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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, 1997
[ ] 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, INC.
(formerly HAUSER CHEMICAL RESEARCH, INC.)
(Exact name of Registrant as specified in its charter)
Colorado 84-0926801
(State or other jurisdiction of (I.R.S.
incorporation or organization) Identification Number)
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 (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 June 1, 1997
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 10,419,028
Class Outstanding at April 30, 1997
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY
STATEMENT FOR THE 1997 ANNUAL SHAREHOLDERS' MEETING TO BE
FILED WITH THE COMMISSION AND INCORPORATED BY REFERENCE INTO
PART III.
<PAGE>
PART I
Item 1. Business
DESCRIPTION OF HAUSER, INC.
Hauser, Inc., ("Hauser" or the "Company") was incorporated
under the laws of the State of Colorado in December 1996,
under the name Hauser, Inc. as the successor company to a
Delaware corporation (Hauser Chemical Research, Inc.) formed
in 1983. The Company's principal offices are located at 5555
Airport Boulevard, Boulder, CO 80301. Its telephone number is
(303) 443-4662. All references to "Hauser" in this Form 10-K
mean Hauser, Inc. and its subsidiaries, unless the context
otherwise requires.
In January 1990, the Company acquired Hauser Laboratories,
Inc. to expand the interdisciplinary laboratory testing and
chemical engineering skills of its Technical Services business
unit. In that same year the Company formed Hauser Northwest, a
wholly-owned subsidiary, to facilitate the collection of yew
bark to be used in one of its products, paclitaxel. In May
1994, Hauser Northwest acquired substantially all of the net
assets of Ironwood Evergreens, Inc. ("Ironwood"), an Olympia,
Washington-based company. This acquisition gave Hauser four
business units: Pharmaceuticals, Natural Ingredients,
Technical Services, and Secondary Forest Products operating in
three industry segments: Natural Products, Technical Services
and Secondary Forest Products. In July 1995, in order to again
expand the skill base of the Company's Technical Services
business unit, the Company acquired 100% of the stock of
Shuster Laboratories, Inc. ("Shuster", formerly Herbert V.
Shuster, Inc.), an independent consumer products research and
development firm and contract laboratory based in Quincy,
Massachusetts and Atlanta, Georgia. In October, 1996, the
Company sold the net assets of Ironwood.
For the three years prior to fiscal 1995, substantially all of
the revenue, profitability and cash flow of the Company came
from the production and sale of paclitaxel to Bristol-Myers
Squibb Company ("Bristol") under a contract, as amended.
Beginning in fiscal 1995, as a result of the expiration of an
exclusive supply contract with Bristol, the Company redirected
its focus to expanding and strengthening its expertise and
experience in its identified market areas. Through fiscal
1997, the Company has continued this business strategy.
Today, Hauser's business units include Pharmaceuticals,
Natural Ingredients, and Technical Services operating in two
industry segments: Natural Products and Technical Services.
The Company continues to invest its technology and financial
resources in order to strengthen its position as a leader in
the development, manufacturing and marketing of special
products from natural sources.
DESCRIPTION OF BUSINESS UNITS
Natural Products
Pharmaceuticals
The principal business of the Company's pharmaceuticals unit
is the development, manufacture, and sale of pharmaceutical
products.
This business unit's primary product is paclitaxel, a non-
patented compound which first exhibited promising results in
the treatment of ovarian, breast and other cancers in clinical
trials sponsored by the National Cancer Institute ("NCI").
Paclitaxel is an anti-tumor agent that has shown broad
spectrum activity against several types of cancer, most
notably refractory ovarian and refractory 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.
Hauser produced paclitaxel first for NCI, and then for
Bristol. In August 1991, the Company 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 ("AHP") to supply bulk paclitaxel to
that company through 2004. In November 1996, a supply contract
was signed with Yew Tree Pharmaceuticals ("Yew Tree") for
sales of paclitaxel in Europe.
Natural Ingredients
Nutraceuticals - During fiscal 1995, Hauser began development
of a new product line, "Nutraceuticals". Shipments commenced
in the first quarter of fiscal 1996, and these products are
currently being marketed by the Company's internal marketing
and technical staff with the support of a sales agency.
Nutraceuticals is a term used to denote the broad range of
healthful natural products used to supplement the diet. 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.
Hauser's nutraceutical products are dietary supplements which
may be consumed as supplements in liquids, capsules, or
tablets, or as ingredients in processed foods. Hauser's
nutraceutical products are distinguished by the Company's
Certified Assay[TradeMark], which guarantees the customer
measured concentrations (the assay) of one or more selected
marker compounds in the final product. Certified
Assay[TradeMark] assumes that the level of the marker compound
is representative of the botanical's natural ratio.
Natural Flavor Extracts - The Company manufactures, markets
and sells natural flavor extracts. The extracts are marketed
under the Company's brand name NaturEnhance[TradeMark] Flavor
Extracts. Industry sources estimate the production of flavor
ingredients at $3.0 billion per year 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 business unit using natural flavors and
botanical extracts.
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 superior in
quality, flavor and taste to competitive extracts. Hauser
produces approximately fifty flavor extract products.
Current extracts sold by Hauser include hibiscus, rosehips,
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. Other
extracts included in this product line are black pepper,
tarragon, basil, sage, thyme, oregano and chili pepper for use
in sauces, soups and stews, frozen entrees, juices, salsa and
dressings.
Natural Food Ingredients - Food ingredients are products which
perform a function in foods, such as preservatives,
stabilizers, antioxidants, and nutritional additives.
During fiscal year 1996, the Company began to manufacture
commercial scale quantities for inventory and introduced 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 of 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.
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.
Customer feedback indicates it solves oxidation and stability
problems of water-based food products.
Minimal revenue from natural food ingredients products was
recognized in fiscal year 1997, but shipments are expected to
increase in fiscal year 1998, 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
Hauser's Technical Services business unit includes Hauser
Laboratories and Shuster. Over 3,000 consulting and testing
projects for several thousand clients are performed annually.
Projects range from multi-year research, development, testing
and consulting programs for Fortune 100 companies, to simple
water tests for homeowners.
Technical Services generally works with clients in two ways.
First, the Company provides routine services to answer
customers' 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 provides product development and
research services on a negotiated fee basis. The Company's
business development staff screens the commercial potential of
many client sponsored programs, negotiates with 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.
The Company offers customers contract research services, as
well as process and product development, in a variety of
chemical, engineering, and food technology applications. These
services may include multiple areas of chemical technology,
including custom organic synthesis of new compounds, process
simulation, process improvement and scale-up, extraction and
purification technology, food technology, and chemical
modification of surfaces.
The Company provides specialized analytical services to
customers related to a variety of materials including
pharmaceuticals, botanicals and medicinals, paints and
coatings, plastics, petroleum products and metals. These
analyses may involve evaluation of the chemical and physical
properties of commercial products such as house paint,
polymeric resins, gasoline, crude oil, welded joints, pipe
failure, industrial equipment failures, and electronic
equipment component failures. The Company is qualified and
experienced in a broad range of product failure investigations
of a cross-disciplinary nature. The Company is involved in
environmentally 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).
Examples of Technical Services projects that became
significant alliances for other business units include
production of bulk paclitaxel for Bristol which grew out of
work for NCI under the Anti-Tumor Master Agreement, and
production of sanguinaria extract for Colgate Oral
Pharmaceuticals ("Colgate").
With the purchase of Shuster, the Company acquired a clientele
of nationally known companies in areas that are complementary
to the services provided by Hauser Laboratories. Areas of
expertise for Shuster include food product development,
household chemical formulation, nutritional supplement and
pharmaceutical assay and formulation, microbiological assay,
Food and Drug Administration ("FDA") labeling and a
significant number of related areas focused on consumer
products.
The Company believes there are opportunities to leverage the
compatibility and reputations of the Hauser Laboratories and
Shuster for increased profitability.
DISCONTINUED OPERATIONS
Secondary Forest Products -
Ironwood Evergreens: Reference is made to Part 2, Item 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-K Annual Report.
TRADE SECRETS, PATENTS, AND TRADEMARKS
Proprietary protection for the Company's technology and body
of knowledge is extremely important to Hauser's business. The
Company relies on patents, trade secrets, and confidentiality
agreements, as well as continuing technological innovation, to
develop and maintain its competitive position. Management
believes the Company has established a distinct competitive
advantage with its proprietary technologies and sophisticated
knowledge of the extraction and purification of natural
products. This expertise enables the Company to produce
certain products which management believes could not be
duplicated without the use of the Company's technologies. The
end products processed by the Company are typically at higher
yield, better quality and lower cost than those produced
solely by conventional methods.
The Company has developed numerous proprietary technologies to
process natural raw materials and produce specialized natural
products. The Company's expertise in analyzing, identifying
and measuring low concentration compounds, occurring in
natural materials and in process streams, is important to raw
material analysis, process development, and process and
quality control. Designing a particular process application
involves selecting the most appropriate processing steps,
determining the proper sequence, and establishing optimum
temperature, pressure, solvent and other parameters for each
process step. The Company develops variations of its processes
based on the nature of the raw material used and the
specifications of the desired product.
For example, the Company's Dynamic Liquid/Solid
Extraction[ServiceMark] (DL/SE[ServiceMark]) isolation
process, typically the first step, is particularly effective
at producing liquid extracts from solid natural materials,
such as roots, bark, seeds and leaves. Relative to
conventional methods, DL/SE[ServiceMark] 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.
DL/SE[ServiceMark] can 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 Company's purification process, Liquid Liquid
Focusing[Service Mark] (LLF[ServiceMark]), is highly versatile
and can be used in place of more costly chromatography
methods. It is often the method of choice as the second step
in a process.
The Company has determined that it would be difficult to
adequately police a patent of certain of its proprietary
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 protects its proprietary technology and knowledge
through established security practices and confidentiality
agreements with employees, consultants, strategic industry
participants, and technical advisors. Few individuals within
the Company possess a full working knowledge of these
processes, although a somewhat larger number of key employees
and several former employees have some working knowledge of
various aspects and applications of these processes. Joint
development agreements and consultant relationships generally
allow only limited access to Company information, which is
protected through confidentiality agreements with the parties
involved. Management recognizes that disputes could arise as
to proprietary rights should technological information,
independently developed by sponsors or consultants, be applied
to Company projects.
There can be no assurance that confidentiality agreements or
other procedures will provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or
disclosure of such information. However, in the past, the
Company has vigorously defended protection of its trade
secrets through the court system, both Federal and State, and
believes that it has proven by this means that the Company has
viable protectable trade secrets as defined by the Colorado
Uniform Trade Secrets Act, C.R.S. Sect. 7-74-101 et seq. Two
such cases, now settled, involved the alleged dissemination to
unauthorized persons, of Hauser's proprietary process for the
extraction and purification of paclitaxel. In addition, there
are 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 technological knowledge
relating to the extraction and purification of natural
products, management believes that, although the loss of trade
secret or confidential status of some portions of its
technology or processes could affect it materially and
adversely, it would not eliminate the Company's ability to
remain competitive.
Patents: Hauser patents technology when appropriate to obtain
long-term protection. The Company owns patents for proprietary
chemical substances, composition of matter, and manufacturing
processes. In addition, many patents are still pending.
Trademarks and Servicemarks: The Company has several
trademarks and servicemarks either registered or pending,
including Certified Assay[TradeMark],
StabilEnhance[TradeMark], NatureEnhance[TradeMark],
RoseOx[TradeMark] and RoseOx 660[TradeMark]. The servicemark
"Hauser" has been registered to the Company.
SEASONAL ASPECTS OF THE COMPANY'S BUSINESS
There are no significant seasonal aspects to the Company's
business. However, the Company has experienced seasonality in
the past in its natural flavor extracts product line primarily
in advance of the demand for summer beverages in which most of
that line's products are used. The seasonality of this one
product line from the Natural Ingredients business unit has no
material impact on the Company's combined operations.
INVENTORY AND SOURCES AND AVAILABILITY OF RAW MATERIALS
Significant amounts of certain raw materials are purchased
into inventory during specified harvest seasons in order for
the Company to meet future production schedules. Through the
summer of 1996, the Company harvested bark from Pacific yew
tree for use in the production of bulk paclitaxel. Hauser is
no longer harvesting bark, as the production process to
manufacture bulk paclitaxel is being modified to use a
different biomass derived from cultivated sources.
During fiscal 1997, the Company completed the extraction of
paclitaxel from its remaining bark inventory and will complete
the purification process during fiscal 1998. This will provide
finished goods inventory of bulk paclitaxel to satisfy
expected customer demand for the next two to three years.
Management believes that this will also give the Company
adequate time to complete necessary modifications for the
extraction and purification of cultivated yew trees for future
production.
In addition, the Company purchases raw materials for its
natural ingredients business when the raw material is
available for harvest. This may be well in advance of when
production needs will require the material to fulfill customer
demands.
Raw materials essential to Hauser's natural ingredients
business unit are generally readily available from multiple
sources. Any curtailment in the availability of such raw
materials could be accompanied by production or other delays
and increased raw material costs, with consequent adverse
effects on Hauser's business and results of operations.
Substantially all such materials are obtainable from a number
of sources so that the loss of any one source of supply should
not have a material adverse effect on the Company.
However, the Company has contracted with several nurseries for
the planting and harvesting of cultivated yew trees for use in
the production of paclitaxel. The loss of any one of these
suppliers could adversely affect the future operations of the
Company.
BACKLOG
Reference is made to Part 2, Item 7 Management's Discussion
and Analysis of Financial Condition and Results of Operations
of this Form 10-K Annual Report.
RENEGOTIATION OF GOVERNMENT CONTRACTS
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts at the
election of the government.
CUSTOMERS AND COMPETITION
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.
Pharmaceuticals
For discussion of the Company's two contracts to supply bulk
paclitaxel, reference is made to Part 2, Item 7 Management's
Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-K Annual Report.
Bristol holds 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, each ending in December, 1997. This
protection falls under the Drug Price Competition and Patent
Term Restoration Act of 1984 ("Waxman-Hatch Act"). This
limited exclusivity provides Bristol 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 paclitaxel final product
which is produced at its facility in Ireland. Many other
companies, including the Company and AHP, are currently poised
to enter the U.S. and worldwide paclitaxel market when
Bristol's exclusive rights expire.
As discussed in Item 3 Legal Proceedings of this Form 10-K
Annual Report, Bristol has named the Company and Yew Tree in a
lawsuit, alleging patent infringement in Europe. Bristol has
also aggressively applied for and been granted patents related
to paclitaxel-based treatments in the United States of
America. Such actions by Bristol could substantially reduce
the market for the Company's paclitaxel-based products. The
Company believes that these actions by Bristol will not be
successful, and intends to devote significant resources to
ensuring that this market opportunity can be realized. This
effort is expected to be substantial and may result in the
expenditure of significant Company resources. If the Company
is not successful in these efforts, the inventory of
paclitaxel valued by the Company as of April 30, 1997 at
$14,372,000 may be subject to significant revaluation.
Many of the competitors of the Company's pharmaceutical
business unit 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.
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
approval.
Pharmaceuticals - Completed Projects:
Sanguinaria - During fiscal 1995, Hauser announced that it had
received purchase orders from Colgate to produce sanguinaria
extract, a 100% natural antimicrobial in Colgate's
Viadent[Registered Trademark] toothpaste and oral rinse
products. Under the agreement, Hauser produced sanguinaria
over a 15 month period. Hauser produced the sanguinaria in the
original Viadent[Registered Trademark] products in 1984, when
they were first introduced by Vipont Pharmaceuticals. 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
Trademark] 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.
The Company completed its production of sanguinaria extract
for Colgate during the third quarter of fiscal 1997. The
expiration of this contract did not and will not have a
material impact on the operations of the Company
Pharmaceuticals - Significance of Dependence Upon a Few
Customers:
Dependence upon one or several customers has material
significance only to the Company's Pharmaceuticals business
unit.
AHP: Hauser believes that, through its agreement with AHP, the
Company will be able to take advantage of AHP's expertise in
clinical testing, sales, marketing and distribution for the
Company's paclitaxel products. There can be no assurance,
however, that AHP will succeed in obtaining the necessary
regulatory approvals to market paclitaxel in the United States
or elsewhere, although approval has been obtained to sell
generic paclitaxel in Canada as of July 8, 1997. In addition,
there can be no assurance that AHP will market paclitaxel
successfully. In that event, loss of revenues and royalties
from the AHP agreement may have a material adverse effect on
Hauser. In addition, while AHP has purchased minimum
quantities of bulk paclitaxel from the Company as required in
the contract, AHP has no obligation to purchase additional
product from Hauser.
Yew Tree: There can be no assurance that Yew Tree will succeed
in obtaining the necessary regulatory approvals to market
paclitaxel in Europe, or elsewhere, or that they will market
paclitaxel successfully. In that event, loss of revenues from
the Company's Yew Tree agreement might have a material impact
on Hauser's operations. Reference is made to Item 3 Legal
Proceedings of the Form 10-K Annual Report.
Natural Ingredients
Nutraceuticals - Hauser's strongest competition in the
nutraceuticals arena comes from Europe, in particular Indena
Pharmaceuticals, Madaus, Muggenburg, Schwabe, and Finzelburg.
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.
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 and that the Company can be a strong competitor in
this market now and in the foreseeable future. However,
management is unable to precisely predict the amount of future
revenues from these nutraceutical products.
Natural Flavor Extracts - In April 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 are
now marketed under Hauser's brand name NaturEnhance[TradeMark]
Flavor Extracts. Tastemaker has continued to purchase Hauser's
natural flavor extracts for use in its flavor compounds. The
Company is marketing its flavor extracts directly to flavor
houses, such as Tastemaker, as well as to food and beverage
companies that are former customers of the strategic alliance.
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.
Natural Food Ingredients - 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.
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. 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 technologies, as
well as its ability to implement expanded production plans.
RESEARCH AND DEVELOPMENT
A key element in Hauser's business strategy is to identify and
develop commercial opportunities from ideas generated both
through its internal research and development ("R&D") and
through its consulting and contract R&D operations.
Management believes that certain opportunities merit internal
funding. These research and development efforts are generally
devoted to five principal areas: (1) development of new
technology; (2) application of the Company's processing
technology to new products; (3) improvement of existing
processes; (4) semi-synthetic preparation of existing and new
biologically active compounds; and (5) development of viable
alternate raw materials for natural products extraction and
purification. Recent efforts in these areas have generated new
products, such as rosemary antioxidants, and improved
processes to manufacture paclitaxel from cultivated sources.
Hauser also offers consultation and contract R&D in the areas
of product purification and isolation, product development,
and process development and optimization. The Company is
currently active in supporting the drug discovery and drug
development efforts of its customers in the pharmaceutical
industry. The Company also provides contract R&D for customers
in the flavors and cosmetic industries. Management believes
that such endeavors may provide Hauser with future
manufacturing opportunities.
The Company's internally funded research and development
expenditures during fiscal 1997, 1996, and 1995, were
approximately $2.2 million, $2.2 million, and $2.4 million
respectively. Hauser's research and development activities
were partially funded by AHP during fiscal 1995. Gross
research costs, which include costs related to work for AHP
under the R&D Agreement were approximately $2.6 million in
fiscal 1995. During fiscal 1997 and 1996 customer-sponsored
R&D costs were approximately $760,000 and $417,000,
respectively.
The Company intends to continue actively pursuing research and
development efforts and these costs are likely to increase in
future periods.
GOVERNMENT REGULATIONS
The Company's business is 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 U.S. Environmental Protection Agency ("EPA") with
respect to the environment; by the U.S. Bureau of Alcohol,
Tobacco and Firearms with respect to alcohol used in flavors
and research; by the Colorado Department of Public Health and
Environment, and the regulations established by the U.S.
Departments of Interior and Agriculture to manage and protect
wildlife and forest resources, including the Pacific yew tree.
The FDA, the EPA, the Departments of the Interior and
Agriculture and other governmental agencies may in the future
change 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.
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.
Environmental Regulations - Because of 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
and Best Achievable Control Technology, 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.
Bureau of Land Management and U.S. Department of Agriculture
Forest Service Regulations - Between 1990, and the summer of
1996, the Company harvested bark from the Pacific yew tree for
use in the production of bulk paclitaxel. 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. 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.
Many plants are considered sensitive, threatened, or
endangered.
The Company completed its last harvest of yew bark in the
summer of 1996. In the future, raw materials for production of
bulk paclitaxel will be derived from cultivated sources.
FDA Regulations:
Pharmaceuticals
Paclitaxel: To market and sell paclitaxel, AHP must
demonstrate that the Company manufactures paclitaxel according
to current Good Manufacturing Practices ("GMP"). The FDA's GMP
regulations require, among other things, that the Company
comply with certain minimum requirements in the facilities,
methods, 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 with the FDA "Drug Master Files" which
describe the Company's manufacturing processes. Each Drug
Master File is kept confidential between Hauser and the FDA,
allowing the Company to keep its manufacturing processes
proprietary. As long as the Company is supplying bulk
paclitaxel and other bulk pharmaceuticals 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. This
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.
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 for generic drugs undergoing market approval before
the FDA. The Abbreviated New Drug Application ("ANDA")
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 ANDA
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 subject to infringement.
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 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.
Natural Ingredients
Nutraceuticals: Nutraceutical products fit into the FDA
product category of "Dietary Supplements". This 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
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 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 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.
Food Ingredients and Flavor Ingredients: 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 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.
PRODUCT LIABILITY INSURANCE
The testing and sale of the Company's products include an
inherent risk that product liability claims may be asserted
against the Company. In particular, the pharmaceutical
industry has experienced increasing difficulty 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 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.
EMPLOYEES
As of April 30, 1997, the Company employed 314 regular
full-time employees.
Of that total, (excluding Shuster), 54 employees were involved
with administrative, financial and marketing functions, 55
were involved in Technical Services, 94 were involved in
processing/sourcing of natural products, and 22 were with
research and development.
Shuster employed 18 people in administration, financial and
marketing functions, 36 in Technical Services, 17 in
processing/sourcing, and 18 in research and development.
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,
and/or, 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.
In July 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 Hauser Laboratories.
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.
During fiscal 1997, the Company obtained a revolving bank line
of credit with a bank for $8,000,000. Under the terms of the
loan agreement, all assets of the Company, with the exception
of intangibles, are secured by the bank.
Through its 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
On April 28, 1997, an action was filed in the Netherlands at
the District Court in The Hague, against Yew Tree, its
affiliated companies, and Hauser (collectively, "Yew Tree"),
by Bristol, a paclitaxel competitor. The statement of claim
filed by Bristol alleges that the defendants, by offering and
delivering Yewtaxan (the active substance paclitaxel
manufactured by Yew Tree) are guilty of indirect patent
infringement of a European patent acquired by Bristol on May
14,1997, entitled "Products containing taxol for use in cancer
therapy". The patent was granted for 17 countries in the
European Union. Bristol seeks an order to restrain Yew Tree
from selling Yewtaxan in the Netherlands where the Bristol
patent is granted.
The Company is mentioned in the action as the supplier to Yew
Tree. In response to the current litigation, the Company has
retained legal counsel in the Netherlands. After review of the
Bristol patent, legal counsel has concluded that infringement
does not exist. In conjunction with Yew Tree and its
affiliates, the Company intends to vigorously defend this
litigation and believes that several meritorious defenses to
the claims exist. No assurance can be given that the Company
or Yew Tree will be successful in their defense. If Bristol is
successful in obtaining an injunction against Yew Tree and the
Company which prohibits Yew Tree from selling Yewtaxan, the
Company's sales of bulk paclitaxel to Yew Tree for treatment
of cancer patients and the Company's results of operations
will be materially adversely affected. The suit may also
impact the Company's results of operations in terms of legal
fees and costs for defending the claims and the loss of
management time needed to deal with the suit.
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 fiscal year ended April 30, 1997.
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>
High Low
<S> <C> <C>
Fiscal 1998
First Quarter through May 31, 1997 6.56 6.00
Fiscal 1997
First Quarter through July 31, 1996 8.00 5.63
Second Quarter through October 31, 1996 7.13 5.50
Third Quarter through January 31, 1997 7.00 5.38
Fourth Quarter through April 30, 1997 7.88 6.38
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
</TABLE>
As of April 30, 1997, there were approximately 682 holders of
record of the Company's 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, 1993, 1994, 1995,
1996 and 1997.
<TABLE>
Year Ended April 30,
1997 1996 1995 1994 1993 1992
Statements of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Natural product processing $16,190,979 $ 8,123,760 $11,460,116 $57,481,911 $57,117,201 $23,121,746
Technical services 9,034,787 9,315,672 3,796,559 2,902,546 2,150,454 2,479,493
Total revenues 25,225,766 17,439,432 15,256,675 60,384,457 59,267,655 25,601,239
Cost of revenues 21,310,463 18,459,170 12,580,463 36,399,299 42,029,501 18,838,090
Gross profit (loss) 3,915,303 (1,019,738) 2,676,212 23,985,158 17,238,154 6,763,149
Operating expenses 9,956,699 9,562,314 7,686,276 9,076,719 5,060,283 2,421,752
Income (loss) from operations (6,041,396) (10,582,052) (5,010,064) 14,908,439 12,177,871 4,341,397
Other income (expense):
Interest income 528,424 1,047,734 1,857,406 1,231,204 975,485 705,202
Interest expense (18,947) (40,738) (42,667) - (10,637) (43,558)
Writedown of investment (1,000,000) - - - -
Total other income (expense) 509,477 6,996 1,814,739 1,231,204 964,848 661,644
Income (loss) from continuing
operations before provision
for income taxes (5,531,919) (10,575,056) (3,195,325) 16,139,643 13,142,719 5,003,041
Benefit (provision)
for income taxes 1,628,993 4,134,812 1,246,666 (5,818,000) (4,997,000) (1,976,000)
Income (loss) from continuing
operations (3,902,926) (6,440,244) (1,948,659) 10,321,643 8,145,719 3,027,041
Loss from discontinued
operations (2,628,610) (1,296,092) (748,491) - - -
Net income (loss) $(6,531,536) $(7,736,336) $(2,697,150) $10,321,643 $ 8,145,719 $ 3,027,041
Income (loss) per share from
continuing operations $ (0.38) $ (0.62) $ (0.19) $ 0.98 $ 0.80 $ 0.31
Income (loss) per share from
discontinued operations (0.25) (0.13) (0.07) - - -
Net income (loss) per share $ (0.63) $ (0.75) $ (0.26) $ 0.98 $ 0.80 $ 0.31
Weighted average number of
shares outstanding 10,389,111 10,344,169 10,478,545 10,504,075 10,019,287 9,846,309
As of April 30,
1997 1996 1995 1994 1993 1992
Balance Sheet Data:
Working capital $21,162,501 $32,054,242 $34,403,946 $37,656,042 $25,389,316 $26,905,009
Property and equipment, net 23,186,057 24,605,560 25,128,717 25,751,356 21,056,665 3,279,150
Total assets 66,797,878 74,410,380 82,575,167 84,568,740 73,565,844 45,634,170
Long-term debt 121,764 130,271 111,078 - - 69,911
Stockholders' equity 63,691,554 70,183,619 77,391,459 80,770,038 69,714,161 42,826,101
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
The table below shows the percentage of total revenues for
each major category on the Statement of Operations (on the
left) and the percentage change from the prior fiscal year (on
the right).
<TABLE>
Percent of Revenues Percent change
Year ended April 30, Year ended April 30,
1997 1996 1995 1997 1996
Revenues:
<C> <C> <C> <S> <C> <C>
64.2% 46.6% 75.1% Natural product processing 99.3% -29.1%
35.8% 53.4% 24.9% Technical services -3.0% 145.4%
100.0% 100.0% 100.0% Total revenues 44.6% 14.3%
15.5% -5.8% 17.5% Gross profit (loss) 484.0% -138.1%
8.9% 12.4% 15.5% Research and development 3.9% -8.6%
6.4% 6.7% 3.4% Sales and marketing 38.8% 122.8%
24.2% 35.8% 31.5% General and administrative -2.3% 29.9%
- -23.9% -60.7% -32.8% Loss from operations -42.9% 111.2%
Loss from continuing operations
- -21.9% -60.6% -20.9% before taxes -47.7% 231.0%
- -15.5% -36.9% -12.8% Loss from continuing operations -39.4% 230.5%
- -10.4% -7.4% -4.9% Loss from discontinued operations 102.8% 73.2%
- -25.9% -44.4% -17.7% Net loss -15.6% 186.8%
</TABLE>
The Company realized significant financial performance
improvement in the year ended April 30, 1997. Compared to the
prior fiscal year, total revenues increased almost 45%, gross
margin increased from negative $1,019,738 to positive
$3,915,303, total operating expenses increased only 4% despite
added investment in sales and marketing expenses, and the
operating loss declined almost 43%.
These dramatic improvements were the result of the Company's
efforts to rebuild its market base for paclitaxel products,
increase its presence in the natural ingredients markets, and
maintain its strength in providing technical services to
clients. Two important contracts were secured during fiscal
1997 that helped to solidify the Company's position. First, on
November 7, 1996, the Company signed a contract with Yew Tree
of Haarlem, Netherlands. Yew Tree is jointly owned by the
Norwegian pharmaceutical company, Nycomed ASA and the Dutch
OPG group. The contract is an agreement for the Company to
supply GMP (Good Manufacturing Practices) bulk paclitaxel for
use in Europe and Eastern Europe over a three year period. The
value of the contract is estimated to be $11,000,000.
Shipments of bulk paclitaxel to Yew Tree commenced during the
quarter ended January 31, 1997. Reference is made to Part 1,
Item 3 Legal Proceedings of this Form 10-K Annual Report.
Second, 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. The Company began shipping product under this
contract during the third quarter of fiscal 1997.
The Company was not profitable in fiscal 1997, although the
loss from continuing operations improved by 39% over the
previous fiscal year. Management has completed operating plans
for fiscal year ended April 30, 1998 and believes that the
Company can attain break-even results in the new fiscal year,
based upon achieving certain sales goals and the continuation
of cost controls; however, there can be no assurance of when
profitability will again be realized.
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. Revenues for Ironwood were $2,670,389 and
$8,225,582 in the fiscal years ended April 30, 1997 and 1996,
respectively.
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 AHP, formerly American Cyanamid Company,
whereby the Company will supply bulk paclitaxel to AHP. On
that same day, the Company and AHP 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 AHP. This program, and its associated
funding, ended in May 1996. The expiration of the R&D
Agreement did not have a material impact on the financial
position or operations of the Company. The R&D Agreement
called for the two companies to cooperate in a mutually
exclusive manner in a research and development program funded
by AHP 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. AHP had the
right to review any products derived by the Company from
naturally or synthetically produced taxanes during the one
year period after expiration of the R&D Agreement (May, 1997).
No products have been identified for development by the
parties at this time.
The Company has been supplying bulk paclitaxel to AHP on a
two- part formula price basis which includes an initial
minimum payment upon shipment of the bulk paclitaxel and a
subsequent final payment, in the form of a royalty, when AHP
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
minimum payments of approximately $9,000,000 during the first
three years (ending August, 1997). The minimum aggregate
payments are nonrefundable subject only to traditional product
warranty criteria. AHP is not required to purchase additional
product after August, 1997.
The Supply Agreement has a ten year term which can be renewed
by AHP for an additional ten year period. Either company 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 contract years, AHP 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 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 AHP from developing, manufacturing or
selling the finished product; (iv) a U.S. or European patent
issues with claims which materially impact AHP's marketing
activities; or (v) the commercial viability of the finished
product deteriorates so that AHP cannot reasonably expect to
profitably capture more than a designated portion of the
defined taxane market. AHP's $1 million 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 contract also called for advance purchase payments
totaling 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 AHP as royalties 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. The Company has accounted for these advance
payments as customer deposits on the balance sheet.
AHP 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.
During fiscal 1997, the Company sold bulk paclitaxel to AHP
for its development needs, including final product
formulations and clinical trials. On July 8, 1997, the Company
announced that AHP, through its majority owned subsidiary
Immunex Corporation ("Immunex"), had received approval to sell
generic paclitaxel in Canada. This marked the first approval
in North America for a generic form of the paclitaxel and is
the first approval under the Company's ten-year agreement with
AHP. This approval provides the Company the possibility of
realizing royalty income depending upon the success of
Immunex's marketing efforts in Canada. Management does not
expect royalty income to be significant in fiscal 1998.
During the first quarter of fiscal 1997, AHP notified the
Company of its decision to maintain exclusivity of the supply
of paclitaxel from Hauser in the United States and Canada. In
addition, AHP released its exclusive supply position in the
rest of the world.
On November 7, 1996, the Company signed a contract with Yew
Tree to supply GMP bulk paclitaxel for use 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 the
Company's existing obligation to supply paclitaxel to AHP in
Europe and Eastern Europe, which obligation is pursuant to the
Company's existing contract. The European firm intends to
purchase from the Company all supplies of GMP bulk paclitaxel
for its total market needs in Europe. Reference is made to
Part 1, Item 3 Legal Proceedings of this Form 10-K Annual
Report.
The Company completed its production of sanguinaria extract
for Colgate during the third quarter of fiscal 1997.
Sanguinaria extract, a natural antimicrobial, is the key
ingredient in Colgate's Viadent[Registered Trademark]
toothpaste and oral rinse products. The expiration of this
contract did not and will not have a material impact on the
operations of the Company.
NATURAL INGREDIENTS
Nutraceuticals - In the fiscal year ended April 30, 1997,
sales of nutraceutical products were $4,533,350, and shipments
were made to a variety of customers. This represents a 464%
increase over nutraceuticals revenues in 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 D&F Industries, a manufacturer of vitamin and food
supplement products. The value of this contract is estimated
to be $12,700,000. The Company has granted this customer
certain rights to use the RoseOx[TradeMark] and RoseOx
660[TradeMark] trademarks for use in the nutraceutical dietary
supplement and cosmetic markets. The Company began shipping
product under this contract during the third quarter of fiscal
year 1997.
Natural Flavor Extracts - The Company manufactures, markets
and sells natural flavor extracts. The extracts are marketed
under the Company's brand name NaturEnhance[TradeMark] 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 leader in the
development, manufacture and sales of natural food
ingredients.
For the past two years, the Company engaged in process
development efforts to produce natural beta carotene, 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
("BetaPharm") with Cyanotech, Inc. ("Cyanotech") 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 to apply
its resources to its own proprietary products. Pursuant to the
terms of the joint venture, the Company could exercise its
option by March 31, 1997 to purchase Cyanotech's exclusive,
perpetual, royalty-free, worldwide license of the Cyanotech
technology 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 decided in March, 1997 not to exercise the option
and is considering opportunities to sell or license its
technology created during the natural beta carotene project.
Minimal revenue from natural food ingredients products was
recognized in fiscal year 1997, but shipments are expected to
increase in fiscal year 1998 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 a
decline in revenue in fiscal 1997 of about 3% compared to
fiscal 1996, primarily due to the loss of a major customer of
Shuster. Management believes that demand for technical
services provided by the Company will continue and expects
this service group 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, a
consumer research and development firm and contract laboratory
with headquarters in the Boston area and another facility in
the Atlanta area, has developed a reputation for delivering
high quality services over the past forty years.
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 fiscal 1997,
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 unpredictable. Shipments of certain
expected tropical greens products were delayed and, therefore,
expected sales levels were not attained 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.
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 year ended April 30,
1997 include a non- recurring divestiture of Ironwood
Evergreens.
The Company received cash of $250,000, a promissory note of
$400,000 and a basic earnout of no more than $550,000. The
earnout is based upon 75% of the buyer's net cash flow, if
any, derived from the business for the four year period ending
December 31, 2000. An additional earnout of 5% of the excess
(if any) of net cash flow over the projected net cash flow in
the buyer's five year plan is available to the Company. The
maximum additional earnout is $400,000. The Company has not
earned any amounts available under either the basic or
additional earnout.
RESULTS OF CONTINUING OPERATIONS:
REVENUES. A breakout of the Company's revenues by product and
service groupings for its continuing operations is as
follows:
<TABLE>
Year ended April 30,
1997 1996 1995
<S> <C> <C> <C>
Pharmaceuticals $ 9,882,924 $ 5,481,279 $ 9,930,085
Natural ingredients products (includes nutraceuticals,
natural flavor extracts and food ingredients) 6,308,055 2,642,481 1,530,031
Technical services (includes chemistry and
engineering services and Shuster) 9,034,787 9,315,672 3,796,559
$25,225,766 $17,439,432 $15,256,675
</TABLE>
Total revenues increased almost 45% to $25,225,766 in fiscal
1997 from $17,439,432 in fiscal 1996 due to increased revenues
from the sales of pharmaceutical and nutraceutical products.
The increase of total revenues in fiscal 1996 of 14% over
fiscal 1995 was due primarily to an increase in technical
services revenues as a result of the acquisition of Shuster
and an increase in natural ingredients revenues with the
introduction of nutraceutical products, offset by decreased
sales of bulk paclitaxel due to the cessation of the amended
contract with Bristol.
Pharmaceuticals:
Revenues from pharmaceuticals products in fiscal 1997
increased more than 80% compared to fiscal 1996. This was due
to increased sales of paclitaxel to two new customers. The
Company signed an agreement with Yew Tree in November, 1996 to
supply bulk paclitaxel over a three year period and began
shipments to this customer during the third quarter ended
January 31, 1997. In addition, the Company shipped bulk
paclitaxel to another customer during fiscal 1997 for use in
its development efforts. The Company does not have a long-term
supply agreement with this customer and future sales of bulk
paclitaxel to this customer are not certain. Total revenues
from bulk paclitaxel and taxanes were $9,142,913 in fiscal
1997, an approximately 101% increase over revenues of
$4,547,819 in fiscal 1996 from the same products.
The Company recognized revenues of $740,011 for the shipment
of sanguinaria extract to Colgate during fiscal 1997 as
compared to revenues of $933,460 in fiscal 1996. Fiscal 1997
shipments of sanguinaria extract completed the requirements of
the Company's contractual obligations with Colgate, and the
Company does not expect additional orders in the foreseeable
future. The expiration of this contract did not and will not
have a material impact on the operations of the Company.
Revenues from pharmaceuticals products in fiscal 1996
decreased 45% from fiscal 1995. This decrease was
substantially the result of lower bulk paclitaxel revenues due
to the cessation of the amended contract with Bristol. Also
included in fiscal 1995 revenues was $1,000,000 from American
Home Products 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 payment was received in June,
1994. The Company had no obligation under any circumstances to
repay any of the $1,000,000 payment received.
Natural ingredients:
Natural ingredients product revenues increased almost 139% in
fiscal 1997 to $6,308,055 from $2,642,481 in fiscal 1996. The
increase is primarily attributable to success in selling
nutraceutical products as revenues were $4,533,350 in fiscal
1997, an increase of $3,730,665 from revenues of $802,685 in
fiscal 1996. Revenues from the sales of natural flavor
extracts in fiscal 1997 were $1,700,945, a 6% decrease from
revenues of $1,815,796 in fiscal 1996. This small decrease was
primarily due to the shift in marketing activities from the
Company's reliance on Tastemaker in fiscal 1996 to its own
internal sales efforts. In addition, the Company sold food
ingredients products of $73,760 in fiscal 1997 compared to
revenues of $24,000 in fiscal 1996.
Natural ingredients product revenues in fiscal 1996 of
$2,642,481 increased almost 73% over fiscal 1995 primarily
because of the introduction of nutraceuticals products in
fiscal 1996 and an increase in natural flavor extract
revenues. Revenues from the sale of nutraceutical products in
fiscal 1996 were $802,685, the first year such revenues were
recognized. Revenues from natural flavor extracts in fiscal
1996 were $1,815,796 compared to $1,480,031, an increase of
$335,765, primarily due to increased sales to the beverage
industry. Finally, revenues from the sale of food ingredients
were $24,000 and $50,000 in fiscal 1996 and fiscal 1995,
respectively.
Technical Services:
Technical services revenues were $9,034,787 fiscal 1997
compared to $9,315,672 in fiscal 1996, a decrease of about 3%.
This decrease was due primarily to the loss of a major
customer of Shuster in fiscal 1997.
Technical services revenues of $9,315,672 in fiscal 1996 were
$5,519,113 higher than revenues in fiscal 1995 primarily
because of the acquisition of Shuster which occurred in July,
1995. Shuster revenues in fiscal 1996 were $4,530,569. The
remaining increase of $988,544 in fiscal 1996 was the result
of a redirection and re-emphasis of efforts to revenue
producing activities for outside clients including the
expansion of laboratory services into the natural products
market.
GROSS PROFIT (LOSS). Gross margin for the natural products
industry segment in fiscal 1997 was 16.5% of total revenues as
compared to negative 40.9% in fiscal 1996. The improvement is
primarily due to the sales of paclitaxel to two new customers
in fiscal 1997. Offsetting this were gross margins on
paclitaxel sales to AHP which are currently low in
anticipation of future royalties. In addition, the Company
recognized increased sales of nutraceuticals products in
fiscal 1997 which generated increased gross margins over the
previous year, but the margins from these sales vary greatly
because of product mix. The Company recognized modest gross
margins from the sale of nutraceutical products during fiscal
1997 and is investigating methods to improve these margins. In
addition, the Company is still incurring high overhead costs
in relation to its current sales levels in anticipation of
growth in other product lines. The negative gross margin of
40.9% in fiscal 1996 was lower than gross margin of 18.7% in
fiscal 1995 because of the reduction of sales of bulk
paclitaxel as a result of the cessation of the amended
contract with Bristol.
Gross margin for technical services decreased in fiscal 1997
to 13% of revenues compared to 24% in the previous year. This
is the result of some project costs in fiscal 1996 which were
classified as research and development costs instead of cost
of sales, given the nature of the projects. Gross margin in
fiscal 1995 was 14% of revenues.
OPERATING EXPENSES. Research and development expenses were
$2,240,992 in fiscal 1997 compared to $2,157,708 in fiscal
1996, an increase of almost 4%. The increase in research and
development costs is related to various projects including
research in using cultivated yew trees as the next source of
paclitaxel and development of natural beta carotene. Research
and development costs were $2,359,961 in fiscal 1995. The
Company intends to actively continue research and development
efforts.
Sales and marketing expenses in fiscal years ending April 30,
1997, 1996, and 1995 were $1,619,937, $1,167,447 and $524,035,
respectively. The increase represents the Company's
accelerated efforts to market new products, particularly in
the areas of pharmaceuticals, 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 $6,095,770 in fiscal 1997, a 2%
decrease compared to general and administrative expenses in
fiscal 1996. The fiscal 1997 expense includes a charge of
$345,000 for the disposition of certain production facility
assets. Without this charge, general and administrative
expenses would have decreased from fiscal 1996 by almost 8%.
These decreases are the result of management's continued
efforts to reduce general and administrative costs where
appropriate.
General and administrative expenses in fiscal 1996 of
$6,237,159 were $1,434,879 higher than general and
administrative costs in fiscal 1995 primarily because of the
acquisition of Shuster.
INTEREST INCOME. Interest income was $528,424 in fiscal 1997
compared to $1,047,734 in fiscal 1996 and $1,857,406 in fiscal
1995. The decrease is due to less capital available for
investment.
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 and short-term
investments were $8,576,302 at April 30, 1997 compared to
$15,055,492 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, advances on growing contracts, and other general
working capital requirements. The Company has a revolving line
of credit totaling $8,000,000 which expires on June 30, 2000.
As of April 30, 1997, $8,000,000 was available for use under
this line of credit. Under the terms of the loan agreement,
all assets of the Company, with the exception of intangibles,
are secured by the bank. In addition, the Company has a lease
credit line with a bank of $564,000; as of April 30, 1997,
$500,000 was available for use under this line. Management
believes that current cash reserves and the revolving line of
credit are sufficient to meet the Company's short-term
liquidity needs. Further, management believes that funds
generated from business opportunities discussed earlier,
including the new contracts secured by the Company, will be
sufficient to meet the liquidity needs of the Company on a
long-term basis.
WORKING CAPITAL. Working capital as of April 30, 1997 was
$21,162,501 compared to $32,054,242 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
$1,486,249 as a result of the write-down related to the
discontinued operations of Ironwood.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in
fiscal 1997 totaled $2,794,209. This was primarily the result
of improvements to manufacturing equipment for the production
of nutraceuticals and food ingredients products.
BACKLOG. Backlog of unfilled purchase orders was $4,370,876 as
of April 30, 1997 compared to $2,270,620 as of April 30, 1996.
Backlog as of April 30, 1997 consists of unfilled purchase
orders for nutraceuticals and flavors 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-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
Independent Auditors' Report F-2
Consolidated Statements of Operations for the
years ended April 30, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of April 30, 1997
and 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended April 30, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the years
ended April 30, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements for the
years ended April 30, 1997, 1996 and 1995 F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hauser, Inc.:
We have audited the accompanying consolidated balance sheet of
Hauser, Inc. and its subsidiaries as of April 30, 1997, and
the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Hauser, Inc. and its subsidiaries as of April 30,
1997, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Denver, Colorado,
June 13, 1997.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Hauser, Inc.
(formerly Hauser Chemical Research, Inc.):
We have audited the accompanying consolidated balance sheet of
Hauser, Inc. (formerly Hauser Chemical Research, Inc.) and its
subsidiaries as of April 30, 1996, and the related
consolidated statements of operations, stockholders' equity
and cash flows for each of the two 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 these 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, the financial statements referred to above
present fairly, in all material respects, the financial
position of Hauser, Inc. (formerly Hauser Chemical Research,
Inc.) and its subsidiaries as of April 30, 1996, and the
results of their operations and their cash flows for each of
the two years in the period ended April 30, 1996, in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Denver, Colorado,
July 15, 1996.
<PAGE>
<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30,
1997 1996 1995
REVENUES:
<S> <C> <C> <C>
Natural product processing $16,190,979 $ 8,123,760 $11,460,116
Technical services 9,034,787 9,315,672 3,796,559
Total revenues 25,225,766 17,439,432 5,256,675
COST OF REVENUES:
Natural product processing 13,488,580 11,446,880 9,319,459
Technical services 7,821,883 7,012,290 3,261,004
Total cost of revenues 21,310,463 18,459,170 12,580,463
GROSS PROFIT (LOSS) 3,915,303 (1,019,738) 2,676,212
OPERATING EXPENSES:
Research and development 2,240,992 2,157,708 2,359,961
Sales and marketing 1,619,937 1,167,447 524,035
General and administrative 6,095,770 6,237,159 4,802,280
Total operating expenses 9,956,699 9,562,314 7,686,276
LOSS FROM OPERATIONS (6,041,396) (10,582,052) (5,010,064)
OTHER INCOME (EXPENSE):
Interest income 528,424 1,047,734 1,857,406
Interest expense (18,947) (40,738) (42,667)
Writedown of other investment _ (1,000,000) -
Total other income 509,477 6,996 1,814,739
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (5,531,919) (10,575,056) (3,195,325)
INCOME TAX BENEFIT 1,628,993 4,134,812 1,246,666
NET LOSS FROM CONTINUING
OPERATIONS (3,902,926) (6,440,244) (1,948,659)
DISCONTINUED OPERATION:
Loss from discontinued
operation, net of applicable
income tax benefit of $321,568,
$832,126 and $478,852,
respectively (528,464) (1,296,092) (748,491)
Loss on disposal of discontinued
operation, net of applicable
income tax benefit of
$1,283,386, $0 and $0,
respectively (2,100,146) - -
LOSS FROM DISCONTINUED OPERATION (2,628,610) (1,296,092) (748,491)
NET LOSS $(6,531,536) $(7,736,336) $(2,697,150)
LOSS PER SHARE:
Continuing operations $ (0.38) $ (0.62) $ (0.19)
Discontinued operation (0.25) (0.13) (0.07)
Net loss per share $ (0.63) $ (0.75) $ (0.26)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING: 10,389,111 10,344,169 10,478,545
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
April 30,
ASSETS 1997 1996
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $8,379,551 $7,428,752
Held-to-maturity investments 196,751 7,791,875
Accounts receivable, less allowance for
doubtful accounts:
1997, $359,632; 1996, $395,237 4,961,132 5,694,142
Income taxes receivable 1,445,046 2,665,464
Inventories, current 7,073,295 8,508,973
Prepaid expenses and other 406,325 290,599
Net deferred income tax assets 1,684,961 998,628
Net current assets of discontinued operation - 1,251,114
Total current assets 24,147,061 34,629,547
PROPERTY AND EQUIPMENT:
Land and buildings 7,418,526 7,264,294
Lab and processing equipment 29,513,011 27,647,235
Furniture and fixtures 4,459,006 4,157,320
Total property and equipment 41,390,543 39,068,849
Accumulated depreciation (18,204,486) (14,463,289)
Net property and equipment 23,186,057 24,605,560
OTHER ASSETS:
Goodwill, less accumulated amortization:
1997, $651,772; 1996, $368,318 2,182,791 2,466,245
Inventories, non-current 14,710,409 8,259,149
Other 2,571,560 1,147,054
Net long-term assets of discontinued operation - 3,302,825
TOTAL $66,797,878 $74,410,380
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,486,499 $ 517,040
Current portion of long-term debt 171,916 616,172
Accrued salaries and benefits 960,698 794,363
Deposits 200,000 174,372
Other accrued current liabilities 165,447 473,358
Total current liabilities 2,984,560 2,575,305
LONG-TERM DEBT 121,764 130,271
NET DEFERRED INCOME TAX LIABILITIES - 1,521,185
COMMITMENTS AND CONTINGENCIES (Notes 1 and 7)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares
authorized; shares issued: 1997, 10,419,028;
1996, 10,564,613 10,419 10,565
Additional paid-in capital 58,622,066 59,418,280
Treasury stock, at cost: 1997, 0 shares;
1996, 201,100 shares - (1,054,812)
Unrealized gain on available-for-sale investment,
net of income taxes 246,119 465,100
Retained earnings 4,812,950 11,344,486
Net stockholders' equity 63,691,554 70,183,619
TOTAL $66,797,878 $74,410,380
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(6,531,536) $(7,736,336) $(2,697,150)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,171,790 3,592,872 3,394,864
Provision for bad debt 105,000 322,673 119,473
Provision for excess inventories 562,057 - -
Loss on disposal of discontinued operation 3,383,532 - -
Loss on disposal of assets 344,255 176,004 916,931
Writedown of investment - 1,000,000 -
Deferred income tax (benefit) provision (2,412,827) (2,169,804) 686,186
Change in deposits and other (1,114,357) 125,569 64,351
Change in assets and liabilities, net of
effects from the purchase of Shuster
and Ironwood:
Accounts receivable 910,073 (613,343) 7,893,435
Income taxes receivable 1,220,418 (366,518) (1,650,116)
Inventories (5,305,498) (4,562,562) (8,625,332)
Prepaid expenses and other (111,692) (173,511) 92,046
Accounts payable 1,036,684 (670,272) 100,214
Other accrued liabilities (185,331) 167,517 40,904
Net cash (used in) provided by operating activities (3,927,432) (10,907,711) 335,806
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,729,671) (2,165,810) (3,963,216)
Purchase of Ironwood net assets - - (1,045,053)
Purchase of Shuster's common stock,
net of cash acquired - (3,317,919) -
Sale of Ironwood net assets 250,000 - -
Purchase of investments (293,865) - (12,267,757)
Maturity of investments 7,900,000 19,587,413 14,087,744
Net cash provided by (used in) investing activities 5,126,464 14,103,684 (3,188,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank lines of credit - - (1,301,408)
Proceeds from issuance of long-term debt 274,833 - -
Repayments of long-term debt and
capitalized leases (781,518) (45,791) (67,567)
Proceeds from issuance of common stock
and warrants 258,452 122,446 30,983
Purchase of treasury stock (88,750) (966,062)
Net cash used in financing activities (248,233) (12,095) (2,304,054)
Net increase (decrease) in cash and cash equivalents 950,799 3,183,878 (5,156,530)
Cash and cash equivalents, beginning of year 7,428,752 4,244,874 9,401,404
Cash and cash equivalents, end of year $ 8,379,551 $ 7,428,752 $ 4,244,874
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 18,947 $ 37,722 $ 42,667
Cash received during the year for income
taxes refunded $ 2,052,637 $ 2,415,450 $ -
Non-cash investing and financing activity:
Capital lease obligation incurred
through lease of lab and processing
equipment $ 64,538 $ - $ -
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, 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 Investment Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options 55,515 55 210,111 - - - - 210,166
Tax benefit from employee
exercise of stock options - - 48,286 - - - - 48,286
Change in unrealized gain
on available for
sale investment - - - - - (218,981) - (218,981)
Retirement of treasury
stock (201,100) (201) (1,054,611) 201,100 1,054,812 - - -
Net loss - - - - - - (6,531,536) (6,531,536)
BALANCE, APRIL 30, 1997 10,419,028 $10,419 $58,622,066 - $ - $ 246,119 $ 4,812,950 $63,691,554
</TABLE>
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED APRIL 30, 1997, 1996, and 1995
1. BUSINESS ORGANIZATION
Hauser, Inc. (the "Company"), a Colorado corporation, and its
100% owned subsidiaries, Shuster Laboratories, Inc. and Hauser
Northwest, 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, and contract research and development.
The Company's existing products are principally marketed to
the pharmaceutical, dietary supplements and food ingredients
industries.
Risks and Uncertainties - A significant portion of the
Company's resources are concentrated in the production of bulk
paclitaxel. The Company has exclusive relationships to sell
its paclitaxel with two companies, one for North America and
one for Europe. In addition, two other customers are currently
buying the Company's paclitaxel for sale in other countries.
Under the Waxman-Hatch Act, Bristol-Myers Squibb Company
("Bristol") has an exclusive right to sell TAXOL[Registered
TradeMark] in the United States, which expires on December 29,
1997. The Company has entered into paclitaxel supply
agreements with other pharmaceutical companies in anticipation
of Bristol's exclusive rights expiring in the Company's fiscal
year 1998. Subsequent to April 30, 1997, the Company's partner
received approval to sell generic paclitaxel in Canada. In
Europe, the Company's other partner has been approved to sell
paclitaxel in the Netherlands as an equivalent product, not a
generic product. Because of a relatively long production cycle
for paclitaxel, the Company has purchased and committed to
purchase significant raw materials and has committed
significant resources to process such raw materials in
anticipation of delivery of paclitaxel to the Company's
customers in the near future. At April 30, 1997, the Company
had recorded as inventory $14,372,000 of paclitaxel,
consisting both of in-process and finished product.
As discussed in Note 7, Bristol has named the Company and one
of its customers in a lawsuit, alleging patent infringement in
Europe. Bristol has also aggressively applied for and been
granted patents related to paclitaxel-based treatments in the
United States. Such actions by Bristol could substantially
reduce the market for the Company's paclitaxel-based products.
The Company believes that these actions by Bristol cannot be
sustained, and intends to devote significant resources to
defend its right to market its paclitaxel product in the
United States and Europe. If the Company is not successful in
these efforts, the recovery of its investment in paclitaxel
related assets may be significantly delayed.
Further, the Company's customers wishing to enter the market
for paclitaxel-based therapies must obtain proper regulatory
approval before they can formulate and sell the paclitaxel in
final form. Any delays in obtaining such approval will
similarly delay the Company's recovery of its investment in
its paclitaxel-based products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial
statements include those of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
Acquisitions - On May 1, 1994, the Company's wholly-owned
subsidiary, Hauser Northwest, Inc., 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.
On July 21, 1995, the Company acquired all of the stock of
Herbert V. Shuster, Inc. ("Shuster") for approximately
$3,959,515 in cash and $621,953 in notes plus a performance
based earnout for meeting certain milestones over the next
five years. The earnout will adjust the cost of the
acquisition once any portion of the payment becomes probable.
Shuster is a consumer research and development firm and
contract laboratory. Subsequent adjustments have increased the
purchase price by $146,008.
The net assets purchased from Shuster 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>
The following pro-forma unaudited consolidated results of
operations for the year ended April 30, 1996, have been
prepared assuming the Shuster acquisition occurred at the
beginning of the fiscal year. These pro-forma results have
been prepared for comparative purposes only and do not purport
to be indicative of results of operations which actually would
have resulted had the acquisition taken effect at the
beginning of the year.
<TABLE>
Year ended
April 30, 1996
<S> <C>
Revenues $ 18,429,018
Net loss $ (6,481,761)
Net loss per share $ (0.63)
</TABLE>
Discontinued Operations - On October 11, 1996, the Company
sold substantially all of the net assets of Ironwood for
$250,000 in cash, notes receivable of $150,000 and certain
performance-based earnouts. Net assets of the discontinued
operations consisted primarily of accounts receivable,
inventory, fixed assets and goodwill. Revenues of Ironwood
were $2,670,389, $8,225,582 and $7,738,404 in fiscal years
1997, 1996 and 1995, respectively.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of these
financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Cash and cash equivalents include
investments in highly liquid instruments with original
maturities of 90 days or less.
Inventories - Raw material, work in process, and finished
goods inventories, which include costs of materials, direct
labor and manufacturing overhead, are priced at the lower of
average cost or market. Writedowns for excess and obsolete
inventories are charged to expense in the period when
conditions giving rise to the writedowns are first recognized.
Non-current inventories represent raw materials and work in
process in various stages of completion in excess of shipments
expected to occur in the next fiscal year.
Inventories as of April 30 consist of the following:
<TABLE>
1997 1996
<S> <C> <C>
Raw materials and supplies $ 3,373,554 $ 7,257,465
Work in process 13,019,432 3,210,704
Finished goods 5,952,775 6,299,953
Total before valuation allowance 22,345,761 16,768,122
Less: valuation allowance (562,057) -
Total inventories 21,783,704 16,768,122
Less non-current inventories 14,710,409 8,259,149
Current portion of inventories $ 7,073,295 $ 8,508,973
</TABLE>
Investments - The Company accounts for debt securities for
which it has the positive intent and ability to hold to
maturity at amortized cost. Below is a table of
held-to-maturity investments.
<PAGE>
<TABLE>
April 30, 1997
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Issues
Maturities less than 1 year:
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 196,751 $ 2,827 $ - $ 199,578
</TABLE>
<TABLE>
April 30, 1996
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
</TABLE>
The Company accounts for equity securities that have readily
determinable values and debt securities that are
available-for- sale at quoted fair values. At April 30, 1997
and 1996, the Company had an equity investment with a cost of
$100,000 and a fair value of $502,966 and $862,500,
respectively. Unrealized gains are recorded in stockholders'
equity net of the income tax effect.
The Company also invests short-term excess cash in a bond
mutual fund which is considered to be a cash equivalent. At
April 30, 1997 and 1996, the funds had a quoted market value
of $4,005,191 and $4,466,397, respectively.
Other investments consist of 20% or less investments in non-
publicly traded companies and are accounted for at the lower
of cost or market. During fiscal 1996, the Company wrote down
their investment in a development stage company resulting in a
loss of $1,000,000. The investment was liquidated in the first
quarter of fiscal 1997.
Property and Equipment - Significant additions and
improvements are capitalized at cost, while maintenance and
repairs which do not improve or extend the life of the
respective assets are charged to expense as incurred.
Depreciation is recognized on a straight-line basis over the
following estimated useful lives:
<TABLE>
<S> <C>
Equipment, furniture and fixtures 2 - 15 years
Buildings 39 years
Leasehold improvements 5 - 10 years
</TABLE>
Impairment of Long-Lived Assets - The Company reviews its
long- lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable from future undiscounted cash flows.
Impairment losses are recorded for the difference between the
carrying value and fair value of the long-lived asset.
Goodwill - Goodwill resulting from acquisitions is stated at
cost, net of accumulated amortization, and is being amortized
using the straight-line method over an estimated useful life
of 10 years.
Revenue Recognition - Natural product processing revenues are
recognized when title and risk of ownership passes to the
customer which generally is upon delivery of processed
product. 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.
Research and Development - Research and development costs are
charged to expense as incurred.
Stock Based Compensation -The Company accounts for its stock
based compensation plans for employees under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25").
Earnings (Loss) Per Share - Earnings (loss) per share is
computed using the weighted average number of common and, if
dilutive, common stock equivalent shares outstanding during
the period. Common stock equivalents include stock options and
warrants. The Company uses the treasury stock method for
determining the effect of outstanding common stock equivalents
on earnings (loss) per share.
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS No. 128") establishes standards for
computing and presenting earnings per share. The Company is
required to adopt SFAS No. 128 for periods ending after
December 15, 1997. Management believes the adoption of SFAS
No. 128 will not have a material effect on previously reported
earnings per share amounts.
Fair Value of Financial Instruments - Due to the short-term
nature of the Company's debt, accounts receivable and other
financial instruments, the fair value of such financial
instruments approximates their carrying amount.
Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year presentation.
3. LONG-TERM DEBT
At April 30, 1997 and 1996, the Company's debt was $293,680
and $746,443, respectively, and consisted of capital lease
obligations and notes payable to Shuster employees as part of
the Shuster acquisition, with interest rates ranging from 5.5%
to 15.4%.
Future minimum payments for the years ending April 30 are as
follows:
<TABLE>
Notes payable Capital lease obligations
<C> <C> <C>
1998 $ 120,230 $ 61,182
1999 36,105 60,688
2000 1,000 30,316
Total $ 157,335 152,186
Less: interest (15,841)
Total $136,345
</TABLE>
At April 30, 1997 and 1996, property and equipment includes
items under capital lease with book values of $138,396 and
$205,403, respectively, and accumulated depreciation of
$85,208 and $77,341, respectively. Bank Line Of Credit - The
Company has an $8,000,000 bank line of credit with no
borrowings outstanding as of April 30, 1997. The line of
credit allows the Company to obtain advances or letters of
credit. Interest is payable monthly at the bank's prime rate
plus 0.75% (9.25% at April 30, 1997). The line of credit
expires June 30, 2000.
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.
In addition, the Company has a lease line of credit for
$564,000, of which $500,000 was available for use at April 30,
1997. The interest rate on the lease line is the bank's cost
of funds plus 2.5% (8.54% at April 30, 1997) and the line
expires on April 8, 2000.
4. STOCKHOLDERS' EQUITY
Non-Qualified Stock Options - The Company's 1987 Stock Option
Plan (the "1987 Plan") authorizes the granting of
non-qualified stock options for up to 718,720 shares of the
Company's common stock by Directors, employees, and
consultants. As of April 30, 1997, there were 685,244 shares
of common stock committed under this plan. Exercise terms,
ranging from one to five years for options granted under the
1987 Plan, are determined by the Board of Directors at the
time of grant. A summary of the status of the Company's 1987
Non-Qualified Stock Option Plan follows.
<TABLE>
FY 1997 FY 1996 FY 1995
Balance outstanding at
<S> <C> <C> <C>
beginning of fiscal year: 196,310 159,141 144,193
Granted 20,023 83,655 151,805
Exercised (44,012) (32,566) (18,607)
Canceled (7,650) (13,920) (118,250)
Outstanding at April 30 164,671 196,310 159,141
Exercisable (vested) at April 30 163,171 189,849 148,251
Weighted average exercise prices:
At beginning of period $ 4.92 $ 4.57 $ 7.02
At end of period $ 5.45 $ 4.92 $ 4.57
Exercisable at end of period $ 5.45 $ 4.91 $ 4.57
Options granted $ 6.44 $ 4.61 $ 5.42
Options exercised $ 3.70 $ 2.83 $ 1.52
Options canceled $ 4.39 $ 4.41 $ 9.32
Weighted average, fair value
of options granted during period $ 6.53 $ 5.21 $ 6.01
</TABLE>
<TABLE>
April 30, 1997
Options Outstanding
Weighted
Average Remaining Options Exercisable
Range of Exercise Exercise Contractual Weighted Average
Prices Shares Price Life (Yrs) Shares Exercise Price
<C> <C> <C> <C> <C> <C>
$3.71 - $4.80 42,760 $4.31 3.16 42,760 $4.33
$4.81 - $5.60 35,279 $5.21 3.22 33,779 $5.19
$5.61 - $6.00 71,332 $5.96 2.73 71,332 $5.96
$6.13 - $7.63 15,300 $6.80 4.32 15,300 $6.80
164,671 163,171
</TABLE>
Incentive Stock Options -The Company's 1992 Stock Option Plan ("1992
Plan") authorizes the granting of 700,000 shares of common stock to employees
at fair market value on the date of grant. As of April 30, 1997, there were
364,831 shares committed under this plan. Exercise terms, ranging from
one month to five years for options granted under the 1992 Plan, are
determined by the Board of Directors at the time of grant.
A summary of the status of the Company's 1992 Plan follows:
<TABLE>
FY 1997 FY 1996 FY 1995
<S> <C> <C> <C>
Balance Outstanding at beginning of fiscal year: 247,377 233,780 145,742
Granted 146,500 145,600 345,090
Exercised (11,503) (4,634) (300)
Canceled (47,160) (127,369) (256,752)
Outstanding at April 30 335,214 247,377 233,780
Exercisable (vested) at April 30 225,414 181,360 166,852
Weighted average exercise prices:
At beginning of period $ 5.87 $ 5.99 $ 10.53
At end of period $ 6.04 $ 5.87 $ 5.99
Exercisable at end of period $ 6.04 $ 5.99 $ 5.99
Options granted $ 6.27 $ 5.28 $ 6.05
Options exercised $ 5.98 $ 5.85 $ 8.94
Options canceled $ 5.86 $ 5.43 $ 8.65
Weighted average, fair value of options
granted during period $ 6.27 $ 5.28 $ 6.05
</TABLE>
<TABLE>
April 30, 1997
Options Outstanding Options Exercisable
Weighted
Average Remaining
Range of Exercise Contractual Weighted Average
Exercise Prices Shares Price Life (Yrs) Shares Exercise Price
<C> <C> <C> <C> <C> <C>
$4.38 - $5.22 11,500 $5.17 6.60 1,500 $4.33
$5.34 - $5.44 10,500 $5.35 5.85 2,900 $5.19
$5.63 - $6.00 255,414 $5.93 3.57 198,214 $5.96
$6.06 - $6.88 57,800 $6.83 5.11 22,800 $6.80
335,214 225,414
</TABLE>
Warrants - The Company has issued to consultants and
stockholders warrants for the purchase of common stock.
Exercise terms were determined by the Board of Directors at
the time of grant. During fiscal 1995 and 1996, no warrants
were issued. During fiscal 1997, 48,477 warrants were issued
at a weighted average exercise price of $6.03 and a grant date
fair value of $147,306. During fiscal 1996, 1,334 warrants
were exercised at $1.50. At April 30, 1997, 48,477 warrants
remained outstanding at $5.67 to $6.22 per warrant.
Valuation - The weighted average fair value of each option
grant or warrant has been estimated as of the date of grant
using the Black-Scholes option-pricing model using the
following assumptions.
<TABLE>
FY 1997 FY 1996
<S> <C> <C>
Dividend rate 0.00% 0.00%
Expected volatility 50.00% 55.00%
Risk-free interest rate 6.37% 5.98%
Expected life (in years) 5 5
</TABLE>
Using these assumptions, the fair value of the stock options
granted in fiscal 1997 and fiscal 1996 was estimated to be
approximately $292,509 and $296,516, respectively. Had
compensation cost been recorded based on the fair value of the
option or warrant grants, the Company's pro-forma net loss and
net loss per share would have been as follows for the years
ended April 30:
<TABLE>
FY 1997 FY 1996
Net loss from continuing
operations:
<S> <C> <C>
As reported $(3,902,926) $(6,440,244)
Pro-forma $(4,109,299) $(6,620,823)
Net loss from continuing
operations per common and
common equivalent share:
As reported $ (0.38) $ (0.62)
Pro-forma $ (0.40) $ (0.64)
</TABLE>
5. INCOME TAXES
Income tax expense (benefit) from continuing operations for
the years ended April 30, 1995, 1996 and 1997 is comprised of
the following components:
<TABLE>
Federal State Total
1995
<S> <C> <C> <C>
Current $ (1,932,852) $ - $ (1,932,852)
Deferred 863,186 (177,000) 686,186
Total $ (1,069,666) $ (177,000) $ (1,246,666)
1996
Current $ (1,965,008) $ - $ (1,965,008)
Deferred (1,834,504) (335,300) (2,169,804)
Total $ (3,799,512) $ (335,300) $ (4,134,812)
1997
Current $ 60,780 $ - $ 60,780
Deferred (1,502,813) (186,960) (1,689,773)
Total $ (1,442,033) $ (186,960) $ (1,628,993)
</TABLE>
As of April 30, 1997 and 1996, temporary differences which
result in deferred tax assets and liabilities are as follows:
<TABLE>
1997 1996
Current:
<S> <C> <C>
Inventories capitalized for income tax purposes $1,296,734 $ 792,761
Bad debt reserves 136,660 118,611
Inventory reserves 213,560 -
Accrued vacation 104,872 110,380
Prepaid expenses (9,943) (856)
Less: Valuation allowance (56,922) (22,268)
Net Current Deferred Tax Assets $1,684,961 $ 998,628
Noncurrent
Federal NOL carryforward $ 949,961 $ -
State NOL carryforward 922,790 621,083
AMT credit carryforward 1,552,491 842,300
R&D credit carryforward 357,120 502,600
Capital loss carryforward 380,000 381,600
Excess of tax over book depreciation (3,903,032) (3,833,122)
Excess book amortization in excess of tax - 84,500
Other 240,610 (62,514)
Less: Valuation allowance (148,078) (57,632)
Net Noncurrent Deferred tax Asset (Liability) $ 351,862 $(1,521,185)
</TABLE>
The Company has approximately $2.6 million in tax loss and
credit carryforwards, which expire in varying amounts
beginning in the year 2007 through the year 2012, and $1.6
million in Alternative Minimum Tax carryforwards which do not
expire. 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 the recorded deferred tax assets will be
realized, except for a portion of the capital loss
carryforwards for which there are insufficient unrealized
capital gains to benefit. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near
term if estimates of the nature or amounts of future taxable
income during the carryforward period are revised.
The Company recognized a reduction of income taxes payable of
$48,286, $29,700 and $39,946 as a result of the exercise of
stock options by employees and others during the years ended
April 30, 1997, 1996, and 1995, respectively. The benefit was
credited directly to additional paid-in capital.
A reconciliation of the expected income tax benefit from
continuing operations 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>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory income tax rate 34.00% 34.00% 34.00%
Computed "expected" income tax
benefit ($1,880,852) ($3,595,519) ($1,086,410)
Increase (reduction) in taxes
resulting from:
State income taxes, net of
federal benefit (186,960) (226,655) (55,643)
General business credit
carryforward - (502,600) -
Non-deductible expenses 103,375 100,064 27,200
Change in valuation allowance 125,100 79,900 -
Other 210,344 9,998 (131,813)
Actual income tax benefit ($1,628,993) ($4,134,812) ($1,246,666)
Effective income tax rate 29.40% 39.10% 39.00%
</TABLE>
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan (the "Plan") for all
employees who have completed one year 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 the remaining 80% of the
participant's contribution with common stock. 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 for the years ended April 30,
1997 and 1996. The Company's contribution expense for the year
ended April 30, 1995 was $218,010.
7. COMMITMENTS AND CONTINGENCIES
Operating leases - The Company leases its office and operating
facilities and various equipment under non-cancelable
agreements. Under the terms of the lease agreement covering
the Company's primary production facility, the Company has the
option to purchase the building through February 29, 2000. The
purchase price of the building is adjusted on an annual basis
and ranges between $3,500,000 and $3,700,000. The lease also
provides for renewal options.
Rent expense from continuing operations was $1,150,977,
$1,068,777, and $792,955 for the years ended April 30, 1997,
1996, and 1995, respectively.
Future minimum lease payments under operating leases for the
years ending April 30 are as follows:
<TABLE>
<C> <C>
1998 $1,071,309
1999 1,006,893
2000 974,592
2001 510,019
Total $3,562,813
</TABLE>
Purchase Commitments - The Company has entered into growing
contracts with numerous nurseries for the future purchases of
natural raw materials to be used in the Company's
manufacturing processes. In some cases, the Company may, at
its option, decide at any time to discontinue the payments on
these contracts for nutraceuticals and pharmaceutical
products. If such decisions are made in the future, the
Company would not be able to recover deposits made on the
growing contracts. As of April 30, 1997, the Company has
$1,408,567 in deposits for such contracts. The future
commitments for purchases under these contracts at April 30
are as follows:
<TABLE>
<C> <C>
1998 $3,539,631
1999 3,626,000
2000 1,605,000
2001 302,500
Total $9,073,131
</TABLE>
Litigation - The Company and one of its significant customers
have been named in a lawsuit in Europe brought by Bristol,
alleging patent infringement. Should the court find that the
patent has been infringed upon, the Company would be precluded
from selling its product in the European market. The Company
and other defendants intend to vigorously defend this suit,
and believe that several meritorious defenses to the claims
exist. However, there can be no assurance that the Company
will be successful in defending this suit.
8. INDUSTRY SEGMENTS
Segments:
Selected financial information from the Company's two business
segments for fiscal 1997 are as follows:
<TABLE>
Natural Product Technical Corporate
Processing Services and Other Total
<S> <C> <C> <C> <C>
Loss from operations $(1,428,081) $ (325,932) $(4,287,383) $(6,041,396)
Capital expenditures 2,352,343 272,335 104,993 2,729,671
Depreciation and amortization 2,524,794 944,894 704,342 4,174,030
Identifiable assets 43,064,754 6,011,785 17,721,339 66,797,878
</TABLE>
Major Customers:
The Company's revenue is concentrated among customers
primarily in the pharmaceutical industry. The following
represents customers comprising more than 10% of the Company's
revenues from continuing operations:
<TABLE>
Year ended April 30,
1997 1996 1995
Revenues:
<S> <C> <C> <C>
Customer A $ 3,575,062 $ 3,880,297 $ 3,018,445
Customer B $ 2,550,000 $ - $ -
Customer C $ - $ - $ 6,063,896
Percent of Total Revenues:
Customer A 14.2% 22.3% 19.8%
Customer B 10.1% - -
Customer C - - 39.7%
</TABLE>
As of April 30, 1997 and 1996, amounts owed the Company from
these customers were $277,682 and $1,185,750, respectively.
Foreign Sales
Export sales were $4,189,256, $71,490, and $20,685 in fiscal
1997, 1996, and 1995, respectively.
<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
Independent Auditors' Report F-2
Consolidated Statements of Operations for the
years ended April 30, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of April 30, 1997
and 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended April 30, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the years
ended April 30, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements for the years
ended April 30, 1997, 1996 and 1995 F-7
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.
FORM 10K
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: June 26, 1997 HAUSER, INC.
By:
/s/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>
Signature Title Date
<S> <C> <C>
/s/Dean P. Stull Chairman of the Board of Directors,
Chief Executive Officer, President and a
Director (Principal Executive Officer) June 26, 1997
/s/Randall J. Daughenbaugh Chief Technical Officer and a
Director June 26, 1997
/s/David I. Rosenthal Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) June 26, 1997
/s/William E. Coleman Director June 26, 1997
/s/Stanley J. Cristol Director June 26, 1997
/s/Ray L. Hauser Director June 26, 1997
/s/Christopher W. Roser Director June 26, 1997
/s/Robert F. Saydah Director June 26, 1997
/s/Bert M. Tolbert Director June 26, 1997
</TABLE>
