SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
FOR THE PERIOD FROM APRIL 1, 1999 TO MARCH 31, 2000 COMMISSION FILE NO. 0-17174
HAUSER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0926801
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(STATE OR OTHER JURISDICTION OF (I.R.S. IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
5555 AIRPORT BLVD., BOULDER, COLORADO 80301
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(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:
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Common Stock, par value $.001
(TITLE OF CLASS)
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.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.
$4,581,530 as of June 30, 2000
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 4,811,585
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Class Outstanding at March 31, 2000
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
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. On December 8, 1999, Hauser was re-incorporated in the state of Delaware.
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
stated otherwise.
Hauser is a manufacturer of extracts from botanical raw materials, using its
proprietary technologies in extraction and purification. Hauser is also a
leading supplier of herbal extracts, botanical raw materials, and related
products to the dietary supplement market in the United States. Hauser and its
subsidiaries are able to source, process and distribute products to the dietary
supplement market including branded product sellers. The Company also provides
interdisciplinary laboratory testing services, chemical engineering services,
and contract research and development. The Company's services are principally
marketed to the pharmaceutical, dietary supplement and food ingredient
industries.
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 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, MA and Smyrna, GA. In November, 1999, a new subsidiary, Hauser Technical
Services, Inc. ("HTS") was created to perform all technical services.
In June 1999, Wilcox Drug Company, Inc., a Delaware corporation ("Wilcox"), and
ZetaPharm, Inc., a New York corporation ("ZetaPharm"), subsidiaries of Zuellig
Group N.A., Inc. ("ZGNA") and Zuellig Botanical Extracts, Inc., a Delaware
corporation ("ZBE"), a subsidiary of Zuellig Botanicals, Inc. ("ZBI"), merged
with three wholly owned subsidiaries of the Company. Subsequent to the merger,
ZBE formally changed its name to Botanicals International Extracts, Inc.
("BIE"). Each of Wilcox, ZetaPharm and BIE (the "Contributed Subsidiaries") were
the surviving corporations of the respective mergers and became wholly-owned
subsidiaries of the Company. As a result of the mergers, the Company became a
leading supplier in the United States of herbal extracts, botanical raw
materials and related products to the manufacturers of dietary supplements.
In December 1998, Hauser elected to terminate its paclitaxel business to focus
its corporate resources on the Natural Products and Technical Service business
units. A corresponding one-time accounting charge of $25,600,000 was recorded in
the quarter ended January 31, 1999. In February
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1999, the Company signed a purchase agreement for the sale of its paclitaxel
inventory as part of the planned closure of the paclitaxel business. Under the
purchase agreement, the Company has received $8,694,819 through March 31, 2000.
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. As of March 31, 2000, the Company has substantially completed its exit
from the paclitaxel business.
During the eleven months ended March 31, 2000, sales of herbal extracts and
botanical raw materials declined significantly due to a substantial reduction of
retail sales of dietary supplements. The reduced sales, combined with a need
to reduce operating expenses resulted in the Company's decision to close the
Wilcox facilities in March 2000. In connection with such closure, the Company
recorded an aggregate charge in the amount of $9.1 million. Included within such
charge is $6,561,009 associated with the abandonment of goodwill recorded in
connection with the merger.
DESCRIPTION OF HAUSER, INC - THE BUSINESS
Hauser has expertise in proprietary extraction and purification technologies,
which produces purified materials with a readily ascertainable concentration of
active ingredients.
Hauser is vertically integrated with the ability to source, process, and
distribute products to the manufacturers of dietary supplements. In addition,
Hauser's integrated research and development capability and proprietary
extraction technology provides customers a full range of solutions to their
product needs.
Hauser's Technical Services business unit ("Technical Services") has earned a
national reputation for scientific and problem-solving excellence. Technical
Services offers innovative technical solutions and has developed expertise in
natural product isolation, pharmaceutical development, and food products and
dietary supplement formulation. Hauser's Technical Services business unit offers
innovative technical services to a diverse customer base.
DESCRIPTION OF EACH REPORTABLE INDUSTRY SEGMENT
NATURAL PRODUCTS
HERBAL EXTRACTS - During fiscal 1995, Hauser began development of a new product
line, "HERBAL EXTRACTS". Herbal extracts include a broad range of natural
products that are used in the manufacture of dietary supplements. Shipments
commenced in the first quarter of fiscal 1996. During fiscal year 1999, the
Company's internal marketing and technical staff marketed these products.
Hauser's herbal extracts are dietary supplements, which may be consumed as
supplements in liquids, capsules, tablets, or as ingredients in processed foods.
The Company has two proprietary products; RoseOx(R), a Rosemary extract and an
antioxidant, and TT550(TM), a Ginger based anti-nausea product. Hauser's herbal
extracts are distinguished by the Company's NaturEnhance(TM) Natural Ratio(TM),
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which assures that 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(TM) Natural Ratio(TM) program provides customers the highest
quality products, superior customer service and access to the Company's new
product development. 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 marker compound (key
ingredient).
During fiscal year 1996, the Company introduced a line of Rosemary extracts,
which protects the flavor, and quality of foods and beverages. Oil-soluble and
water-soluble oxidation stabilizer products are marketed under the brand name
StabilEnhance(R) 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 use of rosemary 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(R) product line is the natural
way to control flavor-deteriorating oxidation in food products containing fats
and oils.
Beginning on June 11, 2000, Hauser's herbal extract sales also include the sales
of BIE. BIE, as a distributor, has sold bulk standardized and non-standardized
herbal extracts to manufacturers of dietary supplements since 1990.
Sales of herbal extracts accounted for 27% of total revenues in the 11 months
ended March 31, 2000, and 34% and 39% of total revenues in the fiscal years
ending April 30, 1999 and 1998, respectively.
TECHNICAL SERVICES
Hauser's Technical Services business unit is comprised of Hauser Laboratories in
Boulder, CO, and Shuster Laboratories in Quincy, MA . The Technical Services
expertise in natural product isolation, pharmaceutical development, and
formulation of food products and dietary supplements supports Hauser's other
business units.
For the pharmaceutical industry, Hauser Laboratories provides process research
and development, 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.
Hauser Laboratories generally works with clients in two ways. First, Hauser
Laboratories provides routine services based upon standard procedures or methods
to answer customers' technical questions. Hauser Laboratories is compensated on
a fee-for-service basis. Second, Hauser Laboratories provides product
development and research services on a negotiated fee basis.
Hauser Laboratories 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
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<PAGE>
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 collaborative agreement with The
National Institute on Drug Abuse ("NIDA") for custom synthesis of drug compounds
that are under development as potential treatment agents for drug addiction.
Under the agreement, the Company receives $2.3 million over a three-year period.
Hauser chemists are performing custom synthesis of specified compounds under
strict Good Manufacturing Practices protocol, for NIDA's use in studying their
efficacy in the treatment of patients with various drug addictions.
Examples of Hauser Laboratories 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 under the Anti-Tumor Master Agreement, and production of sanguinaria
extract for Colgate Oral Pharmaceuticals.
SHUSTER LABORATORIES 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, Food and Drug Administration ("FDA") labeling and a significant number of
related areas focused on consumer products. In addition, Shuster provides
clients with technical services in the Natural Products area.
Shuster offers a Technically Advanced Quality Assurance(R) ("TAQA(R)") program
for private label retailers. The Company works closely with supermarket chains,
chain drug stores, and mass market retailers to develop and maintain quality
assurance programs. The TAQA(R) 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
assurance as to product quality. The TAQA(R) program is based on both
international (ISO) and current U.S. standards, and includes product risk
assessment.
Shuster also offers the Foods 2000 program that focuses on new product
development and related services for clients in the fast-growing organic foods
and functional foods markets. 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.
Revenues from Technical Services accounted for 19% of total revenues in the
eleven months ended March 31, 2000, and 48% and 45% of total revenues in fiscal
years 1999 and 1998, respectively.
FINE CHEMICALS
Hauser's Fine Chemicals consist primarily of sales generated through ZetaPharm.
ZetaPharm, which was founded in 1976, is a distributor of bulk fine chemicals,
excipients and generic active ingredients.
Fine chemicals sold by ZetaPharm include bulk vitamins, dietary supplements,
over-the-counter pharmaceutical ingredients and food additives. These products
are sold to manufacturers and processors of health food, pharmaceuticals, food
and beverages, and dietary supplements.
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ZetaPharm is the exclusive distributor in the United States for the excipient
line of Blanver Farmoquimica, Brazil, a leading manufacturer of excipients.
Excipients are derived from cellulose and are used as binders in the production
of tablets. Excipients are also used as ingredients in the slow release process
of tablets and capsules. Excipients are sold to manufacturers of vitamins and
dietary supplements.
Prior to fiscal 2000, ZetaPharm distributed bulk generic active ingredients to
pharmaceutical manufacturers for use in human and veterinary applications. The
sale of generic active ingredients purchased from Cilag, located in Switzerland,
represented 54% and 38% of ZetaPharm total sales in the fiscal years ended March
31, 1998 and 1999, respectively. In 1998, ZetaPharm was advised that Cilag had
elected to sell its products directly. As a result, the sale of generic active
ingredients in the eleven months ended March 31, 2000 were immaterial.
During the eleven months ended March 31, 2000, sales of Fine Chemicals accounted
for 35% of total revenues.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Historically, the Company has purchased its needed raw materials through a
variety of sources. Raw material availability has been dependent on the price of
the product, growing conditions and available habitat. It is expected that all
future raw materials will be sourced and purchased through the Company.
ZetaPharm imports the products that it sells. ZetaPharm suppliers are primarily
located in Europe, China, India, and South America.
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 that management believes could not be duplicated without the
use of the Company's technologies.
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.
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<PAGE>
For example, the Company's Dynamic Liquid/Solid ExtractionSM ("DL/SESM")
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(SM) 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(SM) 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 herbal product is representative of the botanical natural ratio of
all compounds.
The Company's purification process, Liquid Liquid FocusingSM ("LLFSM") 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.
In addition to patents, 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.
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. The Company vigorously
protects its trade secrets.
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 the loss of trade secrets or
confidential status of some portions of its technology or processes would not
adversely affect the Company.
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.
TRADEMARKS AND SERVICEMARKS: The Company has several trademarks and servicemarks
either registered or pending, including ColorEnhance(TM), CUSTOMER
CONNECTED(TM), Delivering What Nature Intended(R), Hauser Certified Assay(R),
Invigora(TM), Natural Ratio(TM), NatureEnhance(R), Preventia(TM), RoseOx(R),
RoseOx660(R), StabilEnhance(R), TAQA(R), and TT550(R). The servicemarks "Hauser"
and "Shuster" have been registered by the Company.
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SEASONAL ASPECTS OF THE COMPANY'S BUSINESS
The Company's strongest selling season has historically been the months of
January through March. During the eleven months ended March 31, 2000, the
historically strong fourth quarter proved to be weaker than in years past. Such
result was due primarily to reduced demand for herbal extracts at the retail
level. In the three calendar years preceding the merger between the Company and
the Contributed Subsidiaries, there was double digit growth in retail sales. In
the twelve month period ended March 31, 2000, there was a double digit reduction
in retail sales of dietary supplements.
While the Company purchases inventory throughout the year, a substantial portion
of the inventory requirements are purchased during the harvest seasons of
botanical raw materials which begins in August and concludes in December. As a
result, inventory and short-term debt are substantially higher in the second and
third quarters.
BACKLOG
Refer to customer backlog information in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
SIGNIFICANCE OF DEPENDENCE UPON A FEW CUSTOMERS
During fiscal 2000, no customer accounted for 10% of any products produced, or
services performed, by the Company.
GOVERNMENT CONTRACTS
No material portion of the Company's and Contributed Subsidiaries' business is
subject to renegotiation of profits or termination of contracts at the election
of the government. As previously discussed, during fiscal 1998, the Company
signed a collaborative agreement with NIDA. Management believes that if this
contract was terminated, there would be no material impact on the Company's
financial condition or results of operations.
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CUSTOMERS AND COMPETITION
Herbal Extracts - Customer purchases of standardized herbal extract products are
made from a small number of large suppliers, located primarily in North America,
Europe and China. European competition includes Indena Pharmaceuticals, Martin
Bauer and Euromed. These competitors sell bulk products, manufactured in Europe,
in the United States. United States companies selling herbal extracts include
PureWorld, A.M. Todd and Triarco.
During fiscal 2000, the overall herbal industry has suffered from price declines
and an over supply of inventories at the retail, manufacturer and raw material
supplier level. These price declines have resulted in the Company writing down
approximately $10.7 million of certain items in its inventory to their lower of
cost or market value. It is possible that the Company may experience future
write-downs of inventory if market prices for the Company's products continue to
decline.
Management believes that the Company's expertise in the production and sale of
extracts from natural sources and its extensive regulatory experience, will
permit the Company to effectively compete in the sale of herbal extracts to
manufacturers of dietary supplements.
The major competitors of the Company for botanical raw materials wild gathered
in the United States are McAndrews and Forbes Company ("MAFCO"), and Plantation
Botanicals, Inc.
TECHNICAL SERVICES
The market for technical services in the United States is large, diverse and
highly fragmented. The Company competes with a number of companies depending on
the specific type of services provided. Competition is based primarily on
quality and service.
The Company's competitive position depends on its ability to attract and retain
scientific and other personnel and its ability to maintain the proprietary
nature of its technologies.
ZETAPHARM
In the sale of its products, ZetaPharm competes with major pharmaceutical
companies, major manufacturers of food supplements and excipients and other
distributors of such products. ZetaPharm competes on the basis of service,
product quality and price.
RESEARCH AND DEVELOPMENT
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
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extraction and purification. Efforts in these areas have generated products,
such as the rosemary antioxidants and TT550(R).
The Company also offers consultation and contract research and development 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 the pharmaceutical
customers. The Company also provides contract research and development for
customers in the flavors and cosmetic industries. Management believes that such
endeavors could provide the Company with future manufacturing opportunities.
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"); 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 herbal extracts, 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.
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 all applicable laws.
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:
HERBAL EXTRACTS: Herbal extract products are "Dietary Supplements" as defined by
the Dietary Supplement Health and Education Act ("DSHEA") and are governed by
DSHEA.
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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.
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 law 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.
PRODUCT LIABILITY INSURANCE
The sale of the Company's products include an inherent risk that product
liability claims may be asserted against the Company. 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 maintains product liability coverage in an amount that management
considers to be prudent. There can be no assurance that the Company will be able
to maintain product liability insurance on acceptable terms or that such
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 and are resolved against the Company, the Company's business
and prospects could be adversely affected.
EMPLOYEES
As of March 31, 2000, the Company employed 332 employees.
Hauser and BIE have 36 employees involved with administrative, financial and
marketing functions, 59 involved in manufacturing and sourcing of natural
products, and 12 employees involved with research and development efforts.
Hauser Technical Services, which includes Hauser Laboratories and Shuster,
employs 31 people in administration, financial and marketing functions, and 159
in Technical Services.
ZetaPharm has 21 employees. Ten are engaged in sales, 6 are engaged in customer
service, and the balance are engaged in administration.
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As of March 31, 2000, Wilcox had approximately 14 employees. As discussed, the
Wilcox facilities will be closed.
ITEM 2. PROPERTIES
The location and general description of properties owned or leased by the
Company are as follows:
<TABLE>
<CAPTION>
Area/Facility Owned or Leased:
Square If Leased,
Location Type of Facility Footage Expiration Year
------------------------- ---------------------------------------------- ---------------- --------------------
<S> <C> <C> <C>
Airport Boulevard Manufacturing and laboratory facilities 25,298 Leased; 2010
Boulder, CO executive and administrative offices
------------------------- ---------------------------------------------- ---------------- --------------------
Nautilus Court South Manufacturing and laboratory facilities 26,426 Owned
Boulder, CO
------------------------- ---------------------------------------------- ---------------- --------------------
Longmont, CO Manufacturing and warehouse facilities 32,052 Owned
administrative office
------------------------- ---------------------------------------------- ---------------- --------------------
Clear Creek, CO Technical services 18,000 Leased; 2001
------------------------- ---------------------------------------------- ---------------- --------------------
Quincy, MA Laboratory and storage facilities executive 35,423 Leased; 2000
and administrative offices
------------------------- ---------------------------------------------- ---------------- --------------------
Canton, MA Laboratory facilities executive and 42,000 Leased; 2010
administrative offices
------------------------- ---------------------------------------------- ---------------- --------------------
Smyrna, GA Laboratory facilities executive and 9,350 Leased; 2003
administrative offices
------------------------- ---------------------------------------------- ---------------- --------------------
New York, NY Executive and sales offices 3,300 Leased; 2001
------------------------- ---------------------------------------------- ---------------- --------------------
Boone, NC Warehouse facility executive and 17,900 Leased; 2003
administrative offices
------------------------- ---------------------------------------------- ---------------- --------------------
</TABLE>
The Company also leases additional warehouse space in North Carolina, Florida
and Kentucky.
As discussed earlier, the Company is in the process of closing the Wilcox
facilities. As a result, the Company is negotiating the termination of certain
leases in North Carolina, Florida and Kentucky. Also, the Company is in the
process of negotiating the termination of the Smyrna, GA lease, as the
operations of this facility have now been moved to Quincy, MA.
Subsequent to March 31, 2000, the Company sold unimproved land for $1,436,000.
The proceeds of such sale were used to pay down the Company's Credit Facility.
The Company believes that its facilities are in good repair and are suitable for
its needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings exist.
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 eleven months ended March 31, 2000.
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On June 11, 1999 the shareholders voted to approve (1) the Agreement and Plan of
the Merger among Hauser, ZGNA, ZBI and certain other parties, and (2) issuance
to ZGNA and ZBI of shares of Common Stock of Hauser representing 49% of the
issued and outstanding shares after giving effect to such issuance, subject to
adjustment under certain circumstances.
On December 8, 1999, the shareholders voted to approve (1) the election of the
Board of Directors to hold office until the next annual meeting of shareholders,
(2) the reincorporation of the Company from Colorado to Delaware, (3) the
Company's 1999 Stock Incentive Plan, with respect to which 850,000 shares of
Common Stock were reserved for issuance and (4) the Company's 1999 Employee
Stock Purchase Plan, with respect to which 150,000 shares of Common Stock were
reserved for issuance.
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, markdown 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 as adjusted for the one-for-four reverse stock
split approved by shareholders on June 11, 1999:
<TABLE>
<CAPTION>
Eleven Months Ended March 31, 2000 Year Ended April 30, 1999
------------------------------------------------ -------------------------------------------
High Bid Low Bid High Bid Low Bid
----------------------- ----------------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
First Quarter $ 11.50 $ 5.31 $ 33.75 $ 21.75
Second Quarter 5.88 2.94 25.75 11.25
Third Quarter 4.50 2.28 20.50 12.00
Fourth Quarter 5.00 2.22 15.75 6.00
</TABLE>
As of March 31, 2000, there were approximately 532 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.
On June 22, 2000, the Company received notice from NASDAQ that the Company does
not comply with the requirements for continued listing on the NASDAQ National
Market System. The notice indicates that the Company will be de-listed on
September 22, 2000. The Company is in the process of determining whether to
appeal NASDAQ's determination or whether to apply for listing on the SmallCap
Market. There can be no assurance that the Common Stock will continue to trade
on the NASDAQ National Market System or that the Company will meet the initial
or continued listing requirements for the SmallCap Market.
Page 12 of 27
<PAGE>
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.
Page 13 of 27
<PAGE>
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 eleven months ended March 31, 2000, and the Company's
fiscal years ended April 30, 1999, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Eleven Months
Ended
March 31, Year Ended April 30,
------------- ------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Natural product processing $ 28,329,424 $ 13,826,862 $ 13,674,832 $ 6,308,221 $ 2,642,481
Technical services 15,442,139 17,220,146 14,507,424 9,034,787 9,315,672
Fine Chemicals and Excipients 28,695,223 -- -- -- --
Pharmaceuticals 8,694,819 5,218,413 3,855,272 9,882,758 5,481,279
------------ ------------ ------------ ------------ ------------
Total revenues 81,161,605 36,265,421 32,037,528 25,225,766 17,439,432
Cost of Revenues 77,910,910 48,699,253 24,541,003 20,702,086 18,459,170
------------ ------------ ------------ ------------ ------------
Gross profit (loss) 3,250,695 (12,433,832) 7,496,525 4,523,680 (1,019,738)
Operating expenses 26,204,399 16,874,341 12,142,067 10,565,076 9,562,314
------------ ------------ ------------ ------------ ------------
Loss from operations (22,953,704) (29,308,173) (4,645,542) (6,041,396) (10,582,052)
Other income (expense):
Interest and other income 88,371 153,987 315,280 528,424 1,047,734
Interest expense (1,879,465) (581,920) (44,931) (18,947) (40,738)
Gain (loss) from investments -- -- 361,461 -- (1,000,000)
------------ ------------ ------------ ------------ ------------
Total other income (expense) (1,791,094) (427,933) 631,810 509,477 6,996
------------ ------------ ------------ ------------ ------------
Loss from continuing operations before
provision for income taxes (24,744,798) (29,736,106) (4,013,732) (5,531,919) (10,575,056)
Provision (benefit) for income taxes 3,630,057 -- (879,723) (1,628,993) (4,134,812)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (28,374,855) (29,736,106) (3,134,009) (3,902,926) (6,440,244)
Loss from discontinued operations -- -- -- 2,628,610 1,296,092
------------ ------------ ------------ ------------ ------------
Net loss $(28,374,855) $(29,736,106) $ (3,134,009) $ (6,531,536) $ (7,736,336)
============ ============ ============ ============ ============
Loss per share from continuing operations-
basic and diluted $ (6.47) $ (11.36) $ (1.20) $ (1.50) $ (2.49)
Loss per share from discontinued operations-
basic and diluted -- -- -- (1.01) (0.50)
Loss per share basic and diluted $ (6.47) $ (11.36) $ (1.20) $ (2.51) $ (2.99)
Weighted average number of shares outstanding 4,388,221 2,617,166 2,609,950 2,597,278 2,583,542
As of
March 31, As of April 30,
------------- ------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------
Balance Sheet Data:
Working capital $ 3,754,120 $ 10,715,970 $ 16,671,596 $ 21,162,501 $ 32,054,242
Property and equipment, net 15,684,906 16,571,066 22,344,618 23,186,057 24,605,560
Total assets 76,059,641 49,903,537 68,293,581 66,797,878 74,410,380
Long-term debt 418,832 486,596 692,733 121,764 130,271
Stockholders' equity 37,825,542 30,835,851 60,533,700 63,691,554 70,183,619
</TABLE>
Page 14 of 27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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 of ZGNA and ZBI. Two subsidiaries of ZGNA, Wilcox and ZetaPharm,
and one subsidiary of ZBI, BIE, merged with three wholly-owned subsidiaries of
the Company which were created for the purpose of the Merger. Wilcox, ZetaPharm
and BIE 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 Company's then outstanding
shares. After the closing, the Company's existing officers and public
shareholders owned 51.0% of the combined company, while ZGNA owned 49.0%. On
December 15, 1999 the number of shares that were issued to ZGNA was reduced to
2,193,568 (46% of shares outstanding at March 31, 2000) in accordance with the
terms of the Merger Agreement. 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 Company has experienced significant losses from operations and has violated
the financial covenants in its current and past borrowing agreements. The
operating losses in prior years have resulted primarily from the failure of
customers purchasing the Company's paclitaxel product to renew their purchase
contracts and in the current year from a worldwide oversupply of dietary
supplement products. The Company has responded by terminating the production of
paclitaxel and reducing its operating costs through closure of the Wilcox
operations; substantially reducing manufacturing costs while increasing
manufacturing efficiencies; consolidating its technical services operations; and
restructuring its administrative activities.
In connection with the Merger, Wells Fargo Bank, N.A. ("Wells Fargo") provided a
$35.0 million line of credit and a $10.0 million fixed asset line (the "Credit
Facility") in support of the merged companies. As part of the Merger, the
Company repaid approximately $21.0 million in bank debt of Wilcox, ZetaPharm and
BIE with proceeds from the Credit Facility. The Credit Facility is
collateralized by all of the Company's assets. Since February 28, 1999, the
Company has not been in compliance with the financial covenants under the Credit
Facility and has not obtained a waiver for these violations. The Company is
currently in default under the terms of the Credit Facility and exceeded its
borrowing base availability by $1,200,000 at March 31, 2000. As of June 30,
2000, the Company's borrowings under the Credit Facility totaled approximately
$24,500,000 and exceeded borrowing base availability by $3,600,000. The Company
has been in discussions with the lender regarding a restructure of the Credit
Facility. There can be no assurance that the lender will agree to restructure
the Credit Facility on terms acceptable to the Company. Due to the Company's
covenant violations, the lender can call the Credit Facility at any time, and
may pursue other actions available to it, some of which could have a significant
negative impact on the Company's ongoing operations. Zatpack, Inc., through
ZGNA, the owner of 46% of the outstanding common stock of the Company, has
agreed, in principle, to purchase a promissory note from the
Page 15 of 27
<PAGE>
Company (the "Note") for $5 million subordinated debt. Such purchase would close
simultaneously with the restructuring of the Credit Facility. The Note will earn
interest at 12%, be payable in three years and have warrants attached which
would permit Zatpack to purchase an additional 794,161 shares of common stock of
the Company at a price equal to the closing price of the common stock on the
date of the closing of the purchase of the Note. The Note would be subordinated
to the Credit Facility or any loan agreement that replaces the Credit Facility.
On June 28, 2000, Zatpack advanced $969,250 against the purchase of the Note.
In the event that the Company is unable to successfully negotiate an amendment
to the Credit Facility and/or close the Note agreement with Zatpack, Inc.,
alternative financing would be required. If additional financing is not
available, or the terms of the available financing are not acceptable to the
Company, the Company would have to delay planned expenditures and/or cut back on
its current level of spending to meet its liquidity needs. There is no assurance
that such additional financing will be available when and if needed by the
Company. These uncertainties raise substantial doubt about the Company's ability
to continue as a going concern.
However, management believes that the actions described above, combined with a
continued focus on streamlining operations and cost reductions, will enable the
Company to sustain operations throughout fiscal 2001.
On June 22, 2000, the Company received notice from NASDAQ that the Company does
not comply with the requirements for continued listing on the NASDAQ National
Market System. The notice indicates that the Company will be de-listed on
September 22, 2000. The Company is in the process of determining whether to
appeal NASDAQ's determination or whether to apply for listing on the SmallCap
Market. There can be no assurance that the Common Stock will continue to trade
on the NASDAQ National Market System or that the Company will meet the initial
or continued listing requirements for the SmallCap Market.
Effective in fiscal year 2000, management of the Company decided to change the
year-end reporting requirement of the Company to a fiscal year ending March 31
from April 30 in order to improve the internal reporting requirements of the
Company and to reflect calendar quarters.
DISCONTINUED ACTIVITIES
Prior to the Merger, in the third quarter fiscal 1999, the Company discontinued
the manufacture and sale of paclitaxel. In the quarter ended January 31, 1999,
the Company incurred a one-time charge to earnings of $25,600,000. The charge
and paclitaxel revenues and cost of sales 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 purchase
agreement for the sale of its paclitaxel inventory as part of the planned
closure of the paclitaxel business. Under the purchase agreement, the Company
has received $8,694,819 through March 31, 2000. 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. The Company has
substantially completed its exit from the paclitaxel business as of March 31,
2000.
Page 16 of 27
<PAGE>
RESULTS OF CONTINUING ACTIVITIES
The results of continuing activities exclude paclitaxel, as discussed above.
Additionally, the following discussion of results of operations is based on a
comparison of pro forma fiscal year ended March 31, 2000 operating results to
the pro forma fiscal years ended March 31, 1999 and 1998 operating data because
management believes the Merger has made comparison of actual results between
years meaningless. Pro forma adjustments incorporated into the table below
include the operating results of the Contributed Subsidiaries as if the Merger
had occurred on April 1, 1997. Additionally, the pro forma data includes
adjustments required to conform all years presented to a March 31 fiscal year
end. This information is unaudited.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 88,978,356 $ 123,152,624 $ 127,090,102
Cost of Revenues 86,571,633 101,437,348 104,394,461
------------- ------------- -------------
Gross Profit 2,406,723 21,715,276 22,695,641
Operating Expenses 30,004,101 22,775,119 21,079,501
------------- ------------- -------------
Loss from Operations (27,597,378) (1,059,843) 1,616,140
Net Loss $ (33,436,969) $ (2,949,782) $ (147,933)
============= ============= =============
</TABLE>
REVENUES. A breakout of the Company's pro forma revenues by product and service
groupings for its continuing activities is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------
2000 1999 1998
------------ ------------ -------------
<S> <C> <C> <C>
Natural Products $ 38,012,328 $ 67,706,852 $ 58,175,179
Technical Services 16,750,234 17,468,456 13,621,331
Fine Chemicals and Excipients 34,215,794 37,977,316 55,293,592
------------ ------------ ------------
$ 88,978,356 $123,152,624 $127,090,102
============ ============ ============
</TABLE>
Total pro forma revenues in 2000 were $88,978,356 compared to $123,152,624 in
1999, a decrease of 28%. Pro forma revenues were $123,152,624 in 1999 compared
to $127,090,102 in 1998, a decrease of 3%.
Pro forma Natural Products revenues decreased by 44% in 2000 to $38,012,328 from
$67,706,852 in 1999. The decrease can be attributed to a reduction in botanical
raw material sales, as well as a reduction in sales of herbal extracts. The
significant reduction in botanical raw material sales was a driving factor in
the Company's decision to close the Wilcox facilities. In 1999, pro forma
Natural Products revenues increased by 16% from $58,175,179 in 1998. The
increase reflected increases in sales of botanical raw materials as well as
herbal extracts. These increases reflected rapid industry growth and the desire
of customers to build inventories to meet expected demand. As the industry
growth slowed in 2000, customer demand decreased significantly as customers
reduced inventories.
Page 17 of 27
<PAGE>
In addition to the reduced customer demand in 2000, competitive pressures caused
sales prices to decrease, thus causing further reductions in revenue.
Pro forma Technical Services revenues decreased by 4% in 2000 to $16,750,234
from $17,468,456 in 1999. During 2000, Technical Services resources were
utilized in connection with the Company's exit from the paclitaxel business. As
a result, Technical Services revenues experienced a decrease in 2000. As the
paclitaxel liquidation has been concluded, additional personnel have become
available for the Technical Service business, which should result in increased
revenue. In 1999, pro forma Technical Services revenue increased by 28% from
$13,621,331 in 1998. The increase in revenues is due primarily to the Company's
concentrated efforts to increase the number of projects related to custom
synthesis and natural product isolation in the pharmaceuticals industry.
Pro forma Fine Chemicals and Excipients revenues decreased by 10% in 2000 to
$34,215,794 from $37,977,316 in 1999. Pro forma Fine Chemical and Excipient
revenues decreased by 31% in 1999 from $55,293,592 in 1998. During 1998, the
Company was advised that its principal generic active ingredient supplier had
elected to sell its products directly. As a result, the Company's generic active
ingredient sales decreased significantly in 1999 and were insignificant in 2000.
Sales of other products in the Fine Chemical and Excipients segment have
increased, thus offsetting a portion of the loss of the generic active
ingredient sales.
GROSS PROFIT. Pro forma gross profit decreased by 89% to $2,406,723 in 2000 from
$21,715,276 in 1999. During the pro forma year ended March 31, 2000, the Company
recorded a charge to write-down inventory in the amount of $10,670,615, which
was offset by the reversal of a reserve of $3,994,759 established in connection
with termination of yew tree cultivation agreements and the discontinuation of
paclitaxel. The inventory write-downs occurred because of market price
reductions for both botanical raw materials and herbal extracts. Additionally, a
portion of the inventory write-downs relate to the Company's decision to close
the Wilcox facilities.
Excluding the impact of the above referenced items, the pro forma gross profit
percentage of 15% is a deterioration from the prior year percentage of 18%. This
deterioration is due to intense competition in the dietary supplement market.
Pro forma gross profit decreased by 4% to $21,715,276 in 1999 from $22,695,641
in 1998. In absolute dollars, the decrease in gross profit can be attributed to
a reduction in top-line revenues. In terms of gross margin percentages, the
gross margin was consistent at approximately 18% in both years.
OPERATING EXPENSES. Pro forma operating expenses increased by 32% in 2000 from
$22,775,119 in 1999 to $30,004,101 in 2000. During the pro forma year ended
March 31, 2000, the Company recorded a charge in the amount of $814,000 in
connection with post-merger severance costs and other one-time merger related
expenses. During the third quarter, the Company incurred a charge of $650,000 in
connection with the closure of one of Wilcox's facilities. In March 2000, the
Company elected to close the remaining Wilcox facilities as part of its
cost-reduction program. In connection with this closure, a charge of $6,561,009
was recorded to write down the portion of goodwill allocated to Wilcox. In
addition, $1,545,000 was accrued for expenses relating to the shut-down of
Wilcox. Also recorded in the fourth quarter is a charge
Page 18 of 27
<PAGE>
of $499,891 which relates to closing Shuster's Smyrna, GA facility. Included in
1999 pro forma operating expenses is a charge of $1,500,000 recorded in
connection with a product warranty issue. Excluding the impact of the above
items, operating expenses decreased by 6% from 1999. The decrease is due
primarily to employee reductions.
Operating expenses increased by 8% in 1999 from $21,079,501 in 1998 to
$22,775,119 in 1999. Excluding the impact of the product warranty reserve
recorded in 1999, operating expenses increased by 1% from 1998.
Given the recent decline in the market price of herbal extracts sold to dietary
supplement manufacturers, it is possible that certain long-lived assets
(principally goodwill of $18.6 million) may be deemed to be impaired. Such
impairment would result in possible charges to operating expenses in future
periods.
INTEREST EXPENSE. Interest expense was $2,266,518 in 2000, $1,889,939 in 1999,
and $864,073 in 1998. The increases in interest expense are due to increased
borrowings in 1999 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $1,272,875 at March 31, 2000,
compared to $3,610,825 at April 30, 1999. The Company's primary cash needs are
for operations, working capital and capital expenditures.
Cash provided by operating activities for the eleven months ended March 31, 2000
was $3,539,198. The positive cash flow from operations is due to a net loss of
$28,374,855, offset primarily by non-cash expenses of $22,096,878, and changes
in working capital of $9,420,215.
Cash used in investing activities is comprised of capital expenditures and cash
paid for merger costs of $1,403,689 and $1,793,367, respectively, offset by a
reduction in restricted cash of $567,032.
Cash used in financing activities is comprised primarily of changes in the
Company's bank line of credit, and repayments of long-term debt.
The Company has been in discussions with the lender regarding a restructure of
the Credit Facility. There can be no assurance that the lender will agree to
restructure the Credit Facility on terms acceptable to the Company. Due to the
Company's covenant violations, the lender may call the Credit Facility at any
time, and may pursue other actions available to it, some of which could have a
significant negative impact on the Company's ongoing operations. Zatpack, Inc.,
through ZGNA, the owner of 46% of the outstanding common stock of the Company,
has agreed, in principle, to purchase a promissory note from the Company (the
"Note") for $5 million subordinated debt. Such purchase would close
simultaneously with the restructuring of the Credit Facility. The Note will earn
interest at 12%, be payable in three years and have warrants attached which
would permit Zatpack to purchase an additional 794,161 shares of common stock of
the Company at a price equal to the closing price of the common stock on the
Page 19 of 27
<PAGE>
date of the closing of the purchase of the Note. The Note would be subordinated
to the Credit Facility or any loan agreement that replaces the Credit Facility.
On June 28, 2000, Zatpack advanced $969,250 against the purchase of the Note.
The Company expects to meet its liquidity requirements through cash flows from
operations and, if the Bank agrees to an amendment of the financial covenants
under the Credit Facility (see Notes 1 and 3 to the Financial Statements), from
the Credit Facility. Management believes that current cash reserves, the Credit
Facility and funds generated from operating activities will be sufficient to
meet the Company's liquidity needs within the next twelve months and on a
long-term basis.
In the event that the Company is unable to successfully negotiate an amendment
to the Credit Facility, alternative financing would be required. If additional
financing is not available, or the terms of the available financing are not
acceptable to the Company, the Company would have to delay planned expenditures
and/or cut back on its current level of spending to meet its liquidity needs.
There is no assurance that such additional financing will be available when and
if needed by the Company.
WORKING CAPITAL. Working capital as of March 31, 2000 was $3,754,120 as compared
to $10,715,970 as of April 30, 1999. The change is primarily attributable to
changes in current assets and liabilities related to the merger, which have been
offset by the use of cash during the year, as well as inventory write-downs and
accruals for facility closures.
INCOME TAXES. During the quarter ended January 31, 2000, Management concluded
that the current value of the net deferred tax assets did not meet the
realization criteria as set forth in Statement of Accounting Standards No. 109
"Accounting for Income Taxes". Based on these factors, Management decreased net
deferred tax assets to zero, with a net change of $3,524,474. As of March 31,
2000, the Company had a valuation allowance of approximately $21.9 million.
Included in gross deferred tax assets at March 31, 2000, are federal and state
net operating loss carry forwards of approximately $41.6 million and $50.3
million respectively, income tax credits of approximately $659,000 and
alternative minimum tax credits of approximately $1.5 million. Although the
deferred income taxes have been 100% reserved for, the reserve may be reversed
and a related benefit recorded in the future when and if the assets are deemed
realizable.
BACKLOG. Backlog of unfilled sales orders was $6,300,000 of as March 31, 2000,
compared to $1,590,302 as of April 30, 1999. Backlog at March 31, 2000 consists
of unfilled sales orders for Natural Products, Technical Services and Fine
Chemicals and Excipients. The increase in backlog from the prior year is due
primarily to the addition of the Contributed Subsidiaries.
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. Additionally, the Company is exposed to
market risk
Page 20 of 27
<PAGE>
because of market price reductions for botanical raw materials and
extracts. The Company performs ongoing evaluations regarding the net realizable
value of inventory and writes down such inventory as appropriate. Historically
and as of March 31, 2000, 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 or LIBOR, and is therefore, affected by changes in market
interest rates. At March 31, 2000, $2,793,720 was outstanding with an interest
rate of 8.75% (prime less 0.25%), and $23,000,000 was outstanding with an
interest rate of 8.05% (LIBOR plus 1.95%). Should the Company be required to
obtain financing for the existing line elsewhere, the interest rate to replace
the Credit Facility could be significantly higher. For example, if the interest
rate on the Company's Credit Facility had been 2% higher for the eleven months
ended March 31, 2000, the Company would have incurred additional interest
expense of approximately $550,000, with an associated $.13 increase in the per
share loss for the eleven months ended March 31, 2000. Therefore, the Company's
exposure to changes in interest rates will be significant until such time as its
operating results permit it to obtain financing on terms equivalent to those
available under the Credit Facility.
YEAR 2000 COMPLIANCE
The Company's computer systems and equipment successfully transitioned to the
Year 2000 with no significant issues. There have been no indications that any
third party upon which the Company relies (including vendors, suppliers, or
financial institutions) has experienced any Year 2000 problems that would have a
material impact on the future operations or financial results of the Company.
The Company continues to keep its Year 2000 project management in place to
monitor latent problems that could surface at key dates or events in the future.
No significant problems related to these events are anticipated.
The total cost of the Company's Year 2000 project was reported previously at
$360,000, and no additional costs have been incurred. The Company has expensed
all costs related to the assessment and remediation of the Year 2000 issue as
incurred.
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 Exchange 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 21 of 27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in this Report:
PAGE
Report of Independent Public Accountants F-1
Consolidated Statements of Operations for the eleven months ended
March 31, 2000, and the years ended April 30, 1999 and 1998 F-2
Consolidated Balance Sheets as of March 31, 2000 and April 30, 1999 F-3
Consolidated Statements of Cash Flows for the eleven months ended
March 31, 2000 and the years ended April 30, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the eleven months
ended March 31, 2000 and the years ended April 30, 1999 and 1998 F-5
Notes to Consolidated Financial Statements for the eleven months ended
March 31, 2000 and the years ended April 30, 1999 and 1998 F-6
Page 22 of 27
<PAGE>
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.
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.
Page 23 of 27
<PAGE>
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:
PAGE
Report of Independent Public Accountants F-1
Consolidated Statements of Operations for the eleven months ended
March 31, 2000 and the years ended April 30, 1999 and 1998 F-2
Consolidated Balance Sheets as of March 31, 2000 and April 30, 1999 F-3
Consolidated Statements of Cash Flows for the eleven months ended
March 31, 2000 and the years ended April 30, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the eleven months
ended March 31, 2000 and the years ended April 30, 1999 and 1998 F-5
Notes to Consolidated Financial Statements for the eleven months ended
March 31, 2000 and the years ended April 30, 1999 and 1998 F-6
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.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are incorporated
herein by reference to the Exhibit Index of this report.
Page 24 of 27
<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 14, 2000
HAUSER, INC.
By:
----------------------------------
Volker Wypyszyk
CEO / President
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>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
---------------------------
Volker Wypyszyk Chief Executive Officer, President July 14, 2000
(Principal Executive Officer)
---------------------------
Ralph L. Heimann Chief Financial Officer and Treasurer (Principal July 14, 2000
Financial and Accounting Officer)
---------------------------
Dean Stull Senior Executive Vice President, Technology July 14, 2000
---------------------------
Herbert Elish Director July 14, 2000
---------------------------
James R. Mellor Director July 14, 2000
---------------------------
Robert F. Saydah Director July 14, 2000
---------------------------
Harvey Sperry Director July 14, 2000
</TABLE>
Page 25 of 27
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Agreement and Plan of Merger by and among Zuellig Group
N.A., Inc., Hauser, Inc. and certain other parties, dated as
of December 8, 1998 and amended as of February 11, 1999
(Incorporated by reference to Appendix B to the Company's
definitive proxy statement dated May 11, 1999).
3.1 Certificate of Incorporation
3.2 Bylaws
10.1 Governance Agreement, dated as of June 11, 1999, by and
between Hauser, Inc., Zuellig Group N.A., Inc. and Zuellig
Botanicals, Inc. (Incorporated by reference to Appendix C to
the Company's definitive proxy statement dated May 11,
1999).
10.2 Registration Rights Agreement, dated as of December 8, 1999,
by and between Hauser, Inc., Zuellig Group N.A., Inc. and
Zuellig Botanicals, Inc. (Incorporated by reference to
Exhibit 2.7 to the Company's report on Form 10-Q for the
quarter ended October 31, 1998).
10.3 Agreement for Option to Acquire Powders Business From
Zuellig Botanicals, Inc., dated as of June 11, 1999, by and
between Hauser, Inc. and Zuellig Botanicals, Inc.
(Incorporated by reference to Exhibit 2.6 to the Company's
report on Form 10-Q for the quarter ended October 31, 1998).
10.4 Sourcing Agency Agreement, dated as of June 11, 1999, by and
between Hauser, Inc. and Zuellig Botanicals, Inc.
(Incorporated by reference to Exhibit 2.8 to the Company's
report on Form 10-Q for the quarter ended October 31, 1998).
10.5 Agreement Regarding Employees, dated as of June 11, 1999, by
and between Hauser, Inc. and Zuellig Botanicals, Inc.
(Incorporated by reference to Exhibit 2.2 to the Company's
report on Form 10-Q for the quarter ended October 31, 1998).
10.6 Paclitaxel Supply Agreement dated February 3, 1999
(Incorporated by reference to Exhibit 10.1 to the Company's
report on Form 10-Q for the quarter ended January 31, 1999).
10.7 Escrow Agreement dated February 3, 1999 (Incorporated by
reference to Exhibit 10.2 to the Company's report on Form
10-Q/A for the quarter ended January 31, 1999).
10.8 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 to Exhibit
10.1 to the Company's report on Form 8-K dated June 25,
1999).
10.9 Waiver and Amendment to the Credit Agreement (Incorporated
by reference to Exhibit 10.10 to the Company's report on
Form 10-Q for the quarter ended October 31, 1999).
10.10 Revolving Credit Note dated June 11, 1999 (Incorporated by
reference to Exhibit 10.2 to the Company's report on Form
8-K dated June 25, 1999).
10.11 Term Note dated June 11, 1999 (Incorporated by reference to
Exhibit 10.3 to the Company's report on Form 8-K dated June
25, 1999).
10.12 Security Agreement dated June 11, 1999m among Hauser, Inc.,
Shuster Laboratories, Inc. and Wells Fargo Bank, N.A.
(Incorporated by reference to Exhibit 10.4 to the Company's
report on Form 8-K dated June 25, 1999).
10.13 Collateral Assignment of Trademarks, Trademark Applications,
Patent and Patent Applications dated June 11, 1999
(Incorporated by reference to Exhibit 10.5 to the Company's
report on Form 8-K dated June 25, 1999).
Page 26 of 27
<PAGE>
10.14 Collateral Assignment of Patents and Patent Applications
dated June 11, 1999 (Incorporated by reference to Exhibit
10.6 to the Company's report on Form 8-K dated June 25,
1999).
10.15 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 to Exhibit 10.7 to the Company's
report on Form 8-K dated June 25, 1999).
10.16 Pledge and Security Agreement dated June 11, 1999
(Incorporated by reference to Exhibit 10.8 to the Company's
report on Form 8-K dated June 25, 1999).
10.17 Deed of Trust, Assignment of Rents, Security Agreement and
Financing Statement dated June 11, 1999 (Incorporated by
reference to Exhibit 10.9 to the Company's report on Form
8-K dated June 25, 1999).
23.1 Consent of Independent Public Accountants.
Page 27 of 27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of Hauser, Inc.:
We have audited the accompanying consolidated balance sheets of Hauser, Inc. (a
Delaware Corporation) and its subsidiaries as of March 31, 2000 and April 30,
1999, and the related consolidated statements of operations, stockholders'
equity and comprehensive loss and cash flows for the eleven months ended March
31, 2000 and each of the two years in the period ended April 30, 1999. 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 auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hauser, Inc. and its
subsidiaries as of March 31, 2000, and April 30, 1999, and the results of their
operations and their cash flows for the eleven months in the period ended March
31, 2000, and each of the two years in the period ended April 30, 1999 in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant losses
from operations, has an accumulated deficit of approximately $56.4 million, has
violated the financial covenants in its current borrowing agreement and is
dependent on additional financing to fund operations. These factors raise a
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 30, 2000.
F-1
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
Months
Ended Years ended April 30,
------------ ----------------------------
March 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Natural products $ 28,329,424 $ 13,826,862 $ 13,674,832
Fine chemicals 28,695,223 -- --
Technical services 15,442,139 17,220,146 14,507,424
Pharmaceuticals 8,694,819 5,218,413 3,855,272
------------ ------------ ------------
Total revenues 81,161,605 36,265,421 32,037,528
------------ ------------ ------------
COST OF REVENUES:
Natural products 26,013,125 12,499,299 11,335,201
Fine chemicals 24,139,555 -- --
Technical services 12,585,162 12,612,525 10,102,016
Pharmaceuticals 8,497,212 3,887,429 3,103,786
Write-down of inventory 6,675,856 19,700,000 --
------------ ------------ ------------
Total cost of revenues 77,910,910 48,699,253 24,541,003
------------ ------------ ------------
GROSS PROFIT (LOSS) 3,250,695 (12,433,832) 7,496,525
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 800,462 1,593,880 2,229,843
Sales and marketing 4,611,631 2,732,057 2,390,602
General and administrative 11,536,406 6,648,404 6,021,622
Product warranty -- -- 1,500,000
Write-off of assets and
facility closure costs 9,255,900 5,900,000 --
------------ ------------ ------------
Total operating expenses 26,204,399 16,874,341 12,142,067
------------ ------------ ------------
LOSS FROM OPERATIONS (22,953,704) (29,308,173) (4,645,542)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest and other income 88,371 153,987 315,280
Interest expense (1,879,465) (581,920) (44,931)
Gain from sale of investment -- -- 361,461
------------ ------------ ------------
Total other (expense) income (1,791,094) (427,933) 631,810
------------ ------------ ------------
LOSS BEFORE INCOME TAX (24,744,798) (29,736,106) (4,013,732)
INCOME TAX EXPENSE (BENEFIT) 3,630,057 -- (879,723)
------------ ------------ ------------
NET LOSS $(28,374,855) $(29,736,106) $ (3,134,009)
============ ============ ============
LOSS PER SHARE BASIC AND
DILUTED: $ (6.47) $ (11.36) $ (1.20)
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING BASIC AND
DILUTED 4,388,221 2,617,166 2,609,950
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, April 30,
ASSETS 2000 1999
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,272,875 $ 3,610,825
Restricted cash -- 567,032
Accounts receivable, less allowance for
doubtful accounts:
2000, $976,101; 1999, $158,421 17,052,701 6,812,444
Inventory, at cost or market 22,631,914 9,665,832
Paclitaxel inventory -- 6,034,525
Prepaid expenses and other 611,897 292,808
Net deferred income tax asset -- 2,313,594
------------ ------------
Total current assets 41,569,387 29,297,060
------------ ------------
PROPERTY AND EQUIPMENT:
Land and buildings 8,753,733 7,692,252
Laboratory and processing equipment 25,879,426 23,972,862
Furniture and fixtures 4,289,140 3,970,364
------------ ------------
Total property and equipment 38,922,299 35,635,478
Accumulated depreciation and amortization (23,237,393) (19,064,412)
------------ ------------
Net property and equipment 15,684,906 16,571,066
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
2000, $1,742,698; 1999, $847,509 18,556,242 1,373,471
Deposits and other 249,106 2,019,041
Net deferred income tax asset -- 642,899
------------ ------------
$ 76,059,641 $ 49,903,537
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,067,144 $ 2,953,559
Current portion of long-term debt 26,377,638 6,750,342
Accrued salaries and benefits 2,391,576 1,347,040
Deposits 916,870 3,807,798
Accrued exit costs 1,987,214 3,537,203
Other current liabilities 2,074,825 185,148
------------ ------------
Total current liabilities 37,815,267 18,581,090
------------ ------------
LONG-TERM DEBT 418,832 486,596
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value;
50,000,000 shares authorized;
shares issued and outstanding:
2000, 4,811,585; 1999, 2,618,017 4,812 2,618
Additional paid-in capital 94,252,750 58,890,398
Accumulated deficit (56,432,020) (28,057,165)
------------ ------------
37,825,542 30,835,851
------------ ------------
$ 76,059,641 $ 49,903,537
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven
months
ended
March 31, Years ended April 30,
------------ ----------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(28,374,855) $(29,736,106) $ (3,134,009)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,411,245 4,010,701 4,022,965
Provision for bad debts 359,440 111,151 235,574
Provision for inventories 10,670,615 223,142 41,829
(Expenditure) provision for product warranty -- (1,500,000) 1,500,000
Provision for paclitaxel and other related assets (3,994,759) 25,600,000 --
Change in accrued exit costs (1,549,989) (1,512,797) --
Abandonment of goodwill 6,561,009 -- --
Write-off of fixed assets 564,854 -- --
Loss on disposal of assets -- -- 92,319
Gain on sales of investment -- -- (361,461)
Deferred income tax expense (benefit) 3,524,474 -- (879,723)
Change in deposits and other 1,946,949 (2,581,994) (2,535,737)
Change in assets and liabilities-
Accounts receivable 3,500,280 2,166,410 (4,364,447)
Income taxes receivable -- -- 1,445,046
Inventories 6,900,464 (1,199,444) (3,304,476)
Prepaid expenses and other 2,068,114 (259,378) 56,755
Accounts payable (1,997,875) 1,189,265 277,795
Customer deposits (2,890,928) 3,137,643 470,155
Other accrued liabilities 1,840,160 330,987 75,056
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,539,198 (20,420) (6,362,359)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,403,689) (1,907,986) (2,058,167)
Cash paid for merger costs (1,793,367) -- --
Proceeds from sale of investment -- -- 458,479
Purchase of Shuster's common stock, net of cash acquired -- -- (63,569)
Collection on note receivable -- -- 108,411
Issuance of notes receivable -- -- (60,000)
Purchase of investments -- -- (194,922)
Maturity of investments -- -- 391,673
Net change in restricted cash 567,032 (427,686) (139,346)
------------ ------------ ------------
Net cash used in investing activities (2,630,024) (2,335,672) (1,557,441)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank debt (6,000,000) 4,500,000 1,500,000
Repayments of bank line of credit (21,293,887) -- --
Proceeds from bank line of credit 24,774,281 -- --
Repayments of long-term debt (727,518) (633,136) (120,229)
Proceeds from issuance of common stock and warrants -- 18,257 242,274
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,247,124) 3,885,121 1,622,045
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,337,950) 1,529,029 (6,297,755)
Cash and cash equivalents, beginning of period 3,610,825 2,081,796 8,379,551
------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,272,875 $ 3,610,825 $ 2,081,796
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 1,867,484 $ 581,920 $ 44,934
============ ============ ============
Cash received during the year for income taxes refunded $ -- $ -- $ 1,625,855
============ ============ ============
Non-cash investing and financing activity:
Capital lease obligations incurred through lease of
laboratory and processing equipment $ 493,330 $ 765,843 $ 930,780
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Comprehensive
Shares Amount Capital (Loss)
------------------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCES, APRIL 30, 1997 2,604,757 $ 2,605 $ 58,629,921
Exercise of stock options 11,358 11 223,915
Tax benefit from employee
exercise of stock options -- -- 18,348
Change in unrealized gain on
available-for-sale investment, net
of income tax effect of $15,010 -- -- -- $ (23,477)
Reclassification adjustment for gains
included in net income, net of income
tax effect of $135,837 -- -- -- (222,642)
Net loss -- -- -- (3,134,009)
------------
Comprehensive loss -- -- -- $ (3,380,128)
------------------------ ------------ ============
BALANCES, APRIL 30, 1998 2,616,115 2,616 58,872,184
Exercise of stock options 1,902 2 18,214
Net loss -- -- -- $(29,736,106)
------------------------ ------------ ============
BALANCES, APRIL 30, 1999 2,618,017 2,618 58,890,398
Common stock issued in merger 2,193,568 2,194 35,362,352
Net loss -- -- -- $(28,374,855)
------------------------ ------------ ============
BALANCES, MARCH 31, 2000 4,811,585 $ 4,812 $ 94,252,750
======================== ============
<CAPTION>
Accumulated
Other Retained Total
Comprehensive Earnings Stockholders'
Income (Loss) (Deficit) Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCES, APRIL 30, 1997 $ 246,119 $ 4,812,950 $ 63,691,595
Exercise of stock options -- -- 223,926
Tax benefit from employee
exercise of stock options -- -- 18,348
Change in unrealized gain on
available-for-sale investment, net
of income tax effect of $15,010 (23,477) -- (23,477)
Reclassification adjustment for gains
included in net income, net of income
tax effect of $135,837 (222,642) -- (222,642)
Net loss -- (3,134,009) (3,134,009)
Comprehensive loss -- -- --
------------ ------------ ------------
BALANCES, APRIL 30, 1998 -- 1,678,941 60,553,741
Exercise of stock options -- -- 18,216
Net loss -- (29,736,106) (29,736,106)
------------ ------------ ------------
BALANCES, APRIL 30, 1999 -- (28,057,165) 30,835,851
Common stock issued in merger -- -- 35,364,546
Net loss -- (28,374,855) (28,374,855)
------------ ------------ ------------
BALANCES, MARCH 31, 2000 $ -- $(56,432,020) $ 37,825,542
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
`
F-5
<PAGE>
HAUSER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
Hauser, Inc., a Delaware corporation, and its wholly owned subsidiaries
(together, the "Company"), is a manufacturer of extracts from natural
sources, using its proprietary technologies in extraction and
purification. Hauser is also a leading supplier of herbal extracts,
botanical raw materials, and related products to the dietary supplement
market in the United States. Hauser and its subsidiaries are able to
source, process, and distribute products to the dietary supplement market
including branded product sellers. The Company also provides
interdisciplinary laboratory testing services, chemical engineering
services, and contract research and development. The Company's services
are principally marketed to the pharmaceutical, dietary supplement and
food ingredient industries.
On June 11, 1999, the Company completed a merger (the "Merger") with
three subsidiaries (the "Contributed Subsidiaries") of privately-held
Zuellig Group N. A., Inc., ("ZGNA") and Zuellig Botanicals, Inc. ("ZBI").
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 Company's then
outstanding shares. After the closing, the Company's existing officers
and public shareholders owned 51.0% of the combined company, while ZGNA
owned 49.0%. On December 15, 1999 the number of shares that were issued
to ZGNA was reduced to 2,193,568 (46% of shares outstanding at March 31,
2000) in accordance with the terms of the Merger Agreement.
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 Company has experienced significant losses from operations and has
violated the financial covenants in its current and past borrowing
agreements. The operating losses in prior years have resulted primarily
from the failure of customers purchasing the Company's paclitaxel product
to renew their purchase contracts and in the current year from a
worldwide oversupply of dietary supplement products. The Company has
responded by terminating the production of paclitaxel and reducing its
operating costs through closure of the Wilcox operations; substantially
reducing manufacturing costs while increasing manufacturing efficiencies;
consolidating its technical services operations; and restructuring its
administrative activities.
In connection with the Merger, Wells Fargo Bank, N.A. ("Wells Fargo")
provided a $35.0 million line of credit and a $10.0 million fixed asset
line (the "Credit Facility") in support of the merged companies. As part
of the Merger, the Company repaid approximately $21.0 million in bank
debt of Contributed Subsidiaries with proceeds from the Credit Facility.
The Credit Facility is collateralized by all of the Company's assets.
Since February 28, 1999, the Company has not been in compliance with the
financial covenants under the Credit Facility and has not obtained a
waiver for these violations. The Company is currently in default under
the terms of the Credit Facility and exceeded its borrowing base
availability by $1,200,000 at March 31, 2000. As of June 30, 2000, the
Company's borrowings under the Credit Facility totaled approximately
$24,500,000 and exceeded borrowing base availability by $3,600,000. The
Company has been in discussions with the lender regarding a restructure
of the Credit Facility. There can be no assurance that the lender will
agree to restructure the Credit Facility on terms
F-6
<PAGE>
acceptable to the Company. Due to the Company's covenant violations, the
lender can call the Credit Facility at any time, and may pursue other
actions available to it, some of which could have a significant negative
impact on the Company's ongoing operations. Zatpack, Inc., through ZGNA,
the owner of 46% of the outstanding common stock of the Company, has
agreed, in principle, to purchase a promissory note from the Company (the
"Note") for $5 million subordinated debt. Such purchase would close
simultaneously with the restructuring of the Credit Facility. The Note
will earn interest at 12%, be payable in three years and have warrants
attached which would permit Zatpack to purchase an additional 794,161
shares of common stock of the Company at a price equal to the closing
price of the common stock on the date of the closing of the purchase of
the Note. The Note would be subordinated to the Credit Facility or any
loan agreement that replaces the Credit Facility. On June 28, 2000,
Zatpack advanced $969,250 against the purchase of the Note.
In the event that the Company is unable to successfully negotiate an
amendment to the Credit Facility, alternative financing would be
required. If additional financing is not available, or the terms of the
available financing are not acceptable to the Company, the Company would
have to delay planned expenditures and/or cut back on its current level
of spending to meet its liquidity needs. There is no assurance that such
additional financing will be available when and if needed by the Company.
These uncertainties raise substantial doubt about the Company's ability
to continue as a going concern.
However, management believes that the actions described above, combined
with a continued focus on streamlining operations and cost reductions,
will enable the Company to sustain operations throughout fiscal 2001.
On June 22, 2000, the Company received notice from NASDAQ that the
Company does not comply with the requirements for continued listing on
the NASDAQ National Market System. The notice indicates that the Company
will be de-listed on September 22, 2000. The Company is in the process of
determining whether to appeal NASDAQ's determination or whether to apply
for listing on the SmallCap Market. There can be no assurance that the
Common Stock will continue to trade on the NASDAQ National Market System
or that the Company will meet the initial or continued listing
requirements for the SmallCap Market.
The total consideration issued for the Contributed Subsidiaries,
including the repayment of approximately $21 million of bank debt, was
approximately $58.2 million. The Merger was treated as a purchase of the
Contributed Subsidiaries for accounting purposes and the purchase
consideration was allocated to the fair value of the identifiable
tangible and intangible assets acquired with the remainder allocated to
goodwill. Goodwill of approximately $24.9 million resulting from the
Merger will be amortized over twenty years.
The results of operations of the Contributed Subsidiaries have been
included subsequent to June 11, 1999. The following pro forma
consolidated results of operations assumes the Merger was consummated on
April 1, 1998. Additionally, the pro forma results summarized below have
been adjusted to conform the fiscal year presentation to a March 31
year-end and excludes the results of paclitaxel activities. These pro
forma results do not purport to be indicative of the results which would
have actually resulted had the Merger occurred on that date.
F-7
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
----------------------------------------
1999 2000
------------------ -------------------
<S> <C> <C>
Revenues $ 123,152,624 $ 88,978,356
Loss from operations (1,059,843) (27,597,378)
Net loss $ (2,949,782) $(33,436,969)
Basic and diluted loss per share $ (0.61) $ (7.46)
</TABLE>
MERGER COSTS
In connection with the acquisition of the Contributed Subsidiaries, the Company
incurred certain merger related costs including transaction fees related to
legal and accounting services of $1,793,367, and post-merger severance costs and
other one time merger related expenses of $814,000.
DISCONTINUANCE OF PACLITAXEL ACTIVITIES
As a result of the Merger, the Company decided to discontinue its paclitaxel
activities. In the quarter ended January 31, 1999, the Company incurred a
one-time charge to earnings of $25.6 million. The charge to cost of sales was
comprised of a reduction of bulk paclitaxel inventory ($10.2 million) to its
estimated net realizable value, a write-off of advanced payments made for the
purchase of cultivated yew trees ($4.5 million) and the estimated cost of
terminating cultivar nursery contracts ($5.0 million). The charge to operating
expenses includes the write-off of paclitaxel related equipment ($4.7 million)
and miscellaneous other related assets consisting primarily of intangibles ($1.2
million).
In February 1999, the Company signed a purchase agreement for the sale of its
paclitaxel inventory as part of the planned closure of the paclitaxel business.
Under the purchase agreement, the Company has received $8,694,819 through March
31, 2000. 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. The Company has substantially completed its exit from
the paclitaxel business as of March 31, 2000 and has reversed approximately $4.0
million of the charge to cost of revenues taken in fiscal 1999 principally
because of a favorable settlement of its yew tree cultivation agreements.
F-8
<PAGE>
CLOSURE OF WILCOX NATURAL PRODUCTS ("WILCOX")
In March 2000, the Company elected to cease the operations of Wilcox.
Wilcox principally purchased wild botanical raw materials gathered in the
United States and sold those materials to customers in the United States,
Europe and Asia. The decision to terminate the activities of Wilcox was
taken as a result of the significant decline in market prices for the
botanicals sourced by Wilcox during fiscal 2000. The Company recorded the
following charge as a result of the decision to liquidate Wilcox:
<TABLE>
<S> <C>
Lease termination $1,050,000
Employee severance (14 employees) 645,000
Write-down of fixed assets 500,000
Abandonment of goodwill 6,561,009
----------
Charged to operations $8,756,009
==========
Write-down of inventory 355,000
----------
Charged to cost of revenues $ 355,000
==========
</TABLE>
CONSOLIDATION OF SHUSTER LABORATORIES ("SHUSTER")
In March 2000, the Company began a consolidation of its technical
services operations in order to gain operational efficiencies. As part of
this consolidation, the Company shut-down its laboratory operations in
Smyrna, Georgia. The cost to close the Smyrna operations was charged to
operations and included the following:
<TABLE>
<S> <C>
Lease termination $ 400,000
Employee severance (3 employees) 99,891
----------
Charged to operations $ 499,891
==========
</TABLE>
CHANGE IN FISCAL YEAR
During fiscal 2000, the Company changed its fiscal year-end from April 30
to March 31 to align its periodic reporting with calendar quarters.
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.
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.
F-9
<PAGE>
CONCENTRATION OF CREDIT RISK - The Company is exposed to credit risk from
its cash and cash equivalents and trade receivables. The Company's policy
is to place cash and cash equivalents in financial institutions it
believes to be financially sound, however amounts deposited may exceed
balances federally insured by the U.S. Government. The Company generally
grants credit to its customers without collateral. The Company's
creditors are concentrated in the food processing, dietary supplement and
pharmaceutical industries. During the eleven months ended March 31, 2000,
no customer accounted for more than 10% of the Company's revenues. During
the year ended April 30, 1999, two customers accounted for 13% and 11% of
total revenues, respectively.
PRODUCT WARRANTY - During the fourth quarter of fiscal 1998, the Company
recorded a charge to earnings for$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. The cost of reworking
the Panax Ginseng and settling related claims approximated the warranty
charge of $1,500,000.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include investments
in highly liquid instruments with original maturities of 90 days or less.
INVENTORY - Raw material, work in process, and finished goods inventory,
which include costs of materials, direct labor and manufacturing
overhead, are priced at the lower of average cost or market. Write-downs
for price declines, obsolescence, spoilage and excess inventory 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, which subjects the Company to risk of price declines,
obsolescence, spoilage and excess inventory. During the period ended
March 31, 2000, there was a significant decline in the wholesale prices
for bulk dietary supplement ingredients. As such, the Company reduced the
value of certain of its inventory to its net realizable value and
recorded a charge of $10,670,615.
Markets for the Company's raw materials and finished goods have become
more volatile. Accordingly, it is reasonably possible that the Company
may record future write-downs of inventory to net realizable value based
on volatile selling prices, and such write-downs could be material.
Inventory as of March 31, 2000 and April 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
March 31, 2000 April 30, 1999
-------------- -------------
<S> <C> <C>
Raw materials $ 4,197,169 $ 2,694,883
Work in process 2,856,394 3,562,967
Finished goods 15,578,351 3,407,982
----------- -----------
$22,631,914 $ 9,665,832
=========== ===========
</TABLE>
Bulk paclitaxel held for sale at April 30, 1999 at a net realizable value
of $6,034,525 includes finished goods of $3,234,121 and work in process
of $2,800,404.
F-10
<PAGE>
INVESTMENTS - The Company accounts for equity securities that have a
readily determinable value and debt securities that are
available-for-sale at quoted fair values. Unrealized gains are recorded
in stockholders' equity net of the related income tax effect. The Company
sold an investment in a publicly traded company during fiscal 1998 for
$458,479 and realized a gain of $361,461.
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 and amortization is recognized on a straight-line basis over
the following estimated useful lives:
Equipment, furniture and fixtures 2-15 years
Buildings 39 years
Leasehold improvements 5-10 years
Depreciation and amortization was $3,245,645 for the eleven months ended
March 31, 2000, and $3,775,577 and $3,738,158 for the years ended April
30, 1999 and 1998, respectively.
Subsequent to March 31, 2000, the Company sold unimproved land for
$1,436,000. The proceeds of such sale were used to pay down the Company's
borrowings under the Credit Facility.
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.
During 1999, the Company determined that its long-lived assets related to
its pharmaceutical business were impaired and recognized an impairment
charge of $5.9 million. These assets were written down to zero because of
their specialized nature and the lack of alternative uses for the
equipment.
Given the recent decline in the market price of nutraceutical products,
it is at least reasonably possible that certain long-lived assets
(principally goodwill of $18.6 million) may be deemed to be impaired in
the near future.
GOODWILL - Goodwill resulting from acquisitions is being amortized using
the straight-line method over an estimated useful life of 10 or 20 years.
REVENUE RECOGNITION - Natural product processing revenues are recognized
when title and risk of ownership passes to the customer, which generally
is upon shipment of processed product. Technical Services revenues are
recognized upon completion of specified contract requirements. Unbilled
receivables result from costs incurred on time and materials contracts
and are included in accounts receivable in the accompanying balance
sheets. Unbilled accounts receivable at March 31, 2000, April 30, 1999
and 1998, were $501,749, $420,505 and $434,629, respectively. Anticipated
losses from contracts in progress are
F-11
<PAGE>
provided for in the period the loss is identified. No losses have been
accrued as of March 31, 2000, April 30, 1999 and 1998.
Royalty revenues are recognized upon completion of the Company's
performance obligations with respect to these revenues and coincident
with the billing requirements defined in the supply contract (generally
upon sale of the product to an end-user).
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INCOME TAXES - The current provision for income taxes represents actual
or estimated amounts payable on tax return filings each year. Deferred
tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying balance sheets, and
for operating loss and tax credit carryforwards. The change in deferred
tax assets and liabilities for the period measures the deferred tax
provision or benefit for the period. Effects of changes in enacted tax
laws on deferred tax assets and liabilities are reflected as adjustments
to the tax provision or benefit in the period of enactment. The Company's
deferred tax assets have been reduced by a valuation allowance to the
extent it is more likely than not that some or all of the deferred tax
assets will not be realized.
STOCK-BASED COMPENSATION - The Company accounts for its employee stock
option plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
No. 25"), and related interpretations. The Company adopted the
disclosure-only requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No.
123") which allows entities to continue to apply the provision of APB No.
25 for transactions with employees and provide pro forma disclosures for
employee stock grants made as if the fair value-based method of
accounting in SFAS No. 123 had been applied to these transactions. Any
deferred stock compensation calculated according to APB No. 25 is
amortized on a straight-line basis over the vesting period of the
individual options, generally four years.
The Company applies the provisions of SFAS No. 123 and related
interpretations to stock-based compensation to non-employees.
EARNINGS (LOSS) PER SHARE - 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.
In the eleven months ended March 31, 2000, and in the years ended April
30, 1999 and 1998, stock options and warrants totaling 942,293, 252,354,
and 177,264, respectively were excluded from the calculation of diluted
earnings (loss per share) since the result would have been anti-dilutive.
F-12
<PAGE>
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.
REVERSE STOCK SPLIT - On June 11, 1999, the Company's stockholders
approved a one-for-four reverse stock split. All per share and equivalent
share amounts in the accompanying financial statements have been adjusted
to reflect the reverse stock split.
RECENTLY ISSUED ACCOUNTING STANDARDS -
SFAS NO. 133. 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 137"). SFAS 137
delays the effective date of SFAS 133 to financial quarters and financial
years beginning after June 15, 2000. 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 recognize all derivatives as
either assets or liabilities in the statement of financial position and
measures those instruments at fair value. Management believes that the
adoption of SFAS 133 will not have a significant impact on the Company's
financial condition and results of operations.
SAB 101. In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosures related to revenue in the financial statements. The Company
is required to adopt this standard in its fourth quarter of fiscal 2001.
Management does not believe the adoption of SAB 101 will have a
significant impact on the results of operations or financial position of
the Company.
FIN NO. 44. In March 2000, the Financial Accounting Standards Board
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN No. 44"). FIN No. 44 clarifies the
application of APB No. 25 for certain issues related to equity-based
instruments issued to employees. FIN No. 44 is effective on July 1, 2000,
except for certain transactions, and will be applied on a prospective
basis. Management believes that FIN No. 44 will not have a significant
impact on its financial statements.
F-13
<PAGE>
3. LONG-TERM DEBT
Future minimum payments at March 31, 2000 and April 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Capital Lease
Obligations Line of Credit
(11.2% to 15%) (Variable)
------------ -------------
<S> <C> <C>
2001 $ 679,462 $ 25,793,720
2002 381,119 --
2003 86,953 --
------------ -------------
Total 1,147,534 25,793,720
Less: interest 144,784 --
------------ -------------
March 31, 2000 $ 1,002,750 $ 25,793,720
============ =============
April 30, 1999 $ 1,236,938 $ 6,000,000
============ =============
</TABLE>
At March 31, 2000 and April 30, 1999, property and equipment includes
items under capital leases with a net book value of $946,284 and
$1,298,564, respectively, and accumulated depreciation of $977,561 and
$647,884, respectively.
LINES OF CREDIT - Through June 11, 1999, the Company had an $8,850,000
bank line of credit which allowed 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, 1999, $6,000,000
had been borrowed against the line. The line of credit had an annual fee
of 0.50% of the unused portion of the line and interest was payable
monthly at the bank's prime rate plus 0.75% (9.25% at April 30, 1999).
The line of credit was secured by all assets of the Company, with the
exception of intangibles.
Under the terms of the lending agreement, the Company could not pay any
dividends without the consent of the bank and was required to maintain
certain financial ratios and minimum working capital and equity amounts.
An amount equal to the following year's interest payment was 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, 1999 was $567,032.
In addition, the Company had a lease line of credit for $564,000, of
which $444,875 was available for use at April 30, 1999. The interest rate
on the lease line was the bank's cost of funds plus 2.5% (8.21% at April
30, 1999).
In connection with the Merger, Wells Fargo Bank, N.A. ("Wells Fargo")
provided a $35.0 million line of credit and a $10.0 million fixed asset
line (the "Credit Facility") in support of the merged companies. As part
of the Merger, the Company repaid approximately $21.0 million in bank
debt of the Contributed Subsidiaries with proceeds from the Credit
Facility. The lines of credit are subject to borrowing base limitations
on inventory and is secured by all of the Company's assets. Additionally,
the Credit Facility contains affirmative and negative covenants,
including certain financial covenants.
F-14
<PAGE>
The interest payable on the Company's revolving line of credit is
variable based on the prime rate or LIBOR, and is therefore, affected by
changes in market interest rates. At March 31, 2000, $2,793,720 was
outstanding with an interest rate of 8.75% (prime less 0.25%), and
$23,000,000 was outstanding with an interest rate of 8.05% (LIBOR plus
1.95%).
As of March 31, 2000, the Company was not in compliance with the
financial covenants in the Credit Facility. Additionally, the Company's
borrowings under the Credit Facility exceeded the borrowing base
availability by $1,200,000. As of June 30, 2000, borrowings under the
Credit Facility totaled approximately $24,500,000 and exceeded borrowing
base availability by $3,600,000. As the borrowing base is computed on a
monthly basis, future borrowing availability is contingent upon eligible
accounts receivable and inventory levels. As discussed in Note 1, on June
28, 2000, the Company received an advance of $969,250 against the
purchase of the Zatpack Note.
The Company has been in discussions with the lender regarding a
restructure of the Credit Facility. There can be no assurance that the
lender will agree to restructure the Credit Facility on terms acceptable
to the Company. Due to the Company's covenant violations, the lender can
call the Credit Facility at any time, and may pursue other actions
available to it, some of which could have a significant negative impact
on the Company's ongoing operations.
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 304,680 shares of the Company's common stock to directors,
employees, and consultants. As of March 31, 2000, there were 299,428
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 for the
eleven months ended March 31, 2000, and the years ended April 30, 1999
and 1998, follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Balance outstanding at beginning of period: 101,577 69,017 41,168
Granted 90,747 34,109 38,712
Exercised -- (1,426) (4,149)
Canceled (27,930) (123) (6,714)
----------- ----------- ----------
Outstanding at end of period 164,394 101,577 69,017
=========== =========== ==========
Exercisable at end of period 74,502 69,295 60,688
=========== =========== ==========
Weighted average exercise prices:
At beginning of period $ 23.11 $ 23.13 $ 21.80
At end of period $ 12.41 $ 23.11 $ 23.13
Exercisable at end of period $ 23.22 $ 22.96 $ 23.04
Options granted $ 3.51 $ 22.71 $ 23.96
Options exercised $ -- $ 19.16 $ 18.40
Options canceled $ 22.39 $ 20.54 $ 23.00
Weighted average, fair value of options
granted during period $ 1.93 $ 14.74 $ 15.68
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------- Remaining --------------------------------
Range of Exercise Weighted Average Contractual Live Weighted Average
Prices Shares Exercise Price (Years) Share Exercise Price
-------------------- ---------- -------------------- ------------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
$ 3.45 - $ 3.45 89,892 $ 3.45 9.69 -- $ 0.00
$ 8.94 - $23.38 31,566 $21.35 6.85 31,566 $21.35
$23.50 - $23.88 21,768 $23.75 7.53 21,768 $23.75
$24.00 - $33.13 21,168 $25.47 4.98 21,168 $25.47
--------- ---------
164,394 74,502
========= =========
</TABLE>
F-16
<PAGE>
INCENTIVE STOCK OPTIONS - The Company's 1992 Stock Option Plan ("1992
Plan") and the 1999 Stock Option Plan ("1999 Plan") authorizes the
granting of 175,000 and 850,000 shares of common stock, respectively, to
employees at fair market value on the date of grant. As of March 31,
2000, there were 166,427 and 625,364 shares, respectively, committed
under the plans. Exercise terms, currently ranging from one month to ten
years, are determined by the Board of Directors at the time of grant. A
summary of the status of the Company's 1992 Plan and 1999 Plan for the
eleven months ended March 31, 2000, and the years ended April 30, 1999
and 1998, follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance outstanding at beginning of period: 138,658 96,127 83,804
Granted 707,608 43,155 32,575
Exercised -- (476) (7,209)
Canceled (68,335) (148) (13,043)
-------- -------- --------
Outstanding at end of period 777,931 138,658 96,127
======== ======== ========
Exercisable at end of period 58,990 66,940 52,077
======== ======== ========
Weighted average exercise prices:
At beginning of period $ 23.58 $ 23.73 $ 24.16
At end of period $ 12.76 $ 23.59 $ 23.73
Exercisable at end of period $ 23.66 $ 23.86 $ 24.08
Options granted $ 3.45 $ 23.29 $ 23.64
Options exercised $ -- $ 23.56 $ 23.76
Options canceled $ 23.52 $ 23.83 $ 26.12
Weighted average, fair value of options granted during
period $ 1.90 $ 15.01 $ 15.44
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------- ------------------------------
Remaining
Range of Exercise Weighted Average Contractual Life Weighted Average
Prices Shares Exercise Price (Years) Shares Exercise Price
----------------- ----------- ---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 3.45 - $ 3.45 707,608 $ 3.45 9.69 -- $ 0.00
$10.50 - $23.25 20,236 $22.80 6.40 10,861 $22.66
$23.38 - $23.69 23,387 $23.40 8.22 23,179 $23.39
$24.00 - $30.25 26,700 $24.50 4.84 24,950 $24.34
---------- ---------
777,931 58,990
========== =========
</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. At April 30, 1999 and
1998, 12,119 warrants remained outstanding at exercise prices ranging
from $22.68 to $24.88 per warrant. During fiscal 2000, all outstanding
warrants expired.
F-17
<PAGE>
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 for
the eleven months ended March 31, 2000 and the years ended April 30, 1999
and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Dividend rate 0.00% 0.00% 0.00%
Expected volatility 68.00% 60.00% 40.00%
Risk-free interest rate 6.24% 5.44% 5.79%
Expected life (in years) 7.0 7.0 5.6
</TABLE>
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 eleven months ended March 31,
2000, and the years ended April 30, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Net loss from continuing operations:
As reported $ (28,374,855) $ (29,736,106) $ (3,134,009)
Pro forma $ (28,717,905) $ (31,000,801) $ (3,455,707)
Net loss from continuing operations per
share basic and diluted
As reported $ (6.47) $ (11.36) $ (1.20)
Pro forma $ (6.54) $ (11.85) $ (1.32)
</TABLE>
5. INCOME TAXES
Income tax expense (benefit) from continuing operations for the eleven
months ended March 31, 2000 and the years ended April 30, 1999 and 1998,
is comprised of the following components:
<TABLE>
<CAPTION>
Federal State Total
----------- ------------ ------------
<S> <C> <C> <C>
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)
============ ============ ============
1999
Current $ -- $ -- $ --
Deferred (9,522,035) (1,680,359) (11,202,394)
Valuation Allowance 9,522,035 1,680,359 11,202,394
------------ ------------ ------------
Total $ -- $ -- $ --
============ ============ ============
2000
Current $ -- $ 105,583 $ 105,583
Deferred (6,218,617) (292,805) (6,511,422)
Valuation Allowance 8,979,486 1,056,410 10,035,896
------------ ------------ ------------
Total $ 2,760,869 $ 869,188 $ 3,630,057
============ ============ ============
</TABLE>
F-18
<PAGE>
As of March 31, 2000 and April 30, 1999, temporary differences which
result in deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Current:
Inventories capitalized for income
tax purposes $ 1,680,849 $ 1,068,139
Bad debt reserves 370,918 55,868
Inventory reserves 3,567,474 3,428,424
Accrued vacation 149,057 235,176
Prepaid expenses (79,890) 59,125
Accrued facility closure 797,517 --
Accrued exit costs 123,788 1,344,137
Less: Valuation allowance (6,609,713) (3,877,275)
------------ ------------
Net Current Deferred Tax Asset $ -- $ 2,313,594
============ ============
Noncurrent
Federal NOL carryforward $ 14,134,515 $ 8,427,687
State NOL carryforward 2,011,519 1,778,924
AMT credit carryforward 1,455,524 1,484,151
R&D credit carryforward 658,732 544,068
Capital loss carryforward 106,261 106,261
Excess of tax over book depreciation (3,879,646) (4,027,561)
Income for tax purposes, not book 824,600 304,000
Other (59,648) (26,232)
Less: Valuation allowance (15,251,857) (7,948,399)
------------ ------------
Net Noncurrent Deferred tax Asset $ -- $ 642,899
============ ============
</TABLE>
The Company has approximately $41.6 million of federal and $50.3 million
of state net operating loss carry forwards that expire in varying amounts
through the year 2020 and approximately $279,633 of capital loss carry
forwards expiring in 2001. The Company also has available income tax
credits of $658,732, expiring on varying dates through 2014 and
alternative minimum tax credits of $1,455,524, which do not expire.
During the eleven months ended March 31, 2000, the Company increased its
valuation allowance by approximately $10.0 million due to uncertainty
regarding the realizability of its net deferred tax assets. The increase
in the valuation allowance includes a charge of approximately $3.5
million in the third quarter of fiscal 2000 for deferred tax assets
recorded at May 1, 1999. Management concluded these deferred tax assets
were no longer likely to be realized based on fiscal 2000 operating
results.
F-19
<PAGE>
A reconciliation of the expected income tax benefit at the federal
statutory income tax rate to the Company's actual income tax expense for
the eleven months ended March 31, 2000 and for the years ended April 30,
1999, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------- ------------
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34%
Computed "expected" income tax benefit $ (8,413,231) $ (10,110,276) $ (1,364,669)
Increase (reduction) in taxes resulting
from:
State income taxes, net of federal benefit (989,792) (1,109,037) (160,549)
General business credit carryforward -- (18,000) (75,000)
Non-deductible expenses 523,768 111,000 116,735
Abandonment of goodwill 2,447,256 -- --
Change in valuation allowance 10,035,896 11,202,394 418,281
Other 26,160 (76,081) 185,479
------------ ------------- ------------
Actual income tax expense (benefit) $ 3,630,057 $ -- $ (879,723)
============ ============= ============
Effective income tax rate -14.7% 0.0% 21.9%
============ ============= ============
</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 20%
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 may make a matching contribution. 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
eleven months ended March 31, 2000, or the years ended April 30, 1999 and
1998.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases its office and operating facilities
and various equipment under non-cancelable agreements.
Rent expense was $1,462,355, $1,498,071, and $1,204,226, for the eleven
months ended March 31, 2000, and the years ended April 30, 1999 and 1998,
respectively.
F-20
<PAGE>
Future minimum lease payments under operating leases for the years ending
March 31 are as follows:
<TABLE>
<S> <C>
2001 $ 2,026,572
2002 1,766,736
2003 1,506,080
2004 1,417,780
2005 1,366,508
Thereafter 4,360,895
------------
Total $12,444,571
============
</TABLE>
Subsequent to March 31, 2000, the Company entered into a ten year
operating lease agreement for a facility in Canton, MA. The facility will
replace the Company's current lease in Quincy, MA. Annual rent expense
relating to the Canton facility will be $346,000.
LOAN GUARANTEE - The Company has guaranteed a bank loan in the amount of
$650,000 for another company and has pledged 25,000 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:
The Company's business segments are Natural Products, 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
activities, which have been terminated in connection with the Merger with
the Contributed Subsidiaries.
F-21
<PAGE>
Selected financial information from the Company's business segments are
as follows:
<TABLE>
<CAPTION>
Eleven Months Ended March 31, 2000
--------------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 28,329,424 $ 15,442,139 $ 28,695,223 $ 8,694,819 $ 81,161,605
Cost of revenues 36,683,740 12,585,162 24,139,555 4,502,453 77,910,910
Gross profit (loss) (8,354,316) 2,856,977 4,555,668 4,192,366 3,250,695
Operating expenses 7,666,895 5,002,250 3,003,978 10,531,276 26,204,399
(Loss) income from operations (16,021,211) (2,145,273) 1,551,690 (6,338,910) (22,953,704)
Net income (loss) $(15,885,246) $(2,043,702) $ 951,693 $ (11,397,600) $ (28,374,855)
Year Ended April 30, 1999
--------------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
---------------- -------------- -------------- -------------- --------------
Revenues $ 13,826,862 $ 17,220,146 $ - $ 5,218,413 $ 36,265,421
Cost of revenues 12,499,299 12,612,525 - 23,587,429 48,699,253
Gross profit (loss) 1,327,563 4,607,621 - (18,369,016) (12,433,832)
Operating expenses 4,603,711 3,944,742 - 8,325,888 16,874,341
(Loss) income from operations (3,276,148) 662,879 - (26,694,904) (29,308,173)
Net income (loss) $ (3,276,148) $ 662,879 $ - $ (27,122,837) $ (29,736,106)
Year Ended April 30, 1998
--------------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
---------------- -------------- -------------- -------------- --------------
Revenues $ 13,674,832 $14,507,424 $ - $ 3,855,272 $32,037,528
Cost of revenues 11,335,201 10,102,016 - 3,103,786 24,541,003
Gross profit (loss) 2,339,631 4,405,408 - 751,486 7,496,525
Operating expenses 5,182,933 3,638,151 - 3,320,983 12,142,067
(Loss) income from operations (2,843,302) 767,257 - (2,569,497) (4,645,542)
Net income (loss) $(2,843,302) $ 767,257 $ - $ (1,057,964) $ (3,134,009)
</TABLE>
The Company determines segment results consistent with its consolidated
accounting policies. Included in Natural Products and Technical Services
for the eleven months ended March 31, 2000 are charges of $9.1 million
and $.5 million, respectively, for the cessation of operations at Wilcox
Natural Products and the consolidation of laboratory operations. Included
in Corporate and Other in 1999 are charges of $19.7 million in cost of
revenues and $5.9 million in operating expenses to exit the paclitaxel
business. During the eleven months ended March 31, 2000, $4.0 million of
the $19.7 million charge to cost of revenues was reversed and that
reversal is included in Corporate and Other.
MAJOR CUSTOMERS:
The Company's revenue is concentrated among customers primarily in the
dietary supplement and pharmaceutical industries. During the eleven
months ended March 31, 2000, no customer accounted for more than 10% of
total revenues. During the years ended April 30, 1999 and 1998, two
customers accounted for 13% and 11%, and 15% and 10% of total revenues,
respectively.
F-22
<PAGE>
FOREIGN SALES
Export sales were $7,371,079, $2,269,434, and $2,226,875 in the eleven
months ended March 31, 2000, and the years ended April 30, 1999 and 1998,
respectively. The Company has no foreign assets.
F-23
