<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S ANNUAL 10-K FOR FISCAL 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 2,081,796
<SECURITIES> 0
<RECEIVABLES> 9,520,523
<ALLOWANCES> 430,518
<INVENTORY> 10,111,688
<CURRENT-ASSETS> 23,718,744
<PP&E> 44,190,650
<DEPRECIATION> 21,846,032
<TOTAL-ASSETS> 68,293,581
<CURRENT-LIABILITIES> 7,047,148
<BONDS> 0
<COMMON> 10,464
0
0
<OTHER-SE> 60,543,236
<TOTAL-LIABILITY-AND-EQUITY> 68,293,581
<SALES> 17,530,104
<TOTAL-REVENUES> 32,037,528
<CGS> 25,193,098
<TOTAL-COSTS> 25,193,098
<OTHER-EXPENSES> 11,489,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,931
<INCOME-PRETAX> (4,013,732)
<INCOME-TAX> 879,723
<INCOME-CONTINUING> (3,134,009)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,134,009)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
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, 1998
[ ] 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. Identification
incorporation or organization) 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.
$73,325,711 as of July 13, 1998
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 10,665,558
Class Outstanding at April 30, 1998
<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" or the "Company" 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,
Inc., a wholly-owned subsidiary, to facilitate 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
expand the skill base of the Company's Technical Services
business unit, the Company acquired 100% of the stock of
Shuster Laboratories, Inc. ("Shuster"), 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.
Today, the Company develops, manufactures and markets special
products from natural sources and offers innovative technical
services to a diverse customer base. The Company operates in
two industry segments: Natural Products and Technical
Services. Hauser's three business units are
NaturEnhance[TradeMark] Natural Ingredients, Technical
Services and Pharmaceuticals. It is a premier supplier of bulk
natural ingredients to dietary supplement and food ingredient
suppliers in the United States. Hauser's proprietary
extraction and purification processes enable the production of
natural extracts at a higher quality, yield and concentration.
The Company's Technical Services business unit has earned a
national reputation for scientific and problem-solving
excellence. It is comprised of Hauser Laboratories in Boulder,
and Shuster Laboratories in Quincy and Atlanta. The expertise
of the Technical Services' team in natural product isolation,
pharmaceutical development, and formulation of food products
and nutraceuticals well qualifies them to support Hauser's
other business units. The Company's pharmaceutical products
include natural and custom synthesized compounds used in a
variety of drug development and commercial applications. This
business unit is built on substantial experience and
capabilities manufacturing under Food and Drug Administration
("FDA") and Good Manufacturing Practices ("GMP"). Hauser is a
"Customer connected" company whose customer support utilizes
Hauser's technical and regulatory expertise to ensure the
success of each project. "Customer connected", a management
strategy implemented at Hauser, defines a company that:
totally focuses on customers' needs, owns and solves
customers' problems, builds strong customer/company
relationships at all levels, and capitalizes on customer
problems as company opportunities.
See Footnote 8 to the financial statements for a discussion of
the Company's two industry segments.
DESCRIPTION OF BUSINESS UNITS
NaturEnhance[TradeMark] Natural Ingredients - According to
industry sources, the natural ingredients industry is
currently estimated at $11 to $15 billion in size, registering
approximately an 18% compound annual growth rate since 1990.
Included in this market are the $7 billion natural foods
market, the $6 billion dietary supplements market and the $2
billion natural personal care market. The Company is
manufacturing bulk natural ingredients for the dietary
supplement and food ingredient industries in the United
States. This business unit contributed 43% of total revenues
in fiscal 1998.
Nutraceuticals - During fiscal 1995, Hauser began development
of a new product line, "Nutraceuticals". Nutraceuticals
include a broad range of natural, healthful products that are
used as dietary supplements. 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.
According to the Nutrition Business Journal, annual sales of
herbs and herb supplement products were approximately $2.7
billion in 1996, and now exceed $3.2 billion. Growth in
consumer sales was 24% in 1996, and, according to this
industry source, should be 30% per year for the foreseeable
future. Growth within the herbal supplement category has
occurred as a result of changing consumer trends, including
healthier habits, an aging "baby boomer" population with
rising discretionary income, rising costs of conventional
health care, and the enactment of the Dietary Supplement
Health & Education Act ("DSHEA") in 1994. Under DSHEA, the FDA
regulates herbal supplements as foods, not drugs.
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
currently sells the following nutraceutical products:
echinacea, valerian, Siberian ginseng, Panax ginseng,
rosemary, goldenseal, chamomille and St. John's wort. In
addition, the Company has introduced two proprietary products;
RoseOx[Registered Trademark], a rosemary extract and an
antioxidant, and TT550, a ginger based anti-nausea product.
Hauser's nutraceutical products are distinguished by the
Company's NaturEnhance[TradeMark] Natural Ratio, which
guarantees the product contains measured concentrations (the
assay) of one or more selected marker compounds, and assures
that the level of the active compounds is representative of
the botanical's natural ratio. The Hauser
NaturEnhance[TradeMark] Natural Ratio program ensures
customers the highest quality products, superior customer
service and access to the Company's cutting edge new product
development. See "Competition". Currently, there are no
government standards in the U.S. specifying the purity and
dosage of herbal supplements. Standardized herbal supplements
are defined as containing a concentrated market compound (key
ingredient).
The Company operates in the bulk herb market, providing
supplement manufacturers with standardized extracts and
service. The manufacturing chain of herbal supplements
consists of: 1) sourcing raw material; 2) extracting the
material; 3) standardizing and testing the extract; and 4)
selling it to manufacturers and marketers who then encapsulate
and package the supplements.
Sales of nutraceutical products accounted for 39%, 18%, and 5%
of total revenues in the fiscal years ending April 30, 1998,
1997, and 1996, respectively.
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. Sales of these products represent a very
small portion of the overall sales in the Natural Ingredients
business unit.
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 forty 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. In the
slow growing food and beverage business, an emerging trend is
occurring; the acceptance of "functional foods". During fiscal
1998, the Company entered into an agreement with Rockland
Foods, of Blauvelt, NY ("RFI"). RFI will serve as the
exclusive distributor for Hauser's NaturEnhance[TradeMark]
product lines to the foods and beverages markets. RFI
specializes in servicing food and beverage manufacturers,
flavor houses and cosmetic companies throughout North America.
RFI reaches 80% of the major foods market through its direct
sales force; the other 20% through eight broker networks.
During fiscal year 1996, the Company 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 ("Generally
Recognized As Safe") 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. Its StabilEnhance[TradeMark] product line is
the natural way to control flavor-deteriorating oxidation in
food products containing fats and oils.
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 1998, but shipments are expected to
increase in fiscal year 1999, because of increased interest
expressed by potential customers and the Company's
relationship with RFI. However, management is unable to
predict the timing and amount of future revenues from natural
food ingredients products and will continue to evaluate this
business during fiscal 1999.
Technical Services
Hauser's Technical Services business unit includes Hauser
Laboratories and Shuster Laboratories. Hauser Laboratories
reorganized during fiscal 1998 to meet the increasing demands
of the pharmaceutical, medical device and natural products
industries. To the pharmaceutical industry, Hauser
Laboratories provides process research and development, small
scale (cGMP) custom manufacturing, analytical methods and
development validation, and complete pharmaceutical testing.
For the medical device industry, Hauser Laboratories provides
failure analysis, material identification and suitability
testing, and product design validation. Natural product
services provided by Hauser Laboratories include development
of extraction and isolation processes, analytical method
development, custom manufacturing, and analysis of the
chemistry of natural products. Shuster provides a variety of
services for the consumer products industry which 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 on consumer
products. In addition, Shuster provides clients with technical
services in the Natural Ingredients area.
Technical Services generally works with clients in two ways.
First, the Company provides routine services based upon
standard procedures or methods to answer customers' technical
questions. The Company is compensated on a fee-for-service
basis. Second, 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 assist the
customer and 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.
During fiscal 1998, the Company signed a contract with
PharmaPrint, Inc. ("PharmaPrint") to manufacture various
botanical extracts and provide research and development
services. During fiscal 1998, sales to PharmaPrint accounted
for 14.9% of total revenues.
In addition, during fiscal 1998, the Company signed 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, Hauser will receive $2.3
million over a three year period. Hauser chemists will perform
custom synthesis of specified compounds under strict GMP
protocol, for NIDA's use in studying their efficacy in the
treatment of patients with various drug addictions. Some of
the new drug compounds may go through clinical trial
evaluation for treatment of cocaine abuse.
Examples of Technical Services projects that became
significant alliances for other business units include
production of bulk paclitaxel for Bristol-Myers Squibb Company
("Bristol") which grew out of work for the National Cancer
Institute ("NCI") under the Anti-Tumor Master Agreement, and
production of sanguinaria extract for Colgate Oral
Pharmaceuticals ("Colgate").
During fiscal 1998, Shuster developed a new Technically
Advanced Quality Assurance[TradeMark] ("TAQA[TradeMark]")
program for private label retailers. Shuster has been one of
the driving forces behind the development of the private label
industry. Over the years, the Company has stayed on the
cutting edge of the industry - working closely with top
supermarket chains, chain drug stores, and mass market
retailers to develop and maintain the best quality assurance
programs available in the private label industry.
TAQA[TradeMark] is a scientific program designed by Shuster to
help U.S. retailers increase private label sales. The
TAQA[TradeMark] program utilizes state-of-the-art performance
laboratories, qualified and trained laboratory personnel,
in-house expert sensory panels, and certified regulatory
affairs teams to provide retailers with a 99+% assurance level
of product quality. Current private label testing procedures
typically deliver a confidence level of only 55% to 60%. The
TAQA[TradeMark] program is based on the best of both
international (ISO) and current U.S. standards, and includes
product risk assessment.
Shuster recently launched Foods 2000, a program focusing on
new product development and related services for clients in
the fast-growing natural/organic foods and functional foods
markets. As part of this program, Shuster applied for and
received certification as a processor of organic foods from
one of the world's leading third-party certification agencies.
Under Foods 2000, Shuster is continuing to offer a wide range
of services to companies in the conventional foods market,
including product development, laboratory analysis, quality
assurance, regulatory compliance, and consumer testing.
However, in response to consumer trends, Shuster is putting
special emphasis on natural foods (including organic
products), and functional foods segments, particularly in the
area of new product development.
The Company believes there are opportunities to leverage the
synergy and reputations of Hauser Laboratories and Shuster for
increased profitability.
Revenues from Technical Services accounted for 45%, 36% and
53% of total revenues in fiscal years 1998, 1997, and 1996,
respectively.
Pharmaceuticals
The principal business of the Company's pharmaceuticals unit
is the development, manufacture, and sale of pharmaceutical
products. Hauser's pharmaceutical products include natural and
custom synthesized compounds used in a variety of drug
development and commercial applications.
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 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 unique 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. This business unit contributed
12% of total revenues in fiscal 1998, as compared to 88% in
fiscal 1994 when the Company's primary business activity was
the manufacture and sale of bulk paclitaxel to Bristol. See
"Competition".
As a percentage of total revenues, sales of pharmaceutical
products, were 12% in fiscal 1998, 39% in fiscal 1997, and 31%
in fiscal 1996.
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 and better quality 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[StateMark] (DL/SE[StateMark]) 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[StateMark] 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[StateMark] 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 process also ensures that the
level of the marker compound in a specific nutraceutical
product is representative of the botanical's natural ratio of
all compounds.
The Company's purification process, Liquid Liquid
Focusing[StateMark] (LLF[StateMark]), 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. 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[Registered Trademark], RoseOx 660[Registered
Trademark], Carnosic Acid Cascade[TradeMark], Delivering What
Nature Intended[TradeMark]. Natural Ratio[TradeMark],
Collagenex[TradeMark], and TT550[TradeMark]. The servicemarks
"Hauser" and "Shuster" have been registered to the Company.
During fiscal 1998, Shuster registered the trademark
TAQA[TradeMark] for its Technically Advanced Quality
Assurance[TradeMark] program.
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.
The Company purchases raw materials for its natural
ingredients business when the raw materials are 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, however, certain raw materials are in short supply
from time to time. 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. During fiscal 1998, the Company experienced one
such delay with increased costs because of poor raw material
quality.
The Company has contracted with several nurseries for the
planting and harvesting of cultivated yew trees for use in the
future production of paclitaxel. The loss of any one of these
suppliers would not adversely affect the current operations of
the Company. As of April 30, 1998, the Company had made
advance payments on these cultivated yew trees of $3,847,862.
Reference is made to Footnote 7 of the financial statements to
describe future commitments.
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.
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.
NaturEnhance[TradeMark] Natural Ingredients
Nutraceuticals - Today, virtually all guaranteed potency and
standardized herbal extract products are purchased from a
small number of large suppliers, located mostly in Europe and
China. Hauser's strongest competition in the nutraceuticals
market comes from Europe, in particular Indena
Pharmaceuticals, 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. There are several U.S. companies that
sell product into the nutraceuticals market, including
PureWorld, East Earth Herb and Triarco. While all competitors
manufacture standardized extracts, none produce products that
contain the natural ratio assay that the Company provides. In
general, these competitors are larger than Hauser, have more
years of experience, and established product lines.
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. Sales from
these products in fiscal 1998 increased 176% over fiscal 1997.
Natural Flavor Extracts - The Company markets natural flavor
extracts under Hauser's brand name NaturEnhance[TradeMark]
Flavor Extracts. The Company is marketing its flavor extracts
directly to flavor houses, as well as to food and beverage
companies through its exclusive distribution contract with
RFI.
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.
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.
Paclitaxel - United States
Paclitaxel, currently marketed by Bristol under their
trademark TAXOL[Registered Trademark], is used to treat
metastatic breast and ovarian cancers that have not responded
to first-line therapies. Bristol has enjoyed market
exclusivity in the United States for TAXOL[Registered
Trademark] pursuant to provisions of the Drug Price
Competition and Patent Term Restoration Act of 1984, commonly
referred to as the "Waxman-Hatch Act". This legislation
provided Bristol with marketing exclusivity through provisions
that barred the FDA from accepting paclitaxel its Abbreviated
New Drug Application ("ANDA") for filing until December 29,
1997.
In July 1997, Immunex Corporation (Hauser's customer through
AHP) received the first approval to market a competing
paclitaxel product in North America from the Health Protection
Branch in Canada. Boehringer-Ingelheim (Canada) Ltd., has
acquired Canadian marketing rights for Immunex's Paclitaxel
Injection product and is responsible for product distribution.
In Canada, the only approved and available paclitaxel product
that is competitive to TAXOL[Registered Trademark] is
Paclitaxel Injection. The bulk paclitaxel for the Immunex
Paclitaxel Injection is supplied by Hauser.
Immunex has announced that the FDA had accepted for review its
ANDA for generic Paclitaxel Injection. A provision of the
Waxman-Hatch Act permits a competitor to file an ANDA after
four years of exclusivity if the application contains a
Paragraph IV patent certification. Two patents issued to
Bristol relating to paclitaxel provide the basis for Immunex's
early filing. The Immunex ANDA, submitted on August 8, 1997,
and accepted for review on October 7, 1997, contains a
certification by Immunex, known as a "Paragraph IV
certification" that U.S. Patents 5,641,803 and 5,670,537 held
by Bristol and relating to TAXOL[Registered Trademark] are
invalid and not infringed by the Immunex paclitaxel product.
In January 1998, Immunex was sued by Bristol in the U.S.
District Court in Newark, New Jersey, alleging infringement by
Immunex of the two U.S. patents pertaining to TAXOL[Registered
Trademark]. The legal action by Bristol was anticipated by
Immunex and Hauser. As a result of the litigation, the FDA has
the right to withhold clearance of Immunex's ANDA until the
earlier of June 2000, or until a court enters final judgment
finding the patents invalid, unenforceable or not infringed.
As a result, Immunex, Hauser's customer, will not be able to
sell paclitaxel in the U.S. until the generic approval issue
is resolved.
On June 8, 1998, Immunex announced that they will collaborate
with IVX BioScience, Inc. ("IVX"), to market paclitaxel
products in the United States, subject to FDA approval. IVX
agreed to acquire the Immunex ANDA for generic paclitaxel. IVX
will also acquire Immunex's inventories of bulk paclitaxel.
The Company is currently in discussions with AHP, Immunex and
IVX with regard to its role in the future supply of
paclitaxel.
Paclitaxel - Europe
The Company and its customer, Yew Tree had been named in a
lawsuit filed by 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 was
determined. Subsequent to this result, Bristol appealed the
court's findings, and the case has now been settled in favor
of Yew Tree.
The legal actions initiated by Bristol in the United States
and elsewhere could substantially reduce the market for the
Company's paclitaxel-based products. The Company believes that
these actions by Bristol will not be successful. However, if
the courts uphold Bristol's position, the Company's investment
in paclitaxel related assets, including inventory of
paclitaxel valued by the Company as of April 30, 1998 at
$14,321,020, may be significantly delayed and 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.
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. AHP owns a majority interest in
Immunex, and bulk paclitaxel is actually supplied to Immunex
under the agreement between the Company and AHP. The Company
has supplied Immunex with bulk paclitaxel for its development
needs, including final product formulation and clinical
trials. In addition, Immunex has fulfilled the first stage of
minimum purchase agreements required over the first three
years of the AHP contract. The second stage of the AHP
contract will consist of subsequent payments made to the
Company in the form of a royalty, when Immunex sells finished
products which contain bulk paclitaxel. 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 was obtained to
sell generic paclitaxel in Canada as of July 8, 1997.
According to industry sources, the total annual market for
paclitaxel in Canada is about $20 million. In addition, there
can be no assurance that AHP or Immunex will market paclitaxel
successfully. 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. See "Competition - Paclitaxel - United States".
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, TT550[TradeMark], 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 could provide Hauser with future
manufacturing opportunities.
The Company's internally funded research and development
expenditures were approximately $2.2 million during fiscal
years 1998, 1997, and 1996. During fiscal 1998, 1997 and 1996
customer-sponsored R&D costs were approximately $2,530,000,
$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 manufacturing
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 by the U.S. Departments of
Interior and Agriculture to manage and protect wildlife and
forest resources.
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 necessary raw
materials, to manufacture natural ingredients, 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 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.
FDA Regulations:
NaturEnhance[TradeMark] Natural Ingredients
Nutraceuticals: Nutraceutical products fit into the FDA
product category of "Dietary Supplements". This product
category was established by the DSHEA and is separate from
foods and drugs.
The DSHEA 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 DSHEA, 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 DSHEA 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 DSHEA 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.
The DSHEA 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 DSHEA 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.
Pharmaceuticals
Paclitaxel: To market and sell paclitaxel in the United
States, the Company's customers must demonstrate that the
Company manufactures paclitaxel according to current 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 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.
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 $11 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, 1998, the Company employed 320 regular
full-time employees.
Hauser's operations in Boulder, Colorado included 39 employees
involved with administrative, financial and marketing
functions, 71 involved in Technical Services, 103 involved in
processing/sourcing of natural products, and 24 employees
involved with research and development efforts.
Shuster employed 34 people in administration, financial and
marketing functions, and 49 in Technical Services.
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.
The Company's facility at Hauser Park became operational in
January 1994. The 32,052 square foot facility houses 12,295
square feet of manufacturing space, 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.
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. The lease
expires on July 31, 2000.
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. This lease expires on November 30,
1998, and management is currently negotiating terms to renew
the lease.
During fiscal 1997, the Company obtained a revolving bank line
of credit with a bank for $8,850,000. Under the terms of the
loan agreement, all assets of the Company, with the exception
of intangibles, are secured by the bank.
Item 3. Legal Proceedings
Not applicable.
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, 1998.
<PAGE>
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 National Market 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>
Fiscal Year Ended April 30,
1998 1997
High Bid Low Bid High Bid Low Bid
<S> <C> <C> <C> <C>
First Quarter $ 7.38 $ 5.38 $ 8.00 $ 5.63
Second Quarter 7.38 5.75 7.13 5.50
Third Quarter 7.58 5.38 7.00 5.83
Fourth Quarter 9.00 5.88 7.88 6.38
</TABLE>
As of April 30, 1998, there were approximately 607 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, 1998, 1997, 1996,
1995 and 1994.
<TABLE>
Year Ended April 30,
1998 1997 1996 1995 1994
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Natural product processing $17,530,104 $16,190,979 $ 8,123,760 $11,460,116 $57,481,911
Technical services 14,507,424 9,034,787 9,315,672 3,796,559 2,902,546
Total revenues 32,037,528 25,225,766 17,439,432 15,256,675 60,384,457
Cost of revenues 25,193,098 21,310,463 18,459,170 12,580,463 36,399,299
Gross profit (loss) 6,844,430 3,915,303 (1,019,738) 2,676,212 23,985,158
Operating expenses 11,489,972 9,956,699 9,562,314 7,686,276 9,076,719
Income (loss) from operations (4,645,542) (6,041,396) (10,582,052) (5,010,064) 14,908,439
Other income (expense):
Interest income 315,280 528,424 1,047,734 1,857,406 1,231,204
Interest expense (44,931) (18,947) (40,738) (42,667) -
Gain (loss) from investments 361,461 - (1,000,000) - -
Total other income (expense) 631,810 509,477 6,996 1,814,739 1,231,204
Income (loss) from continuing operations before
provision for income taxes (4,013,732) (5,531,919) (10,575,056) (3,195,325) 16,139,643
Benefit (provision) for income taxes 879,723 1,628,993 4,134,812 1,246,666 (5,818,000)
Income (loss) from continuing operations (3,134,009) (3,902,926) (6,440,244) (1,948,659) 10,321,643
Loss from discontinued operations - (2,628,610) (1,296,092) (748,491) -
Net income (loss) $(3,134,009) $(6,531,536) $(7,736,336) $(2,697,150) $10,321,643
Diluted income (loss) per share from
continuing operations $ (0.30) $ (0.38) $ (0.62) $ (0.19) $ 0.98
Diluted income (loss) per share from
discontinued operations - (0.25) (0.13) (0.07) -
Diluted net income (loss) per share $ (0.30) $ (0.63) $ (0.75) $ (0.26) $ 0.98
Weighted average number of shares outstanding 10,439,800 10,389,111 10,344,169 10,478,545 10,504,075
</TABLE>
<TABLE>
As of April 30,
1998 1997 1996 1995 1994
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital $16,671,596 $21,162,501 $32,054,242 $34,403,946 $ 37,656,042
Property and equipment, net 22,344,618 23,186,057 24,605,560 25,128,717 25,751,356
Total assets 68,293,581 66,797,878 74,410,380 82,575,167 84,568,740
Long-term debt 692,733 121,764 130,271 111,078 -
Stockhkolders' equity 60,553,700 63,691,554 70,183,619 77,391,459 80,770,038
</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,
1998 1997 1996 1998 1997
Revenues:
<C> <C> <C> <S> <C> <C>
54.7% 64.2% 46.6% Natural product processing 8.3% 99.3%
45.3% 35.8% 53.4% Technical services 60.6% -3.0%
100.0% 100.0% 100.0% Total revenues 27.0% 44.6%
21.4% 15.5% -5.8% Gross profit (loss) 74.8% 484.0%
7.0% 8.9% 12.4% Research and development -0.5% 3.9%
7.5% 6.4% 6.7% Sales and marketing 47.6% 38.8%
16.8% 24.2% 35.8% General and administrative -11.9% -2.3%
4.7% - - Product warranty N/A -
- -14.5% -23.9% -60.7% Loss from operations -23.1% -42.9%
- -12.5% -21.9% -60.6% Loss from continuing operations before taxes -27.4% -47.7%
- -9.8% -15.5% -36.9% Loss from continuing operations -19.7% -39.4%
- - -10.4% -7.4% Loss from discontinuing operations N/A 102.8%
- -9.8% -25.9% -44.4% Net loss -52.0% -15.6%
</TABLE>
The Company realized significant financial performance
improvement in the year ended April 30, 1998. Compared to the
prior fiscal year, total revenues increased 27%, gross margin
increased 75%, and the operating loss declined from $6,041,396
in fiscal 1997, to $4,645,542 in fiscal 1998.
These dramatic improvements were the result of the Company's
efforts to increase its presence in the natural ingredients
markets, and expand its strength in providing technical
services to clients. Sales of NaturEnhance[TradeMark] natural
ingredients, which include nutraceuticals, flavors and food
ingredients, increased 117% over the prior year. Revenues from
technical services increased almost 61% over the prior year.
Offsetting these improvements was a decline in pharmaceutical
revenues of 61% because of regulatory issues and uncertainty
in the market for paclitaxel products. Pharmaceutical sales
are largely dependent upon the Company's strategic customers,
and legal and regulatory issues that are out the Company's
control create unpredictability quarter-to-quarter.
The Company was not profitable in fiscal 1998, although the
loss from continuing operations improved almost 20% over the
previous fiscal year. Management has completed operating plans
for fiscal year ended April 30, 1999, and believes that the
Company can regain profitability 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 May 21, 1998, the Company announced the discovery of small
amounts of a common fungicide called quintozene in its bulk
Panax ginseng that had been shipped to customers. The Company
had used Environmental Protection Agency guidelines to screen
for herbicides and pesticides, but this particular fungicide
was not included in the general guidelines. The Company
immediately stopped all Panax ginseng processing and
shipments, pending further testing and discussions with
regulatory authorities. Based upon test results and analytical
reviews of the substance, the Company believes that the levels
of quintozene present in the bulk extract are well below any
reasonable risk levels.
However, management does expect that the existence of this
fungicide in the Panax ginseng will create additional cost to
the Company. As such, a charge to earnings of $1,500,000 was
taken in the fourth quarter of fiscal 1998 in anticipation of
product returns, re-work costs, development work required to
provide methodology to remove the substance from the bulk
extracts, and legal and professional fees. Sales of Panax
ginseng generated less than 5% of total revenues in fiscal
1998, and management believes that the temporary hold on
shipments of this product will not have a material impact on
the future operations of the Company.
When reviewing the results of operations for the Company, it
is important to note that significant sales momentum occurred
in the fourth quarter of fiscal 1998, and had the
aforementioned charge to earnings not been required, results
for the fourth quarter would have been profitable.
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.
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 $3.2 billion, and
is growing at over 30% 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(). 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 January 31, 1998, 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 is expected to be
$20 million over the next three years. The Company continues
to manufacture botanical products and provides research and
development services to PharmaPrint to support its
herbal-based pharmaceuticals. Sales of products and services
to PharmaPrint in the year ended April 30, 1998 were 14.9% of
total revenues. Management expects the level of sales to
PharmaPrint to decline in fiscal 1999 due to growth in other
areas and delays in sales of Panax ginseng.
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.
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.
Minimal revenue from natural food ingredients products was
recognized in fiscal year 1998, but shipments are expected to
increase because of expanded marketing efforts generating
interest from 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. 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 year ended
April 30, 1998, Technical Services revenues increased almost
61% over the 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 year 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 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.
On-going 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, had been named in a
lawsuit filed by 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 was
determined. Subsequent to this result, Bristol appealed the
court's findings, and the case has now been settled in favor
of Yew Tree. 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 $14,321,020 of paclitaxel
related inventory at April 30, 1998, $3,847,862 as deposits on
future raw materials, and approximately $4,437,748 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
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
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 IVX
BioScience, Inc., to market paclitaxel products in the United
States, subject to FDA approval. IVX agreed to acquire the
Immunex abbreviated new drug application for generic
paclitaxel. IVX will also acquire Immunex's inventories of
bulk paclitaxel. The Company is currently in discussions with
AHP, Immunex and IVX Bio Science, Inc. with regard to its role
in the supply of 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
non-refundable subject only to traditional product warranty
criteria. AHP is not required to purchase additional product
after August 1997. Sales to AHP were less than 10% of total
revenues in fiscal 1998.
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 1999.
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 could total
$11,000,000 and has an initial three-year term. Purchases by
Yew Tree depend on necessary governmental approvals in various
European countries. No sales of bulk paclitaxel to Yew Tree
were recognized in the year ended April 30, 1998.
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").
Revenues for Ironwood were $2,670,389 and $8,225,582 in the
years ended April 30, 1997 and 1996, respectively. The results
for fiscal 1997 include a non-recurring charge for the
divestiture of Ironwood.
The Company received cash of $250,000, a promissory note of
$150,000 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
1998 1997 1996
<S> <C> <C> <C>
Natural ingredients products (includes nutraceuticals,
natural flavor extracts and food ingredients) $13,674,835 $ 6,308,055 $ 2,642,481
Technical services (includes Hauser and Shuster
Laboratories) 14,507,424 9,034,787 9,315,672
Pharmaceuticals 3,855,269 9,882,924 5,481,279
$32,037,528 $25,225,766 $17,439,432
</TABLE>
Total revenues in fiscal 1998 increased 27% to $32,037,528
from $25,225,766 in fiscal 1997. This increase was the result
of increases in natural ingredients product sales and
increases in technical service revenues, offset by a decline
in the sales of bulk paclitaxel to pharmaceutical customers.
Revenues increased almost 45% in fiscal 1997 as compared to
fiscal 1996 due to increased revenues from the sales of
pharmaceutical and nutraceutical products.
Natural ingredients:
Natural ingredients product revenues increased almost 117% in
fiscal 1998 to $13,674,835 from $6,308,055 in fiscal 1997. The
increase is primarily attributable to success in selling
nutraceutical products as revenues were $12,531,190 in fiscal
1998, an increase of $7,997,840 from revenues of $4,533,350 in
fiscal 1997. Revenues from the sales of natural flavor
extracts in fiscal 1998 were $960,267, a 44% decrease from
revenues of $1,700,945 in fiscal 1997. This decrease was
primarily due to low sales activities until November, 1997 at
which time a distributor was hired to market the products. In
addition, the Company sold food ingredients products of
$183,378 in fiscal 1998 compared to revenues of $73,760 in
fiscal 1997.
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.
Technical Services:
Technical services revenues were $14,507,424 in fiscal 1998
compared to $9,034,787 in fiscal 1997, an increase of almost
61%. This increase was due primarily to the Company's
concentrated efforts to increase 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 year as part of the
expanded relationship mentioned earlier.
Technical services revenues were $9,034,787 in 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.
Pharmaceuticals:
Revenues from pharmaceuticals products in fiscal 1998
decreased 61% compared to fiscal 1997. This was due to
decreased sales of bulk paclitaxel because of regulatory
issues and on-going litigation which have created some
uncertainty in the market. Pharmaceutical sales are largely
dependent upon the Company's strategic customers, and legal
and regulatory issues that are out of the Company's control
create unpredictability quarter-to-quarter. Total revenues
from bulk paclitaxel and taxanes were $3,855,269 in fiscal
1998 compared to revenues of $9,142,913 in fiscal 1997.
Revenues from pharmaceutical products in fiscal 1997 increased
more than 80% compared to fiscal 1996. This was due to
increased sales of paclitaxel to two customers. The Company
signed an agreement with Yew Tree in November, 1996 to supply
bulk paclitaxel over a three-year period and made a
significant shipment 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. 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. No revenues
from sanguinaria extract were recognized in fiscal 1998.
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.
GROSS PROFIT (LOSS). Gross margin for the natural products
industry segment in fiscal 1998 was 13.9% of total revenues as
compared to 16.5% in fiscal 1997 and negative 40.9% in fiscal
1996. The decline in fiscal 1998 is primarily due to lower
sales of paclitaxel offset by significantly higher sales of
natural ingredients products. The improvement in fiscal 1997
was the result of two large sales of paclitaxel. The Company
recognized improved gross margins from the sales of
nutraceuticals products in fiscal 1998 due to changes in
pricing and increased manufacturing efficiencies. However,
margins from these sales vary because of product mix. In
addition, the Company is still incurring high overhead costs
in relation to its current sales levels, the result of excess
plant capacity.
Gross margin for technical services increased in fiscal 1998
to 30% of revenue as compared to 14% in fiscal 1997 and 24% of
revenues in fiscal 1996. The increase in fiscal 1998 was the
result of more projects related to drug development and
natural ingredients formulations that generated higher
margins. The decline in fiscal 1997 was the result of the mix
of services provided, including more analytical and testing
services which generate lower margins.
OPERATING EXPENSES. Research and development expenses were
$2,229,843 in fiscal 1998 compared to $2,240,992 in fiscal
1997 and $2,157,708 in fiscal 1996. While research and
development expenses have remained approximately flat, the
Company intends to actively continue research and development
efforts and expenses in this area could increase over the next
year to support the growing needs of the Company.
Sales and marketing expenses in fiscal years ending April 30,
1998, 1997, and 1996 were $2,390,602, $1,619,937, and
$1,167,447, respectively. The increase represents the
Company's accelerated efforts to market new products,
particularly in the areas of nutraceuticals and natural food
ingredients. Fiscal 1998 and 1997 sales expenses include
payments of commissions to internal salespeople and external
distributors, and these costs have increased as sales have
increased.
General and administrative expenses were $5,369,527 in fiscal
1998, a 12% decrease from $6,095,770 in fiscal 1997. Fiscal
1997 general and administrative expenses declined 2% as
compared to fiscal 1996. The decrease in fiscal 1998 was the
result of lower insurance, legal and consulting fees. In
addition, the fiscal 1997 expense includes a charge of
$345,000 for the disposition of certain production facility
assets. These decreases are the result of management's
continued efforts to reduce general and administrative costs
where appropriate.
Product warranty expense in fiscal 1998 of $1,500,000 was an
estimate of anticipated costs related to a fungicide found in
a product sold by the Company. This estimate was recorded in
the fourth quarter of the fiscal year, since the discovery of
the substance was made in May 1998. The reserve related to
potential product returns, re-work costs, development work
required to provide methodology to remove the substance from
the bulk extracts and legal and professional fees. Management
believes this estimate is adequate, but has no assurance that
this reserve will cover the actual costs related to this
situation.
INTEREST INCOME. Interest income was $315,280 in fiscal 1998,
$528,424 in fiscal 1997 and $1,047,734 in fiscal 1996. The
decreases are due to less capital available for investment.
OTHER INVESTMENTS. The Company sold its investment in a
public company and realized a gain of $361,461 in fiscal 1998.
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 were $2,081,796 at
April 30, 1998 compared to $8,379,551 at April 30, 1997. The
decrease is due primarily to 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 $8,850,000
which expires on June 30, 2000. As of April 30, 1998,
$7,350,000 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. 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. As of April 30, 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 fourth quarter of fiscal 1998. The
Company has obtained a waiver from the bank for this covenant
as of April 30, 1998.
In addition, the Company has a lease credit line with a bank
of $564,000; as of April 30, 1998, $346,083 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 will be sufficient to meet the
liquidity needs of the Company on a long-term basis.
WORKING CAPITAL. Working capital as of April 30, 1998 was
$16,671,596 compared to $21,162,501 as of April 30, 1997. This
decrease is primarily attributable to the use of cash to fund
deposits on growing contracts of $2,599,619 and capital
expenditures of $1,994,285. Further, current borrowings
increased $1,739,582 primarily due to a $1,500,000 increase in
the line of credit and a one time product warranty reserve of
$1,500,000.
PROPERTY AND EQUIPMENT. Purchases of property and equipment
in fiscal 1998 totaled $2,058,167. This was primarily the
result of improvements to manufacturing equipment for the
production of nutraceuticals and food ingredients products.
The Company expects capital expenditures to be approximately
$3,000,000 in fiscal 1999 for additional manufacturing
equipment improvements, and expects to fund these expenditures
through cash generated from operations.
INCOME TAXES. The Company has a net deferred tax asset of
$3,579,773 that has been reduced by a valuation allowance of
$623,280 to $2,956,493 as of April 30, 1998. The Company
believes the $2,956,493 recorded is more likely than not to be
recovered because of: (1) absent the one-time product warranty
charge, the Company returned to profitability in the fourth
quarter of fiscal 1998 and (2) the Company has significant
appreciated assets on its balance sheet at April 30, 1998,
including investments in its land and buildings and paclitaxel
related assets. Although the Company believes the $2,956,493
will be realized, the amount of the deferred tax asset
considered realizable could be reduced in the near term if
estimates of future taxable income do not materialize.
BACKLOG. Backlog of unfilled purchase orders was $2,974,817
of as April 30, 1998, compared to $4,370,876 as of April 30,
1997. Backlog 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.
YEAR 2000
The Company is currently working to resolve the potential
impact of the Year 2000 on the processing of date-sensitive
information by the Company's computerized information systems.
The Year 2000 problem is the result of computer programs
recognizing a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system
failures. Through fiscal 1998, the Company had expensed
incremental costs of $50,000 related to Year 2000 remediation
efforts. The additional costs of addressing potential problems
are not currently expected to have a material adverse impact
on the Company's financial position, results of operations or
cash flows in future periods. The Company plans to devote the
necessary resources to resolve all significant Year 2000
issues in a timely manner.
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:
<TABLE>
Page
<S> <S>
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended April 30,
1998, 1997 and 1996 F-3
Consolidated Balance Sheets as of April 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended April 30,
1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the years ended
April 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements for the years
ended April 30, 1998, 1997 and 1996 F-7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hauser, Inc.:
We have audited the accompanying consolidated balance sheets
of Hauser, Inc. (a Colorado Corporation) and its subsidiaries
as of April 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows
for the years 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 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. and its subsidiaries as of April 30,
1998 and 1997, and the results of their operations and their
cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Denver, Colorado,
June 19, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Hauser, Inc.:
We have audited the accompanying consolidated statements of
operations, stockholders' equity and cash flows of Hauser,
Inc. (formerly Hauser Chemical Research, Inc.) and its
subsidiaries for the year 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 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 consolidated
results of operations and cash flows of Hauser, Inc. (formerly
Hauser Chemical Research, Inc.) and its subsidiaries for the
year 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,
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Natural product processing $ 17,530,104 $ 16,190,979 $ 8,123,760
Technical services 14,507,424 9,034,787 9,315,672
Total revenues 32,037,528 25,225,766 17,439,432
COST OF REVENUES:
Natural product processing 15,091,082 13,543,487 11,446,880
Technical services 10,102,016 7,766,976 7,012,290
Total cost of revenues 25,193,098 21,310,463 18,459,170
GROSS PROFIT (LOSS) 6,844,430 3,915,303 (1,019,738)
OPERATING EXPENSES:
Research and development 2,229,843 2,240,992 2,157,708
Sales and marketing 2,390,602 1,619,937 1,167,447
General and administrative 5,369,527 6,095,770 6,237,159
Product warranty 1,500,000 - -
Total operating expenses 11,489,972 9,956,699 9,562,314
LOSS FROM OPERATIONS (4,645,542) (6,041,396) (10,582,052)
OTHER INCOME (EXPENSE):
Interest income 315,280 528,424 1,047,734
Interest expense (44,931) (18,947) (40,738)
Gain (loss) from investments 361,461 - (1,000,000)
Total other income 631,810 509,477 6,996
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (4,013,732) (5,531,919) (10,575,056)
INCOME TAX BENEFIT 879,723 1,628,993 4,134,812
NET LOSS FROM CONTINUING OPERATIONS (3,134,009) (3,902,926) (6,440,244)
DISCONTINUED OPERATION:
Loss from discontinued operation, net of applicable income
tax benefit of $0, $321,568, and $832,126 respectively - (528,464) (1,296,092)
Loss on disposal of discontinued operation, net of applicable
income tax benefit of $0, $1,283,386,and $0, respectively - (2,100,146) -
LOSS FROM DISCONTINUED OPERATION - (2,628,610) (1,296,092)
NET LOSS $ (3,134,009) $ (6,531,536) $ (7,736,336)
LOSS PER SHARE BASIC AND DILUTED:
Continuing operations $(0.30) $(0.38) $(0.62)
Discontinued operations - (0.25) (0.13)
Loss per share $(0.30) $(0.63) $(0.75)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 10,439,800 10,389,111 10,344,169
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
April 30,
ASSETS 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,081,796 $ 8,379,551
Restricted cash 139,346 -
Held-to-maturity investments - 196,751
Accounts receivable, less allowance for doubtful accounts:
1998, $430,518; 1997, $359,632 9,090,005 4,961,132
Income taxes receivable - 1,445,046
Inventories, current 10,111,688 7,073,295
Prepaid expenses and other 349,570 406,325
Net deferred income tax asset 1,946,339 1,684,961
Total current assets 23,718,744 24,147,061
PROPERTY AND EQUIPMENT:
Land and buildings 7,635,216 7,418,526
Lab and processing equipment 31,883,787 29,513,011
Furniture and fixtures 4,671,647 4,459,006
Total property and equipment 44,190,650 41,390,543
Accumulated depreciation (21,846,032) (18,204,486)
Net property and equipment 22,344,618 23,186,057
OTHER ASSETS:
Goodwill, less accumulated amortization:
1998, $936,670; 1997, $651,772 1,961,462 2,182,791
Inventories, non-current 14,787,837 14,710,409
Deposits 4,013,992 1,414,373
Net deferred income tax asset 1,010,154 351,862
Other 456,774 805,325
$68,293,581 $66,797,878
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,764,294 $ 1,486,499
Current portion of long-term debt 1,911,498 171,916
Accrued salaries and benefits 1,201,201 960,698
Deposits 670,155 200,000
Product warranty 1,500,000 -
Other accrued current liabilities - 165,447
Total current liabilities 7,047,148 2,984,560
LONG-TERM DEBT 692,733 121,764
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 1998, 10,464,458; 1997, 10,419,028 10,464 10,419
Additional paid-in capital 58,864,295 58,622,066
Unrealized gain on available-for-sale investment, net of income taxes - 246,119
Retained earnings 1,678,941 4,812,950
Total stockholders' equity 60,553,700 63,691,554
$68,293,581 $66,797,878
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(3,134,009) $(6,531,536) $(7,736,336)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,022,965 4,171,790 3,592,872
Provision for bad debt 235,574 105,000 322,673
Provision for excess inventories 41,829 562,057 -
Provision for product warranty 1,500,000 - -
Loss on disposal of discontinued operation - 3,383,532 -
Loss on disposal of assets 92,319 344,255 176,004
Gain on sales of investment (361,461) - -
Writedown of investment - - 1,000,000
Deferred income tax benefit (879,723) (2,412,827) (2,169,804)
Change in deposits and other (2,535,737) (1,139,985) 125,569
Change in assets and liabilities, net of effects from
the purchase of Shuster and Ironwood:
Accounts receivable (4,364,447) 910,073 (613,343)
Income taxes receivable 1,445,046 1,220,418 (366,518)
Inventories (3,304,476) (5,305,498) (4,562,562)
Prepaid expenses and other 56,755 (111,692) (173,511)
Accounts payable 277,795 1,036,684 (670,272)
Customer deposits 470,155 25,628 -
Other accrued liabilities 75,056 (185,331) 167,517
Net cash used in operating activities (6,362,359) (3,927,432) (10,907,711)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,058,167) (2,729,671) (2,165,810)
Proceeds from sale of investments 458,479 - -
Purchase of Shuster's common stock, net of cash acquired (63,569) - (3,317,919)
Sale of Ironwood net assets - 250,000 -
Collection on Note Receivable 108,411 - -
Issuance of Notes Receivable (60,000) - -
Purchase of investments (194,922) (293,865) -
Maturity of investments 391,673 7,900,000 19,587,413
Net change in restricted cash (139,346) - -
Net cash (used in) provided by investing activities (1,557,441) 5,126,464 14,103,684
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank lines of credit 1,500,000 - -
Proceeds from issuance of long-term debt - 274,833 -
Repayments of long-term debt (120,229) (781,518) (45,791)
Proceeds from issuance of common stock and warrants 242,274 258,452 122,446
Purchase of treasury stock - - (88,750)
Net cash provided by (used in) financing activities 1,622,045 (248,233) (12,095)
Net increase (decrease) in cash and cash equivalents (6,297,755) 950,799 3,183,878
Cash and cash equivalents, beginning of year 8,379,551 7,428,752 4,244,874
Cash and cash equivalents, end of year $ 2,081,796 $ 8,379,551 $ 7,428,752
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 44,931 $ 18,947 $ 37,722
Cash received during the year for income taxes refunded $ 1,625,855 $ 2,052,637 $ 2,415,450
Non-cash investing and financing activity:
Capital lease obligations incurred through lease of lab
and processing equipment $ 930,780 $ 64,538 $ -
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gain On
Additional Available Total
Common Stock Paid-in Treasury Stock For-Sale Retained Stockholders'
Shares Amount Capital Shares Amount Investments Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 benefit 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
Retirement of treasury
stock (201,100) (201) (1,054,611) 201,100 1,054,812 - - -
Change in unrealized
gain on available-for-
sale investment - - - - - (218,981) - (218,981)
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
Exercise of stock options 45,430 45 223,881 - - - - 223,926
Tax benefit from employee
exercise of stock
options - - 18,348 - - - - 18,348
Change in unrealized
gain on available-for-
sale investment - - - - - (246,119) - (246,119)
Net loss - - - - - - (3,134,009) (3,134,009)
BALANCE, April 30, 1998 10,464,458 $10,464 $58,864,295 - $ - $ - $ 1,678,941 $60,553,700
See notes to consolidated financial statements.
</TABLE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
Hauser, Inc. (the "Company"), a Colorado corporation, and its
wholly 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. Because of a relatively long production cycle for
paclitaxel, the Company has purchased and committed to
purchase significant raw materials (see note 7), and has
committed significant resources to process such raw materials
in anticipation of delivering paclitaxel to customers in the
future. At April 30, 1998, the Company had paclitaxel related
assets of: $14,321,020 of both in-process and finished
inventory; $3,847,862 as deposits on future raw materials; and
approximately $4,437,748 net book value of related equipment
used in the manufacturing process for paclitaxel.
Under the Waxman-Hatch Act, Bristol-Myers Squibb Company
("Bristol") had an exclusive right to sell Taxol[Registered
Trademark] in the United States, which expired on December 27,
1997. Bristol has also obtained certain usage patents which
have barred access to the United States market. The validity
of these patents is currently in litigation. If Bristol's
usage patents are upheld in the courts, entry into the United
States market would be significantly delayed, and thus the
recovery of the Company's investment in paclitaxel related
assets would also be significantly delayed, or could result in
revaluation in the amounts recoverable from such assets.
The Company markets paclitaxel through an exclusive
relationship with one company in North America and a
non-exclusive relationship with one company in Europe. The
Company's North American partner has approval to sell generic
paclitaxel in Canada. In Europe, the Company's partner has
been approved to sell paclitaxel in the Netherlands as an
equivalent product, not a generic product.
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 related assets.
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 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 $209,577.
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 from continuing operations $(6,481,761)
Net loss per share from continuing operations $ (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. Revenues of Ironwood were
$2,670,389 and $8,225,582 in fiscal years 1997 and 1996,
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.
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 common fungicide, quintozene, in its bulk
Panax ginseng. Sales of Panax ginseng accounted for less than
5% of total revenues in fiscal 1998.
Advertising - The Company expenses advertising costs as they
are incurred.
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>
1998 1997
<S> <C> <C>
Raw materials $ 5,224,750 $ 3,373,554
Work in process 11,763,470 13,019,432
Finished goods 8,515,134 5,952,775
Total before valuation allowance 25,503,354 22,345,761
Less: valuation allowance (603,829) (562,057)
Total inventories 24,899,525 21,783,704
Less non-current inventories 14,787,837 14,710,409
Current portion of inventories $10,111,688 $ 7,073,295
</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 as of April 30, 1997. The Company
had no held-to-maturity investments as of April 30, 1998.
<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>
The Company accounts for equity securities that have a readily
determinable value and debt securities that are
available-for-sale at quoted fair values. At April 30, 1997,
the Company had an equity investment with a cost of $100,000
and a fair value of $502,966. Unrealized gains are recorded in
stockholders' equity net of the income tax effect. This
investment was sold during fiscal 1998 for a gain of $361.461.
The Company also invests short-term excess cash in a bond
mutual fund which is considered to be a cash equivalent. At
April 30, 1998 and 1997, the fund had a quoted market value of
$1,120,513 and $4,005,191, 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 its 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>
Depreciation was $3,738,158, $3,888,336, and $3,356,396 for
fiscal years 1998, 1997 and 1996, respectively.
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.
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 - During fiscal 1998, the Company
adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), which was required to be
adopted on December 15, 1997. This statement establishes
standards for computing and presenting basic and diluted
earnings per share. Under this statement, basic earnings or
loss per share is computed by dividing the net earnings or
loss by the weighted average number of shares of common stock
outstanding. Diluted earnings or loss per share is determined
by dividing the net earnings or loss by the sum of (1) the
weighted average number of common shares outstanding and (2)
if not anti-dilutive, the effect of outstanding warrants and
stock options determined utilizing the treasury stock method.
The adoption of SFAS 128 had no effect on previously reported
earnings (loss) per share.
In fiscal 1998, 1997 and 1996, stock options and warrants
totaling 709,256, 548,362, and 443,687 respectively were
excluded from the calculation of diluted earnings (loss) per
share since the result would have been anti-dilutive.
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.
Recently Issued Accounting Standards - In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes
standards for reporting and displaying comprehensive income
and its components in a financial statement that is displayed
with the same prominence as other financial statements. SFAS
130 is effective for fiscal years beginning after December 15,
1997. Comprehensive (loss) would have been approximately
($3,380,000), ($6,750,000) and ($7,270,000) for the years
ended April 30, 1998, 1997, and 1996, respectively.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("SFAS 131"). SFAS 131
requires that public companies report information about their
operating segments based on the financial information used by
the chief operating decision maker in their annual financial
statements and requires those companies to report selected
information in their interim statements. SFAS 131 is effective
for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. It requires
that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and
measures those instruments at fair value. SFAS 133 is
effective for fiscal quarters and fiscal years beginning after
June 15, 1999. Management believes that the adoption of SFAS
133 will not have a significant impact on the Company's
financial condition and results of operations.
3. LONG-TERM DEBT
Future minimum payments for the years ending April 30 are as
follows:
<TABLE>
Notes payable Capital lease obligations Lin Of Credit
(5.5% to 15.4%) (11.2% to 15%) (variable)
<S> <C> <C> <C>
1999 $ 36,105 $ 473,327 $1,500,000
2000 1,000 443,246 -
2001 - 299,293 -
2002 - 13,296 -
2003 - 12,188 -
Total 37,105 1,241,350 1,500,000
Less: interest - (174,224) -
April 30, 1998 $ 37,105 $1,067,126 $1,500,00
April 30, 1997 $ 157,335 $ 136,345 $ -
</TABLE>
At April 30, 1998 and 1997, property and equipment includes
items under capital leases with book values of $1,032,293 and
$138,396, respectively, and accumulated depreciation of
$247,570 and $85,208, respectively.
Lines Of Credit - The Company has an $8,850,000 bank line of
credit which allows the Company to obtain advances or letters
of credit against a borrowing base of eligible accounts
receivable, inventory and fixed assets. As of April 30, 1998,
$1,500,000 had been borrowed against the line. The line of
credit has an annual fee of 0.50% of the unused portion of the
line and interest is payable monthly at the bank's prime rate
plus 0.75% (9.25% at April 30, 1998). The line of credit
expires June 30, 2000 and is secured by all assets of the
Company, with the exception of intangibles.
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. As of April 30, 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 fourth quarter of fiscal 1998. The
Company has obtained a waiver from the bank for this covenant
as of April 30, 1998.
Restricted cash is equal to interest due over one year based
on the amount borrowed and is required to be maintained on
deposit at a financial institution as security for the
Company's line of credit. Cash on deposit at April 30, 1998
was $139,346.
In addition, the Company has a lease line of credit for
$564,000, of which $346,083 was available for use at April 30,
1998. The interest rate on the lease line is the bank's cost
of funds plus 2.5% (8.54% at April 30, 1998) 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 1,218,720 shares of the
Company's common stock by directors, employees, and
consultants. As of April 30, 1998, there were 813,237 shares
of common stock committed under this plan. Exercise terms,
ranging from one to ten 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 1998 FY 1997 FY 1996
<S> <C> <C> <C>
Balance outstanding at beginning of fiscal year: 164,671 196,310 159,141
Granted 154,849 20,023 83,655
Exercised (16,594) (44,012) (32,566)
Canceled (26,856) (7,650) (13,920)
Outstanding at April 30 276,070 164,671 196,310
Exercisable at April 30 242,752 163,171 189,849
Weighted average exercise prices:
At beginning of period $ 5.45 $ 4.92 $ 4.57
At end of period $ 5.78 $ 5.45 $ 4.92
Exercisable at end of period $ 5.76 $ 5.45 $ 4.91
Options granted $ 5.99 $ 6.44 $ 4.61
Options exercised $ 4.60 $ 3.70 $ 2.83
Options canceled $ 5.75 $ 4.39 $ 4.41
Weighted average, fair value of
options granted during period $ 3.91 $ 3.36 $ 2.85
</TABLE>
<TABLE>
April 30, 1998
Options Outstanding Options Exercisable
Weighted Remaining
Average Contractual Weighted
Range of Exercise Exercise Life Average
Prices Shares Price (Years) Shares Exercise Price
<C> <C> <C> <C> <C> <C>
$3.71 - $4.80 29,603 $4.38 2.18 29,603 $4.38
$4.81 - $5.60 33,029 $5.25 2.66 33,029 $5.25
$5.61 - $6.00 188,238 $5.95 6.86 154,920 $5.95
$6.13 - $8.28 25,200 $6.89 5.75 25,200 $6.89
276,070 242,752
</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, 1998, there were 439,162 shares
committed under this plan. Exercise terms, ranging from one
month to ten 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 1998 FY 1997 FY 1996
<S> <C> <C> <C>
Balance outstanding at beginning of fiscal year: 335,214 247,377 233,780
Granted 130,300 146,500 145,600
Exercised (28,836) (11,503) (4,634)
Canceled (52,169) (47,160) (127,369)
Outstanding at April 30 384,509 335,214 247,377
Exercisable at April 30 208,309 225,414 181,360
Weighted average exercise prices:
At beginning of period $ 6.04 $ 5.87 $ 5.99
At end of period $ 5.93 $ 6.04 $ 5.87
Exercisable at end of period $ 6.02 $ 6.04 $ 5.99
Options granted $ 5.91 $ 6.27 $ 5.28
Options exercised $ 5.94 $ 5.98 $ 5.85
Options canceled $ 6.53 $ 5.86 $ 5.43
Weighted average, fair value of
options granted during period $ 3.86 $ 2.83 $ 2.71
</TABLE>
<TABLE>
April 30, 1998
Options Outstanding Options Exercisable
Weighted Remaining
Average Contractual Weighted
Range of Exercise Exercise Life Average
Prices Shares Price (Years) Shares Exercise Price
<C> <C> <C> <C> <C> <C>
$4.38 - $5.22 11,400 $5.17 5.62 3,400 $5.07
$5.34 - $5.44 4,400 $5.36 4.91 1,700 $5.39
$5.63 - $6.00 331,109 $5.88 5.18 177,609 $5.96
$6.06 - $7.56 37,600 $6.67 7.84 25,600 $6.62
384,509 208,309
</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 1996 and 1998, 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, 1998, 48,477 warrants
remained outstanding at exercise prices ranging from $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 1998 FY 1997 FY 1996
<S> <C> <C> <C>
Dividend rate 0.00% 0.00% 0.00%
Expected volatility 40.00% 50.00% 55.00%
Risk-free interest rate 5.79% 6.37% 5.98%
Expected life (in years) 5.6 5.0 5.0
</TABLE>
Using these assumptions, the fair value of the stock options
granted in fiscal years 1998, 1997, and 1996 was estimated to
be approximately $1,107,242, $480,271, and $632,440,
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 1998 FY 1997 FY 1996
Net loss from continuing operations:
<S> <C> <C> <C>
As reported $ (3,134,009) $ (3,902,926) $ (6,440,244)
Pro-forma $ (3,455,707) $ (4,109,299) $ (6,620,823)
Net loss from continuing operations per
share basic and diluted
As reported $ (0.30) $ (0.38) $ (0.62)
Pro-forma $ (0.33) $ (0.40) $ (0.64)
</TABLE>
5. INCOME TAXES
Income tax benefit from continuing operations for the years
ended April 30, 1996, 1997 and 1998 is comprised of the
following components:
<TABLE>
Federal State Total
1996
<S> <C> <C> <C>
Current $(1,965,008) $ - $(1,965,008)
Deferred (1,905,993) (343,711) (2,249,704)
Valuation Allowance 71,489 8,411 79,900
Total $(3,799,512) $ (335,300) $(4,134,812)
1997
Current $ 60,780 $ - $ 60,780
Deferred (1,614,745) (200,128) (1,814,873)
Valuation Allowance 111,932 13,168 125,100
Total $(1,442,033) $ (186,960) $(1,628,993)
1998
Current $ - $ - $ -
Deferred (1,199,285) (98,719) (1,298,004)
Valuation Allowance 374,251 44,030 418,281
Total $ (825,034) $ (54,689) $ (879,723)
</TABLE>
As of April 30, 1998 and 1997, temporary differences which
result in deferred tax assets and liabilities are as follows:
<TABLE>
1998 1997
Current:
<S> <C> <C>
Inventories capitalized for income tax purposes $1,008,199 $1,296,734
Bad debt reserves 201,597 136,660
Inventory reserves 229,477 213,560
Accrued vacation 119,716 104,872
Prepaid expenses - (9,943)
Product warranty reserve 570,000 -
Less: Valuation allowance (182,650) (56,922)
Net Current Deferred Tax Asset $1,946,339 $1,684,961
Noncurrent
Federal NOL carryforward $1,469,501 $ 949,961
State NOL carryforward 977,479 922,790
AMT credit carryforward 1,484,151 1,552,491
R&D credit carryforward 510,265 357,120
Capital loss carryforward 243,616 380,000
Excess of tax over book depreciation (3,648,241) (3,903,032)
Income for tax purposes, not book 304,000 361,000
Other 110,013 (120,390)
Less: Valuation allowance (440,630) (148,078)
Net Noncurrent Deferred tax Asset $1,010,154 $ 351,862
</TABLE>
The Company has approximately $4.3 million of federal and
$24.4 million of state net operating loss carry forwards that
expire in varying amounts through the year 2013 and
approximately $641,000 of capital loss carry forwards expiring
in 2001. The Company also has available income tax credits of
$510,265, expiring on varying dates through 2013 and
alternative minimum tax credits of $1,484,151, 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 net deferred tax assets will
be realized.
During fiscal 1998, the Company increased its valuation
allowance by approximately $418,000, due mainly to the
one-time product warranty charge. The amount of the net
deferred tax asset considered realizable could be reduced in
the near term if estimates of future taxable income do not
materialize.
The Company recognized a reduction of income taxes payable of
$18,348, $48,286, and $29,700 as a result of the exercise of
stock options by employees and others during the years ended
April 30, 1998, 1997, and 1996, 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>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
Computed "expected" income tax benefit ($1,364,669) ($1,880,852) ($3,595,519)
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit (160,549) (186,960) (226,655)
General business credit carryforward (75,000) - (502,600)
Non-deductible expenses 116,735 103,375 100,064
Change in valuation allowance 418,281 125,100 79,900
Other 185,479 210,344 9,998
Actual income tax benefit ($879,723) ($1,628,993) ($4,134,812)
Effective income tax rate 21.9% 29.4% 39.1%
</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,
1998, 1997 and 1996.
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 $1,204,226,
$1,150,977 and $1,068,777, for the years ended April 30, 1998,
1997, and 1996, respectively.
Future minimum lease payments under operating leases for the
years ending April 30 are as follows:
<TABLE>
<S> <C>
1999 $ 1,110,933
2000 1,073,698
2001 614,952
2002 13,237
Total $ 2,812,820
</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, 1998, the Company has
$3,847,862 in deposits for such contracts. The future
commitments for purchases under these contracts at April 30
are as follows:
<TABLE>
<S> <C>
1999 $ 4,217,732
2000 2,352,841
2001 3,187,825
2002 3,440,106
2003 3,216,738
2004 123,148
Total $16,538,390
</TABLE>
Loan Guarantee - During the year ended April 30, 1998, the
Company guaranteed a bank loan in the amount of $650,000 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.
8. INDUSTRY SEGMENTS
Segments:
Selected financial information from the Company's two business
segments are as follows:
<TABLE>
Year Ended April 30, 1998
Natural Product Technical Corporate
Processing Services and Other Total
<S> <C> <C> <C> <C>
Income (Loss) from operations $ (1,073,967) $ 2,405,254 $(5,976,829) $(4,645,542)
Capital expenditures $ 1,545,582 $ 267,232 $ 245,353 $ 2,058,167
Depreciation and amortization $ 2,634,458 $ 953,820 $ 434,687 $ 4,022,965
Identifiable assets $ 49,429,962 $ 7,876,394 $10,987,225 $68,293,581
Year Ended April 30, 1997
Natural Product Technical Corporate
Processing Services and Other Total
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 $ 702,102 $ 4,171,790
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,
1998 1997 1996
Revenues:
<S> <C> <C> <C>
Customer A $ 4,783,683 $ 52,945 $ -
Customer B $ 999,651 $ 3,575,062 $ 3,880,297
Customer C $ 681,000 $ 2,550,000 $ -
Percent of Total Revenues:
Customer A 14.9% 0.2% -
Customer B 3.1% 14.2% 22.3%
Customer C 2.1% 10.1% -
</TABLE>
As of April 30, 1998 and 1997, amounts owed the Company from
these customers were $2,100,918 and $277,682, respectively.
Foreign Sales
Export sales were $2,226,875, $4,189,256, and $71,490 in
fiscal 1998, 1997, and 1996, respectively.
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:
<TABLE>
Page
<S> <C>
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Statements of Operations for the years ended
April 30, 1998, 1997 and 1996 F-3
Consolidated Balance Sheets as of April 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
April 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the years
ended April 30, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements for the years ended
April 30, 1998, 1997 and 1996 F-7
</TABLE>
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.
<PAGE>
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: July 17, 1998 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
<C> <S> <S>
/s/Dean P. Stull Chairman of the Board of Directors, July 17, 1998
Chief Executive Officer,
President and a Director
(Principal Executive Officer)
/s/Randall J. Daughenbaugh Chief Technical Officer and a Director July 17, 1998
/s/David I. Rosenthal Chief Financial Officer and July 17, 1998
Treasurer (Principal Financial and
Accounting Officer)
/s/William E. Coleman Director July 17, 1998
/s/Stanley J. Cristol Director July 17, 1998
/s/Beverly J. Haddon Director July 17, 1998
/s/Robert F. Saydah Director July 17, 1998
/s/Bert M. Tolbert Director July 17, 1998
</TABLE>
