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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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.
SEE PAGE 2 FOR A LIST OF ADDITIONAL REGISTRANTS
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3267801
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
987 NORTH ENTERPRISE STREET, ORANGE, CALIFORNIA 92867
(714) 633-2320
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_] At March 15, 1999 the aggregate market value of the voting stock
held by non-affiliates of the registrant was $0. For purposes of this
information, the outstanding shares of common stock owned by directors and
executive officers of the registrant were deemed to be shares of Common Stock
held by affiliates.
On March 15, 1999 the registrant had outstanding 495,148 shares of common stock,
par value $0.01 per share, which is the registrant's only class of common stock.
<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
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 St.
Inc. Orange, California 92867
(714) 633-2320
D&F Industries,
Inc. California 100 2833 33-0801652 987 N. Enterprise St.
Orange, California 92867
(714) 633-2320
</TABLE>
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PART I
- ------------------------------------------------------------------------------
ITEM 1. BUSINESS.
OVERVIEW
Global Health Sciences, Inc. ("Global Health" or the "Company") is one of
the world's leading developers and custom manufacturers of dietary and
nutritional supplements. The Company develops and manufactures vitamins,
minerals, herbs, teas and other supplements in tablet, capsule and powder form
in a variety of shapes, sizes, colors, flavors and textures designed to meet its
customers' specifications. The Company supplies specialty products for branded
distributors, branded retailers, television marketing companies and network
marketing organizations who then distribute these products around the world. The
Company controls the entire development process for the vast majority of its
products from the initial market identification stage through formulation,
manufacturing, label design and distribution to its customers. The Company
believes that it has distinguished itself during its more than 20 years in the
industry through its ability to develop products in anticipation of market
trends, its superior customer service and its ability to produce a large variety
of high quality products.
The Company's products are sold to over 60 customers, including Herbalife
International, Inc. ("Herbalife"), Natural Supplement Association, Inc. d/b/a
Experimental and Applied Sciences ("EAS") and Metagenics, Inc. ("Metagenics"),
who then distribute these products in over 35 countries. For the fiscal year
ended December 31, 1998, sales to Herbalife represented approximately 61% of the
Company's combined total sales. Since 1995, sales to non-Herbalife customers
have grown from $14.8 million to $69.4 million in 1998. See "Business-Sales and
Distribution."
RECENT ACQUISITION
On December 11, 1998, the Company, through its wholly-owned subsidiary
Global Health Sub, Inc. ("Global Sub"), acquired all of the outstanding shares
of capital stock of American Ingredients Inc., a California corporation
("American"), pursuant to a Stock Purchase Agreement, dated as of December 11,
1998 (the "Stock Purchase Agreement"), between Global Sub and Arthur J. Salerno
and Kathleen P. Salerno (the "Sellers"). American is a supplier of raw materials
to the nutraceutical industry. American's principal offices are located in
Anaheim, California.
In accordance with the terms of the Stock Purchase Agreement, Global Sub
purchased all of the outstanding shares of capital stock of American for a total
purchase price of approximately $36,000,000 (which may be subject to further tax
adjustments). Prior to the closing, the Sellers contributed to American
substantially all of the assets of The AJS Company, a sole proprietorship of
Arthur J. Salerno which was engaged in the business of acting as exclusive
distributor for manufacturers of nutraceutical products in certain target
markets. The purchase price was determined by the parties to the Stock Purchase
Agreement based on arm's length negotiations. The purchase price was funded
through a combination of the Company's available cash and borrowings under the
Company's credit facility with Citibank, N.A.
PRODUCTS
The Company manufactures on demand and on a large scale to its customers'
specifications a highly diversified array of products in tablet, capsule, powder
and liquid form. The Company's products may be divided in the following manner:
herbal products; weight control; sports and performance nutrition; and special
products.
HERBAL PRODUCTS. Herbal products may be subdivided into herbal supplements
and herbal teas.
HERBAL SUPPLEMENTS. The Company's herbal supplements are sold to
a number of the Company's customers and are intended to address
certain physiological conditions such as bone and joint function,
aging, visual acuity and prostate health. The Company's herbal
supplements are sold primarily in the form of tablets and capsules.
The Company also sells a number of aloe-based products primarily as
liquids and gels. All liquid and gel products are subcontracted to
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other manufacturers. Common herbs used in the Company's formulations
include St. John's wort, ginkgo biloba, echinacea, saw palmetto,
garlic, schizandra berry extract, valerian root, kava kava, ginseng
and lutein.
HERBAL TEAS. The Company manufactures herbal teas in a variety
of flavors and with a number of different ingredients, including black
(pekoe) or green tea, ginseng, guarana and other herbs for toning and
cleansing, such as cardamon. These products are packaged primarily in
jars.
WEIGHT CONTROL. The Company's weight control products consist primarily of
meal-replacement powders and various other dietary supplements designed to
satisfy certain nutritional needs and to aid in appetite and weight control. The
Company's weight control products provide a natural alternative for consumers
who demand all-natural products in their dietary weight control regimen. Weight
control products are sold primarily to Herbalife as well as to a number of other
customers. The meal-replacement powders come in different flavors and combine
any of various proteins, vitamins and minerals, polyunsaturated fats,
carbohydrates, dietary fibers and herbs. Weight control products are also sold
in the form of tablets and capsules and contain a variety of herbs, amino acids,
natural fibers and nutrients. Many of the Company's products are bundled
together as part of a full weight control program.
SPORTS AND PERFORMANCE NUTRITION. The Company's sports and performance
nutrition products represent the fastest-growing product segment for the
Company. These products are formulated for and targeted to athletes, body
builders and others who desire to improve their physical performance, physique,
mental alertness and general well-being in conjunction with a fitness program.
The products are sold to customers such as EAS and Bally's Total Fitness and
consist of a variety of high protein powders, including those combined with
carbohydrates and proper fats and/or enhanced with creatine or hydroxy methyl
butyrate. Sports and performance nutrition products also include powders high in
carbohydrates for rehydration, weight gain and quick energy, as well as tablets
containing ginseng and other ingredients.
SPECIAL PRODUCTS. The Company's special products represent a broad range of
products and may be subdivided into the following categories:
VITAMINS, MINERALS AND AMINO ACIDS. The Company manufactures and
sells to a majority of its customers a number of vitamins, minerals
and amino acids primarily in tablet and capsule form. The most common
of such products is the Company's multivitamins/minerals, which
provide a range of essential vitamins and minerals. The Company also
manufactures natural multivitamins, such as water-soluble B-complex
and various vitamin C sources, and multiminerals containing minerals
such as calcium, magnesium, potassium, zinc, chromium and various
trace minerals. The Company's amino acid products come in tablets,
capsules and powders and consist of amino acids such as tyrosine,
lysine and arginine and combinations thereof, and peptide specific
peptidase, which is taken to increase the utilization of certain amino
acids.
COMBINATION PRODUCTS. A distinguishing characteristic of the
Company is its ability to develop innovative products by adding herbs
to various other ingredients to create products that combine the
benefits of vitamins, minerals and herbal supplements. This practice
allows the Company to meet a wide range of customer needs. The Company
sells these combination products to a majority of its customers. These
products generally come in tablets and capsules and represent a
growing portion of the Company's sales.
OTHER PRODUCTS. The Company manufactures other products in order
to meet the specific requirements of certain customers including pet
products and products intended to aid in the treatment of poisonings.
These products currently account for a small but growing percentage of
the Company's sales. The Company also manufactures over-the-counter
("OTC") drugs and pet products in solid and powder form. The Company
subcontracts to other manufacturers its liquid, ointment and gel
products, including aloe drinks, acne and arthritis creams, herbal
shampoos and fish oil capsules.
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PRODUCT DEVELOPMENT
The Company continually monitors new and developing health and nutrition
trends to anticipate its customers' needs and to introduce new products and
reformulate existing ones. The Company's ability to design, develop and
manufacture new products has enabled it to be a "one-stop shop" for most of its
customers, alleviating the necessity of current and potential customers to seek
out multiple manufacturers to fulfill product needs. This approach also creates
a synergy between the Company and its customers in the development and
enhancement of a customer's products or product lines.
The Company will often begin its development process by identifying target
groups with certain physiological needs (e.g., weight control or prostate
health) and then develop a dietary supplement product to respond to such
conditions. The Company also develops a product based on a newly discovered or
unique raw material or on a new application of an existing raw material. After
either identifying a target group or a new raw material, the Company will then
develop a product in its pilot laboratory. The Company refines the new product
in the pilot laboratory to ensure that it contains the proper mix of ingredients
to respond to the physiological problem for which it has been designed or that
it makes proper use of the new raw material. The Company also ensures that the
new product can be manufactured on a large scale, in an economical and efficient
manner and with satisfactory size, shape, color, solubility and shelf life.
After developing the product, the Company will present the product to an
appropriate customer who will, if interested, enter into an agreement with the
Company for the right to, in most instances, exclusively distribute the new
product in return for the obligation on the part of the customer to exclusively
purchase such product from the Company.
Another method of product development is the formulation of new or modified
products in response to a customer's request. Customers will often approach the
Company to request a product containing particular ingredients or a product
designed for a specific condition. In response, the product development team
will then develop a product for that customer that meets its particular
specifications using the same development techniques discussed above.
The Company's seven-member product development team, led by Mr. Richard D.
Marconi, Chairman of the Board and President of the Company, includes a former
NASA scientist who assisted in the development of a nutrition program for early
space flights and a former member of the USDA's Human Nutrition Institute. The
team is responsible for new product formulations, herbal and nutritional
ingredient use and formulation safety. The Company maintains an extensive
collection of literature on herbal remedies and products and the product
development team keeps abreast of new developments by reviewing a wide variety
of scientific and medical journals and attending industry, the U.S. Food and
Drug Administration (the "FDA"), United States Pharmacopoeia Convention, Inc.
("USP") and other scientific seminars and conferences. The Company also
maintains consulting arrangements with a number of well-respected scientists and
other experts, some of whom participated in the drafting and passage of the
Dietary Supplement Health and Education Act of 1994 ("DSHEA"). These scientists
and other experts are also consulted periodically in order to identify new
health trends prior to and during the development of new products.
MANUFACTURING AND PRODUCT QUALITY
The Company believes that it has distinguished itself within the dietary
and nutritional supplement industry through consistently manufacturing high
quality products. All of the Company's products are manufactured and packaged at
facilities located in Orange County, California, all of which are located within
a ten-mile radius.
The facilities include a 17,500 square foot facility that contains the
Company's granulation plant and administrative offices. Equipment at the
granulation plant includes wall ovens, fluid bed dryers and wet granulators.
Equipment at the Company's 60,000 square foot tablet and capsule facility
includes high speed tablet presses, encapsulating machines, large capacity
blenders, a large hammermill, miscellaneous mills and oscillators and various
coating machines and pans. The tablet and capsule facility also contains
production offices and warehousing and receiving departments. Tablets and
capsules manufactured by the Company are then packaged at a 38,000 square foot
packaging facility. The Company's powder products are manufactured and packaged
at a 44,000 square foot production facility that contains blending equipment
consisting of three dual head can-filling lines, two dual head small
bottle-filling lines and four automatic packaging lines. Raw materials for the
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Company's powder products are received and prepared for blending at a 50,800
square foot facility from which the finished products are shipped to the
Company's customers. The Company also maintains an additional warehousing
facility totalling 22,000 square feet. In April 1998, the Company executed a
lease on a 286,000 square foot building in Anaheim, California. This
building, which is expected to be available for occupancy in May 1999, will
allow the Company to consolidate three existing facilities for the
manufacture of powder and tablet packaging. In connection with this occupancy,
the Company will sublease 154,800 square feet of existing space. American
occupies a 37,800 square foot facility for its manufacturing and warehouse
activities. This facility also serves as the corporate office for American.
The Company's manufacturing facilities are capable of producing over one
billion capsules and tablets and over six million pounds of blended powder per
month. These facilities are also capable of filling on a monthly basis
approximately 1.2 million cans and large bottles, approximately 1.2 million
small bottles and approximately 4.3 million packets. The Company custom
manufactures all of its products to meet its customers' specifications and, as a
result, maintains a very low finished goods inventory. The Company normally
operates two work shifts, but has the capability to run three, if necessary, to
meet its customers' needs.
The Company's flexible manufacturing lines enable it to service its
equipment without materially interrupting production by shifting output among
various lines. Equipment servicing is generally completed in-house by employees
of the Company. The Company has also designed modifications to its equipment to
produce better quality products.
The Company purchases its raw materials from several foreign and domestic
third-party suppliers, one of which accounted for more than 10% of the Company's
total purchases in 1998. Several of these raw materials are harvested on a
seasonal basis. The Company's raw material needs are readily available from
multiple suppliers and the Company is not dependent on any single supplier.
The Company maintains a quality control department at each production
facility, led by individuals with backgrounds in pharmacology and nutrition.
Each product undergoes comprehensive quality control testing procedures in the
Company's on-site quality control laboratories from the receipt of all incoming
raw materials through the distribution of the finished product. Each laboratory
contains equipment such as computerized liquid chromatographs, automatic
spectrometers, dissolutioned testers, disintegration testers and each laboratory
has complete microbiological testing capabilities. Incoming raw materials are
subjected to numerous testing procedures, including liquid chromatography and
infrared spectrophotometry, to ensure that the product is unadulterated and
labeled correctly. Moreover, in order to easily identify the origin of the
ingredients contained in its products and ensure traceability, the Company
tracks each ingredient by assigning it a commodity number and lot number. Tablet
products are frequently tested during the manufacturing process for friability,
thickness, hardness and weight. In addition, periodically throughout production,
quality control personnel will take samples to perform product assays. After a
product is manufactured, it is subjected to stability, dissolution and potency
tests. The Company's powder products are tested and sampled in the laboratory
for proper mix and "taste and mouth-feel" to ensure correct color and
consistency.
SALES AND DISTRIBUTION
The Company's products are sold throughout the United States, Europe and
Asia by over 60 customers, including Herbalife, EAS, Metagenics, Bally's
Total Fitness, Rockwood Cosmetics and Nature's Life. Herbalife, which has
been a customer of the Company since 1980, is the Company's largest customer.
Products manufactured for Herbalife are specially formulated and packaged
only for Herbalife's distribution channel and are not available through
retailers. Sales to Herbalife represented 61%, 76% and, 74% of the Company's
combined total sales in 1998, 1997 and 1996, respectively. Additionally,
sales to EAS represented approximately 27% and 12.0% of the Company's
combined sales in 1998 and 1997, respectively. Since 1995, sales to
non-Herbalife customers have grown from $14.8 million to $69.4 million in
1998. The Company intends to expand its presence in the health food/retail
market through such customers as EAS, in the growing direct television market
through such customers as The Good Doctors, and in direct sales to fitness
centers through Bally's Total Fitness. In addition, the Company plans to
expand its sales in international markets by developing new customers and by
supplying the needs of its existing customers in the growing markets of
Europe, Latin America and Asia.
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In September 1997, D&F industries, Inc., a California corporation ("D&F"),
Raven Industries, Inc. d/b/a Omni-Pak Industries, a California corporation
("Omni-Pak") and Dynamic Products, Inc., a California Corporation ("Dynamic")
entered into separate three-year agreements with Herbalife replacing their
previous agreements. Pursuant to these new agreements, Herbalife is required to
purchase from each of D&F, Omni-Pak and Dynamic, respectively, any combination
of products in an aggregate dollar amount equal to at least the sum of (i) 80%
of the aggregate dollar amount of all purchases made by Herbalife of nutritional
supplement products manufactured by the Company and by another supplier in
accordance with a product formula developed by the Company and (ii) 40% of the
aggregate dollar amount of all purchases made by Herbalife of independent
nutritional supplement products manufactured by suppliers other than the
Company. The agreements cover all products currently manufactured for Herbalife
for distribution in the countries in which Herbalife currently distributes such
products. The prices for the products purchased by Herbalife are fixed, subject
to adjustment in the event of a variation (upwards or downwards) in excess of
five percent in the aggregate actual cost of the raw materials used to
manufacture the products supplied to Herbalife. The agreements also provide the
Company with a right of first refusal to become the primary manufacturing source
for Herbalife for certain new products developed by Herbalife for distribution
in the countries in which Herbalife distributes products currently manufactured
by the Company. Pursuant to the agreements, the Company transferred to Herbalife
those formulas owned by the Company for all products manufactured by the Company
exclusively for Herbalife at January 1998. In the event of a material breach of
the agreement by either party, the breaching party has 60 days to cure such
breach. If such breach is not cured within such period, the non-breaching party
can terminate each agreement with 60 days' prior written notice. In addition,
Herbalife may terminate any agreement if the Company fails to meet certain
service level requirements or immediately following a change in control. A
change in control is triggered in the event that, among other things, without
the prior written consent of Herbalife, Mr. Marconi ceases to own more than 50%
of the capital stock of the Company or if Mr. Marconi is no longer an executive
officer of the Company and responsible for the day-to-day operations and
management of the Company.
COMPETITION
The dietary and nutritional supplement industry is highly fragmented. The
industry includes (i) companies that produce products for specialty health and
natural food stores, (ii) companies that manufacture products for the mass
retail market and (iii) direct sales and mail order companies. There are
numerous dietary and nutritional supplement manufacturers of general products,
including Twin Laboratories, Inc., NBTY, Inc., Rexall Sundown, Inc. and Leiner
Health Products Group Inc., some of which are larger and have resources greater
than the Company.
EMPLOYEES
At December 31, 1998, the Company employed approximately 500 persons. Of
these employees, 77 are in executive or administrative capacities with the
remaining employees in manufacturing, shipping and packaging positions. None of
the Company's employees are represented by a labor union. The Company considers
its relationship with its employees to be good.
At December 31, 1998, the Company also utilized approximately 280 temporary
employees. These employees are supplied to the Company by a temporary agency
that maintains offices at the Company's manufacturing facilities. This enables
the Company to utilize temporary employees to adjust staffing levels on a daily
basis in response to fluctuations in demand or an unexpected increase in sales
volume.
REGULATORY MATTERS
The manufacturing, packaging, labeling, advertising, distribution and
sale of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the U.S. Federal Trade Commission
("FTC") and the U.S. Environmental Protection Agency ("EPA"), and various
agencies of the states, localities and foreign countries in which the
Company's products are sold. The FDA, pursuant to the Federal Food, Drug and
Cosmetic Act (the "FFDC"), regulates the production, packaging, labeling
and distribution of dietary and nutritional supplements. The FTC regulates
the advertising of such products.
The FFDC was recently amended by the DSHEA. The DSHEA created a new
statutory framework governing the composition and labeling of dietary
supplements. Under the DSHEA, "dietary supplements" are defined as any product
(except
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tobacco) intended to supplement the diet that contains at least one of the
following dietary ingredients: (i) a vitamin, (ii) a mineral, (iii) an herb or
botanical, (iv) an amino acid, (v) other dietary ingredients for human use to
supplement the diet or (vi) concentrates, metabolites, extracts or combinations
of (i) through (v) above. Dietary ingredients meeting this definition are
excluded from regulation as a food additive.
Under the DSHEA, dietary ingredients that were on the market in the United
States prior to October 15, 1994 may be sold without the FDA's pre-market
approval and without notifying the FDA. The marketing of a product containing a
new dietary ingredient (one not on the market prior to October 15, 1994)
requires that: (i) it has been used as an article of food without being
chemically altered or (ii) there is evidence of a history of use or other
evidence of safety establishing that it is reasonably expected to be safe and
such evidence is supplied to the FDA at least 75 days before the initial use of
any new dietary ingredient. There can be no assurance that the FDA will accept
the evidence of prior use or safety presented for any new dietary ingredient
that the Company may decide to use in the future and the FDA's refusal to accept
any such evidence could result in a determination that either the product is
adulterated or the product must be regulated as a food additive, which requires
FDA approval prior to marketing. Under the DSHEA, the burden of proving the
safety of the dietary supplement is shifted from the manufacturers to the FDA.
The FDA may object only if a product or ingredient presents a "significant and
unreasonable risk of illness or injury" or poses an imminent safety hazard.
The DSHEA provides for specific nutrition labeling requirements for dietary
supplements. The DSHEA permits the manufacturer of a dietary supplement to make
substantiated, truthful and non-misleading "statements of nutritional support"
with respect to the product, including an accurate description of how a nutrient
affects the structure or function of the human body and a general description of
well-being resulting from consumption of a dietary ingredient. The claim must be
accompanied by a disclaimer stating that the product has not been evaluated by
the FDA. There can be no assurance that the FDA will not determine that a given
statement of nutritional support is not adequately substantiated, or is an
unapproved drug claim rather than a statement of nutritional support. Either
determination may entail costly and time-consuming clinical studies and may
entail the deletion or modification of such statement. The FDA has finalized
certain regulations to implement the labeling provisions of the DSHEA. Further
FDA regulations may be proposed by the FDA in response to a report issued in
November 1997 by the Commission on Dietary Supplement Labels which was
established to provide recommendations on labeling claims for dietary
supplements.
The Company exercises significant control over the labeling of its
customers' nutritional and dietary supplement products. The Company designs
the "Nutrition Facts" box required by the National Labeling and Education Act
of 1990 (the "NLEA") for its powdered products. The Company performs some
review of the proposed structure/function claims made on the labels of the
dietary supplement products for compliance with the DSHEA. Submission of
these claims as required by the FFDC is the obligation of the Company's
customers, but the Company does submit to the FDA labels for many of the
dietary supplements that contain structure/function claims. Maintaining the
substantiation for such claims as required under the FFDC is the obligation
of the Company's customers. Similarly, the Company's customers are
responsible for making the required submissions to the FDA for any new
dietary ingredients.
A number of the products sold by the Company, including some protein
powders and any products labeled for meal replacement, are conventional foods as
opposed to dietary supplements. The NLEA dictates the labeling claims
permissible for such products, which are more limited in scope than those for
dietary supplements. Some of the Company's products will require label revisions
to comply.
The DSHEA also allows the dissemination of third party literature to
promote the sale of dietary supplements to consumers at retail or by mail order.
Such literature, if distributed, must (i) not be false or misleading; (ii) not
promote a particular manufacturer or brand; (iii) present a balanced view of the
available information; and (iv) be physically separated from supplement products
if displayed in a store.
The DSHEA authorizes the FDA to promulgate good manufacturing practices
("GMPs") with respect to the manufacture of dietary supplements, to be
modeled after the current GMPs applicable to food products. On February 6,
1997, the FDA published an advance notice of proposed rulemaking ("ANPR") in
which it requested public comment concerning whether to adopt GMP regulations
for dietary
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supplements. The comment period for this ANPR closed on May 7, 1997. The FDA is
still reviewing comments before publication of final GMP regulations. The
Company cannot predict in what form such regulations, if adopted, would be
enacted. As with any new regulations, if adopted, the Company will take all
necessary steps to attempt to comply with such new regulations.
On September 23, 1997, the FDA issued final regulations reiterating the
FDA's position that dietary supplements must maintain 100% of the declared value
of added vitamins and minerals for the entire shelf life of the product. As with
any new regulations, the Company will take all necessary steps to attempt to
comply with such new regulations. During the past ten years, the Company has
received four Form 483 notices following customary FDA inspections. These
notices cited numerous GMP deficiencies including those relating to product
labeling, product validation and testing, equipment and facility cleanliness and
maintenance, personnel training, and recordkeeping. The FDA also previously
issued two Warning Letters to the Company stating that products manufactured by
the Company were adulterated because they were not manufactured in accordance
with GMPs. In 1994, the Company paid $75,000 in settlement of a claim brought by
a California state agency which concerned alleged violations of California food
and drug laws. The Company believes that it is currently in material compliance
with the California food and drug laws related to such claim.
The NLEA prohibits the use of any health claim describing the relationship
between a nutrient and a disease or health-related condition for foods,
including dietary supplements, unless the claim is supported by significant
scientific agreement and is approved by the FDA by regulation. Regulations
promulgated by the FDA to date allow the use of health claims for dietary
supplements only in connection with osteoporosis and the use of folic acid for
neural tube defects. The NLEA also prohibits the use of most nutrient content
descriptors ("high" or "low") unless the specific descriptor complies with the
FDA regulations governing nutrient content claims. Under the recently enacted
Food and Drug Administration Modernization Act of 1997, both health claims and
nutrient claims are permitted to be made on the basis of authoritative
statements of governmental bodies other than the FDA, so long as the FDA is
notified of the claim and the authoritative statement and is presented with a
balanced representation of the scientific literature concerning such claim.
Certain of the Company's products are regulated as pet foods. The claims
permitted by the FFDC for such products are more limited than those for human
foods or dietary supplements, and such products are not included within the
purview of the NLEA or the DSHEA. A company marketing such products must
register its labels with state authorities. Other products sold by the Company
are OTC drugs or veterinary drugs. The Company must register with the FDA and
the State of California, provide drug listings annually and comply with current
GMP requirements in the manufacture and record keeping relating to these
products. To the extent that certain of the Company's products are sold with
drug claims on their labels, those products would require inclusion as OTC
drugs. The Company will be required to relabel and register some of its products
accordingly. The Company also sells products regulated by the FDA as cosmetics,
which must meet specified labeling requirements and minimum safety standards.
The Company is also subject to regulation under various foreign, state and
local laws that include provisions regulating, among other things, the marketing
of dietary supplements and the operations of direct sales programs.
The Company may be subject to additional laws or regulations administered
by the FDA or other federal, state or foreign regulatory authorities, the repeal
of laws or regulations favorable to the industry (such as the DSHEA), or more
stringent interpretations of current laws or regulations. The FTC, for example,
has actively investigated the dietary and nutritional supplement industry in the
past few years, and certain of the Company's customers have signed consent
orders which could, in the future, affect the volume of product that the
customers will order from the Company. The Company cannot determine what effect
future laws, regulations, guidance or policy of the FDA, when and if
promulgated, will have on its business in the future. Such regulations may,
however, among other things, require changes in manufacturing, expanded or
different labeling for the Company's dietary and nutritional supplements,
require the recall, reformulation, or discontinuance of certain products, or
require scientific substantiation regarding ingredients, product claims or
safety.
9
<PAGE>
The USP is a non-governmental, voluntary standard-setting organization. Its
drug standards are incorporated by reference into the FFDC as the standards that
must be met for the listed drugs, unless compliance with those standards is
specifically disclaimed. USP standards exist for most prescription and
non-prescription pharmaceuticals.
The USP began adopting standards for vitamin and mineral dietary
supplements in 1994. These standards cover composition (nutrient ingredient
potency and combinations), disintegration, dissolution, manufacturing practices
and testing requirements. These standards are codified in the USP Monographs and
the USP Manufacturing Practices. In 1995, USP compliance included the standards
for disintegration and dissolution. While USP standards for vitamins are
voluntary, and not incorporated into federal law, customers of the Company may
demand that products they are supplied meet these standards. Inaccurate label
claims of compliance with the USP may expose a company to FDA scrutiny for such
claims. In addition, the FDA may in the future require compliance, or such a
requirement may be included in new dietary supplement legislation. All of the
Company's vitamin products (excluding certain dietary supplements products for
which no USP standards have been adopted) are formulated to comply with existing
USP standards.
Certain of the Company's products contain a Chinese herb known as "Ma
Huang," which contains naturally occurring ephedrine. The Company estimates that
these products accounted for approximately 4% of the Company's sales in the
fiscal year ended December 31, 1998. Ma Huang has been the subject of certain
adverse publicity in the United States and other countries relating to alleged
harmful or adverse effects, including the deaths of several individuals.
On April 10, 1996, the FDA issued a statement warning consumers not to
purchase or consume dietary supplements containing ephedrine with labels
portraying the products as apparent alternatives to illegal street drugs. None
of the Company's products which contain Ma Huang are marketed for such purpose.
The FDA explained that the products portrayed as alternatives to illegal street
drugs pose significant health risks to consumers-dizziness, headache,
gastrointestinal distress, irregular heartbeat, heart palpitations, heart
attack, strokes, seizures and death, and that the labels on such product claim
or imply that they produce such effects as euphoria, increased sexual
sensations, heightened awareness, increased energy and other effects. In August
1996, the FDA sent warning letters to several companies marketing such products
as alternatives to street drugs, indicating that enforcement action with respect
to such products may be initiated.
In August 1996, the FDA convened a Food Advisory Committee meeting to
review and make recommendations concerning the safety and appropriate labeling
of dietary supplements containing Ma Huang. The FDA, after considering the
differing views expressed at the Committee meeting, proposed regulations in June
of 1997 that would require reduced dosages coupled with strict manufacturing
standards, labeling restrictions and a prohibition against combining Ma Huang
with body building or weight loss products and with other central nervous system
stimulants such as caffeine. There can be no assurance that such regulations
will not prohibit either the sale of dietary supplements containing Ma Huang in
combination with any other ingredients or the sale of all dietary supplements
containing any Ma Huang. The promulgation of such regulations could require the
Company to reformulate and relabel substantially all of its Ma Huang products.
There can be no assurance as to the final form or content of any FDA regulations
concerning dietary supplements containing Ma Huang or as to the effect that any
attendant adverse publicity or resulting reformulation and relabeling of the
Company's products would have on the sale of such products.
A number of foreign, state and local governmental entities limit ephedrine
levels and require appropriate warnings on product labels, regulate products
containing ephedrine as controlled substances or prohibit sales of products
which contain Ma Huang by individuals other than licensed pharmacists. There are
also federal, state and local proposals to broaden the regulation of, or
otherwise limit or prohibit, the sale of products containing ephedrine.
The Company's products containing Ma Huang may become subject to
further federal, state, local or foreign laws or regulations, which could
require the Company to: (i) reformulate its products with reduced ephedrine
levels or with a substitute for Ma Huang and/or (ii) relabel its products with
different warnings or revised directions for use. Even in the absence of further
laws or regulations, the Company may elect to reformulate and/or relabel its
products which contain Ma Huang. While the Company believes that its Ma Huang
products could be reformulated and relabeled, there can be no assurance in that
regard or that reformulation and/or relabeling would not have a material adverse
effect on sales of such products.
10
<PAGE>
ITEM 2. PROPERTIES.
The Company leases the following facilities in Orange County, California:
(i) a 38,000 square foot tablet and capsule packaging facility; (ii) a 60,000
square foot tablet and capsule manufacturing facility; (iii) a 17,500 square
foot facility that includes a granulation plant and administrative offices; (iv)
a 44,000 square foot powder production and packaging facility; (v) a 22,000
square foot warehouse; (vi) a 50,800 square foot facility which contains
receiving, shipping and administrative departments; and (vii) a 37,800 square
foot facility for corporate offices and warehousing for American.
In April 1998, the Company executed a lease on a 286,000 square foot
building in Anaheim, California. This building, which is expected to be
available for occupancy in May 1999, will allow the Company to consolidate three
existing facilities for the manufacture of powders and tablet packaging. In
connection with this occupancy, the Company will sublease 154,800 square feet of
existing space.
The Company's leases have terms of three to ten years. In 1998, the Company
paid an aggregate of approximately $1.9 million in rent on its facilities.
The Company believes that its facilities and equipment are maintained in
good operating condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time a party to lawsuits arising in the
ordinary course of its business. The Company believes that the ultimate
resolution of such pending matters will not materially and adversely affect the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Common Stock, which
is the Company's only class of common equity. As of the date hereof, Mr. Richard
D. Marconi is the only holder of record of the Common Stock. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management."
Mr. Marconi has granted Mr. Buxbaum an option to acquire up to 20% of the
Common Stock currently owned by Mr. Marconi at the fair market value thereof on
April 23, 1998. This option will vest over a period of years, the term of which
has not yet been determined.
Because the Company has elected S corporation status for federal and state
income tax purposes, taxable income is passed through to the Company's
shareholder. In 1997 and 1998, the Company distributed as a dividend to its
shareholders amounts sufficient for the shareholders to pay their required
taxes.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Company and
D&F (the "Predecessor") as of and for each of the five years ended December 31,
1998 and are derived from audited financial statements of the Company and the
Predecessor. The information set forth below should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, each of which is included
elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in Thousands)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $68,679 $52,164 $73,523 $85,191 $146,741
Cost of sales 44,337 34,895 47,958 55,020 102,756
------- ------- ------- ------- --------
Gross Profit 24,342 17,269 25,565 30,171 43,985
Selling, general and administrative
expenses 9,325 5,462 6,347 7,088 28,263
------- ------- ------- ------- --------
Operating income 15,017 11,807 19,218 23,083 15,722
Interest income (expense), net 63 76 56 82 (17,842)
------- ------- ------- ------- --------
Income (loss) before state income 15,080 11,883 19,274 23,165 (2,120)
taxes
State income taxes (a) 257 137 280 350 203
------- ------- ------- ------- --------
Net income (loss) (a) $14,823 $11,746 $18,994 $22,815 ($2,323)
------- ------- ------- ------- --------
------- ------- ------- ------- --------
BALANCE SHEET DATA
Cash and cash equivalents $1,791 $4,474 $4,571 $3,768 $7,987
Working Capital (deficit) 2,696 3,258 4,048 5,612 (16,256)
Total assets 11,693 11,948 13,670 16,736 204,217
Total debt 770 640 540 420 249,832
Shareholders' equity (deficit) 4,639 5,170 6,328 7,596 (69,768)
OTHER DATA
EBITDA (b) $15,268 $12,256 $19,722 $23,606 $32,661
EBITDA Margin (b) 22.2% 23.5% 26.8% 27.7% 22.3%
Cash Flows Provided By:
Operating activities $16,143 $14,447 $18,905 $21,090 $12,440
Investing activities (2,139) (420) (871) (226) (172,960)
Financing activities (17,490) (11,344) (17,936) (21,667) 164,739
Capital expenditures 1,134 420 871 226 2,005
Dividends (a) (b) 17,380 11,214 17,836 21,547 14,114
Depreciation and amortization 251 449 504 523 16,944
</TABLE>
12
<PAGE>
SELECTED SUPPLEMENTAL COMBINED FINANCIAL DATA
The following table sets forth selected historical combined D&F and
Omni-Pak and affiliates financial data ("Combined Financial Data") as of and for
each of the five years ended December 31, 1998. The Combined Financial Data
presents the combined group's historical operating results which, in the opinion
of management, provide a more meaningful representation of the underlying
business and cash flows. These entities were combined on April 23, 1998 to form
Global Health and, prior to such date, were operated under common management and
had a high degree of common ownership, customers and financial and operating
systems. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, each of which
is included elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in Thousands)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales $116,173 $85,264 $144,735 $182,385 $177,511
Cost of sales 71,246 55,382 94,758 117,733 123,766
--------- -------- --------- -------- --------
Gross Profit 44,927 29,882 49,977 64,652 53,745
Selling, general and administrative
expenses 12,322 8,246 11,203 13,019 30,175
--------- -------- --------- -------- --------
Operating income 32,605 21,636 38,774 51,633 23,570
Interest income (expense), net 80 144 162 279 (17,800)
--------- -------- --------- -------- --------
Income before state income taxes 32,685 21,780 38,936 51,912 5,770
State income taxes (a) 521 283 567 778 322
--------- -------- --------- -------- --------
Net income (a) $32,164 $21,497 $38,369 $51,134 $5,448
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
BALANCE SHEET DATA
Cash and cash equivalents $4,065 $8,155 $7,079 $8,957 $7,987
Working Capital 5,972 6,601 6,901 12,032 (16,256)
Total assets 18,710 21,047 23,783 31,505 204,217
Total debt 770 640 540 420 249,832
Shareholders' equity (deficit) 9,102 9,789 11,498 16,643 (69,768)
OTHER DATA
EBITDA (b) $33,084 $22,363 $39,676 $52,669 $ 42,693
EBITDA Margin (b) 28.5% 26.2% 27.4% 28.9% 24.1%
Cash flows provided by:
Operating activities 33,477 25,814 37,995 49,037 23,685
Investing activities (2,650) (786) (2,311) (1,050) (172,960)
Financing activities (31,065) (20,939) (36,760) (46,109) 150,946
Capital expenditures 1,728 786 2,311 1,050 1,883
Dividends (a) (b) 34,565 20,808 36,660 45,989 27,931
Depreciation and amortization 479 727 902 1,036 19,123
</TABLE>
(a) The Company has elected S corporation status for federal and state income
tax purposes, and other than a 1.5% state tax, taxable income is passed
through to the Company's shareholder. The Company has historically
distributed as a dividend to its shareholders amounts sufficient for the
shareholders to pay their required taxes.
(b) 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
determine 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 generally accepted accounting principles
(which is also presented in the accompanying table) or as a measure of
profitability or liquidity.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN.
OVERVIEW
The Company, founded in 1978, is one of the world's leading developers and
custom manufacturers of dietary and nutritional supplements. The Company
develops specialty products for branded distribution companies, branded
retailers, television marketing companies and network marketing organizations
who then distribute such products throughout the world.
Prior to April 23, 1998, the Company's operations were conducted by four S
corporations: D&F, Omni-Pak, Dynamic and West Coast Sales ("West Coast"). These
companies were reorganized in the Reorganization (as defined below) to
consolidate related and complementary business activities under one holding
company, Global Health (formerly D&F). These companies historically operated
under common management and had a high degree of common ownership, customers and
systems, including similar accounting and financial reporting systems.
Effective April 23, 1998, (i) D&F changed its name to Global Health
Sciences, Inc., (ii) Global Health formed Global Sub, (iii) Global Sub formed
D&F Industries, Inc. ("D&F Sub"), Raven Sub, Inc. ("Omni-Pak Merger Sub"),
Dynamic Sub, Inc. ("Dynamic Merger Sub") and New West Coast Sales, Inc.
("West Coast Merger Sub"), (iv) Global Health transferred to D&F Sub all of
its assets and liabilities except for its obligation under the Company's 11%
Senior Notes due 2008 (the "Notes") and the capital stock of Global Sub, (v)
Global Health acquired Omni-Pak and affiliates for approximately $137.9
million in cash and expenses, 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
Merger Sub and West Coast (with West Coast as the surviving corporation) and
(vi) the shareholders of Global Health received approximately $58.7 million
in cash in exchange for the cancellation of approximately 50% of the
outstanding capital stock of Global Health (collectively, the
"Reorganization").
On December 11, 1998, the Company, through its wholly owned subsidiary,
Global Sub, acquired American for approximately $36 million plus expenses.
American is a supplier of raw materials to the nutraceutical industry with 1998
revenues of $29.5 million and pre-tax income of $4.4 million before payment of
$6 million in one-time bonuses to key employees. The acquisition was financed
with cash and borrowings under the Acquisition Facility (as defined herein).
The Company's historical growth in sales and EBITDA has been primarily
attributable to increased sales to Herbalife, the Company's largest customer.
Combined sales to Herbalife have increased from approximately $70.5 million in
fiscal year 1995, representing approximately 83% of the Company's combined sales
in that year, to approximately $108.1 million in fiscal year 1998, representing
approximately 61% of the combined Company's sales in that year. Due to the
significant percentage of the Company's sales attributable to Herbalife,
fluctuations in Herbalife's inventory levels or inaccurate sales forecasting by
Herbalife have had adverse effects on Company sales in the past and could have
adverse effects in the future. The Company and Herbalife entered into three-year
supply agreements which extend through January 2001.
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.
In addition to the historical financial information and accompanying
discussion and analysis presented below, supplemental combined historical
financial information and accompanying discussion and are also presented
because, in the opinion of management, such information provides a more
meaningful representation of the Company's underlying business and cash flows.
14
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES. In 1998, sales increased by $61.5 million, or 72.2%, to $146.7
million compared to $85.2 million in 1997. The increase in sales primarily
resulted from the impact of the Reorganization as the sales of Omni-Pak and
affiliates are included in the consolidated results from April 23, 1998.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $47.8 million,
or 86.9%, to $102.8 million in 1998 compared to $55.0 million in 1997, while
cost of sales as a percentage of sales increased to 70.1% in 1998 compared to
64.6% in 1997, thereby reducing gross margin in 1998 to 29.9% from 35.4% in
1997. The increase in cost of sales resulted from the increase in sales in 1998
compared to 1997, and the reduction in gross margin principally resulted from
the change in the mix of business and the impact of the price reduction in the
Herbalife supply agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $21.2 million, or 298.6%, to $28.3 million
in 1998 compared to $7.1 million in 1997. As a percentage of sales, selling,
general and administrative expenses increased to 19.3% in 1998 compared to 8.3%
in 1997. The increase in selling, general and administrative expenses primarily
resulted from the impact of the Reorganization and an increase of $15.7 million
in amortization of intangibles. The increase in selling, general and
administrative expenses as a percentage of sales primarily resulted from the
amortization of intangibles (10.7% of sales).
NET INCOME (LOSS). Net income (loss) decreased by $25.1 million to a loss
of $2.3 million in 1998 compared to net income of $22.8 million in 1997. This
decrease resulted primarily from interest on senior debt ($17.8 million) and
amortization of intangibles ($15.7 million).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. In 1997, sales increased by $11.7 million, or 15.9%, to $85.2
million compared to $73.5 million in 1996. The increase in sales primarily
resulted from the increase in sales to Herbalife arising from Herbalife's
continued growth, particularly in Japan and Taiwan, and to an increase in
Herbalife's inventory levels to support such growth.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $7.1 million, or
14.6%, to $55.0 million in 1997 compared to $48.0 million in 1996, while cost of
sales as a percentage of sales decreased to 64.6% in 1997 compared to 65.2% in
1996, thereby improving the gross margin in 1997 to 35.4% from 34.8% in 1996.
The increase in cost of sales resulted from the increase in sales in 1997
compared to 1996, and the improvement in gross margin principally resulted from
efficiency improvements in manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.7 million, or 11.7%, to $7.1 million in
1997 compared to $6.3 million in 1996. As a percentage of sales, selling,
general and administrative expenses decreased to 8.3% in 1997 compared to 8.6%
in 1996. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale, as the Company's general and administrative
expenses remained relatively constant despite the increase in sales.
NET INCOME. Net income increased by $3.8 million, or 20.1%, to $22.8
million in 1997 compared to $19.0 million in 1996. This increase resulted
primarily from the 15.9% increase in sales and a slight improvement in gross
margin in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, prospective
acquisitions and capital expenditures. Prior to April 22, 1998, the Company
financed its cash requirements through internally generated cash flow. The
Company currently expects that its primary source of liquidity will be cash
flow from operations and the Acquisition Facility.
15
<PAGE>
The Company is a party to a bank line of credit which provides for up to
$75 million for acquisitions. It is secured by all of the assets of the
Company and expires in April 2003. It includes a $10.0 million sublimit for
working capital and general corporate purposes while all undrawn amounts are
to be available for acquisitions permitted by the terms thereof (such line of
credit, the "Acquisition Facility"). As of December 31, 1998, the Company had
drawn $31 million to finance the acquisition of American. The Acquisition
Facility requires the Company to maintain certain ratios of leverage, fixed
charge coverage and interest coverage, all as defined. As of December 31,
1998 the Company was in violation of the leverage ratio. The issuing banks
waived this requirement through March 31, 1999. While there can be no
assurance about what actions, if any, the lenders may take after March 31,
1999, the Company does not expect the lenders to accelerate the maturity of
the Acquisition Facility. Failure by the Company to make payment at maturity
or to comply with any covenant of the Acquisition Facility that results in
acceleration of the maturity of the Acquisition Facility would be an event of
default on the Notes. Such acceleration and such event of default would have
a material adverse effect on the Company. In addition, the Acquisition
Facility gives the issuing banks discretion over the approval of acquisitions
and limits capital expenditures to 3% of consolidated revenues.
Cash provided by operating activities for the years ended December 31,
1998, 1997 and 1996, was $12.4 million, $21.1 million and $18.9 million,
respectively. The major operating uses for these periods resulted from changes
in accounts receivable, inventories and prepaid expenses and other current
assets.
Cash used in investing activities for the years ended December 31, 1998,
1997 and 1996 was $173 million, $0.2 million and $0.9 million, respectively.
Investing activities consisted of the purchase of Omni-Pak and affiliates for
$135.2 million and American for $36.3 million in 1998 and purchases of property
and equipment in all three years.
Cash provided by (used in) financing activities for the years ended
December 31, 1998, 1997 and 1996 was $164.7 million, $(21.7) million and $(17.9)
million, respectively. The principal uses of cash for financing activities for
the year ended December 31, 1998, was the repurchase of common shares for $62.6
million and dividends to shareholders in the amount of $14.1 million. The
principal source of cash from financing activities in 1998 was the proceeds from
the issuance of notes, net of issuance costs, of $210.8 million. The principal
use of cash for financing activities for the years ended December 31, 1997 and
1996 was cash dividends paid to shareholders in the amounts of $21.5 million and
$17.8 million, respectively.
COMBINED D&F, OMNI-PAK AND AFFILIATES RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES. In 1998, sales decreased by $4.9 million, or 2.7%, to $177.5 million
compared to $182.4 million in 1997. This decrease in sales primarily resulted
from a decrease of approximately $29.5 million or 28.8%, to $108.1 million, in
sales to Herbalife. The principal reasons for the decline relate to the price
reduction from the Herbalife supply agreement, which took effect in January 1998
and the reduction in the Company's sales to Herbalife for resale in Russia and
Japan. The decline was offset by an increase in sales to other customers of
approximately $24.6 million, to $69.4 million, or 54.9%.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $6.1 million, or
5.2%, to $123.8 million in 1998 compared to $117.7 million in 1997. Cost of
sales as a percentage of sales increased to 69.7% in 1998 compared to 64.6% in
1997, thereby reducing the gross margin in 1998 to 30.3% from 35.4% in 1997. The
increase in cost of sales resulted from changes in the Company's mix of business
in 1998 compared to 1997. The decline in the Company's gross margin principally
resulted from changes brought about by the Herbalife supply agreement and
changes in the Company's mix of business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $17.2 million, or 132.3%, to $30.2 million
in 1998 compared to $13.0 million in 1997. As a percentage of sales, selling,
general and administrative expenses were 17.0% in 1998 compared to 7.1% in 1997.
The increase in selling, general and administrative expenses primarily resulted
from an increase in amortization of intangibles ($15.7 million) resulting from
the recapitalization. Intangibles are being amortized over five years. The
increase in selling, general and administrative expenses as a percentage of
sales primarily resulted from the impact of the amortization of intangibles, as
the Company's general and administrative expenses remained relatively constant
despite the decrease in sales.
16
<PAGE>
NET INCOME. Net income decreased by $45.7 million, or 89.4%, to $5.4
million in 1998 compared to $51.1 million in 1997. This decrease resulted
primarily from the decrease in sales, a slight decrease in gross margin in 1998
and an increase in selling, general and administrative costs as a percentage of
sales.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. In 1997, sales increased by $37.7 million, or 26.1%, to $182.4
million compared to $144.7 million in 1996. This increase in sales primarily
resulted from an increase of (i) approximately $30.7 million or 28.8%, to $137.6
million, in sales to Herbalife arising from Herbalife's continued growth in
foreign markets, particularly Japan and Taiwan, and an increase in its inventory
levels to support such growth and (ii) approximately $7.0 million, or 18.3%, in
sales to other customers, particularly in the sports and performance nutrition
segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $23.0 million,
or 24.2%, to $117.7 million in 1997 compared to $94.8 million in 1996, while
cost of sales as a percentage of sales decreased to 64.6% in 1997 compared to
65.5% in 1996, thereby improving the gross margin in 1997 to 35.4% from 34.5% in
1996. The increase in cost of sales resulted from the Company's increase in
sales in 1997 compared to 1996. The improvement in the Company's gross margin
principally resulted from efficiency improvements in manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.8 million, or 16.2%, to $13.0 million in
1997 compared to $11.2 million in 1996. As a percentage of sales, selling,
general and administrative expenses decreased to 7.1% in 1997 compared to 7.7%
in 1996. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale, as the Company's general and administrative
expenses remained relatively constant despite the increase in sales.
NET INCOME. Net income increased by $12.8 million, or 33.3%, to $51.1
million in 1997 compared to $38.4 million in 1996. This increase resulted
primarily from the 26.1% increase in sales, a slight improvement in gross margin
in 1997 and a decrease in selling, general and administrative costs as a
percentage of sales.
YEAR 2000 COMPLIANCE
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 $2 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 on the Company.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K which are not
historical facts are forward-looking statements. Such forward-looking statements
are necessarily estimates reflecting the Company's best judgment based upon
current information and involve a number of risks and uncertainties, and there
can be no assurance that other factors will not affect the accuracy of such
forward-looking statements. While it is impossible to identify all such factors,
factors which could cause actual results to differ materially from those
estimated by the Company include, but are not limited to, risks associated with
acquisitions, the financial condition of customers, non-renewal of contracts,
government regulation, as well as operating risks, general conditions in the
economy and capital markets, and other factors which may be identified from time
to time in the Company's Securities and Exchange Commission filings and other
public announcements.
17
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently uses no material derivative financial instruments
which expose the Company to significant market risk. However, the Company's cash
flow, earnings and the fair value of its debt, may be adversely effected due to
changes in interest rates with respect to its long-term debt. The table below
presents principal cash flows and related weighted average interest rates of the
Company's debt at December 31, 1998 by expected maturity dates. Weighted average
variable rates are based on rates in effect at December 31, 1998. These rates
should not be considered a predictor of actual future interest rates.
<TABLE>
<CAPTION>
December 99 December 00 December 01 December 02 December 03 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Notes
Average(1) $0 $0 $0 $0 $0 $225,000 $225,000 $146,250
Interest Rate 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%
Bank Line (2) $31,000 $31,000 $31,000
Average
Interest Rate 8.25% 8.25% 8.25% 8.25% 8.25% 8.25% 8.25%
</TABLE>
(1) The interest rate is fixed at 11%; original issue discount increases the
effective rate to 11.5%. Fair value is based on quoted prices as of
December 31, 1998.
(2) Consists of debt under which interest rates will fluctuate based on changes
in the prime rate or LIBOR. The initial term of the Acquisition Facility
expires in April 2003. However, as of December 31, 1998, the Company was
in violation of the leverage ratio. The issuing banks waived this
requirement through March 31, 1999. While there can be no assurance about
what actions, if any, the lenders may take after March 31, 1999, the
Company does not expect the lenders to accelerate the maturity of the
Acquisition Facility. Failure by the Company to make payment at maturity or
to comply with any covenant of the Acquisition Facility that results
in acceleration of the maturity of the Acquisition Facility would be an
event of default on the Notes. Such acceleration and such event of
default would have a material adverse effect on the Company. In addition,
the Acquisition Facility gives the issuing banks discretion over the
approval of acquisitions and limits capital expenditures to 3% of
consolidated revenues.
In making its determination as to the balance of fixed and variable rate debt,
the Company considers the interest rate environment (including interest rate
trends), borrowing alternatives and relative pricing. The Company periodically
monitors the balance of fixed and variable rate debt and can make appropriate
corrections either pursuant to the terms of debt agreements or through the use
of swaps and other financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See attached financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table identifies each of the directors, executive officers
and key personnel of the Company. Each director is elected at the annual meeting
of shareholders to serve until the next annual meeting or until his successor is
elected or appointed.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard D. Marconi1 64 Chairman of the Board and President
Paul M. Buxbaum1 43 Chief Executive Officer and Director
Donald J. Lewis1 48 Chief Financial Officer, Senior Vice
President and Director
Howard L. Simon 55 Chief Operating Officer and Senior Vice
President
Arthur J. Salerno 58 President of American Ingredients, Inc.
Sen. Dennis DeConcini 61 Director
Brad Gates 59 Director
</TABLE>
MR. RICHARD D. MARCONI co-founded the Company in 1978 and is the Chairman of the
Board of Directors and President, as well as the Company's sole stockholder. Mr.
Marconi has been in the food supplement and pharmaceutical industries for over
40 years. Mr. Marconi is a director of American Health Sciences, Inc. and is
Chairman of the Marconi Foundation for Kids.
MR. PAUL M. BUXBAUM became Chief Executive Officer of the Company on April 23,
1998. Prior thereto, Mr. Buxbaum was Chief Executive Officer of The Buxbaum
Group, a consumer products consulting group, specializing in asset evaluations
for lending institutions, crisis management services, inventory acquisitions and
bankruptcy liquidations. Since 1993, Mr. Buxbaum has served as Chairman of the
Board of Ames Department Stores, Inc. of Rocky Hill, Connecticut and since 1997
he has served as a director of Lamonts Apparel, Inc. From 1995 through 1998 Mr.
Buxbaum has served as a director of Richmond Gordman 1/2 Price Stores of Omaha,
Nebraska. From 1991 through 1996, Mr. Buxbaum served on the Board of Directors
of Herbalife and in 1997 served as Chairman of the Board of Jay Jacobs Stores of
Seattle, Washington.
MR. DONALD J. LEWIS entered into a consulting arrangement with the Company in
February 1998 and became Chief Financial Officer and Senior Vice President on
April 23, 1998. Prior to joining the Company, Mr. Lewis was Chief Financial
Officer of Visy Industries (U.S.A.), Inc. from 1995 to 1998 and was an audit
partner with Arthur Andersen & Co. from 1984 to 1995.
MR. HOWARD L. SIMON has been Chief Operating Officer and Senior Vice President
of the Company since June 1998. Prior thereto, Mr. Simon was President of
Cosmetic Group USA LLC from September 1997 to May 1998 and Chief Operating
Officer of Cosmetic Group USA, Inc. from January 1994 to August 1997.
- --------
1. Mr. Marconi is also a director, Chairman of the Board and President
of each of Global Sub, D&F, Omni-Pak, Dynamic and West Coast Sales (the
"Subsidiaries"); Mr. Buxbaum is also a director and the Chief Executive Officer
of each of the Subsidiaries; and Mr. Lewis is also a director, the Chief
Financial Officer and Senior Vice President of each of the Subsidiaries.
19
<PAGE>
MR. ARTHUR J. SALERNO has been President and Chief Executive Officer of American
since 1984. Mr. Salerno became an officer in connection with the acquisition of
American.
SENATOR DENNIS DECONCINI became a member of the Board of Directors of the
Company on April 23, 1998. From January 1977 through January 1995, Senator
DeConcini served as a United States Senator from Arizona. During his senatorial
term, Senator DeConcini served as a member of the Appropriations Committee and
the Judiciary Committee. Senator DeConcini is a member of the board of directors
of the Federal Home Loan Mortgage Corporation, the Schuff Steel Company, Safe T
Lock Incorporator and RDL Commercial Technologies Corporation.
MR. BRAD GATES became a member of the Board of Directors of the Company on April
23, 1998. From January 1975 to January 1999, Mr. Gates served as Sheriff of
Orange County, California. Mr. Gates currently serves on the boards of directors
of the Orange County Council of the Boy Scouts of America, the Drug Abuse is
Life Abuse Foundation and the eTrak Corporation. In addition, Mr. Gates is a
member of various civic and professional organizations.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for 1998
and 1997 awarded to or earned by the Chief Executive Officer and the other
executive officers as of December 31, 1998, for services rendered to the Company
and the Subsidiaries.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
<S> <C> <C> <C> <C>
Richard D. Marconi.................................... 1998 $2,035,896 - $83,990(1)
President and Chairman 1997 2,000,000 - 122,483(2)
Paul M. Buxbaum(3).................................... 1998 311,538 - 285,428(4)
Chief Executive Officer 1997 - - -
Donald J. Lewis(3).................................... 1998 196,269 - 7,650(5)
Chief Financial Officer 1997 - - -
and Senior Vice President
Howard L. Simon(3).................................... 1998 129,808 - 5,950(6)
Chief Operating Officer 1997 - - -
and Senior Vice President
</TABLE>
- ------------------------------------
1. Includes a $5,000 matching contribution to Mr. Marconi's 401(k) Plan, a
$26,400 car allowance and $52,590 representing automobile lease payments
paid by the Company.
2. Includes a $4,750 matching contribution to Mr. Marconi's 401(k) Plan, a
$14,400 car allowance, $52,590 representing automobile lease payments paid
by the Company and $50,753 representing insurance payments paid by the
Company.
3. Each of Mr. Buxbaum, Mr. Lewis and Mr. Simon commenced employment with the
Company in 1998.
4. Includes $277,778 paid to BGA Consulting, a company of which Mr. Buxbaum is
president, and a $7,650 automobile allowance.
5. Car allowance.
6. Car allowance
Non-employee directors of the Company are paid a monthly fee of $2,000.
Employee directors are not separately compensated for their services as a
director of the Company. No benefit plan or similar compensation existed for any
of the persons named above at December 31, 1998. The Company intends to adopt a
share incentive plan in order to provide incentives to attract, retain and
motivate highly competent persons as executive management, employees and
directors of the Company and of any affiliate thereof. This plan will provide
such persons with opportunities to acquire shares of common stock of Global
Health, or to receive monetary payments based on the value of such shares
pursuant to certain benefits. Benefits under the plan will be available for
grant in any one or a combination of stock options, stock appreciation rights,
stock awards, performance awards and stock units.
21
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
Upon consummation of the Reorganization, the Company entered into
employment agreements with Mr. Marconi, Mr. Paul M. Buxbaum and Mr. Donald J.
Lewis to serve as President, Chief Executive Officer and Chief Financial Officer
and Senior Vice President, respectively, of the Company.
The employment agreement with Mr. Marconi provides that he is employed as
President of the Company for a term of five years, renewable upon 90 days' prior
notice by the Company to Mr. Marconi. The agreement provides for a base salary
of $2 million and an annual bonus to be determined by the Board of Directors of
the Company to the extent the Company's EBITDA exceeds $50 million in any year
during the term of the Agreement, which amount can be up to 15% of the amount by
which EBITDA in such year exceeds $50 million. Upon a change of control (as
defined therein), Mr. Marconi has the right to terminate his employment. In such
event, the Company would be required to pay Mr. Marconi his pro rated base
salary and bonus (if one was received the year prior to termination) at the time
of termination plus one year severance pay equal to his annual salary. The
agreement also provides that Mr. Marconi will serve as Chairman of the Board of
Directors of the Company.
The employment agreement with Mr. Buxbaum provides that he is employed as
Chief Executive Officer of the Company for a term of three years, renewable upon
90 days' prior notice by the Company to Mr. Buxbaum. The agreement provides for
a base salary of $450,000 and an annual bonus to be determined by the Board of
Directors of the Company. Upon a change of control (as defined therein), Mr.
Buxbaum has the right to terminate his employment. In such event, the Company
would be required to pay Mr. Buxbaum his pro rated base salary and bonus (if one
was received the year prior to termination) at the time of termination plus one
year severance pay equal to his annual salary. In addition, Mr. Marconi has
agreed to grant to Mr. Buxbaum an option to acquire up to 20% of the common
stock of the Company owned by Mr. Marconi on the Original Issue Date at the fair
market value thereof as of the Original Issue Date.
The employment agreement with Mr. Lewis provides that he is employed as
Chief Financial Officer and Senior Vice President of the Company for a term of
three years, renewable upon 90 days' prior notice by the Company to Mr. Lewis.
The agreement provides for a base salary of $225,000 and an annual bonus to be
determined by the Board of Directors of the Company. Upon a change of control
(as defined therein), Mr. Lewis has the right to terminate his employment. In
such event, the Company would be required to pay Mr. Lewis his pro rated base
salary and bonus (if one was received the year prior to termination) at the time
of termination plus one year severance pay equal to his annual salary.
In June 1998, the Company entered into an employment agreement with Mr.
Howard L. Simon to serve as Chief Operating Officer of the Company for a term of
three years, renewable upon 90 days prior notice by the Company to Mr. Simon.
The agreement provides for a base salary of $225,000 and an annual bonus to be
determined by the Board of Directors of the Company. Upon a change in control
(as defined therein), Mr. Simon has the right to terminate his employment. In
such event, the Company would be required to pay Mr. Simon his pro rated base
salary and bonus (if one was received in the year prior to termination) at the
time of termination plus one year's severance pay equal to his annual salary.
In December 1998, the Company entered into an employment agreement with Mr.
Arthur J. Salerno to serve as President of American. The employment agreement
with Mr. Salerno provides that he is employed as President of American for a
term of three years. The agreement provides for a base salary of $300,000 and an
annual bonus to be determined by the Board of Directors of the Company. If the
Company terminates Mr. Salerno (other than for cause) he is entitled to his base
salary for the remainder of the term, less any compensation he would receive
from a successor employer.
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to the ownership of
the outstanding common stock of the Company (the "Common Stock"), as of the date
hereof, by each person known to the Company to own beneficially more than 5% of
the Common Stock outstanding on that date. No other person owns any Common
Stock.(1)
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF TOTAL VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS POWER
- -------------- ------------------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock Richard D. Marconi 495,1481 100% 100%
Global Health Sciences, Inc.
987 N. Enterprise Street
Orange, California 92867
</TABLE>
- ---------------------------
(1) Mr. Marconi has granted Mr. Buxbaum an option to acquire up to 20% of the
Common Stock currently owned by Mr. Marconi at the fair market value
thereof on April 23, 1998. This option will vest over a period of years,
the term of which has not yet been determined.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
A portion of the proceeds of the Company's offering (the "Notes Offering")
of the Notes was used by the Company to acquire all outstanding shares of
Omni-Pak and Dynamic owned by Mr. Mark Hughes, Chairman and Chief Executive
Officer of Herbalife, pursuant to the Reorganization. Herbalife accounted for
61% of the Company's sales in 1998.
The facility containing the Company's corporate headquarters and
granulation factory is leased by the Company pursuant to the terms of a
three-year lease agreement by and among the Company, Mr. Marconi and certain
other persons. The base rent is approximately $7,000 per month. Mr. Marconi owns
shares in American Health Sciences, Inc. ("American Health Sciences"), a
privately held company and customer of D&F. Aggregate sales to American Health
Sciences in 1998 were approximately $673,000.
The Company engaged BGA Consulting in April 1998 to perform certain
consulting services relating to the operation of the Company. The consulting
agreement has a three-year term and provides for an annual consulting fee of
$400,000. In addition, in consideration for its services to the Company in
connection with the Notes Offering and the Reorganization, BGA Consulting
received directly from the Company's shareholders at the time of the
Reorganization, a fee equal to approximately $2.4 million. The Company also
employed BGA Consulting to assist in financial due diligence relating to two
proposed acquisitions and paid BGA Consulting $39,407 in consideration of such
services. Mr. Buxbaum is the President of BGA Consulting.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 17th day of
March 1999.
GLOBAL HEALTH SCIENCES, INC.
GLOBAL HEALTH SUB, INC.
RAVEN INDUSTRIES, INC.
WEST COAST SALES
DYNAMIC PRODUCTS, INC.
D&F INDUSTRIES, INC.
By: /S/ PAUL M. BUXBAUM
---------------------------
Name: Paul M. Buxbaum
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ DONALD J. LEWIS Chief Financial Officer, Senior Vice President and March 17, 1999
- -------------------- Director (Principal Financial Officer and Principal
Donald J. Lewis Accounting Officer) of Global Health Sciences,
Inc. and each of the Subsidiaries
/S/ RICHARD D. MARCONI President, Chairman of the Board and Director of March 17, 1999
- ----------------------- Global Health Sciences, Inc. and each of the
Richard D. Marconi Subsidiaries
/S/ DENNIS DECONCINI Director of Global Health Sciences, Inc. March 17, 1999
- ---------------------
Dennis DeConcini
/S/ BRADLEY GATES Director of Global Health Sciences, Inc. March 17, 1999
- ------------------
Bradley Gates
/S/ PAUL M. BUXBAUM Chief Executive Officer and Director (Principal March 17, 1999
- -------------------- Executive Officer) of Global Health Sciences, Inc.
Paul M. Buxbaum and each of the Subsidiaries.
</TABLE>
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS:
FINANCIAL STATEMENTS:
The financial statements required to be filed hereunder are listed on
page F-1 hereof.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof.
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <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.
(incorporated by reference to Exhibit 4.1 to the Company's registration
statement on Form S-4 (File No. 333-52539 (the "S-4"))
2.2 Stock Purchase Agreement, dated as of December 11, 1998, by and among
Global Health Sub, Inc., Arthur J. Salerno and Kathleen P. Salerno
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
filed on December 23, 1998)
3.1(i) Articles of Incorporation of Global Health Sciences, Inc.
(incorporated by reference to Exhibit 3.1(i) to the S-4)
3.1(ii) Articles of Incorporation of Global Health Sub, Inc. (incorporated by
reference to Exhibit 3.1(ii) to the S-4)
3.1(iii)Articles of Incorporation of Raven Industries, Inc. (incorporated by
reference to Exhibit 3.1(iii) to the S-4)
3.1(iv) Articles of Incorporation of Dynamic Products Inc. (incorporated by
reference to Exhibit 3.1(iv) to the S-4)
3.1(v) Articles of Incorporation of West Coast Sales (incorporated by reference
to Exhibit 3.1(v) to the S-4)
3.1(vi) Articles of Incorporation of D&F Industries, Inc. (incorporated by
reference to Exhibit 3.1(vi) to the S-4)
3.2(i) By-Laws of Global Health Sciences, Inc. (incorporated by reference to
Exhibit 3.2(i) to the S-4)
3.2(ii) By-Laws of Global Health Sub, Inc. (incorporated by reference to Exhibit
3.2(ii) to the S-4)
3.2(iii)By-Laws of Raven Industries, Inc. (incorporated by reference to Exhibit
3.2(iii) to the S-4)
3.2(iv) By-Laws of Dynamic Products Inc. (incorporated by reference to Exhibit
3.2(iv) to the S-4)
3.2(v) By-Laws of West Coast Sales (incorporated by reference to Exhibit 3.2(v)
to the S-4)
3.2(vi) By-Laws of D&F Industries, Inc. (incorporated by reference to Exhibit
3.2(vi) to the S-4)
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 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 to 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 to the S-4)
25
<PAGE>
4.7 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 to the
S-4)
4.8 Supplemental Indenture, dated as of December 11, 1998, among American
Ingredients Inc., Global Health Sciences, Inc., the existing subsidiary
guarantors named therein and Chase Manhattan Bank and Trust Company,
National Association.
10.1 Supply Agreement dated as of September 2, 1997 by and between Raven
Industries, Inc. and Herbalife International of America, Inc.
("Herbalife") (incorporated by reference to Exhibit 10.23 to Herbalife's
Form 10-K for the year ended December 31, 1997)
10.2 Supply Agreement dated as of September 2, 1997 by and between Dynamic
Products Inc. and Herbalife (incorporated by reference to Exhibit 10.22
to Herbalife's Form 10-K for the year ended December 31, 1997)
10.3 Supply Agreement dated as of September 2, 1997 by and between Global
Health and Herbalife (incorporated by reference to Exhibit 10.21 to
Herbalife's Form 10-K for the year ended December 31, 1997)
10.4 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 to the S-4)
10.5 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 to the S-4)
10.6 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 to the S-4)
10.7 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 to the S-4)
10.8 Employment Agreement dated as of June 1, 1998 by and between Global
Health Sciences, Inc. and Howard L. Simon (incorporated by reference to
Exhibit 10.8 to the S-4)
10.9 Executive Employment Agreement dated as of December 11, 1998, between
American Ingredients, Inc. and Arthur J. Salerno.
21 Subsidiaries of the Registrants
27 Financial Data Schedule for the fiscal year ended December 31, 1998,
which is submitted electronically to the Commission for information only
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on December 23, 1998.
The Company filed a Form 8-K/A on February 24, 1999.
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Global Health Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of Global Health
Sciences, Inc. (the "Company"), as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' (deficit) equity,
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Los Angeles, California
March 2, 1999
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
(Formerly D&F Industries, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 7,987 $ 3,768
Accounts receivable, net of allowance for doubtful accounts of $284 and
$231 at December 31, 1998 and 1997, respectively (Notes 2 and 11) 11,912 2,864
Inventories (Notes 2 and 3) 15,014 8,040
Prepaid expenses and other current assets 3,984 80
------ -----
Total current assets 38,897 14,752
PROPERTY AND EQUIPMENT, Net (Notes 2 and 4) 6,790 1,984
GOODWILL AND OTHER ASSETS, Net (Notes 1, 2, 5 and 12) 158,530
------- --------
TOTAL $204,217 $16,736
======== =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 20,028 $ 8,720
Accrued interest payable 4,125
Acquisition Facility (Note 7) 31,000
Line of credit (Note 6) 420
-------- ------
Total current liabilities 55,153 9,140
-------- ------
LONG-TERM DEBT (Notes 1 and 7) 218,832
-------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' (DEFICIT) EQUITY :
Common stock; no par value, 2,000,000 shares authorized;
495,148 and 1,075,000 shares issued and outstanding at December 31, 1998
and 1997, respectively 473 1,026
(Accumulated deficit) retained earnings (70,241) 6,570
------- -----
Total stockholders' (deficit) equity (69,768) 7,596
-------- -----
TOTAL $204,217 $16,736
========= =======
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
(Formerly D&F Industries, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES (Notes 2 and 11) $146,741 $85,191 $73,523
COST OF SALES 102,756 55,020 47,958
-------- ------ ------
GROSS PROFIT 43,985 30,171 25,565
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Note 8) 12,589 7,088 6,347
AMORTIZATION OF INTANGIBLES (Notes 2 and 5) 15,674
------ ------ ------
OPERATING INCOME 15,722 23,083 19,218
INTEREST EXPENSE (INCOME) (Notes 1, 6 and 7) 17,842 (82) (56)
------ ------- -------
(LOSS) INCOME BEFORE PROVISION FOR STATE
INCOME TAXES (2,120) 23,165 19,274
PROVISION FOR STATE INCOME TAXES (Note 2) 203 350 280
--------- ------- -------
NET (LOSS) INCOME $ (2,323) $22,815 $18,994
--------- ------- -------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
(Formerly D&F Industries, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Retained Stockholders'
-------------------------------- Earnings (Deficit)
Shares Amount (Accumulated Equity
Deficit)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,075,000 $1,026 $ 4,144 $ 5,170
Net income 18,994 18,994
Dividends (17,836) (17,836)
--------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 1,075,000 1,026 5,302 6,328
Net income 22,815 22,815
Dividends (21,547) (21,547)
--------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 1,075,000 1,026 6,570 7,596
Net loss (2,323) (2,323)
Dividends (12,466) (12,466)
Recapitalization (Note 1) (543,085) (518) (58,182) (58,700)
Share repurchase (Note 10) (36,767) (35) (3,840) (3,875)
------- ------ --------- ---------
BALANCE, DECEMBER 31, 1998 495,148 $ 473 $ (70,241) $(69,768)
======= ====== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
(Formerly D&F Industries, Inc.)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,323) $ 22,815 $ 18,994
Adjustments to reconcile net (loss) income to net cash
provided by operating activities, net of acquisition of
American and the Reorganization:
Depreciation and amortization 16,944 523 504
Changes in operating assets and liabilities:
Accounts receivable (2,111) (502) (383)
Inventories (18) (3,740) (827)
Prepaid expenses and other current assets (3,492) 75 (47)
Accounts payable and accrued liabilities (685) 1,919 664
Accrued interest payable 4,125
------ ------ ------
Net cash provided by operating activities 12,440 21,090 18,905
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Omni-Pak and Affiliates, net of cash acquired
of $2,640 (135,227)
Purchase of American, less cash acquired of $733 (Note 12) (29,626)
Issuance of note receivable (Note 12) (6,000)
Proceeds from sale of property and equipment 280
Other assets (382)
Purchases of property and equipment (2,005) (226) (871)
------- ------ ------
Net cash used in investing activities (172,960) (226) (871)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (14,114) (21,547) (17,836)
Principal payments under note payable (40)
Principal payments under line of credit, net (420) (120) (60)
Repurchase of common stock (62,575)
Issuance of long-term debt 218,502
Net borrowings on Acquisition Facility 31,000
Debt issuance costs (7,654)
------- ------- -------
Net cash provided by (used in) financing activities 164,739 (21,667) (17,936)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,219 (803) 98
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,768 4,571 4,473
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,987 $ 3,768 $ 4,571
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the period for:
Interest $ 13,100 $ 43 $ 51
Income taxes 291 350 280
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
(FORMERLY D&F INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
1. GENERAL AND THE REORGANIZATION
Global Health Sciences, Inc. (the "Company") is primarily engaged in the
manufacture of nutritional supplements.
On April 23, 1998, D&F Industries ("D&F" or the "Predecessor"), Raven
Industries dba 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 $137,900 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 $58,700
in cash to repurchase approximately 543,000 outstanding shares from its
stockholders (the "Recapitalization"). The above transactions were financed
principally through the sale of $225,000 aggregate principal amount of the
Notes, the net proceeds of which were approximately $210,800. The
transactions described above are referred to as the "Reorganization."
The Acquisition has been accounted for under the purchase method of
accounting. The purchase price consists of $136,900 of cash and $1,000 of
transaction costs and was allocated to Omni-Pak and Affiliates assets and
liabilities based on their respective values as of the closing date. The
excess of purchase price over the approximate $1,400 of net asset value at
the closing date has been allocated to goodwill.
The financial statements presented for the 1996 and 1997 periods are those
of D&F. The statements of operations and cash flows for the period ended
December 31, 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.
-6-
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. To reduce its credit risk, the Company monitors the credit
standing of the financial institutions that hold the Company's cash and
cash equivalents.
ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS - Financial instruments that
potentially subject the Company to a concentration of credit risk consist
primarily of accounts receivable. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential
credit losses.
The Company's largest customer is Herbalife International, Inc.
("Herbalife"). Sales to Herbalife represented 65%, 85% and 80% of net sales
in 1998, 1997 and 1996, respectively. Receivables from Herbalife also
represented 14%, 41% and 38% of total accounts receivable at December 31,
1998, 1997 and 1996, respectively.
The Company's second largest customer, Natural Supplement Association, Inc.
dba Experimental and Applied Sciences ("EAS"), represented 24% of net sales
in 1998. Receivables from EAS also represented 28% of total accounts
receivable at December 31, 1998.
In addition, at December 31, 1998 the Company had accounts receivable from
two other customers that aggregated 21% of total accounts receivable.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are provided for on the straight-line method
using estimated useful lives of 7 years for equipment and 31 years for
buildings. Leasehold improvements are amortized over the life of the
related asset or the term of the lease, whichever is shorter.
LONG-LIVED ASSETS - Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable based upon undiscounted cash flows.
Impairment losses would be recognized if the carrying amount of the asset
exceeds its fair value.
GOODWILL - Goodwill is being amortized over a five year-period using the
straight-line method.
DEFERRED FINANCING COSTS - Deferred financing costs are being amortized
over the term of the related debt: five years for costs incurred related to
the Acquisition Facility and ten years for costs incurred related to the
long-term debt.
-7-
<PAGE>
INCOME TAXES - The Company has elected S corporation status for federal and
state income tax purposes, and other than a 1.5% state tax, taxable income
is passed through to the Company's shareholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable and
payable, and debt instruments. The carrying values of all financial
instruments, other than debt instruments, are representative of their fair
values due to their short maturities. The carrying value of the Company's
Acquisition Facility approximates fair value because the interest rates are
based on current rates offered to the Company. The fair value of the
Long-Term Debt at December 31, 1998 was $146,250 based upon quoted market
prices.
NEW ACCOUNTING STANDARDS -. In September 1997, the FASB issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information."
SFAS No. 131 requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operations and major
customers. The Company has adopted this statement as of December 31, 1998.
The Company operates within a single industry and geographic segment as a
manufacturer and supplier of herbal products, weight control, sports and
performance nutrition products, and special products; however, the Company
does not aggregate financial information by product line. Revenues from
significant customers are provided above.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Statement of Position 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. The Company has not yet analyzed
the impact of adopting Statement of Position 98-1.
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.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
<S> <C> <C>
Raw materials $12,549 $6,759
Work in process 1,535 1,022
Finished goods 930 259
------- -------
Total $15,014 $8,040
------- -------
</TABLE>
-8-
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
<S> <C> <C>
Equipment $13,121 $7,114
Leasehold improvements 3,589 1,200
Land 150 150
------- ------
16,860 8,464
Less accumulated depreciation and amortization 10,070 6,480
------- ------
Total $ 6,790 $1,984
------- ------
------- ------
</TABLE>
5. GOODWILL AND OTHER ASSETS
Goodwill and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
<S> <C> <C>
Goodwill $166,116 $ -
Deferred financing costs 8,666
Other assets 21
-------- -------
174,803
Less accumulated amortization 16,273
------- -------
Total goodwill and other assets, net $158,530 $ -
-------- -------
-------- -------
</TABLE>
6. LINE OF CREDIT
During 1997, the Company had an unsecured line of credit agreement with a
bank under which it could borrow up to $2,000. The Company had borrowings
of $420 outstanding at December 31, 1997. Borrowings accrued interest at
the bank's reference rate, which was 8.50% at December 31, 1997. The line
of credit was collateralized by substantially all of the Company's assets.
In addition, the agreement contained financial covenants related to the
Company's ratio of debt to tangible net worth and requires the Company to
maintain minimum levels of net income.
In conjunction with the Reorganization described in Note 1, the line of
credit was repaid and the agreement was terminated.
-9-
<PAGE>
7. LONG-TERM DEBT AND REVOLVING COMMITMENT
ACQUISITION FACILITY - Effective April 23, 1998, the Company entered into a
new credit agreement (the "Acquisition Facility"), which provided for
borrowings of up to $50,000 under a line of credit through April 2003, of
which no more than $10,000 is available for working capital and general
corporate purposes. In conjunction with its acquisition of American
Ingredients (see Note 12), in December 1998, the Company entered into the
First Amendment to the Acquisition Facility, which increased the available
borrowings to $75,000. Under the terms of 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
(8.25% at December 31, 1998). 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 subsidiaries 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. At
December 31, 1998, the Company was not in compliance with certain of the
financial ratio covenants identified above. The Company obtained a waiver
of such through March 31, 1999, and, as a result, the Acquisition Facility
has been classified as a current liability. While there can be no assurance
what actions, if any, the lenders may take after March 31, 1999, the
Company does not expect the lenders to accelerate the maturity of the
Acquisition Facility. Failure by the Company to make payment at maturity or
to comply with any covenant of the Acquisition Facility that results in
acceleration of the maturity of the Acquisition Facility would be an event
of default on the Notes. In addition, the Acquisition Facility gives the
issuing banks discretion over the approval of acquisitions and limits
capital expenditures to 3% of consolidated revenues.
LONG-TERM DEBT - As described in Note 1, the Company issued $225,000 of
Notes due 2008, the net proceeds of which were approximately $210,600. The
difference is being amortized over the term of the note. Expenses related
to the issuance of the Notes were approximately $7,700. The stated interest
rate on the Notes is 11%. The Notes were issued at a discount of $6,600 for
an effective rate of approximately 11.5%. The indenture places certain
limitations on, among other things, incurrances of additional debt,
acquisitions, investments and dividends.
8. EMPLOYEE BENEFITS
The Company has a qualified 401(k) retirement plan for its full-time
employees and makes matching contributions in an amount equal to 50% of the
first 6% of the employee's compensation. In addition, the Company may make
additional contributions at the discretion of the Board of Directors. Total
contributions to the plan were $152, $92 and $90 in 1998, 1997 and 1996,
respectively.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases certain of its operating facilities.
Facility leases contain rent escalation clauses. Leases are primarily net
leases, which require the payment of executory costs such as real estate
taxes, insurance, common area maintenance and other operating costs in
addition to minimum rentals.
-10-
<PAGE>
The Company also rents an operating facility from an entity affiliated
through common ownership. The facility is rented on a month-to-month basis.
Total rent paid to this entity was $84 in 1998, 1997 and 1996. The Company
also leases certain equipment under noncancelable operating leases. The
Company is committed under facility and equipment operating leases for
minimum rental payments as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1999 $ 3,077
2000 3,185
2001 3,307
2002 3,361
2003 2,832
Thereafter 10,503
-------
$26,265
=======
</TABLE>
Rental expense for the periods ended December 31, 1998, 1997 and 1996 was
$1,517, $669 and $629, respectively.
AGREEMENT WITH HERBALIFE - The Company has a three-year agreement with
Herbalife, which became effective on January 12, 1998 and extends through
January 2001. Among other matters, the terms of the agreement require
Herbalife to purchase a minimum of 80% of its inventory requirements of
certain specified products from the Company at agreed-upon prices.
LITIGATION - The Company is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not expect the
resolution of these legal matters to have a material adverse effect on the
Company's financial statements.
STOCK OPTIONS - Mr. Marconi, Chairman of the Company and sole shareholder,
has granted Mr. Buxbaum, the Company's Chief Executive Officer, an option
to acquire up to 20% of the common stock of the Company at the fair value
as of the date of the Reorganization. The option will vest over a period
of years, the term of which has not yet been determined.
10. REPURCHASE OF COMMON SHARES
In late September 1998, the Company repurchased 36,767 shares of its common
stock for $3,875 in cash.
11. RELATED-PARTY TRANSACTIONS
During 1996 and 1997, the Company sold products to an entity affiliated
through common ownership, which in turn sold products to Herbalife. The
entity was acquired in conjunction with the Acquisition described in Note
1. Sales to the affiliated company were $1,393 in 1997 and $1,162 in 1996.
The Company had a receivable from the affiliated company of $101 at
December 31, 1997 and $45 at December 31, 1996.
During 1998, BGA Consulting was paid fees of $2,431 related to the
Reorganization, $39 related to the American Acquisition and $400 as an
annual consulting fee. The Company's Chief Executive Officer, Mr. Paul
Buxbaum, is the President of BGA Consulting.
-11-
<PAGE>
12. ACQUISITION
On December 11, 1999, the Company, through its wholly owned subsidiary,
Global Sub, acquired all of the outstanding capital stock of American (the
"American Acquisition"). American is a distributor of raw materials used in
the nutritional supplement industry. The purchase price was $36,359,
including transaction costs of $359, consisting of $30,359 in cash and the
forgiveness of a $6,000 note receivable. The acquisition was accounted for
as a purchase, and accordingly, the acquired assets and liabilities were
recorded in the Company's consolidated balance sheet based on their
estimated fair values on December 11, 1998 as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets acquired $ 8,802
Liabilities assumed (2,109)
Goodwill 29,667
-------
Total $ 36,360
========
</TABLE>
The following unaudited pro forma information presents the results of
operations for the years ended December 31, 1998 and 1997 as though the
Reorganization discussed in Note 1 and the American Acquisition had
occurred at the beginning of the respective years.
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
<S> <C> <C>
Net sales $200,725 $200,214
Operating income 7,223 20,000
Net loss 21,406 8,842
</TABLE>
Pro forma operating income and net loss in 1998 include $6,000 in one-time
bonuses to key executives paid by American. Such bonuses were paid in
December 1998 prior to American's sale to the Company.
******
-12-
<PAGE>
SUPPLEMENTAL INDENTURE
----------------------
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
December 11, 1998, among American Ingredients, Inc. (the "New Subsidiary
Guarantor"), and indirect subsidiary of Global Health Sciences, Inc., a
California corporation (the "Company"), the Company, the Subsidiary
Guarantors (the "Existing Subsidiary Guarantors") under the Indenture
referred to below, and Chase Manhattan Bank and Trust Company, National
Association, a national banking association, as trustee under the Indenture
referred to below (the "Trustee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS the Company has heretofore executed and delivered to the
Trustee an Indenture (as such may be amended from time to time, the
"Indenture"). dated as of April 23, 1998, providing for the issuance of an
aggregate principal amount of up to $325,000 of 11% Senior Notes due 2008
(the "Notes");
WHEREAS Section 4.18 of the Indenture provides that under certain
circumstances the Company is required to cause the New Subsidiary Guarantor
to execute and deliver to the Trustee a supplemental indenture pursuant to
which the New Subsidiary Guarantor shall unconditionally guarantee all of the
Company's obligations under the Notes and the Indenture pursuant to a
Guarantee on the terms and conditions set forth herein; and
WHEREAS pursuant to Section 8.01 of the Indenture, the Trustee, the
Company and Existing Subsidiary Guarantors are authorized to execute and
deliver this Supplemental Indenture;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the New
Subsidiary Guarantor, the Company, the Existing Subsidiary Guarantors and the
Trustee mutually covenant and agree for the equal and ratable benefit of the
Holders of the Notes as follows:
1. Definitions. (a) Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
(b) For all purposes of this Supplemental Indenture, except as otherwise
herein expressly provided or unless the context otherwise requires. (i) the
terms and expressions used herein shall have the same meanings as
corresponding terms and expressions used in the Indenture; and (ii) the
words "herein", "hereof" and
<PAGE>
"hereby" and other words of similar import used in this Supplemental
Indenture refer to this Supplemental Indenture as a whole and not to any
particular section hereof.
2. Agreement to Guarantee. The New Subsidiary Guarantor hereby agrees,
jointly and severally with all other Subsidiary Guarantors, to guarantee the
Company's obligations under the Notes and the Indenture on the terms and
subject to the conditions set forth in Article 10 of the Indenture
(including, without limitation, the subordination provisions thereof) and to
be bound by all other applicable provisions of the Indenture. From and after
the date hereof, the New Subsidiary Guarantor shall be a Subsidiary Guarantor
for all purposes under the Indenture and the Notes.
3. Execution of New Guarantee. To evidence the Guarantee set forth in
this Supplemental Indenture, the New Subsidiary Guarantor hereby agrees that a
notation of such Guarantee in accordance with Section 10.09 of the Indenture
will be placed on the Notes. The Trustee is hereby authorized and directed,
with no further action by the Company, the New Subsidiary Guarantor or the
other Subsidiary Guarantors, to replace the Guarantee currently attached to
the Notes with the Guarantee executed in connection herewith.
4. Ratification of Indenture: Supplemental Indentures part of
Indenture. Except as expressly amended hereby, the Indenture is in all
respects ratified and confirmed and all the terms, conditions and provisions
thereof shall remain in full force and effect. This Supplemental Indenture
shall form a part of the Indenture for all purposes, and every holder of
Notes heretofore or hereafter authenticated and delivered shall be bound
hereby.
5. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
6. Trustee Makes No Representation. The Trustee makes no representation
as to the validity or sufficiency of this Supplemental Indenture.
7. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement.
8. Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction thereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
AMERICAN INGREDIENTS INC.
By:
--------------------------
Name:
Title:
GLOBAL HEALTH SCIENCES, INC.:
By:
--------------------------
Name:
Title:
GLOBAL HEALTH SUB, INC.:
By:
--------------------------
Name:
Title:
D&F INDUSTRIES, INC.:
By:
--------------------------
Name:
Title:
RAVEN INDUSTRIES, INC.:
By:
--------------------------
Name:
Title:
<PAGE>
DYNAMIC PRODUCTS, INC.:
By:
--------------------------
Name:
Title:
WEST COAST SALES:
By:
--------------------------
Name:
Title:
CHASE MANHATTAN BANK AND
TRUST COMPANY
NATIONAL ASSOCIATION:
By:
--------------------------
Name:
Title:
<PAGE>
Exhibit 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 11, 1998, between American Ingredients
Inc., a California corporation (the "EMPLOYER"), and Arthur J. Salerno, an
individual ("EXECUTIVE"). The employer is an indirect wholly-owned subsidiary of
Global Health Sciences, Inc., a California corporation (the"COMPANY").
The parties hereto hereby agree as follows:
1. EMPLOYMENT; DUTIES.
The Employer hereby employs Executive, and Executive hereby accepts
employment, in an executive capacity for the Employer and its subsidiaries and
agrees to perform duties customarily incident to his position and such other
duties for the Company and its subsidiaries as he may be reasonably assigned
from time to time pursuant to the direction of the Employer's Board of Directors
(the "BOARD"). Executive shall have such authority, discretion, power and
responsibility as determined by the Board, and shall be entitled to appropriate
office and secretarial facilities. Executive shall devote his best efforts on a
full-time basis which shall represent substantially all of his business time to
the performance of his duties hereunder and to advancing the interests of the
Company and its subsidiaries.
2. COMPENSATION; BENEFITS.
2.1 GENERAL. As full compensation for his services hereunder in
whatever capacity rendered (including, without limitation, as an officer and/or
director of the Employer or the Company or any of the Company's other
subsidiaries), the Employer shall pay, grant or provide to Executive, and
Executive agrees to accept, the following salary and other compensation and
benefits:
(a) an annual base salary, payable in accordance with the Company's
standard payroll practices for senior executive officers, of $300,000 per annum
(the "BASE SALARY");
(b) an annual bonus, payable with respect to each full fiscal year of
the Employer during the Term (as defined in Section 4.1), or PRO RATA portion
thereof, in each case as determined by the Board in its sole discretion;
<PAGE>
(c) the right to participate in any medical, dental, disability,
retirement, insurance, savings, vacation, holiday, paid sick leave or other
plans as in effect from time to time for the benefit of the Company's senior
executive officers;
(d) except as otherwise provided in Section 4.2(b), for a period of
five years following the Term, the right to participate in any medical and
dental insurance plans that were provided to Executive pursuant to Section
4.2(c) during the Term; PROVIDED, HOWEVER, that Executive shall pay the
Employer's costs of continuing to provide such insurance to Executive (such cost
will be based upon the same evaluation or formula used to determine the cost of
such insurance during the Term).
(e) four weeks paid vacation per year to be taken in accordance with
the policies and procedures of the Employer as in effect from time to time for
senior executive officers; and
(f) if Executive agrees to serve on the board of directors of the
Company or any of its subsidiaries, Executive shall receive compensation for
service as a director equal to the highest level of compensation paid solely for
services as a director to any member of such board of directors who is also an
officer of the Company or any of its subsidiaries.
2.2 INCOME TAX WITHHOLDING. The Employer may withhold from any
compensation or benefits payable to Executive all Federal, State, City or other
taxes as shall be required pursuant to any applicable law or governmental
regulation or ruling.
3. EXPENSES; INSURANCE.
3.1 EXPENSES. Executive is hereby authorized to incur
reasonable expenses in connection with the performance of his duties hereunder
during the Term, provided that such expenses are consistent with the policies of
the Employer as established from time to time or otherwise approved or ratified
by the Board. The Employer shall reimburse Executive in accordance with its
standard policies as established from time to time for all such expenses, upon
presentation by Executive from time to time of evidence thereof, provided that
the Board approves such reimbursements and that Executive maintains the
appropriate records and accounts as required by applicable law and the policies
and procedures of the Employer.
2
<PAGE>
3.2 INSURANCE. The Company or any affiliate thereof may apply
for and take out, in its own name and at its own expense, life, health,
accident, disability and other insurance upon Executive in any sum or sums that
it may deem necessary to protect its interests. Executive agrees to aid and
cooperate, in all reasonable respects, with the Company or such affiliate in
procuring any and all such insurance, including, without limitation, by
submitting to the usual and customary medical examinations and filling out,
executing and delivering such applications and other instruments in writing as
may be reasonably required by an insurance company or companies to which any
application or applications for such insurance may be made by or for the
Employer or any such affiliate.
4. TERM; TERMINATION.
4.1 TERM. Subject to Section 4.2, the term of Executive's
employment hereunder (the "TERM") shall commence as of the date hereof, and
shall continue for three years thereafter.
4.2 TERMINATION BY THE EMPLOYER. (a) The Term shall terminate
upon Executive's death, and may be terminated by the Employer (pursuant to an
action by the Board), upon notice to Executive for cause or, 30 days after
notice to Executive, as a result of Executive's disability. For the purposes of
this Agreement, "FOR CAUSE" means:
i) a material breach by Executive of any provision of this Agreement;
ii) any conduct, action or behavior by Executive that has or may
reasonably be expected to have a material adverse effect on the
reputation of the Company or any of its subsidiaries or on Executive's
reputation or that is not befitting of a senior executive of the
Employer (including, without limitation, the commission of a fraud by
Executive in the course of his employment hereunder);
iii) the commission by Executive of an act involving moral turpitude of
dishonesty, whether or not in connection with Executive's employment
hereunder (including, without limitation, the commission by Executive
of a felony, as evidenced by his conviction therefor (including a plea
of NOLO CONTENDERE therefor));
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iv) the conviction of Executive in a court of competent jurisdiction of a
crime constituting a felony in such jurisdiction involving money or
other property of the Company or any of its affiliates or any other
felony (whether or not involving money or other property of the
Company or any of its affiliates) involving moral turpitude;
v) any continued failure to satisfactorily perform Executive's duties
with the Company or any of its subsidiaries after a written demand for
performance is delivered to Executive by the Board, which specifically
identifies the manner in which the Board believes that Executive shall
not have satisfactorily performed his duties;
vi) the willful engaging in misconduct that is materially injurious to the
Company or any of its subsidiaries, monetarily or otherwise; or
vii) chronic absenteeism, alcoholism or drug addiction of Executive.
For the purposes hereof, Executive shall be deemed "DISABLED"
if he is unable, as a result of any physical or mental incapacity or impairment
as determined by the Board, to perform the services required of him hereunder
for any period or periods aggregating three months during any twelve-month
period.
(b) Executive shall continue to receive the Base Salary,
regardless of any illness or incapacity unless the Term is terminated. If
Executive's employment is terminated pursuant to Section 4.2(a) or voluntarily
terminated by Executive, Executive shall be entitled to receive only his Base
Salary through the effective date of termination, except that if Executive's
employment is terminated by the Employer as a result of Executive's disability,
Executive shall also be entitled to receive health insurance benefits pursuant
to Section 2.1(d).
(c) If the Employer terminates the employment of Executive
otherwise than in accordance with the provisions of Section 4.2(a), Executive
shall be entitled to receive from the Employer (i) health insurance benefits
pursuant to Section 2.1(d), and (ii) at the same times as such payments would
otherwise have been made hereunder, payments equal to the Base Salary for the
remainder of the period originally fixed as the Term pursuant to Section 4.1.
Executive shall use his best efforts to mitigate the amount of any payment
required to be made by the Employer hereunder and if Executive accepts
employment with any person, firm or corporation after the date of termination of
his employment, the compensation from such
4
<PAGE>
employment shall be applied in reduction of the compensation payable by the
Employer under this paragraph 4.2(c).
5. COVENANTS.
5.1 CONFIDENTIALITY. Executive shall not, during the Term or
at any time thereafter, directly or indirectly, publish or disclose to any
person, firm or corporation or other entity, whether or not a competitor of the
Company, any confidential information concerning the assets, business or affairs
of the Company or any of its affiliates including, without limitation, any trade
secrets, sources of supply, costs, pricing and distribution practices, customer
lists, financial data, employee information or information as to organizational
structure.
5.2 NON-COMPETITION. (a) two years thereafter (the "OPERATIVE
PERIOD"), Executive agrees to refrain, directly or indirectly, alone or as an
officer, agent, employee, director, member, manager, stockholder, partner of or
investor in any other corporation or other entity (except as to the acquisition
of not more than two percent of the outstanding stock of any corporation the
securities of which are traded on a regular basis on a recognized securities
exchange or on a regular basis in over-the-counter markets) from owning,
managing, operating or controlling, or participating in the ownership,
management, operation or control of, or working for or permitting the use of his
name by, any business or activity in any jurisdiction which is at the time
competitive with the business of the Company or any of its subsidiaries as
carried on as of the date hereof and as subsequently developed and derived
during Executive's employment with the Employer. In addition to, and not in
limitation of, the foregoing, throughout the Operative Period, Executive, alone,
or as a member, manager, officer, employee or agent of any partnership or
limited liability company, or as an officer, agent, employee or director of any
corporation, shall not, for himself or for others, solicit or accept business of
the nature of that in which the Company or any of its subsidiaries is or shall
be engaged of any person or entity who shall have been a supplier, customer or
client of the Company or any of its subsidiaries at any time within the two
years preceding the effective date of termination of Executive's employment with
the Employer. While the restrictions set forth above are considered by the
parties to be reasonable in all the circumstances, it is recognized that
restrictions of the nature in question may fail for technical reasons
unforeseen, and accordingly it is hereby agreed and declared that if any of such
restrictions shall be adjudged to be void as going beyond what is reasonable in
all the circumstances for the protection of the interests of the Company or any
of its subsidiaries or affiliates but would be valid if part of the wording
thereof were deleted
5
<PAGE>
or the periods (if any) thereof reduced or the range of activities or areas
dealt with thereby reduced in scope, the said restriction shall apply with such
modifications as may be necessary to make it valid and effective.
(b) Executive shall not, throughout the Operative Period,
without the prior written consent of the Board, directly or indirectly offer
employment to, or retain as a consultant, or offer consulting services to, or be
employed by, or engage in consulting services with, persons (other than
secretarial and clerical personnel) who were employed by the Company or any of
its subsidiaries within 12 months after the date of the termination of
Executive's employment with the Employer.
(c) Notwithstanding the foregoing, nothing in this Section 5.2
shall restrict Executive from owning up to 49% of the outstanding capital stock
of Yelm Processing, Inc. or acting as a director and officer of Yelm Processing,
Inc., provided, that (i) Yelm Pocessing, Inc. continues to generally engage only
in the business in which it is presently engaged (as described in Section
5.13(c) of the Disclosure Schedule to that certain Stock Purchase Agreement,
dated as of the date hereof, among Executive, Kathleen P. Salerno and Global
Health Sub, Inc.) and other directly related business activities which do not
compete with the business of Purchaser and its Affiliates as currently conducted
or as it may in the future be conducted, and (ii) Executive devotes
substantially all of his business time and energy to the performance of his
duties under this Agreement during the Term and does not during the Operative
Period actively engage in the conduct of business (including by making business
contacts or referrals or selling efforts) by Yelm Processing, Inc.; PROVIDED,
HOWEVER, that Employer hereby acknowledges that, subject to the foregoing,
Executive may occasionally make business contacts, referrals and selling efforts
on behalf of Yelm Processing, Inc.
6. SPECIFIC PERFORMANCE.
Executive acknowledges that the services to be rendered by
Executive are of a special, unique and extraordinary character and, in
connection with such services, Executive will have access to confidential
information vital to the business of the Employer, the Company and the
subsidiaries and affiliates of the Company. By reason of this, Executive
consents and agrees that if Executive violates any of the provisions of Section
5 hereof, the Employer, the Company and the subsidiaries and affiliates of the
Company would sustain irreparable injury and that monetary damages will not
provide adequate remedy to the Employer and that the Employer shall be entitled
to have Section 5 specifically enforced by any court having equity
6
<PAGE>
jurisdiction. Nothing contained herein shall be construed as prohibiting the
Employer, the Company or any of the subsidiaries or affiliates of the Company
from pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages from Executive.
7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
agreements made and to be performed in that state.
7.2 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made by
delivery in person, by telecopy, or by registered or certified mail (postage
prepaid, return receipt requested) or, with a written receipt, by courier
service or overnight service such as Federal Express (and shall be deemed to
have been duly given or made (i) upon receipt if delivered in person, by courier
or overnight service, (ii) upon transmission if delivered by telecopy, and (iii)
two days after mailing if delivered by registered or certified mail) to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
7.2):
(a) if to Executive:
Arthur J. Salerno
9531 Las Flores Drive
Villa Park, CA 92681
Telecopy: (714) 998-8063
with a copy to:
Paul E. Greenwald & Associates
500 North State College Boulevard, Suite 420
Orange, CA 92868
Telecopy: (714) 937-0088
Attention: Paul E. Greenwald
7
<PAGE>
(b) if to the Employer:
American Ingredients Inc.
987 N. Enterprise Street
Orange, CA 92867
Telecopy: (714) 997-7986
Attention: Donald J. Lewis
with a copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Telecopy: (212) 479-6275
Attention: Russell S. Berman
7.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement shall be the
entire agreement between Executive and the Employer with respect to the terms of
Executive's employment and shall supersede all existing agreements between
Executive and the Company relating to the terms of his employment. It may not be
amended except by a written agreement signed by both parties.
7.4 NO WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver thereof or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement.
7.5 ASSIGNMENT. Subject to the limitations below, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective heirs, representatives, successors and assigns. This
Agreement shall not be assignable by Executive, and shall be assignable by the
Employer only to any corporation or entity resulting from the reorganization,
merger or consolidation of the Employer with any other corporation or entity or
any corporation or entity to which the Employer may sell all or substantially
all of its assets, and it must be so assigned by the Employer to, and accepted
as binding upon it by such other corporation or entity, in connection with any
such reorganization, merger, consolidation or sale.
7.6 SEVERABILITY. If any provision of this Agreement or any part
thereof, including, without limitation, Section 5, as applied to either party or
to any
8
<PAGE>
circumstances shall be adjudged by a court of competent jurisdiction to be void
or unenforceable, the same shall in no way affect any other provision of this
Agreement or remaining part thereof, which shall be given full effect without
regard to the invalid or unenforceable part thereof, or the validity or
enforceability of this Agreement.
IN WITNESS WHEREOF, Executive has executed and the Employer
has caused to be executed this Agreement as of the first date above written.
AMERICAN INGREDIENTS INC.
By: /s/ Arthur J. Salerno
--------------------------------
Name: Arthur J. Salerno
Title: President
/s/ Arthur J. Salerno
--------------------------------
9
<PAGE>
Exhibit 21
SUBSIDIARIES
Subsidiaries of Global Health Sciences, Inc.
Global Health Sub, Inc. (100% owned by Global Health Sciences, Inc.)
D&F Industries, Inc. (100% owned by Global Health Sub, Inc.)
Raven Industries, Inc. (100% owned by Global Health Sub, Inc.)
Dynamic Products Inc. (100% owned by Raven Industries, Inc.)
West Coast Sales (100% owned by Raven Industries, Inc.)
American Ingredients, Inc. (100% owned by Global Health Sub, Inc.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,987
<RECEIVABLES> 12,196
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 284
<PP&E> 16,860
<TOTAL-ASSETS> 204,217
<SHORT-TERM> 31,000
<PAYABLES> 24,153
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 218,832
0
0
<COMMON> 473
<OTHER-SE> (70,241)
<TOTAL-LIABILITY-AND-EQUITY> 204,217
<TRADING-REVENUE> 146,741
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 102,756
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 17,842
<COMPENSATION> 0
<INCOME-PRETAX> (2,120)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,323)
<EPS-PRIMARY> 0
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