SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
QUARTERLY REPORT UNDER
TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NO. 0-17174
-------
HAUSER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0926801
-------- ----------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5555 AIRPORT BLVD., BOULDER, COLORADO 80301
-------------------------------------- ----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (303) 443-4662
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
-----------------------------
Common Stock, par value $.001
(TITLE OF CLASS)
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate 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 4,820,284
---------------------------------- ------------------------------
Class Outstanding at June 30, 2000
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Part 1. FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three months ended June 30, 2000 and 1999.........................1
Consolidated Balance Sheets (Unaudited) -
June 30, 2000 and March 31, 2000..................................2
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended June 30, 2000 and 1999.........................3
Notes to Consolidated Financial Statements...........................4-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................10-13
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings...................................................14
Item 2. Changes in Securities...............................................14
Item 3. Defaults Upon Senior Securities.....................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports on Form 8-K....................................14
SIGNATURE PAGE...............................................................15
</TABLE>
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS-Unaudited
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------------
2000 1999
----------------- -----------------
REVENUES:
<S> <C> <C>
Natural products $ 6,958,133 $ 4,758,327
Fine chemicals 10,113,867 2,244,840
Technical services 4,264,769 3,838,104
Pharmaceuticals 402,870 3,152,536
--------------- ---------------
Total revenues 21,739,639 13,993,807
--------------- ---------------
COST OF REVENUES:
Natural products 7,081,529 4,711,642
Fine chemicals 9,084,016 1,927,092
Technical services 3,345,973 3,229,006
Pharmaceuticals - 3,152,536
--------------- ---------------
Total cost of revenues 19,511,518 13,020,276
--------------- ---------------
GROSS PROFIT 2,228,121 973,531
--------------- ---------------
OPERATING EXPENSES:
Research and development 533,257 300,482
Sales and marketing 847,999 731,095
General and administrative 2,827,420 1,910,418
--------------- ---------------
Total operating expenses 4,208,676 2,941,995
--------------- ---------------
LOSS FROM OPERATIONS (1,980,555) (1,968,464)
--------------- ---------------
OTHER INCOME (EXPENSE):
Interest and other income 17,153 28,978
Interest expense (587,450) (188,971)
Net gain from sale of assets 626,965 -
--------------- ---------------
Total other (expense) income 56,668 (159,993)
--------------- ---------------
LOSS BEFORE INCOME TAX (1,923,887) (2,128,457)
INCOME TAX EXPENSE (BENEFIT) - -
--------------- ---------------
NET LOSS $ (1,923,887) $ (2,128,457)
=============== ===============
LOSS PER SHARE BASIC AND DILUTED $ (0.40) $ (0.67)
=============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 4,818,372 3,171,046
=============== ===============
</TABLE>
See notes to consolidated financial statements.
Page 1 of 16
<PAGE>
<TABLE>
<CAPTION>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS-Unaudited
---------------------------------------------------------------------------------------------------------------
June 30, March 31,
ASSETS 2000 2000
--------------- ---------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,082,267 $ 1,272,875
Accounts receivable, less allowance for doubtful accounts:
June 30, 2000, $782,228; March 31, 2000, $976,101 17,647,543 17,052,701
Inventory, at cost or market 20,037,995 22,631,914
Prepaid expenses and other 1,132,880 611,897
--------------- ---------------
Total current assets 39,900,685 41,569,387
--------------- ---------------
PROPERTY AND EQUIPMENT:
Land and buildings 7,601,888 8,753,733
Laboratory and processing equipment 25,998,884 25,879,426
Furniture and fixtures 4,029,722 4,289,140
--------------- ---------------
Total property and equipment 37,630,494 38,922,299
Accumulated depreciation and amortization (23,568,609) (23,237,393)
--------------- ---------------
Net property and equipment 14,061,885 15,684,906
--------------- ---------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
June 30, 2000 $2,024,485; March 31, 2000, $1,742,698 18,274,454 18,556,242
Deposits and other 570,577 249,106
--------------- ---------------
$ 72,807,601 $ 76,059,641
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,778,209 $ 4,067,144
Current portion of long-term debt 24,983,953 26,377,638
Accrued salaries and benefits 1,821,599 2,391,576
Deposits 876,553 916,870
Note payable to related party 969,250 -
Accrued exit costs 1,492,580 1,987,214
Other current liabilities 1,708,657 2,074,825
--------------- ---------------
Total current liabilities 36,630,801 37,815,267
--------------- ---------------
LONG-TERM DEBT 265,110 418,832
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized; shares issued
and outstanding: June 30, 2000, 4,820,284; March 31, 2000, 4,811,585 4,820 4,812
Additional paid-in capital 94,262,777 94,252,750
Accumulated deficit (58,355,907) (56,432,020)
--------------- ---------------
35,911,690 37,825,542
--------------- ---------------
$ 72,807,601 $ 76,059,641
=============== ===============
</TABLE>
See notes to consolidated financial statements.
Page 2 of 16
<PAGE>
<TABLE>
<CAPTION>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-Unaudited
----------------------------------------------------------------------------------------
Three months ended June 30,
-----------------------------
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net cash used in operating activities $ (1,103,015) $ (3,229,546)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (118,471) (213,869)
Proceeds from sale of assets 1,599,000 -
Net change in restricted cash - 567,032
-------------- --------------
Net cash provided by investing activities 1,480,529 353,163
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank line of credit - (6,000,000)
Repayments of bank line of credit (1,248,449) -
Proceeds from bank line of credit - 6,608,879
Proceeds from related party note payable 969,250 -
Repayments of long-term debt (298,958) (625,983)
Proceeds from issuance of common stock 10,035 -
-------------- --------------
Net cash used in financing activities (568,122) (17,104)
-------------- --------------
Net decrease in cash and cash equivalents (190,608) (2,893,487)
Cash and cash equivalents, beginning of period 1,272,875 4,117,972
-------------- --------------
Cash and cash equivalents, end of period $ 1,082,267 $ 1,224,485
============== ==============
</TABLE>
See notes to consolidated financial statements.
Page 3 of 16
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2000 AND MARCH 31,
2000 AND FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
1. BASIS OF PRESENTATION
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 June 30, 2000) in accordance with the terms of the Merger.
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 $3,600,000 at June 30, 2000. 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
Page 4 of 16
<PAGE>
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 Company (the
"Note") for 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 additional 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 the Company will meet the initial or
continued listing requirements for the SmallCap Market.
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, 1999. Additionally,
the pro forma results summarized below exclude 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.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------
2000 1999
-------------------- -----------------
<S> <C> <C>
Revenues $ 21,336,769 $ 24,150,883
Loss from operations (2,383,425) (1,488,307)
Net loss $ (2,326,757) $ (1,961,403)
Basic and diluted loss per share $ (0.48) $ (0.41)
</TABLE>
Page 5 of 16
<PAGE>
DISCONTINUANCE OF PACLITAXEL 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. During fiscal
2000, the Company reversed approximately $4,000,000 of the charge to earnings
taken in fiscal 1999 principally because of a favorable settlement of its yew
tree cultivation agreements. 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 June
30, 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 June 30, 2000.
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.
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 following analysis provides a summary of the liabilities established as a
result of the above referenced items, and subsequent activity to such reserves
through June 30, 2000:
<TABLE>
<CAPTION>
Reserve Balance Expenses Paid Reserve Balance
March 31, 2000 April 1-June 30, 2000 June 30, 2000
-----------------------------------------------------------
<S> <C> <C> <C>
Lease termination $ 1,467,455 $ (297,307) $ 1,170,148
Employee severance 194,000 (94,000) 100,000
Paclitaxel 325,759 (103,327) 222,432
----------- ------------ -----------
Total $ 1,987,214 $ (494,634) $ 1,492,580
=========== ============ ===========
</TABLE>
Management believes that the reserve balance at June 30, 2000 is adequate to
cover remaining costs relating to the discontinuance of paclitaxel, the
liquidation of Wilcox and the closure of Shuster's Smyrna facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position as of June 30,
2000, and the results of its operations and its cash flows for the periods ended
June 30, 2000 and 1999. The year-end balance sheet data was derived from audited
financial statements,
Page 6 of 16
<PAGE>
but does not include all disclosures required by generally accepted accounting
principles. Certain fiscal 2000 amounts have been reclassified to conform to
the fiscal 2001 presentation.
BASIS OF CONSOLIDATION - The accompanying financial statements include the
accounts of Hauser and its wholly owned subsidiaries: Botanicals International
Extracts, Inc. ("BIE"), Hauser Laboratories, Inc. ("Hauser Labs"), Shuster
Laboratories, Inc. ("Shuster"), Hauser Technical Services, Inc. ("HTS"), Wilcox
Natural Products, Inc. ("Wilcox"), and ZetaPharm, Inc. ("ZetaPharm"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these financial statements.
Actual results could differ from those estimates.
The Company has incurred significant losses from operations that it believes
will be curtailed by the results of the restructuring activities entered into in
fiscal 2000 and 2001. If the results of the restructuring activities are not as
effective as anticipated by management, it is possible that the Company will
recognize an impairment charge related to its $18.3 million goodwill balance
in the future. Further, the Company is evaluating the estimated remaining life
of its goodwill and it is also reasonably possible that the life will be
shortened in the near future because of the factors described above.
3. INVENTORIES
Raw material, work in process, and finished goods inventories, which include
costs of materials, direct labor and manufacturing overhead, are priced at the
lower of average cost or market. Write-downs for excess and obsolete inventories
are charged to expense in the period when conditions giving rise to the
write-downs are first recognized. The Company purchases raw material inventory
during harvest seasons, generally in the spring and fall. These purchases may
take place well in advance of scheduled production of finished product.
Inventories, at cost, are classified as follows:
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
------------ ------------
<S> <C> <C>
Raw materials and supplies $ 2,613,943 $ 4,197,169
Work in process 3,241,577 2,856,394
Finished goods 14,182,475 15,578,251
------------ ------------
Total inventories $ 20,037,995 $ 22,631,914
</TABLE>
4. DEBT
Notes payable and long-term debt consisted of the following:
Page 7 of 16
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
<S> <C> <C>
Line of Credit $ 24,545,271 $ 25,793,720
Capital Leases 703,792 1,002,750
------------- -------------
Total 25,249,063 26,796,470
Less current portion 24,983,953 26,377,638
------------- -------------
Long Term debt $ 265,110 $ 418,832
============= =============
</TABLE>
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.
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. During the quarter ended June 30, 2000, the amounts outstanding
under LIBOR expired and the bank classified the entire debt balance under the
prime rate. At June 30, 2000, $24,545,271 was outstanding with an interest rate
of 9.25% (prime less 0.25%).
As of June 30, 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 $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.
5. EARNINGS (LOSS) PER SHARE
The Company calculates basic earnings (loss) per share by dividing the net
earnings or loss by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted average number of common shares
outstanding and (2) if not antidilutive, the effect of outstanding warrants and
stock options determined utilizing the treasury stock method. For the three
months ended June 30, 2000, and 1999, all options were excluded from the
calculation of diluted loss per share since the result would have been
antidilutive.
Page 8 of 16
<PAGE>
6. RELATED PARTY TRANSACTIONS
The Company sells botanical raw materials to ZBI. During the three months ended
June 30, 2000 and 1999, sales to ZBI totaled $2,276,788 and $428,825,
respectively. The related trade accounts receivable due from ZBI totaled
$2,294,501 and $1,131 at June 30, 2000 and March 31, 2000, respectively.
7. OPERATING SEGMENTS
The Company's three 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 related activities, which are being
terminated. Selected financial information from the Company's business segments
are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
----------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------ ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 6,958,133 $ 4,264,769 $10,113,867 $ 402,870 $ 21,739,639
Cost of revenues 7,081,529 3,345,973 9,084,016 - 19,511,518
Gross profit (loss) (123,396) 918,796 1,029,851 402,870 2,228,121
Operating expenses 1,409,147 1,227,164 582,251 990,114 4,208,676
(Loss) income from operations (1,532,543) (308,368) 447,600 (587,244) (1,980,555)
Net income (loss) $(1,925,155) $ (334,533) $ 394,041 $ (58,240) $ (1,923,887)
Three Months Ended June 30, 1999
----------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------ ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,758,327 $ 3,838,104 $ 2,244,840 $3,152,536 $ 13,993,807
Cost of revenues 4,711,642 3,229,006 1,927,092 3,152,536 13,020,276
Gross profit (loss) 46,685 609,098 317,748 - 973,531
Operating expenses 1,024,646 988,699 182,384 746,266 2,941,995
(Loss) income from operations (977,961) (379,601) 135,364 (746,266) (1,968,464)
Net income (loss) $(1,249,541) $ (376,918) $ 127,206 $ (629,204) $ (2,128,457)
</TABLE>
8. 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
Page 9 of 16
<PAGE>
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 effective April 1, 2000.
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. FIN No. 44 did not have a significant impact
on the Company's financial statements.
Page 10 of 16
<PAGE>
PART 1, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company operates in three business segments: Natural Products, Technical
Services, and Fine Chemicals and Excipients.
RESULTS OF CONTINUING ACTIVITIES:
The results of continuing activities exclude paclitaxel related activities, as
discussed in Note 1 to the financial statements. Additionally, the following
discussion of results of operations is based on a comparison of fiscal 2001
operating results to the proforma fiscal 2000 operating data because management
believes the merger has made comparison of actual results between quarters
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, 1999.
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Revenues $ 21,336,769 $ 24,150,883
Cost of Revenues 19,511,518 20,845,354
--------------- --------------
Gross Profit 1,825,251 3,305,529
Operating Expenses 4,208,676 4,793,836
--------------- --------------
Loss from Operations (2,383,425) (1,488,307)
Net Loss $ (2,326,757) $ (1,961,403)
=============== ==============
</TABLE>
REVENUES. A breakout of the Company's revenues by product and service is as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
2000 1999
------------ --------------
<S> <C> <C>
Natural Products $ 6,958,133 $ 12,789,543
Technical Services 4,264,769 3,838,104
Fine Chemicals and Excipients 10,113,867 7,523,236
------------ --------------
$ 21,336,769 $ 24,150,883
============ ==============
</TABLE>
Total revenues decreased by 12% to $21,336,769 in the first quarter of fiscal
2001 from $24,150,883 in the first quarter of the prior fiscal year.
Natural Product revenues decreased by 46% to $6,958,133 in the first quarter of
fiscal 2001 from $12,789,543 in the first quarter of the prior fiscal year. The
decrease was due to the world-wide
Page 11 of 16
<PAGE>
oversupply of herbal extracts for manufacturer's of dietary supplements, which
has resulted in depressed prices for herbal extracts.
Technical Service revenues increased by 11% to $4,264,769 in the first quarter
of fiscal 2001 from $3,838,104 in the first quarter of the prior fiscal year.
During the prior year, certain Technical Service resources were dedicated to the
production of paclitaxel, as the Company worked through its exit from the
paclitaxel business. These resources have now become available to the Technical
Service business, and as a result overall revenues have increased.
Fine Chemical and Excipient revenues increased by 34% to $10,113,867 in the
first quarter of fiscal 2001 from $7,523,236 in the first quarter of the prior
fiscal year. This increase is due primarily to increased sales volume of Fine
Chemicals. In July 2000, the Company was informed that its principal excipient
supplier, Blanver, had elected to sell products directly, rather than to utilize
the Company for marketing and distribution. Sales of Blanver products totaled
$2,781,079 and $2,558,574 during the quarters ended June 30, 2000 and 1999,
respectively. It is anticipated that the sales of excipients will decrease
significantly beginning in August 2000.
GROSS PROFIT. Gross profit decreased by 45% to $1,825,251 in the first quarter
of fiscal 2001 from $3,305,529 in the first quarter of the prior year. The gross
profit percentage of 9% in the quarter ended June 30, 2000 has deteriorated from
the gross profit percentage of 14% for the same period in the prior year. This
decrease can be attributed primarily to reduced prices caused by the world-wide
oversupply of herbal extracts.
OPERATING EXPENSES. Operating expenses decreased by 12% to $4,208,676 in the
quarter ended June 30, 2000 from $4,793,836 in the same period in the prior
year. This decrease is primarily results from a reduction of general and
administrative expenses due to the Company's restructuring and cost containment
efforts.
INTEREST INCOME/EXPENSE. Interest expense, net increased by 21% to $570,297 in
the quarter ended June 30, 2000 from $473,096 in the same period in the prior
year. The increase in interest expense is due to the increased debt levels,
combined with higher interest rates in the current year.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $1,082,267 at June 30, 2000,
compared to $1,272,875 at March 31, 2000. The Company's primary cash needs are
for operations, working capital and capital expenditures.
Cash used in operating activities for the quarter ended June 30, 2000 was
$1,103,015. This amount is comprised primarily of a net loss of $1,923,887,
offset primarily by non-cash expenditures of $553,800, and changes in working
capital of $267,072.
Cash provided by investing activities is comprised of capital expenditures of
$118,471, and proceeds from sale of assets of $1,599,000.
Page 12 of 16
<PAGE>
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 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 additional 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.
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 4 to the Financial Statements), from
the Credit Facility. Management believes that current cash reserves, advances
from Zatpack, 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 June 30, 2000 was $3,269,884 as compared
to $3,754,120 as of March 31, 2000.
INCOME TAXES. The Company has a net deferred tax asset of approximately
$22,500,000 that has been fully reserved for at June 30, 2000. Included in
deferred tax assets at June 30, 2000, are federal net operating loss carry
forwards of approximately $43,500,000, income tax credits of approximately
$659,000 and alternative minimum tax credits of approximately $1,500,000.
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 $5,500,000 as of June 30, 2000,
compared to $6,300,000 as of March 31, 2000. Backlog consists of unfilled sales
orders for Natural Products, Technical Services and Fine Chemicals and
Excipients.
Page 13 of 16
<PAGE>
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 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 June 30, 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 and/or LIBOR, and is therefore, affected by changes in market
interest rates. At June 30, 2000, $24,545,271 was outstanding with an interest
rate of 9.25% (prime less 0.25%). Should the Company be required to obtain
financing for the existing line elsewhere, or should the Company's liquidity
needs exceed amounts available under this line of credit, the interest rate to
replace the credit facilities might be significantly higher. For example, if the
interest rate on the Company's line of credit had been 2% higher for its quarter
ended June 30, 2000, the Company would have incurred additional interest expense
of approximately $126,000, with an associated $.03 increase in the per share
loss for the quarter. Therefore, the Company's exposure to changes in interest
rates will be significant until such time as its operating results permit it
greater access to other lenders and lending instruments on terms equivalent to
those available under the Credit Facility.
FORWARD-LOOKING STATEMENTS
Certain oral and written statements of management of the Company included in the
Form 10-Q and elsewhere may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations. The forward-looking statements included herein
and elsewhere are based on current expectations that involve judgments which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Page 14 of 16
<PAGE>
PART 2.
Item 1 Legal Proceedings.
None
Item 2 Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits required to be filed by Item 601 of Regulation
S-K are incorporated herein by reference to the exhibit index
of the Company's report on Form 10-K for the period ended
March 31, 2000.
(b) Reports on Form 8-K
None
Page 15 of 16
<PAGE>
FORM 10 Q
SIGNATURES
Pursuant to the requirements 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.
HAUSER, INC.
Date: August 14, 2000 /s/ Volker Wypyszyk
--------------------------------------------
Volker Wypyszyk
Chief Executive Officer
Date: August 14, 2000 /s/ Kenneth C. Cleveland
--------------------------------------------
Kenneth C. Cleveland
Chief Financial Officer
