<PAGE>
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 January 31, 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
incorporation or organization Number)
5555 Airport Blvd., Boulder, Colorado 80301
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 443-4662
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
---------------------------
Common Stock, par value $.001
(Title of Class)
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value 4,811,585
- ----------------------------- -------------------------------
Class Outstanding at January 31, 2000
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited)-
Three and nine months ended January 31, 2000 and
January 31, 1999..................................................1
Consolidated Balance Sheets-
January 31, 2000 (unaudited) and April 30, 1999...................2
Consolidated Statements of Cash Flows (unaudited)-
Nine months ended January 31, 2000 and January 31, 2000...........3
Notes to Consolidated Financial Statements......................4-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................10-14
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings................................................15
Item 2. Changes in Securities............................................15
Item 3. Defaults Upon Senior Securities..................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
Item 5. Other Information................................................15
Item 6. Exhibits and Reports on Form 8-K.................................15
SIGNATURE PAGE...........................................................16
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
------------------------------- ------------------------------------
2000 1999 2000 1999
------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
REVENUES:
Natural products processing $9,756,295 $3,915,688 $23,756,324 $10,257,581
Technical services 4,402,940 4,471,668 12,839,222 12,784,147
Fine Chemicals and Excipients 8,600,793 - 21,870,962 -
Paclitaxel 216,587 897,770 8,599,819 2,893,845
------------- --------------- --------------- ------------------
Total revenues 22,976,615 9,285,126 67,066,327 25,935,573
COST OF REVENUES:
Natural products processing 9,050,129 3,658,432 21,379,250 8,374,690
Technical services 3,684,290 3,349,237 10,083,470 9,287,157
Fine Chemicals and Excipients 7,332,894 - 18,301,394 -
Paclitaxel 13,005 287,166 8,396,237 1,572,734
Other costs of revenues 2,481,000 19,700,000 1,712,801 19,700,000
------------- --------------- --------------- ------------------
Total cost of revenues 22,561,318 26,994,835 59,873,152 38,934,581
GROSS PROFIT (LOSS) 415,297 (17,709,709) 7,193,175 (12,999,008)
------------- --------------- --------------- ------------------
OPERATING EXPENSES:
Research and development 215,514 318,581 717,590 1,136,479
Sales and marketing 1,471,565 624,314 3,801,761 2,120,511
General and administrative 3,164,573 1,546,238 8,026,205 4,848,124
Other operating expenses 650,000 5,900,000 1,464,000 5,900,000
------------- --------------- --------------- ------------------
Total operating expenses 5,501,652 8,389,133 14,009,556 14,005,114
------------- --------------- --------------- ------------------
LOSS FROM OPERATIONS (5,086,355) (26,098,842) (6,816,381) (27,004,122)
OTHER INCOME (EXPENSE):
Interest income 17,946 29,713 80,132 79,521
Interest expense (556,498) (190,653) (1,500,367) (370,131)
Other - - (10,481) 42,037
------------- --------------- --------------- ------------------
Other income (expense)-net (538,552) (160,940) (1,430,716) (248,573)
------------- --------------- --------------- ------------------
LOSS BEFORE INCOME TAXES (5,624,907) (26,259,782) (8,247,097) (27,252,695)
INCOME TAX PROVISION (3,573,073) - (3,573,073) -
------------- --------------- --------------- ------------------
NET LOSS $ (9,197,980) $ (26,259,782) $ (11,820,170) $ (27,252,695)
============= =============== =============== ==================
INCOME (LOSS) PER SHARE:
BASIC AND DILUTED $(1.97) $(10.03) $(2.75) $(10.41)
============= =============== =============== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 4,677,774 2,617,091 4,296,185 2,616,883
============= =============== =============== ==================
See notes to consolidated financial statements.
</TABLE>
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Page 1 of 16
<PAGE>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, April 30,
ASSETS: 2000 1999
- ------ ---------------- ---------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 483,398 $ 3,610,825
Restricted cash - 567,032
Accounts receivable, less allowance for doubtful accounts:
January 31, 2000, $807,983; April 30, 1999, $158,421 20,563,993 6,812,444
Income taxes receivable 357,140 -
Inventory, at cost 28,258,345 9,665,832
Inventory, at net realizable value - 6,034,525
Prepaid expenses and other 697,257 292,808
Net deferred income tax assets - 2,313,594
---------------- ---------------
Total current assets 50,360,133 29,297,060
---------------- ---------------
PROPERTY AND EQUIPMENT
Land and buildings 8,711,916 7,692,252
Lab and processing equipment 26,713,486 23,972,862
Furniture and fixtures 4,668,646 3,970,364
---------------- ---------------
Total property and equipment 40,094,048 35,635,478
Accumulated depreciation and amortization (23,140,103) (19,064,412)
---------------- ---------------
Net property and equipment 16,953,945 16,571,066
---------------- ---------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
January 31, 2000, $1,768,529; April 30, 1999, $847,509 25,361,830 1,373,471
Deposits 293,930 1,953,041
Net deferred income tax asset - 642,899
Other 75,393 66,000
---------------- ---------------
Total other assets 25,731,153 4,035,411
---------------- ---------------
TOTAL $93,045,231 $49,903,537
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,495,036 $ 2,953,559
Current borrowings 27,439,927 6,750,342
Accrued salaries and wages 1,926,531 1,347,040
Deposits 846,194 3,807,798
Accrued exit costs 1,179,105 3,537,203
Other accrued liabilities 1,586,700 185,148
---------------- ---------------
Total current liabilities 38,473,493 18,581,090
---------------- ---------------
LONG TERM LIABILITIES 178,672 486,596
---------------- ---------------
STOCKHOLDER' EQUITY
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued: January 31, 2000, 4,811,585;
April 30, 1999, 2,618,017 4,812 2,618
Additional paid-in capital 94,265,589 58,890,398
Accumulated deficit (39,877,335) (28,057,165)
---------------- ---------------
Net stockholders' equity 54,393,066 30,835,851
---------------- ---------------
TOTAL $93,045,231 $49,903,537
================ ===============
See notes to consolidated financial statements.
</TABLE>
- --------------------------------------------------------------------------------
Page 2 of 16
<PAGE>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended January 31,
----------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities 308,592 (100,892)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,071,386) (1,521,531)
Net change in restricted cash 567,032 (423,271)
------------------ -----------------
Net cash used in investing activities (1,504,354) (1,944,802)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank line of credit (6,000,000) 4,500,000
Proceeds from bank line of credit 4,376,259 -
Repayments of long-term debt (307,924) (429,406)
Proceeds from issuance of common stock and warrants - 18,258
------------------ -----------------
Net cash (used in) provided by financing activities (1,931,665) 4,088,852
------------------ -----------------
------------------ -----------------
Net (decrease) increase in cash and cash equivalents (3,127,427) 2,043,158
Cash and cash equivalents, beginning of year 3,610,825 2,081,796
------------------ -----------------
Cash and cash equivalents, end of period $ 483,398 $ 4,124,954
See notes to consolidated financial statements. ================== =================
</TABLE>
- --------------------------------------------------------------------------------
Page 3 of 16
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 2000 AND APRIL
30, 1999 AND FOR THE THREE AND NINE MONTH PERIODS ENDED JANUARY 31, 2000 AND
1999 (UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly Hauser, Inc.'s ("Hauser" or the "Company") financial
position as of January 31, 2000, and the results of its operations and its cash
flows for the periods ended January 31, 2000 and 1999. The year-end balance
sheet data was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles. Certain
fiscal year ended April 30, 1999 amounts have been reclassified to conform to
the fiscal year ending March 31, 2000 presentation.
Basis of Consolidation - The accompanying financial statements include the
accounts of Hauser and its wholly owned subsidiaries: Botanicals International
Extracts, Inc. ("BIE"), formerly known as Zuellig Botanical Extracts, Inc.,
Wilcox Natural Products Inc. ("Wilcox"), formerly known as Wilcox Drug Company,
Inc., ZetaPharm, Inc. ("ZetaPharm"), Shuster Laboratories, Inc. ("Shuster"), and
Hauser Technical Services, Inc. ("HTS"), a newly created subsidiary under which
Hauser will perform laboratory services. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these financial statements.
Actual results could differ from those estimates.
2. INVENTORIES
Raw material, work in process, and finished goods inventories, which include
costs of materials, direct labor and manufacturing overhead, are priced at the
lower of average cost or market. Write-downs for excess and obsolete inventories
are charged to expense in the period when conditions giving rise to the
write-downs are first recognized. The Company purchases raw material inventory
during harvest seasons, generally in the spring and fall. These purchases may
take place well in advance of scheduled production of finished product.
Inventories, at cost, are classified as follows:
January 31, 2000 April 30, 1999
---------------- ----------------
Raw materials and supplies $ 5,656,630 $ 2,694,883
Work in process 2,777,462 3,562,967
Finished goods 19,824,253 3,407,982
---------------- ----------------
Total inventories $ 28,258,345 $ 9,665,832
================ ================
- --------------------------------------------------------------------------------
Page 4 of 16
<PAGE>
Bulk paclitaxel held for sale as of January 31, 2000 and April 30, 1999, at a
net realizable value of $0 and $6,034,525, respectively, is not included in the
table above. As of January 31, 2000 and April 30, 1999, the bulk paclitaxel
consisted of finished goods of $0 and $3,234,121 and work-in-process of $0, and
$2,800,404, respectively.
3. DEBT
Notes payable and long-term debt consisted of the following:
January 31, 2000 April 30, 1999
---------------- ----------------
Line of Credit $ 26,716,419 $ 6,000,000
Capital Leases 902,180 1,236,938
---------------- ----------------
Total 27,618,599 7,236,938
Less current portion 27,439,927 6,750,342
---------------- ----------------
Long Term debt $ 178,672 $ 486,596
================ ================
On June 11, 1999 the Company obtained financing from Wells Fargo Bank, NA ("the
Bank") for an aggregate amount of $45,000,000, which is guaranteed by each of
its subsidiaries. The borrowings consist of a revolving line of credit up to
$35,000,000 for general working capital purposes maturing two years after the
loan closing, and a $10,000,000 non-revolving term loan to finance the
acquisition of fixed assets with a draw down period of two years and a maturity
date of five years following the loan closing (collectively, the "Credit
Facility"). The Company also assumed approximately $22,000,000 of BIE, Wilcox
and ZetaPharm (collectively referred to as the "Contributed Subsidiaries") bank
debt. The Credit Facility includes a $1,000,000 sublimit for the issuance of
commercial letters of credit up to 150 days in term. Aggregate loans under the
Credit Facility are limited to 80% and 50% of eligible accounts receivable and
inventory, respectively. Inventory collateral for loan purposes may not exceed
$20,000,000. As of January 31, 2000, the Company's borrowing base eligibility
totaled $27,310,000. The Credit Facility is secured by all of the Company's
assets. Additionally, the Credit Facility contains affirmative and negative
covenants, including certain financial covenants. On October 29, 1999, the
Credit Facility was amended pursuant to which, among other things, (a) certain
financial covenants were amended to be less restrictive, (b) an over-advance was
approved in the amount of $2,500,000 through December 31, 1999, $1,500,000 from
January 1, 2000 through April 30, 2000, and $1,000,000 from May 1, 2000 through
June 30, 2000, (c) for the revolving loan, the interest rates were increased for
LIBOR based borrowings from LIBOR plus 1.50% to LIBOR plus 1.95%, and for Prime
rate based borrowings from Prime less .75% to Prime less .25%, and (d) for the
term loan fixed asset facility, the interest rate was increased for LIBOR based
borrowings from LIBOR plus 1.75% to LIBOR plus 2.20% and for Prime rate based
borrowings from Prime less .50% to the Prime interest rate. A commitment fee of
.25% per annum is charged on the unused portion of the term loan fixed asset
commitment.
The Company is not in compliance with certain financial covenants in the Credit
Facility. The Company is currently discussing with the Bank an amendment of the
financial covenants in the Credit Facility. The Company is also in discussions
with Zatpack, Inc. regarding the sale of debt subordinate to the Credit
Facility. There can be no assurance that the Company will reach agreement either
with the Bank or with Zatpack, Inc. If the Bank does not agree to the financial
covenant amendment, the debt under the Credit Facility could become payable in
full prior to maturity.
- --------------------------------------------------------------------------------
Page 5 of 16
<PAGE>
Throughout the current year, the Company has taken significant actions to reduce
cash requirements for operating expenses. These actions have included work force
reductions and facility closures. Additionally, Management is currently
evaluating additional sources of cash flow, including debt issuances and
possible sale-leaseback of Company owned real estate.
4. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires, among other things, that the components and
total amount of comprehensive income be displayed in the financial statements
for interim and annual periods. Comprehensive income includes net income and all
changes in equity during a period that arise from nonowner sources, such as
foreign currency items and unrealized gains and losses on certain investments in
debt and equity securities. The Company had no transactions during the periods
ended January 31, 2000 and 1999 that are required to be reported in
comprehensive income as compared to its net loss.
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 nine and
three months ended January 31, 2000, no options were excluded from the
calculation of diluted loss per share using the treasury stock method. For the
nine and three months ended January 31, 1999, 1,503 and 118 options were
excluded from the calculation using the treasury stock method.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An amendment of FASB Statement No. 133" ("SFAS No.
137"). SFAS No. 137 delays the effective date of SFAS No. 133 to financial
quarters and financial years beginning after June 15, 2000. The Company does not
typically enter into arrangements that would fall under the scope of SFAS No.
133 and thus, management believes that the adoption of SFAS No. 133 will not
have a significant impact on the Company's financial condition and results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides
the SEC Staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. The guidance in SAB 101 must be implemented
by the Company's first fiscal quarter of fiscal 2001. The Company is currently
reviewing the guidance provided by the SEC staff and has not concluded as to the
effects on the Company's results of operations.
- --------------------------------------------------------------------------------
Page 6 of 16
<PAGE>
7. MERGER
Pursuant to an Agreement and Plan of Merger dated December 8, 1998 (the "Merger
Agreement"), the Company completed a merger on June 11, 1999 with three
subsidiaries of Zuellig Group N.A., Inc. ("ZGNA") and Zuellig Botanicals, Inc.
("ZBI"). Two subsidiaries of ZGNA, Wilcox and ZetaPharm, and one subsidiary of
ZBI, BIE merged with three wholly owned subsidiaries of the Company (the
"Merger"), which were created for the purpose of the Merger. The Contributed
Subsidiaries were the surviving corporations and became wholly owned
subsidiaries of the Company as a result of the Merger.
At the closing of the Merger, the Company issued 2,515,349 shares of its common
stock to ZGNA and ZBI, which constituted 49% of the outstanding shares. After
the closing, the Company's existing officers and public shareholders 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 2,193,426 (46% of shares
outstanding at January 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 Merger was treated as a purchase of the Contributed Subsidiaries for
accounting purposes. Goodwill of $23,953,397 was recognized in June 1999 and
additional goodwill of $955,982 was recognized in December 1999. Goodwill will
be amortized over a twenty-year period and was computed as follows:
<TABLE>
<S> <C>
Common stock issued 1,913,640(1)
Fair value per share 17.98(2)
------------
Fair value of common stock issued $ 34,408,523
Cost associated with the transaction 1,793,387
------------
Total consideration 36,201,910
Fair value of the excess of identifiable assets acquired over
liabilities assumed by Hauser (12,248,513)
------------
Goodwill recorded during quarter ended July 31, 1999 23,953,397
------------
Common stock issued 279,786(3)
Fair value per share 3.42(4)
------------
Additional goodwill recorded during quarter ended January 31, 2000 955,982
------------
Total goodwill recorded in connection with the Merger $ 24,909,379
============
(1) Represents total common stock issued in connection with the Merger, less
601,709 shares held in escrow in accordance with The Escrow Agreement, dated as
of June 11, 1999 by and among ZGNA, the company, ZBI and American Securities
Transfer & Trust, Inc. (the "Escrow Agreement").
(2) Fair value per share computed based on the average closing price for three days
prior and three days after the announcement of the Merger, after consideration
of the effect of the 1:4 reverse stock split which occurred concurrent with the
closing of the Merger.
- --------------------------------------------------------------------------------
Page 7 of 16
<PAGE>
(3) Represents total common stock issued on December 15, 1999, in accordance with
the Escrow Agreement.
(4) Fair value per share computed based on the average closing price for three days
prior and three days after December 15, 1999.
</TABLE>
The following pro forma unaudited consolidated results of operations for the
three and nine months ended January 31, 2000, and 1999 have been prepared
assuming the Merger occurred on May 1, 1998. These pro forma results do not
include the results of paclitaxel related activities and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition taken effect on May 1, 1998.
<TABLE>
<CAPTION>
Three months ended January 31, Nine months ended January 31,
---------------------------------- ----------------------------------
---------------- ---------------- ---------------- ----------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 22,760,028 $ 30,361,528 $ 65,499,188 $ 85,748,343
Cost of revenue 23,007,313 25,897,249 61,108,359 70,899,404
---------------- ---------------- ---------------- ----------------
Gross profit (247,285) 4,464,279 4,390,829 14,848,939
Operating expenses 5,501,652 4,625,387 15,151,299 14,812,021
---------------- ---------------- ---------------- ----------------
(Loss) income from operations $ (5,748,937) $ (161,108) $ (10,760,470) $ 36,918
Net loss $ (9,860,562) $ (730,597) $ (16,017,969) $ (1,298,285)
Diluted net loss per share $ (2.05) $ (0.15) $ (3.33) $ (0.27)
Weighted average shares
outstanding, diluted 4,811,585 4,810,517 4,811,585 4,810,309
</TABLE>
8. DISCONTINUED ACTIVITIES
Prior to the Merger, in the third quarter of the fiscal year ended April 30,
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 $8,599,849 through January 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 January 31, 2000.
9. OTHER COSTS OF REVENUE AND OTHER OPERATING CHARGES
During the first quarter of the fiscal year ending March 31, 2000, the Company
took a charge to earnings of $3,581,560. The charge to cost of revenues of
$2,767,560 was recorded to write-off advance payments made for the purchase of
raw material and to reduce the value of Natural Products inventory to net
realizable value. The Company also recorded a charge to operating expenses in
the amount of $814,000 related to the payment of post-merger severance costs,
asset abandonment and reserves for leases on obsolete equipment.
Offsetting the above charges in cost of revenues was the reversal of $3,535,759
of the provision established in connection with the termination of yew tree
cultivation contracts.
During the quarter ended January 31, 2000, the Company took an additional charge
to earnings of $3,590,000. The charge to cost of revenues of $2,940,000 was
recorded to write down inventory to net
- --------------------------------------------------------------------------------
Page 8 of 16
<PAGE>
realizable value. The Company also recorded a charge to operating expenses in
the amount of $650,000 related to the closure of one of Wilcox's facilities.
Partially offsetting the above charges in cost of revenues was the reversal of
$459,000 of the provision established in connection with the Company's
discontinuation of paclitaxel. The Company has substantially completed its exit
from the paclitaxel business as of January 31, 2000.
10. OPERATING SEGMENTS
The Company's three business segments are; Natural Products, Technical Services,
and Fine Chemicals and Excipients. Included in corporate and other are the
results of the Company's paclitaxel related activities, which are being
terminated. Selected condensed financial information from the Company's business
segments are as follows:
<TABLE>
<CAPTION>
Three Months Ended January 31, 2000
------------------------------------------------------------------------------
Natural Technical Fine Corporate Total
Products Services Chemicals and Other Hauser
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 9,756,295 $ 4,402,940 $ 8,600,793 $ 216,587 $ 22,976,615
Cost of revenues 11,990,129 3,684,290 7,332,894 (445,995) 22,561,318
-------------- -------------- -------------- -------------- --------------
Gross profit (loss) (2,233,834) 718,650 1,267,899 662,582 415,297
Operating expenses 2,397,009 1,264,970 837,611 1,002,062 5,501,652
-------------- -------------- -------------- -------------- -------------
Operating income (loss) $ (4,630,843) $ (546,320) $ 430,288 $ (339,480) $ (5,086,355)
============== ============== ============== ============== ==============
Assets $ 44,514,776 $ 8,236,501 $ 12,067,793 $ 28,226,161 $ 93,045,231
<CAPTION>
Three Months Ended January 31, 1999
------------------------------------------------------------------------------
Natural Technical Fine Corporate Total
Products Services Chemicals and Other Hauser
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 3,915,688 $ 4,471,668 $ - $ 897,770 $ 9,285,126
Cost of revenues 3,658,432 3,349,237 - 19,987,166 26,994,835
-------------- -------------- -------------- -------------- --------------
Gross profit (loss) 257,256 1,122,431 - (19,089,396) (17,709,709)
Operating expenses 618,548 609,592 - 7,160,993 8,389,133
-------------- -------------- -------------- -------------- --------------
Operating income (loss) $ (361,292) $ 512,839 $ - $ (26,250,389) $ (26,098,842)
============== ============== ============== ============== ==============
Assets $ 35,064,073 $ 10,590,065 $ - $ 7,790,479 $ 53,444,617
<CAPTION>
Nine Months Ended January 31, 2000
------------------------------------------------------------------------------
Natural Technical Fine Corporate Total
Products Services Chemicals and Other Hauser
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 23,756,324 $ 12,839,222 $ 21,870,962 $ 8,599,819 $ 67,066,327
Cost of revenues 27,086,810 10,083,470 18,301,394 4,401,478 59,873,152
-------------- -------------- -------------- -------------- --------------
Gross profit (loss) (3,330,486) 2,755,752 3,569,568 4,198,341 7,193,175
Operating expenses 5,036,280 3,587,592 2,388,547 2,997,137 14,009,556
-------------- -------------- -------------- -------------- --------------
Operating income (loss) $ (8,366,766) $ (831,840) $ 1,181,021 $ 1,201,204 $ (6,816,381)
============== ============== ============== ============== ==============
<CAPTION>
Nine Months Ended January 31, 1999
------------------------------------------------------------------------------
Natural Technical Fine Corporate Total
Products Services Chemicals and Other Hauser
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenue $ 10,257,581 $ 12,784,147 $ - $ 2,893,845 $ 25,935,573
Cost of revenues 8,374,690 9,287,157 - 21,272,734 38,934,581
-------------- -------------- -------------- -------------- --------------
Gross profit (loss) 1,882,891 3,496,990 - (18,378,889) (12,999,008)
Operating expenses 2,104,196 1,871,556 - 10,029,362 14,005,114
-------------- -------------- -------------- -------------- --------------
Operating income (loss) $ (221,305) $ 1,625,434 $ - $ (28,408,251) $ (27,004,122)
============== ============== ============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
Page 9 of 16
<PAGE>
Part 1, Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- -----------------------------------------------------------
RESULTS OF CONTINUING ACTIVITIES
- --------------------------------
The results of continuing activities exclude paclitaxel, as discussed in Note 8
to the financial statements. Additionally, the following discussion of results
of operations is based on a comparison of pro forma fiscal year ending March 31,
2000 operating results to the pro forma fiscal year ended March 30, 1999
operating data because management believes the Merger has made comparison of
actual results between quarters meaningless.
Comparison of the three months ended January 31, 2000 to the three months ended
January 31, 1999:
REVENUES. The Company's revenues by product and services are as follows:
Three months ended January 31,
------------------------------
2000 1999
-------------- --------------
Natural Products $ 9,756,295 $ 19,210,439
Technical Services 4,402,940 4,471,668
Fine Chemicals and Excipients 8,600,793 6,679,421
-------------- --------------
$ 22,760,028 $ 30,361,528
============== ==============
Total revenues decreased by 25% to $22,760,028 in the third quarter of the
fiscal year ending March 31, 2000 from $30,361,528 in the third quarter of the
prior fiscal year.
Natural Products revenues decreased by 49% to $9,756,295 in the third quarter of
the fiscal year ending March 31, 2000 from $19,210,439 in the third quarter of
the prior fiscal year. While unit sales of herbal extracts have increased over
the prior year, prices have decreased due to the intense competition in
supplying the dietary supplement market. Additionally, sales of botanical raw
materials have decreased from the prior year.
Technical Service revenues decreased by 2% to $4,402,940 in the third quarter of
the fiscal year ending March 31, 2000 from $4,471,668 in the third quarter of
the prior fiscal year. The decrease is attributed primarily to reduced Technical
Service activity during the months of November and December 1999.
Fine Chemical and Excipient revenues increased by 29% to $8,600,793 in the third
quarter of the fiscal year ending March 31, 2000 from $6,679,421 in the third
quarter of the prior fiscal year. This increase is due to increased demand for
Fine Chemicals and Excipients.
GROSS PROFIT. Gross profit decreased by 95% to $211,715 in the third quarter of
the fiscal year ending March 31, 2000 from $4,464,279 in the third quarter of
the prior year. Included in gross profit in the quarter ended January 31, 2000
is a charge to write down inventory in the amount of $2,940,000. This write down
occurred because of the reduction of the market price of both botanical raw
materials and extracts. This charge was partially offset by a reversal of a
reserve of $459,000 established in connection with the discontinuation of
paclitaxel. The Company has substantially completed its exit from the paclitaxel
business as of January 31, 2000.
- --------------------------------------------------------------------------------
Page 10 of 16
<PAGE>
Excluding the impact of the above referenced items, the gross profit percentage
for the quarter ended January 31, 2000 was 12% compared to 15% for the same
period in the prior year. Although unit sales of herbal extracts have increased
over the prior year, the price per unit has substantially declined in the
current year, thereby reducing the net gross profit percentage.
OPERATING EXPENSES. Operating expenses in the quarter ended January 31, 2000
include a charge of $650,000 resulting from the closure of one of Wilcox's
facilities. Excluding the impact of this charge, operating expenses increased by
5% to $4,851,652 in the quarter ended January 31, 2000 from $4,625,387 in the
same period in the prior year.
INTEREST INCOME/EXPENSE. Interest expense decreased by 9% to $538,552 in the
quarter ended January 31, 2000 from $589,489 in the same period in the prior
year. The decrease in interest expense is due to decreased debt in relation to
pro forma debt in the third quarter of the prior fiscal year.
Comparison of the nine months ended January 31, 2000 to the nine months ended
January 31, 1999:
REVENUES. The Company's revenues by product and services are as follows:
Nine months ended January 31,
------------------------------
2000 1999
-------------- --------------
Natural Products $ 27,673,072 $ 48,419,312
Technical Services 12,839,222 12,784,147
Fine Chemicals and Excipients 24,986,894 24,544,884
-------------- --------------
$ 65,499,188 $ 85,748,343
============== ==============
Total revenues decreased by 24% to $65,499,188 in the first 9 months of the
fiscal year ending March 31, 2000 from $85,748,343 in the first nine months of
the prior fiscal year.
Natural Products revenues decreased by 43% to $27,673,072 in the first nine
months of the fiscal year ending March 31, 2000 from $48,419,312 in the first
nine months of the prior fiscal year. While unit sales of herbal extracts have
increased over the prior year, prices have decreased due to the intense
competition in supplying the dietary supplement market. Additionally, sales
volume of botanical raw materials have decreased from the prior year.
Technical Service revenues were substantially unchanged with revenues of
$12,839,222 in the first nine months of the fiscal year ending March 31, 2000
and $12,784,147 in the first nine months of the prior fiscal year. On a
year-to-date basis, Technical Service revenues have increased as a result of the
Company's focus on revenue-generating activities. The increased billings have
been partially offset by the utilization of significant Technical Service
resources in the process of exiting paclitaxel.
Fine Chemical and Excipient revenues increased by 2% to $24,986,894 in the first
nine months of the fiscal year ending March 31, 2000 from $24,544,884 in the
first nine months of the prior fiscal year. The increase reflects the net of
high demand for Fine Chemical and Excipient products, offset by a reduction in
generic active ingredient revenues.
- --------------------------------------------------------------------------------
Page 11 of 16
<PAGE>
GROSS PROFIT. Gross profit decreased by 44% to $8,385,588 in the first nine
months of the fiscal year ending March 31, 2000 from $14,848,939 in the first
nine months of the prior year. During the first quarter of the fiscal year
ending March 31, 2000, the Company recorded a charge to write down inventory in
the amount of $2,767,560. This charge was offset by a reversal of a reserve of
$3,535,759 established in connection with termination of yew tree cultivation
agreements. During the third quarter of the fiscal year ending March 31, 2000,
the Company recorded a charge to write down inventory in the amount of
$2,940,000. This charge was partially offset by a reversal of a reserve of
$459,000 established in connection with the discontinuation of paclitaxel. These
write downs occurred because of market price reductions for both botanical raw
materials and extracts.
Excluding the impact of the above referenced items, the gross profit percentage
of 15% in the nine months ended January 31, 2000 has deteriorated from the gross
profit percentage of 17% for the same period in the prior year. While unit sales
of herbal extracts have increased over the prior year, prices have decreased due
to the intense competition in supplying the dietary supplement market, thus
reducing the net gross profit percentage.
OPERATING EXPENSES. Operating expenses in the nine months ended January 31, 2000
include a first quarter charge of $814,000 related to post-merger severance
costs, asset abandonment and reserves for leases on obsolete equipment.
Additionally, operating expenses in the third quarter of the current year
include a charge of $650,000 recorded in connection with the closure of one of
Wilcox's facilities. Excluding the impact of these charges, operating expenses
decreased by 8% to $13,687,299 in the nine months ended January 31, 2000 from
$14,812,021 in the same period in the prior year. This decrease primarily
results from a reduction of general and administrative expenses.
INTEREST INCOME/EXPENSE. Interest expense increased by 26% to $1,684,426 in the
nine months ended January 31, 2000 from $1,335,203 in the same period in the
prior year. The increase in interest expense is due to the increased debt
carried during the current year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
GENERAL. Total cash and cash equivalents were $483,398 at January 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 nine months ended January 31, 2000
was $308,592. This is primarily the result of a net loss of $11,820,170, offset
by non-cash expenses of $4,852,471, and changes in working capital of
$7,276,291.
Cash used in investing activities is comprised of capital expenditures of
$2,071,386, offset by a reduction in restricted cash of $567,032.
Cash provided by financing activities relates primarily to net funds provided in
connection with the Company's Credit Facility.
As of January 31, 2000, the Company was not in compliance with certain financial
covenants in the Credit Facility. See Note 3 to the Financial Statements.
- --------------------------------------------------------------------------------
Page 12 of 16
<PAGE>
As of January 31, 2000, the Company's borrowing base eligibility under the
Credit Facility totaled $27,310,000, which resulted in available additional
borrowings of $593,581. As the borrowing base is computed on a monthly basis,
future borrowing availability is contingent upon eligible accounts receivable
and inventory levels.
The Company expects to meet its liquidity requirements through cash flow from
operations and, if the Bank agrees to an amendment of the financial covenants
under the Credit Facility (see Note 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.
WORKING CAPITAL. Working capital as of January 31, 2000 was $11,886,640 as
compared to $10,715,970 as of April 30, 1999. The increase is primarily
attributable to changes in current assets and liabilities related to the merger.
These increases have been offset by current year inventory write-downs and
operating losses.
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 Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Based on these factors, Management
increased the valuation allowance on its deferred tax assets by an additional
$3,524,474 to reduce the deferred tax asset balance to zero. At January 31,
2000, the company had a valuation allowance of approximately $18.5 million.
Although the deferred income taxes have been 100% reserved for, the reserve may
be reversed and a related benefit will be recorded in the future when and if the
assets are deemed realizable.
BACKLOG. Backlog of unfilled sales orders was $4,500,000 as of January 31, 2000,
compared to $1,600,000 as of April 30, 1998. Backlog consists of unfilled sales
orders for Natural Products.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the area of changes in United States interest rates.
These exposures are directly related to the Company's fixed and variable rate
borrowings used to fund its operations. 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 January 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 January 31, 2000, $3,716,419 was outstanding with an interest
rate of 8.25% (prime less 0.25%), and $23,000,000 was outstanding with an
interest rate of 8.07% (LIBOR plus 1.95%). 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 could be significantly higher. For
example, if the interest rate on the Company's line of credit had been 2% higher
for its quarter ended January 31, 2000, the Company would have incurred
additional interest expense of approximately $135,000, with an associated $.03
increase in the per share loss for the quarter. Therefore, the
- --------------------------------------------------------------------------------
Page 13 of 16
<PAGE>
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
or superior to those available under its current lending agreement.
YEAR 2000 COMPLIANCE
- --------------------
The "Year 2000 Problem" is defined as the inability of a computer or other
device to perform properly because it does not interpret date information
correctly. It is believed that cases of misinterpretation might result from
computer hardware, firmware or software using only two digits to identify year
information, and therefore not being able to distinguish the year 1900 from the
year 2000. However, other date-related misinterpretations may also occur,
including one, which could occur when the date February 29, 2000 is processed.
Also for purposes of this statement "Year 2000 Compliant" means that the
performance or functionality of a device (including software) is not affected by
dates prior to, during or after the Year 2000.
In order to minimize or eliminate the effect of the Year 2000 Problem on
Hauser's business systems and applications, the Company has identified,
evaluated, implemented and tested changes to computer systems, applications and
software necessary to achieve 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-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.
The Company is not in compliance with certain financial
covenants in the Credit Facility. The Company is currently discussing with the
Bank an amendment of the financial covenants in the Credit Facility. The Company
is also in discussions with Zatpack, Inc. regarding the sale of debt subordinate
to the Credit Facility. There can be no assurance that the Company will reach
agreement either with the Bank or with Zatpack, Inc. If the Bank does not agree
to the financial covenant amendment, the debt under the Credit Facility could
become payable in full prior to maturity.
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
None
(b) Reports on Form 8-K
(1) Report on Form 8-K dated December 14, 1999.
(1) Report on Form 8-K dated January 14, 2000.
- --------------------------------------------------------------------------------
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.
/s/ Volker Wypyszyk
Date: March 15, 2000 ------------------------------
Volker Wypyszyk
President and Chief Executive Officer
/s/ Ralph L. Heimann
Date: March 15, 2000 ------------------------------
Ralph L. Heimann
Chief Financial Officer and Treasurer
- --------------------------------------------------------------------------------
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000773723
<NAME> HAUSER, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAY-1-1999
<PERIOD-END> JAN-31-2000
<EXCHANGE-RATE> 1
<CASH> 483,398
<SECURITIES> 0
<RECEIVABLES> 21,371,976
<ALLOWANCES> 807,983
<INVENTORY> 28,258,345
<CURRENT-ASSETS> 1,054,397
<PP&E> 40,094,048
<DEPRECIATION> 23,140,103
<TOTAL-ASSETS> 93,045,231
<CURRENT-LIABILITIES> 38,473,493
<BONDS> 0
0
0
<COMMON> 4,812
<OTHER-SE> 54,388,254
<TOTAL-LIABILITY-AND-EQUITY> 93,045,231
<SALES> 67,066,327
<TOTAL-REVENUES> 67,066,327
<CGS> 58,160,351
<TOTAL-COSTS> 59,873,152
<OTHER-EXPENSES> 14,009,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,420,235
<INCOME-PRETAX> (8,247,097)
<INCOME-TAX> 3,573,073
<INCOME-CONTINUING> (11,820,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,820,170)
<EPS-BASIC> (2.75)
<EPS-DILUTED> (2.75)
</TABLE>
