<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1998
SECURITIES ACT FILE NO. 333-44807
INVESTMENT COMPANY ACT FILE NO. 811-08615
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 1 [X]
------------------------
DECS TRUST III
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
C/O SMITH BARNEY INC.
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 816-6000
MARK J. AMRHEIN
SMITH BARNEY INC.
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(NAME AND ADDRESS OF AGENT FOR SERVICE)
With copies to:
RAYMOND B. CHECK, ESQ.
CLEARY, GOTTLIEB, STEEN & HAMILTON
ONE LIBERTY PLAZA
NEW YORK, NEW YORK 10006
(212) 225-2000
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C> <C>
=======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES BEING AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER DECS(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
DECS representing shares of
beneficial interest.......... 5,750,000 $23 9/32 $133,867,188 $39,491(3)
=======================================================================================================================
</TABLE>
(1) Includes an aggregate of 750,000 DECS that (i) may be issued in connection
with the exercise of an over-allotment option and (ii) were subscribed for
and purchased by Smith Barney Inc. in connection with the formation of the
DECS Trust III.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Of this amount, $3,393 was previously paid by the Registrant in connection
with the initial filing of this registration statement on January 23, 1998.
The balance of $36,098 is submitted herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
================================================================================
<PAGE> 2
DECS TRUST III
CROSS-REFERENCE SHEET
PARTS A AND B OF PROSPECTUS*
<TABLE>
<CAPTION>
ITEM NO. CAPTION PROSPECTUS CAPTION
- -------- ------- ------------------
<C> <S> <C>
1. Outside Front Cover................................ Front Cover Page
2. Inside Front and Outside Back Cover Page........... Front Cover Page; Inside Front Cover
Page
3. Fee Table and Synopsis............................. Prospectus Summary; Fees and
Expenses
4. Financial Highlights............................... Not Applicable
5. Plan of Distribution............................... Front Cover Page; Prospectus
Summary; Underwriting
6. Selling Shareholders............................... Not Applicable
7. Use of Proceeds.................................... Use of Proceeds; Investment
Objectives and Policies
8. General Description of the Registrant.............. Front Cover Page; Prospectus
Summary; The Trust; Investment
Restrictions; Investment Objectives
and Policies; Risk Factors Relating
to DECS
9. Management......................................... Management and Administration of the
Trust
10. Capital Stock, Long-Term Debt and Other Securities; Description of DECS
Federal Income Tax Considerations..................
11. Defaults and Arrears on Senior Securities.......... Not Applicable
12. Legal Proceedings.................................. Not Applicable
13. Table of Contents of the Statement of Additional Not Applicable
Information........................................
14. Cover Page......................................... Not Applicable
15. Table of Contents.................................. Not Applicable
16. General Information and History.................... The Trust
17. Investment Objective and Policies.................. Investment Objectives and Policies;
Investment Restrictions
18. Management......................................... Management and Administration of the
Trust
19. Control Persons and Principal Holders of Management and Administration of the
Securities......................................... Trust
20. Investment Advisory and Other Services............. Management and Administration of the
Trust
21. Brokerage Allocation and Other Practices........... Investment Objectives and Policies
22. Tax Status......................................... Certain United States Federal Income
Tax Considerations
23. Financial Statements............................... Statement of Assets and Liabilities
</TABLE>
- ---------------
* Pursuant to the General Instructions to Form N-2, all information required to
be set forth in Part B: Statement of Additional Information has been included
in Part A: The Prospectus. Information required to be included in Part C is
set forth under the appropriate item, so numbered, in Part C of the N-2
Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 5, 1998
PROSPECTUS
5,000,000 DECS(SM)
DECS TRUST III
(SUBJECT TO EXCHANGE INTO SHARES OF CLASS B COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF HERBALIFE INTERNATIONAL, INC.)
------------------
The issue price (the "Initial Price") of each of the DECS (each, a "DECS")
of the DECS Trust III (the "Trust") being offered hereby will be $ (the
last sale price of the Class B Common Stock, par value $.01 per share (the
"Class B Stock") of Herbalife International, Inc. (the "Company") on ,
1998, as reported on the Nasdaq National Market System). Each of the DECS
represents the right to receive (a) an annual distribution of $ ,
payable quarterly on each , , and ,
during the term of the Trust, beginning , 1998 and (b) upon the
conclusion of the term of the Trust on , 2001 (the "Exchange Date"),
between and 1.0 shares of Class B Stock or cash with an equivalent value. The
DECS are not subject to redemption prior to the Exchange Date or the earlier
termination of the Trust.
The Trust is a newly organized Delaware business trust that is registered
as a closed-end investment company and was established to purchase and hold (a)
a series of zero-coupon U.S. Treasury securities maturing on a quarterly basis
during the term of the Trust (the "Treasury Securities") and (b) one or more
forward purchase contracts (each, a "Contract" and collectively, the
"Contracts") with certain stockholders (individually, a "Seller" and
collectively, the "Sellers") of the Company relating to the Class B Stock.
The investment objectives of the Trust are to provide holders of DECS with
a quarterly distribution of $ per DECS over the term of the Trust and
to provide holders of DECS, at the Exchange Date, a number of shares of Class B
Stock (or, if some or all of the Sellers exercise their cash settlement option
in the Contracts under the circumstances described herein, the cash equivalent
of all or part thereof or a combination of Class B Stock and cash) at the
Exchange Rate (as defined herein). The Exchange Rate is equal to, subject to
certain adjustments, (a) if the Exchange Price (as defined herein) is greater
than $ per share of Class B Stock (the "Threshold Appreciation Price"),
shares of Class B Stock per DECS, (b) if the Exchange Price is less
than or equal to the Threshold Appreciation Price but is greater than the
Initial Price, a fraction equal to the Initial Price divided by the Exchange
Price of one share of Class B Stock per DECS such that the value (determined at
the Exchange Price) of the Class B Stock delivered at the Exchange Date equals
the Initial Price and (c) if the Exchange Price is less than or equal to the
Initial Price, one share of Class B Stock per DECS. The "Exchange Price" means
the average Closing Price (as defined herein) per share of Class B Stock on the
20 Trading Days (as defined herein) immediately prior to the Exchange Date,
except as otherwise described herein. Accordingly, the value of the Class B
Stock to be received by holders of the DECS at the Exchange Date will not
necessarily equal the Initial Price. If the Exchange Price is less than the
Initial Price, the value of the Class B Stock to be received at the Exchange
Date will generally be less than the price paid for the DECS. See "Investment
Objectives and Policies."
SEE "RISK FACTORS RELATING TO DECS" BEGINNING ON PAGE 19 FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
PURCHASERS.
(Cover continued on next page)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
=============================================================================================================================
PRICE TO PUBLIC SALES LOAD PROCEEDS TO THE TRUST(2)
- -----------------------------------------------------------------------------------------------------------------------------
Per DECS $ $ (3) $
- -----------------------------------------------------------------------------------------------------------------------------
Total (1) $ $ (3) $
=============================================================================================================================
</TABLE>
(1) The Trust has granted to the Underwriters an option, exercisable within
30 days from the date hereof, to purchase up to an additional
DECS to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Sales Load and Proceeds to
the Trust will be $ , $ and $ , respectively. See
"Underwriting."
(2) Before deducting estimated expenses of $ , payable by Smith
Barney Inc., which will be reimbursed by the Mark Hughes Entities (as
defined herein).
(3) In light of the fact that the proceeds of the sale of the DECS will be
used in part by the Trust to purchase the Contracts from the Sellers,
the Underwriting Agreement (as defined herein) provides that the Mark
Hughes Entities will pay to the Underwriters as compensation
$ per DECS. See "Underwriting."
------------------------
The DECS are offered subject to receipt and acceptance by the Underwriters,
to prior sales and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the DECS will be made at the office of Salomon Smith Barney,
333 West 34th Street, New York, New York, or through the facilities of The
Depository Trust Company on or about , 1998.
------------------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
March , 1998
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A STOCK (AS
DEFINED BELOW), THE CLASS B STOCK OR THE DECS, INCLUDING PURCHASES OF THE DECS
OR THE CLASS B STOCK TO STABILIZE THEIR MARKET PRICES AND PURCHASES OF THE DECS
OR THE CLASS B STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE DECS OR THE
CLASS B STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS B STOCK,
THE CLASS A STOCK OR THE DECS ON THE NASDAQ NATIONAL MARKET SYSTEM IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
------------------------
(Continued from previous page)
In the event of certain Adjustment Events (as defined herein), holders may
receive property other than (or in addition to) Class B Stock or a combination
of such property and cash. See "Investment Objectives and Policies -- The
Contracts -- Dilution Adjustments; Adjustment Events." In addition, holders
otherwise entitled to receive fractional shares in respect of their aggregate
holdings of DECS will receive cash in lieu thereof.
The Trust has adopted a policy that the Contracts may not be disposed of
during the term of the Trust. The Trust will continue to hold the Contracts
despite any significant decline in the market price of the Class B Stock or
adverse changes in the financial condition of the Company.
This Prospectus sets forth information about the Trust that a prospective
investor ought to know before investing. Potential investors are advised to read
this Prospectus and to retain it for future reference.
DECS may be a suitable investment for those investors who are capable of
evaluating the risks involved in making an investment in the Class B Stock of
the Company and the advantages and disadvantages of doing so in a manner which
will give investors in the DECS a potentially higher yield but a lesser
opportunity for equity appreciation than would be afforded by a direct
investment in the Class B Stock. There is no assurance that the yield on the
DECS will be higher than the dividend yield on the Class B Stock over the term
of the Trust. See "Investment Objectives and Policies."
Attached hereto for convenience of reference is a prospectus of the Company
relating to the shares of Class B Stock that may be received by holders of DECS
at the Exchange Date. The Company is not affiliated with the Trust, will not
receive any of the proceeds from the sale of the DECS and will have no
obligations with respect to the DECS or the Contracts. The Class B Stock is
listed on the Nasdaq National Market System under the symbol "HERBB."
The Trust will be a grantor trust owned solely by the present and future
holders of DECS for U.S. federal income tax purposes and each holder will be
treated as the owner of its pro rata portion of the Treasury Securities and the
Contracts. The Treasury Securities will be treated as having "original issue
discount" which holders must recognize currently as income as it accrues.
Holders will not recognize income, gain or loss upon the Trust's entry into the
Contracts nor will the delivery of Class B Stock pursuant to the Contracts be
taxable to holders. Holders should not recognize income, gain or loss with
respect to the Contracts over their term. See "Certain United States Federal
Income Tax Considerations."
THE TRUST IS A NEWLY ORGANIZED CLOSED-END INVESTMENT COMPANY WITH NO
PREVIOUS HISTORY OF PUBLIC TRADING. APPLICATION HAS BEEN MADE TO QUOTE THE DECS
ON THE NASDAQ NATIONAL MARKET SYSTEM UNDER THE SYMBOL " ." THERE IS NO
GUARANTEE THAT SUCH APPLICATION WILL BE APPROVED. TYPICAL CLOSED-END FUND SHARES
FREQUENTLY TRADE AT A DISCOUNT FROM NET ASSET VALUE. THIS CHARACTERISTIC OF
INVESTMENTS IN A CLOSED-END INVESTMENT COMPANY IS A RISK SEPARATE AND DISTINCT
FROM THE RISK THAT THE TRUST'S NET ASSET VALUE WILL DECREASE. THE TRUST CANNOT
PREDICT WHETHER THE DECS WILL TRADE AT, BELOW OR ABOVE NET ASSET VALUE. THE RISK
OF PURCHASING INVESTMENTS IN A CLOSED-END COMPANY THAT MIGHT TRADE AT A DISCOUNT
IS MORE PRONOUNCED FOR INVESTORS WHO WISH TO SELL THEIR INVESTMENTS SOON AFTER
COMPLETION OF AN INITIAL PUBLIC OFFERING.
The address of the Trust is c/o Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013, and the Trust's telephone number is (212) 816-6000.
Investors are advised to read this Prospectus and to retain it for future
reference.
"DECS(SM)" is a service mark of Salomon Brothers Inc.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE TRUST
DECS Trust III (the "Trust") is a newly organized Delaware business trust
that is registered as a non-diversified closed-end management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The term of the Trust will expire on or shortly after
, 2001 (the "Exchange Date"), except that the Trust may be
dissolved prior to such date under certain limited circumstances. The Trust will
be treated as a grantor trust owned solely by the present and future holders of
DECS for U.S. federal income tax purposes.
THE OFFERING
5,000,000 DECS representing shares of beneficial interest in the Trust are
being offered for sale by Smith Barney Inc. and Prudential Securities
Incorporated (the "Underwriters") to the public at a purchase price of $ per
DECS (the "Initial Price") (which is equal to the last sale price of the Class B
Common Stock, par value $.01 per share (the "Class B Stock"), of Herbalife
International, Inc. (the "Company") on March , 1998, as reported on the Nasdaq
National Market System). In addition, the Underwriters have been granted an
option to purchase up to an additional 750,000 DECS (subject to decrease as a
result of the issuance and sale of DECS in connection with the formation of the
Trust) to cover over-allotments, if any. See "Underwriting."
PURPOSE OF THE TRUST
The DECS are designed to provide investors (the "Holders") with a higher
yield than the current dividend yield paid on the Class B Stock, while also
providing the opportunity for Holders to share in the appreciation, if any, of
the Class B Stock above the Threshold Appreciation Price. The annual calendar
year distribution on the DECS is $ per DECS. The dividend paid per share of
Company common stock in the Company's fiscal year ended December 31, 1997 was
$0.60.
The yield on the DECS is higher than the current dividend yield on the
Class B Stock. However, there is no assurance that the yield on the DECS will be
higher than the dividend yield on the Class B Stock over the term of the Trust.
In addition, the opportunity for equity appreciation afforded by an investment
in the DECS is less than the opportunity for equity appreciation afforded by a
direct investment in the Class B Stock because the value of the Class B Stock to
be received by Holders of the DECS at the Exchange Date (the "Amount Receivable
at the Exchange Date") will generally exceed the Initial Price only if the
Exchange Price (as defined herein) exceeds $ per share of Class B Stock (the
"Threshold Appreciation Price," which represents an appreciation of % over
the Initial Price) and because Holders will be entitled to receive at the
Exchange Date only % of any appreciation of the value of the Class B Stock
in excess of the Threshold Appreciation Price. Moreover, if the Exchange Price
is less than the Initial Price, the value of the Class B Stock to be received at
the Exchange Date will generally be less than the price paid for the DECS.
DISTRIBUTIONS PRIOR TO EXCHANGE DATE
The Holders are entitled to receive distributions at the rate per DECS of
$ per annum or $ per quarter, payable quarterly on each
, , and
or, if any such date is not a Business Day (as defined
herein), on the next succeeding Business Day (each a "Distribution Date"), to
Holders of record as of each , ,
and , respectively. The first
distribution will be payable on , 1998 to Holders of record
as of , 1998. See "Investment Objectives and Policies Trust
Assets."
3
<PAGE> 6
DISTRIBUTIONS ON EXCHANGE DATE
At the Exchange Date, in respect of each outstanding DECS, Holders will
have the right to receive between and 1.0 shares of Class B Stock, subject
to adjustment in the event of certain dividends or distributions, subdivisions,
splits, combinations, issuances of certain rights or warrants or distributions
of certain assets with respect to the Class B Stock. In the event of a merger of
the Company into another entity, or the liquidation of the Company, or in
certain related events, Holders would receive consideration in the form of cash,
Reported Securities (as defined under "Investment Objectives and Policies -- The
Contracts Dilution Adjustments; Adjustment Events") or a combination thereof,
rather than (or in addition to) shares of Class B Stock. If some or all of the
Sellers exercise their cash settlement option, Holders would receive cash in
lieu of all or part of the Class B Stock or Reported Securities that would
otherwise be deliverable. See "Investment Objectives and Policies -- The
Contracts -- General." Additionally, the occurrence of certain defaults by a
Seller (or by any Mark Hughes Entity (as defined below))under its Contract or
the related collateral arrangements would cause the acceleration of such
Contract and the distribution to the Trust for distribution pro rata to Holders
of all or a portion of the Class B Stock, Reported Securities, cash or a
combination thereof subject to such Contract and of a portion of the Treasury
Securities (as defined below) then held by the Trust. See "Investment Objectives
and Policies -- The Contracts -- Collateral Requirements of the Contracts;
Acceleration" and "-- The Treasury Securities."
VOTING RIGHTS
Holders will not have voting rights with respect to the Class B Stock
unless and until the Sellers have delivered shares of Class B Stock to the Trust
pursuant to the Contracts and the Trust has distributed such shares to the
Holders. See "Investment Objectives and Policies -- The Company." Currently, the
holders of Class B Stock are entitled to vote separately as a class only with
respect to (i) amendments to the Company's Amended and Restated Articles of
Incorporation that alter or change the relative or other rights given to the
holders of Class B Stock, and (ii) such other matters as may require separate
class voting under the Company's Amended and Restated Articles of Incorporation
or by law. Holders of Class B Stock are not entitled to any other voting rights.
The Holders have the right to vote on matters affecting the Trust, as described
under "Description of DECS."
ASSETS OF THE TRUST; INVESTMENT OBJECTIVES AND POLICIES
The Trust will purchase and hold (i) a series of zero-coupon U.S. Treasury
securities (the "Treasury Securities") maturing on a quarterly basis during the
term of the Trust and representing in the aggregate approximately % of the
initial assets of the Trust and (ii) one or more forward purchase contracts
(each, a "Contract" and collectively, the "Contracts") with certain existing
stockholders (individually, a "Seller" and collectively, the "Sellers") of the
Company relating to the Class B Stock and representing approximately % of
the initial assets of the Trust. The Trust's investment objective is to provide
each Holder with a quarterly distribution of $ per DECS over the term of the
Trust, equal to the pro rata portion of the quarterly cash distributions from
the Treasury Securities. It is also the Trust's investment objective to provide
each Holder, at the Exchange Date, a number of shares of Class B Stock (or, if
any Seller exercises its cash settlement option in the Contracts under the
circumstances described herein, the cash equivalent of all or part thereof) at
the Exchange Rate. The Exchange Rate is equal to, subject to certain
adjustments, (a) if the Exchange Price (as defined herein) is greater than the
Threshold Appreciation Price, shares of Class B Stock per DECS, (b) if
the Exchange Price is less than or equal to the Threshold Appreciation Price but
is greater than the Initial Price, a fraction equal to the Initial Price divided
by the Exchange Price of one share of Class B Stock per DECS such that the value
(determined at the Exchange Price) of the Class B Stock delivered at the
Exchange Date equals the Initial Price and (c) if the Exchange Price is less
than or equal to the Initial Price, one share of Class B Stock per DECS. Holders
otherwise entitled to receive fractional shares of Class B Stock or Reported
Securities in respect of their aggregate holdings of DECS will receive cash in
lieu thereof. See "Investment Objectives and Policies -- The Contracts" and
"-- Delivery of Class B Stock and Reported Securities; No Fractional Shares of
Class B Stock or Reported Securities."
4
<PAGE> 7
The Trust will enter into Contracts with the Sellers and the Mark Hughes
Control Entities (as defined below) obligating the Sellers, severally and not
jointly, at the Exchange Date, to deliver to the Trust 5,000,000 shares of Class
B Stock in the aggregate (excluding shares required to be delivered in respect
of DECS issued to cover the Underwriters' over-allotment option and DECS issued
in connection with the formation of the Trust), except that (i) if the Exchange
Price per share of Class B Stock is greater than the Threshold Appreciation
Price, each Seller will be obligated to deliver under its Contract a number of
shares of Class B Stock equal to the product of times the
initial number of shares of Class B Stock subject to such Contract, (ii) if the
Exchange Price per share of Class B Stock is less than or equal to the Threshold
Appreciation Price but greater than the Initial Price, each Seller will be
obligated to deliver under its Contract a number of shares of Class B Stock
equal to the product of (A) the Initial Price divided by the Exchange Price
multiplied by (B) the initial number of shares of Class B Stock subject to such
Contract and (iii) if the Exchange Price per share of Class B Stock is less than
or equal to the Initial Price, each Seller will be obligated to deliver under
its contract a number of shares of Class B Stock equal to the initial number of
shares of Class B Stock subject to such Contract. This provides the Trust with
the opportunity to share in the appreciation, if any, of the Class B Stock above
the Threshold Appreciation Price. Each Seller has the right to deliver cash in
lieu of all (but not part) of its Class B Stock delivery obligation. The
purchase price under the Contracts is equal to $ per share of Class B Stock
and $ in the aggregate and is payable to the Sellers by the Trust on
the closing of this offering.
The obligations of each Seller under its Contract will be secured by a
pledge of one share of Class B Stock for each share subject to the Contract or,
at the election of such Seller, by substitute collateral consisting of U.S.
Government securities. See "Investment Objectives and Policies -- The
Contracts -- Collateral Requirements of the Contracts; Acceleration." Each Mark
Hughes Control Entity has guaranteed the performance and payment by each Seller
under each Contract and Collateral Agreement (as defined below) to which such
Seller is a party.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
There are no regulations, published rulings or judicial decisions
addressing the characterization for federal income tax purposes of securities
with terms substantially the same as the DECS. The Trust intends to treat a DECS
for U.S. federal income tax purposes as a beneficial interest in a grantor trust
owned solely by the present and future holders of DECS that holds the Treasury
Securities and Contracts, and to report Holders' income to the Internal Revenue
Service in accordance with this treatment. Under this approach, the tax
consequences of holding a DECS will be as described below and as described in
"Certain United States Federal Income Tax Considerations." Prospective investors
in the DECS should be aware that the Internal Revenue Service might take a
different view as to the proper characterization of the DECS and of the tax
consequences to a Holder.
The Treasury Securities held by the Trust will be treated for U.S. federal
income tax purposes as having "original issue discount" that will accrue over
the term of the Treasury Securities. It is currently anticipated that a
substantial portion of each quarterly cash distribution to the Holders will be
treated as a tax-free return of the Holders' costs of the Treasury Securities
and therefore will not be considered current income for U.S. federal income tax
purposes. However, a Holder (whether on the cash or accrual method of tax
accounting) must recognize currently as income original issue discount on the
Treasury Securities as it accrues.
A Holder will not recognize income, gain or loss upon the Trust's entry
into the Contracts and should not recognize income, gain or loss with respect to
the Contracts over their term. Prospective investors in the DECS should be aware
that it is possible that the Internal Revenue Service will assert that a Holder
should include in income over the term of the Contracts additional amounts which
together with the original issue discount on such Holder's pro rata portion of
the Treasury Securities may exceed the aggregate amount of the quarterly cash
distributions to such Holder. See "Certain United States Federal Income Tax
Considerations."
The delivery of Class B Stock to the Trust pursuant to the Contracts will
not be taxable to the Holders. The distribution of Class B Stock upon the
termination of the Trust will not be taxable to the Holders. A Holder will have
taxable gain or loss upon receipt of cash in lieu of fractional shares of Class
B Stock
5
<PAGE> 8
distributed upon termination of the Trust. Each Holder's aggregate basis in its
shares of Class B Stock will be equal to its basis in its pro rata portion of
the Contracts less the portion of such basis allocable to pay any fractional
shares of Class B Stock for which cash is received. A Holder will have taxable
gain or loss upon receipt of cash, if any, upon dissolution of the Trust or if a
Seller elects to exercise the Cash Delivery Option and satisfy its obligations
under the Contract with cash.
THE COMPANY
The Company is a network marketing company that sells a wide range of
weight management products, food and dietary supplements and personal care
products worldwide. The Company's products are marketed exclusively through a
network marketing system. This system enables the Company's independent
distributors to earn profits by selling Company products to retail consumers or
other distributors. Distributors may also develop their own distributor downline
organizations by sponsoring other distributors to do business in any market
where the Company operates, entitling the sponsors to receive royalty overrides
(cash incentives, including royalties and bonuses) on product sales within their
downline organizations.
In December 1997, the Company's common stock, par value $.01 per share (the
"Old Common Stock"), was reclassified into voting Class A Common Stock, par
value $.01 per share (the "Class A Stock," and together with the Class B Stock,
the "Common Stock"), of the Company and non-voting Class B Stock (the
"Recapitalization"). As a result of the Recapitalization (including a related
Class B Stock dividend), as of December 12, 1997, the Old Common Stock was
effectively split into the Class A Stock and the Class B Stock.
Attached hereto is a prospectus of the Company which describes the Company
and the Class B Stock that may be delivered to the Trust by the Sellers, and by
the Trust to the Holders, at the Exchange Date or upon earlier acceleration of a
Contract. The Company is not affiliated with the Trust, will not receive any of
the proceeds from the sale of the DECS and will have no obligations with respect
to the DECS or the Contracts. The prospectus of the Company is being attached
hereto and delivered to prospective purchasers of DECS together with this
Prospectus for convenience of reference only. The prospectus of the Company does
not constitute a part of this Prospectus, nor is it incorporated by reference
herein.
MANAGEMENT AND ADMINISTRATION OF THE TRUST
The Trust will be internally managed and will not have an investment
adviser. The administration of the Trust will be overseen by three Trustees. The
day-to-day administration of the Trust will be carried out by The Bank of New
York (or its successor) as trust administrator (the "Administrator"). The Bank
of New York (or its successor) will also act as custodian for the Trust's assets
(the "Custodian") and as paying agent, registrar and transfer agent (the "Paying
Agent") with respect to the DECS. Except as aforesaid, and except for its role
as Collateral Agent under the collateral agreements (each, a "Collateral
Agreement" and collectively, the "Collateral Agreements") among each Seller,
each Mark Hughes Control Entity, the Trust and the Collateral Agent (see
"Investment Objectives and Policies -- The Contracts -- Collateral Requirements
of the Contracts; Acceleration"), The Bank of New York has no other affiliation
with, and is not engaged in any other transaction with, the Trust.
TERM OF THE TRUST
The Trust will terminate automatically on or shortly after the Exchange
Date, except that the Trust may expire prior to such date under certain limited
circumstances. Promptly after the Exchange Date the shares of Class B Stock
delivered under the Contracts (or the equivalent amount of cash, to the extent
that any Seller exercises its cash settlement option) and other remaining Trust
assets, if any, will be distributed pro rata to Holders. See "Investment
Objectives and Policies -- Trust Termination."
RISK FACTORS
The Trust has adopted a policy that the Contracts may not be disposed of
during the term of the Trust and that the Treasury Securities held by the Trust
may not be disposed of prior to the earlier of their respective maturities and
the termination of the Trust except upon the acceleration of one or more
Contracts
6
<PAGE> 9
as described herein. The Trust will continue to hold the Contracts despite any
significant decline in the market price of the Class B Stock or adverse changes
in the financial condition of the Company.
The yield on the DECS is higher than the current dividend yield on the
Class B Stock. However, there is no assurance that the yield on the DECS will be
higher than the dividend yield on the Class B Stock over the term of the Trust.
The Amount Receivable at the Exchange Date is not fixed, but is based on
the market price of the Class B Stock as reflected in the Exchange Rate. There
can be no assurance that the Amount Receivable at the Exchange Date will be
equal to or greater than the Initial Price of the DECS. If the Exchange Price is
less than the Initial Price, the Amount Receivable at the Exchange Date will
generally be less than the amount paid for the DECS, in which case an investment
in DECS will result in a loss and, if the Company became insolvent or bankrupt,
could result in a total loss. Holders of the DECS, therefore, bear the full risk
of a decline in the value of the Class B Stock prior to the Exchange Date.
In addition, the opportunity for equity appreciation afforded by an
investment in the DECS is less than the opportunity for equity appreciation
afforded by a direct investment in the Class B Stock because the Amount
Receivable at the Exchange Date will generally exceed the Initial Price only if
the Exchange Price exceeds the Threshold Appreciation Price, which represents an
appreciation of % over the Initial Price. Moreover, Holders will be
entitled to receive at the Exchange Date only % of any appreciation of the
value of the Class B Stock in excess of the Threshold Appreciation Price.
Because the market price of the Class B Stock is subject to market fluctuations,
the Amount Receivable at the Exchange Date may be more or less than the Initial
Price of the DECS. Additionally, because the Exchange Price is generally
determined based on a 20 Trading Day average, the value of a share of Class B
Stock distributed on the Exchange Date may be more or less than the Exchange
Price used to determine the Amount Receivable at the Exchange Date.
The Trust is classified as a "non-diversified" investment company under the
Investment Company Act. Consequently, the Trust is not limited by the Investment
Company Act in the proportion of its assets that may be invested in the
securities of a single issuer. Since the only securities held by the Trust will
be the Treasury Securities and the Contracts, the Trust may be subject to
greater risk than would be the case for an investment company with more
diversified investments.
The trading prices of the DECS in the secondary market will be directly
affected by the trading prices of the Class B Stock in the secondary market.
Trading prices of the Class B Stock will be influenced by the Company's
operating results and prospects and by economic, financial and other factors and
market conditions.
Holders of the DECS will not be entitled to any rights with respect to the
Class B Stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions in respect thereof) unless and
until such time, if any, as the Sellers deliver shares of Class B Stock to the
Trust pursuant to the Contracts and the Trust has distributed such shares to the
Holders.
Each of the Sellers is a Delaware limited liability company. Two other
Delaware limited liability companies controlled by the Mark Hughes Family Trust
own all of the interests in each of the Sellers. The Mark Hughes Family Trust is
controlled by Mark Hughes (the Company's principal stockholder, Chairman of the
Board, Chief Executive Officer and President), as trustee. Each of the two
intermediate Delaware limited liability companies that own all of the interests
in the Sellers, the Mark Hughes Family Trust and Mark Hughes are collectively
referred to herein as the "Mark Hughes Control Entities," and each of the Mark
Hughes Control Entities and the Sellers are collectively referred to herein as
the "Mark Hughes Entities." A bankruptcy of a Seller (or of any Mark Hughes
Entity) could adversely affect the timing of settlement and, as a result, the
amount received by the Holders in respect of the DECS.
LISTING
Application has been made to list the DECS on the Nasdaq National Market
System under the symbol " ." There is no guarantee that such application
will be approved.
7
<PAGE> 10
FEES AND EXPENSES
In light of the fact that proceeds from the sale of the DECS will be used
by the Trust to purchase the Contracts from the Sellers, the Underwriting
Agreement provides that the Mark Hughes Entities will pay to the Underwriters as
compensation $ per DECS. See "Underwriting." Estimated organization
costs of the Trust in the amount of $ and estimated costs of the Trust
in connection with the initial registration and public offering of the DECS in
the amount of $ will be paid by Smith Barney Inc. ("Smith Barney") at
the closing of this offering. In addition, each of the Administrator, the
Custodian and the Paying Agent, and each Trustee will be paid by Smith Barney at
the closing of this offering a one-time, up-front amount in respect of its
ongoing fees and, in the case of the Administrator, anticipated expenses of the
Trust (estimated to be $ in the aggregate) over the term of the Trust.
Smith Barney has agreed to pay any on-going expenses of the Trust in excess of
these estimated amounts and to reimburse the Trust for any amounts it may be
required to pay as indemnification to any Trustee, the Administrator, the
Custodian or the Paying Agent. Smith Barney will be reimbursed by the Mark
Hughes Entities for all expenses of the Trust and reimbursements of
indemnifications paid by it. See "Management and Administration of the Trust --
Estimated Expenses."
Regulations of the Securities and Exchange Commission (the "Commission")
applicable to closed-end investment companies designed to assist investors in
understanding the costs and expenses that an investor will bear directly or
indirectly require the presentation of Trust expenses in the following format.
Because the Trust will not bear any ongoing fees or expenses, investors will not
bear any direct expenses. The only expenses that an investor might be considered
to be bearing indirectly are (a) the Underwriters' compensation payable by the
Mark Hughes Entities with respect to such investor's DECS and (b) the ongoing
expenses of the Trust (including fees of the Administrator, Custodian, Paying
Agent and Trustees), estimated at $ per year in the aggregate, payable by
Smith Barney at the closing of the offering.
<TABLE>
<S> <C>
Investor transaction expenses
Sales load (as a percentage of offering price)............ %
====
Annual Expenses
Management Fees........................................... 0%
Other Expenses (after reimbursement by the Mark Hughes
Entities)*............................................. 0%
----
Total Annual Expenses*............................ 0%
====
</TABLE>
- ---------------
* Absent the reimbursement, the Trust's "total annual expenses" would be equal
to approximately % of the Trust's average net assets.
Commission regulations also require that closed-end investment companies present
an illustration of cumulative expenses (both direct and indirect) that an
investor would bear. The example is required to factor in the applicable Sales
Load and to assume, in addition to a 5% annual return, the reinvestment of all
distributions at net asset value. Investors should note that the assumption of a
5% annual return does not accurately reflect the financial terms of the Trust.
See "Investment Objectives and Policies -- Trust Assets." Additionally, the
Trust does not permit the reinvestment of distributions.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following expenses (i.e., the applicable
sales load and allocable portion of ongoing expenses paid
by Smith Barney and the Mark Hughes Entities) on a $1,000
investment, assuming a 5% annual return................... $ $
</TABLE>
THE TRUST
DECS Trust III is a newly organized Delaware business trust that is
registered as a closed-end management investment company under the Investment
Company Act. The Trust was formed on January 22, 1998 pursuant to a Declaration
of Trust dated as of January 22, 1998 (the "Declaration of Trust"). The term
8
<PAGE> 11
of the Trust will expire on or shortly after , 2001, except
that the Trust may be dissolved prior to such date under certain limited
circumstances. The address of the Trust is c/o Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013 (telephone number: (212) 816-6000).
USE OF PROCEEDS
The net proceeds of this offering will be used on or shortly after the date
on which this offering is completed to purchase a fixed portfolio comprised of a
series of zero-coupon U.S. Treasury securities maturing quarterly during the
term of the Trust and to pay the purchase price under the Contracts to the
Sellers.
INVESTMENT OBJECTIVES AND POLICIES
TRUST ASSETS
The Trust's investment objectives are to provide Holders with a quarterly
distribution of $ per DECS on each Distribution Date during the term of
the Trust (representing the pro rata portion of the quarterly distributions in
respect of the maturing Treasury Securities held by the Trust) and to provide
Holders, at the Exchange Date, a number of shares of Class B Stock at the
Exchange Rate (as defined below) or, to the extent that some or all of the
Sellers elect the Cash Delivery Option (as defined below), an amount in cash
equal to the Exchange Price (as defined below) of all or part thereof. On or
prior to the 25th Business Day prior to the Exchange Date, each of the Sellers
will be obligated to notify the Trust concerning its exercise of the Cash
Delivery Option, and the Trust in turn will notify The Depository Trust Company
and publish a notice in a daily newspaper of national circulation stating
whether Holders of DECS will receive shares of Class B Stock, cash or a
combination thereof and, if a combination of Class B Stock and cash, the
relative proportion of each. See "-- The Contracts -- General" below. "Business
Day" means any day that is not a Saturday, a Sunday or a day on which the NYSE
or banking institutions or trust companies in The City of New York are
authorized or obligated by law or executive order to close.
The "Exchange Rate" is equal to, subject to certain adjustments, (a) if the
Exchange Price (as defined below) is greater than the Threshold Appreciation
Price, shares of Class B Stock per DECS, (b) if the Exchange Price is
less than the Threshold Appreciation Price but is greater than or equal to the
Initial Price, a fraction, equal to the Initial Price divided by the Exchange
Price, of one share of Class B Stock per DECS and (c) if the Exchange Price is
less than or equal to the Initial Price, one share of Class B Stock per DECS.
Accordingly, the value of the Class B Stock to be received by Holders of the
DECS (or, as discussed below, the cash equivalent to be received in lieu of such
Class B Stock) at the Exchange Date will not necessarily equal the initial price
of the DECS. The numbers of shares of Class B Stock per DECS specified in
clauses (a), (b) and (c) of the Exchange Rate are hereinafter referred to as the
"Share Components." Any shares of Class B Stock delivered by the Trust to the
Holders of the DECS that are not affiliated with the Company will be free of any
transfer restrictions and the Holders of the DECS will be responsible for the
payment of any and all brokerage costs upon the subsequent sale of such shares.
Holders otherwise entitled to receive fractional shares in respect of their
aggregate holdings of DECS will receive cash in lieu thereof. See " -- Delivery
of Class B Stock and Reported Securities; No Fractional Shares of Class B Stock
or Reported Securities" below. Notwithstanding the foregoing, (i) in the case of
certain dilution events, the Exchange Rate will be subject to adjustment and
(ii) in the case of certain adjustment events, the consideration received by
Holders at the Exchange Date will be cash or Reported Securities (as defined
herein) or a combination thereof, rather than (or in addition to) shares of
Class B Stock. See "-- The Contracts -- Dilution Adjustments; Adjustment Events"
below.
The Trust has adopted a fundamental policy to invest at least 65% of its
portfolio in the Contracts. The Contracts will comprise approximately % of
the Trust's initial assets. The Trust has also adopted a fundamental policy that
the Contracts may not be disposed of during the term of the Trust and that the
Treasury Securities held by the Trust may not be disposed of prior to the
earlier of their respective maturities and the termination of the Trust except
for the partial liquidation of Treasury Securities following acceleration of any
Contract as described below under "-- The Treasury Securities." The foregoing
fundamental policies of
9
<PAGE> 12
the Trust may not be changed without the vote of a majority in interest of the
Holders. A "majority in interest of the Holders" means the lesser of (i) 67% of
the DECS represented at a meeting at which more than 50% of the outstanding DECS
are represented and (ii) more than 50% of the outstanding DECS.
The "Exchange Price" means the average Closing Price per share of Class B
Stock on the 20 Trading Days immediately prior to (but not including) the
Exchange Date; provided, however, that if there are not 20 Trading Days for the
Class B Stock occurring later than the 60th calendar day immediately prior to,
but not including, the Exchange Date, the Exchange Price shall be defined as the
market value per share of the Class B Stock as of the Exchange Date as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Administrator. The "Closing Price" of any
security on any date of determination means (i) the closing sale price (or, if
no closing price is reported, the last reported sale price) of such security
(regular way) on the NYSE on such date, (ii) if such security is not listed for
trading on the NYSE on any such date, as reported in the composite transactions
for the principal United States national securities exchange on which such
security is so listed, (iii) if such security is not so listed on a United
States national securities exchange, as reported by The Nasdaq Stock Market,
(iv) if such security is not so reported, as reported in the composite
transactions for the principal United States regional securities exchange on
which such security is so listed, (v) if such security is not so reported, the
last quoted bid price for such security in the over-the-counter market as
reported by the National Quotation Bureau or similar organization or (vi) if
such security is not so quoted, the average of the mid-point of the last bid and
ask prices for such security from at least three nationally recognized
investment banking firms selected by the Administrator for such purpose. A
"Trading Day" is defined as a day on which the security the Closing Price of
which is being determined (A) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market at the
close of business and (B) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is the
primary market for the trading of such security.
For illustrative purposes only, the following chart shows the number of
shares of Class B Stock or the amount of cash that a Holder would receive for
each DECS at various Exchange Prices. The chart assumes that there would be no
adjustments to the Exchange Rate by reason of the occurrence of any of the
events described under "-- The Contracts -- Dilution Adjustments; Adjustment
Events" below, that no Contracts will be accelerated and that either no Sellers
exercise the Cash Delivery Option or all Sellers do. There can be no assurance
that the Exchange Price will be within the range set forth below. Given the
Initial Price of $ per DECS and the Threshold Appreciation Price of $ ,
a Holder would receive at the Exchange Date the following number of shares of
Class B Stock or amount of cash (if all Sellers exercise the Cash Delivery
Option) per DECS:
<TABLE>
<CAPTION>
EXCHANGE PRICE OF NUMBER OF SHARES OF
CLASS B STOCK CLASS B STOCK AMOUNT OF CASH
- ----------------- ------------------- --------------
<S> <C> <C>
</TABLE>
As the foregoing chart illustrates, if at the Exchange Date, the Exchange
Price is greater than $ , the Trust will be obligated to deliver
shares of Class B Stock per DECS, resulting in the DECS Holder receiving only
percent of the appreciation in market value above $ . If at the
Exchange Date, the Exchange Price is greater than $ and less than or equal
to $ , the Trust will be obligated to deliver only a fraction of a share of
Class B Stock having a value at the Exchange Price equal to $ , resulting in
the DECS Holder receiving none of the appreciation in market value. If at the
Exchange Date, the Exchange Price is less than or equal to $ , the Trust
will be obligated to deliver one share of Class B Stock per DECS, regardless of
the market price of such share, resulting in the DECS Holder realizing the
entire loss on the decline in market value of the Class B Stock.
The following table sets forth information regarding the distributions to
be received on the Treasury Securities held by the Trust, the portion of each
year's distributions that will constitute a return of capital for U.S. federal
income tax purposes and the amount of original issue discount accruing on the
Treasury
10
<PAGE> 13
Securities with respect to a Holder who acquires its DECS at the issue price
from the Underwriters in the original offering. See "Certain United States
Federal Income Tax Considerations."
<TABLE>
<CAPTION>
ANNUAL GROSS ANNUAL CASH DISTRIBUTIONS ANNUAL
ANNUAL GROSS DISTRIBUTIONS FROM IN EXCESS OF ORIGINAL INCLUSION OF ORIGINAL ISSUE
DISTRIBUTIONS FROM TREASURY SECURITIES ISSUE DISCOUNT INCLUSION DISCOUNT IN INCOME
YEAR TREASURY SECURITIES PER DECS PER DECS PER DECS
---- ------------------- ------------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
1998................. $ $ $ $
1999.................
2000.................
2001.................
</TABLE>
The annual distribution of $ per DECS is payable quarterly on each
, , and (or, if any such
date is not a Business Day, on the next succeeding Business Day), commencing
, 1998. Quarterly distributions on the DECS will consist
solely of the cash received from the Treasury Securities. The Trust will not be
entitled to any dividends that may be declared on the Class B Stock.
ENHANCED YIELD; LESS POTENTIAL FOR EQUITY APPRECIATION THAN CLASS B STOCK; NO
DEPRECIATION PROTECTION
The yield on the DECS is higher than the current dividend yield on the
Class B Stock. However, there is no assurance that the yield on the DECS will be
higher than the dividend yield on the Class B Stock over the term of the Trust.
In addition, the opportunity for equity appreciation afforded by an investment
in the DECS is less than the opportunity for equity appreciation afforded by a
direct investment in the Class B Stock because the Amount Receivable at the
Exchange Date will generally exceed the Initial Price only if the Exchange Price
exceeds the Threshold Appreciation Price (which represents an appreciation of
% over the Initial Price) and because Holders will be entitled to receive
at the Exchange Date only % (the percentage equal to the Initial Price
divided by the Threshold Appreciation Price) of any appreciation of the value of
the Class B Stock in excess of the Threshold Appreciation Price. Moreover,
Holders of DECS will realize the entire decline in value if the Exchange Price
on the Exchange Date is less than the Initial Price. Additionally, because the
Exchange Price is generally determined based on a 20 Trading Day average, the
value of a share of Class B Stock distributed on the Exchange Date may be more
or less than the Exchange Price used to determine the Amount Receivable at the
Exchange Date.
THE COMPANY
The Company is a network marketing company that sells a wide range of
weight management products, food and dietary supplements and personal care
products worldwide. The Company's products are marketed exclusively through a
network marketing system. This system enables the Company's independent
distributors to earn profits by selling Company products to retail consumers or
other distributors. Distributors may also develop their own distributor downline
organizations by sponsoring other distributors to do business in any market
where the Company operates, entitling the sponsors to receive royalty overrides
(cash incentives, including royalties and bonuses) on product sales within their
downline organizations.
Holders will not be entitled to rights with respect to the Class B Stock
(including, without limitation, voting rights and rights to receive dividends or
other distributions in respect thereof) unless and until such time, if any, as
the Sellers deliver shares of Class B Stock to the Trust pursuant to the
Contracts and the Trust has distributed such shares to the Holders. Currently,
the holders of Class B Stock are entitled to vote separately as a class only
with respect to (i) amendments to the Company's Amended and Restated Articles of
Incorporation that alter or change the relative or other rights given to the
holders of Class B Stock, and (ii) such other matters as may require separate
class voting under the Company's Amended and Restated Articles of Incorporation
or by law. Holders of Class B Stock are not entitled to any other voting rights.
Attached hereto is a prospectus of the Company which describes the Company
and the Class B Stock that may be delivered to the Trust by the Sellers, and by
the Trust to the Holders, at the Exchange Date or upon earlier acceleration of a
Contract.
11
<PAGE> 14
In December 1997, the Company's common stock, par value $.01 per share (the
"Old Common Stock") was reclassified into voting Class A Stock and non-voting
Class B Stock (the "Recapitalization"). As a result of the Recapitalization
(including a related Class B Stock dividend), as of December 12, 1997, the Old
Common Stock was effectively split into the Class A Stock and the Class B Stock.
The Old Common Stock was quoted on the Nasdaq National Market System under the
symbol "HERB" from April 21, 1992 through December 12, 1997. The Class A Stock
and the Class B Stock have been quoted on the Nasdaq National Market System
under the symbols "HERBA" and "HERBB," respectively, since December 15, 1997.
The following table sets forth, for the indicated periods, the high and low
sales prices of the Old Common Stock, and, commencing December 15, 1997, the
Class A Stock and the Class B Stock, in each case, as reported on the Nasdaq
National Market System, and the quarterly cash dividends per share of the
Company's common stock. The sales prices in the table were taken from a written
summary provided to the Company by Nasdaq. Prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. As of February 23, 1998, there were 1,010 and 1,011 record holders
of the Class A Stock and Class B Stock, respectively, including, in each case,
The Depository Trust Company, which holds shares of Class A Stock and Class B
Stock on behalf of an indeterminate number of beneficial owners.
<TABLE>
<CAPTION>
DIVIDEND
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
1996
First Quarter............................................. $12 1/8 $ 8 5/8 $ .15
Second Quarter............................................ 16 3/8 10 1/8 .15
Third Quarter............................................. 15 7/8 12 1/3 .15
Fourth Quarter............................................ 32 5/8 15 1/2 .15
1997
First Quarter............................................. $37 3/4 $14 3/4 .15
Second Quarter............................................ 21 1/8 15 3/4 .15
Third Quarter............................................. 26 1/4 14 7/8 .15
Fourth Quarter through December 12, 1997*................. 27 7/8 19 1/4
Fourth Quarter commencing December 15, 1997
Class A Stock*......................................... $24 $20 1/2 .15
Class B Stock*......................................... 23 20 .15
1998
First Quarter
Class A Stock**........................................ $25 $19 7/16
Class B Stock**........................................ 24 1/2 17 3/4
</TABLE>
- ---------------
* The Recapitalization became effective December 12, 1997. Beginning December
15, 1997, the Old Common Stock commenced trading as the Class A Stock and
the Class B Stock as a result of the Recapitalization. Accordingly, the
prices set forth above relate to the Old Common Stock through December 12,
1997, and the Class A Stock and Class B Stock, as indicated, commencing on
December 15, 1997.
** Reflects high and low sales prices through March 3, 1998.
The Company is not affiliated with the Trust, will not receive any of the
proceeds from the sale of the DECS and will have no obligations with respect to
the DECS or the Contracts. This Prospectus relates only to the DECS offered
hereby and does not relate to the Company or the Class B Stock. The Company has
filed a registration statement on Form S-3 with the Commission with respect to
the shares of Class B Stock that may be delivered to the Trust by the Sellers,
and by the Trust to the Holders of DECS, at the Exchange Date or upon earlier
acceleration of a Contract. The prospectus of the Company constituting a part of
such registration statement includes information relating to the Company and
Class B Stock, including certain risk factors relevant to an investment in Class
B Stock. THE PROSPECTUS OF THE COMPANY IS BEING ATTACHED HERETO AND DELIVERED TO
PROSPECTIVE PURCHASERS OF DECS TOGETHER WITH THIS PROSPECTUS FOR CONVENIENCE OF
REFERENCE ONLY.
12
<PAGE> 15
THE PROSPECTUS OF THE COMPANY DOES NOT CONSTITUTE A PART OF THIS PROSPECTUS, NOR
IS IT INCORPORATED BY REFERENCE HEREIN.
THE CONTRACTS
General. The Trust will enter into one or more Contracts with the Sellers
and the Mark Hughes Control Entities obligating each Seller, severally and not
jointly, at the Exchange Date to deliver to the Trust a number of shares of
Class B Stock equal to the initial number of shares of Class B Stock subject to
such Seller's Contract multiplied by the Exchange Rate. Each of the Mark Hughes
Control Entities has guaranteed the performance and payment by each Seller under
each Contract and Collateral Agreement to which such Seller is a party. The
Exchange Rate is equal to, subject to adjustment as described in " -- Dilution
Adjustments; Adjustment Events" below, (i) if the Exchange Price per share of
Class B Stock is greater than the Threshold Appreciation Price,
, (ii) if the Exchange Price per share of Class B Stock is
less than or equal to the Threshold Appreciation Price but greater than the
Initial Price, the Initial Price divided by the Exchange Price and (iii) if the
Exchange Price per share of Class B Stock is less than or equal to the Initial
Price, one. The purchase price under the Contracts is equal to $ per share
of Class B Stock and $ in the aggregate and is payable to the Sellers
by the Trust on the closing of this offering. The purchase price of the
Contracts was arrived at by arm's length negotiations between the Trust and the
Sellers taking into consideration factors including the price, expected dividend
level and volatility of the Class B Stock, current interest rates, the term of
the Contracts, current market volatility generally, the collateral security
pledged by the Sellers, the value of other similar instruments and the costs and
anticipated proceeds of the offering of the DECS. All matters relating to the
administration of the Contracts will be the responsibility of either the Trust's
Administrator or Custodian.
Although it is the Sellers' current intention to deliver shares of Class B
Stock at the Exchange Date, each Seller may, at its option, deliver cash in lieu
of delivering all, but not less than all, of the shares of Class B Stock
otherwise deliverable by it on the Exchange Date (the "Cash Delivery Option"),
except where such delivery would violate applicable state law. The amount of
cash deliverable by a Seller upon the exercise of the Cash Delivery Option will
be equal to the product of the number of shares of Class B Stock otherwise
deliverable by such Seller on the Exchange Date multiplied by the Exchange
Price. On or prior to the 25th Business Day prior to the Exchange Date, each of
the Sellers will be obligated to notify the Trust concerning its exercise of the
Cash Delivery Option, and the Trust in turn will notify The Depository Trust
Company and publish a notice in a daily newspaper of national circulation
stating whether the Holders of DECS will receive shares of Class B Stock, cash
or a combination thereof and, if a combination of Class B Stock and cash, the
relative proportion of each.
Dilution Adjustments; Adjustment Events. The Exchange Rate is subject to
adjustment if the Company shall (i) pay a stock dividend or make a distribution,
in either case, with respect to Class B Stock in shares of such stock, (ii)
subdivide or split its outstanding shares of Class B Stock into a greater number
of shares, (iii) combine its outstanding shares of Class B Stock into a smaller
number of shares, (iv) issue by reclassification (other than a reclassification
pursuant to clause (ii), (iii), (iv) or (v) of the definition of Adjustment
Event below) of its shares of Class B Stock any other equity securities of the
Company or (v) issue rights or warrants (other than rights to purchase Class B
Stock pursuant to a plan for the reinvestment of dividends or interest) to all
holders of Class B Stock entitling them to subscribe for or purchase shares of
Class B Stock at a price per share less than the Market Price (as defined below)
of the Class B Stock on the Business Day next following the record date for the
determination of holders of Class B Stock entitled to receive such rights or
warrants.
In the case of the events referred to in clauses (i), (ii), (iii) and (iv)
above, the Exchange Rate shall be adjusted by adjusting each of the Share
Components of the Exchange Rate in effect immediately prior to such event so
that the Trust will be entitled to receive at the Exchange Date, with respect to
each Contract, the number of shares of Class B Stock (or, in the case of a
reclassification referred to in clause (iv) above, the number of other equity
securities of the Company issued pursuant thereto) which it would have owned or
been entitled to receive immediately following such event had the Exchange Date
occurred immediately prior to such event or any record date with respect
thereto. In the case of the event referred to in clause (v) above, the
13
<PAGE> 16
Exchange Rate shall be adjusted by multiplying each of the Share Components of
the Exchange Rate in effect on the record date for the issuance of the rights or
warrants referred to in clause (v) above, by a fraction, of which the numerator
shall be (A) the number of shares of Class B Stock outstanding on the record
date for the issuance of such rights or warrants plus (B) the number of
additional shares of Class B Stock offered for subscription or purchase pursuant
to such rights or warrants, and of which the denominator shall be (x) the number
of shares of Class B Stock outstanding on the record date for the issuance of
such rights or warrants plus (y) the number specified in clause (B) above
multiplied by the quotient of the exercise price of such rights or warrants
divided by the Market Price of the Class B Stock on the Business Day next
following the record date for the determination of holders of Class B Stock
entitled to receive such rights or warrants. To the extent that such rights or
warrants expire prior to the Exchange Date of the DECS and shares of Class B
Stock are not delivered pursuant to such rights or warrants prior to such
expiration, the Exchange Rate shall be readjusted to the Exchange Rate which
would then be in effect had such adjustments for the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Class B Stock actually delivered pursuant to such rights or warrants. For
purposes of this paragraph, dividends will be deemed to be paid as of the record
date for such dividend. "Market Price" means, as of any date of determination,
the average Closing Price per share of Class B Stock on the 20 Trading Days
immediately prior to (but not including) the date of determination; provided,
however, that if there are not 20 Trading Days for the Class B Stock occurring
later than the 60th calendar day immediately prior to, but not including, such
date, the Market Price shall be determined as the market value per share of
Class B Stock as of such date as determined by a nationally recognized
investment banking firm retained for such purpose by the Administrator. All
adjustments to the Exchange Rate will be calculated to the nearest 1/10,000th of
a share of Class B Stock (or, if there is not a nearest 1/10,000th of a share,
to the next higher 1/10,000th of a share). No adjustment in the Exchange Rate
shall be required unless such adjustment would require an increase or decrease
of at least one percent therein; provided, however, that any adjustments which
by reason of the foregoing are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. If an adjustment is made to
the Exchange Rate pursuant to clauses (i), (ii), (iii), (iv) or (v) above, an
adjustment will also be made to the Exchange Price as such term is used
throughout the definition of Exchange Rate. The required adjustment to the
Exchange Price shall be made at the Exchange Date by multiplying the Exchange
Price by the cumulative number or fraction determined pursuant to the Exchange
Rate adjustment procedure described above. In the case of the reclassification
of any shares of Class B Stock in to any equity securities of the Company other
than the Class B Stock, such equity securities shall be deemed shares of Class B
Stock for all purposes. Each such adjustment to the Exchange Rate and the
Exchange Price shall be made successively.
In the event of (i) any dividend or distribution by the Company to all
holders of Class B Stock of evidences of its indebtedness or other assets
(excluding any dividends or distributions referred to in clause (i) of the first
paragraph under the caption "-- Dilution Adjustments; Adjustment Events," any
equity securities issued pursuant to a reclassification referred to in clause
(iv) of such paragraph and any Ordinary Cash Dividends (as defined below)) or
any issuance by the Company to all holders of Class B Stock of rights or
warrants to subscribe for or purchase any of its securities (other than rights
or warrants referred to in clause (v) of the first paragraph under the caption
"-- Dilution Adjustments; Adjustment Events"), (ii) any consolidation or merger
of the Company with or into another entity (other than a merger or consolidation
in which the Company is the continuing corporation and in which the Class B
Stock outstanding immediately prior to the merger or consolidation is not
exchanged for cash, securities or other property of the Company or another
corporation), (iii) any sale, transfer, lease or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, (iv) any statutory exchange of securities of the Company with another
corporation (other than in connection with a merger or acquisition) or (v) any
liquidation, dissolution or winding up of the Company (any such event, an
"Adjustment Event"), each Seller will be obligated to deliver at the Exchange
Date, in lieu of or (in the case of an Adjustment Event described in clause (i)
above) in addition to, shares of Class B Stock as described above, cash in an
amount equal to (A) if the Exchange Price is greater than the Threshold
Appreciation Price, multiplied by the Transaction Value (as defined below),
(B) if the Exchange Price is less than or equal to the Threshold Appreciation
Price but is greater than the Initial Price, the product of (x) the Initial
Price divided by the
14
<PAGE> 17
Exchange Price multiplied by (y) the Transaction Value and (C) if the Exchange
Price is less than or equal to the Initial Price, the Transaction Value.
Following an Adjustment Event, the Exchange Price, as such term is used in this
paragraph and throughout the definition of Exchange Rate, shall be deemed to
equal (A) if shares of Class B Stock are outstanding at the Exchange Date, the
Exchange Price of the Class B Stock, as adjusted pursuant to the method set
forth in the preceding paragraph, otherwise zero, plus (B) the Transaction
Value.
Notwithstanding the foregoing, with respect to any securities received by
holders of Class B Stock in an Adjustment Event that (A) are (i) listed on a
United States national securities exchange, (ii) reported on a United States
national securities system subject to last sale reporting, (iii) traded in the
over-the-counter market and reported on the National Quotation Bureau or similar
organization or (iv) for which bid and ask prices are available from at least
three nationally recognized investment banking firms and (B) are either (x)
perpetual equity securities or (y) non-perpetual equity or debt securities with
a stated maturity after the Exchange Date of the DECS ("Reported Securities"),
each Seller is obligated, in lieu of delivering cash in respect of such Reported
Securities received in an Adjustment Event, to deliver a number of such Reported
Securities with a value equal to all cash amounts that would otherwise be
deliverable in respect of Reported Securities received in such Adjustment Event,
as determined in accordance with clause (ii) of the definition of Transaction
Value, unless such Seller has made an election to exercise the Cash Delivery
Option or such Reported Securities have not yet been delivered to the holders
entitled thereto following such Adjustment Event or any record date with respect
thereto. If a Seller delivers any Reported Securities, upon distribution thereof
by the Trust to Holders of DECS, each Holder of a DECS will be responsible for
the payment of any and all brokerage and other transaction costs upon the sale
of such Reported Securities. If, following any Adjustment Event, any Reported
Security ceases to qualify as a Reported Security, then (x) the Sellers shall
not deliver such Reported Security but instead shall deliver an equivalent
amount of cash and (y) notwithstanding clause (ii) of the definition of
Transaction Value, the Transaction Value of such Reported Security shall mean
the fair market value of such Reported Security on the date such security ceases
to qualify as a Reported Security, as determined by a nationally recognized
investment banking firm retained for this purpose by the Administrator.
Because each DECS represents a Holder's right to receive a pro rata portion
of the Class B Stock or other assets delivered by the Sellers pursuant to the
Contracts, the amount of cash and/or the kind and number of securities which the
Holders of DECS are entitled to receive after an Adjustment Event shall be
subject to adjustment following the date of such Adjustment Event in the same
manner and upon the occurrence of the same type of events as described under
this caption "-- Dilution Adjustments; Adjustment Events" with respect to Class
B Stock and the Company.
For purposes of the foregoing, the term "Ordinary Cash Dividend" means,
with respect to any consecutive 365 day period, any dividend with respect to
Class B Stock paid in cash to the extent that the amount of such dividend,
together with the aggregate amount of all other dividends on the Class B Stock
paid in cash during such 365 day period, does not exceed on a per share basis
10% of the average of the Closing Prices of the Class B Stock over such 365 day
period.
The term "Transaction Value" means (i) for any cash received in any
Adjustment Event, the amount of cash received per share of Class B Stock, (ii)
for any Reported Securities received in any Adjustment Event, an amount equal to
(x) the average Closing Price per security of such Reported Securities on the 20
Trading Days immediately prior to (but not including) the Exchange Date
multiplied by (y) the number of such Reported Securities (as adjusted pursuant
to the second preceding paragraph) received per share of Class B Stock and (iii)
for any property received in any Adjustment Event other than cash or such
Reported Securities, an amount equal to the fair market value of the property
received per share of Class B Stock on the date such property is received, as
determined by a nationally recognized investment banking firm retained for this
purpose by the Administrator; provided, however, that in the case of clause
(ii), (x) with respect to securities that are Reported Securities by virtue of
only clause (iv) of the definition of Reported Securities above, Transaction
Value with respect to any such Reported Security means the average of the
mid-point of the last bid and ask prices for such Reported Security as of the
Exchange Date from each of at least three nationally recognized investment
banking firms retained for such purpose by the Administrator multiplied by
15
<PAGE> 18
the number of such Reported Securities (as adjusted pursuant to the method set
forth in the third preceding paragraph) received per share of Class B Stock and
(y) with respect to all other Reported Securities, if there are not 20 Trading
Days for any particular Reported Security occurring after the 60th calendar day
immediately prior to, but not including, the Exchange Date, Transaction Value
with respect to such Reported Security means the market value per security of
such Reported Security as of the Exchange Date as determined by a nationally
recognized investment banking firm retained for such purpose by the
Administrator multiplied by the number of such Reported Securities (as adjusted
pursuant to the method set forth in the third preceding paragraph) received per
share of Class B Stock. For purposes of calculating the Transaction Value, any
cash, Reported Securities or other property receivable in an Adjustment Event
shall be deemed to have been received immediately prior to the close of business
on the record date for such Adjustment Event or, if there is no record date for
such Adjustment Event, immediately prior to the close of business on the
effective date of such Adjustment Event.
No adjustments will be made for certain other events, such as offerings of
Class B Stock or Class A Stock by the Company for cash or in connection with
acquisitions. Likewise, no adjustments will be made for any sales of Class B
Stock or Class A Stock by any of the Mark Hughes Entities.
Each Seller is required under its Contract to notify the Trust promptly
upon becoming aware that an event that requires an adjustment to the Exchange
Rate or an Adjustment Event is pending or has occurred. The Trust is required,
within ten Business Days following the occurrence of an event that requires an
adjustment to the Exchange Rate or the occurrence of an Adjustment Event (or, in
either case, if the Trust is not aware of such occurrence, as soon as
practicable after becoming so aware), to provide written notice to each Holder
of DECS of the occurrence of such event including a statement in reasonable
detail setting forth the method by which the adjustment to the Exchange Rate or
change in the consideration to be received by Holders of DECS following the
Adjustment Event was determined and setting forth the revised Exchange Rate or
consideration, as the case may be; provided, however, that, in respect of any
adjustment to the Exchange Price, such notice will only disclose the factor by
which the Exchange Price is to be multiplied in order to determine which clause
of the Exchange Rate definition will apply at the Exchange Date.
Collateral Requirements of the Contracts; Acceleration. Each Seller's
obligations under its Contract will be secured by a security interest in one
share of Class B Stock for each share of Class B Stock subject to such Contract
(subject to adjustment in accordance with the dilution provisions of such
Contract), pursuant to a Collateral Agreement among such Seller, each Mark
Hughes Control Entity, the Trust and The Bank of New York, as collateral agent
(the "Collateral Agent"). Unless a Seller is in default in its obligations under
the Collateral Agreement, the Seller will be permitted to substitute for the
pledged shares of Class B Stock collateral consisting of short-term, direct
obligations of the U.S. Government. Any U.S. Government obligations pledged as
substitute collateral for shares of Class B Stock will be required to have an
aggregate market value at the time of substitution and at daily mark-to-market
valuations thereafter of not less than 150% (or, from and after any
Insufficiency Determination that shall not be cured by the close of business on
the next business day thereafter, as described below, 200%) of the product of
the market price of the Class B Stock at the time of each valuation times the
number of shares of Class B Stock for which such obligations are being
substituted. Each Collateral Agreement will provide that, in the event of an
Adjustment Event, the relevant Seller will pledge as alternative collateral any
Reported Securities, plus cash in an amount at least equal to the Transaction
Value of any consideration other than Reported Securities, received by it in
respect of the maximum number of shares of Class B Stock subject to such
Seller's Contract at the time of the Adjustment Event. The number of Reported
Securities required to be pledged shall be subject to adjustment if any event
requiring a dilution adjustment under the Contracts shall occur. Each Seller
will be permitted to substitute U.S. Government obligations for Reported
Securities or cash pledged after any Adjustment Event. Any U.S. Government
obligations so substituted will be required to have an aggregate market value at
the time of substitution and at daily mark-to-market valuations thereafter of:
(A) in the case of obligations substituted for pledged Reported Securities, not
less than 150% (or, from and after any Insufficiency Determination that shall
not be cured by the close of business on the next business day thereafter, as
described below, 200%) of the product of the market price per security of
Reported Securities at the time of each valuation times the number of Reported
Securities for which such obligations are being substituted; and
16
<PAGE> 19
(B) in the case of obligations substituted for pledged cash, not less than 105%
of the amount of cash for which such obligations are being substituted. The
Collateral Agent will promptly pay over to each Seller any dividends, interest,
principal or other payments received by the Collateral Agent in respect of any
collateral, including any substitute collateral, unless the relevant Seller is
in default of its obligations under its Collateral Agreement, or unless the
payment of such amount to the relevant Seller would cause the collateral to
become insufficient under the Collateral Agreement.
If the Collateral Agent shall determine (an "Insufficiency Determination")
that U.S. Government obligations pledged by any Seller as substitute collateral
fail to meet the foregoing requirements at any valuation, or that such Seller
has failed to pledge additional collateral required as a result of a dilution
adjustment increasing the maximum number of shares of Class B Stock or Reported
Securities subject to such Contract, and such failure shall not be cured by the
close of business on the next business day after such determination, then,
unless a Collateral Event of Default (as defined below) under such Collateral
Agreement shall have occurred and be continuing, the Collateral Agent shall
commence (i) sales of the collateral consisting of U.S. Government obligations
and (ii) purchases, using the proceeds of such sales, of shares of Class B Stock
or Reported Securities, in an amount sufficient to cause the collateral to meet
the requirements under such Collateral Agreement. The Collateral Agent shall
discontinue such sales and purchases if at any time a Collateral Event of
Default under such Collateral Agreement shall have occurred and be continuing.
The occurrence of a Collateral Event of Default (as defined below) under
any Collateral Agreement, or the bankruptcy or insolvency of any Seller (or of
any Mark Hughes Entity), will cause an automatic acceleration of each Seller's
obligations under its Contract. A "Collateral Event of Default" under any
Collateral Agreement shall mean, at any time, (A) if no U.S. Government
obligations shall be pledged as substitute collateral at such time, failure of
the collateral to consist of at least the maximum number of shares of Class B
Stock subject to the relevant Seller's Contract at such time (or, if an
Adjustment Event shall have occurred at or prior to such time, failure of the
collateral to include the amount of cash and the maximum number of any Reported
Securities required to be pledged as described above); (B) if any U.S.
Government obligations shall be pledged as substitute collateral for shares of
Class B Stock (or Reported Securities) at such time, failure of such U.S.
Government obligations to have a market value at such time of at least 105% of
the market price of the Class B Stock (or the then-current market price per
security of Reported Securities, as the case may be) times the difference
between (x) the maximum number of shares of Class B Stock (or Reported
Securities) subject to the relevant Seller's Contract at such time and (y) the
number of shares of Class B Stock (or Reported Securities) pledged as collateral
at such time; and (C) if any U.S. Government obligations shall be pledged as
substitute collateral for any cash at such time, failure of such U.S. Government
obligations to have a market value at such time of at least 105% of such cash,
if such failure shall not be cured within one Business Day after notice thereof
is delivered to the relevant Seller.
Except as described below, upon acceleration of any Seller's Contract, the
Collateral Agent will to the extent permitted by law distribute to the Trust for
distribution pro rata to the Holders, with respect to such Seller's Contract,
the maximum number of shares of Class B Stock subject to such Contract, in the
form of the shares of Class B Stock then pledged by that Seller, or cash
generated from the liquidation of U.S. Government obligations then pledged by
that Seller, or a combination thereof (or, after an Adjustment Event, in the
form of Reported Securities then pledged, cash then pledged, cash generated from
the liquidation of U.S. Government obligations then pledged, or a combination
thereof). In addition, in the event that by the Exchange Date any substitute
collateral has not been replaced by shares of Class B Stock (or, after an
Adjustment Event, cash or Reported Securities) sufficient to meet the
obligations under any Contract, the Collateral Agent will distribute to the
Trust for distribution pro rata to the Holders, with respect to such Contract,
the market value of the shares of Class B Stock required to be delivered
thereunder, in the form of any shares of Class B Stock then pledged by the
relevant Seller plus cash generated from the liquidation of U.S. Government
obligations then pledged by such Seller (or, after an Adjustment Event, the
market value of the alternative consideration required to be delivered
thereunder, in the form of any Reported Securities then pledged, plus any cash
then pledged, plus cash generated from the liquidation of U.S. Government
obligations then pledged).
17
<PAGE> 20
If upon acceleration of a Seller's Contract, such Seller (or any Mark
Hughes Entity) is subject to a Bankruptcy Code or similar proceeding, the
Collateral Agent will to the extent permitted by law distribute to the Trust for
distribution pro rata to the Holders, with respect to such Seller's Contract, a
number of shares of Class B Stock, in the form of the shares of Class B Stock
then pledged by that Seller, or cash generated from the liquidation of U.S.
Government obligations then pledged by that Seller, or a combination thereof
(or, after an Adjustment Event, in the form of Reported Securities then pledged,
cash then pledged, cash generated from the liquidation of U.S. Government
obligations then pledged, or a combination thereof), with an aggregate value
equal to such Seller's "Acceleration Value." The Acceleration Value will be
determined by the Administrator on the basis of quotations from independent
dealers. Each quotation will be for an amount that would be paid to the relevant
dealer in consideration of an agreement that would have the effect of preserving
the Trust's rights to receive the number of shares of Class B Stock (or, after
an Adjustment Event, Reported Securities, cash or a combination thereof) subject
to such Seller's Contract on the Exchange Date. The Administrator will request
quotations from four nationally recognized independent dealers on or as soon as
reasonably practicable following the date of acceleration. If four quotations
are provided, the Acceleration Value will be the arithmetic mean of the two
quotations remaining after disregarding the highest and lowest quotations. If
two or three quotations are provided, the Acceleration Value will be the
arithmetic mean of such quotations. If one quotation is provided, the
Acceleration Value will be such quotation. If no quotations are provided, the
Acceleration Value will be the aggregate value of the number of shares of Class
B Stock (or, after an Adjustment Event, Reported Securities, cash or a
combination thereof) that would be required to be delivered under such Seller's
Contract on the date of acceleration if the Exchange Date were redefined to be
the date of acceleration.
Description of Sellers. Each of the Sellers is a Delaware limited liability
company. Two other Delaware limited liability companies controlled by the Mark
Hughes Family Trust own all of the interests in each of the Sellers. The Mark
Hughes Family Trust is controlled by Mark Hughes (the Company's principal
stockholder, Chairman of the Board, Chief Executive Officer and President),as
trustee. Each of the two intermediate Delaware limited liability companies that
own all of the interests in the Sellers, the Mark Hughes Family Trust and Mark
Hughes are collectively referred to herein as the "Mark Hughes Control
Entities," and each of the Mark Hughes Control Entities and the Sellers are
collectively referred to herein as the "Mark Hughes Entities." Specific
information on the holdings of Mark Hughes is included in the prospectus of the
Company attached hereto.
THE TREASURY SECURITIES
The Trust will purchase and hold a series of zero-coupon ("stripped") U.S.
Treasury securities with such face amounts and maturities as will provide
Holders with a quarterly distribution of $ per DECS on each
Distribution Date during the term of the Trust. Up to % of the Trust's
total assets may be invested in these Treasury Securities. If any Contract is
accelerated, a proportionate amount of the Treasury Securities of each maturity
then held in the Trust will be liquidated by the Administrator and the proceeds
thereof distributed pro rata to the Holders, together with proceeds from the
acceleration of such Contract. See "--The Contracts -- Collateral Requirements
of the Contracts; Acceleration" above and "-- Trust Termination" below.
TEMPORARY INVESTMENTS
For cash management purposes, the Trust may invest the proceeds of the
Treasury Securities held by the Trust and any other cash held by the Trust in
short-term obligations of the U.S. Government maturing no later than the
Business Day preceding the next following Distribution Date.
TRUST TERMINATION
The Trust will terminate automatically on or shortly after the Exchange
Date or following the distribution of all Trust assets to the Holders, if
earlier.
In the event that all of the Contracts remaining in effect at any time are
accelerated, then any Treasury Securities then held by the Trust will be
liquidated by the Administrator and the proceeds thereof distributed pro rata to
the Holders, together with all shares of Class B Stock subject to each Seller's
Contract that are
18
<PAGE> 21
pledged by each Seller, or cash generated from the liquidation of U.S.
Government obligations then pledged by each Seller, or a combination thereof
(or, after an Adjustment Event, in the form of Reported Securities then pledged,
cash then pledged, cash generated from the liquidation of U.S. Government
obligations then pledged, or a combination thereof) or in certain cases, the
Acceleration Value of a Seller's Contract, and the term of the Trust will
expire. See "-- The Contracts -- Collateral Requirements of the Contracts;
Acceleration" above.
DELIVERY OF CLASS B STOCK AND REPORTED SECURITIES; NO FRACTIONAL SHARES OF CLASS
B STOCK OR REPORTED SECURITIES
Class B Stock and Reported Securities delivered under the Contracts at the
Exchange Date are expected to be distributed by the Trust to the Holders pro
rata shortly after the Exchange Date, except that no fractional shares of Class
B Stock or Reported Securities will be distributed. If more than one DECS shall
be surrendered at one time by the same Holder, the number of full shares of
Class B Stock or Reported Securities which shall be delivered upon termination
of the Trust, in whole or in part, as the case may be, shall be computed on the
basis of the aggregate number of DECS so surrendered at the Exchange Date. In
lieu of delivering any fractional share or security, the Trust will sell a
number of shares or securities equal to the total of all fractional shares or
securities that would otherwise be delivered to Holders of all DECS, and each
such Holder will be entitled to receive an amount in cash equal to the pro rata
portion of the proceeds of such sale (which may be at a price lower than the
Exchange Price).
INVESTMENT RESTRICTIONS
The Trust has adopted a fundamental policy that the Trust may not purchase
any securities or instruments other than the Treasury Securities, the Contracts
and the Class B Stock or other assets received pursuant to the Contracts and,
for cash management purposes, short-term obligations of the U.S. Government;
issue any securities or instruments except for the DECS; make short sales or
purchase securities on margin; write put or call options; borrow money;
underwrite securities; purchase or sell real estate, commodities or commodities
contracts; or make loans. The Trust has also adopted a fundamental policy that
the Contracts may not be disposed of during the term of the Trust and that
(except for a partial liquidation of Treasury Securities following acceleration
of any Contract as described above under "Investment Objectives and
Policies -- The Treasury Securities") the Treasury Securities may not be
disposed of prior to the earlier of their respective maturities and the
termination of the Trust.
RISK FACTORS RELATING TO DECS
INTERNAL MANAGEMENT; NO PORTFOLIO MANAGEMENT
The Trust will be internally managed by its Trustees and will not have any
separate investment adviser. It is a fundamental policy of the Trust that the
Contracts may not be disposed of during the term of the Trust and that the
Treasury Securities held by the Trust may not be disposed of prior to the
earlier of their respective maturities and the termination of the Trust, except
for a partial liquidation of Treasury Securities following acceleration of any
Contract. As a result, the Trust will continue to hold the Contracts despite any
significant decline in the market price of the Class B Stock or adverse changes
in the financial condition of the Company (or, after an Adjustment Event,
comparable developments affecting any Reported Securities or the issuer
thereof). The Trust will not be managed like a typical closed-end investment
company.
RELATIONSHIP TO CLASS B STOCK; LIMITATIONS ON OPPORTUNITY FOR EQUITY
APPRECIATION; POTENTIAL LOSSES
The yield on the DECS is higher than the current dividend yield on the
Class B Stock. However, there is no assurance that the yield on the DECS will be
higher than the dividend yield on the Class B Stock over the term of the Trust.
The Amount Receivable at the Exchange Date is not fixed, but is based on
the market price of the Class B Stock as reflected in the Exchange Rate. There
can be no assurance that the Amount Receivable at the Exchange Date will be
equal to or greater than the Initial Price of the DECS. If the Exchange Price is
less
19
<PAGE> 22
than the Initial Price, the Amount Receivable at the Exchange Date will
generally be less than the amount paid for the DECS, in which case an investment
in DECS will result in a loss and, if the Company became insolvent or bankrupt,
could result in a total loss. Holders of the DECS, therefore, bear the full risk
of a decline in the value of the Class B Stock prior to the Exchange Date.
In addition, the opportunity for equity appreciation afforded by an
investment in the DECS is less than the opportunity for equity appreciation
afforded by a direct investment in the Class B Stock because the Amount
Receivable at the Exchange Date will generally exceed the Initial Price only if
the Exchange Price exceeds the Threshold Appreciation Price (which represents an
appreciation of % over the Initial Price) and because Holders will be
entitled to receive at the Exchange Date only % of any appreciation of the
value of the Class B Stock in excess of the Threshold Appreciation Price. See
"Investment Objectives and Policies -- Trust Assets" for an illustration of the
Amount Receivable at the Exchange Date that a DECS Holder would receive at
various Exchange Prices. Because the market price of the Class B Stock is
subject to market fluctuations, the Amount Receivable at the Exchange Date may
be more or less than the Initial Price of the DECS. Additionally, because the
Exchange Price is generally determined based on a 20 Trading Day average, the
value of a share of Class B Stock distributed on the Exchange Date may be less
than the Exchange Price used to determine the Amount Receivable at the Exchange
Date.
The market price of the DECS at any time will be affected primarily by
changes in the price of Class B Stock. It is impossible to predict whether the
price of the Class B Stock will rise or fall. Trading prices of Class B Stock
will be influenced by the Company's operational results and by complex and
interrelated political, economic, financial and other factors that can affect
the capital markets generally, the stock exchange or quotation system on which
Class B Stock is traded or listed and the market segment of which the Company is
a part. See the prospectus relating to the Company and to the Class B Stock
attached hereto. Trading prices of the Class B Stock also may be influenced if
any of the Mark Hughes Entities or another principal shareholder of the Company
hereafter issues securities with terms similar to those of the DECS or otherwise
transfers shares of the Class B Stock or of the Class A Stock. As of February
23, 1998, Mark Hughes beneficially owned 5,666,932 shares of Class A Stock and
11,333,866 shares of Class B Stock (which amounts include 183,333 shares of
Class A Stock and 366,666 shares of Class B Stock held by a charitable
foundation of which Mark Hughes is a director but with respect to which Mark
Hughes has no pecuniary interest), of which 5,750,000 shares of Class B Stock
(assuming the Underwriters' over-allotment option is exercised in full) may be
delivered by the Sellers to the Trust at the Exchange Date.
IMPACT OF THE DECS ON THE MARKET FOR THE COMMON STOCK
It is not possible to predict accurately how or whether the DECS will trade
in the secondary market or whether such market will be liquid. Any market that
develops for the DECS is likely to influence and be influenced by the market for
the Class A Stock and the Class B Stock. For example, the price of the Class A
Stock and/or Class B Stock could become more volatile and could be depressed by
investors' anticipation of the potential distribution into the market of
substantial additional amounts of Class B Stock at the termination of the Trust,
by possible sales of the Class A Stock or Class B Stock by investors who view
the DECS as a more attractive means of equity participation in the Company and
by hedging or arbitrage trading activity that may develop involving the DECS and
the Class B Stock.
DILUTION ADJUSTMENTS; STOCKHOLDER RIGHTS
The number of shares of Class B Stock that Holders are entitled to receive
at the termination of the Trust is subject to adjustment for certain events
arising from stock splits and combinations, stock dividends and certain other
actions of the Company that modify its capital structure. See "Investment
Objectives and Policies -- The Contracts -- Dilution Adjustments; Adjustment
Events." Such number of shares to be received by Holders may not be adjusted for
other events, such as offerings of Class B Stock or Class A Stock for cash or in
connection with acquisitions, that may adversely affect the price of the Class B
Stock and, because of the relationship of the number of shares of Class B Stock
to be received pursuant to the Contracts to the price of the Class B Stock, such
other events may adversely affect the trading price of the DECS. There can be no
assurance that the Company will not take any of the foregoing actions, or that
it will not make
20
<PAGE> 23
offerings of, or that major shareholders will not sell any, Class B Stock or
Class A Stock in the future, or as to the amount of any such offerings or sales.
In addition, until the receipt of the Class B Stock by Holders upon a
distribution thereof by the Trust, Holders will not be entitled to any rights
with respect to the Class B Stock (including without limitation voting rights
and the rights to receive any dividends or other distributions in respect
thereof).
NO OBLIGATION ON THE PART OF THE COMPANY WITH RESPECT TO THE DECS OR THE
CONTRACTS
The Company has no obligations with respect to the DECS, the Contracts or
the Amount Receivable at the Exchange Date, including any obligation to take the
needs of the Trust or of Holders of the DECS into consideration for any reason.
The Company will not receive any of the proceeds of the offering of the DECS
made hereby and is not responsible for, and has not participated in, the
determination of the time of sale of, quantities of or prices for the DECS to be
issued or the determination or calculation of the Amount Receivable at the
Exchange Date. The Company is not involved with the administration or trading of
the DECS.
TRADING VALUE; LISTING
The DECS are innovative securities and have no trading history, and it is
not possible to predict how they will trade in the secondary market. The trading
price of the DECS may vary considerably prior to the Exchange Date due to, among
other things, fluctuations in the price of the Class B Stock (which may occur
due to changes in the Company's financial condition, results of operations or
prospects, or because of complex and interrelated political, economic, financial
and other factors that can affect the capital markets generally, the stock
exchanges or quotation systems on which the Class B Stock is traded or listed
and the market segment of which the Company is a part) and fluctuations in
interest rates and other factors that are difficult to predict and beyond the
Trust's control.
Each Underwriter currently intends, but is not obligated, to make a market
in the DECS and any such market-making may be discontinued at any time in the
sole discretion of such Underwriter without notice. There can be no assurance
that a secondary market will develop or, if a secondary market does develop,
that it will provide the Holders of the DECS with liquidity of investment or
that it will continue for the life of the DECS.
Application has been made to quote the DECS on the Nasdaq National Market
System. There is no guarantee that such application will be approved. Assuming
the acceptance of such application, there can be no assurance that the DECS will
not later be delisted or that trading in the DECS on the Nasdaq National Market
System will not be suspended. In the event of a delisting or suspension of
trading on such trading market, the Trust will apply for listing of the DECS on
another national securities exchange or for quotation on another trading market.
If the DECS are not listed or traded on any securities exchange or trading
market, or if trading of the DECS is suspended, pricing information for the DECS
may be more difficult to obtain, and the price and liquidity of the DECS may be
adversely affected.
NET ASSET VALUE
The Trust is a newly organized closed-end investment company with no
previous operating history. Shares of closed-end investment companies frequently
trade at a discount from their net asset value, which is a risk separate and
distinct from the risk that the Trust's net asset value will decrease. The Trust
cannot predict whether the DECS will trade at, below or above their net asset
value. The risk of purchasing investments that might trade at a discount is more
pronounced for investors who wish to sell their investments in a relatively
short period of time after completion of the Trust's initial public offering
because for those investors realization of a gain or loss on their investments
is likely to be more dependent upon the existence of a premium or discount than
upon portfolio performance. The DECS are not subject to redemption prior to the
Exchange Date or the earlier termination of the Trust.
21
<PAGE> 24
NON-DIVERSIFIED STATUS
The Trust is considered non-diversified under the Investment Company Act,
which means that the Trust is not limited in the proportion of its assets that
may be invested in the obligations of a single issuer. Because the only
securities held or received by the Trust will be the Treasury Securities and the
Contracts or other assets subject to the Contracts, the Trust may be subject to
greater risk than would be the case for an investment company with more
diversified investments.
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES
No statutory, judicial or administrative authority directly addresses the
characterization of the DECS or instruments similar to the DECS for U.S. federal
income tax purposes. As a result, significant aspects of the U.S. federal income
tax consequences of an investment in the DECS are not certain. No ruling is
being requested from the Internal Revenue Service with respect to the DECS and
no assurance can be given that the Internal Revenue Service will agree with the
conclusions expressed under "Certain United States Federal Income Tax
Considerations."
RISK FACTORS RELATING TO THE COMPANY
Investors in the DECS should carefully consider the information in the
prospectus of the Company attached hereto, including the information contained
therein under "Risk Factors."
RISK RELATING TO BANKRUPTCY OF THE MARK HUGHES ENTITIES
The Trust believes that the Contracts constitute "securities contracts" for
purposes of the Bankruptcy Code, liquidation of which would not be subject to
the automatic stay provisions of the Bankruptcy Code in the event of the
bankruptcy of a Seller (or of any Mark Hughes Entity). It is, however, possible
that the Contracts will be determined not to qualify as "securities contracts"
for this purpose, in which case a Seller's (or any Mark Hughes Entity's)
bankruptcy may cause a delay in settlement of such Seller's Contract, or
otherwise subject such Contract to bankruptcy proceedings, which could adversely
affect the timing of settlement and could impair the Trust's ability to
distribute the Class B Stock or other assets subject to such Contract and the
related Collateral Agreement to the Holders on a timely basis and, as a result,
could adversely affect the amount received by the Holders in respect of the DECS
and/or the timing of such receipt. It is also possible, even if the Contracts
are "securities contracts", that a Bankruptcy court could exercise its equitable
powers to stay the Trust's exercise of its remedies, which could similarly
adversely affect the amount received by the Holders in respect of the DECS
and/or the timing of such receipt.
NET ASSET VALUE
The net asset value of the portfolio will be calculated by the
Administrator no less frequently than quarterly by dividing the value of the net
assets of the Trust (the value of its assets less its liabilities) by the total
number of DECS outstanding. The Trust's net asset value will be published
semi-annually as part of the Trust's semi-annual report to Holders and at such
other times as the Trustees may determine. The Treasury Securities held by the
Trust will be valued at the mean between the last current bid and asked prices
or, if quotations are not available, as determined in good faith by the
Trustees. Short-term investments having a maturity of 60 days or less will be
valued at cost with accrued interest or discount earned included in interest to
be received. The Contracts will be valued at the mean of the bid prices received
by the Trust from at least three independent broker-dealer firms unaffiliated
with the Trust who are in the business of making bids on financial instruments
similar to the Contracts and with terms comparable thereto. In the event that
the Trust (acting through the Administrator) is unable to obtain valuations from
three independent broker-dealer firms, as required by the preceding sentence, on
a timely basis or without unreasonable effort or expense, the Contracts shall be
valued at the median of bid prices received from two such broker-dealer firms.
In the event that the Trust (acting through the Administrator) is unable to
obtain a valuation for the Contracts that it believes to be reasonable through
the above method, valuation shall be established at a level deemed to be fair
and reflective of the market value for the Contracts based on all appropriate
factors relevant to the value of the Contracts as set forth in pricing
guidelines adopted by the Trustees.
22
<PAGE> 25
DESCRIPTION OF THE DECS
Each DECS represents an equal proportional interest in the Trust. Upon
liquidation of the Trust, Holders are entitled to share pro rata in the net
assets of the Trust available for distribution. DECS have no preemptive,
redemption or conversion rights. The DECS, when issued and outstanding, will be
fully paid and nonassessable. The only securities that the Trust is authorized
to issue are the DECS offered hereby and those sold to the initial Holder
referred to below. See "Underwriting."
Holders are entitled to one vote for each DECS held on all matters to be
voted on by Holders and are not able to cumulate their votes in the election of
Trustees. The Trustees of the Trust have been selected initially by Smith Barney
as the initial Holder of the Trust. The Trust intends to hold annual meetings as
required by the rules of the NYSE. The Trustees may call special meetings of
Holders for action by Holder vote as may be required by either the Investment
Company Act or the Declaration of Trust. The Holders have the right, upon the
declaration in writing or vote of more than two-thirds of the outstanding DECS,
to remove a Trustee. The Trustees will call a meeting of Holders to vote on the
removal of a Trustee upon the written request of the record Holders of 10% of
the DECS or to vote on other matters upon the written request of the record
Holders of 51% of the DECS (unless substantially the same matter was voted on
during the preceding 12 months). The Trustees shall establish, and notify the
Holders in writing of, the record date for each such meeting, which shall be not
less than 10 nor more than 50 days before the meeting date. Holders at the close
of business on the record date will be entitled to vote at the meeting. The
Trust will also assist in communications with other Holders as required by the
Investment Company Act.
BOOK-ENTRY SYSTEM
The DECS will be issued in the form of one or more global securities (the
"Global Securities") deposited with The Depository Trust Company (the
"Depositary") and registered in the name of a nominee of the Depositary.
The Depositary has advised the Trust and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. The
Depositary was created to hold securities of persons who have accounts with the
Depositary ("participants") and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the Depositary's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee will
credit the respective DECS represented by such Global Security to the accounts
of participants. The accounts to be credited shall be designated by the
Underwriters. Ownership of beneficial interests in such Global Securities will
be limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests by participants in such Global
Securities will be shown on, and the transfer of those ownership interests will
be effected only through, records maintained by the Depositary or its nominee
for such Global Securities. Ownership of beneficial interests in such Global
Securities by persons that hold through participants will be shown on, and the
transfer of that ownership interest within such participant will be effected
only through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the DECS. Except
as set forth below, owners of beneficial interests in such Global Securities
will not be
23
<PAGE> 26
entitled to have the DECS registered in their names and will not receive or be
entitled to receive physical delivery of the DECS in definitive form and will
not be considered the owners or holders thereof.
Shares of Class B Stock or other assets deliverable in respect of, and any
quarterly distributions on, DECS registered in the name of or held by the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner or the holder of the Global Security. None
of the Trust, any Trustee, the Paying Agent, the Administrator or the Custodian
for the DECS will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in a Global Security or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The Trust expects that the Depositary, upon receipt of any payment in
respect of a permanent Global Security, will credit immediately participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Security as shown on the
records of the Depositary. The Trust also expects that payments by participants
to owners of beneficial interests in such Global Security held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
participants.
A Global Security may not be transferred except as a whole by the
Depositary to a nominee or a successor of the Depositary. If the Depositary is
at any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by the Trust within 90 days, the Trust will issue
DECS in definitive registered form in exchange for the Global Security
representing such DECS. In that event, an owner of a beneficial interest in a
Global Security will be entitled to physical delivery in definitive form of DECS
represented by such Global Security equal in number to that represented by such
beneficial interest and to have such DECS registered in its name.
MANAGEMENT AND ADMINISTRATION OF THE TRUST
TRUSTEES
The Trust will be internally managed by three Trustees, none of whom is an
"interested person" of the Trust as defined in the Investment Company Act, and
will not have an investment adviser. Under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to grantor trusts, the
Trustees will not have the power to vary the investments held by the Trust. It
is a fundamental policy of the Trust that the Contracts may not be disposed of
during the term of the Trust and that the Treasury Securities held by the Trust
may not be disposed of prior to the earlier of their respective maturities and
the termination of the Trust, except for a partial liquidation of Treasury
Securities following acceleration of any Contract.
24
<PAGE> 27
The names of the persons who will be elected by Smith Barney, the initial
Holder of the Trust, to serve as the Trustees are set forth below. The positions
and the principal occupations of the individual Trustees during the past five
years are also set forth below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS TITLE DURING PAST FIVE YEARS
--------------------- ----- -----------------------
<S> <C> <C>
Donald J. Puglisi, 52.................. Managing Trustee Professor of Finance
Department of Finance University of Delaware
University of Delaware
Newark, DE 19716
William R. Latham III, 53.............. Trustee Professor of Economics
Department of Economics University of Delaware
University of Delaware
Newark, DE 19716
James B. O'Neill, 58................... Trustee Professor of Economics
Center for Economic Education University of Delaware
& Entrepreneurship
University of Delaware
Newark, DE 19716
</TABLE>
Each Trustee who is not a director, officer or employee of either
Underwriter or the Administrator, or of any affiliate thereof, will be paid by
Smith Barney (which will be reimbursed by the Mark Hughes Entities), in respect
of its annual fee and anticipated out-of-pocket expenses, a one-time, up-front
fee of $ . The Trust's Managing Trustee will also receive an additional
up-front fee of $ for serving in that capacity. The Trustees will not
receive, either directly or indirectly, any compensation, including any pension
or retirement benefits, from the Trust. None of the Trustees receives any
compensation for serving as a trustee or director of any other affiliated
investment company.
ADMINISTRATOR
The day-to-day affairs of the Trust will be managed by The Bank of New
York, as Trust Administrator pursuant to an Administration Agreement. Under the
Administration Agreement, the Trustees have delegated most of their operational
duties to the Administrator, including without limitation, the duties to: (i)
receive invoices for and pay, or cause to be paid, all expenses incurred by the
Trust; (ii) with the approval of the Trustees, engage legal and other
professional advisors (other than the independent public accountants for the
Trust); (iii) instruct the Paying Agent to pay distributions on DECS as
described herein; (iv) prepare and mail, file or publish all notices, proxies,
reports, tax returns and other communications and documents, and keep all books
and records, for the Trust; (v) at the direction of the Trustees, institute and
prosecute legal and other appropriate proceedings to enforce the rights and
remedies of the Trust; and (vi) make all necessary arrangements with respect to
meetings of Trustees and any meetings of holders of DECS. The Administrator will
not, however, select the independent public accountants for the Trust or sell or
otherwise dispose of the Trust assets (except in connection with an acceleration
of the Contracts, or the settlement of the Contracts at the Exchange Date, and
upon termination of the Trust).
The Administration Agreement may be terminated by either the Trust or the
Administrator upon 60 days' prior written notice, except that no termination
shall become effective until a successor Administrator has been chosen and has
accepted the duties of the Administrator.
Except for its roles as Administrator, custodian, paying agent, registrar
and transfer agent of the Trust, and except for its role as Collateral Agent
under the Collateral Agreements, The Bank of New York has no other affiliation
with, and is not engaged in any other transactions with, the Trust.
The address of the Administrator is 101 Barclay Street, New York, New York
10286.
CUSTODIAN
The Trust's custodian (the "Custodian") is The Bank of New York pursuant to
a custodian agreement (the "Custodian Agreement"). In the event of any
termination of the Custodian Agreement by the Trust or
25
<PAGE> 28
the resignation of the Custodian, the Trust must engage a new Custodian to carry
out the duties of the Custodian as set forth in the Custodian Agreement.
Pursuant to the Custodian Agreement, all net cash received by the Trust will be
invested by the Custodian in short-term U.S. Government securities maturing on
or shortly before the next quarterly distribution date. The Custodian will also
act as Collateral Agent under the Collateral Agreement and will hold a perfected
security interest in the Class B Stock and U.S. Government obligations or other
assets consistent with the terms of the Contracts.
PAYING AGENT
The transfer agent, registrar and paying agent (the "Paying Agent") for the
DECS is The Bank of New York pursuant to a paying agent agreement (the "Paying
Agent Agreement"). In the event of any termination of the Paying Agent Agreement
by the Trust or the resignation of the Paying Agent, the Trust will use its best
efforts to engage a new Paying Agent to carry out the duties of the Paying
Agent.
INDEMNIFICATION
The Trust will indemnify each Trustee, the Administrator, the Custodian and
the Paying Agent with respect to any claim, liability, loss or expense
(including the costs and expenses of the defense against any claim or liability)
which it may incur in acting as Trustee, Administrator, Custodian or Paying
Agent, as the case may be, except in the case of willful misfeasance, bad faith,
gross negligence or reckless disregard of their respective duties or where
applicable law prohibits such indemnification. Smith Barney has agreed to
reimburse the Trust for any amounts it may be required to pay as indemnification
to any Trustee, the Administrator, the Custodian or the Paying Agent. Smith
Barney will in turn be reimbursed by the Mark Hughes Entities for all such
reimbursements paid by it.
DISTRIBUTIONS
The Trust intends to distribute to Holders on a quarterly basis the
proceeds of the Treasury Securities held by the Trust. The first distribution,
reflecting the Trust's operations from the date of the offering, will be made on
, 1998 to Holders of record as of , 1998. Thereafter,
distributions will be made on , , and
or, if any such date is not a Business Day, on the next
succeeding Business Day, of each year to Holders of record as of each
, , and ,
respectively. A portion of each such distribution should be treated as a
tax-free return of the Holder's investment. See "Investment Objective and
Policies -- Trust Assets" and "Certain United States Federal Income Tax
Considerations." If any Contract is accelerated as described in "Investment
Objectives and Policies -- The Contracts -- Collateral Requirements of the
Contracts; Acceleration," each Holder will receive its pro rata share of the
proceeds from the acceleration of such Contract and from the liquidation of a
proportionate amount of the Treasury Securities then held in the Trust. Upon
termination of the Trust as described in "Investment Objectives and
Policies -- Trust Termination," each Holder will receive its pro rata share of
any remaining net assets of the Trust.
The Trust does not permit the reinvestment of distributions.
ESTIMATED EXPENSES
At the closing of this offering Smith Barney will pay to each of the
Administrator, the Custodian and the Paying Agent, and to each Trustee, a
one-time, up-front amount in respect of its fee and, in the case of the
Administrator, anticipated expenses of the Trust over the term of the Trust. The
anticipated Trust expenses to be borne by the Administrator include, among other
things, expenses for legal and independent accountants' services, costs of
printing proxies, DECS certificates and Holder reports, expenses of the
Trustees, fidelity bond coverage, stock exchange listing fees and expenses of
qualifying the DECS for sale in the various states. The aggregate of the
one-time, up-front payments described above will be in the amount of
$ . Smith Barney will also pay estimated organization costs of the
Trust in the amount of $ and estimated costs of the Trust in connection
with the initial registration and public offering of the DECS in the amount of
26
<PAGE> 29
$ at the closing of the offering. Smith Barney will be reimbursed by
the Mark Hughes Entities for such payments.
The amount payable to the Administrator in respect of ongoing expenses of
the Trust was determined based on estimates made in good faith on the basis of
information currently available to the Trust, including estimates furnished by
the Trust's agents. There cannot, however, be any assurance that actual
operating expenses of the Trust will not be substantially more than this amount.
Any excess expenses will be paid by Smith Barney or, in the event of its failure
to pay such amounts, the Mark Hughes Entities, or, in the event of the failure
of either Smith Barney or the Mark Hughes Entities to pay such amounts, the
Trust. Smith Barney will be reimbursed by the Mark Hughes Entities for all
expenses of the Trust paid by it.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal U.S. federal income tax
consequences that may be relevant to a holder of a DECS that is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized under the laws of the United States, an estate the income
of which is subject to U.S. federal income taxation regardless of its source, or
a trust if (i) a U.S. court is able to exercise primary supervision over the
trust's administration and (ii) one or more United States persons have the
authority to control all of the trust's substantial decisions (a "U.S. person")
or a holder that is otherwise subject to U.S. federal income taxation on a net
income basis in respect of a DECS (such a holder and any U.S. person, a "U.S.
Holder"). The discussion below is based on the advice of Cleary, Gottlieb, Steen
& Hamilton.
This summary is based on the U.S. federal income tax laws, regulations,
rulings and decisions now in effect, all of which are subject to change. Except
to the extent discussed below under "Non-United States Persons," this summary
deals only with U.S. Holders that will hold DECS as capital assets. This summary
deals only with initial Holders and does not address tax considerations
applicable to investors that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities, persons that will hold DECS as a
position in a "straddle" for tax purposes or as a part of a "synthetic security"
or a "conversion transaction" or other integrated investment comprised of a DECS
and one or more other investments, or persons that have a functional currency
other than the U.S. dollar. It does not include any description of the tax laws
of any state or local governments or of any foreign government that may be
applicable to the DECS or to the Holders thereof. It also does not discuss the
tax consequences of the ownership of the Class B Stock or Reported Securities.
Prospective purchasers of DECS are urged to review the discussion under
"Taxation' in the accompanying prospectus of the Company concerning the federal
income tax consequences of an investment in the Class B Stock. INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS IN DETERMINING THE TAX CONSEQUENCES TO THEM OF
HOLDING DECS, INCLUDING THE APPLICATION TO THEIR PARTICULAR SITUATION OF THE
U.S. FEDERAL INCOME TAX CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE
APPLICATION OF STATE, LOCAL OR OTHER TAX LAWS.
There are no regulations, published rulings or judicial decisions
addressing the characterization for federal income tax purposes of securities
with terms substantially the same as the DECS. The Trust intends to treat a DECS
for U.S. federal income tax purposes as a beneficial interest in a trust that
holds zero-coupon U.S. Treasury securities and Contracts, and to report Holders'
income to the Internal Revenue Service in accordance with this treatment. Under
this approach, the tax consequences of holding a DECS will be as described
below. However, prospective investors in the DECS should be aware that the
Internal Revenue Service might take a different view as to the proper
characterization of the DECS and of the tax consequences to a Holder.
TAX STATUS OF THE TRUST
The Trust will be taxable as a grantor trust owned solely by the present
and future holders of DECS for federal income tax purposes, and income received
by the Trust will be treated as income of the Holders in the manner set forth
below.
27
<PAGE> 30
TAX CONSEQUENCES TO UNITED STATES HOLDERS
Tax Basis of the Treasury Securities and the Contracts. Each Holder will be
considered the owner of its pro rata portion of the Treasury Securities and the
Contracts in the Trust. The cost to the Holder of its DECS will be allocated
among the Holder's pro rata portion of the Treasury Securities and the Contracts
(in proportion to the fair market values thereof on the date on which the Holder
acquires its DECS) in order to determine the Holder's tax bases. It is currently
anticipated that % and % of the net proceeds of the offering will be used by
the Trust to purchase the Treasury Securities and as payments under the
Contracts, respectively.
Recognition of Original Issue Discount on the Treasury Securities. The
Treasury Securities in the Trust will consist of zero-coupon U.S. Treasury
securities. A Holder will be required to treat its pro rata portion of each
Treasury Security in the Trust as a bond that was originally issued on the date
the Holder purchased its DECS and at an original issue discount equal to the
excess of the Holder's pro rata portion of the amounts payable on such Treasury
Security over the Holder's tax basis therefor as discussed above. The Holder
(whether on the cash or accrual method of tax accounting) is required to include
original issue discount (other than original issue discount on short-term
Treasury Securities as described below) in income for federal income tax
purposes as it accrues, in accordance with a constant yield method, prior to the
receipt of cash attributable to such income. Because it is expected that more
than 20% of the Holders will be accrual basis taxpayers, original issue discount
on any short-term Treasury Security (i.e., any Treasury Security with a maturity
of one year or less from the date it is purchased) held by the Trust will also
be required to be included in income by the Holders as it is accrued. Unless a
Holder elects to accrue the original issue discount on a short-term Treasury
Security according to a constant yield method based on daily compounding, such
original issue discount will be accrued on a straight-line basis. The Holder's
tax basis in a Treasury Security will be increased by the amount of any original
issue discount included in income by the Holder with respect to such Treasury
Security.
Treatment of the Contracts. Each Holder will be treated as having entered
into a pro rata portion of the Contracts and, at the Exchange Date, as having
received a pro rata portion of the Class B Stock (or cash, Reported Securities
or combination thereof) delivered to the Trust. Under existing law, a Holder
will not recognize income, gain or loss upon entry into the Contracts. A Holder
should not be required under existing law to include in income additional
amounts over the term of the Contracts.
The Internal Revenue Service may contend that a DECS should be
characterized for federal income tax purposes in a manner different from the
approach described above. For example, the Internal Revenue Service might assert
that the Contracts should be treated as contingent debt obligations of the
Sellers that are subject to Treasury regulations promulgated in June 1996
governing contingent payment debt instruments. If the Internal Revenue Service
were to prevail in making such an assertion, original issue discount would
accrue with respect to each Contract at a "comparable yield' for the Seller
under that Contract, determined at the time the Contract is entered into. A
Holder's pro rata portion of original issue discount in respect of the Contracts
and original issue discount in respect of the Treasury Securities might exceed
the aggregate amount of the quarterly cash distributions to a Holder. In
addition, under this treatment, a Holder would be required to treat any gain
realized on the sale, exchange or redemption of the DECS as ordinary income to
the extent that such gain is allocable to the Contracts. Any loss realized on
such sale, exchange or redemption that is allocable to the Contracts would be
treated as an ordinary loss to the extent of the Holder's original issue
discount inclusions with respect to the Contracts, and as capital loss to the
extent of loss in excess of such inclusions. It is also possible that the
Internal Revenue Service could take the view that a Holder should include in
income the amount of cash actually received each year in respect of the DECS, or
that the DECS as a whole constitute a contingent payment debt instrument subject
to the rules described above.
Sale of the DECS. Upon a sale of all or some of a Holder's DECS, a Holder
will be treated as having sold its pro rata portion of the Treasury Securities
and Contracts underlying the DECS. The selling Holder will recognize gain or
loss equal to the difference between the amount realized and the Holder's
aggregate tax bases in its pro rata portion of the Treasury Securities and the
Contracts. Any gain or loss will be long-term capital gain or loss if the Holder
has held the DECS for more than one year. The distinction between capital
28
<PAGE> 31
gain or loss and ordinary income or loss is important for purposes of the
limitations on a Holder's ability to offset capital losses against ordinary
income. In addition, certain individuals are subject to taxation at a reduced
rate on long-term capital gains. The Taxpayer Relief Act of 1997 further reduces
tax rates on capital gains recognized by individuals in respect of assets held
for more than 18 months. Holders are advised to consult their own tax advisers
as to the consequences of the Taxpayer Relief Act of 1997 in their particular
circumstances.
Distribution of the Class B Stock. The delivery of Class B Stock to the
Trust pursuant to the Contracts will not be taxable to the Holders. The
distribution of Class B Stock upon the termination of the Trust will not be
taxable to the Holders. A Holder will have taxable gain or loss (which will be
short-term capital gain or loss) upon receipt of cash in lieu of fractional
shares of Class B Stock distributed upon termination of the Trust, in an amount
equal to the difference between the cash received and the portion of the basis
of the Contracts allocable to fractional shares (based on the relative number of
fractional shares and full shares delivered to the Holder). Each Holder's
aggregate basis in its shares of Class B Stock will be equal to its basis in its
pro rata portion of the Contracts less the portion of such basis allocable to
any fractional shares of Class B Stock for which cash is received.
Distribution of Cash. If a Holder receives cash upon dissolution of the
Trust or as a result of a Seller's election to deliver cash under the Cash
Delivery Option, a Holder will recognize capital gain or loss equal to any
difference between the amount of cash received from the Sellers and the Holder's
tax basis in the DECS at that time. Such gain or loss generally will be
long-term capital gain or loss if the Holder has held the DECS for more than one
year at the Exchange Date.
Distribution of Cash or Reported Securities as a Result of an Adjustment
Event. If as a result of an Adjustment Event, cash, Reported Securities, or a
combination of cash and Reported Securities is delivered pursuant to the
Contracts, a Holder will have taxable gain or loss upon receipt equal to the
difference between the amount of cash received, including cash received in lieu
of fractional Reported Securities, and its basis in its pro rata portion of the
Contracts allocable to any shares of Class B Stock for which such cash or
fractional Reported Securities were received. Any gain or loss will be capital
gain or loss, and if the Holder has held the DECS for more than one year, such
gain or loss will be long-term capital gain or loss. A Holder's basis in any
Reported Securities received will be equal to its basis in its pro rata portion
of the Contracts less the portion of such basis allocable to any shares of Class
B Stock for which cash or fractional Reported Securities were received. See
"Investment Objectives and Policies -- The Contracts."
Fees and Expenses of the Trust. A Holder's pro rata portion of the expenses
in connection with the organization of the Trust, underwriting discounts and
commissions and other offering expenses should be includable in the cost to the
Holder of the DECS. However, there can be no assurance that the Internal Revenue
Service will not take a contrary view. If the Internal Revenue Service were to
prevail in treating such expenses as excludable from the Holder's cost of the
DECS, such expenses would not be includable in the basis of the assets of the
Trust and should instead be amortizable and deductible over the term of the
Trust. If such expenses were treated as amortizable and deductible, an
individual Holder who itemizes deductions would be entitled to amortize and
deduct (subject to any other applicable limitations on itemized deductions) such
expenses over the term of the Trust only to the extent that such amortized
annual expenses together with such Holder's other miscellaneous deductions
exceed 2% of such Holder's adjusted gross income.
Proposed Legislation. A bill recently introduced in Congress by a member of
the House of Representatives (H.R. 3170) would treat some or all of the net
long-term capital gain arising from "constructive ownership" transactions
involving certain derivative financial instruments as short-term capital gain,
and would impose an interest charge on such short-term capital gain. The
proposed legislation would be effective with respect to gain recognized after
the date the legislation is enacted into law, without regard to when the
constructive ownership transaction was entered into. If enacted in its current
form, the legislation would not apply to the DECS transaction (and, even if the
legislation in its current form were extended to cover the DECS transaction,
would have no material effect on the DECS transaction). It is not possible to
predict whether legislation addressing constructive ownership transactions will
be enacted, or what form any such legislation might take (including with respect
to effective dates).
29
<PAGE> 32
NON-UNITED STATES PERSONS
In the case of a Holder of the DECS that is not a U.S. person, payments
made with respect to the DECS will not be subject to U.S. withholding tax,
provided that such Holder complies with applicable certification requirements
(including in general the furnishing of an Internal Revenue Service Form W-8 or
a substitute form). Any capital gain realized upon the sale or other disposition
of the DECS by a Holder that is not a U.S. person will generally not be subject
to U.S. federal income tax if (i) such gain is not effectively connected with a
U.S. trade or business of such Holder and (ii) in the case of an individual,
such individual is not present in the United States for 183 days or more in the
taxable year of the sale or other disposition or the gain is not attributable to
a fixed place of business maintained by such individual in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A Holder of a DECS may be subject to information reporting and to backup
withholding at a rate of 31 percent of certain amounts paid to the Holder unless
such Holder (a) is a corporation or comes within certain other exempt categories
and, when required, provides proof of such exemption or (b) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Information reporting and backup withholding do not apply to
payments made to a Holder of a DECS that is not a U.S. person if the beneficial
owner of the DECS certifies as to its non-U.S. status or otherwise establishes
an exemption, provided that the Trust or its agent does not have actual
knowledge that the Holder is a U.S. person.
Payment of the proceeds from the sale of a DECS to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding, except that if the broker is (i) a U.S. person, (ii) a controlled
foreign corporation for U.S. tax purposes, (iii) a foreign person 50 percent or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business or (iv) with respect to payments made
after December 31, 1998, a foreign partnership that, at any time during its
taxable year is 50% or more (by income or capital interest) owned by U.S.
persons or is engaged in the conduct of U.S. trade or business, information
reporting may apply to such payments. Payment of the proceeds from a sale of a
DECS to or through the U.S. office of a broker is subject to information
reporting and backup withholding unless the Holder or beneficial owner certifies
as to its non-U.S. status or otherwise establishes an exemption from information
reporting and backup withholding.
Any amounts withheld under the backup withholding rules are not an
additional tax and may be credited against the U.S. Holder's U.S. federal income
tax liability, provided that the required information is furnished to the
Internal Revenue Service.
30
<PAGE> 33
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Trust, the Company, each of the
Sellers, certain other parties thereto and the Underwriters named below, the
Trust has agreed to sell to each of the Underwriters, and each of the
Underwriters severally has agreed to purchase, the number of DECS set forth
opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF DECS
----------- --------------
<S> <C>
Smith Barney Inc. ..........................................
Prudential Securities Incorporated..........................
----------
Total............................................. 5,000,000
==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all the DECS offered hereby if any of the DECS are
purchased.
The Underwriters propose to offer the DECS directly to the public initially
at the public offering price set forth on the cover of this Prospectus and to
certain dealers at such prices less a concession not in excess of $ per
DECS. The Underwriters may allow, and such dealers may reallow, a concession not
in excess of $ per DECS to other dealers. After the initial public
offering, such public offering price and such concession and reallowance may be
changed. The sales load of $ per DECS is equal to % of the initial
public offering price.
The Company, its directors and executive officers, and the Mark Hughes
Entities have each agreed not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, for a period of 90 days, in the case of the Company and its directors
and executive officers (other than the Selling Stockholder), and one year, in
the case of the Mark Hughes Entities, from the date of this Prospectus without
the prior written consent of Smith Barney; provided, however, that (x) Herbalife
may issue, or grant options for, Common Stock pursuant to any stock plan for
employees or directors, or any employee benefit plan, in effect on the date of
this Prospectus, or pursuant to any stock options outstanding on the date of
this Prospectus and (y) such agreements will not restrict the ability of the
Mark Hughes Entities to engage in any of the transactions described in clause
(i) or (ii) above in connection with (a) the offering by the Trust of the DECS
or any delivery of shares of Class B Stock pursuant to the terms of the DECS,
(b) the loaning of shares of Class B Stock pursuant to the Securities Loan
Agreement (as defined below), or (c) sales by the Herbalife Family Foundation, a
charitable trust of which Mark Hughes is a director but with respect to which
Mark Hughes has no pecuniary interest. If any such consent were given it would
not necessarily be preceded or followed by a public announcement thereof.
In light of the fact that proceeds from the sale of the DECS will be used
by the Trust to purchase the Contracts from the Sellers, the Underwriting
Agreement provides that the Mark Hughes Entities will pay to the Underwriters as
compensation $ per DECS.
The Trust has granted to the Underwriters an option, exercisable for the 30
day period after the date of this Prospectus, to purchase up to an additional
DECS from the Trust, at the same price per DECS as the
initial DECS to be purchased by the Underwriters. The Underwriters may exercise
such option only for the purpose of covering over-allotments, if any, incurred
in connection with the sale of DECS offered hereby. To the extent that the
Underwriters exercise such option, each Underwriter will have a firm commitment,
subject to certain conditions, to purchase the same proportion of the DECS as
the number of
31
<PAGE> 34
DECS to be purchased and offered by such Underwriter in the above table bears to
the total number of initial DECS to be purchased by the Underwriters.
The DECS will be a new issue of securities with no established trading
market. Application has been made to quote the DECS on the Nasdaq National
Market System under the symbol " ." There is no guarantee that such
application will be approved. The Underwriters intend to make a market in the
DECS, subject to applicable laws and regulations. However, the Underwriters are
not obligated to do so and any such market-making may be discontinued at any
time at the sole discretion of the Underwriters without notice. Accordingly, no
assurance can be given as to the liquidity of such market.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof, and that the Mark Hughes Entities (including the Mark
Hughes Family Trust) will guarantee the indemnity and contribution obligations
of the Company.
In connection with the formation of the Trust, Smith Barney subscribed for
and purchased DECS for a purchase price of $100. Under the Contracts,
the Sellers will be obligated to deliver to the Trust Class B Stock in respect
of such DECS on the same terms as the DECS offered hereby. Smith Barney
sponsored the formation of the Trust for purposes of this offering, including
selecting its initial Trustee.
Pursuant to the Contracts, the Trust has agreed, subject to the terms and
conditions set forth therein, to purchase from the Sellers an aggregate number
of shares of the Class B Stock equal to the aggregate number of DECS to be
purchased by the Underwriters from the Trust pursuant to the Underwriting
Agreement (including the DECS to be purchased by the Underwriters upon exercise
of the over-allotment option plus the number of DECS purchased by Smith Barney
in connection with the organization of the Trust). Pursuant to the terms of the
Contracts, the Sellers will be obligated to deliver to the Trust at the Exchange
Date of the DECS a number of shares of the Class B Stock (or, at the Sellers'
option, the cash equivalent) and/or such other consideration as permitted or
required by the terms of the Contract, that are expected to have the same value
as the shares of the Class B Stock delivered pursuant to the DECS. The closing
of the offering of the DECS is conditioned upon the closing of the purchase of
the Class B Stock pursuant to the Contract.
In connection with this offering, the Underwriters and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the DECS, the Class
A Stock or the Class B Stock. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase DECS or the Class B Stock for
purposes of stabilizing their market prices. The Underwriters also may create
short positions for the account of the Underwriters by selling more DECS in
connection with this offering than they are committed to purchase from the
Trust, and in such case may purchase DECS in the open market following the
completion of this offering to cover all or a portion of such short positions.
The Underwriters may also cover all or a portion of such short positions by
exercising the Underwriters' over-allotment options in this offering. In
addition, Smith Barney, on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements whereby it may reclaim from a dealer
participating in this offering the selling concession with respect to DECS that
are distributed in this offering but subsequently purchased of the account of
either Underwriter in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the DECS, the Class A
Stock or the Class B Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
In connection with this offering, certain Underwriters and selling group
members who are qualifying registered market makers on the Nasdaq National
Market System may engage in passive market making transactions in the Class B
Stock, the Class A Stock or the DECS on the Nasdaq National Market System in
accordance with Rule 103 of Regulation M. Passive market making transactions
must comply with certain volume and price limitations and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security, and if all independent bids are
lowered below the passive market maker's bid, then such bid must be lowered when
certain purchase limits are exceeded.
32
<PAGE> 35
In connection with this offering, certain affiliates of Mark Hughes (the
"Lender") and Smith Barney intend to enter into a Securities Loan Agreement (the
"Securities Loan Agreement") which provides that, subject to certain
restrictions and with the agreement of the Lender, Smith Barney may from time to
time borrow, return and reborrow shares of Class B Stock from the Lender (the
"Borrowed Securities"); provided, however, that the number of Borrowed
Securities at any time may not exceed 1,000,000 shares, subject to adjustment
for certain dilutive events. The Securities Loan Agreement is intended to
facilitate market-making activity in the DECS by Smith Barney. Smith Barney may
from time to time borrow shares of Class B Stock under the Securities Loan
Agreement for the purpose of settling short sales of Class B Stock, or for the
purpose of returning shares of Class B Stock previously borrowed by Smith Barney
to settle short sales of Class B Stock, in each case, where such short sales
were entered into by Smith Barney to hedge any long position in the DECS
resulting from its market-making activities. Such sales will be made in the
over-the-counter market at market prices prevailing at the time of sale or at
prices related to such market prices. Market conditions will dictate the extent
and timing of Smith Barney's market-making transactions in the DECS and the
consequent need to borrow shares of Class B Stock. The availability of shares of
Class B Stock under the Securities Loan Agreement at any time is not assured and
any such availability does not assure market-making activity with respect to the
DECS and any market-making actually engaged in by Smith Barney may cease at any
time. The foregoing description of the Securities Loan Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Securities Loan Agreement, a copy of which will be filed with the Commission and
incorporated herein by reference when filed.
In the ordinary course of their respective businesses, certain of the
Underwriters and their respective affiliates have engaged in and may in the
future engage in commercial and investment banking transactions with the
Company, the Mark Hughes Entities and their respective affiliates.
LEGAL MATTERS
Certain legal matters will be passed upon for the Trust and the
Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain
matters of Delaware law will be passed upon for the Trust by Richards, Layton &
Finger, Wilmington, Delaware.
EXPERTS
The statement of assets, liabilities and capital included in this
Prospectus has been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report appearing herein, and is included in
reliance upon the report of such firm given upon their authority as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Trust has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement under the Securities Act with
respect to the DECS offered hereby. Further information concerning the DECS and
the Trust may be found in the Registration Statement, of which this Prospectus
constitutes a part. The Registration Statement may be inspected without charge
at the Commission's office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission. Such Registration Statement is also available on the
Commission's website (http://www.sec.gov).
33
<PAGE> 36
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF DECS TRUST III
We have audited the accompanying statement of assets, liabilities and
capital of DECS Trust III (a Delaware trust) as of March 3, 1998. This financial
statement is the responsibility of the Trustees of the Trust. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets, liabilities and
capital is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement of
assets, liabilities and capital. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets, liabilities and capital referred
to above presents fairly, in all material respects, the financial position of
DECS Trust as of March 3, 1998, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 4, 1998
34
<PAGE> 37
DECS TRUST III
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MARCH 3, 1998
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100
Total Assets................................................ $100
LIABILITIES
Total Liabilities........................................... $ --
NET ASSETS.................................................. $100
CAPITAL
DECS, 1 DECS issued and outstanding......................... $100
</TABLE>
The accompanying notes are an integral part of this financial statement.
35
<PAGE> 38
DECS TRUST III
NOTES TO STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
MARCH 3, 1998
I. ORGANIZATION
DECS Trust III (the "Trust"), organized as a Delaware business trust on
January 22, 1998, is a closed-end management investment company registered under
the Investment Company Act of 1940. The term of the Trust is anticipated to
expire in the year 2001; however, the exact date will be determined in the
future. The Trust may be dissolved prior to its planned termination date under
certain circumstances as outlined in the registration statement.
The Trust has registered 5,750,000 DECS representing shares of beneficial
interest in the Trust. The only securities that the Trust is authorized to issue
are the DECS. Each of the DECS represents the right to receive (a) quarterly
distributions during the term of the Trust, and (b) upon the conclusion of the
term of the Trust (the "Exchange Date"), certain shares of the Class B Common
Stock, par value $.01, of Herbalife International, Inc. or cash with an
equivalent value (such amounts determined as described in the registration
statement). The DECS are not subject to redemption prior to the Exchange Date or
the earlier termination of the Trust. The Trust will hold a series of
zero-coupon U.S. Treasury securities and one or more forward purchase contracts
relating to the Common Stock. The business activities of the Trust are limited
to the matters discussed above. The Trust will be treated as a grantor trust for
U.S. federal income tax purposes.
On March 3, 1998, the Trust issued one DECS to Smith Barney Inc. ("Smith
Barney") in consideration for a purchase price of $100.
II. ORGANIZATIONAL COSTS, FEES AND EXPENSES
Organizational costs and ongoing fees of the Trust will be borne by Smith
Barney.
III. MANAGEMENT AND ADMINISTRATION OF TRUST
The Trust will be managed by its trustees and will not have a separate
investment adviser. The Trust will be overseen by three trustees and the daily
administration will be carried out by The Bank of New York as the administrator.
The Bank of New York will also serve as the Trust's custodian, paying agent,
registrar and transfer agent with respect to the DECS.
36
<PAGE> 39
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE TRUST SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Fees and Expenses..................... 8
The Trust............................. 8
Use of Proceeds....................... 9
Investment Objectives and Policies.... 9
Investment Restrictions............... 19
Risk Factors Relating to DECS......... 19
Net Asset Value....................... 22
Description of the DECS............... 23
Management and Administration of the
Trust............................... 24
Certain United States Federal Income
Tax Considerations.................. 27
Underwriting.......................... 31
Legal Matters......................... 33
Experts............................... 33
Additional Information................ 33
Report of Independent Accountants..... 34
Statement of Assets, Liabilities and
Capital............................. 35
</TABLE>
Until , 1998, all dealers effecting transactions in the DECS,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
======================================================
======================================================
5,000,000 DECSSM
DECS TRUST III
------------
PROSPECTUS
MARCH , 1998
------------
SALOMON SMITH BARNEY
PRUDENTIAL SECURITIES INCORPORATED
======================================================
<PAGE> 40
[ATTACHED PROSPECTUS FOLLOWS]
<PAGE> 41
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
<TABLE>
<S> <C> <C> <C>
Part A -- (i) Report of Independent Accountants
Statement of Assets, Liabilities and Capital as of March 3,
(ii) 1998
Part B -- none
</TABLE>
2. Exhibits
<TABLE>
<S> <C> <C>
(a)(1)(A) -- Declaration of Trust dated as of January 22, 1998**
(a)(1)(B) -- Amended and Restated Declaration of Trust dated as of
, 1998/*/
(a)(2)(A) -- Certificate of Trust dated January 22, 1998**
(a)(2)(B) -- Restated Certificate of Trust dated March 3, 1998
(b) -- Not applicable
(c) -- Not applicable
(d)(1) -- Form of specimen certificate of DECS (included in Exhibit
2(a)(1)(B))*
(d)(2) -- Portions of the Amended and Restated Declaration of Trust
defining the rights of Holders of DECS (included in Exhibit
2(a)(1)(B))*
(e) -- Not applicable
(f) -- Not applicable
(g) -- Not applicable
(h) -- Form of Underwriting Agreement*
(i) -- Not applicable
(j) -- Custodian Agreement dated as of March 3, 1998
(k)(1) -- Form of Administration Agreement*
(k)(2) -- Form of Paying Agent Agreement*
(k)(3) -- Form of Purchase Contract*
(k)(4) -- Form of Collateral Agreement*
(k)(5) -- Form of Fund Expense Agreement*
(k)(6) -- Form of Fund Indemnity Agreement*
(l) -- Opinion and Consent of Counsel to the Trust*
(m) -- Not applicable
(n)(1) -- Tax Opinion of Counsel to the Trust (Consent contained in
Exhibit 2(n)(1))*
(n)(2) -- Consent of Independent Public Accountants
(n)(3) -- Consents to being named as Trustee*
(o) -- Not applicable
(p) -- Subscription Agreement dated as of March 3, 1998
(q) -- Not applicable
(r) -- Financial Data Schedule*
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
C-1
<PAGE> 42
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
Registration fees........................................... $39,491
Nasdaq National Market System listing fee................... *
Printing (other than certificates).......................... *
Engraving and printing certificates......................... *
Fees and expenses of qualification under state securities
laws (including fees of counsel).......................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
NASD fees................................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be furnished by amendment.
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The Trust will be internally managed and will not have an investment
adviser. The information in the Prospectus under the caption "Management and
Administration of the Trust" is incorporated herein by reference.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of the effective date of this Registration Statement:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
DECS representing shares of beneficial interest.......... 1
</TABLE>
ITEM 29. INDEMNIFICATION
The Underwriting Agreement (Exhibit 2(h) to this Registration Statement)
provides for indemnification.
The Amended and Restated Declaration of Trust filed as Exhibit 2(a)(1)(B)
to this Registration Statement provides for indemnification to each Trustee
against any claim or liability incurred in acting as Trustee of the Trust,
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of the Trustee's duties. The Custodian Agreement,
Administration Agreement and Paying Agent Agreement filed as Exhibits 2(j),
2(k)(1) and 2(k)(2) to this Registration Statement provide for indemnification
to the Custodian, Administrator and Paying Agent against any loss or expense
incurred in the performance of their obligations under the respective
agreements, unless such loss or expense is due to willful misfeasance, bad
faith, gross negligence or reckless disregard of their obligations. The Fund
Indemnity Agreement filed as Exhibit 2(k)(6) to this Registration Statement
provides that Smith Barney will indemnify the Trust for certain indemnification
expenses incurred under the Amended and Restated Declaration of Trust, the
Custodian Agreement, the Administration Agreement and the Paying Agent
Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with
C-2
<PAGE> 43
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder are
maintained as follows: journals, ledgers, securities records and other original
records are maintained principally at the offices of the Registrant, c/o Smith
Barney Inc., 388 Greenwich Street, New York, New York 10013 and at the offices
of The Bank of New York, the Registrant's Administrator, Custodian, paying
agent, transfer agent and registrar. All other records so required to be
maintained are maintained at the offices of the Registrant, c/o Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(a) The Registrant hereby undertakes to suspend the offering of the shares
covered hereby until it amends its prospectus contained herein if (1) subsequent
to the effective date of this Registration Statement, its net asset value per
share declines more than ten percent from its net asset value per share as of
the effective date of this Registration Statement or (2) the net asset value per
share increases to an amount greater than its net proceeds as stated in its
prospectus contained herein.
(b) The Registrant hereby undertakes that (i) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
under Rule 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; (ii) for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof.
C-3
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 5th day of March, 1998.
DECS TRUST III
By: /s/ MICHAEL SHERMAN
------------------------------------
Michael E. Sherman
Trustee
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
person, in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MICHAEL SHERMAN Principal Executive Officer, March 5, 1998
- -------------------------------------------------------- Principal Financial Officer,
Michael E. Sherman Principal Accounting Officer
and Trustee
</TABLE>
C-4
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NAME OF EXHIBIT
------- ---------------
<S> <C>
(a)(1)(A) Declaration of Trust dated as of January 22, 1998**
(a)(1)(B) Amended and Restated Declaration of Trust dated as of
, 1998*
(a)(2)(A) Certificate of Trust dated January 22, 1998**
(a)(2)(B) Restated Certificate of Trust dated March 3, 1998
(b) Not applicable
(c) Not applicable
(d)(1) Form of specimen certificate of DECS (included in Exhibit
2(a)(1)(B))*
(d)(2) Portions of the Amended and Restated Declaration of Trust
defining the rights of Holders of DECS (included in
Exhibit 2(a)(1)(B))*
(e) Not applicable
(f) Not applicable
(g) Not applicable
(h) Form of Underwriting Agreement*
(i) Not applicable
(j) Custodian Agreement dated as of March 3, 1998
(k)(1) Form of Administration Agreement*
(k)(2) Form of Paying Agent Agreement*
(k)(3) Form of Purchase Contract*
(k)(4) Form of Collateral Agreement*
(k)(5) Form of Fund Expense Agreement*
(k)(6) Form of Fund Indemnity Agreement*
(l) Opinion and Consent of Counsel to the Trust*
(m) Not applicable
(n)(1) Tax Opinion of Counsel to the Trust (Consent contained in
Exhibit 2(n)(1))*
(n)(2) Consent of Independent Public Accountants
(n)(3) Consents to being named as Trustee*
(o) Not applicable
(p) Subscription Agreement dated as of March 3, 1998
(q) Not applicable
(r) Financial Data Schedule*
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 2(a)(2)(B)
RESTATED CERTIFICATE OF TRUST
OF
DECS TRUST III
THIS Restated Certificate of Trust of DECS Trust III (the "Trust"),
dated March 3, 1998, is being duly executed and filed by Donald J. Puglisi,
William R. Latham III and James B. O'Neill, as trustees, to restate the
original Certificate of Trust of the Trust which was filed on January 23, 1998
with the Secretary of State of Delaware under the Delaware Business Trust Act
(12 Del. C. Section 3801 et seq.) (the "Original Certificate of Trust").
The Original Certificate of Trust is hereby restated in its entirety
to read as follows:
1. Name. The name of the business trust formed hereby is DECS
Trust III.
2. Registered Office; Registered Agent. The business address of the
registered office of the trust in the State of Delaware is c/o Puglisi &
Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715. The name of
the Trust's registered agent at such address is Puglisi & Associates.
3. Effective Date. This Restated Certificate of Trust will be
effective upon the date and time of filing.
4. The Trust is to be registered under the Investment Company Act of
1940, as amended, prior to the issuance of beneficial interests in the Trust.
IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust,
have executed this Certificate of Trust as of the date first-above written.
/s/ DONALD J. PUGLISI
--------------------------------------
Donald J. Puglisi, as Managing Trustee
/s/ WILLIAM R. LATHAM III
--------------------------------------
William R. Latham III, as Trustee
/s/ JAMES B. O'NEILL
--------------------------------------
James B. O'Neill, as Trustee
<PAGE> 1
Exhibit 2(j)
CUSTODIAN AGREEMENT
This CUSTODIAN AGREEMENT dated as of this 3rd day of March 1998 by and
between The Bank of New York, a New York banking corporation (the "Custodian"),
and DECS Trust III (such trust and the trustees thereof acting in their capacity
as such being referred to herein as the "Trust"), a statutory business trust
organized under the Business Trust Act of the State of Delaware pursuant to a
Declaration of Trust dated as of January 22, 1998 (as it may be amended and
restated from time to time, the "Trust Agreement").
WITNESSETH
WHEREAS the Trust is a non-diversified, closed-end management
investment company, as defined in the Investment Company Act of 1940 (the
"Investment Company Act"), formed to purchase and hold certain U.S. treasury
securities (the "Treasury Securities"), to enter into and hold a forward
purchase contract with one or more existing shareholders of Herbalife
International, Inc. (individually, a "Contract" and collectively, the
"Contracts"), to hold security for the performance of such shareholder of their
obligations under the Contracts pursuant to related collateral agreement (the
"Collateral Agreement") and to issue DECS in accordance with the terms and
conditions of the Trust Agreement;
WHEREAS the Trustees desire to engage the services of the Custodian to
perform certain custodial duties for the Trust; and
WHEREAS the Custodian is qualified and willing to assume such duties on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall
have the respective meanings specified in the Trust Agreement.
2. Appointment of Custodian; Transfer of Assets. The Trust hereby
constitutes and appoints the Custodian, and the Custodian accepts such
appointment, as agent of the Trust and as custodian of all of the property,
including but not limited to, the Contracts, the Treasury Securities, the
Temporary Investments, any cash and any other property at any time owned or held
by the Trust (other than Pledged Items (as defined in the Collateral Agreements)
held by the Collateral Agent thereunder) (collectively, the "Assets"). The Trust
hereby deposits the Assets owned by the Trust on the date hereof with the
Custodian and the Custodian hereby accepts such Assets into its custody, and the
Trust shall deliver to the Custodian all additional Assets, including all
monies, securities and other property, received by the Trust at any time during
the period of this Agreement, subject to the following terms and conditions. The
Custodian hereby agrees that it shall hold the Assets in a segregated custody
account, separate and distinct from all other accounts, in accordance with
Section 17(f) of, and in such manner as shall constitute the
<PAGE> 2
segregation and holding in trust within the meaning of, the Investment Company
Act and the rules and regulations thereunder. The Trust authorizes the
Custodian, for any Assets held hereunder, to use the services of any United
States securities depository permitted to perform such services for registered
investment companies and their custodians under Rule 17f-4 under the Investment
Company Act and which have been approved by the Trust, including but not limited
to, The Depository Trust Company and the Federal Reserve Book Entry System. The
Custodian shall be under no duty or obligation to inspect, review or examine any
Assets to determine that they are genuine, enforceable, or appropriate for the
represented purpose or that they are other than what they purport to be on their
face.
3. Asset Disposition; Examinations. The Custodian shall have no power
or authority to assign, hypothecate, pledge or otherwise dispose of the Assets,
except pursuant to a written direction in accordance with paragraph 4 below and
then only for the account of the Trust. The Assets shall be subject to no lien
or charge of any kind in favor of the Custodian for itself or for any other
Person claiming through the Custodian. The Custodian shall permit actual
examination of the Assets by the Trust's independent public accountant at the
end of each annual and semi-annual fiscal period of the Trust and at least one
other time during the fiscal year of the Trust chosen by such independent public
accountant and shall permit the inspection of the Assets by the Commission
through its employees or agents during the normal business hours of the
Custodian upon reasonable request.
4. Authorized Actions. The Custodian shall take such actions with
respect to the Assets as directed in writing by any Trustee or by any officer of
the Administrator as may be received by the Custodian from time to time.
5. Custodian's Actions Taken In Good Faith. In connection with the
performance of its duties under this Agreement, the Custodian shall have no
duties or obligations other than those specifically set forth herein or in the
Trust Agreement or as may subsequently be agreed in writing by the parties
hereto and shall be under no liability to the Trust or any Holder for any action
taken in good faith in reliance on any paper, order, certification, list,
demand, request, consent, affidavit, notice, opinion, direction, endorsement,
assignment, resolution, draft or other document, prima facie property executed,
or for the disposition of the Assets pursuant to the Trust Agreement or in
respect of any action taken or suffered under the Trust Agreement in good faith,
in accordance with an opinion of counsel or at the direction of the Trustees
pursuant hereto; provided that this provision shall not protect the Custodian
against any liability to which it would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder. Notwithstanding any other provision of this Agreement, the Custodian
shall under no circumstances be liable for any punitive, exemplary, indirect or
consequential damages.
6. Trust Agreement Validity. The Custodian shall not be responsible for
the validity or sufficiency of the Trust Agreement or the due execution thereof,
or for the form, character, genuineness, sufficiency, value or validity of any
of the Assets and the Custodian shall in no event assume or incur any liability,
duty or obligation to any Holder or to the Trustees,
2
<PAGE> 3
other than as expressly provided herein. The Custodian shall not be responsible
for or in respect of the validity of any signature by or on behalf of the
Trustees.
7. Litigation Obligations, Costs and Indemnity. The Custodian shall not
be under any obligation to appear in, prosecute or defend any action which in
its opinion may involve it in expense or liability, unless it shall be furnished
with such reasonable security and indemnity against such expense or liability as
it may require, and any pecuniary costs of the Custodian from such actions shall
be expenses which are reimbursable pursuant to paragraph 13 hereof.
8. Taxes; Trust Expenses. In no event shall the Custodian be personally
liable for any taxes or other governmental charges imposed upon or in respect of
the Assets or upon the monies, securities or other properties included therein.
The Custodian shall be reimbursed and indemnified by the Trust for all such
taxes and charges, for any tax or charge imposed against the Trust and for any
expenses, including counsel fees, interest, penalties and additions to tax which
the Custodian may sustain or incur with respect to such taxes or charges.
9. Custodian Resignation, Succession. (a) The Custodian may resign by
executing an instrument in writing resigning as Custodian and delivering the
same to the Trustees, not less than 60 days before the date specified in such
instrument when, subject to clause (b) of this paragraph 9, such resignation is
to take effect. Upon receiving such notice of resignation, the Trustees shall
use their reasonable efforts promptly to appoint a successor Custodian in the
manner and meeting the qualifications provided in the Trust Agreement, by
written instrument or instruments delivered to the resigning Custodian and the
successor Custodian.
(b) In case no successor Custodian shall have been appointed within 30
days after notice of resignation has been received by the Trustees, the
resigning Custodian may forthwith apply to a court of competent jurisdiction for
the appointment of a successor Custodian. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribed, appoint a successor
Custodian.
10. Custodian Removal. The Trust may remove the Custodian upon 60 days'
prior written notice to the Custodian and appoint a successor Custodian. In case
at any time the Custodian shall not meet the requirements set forth in the Trust
Agreement or shall become incapable of acting or if a court having jurisdiction
shall enter a decree or order for relief in respect of the Custodian in an
involuntary case, or the Custodian shall commence a voluntary case, under any
applicable bankruptcy, insolvency, or other similar law now or hereafter in
effect, or any receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) for the Custodian or for any substantial part of its
property shall be appointed, or the Custodian shall make any general assignment
for the benefit of creditors, or shall generally fail to pay its debts as they
become due, the Trust may remove the Custodian immediately and appoint a
successor Custodian. The termination of the Administration Agreement or the
Paying Agent Agreement shall cause the removal of the Custodian simultaneously
therewith.
3
<PAGE> 4
11. Transfers to Successor Custodian. Upon the request of any successor
Custodian, the Custodian hereunder shall, upon payment of all amounts due it,
execute and deliver an instrument acknowledged by it transferring to such
successor Custodian all the rights and powers of the retiring Custodian; and the
retiring Custodian shall transfer, deliver and pay over to the successor
Custodian the Assets at the time held by it hereunder, if any, together with all
necessary instruments of transfer and assignment or other documents property
executed necessary to effect such transfer and such of the records or copies
thereof maintained by the retiring Custodian in the administration hereof as may
be requested by the successor Custodian, and shall thereupon be discharged from
all duties and responsibilities hereunder. Any resignation or removal of the
Custodian shall become effective upon such acceptance of appointment by the
successor Custodian. The indemnification of the resigning Custodian provided for
hereunder shall survive any resignation, discharge or removal of the Custodian
hereunder.
12. Custodian Merger, Consolidation. Any corporation into which the
Custodian may be merged or converted or with which it may be consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Custodian shall be a party, shall be the successor Custodian hereunder and
under the Trust Agreement without the execution or filing of any paper,
instrument or further act to be done on the part of the parties hereto or
thereto, provided that such corporation meets the requirements set forth in the
Trust Agreement.
13. Compensation; Expenses. The Custodian shall receive compensation
for performing the usual, ordinary, normal and recurring services under this
Custodian Agreement and, with the prior written approval of the Trust,
reimbursement for any and all expenses and disbursements incurred hereunder, as
provided in Section 3.1 of the Administration Agreement.
14. Section 17(f) Qualification. The Custodian hereby represents that
it is qualified to act as a custodian under Section 17(f) of the Investment
Company Act.
15. Custodian's Limited Liability. The Trust shall indemnify and hold
the Custodian harmless from and against any loss, damages, cost or expense
(including the costs of investigation, preparation for and defense of legal
and/or administrative proceedings related to a claim against it and reasonable
attorneys' fees and disbursements), liability or claim incurred by reason of any
inaccuracy in information furnished to the Custodian by the Trustees, or any act
or omission in the course of, connected with or arising out of any services to
be rendered hereunder, provided that the Custodian shall not be indemnified and
held harmless from and against any such loss, damages, cost, expense, liability
or claim arising from its willful misfeasance, bad faith or gross negligence in
the performance of its duties, or its reckless disregard of its duties and
obligations hereunder. Neither the Federal Reserve Book Entry System nor the
Depository Trust Company shall be deemed to be agents of the Custodian.
16. Rights of Set-Off; Banker's Lien. The Custodian hereby waives all
rights of set-off or banker's lien it may have with respect to the Assets held
by it as Custodian hereunder.
17. Termination. This Agreement shall terminate upon the earlier of the
termination of the Trust or the appointment of a successor Custodian.
4
<PAGE> 5
18. Choice of Law. This Agreement is executed and delivered in the
State of New York, and all laws or rules of construction of the State of New
York shall govern the right of the parties hereto and the interpretation of the
provisions hereof.
19. Notices. Any notice to be given to the Trust hereunder shall be in
writing and shall be duly given if mailed or delivered to DECS Trust III, c/o
Michael E. Sherman, Salomon Brothers Inc, Seven World Trade Center, New York,
New York 10048, Tel. (212) 723-7918, Fax. (212) 723-2311, and to the Custodian
if mailed or delivered to The Bank of New York, 101 Barclay Street, Floor 12E,
New York, New York 10286, Attention: Mark G. Walsh, Tel.: (212) 815-5228, Fax:
(212) 815-7157 or at such other address as shall be specified by the addressee
to the other party hereto in writing.
20. No Third Party Beneficiaries. Nothing herein, express or implied,
shall give to any Person, other than the Trust, the Custodian and their
respective successors and assigns, any benefit of any legal or equitable right,
remedy or claim hereunder.
21. Amendments; Trust Agreement Changes; Waiver. This Agreement shall
not be deemed or construed to be modified, amended, rescinded, canceled or
waived, in whole or in part, except by a written instrument signed by a duly
authorized representative of the party to be charged. The Trustees shall notify
the Custodian of any change in the Trust Agreement prior to the effective date
of any such change. Failure of either party hereto to exercise any right or
remedy hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.
22. Counterparts. This Agreement may be signed in counterparts with all
counterparts constituting one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
DECS TRUST III
By: /s/ Michael Sherman
-------------------------------------
Michael E. Sherman
as Trustee
The Bank of New York
By: /s/ Betty A. Cocozza
-------------------------------------
Name: Betty A. Cocozza
Title: Assistant Vice-President
5
<PAGE> 1
Exhibit 2(n)(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Registration Statement of DECS Trust III on
Form N-2 filed with the Securities and Exchange Commission on or about March 5,
1998 of our report dated March 4, 1998 on our audit of the Statement of Assets,
Liabilities and Capital of DECS Trust III as of March 3, 1998. We also consent
to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
New York, New York
March 4, 1998
<PAGE> 1
Exhibit 2(p)
SUBSCRIPTION AGREEMENT
This SUBSCRIPTION AGREEMENT dated as of the 3rd day of March, 1998, is
entered into between DECS Trust III, a statutory business trust organized under
the Business Trust Act of the State of Delaware (such trust and the trustees
thereof acting in their capacity as such being referred to herein as the
"Trust"), and Smith Barney Inc. (the "Purchaser").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of the DECS.
1.1. Sale and Issuance of DECS. Subject to the terms and conditions of
this Agreement, the Trust agrees to sell to the Purchaser, and the Purchaser
agrees to purchase from the Trust, one DECS (the "Subscription DECS"),
representing an undivided beneficial interest in the Trust, at a purchase price
of $100.00.
1.2. Closing. The purchase and sale of the Subscription DECS shall take
place at the offices of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza,
New York, New York 10006 at 10:00 a.m., on March 3, 1998, or at such other time
(the "Closing Date") and place as the Trust and the Purchaser mutually agree
upon. At or after the Closing Date, the Trust shall deliver to the Purchaser a
certificate representing the Subscription DECS, registered in the name of the
Purchaser or its nominee. Payment for the Subscription DECS shall be made on the
Closing Date by the Purchaser by bank wire transfer or by delivery of a
certified or official bank check, in either case in immediately available funds,
of an amount equal to the purchase price of the Subscription DECS.
2. Representations, Warranties and Covenants of the Purchaser. The
Purchaser hereby represents and warrants to, and covenants for the benefit of,
the Trust that:
2.1. Purchase Entirely for Own Account. This Agreement is made by the
Trust with the Purchaser in reliance upon the Purchaser's representation to the
Trust, which by the Purchaser's execution of this Agreement the Purchaser hereby
confirms, that the Subscription DECS are being acquired for investment for the
Purchaser's own account, and not as a nominee or agent and not with a view to
the resale or distribution by the Purchaser of such Subscription DECS, and that
the Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing such Subscription DECS, in either case in
violation of any securities registration requirement under applicable law, but
subject nevertheless to any requirement of law that the disposition of its
property shall at all times be within its control. By executing this Agreement,
the Purchaser further represents that the Purchaser does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person, or to any third person, with respect to any of the
Subscription DECS.
2.2. Investment Experience. The Purchaser acknowledges that it can bear the
economic risk of the investment for an indefinite period of time and has such
knowledge and
<PAGE> 2
experience in financial and business matters (and particularly in the business
in which the Trust operates) as to be capable of evaluating the merits and risks
of the investment in the Subscription DECS. The Purchaser is an "accredited
investor" as defined in Rule 501(a) of Regulation D under the Securities Act of
1933 (the "Act").
2.3. Restricted Securities. The Purchaser understands that the
Subscription DECS are characterized as "restricted securities" under the United
States securities laws inasmuch as they are being acquired from the Trust in a
transaction not involving a public offering and that under such laws and
applicable regulations such Subscription DECS may be resold without registration
under the Act only in certain circumstances. In this connection, the Purchaser
represents that it understands the resale limitations imposed by the Act and is
generally familiar with the existing resale limitations imposed by Rule 144
under the Act.
2.4. Further Limitations on Disposition. The Purchaser further agrees
not to make any disposition directly or indirectly of all or any portion of the
Subscription DECS unless and until:
(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) The Purchaser shall have furnished the Trust with an opinion of
counsel, reasonably satisfactory to the Trust, that such disposition
will not require registration of such Subscription DECS under the Act.
(c) Notwithstanding the provisions of subsections (a) and (b) above, no
such registration statement or opinion of counsel shall be necessary
for a transfer by the Purchaser to any affiliate of the Purchaser, if
the transferee agrees in writing to be subject to the terms hereof to
the same extent as if it were the original Purchaser hereunder.
2.5. Legends. It is understood that the certificate evidencing the
Subscription DECS may bear either or both of the following legends:
(a) "These securities have not been registered under the Securities Act
of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
reasonably satisfactory to the Trustee of DECS Trust III that such
registration is not required."
(b) Any legend required by the laws of any other applicable
jurisdiction.
2
<PAGE> 3
The Purchaser and the Trust agree that the legend contained in
paragraph (a) above shall be removed at a holder's request when it is no longer
necessary to ensure compliance with federal securities laws.
2.6. Amendment to Declaration of Trust; Split of DECS. The Purchaser
consents to (a) the execution and delivery by the Trustees and Smith Barney
Inc., as sponsor of the Trust, of an Amended and Restated Declaration of Trust
substantially in the form attached hereto and (b) the split of the Subscription
DECS subsequent to the determination of the public offering price per DECS and
related underwriting discount for the DECS to be sold to the Underwriter (as
defined in such Amended and Restated Declaration of Trust) but prior to the sale
of the DECS to the Underwriter into a greater number of DECS so that immediately
following such split the value of the Subscription DECS will equal the aforesaid
public offering price per DECS.
2.7. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
2.8. Governing Law. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of New York applicable
to agreements made and to be performed wholly within such state.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DECS TRUST III
By /s/ Michael Sherman
-----------------------------
Michael E. Sherman, as Trustee
SMITH BARNEY INC.
By /s/ James C. Cowles
-----------------------------
Name: James C. Cowles
Title: Managing Director
3
