<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1ST QUARTER 10-Q FOR FISCAL 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> JUL-31-1996
<CASH> 7,139,221
<SECURITIES> 3,791,875
<RECEIVABLES> 6,839,891
<ALLOWANCES> 567,414
<INVENTORY> 7,397,824<F1>
<CURRENT-ASSETS> 30,343,493
<PP&E> 40,016,479
<DEPRECIATION> 16,015,101
<TOTAL-ASSETS> 70,987,596
<CURRENT-LIABILITIES> 3,300,202
<BONDS> 67,993
<COMMON> 10,590
0
0
<OTHER-SE> 65,890,654
<TOTAL-LIABILITY-AND-EQUITY> 70,987,596
<SALES> 2,677,099
<TOTAL-REVENUES> 4,916,695
<CGS> 4,595,002
<TOTAL-COSTS> 4,595,002
<OTHER-EXPENSES> 2,180,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,102
<INCOME-PRETAX> (1,682,265)
<INCOME-TAX> (471,034)
<INCOME-CONTINUING> (1,211,231)
<DISCONTINUED> (3,059,838)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,271,069)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
<FN>
<F1>EXCLUDES 13,169,395 OF LONG-TERM INVENTORY
</FN>
</TABLE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended
July 31, 1996 Commission File No. 0-17174
HAUSER CHEMICAL RESEARCH, INC.
Delaware 84-0926801
(State or other jurisdiction of (I.R.S. Identification
incorporation or organization) Number)
5555 Airport Boulevard, Boulder, Colorado 80301
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (303) 443-4662
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $ .001 par value 10,589,020
Class Outstanding at July 31, 1996
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Three months ended July 31,
1996 1995
REVENUES:
<S> <C> <C>
Natural product processing $2,677,099 $1,125,447
Technical services 2,239,596 1,454,032
Total revenues 4,916,695 2,579,479
COST OF REVENUES 4,595,002 3,203,035
GROSS MARGIN 321,693 (623,556)
OPERATING EXPENSES:
Research and development 495,915 466,895
Sales and marketing 413,200 229,044
General and administrative 1,270,990 1,369,743
Total operating expenses 2,180,105 2,065,682
LOSS FROM OPERATIONS (1,858,412) (2,689,238)
OTHER INCOME (EXPENSE):
Interest income 188,249 350,581
Interest expense (12,102) (2,326)
Other income - net 176,147 348,255
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,682,265) (2,340,983)
INCOME TAX BENEFIT 471,034 819,372
LOSS FROM CONTINUING OPERATIONS (1,211,231) (1,521,611)
DISCONTINUED OPERATIONS:
Loss from operations, net of applicable
income taxes of $110,211 (283,386) (242,724)
Loss on disposal, including provision for
losses through estimated disposal date
of $157,000, net of applicable income
taxes of $1,080,548 (2,776,452)
LOSS FROM DISCONTINUED OPERATIONS (3,059,838) (242,724)
NET LOSS $(4,271,069) $(1,764,335)
LOSS PER SHARE:
Continuing operations $(0.12) $(0.15)
Discontinued operations (0.29) (0.02)
Net loss per share $(0.41) $(0.17)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,375,881 10,338,295
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 1996 1996
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,139,221 $7,428,752
Held-to-maturity investments 3,791,875 7,791,875
Accounts receivable, less allowance for doubtful accounts:
July 31, 1996, $567,414; April 30, 1996, $472,215 6,272,477 6,801,376
Income taxes receivable 3,893,257 2,665,464
Inventories, current 7,397,824 8,508,973
Prepaid expenses and other 393,944 772,780
Net deferred income tax assets 1,454,895 1,020,895
Total current assets 30,343,493 34,990,115
PROPERTY AND EQUIPMENT
Land and buildings 7,312,948 7,264,294
Lab and processing equipment 27,964,510 27,647,235
Furniture and fixtures 4,739,021 5,632,013
Total property and equipment 40,016,479 40,543,542
Accumulated depreciation and amortization (16,015,101) (15,016,815)
Net property and equipment 24,001,378 25,526,727
OTHER ASSETS:
Goodwill, less accumulated amortization:
July 31, 1996, $776,550; April 30, 1996, $668,202 2,407,432 3,665,780
Inventories, non-current 13,169,395 9,499,450
Deposits and other 365,898 311,027
Available-for-sale investment 700,000 862,500
Total other assets 16,642,725 14,338,757
TOTAL $70,987,596 $74,855,599
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,315,852 $754,710
Current portion of long term debt 234,200 623,279
Accrued salaries and wages 1,065,343 860,747
Other accrued current liabilities 684,807 674,870
Total current liabilities 3,300,202 2,913,606
LONG TERM LIABILITIES 299,575 214,922
NET DEFERRED INCOME TAX LIABILITIES 1,486,575 1,543,452
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares
authorized; shares issued:
July 31, 1996, 10,589,020; April 30, 1996, 10,564,613 10,590 10,565
Additional paid-in capital 59,512,574 59,418,280
Treasury stock, at cost; 201,100 shares (1,054,812) (1,054,812)
Unrealized gain on available-for-sale investment,
net of income taxes 359,475 465,100
Retained earnings 7,073,417 11,344,486
Net stockholders' equity 65,901,244 70,183,619
TOTAL $70,987,596 $74,855,599
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Three months ended July 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(4,271,069) $(1,764,335)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on disposal of discontinued operations 2,776,452
Depreciation and amortization 1,106,634 795,333
Loss on disposal of assets 176,004
Amortization of investment premium 77,610
Change in assets and liabilities, net of effects
from the purchase of Shuster:
Accounts receivable 367,899 1,163,835
Income taxes receivable (581,247) (950,150)
Inventories (3,515,796) (2,059,492)
Prepaid expenses and other (80,164) (94,370)
Accounts payable 561,142 (657,865)
Other accrued liabilities 57,533 596,023
Net cash used in operating activities (3,578,616) (2,717,407)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (445,937) (1,225,174)
Deposits and other (54,871) (6,351)
Purchase of Shuster's common stock, net
of cash acquired (2,827,153)
Maturity of investments 4,000,000 6,420,671
Net cash provided by investing activities 3,499,192 2,361,993
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (304,426) (2,784)
Proceeds from issuance of common stock 94,319 14,252
Purchase of treasury stock (88,751)
Net cash used in financing activities (210,107) (77,283)
Net decrease in cash and cash equivalents (289,531) (432,697)
Cash and cash equivalents, beginning of period 7,428,752 4,244,874
Cash and cash equivalents, end of period $7,139,221 $3,812,177
See notes to consolidated financial statements.
</TABLE>
HAUSER CHEMICAL RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 31,
1996 AND APRIL 30, 1996 AND FOR THE THREE MONTH PERIODS ENDED
JULY 31, 1996 AND 1995
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly
the Company's financial position as of July 31, 1996 and
results of its operations and cash flows for the periods ended
July 31, 1996 and 1995. The year end balance sheet data was
derived from audited financial statements, but does not
include all disclosures required by generally accepted
accounting principles. Certain fiscal 1996 amounts have been
reclassified to conform to the fiscal 1997 presentation.
Effective July 21, 1995, the Company acquired all of the
stock of Shuster Laboratories, Inc. (Shuster), formerly
Herbert V. Shuster, Inc., 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. The following pro-forma unaudited consolidated
results of operations for the three months ended July 31, 1995
have been prepared assuming the Shuster acquisition occurred
as of the beginning of the quarter. The pro-forma unaudited
revenues for Shuster used for this comparison were $1,459,268
for the three months ended July 31, 1995. 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>
Three months ended July 31, 1995
<S> <C>
Revenues $ 5,023,760
Net loss (1,789,693)
Net loss per share $ (0.17)
</TABLE>
2. ACCOUNTING POLICIES
The accounting policies followed by the Company are set
forth in Note 1 to the Company's financial statements in the
Company's form 10-K filed for the year ended April 30, 1996.
3. DISCONTINUED OPERATIONS
On September 13, 1996, the Company adopted plans to sell
substantially all of the net assets of its secondary forest
products subsidiary, Hauser Northwest, Inc., d/b/a Ironwood
Evergreens (Ironwood). The Company is currently negotiating
the terms of a potential sale with certain interested buyers
and expects that it will consummate the sale by December 1996.
Accordingly, the Company has recorded the estimated loss on
the disposal of this segment in accordance with the Accounting
Principles Board Opinion No. 30 (APB No. 30). As of July 31,
1996, the remaining assets related to Ironwood total
approximately $954,000 and are principally comprised of
accounts receivable and inventory; the remaining liabilities
total approximately $593,000 and are principally comprised of
accounts payable and other current obligations. Revenues for
Ironwood were $1,561,395 and $1,454,695, respectively, for the
three months ended July 31, 1996 and 1995.
4. 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 July 31, 1996:
<TABLE>
Held-to-Maturity Investments:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Issues
Maturities less than 1 year:
<S> <C> <C> <C> <C>
Mortgage Backed Securities $1,793,750 $ 16,260 $1,810,010
Municipal Securities 1,998,125 4,125 2,002,250
Total Investments $3,791,875 $ 20,385 $ - $3,812,260
Below is a table of held-to-maturity investments as of April 30, 1996:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Issues
Maturities less than 1 year:
U.S. Treasury Securities $3,000,000 $ 6,250 $ (620) $3,005,630
Mortgage Backed Securities 2,793,750 26,560 26,560 2,846,870
Municipal Securities 1,998,125 7,190 (3,125) 2,002,190
Total Investments $7,791,875 $ 40,000 $ 22,815 $7,854,690
</TABLE>
Available-For-Sale Investment - The Company records
available-for-sale investments at fair value. At July 31, 1996
and April 30, 1996 respectively, the Company held an
investment in an equity security that had a readily
determinable fair value of $700,000 and $862,500, resulting in
a decrease in unrealized gain, net of taxes, as
available-for-sale investment during the first quarter of
fiscal 1997 of $105,625.
5. INVENTORIES
Inventories are classified as follows:
<TABLE>
July 31, April 30,
1996 1996
<S> <C> <C>
Raw materials and supplies $ 8,454,947 $ 8,497,766
Work in process 5,466,947 3,210,704
Finished goods 6,645,325 6,299,953
Total inventories 20,567,219 18,008,423
Less non-current inventories 13,169,395 9,499,450
Current portion of inventories $ 7,397,824 $ 8,508,973
</TABLE>
6. LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
July 31, April 30,
1996 1996
<S> <C> <C>
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,
collateralized by land. $ 67,993 68,430
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%. 131,690 143,380
Obligations to Shuster employees as part of the acquisition settlement. 334,092 77,256
533,775 838,201
Less current portion 234,200 623,279
Long term debt $299,575 $214,922
</TABLE>
In July 1996, the Company received cash of $274,833 from
a bank escrow account established for the distribution of
funds related to the acquisition of Shuster. The funds are not
restricted, but the Company is contractually obligated to
disburse these funds to employees of Shuster over a two year
period. If the employees should leave Shuster before the two
year period is up, the Company is obligated to distribute the
remaining funds to the former shareholders of Shuster. The
receipt of this cash by the Company did not alter the purchase
price of Shuster.
7. MAJOR CUSTOMER
During the three months ended July 31, 1995, the Company
recognized revenues of $566,348, or 14% of total revenues from
a major customer. In the quarter ended July 31, 1996, no
customer accounted for more than 10% of total revenues.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental Cash Flow Information - The amounts paid by
the Company for interest are as follows:
<TABLE>
Three months ended July 31,
1996 1995
<S> <C> <C>
Interest $37,686 $ 6,411
</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.
<TABLE>
The net assets purchased were as follows:
<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>
<PAGE>
Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
On September 13, 1996, the Company adopted plans to sell
substantially all of the net assets of its secondary forest
products subsidiary, Hauser Northwest, Inc., d/b/a Ironwood
Evergreens (Ironwood). The Company is currently negotiating
the terms of a possible sale with certain interested buyers
and expects that it will consummate the sale by December 1996.
Accordingly, the Company has recorded the estimated loss on
the disposal of this segment. As of July 31, 1996, the
remaining assets related to Ironwood total approximately
$954,000 and are principally comprised of accounts receivable
and inventory; the remaining liabilities total approximately
$593,000 and are principally comprised of accounts payable and
other current obligations. Revenues for Ironwood were
$1,561,395 and $1,454,695, respectively, for the three months
ended July 31, 1996 and 1995.
During the approximate five month period since the end of
the fiscal year, certain events occurred which had significant
negative impacts on the Company's secondary forest products
business. The European greens market, a significant portion of
Ironwood's customer base, became more confused and
unpredictable. Management concluded that the European market
would not offer sufficient reliability in the future to meet
Hauser corporate goals. Shipment of certain expected tropical
greens products was delayed and, therefore, sales were not
consummated during this time period. In addition, the number
of competitors for raw material sourcing in the United States
has increased dramatically over the past three years and, when
combined with unpredictable weather patterns this quarter, has
caused higher raw material costs to the Company for its greens
business. These higher raw material costs could not be passed
on to the European customers as the European greens business
was highly price competitive and unpredictable. In August
1996, the Company completed its annual harvest of Pacific yew
bark and obtained 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
determined 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.
In September 1996, the Company also completed a thorough
analysis of its secondary forest products business and
examined expanding penetration of the domestic wholesale
market base, shortening distribution channels in Europe and
expanding its new dried and preserved tropical product lines
as well as possible cost cutting measures. The analysis
included a review of the secondary forest products markets
both in the United States and Europe and cost structures for
this subsidiary. Management's analysis revealed a high
manufacturing cost overhead that was limiting profitability in
all areas. Potential profitability of the Christmas greens
business was most significantly negatively impacted. Finally,
even with many attempts to cut costs and restructure this
business, the secondary forest products business continued to
post unacceptable monthly losses.
Operating results during the quarter ended July 31, 1996
were unacceptable and well below management's expectations,
especially in light of corrective measures imposed over the
past six months. Ironwood's operating loss in the first
quarter of fiscal 1997 was $393,597. This pattern worsened as
Ironwood posted a loss of approximately $157,000 in the month
of August 1996.
Because of the foregoing, and in order to retain cash for its
core businesses and improve the Company's operating position
going forward, management decided on September 13, 1996 that
this business should be sold. The results for the first
quarter of fiscal 1997 include a non-recurring write-down of
the Ironwood Evergreens business to its fair market value as
determined by management after evaluating the possible
opportunities to sell this business.
The original acquisition of Ironwood enabled the Company to
retain its bark harvesting capabilities in the Pacific
Northwest, thereby significantly reducing the cost of bark
collection. Over three collection seasons, Ironwood reduced
the cost of collection by $2.5 million compared to original
estimates. Pacific yew bark is used in the production of bulk
paclitaxel.
Despite the foregoing, results from continuing operations in
the first quarter of fiscal 1997 showed improvements in the
Company's efforts to secure its position as a leader in the
development, manufacturing, and marketing of special products
from natural sources. As compared to the same period in the
previous fiscal year, revenues increased 91%, gross margin was
significantly improved, and operating expenses increased
marginally by 6%. Loss per share from continuing operations in
the first quarter of fiscal 1997 was $.12 compared to loss per
share of $.15 in the first quarter of fiscal year 1996.
The Company's improvements were the result of activities
over the last two years to diversify product lines and expand
its customer base. In the first quarter of fiscal 1997, this
was the case particularly in the areas of natural ingredients
and technical services. Sales of natural ingredients products
grew significantly with increasing shipments of nutraceuticals
products, with favorable gross margins, to a variety of
customers. The technical services area grew in the first
quarter of fiscal 1997 over the same period last year because
of the acquisition of Shuster Laboratories, Inc. (Shuster),
which was consummated in July 1995. Management intends to
continue to invest in new products directed at different
markets.
Through development and marketing plans implemented in the
first quarter of fiscal 1997, and through continued cost
controls, the Company could return 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.
In the first quarter of 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 continuing operations.
HEALTH CARE PRODUCTS
Pharmaceuticals - On May 12, 1994, the Company entered into
a multi-year, worldwide 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 been 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.
In the first quarter of fiscal 1997, the Company sold
paclitaxel to American Home Products for its 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 the quarter ended July 31, 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. Revenues under the Supply Agreement with American Home
Products totaled $527,000 in the first quarter of fiscal 1997.
During the first quarter of fiscal 1997, 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.
Also during the quarter ended July 31, 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 the first quarter of 1997. Sanguinaria extract,
a natural antimicrobial, is the key ingredient in Colgate's
Viadent[Registered Trademark] toothpaste and oral rinse
products. Shipments totaling $205,981 were made during the
quarter ended July 31, 1996. Production will continue into
fiscal 1997 as the Company will ship sanguinaria extract to
complete the current contract with Colgate.
NATURAL INGREDIENTS
Nutraceuticals - The Company made its initial shipment of
nutraceuticals products in the first quarter of fiscal 1996.
In the quarter ended July 31, 1996, sales of nutraceuticals
products amounted to $977,855, with favorable gross margins,
and were sold to a variety of customers. 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 - The Company manufactures, markets
and sells natural flavor extracts. The extracts are marketed
under the Company's new brand name NaturEnhance[Trade Mark]
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.
Natural Food Ingredients - 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
ingredients.
During the first quarter of fiscal 1997, the Company
continued to market 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.
During the first quarter of fiscal 1997, 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 ingredients products was
recognized in the first quarter of fiscal 1997, 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 ingredients products.
TECHNICAL SERVICES
The Technical Services Division, which includes Chemistry
and Engineering Laboratory Services of Hauser Laboratories and
Shuster, experienced revenue growth in the first quarter of
fiscal 1997 of 54% over the same period in fiscal 1996,
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>
RESULTS OF OPERATIONS:
<TABLE>
Statement of Operations
Three months ended July 31,
1996 1995
<S> <C> <C>
Total revenues $ 4,916,695 $ 2,579,479
Gross margin 321,693 (623,556)
Research and development 495,915 466,895
Sales and marketing 413,200 229,044
General and administrative 1,270,990 1,369,743
Loss from operations (1,858,412) (2,689,238)
Loss from continuing operations before taxes (1,682,265) (2,340,983)
Loss from continuing operations (1,211,231) (1,521,611)
Loss from discontinued operations (3,059,838) (242,724)
Net loss (4,271,069) (1,764,335)
Loss per share - continuing operations (0.12) (0.15)
Loss per share - discontinued operations (0.29) (0.02)
Loss per share $ (0.41) $ (0.17)
Number of weighted shares outstanding 10,375,881 10,338,295
</TABLE>
<TABLE>
Percentage Relationship to Total Revenues
Three months ended July 31,
1996 1995
<S> <C> <C>
Total revenues 100.0% 100.0%
Gross margin 6.5% (24.2)%
Research and development 10.1% 18.1%
Sales and marketing 8.4% 8.9%
General and administrative 25.9% 53.1%
Loss from operations (37.8)% (104.3)%
Loss from continuing operations before taxes (34.2)% (90.8)%
Loss from continuing operations (24.6)% (58.9)%
Loss from discontinued operations (62.2)% (9.4)%
Net loss (86.9)% (68.4)%
</TABLE>
<TABLE>
Balance Sheet
July 31, 1996 April 30, 1996
<S> <C> <C>
Working capital $27,043,291 $32,076,509
Property and equipment, net 24,001,378 25,526,727
Total assets 70,987,596 74,855,599
Net stockholder's equity 65,901,244 70,183,619
</TABLE>
CONTINUING OPERATIONS:
REVENUES. Total revenues increased 91% to $4,916,695 in the
first quarter of fiscal 1997 from $2,579,479 in the first
quarter of fiscal 1996 primarily due to increased revenues of
nutraceutical products and the acquisition of Shuster.
A breakout of the Company's revenues by product and service
groupings for its continuing operations is as follows:
<TABLE>
Three months July 31,
Revenues 1996 1995
<S> <C> <C>
Healthcare products (include pharmaceuticals) $ 919,025 $ 772,771
Natural ingredients products (includes
nutraceuticals, natural flavor extracts
and food ingredients) 1,758,074 352,676
Technical services (includes chemistry and
engineering services and Shuster) 2,239,596 1,454,032
$4,916,695 $2,579,479
</TABLE>
Healthcare products: Revenues from healthcare products in the
first quarter of fiscal 1997 increased 19% compared to the
first quarter of fiscal 1996. This was due to increased
revenues from American Home Products for paclitaxel and
shipments of sanguinaria to Colgate.
Natural ingredients products: Natural ingredients product
revenues increased 399% in the first quarter of fiscal 1997
compared to the first quarter of fiscal 1996. The increase is
primarily attributable to success in selling nutraceuticals
products as revenues were $977,855 in the quarter ended July
31, 1996 compared to $7,012 in the quarter ended July 31, 1995
when sales of nutraceutical products first commenced. In
addition, revenues from natural flavor extracts were $747,949
in the first quarter of fiscal 1997 compared to $345,644 in
the first quarter of fiscal 1996, an increase of 116%. This
increase was the result of higher sales of natural flavor
extracts to the beverage industry. Due to the seasonality of
these natural flavor extract products, revenues are expected
to decline in the next few quarters. Finally, the Company
recognized revenue of $32,270 in the quarter ended July 31,
1996 for a sale of oil soluble rosemary.
Technical services: Technical services revenues increased to
$2,239,596 in the first quarter of fiscal 1997 compared to
$1,454,032 in the same quarter of fiscal 1996, an increase of
54%. This increase is attributable to the inclusion of
revenues for a full quarter in 1997 from Shuster of $1,416,481
in fiscal 1997 compared to revenues for only one month (July)
in fiscal 1996 of $469,682, due to the timing of the
acquisition.
GROSS MARGIN. Gross margin in the first quarter of fiscal 1997
was 6.5% of total revenues as compared to negative 24.2% in
the same quarter of fiscal 1996. The improvement is due to the
sales of nutraceuticals products which generate positive gross
margins and the addition of Shuster. Gross margins are
expected to remain low for the foreseeable future. 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.
During the first quarter of fiscal 1996, the Company
redeployed certain production facility assets 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 $176,004 were expensed.
OPERATING EXPENSES. Research and development expenses were
$495,915 in the first quarter of fiscal 1997 compared to
$466,895 in the first quarter of fiscal 1996. This increase of
6% in research and development costs is related to various
projects including development of beta carotene and research
in using cultivated yew trees as the next source of
paclitaxel. The Company intends to actively pursue research
and development efforts and these costs are likely to increase
in future periods.
Sales and marketing expenses increased $184,156 in the quarter
ended July 31, 1996 compared to the same period in the
previous year. The increase represents the Company's increased
efforts to market new products, particularly in the areas of
nutraceuticals and natural food ingredients.
General and administrative expenses were $1,270,990 in the
first quarter of fiscal 1997 compared to $1,369,743 in the
first quarter of fiscal 1996. This decrease of $98,753 is the
result of the Company's continued efforts to reduce general
and administrative costs where appropriate.
INTEREST INCOME. Interest income was $188,249 in the first
quarter of fiscal 1997 compared to $350,581 in the same
quarter of fiscal 1996. The decrease is due to fewer funds
available for investment.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents plus short-term
investments were $10,931,096 at July 31, 1996 compared to
$15,220,627 at April 30, 1996. The decrease is due primarily
to expenditures for the harvesting of Pacific yew bark,
capital expenditures, raw material purchases for new product
areas, and other general working capital requirements. During
the first quarter of fiscal 1997, the seasonal nature of bark
harvesting operations required a higher use of cash than is
expected in the remaining quarters of fiscal 1997. 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 July 31, 1996,
$1,500,000 was available for use under this line of credit. In
addition, the Company has filed for income tax refunds of
approximately $2,000,000 which it expects to receive by the
end of the third quarter of fiscal 1997. The Company believes
that cash reserves, funds generated from operations, including
the tax refund, and available borrowings from 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 July
31, 1996 do not extend beyond one year, are staggered such
that the Company can access the funds upon their maturation in
a manner to allow the Company to meet its obligations as they
are expected to become due.
WORKING CAPITAL. Working capital as of July 31, 1996 was
$27,043,291 compared to $32,076,509 as of April 30, 1996. This
decrease is primarily attributable to the use of cash and cash
equivalents plus short-term investments for the harvest of
Pacific yew tree bark, which has been classified as
non-current inventory. Non-current inventories reflect the
portion of each of these inventories which is not expected to
be sold in the next twelve months. In addition, working
capital decreased by $856,000 as a result of the write-down
related to the discontinued operations of Ironwood.
PROPERTY AND EQUIPMENT. Purchases of property and equipment
the first quarter of fiscal 1997 totaled $445,937. This was
primarily the result of upgrades to manufacturing equipment
for the production of nutraceuticals and food ingredients
products.
SEASONALITY.
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.
FORWARD LOOKING STATEMENTS.
Certain oral and written statements of management of the
Company included in the Form 10-Q 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.
<PAGE>
Part 2
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
<PAGE>
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HAUSER CHEMICAL RESEARCH, INC.
Date: September 16, 1996
/s/Dean P. Stull, Chairman of the Board, Chief Executive
Officer, and President
Date: September 16, 1996
/s/David I. Rosenthal, Chief Financial Officer and Treasurer