<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1998
REGISTRATION NO. 333-46201
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NUMBER 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HERBALIFE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEVADA 5149 22-2695420
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(310) 410-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT A. SANDLER, ESQ.
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(310) 410-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ANTHONY T. ILER, ESQ. ALLAN G. SPERLING, ESQ.
IRELL & MANELLA LLP CLEARY, GOTTLIEB, STEEN & HAMILTON
333 SOUTH HOPE STREET, SUITE 3300 ONE LIBERTY PLAZA
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10006
(213) 620-1555 (212) 225-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
With respect to the DECS Equity Prospectus, as soon as practicable after this
Registration Statement becomes effective.
With respect to the Shelf Prospectus, from time to time after this Registration
Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) a
prospectus relating to the distribution by DECS Trust III, a Delaware business
trust (the "Trust"), pursuant to DECS representing beneficial interests in the
Trust (the "DECS"), of Class B Common Stock of the Registrant (the "DECS Equity
Prospectus") that the Trust may receive from the Selling Stockholder referred to
herein, pursuant to the terms of separate purchase agreements between the Trust
and the Selling Stockholder; and (ii) a prospectus relating to shares of Class B
Common Stock of the Registrant that may be loaned by the Selling Stockholder to
Smith Barney Inc. from time to time in connection with market-making activities
in the DECS (the "Shelf Prospectus") as described herein. The complete DECS
Equity Prospectus follows immediately. Following such DECS Equity Prospectus is
the Shelf Prospectus. All pages of the Shelf Prospectus are marked "[SHELF
PROSPECTUS PAGE]."
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 23, 1998
PROSPECTUS LOGO
5,000,000 SHARES
HERBALIFE INTERNATIONAL, INC.
CLASS B COMMON STOCK
($.01 PAR VALUE)
------------------
Pursuant to the terms of the DECS(SM) (the "DECS") representing beneficial
ownership interests in DECS Trust III, a Delaware business trust (the "Trust"),
the Trust may distribute to the holders of the DECS non-voting Class B Common
Stock, par value $.01 per share (the "Class B Stock"), of Herbalife
International, Inc. ("Herbalife" or the "Company") on or about , 2001
(the "Exchange Date"), or upon earlier liquidation of the Trust in certain
circumstances. This Prospectus relates to the distribution by the Trust pursuant
to DECS of up to 5,000,000 shares of Class B Stock, plus up to an additional
750,000 shares of Class B Stock, in the aggregate, that may be delivered
pursuant to DECS issued to cover over-allotments and DECS subscribed for and
purchased by Smith Barney Inc. ("Smith Barney") in connection with the
organization of the Trust, that the Trust may receive from certain personal
holding companies controlled by Mark Hughes, the Company's principal
stockholder, Chairman of the Board, Chief Executive Officer and President (such
companies, together with Mr. Hughes and certain other entities controlled by Mr.
Hughes, the "Selling Stockholder"; see "Selling Stockholder"), under the terms
of separate purchase contracts dated , 1998 between the Selling
Stockholder and the Trust (collectively, the "Contract"). This Prospectus
accompanies a Prospectus of the Trust (the "DECS Prospectus") relating to the
sale of 5,000,000 DECS, plus up to an additional DECS solely to cover
over-allotments (the "DECS Offering"). The Company will not receive any of the
proceeds from the sale of the DECS or delivery thereunder of the Class B Stock
to which this Prospectus relates. See "Use of Proceeds." Neither the Company nor
the Selling Stockholder takes any responsibility for any information included in
or omitted from the DECS Prospectus. The DECS Prospectus does not constitute a
part of this Prospectus nor is it incorporated by reference herein.
The Company, its directors and executive officers, and the Selling
Stockholder have agreed, subject to certain exceptions, not to sell, without the
prior written consent of Smith Barney, any of the Company's Class A Common
Stock, par value $.01 per share (the "Class A Stock"), or Class B Stock or any
securities convertible into or exercisable or exchangeable for Class A Stock or
Class B Stock, for a period of 90 days, in the case of the Company and its
directors and executive officers (other than the Selling Stockholder), and one
year, in the case of the Selling Stockholder, after the date of this Prospectus.
See "Plan of Distribution."
In connection with market-making activities in the DECS, Smith Barney may,
subject to certain limitations, from time to time, borrow, return and reborrow
up to 1,000,000 shares of Class B Stock from the Selling Stockholder. See "Plan
of Distribution." Smith Barney is not under any obligation to engage in any such
market-making activities with respect to the DECS, and any such market-making
activities in the DECS actually engaged in by Smith Barney may cease at any
time. The Registration Statement of which this Prospectus forms a part includes
an additional Prospectus relating to shares of Class B Stock which may be
offered and sold by Smith Barney pursuant to such market-making activities.
The Class B Stock is listed for trading on the Nasdaq National Market
System under the symbol "HERBB." On March 3, 1998, the last reported sale price
of the Class B Stock on the Nasdaq National Market System was $23 1/2 per share.
See "Price Range of the Common Stock."
"DECS(SM)" is a service mark of Salomon Brothers Inc.
See "Risk Factors" beginning on page 9 for a discussion of certain factors
that should be carefully considered by prospective purchasers.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
March , 1998
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THE DECS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS
A STOCK, THE CLASS B STOCK OR THE DECS, INCLUDING PURCHASES OF THE CLASS B STOCK
OR THE DECS TO STABILIZE THEIR MARKET PRICES AND PURCHASES OF THE CLASS B STOCK
OR THE DECS TO COVER SOME OR ALL OF SHORT POSITIONS IN THE CLASS B STOCK OR THE
DECS MAINTAINED BY THE RESPECTIVE UNDERWRITERS OF THE DECS OFFERING AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION."
IN CONNECTION WITH THE DECS OFFERING, CERTAIN UNDERWRITERS (AND SELLING
GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS B
STOCK, THE CLASS A STOCK OR THE DECS ON THE NASDAQ NATIONAL MARKET SYSTEM IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "PLAN OF DISTRIBUTION."
FORWARD-LOOKING STATEMENTS
Certain information contained in, or incorporated by reference into, this
Prospectus includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and is subject to the safe
harbor created by that Act. These forward-looking statements include, but are
not limited to, statements concerning the opening of new markets, the
introduction of new products and the like, and are generally identified by
phrases such as "the Company expects," "the Company believes," "Management
expects," "Management believes" and words of similar import. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in such
discussions. Additional information about these factors is contained in the
discussions in the "Risk Factors" beginning on page 9 and elsewhere in this
Prospectus and in documents incorporated by reference into this Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of the reports, proxy statements and other information may be obtained
from the Public Reference Section of the Commission, at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy statements and other information concerning the Company are also
available for inspection at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C., 20006. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities to which this Prospectus
relates. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed as a part thereof. For further
information about the Company and the securities to which this Prospectus
relates, reference is made to the Registration Statement and to the financial
statements, exhibits and schedules filed therewith or incorporated by reference
therein. The statements contained in this Prospectus about the contents of any
contract or other document referred to herein are not necessarily complete, and
where such contract or other document is filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. The Registration Statement, including the exhibits and
schedules filed as a part thereof or incorporated by reference therein, may be
inspected without charge at the public reference facilities maintained by the
Commission as set forth in the preceding paragraph. Copies of these documents
may be obtained from the Commission at its principal office in Washington, D.C.
upon payment of the charges prescribed by the Commission.
2
<PAGE> 5
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been filed with the Commission by the Company
and are incorporated herein by reference and made a part hereof: (i) the
Company's Annual Report on Form 10-K for the year ended December 31, 1997; (ii)
the description of the Company's Class A Common Stock contained in the Company's
Registration Statement on Form 8-A/A filed December 12, 1997; and (iii) the
description of the Company's Class B Common Stock contained in the Company's
Registration Statement on Form 8-A filed December 12, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering to which this Prospectus relates
shall be deemed to be incorporated in this Prospectus by reference and to be a
part hereof from the respective dates of filing of such documents. The Company
will provide, without charge to any person to whom a copy of this Prospectus is
delivered, upon the written or oral request of such person, a copy of any
document incorporated by reference herein other than exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
document. Requests should be directed to Herbalife International, Inc., 1800
Century Park East, Los Angeles, California 90067, Attention: General Counsel
(telephone: (310) 410-9600).
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
------------------
"DECS(SM)" is a service mark of Salomon Brothers Inc.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. Unless the context otherwise requires, references
to the "Company" include Herbalife International, Inc. and its consolidated
subsidiaries. Unless otherwise indicated, all information contained herein
assumes no exercise of the underwriters' over-allotment option in the DECS
Offering. See "Plan of Distribution."
THE COMPANY
Herbalife is a network marketing company that sells a wide range of weight
management products, food and dietary supplements and personal care products
worldwide. As of December 31, 1997, the Company conducted business in 36
countries located in Asia/Pacific Rim, Europe and The Americas. Retail sales in
those regions represented 43.2%, 30.4% and 26.4%, respectively, of the Company's
total retail sales in 1997.
The Company has experienced substantial growth in retail sales and net
income in recent years. From 1992 to 1997, the Company's retail sales grew from
$405.1 million to $1.49 billion, representing a compound annual growth rate of
29.8%. From 1992 to 1997, the Company's net income grew from $20.1 million to
$54.7 million, representing a compound annual growth rate of 22.2%.
The Company's products are marketed exclusively through a network marketing
system. This system enables the Company's independent distributors to earn
profits by selling Herbalife products to retail consumers or other distributors.
Distributors may also develop their own distributor downline organizations by
sponsoring other distributors to do business in any market where the Company
operates, entitling the sponsors to receive royalty overrides (cash incentives,
including royalties and bonuses) on product sales within their downline
organizations.
Management believes that Herbalife's network marketing system is ideally
suited to its products, which emphasize a healthy lifestyle, because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use the Company's products themselves.
The Company's network marketing system appeals to a broad cross-section of
people throughout the world, particularly those seeking to supplement family
income, start a home business or pursue employment opportunities other than
conventional, full-time employment.
KEY OPERATING STRENGTHS
The Company believes the source of its success is its commitment to serving
the needs of its distributors. The Company provides its distributors with high
quality products and an appealing network marketing system that combines a
highly attractive compensation program with extensive Company-sponsored training
and motivational events and services. The Company has established a strong
operating platform to support distributors and facilitate future growth. The key
components of this platform include the following:
High Quality, Healthy Lifestyle Products. The Company offers high quality
weight management, food and dietary supplement and personal care products, many
of which emphasize herbs and other natural ingredients in order to appeal to
consumer demand for products that contribute to a healthy lifestyle. These three
product categories represented 67.8%, 16.4% and 11.3%, respectively, of total
retail sales in 1997.
Attractive Distributor Compensation Program. The Company believes that it
offers one of the most financially rewarding compensation programs in the
network marketing industry. Combining the various sources of earnings available
to the Company's distributors, the Company's total "pay-out" (including
distributor allowances) on products subject to distributor royalty overrides is
approximately 72% of the Company's suggested retail sales price (before
reflecting a 6% handling fee paid by distributors).
Comprehensive Distributor Support Services. The Company is committed to
training and motivating its distributors and providing ongoing support. The
Company regularly conducts motivational events and training programs, both live
and via the Herbalife Broadcast Network ("HBN"). The Company also utilizes
4
<PAGE> 7
teleconferences and a wide range of promotional literature (including catalogs
and newsletters), all in multiple languages and tailored to meet the particular
needs of Herbalife distributors worldwide. In addition to over one hundred
Company-sponsored live events each month, distributors themselves conduct
several thousand local training and motivational events each month.
Proven New Market Expansion Program. The Company has developed a
systematic, proven approach to opening new markets. With the advice of local
legal counsel and other advisors, the Company conducts a detailed analysis of
the new market's regulatory framework, modifies its products and marketing
system as necessary to obtain required regulatory approvals and establishes
plans for product distribution and distributor services within the new market.
Advanced Global Information Systems. To facilitate the Company's global
expansion, the Company employs advanced computer and telecommunications systems
that link its domestic and international operations and provide timely and
accurate product ordering, royalty payment processing and inventory management.
Proactive Approach to Government Relations. The Company employs a staff of
government relations personnel throughout the world who take a proactive
approach to working with governmental agencies, in order to create a favorable
business environment and to ensure that the Company's marketing system and
products comply with regulatory requirements.
GROWTH STRATEGY
The Company plans to continue capitalizing on its strong operating platform
and intends to pursue a growth strategy comprised of the following four
principal elements:
Expand Product Offerings and Develop New Product Lines. The Company is
committed to expanding its product line by developing and offering new products
and introducing existing products into markets where they are not currently
offered. The timely introduction of new, high quality products creates sales
opportunities for distributors, and also serves to generate enthusiasm among
distributors and provide them with additional promotional opportunities to sell
other Company products. During 1997, the Company introduced 17 new products
(exclusive of flavor and color variations) and during 1998 the Company intends
to introduce up to 40 new products (exclusive of flavor and color variations) in
selected markets, including several additions to the weight management program,
an important new line of personal care products and a new line of water
purification systems. The Company will also seek to introduce additional new
product lines in the future, including household products.
Revitalize Sales in Certain Existing Markets. Management continually seeks
to revitalize sales in markets, such as France, Germany, Italy and Spain, that
have experienced an initial period of growth followed by a leveling off or
decline in sales (see "Business -- Geographic Areas of Operations") by, among
other things, providing extensive training and motivational program support to
distributors. In addition, the Company has created regional planning and
strategy groups that include senior members of the Company's distributor base,
increased focus on governmental relations and hired additional distributor
support representatives. The Company also seeks to introduce annually in each
targeted market additional products not previously offered. In certain markets,
the Company has enhanced its presence and visibility by opening new, more
attractive and conveniently located distributor sales centers. The Company
believes that these initiatives favorably impact operations and the Company will
continue to deploy these initiatives in an effort to provide a platform for
renewed growth in the targeted markets in the future.
Expand Into New Markets. The opening of new markets is an important
component of the Company's business strategy. The Company believes there are
numerous additional markets in which its network marketing system and products
should prove successful. The Company opened new markets, Thailand and Chile, in
1997 and plans to open Turkey and Indonesia in 1998. Additional new markets
currently under consideration include China, India, Colombia and Ecuador. The
Company evaluates these and other new markets based, in part, on the Company's
ability to efficiently create a distributor base in potential markets. In
determining when and where to open new markets, the Company will continue to
seek to minimize the impact
5
<PAGE> 8
on distributor focus in existing markets and to ensure that adequate distributor
support services and other Company systems are in place to support the growth.
Enhance Sales and Motivational Training. The Company will continue to seek
to increase sales through its network marketing system by utilizing extensive
training and motivational programs. The Company will also produce extravaganzas
and other large scale events and numerous training and motivational programs
worldwide. In addition, the Company will continue to offer extensive training
programs through various methods of telecommunication, including broadcast
faxes, pre-recorded telephone message services and live multi-lingual
teleconferences on a global basis, and will seek to expand the motivational and
training programming and audience of the HBN network. Approximately 20,000 HBN
home systems are currently in place. The Company believes distributors
frequently invite other distributors and customers into their homes to view the
2 to 3 hours of HBN network programming available each week.
RECENT DEVELOPMENTS
In December 1997, the Company's common stock, par value $.01 per share (the
"Old Common Stock") was reclassified into voting Class A Stock and non-voting
Class B Stock. The reclassification of the Old Common Stock is referred to
herein as the "Recapitalization," and the Class A Stock and Class B Stock are
together referred to herein as the "Common Stock." See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments and Outlook" for a more detailed description of the
Recapitalization.
6
<PAGE> 9
THE OFFERING
PLAN OF DISTRIBUTION....... The DECS are being offered by the Trust in the DECS
Offering pursuant to the DECS Prospectus.
Pursuant to the terms of the DECS, the Trust will
distribute to holders of the DECS on the Exchange
Date shares of Class B Stock (or at the Selling
Stockholder's option, the cash equivalent
thereof) and/or such other consideration as is
delivered by the Selling Stockholder to the Trust
(the "Offering"). This Prospectus relates to the
delivery by the Trust pursuant to the DECS of up
to 5,000,000 shares of Class B Stock, plus up to
an additional 750,000 shares of Class B Stock
that may be delivered pursuant to (a) DECS that
may be issued to cover over-allotments and (b)
DECS subscribed for and purchased by Smith Barney
in connection with the organization of the Trust,
that the Trust may receive from the Selling
Stockholder under the terms of the Contract. For
a description of certain relationships between
the Selling Stockholder and the Company, see
"Certain Transactions."
SELLING STOCKHOLDER........ The Selling Stockholder in this offering is Mark
Hughes, the principal stockholder, Chairman of
the Board, Chief Executive Officer and President
of the Company, together with certain personal
holding companies and other entities controlled
by Mr. Hughes. See "Selling Stockholder." As of
February 23, 1998, Mr. Hughes beneficially owned
5,666,932 shares of the Class A Stock and
11,333,866 shares of Class B Stock (which amounts
include 183,333 shares of Class A Stock and
366,666 shares of Class B Stock held by a
charitable foundation of which Mr. Hughes is a
director but with respect to which Mr. Hughes has
no pecuniary interest), representing 57.2% and
58.2% of the Company's outstanding Class A Stock
and Class B Stock, respectively. Assuming the
delivery to the Trust of the maximum number of
shares of Class B Stock that may be required by
the Selling Stockholder to satisfy the Contract
(assuming full exercise of the over-allotment
option in the DECS Offering), Mr. Hughes would
beneficially own 5,583,866 shares of Class B
Stock (including the foundation-owned shares
referred to above), representing 28.7% of the
Company's outstanding Class B Stock as of
February 23, 1998. During the term of the DECS
and the Contract, Mr. Hughes will retain the
right to receive dividends on the shares of Class
B Stock subject to the Contract. See "Plan of
Distribution."
USE OF PROCEEDS............ All of the shares of Class B Stock covered by this
Prospectus are beneficially owned by Mr. Hughes,
who may cause to be delivered such shares to the
Trust pursuant to the Contract. See "Plan of
Distribution." The Company will not receive any
of the proceeds from the sale of the DECS or the
delivery thereunder of the Class B Stock to which
this Prospectus relates. See "Use of Proceeds."
NASDAQ NATIONAL MARKET
SYSTEM SYMBOL OF THE
CLASS B STOCK................ HERBB
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Retail sales............................. $693,015 $884,058 $923,644 $1,200,144 $1,490,693
Less--Distributor allowances on product
purchases.............................. 328,270 417,177 434,640 568,209 708,241
-------- -------- -------- ---------- ----------
Net sales................................ 364,745 466,881 489,004 631,935 782,452
Cost of sales............................ 103,834 130,707 143,557 168,432 205,070
Royalty overrides........................ 107,381 125,820 138,940 184,669 233,883
-------- -------- -------- ---------- ----------
Gross Profit............................. 153,530 210,354 206,507 278,834 343,499
Marketing, distribution and
administrative expenses................ 88,918 139,629 176,046 210,087 257,514
Restructuring expense.................... -- -- 2,300 -- --
Interest income--net..................... 1,729 2,919 3,404 4,084 4,535
-------- -------- -------- ---------- ----------
Income before income taxes and minority
interest............................... 66,341 73,644 31,565 72,831 90,520
Income taxes............................. 25,160 27,616 11,837 28,040 34,850
Minority interest........................ -- -- -- -- 1,003
-------- -------- -------- ---------- ----------
Net income............................... $ 41,181 $ 46,028 $ 19,728 $ 44,791 $ 54,667
======== ======== ======== ========== ==========
Earnings per share:
Basic.................................. $ 1.52 $ 1.54 $ 0.66 $ 1.50 $ 1.81
Diluted................................ $ 1.47 $ 1.50 $ 0.65 $ 1.43 $ 1.72
Cash dividends per common share.......... $ 0.49 $ 0.80 $ 0.74 $ 0.60 $ 0.60
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
-----------------------------------------------------------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Approximate number of supervisors.................. 41,000 75,000 90,000 99,000 115,000 139,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Number of countries................................ 16 24 32 34 36
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities... $ 79,354 $ 59,113 $104,226 $131,039 $122,707
Working capital.................................... 72,723 89,825 85,126 109,662 125,986
Total assets....................................... 130,820 174,057 207,690 269,114 314,580
Long-term obligations.............................. 994 1,014 1,779 2,306 2,666
Stockholders' equity............................... 81,202 109,815 109,530 138,468 154,733
</TABLE>
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RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully the information set forth below, as well as the other
information contained in this Prospectus.
DEPENDENCE ON DISTRIBUTORS
The Company's success depends in significant part upon its ability to
attract, maintain and motivate a large base of distributors. In its efforts to
attract and retain distributors, the Company competes with other network
marketing organizations, including those in the weight management, food and
dietary supplement and personal care product industries. In addition, as a
result of the Company's network marketing system and its international
sponsorship program, the distributor organizations headed by a relatively small
number of key distributors are responsible for a significant percentage of total
retail sales (in many cases, including retail sales in several different
countries). The Company does not believe that the loss of any key distributor
would necessarily result in the loss of a significant number of that
distributor's downline organization members because of the Company's generally
good relations with its distributors and because of the significant incomes that
many distributors would forego by ceasing to distribute the Company's products.
However, the loss of a key distributor, together with a significant number of
downline distributors, or the loss of a significant number of distributors for
any reason, could materially adversely affect sales of the Company's products
and could impair the Company's ability to attract new distributors.
The Company's ability to attract and retain distributors has been and could
again be negatively affected by adverse publicity and regulatory action relating
to the Company, its products or its operations, including its network marketing
system. In the mid-1980s, the Company's products and marketing system became the
subject of regulatory scrutiny in the United States, resulting in large part
from claims and representations made about the Company's products (including
impermissible therapeutic claims). The resulting adverse publicity caused a
rapid, substantial loss of distributors in the United States and a corresponding
reduction in sales beginning in 1985. More recently, adverse publicity in other
markets, including Brazil, France and Germany, contributed to a loss of
distributors and a decline in sales in those markets. See "-- Sales and Earnings
Volatility." The Company expects that its business in particular markets will,
from time to time, continue to be adversely affected by negative publicity or
regulatory action. See "Business -- Network Marketing System; Geographic Areas
of Operations; Regulation; Growth Strategy."
REGULATION
In both its United States and foreign markets, the Company is subject to
and affected by extensive governmental regulations, including, among other
things, regulations pertaining to (i) the formulation, manufacturing, packaging,
labeling, distribution, importation, sale and storage of the Company's products,
(ii) product claims and advertising (including direct claims and advertising by
the Company, as well as claims and advertising by distributors for which the
Company may be held responsible), (iii) the Company's network marketing system,
(iv) transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties, and (v) taxation of distributors, which in
some instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records. See "Business -- Regulation."
The Company could be found not to be in compliance with existing
regulations as a result, among other things, of the ambiguous nature of certain
of the regulations, the considerable interpretive and enforcement discretion
given to regulators or misconduct by distributors, who are generally independent
contractors over whom the Company has limited control. Enforcement actions that
could be undertaken by state and federal regulators include product seizures,
injunctions against further product distribution, requests for product recall,
and possible criminal prosecution. Any assertion or determination that the
Company or its distributors are not in compliance with existing regulations
could have a material adverse effect on the Company. The Company's business has
been materially, adversely affected in the past as a result of regulatory
activities. See "-- Sales and Earnings Volatility."
In addition, the adoption of new regulations in the United States or in any
of the Company's international markets, or changes in the interpretation of
existing regulations, could have a material adverse effect on the
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<PAGE> 12
Company. For example, in September 1997 the United States Food and Drug
Administration (the "FDA") issued regulations governing the labeling and
marketing of dietary supplement products. The regulations cover: 1) the
identification of dietary supplements and their nutrition and ingredient
labeling; 2) the terminology to be used for nutrient content claims, health
content claims, and statements of nutritional support; 3) labeling requirements
for dietary supplements for which "high potency" and "antioxidant" claims are
made; 4) notification procedures for statements on dietary supplements; and 5)
premarket notification requirements for new dietary ingredients in dietary
supplements. The notification procedures became effective in November, 1997,
while the new labeling requirements will not become effective until March 1999.
The Company will be required to revise a substantial number of its product
labels to reflect the new requirements prior to the 1999 effective date,
although the Company does not expect the cost or impact of such actions to be
material. In addition, the Company will be required to continue its ongoing
program of securing substantiation of its product performance claims, and of
notifying the FDA of certain types of performance claims made for its products.
In addition, in certain markets, including the U.S., claims made with
respect to weight management, dietary supplement, personal care or other
products of the Company may change the regulatory status of the products. In the
U.S., for example, it is possible that the FDA could take the position that
claims made in connection with certain of the Company's products place those
products within the scope of an FDA "over-the counter" (OTC) drug monograph. See
"Business -- Regulation." OTC monographs prescribe permissible ingredients and
appropriate labeling language, and require the marketer or supplier of the
products to register and file annual drug listing information with the FDA. A
limited number of the products sold by the Company are labeled as OTC monograph
drugs, and the Company believes that it is in compliance with the applicable
monographs. In the event that the FDA asserted that product claims for other
products caused them to fall within the scope of OTC monographs, the Company
would be required either to comply with the applicable monographs or change the
claims made in connection with the products. There can be no assurance that the
Company could do so effectively, or that any such changes would not adversely
affect sales and marketing of an affected product.
The U.S. Federal Trade Commission ("FTC"), which exercises jurisdiction
over the advertising of all the Company's products, has in the past several
years instituted enforcement actions against several dietary supplement
companies for false and misleading advertising of certain products. These
enforcement actions have resulted in consent decrees and monetary payments by
the companies involved. In addition, the FTC has increased its scrutiny of the
use of testimonials, which are utilized by the Company. While the Company has
not been the target of FTC enforcement action for the advertising of its
products, there can be no assurance that the FTC will not question the Company's
advertising or other operations in the future.
As a marketer of food and dietary supplements and other products that are
ingested by consumers, the Company is subject to the risk that one or more of
the ingredients in its products may become the subject of adverse regulatory
action. For example, one of the ingredients in the Thermojetics(R) original
green herbal tablet is a Chinese herb, Ma Huang, which contains
naturally-occurring ephedrine in small quantities. Ephedrine products have been
the subject of adverse publicity in the United States and other countries
relating to alleged harmful effects, including the deaths of several
individuals. In response to potential federal regulatory proposals that may have
affected the sale of the Thermojetics(R) original green herbal tablet in the
United States, the Company suspended sales of the product for approximately
three months commencing in July 1995 and introduced a reformulated herbal green
tablet that did not contain Ma Huang. When no such regulations were proposed or
issued at that time, the Company renewed sales of Thermojetics(R) original green
herbal tablets in the United States in October 1995 (except in certain states in
which regulations may prohibit or restrict the sale of such product). The
Thermojetics(R) original green herbal tablet accounted for 2.4% and 2.2% of
total retail sales in 1996 and 1997, respectively, although the marketing of the
Thermojetics(R) weight management tablets (original green, green, beige and
yellow) and other products in the Thermojetics(R) line have contributed
significantly to the Company's retail sales. The Company also previously offered
the Thermojetics(R) original green herbal tablet in Canada but, in response to
Canadian marketing issues and regulatory concerns, suspended sales of the
product in February, 1994.
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<PAGE> 13
The FDA has on record a small number of reports of adverse reactions
allegedly resulting from the ingestion of Ma Huang contained in the Company's
Thermojetics(R) original green tablet. In addition, the Company is a defendant
in three actions alleging adverse reactions to consumption of its original green
Thermojetics(R) product. See "Business -- Regulation." The Company has not
received any communications from the FDA with respect to these reports. However,
many other companies manufacture products containing various amounts of Ma Huang
and the FDA has on record hundreds of reports of adverse reactions to these
products. On April 10, 1996, the FDA issued a statement warning consumers not to
purchase or ingest dietary supplements containing ephedrine that are claimed to
produce such effects as euphoria, heightened awareness, increased sexual
sensations or increased energy, because these products pose significant adverse
health risks, including dizziness, headache, gastrointestinal distress,
irregular heartbeat, heart palpitations, heart attack, strokes, seizures,
psychosis and death. The Company does not market its Ma Huang product with any
of these claims.
On June 4, 1997, the FDA issued a proposed regulation for dietary
supplements containing ephedrine alkaloids. The proposed regulation would
prohibit dietary supplements containing eight milligrams or more of ephedrine
alkaloids per serving, and would not permit such products to contain any other
stimulant, diuretic or laxative ingredients. In addition, labeling of
supplements would be prohibited from suggesting or recommending conditions of
use that would result in an intake of eight milligrams or more of ephedrine
alkaloids within a six-hour period, or a total daily intake of 24 milligrams or
more. The FDA proposal would also require a warning not to take the product for
more than seven days, and would prohibit the supplements from being represented,
either expressly or implicitly, as being suitable for long-term uses, such as
for weight loss or body building. Similarly, claims for increased energy,
increased mental concentration, or enhanced well-being that encourage the
consumer to take more of the product to achieve more of the purported effect
would be required to be accompanied by a warning stating that taking more than
the recommended serving may cause a heart attack, stroke, seizure, or death.
The Company is reviewing the possible impact of the FDA proposal, if it is
finalized in its current form, upon the Company's continued marketing of its
Thermojetics(R) original green tablet. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company may
be required to: (i) withdraw or reformulate its product with reduced ephedrine
levels, or with a substitute for Ma Huang, (ii) relabel its product with
different warnings or revised directions for use, (iii) not make certain
statements, possibly including weight loss, with respect to any product
containing Ma Huang and/or (iv) withdraw its product from the weight management
program and reposition it in a different category. Even in the absence of an FDA
final regulation, the Company may elect to reformulate and/or relabel its
product containing Ma Huang. While the Company believes that its Ma Huang
product could be reformulated and relabeled, there can be no assurance in that
regard or that reformulation and/or relabeling would not have an adverse effect
on sales of such product or related products within the Thermojetics(R) Weight
Management Program, even though such products do not contain Ma Huang. During
1996 and 1997, the Company's 14 weight management products contributed 71.2% and
67.8%, respectively, of total sales.
Governmental regulations in countries where the Company plans to commence
or expand operations may prevent or delay entry into the market. In addition,
the Company's ability to sustain satisfactory levels of sales in its markets is
dependent in significant part on its ability to introduce additional products
into such markets. However, government regulations in the Company's markets,
both domestic and international, can delay or prevent the introduction, or
require the reformulation or withdrawal, of certain of the Company's products.
For example, during the third quarter of 1995, the Company received inquiries
from certain government agencies within Germany and Portugal regarding the
Company's product, Thermojetics(R) Instant Herbal Beverage, relating to the
caffeine content of the product and the status of the product as an "instant
tea," which was disfavored by regulators, versus a "beverage." The sale of this
product in these countries was subsequently suspended by the Company at the
request of the regulators. Further, such regulatory action, whether or not it
results in a final determination adverse to the Company, could create negative
publicity (as it did in Germany with respect to Thermojetics(R) Instant Herbal
Beverage), with detrimental effects on the motivation and
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<PAGE> 14
recruitment of distributors and, consequently, on sales. See
"Business -- Regulation; Geographic Areas of Operations."
The Company may be subject to challenges to the legality of its network
marketing system based on claims that such system is an illegal "pyramid scheme"
or similar allegations. For example, see the discussion of Webster v.
Omnitrition International, Inc. in "Business -- Regulation." While the Company
believes that its network marketing system complies with all applicable laws,
there can be no assurance that such challenges will not be made or made
successfully or that other legal developments in this area will not have a
material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The business of the Company, particularly the operation of its distributor
network, is substantially dependent upon the active participation of Mark
Hughes, the Company's principal stockholder, Chairman of the Board, Chief
Executive Officer and President. The loss of Mr. Hughes' services would
adversely affect the business of the Company. The Company does not maintain key
man life insurance on Mr. Hughes.
SALES AND EARNINGS VOLATILITY
The Company's sales and earnings have been subject to significant
volatility in the past. In the mid-1980s, the Company's products and network
marketing system became the subject of regulatory scrutiny in the United States
resulting in large part from claims and representations made about the Company's
products, including impermissible therapeutic claims. Although the Company
responded by instituting certain regulatory compliance measures (see
"Business -- Regulation"), as a result of the adverse publicity generated by the
regulatory activities the Company experienced, beginning in 1985, a rapid,
substantial loss of distributors in the United States and a corresponding
reduction in sales. In addition, the Company's sales in the United States were
adversely affected by competition from other weight management products. As a
consequence, from 1987 (the Company's first full year as a public company)
through 1990, the Company's operations resulted either in net losses ($2.4
million in 1990 and $6.3 million in 1988) or modest net income ($1.0 million in
1989 and $1.1 million in 1987). More recently, adverse publicity and regulatory
action in other markets, including France and Germany, resulted in a loss of
distributors and a decline in sales in those markets, contributing to a
reduction in worldwide net income from $46.0 million in 1994 to $19.7 million in
1995. While net income increased in subsequent periods (to $44.8 million for
1996 and $54.7 for 1997), the Company expects that its business in particular
markets will, from time to time, be adversely impacted by regulatory actions,
negative publicity and competition in those markets. See "-- Dependence on
Distributors" and "Business -- Geographic Areas of Operations; Regulation."
In addition, after entering a new country, the Company has in many
instances experienced an initial period of rapid growth in sales as new
distributors were recruited, followed by a decline in sales. The Company
believes that this sales trend has been due in part to certain distributor
migration patterns as well as regulatory action and adverse publicity in certain
markets. In certain of these markets, the opening of new markets within the same
geographic region or with the same or similar language or cultural bases has
resulted in a corresponding tendency of some key distributors to focus their
attention on business opportunities provided by the new markets instead of
developing their established downline organizations in existing markets.
Additionally, in certain instances, the Company has become aware that sales in
certain existing markets were attributable to purchasers who distributed such
product in countries which had not yet been opened. When these countries were
opened, such sales in existing markets shifted to the newly opened markets,
resulting in a decline in sales in the existing markets.
The Company's weight management products have historically contributed a
significant portion of the Company's total retail sales. During 1996 and 1997,
the Company's 14 weight management products contributed 71.2% and 67.8%,
respectively, of total retail sales, and one of these products contributed 19.2%
and 19.8%, respectively, of total retail sales. Accordingly, the Company could
be materially adversely affected if, because of regulatory constraints, adverse
publicity, competition or other factors, the Company were unable
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<PAGE> 15
to successfully market its weight management products in one or more significant
markets. See "Business -- Product Overview."
The Company's sales and earnings continue to be subject to significant
potential volatility based upon, among other things, the adverse effect of
distributors' or the Company's failure, and allegations of their failure, to
comply with applicable regulations, which have in the past and could again in
the future result in the removal of certain products from sale in certain
countries, either temporarily or permanently; the negative impact of changes in
or interpretations of regulations that may limit or restrict the sale of certain
of the Company's products, the operation of its network marketing system, the
expansion of its operations into new markets, the introduction of its products
into each market and the recruitment and retention of distributors; the
inability of the Company to introduce new products or the introduction of new
products by the Company's competitors; general conditions in the weight
management, food and dietary supplement and personal care industries or the
network marketing industry; and consumer perceptions of the Company's products
and operations. In particular, because the Company's products are ingested by
consumers or applied to their bodies, the Company is highly dependent upon
consumers' perception of the safety, quality and effectiveness of its products.
As a result, substantial negative publicity, whether founded or unfounded,
concerning one or more of the Company's products or other products similar to
the Company's products could adversely affect the Company's sales and earnings.
In the past, adverse publicity has been connected with prospective regulatory
action, perceived health concerns relating to particular products, issues
related to the Company's network marketing system, disputes between the Company
and certain of its distributors, and other issues relating to the Company's
business.
DEPENDENCE UPON MATERIAL FOREIGN MARKETS
For 1996 and 1997, 76.7% and 80.0% of the Company's total retail sales,
respectively, were generated outside the United States. Such reliance on foreign
markets exposes the Company to the risks associated with foreign operations,
including, among other things, changes in or interpretations of foreign
regulations that may limit the Company's ability to sell certain products,
conduct a network marketing system or repatriate profits to the United States,
and the potential imposition of trade or foreign exchange restrictions or
increased tariffs. The Company is also exposed to risks associated with foreign
currency fluctuations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments and Outlook." For
instance, the Company's purchases from suppliers are generally made in U.S.
dollars while its sales to distributors are generally made in local currencies;
accordingly, strengthening of the U.S. dollar versus a foreign currency can have
a negative impact on the Company. Although the Company engages in transactions
to protect against certain risks associated with foreign currency fluctuations,
there can be no assurance that such fluctuations will not have an adverse effect
on the Company. As the Company continues to expand its international operations,
these and other risks associated with international operations are likely to
increase. See "-- Regulation" and "Business -- Geographic Areas of Operations."
In particular, the Company is exposed to risks associated with the current
economic and currency crisis in Asia. Because of the significance of the Asian
markets, and Japan in particular, which has become the Company's largest single
retail sales market, a sustained economic slowdown and/or currency crisis in
Asia could have a material adverse impact on the Company's business.
Further, during 1997, of the 36 countries in which the Company operated
during that period, 24 countries experienced an aggregate increase in retail
sales of $350.5 million as compared with 1996. Japan accounted for 61.2%, and
Russia and Taiwan together accounted for 10.6% of this increase. The growth in
these 24 countries was offset by a $59.9 million aggregate decrease in retail
sales in the remaining 12 countries in which the Company operated during both
years. The Company expects that its business in these and other markets will,
from time to time, be adversely affected by regulatory action, negative
publicity, competition and other factors. See "-- Sales and Earnings Volatility"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments and Outlook."
In addition, the Company's operations in certain markets may be adversely
affected by political, economic and social instability in those countries. For
instance, the Company has elected not to establish a
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physical presence, through a sales or distribution center, in Russia due to a
difficult business environment in that country. Instead the Company has chosen
to rely on various import/export companies located in Russia to conduct
transactions in the Company's products with Russian distributors. See
"Business -- Geographic Areas of Operations."
UNCERTAINTIES ASSOCIATED WITH BUSINESS EXPANSION
The Company's continued growth is dependent in significant part upon its
ability to expand its operations into new markets. As compared to new market
openings in the past, the Company may have greater difficulty opening new
markets in the future due to greater regulatory barriers, the necessity of
adapting to entirely new regulatory systems and problems related to entering new
markets with different cultural bases and political systems from those
encountered in the past. In addition, the Company's success has been and will
continue to be significantly dependent on its ability to manage rapid growth,
through expansions and enhancements of its worldwide personnel and management
and information, order processing and fulfillment, inventory and shipping
systems and other aspects of operations. From time to time, the Company has
experienced out-of-stock situations with respect to certain products. As the
Company continues to add distributors, products and countries to its operations,
the ability to manage this growth will represent an increasing challenge. See
"Business -- Geographic Areas of Operations; Regulation."
RELATIONSHIP WITH OUTSIDE MANUFACTURERS
All of the Company's products are manufactured by outside companies. Raven
Industries, Inc. ("Raven") currently manufactures all of the Company's powder
products, and D&F Industries, Inc. ("D&F") currently supplies substanatially all
of the Company's tablet products, including Activated Fiber,(TM) one of the
Company's tablet products, pursuant to a licensing agreement with Dynamic
Products, Inc. ("Dynamic"). In 1996 and 1997, aggregate purchases by the Company
from Raven and D&F represented a majority of the Company's product purchases.
Two individuals (not affiliates of the Company) are principal stockholders of
each of D&F, Raven and Dynamic. Mark Hughes owns a one-third ownership interest
in Raven and a one-fifth ownership interest in Dynamic. See "Business -- Product
Overview" and "Certain Transactions." For a number of years prior to 1998, the
Company was subject to requirements contracts with each of Raven, D&F and
Dynamic, pursuant to which the Company agreed to purchase all of its
requirements of powder products from Raven and all of its requirements of
tablet, capsule and certain other products from Dynamic or D&F, to the extent
each such manufacturer was capable of manufacturing such products. In September
1997, the Company entered into new three-year agreements with Raven, D&F and
Dynamic, pursuant to which revised pricing and other provisions became effective
on January 12, 1998. The new contracts provide, among other things, the ability
for the Company to source and develop products with other third party
manufacturers, subject to minimum percentage purchase and other requirements for
nutritional supplement, and a small number of non-nutritional supplement,
products falling into specified product categories. As a result, and because the
new contracts confirm the Company's ownership of product formulations for
substantially all of the Company's nutritional supplement products, the Company
has the capacity, and has begun to seek, to "second source" particular
nutritional supplement products with multiple manufacturers. Further, the
Company has hired its own staffs of product research and development and product
formulation personnel, and will increasingly rely on its in-house staff for
these functions. However, the Company has historically relied on Raven and D&F
for these services, and will continue to do so, albeit to a lesser extent, in
the future. The Company's ability to enter new markets and sustain satisfactory
levels of sales in each market has been in the past and is likely to continue to
be dependent in significant part upon its own ability and the ability of its
manufacturers, including Raven and D&F, to develop new products and reformulate
existing products for introduction into the Company's markets. See
"Business -- Product Overview -- Product Manufacturing and Development." With
the transition in the Company's relationship with Raven and D&F from exclusive
to nonexclusive contracts, there can be no assurance that the Company will seek
or continue to obtain the same amount or quality of product research,
development or formulation services from Raven and D&F that it has received in
the past. While the Company expects to obtain similar such services from
in-house personnel and alternative manufacturers in the future, there can be no
assurance that there will not be some disruption in the Company's business from
time to time as these support services
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<PAGE> 17
begin to be provided internally and by alternative manufacturers. See
"Business -- Product Overview -- Product Manufacturing and Development."
The Company and Mr. Hughes were recently advised by Raven, D&F and Dynamic
that such companies are planning to make a bond offering and obtain a secured
bank credit facility, the proceeds of which would be used, in part, to
repurchase the ownership interests in those companies currently held by Mr.
Hughes and Dr. Katzin. See "Certain Transactions."
ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW; POTENTIAL MISUSE OF PRODUCTS
In general, the Company's products consist of weight management products,
food and dietary supplements and personal care products (a limited number of
which have been or may be classified in the U.S. as OTC drugs) which the Company
believes do not require approvals from the FDA or, in the United States market,
other regulatory agencies, prior to sale. The Company does not conduct clinical
studies of its products. The Company's products consist of herbs, vitamins,
minerals and other ingredients that the Company regards as safe when taken as
suggested by the Company. However, because the Company is highly dependent upon
consumers' perception of the safety and quality of its products as well as
similar products distributed by other companies, the Company could be adversely
affected in the event any of the Company's products or any similar products
distributed by other companies should prove or be asserted to be harmful to
consumers. In addition, because of the Company's dependence upon consumer
perceptions, any adverse publicity associated with illness or other adverse
effects resulting from consumers' use or misuse of the Company's products or any
similar products distributed by other companies could have a material adverse
impact on the Company. See "Business -- Product Overview."
COMPETITION
The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management, food and dietary supplement and personal care products
as well as other types of products. Some of the Company's competitors are
substantially larger and have available considerably greater financial resources
than the Company. The Company's ability to remain competitive depends, in
significant part, on the Company's success in recruiting and retaining
distributors through an attractive compensation plan and other incentives.
In addition, the business of marketing weight management, food and dietary
supplement and personal care products is highly competitive. This market segment
includes numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers both in the
United States and abroad. The market is highly sensitive to the introduction of
new products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, the
Company's ability to remain competitive depends in part upon the successful
introduction of new products. See "Business -- Competition."
PRODUCT LIABILITY CLAIMS
As a marketer of food and dietary supplements and other products that are
ingested by consumers or applied to their bodies, the Company may be subjected
to various product liability claims, including, among other things, that its
products contain contaminants or include inadequate instructions as to use or
inadequate warnings concerning side effects and interactions with other
substances. While such claims to date have not been material to the Company and
the Company maintains product liability insurance, it is possible that
widespread product liability claims and the resultant adverse publicity could
negatively affect the Company. See "Business -- Product Overview; Regulation."
CONCENTRATION OF STOCK OWNERSHIP
As of February 23, 1998, Mr. Hughes beneficially owned 5,666,932 shares of
the Class A Stock and 11,333,866 shares of the Class B Stock (which amounts
include 183,333 shares of Class A Stock and 366,666 shares of Class B Stock held
by a charitable foundation of which Mr. Hughes is a director but with
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<PAGE> 18
respect to which Mr. Hughes has no pecuniary interest), representing 57.2% and
58.2% of the outstanding shares of Class A Stock and Class B Stock,
respectively, as of February 23, 1998. Accordingly, Mr. Hughes currently has the
power to elect the entire Board of Directors of the Company and determine the
outcome of all matters submitted to the Company's stockholders for approval.
Because Class B Stock is non-voting stock, neither the completion of the DECS
Offering nor the settlement of the DECS will affect Mr. Hughes' voting power
with respect to the Company. Assuming the delivery by the Selling Stockholder to
the Trust of the maximum number of shares of Class B Stock required to satisfy
the Contract (assuming full exercise of the over-allotment option in the DECS
Offering), Mr. Hughes would beneficially own 28.7% of the Company's currently
outstanding Class B Stock (including the foundation-owned shares referred to
above). See "Plan of Distribution" and "Principal and Selling Stockholders."
SHARES AVAILABLE FOR FUTURE PUBLIC SALE
In addition to shares already publicly held, as of February 23, 1998, (i)
432,258 shares of Class A Stock and 864,520 shares of Class B Stock subject to
outstanding stock options that are currently exercisable have been registered
for sale under the Securities Act in connection with various compensation plans
of the Company, and (ii) 5,666,932 shares of Class A Stock and 6,333,866 shares
of Class B Stock beneficially owned by the Selling Stockholder (not including
the 5,000,000 shares subject to the Contract (assuming that the over-allotment
option relating to the DECS is not exercised)) are currently available for sale
pursuant to Rule 144 under the Securities Act, subject to the volume limitations
contained in the rule. The Company, its directors and executive officers, and
the Selling Stockholder have agreed, subject to certain exceptions, not to sell,
without the prior written consent of Smith Barney, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for such shares
for a period of 90 days, in the case of the Company and its directors and
executive officers (other than the Selling Stockholder), and one year, in the
case of the Selling Stockholder, after the date of this Prospectus. See "Plan of
Distribution." Future sales of substantial amounts of Class A Stock or Class B
Stock could adversely affect prices in the public market.
IMPACT OF THE DECS ON THE MARKET FOR CLASS B STOCK
It is not possible to predict accurately how or whether any market that
develops for the DECS will trade in the secondary market or whether such market
will be liquid. Any market that develops for the DECS is likely to influence and
be influenced by the market for the Class A Stock and the Class B Stock. For
example, the price of the Class A Stock and/or Class B Stock could become more
volatile and could be depressed by investors' anticipation of the potential
distribution into the market of substantial additional amounts of Class B Stock
upon the maturity of the DECS, by possible sales of Class A Stock or Class B
Stock by investors who view the DECS as a more attractive means of equity
participation in the Company and by hedging or arbitrage trading activity that
may develop involving the DECS and the Class B Stock.
USE OF PROCEEDS
All of the shares of Class B Stock covered by this Prospectus are
beneficially owned by the Selling Stockholder. See "Plan of Distribution." The
Company will not receive any of the proceeds from the sale of the DECS or the
delivery thereunder of the Class B Stock to which this Prospectus relates. The
expenses in connection with the issuance and distribution of the DECS and
delivery thereunder of the Class B Stock are being borne by the Selling
Stockholder.
16
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Old Common Stock has been quoted on the Nasdaq National Market System
under the symbol "HERB" since April 21, 1992. As a result of the
Recapitalization (including a related Class B Stock dividend), as of December
12, 1997, the Old Common Stock was effectively split into the Class A Stock and
the Class B Stock. The Class A Stock and the Class B Stock have been quoted on
the Nasdaq National Market System under the symbols "HERBA" and "HERBB,"
respectively, since December 15, 1997. The table below sets forth, for the
periods indicated, the high and low sales prices of the Old Common Stock, and,
commencing December 15, 1997, the Class A Stock and the Class B Stock, as
reported on the Nasdaq National Market System. The sales prices in the table
were taken from a written summary provided to the Company by Nasdaq. Prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
<TABLE>
<CAPTION>
SALES PRICE
-----------
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter............................................. $12 1/8 $ 8 5/8
Second Quarter............................................ 16 3/8 10 1/8
Third Quarter............................................. 15 7/8 12 1/2
Fourth Quarter............................................ 32 5/8 15 1/2
1997
First Quarter............................................. $37 3/4 $14 3/4
Second Quarter............................................ 21 1/8 15 3/4
Third Quarter............................................. 26 1/4 14 7/8
Fourth Quarter through December 12, 1997*................. $27 7/8 $19 1/4
Fourth Quarter commencing December 15, 1997
Class A Stock*....................................... $24 $20 1/2
Class B Stock*....................................... 23 20
1998
First Quarter
Class A Stock**...................................... $25 $19 7/16
Class B Stock**...................................... 24 1/2 17 3/4
</TABLE>
- ---------------
* The Recapitalization became effective December 12, 1997. Beginning December
15, 1997, the Old Common Stock commenced trading as the Class A Stock and the
Class B Stock as a result of the Recapitalization. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments and Outlook." Accordingly, the prices set
forth above relate to the Old Common Stock through December 12, 1997, and the
Class A Stock and Class B Stock, as indicated, commencing on December 15,
1997.
** Reflects high and low sales prices through March 3, 1998.
As of February 23, 1998, 9,816,436 and 19,277,473 shares of the Company's
Class A Stock and Class B Stock, respectively, were issued and outstanding and
were held by 1,010 and 1,011 stockholders of record, respectively. For a recent
closing sale price of the Class B Stock, see the cover page of this Prospectus.
17
<PAGE> 20
DIVIDEND POLICY
Prior to the third quarter of 1992, the Company had never paid a dividend
on its Old Common Stock. In June 1992, the Company announced the adoption of a
cash dividend practice. The Company paid quarterly dividends of $0.18 per share
for the dividends paid on February 11, 1994, May 5, 1994 and August 4, 1994,
increased the dividend to $0.22 per share for the dividends paid on November 3,
1994, February 2, 1995, May 4, 1995 and August 3, 1995, and reduced the dividend
to $0.15 per share for the dividends paid on November 2, 1995, February 15,
1996, May 6, 1996, August 7, 1996, November 7, 1996, February 12, 1997, May 8,
1997, August 1, 1997, November 6, 1997 and February 11, 1998 (with respect to
the Class A Stock and Class B Stock). The declaration of dividends in the future
will be determined by the Board of Directors in its discretion and the amount of
dividends declared and paid in future quarters will depend on, among other
factors, the Company's profitability and other planned uses of the Company's
cash resources. See "Description of Capital Stock."
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data set forth below for each of the
years in the five-year period ended December 31, 1997 are derived from the
audited consolidated financial statements of the Company. The selected "Other
Data" set forth below are derived from unaudited internal records maintained by
the Company in the ordinary course of business and, in the opinion of the
Company, reflect a fair statement of the specified data for the periods
presented. The selected financial and other data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Retail sales(1)(2).......................................... $693,015 $884,058 $923,644 $1,200,144 $1,490,693
Less -- Distributor allowances on product purchases(1)...... 328,270 417,177 434,640 568,209 708,241
-------- -------- -------- ---------- ----------
Net sales(1)(2)............................................. 364,745 466,881 489,004 631,935 782,452
Cost of sales............................................... 103,834 130,707 143,557 168,432 205,070
Royalty overrides(1)........................................ 107,381 125,820 138,940 184,669 233,883
-------- -------- -------- ---------- ----------
Gross profit................................................ 153,530 210,354 206,507 278,834 343,499
Marketing, distribution and administrative expenses......... 88,918 139,629 176,046 210,087 257,514
Restructuring expense....................................... -- -- 2,300 -- --
Interest income -- net...................................... 1,729 2,919 3,404 4,084 4,535
-------- -------- -------- ---------- ----------
Income before income taxes and minority interest............ 66,341 73,644 31,565 72,831 90,520
Income taxes................................................ 25,160 27,616 11,837 28,040 34,850
Minority interest(3)........................................ -- -- -- -- 1,003
-------- -------- -------- ---------- ----------
Net income.................................................. $ 41,181 $ 46,028 $ 19,728 $ 44,791 $ 54,667
======== ======== ======== ========== ==========
Earnings per share:
Basic(4).................................................. $ 1.52 $ 1.54 $ 0.66 $ 1.50 $ 1.81
Diluted(4)................................................ $ 1.47 $ 1.50 $ 0.65 $ 1.43 1.72
Cash dividends per common share............................. $ 0.49 $ 0.80 $ 0.74 $ 0.60 0.60
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------------------------------------------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Approximate number of supervisors(5)..................... 41,000 75,000 90,000 99,000 115,000 139,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of countries(6)................................... 16 24 32 34 36
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities......... $ 79,354 $ 59,113 $104,226 $131,039 $122,707
Working capital.......................................... 72,723 89,825 85,126 109,662 125,986
Total assets............................................. 130,820 174,057 207,690 269,114 314,580
Long-term obligations.................................... 994 1,014 1,779 2,306 2,666
Stockholders' equity..................................... 81,202 109,815 109,530 138,468 154,733
</TABLE>
- ---------------
(1) For a description of retail sales, distributor allowances on product
purchases, net sales and royalty overrides, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments and Outlook."
(2) Throughout this Prospectus, retail sales and net sales include license fees
paid by the Company's licensees in certain countries. See
"Business -- Geographic Areas of Operation." License fees were not material
in any year presented.
19
<PAGE> 22
(3) See "Certain Transactions" regarding minority interests in the Company's
Japanese subsidiary.
(4) Basic earnings per share are computed by dividing net income, by the
weighted average number of common shares outstanding. The weighted average
number of common shares outstanding for 1993, 1994, 1995, 1996 and 1997 were
(in thousands) 27,075; 29,864; 29,904; 29,803 and 30,193, respectively.
Diluted earnings per share assumes the maximum dilutive effect of stock
options using the Treasury Stock method. Common shares used in the
calculation for 1993, 1994, 1995, 1996 and 1997 were (in thousands) 28,036;
30,768; 30,313; 31,379 and 31,803, respectively. The Recapitalization did
not change the total number of the Company's outstanding common shares. As a
result, earnings per share was not restated.
(5) Supervisors are those distributors who qualify as supervisors, generally, by
purchasing, either from the Company or other distributors, products
representing at least 4,000 "volume points" in one month or 2,500 "volume
points" in two consecutive months (volume points are point values assigned
to each of the Company's products that are equal in all countries and are
based on the suggested retail price of U.S. products). See
"Business -- Marketing." Every February 28th the Company deletes from the
rank of supervisor those supervisors who did not satisfy the supervisor
qualification requirements during the preceding twelve months. Distributors
who meet the supervisor requirements at any time during the year are
promoted to supervisor status at such time (including any supervisors who
were deleted but who subsequently requalified). The Company relies on
distributors' certifications as to the amount and source of their product
purchases from other distributors. Although the Company applies certain
review procedures with respect to such certifications, they are not directly
verifiable by the Company.
(6) For a list of all the countries in which the Company currently operates, see
"Business -- Geographic Areas of Operations."
20
<PAGE> 23
CAPITALIZATION
The following table sets forth the short-term obligations and
capitalization of the Company as of December 31, 1997 (dollars in thousands).
This table should be read in conjunction with the Consolidated Financial
Statements and the related notes incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Short-term obligations
Current maturities of long-term obligations............... $ 1,449
========
Long-term obligations
Bank loans and contracts payable.......................... 2,666
Stockholders' equity
Class A Common Stock, $.01 par value; authorized
33,333,333 shares; issued 9,811,623 shares(1).......... 98
Class B Common Stock, $0.01 par value; authorized
66,666,667; issued 19,818,248 shares(1)................ 198
Paid-in capital in excess of par value.................... 50,319
Retained earnings (includes translation adjustment of
$(4,858)............................................... 104,248
Unearned compensation(2).................................. (152)
Unrealized loss on marketable securities.................. 22
--------
Total stockholders' equity........................ $154,733
--------
Total capitalization.............................. $157,399
========
</TABLE>
- ---------------
(1) Effective December 12, 1997, the Old Common Stock was reclassified into
Class A Stock and Class B Stock pursuant to the Recapitalization. The Class
A Stock and Class B Stock commenced trading on December 15, 1997.
(2) Represents unamortized compensation expense related to restricted stock
grants to one of the Company's executive officers.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS AND OUTLOOK
The Company utilizes a world-wide network marketing system to market weight
management products, food and dietary supplements and personal care products. As
of December 31, 1997, the Company conducted business in 36 countries located
throughout Asia/Pacific Rim, Europe and The Americas.
The Company has reported increased annual retail sales and net sales in
each year since 1988 and has reported profits for each year since 1990. See
"-- Presentation of Retail Sales." Retail sales increased from $405.1 million in
1992 to $1.49 billion in 1997, representing a compound annual growth rate of
29.8%. From 1992 to 1997 the Company's net income increased from $20.1 million
in 1992 to $54.7 million in 1997, representing a compound annual growth rate of
22.2%.
The Company markets it products globally. For the twelve months ended
December 31, 1997, 80.0% of retail sales were attributable to markets located
outside of the United States. The following summarizes the Company's retail
sales by region for the time periods indicated.
<TABLE>
<CAPTION>
NUMBER OF
COUNTRIES
OPEN AS OF
1995 1996 1997 12/31/97
------ -------- -------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Asia/Pacific Rim................... $143.5 $ 378.8 $ 643.4 8
Europe............................. 373.9 431.3 453.1 20
The Americas....................... 406.2 390.0 394.2 8
------ -------- -------- ---
Total Retail Sales....... $923.6 $1,200.1 $1,490.7 36
====== ======== ======== ===
</TABLE>
For the twelve months ended December 31, 1997, a relatively small number of
countries accounted for a large proportion of the $290.6 million increase in
retail sales. Of the 36 countries in which the Company operated during the
twelve months ended December 31, 1997, 24 countries experienced an aggregate
increase in retail sales of $350.5 million as compared with 1996, with Japan
alone accounting for 61.2% of the increase. The growth in these 24 countries was
partially offset by a $59.9 million aggregate decrease in retail sales in the
remaining 12 countries in which the Company operated during both periods. As
part of its growth strategy, management implements various initiatives to
revitalize sales in countries where the Company has experienced a loss of retail
sales. See "Business -- Growth Strategy." The concentration of increased retail
sales in a small number of countries is expected to make the Company's earnings
in future periods more susceptible to various risks. See "Risk Factors" and
"Risk Factors -- Dependence Upon Material Foreign Markets."
Subsequent to commencement of operations in 1980, the Company's network of
independent distributors has grown substantially to include 139,000 supervisors
as of February 28, 1998, an increase of 20.9% from the same date in the prior
year, and a much larger number of distributors. The number of supervisors in the
Asia/ Pacific Rim markets increased from approximately 37,000 to 60,000 from
February 28, 1997 to February 28, 1998.
Consistent with the Company's growth strategy, the Company has continued
its efforts to expand its global presence by opening operations in new countries
where the Company believes there is or will be demand for its products and
participation in its network marketing system. From January 1, 1992 through
December 31, 1997, the Company commenced operations in 26 new countries. During
1997, these countries contributed $1.05 billion of retail sales, representing
70.4% of the Company's total retail sales. Japan accounted for $525.7 million of
such sales, representing 35.3% of the Company's retail sales. During 1997, the
Company commenced operations in Thailand and Chile and plans to open new markets
in Turkey and Indonesia in 1998. Additional new markets currently under
consideration include China, India, Colombia and Ecuador. There can be no
assurance that the opening of any new markets will occur as planned or that any
markets opened will generate significant retail sales. See "Business -- Growth
Strategy."
22
<PAGE> 25
The Company is exposed to risks associated with foreign currency
fluctuations. For instance, the Company's purchases from suppliers are generally
made in U.S. dollars while its sales to distributors are generally made in local
currency. Accordingly, strengthening of the U.S. dollar versus a foreign
currency can have a negative impact on the Company. Although the Company engages
in currency hedging transactions to protect against certain risks associated
with foreign currency fluctuations, there can be no assurance that such
fluctuations will not have an adverse effect on the Company.
There are a number of factors that can adversely impact the success of the
Company's business in any of its existing or potential markets. These factors
include the regulatory environment, consumer acceptance of network marketing
companies, the presence of possible competitors, adverse publicity and in-region
cultural or demographic factors. In several of the Company's markets, the
Company has experienced one or several of these factors, resulting in a decline
in retail sales. For instance, in France in late 1994 through 1995, certain
reports erroneously alleged that the Company was in some manner affiliated with
a disfavored religious group. During the third quarter of 1995, the Company
received inquiries from certain governmental agencies within Germany and
Portugal relating to the Company's product, Thermojetics(R) Instant Herbal
Beverage. The inquiries related to the caffeine content of the product and the
status of the product as an "instant tea," which was disfavored by the
regulators, versus a "beverage." The sale of this product in these countries was
subsequently suspended by the Company at the request of the regulators. As a
result of this and other factors, retail sales in Germany declined from $159.5
million in 1994 to $44.1 million for 1997. See "Risk Factors -- Sales and
Earnings Volatility" and "Business -- Geographic Areas of
Operations -- Geographic Sales Trends."
The Company believes that, in certain of its markets, the opening of other
new markets within the same geographic region or with the same or similar
language or cultural bases has resulted in a corresponding tendency of some key
distributors to focus their attention on business opportunities provided by new
markets instead of developing their established downline organizations in
existing markets. Additionally, in certain instances, the Company has become
aware that certain sales in certain existing markets were attributable to
purchasers who distributed such product in countries which had not yet been
opened. When these countries were opened, such sales in existing markets shifted
to the newly opened markets, resulting in a decline in sales in the existing
market.
In order to increase sales in markets, such as France, Germany, Italy and
Spain, that have experienced a leveling off or decline in sales, management has
implemented several revitalization initiatives. These initiatives include
extensive training and motivational programs, appointment of regional planning
and strategy groups that include senior distributors, enhanced government
relations, introduction of new products, and establishment of distributor sales
centers. The Company believes that these initiatives favorably impact operations
and the Company will continue to deploy these initiatives in an effort to
provide a platform for renewed growth. See "Prospectus Summary -- Growth
Strategies -- Revitalize Sales in Certain Existing Markets."
The Company's weight management products have historically contributed a
significant portion of the Company's total retail sales. During 1997, the
Company's 14 weight management products contributed 67.8% of total retail sales,
and one of these products contributed 19.8% of total retail sales. During
January 1998, the Company introduced two new weight management products into
this product line.
In recent years, the Company sought to diversify its product offerings by
substantially expanding its personal care product line to include skin care,
perfumes, hair care, body lotions, soaps and gel products, and by expanding food
and dietary supplement products. From 1994 to 1997, sales of the personal care
product line increased from $26.6 million to $167.9 million, representing 3.0%
and 11.3% of total retail sales. From 1994 to 1997, sales of food and dietary
supplements increased from $86.8 million to $244.6 million, representing 9.8%
and 16.4% of total retail sales. During 1998, the Company intends to introduce
in certain markets up to thirty new personal care products (exclusive of color
variations), and up to eight new food and dietary supplement products (exclusive
of flavor variations), as well as a new line of water purification systems. The
Company will also seek to introduce additional new lines in the future,
including household products.
At a Special Meeting of the Company's shareholders held on December 11,
1997, the Company's shareholders approved the Recapitalization, pursuant to
which the Company's Articles of Incorporation were
23
<PAGE> 26
amended and restated to: (i) effect a one-for-three reverse split (the "Reverse
Split") of the Old Common Stock, (ii) reclassify each resulting whole share of
Old Common Stock as a share of new Class A Stock, (iii) create a new class of
non-voting common stock, designated as Class B Stock, and (iv) fix the relative
rights, powers and limitations of the Class A Stock and the Class B Stock. The
Recapitalization did not change the number of shares of the Company's authorized
capital stock. On December 12, 1997, the Recapitalization became effective and
the Company's Board of Directors declared a dividend of two shares of Class B
Stock on each whole share of Class A Stock resulting from the Reverse Split. On
December 15, 1997, trading of both the Class A Stock and the Class B Stock
commenced on the Nasdaq National Market System.
PRESENTATION OF RETAIL SALES
Throughout this Prospectus, "retail sales" are determined as the gross
sales amounts reflected on the Company's invoices to its distributors. The
Company does not receive the amount reported as "retail sales," and the Company
does not monitor the actual retail prices charged for the Company's products.
"Net sales" represent the actual purchase prices paid to the Company by its
distributors, after giving effect to distributor discounts (referred to as
"distributor allowances"), which total approximately 50% of suggested retail
sales prices. The Company receives its net sales price in cash or through credit
card payments upon receipt of orders from distributors. Importers are utilized
by the Company in some markets and, under certain circumstances, credit terms
are extended. The Company's "gross profit" consists of net sales less (i) "cost
of sales," consisting of the prices paid by the Company to its manufacturers for
products and costs related to product shipments, foreign duties and tariffs and
similar expenses, and (ii) "royalty overrides," currently consisting of (a)
royalties and bonuses, which total approximately 15% and 6%, respectively, on
the suggested retail sales prices of products earned by qualifying distributors
on sales within their distributor organizations, (b) the President's Team Bonus
payable to certain of the Company's most senior distributors in the aggregate
amount of approximately an additional 1% of product retail sales, and (c) other
one-time incentive cash bonuses to qualifying distributors. Royalty overrides,
as reported in the financial statements and selected financial data appearing
elsewhere herein, are net of a handling fee (6% of retail sales effective April
1, 1994, previously 5%) charged by the Company to its distributors on purchases
of products from the Company.
The Company's use of "retail sales" in reporting financial and operating
data reflects the fundamental role of "retail sales" in the Company's accounting
systems, internal controls and operations, including the basis upon which
distributor bonuses are paid. The retail sales price of the Company's products
is reflected in distributor invoices as the price charged to distributors
together with, in most cases, a deduction for the corresponding distributor
allowance. The U.S. retail sales price is used by the Company to calculate,
among other things, royalty overrides and "volume points" earned by
distributors. Volume points are point values assigned to each of the Company's
products that are equal in all countries and are used as a supervisor
qualification criteria. In addition, management relies upon "retail sales" data
reflected in daily sales reports to monitor results of operations in each of the
Company's markets.
The significance of the Company's "net sales" is to reflect, generally, the
prices actually received by the Company after deducting the basic distributor
allowance, but before deducting royalty overrides and bonuses. The ratio of the
Company's "retail sales" to "net sales" is relatively constant because
distributor allowances historically total approximately 50% of suggested retail
sales prices. Accordingly, factors that affect "retail sales" generally have a
corresponding and proportionate effect on "net sales." To the extent the ratio
of "retail sales" to "net sales" varies from period to period, such variances
have resulted principally from sales of the Company's distributor kits and other
educational and promotional materials, for which there are no distributor
allowances. Sales of such items initially decreased and thereafter stabilized as
a percentage of total retail sales since 1991, but such decreases have not had a
material impact on the ratio of the Company's "retail sales" to "net sales" or
on the Company's operating margin.
RESULTS OF OPERATIONS
The Company's results of operations for the periods described below are not
necessarily indicative of results of operations for future periods, which depend
upon numerous factors including the Company's ability in the future to enter new
markets and introduce additional and new products into its markets.
24
<PAGE> 27
1997 COMPARED TO 1996
Retail sales for the twelve months ended December 31, 1997 increased 24.2%
to $1.49 billion, as compared to retail sales of $1.20 billion in the prior
year.
Retail sales in Asia/Pacific Rim increased $264.6 million or 69.9% during
1997 as compared to the prior year. The increase resulted from strong retail
sales in Japan and Taiwan. Retail sales in Japan increased $214.6 million, or
69.0%. Given the rapid increase in retail sales in Japan to current levels,
retail sales in Japan are not expected to continue to increase at historic
rates. In Taiwan, retail sales for 1997 increased $21.4 million, or 81.7%.
Retail sales in other Asia/Pacific Rim countries for 1997 increased $28.6
million, or 69.1% as compared to 1996. The increases in the other Asia/Pacific
Rim countries resulted from the opening of South Korea in November 1996 and
Thailand in June 1997 coupled with increased retail sales in Hong Kong.
Retail sales in Europe increased $21.8 million or 5.1% in 1997 as compared
to the prior year. Within the region, retail sales in Italy and Russia increased
$10.6 million, or 19.4%, and $15.7 million, or 11.1%, respectively, in 1997
compared to 1996. Offsetting the retail sales increases were declines in
Germany, South Africa and Finland of $10.3 million, $8.2 million and $5.6
million, respectively in 1997 as compared to the prior year. Although retail
sales in Germany, South Africa and Finland declined in comparison to the prior
year, they have remained relatively stable over the past four quarters.
Retail sales in the Americas increased $4.1 million, or 1.1% in 1997 as
compared to the prior year. The increase in retail sales primarily resulted from
retail sales increases in the United States, Canada and Mexico of $19.1 million,
$3.6 million and $4.4 million, respectively, and retail sales of $3.4 million
resulting from the opening of Chile in March 1997. Partially offsetting these
increases was a decline in Brazil of $26.1 million, or 34.3%. The retail sales
decrease in Brazil was primarily due to a difficult regulatory environment
which, among other factors, impeded the introduction of new products within the
country. The Company has recently received approval for approximately 30
personal care products and will continue to pursue approval of other new
products within Brazil. During each of the 1997 third and fourth quarters,
retail sales in Brazil increased as compared to the preceding quarters. The 1997
fourth quarter retail sales in Brazil exceeded the same period in 1996 by 9.7%.
In 1997, retail sales in all the product segments demonstrated strong
growth as compared to the prior year period. The increase in personal care
retail sales primarily resulted from a strong reception of the product line in
Japan and its introduction in Russia during July 1996. The increases in the
remaining categories were primarily due to the same factors identified in the
geographical segment discussion above.
Gross profit of $343.5 million for 1997, was $64.7 million, or 23.2% higher
than the gross profit of $278.8 million in the prior year. As a percentage of
retail sales, gross profit for 1997 as compared to the same period in the prior
year decreased modestly from 23.2% to 23.0%. The decrease in gross profit as a
percentage of retail sales primarily resulted from additional royalty override
expenses from a special 1997 distributor incentive program designed to motivate
distributors to achieve incremental sales growth.
Marketing, distribution and administrative expenses, as a percentage of
retail sales, were 17.3% for 1997 as compared to 17.5% for the same period in
1996. These expenses for the same periods increased 22.6% to $257.5 million from
$210.1 million in the prior year. The increase resulted from: (a) higher
in-country distribution expenses primarily due to facility and staff expansions
in Japan, new country openings in Chile and Thailand, and a full year of
operations in South Korea, (b) higher administrative expenses due to staff
additions and other costs related primarily to supporting sales expansion in
foreign countries, and (c) higher marketing costs resulting from increased sales
event activity in 1997.
The weakening of the Japanese Yen against the U.S. Dollar during 1997
resulted in proportionately lower revenues, expenses, and ultimately income when
translated into the U.S. Dollar reporting currency. Comparing the weighted
average exchange rates in effect during 1996 and 1997, the adverse effect of the
weaker Japanese Yen on the Company's net income and earnings per diluted share
for the 1997 period was $7.9 million and approximately $0.25, respectively. The
effect of foreign currency changes of this nature in countries other than Japan
was not material to the operations of the Company.
25
<PAGE> 28
Income taxes of $34.9 million for 1997 increased from $28.0 million in the
prior year. As a percentage of pre-tax income, income taxes remained unchanged
at 38.5% in 1997. To the extent the Company's operations in high tax
jurisdictions, such as Japan, continue to grow disproportionately relative to
the balance of the Company's operations, the Company may not be able to fully
utilize its foreign tax credits in the U.S., which could, accordingly, result in
the Company incurring a higher overall income tax rate on its worldwide
operations in the future.
On December 30, 1996, the Company sold an approximate 7% interest in its
Japanese subsidiary to certain directors and executive officers of the Company.
In 1997, the earnings attributed to this minority interest in the Japanese
subsidiary were $1.0 million. See "Certain Transactions."
Net income for 1997 increased 22.1% to $54.7 million, from $44.8 million
reported in the prior year.
1996 COMPARED TO 1995
Retail sales increased 29.9% to $1.2 billion in 1996 from $923.6 million in
1995. The increase was primarily due to the year to year aggregate sales growth
of $480.4 million in 14 countries (including two countries which opened in
1996): 82.0% of this increase was derived from sales in three countries: Japan,
Russia and Brazil. This increase was partially offset by an aggregate $203.9
million sales decline in the remaining 20 countries in which the Company
operates.
Regionally, retail sales for 1996 as compared to 1995 increased 164.0% in
Asia/Pacific Rim, 15.4% in Europe and declined 4.0% in The Americas. In
Asia/Pacific Rim, combined retail sales of $378.8 million increased by $235.3
million compared with 1995. The increase was due to a significant growth in
sales in Japan which contributed retail sales of $311.1 million in 1996 as
compared to $81.7 million in 1995. The increase in sales in Japan is in part
attributable to the introduction of new products and expansion of existing
product lines and the growth in the distributor network in Japan. In Europe,
combined retail sales for 1996 of $431.3 million increased by $57.4 million
compared to 1995. This increase was due to a full year operation in Russia which
opened during 1995 and contributed retail sales of $142.1 million in 1996 as
compared to $29.6 million in 1995. The most significant decline in Europe was in
Germany with 1996 retail sales of $54.3 million compared to $115.6 million in
1995. The decrease was due in part to the July 1995 suspension of sales of
Thermojetics(R) Instant Herbal Beverage in that country and the adverse
publicity stemming from the suspension.
In The Americas, combined retail sales in 1996 of $390.0 million decreased
by $16.2 million as compared to 1995. The decrease was due to a decline in sales
in the United States and several South American countries, partially offset by
Brazil which opened in the fourth quarter of 1995. The reduction in U.S. retail
sales is attributable in part to the Company's commencement of operations in
Brazil and the continuing effect of the commencement of operations in Russia in
July 1995. The Company is aware that, prior to the opening of Brazil and Russia,
some retail sales in the U.S. were for products purchased in the U.S. but
re-directed to Brazil or Russia by distributors. The Company expects that U.S.
retail sales may be impacted as the expansion of operations into international
markets continues.
The Company's gross profit increased to $278.8 million for 1996 from $206.5
million in 1995. As a percentage of retail sales, the gross profit was 23.2% in
1996 as compared with 22.4% in 1995. This is primarily attributable to higher
sales in Japan where the gross profit is higher due to higher retail selling
prices.
Marketing, distribution and administrative expenses for 1996 increased to
$210.1 million from $176.0 million in 1995. As a percentage of retail sales,
these expenses were 17.5% in 1996 as compared to 19.1% in 1995. The increase in
these expenses is attributable to higher in-country distribution center costs
directly related to sales volume, particularly in Japan and Brazil. In addition,
administrative expenses increased as a result of a continued emphasis and
increased costs of strengthening government and media relations, increased
compensation related to staff additions and incentive compensation awards. Such
increases were partially offset by a decrease in sales promotion expenses in
1996 as compared to 1995. Foreign exchange losses were $3.0 million in 1996 as
compared to losses of $2.6 million in 1995.
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<PAGE> 29
Income taxes of $28.0 million in 1996 increased from $11.8 million in 1995.
As a percentage of income before income taxes, the income tax rate increased
from 37.5% for 1995 to 38.5% for 1996. The increase is due in part to an
increased proportion of profits in countries which have a higher effective tax
rate. Net income for 1996 increased to $44.8 million from $19.7 million in 1995
because of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital and capital
expenditure requirements, including funding for expansion of operations, through
net cash provided by operating activities.
In 1997, net cash provided by operating activities was $51.2 million,
compared to $65.4 million in 1996. The decrease primarily resulted from (i)
increased inventory levels required to support the Company's growth, and (ii)
higher credit card receivable balances primarily resulting from Japan, where the
collection period related to credit card receivables from banks is longer than
most countries. These reductions were partially offset by increased net income
and additional cash flow provided by increases in royalty overrides and advanced
sales balances.
Capital expenditures for 1997 were $13.1 million compared to $15.4 million
for the prior year. The majority of the 1997 expenditures resulted from
investments in management information systems and the expansion of new and
existing facilities, particularly in the U.S. and Japan. In connection with its
entry into each new market, the Company funds inventory requirements and
typically establishes either a full-service distribution center, sales office, a
fulfillment center or compliance office, or a combination of the foregoing.
While the capital requirements associated with entry into new markets vary, the
Company estimates that up to $7 million will be required for pre-opening
expenses, capital expenditures and other operating cash flow needs associated
with its 1998 new market expansion activities.
Stockholders' equity increased $16.3 million to $154.7 million during 1997.
During 1997, net income of $54.7 million and the issuance of capital stock upon
exercise of stock options, including related tax benefits, of $9.3 million were
partially offset by $18.1 million of dividends declared, stock repurchases of
$26.0 million and a translation loss of $3.9 million. The payment of dividends
is determined by the Board of Directors at its discretion and the amounts of
dividends declared and paid in future quarters will depend, among other factors,
on profitability, as well as other planned uses of the Company's cash resources.
Cash and cash equivalents and marketable securities totaled $122.7 million
at December 31, 1997 compared to $131.0 million at December 31, 1996.
In September, 1997, the Company entered into new agreements with its
suppliers of weight management and food and dietary supplement products. See
"Business -- Product overview -- Product Manufacturing and Development." The new
contracts became effective January 12, 1998 and replace the contracts previously
in effect. The new contracts provide, among other things, the ability for the
Company to source and develop products from other third party manufacturers,
within certain contractual limitations. The new contracts provide the
opportunity for cost savings for certain products; however, the realization of
any product cost savings will be affected by the Company's future product
development.
The Company has not been subjected to material price increases by its
suppliers for several years. The Company believes that it has the ability to
respond to a portion or possibly all of any price increases by raising the price
of its products. Purchases by the Company from its suppliers are generally made
in U.S. Dollars, while sales to distributors are generally made in local
currencies. Consequently, strengthening of the U.S. Dollar versus a foreign
currency can have a negative impact on operating margins and can generate
transaction losses on intercompany transactions. The Company from time to time
enters into forward exchange contracts and other hedging arrangements to manage
its foreign exchange risk on intercompany transactions. During 1997, several
European and Asian currencies weakened against the U.S. Dollar resulting in
foreign exchange loss of $1.6 million as compared to a loss of $3.0 million in
1996.
The Company has conducted a review of its computer systems to consider
upgrades, address the implication of the adoption of a single European Union
currency in 1999 and to identify those areas that require Year 2000 compliance
and is developing an implementation plan to accomplish these objectives. Year
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<PAGE> 30
2000 compliance refers to the inability of certain computer systems to recognize
dates commencing on January 1, 2000. Such inability has the potential to
materially adversely affect the operation of computer systems. The Company
currently believes that by modifying existing software and converting to new
software for certain tasks, Year 2000 compliance will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations in any given year. However, there can be no
assurance that the systems of other companies on which the Company may rely will
be timely converted or that the failure to convert by another company would not
have an adverse effect on the Company. At the present time, the Company
estimates that the incremental cash requirements related to system upgrades,
European Union single currency issues and Year 2000 compliance will total
approximately $10 million to $15 million. Such expenditures will be expensed or
capitalized as appropriate.
In January 1996, the Company's Board of Directors approved a one million
share stock repurchase program, which was completed in April 1997. In April
1997, the Board of Directors adopted an additional $30 million stock repurchase
program which was completed in February 1998. In February 1998, the Board
adopted an additional $20 million stock repurchase program. Pursuant to these
stock repurchase programs, through February 1998 the Company had expended $46.6
million in the aggregate to repurchase a total of 2.5 million shares of Old
Common Stock, Class A Stock and Class B Stock.
The Company has pledged cash and cash equivalents to secure bank financing
primarily for the benefit of its foreign subsidiaries, including letters of
credit, lines of credit, leases, and other obligations. As of December 31, 1997,
an aggregate of $21.2 million had been pledged against $26.4 million of
commitments for debt obligations, contingent guarantees, and foreign exchange
activity. Generally, these debt arrangements expire in less than one year. The
Company also enters into unsecured guarantees related mainly to short-term
currency hedge arrangements. There were no such currency hedges outstanding as
of December 31, 1997.
At December 31, 1997, the Company had $5.5 million of credit facilities of
which $0.3 million is outstanding. The majority of these facilities expire in
1998. These facilities are subject to normal banking terms and conditions and do
not materially restrict the Company's activities.
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<PAGE> 31
BUSINESS
GENERAL
Herbalife is a network marketing company that sells a wide range of weight
management products, food and dietary supplements and personal care products
worldwide. As of December 31, 1997, the Company conducted business in 36
countries located in Asia/Pacific Rim, Europe and The Americas. Retail sales in
those regions represented 43.2%, 30.4% and 26.4%, respectively, of the Company's
total retail sales in 1997.
The Company has experienced substantial growth in retail sales and net
income in recent years. From 1992 to 1997, the Company's retail sales grew from
$405.1 million to $1.49 billion, representing a compound annual growth rate of
29.8%. From 1992 to 1997, the Company's net income grew from $20.1 million to
$54.7 million, representing a compound annual growth rate of 22.2%.
The Company's products are marketed exclusively through a network marketing
system. This system enables the Company's independent distributors to earn
profits by selling Herbalife products to retail consumers and other
distributors. Distributors may also develop their own distributor downline
organizations by sponsoring other distributors to do business in any market
where the Company operates, entitling the sponsors to receive royalty overrides
on product sales within their downline organizations.
Management believes that Herbalife's network marketing system is ideally
suited to its products, which emphasize a healthy lifestyle, because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use the Company's products themselves.
The Company's network marketing system appeals to a broad cross-section of
people throughout the world, particularly those seeking to supplement family
income, start a home business or pursue employment opportunities other than
conventional, full-time employment.
KEY OPERATING STRENGTHS
The Company believes the source of its success is its commitment to serving
the needs of its distributors. The Company provides its distributors with high
quality products and an appealing network marketing system that combines a
highly attractive compensation program with extensive Company-sponsored training
and motivational events and services. The Company has established a strong
operating platform to support distributors and facilitate future growth. The key
components of this platform include the following:
High Quality, Healthy Lifestyle Products. The Company offers high quality
products, many of which emphasize herbs and other natural ingredients in order
to appeal to consumer demand for products that contribute to a healthy
lifestyle. Herbalife's complete product line consists of 94 products, including
14 weight management, 22 food and dietary supplement and 58 personal care
products, with a varying number of these products offered in each of the
Company's markets. These three product categories represented 67.8%, 16.4% and
11.3% of total retail sales in 1997, respectively.
Attractive Distributor Compensation Program. The Company believes that it
offers one of the most financially rewarding compensation programs in the
network marketing industry. Distributors' earnings are derived from two primary
sources: profits on the resale of products and a series of royalties and
production bonuses on product sales within a distributor's downline
organization. Combining these sources of earnings plus participation in the
President's Team bonus, the Company's total "pay-out" (including distributor
allowances) on products subject to distributor royalty overrides is
approximately 72% of the Company's suggested retail sales price (before
reflecting a 6% handling fee paid by distributors.) Distributors can also
participate in various non-cash awards, such as the Get-A-Way vacations and HBN
satellite dishes offered through various Herbalife promotional programs. In
addition, through its international sponsorship program, the Company affords
distributors the opportunity to earn the same types of compensation both in the
distributor's home country and in any other country where Herbalife operates.
Comprehensive Distributor Support Services. Mark Hughes and the Company's
top distributors, in conjunction with the Company's 307 distributor support and
relations employees and 121 sales and marketing employees, are committed to
training and motivating Herbalife's distributors. The Company strives to
29
<PAGE> 32
effectively and efficiently communicate with its global distributor base by
capitalizing on new technologies and marketing techniques. The Company regularly
conducts motivational events and training programs, both live and via the
Herbalife HBN network and teleconferences, and utilizes a range of promotional
literature (including catalogs and newsletters), all in multiple languages and
tailored to meet the particular needs of Herbalife distributors worldwide. In
addition to over one hundred Company-sponsored live events each month,
distributors themselves conduct several thousand local training and motivational
events each month. The Company seeks to inspire distributor loyalty by making
prompt product deliveries and royalty payments and by providing detailed
distributor earnings statements.
Proven New Market Expansion Program. The Company has developed a
systematic, proven approach to opening new markets. With the advice of local
legal counsel and other advisors, the Company conducts a detailed analysis of
the new market's regulatory framework, modifies its products and marketing
system as necessary to obtain required regulatory approvals and establishes
plans for product distribution and distributor services within the new market.
The Company generally commences these activities two years before opening a new
market and commits substantial financial and management resources to the
process.
Advanced Global Information Systems. To facilitate the Company's global
expansion, the Company employs advanced computer and telecommunications systems
that link its domestic and international operations and provide timely and
accurate product ordering, royalty payment processing and inventory management.
During 1995, 1996 and 1997, the Company has invested in excess of $15 million to
enhance its computer and telecommunications systems.
Proactive Approach to Government Relations. The Company employs a staff of
government relations personnel throughout the world who take a proactive
approach to working with governmental agencies, in order to create a favorable
business environment for Herbalife and its distributors. In 1994, the Company
formed its Government Relations Group, currently consisting of 10 employees, and
in 1995 it established the position of Chief International Counsel. The Company
has budgeted approximately $6.0 million to government relations activities
worldwide for 1998. The Company's Government Relations Group and international
legal personnel establish relationships with regulators and community leaders in
both new and existing markets and strive to ensure that the Company's products
comply with regulatory requirements. In addition, the Company coordinates its
activities in each market with a network of legal counsel, regulatory
consultants and other advisors to support its worldwide operations.
GROWTH STRATEGY
The Company's strategy for growth consists of the following four principal
elements:
Expand Product Offerings and Developing New Product Lines. The Company is
committed to expanding its product line by developing and offering new products
and introducing existing products into markets where they are not currently
offered. Expanding product offerings and categories is a fundamental part of the
Company's business strategy. The timely introduction of new, high quality
products creates sales opportunities for distributors, and also serves to
generate enthusiasm among distributors and provide them with additional
promotional opportunities to sell other Company products. During 1997, the
Company introduced 17 new products (exclusive of flavor and color variations),
and during 1998 the Company intends to introduce up to 40 new products
(exclusive of flavor and color variations) in selected markets, including
several additions to the weight management program, an important new line of
personal care products and a new line of state-of-the-art water purification
systems, marketed under the name "AquaGenics(TM)." The Company's new nutritional
products include a reformulated meal-replacement powder with greater protein
content, Chew Slim(TM) herbal diet gum, WaferFull(TM) chewable wafers,
MentaBalance(TM) amino acid and herbal supplement and CarboGuard(TM)
micronutrient fiber and herbal supplement. In its Dermajetics(TM) personal care
line, the Company will launch a new line of color cosmetics in selected markets.
The Company will also seek to introduce additional new product lines in the
future, including household products.
Revitalize Sales in Certain Existing Markets. Management continually seeks
to revitalize sales in markets, such as France, Germany, Italy and Spain, that
have experienced an initial period of growth followed by a leveling off or
decline in sales (see "Geographic Areas of Operations") by, among other things,
providing
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<PAGE> 33
extensive training and motivational program support to distributors. In
addition, the Company has created regional planning and strategy groups that
include senior members of the Company's distributor base, increased focus on
governmental relations and hired additional distributor support representatives.
The Company also seeks to introduce annually in each targeted market additional
products not previously offered. In certain markets, the Company has enhanced
its presence and visibility by opening new, more attractive and conveniently
located distributor sales centers. The Company believes that these initiatives
favorably impact operations and the Company will continue to deploy these
initiatives in an effort to provide a platform for renewed growth in the
targeted markets in the future.
Expand Into New Markets. The opening of new markets is an important
component of the Company's business strategy. From January 1, 1992 through
December 31, 1997, the Company has commenced operations in 26 new countries,
consisting of six in Asia/Pacific Rim, 15 in Europe and five in The Americas.
During 1997, these countries contributed $1.05 billion of retail sales,
representing 70.4% of the Company's total retail sales. The Company believes
there are numerous additional markets in which its network marketing system and
products should prove successful. The Company opened new markets, Thailand and
Chile, in 1997 and plans to open Turkey and Indonesia in 1998. Additional new
markets currently under consideration include China, India, Colombia and
Ecuador. The Company evaluates these and other new markets based, in part, on
the Company's ability efficiently to create a distributor base in potential
markets. In determining when and where to open new markets, the Company will
continue to seek to minimize the impact on distributor focus in existing markets
and to ensure that adequate distributor support services and other Company
systems are in place to support the growth.
Enhance Sales and Motivational Training. The Company will continue to seek
to increase sales through its network marketing system by utilizing extensive
training and motivational programs. The Company will also produce extravaganzas
and other large scale events and numerous training and motivational programs
worldwide. In addition, the Company will continue to offer extensive training
programs through various methods of telecommunication, including broadcast
faxes, pre-recorded telephone message services and live multi-lingual
teleconferences on a global basis, and will seek to expand the motivational and
training programming and audience of the HBN network. Approximately 20,000 HBN
home systems are currently in place. The Company believes distributors
frequently invite other distributors and customers into their homes to view the
2 to 3 hours of HBN network programming available each week.
PRODUCT OVERVIEW
The Company's products include weight management products, food and dietary
supplements, personal care products and educational and promotional materials.
The Company currently markets 94 products, exclusive of variations in product
flavors and colors, reformulations of products to satisfy regulatory
requirements within a particular country and similar variations of the Company's
basic product line. A limited number of the Company's personal care products are
classified in the U.S. as OTC drugs.
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<PAGE> 34
The following chart summarizes the number of products offered by the
Company in its principal product categories as of December 31, 1997 and retail
sales information by product category during the indicated periods.
PRODUCT SALES BY CATEGORY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997
------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
PRODUCT CATEGORY (NUMBER OF RETAIL RETAIL RETAIL RETAIL RETAIL RETAIL
PRODUCTS IN CATEGORY) SALES SALES SALES SALES SALES SALES
--------------------------- -------- -------- ---------- -------- ---------- --------
(AMOUNTS IN THOUSAND)
<S> <C> <C> <C> <C> <C> <C>
Weight Management(14)............. $694,269 75.2% $ 854,410 71.2% $1,011,122 67.8%
Food and Dietary
Supplements(22)................. 86,714 9.4 168,371 14.0 244,569 16.4
Personal Care Products(58)*....... 107,385 11.6 116,938 9.7 167,931 11.3
Other**........................... 35,276 3.8 60,425 5.1 67,071 4.5
-------- ---------- ----------
$923,644 $1,200,144 $1,490,693
======== ========== ==========
</TABLE>
- ---------------
* Includes a limited number of products that are classified in the U.S. as OTC
drugs.
** Includes distributor kits and other educational and promotional materials.
Such materials are regularly developed and enhanced by the Company and, as a
result, the number of such materials is not presented.
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<PAGE> 35
The following chart sets forth the number of the Company's products
available as of December 31, 1997 by category in each of the Company's markets
as of that date.
NUMBER OF PRODUCTS OFFERED BY CATEGORY
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
WEIGHT FOOD AND DIETARY NUMBER OF TOTAL
MANAGEMENT SUPPLEMENT PERSONAL CARE NUMBER OF
YEAR PRODUCTS PRODUCTS PRODUCTS PRODUCTS
COUNTRY ENTERED(1) (14 IN TOTAL) (22 IN TOTAL) (58 IN TOTAL) (94 IN TOTAL)
------- ---------- ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASIA/PACIFIC RIM
Australia....................... 1982 8 7 43 58
New Zealand..................... 1988 8 6 42 56
Hong Kong....................... 1992 5 1 46 52
Japan........................... 1993 7 2 32 41
Philippines..................... 1994 7 -- -- 7
Taiwan.......................... 1995 4 -- 36 40
Korea........................... 1996 3 1 -- 4
Thailand........................ 1997 5 -- 27 32
EUROPE
United Kingdom.................. 1983 7 9 46 62
Israel.......................... 1989 8 3 25 36
Spain........................... 1989 6 2 45 53
France.......................... 1990 7 -- 44 51
Germany......................... 1991 4 -- 44 48
Italy........................... 1992 7 2 44 53
Portugal........................ 1992 5 1 45 51
Czech Republic.................. 1992 7 3 29 39
Netherlands..................... 1993 6 1 44 51
Belgium......................... 1994 7 4 44 55
Poland.......................... 1994 5 1 20 26
Denmark......................... 1994 7 2 44 53
Sweden.......................... 1994 7 1 44 52
Russia.......................... 1995 12 14 31 57
Switzerland..................... 1995 3 -- 44 47
Austria......................... 1995 2 1 44 47
Norway.......................... 1995 5 1 32 38
Finland......................... 1995 8 3 32 43
South Africa.................... 1995 6 2 42 50
Greece.......................... 1996 2 -- 44 46
THE AMERICAS
United States................... 1980 14 22 52 88
Canada.......................... 1982 8 8 44 60
Mexico.......................... 1989 12 12 24 48
Dominican Republic.............. 1994 6 -- -- 6
Venezuela....................... 1994 5 -- 36 41
Argentina....................... 1994 6 -- 34 40
Brazil.......................... 1995 6 -- -- 6
Chile........................... 1997 5 -- 19 24
</TABLE>
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<PAGE> 36
- ---------------
(1) Throughout this Prospectus, "entering", "opening", "commencing operations"
or "doing business" in a market or country means that the Company has
obtained either regulatory approval of, or the favorable opinion of local
legal counsel with respect to, its network marketing system, has obtained
all requisite regulatory approvals of at least one product and has commenced
sales and shipment of that product within the market or country. With
respect to Japan, from 1989 through 1992, the Company operated under a
licensing arrangement in Japan and reported license fees with respect
thereto as revenue. Subsequently, in 1993, the Company formed a new Japanese
subsidiary whose revenues were then included in the Company's results of
operations. Accordingly, the Company considers Japan to have been "opened"
in 1993.
Weight Management Products. A majority of the Company's sales are derived
from the 14 weight management products that the Company markets as the
Thermojetics(R) Weight-Management System. These weight management products
include the following: (i) Formula 1, a protein powder in four different flavors
designed as a meal replacement, (ii) the four Thermojetics(R) weight management
tablets (original green, green, beige and yellow), (iii) Thermojetics(R) Herbal
Concentrate, an herbal beverage blended from five natural botanicals, and (iv) a
variety of other nutritional products, such as Cell-U-Loss(R), Activated Fiber,
N.R.G. (Nature's Raw Guarana), Thermo-bond(R) and Aminogen(R). In addition, the
Company has recently introduced four new products to the Thermojetics(R) system:
Chew Slim(TM) herbal diet gum, WaferFull(TM) chewable wafers, MentaBalance(TM)
amino acid and herbal supplement and CarboGuard(TM) micronutrient and herbal
supplement.
Food and Dietary Supplements. The Company's food and dietary supplements
include a variety of products, each containing herbs, vitamins, minerals and
other natural ingredients. Such products are sold under various names, including
Herbal-Aloe, Florafiber, Xtra-Cal, Herbalifeline(R), Tang Kuei Plus, Male Factor
1000(R), Schizandra Plus(R) and A.M. Replenishing and P.M. Cleansing formula. In
addition, in 1996, the Company launched its Health & Fitness Program and Bulk &
Muscle Program, together with a Longetics Program designed for the needs of
mature adults, which offer various products consisting of a protein drink mix, a
multivitamin, mineral and herbal tablet and Cell Activator(R). In 1996, the
Company also introduced products designed to meet the nutritional needs of
children, consisting of Kindermins(R), a liquid multivitamin/herbal formula,
and Dinomins(TM), a chewable vitamin tablet.
Personal Care Products. The Company's entire personal care product line is
marketed under the name Dermajetics(R), which was initially launched in 1995.
Currently, the Dermajetics(R) product line consists of the following products:
The Skin Survival Kit, consisting of a day and night moisturizer, a deep
cleaning facial mask and a hydrating eye gel, all packaged in a cosmetic bag;
Parfums Vitessence(TM), consisting of six eaux de toilette, three for men and
three for women; Nature's Mirror(R), consisting of a cleanser, toner and
moisturizer for each of three different skin types and four specialty care
products; Good Hair Day, consisting of seven hair care products; Ocean
Currents(R), consisting of three bath products; Aroma Vie(R), consisting of
three aromatic soaps and oils; and other specialty personal care products,
including Herbal Aloe Gel and Lotion, Super APR (Arthritis Pain Relief), a
suncare line and Body Buffing and Toning Cream. In addition, during 1998 the
Company intends to introduce a new line of color cosmetics (lipstick, mascara
and related products) in selected markets.
Educational and Promotional Materials. The Company also sells distributor
kits, which an individual must purchase (at a worldwide average cost of
approximately $87 per kit) in order to become a distributor of the Company, as
well as other educational and promotional materials. Such materials include
sales aids, informational videotapes and cassette recordings. Sales of
distributor kits are not subject to distributor allowances (i.e., the Company
receives the entire retail sales amount from the sale of distributor kits).
Home Technology Products. During 1998, the Company plans to launch its new
AquaGenics(TM) line of home water purification systems. The AquaGenics(TM) line
includes a state-of-the art drinking water filtration system and a shower-head
water filter. In addition, the Company is in the developmental stage for other
home technology products.
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<PAGE> 37
Product Manufacturing and Development. The Company expands its product line
through the development of new products. New product ideas are derived from a
number of sources, including trade publications, scientific and health journals,
the Company's executives, staffs and consultants and outside parties. In advance
of introducing products into its markets, local counsel and other
representatives retained by the Company investigate product formulation matters
as they relate to regulatory compliance and other issues. The Company's products
are then reformulated to suit both the regulatory and marketing requirements of
the particular market. See "-- Regulation."
All of the Company's products are manufactured by outside companies. Raven
currently manufactures all of the Company's powder products, and D&F currently
supplies substantially all of the Company's tablet and capsule products. For a
number of years prior to 1998, the Company was subject to requirements contracts
with each of Raven, D&F and Dynamic, pursuant to which the Company agreed to
purchase all of its requirements of powder products from Raven and all of its
requirements of tablet, capsule and certain other products from Dynamic or D&F,
to the extent each such manufacturer was capable of manufacturing such products.
In 1996 and 1997, aggregate purchases by the Company from Raven and D&F
represented a majority of the Company's product purchases. In September 1997,
the Company entered into new three-year agreements with Raven, D&F and Dynamic,
pursuant to which revised pricing and other provisions became effective on
January 12, 1998. The new contracts provide, among other things, the ability for
the Company to source and develop products with other third party manufacturers,
subject to minimum percentage purchase and other requirements for nutritional
supplement, and a small number of non-nutritional supplement, products falling
into specified product categories. As a result, and because the new contracts
confirm the Company's ownership of product formulations for substantially all of
the Company's nutritional products, the Company has the capacity, and has begun
to seek, to "second source" particular nutritional supplement products with
multiple manufacturers. In addition, the Company's WaferFull(TM) and Chew
Slim(TM) weight management products are being manufactured for the Company by
new manufacturers. Further, the Company has hired its own staffs of product
research and development and product formulation personnel, and will
increasingly rely on its in-house staff for these functions. However, the
Company has historically relied on Raven and D&F for these services, and will
continue to do so, albeit to a lesser extent, in the future.
The Company's ability to enter new markets and sustain satisfactory levels
of sales in each market has been in the past and is likely to continue to be
dependent in significant part upon its own ability and the ability of its
manufacturers, including Raven and D&F, to develop new products and reformulate
existing products for introduction into the Company's markets. Beginning in
1997, the Company has significantly expanded its in-house product research and
development and product formulation staffs, which now consist of 23 individuals.
With the transition in the Company's relationship with Raven and D&F from
exclusive to non-exclusive contracts, there can be no assurance that the Company
will seek or continue to obtain the same amount or quality of product research,
development or formulation services from Raven and D&F that it has received in
the past. While the Company expects to obtain similar such services from
in-house personnel and alternative manufacturers in the future, there can be no
assurance that there will not be some disruption in the Company's business from
time to time as these support services begin to be provided internally or by
alternative manufacturers.
Pursuant to its new contracts with Raven, D&F and Dynamic, the Company owns
the proprietary rights to substantially all of its weight management products
and food and dietary supplements. However, there can be no assurance that
another company will not replicate one of the Company's products. In addition,
Raven and D&F continue to own certain product formulations and manufacturing
processes relating to certain of the Company's nutritional products. Two
individuals (not affiliates of the Company) are principal stockholders of each
of D&F, Raven and Dynamic. Mark Hughes owns a one-third ownership interest in
Raven and a one-fifth ownership interest in Dynamic. See "Certain Transactions."
Product Return and Buy-Back Policies. All of the Company's products include
a customer satisfaction guarantee. Within thirty days of purchase, any customer
who is not satisfied with an Herbalife product for any reason may return it or
any unused portion to the distributor from whom it was purchased for a full
refund from the distributor or credit toward purchase of another Herbalife
product. Distributors may obtain replacements from the Company for products
returned to them by consumers if they return such products to
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<PAGE> 38
the Company on a timely basis. In addition, in most jurisdictions, the Company
maintains a buy-back program pursuant to which it will repurchase products sold
to a distributor provided that the distributor resigns as a Company distributor,
returns the product in marketable condition within twelve months of original
purchase and meets certain documentation and other requirements. The Company
believes this buy-back policy addresses a number of the regulatory compliance
issues pertaining to network marketing systems. See "Regulation -- Network
Marketing System." Historically, product returns and buy-backs have not been
significant, averaging 0.7% of annual retail sales during the last five years.
Recent Regulatory Developments. The development and marketing of the
Thermojetics(R) weight management tablets (original green, green, beige and
yellow) and other products in the Thermojetics(R) line have contributed
significantly to the Company's retail sales. One of the ingredients in the
Thermojetics(R) original green herbal tablet is a Chinese herb, Ma Huang, which
contains naturally-occurring ephedrine in small quantities. Ephedrine products
have been the subject of adverse publicity in the United States and other
countries relating to alleged harmful effects, including the deaths of several
individuals. Currently, the Company offers the Thermojetics(R) original green
herbal tablet only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product). On April 10,
1996, the FDA issued a statement warning consumers not to purchase or ingest
dietary supplements containing natural sources of ephedrine that are claimed to
produce certain effects (none of which are claimed by the Company's product). On
June 4, 1997, the FDA issued a proposed regulation for dietary supplements
containing ephedrine alkaloids. The proposed regulation would include
prohibitions against dietary supplements containing eight milligrams or more of
ephedrine alkaloids per serving, and would not permit such products to contain
any other stimulant, diuretic or laxative ingredients. In addition, labeling of
supplements would be prohibited from suggesting or recommending conditions of
use that would result in an intake of eight milligrams or more of ephedrine
alkaloids within a six-hour period, or a total daily intake of 24 milligrams or
more. The FDA proposal would also include prohibitions against certain claims of
suitability for weight loss and other uses or benefits. However, no final
regulation has been issued to date. There can be no assurance as to the final
form of any new FDA regulations or that the FDA will not seek to impose
additional regulations, possibly prohibiting, limiting potencies or placing
other restrictions on the sale of such products, or the impact, if any, of any
such regulations or actions on the Company. In addition, in September 1997 the
FDA issued regulations governing the labeling and marketing of dietary
supplement products. The Company will be required to revise a substantial number
of its product labels to reflect the new requirements prior to the 1999
effective date, although the Company does not expect the cost or impact of such
actions to be material. See "Risk Factors -- Regulation" and " --Regulation."
In addition, during the third quarter of 1995, the Company received
inquiries from certain governmental agencies within Germany and Portugal
relating to the Company's product, Thermojetics(R) Instant Herbal Beverage,
which does not contain Ma Huang. The inquiries related to the caffeine content
of the product and the status of the product as an "instant tea," which was
disfavored by the regulators, versus a "beverage." The sale of this product in
these countries was subsequently suspended by the Company at the request of the
regulators. The Company may in the future attempt to reintroduce the product as
a "beverage" in one or both of these markets. See "Risk Factors -- Regulation"
and " --Regulation."
NETWORK MARKETING SYSTEM
The Company's products are distributed exclusively through a network
marketing system consisting of an extensive network of distributors.
Distributors are generally independent contractors who purchase products
directly from the Company or from other distributors for resale to retail
consumers and other distributors. Distributors may elect to work on a full-time
or part-time basis. The Company believes that its network marketing system
appeals to a broad cross-section of people worldwide, particularly those seeking
to supplement family income, start a home business or pursue employment
opportunities other than conventional, full-time employment, and that a majority
of its distributors therefore work on a part-time basis. The Company believes
that its network marketing system is ideally suited to marketing its products
because sales of such products are strengthened by ongoing personal contact
between retail consumers and distributors,
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<PAGE> 39
many of whom use the Company's products themselves. The Company encourages its
distributors to use the Company's products and to communicate the results of
their use of such products to their retail customers.
Distributors' earnings are derived from several sources. First,
distributors may earn profits by purchasing the Company's products at wholesale
prices (which are discounted 25% to 50% from suggested retail prices depending
on the distributor's level within the Company's distributor network) and selling
the Company's products to retail customers at retail prices. Second,
distributors may earn profits by selling products to distributors within their
downline organization who receive a lower discount percentage than the selling
distributor. Third, distributors who sponsor other distributors and establish
their own downline organizations may earn royalties of 1% to 5% on product sales
on each of up to three downline supervisor levels and production bonuses of 2%
to 6% on product sales within their downline organizations upon becoming a
qualifying "TAB Team" member. Combining these sources of earnings and including
participation in the President's Team bonus (as described below), the Company's
total "pay-out" on products subject to distributor royalty overrides is
approximately 72% of the Company's suggested retail sale price (i.e. 50%
distributor allowance plus up to 22% of suggested retail sales prices in royalty
overrides and similar bonuses, before reflecting a 6% handling fee charged to
distributors by the Company).
Distributors earn the right to receive royalties upon attaining the level
of supervisor and above, and production bonuses upon attaining the level of
Global Expansion Team and above. Once a distributor becomes a supervisor, he or
she has an incentive to qualify (by earning specified amounts of royalties) as a
member of the Global Expansion Team, the Millionaire Team or the President's
Team and thereby receive production bonuses (2%, 4% and 6%, respectively). The
Company believes that the right of distributors to earn royalties and production
bonuses contributes significantly to the Company's ability to retain its most
productive distributors.
To become a distributor, a person must be sponsored by an existing
distributor and must purchase a distributor kit from the Company (except in
Korea, where there is no charge for a distributor kit). To become a supervisor
or qualify for a higher level, distributors must purchase a certain amount of
the Company's products or earn certain amounts of royalties during specified
time periods and must re-qualify for such levels once each year. To attain
supervisor status, generally, a distributor must purchase, either from the
Company or other distributors, products representing at least 4,000 volume
points in one month or 2,500 volume points in two consecutive months (volume
points are point values assigned to each of the Company's products that are
equal in all countries and are based on the suggested retail price of U.S.
products). Supervisors may then attain higher levels (i.e., the Global Expansion
Team, the Millionaire Team or the President's Team) by earning increasing
amounts of royalties based on purchases by distributors within their
organizations. Supervisors contribute significantly to the Company's sales and
certain key supervisors who have attained the highest levels within the
Company's distributor network are responsible for generating a substantial
portion of the Company's sales and for recruiting a substantial number of the
Company's distributors. The following table sets forth the approximate number of
the Company's supervisors at the dates indicated:
<TABLE>
<CAPTION>
FEBRUARY 28,*
--------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Approximate Number of
Supervisors................. 18,000 41,000 75,000 90,000 99,000 115,000 139,000
</TABLE>
- ---------------
* Every February 28th, the Company deletes from the rank of supervisor those
supervisors who did not satisfy the supervisor qualification requirements
during the preceding twelve months. Distributors who meet the supervisor
requirements at any time during the year are promoted to supervisor status at
such time (including any supervisors who were deleted, but who subsequently
requalified). The Company relies on distributors' certifications as to the
amount and source of their product purchases from other distributors. Although
the Company applies certain review procedures with respect to such
certifications, they are not directly verifiable by the Company.
The Company also has two compensation and incentive programs designed to
motivate distributors at both the most senior and junior levels within the
Company's distributor network. The Company's most senior
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<PAGE> 40
distributors consist of approximately 345 distributors (as of December 31, 1997)
who comprise the President's Team and who work closely with Mark Hughes to
develop and implement new initiatives and strategies for increasing sales and
distributor productivity throughout the Company's entire distributor
organization. Qualifying President Team members have the opportunity to
participate in the President's Bonus, which in 1998 consists of a total
available awards package of one percent of the Company's 1997 total product
retail sales, or approximately $14.2 million. The distribution of the
President's Bonus is determined by Mark Hughes and is based in part upon each
President Team member's participation in corporate-sponsored training and
motivational events. In this manner, the Company attempts to involve its most
senior distributors in the development and growth of the Company in order to
support the sales, training, motivation and strategic planning efforts of Mark
Hughes. In addition to these programs, the Company periodically offers a variety
of special promotions related to particular products or sales periods, involving
special cash bonuses and other awards, such as Get-A-Way vacations.
For the Company's most junior distributors, those who have not yet attained
supervisor status, the Company instituted a "Success Builder" program. This
program permits a distributor who purchases products representing 1,000 volume
points in one month to obtain a 42% distributor allowance from suggested retail
prices on the Company's products, rather than the standard 25%. In addition, in
1996, the Company introduced the Herbalife Advantage Program ("HAP"), which uses
a product brochure that enables the Company's junior distributors to obtain an
extra 10% distributor allowance over the standard 25% and to order products by
individual unit (rather than by cases) to better suit their inventory and usage
needs. The Success Builder and HAP programs are designed to provide incentives
to distributors who are in the initial stages of building distributor
organizations and to encourage them to reach supervisor status.
The Company seeks to expand its distributor base in each market by offering
distributors attractive compensation opportunities. The Company believes its
international sponsorship program provides a significant advantage to its
distributors as compared with distributors in certain other network marketing
organizations because the program permits distributors in any country to sponsor
distributors in other countries (where the Company is licensed to do business
and where the Company has obtained required product approvals) and to earn the
same level of royalties and bonuses on sales by those distributors as if both
distributors resided in the same country.
The Company maintains a computerized system for processing distributor
orders and calculating distributor royalties and bonus payments which enables it
to remit such payments promptly to distributors. The Company believes that
prompt remittance of royalties is vital to maintaining a motivated network of
distributors and that its distributors' loyalty to the Company has been enhanced
by the Company's history of consistently making royalty and bonus payments on a
scheduled basis.
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<PAGE> 41
GEOGRAPHIC AREAS OF OPERATIONS
The following chart sets forth the countries in which the Company currently
operates, the year operations were commenced in each country and retail sales
information by country from 1993 to 1997.
RETAIL SALES BY COUNTRY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
YEAR ------------------------------------------------------------------------------------------
COUNTRY(1) ENTERED 1993 1994 1995 1996 1997
- --------------------------- ------- --------------- --------------- --------------- --------------- ------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Australia.................. 1982 $ 20,602 $ 29,155 $ 30,803 $ 24,059 $ 20,644
New Zealand................ 1988 2,497 3,206 2,535 1,799 1,802
Hong Kong.................. 1992 3,853 5,323 10,783 11,698 21,808
Japan(6)................... 1993 686 18,759 81,730 311,117 525,738
Philippines................ 1994 80 13,219 1,935 1,264
Taiwan..................... 1995 4,424 26,226 47,644
Korea...................... 1996 1,951 14,631
Thailand(7)................ 1997 9,907
-------- -------- -------- ---------- ----------
ASIA/PACIFIC RIM........... 27,638 56,523 143,494 378,785 643,438
-------- -------- -------- ---------- ----------
United Kingdom............. 1983 24,930 30,769 15,296 12,487 11,833
Israel(3).................. 1989 30,359 73,278 30,133 8,419 8,132
Spain...................... 1989 47,662 30,733 15,730 9,792 9,371
France..................... 1990 97,306 46,968 13,129 12,379 12,913
Germany.................... 1991 83,068 159,482 115,555 54,340 44,059
Italy...................... 1992 77,842 72,009 56,687 54,449 65,026
Portugal................... 1992 13,328 11,073 8,934 3,097 3,545
Czech Republic............. 1992 10,005 24,423 15,112 13,733 14,758
Netherlands................ 1993 7,009 17,581 18,237 15,248 18,188
Belgium.................... 1994 1,965 3,775 2,370 2,310
Poland..................... 1994 792 6,238 16,218 13,883
Denmark.................... 1994 2,377 11,263 3,747 4,699
Sweden..................... 1994 1,799 17,845 16,488 21,061
Russia(4).................. 1995 29,593 142,078 157,819
Switzerland................ 1995 4,911 14,412 17,315
Austria.................... 1995 3,134 7,385 10,076
Norway..................... 1995 367 8,279 14,822
Finland.................... 1995 300 14,702 9,073
South Africa(5)............ 1995 7,707 21,497 13,337
Greece..................... 1996 227 898
-------- -------- -------- ---------- ----------
EUROPE..................... 391,509 473,249 373,946 431,347 453,118
-------- -------- -------- ---------- ----------
United States.............. 1980 246,984 294,987 333,595 279,596 298,661
Canada..................... 1982 10,100 10,789 12,042 13,848 17,452
Mexico..................... 1989 16,784 25,422 15,125 11,590 15,973
Dominican Republic(2)...... 1994 2,500 101 33 127
Venezuela.................. 1994 1,527 11,152 5,568 3,667
Argentina.................. 1994 19,061 10,006 3,185 4,784
Brazil..................... 1995 24,183 76,192 50,094
Chile(7)................... 1997 3,379
-------- -------- -------- ---------- ----------
THE AMERICAS............... 273,868 354,286 406,204 390,012 394,137
-------- -------- -------- ---------- ----------
Total Retail Sales..... $693,015 $884,058 $923,644 $1,200,144 $1,490,693
======== ======== ======== ========== ==========
</TABLE>
39
<PAGE> 42
- ---------------
(1) The Company records sales data based on the country from which distributor
orders are shipped by the Company. Sales by distributors to other
distributors or retail consumers may occur in other countries, although such
sales generally violate geographic limitations imposed by the Company on
product sales.
(2) Sales in the Dominican Republic are shipped from the United States.
(3) The Company initiated operations in Israel in 1989 through a licensing
arrangement that was terminated in 1990. In 1991, the Company began
operating in Israel through a wholly-owned subsidiary. Accordingly, sales
data for Israel are reported only for 1991 and subsequent periods.
(4) The Company operates through various import/export companies located in
Russia to conduct transactions in the Company's products with Russian
distributors.
(5) Because sales in South Africa are not large enough to be treated as a
separate segment, they are included with sales from the European region.
(6) In 1989 through 1992 the Company operated under a licensing arrangement in
Japan and recorded license fees with respect thereto as revenue. A new
Japanese subsidiary was formed in November 1993 whose results from that date
are reported above. Approximately 93.0% of the outstanding capital stock of
the Japanese subsidiary is owned by the Company, with the remainder owned by
certain officers and directors of the Company. In addition, the Company has
begun steps to pursue an initial public offering of shares of the Japanese
subsidiary in Japan. See "Certain Transactions."
(7) The Company initiated operations in Chile and Thailand in the first and
second quarters of 1997, respectively.
Geographic Sales Trends. The opening of new markets is an important
component of the Company's business strategy. From January 1, 1992 through
December 31, 1997, the Company commenced operations in 26 new countries. In
1997, these countries contributed $1.05 billion of retail sales, representing
70.4% of the Company's total retail sales. Japan accounted for $525.7 million of
such sales, representing 35.3% of retail sales. Consistent with its growth
strategy, the Company opened markets in Thailand and Chile in 1997 and plans to
open Turkey and Indonesia in 1998. Additional new markets currently under
consideration include China, India, Colombia and Ecuador.
After entering a new country, the Company has in many instances experienced
an initial period of rapid growth in sales as new distributors were recruited,
followed by a decline in sales. The Company believes that a significant factor
affecting these markets has been the opening of other new markets within the
same geographic region or with the same or similar language or cultural bases
and the corresponding tendency of some distributors to focus their attention on
the business opportunities provided by new markets instead of developing their
established downline organizations in existing markets. Additionally, in certain
instances, the Company has become aware that certain sales in certain existing
markets were attributable to purchasers who distributed such product in
countries which had not yet been opened. When these countries were opened, such
sales in existing markets shifted to the newly opened markets, resulting in a
decline in sales in the existing markets. In determining when and where to open
new markets, the Company will continue to seek to minimize the impact on
distributor focus in existing markets and to ensure that adequate distributor
support services and other Company systems are in place to support the growth.
Another significant factor contributing to such sales declines is the
adverse publicity that sometimes arises when the Company experiences rapid
growth within a market, thus drawing the attention of the media and the
Company's competitors. The Company believes such unfavorable press reports are
generally based upon a lack of familiarity with the Company and its network
marketing system and often originate from competitive forces in the local
market. For instance, in France in late 1994 through 1995, certain reports
erroneously alleged that the Company was in some manner affiliated with a
disfavored religious group. In other cases, including a situation in France that
resulted in the arrest of certain Herbalife distributors, adverse publicity has
arisen from allegations of tax improprieties, which typically occur when a
country applies its tax laws for the first time to a sales and distribution
system that is relatively new to that country, as is often the case with the
Company's network marketing system. See "-- Regulation -- Transfer Pricing and
Similar Regulations." The effect of occasional adverse publicity has at times
also led to increased regulatory scrutiny
40
<PAGE> 43
in certain countries, which may also have an adverse effect on sales. For
example, during the third quarter of 1995, the Company received inquiries from
certain governmental agencies within Germany and Portugal related to the
Company's product, Thermojetics(R) Instant Herbal Beverage. The inquiries
related to the caffeine content of the product and the status of the product as
an "instant tea," which was disfavored by the regulators, versus a "beverage."
The sale of this product in these countries was subsequently suspended by the
Company at the request of the regulators. The Company may in the future attempt
to reintroduce the product as a "beverage" in one or both of these markets.
Management continually seeks to revitalize sales in markets, such as
France, Germany, Italy and Spain, that have experienced an initial period of
growth followed by a leveling off or decline in sales, including by providing
extensive training and motivational program support to distributors. In
addition, the Company has created regional planning and strategy groups that
include senior members of the Company's distributor base, increased focus and
budgets for governmental relations and hired additional distributor support
representatives. The Company also seeks to introduce annually in each targeted
market additional products not previously offered. In certain markets, the
Company has enhanced its presence and visibility by opening new, more attractive
and conveniently located distributor sales centers. The Company believes that
these initiatives favorably impact operations and the Company will continue to
deploy these initiatives in an effort to provide a platform for renewed growth.
Asia/Pacific Rim. Retail sales in Asia/Pacific Rim increased $264.6 million
or 69.9% during 1997 as compared to the prior year. The increase resulted from
strong retail sales in Japan and Taiwan. Retail sales in Japan increased $214.6
million, or 69.0%. Given the rapid increase in retail sales in Japan to current
levels, retail sales in Japan are not expected to continue to increase at
historic rates. In Taiwan, retail sales for 1997 increased $21.4 million, or
81.7%. Retail sales in other Asia/Pacific Rim countries for 1997 increased $28.6
million, or 69.1% as compared to 1996. The increases in the other Asia/Pacific
Rim countries resulted from the opening of South Korea in November 1996 and
Thailand in June 1997 coupled with increased retail sales in Hong Kong.
Europe. Retail sales in Europe increased $21.8 million or 5.1% in 1997 as
compared to the prior year. Within the region, retail sales in Italy and Russia
increased $10.6 million, or 19.4%, and $15.7 million, or 11.1%, respectively, in
1997 compared to 1996. Offsetting the retail sales increases were declines in
Germany, South Africa and Finland of $10.3 million, $8.2 million and $5.6
million, respectively in 1997 as compared to the prior year. Although retail
sales in Germany, South Africa and Finland declined in comparison to the prior
year, they have remained relatively stable over the past four quarters.
The Americas. Retail sales in the Americas increased $4.1 million, or 1.1%
in 1997 as compared to the prior year. The increase in retail sales primarily
resulted from retail sales increases in the United States, Canada and Mexico of
$19.1 million, $3.6 million and $4.4 million, respectively and retail sales of
$3.4 million resulting from the opening of Chile in March, 1997. Partially
offsetting these increases was a decline in Brazil of $26.1 million, or 34.3%.
The retail sales decrease in Brazil was primarily due to a difficult regulatory
environment which, among other factors, impeded the introduction of new products
within the country. The Company has recently received approval for approximately
30 personal care products and will continue to pursue approval of other new
products within Brazil. During each of the 1997 third and fourth quarters,
retail sales in Brazil increased as compared to the preceding quarters. The 1997
fourth quarter retail sales in Brazil exceeded the same period in 1996 by 9.7%.
The Company is exposed to risks associated with the current economic and
currency crises in Asia. Because of the significance of the Asian markets, and
Japan in particular, which has become the Company's largest single retail sales
market, a sustained economic slowdown and/or currency crisis in Asia could have
a material adverse impact on the Company's business. It is not possible for the
Company to predict the future economic climate in Asia.
New Market Expansion Program. The Company engages in a structured and
thorough analysis of potential new markets, including analysis of regulatory
conditions, product approval procedures, competitive forces, synergies between
new and existing countries and distributor presence or interest in new markets,
before selecting markets to enter. When the Company decides to enter a new
market, it first hires local legal
41
<PAGE> 44
counsel with expertise in the product approval process to help ensure that the
Company's network marketing system and products comply with all applicable
regulations and that the Company's profits may be expatriated. In addition,
local counsel helps to establish favorable public relations in the new market by
acting as an intermediary between the Company and local regulatory authorities,
public officials and business people. Local counsel is also responsible for
explaining the Company's products and product ingredients to appropriate
regulators and, when necessary, arranging for local technicians to conduct
required ingredient analysis tests of the Company's products. In recent years,
the Company has expanded its hiring of local firms with experience in
governmental relations and public relations prior to opening a market in order
to ensure a more favorable business environment upon entering the market.
Where regulatory approval in a foreign market is required, the Company's
local counsel work with regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify certain aspects of it network marketing system as necessary to comply
with applicable regulations. Where reformulations of the Company's principal
weight management products are required, the Company has historically found
substitute or replacement ingredients to be readily available, although there
can be no assurance in this regard in the future. Where regulatory approval in a
foreign market is not required, the Company obtains the favorable opinion of
local counsel as to compliance with all applicable regulations. See
"-- Regulation."
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. The Company has recently developed a centralized distribution and
telephone ordering system. In the majority of its new markets, the Company
establishes a storefront sales center in one or more major cities and provides
for product purchases by telephone. Product is shipped to the purchaser from a
warehouse located in the general geographic region. In addition, the Company
initiates plans to satisfy the inventory, personnel and transportation
requirements of the new market, and the Company modifies its distributor
manuals, cassette recordings, video cassettes and other training materials as
necessary to be suitable for the new market. In certain instances where the
Company has achieved rapid sales growth in a new market, such as in Japan and
Brazil, the Company has experienced inventory shortages as a result of the large
demand for the Company's products.
Although the Company intends to expand into new markets, there can be no
assurance that the Company can open markets on a timely basis or that such new
markets will prove to be profitable. Significant regulatory and legal barriers
must be overcome before marketing can begin in any new market. In addition,
expansion of the Company's operations into new markets entails substantial
working capital and capital expenditure requirements associated with both the
regulatory compliance and operations phases of the process. The lead-time and
costs associated with opening anticipated new markets may significantly exceed
those of entering new markets in the past due to greater regulatory barriers,
the necessity of adapting to entirely new regulatory systems and problems
related to entering new markets with different cultural bases and political
systems from those encountered in the past. The lead-time necessary to open a
new market is generally up to two years but may be more.
PRODUCT DISTRIBUTION
The Company's weight management products, food and dietary supplements and
some personal care products are distributed to foreign markets either from the
facilities of the Company's manufacturers or from the Company's Los Angeles
distribution center. Products are distributed in the United States market from
the Los Angeles distribution center or from the Company's Memphis distribution
center. Products are generally transported by cargo ship or plane to the
Company's international markets and are warehoused in either one of the
Company's foreign distribution centers or a contracted third party warehouse and
distribution center. After arrival of the products in a foreign market,
distributors purchase the products from the local distribution center or the
associated sales center. The Company's Dermajetics(R) personal care products are
predominantly manufactured in Europe and the United States. The products
manufactured in Europe are shipped to a centralized warehouse facility in
Strasbourg, from which delivery by ship or plane to other international
42
<PAGE> 45
markets occurs. The Company's new line of color cosmetics products are being
manufactured in Italy and Germany, and the AquaGenics(TM) products are being
manufactured in the United States.
Beginning in 1996 and continuing in 1997, the Company undertook the process
of reconfiguring its European product distribution system. As a part of this
process, the Company has reduced the number of European warehousing facilities
from nine to five and has opened new distribution sales centers. These sales
service centers are conveniently located and attractively designed in order to
encourage local distributors to meet and network with each other and learn more
about Herbalife's products, marketing system and upcoming events. In addition,
the Company has opened a central sales ordering facility in the United Kingdom
for answering and processing telephone orders from throughout Europe. Operators
at this center are capable of conversing in 17 different languages. As part of
this reconfiguration, the Company also implemented a new inventory management
system in the U.S., the U.K., France, Germany and Japan. The new European system
has resulted in improved inventory management. Management anticipates that the
reconfigured European distribution system, featuring centralized distribution
and telephone ordering systems coupled with convenient storefront distributor
service centers, will be the model for developing distribution and distributor
service systems in other regions of the world.
MANAGEMENT INFORMATION AND TELECOMMUNICATIONS SYSTEMS
In order to facilitate its continued growth and support distributor
activities, the Company continually upgrades its management information and
telecommunications systems. These systems include, among other things: (i) a
centralized host computer located in the Company's Inglewood, California
Operations Center, which is linked to Herbalife's international markets through
a dedicated wide area network that provides on-line, real-time computer
connectivity and access; (ii) local area networks of personal computers within
Herbalife's markets, serving the Company's regional administrative staffs; (iii)
an international e-mail system through which Herbalife employees communicate;
(iv) a standardized Northern Telecom Meridian telecommunications system
connecting all of the Company's markets; and (v) a new inventory management
system that has recently been installed in the U.S., the U.K., France, Germany
and Japan. These systems are designed to provide, among other things, financial
and operating data for management, timely and accurate product ordering, royalty
payment processing and inventory management and detailed distributor records.
During 1995, 1996 and 1997, the Company has invested in excess of $15 million to
enhance its computer and telecommunications systems. Additional significant
expenditures, including those to address computer system upgrades relating to
the adoption of a single European Union currency in 1999 and Year 2000
compliance issues, are planned for the next several years. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
REGULATION
In both its United States and foreign markets, the Company is subject to
and affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) including, among other things, regulations
pertaining to (i) the formulation, manufacturing, packaging, labeling,
distribution, importation, sale and storage of the Company's products, (ii)
product claims and advertising (including direct claims and advertising by the
Company as well as claims and advertising by distributors, for which the Company
may be held responsible), (iii) the Company's network marketing system, (iv)
transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties, and (v) taxation of distributors, which in
some instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records. See "Risk Factors -- Regulation."
Products. The formulation, manufacturing, packaging, storing, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies, including the Food and Drug
Administration ("FDA"), the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission ("CPSC"), the United States Department of Agriculture
("USDA"), the Environmental Protection Agency ("EPA") and the United States
Postal Service. The Company's activities are also regulated by various agencies
of the states, localities and foreign countries in which the Company's products
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<PAGE> 46
are manufactured, distributed and sold. The FDA, in particular, regulates the
formulation, manufacture and labeling of foods, dietary supplements and OTC
drugs, such as those distributed by the Company. FDA regulations require the
Company and its suppliers to meet relevant good manufacturing practice ("GMP")
regulations for the preparation, packing and storage of these products. GMP's
for dietary supplements have yet to be promulgated but are expected to be
proposed.
The 1994 Dietary Supplement Health and Education Act ("DSHEA") revised the
provisions of the Federal Food, Drug and Cosmetic Act ("FFDCA") concerning the
composition and labeling of dietary supplements and, the Company believes, is
generally favorable to the dietary supplement industry. The legislation creates
a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement which contains a new dietary ingredient (i.e., one
not on the market before October 15, 1994) will require evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers of dietary supplements which make a "statement of
nutritional support," which are statements describing certain types of product
performance characteristics, must have substantiation that the statement are
truthful and not misleading.
The majority of the products marketed by the Company are classified as
dietary supplements under the FFDCA. In addition, the adoption of new
regulations in the United States or in any of the Company's international
markets, or changes in the interpretation of existing regulations, could have a
material adverse effect on the Company. In September 1997 the FDA issued
regulations governing the labeling and marketing of dietary supplement products.
The regulations cover: 1) the identification of dietary supplements and their
nutrition and ingredient labeling; 2) the terminology to be used for nutrient
content claims, health content claims, and statements of nutritional support; 3)
labeling requirements for dietary supplements for which "high potency" and
"antioxidant" claims are made; 4) notification procedures for statements on
dietary supplements; and 5) premarket notification requirements for new dietary
ingredients in dietary supplements. The notification procedures became effective
in November, 1997, while the new labeling requirements will not become effective
until March 1999. The Company will be required to revise a substantial number of
its product labels to reflect the new requirements prior to the 1999 effective
date although the Company does not expect the cost or impact of such actions to
be material. In addition, the Company will be required to continue its ongoing
program of securing substantiation of its product performance claims, and of
notifying the FDA of certain types of performance claims made for its products.
The Company's substantiation program involves compiling and reviewing the
scientific literature pertinent to the ingredients contained in the Company's
products.
In addition, in certain markets, including the U.S., claims made with
respect to weight management, dietary supplement, personal care or other
products of the Company may change the regulatory status of the products. In the
U.S., for example, it is possible that the FDA could take the position that
claims made for certain of the Company's products place those products within
the scope of an FDA "over-the-counter" (OTC) drug monograph. OTC monographs
prescribe permissible ingredients and appropriate labeling language, and require
the marketer or supplier of the products to register and file annual drug
listing information with the FDA. A limited number of the products sold by the
Company are labeled as OTC monograph drugs, and the Company believes that it is
in compliance with the applicable monographs. In the event that the FDA asserted
that product claims for other products caused them to fall within the scope of
OTC monographs, the Company would be required either to comply with the
applicable monographs or change the claims made in connection with the products.
There can be no assurance that the Company could do so effectively, or that any
such changes would not adversely affect sales and marketing of an affected
product.
As a marketer of food and dietary supplements and other products that are
ingested by consumers, the Company is subject to the risk that one or more of
the ingredients in its products may become the subject of adverse regulatory
action. For example, one of the ingredients in the Thermojetics(R) original
green herbal tablet is a Chinese herb, Ma Huang, which contains
naturally-occurring ephedrine in small quantities. Ephedrine products have been
the subject of adverse publicity in the United States and other countries
44
<PAGE> 47
relating to alleged harmful effects, including the deaths of several
individuals. Currently, the Company offers the Thermojetics(R) original green
herbal tablet only in the United States (except in certain states in which
regulations may prohibit or restrict the sale of such product). In response to
potential federal regulatory proposals that may have affected the sale of the
Thermojetics(R) original green tablets in the United States, the Company
suspended sales of the product for approximately three months commencing in July
1995 and introduced a reformulated herbal green tablet that did not contain Ma
Huang. When no such regulations were proposed or issued at that time, the
Company renewed sales of Thermojetics(R) original green herbal tablets in the
United States in October 1995 (except in certain states in which regulations may
prohibit or restrict the sale of such product). During the three-month
suspension period, the Company did not experience a material change in the level
of sales of the reformulated Thermojetics(R) green tablets versus sales of the
Thermojetics(R) original green tablets in the recently preceding months.
However, it is possible that a longer suspension period could have resulted in a
decrease in sales of the reformulated Thermojetics(R) green tablets or other
products within the Thermojetics(R) Weight Management System (even though such
products do not contain Ma Huang). The Thermojetics(R) green tablets accounted
for 2.4% and 2.2% of retail sales in 1996 and 1997, respectively, although the
marketing of the Thermojetics(R) weight management tablets (original green,
green, beige and yellow) and other products in the Thermojetics(R) line have
contributed significantly to the Company's retail sales. The Company also
previously offered the Thermojetics(R) original green herbal tablet in Canada
but, in response to Canadian marketing issues and regulatory concerns, suspended
sales of the product in February 1994.
The FDA has on record a small number of reports of adverse reactions
allegedly resulting from the ingestion of Ma Huang contained in the Company's
Thermojetics(R) original green tablet. The Company has not received any
communications from the FDA with respect to these reports. However, many other
companies manufacture products containing various amounts of Ma Huang and the
FDA has on record hundreds of reports of adverse reactions to these products.
The Company is a defendant in three legal actions by individuals claiming that
ingestion of Thermojetics(R) original green tablets caused them to suffer
serious medical problems. The Company believes that it has substantial defenses
to these actions and that the matters are not material. On April 10, 1996, the
FDA issued a statement warning consumers not to purchase or ingest dietary
supplements containing ephedrine that are claimed to produce such effects as
euphoria, heightened awareness, increased sexual sensations or increased energy,
because these products pose significant adverse health risks, including
dizziness, headache, gastrointestinal distress, irregular heartbeat, heart
palpitations, heart attack, strokes, seizures, psychosis and death. The Company
does not market its Ma Huang product with any of these claims. On June 4, 1997,
the FDA issued a proposed regulation for dietary supplements containing
ephedrine alkaloids. The proposed regulation would prohibit dietary supplements
containing eight milligrams or more of ephedrine alkaloids per serving, and
would not permit such products to contain any other stimulant, diuretic, or
laxative ingredients. In addition, labeling of supplements would be prohibited
from suggesting or recommending conditions of use that would result in an intake
of eight milligrams or more of ephedrine alkaloids within a six-hour period, or
a total daily intake of 24 milligrams or more. The FDA proposal would also
require a warning not to take the product for more than seven days, and would
prohibit the supplements from being represented, either expressly or implicitly,
as being suitable for long-term uses, such as for weight loss or body building.
Similarly, claims for increased energy, increased mental concentration, or
enhanced well-being that encourage the consumer to take more of the product to
achieve more of the purported effect would be required to be accompanied by a
warning stating that taking more than the recommended serving may cause a heart
attack, stroke, seizure, or death.
Although tests performed by an independent laboratory indicate that the
Company's original green Thermojetics(R) product contains less than the eight
milligrams of ephedrine alkaloids per serving permitted under the FDA proposal,
the Company is reviewing the possible impact of the FDA proposal, if it is
finalized in its current form, upon the Company's continued marketing of its
Thermojetics(R) original green tablet. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company may
be required to: (i) withdraw or reformulate its product with reduced ephedrine
levels, or with a substitute for Ma Huang, (ii) relabel its product with
different warnings or revised directions for use, (iii) not make certain
statements, possibly including weight loss, with respect to any product
containing Ma Huang and/or (iv) withdraw its product from the weight management
program and reposition it in a different category. Even
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<PAGE> 48
in the absence of an FDA final regulation, the Company may elect to reformulate
and/or relabel its product containing Ma Huang. While the Company believes that
its Ma Huang product could be reformulated and relabeled, there can be no
assurance in that regard or that reformulation and/or relabeling would not have
an adverse effect on sales of such product or related products within the
Thermojetics(R) Weight Management Program, even though such products do not
contain Ma Huang. During 1996 and 1997, the Company's weight management products
contributed 71.2% and 67.8%, respectively, of total sales.
Some of the products marketed by the Company are considered conventional
foods and are currently labeled as such. Both this category of products and
dietary supplements are subject to the Nutrition, Labeling and Education Act
("NLEA"), and regulations promulgated thereunder, which regulates health claims,
ingredient labeling and nutrient content claims characterizing the level of a
nutrient in the product.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of its products in the market, the Company may be required to
obtain an approval, license or certification from the country's ministry of
health or comparable agency. Where a formal approval, license or certification
is not required, the Company nonetheless seeks a favorable opinion of counsel
regarding the Company's compliance with applicable laws. Prior to entering a new
market in which a formal approval, license or certificate is required, the
Company works extensively with local authorities in order to obtain the
requisite approvals. The approval process generally requires the Company to
present each product and product ingredient to appropriate regulators and, in
some instances, arrange for testing of products by local technicians for
ingredient analysis. Such approvals may be conditioned on reformulation of the
Company's products or may be unavailable with respect to certain products or
certain ingredients. Product reformulation or the inability to introduce certain
products or ingredients into a particular market may have an adverse effect on
sales. The Company must also comply with product labeling and packaging
regulations that vary from country to country. The Company's failure to comply
with such regulations can result in, among other things, a product being removed
from sale in a particular market, either temporarily or permanently.
The FTC, which exercises jurisdiction over the advertising of all the
Company's products, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees and monetary payments by the companies involved. In addition,
the FTC has increased its scrutiny of the use of testimonials, which are
utilized by the Company. While the Company has not been the target of FTC
enforcement action for the advertising of its products, there can be no
assurance that the FTC will not question the Company's advertising or other
operations in the future.
In certain countries, the Company may also be affected by regulations
applicable to the activities of its distributors because in some countries the
Company is, or regulators may assert that the Company is, responsible for its
distributors' conduct, or such regulators may request or require that the
Company take steps to ensure its distributors' compliance with regulations. The
types of regulated conduct include, among other things, representations
concerning the Company's products, income representations made by the Company
and/or distributors, public media advertisements (which in foreign markets may
require prior approval by regulators) and sales of products in markets in which
such products have not been approved, licensed or certified for sale. In certain
markets, it is possible that improper product claims by distributors could
result in the Company's products being reviewed or re-reviewed by regulatory
authorities and, as a result, being classified or placed into another category
as to which stricter regulations are applicable. In addition, certain labeling
changes might be required.
Through its manuals, seminars and other training materials and programs,
the Company attempts to educate its distributors as to the scope of permissible
and impermissible activities in each market. The Company also investigates
allegations of distributor misconduct. However, the Company's distributors are
generally independent contractors, and the Company is not able to monitor
directly all distributor activities. As a consequence, there can be no assurance
that the Company's distributors comply with applicable regulations. Misconduct
by distributors has in the past and could again have a material adverse effect
on the Company in a particular market or in general. See "Risk Factors -- Sales
and Earnings Volatility."
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<PAGE> 49
The Company is unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products not able to be reformulated,
imposition of additional recordkeeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation regarding product ingredients, safety or usefulness.
Any or all such requirements could have a material adverse effect on the
Company's results of operations and financial condition.
All of the officers and directors of the Company are subject to a permanent
injunction entered in October 1986 pursuant to the settlement of an action
instituted by the California Attorney General, the State Health Director and the
Santa Cruz County District Attorney. The Company consented to the entry of this
injunction without in any way admitting the allegations of the complaint. The
injunction prevents the Company and such officers and directors from making
certain specified claims in future advertising of the Company's products and
requires the Company to implement certain documentation systems with respect to
payments to the Company's distributors. At the same time, the injunction does
not prevent the Company from continuing to make certain specified claims
concerning its products which have been and are being made, provided that it has
a reasonable basis for making such claims.
Network Marketing System. The Company's network marketing system is subject
to a number of federal and state regulations administered by the FTC and various
state agencies as well as regulations in foreign markets administered by foreign
agencies. Regulations applicable to network marketing organizations are
generally directed at ensuring that product sales are ultimately made to
consumers and that advancement within such organizations be based on sales of
the organizations' products rather than investments in the organizations or
other non-retail sales related criteria. For instance, in certain markets there
are limits on the extent to which distributors may earn royalties on sales
generated by distributors that were not directly sponsored by the distributor.
Where required by law, the Company obtains regulatory approval of its network
marketing system or, where such approval is not required, the favorable opinion
of local counsel as to regulatory compliance. However, the Company remains
subject to the risk that, in one or more of its markets, its marketing system
could be found not to be in compliance with applicable regulations. Failure by
the Company to comply with these regulations could have a material adverse
effect on the Company in a particular market or in general. See "-- Product
Distribution."
The Company is also subject to the risk of challenges to the legality of
its network marketing system. For example, in Webster v. Omnitrition
International, Inc., 79 F.3d 776 (9th Cir.), Cert. denied, 136 L. Ed. 2d 115,
117 S. Ct. 176 (1996), the "multi-level marketing" program of Omnitrition
International, Inc. ("Omnitrition") was challenged in a class action by certain
Omnitrition distributors who alleged that Omnitrition was operating an illegal
"pyramid scheme" in violation of federal and state laws. The Company believes
that its network marketing system satisfies the standards set forth in the
Omnitrition case and other applicable statutes and caselaw defining a legal
marketing system, in part based upon significant differences between the
Company's marketing system and that described in the Omnitrition case. Further,
it is an ongoing part of the Company's business to monitor and respond to
regulatory and legal developments, including those that may affect its network
marketing system. However, the regulatory requirements concerning network
marketing systems do not include "bright line" rules and are inherently
fact-based. An adverse judicial determination with respect to the Company's
network marketing system could have a material adverse effect on the Company.
Among other things, such a determination could require the Company to make
modifications to its network marketing system, result in negative publicity or
have a negative impact on distributor morale. In addition, further adverse
rulings by the courts in the Omnitrition litigation or other similar litigation
could have a material adverse effect on the Company, even if the Company's
network marketing system is not itself challenged.
Transfer Pricing and Similar Regulations. In many foreign countries, the
Company is subject to transfer pricing regulations, restrictions on management
fees charged by the Company to its local subsidiary and similar regulations and
restrictions designed to ensure that appropriate levels of income are reported
as earned by the local subsidiary and taxed by the foreign governmental
authorities. In addition, the Company's operations in foreign countries are
subject to regulations designed to ensure that appropriate levels of customs
duties are assessed on the importation of the Company's products.
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<PAGE> 50
While the Company believes it is in substantial compliance with all
applicable regulations and restrictions, it is subject to the risk that foreign
governmental authorities could audit its transfer pricing and related practices
and assert that additional taxes are owed. For example, the Company is currently
subject to pending or proposed audits which are at various levels of review,
assessment or appeal in a number of foreign jurisdictions, including Italy,
France and Germany, involving transfer pricing issues, income taxes, value added
taxes, withholding taxes and related interest and penalties in material amounts.
In certain circumstances, additional taxes, interest and penalties have been
assessed, and the Company will be required to litigate to reverse the
assessments. In addition, Italian criminal tax proceedings are pending against
the managing director of the Company's Italian subsidiary in his capacity as
such with respect to certain tax issues affecting the Company (and not affecting
distributors or the taxation of distributors). The Company has been advised by
its Italian tax counsel that referral of tax charges to criminal authorities in
Italy is a relatively common procedure (pursuant to statutory provisions
requiring referral of specific types of claims based upon the amounts thereof)
and in any event the Company believes that it has strong defenses to the
charges. None of the pending or proposed audits, assessments or litigation is
expected to have a material adverse effect on the Company. However, ultimate
resolution of these matters may take several years and the outcome is uncertain.
In the event that such audits or assessments are concluded adversely to the
Company, the Company believes that it could generally offset or mitigate the
consolidated effect of foreign taxes required to be paid through the use of U.S.
foreign tax credits. However, depending upon the years at issue, the Company
might not be able to amend prior U.S. tax returns to obtain the benefit of such
credits. Furthermore, to the extent that the Company's operations in high tax
jurisdictions such as Japan grow disproportionately relative to the balance of
Company's operations, the Company may be unable to fully utilize its foreign tax
credits in the U.S., which could, accordingly, result in the Company paying a
higher overall effective tax rate on its worldwide operations. Because the laws
and regulations governing U.S. foreign tax credits are complex and depend, among
other things, on tax treaties with foreign nations in addition to U.S. tax laws,
there can be no assurance that the Company would in fact be able to take
advantage of any tax credits.
Other Regulations. The Company is also subject to a variety of other
regulations in various foreign markets, including regulations pertaining to
social security assessments and value added taxes, employment and severance pay
requirements, import/export regulations and antitrust issues. As an example, in
many markets, the Company is substantially restricted in the amount and types of
rules and termination criteria that it can impose on distributors without
causing social security assessments to be payable by the Company on behalf of
such distributors and without incurring severance obligations to terminated
distributors. In some countries, the Company may be subject to such obligations
in any event.
Failure by the Company to comply with such regulations could have a
material adverse effect on the Company in a particular market or in general.
Such assertions or the effect of adverse regulations in one market could
adversely affect the Company in other markets as well by causing increased
regulatory scrutiny in those other markets or as a result of the negative
publicity generated in those other markets. See "Risk Factors -- Dependence Upon
Material Foreign Markets."
Compliance Procedures. As indicated above, the Company, its products and
its network marketing system are subject, both directly and indirectly through
distributors' conduct, to numerous federal, state and local regulations both in
the United States and foreign markets. Beginning in 1985, the Company began to
institute formal regulatory compliance measures by developing a system to
identify specific complaints against distributors and to remedy any violations
by distributors through appropriate sanctions, including warnings, suspensions
and, when necessary, terminations. In its manuals, seminars and other training
programs and materials, the Company emphasizes that distributors are prohibited
from making therapeutic claims for the Company's products.
The Company's general policy regarding acceptance of distributor
applications from individuals who do not reside in one of the Company's markets
is to refuse to accept such individual's distributor application. From time to
time, exceptions to the policy are made on a country-by-country basis.
In order to comply with regulations that apply to both the Company and its
distributors, the Company conducts research into the applicable regulatory
framework (typically, with the assistance of local legal
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<PAGE> 51
counsel and other representatives) prior to entering any new market to identify
all necessary licenses and approvals and applicable limitations on the Company's
operations in that market. The Company devotes substantial resources to
obtaining such licenses and approvals and bringing its operations into
compliance with such limitations. The Company also researches laws applicable to
distributor operations and revises or alters its distributor manuals and other
training materials and programs to provide distributors with guidelines for
operating a business, marketing and distributing the Company's products and
similar matters, as required by applicable regulations in each market. However,
the Company is not able to monitor its supervisors and distributors effectively
to ensure that they refrain from distributing the Company's products in
countries where the Company has not commenced operations, and the Company does
not devote significant resources to such monitoring.
In addition, regulations in existing and new markets are often ambiguous
and subject to considerable interpretive and enforcement discretion by the
responsible regulators. Moreover, even when the Company believes that it and its
distributors are initially in compliance with all applicable regulations, new
regulations are regularly being added and the interpretation of existing
regulations is subject to change. Further, the content and impact of regulations
to which the Company is subject may be influenced by public attention directed
at the Company, its products or its network marketing system, so that extensive
adverse publicity about the Company, its products or its network marketing
system may result in increased regulatory scrutiny.
It is an ongoing part of the Company's business to anticipate and respond
to such new and changing regulations and make corresponding changes in the
Company's operations to the extent practicable. In furtherance of these efforts,
in 1994 the Company formed its Government Relations Group, currently consisting
of 10 employees, and in 1995 created the position of Chief International
Counsel. The Company has budgeted approximately $6.0 million to government
relations activities worldwide for 1998. The Company's Government Relations
Group and international legal personnel seek to establish relationships with
regulators and community leaders in both new and existing markets and strive to
ensure that the Company's products and network marketing system comply with
regulatory requirements. However, while the Company devotes considerable
resources to maintaining its compliance with regulatory constraints in each of
its markets, there can be no assurance that the Company would be found to be in
compliance with applicable regulations in all of its markets at any given time
or that the regulatory authorities in one or more markets will not assert,
either retroactively or prospectively or both, that the Company's operations are
not in full compliance. Such assertions or the effect of adverse regulations in
one market could negatively affect the Company in other markets as well by
causing increased regulatory scrutiny in those other markets or as a result of
the negative publicity generated in those other markets. Such assertions could
have a material adverse effect on the Company in a particular market or in
general. Furthermore, depending upon the severity of regulatory changes in a
particular market and the changes in the Company's operations that would be
necessitated to maintain compliance, such changes could result in the Company
experiencing a material reduction in sales in such market or determining to exit
such market altogether. In such event, the Company would attempt to devote the
resources previously devoted to such market to a new market or markets or other
existing markets, but there can be no assurance that such transition would not
have an adverse effect on the Company's business and results of operations
either in the short or long term.
TRADEMARKS
The Company uses the umbrella trademarks Herbalife(R), Thermojetics(R),
Dermajetics(R) and several other trademarks and tradenames in connection with
its products and operations. Trademark registrations are either issued or
pending in the United States Patent and Trademark Office and in comparable
agencies in many other countries. The Company considers its trademarks and
tradenames to be an important factor in its business. The Company's product
formulations are not protected by patents and are generally not patentable.
COMPETITION
The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management products, food and dietary supplements and personal
care products, as well as other types of products. Some of the Company's
competitors are substantially larger and have available considerably greater
financial resources than the Company. The Company's ability to remain
competitive depends, in significant part, on the Company's
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success in recruiting and retaining distributors through an attractive
compensation plan and other incentives. The Company believes that its production
bonus program, international sponsorship program and other compensation and
incentive programs provide its distributors with significant earning potential.
However, there can be no assurance that the Company's programs for recruitment
and retention of distributors will be successful. See "Risk
Factors -- Competition."
In addition, the business of marketing weight management, food and dietary
supplement and personal care products is highly competitive. This market segment
includes numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers both in the
United States and abroad. The market is highly sensitive to the introduction of
new products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, the
Company's ability to remain competitive depends in part upon the successful
introduction of new products.
EMPLOYEES
As of December 31, 1996 and 1997, the Company had 1,180 and 1,459 full-time
employees, respectively. These numbers do not include the Company's
distributors, who generally are independent contractors rather than employees of
the Company. The Company considers its employee relationships to be
satisfactory. Except for certain employees in Mexico, none of the Company's
employees is a member of any labor union, and the Company has never experienced
any business interruption as a result of any labor disputes.
PROPERTIES
The Company leases all of its physical properties located in the United
States. The Company's executive offices, re-located to Century City, California
in February 1996, include approximately 86,000 square feet of general office
space under a lease that expires in January 2006. The Company leases an
aggregate of approximately 97,000 square feet of office space, computer
facilities and conference rooms at the Operations Center in Inglewood,
California, under a lease that expires in October 2006, and approximately
146,000 square feet of warehouse space in two separate facilities located in Los
Angeles and Memphis. The Los Angeles and Memphis agreements have terms through
May 2001 and August 2006, respectively. The Company also leases warehouse and
office space in a majority of its other geographic areas of operations. The
Company believes that its existing facilities are adequate to meet its current
requirements and that comparable space is readily available at each of these
locations.
LEGAL MATTERS
The Company is from time to time engaged in routine litigation incident to
the conduct of its business. The Company regularly reviews all pending
litigation matters in which it is involved and establishes reserves deemed
appropriate by management for such litigation matters. The Company believes that
no litigation currently pending against it will have a material adverse effect
on its consolidated financial position and results of operations. See
"-- Regulation -- Transfer Pricing and Similar Regulations" for a discussion of
certain pending tax matters.
HISTORY AND ORGANIZATION
The Company began operations in February 1980 as a California limited
partnership and operated in that form through December 1985, with the exception
of an interim period from October 1981 through August 1983 when the business was
operated through a California corporation. In January 1986, the Company's
business was transferred from the California limited partnership to its
corporate general partner, Herbalife International of America, Inc. ("Herbalife
of America"). In November 1986, Herbalife of America was acquired in a
stock-for-stock reorganization by Sage Court Ventures, Inc. ("Sage Court"). As a
result of the acquisition, Herbalife of America became a wholly-owned subsidiary
of Sage Court and the former stockholders of Herbalife of America acquired a
controlling interest in Sage Court. Sage Court's name was formally changed to
Herbalife International, Inc. in December 1986.
The Company's principal executive offices are located at 1800 Century Park
East, Los Angeles, California 90067, and its telephone number is (310) 410-9600.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company (ages are as of January 1, 1998).
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Mark Hughes...................... 42 Chairman of the Board, Chief Executive Officer and
President
Christopher Pair................. 44 Executive Vice President, Chief Operating Officer,
Secretary, and Director
Michael E. Rosen................. 51 Executive Vice President, Chief Executive of
Corporate Development/Marketing, and Director
Timothy Gerrity.................. 47 Executive Vice President and Chief Financial Officer
Robert A. Sandler................ 53 Executive Vice President and General Counsel
Edward J. Hall(1),(2)............ 51 Director
Alan Liker(2).................... 60 Director
Christopher M. Miner(1),(2)...... 46 Director
</TABLE>
- ---------------
(1) Member of the Compensation and Stock Option Committees.
(2) Member of the Audit, Finance and Business Development Committees.
MARK HUGHES founded the Company's business in 1980. Since that time Mr.
Hughes has controlled the operations of the business either as the sole
individual general partner of the California limited partnership through which
the business was conducted from inception to December 1985, as the President and
Chairman of the Board of the California corporation through which the business
was conducted for the interim period from October 1981 through August 1983, or
as the President and Chairman of the Board of Herbalife of America, Inc., which
was the corporate general partner of the California limited partnership from May
through December 1985 and the corporation through which the business was
conducted from January 1986 to November 1986. In November 1986, Mr. Hughes
became Chairman of the Board, Chief Executive Officer and President of the
Company when it acquired Herbalife of America, Inc. in a stock-for-stock
reorganization and has continued in those positions since that time.
CHRISTOPHER PAIR joined the Company's predecessor in March 1985 as
Executive Assistant to the President. From May 1991 to November 1996, Mr. Pair
served as the Company's Executive Vice President -- International and Corporate
Administration and Secretary. In November 1996, Mr. Pair became the Company's
Chief Operating Officer. Mr. Pair has been a director of the Company since May
1990. Prior to 1985, Mr. Pair served in various management positions with U.S.
Leasing, Raytheon Data Systems and Consolidated Foods. Mr. Pair serves on the
Board of Directors of the Direct Selling Educational Foundation and also serves
on the Direct Selling Association Long Range Planning Committee. Mr. Pair
received his B.S. and M.B.A. from the University of Redlands.
MICHAEL E. ROSEN joined the Company in August 1993 and is currently
Executive Vice President and Chief Executive of Corporate Development/Marketing.
Mr. Rosen's responsibilities include developing the Company's international and
domestic marketing, sales literature, the Company's personal care and cosmetics
products lines, investor relations and external affairs. Mr. Rosen has served as
a director of the Company since May 1996. Prior to joining the Company, Mr.
Rosen was Chief Executive Officer of Shop Television Network, which he founded
in 1986.
TIMOTHY GERRITY joined the Company in May 1985 and is currently Executive
Vice President and Chief Financial Officer. Mr. Gerrity, a certified public
accountant, is responsible for the worldwide financial affairs of the Company.
His previous experience includes management positions with Wickes Corporation,
Deloitte
51
<PAGE> 54
& Touche LLP, and Fluor Corporation. Mr. Gerrity received his B.S. degree from
California State University at Northridge and his M.B.A. from the University of
Southern California.
ROBERT A. SANDLER joined the Company in January 1997 as its Executive Vice
President and General Counsel. From 1975 to the present, Mr. Sandler has been a
member of Sandler & Morris, a law firm that he co-founded. From 1985 to 1994,
Mr. Sandler served in various capacities with various companies within the
Siemens family of companies, including most recently as the Executive Vice
President and General Counsel of Siemens Pacesetter. Mr. Sandler received his
A.B. degree from the University of California, Los Angeles and his J.D. degree
from the University of Southern California. Mr. Sandler is currently a director
of Physio-Control, a manufacturer of external defribrillators.
EDWARD J. HALL has served as the Chief Financial Officer of Cruttenden Roth
Incorporated, an investment banking firm, since April 1995. He served in a
similar capacity for H.J. Meyers & Co., Inc., an investment banking firm based
in Beverly Hills, California from March 1991 through March 1995. Between May
1990 and March 1991, Mr. Hall, a certified public accountant, was an independent
investor. From March 1988 through May 1990, Mr. Hall was an Executive Vice
President of Angeles Corporation, an investment management firm. Prior to
joining Angeles Corporation, Mr. Hall was with Deloitte & Touche LLP, where he
had been an audit partner since 1980. Mr. Hall was elected a director of the
Company in March 1992.
ALAN LIKER has served as a business advisor to a number of individuals and
companies during the past several years, including currently Budget Rent-A-Car
of Southern California. Until their sale in 1989, Mr. Liker was a director of
Shaklee Corporation and its Japanese affiliate, Shaklee KK. From 1976 to 1980,
he was a principal of Xerox Development Corporation, a strategic planning unit
of Xerox Corporation. Mr. Liker was previously a law professor at the Harvard
University, University of California (Los Angeles) and University of Southern
California law schools. He was elected to the Company's Board in December 1993
and is currently also a director of Budget Group, Inc. Previously he was a
director of First Charter Bank and Shop Television Network.
CHRISTOPHER M. MINER founded Secure Soft and co-founded Vis-A-Vis
Communications, Inc. (formerly Workstation Technologies, Inc.) in 1996 and 1989,
respectively. Vis-A-Vis Communications is a leading developer of interactive
communications software and hardware products. Mr. Miner currently serves as the
Chief Executive Officer for Secure Soft and Chief Financial Officer for Wow!
Laboratories, Inc. Prior to founding Vis-A-Vis Communications, from 1987 to
1989, Mr. Miner served as Chief Financial Officer of Technology Marketing, Inc.,
a custom electronic engineering organization and board level test product
manufacturer. Prior to joining Technology Marketing, he served as Chief
Financial Officer and Director for Media Systems Technology, Inc., a software
manufacturer, from 1981 to 1987. Mr. Miner received his M.B.A. from California
State University in 1976. He was elected a director of the Company in March
1996.
52
<PAGE> 55
SELLING STOCKHOLDER
The following table sets forth the beneficial ownership of shares of Common
Stock by the Selling Stockholder as of February 23, 1998, the number of shares
of Class B Stock offered hereby and the percentage of the Company's outstanding
Common Stock at February 23, 1998 that the Selling Stockholder would
beneficially own assuming the Selling Stockholder delivers 5,000,000 shares of
Class B Stock on the Exchange Date.
<TABLE>
<CAPTION>
SHARES OFFERED
BEFORE THE OFFERING HEREBY AFTER THE OFFERING
--------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT PERCENT NUMBER OF PERCENT PERCENT
SHARES OF OF SHARES OF OF OF SHARES OF OF OF
NAME AND ADDRESS OF CLASS A CLASS A CLASS B CLASS B COMMON CLASS B CLASS A CLASS B
BENEFICIAL OWNER (1) STOCK(2) STOCK(2) STOCK(2) STOCK(2) STOCK(2) STOCK(3) STOCK STOCK(3)
-------------------- --------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Hughes(4)........... 5,666,932 57.2% 11,333,866 58.2% 57.8% 5,000,000 57.2% 32.5%
1800 Century Park East
Los Angeles, CA 90067
<CAPTION>
----------
PERCENT
OF
NAME AND ADDRESS OF COMMON
BENEFICIAL OWNER (1) STOCK(3)
-------------------- ----------
<S> <C>
Mark Hughes(4)........... 40.8%
1800 Century Park East
Los Angeles, CA 90067
</TABLE>
- ---------------
(1) Except as otherwise indicated, the persons in this table have sole voting,
investment and dispositive power with respect to all shares of the Common
Stock shown as beneficially owned by them, subject to community property
laws where applicable.
(2) Includes 183,333 shares of Class A Stock and 366,666 shares of Class B
Stock owned by the Herbalife Family Foundation. Mr. Hughes acts as a
director of the foundation but has no pecuniary interest in the shares.
Also includes 99,999 shares of Class A Stock and 199,998 shares of Class B
Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Prospectus. Shares of Class B Stock
deliverable pursuant to the Contract (including shares of Class B Stock
that may be delivered pursuant to DECS issued to cover over-allotments and
DECS subscribed for and purchased by Smith Barney in connection with the
organization of the Trust) are held by personal holding companies
indirectly controlled by Mr. Hughes. See Note 4 below.
(3) Assumes the Selling Stockholder delivers 5,000,000 shares of Class B Stock
on the Exchange Date. Does not take into account 750,000 shares of Class B
Stock that may be delivered pursuant to DECS issued to cover
over-allotments and DECS subscribed for and purchased by Smith Barney in
connection with the organization of the Trust, or up to 1,000,000 shares of
Class B Stock that may be loaned to Smith Barney pursuant to the Securities
Loan Agreement (as defined in "Plan of Distribution"). The Selling
Stockholder may satisfy its obligations under the DECS by delivering shares
of Class B Stock (or at the Selling Stockholder's option, the cash
equivalent thereof) and/or such other consideration as is delivered by the
Selling Stockholder to the Trust. See the DECS Prospectus for a description
of the Selling Stockholder's obligations under the DECS.
(4) The Selling Stockholder in the Offering consists of (i) the Mark Hughes
Family Trust, a trust of which Mr. Hughes is the sole trustee (the "Family
Trust"), and (ii) Delaware limited liability companies indirectly
controlled solely by Mr. Hughes (the "Delaware LLCs"). The Family Trust
directly and indirectly controls the Delaware LLCs. The Delaware LLCs
consist of six companies designated by letters as MH Holdings III F, G, N,
O, P and Q, as well as MH Holdings I and MH Holdings II, which together own
all of the interests in the MH Holdings III companies.
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<PAGE> 56
CERTAIN TRANSACTIONS
The Company purchases all its powder products from Raven, one-third of
whose stock is owned by Mark Hughes. In addition, one of the Company's tablet
products, Activated Fiber, is manufactured by D&F pursuant to a licensing
agreement with Dynamic, twenty percent and five percent of whose stock is owned
by Mark Hughes and Dr. David B. Katzin, respectively. Dr. Katzin was a director
of the Company until March 22, 1996 and an executive officer until December 31,
1996, and he is currently the Company's Executive Director of the Medical
Advisory Board. Two individuals (not affiliates of the Company) are principal
stockholders of each of D&F, Raven and Dynamic. For a description of contractual
arrangements between the Company and each of Raven, D&F and Dynamic, see
"Business -- Product Overview -- Product Manufacturing and Development." The
Company and Mr. Hughes were recently advised by Raven, D&F and Dynamic that such
companies are planning to make a $225 million bond offering and secure a $50
million secured bank credit facility. They indicated to the Company and Mr.
Hughes that a proposed use of proceeds from this financing would be to
repurchase the ownership interests in the companies held by a number of current
shareholders, including all of the ownership interests held by Mr. Hughes and
Dr. Katzin. The proposed purchase price for Mr. Hughes' shares was indicted to
be approximately $40 million. The Company was contacted to secure its consent to
the grant of a security interest in the manufacturers' assets in connection with
the proposed bank credit facility; under the Company's supply agreements with
the manufacturers, the granting of such a security interest requires the
Company's consent (which consent may not be unreasonably withheld) under the
Company's supply agreements with the manufacturers. The request for consent has
been tentatively approved by the Company, subject to review of final documents
governing the proposed financing transactions. Mr. Hughes has advised the
Company that he has not yet agreed to sell his shares in the manufacturers, but
will consider the terms of a proposed transaction in due course. No assurance
can be given that any of the foregoing transactions will be completed or as to
their impact, if any, on the Company.
For the year ended December 31, 1997 the Company's purchases from Raven and
Dynamic amounted to $63.4 million and $3.3 million, respectively. Under the new
three-year supply agreements, the Company is subject to minimum percentage
purchase and other requirements for nutritional supplement, and a small number
of non-nutritional supplement, products falling into specified product
categories. Mr. Hughes' ownership interest in Raven and Dynamic and Dr. Katzin's
ownership interest in Dynamic entitle them to a proportionate interest in the
profits of those companies, if any. In 1997, Mr. Hughes' share of the earnings
of Raven and Dynamic totalled $7.8 million and $0.3 million, respectively, and
Dr. Katzin's share of the earnings of Dynamic totalled $77,000. Management
believes that the price paid under these requirements contracts is appropriate,
taking into account the product research, development and formulation services
provided by the companies.
In accordance with the 1994 Performance-Based Incentive Compensation Plan,
the Company made advances of targeted performance bonus amounts during 1996 to
1997 to Messrs. Hughes, Pair, Rosen, Sandler (1997 only) and Gerrity (1997
only). As of December 31, 1997, the remaining outstanding principal and accrued
interest obligations of such individuals were $5,571,000 in the case of Mr.
Hughes; $948,000 in the case of Mr. Pair; $165,000 in the case of Mr. Sandler;
and $669,000 in the case of Mr. Gerrity. Each advance is a full recourse
obligation of the executive with a maturity date of two years following the date
of the advance. In addition, the advances bear interest at the applicable
federal rate (AFR) for two-year notes at the time of the advances. The rates for
existing outstanding advances range from 5.64% to 5.69%.
The Company has begun steps to pursue an initial public offering of shares
of Herbalife Japan KK ("Herbalife Japan") in Japan. In preparation for the
possible offering, on December 30, 1996 the Company sold shares of Herbalife
Japan to certain of the Company's directors and executive officers, as well as
to resident managers of Herbalife Japan, as an incentive for increased efforts
to facilitate the operation of the Herbalife Japan business and the success of
the offering. The following table lists the purchasers of such
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<PAGE> 57
shares, the percentage of Herbalife Japan's outstanding shares represented
thereby, and the purchase price paid to the Company by each individual as of the
date of the sale:
<TABLE>
<CAPTION>
PERCENTAGE OF
HERBALIFE
JAPAN AGGREGATE
NAME SHARES PRICE(1)
---- ------------- ----------
<S> <C> <C>
Mark Hughes...................................... 5.000% $3,300,000
Christopher Pair................................. 0.575 379,500
Michael E. Rosen................................. 0.575 379,500
Timothy Gerrity.................................. 0.575 379,500
Alan Liker....................................... 0.200 132,000
Other............................................ 0.075 49,500
----- ----------
Total.................................. 7.000% $4,620,000
===== ==========
</TABLE>
- ---------------
(1) Purchase price for shares was denominated in Japanese yen; dollar amounts
reflect conversion at the yen-to-dollar exchange rate in effect on the date
of purchase.
The purchase price for the shares was determined, in part, based upon a
formula (the "Formula") prescribed by a Japanese regulatory authority
responsible for certain aspects of public offerings of securities in that
country, as applied to Herbalife Japan's 1995 results of operations. The Board
of Directors of the Company separately sought and obtained a valuation of the
shares from an independent investment banking firm, Houlihan, Lokey, Howard &
Zukin, Inc. ("Houlihan Lokey"), which rendered an opinion to the Board to the
effect that the fair market value of the shares was greater than that determined
under the Formula. Consequently, the purchase price per share was increased to
the fair value of the shares as indicated in the Houlihan Lokey opinion. The
Company's Board of Directors, based in part on the Houlihan Lokey opinion and
the determination of price derived under the Formula (which is utilized
generally in Japan in connection with public offerings) and taking into account
the uncertainty of completion of the offering in Japan and other pertinent
factors, has determined that the purchase price reflects the fair market value
of the shares.
For each of the foregoing individuals, the purchase price for the shares
was paid to the Company approximately 30% in cash and approximately 70% in the
form of a full recourse promissory note bearing interest at 6.31% per annum in
the case of Mr. Hughes (loan denominated in U.S. dollars) and 2.125% per annum
in the case of each individual other than Mr. Hughes (loans denominated in
Japanese yen), with principal and accrued interest payments due over five years
ending December 31, 2002. The aggregate amount outstanding under such promissory
notes at December 31, 1997 was $3.3 million.
The Company has not yet determined whether and when to seek to complete an
initial public offering of Herbalife Japan shares. Such determination will be
based, among other factors, on economic and financial market conditions in
Japan. There can be no assurance that the Company will seek to complete an
initial public offering in Japan, that the Company will obtain the necessary
regulatory approvals to proceed with such an offering or that any such offering
will be successfully completed. Further, the Company cannot predict the
valuation of Herbalife Japan that would be achieved in such an offering or the
impact of such an offering on the Company's financial condition or results of
operations.
DESCRIPTION OF CAPITAL STOCK
As a result of the Recapitalization, the Company's authorized capital stock
consists of 100,000,000 shares of common stock with a par value of $.01 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 Stock and
Sixty-Six Million Six Hundred and Sixty-Six Thousand Six Hundred and Sixty-Seven
(66,666,667) shares of Class B Stock (collectively, "Common Stock"), and
100,000,000 shares of undesignated preferred stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments and Outlook." The following description of the Company's capital
stock does not purport to be
55
<PAGE> 58
complete or to give full effect to the provisions of statutory or common law and
is in all respects qualified by reference to the applicable provisions of the
Company's Amended and Restated Articles of Incorporation.
COMMON STOCK
As of February 23, 1998, there were 9,816,436 shares of Class A Stock
issued and outstanding held by 1,010 stockholders of record. As of February 23,
1998, there were 19,277,473 shares of Class B Stock issued and outstanding held
by 1,011 stockholders of record. The holders of Class A Stock are entitled to
one vote for each share held and have no preemptive or other rights to subscribe
for additional shares from the Company. There are no cumulative voting rights,
with the result that the holder of more than 50% of the Class A Stock is able to
elect all of the Company's directors. The holders of Class B Stock are entitled
to vote separately as a class only with respect to (i) amendments to the
Company's Amended and Restated Articles of Incorporation that alter or change
the relative or other rights given to the holders of Class B Stock, and (ii)
such other matters as may require separate class voting under the Company's
Amended and Restated Articles of Incorporation or by law. Holders of Class B
Stock are not entitled to any other voting rights. Holders of Common Stock are
entitled to such dividends as may be declared by the Board of Directors out of
funds legally available therefor. Holders of Class B Stock are entitled to the
same dividends payable with respect to the Class A Stock, provided, however, the
Board of Directors may, in its discretion, pay greater dividends of cash or
property (except for a distribution in liquidation) with respect to the Class B
Stock. See "Dividend Policy." Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive pro rata the net
assets of the Company remaining after the payment of the full preferential
amount to which the holders of any outstanding class of preferred stock are
entitled and after payment of all creditors. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of preferred stock
that the Company may designate and issue in the future.
PREFERRED STOCK
There are currently no shares of the Company's preferred stock outstanding.
The Company's Board of Directors is authorized to issue from time to time up to
100,000,000 shares of preferred stock in one or more series, to determine the
rights, preferences, privileges and restrictions with respect thereto and to fix
the number and designation of shares constituting any series.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corp., Glendale, California.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Trust, the Company, the Selling
Stockholder and the Underwriters named below, the Trust has agreed to sell to
each of the Underwriters, and each of the Underwriters severally has agreed to
purchase, the aggregate number of DECS set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS DECS
------------ ---------
<S> <C>
Smith Barney Inc..........................................
Prudential Securities Incorporated........................
---------
Total........................................... 5,000,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, that the obligations of the Underwriters
are subject to certain conditions precedent and that the
56
<PAGE> 59
Underwriters will be obligated to purchase all of the DECS offered pursuant to
the DECS Prospectus if any of the DECS are purchased.
The Trust has been advised by the Underwriters that they propose to offer
the DECS directly to the public initially at the public offering price set forth
on the cover of the DECS Prospectus and to certain dealers at such prices less a
concession not in excess of $ per DECS. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per DECS to
other dealers. After the initial public offering, such public offering price and
such concession and reallowance may be changed.
The Company, its directors and executive officers, and the Selling
Stockholder have each agreed not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
(ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, for a period of 90 days, in the case of the Company and its directors
and executive officers (other than the Selling Stockholder), and one year, in
the case of the Selling Stockholder, from the date of this Prospectus without
the prior written consent of Smith Barney; provided, however, that (x) Herbalife
may issue, or grant options for, Common Stock pursuant to any stock plan for
employees or directors, or any employee benefit plan, in effect on the date of
this Prospectus, or pursuant to any stock options outstanding on the date of
this Prospectus and (y) such agreements will not restrict the ability of the
Selling Stockholder to engage in any of the transactions described in clause (i)
or (ii) above in connection with (a) the offering by the Trust of the DECS or
any delivery of shares of Class B Stock pursuant to the terms of the DECS, (b)
the loaning of shares of Class B Stock pursuant to the Securities Loan Agreement
(as defined below), or (c) sales by the Herbalife Family Foundation, a
charitable trust of which Mr. Hughes is a director but with respect to which Mr.
Hughes has no pecuniary interest. If any such consent were given it would not
necessarily be preceded or followed by a public announcement thereof.
The Trust has granted to the Underwriters an option, exercisable for the
30-day period after the date of the DECS Prospectus, to purchase up to an
additional DECS from the Trust, at the same price per DECS as the
initial DECS to be purchased by the Underwriters. The Underwriters may exercise
such option only for the purpose of covering over-allotments, if any, incurred
in connection with the sale of DECS offered pursuant to the DECS Prospectus. To
the extent that the Underwriters exercise such option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the same
proportion of the DECS as the number of DECS to be purchased and offered by such
Underwriter in the above table bears to the total number of initial DECS to be
purchased by the Underwriters. In addition, Smith Barney purchased
DECS in connection with the organization of the Trust.
The DECS will be a new issue of securities with no established trading
market. The DECS have been approved for listing on the Nasdaq National Market
System under the symbol "HERBL." The Underwriters intend to make a market in the
DECS, subject to applicable laws and regulations. However, the Underwriters are
not obligated to do so and any such market-making may be discontinued at any
time at the sole discretion of the Underwriters without notice. Accordingly, no
assurance can be given as to the liquidity of such market.
The Underwriting Agreement provides that Herbalife will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof, and that the Selling Stockholder (including the Family
Trust) will guarantee the indemnity and contribution obligations of the Company.
Pursuant to the Contract, the Trust has agreed, subject to the terms and
conditions set forth therein, to purchase from the Selling Stockholder an
aggregate number of shares of Class B Stock equal to the aggregate number of
DECS to be purchased by the Underwriters from the Trust pursuant to the
Underwriting Agreement (including the DECS to be purchased by the Underwriters
upon exercise of the over-allotment option plus the number of DECS purchased by
Smith Barney in connection with the organization of the Trust). Pursuant to the
terms of the Contract, the Selling Stockholder will be obligated to deliver to
the Trust
57
<PAGE> 60
at the Exchange Date of the DECS a number of shares of Class B Stock (or, at the
Selling Stockholder's option, the cash equivalent) and/or such other
consideration as permitted or required by the terms of the Contract, that are
expected to have the same value as the shares of Class B Stock delivered
pursuant to the DECS. The closing of the offering of the DECS is conditioned
upon the closing of the purchase of the Class B Stock pursuant to the Contract.
For further information, see the DECS Prospectus.
In connection with the DECS Offering, Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the DECS, the Class
A Stock, or the Class B Stock. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase DECS or Class B Stock for purposes of
stabilizing their market prices. The Underwriters also may create short
positions for the account of the Underwriters by selling more DECS in connection
with the DECS Offering than they are committed to purchase from the Trust, and
in such case may purchase DECS in the open market following the completion of
the DECS Offering to cover all or a portion of such short positions. The
Underwriters may also cover all or a portion of such short positions by
exercising the Underwriters' over-allotment options in the DECS Offering. In
addition, Smith Barney, on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements whereby it may reclaim from a dealer
participating in this offering the selling concession with respect to DECS that
are distributed in this offering but subsequently purchased of the account of
either Underwriter in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the DECS, the Class A
Stock or the Class B Stock at a level above that which might otherwise prevail
in the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.
In connection with the DECS Offering, certain Underwriters and selling
group members who are qualifying registered market makers on the Nasdaq National
Market System may engage in passive market making transactions in the Class B
Stock, the Class A Stock or the DECS on the Nasdaq National Market System in
accordance with Rule 103 of Regulation M. Passive market making transactions
must comply with certain volume and price limitations and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security, and if all independent bids are
lowered below the passive market maker's bid, then such bid must be lowered when
certain purchase limits are exceeded.
In connection with the offering of the DECS, Mark Hughes (or affiliates
thereof) (the "Lender") and Smith Barney intend to enter into a Securities Loan
Agreement (the "Securities Loan Agreement") which provides that, subject to
certain restrictions and with the agreement of the Lender, Smith Barney may from
time to time borrow, return and reborrow shares of Class B Stock from the Lender
(the "Borrowed Securities"); provided, however, that the number of Borrowed
Securities at any time may not exceed 1,000,000 shares, subject to adjustment
for certain dilutive events. The Securities Loan Agreement is intended to
facilitate market-making activity in the DECS by Smith Barney. Smith Barney may
from time to time borrow shares of Class B Stock under the Securities Loan
Agreement for the purpose of settling short sales of Class B Stock, or for the
purpose of returning shares of Class B Stock previously borrowed by Smith Barney
to settle short sales of Class B Stock, in each case, where such short sales
were entered into by Smith Barney to hedge any long position in the DECS
resulting from its market-making activities. Such sales will be made in the
over-the-counter market at market prices prevailing at the time of sale or at
prices related to such market prices. Market conditions will dictate the extent
and timing of Smith Barney's market-making transactions in the DECS and the
consequent need to borrow shares of Class B Stock. The availability of shares of
Class B Stock under the Securities Loan Agreement at any time is not assured and
any such availability does not assure market-making activity with respect to the
DECS and any market-making actually engaged in by Smith Barney may cease at any
time. The foregoing description of the Securities Loan Agreement does not
purport to be complete and is qualified in its entirety by reference to such
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
In the ordinary course of their respective businesses, certain of the
Underwriters and their respective affiliates have engaged in and may in the
future engage in commercial and investment banking transactions with the
Company, the Selling Stockholder and their respective affiliates.
58
<PAGE> 61
LEGAL MATTERS
Certain legal matters in connection with the Class B Stock offered hereby
will be passed upon for the Company by Irell & Manella LLP, Los Angeles,
California. Certain legal matters will be passed upon for the Underwriters by
Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report which is
incorporated herein by reference, and has been included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
59
<PAGE> 62
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............ 2
Available Information................. 2
Documents Incorporated by Reference... 3
Prospectus Summary.................... 4
Risk Factors.......................... 9
Use of Proceeds....................... 16
Price Range of Common Stock........... 17
Dividend Policy....................... 18
Selected Consolidated Financial and
Operating Data...................... 19
Capitalization........................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 29
Management............................ 51
Selling Stockholder................... 53
Certain Transactions.................. 54
Description of Capital Stock.......... 55
Plan of Distribution.................. 56
Legal Matters......................... 59
Experts............................... 59
</TABLE>
======================================================
======================================================
5,000,000 SHARES
HERBALIFE
INTERNATIONAL, INC.
CLASS B COMMON STOCK
(PAR VALUE $.01 PER SHARE)
LOGO
------------
PROSPECTUS
MARCH , 1998
------------
======================================================
<PAGE> 63
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
[COVER PAGE FOR SHELF PROSPECTUS]
SUBJECT TO COMPLETION, DATED MARCH 23, 1998
PROSPECTUS LOGO
1,000,000 SHARES
HERBALIFE INTERNATIONAL, INC.
CLASS B COMMON STOCK
($.01 PAR VALUE)
------------------
This Prospectus relates to shares of Class B Common Stock, par value $.01
per share (the "Class B Stock"), of Herbalife International, Inc., a Nevada
corporation ("Herbalife" or the "Company"), which may be offered and sold by
Smith Barney Inc. ("Smith Barney") in connection with market-making activities
in the DECS (the "DECS") representing beneficial interests in DECS Trust III, a
Delaware business Trust (the "Trust"). The DECS are being offered pursuant to a
prospectus (the "DECS Prospectus") of the Trust relating to the sale of DECS
(the "DECS Offering") which is accompanied by a form of prospectus (the "DECS
Equity Prospectus") relating to distribution by the Trust pursuant to the DECS
of shares of Class B Stock. The DECS Equity Prospectus is also included as part
of the Registration Statement of which this Prospectus forms a part. Herbalife
will not receive any of the proceeds from the sale of the DECS or delivery
thereunder of shares of Class B Stock to which this Prospectus relates. See "Use
of Proceeds." Neither the Company nor the Lender (as defined below) takes any
responsibility for any information included in or omitted from the DECS
Prospectus. The DECS Prospectus does not constitute a part of this Prospectus
nor is it incorporated by reference herein.
Smith Barney may, subject to certain limitations, from time to time borrow
shares of Class B Stock from certain personal holding companies indirectly
controlled by Mark Hughes, the Company's principal stockholder, Chairman of the
Board, Chief Executive Officer and President (such companies, together with Mr.
Hughes and certain other entities controlled by Mr. Hughes, the "Lender"), for
the purpose of settling short sales of Class B Stock, or for the purpose of
returning shares of Class B Stock previously borrowed by Smith Barney to settle
short sales of Class B Stock, in each case, where such short sales are entered
into by Smith Barney to hedge any long position in the DECS resulting from its
market-making activities. Such sales will be made in the over-the-counter market
at market prices prevailing at the time of sale or at prices related to such
market prices. Shares that have been returned to Lender may be reborrowed. The
number of shares borrowed at any time may not exceed 1,000,000. See "Plan of
Distribution." Smith Barney is not under any obligation to engage in any
market-making transactions with respect to the DECS, and any market-making in
the DECS actually engaged in by Smith Barney may cease at any time.
"DECS(SM)" is a service mark of Salomon Brothers Inc.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
, 1998
<PAGE> 64
[SHELF PROSPECTUS PAGE]
FORWARD-LOOKING STATEMENTS
Certain information contained in, or incorporated by reference into, this
Prospectus includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and is subject to the safe
harbor created by that Act. These forward-looking statements include, but are
not limited to, statements concerning the opening of new markets, the
introduction of new products and the like, and are generally identified by
phrases such as "the Company expects," "the Company believes," "Management
expects," "Management believes" and words of similar import. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in such
discussions. Additional information about these factors is contained in the
discussions in the "Risk Factors" beginning on page 5 and elsewhere in this
Prospectus and in documents incorporated by reference into this Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of the reports, proxy statements and other information may be obtained
from the Public Reference Section of the Commission, at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy statements and other information concerning the Company are also
available for inspection at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C., 20006. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities to which this Prospectus
relates. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed as a part thereof. For further
information about the Company and the securities to which this Prospectus
relates, reference is made to the Registration Statement and to the financial
statements, exhibits and schedules filed therewith or incorporated by reference
therein. The statements contained in this Prospectus about the contents of any
contract or other document referred to herein are not necessarily complete, and
where such contract or other document is filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. The Registration Statement, including the exhibits and
schedules filed as a part thereof or incorporated by reference therein, may be
inspected without charge at the public reference facilities maintained by the
Commission as set forth in the preceding paragraph. Copies of these documents
may be obtained from the Commission at its principal office in Washington, D.C.
upon payment of the charges prescribed by the Commission.
2
<PAGE> 65
[SHELF PROSPECTUS PAGE]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents have been filed with the Commission by the Company
and are incorporated herein by reference and made a part hereof: (i) the
Company's Annual Report on Form 10-K for the year ended December 31, 1997; (ii)
the description of the Company's Class A Common Stock contained in the Company's
Registration Statement on Form 8-A/A filed December 12, 1997; and (iii) the
description of the Company's Class B Common Stock contained in the Company's
Registration Statement on Form 8-A filed December 12, 1997.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering to which this Prospectus relates
shall be deemed to be incorporated in this Prospectus by reference and to be a
part hereof from the respective dates of filing of such documents. The Company
will provide, without charge to any person to whom a copy of this Prospectus is
delivered, upon the written or oral request of such person, a copy of any
document incorporated by reference herein other than exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
document. Requests should be directed to Herbalife International, Inc., 1800
Century Park East, Los Angeles, California 90067, Attention: General Counsel
(telephone: (310) 410-9600).
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
------------------
"DECS(SM)" is a service mark of Salomon Brothers Inc.
3
<PAGE> 66
[SHELF PROSPECTUS PAGE]
THE COMPANY
Herbalife is a network marketing company that sells a wide range of weight
management products, food and dietary supplements and personal care products
worldwide. As of December 31, 1997, the Company conducted business in 36
countries located in Asia/Pacific Rim, Europe and The Americas. Retail sales in
those regions represented 43.2%, 30.4% and 26.4%, respectively, of the Company's
total retail sales in 1997.
The Company has experienced substantial growth in retail sales and net
income in recent years. From 1992 to 1997, the Company's retail sales grew from
$405.1 million to $1.49 billion, representing a compound annual growth rate of
29.8%. From 1992 to 1997, the Company's net income grew from $20.1 million to
$54.7 million, representing a compound annual growth rate of 22.2%.
The Company's products are marketed exclusively through a network marketing
system. This system enables the Company's independent distributors to earn
profits by selling Herbalife products to retail consumers or other distributors.
Distributors may also develop their own distributor downline organizations by
sponsoring other distributors to do business in any market where the Company
operates, entitling the sponsors to receive royalty overrides (cash incentives,
including royalties and bonuses) on product sales within their downline
organizations.
Management believes that Herbalife's network marketing system is ideally
suited to its products, which emphasize a healthy lifestyle, because sales of
such products are strengthened by ongoing personal contact between retail
consumers and distributors, many of whom use the Company's products themselves.
The Company's network marketing system appeals to a broad cross-section of
people throughout the world, particularly those seeking to supplement family
income, start a home business or pursue employment opportunities other than
conventional, full-time employment.
4
<PAGE> 67
[SHELF PROSPECTUS PAGE]
RISK FACTORS
DEPENDENCE ON DISTRIBUTORS
The Company's success depends in significant part upon its ability to
attract, maintain and motivate a large base of distributors. In its efforts to
attract and retain distributors, the Company competes with other network
marketing organizations, including those in the weight management, food and
dietary supplement and personal care product industries. In addition, as a
result of the Company's network marketing system and its international
sponsorship program, the distributor organizations headed by a relatively small
number of key distributors are responsible for a significant percentage of total
retail sales (in many cases, including retail sales in several different
countries). The Company does not believe that the loss of any key distributor
would necessarily result in the loss of a significant number of that
distributor's downline organization members because of the Company's generally
good relations with its distributors and because of the significant incomes that
many distributors would forego by ceasing to distribute the Company's products.
However, the loss of a key distributor, together with a significant number of
downline distributors, or the loss of a significant number of distributors for
any reason, could materially adversely affect sales of the Company's products
and could impair the Company's ability to attract new distributors.
The Company's ability to attract and retain distributors has been and could
again be negatively affected by adverse publicity and regulatory action relating
to the Company, its products or its operations, including its network marketing
system. In the mid-1980s, the Company's products and marketing system became the
subject of regulatory scrutiny in the United States, resulting in large part
from claims and representations made about the Company's products (including
impermissible therapeutic claims). The resulting adverse publicity caused a
rapid, substantial loss of distributors in the United States and a corresponding
reduction in sales beginning in 1985. More recently, adverse publicity in other
markets, including Brazil, France and Germany, contributed to a loss of
distributors and a decline in sales in those markets. See "-- Sales and Earnings
Volatility." The Company expects that its business in particular markets will,
from time to time, continue to be adversely affected by negative publicity or
regulatory action.
REGULATION
In both its United States and foreign markets, the Company is subject to
and affected by extensive governmental regulations, including, among other
things, regulations pertaining to (i) the formulation, manufacturing, packaging,
labeling, distribution, importation, sale and storage of the Company's products,
(ii) product claims and advertising (including direct claims and advertising by
the Company, as well as claims and advertising by distributors for which the
Company may be held responsible), (iii) the Company's network marketing system,
(iv) transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties, and (v) taxation of distributors, which in
some instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records.
The Company could be found not to be in compliance with existing
regulations as a result, among other things, of the ambiguous nature of certain
of the regulations, the considerable interpretive and enforcement discretion
given to regulators or misconduct by distributors, who are generally independent
contractors over whom the Company has limited control. Enforcement actions that
could be undertaken by state and federal regulators include product seizures,
injunctions against further product distribution, requests for product recall,
and possible criminal prosecution. Any assertion or determination that the
Company or its distributors are not in compliance with existing regulations
could have a material adverse effect on the Company. The Company's business has
been materially, adversely affected in the past as a result of regulatory
activities. See "-- Sales and Earnings Volatility."
In addition, the adoption of new regulations in the United States or in any
of the Company's international markets, or changes in the interpretation of
existing regulations, could have a material adverse effect on the Company. For
example, in September 1997 the United States Food and Drug Administration (the
"FDA")
5
<PAGE> 68
[SHELF PROSPECTUS PAGE]
issued regulations governing the labeling and marketing of dietary supplement
products. The regulations cover: 1) the identification of dietary supplements
and their nutrition and ingredient labeling; 2) the terminology to be used for
nutrient content claims, health content claims, and statements of nutritional
support; 3) labeling requirements for dietary supplements for which "high
potency" and "antioxidant" claims are made; 4) notification procedures for
statements on dietary supplements; and 5) premarket notification requirements
for new dietary ingredients in dietary supplements. The notification procedures
became effective in November, 1997, while the new labeling requirements will not
become effective until March 1999. The Company will be required to revise a
substantial number of its product labels to reflect the new requirements prior
to the 1999 effective date, although the Company does not expect the cost or
impact of such actions to be material. In addition, the Company will be required
to continue its ongoing program of securing substantiation of its product
performance claims, and of notifying the FDA of certain types of performance
claims made for its products.
In addition, in certain markets, including the U.S., claims made with
respect to weight management, dietary supplement, personal care or other
products of the Company may change the regulatory status of the products. In the
U.S., for example, it is possible that the FDA could take the position that
claims made in connection with certain of the Company's products place those
products within the scope of an FDA "over-the counter" (OTC) drug monograph. OTC
monographs prescribe permissible ingredients and appropriate labeling language,
and require the marketer or supplier of the products to register and file annual
drug listing information with the FDA. A limited number of the products sold by
the Company are labeled as OTC monograph drugs, and the Company believes that it
is in compliance with the applicable monographs. In the event that the FDA
asserted that product claims for other products caused them to fall within the
scope of OTC monographs, the Company would be required either to comply with the
applicable monographs or change the claims made in connection with the products.
There can be no assurance that the Company could do so effectively, or that any
such changes would not adversely affect sales and marketing of an affected
product.
The U.S. Federal Trade Commission ("FTC"), which exercises jurisdiction
over the advertising of all the Company's products, has in the past several
years instituted enforcement actions against several dietary supplement
companies for false and misleading advertising of certain products. These
enforcement actions have resulted in consent decrees and monetary payments by
the companies involved. In addition, the FTC has increased its scrutiny of the
use of testimonials, which are utilized by the Company. While the Company has
not been the target of FTC enforcement action for the advertising of its
products, there can be no assurance that the FTC will not question the Company's
advertising or other operations in the future.
As a marketer of food and dietary supplements and other products that are
ingested by consumers, the Company is subject to the risk that one or more of
the ingredients in its products may become the subject of adverse regulatory
action. For example, one of the ingredients in the Thermojetics(R) original
green herbal tablet is a Chinese herb, Ma Huang, which contains
naturally-occurring ephedrine in small quantities. Ephedrine products have been
the subject of adverse publicity in the United States and other countries
relating to alleged harmful effects, including the deaths of several
individuals. In response to potential federal regulatory proposals that may have
affected the sale of the Thermojetics(R) original green herbal tablet in the
United States, the Company suspended sales of the product for approximately
three months commencing in July 1995 and introduced a reformulated herbal green
tablet that did not contain Ma Huang. When no such regulations were proposed or
issued at that time, the Company renewed sales of Thermojetics(R) original green
herbal tablets in the United States in October 1995 (except in certain states in
which regulations may prohibit or restrict the sale of such product). The
Thermojetics(R) original green herbal tablet accounted for 2.4% and 2.2% of
total retail sales in 1996 and 1997, respectively, although the marketing of the
Thermojetics(R) weight management tablets (original green, green, beige and
yellow) and other products in the Thermojetics(R) line have contributed
significantly to the Company's retail sales. The Company also previously offered
the Thermojetics(R) original green herbal tablet in Canada but, in response to
Canadian marketing issues and regulatory concerns, suspended sales of the
product in February, 1994.
6
<PAGE> 69
[SHELF PROSPECTUS PAGE]
The FDA has on record a small number of reports of adverse reactions
allegedly resulting from the ingestion of Ma Huang contained in the Company's
Thermojetics(R) original green tablet. In addition, the Company is a defendant
in three actions alleging adverse reactions to consumption of its original green
Thermojetics(R) product. The Company has not received any communications from
the FDA with respect to these reports. However, many other companies manufacture
products containing various amounts of Ma Huang and the FDA has on record
hundreds of reports of adverse reactions to these products. On April 10, 1996,
the FDA issued a statement warning consumers not to purchase or ingest dietary
supplements containing ephedrine that are claimed to produce such effects as
euphoria, heightened awareness, increased sexual sensations or increased energy,
because these products pose significant adverse health risks, including
dizziness, headache, gastrointestinal distress, irregular heartbeat, heart
palpitations, heart attack, strokes, seizures, psychosis and death. The Company
does not market its Ma Huang product with any of these claims.
On June 4, 1997, the FDA issued a proposed regulation for dietary
supplements containing ephedrine alkaloids. The proposed regulation would
prohibit dietary supplements containing eight milligrams or more of ephedrine
alkaloids per serving, and would not permit such products to contain any other
stimulant, diuretic or laxative ingredients. In addition, labeling of
supplements would be prohibited from suggesting or recommending conditions of
use that would result in an intake of eight milligrams or more of ephedrine
alkaloids within a six-hour period, or a total daily intake of 24 milligrams or
more. The FDA proposal would also require a warning not to take the product for
more than seven days, and would prohibit the supplements from being represented,
either expressly or implicitly, as being suitable for long-term uses, such as
for weight loss or body building. Similarly, claims for increased energy,
increased mental concentration, or enhanced well-being that encourage the
consumer to take more of the product to achieve more of the purported effect
would be required to be accompanied by a warning stating that taking more than
the recommended serving may cause a heart attack, stroke, seizure, or death.
The Company is reviewing the possible impact of the FDA proposal, if it is
finalized in its current form, upon the Company's continued marketing of its
Thermojetics(R) original green tablet. In response to the proposal, or to a
final regulation which is substantially similar to the proposal, the Company may
be required to: (i) withdraw or reformulate its product with reduced ephedrine
levels, or with a substitute for Ma Huang, (ii) relabel its product with
different warnings or revised directions for use, (iii) not make certain
statements, possibly including weight loss, with respect to any product
containing Ma Huang and/or (iv) withdraw its product from the weight management
program and reposition it in a different category. Even in the absence of an FDA
final regulation, the Company may elect to reformulate and/or relabel its
product containing Ma Huang. While the Company believes that its Ma Huang
product could be reformulated and relabeled, there can be no assurance in that
regard or that reformulation and/or relabeling would not have an adverse effect
on sales of such product or related products within the Thermojetics(R) Weight
Management Program, even though such products do not contain Ma Huang. During
1996 and 1997, the Company's 14 weight management products contributed 71.2% and
67.8%, respectively, of total sales.
Governmental regulations in countries where the Company plans to commence
or expand operations may prevent or delay entry into the market. In addition,
the Company's ability to sustain satisfactory levels of sales in its markets is
dependent in significant part on its ability to introduce additional products
into such markets. However, government regulations in the Company's markets,
both domestic and international, can delay or prevent the introduction, or
require the reformulation or withdrawal, of certain of the Company's products.
For example, during the third quarter of 1995, the Company received inquiries
from certain government agencies within Germany and Portugal regarding the
Company's product, Thermojetics(R) Instant Herbal Beverage, relating to the
caffeine content of the product and the status of the product as an "instant
tea," which was disfavored by regulators, versus a "beverage." The sale of this
product in these countries was subsequently suspended by the Company at the
request of the regulators. Further, such regulatory action, whether or not it
results in a final determination adverse to the Company, could create negative
publicity (as it did in Germany
7
<PAGE> 70
[SHELF PROSPECTUS PAGE]
with respect to Thermojetics(R) Instant Herbal Beverage), with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
sales.
The Company may be subject to challenges to the legality of its network
marketing system based on claims that such system is an illegal "pyramid scheme"
or similar allegations. While the Company believes that its network marketing
system complies with all applicable laws, there can be no assurance that such
challenges will not be made or made successfully or that other legal
developments in this area will not have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The business of the Company, particularly the operation of its distributor
network, is substantially dependent upon the active participation of Mark
Hughes, the Company's principal stockholder, Chairman of the Board, Chief
Executive Officer and President. The loss of Mr. Hughes' services would
adversely affect the business of the Company. The Company does not maintain key
man life insurance on Mr. Hughes.
SALES AND EARNINGS VOLATILITY
The Company's sales and earnings have been subject to significant
volatility in the past. In the mid-1980s, the Company's products and network
marketing system became the subject of regulatory scrutiny in the United States
resulting in large part from claims and representations made about the Company's
products, including impermissible therapeutic claims. Although the Company
responded by instituting certain regulatory compliance measures, as a result of
the adverse publicity generated by the regulatory activities the Company
experienced, beginning in 1985, a rapid, substantial loss of distributors in the
United States and a corresponding reduction in sales. In addition, the Company's
sales in the United States were adversely affected by competition from other
weight management products. As a consequence, from 1987 (the Company's first
full year as a public company) through 1990, the Company's operations resulted
either in net losses ($2.4 million in 1990 and $6.3 million in 1988) or modest
net income ($1.0 million in 1989 and $1.1 million in 1987). More recently,
adverse publicity and regulatory action in other markets, including France and
Germany, resulted in a loss of distributors and a decline in sales in those
markets, contributing to a reduction in worldwide net income from $46.0 million
in 1994 to $19.7 million in 1995. While net income increased in subsequent
periods (to $44.8 million for 1996 and $54.7 for 1997), the Company expects that
its business in particular markets will, from time to time, be adversely
impacted by regulatory actions, negative publicity and competition in those
markets. See "-- Dependence on Distributors."
In addition, after entering a new country, the Company has in many
instances experienced an initial period of rapid growth in sales as new
distributors were recruited, followed by a decline in sales. The Company
believes that this sales trend has been due in part to certain distributor
migration patterns as well as regulatory action and adverse publicity in certain
markets. In certain of these markets, the opening of new markets within the same
geographic region or with the same or similar language or cultural bases has
resulted in a corresponding tendency of some key distributors to focus their
attention on business opportunities provided by the new markets instead of
developing their established downline organizations in existing markets.
Additionally, in certain instances, the Company has become aware that sales in
certain existing markets were attributable to purchasers who distributed such
product in countries which had not yet been opened. When these countries were
opened, such sales in existing markets shifted to the newly opened markets,
resulting in a decline in sales in the existing markets.
The Company's weight management products have historically contributed a
significant portion of the Company's total retail sales. During 1996 and 1997,
the Company's 14 weight management products contributed 71.2% and 67.8%,
respectively, of total retail sales, and one of these products contributed 19.2%
and 19.8%, respectively, of total retail sales. Accordingly, the Company could
be materially adversely affected if, because of regulatory constraints, adverse
publicity, competition or other factors, the Company were unable to successfully
market its weight management products in one or more significant markets.
8
<PAGE> 71
[SHELF PROSPECTUS PAGE]
The Company's sales and earnings continue to be subject to significant
potential volatility based upon, among other things, the adverse effect of
distributors' or the Company's failure, and allegations of their failure, to
comply with applicable regulations, which have in the past and could again in
the future result in the removal of certain products from sale in certain
countries, either temporarily or permanently; the negative impact of changes in
or interpretations of regulations that may limit or restrict the sale of certain
of the Company's products, the operation of its network marketing system, the
expansion of its operations into new markets, the introduction of its products
into each market and the recruitment and retention of distributors; the
inability of the Company to introduce new products or the introduction of new
products by the Company's competitors; general conditions in the weight
management, food and dietary supplement and personal care industries or the
network marketing industry; and consumer perceptions of the Company's products
and operations. In particular, because the Company's products are ingested by
consumers or applied to their bodies, the Company is highly dependent upon
consumers' perception of the safety, quality and effectiveness of its products.
As a result, substantial negative publicity, whether founded or unfounded,
concerning one or more of the Company's products or other products similar to
the Company's products could adversely affect the Company's sales and earnings.
In the past, adverse publicity has been connected with prospective regulatory
action, perceived health concerns relating to particular products, issues
related to the Company's network marketing system, disputes between the Company
and certain of its distributors, and other issues relating to the Company's
business.
DEPENDENCE UPON MATERIAL FOREIGN MARKETS
For 1996 and 1997, 76.7% and 80.0% of the Company's total retail sales,
respectively, were generated outside the United States. Such reliance on foreign
markets exposes the Company to the risks associated with foreign operations,
including, among other things, changes in or interpretations of foreign
regulations that may limit the Company's ability to sell certain products,
conduct a network marketing system or repatriate profits to the United States,
and the potential imposition of trade or foreign exchange restrictions or
increased tariffs. The Company is also exposed to risks associated with foreign
currency fluctuations. For instance, the Company's purchases from suppliers are
generally made in U.S. dollars while its sales to distributors are generally
made in local currencies; accordingly, strengthening of the U.S. dollar versus a
foreign currency can have a negative impact on the Company. Although the Company
engages in transactions to protect against certain risks associated with foreign
currency fluctuations, there can be no assurance that such fluctuations will not
have an adverse effect on the Company. As the Company continues to expand its
international operations, these and other risks associated with international
operations are likely to increase. See "-- Regulation."
In particular, the Company is exposed to risks associated with the current
economic and currency crisis in Asia. Because of the significance of the Asian
markets, and Japan in particular, which has become the Company's largest single
retail sales market, a sustained economic slowdown and/or currency crisis in
Asia could have a material adverse impact on the Company's business.
Further, during 1997, of the 36 countries in which the Company operated
during that period, 24 countries experienced an aggregate increase in retail
sales of $350.5 million as compared with 1996. Japan accounted for 61.2%, and
Russia and Taiwan together accounted for 10.6% of this increase. The growth in
these 24 countries was offset by a $59.9 million aggregate decrease in retail
sales in the remaining 12 countries in which the Company operated during both
years. The Company expects that its business in these and other markets will,
from time to time, be adversely affected by regulatory action, negative
publicity, competition and other factors. See "-- Sales and Earnings
Volatility."
In addition, the Company's operations in certain markets may be adversely
affected by political, economic and social instability in those countries. For
instance, the Company has elected not to establish a physical presence, through
a sales or distribution center, in Russia due to a difficult business
environment in that country. Instead the Company has chosen to rely on various
import/export companies located in Russia to conduct transactions in the
Company's products with Russian distributors.
9
<PAGE> 72
[SHELF PROSPECTUS PAGE]
UNCERTAINTIES ASSOCIATED WITH BUSINESS EXPANSION
The Company's continued growth is dependent in significant part upon its
ability to expand its operations into new markets. As compared to new market
openings in the past, the Company may have greater difficulty opening new
markets in the future due to greater regulatory barriers, the necessity of
adapting to entirely new regulatory systems and problems related to entering new
markets with different cultural bases and political systems from those
encountered in the past. In addition, the Company's success has been and will
continue to be significantly dependent on its ability to manage rapid growth,
through expansions and enhancements of its worldwide personnel and management
and information, order processing and fulfillment, inventory and shipping
systems and other aspects of operations. From time to time, the Company has
experienced out-of-stock situations with respect to certain products. As the
Company continues to add distributors, products and countries to its operations,
the ability to manage this growth will represent an increasing challenge.
RELATIONSHIP WITH OUTSIDE MANUFACTURERS
All of the Company's products are manufactured by outside companies. Raven
Industries, Inc. ("Raven") currently manufactures all of the Company's powder
products, and D&F Industries, Inc. ("D&F") currently supplies substantially all
of the Company's tablet products, including Activated Fiber,(TM) one of the
Company's tablet products, pursuant to a licensing agreement with Dynamic
Products, Inc. ("Dynamic"). In 1996 and 1997, aggregate purchases by the Company
from Raven and D&F represented a majority of the Company's product purchases.
Two individuals (not affiliates of the Company) are principal stockholders of
each of D&F, Raven and Dynamic. Mark Hughes owns a one-third ownership interest
in Raven and a one-fifth ownership interest in Dynamic. For a number of years
prior to 1998, the Company was subject to requirements contracts with each of
Raven, D&F and Dynamic, pursuant to which the Company agreed to purchase all of
its requirements of powder products from Raven and all of its requirements of
tablet, capsule and certain other products from Dynamic or D&F, to the extent
each such manufacturer was capable of manufacturing such products. In September
1997, the Company entered into new three-year agreements with Raven, D&F and
Dynamic, pursuant to which revised pricing and other provisions became effective
on January 12, 1998. The new contracts provide, among other things, the ability
for the Company to source and develop products with other third party
manufacturers, subject to minimum percentage purchase and other requirements for
nutritional supplement, and a small number of non-nutritional supplement,
products falling into specified product categories. As a result, and because the
new contracts confirm the Company's ownership of product formulations for
substantially all of the Company's nutritional supplement products, the Company
has the capacity, and has begun to, to "second source" particular nutritional
supplement products with multiple manufacturers. Further, the Company has hired
its own staffs of product research and development and product formulation
personnel, and will increasingly rely on its in-house staff for these functions.
However, the Company has historically relied on Raven and D&F for these
services, and will continue to do so, albeit to a lesser extent, in the future.
The Company's ability to enter new markets and sustain satisfactory levels of
sales in each market has been in the past and is likely to continue to be
dependent in significant part upon its own ability and the ability of its
manufacturers, including Raven and D&F, to develop new products and reformulate
existing products for introduction into the Company's markets. With the
transition in the Company's relationship with Raven and D&F from exclusive to
nonexclusive contracts, there can be no assurance that the Company will seek or
continue to obtain the same amount or quality of product research, development
or formulation services from Raven and D&F that it has received in the past.
While the Company expects to obtain similar such services from in-house
personnel and alternative manufacturers in the future, there can be no assurance
that there will not be some disruption in the Company's business from time to
time as these support services begin to be provided internally and by
alternative manufacturers.
The Company and Mr. Hughes were recently advised by Raven, D&F and Dynamic
that such companies are planning to make a bond offering and obtain a secured
bank credit facility, the proceeds of which would be used, in part, to
repurchase the ownership interests in those companies currently held by Mr.
Hughes and Dr. Katzin.
10
<PAGE> 73
[SHELF PROSPECTUS PAGE]
ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW; POTENTIAL MISUSE OF PRODUCTS
In general, the Company's products consist of weight management products,
food and dietary supplements and personal care products (a limited number of
which have been or may be classified in the U.S. as OTC drugs) which the Company
believes do not require approvals from the FDA or, in the United States market,
other regulatory agencies, prior to sale. The Company does not conduct clinical
studies of its products. The Company's products consist of herbs, vitamins,
minerals and other ingredients that the Company regards as safe when taken as
suggested by the Company. However, because the Company is highly dependent upon
consumers' perception of the safety and quality of its products as well as
similar products distributed by other companies, the Company could be adversely
affected in the event any of the Company's products or any similar products
distributed by other companies should prove or be asserted to be harmful to
consumers. In addition, because of the Company's dependence upon consumer
perceptions, any adverse publicity associated with illness or other adverse
effects resulting from consumers' use or misuse of the Company's products or any
similar products distributed by other companies could have a material adverse
impact on the Company.
COMPETITION
The Company is subject to significant competition for the recruitment of
distributors from other network marketing organizations, including those that
market weight management, food and dietary supplement and personal care products
as well as other types of products. Some of the Company's competitors are
substantially larger and have available considerably greater financial resources
than the Company. The Company's ability to remain competitive depends, in
significant part, on the Company's success in recruiting and retaining
distributors through an attractive compensation plan and other incentives.
In addition, the business of marketing weight management, food and dietary
supplement and personal care products is highly competitive. This market segment
includes numerous manufacturers, distributors, marketers, retailers and
physicians that actively compete for the business of consumers both in the
United States and abroad. The market is highly sensitive to the introduction of
new products or weight management plans (including various prescription drugs)
that may rapidly capture a significant share of the market. As a result, the
Company's ability to remain competitive depends in part upon the successful
introduction of new products.
PRODUCT LIABILITY CLAIMS
As a marketer of food and dietary supplements and other products that are
ingested by consumers or applied to their bodies, the Company may be subjected
to various product liability claims, including, among other things, that its
products contain contaminants or include inadequate instructions as to use or
inadequate warnings concerning side effects and interactions with other
substances. While such claims to date have not been material to the Company and
the Company maintains product liability insurance, it is possible that
widespread product liability claims and the resultant adverse publicity could
negatively affect the Company.
CONCENTRATION OF STOCK OWNERSHIP
As of February 23, 1998, Mr. Hughes beneficially owned 5,666,932 shares of
the Company's Class A Common Stock, par value $.01 per share (the "Class A
Stock") and 11,333,866 shares of the Class B Stock (which amounts include
183,333 shares of Class A Stock and 366,666 shares of Class B Stock held by a
charitable foundation of which Mr. Hughes is a director but with respect to
which Mr. Hughes has no pecuniary interest), representing 57.2% and 58.2% of the
outstanding shares of Class A Stock and Class B Stock, respectively, as of
February 23, 1998. Accordingly, Mr. Hughes currently has the power to elect the
entire Board of Directors of the Company and determine the outcome of all
matters submitted to the Company's stockholders for approval. Because Class B
Stock is non-voting stock, neither the completion of the DECS Offering nor the
settlement of the DECS will affect Mr. Hughes' voting power with respect to the
Company. Assuming delivery by the Lender to the Trust of the maximum number of
shares of Class B Stock
11
<PAGE> 74
[SHELF PROSPECTUS PAGE]
required to satisfy certain purchase contracts (collectively, the "Contract")
between the Lender and the Trust (assuming full exercise of the over-allotment
option in the DECS Offering), Mr. Hughes would beneficially own 28.5% of the
Company's outstanding Class B Stock at February 23, 1998 (including the
foundation-owned shares referred to above).
SHARES AVAILABLE FOR FUTURE PUBLIC SALE
In addition to shares already publicly held, as of February 23, 1998, (i)
432,258 shares of Class A Stock and 864,520 shares of Class B Stock subject to
outstanding stock options that are currently exercisable have been registered
for sale under the Securities Act in connection with various compensation plans
of the Company, and (ii) 5,666,932 shares of Class A Stock and 6,333,866 shares
of Class B Stock beneficially owned by the Selling Stockholder (not including
the 5,000,000 shares subject to the Contract (assuming that the over-allotment
option relating to the DECS is not exercised)) are currently available for sale
pursuant to Rule 144 under the Securities Act, subject to the volume limitations
contained in the rule. The Company, its directors and executive officers, and
the Lender have agreed, subject to certain exceptions, not to sell, without the
prior written consent of Smith Barney, any shares of Class A Stock, Class B
Stock or any securities convertible into or exercisable or exchangeable for such
shares for a period of 90 days, in the case of the Company and its directors and
executive officers (other than the Lender), and one year, in the case of the
Lender, after the date of the DECS Prospectus. Future sales of substantial
amounts of Class A Stock or Class B Stock could adversely affect prices in the
public market.
IMPACT OF THE DECS ON THE MARKET FOR CLASS B STOCK
It is not possible to predict accurately how or whether any market that
develops for the DECS will trade in the secondary market or whether such market
will be liquid. Any market that develops for the DECS is likely to influence and
be influenced by the market for the Class A Stock and the Class B Stock. For
example, the price of the Class A Stock and/or Class B Stock could become more
volatile and could be depressed by investors' anticipation of the potential
distribution into the market of substantial additional amounts of Class B Stock
upon the maturity of the DECS, by possible sales of Class A Stock or Class B
Stock by investors who view the DECS as a more attractive means of equity
participation in the Company and by hedging or arbitrage trading activity that
may develop involving the DECS and the Class B Stock.
USE OF PROCEEDS
This Prospectus relates to the shares of Class B Stock which Smith Barney
may, subject to certain limitations, from time to time, borrow from the Lender
for the purpose of settling short sales of Class B Stock, or for the purpose of
returning shares of Class B Stock previously borrowed by Smith Barney to settle
short sales of Class B Stock, in each case, where such short sales are entered
into by Smith Barney to hedge any long position in the DECS resulting from
market making activities. See "Plan of Distribution." The Company will not
receive any proceeds from the sale of the Class B Stock to which this Prospectus
relates.
PLAN OF DISTRIBUTION
The Lender and Smith Barney have entered into a Securities Loan Agreement
(the "Securities Loan Agreement") which provides that, subject to certain
restrictions and with the agreement of the Lender, Smith Barney may from time to
time borrow, return and reborrow shares of Class B Stock from the Lender (the
"Borrowed Securities"); provided, however, that the number of Borrowed
Securities at any time may not exceed 1,000,000 shares, subject to adjustment to
provide antidilution protection. The Securities Loan Agreement is intended to
facilitate market-making activity in the DECS by Smith Barney. Smith Barney may
from time to time borrow shares of Class B Stock under the Securities Loan
Agreement for the purpose of settling short sales of Class B Stock, or for the
purpose of returning shares of Class B Stock previously borrowed by Smith Barney
to settle short sales of Class B Stock, in each case, where such short sales are
entered into by Smith Barney to hedge any long position in the DECS resulting
from its market-making activities. Such sales will be made in the
over-the-counter market at market prices prevailing at the time of sale or at
prices related to such market prices. This Prospectus relates to any borrowing
or reborrowing of
12
<PAGE> 75
[SHELF PROSPECTUS PAGE]
shares of Class B stock from the Lender by Smith Barney pursuant to the
Securities Loan Agreement (as described above) for the purpose of settling short
sales of Class B Stock, or for the purpose of returning shares of Class B Stock
previously borrowed to settle short sales of Class B Stock, in each case, by
Smith Barney with Borrowed Securities as described above.
Market conditions will dictate the extent and timing of Smith Barney's
market-making activity in the DECS and the consequent need to borrow shares of
Class B Stock (which may include borrowings to replace previously borrowed
shares). The availability of shares of Class B Stock under the Securities Loan
Agreement, if any, at any time is not assured and any such availability does not
assure market-making activity with respect to the DECS and any market-making
activity actually engaged in by Smith Barney may cease at any time. The
foregoing description of the Securities Loan Agreement does not purport to be
complete and is qualified in its entirety by reference to the Securities Loan
Agreement, a form of which will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The DECS were initially sold by the Trust to Smith Barney and Prudential
Securities Incorporated as underwriters (the "Underwriters") subject to an
underwriting agreement (the "Underwriting Agreement") the form of which will be
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof, and that the Lender (and the family trust of Mr.
Hughes) will guarantee the indemnity and contribution obligations of the
Company.
The Underwriters intend to make a market in the DECS, subject to applicable
laws and regulations. However, the Underwriters are not obligated to do so and
any such market-making may be discontinued at any time at the sole discretion of
the Underwriters without notice. Accordingly, no assurance can be given as to
the liquidity of such market.
Pursuant to the Contract, the Trust has agreed, subject to the terms and
conditions set forth therein, to purchase from the Lender an aggregate number of
shares of Class B Stock equal to the aggregate number of DECS to be purchased by
the Underwriters from the Trust pursuant to the Underwriting Agreement
(including the DECS to be purchased by the Underwriters upon exercise of the
over-allotment option plus the number of DECS purchased by Smith Barney in
connection with the organization of the Trust). Pursuant to the terms of the
Contract, the Lender will be obligated to deliver to the Trust at the maturity
date of the DEC's a number of shares of Class B Stock (or, at the Lender's
option, the cash equivalent) and/or such other consideration as permitted or
required by the terms of the Contract, that are expected to have the same value
as the shares of Class B Stock delivered pursuant to the DECS. For further
information, see the DECS Prospectus.
In the ordinary course of their respective businesses, certain of the
Underwriters and their respective affiliates have engaged in and may in the
future engage in commercial and investment banking transactions with the
Company, the Lender and their respective affiliates.
LEGAL MATTERS
Certain legal matters in connection with the Class B Stock offered hereby
will be passed upon for the Company by Irell & Manella LLP, Los Angeles,
California.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 have been audited by
Deloitte & Touch LLP, independent auditors, as stated in their report which is
incorporated herein by reference, and has been included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
13
<PAGE> 76
[SHELF PROSPECTUS BACK COVER PAGE]
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE LENDER OR ANY OF THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............ 2
Available Information................. 2
Documents Incorporated by Reference... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 12
Plan of Distribution.................. 12
Legal Matters......................... 13
Experts............................... 13
</TABLE>
======================================================
======================================================
1,000,000 SHARES
HERBALIFE
INTERNATIONAL, INC.
CLASS B
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
[LOGO]
------------
PROSPECTUS
, 1998
------------
======================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
securities being registered, which will be paid by the Selling Stockholder,
other than underwriting compensation, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....... $ 40,448
NASD Fee.................................................. 14,500
Blue Sky Fees............................................. 2,000
Printing and Engraving Expenses........................... 110,000
Legal Fees and Expenses................................... 300,000
Accounting Fees and Expenses.............................. 75,000
Miscellaneous............................................. 7,052
--------
Total........................................... $450,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the General Corporation Law of Nevada ("GCL") empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, except an action by or
in the right of the corporation, by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In the case of any action by or in the right of the
corporation, no indemnification may be made in respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation or for amounts paid in settlement to the corporation unless and only
to the extent that the court in which such action or suit was brought or other
court of competent jurisdiction determines that in view of all the circumstances
of the case such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper. Section 78.751 further provides that to
the extent a director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith.
The Amended and Restated Articles of Incorporation (the "Articles"), and
Restated By-Laws of the Company provide, in effect, that to the extent and under
the circumstances permitted by Section 78.751 of the GCL and subject to certain
conditions, the Company shall indemnify any person who was or is a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding of the type described above by reason of the fact that he or she is
or was a director, officer, employee or other agent of the Company or is or was
serving at the request of the Company 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 or
domestic corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of the predecessor corporation.
The Company has also entered into indemnification agreements with each of
its directors and executive officers providing, among other things, that the
director or officer shall be indemnified to the fullest extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in any action, suit or proceeding of the
type described above by reason of the fact that he or she is or was a director
or officer of the Company or is or was serving at the request of the Company as
a
II-1
<PAGE> 78
director, officer, employee or agent of another corporation. In furtherance of
such indemnification agreements, the Company has established a $1,000,000 trust
fund from which payments owing under the indemnification agreements may be made.
The initial term of the trust is ten years.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement(3)
1.2 Form of Purchase Contract between the Selling Stockholder
and the Trust(3)
4.1 Form of Class A Stock and Class B Stock Certificates(1)
5 Opinion of Irell & Manella LLP(2)
23.1 Consent of Irell & Manella LLP (included in Exhibit 5)
23.2 Consent of Deloitte & Touche LLP(3)
99 Form of Securities Loan Agreement between the Selling
Stockholder and Smith Barney Inc.(3)
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report
on Form 10-K filed March 5, 1998.
(2) Previously filed.
(3) Filed herewith.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the items listed in item 15 hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
II-2
<PAGE> 79
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
Number 2 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on this 23rd day of March, 1998.
HERBALIFE INTERNATIONAL, INC.
(a Nevada corporation)
By: /s/ CHRISTOPHER PAIR
------------------------------------
Christopher Pair
Executive Vice President
Chief Operating Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment Number 1 to Registration Statement has been signed by the
following persons in the capacities indicated on March 23, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman, President, Chief Executive Officer
- ----------------------------------------------------- and Director (Principal Executive Officer)
Mark Hughes
/s/ CHRISTOPHER PAIR Executive Vice President, Chief Operating
- ----------------------------------------------------- Officer, Secretary and Director
Christopher Pair
* Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial and Accounting
Timothy Gerrity Officer)
* Executive Vice President, Chief Executive of
- ----------------------------------------------------- Corporate Development/Marketing and Director
Michael E. Rosen
* Director
- -----------------------------------------------------
Edward J. Hall
* Director
- -----------------------------------------------------
Alan Liker
* Director
- -----------------------------------------------------
Christopher M. Miner
*By: /s/ CHRISTOPHER PAIR
------------------------------------------------
Christopher Pair,
as Attorney-in-Fact
</TABLE>
II-4
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement(3)...........................
1.2 Form of Purchase Contract between the Selling Stockholder
and the Trust(3)............................................
4.1 Form of Class A Stock and Class B Stock Certificates(1).....
5 Opinion of Irell & Manella LLP(2)...........................
23.1 Consent of Irell & Manella LLP (included in Exhibit 5)......
23.2 Consent of Deloitte & Touche LLP(3).........................
99 Form of Securities Loan Agreement between the Selling
Stockholder and Smith Barney Inc.(3)........................
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report
on Form 10-K filed March 5, 1998.
(2) Previously filed.
(3) Filed herewith.
<PAGE> 1
EXHIBIT 1.1
DECS TRUST III
5,000,000 DECS* SM
(Representing Beneficial Interests in Contracts Relating to Shares of Class
B Common Stock, $.01 par value, of Herbalife International, Inc.)
Underwriting Agreement
New York, New York
March [ ], 1998
Salomon Smith Barney
Smith Barney Inc.
Prudential Securities Incorporated
As Representatives of the several Underwriters,
[c/o Smith Barney Inc.]
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
DECS Trust III, a statutory business trust organized under the
Delaware Business Trust Act, 12 Del.C. Section 3801 et seq. (the "Delaware
Act"), of the State of Delaware (such trust and the trustees thereof acting in
their capacities as such being referred to herein as the "Trust"), proposes to
issue and to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, an aggregate of 5,000,000 DECS representing shares of
beneficial interest in the Trust (the "Underwritten DECS"). In addition, the
Underwriters will have an option to purchase up to [ ] DECS (the "Option DECS"
and, together with the Underwritten DECS, the "DECS") to cover over-allotments,
if any. The Option DECS and the Underwritten DECS, together with the [ ] DECS of
the Trust subscribed for by Smith Barney Inc. ("Smith Barney") pursuant to the
Subscription Agreement, dated March 3, 1998, between Smith Barney and the Trust
(the "Subscription DECS"), are referred to herein as the "Securities." The
Securities are to be issued under an Amended and Restated Declaration of Trust,
dated as of March [ ], 1998 (the "Trust Agreement"), among the initial trustee
and initial sponsor of the Trust, trustees of the Trust (the "Trustees") and
Smith Barney, as sponsor.
The Trust has entered into forward purchase contracts (the
"Contracts") with the persons listed on Schedule II hereto (each a "Seller" and
collectively, the "Sellers"), the related persons listed on Schedule II hereto
under "Corporate Seller Control Person" (each, a "Corporate Seller Control
Person" and collectively, the "Corporate Seller Control Persons"), Mark Hughes
and the Mark Hughes Family Trust, solely controlled by Mark Hughes, pursuant to
which each Seller has agreed to sell, and the Trust has agreed to purchase, the
number of shares of Class B Common Stock, $.01 par value (the "Shares"), of
Herbalife International, Inc. (the "Company") specified therein on [ ]
[ ], 2001 (the "Exchange Date") (subject to the Sellers' right to deliver cash
with a value equivalent thereto, or other property, as provided in the
Contracts). Each Seller's obligations under his, her or its respective Contract
will be secured by a pledge of collateral under a collateral agreement (each a
"Collateral Agreement") among such Seller, the Trust and The Bank of New York
("BoNY"), as collateral agent (in such capacity, the "Collateral Agent").
- --------
* Plus an option to purchase from DECS Trust up to [ ] additional DECS to
cover over-allotments.
<PAGE> 2
persons listed on Schedule II hereto under "Corporate Seller Control Person"
(each, a "Corporate Seller Control Person" and collectively, the "Corporate
Seller Control Persons"), Mark Hughes and the Mark Hughes Family Trust, solely
controlled by Mark Hughes, pursuant to which each Seller has agreed to sell, and
the Trust has agreed to purchase, the number of shares of Class B Common Stock,
$.01 par value (the "Shares"), of Herbalife International, Inc. (the "Company")
specified therein on [ ] [ ], 2001 (the "Exchange Date") (subject to the
Sellers' right to deliver cash with a value equivalent thereto, or other
property, as provided in the Contracts). Each Seller's obligations under his,
her or its respective Contract will be secured by a pledge of collateral under a
collateral agreement (each a "Collateral Agreement") among such Seller, the
Trust and The Bank of New York ("BoNY"), as collateral agent (in such capacity,
the "Collateral Agent").
It is further understood by the parties hereto that the persons
listed on Schedule III hereto each a "Lender" and collectively, the "Lenders"
are concurrently entering into a securities loan agreement dated the date hereof
(the "Securities Loan Agreement") which provides that, subject to certain
restrictions and with the agreement of the Lenders, Smith Barney may from time
to time borrow, return and reborrow from the Lenders certain of the Shares for
the purpose of facilitating market-making activity in the DECS by Smith Barney.
In connection with the foregoing, the Company has filed with the
Commission a registration statement with respect to (i) 5,000,000 Shares in
respect of the Underwritten DECS, plus an additional [ ] Shares in respect of
the Option DECS and an additional [ ] Shares in respect of the Subscription
DECS, for delivery by the Sellers pursuant to the Securities and (ii) 1,000,000
Shares (the "Borrowed Shares") for borrowing and delivery pursuant to the
Securities Loan Agreement, which registration statement is referred to in
Section 2(a) of this Agreement.
To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. The use of the neuter in
this Agreement shall include the feminine and masculine wherever appropriate.
Certain terms used herein are defined in Section 23 hereof.
1. Representations and Warranties of the Trust. The Trust
represents and warrants to, and agrees with, each Underwriter as set forth below
in this Section 1.
(a) The Trust meets the requirements for use of Form N-2 under
the Act and has prepared and filed with the Commission (a) a notification on
Form N-8A (the "Notification") of registration of the Trust as an investment
company under the Investment Company Act and (b) a registration statement on
Form N-2 (file numbers 333-44807 and 811-08615), including a related preliminary
prospectus, for the registration of the offering and sale of the DECS under the
Act. The Trust may have filed one or more amendments thereto, including the
related preliminary prospectus, each of which has previously been furnished to
you. The Trust will next file with the Commission one of the following: either
(1) prior to the Trust Effective Date of such registration statement, a further
amendment to such registration statement (including the form of final
prospectus); or (2) after the Trust Effective Date of such registration
statement, a final prospectus in accordance with Rules 430A and 497(h). In the
case of clause (2), the Trust has included in such registration
2
<PAGE> 3
statement, as amended at the Trust Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to be
included in such registration statement and the Trust Prospectus. As filed, such
amendment and form of final prospectus, or such final prospectus, shall contain
all Rule 430A Information, together with all other such required information,
and, except to the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the Execution Time or, to the extent not completed at the Execution
Time, shall contain only such specific additional information and other changes
(beyond that contained in the latest Preliminary Trust Prospectus) as the Trust
has advised you, prior to the Execution Time, will be included or made therein.
(b) On the Trust Effective Date, the Trust Registration Statement
and the Notification did or will, and when the Trust Prospectus is first filed
(if required) in accordance with Rule 497(h) and on the Closing Date (as defined
herein) and on any date on which Option DECS are purchased, if such date is not
the Closing Date (a "Settlement Date"), the Trust Prospectus (and any
supplements thereto) will comply in all material respects with the applicable
requirements of the Act, the Exchange Act and the Investment Company Act, and
the respective rules thereunder; on the Trust Effective Date and at the
Execution Time, the Trust Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; and, on the Trust Effective Date, the Trust Prospectus, if not filed
pursuant to Rule 497(h), did not or will not, and on the date of any filing
pursuant to Rule 497(h) and on the Closing Date and any settlement date, the
Trust Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(c) No stop order suspending the effectiveness of the Trust
Registration Statement is in effect, no order preventing or suspending the use
of any Preliminary Trust Prospectus has been issued by the Commission, no notice
or order under Section 8(e) of the Investment Company Act has been issued, and
no proceedings for any such purpose are pending before or threatened by the
Commission.
(d) The Trust has been duly created, is validly existing as a
business trust under the Delaware Act, has the power and authority to own or
lease, as the case may be, and to operate its properties and conduct its
business as described in the Trust Prospectus and to enter into and perform its
obligations under this Agreement, the Trust Agreement and each of the
Fundamental Documents (as defined below) and is duly qualified to do business
and is in good standing under the laws of each jurisdiction in which it owns or
leases properties or conducts any business so as to require such qualification
other than where the failure to be so qualified would not have a material
adverse effect on the Trust or its assets. The Trust has no subsidiaries.
(e) The Trust is registered with the Commission as a
non-diversified, closed-end management investment company under the Investment
Company Act and no order of suspension or revocation of such registration has
been issued or proceedings therefor initiated or, to the knowledge of the Trust,
threatened by the Commission. No person is serving or acting as an officer or
trustee of the Trust except in accordance with the provisions of the Investment
Company Act.
(f) This Agreement has been duly authorized, executed and
delivered by the Trust.
(g) Each of the Contracts, the Collateral Agreements, the
Administration Agreement between BoNY and the Trust (the "Administration
Agreement"), the Custodian Agreement between BoNY and the Trust (the "Custodian
Agreement"), the Paying Agent Agreement between BoNY and the Trust (the "Paying
Agent Agreement") and the Fund Indemnity Agreement between Smith Barney and the
Trust (the "Fund Indemnity Agreement") (the Contracts, the Collateral
Agreements, the Administration Agreement, the Custodian Agreement, the Paying
Agent Agreement and the Fund Indemnity Agreement are referred to herein,
collectively, as the "Fundamental Agreements") has been duly authorized,
executed and delivered by the Trust and, assuming due authorization, execution
and delivery by the other parties thereto, is valid and binding agreement of
the Trust, enforceable against the Trust in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and by general equitable.
3
<PAGE> 4
(g) Each of the Contracts, the Collateral Agreements, the
Administration Agreement between BoNY and the Trust (the "Administration
Agreement"), the Custodian Agreement between BoNY and the Trust (the "Custodian
Agreement"), the Paying Agent Agreement between BoNY and the Trust (the "Paying
Agent Agreement") and the Fund Indemnity Agreement between Smith Barney and the
Trust (the "Fund Indemnity Agreement") (the Contracts, the Collateral
Agreements, the Administration Agreement, the Custodian Agreement, the Paying
Agent Agreement and the Fund Indemnity Agreement are referred to herein,
collectively, as the "Fundamental Agreements") has been duly authorized,
executed and delivered by the Trust and, assuming due authorization, execution
and delivery by the other parties thereto, is a valid and binding agreement of
the Trust, enforceable against the Trust in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and by general equitable
principles.
(h) The execution and delivery by the Trust of, and the
performance by the Trust of its obligations under, this Agreement and each
Fundamental Agreement (including the issue and sale by the Trust of the DECS as
contemplated by this Agreement) do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach or violation of, or default under, or give the holder of any indebtedness
of the Trust the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Trust
pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or other agreement or instrument to which the Trust is a
party or by which it may be bound, or to which any of the property or assets of
the Trust is subject, nor will such action result in any violation of the
provisions of the Trust Agreement or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Trust or any of its assets or properties; and no consent, approval,
authorization, order of, or qualification or filing with, any governmental body
or agency, self-regulatory organization or court or other tribunal, whether
foreign or domestic, is required for the execution and delivery by the Trust of
this Agreement or the Fundamental Agreements or the performance by the Trust of
its obligations hereunder and thereunder, except for the filing of a Certificate
of Trust and the filing of a Restated Certificate of Trust with the office of
the Secretary of State of the State of Delaware (which filings have been duly
made) and such as have been obtained and as may be required by the securities or
Blue Sky laws of the various states and foreign jurisdictions in connection with
the offer and sale of the DECS by the Underwriters.
(i) The DECS, the Trust Agreement and the Fundamental Agreements
conform in all material respects to the descriptions thereof contained in the
Trust Prospectus.
(j) The Trust Agreement and the Fundamental Agreements comply
with all applicable provisions of the Act, the Exchange Act and the Investment
Company Act, and all approvals of such documents required under the Investment
Company Act by the holders of the Securities and the Trustees have been obtained
and are in full force and effect.
(k) On the Closing Date, as defined below in Section 5, the
Fundamental Agreements will be in full force and effect and the Trust will not
be in default thereunder and, to the knowledge of the Trust, no event will have
occurred which with the passage of time or the giving of notice or both would
constitute a default thereunder. The Trust is not currently in breach of, or in
4
<PAGE> 5
default under, the Trust Agreement or any other written agreement or instrument
to which it or its property is bound or affected.
(l) All of the outstanding Securities have been duly authorized
and are validly issued, fully paid and nonassessable undivided beneficial
interests in the assets of the Trust, and the form of certificate used to
evidence the Securities is in due and proper form and complies with all
provisions of applicable law.
(m) The DECS have been duly authorized by the Trust for issuance
to the Underwriters pursuant to this Agreement and, when issued and delivered by
the Trust in accordance with the terms of this Agreement and the Trust Agreement
against payment of the purchase price therefor as provided herein, will be
validly issued, fully paid and nonassessable undivided beneficial interests in
the assets of the Trust, and the issuance of such DECS will not be subject to
any preemptive or similar rights. No person has rights to the registration of
any securities because of the filing of the Trust Registration Statement, and no
holder of the Securities will be subject to personal liability by reason of
being such a holder.
(n) The DECS have been approved for listing on the National
Market System of the National Association of Securities Dealers Automated
Quotation System (the "Nasdaq National Market System"), subject to official
notice of issuance. The Trust's Registration Statement on Form 8-A under the
Exchange Act is effective.
(o) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, of the Trust, or in the investment objectives,
investment policies, liabilities, business, prospects or operations of the Trust
from that set forth in the Trust Prospectus (exclusive of any supplements
thereto subsequent to the date of this Agreement) and there have been no
transactions entered into by the Trust which are material to the Trust other
than those in the ordinary course of its business or as described in the Trust
Prospectus (exclusive of any supplements thereto subsequent to the date of this
Agreement).
(p) There are no legal or governmental proceedings pending or, to
the knowledge of the Trust, threatened against or affecting the Trust that are
required to be described in the Trust Registration Statement or the Trust
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Trust Registration
Statement or the Trust Prospectus or to be filed as exhibits to the Trust
Registration Statement that are not described or files as required.
(q) The Trust has all necessary consents, authorizations,
approvals, orders (including exemptive orders), certificates and permits of and
from, and has made all declarations and filings with, all governmental
authorities, self-regulatory organizations and courts and other tribunals,
whether foreign or domestic, to own and use its assets and to conduct its
business in the manner described in the Trust Prospectus, except to the extent
that the failure to obtain or file the foregoing would not have a material
adverse effect on the Trust and except such as may be required by the securities
or Blue Sky laws of the various states in connection with the offer and sale of
the DECS.
5
<PAGE> 6
(r) There are no material restrictions, limitations or
regulations with respect to the ability of the Trust to invest its assets as
described in the Trust Prospectus, other than as described therein.
(s) The Trust has good title to all properties owned by it, in
each case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Trust Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Trust.
(t) There are no legal or governmental proceedings pending to
which the Trust is a party or of which any property of the Trust is the subject
which, if determined adversely to the Trust, would individually or in the
aggregate have a material adverse effect on the current or future financial
position or results of operations of the Trust; and, to the best of the Trust's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(u) The statement of assets, liabilities and capital included in
the Trust Registration Statement and the Trust Prospectus, together with the
notes thereto, present fairly the financial position of the Trust at the date
indicated, and such financial statement has been prepared in conformity with
generally accepted accounting principles.
(v) The accountants who certified the financial statements and
supporting schedules included in the Trust Registration Statement are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder.
(w) The Trust has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the DECS or the Shares, and has not effected
any sales of the Company's common stock which, if effected by the Company, would
be required to be disclosed in response to Item 701 of Regulation S-K.
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Underwriter as set forth below
in this Section 2.
(a) The Company meets the requirements for use of Form S-3 under
the Act and has prepared and filed with the Commission a registration statement
(file number 333-46201) on Form S-3, including a related preliminary prospectus,
for the registration under the Act of the offering and sale of the Shares in
connection with the offering and sale of the DECS and an alternate form of
related preliminary prospectus for registration of the use of the Borrowed
Shares in connection with the Securities Loan Agreement. The Company may have
filed one or more amendments thereto, including the related preliminary
prospectuses, each of which has previously been furnished to you. The Company
will next file with the Commission one of the following: either (1) prior to the
Company Effective Date of such registration statement, a further amendment to
such registration statement, (including the final forms of such prospectuses),
(2) after the Company Effective Date of such registration statement, such final
prospectuses in accordance with
6
<PAGE> 7
Rules 430A and 424(b), or (3) a final prospectus in accordance with Rules 415
and 424(b). In the case of clause (2), the Company has included in such
registration statement, as amended at the Company Effective Date, all
information (other than Rule 430A Information) required by the Act and the rules
thereunder to be included in such registration statement and the Company
Prospectus with respect to the Shares and the offering thereof and the Borrowed
Shares and the use thereof. As filed, such amendment and form of final
prospectuses, or such final prospectuses, shall contain all Rule 430A
Information, together with all other such required information with respect to
the Shares and the offering thereof and the Borrowed Shares and the use thereof
and, except to the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the Execution Time or, to the extent not completed at the Execution
Time, shall contain only such specific additional information and other changes
(beyond that contained in the latest Preliminary Company Prospectus) as the
Company has advised you, prior to the Execution Time, will be included or made
therein. If the Company Registration Statement contains the undertaking
specified by Regulation S-K Item 512(a), the Company Registration Statement, at
the Execution Time, meets the requirements set forth in Rule 415(a)(1)(x).
(b) On the Company Effective Date, the Company Registration
Statement did or will, and when the Company Prospectus is first filed (if
required) in accordance with Rule 424(b) and on the Closing Date (as defined
herein) and on any Settlement Date, and on each day when borrowings are made
under the Securities Loan Agreement, the Company Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable requirements
of the Act and the Exchange Act and the respective rules thereunder; on the
Company Effective Date and at the Execution Time, the Company Registration
Statement did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the Company
Effective Date, the Company Prospectus, if not filed pursuant to Rule 424(b),
did not or will not, and on the date of any filing pursuant to Rule 424(b) and
on the Closing Date and any Settlement Date, and on each day when borrowings are
made under the Securities Loan Agreement, the Company Prospectus (together with
any supplement thereto) will not, include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to the information contained in or omitted from the Company
Registration Statement, or the Company Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished herein or in writing
to the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion in the Company Registration Statement or the Company
Prospectus (or any supplement thereto).
(c) No stop order suspending the effectiveness of the Company
Registration Statement is in effect, no order preventing or suspending the use
of any Preliminary Company Prospectus has been issued by the Commission, and no
proceedings for any such purpose are pending before or threatened by the
Commission. Each document incorporated by reference in the Company Registration
Statement or the Company Prospectus, when they were filed or are filed with the
Commission, conformed or will conform in all material respects to the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder, and none of such documents contained or will contain an untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading.
7
<PAGE> 8
(d) The business of the Company and its subsidiaries, including
without limitation the recruitment of distributors and the distribution and
marketing of the Company's products, (a) is conducted in accordance with the
Company's multi-level marketing and distribution plan as described in the
Company Prospectus, (b) does not require the consent, approval, authorization,
filing, registration or qualification or order of or with any court or
governmental agency or body, except such as have been obtained or effected, and
(c) does not violate any statute, law, rule or regulation of any country, or any
political subdivision thereof, in which the Company or any of its subsidiaries
operates, and does not breach or violate any of the terms and provisions of, or
constitute a default under, any judgment, decree or order, applicable to the
Company or any of its subsidiaries, of any court, regulatory body,
administrative agency, governmental body, arbitrator or other governmental
authority having jurisdiction over the Company or its subsidiaries or any of its
or their property, except in each of (b) and (c) for any consent, approval,
authorization, filing, registration, qualification or order the failure of which
to obtain or effect, or any violation, breach or default which, would not have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business.
(e) The Company is not an "investment company" as defined in the
Investment Company Act.
(f) Neither the Company nor any of its subsidiaries has taken and
none of such entities will take, directly or indirectly, any action designed to
or which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
DECS or the Shares, it being understood that this sentence shall not apply to
any share repurchase program conducted by the Company in compliance with the
Exchange Act and other applicable law.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
(and not of such officer in his individual capacity) as to matters covered
thereby, to each Underwriter.
3. Representations and Warranties of the Sellers, the Corporate
Seller Control Persons, the Mark Hughes Family Trust and Mark Hughes. Each of
the Sellers, the Corporate Seller Control Persons, the Mark Hughes Family Trust
and Mark Hughes (each, a "Mark Hughes Entity" and collectively, the "Mark Hughes
Entities") severally and jointly, represents and warrants to, and agrees with,
each Underwriter, the Company and the Trust that:
(a) The Mark Hughes Family Trust has been duly created, is
validly existing and has the power and authority to own its property.
(b) Each of the Sellers and the Corporate Seller Control Persons
has been duly organized, is validly existing as a limited liability company in
good standing under the laws of the State of Delaware, with full power and
authority to own its property, and, in the case of each Seller, does not conduct
any business in any jurisdiction, own any material property other than Shares or
have any subsidiaries.
8
<PAGE> 9
(c) Each of the Mark Hughes Entities has full right, power and
authority to enter into and perform its obligations under this Agreement, each
Contract and Collateral Agreement to which such Mark Hughes Entity is a party
and the letter agreement among each of the Mark Hughes Entities and Smith Barney
relating to expenses of the Trust (the "Reimbursement Agreement").
(d) This Agreement has been duly authorized by each of the Mark
Hughes Entities (other than Mark Hughes) and duly executed and delivered by each
of the Mark Hughes Entities. Each Contract and Collateral Agreement to which
each Mark Hughes Entity is a party and the Reimbursement Agreement have been
duly authorized by such Mark Hughes Entity (other than Mark Hughes), and
executed and delivered by such Mark Hughes Entity and, assuming due
authorization, execution and delivery by the other parties thereto, is a valid
and binding agreement of such Mark Hughes Entity, enforceable against such Mark
Hughes Entity in accordance with its terms.
(e) The execution and delivery by each of the Mark Hughes
Entities of this Agreement, each Contract and Collateral Agreement to which such
Mark Hughes Entity is a party and the Reimbursement Agreement, the performance
by such Mark Hughes Entity of its obligations hereunder and thereunder and the
consummation of the transactions herein and therein contemplated do not and will
not, whether with or without the giving of notice or passage of time or both,
conflict with, result in a breach or violation of or imposition of any lien
(other than pursuant to each Collateral Agreement to which such Mark Hughes
Entity is a party), charge or encumbrance upon any property or assets of such
Mark Hughes Entity or its subsidiaries pursuant to (i) the Organizational
Documents of such Mark Hughes Entity or its subsidiaries, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which such Mark Hughes Entity or its subsidiaries is a party or bound or to
which its or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to such Mark Hughes Entity or
its subsidiaries of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over such
Mark Hughes Entity or its subsidiaries or any of its or their properties.
Amounts received by each of the Mark Hughes Entities, if any, at the Closing
Date and, if any Option DECS are purchased, at the time of delivery thereof
pursuant to Section 4(b), pursuant to such Mark Hughes Entity's Contract will
not be used by such Mark Hughes Entity for the purpose, whether immediate,
incidental or ultimate, of buying or carrying a margin stock, as such terms are
defined in Regulation G promulgated by the Board of Governors of the Federal
Reserve System.
(f) Each of the Sellers, the Corporate Seller Control Persons and
the Mark Hughes Family Trust is not and, after giving effect to the transactions
contemplated in each Contract and Collateral Agreement and the offering and sale
of the DECS contemplated by this Agreement, will not be an "investment company"
or an entity "controlled" by an "investment company" as such terms are defined
in the Investment Company Act.
(g) Each of the Sellers is the sole registered owner of and has,
and on the Closing Date (and, if any Option DECS are purchased, at the time of
delivery thereof pursuant to Section 4(b)) will have, good and valid title to
the Shares to be pledged and assigned by it under its Collateral Agreement, free
and clear of any security interests, claims, liens, equities and other
encumbrances, except for those created pursuant to its Collateral Agreement; and
such Seller has the
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<PAGE> 10
full right, power and authority, and all authorization and
approval required by law to pledge and assign the Shares to be pledged and
assigned by such Seller pursuant to its Collateral Agreement.
(h) Title to any Shares to be delivered by a Seller pursuant to
such Seller's Contract on the Exchange Date, assuming payment of the
consideration due pursuant to such Seller's Contract on the Closing Date, will
pass to the Trust free and clear of any security interests, claims, liens,
equities and other encumbrances. The sale, transfer and delivery of any Shares
to be delivered by a Seller pursuant to such Seller's Contract is not, and at
the time of delivery of such Shares will not be, subject to any right of first
refusal or similar rights of any person pursuant to any contract to which such
Seller or any shareholder of such Seller is a party or by which any of them is
bound.
(i) Each of the Mark Hughes Entities hereby repeats and confirms
as if set forth in full herein each of the representations, warranties,
guarantees and agreements made by such Mark Hughes Entity in each Contract and
Collateral Agreement to which such Mark Hughes Entity is a party and agrees that
the representations, warranties, guarantees and agreements therein and herein
are made hereby for the benefit of, and may be relied upon by, (i) the
Underwriters and Cleary, Gottlieb, Steen & Hamilton, counsel to the Underwriters
and (ii) the Company and Irell & Manella LLP, counsel to the Company and to the
Mark Hughes Entities.
(j) None of the Mark Hughes Entities has taken or will take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result, under the Exchange Act
or otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares or the DECS, it being
understood that this sentence shall not apply to any share repurchase
program conducted by the Company in compliance with the Exchange Act and all
other applicable law.
(k) Each of the Mark Hughes Entities is familiar with the Company
Registration Statement and the Company Prospectus and verifies that the
information set forth therein respecting him or it is true and complete.
(l) No consent, approval, license, authorization, order or
validation of, and no filing, recording, or registration with, any court or
governmental authority, agency or body is required for the compliance by each
Mark Hughes Entity with all of the provisions of this Agreement, each Contract
and Collateral Agreement to which such Mark Hughes Entity is a party and the
Reimbursement Agreement, except such as have been obtained under the Act and
such as may be required under the blue sky laws in connection with the purchase
and distribution of the DECS by the Underwriters and the distribution of the
Shares pursuant to the terms of the DECS in the manner contemplated in this
Agreement and in the Trust Prospectus and the Company Prospectus.
(m) Certificates in negotiable form for each Seller's Shares have
been placed in custody, for delivery pursuant to the terms of such Seller's
Contract and Collateral Agreement, under a Custody Agreement and Power of
Attorney duly authorized, executed and delivered by such Seller, in the form
heretofore furnished to you (the "Custody Agreement") with the Bank of New York,
as Custodian (the "Custodian"); the Shares represented by the certificates so
held in custody for each Seller are subject to the interests of the Trust
pursuant to such Seller's Contract and Collateral Agreement; the arrangements
for custody and delivery of such certificates, made by such Seller
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<PAGE> 11
pursuant to such Seller's Contract and Collateral Agreement and the Custody
Agreement, are not subject to termination by any acts of such Seller, or by
operation of law, whether by the death or incapacity of such Seller or the
occurrence of any other event; and if any such death, incapacity or any other
such event shall occur before the delivery of such Shares pursuant to such
Seller's Contract and Collateral Agreement, certificates for the Shares will be
delivered by the Custodian in accordance with the terms and conditions of such
Seller's Contract and Collateral Agreement and the Custody Agreement as if such
death, incapacity or other event had not occurred, regardless of whether or not
the Custodian shall have received notice of such death, incapacity or other
event.
Any certificate signed by any Mark Hughes Entity or any officer
thereof, as the case may be, and delivered to the Representatives or counsel for
the Underwriters in connection with the offering of the Securities shall be
deemed a representation and warranty by such Mark Hughes Entity (and not, except
in the case of certificates of Mark Hughes, of such officer in his individual
capacity), as to matters covered thereby, to each Underwriter.
4. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Trust agrees to sell to
each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Trust, at a purchase price of $[ ] per DECS, the amount of the
Underwritten DECS set forth opposite such Underwriter's name in Schedule I
hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Trust hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up to
[ ] Option DECS at the same purchase price per DECS as the Underwriters shall
pay for the Underwritten DECS. The option may be exercised only to cover
over-allotments in the sale of the Underwritten DECS by the Underwriters. The
option may be exercised in whole or in part at any time (but not more than once)
on or before the 30th day after the date of the Trust Prospectus upon written or
facsimile notice by the Representatives to the Trust setting forth the number of
shares of the Option DECS as to which the several Underwriters are exercising
the option and the Settlement Date. Delivery of certificates for the Option DECS
by the Trust, and payment therefor to the Trust, shall be made as provided in
Section 5 hereof. The number of shares of the Option DECS to be purchased by
each Underwriter shall be the same percentage of the total number of Option DECS
to be purchased by the several Underwriters as such Underwriter is purchasing of
the Underwritten DECS, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional DECS.
(c) As compensation to the Underwriters for their commitment
hereunder, and in view of the fact that the proceeds of the sale of the DECS
will be used by the Trust as specified in the Contracts, the Mark Hughes
Entities agree, severally and jointly, to pay to Smith Barney, at the time of
each delivery of DECS pursuant to Section 5, an amount equal to $[ ] per DECS
being delivered at such time, plus $[ ] per DECS for each Subscription DECS
owned by Smith Barney after giving effect to the subdivision of the Subscription
DECS provided for in the Subscription Agreement.
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<PAGE> 12
5. Delivery and Payment. Delivery of and payment for the
Underwritten DECS and the Option DECS (if the option provided for in Section
4(b) hereof shall have been exercised on or before the first Business Day prior
to the Closing Date) shall be made at 10:00 A.M., New York City time, on March
[ ], 1998, or at such time on such later date not later than five Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement among the Representatives, the Trust and the
Mark Hughes or as provided in Section 13 hereof (such date and time of delivery
and payment for the DECS being herein called the "Closing Date"). Delivery of
the DECS shall be made to the Representatives for the respective accounts of the
several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the Trust
by wire transfer payable in immediately available same-day funds to an account
specified by the Trust in writing at least two Business Days in advance of the
Closing Date. Delivery of the DECS shall be made through the facilities of the
Depository Trust Company unless the Representatives shall otherwise instruct.
The Trust agrees to have the DECS available for inspection and
checking by the Representatives in New York, New York, not later than 1:00 P.M.
on the Business Day prior to the Closing Date.
If the option provided for in Section 4(b) hereof is exercised
after the first Business Day prior to the Closing Date, the Trust will deliver
the Option DECS (at the expense of the Trust) to the Representatives on the date
specified by the Representatives (which shall be within three Business Days
after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the Trust
by wire transfer payable in immediately available same-day funds to an account
specified by the Trust in writing at least two Business Days in advance of such
Settlement Date. If settlement for the Option DECS occurs after the Closing
Date, the Trust, the Company and the Sellers will deliver to the Representatives
on the Settlement Date for the Option DECS, and the obligation of the
Underwriters to purchase the Option DECS shall be conditioned upon receipt of,
supplemental opinions, certificates and letters confirming as of such date the
opinions, certificates and letters delivered on the Closing Date pursuant to
Section 10 hereof.
6. Offering by the Underwriters. It is understood that the
several Underwriters propose to offer the DECS for sale to the public as set
forth in the Trust Prospectus.
7. Agreements of the Trust. The Trust agrees with the several
Underwriters that:
(a) The Trust will use its best efforts to cause the Trust
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the DECS, the Trust will not file any amendment of the Trust
Registration Statement or supplement to the Trust Prospectus or any Rule
462(b) Trust Registration Statement unless the Trust has furnished you a
copy for your review prior to filing and will not file any such proposed
amendment or supplement to which you object. Subject to the foregoing
sentence, if the Trust Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Trust Prospectus is
otherwise required under Rule 424(b), the Trust will cause the Trust
Prospectus, properly completed,
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<PAGE> 13
and any supplement thereto to be filed with the Commission pursuant to
the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Representatives
of such timely filing. The Trust will promptly advise the
Representatives (1) when the Trust Registration Statement, if not
effective at the Execution Time, shall have become effective, (2) when
the Trust Prospectus, and any supplement thereto, shall have been filed
(if required) with the Commission pursuant to Rule 424(b) or when any
Rule 462(b) Trust Registration Statement shall have been filed with the
Commission, (3) when, prior to termination of the offering of the DECS,
any amendment to the Trust Registration Statement or any Rule 462(b)
Trust Registration Statement, shall have been filed or become effective,
(4) of any request by the Commission or its staff for any amendment of
the Trust Registration Statement, or any Rule 462(b) Trust Registration
Statement, or for any supplement to the Trust Prospectus or for any
additional information, (5) of the issuance by the Commission of any
stop order suspending the effectiveness of the Trust Registration
Statement or the institution or threatening of any proceeding for that
purpose and (6) of the receipt by the Trust of any notification with
respect to the suspension of the qualification of the DECS for sale in
any jurisdiction or the institution or threatening of any proceeding for
such purpose. The Trust will use its best efforts to prevent the
issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the DECS is
required to be delivered under the Act, any event occurs as a result of
which the Trust Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Trust Registration Statement or supplement the
Trust Prospectus to comply with the Act or the Exchange Act or the
respective rules thereunder, the Trust promptly will (1) notify the
Representatives of any such event, (2) prepare and file with the
Commission, subject to the second sentence of paragraph (a) of this
Section 7, an amendment or supplement which will correct such statement
or omission or effect such compliance and (3) supply any supplemental
Trust Prospectus to you in such quantities as you may reasonably
request.
(c) The Trust will furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Trust
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Trust Registration Statement (without exhibits
thereto). The Trust will furnish to the Representatives and counsel for
the Underwriters, without charge, copies of the Trust Registration
Statement (including exhibits thereto). The Trust will furnish to the
Underwriters not later than (i) 6:00 P.M., New York City time, on the
date of determination of the public offering price of the DECS, if such
determination occurred at or prior to 12:00 noon, New York City time, on
such date or (ii) 6:00 P.M., New York City time, on the Business Day
following the date on which the public offering price was determined, if
such determination occurred after 12:00 noon, New York City time, on
such date, as many copies of each Preliminary Trust Prospectus, the
Trust Prospectus and any supplement thereto as the Representatives may
reasonably request; further, so long as delivery of a prospectus by an
Underwriter or any dealer may be required by the Act, as many copies of
each Preliminary Trust Prospectus and the Trust Prospectus and any
supplement thereto as the Representatives may reasonably request.
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<PAGE> 14
(d) The Trust will arrange, if necessary, for the qualification
of the DECS and the Shares for sale under the laws of such jurisdictions
as the Representatives may designate, will maintain such qualifications
in effect so long as required for the distribution of the DECS and will
pay any fee of the National Association of Securities Dealers, Inc. (the
"NASD"), in connection with its review, if any, of the Trust
Registration Statement and the offering of the DECS.
8. Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the Company
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the DECS, the Company will not file any amendment of the
Company Registration Statement or supplement to the Company Prospectus
or any Rule 462(b) Company Registration Statement unless the Company has
furnished to you a copy for your review prior to filing and will not
file any such proposed amendment or supplement to which you reasonably
object. Subject to the foregoing sentence, if the Company Registration
Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Company Prospectus is otherwise required under Rule
424(b), the Company will cause the Company Prospectus, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly advise
the Representatives (1) when the Company Registration Statement, if not
effective at the Execution Time, shall have become effective, (2) when
the Company Prospectus, and any supplement thereto, shall have been
filed (if required) with the Commission pursuant to Rule 424(b) or when
any Rule 462(b) Company Registration Statement shall have been filed
with the Commission, (3) when, prior to termination of the offering of
the DECS, any amendment to the Company Registration Statement shall have
been filed or become effective, (4) of any request by the Commission or
its staff for any amendment of the Company Registration Statement, or
any Rule 462(b) Company Registration Statement, or for any supplement to
the Company Prospectus or for any additional information, (5) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Company Registration Statement or the institution
or threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Act (including in respect of the
offering and sale of the DECS or the use of the Borrowed Shares), any
event occurs as a result of which the Company Prospectus as then
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
in the light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend the Company
Registration Statement or supplement the Company Prospectus to comply
with the Act or the Exchange Act or the respective rules thereunder,
the Company promptly will (1) notify the Representatives of such event,
(2) prepare and file with the Commission, subject to the second
sentence of paragraph (a) of this Section 8, an amendment or supplement
which will correct such statement or omission or effect such compliance
and (3) supply any supplemented Company Prospectus to you in such
quantities as you may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
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<PAGE> 15
Exchange Act or the respective rules thereunder, the Company promptly
will (1) notify the Representatives of such event, (2) prepare and file
with the Commission, subject to the second sentence of paragraph (a) of
this Section 8, an amendment or supplement which will correct such
statement or omission or effect such compliance and (3) supply any
supplemented Company Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under
the Act.
(d) The Company will furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the Company
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Company Registration Statement (without
exhibits thereto). The Company will furnish to the Underwriters not
later than (A) 6:00 P.M., New York City time, on the date of
determination of the public offering price of the DECS, if such
determination occurred at or prior to 12:00 noon, New York City time, on
such date or (B) 6:00 P.M., New York City time, on the Business Day
following the date on which the public offering price of the DECS was
determined, if such determination occurred after 12:00 noon, New York
City time, on such date, as many copies of each Preliminary Company
Prospectus, the Company Prospectus and any supplement thereto as the
Representatives may reasonably request; further, so long as delivery of
a prospectus by any Underwriter or any dealer may be required by the Act
(including in respect of the offering and sale of the DECS or the
borrowing of the Borrowed Shares), as many copies of each Preliminary
Company Prospectus and the Company Prospectus and any supplement thereto
as the Representatives may reasonably request. The Company will pay the
expenses of printing or other production of the Company Registration
Statement, each Preliminary Company Prospectus and the Company
Prospectus.
(e) The Company will cooperate with the Trust for purposes of the
qualification of the DECS and the Shares for sale under the laws of such
jurisdictions as the Representatives may designate, will maintain such
qualifications in effect so long as required for the distribution of the
DECS, the Shares or the use of the Borrowed Shares and will pay any fee
of the NASD in connection with its review, if any, of the Company
Registration Statement and the offering of the Shares in connection with
the offering of the DECS or the use of the Borrowed Shares; provided
that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take
any action that would subject it to (A) taxes or (B) service of process
in suits, in each case, other than those arising out of the offering or
sale of the DECS, the offering and sale of the Shares in connection with
the offering of the DECS or the use of the Borrowed Shares, in any
jurisdiction where it is not now so subject.
(f) The Company will not, without the prior written consent of
Smith Barney, during the period of 90 days following the Execution Time,
(i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, or announce the offering of any shares of any
class of common stock of the Company or any
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<PAGE> 16
securities convertible into or exercisable or exchangeable for shares of
any class of common stock of the Company (whether such shares or any
such securities are now owned or hereafter acquired) or (ii) enter into
any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of any class of the
common stock of the Company, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of any class of
common stock of the Company or such other securities, in cash or
otherwise; provided, however, that the Company may issue, or grant
options for, any class of common stock of the Company pursuant to any
stock plan for employees or directors, or any employee benefit plan, of
the Company in effect at the Execution Time, or pursuant to any stock
options outstanding at the Execution Time.
(g) The Company will furnish the Trust in sufficient quantities
for transmission to holders of the DECS the Company's annual report to
shareholders and reports on Forms 10-K and 10-Q as soon as practicable
after such reports are required to be filed with the Commission.
(h) The Company will take such actions as may be reasonably
necessary to comply with the rules and regulations of the Nasdaq
National Market System in respect of the offering of the Shares
contemplated hereby.
(i) The Company will not become an "investment company" as
defined in the Investment Company Act.
(j) Neither the Company nor any of its subsidiaries has taken and
none of such entities will take, any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in destabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the DECS or the Shares, it being understood that this
sentence shall not apply to any share repurchase program conducted by
the Company in compliance with the Exchange Act and all other applicable
law.
(k) The Company will, promptly following each time the Company
Registration Statement or the Company Prospectus is amended or
supplemented, notify Smith Barney of such amendment or supplement. The
Company will, promptly following (A) filing by the Company of any Annual
Report on Form 10-K or Quarterly Report on Form 10-Q under the Exchange
Act (or any successor forms) and (B) receipt of a written request by
Smith Barney (the date and time as of which any such filing is made or
request is received is referred to herein as a "Bringdown Date"),
deliver or cause to be delivered promptly to Smith Barney a certificate
of the Company signed by the chief executive officer and the principal
financial or accounting officer of the Company, dated the Bringdown
Date, in form satisfactory to Smith Barney, of the same tenor as the
certificate referred to in Section 10(m) but modified to relate to the
Bringdown Date in lieu of the Closing Date, to the last day of the
fiscal quarter for which financial statements of the Company were last
filed with the Commission and to the Company Registration Statement and
the Company Prospectus as amended and supplemented to the Bringdown
Date.
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<PAGE> 17
(l) The Company will, promptly following each Bringdown Date,
furnish or cause to be furnished promptly to Smith Barney written
opinions of counsel for the Company satisfactory to Smith Barney, of the
same tenor as the opinions referred to in Sections 10(c) through (j) but
modified to relate to the Company Registration Statement and the Company
Prospectus as amended and supplemented to the Bringdown Date or, in lieu
of such opinions, counsel last furnishing such opinions to Smith Barney
may furnish Smith Barney with a letter to the effect that it may rely on
such last opinions to the same extent as though they were dated the date
of such letter authorizing reliance (except that statements in such last
opinion will be deemed to relate to the Company Registration Statement
and the Company Prospectus as amended and supplemented to the Bringdown
Date).
(m) The Company will, promptly following each Bringdown Date
which occurs on or following the date of a filing that results in the
inclusion or incorporation in the Company Registration Statement or the
Company Prospectus of amended or supplemental financial information that
has not previously been addressed by a letter of the type described
below, cause its independent public accountants promptly to furnish to
Smith Barney a letter, dated the Bringdown Date, in form satisfactory to
Smith Barney, of the same tenor as the letter referred to in Section
10(o) with such changes as may be necessary to reflect such amended or
supplemental financial information included or incorporated by reference
in the Company Registration Statement and the Company Prospectus, as
amended or supplemented to the Bringdown Date; provided, however, that
if the Company Registration Statement or the Company Prospectus is
amended or supplemented solely to include or incorporate by reference
financial information as of and for a fiscal quarter, such independent
public accountants may limit the scope of such letter, which shall be
satisfactory in form to Smith Barney, to the unaudited financial
statements, the related "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in such
amendment or supplement, unless, in the judgment of Smith Barney, such
letter should cover other information or changes in specified financial
statement line items.
9. Agreements of the Mark Hughes Entities. Each of the Mark
Hughes Entities agrees with each of the Underwriters that:
(a) Each Mark Hughes Entity will not, without the prior written
consent of Smith Barney, during the period of 90 days following the
Execution Time, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, or announce the offering of any
shares of any class of common stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of any class
of common stock of the Company (whether such shares or any such
securities are now owned or hereafter acquired) or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of any class of the
common stock of the Company, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of any class of
common stock of the Company or such other securities, in cash or
otherwise; provided, however, that the Mark Hughes Entities may engage
in any of the transactions described in clause (i) or (ii) above in
connection with (a) the offering by the Trust of the DECS or any
delivery of Shares pursuant to the terms of the DECS, (b) the loaning of
Shares pursuant to the Securities Loan
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<PAGE> 18
Agreement, or (c) sales by the Herbalife Family Foundation, a charitable
trust of which Mark Hughes is a director but with respect to which Mark
Hughes has no pecuniary interest.
(b) No Mark Hughes Entity will take any action designed to or
which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the DECS or the Shares, it being understood that
this sentence shall not apply to any share repurchase program conducted
by the Company in compliance with the Exchange Act and all other
applicable law.
(c) Each Mark Hughes Entity will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as
delivery of a prospectus relating to the Shares (including with respect
to the offering and sale of the DECS or the use of Borrowed Shares) by
an underwriter or dealer may be required under the Act, of any change in
the information in the Company Registration Statement or the Company
Prospectus relating to such Mark Hughes Entity.
10. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten DECS and the Option
DECS, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Trust, the Company, the
Sellers, the Corporate Seller Control Persons, the Mark Hughes Family Trust and
Mark Hughes contained herein as of the Execution Time, the Closing Date and any
Settlement Date pursuant to Section 4(b) hereof, to the accuracy of the
statements of the Trust, the Company, the Sellers, the Corporate Seller Control
Persons, the Mark Hughes Family Trust and Mark Hughes made in any certificates
pursuant to the provisions hereof, to the performance by each of the Trust, the
Company, the Sellers, the Corporate Seller Control Persons, the Mark Hughes
Family Trust and Mark Hughes of their respective obligations hereunder and to
the following additional conditions:
(a) If the Trust Registration Statement or the Company
Registration Statement has not become effective prior to the Execution
Time, unless the Representatives agree in writing to a later time, such
Trust Registration Statement or Company Registration Statement will
become effective not later than (i) 6:00 P.M. New York City time on the
date of determination of the public offering price of the DECS, if such
determination occurred at or prior to 3:00 P.M. New York City time on
such date or (ii) 9:30 A.M. New York City time on the Business Day
following the day on which the public offering price of the DECS was
determined, if such determination occurred after 3:00 P.M. New York City
time on such date; if filing of the Trust Prospectus or the Company
Prospectus, or any supplement thereto, is required pursuant to Rule
497(h) or Rule 424(b), such Trust Prospectus or Company Prospectus, and
any such supplement, will be filed in the manner and within the time
period required by such Rule; and no stop order suspending the
effectiveness of the Trust Registration Statement or the Company
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or threatened.
(b) The Representatives shall have received the opinion of
Richards, Layton & Finger, special Delaware counsel for the Trust, dated
the Closing Date and addressed to the Representatives, with respect to
such matters as the Representatives may reasonably request.
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<PAGE> 19
(c) The Company shall instruct Irell & Manella LLP, counsel for
the Company, to furnish, and such counsel shall have furnished, an
opinion to the Representatives dated the Closing Date and addressed to
the Representatives, to the effect that:
(i) each of the Company and Herbalife International of
America, Inc. (the "Subsidiary") has been duly incorporated and
is validly existing as a corporation in good standing under the
laws of the jurisdiction in which it is chartered or organized,
with full corporate power and authority to own or lease, as the
case may be, and to operate its properties and conduct its
business as described in the Company Prospectus, and is duly
qualified to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires such
qualification wherein it owns or leases material properties or
conducts material business and where the failure to be so
qualified would, individually or in the aggregate, have a
material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Company Prospectus;
notwithstanding the foregoing, the Company is duly qualified to
do business as a foreign corporation and is in good standing
under the laws of California;
(ii) all the outstanding shares of capital stock of the
Subsidiary have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise set
forth in the Company Prospectus, all outstanding shares of
capital stock of the Subsidiary are directly owned by the Company
free and clear of any perfected security interest and, to the
knowledge of such counsel, after due inquiry, any other security
interest, claim, lien or encumbrance;
(iii) the Company's authorized equity capitalization is as
set forth in the Company Prospectus; the capital stock of the
Company conforms to the description thereof contained in the
Company Prospectus; all outstanding Shares have been duly and
validly authorized and issued and are fully paid and
nonassessable; the Shares are duly approved for quotation through
the Nasdaq National Market System; the certificates for the
Shares are in valid and sufficient form; and the holders of
outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the
Shares under the Company's Amended and Restated Articles of
Incorporation, Restated Bylaws or applicable law, or, to the
knowledge of such counsel, after due inquiry, any indenture,
agreement, instrument or order by which the Company is subject;
(iv) to the knowledge of such counsel, after due inquiry,
there is no pending or threatened action, suit or proceeding by
or before any court or governmental agency, authority or body or
any arbitrator involving the Company or any of its subsidiaries
or its or their property of a character required to be disclosed
in the Company Registration Statement which is not adequately
disclosed in the Company Prospectus, and there is no franchise,
contract or other document of a character required to be
described in the Company Registration Statement or Company
Prospectus, or to be filed as an exhibit thereto, which is not
described or
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<PAGE> 20
filed as required; and the statements in the Company Prospectus
under the heading "Description of Capital Stock" fairly summarize
the matters therein described insofar as such statements relate
to laws, regulations, judgments, decrees or orders of the United
States or the State of California;
(v) the Company Registration Statement has become
effective under the Act; any required filing of the Company
Prospectus, and any supplements thereto, pursuant to Rule 424(b)
has been made in the manner and within the time period required
by Rule 424(b); to the knowledge of such counsel, after due
inquiry, no stop order suspending the effectiveness of the
Company Registration Statement has been issued, no proceedings
for that purpose have been instituted or threatened and the
Company Registration Statement and the Company Prospectus (other
than the financial statements and other financial and statistical
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules
thereunder; and such counsel has no reason to believe that on the
Company Effective Date or at the Execution Time the Company
Registration Statement contains or contained any untrue statement
of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Company Prospectus as of its
date and on the Closing Date includes any untrue statement of a
material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (in each
case, other than the financial statements and other financial and
statistical statements and other financial information contained
therein, as to which such counsel need express no opinion) (which
conclusions may be expressed in a separate letter);
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the Company is not an "investment company" as
defined in the Investment Company Act;
(viii) to the knowledge of such counsel, after due
inquiry, there is no action, proceeding or investigation pending
or threatened against the Company, any of its subsidiaries or any
Mark Hughes Entity which questions the validity of the issuance
of the DECS or the offering thereof by the Underwriters;
(ix) no consent, approval, authorization, filing with or
order of any court or governmental agency or body is required in
connection with the performance by the Company of the
transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue
sky laws of any jurisdiction in connection with the purchase and
distribution of the DECS or the distribution of Shares pursuant
to the terms of the DECS by the Underwriters in the
20
<PAGE> 21
manner contemplated in this Agreement and in the Trust Prospectus
or the Company Prospectus;
(x) neither the performance of this Agreement by the
Company, the distribution of the Shares, nor the consummation of
any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a
breach or violation of or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or the
Subsidiary pursuant to (i) the charter or by-laws of the Company
or the Subsidiary, (ii) the terms of any indenture or material
agreement or instrument, known to such counsel, after due
inquiry, to which the Company or any of its subsidiaries is a
party or bound, (iii) any judgment, order or decree, known to
such counsel, after due inquiry, to be applicable to the Company
or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or any of its
subsidiaries or (iv) any law; and
(xi) to the knowledge of such counsel, after due inquiry,
no holders of securities of the Company other than the Sellers
have rights to the registration of such securities under the
Company Registration Statement.
In rendering such opinion, such counsel may include customary
qualifications and exceptions and rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of
California, the State of Delaware or the Federal laws of the United
States, to the extent they deem proper and specified in such opinion,
upon the opinion of other counsel of good standing whom they believe to
be reliable and who are satisfactory to counsel for the Underwriters (B)
as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. References
to the Company Prospectus in this paragraph (c) include any supplements
thereto at the Closing Date.
(d) The Company shall instruct non-U.S. counsel to the Company's
subsidiaries in Brazil, Germany, France, Italy, Japan, Taiwan and the
United Kingdom and non-U.S. counsel to the Company with respect to its
operations in Russia, to furnish, and each such counsel shall have
furnished, an opinion to the Representatives dated the Closing Date and
addressed to the Representatives, in the form attached hereto as Exhibit
B.
(e) The Mark Hughes Entities (other than the Mark Hughes Family
Trust) shall instruct Irell & Manella LLP or Lee, Goddard & Duffy LLP,
counsel for such Mark Hughes Entities, to furnish, and such counsel
shall have furnished, an opinion to the Representatives dated the
Closing Date and addressed to the Representatives, to the effect that:
(i) each of the Sellers and Corporate Seller Control
Persons has been duly organized and is validly existing as a
limited liability corporation in good standing under the laws of
the State of Delaware with full power and authority to own or
lease, as the case may be, and to operate its properties and
conduct its business, and is duly qualified to do business and is
in good standing under the laws of each jurisdiction which
requires such qualification;
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<PAGE> 22
(ii) the Custody Agreement and Power of Attorney have been
duly authorized, executed and delivered by the Sellers, the
Custody Agreement is valid and binding on the Sellers and each
Seller has full legal right and authority to sell, pledge,
transfer and deliver in the manner provided in the Contracts and
Collateral Agreements and the Custody Agreement, the Shares to be
sold, pledged, transferred and delivered thereunder;
(iii) this Agreement has been duly authorized by each of
the Mark Hughes Entities (other than Mark Hughes and the Mark
Hughes Family Trust) and duly executed and delivered by each of
the Mark Hughes Entities (other than the Mark Hughes Family
Trust); each Contract and Collateral Agreement to which each Mark
Hughes Entity is a party and the Reimbursement Agreement has been
duly authorized by such Mark Hughes Entity (other than Mark
Hughes and the Mark Hughes Family Trust) and duly executed and
delivered by such Mark Hughes Entity (other than the Mark Hughes
Family Trust) and, assuming due authorization, execution and
delivery by the other parties thereto, constitutes a valid and
legally binding agreement of such Mark Hughes Entity (other than
the Mark Hughes Family Trust), enforceable against such Mark
Hughes Entity (other than the Mark Hughes Family Trust) in
accordance with its terms, subject, as to enforcement of
remedies, to bankruptcy, insolvency and other similar laws
affecting creditors' rights generally, and to general equitable
principles; and the execution and delivery by each of the Mark
Hughes Entities (other than the Mark Hughes Family Trust) of this
Agreement, each Contract and Collateral Agreement to which such
Mark Hughes Entity is a party and the Reimbursement Agreement,
the performance by such Mark Hughes Entity of its obligations
hereunder and thereunder and the consummation of the transactions
herein and therein contemplated do not and will not, whether with
or without the giving of notice or passage of time or both,
conflict with, result in a breach or violation of or imposition
of any lien (other than pursuant to the Collateral Agreement to
which such Mark Hughes Entity is a party), charge or encumbrance
upon any property or assets of such Mark Hughes Entity or its
subsidiaries pursuant to (i) the Organizational Documents of such
Mark Hughes Entity or any of its subsidiaries, (ii) the terms of
any indenture or material agreement or instrument, known to such
counsel, after due inquiry, to which such Mark Hughes Entity or
any of its subsidiaries is a party or bound, (iii) judgment,
order or decree applicable to such Mark Hughes Entity or any of
its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over such Mark Hughes Entity or its subsidiaries or
(iv) any law;
(iv) no consent, approval, license, authorization, order
or validation of, and no filing, recording, or registration with,
any court or governmental authority, agency or body is required
for the compliance by each Mark Hughes Entity (other than the
Mark Hughes Family Trust) with all of the provisions of this
Agreement, each Contract and Collateral Agreement to which such
Mark Hughes Entity is a party and the Reimbursement Agreement,
except such as have been obtained under the Act and such as may
be required under the blue sky laws in connection with the
purchase and distribution of the DECS by the Underwriters and the
distribution of the Shares
22
<PAGE> 23
pursuant to the terms of the DECS in the manner contemplated in
this Agreement and in the Trust Prospectus and the Company
Prospectus;
(v) this Agreement, the Reimbursement Agreement and each
Contract and Collateral Agreement will be (A) binding on and
legally enforceable against the estate of Mark Hughes should he
become deceased or the legal representative, attorney, or
guardian of Mark Hughes should he lack legal capacity and (B)
binding on and legally enforceable against the Mark Hughes Family
Trust despite the death or legal incapacity of any settlor or
beneficiary of such trust;
(vi) none of the Sellers, the Corporate Seller Control
Persons or the Mark Hughes Family Trust is and, after giving
effect to the transactions contemplated in each Contract and
Collateral Agreement and the offering and sale of the DECS as
contemplated by this Agreement, will be an "investment company"
or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act;
(vii) the Collateral Agreements create a valid security
interest in favor of the Collateral Agent (as defined therein)
for the benefit of the Trust in the Shares pledged thereunder as
security for the performance by the applicable Seller of its
obligations under the Contract to which such Seller is a party
and to secure the observance and performance of the covenants and
agreements of the applicable Seller contained in the Contract and
the Collateral Agreement to which such Seller is a party;
(viii) pursuant to Section 9-103(6) of the California UCC
as currently in effect, the perfection and the effect of
perfection or non-perfection of the security interest of the
Trust in the Shares pledged pursuant to the Contracts and the
Collateral Agreements will be governed by the laws of the State
of New York, assuming the Share certificates are located in New
York at all times.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
State of California, the State of Delaware, or the Federal laws of the
United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
public officials. References to the Company Prospectus in this paragraph
(e) include any supplements thereto at the Closing Date. The opinion of
such counsel shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(f) The Company shall instruct Conrad Lee Klein, Esq. to furnish,
and such counsel shall have furnished, a letter to the Representatives
dated the Closing Date and addressed to the Representatives, in form and
substance substantially similar to the opinion delivered by such counsel
to Salomon Brothers Inc on October 18, 1993 and satisfactory to the
Representatives, confirming as of such date the opinion given in the
letters to the Company, dated June 8 and July 14, 1993, with respect to
the Company's compliance with
23
<PAGE> 24
the Final Judgment and Permanent Injunction, dated October 15, 1986, in
California v. Herbalife International, Inc.
(g) The Company shall instruct Hogan & Hartson LLP, special
regulatory counsel for the Company, to furnish, and such counsel shall
have furnished, an opinion to the Representatives dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) the statements in the Company Prospectus under the
Captions "Risk Factors - Regulation " and "Business -
Regulation," insofar as such statements purport to summarize
applicable provisions of the FDA Act, the regulations promulgated
thereunder and the FDA's June 4, 1997 proposed regulation for
dietary supplements containing ephedrine alkaloids, are accurate
summaries in all material respects of the provisions purposed to
be summarized under such captions in the Company Prospectus.
Such counsel shall state that no facts have come to their attention
which causes them to believe that the statements in the Company
Prospectus under the caption "Risk Factors -- Regulation" and "Business
-- Regulation," insofar as such statements relate the FDA regulatory
matters, at the time the Company Registration Statement became
effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or, as of the date of the
Company Prospectus or as of the date thereof, contained or contains an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
References to the Company Prospectus in this paragraph (g) include any
supplements thereto at the Closing Date.
(h) The Company shall instruct Morrison & Foerster LLP, special
counsel to the Company and Mark Hughes, to furnish, and such counsel
shall have furnished:
(i) an advisory letter to the Representatives dated the
Closing Date and addressed to the Representatives, with respect
to the legality of that the Company's multi-level marketing and
distribution plan under any U.S. or California statute, law, rule
or regulation.
(ii) an opinion to the Representatives dated the Closing
Date and addressed to the Representatives, to the effect there is
no prohibition or restriction on the ability of Mark Hughes to,
directly or indirectly through one or more intermediary entities,
transfer, encumber, hypothecate, conceal, pledge or in any way
dispose of any Shares (including without limitation as
contemplated in the Forward Purchase Contracts and Collateral
Agreements) that arises from the proceeding for the dissolution
of the marriage of Mark and Suzan Hughes or under California
marital property or family law; and
(iii) Suzan Hughes has no claims with respect to the
Collateral, as defined in each Collateral Agreement, pledged
pursuant to such Collateral Agreement that
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<PAGE> 25
may be superior to the rights of the Trust in such Collateral in
the event of any change in the marital status of Mark Hughes.
(i) The Company shall instruct Robert A. Sandler, Esq. to
furnish, and such counsel shall have furnished, a letter to the
Representatives dated the Closing Date and addressed to the
Representatives, in form and substance satisfactory to the
Representatives.
(j) The Company shall instruct Gerald M. Yaroslow, Esq. or other
counsel satisfactory to the Representatives, to furnish, and such
counsel shall have furnished, an opinion to the Representatives dated
the Closing Date and addressed to the Representatives, in form and
substance satisfactory to the Representatives.
(k) The Representatives shall have received from Cleary,
Gottlieb, Steen & Hamilton, counsel for the Underwriters and the Trust,
such opinion or opinions, dated the Closing Date and addressed to the
Representatives, with respect to the issuance and sale of the DECS, the
Trust Registration Statement, the Trust Prospectus (together with any
supplement thereto), the Fundamental Documents, the Company Registration
Statement, the Company Prospectus (together with any supplement thereto)
and other related matters as the Representatives may reasonably require,
and the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon
such matters.
(l) The Trust shall have furnished to the Representatives a
certificate of the Trust, signed by the Managing Trustee and dated the
Closing Date, to the effect that:
(i) the representations and warranties of the Trust in
this Agreement are true and correct in all material respects on
and as of the Closing Date with the same effect as if made on the
Closing Date and the Trust has complied in all material respects
with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date; and
(ii) no stop order suspending the effectiveness of the
Trust Registration Statement or the use of the Trust Prospectus
has been issued and no proceedings for that purpose have been
instituted or, to the Trust's knowledge, threatened.
(m) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Company Registration Statement,
the Company Prospectus, any supplements to the Company Prospectus and
this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct in all material respects on
and as of the Closing Date with the same effect as if made on the
Closing Date and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date;
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<PAGE> 26
(ii) no stop order suspending the effectiveness of the
Company Registration Statement or the use of the Company
Prospectus has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge, threatened;
and
(iii) since the date of the most recent financial
statements included in the Company Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect on
the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken
as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Company Prospectus (exclusive of any
supplement thereto).
(n) Each of the Sellers, the Corporate Seller Control Persons,
the Mark Hughes Family Trust and Mark Hughes shall have furnished to the
Representatives a certificate, signed by Mark Hughes and two appropriate
officers of such Seller or Corporate Seller Control Person or one other
appropriate officer of the Mark Hughes Family Trust, as the case may be,
dated the Closing Date, to the effect that each signer of such
certificate has carefully examined the Company Registration Statement,
the Company Prospectus, any supplements to the Company Prospectus and
this Agreement and that:
(i) the representations and warranties of such Mark Hughes
Entity in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as if
made on the Closing Date and such Mark Hughes Entity has complied
with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date.
(o) At the Execution Time and at the Closing Date, Deloitte &
Touche shall have furnished to the Representatives letters, dated
respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Representatives, confirming that
they are independent accountants within the meaning of the Act and the
Exchange Act and the respective applicable published rules and
regulations thereunder and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated in the
Company Registration Statement and the Company Prospectus and
reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Act and the
Exchange Act and the related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company and its
subsidiaries; carrying out certain specified procedures (but not
an examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the
stockholders, directors and committees of the Company and its
subsidiaries; and inquiries of certain officials of the Company
who have responsibility for financial
26
<PAGE> 27
and accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to December 31, 1997, nothing
came to their attention which caused them to believe that:
(A) with respect to the period subsequent to
December 31, 1997, there were any material changes, at a
specified date not more than three business days prior to
the date of the letter, in the long-term debt of the
Company and its subsidiaries or capital stock of the
Company or decreases in the shareholders' equity of the
Company or the working capital of the Company and its
subsidiaries as compared with the amounts shown on the
December 31, 1997, consolidated balance sheet included or
incorporated in the Company Registration Statement and the
Company Prospectus, or for the period from January 1, 1998
to such specified date there were any decreases, as
compared with the corresponding period in the preceding
[quarter], in net sales, operating margin or net income of
the Company and its subsidiaries, except in all instances
for changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives; or
(B) the information included or incorporated in the
Company Registration Statement and Company Prospectus in
response to Regulation S-K, Item 301 (Selected Financial
Data), Item 302 (Supplementary Financial Information),
Item 402 (Executive Compensation) and Item 503(d) (Ratio
of Earnings to Fixed Charges) is not in conformity with
the applicable disclosure requirements of Regulation S-K;
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Company
Registration Statement and the Company Prospectus, including the
information set forth under the captions "Prospectus Summary,"
"Risk Factors," "Selected Consolidated Financial and Operating
Data," "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business,"
"Principal and Selling Stockholders," "Certain Transactions" and
"Description of Capital Stock" in the Company Prospectus and the
information included or incorporated in Items 1, 2, 6, 7, 8 and
11 of the Company's Annual Report on Form 10-K, incorporated in
the Company Registration Statement and the Company Prospectus,
agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Company Prospectus in this paragraph (m) include any
supplement thereto to the date of the letter.
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<PAGE> 28
(p) The Shares shall have been duly approved for quotation
through the Nasdaq National Market System, and satisfactory evidence of
such action shall have been provided to the Representatives.
(q) The DECS shall have been approved for listing on the Nasdaq
National Market System, subject only to official notice of issuance.
(r) The NASD shall not have raised any objection with respect to
the fairness and reasonableness of the underwriting terms and
arrangements.
(s) Each Fundamental Agreement shall have been executed and
delivered by all parties thereto, and each Seller shall have delivered
to the Collateral Agent the number of Shares required by the Collateral
Agreement to which such Seller is a party to be initially pledged and
assigned by such Seller thereunder in accordance with the requirements
of such Collateral Agreement.
(t) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each executive officer and director of the Company addressed
to the Representatives relating to sales and certain other dispositions
of shares of common stock of the Company or certain other securities,
and such letter agreements shall be in full force and effect on the
Closing Date.
(u) Subsequent to the Execution Time or, if earlier, the dates as
of which information is given in the Company Registration Statement
(exclusive of any amendment thereof) and the Company Prospectus
(exclusive of any supplement thereto), there shall not have been (i) any
change or decrease specified in the letter or letters referred to in
paragraph (m) of this Section 10 or (ii) any change, or any development
involving a prospective change, in or affecting the condition (financial
or otherwise), earnings, business or properties of the Company and its
direct and indirect subsidiaries taken as a whole, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Company Prospectus (exclusive of any
supplement thereto) the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the judgment of the Representatives, so
material and adverse as to make it impractical or inadvisable to proceed
with the offering or delivery of the DECS as contemplated by the Trust
Registration Statement and the Company Registration Statement (in either
case, exclusive of any amendment thereof) and the Trust Prospectus and
the Company Prospectus (in either case, exclusive of any supplement
thereto).
(v) Prior to the Closing Date, the Company, the Trust, and each
of the Sellers, the Corporate Seller Control Persons, the Mark Hughes
Family Trust and Mark Hughes shall have furnished to the Representatives
such further information, certificates and documents as the
Representatives may reasonably request.
If any of the conditions specified in this Section 10 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this
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<PAGE> 29
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to the Trust and the Company in writing or by
telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 10 shall
be delivered at the office of Cleary, Gottlieb, Steen & Hamilton, counsel for
the Underwriters, at One Liberty Plaza, New York, New York 10006, on the Closing
Date.
11. Expenses.
(a) Each of the Sellers, the Corporate Seller Control Persons,
the Mark Hughes Family Trust, Mark Hughes and the Company, severally and
jointly, will pay all expenses incident to the performance by the Trust and each
Seller of their respective obligations under this Agreement and their Contracts
and Collateral Agreements, including (i) the preparation, printing and filing of
the Notification and the Trust Registration Statement (including financial
statements and exhibits) as originally filed and of each amendment thereto, (ii)
the preparation, printing and delivery of this Agreement, the Trust Agreement,
each of the Fundamental Agreements and such other documents as may be required
in connection with the offering, purchase, sale, issuance or delivery of the
DECS, (iii) the preparation, issuance and delivery of the certificates for the
DECS to the Representatives, (iv) the fees and disbursements of the Trust's
counsel, accountants and other advisors, (v) the fees and disbursements of the
Sellers' counsel and other advisors, (vi) the qualification of the DECS under
state securities laws in accordance with the provisions of Section 7(d) hereof,
including filing fees and the reasonable fees and disbursements of the counsel
for the Underwriters in connection therewith and in connection with the
preparation of the related blue sky survey and any supplement thereto, (vii) the
printing and delivery to the Representatives of copies of each Preliminary Trust
Prospectus, the Trust Prospectus and any amendments or supplements thereto,
(viii) the fees and expenses of any transfer agent or registrar for the DECS,
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, securing any required review by
the NASD of the Trust Registration Statement and the offering of the DECS in
accordance with the provisions of Section 7(d) hereof, (x) the fees and expenses
incurred in connection with the listing of the DECS on the Nasdaq National
Market System and (xi) the fees and expenses incurred in connection with the
preparation and filing of a registration statement under the Exchange Act
relating to the DECS. Each of the Sellers, the Corporate Seller Control Persons,
the Mark Hughes Family Trust, Mark Hughes and the Company, severally and
jointly, will reimburse the Underwriters through Smith Barney on the Closing
Date in immediately available funds for the Up-Front Fee Amount and the Up-Front
Expense Amount (each as defined in the Fund Expense Agreement dated as of the
Closing Date between Smith Barney and BoNY) and for the up-front fees of the
trustees of the Trust paid by Smith Barney. The Mark Hughes Entities shall not
be obligated pursuant to this Section 11(a) to pay any fees or disbursements of
counsel to the Underwriters other than in connection with clauses (vi) and (ix)
of this Section 11(a).
(b) Each of the Sellers, the Corporate Seller Control Persons,
the Mark Hughes Family Trust, Mark Hughes and the Company, severally and
jointly, will pay all expenses incident to the performance by the Company of its
obligations under this Agreement, including (i) the preparation, printing and
filing of the Company Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, issuance and delivery of the certificates for the Shares to the
Trust, (iii) the fees and disbursements
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of the Company's counsel, accountants and other advisors, (iv) the qualification
of the Shares under state securities laws in accordance with the provisions of
Section 8(e) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of any related blue sky survey and any
supplement thereto, (v) the printing and delivery to the Representatives of
copies of each Preliminary Company Prospectus, the Company Prospectus and any
amendments or supplements thereto, (vi) the fees and expenses of any transfer
agent or registrar for the Shares, (vii) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, securing any required review by the NASD of the Company Registration
Statement and the offering of the Shares in accordance with the provisions of
Section 8(e) hereof and (viii) the fees and expenses incurred in connection with
the approval of the Shares for quotation through the Nasdaq National Market
System.
(c) If the sale of the DECS provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 10 hereof is not satisfied, because of any termination pursuant
to Section 15 hereof or because of any refusal, inability or failure on the part
of the Company, Mark Hughes, the Mark Hughes Family Trust, any Seller or any
Corporate Seller Control Person to perform any agreement herein or comply with
any provision hereof other than by reason of a default by the Underwriters, each
of the Sellers, the Corporate Seller Control Persons, the Mark Hughes Family
Trust, Mark Hughes and the Company, jointly and severally, will reimburse the
Underwriters through Smith Barney upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by the Underwriters in connection with the proposed purchase and sale
of the DECS.
(d) The provisions of this Section 11 shall not supersede or
otherwise affect any agreement that the Company, the Sellers, the Corporate
Seller Control Persons, the Mark Hughes Family Trust and Mark Hughes may
otherwise have for the allocation of such expenses among themselves.
12. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Mark
Hughes Entity, the Trust, each of the Trustees, each Underwriter, the directors,
officers, employees and agents of each Underwriter, and each person who controls
the Trust or any Underwriter within the meaning of the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Company Registration
Statement as originally filed or in any amendment thereof, or in any Preliminary
Company Prospectus or the Company Prospectus, or in any amendment thereof or
supplement thereto (each such document, a "Company Registration Document"), or
the omission or alleged omission to state in any Company Registration Document a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Trust Registration Statement as originally
filed or in any amendment thereof, or in any Preliminary Trust Prospectus or the
Trust Prospectus, or in any amendment thereto or supplement thereto (each such
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<PAGE> 31
document, a "Trust Registration Document") or the omission or alleged omission
to state in any Trust Registration Document a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
in each such case agrees to reimburse each such indemnified party, as incurred,
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company in any such case will not be liable to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made in any Company Registration Document or Trust Registration
Document in reliance upon and in conformity with written information furnished
to the Company or the Trust by or on behalf of any Underwriter through the
Representatives specifically for inclusion therein. This indemnity agreement
will be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, its directors, each of its officers who
signs the Registration Statement, the Sellers, the Corporate Seller Control
Persons, the Mark Hughes Family Trust, Mark Hughes and each person who controls
the Company within the meaning of the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, to the same
extent as the foregoing indemnity to each Underwriter, but only with reference
to written information relating to such Underwriter furnished to the Company or
the Trust by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the Company Registration Documents or the Trust
Registration Documents, as the case may be. This indemnity agreement will be in
addition to any liability which any Underwriter may otherwise have. Each of the
Company, the Sellers, the Corporate Seller Control Persons, the Mark Hughes
Family Trust and Mark Hughes acknowledges that the statements set forth in the
legend in block capital letters on page 2 related to stabilization and syndicate
covering transactions and in the third, sixth and ninth paragraphs under the
heading "Plan of Distribution" related to concessions and reallowances, related
to listing the DECS and related to stabilization, syndicate covering
transactions and penalty bids, respectively, in any Preliminary Company
Prospectus, the Company Prospectus, any Preliminary Trust Prospectus or the
Trust Prospectus constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in any Company Registration
Document or any Trust Registration Document.
(c) Promptly after receipt by an indemnified party under this
Section 12 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 12, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from any liability under paragraph (a) or (b) above unless
and to the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial rights and
defenses and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party shall
be entitled to appoint counsel of indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any action
for which indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint
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counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded upon the advice of its counsel
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action (provided that,
with respect to the matters set forth in clauses (i), (ii) and (iii), in no
event shall the indemnifying party be liable for fees and expenses of more than
one counsel (in addition to any local counsel) separate from its own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions arising out of the same general allegations or
circumstances) or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding. An indemnifying party
will not be liable to an indemnified party for any amount paid by the
indemnified party to settle or compromise any pending or threatened claim,
action, suit or proceeding if such settlement or compromise is entered into
without the consent of the indemnifying party, which consent may not be withheld
unless such settlement or compromise is unreasonable in light of the pending or
threatened claim, action, suit or proceeding against, and defenses available to,
the indemnified party.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 12 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company, each Seller, each Corporate
Seller Control Person, the Mark Hughes Family Trust and Mark Hughes, jointly and
severally, and the Underwriters severally agree to contribute to the aggregate
losses, claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company, each Seller, each Corporate Seller
Control Person, the Mark Hughes Family Trust, Mark Hughes and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Sellers, the Corporate Seller
Control Persons, the Mark Hughes Family Trust and Mark Hughes on the one hand
and the Underwriters on the other from the offering of the DECS; provided,
however, that in no case shall any Underwriter (except as may be provided in any
agreement among the underwriters relating to the offering of the DECS) be
responsible for any amount in excess of the underwriting discount applicable to
the DECS purchased by such Underwriter hereunder. If the allocation provided by
the immediately preceding sentence is unavailable for any reason, the Company,
each Seller, each Corporate Seller Control Person, the Mark Hughes Family Trust
and Mark Hughes, jointly and severally, and the Underwriters severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company, such Seller, such
Corporate Seller Control Person, the Mark Hughes Family Trust and Mark Hughes on
one hand and of the
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Underwriters on the other in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The benefits received by the Company, the Sellers, the Corporate Seller Control
Persons, the Mark Hughes Family Trust and Mark Hughes shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by the Trust, and the benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and commissions, in each
case as set forth on the cover page of the Trust Prospectus and, as between the
Company and the Underwriters, the Company shall be deemed for this purpose to
have received such total net proceeds as are received by the Trust. Relative
fault shall be determined by reference to, among other things, whether any
untrue or any alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information provided by the
Company, a Seller, a Corporate Seller Control Person, the Mark Hughes Family
Trust or Mark Hughes on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
Company, each Seller, each Corporate Seller Control Person, the Mark Hughes
Family Trust, Mark Hughes and the Underwriters agree that it would not be just
and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 12, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter; each person who controls the Company within the meaning of either
the Act or the Exchange Act, each officer of the Company who shall have signed
the Company Registration Statement and each director of the Company shall have
the same rights to contribution as the Company; each person who controls a
Seller, a Corporate Seller Control Person or the Mark Hughes Family Trust within
the meaning of the Act or the Exchange Act shall have the same rights to
contribution as such Seller, Corporate Seller Control Person or Mark Hughes
Family Trust, as the case may be, subject in each case to the applicable terms
and conditions of this paragraph (d).
13. Subordination
(a) The Company agrees, and each Mark Hughes Entity agrees,
that the obligations of the Company to indemnify and hold harmless each
Mark Hughes Entity against any Losses as provided in paragraph (a) of
Section 12 (the "Subordinated Indemnification Obligations") are
subordinated in right of payment, to the extent and in the manner
provided in this Section 13, to the prior payment of all obligations of
the Company to indemnify and hold harmless the Trust, each
Underwriter, the directors, officers, employees and agents of each
person who controls the Trust or any Underwriter within the meaning of
the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise (each a "Senior Indemnified
Party" and collectively the "Senior Indemnified Parties") against any
Losses as provided in paragraph (a) of Section 12 (the "Senior
Indemnification Obligations") and that the subordination is for the
benefit of and enforceable by the Senior Indemnified Parties.
(b) Upon any payment or distribution of the assets of the
Company to creditors upon a total or partial liquidation or a total or
partial dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company
or its property: (i) the Senior Indemnified Parties shall be entitled
to receive payment in full of all Senior Indemnification Obligations in
cash before any Mark Hughes Entity shall be entitled to receive any
payment of Subordinated Indemnification Obligations; and (ii) until
such Senior Indemnification Obligations are paid in full in cash, any
payment to which any Mark Hughes Entity would be entitled but for this
Section 13 shall be made to the Senior Indemnified Parties as their
interests may appear.
(c) The Company may not pay any Subordinated Indemnification
Obligations if the Company has failed to pay to the Senior Indemnified
Parties any Senior Indemnification Obligations that are then payable.
(d) If any payment in respect of Subordinated Indemnification
Obligations are made to any Mark Hughes Entity that because of this
Section 13 should not have been made to it, the Mark Hughes Entity who
received the payment shall hold it in trust for the Senior Indemnified
Parties and pay it over to them as their interests may appear.
(e) After all Senior Indemnification Obligations of the Company
are paid in full in cash and until the Subordinated Indemnification
Obligations are paid in full, the Mark Hughes Entities shall be
subrogated to the rights of the Senior Indemnified Parties to receive
payments applicable to such Senior Indemnification Obligations. A
payment made under this Section 13 to a Senior Indemnified Party which
otherwise would have been made to a Mark Hughes Entity is not, as
between the Company and the Mark Hughes Entities, a payment by the
Company on such Senior Indemnification Obligations.
(f) Each Mark Hughes Entity acknowledges and agrees that the
foregoing subordination provisions are, and are intended to be, an
inducement and a consideration to each Senior Indemnified Party to enter
into this Agreement.
14. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the DECS agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of DECS set forth
opposite their names in Schedule I hereto bears to the aggregate amount of DECS
set forth opposite the names of all the remaining Underwriters) the DECS which
the defaulting Underwriter or Underwriters agreed but failed to purchase;
provided, however, that in the event that the aggregate amount of DECS which the
defaulting Underwriter or Underwriters agreed but failed to purchase shall
exceed 10% of the aggregate amount of DECS set forth in Schedule I hereto, the
remaining Underwriters shall have the right to purchase all, but shall not be
under any obligation to purchase any, of the DECS, and if such nondefaulting
Underwriters do not purchase all the DECS, this Agreement will terminate without
liability to any nondefaulting Underwriter, the Company, the Sellers, the
Corporate Seller Control Persons, the Mark Hughes Family Trust or Mark Hughes.
In the event of a default by any Underwriter as set forth in this Section 14,
the Closing Date shall be postponed for such period, not exceeding five Business
Days, as the Representatives shall determine in order that the required changes
in the Company Registration Statement, the Company Prospectus, the Trust
Registration
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Statement and the Trust Prospectus or in any other documents or arrangements may
be effected. Nothing contained in this Agreement shall relieve any defaulting
Underwriter of its liability, if any, to the Company, the Sellers, the Corporate
Seller Control Persons, the Mark Hughes Family Trust or Mark Hughes and any
nondefaulting Underwriter for damages occasioned by its default hereunder.
15. Termination. This Agreement shall be subject to termination
in the absolute discretion of the Representatives, by notice given to the Trust
and the Company prior to delivery of and payment for the DECS, if at any time
prior to such time (i) trading in any class of the Company's Common Stock shall
have been suspended by the Commission or the Nasdaq National Market or trading
in securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or National Market, (ii) a banking moratorium shall
have been declared by either Federal or New York State authorities or (iii)
there shall have occurred any outbreak or escalation of hostilities, declaration
by the United States of a national emergency or war or other calamity or crisis,
the effect of which on financial markets of the United States is such as to make
it, in the sole judgment of the Representatives, impractical or inadvisable to
proceed with the offering or delivery of the DECS as contemplated by the Trust
Prospectus (exclusive of any supplement thereto).
16. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Trust, the Company, each Seller, each Corporate Seller Control Person, the Mark
Hughes Family Trust, Mark Hughes, or their respective officers, if applicable,
and of the Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Trust, the Company, any Seller, any Corporate
Seller Control Person, the Mark Hughes Family Trust, Mark Hughes, or any of the
officers, directors or controlling persons referred to in Section 12 hereof, and
will survive delivery of and payment for the DECS. The provisions of Sections
11, 12 and 18 hereof shall survive the termination or cancellation of this
Agreement.
17. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to Smith Barney, will be mailed,
delivered or telefaxed to the Salomon Smith Barney General Counsel (fax no.:
(212) 816-6[ ]) and confirmed to the General Counsel, care of Salomon Smith
Barney, at 388 Greenwich Street, New York, New York 10013, attention: General
Counsel; if sent to the Trust, will be mailed, delivered or telefaxed and
confirmed to it at c/o Puglisi & Associates, 850 Library Avenue, Suite 204,
Newark, Delaware 19715, Attention: Donald J. Puglisi; if sent to the Company,
will be mailed, delivered, telefaxed and confirmed to it at Herbalife
International, Inc., 1800 Century Park East, Los Angeles, California 90067 (fax
no.: [ ]), Attention: Robert A. Sandler; if sent to Mark Hughes or the Mark
Hughes Family Trust, will be mailed, delivered, telegraphed and confirmed to him
or it care of Herbalife International, Inc., 1800 Century Park East, Los
Angeles, California 90067, attention of [ ]; if sent to the Sellers or the
Corporate Seller Control Persons, will be mailed, delivered, telegraphed and
confirmed to it care of Herbalife International, Inc., attention of [ ].
18. Guaranty. (a) In order to induce the Underwriters to enter
into this Agreement and for other valuable consideration, each of Mark Hughes,
the Mark Hughes Family Trust, the Sellers and the Corporate Seller Control
Persons, jointly and severally, hereby irrevocably guarantees (as primary
obligor and not merely as surety) to the Trust, each of the Trustees, each
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Underwriter, the directors, officers, employees and agents of each Underwriter,
and each person who controls the Trust or any Underwriter within the meaning of
the Act, the Exchange Act or other Federal or state statutory law or regulation,
at common law or otherwise (each of such persons, a "Beneficiary") (i) the
accuracy of the representations and warranties of the Company contained in
Section 2 hereof, (ii) the performance by the Company of the agreements
contained in Section 8 hereof and (iii) the performance by the Company of its
indemnification obligations contained in Sections 12(a) and 12(d) hereof and of
its obligation to pay expenses contained in Section 11 hereof.
(b) The obligations of Mark Hughes, the Mark Hughes Family Trust,
each Seller and each Corporate Seller Control Person under this Section 18 shall
be unconditional, irrespective of the validity or enforceability of any other
provision of this Agreement.
(c) The obligations of Mark Hughes, the Mark Hughes Family Trust,
each Seller and each Corporate Seller Control Person under this Section 18
constitute guarantees of performance and of payment, and not merely guarantees
of collection, and shall remain in full force and effect until all amounts
payable by the Company in respect of the matters (the "Guaranteed Matters") that
are the subject of the obligations of Mark Hughes, the Mark Hughes Family Trust,
each Seller and each Corporate Seller Control Person under this Section 18(a) of
this Agreement have been validly, finally and irrevocably paid in full, and
shall not be affected in any way by the absence of any action to obtain such
amounts from the Company or by any variation, extension, waiver, compromise or
release of any or all of the obligations of the Company hereunder or of any
security from time to time therefor. Each of Mark Hughes, the Mark Hughes Family
Trust, the Sellers and the Corporate Seller Control Persons hereby waives all
requirements as to promptness, diligence, presentment, demand for payment,
protest and notice of any kind with respect to his obligations under this
Section 18. Each of Mark Hughes, the Mark Hughes Family Trust, the Sellers and
the Corporate Seller Control Persons hereby agrees, jointly and severally, that
action may be taken directly against such person under this Section 18 without
any action being taken against the Company.
(d) The obligations of Mark Hughes, the Mark Hughes Family Trust,
each Seller and each Corporate Seller Control Person under this Section 18 shall
not be affected by any change in applicable laws, rules or regulations or by any
present or future action of any governmental authority or court amending,
varying, reducing or otherwise affecting or purporting to amend, vary, reduce or
otherwise affect any of the obligations of the Company under this Agreement or
by any other circumstance (other than by complete, irrevocable performance or
payment) that might otherwise constitute a legal or equitable discharge or
defense of a surety or a guarantor. If the Company merges or consolidates with
or into another entity, loses its separate legal identity or ceases to exist,
Mark Hughes, the Mark Hughes Family Trust, each Seller and each Corporate Seller
Control Person shall nonetheless continue to be liable for the payment of all
amounts that would have been payable by the Company in respect of the Guaranteed
Matters.
(e) The obligations of Mark Hughes, the Mark Hughes Family Trust,
each Seller and each Corporate Seller Control Person under this Section 18 shall
remain in full force and effect or shall be reinstated (as the case may be) if
at any time any payment of the Company in respect of the Guaranteed Matters, in
whole or in part, is rescinded or must otherwise be returned by a Beneficiary
upon the insolvency, bankruptcy or reorganization of the Company or otherwise,
all as though such payment had not been made.
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(f) If at any time when any amount payable by the Company in
respect of the Guaranteed Matters is overdue and unpaid Mark Hughes, the Mark
Hughes Family Trust, any Seller or any Corporate Seller Control Person receives
any amount as a result of any action against the Company or any of its property
or assets or otherwise for or on account of any payment made by Mark Hughes, the
Mark Hughes Family Trust, any Seller or any Corporate Seller Control Person
pursuant to this Section 18, Mark Hughes, the Mark Hughes Family Trust, such
Seller or such Corporate Seller Control Person, as the case may be, shall
forthwith pay such amount received by it to Smith Barney, on behalf of the
Beneficiaries, without demand, to be credited and applied toward any such amount
payable by the Company.
(g) Notwithstanding the foregoing, Mark Hughes, the Mark Hughes
Family Trust, each Seller and each Corporate Seller Control Person shall be
liable for any representation or warranty referred to in Section 18(a)(i) or for
any agreement referred to in Section 18(a)(ii) only if the circumstances
underlying the breach of representation or violation of the agreement are a
basis on which action is taken against any Beneficiary by a third party or are a
reason for a diminution in the value of any Shares or any DECS beneficially
owned by the Trust or an Underwriter, in each case, as principal (including for
this purpose any such Shares or DECS the Trust or such Underwriter, as the case
may be, may have sold following such diminution in value). Moreover, none of
Mark Hughes, the Mark Hughes Family Trust, the Sellers or the Corporate Seller
Control Persons shall have any such liability unless written notice of a
Beneficiary's claim under this Section 18(a) and this Section 18(g) is asserted
against Mark Hughes, the Mark Hughes Family Trust, any Seller or any Corporate
Seller Control Person, before the Company shall have made generally available to
its security holders and to the Representatives an earning statement or
statements of the Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 148 under the Act.
(h) The indemnity, contribution and guarantee agreements set
forth in this Agreement, including the limitations on the liabilities of Mark
Hughes, the Mark Hughes Family Trust, each Seller and each Corporate Seller
Control Person set forth in paragraph (g) above, shall be in addition to any
liability which the Company, Mark Hughes, the Mark Hughes Family Trust, each
Seller or each Corporate Seller Control Person may otherwise have.
19. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 12 hereof,
and no other person will have any right or obligation hereunder. This Agreement
will be (A) binding on and legally enforceable against the estate of Mark Hughes
should he become deceased or the legal representative, attorney, or guardian of
Mark Hughes should he lack legal capacity and (B) binding on and legally
enforceable against the Mark Hughes Family Trust despite the death or legal
incapacity of any settlor or beneficiary of such trust.
20. Applicable Law. This agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
21. Counterparts. This Agreement may be executed by any one or
more of the parties in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one and
the same agreement.
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22. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
23. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday
or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Company Borrowings Prospectus" shall mean the prospectus
relating to the Borrowed Shares that is used in connection with the use
of Borrowed Shares and that is first filed pursuant to Rule 424(b) after
the Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of such final prospectus relating to the Borrowed
Shares included in the Company Registration Statement at the Company
Effective Date.
"Company DECS Prospectus" shall mean the prospectus relating to
the Shares that is used in connection with the offering and sale of the
DECS and that is first filed pursuant to Rule 424(b) after the Execution
Time or, if no filing pursuant to Rule 424(b) is required, shall mean
the form of final prospectus relating to the Shares that is used in
connection with such offering and sale and that is included in the
Company Registration Statement at the Company Effective Date.
"Company Effective Date" shall mean each date and time that the
Company Registration Statement, any post-effective amendment or
amendments thereto and any Rule 462(b) Company Registration Statement
became or become effective.
"Company Prospectus" shall mean the Company Borrowings Prospectus
and the Company DECS Prospectus.
"Company Registration Statement" shall mean the registration
statement referred to in Section 2(a) above including incorporated
documents, exhibits and financial statements, as amended at the
Execution Time (or, if not effective at the Execution Time, in the form
in which it shall become effective) and, in the event any post-effective
amendment thereto or any Rule 462(b) Company Registration Statement
becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Company
Registration Statement, as the case may be. Such term shall include any
Rule 430A Information deemed to be included therein at the Company
Effective Date as provided by Rule 430A.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
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"Execution Time" shall mean the date and time that this Agreement
is executed and delivered by the parties hereto.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended, and the rules and regulations of the Commission
promulgated thereunder.
"Organizational Documents" shall mean, in respect of any company,
corporation, partnership, limited liability company, governmental agency
or other enterprise, as applicable, its founding act, charter, articles
of incorporation and by-laws, memorandum and articles of association,
statute, certificate of partnership, partnership agreement, limited
liability company agreement, or similar instrument.
"Preliminary Company Prospectus" shall mean any preliminary
prospectus referred to in Section 2(a) and any preliminary prospectus
included in the Company Registration Statement at the Company Effective
Date that omits Rule 430A Information.
"Preliminary Trust Prospectus" shall mean any preliminary
prospectus referred to in Section 1(a) above and any preliminary
prospectus included in the Trust Registration Statement at the Trust
Effective Date that omits Rule 430A Information.
"Rule 415," "Rule 424," "Rule 430A," "Rule 462," "Rule 497(h)",
"Regulation S-K" and "Regulation S-X" refer to such rules and
regulations under the Act.
"Rule 430A Information" shall mean information with respect to
the DECS, the Shares and the offering thereof permitted to be omitted
from the Trust Registration Statement (or, as used in Section 2 above,
the Company Registration Statement) when it becomes effective pursuant
to Rule 430A.
"Rule 462(b) Company Registration Statement" shall mean a
registration statement and any amendments thereto filed pursuant to Rule
462(b) relating to the offering covered by the initial registration
statement referred to in Section 2(a) above.
"Rule 462(b) Trust Registration Statement" shall mean a
registration statement and any amendments thereto filed pursuant to Rule
462(b) relating to the offering covered by the initial registration
statement referred to in Section 1(a) above.
"Salomon Smith Barney" shall mean Smith Barney Inc. or Salomon
Brothers Inc, to the extent that either such party is a signatory to
this Agreement.
"Trust Effective Date" shall mean each date and time that the
Trust Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Trust Registration Statement became or
become effective.
"Trust Prospectus" shall mean the prospectus relating to the DECS
that is first filed pursuant to Rule 497(h) after the Execution Time or,
if no filing pursuant to Rule 497(h) is required, shall mean the form of
final prospectus relating to the DECS included in the Trust Registration
Statement at the Trust Effective Date.
38
<PAGE> 39
"Trust Registration Statement" shall mean the registration
statement referred to in paragraph 1(a) above, including exhibits and
financial statements, as amended at the Trust Execution Time (or, if not
effective at the Trust Execution Time, in the form in which it shall
become effective) and, in the event any post-effective amendment thereto
or any Rule 462(b) Trust Registration Statement becomes effective prior
to the Closing Date, shall also mean such registration statement as so
amended or such Rule 462(b) Trust Registration Statement, as the case
may be. Such term shall include any Rule 430A Information deemed to be
included therein at the Trust Effective Date as provided by Rule 430A.
As used herein, the terms "Trust Registration Statement,"
"Preliminary Trust Prospectus" and "Trust Prospectus" shall not include the
Company Prospectus attached thereto.
39
<PAGE> 40
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Trust, the Company, the Sellers, the Corporate Seller Control Persons, the Mark
Hughes Family Trust, Mark Hughes and the several Underwriters.
Very truly yours,
DECS Trust III
By: ____________________________
Name: Donald J. Puglisi
Title: Managing Trustee
Herbalife International, Inc.
By:_____________________________
Name: Mark Hughes
Title: Chairman of the Board, Chief
Executive Officer and President
Mark Hughes Family Trust
By:_____________________________
Name: Mark Hughes
Title: Trustee
Mark Hughes
By:_____________________________
Sellers
MH Holdings III N, LLC
By:_____________________________
Name:
Title:
MH Holdings III O, LLC
By:_____________________________
Name:
Title:
40
<PAGE> 41
MH Holdings III P, LLC
By:_____________________________
Name:
Title:
MH Holdings III Q, LLC
By:_____________________________
Name:
Title:
Corporate Seller
Control Persons
Mark Hughes Holdings I, LLC
By:_____________________________
Name:
Title:
Mark Hughes Holdings II, LLC
By:_____________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
Smith Barney Inc.
By:___________________________
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement
41
<PAGE> 42
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
DECS TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
<S> <C>
Smith Barney Inc.
Prudential Securities Incorporated
---------
Total................................... 5,000,000
=========
</TABLE>
<PAGE> 43
SCHEDULE II
List of Sellers
<TABLE>
<CAPTION>
Underwritten Option Total
Seller Corporate Seller Control Person Shares Shares Shares
------ ------------------------------- ------------ ------ ------
<S> <C> <C> <C> <C>
MH Holdings III N MH Holdings I and MH Holdings II [ ] [ ] [ ]
MH Holdings III O MH Holdings I and MH Holdings II [ ] [ ] [ ]
MH Holdings III P MH Holdings I and MH Holdings II [ ] [ ] [ ]
MH Holdings III Q MH Holdings I and MH Holdings II [ ] [ ] [ ]
Total 5,000,000 [ ] [ ]
========= ===== ====
</TABLE>
2
<PAGE> 44
SCHEDULE III
List of Lenders
MH Holdings F
MH Holdings G
3
<PAGE> 45
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
[LETTERHEAD OF EXECUTIVE OFFICER OR DIRECTOR OF HERBALIFE INTERNATIONAL, INC.]
Corporation
Public Offering of Common Stock
,19
Smith Barney Inc.
Prudential Securities Incorporated
As Representatives of the several Underwriters,
[c/o Smith Barney Inc.]
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), among the Mark
Hughes Entities (as defined therein) Herbalife International, Inc., a Nevada
corporation (the "Company"), DECS Trust III (the "Trust"), a Delaware business
trust, and each of you as representatives of a group of Underwriters named
therein, relating to an underwritten public offering of DECS representing shares
of beneficial interest in the Trust.
In order to induce you and the other Underwriters to enter into
the Underwriting Agreement, the undersigned will not, without the prior written
consent of Smith Barney Inc., for a period of 90 days after the date of this
Agreement, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, or announce the offering of any shares of any class of common stock
of the Company or any securities convertible into or exercisable or exchangeable
for shares of any class of common stock of the Company (whether such shares or
any such securities are now owned or hereafter acquired) or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of any class of the common stock of the
Company, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of any class of common stock of the Company or such
other securities, in cash or otherwise, provided, however, that the Company
may issue, or grant options for, the common stock of the Company pursuant to any
stock plan for employees or directors, or any employee benefit plan, of the
Company in effect at the Execution Time, or pursuant to any stock options
outstanding at the Execution Time.
If for any reason the Underwriting Agreement shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreement), the
agreement set forth above shall likewise be terminated.
4
<PAGE> 46
Yours very truly,
[SIGNATURE OF EXECUTIVE OFFICER OR
DIRECTOR]
[NAME AND ADDRESS OF EXECUTIVE OFFICER
OR DIRECTOR]
5
<PAGE> 47
EXHIBIT B
Form of Opinion to Be Delivered by Counsel to Material Foreign Subsidiaries
1. The Company is validly existing as a corporation in good standing under
the laws of [insert Country in which the Subsidiary Operates] and has
corporate power to own its properties and conduct its business as
currently conducted.
2. The Company's authorized and issued equity capitalization is [ ], and
all the outstanding shares of capital stock of the Company have been
duly and validly authorized and issued and are fully paid and
nonassessable.
3. The business of the Company in [insert Country in which the Subsidiary
Operates], including without limitation the recruitment of distributors
and the distribution and marketing of the products listed on Annex A
hereto (the "Products"), which we have been advised by the Company are
all the products currently being distributed or marketed by the Company
in [insert the Country in which the Subsidiary operates], to the extent
conducted in accordance with the Company's multi-level marketing and
distribution plan (the "Marketing Plan"), (a) does not require the
consent, approval, authorization, filing, registration, qualification or
order of or with any court or governmental agency or body [except for
the (insert any requisite consent, approval, authorization, filing,
registration, qualification or order), which have been obtained or
supplied for________________] and (b) does not violate any statute, law,
rule or regulation of [insert the Country in which the Subsidiary
operates] or any political subdivision thereof, and does not breach or
violate any of the terms and provisions of or constitute a default
under, any judgment, decree or order, known to us, applicable to the
Company, of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over the Company or any of its properties.
4. Based on inquiry of appropriate officers of the Company, and on our past
and continuing representation of the Company, we know of no legal or
governmental proceedings pending to which the Company is a party, or
threatened against the Company, that could (a) have a material adverse
effect on the business or financial condition of the Company, (b) result
in the discontinuance or reformulation of any Product or (c) result in
any change to the Marketing Plan; provided that for this purpose we have
not regarded any legal or governmental proceedings to be "threatened"
unless the potential litigant or governmental authority has manifested
to the management of the Company or to us a present intention to
initiate such proceedings.
5. Based on inquiry of appropriate officers and independent auditors of the
Company, and on our past and continuing representation of the Company,
the Company has paid and discharged all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or
profits, or upon any property pertaining to it, and has filed all tax
returns required to be filed, in each case in a timely manner and prior
to the date on which penalties attach.
6. Based on inquiry of appropriate officers of the Company, and on our past
and continuing representation of the Company, we are not aware of any
liabilities of the Company (contingent or otherwise) that are required
to be reported but are not reported in the most recent audited financial
statements of the Company (insert year of most recent audited financial
statements) or the unaudited interim financial statements of the Company
dated (insert dates of all unaudited interim financial statements
subsequent to the most recent audited financial statements).
6
<PAGE> 48
We express no opinion other than as to the law of [insert Country in which the
Subsidiary operates].
7
<PAGE> 1
EXHIBIT 1.2
FORWARD PURCHASE AGREEMENT*
THIS AGREEMENT is made as of this [ ] day of March, 1998 among
[Selling Shareholder], a limited liability company organized under the laws of
the State of Delaware ("Seller" and, together with the Other Sellers (as defined
below), "Sellers"), each of the Corporate Seller Control Persons (as defined
below), each a limited liability company organized under the laws of the State
of Delaware, the Mark Hughes Family Trust, originally established on September
3, 1987, as amended and restated on December 31, 1996, and further amended on
September 17, 1997 and as further amended on March 22, 1998 (collectively the
"Mark Hughes Family Trust"), Mark Hughes (each of Seller, the Corporate Seller
Control Persons, the Mark Hughes Family Trust and Mark Hughes, a "Mark Hughes
Entity", and collectively, the "Mark Hughes Entities") and DECS Trust III, a
business trust organized under the laws of the State of Delaware under and by
virtue of an amended and restated declaration of trust, dated as of March [ ],
1998 (the "Declaration of Trust") (such trust and the trustees thereof acting in
their capacity as such being referred to herein as "Purchaser").
WHEREAS, Seller owns shares of Class B Common Stock, $.01 par
value (the "Common Stock"), of Herbalife International, Inc., a Nevada
corporation (including its successors, the "Company");
WHEREAS, Purchaser has filed with the Securities and Exchange
Commission a registration statement contemplating the offering of up to
5,750,000 DECS (the "DECS"), the terms of which contemplate delivery by
Purchaser to the holders thereof of a number of shares of Common Stock (or, if
some or all of the Sellers exercise their cash settlement option, cash in lieu
of part or all thereof), on [ ] [ ], 2001 (the "Exchange Date");
WHEREAS, in exchange for certain consideration to be paid by
Purchaser hereunder and under other similar agreements, Purchaser and Seller
desire to provide for the future acquisition, sale and delivery of the aggregate
number of shares of Common Stock contemplated to be delivered by Purchaser in
respect of the DECS on the Exchange Date, at a price to be established under
this Agreement and such other agreements;
WHEREAS, Seller has agreed, pursuant to the Collateral Agreement
(the "Collateral Agreement") dated as of March [ ], 1998, among Purchaser,
Seller, each of the Corporate Seller Control Persons, the Mark Hughes Family
Trust, Mark Hughes and The Bank of New York, as collateral agent (the
"Collateral Agent"), to grant Purchaser a security interest in the shares of
Common Stock specified therein and in certain other circumstances certain other
collateral to secure the obligations of Seller hereunder;
WHEREAS, Purchaser has agreed, pursuant to an underwriting
agreement, dated March [ ], 1998 (the "Underwriting Agreement"), among
Purchaser, Seller, the other persons and entities named as "Sellers" therein
(collectively, the "Other Sellers"), each of the Corporate
- --------
* This is a form of Forward Purchase Agreement. A substantially identical
agreement will be entered into by each Seller.
<PAGE> 2
Seller Control Persons, the Mark Hughes Family Trust, Mark Hughes, the Company
and Smith Barney Inc. and Prudential Securities Incorporated (each an
"Underwriter", and collectively, the "Underwriters"), to issue and sell to the
Underwriters an aggregate of [ ] DECS (the "Initial DECS") and, at the
Underwriters' option, up to [ ] additional DECS (the "Additional DECS") to cover
over-allotments, if any;
WHEREAS, MH Holdings I and MH Holdings II (each a "Corporate
Seller Control Person", and collectively, the "Corporate Seller Control
Persons") hold 99% and 1%, respectively, of the limited liability company
interests of each of the Sellers;
WHEREAS, the Mark Hughes Family Trust holds 99% of the limited
liability company interests of each of the Corporate Seller Control Persons;
WHEREAS, the Mark Hughes Family Trust is solely controlled by
Mark Hughes;
NOW, THEREFORE, in consideration of their mutual covenants herein
contained, the parties hereto, intending to be legally bound, hereby mutually
covenant and agree as follows:
DEFINITIONS
As used herein, the following words and phrases shall have the
following meanings:
"Acceleration Date" has the meaning provided in Article VII.
"Acceleration Value" has the meaning provided in Article VII.
"Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Additional DECS" has the meaning provided in the recitals of
this Agreement.
"Additional Purchase Price" has the meaning provided in Section
1.2(b).
"Additional Share Base Amount" means a number equal to the number
of Additional DECS that the Underwriters elect to Purchase under the
Underwriting Agreement.
"Additional Shares" has the meaning provided in Section 1.1(b).
"Additional STRIPS" means the U.S. Treasury obligations purchased
by Purchaser for settlement on the Option Closing Date.
"Adjustment Event" has the meaning provided in Section 6.2.
"Administrator" means The Bank of New York, administrator for
Purchaser under the Administration Agreement dated as of March [ ], 1998, or any
successor thereto.
2
<PAGE> 3
"Affiliate" means, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common control
with such Person or is a partner in, or a trustee, settlor, beneficiary, member,
manager, director or officer of, such Person and, with respect to any Person
that is a natural person, further includes such Person's immediate family
members, including his father, mother, spouse and children, the spouses of his
children, his siblings and their spouses and children. For purposes of this
definition, "control" (including the terms "controlled by" or "under common
control with") means, as to any Person, the possession, direct or indirect, of
the power to vote ten percent or more of the limited liability company interests
of such Person (or of the securities having ordinary voting power for the
election of directors of such Person), or the power to direct or cause the
direction of the management and policies of such Person, whether through
ownership of voting securities or by contract or otherwise.
"Associate" when used to indicate a relationship with any Person
means (i) a limited liability company, corporation or organization of which such
Person is an officer, director, member, manager or partner or is, directly or
indirectly, the beneficial owner of ten percent or more of any class of equity
securities or limited liability company interests, as the case may be, (ii) any
trust or other estate in which such Person serves as trustee or in a similar
capacity, and (iii) any relative or spouse of such Person or any relative of
such spouse.
"Bankruptcy Code" has the meaning provided in Section 10.7.
"Business Day" means any day that is not a Saturday, a Sunday or
a day on which the NYSE or banking institutions or trust companies in The City
of New York are authorized or obligated by law or executive order to close.
"Calculation Period" means any period of Trading Days for which
an average security price must be determined pursuant to this Agreement.
"Cash Delivery Option" has the meaning provided in Section
1.3(d).
"Closing Price" means, for any security on any date of
determination, (i) the closing sale price (or, if no closing price is reported,
the last reported sale price) of such security (regular way) on the NYSE on such
date, (ii) if such security is not listed for trading on the NYSE on any such
date, as listed in the composite transactions for the principal United States
national securities exchange on which such security is so listed, (iii) if such
security is not so listed on a United States national securities exchange, as
reported by The Nasdaq Stock Market, (iv) if such security is not so reported,
as reported in the composite transactions for the principal United States
regional securities exchange on which such security is so listed, (v) if such
security is not so listed on a United States regional security exchange, the
last quoted bid price for such security in the over-the-counter market as
reported by the National Quotation Bureau or similar organization or (vi) if
such security is not so quoted, the average of the mid-point of the last bid and
ask prices for such security from at least three nationally recognized
investment banking firms selected by the Administrator for such purpose. The
Closing Price as determined pursuant to the foregoing shall be subject to
adjustment in certain circumstances as provided in Section 6.1(c).
3
<PAGE> 4
"Collateral" has the meaning provided in the Collateral
Agreement.
"Collateral Agent" has the meaning provided in the recitals of
this Agreement.
"Collateral Agreement" has the meaning provided in the recitals
of this Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" has the meaning provided in the recitals of this
Agreement.
"Company" has the meaning provided in the recitals of this
Agreement.
"Contract Shares" has the meaning provided in Section 1.1.
"Corporate Seller Control Person" and "Corporate Seller Control
Persons" have the meaning provided in the recitals of this Agreement.
"Custodian" means The Bank of New York, custodian for Purchaser
under the Custodian Agreement dated as of March [ ], 1998, or any successor
thereto.
"Declaration of Trust" has the meaning provided in the
introductory paragraph of this Agreement.
"DECS" has the meaning provided in the recitals of this
Agreement.
"Dilution Adjustment" means any fraction or number by which the
Exchange Rate shall be multiplied pursuant to Section 6.1(a) or (b) or by which
Closing Prices may be divided pursuant to Section 6.1(c).
"Event of Default" has the meaning provided in Article VII.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Exchange Date" has the meaning provided in the recitals of this
Agreement.
"Exchange Price" means the average Closing Price per share of
Common Stock on the 20 Trading Days immediately prior to (but not including) the
Exchange Date; provided, however, that if there are not 20 Trading Days for the
Common Stock occurring later than the 60th calendar day immediately prior to,
but not including, the Exchange Date, Exchange Price shall mean the market value
per share of the Common Stock as of the Exchange Date as determined by a
nationally recognized independent investment banking firm retained for this
purpose by the Administrator. The Exchange Price as determined pursuant to the
foregoing shall be subject to adjustment in certain circumstances as provided in
Section 6.1(c).
"Exchange Rate" has the meaning provided in Section 1.1(c).
4
<PAGE> 5
"Firm Payment Date" has the meaning provided in Section 1.3(a).
"Firm Purchase Price" has the meaning provided in Section 1.2(a).
"Firm Share Base Amount" has the meaning provided in Section
1.1(a).
"Firm Shares" has the meaning provided in Section 1.1(a).
"Forward Purchase Contract Characterization" has the meaning
provided in Section 5.2(a).
"Independent Dealers" has the meaning provided in Article VII.
"Initial DECS" has the meaning provided in the recitals of this
Agreement.
"Initial Price" has the meaning provided in Section 1.1(c).
"Mark Hughes Entity" and "Mark Hughes Entities" mean each of the
Sellers, the Corporate Seller Control Persons, the Mark Hughes Family Trust,
Mark Hughes and any successor entity pursuant to Section 5.6(b) hereof.
"Mark Hughes Family Trust" has the meaning provided in the
introductory paragraph of this Agreement.
"Market Price" means, as of any date of determination, the
average Closing Price per share of Common Stock on the 20 Trading Days
immediately prior to (but not including) the date of determination; provided,
however, that if there are not 20 Trading Days for the Common Stock occurring
later than the 60th calendar day immediately prior to, but not including, such
date, the Market Price shall mean the market value per share of Common Stock as
of such date as determined by a nationally recognized investment banking firm
retained for such purpose by the Administrator.
"NYSE" means the New York Stock Exchange Inc.
"Officer" shall mean the manager, trustee, president, any vice
president, the chief financial officer, the treasurer or the secretary of a
Person.
"Officer's Certificate" means a certificate signed by an Officer
of a Person.
"Opinion of Counsel" means a written opinion from legal counsel
who is acceptable to the Trust.
"Option Closing Date" means the settlement dates for the
Additional DECS under Section 5 of the Underwriting Agreement.
"Ordinary Cash Dividend" means, with respect to any consecutive
365-day period, any dividend with respect to Common Stock paid in cash to the
extent that the amount of
5
<PAGE> 6
such dividend, together with the aggregate amount of all other dividends on the
Common Stock paid in cash during such 365-day period, does not exceed on a per
share basis 10% of the average of the Closing Prices of the Common Stock over
such 365-day period; provided that, for purposes of the foregoing definition,
the amount of cash dividends paid on a per share basis shall be appropriately
adjusted to reflect the occurrence during such period of any event described in
Article VI.
"Person" means an individual, partnership, corporation (including
a business trust), joint stock company, trust, unincorporated association,
limited liability company, joint venture or other entity, or a government or any
political subdivision or agency thereof.
"Purchaser" has the meaning provided in the introductory
paragraph of this Agreement.
"Reimbursement Agreement" means the reimbursement agreement,
dated as of March _____, 1998 among Smith Barney Inc., the Sellers and certain
other Persons named therein.
"Reported Securities" has the meaning provided in Section 6.2.
"Seller" and "Sellers" have the meaning provided in the
introductory paragraph of this Agreement.
"Threshold Appreciation Price" has the meaning provided in
Section 1.1(c).
"Trading Day" means, with respect to any security the Closing
Price of which is being determined, a day on which such security (A) is not
suspended from trading on any national or regional securities exchange or
association or over-the-counter market at the close of business and (B) has
traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of such security.
"Transaction Value" has the meaning provided in Section 6.2.
"Underwriter" and "Underwriters" have the meaning provided in the
recitals of this Agreement.
"Underwriting Agreement" has the meaning provided in the recitals
of this Agreement.
6
<PAGE> 7
ARTICLE I
SALE AND PURCHASE
1.1 Sale and Purchase.
(a) Firm Shares. Upon the terms and subject to the conditions of
this Agreement, Seller agrees to sell to Purchaser, and Purchaser agrees to
purchase and acquire from Seller, the number of shares of Common Stock (the
"Firm Shares") equal to the product of ____________ (the "Firm Share Base
Amount") and the Exchange Rate.
(b) Additional Shares. Upon the terms and subject to the
conditions of this Agreement, Seller agrees to sell to Purchaser, and Purchaser
agrees to purchase and acquire from Seller, a number of additional shares of
Common Stock (the "Additional Shares") equal to the product of the Additional
Share Base Amount and the Exchange Rate. In addition to the other conditions set
forth herein, such purchase and sale shall be conditioned on the Underwriters'
purchase of the Additional Share Base Amount of Additional DECS pursuant to the
Underwriting Agreement on the Option Closing Date. Promptly after receipt by
Purchaser of notice that the Underwriters are exercising their option to
purchase Additional DECS, Purchaser will provide Seller with written notice of
such exercise by the Underwriters, stating the related Additional Share Base
Amount and the date on which Purchaser shall deliver the purchase price for the
Additional Shares, which shall be the Option Closing Date for the Additional
DECS. The Firm Shares and the Additional Shares (if any) are collectively
referred to herein as the "Contract Shares."
(c) Exchange Rate. The "Exchange Rate" shall be determined in
accordance with the following formula, subject to adjustment as a result of
certain events as provided in Article VI: (i) if the Exchange Price is greater
than $[ ] (the "Threshold Appreciation Price"), [ ], (ii) if the Exchange Price
is less than or equal to the Threshold Appreciation Price but greater than [$ ]
(the "Initial Price"), a fraction (rounded upward or downward to the nearest
1/10,000th or, if there is not a nearest 1/10,000th, to the next higher
1/10,000th) equal to the Initial Price divided by the Exchange Price and (iii)
if the Exchange Price is less than or equal to the Initial Price, 1.
1.2 Purchase Price.
(a) Firm Purchase Price. The purchase price for the Firm Shares
(the "Firm Purchase Price") shall be $[Y x Firm Share Base Amount] in cash.
(b) Additional Purchase Price. The purchase price for the
Additional Shares (the "Additional Purchase Price") shall be an amount equal to
(i) the difference between (1) the aggregate proceeds to Purchaser from the sale
of the Additional DECS and (2) the aggregate cost to Purchaser, as notified by
Purchaser to Seller on the Option Closing Date for the Additional DECS, of the
Additional STRIPS, multiplied by (ii) a fraction, the numerator of which is the
Firm Share Base Amount and the denominator of which is the number of Initial
DECS purchased by the Underwriters under the Underwriting Agreement.
7
<PAGE> 8
1.3 Payment for and Delivery of Contract Shares.
(a) Firm Payment Date. Upon the terms and subject to the
conditions of this Agreement, Purchaser shall deliver to Seller the Firm
Purchase Price on March [ ], 1998 (the "Firm Payment Date") at the offices of
Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006,
or at such other place as shall be agreed upon by Purchaser and Seller, paid by
wire transfer of Federal (immediately available same-day) funds to an account
designated by Seller, against delivery by Seller to the Collateral Agent of the
number of shares of Common Stock and/or cash, securities and other property
necessary to comply with Seller's obligations under the Collateral Agreement.
(b) Option Closing Date. Upon the terms and subject to the
conditions of this Agreement, Purchaser shall deliver to Seller the Additional
Purchase Price on the Option Closing Date at the offices of Cleary, Gottlieb,
Steen & Hamilton, New York, New York 10006, or at such other place as shall be
agreed upon by Purchaser and Seller, paid by wire transfer of Federal
(immediately available same-day) funds to an account designated by Seller,
against delivery by Seller to the Collateral Agent of the additional number of
shares of Common Stock and/or cash, securities and other property necessary to
comply with Seller's obligations under the Collateral Agreement.
(c) Delivery of Contract Shares.
(i) Seller agrees to deliver the Contract Shares to Purchaser on
the Exchange Date. Seller shall be deemed to have instructed the
Collateral Agent to deliver to the Custodian, for the account of
Purchaser, shares of Common Stock then held by the Collateral Agent as
collateral under the Collateral Agreement, in an amount equal to the
number of Contract Shares, rounded down to the nearest whole number.
Instead of any fractional shares of Common Stock that would otherwise be
deliverable (prior to rounding) to Purchaser at the Exchange Date,
Seller agrees to make a cash payment in respect of such fractional
shares of Common Stock in an amount equal to the value thereof at the
Exchange Price. Notwithstanding the foregoing, if an Adjustment Event
shall have occurred prior to the Exchange Date then, in lieu of the
foregoing, Seller shall be deemed to have instructed: (A) in the case of
any cash required to be delivered on the Exchange Date as provided in
Section 6.2, the Collateral Agent to wire transfer Federal (immediately
available) funds to an account designated by Purchaser; and (B) in the
case of any Reported Securities required to be delivered by Seller in
lieu of cash as provided in Section 6.2, the Collateral Agent to deliver
to the Custodian, for the account of Purchaser, a specified number of
Reported Securities then held as collateral under the Collateral
Agreement, as provided in Section 6(g) of the Collateral Agreement.
(ii) In the event that by the Exchange Date any substitute
collateral has not been replaced by shares of Common Stock (and/or,
after an Adjustment Event, cash or Reported Securities) sufficient to
meet Seller's obligations hereunder, delivery shall be effected by
delivery by the Collateral Agent to the Custodian, for the account of
Purchaser, of the market value of the shares of Common Stock required to
be delivered
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hereunder, in the form of any shares of Common Stock then pledged by
Seller plus cash generated from the liquidation of U.S. Government
obligations then pledged by Seller (and/or, after an Adjustment Event,
the market value of the alternative consideration required to be
delivered hereunder, in the form of any Reported Securities then
pledged, plus any cash then pledged, plus cash generated from the
liquidation of U.S. Government obligations then pledged). In such event,
Seller shall be deemed to have instructed the Collateral Agent to
liquidate and turn into cash the U.S. Government obligations then
pledged by Seller to the extent necessary to satisfy Seller's
obligations hereunder.
(iii) Certificates representing Common Stock (or Reported
Securities) in registered form that are part of the Contract Shares
shall be registered in Purchaser's name or in the name of a depositary
or a nominee of a depositary as requested by Purchaser, unless such
Common Stock (and/or Reported Securities) is represented by one or more
global certificates registered in the name of a depositary or a nominee
of a depositary or are book entry securities, in which event Purchaser's
interest in such securities shall be noted in a manner satisfactory to
Purchaser and its counsel.
(iv) Seller's right to deliver (or cause to be delivered) to
Purchaser hereunder Common Stock and Reported Securities shall be
conditioned upon such Common Stock and Reported Securities to be so
delivered being transferable by Purchaser, following receipt from
Seller, without any restrictions not generally applicable to all holders
of such Common Stock or Reported Securities, as the case may be. If the
condition set forth in the preceding sentence shall not be satisfied
with respect to any Common Stock or Reported Securities to be delivered
by Seller, then, notwithstanding the provisions hereof, Seller shall
exercise the Cash Delivery Option.
(d) Cash Delivery Option. At its option, Seller may deliver to
Purchaser on the Exchange Date, in lieu of the Contract Shares, an amount in
cash equal to, subject to adjustment as provided in Section 6.2, the Exchange
Price of the Contract Shares (the "Cash Delivery Option"), paid by wire transfer
to an account designated by Purchaser, in Federal (immediately available) funds.
Seller may elect the Cash Delivery Option in respect of all, but not less than
all, Contract Shares and may do so by notice to Purchaser, the Collateral Agent
and the Custodian not less than 25 Business Days prior to the Exchange Date. If
Seller elects the Cash Delivery Option and so notifies Purchaser, Purchaser
shall promptly notify The Depository Trust Company and publish a notice in a
daily newspaper of national circulation stating whether the holders of DECS will
receive shares of Common Stock, cash or a combination thereof and, if a
combination of Common Stock and cash, the relative proportion of each.
(e) Seller represents, and Purchaser acknowledges, that it is
Seller's current intention to deliver Contract Shares to the Purchaser on the
Exchange Date and not to exercise the Cash Delivery Option; however, Seller
intends to consider all relevant economic, market and business factors in
ultimately determining whether to deliver Contract Shares on the Exchange Date
or to exercise the Cash Delivery Option.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH OF SELLER, THE
CORPORATE SELLER CONTROL PERSONS, THE MARK HUGHES
FAMILY TRUST AND MARK HUGHES
(a) Each of Seller, the Corporate Seller Control Persons, the
Mark Hughes Family Trust and Mark Hughes, severally and jointly, represents and
warrants to Purchaser that each representation and warranty made by such Person
in Section 3 of the Underwriting Agreement is true and correct on the date
hereof.
(b) Each of the Mark Hughes Entities, severally and jointly,
further represents and warrants to Purchaser that:
(i) Each Mark Hughes Entity holds itself out as a separate and
distinct entity, under such Mark Hughes Entity's own name, and such Mark
Hughes Entity acts solely under its own individual, limited liability
company or trust name, as the case may be, and through its authorized
officers and agents.
(ii) Each Mark Hughes Entity separately identifies its funds and
other assets. Each Mark Hughes Entity maintains its financial statements
and accounting records separate from those of any Affiliate or any other
Person. Such Mark Hughes Entity maintains its own separate books of
account. All of such Mark Hughes Entity's assets are held by or on
behalf of such Mark Hughes Entity and, when held on behalf of such Mark
Hughes Entity by another entity, are kept identifiable (in accordance
with customary usages) as assets owned by such Mark Hughes Entity.
(iii) Each Mark Hughes Entity (other than Mark Hughes) observes
all customary formalities regarding its existence as a limited liability
company or trust, as the case may be.
(iv) Seller does not, directly or indirectly, engage in any
business in any jurisdiction and has not incurred or undertaken to incur
any obligations (including debt) other than (a) entering into this
Agreement, the Collateral Agreement, the Underwriting Agreement and the
Reimbursement Agreement or any other agreement(s) or instrument(s)
entered into in connection with the foregoing (collectively, the "DECS
Documents") and performing its obligations hereunder and thereunder and
(b) in connection with a Permitted Obligation as defined in Section 5.7,
does not own any material property or assets other than the Common Stock
subject to this Agreement and the Collateral Agreement and does not have
any subsidiaries.
(v) Seller has not guaranteed the debts or obligations of any of
its Affiliates, nor has it loaned money or otherwise provided financial
assistance to any of its Affiliates, nor has it pledged, granted a
security interest in or lien upon its assets for the benefit of any of
its Affiliates, nor held itself out to be responsible for the debts or
obligations of any of its Affiliates or the decisions or actions
respecting the daily business and affairs of
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any of its Affiliates other than (i) entering into the DECS Documents
and as necessary to comply with the terms and obligations imposed by the
DECS Documents, or (ii) in connection with a Permitted Obligation as
defined in Section 5.7.
(vi) Seller has not permitted any of its Affiliates to guarantee
or undertake to guarantee the debts or obligations of Seller, nor has it
permitted any of its Affiliates to loan money or otherwise provide
financial assistance to Seller, nor has it permitted any of its
Affiliates to pledge, grant a security interest in or lien upon such
Affiliate's assets for the benefit of Seller, nor has it permitted any
Affiliate to hold itself out to be responsible for the debts or
obligations of Seller or the decisions or actions respecting the daily
business and affairs of Seller other than (i) entering into the DECS
Documents and as necessary to comply with the terms and obligations
imposed by the DECS Documents, or (ii) in connection with a Permitted
Obligation as defined in Section 5.7.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller that:
(a) each representation and warranty made by Purchaser in Section
1 of the Underwriting Agreement is true and correct on the date hereof; and
(b) it acknowledges that the Common Stock delivered pursuant to
this Agreement and the Collateral Agreement may contain one or more of the type
of legends referred to in Section 3(e) of the Collateral Agreement (which legend
(i) will not be applicable to the delivery of any such Common Stock to the Trust
pursuant to this Agreement and the Collateral Agreement or to the delivery of
any such Common Stock by the Trust to the holders of DECS pursuant to the DECS
and (ii) will be removed at the request of the Collateral Agent to the transfer
agent for the Common Stock prior to any such delivery to holders of DECS).
ARTICLE IV
CONDITIONS TO PURCHASER'S OBLIGATIONS
(a) The obligation of Purchaser to deliver the Firm Purchase
Price on the Firm Payment Date is subject to the satisfaction of the following
conditions:
(i) the purchase by the Underwriters of the Initial DECS pursuant
to the Underwriting Agreement shall have been consummated as
contemplated under the Underwriting Agreement;
(ii) the representations and warranties of each Mark Hughes
Entity contained in Article II hereof shall be true and correct as of
the Firm Payment Date;
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(iii) the Collateral Agreement shall have been executed by each
Mark Hughes Entity and the delivery of the Collateral thereunder shall
have been made; and
(iv) the Reimbursement Agreement shall have been executed by each
Mark Hughes Entity and each Other Seller.
(b) The obligation of Purchaser to deliver the Additional
Purchase Price on the Option Closing Date is subject to the satisfaction of the
following conditions:
(i) the purchase by the Underwriter of the Additional DECS
pursuant to the Underwriting Agreement shall have been consummated as
contemplated under the Underwriting Agreement;
(ii) the representations and warranties of each of the Mark
Hughes Entities contained in Article II hereof shall be true and correct
as of the Option Closing Date; and
(iii) the delivery of any additional Collateral under the
Collateral Agreement shall have been made.
ARTICLE V
COVENANTS
5.1 Taxes. Seller shall pay any and all documentary, stamp,
transfer or similar taxes and charges that may be payable in respect of the
entry into this Agreement and the transfer and delivery of the Contract Shares,
cash or Reported Securities pursuant hereto.
5.2 Forward Purchase Contract. Each of Purchaser and Seller
hereby agrees that
(a) it will treat this Agreement in its entirety as a forward
purchase contract for the delivery of the Contract Shares on the Exchange Date
(including as a result of acceleration or otherwise) (the "Forward Purchase
Contract Characterization"), under the terms of which contract (i) at the time
of issuance of the DECS Purchaser deposits irrevocably with Seller a fixed
amount of cash equal to the Firm Purchase Price (plus, if the Underwriters
exercise their option to purchase Additional DECS, the Additional Purchase
Price) to assure the fulfillment of Purchaser's purchase obligation described in
clause (ii) below, which deposit will unconditionally and irrevocably be applied
at the Exchange Date to satisfy such obligation and (ii) at the Exchange Date
such cash deposit unconditionally and irrevocably will be applied by Seller in
full satisfaction of Purchaser's obligation under the forward purchase contract,
and Seller will deliver to Purchaser the number of Contract Shares that
Purchaser is entitled to receive at that time pursuant to the terms of this
Agreement (subject to Seller's right to deliver cash and/or other property as
provided in this Agreement in lieu of the Contract Shares);
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(b) it will treat, consistent with the above characterization,
amounts paid to Seller in respect of this Agreement as allocable in their
entirety to the amount of the cash deposit attributable to such Agreement;
(c) it will not treat this Agreement, any portion of this
Agreement or any obligation hereunder as giving rise to any interest income or
other inclusions of ordinary income (in the case of Purchaser) or as giving rise
to any interest expense or other deductions of ordinary expense (in the case of
Seller);
(d) it will not treat the delivery of any portion of the Contract
Shares, cash or Reported Securities to be delivered pursuant to this Agreement
as the payment of interest or ordinary income; and
(e) it will not take any action (including filing any tax return
or form or taking any position in any tax proceeding) that is inconsistent with
the obligations contained in clauses (a) through (d), unless such action or
position is required by an applicable taxing authority or unless such action or
position is required by a change in statutory law or regulation or by a judicial
or other authoritative interpretation of the law enacted, promulgated or
published after the date of this Agreement.
5.3 Limitations on Trading During Certain Days. Each Mark Hughes
Entity hereby agrees that he or it will not, and will cause each of his or its
Affiliates that is under his or its control not to, buy or sell shares of Common
Stock, Class A Common Stock (the "Class A Stock") par value $.01, of the Company
or Reported Securities for his or its own account during the 60 days prior to
the Exchange Date, except that the Company may repurchase the aforementioned
securities pursuant to an ongoing share repurchase program conducted in
compliance with the conditions specified in Section 5(b) of Rule 10b-18 of the
Exchange Act.
5.4 Notices. Each Mark Hughes Entity will cause to be delivered
to Purchaser:
(a) Immediately upon the occurrence of any Event of Default
hereunder or under the Collateral Agreement, or upon such Mark Hughes Entity's
obtaining knowledge that any of the conditions or events described in paragraph
(a) or (b) of Article VII shall have occurred with respect to the Company,
notice of such occurrence; and
(b) In case at any time prior to the Exchange Date such Mark
Hughes Entity receives notice, or otherwise obtains knowledge, that any event
requiring that an adjustment be effected pursuant to Article VI hereof shall
have occurred or be pending, then such Mark Hughes Entity shall promptly cause
to be delivered to Purchaser a notice identifying such event and stating, if
known to such Mark Hughes Entity, the date on which such event is to occur and,
if applicable, the record date relating to such event. Such Mark Hughes Entity
shall cause further notices to be delivered to Purchaser if such Mark Hughes
Entity shall subsequently receive notice, or shall otherwise obtain knowledge,
of any further or revised information regarding the terms or timing of such
event or any record date relating thereto.
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5.5. Affirmative Covenants. During the term of this Agreement,
each of the Mark Hughes Entities, jointly and severally, covenants and agrees
that he or it will:
(a) Comply in all material respects with all applicable laws,
rules, regulations and orders to the extent noncompliance would have a material
adverse effect on the ability of any Mark Hughes Entity to perform his or its
obligations hereunder or under the Collateral Agreement, such compliance to
include, without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon such Mark Hughes Entity or
upon such Mark Hughes Entity's property, including, in the case of the Seller,
the collateral pledged under the Collateral Agreement, except to the extent
contested in good faith.
(b) Furnish to Purchaser as soon as possible and in any event
within twenty calendar days after such Mark Hughes Entity shall become aware of
the occurrence of any failure by any Mark Hughes Entity to comply with or
perform any agreement or obligation contained in this Agreement or the
Collateral Agreement, a statement of such Mark Hughes Entity describing such
failure and setting forth details of such failure and the action which such Mark
Hughes Entity has taken and proposes to take with respect thereto.
5.6 Additional Affirmative Covenants of each of the Mark Hughes
Entities. During the term of this Agreement, each of the Mark Hughes Entities,
jointly and severally, further covenants and agrees that:
(a) Each of the Mark Hughes Entities (other than Mark Hughes)
will continue in good standing under the laws of the state of its formation and
will continue to be wholly controlled, directly or indirectly, by Mark Hughes,
so long as Mark Hughes has legal capacity.
(b) Each Mark Hughes Entity (other than Mark Hughes) shall not
consolidate with or merge with or into, or transfer all or substantially of its
assets to, any other Person unless:
(i) either (x) such Mark Hughes Entity shall be the resulting or
surviving entity or (y) such other Person is an entity organized and existing
under the laws of the United States, a State thereof or the District of
Columbia, such other Person expressly assumes by supplemental agreement executed
and delivered to the Trust, in form satisfactory to counsel to the Trust, all
the obligations of such Mark Hughes Entity under the Underwriting Agreement,
Collateral Agreement, the Reimbursement Agreement, and this Agreement (in which
case all such obligations of such Mark Hughes Entity shall terminate); and
(ii) such Mark Hughes Entity shall deliver to the Trust prior to
the proposed transaction an Officer's Certificate and an Opinion of Counsel,
each of which shall state that such consolidation, merger or transfer and such
supplemental agreement comply with this Section 5.6(b) and that all conditions
precedent herein provided for relating to such transaction have been complied
with.
Upon any consolidation or merger, or any transfer of all or
substantially all of the assets of a Mark Hughes Entity in accordance with this
Section 5.6(b), the successor entity formed by such consolidation or into which
such Mark Hughes Entity is merged or to which such
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<PAGE> 15
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of such Mark Hughes Entity under this Agreement with the
same effect as if such successor entity had been named as such Mark Hughes
Entity herein, and the predecessor entity, shall be relieved of any further
obligation under this Agreement.
(c) Each of the Mark Hughes Entities (other than Mark Hughes)
will comply in all respects with the requirements and limitations of its powers,
as the case may be, as set forth in its organizational documents.
(d) Each Mark Hughes Entity will at all times hold itself out,
and each of its Affiliates will at all times hold such Mark Hughes Entity out as
a separate and distinct entity, under such Mark Hughes Entity's own name and
such Mark Hughes Entity will act solely under its own individual, limited
liability company or trust name, as the case may be, and through its authorized
officers and agents.
(e) Each Mark Hughes Entity will separately identify funds and
other assets of such Mark Hughes Entity. Such Mark Hughes Entity will maintain
separate accounting records separate from those of any Affiliate or any other
Person. Such Mark Hughes Entity will maintain its own separate bank accounts.
All of such Mark Hughes Entity's assets will at all times be held by or on
behalf of such Mark Hughes Entity and, when held on behalf of such Mark Hughes
Entity by another entity, will at all times be kept identifiable (in accordance
with customary usages) as assets owned by such Mark Hughes Entity.
(f) Each Mark Hughes Entity (other than Mark Hughes) will observe
all customary formalities regarding the existence of such Mark Hughes Entity as
a limited liability company or trust, as the case may be.
5.7 Negative Covenants of Seller. During the term of this
Agreement, Seller will not, and each of the Corporate Seller Control Persons,
the Mark Hughes Family Trust and Mark Hughes, jointly and severally, covenants
and agrees to cause Seller not to:
(a) Directly or indirectly, incur any obligations (including
debt) other than (i) pursuant to or as necessary to comply with the terms and
obligations imposed by this Agreement, the Collateral Agreement, the
Underwriting Agreement, the Reimbursement Agreement or any other agreement(s) or
instrument(s) entered into in connection with the foregoing (collectively, the
"DECS Documents"), (ii) the note outstanding as of the date hereof issued by
Seller to MH Holdings I, including accrued interest thereon and any replacement,
refunding, refinancing, extension or other successor obligation thereto, (iii)
organizational and administrative expenses of Seller (including, without
limitation, annual state franchise taxes), and (iv) any obligations between or
among Seller and any of the other Mark Hughes Entities, including, without
limitation, distribution of available cash and advances provided that each such
action is accurately reflected in the books and records of Seller (collectively,
the matters in clauses (ii) - (iv) are referred to as "Permitted Obligations").
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(b) Acquire or own any property or assets nor engage in any
business other than (i) entering into the DECS Documents and as necessary to
comply with the terms and obligations imposed by the DECS Documents, or (ii) as
the beneficiary of a Permitted Obligation of any other Seller.
(c) Guarantee the debts or obligations of any of its Affiliates,
nor loan money or otherwise provided financial assistance to any of its
Affiliates, nor will it pledge, grant a security interest in or lien upon its
assets for the benefit of any of its Affiliates, nor will it hold itself out to
be responsible for the debts or obligations of any of its Affiliates or the
decisions or actions respecting the affairs of any of its Affiliates, other than
(i) entering into the DECS Documents and as necessary to comply with the terms
and obligations imposed by the DECS Documents, or (ii) in connection with a
Permitted Obligation.
(d) Permit any of its Affiliates to guarantee the debts or
obligations of Seller, nor will it permit any of its Affiliates to loan money or
otherwise provide financial assistance to Seller, nor will it permit any of its
Affiliates to pledge, grant a security interest in or lien upon such Affiliate's
assets for the benefit of Seller, nor will it permit any Affiliate to hold
itself out to be responsible for the debts or obligations of Seller or the
decisions or actions respecting the affairs of Seller, other than (i) entering
into the DECS Documents and as necessary to comply with the terms and
obligations imposed by the DECS Documents, or (ii) in connection with a
Permitted Obligation.
5.8 Covenants of each of the Mark Hughes Entities (other than
Seller). During the term of this Agreement, each of the Mark Hughes Entities
(other than Seller) covenants and agrees that each of them:
(a) Will cause, in its or his capacity as an Affiliate of any
other Mark Hughes Entity, such other Mark Hughes Entity to comply with its
obligations under this Agreement and the Collateral Agreement.
(b) Will not, and will cause each of its or his Affiliates that
is under its or his control not to, buy or sell Common Stock, Class A Stock or
Reported Securities for its or his own account during the 60 days prior to the
Exchange Date, except that the Company may repurchase the aforementioned
securities pursuant to an ongoing share repurchase program conducted in
compliance with the conditions specified in Section 5(b) of Rule 10b-18 of the
Exchange Act .
5.9 Further Assurances. From time to time on and after the date
hereof through the Exchange Date (or, if later, the date on which this Agreement
has been fully performed), each of the parties hereto shall use its or his
reasonable best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper and advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement in accordance with the terms and conditions hereof, including (i)
using reasonable best efforts to remove any legal impediment to the consummation
of such transactions and (ii) the execution and delivery of all such deeds,
agreements, assignments and further instruments of
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transfer and conveyance necessary, proper or advisable to consummate and make
effective the transactions contemplated by the Agreement in accordance with the
terms and conditions hereof.
ARTICLE VI
ADJUSTMENT OF EXCHANGE RATE, EXCHANGE PRICE AND CLOSING PRICE
6.1 Dilution Adjustments. The Exchange Rate, Exchange Price and
Closing Price shall be subject to adjustment successively from time to time as
follows:
(a) Stock Dividends, Splits, Reclassifications, Etc. If the
Company shall, after the date hereof,
(i) pay a stock dividend or make a distribution, in either case,
with respect to Common Stock in shares of such stock;
(ii) subdivide or split its outstanding shares of Common Stock
into a greater number of shares;
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares; or
(iv) issue by reclassification (other than a reclassification
pursuant to clause (b), (c), (d) or (e) of the definition of Adjustment
Event) of its shares of Common Stock any other equity securities of the
Company;
then, in each such case, the Exchange Rate shall be multiplied by a Dilution
Adjustment equal to the number of shares of common stock (or the fraction
thereof) that a holder who held one share of Common Stock immediately prior to
such event would be entitled solely by reason of such event to hold immediately
after such event. In the case of the reclassification of any shares of Common
Stock into any other equity securities of the Company other than the Common
Stock, such other equity securities shall be deemed shares of Common Stock for
all purposes hereunder. The Exchange Price and Closing Price shall also be
adjusted in the manner described in paragraph (c).
(b) Right or Warrant Issuances. If the Company shall, after the
date hereof, issue, or declare a record date in respect of an issuance of,
rights or warrants (other than rights to purchase Common Stock pursuant to a
plan for the reinvestment of dividends or interest) to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Market Price of the Common Stock on the Business
Day next following the record date for the determination of holders of Common
Stock entitled to receive such rights or warrants, then, in each such case, the
Exchange Rate shall be multiplied by the following Dilution Adjustment: a
fraction, of which the numerator shall be (A) the number of shares of Common
Stock outstanding on the record date for the issuance of such rights or warrants
plus (B) the number of additional shares of Common Stock offered for
subscription or
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purchase pursuant to such rights or warrants, and of which the denominator shall
be (x) the number of shares of Common Stock outstanding on the record date for
the issuance of such rights or warrants plus (y) the number specified in clause
(B) above multiplied by the quotient of the exercise price of such rights or
warrants divided by the Market Price of the Common Stock on the Business Day
next following the record date for the determination of holders of Common Stock
entitled to receive such rights or warrants. To the extent that such rights or
warrants expire prior to the Exchange Date and shares of Common Stock are
delivered with respect to less than all of such rights or warrants prior to such
expiration, the Exchange Rate shall be readjusted to the Exchange Rate which
would then be in effect had such adjustments for the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock actually delivered pursuant to such rights or warrants. The
Exchange Price and Closing Price shall also be adjusted in the manner described
in paragraph (c).
(c) Corresponding Adjustments to Exchange Price; Adjustment of
Closing Price in Certain Circumstances.
(i) If any adjustment is made to the Exchange Rate pursuant to
paragraph (a) or (b) of this Section 6.1, an adjustment shall also be
made to the Exchange Price as such term is used throughout the
definition of Exchange Rate. The required adjustment to the Exchange
Price shall be made at the Exchange Date by multiplying the Exchange
Price by the cumulative Dilution Adjustment.
(ii) If, during any Calculation Period used in calculating the
Exchange Price, the Market Price or the Transaction Value, there shall
occur any event requiring an adjustment to be effected pursuant to this
Section 6.1, then the Closing Price for each Trading Day in the
Calculation Period occurring prior to the day on which such adjustment
is effected shall be adjusted by being divided by the relevant Dilution
Adjustment.
(d) Timing of Dilution Adjustments. Each Dilution Adjustment
shall be effected:
(i) in the case of any dividend, distribution, or issuance of
rights or warrants, at the opening of business on the Business Day next
following the record date for determination of holders of Common Stock
entitled to receive such dividend, distribution or issuance or, if the
announcement of any such dividend, distribution or issuance is after
such record date, at the time such dividend, distribution or issuance
shall be announced by the Company; and
(ii) in the case of any subdivision, split, combination or
reclassification, on the effective date of such transaction.
(e) General; Failure of Dilution Event to Occur. All Dilution
Adjustments shall be rounded upward or downward to the nearest 1/10,000th (or if
there is not a nearest 1/10,000th to the next higher 1/10,000th). No adjustment
in the Exchange Rate shall be required unless such adjustment would require an
increase or decrease of at least one percent therein;
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provided, however, that any adjustments which by reason of this sentence are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. If any announcement or declaration of a record date in
respect of a dividend, distribution or issuance requiring an adjustment pursuant
to this Section 6.1 shall subsequently be canceled by the Company, or such
dividend, distribution or issuance shall fail to receive requisite approvals or
shall fail to occur for any other reason, then, upon such cancellation, failure
of approval or failure to occur, the Exchange Rate shall be readjusted to the
Exchange Rate which would then have been in effect had adjustment for such event
not been made. If an Adjustment Event shall occur after the occurrence of one or
more events requiring an adjustment pursuant to this Section 6.1, the Dilution
Adjustments previously applied to the Exchange Rate in respect of such events
shall not be rescinded but shall be applied to the new Exchange Rate provided
for under Section 6.2.
6.2 Adjustment for Consolidation, Merger or Other Adjustment
Event. In the event of (a) any dividend or distribution by the Company to all
holders of Common Stock of evidences of its indebtedness or other assets
(excluding any dividends or distributions referred to in Section 6.1(a)(i), any
other equity securities issued pursuant to a reclassification referred to in
Section 6.1(a)(iv) and any Ordinary Cash Dividends) or any issuance by the
Company to all holders of Common Stock of rights or warrants to subscribe for or
purchase any of its securities (other than rights or warrants referred to in
Section 6.1(b)), (b) any consolidation or merger of the Company with or into
another entity (other than a merger or consolidation in which the Company is the
continuing corporation and in which the Common Stock outstanding immediately
prior to the merger or consolidation is not exchanged for cash, securities or
other property of the Company or another corporation), (c) any sale, transfer,
lease or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, (d) any statutory exchange of
securities of the Company with another corporation (other than in connection
with a merger or acquisition) or (e) any liquidation, dissolution or winding up
of the Company (any such event described in clause (a), (b), (c), (d) or (e), an
"Adjustment Event"), the Exchange Rate shall be adjusted so that on the Exchange
Date Seller shall deliver to Purchaser, in lieu of or (in the case of an
Adjustment Event described in clause (a) above) in addition to, the Contract
Shares, cash in an amount equal to the product of the number of Contract Shares
and the Transaction Value (as defined below). Following an Adjustment Event, the
Exchange Price, as such term is used throughout the definition of Exchange Rate,
shall be deemed to equal (A) if shares of Common Stock are outstanding at the
Exchange Date, the Exchange Price of the Common Stock, as adjusted pursuant to
Section 6.1(c), otherwise zero, plus (B) the Transaction Value.
Notwithstanding the foregoing, with respect to any Reported
Securities (as defined below) received by holders of Common Stock in an
Adjustment Event, Seller shall, in lieu of delivering cash in respect of such
Reported Securities as described above, deliver a number of such Reported
Securities with a value, as determined in accordance with clause (ii) of the
definition of Transaction Value, equal to all cash amounts that would otherwise
be deliverable in respect of Reported Securities received in such Adjustment
Event, unless Seller has made an election to exercise the Cash Delivery Option
or such Reported Securities have not yet been delivered to the holders entitled
thereto following such Adjustment Event or any record date with respect thereto.
If, following any Adjustment Event, any Reported Security ceases to
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<PAGE> 20
qualify as a Reported Security, then (x) Seller shall not deliver such Reported
Security but instead shall deliver of an equivalent amount of cash and (y)
notwithstanding clause (ii) of the definition of Transaction Value, the
Transaction Value of such Reported Security shall mean the fair market value of
such Reported Security on the date such security ceases to qualify as a Reported
Security, as determined by a nationally recognized investment banking firm
retained for this purpose by the Administrator.
"Transaction Value" means (i) for any cash received in any
Adjustment Event, the amount of cash received per share of Common Stock, (ii)
for any Reported Securities received in any Adjustment Event, an amount equal to
(x) the average Closing Price per security of such Reported Securities on the 20
Trading Days immediately prior to (but not including) the Exchange Date
multiplied by (y) the number of such Reported Securities (as adjusted pursuant
to the definition thereof) received per share of Common Stock and (iii) for any
property received in any Adjustment Event other than cash or Reported
Securities, an amount equal to the fair market value of the property received
per share of Common Stock on the date such property is received, as determined
by a nationally recognized investment banking firm retained for this purpose by
the Administrator; provided, however, that in the case of clause (ii), (x) with
respect to securities that are Reported Securities by virtue of only clause (iv)
of the definition of Reported Securities, Transaction Value with respect to any
such Reported Security means the average of the mid-point of the last bid and
ask prices for such Reported Security as of the Exchange Date from each of at
least three nationally recognized investment banking firms retained for such
purpose by the Administrator multiplied by the number of such Reported
Securities (as adjusted pursuant to the definition thereof) received per share
of Common Stock and (y) with respect to all other Reported Securities, if there
are not 20 Trading Days for any particular Reported Security occurring after the
60th calendar day immediately prior to, but not including, the Exchange Date,
Transaction Value with respect to such Reported Security means the fair market
value per security of such Reported Security as of the Exchange Date as
determined by a nationally recognized investment banking firm retained for such
purpose by the Administrator multiplied by the number of such Reported
Securities (as adjusted pursuant to the definition thereof) received per share
of Common Stock. For purposes of calculating the Transaction Value, any cash,
Reported Securities or other property receivable in an Adjustment Event shall be
deemed to have been received immediately prior to the close of business on the
record date for such Adjustment Event or, if there is no record date for such
Adjustment Event, immediately prior to the close of business on the effective
date of such Adjustment Event.
"Reported Securities" means any securities received in an
Adjustment Event that (A) are (i) listed on a United States national securities
exchange, (ii) reported on a United States national securities system subject to
last sale reporting, (iii) traded in the over-the-counter market and reported on
the National Quotation Bureau or similar organization or (iv) for which bid and
ask prices are available from at least three nationally recognized investment
banking firms and (B) are either (x) perpetual equity securities or (y)
non-perpetual equity or debt securities with a stated maturity after the
Exchange Date. The number of shares of any Reported Securities included in the
calculation of Transaction Value pursuant to clause (ii) of the definition
thereof shall be subject to adjustment if any event that would, had it occurred
with respect to the Common Stock or the Company, have required an adjustment
pursuant to Section 6.1 or 6.2,
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<PAGE> 21
shall occur with respect to such Reported Securities or the issuer thereof
subsequent to the date the Adjustment Event is consummated. Adjustment for such
subsequent events shall be as nearly equivalent as practicable to the
adjustments provided for in Section 6.1 or 6.2, as applicable.
ARTICLE VII
ACCELERATION
If one or more of the following events (each an "Event of
Default") shall occur:
(a) Any Mark Hughes Entity (or any Other Seller) shall commence a
voluntary case or other proceeding seeking a liquidation, reorganization or
other relief with respect to himself or itself or his or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of him or it or any substantial part of his or its property, or
shall consent to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against him or it, or shall take any action to authorize any of the foregoing;
(b) an involuntary case or other proceeding shall be commenced
against any Mark Hughes Entity (or any Other Seller) seeking liquidation,
reorganization or other relief with respect to him or it or his or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of him or it or any substantial part of his or its
property; or an order for relief shall be entered against any Mark Hughes Entity
(or any Other Seller) under the federal bankruptcy laws as now or hereafter in
effect; or
(c) a Collateral Event of Default within the meaning of the
Collateral Agreement;
then an "Acceleration Date" shall occur, Seller's rights under
Section 1.3(d) shall terminate immediately and (i) in the case of clause
(c), Seller shall become obligated to the extent permitted by law to
deliver to Purchaser (and shall be deemed to instruct the Collateral
Agent to deliver to the Custodian, for the account of Purchaser, and to
liquidate and turn into cash the U.S. Government obligations then
pledged by Seller to the extent necessary to satisfy such obligation)
the Contract Shares, in the form of the shares of Common Stock then
pledged by Seller, or cash generated from the liquidation of U.S.
Government obligations then pledged by Seller, or a combination thereof
(or, after an Adjustment Event, the alternate consideration to be
delivered, in the form of Reported Securities then pledged, cash then
pledged, cash generated from the liquidation of U.S. Government
obligations then pledged, or a combination thereof); or
(ii) in the case of clauses (a) or (b), Seller shall become
obligated to the extent permitted by law to deliver to Purchaser (and
shall be deemed to instruct the Collateral Agent to deliver to the
Custodian, for the account of Purchaser, and to liquidate and turn
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<PAGE> 22
into cash the U.S. Government obligations then pledged by Seller to the
extent necessary to satisfy such obligation) a number of shares of
Common Stock, in the form of the shares of Common Stock then pledged by
Seller, or cash generated from the liquidation of U.S. Government
obligations then pledged by Seller, or a combination thereof (or, after
an Adjustment Event, the alternate consideration to be delivered, in the
form of Reported Securities then pledged, cash then pledged, cash
generated from the liquidation of U.S. Government obligations then
pledged, or a combination thereof), with an aggregate value (based on
the Closing Price on the Acceleration Date) equal to the Acceleration
Value (as defined below).
"Acceleration Value" means an amount determined by the
Administrator on the basis of quotations from Independent Dealers (as defined
below). Each quotation will be for an amount that would be paid to the relevant
Independent Dealer in consideration of an agreement between Purchaser and such
Independent Dealer that would have the effect of preserving for Purchaser the
economic equivalent of the payments and deliveries that Purchaser would, but for
the occurrence of the Acceleration Date, have been entitled to receive after the
Acceleration Date hereunder (taking into account any adjustments to the Exchange
Rate that may have been effected on or prior to the Acceleration Date). On or as
soon as reasonably practicable following the Acceleration Date, the
Administrator will request each Independent Dealer to provide its quotation as
soon as reasonably practicable, but in any event within two Business Days. The
Administrator shall compute the Acceleration Value upon receipt of each
Independent Dealer's quotation, provided that if, at the close of business on
the fourth Business Day following the Acceleration Date, the Administrator shall
have received quotations from fewer than four of the Independent Dealers, the
Administrator shall compute the Acceleration Value using the quotations, if any,
it shall have received at or prior to such time. If four quotations are
provided, the Acceleration Value will be the arithmetic mean of the two
quotations remaining after disregarding the highest and lowest quotations. (For
this purpose, if more than one quotation has the same highest or lowest value,
then one of such quotations shall be disregarded.) If two or three quotations
are provided, the Acceleration Value will be the arithmetic mean of such
quotations. If one quotation is provided, the Acceleration Value will be equal
to such quotation. If no quotations are provided, the Acceleration Value will be
the aggregate value (based on the Closing Price on the Acceleration Date) of the
number of shares of Common Stock (or, after an Adjustment Event, Reported
Securities, cash or a combination thereof) that would be required to be
delivered hereunder on the Acceleration Date if the Exchange Date were redefined
to be the Acceleration Date.
"Independent Dealers" means four nationally recognized
independent investment banking firms selected in good faith by the
Administrator.
As promptly as reasonably practicable after receipt of the
quotations on which the Acceleration Value is based (or, as the case may be,
after failure to receive any such quotations within the time period prescribed
above), Purchaser shall deliver to Seller and the Collateral Agent a notice
specifying the number of shares of Common Stock (or, after an Adjustment Event,
the alternate consideration) required to be delivered by Seller. Purchaser and
Seller agree that the obligations contained in clauses (i) and (ii) above are a
reasonable pre-estimate of loss
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<PAGE> 23
and not a penalty. Such amount is payable for the loss of bargain and Purchaser
will not be entitled to recover additional damage as a consequence of loss
resulting from an Event of Default.
ARTICLE VIII
8. Guaranty. (a) In order to induce the Purchaser to enter into
this Agreement and for other valuable consideration, each of Mark Hughes, the
Mark Hughes Family Trust and the Corporate Seller Control Persons, jointly and
severally, hereby irrevocably guarantees (as primary obligor and not merely as
surety) to the Purchaser, the trustees, directors, officers, employees and
agents of the Purchaser, and each person who controls the Purchaser within the
meaning of the Act or the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise (each of such persons, a
"Beneficiary") (i) the accuracy of the representations and warranties of the
Seller contained in Article II hereof and (ii) the performance by the Seller of
the covenants and agreements contained in each of Article I, Article V and
Article VII hereof.
(b) The obligations of Mark Hughes, the Mark Hughes Family Trust
and each Corporate Seller Control Person under this Article VIII shall be
unconditional, irrespective of the validity or enforceability of any other
provision of this Agreement.
(c) The obligations of Mark Hughes, the Mark Hughes Family Trust
and each Corporate Seller Control Person under this Article VIII constitute
guarantees of performance and of payment, and not merely guarantees of
collection, and shall remain in full force and effect until all obligations of
and all amounts payable by the Seller in respect of the matters (the "Guaranteed
Matters") that are the subject of the obligations of Mark Hughes, the Mark
Hughes Family Trust and each Corporate Seller Control Person under this Article
VIII of this Agreement have been validly, finally and irrevocably performed or
paid in full, as the case may be, and shall not be affected in any way by the
absence of any action to obtain such performance or amounts, as the case may be,
from the Seller or by any variation, extension, waiver, compromise or release of
any or all of the obligations of the Seller hereunder or of any security from
time to time therefor. Each of Mark Hughes, the Mark Hughes Family Trust and the
Corporate Seller Control Persons hereby waives all requirements as to
promptness, diligence, presentment, demand for payment, protest and notice of
any kind with respect to his or its obligations under this Article VIII. Each of
Mark Hughes, the Mark Hughes Family Trust and the Corporate Seller Control
Persons hereby agrees, jointly and severally, that action may be taken directly
against such person under this Article VIII without any action being taken
against the Seller.
(d) The obligations of Mark Hughes, the Mark Hughes Family Trust
and each Corporate Seller Control Person under this Article VIII shall not be
affected by any change in applicable laws, rules or regulations or by any
present or future action of any governmental authority or court amending,
varying, reducing or otherwise affecting or purporting to amend, vary, reduce or
otherwise affect any of the obligations of the Seller under this Agreement or by
any other circumstance (other than by complete, irrevocable performance or
payment) that might
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<PAGE> 24
otherwise constitute a legal or equitable discharge or defense of a surety or a
guarantor. If the Seller merges or consolidates with or into another entity,
loses its separate legal identity or ceases to exist, Mark Hughes, the Mark
Hughes Family Trust and the Corporate Seller Control Persons shall nonetheless
continue to be liable for the performance of all obligations or the payment of
all amounts, as the case may be, that would have been due or payable, as the
case may be, by the Seller in respect of the Guaranteed Matters.
(e) The obligations of Mark Hughes, the Mark Hughes Family Trust
and the Corporate Seller Control Persons under this Article VIII shall remain in
full force and effect or shall be reinstated (as the case may be) if at any time
any obligation or payment of the Seller in respect of the Guaranteed Matters, in
whole or in part, is rescinded or must otherwise be returned by a Beneficiary
upon the insolvency, bankruptcy or reorganization of the Seller or otherwise,
all as though such performance or payment, as the case may be, had not been
made.
(f) If at any time when any obligation of, or any amount payable
by the Seller in respect of, the Guaranteed Matters is overdue and unperformed
or unpaid, as the case may be, Mark Hughes, the Mark Hughes Family Trust or any
Corporate Seller Control Person receives any amount as a result of any action
against the Seller or any of its property or assets or otherwise for or on
account of any payment made by Mark Hughes, the Mark Hughes Family Trust or any
Corporate Seller Control Person pursuant to this Article VIII, Mark Hughes, the
Mark Hughes Family Trust or such Corporate Seller Control Person, as the case
may be, shall forthwith pay such amount received by it to Smith Barney Inc., on
behalf of the Beneficiaries, without demand, to be credited and applied toward
any such amount payable by the Seller.
(g) The guarantee agreements set forth in this Agreement shall be
in addition to any liability which the Seller, Mark Hughes, the Mark Hughes
Family Trust or the Corporate Seller Control Persons may otherwise have.
ARTICLE IX
MISCELLANEOUS
9.1 Adjustments; Selection of Independent Investment Banking
Firm. Purchaser shall be responsible for the effectuation and calculation of any
adjustment pursuant to Article VI hereof and shall furnish Seller notice of any
such adjustment and shall provide Seller reasonable opportunity to review the
calculations pertaining to any such adjustment. If, pursuant to the terms and
conditions hereof, the Administrator shall be required to retain a nationally
recognized independent investment banking firm for any purpose provided herein,
such nationally recognized independent investment banking firm shall be selected
and retained by the Administrator only after consultation with Seller; provided,
however, that Seller shall be deemed to have waived his right to consult if
Seller fails to consult within five Business Days of notice being sent by the
Administrator to Seller seeking consultation. Purchaser may delegate the
effectuation and calculation of any such adjustments to its Administrator.
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<PAGE> 25
9.2 Notices. Notices to Purchaser shall be directed to it in care
of the Administrator for Purchaser, The Bank of New York, 101 Barclay Street,
New York, New York 10286, Telephone: (212) 816-5228, Telecopier: (212) 816-7157;
notices to Seller, either Corporate Seller Control Person, the Mark Hughes
Family Trust, or Mark Hughes shall be directed to Mark Hughes, Herbalife
International, Inc., 1800 Century Park East, Century City, CA 90067-1501,
Telephone: (310) 410-9600, Telecopier: (310) 577-3904, with a copy to
Irell & Manella LLP, 333 South Hope Street, Suite 3300, Los Angeles, California
90071, Telephone: (213) 620-1555, Telecopier: (213) 229-0515, Attention: Anthony
T. Iler, Esq. Notwithstanding the foregoing, notices to a party shall be
directed to such other address for such party as shall be specified by such
party in a like notice given pursuant to this Section 9.2. All notices and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if either (i) personally delivered (including delivery by courier
service or by Federal Express or any other nationally recognized overnight
delivery service for next day delivery) to the offices specified in the
preceding sentence, in which case they shall be deemed received on the first
Business Day by which delivery shall have been made to said offices; or (ii)
sent by certified mail, return receipt requested, in accordance with the
preceding sentence, in which case they shall be deemed received when receipted
for unless acknowledgment is refused (in which case delivery shall be deemed to
have been received on the first Business Day on which such acknowledgment is
refused). Any notice, demand or other communication to be provided by or on
behalf of Purchaser pursuant to this Agreement shall be sent to the address of
Seller, the Corporate Seller Control Persons, the Mark Hughes Family Trust or
Mark Hughes provided in this Section 9.2 notwithstanding the death of Mark
Hughes, the adjudication of Mark Hughes as incompetent or the appointment of a
guardian with respect to the affairs of Mark Hughes. Any failure by Seller, the
Corporate Seller Control Persons, the Mark Hughes Family Trust or Mark Hughes or
any guardian, conservator, executor, administrator or other similarly appointed
person to receive any such notice, demand or communication shall in no way
abrogate, invalidate or otherwise affect the validity or enforceability of the
notice, demand or communication or the matters set forth therein.
9.3 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
9.4 Entire Agreement. Except as expressly set forth herein, this
Agreement constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior agreements, understandings and
negotiations, both written and oral, among the parties with respect to the
subject matter of this Agreement.
9.5 Amendments; Waivers. Any provision of this Agreement may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Purchaser, Seller, each of the Corporate
Seller Control Persons, the Mark Hughes Family Trust and Mark Hughes or, in the
case of a waiver, by the party or parties against whom the waiver is to be
effective. No failure or delay by either party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other
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right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
9.6 No Third Party Rights; Successors and Assigns. Except as
otherwise agreed in writing, this Agreement is not intended and shall not be
construed to create any rights in any person other than Seller and Purchaser and
their respective successors and assigns and no person shall assert any rights as
third party beneficiary hereunder. Whenever any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
permitted assigns of such party. This Agreement will be (A) binding on and
legally enforceable against the estate of Mark Hughes should he become deceased
or the legal representative, attorney, or guardian of Mark Hughes should he lack
legal capacity and (B) binding on and legally enforceable against the Mark
Hughes Family Trust despite the death or legal incapacity of any settlor or
beneficiary of such trust.
9.7. Application of Bankruptcy Code. The parties hereto
acknowledge and agree that the Collateral Agent is a "financial institution"
within the meaning of Section 101(22) of Title 11 of the United States Code (the
"Bankruptcy Code") and is acting as agent and custodian for Purchaser in
connection with this Agreement and that Purchaser is a "customer" of the
Collateral Agent within the meaning of said Section 101(22). The parties hereto
further acknowledge and agree that this Agreement is a "securities contract", as
such term is defined in Section 741(7) of the Bankruptcy Code, entitled to the
protection of Section 555 of the Bankruptcy Code.
9.8 Governing Law; Jurisdiction; Severability; Waiver of Jury
Trial. This Agreement shall be governed by and construed in accordance with the
laws of the State of New York. For the purpose of any suit, action or proceeding
arising out of or relating to this Agreement, the parties hereto hereby
expressly and irrevocably consent and submit to the non-exclusive jurisdiction
of any United States Federal or New York State court sitting in the Borough of
Manhattan, City and State of New York, and expressly and irrevocably waive, to
the extent permitted under applicable law, any immunity from the jurisdiction
thereof and any claim or defense in such suit, action or proceeding based on a
claim of improper venue, forum non conveniens or any similar basis to which it
or he might otherwise be entitled. To the extent permitted by law, the
unenforceability or invalidity of any provision or provisions of this Agreement
shall not render any other provision or provisions herein contained
unenforceable or invalid. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES
HERETO HEREBY WAIVE AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS
PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN
RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH
PARTY HERETO ACKNOWLEDGES THAT IT OR HE HAS BEEN INFORMED BY THE OTHER PARTY
HERETO THAT THE PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON
WHICH SUCH OTHER PARTY HERETO HAS
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<PAGE> 27
RELIED, IS RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT AND ANY
DOCUMENT RELATED THERETO. EACH PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER
PARTY HERETO TO THE WAIVER OF ITS OR HIS RIGHTS TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties have signed this Agreement as of
the date and year first above written.
PURCHASER: SELLER:
DECS TRUST III: [ ]
By: By:
----------------------------- --------------------------------
Name: Name:
Title: Title
MH HOLDINGS I: MARK HUGHES:
By: By:
----------------------------- --------------------------------
Name: Name:
Title: Title
MH HOLDINGS II: MARK HUGHES FAMILY TRUST:
By: By:
----------------------------- --------------------------------
Name: Name:
Title: Title
27
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to the
Registration Statement No. 333-46201 of Herbalife International, Inc. on Form
S-3 of our report dated February 27, 1998, appearing in the Annual Report on
Form 10-K of Herbalife International, Inc. for the year ended December 31, 1997,
and to the reference to us under the heading "Experts" in the Prospectuses,
which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Los Angeles, CA
March 23, 1998
<PAGE> 1
EXHIBIT 99
SALOMON SMITH BARNEY
Smith Barney Inc.
388 Greenwich Street
New York, NY 10013 (212) 816-6000 PSA
MASTER SECURITIES LOAN AGREEMENT
Dated as of _________________
Between:
Smith Barney Inc.
and
- ------------------------
This Agreement sets forth the terms and conditions under which one party
("Lender") may, from time to time, lend to the other party ("Borrower") certain
securities against a pledge of collateral. Capitalized terms not otherwise
defined herein shall have the meanings provided in Section 26.
The parties hereto agree as follows:
1. Loans of Securities.
1.1. Subject to the terms and conditions of this Agreement, Borrower or
Lender may, from time to time, orally seek to initiate a transaction in which
Lender will lend securities to Borrower. Borrower and Lender shall agree on the
terms of each Loan, including the issuer of the securities, the amount of
securities to be lend, the basis of compensation, and the amount of Collateral
to be transferred by Borrower, which terms may be amended during the Loan.
1.2. Notwithstanding any other provision in this Agreement regarding
when a Loan commences, a Loan hereunder shall not occur until the Loaned
Securities and the Collateral therefor have been transferred in accordance with
Section 16.
1.3. WITHOUT WAIVING ANY RIGHTS GIVEN TO LENDER HEREUNDER, IT IS
UNDERSTOOD AND AGREED THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION
ACT OF 1970 MAY NOT PROTECT LENDER WITH RESPECT TO LOANED SECURITIES HEREUNDER
AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO LENDER MAY CONSTITUTE THE ONLY
SOURCE OF SATISFACTION OF BORROWER'S OBLIGATIONS IN THE EVENT BORROWER FAILS TO
RETURN THE LOANED SECURITIES.
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<PAGE> 2
2. Transfer of Loaned Securities.
2.1. Unless otherwise agreed, Lender shall transfer Loaned Securities to
Borrower hereunder on or before the Cutoff Time on the date agreed to by
Borrower and Lender for the commencement of the Loan.
2.2. Unless otherwise agreed, Borrower shall provide Lender, in each
Loan in which Lender is a Customer, with a schedule and receipt listing the
Loaned Securities. Such schedule and receipt may consist of (a) a schedule
provided to Borrower by Lender and executed and returned by Borrower when the
Loaned Securities are received, (b) in the case of securities transferred
through a Clearing Organization which provides transferors with a notice
evidencing such transfer, such notice, or (c) a confirmation or other document
provided to Lender by Borrower.
3. Collateral.
3.1. Unless otherwise agreed, Borrower shall, prior to or concurrently
with the transfer of the Loaned Securities to Borrower, but in no case later
than the close of business on the day of such transfer, transfer to Lender
Collateral with a market value at least equal to a percentage of the market
value of the Loaned Securities agreed to by Borrower and Lender (which shall be
not less than 100% of the market value of the Loaned Securities) (the "Margin
Percentage").
3.2. The Collateral transferred by Borrower to Lender, as adjusted
pursuant to Section 8, shall be security for Borrower's obligations in respect
to such Loan and for any other obligations of Borrower to Lender. Borrower
hereby pledges with, assigns to, and grants Lender a continuing first security
interest in, and a lien upon, the Collateral, which shall attach upon the
transfer of the Loaned Securities by Lender to Borrower and which shall cease
upon the transfer of the Loaned Securities by Lender to Borrower and which shall
cease upon the transfer of the Loaned Securities by Borrower to Lender. In
addition to the rights and remedies given to Lender hereunder, Lender shall have
all the rights and remedies of a secured party under the New York Uniform
Commercial Code. It is understood that Lender may use or invest the Collateral,
if such consists of cash, at its own risk, but that (unless Lender is a
Broker-Dealer) Lender shall, during the term of any Loan hereunder, segregate
Collateral from all securities or other assets in its possession. Lender may
pledge, repledge, hypothecate, rehypothecate, lend, relend, sell or otherwise
transfer the Collateral, or re-register Collateral evidenced by physical
certificates in any name other than Borrower's, only (a) if Lender is
Broker-Dealer or (b) in the event of a Default by Borrower. Segregation of
Collateral may be accomplished by appropriate identification on the books and
records of Lender if it is a "financial intermediary" or a "clearing
corporation" within the meaning of the New York Uniform Commercial Code.
3.3. Except as otherwise provided herein, upon transfer to Lender of the
Loaned Securities on the day a Loan is terminated pursuant to Section 5, Lender
shall be obligated to transfer the Collateral (as adjusted pursuant to Section
8) to Borrower no later than the Cutoff Time on such day or, if such day is not
a day on which a transfer of such Collateral may be effected under Section 16,
the next day on which such a transfer may be effected.
2
<PAGE> 3
3.4. If Borrower transfers Collateral to Lender, as provided in Section
3.1, and Lender does not transfer the Loaned Securities to Borrower, Borrower
shall have the absolute right to the return of the Collateral; and if Lender
transfers Loaned Securities to Borrower and Borrower does not transfer
Collateral to Lender as provided in Section 3.1, Lender shall have the absolute
right to the return of the Loaned Securities.
3.5. Borrower may, upon reasonable notice to Lender (taking into account
all relevant factors, including industry practice, the type of Collateral to be
substituted and the applicable method of transfer), substitute Collateral for
Collateral securing any Loan or Loans; provided, however, that such substituted
Collateral shall (a) consist only of cash, securities or other property that
Borrower and Lender agreed would be acceptable Collateral prior to the Loan or
Loans and (b) have a market value such that the aggregate market value of such
substituted Collateral, together with all other Collateral for Loans in which
the party substituting such Collateral is acting as Borrower, shall equal or
exceed the agreed upon Margin Percentage of the market value of the Loaned
Securities. Prior to the expiration of any letter of credit supporting
Borrower's obligations hereunder, Borrower shall, no later than the Cutoff Time
on the date such letter of credit expires, obtain an extension of the expiration
of such letter of credit or replace such letter of credit by providing Lender
with a substitute letter of credit in an amount at least equal to the amount of
the letter of credit for which it is substituted.
3.6. Lender acknowledges that, in connection with Loans of Government
Securities and as otherwise permitted by applicable law, some securities
provided by Borrower as Collateral under this Agreement may not be guaranteed by
the United States.
4. Fees for Loan.
4.1. Unless otherwise agreed, (a) Borrower agrees to pay Lender a loan
fee (a "Loan Fee"), computed daily on each Loan to the extent such Loan is
secured by Collateral other than cash, based on the aggregate par value (in the
case of Loans of Government Securities) or the aggregate market value (in the
case of all other Loans) of the Loaned Securities on the day for which such Loan
Fee is being computed, and (b) Lender agrees to pay Borrower a fee or rebate (a
"Cash Collateral Fee") on Collateral consisting of cash, computed daily based on
the amount of cash held by Lender as Collateral, in the case of each of the Loan
Fee and the Cash Collateral Fee at such rates as Borrower and Lender may agree.
Except as Borrower and Lender may otherwise agree (in the event that cash
Collateral is transferred by clearing house funds or otherwise), Loan fees shall
accrue from and including the date on which the Loaned Securities are
transferred to Borrower to, but excluding, the date on which such Loaned
Securities are returned to Lender, and Cash Collateral Fees shall accrue from
and including the date on which the cash Collateral is transferred to Lender to,
but excluding, the date on which such cash Collateral is returned to Borrower.
4.2. Unless otherwise agreed, any Loan Fee or Cash Collateral Fee
payable hereunder shall be payable:
(a) in the case of any Loan of securities other than Government
Securities, upon the earlier of (i) the fifteenth day of the
month following the calendar month in which
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such fee was incurred or (ii) the termination of all Loans
hereunder (or, if a transfer of cash in accordance with Section
16 may not be effected on such fifteenth day or the day of such
termination, as the case may be, the next day on which such a
transfer may be effected); and
(b) in the case of any Loan of Government Securities, upon the
termination of such Loan.
Notwithstanding the foregoing, all Loan Fees shall be payable by Borrower
immediately in the event of a Default hereunder by Borrower and all Cash
Collateral Fees shall be payable immediately by Lender in the event of a Default
by Lender.
5. Termination of the Loan. Unless otherwise agreed, (a) Borrower may terminate
a Loan on any Business Day by giving notice to Lender and transferring the
Loaned Securities to Lender before the Cutoff Time on such Business Day, and (b)
Lender may terminate a Loan on a termination date established by notice given to
Borrower prior to the close of business on a Business Day. The termination date
established by a termination notice given by Lender to Borrower shall be a date
no earlier than the standard settlement date for trades of the Loaned Securities
entered into on the date of such notice, which date shall, unless Borrower and
Lender agree to the contrary, be (i) in the case of Government Securities, the
next Business Day following such notice and (ii) in the case of all other
securities, the fifth Business Day following such notice. Unless otherwise
agreed, Borrower shall, on or before the Cutoff Time on the termination date of
a Loan, transfer the Loaned Securities to Lender, provided, however, that upon
such transfer by Borrower, Lender shall transfer the Collateral (as adjusted
pursuant to Section 8) to Borrower in accordance with Section 3.3.
6. Rights of Borrower in Respect of the Loaned Securities. Except as set forth
in Sections 7.1 and 7.2 and as otherwise agreed by Borrower and Lender, until
Loaned Securities are required to be redelivered to Lender upon termination of a
Loan hereunder, Borrower shall have all of the incidents of ownership of the
Loaned Securities, including the right to transfer the Loaned Securities to
others. Lender hereby waives the right to vote, or to provide any consent or to
take any similar action with respect to, the Loaned Securities in the event that
the record date or deadline for such vote, consent or other action falls during
the term of the Loan.
7. Dividends, Distributions, Etc.
7.1. Lender shall be entitled to receive all distributions made on or in
respect of the Loaned Securities which are not otherwise received by Lender, to
the full extent it would be so entitled if the Loaned Securities had not been
lent to Borrower, including, but not limited to: (a) cash and all other
property, (b) stock dividends, (c) securities received as a result of split ups
of the Loaned Securities and distributions in respect thereof, (d) interest
payments, and (e) all rights to purchase additional securities.
7.2. Any cash distributions made on or in respect of the Loaned
Securities, which Lender is entitled to receive pursuant to Section 7.1, shall
be paid by the transfer of cash to Lender by Borrower, on the date any such
distribution is paid, in an amount equal to such cash
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<PAGE> 5
distribution is paid, in an amount equal to such cash distribution, so long as
Lender is not in Default at the time of such payment. Non-cash distributions
received by Borrower shall be added to the Loaned Securities on the date of
distribution and shall be considered such for all purposes, accept that if the
Loan has terminated, Borrower shall forthwith transfer the same to Lender.
7.3. Borrower shall be entitled to receive all cash distributions made
on or in respect of non-cash Collateral which are not otherwise received by
Borrower, to the full extent it would be so entitled if the Collateral had not
been transferred to Lender. Any distributions of cash made on or in respect of
such Collateral which Borrower is entitled to receive hereunder shall be paid by
the transfer of cash to Borrower by Lender, on the date any such distribution is
paid, in an amount equal to such cash distribution, so long as Borrower is not
in Default at the time of such payment.
7.4. (a) Unless otherwise agreed, if (i) Borrower is required to make a
payment (a "Borrower Payment") with respect to cash distributions on Loaned
Securities under Sections 7.1 and 7.2 ("Securities Distributions"), or (ii)
Lender is required to make a payment (a "Lender Payment") with respect to cash
distributions on Collateral under Section 7.3 ("Collateral Distributions"), and
(iii) Borrower or Lender, as the case may be ("Payor"), shall be required by law
to collect any withholding or other tax, duty, fee, levy or charge required to
be deducted or withheld from such Borrower Payment or Lender Payment ("Tax"),
then Payor shall (subject to subsections (b) and (c) below), pay such additional
amounts as may be necessary in order that the net amount of the Borrower Payment
or Lender Payment received by the Lender or Borrower, as the case may be
("Payee"), after payment of such Tax equals the net amount of the Securities
Distribution or Collateral Distribution that would have been received if such
Securities Distribution or Collateral Distribution had been paid directly to the
Payee.
(b) No additional amounts shall be payable to a Payee under
subsection (a) above to the extent that Tax would have been
imposed on a Securities Distribution or Collateral Distribution
paid directly to the Payee.
(c) No additional amounts shall be payable to a Payee under
subsection (a) above to the extent that such Payee is entitled to
an exemption from, or reduction in the rate of, Tax on a Borrower
Payment or Lender Payment subject to the provision of a
certificate or other documentation, but has failed timely to
provide such certificate or other documentation.
(d) Each party hereto shall be deemed to represent that, as of the
commencement of any Loan hereunder, no Tax would be imposed on
any cash distribution paid to it with respect to (i) Loaned
Securities subject to a Loan in which it is acting as Lender or
(ii) Collateral for any Loan in which it is acting as Borrower,
unless such party has given notice to the contrary to the other
party hereto (which notice shall specify the rate at which such
Tax would be imposed). Each party agrees to notify the other of
any change that occurs during the term of a Loan in the rate of
any Tax that would be imposed on any such cash distributions
payable to it.
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7.5. To the extent that, under the provisions of Sections 7.1 through
7.4 (a) a transfer of cash or other property by Borrower would give rise to a
Margin Excess (as defined in Section 8.3 below) or (b) a transfer of cash or
other property by Lender would give rise to a Margin Deficit (as defined in
Section 8.2 below), Borrower or Lender (as the case may be) shall not be
obligated to make such transfer of cash or other property in accordance with
such Sections, but shall in lieu of such transfer immediately credit the amounts
that would have been transferable under such Sections to the account of Lender
or Borrower (as the case may be).
8. Mark to Market.
8.1. Borrower shall daily mark to market any Loan hereunder and in the
event that at the close of trading on any Business Day the market value of the
Collateral for any Loan to Borrower shall be less than 100% of the market value
of all the outstanding Loaned Securities subject to such Loan, Borrower shall
transfer additional Collateral no later than the close of the next Business Day
so that the market value of such additional collateral, when added to the market
value of the other Collateral for such Loan, shall equal 100% of the market
value of the Loaned Securities.
8.2. In addition to any rights of Lender under Section 8.1, in the event
that at the close of trading on any Business Day the aggregate market value of
all Collateral for Loans by Lender shall be less than the Margin Percentage of
the market value of all the outstanding Loaned Securities subject to such Loans
(a "Margin Deficit"), Lender may, by notice to Borrower, demand that Borrower
transfer to Lender additional Collateral so that the market value of such
additional Collateral, when added to the market value of all other Collateral
for such Loans, shall equal or exceed the agreed upon Margin Percentage of the
market value of the Loaned Securities. Unless otherwise agreed, such transfer is
to be made no later than the close of the next Business Day following the day of
Lender's notice to Borrower.
8.3. In the event that at the close of trading on any Business Day the
market value of all Collateral for Loans to Borrower shall be greater than the
Margin Percentage of the market value of all the outstanding Loaned Securities
subject to such Loans (a "Margin Excess"), Borrower may, by notice to Lender,
demand that Lender transfer to Borrower such amount of the Collateral selected
by Borrower so that the market value of the Collateral for such Loans, after
deduction of such amounts, shall thereupon not exceed the Margin Percentage of
the market value of the Loaned Securities. Unless otherwise agreed, such
transfer is to be made no later than the close of the next Business Day
following the day of Borrower's notice to Lender.
8.4. Borrower and Lender may agree, with respect to one or more Loans
hereunder, to mark the values to market pursuant to Sections 8.2 and 8.3 by
separately valuing the Loaned Securities lent and the Collateral given in
respect thereof on a Loan-by-Loan basis.
8.5. Borrower and Lender may agree, with respect to any or all Loans
hereunder, that the respective rights of Lender and Borrower under Sections 8.2
and 8.3 may be exercised only where a Margin Excess or Margin Deficit exceeds a
specified dollar amount or a specified percentage of the market value of the
Loaned Securities under such Loans (which amount or percentage shall be agreed
to by Borrower and Lender prior to entering into any such Loans).
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<PAGE> 7
9. Representations. Each party to this Agreement hereby makes the following
representations and warranties, which shall continue the term of any Loan
hereunder:
9.1. Each party hereto represents and warrants that (a) it has the power
to execute and deliver this Agreement, to enter into the Loans contemplated
hereby and to perform its obligations hereunder; (b) it has taken all necessary
action to authorize such execution, delivery and performance; and (c) this
Agreement a legal, valid and binding obligation enforceable against it in
accordance with its terms.
9.2. Each party hereto represents and warrants that the execution,
delivery and performance by it of this Agreement and each Loan hereunder will at
all times comply with all applicable laws and regulations including those of
applicable regulatory and self-regulatory organizations.
9.3. Each party hereto represents and warrants that it has not relied on
the other for any tax or accounting advice concerning this Agreement and that it
has made its own determination as to the tax and accounting treatment of any
Loan and any dividends, remuneration or other funds received hereunder.
9.4. Borrower represents and warrants that it is acting for its own
account. Lender represents and warrants that it is acting for its own account
unless it expressly specifies otherwise in writing and complies with Section
10.3(b).
9.5. Borrower represents and warrants that (a) it has, or will have at
the time of transfer of any Collateral, the right to grant a first security
interest therein subject to the terms and conditions hereof, and (b) it (or the
person to whom it relends the Loaned Securities) is borrowing or will borrow the
Loaned Securities (except for Loaned Securities that qualify as "exempted
securities" under Regulation T of the Board of Governors of the Federal Reserve
System) for the purpose of making delivery of such securities in the case of
short sales, failure to receive securities required to be delivered, or as
otherwise permitted pursuant to Regulation T as in effect from time to time.
9.6. Lender represents and warrants that it has, or will have at the
time of transfer of any Loaned Securities, the right to transfer the Loaned
Securities subject to the terms and conditions hereof.
10. Covenants.
10.1. Each party hereto agrees and acknowledges that (a) each Loan
hereunder is a "securities contract," as such term is defined in Section 741(7)
of Title 11 of the United States Code (the "Bankruptcy Code"), (b) each and
every transfer of funds, securities and other property under this Agreement and
each Loan hereunder is a "settlement payment" or a "margin payment," as such
terms are used in Sections 362(b)(6) and 546(e) of the Bankruptcy Code, and (c)
the rights given to Borrower and Lender hereunder upon a Default by the other
constitute the right to cause the liquidation of a securities contract and the
right to set off mutual debts and claims in connection with a securities
contract, as such terms are used in Sections 555 and
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362(b)(6) of the Bankruptcy Code. Each party hereto further agrees and
acknowledges that if a party hereto is an "insured depository institution," as
such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"),
then each Loan hereunder is a "securities contract" and "qualified financial
contract," as such terms are defined in the FDIA and any rules, orders or policy
statements thereunder.
10.2. Borrower agrees to be liable as principal with respect to its
obligations hereunder.
10.3. Lender agrees either (a) to be liable as principal with respect to
its obligations hereunder or (b) to execute and comply fully with the provisions
of Annex I (the terms and conditions of which Annex are incorporated herein and
made a party hereof).
10.4. Promptly upon (and in any event within seven (7) Business Days
after) demand by Lender, Borrower shall furnish Lender with Borrower's most
recent publicly available financial statements mutually agreed upon by Borrower
and Lender. Unless otherwise agreed, if Borrower is subject to the requirements
of Rule 17a-5(c) under the Exchange Act, it may satisfy the requirements of this
Section by furnishing Lender with its most recent statement required to be
furnished to customers pursuant to such Rule.
10.5. Except to the extent required by applicable law or regulation or
as otherwise agreed, Borrower and Lender agree that Loans hereunder shall in no
event be "exchange contracts" for purposes of the rules of any securities
exchange and that Loans hereunder shall not be governed by the buy-in or similar
rules of any such exchange, registered national securities or other
self-regulatory organization.
11. Events of Default. All Loans hereunder may, at the option of the
non-defaulting party exercised by notice to the defaulting party (which option
shall be deemed to have been exercised, even if no notice is given, immediately
upon the occurrence of an event specified in subsection (e) below), be
terminated immediately upon the occurrence of any one or more of the following
events (individually, a "Default"):
(a) if any Loaned Securities shall not be transferred to Lender upon
termination of the Loan as required by Section 5;
(b) if any Collateral shall not be transferred to Borrower upon
termination of the Loan as required by Sections 3.3 and 5;
(c) if either party shall fail to transfer Collateral as required by
Section 8;
(d) if either party (i) shall fail to transfer to the other party
amounts in respect of distributions required to be transferred by
Section 7, (ii) shall have received notice of such failure from
the non-defaulting party, and (iii) shall not have cured such
default by the Cutoff Time on the next day after such notice on
which a transfer of cash may be effected in accordance with
Section 16;
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(e) if (i) either party shall commence as debtor any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law, or seek the appointment
of a receiver, conservator, trustee, custodian or similar
official for such party or any substantial part of its property,
(ii) any such case or proceeding shall be commenced against
either party, or another shall seek such an appointment, or any
application shall be filed against either party for a protective
decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by
such party, (B) results in the entry of an order for relief, such
an appointment, the issuance of such a protective decree or the
entry of an order having a similar effect, or (C) is not
dismissed within 15 days, (iii) either party shall make a general
assignment for the benefit of creditors, or (iv) either party
shall admit in writing its inability to pay its debts as they
become due;
(f) if either party shall have been suspended or expelled from
membership or participation in any national securities exchange
or registered national securities association of which it is a
member or other self-regulatory organization to whose rules it is
subject or if it is suspended from dealing in securities by any
federal or state government agency thereof.
(g) if either party shall have its license, charter, or other
authorization necessary to conduct a material portion of its
business withdrawn, suspended or revoked by any applicable
federal or state government or agency thereof;
(h) if any representation made by either party in respect of this
Agreement or any Loan or Loans hereunder shall be incorrect or
untrue in any material respect during the term of any Loan
hereunder;
(i) if either party notifies the other, orally or in writing, of its
inability to or its intention not to perform its obligations
hereunder or otherwise disaffirms, rejects or repudiates any of
its obligations hereunder; or
(j) if either party (i) shall fail to perform any material obligation
under this Agreement not specifically set forth in clauses (a)
through (i) above, including but not limited to the payment of
fees as required by Section 4, and the payment of transfer taxes
as required by Section 14, (ii) shall have received notice of
such failure from the non-defaulting party and (iii) shall not
have cured such failure by the Cutoff Time on the next day after
such notice on which a transfer of cash may be effected under
Section 16.
12. Lender's Remedies. Upon the occurrence of a Default under Section 11
entitling Lender to terminate all Loans hereunder, Lender shall have the right
(without further notice to Borrower), in addition to any other remedies provided
herein or under applicable law, (a) to purchase a like amount of Loaned
Securities ("Replacement Securities") in the principal market for such
securities in a commercially reasonable manner, (b) to sell any Collateral in
the principal market for such Collateral in a commercially reasonable manner and
(c) to apply and set off the
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Collateral and any proceeds thereof (including any amounts drawn under a letter
of credit supporting any Loan) against the payment of the purchase price for
such Replacement Securities and any amounts due to Lender under Sections 4, 7,
14 and 17. In the event Lender shall exercise such rights, Borrower's obligation
to return a like amount of the Loaned Securities shall terminate. Lender may
similarly apply the Collateral and any proceeds thereof to any other obligation
of Borrower under this Agreement, including Borrower's obligations with respect
to distributions paid to Borrower (and not forwarded to Lender) in respect of
Loaned Securities. In the event that (i) the purchase price of Replacement
Securities (plus all other amounts, if any, due to Lender hereunder) exceeds
(ii) the amount of the Collateral, Borrower shall be liable to Lender for the
amount of such excess together with interest thereon at a rate equal to (A) in
the case of purchases of Foreign Securities, LIBOR, (B) in the case of purchases
of any other securities (or other amounts, if any, due to Lender hereunder), the
Federal Funds Rate or (C) such other rate as may be specified in Schedule B, in
each case as such rate fluctuates from day to day, from the date of such
purchase until the date of payment of such excess. As security for Borrower's
obligation to pay such excess, Lender shall have, and Borrower hereby grants, a
security interest in any property of Borrower then held by or for Lender and a
right of setoff with respect to such property and any other amount payable by
Lender to Borrower. The purchase price of Replacement Securities purchased under
this Section 12 shall include, and the proceeds of any sale of Collateral shall
be determined after deduction of, broker's fees and commissions and all other
reasonable costs, fees and expenses related to such purchase or sale (as the
case may be). In the event Lender exercises its rights under this Section 12,
Lender may elect in its sole discretion, in lieu of purchasing all or a portion
of the Replacement Securities or selling all or a portion of the collateral, to
be deemed to have made, respectively, such purchase of Replacement Securities or
sale of Collateral for an amount equal to the price therefor on the date of such
exercise obtained from a generally recognized source or the most recent closing
bid quotation from such a source. Subject to Section 19, upon the satisfaction
of all obligations hereunder, any remaining Collateral shall be returned to
Borrower.
13. Borrower's Remedies. Upon the occurrence of a Default under Section 11
entitling Borrower to terminate all Loans hereunder, Borrower shall have the
right (without further notice to Lender), in addition to any other remedies
provided herein or under applicable law, (a) to purchase a like amount of
Collateral ("Replacement Collateral") in the principal market for such
Collateral in a commercially reasonable manner, (b) to sell a like amount of the
Loaned Securities in the principal market for such securities in a commercially
reasonable manner and (c) to apply and set off the Loaned Securities and any
proceeds thereof against (i) the payment of the purchase price for such
Replacement Collateral, (ii) Lender's obligation to return any cash or other
Collateral and (iii) any amounts due to Borrower under Sections 4, 7 and 17. In
such event, Borrower may treat the Loaned Securities as its own and Lender's
obligation to return a like amount of the collateral shall terminate; provided,
however, that Lender shall immediately return any letters of credit supporting
any Loan upon the exercise or deemed exercise by Borrower of its termination
rights under Section 11. Borrower may similarly apply the Loaned Securities and
any proceeds thereof to any other obligation of Lender under this Agreement,
including Lender's obligations with respect to distributions paid to Lender (and
not forwarded to Borrower) in respect of Collateral. In the event that (i) the
sales price received from such Loaned Securities is less than (ii) the purchase
price of Replacement Collateral (plus the amount of any cash or other
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<PAGE> 11
Collateral not replaced by Borrower and all other amounts, if any, due to
Borrower hereunder), Lender shall be liable to Borrower for the amount of any
such deficiency, together with interest on such amounts at a rate equal to (A)
in the case of Collateral consisting of Foreign Securities, LIBOR, (B) in the
case of Collateral consisting of any other securities (or other amounts due, if
any, to Borrower hereunder), the Federal Funds Rate or (C) such other rate as
may be specified in Schedule B, in each case as such rate fluctuates from day to
day, from the date of such sale until the date of payment of such deficiency. As
security for Lender's obligation to pay such deficiency, Borrower shall have,
and Lender hereby grants, a security interest in any property of Lender then
held by or for Borrower and a right of setoff with respect to such property and
any other amount payable by Borrower to Lender. The purchase price of any
Replacement Collateral purchased under this Section 13 shall include, and the
proceeds of any sale of Loaned Securities shall be determined after deduction
of, broker's fees and commissions and all other reasonable costs, fees and
expenses related to such purchase or sale (as the case may be). In the event
Borrower exercises its rights under this Section 13, Borrower may elect in its
sole discretion, in lieu of purchasing all or a portion of the Replacement
Collateral or selling all or a portion of the Loaned Securities, to be deemed to
have made, respectively, such purchase of Replacement Collateral or sale of
Loaned Securities for an amount equal to the price therefor on the date of such
exercise obtained from a generally recognized source or the most recent closing
bid quotation from such a source. Subject to Section 19, upon the satisfaction
of all Lender's obligations hereunder, any remaining Loaned Securities (or
remaining cash proceeds thereof) shall be returned to Lender. Without limiting
the foregoing, the parties hereto agree that they intend the Loans hereunder to
be loans of securities. If, however, any Loan is deemed to be a loan of money by
Borrower to Lender, then Borrower shall have, and Lender shall be deemed to have
granted, a security interest in the Loaned Securities and the proceeds thereof.
14. Transfer Taxes. All transfer taxes with respect to the transfer of the
Loaned Securities by Lender to Borrower and by Borrower to Lender upon
termination of the Loan shall be paid by Borrower.
15. Market Value.
15.1. Unless otherwise agreed, if the principal market for the
securities to be valued is a national securities exchange in the United States,
their market value shall be determined by their last sale price on such exchange
on the preceding Business Day or, if there was no sale on that day, by the last
sale price on the next preceding Business Day on which there was a sale on such
exchange, all as quoted on the Consolidated Tape or, if not quoted on the
Consolidated Tape, then as quoted by such exchange.
15.2. Except as provided in Section 15.3 or 15.4 or as otherwise agreed,
if the principal market for the securities to be valued is the over-the-counter
market, their market value shall be determined as follows. If the securities are
quoted on the National Association of Securities Dealers Automated Quotations
System ("NASDAQ"), their market value shall be the closing sale price on NASDAQ
on the preceding Business Day or, if the securities are issues for which last
sale prices are not quoted on NASDAQ, the closing bid price on such day. If the
securities to be valued are not quoted on NASDAQ, their market value shall be
the highest bid quotation as
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<PAGE> 12
quoted in any of The Wall Street Journal, the National Quotation Bureau pink
sheets, the Salomon Brothers quotation sheets, quotations sheets of registered
market makers and, if necessary, dealers' telephone quotations on the preceding
Business Day. In each case, if the relevant quotation did not exist on such day,
then the relevant quotation on the next preceding Business Day in which there
was such a quotation shall be the market value.
15.3. Unless otherwise agreed, if the securities to be valued are
Government Securities, their market value shall be the average of the bid and
ask prices as quoted on Prophesy at 3:30 P.M. New York time on the Business Day
preceding the date on which such determination is made. If the securities are
not so quoted on such day, their market value shall be determined as of the next
preceding Business Day on which they were so quoted. If the securities to be
valued are Government Securities that are not quoted on Prophesy, their market
value shall be determined as of the close of business on the preceding Business
Day in accordance with market practice for such securities.
15.4. Unless otherwise agreed, if the securities to be valued are
Foreign Securities, their market value shall be determined as of the close of
business on the preceding Business Day in accordance with market practice in the
principal market for such securities.
15.5. Unless otherwise agreed, the market value of a letter of credit
shall be the undrawn amount thereof.
15.6. All determinations of market value under Sections 15.1, 15.2, 15.3
and 15.4 shall include, where applicable, accrued interest to the extent not
already included therein (other than any interest transferred to the other party
pursuant to Section 7), unless market practice with respect to the valuation of
such securities in connection with securities loans is to the contrary. All
determinations of market value that are required to be made at the close of
trading on any Business Day pursuant to Section 8 or otherwise hereunder shall
be made as if being determined at the commencement of trading on the next
Business Day. The determinations of market value provided for in this Section 15
shall apply for all purposes under this Agreement, except for purposes of
Sections 12 and 13.
16. Transfers.
16.1. All transfers of securities hereunder shall be by (a) physical
delivery of certificates representing such securities together with duly
executed stock and bond transfer powers, as the case may be, with signatures
guaranteed by a bank or a member firm of the New York Stock Exchange, Inc., (b)
transfer on the books of a Clearing Organization, or (c) such other means as
Borrower and Lender may agree. In every transfer of securities hereunder, the
transferor shall take all steps necessary (i) to effect a "transfer" under
Section 8-313 of the New York Uniform Commercial Code or, where applicable,
under any U.S. federal regulation governing transfers of securities and (ii) to
provide the transferee with comparable rights under any applicable foreign law
or regulation.
16.2. All transfers of cash Collateral hereunder shall be by (a) wire
transfer in immediately available, freely transferable funds or (b) such other
means as Borrower and Lender
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<PAGE> 13
may agree. All other transfers of cash hereunder shall be made in accordance
with the preceding sentence or by delivery of a certified or official bank check
representing next-day New York Clearing House Funds.
16.3. All transfers of a letter of credit from Borrower to Lender shall
be made by Physical delivery to Lender of an irrevocable letter of credit issued
by a "bank" as defined in Section 3(a)(6)(A)-(C) of the Exchange Act. Transfer
of a letter of credit from Lender to Borrower shall be made by causing such
letter of credit to be returned or by causing the amount of such letter of
credit to be reduced to the amount required after such transfer.
16.4. A transfer of securities, cash or letters of credit may be
effected under this Section 16 on any day except (a) a day on which the
transferee is closed for business at its address set forth in Schedule A hereto
or (b) a day on which a Clearing Organization or wire transfer system is closed,
if the facilities of such Clearing Organization or wire transfer system are
required to effect such transfer.
17. Contractual Currency.
17.1. Borrower and Lender agree that: (a) any payment in respect of a
distribution under Section 7 shall be made in the currency in which the
underlying distribution of cash was made; (b) any return of cash shall be made
in the currency in which the underlying transfer of cash was made and (c) any
other payment of cash in connection with a Loan under this Agreement shall be in
the currency agreed upon by Borrower and Lender in connection with such Loan
(the currency established under clause (a), (b) or (c) hereinafter referred to
as the "Contractual Currency"). Notwithstanding the foregoing, the payee of any
such payment may, at its option, accept tender thereof in any other currency;
provided, however, that, to the extent permitted by applicable law, the
obligation of the payor to make such payment will be discharged only to the
extent of the amount of Contractual Currency that such payee may, consistent
with normal banking procedures, purchase with such other currency (after
deduction of any premium and costs of exchange) on the banking day next
succeeding its receipt of such currency.
17.2. If for any reason the amount in the Contractual Currency received
under Section 17.1, including amounts received after conversion of any recovery
under any judgment or order expressed in a currency other than the Contractual
Currency, falls short of the amount in the Contractual Currency due in respect
of this Agreement, the party required to make the payment will (unless a Default
has occurred and such party is the non-defaulting party) as a separate and
independent obligation and to the extent permitted by applicable law,
immediately pay such additional amount in the Contractual Currency as may be
necessary to compensate for the shortfall.
17.3. If for any reason the amount in the Contractual Currency received
under Section 17.1 exceeds the amount in the Contractual Currency due in respect
of this Agreement, then the party receiving the payment will (unless a Default
has occurred and such party is the non-defaulting party) refund promptly the
amount of such excess.
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18. ERISA. Lender shall, if any of the securities transferred to the Borrower
hereunder for any Loan have been or shall be obtained, directly or indirectly,
from or using the assets of any Plan, so notify Borrower in writing upon the
execution of the Agreement or upon initiation of such Loan under Section 1.1. If
Lender so notifies Borrower, then Borrower and Lender shall conduct the Loan in
accordance with the terms and conditions of Department of Labor Prohibited
Transaction Exemption 81-6 (46 Fed. Req. 7527, Jan. 23, 1981; as amended, 52
Fed. Reg. 18754, May 19, 1987), or any successor thereto (unless Borrower and
Lender have agreed prior to entering into a Loan that such Loan will be
conducted in reliance on another exemption, or without relying on any exemption,
from the prohibited transaction provisions of Section 406 of the Employee
Retirement Income Security Act of 1974, as amended, and Section 4975 of the
Internal Revenue Code of 1986, as amended). Without limiting the foregoing and
notwithstanding any other provision of this Agreement, if the Loan will be
conducted in accordance with Prohibited Transaction Exemption 81-6, then:
(a) Borrower represents and warrants to Lender that it is either (i)
a bank subject to federal or state supervision, (ii) a
broker-dealer registered under the Exchange Act or (iii) exempt
from registration under Section 15(a)(1) of the Exchange Act as a
dealer in Government Securities.
(b) Borrower represents and warrants that, during the term of any
Loan hereunder, neither Borrower nor any affiliate of Borrower
has any discretionary authority or control with respect to the
investment of the assets of the Plan involved in the Loan or
renders investment advice (within the meaning of 29 C.F.R.
Section 2510.3-21(c) with respect to the assets of the Plan
involved in the Loan. Lender agrees that, prior to or at the
commencement of any Loan hereunder, it will communicate to
Borrower information regarding the Plan sufficient to identify to
Borrower any person or persons that have discretionary authority
or control with respect to the investment of the assets of the
Plan involved in the Loan or that render investment advice (as
defined in the preceding sentence) with respect to the assets of
the Plan involved in the Loan. In the event Lender fails to
communicate and keep current during the term of any Loan such
information, Lender rather than Borrower shall be deemed to have
made the representation and warranty in the first sentence of
this clause (b).
(c) Borrower and Lender agree that:
(i) the term "Collateral" shall mean cash, securities issued
or guaranteed by the United States government or its
agencies or instrumentalities, or irrevocable bank letters
of credit issued by a person other than Borrower or an
affiliate thereof;
(ii) prior to the making of any Loans hereunder, Borrower shall
provide Lender with (A) the most recent available audited
statement of Borrower's financial condition and (B) the
most recent available unaudited statement of Borrower's
financial condition (if more recent than the most recent
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<PAGE> 15
audited statement), and each Loan made hereunder shall be
deemed a representation by Borrower that there has been no
material adverse change in Borrower's financial condition
subsequent to the date of the latest financial statements
or information furnished in accordance herewith;
(iii) the Loan may be terminated by Lender at any time,
whereupon Borrower shall deliver the Loaned Securities to
Lender within the lesser of (A) the customary delivery
period for such securities; (B) five Business Days and (C)
the time negotiated for such delivery between Borrower and
Lender; provided, however, that Borrower and Lender may
agree to a longer period only if permitted by Prohibited
Transaction Exemption 81-6; and
(iv) the Collateral transferred shall be security only for
obligations of Borrower to the Plan with respect to Loans,
and shall not be security for any obligation of Borrower
to any agent or affiliate of the Plan.
19. Single Agreement. Borrower and Lender acknowledge that, and have entered
into this Agreement in reliance on the fact that, all Loans hereunder constitute
a single business and contractual relationship and have been entered into in
consideration of each other. Accordingly, Borrower and Lender hereby agree that
payments, deliveries and other transfers made by either of them in respect of
any Loan shall be deemed to have been made in consideration of payments,
deliveries and other transfers in respect of any other Loan hereunder, and the
obligations to make any such payments, deliveries and other transfers may be
applied against each other and netted. In addition, Borrower and Lender
acknowledge that, and have entered into this Agreement in reliance on the fact
that, all Loans hereunder have been entered into in consideration of each other.
Accordingly, Borrower and Lender hereby agree that (a) each shall perform all of
its obligations in respect of each Loan hereunder, and that a default in the
performance of any such obligation by Borrower or by Lender (the "Defaulting
Party") in any Loan hereunder shall constitute a default by the Defaulting Party
under all such Loans hereunder, and (b) the non-defaulting party shall be
entitled to set off claims and apply property held by it in respect of any Loan
hereunder against obligations owing to it in respect of any other Loan with the
Defaulting Party.
20. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
21. Waiver. The failure of a party to this Agreement to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any of this Agreement. All waivers in respect of a
Default must be in writing.
22. Remedies. All remedies hereunder and all obligations with respect to any
Loan shall survive the termination of the relevant Loan, return of Loaned
Securities or Collateral and termination of this Agreement.
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<PAGE> 16
23. Notices and Other Communications. Unless another address is specified in
writing by the respective party to whom any notice or other communication is to
be given hereunder, all such notices or communications shall be in writing or
confirmed in writing and delivered at the respective addresses set forth in
Schedule A attached hereto. All notices shall be effective upon actual receipt,
provided, however, that if any notice shall be received by a party on a day on
which such party is not open for business at its office located at the address
set forth in Schedule A, such notice shall be deemed to have been received by
such party at the opening of business on the next day on which such party is
open for business at such address.
24. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
24.1. EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY (A) SUBMITS TO
THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE
COURT SITTING IN NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY SUCH COURT,
SOLELY FOR THE PURPOSE OF ANY SUIT, ACTION OR PROCEEDING BROUGHT TO ENFORCE ITS
OBLIGATIONS HEREUNDER OR RELATING IN ANY WAY TO THIS AGREEMENT OR ANY LOAN
HEREUNDER AND (B) WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, ANY
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT AND ANY RIGHT OF JURISDICTION ON ACCOUNT OF ITS PLACE OF
RESIDENCE OR DOMICILE.
24.2. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY
HAVE TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
25. Miscellaneous. This Agreement supersedes any other agreement between the
parties hereto concerning loans of securities between Borrower and Lender. This
Agreement shall not be assigned by either party without the prior written
consent of the other party and any attempted assignment without such consent
shall be null and void. Subject to the foregoing, this Agreement shall be
binding upon and shall ensure to the benefit of Borrower and Lender and their
respective heirs, representatives, successors and assigns. This Agreement may be
terminated by either party upon written notice to the other, subject only to
fulfillment of any obligations then outstanding. This Agreement shall not be
modified, except by an instrument in writing signed by the party against whom
enforcement is sought. The parties hereto acknowledge and agree that, in
connection with this Agreement and each Loan hereunder, time is of the essence.
Each provision and agreement herein shall be treated as separate and independent
from any other provision herein and shall be enforceable notwithstanding the
unenforceability of any such other provision or agreement.
26. Definitions. For the purposes hereof:
26.1. "Broker-Dealer" shall mean any person that is a broker (including
a municipal securities broker), dealer, municipal securities dealer, government
securities broker or government securities dealer as defined in the Exchange
Act, regardless of whether the activities
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<PAGE> 17
of such person are conducted in the United States or otherwise require such
person to register with the Securities and Exchange Commission or other
regulatory body.
26.2. "Business Day" shall mean, with respect to any Loan hereunder, a
day on which regular trading occurs in the principal market for the Loaned
Securities subject to such Loan, provided, however, that for purposes of Section
15, such term shall mean a day on which regular trading occurs in the principal
market for the securities whose value is being determined. Notwithstanding the
foregoing, (i) for purposes of Section 8, "Business Day" shall mean any day on
which regular trading occurs in the principal market for any Loaned Securities
or for any securities Collateral under any outstanding Loan hereunder and "next
Business Day" shall mean the next day on which a transfer of Collateral may be
effected in accordance with Section 16; and (ii) in no event shall a Saturday or
Sunday be considered a Business Day.
26.3. "Clearing Organization" shall mean The Depositary Trust Company,
or, if agreed to by Borrower and Lender, such other clearing agency at which
Borrower (or Borrower's agent) and Lender (or Lender's agent) maintain accounts,
or a book-entry system maintained by a Federal Reserve Bank.
26.4. "Collateral" shall mean, whether now owned or hereafter acquired
and to the extent permitted by applicable law, (a) any property which Borrower
and Lender agree shall be acceptable collateral prior to the Loan and which is
transferred to Lender pursuant to Section 3 or 8 (including as collateral, for
definitional purposes, any letters of credit mutually acceptable to Lender and
Borrower), (b) any property substituted therefor pursuant to Section 3.5, (c)
all accounts in which such property is deposited and all securities and the like
in which any cash collateral is invested or reinvested, and (d) any proceeds of
any of the foregoing. For purposes of return of Collateral by Lender or purchase
or sale of securities pursuant to Section 12 or 13, such term shall include
securities of the same issuer, class and quantity as the Collateral initially
transferred by Borrower to Lender.
26.5. "Customer" shall mean any person that is a customer of Borrower
under Rule 15c3-3 under the Exchange Act or any comparable regulation of the
Secretary of the Treasury under Section 15C of the Exchange Act (to the extent
that Borrower is subject to such Rule or comparable regulation).
26.6. "Cutoff Time" shall mean a time on a Business Day by which a
transfer of cash, securities or other property must be made by Borrower or
Lender to the other, as shall be agreed by Borrower and Lender in Schedule B or
otherwise orally or in writing or, in the absence of any such agreement, as
shall be determined in accordance with market practice.
26.7. "Default" shall have the meaning assigned in Section 11.
26.8. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
26.9. "Federal Funds Rate" shall mean the rate of interest (expressed as
an annual rate), as published in Federal Reserve Statistical Release H.15(519)
or any publication submitted therefor, charged for federal funds (dollars in
immediately available funds borrowed by banks on
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<PAGE> 18
an overnight unsecured basis) on that day or, if the day is not a banking day in
New York City, on the next preceding banking day.
26.10. "Foreign Securities" shall mean, unless otherwise agreed,
securities that are principally cleared and settled outside the United States.
26.11. "Government Securities" shall mean governmental securities as
defined in Section 3(a)(42)(A)-(C) of the Exchange Act.
26.12. "LIBOR" shall mean for any date, the offered rate for deposits in
U.S. dollars for a period of three months which appears on the Reuters Screen
LIBO page as of 11:00 A.M., London time, on such date (or, if at least two such
rates appear, the arithmetic mean of such rates).
26.13. "Loan" shall mean a loan of securities hereunder.
26.14. "Loaned Security" shall mean any security which is a security as
defined in the Exchange Act, transferred in a Loan hereunder until such security
(or an identical security) is transferred back to Lender hereunder, except that,
if any new or different security shall be exchanged for any Loaned Security by
recapitalization, merger, consolidation or other corporate action, such new or
different security shall, effective upon such exchange, be deemed to become a
Loaned Security in substitution for the former Loaned Security for which such
exchange is made. For purposes of return of Loaned Securities by Borrower or
purchase or sale of securities pursuant to Section 12 or 13, such term shall
include securities of the same issuer, class and quantity as the Loaned
Securities, as adjusted pursuant to the preceding sentence.
26.15. "Plan" shall mean (a) any "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974 which is
subject to Part 4 of Subtitle B of Title 1 of such Act; (b) any "plan" as
defined in Section 4975(e)(1) of the Internal Revenue Code of 1986; or (c) any
entity the assets of which are deemed to be assets of any such "employee benefit
plan" or "plan" by reason of the Department of Labor's plan asset regulation, 29
C.F.R. Section 2510.3-101.
Smith Barney Inc.
By:
---------------------------------
Title:
------------------------------
Date:
--------------------------------
By:
---------------------------------
Title:
------------------------------
Date:
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ANNEX I
Lender Acting as Agent
This Annex sets forth the terms and conditions governing all
transactions in which a party lending securities ("Agent") in a Loan is acting
as agent for one or more third parties (each, a "Principal"). Unless otherwise
defined, capitalized terms used in this Annex shall have the meanings assigned
in the Securities Loan Agreement of which it forms a part (such agreement,
together with this Annex and any other schedules or exhibits, referred to as the
"Agreement") and, unless otherwise specified, all section references herein are
intended to refer to sections of such Securities Loan Agreement.
1. Additional Representations and Warranties. In addition to the
representations and warranties set forth in Section 9 of the Agreement, Agent
hereby makes the following representations and warranties, which shall continue
during the term of any Loan: Principal has duly authorized Agent to execute and
deliver the Agreement on its behalf, has the power to so authorize Agent and to
enter into the Loans contemplated by the Agreement and to perform the
obligations of Lender under such Loans, and has taken all necessary action to
authorize such execution and delivery by Agent and such performance by it.
2. Identification of Principals. Agent agrees (a) to provide
Borrower prior to any Loan under the Agreement with a written list of Principals
for which it intends to act as Agent (which list may be amended in writing from
time to time with the consent of Borrower), and (b) to provide Borrower, before
the close of business on the next Business Day after orally agreeing to enter
into a Loan, with notice of the specific Principal or Principals for whom it is
acting in connection with such Loan. If (i) Agent refuses to identify such
Principal or Principals prior to the close of business on such next Business Day
or (ii) Borrower shall determine in its sole discretion that any Principal or
Principals identified by Agent are not acceptable to it, Borrower may reject and
rescind any Loan with such Principal or Principals, return to Agent any Loaned
Securities previously transferred to Borrower and refuse any further performance
under such Loan, and Agent shall immediately return to Borrower any Collateral
previously transferred to Agent in connection with such Loan; provided, however,
that (A) Borrower shall promptly (and in any event within one Business Day)
notify Agent of its determination to reject and rescind such Loan and (B) to the
extent that any performance was rendered by any party under any Loan rejected by
Borrower, such party shall remain entitled to any fees or other amounts that
would have been payable to it with respect to such performance if such Loan had
not been rejected. Borrower acknowledges that Agent shall not have any
obligation to provide it with confidential information regarding the financial
status of its Principals; Agent agrees, however, that it will assist Borrower in
obtaining from Agent's Principals such information regarding the financial
status of such Principals as Borrower may reasonably request.
3. Limitation of Agent's Liability. The parties expressly
acknowledge that if the representations and warranties of Agent under the
Agreement, including this Annex, are true and correct in all material respects
during the term of any Loan and Agent otherwise complies with the provisions of
this Annex, then (a) Agent's obligations under the Agreement shall not
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include a guarantee of performance by its Principal or Principals and (b)
Borrower's remedies shall not include a right of setoff against obligations, if
any, of Agent arising in other transactions in which Agent is acting as
principal.
4. Multiple Principals.
(a) In the event that Agent proposes to act for more than one
Principal hereunder, Borrower and Agent shall elect whether (i) to treat Loans
under this Agreement as transactions entered into on behalf of separate
Principals or (ii) to aggregate such Loans as if they were transactions by a
single Principal. Failure to make such an election in writing shall be deemed an
election to treat Loans under this Agreement as transactions on behalf of
separate Principals.
(b) In the event that Borrower and Agent elect (or are deemed to
elect) to treat Loans under the Agreement as transactions on behalf of separate
Principals, the parties agree that (i) Agent will provide Borrower, together
with the notice described in Section 2(b) of this Annex, notice specifying the
portion of each Loan allocable to the account of each of the Principals for
which it is acting (to the extent that any such Loan is allocable to the account
of more than one Principal); (ii) the portion of any individual Loan allocable
to each Principal shall be deemed a separate Loan under the Agreement; (iii) the
mark to market obligations of Borrower and Lender under Section 8 of the
Agreement shall be determined on a Loan-by-Loan basis (unless the parties agree
to determine such obligations on a Principal-by-Principal basis); and (iv)
Borrower's and Lender's remedies under the Agreement upon the occurrence of a
Default shall be determined as if Agent had entered into a separate Agreement
with Borrower on behalf of each of its Principals.
(c) In the event that Borrower and Agent elect to treat Loans
under this Agreement as if they were transactions by a single Principal, the
parties agree that (i) Agent's notice under Section 2(b) of this Annex need only
identify the names of its Principals but not the portion of each Loan allocable
to each Principal's account, (ii) the mark to market obligations of Borrower and
Lender under Section 8 shall, subject to any greater requirement imposed by
applicable law, be determined on an aggregate basis for all Loans entered into
by Agent on behalf of any Principal; and (iii) Borrower's and Lender's remedies
upon the occurrence of a Default shall be determined as if all Principals were a
single Lender.
(d) Notwithstanding any other provision of the Agreement
(including without limitation this Annex), the parties agree that any
transactions by Agent on behalf of a Plan shall be treated as transactions on
behalf of separate Principals in accordance with Section 4(b) of this Annex (and
all mark to market obligations of the parties shall be determined on a
Loan-by-Loan basis).
5. Interpretation of Terms. All references to "Lender" in the
Agreement shall, subject to the provisions of this Annex (including among other
provisions the limitations on Agent's liability in Section 3 of this Annex), be
construed to reflect that (i) each Principal shall have, in connection with any
Loan or Loans entered into by Agent on its behalf, the rights, responsibilities,
privileges and obligations of a "Lender" directly entering into such Loan or
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Loans with Borrower under the Agreement, and (ii) Agent's Principal or
Principals have designated Agent as their sole agent for performance of Lender's
obligations to Borrower and for receipt of performance by Borrower of its
obligations to Lender in connection with any Loan or Loans under the Agreement
(including, among other things, as agent for each Principal in connection with
transfers of securities, cash or other property and as agent for giving and
receiving all notices under the Agreement). Both Agent and its Principal or
Principals shall be deemed "parties" to the Agreement and all references to a
"party" or "either party" in the Agreement shall be deemed revised accordingly
(and any Default by Agent under paragraph (e) or any other applicable provision
of Section 11 shall be deemed a Default by Lender).
SMITH BARNEY INC.
By:
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Title:
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Date:
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By:
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Title:
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Date:
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SCHEDULE A
NAMES AND ADDRESSES FOR COMMUNICATIONS
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Trade/Operations Issues:
[__________]
Telephone: 212-[ - ]
Telefax: 212-[ - ]
Contract Issues:
[__________]
Telephone: 212-[ - ]
Telefax: 212-[ - ]
