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 DECEMBER 31, 2000 COMMISSION FILE NO. 0-17174
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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:
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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 4,959,515
---------------------------------- -----------------------------------
Class Outstanding at December 31, 2000
Part 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations (Unaudited) -
Three and nine months ended December 31, 2000 and 1999..........1
Consolidated Balance Sheets (Unaudited) -
December 31, 2000 and March 31, 2000............................2
Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended December 31, 2000 and 1999....................3
Notes to Consolidated Financial Statements.........................4-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................12-17
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 2. Changes in Securities..............................................18
Item 3. Defaults Upon Senior Securities....................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
Item 5. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18-19
SIGNATURE PAGE..............................................................20
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HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
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Three months ended December 31, Nine months ended December 31,
---------------------------------------- ----------------------------------------
2000 1999 2000 1999
------------------- ------------------ ------------------- -------------------
REVENUES:
Natural products $ 3,865,134 $ 9,120,565 $ 15,359,311 $22,161,423
Fine chemicals 5,319,660 8,319,806 24,300,360 18,557,207
Technical services 3,954,872 4,158,332 11,922,466 12,393,307
Pharmaceuticals - 1,434,675 668,270 9,758,355
------------------- ------------------ ------------------- -------------------
Total revenues 13,139,666 23,033,378 52,250,407 62,870,292
------------------- ------------------ ------------------- -------------------
COST OF REVENUES:
Natural products 3,708,946 7,613,951 15,411,699 19,882,167
Fine chemicals 4,528,482 6,853,764 21,068,773 15,381,307
Technical services 3,574,843 3,508,136 10,322,588 9,942,057
Pharmaceuticals - 1,452,128 - 9,775,808
Other costs of revenues 3,100,000 - 3,100,000 (768,199)
------------------- ------------------ ------------------- -------------------
Total cost of revenues 14,912,271 19,427,979 49,903,060 54,213,140
------------------- ------------------ ------------------- -------------------
GROSS PROFIT (LOSS) (1,772,605) 3,605,399 2,347,347 8,657,152
------------------- ------------------ ------------------- -------------------
OPERATING EXPENSES:
Research and development 514,040 170,814 1,823,440 639,172
Sales and marketing 861,414 1,563,891 2,950,134 3,751,867
General and administrative 2,718,452 2,886,748 7,847,957 7,571,279
Merger related costs - - - 814,000
------------------- ------------------ ------------------- -------------------
Total operating expenses 4,093,906 4,621,453 12,621,531 12,776,318
------------------- ------------------ ------------------- -------------------
LOSS FROM OPERATIONS (5,866,511) (1,016,054) (10,274,184) (4,119,166)
------------------- ------------------ ------------------- -------------------
OTHER INCOME (EXPENSE):
Interest income 7,766 19,622 35,456 85,893
Interest expense (576,803) (543,521) (1,795,479) (1,346,025)
Other income and expense 250,000 (10,481) 250,000 (10,481)
Net gain from sale of assets 1,032,489 - 1,633,682 -
------------------- ------------------ ------------------- -------------------
Total other (expense) income 713,452 (534,380) 123,659 (1,270,613)
------------------- ------------------ ------------------- -------------------
LOSS BEFORE INCOME TAX (5,153,059) (1,550,434) (10,150,525) (5,389,779)
INCOME TAX EXPENSE (BENEFIT) - - - -
------------------- ------------------ ------------------- -------------------
NET LOSS $(5,153,059) $(1,550,434) $(10,150,525) $(5,389,779)
=================== ================== =================== ===================
LOSS PER SHARE: BASIC AND DILUTED $ (1.05) $ (0.31) $ (2.08) $ (1.21)
=================== ================== =================== ===================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC AND DILUTED 4,889,020 5,069,833 4,883,444 4,460,537
=================== ================== =================== ===================
See notes to consolidated financial statements.
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HAUSER, INC.
CONSOLIDATED BALANCE SHEETS-UNAUDITED
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December 31, March 31,
ASSETS 2000 2000
------
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $ 786,930 $ 1,272,875
Accounts receivable, less allowance for doubtful accounts:
December 31, 2000, $903,329; March 31, 2000, $976,101 12,560,948 17,052,701
Inventory, at cost or market 12,366,302 22,631,914
Prepaid expenses and other 1,501,453 611,897
-------------------- --------------------
Total current assets 27,215,633 41,569,387
-------------------- --------------------
PROPERTY AND EQUIPMENT:
Land and buildings 8,820,437 8,753,733
Laboratory and processing equipment 25,098,863 25,879,426
Furniture and fixtures 4,601,797 4,289,140
-------------------- --------------------
Total property and equipment 38,521,097 38,922,299
Accumulated depreciation and amortization (23,623,427) (23,237,393)
-------------------- --------------------
Net property and equipment 14,897,670 15,684,906
-------------------- --------------------
OTHER ASSETS:
Goodwill, less accumulated amortization:
December 31, 2000 $2,588,061; March 31, 2000, $1,742,698 17,710,879 18,556,242
Deposits and other 580,884 249,106
-------------------- --------------------
$ 60,405,066 $ 76,059,641
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,276,354 $ 4,067,144
Current portion of long-term debt 18,395,524 26,377,638
Accrued salaries and benefits 965,310 2,391,576
Deposits 723,219 916,870
Note payable to related party 2,675,283 -
Accrued exit costs 944,272 1,987,214
Other current liabilities 3,238,283 2,074,825
-------------------- --------------------
Total current liabilities 32,218,245 37,815,267
-------------------- --------------------
LONG-TERM DEBT 12,402 418,832
-------------------- --------------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized; shares issued
and outstanding: December 31, 2000, 4,959,515; March 31, 2000, 4,811,585 4,960 4,812
Additional paid-in capital 94,752,004 94,252,750
Accumulated deficit (66,582,545) (56,432,020)
-------------------- --------------------
28,174,419 37,825,542
-------------------- --------------------
$ 60,405,066 $ 76,059,641
==================== ====================
See notes to consolidated financial statements.
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HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
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Nine months ended December 31,
-----------------------------------
2000 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 4,512,117 $ 705,254
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,506,235) (1,254,763)
Proceeds from sale of assets 3,778,561 -
Net change in restricted cash - 567,032
----------------- -----------------
Net cash provided by (used in) investing activities 272,326 (687,731)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in bank line of credit - (6,000,000)
Net repayments of bank line of credit (7,741,039) -
Net proceeds from bank line of credit - 3,624,118
Proceeds from related party note payable 3,000,000 -
Repayments of long-term debt (674,514) (873,426)
Proceeds from issuance of common stock 145,165 -
----------------- -----------------
Net cash used in financing activities (5,270,388) (3,249,308)
----------------- -----------------
Net decrease in cash and cash equivalents (485,945) (3,231,785)
Cash and cash equivalents, beginning of period 1,272,875 4,117,972
----------------- -----------------
Cash and cash equivalents, end of period $ 786,930 $ 886,187
================= =================
See notes to consolidated financial statements.
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HAUSER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND MARCH
31, 2000 AND FOR THE THREE AND NINE MONTH PERIODS ENDED DECEMBER 31, 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 (44% of shares outstanding at
December 31, 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.
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 Laboratories with and into HTS.
Currently, the Company's laboratory and technical services business is owned and
operated by HTS.
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 December 2000, the Company announced its intention to sell HTS.
The sale will permit the Company to focus its resources on the production and
sale of bulk herbal extracts and nutritional supplements, including the
development of new products, and the distribution of fine chemicals to dietary
supplement manufacturers.
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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 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, was further reduced to $21.0 million effective October 31, 2000, and
will be reduced to $17.0 million effective March 31, 2001. The amended Credit
Facility bears interest at the prime borrowing rate and expires on September 30,
2001.
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. 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. Approximately $2 million of the proceeds of the
sale of the Note were used to pay down the line of credit.
Management believes that cash flow generated through operations, the
restructured Credit Facility and Note will enable the Company to continue
operations during fiscal 2001.
On November 1, 2000, the Company announced that the Common Stock was 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 traded in the over-the-counter market and
quoted 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.
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------------------- -----------------------------------------
2000 1999 2000 1999
------------------- ----------------- ----------------- ----------------
Revenues $13,139,666 $21,598,703 $ 51,582,137 $66,520,560
Loss from operations (5,866,511) (998,601) (10,942,454) (7,241,422)
Net loss $(5,153,059) $(1,532,981) $(10,821,927) $(8,825,138)
Basic and diluted loss per share $ (1.05) $ (0.31) $ (2.22) $ (1.81)
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
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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 from other sales of paclitaxel, the Company has
received $11,708,557 through December 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
December 31, 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 December 31, 2000:
Reserve Balance Expenses Paid Reserve Balance
March 31, 2000 April 1 - December 31, 2000 December 31, 2000
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Lease termination $1,467,455 $ (667,303) $800,152
Employee severance 194,000 (194,000) -
Paclitaxel 325,759 (181,639) 144,120
------------------ ----------------- -------------
Total $1,987,214 $(1,042,942) $944,272
================== ================= =============
Management believes that the reserve balance at December 31, 2000 is adequate to
cover remaining costs relating to the discontinuance of paclitaxel, the
liquidation of Wilcox and the closure of Shuster's Smyrna facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the Company's financial position as of December 31,
2000, and the results of its operations and its cash flows for the three and
nine month periods ended December 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
2000 amounts have been reclassified to conform to the fiscal 2001 presentation.
BASIS OF CONSOLIDATION - The accompanying financial statements include the
accounts of Hauser and its wholly owned subsidiaries: Botanicals International
Extracts, Inc. ("BIE"), HTS, Wilcox and
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ZetaPharm, Inc. ("ZetaPharm"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of these financial statements.
Actual results could differ from those estimates.
The Company has incurred significant losses from operations that it believes
will be curtailed by the results of the restructuring activities entered into in
fiscal 2000 and 2001. If the results of the restructuring activities are not as
effective as anticipated by management, or if market prices for the Company's
products do not recover as expected, it is possible that the Company will
recognize an impairment charge related to its $17.7 million goodwill balance in
the future. Further, the Company is evaluating the estimated remaining life of
its goodwill and it is also reasonably possible that the life will be shortened
in the near future due to the factors described above.
3. INVENTORIES
Raw material, work in process, and finished goods inventories, which include
costs of materials, direct labor and manufacturing overhead, are priced at the
lower of average cost or market. Write-downs for excess and obsolete inventories
are charged to expense in the period when conditions giving rise to the
write-downs are first recognized. The Company purchases raw material inventory
during harvest seasons, generally in the spring and fall. These purchases may
take place well in advance of scheduled production of finished product.
Inventories, at cost, are classified as follows:
December 31, March 31,
2000 2000
-------------------- -------------------
Raw materials and supplies $ 2,327,970 $ 4,197,169
Work in process 2,289,262 2,856,394
Finished goods 7,749,070 15,578,351
-------------------- -------------------
Total inventories $12,366,302 $22,631,914
==================== ===================
In December 2000, the Company recorded a charge of $3,100,000 in order to
write-down inventories to the lower of cost or market, and to reserve for excess
quantities on-hand.
4. DEBT
Notes payable and long-term debt consisted of the following:
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December 31, 2000 March 31, 2000
------------------ --------------
Line of credit $18,052,681 $25,793,720
Note payable to related party 2,675,283 -
Capital leases 355,245 1,002,750
------------------ --------------
Total 21,083,209 26,796,470
Less current portion 21,070,807 26,377,638
------------------ --------------
Long term debt $ 12,402 $ 418,832
================== ==============
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.
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, was further reduced to $21.0 million effective October
31, 2000, and will be reduced to $17.0 million effective March 31, 2001. The
amended Credit Facility bears interest at the prime borrowing rate and expires
on September 30, 2001. At December 31, 2000 $18,052,681 was outstanding with an
interest rate of 9.50% (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. 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.
The Company has recorded a discount of $354,237 in connection with the warrants
attached to the Note described above. The discount was computed based on the
value of the warrants as determined by use of an option pricing model (Black
Scholes), and will be amortized to interest expense on a straight-line basis
over the term of the Note, through September 2003. Interest expense of $29,520
was recorded for the quarter ended December 31, 2000 in connection with the
amortization of the discount.
As of December 31, 2000, the Company was not in compliance with its financial
covenants in the Credit Facility. The Company is currently in negotiations with
the Bank to further amend the Credit Facility.
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
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utilizing the treasury stock method. For the three and nine months ended
December 31, 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 nine months ended
December 31, 2000 and 1999, sales to ZBI totaled $2,914,162 and $3,380,028,
respectively. The related trade accounts receivable due from ZBI totaled
$1,132,969 and $1,131 at December 31, 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 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:
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Three Months Ended December 31, 2000
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Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
-------------- -------------- ---------------- ---------------- -------------
Revenues $ 3,865,134 $ 3,954,872 $ 5,319,660 $ - $ 13,139,666
Cost of revenues 6,808,946 3,574,843 4,528,482 - 14,912,271
Gross profit (loss) (2,943,812) 380,029 791,178 - 1,772,605
Operating expenses 1,171,893 1,358,679 596,033 967,301 4,093,906
(Loss) income from operations (4,115,705) (978,650) 195,145 (967,301) (5,866,511)
Net income (loss) $(4,443,442) $(1,063,246) $ 330,828 $ 22,801 $ (5,153,059)
Three Months Ended December 31, 1999
-----------------------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
-------------- -------------- ---------------- ---------------- -------------
Revenues $ 9,120,565 $ 4,158,332 $ 8,319,806 $ 1,434,675 $ 23,033,378
Cost of revenues 7,613,951 3,508,136 6,853,764 1,452,128 19,427,979
Gross profit (loss) 1,506,614 650,196 1,466,042 (17,453) 3,605,399
Operating expenses 1,461,895 1,169,800 1,077,764 911,994 4,621,453
(Loss) income from operations 44,719 (519,604) 388,278 (929,447) (1,016,054)
Net income (loss) $ (464,763) $ (526,255) $ 365,717 $ (925,133) $ (1,550,434)
Nine Months Ended December 31, 2000
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Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
-------------- -------------- ---------------- ---------------- -------------
Revenues $15,359,311 $11,922,466 $24,300,360 $ 668,270 $ 52,250,407
Cost of revenues 18,511,699 10,322,588 21,068,773 - 49,903,060
Gross profit (loss) (3,152,388) 1,599,878 3,231,587 668,270 2,347,347
Operating expenses 4,003,830 3,642,894 2,202,087 2,772,720 12,621,531
(Loss) income from operations (7,156,218) (2,043,016) 1,029,500 (2,104,450) (10,274,184)
Net income (loss) $(8,320,150) $(2,212,838) $ 978,537 $ (596,054) $(10,150,525)
Nine Months Ended December 31, 1999
-----------------------------------------------------------------------------------------------
Natural Technical Fine Chemicals Corporate and
Products Services and Excipients Other Total
-------------- -------------- ---------------- ---------------- -------------
Revenues $22,161,423 $12,393,307 $18,577,207 $ 9,758,355 $ 62,870,292
Cost of revenues 22,649,727 9,942,057 15,381,307 6,240,049 54,213,140
Gross profit (loss) (488,304) 2,451,250 3,175,900 3,518,306 8,657,152
Operating expenses 3,899,797 3,378,605 2,243,288 3,254,628 12,776,318
(Loss) income from operations (4,388,101) (927,355) 932,612 263,678 (4,119,166)
Net income (loss) $(5,640,149) $ (909,358) $ 863,997 $ 295,731 $ (5,389,779)
Included in Corporate other income for the quarter ended December 31, 2000 is a
net gain from the sale of land in the amount of $1,032,489. Additionally, Fine
Chemicals and Excipient other income of $250,000 was recorded in connection with
the termination of ZetaPharm's distribution agreement with its principal
excipient supplier, Blanver.
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.
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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.
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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.
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- -----------------
Revenues $13,139,666 $21,598,703 $ 51,582,137 $66,520,560
Cost of Revenues 14,912,271 17,975,851 49,903,060 59,105,893
----------------- ---------------- ---------------- -----------------
Gross Profit (1,772,605) 3,622,852 1,679,077 7,414,667
Operating Expenses 4,093,906 4,621,453 12,621,531 14,656,089
----------------- ---------------- ---------------- -----------------
Loss from Operations (5,866,511) (998,601) (10,942,454) (7,241,422)
Net Loss $(5,153,059) $(1,532,981) $(10,821,927) $(8,825,138)
================= ================ ================ =================
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 TO THE THREE MONTHS ENDED
DECEMBER 31, 1999:
REVENUES. The Company's revenues by product and service are as follows:
Three Months Ended December 31,
-------------------------------------------
2000 1999
------------------ -----------------------
Natural Products $ 3,865,134 $ 9,120,565
Technical Services 3,954,872 4,158,332
Fine Chemicals and Excipients 5,319,660 8,319,806
------------------ -----------------
$13,139,666 $21,598,703
================== =================
Total revenues decreased by 39% to $13,139,666 in the third quarter of fiscal
2001 from $21,598,703 in the third quarter of the prior fiscal year.
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Natural Product revenues decreased by 58% to $3,865,134 in the third quarter of
fiscal 2001 from $9,120,565 in the third quarter of the prior fiscal year. The
decrease was due to the world-wide oversupply of herbal extracts for dietary
supplements, which has resulted in depressed prices for herbal extracts. In
addition, the Company made the decision to close the Wilcox facility in March
2000. The decrease in Wilcox sales accounts for approximately 51% of the total
decrease in Natural Product revenues.
Technical Service revenues decreased by 5% to $3,954,872 in the third quarter of
fiscal 2001 from $4,158,332 in the third quarter of the prior fiscal year. In
November 2000, HTS moved its facility from Quincy, MA to Canton, MA. The
decrease in Technical Service revenues was due to a lack of sales primarily as a
result of the delay in entering into new contracts and starting new projects
because of the move of the Shuster Laboratories division of HTS 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 decreased by 36% to $5,319,660 in the third
quarter of fiscal 2001 from $8,319,806 in the third quarter of the prior fiscal
year. In July 2000, the Company was informed that its principal excipient
supplier, Blanver, had elected to sell products directly. Accordingly, excipient
sales have decreased significantly from the prior year. Sales of Blanver
products totaled $0 and $2.9 million during the quarters ended December 31, 2000
and 1999, respectively.
GROSS PROFIT. Gross profit decreased by 149% to ($1,772,605) in the third
quarter of fiscal 2001 from $3,622,852 in the third quarter of the prior year.
During the third quarter of the current year, the Company recorded a charge of
$3,100,000 in order to write-down inventories to the lower of cost or market,
and to reserve for excess quantities on-hand. No such charge was recorded during
the third quarter of fiscal 2000. Excluding the impact of such charge, gross
profit decreased by 63% from the prior year. Additionally, excluding the impact
of the inventory write-downs, the gross profit percentage of 10% in the quarter
ended December 31, 2000 has deteriorated from the gross profit percentage of 17%
for the same period in the prior year. This decrease can be attributed primarily
to reduced prices caused by the world-wide oversupply of herbal extracts.
OPERATING EXPENSES. Operating expenses decreased by 11% to $4,093,906 in the
quarter ended December 31, 2000 from $4,621,453 in the same period in 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 9% to $569,037 in
the quarter ended December 31, 2000 from $523,899 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.
OTHER INCOME/EXPENSE. Other income/(expense) increased to $1,282,489 in the
quarter ended December 31, 2000 from ($10,481) in the same period in the prior
year. The increase from the prior year is due primarily to a net gain on the
sale of land of $1,032,489. In addition, the Company received $250,000 from
Blanver in connection with the termination of its agreement with ZetaPharm.
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COMPARISON OF THE NINE MONTHS ENDED DECEMBER 31, 2000 TO THE NINE MONTHS ENDED
DECEMBER 31, 1999:
REVENUES. The Company's revenues by product and service are as follows:
Nine Months Ended December 31,
-------------------------------------------
2000 1999
------------------ -----------------
Natural Products $15,359,311 $30,192,639
Technical Services 11,922,466 12,393,307
Fine Chemicals and Excipients 24,300,360 23,934,614
------------------ -----------------
$51,582,137 $66,520,560
================== =================
Total revenues decreased by 23% to $51,582,137 in the nine months ended December
2000 from $66,520,560 in the same period of the prior fiscal year.
Natural Product revenues decreased by 49% to $15,359,311 in the nine months
ended December 2000 from $30,192,639 in the same period of the prior fiscal
year. The decrease was due to the world-wide oversupply of herbal extracts for
dietary supplements, which has resulted in depressed prices for herbal extracts.
In addition, the Company made the decision to close the Wilcox facility in March
2000. The decrease in Wilcox sales accounts for approximately 11% of the total
decrease in Natural Product revenues.
Technical Service revenues decreased by 4% to $11,922,466 in the nine months
ended December 2000 from $12,393,307 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 resulting from the move
of the Shuster Laboratories division of HTS 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 2% to $24,300,360 in the nine
months ended December 2000 from $23,934,614 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. Thus, the increase in
Fine Chemical revenues was offset by a significant decrease in sales of
excipients. Sales of Blanver products totaled $4.4 million and $8.1 million
during the nine months ended December 31, 2000 and 1999, respectively.
GROSS PROFIT. Gross profit decreased by 77% to $1,679,077 in the nine months
ended December 2000 from $7,414,667 in the same period of prior fiscal year.
During the nine months ended December 2000 and 1999, the Company recorded
charges to write-down inventories to the lower of cost or market, and to reserve
for excess quantities in the amount of $3,100,000 and $2,767,560, respectively.
Excluding the impact of these charges, gross profit for the nine months ended
December 2000 decreased by 53% from the prior fiscal year. Additionally,
excluding the impact of the inventory write-downs, the gross profit percentage
of 9% in the nine months ended December 2000 has deteriorated from the gross
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profit percentage of 15% for the same period in the prior year. This decrease is
attributed primarily to reduced prices caused by the world-wide oversupply of
herbal extracts.
OPERATING EXPENSES. Operating expenses decreased by 14% to $12,618,399 in the
nine months ended December 2000 from $14,656,089 in the same period of the prior
fiscal year. During the nine months ended December 1999, 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 9% 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 11% to $1,760,023 in
the nine months ended December 2000 from $1,573,235 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.
OTHER INCOME/EXPENSE. Other income/(expense) increased to $1,883,682 in the nine
months ended December 31, 2000 from ($10,481) in the same period in the prior
year. The increase from the prior year is due primarily to a net gain on the
sale of land of $1,633,682. In addition, the Company received $250,000 from
Blanver in connection with the termination of its agreement with ZetaPharm.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Total cash and cash equivalents were $786,930 at December 31,2000,
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 nine months ended December 31,
2000 was $4,512,117. This amount is comprised of a net loss of $10,150,525,
offset primarily by non-cash expenditures of $4,918,985, reductions in accounts
receivable and inventory of $4,080,034 and $6,843,370, respectively, and net
changes in other working capital of ($1,179,747).
Cash provided by investing activities is comprised of capital expenditures of
$3,506,235, and proceeds from sale of assets of $3,778,561.
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 October 2000, the Credit Facility was amended. In accordance with the terms
of the amendment, the $35 million line of credit commitment was reduced to $24.5
million, further reduced to $21.0 million effective October 31, 2000, and will
be reduced to $17.0 million effective March 31, 2001. The Credit Facility bears
interest at the prime borrowing rate and expires on September 30, 2001. As of
December 31, 2000, the Company was not in compliance with its financial
covenants in the Credit Facility. The Company is currently in negotiations with
the Bank to further amend the Credit Facility.
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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.
In December 2000, the Company announced its intention to sell HTS. The sale will
permit the Company to focus its resources on the production and sale of bulk
herbal extracts and nutritional supplements, including the development of new
products, and the distribution of fine chemicals to dietary supplement
manufacturers.
The Company expects to meet its liquidity requirements through cash flows from
operations, the Credit Facility (see Notes 1 and 4 to the Financial Statements),
the sale of HTS and operational changes as deemed necessary. Management believes
that current cash reserves, proceeds from the sale of the Note to Zatpack, the
Credit Facility, funds generated from operating activities and the sale of HTS
will be sufficient to meet the Company's liquidity needs within the next twelve
months.
WORKING CAPITAL. Working capital as of December 31, 2000 was ($5,002,612) as
compared to $3,754,120 as of March 31, 2000.
INCOME TAXES. The Company has a net deferred tax asset of approximately
$25,600,000 that has been fully reserved for at December 31, 2000. Included in
deferred tax assets at December 31, 2000, are federal net operating loss carry
forwards of approximately $49,650,000, 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 $4,800,000 as of December 31,
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 December 31, 2000, $18,052,681 was outstanding with an interest rate
of 9.50% (the bank's prime borrowing rate). Should the Company be required to
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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 December 31, 2000, the Company would have incurred
additional interest expense of approximately $106,000, with an associated $.02
increase in the per share loss for the quarter. Therefore, the Company's
exposure to changes in interest rates will be significant until such time as its
operating results permit it greater access to other lenders and lending
instruments on terms equivalent to those available under the Credit Facility.
FORWARD-LOOKING STATEMENTS
Certain oral and written statements of management of the Company included in the
Form 10-Q and elsewhere may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
management for future operations. The forward-looking statements included herein
and elsewhere are based on current expectations that involve judgments which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
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PART 2.
Item 1 Legal Proceedings.
Reference is made to the Company's Report of Form 10Q for the period
ended September 30, 2000.
Item 2 Changes in Securities.
Reference is made to the Company's Report of Form 10Q for the period
ended September 30, 2000.
Item 3. Defaults Upon Senior Securities.
As of December 31, 2000, the Company was not in compliance with its
financial covenants in the Credit Facility. The Company is currently in
negotiations with the Bank to amend the Credit Facility. The Company expects to
meet its liquidity requirements through cash flows from operations, the Credit
Facility and the sale of HTS.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on November 28, 2000,
pursuant to the Notice of Annual Meeting of Stockholders and Proxy Statement
dated November 7, 2000 each of the eight nominees standing for election (Kenneth
C. Cleveland, Michael C. Davis, Herbert Elish, James Mellor, Robert F. Saydah,
Harvey L. Sperry, Dean P. Stull, Ph.D. and Volker Wypyszyk) were elected ad
Directors of the Company by a majority of the votes cast in the election.
Item 5. Other Information.
Reference is made to the Company's Report of Form 10Q for the period
ended September 30, 2000.
On December 18, 2000, the Company announced its intention to sell
Hauser Technical Services, Inc., which consists of Hauser Laboratories and
Shuster Laboratories.
On January 30, 2001, the Company announced that it has reached
agreement with the Whitehall-Robins Healthcare division of American Home
Products Corporation (NYSE: AHP) to jointly develop a new dietary supplement.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Press release announcing the Company's intent to sell
Hauser Technical Services, Inc.
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99.2 Press release announcing the agreement with
Whitehall-Robins Healthcare division of American Home
Products Corporation.
(b) Reports on Form 8-K
None
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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: February 14, 2001 /s/ KENNETH C. CLEVELAND
Kenneth C. Cleveland
Chief Executive Officer
Date: February 14, 2001 /s/ TERRY FEIT
Terry L. Feit
Secretary/Treasurer