September 11, 2013 Companies: BTH, HLF, NUS

Herbalife Q3 sales mixed in U.S., strong in Europe and China

REPORT Susan Jennings Kantari, sjk@blueshiftideas.com

Summary of Findings Distributors and consumers continued to buy

Herbalife Ltd. (HLF) products in the third quarter, with particular sales strength reported in Asia and Europe and relatively stable sales in the U.S.

Nine of 17 distributor and member sources have increased their sales or use of Herbalife products in the third quarter compared with the second quarter. Four sources have seen declines, and four have seen sales fluctuate or remain stable.

Three distributor sources from Asia have seen their quarterly sales rise 20% to 30% and their distributor networks increase 10% to 30% in the past six months.

Seventeen of 22 sources do not believe Herbalife is a pyramid scheme. Four had no comment. One member was skeptical about the company. Most cited Herbalife as a pyramid business, but not a pyramid scheme.

Sources listed only a few Herbalife competitors, and none were seen as a significant new threat over the past six months.

3Q vs. 2Q sales

HLF Faces Significant

Competition

HLF’s Plausibility as

a Pyramid Scheme

Distributors

Members MLM Specialists

Competitors

Research Question:

Are consumers and distributors backing off from buying Herbalife products so far in Q3 as scrutiny continues on safety issues and its possible pyramid scheme?

Silo Summaries 1) DISTRIBUTORS Seven of 10 sources report a quarter-over-quarter sales increase for the third quarter. Sources in Asia have seen their quarterly sales rise 20% to 30%. Three sources from China report increases in their distributor networks of 30%, 20%, and 10% from six months ago. Of the four U.S. sources, one saw an increase in sales (attributed to a discount he ran), one has seen sales fluctuate as a new distributor, and two have seen sales decline in the third quarter. Our three European sources have seen their sales increase. All sources were satisfied with their distributor support. No new significant competitor sources were observed in the past six months. Seven of 11 sources do not believe Herbalife is a pyramid scheme. Four sources had no comment. No price or promotional changes were observed, with the exception of one source who discounted products by 40% to move inventory, and one source who saw a price increase in April. 2) MEMBERS Three of seven sources have seen their use of Herbalife products decrease, two have held their use stable and one has increased use in the third quarter. Our South African source, a new distributor, has seen sales fluctuate. Six of seven sources signed up to be a distributor in order to receive the distributor discount. Five of seven sources believe Herbalife is not a pyramid scheme. One source is more skeptical and one source had no comment. Herbalife has little to no competition but one source mentions Body by Vi as an upcoming competitor over the past six months. Only one source has observed an increase in prices in April; no other price changes were observed. 3) MLM SPECIALISTS All three sources expect Herbalife to continue its sales growth led by international markets, particularly from Asia. One source classified Herbalife’s distributor network as a strong growing network. A second source says MLM jobs are rising in popularity in Asia, which should benefit Herbalife. None of the three sources believe Herbalife is a Ponzi scheme. One source sees the multilevel marketing industry leveraging viral and social networking more and another sees no major competitive threats to Herbalife. The one source who commented on pricing said summers typically see a seasonal decrease in pricing as distributors work fewer hours. 4) COMPETITORS These two competitors of wellness products have seen their third-quarter sales rise quarter over quarter, with one specifying a 30% increase. Both sources expect sales growth to continue in the fourth quarter. One source reports knowing someone who worked for Herbalife who was not paid. Neither source believes Herbalife is a pyramid scheme. One source names his own company as a competitor to Herbalife while the second source does not see any new competitors for Herbalife over the past six months. Neither reported pricing changes in the industry.

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Herbalife

Background Herbalife’s recent earnings call boasted an 18% increase in sales year over year with growth coming from each of its six regions. HLF also discussed its robust global expansion plans, including the Chinese market, which has the potential to drive significant sales growth. The multilevel marketing (MLM) distribution model used by HLF is illegal in China, but HLF changed its model for the market and opened retail locations throughout the country. The success in the market could indicate viability of product outside of the controversial MLM model of distribution. HLF is under significant media scrutiny after recent events, including a metal contamination in its top-selling Formula 1 shake, which raised concerns over consumer health and overall regulations and industry standards at the plant. In addition, the company was linked to a suspected pyramid scheme in Canada, aiding the already fiery battle over whether the company is a pyramid scheme itself. While there are still varying interpretations regarding the company’s business model in the marketplace, the feud between hedge-fund manager Bill Ackman and Herbalife backer Carl Icahn exemplifies divergent opinions of investors regarding the company. Blueshift’s October 2012 and February 2013 reports on Herbalife have been positive, debunking Ackman’s thesis along the way. HLF distributors are loyal to the company and its products and expected continued sales growth in 2013. Distributor sources are not being pressured or recruited to sell the products. In fact, some became HLF distributors purely for the discount. They are satisfied with HLF’s support and do not know of anyone lying about sales figures. CURRENT RESEARCH In this next study, Blueshift assessed whether Herbalife is seeing a decrease in member and distributor support as negative publicity surrounds the company. We employed our pattern mining approach to establish and interview sources in four independent silos:

1) Distributors (10) 2) Members (7) 3) MLM specialists (3) 4) Competitors (2) 5) Secondary sources (5)

We interviewed 22 primary sources, including eight repeat sources, and included five of the most relevant secondary sources focused on a growing Asian market for dietary supplements, Herbalife’s sponsorship of athletic events to attract more athletes to the brand, the company’s expansion of licenses in China, and its hiring of former Los Angeles mayor Antonio Villaraigosa to help appease the Latino community.

Next Steps We will interview repeat and new U.S. distributor sources to determine sales growth. We will also ask them about their inventory and promotional levels. Finally, we will monitor growth in China’s distributor network.

Silos 1) DISTRIBUTORS (3 CHINA, 3 EUROPE, 4 U.S.) Seven of 10 sources report a quarter-over-quarter sales increase for the third quarter. Sources in Asia have seen their quarterly sales rise 20% to 30%. Three sources from China report increases in their distributor networks of 30%, 20%, and 10% from six months ago. Of the four U.S. sources, one saw an increase in sales (attributed to a discount he ran), one has seen sales fluctuate as a new distributor, and two have seen sales decline in the third quarter. Our three European sources

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Herbalife

have seen their sales increase. All sources were satisfied with their distributor support. No new significant competitor sources were observed in the past six months. Seven of 11 sources do not believe Herbalife is a pyramid scheme. Four sources had no comment. No price or promotional changes were observed, with the exception of one source who discounted products by 40% to move inventory, and one source who saw a price increase in April. KEY SILO FINDINGS Sales

- 7 of 11 have seen QoQ sales increases between the 3Q and 2Q. - 3 sources in China saw sales increases from 20%-30%. - 2 U.S. sources saw sales decline over the summer but 1 expects sales to increase in the fall. - 1 U.S. source has seen sales fluctuate as a relatively new distributor.

Distribution Network - All sources were satisfied with their distributor support. - 3 sources from China report their distributor networks increasing 30%, 20%, and 10% from 6 months ago.

Corporate Support - 6 of 10 sources do not believe HLF is a pyramid scheme. - 4 of 10 sources had no comment on if HLF is a pyramid scheme. - There were no complaints about corporate support from HLF.

Competition - No new significant competitors were noted as arising in the past 6 months. - 1 source mentioned as having heard about Shakeology in the past 6 months.

Pricing - 1 source ran a 40%-off sale over the summer to move products. - 1 source notes a price increase in the past 6 months. - No other sources report any changes in pricing or promotion levels over the past 6 months.

1. Distributor in Hangzhou, China

The source in Zhejiang province said Q3 sales increased 20% from Q2 this year and increased 22% from Q3 last year. The distributor employs more clients than it did six months ago, and most of them initially want to buy discount products.

Sales “Q3 sales increased by 20% from Q2.” “The reason for sales growth is the number of new clients. Herbalife’s business model adopts direct selling. When we

develop a new client, he/she is our employee, and if he/she would like to take profit from it, they would like to bring their clients into Herbalife too. At present, the buying habit doesn’t change.”

“2013 Q3 increased 22% from 2012 Q3.” “The reason is the same as above.” “Q4 this year is expected to increase 10% from Q3—I have confidence.” Distribution Network “My network has more than 200 clients, growing 30% from six months ago.” “No distributor has quit the business, as this is an emerging industry, and

more people join in.” “I know some distributors have run the business more than one year. The

reason is that taking Herbalife tablets really helps health, and in addition they can earn money from it.”

“Initially, I just want to get the discount for myself, and I didn’t consider more than that.” Corporate Support “Herbalife has done much work to support us. For example, they organize training courses every week.” “I get more confidence after I join in Herbalife business because I get slimmer and also talk to more people.” “No, it’s not a pyramid scheme.” Competition

Q3 sales increased by 20% from Q2. … 2013 Q3 increased 22% from 2012 Q3.

Distributor Hangzhou, China

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Herbalife

“No other competitors.” Pricing “The prices in Q3 and Q2 are the same.” “The number of promotions in Q3 is the same with Q2.”

2. Distributor in Beijing

The source is a large distributor with more than 500 clients in his region and he believes sales in Q3 increased 20% over Q2 this year and also increased from the same period last year. He believes Herbalife is more competitive than Amway Corp., the other U.S.-based brand with a similar direct-selling business model.

Sales

“Q3 sales increased more than 20% from Q2 because Q3 is summer and many people plan to lose weight in this season.”

“I believe 2013 Q3 increased from 2012 Q3.” “The year-on-year increase [was] because of both increasing number of

clients and existing customers’ buying power. Herbalife is accepted by more and more clients.”

“Q4 this year is expected to increase at least 10% from Q3.” Distribution Network “My network has more than 500 clients, growing 20% from six months ago.” “No distributor has quit the business. Some Amway distributors have quit Amway to join in Herbalife, or some

distributors manage more than one brand.” Corporate Support “[Herbalife is] not a pyramid scheme.” Competition “I think in weight management field, there are no competitors.” Pricing “The prices in Q3 and Q2 are the same.” “I don’t have payment issues with Herbalife company.”

3. Distributor in Guangzhou, China

This distributor reports that third-quarter sales increased 30% from the second quarter this year and also increased 20% from third quarter last year. Sales in the fourth quarter will sustain or possibly be a little lower than third-quarter sales. He said Herbalife advertising has increased from last year, and this is driving higher sales.

Sales “Q3 is the best sales season in a year because most of people plan weight management in Q3, so that the Q3 sales

increased 30% from Q2.” “Sales in 2013 Q3 increased more than 20% from 2012Q3.” “The year-on-year increase has two reasons. First, Herbalife company spent more money in advertising in major

cities. In Shanghai, Herbalife logos and advertisement show in metro stations; second, existing customers introduce more customers.”

“Sales in Q4 this year may keep the same level with Q3 or a little lower.” Distribution Network “My network has more than 300 clients, up 10% from six months ago.” “Yes, there was one distributor [who] quit it last year and did other business.” “A lot of distributors stay with Herbalife more than one year. Herbalife’s commission policy and the quality of

Herbalife’s products are the attractiveness to stay with Herbalife.” “Initially I was a consumer of Herbalife, and at that time, I had a full-time job. I did Herbalife as a full-time job since

last year.”

My network has more than 500 clients, growing 20% from six months ago.

Distributor Beijing, China

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Herbalife

Corporate Support N/A Competition N/A Pricing N/A

4. 47-year old Herbalife distributor in Spain and the United Kingdom; repeat source

Year-over-year sales are through the roof. Her personal income has tripled since a year ago third quarter, and monthly increases are roughly 7% in 2013, thanks in part to more products reaching the market through new distributors. She expects growth to continue. All of her members are distributors. While she knows some Herbalife distributors who quit the business, most did so due to life changes. She knows many distributors who have been with Herbalife for more than a year. Herbalife is not a pyramid scheme and the compensation plan offered to distributors is very fair. She praises Herbalife for its wonderful distributor support. She believes Herbalife will continue on an upward trajectory as competition is not really a factor for this 33-year-old company.

Sales “I … am showing a consistent amount of sales. … My team sales are showing

a consistent increase month on month averaging 7% per month this year. This is due to more products reaching the market through new distributors.”

“Third-quarter sales this year have been incredible, in comparison to last year’s third quarter. My team has almost doubled and my personal income has tripled. More people earning more and more people joining and more people demanding the products.”

“I would estimate at least the same increase in the fourth quarter compared to the third quarter. I base this especially on the fact in the U.K. there is a seven-day cooling off period until distributors can order and so I have a delay between seeing new team members join and them ordering; however, as we train them immediately, they have an order ready to go in as soon as they show live.”

“Consumers and distributors are not backing off from buying Herbalife.” Distribution Network “I personally have no members who are not distributors. …although they start as discount customers, they usually

end up selling to friends and family anyway.” “I know of some Herbalife distributors who have quit the business, although they were not close to me. It was in this

year. Some have left to join other companies. Others quit as they do not make the business work …” “I know of other Herbalife distributors who have been in the business over a year. Loads. The majority of my team I

am pleased to say … I was on the products as a customer for 13 years before joining the company, and the marketing plan is simply awesome…”

“I did not initially become a distributor to get the discount. I started purely for the business. My existing real-estate business had gone down the pan, I was in serious debt, was a single mum, no income and was struggling with three jobs trying to make ends meet. I went to a business opportunity and was flabbergasted at the potential. It took me awhile to get going due to my health at the time, but slowly I built and things really took off for me in May 2011.”

Corporate Support “Herbalife is totally awesome in terms of distributor support. … New tools all the time from websites to local trainings

to your own sponsor and we help each other… There are also lots of promotions—fully paid luxury holidays for one, just for building a sustainable business. I qualified for Thailand this year. It was truly amazing and I am going to Greece next year. There are higher level trainings I have qualified for which include free hotel accommodations too…”

“There have not really been any changes in my relationship with Herbalife. I am just past my second month of promotion into the Millionaire team and have a Millionaire team just qualified under me. It shows growth in our team … Spain, where I live, has had the best six months ever so there is growth everywhere.”

Third-quarter sales this year have been incredible, in comparison to last year’s third quarter. My team has almost doubled and my personal income has tripled. More people earning more and more people joining and more people demanding the products.

Distributor Spain & the United Kingdom

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Herbalife

“I have never had payment issues with Herbalife.” “I do not view Herbalife as a pyramid scheme. We all have customers, we have to. If it were a pyramid then you

would see $6.4 billion of products on eBay! Also, I have two members of my team who earn more than me. One started a year after me and the other started seven months ago and is a rocket!”

“We are a company driven by results and by demand. And demand is huge. The compensation plan I would consider very fair; the largest percentage goes to the people just starting out and moving up in sales, hence sales are encouraged. … I have been with the company for over five years and I am extremely satisfied, as are over 700 people in my team.”

Competition “There are not really any new competitors who have become more of a threat to my business over the past six

months. There was a splurge by Body by Vi [Blyth Inc.’s/BTH ViSalus] and quite a few Herbalife distributors went there thinking the grass was greener, so there was publicity and they tried to poach our guys. But I have not heard of them for a while. Herbalife has been around for 33 years—that is 33 years of science and nature coming together with many products in the pipeline and tested well in advance of anyone else. We stand alone.”

Pricing “There was a recent deduction in pricing on a couple of items due to review in the governmental tax but that was all.

No rises.” “There have been no changes in the number of promotions I have done between the second and third quarter…”

5. 37-year-old entrepreneur and long-time distributor of Herbalife products in the Netherlands; repeat source

Third-quarter sales are up quarter over quarter and year over year, thanks to both new customers and distributors. He expects to see more growth in the fourth quarter this year. Over the past six months, the number of members who are not distributors has risen. Distributors come and go like in any business, but he has stayed with Herbalife because he loves what he is doing, which is helping people and making a living. He ranks Herbalife a 9 out of 10 for distributor support, and does not view the company as a pyramid scheme.

Sales “I am seeing growth in third-quarter sales compared to the second quarter. The growth is a combination of new

distributors and customers…” “I am seeing growth in third-quarter sales compared to the third quarter of 2013.” “My expectation for the fourth quarter is more growth.” “Consumers and distributors are not backing off from buying Herbalife products in the third quarter.” Distribution Network “The number of members who are not distributors has increased a lot over the past six months.” “I do know that other Herbalife distributors have quit the business. … A distributor is the same as any other business,

so when they stop, there can be a ton of reasons.” “I know a lot of Herbalife distributors who have been in the business over a year. … I stay in this business simply

because I love what I am doing: helping people become the best version of themselves. And I get rewarded by kindness, love, happiness and last but not least my paycheck.”

“I would rate Herbalife a 9 out of 10 for distributor support.” “No, I have not had any payment issues with Herbalife. They always pay on time!” Corporate Support “I do not view Herbalife as a pyramid scheme.” Competition “A threat to my Herbalife business: No.” Pricing “Pricing is the same in the third quarter compared to the second quarter.” “There have been no changes in the number of promotions I have done between the third quarter and second

quarter.”

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Herbalife

6. 57-year-old distributor in Vienna, Austria

He has been using Herbalife products for more than 15 years and has worked for the company for more than 10 years. He is a strong advocate for Herbalife. Sales are up 80% in the third quarter compared to the second quarter this year, but year-over-year sales are down. He expects a 20% sales increase in the fourth quarter. He says consumers and distributors are still buying Herbalife products and that rumors about the company are common. He has 40 members who are not distributors and that number has increased since January. He praises the company for its distributor support, and says he has never had an issue getting paid. No competitor holds a candle to Herbalife, in his opinion.

Sales “After two months, the third quarter is 80% higher in sales than the second

quarter. I have more members, more customers.” “For the first two months of the third quarter, sales are down 20% compared

to last year’s third quarter, due to a loss of members.” “I expect fourth-quarter sales to be up 20% from the third quarter.” “Consumers and distributors are not backing off from buying Herbalife

products this quarter. We always have had some idiots spreading some rumors! More and more people are having incredible results in their health, and they bring new customers—customer by customer, city by city, country by country.”

Distribution Network “I have 40 members who are not distributors, and that number has

increased over the past six months.” “No, I do not know of other Herbalife distributors who have quit the business.” “I know a lot of Herbalife distributors who have been in the business over a year. We have 70%+ in Vienna.” “Herbalife distributor support is first class! The support from the company with trainings, promotion tours, marketing

material—perfect! “I have never had payment issues with Herbalife!” Corporate Support “Never do I view Herbalife as a pyramid scheme!” Competition “There are no new competitors who have become a threat to my business or Herbalife’s business. There is nobody

who is able to hold a candle.” Pricing “There have not been any changes in pricing or promotions in the third quarter versus the second quarter.”

7. Personal trainer and female bodybuilder in the Mid-Atlantic U.S.

This distributor came aboard two months ago based on her previous experience as a former Herbalife customer five years ago. Although her sales have been minimal, to date, most customers are new to the Herbalife products she sells, which includes the athlete-specific line, Herbalife 24. That said, she is aware of at least one distributor who quit, but that was based more on a personal decision than anything to do with the recent negative attention in the press.

Sales “A lot of the people that are interested in buying Herbalife it is their first time using it.” “I just started so I haven’t sold much, but maybe one thing about the Herbalife is that it might get expensive [to stay

on it], and I know my crowd doesn’t have that type of money.” “I sell everything offered by Herbalife, including the newer line, Herbalife 24 [for athletes].” Distribution Network “I most definitely started distributing to get the discount for myself, but it’s not that big of a difference on the retail

price.“

Herbalife distributor support is first class! The support from the company with trainings, promotion tours, marketing material—perfect! … I have never had payment issues with Herbalife!

Distributor Vienna, Austria

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Herbalife

“I’m not trying to be a ‘millionaire’ by doing this, I’m just trying to get some extra cash on the side and help others with a healthy lifestyle.”

“I started to use Herbalife maybe five years ago because my boss used to sell them, but I stopped. Then I started to get involved again about two months ago. I got involved because I know it’s a good product and people always ask me for good advice on training.”

Corporate Support N/A Competition “The prices are OK. GNC, and some other brands, will always be a lot higher. I think our prices are good [fair]

because the products are also healthy.” Pricing “When I start to sell more, I will be giving out discounts [to boost sales].” “I really don’t know if there has been any price or sales changes because I’ve only sold a couple of things so far.

Nothing major.”

8. Northeast U.S. distributor

This small-time distributor, who has five members who are not distributors, saw a 12% decline in July and August compared to May and June. She attributes the sales decline to the peak and wane of swimsuit season. Based on historical data for Herbalife, she expects a 9% increase in September and October over July and August, and 3% decreases in both November and December. She reports a price increase in the second or third quarter.

Sales “July and August saw about a 12% decline from May and June.” “Prior years have shown that September and October numbers increase

about 9% from July and August with about a 3% decrease in November and December.”

“My client numbers have stayed the same. Many customers will purchase products in bulk to avoid multiple shipping fees.”

“I am not a large distributor. I have about five members, who are not distributors.”

“I haven’t encountered any customers who are concerned about the Ponzi scheme or had any questions or concerns regarding the safety of Herbalife products.”

“May and June seem to be busier than July and August [customer-wise]. I believe it’s attributed to the start of swimsuit season.”

Distribution Network “I don’t know of anyone who left the business.” “Many of the distributors that I am in contact with have been in the business for over a year, mostly due to the ease

of doing business. “ “I initially became a distributor for the discounts and it slowly moved into a side business.” “I got involved with Herbalife about five years ago to save money for my own products.” Corporate Support “I don’t really rely on the corporate side of the business. I mostly use word of mouth.” “No, [there has not been any difference in the way I do business or with my relationship with Herbalife over the past

six months]. I use pamphlets from time to time, but that’s it.” Competition “Some people have mentioned Shakeology, but I haven’t had any problems with losing customers to another

product.” Pricing “There was a small price increase [she declined to give figure]. I’m not sure if it was effective in the 2Q or 3Q. It

wasn’t significant enough to deter current clients form ordering their normal products.” “I don’t usually use promotions.”

I haven’t encountered any customers who are concerned about the Ponzi scheme or had any questions or concerns regarding the safety of Herbalife products.

Distributor Northeast U.S.

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Herbalife

“Herbalife has always provided payment on a timely basis.”

9. Book publisher and Internet information marketer in Utah; repeat source

His Herbalife sales have increased in the third quarter compared to the second quarter, largely from gaining new customers. He anticipates fourth-quarter sales to continue with that upward trend. Twenty-five of his members are not distributors, a rise from six months ago. He knows many Herbalife distributors who have been in the business over a year and are happy with the products and payment structure. He is happy with Herbalife’s distributor support and has had no payment issues with the company. He does not view Herbalife as a pyramid scheme.

Sales “Sales are up in the third quarter compared to the second quarter. The growth is from new customers, and there is

no change to buying habits.” “I anticipate fourth quarter sales to be up.” “No, consumers and distributors are not backing off from buying Herbalife

products in the third quarter.” Distribution Network “I have 25 members who are not distributors. This is up from six months

ago.” “Yes, I know of other Herbalife distributors who quit the business. They

wanted to take a different direction than an Herbalife focus.” “I know other Herbalife distributors who have been in the business over a

year; they are happy with products and with how the payment structure is established.”

“I became a distributor so Herbalife could be a part of my business.” “I am happy with Herbalife’s distributor support; I use the Herbal Network site, which gives me a website for

$100/year. This allows people in area to search for a distributor to contact. Most of my new customers come from this.”

“There have not been any changes with my relationship with Herbalife over the past six months.” “I have not had payment issues with Herbalife.” Corporate Support “I do not view Herbalife as a pyramid scheme.” Competition “No, there are not any new competitors who have become more of a threat to my business over the past six

months.” Pricing “There have been no changes to pricing in the third quarter compared to the second quarter. Prices increased the

first of the year.” “There have been no changes in the number of promotions I have done between the third and second quarters this

year. I have been very busy with other parts of my business. I completed eight books on Amazon the first half of the year.”

10. Herbalife supervisor on the East Coast

This supervisor, who has worked her way up from being a distributor since starting in March 2012, saw a dip in customer sales this summer compared with the spring. In order to move her inventory, she resorted to running a significant discount promotion on some products, which other distributors bought to use for themselves, as opposed to reselling it to their customers. Sales could be compromised by the expense of Herbalife products, effectively precluding purchases by new moms and younger demographics.

Sales

Sales are up in the third quarter compared to the second quarter. The growth is from new customers.

Distributor, Utah

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Herbalife

“I saw more people buying in the spring than summer. I don't know percentage-wise what the difference was, but I ran a 40% off sale [to entice buyers].”

“It was very effective because I had other Herbalife people, who sell themselves, buying from me. They were buying it for themselves [versus to resell the products to their customer base].”

Distribution Network N/A Corporate Support N/A Competition N/A Pricing “I personally feel that Herbalife is very expensive and people, especially new moms or younger people, really can’t

afford the product unless it’s very discounted.” “I personally ran a special that really made people buy.” “I ran my special because I needed to move my inventory.” “I have never had any problems with any payment from Herbalife.”

2) MEMBERS Three of seven sources have seen their use of Herbalife products decrease, two have held their use stable and one has increased use in the third quarter. Our South African source, a new distributor, has seen sales fluctuate. Six of seven sources signed up to be a distributor in order to receive the distributor discount. Five of seven sources believe Herbalife is not a pyramid scheme. One source is more skeptical and one source had no comment. Herbalife has little to no competition but one source mentions Body by Vi as an upcoming competitor over the past six months. Only one source has observed an increase in prices in April; no other price changes were observed. KEY SILO FINDINGS Sales

- 2 sources have held their use of Herbalife stable since Q2. - 3 sources have decreased their use of Herbalife since Q2. - 1 source has increased use and 1, a new user, has increased use.

Distribution Network - 6 of 7 sources became distributors in order to receive the discount.

Corporate Support - 6 of 7 sources do not believe Herbalife is a pyramid scheme. - 1 source believes it is a pyramid scheme ‘somewhat.’

Competition - 5 sources report Herbalife to be a competitively priced product. 1 had no comment. - 1 sources reports Body by Vi has been a threat in last 6 months.

Pricing - 5 sources have not observed any price changes over the past 6 months. 2 had no comment.

1. Stay-at-home mom in her 30s

A high price point and the natural inconsistency of a summer schedule, not the Ponzi scheme allegations and product safety issues per se, led this customer to pull away from Herbalife just five weeks after initially purchasing products for herself and her husband. Since July, she paid an online Herbalife distributor for various products at $150 per person, a price she found comparable to similar competitor products. She signed up to become a distributor, but admits she never intended to sell the products, and only did so to reap the associated discount on her purchases.

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Herbalife

Sales “I had just purchased Herbalife for the first time [in] July 2013. I purchased it two times in July, once in August.” “I have already stopped using Herbalife. The price was a little high for me, and I was having a hard time staying on

it during the summer with vacation and trips.” “I purchased Herbalife online, through a distributor’s website.” “I was only using Herbalife, strictly for two weeks, on and off for five weeks. I did not have any health issues while

using it.” Distributor Network “I did sign up to be a distributor, only to get the discount. I did not have intentions of trying to sell it myself.” “I do not think the distributor I went through started actively trying to sell it yet, but they do plan to. They have been

on it for four to five months, and have been very successful in losing a lot of pounds and inches. They love the product, and are still using it [personally] and losing weight.”

Corporate Support “It could be viewed as a pyramid scheme although [that doesn’t seem to be the case] if the products are working for

you, you believe in them, and would want to help others become healthy as well.” Competition “They are comparable [to competitor products]. Taste and quality was great. It was a lot of money, but if it works,

how can you put a price on health?” “Price was around the same [for Herbalife] as other similar products I have seen.” Pricing “I have not noticed a price change [in Herbalife products in July and August compared with April to June].” “I have not noticed any changes in sales/promos [in the same time frame].”

2. Marketing and sales professional and former Herbalife distributor in Sydney, Australia; repeat source

While she previously sold Herbalife products, this source is now primarily a user of the products but maintains her distribution rights. Her purchases have remained stable since April. Her purchases will increase from October through December. She praises her sponsors, saying they work hard for their successes. She does not view Herbalife as a pyramid scheme, and she believes the weight-loss products, supplements and skin-care products are more effective than competitive brands.

Sales • “My Herbalife purchases have remained stable in July/August compared to April/May/June.” • “In October through December, I will probably have a slight increase in purchases, as my son now has larger helpings

of the shake, and likes to keep some protein bars with him when he goes for sports.”

Distribution Network “I used to sell Herbalife products, and I have maintained my distribution

rights. So I buy them directly from the warehouse.” “My sponsors are President’s Team Members. This means that they are

turning over a large volume of product each month through their own sales as well as the sales of their down-line. I am in regular contact with them, and it is clear that their constant attention to the business and hard work is continually paying off in increasing sales and down-line membership.”

Corporate Support “The Herbalife business depends on sales of real products. Without real people buying and consuming the products,

there would be no Herbalife. So it is not a pyramid scheme. It is not a scheme of any sort.” Competition “In Australia there are many cheaper products in the weight-loss category, though from my observations, these

products do not seem to be as effective, or of as good quality as the Herbalife weight-loss products. I have seen that people who lose a large amount of weight with Herbalife do not have any wrinkling and sagging of skin. That is the problem with many weight-loss products, as well as weight-loss diets.”

The Herbalife supplements seem to be of better or as good quality than the same price products in the market.

Member & Former Herbalife Distributor Sydney, Australia

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Herbalife

“The Herbalife supplements seem to be of better or as good quality than the same price products in the market. There are cheaper supplements available, but I have tried supplements by other famous companies that are of a similar price range, as have been recommended to me in pharmacies.”

“The Herbalife skin-care products are also very effective—as much so as the ones in the same price range. There are a number of products that I am keenly loyal to.”

Pricing “No, I have not noticed any changes in product prices in July and August compared to April through June. Prices go

up every couple of years, in April, by a small margin.” “My sponsors have amped up the training schedule, as they are doing a lot more training sessions, but I do not see

any more promotions than before.”

3. Mother of four and ticketing support agent for a major airline in northern Minnesota; repeat source

She has been consistent in her purchases of Herbalife products, but in July increased her purchases of protein bars. She has no desire to be a distributor due to time constraints. She believes Herbalife is not a pyramid scheme, and says the company’s products are more expensive than competitor products but are superior in quality. Body by Vi has been a threat to Herbalife in the past six months. Overall, she is pleased with Herbalife’s products and will continue using them.

Sales “I have been consistent in my purchases of Herbalife products until July. That month I participated in a weigh-down

challenge so purchased more protein bars than normal.” “I expect to remain consistent in Herbalife purchases for the remainder of the year.” “Overall, I am very pleased with Herbalife products and plan to continue using them.” “I purchase Herbalife products from a distributor.” Distribution Network “I have not wanted to be a distributor. I do not have time.” “My distributor is doing very well.” Corporate Support “I would not say it is a scheme but a structured business model that follows a pyramid approach.” Competition “Body by Vi has been a threat to Herbalife in the last six months.” Pricing “Herbalife is more costly than its competitors, but the product is superior.”

4. 59-year-old weekly community news editor in Minnesota; repeat source

His Herbalife purchase habits remain steady over the past year and he expects to buy the same number of products in coming months. He became a distributor to get discounted products, but he does not actively promote or sell Herbalife. He does not view Herbalife as a pyramid scheme but instead says it is “network marketing,” and an opportunity for some people to be successful. He has seen no changes in pricing or promotions over the past six months.

Sales “My Herbalife purchases have not changed. … I have a shake and some

tea for lunch each day, and they have helped me lose 25 pounds in just over a year.”

“I do not expect to change my buying habits of Herbalife in October through December.”

Distribution Network “I became a distributor simply because the cost of the shakes and tea are

less for a distributor. I do not actively promote or sell Herbalife.” Corporate Support “Herbalife is network marketing, which some people call a pyramid. I would

I became a distributor simply because the cost of the shakes and tea are less for a distributor. I do not actively promote or sell Herbalife.

Herbalife Member Minnesota

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Herbalife

not call it a scheme. It is an opportunity, and some people are very successful with it because of their talent, skill and hard work.”

Competition “[A] casual look at competition leads me to believe Herbalife is comparable to other similar products.” Pricing “There have been no changes in product prices in July/August compared to April through June. I have not noticed

changes in the number of Herbalife promotions.”

5. 51-year-old orthodontic dental assistant in Minnesota; repeat source

She has actually decreased her purchases of Herbalife products this quarter after completing a weight-loss challenge with her neighbors. She expects to spend about the same in the fourth quarter as she is now and does not tend to buy competitive products. She is also a distributor, but purchases products mostly for herself and a few neighbors, so she can get the discount. She views Herbalife as “somewhat” of a pyramid scheme.

Sales “I have decreased my purchases of Herbalife products since my neighbors and I are done with a weight-loss

challenge.” “My purchasing habits of Herbalife will remain the same in October through December due to just purchasing the

products for myself.” Distribution Network “I am a distributor. I am just purchasing items for myself and for a couple of my neighbors to get the discount.” Corporate Support “Yes, Herbalife is a pyramid scheme—somewhat.” Competition “There are not any new competitors who have been more of a threat to Herbalife’s business over the past six

months.” Pricing “I have not noticed any changes in product prices or promotions in July/August compared to April through June.”

6. Hair stylist and mom of twins from New Mexico

This young mother of two started Herbalife within the past month as a weight-loss supplement. However, she stopped within one month as the nutritional shake mixes she used started making her feel ill. She stopped out of concern for her health, and has no intention of buying more products.

Sales “I am not on it anymore.” “I been off and on with Herbalife for a month and stopped entirely just recently.” “I have been getting sick off of it—sick to my stomach after a couple of hours and on the verge of vomiting.” Distribution Network N/A Corporate Support N/A Competition N/A Pricing N/A

7. 46-year-old housewife in Pretoria, South Africa

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Herbalife

She spends between $49 and $99 when she places an order. She recently signed on as a distributor to get the discount and has two regular customers thus far. She does not view the company as a pyramid scheme and says Herbalife’s products are superb. She suffers from a chronic fatigue immune disorder and says Herbalife has helped her lead a normal life. She is a strong advocate for this company and its products.

Sales “I only started on the products again in July. But my purchases do fluctuate according to available finances. I spend

minimum [$49 approximately] to maximum [$99 approximately].” Distribution Network “I have re-signed on as a distributor, but because of transport problems, my supervisor collects and delivers my

orders. The reason I signed on again as distributor is for the discount, because family and friends are interested in the products, and because I enjoy helping people regain their health.”

“I have two regular customers, but know I will be getting more soon.” Corporate Support “Herbalife is not a pyramid scheme. A multilevel marketing system is very different from a pyramid scheme.” Competition “I have tried many other products mainly to try to improve my health but continue to come back to Herbalife mainly

because of the effectiveness and quality. I have also found it to be cost effective, because most of the similar products in order to get any result you need to purchase a larger variety of products. I also found with other products that I get little or no results.”

“I do not believe that any other product (that truly works) can compare with the effectiveness of Herbalife. So I do not think there are any competitors on the same level in the cellular, nutritional and herbs.”

“My main reasons for taking Herbalife is for health reasons. The weight loss is for me an added benefit. I was born with a spastic colon and was diagnosed with chronic fatigue immune disorder syndrome 18 years ago. Herbalife is the only product that allows me to lead a fairly normal life. Last time I was on Herbalife 10 years ago—after six months I was pain free. I am hoping for the same results.”

Pricing “No promotions have been brought to my attention.”

3) MLM SPECIALISTS All three sources expect Herbalife to continue its sales growth led by international markets, particularly from Asia. One source classified Herbalife’s distributor network as a strong growing network. A second source says MLM jobs are rising in popularity in Asia, which should benefit Herbalife. None of the three sources believe Herbalife is a Ponzi scheme. One source sees the multilevel marketing industry leveraging viral and social networking more and another sees no major competitive threats to Herbalife. The one source who commented on pricing said summers typically see a seasonal decrease in pricing as distributors work fewer hours. KEY SILO FINDINGS Sales

- 3 sources expect sales growth to be led from international expansion, 2 specifying strength from Asia. Distribution Network

- 1 source says Herbalife has a strong growing network. - 1 source says MLM as a job is rising in popularity in Asia, should benefit HLF.

Corporate Support - All 3 sources do not think HLF is a Ponzi scheme.

Competition - 1 source sees no major threats to HLF - 1 source sees an increase in leveraging viral and social networking by MLM

Pricing - 1 source says summer usually sees seasonal prices decreases.

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1. Chair and CEO of MLM trade organization; repeat source

Herbalife’s growing presence in the Asian market will sustain its growth despite the recent pyramid scheme accusations. Japan, Korea, China, Malaysia and Vietnam, in particular, have dedicated distributors and customers, which will continue to grow as transportation and thereby product shipments, improves. As far as stateside, Herbalife’s longevity and positive treatment of its distributors continues to work in its favor, and is poised to attract a female and younger demographic looking to earn money as a full-time job or as a financial stepping stone out of college. Overall, Herbalife does not face stiff competition from any other comparable MLM company, though there are some newer and smaller companies, like Vemma and ViSalus (Body by Vi), that are eating market share from all the big MLMs, including Herbalife, Nu Skin Enterprises Inc. (NUS), Amway, and Shaklee Corp.

Sales “Can they sustain their growth? I believe they can. Herbalife is a good company and has been around for almost 30

years. If they didn’t have good products—and I’m not saying theirs is the best on the market—they wouldn’t manage to stay as competitive with similar products and companies.”

“Japan and Korea, particularly, are fast coming up with a population of people who are dedicated to selling Herbalife and, for some, not just Herbalife, but a number of network marketing companies.”

“China is going to open up for network marketing companies, and already has [to a degree]. I was in Vietnam last year and it is really beginning to boom. We in America wouldn’t consider it ‘booming,’ but it is for their culture and, yes, Herbalife was already there. [Distributors and customers] will improve in those places when transportation and, therefore, delivery systems improve. They don’t have UPS right now like [America does].”

“All Herbalife has to do [to boost sales] is have a couple of top, highly dedicated distributors committed to working on it 10, 20, 40 hours per week in order to sell products and recruiting people. … That’s where these Asian companies [are a benefit].”

“MLM companies do not fold [in Asia] as quickly as they do here because the people, the distributors, work at it. People in America view [distributing] more as a game, as a way to get discounts on their products, make some new friends and earn extra money. For these people in these Asian countries, it’s cultural. It’s [in some cases, full-time] work.”

“Herbalife doesn’t appear to be losing customers as there are plenty of new ones coming in to make up for those who do leave…”

“The U.S. still leads other nations in network marketing sales. However, direct sales as we know it is expanding in other countries around the world and Herbalife has certainly spread out to those countries in Asia.”

“As far as sales issues for Herbalife: This too shall pass once this [Ackman allegations] is settled and Herbalife shows these [investors] that their distributors are on the right path and going for it. They also have some clean management.”

Distribution Network “Herbalife is a strong company and they are committed to what they are doing or their distributors would have quit in

droves a long time ago, regardless of these [Ponzi scheme allegations]. They are doing more volume now than they were five years ago. That’s key.”

“I hear a lot in this industry, but I absolutely have not heard of distributors backing away from Herbalife [at any alarming rate]. In fact, they are recruiting more and growing in the last year.”

“They may not have as many distributors now as they’ve had in the past, but understand that people also don’t have much money to spend on these kind of products today [versus pre-recession].”

“Herbalife and other big companies run into problems when they begin making switches to their distributor base, like taking people from somebody’s down-line and putting them in someone else’s down-line to make more money.”

“It’s an old fallacy that distributors will recruit 10 and then those people will recruit 10 more people, and so on. … The reality is, and most big MLM companies know this, most people probably recruit 3 people … who buy with regularity.”

Corporate Support

Herbalife will bounce back from [the poor publicity]. I honestly feel the way they do business is actually among the most ethical of network marketing companies, regardless of what this guy [Ackman] is saying.

Chair & CEO MLM Trade Organization

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Herbalife

“Herbalife is not in any stretch of the imagination a pyramid scheme.” “Herbalife deserves better than what it’s getting in the press. This happened to Amway years ago. The press was

absolutely terrible to Amway, calling it a scheme. But look at Amway now. They keep getting better [i.e. 2012 sales of $11.3 billion].”

“Herbalife has towed the mark for many years. They’ve done the best for their distributors and they’ve managed to grow so much, so big and so relatively quickly because they tend to understand technology quicker than most people. They invested their money in capsules [for products] and had a fleet of cars, all early on, [to help sales]. Now they evolved [i.e. independent distributor websites].”

“Herbalife will bounce back from [the poor publicity]. I honestly feel the way they do business is actually among the most ethical of network marketing companies, regardless of what this guy [Ackman] is saying.”

“I have not looked at Herbalife’s compensation plan, but you’re always going to find someone who will find fault with it because there is no perfect compensation plan out there. Everyone expects something different.”

“That Herbalife’s recent renaming of customers “members,” from “distributors,” has been a MLM trend over the last couple of years from some of the companies because they are trying to keep better records. It’s data driven … It also helps them better reward members with special discounts on particular products.”

Competition “I don’t think any company is a major threat to Herbalife.” “There are other network marketing companies that are doing extremely well right now. They are new and exciting

and only in business four or five years: Vemma out of Arizona and ViSalus of California. Of course, you have Nu Skin, Amway, and Shaklee, who have all been around for years.”

Pricing “Prices in the summer, in general and not just for Herbalife, tend to drop because [distributors] don’t work as many

hours in the summer. Many companies, not just Herbalife, will give discounts on products, like buy-two-get-one-free. It’s been that way in the summers in network marketing for at least the 55 years I’ve been in it.”

2. Vice president of international operations for a marketing and branding company focused on MLM and nutritional products

Herbalife is gaining distributors and customers internationally. The company can sustain its sales growth by tapping into the Asian market, and China in particular, where MLMs are gaining increasing popularity because people are willing to supplement income as distributors and expend disposable income as customers. Asian culture is also heavily reliant on social connections, making MLMs a natural business model to adopt, regardless of Ackman’s pyramid scheme accusations. Amway and Nu Skin have already made their presences known in China with logos and advertisements popping up in airports and within the transportation system.

Sales “Herbalife’s overall growth is going to continue mostly in the international

realm with the single most important opportunity being in China. There are about 2 billion people in China, so this is a huge market for them.”

“In China and in certain other countries, like Russia, Herbalife and other MLMs offer income potential as the people there look to augment the income of their daily jobs. There is a hunger there. Even with their economies slowing, there are still a lot of people with money and vast amount of disposable income to buy these products; a burgeoning middle class. That’s the market to get into.”

“What’s important about these emerging markets is that these populations—the culture, really—is big into social networking, which is what MLMs rely on.”

“The Chinese will pay a premium for these products.” “There is a high affinity in Asia to buy consumer products made in the U.S.,

especially nutritional supplements and skin care products … because of the FDA and the fact the U.S. companies have to jump through hoops to manufacture these products.”

“The U.S. is a very saturated place. You really have to fight so many people to get sales.”

There is a high affinity in Asia to buy consumer products made in the U.S., especially nutritional supplements and skin care products … because of the FDA and the fact the U.S. companies have to jump through hoops to manufacture these products.

VP of International Operations MLM Marketing & Branding company

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Herbalife

Distributor Network “I had a meeting with somebody in China who makes his living off MLM. He has worked with Herbalife, Amway, Nu

Skin and is currently with another company. Networking marketing, MLM, is becoming a way of life over there.” “It makes cultural sense: relationships and connections are very big in Chinese life all the way down to individual

level, so that’s why MLM is a natural fit for them, and for companies, like Herbalife, to seize the opportunity.” Corporate Support “Is Herbalife a pyramid scheme? No. A pyramid scheme means there is

always someone at the end unwittingly holding the bag. In terms of Herbalife or any MLM, [distributors], all know what they are getting into. Whether or not they are willing to put the work in or have the ability to make it work is another thing.”

“I don’t think the international market, particularly distributors and customers, cares terribly well about the dust-up between the investors and Ackman.”

Competition “I traveled to Beijing two months ago, and when I got off the plane, I saw

Amway’s name everywhere in the most discreet places, such as the etching in the glass doors to help people not walk into them and in the subways. … Nu Skin was there too. I did not see Herbalife logos, specifically, but I honestly may have just not noticed them.”

“The potential biggest threat to these veteran companies is those MLMs coming in that break the traditional lull of having to have physical interconnectivity. I’m starting to see more and more newcomers leverage the viral and social nature of the Internet. [For example], Stella & Dot out of San Francisco: that was the first MLM to enable reps to engage in Internet sales.”

“Bona Clara is another one. It focuses primarily on skin care products, but it has the capability to segue into supplements. They are one of the more aggressive ones and there is a hell of a brain trust behind it, trying to break the lull … and focusing in the Chinese market too.” ”

Pricing N/A

3. President of MLM/direct sales consulting firm

Herbalife is best poised to gain sales growth by vigilantly entering new, developing international markets, regardless of its domestic sales climb or fall. Further, from all appearances, investors must realize Ackman went short and as a result his accusations were “like a bad weather prediction.” The FTC has yet to say “boo” like it has in the past year about Ponzi schemes, ZeekRewards and Fortune Hi-Tech Marketing.

Sales “No rapid growth is sustainable. Each market Herbalife goes into is going to have a period of rapid growth and then

level off. The only way to sustain is to continue its growth internationally …” Distributor Network “Another big issue Ackman’s stance has is that people get in as distributors thinking they are going to make money

and then they don’t, [but] that is not illegal. … It’s not illegal to fail.” “The other part is people in network marketing make very little money … and my answer to that is: so what? That’s

also not illegal.” Corporate Support “In the past year or so, the FTC shut down ZeekRewards and Fortune Hi-Tech Marketing. This is not what Herbalife

appears to be about.” “Active investors, like Ackman, are not stupid. It’s like chess—they are making a calculated move, but … what

Ackman did was like a bad weather prediction.” “Is there some kind of negative action that could still come from the federal government about all this? Well, the FTC

operates in the dark … and in waves. They go silent for a few years and then suddenly come out of their cave to impose [sanctions, etc.].”

I had a meeting with somebody in China who makes his living off MLM. He has worked with Herbalife, Amway, Nu Skin and is currently with another company. Networking marketing, MLM, is becoming a way of life over there.

VP of International Operations MLM Marketing & Branding company

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Herbalife

Competition N/A Pricing “If people are objecting to Herbalife’s price, then they must realize that network marketing companies sell at

premium prices. They can do that because of product quality, packaging, and the [company] story. … It’s like makeup. You can go to Nordstrom’s, Macy’s, and Bergdorf Goodman and to the cosmetics counters where the makeup or perfume is $15, $50 or $100, or you can go into the dollar store. It’s user perspective.”

4) COMPETITORS These two competitors of wellness products have seen their third-quarter sales rise quarter over quarter, with one specifying a 30% increase. Both sources expect sales growth to continue in the fourth quarter. One source reports knowing someone who worked for Herbalife who was not paid. Neither source believes Herbalife is a pyramid scheme. One source names his own company as a competitor to Herbalife while the second source does not see any new competitors for Herbalife over the past six months. Neither reported pricing changes in the industry. KEY SILO FINDINGS Sales

- 1 source sees sales up 30% QoQ, 4Q sales expected to increase. - 1 source sees sales up QoQ and expects sales growth to continue into 4Q.

Distribution Network - 1 source knew someone in HLF who was not paid.

Corporate Support - 2 sources don’t believe HLF is a pyramid scheme.

Competition - 1 source sees his own company, Shaklee, as stronger than HLF. - 1 source sees no new competitors to HFL over the past 6 months.

Pricing - Both sources have not seen price changes in the industry.

1. CEO/president of nutritional products company and Shaklee partner

Herbalife has experienced its share of legal and product safety woes, but it’s those MLM companies, namely Shaklee, that have longevity and ultimately an unblemished record, that will reign superior in 2013 and beyond. Herbalife’s reputational damage to MLMs also has not dampened sales for this nutritional product company that currently partners with Shaklee. Its third-quarter sales rose 30% due to increased sales marketing and in part because Shaklee backs its product safety with clinical studies. As a result, fourth-quarter sales are expected to grow as there is a demand for product.

Sales “My sales are up by about 30% because I personally decided to grow my business again. Fourth-quarter expectations

are expected to increase as long as I continue to work it.” Distributor Network “No one in Shaklee ever missed a check because the company couldn’t pay them.” “In Shaklee, if a person wants to only buy products they are considered a member. They become a distributor when

they sell/share the products. When they complete certain criteria they advance to a ‘leadership’ position. There are many levels of leadership where the level of pay and benefits increase.”

“I do not know anything about Herbalife’s compensation program. I do know ours is one of the best.” Corporate Support

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“In Shaklee, if a person wants to only buy products they are considered a member. They are not required to purchase quotas each month. They become a distributor when they sell/share the products. When they complete certain bench marks for advancement they advance to a leadership position. There are many levels of leadership where the level of pay and benefits increase.”

“MLM has gotten a bum rap because some people feel it is a pyramid scheme. It is not, for three reasons. One, the person on the bottom can surpass the ones on the top. Two, most MLMers are selling a product and three, if it were a pyramid scheme it would be illegal in the U.S.”

“Think about the corporate structure. Is there not one person on the top with others underneath him? Is that a pyramid scheme? I think not.”

Competition “Shaklee can run circles around all of them and have the studies to back up all their claims.” “MLM companies are a dime a dozen with many new ones coming on the market.” “There is a huge concern for the safety and efficacy of products [not just with Herbalife] … Most companies that say

they have clinical studies don’t have the correct results to back them up and a lot of their ‘clinicals’ are flawed. It depends on who does the studies, how they were conducted and who reported the results among other things.”

“Longevity in the industry with an unblemished record, product superiority and top-notch compensation plan is what determines who stays and who goes. The new ones make many promises, which I don’t think they can deliver.”

Pricing “Shaklee has never had to lower their prices to compete with anyone in the industry [including Herbalife].”

2. David Cunic, founder and CEO of Pazoo.com, a provider of health and wellness products and information

Herbalife is doing something right: The company has been around for decades and still is doing well and rallying its troops. And isn’t every type of business a pyramid scheme? He believes people who quit Herbalife did not have patience, did not see results quickly enough, or did not have a good mentor. Others quit their full-time jobs to join multilevel marketing companies and had a great leader. His company’s third-quarter sales are up from the second quarter and have risen significantly year over year. Pazoo’s products should be in additional retail stores in the fourth quarter, and thus sales should increase again. He has not seen any dramatic changes in industry pricing, and is not aware of any new competitors who could threaten Herbalife’s business.

Sales “If Herbalife continues to keep coming after you and has cutting-edge products, and keeps improving its current and

new products, yes, the company’s business is sustainable and will continue to grow … If you have been around since 1980 and it is 2013, and you are still profitable, and still doing well—you are doing something right.”

“Our third-quarter sales actually increased compared to the second quarter.”

“Year-over-year, third-quarter sales are up significantly. Our products are now being distributed in several more stores.”

“We expect sales to be up in the fourth quarter compared to the third quarter. … We really increased advertisers. A lot of people come to the site …”

Distribution Network “In my opinion, people who quit Herbalife did not have enough patience.

Nothing in life is a get-rich-quick opportunity. They did not see the results quick enough and they were not happy with their up-line or mentor. They did not feel their mentor was a good leader or role model. And lastly, saturation. If you have a ton of Herbalife distributors in a small region it makes a difference. Amway is very saturated in North Carolina with distributors. … If you are one of the first people to do it in your area, you will be highly successful ...”

“Herbalife distributors who have been in the business over a year had a great mentor. They see the potential that they have with the company and are seeing the results first hand. They are putting in the time and effort and getting the direct results …”

Corporate Support

If you have been around since 1980 and it is 2013, and you are still profitable, and still doing well—you are doing something right.

Founder & CEO Health & Wellness Products Website

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Herbalife

“Isn’t every company a pyramid scheme at the end of the day? You have a CEO/president, people underneath him, then middle management, and then people on the front lines. The person on the top makes the most amount of money—that is true for every business. The pyramid scheme gets a bad rap. People made fun of Amway dramatically in the 1980s and 1990s, because you could never make a lot of money with it. But there is an arena named after Amway. They are doing something right and people are getting paid for it. Everything is a pyramid scheme.”

Competition “I am not aware of any new competitors who have become more of a threat to Herbalife's business over the past six

months.” Pricing “We have not seen any major changes in industry pricing at all.”

Secondary Sources The following five secondary sources show a growing Asian market for dietary supplements, new competition in the market, Herbalife’s sponsorship of the South East Asian Games to attract more athletes, its expansion of the sale of licenses in China, and its hiring of former Los Angeles mayor Antonio Villaraigosa to help ease the allegations from the Latino community. July 25 Morningstar article

The Asian market is set to become the fastest-growing dietary supplement industry with a 30.4% increase through 2017. Genufood Energy Enzymes Corp. is a small company, which could be one of many threats to Herbalife as new dietary supplements enter the market.

“Herbalife Inc. has built a $5 billion empire on the sale of nutritional supplements around the world via about 2.7 million independent distributors in 79 countries.”

“Interestingly, the majority of these sales have come from China and the Asia Pacific region, which represent a combined 34.8% of overall revenues compared to just 20.7% in North America (excluding Mexico). These regions also have far greater sales forces and a sharply higher sales leader retention rate compared to North America (61.5% vs. 51.1%).”

“This suggests that nutritional supplements are on the rise in China and the Asian Pacific, creating a potentially significant market opportunity for other companies.”

“Genufood Energy Enzymes Corporation, or GEEC, is a relatively new public company that’s targeting the Asian Pacific and Chinese markets for these enzymes. Through a combination of multilevel marketing, franchise-investor-dealer-related concepts and wholly-owned retail locations (depending on the dynamics of each local market), the company is introducing its enzyme products from its contract manufacturers to these key markets.”

“The Taiwan Ministry of Health has approved ProCellax SP, a systemic health enzyme product. Other enzyme products are in the approval evaluation process. The Sri Lanka Ministry of Health has categorized ProCellax enzyme products as supplementary drugs and approved them for sale.”

“The dietary supplement industry is slated to become the world’s fastest growing market between 2012 and 2017, according to Research and Markets, with the Asia Pacific segment expected to account for about 30.4% of the total sales. Global Business Intelligence suggests these sales will reach $180.1 billion by 2017, equating to a $55 billion opportunity in Asia.”

“A separate report by Transparency Market Research predicted that the global probiotics market would exceed $44.9 billion by 2018, growing at a 6.8% compound annual rate between 2013 and 2018. Again, the Asia Pacific region was cited as the market leader with an above-market growth rate of 7% over the period, accounting for most of the industry’s expansion.”

“With a market capitalization of just around $200 million, the company only needs to capture a small fraction of the $50+ billion opportunity in order to unlock significant shareholder value. This shouldn’t be too difficult given its science-based approach, unique business model, and experience in targeting the Asian marketplace relative to larger players.”

June 25 Value Walk article

Attendance at Herbalife’s Asian extravaganza increased 22% this year. Coupled with continued organic growth, it shows Herbalife’s expansion into China is paying off. As Herbalife expands its product offerings to the skin-care market in

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October, it faces stiff competition from Nu Skin Enterprises, which is launching a new AgeLOC weight-loss offering in Asia and China. “Analysts at D.A. Davidson & Co. noted that Asia is the primary driver of the out-performance of Herbalife Ltd. as well

as other multilevel marketing (MLM) companies such as Nu Skin Enterprises Inc. and USANA Health Sciences Inc.” “The stock price of Herbalife Ltd. rose by 40.2%, Nu Skin Enterprises, Inc. by 60.9%, and USANA Health Sciences Inc.

by 112.5% year to date.” “During its previous multi-city Asian extravaganza, Herbalife Ltd. recorded 55,000 people attended the event this

year, an increase of 22%, or 10,000 participants, from 45,000 last year. Ramey noted that majority of the increase came from Bangkok, Thailand.”

“According to Ramey, Herbalife Ltd. continues to demonstrate an impressive organic growth across multiple markets. The company is preparing for the launching of new skin-care products in October, and it is planning to expand its Herbalife 24 line in 11 new markets in the third and fourth quarter.”

“On the other hand, USANA Health Sciences Inc. is focused on improving its technology, and continues its long-term distributor and customer engagement. Early this month, the company announced that customers would receive an iPad integrated with the True Health Assessment and True Companionship app, if they will enroll in the auto-ship program and continued participation.”

“Ramey believes that the iPad promotion of USANA Health Sciences Inc. will help boost the company’s sales going forward. In addition, he observed that the company continues to grow in China, North America, and Columbia. However, sales in Canada are slightly flat due to a 10% to 12% price cut.”

“Meanwhile, Nu Skin Enterprises Inc. is preparing for the launch of its AgeLOC Weight-Loss LTO (limited time offering) in September for Southeast Asia and China. The company will also launch the product in Canada, Europe, Japan, Korea, and the United States in October. The product is rumored to cost $1,000 for a three-month supply.”

July 25 Sports Pro Media article

Herbalife is trying to attract more athletes to use its products by extending an agreement with the Vietnam Olympic Committee to become a sponsor for the South East Asian Games in Myanmar. “Herbalife has agreed to sponsor the Vietnam Olympic Committee.” “The deal will see Herbalife become the body's official nutrition partner for the South East Asian Games in Myanmar

in December. It will provide its supplements to the country's athletes for the event, as well as offering consultation on nutritional programmes.”

“Herbalife is already the exclusive nutrition sponsor of Vietnamese sport until 2016 after signing a memorandum of understanding with the Ministry of Culture, Sports and Tourism of Vietnam in 2012. This deal expands the rights offered in that agreement.”

“The 27th edition of the South East Asian Games will take place in Myanmar from 11th to 22nd December, with athletes from 11 countries competing across 34 sports.”

July 25 Isportsconnect: “The sponsorship will see Herbalife providing its nutrition products and sports nutrition consulting and trainings for all the 800 qualified athletes competing in 29 sports disciplines at the Games.”

“As part of this newly signed agreement, Herbalife will provide the participating athletes with its nutrition products, including Formula 1 Nutritional Shake Mix, Personalized Protein Powder, and Multivitamin Complex.”

“This agreement is part of Herbalife's broader sponsorship program aimed at promoting healthy and active lifestyles, supported by good nutrition. Herbalife is currently sponsoring many world famous clubs and athletes of almost 20 different sports, such as soccer superstar Cristiano Ronaldo, LA Galaxy in the U.S., FC Pumas in Mexico and Spartak Moscow in Russia. In Vietnam, Herbalife was also the official nutrition sponsor for Vietnam Team at the London Olympics 2012.”

August 14 Food & Beverage Asia article

Herbalife was granted an extension of its license to conduct direct-selling in the province of Yunnan, China, extending its reach in the Chinese market. “Global nutrition company Herbalife announced that China’s Ministry of Commerce has granted a license for

Herbalife to conduct its direct-selling business in the province of Yunnan. The licensed area in Yunnan province covers 12 cities, including the provincial capital Kunming, and 16 districts and counties. The license is effective immediately.”

“Herbalife received its first direct-selling license in China in March 2007, and Yunnan marks the 25th direct selling license for Herbalife in this important market. Herbalife China now has direct-selling licenses in 25 provinces,

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municipalities or autonomous regions: Shanghai, Jiangsu, Hubei, Anhui, Shangdong, Henan, Zhejiang, Sichuan, Chongqing, Fujian, Hunan, Guangdong, Jiangxi, Hainan, Guizhou, Guangxi, Liaoning, Jilin, Heilongjiang, Shaanxi, Beijing, Shanxi, Tianjin, Hebei and Yunnan.”

September 7 Voxxi article

Following accusations by a leading civil rights organization that it is taking advantage of the Latino population, Herbalife hired former Los Angeles mayor Antonio Villaraigosa as a consultant. Latinos encompass 60% of its independent sales force. “Latinos. Major League Soccer. Herbalife. Antonio Villaraigosa. Mix them up and you get a tossed ethnic salad that

corporate and soccer officials hope amounts to a Mexican Standoff that soothes over potential problems for Los Angeles-based Herbalife and MLS’s glamour team in Hollywood.”

“Herbalife is the nutritional supplement giant that sponsors the Los Angeles Galaxy team of Major League Soccer—a team that depends heavily on the support of Southern California’s huge Hispanic population.”

“But in recent months, Herbalife has come under attack from Hispanics and one of their leading civil rights organizations who accuse the corporation of preying on Latinos—allegations creating a potential public image nightmare not only for the company but also for America’s premiere soccer league.”

“So trying to head off a public relations crisis, Herbalife signed up former Los Angeles Mayor Antonio Villaraigosa to effectively cool off anti-Latino accusations while hoping his influence could get Hispanic critics to come around.”

“Instead, though, the hiring of the former Los Angeles mayor has only heightened tensions and animosity from Latinos toward Herbalife as well as against Villaraigosa, who left office this summer while still keeping an eye on possibly making a run for governor of California in the near future.”

“‘I’m disappointed,’ Brent Wilkes, national executive director of the League of United Latin American Citizens (LULAC), said of learning Herbalife had hired Villaraigosa at an undisclosed salary. ‘We’ve had a long and supportive role with Antonio Villaraigosa. All I can surmise is he doesn’t know the extent of how the Latino community is being negatively impacted by this company. I have to believe in my heart he would not have taken this gig if he realized so many Latinos were being defrauded by the company because they sign up thinking they’re going to make money and they end up losing money instead.’”

“The new controversy comes at a critical time for Herbalife, which acknowledges that Hispanics comprise at least 60% of its independent sales force who sell the company’s diet shake powders, vitamins, snacks, drinks and personal-care products.”

“LULAC alleges that Herbalife misleads Latinos about the prospect of making money selling its products.” “‘I absolutely think they’re being victimized,’ said Wilkes, ‘and I think it’s a really bad idea to become a distributor.’” “Villaraigosa’s title with Herbalife is special advisor to chief executive Michael O. Johnson and its board of directors.” “Their allegations piggyback on those from hedge fund manager Bill Ackman and others that Herbalife operates a

pyramid scheme.” “Wilkes says he is hoping to meet with Villaraigosa to warn him about his concerns. ‘My guess is he doesn’t stay with

the company long,’ Wilkes told reporters. ‘A guy like Villaraigosa wouldn’t want to tarnish his reputation with the Herbalife scandal.’”

Additional research by Cheryl Meyer and Marissa Yaremich The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not own securities in any of the aforementioned companies.

The new controversy comes at a critical time for Herbalife, which acknowledges that Hispanics comprise at least 60% of its independent sales force who sell the company’s diet shake powders, vitamins, snacks, drinks and personal-care products.

Voxxi Article

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