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This article was originally published in The Tan Sheet

Executive Summary

HERBALIFE WILL FUND EXPANSION INTO CATALOG SALES WITH "UP TO $ 25 MIL." in net proceeds from a stock offering of 5 mil. shares, the company reported in a July 29 registration statement filed with the Securities and Exchange Commission. The $ 25 mil. will be used as an "initial investment to expand into the catalog sales business," Herbalife noted. "Subsequent capital and working capital requirements of that business" also will be funded from "internally generated funds," the Inglewood, Calif. firm explained. Herbalife indicated that it is considering an acquisition to get into the catalog business. However, the company added, "no acquisition agreement relating to a catalog sales business exists nor is the company currently involved in negotiations for an acquisition." Herbalife said that if it does not find a suitable catalog business for acquisition, "it intends to develop such a business internally." The company emphasized that a catalog sales business would be "highly compatible" with its "multi-level marketing system in which independent distributors purchase products for resale to retail consumers and other distributors." Herbalife intends to "provide distributors with incentives, such as commissions on catalog sales derived from their customers, to encourage distributors' participation in this new business." Of the 5 mil. shares being offered by Herbalife, 2 mil. are being offered by the company and 3 mil. by shareholders. The company will not receive proceeds from shares sold by the stockholders. As of Aug. 20, the price of Herbalife common stock was $ 13 per share, which would translate into about $ 26 mil. in proceeds to the company. The stock has declined 5 points since the offering was announced due to investor concerns with the possible effect of FDA's proposed dietary supplement regulations on Herbalife's business. Salomon Brothers and NatWest Securities are underwriting the offering. Herbalife plans to "market catalog sales products that supplement its current product lines" of weight loss products, nutritional supplements and personal care products, the prospectus notes. The firm currently markets 31 products; however, a "preponderance of the company's sales are derived from its four principal weight control products" -- Formula 1 meal-replacement protein powder, and the Formula 2, Formula 3 and Formula 4 weight loss tablets containing herbs, vitamins and minerals -- and from Thermojetics, an herbal tablet-based weight control system that has been marketed in the U.S. since May 1992. Herbalife's nutritional supplement products include Cell-U- Loss, Activated Fiber, Herbal Aloe, Florafiber, Xtra-Cal, Herbalifeline and Schizandra Plus. Personal care products include a shaving cream, after-shave, sunscreen, cleanser, herbal shampoo and an "herbal-aloe extract for relief of skin irritations." The company said that it plans to "continue to expand its current product line" with one or two new products per year, as well as introduce existing products into markets where they are not offered. All Herbalife products are manufactured by outside companies under exclusive agreements: Raven Industries manufactures the firm's powder products and D&F Industries makes "substantially all" of Herbalife's tablet, capsule, cream and lotion products. Herbalife said it "does not maintain its own product research, development and formulation staff and relies on Raven and D&F for such services." The company's sales growth, which slowed during the late 1980s, nearly tripled from 1990 to 1992. Worldwide sales in 1992 more than doubled to $ 405.1 mil. while net earnings last year nearly tripled to $ 20.1 mil. The rapid sales acceleration continued in the first quarter of 1993, with sales again doubling to $ 151.7 mil. Herbalife credited the expansion of its international business into 11 countries since 1989 and the successful introduction of Thermojetics in the U.S. for the company's recent strong showing. Weight control products, including Thermojetics, accounted for approximately 82% of Herbalife's 1992 worldwide retail sales, which translates into about $ 330 mil. In the first quarter, weight control products generated about 84% of company sales, or about $ 127 mil., the prospectus reports. Dietary supplements and personal care products accounted for 16% and 1% of 1992 total retail sales, respectively, or about $ 65 mil. and $ 4 mil. The 1992 introduction of Thermojetics, in particular, "contributed significantly to the increase in U.S. retail sales," which more than doubled to $ 86.3 mil. in 1992 from $ 42 mil. in 1991, Herbalife said. First quarter 1993 retail sales in the U.S. grew to $ 44.7 mil. from $ 14.1 mil. in the first quarter of 1992. "Thermojetics represented approximately 28% and 40% of total United States retail sales in 1992 and the first quarter of 1993, respectively," Herbalife estimated. Thermojetics also is sold in Canada and Mexico, and may be introduced in certain of Herbalife's other existing international markets, the company predicted. Despite the retail success of Thermojetics, Herbalife noted that "there is a risk" that the product may be subject to regulatory action in the U.S. that would have an adverse effect on the company. Herbalife explained that Thermojetics features a Chinese herb known as Ma Huang, which contains "naturally occurring ephedrine in small quantities." Ma Huang "has been the subject of adverse publicity" in the U.S., the firm continued, and has been investigated by the Canadian Department of Health and Welfare. Because of the Canadian probe, Herbalife said that it suspended shipments of Thermojetics into Canada shortly following its launch there in February 1993. Herbalife then reformulated Thermojetics with reduced levels of ephedrine "that was acceptable to Canadian authorities," the company said, and reintroduced Thermojetics in Canada in June. Likewise, "there is a risk that Ma Huang may be subject to regulation in the U.S. in the future, as a result of FDA action or otherwise, which could require the reformulation of the Thermojetics tablet with reduced ephedrine levels or with an acceptable substitute for Ma Huang," Herbalife stated. "Any inability to reformulate the product could have an adverse effect on the company." Herbalife also cited FDA's June 18 advance notice of proposed rulemaking on the regulation of dietary supplements as another reason why the firm might have to "reformulate, relabel or discontinue" any of its currently marketed products in the future. Herbalife warned that it "cannot determine the effect that future FDA action or other future governmental regulations or administrative orders may have on the company's business." Herbalife, which has 479 employees, is headed by Chairman, CEO and President Mark Hughes, who founded the business in 1980. Herbalife Exec VP and Chief Operating Officer Norman Friedmann, previously a management consultant, joined the firm in 1992.

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