SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended April 30, 1996
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended ____________________
Commission File No. 0-17174
HAUSER CHEMICAL RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
[IRS-NUMBER] 84-0926801
Delaware 84-0926801
(State or other (I.R.S. Identification Number
jurisdiction of incorporation
or organization)
5555 Airport Blvd., Boulder, Colorado 80301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (303)443-4662
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K ([SECTION]229.405 of this
chapter) is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
nonaffiliates of the Registrant. The aggregate market value
shall be computed by reference to the price at which the stock
was sold, or the average bid and asked prices of such stock,
as of a specified date within 60 days prior to the date of
filing.
$65,592,553, as of July 1, 1996
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest
practicable date.
Common Stock, $.001 par value 10,363,513
Class Outstanding at April 30, 1996
Documents Incorporated by Reference: Definitive Proxy
Statement for the 1996 Annual Shareholders' meeting to be
filed with the Commission and incorporated by reference into
Part III.
<PAGE>
PART I
Item 1. Business.
INTRODUCTION
The Company is a Delaware corporation. As used in this
report, the terms "Hauser" and "Company" include Hauser
Chemical Research, Inc., and its subsidiaries Hauser
Northwest, Inc. and Shuster Laboratories, Inc. (Shuster),
formerly Herbert V. Shuster, Inc. The Company's principal
offices are located at 5555 Airport Boulevard, Boulder, CO
80301. Its telephone number is (303) 443-4662.
The Company continued investing its technology and
finances to secure its position as a multi-product,
multi-customer developer, manufacturer and seller of special
products from natural sources during the fiscal year ended
April 30, 1996. For the three years prior to fiscal 1995,
substantially all of the revenue, profitability and cash flow
of the Company had come from the production and sale of
paclitaxel to Bristol-Myers Squibb Company ("Bristol") under a
contract, as amended ("Amended Contract"). During fiscal 1996,
the Company focused on the development of its four major
product areas: health care products, natural ingredient
products, technical services, and secondary forest products.
Health Care Products
Pharmaceuticals
On May 12, 1994, the Company entered into a multi-year,
worldwide and mutually exclusive contract (the "Supply
Agreement") with American Home Products Corporation ("American
Home Products"), formerly American Cyanamid Company, pursuant
to which the Company will supply American Home Products with
bulk paclitaxel, an anticancer compound. Subsequent to April
30, 1996, American Home Products notified the Company of its
decision to maintain exclusivity of the supply of paclitaxel
from Hauser in the United States and Canada. In addition,
American Home Products released its exclusive supply position
in the rest of the world. Currently, the parties are
negotiating terms of an amended contract.
The Company supplies bulk paclitaxel to American Home
Products on a two-part formula price basis which includes an
initial payment upon transfer of bulk paclitaxel and a
subsequent payment when American Home Products sells finished
products which contain the bulk paclitaxel. During fiscal
1996, the Company sold minimum quantities of paclitaxel under
the Supply Agreement for American Home Products' development
needs, including final product formulation and clinical
trials, as well as pre-launch inventory. On May 12, 1994, the
Company and American Home Products also entered into a
Research and Development Collaboration Agreement (the "R&D
Agreement") which called for the two companies to cooperate in
the research and development of new products derived from
naturally or synthetically produced taxanes. This R&D
agreement expired in May 1996.
Management believes that the Company is one of the few
large-scale operations for the production of bulk paclitaxel
in the world, and currently operates under Good Manufacturing
Practices ("GMP") which are regulations established and
enforced by the Food and Drug Administration ("FDA"). The
Company has developed procedures to extract paclitaxel and
taxanes from taxus bark and alternative sources (needles and
cultivars). Hauser has used semi-synthetic procedures to
convert a variety of taxanes to paclitaxel and taxane analogs.
During fiscal year 1996 the Company completed a two-year,
$480,000, Phase II Small Business Innovative Research ("SBIR")
contract with the National Institute of Health ("NIH") for the
development of Artemisinin analogs for the treatment of
parasitic diseases. Invivo studies of selected analogs are
under way. Patents have been filed on unique compounds
resulting from this work. In addition, subsequent to April 30,
1996, the company signed a Cooperative Research and
Development Agreement ("CRADA Agreement") with Walter Reed
Army Institute of Research to do further testing of
artemisinin analogs produced under SBIR.
The Company has a purchase order from Colgate Oral
Pharmaceuticals, the professional oral care products
subsidiary of Colgate-Palmolive Company ("Colgate") for
sanguinaria extract. Hauser also signed an investment and
research agreement with Dovetail Technologies, Inc.
("Dovetail"), to work on a novel class of compounds which
demonstrate potent anticancer activity in early laboratory
studies. Hauser will provide chemistry and manufacturing
services for Dovetail's proprietary compounds.
Natural Ingredients
Nutraceuticals
The term nutraceuticals is used to identify the broad
range of natural, healthful products that are used to
supplement the diet by increasing the total dietary intake of
important nutrients. This includes nutritional supplements
such as vitamins, minerals, herbal extracts, antioxidants,
amino acids and protein supplements, fortified processed foods
with nutritional supplements added, and "engineered" or
"designer" foods which are whole foods developed to have
enhanced amounts of nutritionally beneficial components. The
Company's current products include liquid and dry herbal
extracts of echinacea, valerian, siberian ginseng, panax
ginseng, rosemary, goldenseal, and chamomile. Management
believes that the Company's expertise in the production of
special products from natural sources and its extensive
regulatory experience position the Company well in this market
area. Shipments of nutraceuticals by the Company commenced in
fiscal 1996.
Natural Flavor Extracts
The Company is a producer of unique flavor extracts which
it markets into the worldwide food and beverage ingredient
market. The Company is commercially producing herbal, spice,
and botanical extracts which typically reach the supermarket
shelves as natural flavor ingredients in new products, such as
ready-to-drink beverages, soups and convenience foods.
Currently about 50 flavor products are being sold.
Effective April 30, 1996, the Company and its former
partner Tastemaker, jointly agreed to dissolve their strategic
alliance to develop, market, and supply natural flavor
extracts to the food and beverage industry. The Company
assumed all responsibilities for marketing and sales of the
natural flavor extracts of the joint venture in addition to
their manufacture. These and other natural flavor extracts
will be marketed under Hauser's new brand name
NaturEnhance[TradeMark] Flavor Extracts as part of the
Company's NaturEnhance[TradeMark] line of food ingredients.
Tastemaker intends to continue to purchase Hauser's natural
flavor extracts for use in its flavor compounds. Hauser
intends to sell its flavor extracts to food and beverage
companies as well as flavor companies.
Oxidation Stabilizers
In the Spring of 1996, the Company introduced a line of
natural rosemary extracts which preserve the quality and
flavor of a variety of food and beverage products. These
extracts are marketed under the brand name of
StabilEnhance[TradeMark], as part of the Company's
NaturEnhance[TradeMark] line of food ingredients.
Color Enhancers
In the Spring of 1996, the Company introduced a unique
natural extract of rosemary, ColorEnhance[TradeMark]-R as part
of the Company's NaturEnhance[TradeMark] line of food
ingredients. This product deepens the hue and increases the
intensity and shelf-life of natural colors. The use of natural
colorants in food and beverages is often limited by their
instability to heat, light, and pH. ColorEnhance[TradeMark]
offers a practical solution to this problem for fruit and
vegetable colorant extracts such as grape skin, red cabbage,
and hibiscus.
Colors
The Company is developing a natural beta carotene from
microalgae and is evaluating various formulations of this
product as food and beverage colorants as well as nutritional
dietary supplements.
Secondary Forest Products
The Company, through its subsidiary Hauser Northwest,
Inc. ("Hauser Northwest"), d/b/a Ironwood Evergreens
("Ironwood"), has collected yew bark in the Pacific Northwest
for the past six years and will continue to do so on an as
needed basis. To take advantage of the synergy that exists
between the collection of floral products and the sourcing of
raw materials, the Company expanded into the collection and
sale of secondary forest products in May 1994 by acquiring
substantially all of the net assets of Ironwood Evergreens,
Inc. ("Ironwood"), an Olympia, Washington based company.
Management believes that the combination of Ironwood with
Hauser Northwest will contribute to the Company through
increased net revenues and significantly reduced sourcing
costs for a wide array of materials.
Technical Services
The Company's Technical Services Division, which includes
both Hauser Laboratories and Shuster, provides
interdisciplinary laboratory testing services, chemical
engineering services and contract research and development.
Specific areas of expertise include custom synthesis, consumer
product development and testing, commercial process and
product development, failure analysis, formulation, problem
solving and small scale natural product isolation and
purification. The focus of the Technical Services Division is
to profitably solve customer problems, develop strategic
relationships and evaluate new product opportunities through
chemistry, engineering, materials science and food science.
On July 21, 1995 the Company acquired 100% of the stock
of Shuster, an independent consumer product research and
development firm and contract testing laboratory based in
Quincy, Massachusetts with outlying facilities near Atlanta,
Georgia.
The Technical Services Division experienced revenue
growth in fiscal 1996 and management believes that demand for
technical services provided by the Company will continue and
expects this division to continue to grow.
PROCESSING TECHNOLOGIES
Management believes the Company has established a
distinct competitive advantage with its proprietary
technologies and body of knowledge regarding the extraction
and purification of natural products. The end products
processed by the Company are typically at higher yield, better
quality and lower cost than those produced solely by
conventional methods. In addition, the Company's proprietary
technologies enable it to produce certain special products
which management believes would be difficult to duplicate by
currently known conventional technologies.
The Company employs proprietary technologies in
combination with conventional techniques to process natural
raw materials and produce specialized natural products. The
Company's expertise in analyzing, identifying and measuring
compounds at low concentrations occurring in natural materials
and in process streams is important in raw material analysis,
process development, process control, and quality control.
Design of the process for a particular application involves
selecting the most appropriate processing steps, determining
the proper sequence, and establishing the optimum temperature,
pressure, solvent and other parameters for each step in the
process. The Company develops variations of its processes
based on the nature of the raw material used and the
specifications of the desired product.
In general, the Company produces a liquid extract from a
solid raw material using Dynamic Liquid/Solid Extraction[State
Trade Mark] ("DL/SE[State Trade Mark]"), and then converts the
product into final form. Its Liquid Liquid Focusing[State
Trade Mark] ("LLF[State Trade Mark]") purification process can
be used with some extracts to even more highly concentrate
solutions prior to final purification steps. DL/SE[State Trade
Mark], typically the first step of the Company's isolation
process, is particularly effective at producing liquid
extracts from solid natural materials, such as roots, bark,
seeds and leaves. Relative to conventional methods,
DL/SE[State Trade Mark] produces a more highly concentrated
extract that can be valuable in itself as a product, or
alternatively, can simplify the subsequent steps required to
isolate an enriched extract or purified natural chemical.
Equally significant, the higher yields generated by the
DL/SE[State Trade Mark] process typically translate into lower
costs since a greater amount of the target natural product is
isolated from the same amount of raw material. Finally,
DL/SE[State Trade Mark] can also capture a broader range of
components, such as the top notes of pepper, which improves
the quality of the final product. Top notes are the
highly-volatile chemical components of an extract, such as a
flavor, which can easily evaporate, the loss of which reduces
the quality or character of the flavor. The next step of the
process further purifies the liquid extract, which is still
relatively dilute in the selected desired compounds.
Conventional and proprietary techniques are employed to
produce a purified extract which is enriched in the active
compound. The Company's proprietary purification technology,
LLF[State Trade Mark], is highly versatile and can be used in
place of more costly chromatography methods, which
conventional technologies employ. Final purification is
required if a pure compound is the desired product.
The Company can process all types of raw materials
including botanical and animal materials and products of
fermentation and plant cell tissue culture. The Company can
adapt existing processes to accept alternative raw materials
as they become available. For example, the Company's chemists
and engineers adapted the Company's proprietary processes to
produce bulk paclitaxel from needles. DL/SE[State Trade Mark]
and LLF[State Trade Mark], along with other purification
techniques, have been successfully modified to produce natural
products in the nutraceuticals and food additives areas.
PRODUCTS AND SERVICES
Hauser applies its proprietary DL/SE[State Trade Mark]
and LLF[State Trade Mark] extraction and purification
processes and conventional technologies to produce a broad
range of natural products for a variety of markets.
Health Care Products
Pharmaceuticals
Paclitaxel - During late 1987 and 1988, the Company was
awarded two Master Agreements by the National Cancer Institute
(NCI), a division of NIH, for the "Large Scale Isolation of
Anti-Tumor Agents from Natural Sources" (the "Anti-Tumor
Master Agreement") and the "Large Scale Isolation of Anti-AIDS
Agents from Natural Sources," (the "Anti-AIDS Master
Agreement"). The Master Agreements were extended an additional
five years to April 1998. The dollar value of the Master
Agreements is dependent upon individual projects. The Master
Agreements are umbrella agreements which grant companies the
opportunity to bid on various projects for NCI. The orders for
specific projects are awarded based on bids submitted on
various projects for NCI. The Company first produced
paclitaxel under the Anti-Tumor Master Agreement in 1988, .
The Company was awarded its first contract under the Anti-AIDS
Master Agreement in June 1993 for the "Isolation and
Purification of Michellamine B from Crude Extracts of
Ancistrocladus sp. Novum".
Hauser produced bulk paclitaxel drug from Taxus resin
which is produced from Pacific yew bark. Hauser has produced
paclitaxel since 1988, first for NCI and then for Bristol, and
in August 1991 signed a supply agreement with Bristol which
expired on August 14, 1994. In May 1994 the Company entered
into a multi-year Supply Agreement with American Home Products
to supply bulk paclitaxel to that company through 2004.
Paclitaxel is an unpatented, novel anti-tumor agent that
has shown broad spectrum activity against several types of
cancer, most notably refractory ovarian and breast cancer. It
is an anti-microtubule agent and is the first of a new class
of potential anti-tumor compounds. Microtubules are
intracellular structures that play a key role in cell division
and the maintenance of cell shape, cell motility and
intracellular transport. Paclitaxel's mechanism by which it
attacks cancer cell division processes (cell mitosis) is novel
and distinct from all previously discovered cytotoxic agents.
On May 12, 1994, the Company entered into a Supply
Agreement and the R & D Agreement with American Home Products.
Under the Supply Agreement, the Company will supply American
Home Products with bulk paclitaxel. Subsequent to April 30,
1996, American Home Products notified the Company of its
decision to maintain exclusivity of the supply of paclitaxel
from Hauser in the United States and Canada. In addition,
American Home Products released its exclusive supply position
in the rest of the world. Currently, the parties are
negotiating terms of an amended contract for the United States
and Canada. The product must meet certain specifications set
by American Home Products.
The Company will supply bulk paclitaxel to American Home
Products on a two-part formula price basis which includes an
initial payment upon transfer of the bulk paclitaxel
("Transfer Payment") and a subsequent payment ("Final
Payment") when American Home Products sells finished bulk
paclitaxel products ("Finished Products"). The contract calls
for certain minimum purchase requirements (which are subject
to variation based upon the Company's production costs) which
are expected to aggregate Transfer Payments of approximately
$8,000,000 during the first three years. American Home
Products has agreed to indemnify Hauser against damages based
upon use or sale of the finished product, except that the
parties have agreed to share the costs of defending any patent
infringement case based upon such use or sale.
The Supply Agreement has a ten (10) year term which can
be renewed by American Home Products for an additional ten
(10) year period. Either party may terminate the contract upon
the occurrence of uncured breaches of contract or the
insolvency of the other party. In addition, during the first
five (5) contract years, American Home Products can terminate
the Agreement in whole or in part if (i) the FDA or a foreign
regulatory agency imposes significant restrictions upon the
manufacture, use or sale of the bulk paclitaxel or finished
product, (ii) the development program in foreign markets is
significantly more burdensome than contemplated, (iii) a third
party claim (including a claim of patent infringement)
materially inhibits American Home Products from developing,
manufacturing or selling the finished product, (iv) a U.S. or
European patent issues with claims which materially impact
American Home Products' marketing activities, or (v) the
commercial viability of the finished product deteriorates so
that American Home Products cannot reasonably expect to
profitably capture more than a designated portion of the
defined taxane market. American Home Products' $1,000,000
payment upon execution of the agreement was in exchange for
the right to terminate the Supply Agreement within the first
year under certain circumstances.
The R&D Agreement called for the two companies to
cooperate in a mutually exclusive manner in a research and
development program funded by American Home Products which was
designed to develop new products derived from naturally or
synthetically produced taxanes. During the two year term of
the program, several taxanes were evaluated and submitted for
in vitro pre-clinical testing. The R&D Agreement expired in
May 1996 and was not extended by American Home Products.
American Home Products has the right to review any products
derived by Hauser from naturally or synthetically produced
taxanes during the one year period after expiration of the R&D
Agreement.
During fiscal 1996, Hauser produced paclitaxel for
American Home Products' development needs, including final
product formulation and clinical trials. While difficult to
predict the exact timing, management of the Company expects
that approval to sell paclitaxel internationally will be
obtained by American Home Products in the latter part of
fiscal 1997.
Subsequent to April 30, 1996, the Company signed a
non-binding letter of intent with a major European
pharmaceutical firm for a three year supply agreement for GMP
bulk paclitaxel in Europe and Eastern Europe. The agreement
will be mutually exclusive to both parties, except for
Hauser's existing obligation to supply paclitaxel to American
Home Products in Europe and Eastern Europe, which obligation
is pursuant to the Company's existing contract. The
pharmaceutical firm intends to purchase from Hauser all
supplies of GMP bulk paclitaxel for its total market needs in
Europe. The letter of intent is a non-binding agreement
subject to contract negotiation, due diligence and approval of
the Boards of both companies.
Artemisinin - Artemisinin is a naturally occurring
chemical from the herb Artemisia annua. The plant has been
used for years in China to treat malaria, a parasitic
infection. The Company has developed derivatives of
Artemisinin and is sponsoring laboratory research on their use
in combatting opportunistic parasitic infections, such as
toxoplasmosis and cryptosporidiosis in humans and animals.
Parasitic infections are a major cause of death in AIDS and
other immunocompromised patients.
The Company's Phase I SBIR grant, completed in 1991,
demonstrated promising results with a number of new
proprietary derivatives of Artemisinin. Work under a Phase II
grant focused on semi-synthesis of additional new derivatives
and preclinical screening, toxicology and efficacy studies to
be carried out at the University of Colorado Health Sciences
Center and Utah State University. The Company has been working
with Artemisinin and its derivatives since 1985. In the event
the project proceeds beyond laboratory research, a stable
source of raw material would have to be developed and
extensive FDA rules complied with prior to bulk manufacture
and commercialization. In addition, subsequent to April 30,
1996, the Company signed a CRADA Agreement with Walter Reed
Army Institute of Research to do further testing of
artemisinin analogs produced under SBIR.
Sanguinaria - During fiscal 1995, Hauser announced that
it had received purchase orders from Colgate Oral
Pharmaceuticals to produce sanguinaria extract, a 100% natural
antimicrobial in Colgate's Viadent[REGISTERED TRADE MARK]
toothpaste and oral rinse products. Under the agreement,
Hauser produced sanguinaria over a 15 month period. Shipments
in fiscal 1996 totaled $933,460. Hauser produced the
sanguinaria in the original Viadent[REGISTERED TRADE MARK]
products in 1984, when they were first introduced by Vipont.
Colgate acquired Vipont in 1989. Sanguinaria is extracted from
the bloodroot plant, which grows abundantly in the southern
United States. This extract contains sanguinarine, which is
the active anti-plaque ingredient found in Viadent[REGISTERED
TRADE MARK] toothpaste and oral rinse, an over-the-counter
regimen designed to reduce gum inflammation and treat
gingivitis. Sanguinaria is also an ingredient in a similar
line of Colgate Oral Pharmaceuticals' products sold in Europe.
Dovetail - The Company entered into a research agreement
with Dovetail Technologies, Inc. (Dovetail) in fiscal 1995 to
work on a novel class of compounds which demonstrate potent
anticancer activity in animal studies. The Company will
provide chemistry and manufacturing services for Dovetail's
proprietary compounds. These compounds appear to reinforce the
body's inherent ability to fight cancer by enhancing the
body's immune system at low doses. They may also amplify
vaccine response to increase protection from future
infections. These compounds have been found to be non-toxic,
even at relatively high doses. They have produced a dramatic
anticancer response in early laboratory studies. The Company
does not expect to recognize significant revenues on this
research project in the foreseeable future.
Natural Ingredients
Nutraceuticals
During fiscal 1995, Hauser began development of a new
product line, "Nutraceuticals". Nutraceuticals is a term used
to denote the broad range of healthful natural products that
are used to supplement the diet. Shipments of nutraceutical
products commenced in the first quarter of fiscal 1996.
Nutraceutical products fit into the new product category
of "Dietary Supplements". This new product category was
established by the Dietary Supplement Health and Education Act
of 1994 ("The Act") and is separate from foods and drugs. The
Act defines Dietary Supplement to include "vitamins, minerals,
herbs or other botanicals, antioxidants, amino acids, or other
dietary substances used to supplement the diet by increasing
the total dietary intake.
Hauser's Nutraceutical products are dietary supplements,
which may be consumed as supplements, in liquids, capsules, or
tablets, or as ingredients in processed foods. Products
currently available from the Company's Nutraceuticals Division
are liquid and dry herbal extracts, including echinacea,
goldenseal, siberian ginseng, panax ginseng, rosemary,
valerian, and chamomile. Additional products are in various
phases of development. Hauser's Nutraceutical products are
distinguished by the Company's Certified AssayTM, which means
guaranteed measured concentrations (the assay) of one or more
selected marker compounds in the final product. This assumes
that the level of the marker compound is representative of the
ratio in the raw material.
Hauser's initial Nutraceutical products are herbal
extracts. According to market research published in 1995 by
Packaged Facts, the market for herbal extracts has more than
doubled between 1987 and 1993, reaching sales of $800 million
in 1994. This growth has been steadily accelerating and is
characterized by double digit growth. The large increases in
sales from 1991 to 1994 were attributed in part to early
penetration into the mass market (drugstores, food stores, and
discount stores).
Hauser's Nutraceuticals, including herbal extract
products, are a part of the multi-billion dollar natural
products industry. Market research gathered by New Hope
Communications, Inc. ("New Hope") in June 1995 revealed that
the natural products industry enjoyed a 22.7% increase over
the previous year. This information indicates that the growth
of the herbal products market is continuing.
Herbal extracts may be either primary or semi-purified.
Primary extracts are produced by extraction with a solvent and
undergo no additional purification. Primary extracts are
typically extracted with alcohol/water and may be sold as
liquid or dry products. They may be single herbal extracts or
formulas, mixtures of a number of herbs.
Currently in the market, primary extract products are
either not standardized or are standardized by the amount of
raw material used. "Guaranteed Potency" primary extracts
(products with a guaranteed measured amount of a target
compound) are increasingly demanded.
Semi-purified extracts are processed further to produce
an extract that is enriched in selected target compounds or
groups of compounds. These are typically dry products, and
they are sold as "Standardized," with the assay of the target
compounds or group of compounds guaranteed. Semi-purified
products are often supported with the publication of research.
This establishes the specifications of the products studied as
the standard, effectively creating a commodity market, as all
products must have the same standard.
The Company's nutraceutical products are currently being
marketed through an agent (distributor/broker) with support
from the Company's marketing and technical staff. Distribution
through an agent gives the Company instant broad
representation at a variable cost. It is anticipated that
sales will be primarily made through an agent for the
foreseeable future, at least until the Company is firmly
established in the marketplace.
Management believes that the Company's proven expertise
in the analysis, development and production of special
products from natural sources, as well as its extensive
experience in meeting regulatory requirements for food and
drug products, position it competitively in this new growth
industry.
Natural Flavor Extracts
According to industry sources, the production of flavor
ingredients is a $3.0 billion per year industry worldwide. The
flavor industry has traditionally utilized a large number of
flavors derived exclusively from natural sources. According to
industry sources, natural flavors account for approximately
70% of the flavor market today. The Company believes there is
a continuing trend in the United States toward use of natural
products. This appears to be due to both an increased
government focus on requirements regarding food package
labeling and consumer preference for all-natural foods. The
emerging market for ready-to-drink beverages is an example of
a rapidly growing market segment using natural flavors and
botanical extracts.
Effective April 30, 1996, the Company and its former
partner Tastemaker, jointly agreed to dissolve their strategic
alliance to develop, market, and supply natural flavor
extracts to the food and beverage industry. The Company
assumed all responsibilities for marketing and sales of the
natural flavor extracts of the joint venture in addition to
their manufacture. These and other natural flavor extracts
will be marketed under Hauser's new brand name
NaturEnhance[TradeMark] Flavor Extracts. Tastemaker intends to
continue to purchase Hauser's natural flavor extracts for use
in its flavor compounds. The Company is marketing its flavor
extracts directly to flavor houses, like Tastemaker, as well
as to food and beverage companies that are former customers of
the strategic alliance.
Management views its proprietary technology as a powerful
tool in flavor extract manufacturing. The Company uses its
technology to capture virtually all of the components of a
flavor, including the volatile top notes that otherwise may be
lost in concentration. This produces an extract with superior
quality, flavor and taste to competitive extracts. Hauser
produces about 50 flavor extract products.
The Company's Flavors Department occupies part of the
33,000 square foot Hauser Park facility on 25 acres of land
north of Denver and east of Boulder. Construction of the
building and the addition of equipment was completed in fiscal
1994. The Hauser Park facility is designed specifically for
maximization of Hauser's proprietary isolation and extraction
technologies.
Current extracts sold by Hauser include hibiscus,
rosehips and lemongrass, chicory and chamomile for use in
ready-to-drink beverages, yogurt, dressings, ethnic foods,
teas and other natural products. Hauser is also producing
coffee, tea and vanilla flavor extracts for use in beverages,
ice cream, yogurt, baked goods, teas, and other applications.
Extracts include black pepper, tarragon, basil, sage, thyme,
oregano and chili pepper for use in sauces, soups and stews,
frozen entrees, juices, salsa and dressings.
Oxidation Stabilizers
During fiscal year 1996, the Company manufactured
substantial commercial scale quantities for inventory and
introduced to the market a line of rosemary extracts which
protect the flavor and quality of foods and beverages.
Oil-soluble and water-soluble oxidation stabilizer products
are marketed under the brand name StabilEnhance[TradeMark] and
are Kosher, GRAS, and Natural Certified.
Although rosemary has been used for centuries to prevent
rancidity in fats and oils, the spice's use has been limited
by its strong odor and taste, and thus historically has been
limited to applications such as Italian sausage where this
flavor is acceptable. Hauser's patent pending process
minimizes the objectionable flavor components while retaining
rosemary's preservative characteristics at a competitive
price.
Customer evaluations have indicated that the Company's
oil-soluble rosemary extract, StabilEnhance[TradeMark]-OSR,
has value-added characteristics: less flavor, less color,
better solubility, and better solution clarity than commercial
rosemary products currently on the market, all at a
competitive price.
The Company's water-soluble rosemary extract,
StabilEnhance[TradeMark]-WSR, is new to the market, and has no
direct competition. Customer feedback indicates it solves
oxidation and stability problems of water-based food products.
Color Enhancers
In fiscal year 1996, the Company introduced a natural
extract also of rosemary, ColorEnhance[TradeMark]-R, which
deepens the hue and increases the intensity and shelf-life of
natural colors.
ColorEnhance[TradeMark]-R is a patent-pending, all
natural water-soluble extract of rosemary that significantly
improves the stability and enhances the color of natural color
extracts. Fruit and vegetable extracts such as grape skin, red
cabbage, and elderberry are used to impart color to foods and
beverages. However, widespread use of these natural colors has
been limited by their lack of heat, light, and pH stability.
ColorEnhance[TradeMark]-R overcomes the traditional
limitations of natural colors.
The major advantages of ColorEnhance[TradeMark]-R are:
1. It increases the intensity of the natural color, thus
allowing for lower usage rates of the color in a food system.
2. It deepens the hue of a natural color providing a more
appealing and marketable color.
3. It lengthens the shelf life of the natural color by
stabilizing it to heat, light, and pH conditions that the
natural color is subjected to on the grocery store shelf.
ColorEnhance[TradeMark]-R is patent-pending, Kosher,
GRAS, and Certified Natural. Management is not aware of a
similarly performing product approved for the U.S. market
today.
Colors
During the second quarter of fiscal 1995, the Company
announced the formation of the BetaPharm partnership with
Cyanotech Corporation for the development, manufacture, and
marketing of natural beta carotene from microalgae. Beta
carotene is sold into the health care products and food
ingredients markets as a food colorant, antioxidant and
vitamin supplement. Industry sources indicate that it accounts
for an estimated $100 million in annual worldwide sales.
Subsequent to April 30, 1996, the Company received
notification from Cyanotech that it had decided to end its
participation in the BetaPharm joint venture project. The
Company believes that the results of the research over the
past two years have been encouraging and the demand for
natural beta carotene continues. Cyanotech has decided to
apply its resources to its own proprietary products. The
Company and Cyanotech are working on an agreement whereby
Cyanotech will be available in a technical advisory role on
the growing and harvesting of microalgae for the BetaPharm
project.
The Company is currently evaluating the possibility of
continuing to pursue this product by itself or with another
partner. Pursuant to the terms of the joint venture, Cyanotech
will grant an exclusive, perpetual, royalty-free worldwide
license of the Cyanotech Technology (as defined in the Joint
Venture Agreement) to make, have made, use and sell the
product in consideration for the payment of out-of-pocket
expenses incurred by Cyanotech on the joint venture project
since August 1, 1994, (estimated to be approximately
$400,000). The Company intends to complete the Pilot Project
and evaluate whether or not to proceed with the final
commercialization phase and acquire the Cyanotech technology
license. As construction and funding of the facilities are
required for commercialization, it is expected that the
evaluation will take approximately six to nine months.
Effective July 1, 1996, the Company will receive 100% of the
profits or losses of the BetaPharm project if it proceeds on
its own.
Secondary Forestry Products
Sourcing is strategically important in support of the
Company's raw material production needs. This function is
fulfilled, in part, through the Company's subsidiary Ironwood,
a Tumwater, Washington based operation with strong growth
prospects.
In May 1994, the Company, purchased substantially all of
the net assets of Ironwood. Consolidation of all Hauser
Northwest and Ironwood activities was completed during fiscal
1995.
Historically, the primary activity of Hauser Northwest
has been the collection of yew bark for the manufacture of
paclitaxel. Yew bark collections are seasonal, concentrated
primarily in the late spring and extending throughout the
summer months. Therefore, the Company's large capital
investment in Hauser Northwest was only being utilized for one
quarter of each year. Ironwood was an established, well
managed company comprised of several seasonal businesses.
Through integration, the two operations now provide excellent
coverage for all of the Company's secondary forest product
requirements in a single entity on a year-round basis.
Ironwood was founded in 1990 as a premium supplier of cut
decorative Western and Christmas greens to the floral trade.
The greens products are sold into the domestic and
international markets through the terminal wholesalers,
catalogue marketers and large scale importers in the European
floral trade. Increased consumption of floral products
worldwide has led to a substantial demand for floral greens,
particularly in Western Europe. This has created the
opportunity for Ironwood to build a strong leadership position
supported by an effective base of supply and availability, and
a market reputation for quality and reliability. High quality
products, unique packaging and exceptional customer service
allow Ironwood to achieve premium pricing.
During fiscal 1996, Ironwood withstood significant price
competition in Europe. By maintaining pricing at the top end
of the market, short-term net revenues were negatively
affected, but, this strategy is expected to maintain long-term
viability. On the domestic front, Ironwood experienced an
unfortunate performance in its Christmas effort occasioned by
building a strong production capability that was not matched
when, as in many industries in 1995, seasonal sales faltered
in December. However, Ironwood successfully expanded into the
higher margin, non-perishable dried and preserved floral
products market. Also, Ironwood now markets tropical greens
grown in Mexico to its entire customer base. Ironwood plays a
significant role in the sourcing, acquisition and processing
of raw materials for other Hauser divisions.
Ironwood is pursuing a variety of new, high margin
markets and continues to explore opportunities for the
successful expansion of its existing businesses.
Technical Services
The Company's Technical Services Division provides
interdisciplinary laboratory testing services, process
engineering services and contract research and development.
The focus of the Technical Services Division is to solve
customers' technical problems and to develop strategic
relationships for new corporate opportunities. The Technical
Services Division is engaged in chemical analysis of
industrial, commercial and consumer products, process and
product development including formulation and prototype
production, materials testing, failure analysis, materials
engineering, industrial problem solving, investigations
supporting expert testimony, custom synthesis, small scale
natural products isolation and purification, and consumer
product development and testing.
The Technical Services Division performs in excess of
2,500 consulting and testing projects for over 1,300 clients
annually. Projects range from multi-year research,
development, testing and consulting programs for Fortune 100
companies to simple water tests for homeowners. Hauser's
diverse client base and project diversity enable the Company
to continuously build its in-house technical expertise through
exposure to cutting edge technologies, which augments its
internally funded research and development efforts. Technical
Services generally works with the clients in two ways. First,
the Company provides routine services to answer customer's
technical questions. As such, the Company performs a service
based upon standard procedures or methods. The Company is
compensated on a fee-for-service basis. In the second case,
the Company may seek consideration for the value of a
development, as negotiated between the Company and the client.
The Company's business development staff screens the
commercial potential of many client sponsored programs,
negotiates with the clients and establishes appropriate
business relationships to expand the profitability of the
Company's business. The Company may seek one or a combination
of several options including manufacturing rights, royalties,
licensing considerations for target markets, equity
participation in client operations and unrestricted buy out of
the new product or technology. Often, sponsored research
yields production opportunities without internally funded
research.
Examples of strategic alliances in the natural products
processing area that began as projects in the Technical
Services business group include the production of bulk
paclitaxel for Bristol which grew out of work for NCI under
the Anti-Tumor Master Agreement and the production of
sanguinaria extract for Colgate. The Company expects Technical
Services to grow profitably at a modest rate, while providing
new opportunities for the Company's businesses.
In November 1994, Hauser signed an agreement with
NeXstar, Inc. (formerly NeXagen "NeXstar"), for the contract
manufacture of NeXstar's oligonucleotide based drug
candidates. Under the terms of the agreement, NeXstar has
leased and retrofitted an existing 5,500 square foot GMP
product facility. Hauser will oversee process validation and
will operate the facility for NeXstar once production begins.
Shuster Laboratories, Inc.
On July 21, 1995, the Company acquired 100% of the stock
of Shuster, an independent consumer products research and
development firm and contract laboratory based in Quincy,
Massachusetts for approximately $4.7 million in cash and
notes. Based on unaudited financials, Shuster's gross revenues
in calendar 1994 were in excess of $6 million.
Shuster, which also has facilities in the Atlanta,
Georgia area, will continue to operate as a wholly-owned
subsidiary of the Company. Shuster is led by executives with
many years of experience. Shuster was founded in Massachusetts
in 1955 as an independent consumer products research and
development firm. It has a professional staff of over 100
employees and lists among its customers manufacturers and
marketers of food, pharmaceuticals, personal care products,
and household products. Shuster provides technical services
for product development, laboratory testing, sensory testing,
claims validation, and quality assurance. Management believes
that Shuster's expertise in the formulation of food products
and nutraceuticals is well suited to support the Company's
Food Ingredients and Nutraceuticals product areas.
Services and Markets
Management believes the market for technical services is
large, diverse and highly fragmented, where key competitive
factors include reputation and technical capability. The
Company provides customers with contract research services and
process and product development in a variety of chemical
engineering, chemical and food technology applications. These
services may involve many areas of chemical technology,
including custom organic synthesis of new chemical compounds,
chemical process simulation, chemical process improvement and
scale-up, applications of extraction and purification
technology, food technology and chemical modifications of
surfaces.
The Company provides specialized analytical services to
customers related to a variety of materials including
pharmaceuticals, paints and coatings, plastics, petroleum
products and metals. This activity involves the chemical and
physical evaluation of the properties of commercial products
such as house paint, polymeric resins, gasoline, crude oil and
welded joints. The Company has also tested jet fuel for Air
Force One since 1966. The Company is involved in
environmental-related projects which include drinking water
analysis, waste water analysis, analysis for proprietary
pollutants, and evaluation of geomembranes (permanent barriers
between the earth and hazardous wastes).
The Company is qualified and experienced in a broad range
of product failure investigations of a cross-disciplinary
nature. Current projects for third parties include pipe
failure, industrial equipment failures, electronic equipment
component failures, and chemical analysis of pharmaceuticals.
RESEARCH AND DEVELOPMENT
A key element in Hauser's business strategy is to
identify and develop commercial opportunities from ideas
generated through its consulting and contract research and
development operations. A significant portion of the Company's
research and development efforts had been externally funded in
the past. The Company's internally funded research and
development expenditures in fiscal 1994, 1995, and 1996 were
approximately, $2,634,000, $2,360,000, and $2,158,000,
respectively. Hauser's research and development activities
were partially funded by American Home Products during fiscal
1995. Gross research costs, which include costs related to
work for American Home Products under the R&D Agreement and
are included in costs of sales, were approximately $2,593,000
in fiscal 1995. The Company intends to continue actively
pursuing research and development efforts and these costs are
likely to increase in future periods.
In early 1992, Management determined that certain
opportunities merit substantially increased direct funding and
authorized expanded research and development activities. The
Company's research and development efforts are devoted to five
principal areas - discovery and development of new technology,
application of the Company's processing technology (including
DL/SE[State Trade Mark] and LLF[State Trade Mark]) to new
products (such as flavors), improvement of existing processes
(such as paclitaxel production), semi-synthetic preparation of
existing and new biologically active compounds (future
pharmaceuticals) and development of viable alternate raw
materials for natural products production (especially
paclitaxel).
Application of the Company's natural products
technologies has been the most active area of research and
development within the Company. Management believes the
Company's natural products technologies, including DL/SE[State
Trade Mark] and LLF[State Trade Mark], provide the Company
with a distinct competitive advantage and are important to the
future of the Company. It is therefore the Company's strategy
to apply these technologies to as many products as possible
including new rosemary antioxidants, and nutraceutical
products.
Improvement of existing processes is an additional way
the Company invests in research and development. In this case,
the research and development is designed to maintain and
enhance the Company's technological advantage over
competition.
COMPETITION
Health Care Products
Pharmaceuticals
The Company competes primarily on the basis of process
innovation, performance characteristics of its products,
pricing, quality of service, and time to market. Further, the
products provided by the Company compete with other products
in their respective markets.
In the Company's health care business, many of its
competitors have significantly greater financial, technical,
manufacturing, marketing and other resources than Hauser. In
addition, the Company may become subject to competition from
existing or potential customers that could develop extraction
and purification capabilities internally. The Company's
paclitaxel processing business could be adversely affected
long-term (new drug approval averages 8-12 years) by the
successful development of competing sources or processes for
the production of paclitaxel, or the development of
paclitaxel-related substances, such as simpler compounds with
the activity of paclitaxel or paclitaxel prodrugs (compounds
which are not themselves drugs but are converted into drugs in
the body). There is a major effort underway to develop
alternative raw materials for paclitaxel. Worldwide, many
groups of scientists are seeking means to obtain paclitaxel
from alternative renewable resources. Some of these companies
and research institutions have developed and patented
processes for producing paclitaxel in plant cell tissue
culture and semi-synthesis.
Bristol has exclusive marketing rights in the U.S. for
paclitaxel for refractory ovarian cancer until December 1997.
Bristol also has five years of protection from generic drug
competition for the first indication, and three years for
subsequent indications, under the Drug Price Competition and
Patent Term Restoration Act of 1984 ("Waxman-Hatch Act"). [See
"FDA Regulation - Generic Drugs."] This limited exclusivity
provides no protection against the introduction of new
compounds, even if they are chemically related. Management
believes that Bristol has applied for and received marketing
approval for its final product produced from paclitaxel which
is to be produced at its facility in Ireland. Many other
companies, including the Company and American Home Products,
are currently poised to enter the U.S. and worldwide
paclitaxel market.
Competition from other potential anti-tumor compounds
will be based on, among other things, product efficacy,
safety, reliability, availability, price, time to market, and
FDA Board approval.
Natural Ingredients
Nutraceuticals
Hauser's strongest competition in the nutraceuticals
arena comes from Europe. These European competitors sell bulk
products directly or through agents or partners in the U.S.
Some have warehousing and distribution in the U.S. In general,
these producers are larger than Hauser, have years of
experience, and established product lines. There are several
old line U.S. companies that sell product into the
nutraceuticals market. Most do not produce the standardized
products that Hauser produces, however, for regulatory reasons
many are developing standardized extracts at this time.
Natural Flavor Extracts
Competition for products in the flavor extract market is
based on flavor quality and concentration, availability,
customer service, and price. Many of these factors are beyond
the direct control of the Company. The Company is competing
with other natural extract manufacturers which include Kalsec,
Folexco, and Chart, and with flavor houses which produce their
own natural extracts internally, such as McCormick and
International Flavors and Fragrances.
Oxidation Stabilizers
Competition for the Company's StabilEnhance[TradeMark]
brand is found in synthetic antioxidants such as BHT and BHA,
and natural extracts such as tocopherols (vitamin E) and other
rosemary extracts presently on the market. Even though there
are many companies that produce all of these products,
management believes that the product performance of its
StabilEnhance[TradeMark] line will make it competitive against
both synthetic and natural products in this market.
Color Enhancers
Management is unaware of a commercial product that is in
direct competition with the Company's
ColorEnhance[TradeMark]-R product. Management believes this
product will be strongly protected by a patent applied for in
fiscal year 1996. Presently, the natural colorant market has
the choice of using synthetic colorants, using excess
quantities of the natural colorant, or accepting poor
stability and color characteristics.
Colors
Beta carotene competition is defined by method of
manufacture rather than by target market; synthetic
manufacturing versus natural cultivation and extraction. While
most beta carotene sold is synthetic, management believes that
there is a substantial demand for quality, well-priced,
natural beta carotene. All natural commercial beta carotene
products are produced from algae. Commercial natural beta
carotene suppliers began operations approximately ten years
ago. Major competitors are Henkle and Western Biotech, both
with operations in Australia.
Secondary Forestry Products
The floral greens business was historically conducted by
a group of small, independently owned family businesses. The
business was essentially commodity oriented. Increased
consumption of floral products worldwide fostered an increase
in the demand for floral greens, particularly in Europe which
in turn resulted in the consolidation of the market into a
relatively small number of significant competitors. Ironwood
entered the market in 1990 and through new and innovative
packaging and a uniform concern for quality coupled with
aggressive marketing, carved out a strong leadership position.
Ironwood's domestic Christmas effort had a negative
impact on profitability when anticipated sales did not
materialize during the 1995 retail Christmas season. Moreover,
Ironwood's profitability was negatively affected through
strong price competition in Europe. By maintaining only
appropriate margin business, volumes and profitability were
severely affected in the short term. Through continued
emphasis on understanding the market needs and creating
products to fill them, Ironwood continues its pattern of solid
growth in Christmas/floral greens and dried and preserved
products.
Technical Services
The market for technical services in the United States is
large, diverse and highly fragmented. The Company competes
with various companies depending on the specific type of
services provided. Most of the Company's technical services
competitors are local or regional testing laboratories.
Competition is based primarily on quality and breadth of
service.
The Company's competitive position depends on its ability
to attract and retain scientific and other personnel, its
ability to maintain the proprietary nature of its DL/SE[State
Trade Mark], LLF[State Trade Mark], and other processes, as
well as its ability to implement expanded production plans.
Management believes that the Company has developed
innovative technologies for the commercial extraction and
purification of natural products. One of these proprietary
technologies, Dynamic Liquid/Solid Extraction[State Trade
Mark] (DL/SE[State Trade Mark]), often produces a more
concentrated extract, with a higher yield, than competing
technologies. A concentrated extract may be valuable in itself
or may simplify the further isolation and purification of the
desired natural products. Another proprietary technology,
Liquid/Liquid Focusing[State Trade Mark] (LLF[State Trade
Mark]), is a purification technique that can be used in place
of more costly chromatography methods. In addition, the
Company has developed expertise in the identification and
measurement of compounds at very low concentration levels,
which can be critical in the development, extraction and
production of natural products.
The Company's proprietary technologies are flexible. They
can be used to extract and purify specialty natural products
from plant matter, plant cell tissue culture and fermentation
broths. The Company's natural products are produced for
several major companies addressing a broad spectrum of
markets. In its relationships with these customers, the
Company matches its unique abilities and expertise in natural
products processing with the market position, product
knowledge and distribution and marketing capabilities of its
customers.
INTELLECTUAL PROPERTY
General. The Company patents technology when appropriate
to obtain long-term protection. Currently the Company owns
several patents for proprietary chemical substances valuable
as future pharmaceuticals. In addition, many patents are still
pending. Some of the Company's technology is protected under
trade secret laws.
Proprietary protection for the Company's technology and
know-how is extremely important to Hauser's business. The
Company relies on patents, trade secrets, confidentiality
agreements with employees and others, as well as continuing
technological innovation, to develop and maintain its
competitive position. The Company's DL/SE[State Trade Mark]
and LLF[State Trade Mark] processes are complex and the body
of knowledge relating to their operation with respect to a
variety of natural materials is extensive. Consequently, few
individuals within the Company possess a full working
knowledge of these processes, although a somewhat larger
number of key employees and several ex-employees have some
working knowledge of various aspects and applications of these
processes. The Company has determined that it would be unable
to adequately police a patent of its proprietary DL/SEO and
LLFO processes; therefore, it has elected to rely on internal
procedures and trade secret laws to protect these and other
proprietary processing technologies as trade secrets.
Disclosure in a patent could be used by third parties in a
manner which would not be susceptible to discovery by the
Company, so protection against infringement would be
difficult. There can be no assurance that others will not
independently develop substantially equivalent proprietary
information, processes and techniques, or otherwise gain
access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its
rights to its unpatented trade secrets.
The Company tries to protect its proprietary technology
and know-how through established security practices and
confidentiality agreements with its employees, consultants,
strategic industry participants, and technical advisors. Joint
development agreements and consultant relationships generally
provide only limited access to Company know-how which is
protected under confidentiality agreements with the parties
involved, but such persons are likely to be engaged in their
own research relating to chemical processing of natural
products. To the extent research sponsors or consultants apply
technological information independently developed by them or
by others to Company projects, disputes may arise as to the
proprietary rights to such information. There can be no
assurance, however, that these agreements or procedures will
provide meaningful protection for the Company's trade secrets
in the event of unauthorized use or disclosure of such
information. There are also finite terms on several of the
Company's confidentiality agreements with strategic industry
participants which the Company may not be able to extend upon
expiration. However, since the Company is continually
improving its processes and developing additional know-how and
technology relating to extraction and purification of natural
products, Management believes that the loss of trade secret or
confidential status of some portions of its technology or
processes could affect materially and adversely, but would not
eliminate, the Company's ability to remain competitive in the
chemical processing industry.
GOVERNMENT REGULATION
Introduction
The Company's chemical processing business and technical
services are subject to comprehensive regulation throughout
the world. In the United States, regulations have been
established by the FDA with respect to the manufacture of
pharmaceuticals, foods and flavors, environmental regulation
by the Environmental Protection Agency (the "EPA") with
respect to the environment, by the Bureau of Alcohol, Tobacco
and Firearms ("BATF) with respect to alcohol used in flavors
and research, by the Colorado Department of Public Health and
Environment ("CDPHE") and the regulations established by the
Department of Interior ("USFWS" and "BLM") and Department of
Agriculture (USFS) to manage and protect wildlife and forest
resources, including the Pacific Yew. The FDA, the EPA, the
Departments of the Interior and Agriculture and other
governmental agencies may in the future change the existing
regulations or adopt additional regulations that may affect
the Company's ability to acquire required raw materials, to
manufacture bulk paclitaxel or to develop or manufacture new
products. Failure to comply with applicable laws, regulations
and permits can result in injunctive actions, product
seizures, damages and civil and criminal penalties. If the
Company expands or changes its existing operations or proposes
any new operations, it may be required to obtain additional or
amended permits or authorizations.
FDA Regulation - Paclitaxel
To market and sell paclitaxel, American Home Products
will have to demonstrate that the Company manufactures
paclitaxel according to current GMP. The FDA's GMP regulations
require, among other things, that the Company comply with
certain minimum requirements in the methods, facilities and
controls used to manufacture the drug. GMP regulations are
designed to assure that the drug is safe and that it meets its
purported identity, strength, quality and purity
characteristics. The Company must follow stringent record
keeping requirements in manufacturing and storing finished
products intended for human use. Additionally, the Company has
filed "Drug Master Files" which describe the Company's
manufacturing processes with the FDA. Each Drug Master File is
kept confidential between the Company and the FDA, and it
allows the Company to keep its manufacturing processes
proprietary. So long as the Company is supplying bulk
paclitaxel and other products for products to be sold in the
United States, the Company's manufacturing processes will
continue to be subject to ongoing FDA regulation and
inspections to ensure compliance with GMP, which may be time
consuming and costly. Failure to comply with these practices
may render the products adulterated and could subject the
Company and the drug to regulatory action by the FDA. Although
to date the Company has not experienced any significant
regulatory problems under GMP, there is no assurance that
regulatory problems will not occur in the future as a result
of expanded production in several of its facilities, new
regulations, changes in interpretation or enforcement of
existing regulations or otherwise.
Some states may have regulatory requirements in addition
to the FDA. The Company does not anticipate that complying
with state regulations will pose any significant difficulties.
Foreign countries may also have laws regulating drugs sold in
those countries.
The Company may, in the future, produce additional
taxanes which will be subject to the same regulation as
described above with respect to paclitaxel.
FDA Regulation - Generic Drugs
The Waxman-Hatch Act was enacted to make more low cost
generic drugs available to the public. The Waxman-Hatch Act
established an abbreviated new drug application procedure
(ANDA) for generic drugs undergoing market approval before the
FDA. The supplemental New Drug Application procedure allows
generic drugs to be approved by the FDA if they are shown to
be the "bioequivalent" of an approved drug. A drug is
considered bioequivalent to an approved drug if the rate and
extent of absorption of the generic drug do not show a
significant difference from the rate and extent of absorption
of the approved drug when administered at the same molar dose
of the therapeutic ingredient under similar experimental
conditions in either a single dose or multiple doses. The ANDA
provision eliminates the expense and delay of proving the
safety and effectiveness of a generic drug in clinical tests
on humans when a pioneer drug manufacturer has already proven
such requirements.
Under the Waxman-Hatch Act, the FDA must approve the
supplemental NDA within 180 days from the time of filing, if
the applicant shows that: 1) the conditions for prescribed,
recommended, or suggested use for the new generic drug have
been previously approved for a prior drug; 2) the generic drug
has the same active ingredients as the prior approved drug; 3)
the generic drug uses the same route of administration, dosage
form and strength as the approved drug; 4) the generic drug is
the "bioequivalent" of an approved drug; and 5) the labeling
proposed for the generic drug is the same as the labeling
approved for the prior drug. Additionally, the applicant must
certify that, in its opinion and to the best of its knowledge,
neither the generic drug nor its use is patented, or if
patented, that the patent has expired, will expire or that the
patent is invalid or will not be infringed.
The Waxman-Hatch Act provides that pioneer drugs receive
five years of exclusive market life. The effective date of the
exclusivity period is the date of NDA approval of the pioneer
drug. This provision which prohibits the approval of a generic
equivalent for five years. The Waxman-Hatch Act also grants
180 days exclusivity to the first successful supplemental NDA
application against future competing supplemental NDA versions
of the product.
FDA Regulation - Nutraceuticals
Nutraceutical products fit into the new product category
of "Dietary Supplements". This new product category was
established by the Dietary Supplement Health and Education Act
of 1994 ("The Act") and is separate from foods and drugs.
The Act created a federal framework for the regulation of
dietary supplements, guaranteeing consumer access to safe and
beneficial products and to balanced information about their
benefits. The legislation recognized the importance of
nutrition and the benefits of dietary supplements in health
promotion. It recognized that preventative health measures,
including education, good nutrition, and appropriate use of
safe dietary supplements can help reduce the incidence of
chronic diseases and reduce long-term health care
expenditures.
Under the Act, dietary supplements are defined as
vitamins, minerals, herbs or other botanicals, amino acids, or
other dietary substances used to supplement the diet by
increasing the total dietary intake. Moreover, concentrates,
metabolites, constituents, extracts, or any combination of
these ingredients are also included in this definition.
Tobacco is specifically excluded from the definition.
The Act also states that where an ingredient is first
marketed as a dietary supplement and is subsequently approved
as a new drug, it can continue to be sold as a supplement
unless the Secretary of Health and Human Services rules that
it would not be safe to do so. Conversely, an ingredient that
is first approved as a new drug, or as an investigational new
drug for which substantial and public clinical testing is in
progress, may not be marketed as a dietary supplement unless
the Secretary determines that it would be safe to do so under
the Food, Drug and Cosmetic Act.
The Act preserves the existing safety standards found in
the Food, Drug and Cosmetic Act and provides additional
safeguards to ensure that consumers are protected from
products which present a significant or unreasonable risk of
illness or injury under the conditions of use recommended or
suggested in product labeling. The bill also grants the
Secretary of Health and Human Services emergency authority to
remove a supplement from the marketplace if it poses an
imminent hazard to public safety. In such cases, the Secretary
must promptly convene on-the-record rule making to examine the
evidence justifying the removal.
The Act addresses dietary supplement claims and
statements of nutritional support. It establishes labeling
practices regarding quality standards for supplements,
including requirements concerning purity, disintegration and
compositional specifications and also amends nutrition
labeling and nutrient content claim requirements for dietary
supplements under the Nutrition Labeling and Education Act of
1990. In addition, the Act clarifies that the protections
granted to vitamins and minerals under the Proxmire Amendment
are extended to all dietary ingredients. Thus, dietary
supplements cannot be treated as drugs solely on the basis of
potency or combination.
FDA Regulation - Other
Any products produced by the Company for use in flavors
or cosmetics are subject to federal and state regulations
relating to grading, quality control, product branding and
labeling and sanitary control. Additionally, due to its
alcohol content, the Company's vanilla extract and other
flavor extracts are regulated by the U.S. Bureau of Alcohol,
Tobacco and Firearms. The U.S. Department of Agriculture and
the FDA also regulate manufacture of foods and cosmetics, as
do various state agencies.
Other Environmental Regulations
Due to its ambient emissions of volatile organic
compounds, some of which are considered toxic as well as
flammable, all of the Company's facilities are considered a
source of hazardous air pollutants and subject to the 1990
Clean Air Act Amendments' phased-in requirements for such
sources. Emission standards established by the EPA setting the
Maximum Achievable Control Technology (MACT) and Best
Achievable Control Technology (BACT) limit hazardous air
pollutant emissions from this category of sources, require a
comprehensive air emission operating permit, which has been
received by the Company, and include related testing and
reporting requirements. The Company believes its facilities
are in compliance with applicable air pollution control
requirements.
The Company is also subject to regulation under the
Occupational Safety and Health Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, the
Federal Water Pollution Control Act, and other federal, state,
and local statutes and regulations. The Company believes it is
in compliance with these and other laws in all material
respects.
The Bureau of Land Management and the USDA Forest Service
work together to create uniform harvesting regulations on
secondary forestry products on federally managed land. The
harvest of special forest products requires a permit for
commercial uses, both state and federal. Prices for permits
are variable and depend on many factors. In addition to
permits, loan tickets are required on products removed from
federal lands. In addition, land managing agencies do not
allow harvesting in some areas, including areas of critical
environmental concern, fenced enclosures and other
experimental test sites. Areas where Native Americans exercise
treaty rights or traditional cultural activities may also have
restrictions. Agencies may restrict harvest by quantity, by
specific methods, to specific locations, and by season of use.
In addition, many plants are considered sensitive, threatened,
or endangered.
EMPLOYEES
As of April 30, 1996, the Company had 365 regular
full-time employees.
Of that total (excluding Hauser Northwest and Shuster),
60 employees were involved with administrative, financial and
marketing functions, 68 were involved in the Technical
Services Division, 59 were involved in processing natural
products, and 32 with Research and Development.
The Company's wholly-owned subsidiary, Hauser Northwest,
employed 14 people in administration, financial and marketing
functions and 39 in sourcing raw materials and processing
natural products as of April 30, 1996. In addition, Hauser
Northwest contracted with independent contractors for the
collection of Pacific yew bark in various areas of the Pacific
Northwest.
The Company's wholly- owned subsidiary, Shuster
Laboratories, Inc. (Shuster), employed 21 people in
administration, financial and marketing functions and 38 in
Technical Services, 14 in processing/sourcing, and 20 in
Research and Development.
PRODUCT LIABILITY INSURANCE
The testing and sale of the Company's products entails an
inherent risk that product liability claims may be asserted
against the Company. In particular, the pharmaceutical
industry has experienced increasing difficulty in maintaining
product liability insurance coverage at reasonable levels, and
substantial increases in insurance premium costs have rendered
coverage economically impractical in many cases. The Company
has obtained $12.0 million in product liability coverage.
There can be no assurance that the Company will be able to
maintain product liability insurance on acceptable terms or
that its insurance will provide adequate coverage against
potential claims. While the Company has not experienced any
product liability claims, if such claims should arise in the
future, the Company's business and prospects could be
materially adversely affected.
Item 2. Properties.
The Company's facility at 5555 Airport Boulevard,
Boulder, CO 80301 houses 25,298 square feet of executive and
administrative offices, 15,474 square feet of processing and
manufacturing facilities , and 15,228 square feet of
laboratory facilities. The building is used to house
operations and provide enlarged, modern production and
laboratory capabilities. The Company's lease on the Airport
Facility expires in 2001, and the Company has an option to
purchase the facility for $3.5 million. The Company has
purchased the adjacent lot for possible future construction of
a building for administration and research and development,
future expansion of other manufacturing activities.
During 1994, the Company completed construction of its
Hauser Park facility. The facility was operational in January
1994. The 32,052 square foot facility houses 9,882 square feet
of flavors manufacturing, 2,413 square feet of nutraceuticals
manufacturing, 2,167 square feet of warehouse space, and
17,590 square feet of administration space.
On July 15, 1994, the Company purchased a
previously-leased 26,426 square foot facility at 4750 Nautilus
Court South, Boulder, Colorado. The facility has 17,536 square
feet utilized for process development/manufacturing, and 8,890
square feet dedicated to the Engineering business group of the
Company's Technical Services Division.
During fiscal 1995, the Company also leased approximately
95,300 square feet of space in two different locations in
Colorado. The leases are for 5,400 square feet of laboratory
and manufacturing space, and 89,900 square feet of warehouse
space. These leases range from three months to three years in
length with options to renew.
Through its wholly-owned subsidiary Ironwood, the Company
leases 43,000 square feet of space in Tumwater, Washington.
The Company has the option to purchase the property for $1.85
million. A second leased facility in Tumwater has 12,000
square feet of storage space. A third 20,000 square feet
facility houses the dried and preserved processing operations.
In addition, Ironwood leases 1,200 square feet of production
space in South Bend, Washington, 3,500 square feet in Nanaimo,
British Columbia (Canada).The Company owns a 5,000 square foot
facility in Waldport, Oregon and it owns 1.2 acres of property
and a 3,200 square foot facility in Myrtle Point, Oregon.
Further, the Company leases a 10,000 square foot warehouse and
production facility in Sutherlin, Oregon. All of Ironwood's
owned/leased space is dedicated to the Company's raw material
acquisitions and secondary forest products operations.
Through it's wholly-owned subsidiary Shuster, the Company
leases 35,423 square feet of space in Quincy, Massachusetts.
The Quincy facility houses 12,284 square feet of executive and
administration offices, 17,528 square feet of laboratory
facilities, and 5,611 square feet of storage space.
In addition, Shuster leases 9,350 square feet of space in
Smyrna, Georgia. The Smyrna facility houses 3,050 square feet
of executive and administration offices, and 6,300 square feet
of laboratory facilities.
Item 3. Legal Proceedings
The Company knows of no material pending legal
proceedings to which the Company is a party or of which any of
its properties is the subject and no such proceedings are
known to the Company to be contemplated by governmental
authorities.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a shareholder vote
during the fourth quarter of the year ended April 30, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded in the
over-the-counter market on the NASDAQ system under the symbol
HAUS. The quotations presented below reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and
may not necessarily represent actual transactions. The
following table sets forth for the periods indicated, the high
and low closing bid quotations for the Common Stock:
<TABLE>
<S> <C> <C>
High Low
Fiscal 1995
First Quarter through July 31, 1994 9.00 6.31
Second Quarter through October 31, 1994 6.94 5.88
Third Quarter through January 31, 1995 6.06 4.50
Fourth Quarter through April 30, 1995 5.75 4.44
Fiscal 1996
First Quarter through July 31, 1995 6.63 4.25
Second Quarter through October 31, 1995 6.00 4.88
Third Quarter through January 31, 1996 7.25 4.25
Fourth Quarter through April 30, 1996 7.38 5.50
Fiscal 1997
First Quarter through July 15, 1996 8.38 6.13
</TABLE>
As of April 30, 1996, there were approximately 772
holders of record of the Common Stock, which numbers do not
reflect stockholders who beneficially own Common Stock held in
nominee or street name.
Dividend Policy
The Company has not paid cash dividends in the past and
does not intend to pay cash dividends in the foreseeable
future nor can it pursuant to the terms of its bank lending
agreement. The Company presently intends to retain earnings
for use in its business, with any future decision to pay cash
dividends dependent upon the Company's growth, profitability,
financial condition, and other factors the Board of Directors
may deem relevant.
Item 6. Selected Financial Data
The following is a summary of selected financial data
which the Company believes highlights trends in its financial
condition and results of operations. The data is as of and for
the Company's fiscal years ended April 30, 1992, 1993, 1994,
1995 and 1996.
<PAGE>
<TABLE>
Year Ended April 30,
1992 1993 1994 1995 1996
Statements of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Natural product processing $23,121,746 $57,117,201 $57,481,911 $19,106,964 $16,349,342
Technical services 2,479,493 2,150,454 2,902,546 3,796,559 9,315,672
Total revenues 25,601,239 59,267,655 60,384,457 22,903,523 25,665,014
Cost of revenues 18,838,090 42,029,501 36,399,299 19,496,891 26,149,374
Gross margin 6,763,149 17,238,154 23,985,158 3,406,632 (484,360)
Operating expenses 2,421,752 5,060,283 9,076,719 9,644,039 12,206,938
Income (loss) from operations 4,341,397 12,177,871 14,908,439 (6,237,407) (12,691,298)
Other income (expense):
Interest income 705,202 975,485 1,231,204 1,857,406 1,048,337
Interest expense (43,558) (10,637) - (42,667) (60,313)
Writedown of investment - - - - (1,000,000)
Total other income (expense) 661,644 964,848 1,231,204 1,814,739 (11,976)
Income (loss) before provision for
income taxes 5,003,041 13,142,719 16,139,643 (4,422,668) (12,703,274)
Provision (benefit) for income taxes 1,976,000 4,997,000 5,818,000 (1,725,518) (4,966,938)
Net income (loss) $ 3,027,041 $ 8,145,719 $10,321,643 $(2,697,150) $(7,736,336)
Net income (loss) per share $ 0.31 $ 0.80 $ 0.98 $ (0.26) $ (0.75)
Weighted average number of shares
outstanding 9,846,309 1,019,287 10,504,075 10,478,545 10,344,169
As of April 30,
1992 1993 1994 1995 1996
Balance Sheet Data:
Working capital $26,905,009 $25,389,316 $37,656,042 $37,156,490 $32,076,509
Property and equipment, net 13,279,150 21,056,665 25,751,356 25,711,954 25,180,146
Total assets 45,634,170 73,565,844 84,568,740 82,575,167 74,855,599
Long-term debt 69,911 - - 111,078 214,922
Stockholders' equity 42,826,101 69,714,161 80,770,038 77,391,459 70,183,619
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
The Company continued to invest its technology and
finances to secure its position as a multi-product,
multi-customer company focused on the development,
manufacturing and marketing of special products from natural
sources during its fiscal year ended April 30, 1996. For the
three years prior to fiscal 1995, substantially all of the
revenue, profitability and cash flow of the Company had come
from the production and sale of paclitaxel to Bristol. In
fiscal 1995, sales to Bristol amounted to only 27% of total
revenues, and in fiscal 1996, no revenues from Bristol were
recognized. Final shipments of paclitaxel to Bristol were made
during fiscal 1995 under the terms of an amended contract
which Bristol chose not to renew. The Company was not
profitable in fiscal 1995 and 1996 as plans were implemented
to broaden product lines and enter new markets.
During fiscal 1996, management implemented comprehensive
plans for business growth. Through continued cost controls
during fiscal 1997, these plans could return the Company to
profitability late in fiscal 1997. These plans, particularly
in the new product areas, anticipate certain revenue levels
and minimal problems with production of the new products.
However, there can be no assurance of when profitability will
be attained.
During fiscal 1995 and 1996, the Company invested its
technical and financial resources to develop its four major
product areas: health care products, natural ingredients,
technical services, and secondary forest products. At the same
time, management continued to analyze its cost structure and
reduced costs to minimize operating losses by restricting
salaries, benefits, and travel and controlling other specific
expenses as appropriate. These cost controls are expected to
continue until such time as the Company becomes profitable
again.
In fiscal 1996, as part of its dedicated effort to find
new sources of revenue through business development activities
with new customers or by acquisition, the Company acquired all
of the stock of Shuster effective July 21, 1995 for
approximately $4,700,000 in cash and notes plus a performance
based earnout for meeting certain milestones over the next
five years. Shuster is a consumer research and development
firm and contract laboratory with headquarters in the Boston
area and another facility in the Atlanta area. See further
discussion under Technical Services section.
The following is a discussion of the Company's activities
in its four product areas.
HEALTH CARE PRODUCTS
Pharmaceuticals - On May 12, 1994, the Company entered
into a multi-year, world-wide and mutually exclusive Supply
Agreement (Supply Agreement) with American Home Products,
formerly American Cyanamid Company (Cyanamid), whereby the
Company will supply bulk paclitaxel to American Home Products.
On that same day, the Company and American Home Products also
entered into the R&D Agreement which called for the two
companies to cooperate in the research and development of new
products derived from naturally or synthetically produced
taxanes.
The research and development program, which had an
initial two year term, was funded by American Home Products.
This program, and its associated funding, ended in May 1996.
The R&D Agreement called for the two companies to cooperate in
a mutually exclusive manner in a research and development
program funded by American Home Products which was designed to
develop new products derived from naturally or synthetically
produced taxanes. During the two year term of the program,
several taxanes were evaluated and submitted for in vitro
pre-clinical testing. No patentable products have beeen
identified by the parties at this time for worldwide
development. The R&D Agreement expired in May 1996 and was not
extended by American Home Products. American Home Products has
the right to review any products derived by Hauser from
naturally or synthetically produced taxanes during the one
year period after expiration of the R&D Agreement.
The Company will supply the bulk paclitaxel to American
Home Products on a two-part formula price basis which includes
an initial Transfer Payment upon transfer of the bulk
paclitaxel and a subsequent Final Payment when American Home
Products sells Finished Products which contain the bulk
paclitaxel. The contract calls for certain minimum purchase
requirements (which are subject to variation based upon the
Company's production costs) which are expected to result in
aggregate Transfer Payments of approximately $8,000,000 during
the first three years.
The contract also called for a $1,000,000 payment upon
execution of the agreements (received by the Company in May
1994) and advance purchase payments aggregating up to
$3,400,000 contingent upon the following milestones being met:
the first filing of a product registration for a Finished
Product anywhere in the world, first approval of such product
registration, the first filing of such a product registration
in the United Kingdom, Germany or France, upon approval of
such foreign product registration, upon filing of such product
registration with the FDA and upon approval of such FDA
registration. Amounts otherwise payable to the Company by
American Home Products as Final Payments when Finished
Products are sold will be reduced by as much as 30% in any
calendar year until such reductions aggregate advance purchase
payments previously made.
During fiscal 1996, the Company produced paclitaxel for
American Home Products' development needs, including final
product formulations and clinical trials. While difficult to
predict the exact timing, the Company's management expects
that approval to sell paclitaxel internationally will be
obtained by American Home Products in the latter part of
fiscal 1997.
During fiscal 1996, the minimum shipments of paclitaxel
provided for in the Supply Agreement were made to American
Home Products and continued minimal requirements for sales are
expected to be fulfilled in fiscal 1997. In the year ended
April 30, 1996, revenues under the Supply Agreement with
American Home Products totaled $3,086,529.
Subsequent to April 30, 1996, American Home Products
notified the Company of its decision to maintain exclusivity
of the supply of paclitaxel from Hauser in the United States
and Canada. In addition, American Home products released its
exclusive supply position in the rest of the world. Currently,
the parties are negotiating terms of an amended contract.
Subsequent to April 30, 1996, the Company signed a
non-binding letter of intent with a major European
pharmaceutical firm, for a three year supply agreement for GMP
bulk paclitaxel in Europe and Eastern Europe. The agreement
will be mutually exclusive to both parties, except for
Hauser's existing obligation to supply paclitaxel to American
Home Products in Europe and Eastern Europe, which obligation
is pursuant to the Company's existing contract. The
pharmaceutical firm intends to purchase from Hauser all
supplies of GMP bulk paclitaxel for its total market needs in
Europe. The letter of intent is a non-binding agreement
subject to contract negotiation, due diligence and approval of
the Boards of both companies.
The Company continued to produce sanguinaria extract for
Colgate during fiscal 1996. Sanguinaria extract, a natural
antimicrobial, is the key ingredient in Colgate's
Viadent[REGISTERED TRADE MARK] toothpaste and oral rinse
products. Shipments totaling $933,460 were made during fiscal
1996. Production will continue into fiscal 1997 as the Company
will ship sanguinaria extract to complete the current contract
with Colgate.
During the third quarter of fiscal 1995, the Company
entered into a research agreement with Dovetail to work on a
novel class of compounds which demonstrate potent anticancer
activity in animal studies. The Company provided chemistry and
manufacturing services for Dovetail's proprietary compounds
during fiscal 1996. The Company will provide chemistry and
manufacturing services for Dovetail's proprietary compounds.
These compounds appear to reinforce the body's inherent
ability to fight cancer by enhancing the body's immune system
at low doses. They may also amplify vaccine response to
increase protection from future infections. These compounds
have been found to be non-toxic, even at relatively high
doses. They have produced a dramatic anticancer response in
early laboratory studies. The Company does not expect to
recognize significant revenues on this research project in the
foreseeable future.
NATURAL INGREDIENTS
Nutraceuticals - The Company initiated the technical and
business plans necessary to enter the nutraceuticals market
during fiscal 1995 and made its initial shipment in the first
quarter of fiscal 1996. Total revenues for the year ended
April 30, 1996 were $802,686. The term nutraceuticals is used
to identify the broad range of natural, healthful products
that are used to supplement the diet by increasing the total
dietary intake of important nutrients. The United States
market is estimated to be over $200 million and is growing at
over 20% per year, according to industry resources. The
Company's current products include liquid and dry herbal
extracts of echinacea, valerian, siberian ginseng, panax
ginseng, rosemary, goldenseal and chamomile. Management
believes that the Company's expertise in the production of
special products from natural sources and its extensive
regulatory experience position it well in this market area.
However, management is unable to predict the amount of future
revenues from these nutraceutical products.
Natural Flavor Extracts - In July 1994, the Company and
Tastemaker, the fifth largest flavor producer in the world,
renewed a strategic alliance for the joint development and
manufacture of natural flavor extracts. Effective April 30,
1996, the Company and Tastemaker jointly agreed to dissolve
the strategic alliance relationship. The Company will assume
the responsibilities for marketing and sales of the natural
flavor extracts in addition to their manufacture. These and
other natural flavor extracts will be marketed under the
Company's new brand name NaturEnhance[TradeMark] Flavor
Extracts. Under the dissolution agreement, the Company
incurred no monetary liabilities, and Tastemaker intends to
continue to purchase the Company's natural flavor extracts for
use in flavors. Revenues and profits were well below
expectations in fiscal 1996 due to lower than expected
requirements from the final customers. Management intends to
continue to invest in natural flavor extracts with the belief
that these products can become significant to overall
revenues.
Natural Food Ingredients - During fiscal 1996, the
Company continued to develop and manufacture natural food
ingredients products. Food ingredients are products which
perform a function in foods, such as preservatives,
stabilizers, colorants, antioxidants, and nutritional
additives. The Company's objective is to build a quality line
of products generating revenues and profits as a world leader
in the development, manufacture and sales of natural food
additives.
During fiscal 1996, the Company manufactured and began
marketing rosemary extracts. Rosemary extracts have been used
for centuries to inhibit oxidative deterioration of fats and
oils, however, widespread use has been limited by excessive
flavor and odor of rosemary extracts. The Company's patent
pending extraction process minimizes rosemary's flavor and
odor components while preserving its natural oxidative
stabilization characteristics. In addition, the Company
engaged in process development efforts on beta carotene, a new
product for the Company, which is sold into the healthcare
products and food ingredients markets as a colorant,
antioxidant and a nutritional supplement. The beta carotene
market represents $100 million in annual worldwide sales,
according to industry sources. In fiscal 1995, the Company
established a joint venture relationship with Cyanotech
(BetaPharm) with the intent to manufacture, market and sell
natural beta carotene.
Subsequent to April 30, 1996, the Company received
notification from Cyanotech that it had decided to end its
participation in the BetaPharm joint venture project.
Cyanotech has decided to apply its resources to its own
proprietary products. The Company believes that the results of
the research over the past two years have been encouraging and
the demand for natural beta carotene continues. The Company
and Cyanotech are working on an agreement whereby Cyanotech
will be available in a technical advisory role on the growing
and harvesting of microalgae for the BetaPharm project.
The Company is currently evaluating the possibility of
continuing to pursue this product by itself or with another
partner. Pursuant to the terms of the joint venture, Cyanotech
will grant an exclusive, perpetual, royalty-free worldwide
license of the Cyanotech Technology (as defined in the Joint
Venture Agreement) to make, have made, use and sell the
products, in consideration for the payment of aggregate
out-of-pocket expenses incurred by Cyanotech on the joint
venture project since August 1, 1994 (estimated to be
approximately $400,000). The Company intends to complete the
Pilot Project and evaluate whether or not to acquire the
Cyanotech Technology license and proceed with the final
commercialization phase. As construction and funding of the
facilities are required for commercialization, it is expected
that the evaluation will take approximately six to nine
months. Effective July 1, 1996, the Company will receive 100%
of the profits or losses of the BetaPharm project if it
proceeds on its own.
Minimal revenue from natural food additive products was
recognized in fiscal 1996 but shipments are expected to
increase in fiscal 1997 because of increased interest
expressed by potential customers. However, management is
unable to predict the timing and amount of future revenues
from natural food additive products.
SECONDARY FOREST PRODUCTS
The Company acquired substantially all of the net assets
of Ironwood in May 1994 through its wholly-owned subsidiary
Hauser Northwest. While revenues in fiscal 1996 of $8,225,582
were 6% higher than fiscal 1995 revenues of $7,738,404,
operating results were disappointing and below expectations.
Ironwood's domestic Christmas season had a negative impact on
profitability when anticipated sales did not materialize.
Moreover, Ironwood's profitability was negatively affected
through strong price competition in Europe. By maintaining
only appropriate margin business, volumes and profitability
were severely affected. In addition, Ironwood incurred higher
than expected manufacturing overhead costs. As a result,
Ironwood's operating loss in fiscal 1996 was $2,128,218.
Prior to the acquisition in May 1994, per unaudited
financial statements, the revenues of Ironwood were $7,217,776
in fiscal year ended April 30, 1994 and it experienced a loss
of $109,446.
The acquisition of Ironwood enabled the Company to retain
its bark harvesting capabilities in the Northwest and
incorporate that seasonal activity into Ironwood's year-around
operation, thereby significantly reducing the cost of bark
collection. During the first quarter of fiscal 1996, the
Company completed its annual harvest of Pacific Yew bark for
the manufacture of bulk paclitaxel. In addition, the Company
is continuing to harvest bark during the summer months of 1996
to obtain enough bark to satisfy the production and sales
requirements of the Supply Agreement for the next three to
four years. With the completion of this harvest, management
believes that the Company will no longer need to harvest yew
bark in the future because cultivated sources will be
utilized. Nursery grown, cultivated yew trees are believed to
be the next source of paclitaxel and have proven to provide an
acceptable raw material for processing.
Management has defined important specific strategies
designed to improve the profitability of Ironwood. During the
next year, the Company will focus on expanding penetration of
the domestic wholesale market base, shortening distribution
channels in Europe and expanding its new dried and preserved
tropical product lines.
With emphasis in these strategic areas, management
believes that Ironwood can return to profitability. However,
because of uncertainty in the market place, volatility in
weather conditions and availability of raw materials,
management is unable to quantify the timing and amount of
future revenues and profitability of Ironwood.
TECHNICAL SERVICES
The Technical Services Division, which includes Chemistry
and Engineering Laboratory Services and Shuster, experienced
revenue growth in fiscal 1996 of 145% over the previous fiscal
year, primarily as a result of the acquisition of Shuster.
Management believes that demand for technical services
provided by the Company will continue and expects this service
group to continue to grow.
As part of its dedicated effort to find new sources of
revenue through business development activities with new
customers or by acquisition, the Company acquired all of the
stock of Shuster effective July 21, 1995 for approximately
$4,700,000 in cash and notes plus a performance based earnout
for meeting certain milestones over the next five years.
Shuster is a consumer research and development firm and
contract laboratory with headquarters in the Boston area and
another facility in the Atlanta area. Shuster, over a forty
year period, has developed a reputation for delivering high
quality services.
Shuster has a clientele of nationally known companies and
operates in areas that are complementary to the services
provided by the Company's own laboratories. Areas of expertise
for Shuster include food product development, household
chemical formulation, nutritional supplement and
pharmaceutical assay and formulation, microbiological assay,
FDA labeling and a significant number of related areas focused
around consumer products. The Company believes that there are
significant opportunities to leverage the compatibility and
reputation of Shuster with its own technical services
capabilities. Shuster operates as a wholly-owned subsidiary
under its own name and key Shuster executives will continue to
manage the new subsidiary.
<PAGE>
<TABLE>
RESULTS OF OPERATIONS:
The following table sets forth, for the periods indicated, the percentage of revenues of selected
amounts from the Company's Consolidated Statements of Operations.
PERCENTAGE OF REVENUES OF
SELECTED OPERATING STATEMENT AMOUNTS
Year ended April 30,
1996 1995 1994
Revenues:
<S> <C> <C> <C>
Natural product processing 63.7% 83.4% 95.2%
Technical services 36.3 16.6 4.8
Total revenues 100.0 100.0 100.0
Gross margin (1.9) 14.9 39.7
Operating expenses:
Research and development 8.4 10.3 4.4
Sales and marketing 8.4 4.7 0.6
General and administrative 30.8 27.1 10.0
Income (loss) from operations (49.4) (27.2) 24.7
Interest income (expense) 3.8 7.9 2.0
Writedown of other investment (3.9)
Income (loss) before income taxes (49.5) (19.3) 26.7
Net income (loss) (30.1)% (11.8)% 17.1%
(amounts may not total due to rounding)
</TABLE>
REVENUES. Revenues increased 12% to $25,665,014 in
fiscal 1996 from $22,903,523 in 1995. The increase in fiscal
1996 was primarily due to the acquisition of Shuster, which
contributed $4,530,569 to consolidated revenues. In addition,
the Company recognized revenues of $802,686 in fiscal 1996
from the sales of nutraceutical products; these products were
not sold in prior fiscal years. These increases were offset by
reduced sales of bulk paclitaxel due to the cessation of the
amended contract with Bristol. The Company also recognized
revenue of $750,000 in both fiscal years 1996 and 1995 for
activities performed under the R&D Agreement with American
Home Products.
Revenues decreased in fiscal 1995 to $22,903,523 from
$60,384,457 in fiscal 1994 primarily due to the reduced sales
of bulk paclitaxel, which were recognized primarily in the
first six months of fiscal 1995, to Bristol based on the
cessation of the amended contract, offset by the shipments of
paclitaxel to American Home Products pursuant to the Supply
Agreement. Also, there were no bark revenues in fiscal 1995
pursuant to the amended contract with Bristol as compared to
$15,879,602 in fiscal 1994. The decrease in fiscal 1995 was
partially offset by the inclusion revenues of $7,697,186 from
Ironwood. Fiscal 1995 was the first year Ironwood was
consolidated into the Company's operations.
Included in fiscal 1995 revenues from American Home
Products is $1,000,000, the payment of which was received by
the Company at the inception of the Supply Agreement in June
1994. Pursuant to the Supply Agreement, American Home Products
agreed to pay $1,000,000 to the Company for the right to
terminate the Supply Agreement at its option during the first
year (which expired May 11, 1995) of its ten year term. The
Company had no obligation under any circumstances to repay any
of the $1,000,000 payment received.
Revenues from American Home Products were $3,880,297 in
fiscal 1996, or 15% of total revenues, and $3,018,445, or 13%
of total revenues, in fiscal 1995. There were no corresponding
revenues from American Home Products in fiscal 1994. Revenues
from Bristol amounted to $6,063,896 in fiscal 1995 and
$53,242,513 in fiscal 1994 and constituted 27% and 88% of
total revenues, respectively.
Flavors revenues increased 23% in fiscal 1996 to
$1,815,797 from $1,480,031 in fiscal 1995. This increase was
primarily due to increased market acceptance of natural flavor
extracts. Flavors revenues decreased in fiscal 1995 to
$1,480,031 from $3,069,959 in fiscal 1994. This decrease
resulted primarily from lower demand from the final customers
for natural flavor extract products.
Revenues from secondary forest products in fiscal 1996
were $8,225,582 compared to $7,738,404 in fiscal 1995, an
increase of 6%. This increase was primarily the result of
higher sales of domestic greens and the introduction of the
dried and preserved product lines. Revenues in fiscal 1995
were $7,738,404 compared to $795,324 in fiscal 1994. This
increase was the result of the Company's acquisition of
substantially all of the net assets of Ironwood on May 1,
1994. For comparative purposes, unaudited revenues for
Ironwood prior to the acquisition were $7,217,776 in fiscal
1994.
Technical services revenues increased to $9,315,672 in
fiscal 1996 compared to $3,796,559 in fiscal 1995, primarily
due to the acquisition of Shuster which contributed $4,530,569
to consolidated revenues. Excluding Shuster, Technical
Services revenues grew 26% in fiscal 1996 over the previous
year. The increase in fiscal 1996 was the result of a
redirection and emphasis of efforts to revenue producing
activities for outside clients including the expansion of
laboratory services into the natural products market.
Technical services revenues of $3,796,559 in fiscal 1995
increased 31% as compared to $2,902,546 in fiscal 1994. This
reflects a decreasing use of technical services personnel in
paclitaxel activities and a redirection and emphasis of their
efforts to revenue producing activities for outside clients.
GROSS MARGIN. Gross margin in fiscal 1996 was (1.9%) of
total revenues compared to 14.9% in fiscal 1995 and 39.7% in
fiscal 1994. The reduction in fiscal 1996 is the result of
revenue generating products in fiscal 1996, including bulk
paclitaxel to American Home Products, nutraceuticals, natural
flavor extracts, secondary forest products and technical
services, which all yield significantly lower margins than the
sale of paclitaxel to Bristol in prior fiscal years. Gross
margins on current paclitaxel sales are low in anticipation of
future royalties. In addition, the Company is incurring high
overhead costs in relation to its current sales levels in
anticipation of growth in other product lines. The Company
also incurred a loss in fiscal 1996 of approximately
$1,460,000 due to a contract amendment with a customer.
Moreover, Ironwood experienced a negative gross margin of
approximately $833,000 in fiscal 1996 due to higher than
anticipated manufacturing overhead costs and severe pricing
pressures. Although gross margins will most likely remain
lower than historical levels, management believes improved
gross margins from current levels are possible as growth in
revenues is realized, particularly in the new product areas,
and production capacities are more fully utilized. Improving
gross margins are a specific goal for the Company in fiscal
1997.
OPERATING EXPENSES. Research and development expenses
were $2,157,708 in fiscal 1996 compared to $2,359,961 in
fiscal 1995, a decrease of 9%. Gross research costs in fiscal
1995, which included costs related to work for American Home
Products under the R&D Agreement, which are included in costs
of sales, were $2,592,772. The Company continued its efforts
in fiscal 1996 in new product development, particularly in the
areas of paclitaxel extraction from cultivated sources,
nutraceuticals and food ingredients products. Research and
development expenses were $2,634,062 in fiscal 1994. The
slight decrease in research and development costs in fiscal
1995 as compared to fiscal 1994 was related to the cessation
of the Bristol contract. The Company also performs, from time
to time, research and development services related to
potential pharmaceutical products under SBIR Agreements (Small
Business Innovation Research programs) for which it is
reimbursed. During fiscal 1996, the Company completed work on
Artemisinin Analogs for the National Institutes of Health. The
Company intends to actively pursue research and development
efforts and these costs are likely to increase in future
periods.
Sales and marketing expenses were $2,149,880 in fiscal
1996 compared to $1,075,120, an increase of $1,074,760. This
increase results from the acquisition of Shuster in July 1995
which contributed $1,150,248 to consolidated sales and
marketing expenses. In fiscal 1994, sales and marketing
expenses were $389,564. The increase in fiscal 1995 was due to
the acquisition of Ironwood, which added $664,116 to
consolidated sales and marketing expenses.
General and administrative expenses were $7,899,350 in
fiscal 1996 compared to $6,208,958 in fiscal 1995 and
$6,053,093 in fiscal 1994. Included in fiscal 1996 is
$1,652,325 from Shuster. Excluding Shuster, general and
administrative expenses in fiscal 1996 were $6,247,025, an
increase of $38,067 as compared to the prior fiscal year due.
Fiscal 1995 general and administrative expenses were up
slightly in comparison to fiscal 1994 expenses because of cost
reduction efforts offset by the addition of $1,428,469 of
Ironwood costs. General and administrative expenses as a
percent of revenues increased to 30.8% in fiscal 1996 from
27.1% in 1995 and 10.0% in fiscal 1994. In the fourth quarters
of fiscal 1996 and 1995, the Company implemented further cost
reduction programs and incurred $97,000 and $152,000 in
severance costs as a result, respectively. In addition, in
fiscal 1995, the Company performed an evaluation of its
production facility assets and concluded that certain assets
should be redeployed in connection with the Company's
transition to a multi-product, multi-customer manufacturer of
special products from natural sources. As a result, certain
remaining costs for assets being redeployed totaling $489,905
were expensed. The Company continues to evaluate opportunities
to reduce general and administrative costs where appropriate.
INTEREST INCOME. Interest income was $1,048,337 in
fiscal 1996 compared to $1,857,406 in fiscal 1995 and
$1,231,204 in fiscal 1994. The decrease in fiscal 1996 is
primarily due to the lower amount of funds available for
investment. The increase in fiscal 1995 as compared to fiscal
1994 was due to an increase in availability of funds for
investment and an increase in interest rates.
WRITEDOWN OF OTHER INVESTMENT. In April, 1996, the
Company's investment in a development stage company was
written down resulting in a loss of $1,000,000. The investment
was liquidated in the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents plus short-term
investments were $15,220,627 at April 30, 1996 compared to
$31,679,693 (including long term investments) at April 30,
1995. The decrease is due primarily to expenditures for the
harvesting of Pacific Yew bark, the purchase of Shuster, the
purchase of raw materials and manufacture of finished goods
inventory for nutraceuticals and food ingredients products,
and the funding of operating losses. The Company has a line of
credit totaling $1,500,000 which expires in September 1996 and
is used primarily for letters of credit related to raw
material purchases. As of April 30, 1996, $1,500,000 was
available for use under this line of credit. The Company
believes that cash reserves, funds generated from operations
and the line of credit will be sufficient to fund the
Company's operations through at least the next twelve months.
The maturities of the Company's investments, which as of
April 30, 1996 do not extend beyond one year, are staggered
such as to allow the Company to access the funds upon their
maturation in a manner to allow the Company to meet its
obligations as they become due.
WORKING CAPITAL. Working capital as of April 30, 1996
was $32,076,509 compared to $37,156,490 as of April 30, 1995.
The decrease is primarily due to the use of working capital
for the acquisition of Shuster and the build up of noncurrent
inventory.
PROPERTY AND EQUIPMENT. Purchases of property and
equipment totaled $2,165,810 in fiscal 1996. This was
principally comprised of equipment required for the production
of rosemary and paclitaxel and of equipment purchased as part
of the acquisition of Shuster.
BACKLOG. Backlog of unfilled purchase orders was
$2,270,620 as of April 30, 1996 compared to $2,029,799 as of
April 30, 1995. Backlog as of April 30, 1996 consist of
unfilled purchase orders for nutraceuticals, flavors and
sanguinaria products.
SEASONALITY. The Company's operations have previously
been subject to seasonality due to the concentration of bark
collection revenues for Bristol in the summer months when the
bark is easiest to collect. Because of this concentration,
total revenues had historically been higher in the first and
second quarter of each fiscal year but, because of the lower
gross margin associated with bark collection compared to
processing of natural products, the gross margins in the first
and second quarters had historically been lower than those
normally experienced in the other two quarters of the fiscal
year. Beginning in fiscal 1995 and beyond, although the
Company may be collecting bark for its own use, it will no
longer be recognizing bark revenue. Thus the effect of this
seasonal activity on the results of operations will be
significantly diminished.
Ironwood's results from operations are expected to be
strongest in the third and fourth quarters because of the
nature of the decorative forest products business.
Additionally, the Company has experienced seasonality in
its flavors product line primarily in advance of the demand
for summer beverages, in which most of its products are used.
Certain oral and written statements of management of the
Company included in the Form 10-K and elsewhere may contain
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future
operations. The forward-looking statements included herein and
elsewhere are based on current expectations that involve
judgments which are difficult or impossible to predict
accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any
of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements will
prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
Item 8. Financial Statements and Supplementary Data
The following financial statements are included in this
Report:
Page
Independent Auditors' Report F-1
Consolidated Statements of Operations for the
years ended April 30, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets as of
April 30, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for
the years ended April 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years
ended April 30, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements for the
years ended April 30, 1996, 1995 and 1994 F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hauser Chemical Research, Inc.:
We have audited the accompanying consolidated balance sheets
of Hauser Chemical Research, Inc. and its subsidiaries as of
April 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended April
30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of Hauser Chemical Research, Inc. and its
subsidiaries as of April 30, 1996 and 1995, and the results
of their operations and their cash flows for each of the
three years in the period ended April 30, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
July 15, 1996
<PAGE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,
1996 1995 1994
REVENUES (Note 8):
<S> <C> <C> <C>
Natural product processing $16,349,342 $19,106,964 $57,481,911
Technical services 9,315,672 3,796,559 2,902,546
Total revenues 25,665,014 22,903,523 60,384,457
COST OF REVENUES 26,149,374 19,496,891 36,399,299
GROSS MARGIN (484,360) 3,406,632 23,985,158
OPERATING EXPENSES (Notes 7 and 9):
Research and development 2,157,708 2,359,961 2,634,062
Sales and marketing 2,149,880 1,075,120 389,564
General and administrative 7,899,350 6,208,958 6,053,093
Total operating expenses 12,206,938 9,644,039 9,076,719
INCOME (LOSS) FROM OPERATIONS (12,691,298) (6,237,407) 14,908,439
OTHER INCOME (EXPENSE):
Interest income 1,048,337 1,857,406 1,231,204
Interest expense (Notes 3 and 4) (60,313) (42,667)
Writedown of other investment (Note 1) (1,000,000)
Total other income (expense) (11,976) 1,814,739 1,231,204
INCOME (LOSS) BEFORE INCOME TAXES (12,703,274) (4,422,668) 16,139,643
INCOME TAX PROVISION (BENEFIT) (Note 6) (4,966,938) (1,725,518) 5,818,000
NET INCOME (LOSS) $(7,736,336) $(2,697,150) $10,321,643
NET INCOME (LOSS) PER SHARE: $(0.75) $(0.26) $0.98
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING: 10,344,169 10,478,545 10,504,075
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
April 30,
ASSETS 1996 1995
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 4) $7,428,752 $4,244,874
Held-to-maturity investments 7,791,875 20,442,944
Accounts receivable, less allowance for doubtful accounts:
1996, $472,215; 1995, $217,130 (Note 8) 6,801,376 5,507,482
Income taxes receivable (Note 6) 2,665,464 2,230,880
Inventories, current (Note 2) 8,508,973 6,094,525
Prepaid expenses and other 772,780 522,470
Net deferred income tax assets (Note 6) 1,020,895 395,492
Total current assets 34,990,115 39,438,667
PROPERTY AND EQUIPMENT (Note 4):
Land and buildings 7,264,294 7,040,283
Lab and processing equipment 27,300,654 25,135,330
Furniture and fixtures 5,632,013 5,426,698
Total property and equipment 40,196,961 37,602,311
Accumulated depreciation and amortization (15,016,815) (11,890,357)
Net property and equipment 25,180,146 25,711,954
OTHER ASSETS:
Held-to-maturity investments 6,991,875
Goodwill, less accumulated amortization:
1996, $668,202; 1995, $281,784 3,665,780 1,464,821
Inventories, non-current (Note 2) 9,846,031 7,697,917
Deposits and other 311,027 169,933
Available-for-sale investment 862,500
Other investments 1,100,000
Total other assets 14,685,338 17,424,546
TOTAL $74,855,599 $82,575,167
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $754,710 $1,268,006
Current portion of long term debt (Note 4) 623,279 30,919
Accrued salaries and benefits 860,747 515,969
Other accrued current liabilities 674,870 467,283
Total current liabilities 2,913,606 2,282,177
LONG TERM DEBT (Note 4) 214,922 111,078
NET DEFERRED INCOME TAX LIABILITIES (Note 6) 1,543,452 2,790,453
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Notes 3, 5, 9 and 10):
Common stock, $.001 par value; 50,000,000 shares
authorized; shares issued:
1996, 10,564,613; 1995, 10,526,079 10,565 10,526
Additional paid-in capital 59,418,280 59,266,173
Treasury stock, at cost: 1996, 201,100 shares;
1995, 181,100 shares (1,054,812) (966,062)
Unrealized gain on available-for-sale investment,
net of income taxes 465,100
Retained earnings 11,344,486 19,080,822
Net stockholders' equity 70,183,619 77,391,459
TOTAL $74,855,599 $82,575,167
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
gain on
Additional available Net
Common Stock Paid-in Treasury Stock for sale Retained Stockholders'
Shares Amount Capital Shares Amount investmentEarnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1993 10,407,547 $10,408 $58,247,424 - - - $11,456,329 $69,714,161
Issuance of common stock
for employee compensation 2,000 2 9,448 9,450
Issuance of stock for
401(k) contribution 25,051 25 287,353 287,378
Exercise of warrants 19,000 19 61,231 61,250
Exercise of stock options 25,356 25 109,950 109,975
Tax reduction from employee
exercise of stock options 91,520 91,520
Reimbursement of fiscal
1993 offering costs 174,661 174,661
Net income 10,321,643 10,321,643
BALANCE, APRIL 30, 1994 10,478,954 10,479 58,981,587 - - - 21,777,972 80,770,038
Issuance of common stock for
401(k) contribution 28,218 28 213,676 213,704
Exercise of stock options 18,907 19 30,964 30,983
Tax reduction from employee
exercise of stock options 39,946 39,946
Purchase of treasury stock (181,100) $(966,062) (966,062)
Net loss (2,697,150) (2,697,150)
BALANCE, APRIL 30, 1995 10,526,079 10,526 59,266,173 (181,100) (966,062) - 19,080,822 77,391,459
Exercise of stock options 37,200 38 120,407 120,445
Tax reduction from employee
exercise of stock options 29,700 29,700
Exercise of warrants 1,334 1 2,000 2,001
Purchase of treasury stock (20,000) (88,750) (88,750)
Change in unrealized gain on
available for sale investment $465,100 465,100
Net loss (7,736,336) (7,736,336)
BALANCE, APRIL 30, 1996 10,564,613 $10,565 $59,418,280 (201,100) $(1,054,812) $465,100 $11,344,486 $70,183,619
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(7,736,336) $(2,697,150) $10,321,643
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,592,872 3,394,864 4,592,713
Loss on disposal of assets 176,004 916,931 143,234
Writedown of other investment 1,000,000
Amortization of investment premium (discount) 55,531 (246,726) (21,075)
Issuance of common stock for employee compensation 9,450
Deferred income tax provision (benefit) (2,169,804) 686,186 562,000
Issuance of common stock for 401(k) contribution 213,704 287,378
Change in assets and liabilities, net of effects from
the purchase of Shuster and Ironwood:
Accounts receivable (290,670) 8,012,908 (1,814,146)
Income taxes receivable (366,518) (1,650,116) (39,800)
Inventories (4,562,562) (8,625,332) (1,672,551)
Prepaid expenses and other (173,511) 92,046 14,666
Accounts payable (670,272) 100,214 (662,581)
Other accrued liabilities 167,517 40,904 84,642
Net cash provided by (used in) operating activities (10,977,749) 238,433 11,805,573
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,165,810) (3,963,216) (9,405,918)
Deposits and other 70,038 97,373 13,602
Purchase of Ironwood net assets (1,045,053)
Purchase of Shuster's common stock, net of cash acquired (3,317,919)
Purchase of investments (12,267,757) (7,857,972)
Maturity of investments 19,587,413 14,087,744 8,842,062
Net cash provided by (used in) investing activities 14,173,722 (3,090,909) (8,408,226)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank lines of credit (1,301,408)
Repayments of long-term debt (45,791) (67,567)
Proceeds from issuance of common stock and warrants 122,446 30,983 171,225
Reimbursement of offering costs 174,661
Purchase of treasury stock (88,750) (966,062)
Net cash provided by (used in) financing activities (12,095) (2,304,054) 345,886
Net increase (decrease) in cash and cash equivalents 3,183,878 (5,156,530) 3,743,233
Cash and cash equivalents, beginning of year 4,244,874 9,401,404 5,658,171
Cash and cash equivalents, end of year $7,428,752 $4,244,874 $9,401,404
See notes to consolidated financial statements.
</TABLE>
HAUSER CHEMICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1996, 1995, and 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Hauser Chemical Research, Inc. is a manufacturer
of special products from natural sources, using its
proprietary technologies in extraction and purification. The
Company also provides interdisciplinary laboratory testing
services, chemical engineering services, contract research
and development services and is engaged in the acquisition
and marketing of secondary forest products.
Basis of Presentation - The accompanying consolidated
financial statements include the accounts of Hauser Chemical
Research, Inc. and its wholly-owned subsidiaries, Hauser
Northwest, Inc. and Shuster Laboratories, Inc., formerly
Herbert V. Shuster, Inc., (collectively, the Company). All
significant intercompany transactions and accounts are
eliminated in consolidation. On May 1, 1994, the company's
wholly-owned subsidiary acquired substantially all of the
net assets of Ironwood Evergreens, Inc. (Ironwood), a
secondary forest products company in the Pacific Northwest
for $1,045,053 and a performance-based earnout over five
years. Effective July 21, 1995, the Company acquired all of
the stock of Herbert V. Shuster, Inc. (Shuster) for
approximately $4,700,000 in cash and notes plus a
performance based earnout for meeting certain milestones
over the next five years. Shuster is a consumer research and
development firm and contract laboratory with headquarters
in the Boston area and another facility in the Atlanta area.
Results of operations of both Ironwood and Shuster are
included within the Company's financial statements from the
date of acquisition forward. The following pro forma
unaudited consolidated results of operations for the years
ended April 30, 1996 and April 30, 1995 have been prepared
assuming the Shuster acquisition occurred as of the
beginning of the earliest period presented. These pro forma
results have been prepared for comparative purposes and do
not purport to be indicative of results of operations which
actually would have resulted had the combination been in
effect on the dates indicated, or which may result in the
future.
<TABLE>
Year ended April 30,
1996 1995
<S> <C> <C>
Revenues $ 26,654,600 $ 29,739,205
Net loss $ (7,777,853) $ (2,530,943)
Net loss per share $ (0.75) $ (0.24)
</TABLE>
Use of Estimates - The preparation of the Company's
consolidated financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers highly
liquid investments and investments purchased with a maturity
of 90 days or less to be cash equivalents.
Inventories - Raw materials and supplies inventories consist
of material to be processed and are recorded at the lower of
first-in, first-out cost or market, except for Pacific yew
bark inventory, which is recorded at the lower of average
cost or market.
Work in process inventory represents the cost of material in
process and the costs required to process such material and
is recorded at the lower of average cost or market.
Non-current inventories represent raw materials and supplies
not expected to be processed within one year and work in
process in various stages of completion representing
quantities produced in excess of shipments expected to occur
in the next fiscal year.
Held-to-Maturity Investments - The Company accounts for
investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company
records held-to-maturity investments at amortized cost. The
Company has the positive intent and ability to hold these
investments to maturity. Below is a table of held-to-
maturity investments as of April 30, 1996:
<PAGE>
<TABLE>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Issues
Maturities less than 1 year:
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 3,000,000 $ 6,250 $ (620) $ 3,005,630
Mortgage Backed Securities 2,793,750 26,560 2,820,310
Municipal Securities 1,998,125 7,190 (3,125) 2,002,190
Total Investments $ 7,791,875 $ 40,000 $ (3,745) $ 7,828,130
Below is a table of held-to-maturity investments as of April 30, 1995:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Issues
Maturities less than 1 year:
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 8,974,779 $15,210 $(123,439) $ 8,866,550
Mortgage Backed Securities 9,502,379 10,908 (55,513) 9,457,774
Municipal Securities 1,965,786 - - 1,965,786
Total 20,442,944 26,118 (178,952) 20,290,110
Maturities 1-3 years:
U.S. Treasury Securities 2,000,000 16,880 (21,250) 1,995,630
Mortgage Backed Securities 2,993,750 37,190 (12,050) 3,018,890
Municipal Securities 1,998,125 6,880 (35,625) 1,969,380
Total 6,991,875 60,950 (68,925) 6,983,900
Total Investments $27,434,819 $ 87,068 $ (247,877) $ 27,274,010
</TABLE>
<PAGE>
Available-for-Sale Investment - The Company records
available-for-sale investments at fair value. During fiscal
1996, the Company's $100,000 investment in an equity
security that had a previous contractual restriction as to
it's resale was reclassified from other investments to
available-for-sale. At April 30, 1996, this investment had a
readily determinable fair value of $862,500, resulting in an
increase in the unrealized gain on available-for-sale
investment during fiscal 1996 of $762,500. The unrealized
gain is recorded in stockholder's equity net of the income
tax effect.
Other Investments - At April 30, 1995, other investments
were principally comprised of the Company's investment in a
development stage company that was not publicly traded and
which was carried at cost. In April 1996, the Company's
investment in this entity was written down resulting in the
loss of $1,000,000. The investment was liquidated in the
first quarter of fiscal 1997.
Property and Equipment - Equipment, furniture and fixtures
are stated at cost and are depreciated on a straight-line
basis over the estimated useful lives of the assets, ranging
from two to fifteen years. Buildings are depreciated on a
straight-line basis over the estimated useful life of 39
years. Leasehold improvements are amortized over their
estimated useful lives, which is five to ten years, or the
term of the lease, whichever is less.
Impairment of Long-Lived Assets - During 1995, the Financial
Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121"). SFAS 121 requires that long-
lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable and established
guidelines for determining recoverability based on future
net cash flows from the use of the asset and for the
measurement of the impairment loss. Impairment loss is
calculated as the difference between the carrying amount of
the asset and its fair value. Any impairment loss is
recorded in the period in which the recognition criteria are
first applied and met. The Company is required to adopt SFAS
121 beginning May 1, 1996. Adoption of SFAS 121 is not
expected to have a material effect on the financial position
or results of operations of the Company.
Goodwill - Goodwill is amortized using the straight-line
method over an estimated useful life of 10 years.
Revenue Recognition - Natural product processing revenues
are recognized upon delivery of processed product or
completion of specific production stages. Technical services
revenues are recognized upon completion of specified
contract requirements.
In connection with the Company's former supply contract for
bulk paclitaxel, which terminated in fiscal 1995, revenue
was recognized upon completion of three specific stages of
production consistent with the requirements of the contract.
These stages of production were as follows: (1) supply of
Pacific yew bark - the Company collected Pacific yew bark in
the Pacific Northwest and shipped the bark to Colorado for
processing. Upon shipment of the Pacific yew bark from the
Company's collection facilities, the Company recognized bark
collection revenues based on the completion of the Company's
collection activities; (2) extraction of taxus resin from
Pacific yew bark - upon completion of the extraction
process, the Company recognized extraction revenue based on
completion of its extraction activities; (3) purification of
taxus resin into bulk paclitaxel - upon shipment of the bulk
paclitaxel to the major customer, the Company recognized
purification revenue based on completion of its purification
activities.
Research and Development - Research and development costs
are charged to expense as incurred.
Stock Based Compensation - During 1995, the FASB issued
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation ("SFAS 123"). SFAS
123 requires that stock based compensation be either
accounted for, or disclosed, in the financial statements.
The Company is required to adopt SFAS 123 beginning May 1,
1996. Because the Company intends to elect only the
disclosure provisions of SFAS 123, adoption of SFAS 123 is
not expected to have a material effect on the financial
position or results of operations of the Company.
Earnings Per Share - Earnings per share are computed using
the weighted average number of common and common stock
equivalent shares outstanding during the period. Common
stock equivalents include stock options, warrants, and
convertible preferred stock. Common stock equivalents have
been excluded from the calculation of earnings per share for
the years ended April 30, 1996 and 1995 as their effect is
anti-dilutive.
Reclassifications - Certain 1995 and 1994 amounts have been
reclassified to conform to the 1996 presentation.
2. INVENTORIES
Inventories as of April 30 consist of the following:
<TABLE>
1996 1995
<S> <C> <C>
Raw materials and supplies $ 8,497,766 $ 7,662,412
Work in process 3,210,704 5,618,219
Finished goods 6,646,534 511,811
Total inventories 18,355,004 13,792,442
Less non-current inventories 9,846,031 7,697,917
Current portion of inventories $ 8,508,973 $ 6,094,525
</TABLE>
Inventories as of April 30, 1995 included bark awaiting
processing under a prior paclitaxel supply contract in the
amount of $2,633,209 for which the Company had received
progress payments totaling $2,633,209. As of April 30, 1996,
the Company held no such inventories.
3. BANK LINE OF CREDIT
The Company has a $1,500,000 bank line of credit with no
borrowings outstanding as of April 30, 1996. The line of
credit allows the Company to obtain advances or letters of
credit. Interest is payable monthly at the bank's prime rate
(8.25% at April 30, 1996). The line of credit expires
September 30, 1996.
Under the terms of the lending agreement, the Company cannot
pay any dividends without the consent of the bank and is
required to maintain certain financial ratios and minimum
working capital and equity amounts, with which it was in
compliance at April 30, 1996.
The Company assumed balances outstanding totaling $1,301,401
under two separate revolving bank lines of credit in
connection with the acquisition of Ironwood ("Ironwood lines
of credit"). The Ironwood lines of credit were payable in
monthly interest only installments, bore interest at a rate
of 7% and were secured by substantially all the assets of
Ironwood. Balances outstanding were repaid in full by the
Company in October 1994.
4. LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
April 30,
<S> <C> <C>
1996 1995
Note payable to former stockholders of Shuster, with
interest of 5.5%, due and payable on July 19, 1996,
collateralized by a certificate of deposit for $582,349. $ 549,135 $ -
Note payable to bank with interest at 10.0% per annum,
payable in monthly installments including interest of $605
and due January 2025, collaterlized by land. 68,430 68,825
Capital lease obligations for vehicles and equipment with
monthly payments ranging from $199 to $3,061 and interest
rates ranging from 7.9% to 15.4%. 143,380 73,172
Other 77,256 -
838,201 141,997
Less current portion 623,279 30,919
Long term debt $ 214,922 $ 111,078
</TABLE>
Future minimum payments for long term debt for the years ending April 30
are as follows:
<TABLE>
Notes payable Capital lease obligations
<C> <C> <C>
1997 $ 583,908 $ 57,039
1998 26,234 57,039
1999 17,701 39,960
2000 589 6,828
2001 650 -
Thereafter 65,739 -
Total $ 694,821 160,866
Less interest 17,486
Total $143,380
</TABLE>
At April 30, 1996 and 1995, property and equipment includes
items under capital lease with book values of $205,403 and
$162,608, respectively, and accumulated depreciation of
$77,341 and $20,251 respectively.
5. STOCKHOLDERS' EQUITY
Warrants - The Company has issued warrants for the purchase
of common stock to consultants and stockholders. During the
year ended April 30, 1994, holders of warrants exercised
their rights to purchase 19,000 shares of common stock,
respectively. During fiscal 1996, holders of warrants
exercised their right to purchase 1,334 shares of common
stock.
Stock Options - The Company adopted a non-statutory stock
option plan in 1987 (the 1987 Plan) and has reserved 718,720
shares of common stock for issuance under the 1987 Plan. As
of April 30, 1996, there were 672,862 shares of common stock
committed under the 1987 Plan. Exercise terms range from one
year to five years for options granted under the Plan.
Transactions with respect to the 1987 Plan are as follows:
<PAGE>
<TABLE>
Option Prices Non-Statutory Stock Options
<S> <C> <C>
Balance, April 30, 1993 $0.81 to 25.13 122,300
Granted 6.00 to 14.80 54,322
Exercised 0.81 to 13.90 (21,304)
Expired 1.28 to 19.60 (11,125)
Balance, April 30, 1994 0.81 to 25.13 144,193
Granted 0.81 to 6.00 151,805
Exercised 0.81 to 6.45 (18,607)
Expired 3.90 to 25.13 (118,250)
Balance, April 30, 1995 0.81 to 6.00 159,141
Granted 3.72 to 6.75 83,655
Exercised 0.81 to 5.65 (32,566)
Expired 2.69 to 6.00 (13,920)
Balance, April 30, 1996 $2.69 to 6.75 196,310
Exercisable (vested) at April 30, 1996 $2.69 to 6.75 189,849
</TABLE>
The Company adopted an incentive stock option plan in 1992
(the 1992 Plan) and has reserved 700,000 shares of common
stock for issuance under the 1992 Plan. As of April 30,
1996, there were 269,263 shares committed under the 1992
Plan. Exercise terms range from one month to five years for
options granted under the 1992 Plan. Transactions with
respect to the 1992 Plan are as follows:
<PAGE>
<TABLE>
Option Prices Incentive Stock Options
<S> <C> <C>
Balance, April 30, 1993 $6.82 to 13.50 97,127
Granted 7.25 to 16.63 65,700
Exercised 8.94 to 13.50 (4,052)
Expired 11.13 to 13.50 (13,033)
Balance, April 30, 1994 6.82 to 16.63 145,742
Granted 6.00 to 7.94 345,090
Exercised 8.94 (300)
Expired 6.00 to 16.63 (256,752)
Balance, April 30, 1995 6.00 233,780
Granted 4.38 to 5.44 145,600
Exercised 5.03 to 6.00 (4,634)
Expired 5.03 to 6.00 (127,369)
Balance, April 30, 1996 $4.38 to 6.00 247,377
Exercisable (vested) at April 30, 1996 $4.38 to 6.00 181,360
</TABLE>
6. INCOME TAXES
Income tax expense (benefit) for the years ended April 30,
1994, 1995 and 1996 is comprised of the following
components:
<TABLE>
Federal State Total
1994
<S> <C> <C> <C>
Current $ 4,721,000 $ 535,000 $ 5,256,000
Deferred 515,000 47,000 562,000
Total $ 5,236,000 $ 582,000 $ 5,818,000
1995
Current $(2,411,704) $(2,411,704)
Deferred 863,186 $ (177,000) 686,186
Total $(1,548,518) $ (177,000) $(1,725,518)
1996
Current $(2,797,134) $(2,797,134)
Deferred (1,834,504) $ (335,300) (2,169,804)
Total $(4,631,638) $ (335,300) $(4,966,938)
</TABLE>
As of April 30, 1996 and 1995, temporary differences which
result in deferred tax assets and liabilities are as
follows:
<TABLE>
<S> <C> <C>
1996 1995
Deferred tax assets:
Current:
Inventories capitalized for income tax purposes
and expensed for financial reporting purposes $ 792,761 $ 310,184
Accrual of expenses for financial reporting purposes
but not for income tax purposes 228,990 158,400
Non-Current:
State net operating loss carry forward 621,083 285,780
AMT credit carry forward 842,300
General business credit carry forward 502,600
Loss on investment not deductible for tax purposes 381,600
Book amortization of intangible assets in excess
tax amortization 84,500
Other 154,987
Deferred tax assets $3,608,821 $ 754,364
Deferred tax liabilities:
Current:
Deduction of expenses for income tax purposes but
not for financial reporting purposes $ 856 $ 73,092
Non-Current:
Excess of tax over book depreciation 3,734,285 3,076,233
Estimated taxes on unrealized gain on investment 297,400 -
Other 98,837 -
Deferred tax liabilities $ 4,131,378 $ 3,149,325
</TABLE>
The Company has recorded deferred tax assets of
approximately $3.6 million including the benefit of
approximately $2.0 million in operating loss and credit
carryforwards, which expire in varying amounts through 2010.
Realization is dependent on generating sufficient taxable
income or realization of future taxable temporary
differences prior to expiration of the carryforwards.
Although realization is not assured, management believes it
is more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the
carryforward period are reduced.
A reconciliation of the expected income tax expense
(benefit) at the federal statutory income tax rate to the
Company's actual income tax expense at its effective income
tax rate is as follows:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34.38%
Computed "expected" income tax expense (benefit) $(4,319,000) $(1,503,707) $ 5,549,000
Increase (reduction) in taxes resulting from:
State income taxes, net of federal tax benefit (335,300) (117,198) 353,000
General busines credit carry forward (502,600)
Other 189,962 (104,613) (84,000)
Actual income tax expense (benefit) $(4,966,938) $(1,725,518) $ 5,818,000
Effective income tax rate 39.1% 39.0% 36.0%
</TABLE>
7. COMMITMENTS
The Company leases its office and operating facilities and
various equipment under noncancelable agreements. During the
year ended April 30, 1992, the Company leased new office and
operating facilities under a ten-year noncancelable
agreement. Under the terms of the agreement the Company has
the option to purchase the building at a future date. The
purchase price of the building is based on its expected
market value. The lease also provides for renewal options.
In addition, the Company leases a facility in Tumwater,
Washington and has an option to purchase the property for
$1,850,000.
Rent expense was $1,543,909, $1,400,932 and $1,729,396 for
the years ended April 30, 1996, 1995, and 1994,
respectively.
Future minimum lease payments under operating leases for the
years ending April 30 are as follows:
<TABLE>
<C> <C>
1997 $1,347,143
1998 1,126,391
1999 946,957
2000 707,147
2001 482,911
Thereafter -
Total $4,610,549
</TABLE>
8. MAJOR CUSTOMERS
The Company recognized revenues from one customer of
$6,063,896 (27% of total revenues) and $53,242,513 (88% of
total revenues) for the years ended April 30, 1995 and 1994,
respectively. No revenue was recognized from this customer
in the year ended April 30, 1996.
The Company recognized revenues of $3,880,297, or 15% of
revenues and $3,018,445, or 13% of total revenues, from
another customer in the years ended April 30, 1996 and 1995,
respectively. There was no corresponding revenue from this
customer in prior years.
9. EMPLOYEE BENEFIT PLAN
Effective July 1992, the Company established a 401(k) plan
(the Plan) for all employees who have completed six months
of service. Participants may contribute up to 15% of their
annual compensation subject to dollar limitations of Section
402(g) of the Internal Revenue Code. At the discretion of
the Board of Directors, the Company matches, with a cash
contribution, 20% of the first 6% of the participant's
contribution and effective January 1993, the Company also
matches, with a common stock contribution, the remaining 80%
of the first 6% of the participant's contribution. The
Company has reserved 200,000 shares of common stock for
issuance under the Plan. The Company's matching portion
vests 20% per year over 5 years. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of
1974. The Company did not make a contribution to the Plan in
the year ended April 30, 1996. The Company's contribution
expense for the years ended April 30, 1995 and 1994 totaled
$218,010 and $384,674, respectively.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental Cash Flow Information - The amounts paid by the
Company for interest and income taxes are as follows:
<TABLE>
Year ended April 30,
1996 1995 1994
<S> <C> <C> <C>
Interest $ 37,722 $42,667
Income taxes paid (refunded) $(2,415,450) $5,295,800
</TABLE>
Effective July 21, 1995, the Company acquired all of the
stock of Shuster for $3,959,515 in cash and $621,953 in
notes. Subsequent adjustments have increased the purchase
price by $146,008.
The net assets purchased were as follows:
<TABLE>
<S> <C>
Current assets $ 1,884,353
Property and equipment 684,840
Long-term assets and goodwill 2,798,238
Current liabilities (541,824)
Long-term liabilities (98,131)
Net assets $ 4,727,476
</TABLE>
Effective May 1, 1994, the Company acquired substantially
all the net assets of Ironwood Evergreens for $1,045,053.
The net assets purchased were as follows:
<TABLE>
<S> <C>
Current assets $ 1,381,660
Property and equipment 210,687
Current liabilities (1,515,632)
Long-term liabilities (178,645)
Net assets $ (101,930)
</TABLE>
Noncash Investing and Financing Activities - The Company
recognized a reduction of income taxes payable of $29,700,
$39,946 and $91,520 as a result of the exercise of stock
options by employees and others during the years ended April
30, 1996, 1995, and 1994, respectively.
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of the
Company's financial statements is made in accordance with
the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts
have been determined by the Company using available market
information and appropriate valuation methodologies.
However, considerable judgment is required to interpret
market data in order to develop the estimates of fair value.
Accordingly, the estimates herein are not necessarily
indicative of the amounts the Company could realize in a
current market exchange. The use of different market
assumptions and/or estimation methodologies may have a
material effect on the estimates fair value amounts.
For certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable, and accrued liabilities, management
believes that the carrying amounts approximate fair value
due to their short maturities. Carrying amounts and
estimated fair values of the other financial instruments are
as follows as of April 30, 1996:
<TABLE>
Carrying Amount Estimated Fair Value
<S> <C> <C>
Long-term debt $ 694,821 $ 652,970
</TABLE>
The fair value of the long term debt is estimated using the
rates currently offered for similar instruments.
12. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following is a summary of the unaudited financial data
for each quarter in the fiscal years ended April 30, 1995
and 1996:
<TABLE>
Income (Loss) Net Income
Gross Before Net Income (Loss) Per
Quarter Ended Revenues Margin Income Taxes (Loss) Share
<S> <C> <C> <C> <C> <C>
July 31, 1994 $5,180,237 $ 1,858,452 $ 109,447 $ 70,042 $ 0.01
October 31, 1994 6,722,296 3,139,806 1,163,032 902,437 0.09
January 31, 1995 5,608,836 (1,188,522) (2,763,264) (1,956,264) (0.19)
April 30, 1995 5,392,154 (403,104) (2,931,883) (1,713,365) (0.16)
July 31, 1995 4,034,174 (712,233) (2,714,485) (1,764,335) (0.17)
October 31, 1995 7,019,003 308,787 (2,444,712) (1,589,063) (0.15)
January 31, 1996 6,504,492 289,486 (2,625,668) (1,706,411) (0.16)
April 30, 1996 8,107,345 (370,400) (4,918,409) (2,676,527) (0.27)
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There have been no disagreements between the Company and
its independent accountants on any matter of accounting
principles or practices or financial statement disclosure
since the Company's inception.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information in response to this item is incorporated by
reference from the Registrant's Definitive Proxy Statement to
be filed within 120 days after the close of the Registrant's
fiscal year.
Item 11. Executive Compensation.
Information in response to this item is incorporated by
reference from the Registrant's Definitive Proxy Statement to
be filed within 120 days after the close of the Registrant's
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information in response to this item is incorporated by
reference from the Registrant's Definitive Proxy Statement to
be filed within 120 days after the close of the Registrant's
fiscal year.
Item 13. Certain Relationships and Related Transactions.
Information in response to this item is incorporated by
reference from the Registrant's Definitive Proxy Statement to
be filed within 120 days after the close of the Registrant's
fiscal year.
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and
Reports on Form 8-K.
(a)(1) and (2) The following financial statements and
financial statement schedules are filed as part of this
report:
Page
Independent Auditors' Report F-1
Consolidated Statements of Operations for the
years ended April 30, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets as of
April 30, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity for
the years ended April 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years
ended April 30, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements for the years
ended April 30, 1996, 1995 and 1994 F-6
All other schedules have been omitted because they are not
applicable, not required, or the required information is shown
in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
3.1 Certificate of Incorporation of Nittany Ventures,
Inc., dated April 25, 1985 (filed as Exhibit 3.1
to Registrant's Registration Statement on Form
S-1, File No. 33-42069, and incorporated herein
by reference)
3.5 Certificate of Amendment to Certificate of
Incorporation of Nittany Ventures, Inc., dated
April 14, 1986 (filed as Exhibit 2.2 to
Registrant's Annual Report on Form 10-K, dated
April 30, 1986, and incorporated herein by
reference)
3.6 Articles of Amendment to Certificate of
Incorporation of Hauser Chemical Research, Inc.,
dated May 10, 1988 (filed as Exhibit 2.3 to
Registrant's Annual Report on Form 10-K, dated
April 30, 1989, and incorporated herein by
reference)
3.9 Articles of Amendment to Certificate of
Incorporation of Hauser Chemical Research, Inc.,
effective February 21, 1990 (filed as Exhibit 2.5
to Registrant's Annual Report on Form 10-K, dated
April 30, 1990, and incorporated herein by
reference)
3.11 Amended Bylaws of Hauser Chemical Research, Inc.
dated January 31, 1995. (filed as Exhibit 3.11
to Registrant's Annual Report on Form 10-K,
dated April 30, 1995, and incorporated herein by
reference).
4.1 Certificate of Designation, Preferences and
Rights of Series A Convertible Preferred Stock,
as filed with the Delaware Secretary of State on
December 7, 1990 (filed as Exhibit 10.1 to
Registrant's Current Report on Form 8-K, dated
January 25, 1991, and incorporated herein by
reference)
10.34 1987 Non-Statutory Stock Option Plan of the
Company, as amended November 30, 1989 (filed as
Exhibit 10.34 to Registrant's Registration
Statement on Form S-1, File No. 33-42069, and
incorporated herein by reference)
10.35 1992 Incentive Stock Option Plan of the Company
(filed as Exhibit 10.35 to Registrant's
Registration Statement on Form S-1, File No.
33-42069, and incorporated herein by reference)
10.44 Supply Agreement dated May 12, 1994 between the
Company and American Home Products Company (filed
as Exhibit 10.43 to Form 8-K filed May 26, 1994,
and incorporated herein by reference).
22.1 List of subsidiaries of the Company (filed as
Exhibit 22.1 to Registrant's Registration
Statement on Form S-1, File No. 33-42069, and
incorporated herein by reference)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July _____, 1996. HAUSER CHEMICAL RESEARCH, INC.
By:
Dean P. Stull
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <S> <S>
Signature Title Date
/s/ Dean P. Stull Chairman of the Board of Directors, July 25, 1996
Dean P. Stull Chief Executive Officer, President
and a Director (Principal Executive Officer)
/s/ Randall J. Daughenbaugh Chief Technical Officer and a Director July 25, 1996
Randall J. Daughenbaugh
/s/ David I. Rosenthal Chief Financial Officer and July 25, 1996
David I. Rosenthal Treasurer (Principal Financial
and Accounting Officer)
/s/ William E. Coleman Director July 25, 1996
William E. Coleman
/s/ Stanley J. Cristol Director July 25, 1996
Stanley J. Cristol
/s/ Ray L. Hauser Director July 25, 1996
Ray L. Hauser
/s/ Christopher W. Roser Director July 25, 1996
Christopher W. Roser
/s/ Robert F. Saydah Director July 25, 1996
Robert F. Saydah
/s/ Bert M. Tolbert Director July 25, 1996
Bert M. Tolbert
/s/ Willem A. Maas Director July 25, 1996
Willem A. Maas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 12 MONTHS FOR FISCAL 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 7,428,752
<SECURITIES> 7,791,875
<RECEIVABLES> 7,273,591
<ALLOWANCES> 472,215
<INVENTORY> 8,508,973<F1>
<CURRENT-ASSETS> 34,990,115
<PP&E> 40,196,961
<DEPRECIATION> 15,016,815
<TOTAL-ASSETS> 74,855,599
<CURRENT-LIABILITIES> 2,913,606
<BONDS> 68,430
<COMMON> 10,565
0
0
<OTHER-SE> 70,173,054
<TOTAL-LIABILITY-AND-EQUITY> 74,855,599
<SALES> 16,349,342
<TOTAL-REVENUES> 25,665,014
<CGS> 26,149,374
<TOTAL-COSTS> 26,149,374
<OTHER-EXPENSES> 12,206,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,313
<INCOME-PRETAX> (12,703,274)
<INCOME-TAX> (4,966,938)
<INCOME-CONTINUING> (7,736,336)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,736,336)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
<FN>
<F1>EXCLUDES 9,846,031 OF LONG-TERM INVENTORY
</FN>
</TABLE>
