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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 UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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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
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification
No.)
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P.O. Box 309GT
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90067
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Ugland House, South Church Street
Grand Cayman, Cayman Islands
(Address of Principal
Executive Offices)
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(Zip Code)
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(310) 410-9600
(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 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
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller Reporting
company o
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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 64,019,233 common shares outstanding as of
February 20, 2008. The aggregate market value of the
Registrants common shares held by non-affiliates was
approximately $2,542 million as of June 29, 2007,
based upon the last reported sales price on the New York
Stock Exchange on that date of $39.65.
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, 2007, 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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risks associated with operating internationally, including
foreign exchange and devaluation risks;
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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 and similar tax regulations;
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taxation relating to our distributors;
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product liability claims; 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,
included under Item 1A Risk Factors,
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations and in
our 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,
Herbalife and Successor refer to
Herbalife Ltd. and its subsidiaries, including WH Capital
Corporation, or WH Capital Corp., and Herbalife International,
Inc., or Herbalife International, and its subsidiaries for
periods subsequent to the acquisition of Herbalife International
on July 31, 2002, by an investment group led by
Whitney & Co., LLC and Golden Gate Private Equity,
Inc., or the Acquisition, and the terms we,
our, us, Company and
Predecessor refer to Herbalife International before
the Acquisition for periods through July 31, 2002.
Herbalife is a holding company, with substantially all of its
assets consisting of the capital stock of its indirect,
wholly-owned subsidiary, Herbalife International.
4
PART I
GENERAL
We are a global network marketing company that sells weight
management, nutritional supplement, energy & 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 customers who seek a
healthy lifestyle. We are one of the largest network marketing
companies in the world with net sales of approximately
$2.1 billion for the fiscal year ended December 31,
2007. We sell our products in 65 countries through a network of
over 1.7 million independent distributors. In China, in
order to comply with local laws and regulations, we sell our
products through retail stores and an employed sales force. 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
28-year
operating history.
We offer science based products in four principal categories:
weight management, targeted nutrition, energy &
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 quality herbs, vitamins, minerals and
natural ingredients that support total well-being and long-term
good health. The energy & 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 & fitness and Outer Nutrition accounted for
63.4%, 20.2%, 4.2% and 6.7% of our net sales in fiscal year
2007, 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 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 product
effectiveness 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. Our efficient and effective distribution,
logistics and customer care support system assists our
distributors by providing same day, or
next-day
sales capabilities and support services. 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.
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Our
Competitive Strengths
We believe that our success stems from our ability to motivate
our distributor network with a range of quality, innovative and
efficacious products that appeal to consumer preferences for
healthy living. We have been able to achieve sustained and
profitable growth by capitalizing on the following competitive
strengths:
Distributor
Base
As of December 2007, we had over 1.7 million distributors,
which includes approximately 129,000 China sales representatives
and employees. Collectively we refer to this group as
distributors. Approximately 473,000 of our
1.7 million distributors have become sales leaders, which
are comprised of approximately 451,000 supervisors in the 64
countries where we use our traditional marketing plan and 22,000
China sales employees operating under our China marketing plan.
Collectively we refer to this group as sales
leaders. We believe that the distributors who have not
attained supervisor level can be segmented into three general
categories based on their product order patterns: discount
buyers, small retailers and potential supervisors. 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 supervisors as distributors
who are proactively developing a business with the intention of
qualifying to become a supervisor. In 2007, excluding China,
distributor orders for these three general categories were
approximately 52%, 26% and 22%, respectively. For the
approximately 451,000 supervisors 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.
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. Many of
our product formulations have been in existence for years;
however, we continually 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 herbal research
and nutrition. 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 supervisors
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.
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Geographic
Diversification
We have a proven ability to establish our network marketing
organization in new markets. Since our founding 28 years
ago, we have expanded our presence into 65 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.
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 Chairman.
Since joining our Company, Mr. Johnson has assembled a team
of experienced executives, including Gregory Probert, President
and Chief Operating Officer and formerly Chief Executive Officer
of DMX Music and Chief Operating Officer of The Walt Disney
Companys Buena Vista Home Entertainment division; Richard
Goudis, Chief Financial Officer and formerly Chief Operating
Officer of Rexall Sundown; Brett R. Chapman, General
Counsel and formerly Senior Vice President and Deputy General
Counsel of The Walt Disney Company; and Steve Henig, Ph.D.,
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 regional
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, expanded our manufacturing
capacity in our Suzhou, China factory and in July 2007, received
a direct-selling license for the Jiangsu province. We are in the
process of opening retail locations and pursuing direct-selling
licenses in additional provinces. Through December 2007, we have
opened 90 retail stores in 29 provinces. Other critical major
market strategies include developing an Eastern European
strategy, nurturing Brazils transition to a better balance
of retailing, retention and recruiting, and identifying new
untapped markets.
Product
Strategy
We are committed to providing our distributors with unique,
innovative products to help them increase sales and recruit new
distributors. Product development is focused on obesity,
anti-aging, fitness, childrens health, and immunity
enhancers. 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 all markets around the
world. We are also empowering regional and country managers to
develop unique products that are specific to their markets to
ensure that local consumer needs can be met. Additionally, each
year we plan to have mega launches of products
and/or
programs to generate continual excitement among our
distributors, to add to our core set of products and to support
our distributor DMOs. These mega launches will
generally target specific market segments deemed strategic to
us, such as the 2007 introduction of a childrens line to
target
stay-at-home
moms and a sports and fitness line to target consumers with
active lifestyles.
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Distributor
Strategy
We continue to increase our investment in events and promotions
as a catalyst to help our distributors improve the effectiveness
and productivity of their businesses. We will attempt 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
Nutrition Clubs, the Total Plan, Wellness Coach and
Internet/Sampling. We also introduced 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
marketing alliances, 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 and
MyHerbalife.com and we have invested in business intelligence
tools to enable better analysis of our business. In 2008, we
expect to execute the next stage of stabilization upgrades for
the software application tier of the Oracle platform with
implementation thereof across multiple regions in 2008 and 2009.
Additionally, we continue to invest in our employees through a
comprehensive and global organizational development program.
Product
Overview
For 28 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 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, 2007, we marketed and sold 131 products
encompassing over 3,500 SKUs through our distributors and had
approximately 1,803 trademarks worldwide. We group our products
into four primary categories: weight management, targeted
nutrition, energy & fitness and Outer Nutrition. Our
products are often sold in programs, which are 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.
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
(63.4% of 2007 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®,
High Protein Bars and Snacks
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Targeted Nutrition
(20.2% of 2007 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 & Fitness
(4.2% of 2007 net sales)
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Products that support a healthy active lifestyle
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Liftoff®
energy drink, H3OTM hydration drink
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Outer Nutrition
(6.7% of 2007 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
(5.5% of 2007 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
63.4% of our net sales for the year 2007. Formula 1, our
best-selling product, is a healthy meal with soy protein,
essential vitamins, minerals 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
28 years and generated approximately 30% of our retail
sales for the year 2007. Personalized Protein Powder is a soy
and whey protein product developed to be added to Formula 1 to
boost protein intake and decrease hunger. 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.
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 lifestages 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.
Energy
and Fitness
We have entered into the high growth energy drink category with
the introduction of
Liftoff®,
an innovative, effervescent energy product with B-vitamins,
ginseng, ginger 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 energy plus
antioxidant protection for people living a healthy, active
lifestyle.
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®
is a personal care product line that utilizes vitamin A, C and E
to provide benefits to the skin. In 2006, we launched an
extension of our successful Skin
Activator®
product, an advanced cream based glucosamine complex to reduce
the appearance of fine lines and wrinkles, into a full line of
anti-aging products.
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 the Companys Nutrition Advisory Board and
Scientific Advisory Board to formulate, review and evaluate new
product ideas. Once a particular market opportunity has been
identified, our
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scientists along with our marketing and sales teams work closely
with distributors to effect a successful development and launch
of the product.
A new product development process was implemented globally 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 2007 for greater efficiency
in product development as well as to carry out related product
development strategies both globally and regionally. During
2007, 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 12 members from six 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 need to travel to such events. Members of
our Scientific Advisory Board are compensated for their time and
efforts in the following manner: (1) ten 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
$1.4 million, $1.0 million and $1.9 million in
2005, 2006 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.
In 2007, we completed construction and moved into modern,
state-of-the-art product development laboratories in Torrance,
California, as well as quality control laboratories in Carson,
California. This investment will enable our developers,
scientists and quality control staff to accelerate product
development, launch products faster and provide a more robust
quality control program.
10
Herbalife also made further 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 is currently limited to
conducting one ongoing clinical studies, 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 2007, we introduced new flavors of Formula 1 including
Café Latte and Pina Colada, as well as Protein Bars Deluxe
and Formula 1 in single serve sachets for Weight Management;
Kids Shakes and Kids Multi-Vitamins for Targeted Nutrition;
H3OTM
Fitness Drink for Energy and Fitness and Skin
Activator®
Packettes and Soft Green Line for Outer Nutrition.
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 over 1.7 million independent
distributors in 65 countries, including in China where, due to
regulations, our sales are conducted through Company operated
retail stores, sales representatives and employed sales
management personnel. In China, in the areas where we have a
direct selling license, our distributors 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.
On July 18, 2002, we entered into an agreement with our
distributors that no material changes adverse to the
distributors will be made to the existing 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 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 US IBP, which costs
$87.95 and includes a canister of Formula 1 shake mix, several
bottles of different 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 US 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 supervisor or qualify for
a higher level, distributors must achieve specified volumes of
product sales or earn certain amounts of royalty overrides
during specified time periods and
11
must re-qualify for the levels once each year. To attain
supervisor 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.
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 based on the suggested retail
price of U.S. products (one volume point equates to one
U.S. dollar). Supervisors 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 supervisor retention rates as of requalification period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the end of February
|
|
|
|
Number of Sales Leaders
|
|
|
Supervisors Retention Rate
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
North America
|
|
|
41,252
|
|
|
|
45,766
|
|
|
|
54,314
|
|
|
|
38.6
|
%
|
|
|
41.2
|
%
|
|
|
43.1
|
%
|
Mexico & Central America
|
|
|
19,055
|
|
|
|
38,356
|
|
|
|
62,683
|
|
|
|
50.6
|
%
|
|
|
57.4
|
%
|
|
|
55.2
|
%
|
South America
|
|
|
28,240
|
|
|
|
40,111
|
|
|
|
51,302
|
|
|
|
33.4
|
%
|
|
|
32.4
|
%
|
|
|
32.9
|
%
|
EMEA
|
|
|
65,485
|
|
|
|
66,103
|
|
|
|
64,862
|
|
|
|
44.0
|
%
|
|
|
45.0
|
%
|
|
|
46.2
|
%
|
Asia Pacific (excluding China)
|
|
|
47,893
|
|
|
|
51,249
|
|
|
|
56,871
|
|
|
|
34.4
|
%
|
|
|
35.9
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Supervisors
|
|
|
201,925
|
|
|
|
241,585
|
|
|
|
290,032
|
|
|
|
39.7
|
%
|
|
|
41.5
|
%
|
|
|
42.5
|
%
|
China Sales Employees
|
|
|
|
|
|
|
1,987
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
201,925
|
|
|
|
243,572
|
|
|
|
298,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February of each year, we remove from the rank of supervisor
those individuals who did not satisfy the supervisor
qualification requirements during the preceding twelve months.
Distributors who meet the supervisor requirements at any time
during the year are promoted to supervisor status at that time,
including any supervisors who were removed, but who subsequently
requalified. For the latest twelve month re-qualification period
ending January 2008, approximately 41.0% of our supervisors
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
supervisors who have committed time and effort to build a sales
organization generally stay for 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 supervisors to requalify 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
requalification criteria to provide that any distributor that
earns at least 4,000 volume points in any
12-month
period can requalify as a supervisor 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.
12
Distributors, with the exception of China, earn the right to
receive royalty overrides upon attaining the level of supervisor
and above, and production bonuses upon attaining the level of
Global Expansion Team and above. Once a distributor becomes a
supervisor, he or she has an incentive to qualify, by earning
specified amounts of royalty overrides, as a member of the
Global Expansion Team, the Millionaire Team or the
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-supervisor distributors join Herbalife to obtain
a 25% discount on our products and become a discount consumer or
merely have a part-time income goal in mind. Consequently,
non-supervisor earnings tend to be relatively low and are 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,
employed sales management personnel 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 supervisors
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 2007, such events were held in
Brazil, Colombia, the United States, Singapore, Germany and
Mexico. In addition to these training sessions, we have our own
Herbalife Broadcast Network that we use to provide
distributors continual training and the most current product and
marketing information. The Herbalife Broadcast Network can be
seen on the internet.
Distributor reward and recognition is a significant factor in
motivating our distributors. In 2007, we invested over
$64 million in regional and worldwide events and promotions
to motivate our distributors to achieve and exceed both sales
and recruiting goals. Examples of our worldwide promotions are
the 2007 Vacations and the Active World Team Promotion. The 2007
Vacations offer incentives for distributors to qualify to
receive a regional vacation. 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, 2007, we conducted business in 65
countries throughout the world. The following chart sets forth
the countries we currently operate in as of December 31,
2007, organized in the Companys five geographic regions,
and the year in which we commenced operations.
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
North America
|
|
|
|
|
USA
|
|
|
1980
|
|
Canada
|
|
|
1982
|
|
Jamaica
|
|
|
1999
|
|
Mexico and Central America
|
|
|
|
|
Mexico
|
|
|
1989
|
|
Dominican Republic
|
|
|
1994
|
|
13
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
Panama
|
|
|
2000
|
|
Costa Rica
|
|
|
2006
|
|
El Salvador
|
|
|
2007
|
|
South America
|
|
|
|
|
Venezuela
|
|
|
1994
|
|
Argentina
|
|
|
1994
|
|
Brazil
|
|
|
1995
|
|
Chile
|
|
|
1997
|
|
Colombia
|
|
|
2001
|
|
Bolivia
|
|
|
2004
|
|
Peru
|
|
|
2006
|
|
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
|
|
China
|
|
|
2001
|
|
Macau
|
|
|
2002
|
|
Singapore
|
|
|
2003
|
|
Malaysia
|
|
|
2006
|
|
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
|
|
14
|
|
|
|
|
|
|
Year
|
|
Country
|
|
Entered
|
|
|
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
|
|
In late 2007, we changed our geographic regions from seven to
five regions as part of our on-going Realignment for Growth
efforts. Historical information presented below relating to the
geographic regions has been reclassified to conform with current
geographic presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Net Sales
|
|
|
Percent of
|
|
|
Countries
|
|
|
|
Year Ended December 31,
|
|
|
Total Net Sales
|
|
|
December 31,
|
|
Geographic Region
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
303.8
|
|
|
$
|
357.6
|
|
|
$
|
438.7
|
|
|
|
20.4
|
%
|
|
|
3
|
|
Mexico & Central America
|
|
|
219.9
|
|
|
|
376.9
|
|
|
|
384.6
|
|
|
|
17.9
|
%
|
|
|
5
|
|
South America
|
|
|
158.1
|
|
|
|
224.1
|
|
|
|
300.1
|
|
|
|
14.0
|
%
|
|
|
7
|
|
EMEA
|
|
|
545.3
|
|
|
|
548.0
|
|
|
|
567.7
|
|
|
|
26.5
|
%
|
|
|
36
|
|
Asia Pacific
|
|
|
339.7
|
|
|
|
378.9
|
|
|
|
454.7
|
|
|
|
21.2
|
%
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
1,566.8
|
|
|
$
|
1,885.5
|
|
|
$
|
2,145.8
|
|
|
|
100.0
|
%
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The top six countries have represented approximately 56%, 58.2%
and 56.1% of net sales in 2005, 2006, 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. 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.
15
Manufacturing
and Distribution
All 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. However, 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 49.7% of our product purchases in 2007. In
addition, each 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 lab
in which we routinely test products received from vendors. We
have established excellent relationships with our manufacturers
and continue to obtain improvements in supply services, product
quality and product delivery. Currently prices of some of our
key input materials such as soy, whey protein, fructose and
packaging material are increasing. However, we are confident we
can offset these increases with our cost reduction programs and
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.
Our global distribution system features centralized 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. We have central sales ordering
facilities for answering and processing telephone orders.
Operators at these centers are capable of conversing in multiple
languages.
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 and Phoenix. 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. 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 an 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, refunds and
buy-back expenses were approximately 1% of retail sales in each
of the years 2005, 2006 and 2007.
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, 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
16
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
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, 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 will have June 2008 to achieve compliance. We
expect to see an increase in certain manufacturing 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 for these products. Those of our
products which are classified as OTC 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. 1994 Dietary Supplement Health and Education Act,
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, is 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
17
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 a 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 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 FDA has on record a small number of reports of adverse
reactions allegedly resulting from the ingestion of our
Thermojetics®
original green tablet. These reports are among thousands of
reports of adverse reactions to these products sold by other
companies.
As a further outgrowth of the FDA ephedra safety review, the
FDA, in January 2004, announced that it would undertake a review
of the safety of the herb Citrus aurantium. We had
previously used Citrus aurantium in the
ShapeWorks®
Total
Control®
and
Thermojetics®
green ephedra-free dietary supplements sold in the United States
and in a number of international markets. Unconfirmed reports of
serious adverse events, reportedly associated with Citrus
aurantium, were disclosed by the FDA to the New York Times
during April 2004. Under the Freedom of Information Act, we
obtained a copy of those anecdotal serious adverse event
reports. No Herbalife dietary supplement containing Citrus
aurantium was cited by the FDA. Indeed, many cited products
from other companies did not even contain Citrus aurantium.
Nonetheless, we decided to reformulate our products and we
no longer market dietary supplements containing Citrus
aurantium anywhere in the world.
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
110th 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
18
we are in full compliance with this new 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
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, and Herbalife will have until June, 2008
to achieve compliance. 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 can be expected to result in additional costs and
possibly the need to seek alternate suppliers. 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.
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 temporarily 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
temporarily 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. This review is ongoing and there can be
no assurances as to the outcome.
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
19
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, an EU Health Claim regulation was recently finalized.
The final regulation will 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 assembling the necessary scientific substantiation for
its European product claims based on the requirements of this
recently enacted regulation.
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 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.
We are aware that, in some of our international markets, there
has been recent adverse publicity concerning products that
contain ingredients that have been genetically modified, or GM.
In some markets, the possibility of health risks or perceived
consumer preference thought to be associated with GM ingredients
has prompted proposed or actual governmental regulation. For
example, the European Union has adopted a EC
Regulation 1829/2003 affecting the labeling of products
containing ingredients that have been genetically modified, and
the documents manufacturers and marketers will need to possess
to ensure traceability at all steps in the chain of
production and distribution. This new regulation, which took
effect in 2004, has been implemented by us and our contract
manufacturers, resulting in modifications to our labeling, and
in some instances, to some of our foods and food supplements
sold in Europe. Differing GM regulations affecting us also have
been adopted in Brazil, Japan, Korea, Taiwan and Thailand. We
cannot anticipate the extent to which future regulations in our
markets will restrict the use of GM ingredients in our products
or the impact of any regulations on our business in those
markets. In response to any applicable regulations, we would,
where practicable, attempt to reformulate our products to
satisfy the regulations. We believe, based upon currently
available information, that compliance with regulatory
requirements in this area should not have a material adverse
effect on us or our business. However, because publicity and
governmental scrutiny of GM ingredients is a relatively new and
evolving area, there can be no assurance in this regard. If a
significant number of our products were found to be genetically
modified and regulations in our markets
20
significantly restricted the use of GM ingredients in our
products, our business could be materially adversely affected.
We have been required to comply with recent regulations within
the European Union, Australia, Brazil, Canada, China, Hong Kong,
Japan, Taiwan, and Thailand affecting the use
and/or
labeling of irradiated raw ingredients.
Compliance with GM, BSE and irradiation regulations can be
expected to increase the cost of manufacturing certain of our
products.
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, will regulate all sellers of
business opportunities in the United States. The
proposed rule would, among other things, require all sellers of
business opportunities, which would likely include Herbalife, to
(i) implement a seven day waiting period before entering
into an agreement with a prospective business opportunity
purchaser, and (ii) provide all prospective business
opportunity purchasers with substantial information in writing
at the beginning of the waiting period regarding the business
opportunity, including information relating to: representations
made as to the earnings experience of other business opportunity
purchasers, the names and telephone numbers of recent purchasers
in their geographic area, cancellation or refund policies and
requests within the prior two years, certain legal actions
against the company, its affiliated companies and company
officers, directors, sales managers and certain others. We,
other direct selling companies, the Direct Selling Association,
or the DSA, and other interested parties have filed over 17,000
comments with the FTC that are publicly available regarding the
proposed rule through the FTCs website at
http://www.ftc.gov/os/comments/businessopprule/index.htm.
We, the DSA, other direct selling companies, and other
interested parties also filed rebuttal comments with
the FTC in September, 2006. Based on information currently
available, we anticipate that the final rule may require several
years to become final and effective, and may differ
substantially from the rule as originally proposed. Nevertheless
the proposed rule, if implemented in its original form, would
negatively impact our U.S. business.
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 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.
Herbalife International and certain of its independent
distributors have been named as defendants in a purported class
action lawsuit filed February 17, 2005, in the Superior
Court of California, County of San Francisco, and served on
Herbalife International on March 14, 2005
(Minton v. Herbalife International, et al). The case
has been transferred to the Los Angeles County Superior Court.
The plaintiff is challenging the marketing practices of certain
Herbalife International independent distributors and Herbalife
International under various state laws prohibiting endless
chain schemes, insufficient disclosure in assisted
marketing plans, unfair and deceptive
21
business practices, and fraud and deceit. The plaintiff alleges
that the Freedom Group system operated by certain independent
distributors of Herbalife International products places too much
emphasis on recruiting and encourages excessively large
purchases of product and promotional materials by distributors.
The plaintiff also alleges that Freedom Group pressured
distributors to disseminate misleading promotional materials.
The plaintiff seeks to hold Herbalife International vicariously
liable for the actions of its independent distributors and is
seeking damages and injunctive relief. On January 24, 2007,
the Superior Court denied class certification of all claims,
except for the claim under California law prohibiting
endless chain schemes. That claim was granted
California-only class certification, provided that class counsel
is able to substitute in as a plaintiff a California resident
with claims typical of the class. We believe that we have
meritorious defenses to the suit.
Herbalife International and certain of its distributors were
defendants in a class action lawsuit filed July 16, 2003,
in the Circuit Court of Ohio County in the State of West
Virginia (Mey v. Herbalife International, Inc., et
al). The complaint alleged that certain telemarketing
practices of certain Herbalife International distributors
violated the Telephone Consumer Protection Act, or TCPA, and
sought to hold Herbalife International vicariously liable for
the practices of its independent distributors. More
specifically, the plaintiffs complaint alleged that
several of Herbalife Internationals distributors used
pre-recorded telephone messages and faxes to contact prospective
customers in violation of the TCPAs prohibition of such
practices. Without in any way acknowledging liability or
wrongdoing by us or our independent distributors, we and the
other defendants have reached a binding settlement with the
plaintiffs. Under the terms of the settlement the defendants
collectively paid $7 million into a fund to be distributed
to qualifying class members. The relevant amount paid by us was
previously fully reserved in our financial statements. The
settlement has received the final approval of the Court in
January 2008.
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, 2007) per
purported violation as well as costs of the trial. For the year
ended December 31, 2007, 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. 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.
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
22
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.
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, however, are unable to monitor
our supervisors and distributors effectively to ensure that they
refrain from distributing our products in countries where we
have not commenced operations, and we do not devote significant
resources to this type of monitoring.
23
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 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 the market, to a new market or markets or other
existing markets. However, we cannot be sure that this
transition would not have an adverse effect on our business and
results of operations either in the short or long-term.
Trademarks
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
Shapeworks®,
Nourifusion®,
and
Liftoff®.
Our trademark registrations are issued through the United States
Patent and Trademark Office 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, we have
sought through our employee inventors one or more patents in the
United States and certain other markets to protect the
formulation of the
Liftoff®
brand effervescent supplement. The United States Patent
Office has recently granted patent no. 7,329,419 to our
employee inventors for the composition that constitutes the
current 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 United States and abroad. The market is highly
sensitive to the introduction of new products or weight
management plans, including various prescription 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
24
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.
Executive
Officers of the Registrant
The table sets forth certain information, as of
December 31, 2007, 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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53
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Chief Executive Officer, Director, Chairman of the Board
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2003
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Gregory Probert
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51
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President, Chief Operating Officer
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2003
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Richard Goudis
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46
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Chief Financial Officer
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2004
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Brett R. Chapman
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52
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General Counsel and Corporate Secretary
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2003
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Steve Henig Ph.D.
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65
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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 Loyola High School of Los
Angeles. Mr. Johnson received his Bachelor of Arts in
Political Science from Western State College.
Gregory Probert is President and Chief Operating Officer
of the Company. Mr. Probert joined the Company in August
2003, after serving as President and CEO of DMX MUSIC for over
2 years. Mr. Probert joined DMX MUSIC after serving as
Chief Operating Officer of planet Lingo from January 2000 to
November 2000, where he led the team that designed and built the
companys first product, an online conversational system
for the $20 billion ESL market in Japan. Immediately prior
to planet Lingo, Mr. Probert spent 12 years with The
Walt Disney Company, where he most recently served as Executive
Vice President and Chief Operating Officer for the
$3.5 billion Buena Vista Home Entertainment worldwide
business. Mr. Proberts positions with The Walt Disney
Company also included service as Executive Vice President and
Managing Director of the International Home Video Division,
Senior Vice President and Managing Director of Buena Vista Home
Entertainment, Asia Pacific Region, based in Hong Kong, and
Chief Financial Officer of Buena Vista International,
Disneys theatrical distribution arm, among others.
Mr. Probert received his Bachelor of Science from the
University of Southern California and his MBA from California
State University, Los Angeles.
Richard Goudis is Chief Financial Officer of the Company.
Mr. Goudis joined the Company in June 2004 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 with several retired executives from
Rexall Sundown. Prior to working at Rexall Sundown,
Mr. Goudis 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 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,
25
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.
Steve Henig, Ph.D. is Chief Scientific Officer of
the Company. Mr. 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. Mr. Henig served as Senior Vice
President, technology and marketing services at Con Agras
Grocery products. Mr. 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, 2007, we had approximately
3,600 employees. In China, as of December 31, 2007, we
also had labor contracts with approximately 22,000 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 request it,
with any such requests addressed to Investor Relations, 1800
Century Park East, Los Angeles, CA 90067. 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.
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 over
1.7 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, a characteristic of the network
marketing business. The loss of a significant number of
distributors for any 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.
In light of the high year-over-year rate of turnover in our
distributor base, we have our supervisors re-qualify annually in
order to help us maintain a more accurate count of their
numbers. For the latest twelve month re-qualification period
ending January 2008, 41.0% of our supervisors 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. Supervisors who have committed time and
effort to build a sales organization will generally stay for
longer periods.
26
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 over 1.7 million independent
distributors, we had approximately 473,000 sales leaders as
of December 31, 2007. 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.
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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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.
27
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. 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 negatively impact our
reputation or the market demand for our products.
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. 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 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.
28
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.
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 restraints 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.
29
On April 12, 2006, the FTC issued a notice of proposed
rulemaking which, if implemented, will regulate all sellers of
business opportunities in the United States. The
proposed rule would, among other things, require all sellers of
business opportunities, which would likely include Herbalife, to
(i) implement a seven day waiting period before entering
into an agreement with a prospective business opportunity
purchaser, and (ii) provide all prospective business
opportunity purchasers with substantial information in writing
at the beginning of the waiting period regarding the business
opportunity, including information relating to: representations
made as to the earnings experience of other business opportunity
purchasers, the names and telephone numbers of recent purchasers
in their geographic area, cancellation or refund policies and
requests within the prior two years, certain legal actions
against the company, its affiliated companies and company
officers, directors, sales managers and certain others. We,
other direct selling companies, the Direct Selling Association,
or the DSA, and other interested parties have filed over 17,000
comments with the FTC that are publicly available regarding the
proposed rule through the FTCs website at
http://www.ftc.gov/os/comments/businessopprule/index.htm.
We, the DSA, other direct selling companies, and other
interested parties also filed rebuttal comments with
the FTC in September, 2006. Based on information currently
available, we anticipate that the final rule may require several
years to become final and effective, and may differ
substantially from the rule as originally proposed. Nevertheless
the proposed rule, if implemented in its original form, would
negatively impact our U.S. business.
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. Any such regulatory action,
whether or not it 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. Companies with more than 500 employees,
such as Herbalife, have until June 25, 2008 to comply while
companies with fewer than 500 employees have until June
2009 to comply and companies with fewer than 20 employees
have until June 2010 to comply with these regulations. 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. The final
rule differs from the FDAs 2003 proposed rule as it does
not contain language regarding the regulatory status of
excipients and other ingredients that are not dietary
ingredients. Instead, the final rule relies on a
requirement to comply with all other relevant regulations.
Further, the final rule does not call for any specific finished
product testing program nor does it require 100% testing of all
finished products. Instead the final rule calls for a
scientifically valid system for ensuring that
finished products meet all specifications. Although we, in
consultation with experts in the field, are currently evaluating
the likely impact of the final rule and the interim final rule
on our business and the contract manufacturers we utilize to
manufacture our products, it is likely that the final cGMP rules
will result in additional costs and possibly the need to seek
alternate suppliers.
30
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
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, 2007) per
purported violation as well as costs of the trial. For the year
ended December 31, 2007, 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. 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 learned on November 5, 2007 that Barry Minkow of the
Fraud Discovery Institute had published a letter, dated
October 29, 2007, to certain officials of the government of
the Peoples Republic of China. The letter includes
numerous allegations of allegedly wrongful conduct by Herbalife
and its employees in China and elsewhere. Mr. Minkows
letter attacks, among other things, our business practices in
China as illegal under Chinese law. Contrary to the allegations
in the letter, we have acted in a responsible manner with regard
to our business plans in China including retaining knowledgeable
Chinese counsel to assist it in complying with Chinese law. In
connection with our application for our direct selling license
in China, our plan and methods for business in China were
reviewed by members of the state and provincial governments of
China and an initial license was granted in March 2007 and a
subsequent expansion of that license was granted in July 2007.
In addition, we have designed and implemented systems and
financial and operational controls intended to ensure compliance
with applicable law. We believe that our plan and methods for
business in China are in compliance with applicable law.
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, 2007, 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.
31
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 US dollars at the official foreign exchange rate to pay
for imported products. Unless our ability to obtain US dollars
at the official foreign exchange rate is made more readily
available, the results of Herbalife Venezuelas operations
could be negatively impacted as it may need to obtain US dollars
from non-government sources where the exchange rate is weaker
than the official rate.
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 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 management
personnel to customers and preferred customers. We provide
training and certification procedures for sales personnel in
China. We also have non-employee sales representatives who sell
through our retail stores. Our sales representatives are also
permitted by the terms of our direct selling license to sell
away from fixed retail locations in the Jiangsu province. 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 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
32
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, others 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.
As we expand operations in China, we anticipate that certain
distributors will switch their focus from their home markets to
that of China. As a result, we may see reduced distributor focus
in Hong Kong, Taiwan and possibly other of our markets as
Chinese nationals that are distributors shift their attention to
China, and a resultant reduction in distributor growth,
leadership and revenue in these other countries.
Recently, China enacted a labor contract law which is expected
to become effective in early 2008. We are reviewing the new law
to determine what changes, if any, will be required in our
employment contracts and contractual relations with our
employees, which include certain of our salespersons. 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 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.
33
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. 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 would 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 timely provide products to our distributors and
their customers, and services to our distributors, depends on
the integrity of our information technology system, which we are
in the process of upgrading, including the reliability of
software and services supplied by our vendors. We are
implementing an Oracle enterprise-wide technology solution, a
scalable and stable open architecture platform, to enhance our
and our distributors efficiency and productivity. In
addition, we are upgrading our internet-based marketing and
distributor services platform, MyHerbalife.com.
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
34
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 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.
All of our products are manufactured by outside companies,
except for a small amount of products manufactured in our own
manufacturing facility in China. 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.
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, PharmaChem Labs for teas and
Niteworks®
and JB Labs for fiber. 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.
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.
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
35
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 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 responsible 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 recently settled lawsuit
Unither Pharma, Inc. and others had alleged that sales by
Herbalife International of (1) its
Niteworks®
and Prelox Blue products and (2) its former products
Womans Advantage with DHEA and Optimum Performance
infringed on patents that are licensed to or owned by those
parties. Although we do not believe that we are infringing on
any third party intellectual property rights, 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 27.0% 28.4%
and 30% of retail sales for the fiscal years ended
December 31, 2005, 2006 and 2007,
36
respectively. 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 would be
harmed.
We depend on the continued services of our Chairman and Chief
Executive Officer, Michael O. Johnson, and our current senior
management team. The relationships that they have developed with
our senior distributor leadership, especially in light of the
high level of turnover in our former senior management team and
the resulting need to reestablish good working relationships
with our senior distributor leadership after the death of our
founder in May 2000. 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, which the lenders thereunder could proceed to
foreclose against.
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
37
material amounts. In one such case we are currently appealing a
tax assessment in Spain. The Company believes that it has
meritorious defenses. Further, 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. 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. 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.
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 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 herbs, vitamins and minerals and other
ingredients that are classified as foods or dietary supplements
and are not subject to pre-market regulatory approval in the
United States. Our products could contain contaminated
substances, and some of our products contain innovative
ingredients that do not have long histories of human
consumption. We generally do not conduct or sponsor clinical
studies for our products and previously 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.
38
We are
subject to, among other things, requirements regarding the
effectiveness of internal control 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. At the time of the filing of our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006, one such
investigation was pending. This investigation concerned certain
activities related to one of our foreign subsidiaries and
related matters, and involved possible violations of applicable
law. The then pending review of this investigation necessitated
our filing of a request for extension on
Form 12b-25
with the SEC. This investigation was completed in the fourth
quarter of 2006, and the Audit Committee of our Board of
Directors has adopted, and we have implemented, a remediation
plan in response to the related findings. We believe the results
of this investigation will not have a material adverse effect on
our financial condition or results of 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.
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, and by the Companies Law
(2004 Revision) 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.
Unlike many jurisdictions in the United States, Cayman Islands
law does not specifically provide for shareholder appraisal
rights on a merger or consolidation of a company. This may make
it more difficult for shareholders to assess the value of any
consideration they may receive in a merger or consolidation or
to require that the offer give shareholders additional
consideration if they believe the consideration offered is
insufficient.
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
39
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.
Subject to limited exceptions, under Cayman Islands law, a
minority shareholder may not bring a derivative action against
the board of directors. Maples and Calder, our Cayman Islands
counsel, has informed us that they are not aware of any reported
class action or derivative action having been brought in a
Cayman Islands court.
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.
Unlike many jurisdictions in the United States, Cayman Islands
law does not provide for mergers as that term is understood
under corporate law in the United States. However, Cayman
Islands law does have statutory provisions that provide for the
reconstruction and amalgamation of companies, which 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 each class of shareholders, in
each case, by a majority of the number of holders of each class
of a companys shares that are present and voting (either
in person or by proxy) at such a meeting, which holders must
also represent 75% in value of such class issued that are
present and voting (either in person or by proxy) at such
meeting (excluding the shares owned by the parties to the scheme
of arrangement).
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 have a material adverse effect on
the creditors interests. Furthermore, the Grand 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 have been fairly represented at the meeting in
question;
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the scheme of arrangement is such as a businessman would
reasonably approve; and
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the scheme or arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law.
|
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
40
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
|
None.
We lease all of our physical properties. Our executive offices,
located in Century City, California, include approximately
75,000 square feet of general office space leased under
arrangements expiring in August 2008. During the fall of 2008 we
expect to relocate our executive offices to the LA Live complex
in downtown Los Angeles, California, where we expect to
occupy approximately 60,000 square feet under a lease
expiring in 2018. We 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 and
Southeast Asia 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
Venray, Netherlands, we lease our European centralized warehouse
of approximately 150,000 square feet under an arrangement
expiring in June 2010. In Guadalajara, Mexico we lease
approximately 136,000 square feet of warehouse space with
the term of the lease expiring in October 2010. 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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We are from time to time engaged in routine litigation. We
regularly review all pending litigation matters in which we are
involved and establish reserves deemed appropriate by management
for these litigation matters when a probable loss estimate can
be made.
Herbalife International and certain of its independent
distributors have been named as defendants in a purported class
action lawsuit filed February 17, 2005, in the Superior
Court of California, County of San Francisco, and served on
Herbalife International on March 14, 2005
(Minton v. Herbalife International, et al). The case
has been transferred to the Los Angeles County Superior Court.
The plaintiff is challenging the marketing practices of certain
Herbalife International independent distributors and Herbalife
International under various state laws prohibiting endless
chain schemes, insufficient disclosure in assisted
marketing plans, unfair and deceptive business practices and
fraud and deceit. The plaintiff alleges that the Freedom Group
system operated by certain independent distributors of Herbalife
International products places too much emphasis on recruiting
and encourages excessively large purchases of product and
promotional materials by distributors. The plaintiff also
alleges that Freedom Group pressured distributors to disseminate
misleading promotional materials. The plaintiff seeks to hold
41
Herbalife International vicariously liable for the actions of
its independent distributors and is seeking damages and
injunctive relief. On January 24, 2007, the Superior Court
denied class certification of all claims, except for the claim
under California law prohibiting endless chain
schemes. That claim was granted California-only class
certification, provided that class counsel is able to substitute
in as a plaintiff a California resident with claims typical of
the class. We believe that we have meritorious defenses to the
suit.
Herbalife International and certain of its distributors were
defendants in a class action lawsuit filed July 16, 2003,
in the Circuit Court of Ohio County in the State of West
Virginia (Mey v. Herbalife International, Inc., et
al). The complaint alleged that certain telemarketing
practices of certain Herbalife International distributors
violated the Telephone Consumer Protection Act, or TCPA, and
sought to hold Herbalife International vicariously liable for
the practices of its independent distributors. More
specifically, the plaintiffs complaint alleged that
several of Herbalife Internationals distributors used
pre-recorded telephone messages and faxes to contact prospective
customers in violation of the TCPAs prohibition of such
practices. Without in any way acknowledging liability or
wrongdoing by us or our independent distributors, we and the
other defendants have reached a binding settlement with the
plaintiffs. Under the terms of the settlement the defendants
collectively paid $7 million into a fund to be distributed
to qualifying class members. The relevant amount paid by us was
previously fully reserved in our financial statements. The
settlement has received the final approval of the Court in
January 2008.
On September 20, 2007, the Company was orally advised by
the Los Angeles Regional Office of the SEC that the SEC had
issued a formal order of investigation into the timing of
trading in Herbalife securities by a former mid-level employee.
The Company does not believe these trades involve the Company
itself. In addition, on November 1, 2007, the Company
received a voluntary request for the production of documents
from the staff of the Los Angeles Regional Office of the SEC
regarding the extent of personal use of Herbalife products by
the Companys distributors and the Companys related
policies and procedures. The SEC has advised the Company that
its inquiry should not be construed as an adverse reflection on
any person, the Company or its common shares, or as an
indication from the SEC or its staff that any violation of law
has occurred. The Company is cooperating fully with the staff of
the SEC in these matters.
As a marketer of dietary and nutritional supplements and other
products that are ingested by consumers or applied to their
bodies, we have been and are currently subjected to various
product liability claims. The effects of these claims to date
have not been material to us, and the reasonably possible range
of exposure on currently existing claims is not material to us.
We believe that we have meritorious defenses to the allegations
contained in the lawsuits. We currently maintain product
liability insurance with an annual deductible of
$10 million.
Certain of our subsidiaries have been subject to tax audits by
governmental authorities in their respective countries. In
certain of these tax audits, governmental authorities are
proposing that significant amounts of additional taxes and
related interest and penalties are due. We and our tax advisors
believe that there are substantial defenses to their allegations
that additional taxes are owed, and we are vigorously contesting
the additional proposed taxes and related charges.
These matters may take several years to resolve, and we cannot
be sure of their ultimate resolution. However, it is the opinion
of management that adverse outcomes, if any, will not likely
result in a material effect on our financial condition and
operating results. This opinion is based on our belief that any
losses we suffer would not be material and that we have
meritorious defenses. Although we have reserved an amount that
we believe represents the likely outcome of the resolution of
these disputes, if we are incorrect in our assessment, we 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
|
None.
42
PART II
Item 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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.
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Quarter Ended
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High
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Low
|
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March 31, 2006
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$
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35.55
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$
|
29.41
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June 30, 2006
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$
|
41.21
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|
$
|
32.91
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|
September 30, 2006
|
|
$
|
40.95
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|
$
|
27.73
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|
December 31, 2006
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|
$
|
41.34
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$
|
35.24
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Quarter Ended
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High
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Low
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March 31, 2007
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$
|
40.50
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$
|
29.25
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June 30, 2007
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|
$
|
42.54
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|
$
|
37.90
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|
September 30, 2007
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|
$
|
45.70
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|
$
|
37.02
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|
December 31, 2007
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|
$
|
46.04
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|
$
|
35.30
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|
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 20,
2008, was $41.83. The approximate number of holders of record of
our common shares as of February 20, 2008 was 959. 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.
43
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 for the period from December 16, 2004
through December 31, 2007. 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 16, 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 Total Return
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|
|
|
|
|
|
|
|
12/16/04
|
|
|
|
|
12/31/04
|
|
|
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12/31/05
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12/31/06
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12/31/07
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Herbalife Ltd.
|
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|
$
|
100.00
|
|
|
|
$
|
116.07
|
|
|
|
$
|
232.29
|
|
|
|
$
|
286.86
|
|
|
|
$
|
291.90
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
100.72
|
|
|
|
$
|
105.67
|
|
|
|
$
|
122.36
|
|
|
|
$
|
129.08
|
|
Peer Index
|
|
|
$
|
100.00
|
|
|
|
$
|
100.80
|
|
|
|
$
|
85.38
|
|
|
|
$
|
97.51
|
|
|
|
$
|
108.42
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Information
with Respect to Dividends
There were no dividends paid in 2005 or 2006 as the Company had
not adopted a cash dividend program during those respective
years. During the second quarter of 2007, the Companys
board of directors adopted a regular quarterly cash dividend
program. On April 18, 2007, the Companys board of
directors authorized a $0.20 per common share cash dividend, or
$14.4 million in the aggregate, for the first quarter of
2007, that was paid on May 15, 2007, to shareholders of
record as of April 30, 2007. On August 6, 2007, the
Companys board of directors authorized a $0.20 per common
share cash dividend, or $13.5 million in the aggregate, for
the second quarter of 2007, that was paid on September 14,
2007, to shareholders of record on August 31, 2007. On
October 30, 2007, the Companys board of directors
authorized a $0.20 per common share cash dividend, or
$13.6 million in the aggregate, for the third quarter of
2007, that was paid on December 14, 2007, to shareholders
of record on November 30, 2007. The aggregate amount of
dividends paid and declared during fiscal year 2007 was
$41.5 million. In January 2008, the Companys board of
directors authorized a $0.20 per common share cash dividend for
the fourth quarter of 2007 payable on March 14, 2008, to
shareholders of record on February 29, 2008.
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
44
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 and as amended in November 2007, 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, 2007,
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.
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|
|
|
|
|
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Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Upon Exercise of
|
|
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Exercise Price of
|
|
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Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
in Column (a))(2)
|
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(a)
|
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|
(b)
|
|
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(c)
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
8,473,373
|
|
|
$
|
20.03
|
|
|
|
4,648,877
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,473,373
|
|
|
$
|
20.03
|
|
|
|
4,648,877
|
|
|
|
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(1) |
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Consists of five plans: The WH Holdings (Cayman Islands) Ltd.
Stock Incentive Plan, or the Management Plan, the WH Holdings
(Cayman Islands) Ltd. Independent Directors Stock Incentive
Plan, or the Independent Directors Plan, the Herbalife Ltd. 2004
Stock Incentive Plan, or the 2004 Stock Incentive Plan, the
Herbalife Ltd. 2005 Stock Incentive Plan, or the 2005 Stock
Incentive Plan, and the Herbalife Ltd. Independent Directors
Deferred Compensation and Stock Unit Plan, or the Independent
Director Stock Unit Plan. In February 2008, the shareholder
approved Employee Stock Purchase Plan was implemented. The terms
of these plans are summarized in Note 9 to our consolidated
financial statements under the heading Equity Compensation
Plans. |
|
(2) |
|
Includes approximately one million common shares reserved for
issuance under the shareholder approved Employee Stock Purchase
Plan which was implemented in February 2008. |
Information
with Respect to Purchases of Equity Securities by the
Issuer
On April 18, 2007, we announced that 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 management, as market conditions
warrant. On August 23, 2007, our board of directors
approved an increase of $150 million to this share
repurchase program raising the total value of common shares
authorized to be repurchased to $450 million.
The following is a summary of our repurchases of common shares
during the three months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
246,114,301
|
|
November 1 - November 30
|
|
|
67,900
|
|
|
$
|
38.55
|
|
|
|
67,900
|
|
|
$
|
243,496,933
|
|
December 1 - December 31
|
|
|
3,821,600
|
|
|
$
|
41.61
|
|
|
|
3,821,600
|
|
|
$
|
84,470,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,889,500
|
|
|
$
|
41.56
|
|
|
|
3,889,500
|
|
|
$
|
84,470,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
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, 2003, 2004, 2005, 2006 and 2007 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. All
common share and earnings per share data gives effect to a 1:2
reverse stock split, which took effect December 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,159,433
|
|
|
$
|
1,309,663
|
|
|
$
|
1,566,750
|
|
|
$
|
1,885,534
|
|
|
$
|
2,145,839
|
|
Cost of sales
|
|
|
235,785
|
|
|
|
269,913
|
|
|
|
315,746
|
|
|
|
380,338
|
|
|
|
438,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
923,648
|
|
|
|
1,039,750
|
|
|
|
1,251,004
|
|
|
|
1,505,196
|
|
|
|
1,707,457
|
|
Royalty overrides
|
|
|
415,351
|
|
|
|
464,892
|
|
|
|
555,665
|
|
|
|
675,245
|
|
|
|
760,110
|
|
Selling, general and administrative expenses(1)
|
|
|
401,261
|
|
|
|
436,139
|
|
|
|
476,268
|
|
|
|
573,005
|
|
|
|
634,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income(1)
|
|
|
107,036
|
|
|
|
138,719
|
|
|
|
219,071
|
|
|
|
256,946
|
|
|
|
313,157
|
|
Interest expense, net
|
|
|
41,468
|
|
|
|
123,305
|
|
|
|
43,924
|
|
|
|
39,541
|
|
|
|
10,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
65,568
|
|
|
|
15,414
|
|
|
|
175,147
|
|
|
|
217,405
|
|
|
|
302,584
|
|
Income taxes
|
|
|
28,721
|
|
|
|
29,725
|
|
|
|
82,007
|
|
|
|
74,266
|
|
|
|
111,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
36,847
|
|
|
$
|
(14,311
|
)
|
|
$
|
93,140
|
|
|
$
|
143,139
|
|
|
$
|
191,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.35
|
|
|
$
|
2.02
|
|
|
$
|
2.75
|
|
Diluted
|
|
$
|
0.69
|
|
|
$
|
(0.27
|
)
|
|
$
|
1.28
|
|
|
$
|
1.92
|
|
|
$
|
2.63
|
|
Weighted average shares outstanding Basic
|
|
|
|
|
|
|
52,911
|
|
|
|
68,972
|
|
|
|
70,814
|
|
|
|
69,497
|
|
Diluted
|
|
|
53,446
|
|
|
|
52,911
|
|
|
|
72,491
|
|
|
|
74,509
|
|
|
|
72,714
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail sales(2)
|
|
$
|
1,894,384
|
|
|
$
|
2,146,241
|
|
|
$
|
2,575,716
|
|
|
$
|
3,100,205
|
|
|
$
|
3,511,003
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
94,350
|
|
|
|
80,110
|
|
|
|
143,352
|
|
|
|
184,447
|
|
|
|
270,811
|
|
Investing activities
|
|
|
3,152
|
|
|
|
(8,086
|
)
|
|
|
(32,526
|
)
|
|
|
(66,808
|
)
|
|
|
(43,390
|
)
|
Financing activities
|
|
|
(18,831
|
)
|
|
|
(23,160
|
)
|
|
|
(225,890
|
)
|
|
|
(55,044
|
)
|
|
|
(203,511
|
)
|
Depreciation and amortization
|
|
|
55,605
|
|
|
|
43,896
|
|
|
|
35,436
|
|
|
|
29,995
|
|
|
|
35,115
|
|
Capital expenditures(3)
|
|
|
20,435
|
|
|
|
30,279
|
|
|
|
32,604
|
|
|
|
66,870
|
|
|
|
49,027
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(4)
|
|
$
|
156,380
|
|
|
$
|
201,577
|
|
|
$
|
88,248
|
|
|
$
|
154,323
|
|
|
$
|
187,407
|
|
Receivables, net
|
|
|
31,977
|
|
|
|
29,546
|
|
|
|
37,266
|
|
|
|
51,758
|
|
|
|
58,729
|
|
Inventories
|
|
|
59,397
|
|
|
|
71,092
|
|
|
|
109,785
|
|
|
|
146,036
|
|
|
|
128,648
|
|
Total working capital
|
|
|
1,521
|
|
|
|
(1,556
|
)
|
|
|
14,094
|
|
|
|
132,215
|
|
|
|
111,478
|
|
Total assets
|
|
|
903,964
|
|
|
|
948,701
|
|
|
|
837,801
|
|
|
|
1,016,933
|
|
|
|
1,067,243
|
|
Total debt
|
|
|
325,294
|
|
|
|
486,217
|
|
|
|
263,092
|
|
|
|
185,438
|
|
|
|
365,152
|
|
Shareholders equity(5)
|
|
|
237,788
|
|
|
|
64,342
|
|
|
|
168,888
|
|
|
|
353,890
|
|
|
|
182,244
|
|
Cash dividends per common share
|
|
|
|
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
0.60
|
|
|
|
|
(1) |
|
The year ended December 31, 2003 includes $5.1 million
in legal and related costs associated with litigation resulting
from the Acquisition. The years ended December 31, 2006 and
2007 includes approximately $7.5 million and
$5.8 million of severance and related expenses associated
with the Realignment for Growth plan efforts. |
|
(2) |
|
Prior to 2003, we reported retail sales on the face of our
consolidated income statement in addition to the required
disclosure of net sales. 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,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Retail sales
|
|
$
|
1,894,384
|
|
|
$
|
2,146,241
|
|
|
$
|
2,575,716
|
|
|
$
|
3,100,205
|
|
|
$
|
3,511,003
|
|
Distributor allowance
|
|
|
(899,264
|
)
|
|
|
(1,021,196
|
)
|
|
|
(1,225,441
|
)
|
|
|
(1,472,527
|
)
|
|
|
(1,658,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
995,120
|
|
|
|
1,125,045
|
|
|
|
1,350,275
|
|
|
|
1,627,678
|
|
|
|
1,852,434
|
|
Handling and freight income
|
|
|
164,313
|
|
|
|
184,618
|
|
|
|
216,475
|
|
|
|
257,856
|
|
|
|
293,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,159,433
|
|
|
$
|
1,309,663
|
|
|
$
|
1,566,750
|
|
|
$
|
1,885,534
|
|
|
$
|
2,145,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Includes acquisition of property from capitalized leases of
$6.8 million, $7.2 million, $1.1 million,
$2.6 million and $7.1 million for the years ended
December 31, 2003, 2004, 2005, 2006 and 2007, respectively. |
|
(4) |
|
Includes restricted cash of $5.7 million as of
December 31, 2003. |
|
(5) |
|
In December 2004, we used a portion of the net proceeds from the
initial public offering of our common shares to pay an aggregate
of $139.7 million in special cash dividends, or $2.64 per
common share, to our shareholders of record on December 14,
2004. In addition, we paid an aggregate of $6.3 million in
special cash dividends, or $0.12 per common share, to
shareholders on record on December 13, 2004. In March 2004,
in conjunction with the conversion of our 12% preferred shares
into common shares we paid a total of $221.6 million to the
preferred shareholders including, $38.5 million,
representing accrued and unpaid dividends. During the year ended
December 31, 2007, we paid an aggregate $41.5 million
in dividends and repurchased $365.8 million of our common
shares. |
47
|
|
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, nutritional supplement, energy & 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
$2.1 billion for the year ended December 31, 2007. We
sell our products in 65 countries through a network of over
1.7 million independent distributors except in China, where
we sell our products through retail stores and an employed sales
force. 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
28-year
operating history.
During the quarter ended June 30, 2007, we reorganized our
product categories to better reflect how our distributors sell
products and programs. Our products are grouped in four
principal categories: weight management, targeted nutrition,
energy & fitness products and Outer Nutrition. Our
products are often sold in programs that are comprised of a
series of related products 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 and the recruitment and retention of
distributors.
The opportunities and challenges upon which we are most focused
are: retailing of our products, recruitment and retention of
distributors, improving distributor productivity, new markets,
further penetrating existing markets including China,
globalizing successful distributor methods of operation such as
Nutrition Clubs, introducing new products, developing niche
market segments and further investing in our infrastructure.
In late 2007, we changed our geographic regions from seven to
five regions as part of our on-going Realignment for Growth
plan. This updated regional structure allows us to better
support the distributor leadership and enhance synergies within
the regions. Under the new geographic regions, we report revenue
from:
|
|
|
|
|
North America, which consists of the U.S., Canada and Jamaica;
|
|
|
|
Mexico and Central America, which consists of Mexico, Costa
Rica, El Salvador, Panama and Dominican Republic;
|
|
|
|
South America, including Brazil;
|
|
|
|
EMEA, which consists of Europe, the Middle East and
Africa; and
|
|
|
|
Asia Pacific, including countries in the former Greater China,
North Asia and South East Asia regions.
|
Historical information presented in this Annual Report on
Form 10-K
relating to our geographic regions has been reclassified to
conform with our current geographic presentation.
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 for us, as it excludes the impact of foreign currency
fluctuations and ignores the differences generated by varying
retail pricing across geographic markets. In general, an
increase in Volume Points in a particular geographic region or
country indicates an increase in local currency net sales.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
|
(Volume points in millions)
|
|
|
North America
|
|
|
471.0
|
|
|
|
13.4
|
%
|
|
|
551.4
|
|
|
|
17.1
|
%
|
|
|
680.9
|
|
|
|
23.5
|
%
|
Mexico & Central America
|
|
|
363.5
|
|
|
|
99.9
|
%
|
|
|
616.3
|
|
|
|
69.5
|
%
|
|
|
611.2
|
|
|
|
(0.8
|
)%
|
South America
|
|
|
236.7
|
|
|
|
43.6
|
%
|
|
|
300.8
|
|
|
|
27.1
|
%
|
|
|
397.9
|
|
|
|
32.3
|
%
|
EMEA
|
|
|
572.9
|
|
|
|
(0.3
|
)%
|
|
|
558.9
|
|
|
|
(2.4
|
)%
|
|
|
529.7
|
|
|
|
(5.2
|
)%
|
Asia Pacific
|
|
|
375.9
|
|
|
|
9.9
|
%
|
|
|
407.0
|
|
|
|
8.3
|
%
|
|
|
468.4
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
2,020.0
|
|
|
|
20.4
|
%
|
|
|
2,434.4
|
|
|
|
20.5
|
%
|
|
|
2,688.1
|
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
supervisor status based on their Volume Points. The growth in
the number of new sales leaders is a general indicator of the
level of distributor recruitment, which generally drives net
sales in a particular country or geographic region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full Year December 31,
|
|
|
|
2005
|
|
|
% Change
|
|
|
2006
|
|
|
% Change
|
|
|
2007
|
|
|
% Change
|
|
|
North America
|
|
|
29,329
|
|
|
|
18.3
|
%
|
|
|
35,506
|
|
|
|
21.1
|
%
|
|
|
42,473
|
|
|
|
19.6
|
%
|
Mexico & Central America
|
|
|
24,406
|
|
|
|
116.0
|
%
|
|
|
42,232
|
|
|
|
73.0
|
%
|
|
|
34,093
|
|
|
|
(19.3
|
)%
|
South America
|
|
|
28,265
|
|
|
|
35.3
|
%
|
|
|
36,817
|
|
|
|
30.3
|
%
|
|
|
46,123
|
|
|
|
25.3
|
%
|
EMEA
|
|
|
38,786
|
|
|
|
(1.9
|
)%
|
|
|
36,892
|
|
|
|
(4.9
|
)%
|
|
|
31,831
|
|
|
|
(13.7
|
)%
|
Asia Pacific (excluding China)
|
|
|
34,705
|
|
|
|
5.2
|
%
|
|
|
39,174
|
|
|
|
12.9
|
%
|
|
|
40,174
|
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total New Supervisors
|
|
|
155,491
|
|
|
|
20.1
|
%
|
|
|
190,621
|
|
|
|
22.6
|
%
|
|
|
194,694
|
|
|
|
2.1
|
%
|
New China Sales Employees
|
|
|
1,732
|
|
|
|
N/M
|
|
|
|
6,484
|
|
|
|
274.3
|
%
|
|
|
15,365
|
|
|
|
137.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total New Sales Leaders
|
|
|
157,223
|
|
|
|
21.4
|
%
|
|
|
197,105
|
|
|
|
25.4
|
%
|
|
|
210,059
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Supervisors and Retention Rates by Geographic Region as of
Requalification Period
Our compensation system requires each supervisor 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 supervisor those distributors who did not
satisfy the supervisor re-qualification requirements during the
preceding twelve months. The re-qualification requirement does
not apply to new supervisors (i.e. those who became supervisors
subsequent to the January re-qualification of the prior year).
|
|
|
|
|
|
|
|
|
|
|
|
|
Supervisor Statistics (excluding China)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
January 1 total supervisors
|
|
|
299.1
|
|
|
|
332.6
|
|
|
|
400.6
|
|
January & February new supervisors
|
|
|
19.1
|
|
|
|
25.3
|
|
|
|
26.7
|
|
Demoted supervisors (did not requalify)
|
|
|
(107.5
|
)
|
|
|
(114.9
|
)
|
|
|
(135.9
|
)
|
Other supervisors (resigned, etc)
|
|
|
(8.8
|
)
|
|
|
(1.4
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of February total supervisors
|
|
|
201.9
|
|
|
|
241.6
|
|
|
|
290.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The distributor statistics below further highlight the
calculation for retention.
|
|
|
|
|
|
|
|
|
|
|
|
|
Supervisor Retention (excluding China)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Supervisors needed to requalify
|
|
|
178.2
|
|
|
|
196.3
|
|
|
|
236.2
|
|
Demoted supervisors (did not requalify)
|
|
|
(107.5
|
)
|
|
|
(114.9
|
)
|
|
|
(135.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total requalified
|
|
|
70.7
|
|
|
|
81.4
|
|
|
|
100.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention rate
|
|
|
39.7
|
%
|
|
|
41.5
|
%
|
|
|
42.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below reflects the number of sales leaders as of
February (subsequent to the annual re-qualification date) and
supervisor retention rate by year and by region.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Sales Leaders
|
|
|
Supervisors Retention Rate
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
North America
|
|
|
41,252
|
|
|
|
45,766
|
|
|
|
54,314
|
|
|
|
38.6
|
%
|
|
|
41.2
|
%
|
|
|
43.1
|
%
|
Mexico & Central America
|
|
|
19,055
|
|
|
|
38,356
|
|
|
|
62,683
|
|
|
|
50.6
|
%
|
|
|
57.4
|
%
|
|
|
55.2
|
%
|
South America
|
|
|
28,240
|
|
|
|
40,111
|
|
|
|
51,302
|
|
|
|
33.4
|
%
|
|
|
32.4
|
%
|
|
|
32.9
|
%
|
EMEA
|
|
|
65,485
|
|
|
|
66,103
|
|
|
|
64,862
|
|
|
|
44.0
|
%
|
|
|
45.0
|
%
|
|
|
46.2
|
%
|
Asia Pacific (excluding China)
|
|
|
47,893
|
|
|
|
51,249
|
|
|
|
56,871
|
|
|
|
34.4
|
%
|
|
|
35.9
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Supervisors
|
|
|
201,925
|
|
|
|
241,585
|
|
|
|
290,032
|
|
|
|
39.7
|
%
|
|
|
41.5
|
%
|
|
|
42.5
|
%
|
China Sales Employees
|
|
|
|
|
|
|
1,987
|
|
|
|
8,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide Total Sales Leaders
|
|
|
201,925
|
|
|
|
243,572
|
|
|
|
298,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of supervisors by geographic region as of the
quarterly reporting dates will normally be higher than the
number of supervisors by geographic region as of the
requalification period because supervisors who do not re-qualify
during the relevant twelve-month period will be dropped from the
rank of supervisor the following February. Since supervisors
purchase most of our products for resale to other distributors
and consumers, comparisons of supervisor totals on a
year-to-year, same period basis are good 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 primarily by our
retention of supervisors and by our recruitment and retention of
distributors, rather than through increases in the productivity
of our overall supervisor base.
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.
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
50
accordance with Generally Accepted Accounting Principles in the
U.S., or 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
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 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:
|
|
|
|
|
royalty overrides and production bonuses which total
approximately 15% and 7%, respectively, of the retail sales of
Weight Management, Targeted Nutrition, Energy &
Fitness, Outer Nutrition and promotional products;
|
|
|
|
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 &
Fitness and Outer Nutrition; and
|
|
|
|
other discretionary incentive cash bonuses to qualifying
distributors.
|
Royalty overrides are generally earned based on retail sales and
approximate in the aggregate about 22% of retail sales or
approximately 36% of our net sales. Royalty overrides together
with distributor allowances 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 instead of the
distributors earnings, distributor allowances and royalty
overrides. Because of local country regulatory constraints, we
may be required to modify our typical distributor incentive
plans as described above. Consequently, the total distributor
discount percentage may vary over time. We also offer reduced
distributor allowances and pay reduced royalty overrides with
respect to certain products worldwide.
Our 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 contracts and option contracts to
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, 2007 increased
13.8% to $2,145.8 million from $1,885.5 million in
2006. The increase was primarily due to growth in several of the
Companys top countries including, the U.S., China,
Venezuela and Taiwan with increases of 23.9%, 136.9%, 317.3% and
27.7%, respectively, as compared to 2006. The increase in these
markets reflects strong supervisor growth, the continued success
of our distributors with various operating methods like the
Nutrition Club DMO and Lead Generation/Sampling DMO, and an
increase in the number of stores in China. The opening of Peru
in December 2006 as a new market also contributed to the sales
51
growth. Overall, the appreciation of foreign currencies had a
$73.0 million favorable impact on net sales in 2007,
representing about 3.9% of the total sales increase.
Net income for the year ended December 31, 2007 increased
33.8% to $191.5 million, or $2.63 per diluted share,
compared to $143.1 million, or $1.92 per diluted share, for
2006. The increase was driven by revenue growth in many of our
markets, expansion in operating profit margins and reduction in
interest expense following a debt refinancing in July 2006,
partially offset by higher labor costs, depreciation expense and
foreign exchange losses.
Net income for 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. Net income for 2006 included
$14.3 million additional interest expense related to our
refinancing arrangements in July 2006, a $3.7 million tax
benefit resulting from an international tax settlement, a
$2.7 million additional tax benefit from refinancing
transactions, a $2.2 million favorable impact of the
adjustment to income tax accrual and a $4.9 million
unfavorable after tax impact in connection with the Realignment
for Growth plan in the fourth quarter of 2006. The amounts for
2006 were partially offset by a $7.0 million expense in
connection with the adoption of the new accounting rules for
stock based compensation and a $12.4 million charge for the
continued build-out of infrastructure in China.
Results
of Operations
Our results of operations for the periods described below are
not necessarily indicative of results of operations for future
periods, which depend upon numerous factors, including our
ability to 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.
The following table sets forth selected results of our
operations expressed as a percentage of net sales for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
20.1
|
|
|
|
20.2
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79.9
|
|
|
|
79.8
|
|
|
|
79.6
|
|
Royalty overrides
|
|
|
35.5
|
|
|
|
35.8
|
|
|
|
35.4
|
|
Selling, general and administrative expenses
|
|
|
30.4
|
|
|
|
30.4
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14.0
|
|
|
|
13.6
|
|
|
|
14.6
|
|
Interest expense, net
|
|
|
2.8
|
|
|
|
2.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11.2
|
|
|
|
11.5
|
|
|
|
14.1
|
|
Income taxes
|
|
|
5.3
|
|
|
|
3.9
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5.9
|
|
|
|
7.6
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Net
Sales
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
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)
|
|
|
North America
|
|
$
|
575.9
|
|
|
$
|
(274.9
|
)
|
|
$
|
301.0
|
|
|
$
|
56.6
|
|
|
$
|
357.6
|
|
|
$
|
708.8
|
|
|
$
|
(338.3
|
)
|
|
$
|
370.5
|
|
|
$
|
68.2
|
|
|
$
|
438.7
|
|
|
|
22.7
|
%
|
Mexico & Central America
|
|
|
634.3
|
|
|
|
(308.0
|
)
|
|
|
326.3
|
|
|
|
50.6
|
|
|
|
376.9
|
|
|
|
647.1
|
|
|
|
(315.5
|
)
|
|
|
331.6
|
|
|
|
53.0
|
|
|
|
384.6
|
|
|
|
2.0
|
%
|
South America
|
|
|
386.8
|
|
|
|
(189.8
|
)
|
|
|
197.0
|
|
|
|
27.1
|
|
|
|
224.1
|
|
|
|
523.4
|
|
|
|
(259.6
|
)
|
|
|
263.8
|
|
|
|
36.3
|
|
|
|
300.1
|
|
|
|
33.9
|
%
|
EMEA
|
|
|
895.5
|
|
|
|
(430.0
|
)
|
|
|
465.5
|
|
|
|
82.5
|
|
|
|
548.0
|
|
|
|
924.0
|
|
|
|
(445.5
|
)
|
|
|
478.5
|
|
|
|
89.2
|
|
|
|
567.7
|
|
|
|
3.6
|
%
|
Asia Pacific
|
|
|
607.7
|
|
|
|
(269.8
|
)
|
|
|
337.9
|
|
|
|
41.0
|
|
|
|
378.9
|
|
|
|
707.7
|
|
|
|
(299.7
|
)
|
|
|
408.0
|
|
|
|
46.7
|
|
|
|
454.7
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
3,100.2
|
|
|
$
|
(1,472.5
|
)
|
|
$
|
1,627.7
|
|
|
$
|
257.8
|
|
|
$
|
1,885.5
|
|
|
$
|
3,511.0
|
|
|
$
|
(1,658.6
|
)
|
|
$
|
1,852.4
|
|
|
$
|
293.4
|
|
|
$
|
2,145.8
|
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the 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 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 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, management
believes that these development and motivation programs can
increase the productivity of the supervisor 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
supervisors 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 has driven growth in our business.
The discussion below of net sales by geographic region further
details some of the above factors and describes unique growth
factors specific to certain 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 our products. The
correct business foundation includes strong country management
that works closely with the distributor leadership, 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, World Team Schools, 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.
Our strategy will continue to include creating and maintaining
growth within existing markets, while expanding into new
markets. We expect to increase our spending in selling, general
and administrative expenses to maintain or stimulate sales
growth, while making strategic investments in new initiatives
and in new markets. In addition, new ideas and DMOs are being
generated in our regional markets and globalized where
applicable, either
53
by distributors, country management or corporate management.
Examples of DMOs include the Nutrition Clubs in Mexico, the
Total Plan in Brazil, the Wellness Coach in France and the Lead
Generation/Sampling 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
$438.7 million for the year ended December 31, 2007.
Net sales increased $81.1 million, or 22.7%, for the year
ended December 31, 2007, as compared to 2006. In local
currency, net sales increased by 22.5% for the year ended
December 31, 2007, as compared to 2006. The fluctuation of
foreign currency rates had a positive impact of
$0.8 million on net sales for the year ended
December 31, 2007. The overall increase was a result of net
sales growth in the U.S. of $80.8 million, or 23.9%,
for the year ended December 31, 2007.
The increase in net sales in North America was led by
distributor momentum behind the Nutrition Club DMO among our
Latino distributors as well as the Lead Generation/Sampling DMO
among our non-Latino distributors in the United States. In
October 2007, the region hosted over 7,000 distributors in Long
Beach, California for the annual Herbalife University and Latino
Development Weekend event.
New supervisors in the region increased 19.6% for the year
ending December 31, 2007, as compared to the same period in
2006. This was led by new supervisor growth in the United States
of 20.8%. Total supervisor growth in the region increased 19.9%.
We believe the fiscal year 2008 net sales in North America
should continue to show year over year positive growth primarily
as a result of continued momentum in the United States behind
expansion of the club concept and Lead Generation/Sampling DMOs.
Mexico
and Central America
The Mexico and Central America region reported net sales of
$384.6 million for the year ended December 31, 2007.
Net sales for the year ended December 31, 2007 increased
$7.7 million, or 2.0%, as compared to 2006. In local
currency, net sales for the year ended December 31, 2007
increased by 2.2%, as compared to 2006. The fluctuation of
foreign currency rates had an unfavorable impact of
$0.6 million on net sales for the year ended
December 31, 2007. Net sales in Mexico had a decline of
$2.3 million, or 0.6% for the year ended December 31,
2007, as compared to 2006.
New supervisors in the region decreased 19.3% for the year
ending December 31, 2007, as compared to the same period in
2006. Driving this decline was Mexico, whose number of
supervisors decreased by 21.2% for 2007. Total supervisor growth
in the region increased 22.1%.
After experiencing explosive sales growth in 2004 through 2006,
2007 was a re-building year for Mexico as the management team,
in conjunction with the distributor leadership, addressed issues
of infrastructure needs as well as distributor training.
Infrastructure enhancements included introduction of sales
centers and expansion of current distribution facilities, the
addition of a toll-free phone line, and enhanced Ethical
Business Practices or EBP resources. There are now 20 locations
throughout Mexico, an increase of 6 locations and expansion of 3
sales centers. These additions were designed to provide
additional distributor access points and support the expansion
of our business. In addition, the distributor leadership has
invested significant time training other distributors on
Nutrition Club operations and the marketing plan in Mexico.
In Central America, we opened El Salvador, our
64th country, in February 2007. For the year 2007, net
sales in El Salvador were $4.9 million, making it the
regions second largest market.
We believe the fiscal year 2008 net sales in Mexico and
Central America should show year over year positive growth as a
result of infrastructure enhancements, and better trained
distributors driving penetration across Mexico, and focusing on
retailing and recruiting.
54
South
America
The South America region now includes Argentina, Bolivia,
Brazil, Chile, Colombia, Peru and Venezuela. The South America
region reported net sales of $300.1 million for the year
ended December 31, 2007. Net sales increased
$76.0 million or 33.9% for the year ended December 31,
2007, as compared to 2006. In local currency, net sales
increased 27.0% for the year ended December 31, 2007, as
compared to the same period of 2006. The fluctuation of foreign
currency rates had a $15.5 million favorable impact on net
sales for the year ended December 31, 2007. The increase
was attributable to net sales increases in Venezuela, Argentina,
and Peru, and partially offset by a decline in Brazil.
New supervisors in the region increased 25.3% for the year
ending December 31, 2007, as compared to the same period in
2006. This was driven by new supervisor growth in Venezuela and
Argentina, which increased 391.3% and 26.9%, respectively,
offset by a 31.7% decline in Brazil. Total supervisor growth in
the region increased 26.1%.
In Brazil, the regions largest market, the net sales
decline was primarily due to distributors transitioning to a
more balanced mix of recruiting, retailing and retention via the
Nutrition Club DMO in an effort to build a more sustainable
platform for long-term growth. Also contributing to the sales
decline was the fact that our senior distributor leadership in
Brazil focused on building new business in Peru, which opened in
December of 2006 and had net sales of $28.0 million for
year ending December 31, 2007. Brazil hosted a southeastern
Extravaganza in December 2007 with over 6,000 distributors in
attendance and launched three additional products within their
unique green tea based outer care product line called Soft
Green. This line is strategically positioned for Brazil to fuel
growth in the large personal care segment and is strategically
priced to compete with other multi-level marketing companies.
Venezuela, the regions second largest market, experienced
strong growth with net sales up 317.3% for the year ending
December 31, 2007 compared to 2006. Total supervisors
increased 246.0% for the year. Argentina, the regions
third largest market, experienced sales growth of 27.5% for the
year ended December 31, 2007.
In February 2008, the South America region will host
extravaganza events in Argentina and Venezuela. In March 2008,
the region will host a Brazil northeast extravaganza in
Fortaleza, Brazil.
We believe the fiscal year 2008 net sales in South America
should continue to show year over year positive growth primarily
as a result of continued momentum in Venezuela and other key
South America markets, offset by softness in Brazil as it
completes its transition.
EMEA
The EMEA region reported net sales of $567.7 million for
the year ended December 31, 2007. Net sales increased
$19.7 million, or 3.6%, for the year ended
December 31, 2007, as compared to 2006. In local currency,
net sales decreased 4.3% for the year ended December 31,
2007, as compared to 2006. The fluctuation of foreign currency
rates had a favorable impact on net sales of $43.1 million
for the year ended December 31, 2007.
Among the largest markets in the region, Spain, France and
Italy, reported net sales increases of 25.9%, 18.1% and 14.3%,
respectively. Germany and Netherlands net sales declined 21.1%
and 19.0%, respectively, for the same time period. Growth in
these western markets has been driven by the Wellness Coach DMO.
In addition, Eastern European countries have shown signs of
potential long-term growth including net sales gains for Russia
of 4.4% driven by adoption of the Nutrition Club concept in the
form of a Breakfast Club DMO.
For the year ending December 31, 2007, new supervisors for
the region decreased 13.7%, with gains in Spain, France, and
Italy which were up 17.6%, 7.3%, and 5.8% respectively,
offsetting declines in Germany and the Netherlands of 46.5% and
25.3%, respectively. Total supervisor growth for the region has
declined 5.6%.
In EMEA, Zambia, our 65th country, was opened in July 2007.
In April and May 2008, EMEA will host a series of Spring
Spectaculars and Leadership Development Weekends in local
markets across the region.
55
We expect 2008 net sales to have modest gains driven by
continued momentum in key western markets and with eastern
markets building momentum as we continue to develop and
implement strategies for growth.
Asia
Pacific
The Asia Pacific region now includes Australia, China, Hong
Kong, India, Indonesia, Japan, Malaysia, New Zealand,
Philippines, Singapore, Thailand, South Korea and Taiwan. The
Asia Pacific region reported net sales of $454.7 million
for the year ended December 31, 2007. Net sales increased
$75.8 million, or 20.0%, for the year ended
December 31, 2007, as compared to 2006. In local currency,
net sales increased 16.3% for the year ended December 31,
2007, as compared to 2006. The fluctuation of foreign currency
rates had a favorable impact of $14.3 million on net sales
for the year ended December 31, 2007. The increase in net
sales in Asia Pacific was attributable to the increase in net
sales in China and Taiwan as our presence continues to grow in
those countries, partially offset by a decrease in Japan.
Net sales in Taiwan, our largest market in the region, increased
$24.0 million, or 27.7%, for the year ended December 31
2007, as compared to 2006. Adoption of the Nutrition Club DMO
has fueled growth in this country. Net sales in Japan, our third
largest market in the region, decreased $3.8 million, or
4.8%, for the year ended December 31, 2007, as compared to
the same periods in 2006. Business trends in Japan made
sequential improvement during 2007 with fourth quarter
2007 net sales increasing 7.1% compared to the third
quarter of 2007 and 3.7% compared to the fourth quarter of 2006.
Net sales in China increased $43.9 million, or 136.9%, for
year ended December 31, 2007, compared to the same periods
in 2006. On March 23, 2007, we received the Direct Sellers
license for the cities of Suzhou and Nanjing in the Jiangsu
province. On July 9, 2007, we received our expanded Direct
Sellers license for the entire Jiangsu province. As of
December 31, 2007, we are operating 90 stores in China
across 29 Chinese provinces.
New supervisors in the region (excluding China) increased 2.6%
for the year ending December 31, 2007, as compared to the
same period in 2006. Driving this growth are Taiwan, Japan and
Thailand up 40.7%, 12.1% and 22.7% respectively. Total
supervisor growth in the region (excluding China) increased 7.1%.
In March 2008, Herbalife will host its annual global Herbalife
Honors event in Singapore, where President Team members from
around the world will meet and share best practices and where
Herbalife management will give distributors the Mark Hughes
bonus awards. Herbalife is the sponsor of the Los Angeles
Galaxys Asia tour, where the team will be playing
exhibition games in March including matches in Hong Kong, Seoul,
Korea and Shanghai, China.
We believe the fiscal year 2008 net sales in Asia Pacific
should continue to show positive year over year growth,
primarily as a result of the expansion of our direct selling
business in China along with the continued growth in Taiwan and
improving business trends in Japan.
Sales by
Product Category
The following historical information related to sales organized
by product categories has been reclassified to conform to our
current product line presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
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
|
|
$
|
2,015.6
|
|
|
$
|
(993.2
|
)
|
|
$
|
1,022.4
|
|
|
$
|
167.6
|
|
|
$
|
1,190.0
|
|
|
$
|
2,292.2
|
|
|
$
|
(1,124.3
|
)
|
|
$
|
1,167.9
|
|
|
$
|
191.5
|
|
|
$
|
1,359.4
|
|
|
|
14.2
|
%
|
Targeted Nutrition
|
|
|
616.6
|
|
|
|
(303.8
|
)
|
|
|
312.8
|
|
|
|
51.3
|
|
|
|
364.1
|
|
|
|
730.7
|
|
|
|
(358.4
|
)
|
|
|
372.3
|
|
|
|
61.1
|
|
|
|
433.4
|
|
|
|
19.0
|
%
|
Energy and Fitness
|
|
|
132.3
|
|
|
|
(65.2
|
)
|
|
|
67.1
|
|
|
|
11.0
|
|
|
|
78.1
|
|
|
|
152.2
|
|
|
|
(74.6
|
)
|
|
|
77.6
|
|
|
|
12.7
|
|
|
|
90.3
|
|
|
|
15.6
|
%
|
Outer Nutrition
|
|
|
256.9
|
|
|
|
(126.6
|
)
|
|
|
130.3
|
|
|
|
21.4
|
|
|
|
151.7
|
|
|
|
243.2
|
|
|
|
(119.3
|
)
|
|
|
123.9
|
|
|
|
20.3
|
|
|
|
144.2
|
|
|
|
(4.9
|
)%
|
Literature, Promotional and Other
|
|
|
78.8
|
|
|
|
16.3
|
|
|
|
95.1
|
|
|
|
6.5
|
|
|
|
101.6
|
|
|
|
92.7
|
|
|
|
18.0
|
|
|
|
110.7
|
|
|
|
7.8
|
|
|
|
118.5
|
|
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,100.2
|
|
|
$
|
(1,472.5
|
)
|
|
$
|
1,627.7
|
|
|
$
|
257.8
|
|
|
$
|
1,885.5
|
|
|
$
|
3,511.0
|
|
|
$
|
(1,658.6
|
)
|
|
$
|
1,852.4
|
|
|
$
|
293.4
|
|
|
$
|
2,145.8
|
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Our emphasis on the science of weight management, energy and
nutrition has resulted in product introductions such as
Niteworks®
and Garden
7®,
Best
Defense®,
Liftoff®,
H3OTM
and a new Kids Line. Due to the launch of these products
together with the continued positive sales momentum discussed
above, net sales of weight management products, targeted
nutrition products and energy and fitness products increased
compared to 2006. The change of product mix due to various DMOs,
as well as the change in country mix, resulted in a decrease in
the sales of Outer Nutrition products for 2007. We expect growth
rates within our product categories to vary from time to time as
we launch new products.
Gross
Profit
Gross profit was $1,707.5 million for the year ended
December 31, 2007, as compared to $1,505.2 million in
2006. As a percentage of net sales, gross profit for the year
ended December 31, 2007 decreased slightly to 79.6% as
compared to 79.8% for the same period in 2006. Generally, gross
profit percentages do not vary significantly as a percentage of
net sales other than due to product or country mix, ongoing cost
reduction initiatives and provisions for slow moving and
obsolete inventory. Additionally, we believe that we have the
ability to mitigate ingredient and manufacturing cost increases
from our suppliers by raising the prices of our products or
shifting product sourcing to alternative manufacturers.
Royalty
Overrides
Royalty overrides as a percentage of net sales was 35.4% for the
year ended December 31, 2007, as compared to 35.8% in the
same period of 2006. The decrease for the year ended
December 31, 2007 was primarily due to changes in the mix
of products and countries, and the increase in sales in China
where compensation to our full-time employee sales
representatives 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. Due to the structure of our global
compensation plan, we expect to see slight fluctuations in
royalty overrides as a percent of net sales.
Selling,
General and Administrative Expenses
Selling, general and administrative Expenses as a percentage of
net sales was 29.6% for the year ended December 31, 2007,
as compared to 30.4% for the same period of 2006.
For the year ended December 31, 2007, selling, general and
administrative expenses increased $61.2 million to
$634.2 million from $573.0 million in 2006. The
increase included $38.5 million in higher salaries and
benefits due primarily to normal merit increases, severance
related to the Realignment for Growth plan (as discussed in
Note 13 in the Notes to our consolidated financial
statements) and higher compensation costs associated with
full-time employee sales representatives in China,
$10.1 million in higher foreign exchange losses,
$4.7 million in higher credit card fees due to the increase
in sales, and $3.8 million in higher depreciation and
amortization related mostly to the development of the Customer
Initiative
e-tailing
and distributor support websites launched in April 2007 and the
expansion and relocation to new facilities. The increases were
partially offset by $6.2 million lower professional fees.
We expect 2008 selling, general and administrative expenses to
increase in absolute dollars over 2007 levels reflecting general
salary merit increases, continued investments in China, and
various sales growth initiatives including sales events and
promotions. As a result of these initiatives, selling, general
and administrative expenses as a percentage of net sales should
remain at or below 2007 levels.
Net
Interest Expense
Net interest expense was $10.6 million for the year ended
December 31, 2007, as compared to $39.5 million in
2006. Interest expense for 2007 was $28.9 million lower
than 2006 primarily due to the recapitalization expenses
recorded in 2006 related to the redemption of
$165.0 million principal amount of our
91/2% Notes
due 2011, and the
57
repayment of $79.6 million term loan under our prior senior
credit facility originally entered into on December 21,
2004. The table below shows a break down of the amounts
comprising interest expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net Interest Expense
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
91/2% Senior
Notes Clawback Premium and Write-off of deferred financing fees
|
|
|
21.2
|
|
|
|
|
|
Term Loan-Write-off of deferred financing fees
|
|
|
1.4
|
|
|
|
|
|
Revolver-Write-off of deferred finance fees
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization expenses included in Interest Expense
|
|
|
22.9
|
|
|
|
|
|
Interest expense
|
|
|
21.5
|
|
|
|
16.4
|
|
Interest income
|
|
|
(4.9
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
Total Net Interest Expense
|
|
$
|
39.5
|
|
|
$
|
10.6
|
|
|
|
|
|
|
|
|
|
|
See Liquidity and Capital Resources below for
further discussion on our senior secured credit facility.
Income
Taxes
Income taxes were $111.1 million for the year ended
December 31, 2007, as compared to $74.3 million in
2006. As a percentage of pre-tax income, the estimated effective
income tax rate was 36.7% for the year ended December 31,
2007, as compared to 34.2% in 2006. The increase in the
effective tax rate for the year ended December 31, 2007, as
compared to 2006, was primarily due to an increase in
unrecognized tax benefits (i.e. income tax reserves that are not
related to our adoption of FIN 48 (as defined below) in
2007), the settlement of an international tax audit in 2006, the
tax benefit of a bond redemption in 2006, and the
$2.2 million favorable impact of the adjustment to income
tax accrual in the fourth quarter of 2006. Excluding the effect
of the increase in prior year unrecognized tax benefits and
other non-recurring items, the effective tax rate for the year
ended December 31, 2007 would have been approximately 35.7%
compared to 38% in 2006.
Restructuring
Costs
In July 2006, the Company initiated its realignment of its
employee base as part of the first phase of its Realignment For
Growth plan. The Company recorded $10.5 million and
$1.8 million of professional fees, severance and related
costs relating to the restructuring for the years ended
December 31, 2006 and 2007. All such amounts were included
in selling, general and administrative expenses.
During the fourth quarter of 2007, the Company initiated the
second phase of its Realignment for Growth plan and incurred
approximately $4.0 million of professional fees, severance
and related costs relating to the restructuring. The Company
expects to complete its Realignment For Growth plan in 2008 and
estimates that the corresponding severance and related cost that
will be incurred in 2008 will be approximately $4.0 million
to $6.0 million.
Year
ended December 31, 2006 compared to year ended
December 31, 2005
Net
Sales
The discussion below for the years ended December 31, 2006
and 2005 has been revised from how it was originally disclosed
to conform to the December 31, 2007 presentation in
connection with the reduction in the number of our geographic
regions from seven to five in late 2007.
58
The following chart reconciles retail sales to net sales:
Sales by
Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
North America
|
|
$
|
488.3
|
|
|
$
|
(232.6
|
)
|
|
$
|
255.7
|
|
|
$
|
48.1
|
|
|
$
|
303.8
|
|
|
$
|
575.9
|
|
|
$
|
(274.9
|
)
|
|
$
|
301.0
|
|
|
$
|
56.6
|
|
|
$
|
357.6
|
|
|
|
17.7
|
%
|
Mexico & Central America
|
|
|
369.2
|
|
|
|
(178.9
|
)
|
|
|
190.3
|
|
|
|
29.6
|
|
|
|
219.9
|
|
|
|
634.3
|
|
|
|
(308.0
|
)
|
|
|
326.3
|
|
|
|
50.6
|
|
|
|
376.9
|
|
|
|
71.4
|
%
|
South America
|
|
|
265.7
|
|
|
|
(128.0
|
)
|
|
|
137.7
|
|
|
|
20.4
|
|
|
|
158.1
|
|
|
|
386.8
|
|
|
|
(189.8
|
)
|
|
|
197.0
|
|
|
|
27.1
|
|
|
|
224.1
|
|
|
|
41.7
|
%
|
EMEA
|
|
|
890.4
|
|
|
|
(424.1
|
)
|
|
|
466.3
|
|
|
|
79.0
|
|
|
|
545.3
|
|
|
|
895.5
|
|
|
|
(430.0
|
)
|
|
|
465.5
|
|
|
|
82.5
|
|
|
|
548.0
|
|
|
|
0.5
|
%
|
Asia Pacific
|
|
|
562.1
|
|
|
|
(261.8
|
)
|
|
|
300.3
|
|
|
|
39.4
|
|
|
|
339.7
|
|
|
|
607.7
|
|
|
|
(269.8
|
)
|
|
|
337.9
|
|
|
|
41.0
|
|
|
|
378.9
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
$
|
2,575.7
|
|
|
$
|
(1,225.4
|
)
|
|
$
|
1,350.3
|
|
|
$
|
216.5
|
|
|
$
|
1,566.8
|
|
|
$
|
3,100.2
|
|
|
$
|
(1,472.5
|
)
|
|
$
|
1,627.7
|
|
|
$
|
257.8
|
|
|
$
|
1,885.5
|
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the 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 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 corporate
sales events such as Extravaganzas 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, management believes that
these development and motivation programs can increase the
productivity of the supervisor 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 supervisors 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
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 has driven growth in our business.
The following net sales by geographic region discussion further
details some of the above factors and describes unique growth
factors specific to certain 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 our products. The
correct business foundation includes strong country management
that works closely with the distributor leadership, 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, World Team Schools, 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.
North
America
Net sales in North America increased $53.8 million, or
17.7%, for the year ended December 31, 2006, as compared to
2005. In local currency, net sales increased by 17.4% for the
year ended December 31, 2006, as compared to 2005. The
fluctuation of foreign currency rates had a positive impact of
$1.0 million on net sales for the year ended
December 31, 2006. The overall increase was a result of net
sales growth in the U.S. of $53.5 million, or 18.8%,
for the year ended December 31, 2006. The
U.S. continues to benefit from strong retailing, especially
from
59
an increasing Latino distribution base, the improved retention
of the distributor force that retails our products and a product
line and business opportunity that is attractive to the
demographics in this country.
In the U.S. we have also expanded branding efforts to
include sponsorship of the AVP Volleyball Tour, the Bay to
Breakers Run, the 2006 Amgen Tour of California bicycle race,
the AEG Home Depot Center in Torrance, CA, and the 2006 Nautica
Triathlon; and various new promotions including the 2006 Active
World Team promotion and the 2006 President Team Challenge. In
2006 we introduced several new products, including a convenient
water mixable version of our top selling Formula One shake, a
reformulated and reduced retail price version of our Garden
7®
product,
NouriFusion®
personal care line in individual use packets and most recently
launched Best
Defense®
and Skin
Activator®
Line Extensions. We believe that the above activities were
critical to maintain and expand upon the positive momentum,
created within the U.S. distributors sales force.
Mexico
and Central America
Net sales in Mexico and Central America for the year ended
December 31, 2006 increased $157.0 million, or 71.4%,
as compared to 2005. In local currency, net sales for the year
ended December 31, 2006 increased by 72.1%, as compared to
2005. The fluctuation of foreign currency rates had an
unfavorable impact of $1.4 million on net sales for the
year ended December 31, 2006. The overall increase was a
result of net sales growth in Mexico of $154.3 million, or
70.5%, for the year ended December 31, 2006, as compared to
2005.
The increase in new supervisors along with continued expansion
of distributors adopting the Nutrition Clubs DMO contributed to
the net sales growth in Mexico and improved the distributor
retention rate to 57% and supervisor growth, up 81.9% at
December 31, 2006, as compared to December 31, 2005.
We estimate that distributors are operating approximately 34,000
Nutrition Clubs in Mexico. During 2006 we opened an additional
sales center in Mexico City, held a Presidents Team Tour
attended by approximately 9,000 distributors, hosted the Mexico
Extravaganza in Mexico City, which was attended by over 11,000
distributors and held two Active Supervisor Schools, which
approximately 4,300 distributors attended. Additionally, we
relocated our Mexico headquarters and main warehouse in
Guadalajara and plan to open a new sales center in the Mexico
City to support the expansion of our business. During December
2006, we held several Supervisor Training Schools, which over
11,500 distributors attended.
South
America
Net sales in South America increased $66.0 million or 41.7%
for the year ended December 31, 2006, as compared to 2005.
In local currency, net sales increased 32.8% for the year ended
December 31, 2006, as compared to the same period of 2005.
The fluctuation of foreign currency rates had a
$14.1 million favorable impact on net sales for the year
ended December 31, 2006. The overall increase was
attributable mainly to net sales increases in Brazil, Colombia,
Argentina, Venezuela and Bolivia. During the year we held a
South America extravaganza in Brazil, held Supervisor Mega
Schools in the South American markets, reaching more than 6,500
distributors and opened Peru in December 2006.
Net sales in Brazil increased $26.5 million or 23.7% for
the year ended December 31, 2006, as compared to 2005. In
local currency, net sales increased by 11.1% for the year ended
December 31, 2006, as compared to 2005. The fluctuation of
foreign currency rates had a favorable impact of
$14.2 million on net sales for the year ended
December 31, 2006.
The net sales growth trend in Brazil is a result of strong
supervisor growth, up 15.0% at December 31, 2006, as
compared to 2005, strong distributor leadership, a highly
effective country management team and the introduction of a new
distributor promotion launched in the third quarter of 2006. In
addition, expansion of the Total Plan lead generation method and
the introduction of the Nutrition Club method, or DMO, in this
market have been key catalysts for growth. During the year we
held a World Team School attended by over 4,500 distributors and
launched the
NouriFusion®
personal care line. Additionally, we held our Brazil
Extravaganza during December 2006, which approximately 11,000
distributors attended.
Colombia, Argentina, Venezuela and Bolivia experienced sales
increases of 233.0%, 67.5%, 63.2% and 132.7%, respectively for
the year ended December 31, 2006. This growth was the
result of new supervisor growth
60
and positive momentum from the local events, including
Millionaires Retreats held in Panama and Pucon, Chile,
sponsored activities such as the Bogota, Colombia Marathon
during the third quarter of 2006 and several new product
launches, Cell Activator and Cell U Loss in Chile and Total
Control®
in Venezuela.
EMEA
Net sales in Europe showed a nominal increase of
$2.7 million, or 0.5%, for the year ended December 31,
2006, as compared to 2005. In local currency, net sales
increased 0.6% for the year ended December 31, 2006, as
compared to 2005. The fluctuation of foreign currency rates had
an unfavorable impact on net sales of $0.2 million for the
year ended December 31, 2006.
Portugal, France and Spain continued to grow and experienced
sales increases of 41.9%, 24.3% and 15.6%, respectively, while
Germany and the Netherlands continued their declines in net
sales of 19.9% and 20.2%, respectively for the year ended
December 31, 2006, as compared to 2005. During the first
quarter of 2006 we decentralized our regional call centers to
Italy, France and the Netherlands in an effort to improve
service and support to distributors who previously were serviced
out of the United Kingdom. During this process we also opened
our first sales center in the Netherlands. Additionally, during
the third quarter an Extravaganza was held in Athens, Greece and
was attended by over 15,000 distributors from over 40 countries
and we held a Regional World Team School in Lisbon and Portugal,
which approximately 7,500 World and TAB Members attended.
The net sales increases in Portugal, France, and Spain
continued, primarily due to a well balanced performance across
distributor retailing, recruiting and retention efforts, a
united distributor leadership working closely with the local
management, and a program focus on the Total Plan. In addition,
there has been an increasing emphasis on good health and
nutrition in France, which is supported and promoted by local
nutritionists. During the year two Nutrition Advisory Board
members were appointed in France and Spain.
The decline in Germany was primarily driven by a loss of
momentum resulting in a decrease in supervisors, down 25.3% at
December 31, 2006, as compared to December 31, 2005.
In Germany, a recently constituted strategy group comprised of
distributor leaders and regional management has focused on
turnaround initiatives, both in business activity as well as
brand building and new product introductions. Significant
distributor training has been undertaken, concentrating on long
term customers, Nutrition Clubs and wellness coaching
DMOs. In addition, improved distributor communications has
been a key focus and new online tools are being provided.
The net sales decline in the Netherlands was primarily driven by
lower recruiting of new distributors. A reconstituted
distributor strategy group, working closely with regional
management, is focused on initiatives to reverse that trend.
These included a National Supervisor recruitment drive, the
launch of
Liftoff®
in June 2006, a highly successful Spring Spectacular
event and the appointment of a member of the Global Nutritional
Advisory Board.
Asia
Pacific
Asia Pacific net sales increased $39.2 million or 11.5% for
the year ended December 31, 2006, as compared to 2005. In
local currency, net sales increased 11.0% for the year ended
December 31, 2006, as compared to 2005. The fluctuation of
foreign currency rates had a favorable impact of
$1.8 million on net sales for the year ended
December 31, 2006. The increase in net sales in Asia
Pacific was attributable to net sales increases in China and the
opening of Malaysia in February 2006 as a new market partially
offset by the decrease in net sales in Japan, Taiwan and Hong
Kong.
Net sales in China increased by $26.9 million to
$32.1 million, for the year ended December 31, 2006,
as compared to 2005. Since March of 2005 we have opened 42
retail stores in 21 provinces throughout China.
Net sales in Japan decreased $16.2 million or 17.1%, for
the year ended December 31, 2006, as compared to 2005. The
decline in sales is primarily attributable to increased
competition from new companies entering the market. In spite of
the decrease in net sales, the number of new distributors and
the supervisor retention rate are improving when compared to the
same period last year. The improved retention rate was caused by
an increase in the number of distributors taking advantage of
the modified re-qualification criteria.
61
Net sales in Taiwan decreased $3.6 million, or 4.0%, for
the year ended December 31, 2006, as compared to 2005. In
local currency, net sales in Taiwan decreased 3.1% for the year
ended December 31, 2006, as compared to 2005. The
fluctuation of foreign currency rates had an unfavorable impact
on net sales of $0.9 million for the year ended
December 31, 2006. The decrease in net sales was primarily
attributable to the loss of focus of local distributor
leadership and some of their key members. In 2006, their
attention was primarily directed towards the opening of Malaysia
and the emerging business opportunity in China. We saw this
trend improve in the 4th quarter as sales in Taiwan
increased 13.9% as compared to 2005. In 2006 we invested an
incremental $20.0 in the China infrastructure, including working
capital of $5.6 million and capital expenditures of
$3.4 million.
Net sales in Hong Kong decreased $4.8 million, or 28.8%,
for the year ended December 31, 2006, as compared to 2005.
The decline in net sales was primarily the result of a loss of
momentum, attributable to the focus on the emerging opportunity
in China, resulting in a decrease in supervisors, down 24.4% at
December 31, 2006, as compared to December 31, 2005.
We opened our Malaysia market in February 2006. Over
10,000 people attended the various opening events. Also,
during the year we held an extravaganza in Bangkok, Thailand,
which was attended by over 15,000 distributors from 13 countries
and conducted a World Training School in Korea, which
approximately 5,000 distributors attended.
Sales by
Product Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,655.7
|
|
|
$
|
(814.3
|
)
|
|
$
|
841.4
|
|
|
$
|
139.1
|
|
|
$
|
980.5
|
|
|
$
|
2,015.6
|
|
|
$
|
(993.2
|
)
|
|
$
|
1,022.4
|
|
|
$
|
167.6
|
|
|
$
|
1,190.0
|
|
|
|
21.4
|
%
|
Targeted Nutrition
|
|
|
490.0
|
|
|
|
(241.0
|
)
|
|
|
249.0
|
|
|
|
41.2
|
|
|
|
290.2
|
|
|
|
616.6
|
|
|
|
(303.8
|
)
|
|
|
312.8
|
|
|
|
51.3
|
|
|
|
364.1
|
|
|
|
25.5
|
%
|
Energy and Fitness
|
|
|
95.8
|
|
|
|
(47.1
|
)
|
|
|
48.7
|
|
|
|
8.1
|
|
|
|
56.8
|
|
|
|
132.3
|
|
|
|
(65.2
|
)
|
|
|
67.1
|
|
|
|
11.0
|
|
|
|
78.1
|
|
|
|
37.5
|
%
|
Outer Nutrition
|
|
|
275.9
|
|
|
|
(135.7
|
)
|
|
|
140.2
|
|
|
|
23.2
|
|
|
|
163.4
|
|
|
|
256.9
|
|
|
|
(126.6
|
)
|
|
|
130.3
|
|
|
|
21.4
|
|
|
|
151.7
|
|
|
|
(7.2
|
)%
|
Literature, Promotional and Other
|
|
|
58.3
|
|
|
|
12.7
|
|
|
|
71.0
|
|
|
|
4.9
|
|
|
|
75.9
|
|
|
|
78.8
|
|
|
|
16.3
|
|
|
|
95.1
|
|
|
|
6.5
|
|
|
|
101.6
|
|
|
|
33.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,575.7
|
|
|
$
|
(1,225.4
|
)
|
|
$
|
1,350.3
|
|
|
$
|
216.5
|
|
|
$
|
1,566.8
|
|
|
$
|
3,100.2
|
|
|
$
|
(1,472.5
|
)
|
|
$
|
1,627.7
|
|
|
$
|
257.8
|
|
|
$
|
1,885.5
|
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our continued emphasis on the science of weight management and
nutrition during the recent years, has resulted in product
introductions such as
ShapeWorks®,
a personalized meal replacement program; Formula 1 Instant
Nutritional Snack Mix;
Niteworks®;
which supports energy, circulatory and vascular health;
Garden
7®,
which provides seven servings of fruits and vegetables; and
Liftoff®,
an innovative, effervescent energy product. Due to the launch of
these products together with the continued positive sales
momentum discussed above, net sales of Weight Management
products and Targeted Nutrition products increased at a higher
rate than that for the entire Company. Net sales declines in
Outer Nutrition reflects country mix along with distributors
shifting their procedures to products sold in their
DMO primarily Nutrition Clubs. We expect shifts
within these categories from time to time as we launch new
products and as new DMOs shift buying patterns.
Gross
Profit
Gross profit was $1,505.2 million for the year ended
December 31, 2006, as compared to $1,251.0 million in
2005. As a percentage of net sales, gross profit for the year
ended December 31, 2006 remained flat at 79.8% as compared
to the same period of 2005. Generally, gross profit percentages
do not vary significantly as a percentage of net sales other
than due to product or country mix, currency fluctuation,
importation and product cost and provisions for slow moving and
obsolete inventory.
Royalty
Overrides
Royalty overrides as a percentage of net sales was 35.8% for the
year ended December 31, 2006, as compared to 35.5% in the
same period of 2005. The increase for the year ended
December 31, 2006 was primarily due to a
62
favorable pre-tax impact of $4.0 million relating to a
change in the allowance for uncollectible royalty overrides
receivables from distributors in the third quarter of 2005.
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 remained flat at 30.4% for the year ended
December 31, 2006, as compared to the same period of 2005.
The unfavorable impact of foreign currency fluctuations was
$9.7 million for the year ended December 31, 2006.
For the year ended December 31, 2006, selling, general and
administrative expenses increased $96.7 million to
$573.0 million from $476.3 million in 2005. The
increase included $47.5 million in higher labor and
benefits due primarily to normal merit increases, severance
related to our Realignment for Growth plan (discussed in
Note 13 to our consolidated financial statements), higher
compensation costs associated with employee sales
representatives in China and higher stock based compensation
expenses mostly from adopting the new accounting rules for stock
based compensation; $8.6 million relating to legal and
litigation expenses; $2.6 million for professional fees
primarily associated with our consulting expense for our
Realignment for Growth plan; $10.8 million in higher
occupancy expenses primarily due to new facilities and duplicate
rent as we transitioned to new facilities in 2006;
$5.2 million in higher employees bonuses and
$5.9 million in higher depreciation expenses. The increases
were partially offset by $9.9 million lower amortization
expenses and $2.6 million lower advertising and promotion
expenses.
Net
Interest Expense
Net interest expense was $39.5 million for the year ended
December 31, 2006, as compared to $43.9 million in
2005. Interest expense for 2006 was lower primarily due to the
redemption of $165.0 million principal amount of our
91/2% Notes
due 2011 and the repayment of our prior credit facility
originally entered into on December 21, 2004, of
$79.6 million in the third quarter of 2006, partially
offset by recapitalization expenses as noted in the table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Net Interest Expense
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
91/2% Senior
Notes Clawback Premium and Write-off of deferred financing fees
|
|
$
|
14.2
|
|
|
$
|
21.2
|
|
Term Loan-Write-off of deferred financing fees
|
|
|
2.2
|
|
|
|
1.4
|
|
Revolver-Write-off of deferred finance fees
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Recapitalization expenses included in Interest Expense
|
|
|
16.4
|
|
|
|
22.9
|
|
Interest expense
|
|
|
29.9
|
|
|
|
21.5
|
|
Interest income
|
|
|
(2.4
|
)
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
Total Net Interest Expense
|
|
$
|
43.9
|
|
|
$
|
39.5
|
|
|
|
|
|
|
|
|
|
|
In 2004, we exercised a contract provision to redeem 40%, or
$110.0 million, of the
91/2% Notes.
After the required notice period, this redemption was completed
on February 4, 2005. The premium and the write-off of
deferred financing fees of $14.2 million associated with
this redemption was included in interest expense in the first
quarter of 2005.
In the third quarter of 2006, we repaid all amounts outstanding
under the Prior Credit Facility, $79.6 million, and
redeemed the $165.0 million aggregate principal amount of
our
91/2% Notes.
The premium and write-off of deferred financing fees of
$22.9 million associated with the recapitalization were
included in interest expense for 2006. As part of the
recapitalization, we entered into a $300 million senior secured
credit facility, or the New Credit Facility, and borrowed
$200.0 million pursuant to the term loan thereunder. In
September 2006, we prepaid
63
$20.0 million of our new term loan, resulting in
approximately $0.1 million additional interest expense from
the write-off of deferred financing fees.
Income
taxes
Income taxes were $74.3 million for the year ended
December 31, 2006, as compared to $82.0 million in
2005. As a percentage of pre-tax income, the estimated effective
income tax rate was 34.2% for the year ended December 31,
2006, as compared to 46.8% in 2005. The decrease in the
effective tax rate for the year ended December 31, 2006, as
compared to 2005, was caused primarily by the impact of
non-deductible interest and other recapitalization charges in
2005, the settlement of an international tax audit in 2006, the
tax benefit of a bond redemption in 2006, and the
$2.2 million favorable impact of the adjustment to income
tax accrual in the fourth quarter of 2006. Excluding the effects
of the settlement of the international tax audit, the tax
benefit of the bond redemption and other items, the effective
tax rate for the year ended December 31, 2006 would have
been 38.0%.
Restructuring
Costs
In July 2006, we initiated a realignment of our employee base as
part of our Realignment For Growth plan. We incurred
$7.5 million of severance and related costs in the fourth
quarter of 2006. As of December 31, 2006, the accrued
liability for employees severance, retention and other
related costs was $5.1 million.
Net
Results
Net income for the year ended December 31, 2006 increased
53.7% to $143.1 million, or $1.92 per diluted share,
compared with $93.1 million, or $1.28 per diluted share,
for 2005. The increase was driven by revenue growth primarily in
Mexico and the U.S. markets, lower interest expense
following a debt refinancing in July 2006 and a lower effective
income tax rate.
Net income for 2006 included $14.3 million additional
interest expense related to the refinancing arrangements in July
2006, a $3.7 million tax benefit resulting from an
international income tax settlement, a $2.7 million
additional tax benefit from refinancing transactions, a
$2.2 million favorable impact of the adjustment to income
tax accrual and a $4.9 million unfavorable after tax impact
in connection with the Re-alignment for Growth plan in the
fourth quarter of 2006, partially offset by a $7.0 million
expense in connection with the adoption of the new accounting
rules for stock based compensation and a $12.4 million
charge for the continued build-out of China infrastructure. Net
income for 2005 included a $14.2 million additional
interest expense related to the clawback of the
91/2% Notes,
a favorable after tax impact of a $2.3 million charge
relating to a change in allowance for uncollectible royalty
overrides receivables from distributors in the third quarter of
2005 and a non-cash tax charge of $5.5 million associated
with moving our China subsidiary within the global corporate
structure in the second quarter of 2005. Overall, appreciation
of foreign currencies had a $0.6 million unfavorable impact
on net income in 2006.
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
restrictions on the ability to transfer and remit funds among
our international affiliated companies.
For the year ended December 31, 2007, we generated
$270.8 million from operating cash flows, as compared to
$184.4 million in 2006. The increase in cash generated from
operations was primarily due to an increase in operating income
of $56.2 million driven by a 13.8% growth in net sales,
lower inventory balance and lower interest payments in 2007
compared to 2006.
Capital expenditures, including capital leases, for the year
ended December 31, 2007 were $49.0 million, as
compared to $66.9 million in 2006. The majority of these
expenditures represented investments in management information
system, the development of our distributor internet initiatives,
and the expansion of our facilities domestically and
internationally. We expect to incur capital expenditures of
approximately $95.1 million in 2008.
64
We entered into a new $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. 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% and the revolver
bears interest at LIBOR plus a margin of 1.25%. In March 2007,
we made a prepayment of $29.5 million on our term loan
borrowings. In the second quarter of 2007, we borrowed an
aggregate amount of $100.0 million under the revolving
credit facility to fund our share repurchase program. In June
2007, we repaid $40.0 million of our revolving credit
facility. In September 2007, the credit agreement was amended
increasing the revolving credit facility by $150.0 million
to fund the increase in the share repurchase program. In the
third quarter of 2007, we borrowed an additional
$48.7 million, and repaid $30.0 million of our
revolving credit facility. During October 2007, we repaid
$15.0 million of the revolving credit facility, and during
December 2007, we borrowed an additional amount of
$145.0 million to repurchase more of our common shares.
The following summarizes our contractual obligations including
interest at December 31, 2007 and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 &
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
(Dollars in millions)
|
|
|
Borrowings under the senior credit facility
|
|
$
|
466.2
|
|
|
$
|
22.0
|
|
|
$
|
24.0
|
|
|
$
|
23.9
|
|
|
$
|
23.8
|
|
|
$
|
226.6
|
|
|
$
|
145.9
|
|
Capital leases
|
|
$
|
7.8
|
|
|
$
|
3.1
|
|
|
$
|
2.1
|
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
Operating leases
|
|
$
|
128.1
|
|
|
$
|
30.8
|
|
|
$
|
23.3
|
|
|
$
|
17.6
|
|
|
$
|
11.9
|
|
|
$
|
10.7
|
|
|
$
|
33.8
|
|
Other
|
|
$
|
18.2
|
|
|
$
|
4.6
|
|
|
$
|
4.8
|
|
|
$
|
4.4
|
|
|
$
|
4.4
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
620.3
|
|
|
$
|
60.5
|
|
|
$
|
54.2
|
|
|
$
|
46.9
|
|
|
$
|
40.9
|
|
|
$
|
238.0
|
|
|
$
|
179.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off
Balance Sheet Arrangements
At December 31, 2007, we had no material off-balance-sheet
arrangements.
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.
During the second quarter 2007, we repurchased approximately
3.5 million of common shares through open market purchases
at an aggregate cost of $138.8 million, or an average cost
of $39.65 per share. During the third quarter 2007, we
repurchased approximately 1.7 million of our common shares
through open market purchases at an aggregate cost of
$65.1 million or an average cost of $39.23 per share.
During the fourth quarter ended December 31, 2007, the
Company repurchased approximately 3.9 million of its common
shares through open market purchases at an aggregate cost of
$161.8 million or an average cost of $41.56 per share.
Dividends
During the second quarter of 2007, our board of directors
adopted a regular quarterly cash dividend program. On
April 18, 2007, our board of directors authorized a $0.20
per common share cash dividend, or $14.4 million in the
aggregate, for the first quarter of 2007 that was paid on
May 15, 2007 to shareholders of record as of April 30,
2007. On August 6, 2007, our board of directors authorized
a $0.20 per common share cash dividend, or $13.5 million in
the aggregate, for the second quarter of 2007 that was paid on
September 14, 2007 to shareholders of record on
August 31, 2007. On October 30, 2007, our board of
directors authorized a $0.20 per common share cash dividend, or
$13.6 million in aggregate, for the third quarter of 2007
that was paid on December 14, 2007 to shareholders of
record on November 30, 2007. The aggregate amount of
dividends paid and declared during fiscal year 2007 was
$41.5 million.
65
Working
Capital and Operating Activities
As of December 31, 2007, we had positive working capital of
$111.5 million. Cash and cash equivalents were
$187.4 million at December 31, 2007, compared to
$154.3 million at December 31, 2006.
We expect that cash and funds provided from operations and
available borrowings under our new 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.
There can be no assurance, however, that our business will
service our debt, or fund our other liquidity needs.
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 operating margins and can generate transaction losses
on intercompany transactions. For discussion of our foreign
exchange contracts and other hedging arrangements, see
Item 7A Quantitative and Qualitative
Disclosures about Market Risks.
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 US dollars at the official foreign exchange rate to pay
for imported products. Unless official foreign exchange is made
more readily available, the results of Herbalife
Venezuelas operations could be negatively impacted as it
may need to obtain more US dollars from non-government sources
where the exchange rate is weaker than the official rate.
At December 31, 2007, Herbalife Venezuela had cash balances
of approximately $18.0 million, primarily denominated in
bolivars. During 2006, Herbalife Venezuela paid for certain
products by converting its bolivars to US dollars at the
official exchange rate. During 2008, Herbalife Venezuela expects
to convert its bolivars to US dollars using the official
foreign exchange rate for some of its imports, dividends and
other remittances. As a result, we continue to use the official
foreign exchange rate to translate the financial statements of
Herbalife Venezuela into US dollars. Herbalife Venezuelas
net sales represented less than 3% of consolidated worldwide net
sales for the year 2007.
Quarterly
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
455,788
|
|
|
$
|
465,987
|
|
|
$
|
476,374
|
|
|
$
|
487,385
|
|
|
$
|
508,099
|
|
|
$
|
530,100
|
|
|
$
|
529,543
|
|
|
$
|
578,096
|
|
Cost of sales
|
|
|
91,366
|
|
|
|
92,640
|
|
|
|
97,159
|
|
|
|
99,173
|
|
|
|
107,283
|
|
|
|
111,361
|
|
|
|
105,886
|
|
|
|
113,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
364,422
|
|
|
|
373,347
|
|
|
|
379,215
|
|
|
|
388,212
|
|
|
|
400,816
|
|
|
|
418,739
|
|
|
|
423,657
|
|
|
|
464,245
|
|
Royalty overrides
|
|
|
165,298
|
|
|
|
167,351
|
|
|
|
168,658
|
|
|
|
173,938
|
|
|
|
180,260
|
|
|
|
188,509
|
|
|
|
186,497
|
|
|
|
204,845
|
|
Selling, general and administrative expenses
|
|
|
135,044
|
|
|
|
140,881
|
|
|
|
146,070
|
|
|
|
151,010
|
|
|
|
149,428
|
|
|
|
152,157
|
|
|
|
158,864
|
|
|
|
173,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
64,080
|
|
|
|
65,115
|
|
|
|
64,487
|
|
|
|
63,265
|
|
|
|
71,128
|
|
|
|
78,073
|
|
|
|
78,296
|
|
|
|
85,658
|
|
Interest expense, net
|
|
|
6,015
|
|
|
|
4,955
|
|
|
|
25,869
|
|
|
|
2,702
|
|
|
|
2,204
|
|
|
|
2,274
|
|
|
|
2,740
|
|
|
|
3,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
58,065
|
|
|
|
60,160
|
|
|
|
38,618
|
|
|
|
60,562
|
|
|
|
68,924
|
|
|
|
75,799
|
|
|
|
75,556
|
|
|
|
82,304
|
|
Income taxes
|
|
|
19,369
|
|
|
|
23,834
|
|
|
|
12,151
|
|
|
|
18,912
|
|
|
|
27,744
|
|
|
|
27,690
|
|
|
|
27,226
|
|
|
|
28,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
38,696
|
|
|
$
|
36,326
|
|
|
$
|
26,467
|
|
|
$
|
41,650
|
|
|
$
|
41,180
|
|
|
$
|
48,109
|
|
|
$
|
48,330
|
|
|
$
|
53,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
|
$
|
0.51
|
|
|
$
|
0.37
|
|
|
$
|
0.58
|
|
|
$
|
0.57
|
|
|
$
|
0.68
|
|
|
$
|
0.71
|
|
|
$
|
0.80
|
|
Diluted
|
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
0.36
|
|
|
$
|
0.56
|
|
|
$
|
0.55
|
|
|
$
|
0.65
|
|
|
$
|
0.67
|
|
|
$
|
0.77
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69,947
|
|
|
|
70,647
|
|
|
|
71,179
|
|
|
|
71,463
|
|
|
|
71,722
|
|
|
|
70,616
|
|
|
|
68,513
|
|
|
|
67,219
|
|
Diluted
|
|
|
73,451
|
|
|
|
74,220
|
|
|
|
74,257
|
|
|
|
74,997
|
|
|
|
74,943
|
|
|
|
73,990
|
|
|
|
71,657
|
|
|
|
70,042
|
|
66
Contingencies
We are from time to time engaged in routine litigation. We
regularly review all pending litigation matters in which we are
involved and establish reserves deemed appropriate by management
for these litigation matters when a probable loss estimate can
be made.
Herbalife International and certain of its independent
distributors have been named as defendants in a purported class
action lawsuit filed February 17, 2005, in the Superior
Court of California, County of San Francisco, and served on
Herbalife International on March 14, 2005
(Minton v. Herbalife International, et al). The case
has been transferred to the Los Angeles County Superior Court.
The plaintiff is challenging the marketing practices of certain
Herbalife International independent distributors and Herbalife
International under various state laws prohibiting endless
chain schemes, insufficient disclosure in assisted
marketing plans, unfair and deceptive business practices and
fraud and deceit. The plaintiff alleges that the Freedom Group
system operated by certain independent distributors of Herbalife
International products places too much emphasis on recruiting
and encourages excessively large purchases of product and
promotional materials by distributors. The plaintiff also
alleges that Freedom Group pressured distributors to disseminate
misleading promotional materials. The plaintiff seeks to hold
Herbalife International vicariously liable for the actions of
its independent distributors and is seeking damages and
injunctive relief. On January 24, 2007, the Superior Court
denied class certification of all claims, except for the claim
under California law prohibiting endless chain
schemes. That claim was granted California-only class
certification, provided that class counsel is able to substitute
in as a plaintiff a California resident with claims typical of
the class. We believe that we have meritorious defenses to the
suit.
Herbalife International and certain of its distributors were
defendants in a class action lawsuit filed July 16, 2003,
in the Circuit Court of Ohio County in the State of West
Virginia (Mey v. Herbalife International, Inc., et
al). The complaint alleged that certain telemarketing
practices of certain Herbalife International distributors
violated the Telephone Consumer Protection Act, or TCPA, and
sought to hold Herbalife International vicariously liable for
the practices of its independent distributors. More
specifically, the plaintiffs complaint alleged that
several of Herbalife Internationals distributors used
pre-recorded telephone messages and faxes to contact prospective
customers in violation of the TCPAs prohibition of such
practices. Without in any way acknowledging liability or
wrongdoing by us or our independent distributors, we and the
other defendants reached a binding settlement with the
plaintiffs. Under the terms of the settlement, the defendants
collectively paid $7 million into a fund to be distributed
to qualifying class members. The relevant amount paid by us was
previously fully reserved in our financial statements. The
settlement has received the final approval of the Court in
January 2008.
As a marketer of dietary and nutritional supplements and other
products that are ingested by consumers or applied to their
bodies, we have been and are currently subjected to various
product liability claims. The effects of these claims to date
have not been material to us, and the reasonably possible range
of exposure on currently existing claims is not material to us.
We believe that we have meritorious defenses to the allegations
contained in the lawsuits. We currently maintain product
liability insurance with an annual deductible of
$10 million.
Certain of our subsidiaries have been subject to tax audits by
governmental authorities in their respective countries. In
certain of these tax audits, governmental authorities are
proposing that significant amounts of additional taxes and
related interest and penalties are due. We and our tax advisors
believe that there are substantial defenses to their allegations
that additional taxes are owed, and we are vigorously contesting
the additional proposed taxes and related charges.
These matters may take several years to resolve, and we cannot
be sure of their ultimate resolution. However, it is the opinion
of management that adverse outcomes, if any, will not likely
result in a material effect on our financial condition and
operating results. This opinion is based on our belief that any
losses we suffer would not be material and that we have
meritorious defenses. Although we have reserved an amount that
we believe represents the likely outcome of the resolution of
these disputes, if we are incorrect in our assessment, we may
have to record additional expenses.
67
Subsequent
Events
On January 28, 2008, the Company issued a press release
announcing that Mr. Peter Maslen, a Class III member
of the board of directors, communicated his decision to retire
from the board of directors effective as of the close of
business on January 23, 2008. The Company also announced
that the board of directors elected Mr. Hal Gaba to
fill the vacancy created by Mr. Maslens retirement,
effective as of the close of business on January 23, 2008.
On January 31, 2008, the Companys Board of Directors
approved a quarterly cash dividend of $0.20 per common share to
shareholders of record effective February 29, 2008, payable
on March 14, 2008.
Critical
Accounting Policies
Our Consolidated Financial Statements are prepared in conformity
with 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. 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 and personal
care products within one industry segment as defined under
Statement of Financial Accounting Standards, or SFAS,
No. 131, Disclosures about Segments of an Enterprise and
Related Information, or SFAS No. 131. Our products
are manufactured by third party providers and then sold to
independent distributors who sell Herbalife products to retail
consumers or other distributors. We sell products in 65
countries throughout the world and we are organized and managed
by geographic region. In the first quarter of 2003, we elected
to aggregate our operating segments into one reporting segment,
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 products are sold to, the methods used to distribute
the products, and the nature of the regulatory environment.
Revenue is recognized when products are shipped and title passes
to the independent distributor or importer. Amounts billed for
freight and handling costs are included in net sales. 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 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 1.0% of retail sales for
the years ended December 31, 2005, 2006 and 2007. No
material changes in estimates have been recognized for the years
ended December 31, 2005, 2006 and 2007.
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 $8.0 million,
$11.4 million and $12 million as of December 31,
2005, 2006 and 2007 respectively.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, such as
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
68
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. This determination is made at the reporting unit level
and consists of two steps. First, the Company determines the
fair value of a reporting unit and compares 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 is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141,
Business Combinations. The residual fair value after this
allocation is the implied fair value of the reporting
units goodwill and other intangibles. As of
December 31, 2007, we had goodwill of approximately
$111.4 million, and marketing franchise of
$310.0 million. Goodwill was reduced in 2007 by
approximately $1.7 million due primarily to the effect of
the settlement of an international tax audit related to the
pre-acquisition period and the realization of pre-acquisition
net operating losses.
Contingencies are accounted for in accordance with
SFAS No. 5, Accounting for Contingencies.
SFAS No. 5 requires that we record an estimated loss
from a loss contingency when information available prior to
issuance of our financial statements indicates that it is
probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements and the amount
of the loss can be reasonably estimated. Accounting for
contingencies such as legal and income tax matters requires us
to use judgment. Many of these legal and tax contingencies can
take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the
likelihood of changes to the estimate of the ultimate outcome
increases.
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
realizable, however, could change if estimates of future taxable
income during the carryforward period are adjusted.
We account for stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment, or
SFAS No. 123R. 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 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
observed historical exercise patterns, which can vary over time.
As stock-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.
SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience.
We account for uncertain tax positions in accordance with the
Financial Accounting Standards Board, or FASB, Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
or FIN 48, an interpretation of SFAS No. 109,
Accounting for Income Taxes, or SFAS No. 109.
FIN 48 addressed the determination of how tax benefits
claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, 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
69
benefit that has a greater than fifty percent likelihood of
being realized upon ultimate resolution. The impact of the
adoption of FIN 48 did not have a material impact on our
results of operations, financial condition or liquidity.
New
Accounting Pronouncements
In December 2007, the FASB, issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141R, which replaces FASB Statement
No. 141. SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS No. 141(R) also
modifies the recognition for preacquisition contingencies, such
as environmental or legal issues, restructuring plans and
acquired research and development value in purchase accounting.
SFAS No. 141(R) amends SFAS No. 109 to
require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations
in the period of the combination or directly in contributed
capital, depending on the circumstances. SFAS No. 141R
also establishes disclosure requirements which will enable users
to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective as of the
beginning of an entitys fiscal year that begins after
December 15, 2008. We are currently evaluating the
potential impact, if any, of the adoption of
SFAS No. 141R on our consolidated financial statements.
On May 2, 2007, the FASB issued FASB Staff Position
No. FIN 48-1,
Definition of Settlement in FASB Interpretation
No. 48, or FSP
FIN 48-1,
which amends FIN 48 to provide guidance about how an
enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously
unrecognized tax benefits. Under the FSP
FIN 48-1,
a tax position is considered to be effectively settled if the
taxing authority completed its examination, the enterprise does
not plan to appeal, and it is remote that the taxing authority
would reexamine the tax position in the future. FSP
FIN 48-1
is effective retroactively to January 1, 2007. The adoption
of FSP
FIN 48-1
did not have a material impact on our consolidated financial
position or operating results.
In April 2007, the FASB issued FASB Staff Position
No. FIN 39-1,
Amendment of FASB Interpretation No. 39, or FSP
FIN 39-1.
FSP
FIN 39-1
modifies FIN No. 39, Offsetting of Amounts Related
to Certain Contracts and permits companies to offset cash
collateral receivables or payables with net derivative positions
under certain circumstances. FSP
FIN 39-1
is effective for fiscal years beginning after November 15,
2007, with early adoption permitted. We believe that the
adoption of FSP
FIN 39-1
will not have material effect on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS No. 159, which permits
entities to choose to measure many financial instruments, and
certain other items, at fair value. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and
liabilities. SFAS No. 159 applies to reporting periods
beginning after November 15, 2007. We believe that the
adoption of SFAS No. 159 will not have a material impact on
our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement, or SFAS No. 157, which
defines fair value, establishes a framework for measuring fair
value in accordance with GAAP and expands disclosures about fair
value measurements. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FSP
FAS 157-1
and FSP
FAS 157-2.
FSP 157-1
amends SFAS No. 157 to exclude SFAS No. 13,
Accounting for Leases, and its related interpretive
accounting pronouncements that address leasing transactions. FSP
FAS 157-2
will delay the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP
FAS 157-2
partially defers the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
FSP 157-2.
Effective for fiscal 2008, we will adopt SFAS No. 157
except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in FSP
FAS 157-2.
We believe that the adoption of SFAS No. 157 will not have
a material impact on our consolidated financial statements.
70
|
|
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 SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS No. 133. SFAS No. 133, as amended and
interpreted, established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. 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, or OCI, and are recognized in the statement of
operations when the hedged item affects earnings.
SFAS No. 133 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 enter into foreign exchange derivatives in the ordinary
course of business primarily to reduce exposure to currency
fluctuations attributable to intercompany transactions and
translation of local currency revenue. All of these foreign
exchange contracts are designated as free standing derivatives
for which hedge accounting does not apply.
We purchase average rate put options, which give us the right,
but not the obligation, to sell foreign currency at a specified
exchange rate, or strike rate. These contracts provide
protection in the event that the foreign currency weakens beyond
the option strike rate. We also enter into various forward extra
contracts (a combination of a foreign forward exchange contract
and an option), which provide protection against adverse market
movement at a strike rate slightly worse than the forward and
participate in favorable currency move up to a predetermined
trigger level. We are only obliged to sell foreign currency at
the strike rate when the spot exchange rate is traded at or
above the trigger rate. As of December 31, 2007, we did not
have any outstanding option contracts.
Foreign exchange forward contracts are used to hedge advances
between subsidiaries. The objective of these contracts is to
neutralize the impact of foreign currency movements on the
subsidiarys operating results. We also purchased ratio
forward contracts which protect against adverse market movement
at a rate better than the current forward. The fair value of
forward contracts is based on third-party bank quotes. All of
our foreign exchange forward contracts have a maturity of less
than one year with the majority maturing within 31 days or
less as of December 31, 2007.
71
The following table provides information about the details of
our forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Original Notional
|
|
|
Fair
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy BRL sell USD
|
|
|
1.77
|
|
|
$
|
5.3
|
|
|
$
|
|
|
Buy DKK sell EUR
|
|
|
7.45
|
|
|
$
|
1.6
|
|
|
$
|
|
|
Buy EUR sell GBP
|
|
|
0.73
|
|
|
$
|
1.0
|
|
|
$
|
|
|
Buy EUR sell MXN
|
|
|
15.95
|
|
|
$
|
34.2
|
|
|
$
|
|
|
Buy EUR sell MXN
|
|
|
15.88
|
|
|
$
|
29.1
|
|
|
$
|
0.3
|
|
Buy EUR sell SEK
|
|
|
9.47
|
|
|
$
|
0.9
|
|
|
$
|
|
|
Buy EUR sell USD
|
|
|
1.46
|
|
|
$
|
15.2
|
|
|
$
|
0.1
|
|
Buy GBP sell EUR
|
|
|
0.73
|
|
|
$
|
3.6
|
|
|
$
|
|
|
Buy INR sell USD
|
|
|
39.44
|
|
|
$
|
6.5
|
|
|
$
|
|
|
Buy KRW sell USD
|
|
|
935.00
|
|
|
$
|
4.3
|
|
|
$
|
|
|
Buy MYR sell EUR
|
|
|
4.81
|
|
|
$
|
0.7
|
|
|
$
|
|
|
Buy NOK sell EUR
|
|
|
7.97
|
|
|
$
|
2.3
|
|
|
$
|
|
|
Buy NZD sell EUR
|
|
|
1.90
|
|
|
$
|
0.8
|
|
|
$
|
|
|
Buy PLN sell EUR
|
|
|
3.61
|
|
|
$
|
1.6
|
|
|
$
|
|
|
Buy SEK sell EUR
|
|
|
9.47
|
|
|
$
|
2.8
|
|
|
$
|
|
|
Buy TWD sell EUR
|
|
|
46.71
|
|
|
$
|
5.1
|
|
|
$
|
(0.1
|
)
|
Buy USD sell EUR
|
|
|
1.46
|
|
|
$
|
55.2
|
|
|
$
|
0.1
|
|
Buy USD sell TRY
|
|
|
1.19
|
|
|
$
|
1.3
|
|
|
$
|
|
|
Buy YEN sell EUR
|
|
|
166.00
|
|
|
$
|
21.5
|
|
|
$
|
0.4
|
|
Buy YEN sell USD
|
|
|
113.57
|
|
|
$
|
9.3
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
202.3
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Original Notional
|
|
|
Fair
|
|
Foreign Currency
|
|
Rate
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Buy SEK sell USD
|
|
|
6.87
|
|
|
$
|
2.7
|
|
|
$
|
|
|
Buy EUR sell USD
|
|
|
1.31
|
|
|
$
|
1.0
|
|
|
$
|
|
|
Buy GBP sell USD
|
|
|
1.96
|
|
|
$
|
3.5
|
|
|
$
|
|
|
Buy USD sell TRY
|
|
|
1.43
|
|
|
$
|
2.5
|
|
|
$
|
|
|
Buy JPY sell USD
|
|
|
118.57
|
|
|
$
|
5.0
|
|
|
$
|
|
|
Buy INR sell USD
|
|
|
44.54
|
|
|
$
|
5.3
|
|
|
$
|
|
|
Buy USD sell EUR
|
|
|
1.32
|
|
|
$
|
26.3
|
|
|
$
|
(0.1
|
)
|
Buy NZD sell EUR
|
|
|
1.87
|
|
|
$
|
0.7
|
|
|
$
|
|
|
Buy TWD sell EUR
|
|
|
42.85
|
|
|
$
|
5.0
|
|
|
$
|
|
|
Buy NOK sell EUR
|
|
|
8.25
|
|
|
$
|
2.0
|
|
|
$
|
|
|
Buy DKK sell EUR
|
|
|
7.46
|
|
|
$
|
1.4
|
|
|
$
|
|
|
Buy PLN sell EUR
|
|
|
3.83
|
|
|
$
|
1.4
|
|
|
$
|
|
|
Buy USD sell EUR
|
|
|
1.32
|
|
|
$
|
0.9
|
|
|
$
|
|
|
Buy EUR sell USD
|
|
|
1.32
|
|
|
$
|
10.5
|
|
|
$
|
|
|
Buy MYR sell EUR
|
|
|
4.64
|
|
|
$
|
0.7
|
|
|
$
|
|
|
Buy JPY sell EUR
|
|
|
156.02
|
|
|
$
|
17.6
|
|
|
$
|
(0.1
|
)
|
Buy USD sell EUR
|
|
|
1.32
|
|
|
$
|
24.8
|
|
|
$
|
(0.1
|
)
|
Buy EUR sell SEK
|
|
|
9.05
|
|
|
$
|
0.8
|
|
|
$
|
|
|
Buy EUR sell GBP
|
|
|
0.67
|
|
|
$
|
0.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total forward contracts
|
|
|
|
|
|
$
|
113.0
|
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
All our foreign subsidiaries, excluding those operating in
hyper-inflationary environments, designate their local
currencies as their functional currencies. At December 31,
2007, the total amount of our foreign subsidiary cash was
$154.8 million, of which $8.4 million was invested in
U.S. dollars.
Interest
Rate Risk
As of December 31, 2007, the aggregate annual maturities of
the senior secured credit facility entered into on July 2006, as
amended, were: 2008-$1.5 million; 2009-$1.5 million; 2010-
$1.5 million; 2011-$1.5 million; 2012-$210.2 million
and $140.9 million thereafter. The fair value of the senior
secured credit facility approximates its carrying value of
$357.1 million as of December 31, 2007. The senior
secured credit facility bears a variable interest rate, and on
December 31, 2007, the average interest rate was 6.26%.
On July 21, 2006, the interest rate swap associated with
the prior credit facility, originally entered into on
February 21, 2005, was terminated due to the debt
refinancing and interest income of $0.8 million was
recorded in our consolidated statements of income for the
quarter ended September 30, 2006. Under our senior secured
credit facility, we are obligated to enter into an interest rate
hedge for up to 25% of the aggregate principal amount of term
loan for a minimum of three years. On August 23, 2006, we
entered into a new interest rate swap agreement. This agreement
provides 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 is scheduled to be reduced by $20 million
in the second, third and fourth quarters of each year commencing
January 1, 2007, throughout the term of the swap. The swap
has 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%. At December 31, 2006, the swap notional amount was
reduced to $160.0 million as scheduled. As of
December 31, 2007, the swap notional amount was reduced to
$100.0 million as scheduled. As of December 31, 2007,
we recorded the interest rate swap as a liability at fair value
of $1.4 million with the offsetting amount recorded in
other comprehensive income.
|
|
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.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
The Company maintains disclosure controls and procedures as
defined in
Rule 13a-15(e)
under the Exchange Act. Based on an evaluation of the
Companys disclosure controls and procedures as of the end
of the period covered by this report conducted by the
Companys management, with the participation of the Chief
Executive Officer and Chief Financial Officer, the Chief
Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures were
effective as of December 31, 2007.
Managements
Report on Internal Control over Financial Reporting
The SEC, as directed by Section 404 of the Sarbanes-Oxley
Act of 2002, adopted rules which require the Company to include
in its Annual Reports on
Form 10-K,
an assessment by management of the effectiveness of the
Companys internal control over financial reporting as
defined in
Rule 13a-15(f)
under the Exchange Act. In addition, the Companys
independent auditors must attest to and report on the
effectiveness of the Companys internal control over
financial reporting.
73
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Exchange Act. The Companys internal control over
financial reporting is designed to provide reasonable assurance
to the Companys management and Board of Directors
regarding the preparation and fair presentation of published
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
The Companys management carried out an evaluation, under
the supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Companys internal control over
financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based
upon this evaluation, under the framework in Internal Control
Integrated Framework, our management concluded that
our internal control over financial reporting was effective as
of December 31, 2007.
The independent registered public accounting firm that audited
the financial statements included in this Annual Report on
Form 10-K
has issued an attestation report on the Companys internal
control over financial reporting, which is set forth below.
Changes
in Internal Control over Financial Reporting
There has been no change in the Companys internal control
over financial reporting during the fourth quarter of 2007 that
has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial
reporting.
74
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Herbalife Ltd.:
We have audited Herbalife Ltd.s (the Company)
internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Herbalife Ltd. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Herbalife Ltd. as of
December 31, 2007 and 2006, and the related consolidated
statements of income, changes in shareholders equity and
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2007, and our
report dated February 26, 2008 expressed an unqualified
opinion on those consolidated financial statements.
Los Angeles, California
February 26, 2008
75
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III.
|
|
Item 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2007, except that the
information required with respect to our executive officers is
set forth under Item 1 Business, of this Annual
Report on
Form 10-K,
and is incorporated herein by reference.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2007.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2007, except that the
information required with respect to our equity compensation
plans is set forth under Item 5 Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities of this Annual Report on
Form 10-K,
and is incorporated herein by reference.
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2007.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required under this Item is incorporated herein
by reference to our definitive proxy statement to be filed with
the SEC no later than 120 days after the close of our
fiscal year ended December 31, 2007.
76
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
The following documents are filed as part of this Annual Report
on
Form 10-K,
or incorporated herein by reference:
1. Financial Statements. The following
financial statements of Herbalife Ltd. are filed as part of this
Annual Report on
Form 10-K
on the pages indicated:
|
|
|
|
|
|
|
Page No.
|
|
HERBALIFE LTD. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
83
|
|
|
|
|
84
|
|
|
|
|
85
|
|
|
|
|
86
|
|
|
|
|
87
|
|
|
|
|
88
|
|
2. Financial Statement
Schedules. Schedules are omitted because the
required information is inapplicable or the information is
presented in the consolidated financial statements or related
notes.
3. Exhibits. The exhibits listed in the
Exhibit Index immediately below are filed as part of this
Annual Report on
Form 10-K,
or are incorporated by reference herein.
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated April 10, 2002, by and
among Herbalife International, Inc., WH Holdings (Cayman
Islands) Ltd. and WH Acquisition Corp.
|
|
(a)
|
|
3
|
.1
|
|
Form of Amended and Restated Memorandum and Articles of
Association of Herbalife Ltd.
|
|
(d)
|
|
4
|
.1
|
|
Form of Share Certificate
|
|
(d)
|
|
10
|
.1
|
|
Form of Indemnity Agreement between Herbalife International Inc.
and certain officers and directors of Herbalife International
Inc.
|
|
(a)
|
|
10
|
.2
|
|
Office lease agreement between Herbalife International of
America Inc. and State Teachers Retirement System, dated
July 11, 1995
|
|
(a)
|
|
10
|
.3#
|
|
Herbalife International of America, Inc.s Senior Executive
Deferred Compensation Plan, effective January 1, 1996, as
amended
|
|
(a)
|
|
10
|
.4#
|
|
Herbalife International of America, Inc.s Management
Deferred Compensation Plan, effective January 1, 1996, as
amended
|
|
(a)
|
|
10
|
.5
|
|
Master Trust Agreement between Herbalife International of
America, Inc. and Imperial Trust Company, Inc., effective
January 1, 1996
|
|
(a)
|
|
10
|
.6#
|
|
Herbalife International Inc. 401K Profit Sharing Plan and Trust,
as amended
|
|
(a)
|
|
10
|
.7
|
|
Trust Agreement for Herbalife 2001 Executive Retention
Plan, effective March 15, 2001
|
|
(a)
|
|
10
|
.8#
|
|
Herbalife 2001 Executive Retention Plan, effective
March 15, 2001
|
|
(a)
|
|
10
|
.9
|
|
Notice to Distributors regarding Amendment to Agreements of
Distributorship, dated as of July 18, 2002 between
Herbalife International, Inc. and each Herbalife Distributor
|
|
(a)
|
77
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.10
|
|
Indemnity Agreement dated as of July 31, 2002, by and among
WH Holdings (Cayman Islands) Ltd., WH Acquisition Corp.,
Whitney & Co., LLC, Whitney V, L.P., Whitney
Strategic Partners V, L.P., GGC Administration, L.L.C.,
Golden Gate Private Equity, Inc., CCG Investments (BVI), L.P.,
CCG Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C, CCG AV, LLC-Series C, CCG AV,
LLC-Series E, CCG Associates-QP, LLC and WH Investments
Ltd.
|
|
(a)
|
|
10
|
.11#
|
|
Independent Directors Stock Option Plan of WH Holdings
(Cayman Islands) Ltd.
|
|
(a)
|
|
10
|
.12#
|
|
WH Holdings (Cayman Islands) Ltd. Stock Incentive Plan, as
restated, dated as of November 5, 2003
|
|
(a)
|
|
10
|
.13#
|
|
Employment Agreement dated as of April 3, 2003 between
Michael O. Johnson and Herbalife International, Inc. and
Herbalife International of America, Inc.
|
|
(a)
|
|
10
|
.14#
|
|
Non-Statutory Stock Option Agreement, dated as of April 3,
2003 between WH Holdings (Cayman Islands) Ltd. and Michael O.
Johnson
|
|
(a)
|
|
10
|
.15#
|
|
Side Letter Agreement dated as of April 3, 2003 by and
among WH Holdings (Cayman Islands) Ltd., Michael O. Johnson and
the Shareholders listed therein
|
|
(a)
|
|
10
|
.16#
|
|
Form of Non-Statutory Stock Option Agreement (Non-Executive
Agreement)
|
|
(a)
|
|
10
|
.17#
|
|
Form of Non-Statutory Stock Option Agreement (Executive
Agreement)
|
|
(a)
|
|
10
|
.18
|
|
Indemnity Agreement, dated as of February 9, 2004, among WH
Capital Corporation and Gregory Probert
|
|
(a)
|
|
10
|
.19
|
|
Indemnity Agreement, dated as of February 9, 2004, among WH
Capital Corporation and Brett R. Chapman
|
|
(a)
|
|
10
|
.20
|
|
Stock Subscription Agreement of WH Capital Corporation, dated as
of February 9, 2004, between WH Capital Corporation and WH
Holdings (Cayman Islands) Ltd.
|
|
(a)
|
|
10
|
.21
|
|
First Amendment to Amended and Restated WH Holdings (Cayman
Islands) Ltd. Stock Incentive Plan, dated November 5, 2003
|
|
(a)
|
|
10
|
.22
|
|
Registration Rights Agreement, dated as of July 31, 2002,
by and among WH Holdings (Cayman Islands) Ltd., Whitney V,
L.P., Whitney Strategic Partners V, L.P., WH Investments
Ltd., CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, L.P., CCG AV,
LLC-Series C and CCG AV, LLC-Series E.
|
|
(b)
|
|
10
|
.23
|
|
Share Purchase Agreement, dated as of July 31, 2002, by and
among WH Holdings (Cayman Islands) Ltd., Whitney Strategic
Partners V, L.P., WH Investments Ltd., Whitney V,
L.P., CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C and CCG AV, LLC-Series E.
|
|
(b)
|
|
10
|
.24
|
|
Form of Indemnification Agreement between Herbalife Ltd. and the
directors and certain officers of Herbalife Ltd.
|
|
(c)
|
|
10
|
.25#
|
|
Herbalife Ltd. 2004 Stock Incentive Plan, effective
December 1, 2004
|
|
(c)
|
|
10
|
.26
|
|
Termination Agreement, dated as of December 1, 2004,
between Herbalife Ltd., Herbalife International, Inc. and
Whitney & Co., LLC.
|
|
(d)
|
|
10
|
.27
|
|
Termination Agreement, dated as of December 1, 2004,
between Herbalife Ltd., Herbalife International Inc. and GGC
Administration, L.L.C.
|
|
(d)
|
|
10
|
.28
|
|
Indemnification Agreement, dated as of December 13, 2004,
by and among Herbalife Ltd., Herbalife International, Inc.,
Whitney V, L.P., Whitney Strategic Partners V, L.P.,
CCG Investments (BVI), L.P., CCG Associates-QP, LLC, CCG
Associates-AI, LLC, CCG Investment Fund-AI, LP, CCG AV,
LLC-Series C, CCG AV, LLC-Series E, CCG CI, LLC and
GGC Administration, LLC.
|
|
(d)
|
|
10
|
.29#
|
|
Amendment No. 1 to Herbalife Ltd. 2004 Stock Incentive Plan
|
|
(e)
|
|
10
|
.30#
|
|
Form of Stock Bonus Award Agreement
|
|
(e)
|
|
10
|
.31#
|
|
Employment Agreement Effective as of January 1, 2005
between Herbalife Ltd. and Henry Burdick
|
|
(f)
|
78
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.32#
|
|
Form of 2004 Herbalife Ltd. 2004 Stock Incentive Plan Stock
Option Agreement
|
|
(g)
|
|
10
|
.33#
|
|
Form of 2004 Herbalife Ltd. 2004 Stock Incentive Plan
Non-Employee Director Stock Option Agreement
|
|
(g)
|
|
10
|
.34
|
|
Service Agreement by and between Herbalife Europe Limited and
Wynne Roberts ESQ, dated as of September 6, 2005
|
|
(h)
|
|
10
|
.35#
|
|
Amendment to employment agreement between Michael O. Johnson and
Herbalife International, Inc. and Herbalife International of
America, Inc., dated May 15, 2005
|
|
(i)
|
|
10
|
.36#
|
|
Independent Directors Deferred Compensation and Stock Unit Plan
|
|
(j)
|
|
10
|
.37#
|
|
Independent Directors Stock Unit Award Agreement
|
|
(j)
|
|
10
|
.38#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement
|
|
(k)
|
|
10
|
.39#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement
|
|
(k)
|
|
10
|
.40#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Mr. Michael O. Johnson
|
|
(l)
|
|
10
|
.41#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to
Mr. Michael O. Johnson
|
|
(l)
|
|
10
|
.42#
|
|
Amendment to Herbalife Ltd. Independent Directors Deferred
Compensation and Stock Unit Plan
|
|
(m)
|
|
10
|
.43#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Messrs. Gregory Probert,
Brett R. Chapman and Richard Goudis
|
|
(n)
|
|
10
|
.44#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to
Messrs. Gregory Probert, Brett R. Chapman and Richard Goudis
|
|
(n)
|
|
10
|
.45#
|
|
Employment agreement dated December 18, 2007 between
Herbalife International of America, Inc. and Paul Noack
|
|
(o)
|
|
10
|
.46#
|
|
Summary of Board Committee Compensation
|
|
(p)
|
|
10
|
.47
|
|
Form of Credit Agreement, dated as of July 21, 2006, by and
among Herbalife International Inc., Herbalife Ltd., WH
Intermediate Holdings Ltd., HBL Ltd., WH Luxembourg Holdings
S.á.R.L., Herbalife International Luxembourg S.á.R.L.,
HLF Luxembourg Holdings, S.á.R.L., WH Capital Corporation,
WH Luxembourg Intermediate Holdings S.á.R.L., HV Holdings
Ltd., Herbalife Distribution Ltd., Herbalife Luxembourg
Distribution S.á.R.L., and the Subsidiary Guarantors party
thereto in favor of Merrill Lynch Capital Corporation, as
Collateral Agent
|
|
(q)
|
|
10
|
.48
|
|
Form of Security Agreement, dated as of July 21, 2006, by
and among Herbalife International, Inc., Herbalife Ltd., WH
Intermediate Holdings Ltd., HBL Ltd., WH Luxembourg Holdings
S.á.R.L., Herbalife International Luxembourg S.á.R.L.,
HLF Luxembourg Holdings, S.á.R.L., WH Capital Corporation,
WH Luxembourg Intermediate Holdings S.á.R.L., HV Holdings
Ltd., Herbalife Distribution Ltd., Herbalife Luxembourg
Distribution S.á.R.L., and the Subsidiary Guarantors party
thereto in favor of Merrill Lynch Capital Corporation, as
Collateral Agent
|
|
(q)
|
|
10
|
.49#
|
|
Amended and Restated Independent Directors Deferred Compensation
and Stock Unit Plan
|
|
(q)
|
|
10
|
.50#
|
|
Employment Agreement by and between Herbalife Ltd. and Gregory
L. Probert dated October 10, 2006
|
|
(r)
|
|
10
|
.51#
|
|
Employment Agreement by and between Herbalife Ltd. and Brett R.
Chapman dated October 10, 2006
|
|
(r)
|
|
10
|
.52#
|
|
Stock Unit Agreement by and between Herbalife Ltd. and Gregory
L. Probert dated October 10, 2006
|
|
(r)
|
|
10
|
.53#
|
|
Stock Unit Agreement by and between Herbalife Ltd. and Brett R.
Chapman dated October 10, 2006
|
|
(r)
|
|
10
|
.54#
|
|
Second Amendment dated October 10, 2006, to Stock Option
Agreement by and between Herbalife Ltd. and Gregory L. Probert
dated July 31, 2003
|
|
(r)
|
|
10
|
.55#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Gregory L. Probert dated
September 1, 2004
|
|
(r)
|
79
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description
|
|
Reference
|
|
|
10
|
.56#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Gregory L. Probert dated
December 1, 2004
|
|
(r)
|
|
10
|
.57#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Gregory L. Probert dated
April 27, 2005
|
|
(r)
|
|
10
|
.58#
|
|
Second Amendment dated October 10, 2006, to Stock Option
Agreement by and between Herbalife Ltd. and Gregory L. Probert
dated October 6, 2003
|
|
(r)
|
|
10
|
.59#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
September 1, 2004
|
|
(r)
|
|
10
|
.60#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
December 1, 2004
|
|
(r)
|
|
10
|
.61#
|
|
Amendment dated October 10, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Brett R. Chapman dated
April 27, 2005
|
|
(r)
|
|
10
|
.62#
|
|
Employment Agreement by and between Herbalife Ltd. and Richard
P. Goudis dated October 24, 2006
|
|
(s)
|
|
10
|
.63#
|
|
Stock Unit Agreement by and between Herbalife Ltd. and Richard
P. Goudis dated October 24, 2006
|
|
(s)
|
|
10
|
.64#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
June 14, 2004
|
|
(s)
|
|
10
|
.65#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
September 1, 2004
|
|
(s)
|
|
10
|
.66#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
December 1, 2004
|
|
(s)
|
|
10
|
.67#
|
|
Amendment dated October 24, 2006, to Stock Option Agreement
by and between Herbalife Ltd. and Richard P. Goudis dated
April 27, 2005
|
|
(s)
|
|
10
|
.68#
|
|
Amendment dated March 26, 2007, to Employment Agreement by
and between Herbalife Ltd. and Michael O. Johnson dated
April 3, 2003
|
|
(t)
|
|
10
|
.69#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Michael O. Johnson
|
|
(u)
|
|
10
|
.70#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock
Appreciation Right Award Agreement applicable to Michael O.
Johnson
|
|
(u)
|
|
10
|
.71#
|
|
Form of Herbalife Ltd. 2005 Stock Incentive Plan Stock Unit
Award Agreement applicable to Messrs. Gregory L. Probert,
Richard P. Goudis and Brett R. Chapman
|
|
(u)
|
|
10
|
.72#
|
|
|