<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------
Commission file number 333-52534
GLOBAL HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267801
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
987 N. Enterprise Street
Orange, California 92867
(Address and zip code of principal executive offices)
(714) 633-2320
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
*Yes /x/ No / /
*Registrant has been subject to this filing registration since August 12, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
As of November 15, 1998...531,915 Shares of Global Health Sciences, Inc. Common
Stock, par value $0.01 per share, were outstanding.
<PAGE>
Additional Registrants
<TABLE>
<CAPTION>
Address, including
Primary Standard Commission zip code and
Exact name of State or other Industrial File No./ telephone number
Registrant as jurisdiction of No. of Classification IRS Employer area code of
specified in its Incorporation or Shares Code Number Identification registrant's principal
Charter organization Outstanding No. executive officer
- ------------------- -------------------- ------------- ------------------ ---------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Global Health
Sub., Inc.... California 100 2833 33-0801650 987 N. Enterprise St.
Orange, California 92867
(714) 633-2320
Raven Industries
Inc. ...
California 100 2833 33-0042849 987 N. Enterprise St.
Orange, California 92867
(714) 633-2320
West Coast Sales
Inc.... California 100 2833 33-0554820 987 N. Enterprise St.
Orange, California 92867
(714) 633-2320
Dynamic Products ...
California 100 2833 33-023847 987 N. Enterprise Street
Orange, California 92867
(714) 633-2320
D&F Industries,
Inc. ...
California 100 2833 33-0801652 987 N. Enterprise Street
Orange, California 92867
(714) 633-2320
</TABLE>
2
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Reference
--------------
<S> <C>
COVER PAGE..................................................................... 1
INDEX.......................................................................... 3
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 1998 and
1997 5
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II--OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES.................................................................... 20
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................. $ 22,768 $ 3,768
Accounts Receivable ....................................................... 5,768 2,864
Inventories ............................................................... 11,741 8,040
Prepaid expenses and other current assets ................................. 1,395 80
---------- ------------
Total current assets ...................................................... 41,672 14,752
Property and equipment, net ............................................... 5,862 1,983
Intangibles and other assets, net ......................................... 135,082 --
---------- ------------
Total ................................................................ $ 182,616 $ 16,735
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable and accrued expenses ..................................... $ 16,812 $ 8,720
Accrued Interest Payable .................................................. 10,863 --
Line of credit ............................................................ -- 420
---------- ------------
Total current liabilities ................................................. 27,675 9,140
Long-term debt ............................................................ 218,667 --
---------- ------------
Total liabilities .................................................... 246,342 9,140
---------- ------------
Commitments and contingencies
Stockholders' Equity (Deficit):
Common Stock .............................................................. 473 1,026
Retained earnings (deficit) ............................................... (64,199) 6,569
---------- ------------
Total stockholders' equity (deficit) ...................................... (63,726) 7,595
---------- ------------
Total ................................................................ $ 182,616 $ 16,735
---------- ------------
---------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales................................................. $ 42,452 $ 21,964 $ 106,382 $ 63,322
Cost of Sales............................................. 30,072 13,866 74,039 40,373
-------------- -------------- -------------- --------------
Gross Profit.............................................. 12,380 8,098 32,343 22,949
Selling, general and administrative expenses.............. 3,456 1,963 8,123 5,203
Amortization of Intangibles............................... 6,701 -- 8,973 --
-------------- -------------- -------------- --------------
Operating income.......................................... 2,223 6,135 15,247 17,746
Interest expense, net..................................... 6,464 (20) 11,335 (68)
-------------- -------------- -------------- --------------
Income (loss) before income taxes......................... (4,241) 6,155 3,912 17,814
Provision for state income taxes.......................... 37 95 193 270
-------------- -------------- -------------- --------------
Net income (loss)......................................... $ (4,278) $ 6,060 $ 3,719 $ 17,544
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 3,719 $ 17,544
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization ...................... 9,597 106
Change in assets and liabilities:
Increase (decrease) in:
Accounts receivable ................................ 87 (775)
Inventories ........................................ 316 (3,331)
Prepaid expenses and other current assets .......... (921) 103
Accounts payable and accrued liabilities ........... (1,388) 2,494
Accrued Interest ................................... 10,863 --
------------ ------------
Net cash provided by operating activities .......... 22,273 16,141
------------ ------------
Cash flows from investing activities:
Purchases of Property and equipment ................ (1,785) (80)
Purchase of Omni-Pak and Affiliates,
net of cash acquired of $2,640 ..................... (135,227) --
------------ ------------
Net cash provided by (used in) investing activities (137,012) (80)
------------ ------------
Net cash provided by (used in) financing activities:
Repurchase of common stock ......................... (62,575) --
Dividends paid ..................................... (14,114) (17,678)
Issuance of Notes Due 2008 ......................... 218,502 --
Debt issue costs ................................... (7,654) --
Net repayment of line of credit .................... (420) --
------------ ------------
Net cash provided by (used in) financing activities 133,739 (17,678)
------------ ------------
Increase in cash ................................... 19,000 (1,617)
Cash at beginning of period ........................ 3,768 4,571
------------ ------------
Cash at end of period .............................. $ 22,768 $ 2,954
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Global Health Sciences, Inc. (Formerly D&F Industries)
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - THE REORGANIZATION
On April 23, 1998, D&F Industries ("D&F," the predecessor), Raven d/b/a
Omni-Pak Industries ("Omni-Pak"), Dynamic Products Inc. ("Dynamic") and West
Coast Sales ("West Coast") entered into a reorganization agreement pursuant to
which (a) D&F changed its name to Global Health Sciences, Inc., (b) Global
Health Sciences, Inc. formed a new subsidiary, Global Health Sub, Inc. ("Global
Sub"), (c) Global Sub formed four new subsidiaries named D&F Industries, Inc.
("D&F Sub"), Raven Sub, Inc. ("Omni-Pak Merger Sub"), New West Coast Sales, Inc.
("West Coast Merger Sub") and Dynamic Sub, Inc. ("Dynamic Merger Sub"), (d)
Global Health Sciences, Inc. transferred to D&F Sub all of its assets and
liabilities except for its obligation under the 11% Senior Notes due 2008 (the
"Notes") and the common stock of Global Sub, (e) Global Health Sciences, Inc.
through Global Sub acquired Omni-Pak, Dynamic and West Coast (together referred
to as Omni-Pak and Affiliates) from their respective shareholders for
approximately $137.9 million in cash and expenses (the "Acquisition"), in
transactions accounted for under the purchase method of accounting pursuant to
the mergers of Omni-Pak Merger Sub and Omni-Pak (with Omni-Pak as the surviving
corporation), Dynamic Merger Sub and Dynamic (with Dynamic as the surviving
corporation), and West Coast Sub and West Coast (with West Coast as the
surviving corporation) and (f) the shareholders of Global Health Sciences, Inc.
received approximately $58.7 million in cash to repurchase approximately 543,000
outstanding shares from its stockholders (the "Recapitalization"). The above
transactions were financed principally through the sale of $225 million in
aggregate principal amount of the Notes, the net proceeds of which were
approximately $210.8 million. The transactions described above are referred to
as the "Reorganization." A complete description of the above transactions is
contained within the Company's S-4 Registration Statement dated August 12, 1998.
In connection with the Reorganization, BGA Consulting was paid a fee of $2.4
million by the D&F and the Omni-Pak and Affiliate stockholders. The Company's
Chief Executive Officer, Mr. Paul Buxbaum, is the President of BGA Consulting.
The financial statements presented for the 1997 periods are those of D&F.
The statement of operations and cash flows for the interim periods ended
September 30, 1998, include those of D&F through April 23, 1998, the date of the
Reorganization and those of Global Health Sciences, Inc. (which include the
operations of D&F and Omni-Pak and Affiliates), subsequent to April 23, 1998.
The following is summarized pro forma operating results assuming that the
Reorganization had occurred as of the beginning of the periods presented,
including the effect of the Acquisition, the Recapitalization and the issuance
of the Notes:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales............................................. $ 42,452 $ 45,256 $ 137,152 $ 131,045
Operating income.................................. 2,223 6,829 11,720 16,956
Interest expense and other........................ (6,464) (6,399) (19,337) (19,270)
Net income (loss)................................. (4,278) 225 (7,929) 641
</TABLE>
7
<PAGE>
Global Health Sciences, Inc. (Formerly D&F Industries)
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - THE REORGANIZATION (continued)
Acquisition - The Acquisition has been accounted for under the purchase
method of accounting. The purchase price consists of $136.9 million of cash and
$1 million of estimated transaction costs and is being allocated to Omni-Pak and
Affiliates assets and liabilities based on their respective values as of the
closing date. Although the final allocation has not been determined, it is
expected that substantially all of the excess of purchase price over the
approximate $1.4 million of net asset value at the closing date, will be
allocated to customer contracts, customer lists, goodwill and other intangibles.
The Notes - As described above, the Company issued $225 million of Notes due
2008, the net proceeds of which were approximately $210.8 million. Expenses
related to the issuance of the Notes were approximately $7.7 million. The stated
interest rate on the Notes is 11%. The Notes were issued at a discount of $6,608
million for an effective rate of approximately 11.5%. The indenture places
certain limitations on, among other things, incurrence of additional debt,
acquisitions, investments and dividends.
Acquisition Facility - Effective April 23, 1998, the Company entered into a
new credit agreement (the "Acquisition Facility"), which provides for borrowings
of up to $50 million under a line of credit through April 2003, of which no more
than $10 million is available for working capital and general corporate
purposes. Under the Acquisition Facility, borrowings bear interest at the
Company's election either at the bank's prime rate plus certain margins, which
range from 75 to 150 basis points or at LIBOR plus certain margins, which range
from 200 to 275 basis points. The Acquisition Facility requires the Company to
maintain consolidated financial ratios related to leverage, consolidated EBITDA,
cash interest coverage and fixed charge coverage. In addition, the Acquisition
Facility limits the amount of annual capital expenditures and cash dividends.
Also, the Acquisition Facility places certain limitations on the ability of the
Subsidiary Guarantors to make distributions to Global Health Sciences Inc.,
although distributions to the Company to cover scheduled principal and interest
payments on the Notes are expressly permitted. There was no borrowing under the
Acquisition Facility at September 30, 1998.
NOTE 2 - BASIS OF PRESENTATION
General - The condensed consolidated financial statements as of, and for the
periods ended September 30, 1998, include the accounts of Global Health
Sciences, Inc. and its wholly-owned subsidiaries (together referred to herein as
the "Company"). Global Health Sciences, Inc. is a holding Company with no
independent operations other than its investments in its subsidiaries,
principally D&F and Omni-Pak and Affiliates. Pursuant to the indenture, Global
Health Sciences, Inc.'s subsidiaries (the "Subsidiary Guarantors"), have jointly
and severally guaranteed the Notes on a full and unconditional basis. Separate
financial statements related to the Subsidiary Guarantors are not included
herein, as the management of Global Health Sciences, Inc. has determined that
the separate financial statements of the Subsidiary Guarantors are not material
to investors. All significant intercompany balances and transactions have been
eliminated in consolidation.
Interim Period Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
8
<PAGE>
Global Health Sciences, Inc. (Formerly D&F Industries)
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
NOTE 3 - INVENTORIES
Inventories at September 30, 1998 consist of the following (amounts in
thousands):
<TABLE>
<S> <C>
Raw materials $ 8,464
Work in process 1,640
Finished goods 1,637
-----------
$ 11,741
------------
------------
</TABLE>
NOTE 4 - INTANGIBLES AND OTHER ASSETS
Other assets at September 30, 1998 consist of the following (amounts in
thousands):
<TABLE>
<S> <C>
Goodwill and other intangibles, net $127,511
Deferred financing costs, net 7,571
-----------
$135,082
------------
------------
</TABLE>
Accumulated amortization of goodwill and other intangibles was $8,973,000, and
accumulated amortization of deferred financing costs was $359,000.
During the quarter ended September 30, 1998, the Company continued to perform a
thorough analysis to determine the components of the purchase price and their
respective lives. Although the analysis is still incomplete, the Company
believes that a significant component of the purchase price will be allocated to
customer contracts and customer lists. Such assets are expected to have a
composite life of five years.
In addition, the Company has been assessing the appropriate amortization period
for goodwill and has determined that the customer concentration creates a lack
of certainty about the Company's ability to sustain its revenue stream beyond
five years. The Company believes that an amortization period of five years for
goodwill is appropriate and began using a five-year period for amortization of
goodwill, effective July 1, 1998. The effect of the change in the quarter was to
increase amortization expense by $3,294,000.
9
<PAGE>
Global Health Sciences, Inc. (Formerly D&F Industries)
Notes to the Condensed Consolidated Financial Statements (Continued)
NOTE 5 - NEW ACCOUNTING STANDARDS
In September 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." Statement of Financial Accounting
Standards ("SFAS") No. 130 establishes new standards for reporting and
displaying comprehensive income, its components and accumulated balances. The
statement, which the Company adopted in the first quarter of 1998, establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. There are no adjustments
between net income and comprehensive income for the periods presented.
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information." The Company is required to
adopt this statement as of December 31, 1998. SFAS No. 131 requires disclosure
of certain information regarding operating segments, products and services,
geographic areas of operations and major customers. The Company has not analyzed
the impact of adopting this statement.
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement will be effective January 1,
2000. The Company has not yet analyzed the impact of adopting the statement.
NOTE 6 - COMMITMENTS & CONTIGENCIES
On March 31, 1998, the Company was named as a defendant in an action originally
filed on September 13, 1997 by John W. Rowles against Mr. Mark Hughes, Herbalife
and an Herbalife distributor. The plaintiff alleges that a product manufactured
by the Company for Herbalife was defective and unsafe for its intended use and
caused harm to the plaintiff. The plaintiff is claiming an unspecified amount of
damages, including a claim for punitive damages. The lawsuit is in its
preliminary stages of discovery and an estimate of the range of loss, if any,
cannot be made at this time. The Company believes, however, that liability, if
any is incurred, will not be material to the Company's results of operations or
financial condition. In addition, the Company has appropriate product liability
insurance.
NOTE 7 - REPURCHASE OF COMMON SHARES
In late September 1998, the Company repurchased 36,767 shares of its common
stock for $3.9 million in cash.
NOTE 8 - ACQUISITIONS
In August 1998 the Company entered into a non-binding letter of intent to
acquire certain assets of another manufacturer of dietary and nutritional
supplement products. Negotiations for this transaction continue. In addition, in
October 1998 the Company entered into a non-binding letter of intent to acquire
a supplier of raw materials to the Company and other manufacturers. Both
acquisitions are subject to, among other conditions, satisfactory completion of
the Company's due diligence and the execution of definitive agreements. There
can be no assurance that definitive agreements will be signed with either
company or if either acquisition will be completed. However, the Company hopes
to close the transactions by year end.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Prior to its Reorganization Global Health Sciences Inc.'s (the "Company")
operations were conducted by four subchapter S corporations: D&F Industries
("D&F"), Raven d/b/a Omni-Pak Industries, Dynamic Industries and West Coast
Sales (Omni-Pak and Affiliates). Together these companies are one of the world's
leading developers and custom manufacturers of dietary and nutritional
supplements. These companies develop specialty products for branded distribution
companies, branded retailers, television marketing companies and network
marketing organizations who then distribute such products throughout the world.
These companies were reorganized in (the "Reorganization") to consolidate
related and complementary business activities under one holding company, Global
Health Sciences, Inc. (see note 1 to the financial statements). These companies
(together the "Combined Companies") historically operated under common
management and had a high degree of common ownership, customers and systems,
including similar accounting and financial reporting systems. As subchapter S
corporations, all federal and state income taxes (other than a minimum state
income tax of 1.5%) for each of such corporations are paid directly by the
shareholders. The Company makes quarterly distributions to its shareholders in
order for such shareholders to pay their state and federal income taxes. In
1997, the effective income tax rate for the Company's shareholders was
approximately 45%. The Company has historically distributed, and intends to
continue to distribute, as a dividend to its shareholders amounts sufficient for
the shareholders to pay their required income taxes.
The Combined Company's historical growth in sales and EBITDA has been primarily
attributable to increased sales to Herbalife, the Combined Company's largest
customer. Sales to Herbalife have increased from approximately $70. 5 million in
fiscal year 1995, representing approximately 83% of the Combined Company's sales
in that year, to approximately $137.6 million in fiscal year 1997, representing
approximately 76% of the Combined Company's sales in that year. Due to the
significant percentage of the Combined Company's sales attributable to
Herbalife, fluctuations in Herbalife's inventory levels or inaccurate sales
forecasting by Herbalife have had adverse effects on Combined Company sales in
the past and could have adverse effects in the future. Effective January 1998,
the Combined Company and Herbalife entered into three new three-year supply
agreements. These agreements, among other items, provide prices discounted from
the previous arrangements, (ii) allow Herbalife to purchase certain products
from manufacturers other than the Combined Company, subject to minimum purchase
requirements, and (iii) a right of termination without prior consent if Mr.
Marconi ceases to own more than 50% of the capital stock of the Company or is no
longer an executive officer of the Company and responsible for the day to day
operations. The Combined Company's sales to Herbalife for the Nine months ended
September 30, 1998 were approximately $84.1 million or 61% of total sales.
The Company's cost of sales consists primarily of labor costs, materials and
manufacturing overhead. The Company's selling, general and administrative
expenses consist primarily of salaries and wages, sales commissions,
professional fees and rent. The Company does not anticipate that, as a
percentage of sales, future selling, general and administrative expenses
incurred in connection with implementing its growth strategy will be materially
different from historical percentages. There can be no assurance, however, in
this regard.
11
<PAGE>
Results of Operations
The following tables summarize historical operating results for Global Health
Sciences, Inc. (formerly D&F Industries Inc.) and display supplemental operating
results for Omni-Pak and Affiliates for the periods prior to their acquisition
on April 23, 1998, as well as supplemental combined operating results for the
periods presented. In addition, supplemental sales and gross profit information
is being presented for Global Health's operating subsidiaries D&F Industries,
and Omni-Pak Industries and Affiliates. Management believes that the
supplemental information is necessary for meaningful comparisons of period - to
- - period operating results as such information is representative of the
Company's underlying business and cash flows. As discussed herein, the Combined
Company refers to the Supplemental Combined information presented in the
accompanying tables.
Historical Information
(Amounts in thousands)
Statement of Income Data:
(Three months ended September 30, 1998)
<TABLE>
<CAPTION>
Historical
September 30,1998
Global Health
Sciences
<S> <C>
Revenues .......................... $ 42,452
Cost of Sales ..................... 30,072
--------
Gross Profit ...................... 12,380
Selling, general and administrative 3,456
Amortization of intangibles assets 6,701
--------
Operating income .................. 2,223
Interest expense, net ............. 6,464
--------
Loss before state taxes ........... (4,241)
Provision for state income taxes .. 37
--------
Net loss .......................... $ (4,278)
--------
--------
EBITDA (2) ........................ $ 9,165
EBITDA margin (2) ................. 21.6%
</TABLE>
12
<PAGE>
Supplemental Combined Information
(Amounts in thousands)
Statement of Income Data:
(Three months ended September 30, 1997)
<TABLE>
<CAPTION>
Historical
September 30,1997 Historical
Global Health September 30, 1997
Sciences Omni-Pak &
(Formerly D&F) Affiliates Combined (1)
-------------------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues........................................ $ 21,964 $ 23,968 $ 45,256
Cost of Sales................................... 13,866 15,223 28,413
-------------------- --------------------- ---------------------
Gross Profit.................................... 8,098 8,745 16,843
Selling, general and administrative............. 1,963 1,226 3,189
Amortization of intangibles assets.............. -- -- --
-------------------- --------------------- ---------------------
Operating income................................ 6,135 7,519 13,654
Interest (income), net.......................... (20) (45) (65)
-------------------- --------------------- ---------------------
Income before state taxes....................... 6,155 7,564 13,719
Provision for state income taxes................ 95 110 205
-------------------- --------------------- ---------------------
Net income...................................... $ 6,060 $ 7,454 $ 13,514
-------------------- --------------------- ---------------------
-------------------- --------------------- ---------------------
EBITDA (2) $ 13,782
EBITDA margin (2) 30.2%
</TABLE>
13
<PAGE>
Supplemental Combined Information
(Amounts in thousands)
Statement of Income Data:
(Nine months ended September 30, 1998)
<TABLE>
<CAPTION>
Historical January 1, 1998
September 30, 1998 to April 23, 1998
Global Health Omni-Pak &
Sciences Affiliates Combined (1)
------------------- ------------------ ------------
<S> <C> <C> <C>
Revenues .......................... $106,382 $ 31,146 $137,152
Cost of Sales ..................... 74,039 21,386 95,049
-------- -------- --------
Gross Profit ...................... 32,343 9,760 42,103
Selling, general and administrative 8,123 1,912 10,035
Amortization of intangible assets . 8,973 -- 8,973
-------- -------- --------
Operating income .................. 15,247 7,848 23,095
Interest (income) expense, net .... 11,335 (42) 11,293
-------- -------- --------
Income before state taxes ......... 3,912 7,890 11,802
Provision for state income taxes .. 193 119 312
-------- -------- --------
Net income ........................ $ 3,719 $ 7,771 $ 11,490
-------- -------- --------
-------- -------- --------
EBITDA (2) ........................ $ 32,737
EBITDA margin (2) ................. 23.9%
Statement of Income Data:
(Nine months ended September 30, 1997)
<CAPTION>
Historical
September 30, 1997 Historical
Global Health September 30, 1997
Sciences Omni-Pak &
(Formerly D&F) Affiliates Combined (1)
------------------ ------------------- -------------
<S> <C> <C> <C>
Revenues .......................... $ 63,322 $ 68,808 $ 131,045
Cost of Sales ..................... 40,373 44,951 84,239
--------- --------- ---------
Gross Profit ...................... 22,949 23,857 46,806
Selling, general and administrative 5,203 4,173 9,376
--------- --------- ---------
Operating income .................. 17,746 19,684 37,430
Interest (income), net ............ (68) (53) (121)
--------- --------- ---------
Income before state taxes ......... 17,814 19,737 37,551
Provision for state income taxes .. 270 293 563
--------- --------- ---------
Net income ........................ $ 17,544 $ 19,444 $ 36,988
--------- --------- ---------
--------- --------- ---------
EBITDA (2) ........................ $ 37,806
EBITDA margin (2) ................. 28.9%
</TABLE>
- ----------
(1) Combined operating results are shown net of eliminating entries.
(2) EBITDA is defined as net income before interest income (expense), income
taxes and depreciation and amortization. Management believes that EBITDA
and EBITDA margin are measures commonly used by analysts and investors to
determined a company's ability to service and incur debt. Accordingly, this
information has been presented to permit a more complete analysis. However,
EBITDA as reported may not be comparable to similarly titled measures used
by other companies. EBITDA margin is computed by dividing EBITDA by sales.
EBITDA should not be considered a substitute for net income or cash flow
data prepared in accordance with general accepted accounting principles or
as a measure of profitability or liquidity.
14
<PAGE>
Supplemental Combined Information
(Amounts in thousands)
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Sales. In the third quarter of 1998, sales decreased by $2.8 million or
6.2%, to $42.5 million compared to $45.3 million in the third quarter of 1997.
Combined Company sales to Herbalife were $25.0 million in the third quarter of
1998 as compared to $36.7 million in the third quarter of 1997. Sales to the
Combined Company's second largest customer, EAS, continue to grow with EAS'
continued growth.
Cost of sales and gross profit. Combined Company cost of sales increased by
$1.7 million, or 6.0%, to $30.1 million in the third quarter of 1998 compared to
$28.4 million in the third quarter of 1997. Cost of sales as a percentage of
sales increased to 70.8% in the third quarter of 1998 compared to 62.8% in the
third quarter of 1997, thereby decreasing the gross margin in the third quarter
of 1998 to 29.2% from 37.2% in the third quarter of 1997. The reduction in gross
margin principally was primarily due to price reductions given to Herbalife as a
result of the new supply agreements. The balance of the margin decline resulted
from changes in the Company's business mix.
Selling, general, and administrative expenses. Combined Company selling,
general and administrative expenses, excluding amortization of goodwill and
other intangibles of $6.7 million in 1998, increased by $0.3 million to $3.5
million in the third quarter of 1998 compared to $3.2 million in the third
quarter of 1997. As a percentage of sales, selling, general and administrative
expenses (excluding amortization of goodwill and other intangibles) increased by
1.2% to 8.2% in the third quarter of 1998 as compared to 7.0% in the third
quarter of 1997.
Net income. Combined Company net income decreased by $17.8 million to a net
loss of $4.3 million in the third quarter of 1998 compared to $13.5 million in
the third quarter of 1997. This decrease resulted primarily from a $4.4 million
decrease in gross margin, a $6.7 million increase in goodwill and other
intangibles amortization expense and $6.6 million increase in interest expense.
15
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Sales. In the first nine months of 1998, sales increased by $6.2 million or
4.7%, to $137.2 million compared to $131.0 million in the first nine months of
1997. Combined Company sales to Herbalife were $84.1 million in the first nine
months of 1998, as compared to $98.6 million in the first nine months of 1997.
Sales to the Combined Company's second largest customer, EAS, continue to grow
with EAS' continued growth.
Cost of sales and gross profit. Combined Company cost of sales increased by
$10.9 million, or 12.9%, to $95.1 million in the first nine months of 1998
compared to $84.2 million in the first nine months of 1997. Cost of sales as a
percentage of sales increased to 69.3% in the first nine months of 1998 compared
to 64.3% in the first nine months of 1997, thereby decreasing the gross margin
in the first nine months of 1998 to 30.7% from 35.7% in the first nine months of
1997. The reduction in gross margin was primarily due to price reductions given
to Herbalife as a result of the new supply agreements.
Selling, general, and administrative expenses. Selling, general and
administrative expenses, for the Combined Company, excluding amortization of
goodwill and other intangibles of $9.0 million in 1998, increased by $0.6
million to $10.0 million in the first nine months of 1998 compared to $9.4
million in the first nine months of 1997. As a percentage of sales, selling,
general and administrative expenses (excluding amortization of goodwill and
other intangibles) remained relatively constant at 7.3% compared to 7.2% in the
first nine months of 1997.
Net income. Combined Company net income decreased by $25.5 million to $11.5
million in the first nine months of 1998 compared to $37.0 million in the first
nine months of 1997. This decrease resulted primarily from a $4.7 million
decrease in gross margin, a $9.0 million increase in goodwill and other
intangibles amortization expenses and a $11.4 million increase in interest
expense.
Liquidity and Capital Resources
Cash and cash equivalents were $22.8 million at September 30, 1998 compared to
$3.8 million ($9.0 million for the Combined Company) at December 31, 1997.
Cash provided by operating activities for the periods ended September 30, 1998
and September 30, 1997 were $22.3 million and $16.1 million, respectively. The
increase is primarily the result of an increase in accounts payable of $2.3
million and an increase in accrued interest payable of $10.9. The major
operating uses for these periods resulted from changes in accounts receivable,
inventories, prepaid expenses and other current assets.
Cash used in investing activities for the period ended September 30, 1998 was
$137.0 million as a result of the purchase of Omni-Pak and Affiliates (see Note
2 to the Condensed Combined Financial Statements) and purchases of property and
equipment of $1.8 million.
Cash provided by financing activities for the period ended September 30, 1998
was $133.7 million. The cash was provided by the issuance of the senior debt of
$218.5 million. The primary uses of cash included the repurchase of
approximately 580,000 shares of the Company for $62.6 million, dividends of
$14.1 million and debt issuance costs in connection with the issuance of the
Notes of $7.7 million. Dividends paid by the Company were $14.1 million through
September 1998. The Company has elected S Corporation status for federal and
state tax purpose, and other than the 1.5% state tax, income tax is paid by its
shareholders. The Company distributes cash dividends to shareholders to pay
federal and state taxes.
16
<PAGE>
In addition, the Company has been assessing the appropriate amortization period
for goodwill and has determined that the customer concentration creates a lack
of certainty about the Company's ability to sustain its revenue stream beyond
five years. The Company believes that an amortization period of five years for
goodwill is appropriate and began using a five-year period for amortization of
goodwill, effective July 1, 1998. The effect of the change in the quarter was to
increase amortization expense by $3,294,000.
The Company signed a ten-year lease for a new manufacturing facility in Anaheim,
California. The facility is 300,000 square feet with an annual rental of
$1,250,000.
In August 1998 the Company entered into a non-binding letter of intent to
acquire certain assets of another manufacturer of dietary and nutritional
supplement products. Negotiations for this transaction continue. In addition, in
October 1998 the Company entered into a non-binding letter of intent to acquire
a supplier of raw materials to the Company and other manufacturers. Both
acquisitions are subject to, among other conditions, satisfactory completion of
the Company's due diligence and the execution of definitive agreements. There
can be no assurance that definitive agreements will be signed with either
company or if either acquisition will be completed. However, the Company hopes
to close the transactions by year end.
As described above, the Company issued $225 million of Notes due 2008, the net
proceeds of which were approximately $210.8 million. Expenses related to the
issuance of the Notes were approximately $7.7 million. The stated interest rate
on the Notes is 11%. The Notes were issued at a discount of $6.6 million for an
effective rate of approximately 11.5%. The indenture places certain limitations
on incurrence of additional debt, acquisitions, investments and dividends.
Effective April 23, 1998 the Company entered into a new credit agreement (the
"Acquisition Facility"), which provides for borrowings of up to $50 million
under a line of credit through April 2003, of which no more than $10 million is
available for working capital and general corporate purposes. Under the
Acquisition Facility, borrowings bear interest at the Company's election either
at the bank's prime rate plus certain margins, which range from 75 to 150 basis
points or at LIBOR plus certain margins, which range from 200 to 275 basis
points. The Acquisition Facility requires the Company to maintain financial
ratios related to leverage, consolidated EBITDA, cash interest coverage and
fixed charge coverage. In addition, the Acquisition Facility limits the amount
of annual capital expenditures and cash dividends. Also, the Acquisition
Facility places certain limitations on the ability of the Subsidiary Guarantors,
D&F Industries Inc. ("D&F") and Raven d/b/a Omni- Pak , West Coast Sales and
Dynamic Inc. ("Omni-Pak and Affiliates"), to make distributions to Global Health
Sciences Inc. ("the Company"), although distributions to the Company to cover
scheduled principal and interest payments on the Notes are expressly permitted.
The Company is in the process of replacing its computer software applications
and systems. The new systems will accommodate the "year 2000" dating changes
necessary to permit correct recording of year dates for 2000 and later years.
The cost of the new systems is expected to approximate $1 million. The Company
believes that it will be able to achieve compliance by the end of 1999, and does
not currently anticipate any material disruption of its operations as the result
of any failure by the Company to be in compliance. The Company does not
currently have any information concerning the compliance status of its
suppliers. Failure by the Company's suppliers to be in compliance could have a
material adverse effect to the Company.
17
<PAGE>
Statements which are not historical facts are forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere herein regarding
Year 2000 compliance and its effects, if any, if the Company is unable to
achieve such compliance and the Company's operations and financial position.
In addition, forward-looking statements generally can be identified by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue," or the negative thereof
or variations thereon or similar terminology. All such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement, including, with respect to Year 2000 compliance,
if the cost of compliance exceeds our estimates or if the failure of the
Company's suppliers to be Year 2000 compliant results in an adverse effect on
the Company's operations. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable at this time, it
can give no assurance that such expectations will prove to have been correct.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 31, 1998, the Company was named as a defendant in an action
originally filed on September 13, 1997 by John W. Rowles against Mr.
Mark Hughes, Herbalife and an Herbalife distributor. The plaintiff
alleges that a product manufactured by the Company for Herbalife was
defective and unsafe for its intended use and caused harm to the
plaintiff. The plaintiff is claiming an unspecified amount of damages,
including a claim for punitive damages. The lawsuit is in its
preliminary stages of discovery and an estimate of the range of loss,
if any, cannot be made at this time. The Company believes, however,
that liability, if any is incurred, will not be material to the
Company's results of operations or financial condition. In addition,
the Company has approximately $2 million in available product liability
insurance.
Item 4. None
Item 6. Exhibits
Financial Data Schedule for the quarter ended September 30, 1998, which
is submitted electronically to the Commission for information only.
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- --------- ---------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization dated as of April 23, 1998 by and among Global Health
Sciences, Inc., Global Health Sub, Inc., Raven Sub, Inc., Raven Industries, Dynamic Sub, Inc.,
Dynamic Products Inc, New West Coast Sales, Inc., West Coast Sales and Global Merger Sub, Inc.
4.1 Indenture, dated as of April 23, 1998, by and among the Registrants and Chase Manhattan Bank
and Trust Company, National Association, as trustee incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-4 (File No. 333-52539 (the "S-4))
4.2 Form of Notes (included in Exhibit 4.1)
4.3 Guarantees of Global Health Sub, Inc., Raven Industries, Inc., Dynamic Products Inc., West
Coast Sales and D&F Industries, Inc. under Indenture (included in Exhibit 4.1)
4.4 Credit Agreement dated as of April 23, 1998 among Global Health Sub, Inc., Global Health
Sciences, Inc., the Lenders party thereto, Citicorp USA, Inc., Citibank, N.A., and Bank of
America NT&SA (incorporated by reference to Exhibit 4-5 of the S-4)
4.5 Guaranty, Indemnity and Subordination Agreement dated as of April 23, 1998 among Global Health
Sciences, Inc., D&F Industries, Inc., Raven Industries, Inc., Dynamic Products Inc. and West
Coast Sales (incorporated by reference to Exhibit 4-6 of the S-4)
4.6 Pledge and Security Agreement dated as of April 23, 1998 by and among Global Health Sub, Inc.,
Global Health Sciences, Inc., D&F Industries, Inc., Raven Industries, Inc., Dynamic Products
Inc., West Coast Sales and Citicorp USA, Inc. (incorporated by reference to Exhibit 4-7 of the
S-4)
10.1 Employment Agreement dated as of April 23, 1998 by and between Global Health Sciences, Inc.
and Richard D. Marconi (incorporated by reference to Exhibit 10.4 of the S-4)
10.2 Employment Agreement dated as of April 23, 1998 by and between Global Health Sciences, Inc.
and Paul M. Buxbaum (incorporated by reference to Exhibit 10.5 of the S-4)
10.3 Employment Agreement dated as of April 23, 1998 by and between Global Health Sciences, Inc.
and Donald J. Lewis (incorporated by reference to Exhibit 10.6 of the S-4)
10.4 Consulting Agreement dated as of April 23, 1998 by and between Global Health Sciences, Inc.
and BGA Consulting (incorporated by reference to Exhibit 10.7 of the S-4)
10.5 Employment Agreement dated as of June 1, 1998 by and between Global Health Sciences, Inc. and
Howard Simon (incorporated by reference to Exhibit 10.8 of the S-4)
27 Financial Data Schedule for the quarter ended September 30, 1998, which is submitted
electronically to the Commission for information only
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998
Global Health Sciences, Inc.
Raven Industries, Inc.
West Coast Sales
Dynamic Products, Inc.
D&F Industries, Inc.
By: /s/ Paul M. Buxbaum
-------------------------------------
Paul M. Buxbaum
Chief Executive Officer
By: /s/ Donald J. Lewis
-------------------------------------
Donald J. Lewis
Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-01-1997 JAN-01-1998 JUL-01-1997 JUL-01-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998 SEP-30-1997 SEP-30-1998
<CASH> 8,307 22,768 8,307 22,768
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,549 5,902 5,549 5,902
<ALLOWANCES> 0 134 0 134
<INVENTORY> 11,483 11,741 11,483 11,741
<CURRENT-ASSETS> 25,555 41,072 25,565 41,072
<PP&E> 14,526 15,320 14,526 15,320
<DEPRECIATION> 9,703 9,458 9,703 9,458
<TOTAL-ASSETS> 30,377 182,616 30,577 182,616
<CURRENT-LIABILITIES> 17,527 27,675 17,327 27,675
<BONDS> 450 218,667 450 218,667
0 0 0 0
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<TOTAL-REVENUES> 131,045 137,152 21,964 42,452
<CGS> 84,239 95,049 13,866 30,072
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<OTHER-EXPENSES> 9,376 10,035 1,963 3,456
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (121) 11,293 20 (6,464)
<INCOME-PRETAX> 37,551 11,802 6,155 (4,241)
<INCOME-TAX> 563 312 95 37
<INCOME-CONTINUING> 36,988 11,490 6,060 (4,278)
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