<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 June 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 osutanding of each of the registrant's
classes of Common Stock, as of the lastest practicable date:
As of September 16, 1998...531,915 Shares of Global Health Sciences, Inc.
Common Stock, par value $0.01 per share, were outstanding.
<PAGE>
Additional Registrants
<TABLE>
<CAPTION>
Exact name of State or other Primary Standard Commission File Address, including zip code and
registrant as jurisdiction of No. of Industrial No./ telephone number area code of
specified in its Incorporation or Shares Classification IRS Employer registrant's principal executive
Charter organization Outstanding Code Number Identification No. officer
<S> <C> <C> <C> <C> <C>
987 N. Enterprise Street
Global Health California 100 2833 33-0801650 Orange, California 92867 (714)
Sub. Inc. 633-2320
987 N. Enterprise Street
Raven Industries California 100 2833 33-0042849 Orange, California 92867 (714)
Inc. 633-2320
987 N. Enterprise Street
West Coast Sales California 100 2833 33-0554820 Orange, California 92867 (714)
Inc. 633-2320
987 N. Enterprise Street
Dynamic Products California 100 2833 33-023847 Orange, California 92867 (714)
633-2320
987 N. Enterprise Street
D&F Industries California 100 2833 33-0801652 Orange, California 92867 (714)
Inc. 633-2320
</TABLE>
<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
June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Income
Threee and Six Months Ended June 30, 1998 and
1997 5
Condensed Consolidated Statements of Cash Flows
Three and Six Months Ended June 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 12
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>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,331 $ 3,768
Accounts Receivable 6,631 2,864
Inventories 12,369 8,040
Prepaid expenses and other current assets 844 80
--------- ---------
Total current assets 40,175 14,752
Property and equipment, net 4,963 1,983
Intangibles and other assets, net
141,722 --
Total
--------- ---------
$ 186,860 $ 16,735
--------- ---------
--------- ---------
Current Liabilities:
Accounts Payable and accrued expenses $ 21,806 $ 8,720
Line of credit -- 420
Total current liabilties --------- ---------
21,806 9,140
Long-term debt 218,502 --
--------- ---------
Total liabilities 240,308 9,140
Commitments and contingencies
Stockholders' Equity (Deficit):
Common Stock 508 1,026
Retained earnings (deficit) (53,956) 6,569
Total stockholders' equity (deficit) --------- ---------
(53,448) 7,595
--------- ---------
Total $ 186,860 $ 16,735
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) --------- ---------
--------- ---------
</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 Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 41,558 $ 22,437 $ 63,930 $ 41,358
Cost of Sales 28,372 14,373 43,967 26,507
-------- -------- -------- --------
Gross Profit 13,186 8,064 19,963 14,851
Selling, general and administrative expenses 2,917 1,704 4,667 3,240
Amortization of Intangibles 2,272 -- 2,272 --
-------- -------- -------- --------
Operating income 7,997 6,360 13,024 11,611
Interest (income) expense, net 4,909 (15) 4,871 (48)
-------- -------- -------- --------
Income before income taxes 3,088 6,375 8,153 11,659
Provision for state income taxes 80 97 156 175
-------- -------- -------- --------
Net income $ 3,008 $ 6,278 $ 7,997 $ 11,484
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ending
-----------------------
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,997 $ 11,484
Adjustments to reconcile net income to
net cash provided by (used in) operating activites:
Depreciation and amortization 2,810 30
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (778) (167)
Inventories (312) (1,988)
Prepaid expenses and other current assets (450) 88
Accounts payable and accrued liabilities 3,606 1,649
--------- ---------
Net cash provided by operating activities 12,873 11,096
--------- ---------
Cash flows from investing activties:
Purchases of Property and equipment (822) --
Purchase of Omni-Pak and Affiliates, net of cash
acquired of $2,640 (135,227) --
--------- ---------
Net cash provided by (used in) investing activities (136,049) --
--------- ---------
Net cash provided by (used in) financing activities:
Repurchase of common stock (58,700) --
Dividends paid (11,989) (10,905)
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 139,739 (10,905)
--------- ---------
Increase in cash 16,563 191
Cash at beginning of period 3,768 4,571
--------- ---------
Cash at end of period $ 20,331 $ 4,762
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to the 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 Affilate 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 June 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:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $47,858 $46,365 $94,699 $85,481
Operating income 8,619 10,191 16,616 16,962
Interest expense and other 6,413 6,569 12,892 13,082
Net income 2,033 3,410 3,635 3,719
</TABLE>
Acquisition - The Acquisition will be 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 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 $7.6 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.
There was no borrowing under the Acquisition Facility at June 30, 1998.
8
<PAGE>
NOTE 2 - BASIS OF PRESENTATION
General - The condensed consolidated financial statements as of, and for the
periods ended June 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 June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
NOTE 3 - INVENTORIES
Inventories at June 30, 1998 consist of the following (amounts in thousands):
<TABLE>
<S> <C>
Raw materials $ 8,760
Work in process 1,999
Finished goods 1,610
-------
$12,369
-------
-------
</TABLE>
9
<PAGE>
NOTE 4 - INTANGIBLES AND OTHER ASSETS
Other assets at June 30, 1998 consist of the following (amounts in thousands):
<TABLE>
<S> <C>
Goodwill and other intangibles, net $134,210
Deferred financing costs, net 7,512
--------
$141,722
--------
--------
</TABLE>
Accumulated amortization of goodwill and other intangibles was $2,271, and
accumulated amortization of deferred financing costs was $143.
NOTE 5 - NEW ACCOUNTING STANDARDS
In June 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 June 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 June 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 origingally
filed on June 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
10
<PAGE>
operations or financial condition. In addition, the Company has appropriate
product liability insurance.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Prior to its Reorganization Global Health Sciences Inc., (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 Affliates). 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 shreholders 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 recently 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 six months
ended June 30, 1998 were approximately $59.2 million or 63% of total sales.
12
<PAGE>
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.
13
<PAGE>
Results of Operations
The following tables summarize historical operating results for the Registrant,
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. 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.
Supplemental Combined Information
(Amounts in thousands)
Statement of Income Data:
(Three months ended June 30, 1998)
<TABLE>
<CAPTION>
April 1, 1998
Historical to April 23, 1998
Global Health Omni-Pak &
Sciences Affiliates Combined (1)
------------- ----------------- ------------
<S> <C> <C> <C>
Revenues $ 41,558 $ 6,717 $ 47,858
Cost of sales 28,372 4,898 32,853
-------- -------- --------
Gross profit 13,186 1,819 15,005
Selling, general & administrative 2,918 376 3,294
Amortization of intangible assets 2,271 -- 2,271
-------- -------- --------
Operating income 7,997 1,443 9,440
Interest income (expense), net (4,909) 8 (4,901)
-------- -------- --------
Income before state taxes 3,088 1,451 4,539
Provision for state income taxes 80 22 102
-------- -------- --------
-------- -------- --------
Net income $ 3,008 $ 1,429 $ 4,437
-------- -------- --------
-------- -------- --------
EBITDA (2) $ 12,048
EBITDA margin (2) 25%
</TABLE>
Statement of Income Data:
(Three months ended June 30, 1997)
<TABLE>
<CAPTION>
Historical Historical
June 30, 1997 June 30, 1997
Global Health Omni-Pak &
Sciences Affiliates Combined (1)
------------- ------------- ------------
<S> <C> <C> <C>
Revenues $ 22,437 $ 24,559 $ 46,364
Cost of sales 14,373 15,823 29,564
-------- -------- --------
Gross profit 8,064 8,736 16,800
Selling, general & administrative 1,704 1,493 3,197
-------- -------- --------
Operating income 6,360 7,243 13,603
Interest income (expense), net 15 (14) 1
-------- -------- --------
Income before state taxes 6,375 7,229 13,604
Provision for state income taxes 97 108 205
-------- -------- --------
Net income $ 6,278 $ 7,121 $ 13,399
-------- -------- --------
-------- -------- --------
EBITDA (2) $ 13,635
EBITDA margin (2) 29%
</TABLE>
<TABLE>
<CAPTION>
Combined Sales Combined Gross Profit
Three Months June 30, Three Months June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
D&F Industries $21,158 $22,437 $ 6,084 $ 8,065
Omni-Pak and Affiliates (net of eliminations) 26,700 23,927 8,921 8,760
------- ------- ------- -------
Total $47,858 $46,364 $15,005 $16,825
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
14
<PAGE>
Supplemental Combined Information
(Amounts in thousands)
Statement of Income Data:
(Six months ended June 30, 1998)
<TABLE>
<CAPTION>
January 1, 1998
Historical to April 23, 1998
Global Health Omni-Pak &
Sciences Affiliates Combined (1)
------------- ----------------- ------------
<S> <C> <C> <C>
Revenues $63,930 $31,146 $94,700
Cost of sales 43,967 21,386 64,977
------- ------- -------
Gross profit 19,963 9,760 29,723
Selling, general & administrative 4,668 1,912 6,580
Amortization of intangible assets 2,271 -- 2,271
------- ------- -------
Operating income 13,024 7,848 20,872
Interest income (expense), net 4,871 42 4,829
------- ------- -------
Income before state taxes 8,153 7,890 16,043
Provision for state income taxes 156 119 275
------- ------- -------
Net Income $ 7,997 $ 7,771 $15,768
------- ------- -------
------- ------- -------
EBITDA (2) $23,682
EBITDA margin (2) 25%
</TABLE>
Statement of Income Data:
(Six months ended June 30, 1997)
<TABLE>
<CAPTION>
Historical Historical
June 30, 1997 June 30, 1997
Global Health Omni-Pak &
Sciences Affiliates Combined (1)
------- ------- -------
<S> <C> <C> <C>
Revenues $41,358 $44,840 $85,481
Cost of sales 26,507 29,728 55,518
------- ------- -------
Gross profit 14,851 15,112 29,963
Selling, general & administrative 3,240 2,947 6,187
------- ------- -------
Operating income 11,611 12,165 23,776
Interest income (expense), net 48 8 56
------- ------- -------
Income before state taxes 11,659 12,173 23,832
Provision for state income taxes 175 183 358
------- ------- -------
Net Income $11,484 $11,990 $23,474
------- ------- -------
------- ------- -------
EBITDA (2) $23,918
EBITDA margin (2) 28%
</TABLE>
<TABLE>
<CAPTION>
Combined Sales Combined Gross Profit
Six Months June 30, Six Months June 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
D&F Industries $43,530 $41,358 $12,861 $14,852
Omni-Pak (net of eliminations) 51,170 44,123 16,862 15,111
------- ------- ------- -------
Total $94,700 $85,481 $29,723 $29,963
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(1) Combined operating results are shown net of eliminating entries.
(2) EBITDA is defined 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 generall accepted accounting principles or as a measure of profitability or
liquidity.
15
<PAGE>
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Sales. In the second quarter of 1998, sales increased by $1.5 million
or 3.2%, to $47.9 million compared to $46.4 million in the second quarter of
1997. Combined Company sales to Herbalife were $26.8 in the second quarter of
1998 as compared to $33 million in the second 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 $3.3 million, or 11.1%, to $32.9 million in the second quarter of
1998 compared to $29.6 million in the second quarter of 1997. Cost of sales as a
percentage of sales increased to 68.7% in the second quarter of 1998 compared to
63.8% in the second quarter of 1997, thereby decreasing the gross margin in the
second quarter of 1998 by 4.9% to 31.3% from 36.2% in the second quarter of
1997. The reduction in gross margin principally resulted from price reductions
given to Herbalife as a result of the new supply agreements.
Selling, general, and administrative expenses. Combined Company
selling, general and administrative expenses, net of amortization of goodwill
and other intangibles of $2.3 million in 1998, increased by $.1 million to $3.3
million in the second quarter of 1998 compared to $3.2 million in the second
quarter of 1997. As a percentage of sales, selling, general and administrative
expenses (net of amortization of goodwill and other intangibles) remained
constant at 6.9% in the second quarter of 1998 as compared to the second quarter
of 1997.
Net income. Combined Company net income decreased by $9 million to $4.4
million in the second quarter of 1998 compared to $13.4 million in the second
quarter of 1997. This decrease resulted primarily from a $1.8 million decrease
in gross margin, a $2.3 million increase in goodwill and other intangibles
amortization expense and $4.9 increase in interest expense.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Sales. In the first six months of 1998, sales increased by $9.2 million
or 10.8%, to $94.7 million compared to $85.5 million in the first half of 1997.
Combined Company sales to Herbalife were $59.2 million in the first half of
1998, as compared to $61.9 million in the first half 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 $9.5 million, or 17.1%, to $65.0 million in the first half of 1998
compared to $55.5 million in the first half of 1997. Cost of sales as a
percentage of sales increased to 68.6% in the first half of 1998 compared to
64.9% in the first half of 1997, thereby decreasing the gross margin in the
first half of 1998 by 3.7% to 31.4% from 35.1% in the first half of 1997. The
reduction in gross margin principally resulted from price reductions given to
Herbalife as a result of the new supply agreements.
16
<PAGE>
Selling, general, and administrative expenses. Combined Copy selling,
general and administrative expenses, for the Combined Company, net of
amortizaion of goodwill and other intangibles of $2.3 million in 1998, increased
by $.4 million to $6.6 million in the first half of 1998 compared to $6.2
million in the first half of 1997. As a percentage of sales, selling, general
and administrative expenses (net of amortization of goodwill and other
intangibles) remained relatively constant at 7.0% compared to 7.3% in the first
half of 1997.
Net income. Combined Company net income decreased by $7.5 million to
$15.8 million in the first half of 1998 compared to $23.5 million in the first
half of 1997. This decrease resulted primarily from a $2.3 million increase in
goodwill and other intangibles amortization expenses and a $5.0 million increase
in interest expense.
Liquidity and Capital Resources
Cash and cash equivalents were $20.3 million at June 30, 1998 compared
to $9.0 million at December 31, 1997, which represents an $11.3 million increase
from the balance at December 31, 1997. The increase is primarily the result of
an increase in accounts payable of $7.4 million and additional cash proceeds of
$14.3 million from the April 23, 1998 recapitalization.
Cash provided by operating activities for the periods ended June 30, 1998 and
June 30, 1997 were $12.9 million and $11.1 million, respectively. 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 June 30, 1998 was $136.0
million as a result of the purchase of Omni-Pak and Affiliates (see Note 2 to
theCondensed Combined Financial Statements).
Cash provided by financing activities for the period ended June 30, 1998 was
$139.8 million. The cash was provided by the issuance of the senior debt of
$218.5 million. The major uses of cash was the repurchase of approximately
543,000 shares of the Company for $58.7 million, dividends of $12 million and
debt issuance costs in connection with the issuance of the Notes of $7.7
million. Dividends paid by the Company were $12.0 million through June 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.
As described above, the Company issued $225 million of Notes due 2008, the net
proceeds of which were approximately $211.1 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.
17
<PAGE>
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.
All notice regarding forward looking statements other than the actual reported
financial results and other historical information, including without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and located 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, financial position,
may constitute forward-looking statements intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995. 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. 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 June 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 and Reports of Form 8-K
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 March 31, 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: September 17, 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
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<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
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<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 0 4,571 3,768
<SECURITIES> 0 0 0
<RECEIVABLES> 0 2,362 2,864
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<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998
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<SECURITIES> 0 0 0 0
<RECEIVABLES> 2,991 3,114 4,562 6,631
<ALLOWANCES> 0 0 0 0
<INVENTORY> 5,600 7,414 9,813 12,369
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<PP&E> 0 0 14,267 14,180
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0 0 0 0
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<TOTAL-REVENUES> 18,921 22,372 22,437 41,558
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<TOTAL-COSTS> 12,134 15,595 14,373 28,372
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<INTEREST-EXPENSE> 33 38 15 (4,909)
<INCOME-PRETAX> 5,284 5,065 6,375 3,088
<INCOME-TAX> 78 76 97 80
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