<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [ ]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
HERBALIFE
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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<PAGE> 2
[HERBALIFE LOGO]
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HERBALIFE INTERNATIONAL, INC.
1800 Century Park East, Los Angeles, California 90067
Tel: (310) 410-9600; Fax: (310) 557-3929
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1999
The 1999 Annual Meeting of Shareholders (the "Meeting") of Herbalife
International, Inc., a Nevada corporation (the "Company"), will be held
beginning at 6:00 p.m. on Thursday, May 20, 1999 at the Beverly Hilton Hotel,
9876 Wilshire Boulevard, Beverly Hills, California, 90210, to consider and vote
on the following matters:
1. The election of six directors to serve on the Company's Board of
Directors;
2. A proposal to amend the Company's Amended and Restated 1991 Stock
Option Plan (the "Option Plan") (i) to increase the aggregate number of
shares which may be issued upon exercise of all options granted under the
Option Plan by 500,000, (ii) to permit certain limited transfers of options
granted pursuant to the Option Plan, (iii) to increase the period for
exercise of an option following termination of employment (other than by
death or disability) from 30 days to 90 days and (iv) to increase the
aggregate number of stock options a participant under the Option Plan may
be awarded during any single calendar year from 1,500,000 to 2,250,000; and
3. Such other business as may properly come before said Meeting or any
adjournment or postponement thereof.
April 5, 1999 has been fixed as the record date for shareholders entitled
to vote at the Meeting, and only holders of record of the Company's Class A
Common Stock at the close of business on that day will be entitled to receive
notice of and to vote at the Meeting. Each outstanding share of Class A Common
Stock is entitled to one vote on all matters to be voted on at the Meeting.
Shares of Class B Common Stock have no voting rights at the Meeting.
All shareholders are cordially invited to attend the Meeting. To ensure
your representation at the Meeting, whether or not you plan to attend, you are
urged to complete and promptly return the enclosed proxy, which is solicited by
the Board of Directors, in the return envelope provided. Returning your proxy
does not deprive you of your right to attend the Meeting and to vote your shares
of Class A Common Stock in person, should you desire to do so.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ CHRISTOPHER PAIR
Christopher Pair
Secretary
Dated: April 20, 1999
PLEASE DATE, MARK AND SIGN THE ACCOMPANYING PROXY CARD AND MAIL IT
PROMPTLY IN THE ENCLOSED ENVELOPE WHICH REQUIRES
NO POSTAGE FOR MAILING IN THE UNITED STATES.
<PAGE> 3
HERBALIFE INTERNATIONAL, INC.
------------------------
PROXY STATEMENT
------------------------
ANNUAL MEETING OF SHAREHOLDERS
MAY 20, 1999
VOTING INFORMATION
This Proxy Statement is first being mailed on or about April 20, 1999 to
all of the holders of shares of the voting common stock of Herbalife
International, Inc., a Nevada corporation (the "Company"), in connection with
the solicitation by the Board of Directors of the Company of proxies in the
enclosed form to be used at the Annual Meeting of Shareholders to be held on
Thursday, May 20, 1999 beginning at 6:00 p.m. at the Beverly Hilton Hotel, 9876
Wilshire Boulevard, Beverly Hills, California 90210, and at any adjournment or
postponement thereof (the "Meeting"), pursuant to the accompanying Notice of
Annual Meeting.
Pursuant to a recapitalization approved by the shareholders on December 11,
1997 (the "Recapitalization"), the Company has two classes of common stock. They
are the Class A Common Stock, $0.01 par value per share (the "Class A Common
Stock"), and the Class B Common Stock, $0.01 par value per share (the "Class B
Common Stock"). The Class A Common Stock and the Class B Common Stock are
collectively referred to in this Proxy Statement as the "Common Stock." Class A
Common Stock is entitled to one vote per share on each matter submitted to vote
at the Meeting. Class B Common Stock has no voting rights at the Meeting.
Shares of Class A Common Stock, represented by a properly executed proxy,
will be voted as indicated on the proxy. The form of proxy accompanying this
Proxy Statement and the persons named therein as proxies have been approved by
the Board of Directors of the Company. Any proxy given pursuant to this
solicitation is revocable at any time prior to the voting at the Meeting by (i)
delivering written notice to the Secretary of the Company; (ii) submitting a
subsequently dated proxy; or (iii) attending the Meeting, withdrawing the proxy,
and voting in person.
It is proposed that, at the Meeting, action will be taken on the matters
set forth in the accompanying Notice of Annual Meeting and described in this
Proxy Statement. The Board of Directors knows of no other matters which may
properly be presented for action at the Meeting. If any other matters do
properly come before the Meeting, the persons named on the enclosed proxy will
have discretionary authority to vote thereon in accordance with their best
judgment.
When proxies in the form accompanying this Proxy Statement are returned
properly executed, the shares represented thereby will be voted as indicated
thereon and, where a choice has been specified by the shareholder on the proxy,
the shares will be voted in accordance with the specification so made. The
expense of soliciting proxies, including the cost of preparing, assembling, and
mailing the material submitted herewith, will be paid for by the Company. In
addition to solicitations by mail, directors, officers and regular employees of
the Company may solicit proxies personally or by telephone, mail, or other
means, for which no compensation shall be paid other than their regular salary
or other usual compensation. Arrangements will also be made as appropriate with
banks, brokerage houses, and other custodians, nominees, and fiduciaries to
forward solicitation materials to the beneficial owners of Class A Common Stock
held of record by such persons, and the Company will, upon request, reimburse
said persons for their reasonable expenses in so doing.
At the close of business on April 5, 1999, there were outstanding and
entitled to vote at the Meeting 9,983,418 shares of Class A Common Stock. Each
share of Class A Common Stock outstanding on such date entitles the shareholder
of record to one vote on all matters submitted at the Meeting.
The presence in person or by proxy of shareholders entitled to cast a
majority of all the votes entitled to be cast will constitute a quorum for the
transaction of business at the Meeting.
1
<PAGE> 4
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table lists, as of March 1, 1999, information as to the
beneficial ownership of Class A Common Stock and Class B Common Stock by (i)
each of the Company's directors, (ii) the Company's Chief Executive Officer and
each of the four other most highly compensated executive officers as indicated
in the Summary Compensation Table under "Compensation of Directors and Executive
Officers -- Executive Compensation" below, (iii) all directors and executive
officers as a group, and (iv) each person or entity believed by the Company to
beneficially own more than five percent (5%) of the Common Stock outstanding. In
each instance, information as to the number of shares owned and the nature of
ownership has been provided by the individuals identified or described and is
not within the direct knowledge of the Company.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF PERCENT OF SHARES OF PERCENT OF PERCENT OF
NAME AND ADDRESS OF CLASS A CLASS A CLASS B CLASS B COMMON
BENEFICIAL OWNER(1) COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK STOCK
------------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Mark Hughes(2).............. 5,841,931 57.0% 11,533,864 60.7% 59.4%
1800 Century Park East
Los Angeles, CA 90067
Christopher Pair(3)......... 110,249 1.1% 250,496 1.3% 1.3%
1800 Century Park East
Los Angeles, CA 90067
Michael E. Rosen(4)......... 75,417 * 180,832 * *
1800 Century Park East
Los Angeles, CA 90067
Robert A. Sandler(3)........ 37,498 * 84,998 * *
1800 Century Park East
Los Angeles, CA 90067
Timothy Gerrity(3).......... 43,082 * 106,165 * *
1800 Century Park East
Los Angeles, CA 90067
Edward J. Hall(5)........... 11,330 * 32,664 * *
P.O. Box 907
Newport Beach, CA 92662
Alan Liker(3)............... 8,997 * 27,998 * *
150 South Doheny Drive
Beverly Hills, CA 90211
Christopher M. Miner(3)..... 8,997 * 29,998 * *
Redfish Telemetrix, Inc.
3183 Airway Avenue, Bldg E
Costa Mesa, CA 92626
Fidelity Management &....... 1,037,500 10.4% 2,010,500 10.8% 10.7%
Research Company(6)
82 Devonshire Street
Boston, MA 02109
All executive officers
and....................... 6,136,034 58.2% 12,247,015 62.2% 60.8%
directors as a group
(8 persons)(7)
</TABLE>
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* Less than one percent (1%).
(1) The persons in this table have sole voting, investment, and dispositive
power with respect to all shares of the Common Stock shown as beneficially
owned by them, subject to community property laws where applicable.
(2) Includes 183,333 shares of Class A Common 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 274,998 shares of Class A Common Stock and 399,996 shares of Class
B Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement. Also includes 5 million
shares of Class B Common Stock held by
2
<PAGE> 5
affiliates of Mr. Hughes that are subject to forward purchase contracts with
DECS(SM) Trust III, a Delaware business trust. Pursuant to the terms of the
forward purchase contracts, such shares (or a portion thereof) or an
equivalent amount of cash is required to be delivered to DECS(SM) Trust III
in February 2001 in order to enable DECS(SM) Trust III to settle the
DECS(SM) securities issued by that entity. Until settlement of the DECS(SM),
generally, Mr. Hughes' affiliates retain any voting rights and the right to
receive dividends with respect to the Class B Common Stock. In addition,
such shares have been pledged in favor of DECS(SM) Trust III to secure the
obligations under the forward purchase contracts.
(3) Consists of shares issuable upon exercise of stock options which are
exercisable presently or within 60 days of this Proxy Statement.
(4) Includes 64,164 shares of Class A Common Stock and 158,330 shares of Class B
Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement.
(5) Includes 8,997 shares of Class A Common Stock and 27,998 shares of Class B
Common Stock issuable upon exercise of stock options which are exercisable
presently or within 60 days of this Proxy Statement.
(6) Information based on Technimetrics Service Report as of December 31, 1998.
(7) Includes an aggregate of 555,515 shares of Class A Common Stock and
1,085,979 shares of Class B Common Stock issuable upon exercise of stock
options which are exercisable presently or within 60 days of this Proxy
Statement.
3
<PAGE> 6
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors is presently comprised of six members, all
of whom hold office after election until the next annual meeting of
shareholders, or until their respective successors are elected and qualified.
All six of the Company's current directors are the nominees to be elected at the
Meeting to one year terms expiring in 2000.
Each nominee has consented to being named in the Proxy Statement and to
serve if elected.
Directors are elected by a plurality of the votes cast. It is the intention
of the persons named in the enclosed form of proxy, unless authorization to do
so is withheld, to vote FOR the election of the six nominees listed below. If
prior to the Meeting any nominee should become unavailable for election, an
event which is not now anticipated by the Board of Directors, the proxies will
be voted for the election of such other person or persons as shall be determined
by the persons named in the enclosed form of proxy in accordance with their
judgment.
Biographical information follows for each person nominated and for two
executive officers of the Company. The table sets forth certain information
regarding these individuals (ages are as of January 1, 1999).
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Mark Hughes*................. 43 Chairman of the Board, Chief Executive
Officer and President
Christopher Pair*............ 44 Director, Executive Vice President,
Chief Operating Officer and Secretary
Michael E. Rosen*............ 52 Director, Executive Vice President,
Chief Executive Corporate Marketing and
Corporate Development
Edward J. Hall*(1)(2)........ 52 Director
Alan Liker*(2)............... 61 Director
Christopher M. 47 Director
Miner*(1)(2)...............
Robert A. Sandler............ 54 Executive Vice President and General
Counsel
Timothy Gerrity.............. 48 Executive Vice President and Chief
Financial Officer
</TABLE>
- ---------------
* Nominee.
(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 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 International 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
Executive Vice President and Chief Operating Officer. Mr. Pair has been a
director of the
4
<PAGE> 7
Company since May 1990 and is the Corporate Secretary. Prior to 1985, Mr. Pair
served in various management positions with U.S. Leasing, Raytheon Data Systems
and Consolidated Foods. Mr. Pair is Vice-Chairman of the Direct Selling
Educational Foundation and serves on its Executive Committee. Mr. Pair is also
Vice-Chairman of the Board of Directors of the Direct Selling Association, a
member of its Executive and Finance Committee and serves on its Long-Range
Planning Committee. He also serves on the Board of the Counsel for Responsible
Nutrition, The American Herbal Products Association and is a member of the CEO
Council of The World Federation of Direct Selling Associations. 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 Corporate Marketing and Corporate
Development. Mr. Rosen's responsibilities include the Company's international
and domestic marketing, developing the Company's personal care and cosmetics
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 Chairman of the JCP Television Shopping Network, which he founded in 1986.
EDWARD J. HALL, a certified public accountant, is an independent investor.
From April 1995 through November 1998, he served as the Chief Financial Officer
of Cruttenden Roth Incorporated, an investment banking firm. 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. From 1988 through
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. Currently, Mr. Liker serves as a
business adviser to 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. Previously he was a
director of Budget Group, Inc., First Charter Bank and the JCP Television
Shopping Network.
CHRISTOPHER M. MINER is serving as the Chief Executive Officer and Chief
Financial Officer of Redfish Telemetrix, Inc., a telecommunication company,
since May 1997. He has served as Chief Financial Officer of Wow! Laboratories,
Inc., an oral healthcare company, from July 1996 to December 1998. Mr. Miner co-
founded Vis-A-Vis Communications, Inc. (formerly Workstation Technologies, Inc.)
in 1989. Vis-A-Vis Communications is a leading developer of interactive
communications software and hardware products. 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.
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 & Morse, 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.
TIMOTHY GERRITY joined the Company in May 1985 and currently serves as its
Executive Vice President and Chief Financial Officer. Mr. Gerrity, a certified
public accountant, is responsible for the worldwide financial operations of the
Company. His previous experience includes various management positions with
Wickes Corporation, Deloitte & Touche LLP, and Fluor Corporation. Mr. Gerrity
was recently appointed a
5
<PAGE> 8
member of the Finance Committee of the Direct Selling Association. Mr. Gerrity
received his B.S. degree from California State University at Northridge and his
M.B.A. from the University of Southern California.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held 8 meetings and acted by unanimous written
consent on 7 occasions during the fiscal year ended December 31, 1998.
The Board has five standing committees, the Audit Committee, established in
March 1992, the Compensation Committee, established in August 1991, the Stock
Option Committee, established in September 1991, the Finance Committee,
established in February 1994, and the Business Development Committee,
established in April 1994.
The Audit Committee recommends engagement of the Company's independent
accountants, approves the services performed by such accountants and reviews and
evaluates the Company's accounting systems and its system of internal accounting
controls.
The Compensation Committee makes recommendations to the full Board of
Directors regarding levels and types of compensation of the Company's executive
officers. In addition, the Compensation Committee administers the 1994
Performance-Based Annual Incentive Compensation Plan and, in conjunction with
the Chief Executive Officer, the 1992 Executive Incentive Compensation Plan. See
"Compensation of Directors and Executive Officers -- Executive
Compensation -- Description of Certain Plans."
The Stock Option Committee administers the Company's Stock Option Plan. See
"Compensation of Directors and Executive Officers -- Executive
Compensation -- Description of Certain Plans."
The Finance Committee reviews certain aspects of the Company's cash
management systems.
The Business Development Committee develops and investigates the Company's
financing alternatives, tax planning structures and expansion opportunities.
In 1998, the Audit, Compensation, Stock Option, Finance, and Business
Development Committees met and acted by unanimous written consent on 5 and 0, 5
and 2, 0 and 9, 5 and 0, and 0 and 0 occasions, respectively. In 1998, all
directors attended at least 75% of the aggregate number of Board and committee
meetings held during the period of his service.
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.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Each director who is not an officer of or consultant to the Company
receives $45,000 per year for his services as a director plus $5,000 per year
for each committee of the Board on which he serves ($10,000 if he serves as
chairman of that committee). Any outside directors serving on the Board of
Directors of any of the foreign subsidiaries of the Company are paid fees of
$2,500 annually for each such Board on which they serve. Additionally, the Board
authorized the issuance, as of April 19, 1993, to each of Mr. Hall and Paul
Buxbaum, a former director of the Company, of a cash-only stock appreciation
right ("SAR") covering 25,000 shares of Common Stock as constituted prior to the
Recapitalization (the "Old Common Stock"). The SARs vest in
6
<PAGE> 9
annual installments and are automatically exercised and redeemed on the date of
vesting of each installment. The amount payable upon each such automatic
exercise is equal to the fair market value of the Common Stock or Old Common
Stock, as the case may be, on the date of exercise less the "exercise price" of
$9.00 (the closing sale price of the Old Common Stock on April 19, 1993) in the
case of the installments that vested in 1994 and 1995 and $7.375 (the closing
sale price of the Old Common Stock on November 1, 1995, the effective date of a
repricing of the SARs) in the case of the installments that will vest
thereafter, in each case multiplied by the number of SARs being exercised and
redeemed. In addition, the Board authorized the issuance, as of November 1,
1995, to each of Messrs. Buxbaum, Hall and Liker of a cash-only SAR covering
10,000 shares of Old Common Stock. The SARs vest in five annual installments and
are automatically exercised and redeemed on the date of vesting of each
installment for an amount equal to the fair market value of the Common Stock or
Old Common Stock, as the case may be, on such date less the "exercise price" of
$7.375 (the closing sale price of the Old Common Stock on November 1, 1995)
multiplied by the number of SARs being exercised and redeemed. In addition, the
Board authorized the issuance, as of July 15, 1996, to each of Messrs. Buxbaum,
Hall, Liker and Miner of a cash-only SAR covering 25,000 shares of Old Common
Stock. The SARs vest in five annual installments and are automatically exercised
and redeemed on the date of vesting of each installment of an amount equal to
the fair market value of the Common Stock or Old Common Stock, as the case may
be, on such date, less the "exercise price" of $13.00 (the closing sale price of
the Old Common Stock on July 15, 1996), multiplied by the number of SARs being
exercised and redeemed. Finally, the Board authorized the issuance, as of
November 5, 1996, to each of Messrs. Hall, Liker and Miner of a cash-only SAR
covering 25,000 shares of Old Common Stock. The SARs vest in five annual
installments and are automatically exercised and redeemed on the date of vesting
of each installment for an amount equal to the fair market value of the Common
Stock or the Old Common Stock, as the case may be, on such date, less the
"exercise price" of $19.875 (the closing sale price of the Old Common Stock on
November 5, 1996), multiplied by the number of SARs being exercised and
redeemed. In July 1997, all of the outstanding SAR's described above (except for
those held by Mr. Buxbaum) were converted into options to purchase shares of
Common Stock, each with a vesting schedule identical to the vesting schedule of
the corresponding SAR and with an exercise price originally equal to the
exercise price of the corresponding SAR and subsequently repriced in accordance
with the repricing table set forth in section (4) below. Additionally, in April
1997, the Company granted, under the Option Plan, 8,333 stock options of Class A
Common Stock and 16,667 stock options of Class B Common Stock and on June 19,
1998, 50,000 shares of Class B Common Stock to each of Messrs. Hall, Liker and
Miner all with a five year vesting schedule. On October 14, 1998, these stock
options were also repriced as set forth in the repricing table. Directors who
are also officers receive no separate compensation for their services as
directors.
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<PAGE> 10
EXECUTIVE COMPENSATION
(1) SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation of the
Company's Chief Executive Officer and four additional most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 during
the fiscal year ended December 31, 1998 (the "Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- -------------------------------------
AWARDS PAYOUTS
------------------------ ----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) AWARD(S)($) SARS(#) PAYOUTS($) ($)(3)
------------------ ---- ---------- ----------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark Hughes............... 1998 $1,000,011 $4,500,000 $ -- $-- 375,000 $-- $129,013
President, Chief 1997 1,000,012 6,757,563 -- -- 1,000,000 -- 126,237
Executive Officer 1996 1,000,000 6,288,913 -- -- 500,000 -- 126,710
and Chairman of the
Board
Christopher Pair.......... 1998 $1,098,558 $ 920,000 $ -- $-- 150,000 $-- $227,483
Executive Vice President 1997 894,615 896,000 -- -- 200,000 -- 216,426
and Chief Operating
Officer 1996 699,037 500,000 -- -- 242,500 -- 106,369
Michael E. Rosen.......... 1998 $ 896,154 $ 630,000 $600,000 $-- 150,000 $-- $128,080
Executive Vice
President, 1997 694,616 784,000 600,000 -- 150,000 -- 107,220
Chief Executive
Corporate 1996 500,006 350,000 600,000 -- 100,000 -- 74,744
Marketing and
Corporate Development
Robert A. Sandler......... 1998 $ 697,115 $ 360,000 $ -- $-- 50,000 $-- $ 96,660
Executive Vice President 1997 492,884 448,000 325,000 48,022
and General Counsel
Timothy Gerrity........... 1998 $ 548,692 $ 540,000 $ -- $-- 100,000 $-- $ 81,441
Executive Vice President 1997 447,308 672,000 -- -- 75,000 -- 84,877
and Chief Financial
Officer 1996 347,596 320,000 -- -- 138,875 -- 53,381
</TABLE>
- ---------------
(1) 1998, 1997 and 1996 amounts (other than for Mr. Gerrity in 1996) include
bonuses earned under the Company's 1994 Performance-Based Annual Incentive
Compensation Plan. The 1996 amount for Mr. Gerrity includes bonuses paid
under a bonus program falling within the framework of the Company's 1992
Executive Incentive Compensation Plan. See "Description of Certain Plans"
and "Compensation Committee Report."
(2) For each individual named, excludes perquisites, other personal benefits,
securities and property, which did not exceed in any year the lesser of
$50,000 or 10% of the total annual salary and bonus reported for such
individual for such year. In the case of Mr. Rosen, the listed amount
reflects deferred compensation pursuant to a Deferred Compensation Agreement
between the Company and Mr. Rosen. See "Employment Contracts and Change in
Control Arrangements."
(3) For 1998, these amounts represent payments under the Company's 401(k)
Tax-Sheltered Savings Plan, Executive Medical Plan, Executive Long Term
Disability Plan, Executive Life Insurance Plan and Deferred Compensation
Plan. Amounts with respect to the 401(k) Tax-Sheltered Savings Plan were
$4,800, $4,800, $4,800, and $4,800 for Mr. Pair, Mr. Rosen, Mr. Sandler and
Mr. Gerrity, respectively; amounts with respect to the Executive Medical
Plan were $9,390, $9,390, $9,390, $9,390 and $9,390 for Mr. Hughes, Mr.
Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively; amounts with
respect to the Executive Long Term Disability Plan were $4,093, $6,189,
$7,220, $4,093 and $5,952 for Mr. Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler
and Mr. Gerrity, respectively; amounts with respect to the Executive Life
Insurance Plan were $15,529, $97,104, $17,055, $8,377 and $6,229 for Mr.
Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively;
amounts with respect to the Deferred Compensation Plan were $100,001,
$110,000, $89,615, $70,000 and $55,000 for Mr. Hughes, Mr. Pair, Mr. Rosen,
Mr. Sandler and Mr. Gerrity, respectively. For 1997, these amounts represent
payments under the Company's 401(k) Tax-Sheltered Savings Plan, Executive
Medical Plan, Executive Long Term Disability Plan, Executive Life Insurance
Plan and Deferred Compensation Plan. Amounts with respect to the 401(k)
Tax-Sheltered Savings Plan were $4,800, $4,800, $4,800, and $4,800 for Mr.
Pair,
8
<PAGE> 11
Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively; amounts with respect
to the Executive Medical Plan were $8,333, $8,333, $8,333, $8,333 and $8,333
for Mr. Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity,
respectively; amounts with respect to the Executive Long Term Disability
Plan were $4,093, $6,189, $6,964, $3,575 and $5,302 for Mr. Hughes, Mr.
Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively; amounts with
respect to the Executive Life Insurance Plan were $14,284, $97,104, $7,123,
$3,519 and $1,663 for Mr. Hughes, Mr. Pair, Mr. Rosen, Mr. Sandler and Mr.
Gerrity, respectively; amounts with respect to the Deferred Compensation
Plan were $100,000, $90,000, $70,000, $27,795 and $45,000 for Mr. Hughes,
Mr. Pair, Mr. Rosen, Mr. Sandler and Mr. Gerrity, respectively; and amounts
for a special Company-provided vacation payment were $10,000, $10,000, and
$20,000 for Mr. Pair, Mr. Rosen, and Mr. Gerrity, respectively. For 1996,
these amounts represent payments under the Company's 401(k) Tax-Sheltered
Savings Plan, Executive Medical Plan, Executive Long Term Disability Plan,
Executive Life Insurance Plan and Deferred Compensation Plan. Amounts with
respect to the 401(k) Tax-Sheltered Savings Plan were $4,500, $4,500 and
$4,500 for Mr. Pair, Mr. Rosen and Mr. Gerrity, respectively; amounts with
respect to the Executive Medical Plan were $8,004, $8,004, $8,004 and $8,004
for Mr. Hughes, Mr. Pair, Mr. Rosen and Mr. Gerrity, respectively; amounts
with respect to the Executive Long Term Disability Plan were $4,093, $6,189,
$6,743 and $4,652 for Mr. Hughes, Mr. Pair, Mr. Rosen and Mr. Gerrity,
respectively; amounts with respect to the Executive Life Insurance Plan were
$14,140, $17,772, $5,497 and $1,225 for Mr. Hughes, Mr. Pair, Mr. Rosen and
Mr. Gerrity, respectively; and amounts with respect to the Deferred
Compensation Plan were $100,000, $69,904, $50,000 and $35,000 for Mr.
Hughes, Mr. Pair, Mr. Rosen and Mr. Gerrity, respectively.
(2) OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of Class A Common Stock Options and
Class B Common Stock Options during the fiscal year ended December 31, 1998 to
the Named Officers.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
OPTIONS/SARS
GRANTED TO EXERCISE GRANT DATE
OPTIONS/SARS EMPLOYEE IN OR BASE EXPIRATION PRESENT
NAME GRANTS(#)(1) FISCAL YEAR PRICE($/SH)(2) DATE VALUE($)(3)
---- ------------ ------------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Mark Hughes
Class A 375,000 20.22% 8.000 6/19/08 4,374,015
Class B -- -- -- -- --
Christopher Pair
Class A -- -- -- -- --
Class B 150,000 8.09% 6.625 6/19/08 1,472,346
Michael E. Rosen
Class A -- -- -- -- --
Class B 150,000 8.09% 6.625 6/19/08 1,472,346
Robert A. Sandler
Class A -- -- -- -- --
Class B 50,000 2.70% 6.625 6/19/08 490,782
Timothy Gerrity
Class A -- -- -- -- --
Class B 100,000 5.39% 6.625 6/19/08 981,564
</TABLE>
- ---------------
(1) All options granted in 1998 are exercisable in cumulative 20% installments
commencing one year from date of grant, with full vesting occurring on the
fifth anniversary.
(2) All options were granted based on the closing price for the Common Stock (as
reported in the Wall Street Journal). During October 1998, substantially all
Common Stock options were repriced to reflect the then current price of the
Common Stock.
(3) In accordance with the rules of the Securities & Exchange Commission, the
Black Scholes option pricing model was used to estimate the grant date
present value of the options set forth in this table. The Company cannot
predict or estimate the future price of the Company's Common Stock and no
option
9
<PAGE> 12
pricing model, including the Black Scholes model, can accurately determine
the value of an option. Accordingly, there is no assurance that the value
realized by an officer, if any, will be at or near the value estimated in
accordance with the Black Scholes model. Assumptions used for the valuation
include: 59.54% price volatility; 5.65% weighed average risk free rate of
return; 3.5% dividend yield and options exercises averaging 4.9 year term.
No adjustment was made for non-transferability or risk of forfeiture.
(3) AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to shares acquired
on exercise of Class A Common Stock Options and Class B Common Stock Options and
unexercised options to purchase Class A Common Stock and Class B Common Stock
granted in fiscal 1998 and prior years.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SHARES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
ACQUIRED VALUE FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- -------------- ----------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Hughes
Class A -- -- 133,332 741,669 833,325.00 4,635,431.25
Class B -- -- 266,664 733,335 2,033,313.00 5,591,679.36
Christopher Pair
Class A -- 105,249 89,336 687,233.749 558,350.00
Class B -- 210,496 328,669 1,605,031.99 2,506,101.11
Michael E. Rosen
Class A -- -- 60,831 61,669 397,371.24 392,723.12
Class B -- -- 121,664 273,336 927,687.999 2,084,186.99
Robert A. Sandler
Class A -- -- 24,165 84,168 151,031.25 526,050.00
Class B -- -- 48,332 218,335 368,531.49 1,664,804.37
Timothy Gerrity
Class A -- -- 39,749 45,251 257,025.00 282,818.75
Class B -- -- 79,499 190,501 606,179.87 1,452,570.12
</TABLE>
- ---------------
(1) Represents the difference between the market price of the Company's Common
Stock on December 31, 1998 and the exercise price of the options.
10
<PAGE> 13
(4) TEN YEAR OPTION/SAR REPRICINGS
In October 1998, the Compensation Committee reviewed the exercise price of
certain stock options in light of the current stock trading prices. Based on a
comparison of then current trading prices and the exercise price of such
options, the Committee determined that such options had ceased to provide the
incentives that they were originally intended to provide. Accordingly, on
October 14, 1998, the Board of Directors approved the repricing of substantially
all option grants to then current fair market value of the Company's Common
Stock.
The following table sets forth information with respect to the repricing of
options of Common Stock held by any current director or executive officer of the
Company at any time during the last ten fiscal years of the Company. As a result
of the Recapitalization, 1/3 of the options of Old Common Stock were
reclassified as options of Class A Common Stock and 2/3 as options of Class B
Common Stock. Accordingly, options repriced prior to the Recapitalization are
classified as options of Class A Common Stock and Class B Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE EXERCISE LENGTH OF ORIGINAL
UNDERLYING OF OLD COMMON PRICE AT OPTION TERM
OPTIONS/SARS STOCK AT TIME TIME OF REMAINING AT DATE
REPRICED OR OF REPRICING REPRICING OR NEW EXERCISE OF REPRICING OR
NAME DATE AMENDED OR AMENDMENT AMENDMENT PRICE AMENDMENT
(a) (b) (#)(c) ($)(d) ($)(e) ($)(f) (g)
---- -------- ------------ ------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
MARK HUGHES
Class A
3/13/97 166,667 $16.375 $ 30.75 $16.375 9 yrs.; 299 days
10/14/98 166,667 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 166,667 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 274 days
10/14/98 375,000 $ 8.00 $ 22.125 $ 8.00 9 yrs.; 249 days
10/14/98 166,667 $ 8.00 $ 16.375 $ 8.00 8 yrs.; 84 days
Class B
3/13/97 333,333 $16.375 $ 30.75 $16.375 9 yrs.; 299 days
10/14/98 333,333 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 333,333 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 274 days
10/14/98 333,333 $ 6.625 $ 16.375 $ 6.625 8 yrs.; 84 days
CHRISTOPHER PAIR
Class A
11/01/95 20,000 $ 7.375 $ 8.875 $ 7.375 7 yrs.; 1 day
11/01/95 50,000 $ 7.375 $ 15.25 $ 7.375 8 yrs.; 35 days
10/14/98 25,000 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 39,167 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 274 days
10/14/98 41,667 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 22 days
10/14/98 41,667 $ 8.00 $ 20.00 $ 8.00 9 yrs.; 45 days
Class B
11/01/95 40,000 $ 7.375 $ 8.870 $ 7.375 7 yrs.; 1 day
11/01/95 100,000 $ 7.375 $ 15.25 $ 7.375 8 yrs.; 35 days
10/14/98 50,000 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 78,333 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 274 days
10/14/98 20,833 $ 6.625 $ 7.375 $ 6.625 7 yrs.; 18 days
10/14/98 83,333 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 22 days
10/14/98 83,333 $ 6.625 $ 20.00 $ 6.625 9 yrs.; 45 days
10/14/98 150,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
10/14/98 40,000 $ 6.625 $ 7.375 $ 6.625 5 yrs.; 53 days
10/14/98 33,333 $ 6.625 $ 7.375 $ 6.625 4 yrs.; 19 days
MICHAEL ROSEN
Class A
11/01/95 58,333 $ 7.375 $ 19.875 $ 7.375 8 yrs.; 282 days
10/14/98 16,667 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 33,333 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 22 days
10/14/98 33,333 $ 8.00 $ 20.00 $ 8.00 9 yrs.; 45 days
Class B
11/01/95 116,667 $ 7.375 $ 19.875 $ 7.375 8 yrs.; 282 days
10/14/98 33,333 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 8,333 $ 6.625 $ 7.375 $ 6.625 7 yrs.; 18 days
10/14/98 66,667 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 22 days
10/14/98 66,667 $ 6.625 $ 20.00 $ 6.625 9 yrs.; 45 days
10/14/98 150,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
10/14/98 70,000 $ 6.625 $ 7.375 $ 6.625 5 yrs.; 300 days
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE EXERCISE LENGTH OF ORIGINAL
UNDERLYING OF OLD COMMON PRICE AT OPTION TERM
OPTIONS/SARS STOCK AT TIME TIME OF REMAINING AT DATE
REPRICED OR OF REPRICING REPRICING OR NEW EXERCISE OF REPRICING OR
NAME DATE AMENDED OR AMENDMENT AMENDMENT PRICE AMENDMENT
(a) (b) (#)(c) ($)(d) ($)(e) ($)(f) (g)
---- -------- ------------ ------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
ROBERT SANDLER
Class A
03/13/97 50,000 $16.375 $ 30.75 $16.375 9 yrs.; 299 days
10/14/98 16,667 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 33,333 $ 8.00 $15.6875 $ 8.00 8 yrs.; 273 days
10/14/98 8,333 $ 8.00 $ 20.00 $ 8.00 9 yrs.; 45 days
10/14/98 50,000 $ 8.00 $ 16.375 $ 8.00 8 yrs.; 84 days
Class B
03/13/97 100,000 $16.375 $ 30.75 $16.375 9 yrs.; 299 days
10/14/98 33,333 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 66,667 $ 6.625 $15.6875 $ 6.625 8 yrs.; 273 days
10/14/98 16,667 $ 6.625 $ 20.00 $ 6.625 9 yrs.; 45 days
10/14/98 50,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
10/14/98 100,000 $ 6.625 $ 16.375 $ 6.625 8 yrs.; 84 days
TIMOTHY GERRITY
Class A
11/01/95 16,667 $ 7.375 $ 15.25 $ 7.375 8 yrs.; 35 days
10/14/98 16,667 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 21,250 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 274 days
10/14/98 25,000 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 22 days
10/14/98 8,333 $ 8.00 $ 20.00 $ 8.00 9 yrs.; 45 days
Class B
11/01/95 33,333 $ 7.375 $ 15.25 $ 7.375 8 yrs.; 35 days
10/14/98 33,333 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 42,500 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 274 days
10/14/98 7,500 $ 6.625 $ 7.375 $ 6.625 7 yrs.; 18 days
10/14/98 50,000 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 22 days
10/14/98 16,667 $ 6.625 $ 20.00 $ 6.625 9 yrs.; 45 days
10/14/98 100,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
10/14/98 20,000 $ 6.625 $ 7.375 $ 6.625 5 yrs.; 53 days
EDWARD HALL
Class A
10/14/98 8,333 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 6,667 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 305 days
10/14/98 8,333 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 52 days
Class B
10/14/98 16,667 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 13,333 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 305 days
10/14/98 16,667 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 52 days
10/14/98 4,000 $ 6.625 $ 7.375 $ 6.625 7 yrs.; 48 days
10/14/98 50,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
ALAN LIKER
Class A
10/14/98 8,333 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 6,667 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 305 days
10/14/98 8,333 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 52 days
Class B
10/14/98 16,667 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 4,000 $ 6.625 $ 7.375 $ 6.625 7 yrs.; 48 days
10/14/98 13,333 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 305 days
10/14/98 16,667 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 52 days
10/14/98 50,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
CHRISTOPHER MINER
Class A
10/14/98 8,333 $ 8.00 $ 16.25 $ 8.00 8 yrs.; 178 days
10/14/98 8,333 $ 8.00 $ 19.875 $ 8.00 8 yrs.; 52 days
10/14/98 5,867 $ 8.00 $ 13.00 $ 8.00 7 yrs.; 305 days
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES MARKET PRICE EXERCISE LENGTH OF ORIGINAL
UNDERLYING OF OLD COMMON PRICE AT OPTION TERM
OPTIONS/SARS STOCK AT TIME TIME OF REMAINING AT DATE
REPRICED OR OF REPRICING REPRICING OR NEW EXERCISE OF REPRICING OR
NAME DATE AMENDED OR AMENDMENT AMENDMENT PRICE AMENDMENT
(a) (b) (#)(c) ($)(d) ($)(e) ($)(f) (g)
---- -------- ------------ ------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Class B
10/14/98 16,667 $ 6.625 $ 16.25 $ 6.625 8 yrs.; 178 days
10/14/98 16,667 $ 6.625 $ 19.875 $ 6.625 8 yrs.; 52 days
10/14/98 13,333 $ 6.625 $ 13.00 $ 6.625 7 yrs.; 305 days
10/14/98 50,000 $ 6.625 $ 19.625 $ 6.625 9 yrs.; 249 days
</TABLE>
(5) DESCRIPTION OF CERTAIN PLANS
1994 Performance-Based Annual Incentive Compensation Plan. The Company
maintains an Amended and Restated 1994 Performance-Based Annual Incentive
Compensation Plan, (the "1994 Plan") to provide additional compensation as an
incentive to certain key executives and consultants to attain specified
performance objectives of the Company and its subsidiary and affiliated
corporations and to ensure the continued availability of their full-time or
part-time services to the Company. Specifically, the individuals entitled to
participate in the 1994 Plan are those executive officers and consultants of the
Company determined by the committee administering the 1994 Plan. The 1994 Plan
was amended and restated in 1996 and further amended in 1997; each such
amendment was approved by the Company's shareholders.
The 1994 Plan is administered by the Compensation Committee of the
Company's Board (the "1994 Plan Committee"). The Board members who currently
administer the 1994 Plan qualify as "outside directors" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the Board of
Directors does not currently intend to appoint individuals to the 1994 Plan
Committee who are not both "outside directors" under the Code and "disinterested
directors" within the meaning of Rule 16b-3(c) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
The amount of an available award to a participant or the aggregate amount
of available awards to all participants for each award period is determined
based upon an objective computation (the "Formula") of the actual performance of
the Company relative to pre-established performance goals. The performance goal
or goals included in the Formula for each award period is selected by the 1994
Plan Committee from among the following performance measures: level of retail
sales (in the aggregate or for a particular category or categories of retail
sales); net cash flow; net income; operating income; earnings per share; return
on sales; reduction in expenditure levels for a particular category or
categories of expenses versus a prior period; return on total capital; return on
equity; and increase in the Common Stock price over a specified time period.
The 1994 Plan Committee determines the performance measure or measures, the
performance goal or goals and all computations included within each Formula,
each of which may be different for different award periods or for different
participants within a single award period. The 1994 Plan Committee does not have
the discretion to increase any award to an amount in excess of that determined
in accordance with the 1994 Plan and the Formula applicable to a particular
award period. However, the 1994 Plan Committee, may, in its discretion, (a)
designate in advance a maximum dollar award for any award period with respect to
any participant, and/or (b) designate in advance that certain other incentive
award payments (under the 1994 Plan or otherwise) made to a participant will be
deducted from award amounts otherwise earned under the 1994 Plan and/or (c)
decrease any award under the 1994 Plan. Notwithstanding anything in the 1994
Plan to the contrary, no participant is entitled to earn in excess of $10
million under the 1994 Plan with respect to any single calendar year.
Award periods under the 1994 Plan may be quarters, calendar years or such
other periods as the 1994 Plan Committee may designate. All award periods,
performance measures, performance goals and other aspects of each Formula are
designated in advance of the commencement of each award period by the 1994 Plan
Committee, except as otherwise permitted by the regulations under Section
162(m). Determinations based on a calendar year award period may be made by the
1994 Plan Committee on or before March 31 of the calendar year.
13
<PAGE> 16
To be entitled to receive a full award with respect to an award period, a
participant must continue to be employed by the Company or rendering services to
the Company on the last day of such award period. With respect to participants
whose service relationship terminates during an award period, the 1994 Plan
Committee provides for prorated awards based upon satisfaction of performance
goals for the entire award period, with the proration formula to be set by the
1994 Plan Committee in its discretion in advance of the commencement of each
award period. In addition, no award can be paid unless the 1994 Plan Committee
certifies that the objective performance goal or goals for the award have been
satisfied and that the amount of the award is no greater than that dictated by
the Formula for the applicable award period. The 1994 Plan Committee makes such
determinations by means of written resolutions of the 1994 Plan Committee that
are maintained in the records of the Company.
Awards pursuant to the 1994 Plan may be made, at the discretion of the 1994
Plan Committee, in cash, through the issuance of shares of Class A Common Stock
or Class B Common Stock, or through a combination of any of the foregoing
methods. The total number of shares of Common Stock that may be issued under the
1994 Plan in any fiscal year of the Company, and the total number of shares of
Common Stock that may be issued under the 1994 Plan in any fiscal year of the
Company to any single participant, may not exceed 5% of the number of issued and
outstanding shares of Common Stock at the beginning of the prior fiscal year.
Awards under the 1994 Plan are subject to withholding for applicable
employment and income taxes. The 1994 Plan Committee may, in its discretion and
subject to the consent of each affected participant, approve the advance of all
or a portion of a target cash award to a participant prior to the conclusion of
an award period. Each such advance, if made, is a full recourse obligation of
the participant and bears interest from the date of the advance until repaid or
deemed earned at the applicable Federal rate (as specified in the 1994 Plan) for
loans of comparable term. Each such advance is evidenced by a promissory note
executed by the participant and delivered to the Company.
The 1994 Plan will continue in place until terminated by the Board of
Directors. The Board of Directors may from time to time amend, suspend or
terminate in whole or in part any or all of the provisions of the 1994 Plan;
provided, however, that no such action will adversely affect the right of any
participant with respect to (a) any award to which he or she may have become
entitled under the 1994 Plan prior to the effective date of such amendment,
suspension or termination, or (b) any award period that commenced prior to the
taking of such action by the Board.
1992 Executive Incentive Compensation Plan. In 1992, the Board adopted the
Herbalife International, Inc. 1992 Amended and Restated Executive Incentive
Compensation Plan (the "1992 Plan"). Eligible participants under the 1992 Plan
consist of the Company's executive vice presidents, vice presidents, country
managers and other executive officers and key employees (other than the
Company's Chief Executive Officer and President) and consultants as designated
by the Chief Executive Officer in conjunction with the committee administering
the 1992 Plan.
The 1992 Plan is administered by the Compensation Committee of the
Company's Board (the "1992 Plan Committee") in conjunction with the Chief
Executive Officer. The current members of the 1992 Plan Committee are the
members of the Compensation Committee, and the Board of Directors does not
currently intend to appoint individuals to the 1992 Plan Committee who are not
"disinterested directors" within the meaning of Rule 16b-3(c) under the Exchange
Act. In addition, any awards of Common Stock under the 1992 Plan would be
determined and administered solely by the 1992 Plan Committee.
The 1992 Plan provides for the payment of bonuses to participants for each
year that the 1992 Plan is in effect, beginning with 1992. Awards are made to
participants based upon the extent to which certain corporate performance goals
and individual performance goals (set in advance by the Chief Executive Officer
together with, in the case of corporate performance goals, the 1992 Plan
Committee) are met. If a goal applicable to a participant is exceeded or not
met, then the participant is entitled to receive an award in excess of, or a pro
rata portion of, as applicable, the targeted amount. In addition, the 1992 Plan
Committee, in conjunction with the Chief Executive Officer, may make
discretionary awards to participants. To be eligible for payment with
14
<PAGE> 17
respect to a particular award period, a participant is required to be employed
by the Company on the last day of such award period, subject to certain
exceptions.
Awards pursuant to the 1992 Plan may be made, at the discretion of the 1992
Plan Committee, in cash, through the issuance of shares of Class A Common Stock
or Class B Common Stock, or through a combination of any of the foregoing
methods. The total number of shares of Common Stock that may be issued under the
1992 Plan in any fiscal year of the Company, and the total number of shares of
Common Stock that may be issued under the 1992 Plan in any fiscal year of the
Company to any single participant, may not exceed the excess of (i) 5% of the
number of issued and outstanding shares of Common Stock at the beginning of the
prior fiscal year, over (ii) the number of shares of Common Stock issued during
the prior fiscal year pursuant to the 1994 Plan.
The Board of Directors may from time to time amend, suspend or terminate in
whole or in part any or all of the provisions of the 1992 Plan; provided,
however, that no such action will adversely affect the right of any participant
with respect to any award to which he or she may have become entitled under the
1992 Plan prior to the effective date of such amendment, suspension or
termination. The 1992 Plan will continue in place until terminated by the Board
of Directors.
For 1996 the Company utilized a bonus arrangement falling within the
framework of the 1992 Plan, although the Named Officers did not participate in
the 1992 Plan for 1996, except for Mr. Gerrity. See "Compensation Committee
Report -- Annual Incentive Compensation." The 1992 Plan is expected to continue
to be utilized with respect to certain executives for future periods.
1991 Stock Option Plan. Subject to shareholder approval at the Meeting, the
Board of Directors has approved the following amendments to the Option Plan: (i)
to increase the aggregate number of shares which may be issued upon exercise of
all options granted under the Option Plan by 500,000, (ii) to permit certain
limited transfers of options granted pursuant to the Option Plan, (iii) to
increase the period for exercise of an option following termination of
employment (other than by death or disability) from 30 days to 90 days and (iv)
to increase the aggregate number of stock options a participant under the Option
Plan may be awarded during any single calendar year from 1,500,000 to 2,250,000.
See "Proposal 2 -- Approval of Amendments to the 1991 Stock Option Plan." The
purpose of the Option Plan is to secure for the Company and its shareholders the
benefits arising from stock ownership by key employees, directors, consultants
and other persons selected by the Stock Option Committee of the Board of
Directors. As of March 25, 1999, approximately 135 persons were eligible to
participate in the Option Plan.
The Option Plan is administered by the Stock Option Committee of the
Company's Board. The Board of Directors does not currently intend to appoint
individuals to the Stock Option Committee who are not both "Non-Employee
Directors" within the meaning of Rule 16b-3 under the Exchange Act and "outside
directors" within the meaning of Section 162(m) under the Code. Currently, the
Stock Option Committee consists of Messrs. Hall and Miner.
Options under the Option Plan may be designated as "incentive stock
options" for federal income tax purposes or as options which are not qualified
for such treatment, or "non-qualified stock options." See "Federal Income Tax
Matters" below.
As of March 25, 1999, (i) 2,190,335 shares of Class A Common Stock and
5,007,825 shares of Class B Common Stock were subject to outstanding stock
options and (ii) additional options could be issued under the Option Plan with
respect to 59,876 shares of Common Stock.
Under the Option Plan, the aggregate number of shares of Class A Common
Stock and Class B Common Stock with respect to which stock options may be
awarded to a participant during any single calendar year currently may not
exceed 1,500,000. Such number would increase to 2,250,000 shares if the proposed
amendments to the Option Plan are approved by the shareholders.
Currently, all options granted under the Option Plan are non-transferable
and exercisable in installments determined by the Stock Option Committee, except
that each option is to be exercisable in minimum annual installments of 20%
commencing with the first anniversary of the option's grant date. Each option
granted has
15
<PAGE> 18
a term specified in the option agreement, but all options expire no later than
ten years from the date of grant. Incentive stock options granted to a person
holding more than 10% of the total voting power of the Company's capital stock
must expire within five years from the date of grant. Upon shareholder approval,
the Option Plan will be amended to permit certain limited transfers.
In the case of incentive stock options, the exercise price must be at least
equal to 100% of the fair market value of the Common Stock on the date the
option is granted. The exercise price for incentive stock option grants to a
person holding more than 10% of the total voting power of the Company's capital
stock must equal 110% of the fair market value of the Common Stock. The exercise
price of a non-qualified option need not be equal to the fair market value of
the Common Stock at the date of grant, but may be granted with any exercise
price which is not less than 85% of fair market value at the time the option is
granted, as the Stock Option Committee may determine. Upon exercise of any
option, the purchase price must generally be paid in full either in cash or by
certified or cashier's check. However, in the discretion of the Stock Option
Committee, the terms of a stock option grant may permit payment of the purchase
price by means of (i) cancellation of indebtedness owed by the Company, (ii)
delivery of shares of Common Stock already owned by the optionee (valued at fair
market value as of the date of exercise), (iii) delivery of a promissory note
secured by the shares issued, (iv) delivery of a portion of the shares issuable
upon exercise (i.e., exercise for the "spread" on the option payable in shares),
or (v) any combination of the foregoing or any other means permitted by the
Stock Option Committee.
The aggregate fair market value (determined at the time the options are
granted) of the shares covered by incentive stock options granted to any
employee under the Option Plan (or any other incentive stock option plan of the
Company) which may become exercisable for the first time in any one calendar
year may not exceed $100,000.
Federal Income Tax Matters. As stated above, participants in the Option
Plan may be granted either "incentive" stock options (qualified as such under
the Code) or "non-incentive" stock options (customarily referred to as
"non-qualified" stock options). Persons who receive non-qualified stock options
under the Option Plan will realize no tax consequence upon receipt. On the date
of option exercise, however, the optionee will generally have income (and the
Company will have a deduction) equal to the excess of (a) the fair market value
of the stock received upon such date less (b) the option exercise price. If the
stock acquired upon exercise of the option is non-transferable and subject to a
"substantial risk of forfeiture," however, the taxable event will generally be
delayed to the earliest of the date on which the stock becomes transferable or
the date on which the risk of forfeiture ends, at which time the participant
will be taxed on the excess of the stock's fair market value on such date over
the cost of such stock, and the Company will be entitled to an equal deduction
at that time.
In the case of an incentive stock option, however, the employee will
generally not have taxable income (although the alternative minimum tax may
apply, as described below) upon exercise or lapse of any forfeiture restrictions
or transfer restrictions. The employee will be taxed only upon the sale of stock
received on the incentive option exercise. If the employee holds the stock for
more than one year after exercise and two years after option grant, the
employee's gain will generally be capital gain, and the Company will not be
entitled to a deduction for compensation paid. Any earlier sale will result at
least in part in ordinary income to the employee and a deduction for the Company
equal to the amount of ordinary income recognized by the employee. Depending
upon a particular option holder's circumstances and the holding period of the
stock after exercise of the option, there may be a favorable differential tax
rate applicable to capital gains.
Upon exercise of incentive stock options, the alternative minimum tax may
apply to optionees because the excess of the fair market value of the shares
received over the exercise price of an incentive stock option constitutes an
item of tax preference. The alternative minimum tax may produce a higher tax
than the regular income tax applicable to an optionee.
The above summary of tax matters is general in scope and does not apply to
every specific transaction which may arise. Moreover, the rules of government
taxation of non-qualified and incentive stock options are complex, and the
statement of tax consequences set forth herein is necessarily general. Finally,
Congress is considering many additional proposals to change the tax laws, and
the interpretation of existing laws and any
16
<PAGE> 19
additional revisions ultimately adopted could significantly alter the tax
requirements and effects covered in this discussion.
Deferred Compensation Plans. The Company maintains three deferred
compensation plans for select groups of management or highly compensated
employees: the Herbalife Management Deferred Compensation Plan, effective
January 1, 1996 (the "Management Plan," applicable to directors and vice
presidents) and the Herbalife Senior Executive Compensation Plan, effective
January 1, 1996 (the "Senior Executive Plan," applicable to eligible employees
at the rank of Senior Vice President and higher) and the Herbalife International
of America, Inc. Executive Officer Deferred Compensation Plan (collectively with
the Management Plan, the "Deferred Compensation Plans"). The Deferred
Compensation Plans are unfunded and their benefits are paid from the general
assets of the Company, except that the Company has contributed certain amounts
to a "rabbi trust" whose assets will be used to pay benefits if the Company
remains solvent, but can be reached by the Company's creditors if the Company
becomes insolvent. The Deferred Compensation Plans allow eligible employees, who
are selected by the administrative committee that manages and administers the
plans (the "Deferred Compensation Committee"), to elect annually to defer up to
fifty percent (50%) of their base annual salary and up to one hundred percent
(100%) of their annual bonus for each calendar year (the "Annual Deferral
Amount"). The Company makes matching contributions on behalf of each participant
in the Senior Executive Plan ("Company Matching Contributions") of one hundred
percent (100%) of the amount deferred by each such participant from such
participant's base annual salary up to ten percent (10%) of the participant's
base annual salary. Each participant in either Deferred Compensation Plan has at
all times a fully vested and nonforfeitable interest in each year's
contribution, including interest credited thereto, and in any Company Matching
Contributions, if applicable. In connection with a participant's election to
defer an Annual Deferral Amount, the participant may also elect to receive a
short-term payout, equal to the Annual Deferral Amount plus interest and payable
five or more years from the first day of the year in which the Annual Deferral
Amount is actually deferred. Subject to the short term payout provision and
certain exceptions for unforeseeable financial emergencies, a participant may
not withdraw, without incurring a ten percent (10%) withdrawal penalty, all or
any portion of his or her account under the Deferred Compensation Plans prior to
the date that such participant either (a) is determined by the Deferred
Compensation Committee to have incurred permanent and total disability or (b)
dies or otherwise terminates employment with the Company. The Company has
amended the Deferred Compensation Plans effective as of January 1, 1997, May 8,
1998 and September 30, 1998 in ways which the Company considers technical and
not material for purposes of this discussion.
Retirement Plan. The Company adopted, effective September 1997, a
Supplemental Executive Retirement Plan (the "Retirement Plan") providing
retirement benefits for a select group of management and highly compensated
employees. The Retirement Plan is unfunded and its benefits are paid from the
general assets of the Company, except that the Company has contributed certain
amounts to a "rabbi trust" whose assets will be used to pay benefits if the
Company remains solvent, but can be reached by the Company's creditors if the
Company becomes insolvent. The normal retirement benefit under the Retirement
Plan is 60 quarterly installments payments commencing at age 65, each of which
equals one-quarter of 1.75% of "compensation" times the number of years of
service up to 20 years. The term "compensation" for this purpose means the
average yearly base compensation of the five calendar years within the last 10
years of employment that would yield the highest average. A participant may
elect to receive his or her benefits in a lump sum equal to 90% of the actuarial
equivalent of the remaining quarterly installments.
A participant who reaches the "early retirement date" may choose to retire
and to receive an early retirement benefit equal to the normal retirement
benefit. A participant who becomes disabled shall receive a benefit equal to his
normal retirement benefit. A participant generally reaches his or her early
retirement date when he or she completes 10 years of service and reaches age 55.
An employee whose employment with the company terminates before he or she
reaches early retirement date will receive the actuarial equivalent of his or
her vested benefits paid in a lump sum within 90 days of such termination. Upon
a change in control of the Company, a participant will receive a lump sum
payment equal to the actuarial equivalent of the normal retirement benefit, or,
if payment of benefits has begun, the actuarial equivalent of the remaining
quarterly installments. A participant becomes fully vested in his or her
interest in the Retirement Plan on his or her
17
<PAGE> 20
normal or early retirement date, death, or disability, or on a change in control
of the Company. If a participant's employment is terminated for cause, the
Company has the discretion to reduce his or her vested benefit to zero. In all
other cases, a participant's vested interest is determined as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
<S> <C>
less than 5................................. 0%
5....................................... 20
6....................................... 40
7....................................... 60
8....................................... 80
9....................................... 100
</TABLE>
The Plan Administrator has the discretion to credit a participant with
additional years of service as of his or her date of hire or commencement of
participation in the Plan.
For illustration purposes only, the following table provides examples of
the annual benefit payable under the Retirement Plan beginning at age 65.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
15 20 25 30 35
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Compensation
$ 125,000 $ 32,813 $ 43,750 $ 43,750 $ 43,750 $ 43,750
150,000 39,375 52,500 52,500 52,500 52,500
175,000 45,938 61,250 61,250 61,250 61,250
200,000 52,500 70,000 70,000 70,000 70,000
225,000 59,063 78,750 78,750 78,750 78,750
250,000 65,625 87,500 87,500 87,500 87,500
300,000 78,750 105,000 105,000 105,000 105,000
400,000 105,000 140,000 140,000 140,000 140,000
450,000 118,125 157,500 157,500 157,500 157,500
500,000 131,250 175,000 175,000 175,000 175,000
600,000 157,500 210,000 210,000 210,000 210,000
700,000 183,750 245,000 245,000 245,000 245,000
800,000 210,000 280,000 280,000 280,000 280,000
900,000 236,250 315,000 315,000 315,000 315,000
1,000,000 262,500 350,000 350,000 350,000 350,000
1,100,000 288,750 385,000 385,000 385,000 385,000
1,200,000 315,000 420,000 420,000 420,000 420,000
</TABLE>
Messrs. Hughes, Pair, Rosen, Sandler and Gerrity have 19, 14, 5, 2 and 13 years
of service respectively. "Compensation" covered by the Retirement Plan is equal
to the amounts set forth in the Summary Compensation Table under "Salary."
401(k) Profit Sharing Plan. The Company maintains a tax-qualified profit
sharing plan pursuant to Sections 401(a) and 401(k) of the Code. This plan
allows any eligible employee to contribute each pay period from 2% to 17% of the
employee's earnings (but not in excess of $10,000 per year, adjusted for
increases in the cost of living after 1998) for investment in annuity contracts
and mutual funds held by the plan's trust. As of January 1, 1998, the Company
amended the Plan so that common-law employees of the Company are eligible to
participant in the Plan after completing six months of service with the Company,
unless they are union members or non-resident aliens. The Company makes
contributions to the plan in an amount equal to 3% of the earnings of each
employee who elects to defer 2% or more of his or her earnings. The plan also
imposes
18
<PAGE> 21
certain restrictions on the aggregate amount which may be contributed by
higher-paid employees in relation to the amount contributed by the remaining
employees. A participating employee is fully vested at all times in his or her
contributions and in the trust fund's earnings attributable thereto. The
employee has no vested interest in the Company's contributions and earnings of
the trust fund attributable thereto until he or she completes three years of
service with the Company, and is not fully vested in the Company's contributions
and earnings of the trust fund attributable thereto until he or she has
completed seven years of service with the Company. However, an employee becomes
fully vested in the Company's contributions and earnings of the trust fund
attributable thereto on the employee's death, disability, or reaching the plan's
normal retirement age (the later of age 65 or the completion of five years of
service with the Company). An employee may not withdraw all or any portion of
his or her account prior to the date that such employee either (a) incurs a
hardship, or (b) terminates employment with the Company.
Executive Medical Plan. The Executive Medical Plan is an insured hospital
and medical reimbursement plan covering executives and key employees and their
dependents during the executive's or employee's employment by the Company. The
Plan provides coverage of medical expenses incurred beyond the Company's basic
plan. For the fiscal year ended December 31, 1998, the Plan's cost to the
Company was an aggregate of approximately $47,000.
Executive Long-Term Disability Plan. The Executive Long-Term Disability
Plan is an insured disability plan covering executives and key employees. It
provides for extended disability insurance for such participants with premiums
paid by the Company. For the fiscal year ended December 31, 1998, the Plan's
cost to the Company was an aggregate of approximately $28,000.
Executive Life Insurance Plan. The Executive Life Insurance Plan covers
executives and key employees and provides for life insurance benefits in excess
of those available under the Company's basic plan. Premiums are paid by the
Company. For the fiscal year ended December 31, 1998, the Plan's cost to the
Company was an aggregate of approximately $144,000.
(6) EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS
Effective as of April 3, 1994, the Company entered into a five-year
employment agreement with Christopher Pair (the "Pair Agreement"), engaging him
as Executive Vice President of International and Corporate Administration of the
Company. Mr. Pair currently serves as the Company's Executive Vice President,
Chief Operating Officer and Secretary. For his services, Mr. Pair initially
received an annual salary of $650,000; such amount has been periodically
adjusted upwards by the Compensation Committee. In addition, Mr. Pair
participates in incentive compensation plans on the same basis as other
comparable level executives.
The Pair Agreement provided that Mr. Pair was entitled to certain other
benefits paid for by the Company, including, among other things, an automobile
allowance, reimbursement of the cost of a health club membership, and
participation in various benefit plans.
Under the Pair Agreement, had the Company terminated Mr. Pair's employment
at any time during the five year term of the Pair Agreement without cause (as
defined in such agreement), it would have been required to pay him (in addition
to other accrued amounts and benefits) an amount equal to one year of base
compensation, plus an amount equal to the actual bonuses paid to Mr. Pair under
the applicable executive incentive compensation plan in respect of the one
fiscal or plan year completed immediately prior to the date of termination.
Effective as of August 23, 1993, the Company entered into a Restricted
Stock Agreement with Michael Rosen, pursuant to which Mr. Rosen received a
100,000 share restricted stock grant. Such shares vested in cumulative annual
installments of 20%, commencing on August 23, 1994 and ending on August 23,
1998.
In addition, effective as of August 9, 1994, the Company entered into a
Deferred Compensation Agreement with Mr. Rosen, pursuant to which Mr. Rosen has
received and will continue to receive $600,000 in cash deferred compensation
from the Company on each of the first five anniversary dates of such Deferred
Compensation Agreement on which Mr. Rosen remained continuously employed by the
Company. If the
19
<PAGE> 22
Company were to terminate Mr. Rosen without cause (as such term is defined in
the Deferred Compensation Agreement), Mr. Rosen will be deemed to have earned,
as of the termination date, deferred compensation for the year in which
termination occurs in an amount equal to $600,000 prorated on a daily basis for
the number of days in the twelve month period ending August 9 through and
including the date of termination. Mr. Rosen is eligible to receive such
deferred compensation on or before the tenth day following the day the deferred
compensation is earned, subject to the right of the Company to delay payment
until the Company's deduction for such payment would no longer be disallowed
under Section 162(m) of the Code. The Company has amended and restated the
Deferred Compensation Agreement in its entirety, effective as of January 1,
1998, to make the following changes: (1) deferred amounts will bear interest at
a rate equal to the current general account crediting rate on SunLife of
Canada's corporate universal life product effective on January 1 of each year,
(2) the Company will contribute certain amounts to a "rabbi trust" whose assets
will be used to pay benefits if the Company remains solvent, but can be reached
by the Company's creditors if the Company becomes insolvent, and (3) Mr. Rosen
may elect to receive payments in the form of installments payable over five
years or 10 years, but may receive 90% of the unpaid balance at any time,
provided that such payment would be deductible to the Company and provided that
he would forfeit the remaining 10% of the unpaid balance.
(7) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During 1998, the Company's Compensation Committee consisted of Messrs. Hall
and Miner. No additional information concerning the Compensation Committee or
the Company's executive officers is required by Item 402 of Regulation S-K.
(8) COMPENSATION COMMITTEE REPORT
The Company's executive compensation programs are administered by the
Compensation Committee of the Board of Directors and, to the extent summarized
below, the Company's Chief Executive Officer.
The compensation policy of the Company is designed to motivate the overall
success of the Company by:
- Attracting, retaining, and rewarding highly qualified and productive
individuals;
- Delivering a significant portion of compensation through
performance-based incentives;
- Directly relating incentive compensation to overall Company and
individual performance; and
- Encouraging executive stock ownership to align the interests of
management with those of shareholders.
Base Salary and Annual Incentive Compensation
The base salary of the Chief Executive Officer is established through
negotiations between the Compensation Committee and Mr. Hughes. For 1998, in
order to preserve the tax deductibility of his compensation by the Company, Mr.
Hughes agreed to maintain his base salary at approximately $1,000,000. See
"Summary Compensation Table." Base salaries for each of the other Named Officers
were established through negotiations between Mr. Hughes and each Named Officer.
See "Employment Contracts and Change in Control Arrangements."
In setting Mr. Hughes' annual salary and target incentive compensation for
1998, the Compensation Committee considered numerous factors, including Mr.
Hughes' cash compensation relative to that of the Company's leading distributors
and Mr. Hughes' unique role as the preeminent personality in the selling of the
Company's products, the motivation of the sales organization and the formulation
of sales promotional programs. The Compensation Committee provided an
opportunity for Mr. Hughes to earn incentive compensation for 1998 based
strictly upon a formula performance measure adopted in accordance with the 1994
Plan.
As in prior years, in 1998, the Compensation Committee utilized financial
and operational performance criteria to establish target awards under the 1994
Plan, subject to maximum award amounts in the case of
20
<PAGE> 23
each participant and discretionary authority to reduce awards in the case of
certain of the Named Officers. See "Description of Certain Plans" above. The
Company met the earnings per share threshold for 1998, and as a result bonuses
were earned by the Named Officers for the past fiscal year.
Long-Term Incentive Plans
Executives of the Company are encouraged to own shares of the Company's
Common Stock, thereby aligning the interests of management with those of
shareholders and tying a significant portion of executive compensation to
long-term market performance. The vesting schedules for stock options are set by
the Stock Option Committee. All options granted to executive officers and all
other grants under the plan have had an exercise price equal to 100% of fair
market value at the time of grant. During 1998, certain options held by the
Company's executive officers were repriced. See "Ten Year Option/SAR Repricing"
above. Beginning in 1996, the Stock Option Committee began to grant stock
options under the Option Plan to Mr. Hughes, in order to provide him with an
additional incentive to promote the success of the Company. The Compensation and
Stock Option Committees believe that the use of stock options to provide
incentive compensation to Mr. Hughes is appropriate and advisable, since stock
options further align Mr. Hughes' compensation with public shareholders'
interests while minimizing the use of cash resources.
In order to preserve the effectiveness of the Option Plan as an incentive
for executive performance, the Board of Directors, based upon the recommendation
of the Compensation Committee, is seeking shareholder approval of four
amendments to the Company's Option Plan, including an increase in the aggregate
number of shares which may be issued upon exercise of all options under the
Option Plan. These proposed amendments to the Option Plan are further described
in Proposal 2.
Tax Issues
For 1999 and later years, the Compensation Committee intends to continue to
seek to structure executive compensation arrangements to preserve the
deductibility of Named Officer compensation under applicable federal and state
income tax laws, including the Omnibus Budget Reconciliation Act of 1993, while
also taking into account the need to provide appropriate incentives to the
Company's key executives. However, no assurance can be given that the Company
will preserve the deductibility of all executive compensation.
COMPENSATION COMMITTEE
Edward J. Hall
Christopher M. Miner
April 20, 1999
21
<PAGE> 24
(9) PERFORMANCE GRAPH
Set forth on the following page is a comparison of the yearly percentage
change in total shareholder return of the Company's Common Stock and the returns
for the NASDAQ Composite Index and a designated Peer Group. The total
shareholder return calculation is for the five-year period commencing on
December 31, 1993 and includes the reinvestment of dividends.
The Peer Group for the total shareholder return chart is comprised of
publicly-traded companies possessing the following characteristics similar to
those of the Company:
- Size, as measured by net sales;
- Similarity in selling methodology;
- Comparable products including companies engaged in the distribution of
weight control products, health and nutritional supplements, and skin,
hair, or other personal care products;
- Relatively high insider ownership; and/or
- Particular emphasis on the talents and visibility of the chief executive
officer.
Companies included in the Peer Group are: Beauticontrol Cosmetics, Inc.;
Nature's Sunshine Products, Inc.; Avon Products; Premark International, Inc.;
Amway Japan; and Amway Asia. Amway Japan is included with respect to American
Depositary Receipts commencing September 1993 (when such securities began
trading in the United States). No data is included for Amway Asia Pacific prior
to the company began public trading in December 1993.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN*
AMONG THE COMPANY, NASDAQ COMPOSITE AND PEER GROUP**
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
HERBALIFE CLASS A STOCK NASDAQ COMPOSITE INDEX OLD PEER GROUP
----------------------- ---------------------- --------------
<S> <C> <C> <C>
1993 100 100 100
1994 99 112 115
1995 54 159 146
1996 213 195 184
1997 141 240 161
1998 99 293 188
</TABLE>
- ---------------
* Assumes $100 invested on December 31, 1993 in the stock of Herbalife, the
NASDAQ-OTC Composite Index, and peer companies (weighted by market
capitalization).
** Total return assumes reinvestment of dividends.
22
<PAGE> 25
CERTAIN TRANSACTIONS
On April 23, 1998 Raven Industries ("Raven"), D&F Industries ("D&F") and
Dynamic Products, Inc. ("Dynamic"), the Company's most significant suppliers of
powder and tablet products, concluded a $225 million bond offering and secured a
$50 million secured bank credit facility. Part of the proceeds from the offering
and the credit facility were used to repurchase certain ownership interests in
such entities, including the entire ownership interest of Mr. Hughes, CEO and
President of the Company (representing 1/3 and 1/5 of the formerly outstanding
shares of such companies, respectively), as well as the entire ownership of
shares of Dynamic held by a former director and executive officer (currently, an
employee) of the Company (representing 5% of the formerly outstanding shares of
Dynamic). Mr. Hughes sold his shares for approximately $43 million. As a result,
Mr. Hughes and such employee have ceased to have any ownership interest in those
suppliers. The Company consented 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 required the Company's consent (which consent could not
be unreasonably withheld). The Company believes that such transaction did not
have a material impact on the Company.
For the period ended April 23, 1998, the Company's purchases from Raven and
Dynamic amounted to $16.4 million and $1.0 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. Until April 23, 1998, Mr. Hughes' ownership interest in Raven and
Dynamic entitled him to a proportionate interest in the profits of those
companies, if any. In 1998, Mr. Hughes' share of the earnings of Raven and
Dynamic totaled $2.2 million and $0.1 million, respectively. 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 Plan, the Company made advances of targeted
performance bonus amounts during 1996, 1997 and 1998 to Messrs. Hughes and Pair,
during 1996 and 1998 to Mr. Rosen and during 1997 and 1998 to Messrs. Sandler
and Gerrity. As of December 31, 1998, the remaining outstanding principal and
accrued interest obligations of such individuals were $4,574,000 in the case of
Mr. Hughes; $336,000 in the case of Mr. Pair, $367,000 in the case of Mr. Rosen,
$174,000 in the case of Mr. Sandler; and $549,000 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%.
In 1998, the Company also made loans in the aggregate amounts including
interest of $61,000 and $79,000 to Messrs. Miner and Pair, respectively.
In 1998, the Company obtained the necessary regulatory approvals to make an
initial public offering of shares of Herbalife Japan KK ("Herbalife Japan") in
Japan and is currently considering making such offering. While no assurance can
be given that the Company will proceed with such offering, on December 30, 1996,
in preparation for the possible offering, 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.
23
<PAGE> 26
The following table lists the purchasers of such 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, 1998 was $2.7 million.
In 1997, the Company engaged Mr. Liker, a director of the Company, to
provide consulting services though 1999 in connection with the offering in
Japan. Under the terms of the Company's oral agreement with Mr. Liker, Mr. Liker
received $80,000 in 1997 and in 1998 and is to receive an additional $80,000 in
1999 from the Company for such services.
The Company has not yet determined whether and when to make an initial
public offering of Herbalife Japan shares. Such determination will be based,
among other things, 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 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 nor the impact of such an offering on the
Company's financial condition or results of operations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 1998, the Company believes, based solely on a review of Forms 3, 4
and 5 (including amendments) with which it has been furnished, that all required
Section 16(a) filings relating to the Company were timely made.
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<PAGE> 27
PROPOSAL 2
APPROVAL OF AMENDMENTS TO THE 1991 STOCK OPTION PLAN
BACKGROUND
As of March 25, 1999, 7,198,160 shares were subject to issuance upon
exercise of options granted pursuant to the Option Plan. After giving effect to
such outstanding options, 59,876 shares will remain available for future grants
of stock option under the Option Plan. Accordingly, the Board of Directors has
determined that it is the best interest of the Company to replenish the number
of shares that may be issued upon exercise of stock options granted under the
Option Plan by increasing the number of such shares by 500,000.
The Option Plan currently prohibits the transfer of any options by the
option holder and, during the holder's lifetime, options are exercisable only by
the holder. In addition, the period for exercise of an option following
termination of employment of the option holder (other that by reason of death or
permanent disability) is 30 days. The Option Plan also currently provides that
no participant may be awarded, during any single calendar year, stock options
with respect to more than 1,500,000 shares of Common Stock. The Board of
Directors has determined that it is also in the best interest of the Company to
make certain amendments affecting these provisions, as described below.
DESCRIPTION OF OPTION PLAN AMENDMENTS
The terms of the Option Plan are described above under "Executive
Compensation -- Description of Certain Plans -- Stock Option Plan." That
description is subject to the full text of the Option Plan, which is available
upon request.
One proposed amendment to the Option Plan would increase the number of
shares of Common Stock that may be issued under the Option Plan by 500,000. The
effect of the proposed amendment is to preserve the benefits to the Company of
the Option Plan by ensuring that employees, consultants and directors who are
eligible to receive options to purchase shares of Common Stock pursuant to the
Option Plan may continue to receive such options, if the Committee so
determines. Without such amendment, the Company would, in the near future, reach
the limit of authorized shares which may be validly issued upon exercise of all
options under the Option Plan.
As set forth in Appendix A, the second proposed amendment to the Option
Plan would permit certain limited transfers of options granted pursuant to the
Option Plan, principally to facilitate estate planning and to permit transfers
of options in property settlement arrangements between spouses. The Company
believes that the gifting of stock options may provide for significant estate
and gift tax advantages to option holders under certain circumstances, and that
it is appropriate to make this opportunity available by means of the proposed
amendment. The third proposed amendment would increase the period for exercise
of an option following termination of employment (other than by death or
disability) from 30 days to 90 days. The fourth proposed amendment to the Option
Plan would provide that a participant under the Option Plan may be awarded,
during any single calendar year, stock options with respect to 2,250,000 shares
of Common Stock. The Board of Directors believes that this amendment is
appropriate given the participation in the Option Plan by Mr. Hughes, and in
light of the fact that the repricing of stock options is deemed to constitute a
new grant for purposing of Section 162(m) of the Code and, as a result, the
annual per participant grant limitation. In October 1998, the Company repriced
substantially all the options grants to then current fair market values. Without
the proposed amendment, such repricing would cause Mr. Hughes to have received
stock options for 1998 in excess of the current limit. Accordingly, the
repricing of Mr. Hughes' stock options was made contingent upon shareholder
approval of the fourth proposed amendment to the Option Plan.
In 1996, the Compensation Committee of the Board of Directors began to
award Mr. Hughes stock options, and the Committee intends to continue to
consider Mr. Hughes for future grants of stock options in recognition of his
contributions to the Company's financial performance. The Compensation Committee
expects to grant stock options to Mr. Hughes at levels deemed appropriate by the
Committee in the future.
25
<PAGE> 28
VOTE REQUIRED
Approval of the Board of Directors' action in amending the Option Plan
requires the affirmative vote of the holders of at least a majority of the
shares of Class A Common Stock represented and voting at the Meeting. Broker
abstentions and non-votes will have the effect of a vote against the Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF
THE PROPOSED AMENDMENTS TO THE OPTION PLAN AND, UNLESS DIRECTED OTHERWISE, IT IS
THE INTENTION OF THE PROXIES NAMED IN THE FORM OF PROXY THAT ACCOMPANIES THIS
PROXY STATEMENT TO VOTE FOR THE APPROVAL OF SUCH ADOPTION.
INDEPENDENT AUDITORS
The firm of Deloitte & Touche LLP ("D&T") has audited the financial
statements of the Company for the year ended December 31, 1998. A representative
of D&T is expected to be present at the Meeting, with the opportunity to make a
statement if the representative desires to do so. That representative is also
expected to be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Proposals intended to be submitted to the Company for presentation at its
next Annual Meeting to be held in 2000 must be received by the Company at its
principal executive office shown on the first page of this Proxy Statement no
later than December 22, 1999, in order to be included in the proxy material for
the 2000 meeting.
1998 ANNUAL REPORT
On March 30, 1999, the Company filed with the Securities and Exchange
Commission its Annual Report on Form 10-K for the fiscal year ended December 31,
1998. Copies of the 1998 Form 10-K may be obtained without charge by writing to
Herbalife International, Inc., 1800 Century Park East, Century City, California
90067, Attention: Investor Relations.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ CHRISTOPHER PAIR
Christopher Pair
Secretary
26
<PAGE> 29
APPENDIX A
PROPOSED AMENDMENT TO THE 1991 STOCK OPTION PLAN
Subject to shareholder approval, Section 9 of the 1991 Stock Option Plan
(the "Plan") shall be amended and restated to read in full as follows:
Except for Permitted Transfers, an option granted under the Plan shall, by
its terms, be nontransferable by the holder either voluntarily or by operation
of law, and shall be exercisable during the holder's lifetime only by the holder
(or a permitted Transferee), regardless of any community property interest
therein of the spouse of the holder or any other interest therein of such
spouse. "Permitted Transfer" means a transfer (a) by will or pursuant to the
laws of descent and distribution, (b) to a family member who acquires the option
from the Participant through gift or pursuant to a domestic relations order, (c)
to a trust in which individuals described in clause (b) have more than fifty
percent (50%) of the beneficial interest, (d) to a foundation in which
individuals described in clause (b) (including the Participant) control the
management of assets, or (e) to any other entity in which individuals described
in clause (b) (including the Participant) own more than 50% of the voting
interests. "Permitted Transferee" means any individual or entity that acquires
an option pursuant to a Permitted Transfer. "Family member" includes any child,
stepchild, grandchild, spouse, former spouse or sibling, including through
adoptive relationships, or any other individual sharing the Participant's
household (other than a tenant or employee). An option held by a Permitted
Transferee shall be nontransferable by such holder either voluntarily or by
operation of law, except that such option may be transferred to another
individual or entity that qualifies as a Permitted Transferee of the
Participant. An option held by a Permitted Transferee shall be subject to all
restrictions and conditions of the option as originally issued to the
Participant, as if such option were still held by the Participant.
27
<PAGE> 30
HERBALIFE INTERNATIONAL, INC.
1800 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Christopher Pair and Robert A. Sandler, and
each of them, as Proxy, with the power to appoint his or their substitutes, and
hereby authorizes each of them to represent and to vote as designated below all
shares of Class A Common Stock of Herbalife International, Inc. held of record
by the undersigned on April 5, 1999 at the Annual Meeting of Shareholders to be
held on May 20, 1999 or at any adjournment or postponement thereof, with the
same authority as if the undersigned were personally present.
1. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed below (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
Mark Hughes, Christopher Pair, Michael E. Rosen,
Edward J. Hall, Alan Liker and Christopher M. Miner
(Instructions: To withhold authority to vote for any individual nominee, write
the nominee's or nominees' name(s) on the line below)
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
2. AMENDMENTS TO THE 1991 STOCK OPTION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. In his discretion, the Proxy is authorized to vote upon such other business
as may properly come before the meeting.
(Date and Sign on Reverse Side)
<PAGE> 31
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE THIS PROXY WILL
BE VOTED FOR THE ELECTION OF ALL NOMINEES LISTED IN ITEM 1 AND IN FAVOR OF THE
AMENDMENTS TO THE 1991 STOCK OPTION PLAN.
Date:, 1999
------------------------
Signature
------------------------
Signature if held
jointly
Please sign exactly as
name (or names)
appear(s) be low. When
shares are held by joint
tenants, both must sign.
When signing as attor
ney, executor,
administrator, parent or
guardian, please give
full title as such. If a
corporation, please sign
in full corporate name
by the President or
other authorized
officer. If a partner
ship, please sign in
partnership name by an
authorized person.
PLEASE MARK, SIGN, DATE, AND PROMPTLY RETURN THE PROXY CARD USING THE ENCLOSED
ENVELOPE.
