<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, 2000
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 / /
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
As of June 30, 2000, 495,148 Shares of Global Health Sciences, Inc. Common
Stock, par value $0.01 per share, were outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL REGISTRANTS
ADDRESS, INCLUDING
PRIMARY ZIP CODE AND
EXACT NAME OF STATE OR OTHER STANDARD COMMISSION FILE TELEPHONE NUMBER
REGISTRANT AS SPECIFIED JURISDICTION OF NO. OF INDUSTRIAL NO./ AREA CODE OF
IN ITS INCORPORATION SHARES CLASSIFICATION IRS EMPLOYER REGISTRANT'S PRINCIPAL
CHARTER OR ORGANIZATION OUTSTANDING CODE NUMBER IDENTIFICATION EXECUTIVE OFFICER
----------------------- --------------- ------------- -------------- --------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Global Health Sub., California 100 2833 33-0801650 987 N. Enterprise St.
Inc. 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>
-2-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
INDEX
PAGE REFERENCE
<TABLE>
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 .............. 4
Condensed Consolidated Statements of Operations For The Three and Six Months
Ended June 30, 2000 and 1999 ............................................................. 5
Condensed Consolidated Statements of Cash Flows For The Six Months
Ended June 30, 2000 and 1999 ............................................................ 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 ................................... 15
PART II--OTHER INFORMATION
Signatures ............................................................................................ 16
Exhibit 1--Financial Data Schedule ................................................................... 17
</TABLE>
-3-
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 1,495 $ 6,400
Accounts receivable, net ....................................... 14,891 20,882
Inventories .................................................... 25,565 31,532
Prepaid expenses and other current assets ...................... 771 1,601
--------- ---------
Total current assets ...................................... 42,722 60,415
Property and equipment, net ........................................ 21,351 18,749
Intangibles and other assets, net .................................. 106,590 123,683
Other assets ....................................................... 424 30
--------- ---------
Total ..................................................... $ 171,087 $ 202,877
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable and accrued expenses .......................... $ 23,574 $ 37,224
Accrued interest payable ....................................... 4,125 4,125
Line of credit ................................................. 38,000 38,500
--------- ---------
Total current liabilities ...................................... 65,699 79,849
Long-term subordinated debt .................................... 219,824 219,493
--------- ---------
Total liabilities ......................................... 285,523 299,342
--------- ---------
Commitments and contingencies
Stockholder's Deficit:
Common stock, no par value, 2,000,000 shares authorized:
495,148 issued and outstanding .............................. 473 473
Accumulated deficit ............................................ (114,909) (96,938)
--------- ---------
Total stockholder's deficit .................................... (114,436) (96,465)
--------- ---------
Total ..................................................... $ 171,087 $ 202,877
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements
-4-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 49,239 $ 57,615 $ 120,406 $ 109,711
Cost of sales ................................. 38,236 40,647 92,179 77,480
--------- --------- --------- ---------
Gross profit .................................. 11,003 16,968 28,227 32,231
Selling, general and administrative expenses .. 7,564 6,005 14,040 11,125
Amortization of intangibles ................... 8,182 8,166 16,365 16,349
--------- --------- --------- ---------
Operating (loss) income ....................... (4,743) 2,797 (2,178) 4,757
Interest expense, net ......................... 8,262 7,313 15,863 14,505
--------- --------- --------- ---------
Loss before income taxes ...................... (13,005) (4,516) (18,041) (9,748)
State income tax (benefit) provision .......... (95) 33 (70) 56
--------- --------- --------- ---------
Net loss ...................................... $ (12,910) $ (4,549) $ (17,971) $ (9,804)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements
-5-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(17,971) $ (9,804)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ......................... 1,723 832
Amortization of goodwill .............................. 16,365 16,349
Non-cash portion of interest expense .................. 1,059 865
Changes in assets and liabilities:
Accounts receivable ................................. 5,991 (5,421)
Inventories ......................................... 5,967 (8,259)
Prepaid expenses and other current assets ........... 830 (767)
Accounts payable and accrued liabilities ............ (13,650) 13,886
Accrued interest .................................... -- 262
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 314 7,943
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (4,325) (11,310)
Other assets .......................................... (394) --
Acquisition costs ..................................... -- (273)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ......................... (4,719) (11,583)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................ -- (3,523)
(Repayments) borrowings on line of credit ............. (500) 7,500
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ........... (500) 3,977
-------- --------
(Decrease) increase in cash.................................... (4,905) 337
Cash at beginning of period.................................... 6,400 7,987
-------- --------
Cash at end of period.......................................... $ 1,495 $ 8,324
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements
-6-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
GLOBAL HEALTH SCIENCES, INC. is a holding company which conducts all of
its operations through subsidiaries, principally D&F Industries, Omni-Pak
Industries and Affiliates, and American Ingredients, Inc. Pursuant to the
indenture governing its obligations under the $225 million 11% Senior Notes due
2008 (the Notes). These 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 only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
NEW ACCOUNTING STANDARDS--In September 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement will be effective for the Company January 1, 2001. The company has not
yet analyzed the impact of adopting the statement as amended.
COMPREHENSIVE INCOME--There are no adjustments between net income and
comprehensive income for the periods presented. In December 1999 , the
Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB No.
101"), REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101 summarizes the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The company is in compliance with this
pronouncement.
-7-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $19,851 $19,360
Work in process 3,606 5,565
Finished goods 2,108 6,607
------- -------
Total Inventory $25,565 $31,532
------- -------
------- -------
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Equipment $ 21,289 $ 18,274
Leasehold improvements 13,340 12,030
Land 150 150
-------- --------
Gross property and equipment 34,779 30,454
Less accumulated depreciation and amortization (13,428) (11,705)
-------- --------
Net property and equipment $ 21,351 $ 18,749
-------- --------
-------- --------
</TABLE>
NOTE 4--INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Goodwill and other intangibles $ 165,702 $ 165,702
Deferred financing costs 7,119 9,166
--------- ---------
Gross intangible assets 172,821 174,868
Accumulated amortization
Goodwill (64,720) (48,355)
Deferred financing costs (1,511) (2,830)
--------- ---------
Net intangible assets $ 106,590 $ 123,683
--------- ---------
--------- ---------
</TABLE>
-8-
<PAGE>
NOTE 5--DEBT
CREDIT FACILITY--The Company maintains a bank line of credit ( the
"Facility') which is secured by all of its assets and matures on January 31,
2001. As of June 30, 2000, the outstanding balance under the Facility was $38
million and no further advances were available under the Facility.
As of June 30, 2000, the Company did not comply with several financial covenants
under the Facility. As a result, the lenders under the Facility have notified
the Company of a default and are entitled to accelerate maturity of the bank
debt. The lenders have informally agreed to forbear from doing so as long as the
Company makes monthly principal reductions of $1 million. A $1 million principal
reduction was made in July 2000.
-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.
The Company 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 their products throughout the world. The Company (and its
subsidiaries) subchapter S corporations, and all federal and state income taxes
(other than a minimum state income tax of 1.5%) are paid directly by its
shareholder. The Company has historically distributed, as a quarterly dividend
to its shareholder, amounts sufficient for the shareholder to pay the required
income taxes. No distribution was made during the three month period ended June
30, 2000 and no additional shareholder payments are anticipated during the
current year.
A significant portion of the Company's sales and EBITDA has been
attributable to sales to Herbalife, the Company's largest customer. Sales to
Herbalife increased from approximately $70.5 million in fiscal year 1995,
representing approximately 83% of the Company's sales in that year, to
approximately $141.6 million in fiscal year 1999, representing approximately 57%
of the Company's sales in that year. Sales to Herbalife were $20.4 million in
the quarter ended June 30, 2000 (41.5% of total sales) compared to $32.6 million
(56.6% of total sales) in the quarter ended June 30, 1999. The comparative
decline in sales to Herbalife in the second quarter of 2000 adversely affected
EBITDA for the quarter. Other periodic declines in sales to Herbalife due to
decreases in Herbalife's sales and/or inventory levels or other factors have had
adverse effects on Company sales and EBITDA in the past and could have adverse
effects in the future. The Company has a supply agreement with Herbalife which
extends through January 31, 2001. There is no assurance that the agreement will
be renewed or that, if renewed, it will provide the Company with benefits
equivalent to those available under the existing agreement. The Company's sales
to Herbalife for the six months ended June 30, 2000 were approximately $62.4
million or 51.8% of net sales; as compared to $63.8 million or 58.2% of net
sales for the six months ended June 30, 1999.
-10-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 49,239 $ 57,615 $ 120,406 $ 109,711
Cost of sales 38,236 40,647 92,179 77,480
--------- --------- --------- ---------
Gross profit 11,003 16,968 28,227 32,231
Selling, general and administrative
expenses 7,564 6,005 14,040 11,125
Amortization of intangibles 8,182 8,166 16,365 16,349
--------- --------- --------- ---------
Operating (loss) income (4,743) 2,797 (2,178) 4,757
Interest expense, net 8,262 7,313 15,863 14,505
--------- --------- --------- ---------
Loss before income taxes (13,005) (4,516) (18,041) (9,748)
State income taxes (benefit) provision (95) 33 (70) 56
--------- --------- --------- ---------
Net loss $ (12,910) $ (4,549) $ (17,971) $ (9,804)
--------- --------- --------- ---------
--------- --------- --------- ---------
EBITDA (1) $ 4,321 $ 11,363 $ 15,876 $ 21,875
EBITDA margin (1) 8.8% 19.8% 13.2% 0.0%
</TABLE>
----------
EBITDA is defined as 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 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.
-11-
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
SALES. In the second quarter of 2000, sales decreased by $8.4 million or
14.6%, to $49.2 million as compared to $57.6 million in the second quarter of
1999. The decrease results primarily from a decrease in sales to Herbalife, the
Company's largest customer, due to a buildup of inventories at Herbalife in
prior periods Sales to Herbalife decreased by $12.2 million to $20.4 million in
the second quarter of 2000 as compared to $32.6 million in the second quarter of
1999. The Herbalife decrease was offset by a $3.8 million increase sales to
other customers.
COST OF SALES AND GROSS PROFIT. Cost of sales decreased by $2.4 million or
5.9%, to $38.2 million in the second quarter of 2000, as compared to $40.6
million in the second quarter of 1999. Cost of sales as a percentage of sales
increased to 77.6% in the second quarter of 2000 as compared to 70.5% in the
second quarter of 1999, thereby decreasing the gross margin in the second
quarter of 2000 to 22.4% from 29.5% in the second quarter of 1999. The reduction
in gross margin was primarily due to relatively higher raw material costs and
higher costs related to expanded manufacturing capacity.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.6 million to $7.6 million in the second
quarter of 2000, as compared to $6.0 million in the second quarter of 1999. As a
percentage of sales, selling, general and administrative expenses increased to
15.4% in the second quarter of 2000, as compared to 10.4% in the second quarter
of 1999. The increase in selling, general and administrative expenses was due to
several factors: bad debt reserves were increased $0.6 million due to a change
in certain customers' credit condition; commission expense increased $0.4
million due to changes in sales mix; and the Company had increased general
overhead and facility capacity expenses to support the high levels of sales
experienced during the first quarter of the year. Overhead expenses that were
developed to support the higher sales were not reduced until mid-June as the
lower sales levels persisted.
INTEREST EXPENSE. Net interest expense increased by $1.0 million to $8.3
million in the second quarter of 2000, as compared to $7.3 million in the second
quarter of 1999. The 13.7% increase in interest expense results primarily from
non-compliance with certain covenants under its bank line of credit. As a result
of the non-compliance the lender has assessed penalties and increased the
effective annual interest rate from a LIBOR-based rate (approximating 7% at
June 30, 1999) to a fixed rate of approximately 13.5% at June 30, 2000.
NET LOSS. The Company's net loss increased by $8.4 million to a net loss of
$12.9 million in the second quarter of 2000, as compared to a $4.5 million net
loss in the second quarter of 1999. The increased loss resulted primarily from
the effect of lower sales volume, lower gross margins and the other reasons
described above.
SIX ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
SALES. In the first six months of 2000, sales increased by $10.7 million or
9.8%, to $120.4 million as compared to $109.7 million in the first six months of
1999. Sales to Herbalife decreased by $1.4 million to $62.4 million in the first
six months of 2000 as compared to $63.8 million in the first six months of 1999.
Sales to other customers in the first six months of 2000 increased by $12.1
million as compared to the first six months of 1999.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $14.7 million or
19.0%, to $92.2 million in the first six months of 2000, as compared to $77.5
million in the first six months of 1999. Cost of sales as a percentage of sales
increased to 76.6% in the first six months of 2000 as compared to 70.6% in the
first six months of 1999, thereby decreasing the gross margin in the first six
months of 2000 to 23.4% from 29.4% in
-12-
<PAGE>
the first six months of 1999. The reduction in gross margin was primarily due to
relatively higher raw material costs and higher costs related to expanded
manufacturing capacity.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.9 million to $14.0 million in the first
six months of 2000, as compared to $11.1 million in the first six months of
1999. As a percentage of sales, selling, general and administrative expenses
increased to 11.6% in the first six months of 2000, as compared to 10.1% in the
first six months of 1999. The increased expenses were primarily related to costs
required to support the increase in sales, the expansion of sales and
manufacturing capacity, increased bad debt provisions of $0.7 million, and
increased commission expense due to changes in sales mix of $0.4 million.
INTEREST EXPENSE. Net interest expense increased by $1.4 million to $15.9
million in the first six months of 2000, as compared to $14.5 million in the
first six months of 2000. The 9.7% increase in interest expense results
primarily from non-compliance with certain covenants under the Company's bank
line of credit. As a result of the non-compliance the lenders' have assessed
penalties and increased the effective annual interest rate from a LIBOR-based
rate (approximating 7% at June 30, 1999) to a fixed rate of approximately 13.5%
at June 30, 2000.
NET LOSS. The Company's net loss increased by $8.2 million to a net loss of
$18.0 million in the first six months of 2000, as compared to a $9.8 million net
loss in the first six months of 1999. The increased loss resulted primarily from
the effect of lower gross margins, higher administrative costs and for the
reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital , reduction of bank
debt and interest payments. The Company's' primary source for meeting these
requirements is through cash flow from operating activities. The Company has
taken steps to reduce costs. Such steps are expected to improve its ability to
meet its cash needs
Cash and cash equivalents were $1.5 million at June 30, 2000 compared to
$6.4 million at December 31, 1999. The Company is required to make semi annual
interest payments on the Notes of $12.4 million on May 1 and November 1. The
ability of the Company to meet the November 1 interest payment depends on either
raising equity or replacing the lending Facility, neither of which can be
assured.
Cash provided by operating activities for the six month period ended June
30, 2000 was $0.3 million compared to $8.0 million provided by operations for
the six months ended June 30, 1999. The $0.3 million primarily results from
depreciation and amortization of $18.1 million, decreases in accounts receivable
of $6.0 million and inventory of $6.0 million, a net loss of $18.0 million and
decreases in accounts payable and accrued liabilities of $13.6 million.
Capital expenditures of $4.3 million for the period ended June 30, 2000 were
primarily for additional manufacturing equipment.
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 maintains a bank line of credit ( the "Facility') which is
secured by all of its assets and matures on January 31, 2001. As of June 30,
2000, the outstanding balance under the Facility was $38 million and no further
advances were available under the Facility
-13-
<PAGE>
As of June 30, 2000, the Company did not comply with several financial
covenants under the Facility. As a result, the lenders under the Facility
have notified the Company of a default and are entitled to accelerate the
maturity of the bank debt. The lenders have informally agreed to forbear from
doing so as long as the Company makes monthly principal reductions of
$1 million. A $1 million principal reduction was made in July 2000.
The Company has engaged ING Barings as its financial advisor and Weil
Gotshal & Manges as its legal counsel in connection with a possible
restructuring of the Facility and the Notes.
The Company is actively engaged in discussions with other lenders to replace
or refinance the Facility, at or prior to its fixed maturity or an earlier
accelerated maturity. The terms of any new or replacement facility may not
provide the Company with additional liquidity and may be less advantageous
than the terms of the existing Facility. Failure to refinance or replace the
Facility, cure the existing covenant violations or obtain other sources of
liquidity could have material adverse consequences for the Company and could
result in a default under the Notes at any time. In any event, the Company
does not anticipate that any replacement facility it obtains will provide it
with significant additional liquidity; accordingly, for the foreseeable
future, the Company expects to depend primarily on cash flow from operating
activities to meet its liquidity needs. Under these circumstances, the
Company does not plan or expect to make additional acquisitions. Failure to
obtain additional funding for acquisitions could limit the Company's ability
to expand its marketing and production capabilities as necessary to grow its
business and compete effectively.
-14-
<PAGE>
FORWARD LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q 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.
ITEM 3. 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.
PART II--OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Under the terms of the Company's Credit Agreement with certain bank lenders,
dated April 23, 1998, as amended, the Company had outstanding indebtedness of
$38 million as of June 30, 2000. As of that date, the Company was not in
compliance with certain financial covenants under the Credit Agreement, and the
lenders have notified the Company of a default and are entitled to accelerate
the maturity of the bank debt.
ITEM 6. EXHIBITS
Exhibit 27.1--Financial Data Schedule for the quarter ended June 30, 2000,
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 11, 2000
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-
