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 SEPTEMBER 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 4,886,836
------------------------------- --------------------------------------
Class Outstanding at September 30, 2000
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three and six months ended September 30, 2000 and 1999................................1
Consolidated Balance Sheets (Unaudited) -
September 30, 2000 and March 31, 2000.................................................2
Consolidated Statements of Cash Flows (Unaudited) -
Six months ended September 30, 2000 and 1999..........................................3
Notes to Consolidated Financial Statements...............................................4-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................11-16
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................17
Item 2. Changes in Securities....................................................................17
Item 3. Defaults Upon Senior Securities..........................................................17
Item 4. Submission of Matters to a Vote of Security Holders......................................17
Item 5. Other Information........................................................................17
Item 6. Exhibits and Reports on Form 8-K.........................................................17-18
SIGNATURE PAGE....................................................................................19
</TABLE>
<PAGE>
HAUSER, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
----------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, Six months ended September 30,
------------------------------------------ ---------------------------------------------
2000 1999 2000 1999
-------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
REVENUES:
Natural products $ 4,536,044 $ 8,282,531 $ 11,494,177 $ 13,040,858
Fine chemicals 8,866,833 8,091,572 18,980,700 10,336,412
Technical services 3,702,825 4,396,871 7,967,594 8,234,975
Pharmaceuticals 265,400 6,612,444 668,270 9,764,980
-------------------- ------------------- -------------------- ----------------------
Total revenues 17,371,102 27,383,418 39,110,741 41,377,225
-------------------- ------------------- -------------------- ----------------------
COST OF REVENUES:
Natural products 4,621,224 7,556,574 11,702,753 12,268,216
Fine chemicals 7,456,275 6,699,462 16,540,291 8,626,554
Technical services 3,401,772 3,204,915 6,747,745 6,433,921
Pharmaceuticals - 6,612,444 - 9,764,980
Other cost of revenues - (768,199) - (768,199)
-------------------- ------------------- -------------------- ----------------------
Total cost of revenues 15,479,271 23,305,196 34,990,789 36,325,472
-------------------- ------------------- -------------------- ----------------------
GROSS PROFIT 1,891,831 4,078,222 4,119,952 5,051,753
-------------------- ------------------- -------------------- ----------------------
OPERATING EXPENSES:
Research and development 776,143 167,876 1,309,400 468,358
Sales and marketing 1,240,721 1,456,881 2,088,720 2,187,976
General and administrative 2,298,953 2,802,043 5,129,505 4,684,531
Merger related costs - 814,000 - 814,000
-------------------- ------------------- -------------------- ----------------------
Total operating expenses 4,315,817 5,240,800 8,527,625 8,154,865
-------------------- ------------------- -------------------- ----------------------
LOSS FROM OPERATIONS (2,423,986) (1,162,578) (4,407,673) (3,103,112)
-------------------- ------------------- -------------------- ----------------------
OTHER INCOME (EXPENSE):
Interest and other income 10,537 37,293 27,690 66,271
Interest expense (631,226) (613,533) (1,218,676) (802,504)
Net gain (loss) from sale of assets (28,904) - 601,193 -
-------------------- ------------------- -------------------- ----------------------
Total other (expense) income (649,593) (576,240) (589,793) (736,233)
-------------------- ------------------- -------------------- ----------------------
LOSS BEFORE INCOME TAX (3,073,579) (1,738,818) (4,997,466) (3,839,345)
INCOME TAX EXPENSE (BENEFIT) - - - -
-------------------- ------------------- -------------------- ----------------------
NET LOSS $ (3,073,579) $ (1,738,818) $ (4,997,466) $ (3,839,345)
==================== =================== ==================== ======================
LOSS PER SHARE: BASIC AND DILUTED $ (0.63) $ (0.34) $ (1.03) $ (0.92)
==================== =================== ==================== ======================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 4,874,606 5,133,510 4,855,366 4,157,554
==================== =================== ==================== ======================
</TABLE>
See notes to consolidated financial statements.
Page 1 of 19
<PAGE>
<TABLE>
<CAPTION>
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS-UNAUDITED
----------------------------------------------------------------------------------------------------------------------------
September 30, March 31,
2000 2000
------------------- ---------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,214,717 $ 1,272,875
Accounts receivable, less allowance for doubtful accounts:
September 30, 2000, $810,674; March 31, 2000, $976,101 15,594,682 17,052,701
Inventory, at cost or market 17,169,191 22,631,914
Prepaid expenses and other 1,288,121 611,897
------------------- ---------------------
Total current assets 36,266,711 41,569,387
------------------- ---------------------
PROPERTY AND EQUIPMENT:
Land and buildings 7,791,228 8,753,733
Laboratory and processing equipment 25,078,646 25,879,426
Furniture and fixtures 4,292,809 4,289,140
------------------- ---------------------
Total property and equipment 37,162,683 38,922,299
Accumulated depreciation and amortization (22,945,947) (23,237,393)
------------------- ---------------------
Net property and equipment 14,216,736 15,684,906
------------------- ---------------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
September 30, 2000 $2,306,274; March 31, 2000, $1,742,698 17,992,666 18,556,242
Deposits and other 581,319 249,106
------------------- ---------------------
$ 69,057,432 $ 76,059,641
=================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,285,811 $ 4,067,144
Current portion of long-term debt 24,883,311 26,377,638
Accrued salaries and benefits 1,534,866 2,391,576
Deposits 697,364 916,870
Note payable to related party 969,250 -
Accrued exit costs 1,037,981 1,987,214
Other current liabilities 1,612,029 2,074,825
------------------- ---------------------
Total current liabilities 36,020,612 37,815,267
------------------- ---------------------
LONG-TERM DEBT 123,699 418,832
------------------- ---------------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized; shares issued
and outstanding: September 30, 2000, 4,886,836; March 31, 2000, 4,811,585 4,887 4,812
Additional paid-in capital 94,337,720 94,252,750
Accumulated deficit (61,429,486) (56,432,020)
------------------- ---------------------
32,913,121 37,825,542
------------------- ---------------------
$ 69,057,432 $ 76,059,641
=================== =====================
</TABLE>
See notes to consolidated financial statements.
Page 2 of 19
<PAGE>
<TABLE>
<CAPTION>
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
----------------------------------------------------------------------------------------------------------
Six months ended September 30,
-----------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 1,061,993 $ (2,385,835)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (983,986) (656,074)
Proceeds from sale of assets 1,599,000 -
Net change in restricted cash - 567,032
----------------- -----------------
Net cash provided by (used in) investing activities 615,014 (89,042)
----------------- -----------------
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 - 5,686,674
Proceeds from related party note payable 969,250 -
Repayments of long-term debt (541,011) (746,387)
Proceeds from issuance of common stock 85,045 -
----------------- -----------------
Net cash used in financing activities (735,165) (1,059,713)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 941,842 (3,534,590)
Cash and cash equivalents, beginning of period 1,272,875 4,117,972
----------------- -----------------
Cash and cash equivalents, end of period $ 2,214,717 $ 583,382
================= =================
</TABLE>
See notes to consolidated financial statements.
Page 3 of 19
<PAGE>
HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2000 AND
MARCH 31, 2000 AND FOR THE THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 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 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 its wholly owned subsidiary 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 and ZBI
collectively owned 49.0%. On December 15, 1999 the number of shares that were
issued to ZGNA and ZBI was reduced to 2,193,568 (45% of shares outstanding at
September 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 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; 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. In September 2000, the Credit
Facility was amended to eliminate defaults and to revise the financial
covenants. In addition, the $35 million line of credit was reduced to $24.5
million and is further reduced to $21.0 million effective October 31, 2000, and
$17.0 million effective March 31, 2001. The amended Credit Facility bears
interest at the prime borrowing rate and expires on September 30,
Page 4 of 19
<PAGE>
2001. All past covenant violations of the Company's Credit Facility were also
waived by the bank in October 2000 and the Company is now in compliance with the
terms of the amended Credit Facility.
Also in October 2000, as a condition to Wells Fargo entering into the amendment
to the Credit Facility, the Company sold a $3 million Subordinated Promissory
Note (the "Note") to Zatpack, Inc. ("Zatpack"). ZGNA is a wholly owned
subsidiary of Zatpack. ZGNA and ZBI collectively own 45% of the outstanding
stock of the Company. The Note is subordinate to the Credit Facility, will
accrue interest at a rate of 6.5%, requires no principle or interest payments
until its maturity date of October 2003, and has five-year warrants attached.
The warrants permit Zatpack to purchase 992,789 shares of Hauser's common stock
at a price of approximately $.5855 per share which was the fair market value of
the company's common stock on the date of issuance. Approximately $2 million of
the proceeds of the sale of the note were used to pay down the line of credit.
Management believes that the restructured Credit Facility and Note will enable
the Company to continue operations during fiscal 2001.
On November 1, 2000, the Company announced that its shares of Common Stock were
officially delisted from the Nasdaq National Market. The delisting is based upon
the Company's lack of compliance with the Nasdaq National Market's listing
requirements, which call for a minimum bid price of $1.00 and a minimum public
float value of $5 million. The Company's common stock is now eligible for
trading in the over-the-counter market and quotation on the OTC Bulletin Board
("OTCBB"). The OTCBB is a regulated quotation service that displays real-time
quotes and last-sale price and volume information in over the counter ("OTC")
equity securities.
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 September 30, Six months ended September 30,
------------------------------------------ ---------------------------------------------
2000 1999 2000 1999
-------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ 17,105,702 $ 20,770,974 $ 38,442,471 $ 44,921,857
Loss From Operations (2,689,386) (4,754,514) (5,072,811) (6,242,821)
Net Loss $ (3,338,979) $ (5,330,754) $ (5,665,736) $ (7,292,157)
Basic and diluted loss per share $ (0.68) $ (1.04) $ (1.17) $ (1.75)
</TABLE>
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 and
Page 5 of 19
<PAGE>
from other sales of paclitaxel, the Company has received $11,708,557 through
September 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 September 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 purchased by Wilcox
during fiscal 2000.
CONSOLIDATION OF SHUSTER LABORATORIES ("SHUSTER")
In March 2000, the Company consolidated its technical services operations in
order to gain operational efficiencies. As part of this consolidation, the
Company ceased 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 September 30, 2000:
<TABLE>
<CAPTION>
Reserve Balance Expenses Paid Reserve Balance
March 31, 2000 April 1-September 30, 2000 September 30, 2000
------------------ -------------------------- ------------------
<S> <C> <C> <C>
Lease termination $ 1,467,455 $ (599,530) $ 867,925
Employee severance 194,000 (194,000) -
Paclitaxel 325,759 (155,703) 170,056
------------------ -------------------------- ------------------
Total $ 1,987,214 $ (949,233) $ 1,037,981
================== ========================== ==================
</TABLE>
Management believes that the reserve balance at September 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.
In October 2000, the Company contributed its laboratory assets operated by its
Hauser Laboratories division to the Company's newly formed, wholly owned
subsidiary, Hauser Technical Services, Inc. ("HTS"). Simultaneous with the asset
contribution, the Company merged Shuster with and into HTS. Currently, the
Company's laboratory and technical services business is owned and operated by
HTS.
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 September 30,
2000, and the results of its operations and its cash flows for the three and six
month periods ended September 30, 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
2000 amounts have been reclassified to conform to the fiscal 2001 presentation.
Page 6 of 19
<PAGE>
BASIS OF CONSOLIDATION - The accompanying financial statements include the
accounts of Hauser and its wholly owned subsidiaries: Botanicals International
Extracts, Inc. ("BIE"), Shuster, Hauser Technical Services, Inc. ("HTS"), 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.
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>
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Raw materials and supplies $ 2,097,070 $ 4,197,169
Work in process 2,764,515 2,856,394
Finished goods 12,307,606 15,578,351
------------ ------------
Total inventories $ 17,169,191 $ 22,631,914
============ ============
</TABLE>
4. DEBT
Notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
Line of credit $ 24,545,271 $ 25,793,720
Note payable to related party 969,250 --
Capital leases 461,739 1,002,750
------------ ------------
Total 25,976,260 26,796,470
Less current portion 25,852,561 26,377,638
------------ ------------
Long term debt $ 123,699 $ 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.
Page 7 of 19
<PAGE>
In October 2000, the Credit Facility was amended to eliminate defaults and to
revise the financial covenants. In addition, the $35 million line of credit was
reduced to $24.5 million, and is further reduced to $21.0 million effective
October 31, 2000, and $17.0 million effective March 31, 2001. The amended Credit
Facility bears interest at the prime borrowing rate and expires on September 31,
2001. At September 30, 2000 $24,545,271 was outstanding with an interest rate of
9.25% (the Bank's prime borrowing rate).
Also in October 2000, as a condition of Wells Fargo to execute the amended
Credit Facility, the Company sold a $3 million Subordinated Promissory Note (the
"Note") to Zatpack, Inc. ("Zatpack"). ZGNA is a wholly owned subsidiary of
Zatpack. ZGNA and its wholly owned subsidiary ZBI, collectively own 45% of the
outstanding stock of the Company. The Note is subordinate to the Credit
Facility, will accrue interest at a rate of 6.5%, is payable in three years and
has five-year warrants attached. The warrants permit Zatpack to purchase 992,789
shares of Hauser's common stock at a price of $.5855 per share. The proceeds of
the sale of the Note were used by the Company to repay a portion of the line of
credit outstanding under the Credit Facility. During June 2000, the Company
received an advance of $969,250 against the purchase of the Note.
Subsequent to amending the Credit Facility and repaying a portion of the Credit
Facility with the proceeds from the sale of the Note, the Company was in
compliance with the financial covenants and borrowing base limitations of the
Credit Facility, as amended.
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 and
six months ended September 30, 2000, and 1999, all options were excluded from
the calculation of diluted loss per share since the result would have been
antidilutive.
6. RELATED PARTY TRANSACTIONS
The Company sells botanical raw materials to ZBI. During the six months ended
September 30, 2000 and 1999, sales to ZBI totaled $2,636,659 and $1,505,523,
respectively. The related trade accounts receivable due from ZBI totaled
$2,384,238 and $1,131 at September 30, 2000 and March 31, 2000, respectively.
In October 2000, the Company sold the Note to Zatpack, Inc. (See Note 4 to the
Consolidated Financial Statements.)
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 customers. Included in corporate and other
Page 8 of 19
<PAGE>
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 September 30, 2000
-------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,536,044 $ 3,702,825 $ 8,866,833 $ 265,400 $ 17,371,102
Cost of revenues 4,621,224 3,401,772 7,456,275 -- 15,479,271
Gross profit (loss) (85,180) 301,053 1,410,558 265,400 1,891,831
Operating expenses 1,422,790 1,057,051 1,023,803 812,173 4,315,817
(Loss) income from operations (1,507,970) (755,998) 386,755 (546,773) (2,423,986)
Net income (loss) $ (1,951,553) $ (815,079) $ 253,668 $ (560,615) $ (3,073,579)
<CAPTION>
Three Months Ended September 30, 1999
-------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 8,282,531 $ 4,396,871 $ 8,091,572 $ 6,612,444 $ 27,383,418
Cost of revenues 10,380,311 3,204,915 6,699,462 3,020,508 23,305,196
Gross profit (loss) (2,097,780) 1,191,956 1,392,110 3,591,936 4,078,222
Operating expenses 1,441,179 1,220,106 983,141 1,596,374 5,240,800
(Loss) income from operations (3,538,959) (28,150) 408,969 1,995,562 (1,162,578)
Net income (loss) $ (4,104,470) $ (6,185) $ 371,073 $ 2,000,764 $ (1,738,818)
<CAPTION>
Six Months Ended September 30, 2000
-------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 11,494,177 $ 7,967,594 $ 18,980,700 $ 668,270 $ 39,110,741
Cost of revenues 11,702,753 6,747,745 16,540,291 -- 34,990,789
Gross profit (loss) (208,576) 1,219,849 2,440,409 668,270 4,119,952
Operating expenses 2,831,937 2,284,215 1,606,054 1,805,419 8,527,625
(Loss) income from operations (3,040,513) (1,064,366) 834,355 (1,137,149) (4,407,673)
Net income (loss) $ (3,876,708) $ (1,149,612) $ 647,709 $ (618,855) $ (4,997,466)
<CAPTION>
Six Months Ended September 30, 1999
-------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 13,040,858 $ 8,234,975 $ 10,336,412 $ 9,764,980 $ 41,377,225
Cost of revenues 15,031,518 6,433,921 8,626,554 6,233,479 36,325,472
Gross profit (loss) (1,990,660) 1,801,054 1,709,858 3,531,501 5,051,753
Operating expenses 2,437,902 2,208,805 1,165,524 2,342,634 8,154,865
(Loss) income from operations (4,428,562) (407,751) 544,334 1,188,867 (3,103,112)
Net income (loss) $ (5,171,128) $ (383,103) $ 498,280 $ 1,216,606 $ (3,839,345)
</TABLE>
See notes to consolidated financial statements.
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 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.
Page 9 of 19
<PAGE>
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.
9. SUBSEQUENT EVENT
In October 2000, the Company sold a parcel of land located in Longmont, CO. The
net proceeds of $1,898,126 were used to repay a portion of the line of credit
outstanding under the Credit Facility. Additionally, a gain of $1,032,489 was
recorded in connection with the sale.
Page 10 of 19
<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 pro forma 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 September 30, Six months ended September 30,
------------------------------------------ ---------------------------------------------
2000 1999 2000 1999
-------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ 17,105,702 $ 20,770,974 $ 38,442,471 $ 44,921,857
Cost of Revenues 15,479,271 20,284,688 34,990,789 41,130,042
-------------------- ------------------- -------------------- ----------------------
Gross Profit 1,626,431 486,286 3,451,682 3,791,815
Operating Expenses 4,315,817 5,240,800 8,524,493 10,034,636
-------------------- ------------------- -------------------- ----------------------
Loss from Operations (2,689,386) (4,754,514) (5,072,811) (6,242,821)
Net Loss $ (3,338,979) $ (5,330,754) $ (5,665,736) $ (7,292,157)
==================== =================== ==================== ======================
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999:
REVENUES. The Company's revenues by product and service are as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
REVENUES:
Natural Products $ 4,536,044 $ 8,282,531
Technical Services 3,702,825 4,396,871
Fine Chemicals and Excipients 8,866,833 8,091,572
---------------- ---------------
$ 17,105,702 $ 20,770,974
================ ===============
</TABLE>
Total revenues decreased by 18% to $17,105,702 in the second quarter of fiscal
2001 from $20,770,974 in the second quarter of the prior fiscal year.
Page 11 of 19
<PAGE>
Natural Product revenues decreased by 45% to $4,536,044 in the second quarter of
fiscal 2001 from $8,282,531 in the second quarter of the prior fiscal year. The
decrease was due to the world-wide oversupply of herbal extracts for
manufacturer's of dietary supplements, which has resulted in depressed prices
for herbal extracts.
Technical Service revenues decreased by 16% to $3,702,825 in the second quarter
of fiscal 2001 from $4,396,871 in the second quarter of the prior fiscal year.
The decrease was due to a lack of sales primarily as a result of the delay in
entering into new contracts and starting new projects that would be adversely
impacted or interrupted by the move of the Technical Services business to a new
facility. In addition, a slow down of growth in the dietary supplement industry
also contributed to such a decrease.
Fine Chemical and Excipient revenues increased by 10% to $8,866,833 in the
second quarter of fiscal 2001 from $8,091,572 in the second 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
$1,921,787 and $2,844,763 during the quarters ended September 30, 2000 and 1999,
respectively.
GROSS PROFIT. Gross profit increased by 234% to $1,626,431 in the second quarter
of fiscal 2001 from $486,286 in the second quarter of the prior year. During the
second quarter of the prior year, the Company recorded a charge of $2,767,560 in
order to write-down inventories to the lower of cost or market. No such charges
were recorded during the second quarter of fiscal 2001. Excluding the impact of
such charge, gross profit decreased by 50% from the prior year. Additionally,
excluding the impact of the inventory write-downs, the gross profit percentage
of 10% in the quarter ended September 30, 2000 has deteriorated from the gross
profit percentage of 16% 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 18% to $4,315,817 in the
quarter ended September 30, 2000 from $5,240,800 in the same period in the prior
year. During the second quarter of the prior year, the Company recorded a charge
of $814,000 in connection with post merger severance costs, asset abandonment
and reserves for leases on obsolete equipment. Excluding the impact of the above
referenced charge, operating expenses decreased by 3% from the prior year. This
decrease 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 8% to $620,689 in
the quarter ended September 30, 2000 from $576,240 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.
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 2000 TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1999:
REVENUES. The Company's revenues by product and service are as follows:
Page 12 of 19
<PAGE>
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
REVENUES:
Natural Products $ 11,494,177 $ 21,072,074
Technical Services 7,967,594 8,234,975
Fine Chemicals and Excipients 18,980,700 15,614,808
---------------- ---------------
$ 38,442,471 $ 44,921,857
================ ===============
</TABLE>
Total revenues decreased by 14% to $38,442,471 in the six months ended September
2000 from $44,921,857 in the same period of the prior fiscal year.
Natural Product revenues decreased by 45% to $11,494,177 in the six months ended
September 2000 from $21,072,074 in the same period of the prior fiscal year. The
decrease was due to the world-wide oversupply of herbal extracts for
manufacturer's of dietary supplements, which has resulted in depressed prices
for herbal extracts.
Technical Service revenues decreased by 3% to $7,967,594 in the six months ended
September 2000 from $8,234,975 in the same period of the prior fiscal year. The
decrease was due to a lack of sales primarily as a result of the delay in
entering into new contracts and starting new projects that would be adversely
impacted or interrupted by the move of the Technical Services business to a new
facility. In addition, a slow down of growth in the dietary supplement industry
also contributed to such a decrease.
Fine Chemical and Excipient revenues increased by 22% to $18,980,700 in the six
months ended September 2000 from $15,614,808 in the same period 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
$4,442,608 and $5,192,984 during the six months ended September 30, 2000 and
1999, respectively.
GROSS PROFIT. Gross profit decreased by 9% to $3,451,682 in the six months ended
September 2000 from $3,791,815 in the same period of prior fiscal year. During
the second quarter of the prior year, the Company recorded a charge of
$2,767,560 in order to write-down inventories to the lower of cost or market. No
such charges were recorded during the second quarter of fiscal 2001. Excluding
the impact of such charge, gross profit for the six months ended September 2000
decreased by 47% from the prior fiscal year. Additionally, excluding the impact
of the inventory write-downs, the gross profit percentage of 9% in the six
months ended September 2000 has deteriorated from the gross profit percentage of
15% 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 15% to $8,524,493 in the six
months ended September 2000 from $10,034,636 in the same period of the prior
fiscal year. During the second quarter of the prior year, the Company recorded a
charge of $814,000 in connection with post merger severance costs, asset
abandonment and reserves for leases on obsolete equipment. Excluding the impact
of the above referenced charge, operating expenses decreased by 8% from the
prior year. This
Page 13 of 19
<PAGE>
decrease 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 62% to $1,190,986 in
the six months ended September 2000 from $736,233 in the same period of the
prior fiscal 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 $2,214,717 at September 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 provided by operating activities for the six months ended September 30,
2000 was $1,061,993. This amount is comprised of a net loss of $4,997,466,
offset primarily by non-cash expenditures of $4,413,050, and changes in working
capital of $4,080,837.
Cash provided by investing activities is comprised of capital expenditures of
$983,986, and proceeds from sale of assets of $1,599,000.
Cash used in financing activities is comprised primarily of changes in the
Company's bank line of credit, repayments of long-term debt and proceeds from a
note payable to Zatpack, Inc.
In September 2000, the Credit Facility was amended. In accordance with the terms
of the amendment, the $35 million line of credit commitment has been reduced to
$24.5 million, to $21.0 million effective October 31, 2000, and $17.0 million
effective March 31, 2001. The Credit Facility bears interest at the prime
borrowing rate and expires on September 30, 2001. All past covenant violations
of the Company's Credit Facility were waived by the bank in October 2000 and the
Company is currently in compliance with the terms of the amended Credit
Facility.
Also in October 2000, the Company sold a $3 million Note to Zatpack. The Note is
subordinate to the Credit Facility, will accrue interest at a rate of 6.5%, is
payable in three years and has five-year warrants attached. The warrants permit
Zatpack to purchase 992,789 shares of Hauser's common stock at a price of
approximately $.5855 per share. The proceeds of the sale of the note were used
to pay down the line of credit outstanding under the Credit Facility.
The Company expects to meet its liquidity requirements through cash flows from
operations and the Credit Facility (see Notes 1 and 4 to the Financial
Statements). Management believes that current cash reserves, proceeds from the
sale of the Note to 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.
WORKING CAPITAL. Working capital as of September 30, 2000 was $246,099 as
compared to $3,754,120 as of March 31, 2000.
Page 14 of 19
<PAGE>
INCOME TAXES. The Company has a net deferred tax asset of approximately
$23,500,000 that has been fully reserved for at September 30, 2000. Included in
deferred tax assets at September 30, 2000, are federal net operating loss carry
forwards of approximately $44,500,000, 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 $4,200,00 as of September 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.
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 September 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 is therefore affected by changes in market interest
rates. At September 30, 2000, $24,545,271 was outstanding with an interest rate
of 9.25% (the bank's prime borrowing rate). 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 September 30, 2000, the Company would have incurred
additional interest expense of approximately $123,000, 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
Page 15 of 19
<PAGE>
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 16 of 19
<PAGE>
PART 2.
Item 1 Legal Proceedings.
In March 2000, the United States attorney for the District of New
Jersey informed ZetaPharm of a possible civil prosecution based on allegations
by the Drug Enforcement Administration (the "DEA") that in 1997 ZetaPharm
imported, distributed, and purchased domestically the chemicals pseudoephedrine
and ephedrine without registrations required under federal law. No prosecution
has been commenced, and ZetaPharm has fully cooperated with the investigation.
Currently, ZetaPharm is undergoing an administrative inspection by the DEA,
which may be related to the investigation.
A related criminal prosecution against ZetaPharm in California, which
alleged that ZetaPharm had received pseudoephedrine shipments in California in
contravention of procedures set forth in the California Health and Safety Code,
reached a pre-trial resolution. ZetaPharm plead guilty to a misdemeanor under
California law in exchange for a dismissal of a misdemeanor charge against an
employee of ZetaPharm.
Item 2 Changes in Securities.
On October 11, 2000, as a condition of Wells Fargo to execute the
amended Credit Facility, the Company sold a $3 million Note to Zatpack. The Note
is subordinate to the Credit Facility, will accrue interest at a rate of 6.5%,
is payable in three years and has five-year warrants attached. The warrants are
immediately exercisable and permit Zatpack to purchase 992,789 shares of
Hauser's common stock at a price of $.5855 per share. The proceeds of the sale
were used by the Company to repay a portion of the line of credit outstanding
under the Credit Facility.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
On October 12, 2000, the Company announced that it had amended its
Credit Facility with Wells Fargo and completed the sale of a $3 million Note to
Zatpack.
On October 31, 2000, the Company announced that its shares of Common
Stock would be officially delisted from the Nasdaq National Market effective
November 1, 2000. The delisting was based upon the Company's lack of compliance
with the Nasdaq National Market's listing requirements which call for a minimum
bid price of $1.00 and a minimum public float value of $5 million.
On November 2, 2000, the Company announced that Volker Wypyszyk, former
President and Chief Executive Officer of Hauser, Inc., requested the Board of
Directors relieve him of his duties as Chief Executive Officer so he could
concentrate on restoring the Natural Products Division of the Company to
profitability. The Company also announced that Kenneth C. Cleveland was named
President and Chief Executive Officer of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Waiver and Amendment No. 2 to the Credit Agreement,
dated September 1, 2000, by and between the Company,
Wells Fargo and certain other parties.
10.2 General Release, dated October 11, 2000, by and
between the Company, Wells Fargo and certain other
parties.
Page 17 of 19
<PAGE>
10.3 Amendment No. 1 to the Security Agreement, dated
September 1, 2000, by and between the
Company, Wells Fargo and certain other parties.
10.4 Amendment No. 1 to the Pledge and Security Agreement,
dated September 1, 2000, by and between the Company,
Wells Fargo and certain other parties.
10.5 Form of Borrowing Base Certificate
10.6 Waiver and Amendment No. 3 to the Credit Agreement,
dated November 13, 2000, by an between the Company,
Wells Fargo and certain other parties.
10.7 Subordination Agreement, dated as of October 11, by
and among the Company, Zatpack & Wells Fargo.
Exhibit 27 Financial Data Schedule
99.1 Press release announcing the amendment to the Credit
Facility and the sale of the Note to Zatpack.
99.2 Press release announcing delisting of the Company's
common stock from the Nasdaq National Market.
99.3 Press release announcing the Company's new chief
executive officer.
(b) Reports on Form 8-K
None
Page 18 of 19
<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: November 14, 2000 /S/ KENNETH C. CLEVELAND
--------------------------------------------
Kenneth C. Cleveland
Chief Executive Officer
a principal financial officer
