<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number 333-52534
GLOBAL HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3267801
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
987 N. Enterprise Street
Orange, California 92867
(Address and zip code of principal executive offices)
(714) 765-8330
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
*Yes /x/ No / /
*Registrant has been subject to this filing registration since August 12, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
As of August 11, 1998, 495,148 Shares of Global Health Sciences, Inc. Common
Stock, par value $0.01 per share, were outstanding.
<PAGE>
ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING
PRIMARY ZIP CODE AND
EXACT NAME OF STATE OR OTHER STANDARD COMMISSION FILE TELEPHONE NUMBER
REGISTRANT AS JURISDICTION OF NO. OF INDUSTRIAL NO./ AREA CODE OF
SPECIFIED IN ITS INCORPORATION SHARES CLASSIFICATION IRS EMPLOYER REGISTRANT'S PRINCIPAL
CHARTER OR ORGANIZATION OUTSTANDING CODE NUMBER IDENTIFICATION 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) 765-8330
Raven Industries
Inc.... California 100 2833 33-0042849 987 N. Enterprise St.
Orange, California 92867
(714) 765-8330
West Coast Sales Inc. California 100 2833 33-0554820 987 N. Enterprise St.
Orange, California 92867
(714) 765-8330
Dynamic Products... California 100 2833 33-023847 987 N. Enterprise Street
Orange, California 92867
(714) 765-8330
D&F Industries,
Inc.... California 100 2833 33-0801652 987 N. Enterprise Street
Orange, California 92867
(714) 765-8330
</TABLE>
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<PAGE>
GLOBAL HEALTH SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
Page Reference
<S> <C>
COVER PAGE........................................................................................... 1
INDEX................................................................................................ 3
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)...............
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998............... 4
Condensed Consolidated Statements of Operations For The Six months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows For The Six months Ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 10
Item 3. Quantitative and Qualitative disclosures about Market Risk...................................
14
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 15
Item 2. Changes in Securities and use of Proceeds.................................................... 15
Item 3. Defaults Upon Senior Securities.............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 15
Item 5. Other Information............................................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................................. 15
SIGNATURES............................................................................................. 16
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 8,324 $ 7,987
Accounts receivable, net ............................. 17,333 11,912
Inventories .......................................... 23,043 14,784
Prepaid expenses and other current assets ............ 3,221 2,454
--------- ---------
Total current assets ................................. 51,921 37,137
Property and equipment, net .............................. 17,968 7,490
Intangibles and other assets, net ........................ 141,506 158,116
--------- ---------
Total ........................................... $ 211,395 $ 202,743
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ................ $ 32,440 $ 18,554
Accrued interest payable ............................. 4,387 4,125
Line of credit ....................................... 38,500 31,000
--------- ---------
Total current liabilities ............................ 75,327 53,679
Long-term debt ....................................... 219,163 218,832
--------- ---------
Total liabilities ............................... 294,490 272,511
--------- ---------
Commitments and contingencies
Stockholders' Deficit:
Common stock (495,148 shares) issued and outstanding . 473 473
Accumulated deficit .................................. (83,568) (70,241)
--------- ---------
Total stockholders' deficit .......................... (83,095) (69,768)
========= =========
Total ........................................... $ 211,395 $ 202,743
========= =========
</TABLE>
See notes to condensed consolidated financial statements
-4-
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................... $ 57,615 $ 41,558 $ 109,711 $ 63,930
Cost of sales ................................ 40,647 28,372 77,480 43,967
--------- --------- --------- ---------
Gross profit ................................. 16,968 13,186 32,231 19,963
Selling, general and administrative expenses . 6,005 2,917 11,125 4,667
Amortization of intangibles .................. 8,166 2,272 16,349 2,272
--------- --------- --------- ---------
Operating income ............................. 2,797 7,997 4,757 13,024
Interest expense, net ........................ 7,313 4,909 14,505 4,871
--------- --------- --------- ---------
Income (loss) before income taxes ............ (4,516) 3,088 (9,748) 8,153
Provision for state income taxes ............. 33 80 56 156
========= ========= ========= =========
Net income (loss) ............................ $ (4,549) $ 3,008 $ (9,804) $ 7,997
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (9,804) $ 7,997
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization .................... 832 80
Amortization of goodwill ......................... 16,349 2,730
Non cash portion of interest expense ............. 865 --
Changes in assets and liabilities:
Accounts receivable .............................. (5,421) (778)
Inventories ...................................... (8,259) (312)
Prepaid expenses and other current assets ........ (767) (450)
Accounts payable and accrued liabilities ......... 13,886 3,606
Accrued interest ................................. 262 --
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 7,943 12,873
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............. (11,310) (822)
Acquisition costs ................................ (273) --
Purchase of Omni-Pak and Affiliates .................. -- (135,227)
Net of cash acquired of $2,640
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES .................. (11,583) (136,049)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock ....................... -- (58,700)
Dividends paid ................................... (3,523) (11,989)
Issuance of Notes due 2008 ....................... -- 218,502
Debt issue costs ................................. -- (7,654)
Borrowings (Repayments) of credit line ........... 7,500 (420)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...... 3,977 139,739
--------- ---------
Increase in cash ......................................... 337 16,563
Cash at beginning of period .............................. 7,987 3,768
--------- ---------
Cash at end of period .................................... $ 8,324 $ 20,331
========= =========
</TABLE>
See notes to condensed consolidated financial statements
-6-
<PAGE>
GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F INDUSTRIES)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
On April 23, 1998, D&F Industries ("D&F," the predecessor), Raven d/b/a
Omni-Pak Industries ("Omni-Pak"), Dynamic Products Inc. ("Dynamic") and
West Coast Sales ("West Coast") entered into a reorganization agreement
pursuant to which (a) D&F changed its name to Global Health Sciences,
Inc., (b) Global Health Sciences, Inc. formed a new subsidiary, Global
Health Sub, Inc. ("Global Sub"), (c) Global Sub formed four new
subsidiaries named D&F Industries, Inc. ("D&F Sub"), Raven Sub, Inc.
("Omni-Pak Merger Sub"), New West Coast Sales, Inc. ("West Coast Merger
Sub") and Dynamic Sub, Inc. ("Dynamic Merger Sub"), (d) Global Health
Sciences, Inc. transferred to D&F Sub all of its assets and liabilities
except for its obligation under the 11% Senior Notes due 2008 (the
"Notes") and the common stock of Global Sub, (e) Global Health
Sciences, Inc. through Global Sub acquired Omni-Pak, Dynamic and West
Coast (together referred to as Omni-Pak and Affiliates) from their
respective shareholders for approximately $137.9 million in cash and
expenses (the "Acquisition"), in transactions accounted for under the
purchase method of accounting pursuant to the mergers of Omni-Pak
Merger Sub and Omni-Pak (with Omni-Pak as the surviving corporation),
Dynamic Merger Sub and Dynamic (with Dynamic as the surviving
corporation), and West Coast Sub and West Coast (with West Coast as the
surviving corporation) and (f) the shareholders of Global Health
Sciences, Inc. received approximately $58.7 million in cash to
repurchase approximately 543,000 outstanding shares from its
stockholders (the "Recapitalization"). The transactions above are
referred to as the "Reorganization".
On December 11, 1998, Global Health Sciences, Inc. acquired the stock
of American Ingredients, Inc. for $36.8 million in cash and expenses in
a transaction accounted for under the purchase method of accounting.
On June 16, 1999 the American Ingredients subsidiary of Global Health
Sciences and the Martin Bauer Group of Germany announced their intent
to form a joint venture to provide ingredients to the nutraceutical,
food, pharmaceutical and cosmetic industries. The joint venture , if
finalized, will operate under the name American Ingredients, LLC.
Global Health Sciences will have a 50% interest in the joint venture
and will account for the operation under the equity method of
accounting.
-7-
<PAGE>
The statement of operations and cash flow for the 1998 periods prior to
April 23,1998 are those of D&F and subsequent to that date include D&F,
Omni-Pak and Affiliates. The financial statements presented for the
1999 period are those of Global Health Sciences, Inc. (which include
the operations of D&F, Omni-Pak and Affiliates and American
Ingredients.) The following is summarized pro forma operating results
assuming that the Reorganization and the acquisition of American
Ingredients occurred as of January 1, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Sales (net).................... $ 54,393 $ 107,769
Operating income............... 3,051 5,856
Interest expense and other..... 7,092 14,247
Net income (loss).............. (4,142) (8,665)
</TABLE>
NOTE 1 - BASIS OF PRESENTATION (CONTINUED)
ACQUISITION FACILITY - The Company maintains a credit facility (the
"Acquisition Facility"), which provides for borrowings of up to $75
million under a line of credit through April 2003, of which no more
than $10 million is available for working capital and general corporate
purposes.
The terms of the Acquisition Facility were modified in April, 1999 to
increase the maximum allowable leverage and reduce the minimum
allowable cash interest coverage. Due to production slowdowns, caused
by the consolidation of four locations which previously occupied
155,000 square feet into a single new facility with a total of 302,000
square feet, the Company is temporarily out of compliance with the
financial maintenance covenants of the Acquisition Facility. The
Company expects to be back in compliance by September 30,1999. The
facility has been classified as short term debt at June 30, 1999. If
the Company fails to achieve compliance with such financial covenants,
the lenders under the Acquisition Facility could seek to accelerate the
indebtedness outstanding thereunder. This acceleration would cause a
materiel adverse effect on the Company's operations and financial
position.
GLOBAL HEALTH SCIENCES, INC. is a holding Company with no independent
operations other than its investments in its subsidiaries, principally
D&F, Omni-Pak and Affiliates and American Ingredients. Pursuant to the
indenture governing the Notes, Global Health Sciences, Inc.'s
subsidiaries (the "Subsidiary Guarantors") have jointly and severally
guaranteed the Notes on a full and unconditional basis. Separate
financial statements related to the Subsidiary Guarantors are not
included herein, as the management of Global Health Sciences, Inc. has
determined that the separate financial statements of the Subsidiary
Guarantors are not material to investors. All significant intercompany
balances and transactions have been eliminated in consolidation.
INTERIM PERIOD PRESENTATION - The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of only
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the interim period ended June
30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
-8-
<PAGE>
NEW ACCOUNTING STANDARDS In September 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This statement will be effective January 1, 2001. The Company has not
yet analyzed the impact of adopting the statement.
In September 1997, The Financial Accounting Standards Board ("FASB")
issued SFAS No.130, "Reporting Comprehensive Income." Statement of
Financial Accounting Standards ("SFAS") No.130 establishes new
standards for reporting and displaying comprehensive income, its
components and accumulated balances. The statement, which the Company
adopted in the first quarter of 1998, establishes standards for
reporting and displaying comprehensive income and its components in a
full set of general purpose financial statements. There are no
adjustments between net income and comprehensive income for the periods
presented.
RECLASSIFICATIONS--Certain amounts from the December 31, 1998 balance
sheet have been reclassified to conform to the current classifications.
NOTE 2 - INVENTORIES
<TABLE>
<CAPTION>
Inventories at June 30, 1999 consist of the following (amounts in thousands):
<S> <C>
Raw materials $18,106
Work in process 2,718
Finished goods 2,219
-------
Total Inventory $23,043
=======
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at June 30, 1999 consist of the following
(amounts in thousands):
<S> <C>
Equipment $ 14,557
Leasehold improvements 14,101
Land 149
Less accumulated depreciation and amortization (10,839)
--------
Net property and equipment $ 17,968
========
</TABLE>
NOTE 4 - INTANGIBLES AND OTHER ASSETS
<TABLE>
<CAPTION>
Intangibles and Other assets at June 30, 1999 consist of the following
(amounts in thousands):
<S> <C>
Goodwill and other intangibles $ 165,722
Deferred financing costs 8,939
Accumulated Amortization
Goodwill (32,023)
Deferred financing costs (1,132)
---------
$ 141,506
=========
</TABLE>
NOTE 5 - COMMITMENTS & CONTINGENCIES
The Company is a defendant in certain litigation in the normal course of
business. The Company believes, after consultation with legal counsel, that
liability incurred in connection with pending or threatened litigation, if any,
will not be material to the Company's results of operations or financial
condition.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the consolidated
financial statements included elsewhere herein.
Prior to its Reorganization, the operations of Global Health Sciences Inc. (the
"Company") were conducted by four subchapter S corporations: D&F, Omni-Pak,
Dynamic and West Coast. Together these companies are one of the world's leading
developers and custom manufacturers of dietary and nutritional supplements.
These companies develop specialty products for branded distribution companies,
branded retailers, television marketing companies and network marketing
organizations who then distribute such products throughout the world. These
companies were reorganized in the Reorganization to consolidate related and
complementary business activities under one holding company, Global Health
Sciences, Inc. (see Note 1 to the financial statements). These companies
(together the "Combined Companies") historically operated under common
management and had a high degree of common ownership, customers and systems,
including similar accounting and financial reporting systems. As subchapter S
corporations, all federal and state income taxes (other than a minimum state
income tax of 1.5%) for each of such corporations is paid directly by its
shareholder. The Company has historically distributed, and intends to continue
to distribute, as a quarterly dividend to its shareholder amounts sufficient for
the shareholder to pay his required income taxes.
The Company's historical growth in sales and EBITDA has been primarily
attributable to increased sales to Herbalife, the Company's largest customer.
Sales by the Combined Companies to Herbalife have increased from approximately
$70.5 million in fiscal year 1995, representing approximately 83% of the
Company's sales in that year, to approximately $108.1 million in fiscal year
1998, representing approximately 61% of the Company's sales in that year. Due to
the significant percentage of the Company's sales attributable to Herbalife,
fluctuations in Herbalife's sales and inventory levels have had adverse effects
on Company sales in the past and could have adverse effects in the future. The
Company and Herbalife have a supply agreement, which extends through January
2001. The Company's sales to Herbalife for the six months ended June 30, 1999
were approximately $63.8 million or 58% of net sales.
RESULTS OF OPERATIONS
The following summarizes historical operating results for Global Health
Sciences, Inc. for the six months ended June 30, 1999 and supplemental pro forma
operating results for the six months ended June 30,1998, assuming that the
Reorganization and the acquisition of American Ingredients occurred as of
January 1, 1998.
-10-
<PAGE>
HISTORICAL STATEMENT OF INCOME
FOR GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F)
(AMOUNTS IN THOUSANDS)
(SIX MONTHS ENDED JUNE 30, 1999)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales (net) ....................... $ 57,615 $ 41,558 $ 109,711 $ 63,930
Cost of sales ..................... 40,647 28,372 77,480 43,967
--------- --------- --------- ---------
Gross profit ...................... 16,698 13,186 32,231 19,963
Selling, general and administrative 6,005 2,917 11,125 4,667
Amortization of intangible assets . 8,166 2,272 16,349 2,272
--------- --------- --------- ---------
Operating income .................. 2,797 7,997 4,757 13,024
Interest (income) expense, net .... 7,313 4,909 14,505 4,871
--------- --------- --------- ---------
Income (loss) before state taxes .. (4,516) 3,088 (9,748) 8,153
Provision for state income taxes .. 33 80 56 156
--------- --------- --------- ---------
Net income (loss) ................. $ (4,549) $ 3,008 $ (9,804) $ 7,997
========= ========= ========= =========
</TABLE>
SUPPLEMENTAL PRO FORMA COMBINED STATEMENT OF INCOME DATA
FOR GLOBAL HEALTH SCIENCES, INC. (FORMERLY D&F) (1)
(AMOUNTS IN THOUSANDS)
(SIX MONTHS ENDED JUNE 30, 1998)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales (net) ....................... $ 57,615 $ 54,393 $ 109,711 $ 107,769
Cost of sales ..................... 40,647 37,546 77,480 74,360
--------- --------- --------- ---------
Gross profit ...................... 16,698 16,849 32,231 33,409
Selling, general and administrative 6,005 5,549 11,125 11,090
Amortization of intangible assets . 8,166 8,166 16,349 16,349
--------- --------- --------- ---------
Operating income .................. 2,797 3,134 4,757 5,970
Interest expense, net ............. 7,313 7,091 14,505 14,247
--------- --------- --------- ---------
Income (loss) before state taxes .. (4,516) (3,957) (9,748) (8,277)
Provision for state income taxes .. 33 101 56 274
========= ========= ========= =========
Net income (loss) ................. $ (4,549) $ (4,058) $ (9,804) $ (8,551)
========= ========= ========= =========
EBITDA (2) ........................ $ 11,363 $ 11,691 $ 21,875 $ 22,967
EBITDA margin (2) ................. 19.8% 21.5% 20.0% 21.3%
</TABLE>
(1) supplemental pro forma combined statement of income data reflects the
following as if the transactions occurred January 1, 1998.
a. The acquisition of American Ingredients, Inc.
b. The acquisition of Omni-Pak and Affiliates
c. The impact of borrowing for the recapitalization of Global Health
Sciences, Inc. and the acquisition of American Ingredients, Inc.
d. The amortization of intangibles resulting from the acquisition of
American Ingredients, Inc. and acquisition of Omni-Pak and
Affiliates.
-11-
<PAGE>
(2) EBITDA is defined as net income before interest income (expense),
income taxes and depreciation and amortization. Management believes
that EBITDA and EBITDA margin are measures commonly used by analysts
and investors to determined a company's ability to service and incur
debt. Accordingly, this information has been presented to permit a more
complete analysis. However, EBITDA as reported may not be comparable to
similarly titled measures used by other companies. EBITDA margin is
computed by dividing EBITDA by net sales. EBITDA should not be
considered a substitute for net income or cash flow data prepared in
accordance with general accepted accounting principles or as a measure
of profitability or liquidity.
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
The following discussion of results of operations is based on a
comparison of historical 1999 operating results to the 1998 supplemental pro
forma operating data because management believes that such comparison provides
the most meaningful analysis of comparative results.
SALES. In the second quarter of 1999, sales increased by $3.2 million
or 5.9%, to $57.6 million in the second quarter of 1999 as compared to $54.4
million in the second quarter of 1998. Sales to Herbalife were $32.6 million in
the second quarter of 1999 as compared to $26.6 million in the second quarter of
1998.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $3.1 million
or 8.3% to $40.6 million in the second quarter of 1999 as compared to $37.5
million in the second quarter of 1998. Cost of sales as a percentage of sales
increased to 70.5% in the second quarter of 1999 as compared to 68.9% in the
second quarter of 1998, thereby decreasing the gross margin in the first quarter
of 1999 to 29.5% from 30.9% in the second quarter of 1998. The reduction in
gross margin was primarily due to a change in product mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.5 million to $6.0 million in the second
quarter of 1999 as compared to $5.5 million in the second quarter of 1998. As a
percentage of sales, selling, general and administrative expenses (excluding
amortization of goodwill and other intangibles) increased to 10.4% in the second
quarter of 1999 as compared to 10.1% in the second quarter of 1998. The
increased expenses were primarily related to the expansion of sales and
manufacturing capacity.
NET LOSS. Company net loss increased by $0.4 million to a net loss of
$4.5 million in the second quarter of 1999 as compared to a $4.1 million net
loss in the second quarter of 1998. This decrease in profitability resulted
primarily from the effect of higher selling, general and administrative expenses
related to the expansion of sales and manufacturing capacity.
-12-
<PAGE>
SIX MONTHS ENDED JUNE 30,1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
SALES. In the first six months of 1999, sales increased by $1.9 million
or 1.8%, to $109.7 million as compared to $107.8 million in the first six months
of 1998. Sales to Herbalife were $63.8 million in the first six months of 1999
as compared to $59.2 million in the first six months of 1998. Sales to the
Company's second largest customer, EAS, continue to grow with EAS' continued
growth.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $3.1 million
or 4.2% to $77.5 million in the first six months of 1999 as compared to $74.4
million in the first six months of 1998. Cost of sales as a percentage of sales
increased to 70.6% in the first six months of 1999 as compared to 69.0% in the
first six months of 1998, thereby decreasing the gross margin in the first six
months of 1999 to 29.4% from 31.0% in the first six months of 1998. The
reduction in gross margin was primarily due to a change in product mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were unchanged at $11.1 million in the first six months
of 1999 compared to the first six months of 1998. As a percentage of sales,
selling, general and administrative expenses (excluding amortization of goodwill
and other intangibles) decreased by 0.2% to 10.1% in the first six months of
1999 as compared to 10.3% the first six months of 1998.
NET LOSS. Company net loss increased by $1.3 million to a net loss of
$9.8 million in the first six months of 1999 as compared to a $8.6 million net
loss in the first six months of 1998. This decrease resulted primarily from the
effect of lower gross margins due to a change in product mix.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, prospective
acquisitions and capital expenditures. The Company expects to meet its liquidity
requirements through cash flow from operations and the Acquisition Facility.
Cash and cash equivalents were $8.3 million at June 30, 1999 compared to $8.0
million at December 31, 1998. The Company is required to make semi annual
interest payments on the Notes of $12.4 million on May 1 and November 1.
Cash provided by operating activities for the period ended June 30, 1999 was
$7.9 million. This amount primarily represents depreciation and amortization of
$18.0 million, increases in accounts payable and accrued liabilities of $13.9
million, net of the loss of $9.8 million and increases in accounts receivable of
$5.4 million and inventory of $8.3 million.
Capital expenditures of $11.3 million for the period ended June 30, 1999 were
primarily for leasehold improvements on the Company's new manufacturing
facility, additional manufacturing equipment and purchases of management
information systems.
Cash used by financing activities for the period ended June 30, 1999 was $3.5
million. The Company has elected S Corporation status for federal and state tax
purpose, and other than the 1.5% state tax, income tax is paid by its
shareholder. The Company distributed cash dividends of $3.5 million to its
shareholder to pay federal and state taxes.
Cash provided by financing activities for the period ended June 30, 1999 was
$7.5 million. The Company maintains the Acquisition Facility which provides for
borrowings of up to $75 million under a line of credit which expires in April
2003, of which no more than $10 million is available for working capital and
general corporate purposes. Borrowings under the facility were $38.5 million at
June 30, 1999, including borrowings of $7.5 million under the working capital
portion of the facility.
-13-
<PAGE>
The terms of the Acquisition Facility were modified in April, 1999 to increase
the maximum allowable leverage and reduce the minimum allowable cash interest
coverage. Due to production slowdowns, caused by the consolidation of four
locations which previously occupied 155,000 square feet into a single new
facility with a total of 302,000 square feet, the Company is temporarily out of
compliance with the covenants of the Acquisition Facility. The Company expects
to be back in compliance by September 30,1999. The facility has been classified
as short term debt at June 30, 19999.
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 to the Company.
FORWARD LOOKING STATEMENTS
Statements other than the actual reported financial results and other historical
information, including without limitation, certain statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and located elsewhere herein regarding Year 2000 compliance and its
effects, if any, if the Company is unable to achieve such compliance, and the
Company's operations and financial position, including its ability to achieve
full compliance with the financial covenants of the acquisition facility may
constitute forward-looking statements and are intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995. Forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue," or the negative thereof or
variations thereon or similar terminology. All such forward-looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those contemplated by the relevant forward-looking
statement. These risks and uncertainties include, without limitation, the
ability to increase production at the Company's new manufacturing facility, the
continued growth in sales to significant customers and the ability of the
companies suppliers to become year 2000 compliant. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that such expectations will
prove to have been correct.
ITEM 3. 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. Other than the
amendments to the Acquisition Facility, as described in the Liquidity and
Capital Resources, there have been no significant changes in the Company's
market risk in the quarter ended June 30, 1999.
-14-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in certain litigation in the normal course of
business. The Company believes, after consultation with legal counsel, that
liability incurred in connection with pending or threatened litigation, if any,
will not be material to the Company's results of operations or financial
condition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The terms of the Acquisition Facility were modified in April, 1999 to increase
the maximum allowable leverage and reduce the minimum allowable cash interest
coverage. Due to production slowdowns, caused by the consolidation of four
locations which previously occupied 155,000 square feet into a single new
facility with a total of 302,000 square feet, the Company is temporarily out of
compliance with the financial maintenance covenants of the Acquisition Facility.
The Company expects to be back in compliance by September 30,1999. The facility
has been classified as short term debt at June 30, 1999. If the Company fails to
achieve compliance with such financial covenants, the lenders under the
Acquisition Facility could seek to accelerate the indebtedness outstanding
thereunder. This acceleration would cause a materiel adverse effect on the
Company's operations and financial position.
ITEM 6. EXHIBITS
Financial Data Schedule for the quarter ended June 30, 1999, which is submitted
electronically to the Commission for information only.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 5, 1999
Global Health Sciences, Inc.
Global Health Sub, Inc.
D&F Industries, Inc.
Raven Industries, Inc.
West Coast Sales
Dynamic Products, Inc.
By: /s/ Paul M. Buxbaum
------------------------------------
Paul M. Buxbaum
Chief Executive Officer
By: /s/ Donald J. Lewis
------------------------------------
Donald J. Lewis
Chief Financial Officer
-16-
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