<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (I.R.S. Employer
(State or other jurisdiction Identification Number)
of incorporation or organization
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 September 30, 2000, 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 COMMISSION FILE ZIP CODE AND
EXACT NAME OF STATE OR OTHER STANDARD NO./ TELEPHONE NUMBER
REGISTRANT AS JURISDICTION OF NO. OF INDUSTRIAL IRS EMPLOYER AREA CODE OF
SPECIFIED IN ITS INCORPORATION SHARES CLASSIFICATION IDENTIFICATION REGISTRANT'S PRINCIPAL
CHARTER OR ORGANIZATION OUTSTANDING CODE NUMBER NO. 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
PART I--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999........................................... 4
Condensed Consolidated Statements of Operations For The Three
and Nine Months Ended September 30, 2000 and 1999............... 5
Condensed Consolidated Statements of Cash Flows For The Nine
Months Ended September 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
-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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................. $ 4,456 $ 6,400
Accounts receivable, net ................... 12,244 20,882
Inventories ................................ 24,119 31,532
Prepaid expenses and other current assets .. 936 1,601
--------- ---------
Total current assets .................... 41,755 60,415
Property and equipment, net ................... 20,499 18,749
Intangibles and other assets, net ............. 5,430 123,683
Other assets .................................. 259 30
--------- ---------
Total ................................... $ 67,943 $ 202,877
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ...... $ 20,819 $ 37,224
Accrued interest payable ................... 10,666 4,125
Line of credit ............................. 35,000 38,500
--------- ---------
Total current liabilities .................. 66,485 79,849
Long-term subordinated debt ................ 219,989 219,493
--------- ---------
Total liabilities ....................... 286,474 299,342
--------- ---------
Commitments and contingencies
Stockholder's Deficit:
Common stock, no par value, 2,000,000 shares
authorized: 495,148 shares issued and
outstanding ................................ 473 473
Accumulated deficit ........................ (219,004) (96,938)
--------- ---------
Total stockholder's deficit ................ (218,531) (96,465)
--------- ---------
Total ................................... $ 67,943 $ 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 NINE MONTHS ENDED
------------------------ ------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................. $ 50,162 $ 74,619 $ 170,568 $ 184,330
Cost of sales ............. 39,048 55,738 131,227 133,218
--------- --------- --------- ---------
Gross profit .............. 11,114 18,881 39,341 51,112
Selling, general and
administrative expenses ... 6,356 6,592 20,396 17,717
Amortization of intangibles 100,983 8,165 117,347 24,514
--------- --------- --------- ---------
Operating (loss) income ... (96,225) 4,124 (98,402) 8,881
Interest expense, net ..... 8,099 7,544 23,964 22,049
--------- --------- --------- ---------
Loss before income taxes .. (104,324) (3,420) (122,366) (13,168)
State income tax (benefit)
provision ................. (230) 50 (300) 106
--------- --------- --------- ---------
Net loss .................. $(104,094) $ (3,470) $(122,066) $ (13,274)
========= ========= ========= =========
</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>
NINE MONTHS ENDED
------------------------
SEPT 30, SEPT 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $(122,066) $ (13,274)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization ............. 2,633 1,516
Amortization of goodwill .................. 117,347 24,514
Non-cash portion of interest expense ...... 1,402 1,312
Changes in assets and liabilities:
Accounts receivable ....................... 8,638 (3,942)
Inventories ............................... 7,413 (10,996)
Prepaid expenses and other current assets . 436 (537)
Accounts payable and accrued liabilities .. (16,405) 15,365
Accrued interest .......................... 6,541 6,457
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 5,939 20,415
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....... (4,383) (13,039)
Other assets .............................. -- --
Acquisition costs ......................... -- (273)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......... (4,383) (13,312)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ............................ -- (3,734)
(Repayments) borrowings on line of credit . (3,500) 7,500
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES ..................................... (3,500) 3,766
--------- ---------
(Decrease) increase in cash .................... (1,944) 10,869
Cash at beginning of period .................... 6,400 7,987
--------- ---------
Cash at end of period .......................... $ 4,456 $ 18,856
========= =========
</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 the Company's $225 million 11% Senior Notes due 2008 (the
Notes), these subsidiaries (the "Subsidiary Guarantors") have jointly, severally
and unconditionally guaranteed the Notes. 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 September 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. 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.
IMPAIRMENT LOSSES--The Company has a supply agreement with Herbalife
International, Inc. ("Herbalife") which extends through December 31, 2000.
Sales to Herbalife represented 57.0% of total sales in 1999 and 50.9% of sales
for the nine months ended September 30, 2000. Herbalife disclosed in its
filing on Form 10-Q for the quarter ended June 30, 2000 that they do not
anticipate placing significant orders with the Company for their first
quarter 2001 supply requirements. Currently, there is no indication from
Herbalife that they intend to purchase any meaningful amounts from the
Company after December 31, 2000. As a result of the impending loss of sales
to Herbalife and other business factors, the Company reviewed the
recoverability of its long-lived assets, and determined that the Company's
goodwill had been impaired. Accordingly, the Company recorded an impairment
loss of $101 million representing the unamortized goodwill.
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").
-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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Raw materials $18,327 $19,360
Work in process 3,669 5,565
Finished goods 2,123 6,607
------- ------
Total Inventory $24,119 $31,532
======= =======
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Equipment $21,347 $18,274
Leasehold improvements 13,340 12,030
Land 150 150
------ ------
Gross property and equipment 34,837 30,454
Less accumulated depreciation and amortization (14,338) (11,705)
------- -------
Net property and equipment $20,499 $18,749
======= =======
</TABLE>
NOTE 4 - INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Goodwill and other intangibles $ 0 $165,702
Deferred financing costs 7,119 9,166
------ --------
Gross intangible assets 7,119 174,868
Accumulated amortization
Goodwill (0) (48,355)
Deferred financing costs (1,689) (2,830)
------ --------
Net intangible assets $5,430 $123,683
====== ========
</TABLE>
IMPAIRMENT lOSSES--The Company has a supply agreement with Herbalife
International, Inc. ("Herbalife") which extends through December 31, 2000.
Sales to Herbalife represented 57.0% of total sales in 1999 and 50.9% of
sales for the nine months ended September 30, 2000. Herbalife disclosed in
its filing on Form 10-Q for the quarter ended June 30, 2000 that they do not
anticipate placing significant orders with the Company for their first
quarter 2001 supply requirements. Currently, there is no indication from
Herbalife that they intend to purchase any meaningful amounts from the
Company after December 31, 2000. As a result of the impending loss of sales
to Herbalife and other business factors, the Company reviewed the
recoverability of its long-lived assets, and determined that the Company's
goodwill had been impaired. Accordingly, the Company recorded an impairment
loss of $101 million, representing the unamortized goodwill.
-8-
<PAGE>
NOTE 5 - DEBT
CREDIT FACILITY--The Company's bank line of credit facility is secured by
all of the Company's assets and matures on January 31, 2001. As of September 30,
2000, the outstanding indebtedness under the bank line was $35 million. The
Company has not complied with certain financial covenants under the line of
credit, as a result of which the lenders have notified the Company of an event
of default and are entitled to accelerate the maturity of the debt. The lenders
have informally agreed to forbear from doing so as long as the Company continues
to reduce principal of the bank line by at least $1 million in each month.
Principal reductions totaling $3.5 million were made during the nine months
ended September 30, 2000, and an additional principal reduction of $1 million
was made in October 2000.
SENIOR NOTES--The Company has not paid the semi-annual installment
of interest in the amount of $12,375,000 due November 1, 2000 under the Senior
Notes. Failure to cure this Default prior to December 1, 2000, will constitute
an Event of Default under the terms of the Notes, entitling the trustee or the
holders of 25% in aggregate principal amount of outstanding Notes to accelerate
the maturity of the Notes. The balance of the Notes outstanding as of September
30, 2000 was $225,000,000. Failure to pay the past-due interest on the Senior
Notes prior to December 1, 2000 would constitute an additional event of default
under the bank line of credit.
-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 September 30, 2000 and no
additional shareholder tax distributions 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 $24.4 million in the quarter ended
September 30, 2000 (48.6% of total sales) compared to $45.1 million (60.5% of
total sales) in the quarter ended September 30, 1999. The comparative decline in
sales to Herbalife in the third quarter of 2000 adversely affected EBITDA for
the quarter. Sales to Herbalife for the nine months ended September 30, 2000
were approximately $86.8 million or 50.9% of net sales; as compared to $108.9
million or 59.1% of net sales for the nine months ended September 30, 1999.
The Company has a supply agreement with Herbalife which extends through
December 31, 2000. Herbalife disclosed in its filing on Form 10-Q for the
quarter ended June 30, 2000 that it does not anticipate placing significant
orders with the Company for Herbalife's first quarter 2001 supply requirements.
Currently, there is no indication from Herbalife that it intends to purchase any
meaningful amounts from the Company after December 31, 2000.
The declines in EBITDA, the demands of the Company's bank lenders, and the
interest requirements of the Company's outstanding Senior Notes due 2008 have
combined to require the Company to undertake significant cost-cutting measures.
At present, the Company is on a strict payment schedule to reduce its secured
bank debt and has not made the semi-annual interest payment of $12.4 million due
November 1, 2000 under the terms of the Senior Notes.
The Company has engaged a financial advisor to assist in a possible
refinancing, repurchase or restructuring of or amendment or modification to any
or all of the Company's existing debt, other obligations or equity securities.
The Company does not anticipate that any refinancing, repurchase or restructure
of existing debt or other obligations 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. Its ability to conduct business under these circumstances
depends on continuing forbearance by its lenders. The absence of capital and
liquidity limits the Company's ability to expand its marketing capabilities as
necessary to grow its business and may adversely affect its ability to compete
effectively.
-10-
<PAGE>
GLOBAL HEALTH SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................. $ 50,162 $ 74,619 $ 170,568 $ 184,330
Cost of sales .............. 39,048 55,738 131,227 133,218
--------- --------- --------- ---------
Gross profit ............... 11,114 18,881 39,341 51,112
Selling, general and
administrative expenses... 6,356 6,592 20,396 17,717
Amortization of intangibles 100,983 8,165 117,347 24,514
--------- --------- --------- ---------
Operating (loss) income .... (96,225) 4,124 (98,402) 8,881
Interest expense, net ...... 8,099 7,544 23,964 22,049
--------- --------- --------- ---------
Loss before income taxes ... (104,324) (4,544) (122,366) (13,168)
State income taxes (benefit)
provision ............... (230) 50 (300) 106
--------- --------- --------- ---------
Net loss ................... $(104,094) $ (3,470) $(122,066) $ (13,274)
========= ========= ========= =========
EBITDA (1) ................. $ 5,667 $ 12,974 $ 21,543 $ 34,849
EBITDA margin (1) .......... 11.3% 17.4% 12.6% 18.9%
</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 might
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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
SALES. In the third quarter of 2000, sales decreased by $24.4 million or
32.7%, to $50.2 million as compared to $74.6 million in the third quarter of
1999. The decrease results primarily from a decrease in sales to Herbalife, the
Company's largest customer. Sales to Herbalife decreased by $20.7 million to
$24.4 million in the third quarter of 2000 as compared to $45.1 million in the
third quarter of 1999. Sales to other customers decreased by $3.7 million to
$25.8 million from $29.5 million.
The Company has a supply agreement with Herbalife which extends through
December 31, 2000. Herbalife disclosed in its filing on Form 10-Q for the
quarter ended June 30, 2000 that it does not anticipate placing significant
orders with the Company for Herbalife's first quarter 2001 supply
requirements. Currently, there is no indication from Herbalife that it
intends to purchase any meaningful amounts from the Company after December
31, 2000.
COST OF SALES AND GROSS PROFIT. Cost of sales decreased by $16.6 million or
29.8%, to $39.1 million in the third quarter of 2000, as compared to $55.7
million in the third quarter of 1999. Cost of sales as a percentage of sales
increased to 77.9% in the third quarter of 2000 as compared to 74.7% in the
third quarter of 1999, thereby decreasing the gross margin in the third quarter
of 2000 to 22.1% from 25.3% in the third 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 remains relatively consistent at $6.4 million in the
third quarter of 2000, as compared to $6.6 million in the third quarter of
1999. As a percentage of sales, selling, general and administrative expenses
increased to 12.7% in the third quarter of 2000, as compared to 8.8% in the
third quarter of 1999. Bad debt provisions increased by $1.2 million to $1.3
million in the third quarter of 2000 from $0.1 million in the third quarter
of 1999 due to a deterioration in the creditworthiness of several customers.
Excluding the increase in bad debt provisions, selling, general and
administrative expenses decreased by $1.4 million, or 21.5%, to $5.1 million
in the third quarter of 2000, as compared to $6.5 million in the third
quarter of 1999. The decrease in selling, general and administrative
expenses, excluding bad debt provisions, was due to the effects of a cost
reduction program that is expected to reduce operating and selling, general
and administrative costs by $1 million per month. Excluding the increase in
bad debt provisions, as a percentage of sales selling, general and
administrative expenses increased to 10.2% in the third quarter of 2000, as
compared to 8.7% in the third quarter of 1999.
AMORTIZATION OF INTANGIBLES. Amortization of Intangibles increased by
$92.8 million to $101.0 million in the third quarter of 2000, as compared to
$8.2 million in the third quarter of 1999. The increase results from the
write-off of all remaining goodwill in the third quarter of 2000. The write-off
of goodwill associated with the reorganization was taken based on management's
evaluation of its recoverability in view of the uncertainty of future
profitability following Herbalife's announcement that it is not placing orders
with the Company for the first quarter of calendar year 2001. The goodwill
associated with the acquisition of American Ingredients was written off as
result of declining sales and profit margins that have materially affected the
long term prospects of American Ingredients.
INTEREST EXPENSE. Net interest expense increased by $0.6 million to $8.1
million in the third quarter of 2000, as compared to $7.5 million in the third
quarter of 1999. The 8.0% increase in interest expense results primarily from
penalties and increased interest charges under the Company's bank line of
credit, imposed by the lenders following the Company's failure to meet financial
covenants. The interest rate was increased from a LIBOR-based rate
(approximating 7% at September 30, 1999) to a fixed rate of approximately 13.5%
at September 30, 2000.
NET LOSS. The Company's net loss increased by $100.6 million to a net loss
of $104.1 million in the third quarter of 2000, as compared to a $3.5 million
net loss in the third quarter of 1999. The increased loss resulted primarily
from the effect of the $101.0 million write off of goodwill, lower sales volume,
lower gross margins and the other reasons described above.
-12-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
SALES. In the first nine months of 2000, sales decreased by $13.7 million or
7.4%, to $170.6 million as compared to $184.3 million in the first nine months
of 1999. Sales to Herbalife decreased by $22.1 million to $86.8 million in the
first nine months of 2000, as compared to $108.9 million in the first nine
months of 1999. Sales to other customers in the first nine months of 2000
increased by $8.4 million to $83.8 million in the first nine months of 2000, as
compared to $75.4 million in the first nine months of 1999.
COST OF SALES AND GROSS PROFIT. Cost of sales decreased by $2.0 million or
1.5%, to $131.2 million in the first nine months of 2000, as compared to $133.2
million in the first nine months of 1999. Cost of sales as a percentage of sales
increased to 77.0% in the first nine months of 2000 as compared to 72.3% in the
first nine months of 1999, thereby decreasing the gross margin in the first nine
months of 2000 to 23.0% from 27.7% in the first nine 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 $2.7 million to $20.4 million in the first
nine months of 2000, as compared to $17.7 million in the first nine months of
1999. As a percentage of sales, selling, general and administrative expenses
increased to 12.0% in the first nine months of 2000, as compared to 9.6% in the
first nine months of 1999. Bad debt provisions increased by $1.9 million to $2.2
million in the first nine months of 2000 from $0.3 in the first nine months of
1999 due to deterioration in the creditworthiness several customers. Excluding
the increase in bad debt provisions, selling, general and administrative
expenses increased by $0.8 million to $18.2 million in the first nine months of
2000, as compared to $17.4 million in the first nine months of 1999. The
increased expenses were primarily related to the growth in non Herbalife sales
and increased commission expense due to changes in sales mix.
AMORTIZATION OF INTANGIBLES. Amortization of Intangibles increased by $92.8
million to $117.3 million in first nine months of 2000, as compared to $24.5
million in the first nine months of 1999. The increase results from the
write-off of all goodwill in the third quarter of 2000, as described above.
INTEREST EXPENSE. Net interest expense increased by $2.0 million to $24.0
million in the first nine months of 2000, as compared to $22.0 million in the
first nine months of 2000. The 9.1% increase in interest expense results
primarily from penalties and increased interest charges under the Company's bank
line of credit, as described above.
NET LOSS. The Company's net loss increased by $108.8 million to a net loss
of $122.1 million in the first nine months of 2000, as compared to a $13.3
million net loss in the first nine months of 1999. The increased loss resulted
primarily from the $117.3 million write off of goodwill, the effect of lower
gross margins, lower sales volume, 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 on the bank debt and its outstanding 11% Senior Notes
due 2008. The Company's' primary source for meeting these requirements is
through cash flow from operating activities. The Company has taken steps to
reduce costs and continues to meet its operating cash flow requirements;
however, the Company requires a substantial infusion of additional capital or
other remedial action to meet or modify its debt service requirements. See below
for a discussion of defaults under the Senior Notes and the Company's
indebtedness to banks and additional steps being taken by the Company to deal
with its debt service requirements while continuing to meet its obligations to
trade creditors on a current basis.
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<PAGE>
Cash and cash equivalents were $4.5 million at September 30, 2000 compared
to $6.4 million at December 31, 1999.
Cash provided by operating activities for the nine month period ended
September 30, 2000 was $5.9 million compared to $20.4 million provided by
operations for the nine months ended September 30, 1999. The $5.9 million
primarily results from a net loss of $122.1, amortization of $117.3 million,
depreciation of $2.6 million, (the net loss before amortization and depreciation
was $2.2 million) decreases in accounts receivable of $8.6 million and inventory
of $7.4 million and decreases in accounts payable and accrued liabilities of
$16.4 million
Capital expenditures of $4.3 million for the period ended September 30, 2000
were primarily for additional manufacturing equipment.
The Company used cash of $3.5 million to make principal payments on the bank
debt.
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 has made no tax distributions to its shareholder in the
nine month period ended September 30, 2000.
The Company's bank line of credit is secured by all of the Company's assets
and matures on January 31, 2001. As of September 30, 2000, the outstanding
balance of the bank debt was $35 million. The Company has not complied with
certain financial covenants under the line of credit, as a result of which the
lenders have notified the Company of an event of default and are entitled to
accelerate the maturity of the debt. The lenders have informally agreed to
forbear from doing so as long as the Company continues to reduce principal of
the bank line by at least $1 million in each month. Principal reductions
totaling $3.5 million were made during the nine months ended September 30, 2000,
and an additional principal reduction of $1 million was made in October 2000.
The Company has not paid the semi-annual installment of interest in the
amount of $12,375,000 due November 1, 2000 under the Senior Notes. Failure to
cure this Default prior to December 1, 2000, will constitute an Event of Default
under the terms of the Notes, entitling the trustee or the holders of 25% in
aggregate principal amount of outstanding Notes to accelerate the maturity of
the Notes. The balance of the Notes outstanding as of September 30, 2000 was
$225,000,000. Failure to pay the past-due interest on the Senior Notes prior to
December 1, 2000 would constitute an additional event of default under the bank
line of credit.
The Company has engaged a financial advisor to assist in a possible
refinancing, repurchase or restructuring of or amendment or modification to any
or all of the Company's existing debt, other obligations or equity securities.
The Company does not anticipate that any refinancing, repurchase or restructure
of existing debt or other obligations 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. Its ability to conduct business under these circumstances
depends on continuing forbearance by its lenders. The absence of capital and
liquidity limits the Company's ability to expand its marketing capabilities as
necessary to grow its business and may adversely affect its ability to compete
effectively.
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<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 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
The Company's cash flow, earnings and the fair value of its debt, may be
adversely affected due to changes in interest rates with respect to its
long-term debt.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
The Company has not complied with certain financial covenants under its
Credit Agreement with bank lenders, dated April 23, 1998, as amended. The
lenders have notified the Company of a default and are entitled to accelerate
the maturity of the bank debt. The balance of the bank debt outstanding at
September 30, 2000 was $35 million.
The Company has not paid the semi-annual installment of interest in the
amount of $12,375,000 due November 1, 2000 under its 11% Senior Notes due 2008.
Failure to cure this Default prior to December 1, 2000, will constitute an Event
of Default entitling the Trustee or the holders of 25% in aggregate principal
amount of outstanding Notes to accelerate the maturity of the Notes. The balance
of the Notes outstanding as of September 30, 2000 was $225,000,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule for the quarter ended
September 30, 2000, which is submitted electronically to the
Commission for information only.
(b) There were no reports on Form 8-K filed during the quarter for which this
report is filed.
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<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: May 12, 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
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