<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S 1st QUARTER 10-Q FOR FISCAL 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JUL-31-1999
<CASH> 1,378,756
<SECURITIES> 0
<RECEIVABLES> 21,252,062
<ALLOWANCES> (708,558)
<INVENTORY> 32,337,803
<CURRENT-ASSETS> 58,568,261
<PP&E> 38,693,237
<DEPRECIATION> (21,452,752)
<TOTAL-ASSETS> 102,681,027
<CURRENT-LIABILITIES> 39,178,148
<BONDS> 0
<COMMON> 6,493
0
0
<OTHER-SE> 63,023,011
<TOTAL-LIABILITY-AND-EQUITY> 102,681,027
<SALES> 13,879,045
<TOTAL-REVENUES> 17,687,317
<CGS> 12,998,327
<TOTAL-COSTS> 15,341,857
<OTHER-EXPENSES> 4,199,318
<LOSS-PROVISION> (1,853,858)
<INTEREST-EXPENSE> (359,419)
<INCOME-PRETAX> (2,192,203)
<INCOME-TAX> 23,000
<INCOME-CONTINUING> (2,215,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,215,230)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
<FN>
<F1>
</FN>
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-Q
QUARTERLY REPORT UNDER TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the quarter ended July 31, 1999 Commission File No. 0-17174
HAUSER, INC.
(Exact name of Registrant as specified in its charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-0926801
(I.R.S. Identification Number)
5555 Airport Blvd., Boulder, Colorado 80301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 443-4662
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
___________________________
Common Stock, par value $.001
(Title of Class)
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes __ No _X_
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 5,133,510
Class Outstanding at July 31, 1999
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three months ended July 31, 1999 and July 31, 1998 1
Consolidated Balance Sheets -
July 31, 1999 and April 30, 1999 2
Consolidated Statements of Cash Flows -
Three months ended July 31, 1999 and July 31, 1998 3
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities. 15
Item 3. Defaults Upon Senior Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K. 15-16
SIGNATURE PAGE 17
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Three months ended July 31,
1999 1998
REVENUES:
<S> <C> <C>
Natural product processing $9,698,536 $2,492,235
Technical services 3,808,272 3,968,466
Paclitaxel 4,180,509 590,717
Total revenues 17,687,317 7,051,418
COST OF REVENUES:
Natural product processing 8,817,818 1,896,864
Technical services 3,111,729 2,903,418
Paclitaxel 4,180,509 588,665
Other costs of revenues (768,199) -
Total cost of revenues 15,341,857 5,388,947
GROSS PROFIT 2,345,460 1,662,471
OPERATING EXPENSES:
Research and development 265,517 320,956
Sales and marketing 1,023,283 699,200
General and administrative 2,096,518 1,684,909
Other operating charges 814,000 -
Total operating expenses 4,199,318 2,705,065
LOSS FROM OPERATIONS (1,853,858) (1,042,594)
OTHER INCOME (EXPENSE):
Interest income 21,047 27,054
Interest expense (359,419) (46,384)
Other (23,000) -
Other income (expense) - net (361,372) (19,330)
LOSS BEFORE INCOME TAXES (2,215,230) (1,061,924)
INCOME TAX EXPENSE - -
NET LOSS $(2,215,230) $(1,061,924)
LOSS PER SHARE BASIC AND DILUTED $ (0.55) $ (0.41)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 4,012,538 2,617,263
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 1999 1999
(unaudited)
CURRENT ASSETS:
<S> <C>
<C>
Cash and cash equivalents $ 1,378,756 $ 3,610,825
Restricted cash - 567,032
Accounts receivable, less allowance for doubtful accounts:
July 31, 1999, $706,558; April 30, 1999, $158,421 20,545,504 6,812,444
Income taxes receivable 293,255 -
Inventory, at cost 29,669,443 9,665,832
Inventory, at net realizable value 2,668,360 6,034,525
Prepaid expenses and other 1,131,368 292,808
Net deferred income tax assets 2,881,575 2,313,594
Total current assets 58,568,261 29,297,060
PROPERTY AND EQUIPMENT
Land and buildings 8,284,334 7,692,252
Lab and processing equipment 26,187,441 23,972,862
Furniture and fixtures 4,221,462 3,970,364
Total property and equipment 38,693,237 35,635,478
Accumulated depreciation and amortization (21,452,752) (19,064,412)
Net property and equipment 17,240,485 16,571,066
OTHER ASSETS:
Goodwill, less accumulated amortization:
July 31, 1999, $1,052,717; April 30, 1999, $847,509 25,121,660 1,373,471
Deposits 1,003,201 1,953,041
Net deferred income tax asset 642,899 642,899
Other 104,521 66,000
Total other assets 26,872,281 4,035,411
TOTAL $102,681,027 $ 49,903,537
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,581,407 $ 2,953,559
Current portion of long term debt 31,069,641 6,750,342
Accrued salaries and wages 1,317,295 1,347,040
Deposits 866,878 3,807,798
Accrued merger related costs 550,228 -
Accrued exit costs - 3,537,203
Other accrued liabilities 792,699 185,148
Total current liabilities 39,178,148 18,581,090
LONG TERM LIABILITIES 473,375 486,596
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: July 31, 1999, 5,133,510;
April 30, 1999, 2,618,017 5,134 2,618
Additional paid-in capital 93,296,765 58,890,398
(Accumulated deficit) retained earnings (30,272,395) (28,057,165)
Net stockholders' equity 63,029,504 30,835,851
TOTAL $102,681,027 $ 49,903,537
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS-Unaudited
Three months endedJuly 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,215,230) $(1,061,924)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,593,550 1,171,673
Provision for bad debt 49,652 24,538
Change in accrued exit costs (3,537,203) -
Accrued merger costs 550,228 -
Change in deposits and other 1,153,187 (1,114,559)
Change in assets and liabilities:
Accounts receivable 317,245 2,288,265
Inventory 3,870,431 (1,722,038)
Prepaid expenses and other (615,952) (87,002)
Income taxes receivable (18,685) -
Accounts payable (1,483,612) (356,894)
Customer deposits (2,940,920) (422,661)
Provision for product warranty - (270,430)
Other accrued liabilities (419,249) (197,286)
Net cash used in operating activities (2,696,558) (1,748,318)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,095,295) (723,895)
Net change in restricted cash 567,032 (139,653)
Net cash used in investing activities (1,528,263) (863,548)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bank line of credit (6,000,000) 1,500,000
Proceeds from bank line of credit 8,005,973 -
Repayments of long-term debt (13,221) (27,106)
Net cash provided by financing activities 1,992,752 1,472,894
Net increase (decrease) in cash and cash equivalents (2,232,069) (1,138,972)
Cash and cash equivalents, beginning of year 3,610,825 2,081,796
Cash and cash equivalents, end of period $ 1,378,756 $ 942,824
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 31, 1999
AND
APRIL 30, 1999 AND FOR THE THREE MONTH PERIOD ENDED JULY 31, 1999 AND
1998
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position
as of July 31, 1999, and the results of its operations and its cash flows
for the periods ended July 31, 1999 and 1998. 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 1999 amounts have been reclassified to conform to the
fiscal 2000 presentation.
Basis of Consolidation - The accompanying financial statements include the
accounts of Hauser and its wholly owned subsidiaries: Zuellig Botanical
Extract, Inc. ("ZBE"), Shuster Laboratories, Inc. ("Shuster"), Wilcox Drug
Company, Inc. ("Wilcox"), and ZetaPharm Inc. ("ZetaPharm") All significant
intercompany accounts and transactions have been eliminated in consolidation.
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. 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. Write-downs for excess and
obsolete inventories are charged to expense in the period when conditions
giving rise to the write-downs 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.
Inventories, at cost, are classified as follows:
<TABLE>
July 31, April 30,
1999 1999
<S> <C> <C>
Raw materials and supplies $ 2,944,380 $ 2,694,883
Work in process 5,119,273 3,562,967
Finished goods 21,605,790 3,407,982
Total inventories $29,669,443 $ 9,665,832
</TABLE>
Bulk paclitaxel held for sale as of July 31, 1999 and April 30, 1999, at a
net realizable value of $2,668,360 and $6,034,525, respectively, is not
included in the table above. As of July 31, 1999 and April 30, 1999, this
included bulk paclitaxel finished goods of $2,668,360 and $3,234,121 and
bulk paclitaxel work-in-process of $0, and $2,800,404, respectively.
3. DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
July 31, 1999 April 30, 1999
<S> <C> <C>
Line of Credit $30,557,823 $6,000,000
Capital Leases 985,193 1,236,938
Total 31,543,016 7,236,938
Less current portion 31,069,641 6,750,342
Long Term debt $ 473,375 $ 486,596
</TABLE>
Loan Agreement - On June 11, 1999 the Company obtained financing from Wells
Fargo Bank, NA for provide an aggregate amount of $45,000,000, to be
guaranteed by each of its subsidiaries: a revolving line of credit up to
$35,000,000 for general working capital purposes maturing two years after
the loan closing, and a $10,000,000 non-revolving term commitment to
financing the acquisition of fixed assets with a draw down period of two
years and a maturity date five years following the loan closing (collectively,
the "Credit Facility"). The Company also assumed approximately $22,000,000 of
the Contributed Subsidiaries' bank debt. The Credit Facility includes a
$1,000,000 sublimit for the issuance of commercial letters of credit up to
150 days in term. The advance rates for the revolving facility are 80% of
eligible accounts receivable and 50% of eligible inventory. Inventory
collateral for loan purposes may not exceed $20,000,000. For the revolving
loan, the interest rate is the Bank's prime-rate minus .75% or the Bank's
quoted LIBOR plus 1.5% per annum. For the term loan fixed asset facility,
the interest rate is the Bank's prime rate minus .5% or the Bank's quoted
LIBOR plus 1.75% per annum, or on an unspecified fixed rate basis. A
commitment fee of .25% per annum will be charged on the unused portion of
the term loan fixed asset commitment. The Credit Facility is secured by all
of the Company's assets. Additionally, the Credit Facility contains
affirmative and negative covenants, including certain financial covenants.
As of July 31, 1999, the Company borrowings exceeded the borrowing base by
$3,008,000, and the Company was in technical default of one financial
covenant under the Credit Facility. The Company has received a waiver of
these defaults from its lenders and is engaged in discussions with its
lenders concerning various technical amendments to the Credit Facility to
cure the technical default.
4. EARNINGS (LOSS) PER SHARE
The Company calculates basic earnings (loss) per share by dividing the net
earnings or loss by the weighted average number of shares of common stock
outstanding. Diluted earnings (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 antidilutive, the effect of
outstanding warrants and stock options determined utilizing the treasury
stock method. For the three months ended July 31, 1999, and 1998, 0 and
36,007 options were excluded from the calculation of diluted loss per
share since the result would have been antidilutive.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
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. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - An
amendment of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 delays
the effective date of SFAS No. 133 to financial quarters and financial
years beginning after June 15, 2000. The Company does not typically enter
into arrangements that would fall under the scope of SFAS No. 133 and thus,
management believes that the adoption of SFAS No. 133 will not have a
significant impact on the Company's financial condition and results of
operations.
6. MERGER
Pursuant to an Agreement and Plan of Merger dated December 8, 1998 (the
"Merger Agreement"), the Company completed a merger on June 11, 1999, with
three subsidiaries (collectively referred to as the "Contributed
Subsidiaries") of Zuellig Group N.A, Inc. ("ZGNA") and Zuellig Botanicals,
Inc. ("ZBI"). Two subsidiaries of ZGNA, Wilcox and ZetaPharm and one
subsidiary of ZBI, ZBE merged with three wholly owned subsidiaries of the
Company which were created for the purpose of the Merger. The Contributed
Subsidiaries were the surviving corporations and became wholly owned
subsidiaries of the Company as a result of the Merger.
At the closing of the Merger, the Company issued 2,515,349 shares of its
common stock to ZGNA and ZBI, which constituted 49% of the outstanding
shares. After the closing, the Company's existing officers and public
shareholders own 51.0% of the combined company, while ZGNA owns 49.0%. The
number of shares that were issued to ZGNA is subject to downward adjustment
under certain circumstances. Simultaneously with the Merger, the Company
effected a one-for-four reverse stock split. The reverse stock split was
implemented in order to satisfy NASDAQ's listing requirements. All share
and per share information has been adjusted for the reverse stock split.
The Merger was treated as a purchase of the Contributed Subsidiaries for
accounting purposes. Goodwill of $23,953,397 was recognized and will be
amortized over a twenty year period. Goodwill was computed as follows:
<TABLE>
<S> <C>
Common stock issued 1,913,640 <F1>
Fair value per share 17.98 <F2>
Fair value of common stock issued $34,408,523
Cost associated with the transaction 1,793,387
Total consideration 36,201,910
Fair value of the excess of identifiable assets
acquired over liabilities assumed by Hauser (12,248,513)
Goodwill 23,953,397
<FN>
<F1> Represents total common stock issued in connection with the Merger,
less 601,709 shares held in escrow in accordance with The Escrow Agreement,
described in Part 2, Item 2.3 and incorporated by reference.
<F2> Fair value per share computed based on the average closing price for
three days prior and three days after the announcement of the Merger, after
consideration of the effect of the 1:4 reverse stock split which occurred
concurrent with the closing of the Merger.
</FN>
</TABLE>
The following pro forma unaudited consolidated results of operations for
the three months ended July 31, 1999, and 1998 have been prepared assuming
the Merger occured on May 1, 1998. These pro forma results do not purport to
be indicative of the results of operations which actually would have resulted
had the acquisition taken effect on May 1, 1998.
<TABLE>
July 31
1999 1998
<S> <C> <C>
Revenue $20,539,488 $29,656,773
Cost of Revenue 20,333,792 24,748,024
Gross Profit 205,696 4,908,749
Operating Expenses 5,341,061 5,061,835
Loss From Operations $(5,135,365) $ (153,086)
Net Loss $(5,750,447) $ (796,564)
Net Loss Per Share Basic and Diluted $ (1.12) (0.16)
Weighted Average Shares
Outstanding, Basic and Diluted 5,133,510 5,132,614
</TABLE>
7. DISCONTINUED ACTIVITIES
Prior to the Merger, in the third quarter fiscal 1999, the Company
discontinued its paclitaxel related activities. In the quarter ended
January 31, 1999, the Company incurred a one-time charge to earnings of
$25,600,000. The change and the results of paclitaxel activities have been
included in the continuing operations because paclitaxel activities did
not constitute a separate business segment of the Company. In February
1999, the Company signed a contract for the sale of its paclitaxel
inventory as part of the planned closure of the paclitaxel business. The
purchase agreement will gross approximately $9,500,000 to the Company over
the first six to nine months of fiscal 2000 and is contingent upon the
Company delivering the product in final form within agreed upon
specifications. As of July 31, 1999, shipments of paclitaxel under the
above referenced purchase agreement totaled $4,200,000. The Company has
negotiated settlement of its yew tree cultivation agreements and
termination of a multi year non-exclusive agreement to supply paclitaxel
to a customer. These agreements are contingent upon contractual performance
by third parties assuming Hauser's obligations under these settlement
agreements. The Company anticipates completion of its exit of the
paclitaxel business by January 31, 2000.
8. OTHER COSTS OF REVENUE AND OTHER OPERATING CHARGES
During the first quarter of fiscal 2000, the Company took a charge to
earnings of $3,581,560. The charge to cost of revenues of $2,767,560 was
recorded to write-off advance payments made for the purchase of raw
material and to reduce the value of certain raw materials related to
Natural Products to net realizable value. The Company also recorded a
charge to operating expenses in the amount of $814,000 related to the
payment of post-merger severance costs, asset abandonment and reserves
for leases on obsolete equipment.
Offsetting the above charges in cost of revenues was the reversal of a
reserve of $3,535,759 of the provision established in connection with
the termination of cultivar contracts.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following schedule summarizes non-cash transactions for the quarter
ended July 31, 1999:
<TABLE>
<S> <C>
Increase in goodwill $ 23,953,397
Reclassification from of merger costs from prepaid
expenses to goodwill (1,793,387)
Increase in net assets (Contributed Subsidiaries') 12,248,513
Increase in common stock (2,515)
Increase in additional paid in capital (34,406,367)
</TABLE>
10. OPERATING SEGMENTS
The Company's three business segments are; natural product processing,
technical services, and fine chemicals and excipients, each having a
separate management team and infrastructure offering different products and
services, and utilizing different marketing strategies to target customers.
Included in corporate and other are the results of the Company's paclitaxel
related activities, which are being terminated. Selected condensed
financial information from the Company's business segments are as follows:
<TABLE>
Three Months Ended July 31, 1999
Natural Technical Corporate
Products Services Fine Chemicals and Other Total Hauser
<S> <C> <C> <C> <C> <C>
Revenue $ 4,655,373 $ 3,808,272 $ 5,043,163 $ 4,180,509 $17,687,317
Cost of revenues 7,302,608 3,111,729 4,282,770 644,750 15,341,857
Gross profit (loss) (2,647,235) 696,543 760,393 3,535,759 2,345,460
Operating expenses 1,233,339 1,122,313 535,357 1,308,309 4,199,318
Operating income (loss) $ (3,880,574) $ (425,770) $ 225,036 $ 2,227,450 $(1,853,858)
Assets $ 43,820,330 $ 11,381,000 $ 12,075,205 $35,404,492 $102,681,027
Three Months Ended July 31, 1998
Natural Technical Corporate
Products Services Fine Chemicals and Other Total Hauser
Revenue $ 2,492,235 $ 3,968,466 $ - $ 590,717 $ 7,051,418
Cost of revenues 1,852,505 2,903,418 - 633,024 5,388,947
Gross profit (loss) 639,730 1,065,048 - (42,307) 1,662,471
Operating expenses 684,168 674,013 - 1,346,884 2,705,065
Operating income (loss) $ (44,438) $ 391,035 $ - $(1,389,191) $(1,042,594)
Assets $ 26,658,000 $ 12,006,000 $ - $28,888,957 $67,552,957
</TABLE>
<PAGE>
Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company operates in three business segments; natural product
processing, technical services, and fine chemicals and excipients. Prior to
fiscal 2000 the Company began the process of exiting its paclitaxel related
activities.
RESULTS OF CONTINUING ACTIVITIES:
The results of continuing activities exclude paclitaxel related activities,
as discussed in Note 7 to the financial statements. Additionally, the
following discussion of results of operations is based on a comparison of
proforma fiscal 2000 operating results to the proforma fiscal 1999
operating data because management believes the merger has made comparision
of actual results between quarters meaningless.
REVENUES. A breakout of the Company's revenues by product and service is
as follows:
<TABLE>
Three months ended July 31,
1999 1998
<S> <C> <C>
Natural products (includes herbal extracts,
natural flavor extracts, food ingredients
and raw botanicals) $ 8,572,121 $14,521,114
Technical services (includes Hauser
Laboratories and Shuster Laboratories, Inc.) 3,808,272 3,968,466
Fine chemicals and excipients 8,159,095 11,167,193
$20,539,488 $29,656,773
</TABLE>
Total revenues decreased by 31% to $20,539,488 in the first quarter of
fiscal 2000 from $29,656,773 in the first quarter of the prior fiscal year.
Natural Product revenues decreased by 41% to $8,572,121 in the first
quarter of fiscal 2000 from $14,521,114 in the first quarter of the prior
fiscal year. This decrease is attributable primarily to reduced revenues
generated by Wilcox due to continued softness in the dietary supplement
market. Additionally, herbal extract sales have decreased from the prior
year as customers continue to carry high inventories.
Technical Service revenues decreased by 4% to $3,808,272 in the first
quarter of fiscal 2000 from $3,968,466 in the first quarter of the prior
fiscal year. The decrease in technical service revenues is attributed to
the significant technical service resources which have been utilized in the
process of exiting the paclitaxel business. It is expected that these
resources will be utilized to generate technical service revenue upon
completion of the Company's exit from the paclitaxel business.
Fine Chemical and Excipient revenues decreased by 27% to $8,159,095 in the
first quarter of fiscal 2000 from $11,167,193 in the first quarter of the
prior fiscal year. This decrease is due to a reduction in generic active
ingredient revenues, offset partially by increases in fine chemical and
excipient revenues.
GROSS PROFIT. Gross profit decreased by 24% to $3,741,455 in the first
quarter of fiscal 2000 from $4,908,749 in the first quarter of the prior
year. Included in gross profit in the quarter ended July 31, 1999 is a
charge for write-downs of inventories and other assets totaling $2,767,560.
This charge was offset by a reversal of a reserve of $3,535,759 established
in connection with termination of cultivar contracts.
Excluding the impact of the above referenced items, the gross profit
percentage of 15% in the quarter ended July 31, 1999 has deteriorated from
the gross profit percentage of 17% for the same period in the prior year.
This decrease can be attributed primarily to reduced production volumes,
related to the reduced sales of herbal extracts, which resulted in
unfavorable manufacturing variances.
OPERATING EXPENSES. Operating expenses in the quarter ended July 31, 1999
include a charge of $814,000 relating to post-merger severance costs, asset
abandonment and reserves for leases on obsolete equipment. Excluding the
impact of this charge, operating expenses decreased by 5% to $4,527,061 in
the quarter ended July 31, 1999 from $5,098,644 in the same period in the
prior year. This decrease is primarily results from a reduction of general
and administrative expenses.
INTEREST INCOME/EXPENSE. Interest expense increased by 82% to $592,082 in
the quarter ended July 31, 1999 from $325,761 in the same period in the
prior year. The increase in interest expense is due to the increased debt
levels in the current year.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary cash needs are for working capital and
capital expenditures. The Company expects to meet its liquidity
requirements through cash flow from operations and the Credit Facility.
As of July 31, 1999, the Company's borrowings exceeded the borrowing base
by $3,008,000, and the Company was in technical default of one financial
covenant under the Credit Facility. The Company has received a waiver of
these defaults from its lenders and is engaged in discussions with its
lenders concerning various technical amendments to the Credit Facility
which would cure the technical default.
Total cash and cash equivalents were $1,378,756 at July 31, 1999 compared
to $3,610,825 at April 30, 1999.
Cash used in operating activities for the quarter ended July 31, 1999 was
$2,696,558. This amount is comprised primarily of a net loss of $2,215,230,
a reversal of accrued exit costs of $3,537,203 and decreases in accounts
payable and customer deposits of $1,483,612 and $2,940,920, respectively.
The use of cash was partially offset by depreciation and amortization of
$2,593,550, and decreases in deposits, accounts receivable and inventory
of $1,153,187, $317,245 and $3,870,431, respectively.
Cash used in investing activities is comprised of capital expenditures of
$2,095,295, offset by a reduction in restricted cash of $567,032.
Cash provided by financing activities relates primarily to net funds
provided in connection with the Company's Credit Facility.
Management believes that current cash reserves, the new Credit Facility and
funds generated from earnings are sufficient to meet the Company's
liquidity needs within the next twelve months and on a long-term basis.
WORKING CAPITAL. Working capital as of July 31, 1999 was $19,390,113 as
compared to $10,715,970 as of April 30, 1999. The increase is primarily
attributable to changes in current assets and liabilities related to the
merger.
INCOME TAXES. The Company has a net deferred tax asset of $15,665,180 that
has been reduced by a valuation allowance of $12,140,707 as of July 31,
1999. Included in deferred tax assets at July 31, 1999, are federal net
operating loss carry forwards of approximately $24,800,000, income tax
credits of approximately $544,000 and alternative minimum tax credits of
approximately $1,400,000. Realization is dependent on generating sufficient
taxable income or realization of future taxable temporary difference prior
to expiration of the carry forwards. Although, realization is not assured,
management believes it is more likely than not the recorded net deferred
tax asset will be realized.
In assessing the amount of its net deferred tax assets considered
realizable, management has considered the following factors: (1) taxable
income projected within the next twenty-four months; (2) the expiration
dates of its net operating loss and tax credit carryovers; and (3) tax
planning strategies which would allow Hauser to generate significant
taxable income from existing assets (including possible sale-leaseback
scenarios for its land, property and equipment held fee simple). 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 sales orders was $4,500,000 of as July 31,
1999, compared to $1,600,000 as of April 30, 1998. Backlog consists of
unfilled sales orders for herbal extracts and flavors products.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the area of changes in United States interest
rates. These exposures are directly related to the Company's fixed and
variable rate borrowings used to fund its operations. Historically and as
of July 31, 1999, the Company has not used derivative instruments or
engaged in hedging activities.
The interest payable on the Company's revolving line of credit is variable
based on the prime rate and/or LIBOR, and is therefore, affected by changes
in market interest rates. At July 31, 1999, approximately $2,600,000 was
outstanding with an interest rate of 7.25% (prime plus 0.75%), and
approximately $28,000,000 was outstanding with an interest rate of 6.81%
(LIBOR plus 1.50%). Should the Company be required to obtain financing for
the existing line elsewhere, or should the Company's liquidity needs exceed
amounts available under this line of credit, the interest rate to replace
the credit facilities might be significantly higher. For
example, if the interest rate on the Company's line of credit had been
2% higher for its quarter ended July 31, 1999, the Company
would have incurred additional interest expense of approximately $153,000,
on a proforma basis, with an associated $.04 increase in the per share
loss for the quarter. Therefore, the Company's exposure to changes in
interest rates will be significant until such time as its operating results
permit it greater access to other lenders and lending instruments on terms
equivalent or superior to those available under its current lending agreement.
Year 2000 COMPLIANCE:
Hauser is preparing its systems and applications for the year 2000 ("Y2K").
The issue the Company's Y2K program addresses is the use of two-digit
instead of four-digit year fields in computer systems. If the computer
systems cannot distinguish between the year 1900 and the year 2000, system
failures or other computer errors could result. The potential for failures
and errors spans all aspects of the Company's business, including computer
systems, voice and data networks, and building infrastructures. The Company
is also faced with addressing its interdependencies with suppliers and
major customers, which all face the same problem.
The Company recognizes the importance of readiness for Y2K and has given it
high priority. The Company created a corporate-wide Y2K team to represent
all company business and staff units. The team is headed by the Company's
Director of Information Technology. The team's objective is to ensure an
uninterrupted transition to the year 2000 by assessing, testing and
modifying information technology ("IT") and non-IT systems so that (a) they
would perform as intended, regardless of the date (before, during and after
December 31, 1999), and (b) dates could be processed (before, during and
after December 31, 1999 and including February 29, 2000) with expected
results ("Year 2000 Compliant").
The scope of the Y2K compliance effort includes (i) information technology
(IT) such as software and hardware; (ii) non-IT systems or embedded
technology such as micro-controllers contained in various manufacturing and
laboratory equipment; environmental and safety systems, facilities and
utilities, and (iii) the readiness of key third parties, including
suppliers and customers.
The Y2K project team has taken an inventory of IT and non-IT systems that
might malfunction or fail as a result of using only the last two digits to
indicate the year. The project team categorized the potential date
component failures into three categories: "Vital" (stops the business
operation and no short-term solution is available); "Critical"
(inconvenient to the business operation and a short-term solution is
available); and "Marginal" (inconsequential to the business operation).
IT Systems - The Company is using both internal and external resources to
remediate and test millions of lines of application software code. As of
August 31, 1999, approximately 99 percent of the core IT systems (e.g.,
general ledger, payroll, procurement, and order management) that were
deemed "Vital" or "Critical" are Year 2000 Compliant.
Non-IT Systems - The Company has manufacturing and laboratory locations
with varying degrees of non-IT systems (such as programmable logic
controllers, gauging guidance and adjustment systems, and testing
equipment). Assessment and testing of non-IT systems for Y2K compliance has
proven much more difficult than assessing compliance of IT systems because
testing of non-IT systems often requires shutdown of operations.
As a result, the Company has approached assessment and testing of non-IT
systems that are common to many of the Company's facilities by (i)
contacting the suppliers of these non-IT systems and obtaining statements
that the systems are Y2K Compliant, and (ii) testing components of non-IT
systems when they are shut down for normal maintenance. The Company has
also tested manufacturing lines and tested non-IT systems at the Company's
several facilities. These tests demonstrate that "time interval" instead of
"dates" are used primarily in these non-IT systems and support the
Company's belief that potential disruption of such systems due to the Y2K
issue should be minimal.
Third Parties - In addition to internal Y2K IT and non-IT remediation
activities, the Company is in contact with key suppliers and with customers
to minimize potential disruptions in the relationships between the Company
and these important third parties related to the Y2K issue. The Company has
also categorized supplies purchased from vendors into three categories:
"Vital" (disruption of supply stops the business operation and no
short-term solution is available); "Critical" (disruption of supply is
inconvenient to the business operation and a short-term solution is
available); and "Marginal" (disruption of supply is inconsequential to the
business operation). The Company has focused its efforts on those vendors
that supply goods or services deemed "Vital" to the Company's business. All
vendors categorized as "Vital" or "Critical" have responded confirming that
they are fully Y2K Compliant. While the Company cannot guarantee compliance
by third parties, the Company has developed contingency plans with its key
suppliers that include availability of appropriate inventories of supplies
in the event the supplier is not Y2K Compliant.
Contingency Planning - The Company has prepared contingency plans
specifying what the Company will do if failures occur in IT and non-IT
systems, or if important third parties are not Y2K Compliant. The Company
has finalized contingency plans company-wide for its IT and non-IT systems.
Costs - From the project inception through July 31, 1999, the Company has
spent $300,000 out of a total estimate of approximately $360,000 related to
Y2K readiness. These costs include the costs incurred for external
consultants and professional advisors and the costs for software and
hardware. The Company's process for tracking internal costs does not
capture all of the costs incurred for each of the employees working on the
Y2K project. Such internal costs are principally the related payroll costs
for its information technology group and other employees who worked on the
Y2K project. The Company is expensing as incurred all costs related to the
assessment and remediation of the Y2K issue. These costs are being funded
through operating cash flows.
Risk Assessment - The Company's current estimates of the time and costs
necessary to remediate and test its computer systems are based on the facts
and circumstances existing at this time. The estimates were made using
assumptions of future events including the continued availability of
certain resources, such as skilled IT personnel and electrical power, Y2K
modification plans, implementation success by key third-parties, and other
factors. New developments could affect the Company's estimates of the
amount of time and costs needed to modify and test its IT and non-IT
systems for Y2K compliance. These developments include, but are not limited
to: (i) the availability and cost of personnel trained in this area; (ii)
the ability to locate and correct all relevant codes in both IT and non-IT
systems; (iii) unanticipated failures in IT and non-IT systems; and (iv)
the planning and Y2K compliance success that key customers and suppliers
attain.
The Company cannot determine the impact of these potential developments on
the current estimate of probable total cost of making its IT and non-IT
systems Y2K Compliant. Accordingly, the Company is not able to estimate
possible future costs beyond the current estimates. As new developments
occur, these cost estimates may be revised to reflect the impact of these
developments on the costs to the Company of making its IT and non-IT
systems Y2K Compliant. Such cost revisions could have a material adverse
impact on the Company's net income in the quarterly period in which they
are recorded. Although the Company considers it unlikely, such revisions
could also have a material effect on the consolidated financial position or
annual results of 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.
On June 11, 1999, as part of the Merger, the Company issued
2,515,349 shares of its common stock to ZGNA and ZBI in exchange for the
Contributed Subsidiaries. The shares were sold in a transaction exempt from
registration requirements pursuant to 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 11, 1999, the Company held a special meeting of its
shareholders at which the shareholders approved the Merger Agreement and
the issuance by the Company to ZGNA and ZBI shares of common stock, par
value $.001 per share, representing 49% of the issued and outstanding
shares after giving effect to such issuance. Additionally, the shareholders
approved a resolution of the Board of Directors of the Company that
effected a reverse stock split whereby 4 shares of the outstanding common
stock would be exchanged for ones share of common stock. The results of the
votes were as follows:
<TABLE>
Proposal For Against Abstentions
<S> <C> <C> <C>
Merger Agreement 6,662,596 877,186 79,169
Reverse Stock Split 6,460,485 1,101,861 110,004
</TABLE>
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger
Incorporated by reference as Exhibit 2.1 to Form 10-Q dated October
31, 1998, and amended as Appendix B to Definitive Proxy Statement
dated May 11, 1999
2.2 Form of Agreement Regarding Employees
Incorporated by reference as Exhibit 2.2 to Form 10-Q dated October
31, 1998
2.3 Form of Escrow Agreement
Incorporated by reference as Exhibit 10.2 to Form 10Q-A dated January
31, 1999
2.4 Form of Governance Agreement
Incorporated by reference as Exhibit 2.4 to Form 10-Q dated October
31, 1998, and amended as Appendix C to the Definitive Proxy Statement
dated May 11, 1999
2.5 Inventory Purchase Agreement
Incorporated by reference as Exhibit 2.5 to Form 10Q dated October
31, 1998
2.6 Agreement for Option to Acquire Powders Business
Incorporated by reference as Exhibit 2.6 to Form 10-Q dated October
31, 1998
2.7 Registration Rights Agreement
Incorporated by reference as Exhibit 2.7 to Form 10-Q dated October
31, 1998
2.8 Sourcing Agreement dated June 11, 1998
Incorporated by reference as Exhibit 2.8 to Form 10-Q dated October
31, 1998
10.1 Credit Agreement dated as of June 11, 1999 among Hauser, Inc.,
Zuellig Botanical Extracts, Inc., Zetapharm, Inc., Wilcox Drug
Company, Inc., Shuster Laboratories, Inc. and Wells Fargo Bank, N.A.
Incorporated by reference as Exhibit 10.1 to Form 10-K dated July
29, 1999
10.2 Revolving Credit Note dated June 11, 1999
Incorporated by reference as Exhibit 10.2 to Form 10-K dated July
29, 1999
10.3 Term Note dated June 11, 1999
Incorporated by reference as Exhibit 10.3 to Form 10-K dated July
29, 1999
10.4 Security Agreement dated June 11, 1999 among Hauser, Inc., Shuster
Laboratories, Inc. and Wells Fargo Bank, N.A. Incorporated by
reference as Exhibit 10.4 to Form 10-K dated July 29, 1999
10.5 Collateral Assignment of Trademarks, Trademark Applications, Patent
and Patent Applications dated June 11, 1999 Incorporated by
reference as Exhibit 10.5 to Form 10-K dated July 29, 1999
10.6 Collateral Assignment of Patents and Patent Applications dated June
11, 1999 Incorporated by reference as Exhibit 10.6 to Form 10-K
dated July 29, 1999
10.7 Amended and Restated Security Agreement dated as of June 11, 1999,
among Zuellig Botanical Extracts, Inc., Wilcox Drug Company, Inc.,
Zetapharm, Inc., and Wells Fargo Bank, N.A. Incorporated by
reference as Exhibit 10.7 to Form 10-K dated July 29, 1999
10.8 Pledge and Security Agreement dated June 11, 1999 Incorporated by
reference as Exhibit 10.8 to Form 10-K dated July 29, 1999
10.9 Deed of Trust, Assignment of Rents, Security Agreement and Financing
Statement dated June 11, 1999 Incorporated by reference as Exhibit
10.9 to Form 10-K dated July 29, 1999
(b) Reports on Form 8-K
(1) Report on Form 8-K dated June 25, 1999.
<PAGE>
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HAUSER, INC.
Date: September 14, 1999
/s/Dean P. Stull
Chairman of the Board and Co-Chief Executive Officer
Date: September 14, 1999
/s/Volker Wypyszyk
President and Co-Chief Executive Officer
Date: September 14, 1999
/s/Ralph L. Heimann
Chief Financial Officer and Treasurer
