.2%, for the year ended
December 31, 2008, as compared to the same period in 2007.
Adoption of the Nutrition Club DMO, in the form of Commercial
Clubs, has been a positive catalyst for growth in this country.
Net sales in South Korea, our second largest market in the
region, increased $7.5 million, or 11.5%, for the year
ended December 31, 2008 as compared to the same period in
2007, driven by branding activities and the adoption of the
Nutrition Club DMO, in the form of Commercial Clubs.
Net sales in Japan, our third largest market in the region,
decreased $7.7 million, or 10.3%, for the year ended
December 31, 2008, as compared to the same period in 2007,
driven by a decline in distributor recruiting.
Net sales in Malaysia, our fourth largest market in the region,
increased $15.9 million, or 68.9%, for the year ended
December 31, 2008, as compared to the same period in 2007,
reflecting positive distributor momentum and increased
recruiting.
In March 2008, Herbalife hosted its annual global Herbalife
Honors event in Singapore, where President Team members from
around the world met and shared best practices and Herbalife
management awarded the Mark Hughes bonus to certain
distributors. In addition, in July 2008, we hosted a regional
Extravaganza in Bangkok with attendance of approximately 18,000
distributors.
New sales leaders in the region increased 1.8% for the year
ended December 31, 2008, as compared to the same period in
2007. New sales leaders for Malaysia, Korea and Taiwan increased
55.6%, 28.5% and 8.0%, respectively, for the year ended
December 31, 2008. These increases were offset by declines
in Japan and Thailand of 42.7% and 30.9%, respectively, for the
year ended December 31, 2008. Total sales leader growth in
the region increased 1.5%.
China
Net sales in China were $145.0 million for the year ended
December 31, 2008. Net sales increased $69.0 million,
or 90.8%, for year ended December 31, 2008, compared to the
same period in 2007. In local currency, net sales increased
74.3% for the year ended December 31, 2008, as compared to
same period in 2007. The fluctuation of foreign currency rates
had a favorable impact of $12.6 million on net sales for
the year ended December 31, 2008.
As of December 31, 2008, we had 84 stores in China across
30 provinces. Additionally, during the third quarter of 2008 we
received approval for five additional direct selling licenses in
the provinces of Beijing, Guangdong, Shandong, Zhejiang
(excluding Ningbo) and Guizhou. In Beijing, our direct selling
license will permit us to sell away from fixed retail locations
once our Beijing outlet is inspected and confirmed by the
relevant authority.
New sales employees in China increased 70.9% for the year ended
December 31, 2008, as compared to the same period in 2007.
Total sales employees in China increased 116.4%.
66
Sales by
Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Handling &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Handling &
|
|
|
|
|
|
% Change
|
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Freight
|
|
|
Net
|
|
|
Retail
|
|
|
Distributor
|
|
|
Product
|
|
|
Freight
|
|
|
Net
|
|
|
in Net
|
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Income
|
|
|
Sales
|
|
|
Sales
|
|
|
Allowance
|
|
|
Sales
|
|
|
Income
|
|
|
Sales
|
|
|
Sales
|
|
|
|
(Dollars in millions)
|
|
|
Weight Management
|
|
$
|
2,469.9
|
|
|
$
|
(1,196.8
|
)
|
|
$
|
1,273.1
|
|
|
$
|
211.9
|
|
|
$
|
1,485.0
|
|
|
$
|
2,292.2
|
|
|
$
|
(1,124.3
|
)
|
|
$
|
1,167.9
|
|
|
$
|
191.5
|
|
|
$
|
1,359.4
|
|
|
|
9.2
|
%
|
Targeted Nutrition
|
|
|
818.0
|
|
|
|
(396.4
|
)
|
|
|
421.6
|
|
|
|
70.2
|
|
|
|
491.8
|
|
|
|
730.7
|
|
|
|
(358.4
|
)
|
|
|
372.3
|
|
|
|
61.1
|
|
|
|
433.4
|
|
|
|
13.5
|
%
|
Energy, Sports and Fitness
|
|
|
165.6
|
|
|
|
(80.2
|
)
|
|
|
85.4
|
|
|
|
14.2
|
|
|
|
99.6
|
|
|
|
152.2
|
|
|
|
(74.6
|
)
|
|
|
77.6
|
|
|
|
12.7
|
|
|
|
90.3
|
|
|
|
10.3
|
%
|
Outer Nutrition
|
|
|
243.8
|
|
|
|
(118.1
|
)
|
|
|
125.7
|
|
|
|
20.9
|
|
|
|
146.6
|
|
|
|
243.2
|
|
|
|
(119.3
|
)
|
|
|
123.9
|
|
|
|
20.3
|
|
|
|
144.2
|
|
|
|
1.7
|
%
|
Literature, Promotional and Other
|
|
|
113.9
|
|
|
|
12.6
|
|
|
|
126.5
|
|
|
|
9.7
|
|
|
|
136.2
|
|
|
|
92.7
|
|
|
|
18.0
|
|
|
|
110.7
|
|
|
|
7.8
|
|
|
|
118.5
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,811.2
|
|
|
$
|
(1,778.9
|
)
|
|
$
|
2,032.3
|
|
|
$
|
326.9
|
|
|
$
|
2,359.2
|
|
|
$
|
3,511.0
|
|
|
$
|
(1,658.6
|
)
|
|
$
|
1,852.4
|
|
|
$
|
293.4
|
|
|
$
|
2,145.8
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales of all product categories increased for the year ended
December 31, 2008, as compared to the same period in 2007,
mainly due to the sales momentum discussed above.
Gross
Profit
Gross profit was $1,900.8 million for the year ended
December 31, 2008, as compared to $1,707.5 million in
2007. As a percentage of net sales, gross profit for the year
ended December 31, 2008 increased slightly to 80.6% as
compared to 79.6% for the same period in 2007. The increase in
gross profit percentage was primarily due to country mix and
foreign exchange fluctuations. Generally, gross profit
percentages do not vary significantly as a percentage of net
sales. We experienced ingredient and product price pressure in
the areas of soy, dairy products, plastics, and transportation
reflecting then current global economic trends.
Royalty
Overrides
Royalty overrides as a percentage of net sales was 33.8% for the
year ended December 31, 2008, as compared to 35.4% in the
same period in 2007. The decrease for the year ended
December 31, 2008 was primarily due to the increase in net
sales in China where compensation to our full-time sales
employees is included in selling, general and administrative
expenses as opposed to royalty overrides where it is included
for all other distributors under our worldwide marking plan.
Generally, this ratio varies slightly from period to period due
to changes in the mix of products and countries because full
royalty overrides are not paid on certain products and in
certain countries.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
net sales was 32.7% for the year ended December 31, 2008,
as compared to 29.6% for the same period in 2007.
For the year ended December 31, 2008, selling, general and
administrative expenses increased $137.6 million to
$771.8 million from $634.2 million in 2007. The
increase for the year ended December 31, 2008 included
$64.3 million in higher salaries and benefits due primarily
to normal merit increases, higher stock based compensation
expenses, unfavorable impact of foreign currency fluctuations,
coupled with severance related to our restructuring (as
discussed in Note 13, Restructuring Reserve, in the
Notes to our consolidated financial statements), and higher
compensation costs associated with full-time sales employees in
China, $14.1 million in higher distributor sales events
costs, $13.6 million in higher depreciation and
amortization expenses, related mostly to the development of our
technology infrastructure and the expansion and relocation to
new facilities, $11.2 million in higher advertising and
promotion expenses, $3.4 million in higher credit card fees
due to the increase in sales, and $3.2 million in higher
professional fees. These increases were partially offset by
lower foreign currency exchange losses of $6.7 million as
compared to 2007.
67
Net
Interest Expense
Net interest expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net Interest Expense
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Interest expense
|
|
|
20.1
|
|
|
|
16.4
|
|
Interest income
|
|
|
(6.9
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
Total Net Interest Expense
|
|
$
|
13.2
|
|
|
$
|
10.6
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense for the year ended
December 31, 2008 as compared to the same period in 2007
was primarily due to the higher average balance of long term
borrowings, partially offset by lower interest rates, in 2008 as
compared to 2007.
Income
Taxes
Income taxes were $97.8 million for the year ended
December 31, 2008, as compared to $111.1 million in
2007. As a percentage of pre-tax income, the effective income
tax rate was 30.7% for the year ended December 31, 2008, as
compared to 36.7% in 2007. The decrease in the effective tax
rate for the year ended December 31, 2008, as compared to
the same period in 2007, was primarily due to a decrease in the
operating effective tax rate reflecting country mix, the tax
holiday in China and the favorable impact of our global entity
structuring and planning offset by an increase in unrecognized
tax benefits during the year ended December 31, 2008 and a
valuation allowance on deferred tax asset for deferred interest.
Restructuring
Costs
In July 2006, we initiated the realignment of our employee base
as part of the first phase of the Realignment for Growth plan.
During the fourth quarter of 2007,we initiated the second phase
of the Realignment for Growth plan. During the fourth quarter of
2008, we initiated a new restructuring program. As part of the
restructurings, we recorded $6.7 million and
$5.8 million of professional fees, severance and related
costs for the year ended December 31, 2008 and 2007,
respectively. All such amounts were included in selling, general
and administrative expenses.
Net
Income
Net income for the year ended December 31, 2008 increased
15.5% to $221.2 million, or $3.36 per diluted share,
compared to $191.5 million, or $2.63 per diluted share, for
the same period in 2007. The increase was driven by revenue
growth in many of our markets and a lower effective tax rate,
partially offset by higher labor costs, sales events costs,
advertising and promotion expenses and depreciation expense.
Net income for the year ended December 31, 2008 included a
$4.8 million unfavorable after tax impact related to
restructuring costs and a $6.1 million valuation allowance
on deferred tax asset for deferred interest. Net income for the
year ended December 31, 2007 included an unfavorable after
tax impact of $3.8 million from the completion of the first
phase and start of the second phase of our Realignment for
Growth plan, an increase in tax reserves of $3.6 million
and a $2.1 million net tax benefit resulting from various
international tax settlements.
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 our operating
cash flows. Variations in sales of our products would directly
affect the availability of funds. There are no material
contractual restrictions on the ability to transfer and remit
funds among our international affiliated companies. We are
closely monitoring various aspects of the current worldwide
financial crisis and we do not believe that there has been or
will be a material impact on our liquidity from this crisis. As
noted above, we have historically met our funding needs
utilizing cash flow from operating activities and we believe we
will have
68
sufficient resources to meet debt service obligations in a
timely manner. Our existing debt has not resulted from the need
to fund our normal operations, but instead has effectively
resulted from our share repurchase and dividend activities over
the recent years, which together, since the inception of the
original share repurchases and dividends program that was first
initiated during 2007, amounted to approximately
$716.9 million. Our use of the credit facility for only
these purposes and not for general working capital and capital
expenditure needs has limited the impact that the current
worldwide credit crisis has on us. While a significant net sales
decline could potentially affect the availability of funds, many
of our largest expenses are purely variable in nature, which
could protect our funding in all but a dramatic net sales
downturn. Further we maintain a revolving credit facility which
had $159.0 million of undrawn capacity as of
December 31, 2009, and is comprised of banks who are
continuing to support the facility through the recent worldwide
financial crisis.
For the year ended December 31, 2009, we generated
$285.1 million of operating cash flow, as compared to
$273.0 million for the same period in 2008. The increase in
cash generated from operations was primarily due to the increase
in non-cash items included in net income for the year ended
December 31, 2009, as compared to the same period in 2008,
lower interest payments due to lower average debt balance and
lower interest rates and the favorable change in operating
assets for the year ended December 31, 2009, compared to
the same period in 2008. This was partially offset by lower
operating income, higher income tax payments, and unfavorable
change in operating liabilities for the year ended
December 31, 2009, as compared to the same period in 2008.
Capital expenditures, including capital leases, for the year
ended December 31, 2009, were $60.1 million as
compared to $106.8 million for the same period in 2008. The
majority of these expenditures represented investments in
management information systems, primarily the global roll-out of
Oracle, the development of our distributor internet initiatives,
and the expansion of our domestic and international facilities.
The decrease from 2008 primarily reflects lower spending in 2009
as the Oracle roll-out project was completed during the third
quarter of 2009. We expect to incur total capital expenditures
of approximately $75.0 million for the full year of 2010.
We entered into a $300.0 million senior secured credit
facility, comprised of a $200.0 million term loan and a
revolving credit facility of $100.0 million, with a
syndicate of financial institutions as lenders in July 2006. In
September 2007, we amended our senior secured credit facility,
increasing the revolving credit facility by $150.0 million
to $250.0 million to fund the increase in our share
repurchase program discussed below. The term loan matures on
July 21, 2013 and the revolving credit facility is
available until July 21, 2012. The term loan bears interest
at LIBOR plus a margin of 1.5%, or the base rate, which
represents the prime rate offered by major U.S. banks, plus
a margin of 0.50%. The revolving credit facility bears interest
at LIBOR plus a margin of 1.25%, or the base rate, which
represents the prime rate offered by major U.S. banks, plus
a margin of 0.25%. The senior secured credit facility requires
us to comply with a leverage ratio and an interest coverage
ratio. In addition, the senior secured credit facility contains
customary covenants, including covenants that limit or restrict
our ability to incur liens, incur indebtedness, make
investments, dispose of assets, make certain restricted
payments, merge or consolidate and enter into certain
transactions with affiliates.
In March 2007, we made a prepayment of $29.5 million on our
term loan borrowings. During 2007, we borrowed an aggregate
amount of $293.7 million and paid $85.0 million of the
revolving credit facility. During 2008, we borrowed an aggregate
amount of $118.0 million and paid $149.0 million of
the revolving credit facility. During 2009, we borrowed an
aggregate amount of $212.0 million under the revolving
credit facility and paid $298.7 million of the revolving
credit facility. During the years ended December 31, 2009,
2008, and 2007, these borrowings were primarily related to our
share repurchases and dividends program as discussed further
below.
69
The following summarizes our contractual obligations including
interest at December 31, 2009, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods:
|
|
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|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
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Payments Due by Period
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|
|
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|
|
|
|
|
|
|
|
|
|
2015 &
|
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|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
(Dollars in millions)
|
|
|
Borrowings under the senior credit facility
|
|
$
|
249.0
|
|
|
$
|
5.5
|
|
|
$
|
5.5
|
|
|
$
|
95.8
|
|
|
$
|
142.2
|
|
|
$
|
|
|
|
$
|
|
|
Capital leases
|
|
|
5.2
|
|
|
|
2.0
|
|
|
|
1.7
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
158.6
|
|
|
|
35.8
|
|
|
|
26.4
|
|
|
|
21.5
|
|
|
|
19.4
|
|
|
|
17.8
|
|
|
|
37.7
|
|
Other
|
|
|
21.3
|
|
|
|
15.6
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
434.1
|
|
|
$
|
58.9
|
|
|
$
|
39.3
|
|
|
$
|
118.8
|
|
|
$
|
161.6
|
|
|
$
|
17.8
|
|
|
$
|
37.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance
Sheet Arrangements
At December 31, 2009 and December 31, 2008, we had no
material off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
Share
Repurchases
On April 18, 2007, our board of directors authorized the
repurchase of up to $300 million of our common shares
during the next two years, at such times and prices as
determined by our management, as market conditions warrant. On
August 23, 2007, our board of directors approved an
increase of $150 million, raising the total value of our
common shares authorized to be repurchased to $450 million.
On May 20, 2008, our board of directors approved an
additional increase of $150 million to our previously
authorized share repurchase program raising the total value of
common shares authorized to be repurchased to $600 million.
On April 17, 2009, our share repurchase program adopted on
April 18, 2007 expired pursuant to its terms. On
April 30, 2009, our board of directors authorized a new
program for us to repurchase up to $300 million of our
common shares during the next two years, at such times and
prices as determined by management, as market conditions
warrant. As of December 31, 2009, the approximate dollar
value of shares that could be repurchased under the new share
repurchase program was approximately $226.8 million.
During the year ended December 31, 2009, we repurchased
approximately 2.0 million of our common shares through open
market purchases at an aggregate cost of approximately
$73.2 million or an average cost of $36.60 per share.
During the year ended December 31, 2008, we repurchased
approximately 4.6 million of our common shares through open
market purchases at an aggregate cost of $137.0 million, or
an average cost of $29.60 per share. During the year ended
December 31, 2007, we repurchased approximately
9.1 million of our common shares through open market
purchases at an aggregate cost of $365.8 million or an
average cost of $40.42 per share.
The number of shares issued upon vesting or exercise for certain
restricted stock units and stock appreciation rights granted,
pursuant to the Companys share-based compensation plans,
is net of the statutory withholding requirements that the
Company pays on behalf of its employees. Although shares
withheld are not issued, they are treated as common share
repurchases for accounting purposes, as they reduce the number
of shares that would have been issued upon vesting.
Dividends
During the second quarter of 2007, our board of directors
adopted a regular quarterly cash dividend program. Since, the
adoption of the dividend program, our board of directors has
authorized $0.20 per common share dividend in each quarter. The
aggregate amount of dividends paid and declared during the year
ended December 31, 2009, 2008 and 2007 was approximately
$48.7 million, $50.7 million and $41.5 million,
respectively.
On February 19, 2010, our Board of Directors approved a
quarterly cash dividend of $0.20 per common share, for the
fourth quarter, to shareholders of record effective
March 2, 2010, payable on March 16, 2010.
70
Working
Capital and Operating Activities
As of December 31, 2009 and 2008, we had positive working
capital of $83.5 million and $82.9 million,
respectively. Cash and cash equivalents were $150.8 million
at December 31, 2009 and 2008.
We expect that cash and funds provided from operations and
available borrowings under our revolving credit facility will
provide sufficient working capital to operate our business, to
make expected capital expenditures and to meet foreseeable
liquidity requirements, including debt service on our term loan
and amounts outstanding under our revolving credit facility, for
the next twelve months.
The majority of our purchases from suppliers are generally made
in U.S. dollars, while sales to our distributors generally
are made in local currencies. Consequently, strengthening of the
U.S. dollar versus a foreign currency can have a negative
impact on net sales and operating margins and can generate
transaction losses on intercompany transactions. For discussion
of our foreign exchange contracts and other hedging
arrangements, see Part II, Item 7A
Quantitative and Qualitative Disclosures about Market
Risks.
Venezuelas
Currency Restrictions
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of our subsidiary in Venezuela, Herbalife Venezuela, to obtain
U.S. dollars at the official foreign exchange rate. The
application and approval processes have been intermittently
delayed in recent periods, and the timing and ability to obtain
U.S. dollars at the official exchange rate remains
uncertain. In certain instances, we have made appropriate
applications through the Venezuelan government and its Foreign
Exchange Commission, CADIVI, for approval to obtain
U.S. dollars to pay for imported products and an annual
dividend at the official exchange rate, which represents the
exchange rate we expect to settle these CADIVI registered
balances. Therefore, these CADIVI registered balances were
recorded and remeasured at the official exchange rate at
December 31, 2009. In other instances, in order to timely
provide products to our distributors, we did not register
certain shipments with CADIVI, or non-CADIVI registered, and
instead used a legal parallel market mechanism for payment. If
CADIVI does not approve further exchanges at the official
exchange rate, Herbalife Venezuela could continue to use a legal
parallel exchange process to exchange U.S. dollars in
addition to going through CADIVI to obtain the official rate.
The parallel exchange rate was approximately 63% less favorable
than the official exchange rate as of December 31, 2009 and
could further deteriorate in future periods which would have a
negative impact to our earnings if we are unable to access the
official rate.
During the fourth quarter of 2009, due to the currency
restrictions in obtaining U.S. dollars at the official
currency exchange rate and in order to mitigate our currency
exchange risk in Venezuela, Herbalife Venezuela entered into a
series of parallel market transactions and exchanged
105.0 million Bolivars for approximately $19.5 million
U.S. dollars at an average rate of approximately 5.4
Bolivars per U.S. dollar. Also, during the fourth quarter
of 2009, Herbalife Venezuela settled $13.6 million of its
U.S. dollar denominated non-CADIVI registered intercompany
shipment payables that were initially recorded and then
subsequently remeasured at the parallel market exchange rate.
Therefore, the settlement of these intercompany shipment
payables did not result in any net foreign exchange gains or
losses recorded in our consolidated statement of income. The
incremental costs relating to these intercompany shipments are
included in cost of sales in our consolidated statements of
income as these inventories are sold in current and future
periods. Incremental costs of $18.8 million were recorded
in cost of sales in our consolidated statement of income during
fiscal year 2009, and approximately $12.7 million
incremental costs are expected to be recorded during 2010.
As of December 31, 2009, Herbalife Venezuelas
$5.9 million U.S. dollar cash and cash equivalents
residing in its U.S. dollar bank account were remeasured to
Bolivars at the parallel market exchange rate of approximately
5.9 Bolivars per U.S. dollar. These remeasured cash
and cash equivalents were translated at the official rate of
2.15 Bolivars per U.S. dollar and reported as
$15.8 million in our consolidated balance sheet at
December 31, 2009. In our specific facts and circumstances,
U.S. GAAP requires us to use the dividend remittance rate
(the official exchange rate) for translation purposes, and the
parallel market exchange rate (the applicable rate at which a
particular transaction could be settled) for certain
remeasurement purposes. Due to the difference between the
remeasurement rate and translation rate, the cash and cash
equivalents relating to Herbalife Venezuela reported on our
consolidated balance sheet at December 31, 2009, is
$9.9 million greater than the U.S. dollar amount
residing in
71
Herbalife Venezuelas U.S. dollar bank account and
therefore does not necessarily reflect the true purchasing power
of these reported U.S. dollar cash and cash equivalents.
At December 31, 2009, Herbalife Venezuela had reported cash
and cash equivalents of approximately $34.2 million of
which $15.8 million was denominated in U.S. dollars
and $18.4 million was denominated in Bolivars. The cash and
cash equivalents were translated at the official exchange rate,
which is the rate applicable for dividend remittance.
At December 31, 2009, Herbalife Venezuelas net sales
represented approximately 4% of our consolidated worldwide net
sales for the year ended December 31, 2009.
Highly
Inflationary Economy in Venezuela
Venezuelas inflation rate as measured using the blended
National Consumer Price Index and Consumer Price Index rate
exceeded the three-year cumulative inflation rate of 100% as of
December 31, 2009. Accordingly, effective January 1,
2010, Venezuela is considered a highly inflationary economy.
Beginning January 1, 2010, pursuant to the highly
inflationary basis of accounting, Herbalife Venezuela will
change its functional currency from the Bolivar to the
U.S. dollar. Subsequent movements in the Bolivar to
U.S. dollar exchange rate will impact our consolidated
earnings. In addition, Bolivar denominated monetary assets and
liabilities will be remeasured at the end of each reporting
period using the currency exchange rate at that time and any
foreign exchange gains and losses will be recognized in earnings
until such time as the economy is no longer considered highly
inflationary. Based on our current facts and circumstances,
beginning January 1, 2010, we plan to use the parallel
market exchange rate for remeasurement purposes under the highly
inflationary accounting rules. Our ability to access the
official exchange rate and the parallel market exchange rate
could impact the determination of the appropriate exchange rates
we use for remeasurement purposes in future periods.
At December 31, 2009, prior to the determination of
Venezuela as a highly inflationary economy, certain of our
U.S. dollar balances were remeasured to the functional
Bolivar currency using the parallel market exchange rate and
Bolivars were translated to U.S. dollars using the official
rate. On January 1, 2010, upon Venezuela being designated
as a highly inflationary economy, we anticipate to record
foreign exchange losses in our fiscal year 2010 consolidated
statement of income relating to the remeasurement of Herbalife
Venezuelas monetary assets and liabilities. We plan to use
the parallel market exchange rate for remeasurement of Herbalife
Venezuelas monetary assets and liabilities on its opening
January 1, 2010 consolidated balance sheet and expect to
record a charge of approximately $15.1 million pre-tax
foreign currency losses in our fiscal year 2010 consolidated
statement of income, which includes the $9.9 million
pre-tax foreign exchange loss relating to its U.S. dollar
cash and cash equivalents reported at December 31, 2009, as
discussed above. Also, Herbalife Venezuelas
$34.2 million cash and cash equivalents reported on our
consolidated balance sheet at December 31, 2009, which
includes U.S. dollar denominated cash, will be reduced to
$12.5 million on January 1, 2010 assuming the parallel
market exchange rate is used for remeasurement. However,
nonmonetary assets, such as inventory, reported on our
consolidated balance sheet at December 31, 2009, will
remain at historical dollar cost subsequent to Venezuela
becoming a highly inflationary economy. Therefore, we anticipate
that incremental inventory costs will negatively impact our 2010
fiscal year consolidated statement of income by approximately
$12.7 million, pre-tax, as they will not be devalued based
on the 2010 exchange rates but will be expensed at their
historical dollar costs.
Also in early January 2010, Venezuela announced an official rate
devaluation of the Bolivar to an official rate of 4.30 Bolivars
per U.S. dollar for non-essential items and 2.60 Bolivars
per U.S. dollar for essential items. Herbalifes
imports are expected to fall into both classifications. During
Fiscal Year 2010, we plan to continue making applications with
CADIVI in order to obtain U.S. dollars at the official
foreign exchange rate from CADIVI. In future periods, if we use
the unfavorable parallel market exchange rate for remeasurement
purposes, U.S. dollars obtained from CADIVI at the official
rate could have a positive impact to our consolidated net
earnings. We continue to assess and monitor the current economic
and political environment in Venezuela.
72
Quarterly
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands except per share data)
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
630,871
|
|
|
$
|
600,218
|
|
|
$
|
571,805
|
|
|
$
|
521,683
|
|
|
$
|
512,877
|
|
|
$
|
602,199
|
|
|
$
|
639,700
|
|
|
$
|
604,437
|
|
Cost of sales
|
|
|
136,515
|
|
|
|
131,777
|
|
|
|
122,442
|
|
|
|
102,400
|
|
|
|
96,061
|
|
|
|
116,620
|
|
|
|
128,049
|
|
|
|
117,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
494,356
|
|
|
|
468,441
|
|
|
|
449,363
|
|
|
|
419,283
|
|
|
|
416,816
|
|
|
|
485,579
|
|
|
|
511,651
|
|
|
|
486,771
|
|
Royalty overrides
|
|
|
204,580
|
|
|
|
194,639
|
|
|
|
186,750
|
|
|
|
175,532
|
|
|
|
168,375
|
|
|
|
200,323
|
|
|
|
215,300
|
|
|
|
212,720
|
|
Selling, general and administrative expenses
|
|
|
205,691
|
|
|
|
195,968
|
|
|
|
190,794
|
|
|
|
181,458
|
|
|
|
187,573
|
|
|
|
196,761
|
|
|
|
203,113
|
|
|
|
184,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
84,085
|
|
|
|
77,834
|
|
|
|
71,819
|
|
|
|
62,293
|
|
|
|
60,868
|
|
|
|
88,495
|
|
|
|
93,238
|
|
|
|
89,651
|
|
Interest expense, net
|
|
|
1,016
|
|
|
|
1,037
|
|
|
|
1,338
|
|
|
|
1,712
|
|
|
|
2,858
|
|
|
|
3,407
|
|
|
|
3,167
|
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
83,069
|
|
|
|
76,797
|
|
|
|
70,481
|
|
|
|
60,581
|
|
|
|
58,010
|
|
|
|
85,088
|
|
|
|
90,071
|
|
|
|
85,860
|
|
Income taxes
|
|
|
27,413
|
|
|
|
18,902
|
|
|
|
22,228
|
|
|
|
19,039
|
|
|
|
24,351
|
|
|
|
27,004
|
|
|
|
22,991
|
|
|
|
23,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
55,656
|
|
|
$
|
57,895
|
|
|
$
|
48,253
|
|
|
$
|
41,542
|
|
|
$
|
33,659
|
|
|
$
|
58,084
|
|
|
$
|
67,080
|
|
|
$
|
62,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.92
|
|
|
$
|
0.95
|
|
|
$
|
0.78
|
|
|
$
|
0.68
|
|
|
$
|
0.54
|
|
|
$
|
0.91
|
|
|
$
|
1.04
|
|
|
$
|
0.97
|
|
Diluted
|
|
$
|
0.88
|
|
|
$
|
0.91
|
|
|
$
|
0.77
|
|
|
$
|
0.67
|
|
|
$
|
0.53
|
|
|
$
|
0.89
|
|
|
$
|
1.01
|
|
|
$
|
0.93
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,492
|
|
|
|
61,234
|
|
|
|
61,642
|
|
|
|
61,510
|
|
|
|
62,707
|
|
|
|
63,594
|
|
|
|
64,282
|
|
|
|
64,381
|
|
Diluted
|
|
|
63,004
|
|
|
|
63,397
|
|
|
|
62,929
|
|
|
|
61,614
|
|
|
|
63,187
|
|
|
|
65,439
|
|
|
|
66,110
|
|
|
|
67,200
|
|
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 when a probable loss
estimate can be made.
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. The effects of these claims to
date have not been material to the Company, and the reasonably
possible range of exposure on currently existing claims is not
material to the Company. The Company believes that it has
meritorious defenses to the allegations contained in the
lawsuits. The Company currently maintains product liability
insurance with an annual deductible of $10 million.
On April 16, 2007, Herbalife International of America, Inc.
filed a Complaint in the United States District Court for the
Central District of California against certain former Herbalife
distributors who had left the Company to join a competitor. The
Complaint alleged breach of contract, misappropriation of trade
secrets, intentional interference with prospective economic
advantage, intentional interference with contract, unfair
competition, constructive trust and fraud and seeks monetary
damages, attorneys fees and injunctive relief.
(Herbalife International of America, Inc. v. Robert E.
Ford, et al) The court entered a Preliminary Injunction
against the defendants enjoining them from further use
and/or
misappropriation of the Companys trade secrets on
December 11, 2007. Defendants appealed the courts
entry of the Preliminary Injunction to the U.S. Court of
Appeals for the Ninth Circuit. That court affirmed, in relevant
part, the Preliminary Injunction. On December 3, 2007, the
defendants filed a counterclaim alleging that the Company had
engaged in unfair and deceptive business practices, intentional
and negligent interference with prospective economic advantage,
false advertising and that the Company was an endless chain
scheme in violation of California law and seeking restitution,
contract rescission and an injunction. Both sides engaged in
discovery and filed cross motions for Summary Judgment. On
August 25, 2009, the court granted partial summary judgment
for Herbalife on all of defendants claims except the claim
that
73
the Company is an endless chain scheme which under applicable
law is a question of fact that can only be determined at trial.
The court denied defendants motion for Summary Judgment on
Herbalifes claims for misappropriation of trade secrets
and breach of contract. On December 4, 2009 the Court
ordered mediation to occur on February 8, 1010 and set a
schedule for Herbalifes motion for summary judgment to
dismiss the sole remaining counterclaim by the defendants, with
a hearing scheduled for March 9, 2010 if all matters were
not resolved before that date. The mediation occurred but did
not resolve any issues. No date has been set for trial. The
Company believes that there is merit to its remaining claims for
relief and that it has meritorious defenses to the remaining
counterclaim.
Certain of the Companys 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 their allegations that additional taxes are owed, and the
Company is vigorously contesting the additional proposed taxes
and related charges.
These matters may take several years to resolve. While the
Company believes it has meritorious defenses, it cannot be sure
of their ultimate resolution. Although the Company has reserved
an amount that the Company believes represents the most likely
outcome of the resolution of these disputes, if the Company is
incorrect in the assessment the Company may have to record
additional expenses.
Critical
Accounting Policies
Our Consolidated Financial Statements are prepared in conformity
with U.S. GAAP, 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. We regularly evaluate
our estimates and assumptions related to revenue recognition,
allowance for product returns, inventory reserves, stock-based
compensation expense, goodwill and purchased intangible asset
valuations, deferred income tax asset valuation allowances,
uncertain tax positions, tax contingencies, and other loss
contingencies. We base our estimates and assumptions on current
facts, historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities and the recording of revenue,
costs and expenses. Actual results could differ from those
estimates. We consider the following policies to be most
critical in understanding the judgments that are involved in
preparing the financial statements and the uncertainties that
could impact our operating results, financial condition and cash
flows.
We are a network marketing company that sells a wide range of
weight management products, nutritional supplements, energy,
sports & fitness products and personal care products
within one industry segment as defined under FASB Accounting
Standards Codification, or ASC, Topic 280, Segment
Reporting. Our products are manufactured by third party
providers and manufactured in our Suzhou, China facility, and in
our recently acquired manufacturing facility located in Lake
Forest, California, and then are sold to independent
distributors who sell Herbalife products to retail consumers or
other distributors. We sell products in 72 countries throughout
the world and we are organized and managed by geographic region.
We have elected to aggregate our operating segments into one
reporting segment, except China, as management believes that our
operating segments have similar operating characteristics and
similar long term operating performance. In making this
determination, management believes that the operating segments
are similar in the nature of the products sold, the product
acquisition process, the types of customers to whom products are
sold, the methods used to distribute the products, and the
nature of the regulatory environment.
Revenue is recognized when products are shipped and title and
risk of loss passes to the independent distributor or importer
or as products are sold in our retail stores in China. Sales are
recognized on a net sales basis, which reflects product returns,
net of discounts referred to as distributor
allowances, and amounts billed for freight and handling
costs. We generally receive the net sales price in cash or
through credit card payments at the point of sale. Related
royalty overrides and allowances for product returns are
recorded when the merchandise is shipped.
Allowances for product returns, primarily in connection with our
buyback program, are provided at the time the product is
shipped. This accrual is based upon historic return rates for
each country and the relevant return
74
pattern, which reflects anticipated returns to be received over
a period of up to 12 months following the original sale.
Historically, product returns and buybacks have not been
significant. Product returns and buybacks were approximately
0.5%, 0.8% and 1% of retail sales for the years ended
December 31, 2009, 2008 and 2007, respectively.
We record reserves against 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
managements assumptions, additional reserves could be
required. Likewise, favorable future demand and market
conditions could positively impact future operating results if
previously reserved for inventory is sold. We reserved for
obsolete and slow moving inventory totaling $9.3 million
and $11.6 million as of December 31, 2009 and 2008,
respectively.
In accordance with the FASB ASC Topic 360, Property, Plant
and Equipment, property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.
Goodwill and other intangibles not subject to amortization are
tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the assets fair
value. In order to estimate the fair value of goodwill, we
primarily use the discounted cash flow model, known as the
income approach. The determination of impairment is made at the
reporting unit level and consists of two steps. First, we
determine the fair value of a reporting unit and compare it to
its carrying amount. Second, if the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the
reporting units goodwill and other intangibles over the
implied fair value. The implied fair value of goodwill is
determined in a similar manner as how the amount of goodwill
recognized in a business combination is determined, in
accordance with FASB ASC Topic 805, Business
Combinations, or ASC 805. We would assign the fair value of
a reporting unit to all of the assets and liabilities of that
reporting unit as if the reporting unit had been acquired in a
business combination and the fair value of the reporting unit
was the price paid to acquire the reporting unit. The excess of
the fair value of a reporting unit over the amounts assigned to
its assets and liabilities is the implied fair value of
goodwill. As of December 31, 2009 and 2008, we had goodwill
of approximately $102.5 million and $110.7 million,
respectively, and marketing franchise of approximately
$310.0 million at December 31, 2009, and
December 31, 2008. No marketing related intangibles or
goodwill impairment was recorded during the year ended
December 31, 2009.
Contingencies are accounted for in accordance with the FASB ASC
Topic 450, Contingencies, or ASC 450. ASC 450 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 related to
both the likelihood of a loss and the estimate of the amount or
range of loss. 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.
Deferred income tax assets have been established for net
operating loss carryforwards of certain foreign subsidiaries and
have been reduced by a valuation allowance to reflect them at
amounts estimated to be ultimately realized. The net operating
loss carryforwards expire in varying amounts over a future
period of time. Realization of the income tax carryforwards is
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
75
realizable, however, could change if estimates of future taxable
income during the carryforward period are adjusted. In the
ordinary course of our business, there are many transactions and
calculations where the tax law and ultimate tax determination is
uncertain. As part of the process of preparing our Consolidated
Financial Statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate prior to
the completion and filing of tax returns for such periods. This
process requires estimating both our geographic mix of income
and our uncertain tax positions in each jurisdiction where we
operate. These estimates involve complex issues and require us
to make judgments about the likely application of the tax law to
our situation, as well as with respect to other matters, such as
anticipating the positions that we will take on tax returns
prior to our actually preparing the returns and the outcomes of
disputes with tax authorities. The ultimate resolution of these
issues may take extended periods of time due to examinations by
tax authorities and statutes of limitations. In addition,
changes in our business, including acquisitions, changes in our
international corporate structure, changes in the geographic
location of business functions or assets, changes in the
geographic mix and amount of income, as well as changes in our
agreements with tax authorities, valuation allowances,
applicable accounting rules, applicable tax laws and
regulations, rulings and interpretations thereof, developments
in tax audit and other matters, and variations in the estimated
and actual level of annual pre-tax income can affect the overall
effective income tax rate.
We account for uncertain tax positions in accordance with the
FASB ASC Topic 740, Income Taxes, or ASC 740 which
provides guidance on the determination of how tax benefits
claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under ASC 740, we must
recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based
on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution.
We account for share-based compensation in accordance with the
FASB ASC Topic 718, Compensation-Stock Compensation, or
ASC 718. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the
grant date based on the value of the award and is recognized as
an expense over the vesting period. Determining the fair value
of share-based awards at the grant date requires judgment,
including estimating our stock price volatility and employee
stock award exercise behaviors. Our expected volatility is
primarily based upon the historical volatility of our common
shares and, due to the limited period of public trading data for
our common shares, it is also validated against the volatility
of a company peer group. The expected life of awards is based on
the simple average of the average vesting period and the life of
the award, or the simplified method. As share-based compensation
expense recognized in the Statements of Income is based on
awards ultimately expected to vest, the amount of expense has
been reduced for estimated forfeitures. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. If actual forfeitures differ from
estimates, additional expense or reversal of previous expense
are recorded. Forfeitures were estimated based on historical
experience.
We account for foreign currency transactions in accordance with
ASC Topic 830, Foreign Currency Matters. In substantially
all of the countries where we operate, the functional currency
is the local currency. Our 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. Our foreign exchange
translation adjustments are included in accumulated other
comprehensive loss on our accompanying consolidated balance
sheets. Foreign currency transaction gains and losses and
foreign currency remeasurements are included in selling, general
and administrative expenses in the accompanying consolidated
statements of income.
New
Accounting Pronouncements
In January 2010, the FASB issued Final Accounting Standards
Update, or ASU,
2010-06,
Improving Disclosures about Fair Value Measurements, or
ASU 2010-06.
ASU 2010-06
sets forth additional requirements and guidance regarding
disclosures of fair value measurements. ASU
2010-06
requires the gross presentation of activity within the
Level 3 fair value measurement roll forward and details of
transfers in and out of Level 1 and 2 fair value
measurements. It also clarifies two existing disclosure
requirements of ASC Topic 820, Fair Value Measurements and
Disclosures, or ASC 820, relating to the level of
disaggregation of fair value measurements and
76
disclosures on inputs and valuation techniques. ASU
2010-06 is
effective for fiscal years and interim periods beginning after
December 15, 2009, except for the Level 3 roll
forward, which is effective for fiscal years and interim periods
beginning after December 15, 2010. The Company is assessing
the potential effect of this guidance on the consolidated
financial statements.
In June 2009, the FASB issued guidance to revise the approach to
determine when a variable interest entity, or VIE, should be
consolidated. The new consolidation model for VIEs
considers whether the Company has the power to direct the
activities that most significantly impact the VIEs
economic performance and shares in the significant risks and
rewards of the entity. The guidance on VIEs requires
companies to continually reassess VIEs to determine if
consolidation is appropriate and provide additional disclosures.
The guidance is effective for the Companys 2010 fiscal
year. The Company is assessing the potential effect of this
guidance on the consolidated financial statements.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
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.
We have adopted FASB ASC Topic 815, Derivatives and
Hedging, or ASC 815, which 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 as
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 as a
cash-flow hedge, changes in the fair value of the derivative are
recorded in other comprehensive income (loss) and are recognized
in the consolidated statements of income when the hedged item
affects earnings. ASC 815 defines the 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.
A discussion of our primary market risk exposures and
derivatives is presented below.
Foreign
Exchange Risk
We transact business globally and are subject to risks
associated with changes in foreign exchange rates. Our objective
is to minimize the impact to earnings and cash flow fluctuations
associated with foreign exchange rate fluctuations. We enter
into foreign exchange derivatives in the ordinary course of
business primarily to reduce exposure to currency fluctuations
attributable to intercompany transactions, translation of local
currency revenue, inventory purchases subject to foreign
currency exposure, and to partially mitigate the impact of
foreign currency rate fluctuations. Due to the recent
significant volatility in the foreign exchange market, our
current strategy, in general, is to hedge some of the
significant exposures on a short-term basis. We will continue to
monitor the foreign exchange market and evaluate our hedging
strategy accordingly. With the exception of our foreign exchange
forward contracts relating to forecasted inventory purchases and
intercompany management fees as discussed below in this section,
all of our foreign exchange contracts are designated as free
standing derivatives for which hedge accounting does not apply.
The changes in the fair market value of the derivatives not
qualifying as cash flow hedges are included in selling, general
and administrative expenses in our consolidated statements of
income.
The foreign exchange forward contracts designated as free
standing derivatives are used to hedge advances between
subsidiaries and to partially mitigate the impact of foreign
currency fluctuations. Foreign exchange average rate option
contracts are also used to mitigate the impact of foreign
currency rate fluctuations. The objective of these contracts is
to neutralize the impact of foreign currency movements on the
operating results of our subsidiaries. The fair value of forward
and option contracts is based on third-party bank quotes.
We also purchase foreign currency forward contracts in order to
hedge forecasted inventory purchases and intercompany management
fees that are designated as cash-flow hedges and are subject to
foreign currency
77
exposures. We applied the hedge accounting rules as required by
ASC Topic 815 for these hedges. These contracts allow us to sell
Euros in exchange for U.S. dollars at specified contract
rates. As of December 31, 2009, the aggregate notional
amounts of these contracts outstanding were approximately
$66.8 million and were expected to mature over the next
fourteen months. Our derivative financial instruments are
recorded on the consolidated balance sheet at fair value based
on quoted market rates. For the forecasted inventory purchases,
the forward contracts are used to hedge forecasted inventory
purchases over specific months. Changes in the fair value of
these forward contracts, excluding forward points, designated as
cash-flow hedges are recorded as a component of accumulated
other comprehensive income (loss) within shareholders
equity, and are recognized in cost of sales in the consolidated
statement of income during the period which approximates the
time the hedged inventory is sold. We also hedge forecasted
intercompany management fees over specific months. Changes in
the fair value of these forward contracts designated as cash
flow hedges are recorded as a component of accumulated other
comprehensive income (loss) within shareholders equity,
and are recognized in selling, general and administrative
expenses in the consolidated statement of income in the period
when the hedged item and underlying transaction affects
earnings. As of December 31, 2009 and December 31,
2008, we recorded an asset and liability at fair value of
$2.3 million and $0.1 million, respectively, relating
to all outstanding foreign currency contracts designated as
cash-flow hedges. We assess hedge effectiveness and measure
hedge ineffectiveness at least quarterly. During the year ended
December 31, 2009, the ineffective portion relating to
these hedges was immaterial and the hedges remained effective as
of December 31, 2009.
78
As of December 31, 2009 and 2008, substantially all of our
foreign exchange forward contracts had a maturity of less than
one year. The following table provides information about the
details of all our foreign exchange forward contracts
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Original
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Notional
|
|
|
Value
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy EUR sell MXN
|
|
|
19.67
|
|
|
$
|
32.6
|
|
|
$
|
(1.6
|
)
|
Buy JPN sell USD
|
|
|
90.60
|
|
|
|
16.9
|
|
|
|
(0.5
|
)
|
Buy USD sell EUR
|
|
|
1.48
|
|
|
|
77.2
|
|
|
|
2.6
|
|
Buy CLP sell USD
|
|
|
523.79
|
|
|
|
5.3
|
|
|
|
0.2
|
|
Buy USD sell CLP
|
|
|
509.40
|
|
|
|
2.9
|
|
|
|
|
|
Buy HKD sell USD
|
|
|
7.75
|
|
|
|
6.5
|
|
|
|
|
|
Buy JPY sell EUR
|
|
|
131.55
|
|
|
|
3.3
|
|
|
|
|
|
Buy EUR sell JPY
|
|
|
131.59
|
|
|
|
3.3
|
|
|
|
|
|
Buy USD sell BRL
|
|
|
1.78
|
|
|
|
7.3
|
|
|
|
(0.1
|
)
|
Buy USD sell ZAR
|
|
|
7.86
|
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
Buy ZAR sell USD
|
|
|
7.49
|
|
|
|
1.3
|
|
|
|
|
|
Buy USD sell PHP
|
|
|
47.49
|
|
|
|
6.3
|
|
|
|
(0.1
|
)
|
Buy USD sell KRW
|
|
|
1,181.27
|
|
|
|
1.9
|
|
|
|
|
|
Buy USD sell INR
|
|
|
46.72
|
|
|
|
3.0
|
|
|
|
|
|
Buy USD sell COP
|
|
|
1,983.88
|
|
|
|
3.5
|
|
|
|
0.1
|
|
Buy EUR sell USD
|
|
|
1.43
|
|
|
|
45.2
|
|
|
|
|
|
Buy EUR sell HKD
|
|
|
11.26
|
|
|
|
2.6
|
|
|
|
|
|
Buy MXN sell USD
|
|
|
13.19
|
|
|
|
8.5
|
|
|
|
|
|
Buy GBP sell USD
|
|
|
1.63
|
|
|
|
5.7
|
|
|
|
|
|
Buy USD sell RUB
|
|
|
29.78
|
|
|
|
1.3
|
|
|
|
|
|
Buy COP sell USD
|
|
|
2,053.31
|
|
|
|
4.2
|
|
|
|
|
|
Buy KRW sell USD
|
|
|
1,167.38
|
|
|
|
1.9
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.78
|
|
|
|
0.6
|
|
|
|
|
|
Buy EUR sell GBP
|
|
|
0.89
|
|
|
|
3.3
|
|
|
|
|
|
Buy MXN sell EUR
|
|
|
18.81
|
|
|
|
7.0
|
|
|
|
|
|
Buy PHP sell USD
|
|
|
46.47
|
|
|
|
3.2
|
|
|
|
|
|
Buy RUB sell USD
|
|
|
30.25
|
|
|
|
0.3
|
|
|
|
|
|
Buy USD sell MXN
|
|
|
13.15
|
|
|
|
1.7
|
|
|
|
|
|
Buy USD sell JPN
|
|
|
92.46
|
|
|
|
7.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
266.0
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Original
|
|
|
Fair
|
|
|
|
Contract
|
|
|
Notional
|
|
|
Value
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy EUR sell MXN
|
|
|
19.42
|
|
|
$
|
50.0
|
|
|
$
|
(0.1
|
)
|
Buy SEK sell EUR
|
|
|
11.00
|
|
|
|
2.0
|
|
|
|
|
|
Buy MYR sell EUR
|
|
|
4.87
|
|
|
|
0.7
|
|
|
|
|
|
Buy DKK sell EUR
|
|
|
7.46
|
|
|
|
1.5
|
|
|
|
|
|
Buy TWD sell EUR
|
|
|
45.95
|
|
|
|
5.0
|
|
|
|
|
|
Buy GBP sell EUR
|
|
|
0.97
|
|
|
|
1.8
|
|
|
|
|
|
Buy CLP sell USD
|
|
|
633.00
|
|
|
|
3.0
|
|
|
|
|
|
Buy GBP sell USD
|
|
|
1.46
|
|
|
|
3.6
|
|
|
|
|
|
Buy USD sell YEN
|
|
|
98.42
|
|
|
|
3.4
|
|
|
|
(0.3
|
)
|
Buy USD sell EUR
|
|
|
1.41
|
|
|
|
99.6
|
|
|
|
1.3
|
|
Buy USD sell BRL
|
|
|
2.29
|
|
|
|
6.9
|
|
|
|
0.2
|
|
Buy USD sell MXN
|
|
|
11.18
|
|
|
|
13.7
|
|
|
|
2.9
|
|
Buy EUR sell USD
|
|
|
1.52
|
|
|
|
10.0
|
|
|
|
(0.9
|
)
|
Buy MXN sell USD
|
|
|
11.56
|
|
|
|
19.8
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
221.0
|
|
|
$
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 we did not have any outstanding
foreign currency option contracts. The following table provides
information about the details of our foreign currency option
contracts outstanding as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Fair
|
|
Foreign Currency
|
|
Coverage
|
|
|
Strike Price
|
|
|
Value
|
|
|
|
(In millions)
|
|
|
|
|
|
(In millions)
|
|
|
Purchase Puts (Company may sell EURO/buy USD) Euro
|
|
$
|
10.0
|
|
|
|
1.52
|
|
|
$
|
0.9
|
|
Purchase Puts (Company may sell MXN/buy USD) Mexican Peso
|
|
|
14.2
|
|
|
|
10.76
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total option contracts
|
|
$
|
24.2
|
|
|
|
|
|
|
$
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most of our foreign subsidiaries designate their local
currencies as their functional currencies. At December 31,
2009 and 2008, the total amount of our foreign subsidiary cash
reported in our consolidated balance sheet was
$149.6 million and $142.0 million, respectively, of
which $11.9 million and $9.7 million, respectively,
was invested in U.S. dollars.
Currency restrictions enacted by the Venezuelan government in
2003 have become more restrictive and have impacted the ability
of Herbalife Venezuela, to obtain U.S. dollars at the
official foreign exchange rate. The application and approval
processes have been intermittently delayed in recent periods,
and the timing and ability to obtain U.S. dollars at the
official exchange rate remains uncertain. In certain instances,
we have made appropriate applications through the Venezuelan
government and its Foreign Exchange Commission, CADIVI, for
approval to obtain U.S. dollars to pay for imported
products and an annual dividend at the official exchange rate.
In other instances, in order to timely provide products to our
distributors, we did not register certain shipments with CADIVI,
or non-CADIVI registered, and instead used a legal parallel
market mechanism for payment. If CADIVI does not approve further
exchanges at the official exchange rate, Herbalife Venezuela
could continue to use a legal parallel exchange process to
exchange U.S. dollars in addition to going through CADIVI
to obtain the official rate. The parallel market exchange rate
was approximately 63% less favorable than the official exchange
rate as of December 31, 2009 and could further deteriorate
in future periods which would have a negative impact to our
earnings if we are unable to access the official rate.
80
In addition, beginning January 1, 2010, Venezuela is
considered a highly inflationary economy. We plan to use the
parallel market exchange rate for remeasurement purposes under
highly inflationary accounting rules based on our specific facts
and circumstances including our ability to access the official
exchange rate and the parallel market exchange rate. Also in
early January 2010, Venezuela announced an official rate
devaluation of the Bolivar to an official rate of 4.30 Bolivars
per U.S. dollar for non-essential items and 2.60 Bolivars
per U.S. dollar for essential items. Therefore, any future
changes to the parallel market exchange rate or the official
rate may result in a significant impact to our consolidated
earnings. See Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations, for a further discussion on how the currency
restrictions in Venezuela have impacted Herbalife
Venezuelas operations.
Interest
Rate Risk
As of December 31, 2009, the aggregate annual maturities of
our senior secured credit facility were expected to be:
2010-$1.5 million; 2011-$1.5 million;
2012-$92.5 million and 2013-$140.9 million. The fair
value of our senior secured credit facility approximates its
carrying value of $236.4 million as of December 31,
2009 and $324.5 million as of December 31, 2008. Our
senior secured credit facility bears a variable interest rate,
and on December 31, 2009 and 2008, the weighted average
interest rate was 1.66% and 3.04%, respectively.
Under our senior secured credit facility, we were obligated to
enter into interest rate hedges for up to 25% of the aggregate
principal amount of the term loan for a minimum of three years.
On August 23, 2006, we entered into an interest rate swap
agreement. This agreement provided for us to pay interest for a
three-year period at a fixed rate of 5.26% on the initial
notional principal amount of $180.0 million while receiving
interest for the same period at the LIBOR rate on the same
notional principal amount. The notional amount was scheduled to
be reduced by $20.0 million in the second, third and fourth
quarters of each year commencing January 1, 2007 throughout
the term of the swap. The swap had been designated as a cash
flow hedge against the variability in LIBOR interest rate on the
new term loan at LIBOR plus 1.50%, thereby fixing our effective
rate on the notional amounts at 6.76%. As of December 31,
2008, the swap notional amount was $40.0 million. At
December 31, 2008, we recorded the interest rate swap as a
liability at fair value of $1.0 million with the offsetting
amounts recorded in other comprehensive income. During September
2009, the swap expired and was consequently settled.
On June 26, 2009, we entered into an interest rate swap
agreement, with an effective date of June 30, 2009, which
expired on September 30, 2009. The swap notional amount was
$20 million, where we paid three month LIBOR and received
one month LIBOR plus 0.185%. During September 2009, the interest
rate swap agreement expired and all outstanding amounts were
settled. We had elected not to apply hedge accounting for this
interest rate swap.
During August 2009, we entered into four interest rate swap
agreements with an effective date of December 31, 2009. The
agreements, collectively, provide for us to pay interest for
less than a four-year period at a weighted average fixed rate of
2.78% on notional amounts aggregating to $140 million while
receiving interest for the same period at the one month LIBOR
rate on the same notional amounts. These agreements will expire
in July 2013. The swaps have been designated as cash flow hedges
against the variability in the LIBOR interest rate on the term
loan at LIBOR plus 1.50%, thereby fixing our weighted average
effective rate on the notional amounts at 4.28%. We formally
assess, both at inception and at least quarterly thereafter,
whether the derivatives used in hedging transactions are
effective in offsetting changes in cash flows of the hedged
item. As of December 31, 2009 the hedge relationships
qualified as effective hedges under the ASC 815. Consequently,
all changes in the fair value of the derivatives are deferred
and recorded in other comprehensive income (loss) until the
related forecasted transactions are recognized in the
consolidated statements of income. As of December 31, 2009,
the fair value of the interest rate swap agreements are based on
third-party bank quotes and we recorded the interest rate swaps
as a liability at fair value of $2.6 million.
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements and notes thereto and the
reports of KPMG LLP, independent registered public accounting
firm, are set forth in the Index to Financial Statements under
Item 15 Exhibits and Financial Statement
Schedules of this Annual Report on
Form 10-K,
and is incorporated herein by reference.
81