<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S 1ST QUARTER 10-Q FOR FISCAL 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999<F1>
<PERIOD-END> JUL-31-1998
<CASH> 1,237,580
<SECURITIES> 0
<RECEIVABLES> 7,041,942
<ALLOWANCES> 264,740
<INVENTORY> 9,910,273
<CURRENT-ASSETS> 20,317,856
<PP&E> 44,994,465
<DEPRECIATION> 22,944,676
<TOTAL-ASSETS> 67,552,957
<CURRENT-LIABILITIES> 7,337,353
<BONDS> 0
<COMMON> 10,468
0
0
<OTHER-SE> 59,497,065
<TOTAL-LIABILITY-AND-EQUITY> 67,552,957
<SALES> 3,082,952
<TOTAL-REVENUES> 7,051,418
<CGS> 5,388,947
<TOTAL-COSTS> 5,388,947
<OTHER-EXPENSES> 2,705,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,054
<INCOME-PRETAX> (1,061,924)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,061,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,061,924)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<FN>
<F1>EXCLUDES 16,711,290 OF LONG-TERM INVENTORY
</FN>
</TABLE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended
July 31, 1998 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 10,467,519
Class Outstanding at July 31, 1998
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three months ended July 31, 1998 and July 31, 1997 1
Consolidated Balance Sheets -
July 31, 1998 and April 30, 1998 2
Consolidated Statements of Cash Flows -
Three months ended July 31, 1998 and July 31, 1997 3
Notes to Condensed Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-12
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings. 13
Item 2. Changes in Securities. 13
Item 3. Defaults Upon Senior Securities. 13
Item 4. Submission of Matters to a Vote of
Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURE PAGE 14
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
<TABLE>
Three months ended July 31,
1998 1997
REVENUES:
<S> <C> <C>
Natural product processing $ 3,082,952 $ 4,782,298
Technical services 3,968,466 2,763,219
Total revenues 7,051,418 7,545,517
COST OF REVENUES:
Natural product processing 2,485,529 3,654,974
Technical services 2,903,418 2,012,445
Total cost of revenues 5,388,947 5,667,419
GROSS PROFIT 1,662,471 1,878,098
OPERATING EXPENSES:
Research and development 320,956 457,312
Sales and marketing 699,200 526,483
General and administrative 1,684,909 1,445,656
Total operating expenses 2,705,065 2,429,451
LOSS FROM OPERATIONS (1,042,594) (551,353)
OTHER INCOME (EXPENSE):
Interest income 27,054 110,120
Interest expense (46,384) (2,382)
Other - 187,645
Other income (expense) - net (19,330) 295,383
LOSS BEFORE INCOME TAXES (1,061,924) (255,970)
INCOME TAX BENEFIT - 74,233
NET LOSS $ (1,061,924) $ (181,737)
LOSS PER SHARE BASIC AND DILUTED
Net loss per share $ (0.10) $ (0.02)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC & DILUTED 10,469,050 10,420,475
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
July 31, April 30,
ASSETS 1998 1998
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 958,581 $ 2,081,796
Restricted Cash 278,999 139,346
Accounts receivable, less allowance for doubtful accounts:
July 31, 1998, $264,740; April 30, 1998, $430,518 6,777,202 9,090,005
Inventories, current 9,910,273 10,111,688
Prepaid expenses and other 436,572 349,570
Net deferred income tax asset 1,956,229 1,946,339
Total current assets 20,317,856 23,718,744
PROPERTY AND EQUIPMENT:
Land and buildings 9,644,391 9,644,391
Lab and processing equipment 32,554,281 31,883,787
Furniture and fixtures 2,795,793 2,662,472
Total property and equipment 44,994,465 44,190,650
Accumulated depreciation (22,944,676) (21,846,032)
Net property and equipment 22,049,789 22,344,618
OTHER ASSETS:
Goodwill, less accumulated amortization:
July 31, 1998, $1,009,699; April 30, 1998, $936,670 1,888,433 1,961,462
Inventories, non-current 16,711,290 14,787,837
Deposits 5,117,507 4,013,992
Net deferred income tax asset 1,010,154 1,010,154
Other 457,928 456,774
$ 67,552,957 $ 68,293,581
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,407,400 $ 1,764,294
Current portion of long-term debt 3,448,974 1,911,498
Accrued salaries and benefits 982,391 1,201,201
Deposits 247,494 670,155
Product warranty 1,229,570 1,500,000
Other accrued current liabilities 21,524 -
Total current liabilities 7,337,353 7,047,148
LONG-TERM DEBT 708,071 692,733
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: July 31, 1998 10,467,519; April 30, 1998, 10,464,458 10,468 10,464
Additional paid-in capital 58,880,048 58,864,295
Retained earnings 617,017 1,678,941
Total stockholders' equity 59,507,533 60,553,700
$ 67,552,957 $ 68,293,581
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Three months ended July 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,061,924) $ (181,737)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,171,673 878,493
Provision for bad debt 24,538 27,000
Provision for excess inventories - 165,000
Gain on sales of investment - (187,639)
Deferred income tax benefit - (74,233)
Change in deposits and other (1,114,559) (606,677)
Change in assets and liabilities:
Accounts receivable 2,288,265 (1,478,954)
Inventories (1,722,038) (155,223)
Prepaid expenses and other (87,002) (110,435)
Accounts payable (356,894) (101,341)
Customer deposits (422,661) 200,000
Provision for product warranty (270,430) -
Other accrued liabilities (197,286) 236,574
Net cash used in operating activities (1,748,318) (1,389,172)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (723,895) (526,153)
Proceeds from sale of investments - 239,189
Purchase of investments - (7,585,272)
Maturity of investments - 4,091,371
Net change in restricted cash (139,653) -
Net cash (used in) provided by investing activities (863,548) (3,780,865)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank lines of credit 1,500,000 -
Repayments of long-term debt (27,106) (37,807)
Proceeds from issuance of common stock and warrants 15,757 12,649
Net cash provided by (used in) financing activities 1,488,651 (25,158)
Net decrease in cash and cash equivalents (1,123,215) (5,195,195)
Cash and cash equivalents, beginning of year 2,081,796 8,379,551
Cash and cash equivalents, end of year $ 958,581 $ 3,184,356
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 31,
1998 AND APRIL 30, 1998 AND FOR THE THREE MONTH PERIODS ENDED
JULY 31, 1998 AND 1997 (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 July 31, 1998, and
results of its operations and cash flows for the periods ended
July 31, 1998 and 1997. 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 1998 amounts have been
reclassified to conform to the fiscal 1999 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. The Company has a significant investment in
paclitaxel related assets and deferred tax assets. Management
anticipates realization of these assets; however, there can be
no assurance of when realization will occur.
2. 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. The Company
purchases raw material inventory during harvest seasons,
generally in the spring and fall. These purchases may take
place well in advance of scheduled production of finished
product.
Non-current inventories represent raw materials, work in
process, and finished goods in various stages of completion in
excess of shipments expected to occur in the next fiscal year.
Inventories are classified as follows:
<TABLE>
July 31, April 30,
1998 1998
<S> <C> <C>
Raw materials and supplies $ 4,987,011 $ 5,224,750
Work in process 12,907,707 11,763,470
Finished goods 9,749,924 8,515,134
Total before valuation allowance 27,644,642 25,503,354
Less valuation allowance (1,023,079) (603,829)
Total inventories 26,621,563 24,899,525
Less non-current inventories 16,711,290 14,787,837
Current portion of inventories $ 9,910,273 $10,111,688
</TABLE>
Paclitaxel related inventory at July 31, 1998 and April 30,
1998, was $14,889,396 and $14,927,290, respectively.
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
July 31, 1998 April 30, 1998
<S> <C> <C>
Line of Credit $ 3,000,000 $ 1,500,000
Capital Leases 1,147,045 1,067,125
Other 10,000 37,106
Total $ 4,157,045 $ 2,604,231
Less current portion 3,448,974 1,911,498
Long Term debt $ 708,071 $ 692,733
</TABLE>
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 July 31, 1998, the Company was
not in compliance with the financial covenants for the line of
credit. The Company has obtained a waiver from the bank
through July 31, 1998. A similar covenant exists for the
remaining quarters of fiscal 1999.
4. PRODUCT WARRANTY
During the fourth quarter of fiscal 1998, the Company took a
charge to earnings and reserved $1,500,000 in anticipation of
product returns, rework costs, legal and professional fees,
and process development costs related to the discovery of a
contaminant in its bulk Panax ginseng. In the first quarter of
fiscal 1999, the Company charged $270,430 against the reserve
for expenses associated with this issue.
<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 July
31, 1998 declined compared to the same quarter in the prior
fiscal year. Compared to the first quarter of fiscal 1998,
total revenues decreased 6.5% to $7,051,418, gross margin
decreased $215,627, and operating loss increased by $491,241.
This decline in operating performance was the result of two
events. First, the Company experienced a period of lower
demand for its Natural Ingredients products, especially
nutraceuticals, because many large customers had overstocked
their inventories in previous months. Management had expected
shipment of additional orders totaling approximately
$2,000,000 in the last month of the quarter ended July 31,
1998, but customer requests delayed these shipments until the
second and third quarters of fiscal 1999. Total revenues from
Natural Ingredients products declined 12% quarter-to-quarter,
from $2,822,155 in the first quarter of fiscal 1998, to
$2,492,236 in the first quarter of fiscal 1999. Management
expects the sales of Natural Ingredients products to increase
in the second quarter of fiscal 1999.
Second, management had expected to realize additional revenues
of $418,000 in the quarter ended July 31, 1998, as a result of
contract negotiations with Immunex Corporation ("Immunex").
The Company announced on August 13, 1998, the signing of a
supply contract with Immunex to provide them and their
collaborative partner, IVAX Corporation ("IVAX") with bulk
paclitaxel. Because the contract was signed two weeks later
than anticipated, this revenue will be recognized in the
second quarter of fiscal 1999. Revenues from the sale of
paclitaxel in the quarter ended July 31, 1998, were $590,716
compared to $1,960,143 in the first quarter of fiscal 1998.
Regulatory issues and on-going litigation have created some
uncertainty in the paclitaxel market. Pharmaceutical sales are
largely dependent upon the Company's strategic customers;
their ability to sell products is dependent upon legal and
regulatory issues that are out of their control, which create
unpredictability quarter-to-quarter.
In the first quarter of fiscal 1999, revenues from Technical
Services increased 44% over the same period last year to
$3,968,466 from $2,763,219 in the quarter ended July 31, 1997.
This increase is the result of on-going natural products,
custom synthesis and drug development projects at Hauser
Laboratories and increasing revenues from Shuster Laboratories
attributable to the recently announced Technically Advanced
Quality Assurance ("TAQA[Trademark]") program and the Foods
2000 initiative.
Despite the operating loss in the first quarter ended July 31,
1998, management believes that the opportunity for revenue
growth from the natural ingredients and technical services
business groups can still result in profitability for the
fiscal year ended April 30, 1999; however, there can be no
assurance of when profitability will again be realized.
The following is a discussion of the Company's activities.
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 products include liquid and dry herbal
extracts of Echinacea, Valerian, St. John's Wort, Siberian
Ginseng, Panax Ginseng, Ginger, Goldenseal and Rosemary
(RoseOx[Registered Trademark]). 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.
During the third quarter of fiscal 1998, the Company completed
several new agreements with PharmaPrint, Inc. ("PharmaPrint").
On December 3, 1997, the Company announced that the value of
the contracts with PharmaPrint is expected to be $20 million
over the next three years. The Company continues to
manufacture botanical products and provide research and
development services to PharmaPrint to support its
herbal-based pharmaceuticals. Sales of products and services
to PharmaPrint in the three months ended July 31, 1998, were
17% of total revenues. Management expects the percentage of
sales from PharmaPrint to decline during fiscal 1999 because
fewer sales of herbal products and technical services as well
as growth in sales to other customers.
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[Registered 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 through the second quarter of
fiscal 1998. Sales to D&F comprised 11% of total revenues in
the three-month period ended July 31, 1997.
On November 6, 1997, the Company announced it had mutually
agreed with D&F, to cancel the exclusivity agreement between
the companies. A sales and marketing program by the Company is
now underway, as this change in exclusivity allows the Company
to market RoseOx[Registered Trademark] products directly
through its sales force. While sales volumes of this product
are not yet at previous levels, expanded sales have already
occurred, and 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.
Revenues from natural food ingredients products were $312,309
in the first quarter of fiscal 1999, but shipments are
expected to increase because of expanded marketing efforts and
resultant interest expressed by potential customers. On
November 3, 1997, the Company announced 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. To improve the success of these
products, the Company has reduced the number of products
offered to allow for improved marketing focus and technical
support of the remaining products. 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 first quarter
of fiscal 1999, Technical Services revenues increased 44% 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. Also, Shuster's TAQA[Trademark] and
Foods 2000 initiatives contributed additional revenues during
the quarter.
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 various drug
addictions. Under the agreement, the Company will receive $2.3
million over a three-year period.
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
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 (including $14,889,396 of paclitaxel
related inventory at July 31, 1998, $3,716,570 as deposits on
future raw materials, and approximately $3,780,000 net book
value of related equipment used in the paclitaxel
manufacturing process) 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,
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 January 21, 1998,
Bristol filed a patent infringement lawsuit against Immunex.
Now, the FDA may withhold clearance of Immunex's generic drug
application until the earlier of June 2000 or until a court
enters a final judgment finding the patents invalid,
unenforceable or not infringed. On June 8, 1998, Immunex
announced that they will collaborate with IVAX, to market
paclitaxel products in the United States, subject to FDA
approval. IVAX agreed to acquire the Immunex abbreviated new
drug application for generic paclitaxel. IVAX will also
acquire Immunex's inventories of bulk paclitaxel.
On August 13, 1998, the Company announced the signing of a
new, non-exclusive agreement with Immunex, under which the
Company will supply bulk paclitaxel to Immunex and its
collaborative partner, IVAX. Additionally, the Company
terminated its original supply agreement with AHP, formerly
American Cyanamid Company, which was entered into on May 12,
1994. Revenues from the previous contract with AHP were less
than 10% of total revenues in the three months ended July 31,
1998, and were 12% of total revenues in the quarter ended July
31, 1997.
The new contract stipulates that the sales price of bulk
paclitaxel to Immunex will be based on fair market value. As
a result, the Company relinquished future royalty payments
called for in the May 12, 1994 agreement in return for a
standard supply agreement and access to purchasers of bulk
paclitaxel worldwide. Further, the Company received the right
to earn revenues during fiscal 1999 as a result of shipments
of bulk paclitaxel that Immunex is expected to sell to IVAX.
Management expects total revenues from this new contract to
total approximately $1,400,000 in fiscal 1999. Finally, upon
termination of the original contract with AHP, which was
effective July 31, 1998, AHP relinquished all future claims
related to any advance payments made by AHP to the Company.
As such, the Company recognized revenue on all these advance
payments of $400,000 in the first quarter ended July 31, 1998.
On November 7, 1996, the Company signed a contract with Yew
Tree to supply GMP bulk paclitaxel for use in Europe and
Eastern Europe. Purchases by Yew Tree depend on necessary
governmental approvals in various European countries. The
agreement is non-exclusive. No sales of bulk paclitaxel to Yew
Tree were recognized in the three months ended July 31, 1998
and 1997.
RESULTS OF OPERATIONS:
Below is a table that summarizes the Company's results of
operations as a percentage of total revenues.
<TABLE>
Three months ended July 31,
1998 1997
<S> <C> <C>
Total revenues 100.0 % 100.0 %
Gross profit 23.6 % 24.9 %
Research and development 4.6 % 6.1 %
Sales and marketing 9.9 % 7.0 %
General and administrative 23.9 % 19.2 %
Loss from operations (14.8) % (7.3) %
Other income, net (0.3) % 3.9 %
Loss from operations before taxes (15.1) % (3.4) %
Net income (loss) (15.1) % (2.4) %
</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 July 31,
1998 1997
<S> <C> <C>
Natural ingredients products (includes nutraceuticals, $ 2,492,236 $ 2,822,155
natural flavor extracts and food ingredients)
Technical services (includes Hauser Laboratories 3,968,466 2,763,219
and Shuster Laboratories, Inc.)
Pharmaceuticals 590,716 1,960,143
$ 7,051,418 $ 7,545,517
</TABLE>
Total revenues decreased 6.5% to $7,051,418 in the first
quarter of fiscal 1999, from $7,545,417 in the first quarter
of fiscal 1998, the result of lower revenues from natural
ingredients products and pharmaceuticals, offset by increases
in revenues from technical services.
Natural Ingredients:
Natural ingredients product revenues decreased 12% in the
three months ended July 31, 1998, as compared to the same
period in last the fiscal year. The decrease is primarily
attributable to a decline in sales of nutraceutical products.
In the quarter ended July 31, 1998, nutraceuticals revenues
were $2,180,027, a decrease of $275,348, or 11%, from revenues
of $2,455,375 in the same quarter last year. Management had
expected to ship additional nutraceutical products totaling
approximately $2,000,000 in the first quarter of fiscal 1998,
but inventory overstock conditions at major customers delayed
these shipments until, management believes, the second and
third quarters of fiscal 1999.
Sales of natural flavor extracts and food ingredients were
$312,209 in the quarter ended July 31, 1998, a decrease of 15%
from revenues of $366,780 in the quarter ended July 31, 1997.
This decrease was the result of the timing of an order for
flavor extracts that did not take place during the first
quarter of fiscal 1999 but is expected to occur during the
second quarter fiscal 1999.
Technical Services:
Technical services revenues were $3,968,466 in the quarter
ended July 31, 1998, compared to $2,763,219 in the same
quarter of fiscal 1997, an increase of 44%. These increases
were because of ongoing natural products, custom synthesis and
drug development projects at Hauser Laboratories as well as
increasing revenues from Shuster Laboratories attributable to
the recently announced TAQA[Trademark] program and the Foods
2000 initiative.
Pharmaceuticals:
Revenues from pharmaceutical products in the quarter ended
July 31, 1998, decreased 70% 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 delivered in the first quarter
of fiscal 1998. The Company terminated its original contract
with AHP on July 31, 1998. As part of this agreement, AHP
relinquished all future claims related to any advance payments
made by AHP to the Company. As such, the Company recognized
revenue on all these advance payments of $400,000 in the first
quarter ended July 31, 1998.
Revenues from the sale of bulk paclitaxel could remain low for
the foreseeable future unless the Company is successful in
selling this product to other customers.
GROSS PROFIT. Total gross profit for the Company was 23.6%
and 24.9% of total revenues in the quarters ended July 31,
1998, and 1997, respectively. In the three-month periods
ended July 31, 1998, and 1997, gross profit for the natural
products industry segment was 19.4% and 23.6% of total natural
product revenues, respectively. The decrease was the result of
lower sales volume of nutraceutical product sales.
Gross profit for technical services in the three months ended
July 31, 1998, and 1997, was 26.8% and 27.2%, respectively.
This slight decrease is the result of a change in the mix of
technical service projects, which can change gross profit
quarter-to-quarter.
OPERATING EXPENSES. Research and development expenses were
$320,956 in the quarter ended July 31, 1998, compared to
$457,312 in the quarter ended July 31, 1997, a decrease of
almost 30%. The decrease in research and development costs is
related to not filling certain scientific staff positions
while the recruiting process is underway. The Company intends
to actively continue research and development efforts.
Sales and marketing expenses in the quarter ended July 31,
1998, were $699,200, an increase of $172,717 or 33% over the
same three-month period last year. The increase represents the
Company's accelerated efforts to market new products,
particularly in the areas of nutraceuticals and natural food
ingredients. The Company added new staff and increased
spending on advertising and marketing materials for launches
of new products, such as TT550[Trademark], a ginger based
product for motion sickness.
General and administrative expenses were $1,684,909 in the
first quarter of fiscal 1998, a 17% increase compared to
general and administrative expenses in the same quarter of
fiscal 1997. This increase is the result of adding staff to
the Company's Information Systems department, a one-time
$60,000 write-off of assets, and additional depreciation
expense on certain new leasehold improvements. Management
does not expect this expense to change materially over the
remainder of fiscal year 1999.
INTEREST INCOME/EXPENSE. Interest income was $27,054 and
$110,120 in the three months ended July 31, 1998, and 1997,
respectively. The decrease is the result of less capital
available for investment. Interest expense in the first
quarter ended July 31, 1998, was $46,384, compared to $2,382
in the quarter ended July 31, 1997. This increase reflects the
Company's use of its line of credit during the first quarter
of fiscal 1999.
OTHER INCOME. The Company sold shares of stock of a public
company during the first quarter of fiscal 1998 ended July 31,
1997. The gain recognized from the sale of this stock was
$187,645.
INCOME TAXES. The Company did not record any income tax
benefit on the operating loss in the quarter ended July 31,
1998, and is continuing to evaluate on a quarterly basis the
realizability of the deferred assets on the balance sheet.
Management believes it is more likely than not that these
assets will be realized by return to profitability, although
there can be no assurance of when profitability will be
attained. Management's estimate of the deferred tax assets
may change in the future.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $958,581 at
July 31, 1998, compared to $2,081,796 at April 30, 1998. The
decrease is primarily the result of an increase in advance
deposits for raw material inventory and the acquisition of
capital equipment. Cash has historically decreased during the
summer months because of the seasonality of raw material
purchases.
The Company has a revolving line of credit totaling $8,850,000
which expires on June 30, 2000. As of July 31, 1998, the
Company had borrowed $3,000,000 under this line and $595,081
had been applied against letters of credit for the purchase of
raw materials. Therefore, $5,254,919 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. Additionally, the
Company has a lease credit line with a bank of $564,000; as of
July 31, 1998, $370,158 was available for use under this line.
The Company does not use derivatives to manage its interest
rate risk. As of July 31, 1998, the Company was not in
compliance with a financial covenant for the line of credit,
which required the Company to report profitability in the
first quarter of fiscal 1999. The Company has obtained a
waiver from the bank for this covenant for the quarter ended
July 31, 1998. A similar covenant exists for the remaining
quarters of fiscal 1999.
The decline in revenues during the first quarter of fiscal
1999 reduced the Company's cash flows and required more use of
the bank line of credit. Management is considering several
opportunities to obtain additional funds to support working
capital needs and fund required expansion of plant capacity.
Therefore, 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, will be sufficient to meet the liquidity
needs of the Company on a long-term basis.
WORKING CAPITAL. Working capital as of July 31, 1998 was
$12,980,503 compared to $16,671,596 as of April 30, 1998. This
decrease is primarily attributable to the use of cash and cash
equivalents for the purchase of capital equipment, an increase
in deposits which represent advance payments for contracted
raw material, and an increase in non-current inventory
balances.
PROPERTY AND EQUIPMENT. Purchases of property and equipment
in the first three months of fiscal 1999, totaled $723,895.
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. The
Company also entered into new capital leases totaling $187,245
during the three months ended July 31, 1998, primarily for
laboratory equipment used in technical services.
YEAR 2000. The Year 2000 problem is the result of computer
systems and programs recognizing a date using "00" as the year
1900 rather than the year 2000, which could result in
miscalculations or system failures. The term "Year 2000
compliant" means that all computers, computer systems, and
software, including all firmware, microcode, and embedded
software, will accurately and consistently process date data
for all dates in the twentieth and twenty-first centuries
(including leap year considerations and data) without any loss
of functionality or performance. This processing includes
calculating, comparing, sequencing, storing, retrieving,
transmitting, receiving, sorting, and displaying date data
when computers, computer systems, or software are used as
stand-alone systems, or in combination with other software or
hardware. These computer systems will function without
interruption before, during, and after January 1, 2000 without
any change in operation or performance associated with the
advent of the new century. Additionally, these computer
systems will respond to date data input in a way that resolves
any ambiguity as to century in a defined and predetermined
manner; and store and provide output of date data in ways that
are unambiguous as to century. The term "software" includes,
but is not limited to, firmware, embedded software, and
microcode.
The Company has undertaken a thorough review of its current
information technology ("IT") and non-IT systems. This review
is expected to be a continuing process. Initial results of
the testing and identification phase of the Company's core
systems indicate that approximately one third of its desktop
computer systems (approximately 100 machines) and less than
one fourth of its other microprocessor or
microcontroller-based equipment (approximately 20 machines)
are in need of replacement for Year 2000 compliance. The
replacement of these machines is expected to be completed by
October 1999. Cost of replacement is not expected to exceed
$200,000. As the review progresses, this estimate could be
revised. Through first quarter of fiscal 1999, the Company
had expensed a total of $50,000 directly related to Year 2000
remediation efforts.
As another part of Year 2000-compliance review, the Company
has also undertaken a logical process of updating or deleting
software systems known to have problems handling two-digit
date information properly. The Company has completed the
testing and identification phase of the review of its core
applications supporting accounting, human resources and
manufacturing processes. Upgrade or replacement of these
applications is expected to be completed in the spring of
1999. The net cost of these upgrades is not expected to
exceed $50,000. The review of other software applications is
underway as well.
The Company has also implemented a Year 2000 compliance
inquiry program with its current and potential major vendors
and suppliers as to both the status of their equipment and
systems and any delays they anticipate in supplying goods and
services to the Company. Management expects that this
inquiry program will be completed by November 1, 1998. If a
third party's systems are not Year 2000 compliant, that
problem will be addressed directly with that third party.
Management recognizes that failure to meet all Year 2000
issues could result in significant degradation of the
Company's ability to provide laboratory testing, to produce
products, and to invoice customers and pay vendors.
Management is addressing these issues directly, aggressively
pursuing upgrading of all mission-critical systems.
Management foresees the likely internal "worst case scenario"
to be limited in scope, and could include a very small number
of machines which may not handle date data correctly. In this
event, processing of data will be shifted to other machines
until replacement can be accomplished. No significant
degradation of data collection or processing is anticipated.
The other major risk to normal operations could result from
the inability of our suppliers to provide materials, products
and services. The Company has begun identifying alternative
sources or suppliers to alleviate such circumstances.
If, due to unforeseen circumstances, installed hardware and
software systems cease to function on January 1, 2000, a
disaster recovery contingency plan (currently being drafted)
will be activated to handle the emergency situation. The
disaster recovery plan is expected to include a disaster
recovery computer center with sufficient equipment to allow
the Company to continue to data processing operations that
will operate on a 24-hour-a-day basis until normal operations
can be resumed. The Company has established relationships
with several computer system vendors who will be contracted to
provide the necessary hardware and software to support the
contingency plan.
The Company plans to devote the necessary resources to resolve
all significant Year 2000 issues in a timely manner.
SEASONALITY. The Company has experienced seasonality in its
sales of nutraceutical products. Lower demand for these
products is evident in the summer months and tend to increase
in the fall and winter months.
FORWARD LOOKING STATEMENTS
Certain oral and written statements of management of the
Company included in the Form 10-Q and elsewhere may contain
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future
operations. The forward-looking statements included herein and
elsewhere are based on current expectations that involve
judgments which are difficult or impossible to predict
accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any
of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements will
prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
Part 2.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security
Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
<PAGE>
FORM 10 Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HAUSER, INC.
Date: September 14, 1998
/s/Dean P. Stull
Chairman of the Board, Chief Executive Officer, and President
Date: September 14, 1998
/s/ David I. Rosenthal
Chief Financial Officer and Treasurer
