<PAGE> 1
SCHEDULE 14A INFORMATION
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of
the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 14a-11(c) or 14a-12
---- ----
HERBALIFE INTERNATIONAL, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
---------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
[LOGO]
HERBALIFE INTERNATIONAL, INC.
November 17, 1997
Dear Shareholder:
In order to provide additional financial flexibility for both our Company
and for you, our shareholders, the Board of Directors of Herbalife
International, Inc. (the "Company") has adopted three proposals.
These proposals, which are summarized in this letter and explained in
greater detail in the enclosed Proxy Statement, are subject to the approval of
the Company's shareholders, and will be the subject of a special meeting of
shareholders to be held at 6:00 p.m. on December 11, 1997 (the "Meeting") at the
Beverly Hilton Hotel, 9876 Wilshire Boulevard, Beverly Hills, California 90210.
Mr. Mark Hughes, the Company's founder and majority shareholder, has indicated
his intent to vote in favor of the three proposals.
Shareholder approval of the first proposal, the "Recapitalization," will
result in:
-- a one-for-three reverse split of the Company's common stock, $.01
par value (the "Old Common Stock");
-- a reclassification of each resulting whole share of Old Common
Stock as a share of new "Class A Common Stock";
-- the creation of a new class of non-voting common stock, to be
designated as "Class B Common Stock"; and
-- a dividend of two shares of Class B Common Stock for each share of
Class A Common Stock, payable immediately following the reclassification of
Old Common Stock as Class A Common Stock.
The total number of shares of stock in the Company after the
Recapitalization will not change, except that fractional shares of stock
resulting from the reverse stock split will be cancelled in exchange for cash.
The Class A Common Stock will have one vote per share, and the Class B
Common Stock will be non-voting, except to the extent such class is entitled to
vote as a matter of law. The Class A Common Stock and the Class B Common Stock
will otherwise have substantially identical rights, except that the Board of
Directors will have discretion to pay higher dividends on the Class B Common
Stock than on the Class A Common Stock.
The Recapitalization proposal contains a "minority protection" feature
which provides that the Class B Common Stock, under certain circumstances, will
have the opportunity to participate in any premium paid in the future for a
significant block (10% or more) of the Class A Common Stock by a buyer who has
not acquired a proportionate share of the Class B Common Stock.
The following example provides an illustration of the effect of the
Recapitalization:
If you currently own 100 shares of the Company's common stock, then
following the Recapitalization, you will own 33 shares of Class A
Common Stock and 66 shares of Class B Common Stock, and will receive
cash (in lieu of fractional shares) with respect to one share of Old
Common Stock.
All shareholders are treated equally in the Recapitalization proposal.
A Special Committee of the Company's Board of Directors, consisting of all
of the Company's non-management directors, unanimously recommended adoption of
the Recapitalization proposal to the Company's Board of Directors. In adopting
the Recapitalization proposal, the Board of Directors determined that the
Recapitalization is in the best interests of the Company and its shareholders
because:
-- The Recapitalization will help maintain continuity in the Company's
management and strategy and will help preserve the Company's relationship
with its independent distributors; and
<PAGE> 3
-- The Recapitalization will give the Company greater flexibility to
use equity in future acquisitions, financings and employee benefit plans.
The Board of Directors believes that the advantages of the Recapitalization
outweigh any of the potential disadvantages, and is therefore soliciting your
proxy in favor of the adoption of the Recapitalization.
The Board of Directors is also soliciting your proxy with respect to two
other proposals which provide for amendments to the Company's second Amended and
Restated 1994 Performance-Based Annual Incentive Compensation Plan and to the
Amended and Restated 1991 Stock Option Plan to reflect the effect of the
Recapitalization.
The Recapitalization Proposal and the proposed amendments to the Company's
Amended and Restated 1994 Performance-Based Annual Incentive Compensation Plan
and Amended and Restated 1991 Stock Option Plan are described in greater detail
in the enclosed Proxy Statement. The Proxy Statement is being furnished in
connection with the solicitation of proxies by the Board of Directors. You are
urged to read the Proxy Statement carefully.
The Board of Directors has fixed November 5, 1997 as the record date for
the determination of shareholders entitled to vote at the Meeting and only
holders of record of shares of the Company's Old Common Stock at the close of
business on that day will be entitled to receive notice of and to vote at the
Meeting.
All shareholders are cordially invited to attend the Meeting. It is
important that your shares be represented and voted at the Meeting, regardless
of whether you intend to attend in person. Please sign, date and promptly return
the enclosed proxy card in the envelope provided.
Sincerely,
/s/ CHRISTOPHER PAIR
CHRISTOPHER PAIR
Secretary
<PAGE> 4
[LOGO]
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST, LOS ANGELES, CA 90067
(310) 410-9600 FAX: (310) 557-3929
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 11, 1997
A Special Meeting of Shareholders of Herbalife International, Inc., a
Nevada corporation (the "Company"), will be held beginning at 6 p.m. on December
11, 1997 at the Beverly Hilton Hotel, 9876 Wilshire Boulevard, Beverly Hills,
California 90210, to consider and vote on the following matters:
1. To consider and act upon a proposal to amend and restate the Company's
Articles of Incorporation, as amended (the "Articles"), which amendment
and restatement (the "Amendment") shall have the following effects: (i)
effecting a one-for-three reverse split of the Company's common stock,
$.01 par value (the "Old Common Stock"), (ii) reclassifying each
resulting whole share of Old Common Stock as a share of new "Class A
Common Stock," such newly designated class consisting of 33,333,333
authorized shares, $0.01 par value, (iii) creating a new class of
non-voting common stock, to be designated as "Class B Common Stock",
consisting of 66,666,667 authorized shares, $0.01 par value, and (iv)
fixing and establishing the relative rights, powers and limitations of
the Class A Common Stock and Class B Common Stock (collectively referred
to as the "Common Stock");
2. Subject to the approval of the proposal in paragraph 1 above, to
consider and act upon a proposal to approve amendments to the Company's
Amended and Restated 1991 Stock Option Plan;
3. Subject to the approval of the proposal in paragraph 1 above, to
consider and act upon a proposal to approve amendments to the Company's
Amended and Restated 1994 Performance-Based Annual Incentive
Compensation Plan; and
4. Such other business as may properly come before said Special Meeting or
any adjournment or postponement thereof (the "Meeting").
November 5, 1997 has been fixed as the record date for determining
shareholders entitled to vote at the Meeting, and only holders of record of
shares of the Company's Old Common Stock at the close of business on that day
will be entitled to receive notice of and to vote at the Meeting.
All shareholders are cordially invited to attend the Meeting. To insure
your representation at the Meeting, whether or not you plan to attend, you are
urged to complete and promptly return the enclosed proxy, which is solicited by
the Board of Directors, in the return envelope provided. Returning your proxy
does not deprive you of your right to attend the Meeting and to vote your shares
in person, should you desire to do so.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ CHRISTOPHER PAIR
CHRISTOPHER PAIR
Secretary
Dated: November 17, 1997
PLEASE DATE AND SIGN THE ACCOMPANYING PROXY CARD
AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE> 5
HERBALIFE INTERNATIONAL, INC.
------------------------
PROXY STATEMENT
------------------------
NOVEMBER 17, 1997
GENERAL INFORMATION
This Proxy Statement is first being mailed on or about November 17, 1997 to
all of the holders of shares of the common stock, $.01 par value (the "Old
Common Stock") of Herbalife International, Inc., a Nevada corporation (the
"Company"), in connection with the solicitation by the Board of Directors of the
Company of proxies in the enclosed form to be used at the Special Meeting of
Shareholders to be held on December 11, 1997 beginning at 6:00 p.m. at the
Beverly Hilton Hotel, 9876 Wilshire Boulevard, Beverly Hills, California 90210,
and at any adjournment or postponement thereof (the "Meeting"), pursuant to the
accompanying Notice of Special Meeting.
Shares represented by a properly executed proxy will be voted as indicated
on the proxy. The form of proxy accompanying this Proxy Statement and the
persons named therein as proxies have been approved by the Board of Directors of
the Company. Any proxy given pursuant to this solicitation is revocable at any
time prior to the voting at the Meeting by (i) notice in writing delivered to
the Secretary of the Company; (ii) submitting a subsequently dated proxy; or
(iii) attending the Meeting, withdrawing the proxy, and voting in person.
It is proposed that at the Meeting action will be taken on the matters set
forth in the accompanying Notice of Meeting and described in this Proxy
Statement. The Board of Directors knows of no other matters which may properly
be presented for action at the Meeting. If any other matters do properly come
before the Meeting, the persons named on the enclosed proxy will have
discretionary authority to vote thereon in accordance with their best judgment.
When proxies in the form accompanying this Proxy Statement are returned
properly executed, the shares represented thereby will be voted as indicated
thereon, and where a choice has been specified by the shareholder on the proxy,
the shares will be voted in accordance with the specification so made. The
expense of soliciting proxies, including the cost of preparing, assembling, and
mailing the material submitted herewith, will be paid for by the Company. In
addition to solicitations by mail, directors, officers and regular employees of
the Company may solicit proxies personally or by telephone, mail, or other
means, for which no compensation shall be paid other than their regular salary
or other usual compensation. Arrangements will also be made as appropriate with
banks, brokerage houses, and other custodians, nominees, and fiduciaries to
forward solicitation materials to the beneficial owners of stock held of record
by such persons, and the Company will, upon request, reimburse said persons for
their reasonable expenses in so doing.
OUTSTANDING SHARES AND VOTING RIGHTS
At the close of business on November 5, 1997, there were outstanding and
entitled to vote at the Meeting 30,652,155 shares of Old Common Stock of the
Company. Each share of Old Common Stock outstanding on such date entitles the
shareholder of record to one vote on all matters submitted at the Meeting.
The presence in person or by proxy of shareholders entitled to cast a
majority of all the votes entitled to be cast will constitute a quorum for the
transaction of business at the Meeting.
<PAGE> 6
PROPOSAL 1
APPROVAL OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
GENERAL INFORMATION
The Board of Directors of the Company has determined that it is in the best
interests of the Company and its shareholders to amend and restate, subject to
certain conditions as more fully explained herein, the Company's Restated
Articles of Incorporation, as amended (the "Articles") and recommends the
approval of the proposed Amended and Restated Articles of Incorporation (the
"New Articles"). The New Articles reflect changes from the Company's current
Articles, which changes are referred to herein as the "Amendments." The
following summary of the Amendments and the various provisions of the Amendments
contained within this Proxy Statement should be read in conjunction with, and
are qualified in their entirety by reference to, the complete text of the New
Articles which are attached hereto as Exhibit A.
A reverse split amendment (the "Reverse Split Amendment") would effect a
one-for-three reverse split (the "Reverse Split") of the Old Common Stock.
Additional amendments ("Reclassification Amendments") would: (i) reclassify each
whole share of Old Common Stock as a share of new "Class A Common Stock," such
newly designated class consisting of 33,333,333 authorized shares, $0.01 par
value; (ii) create a new class of non-voting common stock, to be designated as
"Class B Common Stock," consisting of 66,666,667 authorized shares, $0.01 par
value; and (iii) fix and establish the relative rights, powers and limitations
of the Class A Common Stock and Class B Common Stock (collectively, the "Common
Stock").
The Board of Directors has directed that the New Articles be submitted to a
vote of the shareholders, and has fixed the close of business on November 5,
1997, as the record date for determining the shareholders entitled to notice of,
and to vote at, the Meeting or at any adjournment thereof. Pursuant to Nevada
law, votes representing a majority of the issued and outstanding Old Common
Stock must be cast in favor of the New Articles in order for the New Articles to
be adopted. Shareholders who abstain or fail to return a valid and properly
signed proxy on or prior to action being taken at the Meeting will not be deemed
to have approved the adoption of the New Articles. Broker abstentions and
non-votes will have the effect of a vote against the adoption of the New
Articles. THE BOARD OF DIRECTORS RECOMMENDS THAT ALL SHAREHOLDERS VOTE FOR THE
ADOPTION OF THE NEW ARTICLES. Mr. Hughes, who is the beneficial owner of
approximately 55% of the issued and outstanding Old Common Stock, has indicated
that he will vote in favor of the adoption of the New Articles.
Subject to shareholder approval of the New Articles, as noted above, the
New Articles will become effective upon filing with the Secretary of State of
Nevada, which filing is expected to occur as soon as practicable following the
date of the Meeting. The date on which the filing occurs is referred to as the
"Effective Date." The Board of Directors has conditioned the submission of the
New Articles upon the right, even if the shareholders approve the New Articles,
to defer or to abandon the filing of the New Articles altogether if, in its
business judgment, such a filing is no longer in the best interests of the
Company and its shareholders. The Company will notify shareholders if the filing
of the New Articles is abandoned.
The Board of Directors also intends to declare, subject to shareholder
approval of and filing of the New Articles, a stock dividend of two shares of
Class B Common Stock for each share of newly reclassified Class A Common Stock
to each holder of record of Class A Common Stock on the Effective Date (the
"Dividend"). The adoption of the New Articles and the declaration and payment of
the Dividend is sometimes referred to herein as the "Recapitalization," and the
proposal to consummate the Recapitalization is sometimes referred to herein as
the "Recapitalization Proposal."
On the Effective Date, each outstanding share of Old Common Stock will
automatically be converted into, and the certificate therefor will be deemed to
represent, one-third of one share of Old Common Stock. No fractional shares of
Old Common Stock will be issued in connection with the Reverse Split. Instead,
each fractional share resulting from the one-for-three reverse stock split will
be converted into the right to receive, upon surrender of certificates
evidencing the Old Common Stock as provided below, cash in an amount equal to
the greater of (i) the average closing sale price of a share of Old Common Stock
on the NASDAQ
2
<PAGE> 7
National Market System for the fifteen trading days immediately preceding the
Effective Date, and (ii) the closing sale price of a share of Old Common Stock
on the NASDAQ National Market System on the trading day immediately preceding
the Effective Date.
Immediately following the Reverse Split, each whole share of Old Common
Stock resulting from the Reverse Split will automatically be reclassified,
changed and converted into one share of Class A Common Stock. Each record owner
of one such whole share of Old Common Stock after the Reverse Split will become
the record owner of one share of Class A Common Stock and, upon payment of the
Dividend, two shares of Class B Common Stock. The Old Common Stock certificates
will no longer specify the correct designation, par value or number of shares,
and the Old Common Stock will cease to exist and will not be transferred on the
books of the Company.
The following example provides an illustration of the effect of the
Recapitalization. If a shareholder owns 100 shares of Old Common Stock, then
following the Recapitalization, such shareholder would own 33 shares of Class A
Common Stock, 66 shares of Class B Common Stock, and the right to receive cash
(in lieu of fractional shares) with respect to one share of Old Common Stock.
As soon as practicable after the effectiveness of the Amendments and the
payment of the Dividend, U.S. Stock Transfer Corporation, the Company's transfer
agent, will mail to each record holder of Old Common Stock on the Effective Date
a letter of transmittal (the "Transmittal Letter"). New certificates
representing the Class A Common Stock, certificates representing the Class B
Common Stock issuable pursuant to the Dividend and checks representing payment
in lieu of fractional shares will be issued to the record holders of Old Common
Stock who deliver properly executed Transmittal Letters accompanied by their
certificates representing shares of Old Common Stock. Shareholders should
surrender certificates representing Old Common Stock only after they have
received the Transmittal Letter, and then only in accordance with the
instructions contained in the Transmittal Letter.
DESCRIPTION OF THE CLASS A AND CLASS B COMMON STOCK
As indicated above, the Reclassification Amendments will automatically
reclassify, change and convert each three whole shares of the Old Common Stock,
after the Reverse Split, into one whole share of Class A Common Stock and create
a new Class B Common Stock. Except as set forth in the following summary, the
Class A Common Stock and the Class B Common Stock will have rights, powers and
limitations identical to those of the Old Common Stock. The rights, powers and
limitations of the Class A Common Stock and the Class B Common Stock are set
forth in full in the New Articles. The following summary, therefore, should be
read in conjunction with, and is qualified in its entirety by reference to, the
full text of the New Articles, a copy of which is attached hereto as Exhibit A.
Voting. Under the Articles as now in effect, each share of Old Common Stock
has one (1) vote per share on all matters, and holders of Old Common Stock are
entitled to vote for the election of directors and on all other matters
submitted to the shareholders of the Company. After the Amendments, each share
of Class A Common Stock will entitle the holder thereof to one vote on all
matters submitted to the shareholders, including the election of directors. Each
share of Class B Common Stock will have no voting rights, except as otherwise
provided in the New Articles and as required by the Nevada Revised Statutes
("NRS"). The New Articles, upon effectiveness, will provide that holders of
Class B Common Stock will be entitled to vote separately as a class with respect
to amendments to the New Articles that alter or change any preference or any
relative or other right of the holders of Class B Common Stock. The NRS provide
that the holders of Class B Common Stock also will be entitled to vote
separately as a class with respect to (i) a plan of merger if the plan contains
a provision that, if contained in a proposed amendment to the New Articles,
would entitle the holders of the Class B Common to vote as a class on the
proposed amendment, and (ii) a plan of exchange, if Class B Common Stock is
included in the exchange.
The Recapitalization Proposal will not affect the relative voting power of
the holders of Old Common Stock (except that the voting power of the holders of
a number of shares of Old Common Stock which is not an integral multiple of
three will be reduced slightly by the elimination of fractional shares created
as a result
3
<PAGE> 8
of the Reverse Split). See "Certain Other Effects of the Recapitalization
Proposal -- Effect on Relative Voting Power."
Dividends and Other Distributions. Each share of Class A Common Stock and
Class B Common Stock would be equal in respect to dividends and other
distributions in cash, stock or property (including distributions in connection
with any recapitalization and upon liquidation, dissolution or winding up of the
Company), except as described below. Dividends or other distributions payable on
the Common Stock in shares of capital stock of the Company would be made to all
holders of Common Stock and may be made (i) in shares of Class B Common Stock to
the holders of Class A Common Stock and to the holders of Class B Common Stock,
(ii) in shares of Class A Common Stock to the holders of Class A Common Stock
and in shares of Class B Common Stock to the holders of Class B Common Stock, or
(iii) in any other authorized class or series of capital stock to the holders of
both classes of Common Stock. In no event would either Class A Common Stock or
Class B Common Stock be split, subdivided or combined unless the other is
proportionately split, subdivided or combined. Dividends or other distributions
that are payable in cash or property (except for a distribution in liquidation)
to the Class B Common Stock would be equal, or in the Board's discretion,
greater than those payable to the Class A Common Stock.
Merger or Consolidation. Each holder of Class B Common Stock will be
entitled to receive the same per share consideration as the per share
consideration, if any, received by any holder of the Class A Common Stock in a
merger or consolidation of the Company (whether or not the Company is the
surviving corporation).
Conversion Rights. Neither the Class A Common Stock nor the Class B Common
Stock will be convertible into another class of Common Stock or any other
security of the Company, except that (i) the outstanding Class B Common Stock
will automatically convert into Class A Common Stock on a share-for-share basis
if at any time the aggregate number of outstanding shares of Class A Common
Stock is less than 10% of the aggregate number of shares of outstanding Class A
Common Stock and Class B Common Stock together, or (ii) the outstanding Class B
Common Stock could be converted into Class A Common Stock on a share-for-share
basis by the Board of Directors if, as a result of the existence of the Class B
Common Stock, either class of Common Stock becomes excluded from trading on all
principal national securities exchanges and also is excluded from quotation on
the NASDAQ National Market System and any other comparable national quotation
system then in use. In making the determination for (ii) above, the Board may
conclusively rely on any information or documentation available to it, including
filings made with the Securities and Exchange Commission (the "SEC"), any stock
exchange, the National Association of Securities Dealers, Inc. (the "NASD") or
any other governmental or regulatory agencies or any written instrument
purporting to be authentic. Upon such conversion, the voting interests of the
holders of Class A Common Stock would be diluted. In addition, to the extent
that the Class A Common Stock has a market price which is higher than the Class
B Common Stock market price immediately prior to such conversion, the market
price of the Class A Common Stock may be decreased as a result of such
conversion.
Class B Protection Provision. Currently, any person or group that acquires
Old Common Stock acquires an equal voting and equity interest in the Company.
After the implementation of the Recapitalization Proposal, voting rights
disproportionate to equity ownership could be acquired through acquisitions of
Class A Common Stock without proportionate acquisitions of Class B Common Stock.
In order to reduce the economic reasons for the Class A Common Stock and the
Class B Common Stock to trade at disparate market prices and to give all holders
the opportunity to participate in any premium paid in the future for a
significant block (10% or more) of the Class A Common Stock by a buyer who has
not acquired a proportionate share of the Class B Common Stock, the New Articles
include a feature referred to herein as the "Class B Protection Provision," as
summarized below.
If, after the Effective Date, (A) any person or group (other than the
Company) acting in concert acquires beneficial ownership of shares representing
10% or more of the then issued and outstanding shares of Class A Common Stock
(excluding (i) shares of Class A Common Stock beneficially owned by such person
or group which were received as a result of the conversion of Old Common Stock
beneficially owned by such person or group immediately prior to the Effective
Date and (ii) shares of Class A Common Stock of which beneficial ownership was
acquired by such person or group by the issuance or sale by the corporation, by
4
<PAGE> 9
operation of law, by will or the laws of descent and distribution, by gift or by
foreclosure of a bona fide loan or in connection with a marital dissolution)
(collectively, the exclusions described in clauses (i) and (ii) are referred to
as "Excluded Acquisitions"), and (B) the percentage of all issued and
outstanding shares of Class B Common Stock owned by such person or group is less
than the percentage of all issued and outstanding shares of Class A Common Stock
owned by such group or person (a "Significant Shareholder") at such time, such
Significant Shareholder must, within a 90 day period beginning the day after
becoming a Significant Shareholder, make a public tender offer to acquire
additional shares of Class B Common Stock (a "Class B Protection Transaction").
For purposes of this Class B Protection Provision "beneficial ownership" and
"group" have the meanings of such terms as used in Regulation 13D promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
In a Class B Protection Transaction, the Significant Shareholder must offer
to acquire from the holders of the Class B Common Stock that number of shares of
additional Class B Common Stock determined by (i) multiplying the percentage of
outstanding Class A Common Stock owned by such Significant Shareholder by the
total number of shares of Class B Common Stock outstanding on the date such
person or group became a Significant Shareholder, and (ii) subtracting therefrom
the total number of shares of Class B Common Stock owned by such Significant
Shareholder on such date. The Significant Shareholder must acquire all shares
validly tendered or, if the number of shares tendered exceeds the number
determined pursuant to such formula, a pro rata amount from each tendering
holder.
The offer price for any shares required to be purchased by the Significant
Shareholder pursuant to a Class B Protection Transaction would be the greater of
(i) the highest price per share paid by the Significant Shareholder for any
share of Class A Common Stock in the six month period ending on the date such
person or group became a Significant Shareholder or (ii) the highest bid price
of a share of the Class A Common Stock or Class B Common Stock on the NASDAQ
National Market System (or such other quotation system or securities exchange
constituting the principal trading market for either class of Common Stock) on
the date such person or group became a Significant Shareholder.
A Class B Protection Transaction also would be required of any Significant
Shareholder each time that such Significant Shareholder acquires an additional
5% (the next highest integral multiple of 5%, e.g., 15%, 20%, 25%, etc.) of the
then issued and outstanding shares of Class A Common Stock after the Effective
Date (other than through Excluded Acquisitions), if the percentage of all issued
and outstanding shares of Class B Common Stock owned by such Significant
Shareholder at such time is less than the percentage of all issued and
outstanding shares of Class A Common Stock owned by such Significant
Shareholder. Such Significant Shareholder would be required to offer to buy that
number of additional shares prescribed by the formula set forth above, even if a
previous offer resulted in fewer shares of Class B Common Stock being tendered
than such previous offer included.
The requirement to engage in a Class B Protection Transaction is satisfied
by making the requisite offer and purchasing all validly tendered shares, even
if the number of shares tendered is less than the number of shares included in
the required offer. Any Significant Shareholder who fails to make an offer
required or to purchase shares validly tendered, will have the voting rights of
the shares of Class A Common Stock owned by such Significant Shareholder
suspended automatically until consummation of an offer as required or until
divestiture of the shares of Class A Common Stock that triggered the offer
requirement. Neither the Class B Protection Transaction requirement nor the
related result of failing to comply with such requirement applies to any
increase in percentage ownership of Class A Common Stock resulting solely from a
change in the total amount of Class A Common Stock outstanding.
The Class B Protection Provision of the New Articles can be amended in a
manner adversely affecting the holders of Class B Common Stock only if the
amendment is approved by the vote of the holders of a majority of the issued and
outstanding shares of Class B Common Stock.
Preemptive Rights. The Old Common Stock does not carry, and, following the
implementation of the Recapitalization Proposal, the Common Stock will not
carry, any preemptive rights enabling a holder to subscribe for or receive
shares of any class of stock of the Company or any other securities convertible
into shares of any class of stock of the Company.
5
<PAGE> 10
BACKGROUND OF THE RECAPITALIZATION PROPOSAL
In recent years, a number of publicly held companies have adopted capital
structures utilizing two classes of common stock. In reviewing the Company's
capital structure and possible alternatives for its future business plan,
management determined that such a structure, subject to applicable regulatory
limitations, offered the Company a number of possible advantages that outweighed
potential disadvantages, and management recommended to the Board of Directors
that the Company consider adopting a capital structure utilizing two classes of
common stock.
In July, 1997, the Board of Directors of the Company acting by unanimous
written consent, established a Special Committee of the Board of Directors
consisting of the Company's non-management directors, Edward J. Hall, Alan Liker
and Christopher M. Miner, to consider and evaluate a proposal for the Company to
adopt a capital structure with two classes of common stock as a means, among
other things, of enhancing the financial flexibility of the Company and its
shareholders.
On August 7, 1997, the Special Committee met, together with certain members
of management and representatives of counsel to the Company, Irell & Manella LLP
("I&M"), and Salomon Brothers Inc ("Salomon"), financial advisor to the Special
Committee. The Special Committee discussed the importance of the role played by
Mr. Hughes and his management team in connection with the Company's strategy and
vision and the importance of Mr. Hughes in connection with maintaining the
Company's relationship with its worldwide base of independent distributors. The
Special Committee discussed possible methods that the Company could consider (i)
to enhance the Company's flexibility to issue additional equity to fund internal
growth or to conduct acquisitions without adversely impacting the ability of Mr.
Hughes and his management team to continue to control and direct the operations
and strategy of the Company and (ii) to protect against unfair and coercive
offers. The Special Committee requested that Salomon prepare a presentation
regarding potential methods of achieving this goal.
On August 13, 1997, the Special Committee met, together with certain
members of management and representatives of I&M and Salomon. Salomon made a
presentation to the Special Committee relating to different methods of
protecting the Company against unsolicited offers, including a shareholder
rights plan, creation of a classified board, possible charter and bylaw
amendments and a "dual-class" recapitalization which would create two classes of
stock, voting and non-voting. Salomon provided preliminary information regarding
dual-class recapitalization transactions consummated by other companies.
On September 9, 1997, the Special Committee met, together with certain
members of management and representatives of I&M and Salomon. Representatives of
Salomon made a presentation regarding transactions similar to the
Recapitalization that had been adopted by other publicly traded companies, and
discussed the impact that such transactions had on the liquidity and market
value of such companies' stock and on such companies' ability to access the
capital markets. Representatives of I&M discussed with the Special Committee
certain legal aspects associated with dual-class recapitalization transactions,
and noted that the transaction would require the approval of the Company's
shareholders as well as the consent of the NASDAQ Stock Market. The Special
Committee instructed I&M to prepare a draft submission to the NASDAQ Stock
Market regarding a potential recapitalization transaction that could be
discussed by the Special Committee at its next meeting.
On September 15, 1997, a telephonic meeting of the Special Committee was
held, with certain members of management and representatives of I&M and Salomon
present, to discuss the draft submission to the NASDAQ Stock Market. Members of
management presented their comments with respect to the structure of the
transaction described in the draft submission to the NASDAQ Stock Market, and
then left the meeting. The Special Committee discussed and preliminarily
approved the structure of a proposed dual-class recapitalization, and authorized
I&M to send a confidential inquiry to the NASDAQ Stock Market to determine
whether the Company's Common Stock would comply with the NASDAQ Stock Market's
rules regarding voting rights of shares.
On October 23, 1997, the NASDAQ Stock Market informed the Company that the
Recapitalization would not violate the NASDAQ Stock Market's rules regarding
voting rights of shares.
6
<PAGE> 11
On October 28, 1997, a telephonic meeting of the Special Committee was
held, with representatives of I&M and Salomon present. The Special Committee
discussed the NASDAQ Stock Market's response to the Company's inquiry regarding
the Recapitalization. In addition, representatives of Salomon made an initial
presentation regarding Salomon's opinion to be delivered to the Special
Committee in connection with the Recapitalization.
On October 30, 1997, the Special Committee met, together with
representatives of I&M. The Special Committee reviewed the opinion of Salomon as
to the effects of the Recapitalization, subject to certain qualifications,
assumptions and limitations set forth in such opinion, upon the Company's
ability to raise equity capital through an offering or offerings of shares of
common equity and upon the aggregate market value of the Company's common
equity. See "Opinion of Financial Advisor." The Special Committee unanimously
approved the Recapitalization and recommended that the Board of Directors
approve and adopt the Recapitalization. Following the Special Committee Meeting,
the full Board of Directors met, together with representatives of I&M and
Salomon. The Special Committee informed the Board of its recommendation that the
Board of Directors adopt the Recapitalization Proposal. The Board of Directors
discussed and unanimously approved the Recapitalization Proposal, with the
exception of Mr. Hughes, who abstained from voting on the Recapitalization
Proposal.
REASONS FOR THE PROPOSAL; RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
RECAPITALIZATION PROPOSAL.
The Board believes that a capital structure having two classes of common
stock offers a number of potential benefits described below and that adoption of
the Recapitalization Proposal is in the best interests of the Company and all of
its shareholders. The Recapitalization Proposal enables the Company to issue
Class B Common Stock or securities convertible into Class B Common Stock for
financing, acquisition and compensation purposes without adversely affecting the
voting percentage of any shareholder, including Mr. Hughes.
The Board has given due consideration to the Amendments and the
Distribution and has determined that the adoption of the Amendments would be in
the best interests of the Company and its shareholders. The Board of Directors
believes that the Recapitalization Proposal is advantageous to the Company's
long-term growth strategy to the extent that it may favor long-term investors
and may discourage unfair or coercive offers to acquire the Company which might
have an undesirable effect on the Company's business and operations. The Board
suggests that each shareholder carefully read and review the Amendments, the
description of the Amendments and the Distribution and certain effects thereof
which are set forth below.
Acquisition and Financing Flexibility. Implementation of the
Recapitalization Proposal will provide the Company with an additional class
of equity securities that could be used in connection with the acquisition
of businesses.
Implementation of the Recapitalization Proposal also will provide the
Company with increased flexibility in the future to utilize the Class B
Common Stock to fund employee benefit plans (See "Certain Other Effects of
The Recapitalization Proposal -- Employee Plans") and to raise equity
capital or to issue convertible debt or convertible preferred stock as a
means to finance future growth without diluting the voting power of the
Company's existing shareholders. The issuance of the Class B Common Stock
as a result of the Dividend is expected to create a trading market for the
Class B Common Stock, the existence of which can be an important factor in
facilitating any acquisition or financing and in assessing the value of
such stock as an employee benefit. See "Certain Other Effects of the
Recapitalization Proposal -- Trading Market."
The Company has no present plans to issue additional equity securities
or convertible securities in any acquisition or financing transaction after
the implementation of the Recapitalization Proposal. If the Company issues
any shares, it is more likely to issue shares of Class B Common Stock.
Although the Class A Common Stock may trade at a premium with respect to
the Class B Common Stock, as discussed below, the New Articles expressly
permit the Board to issue and sell shares of Class B Common
7
<PAGE> 12
Stock even if the consideration which could be obtained by issuing or
selling Class A Common Stock would be greater.
Shareholder Flexibility. Under the Recapitalization Proposal,
shareholders desiring to maintain their voting positions will be able to do
so even if they decide to sell or otherwise dispose of up to 66 2/3% of
their equity interest in the Company. The Recapitalization Proposal gives
all shareholders, including Mr. Hughes, increased flexibility to dispose of
a portion of their equity interest in the Company for estate planning and
other personal reasons, and otherwise to determine the extent of their
equity ownership without necessarily affecting their relative voting power.
Mr. Hughes has advised the Company that it is his current intention to hold
shares of Class A Common Stock and to sell shares of Class B Common Stock,
if he sells any shares. Mr. Hughes has also informed the Company that,
subject, among other things, to market conditions and personal financial
considerations, he is exploring the possibility of selling a portion of his
shares of Class B Common Stock, and is considering, among other things, a
publicly-underwritten secondary offering of such shares (or a security
exchangeable for such shares) during 1998.
Continuity. Because implementation of the Recapitalization Proposal
would allow Mr. Hughes (i) to continue to exercise control over a majority
of the Company's voting power even if he chooses to reduce his total equity
position significantly, and (ii) to exercise additional estate planning
flexibility by determining the succession of voting control through
bequests of Class A Stock to one or more of his heirs, the adoption of the
Recapitalization Proposal would reduce the risk of a disruption in the
continuity of the Company's long-term plans and objectives that could
otherwise result if Mr. Hughes should find it desirable or necessary to
sell a significant block of stock for diversification, estate planning or
for other reasons. Implementation of the Recapitalization Proposal may
provide a basis for continued pursuit of the Company's long-term plans and
objectives, if and when such circumstances arise, and should reduce the
risk that the Company could at some future date be compelled to consider a
potential acquisition of the Company in an environment that could be
dictated to the Company and the Board by the financial circumstances of Mr.
Hughes or by third parties who may be anticipating or speculating about
such circumstances.
Key Employees. By reducing the uncertainty that could result if Mr.
Hughes should dispose of a significant block of Old Common Stock,
implementation of the Recapitalization Proposal may enhance the ability of
the Company to attract and retain highly qualified key employees.
Implementation of the Recapitalization Proposal should allow all employees
to continue to concentrate on their responsibilities without undue concern
that the future of the Company could be affected by real or perceived
succession issues or an unwanted takeover that could otherwise be triggered
by any substantial divestiture by Mr. Hughes in the future. In addition, as
discussed above, the ability to issue Class B Stock increases the Company's
flexibility in structuring compensation so that key employees may
participate in the growth of the Company.
Business Relationships. Mr. Hughes and the Company's senior management
team have played a key role in the Company's ability to attract and retain
highly motivated individuals to act as distributors of the Company's
products. Implementation of the Recapitalization Proposal may help to
mitigate the uncertainties and risks of disruption of existing and
potential business relationships with distributors and other parties who
may in the future become concerned about changes in control of the Company
in the event that the holdings of Mr. Hughes are ever diluted. The Company
may be less able to attract and retain distributors willing to make
long-term commitments to the Company if the Company is perceived to be
vulnerable to disruptive uncertainty concerning the Company's ownership
succession. The Company's position in this regard is particularly unique
and significant. The Company has hundreds of thousands of distributors
throughout the world, and for many, the personal role of Mr. Hughes and the
Company's senior management team in providing vision and inspiration in the
Company's business is fundamental. A perception that Mr. Hughes and his
management group ceased to control the Company's operations could have a
negative impact on the morale of the distributor base and, as a result, on
the Company's financial results. Thus, the Board has considered that the
Recapitalization Proposal may be particularly important in terms of
preserving and enhancing the Company's worldwide distributor base.
8
<PAGE> 13
Operations. The Proposal allows the Company to maintain continuity of
voting ownership without involving the leverage, asset sales or both that
could otherwise characterize a recapitalization plan, and should not
significantly affect the Company's operations, long-term plans,
debt-to-equity ratio or growth potential.
OPINION OF FINANCIAL ADVISOR
Salomon, acting as the financial advisor to the Special Committee, has
advised the Special Committee that in its opinion, from a financial point of
view and under current market conditions, assuming that the Recapitalization
Proposal was effective on the date of such opinion, the Recapitalization
Proposal would not have a material adverse effect on (i) the Company's ability
to raise equity capital after implementation of the Recapitalization Proposal
through an offering or offerings of common equity as compared with the Company's
ability to raise equity capital through an offering or offerings of common
equity immediately prior to the announcement of the Recapitalization Proposal,
or (ii) the total market value of the Common Stock outstanding after
implementation of the Recapitalization Proposal as compared with the total
market value of the Old Common Stock outstanding immediately prior to the
announcement of the Recapitalization Proposal. The opinion of Salomon (the
"Opinion"), which is subject to certain qualifications, assumptions and
limitations described therein, is set forth as Exhibit B to this Proxy
Statement. SHAREHOLDERS ARE URGED TO READ THE FULL TEXT OF THE OPINION, AND THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH OPINION.
Salomon has consented to the inclusion in this Proxy Statement of the
Opinion and the description of the Opinion contained herein. Salomon has advised
the Board of Directors that, based on an express disclaimer in the engagement
letter dated July 21, 1997, between Salomon and the Company (the "Engagement
Letter"), pursuant to which Salomon was retained to act as financial advisor to
the Special Committee, Salomon does not believe that any person (including a
shareholder of the Company), other than the Company or the Special Committee,
has a legal right to rely upon the Opinion to support any claims against Salomon
under applicable state law and that, should any such claims be brought against
Salomon by any such person, this assertion will be raised as a defense. In the
absence of applicable state law authority, the availability of such a defense
will be resolved by a court of competent jurisdiction. Resolution of the
question of the availability of such a defense, however, will have no effect on
the rights and responsibilities of the Board of Directors under applicable state
law and the availability of such a state law defense to Salomon would not have
any effect on the rights and responsibilities of either Salomon or the Board of
Directors under the federal securities laws.
Salomon has assisted the Special Committee in the development and
consideration of the Recapitalization Proposal. Pursuant to the Engagement
Letter, the Company will pay the following fees to Salomon: (i) $100,000 for
Salomon's initial work (which has been previously paid), (ii) an additional fee
of $200,000, which was earned upon the delivery by Salomon of the Opinion to the
Special Committee (which has not yet been paid), and (iii) an additional fee of
$100,000 upon consummation of the Recapitalization. Salomon will also be
reimbursed by the Company for its expenses. The Company also provided Salomon
with certain indemnities relating to such retention as is typical in the
retention of financial advisors. Salomon has also acted as financial advisor to
the Company with respect to matters unrelated to the Recapitalization Proposal
and has received fees for such services.
CERTAIN POTENTIAL DISADVANTAGES OF THE RECAPITALIZATION PROPOSAL
While the Board of Directors has determined that implementation of the
Recapitalization Proposal is in the best interests of the Company and its
shareholders, the Board recognizes that implementation of the Recapitalization
Proposal may have certain disadvantages, including the following:
Anti-Takeover Effect. Because Mr. Hughes has maintained voting control
over the Company since he founded it, the Company has never found it
necessary to adopt "anti-takeover" measures, and the Articles and By-Laws
of the Company presently contain no such measures. Regardless of whether
the Recapitalization Proposal is implemented, Mr. Hughes will maintain the
ability to keep or dispose of voting control of the Company as he sees fit.
As noted above, however, implementation of the Recapitalization Proposal
will allow Mr. Hughes to (i) continue to exercise control over a majority
of the
9
<PAGE> 14
Company's voting power even if he chooses to reduce his total equity
position by up to approximately 70%, and (ii) exercise additional estate
planning flexibility by determining the succession of voting control
through bequests of Class A Stock to one or more of his heirs. As a
consequence, implementation of the Recapitalization Proposal is likely to
limit the future circumstances in which a sale or transfer of equity by Mr.
Hughes could lead to a merger proposal or tender offer that is not
acceptable to Mr. Hughes, or a proxy contest for the removal of incumbent
directors. Accordingly, adoption of the Amendments might deprive
shareholders of an opportunity to sell their shares at a premium over
prevailing market prices or to replace the Board of Directors and
management. The Company is not aware of any current or planned effort on
the part of any party to acquire control of the Company by means of a
merger, tender offer, solicitation in opposition to management or
otherwise, or to change the Board of Directors or management.
In addition, shareholders should take note of Nevada's "Combinations
with Interested Stock-holders" statute and Nevada's "Acquisition of
Controlling Interest" statute, which could also have the effect of delaying
or making it more difficult to effect a change in control of the Company.
The Combinations with Interested Stockholders statute (NRS sec.sec.
78.411-78.444), which applies to Nevada corporations having at least 200
stockholders, prevents an "interested stockholder" and an applicable Nevada
corporation from entering into a "combination" unless certain conditions
are met. A "combination" means any merger or consolidation with an
"interested stockholder," or any sale, lease exchange, mortgage, pledge,
transfer or other disposition, in one transaction or a series of
transactions, with an "interested stockholder:" (i) having an aggregate
market value equal to 5% or more of the aggregate market value of the
assets of a corporation; (ii) having an aggregate market value equal to 5%
or more of the aggregate market value of all outstanding shares of the
corporation, or (iii) representing 10% or more of the earning power or net
income of the corporation. An "interested stockholder" means a person who,
together with affiliates and associates, beneficially owns (or within the
prior three years, did beneficially own) 10% or more of the voting power of
the corporation. A corporation to which this statute applies may not engage
in a "combination" within three years after the interested stockholder
acquired its shares unless the combination or purchase is approved by the
board of directors before the interested stockholder acquired such shares.
If this approval is not obtained, then after the expiration of the three-
year period, the business combination may be consummated with the approval
of the board of directors or a majority of the voting power held by
disinterested stockholders, or if the consideration to be paid by the
interested stockholder is at least equal to the highest of: (i) the highest
price per share paid by the interested stockholder within the three years
immediately preceding the date of the announcement of the combination or in
the transaction in which it became an interested stockholder, whichever is
higher; (ii) the market value per share of common stock on the date of
announcement of the combination and the date the interested stockholder
acquired the shares, whichever is higher, or (iii) for holders of preferred
stock, the highest liquidation value of the preferred stock, if it is
higher.
The Acquisition of Controlling Interest statute (NRS
sec.sec. 78.378-78.3793) applies only to Nevada corporations with at least
200 stockholders, including at least 100 stockholders of record who are
Nevada residents, and which conduct business directly or indirectly in
Nevada. As of the date of this proxy statement, the Company does not
believe that it has 100 stockholders of record who are residents of Nevada,
although there can be no assurance that in the future the Acquisition of
Controlling Interest statute will not be applicable to the Company.
The Acquisition of Controlling Interest statute prohibits an acquiror,
under certain circumstances, from voting shares of a target corporation's
stock after crossing certain threshold ownership percentages, unless the
acquiror obtains the approval of the target corporation's disinterested
stockholders. The statute specifies three thresholds: one-fifth or more but
less than one-third, one-third but less than majority, and a majority or
more, of the outstanding voting power. Once an acquiror crosses one of the
above thresholds, those shares in an offer or acquisition and acquired
within 90 days thereof become "Control Shares" and such Control Shares are
deprived of the right to vote until disinterested stockholders restore the
right. The Acquisition of Controlling Interest statute also provides that
in the event Control Shares are accorded full voting rights and the
acquiring person has acquired a majority or more of all voting
10
<PAGE> 15
power, all other stockholders who do not vote in favor of authorizing
voting rights to the Control Shares are entitled to demand payment for the
fair value of their shares. The Board of Directors is required to notify
the stockholders as soon as practicable after such an event has occurred
that they have the right to receive the fair value of their shares in
accordance with statutory procedures established generally for dissenter's
rights.
Acquisition Accounting. The use of a Class B Common Stock to effect a
business combination would make such combination ineligible to be accounted
for using the "pooling of interests" method. In order for such method to be
used, the Company would be required to issue Class A Common Stock as the
consideration for the combination.
State Securities Laws. Some state securities statutes contain
provisions which, following the issuance of shares of Class B Common Stock,
may restrict offerings of equity securities by the Company or the secondary
trading of its equity securities in such states. Because of the
availability of applicable exemptions from such restrictions and because
such restrictive provisions would only apply to offers or sales made in a
limited number of states, the Company does not believe that such provisions
will materially adversely affect the aggregate amount of equity securities
which the Company will be able to offer, the price obtainable for its
equity securities in such offerings or the secondary trading market for its
equity securities.
Investment by Institutions. Certain institutional holders may be
prohibited from holding or purchasing Class B Common Stock as a result of
charter provisions or business policies which prohibit such institutions
from investing in securities without voting privileges.
CERTAIN OTHER EFFECTS OF THE RECAPITALIZATION PROPOSAL
Effect on Relative Voting Power. Because the New Articles provide that each
whole share of Old Common Stock outstanding after effectiveness of the Reverse
Split will be reclassified and changed into one share of Class A Common Stock,
and because the Dividend is to be paid to all shareholders in proportion to the
number of shares of Class A Common Stock owned on the Effective Date by each
shareholder, the relative ownership interest and voting power of each holder of
a whole share of Old Common Stock after implementation of the Recapitalization
Proposal will be the same immediately as it was immediately prior thereto
(except that the relative ownership interest and voting power of the holders of
a number of shares of Old Common Stock which is not an integral multiple of
three will be reduced slightly by the elimination of fractional shares created
as a result of the Reverse Split).
Consequently, assuming that Mr. Hughes retains the shares of Class A Common
stock beneficially owned by him and that the Company does not issue additional
Class A Common Stock, the Amendment will not alter Mr. Hughes' present voting
position in the Company.
Shareholders who sell their shares of Class A Common Stock after the
Distribution will lose a greater amount of voting control in proportion to
equity than they would have prior to the Distribution. At the same time,
shareholders desiring to maintain a long-term investment in the Company will be
free to continue to hold the Class A Common Stock and retain the benefits of the
voting power attached to such Common Stock.
As of the date of this Proxy Statement Mr. Hughes has sole or shared voting
or dispositive power over an aggregate of approximately 16,764,000 shares or
approximately 55% of the outstanding Old Common Stock of the Company. If the
Recapitalization is consummated, Mr. Hughes will have sole or shared voting or
disposition power over an aggregate of approximately 5,588,000 shares of
outstanding Class A Common Stock and 11,176,000 shares of outstanding Class B
Common Stock immediately following the Effective Date.
If Mr. Hughes, following the Effective Date, were to sell all of the shares
of Class B Common Stock received in the Distribution, Mr. Hughes would still
have approximately 55% of the voting power assuming no other change. The
foregoing is for illustrative purposes only. It is the present intention of Mr.
Hughes to hold the shares of Class A Common Stock and to dispose of shares of
Class B Common Stock if he disposes of any shares. Mr. Hughes has advised the
Company that it is his current intention to hold shares of Class A
11
<PAGE> 16
Common Stock and to sell shares of Class B Common Stock, if he sells any shares.
Mr. Hughes has also informed the Company that, subject, among other things, to
market conditions and personal financial considerations, he is exploring the
possibility of selling a portion of his shares of Class B Common Stock, and is
considering, among other things, a publicly-underwritten secondary offering of
such shares (or a security exchangeable for such shares) during 1998.
Effect on Market Price. On November 12, 1997, the closing sale price of the
Old Common Stock on the NASDAQ National Market System was $22.125 per share. The
market price of shares of Class A Common Stock and Class B Common Stock after
the effectiveness of the New Articles and payment of the Dividend will depend,
as before the implementation of the Recapitalization Proposal, on many factors,
including among others, the future performance of the Company, general market
conditions and conditions relating to companies in industries similar to that of
the Company. Accordingly, the Company cannot predict the prices at which the
Class A Common Stock and Class B Common Stock will trade following the
effectiveness of the Amendments and the payment of the Dividend. Because of the
large amount of Class B Common Stock being issued to the Company's shareholders,
the Class B Common Stock may trade initially at market prices below those at
which they would trade on a fully distributed basis. Salomon has opined that,
subject to certain qualifications, limitations and assumptions set forth in the
Opinion, the Recapitalization would not have a material adverse effect on the
total market value of the Common Stock outstanding after implementation of the
Recapitalization Proposal as compared with the total market value of the Old
Common Stock outstanding immediately prior to the announcement of the
Recapitalization Proposal. See "Opinion of Financial Advisor" above.
Should a premium on the Class A Common Stock develop, the New Articles
expressly permit the Board to issue and sell shares of Class B Common Stock even
if the consideration which could be obtained by issuing or selling Class A
Common Stock would be greater. The New Articles also expressly permit the Board
to purchase shares of Class A Common Stock even if the consideration which would
be paid by purchasing Class B Common Stock would be less.
Trading Market. Upon effectiveness of the Amendments approximately
10,217,000 shares of Class A Common Stock will be issued and outstanding. After
payment of the Dividend, approximately 20,434,000 shares of Class B Common Stock
will be issued and outstanding.
To minimize dilution of voting power to existing shareholders, the Company
is more likely to issue additional Class B Common Stock than Class A Common
Stock in the future to raise equity, finance acquisitions or fund employee
benefit plans. Furthermore, Mr. Hughes has indicated that he is more likely to
dispose of Class B Common Stock over time than Class A Common Stock. Any such
issuance of additional Class B Common Stock by the Company or dispositions of
Class B Common Stock by Mr. Hughes or other major shareholders may serve to
further increase market activity in Class B Common Stock relative to the Class A
Common Stock.
NASD Criteria. The Old Common Stock is currently traded on the NASDAQ
National Market System and application is being made to trade the Class A Common
Stock and the Class B Common Stock on the NASDAQ National Market System. The
Recapitalization Proposal is intended to comply with the requirements of Rule
19c-4 (the "Rule") adopted in July 1988 by the SEC under the Exchange Act.
Although a federal appellate court has vacated the Rule as a rule of the SEC,
the Rule has been adopted as a standard for quotation on the NASDAQ National
Market System by the NASD. The effect of the Rule is to prohibit the quotation
on the NASDAQ National Market System of equity securities of an issuer if such
issuer "issues any class of security, or takes other corporate action, with the
effect of nullifying, restricting or disparately reducing the per share voting
rights of holders of an outstanding class or classes of common stock of such
issuer. . . ." The purpose of the Rule is to prohibit stock issuances and other
corporate actions that have a "disenfranchising effect" on existing
shareholders.
The NASD has advised the Company that the issuance of nonvoting Class B
Common Stock pursuant to the Recapitalization Proposal would not violate the
NASD's rules and By-Laws, and will be permitted thereunder. The Company
presently anticipates that both the Class A Common Stock and the Class of B
Common Stock will be traded on the NASDAQ National Market System. Future
issuances of shares of
12
<PAGE> 17
Common Stock may be subject to the Rule and the Company may be required to seek
and obtain NASD approval in connection with such issuances.
Potential Changes in Laws or Regulations. In recent years, bills were
introduced in Congress that, if enacted, would have prohibited the registration
of common stock on a national securities exchange or the quoting of such common
stock on NASDAQ if such common stock was part of a class of securities which has
no voting rights or carried disproportionate voting rights. While these bills
have not been acted upon by Congress, there can be no assurance that such a bill
(or a modified version thereof) will not be introduced before Congress in the
future. Such legislation or other regulatory developments could make the
Company's Class A Common Stock and Class B Common Stock ineligible for trading
on the national securities exchanges and for quotation on NASDAQ. The Company is
unable to predict whether any such regulatory proposals will be adopted or
whether they will have such effect. If such legislation is adopted, however, it
could include "grandfather" provisions, in which event the Company might not be
affected as to any action already taken.
If legislation is adopted which would make either class of Common Stock
ineligible for trading on all principal national securities exchanges and for
quotation on NASDAQ, the New Articles provide that the Board of Directors may
convert Class B Common Stock into Class A Common Stock if, as a result of the
existence of the Class B Common Stock, the Class A Common Stock or the Class B
Common Stock or both are excluded from trading on the New York Stock Exchange,
the American Stock Exchange and all other principal national securities
exchanges then in existence and also is excluded from quotation on NASDAQ and
any other comparable national quotation system then in existence.
Shareholder Information. The Company will deliver to the holders of Class B
Common Stock the same proxy statements (excluding proxies to cast votes in
situations where the Class B Common Stock is not entitled to vote pursuant to
the New Articles; see "Description of the Class A and Class B Common Stock --
Voting"), annual reports and other information and reports as it delivers to
holders of Class A Common Stock.
Certain Federal Income Tax Consequences. The Company's shareholders will
not recognize gain or loss upon (i) the Reverse Split (other than with respect
to their receipt of cash for fractional shares, as described below), (ii) the
reclassification of Old Common Stock, after the Reverse Split, as Class A Common
Stock, (iii) their receipt of Class B Common Stock pursuant to the Dividend, and
(iv) any subsequent conversion of shares of Class B Common Stock into shares of
Class A Common Stock. Any shareholder receiving cash in lieu of a fractional
share of Old Common Stock in the Reverse Split will recognize capital gain or
loss equal to the difference between the amount of cash received and the basis
he would have had in such fractional share. Any such gain will be mid-term,
currently taxable at 28% for individuals or long-term, currently taxable at 20%
for individuals, if such shareholder has held the Old Common Stock subject to
the reverse split for more than 12 months or 18 months, respectively.
Each shareholder's tax basis in, and holding period for, his shares of Old
Common Stock prior to the Reverse Split will carry over to the shares of Old
Common Stock received by him in the Reverse Split and to the shares of Class A
Common Stock and Class B Common Stock received by him pursuant to the Amendments
and Dividend. Such tax basis will be reallocated among such shares of Class A
Common Stock and Class B Common Stock in proportion to their respective fair
market values on the Effective Date.
The above discussion is a general summary of the material Federal income
tax consequences to the Company's shareholders with respect to the
Recapitalization Proposal, based on the current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations, judicial
authority and administrative rulings and practice. This discussion, however,
does not discuss any aspects of state, local or foreign taxation. Further, this
discussion assumes that all of the Company's shareholders have held their shares
of Old Common Stock as capital assets. Legislative, judicial or administrative
changes or interpretations may be forthcoming that could alter or modify the
statements and conclusions set forth herein. Any such changes or interpretations
may or may not be retroactive. Shareholders, therefore, are urged to seek the
advice of their own tax counsel on these matters.
13
<PAGE> 18
Securities Act of 1933. Since the Old Common Stock will be reclassified as
Class A Common Stock with essentially the same rights, powers and limitations,
the reclassification is not an "offer," "offer to sell," "offer for sale" or
"sale" of a security within the meaning of Section 2(3) of the Securities Act of
1933, as amended (the "Securities Act") and will not involve the substitution of
one security for another under Rule 145 thereunder. In addition, the Dividend
will not involve a "sale" of a security under the Securities Act or Rule 145.
Consequently, the Company has not registered the Class A Common Stock or the
Class B Common Stock under the Securities Act.
Since there will be no sale of either the Class A Common Stock or the Class
B Common Stock, shareholders will not be deemed to have purchased such shares
separately from the Old Common Stock under the Securities Act and Rule 144
thereunder. Shares of Class A Common Stock held immediately upon effectiveness
of the New Articles and shares of Class B Common Stock received in the Dividend,
other than any such shares held by affiliates of the Company within the meaning
of the Securities Act, may be offered for sale and sold in the same manner as
the Old Common Stock without registration under the Securities Act. Affiliates
of the Company will continue to be subject to the restrictions specified in Rule
144 under the Securities Act, with each class of Common Stock considered
separately.
Employee Plans. The Company currently has one option plan in effect
pursuant to which options to purchase shares of Old Common Stock may be granted
(the Amended and Restated 1991 Stock Option Plan (the "Option Plan")). Pursuant
to the terms of the Option Plan, all options outstanding under the Option Plan
as of the Effective Date, to the extent not exercised prior to the Effective
Date, shall be adjusted after the Effective Date as follows: The total number of
shares subject to each option agreement shall remain unchanged; provided,
however, that the total number of shares of common stock subject to each
outstanding option agreement shall be divided, as nearly as possible, such that
1/3 of such shares shall be Class A Common Stock and 2/3 of such shares shall
be Class B Common Stock. The aggregate number of shares of common stock subject
to options before the Effective Date shall equal the aggregate number of shares
of Class A Common Stock and Class B Common Stock together subject to options
after the Effective Date. The exercise price per share of the options after the
Effective Date shall remain unchanged.
The Company also has two incentive compensation plans in effect pursuant to
which grants of shares of Old Common Stock may be made (the Amended and Restated
1994 Performance-Based Annual Incentive Compensation Plan (the "1994 Plan"), and
one other plan).
The Option Plan and the 1994 Plan are the subject of Proposals 2 and 3,
which would provide that options and awards granted in the future under the
Option Plan and the 1994 Plan may relate solely to Class A Common Stock, to
Class B Common Stock, or to a combination of Class A Common Stock and Class B
Common Stock.
Other Changes Made in Amendments. In connection with the adoption of the
New Articles, certain provisions of the Articles which are no longer relevant or
necessary are being deleted. Such other changes are not material to the
Company's shareholders. All such changes are shown in Exhibit A hereto.
Costs. The costs of proceeding with the Recapitalization Proposal (such as
transfer agent's fees, printing, engraving and mailing costs, legal fees,
investment banking fees, solicitation fees, and NASD fees) will be offset
against paid in capital in excess of par value. The approximate cost of
proceeding with the Recapitalization Proposal is estimated to be $550,000,
inclusive of fees of financial and legal advisors.
Subsequent Amendments. Implementation of the Recapitalization Proposal will
not prevent the Company from taking any action, or otherwise affect the
Company's ability, with the requisite approval of its Board of Directors and
shareholders, to adopt any future amendments to the New Articles for the purpose
of further changing the Company's capital structure or for any other lawful
purpose.
FINANCIAL INFORMATION
The Company believes that its shareholders can exercise prudent judgment
with respect to the decision whether to vote for the Recapitalization Proposal
without reference to other financial statements of the Company. The Company has
furnished its financial statements to shareholders in its 1996 Annual Report,
14
<PAGE> 19
which was mailed to shareholders on April 22, 1997, and in its letters to
shareholders for the first, second and third quarters of 1997, which also
previously have been mailed to shareholders. In addition, the Company will
promptly provide without charge to any shareholder, on the request of such
shareholder, an additional copy of the 1996 Annual Report or quarterly earnings
reports for the first, second and third quarters of fiscal year 1997. Written
requests for such copies should be directed to the Investor Relations, Herbalife
International, Inc., 1800 Century Park East, Los Angeles, California 90067, or
orally by telephone to Erik Randerson, Investor Relations at (310) 410-9600
(ext. 32202).
INTERESTS OF CERTAIN PERSONS
Mr. Hughes has an interest in the implementation of the Recapitalization
Proposal because, as noted above, the Recapitalization Proposal may enhance the
ability of Mr. Hughes to retain voting control of the Company even if he
disposes of a substantial portion of his shares of stock in the Company. See
"Reasons for the Recapitalization Proposal; Recommendation of the Board of
Directors."
PROPOSAL 2
APPROVAL OF AMENDMENTS TO
THE AMENDED AND RESTATED 1991 STOCK OPTION PLAN
BACKGROUND
Subject to shareholder approval of Proposal 1, the Board of Directors of
the Company, on October 30, 1997, approved the amendments to the Company's
Amended and Restated 1991 Stock Option Plan (the "Option Plan") described below
(the "Option Plan Amendment"). THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS OF THE COMPANY APPROVE THE OPTION PLAN AMENDMENT.
DESCRIPTION OF OPTION PLAN AMENDMENT.
The terms of the Option Plan are described below under "Executive
Compensation -- Description of Certain Plans -- 1991 Stock Option Plan." A copy
of the Option Plan Amendment is attached as Exhibit C hereto. Shareholders are
urged to review carefully the proposed amendment.
The Option Plan currently provides for the grant of options to purchase
shares of Old Common Stock. The purpose of the Option Plan Amendment is to
conform the Option Plan to the Company's capital structure following
implementation of the Recapitalization Proposal. The Option Plan Amendment
provides that following the Effective Date, options may be granted under the
Option Plan to purchase shares of Class A Common Stock, Class B Common Stock or
a combination thereof. In addition, the Option Plan also currently provides that
no participant may be awarded, during any single calendar year, stock options
with respect to more than 1,500,000 shares of Old Common Stock. If the Option
Plan Amendment is adopted, the aggregate amount of shares of Class A Common
Stock and Class B Common Stock with respect to which stock options may be
awarded to a participant during any single calendar year may not exceed
1,500,000. The Option Plan Amendment will not increase the total number of
shares of stock which can be granted pursuant to the Option Plan.
VOTE REQUIRED
Approval of the Option Plan Amendment requires the affirmative vote of the
holders of at least a majority of the shares of outstanding Old Common Stock
represented and voting at the Meeting and cast on this Proposal 2. While broker
abstentions will have the effect of a vote against the Option Plan Amendment,
broker non-votes will not have such effect. THE BOARD OF DIRECTORS RECOMMENDS
THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE OPTION PLAN AMENDMENT, AND, SUBJECT
TO SHAREHOLDER APPROVAL OF THE RECAPITALIZATION PROPOSAL, AND UNLESS DIRECTED
OTHERWISE, IT IS THE INTENTION OF THE PROXIES NAMED IN THE FORM OF PROXY THAT
ACCOMPANIES THIS PROXY STATEMENT TO VOTE FOR THE APPROVAL OF THE OPTION PLAN
AMENDMENT.
15
<PAGE> 20
PROPOSAL 3
APPROVAL OF AMENDMENTS TO
AMENDED AND RESTATED 1994 PERFORMANCE-BASED
ANNUAL INCENTIVE COMPENSATION PLAN
BACKGROUND
Subject to shareholder approval of Proposal 1, the Board of Directors of
the Company, on October 30, 1997, approved an amendment to the Company's Amended
and Restated 1994 Performance-Based Annual Incentive Compensation Plan (as
amended in 1996, the "1994 Plan") described below (the "1994 Plan Amendment").
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY APPROVE
THE 1994 PLAN AMENDMENT.
DESCRIPTION OF 1994 PLAN AMENDMENT.
The terms of the 1994 Plan are described below under "Executive
Compensation -- Description of Certain Plans -- 1994 Performance-Based Annual
Incentive Compensation Plan." A copy of the 1994 Plan Amendment is attached as
Exhibit D hereto. Shareholders are urged to review the proposed amendment
carefully.
The 1994 Plan currently provides that awards may be made in cash or in
shares of Old Common Stock, or a combination thereof. The purpose of the 1994
Plan Amendment is to conform the 1994 Plan to the Company's capital structure
following implementation of the Recapitalization Proposal. The 1994 Plan
Amendment provides that following the Effective Date, awards may be made under
the 1994 Plan in cash, shares of Class A Common Stock or shares of Class B
Common Stock, or a combination thereof.
VOTE REQUIRED
Approval of the 1994 Plan Amendment requires the affirmative vote of the
holders of at least a majority of the shares of outstanding Old Common Stock
represented and voting at the Meeting and cast on this Proposal 3. While broker
abstentions will have the effect of a vote against the Option Plan Amendment,
broker non-votes will not have such effect. THE BOARD OF DIRECTORS RECOMMENDS
THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE 1994 PLAN AMENDMENT, AND, SUBJECT TO
SHAREHOLDER APPROVAL OF THE RECAPITALIZATION PROPOSAL, AND UNLESS DIRECTED
OTHERWISE, IT IS THE INTENTION OF THE PROXIES NAMED IN THE FORM OF PROXY THAT
ACCOMPANIES THIS PROXY STATEMENT TO VOTE FOR THE APPROVAL OF SUCH ADOPTION.
16
<PAGE> 21
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table lists, as of September 30, 1997, information as to the
beneficial ownership of Old Common Stock by (i) each of the Company's directors,
(ii) the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers as indicated in the Summary Compensation
Table under "Compensation of Directors and Executive Officers -- Executive
Compensation" below, (iii) all directors and executive officers as a group, and
(iv) each person or entity believed by the Company to beneficially own more than
five percent (5%) of the Old Common Stock outstanding. In each instance,
information as to the number of shares owned and the nature of ownership has
been provided by the individuals identified or described and is not within the
direct knowledge of the Company.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT PERCENT OF
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED CLASS
-------------------------------------------------- ------------------ ----------
<S> <C> <C>
Mark Hughes(2).................................... 16,963,738 55.34%
1800 Century Park East
Los Angeles, CA 90067
Dr. David B. Katzin(3)............................ 172,500 *
1800 Century Park East
Los Angeles, CA 90067
Christopher Pair(4)............................... 159,750 *
1800 Century Park East
Los Angeles, CA 90067
Michael Rosen(5).................................. 108,350 *
1800 Century Park East
Los Angeles, CA 90067
David R. Addis(6)................................. 137,000 *
2101 L Street, N.W.
Washington, D.C. 20037
Edward Hall(7).................................... 7,000 *
Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, CA 92715
Alan Liker(8)..................................... 7,000 *
150 South Doheny Drive
Beverly Hills, CA 90211
Christopher M. Miner(9)........................... 5,000 *
WOW! Laboratories, Inc.
18430 Bandilier Circle
Fountain Valley, CA 92708
Fidelity Management & Research Company(10)........ 2,044,900 6.67
82 Devonshire Street
Boston, MA 02109
All executive officers and directors as a group
(10 persons)(11)................................ 17,649,338 57.6
</TABLE>
- - ---------------
* Less than one percent (1%).
(1) The persons in this table have sole voting, investment, and dispositive
power with respect to all shares of the Old Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
(2) Includes 550,000 shares owned by the Herbalife Family Foundation, as to
which Mr. Hughes acts as director but has no pecuniary interest. Also
includes 200,000 shares issuable upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of this
Proxy Statement.
17
<PAGE> 22
(3) Includes 160,000 shares issuable upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the date
of this Proxy Statement. Dr. Katzin ceased to serve as a director and
executive officer of the Company in March 1996 and December 1996,
respectively.
(4) Includes an aggregate of 159,750 shares issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of the date of this Proxy Statement.
(5) Includes 20,000 unvested restricted shares of Old Common Stock and 67,500
shares issuable upon exercise of stock options which are presently
exercisable or will become exercisable within 60 days of this Proxy
Statement.
(6) Includes 40,000 unvested restricted shares of Old Common Stock and 17,500
shares issuable upon exercise of stock options which are presently
exercisable or will become exercisable within 60 days of this Proxy
Statement. Mr. Addis ceased to serve as an executive officer of the Company
in January 1997.
(7) Includes 7,000 shares issuable upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the date
of this Proxy Statement.
(8) Includes 7,000 shares issuable upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the date
of this Proxy Statement.
(9) Includes 5,000 shares issuable upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the date
of this Proxy Statement.
(10) Information based on CDA/Bullseye Service Report as of September 30, 1997.
(11) Includes an aggregate of 712,750 shares issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of the date of this Proxy Statement.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Effective January 1996, each director who is not an officer of or
consultant to the Company receives $45,000 per year for his services as a
director plus, effective May 1994, $5,000 per year for each committee of the
Board on which he serves ($10,000 if he serves as chairman of that committee).
From December 1992 to April 1994, the additional amount paid to directors for
their services on committees of the Board was $10,000 per year for any one or
more committees of the Board. Any outside directors serving on the board of any
of the foreign subsidiaries of the Company are paid fees of $2,500 annually for
each such board on which they serve. Additionally, the Board authorized the
issuance, as of April 19, 1993, to each of Mr. Hall and Paul Buxbaum, a former
director of the Company, of a cash-only stock appreciation right ("SAR")
covering 25,000 shares of Old Common Stock. The SARs vest in annual installments
and are automatically exercised and redeemed on the date of vesting of each
installment. The amount payable upon each such automatic exercise is equal to
the fair market value of the Old Common Stock on the date of exercise less the
"exercise price" of $9.00 (the closing sale price of the Old Common Stock on
April 19, 1993) in the case of the installments that vested in 1994 and 1995 and
$7.375 (the closing sale price of the Old Common Stock on November 1, 1995, the
effective date of a repricing of the SARs) in the case of the installments that
will vest thereafter, in each case multiplied by the number of SARs being
exercised and redeemed. In addition, the Board authorized the issuance, as of
November 1, 1995, to each of Messrs. Buxbaum, Hall and Liker of a cash-only SAR
covering 10,000 shares of Old Common Stock. The SARs vest in five annual
installments and are automatically exercised and redeemed on the date of vesting
of each installment for an amount equal to the fair market value of the Old
Common Stock on such date less the "exercise price" of $7.375 (the closing sale
price of the Old Common Stock on November 1, 1995) multiplied by the number of
SARs being exercised and redeemed. In addition, the Board authorized the
issuance, as of July 15, 1996, to each of Messrs. Buxbaum, Hall, Liker and Miner
of a cash-only SAR covering 25,000 shares of Old Common Stock. The SARs vest in
five annual installments and are automatically exercised and redeemed on the
date of vesting of each installment of an amount equal to the fair market value
of the Old Common Stock on such date, less the exercise price of $13 (the
closing sale price of the Old Common Stock on July 15, 1996), multiplied by the
number of SARs being exercised and redeemed. Finally, the Board authorized the
issuance, as of November 5, 1996, to each of
18
<PAGE> 23
Messrs. Hall, Liker and Miner of a cash-only SAR covering 25,000 shares of Old
Common Stock. The SARs vest in five annual installments and are automatically
exercised and redeemed on the date of vesting of each installment for an amount
equal to the fair market value of the Old Common Stock on such date, less the
"exercise price" of $19.875 (the closing sale price of the Old Common Stock on
November 5, 1996), multiplied by the number of SARs being exercised and
redeemed. In July, 1997, all of the outstanding SARs described above (except for
those held by Mr. Buxbaum) were converted into options to purchase shares of Old
Common Stock, each with an exercise price equal to the exercise price of the
corresponding SAR, and a vesting schedule identical to the vesting schedule of
the corresponding SAR.
Directors who are also officers receive no separate compensation for their
services as directors.
EXECUTIVE COMPENSATION
(1) SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation of the
Company's Chief Executive Officer and four additional most highly compensated
executive officers (including, for this purpose, an executive officer who was a
consultant to the Company through March 1996; see footnote 4 to the table below)
whose total annual salary and bonus exceeded $100,000 during the fiscal year
ended December 31, 1996 (the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ----------------------- -------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- - ------------------------------- ---- ---------- ---------- ------------ ---------- ---------- ------- ------------
RESTRICTED SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($)(2) ($) SARS(#) ($) ($)(3)
- - ------------------------------- ---- ---------- ---------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Hughes 1996 $1,000,000 $6,288,913 $ -- $-- 500,000 $-- $126,237
President, Chief Executive 1995 999,211 -- -- -- -- -- 20,418
Officer and Chairman of the 1994 1,000,000 2,018,000 -- -- -- -- 20,525
Board
Dr. David B. Katzin 1996 $ 902,308 $ 300,000 $ -- $-- -- -- $ 10,834
Executive Vice President(4) 1995 1,002,564 -- -- -- 40,000 -- 4,281
1994 814,279 342,000 -- -- -- -- 5,857
Christopher Pair 1996 $ 699,037 $ 500,000 $ -- $-- 242,500 -- $106,369
Executive Vice President and 1995 647,116 -- -- -- 32,500 -- 22,294
Chief Operating Officer 1994 496,160 450,000 -- -- -- -- 20,019
Michael Rosen 1996 $ 500,006 $ 350,000 $600,000 $-- 100,000 -- $ 74,744
Executive Vice President and 1995 496,160 -- 600,000 -- 25,000 -- 17,058
Chief Executive of Corporate 1994 399,049 104,000 -- -- 175,000 -- 7,762
Development and Marketing
David R. Addis 1996 $ 500,006 $ 300,000 $ -- $-- -- -- $ 77,519
Chief Counsel(5) 1995 500,006 -- -- -- 35,000 -- 14,872
1994 500,006 302,000 -- -- -- -- 10,063
</TABLE>
- - ---------------
(1) 1994 amounts (other than for Mr. Pair) include bonuses earned under the
Company's 1994 Performance-Based Annual Incentive Compensation Plan. The
1994 amount for Mr. Pair and a portion of the 1994 amount for Dr. Katzin
include bonuses paid under a bonus program falling within the framework of
the Company's 1992 Executive Incentive Compensation Plan. See "Description
of Certain Plans" and "Compensation Committee Report."
(2) For each individual named, excludes perquisites, other personal benefits,
securities and property, which did not exceed in any year the lesser of
$50,000 or 10% of the total annual salary and bonus reported for such
individual for such year. In the case of Mr. Rosen, the listed amount
reflects deferred compensation pursuant to a Deferred Compensation Agreement
between the Company and Mr. Rosen. See "Employment Contracts and Change in
Control Arrangements."
(3) For 1996, these amounts represent payments under the Company's 401(k)
Tax-Sheltered Savings Plan, Executive Medical Plan, Executive Long Term
Disability Plan, Executive Life Insurance Plan and Deferred Compensation
Plan. Amounts with respect to the 401(k) Tax-Sheltered Savings Plan were
$4,500, $4,500, and $4,500 for Mr. Pair, Mr. Addis and Mr. Rosen,
respectively; amounts with respect to the Executive Medical Plan were
$8,004, $6,804, $8,004, $8,004 and $8,004 for Mr. Hughes, Dr. Katzin, Mr.
Addis, Mr. Pair and Mr. Rosen, respectively; amounts with respect to the
Executive Long Term
19
<PAGE> 24
Disability Plan were $4,093, $3,070, $8,956, $6,189, and $6,743 for Mr.
Hughes, Dr. Katzin, Mr. Addis, Mr. Pair and Mr. Rosen, respectively; and
amounts with respect to the Executive Life Insurance Plan were $14,140,
$961, $6,059, $17,772, and $5,497 for Mr. Hughes, Dr. Katzin, Mr. Addis, Mr.
Pair and Mr. Rosen, respectively; and amounts with respect to the Deferred
Compensation Plan were $100,000, $50,000, $69,904 and $50,000 for Mr.
Hughes, Mr. Addis, Mr. Pair and Mr. Rosen, respectively. For 1995, these
amounts represent payments under the Company's 401(k) Tax-Sheltered Savings
Plan, Executive Medical Plan, Executive Long Term Disability Plan and
Executive Life Insurance Plan. See "Description of Certain Plans." Amounts
with respect to the 401(k) Tax-Sheltered Savings Plan were $4,913 and $4,913
for Mr. Pair and Mr. Rosen, respectively; amounts with respect to the
Executive Medical Plan were $2,451, $3,363, $1,096, $9,429 and $2,694 for
Mr. Hughes, Dr. Katzin, Mr. Addis, Mr. Pair and Mr. Rosen, respectively;
amounts with respect to the Executive Long Term Disability Plan were $4,093,
$7,903, $6,057 and $5,802 for Mr. Hughes, Mr. Addis, Mr. Pair and Mr. Rosen,
respectively; and amounts with respect to the Executive Life Insurance Plan
were $13,874, $918, $5,873, $2,526 and $3,649 for Mr. Hughes, Dr. Katzin,
Mr. Addis, Mr. Pair and Mr. Rosen, respectively. For 1994, these amounts
represent payments under the Company's 401(k) Tax-Sheltered Savings Plan,
Executive Medical Plan, Executive Long Term Disability Plan and Executive
Life Insurance Plan. Amounts with respect to the 401(k) Tax-Sheltered
Savings Plan were $10,550 for Mr. Pair; amounts with respect to the
Executive Medical Plan were $8,173, $5,238, $124, $4,839 and $4,000 for Mr.
Hughes, Dr. Katzin, Mr. Addis, Mr. Pair and Mr. Rosen, respectively; amounts
with respect to the Executive Long Term Disability Plan were $4,462, $2,039
and $1,210 for Mr. Addis, Mr. Pair and Mr. Rosen, respectively; and amounts
with respect to the Executive Life Insurance Plan were $12,352, $620,
$5,477, $2,591 and $2,552 for Mr. Hughes, Dr. Katzin, Mr. Addis, Mr. Pair
and Mr. Rosen, respectively.
(4) Dr. Katzin served as Executive Vice President and Chief Medical Affairs
Officer of the Company from March 1996 to December 31, 1996. In addition,
Dr. Katzin provided a variety of consulting and related services to the
Company in 1996 through his wholly-owned company, Nutrient Research
Consultants, Ltd. See "Certain Transactions." As a consultant, Dr. Katzin
devoted a substantial portion of his working time to Company matters and, as
a result, the table above reflects the compensation to Dr. Katzin for
serving as a consultant to the Company and for the period during which he
served as an executive officer. The amounts reflected as "salary" for Dr.
Katzin are the amounts of contractual consulting payments made to his
wholly-owned consulting firm and payments made to Dr. Katzin for his
services as an executive officer of the Company, and the amounts reflected
as "bonus" are the amounts of an award under a bonus program falling within
the framework of the Company's 1992 Executive Incentive Compensation Plan
for 1994 and an award under the Company's 1994 Performance-Based Annual
Incentive Compensation Plan for 1994. Dr. Katzin ceased as a director and
executive officer of the Company in March 1996 and December 1996,
respectively.
(5) Mr. Addis served as Chief Counsel of the Company through January 1997.
20
<PAGE> 25
(2) OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options during the fiscal
year ended December 31, 1996 to the Named Officers. No stock appreciation rights
were granted to the Named Officers during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- - -----------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F)
PERCENTAGE
OF TOTAL EXERCISE
OPTIONS/SARS OR
GRANTED TO BASE GRANT DATE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) FISCAL YEAR ($/SH)(2) DATE VALUE($)(3)
- - --------------------------------- ------------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mark Hughes...................... 500,000 26.10% 13.000 07/15/06 $ 3,072,750
Dr. David B. Katzin.............. -- -- -- -- --
Christopher Pair................. 117,500 6.13% 13.000 07/15/06 722,096
125,000 6.53% 19.875 11/05/06 1,174,438
Michael Rosen.................... 100,000 5.22% 19.875 11/05/06 939,550
David R. Addis................... -- -- -- -- --
</TABLE>
- - ---------------
(1) All options granted in 1996 are exercisable in cumulative 20% installments
commencing one year from date of grant, with full vesting occurring on the
fifth anniversary date.
(2) All options were granted based on the closing price for the Old Common Stock
(as reported in the Wall Street Journal) at the date of grant.
(3) Valuation based upon the Black-Scholes pricing model. Assumptions include:
72.68% price volatility, 6.55% risk-free rate of return, 5.2% dividend yield
and exercise at the end of the 10-year term. No adjustment was made for
non-transferability or risk of forfeiture.
(3) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to shares acquired
on exercise and unexercised options to purchase Old Common Stock granted in
fiscal 1996 and prior years.
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES ACQUIRED VALUE FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - --------------------- --------------- ----------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Hughes.......... -- $ -- -- 500,000 -- $ 9,312,500
Dr. David B.
Katzin............. 180,000 2,779,600 80,000 181,600 1,940,000 4,484,692
Christopher Pair..... 50,000 796,625 151,250 333,750 3,667,813 5,870,000
Michael Rosen........ 82,500 896,718 -- 217,500 -- 4,024,375
David R. Addis....... -- -- 17,500 17,500 424,375 424,375
</TABLE>
- - ---------------
(1) Represents the difference between the market price of the Old Common Stock
on December 31, 1996 and the exercise price of the options.
(4) DESCRIPTION OF CERTAIN PLANS
1994 Performance-Based Annual Incentive Compensation Plan. The Company
maintains the 1994 Plan to provide additional compensation as an incentive to
certain key executives and consultants to attain specified performance
objectives of the Company and its subsidiary and affiliated corporations and to
ensure the continued availability of their full-time or part-time services to
the Company. Specifically, the individuals entitled to participate in the 1994
Plan are those executive officers and consultants of the Company determined by
the committee administering the 1994 Plan.
21
<PAGE> 26
The 1994 Plan is administered by the Compensation Committee of the
Company's Board (the "1994 Plan Committee"). The board members who currently
administer the 1994 Plan qualify as "outside directors" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Board of
Directors does not currently intend to appoint individuals to the 1994 Plan
Committee who are not both "outside directors" under the Code and "disinterested
directors" within the meaning of Rule 16b-3(c) under the Exchange Act.
The amount of an available award to a participant or the aggregate amount
of available awards to all participants for each award period is determined
based upon an objective computation (the "Formula") of the actual performance of
the Company relative to pre-established performance goals. The performance goal
or goals included in the Formula for each award period is selected by the 1994
Plan Committee from among the following performance measures: level of retail
sales (in the aggregate or for a particular category or categories of retail
sales); net cash flow; net income; operating income; earnings per share; return
on sales; reduction in expenditure levels for a particular category or
categories of expenses versus a prior period; return on total capital; return on
equity; and increase in the Common Stock price over a specified time period.
The 1994 Plan Committee determines the performance measure or measures, the
performance goal or goals and all computations included within each Formula,
each of which may be different for different award periods or for different
participants within a single award period. The 1994 Plan Committee does not have
the discretion to increase any award to an amount in excess of that determined
in accordance with the 1994 Plan and the Formula applicable to a particular
award period. However, the 1994 Plan Committee, may, in its discretion, (a)
designate in advance a maximum dollar award for any award period with respect to
any participant, and/or (b) designate in advance that certain other incentive
award payments (under the 1994 Plan or otherwise) made to a participant will be
deducted from award amounts otherwise earned under the 1994 Plan and/or (c)
decrease any award under the 1994 Plan. Notwithstanding anything in the 1994
Plan to the contrary, no participant is entitled to earn in excess of $10
million under the 1994 Plan with respect to any single calendar year.
Award periods under the 1994 Plan may be quarters, calendar years or such
other periods as the 1994 Plan Committee may designate. All award periods,
performance measures, performance goals and other aspects of each Formula are
designated in advance of the commencement of each award period by the 1994 Plan
Committee, except as otherwise permitted by the regulations under Section
162(m). Determinations based on a calendar year award period may be made by the
1994 Plan Committee on or before March 31 of the calendar year.
To be entitled to receive a full award with respect to an award period, a
participant must continue to be employed by the Company or rendering services to
the Company on the last day of such award period. With respect to participants
whose service relationship terminates during an award period, the 1994 Plan
Committee provides for prorated awards based upon satisfaction of performance
goals for the entire award period, with the proration formula to be set by the
1994 Plan Committee in its discretion in advance of the commencement of each
award period. In addition, no award can be paid unless the 1994 Plan Committee
certifies that the objective performance goal or goals for the award have been
satisfied and that the amount of the award is no greater than that dictated by
the Formula for the applicable award period. The 1994 Plan Committee makes such
determinations by means of written resolutions of the 1994 Plan Committee that
are maintained in the records of the Company.
Currently, awards pursuant to the 1994 Plan may be made, at the discretion
of the 1994 Plan Committee, in cash, through the issuance of shares of Old
Common Stock, or through a combination of both methods. Under the proposed
amendment to the 1994 Plan, following the Effective Date, awards pursuant to the
1994 Plan may be made, at the discretion of the 1994 Plan Committee, in cash,
through the issuance of shares of Class A Common Stock or Class B Common Stock,
or through a combination of any of the foregoing methods. The total number of
shares of Common Stock that may be issued under the 1994 Plan in any fiscal year
of the Company, and the total number of shares of Common Stock that may be
issued under the 1994 Plan in any fiscal year of the Company to any single
participant, may not exceed 5% of the number of issued and outstanding shares of
Common Stock at the beginning of the prior fiscal year.
22
<PAGE> 27
Awards under the 1994 Plan are subject to withholding for applicable
employment and income taxes. The 1994 Plan Committee may, in its discretion and
subject to the consent of each affected participant, approve the advance of all
or a portion of a target cash award to a participant prior to the conclusion of
an award period. Each such advance, if made, is a full recourse obligation of
the participant and bears interest from the date of the advance until repaid or
deemed earned at the applicable Federal rate (as specified in the 1994 Plan) for
loans of comparable term. Each such advance is evidenced by a promissory note
executed by the participant and delivered to the Company.
The 1994 Plan will continue in place until terminated by the Board of
Directors. The Board of Directors may from time to time amend, suspend or
terminate in whole or in part any or all of the provisions of the 1994 Plan;
provided, however, that no such action will adversely affect the right of any
participant with respect to (a) any award to which he or she may have become
entitled under the 1994 Plan prior to the effective date of such amendment,
suspension or termination, or (b) any award period that commenced prior to the
taking of such action by the Board.
1992 Executive Incentive Compensation Plan. In 1992, the Board adopted the
Herbalife International, Inc. 1992 Amended and Restated Executive Incentive
Compensation Plan (as amended in 1993 and 1996, the "1992 Plan"). Eligible
participants under the 1992 Plan consist of the Company's executive vice
presidents, vice presidents, country managers and other executive officers and
key employees (other than the Company's Chief Executive Officer and President)
and consultants as designated by the Chief Executive Officer in conjunction with
the committee administering the 1992 Plan.
The 1992 Plan is administered by the Compensation Committee of the
Company's Board (the "1992 Plan Committee") in conjunction with the Chief
Executive Officer. The current members of the 1992 Plan Committee are the
members of the Compensation Committee, and the Board of Directors does not
currently intend to appoint individuals to the 1992 Plan Committee who are not
"disinterested directors" within the meaning of Rule 16b-3(c) under the Exchange
Act. In addition, any awards of Common Stock under the 1992 Plan would be
determined and administered solely by the 1992 Plan Committee.
The 1992 Plan provides for the payment of bonuses to participants for each
year that the 1992 Plan is in effect, beginning with 1992. Awards are made to
participants based upon the extent to which certain corporate performance goals
and individual performance goals (set in advance by the Chief Executive Officer
together with, in the case of corporate performance goals, the 1992 Plan
Committee) are met. If a goal applicable to a participant is exceeded or not
met, then the participant is entitled to receive an award in excess of, or a pro
rata portion of, as applicable, the targeted amount. In addition, the 1992 Plan
Committee, in conjunction with the Chief Executive Officer, may make
discretionary awards to participants. To be eligible for payment with respect to
a particular award period, a participant is required to be employed by the
Company on the last day of such award period, subject to certain exceptions.
Awards pursuant to the 1992 Plan may be made, at the discretion of the 1992
Plan Committee, in cash, through the issuance of shares of Common Stock, or
through a combination of both methods. If the Recapitalization Proposal is
approved and implemented, following the Effective Date, the 1992 Plan will be
amended to provide that awards pursuant to the 1992 Plan may be made, at the
discretion of the 1992 Plan Committee, in cash, through the issuance of shares
of Class A Common Stock or Class B Common Stock, or through a combination of any
of the foregoing methods. The total number of shares of Common Stock that may be
issued under the 1992 Plan in any fiscal year of the Company, and the total
number of shares of Common Stock that may be issued under the 1992 Plan in any
fiscal year of the Company to any single participant, may not exceed the excess
of (i) 5% of the number of issued and outstanding shares of Common Stock at the
beginning of the prior fiscal year, over (ii) the number of shares of Common
Stock issued during the prior fiscal year pursuant to the 1994 Plan.
The Board of Directors may from time to time amend, suspend or terminate in
whole or in part any or all of the provisions of the 1992 Plan; provided,
however, that no such action will adversely affect the right of any participant
with respect to any award to which he or she may have become entitled under the
1992 Plan prior to the effective date of such amendment, suspension or
termination. The 1992 Plan will continue in place until terminated by the Board
of Directors.
23
<PAGE> 28
For 1994, 1995 and 1996, the Company utilized a bonus arrangement falling
within the framework of the 1992 Plan, although the Named Officers did not
participate in the 1992 Plan for 1995 or 1996. See "Compensation Committee
Report -- Annual Incentive Compensation." The 1992 Plan is expected to continue
to be utilized with respect to certain executives for future periods.
1991 Stock Option Plan -- General. The purpose of the Option Plan is to
secure for the Company and its shareholders the benefits arising from stock
ownership by key employees, directors, consultants and other persons selected by
the Stock Option Committee of the Board of Directors. As of February 28, 1997,
approximately 66 persons were eligible to participate in the Option Plan.
The Option Plan is administered by the Stock Option Committee of the
Company's Board. The Board of Directors does not currently intend to appoint
individuals to the Stock Option Committee who are not both "Non-Employee
Directors" within the meaning of Rule 16b-3 under the Exchange Act and "outside
directors" within the meaning of Section 162(m) under the Code. Currently, the
Stock Option Committee consists of Messrs. Hall and Miner.
Options under the Option Plan may be designated as "incentive stock
options" for federal income tax purposes or as options which are not qualified
for such treatment, or "non-qualified stock options." See "Federal Income Tax
Matters" below.
As of October 24, 1997 (i) 5,595,239 shares of Old Common Stock were
subject to outstanding options and (ii) additional options could be issued under
the Option Plan with respect to 1,074,386 shares of Old Common Stock.
If the Recapitalization Proposal is approved and implemented, all options
outstanding under the Option Plan as of the Effective Date, to the extent not
exercised prior to the Effective Date, shall be adjusted after the Effective
Date as follows: The total number of shares subject to each option agreement
shall remain unchanged; provided, however, that the total number of shares of
common stock subject to each outstanding option agreement shall be divided, as
nearly as possible, such that 1/3 of such shares shall be Class A Common Stock
and 2/3 of such shares shall be Class B Common Stock. The aggregate number of
shares of common stock subject to options before the Effective Date shall equal
the aggregate number of shares of Class A Common Stock and Class B Common Stock
together subject to options after the Effective Date. The exercise price per
share of the options after the Effective Date shall remain unchanged.
If the Option Plan Amendment is adopted, then following the Effective Date,
options may be granted under the Option Plan to purchase shares of Class A
Common Stock, Class B Common Stock or a combination thereof.
The Option Plan currently provides that no participant may be awarded,
during any single calendar year, stock options with respect to more than
1,500,000 shares of Old Common Stock. Under the Option Plan Amendment the
aggregate amount of shares of Class A Common Stock and Class B Common Stock with
respect to which stock options may be awarded to a participant during any single
calendar year may not exceed 1,500,000. The Option Plan Amendment will not
increase the total number of shares of stock which can be granted pursuant to
the Option Plan.
All options granted under the Option Plan are non-transferable and
exercisable in installments determined by the Stock Option Committee, except
that each option is to be exercisable in minimum annual installments of 20%
commencing with the first anniversary of the option's grant date. Each option
granted has a term specified in the option agreement, but all options expire no
later than ten years from the date of grant. Incentive stock options granted to
a person holding more than 10% of the total voting power of the Company's
capital stock must expire within five years from the date of grant.
In the case of incentive stock options, the exercise price must be at least
equal to 100% of the fair market value of the Common Stock on the date the
option is granted. The exercise price for incentive stock option grants to a
person holding more than 10% of the total voting power of the Company's capital
stock must equal 110% of the fair market value of the Common Stock. The exercise
price of a non-qualified option need not be equal to the fair market value of
the Common Stock at the date of grant, but may be granted with any exercise
24
<PAGE> 29
price which is not less than 85% of fair market value at the time the option is
granted, as the Stock Option Committee may determine. Upon exercise of any
option, the purchase price must generally be paid in full either in cash or by
certified or cashier's check. However, in the discretion of the Stock Option
Committee, the terms of a stock option grant may permit payment of the purchase
price by means of (i) cancellation of indebtedness owed by the Company, (ii)
delivery of shares of Common Stock already owned by the optionee (valued at fair
market value as of the date of exercise), (iii) delivery of a promissory note
secured by the shares issued, (iv) delivery of a portion of the shares issuable
upon exercise (i.e., exercise for the "spread" on the option payable in shares),
or (v) any combination of the foregoing or any other means permitted by the
Stock Option Committee.
The aggregate fair market value (determined at the time the options are
granted) of the shares covered by incentive stock options granted to any
employee under the Option Plan (or any other incentive stock option plan of the
Company) which may become exercisable for the first time in any one calendar
year may not exceed $100,000.
Federal Income Tax Matters. As stated above, participants in the Option
Plan may be granted either "incentive" stock options (qualified as such under
the Code) or "non-incentive" stock options (customarily referred to as
"non-qualified" stock options). Persons who receive non-qualified stock options
under the Option Plan will realize no tax consequence upon receipt. On the date
of option exercise, however, the optionee will generally have income (and the
Company will have a deduction) equal to the excess of (a) the fair market value
of the stock received upon such date less (b) the option exercise price. If the
stock acquired upon exercise of the option is non-transferable and subject to a
"substantial risk of forfeiture," however, the taxable event will generally be
delayed to the earliest of the date on which the stock becomes transferable or
the date on which the risk of forfeiture ends, at which time the participant
will be taxed on the excess of the stock's fair market value on such date over
the cost of such stock, and the Company will be entitled to an equal deduction
at that time.
In the case of an incentive stock option, however, the employee will
generally not have taxable income (although the alternative minimum tax may
apply, as described below) upon exercise or lapse of any forfeiture restrictions
or transfer restrictions. The employee will be taxed only upon the sale of stock
received on the incentive option exercise. If the employee holds the stock for
more than one year after exercise and two years after option grant, the
employee's gain will generally be capital gain, and the Company will not be
entitled to a deduction for compensation paid. Any earlier sale will result at
least in part in ordinary income to the employee and a deduction for the Company
equal to the amount of ordinary income recognized by the employee. Depending
upon a particular option holder's circumstances and the holding period of the
stock after exercise of the option, there may be a favorable differential tax
rate applicable to capital gains.
Upon exercise of incentive stock options, the alternative minimum tax may
apply to optionees because the excess of the fair market value of the shares
received over the exercise price of an incentive stock option constitutes an
item of tax preference. The alternative minimum tax may produce a higher tax
than the regular income tax applicable to an optionee.
The above summary of tax matters is general in scope and does not apply to
every specific transaction which may arise. Moreover, the rules of government
taxation of non-qualified and incentive stock options are complex, and the
statement of tax consequences set forth herein is necessarily general. Finally,
Congress is considering many additional proposals to change the tax laws, and
the interpretation of existing laws and any additional revisions ultimately
adopted could significantly alter the tax requirements and effects covered in
this discussion.
Deferred Compensation Plans. The Company maintains two deferred
compensation plans for select groups of management or highly compensated
employees: the Herbalife Management Deferred Compensation Plan, effective
January 1, 1996 (the "Management Plan," applicable to directors and vice
presidents) and the Herbalife Senior Executive Compensation Plan, effective
January 1, 1996 (the "Senior Executive Plan," applicable to eligible employees
at the rank of Senior Vice President and higher) (collectively with the
Management Plan, the "Deferred Compensation Plans"). The Deferred Compensation
Plans allow eligible employees, who are selected by the administrative committee
that manages and administers the plans (the
25
<PAGE> 30
"Deferred Compensation Committee"), to elect annually to defer up to fifty
percent (50%) of their base annual salary and up to one hundred percent (100%)
of their annual bonus for each calendar year (the "Annual Deferral Amount"). The
Company makes matching contributions on behalf of each participant in the Senior
Executive Plan ("Company Matching Contributions") of one hundred percent (100%)
of the amount deferred by each such participant up to ten percent (10%) of the
participant's base annual salary. Each participant in either Deferred
Compensation Plan has at all times a fully vested and nonforfeitable interest in
each year's contribution, including interest credited thereto, and in any
Company Matching Contributions, if applicable. In connection with a
participant's election to defer an Annual Deferral Amount, the participant may
also elect to receive a short-term payout, equal to the Annual Deferral Amount
plus interest and payable five or more years from the first day of the year in
which the Annual Deferral Amount is actually deferred. Subject to the short term
payout provision and certain exceptions for unforeseeable financial emergencies,
a participant may not withdraw, without incurring a ten percent (10%) withdrawal
penalty, all or any portion of his or her account under the Deferred
Compensation Plans prior to the date that such participant either (a) is
determined by the Deferred Compensation Committee to have incurred permanent and
total disability or (b) terminates employment with the Company.
Retirement Plan. The Company adopted, effective September 1997, an unfunded
Supplemental Executive Retirement Plan (the "Retirement Plan") providing
retirement benefits for a select group of management and highly compensated
employees. The normal retirement benefit under the Retirement Plan is 60
quarterly installments payments commencing at age 65, each of which equals
one-quarter of 1.75% of "compensation" times the number of years of service up
to 20 years. The term "compensation" for this purpose means the average yearly
compensation as described below of the five calendar years within the last 10
years of employment that would yield the highest average. A participant may
elect to receive his or her benefits in a lump sum equal to 90% of the actuarial
equivalent of the remaining quarterly installments.
A participant who reaches the "early retirement date" may choose to retire
and to receive an early retirement benefit equal to the normal retirement
benefit. A participant generally reaches his or her early retirement date when
he or she completes 10 years of service and reaches age 55. An employee whose
employment with the company terminates before he or she reaches early retirement
date will receive the actuarial equivalent of his or her vested benefits paid in
a lump sum within 90 days of such termination. Upon a change in control of the
Company, a participant will receive a lump sum payment equal to the actuarial
equivalent of the remaining quarterly installments. A participant becomes fully
vested in his or her interest in the Plan on his or her normal or early
retirement date, death, or disability, or on a change in control of the Company.
In all other cases, a participant's vested interest is determined as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
----------------------------- -----------------
<S> <C>
less than 5.................. 0%
5....................... 20%
6....................... 40%
7....................... 60%
8....................... 80%
9....................... 100%
</TABLE>
For illustration purposes only, the following table provides examples of
the annual benefit payable under the Retirement Plan beginning at age 65.
26
<PAGE> 31
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------
15 20 25 30 35
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RENUMERATION
$ 125,000 $ 32,813 $ 43,750 $ 43,750 $ 43,750 $ 43,750
150,000 39,375 52,500 52,500 52,500 52,500
175,000 45,938 61,250 61,250 61,250 61,250
200,000 52,500 70,000 70,000 70,000 70,000
225,000 59,063 78,750 78,750 78,750 78,750
250,000 65,625 87,500 87,500 87,500 87,500
300,000 78,750 105,000 105,000 105,000 105,000
400,000 105,000 140,000 140,000 140,000 140,000
450,000 118,125 157,500 157,500 157,500 157,500
500,000 131,250 175,000 175,000 175,000 175,000
600,000 157,500 210,000 210,000 210,000 210,000
700,000 183,750 245,000 245,000 245,000 245,000
800,000 210,000 280,000 280,000 280,000 280,000
900,000 236,250 315,000 315,000 315,000 315,000
1,000,000 262,500 350,000 350,000 350,000 350,000
1,100,000 288,750 385,000 385,000 385,000 385,000
1,200,000 315,000 420,000 420,000 420,000 420,000
</TABLE>
Messrs. Hughes, Katzin, Pair and Rosen have 17, 1, 12, and 4 years of service.
"Compensation" covered by the Retirement Plan is equal to the amounts set forth
in the Summary Compensation Table under "Salary."
401(k) Tax-Sheltered Savings Plan. The Company maintains a qualified
"savings plan" pursuant to Section 401(k) of the Code. This plan allows any
employee who has completed one year of employment with the Company to contribute
each pay period from 2% to 17% of the employee's earnings for investment in
annuity contracts and mutual funds. The maximum aggregate contribution of all
participating employees for any calendar year may not exceed 20% of the total
earnings paid to such participants during each such year. The Company makes
contributions to the plan matching each employee's contribution up to 3% of the
employee's earnings. The plan also imposes certain restrictions on the aggregate
amount which may be contributed by higher-paid employees in relation to the
amount contributed by the remaining employees. A participating employee is fully
vested at all times in his or her contribution and in the interest credited to
such employee's account. However, the employee may not withdraw all or any
portion of his or her account prior to the date that such employee either (a)
incurs total and permanent disability or (b) terminates employment with the
Company. The employee is not fully vested in the Company's matching
contributions until he or she has completed seven years of service with the
Company.
Executive Medical Plan. The Executive Medical Plan is an insured hospital
and medical reimbursement plan covering executives and key employees and their
dependents during the executive's or employee's employment by the Company. The
Plan provides coverage of medical expenses incurred beyond the Company's basic
plan. For the fiscal year ended December 31, 1996, the Plan's cost to the
Company was an aggregate of approximately 38,820.
Executive Long-Term Disability Plan. The Executive Long-Term Disability
Plan is an insured disability plan covering executives and key employees. It
provides for extended disability insurance for such participants with premiums
paid by the Company. For the fiscal year ended December 31, 1996, the Plan's
cost to the Company was an aggregate of approximately $29,051.
Executive Life Insurance Plan. The Executive Life Insurance Plan covers
executives and key employees and provides for life insurance benefits in excess
of those available under the Company's basic plan. Premiums
27
<PAGE> 32
are paid by the Company. For the fiscal year ended December 31, 1996, the Plan's
cost to the Company was an aggregate of approximately $44,429.
(5) EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
Effective as of April 3, 1994, the Company entered into a five-year
Employment Agreement (the "Pair Agreement") with Christopher Pair, engaging him
as Executive Vice President of International and Corporate Administration of the
Company. Mr. Pair currently serves as the Company's Executive Vice President and
Chief Operating Officer. For his services, Mr. Pair is entitled to receive an
annual salary of $650,000 subject to upward adjustment as the Board or the
Compensation Committee of the Board deems appropriate. In addition, Mr. Pair is
entitled to participate in incentive compensation plans on the same basis as
other comparable level executives.
The Pair Agreement provides that Mr. Pair is entitled to certain other
benefits paid for by the Company, including, among other things, an automobile
allowance, reimbursement of the cost of a health club membership, and
participation in various benefit plans.
Under the terms of the Pair Agreement, if the Company terminates Mr. Pair's
employment at any time during the term of the Pair Agreement without cause (as
defined in such agreement), it must pay him (in addition to other accrued
amounts and benefits) an amount equal to one year of base compensation, plus an
amount equal to the actual bonuses paid to Mr. Pair under the executive
incentive compensation plan in respect of the one fiscal or plan year completed
immediately prior to the date of termination.
Effective as of August 23, 1993, the Company entered into a Restricted
Stock Agreement with Michael Rosen, pursuant to which Mr. Rosen received a
100,000 share restricted stock grant. Such shares vest in cumulative annual
installments of 20%, commencing on August 23, 1994. Under such Restricted Stock
Agreement, if the Company were to terminate Mr. Rosen without cause, or if Mr.
Rosen were to die or retire, in any such event if the event were to occur
following Mark Hughes' ceasing to serve as the Chief Executive Officer of the
Company or certain other defined change-of-control events, then Mr. Rosen's
restricted stock grant would fully vest.
In addition, effective as of August 9, 1994, the Company entered into a
Deferred Compensation Agreement with Mr. Rosen, pursuant to which Mr. Rosen has
received and will continue to receive $600,000 in cash deferred compensation
from the Company on each of the first five anniversary dates of such Deferred
Compensation Agreement on which Mr. Rosen remained continuously employed by the
Company. If the Company were to terminate Mr. Rosen without cause (as such term
is defined in the Deferred Compensation Agreement), Mr. Rosen will be deemed to
have earned, as of the termination date, deferred compensation for the year in
which termination occurs in an amount equal to $600,000 prorated on a daily
basis for the number of days in the calendar year through and including the date
of termination. Mr. Rosen is eligible to receive such deferred compensation on
or before the tenth day following the day the deferred compensation is earned,
subject to the right of the Company to delay payment in certain circumstances
specified in the Deferred Compensation Agreement.
28
<PAGE> 33
(6) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
During 1996, the Company's Compensation Committee consisted of Messrs.
Hall, Buxbaum (until his resignation from the Board in September 1996) and Mr.
Miner (commencing in May 1996). No additional information concerning the
Compensation Committee or the Company's executive officers is required by Item
402 of Regulation S-K.
BY ORDER OF THE BOARD OF DIRECTORS
HERBALIFE INTERNATIONAL, INC.
/s/ CHRISTOPHER PAIR
CHRISTOPHER PAIR
Secretary
29
<PAGE> 34
EXHIBIT A
AMENDED AND RESTATED ARTICLES OF INCORPORATION
--------------------
OF
HERBALIFE INTERNATIONAL, INC.
(referred to in the Proxy Statement as the "New Articles"; the proposed changes
from the Articles of Incorporation of the Company as currently in effect are
indicated by underlining (to indicate additions) and cross-throughs (to
indicate deletions)).
Pursuant to the provisions of Nevada Revised Statutes ("NRS") Sections
78.390 and 78.403, the articles of incorporation of the above- referenced
corporation are hereby amended and restated as follows:
[1] I. The name of the corporation (hereinafter called the corporation) is
-
Herbalife International, Inc.
[2]
[3] II. The purposes for which the corporation is organized are to engage in
--
any activity or business not in conflict with the laws of the State of Nevada
or of the United States of America, and without limiting the generality of the
foregoing, specifically:
[4] A. To have and to exercise all the powers now or hereafter
-
conferred by the laws of the State of Nevada upon corporations organized
pursuant to the laws under which the corporation is organized and any and all
acts amendatory thereof and supplemental thereto.
[5] B. To discount and negotiate promissory notes, drafts, bill of
-
exchange and other evidence of debts, and to collect for others money due them
on notes, checks, drafts, bill of exchange, commercial paper and other evidence
of indebtedness.
[6] C. To purchase or otherwise acquire, own, hold, lease, sell,
-
exchange, assign, transfer, mortgage, pledge, or otherwise dispose of, to
guaranty, to invest, trade, and deal in and with personal property of every
class and description.
[7] D. To enter into any kind of contract or agreement, cooperative
-
or profit sharing plan with its officers or employees that the corporation may
deem advantageous or expedient or otherwise to reward or pay such persons for
their services as the directors may deem fit.
A-1
<PAGE> 35
[8] E. To purchase, lease, or otherwise acquire, in whole or in part,
-
the business, the good will, rights, franchises and property of every kind, and
to undertake the whole or any part of the assets or liabilities, of any person,
firm, association, non-profit or profit corporation, or own property necessary
or suitable for its purposes, and to pay the same in cash, in the stocks or
bonds of this company or otherwise, to hold or in any manner dispose of the
whole or any part of the business or property so acquired and to exercise all
of the powers necessary or incidental to the conduct of such business.
[9] F. To lend or borrow money and to negotiate and make loans,
-
either on its own account or as agent, or broker for others.
[10] G. To enter into, make, perform and carry out contracts of every
-
kind and for any lawful purpose, without limit as to amount with any person,
firm, association, cooperative profit or non-profit corporation, municipality,
State or Government or any subdivision, district or department thereof.
[11] H. To buy, sell, exchange, negotiate, or otherwise deal in, or
-
hypothecate securities, stocks, bonds, debentures, mortgages, notes or other
collaterals or securities, created or issued by any corporation wherever
organized, including this corporation, within such limits as may be provided by
law, and while owner of any such stocks or other collaterals to exercise all
rights, powers and privileges of ownership, including the right to vote the
same; to subscribe for stock of any corporation to be organized, other than to
promote the organization thereof.
[12] I. To purchase or otherwise acquire, own, hold, lease, sell,
-
exchange, assign, transfer, mortgage, pledge, license, or otherwise dispose of
any letters, patents, copyrights, or trademarks of every class and description.
[13] J. To do any and all other such acts, things, business or
-
businesses in any manner connected with or necessary, incidental, convenient or
auxiliary to do any of these objects hereinbefore enumerated, or calculated,
directly or indirectly, to promote the interest of the corporation; and in
carrying on its purposes, or for the purpose of obtaining or furthering any of
its business, to do any and all acts and things, and to exercise any and all
other powers which a co-partnership or natural person could do or exercise, and
which now or hereafter may be authorized by law, here and in any other part of
the world.
[14] K. The several clauses contained in this statement of powers
-
shall be construed as both purposes and powers. And the statements contained
in each of these clauses shall be in
A-2
<PAGE> 36
no way limited or restricted, by reference to or inference from, the terms of
any other clauses, but shall be regarded as independent purposes and powers;
and no recitations, expression or declaration of specific or special powers or
purposes herein enumerated shall be deemed to be exclusive; but is hereby
expressly declared that all other lawful powers not inconsistent herewith, are
hereby included.
[15] III. The total number of shares that this corporation is
--- ------------------------------------
authorized to issue [16] is set forth as follows: One hundred million
------------------------ -------------------
(100,000,000) shares of preferred stock; One hundred million (100,000,000)
- - --------------------------------------------------------------------------
shares of common stock with a par value of $.01 [17] per share, consisting of
- - --------------------------- ------------------------
Thirty-Three Million Three Hundred and Thirty-Three Thousand Three Hundred and
- - ------------------------------------------------------------------------------
Thirty-Three (33,333,333) shares of Class A Common Stock ("Class A Common
- - -------------------------------------------------------------------------
Stock") and Sixty-Six Million Six Hundred and Sixty-Six Thousand Six Hundred
- - ----------------------------------------------------------------------------
and Sixty-Seven (66,666,667) shares of Class B Common Stock ("Class B Common
- - ----------------------------------------------------------------------------
Stock").
- - --------
A. Upon these Amended and Restated Articles of Incorporation
-- ---------------------------------------------------------
becoming effective pursuant to Sections 78.390 and 78.403 of the NRS (the
- - -------------------------------------------------------------------------
"Effective Time"), and without any further action on the part of the
- - -------------------------------------------------------------
corporation [18] or its shareholders, the following shall occur:
-----------------------------------------------
1. Each three shares of the corporation's Common Stock,
-- ----------------------------------------------------
par value $0.01 per share (the "Old Common Stock"), then issued shall
- - ---------------------------------------------------------------------
automatically be combined and converted into one share of Old Common Stock. No
- - --------------------------------------------------------------------------- --
fractional shares shall be issued but in lieu thereof, this corporation shall
- - -----------------------------------------------------------------------------
pay in cash an amount equal to the greater of (i) the average closing sale
- - --------------------------------------------------------------------------
price of a share of Old Common Stock on the NASDAQ National Market System for
- - -----------------------------------------------------------------------------
the fifteen trading days immediately preceding the Effective Time, and (ii) the
- - -------------------------------------------------------------------------------
closing sale price of a share of Old Common Stock on the NASDAQ National Market
- - -------------------------------------------------------------------------------
System on the trading day immediately preceding the date on which the Effective
- - -------------------------------------------------------------------------------
Time occurs.
- - ------------
2. Immediately following the reverse stock split
-- ---------------------------------------------
described in subparagraph (A)(1) above, each whole share of Old Common Stock,
- - -----------------------------------------------------------------------------
then issued (including shares held in the treasury of the corporation) shall
- - ----------------------------------------------------------------------------
automatically be reclassified, changed and converted into one fully paid and
- - ----------------------------------------------------------------------------
nonassessable share of Class A Common Stock.
- - --------------------------------------------
B. The preferred shares may be issued in one or more series. The
-
Board of Directors is authorized to fix the number of any such series of
preferred shares and to determine the designation of any such series. The
Board of Directors is further authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of preferred shares and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the
A-3
<PAGE> 37
number of shares constituting any series, to increase or decrease (but not
below the number of shares of such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
[19] C. The powers, preferences and rights of the Class A Common Stock
- --------------------------------------------------------------
and the Class B Common Stock, and the qualifications, limitations or
- - --------------------------------------------------------------------
restrictions thereof, shall be in all respects identical, except as otherwise
- - -----------------------------------------------------------------------------
required by law or expressly provided in these Amended and Restated Articles of
- - -------------------------------------------------------------------------------
Incorporation, as amended.
- - --------------------------
D. DIVIDENDS. Dividends may be declared and paid to the
-- ---------- -----------------------------------------
holders of the Class A Common Stock and the Class B Common Stock in cash,
- - -------------------------------------------------------------------------
property, or other securities of the corporation out of any assets or funds
- - ---------------------------------------------------------------------------
legally available therefor. If and when dividends on the Common Stock are
- - --------------------------------------------------------------------------
declared payable from time to time by the Board of Directors, whether payable
- - -----------------------------------------------------------------------------
in cash, in property or in shares of stock of the corporation, the holders of
- - -----------------------------------------------------------------------------
the Class A Common Stock and the holders of the Class B Common Stock shall be
- - -----------------------------------------------------------------------------
entitled to share equally, on a per share basis, in such dividends, except
- - --------------------------------------------------------------------------
that: (a) a dividend or other distribution of cash or property (except for a
- - -----------------------------------------------------------------------------
distribution in liquidation) with respect to shares of Class B Common Stock may
- - -------------------------------------------------------------------------------
exceed the amount of a dividend or other distribution of cash or property
- - -------------------------------------------------------------------------
(except for a distribution in liquidation) with respect to shares of Class A
- - ----------------------------------------------------------------------------
Common Stock, and (b) dividends or other distributions payable on the Common
- - ----------------------------------------------------------------------------
Stock in shares of capital stock of the corporation shall be made to all
- - ------------------------------------------------------------------------
holders of Common Stock and may be (i) in shares of Class B Common Stock to the
- - -------------------------------------------------------------------------------
record holders of Class A Common Stock and to the record holders of Class B
- - ---------------------------------------------------------------------------
Common Stock, (ii) in shares of Class A Common Stock to the record holders of
- - -----------------------------------------------------------------------------
Class A Common Stock and in shares of Class B Common Stock to the record
- - ------------------------------------------------------------------------
holders of Class B Common Stock, or (iii) in any other authorized class or
- - --------------------------------------------------------------------------
series of capital stock to the record holders of both classes of Common Stock.
- - ------------------------------------------------------------------------------
E. DISTRIBUTIONS ON DISSOLUTION, ETC. Upon any
-- ---------------------------------- --------
liquidation, dissolution or winding up of the corporation, whether voluntary or
- - -------------------------------------------------------------------------------
involuntary, the remaining net assets of the corporation shall, after payment
- - -----------------------------------------------------------------------------
in full of the liquidation preference, if any, of any outstanding preferred
- - ---------------------------------------------------------------------------
stock, be distributed pro rata to the holders of Common Stock in accordance
- - ---------------------------------------------------------------------------
with their respective interests.
- - --------------------------------
F. VOTING RIGHTS
-- -------------
1. At each annual or special meeting of the
-- ----------------------------------------
shareholders, each holder of Class A Common Stock shall be entitled to one (1)
- - ------------------------------------------------------------------------------
vote in person or by proxy for each share of Class A Common Stock standing in
- - -----------------------------------------------------------------------------
his name on the stock transfer records of the corporation in connection with
- - ----------------------------------------------------------------------------
the
- - ---
A-4
<PAGE> 38
election of directors and all other actions submitted to a vote of
- - ------------------------------------------------------------------
shareholders. No holder of Class A Common Stock shall have rights of
- - ------------- ------------------------------------------------------
cumulative voting with respect to the election of directors of the corporation.
- - -------------------------------------------------------------------------------
Holders of Class B Common Stock shall not vote on any matters except as
- - -----------------------------------------------------------------------
otherwise provided by these Amended and Restated Articles of Incorporation, as
- - ------------------------------------------------------------------------------
amended, or by law.
- - -------------------
2. The holders of Class B Common Stock shall be entitled
-- -----------------------------------------------------
to vote separately as a class only with respect to (i) amendments to these
- - --------------------------------------------------------------------------
Amended and Restated Articles of Incorporation that alter or change any
- - -----------------------------------------------------------------------
preference or relative or other right given to the holders of Class B Common
- - ----------------------------------------------------------------------------
Stock, and (ii) such other matters as may require separate class voting under
- - -----------------------------------------------------------------------------
these Amended and Restated Articles of Incorporation, as amended, or by law.
- - ----------------------------------------------------------------------------
G. CONVERSION.
-- -----------
1. All outstanding shares of Class B Common Stock may be
-- -----------------------------------------------------
converted into shares of Class A Common Stock on a share-for- share basis by
- - ----------------------------------------------------------------------------
the Board of Directors if, as a result of the existence of the Class B Common
- - -----------------------------------------------------------------------------
Stock, either the Class A Common Stock or Class B Common Stock is or both are
- - -----------------------------------------------------------------------------
excluded from trading on the New York Stock Exchange, the American Stock
- - ------------------------------------------------------------------------
Exchange and all other principal national securities exchanges then in use and
- - ------------------------------------------------------------------------------
also is excluded from quotation on the NASDAQ National Market System and other
- - ------------------------------------------------------------------------------
comparable national quotation systems then in use.
- - --------------------------------------------------
2. All outstanding shares of Class B Common Stock shall
-- ----------------------------------------------------
be converted into shares of Class A Common Stock on a share-for- share basis if
- - -------------------------------------------------------------------------------
at any time the number of outstanding shares of Class A Common Stock as
- - -----------------------------------------------------------------------
reflected on the stock transfer records of the corporation falls below 10% of
- - -----------------------------------------------------------------------------
the aggregate number of outstanding shares of Class A Common Stock and of Class
- - -------------------------------------------------------------------------------
B Common Stock. For purposes of the immediately preceding sentence, any shares
- - -------------------------------------------------------------------------------
of Common Stock repurchased and held as treasury shares or cancelled by the
- - ---------------------------------------------------------------------------
corporation shall no longer be deemed "outstanding" from and after the date of
- - ------------------------------------------------------------------------------
repurchase.
- - -----------
3. In the event of any conversion of the Class B Common
-- ----------------------------------------------------
Stock pursuant to subparagraph (G)(1) or (G)(2), certificates which formerly
- - ----------------------------------------------------------------------------
represented outstanding shares of Class B Common stock will thereafter be
- - -------------------------------------------------------------------------
deemed to represent a like number of Class A Common Stock and all authorized
- - ----------------------------------------------------------------------------
shares of Common Stock shall consist of only Class A Common Stock.
- - ------------------------------------------------------------------
4. In making the determination for purposes of this
-- ------------------------------------------------
paragraph (G), the Board of Directors may conclusively rely on any information
- - ------------------------------------------------------------------------------
or documentation available to it, including filings made with the Securities
- - ----------------------------------------------------------------------------
and Exchange Commission, any stock exchange, the National Association of
- - ------------------------------------------------------------------------
A-5
<PAGE> 39
Securities Dealers, Inc. or any other governmental or regulatory agencies or
- - ----------------------------------------------------------------------------
any written instrument purporting to be authentic.
- - --------------------------------------------------
H. CLASS B PROTECTION PROVISION.
-- -----------------------------
1. If, after the Effective Time, (a) any person or group
-- -----------------------------------------------------
acting in concert acquires beneficial ownership of shares representing 10% or
- - -----------------------------------------------------------------------------
more of the then issued and outstanding shares of Class A Common Stock
- - ----------------------------------------------------------------------
(excluding (i) shares of Class A Common Stock beneficially owned by such person
- - -------------------------------------------------------------------------------
or group which were received as a result of the conversion of Old Common Stock
- - ------------------------------------------------------------------------------
beneficially owned by such person or group immediately prior to the Effective
- - -----------------------------------------------------------------------------
Date and (ii) shares of Class A Common Stock of which beneficial ownership was
- - ------------------------------------------------------------------------------
acquired by such person or group by the issuance or sale by the corporation, by
- - -------------------------------------------------------------------------------
operation of law, by will or the laws of descent and distribution, by gift or
- - -----------------------------------------------------------------------------
by foreclosure of a bona fide loan or in connection with a marital dissolution)
- - -------------------------------------------------------------------------------
(collectively, the exclusions described in clauses (i) and (ii) are referred to
- - -------------------------------------------------------------------------------
as "Excluded Acquisitions"), and (b) the percentage of all issued and
- - ---------------------------------------------------------------------
outstanding shares of Class B Common Stock owned by such person or group is
- - ---------------------------------------------------------------------------
less than the percentage of all issued and outstanding shares of Class A Common
- - -------------------------------------------------------------------------------
Stock owned by such person or group (a "Significant Shareholder") at such time,
- - -------------------------------------------------------------------------------
such Significant Shareholder must, within a 90 day period beginning the day
- - ---------------------------------------------------------------------------
after becoming a Significant Shareholder, make a public tender offer in
- - -----------------------------------------------------------------------
compliance with all applicable laws and regulations to acquire additional Class
- - -------------------------------------------------------------------------------
B Common Stock as provided in this paragraph (H) of Article III (a "Class B
- - ---------------------------------------------------------------------------
Protection Transaction").
- - -------------------------
2. In each Class B Protection Transaction, the
-- -------------------------------------------
Significant Shareholder must make a public tender offer to acquire that number
- - ------------------------------------------------------------------------------
of shares of Class B Common Stock determined by (a) multiplying the percentage
- - ------------------------------------------------------------------------------
of outstanding Class A Common Stock beneficially owned by such Significant
- - --------------------------------------------------------------------------
Shareholder by the total number of shares of Class B Common Stock outstanding
- - -----------------------------------------------------------------------------
on the date such person or group became a Significant Shareholder, and (b)
- - --------------------------------------------------------------------------
subtracting therefrom the total number of shares of Class B Common Stock
- - ------------------------------------------------------------------------
beneficially owned on such date by such Significant Shareholder (including
- - --------------------------------------------------------------------------
shares acquired on such date at or prior to the time such person or group
- - -------------------------------------------------------------------------
became a Significant Shareholder). (For purposes of subparagraph (H)(4) below,
- - -------------------------------------------------------------------------------
the applicable date for determining the total number of shares of Class B
- - -------------------------------------------------------------------------
Common Stock outstanding for part (a) of the previous sentence shall be the
- - ---------------------------------------------------------------------------
date on which the Significant Shareholder becomes required to engage in a Class
- - -------------------------------------------------------------------------------
B Protection Transaction.) The Significant Shareholder must acquire all of
- - -------------------------- -----------------------------------------------
such shares of Class B Common Stock validly tendered; provided, however, that
- - -----------------------------------------------------------------------------
if the number of shares of Class B Common Stock tendered to the Significant
- - ---------------------------------------------------------------------------
Shareholder exceeds the number of shares required to be
- - -------------------------------------------------------
A-6
<PAGE> 40
acquired to the formula set forth in this subparagraph (H)(2), the number of
- - ----------------------------------------------------------------------------
shares of Class B Common Stock acquired from each tendering holder shall be pro
- - -------------------------------------------------------------------------------
rata in proportion to the total number of shares of Class B Common Stock
- - ------------------------------------------------------------------------
tendered by all tendering holders.
- - ----------------------------------
3. The offer price for any shares of Class B Common
-- ------------------------------------------------
Stock required to be purchased by the Significant Shareholder pursuant to this
- - ------------------------------------------------------------------------------
paragraph (H) shall be the greater of (a) the highest price per share paid by
- - -----------------------------------------------------------------------------
the Significant Shareholder for any share of Class A Common Stock in the six
- - ----------------------------------------------------------------------------
month period ending on the date such person or group became a Significant
- - -------------------------------------------------------------------------
Shareholder or (b) the highest bid price of a share of Class A Common Stock or
- - ------------------------------------------------------------------------------
Class B Common Stock on the NASDAQ National Market System (or such other
- - ------------------------------------------------------------------------
exchange or quotation system as is then the principal trading market for such
- - -----------------------------------------------------------------------------
shares) on the date such person or group became a Significant Shareholder.
- - --------------------------------------------------------------------------
(For purposes of subparagraph (H)(4) below, the applicable date for the
- - -----------------------------------------------------------------------
calculations required by the preceding sentence shall be the date on which the
- - ------------------------------------------------------------------------------
Significant Shareholder becomes required to engage in a Class B Protection
- - --------------------------------------------------------------------------
Transaction.) In the event that the Significant Shareholder has acquired Class
- - ------------- ----------------------------------------------------------------
A Common Stock in the six month period ending on the date such person or group
- - ------------------------------------------------------------------------------
becomes a Significant Shareholder for consideration other than cash, the value
- - ------------------------------------------------------------------------------
of such consideration per share of Class A Common Stock shall be as determined
- - ------------------------------------------------------------------------------
in good faith by the Board of Directors.
- - ----------------------------------------
4. A Class B Protection Transaction shall also be
-- ----------------------------------------------
required to be effected by any Significant Shareholder each time that the
- - -------------------------------------------------------------------------
Significant Shareholder acquires beneficial ownership of the next higher
- - ------------------------------------------------------------------------
integral multiple of 5% (e.g. 15%, 20%, 25%, etc.) of the then issued and
- - -------------------------------------------------------------------------
outstanding shares of Class A Common Stock after the Effective Time (excluding
- - ------------------------------------------------------------------------------
Excluded Acquisitions of shares of Class A Common Stock) if the percentage of
- - -----------------------------------------------------------------------------
all issued and outstanding shares of Class B Common Stock owned by such
- - -----------------------------------------------------------------------
Significant Shareholder at such time is less than the percentage of all issued
- - ------------------------------------------------------------------------------
and outstanding shares of Class A Common Stock owned by such Significant
- - ------------------------------------------------------------------------
Shareholder at such time. Such Significant Shareholder shall be required to
- - ------------------------- -------------------------------------------------
make a public tender offer to acquire that number of shares of Class B Common
- - -----------------------------------------------------------------------------
Stock prescribed by the formula set forth in subparagraph (H)(2) above, and
- - ---------------------------------------------------------------------------
must acquire all shares validly tendered or a pro rata portion thereof, as
- - --------------------------------------------------------------------------
specified in subparagraph (H)(2), at the price determined pursuant to
- - ---------------------------------------------------------------------
subparagraph (H)(3) above.
- - --------------------------
5. If any Significant Shareholder fails to make an offer
-- -----------------------------------------------------
required by this paragraph (H) of Article III, or to purchase shares validly
- - ----------------------------------------------------------------------------
tendered and not withdrawn (after proration, if any), such Significant
- - ----------------------------------------------------------------------
Shareholder shall not be entitled to vote any shares of Class A Common Stock
- - ----------------------------------------------------------------------------
beneficially owned by such Significant Shareholder unless and
- - -------------------------------------------------------------
A-7
<PAGE> 41
until such requirements are complied with or unless and until all shares of
- - ---------------------------------------------------------------------------
Class A Common Stock causing such offer requirement to be effective are no
- - --------------------------------------------------------------------------
longer beneficially owned by such Significant Shareholder. To the extent that
- - ---------------------------------------------------------- ------------------
the voting power of any share of Class A Common Stock cannot be exercised
- - -------------------------------------------------------------------------
pursuant to this paragraph (H), that share of Class A Common Stock shall not be
- - -------------------------------------------------------------------------------
included in the determination of the voting power of the corporation for any
- - ----------------------------------------------------------------------------
purpose under these Amended and Restated Articles of Incorporation, as amended,
- - -------------------------------------------------------------------------------
or under law.
- - -------------
6. The Class B Protection Transaction requirement shall
-- ----------------------------------------------------
not apply to any increase in percentage ownership of Class A Common Stock
- - -------------------------------------------------------------------------
resulting solely from a change in the total amount of Class A Common Stock
- - --------------------------------------------------------------------------
outstanding.
- - ------------
7. All calculations with respect to percentage ownership
-- -----------------------------------------------------
of issued and outstanding shares of either class of Common Stock will be based
- - ------------------------------------------------------------------------------
upon the numbers of issued and outstanding shares reported by the corporation
- - -----------------------------------------------------------------------------
on the last filed of (a) the corporation's most recent annual report on Form
- - ----------------------------------------------------------------------------
10-K, (b) its most recent Quarterly Report on Form 10-Q, or (c) if any, its
- - ---------------------------------------------------------------------------
most recent Current Report on Form 8- K.
- - ----------------------------------------
8. For purposes of this paragraph (H) of this Article
-- --------------------------------------------------
III, the term "person" means a natural person, company, (other than the
- - -----------------------------------------------------------------------
corporation), government, or political subdivision, agency or instrumentality of
- - --------------------------------------------------------------------------------
a government, or other entity. "Beneficial ownership" shall be determined
- - -------------------------------------------------------------------------
pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
- - --------------------------------------------------------------------------------
amended (the "1934 Act"), or any successor regulation. The information or
- - -------------------------------------------------------------------------
existence of a "group" shall be determined pursuant to Rule 13d-5(b) under the
- - ------------------------------------------------------------------------------
1934 Act or any successor regulation.
- - -------------------------------------
I. MERGER OR CONSOLIDATION. In the event of a merger or
-- ------------------------ ---------------------------
consolidation of the corporation with or into another entity (whether or not
- - ----------------------------------------------------------------------------
the corporation is the surviving entity), the holders of Class B Common Stock
- - -----------------------------------------------------------------------------
shall be entitled to receive the same per share consideration as the per share
- - ------------------------------------------------------------------------------
consideration, if any, received by any holder of the Class A Common Stock in
- - ----------------------------------------------------------------------------
such merger or consolidation.
- - -----------------------------
J. SPLITS, SUBDIVISIONS, ETC. If the corporation shall in
-- -------------------------- ---------------------------
any manner split, subdivide or combine the outstanding shares of Class A Common
- - -------------------------------------------------------------------------------
Stock or Class B Common Stock, the outstanding shares of the other such class
- - -----------------------------------------------------------------------------
of Common Stock shall be proportionally subdivided or combined in the same
- - --------------------------------------------------------------------------
manner and on the same basis as the outstanding shares of the other class of
- - ----------------------------------------------------------------------------
Common Stock have been split, subdivided or combined.
- - -----------------------------------------------------
A-8
<PAGE> 42
K. ISSUANCE AND REPURCHASES OF STOCK.
-- ----------------------------------
1. The Board of Directors shall have the power to issue
-- ----------------------------------------------------
and sell all or any part of any class of stock herein or hereafter authorized
- - -----------------------------------------------------------------------------
to such persons, firms, associations or corporations, and for such
- - ------------------------------------------------------------------
consideration as the Board of Directors shall from time to time, in its
- - -----------------------------------------------------------------------
discretion, determine, whether or not greater consideration could be received
- - -----------------------------------------------------------------------------
upon the issue or sale of the same number of shares of another class, and as
- - ----------------------------------------------------------------------------
otherwise permitted by law.
- - ---------------------------
2. The Board of Directors shall have the power to
-- ----------------------------------------------
purchase any class of stock herein or hereafter authorized from such persons,
- - -----------------------------------------------------------------------------
firms, associations or corporations, and for such consideration as the Board of
- - -------------------------------------------------------------------------------
Directors shall from time to time, in its discretion, determine, whether or not
- - -------------------------------------------------------------------------------
less consideration could be paid upon the purchase of the same number of shares
- - -------------------------------------------------------------------------------
of another class, and as otherwise permitted by law.
- - ----------------------------------------------------
L. Shareholders of the corporation's common stock shall not have
-- -------------------------------------------------------------
pre-emptive rights to acquire unissued or other shares of the corporation.
- - --------------------------------------------------------------------------
[20] IV. The members of the governing board shall be styled
- - -------- --------------------------------------------------
"Directors". The number of directors shall not be reduced to less than [21]
- - ------------ ---
three, and may, at any time or times, be increased or decreased by a duly
- - -----
adopted amendment to these Articles of Incorporation, or in such manner as
shall be provided in the By-Laws of the corporation duly adopted by either the
Board of Directors or the shareholders.
[22] V. All shares are to be non-assessable.
-
[23] VI. The period of its duration is perpetual.
--
[24] VII. Provisions for the regulation of the internal affairs of the
---
corporation are contained in the By-Laws of this corporation.
[25] VIII. The personal liability of the directors of the corporation for
----
monetary damages shall be eliminated to the fullest extent permissible under
applicable law, as the same existed [26] on May 14, 1993 (the date upon which
------------------------------------
this Article [27] VIII originally became effective), and to such greater extent
---------------------------------
as applicable law may thereafter permit. Any repeal or modification of the
provisions of this Article [28] VIII by the shareholders of the corporation
----
shall not adversely affect any right or protection of a director of the
corporation existing at the time of such repeal or modification.
[29] IX. The corporation is authorized to indemnify any agent (as
--
hereinafter defined) to the maximum and broadest extent permitted under
applicable law, as the same [30] existed on May 14, 1993 (the date upon which
--------------------------------------------
this Article [31] IX originally became effective), and to such greater extent
-------------------------------
as applicable
A-9
<PAGE> 43
law may thereafter permit, if and to the extent such agent becomes entitled to
indemnification by bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise. This authorization includes, without limitation, the
authority to indemnify any agent in excess of that otherwise expressly
permitted by applicable law as to action in an official capacity and as to
action in another capacity while holding such office for breach of duty to the
corporation and its shareholders; provided, however, that the corporation is
not authorized to indemnify any agent for any acts or omissions for which a
director may not be relieved of liability as set forth in said applicable law,
or as to circumstances in which indemnity is expressly prohibited by said
applicable law. When used in this Article [32] IX, "agent" shall mean any
--------------------------
person who is or was a director, officer, employee or other agent of the
- - ------------------------------------------------------------------------
corporation, or is or was serving at the request of the corporation as a
- - ------------------------------------------------------------------------
director, officer, employee or agent of another foreign or domestic
- - -------------------------------------------------------------------
corporation, partnership, joint venture, trust or other enterprise, or was a
- - ----------------------------------------------------------------------------
director, officer, employee or agent of a foreign of domestic corporation which
- - -------------------------------------------------------------------------------
was a predecessor corporation of the corporation or of another enterprise at
- - ----------------------------------------------------------------------------
the request of the predecessor corporation. Each reference in this Article
- - -------------------------------------------
[33] IX to applicable law shall mean the provision of that law [34] on May 14,
-- ---------
1993 (the date upon which this Article IX originally became effective) and as
- - ----------------------------------------------------------------------
the same may be amended thereafter from time to time, but only to the extent
that such amendment would broaden or increase the scope or magnitude of
permissible indemnification.
A-10
<PAGE> 44
- - ------------------ DELETIONS ------------------
[1] 1
[2] 2. Its principal office in the County of Washoe, State of Nevada is located
at 350 South Center street, Suite 404, Reno, Nevada 89501. The name and address
of its Resident Agent is Elliott R. Pearson, 350 South Center Street, Suite
404, Reno, Nevada 89501.
[3] 3
[4] 1
[5] 2
[6] 3
[7] 4
[8] 5
[9] 6
[10] 7
[11] 8
[12] 9
[13] 10
[14] 11
[15] 4. The
[16] two classes of shares to be designated "common" and "preferred". The total
number of preferred shares which this corporation is authorized to issue is
100,000,000. The total number of common shares which this corporation is
authorized to issue is 100,000,000. Each common share will have
[17] . Shareholders of the corporation's common stock shall not have
pre-emptive rights to acquire unissued or other shares
[18] nor shall such shareholders have the right of cumulative voting with
respect to the election of directors of the corporation.
[19] 5. The governing board shall be styled "Directors", and the first Board
shall be three (3) in number.
A-11
<PAGE> 45
So long as all of the shares of the corporation are owned beneficially and of
record by either one or two shareholders, the number of directors may be less
than three, but not less than the number of shareholders. Otherwise, the number
of directors shall not be less than three.
[20] Subject to the foregoing limitations, the
[21] one
[22] The names and addresses of the first Board of Directors are as follows:
DIRECTORS ADDRESS
Elaine Batchker 1 Sage Court
White Plains, New York 10605
Stuart Davidoff 67 Amber Street
Staten Island, NY 10306
Richard D. Fagan c/o Spear Leeds & Kellogg
115 Broadway
New York, New York 10006
6
[23]
7. The names and addresses of the incorporators of the Corporation are as
follows:
NAME ADDRESS
Elliott R. Pearson 350 S. Center St., Ste. 404
Reno, Nevada 89501
8
[24] 9
[25] 10
[26] exisits when
[27] 10 becomes effective
[28] 10
[29] 11
[30] exists when
[31] 11 becomes effective
A-12
<PAGE> 46
[32] 11, "agent" shall have the meaning assigned to this term in Section 317 of
the California Corporations Code
[33] 11
[34] when this Article 11 becomes effective
[35] .01
A-13
<PAGE> 47
EXHIBIT B
SALOMON BROTHERS INC
Seven World Trade Center
New York, New York 10048
Telephone: (212) 783-7000
--------------------------
SALOMON BROTHERS
--------------------------
<TABLE>
<S> <C>
October 30, 1997
Special Committee
Board of Directors
Herbalife International, Inc.
1800 Century Park East
Century City, CA 90067-1501
Members of the Special Committee:
You have requested that Salomon Brothers Inc, acting as financial advisor to the Special
Committee of the Board of Directors of Herbalife International, Inc. (the "Company"), render
an opinion as to certain effects on the Company's common stock of the implementation of the
proposal (the "Proposal") to recapitalize the Company's common stock, $.01 par value per
share (the "Existing Stock"), into Class A Common Stock ("Class A Stock") and Class B Common
Stock ("Class B Stock" and, together with the Class A Stock, the "Common Stock") as
described in a draft of the Company's Proxy Statement dated October 29, 1997 (the "Proxy
Statement"). Specifically, you have requested our opinion as to the effects of the Proposal,
assuming that the Proposal was effective on the date hereof, from a financial point of view
and under current market conditions, upon the Company's ability to raise equity capital
through an offering or offerings of shares of common equity and upon the aggregate market
value of the Company's common equity.
Under the Proposal, which requires shareholder approval of amendments to the Company's
Restated Articles of Incorporation (as so amended, the "Amended Articles"), the Existing
Stock will be reverse-split (the "Reverse-Split") in a one-for-three ratio, immediately
after which the Existing Stock will be reclassified (the "Reclassification") as the Class A
Stock, and a new Class B Stock will be created. The Company intends, after the Reverse-Split
and the Reclassification, to pay a dividend of two shares of Class B Stock on each share of
Salomon Class A Stock. The Class A Stock and Class B Stock will be substantially identical in all
Brothers Inc respects except that (i) the Class B Stock will have no voting rights except as otherwise
& Worldwide provided in the Amended Articles and as required by law, (ii) dividends or other
Affiliates distributions of cash or property (except for distributions in liquidation) paid on the
Atlanta Class B Stock may, at the discretion of the Board of Directors, be greater than the
Berlin corresponding dividend or distribution paid on the Class A Stock and (iii) stock dividends
Boston on the Class B Stock may not be in Class A Stock. In addition, the Amended Articles will
Chicago require that, among other things, (i) an acquiror or acquirors of ten percent (10%) or more
Dallas of the outstanding Class A Stock (or of a percentage representing a five percent increment
Frankfurt or more in excess thereof) must, under certain circumstances, make a public tender offer to
Hong Kong acquire Class B Stock in an amount such that the acquiror's or acquirors' percentage
London ownership of Class A Stock would be not more than such acquiror's or acquirors' percentage
Los Angeles ownership of Class B Stock after acquisition of such Class B Stock (the "Class B Protection
Madrid Provision"), (ii) in the event of a merger or consolidation of the Company, holders of Class
Melbourne B Stock will be entitled to receive the same consideration per share, if any, as that paid
New York to holders of Class A Stock, (iii) if, at any time, the number of outstanding shares of
San Francisco Class A Stock falls below 10% of the aggregate number of outstanding shares of Common Stock
Seoul then, immediately upon the occurrence of such an event, all the outstanding shares of Class
Singapore B Stock shall be automatically converted into shares of Class A Stock on a share for share
Sydney basis, and (iv) the Class B Stock may be converted into Class A Stock on a share for share
Taipei basis by the Board of Directors if, as a result of the existence of the Class B Stock,
Tokyo either class of Common Stock becomes excluded from trading on all principal national
Toronto securities exchanges then in use and also is excluded from quotation on the Nasdaq National
Zurich Market System and any comparable national quotation system then in use.
</TABLE>
B-1
<PAGE> 48
SALOMON BROTHERS INC
Special Committee
Board of Directors
October 30, 1997
Page 2
--------------------------
SALOMON BROTHERS
--------------------------
For the purpose of rendering the opinions set forth below, we have
reviewed and considered: (a) the Proxy Statement and have assumed that no
material change will be made to the Proposal as described therein; (b) a
draft of the proposed Amended Articles dated October 29, 1997, including
the Class B Protection Provision; (c) historical market price and volume
data for the common stock of certain companies that have effected
recapitalizations similar to the Proposal; (d) voting rights and other
terms of each class of common stock of the companies referred to in (c)
above; (e) historical market price and volume data for the Existing Stock;
and (f) such other analyses as we deemed appropriate. For purposes of the
opinion set forth below, we have not independently verified the accuracy or
completeness of the information which we have considered in our review
(including the information contained in the Proxy Statement). We have
relied upon, but do not assume any responsibility for, the accuracy and
completeness of all such information.
For the purpose of rendering the opinions set forth below, we have
assumed that, immediately prior to the implementation of the Proposal, the
Existing Stock will continue to be quoted on the Nasdaq National Market
System and that following implementation of the Proposal, both the Class A
Stock and the Class B Stock will be eligible for and will be quoted on the
Nasdaq National Market System. We have also assumed that, immediately prior
to implementation of the Proposal, the Existing Stock will continue to be
the only class of common equity outstanding and that, after implementation
of the Proposal, the Class A Stock and Class B Stock will be the only
classes of common equity then outstanding. The opinions set forth below are
based on financial and market conditions prevailing, and other
circumstances and conditions existing, on the date hereof and assumes the
Proposal was effective as of the date hereof. Because of the length of time
which may elapse between the announcement of the Proposal and the
implementation of the Proposal, the market value of the Existing Stock or
Common Stock and the Company's ability to raise equity capital could be
affected by a variety of factors, including changes in the financial
condition of the Company, changes in the regulatory environment, changes in
current and potential investors' perception of the economic implications of
the Proposal and of similar dual class stock structures, changes in the
industry in which the Company operates and changes in general market and
economic conditions. Our opinions set forth below assume the absence of any
impact from any of the foregoing factors. Furthermore, any analysis of the
future market value of securities is only an approximation, subject to
uncertainties and contingencies all of which are difficult to predict.
Accordingly, except as specified in the last sentence of this letter, we do
not express any opinion as to the market value of the Company's common
equity following implementation of the Proposal.
We note that due to the large aggregate amount of Class B Stock being
issued to the stockholders of the Company and other factors, such
securities may trade initially at market prices below those at which they
would trade on a fully distributed basis. In addition, we are aware that
Mark Hughes may dispose of certain amounts of Class B Stock, as disclosed
in the Proxy Statement. Further, the market value of the Existing Stock or
Common Stock and the Company's ability to raise equity capital could also
be affected by the announcement and/or implementation of the Proposal if
such Proposal causes a change in perception by some investors of the future
plans of the Company, including plans with respect to the future issuance
of additional equity securities by the Company, or the future plans of Mark
Hughes. Our opinions set forth below assume the absence of any impact from
any of the foregoing factors.
This letter is intended solely for the benefit and use of the Special
Committee in their evaluation of the Proposal and is not on behalf of, and
is not intended to confer rights or remedies upon, any stockholder of the
B-2
<PAGE> 49
SALOMON BROTHERS INC
Special Committee
Board of Directors
October 30, 1997
Page 3
--------------------------
SALOMON BROTHERS
--------------------------
Company or any person other than the Special Committee. This letter, with
the exception of its reproduction in the Proxy Statement or other filing or
communication relating to the Proposal that the Company files under the
Securities Exchange Act and distributes to shareholders, shall not be
publicly cited, reproduced or disseminated, summarized, quoted or referred
to at any time or relied upon by anyone other than the Special Committee or
the Board of Directors, in any manner or for any purpose, without our prior
written consent. Furthermore, our opinion does not constitute an opinion on
the fairness of the Proposal to either the Company or its current
shareholders.
In the ordinary course of our business, we actively trade the Existing
Stock for our own account and for the account of customers and,
accordingly, may at any time hold a long or short position in such
securities.
We have acted as financial advisor to the Special Committee in
connection with the Proposal and will receive the following fees from the
Company for performing such services: (i) an Initial Advisory fee payable
upon consummation of our services; (ii) a Transaction Fee payable upon the
rendering of this Opinion; and (iii) an Additional fee payable upon
implementation of the Proposal. We will also be reimbursed by the Company
for our out-of-pocket expenses. The Company has agreed to indemnify us
against certain losses and expenses in connection with the Proposal. We
have acted as financial advisor to the Company with respect to matters
unrelated to the Proposal and have received fees for our services.
Based upon and subject to the foregoing, it is our opinion that, from
a financial point of view and under current market conditions, assuming
that the Proposal was effective on the date hereof, the Proposal would not
have a material adverse effect on (i) the Company's ability to raise equity
capital after implementation of such Proposal through an offering or
offerings of common equity as compared with the Company's ability to raise
equity capital through an offering or offerings of common equity
immediately prior to the announcement of such Proposal, or (ii) the total
market value of the Common Stock outstanding after implementation of such
Proposal as compared with the total market value of the Existing Stock
outstanding immediately prior to the announcement of such Proposal.
Very truly yours,
SALOMON BROTHERS INC
[SIGNATURE]
B-3
<PAGE> 50
EXHIBIT C
AMENDMENT TO 1991 AMENDED AND RESTATED STOCK OPTION PLAN OF
HERBALIFE INTERNATIONAL, INC.,
Section 3 of the 1991 Amended and Restated Stock Option Plan of
Herbalife International, Inc. shall be amended to read as follows:
3. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Paragraph 14 hereof, the
shares to be issued under the Plan shall consist of the Company's
------
authorized but unissued Class A Common Stock, $0.01 par value ([1]
-------
"Class A Common Stock")[2] and the Company's authorized but unissued
------- ---------------------------------
Class B Common Stock, $0.01 par value ("Class B Common Stock"). Each
---------------------------------------------------------------------
of the Class A Common Stock and the Class B Common Stock shall be
-----------------------------------------------------------------
referred to as "Common Stock." Options granted under the Plan may
------------------------------ ----------------------------------
consist of (i) options to purchase shares of Class A Common Stock,
------------------------------------------------------------------
(ii) options to purchase shares of Class B Common Stock, or (iii)
-----------------------------------------------------------------
options to purchase shares of Class A Common Stock and Class B Common
---------------------------------------------------------------------
Stock. The aggregate amount of [3] Common Stock which may be issued
----------- ------------
upon exercise of all options under the Plan (excluding options
exercised prior to the adoption of this Amended and Restated Plan by
the Board on April 10, 1997, but including shares issuable upon
exercise of options outstanding on such date) shall not exceed
6,800,000 shares of Common Stock. If any option granted under the
------------
Plan shall expire or terminate for any reason, without having been
exercised in full, the unpurchased shares subject thereto shall again
be available for options to be granted under the Plan.
<PAGE> 51
- - ------------------ DELETIONS ------------------
[1] the
[2] ,
[3] such stock
<PAGE> 52
EXHIBIT D
AMENDMENT TO HERBALIFE INTERNATIONAL, INC.
AMENDED AND RESTATED 1994 PERFORMANCE-BASED
ANNUAL INCENTIVE COMPENSATION PLAN
Section 3 of the Herbalife International, Inc. 1994 Amended and
Restated Performance-Based Annual Incentive Plan shall be amended to read as
follows:
6.2 Payments in Cash and Common Stock; Advances. Awards under
the Plan will be made reasonably promptly following the conclusion of
each award period. Awards will be made, at the discretion of the
Committee (i) in cash by Company check, (ii) subject to Section 6.4,
through the issuance of shares of the Company's authorized but
unissued Class A Common Stock, $0.01 par value ("Class A Common
------- --------------
Stock"), (iii) subject to Section 6.4, the Company's authorized but
-------------------------------------------------------------------
unissued Class B Common Stock, $0.01 par value ("Class B Common
--------------------------------------------------------
Stock"), or [1] (iv) through any combination of (i) [2], (ii) and
-- ----------
(iii). Each of the Class A Common Stock and the Class B Common Stock
---------------------------------------------------------------------
shall be referred to as "Common Stock." All awards under the Plan
---------------------------------------
will be subject to withholding for applicable employment and income
taxes. Such withholding obligations shall be satisfied either in
cash, or in any other method approved by the Committee, in its
discretion. No awards under the Plan will be made to any participant
following the termination of such participant's employment or service
relationship with the Company (other than any amount earned for a
concluded award period that remains unpaid, and provided that the
Committee will provide for prorated awards based upon satisfaction of
performance goals for the entire award period in which termination
occurs, with the proration formula to be set by the Committee in its
discretion in advance of the commencement of the award period). For
all purposes of the Plan, awards shall be deemed fully earned
(notwithstanding that the amounts thereof have not been computed) as
of the last day of each award period. The Committee may, in its
discretion and subject to the consent of each affected participant,
approve the advance of all or a portion of the cash portion of a
target award to such participant prior to the conclusion of an award
period. Each such advance, if made, shall be a full recourse
obligation of the participant and shall bear interest from the date of
the advance until repaid or deemed earned, payable at the amount of
the applicable Federal rate (as referenced in Section 1274 of the
Code) for loans of comparable term in effect on the date such advance
is made.
<PAGE> 53
- - ------------------ DELETIONS ------------------
[1] (iii)
[2] and (ii).
<PAGE> 54
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Christopher Pair and Robert Sandler, and
each of them, as Proxy, with the power to appoint his or their substitutes, and
hereby authorize each of them to represent and to vote as designated below all
shares of Common Stock of Herbalife International, Inc. held of record by the
undersigned on November 5, 1997 at the Special Meeting of Shareholders to be
held on December 11, 1997, or at any adjournment or postponement thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
1. THE RECAPITALIZATION PROPOSAL -- ADOPTION OF AMENDED AND RESTATED ARTICLES
OF INCORPORATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. AMENDMENT TO AMENDED AND RESTATED 1991 STOCK OPTION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. AMENDMENT TO AMENDED AND RESTATED 1994 PERFORMANCE-BASED ANNUAL INCENTIVE
COMPENSATION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. In his discretion, the Proxy is authorized to vote upon such other business
as may properly come before the meeting.
<PAGE> 55
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.
Date:
-------------------------
-------------------------
Signature
-------------------------
Signature if held jointly
Please sign exactly as
name (or names) appears
below. When shares are
held by joint tenants,
both must sign. When
signing as attorney,
executor, administrator,
parent or guardian,
please give full title as
such. If a corporation,
please sign in full
corporate name by the
President or other
authorized officer. If a
partnership, please sign
in partnership name by an
authorized person.
PLEASE MARK, SIGN, DATE, AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED
ENVELOPE.
