Strong growth boosting shares despite staff Woes, litigation.

HERBALIFE Ltd., which burst on the scene in 1980s with a weight loss drink concocted by its salesman-founder Mark Hughes, has become a high-flying stock once again.

Shares have doubled in the past nine months, to $28 a share, up from its $14 IPO price in December.

The Los Angeles-based multi-level marketing company, which sells 130 products in 59 countries, is seeing strong growth in Mexico and Brazil, even though sales in Japan continue to lag.

Chief Executive Michael Johnson, who spent 17 years at Wait Disney Co. before joining the company in 2003, often refers to his own interest in nutrition as a triathlete to motivate rank-and-file distributors.

Johnson has tried to change Herbalife's quirky sales image by tapping his marketing skills. He put together a medical advisory board and has linked some of Herbalife's products to scientific research. That has helped the company compete, particularly against other weight-loss rivals like Weight Watchers International Inc., eDiets.com Inc. and Nutrisystem Inc., whose stocks also have showed strength in recent months.

Herbalife's turnaround also is borne out by second-quarter net income of $22.8 million, compared with $12.1 million for the like period a year earlier. Revenue for the same period rose 15.7 percent, to $384.7 million.

Yet, the company has problems--starting with chronic turnover. Herbalife distributors don't receive salaries, instead earning only commissions and distributors.

Johnson has tried to address the problem by introducing two low-cost recruiting programs called Nutrition Clubs and Total Plan that have been well-received in Mexico and Brazil. Sales declines have slowed in Japan, which suffered a dramatic loss of distributors in the past five years.

Herbalife is also plagued by legal problems.

Two related lawsuits currently pending in California allege that sales of four products--Niteworks, Prelox Blue, Woman's Advantage with DHEA and Optimum Performance--infringe on patents that are licensed or owned by Unither Pharma Inc., maker of Heartbar, and a unit of biotech firm United Therapeuties Corp.

The company also is facing a lawsuit in Belgium that alleges it engages in pyramid selling schemes that violate the Belgian Fair Trade Practices Act. And it has been named as a defendant in 12 product liability lawsuits linked to green herbal tablets that contained ephedrine alkaloids, which were banned by the Food & Drug Administration in 2004.

Compensation questions

Then there are complaints by shareholders and distributors about excessive compensation paid to senior managers and equity sponsors that have brought down earnings.

Johnson received $4.9 million in salary, bonus and options in 2004. Herbalife's compensation committee upped his salary in December to $1.1 million, with a $2.45 million bonus and the option to buy at least 2.9 million shares at prices as low as 88 cents.

Meanwhile Herbalife's two private equity sponsors, Whitney & Co. LLC of Stamford, Conn., and Golden Gate Capital in San Francisco, completed a leverage recapitalization in 2004 that gave them a $272 million payout. The company's IPO threw off a $200 million dividend, according to Moody's Investors Services, which rates Herbalife's debt.

Whitney and Golden Gate have acquired ownership stakes in four separate companies that are now selling products and services to Herbalife. One of the companies, TBA Entertainment, which is 50 percent owned by Whitney, received $6.8 million in the first six months of 2005 for providing "creative services" to Herbalife's 25th Anniversary Extravaganza, a huge sales and marketing event for distributors.

Herbalife said in a recent Securities and Exchange Commission filing that it believes the transactions were done on an "arms length" basis with "fair market pricing."

Eleven of its 15 directors are insiders who are either directly employed by Herbalife or by its private equity stakeholders. The company recently upped the annual equity grant given to its four independent directors to $100,000.

Executives at Herbalife were out of town this week and could not comment. Calls to Whitney and Golden Gate were not returned.

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].

Herbalife Ltd.

YEAR (Dec. 31)                   2004   2003

Revenue (billions)               $1.3   $1.15
Total Expenses (billions)        1.17    1.05
Operating Income (millions)     138.7   107.0
Net Income (Loss) (millions)   (14.3)    36.8
Earnings (Loss) Per Share      ($.27)    $.69

SUMMARY

Business: Supplements, weight-loss products

Headquarters: Los Angeles

CEO: Michael Johnson

Market Cap: $1.97 billion Dividend Yield: N/A

Total Liabilities: $735.3 million P/E Ratio: 821

Long-Term Debt: $327.2 million