<PAGE> 1
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c) OF
THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
[ ] Definitive Information Statement
HERBALIFE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Common Stock, par value $.01 per share; Class B Common Stock,
par value $.01 per share
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(2) Aggregate number of securities to which transaction applies:
12,398,813, exclusive of options*
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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
filing fee is calculated and state how it was determined):
$17.00 per share*
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(4) Proposed maximum aggregate value of transaction:
$267,834,554*
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(5) Total fee paid:
$53,557
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* For purposes of calculating the fee only. This amount assumes the
purchase of all shares of Class A common stock, par value $.01 per
share, and all shares of Class B common stock, par value $.01 per
share, (collectively, the "Common Shares") of Herbalife International,
Inc. (the "Company") from stockholders other than the Continuing
Stockholder (as defined herein) at a price per share of $17.00 in
cash, plus the payment of the aggregate spread value of the
outstanding options to purchase Common Shares to be cancelled in the
transactions (based upon the applicable strike price and the per share
transaction price), estimated at $57,054,733. The amount of the filing
fee, calculated in accordance with Section 14(g)(3) and Rule 0-11(d)
under the Securities Exchange Act of 1934, as amended, equals 1/50th
of one percent of the aggregate transaction value.
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$53,557.00
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(2) Form, Schedule or Registration Statement No.:
Schedule 14D-1
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(3) Filing Party:
Mark Hughes, MH Millennium Holdings LLC, MH Millennium Acquisition
Corp.
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(4) Date Filed:
September 17, 1999
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copies to:
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Anthony T. Iler, Esq. John M. Newell, Esq
Irell & Manella LLP Latham & Watkins
333 South Hope Street, Suite 3300 633 West Fifth Street, Suite 9000
Los Angeles, California 90071 Los Angeles, California 90071
(213) 620-1555 (213) 485-1234
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[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
OCTOBER , 1999
Dear Stockholder:
On September 13, 1999, your Board of Directors approved an agreement and
plan of merger that provides for a tender offer and a merger of Herbalife
International, Inc. In the tender offer, Mark Hughes, Herbalife's founder,
President, Chief Executive Officer and Chairman of the Board, through an
acquisition company controlled by him, is offering to purchase for $17.00 per
share, net to the seller in cash, all Herbalife Class A common stock and Class B
common stock not owned by Mr. Hughes and entities controlled and beneficially
owned by him. If the tender offer is completed, Herbalife will merge with the
acquisition company, and all Herbalife stockholders who did not tender their
shares in the tender offer, except for Mr. Hughes and entities controlled and
beneficially owned by him and any stockholder who properly exercises dissenters'
rights, will also receive $17.00 per share for their Class A common stock and
Class B common stock. As a result of the merger, Herbalife will be wholly owned
indirectly by Mr. Hughes.
Mr. Hughes owns a majority of Herbalife's voting stock, and on September
13, 1999, he executed a written consent as majority stockholder approving the
merger. If the tender offer is completed, Mr. Hughes' written consent assures
that the merger will occur without your vote. Therefore, your vote is not
required to complete the merger.
Please note that this is not a request for your vote or a proxy statement,
but rather an information statement designed to inform you of the merger that
will occur if the tender offer is completed and to provide you with information
about the merger, the tender offer and the background of these transactions.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
Please note also that this is not an offer to purchase your shares. The
offer to purchase Herbalife common stock was previously distributed in a
separate Offer to Purchase, dated September 17, 1999.
The agreement and plan of merger approved by your Board of Directors
provides that, subject to certain conditions, you are entitled to dissenters'
rights in the merger if you dissent by October 25, 1999, as explained in this
information statement.
The tender offer and the merger are subject to a condition that at least a
majority of the holders of Class A common stock and at least a majority of the
holders of Class B common stock outstanding on September 13, 1999, other than
Mr. Hughes and entities controlled and beneficially owned by him, tender and not
withdraw their shares in the tender offer. This condition is not waivable by Mr.
Hughes. In addition, the tender offer and the merger are subject to a financing
condition, and several other conditions explained in this information statement.
The date of this information statement is October [], 1999. We mailed this
information statement to you on or about October [], 1999.
Sincerely,
/s/ CHRISTOPHER PAIR
Christopher Pair,
Executive Vice President, Chief Operating
Officer and Secretary
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TABLE OF CONTENTS
TO
INFORMATION STATEMENT
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INTRODUCTION................................................ 1
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 3
SPECIAL FACTORS............................................. 4
Background of the Offer and the Merger.................... 4
Recommendation of the Special Committee and the Board of
Directors; Fairness of the Offer and the Merger........ 11
Opinion of Financial Advisor to the Special Committee..... 15
Purposes of the Offer and the Merger...................... 20
Position of the Purchaser As to the Fairness of the Offer
and the Merger......................................... 21
Certain Effects of the Offer and the Merger............... 21
Interests of Certain Persons.............................. 21
Description of DECS Securities............................ 24
Conduct of Herbalife's Business After the Offer and the
Merger................................................. 25
Certain Financial Projections............................. 25
Certain Litigation........................................ 26
Certain Federal Income Tax Consequences................... 26
Description of Ownership of Herbalife Before and After the
Offer and the Merger................................... 27
THE MERGER.................................................. 28
The Merger Agreement...................................... 28
Dissenters' Rights........................................ 37
Stockholder Consent to the Merger......................... 38
Financing of the Offer and the Merger..................... 39
Accounting Treatment...................................... 39
Fees and Expenses......................................... 39
Certain Legal Matters; Regulatory Approvals............... 40
THE COMPANY................................................. 41
Description of the Company................................ 41
Selected Consolidated Financial Data...................... 42
Directors and Executive Officers of the Company........... 43
Principal Shareholders and Security Ownership of
Management............................................. 45
Price Range of Shares..................................... 46
Dividends and Distributions............................... 47
Certain Transactions...................................... 47
Recent Purchases of Company Securities.................... 49
WHERE YOU CAN FIND MORE INFORMATION......................... 50
CERTAIN INFORMATION CONCERNING PARENT, PURCHASER AND MR.
HUGHES.................................................... 52
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MISCELLANEOUS............................................... 53
Independent Auditors...................................... 53
Costs of Information Statement............................ 53
ANNEX A -- Agreement and Plan of Merger, dated as of
September 30, 1999........................................ A-1
ANNEX B -- Text of Sections 92A.300 through 92A.500 of the
Nevada Revised Statutes.......................... B-1
ANNEX C -- Bear, Stearns & Co. Inc. Opinion................. C-1
ANNEX D -- Written Consent of the Holders of a Majority of
the Class A Common Stock of Herbalife
International, Inc............................... D-1
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INTRODUCTION
On September 13, 1999, your Board of Directors approved an agreement and
plan of merger that provides for a tender offer (the "Offer") and, if the Offer
is completed and other conditions are satisfied, a merger (the "Merger"), of
Herbalife International, Inc. (the "Company").
The Merger will occur in accordance with an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of September 13, 1999, among the Company, MH
Millennium Holdings LLC, a Delaware limited liability company (the "Parent"), MH
Millennium Acquisition Corp., a Nevada corporation and a wholly-owned subsidiary
of Parent (the "Purchaser"), Mark Hughes, the Company's founder, Chief Executive
Officer, President and Chairman of the Board, ("Mr. Hughes," and together with
entities controlled and beneficially owned by him, directly and indirectly, the
"Continuing Stockholder") and the Mark Hughes Family Trust (the "Family Trust").
In the Offer, the Purchaser is offering to purchase all outstanding shares
of the Company's Class A Common Stock (the "Class A Shares") and Class B Common
Stock (the "Class B Shares" and, together with the Class A Shares, the "Shares")
for $17.00 per Share, net to the seller in cash, upon the terms and subject to
the conditions set forth in an Offer to Purchase (the "Offer to Purchase"),
dated September 17, 1999, and a related Letter of Transmittal (which terms and
conditions constitute the "Offer Documents") distributed to our stockholders
separately. The Offer was originally scheduled to expire at 12:00 midnight, New
York City time, on Friday, October 15, 1999, and has been extended to 5:00 p.m.,
New York City time, on Friday, October 29, 1999.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The Offer and the Merger are conditioned upon, among other things, (i)
there being tendered and not withdrawn prior to the Expiration Time (as defined
in the Offer Documents) at least a majority of the Class A Shares and at least a
majority of the Class B Shares outstanding as of September 13, 1999, excluding
Shares owned by the Continuing Stockholder (the "Minimum Condition"), and (ii)
the Financing Condition (as defined within under the heading "The Merger -- The
Merger Agreement -- Conditions to the Offer") having been satisfied. The Minimum
Condition is not waivable by the Purchaser or the Parent without the consent of
the Company, acting through a Special Committee of the Board of Directors
consisting solely of independent directors (the "Special Committee").
If the Minimum Condition is met and the Offer is consummated, the Purchaser
and the Parent will, subject to certain conditions, cause the Purchaser to be
merged with the Company in the Merger in which the Company will be the surviving
corporation, the Continuing Stockholder will own all of the stock of the
surviving corporation, and the stockholders of the Company other than the
Continuing Stockholder (the "Public Stockholders") will receive $17.00 per Share
in cash (except for those stockholders who elect to exercise dissenters' rights
with respect to their Shares as provided by the Merger Agreement and as
described within under the heading "The Merger -- Dissenters' Rights"). If the
Minimum Condition is not met and not waived by the Company, then the Purchaser
is not obligated or permitted under the Merger Agreement to consummate the Offer
or the Merger. The Offer and the Merger are also subject to other conditions
described within under the heading "The Merger -- The Merger
Agreement -- Conditions to the Offer" and "-- Conditions to the Merger."
The Continuing Stockholder currently owns 5,396,000 Class A Shares,
representing 54% of the outstanding Class A Shares, and 10,792,002 Class B
Shares, representing 58% of the outstanding Class B Shares. On September 13,
1999, the Continuing Stockholder acted by written consent (the "Stockholder
Consent") to approve and adopt the Merger Agreement and the Merger. If the Offer
is completed, the Stockholder Consent assures that the Merger will occur without
your vote and without a meeting. Therefore, your vote is not required to
complete the Merger.
THE MERGER AND THE TENDER OFFER HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE FAIRNESS OR MERIT OF THE MERGER OR THE TENDER OFFER
NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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PLEASE NOTE THAT THIS IS NOT A REQUEST FOR YOUR VOTE OR A PROXY STATEMENT,
BUT RATHER AN INFORMATION STATEMENT (THE "INFORMATION STATEMENT") DESIGNED TO
INFORM YOU OF THE MERGER THAT WILL OCCUR IF THE OFFER IS COMPLETED AND TO
PROVIDE YOU WITH INFORMATION ABOUT THE MERGER, THE OFFER AND THE BACKGROUND OF
THESE TRANSACTIONS.
Please note also that this is not an offer to purchase your Shares. The
Offer Documents were previously distributed to our stockholders. Upon
consummation of the Merger, the Public Stockholders who have not tendered their
Shares pursuant to the Offer will receive instructions on where and how to
exchange their Shares for $17.00 per Share.
The purpose of the Offer and the Merger is to enable the Continuing
Stockholder to acquire all the Shares that the Continuing Stockholder does not
already own. However, as noted above, the Purchaser has agreed that it may not
consummate the Offer or the Merger unless the Minimum Condition is satisfied or
waived. Therefore, even though the Continuing Stockholder currently owns a
sufficient number of Shares to approve the Merger without the vote or approval
of any other stockholders, and has already executed the Stockholder Consent,
neither the Merger nor the Offer may be consummated unless the Minimum Condition
is satisfied or waived.
In connection with the Offer and the Merger, the Public Stockholders are
entitled to exercise dissenters' rights. Stockholders who wish to dissent must
do so by October 25, 1999. See "The Merger -- Dissenters' Rights."
THE BOARD OF DIRECTORS OF THE COMPANY, HAVING RECEIVED THE RECOMMENDATION
OF THE SPECIAL COMMITTEE, (1) HAS UNANIMOUSLY (WITH MR. HUGHES ABSTAINING)
APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND
RESOLVED THAT THE TERMS OF THE OFFER, THE MERGER, AND THE MERGER AGREEMENT ARE
FAIR TO AND IN THE BEST INTERESTS OF THE PUBLIC STOCKHOLDERS AND (2) HAS
RECOMMENDED THAT THE PUBLIC STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR
SHARES IN RESPONSE TO THE OFFER.
Bear, Stearns & Co. Inc. ("Bear Stearns"), financial advisor to the Special
Committee, has delivered to the Special Committee its written opinion to the
effect that, as of the date of the Merger Agreement, the consideration to be
received in the Offer and the Merger is fair, from a financial point of view, to
the Public Stockholders. The full text of the written opinion of Bear Stearns
containing the assumptions made, the matters considered and the scope of the
opinion is included in this Information Statement as Annex C. Stockholders are
urged to read the Bear Stearns opinion in its entirety.
This Information Statement is first being mailed to stockholders on or
about October , 1999. As of the date of this Information Statement, there were
9,982,300 Class A Shares and 18,604,515 Class B Shares outstanding.
THIS INFORMATION STATEMENT IS DATED OCTOBER , 1999.
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why did I receive this Information Statement?
A: Applicable laws require us to provide you information regarding the Merger,
even though your vote is neither required nor requested to complete the
Merger.
Q: What will I receive if the Merger is completed?
A: You will be entitled to receive $17.00 in cash, without interest, for each
Class A Share and Class B Share that you own.
Q: When do you expect the Merger to be completed?
A:We are working to complete the Merger by October 29, 1999. However, the
Continuing Stockholder has the right to, and currently intends to, extend the
completion date for the Offer and the Merger.
Q: Why am I not being asked to vote?
A:The Continuing Stockholder owns enough Shares to approve the Merger without
your vote, and has already given its approval of the Merger. However, the
Merger will not occur unless the Minimum Condition of the pending Offer (and
other conditions) are satisfied.
Q: What if I did not receive the Offer Documents?
A:Please contact the Information Agent for the Offer: D.F. King & Co., Inc., 77
Water Street, New York, New York, 10005-4493 at (800) 928-0153.
Q: How do I dissent from the Merger?
A:If you wish to dissent, you must do so by October 25, 1999. Please refer to
"The Merger -- Dissenters' Rights."
Q: What do I need to do now?
A:Nothing. This Information Statement is purely for your information, and does
not require or request you to do anything. If you need information about the
Offer, please contact the Information Agent.
Q: Should I send in my stock certificates now?
A: No. After the Merger is completed we will send you written instructions for
exchanging your certificates representing your Class A Shares and your Class
B Shares for the payment of $17.00 per share on the effective date of the
Merger. If you tendered your Shares in the Offer, you will not receive these
instructions. Instead, please consult the Offer Documents regarding
procedures for tendering your Shares in the Offer.
Q: Whom can I call with questions?
A: If you have any questions about the Merger, please contact Herbalife Investor
Relations at the following address:
1800 Century Park East
Los Angeles, California 90067
(310) 410-9600
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SPECIAL FACTORS
BACKGROUND OF THE OFFER AND THE MERGER
During 1998, Herbalife experienced a significant deterioration in its stock
market valuation. This began in July 1998 and continued during August, September
and October 1998. Herbalife's Class A Shares and Class B Shares, which traded as
high as $29 and $27 1/4 per share, respectively, in May and March of 1998,
traded at prices as low as $7 1/2 and $6 in October 1998. Valuations have since
increased, but only to levels that remain significantly below the market
valuations experienced during the first half of 1998. On September 13, 1999, the
last trading day prior to the announcement of the execution of the Merger
Agreement, the closing sale prices for Herbalife's Class A Shares and Class B
Shares were $12 and $9 5/32 per share, respectively.
Following the decline in the Company's stock price in the second half of
1998, Mr. Hughes and the other senior executives of Herbalife began to consider
preliminarily strategic alternatives for Herbalife in view of Herbalife's
unsatisfactory stock market performance. Senior executives of Herbalife
considered that Herbalife would have greater flexibility as a private company to
invest in the future of Herbalife, particularly given the longer term pay-off
anticipated from investments in new geographic and product markets. Among other
things, senior executives of Herbalife considered that certain of the markets
that Herbalife is in the process of opening, such as China and India, will
require a substantially greater lead-time and investment in infrastructure than
countries opened by Herbalife in the past. The Indian market, which Herbalife
has been preparing to open since 1995, is expected to be open in the fourth
quarter of 1999. The Chinese market, which Herbalife has been preparing to open
since 1997, awaits finalization of marketing and manufacturing plans and is not
expected to be open until late in the year 2000 or early in 2001. In addition,
Herbalife senior executives considered that new markets, such as China and
India, might be less likely to deliver the rapid growth historically experienced
in many new markets, such as Japan. These types of investments may require
significant up-front expenditures, the benefits of which may not be apparent in
Herbalife's financial results until significantly later periods. The senior
executives of Herbalife considered that, as a public company, Herbalife would
have less flexibility to make long-term investments such as these.
Beginning in September 1998, senior executives of Herbalife and Mr. Hughes
began to have preliminary communications with several investment banking firms
concerning possible alternatives to increase shareholder value. Certain of these
firms addressed the advantages and disadvantages of various capital-markets
transactions, including a going private transaction, a leveraged
recapitalization transaction financed in part by a private equity sponsor and a
"Dutch auction" self-tender by Herbalife. Based on the discussions with these
investment banks and the factors discussed above, Mr. Hughes and Herbalife's
senior management determined that a going private transaction was superior to
the other alternatives in terms of enhancing shareholder value. From September
1998 through March 1999, senior executives of Herbalife interviewed several
investment banking firms to obtain their views concerning the advisability of,
and their qualifications to advise senior executives of Herbalife on the
structuring and financing of, such a transaction. In addition, during this
period senior executives of Herbalife met with a representative of one private
equity sponsor firm. Representatives of Donaldson, Lufkin & Jenrette Securities
Corporation ("Donaldson, Lufkin & Jenrette") were first interviewed on March 31,
1999. At that time and in subsequent meetings and conversations, representatives
of Donaldson, Lufkin & Jenrette provided preliminary views concerning the
feasibility and financing of a going private transaction, as well as other
possible transaction structures. On April 23, 1999, Herbalife formally engaged
Donaldson, Lufkin & Jenrette to advise Herbalife and to arrange for the
financing for a possible transaction. Such engagement did not include a request
to render, and Donaldson, Lufkin & Jenrette has not at any time rendered, an
opinion with respect to the fairness of any price proposed in connection with
the going private transaction.
In the fourth quarter of 1998, senior executives of Herbalife began work on
a multi-year business plan containing certain projections of future operating
performance, which was completed in January 1999. A principal feature of the
plan was a projected sales growth rate of 5% per year starting in the year 2000.
See "-- Certain Financial Projections." In addition, Herbalife and its legal,
accounting and tax advisors also began considering structures for a going
private transaction. In particular, Herbalife and its tax advisors began to
consider a number of structures for obtaining the necessary financing while
minimizing Herbalife's worldwide
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effective tax rate. Following its engagement, Donaldson, Lufkin & Jenrette began
to assist Herbalife and its advisors to address structuring issues.
In addition, immediately following its engagement, Donaldson, Lufkin &
Jenrette began its "due diligence" review of Herbalife, including financial,
business and legal information requested by Donaldson, Lufkin & Jenrette and
provided by Herbalife. In particular, Herbalife provided its multi-year business
plan to Donaldson, Lufkin & Jenrette. On April 26, 1999, Donaldson, Lufkin &
Jenrette met with representatives of Herbalife to receive general presentations
regarding Herbalife's business. In addition, legal counsel for Donaldson, Lufkin
& Jenrette commenced a legal due diligence review. This review involved written
requests for information, on-site inspections of documents at Herbalife's
headquarters and telephone conferences with representatives of, and advisors to,
Herbalife worldwide.
In May and June of 1999, Herbalife continued to provide Donaldson, Lufkin &
Jenrette with financial and business information and its legal counsel with
legal information. In addition, during this period various structural aspects of
the transaction were considered in detail. As they were considered, each of
these aspects of the transaction was analyzed in relation to the multi-year
business plan. These included further analysis of the optimal structure of third
party indebtedness from the point of view of minimizing Herbalife's worldwide
effective tax rate, the degree of benefit to Herbalife if recapitalization
accounting treatment for the transaction were available, the treatment of
minority interests in Herbalife's Japanese subsidiary and the nature and extent
of Herbalife's senior executives' continuing equity participation in Herbalife
after any transaction. In particular, senior executives of Herbalife formulated
the general terms of the new stock option plan. See "-- Interests of Certain
Persons -- New Stock Option Plan." Herbalife's senior executives and Donaldson,
Lufkin & Jenrette also continued discussions regarding the expected uses of
proceeds in the transaction. In particular, senior executives of Herbalife
informed Donaldson, Lufkin & Jenrette that as part of any proposal, Mr. Hughes
indicated that he would seek a significant amount of personal liquidity in
connection with the transaction, plus an additional amount to enable him to
satisfy (through companies he controls) his obligations to DECS Trust III. Mr.
Hughes' concern about personal liquidity was based upon his belief that, as a
private company with significant debt-service obligations, he expected that his
ability to receive dividends on his common stock, which historically have been
significant, would be extremely limited. In addition, any such proposal would
include this amount in view of the lack of liquidity he would have in his
investment in Herbalife if it became a private company. Mr. Hughes informed
Donaldson, Lufkin & Jenrette that this amount (not including the amount needed
to satisfy the obligations to DECS Trust III) would be $125 million.
Representatives of Deloitte & Touche LLP ("Deloitte & Touche"), which provided
the tax advice to Mr. Hughes and Herbalife in connection with the transaction,
proposed that these sums should be provided to Mr. Hughes in the form of loans
from Herbalife to one or more entities owned by Mr. Hughes to be made at the
closing of any transaction. The terms of these loans are described in
"-- Interests of Certain Persons -- The Board of Directors."
At a meeting on June 7, 1999, Mr. Hughes and his tax advisors began
consideration of the structure of the loans to Mr. Hughes.
Donaldson, Lufkin & Jenrette advised the senior executives of Herbalife
that a cash price of $12.50 per Share in the going private transaction should be
proposed. Mr. Hughes and Herbalife's senior executives concluded that $12.50 per
Share would be a fair price to offer to Herbalife's stockholders.
In late June and early July 1999, senior executives of Herbalife, in
consultation with Herbalife's tax and legal advisors, finalized the terms of the
proposed loans to a limited liability company controlled and beneficially owned
by Mr. Hughes. These terms included securing the $125 million loan with the
investments anticipated to be purchased using the proceeds from that loan, and
having Mr. Hughes personally guarantee the loan to be used to satisfy the
obligations to DECS Trust III (approximately $66 million in aggregate amount
based on $12.50 per Share).
On July 8, 1999, at a special meeting of the Board of Directors, Mr. Hughes
delivered to the Board of Directors a proposal to pursue an acquisition of
Herbalife in a going private transaction. This proposal expressed the interest
of Mr. Hughes in acquiring 100% ownership of Herbalife through companies he
controls. In particular, the proposal provided that all stockholders of
Herbalife other than Mr. Hughes would
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be entitled to receive $12.50 in cash for each Share owned by them and that all
stock options held by Herbalife option holders, excluding those held by Mr.
Hughes, would be accelerated as to vesting and would be canceled in exchange for
cash payments equal to the difference, if any, between $12.50 a Share and the
exercise price of the options, multiplied by the number of Shares subject to
such options. On July 8, 1999, the $12.50 offer price represented a 17% and 45%
premium to the closing prices of the Class A Shares and Class B Shares,
respectively. Mr. Hughes' proposal included the same proposed price per Share
for each of the Company's two classes of Shares as a result of provisions in
Herbalife's charter requiring an identical price in specified transactions as
well as fiduciary duty considerations. In addition, the proposal provided that
an entity controlled by Mr. Hughes would receive two loans from Herbalife
totaling approximately $191 million and that certain members of Herbalife's
senior management would participate in a new stock option plan, for which shares
representing approximately 16.5% of the post-transaction fully diluted equity of
Herbalife would be reserved for future issuance. In making his proposal, Mr.
Hughes stated that he had no intention of selling any of his Shares. Mr. Hughes'
proposal was accompanied by a draft form of merger agreement.
At the special meeting, Mr. Michael E. Rosen, a member of the Board of
Directors and Herbalife's Executive Vice President and Chief Executive Corporate
Marketing and Corporate Development, explained the proposal. Because Mr. Hughes
and certain other members of the Board of Directors would have a continuing
financial interest in any transaction arising out of the proposal, the Board of
Directors established an independent Special Committee of the Board of
Directors. The Special Committee was given exclusive authority to evaluate,
negotiate and decide whether or not to engage in the transaction (which was
initially proposed as a one-step long-form merger) and certain related
transactions. Messrs. Edward Hall and Christopher Miner, members of the Board of
Directors with significant business and financial experience, were named as the
members of the Special Committee. These two directors were chosen because
neither of them had a conflict of interest in relation to the proposed
transaction. The Board of Directors authorized the Special Committee to
establish such procedures, review such information and engage such financial
advisors and legal counsel as it deemed necessary to fully and adequately make
determinations about Mr. Hughes' proposal and to accept the proposal, reject the
proposal, or seek to negotiate with Mr. Hughes regarding the terms of the
proposed transaction, and to fulfill its other duties.
At the special meeting of the Board of Directors, Mr. Hughes delivered a
letter from Donaldson, Lufkin & Jenrette to Herbalife dated July 7, 1999, to the
effect that, based on information provided to Donaldson, Lufkin & Jenrette to
that date, subject to certain conditions, it was highly confident that the
financing needed for the proposed transaction could be arranged.
Also, a representative of Deloitte & Touche present at the special meeting
described the general tax and accounting aspects of the proposal, and
representatives of Irell & Manella LLP (the legal advisor to the Company and Mr.
Hughes) present at the special meeting described the Board of Directors'
fiduciary duties in relation to the proposal.
On July 12, 1999, the Special Committee engaged Latham & Watkins as its
legal counsel to advise the Special Committee regarding its duties in response
to the proposal. The Special Committee and Latham & Watkins discussed on several
occasions the procedures to be followed in analyzing the proposal and any other
offers from Mr. Hughes or others to acquire Herbalife. Latham & Watkins advised
the Special Committee concerning the Special Committee's legal responsibilities
and the legal principles applicable to, and the legal consequences of, actions
taken by the Special Committee with respect to the proposal and any other offers
from Mr. Hughes.
The Special Committee provided to Latham & Watkins the draft merger
agreement provided to the Board of Directors at the July 8, 1999 meeting,
together with the other documents provided at such meeting.
Beginning on July 13, 1999, Latham & Watkins submitted requests for legal
documents to Irell & Manella LLP, which were also given to Herbalife. Over the
next few weeks, Herbalife provided the documents requested, including the
multi-year business plan referred to above.
On July 21, 1999, after having interviewed several nationally recognized
investment banking firms, the Special Committee engaged Bear Stearns to serve as
its financial advisor for the purpose of advising the
6
<PAGE> 11
Special Committee and assisting the Special Committee in any negotiations with
Mr. Hughes and if necessary, delivering a fairness opinion to the Special
Committee in connection with the proposed transaction. On July 21, 1999, the
Special Committee instructed Bear Stearns to commence its investigation and
analysis of the value of Herbalife and the proposal of Mr. Hughes. Thereafter,
Bear Stearns submitted to the Company its requests for business and financial
information.
On behalf of the Special Committee, Latham & Watkins requested that
Herbalife provide members of the Special Committee with compensation for serving
on the Special Committee. By unanimous written consent dated July 23, 1999, the
Herbalife Board of Directors approved compensation for the Special Committee in
recognition of the added efforts and time they would need to expend during their
assignment. The terms of this compensation are described under "-- Interests of
Certain Persons -- Special Committee Compensation."
During the period from July 21, 1999 to August 11, 1999, Bear Stearns
reviewed financial and other information concerning Herbalife, including
Herbalife's audited and interim financial statements, Herbalife's multi-year
financial model, and other information concerning Herbalife described below in
"-- Opinion of Financial Advisor to the Special Committee." Bear Stearns also
met with members of Herbalife's management on several occasions.
On July 28, 1999, the Special Committee met with Herbalife's senior
executives, Bear Stearns, Donaldson, Lufkin & Jenrette, Irell & Manella LLP and
Latham & Watkins to receive presentations from Herbalife's senior executives
about the proposed transaction and Herbalife's business, prospects, financial
position and financial statements. In addition, management of Herbalife
presented Herbalife's multi-year business plan, which included projections of
future operating performance.
On July 30, 1999, Bear Stearns and Latham & Watkins met with Mr. Hughes to
discuss his views of Herbalife's business and prospects and his reasons for
proposing the transaction. Representatives of Donaldson, Lufkin & Jenrette and
Irell & Manella LLP were also present at the meeting.
On August 5, 1999, Bear Stearns met with Herbalife's Chief Financial
Officer and certain members of the finance department for a more detailed review
of various aspects of Herbalife's historical and projected financial
performance. With respect to projections, Bear Stearns and the Company's
representatives discussed in detail the assumptions used in the preparation of
the projections, as well as alternative assumptions that management had also
considered at the time the projections were prepared.
On August 10, 1999, the Special Committee held a telephonic meeting at
which Bear Stearns and Latham & Watkins participated. At the meeting,
representatives of Bear Stearns presented the preliminary conclusions of their
valuation analysis to the members of the Special Committee. The representatives
of Bear Stearns indicated that, based on the information that they had received
to date, they would be unable to recommend that Bear Stearns' valuation
committee approve the issuance of a fairness opinion at the proposed $12.50
merger price. In addition, representatives of Latham & Watkins reviewed the
other proposed terms of the transaction with the Special Committee and concluded
that they could not recommend that the Special Committee accept the terms and
conditions offered in the initial proposal. The Special Committee determined
that, before taking action to reject the initial proposal, Mr. Hughes should be
given the opportunity to further explain his proposal to the Special Committee.
Accordingly, that same day, the members of the Special Committee
participated in a teleconference call with representatives of Herbalife,
Donaldson, Lufkin & Jenrette, Irell & Manella LLP, Bear Stearns and Latham &
Watkins. In this conference call, Donaldson, Lufkin & Jenrette and Irell &
Manella LLP provided additional information to the Special Committee and its
advisors regarding Mr. Hughes' views as to the fairness of the proposed
transaction.
On August 11, 1999, the Special Committee held a further telephonic meeting
at which Bear Stearns and Latham & Watkins participated. The views expressed on
the previous day's conference call were discussed in detail. Bear Stearns and
Latham & Watkins both indicated that their views as to the fairness of the
proposed transaction had not been materially altered as a result of the previous
conference call. After further discussion,
7
<PAGE> 12
the Special Committee voted unanimously to reject Mr. Hughes' initial proposal,
and directed the Special Committee's advisors to communicate the rejection to
Mr. Hughes' advisors.
On August 12, 1999, the Special Committee delivered a letter to Mr. Hughes
stating that it had consulted with its legal and financial advisors and on
August 11, 1999 had resolved to reject Mr. Hughes' initial proposal. Prior to
delivering the letter, Bear Stearns and Latham & Watkins informed Donaldson,
Lufkin & Jenrette and Irell & Manella LLP that the Special Committee rejected
the proposal based on the insufficient value of the proposal and the terms of
the draft merger agreement supplied with Mr. Hughes' July 8, 1999 proposal. Bear
Stearns and Latham & Watkins indicated that the Special Committee's view was
that, given the inadequacy of Mr. Hughes' proposal, negotiations on that
proposal would not be productive.
On August 12, 1999, Mr. Hughes delivered a letter to the Special Committee
requesting additional information regarding the reasons for the Special
Committee's rejection.
On August 13, 1999, senior executives of Herbalife, together with
representatives of Donaldson, Lufkin & Jenrette and Bear Stearns as well as
Latham & Watkins and Irell & Manella LLP, participated in a telephonic
conference call during which the reasons for the Special Committee's rejection
of Mr. Hughes' offer were described in greater detail. During this call, the
Special Committee's advisors generally described their approach to analyzing the
fairness of Mr. Hughes' initial proposal. From a financial standpoint, Bear
Stearns discussed broadly the valuation methods that it employed in reaching its
conclusion that the proposed offer price was inadequate. From a legal
standpoint, Latham & Watkins indicated that the Special Committee objected to
several aspects of the merger agreement, including the lack of a meaningful
public stockholder voice in the approval of the transaction, the absence of
dissenters' rights, the lack of financing commitments, terms governing the
payment and reimbursement of expenses, the inclusion of a "material adverse
change" condition in Mr. Hughes' favor, the extensive nature of the proposed
representations and warranties from Herbalife to Mr. Hughes, and certain other
provisions. Bear Stearns and Latham & Watkins indicated that, on the basis of
the foregoing financial and legal analyses, the Special Committee had concluded
that Mr. Hughes' initial offer should be rejected. Neither the Special Committee
nor its advisors offered to Mr. Hughes a counter-proposal or indicated what
price they believed would be acceptable.
Between August 13, 1999 and August 19, 1999, senior executives of Herbalife
discussed possible responses to the Special Committee's action with its
financial and legal advisors. In particular, the senior executives consulted
with Donaldson, Lufkin & Jenrette regarding possibly raising the price per share
to be offered in the proposal. Mr. Hughes consulted with his advisors and
considered the views expressed by Bear Stearns on the August 13, 1999 telephonic
conference call. On August 18, 1999, a representative of Donaldson, Lufkin &
Jenrette informed a representative of Bear Stearns that Mr. Hughes might be
willing to offer a price of $14.50 to $15.00 per share, and also address
substantially all of the legal concerns the Special Committee had expressed in
regard to the proposed merger agreement. On August 19, 1999, a representative of
Donaldson, Lufkin & Jenrette received an indication from a representative of
Bear Stearns that the Special Committee might be willing to consider an offer in
the $15.00 per share price range as a basis for commencement of discussions, but
that such a price was probably below the price that the Special Committee
considered acceptable by a significant amount. The representative from
Donaldson, Lufkin & Jenrette acknowledged that a $15.00 offer might not be
sufficient for the Special Committee, but that his understanding from Mr. Hughes
was that he was unwilling at that time to offer significantly more than $15.00
per share.
On August 19, 1999, Mr. Hughes delivered a letter to the Special Committee
that offered a price of $15.00 per share and indicated that he believed he would
be able to meet a majority of the Special Committee's concerns regarding the
other terms of the proposed merger agreement. In addition, Mr. Hughes' letter
invited the Special Committee and its advisors to meet with Mr. Hughes and his
advisors so that details of his proposal and the basis for his belief in its
fairness could be discussed.
On August 20, 1999, Bear Stearns informed Donaldson, Lufkin & Jenrette that
it believed that the Special Committee would not accept the offer contained in
Mr. Hughes' August 19th letter. On August 24, 1999, Bear Stearns and Donaldson,
Lufkin & Jenrette, as well as Latham & Watkins and Irell & Manella LLP,
participated in a telephonic conference call to discuss further valuation and
legal issues. A representative of Irell & Manella LLP described possible
modifications to the merger agreement to address concerns
8
<PAGE> 13
previously articulated by the Special Committee. Principally, the representative
indicated a willingness of Mr. Hughes to condition the proposed transaction on
obtaining a "majority of the minority" vote in favor of the merger, as well as
Mr. Hughes' willingness to grant dissenters' rights, even though dissenters'
rights would not otherwise be available under Nevada corporate law. In addition,
the representative indicated that Mr. Hughes might be willing to eliminate the
condition in the merger agreement that there be no material adverse change in
Herbalife's business, on the assumption that there would be a financing
condition to consummation of the proposed transaction. Mr. Hughes' advisors
indicated that Mr. Hughes was unwilling to remove the financing condition, and
was unwilling to provide financing commitments. Advisors to the Special
Committee expressed concern about the lack of financing commitments, especially
in light of the significant loans proposed to be made to Mr. Hughes at closing,
and the effect that these loans may have on the marketability of the financing.
Mr. Hughes' advisors indicated that the proposed loans were a fundamental
element of Mr. Hughes' willingness to proceed with the transaction, and that
Donaldson, Lufkin & Jenrette took the loans into account in issuing their
"highly confident" letter. Advisors to the Special Committee also indicated that
the Special Committee did not find a commitment for Herbalife to pay all
expenses of the proposed transaction in all scenarios to be acceptable and asked
for a schedule of expenses incurred and proposed to be incurred in connection
with the proposed transaction, which was provided the next day. Advisors to the
Special Committee also expressed a concern about the one-step merger structure
of the proposal because the possibility of delays would be greater in a merger
as compared to a tender offer.
Following the discussion of legal points, Bear Stearns and Donaldson,
Lufkin & Jenrette discussed valuation issues. In particular, Donaldson, Lufkin &
Jenrette described the premiums to market implied by Mr. Hughes' current offer.
In addition, Donaldson, Lufkin & Jenrette explained that the conditions that may
have contributed to the Company's recent stock price performance were unlikely
to change in the near term. Donaldson, Lufkin & Jenrette also indicated that
there was a limited universe of public companies comparable to Herbalife. Bear
Stearns believed that there were several companies that were relevant
comparisons to Herbalife and that some of these companies suggested higher
valuations for Herbalife. At the conclusion of the call, Bear Stearns and Latham
& Watkins indicated that they would discuss the call with the members of the
Special Committee and have further discussions with Mr. Hughes' advisors at a
later date.
On August 24, 1999 and again on August 27, 1999, the Special Committee held
telephonic meetings at which representatives of Bear Stearns and Latham &
Watkins participated. At these meetings, the Special Committee discussed in
detail the proposed terms of Mr. Hughes' revised proposal. The Special Committee
directed its advisors to continue discussions with Mr. Hughes and his advisors
to determine whether Mr. Hughes' revised proposal could be improved further.
On September 7, 1999, representatives of Herbalife, Bear Stearns,
Donaldson, Lufkin & Jenrette, Irell & Manella LLP and Latham & Watkins met to
discuss Mr. Hughes' proposal. A representative of Irell & Manella LLP summarized
the unresolved legal issues that the Special Committee identified as being
particularly significant, including the lack of financing commitments, the
requirement that Herbalife pay all expenses of the proposed transaction even if
the transaction were not completed, and the structure of the transaction as a
merger rather than as a tender offer followed by a merger. A representative of
Latham & Watkins described the disadvantages of a merger from the Special
Committee's perspective. In particular, he noted that a merger would generally
take longer to consummate than a tender offer, resulting in delay and
potentially added risk to stockholders that the transaction is not consummated.
In addition, a tender offer provided greater flexibility in the timing of
raising the financing for the transaction. Irell & Manella LLP and Donaldson,
Lufkin & Jenrette indicated that, for the reasons described by the Latham &
Watkins representative, Mr. Hughes might be agreeable to a tender offer
structure. They also indicated that Mr. Hughes could not accept any transaction
which required that he obtain financing commitments (particularly bridge
financing commitments) because of the associated expense of obtaining
commitments and the potentially onerous terms of bridge financing, but that,
under certain circumstances, he might be agreeable to paying a portion of the
expenses of a failed transaction. After further discussion, a representative of
Donaldson, Lufkin & Jenrette, based on discussions with Mr. Hughes, indicated to
Bear Stearns that Mr. Hughes would be willing to consider a final offer of
$16.50 per share and possibly agree to a limited expense reimbursement
provision, but that he would not compromise on the issue regarding financing
9
<PAGE> 14
commitments. Bear Stearns informed Donaldson, Lufkin & Jenrette that, based on
its prior discussions with the Special Committee, it did not believe that such
an offer would be acceptable to the Special Committee. After further discussions
among Mr. Hughes and his advisors, Donaldson, Lufkin & Jenrette informed Bear
Stearns that Mr. Hughes would be prepared to offer a final price of $17.00 per
share and agree to pay up to $2 million of his own expenses (including expenses
incurred by Herbalife for his benefit) under certain circumstances. As part of
this proposal, Mr. Hughes would not agree to provide financing commitments. In
addition, Mr. Hughes' offer indicated a willingness to structure the transaction
as a tender offer, if the legal and financial advisors for the Special Committee
and Mr. Hughes jointly concluded that a tender offer was preferable from a
timing and flexibility standpoint. Donaldson, Lufkin & Jenrette indicated to
Bear Stearns that Mr. Hughes had indicated that the $17.00 proposal was
absolutely his best and final offer, and that any attempt by the Special
Committee or its advisors to seek additional cash consideration would be
unacceptable to Mr. Hughes and would seriously affect his willingness to proceed
in further negotiations with the Special Committee. Bear Stearns indicated that,
based on prior discussions with the Special Committee, Bear Stearns believed
that the Special Committee might be receptive to Mr. Hughes' final proposal.
On September 8, the Special Committee held a telephonic meeting at which
representatives of Bear Stearns and Latham & Watkins participated. Bear Stearns
and Latham & Watkins updated the Special Committee on the developments at the
meeting on September 7, and obtained the Special Committee's authorization to
continue negotiations with Mr. Hughes and his advisors.
Between September 7 and 10, Irell & Manella LLP and Latham & Watkins
further negotiated the specific terms of the merger agreement. Revisions agreed
upon included the restructuring of the transaction to a cash tender offer,
followed by a cash merger.
On September 10, 1999, Mr. Hughes delivered a letter to the Special
Committee setting forth an offer on substantially the same terms outlined in the
September 7, 1999 meeting. Herbalife's advisors also delivered a revised draft
version of the merger agreement and a revised draft letter from Donaldson,
Lufkin & Jenrette as to its confidence that the requisite financing for the
transactions could be arranged.
On September 13, 1999, the Special Committee met in person with
representatives of Bear Stearns and Latham & Watkins to consider and vote upon
Mr. Hughes' revised proposal. Representatives of Latham & Watkins discussed the
duties of the Special Committee members in evaluating the most recent proposal
from Mr. Hughes. They reviewed with the Special Committee the history of the
process undertaken by the Special Committee to date. In addition, they
summarized the terms of the proposed merger agreement, and discussed the
concessions that had been made by Mr. Hughes in the terms of the transaction, as
compared to what had originally been proposed. Thereafter, representatives of
Bear Stearns made a detailed presentation regarding their views and analyses of
various aspects of the proposed transaction, the terms of the proposed merger
agreement, and other matters. At this meeting, Bear Stearns delivered its
written opinion, that, based upon the matters presented to the Special Committee
and as set forth in its opinion, as of the date of the opinion, the
consideration proposed to be received in the proposed tender offer and merger is
fair, from a financial point of view, to the Public Stockholders. After
discussion and consideration, the Special Committee unanimously approved the
Merger Agreement, determined that the terms of the tender offer and the merger
are fair to, and in the best interests of the Public Stockholders, recommended
that the Board of Directors approve the Merger Agreement and determined that the
Board of Directors should recommend that the Public Stockholders of Herbalife
accept the proposed tender offer and tender their Shares pursuant to the
proposed tender offer.
Following the Special Committee meeting, a meeting of the full Board of
Directors was convened at the corporate offices of Herbalife. All directors were
present except for Mr. Pair, who participated by telephone. In addition,
representatives of Donaldson, Lufkin & Jenrette, Irell & Manella LLP and Latham
& Watkins were present. Mr. Hall, on behalf of the Special Committee, reported
that the Special Committee had resolved to recommend to the Board of Directors
that Mr. Hughes' proposal be accepted. He indicated that the Special Committee
had received a presentation from Bear Stearns and its written opinion to the
effect that the consideration to be received in the proposed tender offer and
the proposed merger is fair, from a financial point of view, to the Public
Stockholders. He indicated that the Special Committee had also received a
presentation from Latham & Watkins on the terms of the proposed agreement and
plan of merger, including various
10
<PAGE> 15
provisions that had been negotiated to improve the agreement from the
perspective of Public Stockholders. Representatives of Irell & Manella LLP then
summarized the terms of the agreement and plan of merger, as finally negotiated
with the representatives of the Special Committee, and reviewed with the Board
of Directors draft resolutions relating to the proposed transactions. A
representative of Irell & Manella LLP also summarized the fiduciary standard
applicable to directors in approving transactions of this nature. A
representative of Latham & Watkins then summarized for the full Board of
Directors the activities of the Special Committee over the preceding
approximately two months, including the numerous meetings and telephone
conferences. The representative indicated that, in addition to price, the
Special Committee placed importance on several improvements achieved in the
terms of the proposal, including among other things (i) the addition of a
requirement that a majority of the Class A Shares and a majority of the Class B
Shares, other than those owned by Mr. Hughes, be tendered in the proposed tender
offer in order for the transaction to proceed; (ii) the inclusion of dissenters'
rights, even though not mandated by Nevada corporate law; (iii) the conversion
of the merger structure to a cash tender offer to be followed by a cash merger;
(iv) the requirement that Herbalife continue to make regular quarterly dividends
and make a special "stub" dividend for the period in which the transactions
close; (v) the inclusion of only minimal representations and warranties from
Herbalife; (vi) Mr. Hughes' obligation to pay up to $2 million of the expenses
incurred by him or on his behalf in the event that the Merger Agreement were to
be terminated under specified circumstances; and (vii) the condition in favor of
Herbalife that a solvency opinion from an independent valuation expert be
delivered at the closing. Donaldson, Lufkin & Jenrette delivered a letter to the
Board of Directors dated September 13, 1999 reiterating their confidence that
the requisite financing for the transaction could be arranged.
Following further discussion, there was a motion to approve and adopt the
resolutions pertaining to the Merger Agreement and related matters. The
resolutions were approved and adopted by the Board of Directors unanimously,
with Mr. Hughes abstaining from the vote.
Immediately following the meeting, Herbalife, Mr. Hughes and his related
entities entered into the definitive Merger Agreement, and Herbalife issued a
press release announcing that its Board of Directors had accepted Mr. Hughes'
proposal and entered into the definitive Merger Agreement. At this time, the
Stockholder Consent was executed.
On September 17, 1999, the Offer was commenced. On September 28, 1999, the
Offer was extended to October 29, 1999.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE OFFER AND THE MERGER
Recommendation of the Special Committee and the Board of Directors
As described above, the Special Committee has unanimously (a) approved the
Merger Agreement and determined that the terms of the Offer and the Merger are
fair to, and in the best interests of, the Public Stockholders; (b) recommended
that the Board of Directors approve the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger; and (c) determined
that the Board of Directors should recommend that the Public Stockholders accept
the Offer and tender their Shares pursuant to the Offer.
The Board of Directors has unanimously (a) determined that the terms of the
Offer, the Merger and the Merger Agreement are fair to, and in the best
interests of, the Public Stockholders; (b) approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger; and (c)
recommended that the Public Stockholders accept the Offer and tender their
Shares pursuant to the Offer.
11
<PAGE> 16
Fairness of the Offer and the Merger
In recommending approval of the Merger Agreement and the transactions
contemplated thereby, and recommending that the Public Stockholders tender their
Shares pursuant to the Offer, the Special Committee considered a number of
factors, including:
(i) The results of operations, financial condition, assets,
liabilities, business strategy and prospects of the Company and the nature
of the industry in which the Company competes. The members of the Special
Committee and its advisors also had discussions with members of the
Company's management regarding such business, conditions and prospects. In
reviewing the Company's business prospects, the Special Committee reviewed
the Company's potential international expansion markets, and the
significant investment and expense associated with entering those markets.
The Special Committee also reviewed the volatility in the Company's
financial results in recent periods caused by its dependence on
international markets, including Asia, Russia and Latin America;
(ii) The opinion of Bear Stearns dated September 13, 1999 that, as of
the date of such opinion and based upon and subject to certain factors and
assumptions stated therein, the consideration to be received in the Offer
and the Merger is fair, from a financial point of view, to the Public
Stockholders. THE FULL TEXT OF THE BEAR STEARNS OPINION IS ATTACHED AS
ANNEX C TO THIS INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS ARE URGED TO READ THE BEAR STEARNS OPINION IN ITS
ENTIRETY, AND TO READ THE DESCRIPTION OF SUCH OPINION UNDER THE CAPTION
"-- OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE;"
(iii) Current and historical market prices and trading history of the
Shares, including the relatively low trading volume of the Shares;
(iv) The relationship of the Offer Price to the current market price
and the historical market prices for the Shares and the fact that the Offer
Price represents a premium of approximately 42% over the per Share closing
price of the Class A Shares and approximately 86% over the per Share
closing price of the Class B Shares on September 13, 1999, the last trading
day prior to the public announcement of execution of the Merger Agreement.
The historical market prices of the Shares during the time the Shares have
been publicly traded are deemed relevant because they indicate the
arms'-length trading prices of the Shares for that period as determined in
the open market;
(v) The fact that the public float for the Shares consists of only
approximately 46% of the outstanding Class A Shares and 42% of the
outstanding Class B Shares. Because of the limited float and relatively low
trading volume in the Shares, the Special Committee believed that attempts
to sell significant portions of the Shares would cause substantial downward
pressure on market prices, and therefore believed that an offer by Mr.
Hughes represents an opportunity for Public Stockholders to realize a
higher price for such Shares than might be realized in market transactions;
(vi) The fact that the Merger Agreement includes an obligation on the
part of the Parent and the Purchaser to make a first-step cash tender
offer, thereby enabling stockholders who tender their Shares to receive
cash consideration without waiting for the Merger to be consummated. In
addition, stockholders who do not tender their Shares pursuant to the Offer
would receive in the Merger the same cash price per Share paid by the
Parent and the Purchaser in the Offer (unless such stockholders elect to
exercise their dissenters' rights);
(vii) The fact that the per Share price to be received in the Offer
and the Merger is payable in cash, thereby eliminating any uncertainties in
valuing the consideration to be received by the stockholders;
(viii) The availability by the terms of the Merger Agreement of
dissenters' rights under the Nevada Revised Statutes (the "NRS") pursuant
to which stockholders of the Company who dissent from the Merger may have
the fair value of their Shares judicially determined;
(ix) The unlikelihood that the Company would be able to effect a
transaction for the sale of the Company without the cooperation of Mr.
Hughes, as well as the unlikelihood that a prospective acquiror
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<PAGE> 17
would make a serious offer for the Shares not owned by Mr. Hughes and his
affiliates without also entering into an agreement with Mr. Hughes. The
Special Committee concluded that, in view of Mr. Hughes' stated
unwillingness to sell his Shares to a third party, it was not likely that
any party other than Mr. Hughes would propose a transaction that was more
favorable to the Company and its stockholders. Accordingly, the Special
Committee and Bear Stearns were not authorized to, and did not, solicit
third party indications of interest to acquire the Company as a whole or
any of its businesses. In the event that the Company should receive a
proposal from a third party, the terms of the Merger Agreement permit the
Board of Directors to provide information to and negotiate with such party
and to modify or withdraw its recommendation to the stockholders if the
Board of Directors determines that its failure to take such action would be
inconsistent with its fiduciary duties under applicable law;
(x) The fact that the Parent and the Purchaser have advised the
Company that they are not aware of any offer having been made from any
other person regarding the acquisition of the Company or any significant
portion of its assets or equity securities;
(xi) The Special Committee's recognition that consummation of the
Merger will preclude the Public Stockholders from participating in any
future growth of the Company; however, in the view of the Special
Committee, this loss of opportunity was adequately reflected in the Offer
Price of $17.00 per Share;
(xii) The Special Committee's consideration of the likelihood of the
consummation of the proposed transaction in light of (a) the fact that the
Parent and the Purchaser have provided the Special Committee with copies of
a "highly confident" letter with respect to the Offer and the Merger, but
had not provided financing commitments, (b) the limited nature of the other
conditions to the Offer and the Merger, (c) the significant percentage of
Shares owned by the Continuing Stockholder and (d) the proposed structure
of the transaction and anticipated closing date;
(xiii) The arm's-length negotiations between the Special Committee and
its representatives and Mr. Hughes and his representatives, including that
the negotiations resulted in (a) a substantial increase in the price at
which Purchaser was prepared to acquire the Shares, from $12.50 per Share
to $17.00 per Share, and (b) the Special Committee's belief, confirmed by
Bear Stearns in their discussions with Donaldson, Lufkin & Jenrette, that
$17.00 per Share was the highest price that could be obtained from Mr.
Hughes under the circumstances;
(xiv) The terms of the Offer, the Merger and the Merger Agreement,
including provisions that (a) without the consent of the Special Committee,
the Merger Agreement may not be amended and the Purchaser may not reduce
the Offer Price or the number of Shares to be purchased, modify the form of
consideration to be paid in the Offer, impose additional conditions to the
Offer or amend or modify any other material term of the Offer in a manner
materially adverse to the holders of Shares, (b) the recommendation of the
Special Committee may be withdrawn, modified or amended to the extent the
Special Committee believes it necessary to do so in the exercise of its
fiduciary duties and (c) it is a condition to the Merger that all Shares
validly tendered and not withdrawn pursuant to the Offer shall have been
purchased by the Purchaser;
(xv) The requirement of the Minimum Condition that the Offer cannot be
consummated unless at least a majority of both the Class A Shares and the
Class B Shares outstanding at the date of the execution of the Merger
Agreement (other than Shares owned by the Continuing Stockholder) are
tendered pursuant to the Offer and not withdrawn;
(xvi) The nature of the "highly confident" letter received by the
Board of Directors of the Company and the Special Committee with respect to
the Offer and the Merger, including the identity of the institution
providing such letter, their knowledge of the Company and their experience
in consummating financing for transactions such as the Offer and the
Merger, and the conditions to such letter; and
(xvii) The fact that the Merger Agreement requires that the Company
continue to pay regular quarterly cash dividends on the Shares until the
Effective Time, and requires the Company to declare pro
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<PAGE> 18
rata special dividends at the same rate at the consummation of the Offer
and the Merger with respect to the "stub" period since the most recent
regularly quarterly dividend payment record date.
The foregoing discussion of the information and factors considered by the
Special Committee is not meant to be exhaustive but includes the material
factors considered by the Special Committee in reaching its conclusions and
recommendations. In view of the variety of factors considered in its reaching a
determination, the Special Committee did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its conclusions and recommendations. In addition,
individual members of the Special Committee may have given different weights to
different factors.
In reaching its determinations referred to above, the Board of Directors
considered the following factors, each of which, in the view of the Board of
Directors, supported such determinations:
(i) The conclusions and recommendations of the Special Committee;
(ii) The factors referred to above as having been taken into account
by the Special Committee; and
(iii) The fact that the Offer Price and the terms and conditions of
the Merger Agreement were the result of arm's-length negotiations among the
Special Committee, the Company and Mr. Hughes and their respective
advisors.
The Board of Directors, including the members of the Special Committee,
also believes that the Offer and the Merger are procedurally fair because, among
other things:
(i) The Special Committee consisted of two non-employee independent
directors appointed to represent the interests of the Public Stockholders;
(ii) The Special Committee retained and received advice from its
independent legal counsel, Latham & Watkins;
(iii) The Special Committee retained and received an opinion from Bear
Stearns as its independent financial advisor to assist it in evaluating a
potential transaction with Parent and Purchaser;
(iv) The detailed review by the Special Committee and its advisors of
the business and financial condition of the Company;
(v) The deliberations pursuant to which the Special Committee
evaluated the Offer and the Merger;
(vi) The $17.00 Offer Price and the other terms and conditions of the
Merger Agreement resulted from active arm's-length bargaining between
representatives of the Special Committee, on the one hand, and
representatives of Mr. Hughes, on the other hand;
(vi) The Minimum Condition (which may not be waived without the
consent of the Special Committee) has the effect of requiring the holders
of a majority of both the Class A Shares and the Class B Shares (other than
the Continuing Stockholder) to tender their Shares into the Offer in order
for it to be consummated; and
(vii) The availability of dissenters' rights to the Public
Stockholders.
The Board of Directors and the Special Committee recognized that the Merger
was not structured to require the approval of a majority of the stockholders of
the Company other than the Continuing Stockholder, and that the Continuing
Stockholder currently has sufficient voting power to approve the Merger without
the affirmative vote of any other stockholder of the Company. The Continuing
Stockholder acted by written consent on September 13, 1999, to approve and adopt
the Merger and the Merger Agreement. However, the Special Committee and the
Board of Directors also recognized that, since (x) it is a condition to the
Merger that Purchaser shall have purchased all Shares validly tendered and not
withdrawn pursuant to the Offer, and (y) it is a condition (waivable only with
the consent of the Special Committee) to consummation of the Offer that there be
validly tendered and not withdrawn at least a majority of the issued and
outstanding Class A
14
<PAGE> 19
Shares and Class B Shares without regard to the Shares owned by the Continuing
Stockholder (i.e., the Minimum Condition), the Merger is effectively conditioned
on satisfaction of the Minimum Condition.
The Board of Directors recognized that consummation of the Offer and the
Merger will deprive current stockholders of the opportunity to participate in
the future growth prospects of the Company, and, therefore, in reaching its
conclusion to approve the Offer and the Merger, determined that the historical
results of the operations and future prospects of the Company are adequately
reflected in the Offer Price. The members of the Board of Directors, including
the members of the Special Committee, evaluated the Parent's and the Purchaser's
proposal, the Offer and the Merger in light of their knowledge of the business,
financial condition and prospects of the Company, and based upon the advice of
financial and legal advisors. In light of the number and variety of factors that
the Board of Directors considered in connection with their evaluation of the
Offer and the Merger, the Board of Directors did not find it practicable to
assign relative weights to any of the foregoing factors.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
At the September 13, 1999 meeting of the Special Committee, Bear Stearns
delivered its opinion (the "Bear Stearns Opinion" or the "Opinion") to the
effect that, as of the date thereof, and subject to the assumptions and
qualifications set forth therein, the consideration to be received in the Offer
and the Merger was fair, from a financial point of view, to the Public
Stockholders.
THE FULL TEXT OF THE BEAR STEARNS OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY BEAR STEARNS, IS ATTACHED AS ANNEX C TO THIS INFORMATION
STATEMENT, AND IS INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE BEAR
STEARNS OPINION SET FORTH IN THIS INFORMATION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BEAR STEARNS OPINION. HERBALIFE
STOCKHOLDERS ARE URGED TO READ CAREFULLY THE BEAR STEARNS OPINION IN ITS
ENTIRETY.
The Opinion is expressly intended for the benefit and use of the Special
Committee and does not constitute a recommendation to the Special Committee or
any holders of Shares as to whether to tender their Shares in the Offer. The
Opinion does not address the Continuing Stockholder's underlying business
decision to pursue the Offer and the Merger.
The consideration to be received by the Public Stockholders in the Offer
and the Merger was determined by Mr. Hughes and the Special Committee through
arm's-length negotiations. Although Bear Stearns was consulted and provided
certain advice to the Special Committee from time to time during the course of
such negotiations, the consideration to be received was not based on any
recommendation by Bear Stearns. The Special Committee did not provide specific
instructions to, or place any limitations upon, Bear Stearns with respect to the
procedures to be followed or factors to be considered by Bear Stearns in
performing its analyses or rendering the Bear Stearns Opinion.
In the course of performing its review and analyses for rendering the
Opinion, Bear Stearns:
- reviewed the Merger Agreement;
- reviewed Herbalife's Annual Reports to Shareholders and Annual Reports on
Form 10-K for the years ended December 31, 1996 through 1998, and its
Quarterly Reports on Form 10-Q for the periods ended March 31, 1999 and
June 30, 1999;
- reviewed certain operating and financial information, including
projections, provided to Bear Stearns by management relating to
Herbalife's business and prospects;
- met with certain members of Herbalife's senior management to discuss
Herbalife's business, operations, historical and projected financial
statements and future prospects;
15
<PAGE> 20
- reviewed the historical prices, valuation parameters and trading volumes
of the Class A Shares and Class B Shares of Herbalife;
- reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which Bear Stearns deemed generally
comparable to Herbalife;
- reviewed the terms of recent acquisitions of companies which Bear Stearns
deemed generally comparable to Herbalife;
- performed discounted cash flow analyses based on the projections for
Herbalife furnished to Bear Stearns; and
- conducted other studies, analyses, inquiries and investigations that Bear
Stearns deemed appropriate.
In the course of its review, Bear Stearns relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information, including without limitation the projections provided to it
by Herbalife. With respect to Herbalife's projected financial results, Bear
Stearns assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the senior management of
Herbalife as to the expected future performance of Herbalife. Bear Stearns did
not assume any responsibility for the independent verification of any such
information or of the projections provided to Bear Stearns, and Bear Stearns
further relied upon the assurances of the senior management of Herbalife that
they were unaware of any facts that would make the information and projections
provided to Bear Stearns incomplete or misleading. In arriving at the Opinion,
Bear Stearns did not perform or obtain any independent appraisal of the assets
or liabilities of Herbalife, nor was Bear Stearns furnished with any such
appraisals.
Bear Stearns noted that the Continuing Stockholder owns a majority of the
Class A Shares and Class B Shares of Herbalife. Bear Stearns also noted that the
Continuing Stockholder has represented to Bear Stearns and to the Special
Committee that he has no intention of selling any of his Shares. Accordingly,
neither Bear Stearns nor the Special Committee solicited, nor was Bear Stearns
asked to solicit, third party acquisition interest in Herbalife. Bear Stearns
assumed that the representations and warranties made in the Merger Agreement
were true and that the Offer and the Merger will be completed in accordance with
the terms of the Merger Agreement. The Bear Stearns Opinion is necessarily based
on economic, market and other conditions, and the information made available to
Bear Stearns, as of the date of such Opinion.
In connection with preparing and rendering the Opinion, Bear Stearns
performed a variety of valuation, financial and comparative analyses. The
summary of such analyses, as set forth below, does not purport to be a complete
description of the analyses underlying the Bear Stearns Opinion. The preparation
of a fairness opinion is a complex process and is not necessarily susceptible to
summary description. Bear Stearns believes that its analyses must be considered
as a whole, and that selecting portions of its analyses and the factors
considered by it, without considering all such factors and analyses, could
create an incomplete view of the processes underlying the Opinion. Moreover, the
estimates contained in such analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Accordingly, such estimates are inherently subject to
substantial uncertainties.
The following is a summary of the material valuation, financial and
comparative analyses performed by Bear Stearns in arriving at the Bear Stearns
Opinion as of the date thereof.
(i) Comparable Public Company Analysis. In the course of its analysis, Bear
Stearns compared certain ratios and multiples of Herbalife to the corresponding
ratios and multiples of certain publicly-traded companies that Bear Stearns
believed were generally comparable to Herbalife (the "Comparable Companies").
The Comparable Companies included Natrol, Inc., Nature's Sunshine Products,
Inc., NBTY, Inc., Nu Skin Enterprises, Inc., Nutraceutical International
Corporation, Rexall Sundown, Inc., Twinlab Corporation, USANA, Inc. and Weider
Nutrition International, Inc. The multiples and ratios were calculated based on
publicly available financial information and research reports, and were adjusted
for certain extraordinary
16
<PAGE> 21
and non-recurring items. Financial data reviewed included revenue, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), earnings
before interest and taxes ("EBIT"), net income and earnings per share ("EPS")
for various time periods as well as certain operating margins, valuation
statistics, financial ratios and projected growth rates. For purposes of its
analysis, Bear Stearns also reviewed the harmonic mean of certain valuation
multiples of the Comparable Companies.
Among other analyses, for each of the Comparable Companies, Bear Stearns
calculated the ratio of their equity value as of September 9, 1999 plus debt
less cash and cash equivalents ("Enterprise Value") to their respective
revenues, EBITDA and EBIT during the most recent 12-month period ("LTM") and
projected calendar 1999 and 2000 revenues, EBITDA and EBIT and the ratios of
their stock prices as of September 9, 1999 to their respective LTM earnings per
share and projected calendar year 1999 and 2000 earnings per share. References
to "P/E" in the tables below refers to a price to EPS multiple.
Results of those analyses are summarized as follows:
REVENUE, EBITDA AND EBIT MULTIPLES
<TABLE>
<CAPTION>
ENTERPRISE VALUE/
------------------------------------------------------------------------------------
LTM PROJECTED CALENDAR 1999 PROJECTED CALENDAR 2000
-------------------------- -------------------------- --------------------------
REVENUES EBITDA EBIT REVENUES EBITDA EBIT REVENUES EBITDA EBIT
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HERBALIFE TRANSACTION MULTIPLE......... 0.52x 5.4x 6.7x 0.53x 5.0x 5.8x 0.50x 4.9x 5.8x
COMPARABLE COMPANIES MULTIPLE RANGE:
Low.................................. 0.49x 3.6x 4.1x 0.63x 4.1x 5.1x 0.52x 3.4x 4.2x
Harmonic Mean........................ 0.83 5.4 6.7 0.89 6.2 7.5 0.73 5.2 6.4
High................................. 1.34 8.6 12.4 1.26 8.5 12.0 1.09 7.8 9.6
SHARE PRICE IMPUTED BY MULTIPLE:
Low.................................. $16.34 $12.67 $12.02 $19.37 $14.55 $15.41 $17.32 $12.97 $13.47
Harmonic Mean........................ 24.84 17.12 16.85 25.70 19.85 20.87 22.81 17.88 18.42
High................................. 37.68 24.62 27.77 34.68 25.82 30.92 31.89 24.53 25.52
</TABLE>
P/E MULTIPLES
<TABLE>
<CAPTION>
CALENDAR CALENDAR
LTM 1999 2000
P/E P/E P/E
------ -------- --------
<S> <C> <C> <C>
HERBALIFE TRANSACTION MULTIPLE.............................. 12.1x 10.6x 10.5x
COMPARABLE COMPANIES MULTIPLE RANGE:
Low....................................................... 7.9x 9.2x 7.6x
Harmonic Mean............................................. 11.3 12.4 9.0
High...................................................... 25.6 23.0 13.0
SHARE PRICE IMPUTED BY MULTIPLE:
Low....................................................... $11.02 $14.65 $12.27
Harmonic Mean............................................. 15.81 19.82 14.58
High...................................................... 35.91 36.84 21.19
</TABLE>
Bear Stearns noted that the Comparable Companies that distributed their
products predominantly through use of multi-level marketing generally traded at
discounts to those companies which used traditional distribution channels.
Further, Bear Stearns observed that the companies which traded above the
harmonic mean tended to be larger companies (relative to Herbalife) in terms of
equity market capitalization and value of public float. Bear Stearns also noted
that earnings forecasts were not generally available for certain of the smaller
Comparable Companies, which may provide an upward bias to the harmonic means of
forecasted earnings.
Bear Stearns also analyzed the historical and projected financial
performance of Herbalife and the Comparable Companies. Bear Stearns observed
that Herbalife's historical growth rates of revenues and earnings were generally
lower than those of the Comparable Companies and that such slower growth was
generally expected to continue in the future based on the management
projections. Bear Stearns also compared Herbalife's profit margins to those of
the Comparable Companies and noted that Herbalife's margins were generally lower
than those of the Comparable Companies.
17
<PAGE> 22
Bear Stearns chose the Comparable Companies because they have general
business, operating and financial characteristics similar to those of Herbalife.
However, Bear Stearns noted that no company used in the foregoing analysis is
identical to Herbalife. Accordingly, Bear Stearns did not rely solely on the
mathematical results of the analysis, but also made qualitative judgments
concerning differences in financial and operating characteristics of Herbalife
and the Comparable Companies and other factors that could affect the values of
each.
(ii) Comparable Transactions Analysis. Bear Stearns reviewed certain
publicly-available financial information related to 13 merger and acquisition
transactions completed over the prior four years that it deemed generally
comparable to the Transaction (the "Comparable Transactions"). For each of the
Comparable Transactions, Bear Stearns reviewed certain publicly-available
financial information for the acquired companies including revenue, EBITDA,
EBIT, net income and certain valuation statistics, as adjusted for certain
extraordinary and non-recurring items. Bear Stearns observed that the multiples
paid in the Comparable Transactions were generally substantially higher than
those implied for Herbalife in the Offer and the Merger. Bear Stearns noted that
all but one of these transactions took place prior to the substantial decline in
the stock prices of companies in the vitamin and nutritional supplement sector
beginning in the summer of 1998. Bear Stearns noted that the equity market
capitalizations for publicly-traded companies in the vitamin and nutritional
supplement sector in most cases fell by over 50% (and in the case of one company
as high as 83%) from June 1998 as compared to September 1999. Valuation
multiples for such companies fell similarly. Accordingly, Bear Stearns put
little weight on its analysis of Comparable Transactions in reaching its
valuation conclusions.
Bear Stearns noted that no transaction used in the foregoing analysis is
identical to the Offer and the Merger. Accordingly, Bear Stearns did not rely
solely on the mathematical results of the analysis, but also made qualitative
judgments concerning differences in financial and operating characteristics of
the Comparable Transactions and other factors that could affect the value of the
companies or transactions to which Herbalife or the Offer and the Merger are
being compared.
(iii) Discounted Cash Flow Analysis. In the course of this analysis, Bear
Stearns, based on management projections, calculated a stream of future
unlevered free cash flows for the years ended December 31, 2000 to 2006.
Unlevered free cash flow, as calculated by Bear Stearns, is equal to
tax-effected earnings before interest and taxes (EBIT) plus depreciation and
amortization less capital expenditures and working capital requirements. The
cash flows were discounted at certain discount rates ranging from 12.0% to
16.0%, based on a weighted average cost of capital estimated, in part, by using
the Comparable Companies. A terminal value was calculated to estimate the value
of all future cash flows by using a growing perpetuity of the 2006 (the last
projected year) cash flow, assuming perpetual growth rates of between 0.0% to
4.0%. Such perpetual growth rates imply terminal value multiples of EBITDA of
3.8x to 5.6x (at a discount rate of 14%). The summation of the present value of
the projected unlevered free cash flows and the present value of the terminal
value yielded per share results is summarized in the following table:
<TABLE>
<CAPTION>
PERPETUAL GROWTH RATES
----------------------------------------------
0.0% 1.0% 2.0% 3.0% 4.0%
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Discount Rates:
12.0%....................................... $16.55 $17.05 $17.64 $18.33 $19.16
14.0%....................................... 15.88 16.32 16.84 17.46 18.19
16.0%....................................... 15.30 15.69 16.15 16.69 17.34
</TABLE>
Bear Stearns also performed certain sensitivity analysis assuming higher
and lower revenue growth rates (P5% revenue growth rate from the management
projections) and higher and lower profit margins (P2% EBITDA margin). Such
analyses produced values for Herbalife of $11.48 to $23.23 per share.
(iv) Public Shareholder Valuation Analysis. Bear Stearns examined the
present value to stockholders of holding Herbalife stock for three and five
years. Specifically, Bear Stearns assumed that Herbalife continued to pay
dividends at the current level and that the hypothetical stock price in three
and five years was estimated based on multiplying projected EPS (based on the
management projections) by a range of P/E
18
<PAGE> 23
multiples. The sum of the present value of the dividend stream and the present
value of the estimated stock price at the end of the projected period was used
to determine a hypothetical current value for the stock. Bear Stearns used a
range of discount rates from 12.0% to 20.0%, based on the estimated cost of
equity capital for Herbalife. The range of present values of the projected
dividend payments and the estimated future stock price after five years is
summarized in the following table:
<TABLE>
<CAPTION>
P/E MULTIPLE -- YEAR 5
----------------------------------------------
8.0X 10.0X 12.0X 14.0X 16.0X
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Discount Rates:
12.0%....................................... $10.98 $13.19 $15.39 $17.60 $19.80
14.0%....................................... 10.13 12.15 14.17 16.19 18.20
16.0%....................................... 9.36 11.21 13.06 14.91 16.76
18.0%....................................... 8.67 10.37 12.07 13.76 15.46
20.0%....................................... 8.04 9.60 11.16 12.72 14.29
</TABLE>
Similarly, Bear Stearns performed such analysis using the future stock
price after three years. Based on this analysis, a range of stock prices from
$10.01 to $22.95 was calculated.
(v) Historical Stock Price Analysis. Bear Stearns reviewed the historical
closing stock prices of Herbalife Class A Shares and Herbalife Class B Shares.
Over the prior twelve months ending on September 9, 1999, Herbalife's Class A
Shares had traded between a high of $16.25 on January 14, 1999 and a low of
$7.50 on October 8, 1998 and Herbalife's Class B Shares traded between a high of
$13.00 on January 14, 1999, and a low of $6.00 on October 8, 1998. Bear Stearns
also observed that Herbalife's non-voting Class B Shares have consistently
traded at a substantial discount to the voting Class A Shares since the
recapitalization in December 1997.
Bear Stearns noted that the stock prices of Herbalife during 1997 and the
first half of 1998 were generally above $20.00, with the stocks trading for a
short period of time above $30.00. Bear Stearns also noted that the stock prices
of Herbalife fell significantly during the summer of 1998, which coincided with
(i) difficult market conditions and reduced financial performance in certain of
Herbalife's international markets, including Russia, and (ii) an overall decline
in the stock prices for companies in the vitamin and nutritional supplement
sector due in part to perceived slowing of industry growth rates and increased
competition in the sector.
Bear Stearns observed that, based on the proposed stock price of $17.00 per
share for both the Class A Shares and the Class B Shares, the following premia
were applicable as of September 9, 1999:
<TABLE>
<CAPTION>
TRANSACTION PREMIUM OVER
--------------------------------
PERIOD CLASS A SHARES CLASS B SHARES
------ -------------- --------------
<S> <C> <C>
One-Day Prior............................................... 40.9% 82.6%
One-Month Prior............................................. 42.4 77.8
20 Trading Days Average..................................... 41.5 81.8
One-Year Average............................................ 43.7 78.5
52-Week High................................................ 4.6 30.8
52-Week Low................................................. 126.7 183.3
</TABLE>
Bear Stearns compared these premia with those of certain "going private"
and "minority buy-in" transactions which it deemed comparable and found that the
premia to be paid in the Transaction to the Class A Shares were generally above
the premia paid in such transactions, with the premia to the Class B Shares
generally at the high end of such transactions. Bear Stearns further noted that
while premia analyses are an indicia of value, such analyses by themselves were
not sufficient to reach conclusions as to financial fairness.
19
<PAGE> 24
(vi) Other Analyses. Bear Stearns conducted such other analyses as it
deemed necessary, including the following:
- reviewing historical and projected financial and operating data for
Herbalife;
- analyzing selected investment research reports on, and earnings and other
estimates for, Herbalife;
- analyzing the historic stock performance and trading volume for both
classes of Herbalife common stock;
- analyzing the historic dividend payments and dividend yields of
Herbalife; and
- reviewing available information regarding the institutional holdings of
both classes of Herbalife common stock.
The Special Committee engaged Bear Stearns as its financial advisor based
on Bear Stearns' experience and expertise. Bear Stearns is an internationally
recognized investment banking firm that has substantial experience in the
healthcare and consumer products industries and expertise in transactions
similar to the Transaction. As part of its investment banking business, Bear
Stearns is continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Pursuant to
the terms of its engagement letter dated July 21, 1999 (the "Bear Stearns
Engagement Letter"), the Special Committee has agreed to have Herbalife (i) pay
Bear Stearns a non-refundable retainer in the amount of $400,000, (ii) pay Bear
Stearns a fee of $1.35 million in connection with the delivery of the Bear
Stearns Opinion and (iii) reimburse Bear Stearns for all reasonable out-of-
pocket expenses (including fees and disbursements of counsel, and of other
consultants and advisors retained by Bear Stearns). Herbalife has also agreed to
indemnify Bear Stearns and certain related persons against certain liabilities
in connection with its engagement, including certain liabilities under the
federal securities laws. In the ordinary course of business, Bear Stearns may
actively trade the equity securities of Herbalife for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities.
PURPOSES OF THE OFFER AND THE MERGER
The purpose of the Continuing Stockholder for engaging in the transactions
contemplated by the Merger Agreement is to provide the Public Stockholders a
fair price for their Shares, acquire 100% ownership of Herbalife and to
terminate the status of Herbalife as a company with publicly traded equity. The
Continuing Stockholder believes that the Company has not been rewarded by the
public equity markets in recent periods, and that the conditions that may have
contributed to that situation are not likely to change in the near future. If
the Offer and the Merger are completed, Herbalife will become wholly owned
(through one or more controlled entities) by Mr. Hughes. In addition, senior
executives of Herbalife will receive rights to purchase 16.5% of Herbalife's
fully diluted equity pursuant to a new stock option plan. See "-- Interests of
Certain Persons -- New Stock Option Plan."
While Mr. Hughes believes that there will be significant opportunities
associated with his investment in Herbalife, Mr. Hughes realizes that there are
also substantial risks that such opportunities may not be fully realized. The
primary risks to Mr. Hughes are that Herbalife will not be able to service its
third party indebtedness and that, as a result, the value of Mr. Hughes' equity
ownership interest in Herbalife could be significantly reduced or potentially
eliminated. Herbalife historically has not carried significant amounts of
indebtedness on its balance sheet. The financing required to consummate the
Merger will require material debt service obligations. As described below
under"-- Interests of Certain Persons -- The Board of Directors," Mr. Hughes
will personally guarantee an $89 million loan from Herbalife to an entity
controlled and beneficially owned by Mr. Hughes, and the investments purchased
using the proceeds of a $125 million loan from Herbalife to that entity will be
pledged to secure the repayment of that loan. Consequently, defaults under
either of the loans (or defaults by Herbalife under its third party financing)
could have a material adverse effect on Mr. Hughes.
20
<PAGE> 25
POSITION OF THE PURCHASER AS TO THE FAIRNESS OF THE OFFER AND THE MERGER
Mr. Hughes has considered the analyses and findings of the Special
Committee and the Board of Directors (described in detail in "-- Recommendation
of the Special Committee and the Board of Directors; Fairness of the Offer and
the Merger") with respect to the fairness of the Offer and the Merger. As of the
date of this Offer to Purchase, the Continuing Stockholder believes, based in
part on the analyses and findings of the Special Committee and the Board of
Directors with respect to the fairness of the Merger, that the Offer, the
Merger, the Merger Agreement and the transactions contemplated thereby are fair
to, and that the Merger are in the best interests of the Public Stockholders.
The Continuing Stockholder makes no recommendation as to whether the Public
Stockholders should tender their shares in the Offer.
The Continuing Stockholder believes that the Offer and the Merger are
procedurally fair to the Public Stockholders of Herbalife based in part on the
reasons stated above by the Special Committee.
CERTAIN EFFECTS OF THE OFFER AND THE MERGER
Upon consummation of the Offer and the Merger, Herbalife will become a
privately held corporation. Accordingly, the Public Stockholders will not have
the opportunity to participate in the earnings and growth of Herbalife after the
Merger and will not have the right to vote on corporate matters. Instead, the
Public Stockholders of Herbalife will have the right to receive $17.00 in cash,
without interest, for each Share held by them, other than Shares in respect of
which dissenters' rights have been perfected. The Public Stockholders will not
face the risk of any losses generated by Herbalife's operations or any decline
in the value of Herbalife after the Merger.
Following the completion of the Merger, the Shares will cease to be traded
on Nasdaq and Herbalife's registration and reporting obligations under section
12 of the Securities Exchange Act of 1934 will terminate. Herbalife expects,
however, to have reporting obligations under section 15 of the Securities
Exchange Act of 1934 in connection with an exchange-offer registration statement
related to the financing of the Offer and the Merger. See "The
Merger -- Financing of the Offer and the Merger."
It is expected that if the Merger is not consummated, senior executives of
Herbalife, under the general direction of the Board of Directors, will continue
to manage Herbalife and the shares will continue to be traded on Nasdaq.
INTERESTS OF CERTAIN PERSONS
In considering the recommendations of the Special Committee and Board of
Directors with respect to the Offer and the Merger, the Public Stockholders
should be aware that certain officers and directors of Herbalife, have interests
in connection with the Merger which may present them with actual or potential
conflicts of interest as summarized below. The Special Committee and the Board
of Directors were aware of these interests and considered them among the other
matters described under "-- Recommendation of the Special Committee and the
Board of Directors; Fairness of the Offer and the Merger." These interests are
described below.
The Board of Directors
Mr. Hughes, Herbalife's founder, President, Chief Executive Officer,
Chairman of the Board and principal stockholder, currently owns 5,396,000 shares
of Class A Shares, representing 54% of the outstanding Class A Shares, and
10,792,002 shares of Class B Shares, representing 58% of the outstanding Class B
Shares. After the Merger, Mr. Hughes will own 100% of Herbalife. In connection
with the Offer and the Merger, Mr. Hughes will obtain, through an entity or
entities controlled and beneficially owned by him, two loans in the aggregate
amount of approximately $214 million. The first of the loans, in the amount of
approximately $89 million, will be used to satisfy the financial obligations of
Mr. Hughes and affiliated entities to DECS Trust III incurred in connection with
the issuance of the DECS securities by that entity. The proceeds of the second
loan, in the amount of $125 million, will be retained by the borrower entity. It
is expected that, provided certain conditions are satisfied, Mr. Hughes will be
permitted to retain the investment income from
21
<PAGE> 26
the proceeds of the $125 million loan, and that dividends will be permitted to
be declared and paid to Mr. Hughes and/or his controlled entities in amounts
sufficient to enable the borrower to pay interest to Herbalife on the loans.
Finally, provided certain covenants anticipated to be included in the
third-party financing are satisfied, beginning three years following the closing
of the Merger, Herbalife will be permitted to provide funds to Mr. Hughes and/or
his controlled entities in an amount sufficient to satisfy the obligations under
the loans, thereby releasing the guaranty of the $89 million loan and releasing
the collateral pledge on the investments purchased with the proceeds of the $125
million loan.
Additionally, Mr. Hughes owns a 5% interest in Herbalife's Japanese
subsidiary, which he will continue to hold after the completion of the Merger.
Mr. Hughes' options to purchase Shares will be cancelled for no
consideration or contributed to capital.
Mr. Michael E. Rosen, a director and executive officer of the Company,
currently owns approximately 11,253 and 22,502 shares, respectively, of
Herbalife's Class A Shares and Class B Shares. If the Merger is consummated, Mr.
Rosen will receive $573,835 in payment for his Shares based on owning 33,755
Shares at a per Share price of $17. Mr. Rosen and Mr. Christopher Pair, also a
director and executive officer of the Company, will also benefit from
acceleration, vesting and cancellation for cash of all of their outstanding
options to purchase the Shares. The aggregate payment to each of Messrs. Rosen
and Pair in respect of the cancellation for cash of their options will be
$5,471,656, and $6,320,226, respectively. In addition, after the completion of
the Merger they each will receive options exercisable for 2.5%, of the
fully-diluted equity interests in Herbalife through a new stock option plan. As
more fully described under the heading, "-- New Stock Option Plan" below, the
new stock option plan will entitle option holders to acquire equity interests in
Herbalife. These equity interests may have substantial value if Herbalife
remains profitable. Additionally, Messrs. Rosen and Pair each own a 0.58% and
0.58% interest, respectively, in Herbalife's Japanese subsidiary, which they
will continue to hold after the completion of the Merger.
Mr. Alan Liker, a director of the Company, will benefit from acceleration,
vesting and cancellation for cash of all of his outstanding options to purchase
Shares. The aggregate payment to Mr. Liker in respect of the cancellation for
cash of his options will be $1,273,677. In addition, Mr. Liker owns a 0.2%
interest in Herbalife's Japanese subsidiary and will continue to hold such
interest after the completion of the Merger. After the Merger, the Continuing
Stockholder expects that Mr. Liker will continue as a director.
Mr. Hall currently owns 2,333 Shares and 4,666 Shares, respectively, of
Class A Shares and Class B Shares. If the Merger is consummated, Mr. Hall will
receive $118,983 in payment for his Shares based on owning 6,999 Shares, at a
per Share price of $17.00. Messrs. Hall and Miner will also benefit from
acceleration, vesting and cancellation for cash of all of their outstanding
options to purchase Shares. The aggregate payment to each of Messrs. Hall and
Miner in respect of the cancellation for cash of their options will be
$1,273,677, and $1,205,717, respectively.
As previously publicly reported, substantially all outstanding stock
options held by directors and employees of Herbalife were repriced in October
1998, following the decrease in the public trading prices of Herbalife's Shares
that was experienced during the second half of 1998. The value of the stock
option cash-outs summarized above includes the effect of the repricing.
Special Committee Compensation
Messrs. Hall and Miner are entitled to compensation and expense
reimbursement for their service on the Special Committee, in addition to normal
directors fees. The Board of Directors has granted each of Messrs. Hall and
Miner a fee of $35,000 for their services on the Special Committee through the
end of October 1999 and $10,000 per month for each month thereafter until the
dismissal of the Special Committee by the Board of Directors, up to a maximum of
$30,000, plus $2,000 per diem in the event they are required to perform
additional functions or commit additional time in connection with any litigation
relating to the Offer and the Merger. All compensation to members of the Special
Committee is and was payable regardless of the recommendation of the Special
Committee with respect to the fairness of the Merger. The Board of Directors
considered that the interest of Messrs. Hall and Miner in the sale of their
Shares and the cancellation for cash
22
<PAGE> 27
payments of their stock options aligned their interests with those of the Public
Stockholders. That fact, together with the non-contingent nature of the
compensation due to them for service on the Special Committee and the
expectation that they will not continue to serve as directors of Herbalife
following the Offer and the Merger, contributed to the Board of Directors'
conclusion that each of Messrs. Hall and Miner was disinterested in the
transactions proposed by Mr. Hughes.
Except as indicated above, the members of the Board of Directors do not own
any Shares or hold any stock options to acquire Shares.
Herbalife's Articles of Incorporation, Bylaws and existing indemnification
agreements provide for the indemnification of Herbalife's directors and officers
under certain circumstances for actions taken on behalf of Herbalife.
Herbalife's directors and officers are also covered by directors and officers
liability insurance maintained by Herbalife. The Merger Agreement provides that
all rights to indemnification and exculpation from liabilities for acts or
omissions of the current or former directors and officers existing under the
Company's Articles of Incorporation, Bylaws and any indemnifications prior to
the Merger shall be assumed and will survive the Merger. In addition, the
Surviving Corporation will be required to maintain in effect (for not less than
six years from the Effective Time of the Merger) directors' and officers'
liability insurance with the same or substantially similar coverage to the
existing insurance policies. See "The Merger -- The Merger
Agreement -- Indemnification, Exculpation and Issuance."
Senior Executives
The senior executives of Herbalife consist of the persons described below.
Certain senior executives will receive, in certain cases described below,
payment for their Shares and cancellation of stock options for cash. In
addition, certain senior executives will participate in the new stock option
plan. See "-- New Stock Option Plan" below.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
PAYMENT FOR PARTICIPATION PARTICIPATION
COMMON PAYMENT FOR TOTAL IN NEW STOCK IN POST-MERGER
STOCK OPTIONS PAYMENTS OPTION PLAN EQUITY*
----------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Mark Hughes................ $ -- $ -- $ -- --% 100%**
Michael E. Rosen........... 573,835 5,471,656 6,045,491 15.15 2.5
Christopher Pair........... -- 6,320,226 6,320,226 15.15 2.5
Timothy Gerrity............ -- 3,574,844 3,574,844 8.08 1.3
Robert A. Sandler.......... -- 3,741,667 3,741,667 8.08 1.3
</TABLE>
- ---------------
* For each individual other than Mr. Hughes, percentage assumes the exercise of
all other stock options granted pursuant to the new stock option plan.
** Subject to dilution by exercise of stock options granted pursuant to the new
stock option plan.
New Stock Option Plan
At the completion of the Merger, Herbalife will adopt a new stock option
plan that provides for the grant of stock options to senior executives of
Herbalife. The number of shares subject to the stock options will be 16.5% of
the fully diluted shares outstanding after the Merger. The exact terms of the
new stock option plan have not yet been determined; the summary below is
intended to be a general description of the broad parameters of the plan as
determined to date by the Continuing Stockholder.
The exercise price of the options will be calculated based on the estimated
fair value of Herbalife in the Merger. The exercise price will be required to be
paid in cash, or, in the discretion of Herbalife, by delivery of a recourse
note.
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<PAGE> 28
All options will be 100% vested upon grant and will have a term of five
years. Herbalife plans to grant options under the new stock option plan as
follows:
<TABLE>
<CAPTION>
PERCENTAGE PARTICIPATION
NAME IN NEW STOCK OPTION PLAN
---- ------------------------
<S> <C>
Michael E. Rosen............................................ 15.15%
Christopher Pair............................................ 15.15
Timothy Gerrity............................................. 8.08
Robert A. Sandler........................................... 8.08
Other members of management................................. 53.54
------
100.00%
</TABLE>
Option holders will be entitled to require Herbalife to repurchase any
shares of stock acquired upon the exercise of options beginning two years after
the grant of the options, as long as such shares have been held for a minimum
period of six months. Herbalife will have the right to repurchase any shares of
stock beginning six months after exercise of such options and five years after
the grant of the options. The purchase price to be paid by Herbalife for shares
of stock purchased will be the fair market value of the shares purchased,
determined as of the date of the exercise of the put or call right on the
shares, as applicable. If Herbalife's shares are not publicly traded, the fair
market value will be determined based on a formula which values Herbalife based
on a multiple of Herbalife's cash flow. Repurchases of stock by Herbalife may be
deferred to comply with applicable legal or contractual requirements, and any
payments so deferred will accrue interest until paid.
In general, except for transfers to Herbalife, shares of stock acquired
upon the exercise of options under the new stock option plan may not be
transferred until five years after the grant of the options or the occurrence of
an initial public offering of Herbalife.
Option holders will have pro-rata piggyback registration rights with
respect to any registration of Shares, subject to customary limitations,
exclusions and cut-backs.
DESCRIPTION OF DECS SECURITIES
In March 1998, DECS Trust III, a Delaware business trust, issued 5 million
DECS securities in an underwritten public offering. The DECS securities
represent beneficial ownership interests in DECS Trust III. Each of the DECS
securities represents the right to receive (a) an annual distribution of
$2.0125, payable quarterly on each February 15, May 15, August 15 and November
15, during the term of the DECS trust, beginning May 15, 1998 and (b) generally,
upon the conclusion of the term of DECS Trust III on February 15, 2001, between
..8288 and 1.0 shares of Class B Shares or cash with an equivalent value.
However, in the case of an "adjustment event" such as that resulting from the
Merger, the settlement value of each DECS unit becomes fixed, in this case at
the same $17.00 per Share price as is payable in the Offer and the Merger. In
connection with the sale of the DECS securities, DECS Trust III entered into
forward purchase contracts with Mr. Hughes and entities controlled by him,
whereby Mr. Hughes and those entities pledged 5 million Class B Shares to DECS
Trust III and agreed to provide either cash or Shares to DECS Trust III upon
settlement as specified in the forward purchase contracts. At the time that
these contracts were entered into, Mr. Hughes received approximately $88 million
in cash; Herbalife received none of the proceeds from the issuance of the DECS
securities or the forward purchase contracts. As a result of the settlement
value of the DECS becoming fixed at $17.00 per Share as a result of the Merger,
the forward purchase contracts further require that Mr. Hughes and the
Hughes-controlled entities party to the forward purchase contracts deliver to
DECS Trust III government securities with a value equal to 105% of the
settlement value of the DECS, or approximately $89 million. At the time that
such governmental securities are provided to DECS Trust III, DECS Trust III will
be obligated to return the pledged Class B Shares to Mr. Hughes and his
controlled companies. In order to deliver to DECS Trust III the approximately
$89 million in government securities, Mr. Hughes will receive a loan from
Herbalife at the completion of the Merger, the proceeds of which will be used to
purchase such government securities. See "-- Interests of Certain Persons -- The
Board of Directors."
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<PAGE> 29
CONDUCT OF HERBALIFE'S BUSINESS AFTER THE OFFER AND THE MERGER
Mr. Hughes is continuing to evaluate Herbalife's business, practices,
operations, properties, corporate structure, capitalization, management and
personnel to determine what changes, if any, will be desirable. Subject to the
foregoing, Mr. Hughes expects that after the Merger the day-to-day business and
operations of Herbalife will be conducted substantially as they are currently
being conducted by Herbalife. Mr. Hughes does not currently intend to dispose of
any assets of Herbalife other than in the ordinary course of business.
Additionally, Mr. Hughes does not currently contemplate any material change in
the composition of Herbalife's current management or employees, although after
the Merger, the Board of Directors will consist of Messrs. Hughes, Rosen, Pair
and Liker. Messrs. Miner and Hall will resign from the Board of Directors when
the Merger is complete.
CERTAIN FINANCIAL PROJECTIONS
Senior executives of Herbalife have developed a multi-year business plan
containing certain projections of the future operating performance of Herbalife.
Such projections do not give effect to the tender offer, merger, or concurrent
issuance of debt, and were prepared for internal financial planning purposes and
in connection with the Continuing Stockholder's proposal for the going private
transaction. These projections were not reviewed with or approved by
non-management members of the Board of Directors.
Herbalife does not as a matter of course publicly disclose projections as
to future revenue, earnings, or other results. Herbalife's projections were not
prepared with a view to public disclosure and the following summary thereof is
included in the Offer to Purchase only because such information was available to
Mr. Hughes for purposes of making his proposal. Herbalife's projections were
also not prepared with a view to compliance with the published guidelines of the
Securities and Exchange Commission regarding projections, nor were they prepared
in accordance with the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
projections.
Neither the Company's independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures with respect
to the projections contained herein, nor have they expressed any opinion or any
other form of assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the projections.
These forward looking statements reflect numerous assumptions and estimates
made by Herbalife's management, which are not apparent on the face of
Herbalife's projections. The assumptions and estimates underlying the
projections are inherently uncertain and, though considered reasonable by the
senior executives of Herbalife when made, are subject to a wide variety of
factors that could cause actual results to differ materially from those
contained in the projections, including, among other factors, industry
performance, general business, economic, regulatory, and market and financial
conditions, all of which are difficult to predict. Accordingly, there can be no
assurance that the projections are indicative of the future performance of
Herbalife or that actual results will not differ materially from those presented
in the projections. Inclusion of the projections in this Offer to Purchase
should not be regarded as a representation by any person that the results
contained in the projections will be achieved.
Herbalife does not generally publish its business plans and strategies or
make external disclosures of its anticipated financial position or results of
operations. Accordingly, neither Herbalife nor Mr. Hughes intends to update or
otherwise revise the projections to reflect circumstances existing since their
preparation or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, neither Herbalife nor Mr. Hughes intends to update or revise the
projections to reflect changes in general economic or industry conditions.
The senior executives of Herbalife and Mr. Hughes have made the following
projections for fiscal years 1999 through 2006, respectively: (i) total retail
sales of $1,667 million, $1,750 million, $1,842 million, $1,941 million, $2,038
million, $2,140 million, $2,247 million and $2,359 million, (ii) net income of
$49.7 million, $50.3 million, $56.5 million, $58.6 million, $56.4 million, $60.2
million, $63.9 million and $67.6 million, (iii) EBITDA of $91.9 million, $94.5
million, $105.3 million, $109.4 million, $106.5 million,
25
<PAGE> 30
$110.3 million, $114.4 million, and $119.2 million, and (iv) earnings per share
of $1.60, $1.62, $1.82, $1.89, $1.82, $1.94, $2.06 and $2.18. Herbalife's
projections were based on historical data specific to Herbalife. In preparing
Herbalife's projections, senior executives of Herbalife made the following
material assumptions: (i) retail sales growth of approximately 1% in 1999 and
approximately 5% annually thereafter; (ii) marketing, distribution, and
administrative expense growth of approximately 7% annually through year 2003 and
5% annually thereafter. These growth rates take into account the building of
required infrastructure as well as new country and product development. A
reduction in product cost of sales has been projected in year 2001, and
thereafter, in conjunction with an anticipated improvement in product costs due
to the expiration of the existing contract with Herbalife's primary supplier of
powder and tablet products. All other major expense categories, including
distributor royalty payments and income taxes, have been projected to remain
consistent with historical ratios. Mr. Hughes used these projections in
evaluating Herbalife's overall value and its ability to service third party
indebtedness that would be incurred in the financing of the Offer, the Merger
and the related transactions.
CERTAIN LITIGATION
On September 14, 1999, three putative class action lawsuits, one entitled
Patricia Lisa and Harbor Finance Partners v. Mark Hughes, et al., Case No. BC
216711, one entitled Kevin Coyle v. Mark Hughes, et al., Case No. BC 216759 and
one entitled Stuart H. Savett v. Herbalife International, Inc., et al., Case No.
BC 216761, were filed in the Superior Court of the State of California, County
of Los Angeles, challenging the fairness of the proposed transaction. Four
similar lawsuits were later filed in the same court, one on September 15, 1999,
entitled Kenneth Schweitzer v. Herbalife International, Inc. et al., Case No. BC
216823, two others on September 16, 1999, entitled Frances Longstreth v.
Herbalife International, Inc., et al., Case No. BC 216911 and Rae Ellen Plattus
vs. Christopher Pair, et al., Case No. BC 16904 and one on September 17, 1999,
entitled Lee Brenin vs. Mark Hughes, et al., Case No. BC 216932. In addition,
three similar lawsuits were filed in the District Court, Clark County, Nevada,
one on September 14, 1999, entitled Colleen M. Tharp vs. Herbalife
International, Inc., et al., Case No. A408158II, one on September 15, 1999,
entitled Francis Mcfarlain, IRA vs. Herbalife International, Inc., et al., Case
No. A408159I, and one on September 22, 1999, entitled Kevin Coyle vs. Mark
Hughes, et al., Case No. A408466. These lawsuits are referred to collectively
herein as the "Lawsuits."
The Lawsuits challenge the fairness of the proposed transaction to the
Company's Public Stockholders, alleging, among other things, that the price to
be paid in the Offer and the Merger does not reflect the value of the Company's
assets, and that the Offer and the Merger are unfair because they will deprive
the Public Stockholders of the ability to share proportionately in the Company's
future growth in profits and earnings. The Lawsuits also allege that the Special
Committee was not independent, and that the Company's directors breached their
fiduciary duties to the Public Stockholders in approving the proposed
transactions. The plaintiffs have requested an injunction prohibiting the
defendants from proceeding with the proposed transactions, unspecified damages,
costs and attorneys' fees, and other relief.
The Company and Mr. Hughes believe that the Lawsuits are without merit and
plan to vigorously defend them and any other actions that may be brought in
connection with the proposed transactions. There can be no assurances, however,
with regard to the outcome of any such suits or to the impact that an adverse
result would have on the Company's and the Purchaser's ability to consummate the
Offer, the Merger and the related transactions.
The Company believes that an additional lawsuit may have been filed but the
Company has not yet been served with such lawsuit.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
The following summary is a general discussion of certain of the expected
Federal income tax consequences of the Offer and the Merger. The summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"), and
published regulations, rulings and judicial decisions in effect at the date of
this Information Statement, all of which are subject to change. The summary does
not discuss all aspects of Federal income taxation that may be relevant to a
particular holder in light of his or her personal
26
<PAGE> 31
circumstances or to certain types of holders subject to special treatment under
the Federal income tax laws, such as life insurance companies, financial
institutions, tax-exempt organizations and non-U.S. persons. In particular, the
summary does not address issues of taxation pertinent to the Continuing
Stockholder or other members of senior management of the Company. The following
summary may not be applicable with respect to Shares acquired through exercise
of employee stock options or otherwise as compensation or held as part of a
straddle or hedging transaction. It also does not discuss any aspects of state
or local tax laws or of tax laws of jurisdictions outside the United States of
America.
THE DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS FOR
GENERAL INFORMATION ONLY. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE SALE OF THEIR SHARES, INCLUDING
THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS AND POSSIBLE
CHANGES IN TAX LAWS.
Sales of Shares in response to the Offer and cancellation of Shares in the
Merger will be taxable transactions for Federal income tax purposes. For Federal
income tax purposes, a tendering stockholder or a stockholder whose Shares are
cancelled in the Merger will generally recognize gain or loss equal to the
difference between the amount of cash received by the stockholder upon sale or
cancellation of the Shares and the stockholder's tax basis in the Shares which
are sold or cancelled. Under present law, gain or loss will be calculated
separately for each block of Shares tendered and purchased pursuant to the Offer
and cancelled pursuant to the Merger.
If Shares are held by a tendering stockholder or by a stockholder whose
Shares are cancelled in the Merger as capital assets, gain or loss recognized by
the stockholder will be capital gain or loss, which will be long term or short
term depending on whether the stockholder's holding period for the Shares
exceeds one year. Long term capital gains recognized by a stockholder who is an
individual will generally be taxed at a maximum Federal marginal tax rate of
20%. Short term capital gains recognized by an individual will generally be
taxed at the individual's ordinary income tax rate. Capital gains recognized by
a corporate stockholder will be taxed at a maximum Federal marginal tax rate of
35%.
A stockholder (other than certain exempt stockholders, including all
corporations and certain foreign individuals) who tenders Shares or whose Shares
are cancelled in the Merger may be subject to 31% backup withholding unless the
stockholder provides its taxpayer identification number ("TIN") and certifies
that the TIN is correct or properly certifies that it is awaiting a TIN. This
should be done by completing and signing the substitute Form W-9 included as
part of the appropriate letter of transmittal. A stockholder that does not
furnish its TIN also may be subject to a penalty imposed by the IRS.
If backup withholding applies to a stockholder, the Depositary is required
to withhold 31% from each payment to that stockholder. Backup withholding is not
an additional tax. Rather, the amount of the backup withholding can be credited
against the Federal income tax liability of the person subject to the backup
withholding, provided that the required information is given to the IRS. If
backup withholding results in an overpayment of tax, a refund can be obtained by
the stockholder upon filing an income tax return.
DESCRIPTION OF OWNERSHIP OF HERBALIFE BEFORE AND AFTER THE OFFER AND THE MERGER
Immediately after the Offer and the Merger, Mr. Hughes will own all of the
common equity of Herbalife through one or more entities he controls and
beneficially owns. In addition, senior executives of Herbalife will be granted
options to purchase Shares representing 16.5% of the fully diluted equity of
Herbalife. See "-- Interests of Certain Persons -- New Stock Option Plan."
Mr. Hughes, directly or indirectly, is the beneficial owner of 5,704,331
Class A Shares and 11,258,665 Class B Shares, excluding 183,333 Class A Shares
and 366,666 Class B Shares owned by the Herbalife Family Foundation (in which
Mr. Hughes has no pecuniary interest) and including 308,331 Class A Shares and
466,663 Class B Shares issuable upon exercise of stock options that are
exercisable within 60 days of September 1, 1999. The Class A Shares and the
Class B Shares beneficially owned by Mr. Hughes or entities controlled by him,
calculated in accordance with the SEC's Exchange Act Rule 13d-3, represented
55.4% of the total outstanding Class A Shares and 59.0% of the total outstanding
Class B Shares as of September 1, 1999.
27
<PAGE> 32
THE MERGER
The Merger will occur in accordance with the Merger Agreement which is
attached hereto as Annex A. In the Merger, the Purchaser will merge into the
Company, the Company will be the surviving corporation, and all stockholders at
the Company, other than the continuing stockholder and any stockholder who
exercises dissenter's rights, will receive in cancellation of their shares
$17.00 per share in cash. The Merger and the offer are subject to the Minimum
Condition, which is not waivable by the Purchaser, and other conditions,
including a financing condition. See "-- The Merger Agreement -- Conditions to
the Offer" and "-- Conditions to the Merger."
THE MERGER AGREEMENT.
The Offer. The Merger Agreement provides for the commencement of the Offer
as promptly as practicable, but in no event later than five business days after
the initial public announcement of the execution of the Merger Agreement.
The Merger Agreement provides that the obligation of the Parent to, and of
the Parent to cause the Purchaser to, consummate the Offer and accept for
payment, and pay for, any Shares tendered and not withdrawn pursuant to the
Offer is subject only to the conditions set forth below in "-- Conditions to the
Offer" (the "Offer Conditions") (any of which may be waived in whole or in part
by the Purchaser in its sole discretion; provided, however, that the Purchaser
may not waive the Minimum Condition (as defined above in the Introduction)
without the prior written consent of the Company). The Purchaser expressly
reserved in the Merger Agreement the right, subject to compliance with the
Exchange Act, to modify the terms of the Offer, except that, without the express
written consent of the Company, neither the Parent nor the Purchaser may (i)
reduce the number of Shares subject to the Offer; (ii) reduce the Offer Price;
(iii) add to or modify the Offer Conditions; (iv) except as provided in the next
paragraph, change the Expiration Time of the Offer; (v) change the form of
consideration payable in the Offer; or (vi) amend, alter, add or waive any term
of the Offer in any manner adverse to the holders of the Shares.
Notwithstanding the foregoing, if on any scheduled Expiration Time of the
Offer, which shall initially be 20 business days after the commencement date of
the Offer, all Offer Conditions have not been satisfied or waived, the Merger
Agreement provides that the Purchaser may, without the consent of the Company,
and at the request of the Company shall, from time to time, extend the
Expiration Time of the Offer, and the Purchaser may, without the consent of the
Company, extend the Offer for any period required by any rule, regulation,
interpretation or position of the Securities and Exchange Commission ("SEC") or
the SEC staff applicable to the Offer. The Merger Agreement provides that
subject only to the conditions set forth below in "-- Conditions to the Offer",
the Purchaser shall, and the Parent shall cause the Purchaser to, as soon as
practicable after the expiration of the Offer, accept for payment, and pay for,
all Shares validly tendered and not withdrawn that the Purchaser becomes
obligated to accept for payment pursuant to the Offer.
The Merger. The Merger Agreement provides that upon the terms and subject
to the conditions set forth in such agreement, and pursuant to Section 92A.250
of the NRS, at the Effective Time (as defined below) (i) the Purchaser shall be
merged with and into the Company and the separate existence of the Purchaser
shall cease; (ii) the Company shall continue as the Surviving Corporation (the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Nevada; and (iii) the separate corporate existence of the Company shall
continue unaffected by the Merger.
The Continuing Stockholder currently owns a sufficient number of Shares to
approve the Merger without the vote of any other stockholders, and has already
executed and delivered the Stockholder Consent to the Merger. See
"-- Stockholder Consent to the Merger."
Subject to the provisions of the Merger Agreement, as soon as practicable
on or after the satisfaction or waiver of the conditions set forth in
"Conditions to the Merger" (the "Merger Conditions"), the parties shall file and
execute articles of merger (the "Articles of Merger") with the Secretary of
State of the State of Nevada, in such form as required by and executed in
accordance with the relevant provisions of the NRS, and shall make all other
filings or recordings required under the NRS and other applicable law. The
Merger shall
28
<PAGE> 33
become effective at the time and on the date which the Articles of Merger are
duly filed with the Secretary of State of the State of Nevada or at such later
time as the parties shall agree and specified in the Articles of Merger (the
"Effective Time"). The Merger Agreement further provides that notwithstanding
anything contrary therein, in the event that the Purchaser shall acquire 90% of
both classes of the issued and outstanding Shares, including Shares accepted for
purchase pursuant to the Offer, then the parties will, at the request of the
Parent or the Purchaser, take all necessary and appropriate action to cause the
Merger to become effective as soon as practicable after such acquisition,
without approval of the Company's stockholders, in accordance with Section
92A.180 of the NRS.
The Merger Agreement provides that the directors and officers of the
Purchaser at the Effective Time will be the initial directors and officers,
respectively, of the Surviving Corporation until their successors shall have
been duly elected or appointed. The Merger Agreement also provides that (i) the
articles of incorporation of the Company, as in effect immediately prior to the
Effective Time, shall be the articles of incorporation of the Surviving
Corporation, until amended in accordance with such articles and the NRS; and
(ii) the bylaws of the Purchaser, as in effect immediately prior to the
Effective Time, shall be the bylaws of the Surviving Corporation until amended
as provided by law, its articles of incorporation and bylaws.
Conversion of Capital Stock. The Merger Agreement provides that as of the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any Shares or any shares of capital stock of the Purchaser:
(i) Each issued and outstanding share of capital stock of the
Purchaser shall be converted into and become one fully paid and
nonassessable Class A Share, par value $.01 per Share, of the Surviving
Corporation;
(ii) Each Share that is owned by the Company and each Share that is
owned by the Purchaser or the Purchaser shall automatically be canceled and
retired and shall cease to exist and no consideration shall be delivered in
exchange therefor;
(iii) Each issued and outstanding Class A Share that is owned by one
or more limited liability companies owned by Mr. Hughes and which hold a
portion of Mr. Hughes's Shares (collectively, "Debtor LLC") shall become
one fully paid and nonassessable Class B Share of the Surviving
Corporation, and each issued and outstanding Class B Share that is owned by
Debtor LLC shall remain outstanding; and
(iv) Subject to the rights of stockholders ("Dissenting Stockholders")
who properly exercise their right of appraisal under the NRS in regard to
their Shares ("Dissenting Shares"), each issued and outstanding Share
(other than Shares to be canceled or to remain outstanding in accordance
with clause (ii) above, and other than Dissenting Shares) shall be
converted into the right to receive in cash, without interest, $17.00 per
Share (the "Merger Consideration"). The Merger Agreement provides that as
of the Effective Time, all such Shares shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such Shares shall cease to
have any rights with respect thereto, except the right to receive the
Merger Consideration upon surrender of such certificate, without interest.
Stock Options. The Merger Agreement provides that at the Effective Time,
each issued and outstanding warrant, option and other right to acquire Company
Securities (an "Option"), but excluding all such Options held by the Continuing
Stockholder, if not already vested, will become vested and shall terminate. Each
holder of any such Option will receive an amount in cash equal to the product of
(i) the number of Shares subject to such Option immediately prior to the
Effective Time; and (ii) the excess (if any) of the per Share Merger
Consideration over the per Share exercise price of such Option, multiplied by
the number of Shares for which such Option is exercisable immediately prior to
the Effective Time. All Options held by the Continuing Stockholder shall be
cancelled without the right to receive consideration of any kind for such
Options.
Representation and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto, including the
following representations by the Company: organization and qualification of
company and its significant subsidiaries, capital structure, power and
authorities, recommenda-
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tions of the Board of Directors, anti-takeover provisions, consents and
approvals, no violations, supplied information and brokers and finders, and the
following representation and warranties of the Parent and the Purchaser:
organization, authority, consents and approvals, no violations, supplied
information, interim operations of Purchaser, capitalization, solvency, and
brokers and finders.
The Parent and the Purchaser also represent and warrant that the Company
has received written assurances from Donaldson, Lufkin & Jenrette, dated
September 13, 1999 relating to such firm's confidence that financing for the
Offer, the Merger and related transactions as described in the Merger Agreement
(the "Debt Financing") could be arranged, and that the Continuing Stockholder
has issued the Equity Commitment, true and complete copies of which have been
provided to the Special Committee and the Board of Directors. Funds from the
Debt Financing, together with Company cash and cash equivalents would be
sufficient to fund: (i) the Offer; (ii) the Merger Consideration for all Shares
subject to conversion in accordance with the Merger Agreement; (iii) the other
transactions contemplated by the Merger Agreement (including, without
limitation, the cancellation of all outstanding warrants, options and other
rights to acquire Company securities for their spread value, and the loans
described in "Special Factors -- Interests of Certain Persons"; (iv) all fees
and expenses of the Company, the Parent and the Purchaser incurred in connection
with the transactions contemplated by the Merger Agreement; and (v) the working
capital needs of the Company following the Merger, including, without
limitation, if applicable, letters of credit (collectively, the funds required
for the matters specified in clauses (i)-(v) are referred to as the "Uses of
Funds"). None of the representations and warranties of the Company, the Parent
or the Purchaser will survive the Effective Time.
Pursuant to the Equity Commitment, the Continuing Stockholder has agreed
not to tender in response to the Offer any of the Shares of the Company
beneficially owned by the Continuing Stockholder and to ensure none of the
Shares beneficially owned by the Continuing Stockholder will be cancelled for
cash in the Merger.
Payment of Dividends. Under the Merger Agreement, the Company has
covenanted and agreed that, prior to the Effective Time, the Company will
continue to declare and pay its regular quarterly cash dividend on the Shares in
accordance with prior practice. In addition, the Company will declare two
additional special dividends. A special dividend shall be paid to holders of
record on the close of business on the date the Offer is consummated, in an
amount equal to the Company's most recent quarterly dividend rate, pro rated for
the period consisting of the number of days elapsed since the last regular
quarterly dividend record date through and including the date of the
consummation of the Offer. In addition, a second special dividend shall be paid
to holders of record on the close of business on the last business day prior to
the Effective Time, in an amount equal to the Company's most recent quarterly
dividend rate, pro rated for the period consisting of the number of days elapsed
since the last regular or special dividend record date (including the first
special dividend record date) through and including the Effective Time.
No Solicitation. The Merger Agreement provides that the Company, its
subsidiaries and their affiliates will not, and the Company, its subsidiaries
and their affiliates will use their reasonable efforts to ensure that their
respective officers, directors, employees, investment bankers, attorneys,
accountants and other representatives and agents do not, directly or indirectly,
initiate, solicit, encourage or participate in negotiations or discussions
relating to, or provide any information to any natural person, corporation,
partnership, limited liability company or entity (each, a "Person") concerning,
or take any action to facilitate the making of, any offer or proposal which
constitutes or is reasonably likely to lead to any Acquisition Proposal (as
defined below) relating to the Company, its subsidiaries or any affiliate, or
any inquiry with respect thereto, or agree to approve or recommend any
Acquisition Proposal; provided, however, that prior to the Effective Time, the
Special Committee may take such action if in the opinion of the Special
Committee after consultation with its counsel, the failure to take any of the
foregoing actions would be inconsistent with the fiduciary duties of the Special
Committee to the stockholders (other than the Continuing Stockholder) under
applicable law. Furthermore, if taking any such action involves, directly or
indirectly, providing access and/or furnishing information concerning the
Company's business, properties or assets to any Person, the access and/or
information shall be provided only pursuant to any appropriate confidentiality
agreement.
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<PAGE> 35
The Merger Agreement also provides that the Company (acting through the
Special Committee) shall promptly notify the Parent of any such offers,
proposals or Acquisition Proposals (including, without limitation, the terms and
conditions and the identity of the Person making such offer or proposal), and
will keep the Parent apprised of all developments with respect to any such
Acquisition Proposal, including without limitation, any modifications thereof.
In addition, the Merger Agreement provides that no provision of the Merger
Agreement will prohibit the Company or the Special Committee from: (i) taking
and disclosing to the Company's stockholders a position with respect to a tender
offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the
Exchange Act; or (ii) making such disclosure to the Company's stockholders
which, in the opinion of the Special Committee, after consultation with its
counsel, may be required under applicable law.
As used in the Merger Agreement, "Acquisition Proposal" means any tender or
exchange offer involving the Company or its securities, any proposal for a
merger, consolidation or other business combination involving the Company, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, the Company, any proposal or
offer with respect to any recapitalization or restructuring with respect to the
Company or any proposal or offer with respect to any other transaction similar
to any of the foregoing with respect to the Company. For purposes of the Merger
Agreement, the term "Acquisition Proposal" shall not apply to any transaction
involving the Parent, the Purchaser or their respective affiliates.
Cooperation With Financing. The Merger Agreement provides that the Parent,
the Purchaser and Mr. Hughes shall use commercially reasonable best efforts to
obtain the Debt Financing for the Offer and the Merger. The Company agrees to
provide, and use commercially reasonable efforts to cause its subsidiaries, its
officers and employees, representatives and advisors, to provide all necessary
cooperation reasonably requested by the Parent, the Purchaser and Mr. Hughes in
connection with such financing, including causing its appropriate officers and
employees to be available on a customary basis for "road show" appearances, the
preparation of disclosure documents in connection therewith, and causing its
independent accountants and counsel to provide assistance to the Parent, the
Purchaser and Mr. Hughes as reasonably required in connection with such
financing. The Merger Agreement also provides that the Company's obligations
shall not include any obligation to obtain any extraordinary waivers, consents
or approvals to loan agreements, leases or other contracts or to agree to an
adverse modification thereof, to prepay or incur additional obligations to any
other parties or to incur or become liable for any other costs or expenses. In
addition, under the terms of the Merger Agreement, the Parent and the Purchaser
are obligated to keep the Company informed of the status of their arrangements
for the financing, including providing prompt written notification to the
Company with respect to certain material adverse developments relating to the
contemplated financing. In the event the Parent and the Purchaser are unable to
arrange any portion of the Debt Financing, the Parent and the Purchaser shall
use commercially reasonable best efforts (but without any requirement to expend
additional funds or modify in a manner adverse to the Parent, the Purchaser of
Mr. Hughes any of the terms of the Offer, the Merger or the other transactions
contemplated by the Merger Agreement) to arrange any such portion from
alternative sources on substantially the same terms and conditions as such
portion of the financing. The Merger Agreement further provides that the Company
is not required to enter into any credit agreement, indenture, guarantee or
similar agreement related to the Debt Financing (other than by operation of law
upon consummation of the Merger) without the consent of the Special Committee.
The Merger Agreement provides that prior to the acceptance for purchase of
the Shares properly tendered in the Offer, Mr. Hughes shall, and shall have
caused each direct or indirect entity controlled by him to have complied in all
material respects with the equity commitment made by him and referenced in the
Merger Agreement.
Other Agreements of the Parent, the Purchaser and the Company. The Company
has agreed that, upon reasonable notice, it shall: (i) give the Parent, the
Purchaser and their respective officers, employees, accountants, counsel,
financing sources and other agents and representatives full access to all
buildings, officers, and other facilities and to all contracts, books, tax
returns and other records of the Company; (ii) promptly furnish a copy of each
report and other document filed or received by it during such period prior to
the Effective Time, pursuant to the requirements of Federal securities law or
regulations; (iii) permit the
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<PAGE> 36
Parent and the Purchaser to make inspections as they may require; (iv) cause its
officers to furnish such financial, operating, technical and product data
(including financial statements) as reasonably requested by the Parent or the
Purchaser; (v) allow the Parent and the Purchaser the opportunity to interview
the Company's employees and other personnel with the Company's prior written
consent; and (vi) assist and cooperate with the Parent and the Purchaser with
respect to the foregoing.
The parties to the Merger Agreement have agreed to cooperate with each
other and use their reasonable best efforts: (i) to promptly prepare and file
all necessary documentation; (ii) to effect all applications, notices, petitions
and filings; (iii) to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and governmental authorities
which are necessary or advisable to consummate the transactions contemplated by
the Merger Agreement; and (iv) to comply with the terms and conditions of all
such approvals. Under the terms of the Merger Agreement, each of the Parent and
the Company have also agreed to notify the other party promptly of the receipt
of comments or request from governmental authorities relating to governmental
approvals, and to supply the other party with copies of all correspondence
between the notifying party or any of its representatives and governmental
authorities with respect to governmental approvals.
Under the Merger Agreement, the Company has also agreed to give prompt
notice to the Parent of: (i) any notice of default receive by prior to the
Effective Time under any material instrument or material agreement to which it
is a party or by which it is bound, which default, if not remedied, would render
materially incomplete or untrue any representation or warranty made pursuant to
the Merger Agreement; (ii) any suit, action or proceeding instituted or, to the
knowledge of the Company, threatened against or effecting the Company prior to
the Effective Time which, if adversely determined, would render materially
incorrect any representation or warranty made pursuant to the Merger Agreement;
and (iii) any material breach of the Company's covenants hereunder or the
occurrence of any event that is reasonably likely to cause any of its
representations and warranties made to become incomplete or untrue in any
material respect.
Subject to the terms and conditions contained therein, the parties to the
Merger Agreement have also agreed to use all reasonable efforts to take (or
cause to be taken) all action and to do (or cause to be done), all things
necessary, proper or advisable under applicable laws and regulations, or to
remove any injunctions or other impediment or delays, to consummate and make
effective the Offer, the Merger and the other transactions contemplated by the
Merger Agreement.
Certain Use of Proceeds. The Merger Agreement provides that the Surviving
Corporation, immediately after the Effective Time, will make loans to a company
controlled and beneficially owned by Mr. Hughes, in the form and on the terms
and conditions satisfactory to the Parent and Mr. Hughes in their sole
reasonable discretion (as more fully described in Exhibit B to the Merger
Agreement and summarized above in "Special Factors -- Interests of Certain
Persons -- The Board of Directors").
Solvency Matters. Under the terms of the Merger Agreement, the Parent and
the Company have agreed to jointly retain a mutually satisfactory appraisal firm
(the "Appraiser") to provide a letter to the Special Committee and the Board of
Directors of the Parent (the "Solvency Letter") to the effect that the financing
to be provided to the Purchaser to effect the Offer and the Merger and the other
transactions contemplated in the Merger Agreement will not cause: (i) the fair
salable value of the Surviving Corporation's assets to be less than the total
amount of its existing liabilities; (ii) the fair salable value of the assets of
the Surviving Corporation to be less than the amount that will be required to
pay its probable liabilities on its existing debts as they mature; (iii) the
Surviving Corporation not to be able to pay its existing debts as they mature;
or (iv) the Surviving Corporation to have an unreasonably small capital with
which to engage in its business.
The Merger Agreement further provides that the Appraiser will be requested
to deliver a Solvency Letter as promptly as practicable. If the Appraiser is
unable to deliver the Solvency Letter or the Solvency Letter is not reasonably
acceptable to the Special Committee (after reasonable efforts are made to remedy
any deficiencies in the Solvency Letter), the Parent and the Purchaser have
covenanted and agreed in the Merger Agreement that, notwithstanding anything to
the contrary in the Merger Agreement, the Parent and the Purchaser shall not
consummate the Offer.
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Indemnification, Exculpation and Insurance. In the Merger Agreement, the
Parent has agreed that all rights to indemnification and exculpation (including
the advancement of expenses) from liabilities for acts or omissions occurring at
or prior to the Effective Time (including with respect to the transactions
contemplated by the Merger Agreement) existing as of September 13, 1999 or at
the Effective Time in favor of the then current or former directors or officers
of the Company as provided in the Company's Amended and Restated Articles of
Incorporation, the Company's Restated Bylaws or any indemnification agreements
(each as in effect on September 13, 1999) shall be assumed by the Surviving
Corporation in the Merger, without further action, as of the Effective Time and
shall survive the Merger and shall continue in full force and effect without
amendment, modification or repeal in accordance with their terms; provided,
however, that if any claims are asserted or made during the continuance of such
terms, all rights to indemnification (and to advancement of expenses) under the
Merger Agreement in respect of any such claims shall continue, without
diminution, until disposition of any and all such claims.
The Merger Agreement provides that in the event that the Parent, the
Surviving Corporation or any of their successors or assigns: (i) consolidates
with or merges into any other person and is not the continuing or surviving
corporation or entity of such consolidation or merger; or (ii) transfers or
conveys all or substantially all of its properties and assets to any person,
then, and in each such case, proper provision will be made so that the
successors and assigns of the Parent or the Surviving Corporation, as the case
may be, shall expressly assume the obligations set forth above. In the event the
Surviving Corporation transfers any material portion of its assets, in a single
transaction or in a series of transactions, Parent has agreed in the Merger
Agreement that it will either guarantee the indemnification obligations referred
to above or take such other action to insure that the ability of the Surviving
Corporation, legal and financial, to satisfy such indemnification obligations
will not be diminished in any material respect.
The Merger Agreement provides that the Surviving Corporation shall: (i)
maintain for a period of not less than six years from the Effective Time the
Company's current directors' and officers' insurance and indemnification policy
to the extent that it provides coverage for events occurring prior to the
Effective Time (the "D&O Insurance"), for all persons who are directors or
officers of the Company on September 13, 1999 (the "Insured Parties"); or (ii)
cause to be provided coverage no less advantageous to the Insured Parties than
the D&O Insurance, in each case so long as the annual premium therefor would not
be in excess of 150% of the last annual premium paid for the D&O Insurance prior
to the date of the Merger Agreement (such 150% amount, the "Maximum Premium").
If the existing D&O Insurance expires, is terminated or canceled during such
six-year period, the Merger Agreement provides that the Surviving Corporation
will use all reasonable efforts to cause to be obtained as much D&O Insurance as
can be obtained for the remainder of such period for an annualized premium not
in excess of the Maximum Premium.
Conditions of the Offer. Notwithstanding any other term of the Offer, the
Purchaser shall not be required to accept for payment or, subject to any
applicable rules and regulations of the SEC, including Rule 14e-1(c) under the
Exchange Act (relating to the Purchaser's obligation to pay for or return
tendered Shares after the termination or withdrawal of the Offer), to pay for
any Shares tendered pursuant to the Offer unless the Minimum Condition is met
prior to the Expiration Date or such later date as the Offer may be extended as
provided in Section 1.1(a) of the Merger Agreement or by an amendment to the
Merger Agreement. Furthermore, notwithstanding any other term of the Offer, the
Purchaser shall not be required to accept for payment or, subject as aforesaid,
to pay for any Shares not theretofore accepted for payment or paid for, and may
terminate the Offer, subject to the terms and conditions of the Merger Agreement
and the Purchaser's obligation to extend the Offer pursuant to the Merger
Agreement, if, at any time on or after the date of the Merger Agreement and
before the acceptance of such Shares for payment or the payment therefor, any of
the following conditions exists (capitalized terms below not previously defined
having the meanings provided for in the Merger Agreement):
(a) any material Governmental Approvals required to be obtained or any
material filings, notices or declarations with or to Governmental
Authorities required to be made by the parties or their Subsidiaries,
officers, directors and affiliates in order to consummate the Offer, shall
fail to have been obtained or made, or if obtained or made, any such
approval does or would contain any conditions, limitations or
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restrictions that have or would reasonably be expected to have a Company
Material Adverse Effect or Parent Material Adverse Effect;
(b) a Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, injunction or other
order which is in effect and has the effect of making the acquisition of
Shares by the Purchaser, the Offer, the Merger or the other transactions
contemplated by the Merger Agreement illegal or prohibits or imposes
material limitations on the ability of the Purchaser to consummate the
Offer, the Merger or the acquisition of the Shares or otherwise
prohibits(directly or indirectly) consummation of the transactions
contemplated by the Merger Agreement or prohibits or imposes material
limitations on the ability of the Parent to own or operate all or a
material portion of the Company's and its subsidiaries' businesses or
assets, taken as a whole;
(c) any of the representations and warranties of the Company set forth
in the Merger Agreement that are qualified as to materiality shall not be
true and correct, or any such representations and warranties that are not
so qualified shall not be true and correct in any material respect, in each
case at the date of the Merger Agreement and at the scheduled or extended
expiration of the Offer (unless a representation speaks as of an earlier
date, in which case if any such representation is not true and correct as
of such earlier date), which breaches have not been cured within 10
business days after the giving of written notice to the Company;
(d) the Company shall have failed to perform in any material respect
any obligation or to comply in any material respect with any agreement or
covenant of the Company to be performed or complied with by it under this
Merger Agreement, which breaches have not been cured within 10 business
days after the giving of written notice to the Company;
(e) the Merger Agreement shall have been terminated in accordance with
its terms;
(f) the Parent, the Purchaser and/or one or more of their respective
subsidiaries shall not have obtained the Debt Financing (as defined above),
on terms and conditions satisfactory in form and substance to the Parent
and the Purchaser in their sole reasonable discretion (including the
availability of funds for the loans described in "Special
Factors -- Interests of Certain Persons", which loans shall be permitted to
be made immediately after the Effective Time) in amounts that, together
with cash and cash equivalents of the Company as of the Effective Date, is
sufficient to satisfy the Uses of Funds (as defined above) (the "Financing
Condition"); or
(g) the number of Shares as to which the holders thereof have properly
exercised, or reasonably appear to have properly exercised, dissenters'
rights, if any, with respect to the Merger exceed three percent (3%) of the
total number of Shares outstanding as of the date of the Merger Agreement,
which, in the reasonable judgment of the Parent or the Purchaser in any such
case, and regardless of the circumstances (including any action or omission by
the Parent or the Purchaser) giving rise to any such condition, makes it
inadvisable to proceed with such acceptance for payment or payments therefor.
The foregoing conditions in paragraphs (a) through (g) are for the sole
benefit of the Purchaser and the Parent and may, subject to the terms of the
Merger Agreement and except for the Minimum Condition, be waived by the
Purchaser and the Parent in whole or in part at any time and from time to time
in their sole discretion. The failure by Parent or Purchaser at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right, the waiver of any such right with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts and
circumstances and each such right shall be deemed an ongoing right that may be
asserted at any time and from time to time.
Conditions to the Merger. The Merger Agreement provides that the respective
obligation of each party to effect the Merger shall be subject to the
satisfaction or waiver, on or prior to the closing date of the Merger (the
"Closing Date") of the following conditions: (i) all material governmental
approvals and all material filings, notices or declarations to governmental
authorities required to be made in order to consummate the Merger shall have
been obtained or made, other than the filing of the Articles of Merger and other
than any deviation that does not have and may not reasonably be expected to have
a material adverse effect; (ii) no
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statute, rule, regulation, injunction or other order which prohibits or material
limits the Purchaser from consummating the Merger or the Parent from owning and
operating all or a material portion of the Company's assets shall be in effect;
and (iii) the Purchaser shall have: (A) commenced the Offer; and (B) purchased,
pursuant to the terms and conditions of such Offer, all Shares duly tendered and
not withdrawn, provided, however, that neither the Parent nor the Purchaser
shall be entitled to rely on such condition if either of them shall have failed
to purchase Shares pursuant to the Offer in breach of their obligations under
the Merger Agreement.
The Merger Agreement also provides that the obligation of the Company to
effect the Merger shall be subject to the satisfaction or waiver, on or prior to
the Closing Date of the following conditions: (i) the representations and
warranties of the Parent and the Purchaser set forth in the Merger Agreement are
true and correct; (ii) each of the Parent and the Purchaser shall have performed
in all material respects each of their respective obligations under the Merger
Agreement; (iii) the Parent shall have deposited with a bank or trust company
designated to act as agent for the stockholders in regard to the receipt of the
merger consideration; (iv) the Solvency Letter shall have been delivered to the
Special Committee and the Board of Directors prior to the acceptance of Shares
pursuant to the Offer; and (v) the Stockholder Consent (as defined in the Merger
Agreement) shall be in full force and effect.
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of it by the stockholders of the Company:
(a) By mutual written consent of Parent and the Board of Directors.
(b) By either the Parent, the Purchaser or the Board of Directors:
(i) if the Merger shall not have been consummated on or prior to
March 31, 2000; provided, however, that the right to terminate the
Merger Agreement shall not be available to any party whose failure to
fulfill any material obligation under the Merger Agreement has been the
cause of, or resulted in, the failure of the Merger to be consummated on
or prior to such date; or
(ii) if a court of competent jurisdiction or other governmental
authority shall have issued an order, decree or ruling or taken any
other action (which order, decree, ruling or other action the parties
hereto shall use their reasonable efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement and such order,
decree, ruling or other action shall have become final and
non-appealable; or
(iii) if the Offer terminates or expires on account of the failure
of any condition of the Offer without the Purchaser having purchased any
Shares pursuant to the Offer; provided, however, that the right to
terminate the Merger Agreement shall not be available to any party whose
failure to fulfill any material obligation under the Merger Agreement
has been the cause of, or resulted in, the failure of any offer
condition.
(c) By the Parent or the Purchaser:
(i) if the Board of Directors or the Special Committee shall have
withdrawn, modified or changed in a manner adverse to the Parent or the
Purchaser its approval or recommendation of the Merger Agreement, the
Offer or the Merger or shall have approved or recommended an Acquisition
Proposal; or
(ii) if Bear Stearns shall have withdrawn, modified or changed in a
manner adverse to the Parent or the Purchaser its opinion as to the
fairness, from a financial point of view, of the consideration to be
received in the Offer and the Merger; or
(iii) if the Company breaches or fails in any material respect to
perform or comply with any of its material covenants and agreements as
contained in the Merger Agreement or breaches any of its representations
or warranties as contained in the Merger Agreement, in any material
respect, which breach shall not have been cured in the case of a
representation or warranty, prior to the Closing or,
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<PAGE> 40
in the case of a covenant or agreement, within 10 days following receipt
by the Company of written notice specifying such breach from the Parent
or the Purchaser.
(d) By the Company (acting through the Special Committee):
(i) if the Parent or the Purchaser breaches or fails in any
material respect to perform or comply with any of their respective
material covenants and agreements contained in the Merger Agreement or
breaches any of their respective representations or warranties contained
in the Merger Agreement, in any material respect, which breach shall not
have been cured in the case of a representation or warranty, prior to
the Closing or, in the case of a covenant or agreement, within 10 days
following receipt by Parent of written notice specifying such breach
from the Company; or
(ii) if the Purchaser or the Parent shall have (A) failed to
commence the Offer within five business days of the public announcement
by the Parent and the Company of the execution of the Merger Agreement,
or (B) failed to pay for Shares pursuant to the Offer in accordance with
the Merger Agreement.
In the event of termination of the Merger Agreement by the Parent, the
Purchaser or the Company (acting through the Board of Directors or the Special
Committee) as provided under "-- Termination," the Merger Agreement shall
forthwith become null and void and there shall be no liability or obligation on
the part of the Parent, the Purchaser or the Company or their respective
officers, directors or employees except for fraud and as set forth in this
paragraph and in "-- Fees and Expenses," and nothing in this paragraph shall
relieve any party from liability for any willful breach of any provision of the
Merger Agreement.
Fees and Expenses. The Merger Agreement provides that all costs and
expenses incurred in connection with the Merger Agreement and the consummation
of the contemplated transactions, including, without limitation, all fees and
expenses of the parties' respective financial advisors and legal and accounting
advisors (collectively, "Costs") shall be paid by the Company, whether or not
the closing occurs; provided, however, that if a Reimbursement Event (as defined
below) occurs, the Parent, the Purchaser and Mr. Hughes shall reimburse the
Company for $2 million (or such lesser amount actually incurred) of the Costs
incurred by them in connection herewith. As used in the Merger Agreement,
"Reimbursement Event" means a failure to consummate the Offer or the Merger as a
result of the Financing Condition (as defined above) to the Offer not being
satisfied for any reason, and then only if the non-satisfaction of the Financing
Condition is not principally the result of a Company Material Adverse Effect.
Notwithstanding anything in this paragraph to the contrary, in the event that
the Merger Agreement is terminated pursuant to paragraph (d) under
"-- Termination," then the Parent, the Purchaser and Mr. Hughes shall be
responsible fully for the Costs incurred by them.
Amendment and Modification. The Merger Agreement provides, subject to
applicable law and except as set forth in "-- Procedure for Termination,
Amendment, Execution or Waiver," that the Merger Agreement may be amended,
modified and supplemented in any and all respects, whether before or after any
vote of the Company's stockholders, by written agreement of the parties hereto,
by action taken by their respective managing member, the Boards of Directors or
the duly authorized designee thereof at any time prior to the Closing Date;
provided, however, that after the approval of the Merger Agreement by the
stockholders of the Company, no such amendment, modification or supplement shall
reduce or change the form of the Merger Consideration.
Extension; Waiver. Except as set forth under "-- Procedure for Termination,
Amendment, Extension or Waiver," the Merger Agreement provides that at any time
prior to the Effective Time, the parties to the Merger Agreement, by action
taken or authorized by their respective managing member or the Boards of
Directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties to the
Merger Agreement; (ii) waive any inaccuracies in the representations and
warranties of the other parties to the Merger Agreement contained therein or in
any document delivered pursuant thereto; or (iii) except as set forth in
"-- Amendment and Modification," waive compliance with any of the agreements or
conditions of the other parties to the Merger Agreement. The Merger Agreement
further provides that any agreement to any such extension or waiver is valid
only if set forth in a written
36
<PAGE> 41
instrument signed on behalf of such party. The failure of any party to the
Merger Agreement to assert any of its rights under the Merger Agreement or
otherwise shall not constitute a waiver of those rights.
Procedure for Termination, Amendment, Extension or Waiver. The Merger
Agreement provides that a termination of the Merger Agreement pursuant to
"-- Termination," an amendment of the Merger Agreement pursuant to "-- Amendment
and Modification" or an extension or waiver pursuant to "-- Extension; Waiver"
shall, in order to be effective, require in the case of the Parent, the
Purchaser or the Company, action by its respective managing member, the Board of
Directors or the duly authorized designee thereof; provided, however, that the
affirmative vote of a majority of the Special Committee shall be required to:
(i) amend or terminate the Merger Agreement by the Company; (ii) exercise or
waive any of the Company's rights or remedies under the Merger Agreement; (iii)
extend the time for performance of the Parent's and the Purchaser's respective
obligations under the Merger Agreement; or (iv) take any action to amend or
otherwise modify the Company's Amended and Restated Articles of Incorporation or
the Company's Restated Bylaws.
Guarantee. The Merger Agreement provides that each of Mr. Hughes and the
Family Trust, jointly and severally, irrevocably guarantees (as primary obligor
and not merely as surety) to the Company and each person who controls the
Company within the meaning of the Securities Act or the Exchange Act or other
Federal or state statutory law or regulation, at common law or otherwise: (i)
the accuracy of the representations and warranties of Parent and Purchaser
contained in the Merger Agreement and set forth in "-- Representations and
Warranties"; and (ii) the performance by the Parent and the Purchaser of the
covenants and agreements contained in the Merger Agreement.
DISSENTERS' RIGHTS
Under Nevada law, the Company is not required to provide its stockholders
with dissenters' rights in connection with the Merger. The Company has, however,
pursuant to the Merger Agreement, agreed to grant stockholders the right to
dissent from the Merger notwithstanding the provisions of the NRS.
Stockholders who oppose the proposed Merger will have the right to receive
payment for the value of their Shares as set forth in Sections 92A.300 through
92A.500 of the NRS. To assert the dissenters' rights provided under the Merger
Agreement, a stockholder must deliver a written notice to the Company prior to
October 25, 1999, of his or her intention to demand payment for his Shares if
the Merger is effectuated. A stockholder who holds his or her Shares
beneficially, and not of record, may assert his or her dissenters' rights only
by submitting with his or her written notice the written consent of the
stockholder of record to the dissent, and must exercise his or her dissenters'
rights for all the Shares of which he or she is the beneficial owner or over
which he or she has power to direct the vote.
If the Merger is consummated, the Company is required to deliver a written
dissenter's notice no later than 10 days after the consummation of the Merger to
all stockholders who gave due notice of their intention to demand payment. The
notice shall state where a demand for payment must be sent and where and when
certificates must be deposited in order to obtain payment; shall include a form
for demanding payment which includes the date of the first announcement to the
news media or to the stockholders of the terms of the proposed Merger and a
request for certification of the date on which the stockholder (or the person on
whose behalf the stockholder dissents) acquired beneficial ownership of the
shares; shall state the date by which the Company must have received the demand
for payment; and shall be accompanied by a copy of Sections 92A.300 through
92A.500 of the NRS. Stockholders who fail to demand payment, or fail to deposit
certificates as required by the notice mailed to the dissenting stockholders, in
each case by the date set forth in such notice, shall have no right to receive
payment for their shares.
37
<PAGE> 42
Within 30 days following the date on which demand for payment is received
from dissenting stockholders who have deposited their certificates with the
Company, all in accordance with the notice of the Company, the Company shall
remit to the dissenting stockholders the amount which the Company estimates to
be the fair value of the Shares, with interest. The remittance shall be
accompanied by the following:
(1) the Company's closing balance sheet and statements of income and
stockholders' equity for a fiscal year ending not more than 16 months
before the date of remittance, together with the latest available interim
financial statements;
(2) a statement of the Company's estimate of the fair value of the
Shares;
(3) an explanation of how the interest was calculated;
(4) a statement of the dissenter's right to demand payment pursuant to
the NRS, Section 92.A480 (Dissenter's Estimate of Fair Value); and
(5) a copy of Sections 92A.300 through 92.A.500 of the NRS.
The Company may elect, however, to withhold remittance from any dissenter
with respect to Shares of which the dissenter (or the person on whose behalf the
dissenter acts) was not the beneficial owner on the date specified in the notice
to dissenters that is described in the immediately preceding paragraph.
If a dissenting stockholder believes that the amount remitted is less than
the fair value of his or her Shares, he or she may, within 30 days after the
date of mailing of the Company's remittance, mail to the Company his or her own
estimate of the value of the deficiency. If a dissenting stockholder fails to do
so, he or she shall be entitled to no more than the amount remitted. If a demand
for payment remains unsettled for 60 days after such demand is made by a
dissenting stockholder, the Company shall file a petition in an appropriate
court requesting that the fair value of the Shares and interest thereon be
determined by the court. All dissenters are entitled to judgment for the amount
by which the fair value of their Shares, plus interest, is found to exceed the
amount previously remitted, and for the fair value, plus interest, of his
after-acquired shares for which the Company elected to withhold payment. If the
Company fails to file a petition, each dissenter who has made a demand and who
has not already settled his claim against the Company shall be paid by the
Company the amount demanded by him or her with interest and may sue thereafter
in an appropriate court.
The foregoing summary does not purport to be a complete statement of the
provisions of Section 92A.300 through 92A.500 of the NRS and is qualified in its
entirety by reference to those sections, a copy of which is attached as Annex B.
Stockholders intending to exercise dissenters' rights should review Annex B for
more complete and definitive statement of the rights of dissenting stockholders
and the procedures to be followed.
STOCKHOLDER CONSENT TO THE MERGER.
The Continuing Stockholder, as the holder of 54% of the voting power of the
Class A Shares, has taken action by written consent to approve the Merger
Agreement and the Merger pursuant to the NRS Sections 78.320 and 92A.120. On
September 13, 1999, the Continuing Stockholder executed and delivered to the
Company the Stockholder Consent adopting the Merger Agreement and authorizing
the transactions contemplated thereby. The Stockholder Consent is sufficient
under the NRS to adopt the Merger Agreement without the concurrence of any other
stockholders. Therefore, no further action of the Public Stockholders is
necessary. Mr. Hughes' Stockholder Consent is attached as Annex D to this
Information Statement. NRS Section 78.320(2) provides that, unless the articles
of incorporation or bylaws of the corporation provide otherwise, action by the
stockholders may be taken without a meeting if a written consent to that action
is signed by the stockholders holding at least a majority of the voting power
(unless a different proportion of the voting power is required for such an
action at a meeting and then that proportion is required to sign the written
consent). NRS Section 92A.120(7) correspondingly provides that, unless otherwise
provided in the articles of incorporation or the bylaws, a plan of merger (such
as the Merger Agreement) may be approved by written consent as provided in NRS
Section 78.320. NRS Section 78.320(3) further provides that in no instance where
action is authorized by written consent need a meeting of stockholders be called
or notice given.
38
<PAGE> 43
FINANCING OF THE OFFER AND THE MERGER.
Approximately $500 million will be required to finance the Offer, the
Merger and the loans to the Hughes-controlled entities and to pay related
expenses and fees. Approximately $440 million of this amount will be financed
through third party indebtedness, and the balance of approximately $60 million
will be funded from cash on Herbalife's balance sheet. The third party
indebtedness is expected to be financed with a combination of borrowings by
Herbalife under a new senior credit facility with a syndicate of major
commercial banks and the issuance by Herbalife of new subordinated debentures to
qualified institutional buyers in a Rule 144A offering. The 144A offering would
provide customary registration rights in a registered exchange offer after such
144A offering. It is expected that the senior credit facility will consist of
one or more term loans and a revolving credit facility, and that it will be
secured by substantially all of Herbalife's assets. The subordinated debentures
will be unsecured and are expected to have a term of seven years. The other
terms and conditions of these sources of financing are expected to be those
customary for similar debt financing transactions. Herbalife's financial
advisor, Donaldson, Lufkin & Jenrette, has advised it that, subject to certain
conditions, it is highly confident that such financing in the aggregate amount
described above could be arranged. Herbalife currently expects to borrow the
required funds at interest rates prevailing for similar transactions at the time
of the completion of the Offer and the Merger. Herbalife may, however, revise
the allocation between these two sources of credit in light of market and
business conditions at the time of borrowing. The Merger Agreement provides for
a financing condition. Therefore, notwithstanding Donaldson, Lufkin & Jenrette's
expression of confidence, it is possible that the financing required to
consummate the Offer and the Merger will not be available. In that case, none of
Mr. Hughes, the Purchaser or the Parent would have an obligation to complete the
Offer or the Merger. Herbalife intends to repay the indebtedness principally
through corporate earnings. It may also refinance portions of the indebtedness
in the future.
ACCOUNTING TREATMENT.
The Company believes that the Merger will be accounted for as a "purchase"
under the purchase method in accordance with generally accepted accounting
principles.
FEES AND EXPENSES.
The Company has agreed in the Merger Agreement to pay all expenses of the
Offer and the Merger whether or not it is completed (except that the Continuing
Stockholder is responsible for up to $2 million of the Continuing Stockholder's
Costs (as defined in the Merger Agreement) under certain circumstances described
in the Merger Agreement). Estimated fees and expenses incurred or to be incurred
in connection with the Offer, the Merger and related transactions are as
follows:
<TABLE>
<S> <C>
Financial advisory/dealer manager fees and expenses(1)...... $14,800,000
Legal fees and expenses(2).................................. 2,800,000
Accounting fees and expenses................................ 2,100,000
Depositary fees and expenses................................ 20,000
Information Agent fees and expenses......................... 20,000
Securities and Exchange Commission filing fee............... 54,000
Printing and mailing costs.................................. 250,000
Miscellaneous expenses...................................... 200,000
-----------
Total............................................. $20,244,000
===========
</TABLE>
- ---------------
(1) Includes the fees and expenses to Donaldson, Lufkin & Jenrette for financial
advisory services to Herbalife related to the Offer and Merger, the
estimated fees related to the Debt Financing, and the fees and expenses of
Bear Stearns for financial advisory services to the Special Committee.
(2) Includes the estimated fees and expenses of counsel for the Special
Committee, Mr. Hughes and their advisors' counsels.
39
<PAGE> 44
Except as set forth below, neither the Purchaser nor the Parent funds will
pay any fees or commissions to any broker, dealer or other person for soliciting
tenders of Shares pursuant to the Offer.
Pursuant to the engagement agreement between Herbalife and Donaldson,
Lufkin & Jenrette, Donaldson, Lufkin & Jenrette has the exclusive right, but not
the obligation, to act as the sole placement and arranging agent for the Debt
Financing.
The Purchaser has retained D.F. King & Co., Inc. to act as the Information
Agent in connection with the Offer. The Information Agent may contact holders of
Shares by mail, telephone, facsimile, telegraph and personal interviews and may
request brokers, dealers and other nominee stockholders to forward materials
relating to the Offer to beneficial owners of Shares. The Information Agent will
receive reasonable and customary compensation together with reimbursement for
its reasonable out-of-pocket expenses and will be indemnified against certain
liabilities and expenses, including certain liabilities under the federal
securities laws.
In addition, the Purchaser has retained U.S. Stock Transfer Corporation as
the depositary (the "Depositary"). The Depositary has not been retained to make
solicitations or recommendations in its role as Depositary. The Depositary will
receive reasonable and customary compensation for its services, will be
reimbursed for certain reasonable out-of-pocket expenses and will be indemnified
against certain liabilities and expenses. Brokers, dealers, commercial banks and
trust companies will be reimbursed by the Purchaser for customary mailing and
handling expenses incurred by them in forwarding offering material to their
customers.
CERTAIN LEGAL MATTERS; REGULATORY APPROVALS
General. Except as otherwise disclosed in this Information Statement,
based on the Company's representations and warranties in the Merger Agreement
and a review of publicly available filings by the Company with the Commission,
the Purchaser is not aware of: (i) any license or regulatory permit that appears
to be material to the business of the Company and its subsidiaries, taken as a
whole, that might be adversely affected by the acquisition of Shares by the
Purchaser pursuant to the Offer or by the Merger; or (ii) any approval or other
action by any governmental, administrative or regulatory agency or authority,
domestic or foreign, that would be required for the Purchaser to acquire and own
Shares.
Going Private Transactions. The Commission has adopted Rule 13e-3 under
the Exchange Act, which is applicable to certain going private transactions.
This Information Statement contains information required by Rule 13e-3. Also,
the Parent, the Purchaser and the Company have filed with the SEC a Transaction
Statement on Schedule 13E-3. The Schedule 13E-3 and any exhibits or amendments
to it may be inspected at, and copies obtained from, the places described in
"Where You Can Find More Information" (except that they will not be available at
the regional offices of the SEC).
State Takeover Statutes. The Company is incorporated under the laws of
Nevada. Sections 78.411 to 78.444 of the NRS limit the ability of a Nevada
corporation to engage in certain "combinations" with an "interested
stockholder." With certain exceptions, an interested stockholder is a person who
owns 10% or more of the corporation's outstanding voting stock, including any
rights to acquire stock under an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only, or is an affiliate or
associate of the corporation and was the owner of 10% or more of the
corporation's voting stock at any time within the previous three years. These
statutes prohibit combinations with an interested stockholder for three years
from the date of the interested stockholder's acquisition of the shares of the
corporation unless, prior to the date on which the person becomes an interested
stockholder, the board of directors of the corporation approves the combination
or the transaction which resulted in the person becoming an interested
stockholder. These statutes, however, do not apply to any combination with a
stockholder who was an interested stockholder on January 1, 1991. Since the
Offer and the Merger involve the Company combining with a stockholder who was an
interested stockholder on January 1, 1991, these statutes are not applicable.
A number of other states have adopted laws and regulations applicable to
attempts to acquire securities of corporations which are incorporated, or have
substantial assets, stockholders, principal executive offices or
40
<PAGE> 45
principal places of business, or whose business operations otherwise have
substantial economic effects, in such states. In 1982, in Edgar v. MITE Corp.,
the Supreme Court of the United States invalidated on constitutional grounds the
Illinois Business Takeover Statute, which, as a matter of state securities law,
made takeovers of corporations meeting certain requirements more difficult.
However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court
held that the State of Indiana may, as a matter of corporate law, and, in
particular, with respect to those aspects of corporate law concerning corporate
governance, constitutionally disqualify a potential acquiror from voting on the
affairs of a target corporation without the prior approval of the remaining
stockholders. The state law before the Supreme Court was by its terms applicable
only to corporations that had a substantial number of stockholders in the state
and were incorporated there.
THE COMPANY
DESCRIPTION OF THE COMPANY
Herbalife sells a wide range of weight management products, food and
dietary supplements and personal care products worldwide. As of June 30, 1999,
Herbalife conducted business in 44 countries located in Asia/ Pacific Rim,
Europe and the Americas and operated through 40 domestic and foreign
subsidiaries. Herbalife products are marketed exclusively through a network
marketing system. This system enables Herbalife's independent distributors to
earn profits by selling Herbalife products to retail consumers or other
distributors. Distributors may also develop their own distributor downline
organizations by sponsoring other distributors to do business in any market
where Herbalife operates, entitling the sponsors to receive cash incentives
(including royalty overrides and bonuses) on product sales within their downline
organizations.
Herbalife began operations in February 1980 as a California limited
partnership and operated in that form through December 1985, with the exception
of an interim period from October 1981 through August 1983 when the business was
operated through a California corporation. In January 1986, Herbalife's business
was transferred from the California limited partnership to its corporate general
partner, Herbalife International of America, Inc. In November 1986, Herbalife
International of America, Inc. was acquired in a stock-for-stock reorganization
by Sage Court Ventures, Inc. As a result of the acquisition, Herbalife
International of America, Inc. became a wholly owned subsidiary of Sage Court
and the former stockholders of Herbalife International of America, Inc. acquired
a controlling interest in Sage Court. Sage Court's name was formally changed to
Herbalife International, Inc. in December 1986.
The following selected consolidated financial data relating to the Company
and its subsidiaries has been taken or derived from the audited financial
statements contained in the Company 10-K and the unaudited financial statements
contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1999 (the "Company 10-Q"). More comprehensive financial
information is included in the Company 10-K and the Company 10-Q and the other
documents filed by the Company with the SEC, and the financial data set forth
below is qualified in its entirety by reference to those reports and other
documents. They may be examined and copies may be obtained from the SEC's
offices in the manner set forth below under the heading "Where Your Can Find
More Information."
41
<PAGE> 46
HERBALIFE INTERNATIONAL, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Retail sales......................... $884,058 $923,644 $1,200,144 $1,490,693 $1,644,837 $796,589 $854,563
Less -- Distributor allowances on
product purchases.................. 417,177 434,640 568,209 708,241 778,195 376,869 401,774
-------- -------- ---------- ---------- ---------- -------- --------
Net sales............................ 466,881 489,004 631,935 782,452 866,642 419,720 452,789
Cost of sales........................ 130,707 143,557 168,432 205,070 230,818 108,146 116,116
Royalty overrides.................... 125,820 138,940 184,669 233,883 250,905 122,676 134,940
-------- -------- ---------- ---------- ---------- -------- --------
Gross profit......................... 210,354 206,507 278,834 343,499 384,919 188,898 201,733
Marketing, distribution and
administrative expenses............ 139,629 176,046 210,087 257,514 306,589 140,645 163,011
Restructuring expense................ -- 2,300 -- -- -- -- --
Interest income -- net............... 2,919 3,404 4,084 4,535 2,533 1,675 837
-------- -------- ---------- ---------- ---------- -------- --------
Income before income taxes and
minority interest.................. 73,644 31,565 72,831 90,520 80,863 49,928 39,559
Income taxes......................... 27,616 11,837 28,040 34,850 31,132 19,222 15,230
Minority interest.................... -- -- -- 1,003 1,233 590 424
-------- -------- ---------- ---------- ---------- -------- --------
Net income........................... $ 46,028 $ 19,728 $ 44,791 $ 54,667 $ 48,498 $ 30,116 $ 23,905
======== ======== ========== ========== ========== ======== ========
Earnings per share:
Basic.............................. $ 1.54 $ 0.66 $ 1.50 $ 1.81 $ 1.68 $ 1.03 $ 0.84
Diluted............................ $ 1.50 $ 0.65 $ 1.43 $ 1.72 $ 1.60 $ 0.99 $ 0.79
Cash dividends per common share...... $ 0.80 $ 0.74 $ 0.60 $ 0.60 $ 0.60 $ 0.30 $ 0.30
Weighted average shares used in the
calculation of net income per share
Basic.............................. 29,864 29,904 29,803 30,193 28,897 29,110 28,586
Diluted............................ 30,768 30,313 31,379 31,803 30,342 30,565 30,301
BALANCE SHEET AND OTHER DATA:
Working capital...................... $ 89,825 $ 85,126 $ 109,662 $ 125,986 $ 120,623 $118,983 $127,056
Total assets......................... 174,057 207,690 269,114 314,580 348,183 309,239 356,541
Total debt(b)........................ 1,490 2,964 4,799 4,115 4,996 3,866 5,122
Stockholders' equity................. 109,815 109,530 138,468 154,733 163,811 152,553 175,416
Book value per share................. 3.68 3.66 4.65 5.12 5.67 5.24 6.14
Ratio of earnings to fixed
charges(a)......................... 44.2x 14.3x 19.3x 16.8x 10.6x 14.9x 10.6x
</TABLE>
- ---------------
(a) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings before income taxes, plus fixed charges. Fixed
charges consist of interest expense, and a portion of operating lease rental
expense deemed to be representative of the interest factor.
(b) Total debt includes long-term debt and the current portion of long-term
debt.
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<PAGE> 47
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Biographical information follows for each director of Herbalife and for two
of its executive officers who are not directors. The table sets forth certain
information regarding these individuals (ages are as of January 1, 1999).
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HERBALIFE
---- --- -----------------------
<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......................... 52 Director
Alan Liker............................. 61 Director
Christopher M. Miner................... 47 Director
Robert A. Sandler...................... 54 Executive Vice President and General Counsel
Timothy Gerrity........................ 48 Executive Vice President and Chief Financial Officer
</TABLE>
MARK HUGHES founded Herbalife'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 Herbalife when it acquired Herbalife International of America, Inc.
in a stock-for-stock reorganization and has continued in those positions since
that time. Mr. Hughes is a citizen of the United States.
CHRISTOPHER PAIR joined Herbalife's predecessor in March 1985 as Executive
Assistant to the President. From May 1991 to November 1996, Mr. Pair served as
Herbalife's Executive Vice President -- International and Corporate
Administration and Secretary. In November 1996, Mr. Pair became Herbalife's
Executive Vice President and Chief Operating Officer. Mr. Pair has been a
director of Herbalife 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. Mr. Pair is a
citizen of the United States.
MICHAEL E. ROSEN joined Herbalife in August 1993 and is currently Executive
Vice President, and Chief Executive Corporate Marketing and Corporate
Development. Mr. Rosen's responsibilities include Herbalife's international and
domestic marketing, developing Herbalife's personal care and cosmetic lines,
investor relations and external affairs. Mr. Rosen has served as a director of
Herbalife since May 1996. Prior to joining Herbalife, Mr. Rosen was Chairman of
the JCP Television Shopping Network, which he founded in 1986. Mr. Rosen is a
citizen of the United States.
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. The principal
executive offices of Cruttenden Roth Incorporated are located at 18301 Von
Karman, Suite 100, Irvine, California 92715. 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. The principal executive offices
of H.J. Meyers & Co., Inc. are located at 356 N. Camden Drive, Beverly Hills,
California 90210. From 1988 through 1990, Mr. Hall was an Executive Vice
President of Angeles
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<PAGE> 48
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 Herbalife in March 1992.
Mr. Hall is a citizen of the United States.
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. The principal
executive offices of Budget Rent-A-Car of Southern California are located at 105
S. Doheny Drive, Beverly Hills, California 90221. 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 Herbalife's
Board in December 1993. Previously he was a director of Budget Group, Inc.,
First Charter Bank and the JCP Television Shopping Network. Mr. Liker is a
citizen of the United States.
CHRISTOPHER M. MINER is serving as the Chief Executive Officer and Chief
Financial Officer of Redfish Telemetrix, Inc., a telecommunication company,
since May 1997. The principal executive offices of Redfish Telemetric, Inc. are
located at 3183 Airway Avenue, Bldg. E, Cost Mesa, CA 92626. He has served as
Chief Financial Officer of Wow! Laboratories, Inc., an oral healthcare company,
from July 1996 to December 1998. The principal executive offices of Wow!
Laboratories, Inc. are located at 18430 Bandiller Circle, Fountain Valley, CA
92708. 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. The principal
executive offices of Vis-A-Vis Communications, Inc. are located at 18010 Sky
Park Circle, Irvine, CA 92714. 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. Mr. Miner is a citizen of the United States.
ROBERT A. SANDLER joined Herbalife 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. Mr. Sandler is currently a director of
Physio-Control, a manufacturer of external defibrillators. Mr. Sandler is a
citizen of the United States.
TIMOTHY GERRITY joined Herbalife 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 affairs of
Herbalife. His previous experience includes various management positions with
Wickes Corporation, Deloitte & Touche LLP, and Fluor Corporation. Mr. Gerrity
was recently appointed a 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. Mr. Gerrity is a citizen of the United States.
44
<PAGE> 49
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table lists, as of September 28, 1999, information as to the
beneficial ownership of Class A Shares and Class B Shares 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, (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 Shares
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
NAME AND ADDRESS OF CLASS A CLASS A CLASS B CLASS B PERCENT OF
BENEFICIAL OWNER(1) SHARES SHARES SHARES SHARES SHARES
------------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Mark Hughes(2).............. 5,887,664 57.2% 11,625,331 61.0% 59.7%
1800 Century Park East
Los Angeles, CA 90067
Christopher Pair(3)......... 50,029 * 121,600 * *
1800 Century Park East
Los Angeles, CA 90067
Michael E. Rosen(4)......... 93,751 * 217,499 1.2% 1.1%
1800 Century Park East
Los Angeles, CA 90067
Robert A. Sandler(3)........ 44,164 * 98,331 * *
1800 Century Park East
Los Angeles, CA 90067
Timothy Gerrity(3).......... 52,332 * 124,665 * *
1800 Century Park East
Los Angeles, CA 90067
Edward J. Hall(5)........... 15,331 * 40,663 * *
P.O. Box 907
Newport Beach, CA 92662
Alan Liker(3)............... 12,998 * 35,997 * *
150 South Doheny Drive
Beverly Hills, CA 90211
Christopher M. Miner(3)..... 10,864 * 36,664 * *
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....................... 6,167,133 58.4% 12,300,750 62.4% 61.0%
directors as a group
(8 persons)(7)
</TABLE>
- ---------------
* Less than one percent (1%).
(1) The persons in this table have sole voting, investment, and dispositive
power with respect to all Shares shown as beneficially owned by them,
subject to community property laws where applicable.
(2) Includes 183,333 Class A Shares and 366,666 Class B Shares 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 308,331 Class A
Shares and 466,663 Class B Shares issuable upon exercise of stock options
which are exercisable presently or within 60 days of this Information
Statement. Also includes 5 million Class B Shares held by 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
45
<PAGE> 50
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 Shares. 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 Information Statement.
(4) Includes 82,498 Class A Shares and 194,997 Class B Shares issuable upon
exercise of stock options which are exercisable presently or within 60 days
of this Information Statement.
(5) Includes 12,998 Class A Shares and 35,997 Class B Shares issuable upon
exercise of stock options which are exercisable presently or within 60 days
of this Information Statement.
(6) Information based on Technimetrics Service Report as of August 30, 1999.
(7) Includes an aggregate of 599,214 Class A Shares and 1,164,914 Class B Shares
issuable upon exercise of stock options which are exercisable presently or
within 60 days of this Information Statement.
PRICE RANGE OF SHARES
The Class A Shares and Class B Shares are traded on the Nasdaq National
Market under the symbols "HERBA" and "HERBB," respectively. The following table
sets forth the high and low sales prices for each quarterly period since the
fourth quarter of 1997, and for the current fiscal year to date, of the Class A
Shares and Class B Shares. The sales prices in the table were taken from a
written summary provided to Herbalife by NASDAQ. Prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------- --------------
HIGH LOW HIGH LOW
----- ---- ----- ----
<S> <C> <C> <C> <C>
1997:
Fourth quarter commencing December 15, 1997*........ $24 $20 1/2 $23 $20
1998:
First quarter....................................... 28 5/8 19 7/16 27 1/4 17 3/4
Second quarter...................................... 29 21 1/2 26 7/8 19 1/8
Third quarter....................................... 28 1/2 8 7/8 23 7/8 6 5/8
Fourth quarter...................................... 15 3/16 7 1/2 12 1/8 6
1999:
First quarter....................................... 16 1/4 10 7/8 13 8 29/32
Second quarter...................................... 12 1/8 10 9 3/4 8 5/16
Third quarter (through September 28, 1999).......... 16 10 1/16 15 5/8 8 3/8
</TABLE>
- ---------------
* Herbalife's recapitalization into a dual class capital structure became
effective December 12, 1997. Beginning December 15, 1997, Herbalife's public
equity commenced trading as the Class A Shares and the Class B Shares. Prior
to December 15, 1997, Herbalife's shares traded under the symbol "HERB" on the
Nasdaq National Market System. During the fourth quarter of 1997 prior to
December 15, the high sales price of Herbalife's old common stock was $27 7/8
per share and the low sales price was $19 1/4 per share. During the third
quarter of 1997, the high sales price of Herbalife's old common stock was
$26 1/4 per share and the low sales price was $14 7/8 per share.
On September 13, 1999, the last trading day prior to announcement of the
execution of the Merger Agreement, the closing price per Share of the Class A
Shares and the Class B Shares, respectively, as reported by the Nasdaq National
Market System was $12 and 9 5/32. On that day, the high and low bid quotations
per Share of Class A Shares and Class B Shares as reported by the Nasdaq
National Market were $12 6/32 and $11 3/4, and $9 1/4 and $9 1/16, respectively.
On September 16, 1999, the last full day of trading prior to the commencement of
the Offer, the closing price per share of the Class A Shares and the Class B
Shares, respectively, as reported by the Nasdaq National Market was $14 13/16
and $14 3/8, respectively.
46
<PAGE> 51
DIVIDENDS AND DISTRIBUTIONS
The Company has paid cash dividends of $.15 per share on its Shares since
1997 on the following dates: February 12, 1997; May 8, 1997; August 1, 1997;
November 6, 1997; February 11, 1998; May 7, 1998; July 31, 1998; November 5,
1998; February 12, 1999; May 6, 1999; and August 2, 1999. Under the Merger
Agreement, prior to the Effective Time, the Company is required to continue to
declare and pay its regular quarterly cash dividends on the Common Shares in
accordance with prior practice. In addition, the Company has agreed to declare
two additional special dividends. The first special dividend will be declared to
holders of record on the date the Offer is consummated in an amount equal to the
Company's most recent quarterly dividend, pro rated for the period consisting of
the number of days elapsed since the last regular quarterly dividend record date
through the date of the consummation of the Offer and the second such dividend
will be declared to holders of record on the last business day prior to the
Effective Time also in an amount equal to the Company's most recent quarterly
dividend, pro rated for the period consisting of the number of days since the
last regular or special dividend record date through the Effective Time.
CERTAIN TRANSACTIONS
On April 23, 1998 Raven Industries ("Raven"), D&F Industries ("D&F") and
Dynamic Products, Inc. ("Dynamic"), Herbalife'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
(representing 1/3 and 1/5 of the formerly outstanding shares of Raven and
Dynamic, respectively), as well as the entire ownership of shares of Dynamic
held by a former director and executive officer of Herbalife (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. Herbalife consented to the
grant of a security interest in the manufacturers' assets in connection with the
proposed bank credit facility being arranged by the suppliers; under Herbalife's
supply agreements with the manufacturers, the granting of such a security
interest required Herbalife's consent (which consent could not be unreasonably
withheld). Herbalife believes that such transaction did not have a material
impact on its operations.
For the period ended April 23, 1998, Herbalife's purchases from Raven and
Dynamic amounted to $16.4 million and $1.0 million, respectively. 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. Herbalife's 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 Herbalife's 1994 Plan Performance-Based Annual
Incentive Compensation Plan, Herbalife made advances of targeted performance
bonus amounts during 1996, 1997 and 1998 to Mr. Hughes, during 1996, 1997, 1998
and 1999 to Mr. Pair, during 1996 and 1998 to Mr. Rosen and during 1997 and 1998
to Messrs. Sandler and Gerrity. As of June 30, 1999, all such advances have been
repaid except the advance made to Mr. Pair in 1999. The 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 advance bears interest at the
applicable federal rate (AFR) for two-year notes at the time of the advances.
The rate for the existing outstanding advance is 4.67%.
In 1998, Herbalife also made loans in the aggregate amounts including
interest of $61,000 and $79,000 to Messrs. Miner and Pair, respectively, which
were both repaid in 1999.
In 1998, Herbalife obtained the necessary regulatory approvals to make an
initial public offering of shares of Herbalife Japan KK ("Herbalife Japan") in
Japan. On December 30, 1996, in preparation for the possible offering, Herbalife
sold shares of Herbalife Japan to certain of its directors and executive
officers, as well as to resident managers of Herbalife Japan, as an incentive
for increased efforts to facilitate the operation of the Herbalife Japan
business and the success of the offering. The following table lists the
purchasers of such
47
<PAGE> 52
shares, the percentage of Herbalife Japan's outstanding shares represented
thereby, and the purchase price paid to Herbalife by each individual as of the
date of the sale:
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME HERBALIFE JAPAN SHARES AGGREGATE 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 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 separately
sought and obtained a valuation of the shares from an independent investment
banking firm, Houlihan, Lokey, Howard & Zukin, Inc., which rendered an opinion
to the effect that the fair market value of the shares was greater than that
determined under the formula prescribed. Consequently, the purchase price per
share was increased to the fair value of the shares as indicated in the
Houlihan, Lokey, Howard & Zukin opinion. The Board of Directors, based in part
on the Houlihan, Lokey, Howard & Zukin 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 Herbalife 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, Herbalife engaged Mr. Liker to provide consulting services though
1999 in connection with the offering in Japan. Under the terms of the 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 Herbalife for such services.
Herbalife has no current intention to make an initial public offering of
Herbalife Japan shares, based, among other things, on economic and financial
market conditions in Japan and on the impact from the completion of the Offer
and the Merger and the third party financing incurred in connection therewith.
48
<PAGE> 53
RECENT PURCHASES OF COMPANY SECURITIES
Herbalife's board of directors has authorized a stock repurchase program
since 1996. Under this program, Herbalife has repurchased shares of its stock
since January 1, 1997 as described in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES HIGH REPURCHASE LOW REPURCHASE
REPURCHASED PRICE PRICE AVERAGE
----------------- ----------------- ----------------- REPURCHASE TOTAL
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B PRICE AMOUNT
------- ------- ------- ------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
First Quarter*......... 201,950 -- $18.08 -- $15.88 -- $17.43 $ 3,520,271
Second Quarter*........ 288,360 -- 18.32 -- 16.13 -- 17.04 4,914,715
Third Quarter*......... 60,000 -- 18.08 -- 15.13 -- 17.14 1,028,599
Fourth Quarter*........ 655,000 190,000 23.75 23.25 19.88 20.63 22.26 18,810,668
1998
First Quarter.......... -- 754,000 -- 27.06 -- 18.00 22.65 17,076,713
Second Quarter......... -- 381,500 -- 25.50 -- 20.56 23.53 8,976,629
Third Quarter.......... -- 325,617 -- 23.25 -- 7.13 11.62 3,784,519
Fourth Quarter......... -- 4,600 -- 8.19 -- 7.08 7.83 36,004
</TABLE>
- -------------------------
* For each period prior to the Company's 1997 dual class recapitalization,
shares repurchased consisted of the Company's common stock.
Herbalife suspended repurchases of Shares in the Fourth quarter of 1998 due
to global economic uncertainty. No Shares have been repurchased by Herbalife to
date in 1999.
In addition, since January 1, 1997, Mr. Hughes has acquired shares of
Herbalife's stock as follows:
March 13, 1997: 34,000 Shares granted as incentive compensation
pursuant to Herbalife's amended and restated 1994 performance based annual
incentive compensation plan.
December 11, 1997: 12,700 Shares granted as incentive compensation
pursuant to Herbalife's amended and restated 1994 performance based annual
incentive compensation plan. (4,233 Class A Shares and 8,467 Class B
Shares)
March 2, 1998: 12,400 Class A Shares and 24,800 Class B Shares were
granted as incentive compensation pursuant to the Herbalife's amended and
restated 1994 performance based annual incentive compensation plan.
There has been no transaction involving Herbalife Shares which was effected
during the past 60 days by Herbalife or, to Herbalife's knowledge, any of the
executive officers.
49
<PAGE> 54
WHERE YOU CAN FIND MORE INFORMATION
Herbalife files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that Herbalife files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.
Herbalife's public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Web site maintained
by the SEC at http://www.sec.gov. Reports, proxy statements and other
information concerning Herbalife also may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The SEC allows Herbalife to "incorporate by reference" information into
this document, which means that Herbalife can disclose important information to
you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be a part of this document,
except for any information superseded by information contained directly in this
document. This document incorporates by reference certain documents that
Herbalife has previously filed with the SEC. These documents contain important
business information about Herbalife and its financial condition.
Herbalife may have sent to you some of the documents incorporated by
reference, but you can obtain any of them through Herbalife or the SEC or the
SEC's Internet World Wide Web site described above. Documents incorporated by
reference are available from Herbalife without charge, excluding all exhibits
unless specifically incorporated by reference as an exhibit to this document.
Stockholders may obtain documents incorporated by reference in this document by
requesting them in writing or by telephone at the following address:
Investor Relations
Herbalife International, Inc.
1800 Century Park East
Los Angeles, California 90067
Herbalife, MH Millennium Holdings LLC, MH Millennium Acquisition Corp. and
Mr. Hughes have filed a Schedule 13E-3 with the SEC with respect to the Offer
and the Merger. The Schedule 13E-3, including any amendments and exhibits filed
or incorporated by reference as a part thereof, is available for inspection or
copying as set forth above. Statements contained in this Information Statement
or in any document incorporated herein by reference as to the contents of any
contract or other document referred to herein or therein are not necessarily
complete and in each instance reference is made to such contract or other
document filed as an exhibit to the Schedule 13E-3 or such other document, and
each such statement shall be deemed qualified in its entirety by such reference.
This document is dated October , 1999. You should not assume that the
information contained in this document is accurate as of any date other than
that date, and the mailing of this document to stockholders does not create any
implication to the contrary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by Herbalife are
incorporated by reference in this Information Statement:
(i) Herbalife's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998;
(ii) Herbalife's Quarterly Report on Form 10-Q for quarter ended March 31,
1999;
(iii) Herbalife's Quarterly Report on Form 10-Q for quarter ended June 30,
1999; and
(iv) Herbalife's Current Report on Form 8-K filed on September 15, 1999.
All documents filed by Herbalife with the SEC pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior to the
date of the Merger shall be deemed to be incorporated by reference herein and
shall be a part hereof from the date of filing of such documents. Any
50
<PAGE> 55
statements contained in a document incorporated by reference herein or contained
in this Information Statement shall be deemed to be modified or superseded for
purposes hereof to the extent that a statement contained herein (or in any other
subsequently filed document which also is incorporated by reference herein)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to constitute a part hereof except as so modified or
superseded.
51
<PAGE> 56
CERTAIN INFORMATION CONCERNING THE PARENT, THE PURCHASER AND MR. HUGHES
Parent. MH Millennium Holdings, LLC, a Delaware limited liability company,
is a newly formed entity formed and wholly owned by The Mark Hughes Family
Trust, of which Mr. Hughes is the sole trustee. Its sole business purpose is to
engage in the Merger, the Offer and the related transactions and, after the
Merger and the Offer, to hold a portion of the common stock of Herbalife. The
Mark Hughes Family Trust is the sole member of MH Millennium Holdings LLC. Mr.
Hughes is the manager of MH Millennium Holdings LLC.
Purchaser. MH Millennium Acquisition Corp. is a newly formed Nevada
corporation organized by MH Millennium Holdings LLC and Mr. Hughes for the
purpose of effecting the Merger, the Offer and the related transactions. The
sole stockholder of MH Millennium Acquisition Corp. is MH Millennium Holdings
LLC. The sole director of MH Millennium Acquisition Corp. is Mr. Hughes. Mr.
Hughes is the President of MH Millennium Acquisition Corp.
Neither MH Millennium Holdings LLC nor Millennium Acquisitions Corp.
conduct operations.
Mr. Hughes. Mr. Hughes founded Herbalife's business in 1980. Since that
time, he 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 Herbalife when it acquired Herbalife International of America, Inc.
in a stock-for-stock reorganization and has continued in those positions since
that time. Mr. Hughes is a citizen of the United States.
The business address for each of the foregoing is 1800 Century Park East,
Los Angeles, California 90067. None of the foregoing or any executive officer,
director or person controlling any member of the foregoing was during the last
five years convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
Neither the Purchaser nor the Parent have any significant assets or
liabilities and neither entity has engaged in activities other than those
incidental to its formation and capitalization, its execution of the Merger
Agreement and preparation for the Offer and the Merger because both the
Purchaser and the Parent are newly formed and have minimal assets and
capitalization, no meaningful financial information regarding them is available.
During the last five years none of the Purchaser's or the Parent's
officers, directors or general partners were (1) convicted in a criminal
proceeding; or (2) party to a civil proceeding of a judicial or administrative
body and as a result of the proceeding was or is subject to a judgment enjoining
future violations of or prohibiting activities subject to, Federal or state
securities laws or finding any violation of such laws.
Neither the Purchaser nor the Parent is subject to the informational and
reporting requirements of the Exchange Act and neither the Purchaser nor the
Parent is required to file reports and other information with the Commission
relating to its businesses, financial condition or other matters.
Except as set forth in this Information Statement, to the best knowledge of
the Company, none of the Purchaser, the Parent or Mr. Hughes, or any associate
or majority owned subsidiary of any of those persons beneficially owns any
equity security of the Company, and to the best knowledge of the Company none of
the Purchaser, the Parent or, Mr. Hughes, or any of their respective directors,
executive officers or subsidiaries, has effected any transaction in any equity
security of the Company during the past 60 days.
52
<PAGE> 57
Except as described in this Information Statement, to the best knowledge of
the Company, none of the Purchaser, the Parent or Mr. Hughes have any contract,
arrangement, understanding or relationship with any other person with respect to
any securities of the Company, including, without limitation, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any securities of the Company, joint ventures, loan or option arrangements,
puts or calls, guarantees of loans, guarantees against loss or the giving or
withholding of proxies. Except as described in this Information Statement to the
best knowledge of the Company, none of the Purchaser, the Parent or, Mr. Hughes
have had any transactions with the Company or any of its executive officers,
directors or affiliates that would require reporting under the rules of the SEC.
Except as described in this Information Statement, since January 1, 1996,
to the best knowledge of the Company, there have been no contacts, negotiations
or transactions between the Parent or the Purchaser, or their respective
subsidiaries, or, Mr. Hughes, on the one hand, and the Company or its executive
officers, directors or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of securities,
election of directors or a sale or other transfer of a material amount of
assets.
MISCELLANEOUS
INDEPENDENT AUDITORS
The consolidated balance sheets as of December 31, 1998 and December 31,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998, incorporated by reference in this Information Statement, have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report.
COSTS OF INFORMATION STATEMENT
This Information Statement has been prepared by the Company and its Board
of Directors, and the Company will bear the costs of distributing this
Information Statement to stockholders, including the expense of preparing,
assembling, printing, and mailing the Information Statement and attached
materials. Although there is no formal agreement to do so, the Company may
reimburse banks, brokerage houses, and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding this Information
Statement and related materials to stockholders. The Company may pay for and use
the services of other individuals or companies not regularly employed by the
Company in connection with the distribution of this Information Statement if the
Board of Directors of the Company determines that this is advisable.
53
<PAGE> 58
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED
SEPTEMBER 13, 1999
AMONG
MH MILLENNIUM HOLDINGS LLC,
MH MILLENNIUM ACQUISITION CORP.
MARK HUGHES,
THE MARK HUGHES FAMILY TRUST
AND
HERBALIFE INTERNATIONAL, INC.
A-1
<PAGE> 59
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is entered into on
September 13, 1999, by and among MH Millennium Holdings LLC, a Delaware limited
liability company, located at 1800 Century Park East, Los Angeles, California
90067 ("PARENT"), MH Millennium Acquisition Corp., a Nevada corporation and
wholly-owned subsidiary of Parent, located at 1800 Century Park East, Los
Angeles, California 90067 ("PURCHASER"), Mark Hughes, a natural person residing
in Los Angeles, California ("MR. HUGHES"), The Mark Hughes Family Trust, a trust
of which Mr. Hughes is the sole trustee ("FAMILY TRUST"), and Herbalife
International, Inc., a Nevada corporation, located at 1800 Century Park East,
Los Angeles, CA 90067 (the "COMPANY").
RECITALS
WHEREAS, the Board of Directors of the Company has formed a special
committee (the "SPECIAL COMMITTEE") comprised exclusively of independent
directors of the Board to consider and act upon a proposal received from Mr.
Hughes, the founder, president, chief executive officer and principal
stockholder of the Company (including entities controlled and beneficially owned
by him, directly and indirectly, the "CONTINUING STOCKHOLDER"), to acquire the
Company in a "going private" transaction; and, among other things, the Board of
Directors of the Company has delegated to the Special Committee full and
exclusive responsibility and authority on behalf of the Company and the Board of
Directors to accept, reject or seek to modify, amend or otherwise change this
Agreement, or any of its terms or provisions (including modifications,
amendments or changes subsequent to the Closing (as defined below)); and
WHEREAS, having received the advice of its own independent financial and
legal advisors, and following detailed negotiation of the terms of the "going
private" transaction proposal and this Agreement, the Special Committee has
unanimously determined that the terms of the proposed acquisition of the Company
by Parent, upon the terms and subject to the conditions hereinafter provided,
are fair to, and in the best interest of, the Company and the stockholders of
the Company other than the Continuing Stockholder (the "PUBLIC STOCKHOLDERS");
and
WHEREAS, in furtherance of the acquisition of the Company, Parent proposes
to cause Purchaser to make a tender offer (as it may be amended from time to
time as permitted under this Agreement, the "OFFER") to purchase all of the
Company's issued and outstanding shares of Class A Common Stock, par value $.01
per share (the "CLASS A STOCK") and Class B Common Stock, par value $.01 per
share (the "CLASS B STOCK" and, together with the Class A Stock, the "COMPANY
COMMON STOCK" or the "SHARES") at a price per share of Common Stock of $17.00,
net to the seller in cash, upon the terms and subject to the conditions set
forth in this Agreement; and
WHEREAS, the Continuing Stockholder has agreed pursuant to a letter to the
Company dated September 13, 1999, among other things, not to tender any shares
owned by any of the persons and entities comprising the Continuing Stockholder
in connection with the Offer, and to ensure that none of such shares shall be
subject to cancellation in exchange for the cash Merger Consideration (as
defined below) in the Merger (as defined below) (such letter and the commitments
contained therein, the "EQUITY COMMITMENT");
WHEREAS, the managing member of Parent and the Boards of Directors of
Purchaser and the Company have approved the merger (the "MERGER") of Purchaser
into the Company, upon the terms and subject to the conditions set forth in this
Agreement, whereby (i) each issued and outstanding share of Company Common Stock
owned by the Company as treasury stock and any shares of Company Common Stock
owned by Parent or Purchaser shall be cancelled and retired for no
consideration, (ii) each issued and outstanding share of Company Common Stock
that is owned by one or more limited liability companies owned by Mr. Hughes and
which hold a portion of Mr. Hughes's Shares (all of such entities collectively,
"DEBTOR LLC") will remain outstanding or be converted into a different class of
securities of the Surviving Corporation (as hereinafter defined), (iii) all
other Shares issued and outstanding (excluding Shares held by Dissenting
Stockholders (as defined below)) shall be converted into the right to receive
the Merger
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Consideration (as hereinafter defined) in cash (which is the same per share
consideration paid pursuant to the Offer), and (iv) each issued and outstanding
share of capital stock of Purchaser held by Parent shall be converted into one
share of Class A Stock of the Surviving Corporation;
WHEREAS, the Continuing Stockholder has executed and delivered a written
consent (the "STOCKHOLDER CONSENT") as the Company's majority holder of Class A
Stock, whereby the Continuing Stockholder has approved and adopted this
Agreement and the Merger, such Stockholder Consent being sufficient to
constitute stockholder approval of this Agreement and the Merger under
applicable law;
WHEREAS, the Company has agreed to grant certain dissenters' rights to the
Public Stockholders in the Merger, notwithstanding that such rights are not
required by the applicable laws contained in the Nevada Revised Statutes
("NRS");
WHEREAS, the Special Committee has unanimously approved this Agreement and
has unanimously recommended that the Company's Board of Directors approve this
Agreement, the Offer and the Merger; and
WHEREAS, the Special Committee and the Board of Directors have each adopted
resolutions recommending that the Public Stockholders accept the Offer;
WHEREAS, the Company's Board of Directors also granted full responsibility
and authority on behalf of the Company and the Company's Board of Directors to
the Special Committee to take all action and to execute all documents necessary
or desirable to consummate the transactions contemplated by this Agreement, to
give and receive consents and all notices on behalf of the Company hereunder, to
negotiate and settle claims on behalf of the Company hereunder, and to perform
any other act arising under or pertaining to this Agreement and the transactions
contemplated hereby on behalf of the Company; and
WHEREAS, (i) the managing member of Parent and the Boards of Directors of
Purchaser and the Company have each approved this Agreement, the Offer and the
Merger, upon the terms and subject to the conditions hereinafter provided, and
(ii) the Board of Directors of Purchaser has determined that the Offer and the
Merger are fair to, and deem it advisable and in the best interests of, its sole
stockholder to consummate the acquisition of the Company by Parent pursuant
hereto, and (iii) the Board of Directors of the Company has determined that the
Offer and the Merger are fair to, and deem it advisable and in the best
interests of the Public Stockholders to consummate the acquisition of the
Company by Parent pursuant hereto;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
THE OFFER AND MERGER
1.1 The Offer.
(a) Provided that this Agreement shall not have been terminated in
accordance with Article VIII, then (i) not later than the first Business Day
(for purposes of this Agreement, such term having the meaning given in Rule
14d-1 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")) after execution of this Agreement, Parent and the Company shall issue a
public announcement of the execution of this Agreement, and (ii) Purchaser
shall, as promptly as practicable, but in no event later than five Business Days
after the date of such public announcement, and Parent shall cause Purchaser to,
commence (within the meaning of Rule 14d-2 under the Exchange Act), the Offer to
purchase all of the issued and outstanding Shares at a price per share of
$17.00, net to the seller in cash. The Offer shall be made pursuant to the Offer
to Purchase and related Letter of Transmittal in form reasonably satisfactory to
the Company and containing the terms and conditions set forth in this Agreement.
The obligation of Purchaser to, and of Parent to cause Purchaser to, commence
the Offer, conduct and consummate the Offer and accept for payment, and pay for,
any Shares properly tendered and not withdrawn pursuant to the Offer shall be
subject only to the conditions set forth in Exhibit A (the "OFFER CONDITIONS")
(any of which may be waived
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in whole or in part by Purchaser in its sole discretion, provided, however, that
Purchaser shall not waive the Minimum Condition without the prior written
consent of the Company). Purchaser expressly reserves the right, subject to
compliance with the Exchange Act, to modify the terms of the Offer, except that,
without the express written consent of the Company, neither Parent nor Purchaser
shall (i) reduce the number of Shares subject to the Offer, (ii) reduce the
Offer Price, (iii) add to or modify the Offer Conditions, (iv) except as
provided in the next sentence, change the expiration date of the Offer, (v)
change the form of consideration payable in the Offer or (vi) amend, alter, add
or waive any term of the Offer in any manner adverse to the holders of the
Shares. Notwithstanding the foregoing, if on any scheduled expiration date of
the Offer, which shall initially be 20 Business Days after the commencement date
of the Offer, all Offer Conditions have not been satisfied or waived, Purchaser
may, without the consent of the Company, and at the request of the Company
shall, from time to time, extend the expiration date of the Offer, and Purchaser
may, without the consent of the Company, extend the Offer for any period
required by any rule, regulation, interpretation or position of the Securities
and Exchange Commission (the "SEC") or the SEC staff applicable to the Offer.
Subject only to the conditions set forth in Exhibit A, Purchaser shall, and
Parent shall cause Purchaser to, as soon as practicable after the expiration of
the Offer, accept for payment, and pay for all Shares validly tendered and not
withdrawn that Purchaser becomes obligated to accept for payment pursuant to the
Offer.
(b) On the date of commencement of the Offer, Parent and Purchaser shall
file with the SEC a Tender Offer Statement on Schedule 14D-1 (as supplemented or
amended from time to time, the "SCHEDULE 14D-1") and Schedule 13E-3 (as
supplemented or amended from time to time, the "SCHEDULE 13E-3") with respect to
the Offer, which shall contain an offer to purchase and a related letter of
transmittal and summary advertisement (such Schedule 14D-1, the Schedule 13E-3,
and the documents included therein pursuant to which the Offer will be made,
together with any supplements or amendments thereto, the "OFFER DOCUMENTS").
Parent and Purchaser agree that the Offer Documents shall comply as to form and
content in all material respects with the Exchange Act and the rules and
regulations promulgated thereunder, and the Offer Documents, at the time filed
with the SEC and on the date first published, sent or given to the Company's
stockholders, shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading, except that no representation or warranty is made by
Parent or Purchaser with respect to written information supplied by the Company
or any of its stockholders (other than the Continuing Stockholder) specifically
for inclusion or incorporation by reference in the Offer Documents. Parent,
Purchaser and the Company each agrees promptly to correct any written
information provided by it for use in the Offer Documents if and to the extent
that such information shall have become false or misleading in any material
respect, and Parent and Purchaser further agree to take all steps necessary to
cause the Schedule 14D-1 and Schedule 13E-3 as so corrected to be filed with the
SEC and the other Offer Documents as so corrected to be disseminated to holders
of Shares, in each case as and to the extent required by applicable Federal
securities laws. The Company, the Special Committee and their respective counsel
shall be given reasonable opportunity to review and comment upon the Offer
Documents prior to their filing with the SEC or dissemination to the
stockholders of the Company, and Parent and Purchaser shall consider such
comments in good faith. Parent and Purchaser agree to provide the Company, the
Special Committee and their respective counsel any comments Parent, Purchaser or
their counsel may receive from the SEC or its staff with respect to the Offer
Documents promptly after the receipt of such comments.
(c) Parent shall provide or cause to be provided to Purchaser on a
timely basis the funds sufficient to accept for payment, and pay for, any and
all Shares that Purchaser becomes obligated to accept for payment, and pay for,
pursuant to the Offer.
(d) Purchaser shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to the Offer such amounts as may be
required to be deducted and withheld with respect to the making of such payment
under the Internal Revenue Code of 1986, as amended (the "CODE"), or under any
provision of state, local or foreign tax law; provided, however, that Purchaser
shall promptly pay any amounts deducted and withheld hereunder to the applicable
governmental authority, shall promptly file all tax returns
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and reports required to be filed in respect of such deductions and withholding,
and shall promptly provide to the Company proof of such payment and a copy of
all such tax returns and reports.
1.2 Company Actions
(a) The Company hereby approves of and consents to the Offer.
(b) On the date the Offer Documents are filed with the SEC, the Company
shall file with the SEC a Solicitation/Recommendation Statement on Schedule
14D-9 with respect to the Offer (as supplemented or amended from time to time,
the "SCHEDULE 14D-9") containing the recommendation described in Section 1.2(a)
(subject to the fiduciary obligations of the Special Committee and the Board, as
advised by their counsel) and shall mail the Schedule 14D-9 to the stockholders
of the Company. The Schedule 14D-9 shall comply as to form and content in all
material respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder and, on the date filed with the SEC and on
the date first published, sent or given to the Company's stockholders, shall not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation or warranty is made by the Company
with respect to written information supplied by Parent, Purchaser or the
Continuing Stockholder specifically for inclusion in the Schedule 14D-9. The
Company, Parent and Purchaser each agree promptly to correct any written
information provided by it for use in the Schedule 14D-9 if and to the extent
that such information shall have become false or misleading in any material
respect, and the Company further agrees to take all steps necessary to amend or
supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or
supplemented to be filed with the SEC and disseminated to the Company's
stockholders, in each case as and to the extent required by applicable Federal
securities laws. Parent shall be given reasonable opportunity to review and
comment upon the Schedule 14D-9 prior to its filing with the SEC or
dissemination to stockholders of the Company, and the Company shall consider
such comments in good faith. The Company agrees to provide Parent any comments
the Company or its counsel may receive from the SEC or its staff with respect to
the Schedule 14D-9 promptly after the receipt of such comments.
(c) In connection with the Offer and the Merger, the Company shall cause
its transfer agent to furnish Purchaser promptly with mailing labels containing
the names and addresses of the record holders of Shares as of a recent date and
of those persons becoming record holders subsequent to such date, together with
copies of all lists of stockholders, security position listings and computer
files and all other information in the Company's possession or control regarding
the beneficial owners of Shares, and shall furnish to Purchaser such information
and assistance (including updated lists of stockholders, security position
listings and computer files) as Parent may reasonably request in communicating
the Offer to the Company's stockholders. Subject to the requirements of
applicable law, and except for such steps as are necessary to disseminate the
Offer Documents and any other documents necessary to consummate the Merger,
Parent and Purchaser and their agents shall hold in confidence the information
contained in any such labels, listings and files, will use such information only
in connection with the Offer and the Merger and, if this Agreement shall be
terminated, will, upon request, promptly deliver, and will use their best
efforts to cause their agents promptly to deliver, to the Company all copies of
such information (and all copies of information derived therefrom) then in their
possession or control.
1.3 The Merger.
(a) Subject to the terms and conditions of this Agreement, and pursuant
to Section 92A.250 of the NRS, at the Effective Time (as defined in Section 1.4)
the Company and Purchaser shall consummate the Merger pursuant to which (i)
Purchaser shall be merged with and into the Company and the separate corporate
existence of Purchaser shall thereupon cease, (ii) the Company shall be the
successor or surviving corporation in the Merger (the "SURVIVING CORPORATION")
and shall continue to be governed by the laws of the State of Nevada, and (iii)
the separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger.
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(b) Pursuant to the Merger, (i) the articles of incorporation of the
Company as in effect immediately prior to the Effective Time shall be the
articles of incorporation of the Surviving Corporation, until amended in
accordance with such articles and the NRS, and (ii) the bylaws of Purchaser, as
in effect immediately prior to the Effective Time, shall be the bylaws of the
Surviving Corporation until thereafter amended as provided by law, the articles
of incorporation and such bylaws.
(c) The Merger shall have the effects set forth in the NRS (including
without limitation Section 92A.250 thereof). Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Purchaser shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Purchaser shall become the debts, liabilities and duties of the
Surviving Corporation.
1.4 Effective Time. On the date of Closing (as defined in Section 1.5),
the parties shall cause articles of merger or other appropriate documents (in
any such case, the "ARTICLES OF MERGER") to be executed and filed with the
Secretary of State of the State of Nevada in accordance with the provisions of
Chapter 92A of the NRS, and make all other filings and recordings required by
the NRS in connection with the Merger. The Merger shall become effective at the
time and on the date on which the Articles of Merger have been duly filed with
the Secretary of State of the State of Nevada or such later time as is agreed
upon by the parties and specified in the Articles of Merger, and such time is
hereinafter referred to as the "EFFECTIVE TIME".
1.5 Closing. The Closing of the Merger (the "CLOSING") will take place at
9:00 a.m., Los Angeles time, on a date to be specified by the parties, which
shall be as soon as practicable following the satisfaction or waiver of the
conditions set forth in Article VII (or on such other date as Parent and the
Company may agree), but in any event no later than the second Business Day after
satisfaction or waiver of all of the conditions set forth in Article VII hereof
(the "CLOSING DATE"), at the offices of Irell & Manella LLP at 333 South Hope
Street, Suite 3300, Los Angeles, California 90071, unless another date or place
is agreed to in writing by the parties hereto.
1.6 Directors and Officers of the Surviving Corporation. The directors and
officers of Purchaser at the Effective Time shall, from and after the Effective
Time, be the directors and officers, respectively, of the Surviving Corporation
until their successors shall have been duly elected or appointed or qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's articles of incorporation and bylaws.
1.7 Consent of Continuing Stockholder.
(a) Concurrently with the commencement of the Offer, the Company shall
prepare and file with the SEC an Information Statement on Schedule 14C (as
supplemented or amended from time to time, the "SCHEDULE 14C") reflecting the
action taken pursuant to the Stockholder Consent and relating to the Merger and
this Agreement, such Schedule 14C to include the information required to be
included pursuant to the rules and regulations of the SEC and shall use its
commercially reasonable best efforts, after consultation with Parent, to respond
to any comments made by the SEC with respect to the Schedule 14C and, as
promptly as practicable after satisfying applicable SEC rules and regulations,
cause the Schedule 14C to be mailed to its stockholders. If required by the
rules and regulations of the SEC, the Schedule 14C filing shall include a filing
of a Schedule 13E-3. The Offer Documents and, if required, the Schedule 14C,
shall contain a notification conforming to Section 92A.430(d) of the NRS
advising stockholders of (i) the Stockholder Consent and (ii) the date by which
the Company must receive the demand for payment in order for Shares to qualify
for the dissenters' rights provided for hereunder, which date shall be approved
by Parent. The Schedule 14C, including any amendments or supplements thereto,
shall not, at the time filed with the SEC or as of the date mailed to the
Company's stockholders, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading, except that the Company makes no representation or
warranty with respect to any information provided by Parent, Purchaser or the
Continuing Stockholder specifically for use in the Schedule 14C. The Schedule
14C shall comply as to form in all material respects with the provisions of the
Exchange Act.
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(b) Provided that this Agreement has not been terminated in accordance
with Article VIII, Mr. Hughes agrees not to, and to cause the other persons and
entities included within the Continuing Stockholder not to, revoke or withdraw
the Stockholder Consent.
1.8 Short Form Merger. Notwithstanding Section 1.7 or anything else in
this Agreement to the contrary, at Parent's election, in the event that
Purchaser shall acquire Shares, including Shares accepted for purchase pursuant
to the Offer, in a number sufficient to consummate a merger of the Company into
Purchaser pursuant to Section 92A.180 of the NRS, the parties hereto agree, at
the request of Parent or Purchaser, to take all necessary and appropriate action
to cause the Merger to become effective as soon as practicable after such
acquisition, without approval of the Company's stockholders, in accordance with
Section 92A.180.
ARTICLE II
CONVERSION OF SHARES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holders of any shares of
Company Common Stock (as defined below) or Purchaser's common stock, par value
$.001 per share ("PURCHASER COMMON STOCK"):
(a) Purchaser Common Stock. Each issued and outstanding share of
Purchaser Common Stock shall be converted into and become one (1) fully paid and
nonassessable share of Class A Stock of the Surviving Corporation.
(b) Treatment of Treasury Stock, Parent-Owned Stock and Other Non-Public
Stockholder Stock.
(i) All shares of Class A Stock and all shares of Class B Stock that
are owned by the Company as treasury stock and any shares of Company Common
Stock owned by Parent or Purchaser shall be canceled and retired and shall cease
to exist and no consideration shall be delivered in exchange therefor.
(ii) Each issued and outstanding share of Class A Stock that is owned
by Debtor LLC shall be converted into and become one (1) fully paid and
nonassessable share of Class B Stock of the Surviving Corporation, and each
issued and outstanding share of Class B Stock that is owned by Debtor LLC shall
remain outstanding.
(c) Conversion of Shares. Each issued and outstanding share of Company
Common Stock (excluding shares to be cancelled or converted in accordance with
Section 2.1(b) and shares of Company Common Stock held by Dissenting
Stockholders as described in Section 2.1(e)) shall be converted into the right
to receive $17.00 in cash, payable to the holder thereof, without interest (the
"MERGER CONSIDERATION"), upon surrender of the certificate formerly representing
such share of Company Common Stock in the manner provided in Section 2.2. All
such shares of Company Common Stock, at the Effective Time, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the Merger
Consideration therefor upon the surrender of such certificate in the manner
prescribed in Section 2.2, without interest.
(d) Stock Options. At the Effective Time, all issued and outstanding
warrants, options and other rights to acquire Company Securities (as defined in
Section 3.2(a)), but excluding all such options, warrants and rights held by the
Continuing Stockholder, shall, to the extent not theretofore vested, become
vested and shall terminate as of the Effective Time. Each holder of any such
warrant, option or other right shall only be entitled to receive from the
Company, in cancellation and settlement of such warrant, option or other right,
the Option/Warrant Spread (as defined in Section 3.2(b)), if any. All options,
warrants or other rights to acquire Company Securities held by the Continuing
Stockholder shall, at the Effective Time, be cancelled for no consideration or
contributed to capital of the Company.
(e) Shares of Dissenting Stockholders. Notwithstanding anything in this
Agreement or Section 92A.390 of the NRS to the contrary, holders of shares of
Company Common Stock shall have rights
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pursuant to Section 92A.380 of the NRS, provided such holders comply with the
provisions of such Section as if such Section otherwise applied to the Merger.
Each holder who so complies shall be referred to as a "DISSENTING STOCKHOLDER."
For purposes of applying the foregoing provisions of the NRS, the date of the
corporate action triggering the obligation to provide notice of dissenters
rights to the holders of shares of Company Common Stock shall be the date of the
Stockholder Consent. Any issued and outstanding shares of Company Common Stock
held by a Dissenting Stockholder shall not be converted as described in Section
2.1(c) but shall instead represent the right to receive such consideration as
may be determined to be due to such Dissenting Stockholder pursuant to, and to
the extent provided by, the laws of the State of Nevada (notwithstanding Section
92A.390 of the NRS); provided, however, that the shares of Company Common Stock
outstanding immediately prior to the Effective Time and held by a Dissenting
Stockholder who shall, after the Effective Time, fail to perfect his right to
appraisal, withdraw his demand for appraisal or lose his right of appraisal, in
any case pursuant to Sections 92A.400 through 92A.440 (inclusive) of the NRS,
shall be deemed to have been converted as of the Effective Time into the right
to receive the Merger Consideration. The Company shall give Parent (i) prompt
notice of any written demands for appraisal of shares of Company Common Stock
received by the Company and (ii) the opportunity to direct all negotiations and
proceedings with respect to any such demands. Prior to the Effective Time, the
Company shall not, without the prior written consent of Parent, voluntarily make
any payment with respect to, or settle, offer to settle or otherwise negotiate,
any such demands.
2.2 Exchange of Certificates.
(a) Paying Agent. Parent shall designate a bank or trust company to act
as agent for the holders of shares of Company Common Stock in connection with
the Merger (the "PAYING AGENT") to receive the funds to which holders of shares
of Company Common Stock shall become entitled pursuant to Section 2.1(c). Prior
to the filing of the Articles of Merger with the Secretary of State of the State
of Nevada, Parent or Purchaser shall deposit with the Paying Agent cash in an
amount equal to the product of (i) the number of shares of Company Common Stock
required to be converted pursuant to Section 2.1(c), multiplied by (ii) the
Merger Consideration. The deposit made by Parent pursuant to the preceding
sentence is hereinafter referred to as the "Payment Fund." The Paying Agent
shall cause the Payment Fund to be (i) held for the benefit of the holders of
shares of Company Common Stock, and (ii) promptly applied to making the payments
provided for in Section 2.1(c). The Payment Fund shall not be used for any
purpose that is not provided for herein. Such funds shall be invested by the
Paying Agent as directed by Parent or the Surviving Corporation.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Paying Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "CERTIFICATES"),
whose shares of Company Common Stock will have been converted pursuant to
Section 2.1 into the right to receive the Merger Consideration (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and related
materials, including, without limitation, a Substitute Form W-9 and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for payment of the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal and related
materials, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor the Merger Consideration for each share of Company
Common Stock formerly represented by such Certificate and the Certificate so
surrendered shall forthwith be canceled. If payment of the Merger Consideration
is to be made to a person other than the person in whose name the surrendered
Certificate is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and that the person requesting such payment shall have
paid any transfer and other taxes required by reason of the payment of the
Merger Consideration to a person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation that such tax either has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate shall be
deemed at any
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time after the Effective Time to represent only the right to receive the Merger
Consideration in cash, without interest, as contemplated by this Section 2.2.
(c) Transfer Books; No Further Ownership Rights in Company Common
Stock. At the Effective Time, the stock transfer books of the Company shall be
closed and thereafter there shall be no further registration of transfers of
shares of Company Common Stock on the records of the Company. From and after the
Effective Time, the holders of Certificates evidencing ownership of shares of
Company Common Stock outstanding immediately prior to the Effective Time shall
cease to have any rights with respect to such shares, except as otherwise
provided for herein or by applicable law. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason (other
than pursuant to exercise of dissenters' rights granted hereunder), they shall
be canceled and exchanged as provided in this Article II.
(d) Termination of Fund; No Liability. At any time following twelve
months after the Effective Time, the Surviving Corporation shall be entitled to
require the Paying Agent to deliver to it any funds (including any interest
received with respect thereto) which had been made available to the Paying Agent
and which have not been disbursed to holders of Certificates, and thereafter
such holders shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) only as general creditors
thereof with respect to the Merger Consideration payable upon due surrender of
their Certificates, without any interest thereon. Notwithstanding the foregoing,
neither the Surviving Corporation nor the Paying Agent shall be liable to any
holder of a Certificate for Merger Consideration delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(e) Lost Certificates. In the event any Certificates shall have been
lost, stolen or destroyed, the Paying Agent shall pay in exchange for such lost,
stolen or destroyed Certificates, upon the making of an affidavit of that fact
by the holder thereof, the Merger Consideration, if any, as may be required
pursuant to Section 2.1(c); provided, however, that Parent may, in its
discretion and as a condition precedent to the payment thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct against any claim that may be made against
Parent, the Surviving Corporation or the Paying Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
2.3 Further Assurances. If, at any time after the Effective Time, any
further action is necessary or desirable to consummate the Merger, to carry out
the purposes of this Agreement or to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Purchaser, the officers and directors of the
Company, Parent and Purchaser are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Purchaser as follows,
except as previously disclosed in writing to Parent and Purchaser or as
otherwise actually known by Parent, Purchaser or the Continuing Stockholder
(collectively, "EXCLUDED Matters")(provided that such exception shall not be
applicable to the representation and warranty contained in Section 3.4(a)):
3.1 Organization and Qualification.
(a) The Company and each of its "Significant Subsidiaries" (within the
meaning of Regulation S-X of the Securities Act of 1933, as amended (the
"SECURITIES ACT")) is a corporation or other legal entity duly organized,
validly existing and in good standing under the laws of the its respective
jurisdiction of incorporation or organization, and has all requisite corporate
or other legal power and authority to own, lease and operate its properties and
to carry on its respective business as now being conducted.
(b) The Company and each of its Significant Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the respective property owned, leased or operated by it or the nature
of the respective business conducted by it makes such qualification or licensing
necessary, and to
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perform all of its respective obligations under any contract under which the
Company and each of its Significant Subsidiaries (A) has or may acquire any
rights, (B) has or may become subject to any obligation or liability or (C) is
or may, or any of the assets used or owned by it are or may, become bound,
except where the failure to be so duly qualified or licensed and in good
standing or to effect such performance would not, individually or in the
aggregate, have a Company Material Adverse Effect. When used in this Agreement,
the term "COMPANY MATERIAL ADVERSE EFFECT" means any change or effect that would
(i) be materially adverse to the business, assets (tangible or intangible),
results of operations, liabilities, condition (financial or other) or prospects
of the Company and its Subsidiaries taken as a whole, or (ii) prevent, delay or
otherwise impair the ability of the Company to perform its obligations under
this Agreement or to consummate the transactions contemplated hereby.
3.2 Capitalization of the Company.
(a) As of the date hereof, the authorized capital stock of the Company
consists of (i) 33,333,333 shares of Class A Stock, of which 9,982,300 shares
are currently issued and outstanding, (ii) 66,666,667 shares of Class B Stock,
of which 18,604,515 are currently issued and outstanding and (iii) 100,000,000
shares of preferred stock, no par value, of which zero (0) shares are currently
issued and outstanding. All outstanding shares of capital stock of the Company
have been validly issued, and are fully paid, nonassessable and free of, and not
issued in violation of, preemptive rights. As of the date hereof, there are
2,238,703 shares of Class A Stock and 5,303,162 shares of Class B Stock subject
to issuance upon exercise of outstanding options, warrants, or other rights to
purchase capital stock of the Company from the Company. Except as set forth
above, there are outstanding (A) no shares of capital stock or other securities
of the Company, (B) no securities of the Company convertible into or
exchangeable for shares of capital stock or securities of the Company, (C) no
options, subscriptions, warrants, convertible securities, calls or other rights
to acquire from the Company, and no obligation of the Company or any of its
Subsidiaries to issue, deliver or sell, any capital stock, securities or
securities convertible into or exchangeable for capital stock or securities of
the Company, and (D) no equity equivalents, performance shares, interests in the
ownership or earnings of the Company or other similar rights issued by the
Company (the items referred to in clauses (A)-(D) are referred to herein as
"COMPANY SECURITIES"). As of the date hereof, (i) there are no outstanding
obligations of the Company to repurchase, redeem or otherwise acquire any
Company Securities, (ii) no agreement, other document or other obligation that
grants or imposes on any Company Securities any right, preference, privilege or
restriction with respect to the transactions contemplated hereby (including,
without limitation, any rights of first refusal), other than any applicable
right to dissent from the Merger as provided in Section 2.1(e) above, (iii)
there are no bonds, debentures, notes or other indebtedness having general
voting rights (or convertible into securities having such rights) of the Company
issued and outstanding and (iv) the Company is not a party or bound to, and to
the Company's knowledge there are no other, voting agreements, lock-up
agreements or similar agreements or arrangements restricting or affecting
outstanding Company Securities (excluding (x) arrangements governing 5,000,000
shares of Class B Stock pledged by affiliates of Mr. Hughes to secure
obligations owed by them to DECS Trust III, a Delaware business trust, as
described in the final prospectus dated March 25, 1998 relating to the offering
and sale of 5,000,000 DECS by DECS Trust III (the "DECS") and (y) a related
share borrow arrangement between Salomon Smith Barney and Mr. Hughes with
respect to 1,000,000 shares of Class B Stock held by Mr. Hughes).
(b) All issued and outstanding warrants, options and other rights to
acquire Company Securities will, as of or prior to the Effective Time, terminate
or will thereafter constitute only the right to receive the excess, if any, of
the per share Merger Consideration over the per share exercise price of such
warrant, option or such other right, multiplied by the number of shares for
which such warrant or option is exercisable immediately prior to the Effective
Time (in the case of Company Securities other than Company Common Stock and
options or other rights to acquire Company Securities other than Company Common
Stock, if any, computed on a Company Common Stock equivalent basis) (the
"OPTION/WARRANT SPREAD"), without obligation of any other payment. The aggregate
dollar amount of the Option/Warrant Spread, excluding the Option/Warrant Spread
related to options, warrants and other rights to acquire Company Securities held
by the Continuing Stockholder, does not exceed $57,100,000.
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3.3 Power and Authority. The Company has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and is a valid and binding agreement of
the Company, enforceable against it in accordance with its terms, except (a) as
such enforcement may be subject to bankruptcy, insolvency or similar laws now or
hereafter in effect relating to creditors rights generally, and (b) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought (clauses (a) and (b)
collectively, the "ENFORCEABILITY EXCEPTIONS").
3.4 Board Recommendations; Anti-takeover Provisions.
(a) At a Special Committee meeting duly called and held on September 13,
1999, the Special Committee, based in part upon the opinion of the Independent
Advisor, duly and validly (i) determined that this Agreement and the Offer and
the Merger contemplated hereby are fair to and in the best interest of the
Public Stockholders, (ii) approved, authorized and adopted this Agreement, the
Offer, the Merger and the other transactions contemplated hereby; and (iii)
resolved to recommend that the Public Stockholders accept the Offer and tender
their Shares pursuant to the Offer. On September 13, 1999, the Special Committee
received an opinion from Bear, Stearns & Co. Inc. (the "INDEPENDENT ADVISOR")
addressed to the Special Committee to the effect that the consideration to be
received in the Offer and the Merger is fair from a financial point of view to
the Public Stockholders, and a complete and correct signed copy of such opinion
has been delivered by the Special Committee to Parent for purposes of inclusion
in SEC filings.
(b) The Company's Board of Directors, at a meeting duly called and held
on September 13, 1999, has duly and validly (i) determined that this Agreement
and the Offer and the Merger contemplated hereby are fair to and in the best
interest of the Public Stockholders, (ii) approved, authorized and adopted this
Agreement, the Offer, the Merger and the other transactions contemplated hereby;
(iii) resolved to recommend that the Public Stockholders accept the Offer and
tender their Shares pursuant to the Offer; (iv) taken the action required to
cause all issued and outstanding warrants, options and other rights to acquire
Company Securities, as of or prior to the Effective Time, to terminate or
constitute only the right to receive the Option/Warrant Spread; (v) taken all
action necessary to ensure that (A) the provisions of Sections 78.378 through
78.3793, inclusive, of the NRS do not apply to the Company and to ensure that
the prohibitions contained in Sections 78.411 through 78.444, inclusive, of the
NRS applicable to "combinations" (as defined in Section 78.416) do not apply to
the transactions contemplated by this Agreement; and (B) any other
anti-takeover, control-share, business combination, moratorium or like laws of
any state do not and will not apply to the transactions contemplated by this
Agreement or otherwise impair, restrict or prohibit the performance of this
Agreement; and (vi) resolved not to alter, amend, repeal, modify or otherwise
restrict the effect of any action described in clause (v) above, other than an
action to ensure compliance with such clause (v).
3.5 Consents and Approvals; No Violation. The execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby and the performance by the Company of its obligations hereunder will not:
(a) conflict with or violate any provision of the Company's articles of
incorporation or bylaws or the equivalent organizational documents of any of its
Significant Subsidiaries; or
(b) require on the part of the Company or any Significant Subsidiary of
the Company any consent, approval, order, authorization or permit of, or
registration, filing or notification to, any Governmental Authority, except for
(i) the filing with the SEC of (A) the Schedule 14C, and (B) such reports under
Sections 13, 14 and 16(a) of the Exchange Act, as may be required in connection
with this Agreement (including, without limitation, the Schedule 14D-9 and the
Schedule 13E-3), and the transactions contemplated hereby, (ii) the filing of
the Articles of Merger with the Secretary of State of the State of Nevada, and
(iii) such additional actions or filings which, if not taken or made, would not,
singly or in the aggregate, have a Company Material Adverse Effect.
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3.6 Information Supplied. None of the information supplied or to be
supplied by the Company specifically for use in the Offer Documents will, at the
time filed with the SEC or as of the date mailed to the Company's stockholders,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
3.7 Brokers and Finders. Except for payments required to be made to
Donaldson Lufkin & Jenrette Securities Corporation ("DLJ") as the Company's and
Mr. Hughes's financial advisor pursuant to an engagement letter dated April 23,
1999, and to the Independent Advisor, neither the Company nor any of its
affiliates will or has, directly or indirectly, become obligated to pay any
person or entity any brokerage fee, finder's fee, investment banking fee or
agent's fee as a result of the entering into of this Agreement and/or closing of
the Merger or any of the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PARENT AND PURCHASER
Parent and Purchaser represent and warrant to the Company as follows:
4.1 Organization. Parent is a limited liability company and Purchaser is a
corporation, in each case duly organized, validly existing and in good standing
under the laws of their jurisdiction of organization, and each has the requisite
limited liability company or corporate power to carry on its business. Parent
and Purchaser have made available to the Company a complete and correct copy of
their respective certificate of formation, operating agreement, articles of
incorporation and bylaws, each as amended to date and as in full force and
effect. Neither Parent nor Purchaser is in default in the performance,
observation or fulfillment of any provision of its certificate of formation,
operating agreement, articles of incorporation or bylaws. Purchaser is a
wholly-owned subsidiary of Parent.
4.2 Authority Relative to this Agreement. Each of Parent and Purchaser has
all requisite limited liability company or corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby on the part of Parent and
Purchaser have been duly and validly authorized by the managing member of Parent
and the Board of Directors of Purchaser and by Parent as the sole stockholder of
Purchaser and no other limited liability or corporate proceedings on the part of
Parent and Purchaser are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and Purchaser and, assuming this Agreement
constitutes a valid and binding obligation of the Company and the requisite
approval of the Company's stockholders has been obtained, this Agreement
constitutes a valid and binding agreement of Parent and Purchaser, enforceable
against each of them in accordance with its terms, except as such enforcement
may be subject to the Enforceability Exceptions.
4.3 Consent and Approvals; No Violation. The execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby and the performance by Parent and Purchaser of their obligations
hereunder will not:
(a) conflict with any provision of the respective certificate of
formation, operating agreement, articles of incorporation or bylaws of Parent or
Purchaser;
(b) require on the part of Parent or Purchaser any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Authority, except (i) such reports under Sections 13, 14 and 16(a) of the
Exchange Act as may be required in connection with this Agreement (including,
without limitation, the Schedule 14D-1 and Schedule 13E-3), and the transactions
contemplated hereby, (ii) the filing of the Articles of Merger with the
Secretary of State of the State of Nevada, and (iii) such additional actions or
filings which, if not taken or made, would not, singly or in the aggregate, have
a Parent Material Adverse Effect (as defined below); or
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(c) result in any conflict with or violation of or the breach of or
constitute a default (with notice or lapse of time or both) under, or give rise
to any right of termination, cancellation or acceleration or guaranteed payments
under or to a loss of a material benefit under, any of the terms, conditions or
provisions of any note, bond, indenture, lease, mortgage, license, franchise,
agreement or other instrument or obligation to which the Parent or Purchaser is
a party or by which the Parent or Purchaser or any of their properties or assets
may be bound, except for such conflicts, violations, breaches, defaults, or
rights of termination, cancellation or acceleration, or losses as to which
requisite waivers or consents have been obtained or will be obtained prior to
the Effective Time or which, singly or in the aggregate, would not result in any
change or effect that would prevent, delay or otherwise impair the ability of
Parent or Purchaser to perform its obligations under this Agreement or to
consummate the transactions contemplated hereby (a "PARENT MATERIAL ADVERSE
EFFECT").
4.4 Information Supplied. None of the information supplied or to be
supplied by Parent, Purchaser or the Continuing Stockholder specifically for use
in the Schedule 14C or Schedule 14D-9 will, at the time filed with the SEC or as
of the date mailed to the Company's stockholders, contain any untrue statement
of a material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances in which they are made, not misleading.
4.5 Purchaser's Operations. Purchaser was formed solely for the purpose of
engaging in the transactions contemplated hereby and has not engaged in any
business activities or conducted any operations other than to facilitate the
transactions contemplated hereby.
4.6 Capitalization. All of the issued and outstanding shares of Purchaser
Common Stock have been duly and validly issued and are held of record and
beneficially solely by Parent. Purchaser has no other outstanding equity
interests or securities convertible, exchangeable or exercisable for any equity
interests.
4.7 Financing. The Company has received written assurances (the "DLJ
LETTER") from DLJ, dated September 13, 1999 relating to such firm's confidence
in being able to secure and/or arrange the financing of the Offer and the Merger
(the "DEBT FINANCING") and has received from the Continuing Stockholder the
Equity Commitment, true and complete copies of which have been provided to the
Special Committee and the Board of Directors of the Company. Funds from the Debt
Financing, together with Company cash and cash equivalents would be sufficient
to fund (i) the Offer, (ii) the Merger Consideration for all shares of Company
Common Stock subject to conversion in accordance with Section 2.1(c) hereof,
(iii) the other transactions contemplated by this Agreement (including, without
limitation, the cancellation of all outstanding warrants, options and other
rights to acquire Company Securities for their Option/Warrant Spread in
accordance with Section 2.1(d) hereof, and the loans to Debtor LLC described on
Exhibit B hereto), (iv) all fees and expenses of the Company, Parent and
Purchaser incurred in connection with the transactions contemplated by this
Agreement and (v) the working capital needs of the Company following the Merger,
including, without limitation, if applicable, letters of credit (collectively,
the funds required for the matters specified in clauses (i)-(v) are referred to
as the "USES OF FUNDS").
4.8 Solvency. Parent has no reason to believe that the financing to be
provided to Purchaser to effect the Offer and the Merger will cause (i) the fair
salable value of the Surviving Corporation's assets to be less than the total
amount of its existing liabilities and identified contingent liabilities, (ii)
the fair salable value of the assets of the Surviving Corporation to be less
than the amount that will be required to pay its probable liabilities on its
existing debts as they mature, (iii) the Surviving Corporation not to be able to
pay its existing debts as they mature or (iv) the Surviving Corporation to have
an unreasonably small capital with which to engage in its business.
4.9 Brokers and Finders. Except for payments required to be made to DLJ as
the Company's and Mr. Hughes's financial advisor, neither the Parent, Purchaser
nor any of their affiliates will or has, directly or indirectly, become
obligated to pay any person or entity any brokerage fee, finder's fee,
investment banking fee or agent's fee as a result of the entering into of this
Agreement and/or closing of the Offer or the Merger.
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ARTICLE V
COVENANTS OF THE COMPANY
The Company agrees that it shall, prior to the Effective Time, continue to
declare and pay its regular quarterly cash dividend on Company Common Stock, in
accordance with prior practice. In addition, the Company shall declare two
additional special dividends to the holders of its securities, the record dates
for which shall be the close of business on the date that the Offer is
consummated, and the close of business on the last Business Day prior to the
Effective Time, respectively. The amount of the first special dividend shall be
equal to the Company's most recent quarterly dividend rate for such security,
multiplied by the number of days elapsed since the last regular quarterly
dividend record date through and including the date of the consummation of the
Offer, and divided by 90. The amount of the second special dividend shall be
equal to the Company's most recently quarterly dividend rate for such security,
multiplied by the number of days elapsed since the last regular or special
dividend record date (including the first special dividend record date) through
and including the Effective Time, and divided by 90. Dividends payable hereunder
shall be paid in cash in the same manner that regular quarterly dividends are
paid.
ARTICLE VI
ADDITIONAL COVENANTS
The parties hereto further agree as follows:
6.1 Acquisition Proposals.
The Company, its subsidiaries and their affiliates will not, and the
Company, its subsidiaries and their affiliates will use their reasonable efforts
to ensure that their respective officers, directors, employees, investment
bankers, attorneys, accountants and other representatives and agents do not,
directly or indirectly, initiate, solicit, encourage or participate in
negotiations or discussions relating to, or provide any information to any
natural person, corporation, partnership, limited liability company or entity
(each, a "PERSON") concerning, or take any action to facilitate the making of,
any offer or proposal which constitutes or is reasonably likely to lead to any
Acquisition Proposal (as defined below) relating to the Company, its
subsidiaries or any affiliate, or any inquiry with respect thereto, or agree to
approve or recommend any Acquisition Proposal; provided, however, that if at any
time prior to the Effective Time, in the opinion of the Special Committee of the
Board of Directors after consultation with its counsel, the failure to take any
of the foregoing actions described in this Section 6.1 would be inconsistent
with the fiduciary duties of such Special Committee to the Public Stockholders
under applicable law, such Special Committee may take any such action; provided,
further, that if taking any such action involves, directly or indirectly,
providing access and/or furnishing information concerning the Company's
business, properties or assets to any corporation, partnership, person or other
entity or group, the access and/or information shall be provided only pursuant
to an appropriate confidentiality agreement.
The Company (acting through the Special Committee) shall promptly notify
Parent of any such offers, proposals or Acquisition Proposals (including without
limitation the terms and conditions thereof and the identity of the Person
making it), and will keep Parent apprised of all developments with respect to
any such Acquisition Proposal, including without limitation any modifications
thereof.
Nothing contained in this Section 6.1 shall prohibit the Company or the
Special Committee from (i) taking and disclosing to the Company's stockholders a
position with respect to a tender offer by a third party pursuant to Rules 14d-9
and 14e-2 promulgated under the Exchange Act, or (ii) making such disclosure to
the Company's stockholders which, in the opinion of the Special Committee, after
consultation with its counsel, may be required under applicable law.
As used in this Agreement, "Acquisition Proposal" shall mean any tender or
exchange offer involving the Company or its securities, any proposal for a
merger, consolidation or other business combination involving the Company, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, the Company, any proposal or
offer with respect to any recapitalization or
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restructuring with respect to the Company or any proposal or offer with respect
to any other transaction similar to any of the foregoing with respect to the
Company; provided, however, that, as used in this Agreement, the term
"ACQUISITION PROPOSAL" shall not apply to any transaction of the type described
in this subsection (d) involving Parent, Purchaser or their affiliates.
6.2 Access to Information. Between the date of this Agreement and the
Effective Time, upon reasonable notice the Company shall (i) give Parent,
Purchaser and their respective officers, employees, accountants, counsel,
financing sources and other agents and representatives full access to all
buildings, offices, and other facilities and to all contracts, internal reports,
data processing files and records, Federal, state, local and foreign tax returns
and records, commitments, books, records and affairs of the Company, whether
located on the premises of the Company or at another location; (ii) furnish
promptly to Parent and Purchaser a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of Federal securities laws or regulations; (iii) permit
Parent and Purchaser to make such inspections as they may require; (iv) cause
its officers to furnish Parent and Purchaser such financial, operating,
technical and product data and other information with respect to the business
and properties of the Company as Parent and Purchaser from time to time may
request, including without limitation financial statements and schedules; (v)
allow Parent and Purchaser the opportunity to interview such employees and other
personnel and affiliates of the Company with the Company's prior written
consent, which consent shall not be unreasonably withheld; and (vi) assist and
cooperate with Parent and Purchaser in the foregoing; provided, however, that no
investigation pursuant to this Section 6.2 shall affect or be deemed to modify
any representation or warranty made by the Company herein.
6.3 Consents and Approvals.
(a) The parties hereto shall cooperate with each other and use
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, to
obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties ("THIRD PARTY APPROVALS") and federal, state
and local governmental agencies and authorities ("GOVERNMENTAL AUTHORITIES")
which are necessary or advisable to consummate the transactions contemplated by
this Agreement (including without limitation the Offer and the Merger)
("GOVERNMENTAL APPROVALS" and, together with Third Party Approvals,
"APPROVALS"), and to comply with the terms and conditions of all such Approvals.
Each of the parties hereto and their respective officers, directors and
affiliates shall use their reasonable best efforts to file within 15 days after
the date hereof, and in all events shall file within 30 days after the date
hereof, all required initial applications and documents in connection with
obtaining the Governmental Approvals and shall act reasonably and promptly
thereafter in responding to additional requests in connection therewith; and
each party will use its reasonable best efforts to secure such Governmental
Approvals as expeditiously as practicable. Parent and the Company shall have the
right to review in advance, and to the extent practicable each will consult the
other on, in each case subject to applicable laws relating to the exchange of
information, all the information relating to Parent or the Company, as the case
may be, and any of their respective subsidiaries, directors, officers and
stockholders which appear in any filing made with, or written materials
submitted to, any third party or any Governmental Authority in connection with
the transactions contemplated by this Agreement. Without limiting the foregoing,
each of Parent and the Company (the "NOTIFYING PARTY") will notify the other
promptly of the receipt of comments or requests from Governmental Authorities
relating to Governmental Approvals, and will supply the other party with copies
of all correspondence between the Notifying Party or any of its representatives
and Governmental Authorities with respect to Governmental Approvals.
(b) Parent and the Company shall promptly advise each other upon
receiving any communication from any Governmental Authority whose consent or
approval is required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any such consent or approval will not be obtained or that the
receipt of any such consent or approval will be materially delayed.
6.4 Notification of Certain Matters. The Company will give prompt notice
to Parent of (a) any notice of default received by it subsequent to the date of
this Agreement and prior to the Effective Time under any
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material instrument or material agreement to which it is a party or by which it
is bound, which default, if not remedied, would render materially incomplete or
untrue any representation or warranty made herein, (b) any suit, action or
proceeding instituted or, to the knowledge of the Company, threatened against or
affecting the Company subsequent to the date of this Agreement and prior to the
Effective Time which, if adversely determined, would render materially incorrect
any representation or warranty made herein and (c) any material breach of the
Company's covenants hereunder or the occurrence of any event that is reasonably
likely to cause any of its representations and warranties hereunder to become
incomplete or untrue in any material respect.
6.5 Additional Actions. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations, or
to remove any injunctions or other impediments or delays, to consummate and make
effective the Offer, the Merger and the other transactions contemplated by this
Agreement.
6.6 Cooperation with Financing.
(a) Parent, Purchaser and Mr. Hughes shall use commercially reasonable
best efforts to obtain the Debt Financing. The Company agrees to provide, and
will use commercially reasonable efforts to cause its subsidiaries, its officers
and employees, representatives and advisors, including legal and accounting, to
provide all necessary cooperation reasonably requested by Parent, Purchaser and
Mr. Hughes in connection with the Debt Financing, including, without limitation,
using commercially reasonable best efforts to cause (a) appropriate officers and
employees to be available on a customary basis for "road show" appearances and
the preparation of disclosure documents in connection therewith and (b) its
independent accountants and counsel to provide assistance to Parent, Purchaser
and Mr. Hughes as reasonably required in connection with the Debt Financing;
provided, however, that the obligation of the Company to use its commercially
reasonable best efforts in connection with the foregoing shall only apply to
reasonable and customary activities in this regard and shall not include any
obligation to obtain any extraordinary waivers, consents or approvals to loan
agreements, leases or other contracts or to agree to an adverse modification of
the terms of any of such documents, to prepay or incur additional obligations to
any other parties or to incur or become liable for any other costs or expenses.
Parent and Purchaser shall keep the Company informed of the status of their
arrangements for the Debt Financing, including providing written notification to
the Company as promptly as possible (but in any event within forty-eight (48)
hours) with respect to (i) any indication that DLJ has withdrawn or will
withdraw or adversely modify the DLJ Letter, or that DLJ has indicated that
there has occurred a material adverse disruption or material adverse change in
the banking, financial or capital markets generally or in the market for senior
credit facilities or for new issuances of high yield securities which has caused
or could cause DLJ to withdraw the DLJ Letter, and (ii) any other material
adverse developments relating to the financing contemplated by the Debt
Financing. Parent shall provide written notice to the Company within twenty-four
(24) hours if DLJ has indicated to Parent or Purchaser that it will be unable to
arrange or secure the financing contemplated by the DLJ Letter. In the event
Parent and Purchaser are unable to arrange any portion of such financing in the
manner or from the sources contemplated by the DLJ Letter, Parent and Purchaser
shall use commercially reasonable best efforts (but without any requirement to
expend additional funds or modify in a manner adverse to Parent, Purchaser or
Mr. Hughes any of the terms of the Offer, the Merger or the other transactions
contemplated hereby) to arrange any such portion from alternative sources on
substantially the same terms and with substantially the same conditions as the
portion of the financing that Parent and Purchaser were unable to arrange.
Nothing in this Section shall require the Company to enter into any credit
agreement, indenture, guarantee or similar agreement related to the Debt
Financing (other than by operation of law upon consummation of the Merger)
without the consent of the Special Committee.
(b) Prior to the acceptance for purchase of shares of Company Common
Stock properly tendered in the Offer, Mr. Hughes shall, and shall have caused
the other persons and entities included within the Continuing Stockholder to,
have complied in all material respects with the Equity Commitment.
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6.7 Certain Use of Proceeds. Immediately after the Effective Time, the
Surviving Corporation will make the loans to Debtor LLC described on Exhibit B
to this Agreement, the form, terms and conditions thereof to be satisfactory to
Parent and Mr. Hughes in their sole reasonable discretion.
6.8 Indemnification, Exculpation And Insurance.
(a) Parent agrees that all rights to indemnification and exculpation
(including the advancement of expenses) from liabilities for acts or omissions
occurring at or prior to the Effective Time (including with respect to the
transactions contemplated by this Agreement) existing now or at the Effective
Time in favor of the current or former directors or officers of Company as
provided in the Company Certificate of Incorporation, the Company By-Laws and
any indemnification agreements (each as in effect on the date hereof) shall be
assumed by the Surviving Corporation in the Merger, without further action, as
of the Effective Time and shall survive the Merger and shall continue in full
force and effect without amendment, modification or repeal in accordance with
their terms; provided, however, that if any claims are asserted or made during
the continuance of such terms, all rights to indemnification (and to advancement
of expenses) hereunder in respect of any such claims shall continue, without
diminution, until disposition of any and all such claims.
(b) In the event that Parent, the Surviving Corporation or any of their
successors or assigns (i) consolidates with or merges into any other person and
is not the continuing or surviving corporation or entity of such consolidation
or merger or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision will be made so that the successors and assigns of Parent or the
Surviving Corporation, as the case may be, shall expressly assume the
obligations set forth in this Section 6.8. In the event the Surviving
Corporation transfers any material portion of its assets, in a single
transaction or in a series of transactions, Parent will either guarantee the
indemnification obligations referred to in Section 6.8(a) or take such other
action to insure that the ability of the Surviving Corporation, legal and
financial, to satisfy such indemnification obligations will not be diminished in
any material respect.
(c) The Surviving Corporation shall (i) maintain for a period of not
less than six years from the Effective Time the Company's current directors' and
officers' insurance and indemnification policy to the extent that it provides
coverage for events occurring prior to the Effective Time (the "D&O INSURANCE"),
for all persons who are directors or officers of the Company on the date of this
Agreement (the "INSURED PARTIES") or (ii) cause to be provided coverage no less
advantageous to the Insured Parties than the D&O Insurance, in each case so long
as the annual premium therefor would not be in excess of 150% of the last annual
premium paid for the D&O Insurance prior to the date of this Agreement (such
150% amount, the "MAXIMUM PREMIUM"). If the existing D&O Insurance expires, is
terminated or canceled during such six-year period, the Surviving Corporation
will use all reasonable efforts to cause to be obtained as much D&O Insurance as
can be obtained for the remainder of such period for an annualized premium not
in excess of the Maximum Premium.
(d) The provisions of this Section 6.8 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified or insured party, his
or her heirs and his or her representatives and (ii) are in addition to, and not
in substitution for, any other rights to indemnification or contribution that
any such person may have by contract or otherwise.
6.9 Solvency Matters.
(a) Parent and the Company will jointly agree to retain a mutually
satisfactory appraisal firm (the "APPRAISER") to provide a letter to the Special
Committee of the Board of Directors of the Company and the Board of Directors of
the Parent (the "SOLVENCY LETTER") to the effect that the financing to be
provided to Purchaser to effect the Offer and the Merger and the other
transactions contemplated hereby will not cause (i) the fair salable value of
the Surviving Corporation's assets to be less than the total amount of its
existing liabilities and identified contingent liabilities, (ii) the fair
salable value of the assets of the Surviving Corporation to be less than the
amount that will be required to pay its probable liabilities on its existing
debts as they mature, (iii) the Surviving Corporation not to be able to pay its
existing debts as they mature or (iv) the Surviving Corporation to have an
unreasonably small capital with which to engage in its business.
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(b) The Appraiser will be requested to deliver a Solvency Letter as
promptly as practicable. If the Appraiser is unable to deliver the Solvency
Letter prior to the acceptance of Shares pursuant to the Offer or the Solvency
Letter is not reasonably acceptable to the Special Committee of the Board of
Directors of the Company (after reasonable efforts are made to remedy any
deficiencies in the Solvency Letter), Parent and Purchaser covenant and agree
that they shall not consummate the Offer.
ARTICLE VII
CONDITIONS
7.1 Conditions to each Party's Obligations to Effect the Merger. The
respective obligations of the parties to effect the Merger shall be subject to
the satisfaction or waiver, on or prior to the Closing Date, of the following
conditions:
(a) Governmental Approvals. Other than the filing of the Articles of
Merger in accordance with the NRS, all material Governmental Approvals required
to be obtained and all material filings, notices or declarations with or to
Governmental Authorities required to be made by the parties and their
Subsidiaries, officers, directors and affiliates in order to consummate the
Merger shall have been obtained or made, and no such approval shall contain any
conditions, limitations or restrictions, other than any deviation from the
foregoing that does not have and may not reasonably be expected to have a
Company Material Adverse Effect or Parent Material Adverse Effect.
(b) Legal Action; Statutes. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
injunction or other order which is in effect and has the effect of making the
Merger or the transactions contemplated hereby illegal or prohibits or imposes
material limitations on the ability of Purchaser to consummate the Merger or
otherwise prohibiting (directly or indirectly) consummation of the transactions
contemplated by this Agreement or prohibits or imposes material limitations on
the ability of Parent to own or operate all or a material portion of the
Company's and its subsidiaries' businesses or assets, taken as a whole.
(c) Closing of Tender Offer. Purchaser shall have (i) commenced the
Offer pursuant to Article I hereof and (ii) purchased, pursuant to the terms and
conditions of such Offer, all shares of the Company Common Stock duly tendered
and not withdrawn; provided, however, that neither Parent nor Purchaser shall be
entitled to rely on the condition in clause (ii) above if either of them shall
have failed to purchase shares of the Company Common Stock pursuant to the Offer
in breach of their obligations under this Agreement.
7.2 [Intentionally deleted]
7.3 Conditions to Obligations of the Company to Effect the Merger. The
obligations of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the additional following
conditions, unless waived by the Company:
(a) Representations and Warranties Accurate. The representations and
warranties of the Parent and Purchaser set forth in this Agreement that are
qualified as to materiality shall be true and correct, or any such
representations and warranties that are not so qualified shall be true and
correct in all material respects, in each case at the date of the Agreement and
at the date of the Closing (unless a representation speaks as of an earlier
date, in which case it shall be true and correct as of such earlier date).
(b) No Material Breach. Parent and Purchaser shall have performed in all
material respects all obligations, and shall have complied in all material
respects with any agreement or covenant of Parent and/or Purchaser, to be
performed or complied with by either of them under this Agreement, prior to or
as of the date of the Closing, and the Company shall have received a certificate
signed by a senior officer of the Parent to such effect.
(c) Parent to Fund Paying Agent. Prior to the Effective Time, Parent
shall have deposited with the Paying Agent the funds to which holders of Company
Common Stock shall become entitled pursuant to Section 2.1(c) hereof.
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(d) Solvency Letter. The Solvency Letter shall have been delivered to
the Special Committee and the Board of Directors of the Company prior to the
acceptance of Shares pursuant to the Offer.
(e) Stockholder Consent. The Stockholder Consent shall remain in full
force and effect.
ARTICLE VIII
TERMINATION
8.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
stockholder approval thereof:
(a) By Mutual Consent. By mutual consent of Parent and the Board of
Directors of the Company.
(b) By Any Party. By Parent or Purchaser, or by the Board of Directors
of the Company:
(i) if the Merger shall not have been consummated on or prior to
March 31, 2000; provided, however, that the right to terminate this Agreement
under this Section 8.1(b)(i) shall not be available to any party whose failure
to fulfill any material obligation under this Agreement has been the cause of,
or resulted in, the failure of the Merger to be consummated on or prior to such
date;
(ii) if a court of competent jurisdiction or other governmental
authority shall have issued an order, decree or ruling or taken any other action
(which order, decree, ruling or other action the parties hereto shall use their
reasonable efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable; or
(iii) if the Offer terminates or expires on account of the failure of
any condition specified in Exhibit A without Purchaser having purchased any
shares of the Company Common Stock thereunder; provided, however, that the right
to terminate this Agreement pursuant to this Section 8.1(b)(iii) shall not be
available to any party whose failure to fulfill any material obligation under
this Agreement has been the cause of, or resulted in, the failure of any Offer
Condition.
(c) By Parent or Purchaser. By Parent or Purchaser:
(i) if the Board of Directors of the Company or the Special Committee
thereof shall have withdrawn, modified or changed in a manner adverse to Parent
or Purchaser its approval or recommendation of this Agreement, the Offer or the
Merger or shall have approved or recommended an Acquisition Proposal; or
(ii) the Independent Advisor shall have withdrawn, modified or
changed in a manner adverse to Parent or Purchaser its opinion as to the
fairness, from a financial point of view, of the consideration to be received in
the Offer and the Merger; or
(iii) if the Company breaches or fails in any material respect to
perform or comply with any of its material covenants and agreements contained
herein (including without limitation the covenants in Article VI), or breaches
any of its representations or warranties contained herein, in any material
respect, which breach shall not have been cured in the case of a representation
or warranty, prior to the Closing or, in the case of a covenant or agreement,
within ten (10) days following receipt by the Company of written notice
specifying such breach from Parent or Purchaser.
(d) By the Company. By the Company (acting through the Special
Committee): (i) if Parent or Purchaser breaches or fails in any material respect
to perform or comply with any of their respective material covenants and
agreements contained herein (including without limitation the covenants in
Article VI), or breaches any of their respective representations or warranties
contained herein, in any material respect, which breach shall not have been
cured in the case of a representation or warranty, prior to the Closing or, in
the case of a covenant or agreement, within ten (10) days following receipt by
Parent of written notice specifying such breach from the Company; or
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(ii) if Purchaser or Parent shall have (A) failed to commence the
Offer within five Business Days of the public announcement by Parent and the
Company of this Agreement, or (B) failed to pay for Shares pursuant to the Offer
in accordance with Section 1.1(a) hereof.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1 above, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof pursuant to
which such termination is made, and this Agreement shall forthwith become null
and void and there shall be no liability or obligation on the part of Parent and
Purchaser, or either of them, or the Company, or their respective officers,
directors or employees, except (a) for fraud, (b) as set forth in this Section
8.2 and in Section 9.1 hereof and (c) nothing herein shall relieve any party
from liability for any willful breach hereof.
ARTICLE IX
GENERAL PROVISIONS
9.1 Fees and Expenses. All costs and expenses incurred in connection with
this Agreement and the consummation of the transactions contemplated hereby
(including, without limitation, all fees and expenses of the parties' respective
financial advisors and legal and accounting advisors, the Independent Advisor
and the legal and accounting advisors to the Special Committee) (collectively,
"COSTS") shall be paid by the Company, whether or not the Closing occurs;
provided, however, that if a Reimbursement Event occurs, Parent, Purchaser and
Mr. Hughes shall reimburse the Company for $2 million (or such lesser amount
actually incurred) of the Costs incurred by them in connection herewith. A
"REIMBURSEMENT EVENT" shall mean a failure to consummate the Offer or the Merger
as a result of the Financing Condition to the Offer (as defined in Exhibit A
hereto) not being satisfied for any reason, and then only if the
non-satisfaction of the Financing Condition is not principally the result of a
Company Material Adverse Effect. Notwithstanding anything in this Section 9.1 to
the contrary, in the event that this Agreement is terminated pursuant to Section
8.1(d), then Parent, Purchaser and Mr. Hughes shall be responsible fully for the
Costs incurred by them. For purposes of determining the Costs incurred by
Parent, Purchaser and Mr. Hughes, "Costs" shall include (i) the fees and
expenses of DLJ and its legal advisors and (ii) the fees and expenses of legal,
tax and accounting advisors to the Company, to the extent that their services
were provided to assist Mr. Hughes in the structuring and negotiation of the
transactions contemplated by this Agreement.
9.2 Amendment and Modification. Subject to applicable law and subject to
Section 9.13, this Agreement may be amended, modified and supplemented in any
and all respects, whether before or after any vote of the stockholders of the
Company contemplated hereby, by written agreement of the parties hereto, by
action taken by their respective Boards of Directors at any time prior to the
Closing Date with respect to any of the terms contained herein; provided,
however, that after the approval of this Agreement by the stockholders of the
Company, no such amendment, modification or supplement shall reduce or change
the form of the Merger Consideration.
9.3 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Time.
9.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon personal delivery, facsimile transmission
(which is confirmed), telex or delivery by an overnight express courier service
(delivery, postage or freight charges prepaid), or on the fourth day following
deposit in the United States mail (if sent by registered or certified mail,
return receipt requested, delivery, postage or
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freight charges prepaid), addressed to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
(a) if to Parent, Purchaser, Mr. Hughes or the Family Trust, to:
Mr. Hughes
c/o Herbalife International, Inc.
1800 Century Park East
Los Angeles, CA 90067
Telecopy No.: (310) 557-3904
Attention: Mr. Hughes
with a copy to:
Irell & Manella LLP
333 South Hope Street, Suite 3300
Los Angeles, CA 90071
Telecopy No.: (213) 229-0516
Attention: Anthony T. Iler, Esq.
(b) if to the Company, to:
The Special Committee of the Board of Directors
of Herbalife International, Inc.
c/o John M. Newell, Esq.
Latham & Watkins
633 West Fifth Street
Los Angeles, CA 90071
Telecopy No.: (213) 891-8763
Attention: Messrs. Edward J. Hall and Christopher Miner
with a copy to:
Latham & Watkins
633 West Fifth Street
Los Angeles, CA 90071
Telecopy No.: (213) 891-8763
Attention: Randall C. Bassett, Esq. and John M. Newell, Esq.
9.5 Definitions; Interpretation. As used in this Agreement, the terms
"AFFILIATE(S)" and "ASSOCIATES" shall have the meanings set forth in Rule 12b-2
under the Exchange Act. When a reference is made in this Agreement to an
Article, Section, Exhibit or Schedule, such reference shall be to an Article,
Section, Exhibit or Schedule to this Agreement unless otherwise indicated. The
words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in
each case to be followed by the words "WITHOUT LIMITATION." The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
9.6 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof (including without limitation Section 6.1
hereof) in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
9.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
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9.8 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein and therein) (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, and (b) except as provided in Section 6.8, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
9.9 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
9.10 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Nevada (without giving effect to the
principles of conflicts of law thereof).
9.11 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties, except that Purchaser may assign, in its sole discretion, any or all of
its rights, interests and obligations hereunder to Parent or to any direct or
indirect subsidiary of Parent. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by, the parties
and their respective successors and assigns.
9.12 Extension; Waiver. Subject to Section 9.13, at any time prior to the
Effective Time, the parties hereto, by action taken or authorized by their
respective Boards of Directors, may, to the extent legally allowed, (i) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations and
warranties of the other parties hereto contained herein or in any document
delivered pursuant hereto or (iii) subject to Section 9.2, waive compliance with
any of the agreements or conditions of the other parties hereto contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of those
rights.
9.13 Procedure For Termination, Amendment, Extension Or Waiver. A
termination of this Agreement pursuant to Section 8.1, an amendment of this
Agreement pursuant to Section 9.2 or an extension or waiver pursuant to Section
9.12 shall, in order to be effective, require in the case of Parent, Purchaser
or Company, action by its respective managing member, Board of Directors or the
duly authorized designee thereof; provided, however, the affirmative vote of a
majority of the members of the Special Committee of the Board of Directors of
the Company shall be required in order for the Company or the Board of Directors
of the Company to act to (i) amend or terminate this Agreement, (ii) exercise or
waive any of Company's rights or remedies under this Agreement, (iii) extend the
time for performance of Parent's and Purchaser's respective obligations under
this Agreement or (iv) take any action to amend or otherwise modify the
Company's Certificate of Incorporation or By-Laws (each as in effect on the date
hereof).
9.14 Guarantee.
(a) In order to induce the Company to enter into this Agreement and for
other valuable consideration, each of Mr. Hughes and the Family Trust, jointly
and severally, hereby irrevocably guarantees (as primary obligor and not merely
as surety) to the Company and each person who controls the Company within the
meaning of the Securities Act or the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise (each of such persons, a
"BENEFICIARY") (i) the accuracy of the representations and warranties of Parent
and Purchaser contained in Article IV hereof and (ii) the performance by Parent
and Purchaser of the covenants and agreements contained in this Agreement.
(b) The obligations of Mr. Hughes and the Family Trust under this
Section 9.14 shall be unconditional, irrespective of the validity or
enforceability of any other provision of this Agreement.
(c) The obligations of Mr. Hughes and the Family Trust under this
Section 9.14 constitute guarantees of performance and of payment, and not merely
guarantees of collection, and shall remain in full
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force and effect until all obligations of and all amounts payable by Parent and
Purchaser in respect of the matters (the "GUARANTEED MATTERS") that are the
subject of the obligations of Mr. Hughes and the Family Trust under this Section
9.14 of this Agreement have been validly, finally and irrevocably performed or
paid in full, as the case may be, and shall not be affected in any way by the
absence of any action to obtain such performance or amounts, as the case may be,
from Parent or Purchaser hereunder or of any security from time to time
therefor. Each of Mr. Hughes and the Family Trust hereby waives all requirements
as to promptness, diligence, presentment, demand for payment, protest and notice
of any kind with respect to his or its obligations under this Section 9.14. Each
of Mr. Hughes and the Family Trust hereby agrees, jointly and severally, that
action may be taken directly against such person under this Section 9.14 without
any action being taken against Parent or Purchaser.
(d) The obligations of Mr. Hughes and the Family Trust under this
Section 9.14 shall not be affected by any change in applicable laws, rules or
regulations or by any present or future action of any governmental authority or
court amending, varying, reducing or otherwise affecting or purporting to amend,
vary, reduce or otherwise affect any of the obligations of Parent or Purchaser
under this Agreement or by any other circumstance (other than by complete,
irrevocable performance or payment) that might otherwise constitute a legal or
equitable discharge or defense of a surety or a guarantor. If Parent or
Purchaser merges or consolidates with or into another entity, loses its separate
legal identity or ceases to exist, Mr. Hughes and the Family Trust shall
nonetheless continue to be liable for the performance of all obligations or the
payment of all amounts, as the case may be, that would have been due or payable,
as the case may be, by Parent or Purchaser in respect of the Guaranteed Matters.
(e) The obligations of Mr. Hughes and the Family Trust under this
Section 9.14 shall remain in full force and effect or shall be reinstated (as
the case may be) if at any time any obligation or payment of Parent or Purchaser
in respect of the Guaranteed Matters, in whole or in part, is rescinded or must
otherwise be returned by a Beneficiary upon the insolvency, bankruptcy or
reorganization of Parent or Purchaser or otherwise, all as though such
performance or payment, as the case may be, had not been made.
(f) If at any time when any obligation of, or any amount payable by
Parent or Purchaser in respect of, the Guaranteed Matters is overdue and
unperformed or unpaid, as the case may be, Mr. Hughes and the Family Trust
receives any amount as a result of any action against Parent or Purchaser or any
of its property or assets or otherwise for or on account of any payment made by
Mr. Hughes and the Family Trust pursuant to this Section 9.14, Mr. Hughes or the
Family Trust, as the case may be, shall forthwith pay such amount received by it
to the Beneficiaries, without demand, to be credited and applied toward any such
amount payable by Parent or Purchaser.
(g) The guarantee agreements set forth in this Agreement shall be in
addition to any liability which Parent, Purchaser, Mr. Hughes or the Family
Trust may otherwise have.
9.15 Announcements. Neither the Company, Parent nor Purchaser shall make
any public announcement of the terms or existence of this Agreement without the
consent of the other parties hereto, unless required by law.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Parent, Purchaser, Mr. Hughes, the Family Trust and the
Company have caused this Agreement to be signed by their respective officers
thereunto duly authorized as of the date first written above.
<TABLE>
<S> <C>
HERBALIFE INTERNATIONAL, INC.: MH MILLENNIUM HOLDINGS LLC:
By: /s/ MICHAEL E. ROSEN By: /s/ MARK HUGHES
- -------------------------------------------- --------------------------------------------
Mark Hughes
Name: Michael E. Rosen
- --------------------------------------------
Title: Executive Vice President Title: Managing Member
and Chief Executive Corporate
Marketing and Corporate Development
MH MILLENNIUM ACQUISITION CORP.:
By: /s/ MARK HUGHES
--------------------------------------------
Mark Hughes
Title: President
MARK HUGHES*:
/s/ MARK HUGHES
--------------------------------------------
THE MARK HUGHES FAMILY TRUST**:
By: /s/ MARK HUGHES
--------------------------------------------
Mark Hughes
Title: Sole Trustee
</TABLE>
- ---------------
* Signing only with respect to Sections 1.7(b), 6.6 and Section 9.14.
** Signing only with respect to Section 9.14.
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EXHIBIT A
CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer, Purchaser shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating
to Purchaser's obligation to pay for or return tendered Shares after the
termination or withdrawal of the Offer), to pay for any Shares tendered pursuant
to the Offer unless the number of Shares tendered and not withdrawn shall equal
more than 50% of each class of the Company Common Stock outstanding on the date
hereof excluding Company Common Stock owned by the Continuing Stockholder (the
"MINIMUM CONDITION") prior to the date which is 20 Business Days following the
commencement of the Offer in accordance with the terms hereof or such later date
as the Offer may be extended as provided in Section 1.1(a) of the Agreement or
by an amendment to this Agreement in accordance with the provisions of Section
9.13. Furthermore, notwithstanding any other term of the Offer, Purchaser shall
not be required to accept for payment or, subject as aforesaid, to pay for any
Shares not theretofore accepted for payment or paid for, and may terminate the
Offer, subject to the terms and conditions of the Agreement and Purchaser's
obligation to extend the Offer pursuant to Section 1.1(a), if, at any time on or
after the date of this Agreement and before the acceptance of such Shares for
payment or the payment therefor, any of the following conditions exists:
(a) any material Governmental Approvals required to be obtained or any
material filings, notices or declarations with or to Governmental Authorities
required to be made by the parties or their Subsidiaries, officers, directors
and affiliates in order to consummate the Offer, shall fail to have been
obtained or made, or if obtained or made, any such approval does or would
contain any conditions, limitations or restrictions that have or would
reasonably be expected to have a Company Material Adverse Effect or Parent
Material Adverse Effect;
(b) a Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, injunction or other order
which is in effect and has the effect of making the acquisition of Shares by
Purchaser, the Offer, the Merger or the other transactions contemplated by the
Agreement illegal or prohibits or imposes material limitations on the ability of
Purchaser to consummate the Offer, the Merger or the acquisition of the Shares
or otherwise prohibits(directly or indirectly) consummation of the transactions
contemplated by the Agreement or prohibits or imposes material limitations on
the ability of Parent to own or operate all or a material portion of the
Company's and its subsidiaries' businesses or assets, taken as a whole;
(c) any of the representations and warranties of the Company set forth
in the Agreement that are qualified as to materiality shall not be true and
correct, or any such representations and warranties that are not so qualified
shall not be true and correct in any material respect, in each case at the date
of the Agreement and at the scheduled or extended expiration of the Offer
(unless a representation speaks as of an earlier date, in which case if any such
representation is not true and correct as of such earlier date), which breaches
have not been cured within 10 Business Days after the giving of written notice
to the Company;
(d) the Company shall have failed to perform in any material respect any
obligation or to comply in any material respect with any agreement or covenant
of the Company to be performed or complied with by it under this Agreement,
which breaches have not been cured within 10 Business Days after the giving of
written notice to the Company; or
(e) this Agreement shall have been terminated in accordance with its
terms;
(f) Parent, Purchaser and/or one or more of their respective
subsidiaries shall not have obtained the Debt Financing, on terms and conditions
satisfactory in form and substance to Parent and Purchaser in their sole
reasonable discretion (including the availability of funds for the loans
referred to in Section 6.7 of the Agreement, which loans shall be permitted to
be made immediately after the Effective Time) in amounts that, together with
cash and cash equivalents of the Company as of the Effective Date, is sufficient
to satisfy the Uses of Funds (the "FINANCING CONDITION");
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(g) the number of shares of Company Common Stock as to which the holders
thereof have properly exercised, or reasonably appear to have properly
exercised, dissenters' rights, if any, with respect to the Merger exceed three
percent (3%) of the total number of shares of Company Common Stock outstanding
as of the date of the Agreement, which, in the reasonable judgment of Parent or
Purchaser in any such case, and regardless of the circumstances (including any
action or omission by Parent or Purchaser) giving rise to any such condition,
makes it inadvisable to proceed with such acceptance for payment or payments
therefor.
The foregoing conditions in paragraphs (a) through (g) are for the sole
benefit of Purchaser and Parent and may, subject to the terms of this Agreement
and except for the Minimum Condition, be waived by Purchaser and Parent in whole
or in part at any time and from time to time in their sole discretion. The
failure by Parent or Purchaser at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right, the waiver of any such
right with respect to particular facts and circumstances shall not be deemed a
waiver with respect to any other facts and circumstances and each such right
shall be deemed an ongoing right that may be asserted at any time and from time
to time. Terms used herein but not defined herein shall have the meanings
assigned to such terms in the Agreement of which this Exhibit A is a part.
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EXHIBIT B
LOANS TO MR. HUGHES
Immediately after the Closing of the Merger, the Company will make two
loans in the aggregate amount of approximately $214.25 million, comprised of a
loan in the aggregate amount of approximately $125 million ("Loan A") and a loan
in the aggregate amount of approximately $89.25 million ("Loan B" and, together
with Loan A, the "Loans") to Debtor LLC. The Loans will have a stated maturity
of seven years, will bear interest at a commercially reasonable rate (for loans
of similar nature and with similar terms) per annum, and will call for annual
interest-only payments until maturity, at which time the principal balance and
all accrued and unpaid interest will be due.
Debtor LLC will use the proceeds from Loan B to fund the required posting
of alternative collateral to secure the obligations of Mr. Hughes and related
entities under the forward purchase agreements with DECS Trust III. Repayment of
Loan B will not be secured; it will, however, be guaranteed as to repayment by
Mr. Hughes (the "Loan B Guarantee"). The proceeds of Loan A will be retained by
Debtor LLC and invested, and such proceeds and investments (collectively, the
"Collateral") will be pledged by Debtor LLC to secure that Loan. The Company
will pledge Loan A and the related Collateral to the bank anticipated to be the
lender to Purchaser (and, after the Merger, to the Company) under senior bank
financing constituting a portion of the Debt Financing. The secured note
evidencing and securing Loan A will serve as security for Purchaser's (and,
after the Merger, the Company's) obligations under such senior bank financing.
Initially, the value of the Collateral is expected to be approximately $125
million. Other than the Collateral, the only assets of Debtor LLC will consist
of substantially all of the outstanding shares of the Company's capital stock
(other than a small number of voting shares to be held by Parent); however,
under the terms of the agreements governing the Loans (the "Loan Agreements"),
there will be no restriction on the ability of Debtor LLC to make a distribution
of the Company capital stock at any time.
The terms of the Loan Agreements and the pledge of the Collateral may
impose restrictions on investments that Debtor LLC may make utilizing funds
constituting all of the Collateral. In particular, it is anticipated that Debtor
LLC would only be permitted to invest in investment grade government securities.
Provided only that Debtor LLC is not in default in making interest payments on
the Loans, and that the Company is not in default under the Debt Financing,
investment earnings on the Collateral will be released from the Collateral
pledge and are expected to be distributed by Debtor LLC to Mr. Hughes.
Consequently, provided no default is occurring on the Loans or on the Debt
Financing, investment earnings on the Collateral will not provide additional
security for the Loans. If the value of the investment portfolio constituting
all or a portion of the Collateral declines in value, there is no obligation on
the part of Debtor LLC or any other person or entity to post additional security
to restore the value of the Collateral to its initial value or any other amount,
and such a decline in value would not affect the treatment of investment
earnings derived from the Collateral. Such earnings would still be released from
the Collateral pledge (provided, however, that Debtor LLC was not in default in
interest payments on the Loans and the Company is not in default under the Debt
Financing) and available for distribution to Mr. Hughes.
Commencing not earlier than three years following the Closing, if certain
financial covenant criteria contained in the Debt Financing are satisfied, Mr.
Hughes and the Company contemplate causing the Company to redeem the capital
stock held by Debtor LLC (which may, at the Company's election, be recapitalized
into preferred stock), or otherwise make payments to the LLC, in order to permit
Debtor LLC to repay the principal of the Loans, although Mr. Hughes may cause
Debtor LLC to satisfy the Loans in another fashion that does not require any
payment by the Company. The covenants restricting these actions will be
negotiated in arms lengths transactions, in good faith, with the lenders
providing the Debt Financing. Following the redemption of the capital stock held
by Debtor (or such other payments), the Collateral will be released from the
pledge and will thereby cease to act as security for the senior bank facility.
In addition, repayment of the Loans in the foregoing manner will have the effect
of extinguishing the Loan B Guarantee.
The Company intends to make distributions on its capital stock (or
preferred stock, if the common stock held by Debtor LLC is recapitalized) in an
amount approximately equal to the aggregate required interest payments on the
Loans. Under the Loan Agreements and Debt Financing, such distributions would be
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permissible at any time (provided, however, that corresponding interest payments
are made on the Loans substantially contemporaneously by Debtor LLC to the
Company), regardless of whether the Company could then make a restricted payment
pursuant to the restricted payments covenant included in the Debt Financing, and
regardless of the general prohibition on such payments included in the Debt
Financing. However, such distributions could not be made during the existence of
a default or event of default under the Debt Financing.
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ANNEX B
TEXT OF SECTIONS 92A.300 THROUGH 92A.500 OF THE NEVADA REVISED STATUTES
NRS 92A.300 Definitions. As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections.
NRS 92A.305 "Beneficial stockholder" defined. "Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or by
a nominee as the stockholder of record.
NRS 92A.310 "Corporate action" defined. "Corporate action" means the action
of a domestic corporation.
NRS 92A.315 "Dissenter" defined. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.400 to
92A.480, inclusive.
NRS 92A.320 "Fair value" defined. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.
NRS 92A.325 "Stockholder" defined. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation.
NRS 92A.330 "Stockholder of record" defined. "Stockholder of record" means
the person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
NRS 92A.335 "Subject corporation" defined. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
NRS 92A.340 Computation of interest. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances.
NRS 92A.350 Rights of dissenting partner of domestic limited partnership. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity. NRS 92A.360 Rights of dissenting member of domestic limited-liability
company. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
NRS 92A.370 Rights of dissenting member of domestic nonprofit corporation.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.
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2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.
NRS 92A.380 Right of stockholder to dissent from certain corporate actions
and to obtain payment for shares.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, a
stockholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic
corporation is a party:
(1) If approval by the stockholders is required for the merger
by NRS 92A.120 to 92A.160, inclusive, or the articles of
incorporation and he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's
interests will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the
stockholders to the event that the articles of incorporation, bylaws or
a resolution of the board of directors provides that voting or nonvoting
stockholders are entitled to dissent and obtain payment for their
shares.
2. A stockholder who is entitled to dissent and obtain payment under
NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to him or the domestic corporation.
NRS 92A.390 Limitations on right of dissent: Stockholders of certain
classes or series; action of stockholders not required for plan of merger.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or exchange is to
be acted on, were either listed on a national securities exchange, included
in the national market system by the National Association of Securities
Dealers, Inc., or held by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan
of merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in
lieu of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the
plan of merger or exchange, were either listed on a national
securities exchange, included in the national market system by
the National Association of Securities Dealers, Inc., or held of
record by a least 2,000 holders of owner's interests of record;
or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of
paragraph (b).
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2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require
action of the stockholders of the surviving domestic corporation under NRS
92A.130.
NRS 92A.400 Limitations on right of dissent: Assertion as to portions only
to shares registered to stockholder; assertion by beneficial stockholder.
1. A stockholder of record may assert dissenter's rights as to fewer
than all of the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
subject corporation in writing of the name and address of each person on
whose behalf he asserts dissenter's rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which
he dissents and his other shares were registered in the names of different
stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of
the stockholder of record to the dissent not later than the time the
beneficial stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
NRS 92A.410 Notification of stockholders regarding right of dissent.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, the notice of the meeting
must state that stockholders are or may be entitled to assert dissenters'
rights under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a
copy of those sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders,
the domestic corporation shall notify in writing all stockholders entitled
to assert dissenters' rights that the action was taken and send them the
dissenter's notice described in NRS 92A.430.
NRS 92A.420 Prerequisites to demand for payment for shares.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is
taken, written notice of his intent to demand payment for his shares if
the proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1
and NRS 92A.400 is not entitled to payment for his shares under this
chapter.
NRS 92A.430 Dissenter's notice: Delivery to stockholders entitled to assert
rights; contents.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall
deliver a written dissenter's notice to all stockholders who satisfied the
requirements to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and
when certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the
demand for payment is received;
(c) Supply a form for demanding payment that includes the date of
the first announcement to the news media or to the stockholders of the
terms of the proposed action and requires that the
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person asserting dissenter's rights certify whether or not he acquired
beneficial ownership of the shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
NRS 92A.440 Demand for payment and deposit of certificates; retention of
rights of stockholder.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for
this certification; and
(c) Deposit his certificates, if any, in accordance with the terms
of the notice.
2. The stockholder who demands payment and deposits his certificates,
if any, before the proposed corporate action is taken retains all other
rights of a stockholder until those rights are canceled or modified by the
taking of the proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter.
NRS 92A.450 Uncertificated shares: Authority to restrict transfer after
demand for payment; retention of rights of stockholder.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares
not represented by a certificate retains all other rights of a stockholder
until those rights are canceled or modified by the taking of the proposed
corporate action.
NRS 92A.460 Payment for shares: General requirements.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced
by the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its
registered office in this state, of the county where the dissenter
resides or has its registered office. The court shall dispose of the
complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a
fiscal year ending not more than 16 months before the date of payment, a
statement of income for that year, a statement of changes in the
stockholders' equity for that year and the latest available interim
financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under
NRS 92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
NRS 92A.470 Payment for shares: Shares acquired on or after date of
dissenter's notice.
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1. A subject corporation may elect to withhold payment from a
dissenter unless he was the beneficial owner of the shares before the date
set forth in the dissenter's notice as the date of the first announcement
to the news media or to the stockholders of the terms of the proposed
action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate
of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment
pursuant to NRS 92A.480.
NRS 92A.480 Dissenter's estimate of fair value: Notification of subject
corporation; demand for payment of estimate.
1. A dissenter may notify the subject corporation in writing of his
own estimate of the fair value of his shares and the amount of interest
due, and demand payment of his estimate, less any payment pursuant to NRS
92A.460, or reject the offer pursuant to NRS 92A.470 and demand payment of
the fair value of his shares and interest due, if he believes that the
amount paid pursuant to NRS 92A.460 or offered pursuant to NRS 92A.470 is
less than the fair value of his shares or that the interest due is
incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for
his shares.
NRS 92A.490 Legal proceeding to determine fair value: Duties of subject
corporation; powers of court; rights of dissenter.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding
within the 60-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it
shall commence the proceeding in the county where the registered office of
the domestic corporation merged with or whose shares were acquired by the
foreign entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the
proceeding as in an action against their shares. All parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or any amendment thereto. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to
a judgment:
(a) For the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his
after-acquired shares for which the subject corporation elected to
withhold payment pursuant to NRS 92A.470.
NRS 92A.500 Legal proceeding to determine fair value: Assessment of costs
and fees.
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1. The court in a proceeding to determine fair value shall determine
all of the costs of the proceeding, including the reasonable compensation
and expenses of any appraisers appointed by the court. The court shall
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters
if the court finds the subject corporation did not substantially comply
with the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor
of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously or not in
good faith with respect to the rights provided by NRS 92A.300 to
92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and
that the fees for those services should not be assessed against the subject
corporation, the court may award to those counsel reasonable fees to be
paid out of the amounts awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the
proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P.
68 or NRS 17.115.
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ANNEX C
[BEAR, STEARNS & CO. INC. LETTERHEAD]
[BEAR, STEARNS & CO. INC. LOGO]
September 13, 1999
The Special Committee of the Board of Directors
Herbalife International, Inc.
1800 Century Park East
Los Angeles, CA 90067
Gentlemen:
We understand that Herbalife International, Inc. ("Herbalife") and one or
more entities directly or indirectly controlled by Mark Hughes (the "Principal
Shareholder") propose to enter into a merger agreement dated September 13, 1999,
(the "Agreement") pursuant to which all outstanding shares of Class A and Class
B common stock of Herbalife other than those already owned by the Principal
Shareholder will receive $17.00 per share in cash (the "Consideration to be
Received") by means of a tender offer (the "Tender Offer") followed by a
subsequent merger (the "Merger"). The Agreement also provides for the cashing
out of each outstanding option to acquire Herbalife common stock (other than
those held by the Principal Shareholder) at a price equal to $17.00 per share
less the applicable exercise price of such option. Further, the Agreement calls
for Herbalife to make certain loans (which may be forgiven under certain
circumstances) to the Principal Shareholder in the aggregate amount of
approximately $215 million (such series of transactions herein collectively
referred to as the "Transaction"). You have provided us with a copy of the
Agreement in substantially final form. We note that although the Principal
Shareholder controls a majority of the Class A and Class B common stock, the
Agreement provides for a condition to the Transaction that requires holders of
at least a majority of the outstanding shares of each class of Herbalife common
stock not owned by the Principal Shareholder to tender such shares in the Tender
Offer. The Agreement also provides for the right for holders of Class A and
Class B common stock to dissent and receive appraised value for their shares.
You have asked us to render our opinion as to whether the Consideration to
be Received is fair, from a financial point of view, to the shareholders of
Herbalife, excluding the Principal Shareholder.
In the course of performing our review and analyses for rendering this
opinion, we have:
- reviewed the Agreement;
- reviewed Herbalife's Annual Reports to Shareholders and Annual Reports on
Form 10-K for the years ended December 31, 1996 through 1998, and its
Quarterly Reports on Form 10-Q for the periods ended March 31, 1999 and
June 30, 1999;
- reviewed certain operating and financial information, including
projections, provided to us by management relating to Herbalife's
business and prospects;
- met with certain members of Herbalife's senior management to discuss
Herbalife's business, operations, historical and projected financial
statements and future prospects;
- reviewed the historical prices, valuation parameters and trading volumes
of the Class A and Class B common stock of Herbalife;
- reviewed publicly available financial data, stock market performance data
and valuation parameters of companies which we deemed generally
comparable to Herbalife;
- reviewed the terms of recent acquisitions of companies which we deemed
generally comparable to Herbalife;
- performed discounted cash flow analyses based on the projections for
Herbalife furnished to us; and
- conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
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The Special Committee of the Board of Directors of
Herbalife International, Inc.
Page 2
We have relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information, including
without limitation the projections provided to us by Herbalife. With respect to
Herbalife's projected financial results, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the senior management of Herbalife as to the expected future
performance of Herbalife. We have not assumed any responsibility for the
independent verification of any such information or of the projections provided
to us, and we have further relied upon the assurances of the senior management
of Herbalife that they are unaware of any facts that would make the information
and projections provided to us incomplete or misleading. In arriving at our
opinion, we have not performed or obtained any independent appraisal of the
assets or liabilities of Herbalife, nor have we been furnished with any such
appraisals.
We note that the Principal Shareholder owns a majority of the shares of
Class A and Class B common stock of Herbalife. We also note that the Principal
Shareholder has represented to us and to the Special Committee of the Board of
Directors of Herbalife (the "Special Committee") that he has no intention of
selling any of his holdings of Herbalife common stock. Accordingly, we have not
solicited, nor were we asked to solicit, third party acquisition interest in
Herbalife. We have assumed that the representations and warranties made in the
Agreement are true and that the Transaction (including the Merger) will be
completed in accordance with the terms of the Agreement. Our opinion is
necessarily based on economic, market and other conditions, and the information
made available to us, as of the date hereof.
We have acted as a financial advisor to the Special Committee in connection
with the Transaction and have received a fee for such services. In the ordinary
course of business, Bear Stearns may actively trade the equity and debt
securities of Herbalife for our own account and for the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
It is understood that this letter is intended for the benefit and use of
the Special Committee and does not constitute a recommendation to the Special
Committee or any holders of Herbalife common stock as to whether to tender their
shares in the Tender Offer or how to vote in connection with the Merger. This
opinion does not address Herbalife's underlying business decision to pursue the
Transaction. This letter is not to be used for any other purpose, or reproduced,
disseminated, quoted to or referred to at any time, in whole or in part, without
our prior written consent; provided, however, that this letter may be included
in its entirety in any tender offer document or proxy statement to be
distributed to the holders of Herbalife common stock in connection with the
Transaction.
Based on and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be Received is fair, from a financial point of
view, to the shareholders of Herbalife, excluding the Principal Shareholder.
Very truly yours,
BEAR, STEARNS & CO. INC.
By: /s/ DAVIES B. BELLER
----------------------------------
Davies B. Beller
Senior Managing Director
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<PAGE> 94
ANNEX D
WRITTEN CONSENT OF THE HOLDERS OF
A MAJORITY OF THE
CLASS A COMMON STOCK OF
HERBALIFE INTERNATIONAL, INC.
A NEVADA CORPORATION
Pursuant to the authority of Section 78.320(2) of Nevada Revised Statutes
(the "NRS"), the undersigned, being the holders of a majority of the outstanding
shares of Class A Common Stock of Herbalife International, Inc., a Nevada
corporation, do hereby dispense with the formality of a meeting and consent to
and adopt the following recitals and resolutions:
WHEREAS, the Board of Directors of this corporation, acting pursuant
to the recommendation of a Special Committee, has approved the Merger
Agreement and the Merger (each as hereinafter defined); and
WHEREAS, Chapter 92A of Nevada Revised Statutes ("NRS") requires
approval of the holders of a majority of the outstanding shares of Class A
Common Stock of this corporation ("Class A Stock") for consummation of the
Merger; and
WHEREAS, the Merger Agreement in the form approved by the Board of
Directors has been provided to the holders of the Class A Stock signatories
hereto; and
WHEREAS, the Merger Agreement provides for all stockholders of this
corporation, other than Mark Hughes and entities controlled and
beneficially owned by him, directly and indirectly (the "Continuing
Stockholder"), to receive in cancellation of their shares of this
corporation, $17.00 per share (the "Merger Consideration"); and
WHEREAS, the Merger Agreement provides for dissenters' rights for
stockholders who comply with the provisions of the NRS, as further
specified in the Merger Agreement; and
WHEREAS, the Merger Agreement further provides that the Merger will be
preceded by a tender offer (the "Offer") for all outstanding shares of this
corporation's common stock (the "Shares"), at a price of $17.00 per share
net to the seller in cash; and
WHEREAS, the Continuing Stockholder has agreed pursuant to an Equity
Commitment letter dated September 10, 1999, among other things, not to
tender its Shares in the Offer, and to ensure that none of its Shares shall
be subject to cancellation in exchange for the Merger Consideration in the
Merger.
WHEREAS, it is deemed to be advisable and in the best interests of
this corporation and its stockholders to enter into the Merger Agreement
and consummate the Merger.
NOW, THEREFORE, BE IT RESOLVED, that MH Millennium Acquisition Corp.,
a Nevada corporation ("Purchaser"), be merged with and into this
corporation with this corporation being the surviving corporation (the
"Merger"), on the terms, and subject to the conditions, set forth in the
Merger Agreement;
RESOLVED FURTHER, that the Agreement and Plan of Merger (the "Merger
Agreement") dated as of September 13, 1999, among MH Millennium Holdings,
LLC, a Delaware limited liability company, Purchaser, Mark Hughes, the Mark
Hughes Family Trust and this corporation, and the form, terms and
provisions thereof, in substantially the form approved by the Board of
Directors and provided to the holders of the Class A Common Stock
signatories hereto be, and they hereby are, authorized and approved;
RESOLVED FURTHER, this corporation enter into the Merger Agreement and
consummate the Merger.
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<PAGE> 95
RESOLVED FURTHER, that this corporation and its Board of Directors is
authorized and directed, on behalf of the undersigned, to make all
necessary filings with state and federal governmental agencies, including
without limitation, the Secretary of State of the State of Nevada, in
connection with the Merger, and to file this Written Consent and any
related Articles of Merger, as may be necessary, with the same.
This Written Consent shall be filed in the Minute Book of this corporation
and shall become a part of the records of this corporation.
Dated as of September 13, 1999.
MH HOLDINGS II, LLC,
By: THE MARK HUGHES FAMILY TRUST, as
managing member
By: /s/ MARK HUGHES
------------------------------------
Mark Hughes, sole trustee
THE MARK HUGHES FAMILY TRUST
By: /s/ MARK HUGHES
------------------------------------
Mark Hughes, sole trustee
/s/ MARK HUGHES
--------------------------------------
Mark Hughes, an individual
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