FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended
October 31, 1997 Commission File No. 0-17174
HAUSER, INC.
(formerly Hauser Chemical Research, Inc.)
Colorado 84-0926801
(State or other jurisdiction of (I.R.S. Identification
incorporation or organization) Number)
5555 Airport Boulevard, Boulder, Colorado 80301
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (303) 443-4662
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value 10,427,823
Class Outstanding at October 31, 1997
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three and six months ended October 31, 1997
and October 31, 1996 1
Consolidated Balance Sheets -
October 31, 1997 and April 30, 1997 2
Consolidated Statements of Cash Flows -
Six months ended October 31, 1997
and October 31, 1996 3
Notes to Condensed Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-15
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings. n/a
Item 2. Changes in Securities. n/a
Item 3. Defaults Upon Senior Securities. n/a
Item 4. Submission of Matters to a Vote of
Security Holders. 15
Item 5. Other Information. n/a
Item 6. Exhibits and Reports on Form 8-K. n/a
SIGNATURE PAGE 16
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
<TABLE>
Three months ended Six months ended
October 31, October 31,
1997 1996 1997 1996
REVENUES:
<S> <C> <C> <C> <C>
Natural product processing $3,083,406 $3,577,367 $7,865,704 $6,254,466
Technical services 3,015,024 2,310,937 5,778,243 4,550,533
Total revenues 6,098,430 5,888,304 13,643,947 10,804,999
COST OF REVENUES:
Natural product processing 3,267,058 3,556,808 7,032,135 6,411,746
Technical services 2,225,266 1,843,355 4,237,711 3,583,419
Total cost of revenues 5,492,324 5,400,163 11,269,846 9,995,165
GROSS PROFIT 606,106 488,141 2,374,101 809,834
OPERATING EXPENSES:
Research and development 800,450 737,283 1,257,762 1,233,198
Sales and marketing 545,223 340,995 1,071,706 754,195
General and administrative 1,183,093 1,213,891 2,518,640 2,484,881
Total operating expenses 2,528,766 2,292,169 4,848,108 4,472,274
LOSS FROM OPERATIONS (1,922,660) (1,804,028) (2,474,007) (3,662,440)
OTHER INCOME (EXPENSE):
Interest income 89,757 112,247 199,877 300,496
Interest expense (4,281) (2,883) (6,663) (14,985)
Other 173,822 - 361,461 -
Other income - net 259,298 109,364 554,675 285,511
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,663,362) (1,694,664) (1,919,332) (3,376,929)
INCOME TAX BENEFIT 597,367 474,327 671,600 945,361
LOSS FROM CONTINUING OPERATIONS (1,065,995) (1,220,337) (1,247,732) (2,431,568)
DISCONTINUED OPERATIONS:
Loss from operations, net of applicable
income taxes - (325,901) - (609,287)
Income (loss) on disposal, net of applicable
income taxes - 329,692 - (2,446,760)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - 3,791 - (3,056,047)
NET LOSS $(1,065,995) $(1,216,546) $(1,247,732) $(5,487,615)
LOSS PER SHARE:
Continuing operations $(0.10) $(0.12) $(0.12) $(0.24)
Discontinued operations - - - (0.29)
Loss per share $(0.10) $(0.12) $(0.12) $(0.53)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 10,424,872 10,415,626 10,429,458 10,409,218
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
October 31, April 30,
ASSETS 1997 1997
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 7,223,176 $ 8,379,551
Held-to-maturity investments 194,922 196,751
Accounts receivable, less allowance for doubtful accounts:
October 31, 1997, $299,370; April 30, 1997, $359,632 5,886,802 4,961,132
Income taxes receivable - 1,445,046
Inventories, current 7,593,834 7,073,295
Prepaid expenses and other 461,008 406,325
Net deferred income tax assets 1,755,653 1,684,961
Total current assets 23,115,395 24,147,061
PROPERTY AND EQUIPMENT
Land and buildings 7,439,377 7,418,526
Lab and processing equipment 30,570,169 29,513,011
Furniture and fixtures 4,365,656 4,459,006
Total property and equipment 42,375,202 41,390,543
Accumulated depreciation and amortization (19,977,840) (18,204,486)
Net property and equipment 22,397,362 23,186,057
OTHER ASSETS:
Goodwill, less accumulated amortization:
October 31, 1997, $793,499; April 30, 1997, $651,772 2,041,064 2,182,791
Inventories, non-current 14,897,996 14,710,409
Other 3,915,555 2,571,560
Total other assets 20,854,615 19,464,760
TOTAL $ 66,367,372 $ 66,797,878
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,106,243 $ 1,486,499
Current portion of long term debt 143,241 171,916
Accrued salaries and wages 1,127,458 960,698
Deposits 1,350,000 200,000
Other accrued current liabilities 322,993 165,447
Total current liabilities 4,049,935 2,984,560
LONG TERM LIABILITIES 74,666 121,764
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: October 31, 1997, 10,427,823; April 30, 1997, 10,419,028 10,429 10,419
Additional paid-in capital 58,667,124 58,622,066
Unrealized gain on available-for-sale investment, net of income taxes - 246,119
Retained earnings 3,565,218 4,812,950
Net stockholders' equity 62,242,771 63,691,554
TOTAL $ 66,367,372 $ 66,797,878
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
<TABLE>
Six months ended
October 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,247,732) $(5,487,615)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,915,081 2,390,538
Loss on disposal of discontinued operations 2,446,760
Gain on sale of investment (361,461) -
Unrealized loss on available-for-sale investment - 70,391
Amortization of investment discount - (1,875)
Deferred income tax benefit (742,292) (487,193)
Change in other assets (1,015,532) (271,908)
Change in assets and liabilities
Accounts receivable (925,670) 295,851
Income taxes receivable 1,445,046 (72,050)
Inventories (708,126) (4,190,943)
Prepaid expenses and other (54,683) (147,417)
Accounts payable (380,256) (229,424)
Customer deposits 1,150,000 -
Other accrued liabilities 324,306 (64,650)
Net cash used in operating activities (601,319) (5,749,535)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (984,659) (857,375)
Proceeds from sale of investments 458,479 -
Sale of Ironwood net assets - 250,000
Purchase of investments (194,922) (199,646)
Maturity of investments 196,751 7,000,000
Net cash (used in) provided by investing activities (524,351) 6,192,979
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt and capitalized leases (75,773) (395,582)
Proceeds from issuance of common stock 45,068 173,138
Net cash used in financing activities (30,705) (222,444)
Net increase (decrease) in cash and cash equivalents (1,156,375) 221,000
Cash and cash equivalents, beginning of period 8,379,551 7,428,752
Cash and cash equivalents, end of period $ 7,223,176 $ 7,649,752
</TABLE>
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF OCTOBER
31, 1997 AND APRIL 30, 1997 AND FOR THE THREE AND SIX MONTH
PERIODS ENDED OCTOBER 31, 1997 AND 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly
the Company's financial position as of October 31, 1997 and
results of its operations and cash flows for the periods ended
October 31, 1997 and 1996. The year-end balance sheet data was
derived from audited financial statements, but does not
include all disclosures required by generally accepted
accounting principles. Certain fiscal 1997 amounts have been
reclassified to conform to the fiscal 1998 presentation.
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.
2. DISCONTINUED OPERATIONS
On October 11, 1996, the Company sold substantially all of the
net assets of its secondary forest products subsidiary, Hauser
Northwest, Inc., d/b/a Ironwood Evergreens (Ironwood). The
operations of Ironwood have been reflected as discontinued in
the accompanying financial statements.
3. 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 are classified as follows:
<TABLE>
October 31, April 30,
1997 1997
<S> <C> <C>
Raw materials and supplies $ 3,707,216 $ 3,373,554
Work in process 12,634,173 13,019,432
Finished goods 6,421,142 5,952,775
Total before valuation allowance 22,762,531 22,345,761
Less valuation allowance (270,701) (562,057)
Total Inventories 22,491,830 21,783,704
Less non-current inventories 14,897,996 14,710,409
Current portion of inventories $ 7,593,834 $ 7,073,295
</TABLE>
4. LONG TERM DEBT
Bank Line of Credit -The Company has an $8,850,000 bank line
of credit at the bank's prime interest rate plus 0.75% which
matures on June 30, 2000. As of October 31, 1997, the Company
was not in compliance with the financial covenants for the
line of credit. The Company has obtained a waiver from the
bank and plans to negotiate a change in the financial
covenants.
5. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per share is computed based on the weighted average
number of common and common equivalent shares outstanding
during each of the periods. The Company uses the treasury
stock method for determining the effect of outstanding stock
options 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.
6. COMMITMENTS
During the quarter ended October 31, 1997, the Company
guaranteed a bank loan for another company and has pledged
100,000 shares of stock as collateral against the loan. The
Company provided this guarantee to obtain exclusive sales and
marketing rights for a unique dietary supplement and
functional food product.
<PAGE>
Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The Company's financial performance in the quarter ended
October 31, 1997, improved slightly compared to the same
quarter in the prior fiscal year. Total revenues increased 3%,
gross margin increased from approximately 8% of total revenues
to 10% of total revenues, total operating expenses increased
10% primarily as a result of higher spending in sales and
marketing activities, and the loss from continuing operations
declined almost 13%.
The Company's operating results for the second quarter of
fiscal 1998, were lower than management's expectations because
anticipated sales did not materialize in the quarter. However,
management believes that the Company can attain break-even
results in fiscal 1998, 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.
The results of operations in the quarter ended October 31,
1997, reflect the Company's strategy to diversify it's product
lines, be less dependent on sales of pharmaceutical products,
and focus resources for growth in the Natural Ingredients and
Technical Services business units. Revenue growth in natural
ingredients in the quarter was 39% over the previous year and
revenues in the quarter from technical services grew almost
31% over the same period last year. Revenues from
Pharmaceuticals declined 59% in the quarter compared to last
year, as regulatory issues have created some uncertainty in
the paclitaxel market. Pharmaceutical sales are largely
dependent upon the Company's strategic customers, and legal
and regulatory issues out of the Company's control create
unpredictability quarter-to-quarter. The Company plans to
focus on the growth of the Natural Ingredients and Technical
Services business units while the paclitaxel market becomes
better defined.
The following is a discussion of the Company's activities in
its continuing operations.
NATURAL INGREDIENTS
Nutraceuticals - The term nutraceuticals is used to identify
the broad range of natural, healthful products that are used
to supplement the diet by increasing the total dietary intake
of important nutrients. 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.
During the quarter ended October 31, 1997, the Company
expanded its relationship with its customer, PharmaPrint, Inc.
("PharmaPrint"), through the completion of several new
agreements. On December 3, 1997, the Company announced that
the value of the contracts with PharmaPrint was $20 million
over the next three years. The Company will develop a number
of standardized herbal medicines to be sold into the market
created by the Dietary Supplement Health and Education Act
("DSHEA"). Also, the Company will supply a number of bulk
standardized herbal extracts to PharmaPrint. Ongoing in the
relationship between the two companies will be research and
development activities for the development of botanical
extracts for use as pharmaceutical products.
On November 14, 1996, the Company signed a three year contract
to supply RoseOx[Registered Trademark], an antioxidant
nutraceutical product, to D&F Industries ("D&F"), a
manufacturer of vitamin and food supplement products. Under
that agreement, D&F had exclusive marketing rights to the
Company's antioxidant nutraceutical products,
RoseOx[Reegistered Trademark] and RoseOx660[Registered
Trademark], in the multi-level dietary supplement and cosmetic
markets. The Company began shipping product under this
contract during the third quarter of fiscal year 1997, and
delivered contractual quantities in the second quarter of
fiscal 1998. Sales to D&F comprised 11% and 4% of total
revenues in the six months ended October 31, 1997 and 1996,
respectively.
On November 6, 1997, the Company announced it had mutually
agreed with D&F, to cancel the exclusivity agreement between
the companies. D&F will remain a customer of the Company's
natural products; however, sales to D&F are expected to be
down over the next several months, and their performance
against the original contract minimums is uncertain. A major
customer of D&F has launched the product in the United States,
and expects approval in several other countries. This change
in exclusivity allows the Company to market RoseOx[Registered
Trademark] products through its direct sales force, and a
major marketing effort is planned.
Because of the Company's ability to now market these products
through its direct sales force, management believes the
modification of the D&F contract will not have a material
adverse impact on future operations.
Natural Flavor Extracts and Natural Food Ingredients - 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. Some of these factors are beyond the direct control of
the Company.
Natural 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 sale of natural food ingredients.
Minimal revenue from natural food ingredients products was
recognized in the second quarter of fiscal 1998, but shipments
are expected to increase during fiscal year 1998, because of
expanded marketing efforts and resultant interest expressed by
potential customers. The Company announced on November 3,
1997, its signing of a three year agreement with RFI
Ingredients ("RFI"), whereby RFI will serve as exclusive
distributors for the Company's NaturEnhance[Trademark] product
lines to the foods and beverages industries. However,
management is unable to predict the timing and amount of
future revenues from natural food ingredients products.
TECHNICAL SERVICES
The Technical Services business unit, comprised of Hauser
Laboratories and Shuster Laboratories, Inc., (the Company's
wholly-owned subsidiary), operates as a single entity in the
research and development, formulation, analysis and project
delivery to fee-for-service clients. During the second quarter
of fiscal 1998, Technical Services revenues increased almost
31% over the same quarter last year, as the Company
concentrated its efforts on increasing the number of projects
related to custom synthesis and natural products isolation in
the pharmaceuticals industry. Additionally, research and
development services from both Hauser and Shuster laboratories
were sold to PharmaPrint during the quarter as part of the
expanded relationship mentioned earlier.
The Company announced on November 6, 1997, a collaborative
agreement with The National Institute on Drug Abuse ("NIDA"),
for custom synthesis of drug compounds that are under
development as potential treatment agents for drug addiction.
Under the agreement, the Company will receive $2.3 million
over a three year period. To date, five task orders have been
awarded to the Company under the contract.
Management believes that demand for technical services will
continue to increase and expects this business unit to grow.
Ongoing marketing efforts in the Company's Technical Services
business unit will be centered on projects that provide
opportunity to employ the collective capabilities of the
Hauser Laboratories and Shuster Laboratories team.
PHARMACEUTICALS
The Company and its customer, Yew Tree Pharmaceuticals ("Yew
Tree") had been named in a lawsuit filed by Bristol
Myers-Squibb Company ("Bristol") in the Netherlands, alleging
patent infringement in Europe. On July 24, 1997, the District
Court in the Netherlands ruled against Bristol in this
proceeding denying Bristol's request for an injunction to stop
Yew Tree from selling their product while the patent validity
is determined. Subsequent to this result, Bristol has appealed
the court's findings. Bristol has also applied for and been
granted patents related to paclitaxel-based treatments in the
United States. Such actions by Bristol, if successful, 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 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. On November 26, 1997, Immunex
Corporation ("Immunex"), majority owned by American Home
Products, Inc. ("AHP"), announced that The U.S. Food and Drug
Administration ("FDA") had accepted for review Immunex's
abbreviated new drug application for generic paclitaxel.
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 would supply bulk paclitaxel to AHP. 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 resulted in aggregate minimum payments
of approximately $8,841,000 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.
Additionally, 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.
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 received as customer deposits on the balance sheet.
AHP has agreed to indemnify the Company 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 the second quarter of fiscal 1998, the Company
completed its minimum contractual requirements to sell 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 Immunex, had received
approval to sell generic paclitaxel in Canada. This marked the
first approval in North America for a generic form of
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 the Company 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.
DISCONTINUED OPERATIONS
On September 13, 1996, the Company adopted plans to sell
substantially all of the net assets of its secondary forest
products subsidiary, Hauser Northwest, Inc., d/b/a Ironwood
Evergreens ("Ironwood"). On October 11, 1996, this sale was
completed. Revenues for Ironwood were $964,956 and $2,526,351
for the three and six months ended October 31, 1996,
respectively.
During the first and second quarters of fiscal 1997, certain
events occurred which had significant negative impacts on the
Company's secondary forest products business. 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 prior 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 first quarter of fiscal
1997 include a non-recurring charge for the divestiture of
Ironwood.
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:
Below is a table which summarizes the Company's results of
continuing operations as a percentage of total revenues.
<TABLE>
Three months Six months
ended October 31, ended October 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit 9.9% 8.3% 17.4% 7.5%
Research and development 13.1% 12.5% 9.2% 11.4%
Sales and marketing 8.9% 5.8% 7.9% 7.0%
General and administrative 19.4% 20.6% 18.5% 23.0%
Loss from operations (31.5)% (30.6)% (18.1)% (33.9)%
Other income, net 4.3% 1.9% 4.1% 2.6%
Loss from continuing operations before taxes (27.3)% (28.8)% (14.1)% (31.3)%
Loss from continuing operations (17.5)% (20.7)% (9.1)% (22.5)%
Loss from discontinued operations - - - (28.3)%
Net loss (17.5)% (20.7)% (9.1)% (50.8)%
</TABLE>
REVENUES. A breakout of the Company's revenues by product and
service groupings for its continuing operations is as follows:
<TABLE>
Three months ended Six months ended
October 31, October 31,
1997 1996 1997 1996
Natural ingredients products (includes
nutraceuticals, natural flavor extracts
<S> <C> <C> <C> <C>
and food ingredients) $ 2,518,077 $ 1,808,450 $ 5,340,232 $ 3,566,524
Technical services (includes Hauser Laboratories 3,015,024 2,310,937 5,778,243 4,550,533
and Shuster Laboratories, Inc.)
Pharmaceuticals 565,329 1,768,917 2,525,472 2,687,942
$ 6,098,430 $ 5,888,304 $13,643,947 $10,804,999
</TABLE>
Total revenues increased 3.6% to $6,098,430 in the second
quarter of fiscal 1998, from $5,888,304 in the second quarter
of fiscal 1997, the result of increased revenues in natural
ingredients products and technical services, offset by a
decrease in pharmaceuticals revenues.
Natural Ingredients:
Natural ingredients product revenues increased approximately
39% and 50% in the three and six months ended October 31,
1997, respectively, as compared to the same periods in last
the fiscal year.
The increases are primarily attributable to success in selling
nutraceutical products. In the quarter ended October 31, 1997,
nutraceuticals revenues were $2,342,380, an increase of
$979,358, or 72%, from revenues of $1,363,022 in the same
quarter last year. In the six months ended October 31, 1997,
nutraceuticals revenues were $4,797,758, an increase of 105%
over the same period in fiscal year 1997.
However, these increases were offset by decreased sales of
natural flavor extracts, which totaled $148,563 in the second
quarter of fiscal 1998, compared to $444,528 in the second
quarter of fiscal 1997, a decrease of 67%. Revenues from
natural flavor extracts in the six months ended October 31,
1997, were $497,873, a decrease of 58% from the prior year.
This decrease was the result of the loss of specific product
sales to a customer that decided to use other ingredients in
its final product. Management believes that other sales
opportunities exist to replace this customer loss.
Additionally, the Company sold food ingredients products of
$27,133 in the second quarter of fiscal 1998, compared to
revenues of $900 in the second quarter of fiscal 1997. Food
ingredients revenues in the six months ended October 31, 1997,
were $44,603 compared to revenues of $33,170 in the six months
ended October 31, 1996.
Technical Services:
Technical services revenues were $3,015,024 in the quarter
ended October 31, 1997, compared to $2,310,937 in the same
quarter of fiscal 1997, an increase of 30.5%. During the six
months ended October 31, 1997, technical services revenues of
$5,778,243 increased 27% over revenues of $4,550,533 in the
same period last fiscal year. These increases were due
primarily to a general price increase for services provided as
well as concentrated efforts to increase projects that relate
to custom synthesis and natural product isolation for clients
in the pharmaceuticals industry.
Pharmaceuticals:
Revenues from pharmaceutical products in the quarter ended
October 31, 1997, decreased 68% compared to the same quarter
in fiscal 1997. This was primarily because of decreased sales
of bulk paclitaxel to AHP as the minimum contractual purchase
commitment for the product was fulfilled early in the second
quarter of fiscal 1998. Management does not expect to ship
additional paclitaxel to AHP for the next twelve to eighteen
months because of the inventory level this customer has on
hand. Revenues from the sale of bulk paclitaxel could remain
low for the next several quarters unless the Company is
successful in selling this product to other customers. For the
six months ended October 31, 1997, pharmaceuticals revenues
decreased 6%, primarily because of the reduction of
sanguinaria extract sales, offset by increased sales of
paclitaxel to new customers during the first quarter of fiscal
1998.
The Company recognized revenues of $390,926 and $596,907 for
the shipment of sanguinaria extract to Colgate during the
three and six months ended October 31, 1996, respectively,
while no revenues from the sale of sanguinaria extract were
recognized in the same periods ended October 31, 1997, because
the Company's contract with Colgate was completed in fiscal
1997. The Company does not expect additional orders for this
product in the foreseeable future. The expiration of the
contract with Colgate did not and will not have a material
impact on the operations of the Company.
GROSS PROFIT. Total gross profit for the Company was 9.9% and
8.3% of total revenues in the quarters ended October 31, 1997,
and 1996, respectively, and 17.4% and 7.5% of total revenues
in the six month periods ended October 31, 1997, and 1996,
respectively. The change is the result of lower sales of
paclitaxel offset by increased sales of nutraceuticals
products sold during the quarter. In the six month periods
ended October 31, 1997, and 1996, gross profit for the natural
products industry segment was 10.6% and negative 2.5% of total
revenues, respectively. This increase was the result of higher
margin sales of paclitaxel in the first quarter of fiscal
1998, and increased sales of nutraceuticals.
Gross profit for technical services increased in the three and
six months ended October 31, 1997, to 26.2% and 26.7%,
respectively, from 20.2% and 21.3% in the three and six months
ended October 31, 1996, respectively. These increases are the
result of efforts to improve productivity as well as an
increase in projects that allow for more value-added pricing,
thereby improving gross profits.
OPERATING EXPENSES. Research and development expenses were
$800,450 in the quarter ended October 31, 1997, compared to
$737,283 in the quarter ended October 31, 1996, an increase of
almost 9%. Research and development expenses in the six months
ended October 31, 1997, were $1,257,762, a 2% increase over
the same period last year. The increase in research and
development costs is related to the development of the process
to manufacture paclitaxel from cultivated sources and
increased efforts to develop other natural ingredients
products. The Company intends to actively continue research
and development efforts.
Sales and marketing expenses in the quarter ended October 31,
1997, were $545,223, an increase of $204,228, or 60% over the
same three month period last year. Sales and marketing
expenses in the six months ended October 31, 1997, were
$1,071,706, a 42% increase over the same period last year. 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, sales and marketing expenses in fiscal 1998,
include higher payments of commissions to external
distributors due to increased revenues.
General and administrative expenses were $1,183,093 in second
quarter of fiscal 1998, a 2% decrease compared to general and
administrative expenses in the same quarter of fiscal 1997.
For the six months ended October 31, 1997, general and
administrative expenses were $2,518,640, an increase of 1%
over the same period last year. These slight variations are
the result of management's continued efforts to maintain
general and administrative expenses while growing the revenue
base.
INTEREST INCOME. Interest income was $89,757 and $199,877 in
the three and six months ended October 31, 1997, respectively,
compared $112,247 and $300,496 in the three and six months
ended October 31, 1996, respectively. The decrease is the
result of less capital available for investment.
OTHER INCOME. The Company sold its remaining shares of stock
of a public company during the second quarter of fiscal 1998
for $219,300 and recognized a gain of $170,850 For the six
months ended October 31, 1997, the total gain recognized from
the sale of this stock was $361,461.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents and short-term
investments were $7,418,098 at October 31, 1997, compared to
$8,576,302 at April 30, 1997. The decrease is primarily the
result of an increase in accounts receivable and the purchase
of raw materials and capital equipment.
The Company has a revolving line of credit totaling $8,850,000
which expires on June 30, 2000. As of October 31, 1997,
$8,779,650 was available for use under this line of credit as
$70,350 had been applied against a letter a credit for the
purchase of raw materials. Under the terms of the loan
agreement, all assets of the Company, with the exception of
intangibles, are secured by the bank. As of October 31, 1997,
the Company was not in compliance with the financial covenants
for the line of credit. The Company has obtained a waiver from
the bank and plans to negotiate a change in the financial
covenants. Additionally, the Company has a lease credit line
with a bank of $564,000; as of October 31, 1997, $435,460 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 October 31, 1997 was
$19,065,460 compared to $21,162,501 as of April 30, 1997. This
decrease is primarily attributable to the use of cash and cash
equivalents plus short-term investments for the purchase of
capital equipment, and an increase in deposits which represent
advance payments from customers.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in
the first six months of fiscal 1998, totaled $984,659. This
was primarily the result new construction and improvements to
manufacturing equipment for the production of nutraceuticals
and food ingredients products and development and processing
of paclitaxel from cultivated sources.
SEASONALITY
The Company has experienced seasonality in its natural flavor
extracts product line primarily in advance of the demand for
summer beverages, in which most of its products are used.
FORWARD LOOKING STATEMENTS
Certain oral and written statements of management of the
Company included in the Form 10-Q and elsewhere may contain
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future
operations. The forward-looking statements included herein and
elsewhere are based on current expectations that involve
judgments which are difficult or impossible to predict
accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any
of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements will
prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
Part 2.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security
Holders.
The Company's annual meeting of shareholders
was held October 30, 1997.
1. The following directors were re-elected to serve as
directors of the Company for the following year: William E.
Coleman, Stanley J. Cristol, Randall J. Daughenbaugh,
Christopher W. Roser, Robert F. Saydah, Dean P. Stull and Bert
M. Tolbert.
The votes cast for, against or withheld as to each director
nominee is as follows:
To elect seven (7) Directors:
<TABLE>
Director For Against/Withheld
<S> <C> <C> <C>
Dean P. Stull 8,987,657 298,932
Randall J. Daughenbaugh 8,964,364 322,225
Stanley J. Cristol 8,988,981 297,608
Bert M. Tolbert 8,983,312 303,277
William E. Coleman 8,990,999 295,590
Christopher W. Roser 8,988,633 297,956
Robert F. Saydah 8,990,143 296,446
</TABLE>
2. The shareholders also voted upon a proposal to: a)
amend and extend the term of the 1987 non-qualified stock
option plan and b) increase the number of shares of common
stock available for reissue thereunder by 500,000 shares from
718,720 to 1,218,720.
The shareholders approved the proposal by the following
action:
<TABLE>
For Against Withheld
<C> <C> <C>
8,443,734 554,624 288,231
</TABLE>
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
<PAGE>
FORM 10 Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HAUSER, INC.
Date: December 5, 1997
/s/ Dean P. Stull
Chairman of the Board, Chief Executive Officer, and
President
Date: December 5, 1997
/s/ David I. Rosenthal
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S 2ND QUARTER 10-Q FOR FISCAL 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 7,223,176
<SECURITIES> 194,922
<RECEIVABLES> 6,186,172
<ALLOWANCES> 299,370
<INVENTORY> 7,593,834<F1>
<CURRENT-ASSETS> 23,115,395
<PP&E> 42,375,202
<DEPRECIATION> 19,907,840
<TOTAL-ASSETS> 66,367,372
<CURRENT-LIABILITIES> 4,049,935
<BONDS> 0
<COMMON> 10,429
0
0
<OTHER-SE> 62,232,342
<TOTAL-LIABILITY-AND-EQUITY> 66,367,372
<SALES> 7,865,704
<TOTAL-REVENUES> 13,643,947
<CGS> 7,032,135
<TOTAL-COSTS> 11,269,846
<OTHER-EXPENSES> 4,848,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,663
<INCOME-PRETAX> (1,919,332)
<INCOME-TAX> 671,600
<INCOME-CONTINUING> (1,247,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,247,732)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>EXCLUDES $14,897,996 OF NON-CURRENT INVENTORY
</FN>
</TABLE>
