FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended
January 31, 1998 Commission File No. 0-17174
HAUSER, INC.
(formerly Hauser Chemical Research, Inc.)
Colorado 84-0926801
(State or other jurisdiction (I.R.S. Identification Number)
of incorporation or organization)
5555 Airport Boulevard, Boulder, Colorado 80301
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number,
including area code:
(303) 443-4662
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, $.001 par value 10,432,650
Class Outstanding at January 31, 1998
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three and nine months ended January 31, 1998
and January 31, 1997 1
Consolidated Balance Sheets -
January 31, 1998 and April 30, 1997 2
Consolidated Statements of Cash Flows -
Nine months ended January 31, 1998 and
January 31, 1997 3
Notes to Condensed Consolidated Financial
Statements 4-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-15
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of
Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURE PAGE 17
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<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Three months ended Nine months ended
January 31, January 31,
1998 1997 1998 1997
REVENUES:
<S> <C> <C> <C> <C>
Natural product processing $2,834,250 $5,785,729 $10,699,954 $12,040,195
Technical services 4,283,919 2,171,987 10,062,162 6,722,520
Total revenues 7,118,169 7,957,716 20,762,116 18,762,715
COST OF REVENUES:
Natural product processing 2,759,628 3,642,698 9,780,287 10,054,444
Technical services 2,965,616 1,812,834 7,214,803 5,396,253
Total cost of revenues 5,725,244 5,455,532 16,995,090 15,450,697
GROSS PROFIT 1,392,925 2,502,184 3,767,026 3,312,018
OPERATING EXPENSES:
Research and development 536,128 422,984 1,793,890 1,656,182
Sales and marketing 561,695 458,461 1,633,401 1,212,656
General and administrative 1,369,283 1,718,685 3,887,923 4,203,566
Total operating expenses 2,467,106 2,600,130 7,315,214 7,072,404
LOSS FROM OPERATIONS (1,074,181) (97,946) (3,548,188) (3,760,386)
OTHER INCOME (EXPENSE):
Interest income 81,363 119,014 281,240 419,510
Interest expense (3,380) (1,743) (10,043) (16,728)
Other - - 361,461 -
Other income - net 77,983 117,271 632,658 402,782
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (996,198) 19,325 (2,915,530) (3,357,604)
INCOME TAX BENEFIT (PROVISION) 348,835 (5,411) 1,020,435 939,950
INCOME (LOSS) FROM CONTINUING OPERATIONS (647,363) 13,914 (1,895,095) (2,417,654)
DISCONTINUED OPERATIONS:
Loss from operations, net of
applicable income taxes - - - (609,287)
Loss on disposal, net of
applicable income taxes - - - (2,446,760)
LOSS FROM DISCONTINUED OPERATIONS - - - (3,056,047)
NET INCOME (LOSS) $(647,363) $13,914 $(1,895,095) $(5,473,701)
INCOME (LOSS) PER SHARE - BASIC:
Continuing operations $(0.06) $0.00 $(0.18) $(0.23)
Discontinued operations - - - (0.30)
Net income (loss) per share $(0.06) $0.00 $(0.18) $(0.53)
INCOME (LOSS) PER SHARE - DILUTED:
Continuing operations $(0.06) $0.00 $(0.18) $(0.23)
Discontinued operations - - - (0.30)
Net income (loss) per share $(0.06) $0.00 $(0.18) $(0.53)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 10,428,237 10,471,005 10,420,632 10,405,818
DILUTED 10,428,237 10,800,029 10,420,632 10,405,818
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER,
CONSOLIDATED BALANCE
January 31, April 30,
ASSETS 1998 1997
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,785,092 $ 8,379,551
Held-to-maturity investments 97,486 196,751
Accounts receivable, less allowance for doubtful accounts:
January 31, 1998, $328,470; April 30, 1997, $359,632 6,777,561 4,961,132
Income taxes receivable - 1,445,046
Inventories, current 9,949,340 7,073,295
Prepaid expenses and other 418,566 406,325
Net deferred income tax assets 1,755,653 1,684,961
Total current assets 21,783,698 24,147,061
PROPERTY AND EQUIPMENT
Land and buildings 7,605,690 7,418,526
Lab and processing equipment 31,340,834 29,513,011
Furniture and fixtures 4,492,418 4,459,006
Total property and equipment 43,438,942 41,390,543
Accumulated depreciation and amortization (20,895,049) (18,204,486)
Net property and equipment 22,543,893 23,186,057
OTHER ASSETS:
Goodwill, less accumulated amortization:
January 31, 1998, $864,362; April 30, 1997, $651,772 2,033,770 2,182,791
Inventories, non-current 14,693,691 14,710,409
Deposits 3,824,557 1,414,373
Other 1,926,167 1,157,187
Total other assets 22,478,185 19,464,760
TOTAL $66,805,776 $66,797,878
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,099,118 $ 1,486,499
Current portion of long term debt 249,306 171,916
Accrued salaries and wages 1,151,881 960,698
Deposits 671,934 200,000
Other accrued current liabilities 561,217 165,447
Total current liabilities 4,733,456 2,984,560
LONG TERM LIABILITIES
Capital lease obligations 468,116 84,658
Other 5,000 37,106
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: January 31, 1998, 10,432,650;
April 30, 1997, 10,419,028 10,433 10,419
Additional paid-in capital 58,670,916 58,622,066
Unrealized gain on available-for-sale investment,
net of income taxes - 246,119
Retained earnings 2,917,855 4,812,950
Net stockholders' equity 61,599,204 63,691,554
TOTAL $66,805,776 $66,797,878
See notes to consolidated financial statements.
</TABLE>
<TABLE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Nine months ended
January 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,895,095) $ (5,473,701)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,839,584 3,419,451
Loss on disposal of discontinued operations - 2,446,760
Loss on disposal of assets - 344,255
Gain on sale of investment (361,461) -
Amortization of investment premium (discount) - (1,875)
Deferred income tax benefit (1,091,127) (405,391)
Change in deposits (2,410,184) (757,183)
Change in other assets 115,144 92,579
Change in assets and liabilities
Accounts receivable (1,816,429) (1,359,062)
Income taxes receivable 1,445,046 (72,049)
Inventories (3,006,153) (4,611,401)
Prepaid expenses and other (12,241) (183,862)
Accounts payable 612,619 830,326
Customer deposits 471,934 491,921
Other accrued liabilities 586,953 (135,347)
Net cash used in operating activities (4,521,410) (5,374,579)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,529,485) (1,326,693)
Proceeds from sale of investments 458,479 -
Sale of Ironwood net assets - 250,000
Issuance of notes receivable (60,000) -
Purchase of investments (194,922) (199,646)
Maturity of investments 294,187 7,000,000
Net cash (used in) provided by investing activities (1,031,741) 5,723,661
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (90,172) (443,099)
Proceeds from issuance of common stock 48,864 176,472
Net cash (used in) provided by financing activities (41,308) (266,627)
Net increase (decrease) in cash and cash equivalents (5,594,459) 82,455
Cash and cash equivalents, beginning of period 8,379,551 7,428,752
Cash and cash equivalents, end of period $2,785,092 $7,511,207
See notes to consolidated financial statements.
</TABLE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY
31, 1998 AND APRIL 30, 1997 AND FOR THE THREE AND NINE MONTH
PERIODS ENDED JANUARY 31, 1998 AND 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly
the Company's financial position as of January 31, 1998 and
results of its operations and cash flows for the periods ended
January 31, 1998 and 1997. The year-end balance sheet data was
derived from audited financial statements, but does not
include all disclosures required by generally accepted
accounting principles. Certain fiscal 1997 amounts have been
reclassified to conform to the fiscal 1998 presentation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of these
financial statements. Actual results could differ from those
estimates.
2. DISCONTINUED OPERATIONS
On October 11, 1996, the Company sold substantially all of the
net assets of its secondary forest products subsidiary, Hauser
Northwest, Inc., d/b/a Ironwood Evergreens (Ironwood). The
operations of Ironwood have been reflected as discontinued in
the accompanying financial statements.
3. INVENTORIES
Raw material, work in process, and finished goods inventories,
which include costs of materials, direct labor and
manufacturing overhead, are priced at the lower of average
cost or market. Writedowns for excess and obsolete inventories
are charged to expense in the period when conditions giving
rise to the writedowns are first recognized. The Company
purchases raw material inventory during harvest seasons,
generally in the spring and fall. These purchases may take
place well in advance of scheduled production of finished
product.
Non-current inventories represent raw materials, work in
process, and finished goods in various stages of completion in
excess of shipments expected to occur in the next fiscal year.
Inventories are classified as follows:
<TABLE>
January 31, April 30,
1998 1997
<S> <C> <C>
Raw materials and supplies $ 4,713,364 $ 3,373,554
Work in process 14,654,796 13,019,432
Finished goods 5,635,571 5,952,775
Total before valuation allowance 25,003,731 22,345,761
Less valuation allowance (360,700) (562,057)
Total inventories 24,643,031 21,783,704
Less non-current inventories 14,693,691 14,710,409
Current portion of inventories $ 9,949,340 $ 7,073,295
</TABLE>
Paclitaxel related inventory at January 31, 1998 and April 30,
1997, was $15,145,553 and $14,371,945, respectively.
4. NET (LOSS) EARNINGS PER SHARE
On December 15, 1997 the Company was required to adopt
Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS No. 128"). 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, (2) if
not anti-dilutive, the effect of outstanding stock options
determined utilizing the treasury stock method. As a result of
adopting SFAS No. 128, reported (loss) earnings per share for
the periods ended January 31, 1997 were restated. The effect
of this accounting change on previously reported (loss)
earnings per share is as follows were:
<TABLE>
Three months ended Nine months ended
January 31, January 31,
1997 1997
Primary (loss) earning per share under
previous reporting requirements:
<S> <C> <C>
Continuing operations $ 0.00 $(0.23)
Discontinued operations $(0.30)
Net income (loss) per share $ 0.00 $(0.53)
Effect of SFAS No. 128
Continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ 0.00
Net income (loss) per share $ 0.00 $ 0.00
Basic (loss) earnings per share as restated
Continuing operations $ 0.00 $(0.23)
Discontinued operations $(0.30)
Net income (loss) per share $ 0.00 $(0.53)
Effect of SFAS No. 128
Continuing operations $ 0.00 $ 0.00
Discontinued operations $ 0.00 $ 0.00
Net income (loss) per share $ 0.00 $ 0.00
Diluted (loss) earnings per share
Continuing operations $ 0.00 $(0.23)
Discontinued operations $(0.30)
Net income (loss) per share $ 0.00 $(0.53)
</TABLE>
<TABLE>
Three months ended Nine months ended
January 31, 1998 January 31, 1998
Per Share Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Net Income $(647,363) $(1,895,095)
Basic Earnings per Share:
Income available to common shareholders $(647,363) $10,428,237 $(0.06) $(1,895,095) $10,420,632 $(0.18)
Options and warrants outstanding * - -
Diluted Earnings per share
Income available to common stockholders
plus assumed conversions $(647,363) $10,428,237 $(0.06) $(1,895,095) $10,420,632 $(0.18)
Three months ended Nine months ended
January 31, 1997 January 31, 1997
Per Share Per Share
Income Shares Amount Income Shares Amount
Net Income $ 13,914 $(5,473,701)
Basic Earnings per Share:
Income available to common shareholders $ 13,914 $10,471,005 $ 0.00 $(5,473,701) $10,405,818 $(0.53)
Options and warrants outstanding * 329,024 -
Diluted Earnings per share
Income available to common stockholders
plus assumed conversions $ 13,914 $10,800,029 $ 0.00 $(5,473,701) $10,405,818 $(0.53)
* Options and warrants have not been included in the calculations for the periods ended January 31, 1998 and nine month
periods ended January 31, 1997 as they are anti-dilutive. Options and warrants outstanding for the three and nine months ended
January 31, 1998 were 617,517 and 553,875 respectively, and for the three and nine months ended January 31, 1997 were 518,540
and 491,363 respectively.
</TABLE>
The effect of implementing SFAS No. 128 did not have a
material impact on the financial statements of the Company.
5. COMMITMENTS
During the quarter ended October 31, 1997, the Company
guaranteed a bank loan for another company and has pledged
100,000 shares of stock as collateral against the loan. The
Company provided this guarantee to obtain exclusive sales and
marketing rights for a unique dietary supplement and
functional food product.
<PAGE>
Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The Company's financial performance in the quarter ended
January 31, 1998, declined compared to the same quarter in the
prior fiscal year. However, for the nine months ended January
31, 1998, operating results improved over the same period last
year. Year-to-date, total revenues increased 11% over the same
period last year, and the loss from continuing operations
improved almost 22%. Comparing the quarters ended January 31,
1998 and October 31, 1997, total revenues increased almost 17%
and operating loss declined 39% in the third quarter of fiscal
1998. In comparison with the quarter ended January 31, 1997,
total revenues in the quarter ended January 31, 1998,
decreased almost 11%, gross margin decreased from
approximately 31% of total revenues to 20% of total revenues,
total operating expenses decreased 5%, and the loss from
operations increased by $976,235.
This decline in operating performance results from lower sales
of bulk paclitaxel in the third quarter of fiscal 1998. In the
third quarter of fiscal 1997, revenues from bulk paclitaxel
were $4,123,891 due to significant orders from two customers.
Management was not certain that this level of bulk paclitaxel
sales would continue in subsequent quarters. In the quarter
ended January 31, 1998, revenues from bulk paclitaxel were
$522,400.
In the third quarter fiscal 1998, however, Natural Ingredients
revenues increased 44% over the same period last year and
revenues from Technical Services increased 97% over the third
quarter of fiscal 1997. These growth rates substantiate the
Company's strategy to diversify its product lines, be less
dependent on sales of pharmaceutical products, and focus
resources for growth in the Natural Ingredients and Technical
Services business units. Revenues from Pharmaceuticals
declined 85% in the quarter compared to last year, because of
unusually high sales in the quarter ended January 31, 1997 and
as regulatory issues and on-going litigation have created some
uncertainty in the paclitaxel market. Pharmaceutical sales are
largely dependent upon the Company's strategic customers, and
legal and regulatory issues that are out of the Company's
control create unpredictability quarter-to-quarter.
The Company's operating performance continues to improve,
although the Company is not consistently profitable at this
time. Management believes that the growth of revenues from the
natural ingredients and technical services business groups has
nearly reached the level required to cover fixed overhead
costs and allow the Company to return to profitability.
Management believes that the Company could attain sustained
profitability during the next fiscal year; however, there can
be no assurance of when profitability will again be realized.
The following is a discussion of the Company's activities in
its continuing operations.
NATURAL INGREDIENTS
Nutraceuticals - The term nutraceuticals is used to identify
the broad range of natural, healthful products that are used
to supplement the diet by increasing the total dietary intake
of important nutrients. The United States market for herbal
and botanical supplements is estimated to be $2.3 billion, and
is growing at over 20% per year, according to industry
sources. The Company's products include liquid and dry herbal
extracts of Echinacea, Valerian, St. John's Wort, Siberian
ginseng, Panax ginseng, Ginger, Goldenseal and Rosemary
(RoseOx[Registered Trademark]). Management believes that the
Company's expertise in the production of special products from
natural sources and its extensive regulatory experience
position it well in this market 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 will
manufacture various botanical extracts and provide research
and development services focused on PharmaPrint's herbal-based
pharmaceuticals. Sales to PharmaPrint in the three and nine
months ended January 31, 1998 were 21% and 10% of total
revenues, respectively.
On November 14, 1996, the Company signed a three-year contract
to supply RoseOx[Registered Trademark], an antioxidant
nutraceutical product, to D&F Industries ("D&F"), a
manufacturer of vitamin and food supplement products. Under
that agreement, D&F had exclusive marketing rights to the
Company's antioxidant nutraceutical products,
RoseOx[Registered Trademark] and RoseOx660[Registered
Trademark], in the multi-level dietary supplement and cosmetic
markets. The Company began shipping product under this
contract during the third quarter of fiscal year 1997, and
delivered contractual quantities through the second quarter of
fiscal 1998. Sales to D&F comprised 7% of total revenues in
the nine-month periods ended January 31, 1998 and 1997.
On November 6, 1997, the Company announced it had mutually
agreed with D&F, to cancel the exclusivity agreement between
the companies. D&F will remain a customer of the Company's
natural products. 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, initial sales have
already occurred.
Because of the Company's ability to now market these products
through its sales force, management believes the modification
of the D&F contract will not have a material adverse impact on
future operations.
Natural Flavor Extracts and Natural Food Ingredients - The
Company manufactures, markets and sells natural flavor
extracts. The extracts are marketed under the Company's brand
name NaturEnhance[Trademark] Flavor Extracts. Competition for
products in the flavor extract market is based on flavor
quality and concentration, availability, customer service, and
price. Some of these factors are beyond the direct control of
the Company.
Natural food ingredients are products which perform a function
in foods, such as preservatives, stabilizers, colorants,
antioxidants, and nutritional additives. The Company's
objective is to build a quality line of products generating
revenues and profits as a leader in the development,
manufacture and sale of natural food ingredients.
Minimal revenue from natural food ingredients products was
recognized in the third quarter of fiscal 1998, but shipments
are expected to increase because of expanded marketing efforts
and resultant interest expressed by potential customers. The
Company announced on November 3, 1997, its signing of a three
year agreement with RFI Ingredients ("RFI"), whereby RFI will
serve as exclusive distributors for the Company's
NaturEnhance[Trademark] product lines to the foods and
beverages industries. 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 third quarter
of fiscal 1998, Technical Services revenues increased 97% over
the same quarter last year, as the Company concentrated its
efforts on increasing the number of projects related to custom
synthesis and natural products isolation in the
pharmaceuticals industry. Additionally, research and
development services from both Hauser and Shuster laboratories
were sold to PharmaPrint during the quarter as part of the
expanded relationship mentioned earlier.
The Company announced on November 6, 1997, a collaborative
agreement with The National Institute on Drug Abuse ("NIDA"),
for custom synthesis of drug compounds that are under
development as potential treatment agents for various drug
addictions. Under the agreement, the Company will receive $2.3
million over a three-year period.
Management believes that demand for technical services will
continue to increase and expects this business unit to grow.
Ongoing marketing efforts in the Company's Technical Services
business unit will be centered on projects that provide
opportunity to employ the collective capabilities of the
Hauser Laboratories and Shuster Laboratories team.
PHARMACEUTICALS
The Company and its customer, Yew Tree Pharmaceuticals ("Yew
Tree") had been named in a lawsuit filed by Bristol
Myers-Squibb Company ("Bristol") in the Netherlands, alleging
patent infringement in Europe. On July 24, 1997, the District
Court in the Netherlands ruled against Bristol in this
proceeding denying Bristol's request for an injunction to stop
Yew Tree from selling their product while the patent validity
is determined. Subsequent to this result, Bristol has appealed
the court's findings. Bristol has also applied for and been
granted patents related to paclitaxel-based treatments in the
United States. Such actions by Bristol, if successful, could
substantially reduce the market for the Company's
paclitaxel-based products. The Company believes that these
actions by Bristol cannot be sustained, and intends to devote
resources to defend its right to market its paclitaxel product
in the United States and Europe. If the Company is not
successful in these efforts, the recovery of its investment in
paclitaxel related assets (including $15,145,553 of paclitaxel
related inventory at January 31, 1998) 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 May 12, 1994, the Company entered into a multi-year,
worldwide and mutually exclusive Supply Agreement ("Supply
Agreement") with AHP, formerly American Cyanamid Company,
whereby the Company would supply bulk paclitaxel to AHP. The
Company has been supplying bulk paclitaxel to AHP on a
two-part formula price basis which includes an initial minimum
payment upon shipment of the bulk paclitaxel and a subsequent
final payment, in the form of a royalty, when AHP sells
finished products which contain the bulk paclitaxel. The
contract calls for certain minimum purchase requirements
(which are subject to variation based upon the Company's
production costs) which resulted in aggregate minimum payments
of approximately $8,841,000 during the first three years
(ending August 1997). The minimum aggregate payments are
nonrefundable subject only to traditional product warranty
criteria. AHP is not required to purchase additional product
after August 1997. Sales to AHP were less than 10% of total
revenues in the three and nine months ended January 31, 1998,
and were 6% and 12% of total revenues in the three and nine
months ended January 31, 1997.
The Supply Agreement has a ten-year term which can be renewed
by AHP for an additional ten-year period. Either company may
terminate the contract upon the occurrence of uncured breaches
of contract or the insolvency of the other party.
Additionally, during the first five contract years, AHP can
terminate the Agreement in whole or in part if (i) the FDA or
a foreign regulatory agency imposes significant restrictions
upon the manufacture, use or sale of bulk paclitaxel or
finished product; (ii) the development program in foreign
markets is significantly more burdensome than contemplated;
(iii) a third party claim (including a claim of patent
infringement) materially inhibits AHP from developing,
manufacturing or selling the finished product; (iv) a U.S. or
European patent issues with claims which materially impact
AHP's marketing activities; or (v) the commercial viability of
the finished product deteriorates so that AHP cannot
reasonably expect to profitably capture more than a designated
portion of the defined taxane market.
The contract also called for advance purchase payments
totaling up to $3,400,000 contingent upon the following
milestones being met: the first filing of a product
registration for a finished product anywhere in the world,
first approval of such product registration, the first filing
of such a product registration in the United Kingdom, Germany
or France, upon approval of such foreign product registration,
upon filing of such product registration with the FDA and upon
approval of such FDA registration. Amounts otherwise payable
to the Company by AHP as royalties when finished products are
sold will be reduced by as much as 30% in any calendar year
until such reductions aggregate advance purchase payments
previously made. The Company has accounted for these advance
payments received as customer deposits on the balance sheet.
AHP has agreed to indemnify the Company against damages based
upon use or sale of the finished product, except that the
parties have agreed to share the costs of defending any patent
infringement case based upon such use or sale.
During the second quarter of fiscal 1998, the Company
completed its minimum contractual requirements to sell bulk
paclitaxel to AHP for its development needs, including final
product formulations and clinical trials. On July 8, 1997, the
Company announced that AHP, through Immunex, had received
approval to sell generic paclitaxel in Canada. This marked the
first approval in North America for a generic form of
paclitaxel and is the first approval under the Company's
ten-year agreement with AHP. This approval provides the
Company the possibility of realizing royalty income depending
upon the success of Immunex's marketing efforts in Canada.
Management does not expect royalty income to be significant in
fiscal 1998.
During the first quarter of fiscal 1997, AHP notified the
Company of its decision to maintain exclusivity of the supply
of paclitaxel from the Company in the United States and
Canada. In addition, AHP released its exclusive supply
position in the rest of the world.
On November 7, 1996, the Company signed a contract with Yew
Tree to supply GMP bulk paclitaxel for use in Europe and
Eastern Europe. The value of this contract is estimated to be
$11,000,000 and has an initial three-year term. Purchases by
Yew Tree depend on necessary governmental approvals in various
European countries. The agreement is mutually exclusive to
both parties, except for the Company's existing obligation to
supply paclitaxel to AHP in Europe and Eastern Europe, which
obligation is pursuant to the Company's existing contract.
Sales to Yew Tree were 26% and 11% of total revenues in the
three and nine months ended January 31, 1997; no sales of bulk
paclitaxel to Yew Tree were recognized in the three and nine
months ended January 31, 1998.
DISCONTINUED OPERATIONS
On September 13, 1996, the Company adopted plans to sell
substantially all of the net assets of its secondary forest
products subsidiary, Hauser Northwest, Inc., d/b/a Ironwood
Evergreens ("Ironwood"). On October 11, 1996, this sale was
completed. Revenues for Ironwood were $2,526,351 in the nine
months ended January 31, 1997.
During the first and second quarters of fiscal 1997, certain
events occurred which had significant negative impacts on the
Company's secondary forest products business. Ironwood's
operating results during the first and second quarters of
fiscal 1997 were unacceptable and well below management's
expectations, especially in light of corrective measures
imposed over the prior nine months. Ironwood's operating loss
in the six-month period ended October 31, 1996, was $846,232.
Because of the foregoing, and in order to retain cash for its
core businesses and improve the Company's operating position
going forward, management decided on September 13, 1996, that
this business should be sold. This sale was completed on
October 11, 1996. The results for the first quarter of fiscal
1997 include a non-recurring charge for the divestiture of
Ironwood.
The Company received cash of $250,000, a promissory note of
$400,000 and a basic earnout of no more than $550,000. The
earnout is based upon 75% of the buyer's net cash flow, if
any, derived from the business for the four-year period ending
December 31, 2000. An additional earnout of 5% of the excess
(if any) of net cash flow over the projected net cash flow in
the buyer's five year plan is available to the Company. The
maximum additional earnout is $400,000. The Company has not
earned any amounts available under either the basic or
additional earnout.
RESULTS OF CONTINUING OPERATIONS:
Below is a table which summarizes the Company's results of
continuing operations as a percentage of total revenues.
<TABLE>
Three months ended Nine months ended
January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 19.6 % 31.4 % 18.1 % 17.7 %
Research and development 7.5 % 5.3 % 8.6 % 8.8 %
Sales and marketing 7.9 % 5.8 % 7.9 % 6.5 %
General and administrative 19.2 % 21.6 % 18.7 % 22.4 %
Loss from operations (15.1)% (1.2)% (17.1)% (20.0)%
Other income, net 1.1 % 1.5 % 3.0 % 2.1 %
Income (loss) from continuing operations before taxes (14.0)% 0.2 % (14.0)% (17.9)%
Income (loss) from continuing operations (9.1)% 0.2 % (9.1)% (12.9)%
Loss from discontinued operations - - - (16.3)%
Net income (loss) (9.1)% 0.2 % (9.1)% (29.2)%
</TABLE>
REVENUES. A breakout of the Company's revenues by product and
service groupings for its continuing operations is as follows:
<TABLE>
Three months ended Nine months ended
January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Natural ingredients products (includes nutraceuticals, $2,184,845 $1,518,734 $ 7,512,678 $ 5,001,301
natural flavor extracts and food ingredients)
Technical services (includes Hauser Laboratories 4,283,919 2,171,987 10,062,162 6,722,520
and Shuster Laboratories, Inc.)
Pharmaceuticals 649,405 4,266,995 3,187,276 7,038,894
$7,118,169 $7,957,716 $20,762,116 $18,762,715
</TABLE>
Total revenues decreased 11% to $7,118,169 in the third
quarter of fiscal 1998, from $7,957,716 in the third quarter
of fiscal 1997, the result of lower revenues from
pharmaceuticals (paclitaxel sales declined from $4,123,891 in
the quarter ended January 31, 1997 to $522,400 in the quarter
ended January 31, 1998), offset by increases in revenues from
natural ingredients products and technical services.
Natural Ingredients:
Natural ingredients product revenues increased approximately
44% and 50% in the three and nine months ended January 31,
1998, respectively, as compared to the same periods in last
the fiscal year.
The increases are primarily attributable to success in selling
nutraceutical products. In the quarter ended January 31, 1998,
nutraceuticals revenues were $2,016,478, an increase of
$888,534, or 79%, from revenues of $1,127,944 in the same
quarter last year. In the nine months ended January 31, 1998,
nutraceuticals revenues were $6,814,235, an increase of 96%
over sales from nutraceuticals products of $3,468,821 in the
nine months ended January 31, 1997.
However, these increases were offset by decreased sales of
natural flavor extracts, which totaled $152,106 in the third
quarter of fiscal 1998, compared to $300,961 in the third
quarter of fiscal 1997, a decrease of 50%. Revenues from
natural flavor extracts in the nine months ended January 31,
1998, were $649,979, a decrease of 57% from revenues of
$1,493,437 in the prior year. This decrease was the result of
the loss of specific product sales to a customer that decided
to use other ingredients in its final product. Management
believes that other sales opportunities exist to replace this
customer loss.
Additionally, the Company sold food ingredients products of
$16,261 in the third quarter of fiscal 1998, compared to
revenues of $5,873 in the third quarter of fiscal 1997. Food
ingredients revenues in the nine months ended January 31,
1998, were $48,464 compared to revenues of $39,043 in the nine
months ended January 31, 1997. Finally, the Company sold
non-GMP taxane sidestreams of $83,956 in the three months
ended January 31, 1997.
Technical Services:
Technical services revenues were $4,283,919 in the quarter
ended January 31, 1998, compared to $2,171,987 in the same
quarter of fiscal 1997, an increase of 97%. During the nine
months ended January 31, 1998, technical services revenues of
$10,062,162 increased 50% over revenues of $6,722,520 in the
same period last fiscal year. These increases were due
primarily to work performed for PharmaPrint, a general price
increase for services provided, and overall efforts to
increase projects that relate to custom synthesis and natural
product isolation for clients in the pharmaceuticals industry.
Pharmaceuticals:
Revenues from pharmaceutical products in the quarter ended
January 31, 1998, decreased 85% compared to the same quarter
in fiscal 1997. This was primarily because of decreased sales
of bulk paclitaxel to Yew Tree Pharmaceuticals and AHP as the
minimum contractual purchase commitment for the product was
fulfilled early in the second quarter of fiscal 1998.
Management does not expect to ship additional paclitaxel to
AHP for the next twelve to eighteen months because of the
inventory level this customer has on hand. Revenues from the
sale of bulk paclitaxel could remain low for the foreseeable
future unless the Company is successful in selling this
product to other customers. For the nine months ended January
31, 1998, pharmaceuticals revenues decreased 55%, primarily
because of the reduction of both paclitaxel sales mentioned
above and sanguinaria extract sales.
The Company recognized revenues of $143,104 and $740,011 for
the shipment of sanguinaria extract to Colgate during the
three and nine months ended January 31, 1997, respectively,
while no revenues from the sale of sanguinaria extract were
recognized in the same periods ended January 31, 1998, because
the Company's contract with Colgate was completed in fiscal
1997. The Company does not expect additional orders for this
product in the foreseeable future. The expiration of the
contract with Colgate did not and will not have a material
impact on the operations of the Company.
GROSS PROFIT. Total gross profit for the Company was
19.6% and 31% of total revenues in the quarters ended January
31, 1998, and 1997, respectively, and 18% of total revenues in
the nine month periods ended January 31, 1998, and 1997. The
change in the third quarter is the result of lower sales of
paclitaxel offset by increased sales of nutraceuticals
products sold during the quarter. In the nine-month periods
ended January 31, 1998, and 1997, gross profit for the natural
products industry segment was 8.6% and 16.5% of total natural
product revenues, respectively. This decrease was the result
of higher margin sales of paclitaxel in fiscal 1997.
Gross profit for technical services increased in the three and
nine months ended January 31, 1998, to 30.8% and 28.3%,
respectively, from 16.5% and 19.7% in the three and nine
months ended January 31, 1997, respectively. These increases
are the result of efforts to improve productivity as well as
an increase in projects that allow for more value-added
pricing, thereby improving gross profits.
OPERATING EXPENSES. Research and development expenses were
$536,128 in the quarter ended January 31, 1998, compared to
$422,984 in the quarter ended January 31, 1997, an increase of
almost 27%. Research and development expenses in the nine
months ended January 31, 1998, were $1,793,890, an 8% increase
over the same period last year. The increase in research and
development costs is related to the development of the process
to manufacture paclitaxel from cultivated sources and
increased efforts to develop other natural ingredients
products. The Company intends to actively continue research
and development efforts.
Sales and marketing expenses in the quarter ended January 31,
1998, were $561,695, an increase of $103,234, or 23% over the
same three month period last year. Sales and marketing
expenses in the nine months ended January 31, 1998, were
$1,633,401, a 35% increase over the same period last year. The
increase represents the Company's accelerated efforts to
market new products, particularly in the areas of
nutraceuticals and natural food ingredients. In addition,
sales and marketing expenses in fiscal 1998, include higher
payments of commissions to external distributors because of
increased revenues.
General and administrative expenses were $1,369,283 in the
third quarter of fiscal 1998, a 20% decrease compared to
general and administrative expenses in the same quarter of
fiscal 1997. For the nine months ended January 31, 1998,
general and administrative expenses were $3,887,923, a
decrease of 7.5% over the same period last year. These
decreases are the result of management's continued efforts to
control general and administrative expenses while growing the
revenue base.
INTEREST INCOME. Interest income was $81,363 and $281,240 in
the three and nine months ended January 31, 1998,
respectively, compared $119,014 and $419,510 in the three and
nine months ended January 31, 1997, respectively. The decrease
is the result of less capital available for investment.
OTHER INCOME. The Company sold all of its shares of stock of a
public company during the first and second quarters of fiscal
1998. The total gain recognized from the sale of this stock
in fiscal 1998 was $361,461.
INCOME TAXES. The Company is using an effective tax rate of
35% and is continuing to evaluate the realizability of the
deferred assets on the balance sheet. Management believes
these assets will be realized by return to profitability,
although there can be no assurance of when profitability will
be attained.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents and short-term
investments were $2,882,578 at January 31, 1998, compared to
$8,576,302 at April 30, 1997. The decrease is primarily the
result of an increase in accounts receivable and the purchase
of raw materials and capital equipment. Cash is expected to
decrease during this time of year because of the seasonality
of raw material purchases.
The Company has a revolving line of credit totaling $8,850,000
which expires on June 30, 2000. As of January 31, 1998,
$8,336,434 was available for use under this line of credit as
$513,566 had been applied against a letter a credit for the
purchase of raw materials. Under the terms of the loan
agreement, all assets of the Company, with the exception of
intangibles, are secured by the bank. Additionally, the
Company has a lease credit line with a bank of $564,000; as of
January 31, 1998, $435,460 was available for use under this
line. The Company does not use derivatives to manage its
interest rate risk.
Management believes that current cash reserves and the
revolving line of credit are sufficient to meet the Company's
short-term liquidity needs. Further, management believes that
funds generated from business opportunities discussed earlier,
including the new contracts secured by the Company, will be
sufficient to meet the liquidity needs of the Company on a
long-term basis.
WORKING CAPITAL. Working capital as of January 31, 1998 was
$17,050,242 compared to $21,162,501 as of April 30, 1997. This
decrease is primarily attributable to the use of cash and cash
equivalents plus short-term investments for the purchase of
raw material inventory, capital equipment, and an increase in
deposits which represent advance payments for contracted raw
material.
PROPERTY AND EQUIPMENT. Purchases of property and equipment in
the first nine months of fiscal 1998, totaled $1,529,485. This
was primarily the result new construction and improvements to
manufacturing equipment for the production of nutraceuticals
and food ingredients products and development and processing
of paclitaxel from cultivated sources. The Company also
entered into new capital leases totaling $432,220 during the
nine months ended January 31, 1998, primarily for laboratory
equipment used in technical services.
YEAR 2000. Management is currently studying the impact of
Year 2000 issues and believes that there should be no material
impact on the future operations of the Company.
FORWARD LOOKING STATEMENTS
Certain oral and written statements of management of the
Company included in the Form 10-Q and elsewhere may contain
forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be
covered by the safe harbors created thereby. These statements
include the plans and objectives of management for future
operations. The forward-looking statements included herein and
elsewhere are based on current expectations that involve
judgments which are difficult or impossible to predict
accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any
of the assumptions could be inaccurate and, therefore, there
can be no assurance that the forward-looking statements will
prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a
representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
<PAGE>
Part 2.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
<PAGE>
FORM 10 Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HAUSER, INC.
Date: March 11, 1998
/s/ Dean P. Stull
Chairman of the Board, Chief Executive Officer,
and President
Date: March 11, 1998
/s/ David I. Rosenthal
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S 3RD QUARTER 10-Q FOR FISCAL 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 2,785,092
<SECURITIES> 97,486
<RECEIVABLES> 7,106,031
<ALLOWANCES> 328,470
<INVENTORY> 9,949,340<F1>
<CURRENT-ASSETS> 21,783,698
<PP&E> 43,438,942
<DEPRECIATION> 20,895,049
<TOTAL-ASSETS> 66,805,776
<CURRENT-LIABILITIES> 4,733,456
<BONDS> 0
<COMMON> 10,433
0
0
<OTHER-SE> 61,588,771
<TOTAL-LIABILITY-AND-EQUITY> 66,805,776
<SALES> 10,699,954
<TOTAL-REVENUES> 20,762,116
<CGS> 9,780,287
<TOTAL-COSTS> 16,995,090
<OTHER-EXPENSES> 7,315,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,043
<INCOME-PRETAX> (2,915,530)
<INCOME-TAX> 1,020,435
<INCOME-CONTINUING> (1,895,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,895,095)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
<FN>
<F1>EXCLUDES NON-CURRENT INVENTORY OF $14,693,691
</FN>
</TABLE>
