<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's 2nd quarter 10-Q for fiscal 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> OCT-31-1996
<CASH> 7,649,752
<SECURITIES> 993,396
<RECEIVABLES> 6,417,921
<ALLOWANCES> 435,208
<INVENTORY> 8,447,340<F1>
<CURRENT-ASSETS> 28,667,748
<PP&E> 39,847,423
<DEPRECIATION> 16,612,180
<TOTAL-ASSETS> 68,230,609
<CURRENT-LIABILITIES> 1,818,184
<BONDS> 0
<COMMON> 10,611
0
0
<OTHER-SE> 64,702,721
<TOTAL-LIABILITY-AND-EQUITY> 68,230,609
<SALES> 6,254,466
<TOTAL-REVENUES> 10,804,999
<CGS> 9,995,165
<TOTAL-COSTS> 9,995,165
<OTHER-EXPENSES> 4,472,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,985
<INCOME-PRETAX> (3,376,929)
<INCOME-TAX> 945,361
<INCOME-CONTINUING> (2,431,568)
<DISCONTINUED> (3,056,047)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,487,615)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
<FN>
<F1>Excludes 12,783,866 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
October 31, 1996 Commission File No.
0-17174
HAUSER CHEMICAL RESEARCH, INC.
Delaware 84-0926801
(State or other jurisdiction of (I.R.S. Identification Number)
incorporation or organization)
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 10,610,731
Class Outstanding at October 31, 1996
<PAGE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Three months ended Six months ended
October 31, October 31,
1996 1995 1996 1995
REVENUES:
<S> <C> <C> <C> <C>
Natural product processing $ 3,577,367 $ 2,836,159 $ 6,254,466 $ 3,961,606
Technical services 2,310,937 2,446,650 4,550,533 3,900,682
Total revenues 5,888,304 5,282,809 10,804,999 7,862,288
COST OF REVENUES 5,400,163 5,216,598 9,995,165 8,656,073
GROSS MARGIN 488,141 66,211 809,834 (793,785)
OPERATING EXPENSES:
Research and development 737,283 422,292 1,233,198 889,187
Sales and marketing 340,995 323,498 754,195 486,263
General and administrative 1,213,891 1,558,377 2,484,881 2,758,034
Total operating expenses 2,292,169 2,304,167 4,472,274 4,133,484
LOSS FROM OPERATIONS (1,804,028) (2,237,956) (3,662,440) (4,927,269)
OTHER INCOME (EXPENSE):
Interest income 112,247 245,415 300,496 595,996
Interest expense (2,883) (14,418) (14,985) (16,744)
Other income - net 109,364 230,997 285,511 579,252
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,694,664) (2,006,959) (3,376,929) (4,348,017)
INCOME TAX BENEFIT 474,327 702,581 945,361 1,521,808
LOSS FROM CONTINUING OPERATIONS (1,220,337) (1,304,378) (2,431,568) (2,826,209)
DISCONTINUED OPERATIONS:
Loss from operations, net of
applicable income taxes (325,901) (284,685) (609,287) (527,189)
Gain (loss) on disposal,
net of applicable income taxes 329,692 (2,446,760)
LOSS FROM DISCONTINUED OPERATIONS 3,791 (284,685) (3,056,047) (527,189)
NET LOSS $(1,216,546) $(1,589,063) $(5,487,615) $(3,353,398)
LOSS PER SHARE:
Continuing operations $(0.12) $(0.12) $(0.24) $(0.27)
Discontinued operations 0.00 (0.03) (0.29) (0.05)
Net loss per share $(0.12) $(0.15) $(0.53) $(0.32)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,415,626 10,340,000 10,409,218 10,336,467
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
October 31, April 30,
ASSETS 1996 1996
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,649,752 $ 7,428,752
Held-to-maturity investments 993,396 7,791,875
Accounts receivable, less allowance
for doubtful accounts:
October 31, 1996, $435,208;
April 30, 1996, $472,215 5,982,713 6,801,376
Income taxes receivable 3,678,086 2,665,464
Inventories, current 8,447,340 8,508,973
Prepaid expenses and other 442,050 772,780
Deferred income tax assets 1,474,411 1,020,895
Total current assets 28,667,748 34,990,115
PROPERTY AND EQUIPMENT
Land and buildings 7,327,978 7,264,294
Lab and processing equipment 28,107,070 27,647,235
Furniture and fixtures 4,412,375 5,632,013
Total property and equipment 39,847,423 40,543,542
Accumulated depreciation and amortization (16,612,180) (15,016,815)
Net property and equipment 23,235,243 25,526,727
OTHER ASSETS:
Goodwill, less accumulated amortization:
October 31, 1996, $510,045;
April 30, 1996, $668,202 2,324,518 3,665,780
Inventories, non-current 12,783,866 9,499,450
Deposits and other 582,935 311,027
Other investments 636,299 862,500
Total other assets 16,327,618 14,338,757
TOTAL $68,230,609 $74,855,599
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $332,731 $754,710
Current portion of long term debt 150,927 623,279
Accrued salaries and wages 722,541 860,747
Other current liabilities 611,985 674,870
Total current liabilities 1,818,184 2,913,606
LONG TERM LIABILITIES 189,318 214,922
DEFERRED INCOME TAXES 1,509,775 1,543,452
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value;
50,000,000 shares authorized;
shares issued:
October 31, 1996, 10,610,731;
April 30, 1996, 10,564,613 10,611 10,565
Additional paid-in capital 59,591,372 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 309,290 465,100
Retained earnings 5,856,871 11,344,486
Net stockholders' equity 64,713,332 70,183,619
TOTAL $68,230,609 $74,855,599
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER CHEMICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Six months ended
October 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (5,487,615) $ (3,353,398)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,390,538 1,396,582
Loss on disposal of discontinued
operations 2,446,760
Loss on disposal of assets 176,004
Amortization of investment
premium (discount) (1,875) 72,609
Unrealized loss on available-for-sale
investment 70,391
Deferred income tax expense (benefit) (487,193) 184,890
Change in assets and liabilities, net
of effects from the purchase of
Shuster and the sale of Ironwood:
Accounts receivable 295,851 1,933,156
Income taxes receivable (72,050) (1,952,323)
Inventories (4,190,943) (3,675,843)
Prepaid expenses and other (147,417) (251,375)
Accounts payable (229,424) (193,753)
Other accrued liabilities (64,650) 903,037
Net cash used in operating activities (5,477,627) (4,760,414)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (857,375) (1,882,410)
Deposits and other (271,908) 125,183
Purchase of Shuster's common stock,
net of cash acquired (2,968,723)
Sale of Ironwood net assets 250,000
Purchase of investments (199,646)
Maturity of investments 7,000,000 8,917,860
Net cash provided by investing activities 5,921,071 4,191,910
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and
capitalized leases (395,582) (13,187)
Proceeds from issuance of common stock 173,138 26,239
Purchase of treasury stock (88,750)
Net cash used in financing activities (222,444) (75,698)
Net increase (decrease) in cash and
cash equivalents 221,000 (644,202)
Cash and cash equivalents, beginning
of period 7,428,752 4,244,874
Cash and cash equivalents, end of period $7,649,752 $3,600,672
See notes to consolidated financial
statements.
</TABLE>
<PAGE>
HAUSER CHEMICAL RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF OCTOBER
31, 1996 AND APRIL 30, 1996 AND FOR THE THREE AND SIX MONTH
PERIODS ENDED OCTOBER 31, 1996 AND 1995
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 October 31, 1996 and
results of its operations and cash flows for the periods ended
October 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 six months ended
October 31, 1995 have been prepared assuming the Shuster
acquisition occurred as of the beginning of the earliest
period presented. The pro-forma unaudited revenues for
Shuster used for this comparison were $2,837,103 for the six
months ended October 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>
Six months ended
October 31, 1995
<S> <C>
Revenues $ 8,851,874
Net loss (3,378,756)
Net loss per share $ (0.33)
</TABLE>
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.
DISCONTINUED OPERATIONS
On October 11, 1996, the Company sold substantially all
of the net assets of its secondary forest products subsidiary,
Hauser Northwest, Inc., d/b/a Ironwood Evergreens (Ironwood).
The Company has recorded the loss on the disposal of this
segment in accordance with the Accounting Principles Board
Opinion No. 30 (APB No. 30). Revenues for Ironwood were
$964,956 and $1,736,194, respectively, for the three months
ended October 31, 1996 and 1995. Revenues for Ironwood for
the six months ended October 31, 1996 and 1995 were $2,526,351
and $3,190,889, respectively.
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 October 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>
U.S. Treasury Securities $ 199,646 $ 162 $ 199,808
Mortgage Backed Securities 793,750 7,530 801,280
Total Investments $ 993,396 $ 7,692 $ - $ 1,001,088
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 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
</TABLE>
Available-For-Sale Investment - The Company records
available-for-sale investments at fair value. At October 31,
1996 and April 30, 1996 respectively, the Company held an
investment in an equity security that had a readily
determinable fair value of $636,299 and $862,500, resulting in
a decrease in unrealized gain, net of taxes, in
available-for-sale investment during the first six months of
fiscal 1997 of $155,810.
INVENTORIES
Inventories are classified as follows:
<TABLE>
October 31, April 30,
1996 1996
<S> <C> <C>
Raw materials and supplies $ 7,132,365 $ 8,497,766
Work in process 9,322,108 3,210,704
Finished goods 4,776,733 6,299,953
Total inventories 21,231,206 18,008,423
Less non-current inventories 12,783,866 9,499,450
Current portion of inventories $ 8,447,340 $ 8,508,973
</TABLE>
LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
October 31, April 30,
1996 1996
Note payable to former stockholders of
Shuster, with interest of 5.5%,due and
payable on July 19, 1996, collateralized
<S> <C> <C>
by a certificate ofdeposit 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. 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%. $ 86,840 143,380
Obligations to Shuster employees as part
of the acquisition settlement. 253,405 77,256
340,245 838,201
Less current portion 150,927 623,279
Long term debt $189,318 $ 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.
MAJOR CUSTOMERS
During the three and six months ended October 31, 1996,
the Company recognized revenues of $1,222,609, or 21% of total
revenues, and $1,749,608, or 16% of total revenues,
respectively, from a major customer. During the three and six
months ended October 31, 1995, the Company recognized
revenues of $1,617,845, or 23% of total revenues and
$2,184,193 or 20% of total revenues, respectively, from the
same major customer. In addition, the Company recognized
revenues from another customer of $1,129,934, or 19% of total
revenues, and $1,359,294, or 13% of total revenues, in the
three and six months ended October 31, 1996, respectively.
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 Six months ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest $ 2,883 $ 19,266 $ 40,568 $ 25,677
</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
Results from continuing operations in the second quarter
of fiscal 1997 showed continued 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 11%, gross margin was
significantly improved, and operating expenses remained
stable. Loss from continuing operations before income taxes
improved 16% over the same period last year. Despite these
improvements, loss per share from continuing operations in the
second quarter of fiscal 1997 was $.12 compared to loss per
share of $.12 in the second quarter of fiscal year 1996,
primarily as a result of decreased income tax benefits.
In addition, subsequent to October 31, 1996, the
Company announced the signing of two important multi-year
contracts. On November 7, 1996, the Company signed a
contract with a European pharmaceutical firm to supply GMP
(Good Manufacturing Practices) bulk paclitaxel in Europe and
Eastern Europe over a three year period. The value of the
contract is estimated to be $11,000,000. On November 14,
1996, the Company signed a three year contract to supply
RoseOx[Trademark], a new anti-oxidant nutraceutical product,
to a manufacturer of vitamins and food supplement products.
This contract has an estimated value of $12,700,000.
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). On October 11, 1996, this sale was
completed. Accordingly, the Company recorded the estimated
loss on the disposal of this segment in the quarter ended July
31, 1996 and adjusted the estimate in the quarter ended
October 31, 1996 to reflect the final sale. Revenues for
Ironwood were $964,956 and $1,736,194, respectively, for the
three months ended October 31, 1996 and 1995 and were
$2,526,351 and $3,190,889 in the six months ended October 31,
1996 and 1995, respectively.
The Company's improvements in continuing operations were
the result of activities over the last two years to diversify
product lines and expand its customer base. In the second
quarter of fiscal 1997, this was the case particularly in
the area of natural ingredients. Sales of natural ingredients
products grew significantly with increasing shipments of
nutraceuticals products, with favorable gross margins, to a
variety of customers. Management intends to continue to
invest in new products directed at different markets.
Through development and marketing plans implemented in
the first six months 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.
The following is a discussion of the Company's activities
in its continuing operations.
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, 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. 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. No
products have been identified by the parties at this time for
worldwide development.
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 second 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 regulatory approval to sell
paclitaxel in at least one country will be obtained by
American Home Products in the latter part of fiscal 1997.
During the quarter ended October 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 $1,222,608 in the second quarter of fiscal
1997 and $1,749,608 in the six months ended October 31, 1996.
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.
On November 7, 1996, the Company signed a contract with a
European pharmaceutical firm to supply GMP bulk paclitaxel in
Europe and Eastern Europe. The value of this contract is
estimated to be $11,000,000 and has an initial three year
term. The agreement is 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 European firm intends to purchase from Hauser all supplies
of GMP bulk paclitaxel for its total market needs in Europe.
The Company continued to produce sanguinaria extract for
Colgate during the second quarter of fiscal 1997. Sanguinaria
extract, a natural antimicrobial, is the key ingredient in
Colgate's Viadent[Registered Trademark] toothpaste and oral
rinse products. Shipments totaling $390,926 were made during
the quarter ended October 31, 1996. Production will continue
into the third quarter of 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 October 31, 1996, sales of
nutraceuticals products were $1,363,022, with improving gross
margins, and were sold to a variety of customers. This
represents a 39% increase over the sales in the first quarter
of fiscal 1997 and a 617% increase over nutraceuticals
revenues in the second quarter of the prior fiscal year. 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 for herbal and botanical
supplements is estimated to be $2.3 billion and is growing at
over 20% per year, according to industry sources. 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.
On November 14, 1996, the Company signed a three year
contract to supply RoseOx[Trademark], a new anti-oxidant
nutraceutical product, to a manufacturer of vitamin and food
supplement products. The value of this contract is estimated
to be $12,700,000. The Company has granted its customer
certain rights to use the RoseOx[Trademark] and RoseOx
660[Trademark] trademarks for use in the nutraceutical dietary
supplement and cosmetic markets.
Natural Flavor Extracts - The Company manufactures,
markets and sells natural flavor extracts. The extracts are
marketed under the Company's new brand name
NaturEnhance[Trademark] Flavor Extracts. Revenues in the six
months ended October 31, 1996 increased 62% over the same
period last year. 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 leader in the
development, manufacture and sales of natural food
ingredients.
For the past two years, 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 has completed the pilot
project and is evaluating 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 second 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
Technical Services, which includes Shuster and Chemistry
and Engineering Laboratory Services of Hauser, experienced
revenue growth in the first six months of fiscal 1997 of
almost 17% 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.
DISCONTINUED OPERATIONS
During the first and second quarters of the current
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 during the last
six months, 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
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.
Ironwood's operating results during the first and second
quarters of fiscal 1997 were unacceptable and well below
management's expectations, especially in light of corrective
measures imposed over the past nine months. Ironwood's
operating loss in the six month period ended October 31, 1996
was $846,232.
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. This sale was
completed on October 11, 1996. The results for the six months
ended October 31, 1996 include a non-recurring write-down of
the Ironwood Evergreens business to its fair market value.
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.
RESULTS OF OPERATIONS:
Statement of Operations
<TABLE>
Three months ended Six months ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Total revenues $ 5,888,304 $ 5,282,809 $ 10,804,999 $ 7,862,288
Gross margin 488,141 66,211 809,834 (793,785)
Research and
development 737,283 422,292 1,233,198 889,187
Sales and marketing 340,995 323,498 754,195 486,263
General and
administrative 1,213,891 1,558,377 2,484,881 2,758,034
Loss from operations (1,804,028) (2,237,956) (3,662,440) (4,927,269)
Loss from continuing
operations before
taxes (1,694,664) (2,006,959) (3,376,929) (4,348,017)
Loss from continuing
operations (1,220,337) (1,304,378) (2,431,568) (2,826,209)
Gain (loss) from
discontinued
operations 3,791 (284,685) (3,056,047) (527,184)
Net loss (1,216,546) (1,589,063) (5,487,615) (3,353,393)
Loss per share -
continuing operations (0.12) (0.12) (0.24) (0.27)
Loss per share -
discontinued
operations 0.00 (0.03) (0.29) (0.05)
Loss per share $ (0.12) $ (0.15) $ (0.53) $ (0.32)
Number of weighted
shares outstanding 10,415,626 10,340,000 10,409,218 10,336,467
</TABLE>
Percentage Relationship to Total Revenues
<TABLE>
Three months ended Six months ended
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Gross margin 8.3 % 1.3 % 7.5 % (10.1)%
Research and development 12.5 % 8.0 % 11.4 % 11.3 %
Sales and marketing 5.8 % 6.1 % 7.0 % 6.2 %
General and administrative 20.6 % 29.5 % 23.0 % 35.1 %
Loss from operations (30.6)% (42.4)% (33.9)% (62.7)%
Loss from continuing
operations before taxes (28.8)% (38.0)% (31.3)% (55.3)%
Loss from continuing
operations (20.7)% (24.7)% (22.5)% (35.9)%
Gain (loss) from
discontinued operations 0.1 % (5.4)% (28.3)% (6.7)%
Net loss (20.7)% (30.1)% (50.8)% (42.7)%
</TABLE>
Balance Sheet
<TABLE>
October 31, 1996 April 30, 1996
<S> <C> <C>
Working capital $ 26,849,564 $ 32,076,509
Property and equipment, net 23,235,243 25,526,727
Total assets 68,230,609 74,855,599
Net stockholder's equity 64,713,332 70,183,619
</TABLE>
CONTINUING OPERATIONS:
REVENUES. Total revenues increased 11% to $5,888,304 in the
second quarter of fiscal 1997 from $5,282,809 in the second
quarter of fiscal 1996 primarily due to increased revenues of
nutraceutical products partially offset by reduced revenues of
pharmaceutical products. Total revenues in the first six
months of fiscal 1997 were $10,804,999, an increase of 37%
over the same period last year of $7,862,288. This increase
was primarily due to increased sales of nutraceutical products
and the acquisition of Shuster, offset by a reduction in
pharmaceuticals product revenues.
A breakout of the Company's revenues by product and service
groupings for its continuing operations is as follows:
<TABLE>
Three months ended Six months ended
October 31, October 31,
Revenues 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Pharmaceuticals $ 1,768,917 $ 2,232,966 $ 2,687,942 $ 3,005,738
Natural ingredients
products (includes
nutraceuticals, natural
flavor extracts and
food ingredients) 1,808,450 603,193 3,566,524 955,868
Technical services
(includes chemistry and
engineering services
and Shuster) 2,310,937 2,446,650 4,550,533 3,900,682
$ 5,888,304 $ 5,282,809 $10,804,999 $ 7,862,288
</TABLE>
Pharmaceuticals:
Revenues from pharmaceuticals products in the second quarter
of fiscal 1997 decreased 21% compared to the second quarter of
fiscal 1996. Revenues for the first six months of fiscal 1997
decreased 11% from the same period in the previous fiscal
year. This was due to lower revenues from American Home
Products for paclitaxel, the absence of R&D contract revenues
in fiscal 1997, and lower sales of sanguinaria to Colgate due
to timing of shipments.
Natural ingredients:
Natural ingredients product revenues increased 200% in the
second quarter of fiscal 1997 and 273% in the first six months
of fiscal 1997 compared to the same periods last year. The
increase is primarily attributable to success in selling
nutraceuticals products as revenues were $1,363,022 in the
quarter ended October 31, 1996 compared to revenues of
$190,068 in the quarter ended October 31, 1995.
Nutraceuticals product revenues were $2,340,877 in the six
months ended October 31, 1996 compared to $197,080 in the same
period last year. In addition, revenues from natural flavor
extracts were $444,528 and $1,192,477 in the three and six
months ended October 31, 1996, respectively, compared to
$389,125 and $734,788 in the three and six months ended
October 31, 1995, respectively. This increase was the result
of higher sales of natural flavor extracts to the beverage
industry. Revenues from these natural flavor extracts are
expected to decline in the next two quarters due to
seasonality.
Technical services:
Technical services revenues were $2,310,937 in the second
quarter of fiscal 1997 compared to $2,446,650 in the same
quarter of fiscal 1996, a decrease of 6%. This decrease is due
to the reduction of contract work for one particular customer
at Shuster. Technical Services revenues increased almost 17%
in the six months ended October 31, 1996 compared to the same
period in the last fiscal year primarily because of the
acquisition of Shuster which occurred in July, 1995.
GROSS MARGIN. Gross margin in the second quarter of fiscal
1997 was 8% of total revenues as compared to 1% in the same
quarter of fiscal 1996. Gross margin in the six months
ended October 31, 1996 was approximately 8% of total revenues
compared to negative 10% in the same period last year. The
improvement is due to the sales of nutraceuticals products
which generate positive gross margins and the addition of
Shuster. 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.
Management continues to concentrate on sales and manufacturing
operations with the goal of generating improved gross margins.
During the first six months 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
$737,283 in the second quarter of fiscal 1997 compared to
$422,292 in the second quarter of fiscal 1996, an increase of
75%. In the first six months of fiscal 1997, research and
development expenses of $1,233,198 were 39% higher than the
same period in fiscal 1996. The increase 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 in the three and six months ended
October 31, 1996 were $340,995 and $754,195, respectively,
compared to $323,498 and $486,263, respectively, in the three
and six months ended October 31, 1995. The increase
represents the Company's increased efforts to market new
products, particularly in the areas of nutraceuticals and
natural food ingredients. In addition, fiscal 1997 sales
expenses include, for the first time, payments of commissions
to internal salespeople and external distributors.
General and administrative expenses were $1,213,891 in the
quarter ended October 31, 1996, a 22% decrease over the same
quarter last year. For the six months ended October 31, 1996,
general and administrative expenses of $2,484,881 were 10%
lower compared to the same period last year. These decreases
are the result of management's continued efforts to reduce
general and administrative costs where appropriate and the
attrition of various administrative positions.
INTEREST INCOME. Interest income was $112,247 in the second
quarter of fiscal 1997 compared to $245,415 in the same
quarter of fiscal 1996. Interest income was $300,496 and
$595,996 in the six months ended October 31, 1996 and 1995,
respectively. 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 $8,643,148 at October 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. The
Company has a line of credit totaling $1,500,000 which expires
on September 30, 1997 and is used primarily for letters of
credit related to raw material purchases. As of October 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 $1,300,000 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
October 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 October 31, 1996 was
$26,849,564 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 total inventories which are not expected to be sold
in the next twelve months. In addition, working capital
decreased by $1,287,749 as a result of the write-down related
to the discontinued operations of Ironwood.
PROPERTY AND EQUIPMENT. Purchases of property and equipment
in the first six months of fiscal 1997 totaled $857,375. 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 natural flavor
extracts 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: December 9, 1996
/s/Dean P. Stull
Chairman of the Board, Chief Executive
Officer, and President
Date: December 9, 1996
/s/David I. Rosenthal
Chief Financial Officer and Treasurer
