Item
1. Business GENERAL
DEVELOPMENT OF BUSINESS Hauser, Inc., a Delaware
corporation, together with its wholly owned subsidiaries (together, “Hauser” or the “Company”), is a leading
supplier of natural product extracts and related products to the dietary
supplement market in the United States.
Hauser manufactures extracts from botanical raw materials using its
proprietary technologies in extraction and purification. 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.
The Company has experienced significant losses from operations. In fiscal year 2002, a major factor in the
operating loss was the $2,884,000 restructuring charge which was recorded,
primarily due to costs of contractual severance and facilities
consolidation. The operating losses in
fiscal years ended 2001 and 2000 resulted from a worldwide oversupply of
dietary supplement products coupled with high fixed costs. The Company has substantially reduced costs,
increased manufacturing efficiencies, consolidated operations, restructured
administrative activities and reduced operating assets. Beginning in 2002, the Company began
divesting its ownership of its wholly owned subsidiary Hauser Technical
Services, Inc. (“HTS”). In February
2002, the Company sold the Hauser Laboratories division of HTS. The proceeds from the sale of Hauser
Laboratories were used to reduce the Company’s bank debt. The Company is currently seeking potential
buyers for the Shuster Laboratories division of HTS. If a sale of the Shuster Laboratories division is consummated,
the Company expects to use the proceeds to further reduce the Company’s bank
debt.
In April and June 2002, the Company defaulted under the Company’s
Amended and Restated Credit Agreement (the “Amended Credit Facility”), which it
entered into with Wells Fargo Bank, N.A. (“Wells Fargo”) on December 7, 2001. The defaults occurred because the Company
failed to make $1.9 million of a $3.0 million payment on April 30, 2002, as
required by the term note, and was not in compliance with its cash flow
covenant for the quarter ending June 30, 2002.
On June 25, 2002, in consideration of a waiver by Wells Fargo of these
events of default, the Company amended the terms of the Amended Credit Facility
(the “Amendment”). Pursuant to the
Amendment, both the term note and the revolving line of credit will mature on
August 31, 2002. Specifically, the
Amendment extends the maturity date of the term note from June 30, 2002 to
August 31, 2002 and amends the maturity date of the revolving line of credit
from August 31, 2003 to August 31, 2002.
The Company is engaged in discussions, including discussions regarding
the sale of Shuster Laboratories, which could result in the Company obtaining
funds to pay the outstanding loans to Wells Fargo in August 2002 and permit the
Company to obtain a new line of credit to finance operations. There can be no assurance that the requisite
funds will be obtained. Arthur Andersen
LLP, auditors for the Company, has issued a modified opinion in connection with
the audit of the fiscal year March 31, 2002, which states that there is a
substantial doubt about the ability of the Company to continue as a going
concern. See “Report of Independent
Public Accountants” herein.
The Company provides its interdisciplinary laboratory testing services,
chemical engineering services and contract research and development services
through HTS. In June 1999, the Company
acquired Wilcox Drug Company, Inc. (“Wilcox”), a supplier of botanical raw
materials, Botanicals International Extracts, Inc. (“BIE”), a distributor of
bulk dietary supplements, and ZetaPharm, Inc. (“ZetaPharm”), a distributor of
bulk fine chemicals, excipients and generic active ingredients. During the fiscal year ended March 31, 2001,
the Company terminated the Wilcox operations.
BIE and ZetaPharm are wholly owned subsidiaries of the Company.
The Company was incorporated under the laws of the State of Delaware in
December 1999 as the successor company to a Colorado corporation, Hauser,
Inc. The Company’s predecessor
corporation was incorporated in 1996 as the successor company to Hauser
Chemical Research, Inc., a Delaware corporation. The Company’s principal offices are located at 20710 S. Alameda
Street, Long Beach, CA 90810. The
Company’s telephone number is (310) 637-9566.
DESCRIPTION OF THE BUSINESS Hauser has expertise in proprietary extraction and purification
technologies which produce purified materials with a readily ascertainable
concentration of active ingredients.
Hauser
is vertically integrated with the ability to source, process and distribute
bulk ingredients to manufacturers and marketers of dietary supplements. In addition, Hauser’s integrated research
and development capability and proprietary extraction technology provides
customers with a full range of solutions to accommodate their product needs.
DESCRIPTION OF EACH REPORTABLE
INDUSTRY SEGMENT
Dietary
Supplements
Dietary Supplements include a broad range of
natural product extracts that are used in the manufacture of dietary
supplements. Hauser’s natural product
extracts are dietary supplements, which may be consumed in liquids, capsules,
tablets or as ingredients in processed foods. The Company has several
proprietary products, including:
RoseOx® and Rossentia, two rosemary based antioxidants; TT550™, a ginger
based anti-nausea product; and NaturSpan®, a time release extract line for
once-a-day dosing and better consumer compliance. Hauser has developed a product (Policor™) in which policosonal is
extracted from beeswax. Policosonal has
been shown to reduce human serum cholesterol levels.
The Company also produces rosemary extracts which protect the flavor
and quality of foods and beverages. The Company’s rosemary extracts are
oil-soluble and water-soluble oxidation stabilizer products that are marketed
under the brand name StabilEnhance®.
Although rosemary has been used for centuries to prevent rancidity of
fats and oils, the use of rosemary has been limited by its strong odor and
taste and thus, historically, has been limited to applications such as Italian
sausage where this flavor is acceptable. Hauser’s process minimizes the
objectionable flavor components while retaining rosemary’s preservative
characteristics. The Company’s StabilEnhance® product line is a natural way to
control flavor-deteriorating oxidation in food products containing fats and
oils.
Sales from Dietary Supplements accounted for 56% of total revenues in
the fiscal year ended March 31, 2002, 59% of total revenues in the fiscal year
ended March 31, 2001 and 53% of total revenues in the 11 months ended
March 31, 2000.
Technical Services
The Company, through HTS, provides research, development, testing,
quality assurance, problem-solving and regulatory consultation services to
manufacturers, marketers and retailers of foods, dietary supplements, natural
products, pharmaceuticals, household chemicals, personal care, plastic pipe,
construction materials, industrial formulations and petroleum products, as well
as to customers in the medical devices, legal and insurance industries. HTS also provides contract research,
development and testing services to manufacturers of natural and pharmaceutical
products.
In December 2000, the Company announced its intention to divest
HTS. HTS consisted of the following
three divisions: Hauser Laboratories, Shuster Laboratories and Hauser Contract
Research Organization. In February
2002, the Company sold the Hauser Laboratories division. The Company is currently seeking potential
buyers for the Shuster Laboratories division.
The sale of Shuster Laboratories will provide a portion of the funds
necessary to reduce the bank debt. The
Company believes that the sale of the Shuster Laboratories division of HTS
would permit the Company to focus its resources on the production and sale of
bulk natural product extracts and nutritional supplements, the development of
new clinically supported natural product extracts and the distribution of fine
chemicals to dietary supplement manufacturers.
Revenues from Technical Services accounted for 33% of total revenues in
the fiscal year ended March 31, 2002, 24% of total revenues in the fiscal year
ended March 31, 2001 and 19% of total revenues in the 11 months ended
March 31, 2000.
Pharmaceutical and Functional Food Ingredients
Through ZetaPharm, the Company distributes active pharmaceutical
ingredients and functional food ingredients. These products are sold to
manufacturers and processors of health food, pharmaceuticals, food, beverages
and dietary supplements.
Sales from Pharmaceutical and Functional Food Ingredients accounted for
11% of total revenues in the fiscal year ended March 31, 2002, 16% of total
revenues in the fiscal year ended March 31, 2001 and 17% of total revenues in
the 11 months ended March 31, 2000.
SOURCES AND AVAILABILITY OF RAW MATERIALS Historically, the Company has purchased its needed raw materials
through a variety of sources. The availability of raw material has been
dependent on available habitat, growing conditions and price of the product.
ZetaPharm imports the products that it sells. ZetaPharm suppliers are primarily located in
Europe, Asia and South America.
TRADE SECRETS, PATENTS AND TRADEMARKS Proprietary protection for the Company’s technology and body of knowledge
is extremely important to Hauser’s business. The Company relies on patents,
trade secrets and confidentiality agreements, as well as continuing
technological innovation, to develop and maintain its competitive position. The Company believes that it has established
a distinct competitive advantage with its proprietary technologies and
sophisticated knowledge of the extraction and purification of natural products.
This expertise enables the Company to produce products that it believes could
not be duplicated without the use of the Company’s technologies.
The Company has developed numerous proprietary technologies to process
natural raw materials and produce specialized extracts of natural products. The
Company’s expertise in analyzing, identifying and measuring low concentration
compounds occurring in natural materials and in process streams, is important
to raw material analysis, process development and process and quality control.
Designing a particular process application involves selecting the most appropriate
processing steps, determining the proper sequence, and establishing optimum
temperature, pressure, solvent and other parameters for each process step. The
Company develops variations of its processes based on the nature of the raw
material used and the specifications of the desired product.
For example, the Company’s Dynamic Liquid/Solid ExtractionSM
(“DL/SESM”) isolation process, typically the first manufacturing
step, is particularly effective at producing liquid extracts from solid natural
materials such as roots, bark, seeds and leaves. Relative to conventional methods, DL/SESM produces a
higher concentrated extract that can be valuable in itself as a product, or
alternatively, can simplify the subsequent steps required to isolate an
enriched extract or purified natural chemical.
DL/SESM can capture a broad range of components, such as the
top notes of pepper, which improves the quality of the final product. Top notes
are the highly volatile chemical components of an extract, such as a flavor which
can easily evaporate, the loss of which reduces the quality or character of the
flavor. The Company’s process also ensures that the level of the marker
compound in a specific natural product is representative of the botanical
natural ratio of all compounds.
The Company patents technology when appropriate to obtain long-term
protection. The Company owns patents for proprietary chemical substances,
composition of matter and manufacturing processes.
The Company has several trademarks and servicemarks either registered
or pending, including ColorEnhance™, Customer Connected™, Delivering What
Nature Intended®, Invigora™, Preventia™, RoseOx®, Rossentia™, StabilEnhance®,
TAQA®, Policor™, and Apisol™. The
servicemarks “Hauser” and “Shuster” have been registered by the Company.
In addition to patents, trademarks and servicemarks, the Company
protects its proprietary technology and knowledge through established security
practices and confidentiality agreements with employees, consultants, strategic
industry participants and technical advisors.
SEASONAL ASPECTS OF THE COMPANY’S BUSINESS While the Company purchases inventory throughout the year, a portion of
the inventory requirements are purchased during the harvest seasons specific to
certain botanical raw material which begins in August and concludes in
December.
SIGNIFICANCE OF DEPENDENCE UPON A FEW CUSTOMERS During the fiscal
year ended March 31, 2002, no customer accounted for 10% of any products
produced, or services performed, by the Company.
BACKLOG
For a discussion of customer backlog information see “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
GOVERNMENT CONTRACTS No material portion of the Company’s business is subject to
renegotiation of profits or termination of contracts at the election of the
government.
CUSTOMERS AND COMPETITION Dietary Supplements
Natural products which are used in the production of extracts are
purchased from a large number of suppliers, located primarily in North America,
South America, Europe and Asia. In the
United States, companies selling bulk natural products include domestic natural
product manufacturers such as PureWorld, U.S. Nutraceuticals and Triarco,
foreign manufacturers such as Indena, Euromed and Martin Bauer, and a large
number of brokers and distributors selling products that are manufactured
worldwide. The Company competes with
these companies for both the purchase of natural products and sales of natural
product extracts.
Competition with respect to the purchase of natural products is based
primarily on price and competition with respect to the sale of natural product
extracts is based primarily on service, product quality and price.
The Company believes that its expertise in the production, marketing
and sale of bulk natural products and its extensive regulatory experience will
permit the Company to effectively compete in the sale of these products to
manufacturers and marketers of consumer products.
Technical Services
The market for technical services in the United States is large,
diverse and highly fragmented. The Company competes with a number of companies
depending on the specific type of services provided. Competition is based
primarily on quality and service.
The Company’s competitive position depends on its ability to attract
and retain scientific and other personnel and its ability to maintain the
proprietary nature of its technologies.
Pharmaceutical and Functional Food Ingredients
The Company imports bulk active pharmaceutical ingredients with
emphasis on the over-the counter cough and cold market. Competitors include major international
producers including BASF, Mallinkrodt, Rhodia, and a number of importers of
bulk ingredients produced in China and India. Competition with respect to sales
of Pharmaceutical and Functional Food Ingredients is based on service, product quality and price.
RESEARCH AND DEVELOPMENT Research and development efforts are generally devoted to five
principal areas: (1) development of new technology; (2) application of the
Company’s processing technology to new products; (3) improvement of existing
processes; (4) semi-synthetic preparation of existing and new biologically active
compounds; and (5) development of viable alternate raw materials for natural
products extraction and purification.
The Company has spent approximately $2.6 million on Company-sponsored
research and development in the fiscal years ended March 31, 2002 and 2001, and
$800,000 on Company-sponsored research and development in the 11 months ended
March 31, 2000.
GOVERNMENT REGULATIONS General
The Company’s business is subject to comprehensive regulation
throughout the world. In the United
States, the Company’s business is regulated by federal agencies such as the
Food and Drug Administration (“FDA”), the U.S. Environmental Protection Agency
(“EPA”), the U.S. Bureau of Alcohol, Tobacco and Firearms, the U.S. Drug
Enforcement Agency (“DEA”), the U.S. Departments of Interior and Agriculture
and various state and local government agencies.
Products manufactured or sold by the Company are defined as “Dietary
Supplements,” as defined by the Dietary Supplement Health and Education Act
(“DSHEA”), and are governed by DSHEA.
DSHEA governs claims and statements of nutritional support regarding
dietary supplements. DSHEA establishes
labeling practices regarding quality standards for supplements, including
requirements concerning purity, disintegration and compositional specifications
and also amends nutrition labeling and nutrient content claim requirements for
dietary supplements under the Nutrition Labeling and Education Act of 1990.
The Company is also subject to regulation under the Occupational Safety
and Health Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act, the Federal Water Pollution Control Act, and other federal, state
and local statutes and regulations.
Failure to comply with applicable laws, regulations and permits can
result in injunctive actions, product seizures, damages and civil and criminal
penalties. Although the Company
believes it is in substantial compliance with current applicable federal, state
and local regulations, the FDA, the EPA, the Departments of the Interior and
Agriculture and other governmental agencies may in the future change existing
regulations or adopt additional regulations that may affect the Company’s
ability to acquire necessary raw materials, manufacture natural product
extracts or develop or manufacture new products.
Environmental Regulations
Because of its ambient emissions of volatile organic compounds, some of
which are considered toxic as well as flammable, all of the Company’s
facilities are subject to the 1990 Clean Air Act Amendments’ phased-in
requirements for such sources. Emission
standards, established by the EPA setting the Maximum Achievable Control
Technology and Best Achievable Control Technology, limit hazardous air
pollutant emissions from this category of sources, require a comprehensive air
emission operating permit, which has been received by the Company, and include
related testing and reporting requirements. The Company believes its facilities
are in compliance with applicable air pollution control requirements.
PRODUCT
LIABILITY INSURANCE
The sale of the Company’s products include an inherent risk that
product liability claims may be asserted against the Company. The natural
products industry has experienced increasing difficulty maintaining product
liability insurance coverage at reasonable levels and substantial increases in
insurance premium costs have rendered coverage economically impractical in
certain cases. The Company maintains
product liability coverage in an amount the Company considers to be
reasonable. There can be no assurance
that the Company will be able to maintain product liability insurance on
acceptable terms or that such insurance will provide adequate coverage against
potential claims. The Company’s business
and prospects could be adversely affected if such claims are resolved against
the Company.
EMPLOYEES As of March 31, 2002, the Company had 228 employees.
Dietary Supplements has 15 employees involved with administrative,
financial and marketing functions, 39 employees involved in manufacturing and
sourcing of natural products, eight employees involved in sales and 10
employees involved with research and development.
Technical Services has 20 employees involved in administration,
financial and sales and marketing functions, and 129 employees involved in
performing the technical services.
Pharmaceutical and Functional Food Ingredients has
seven employees, four of whom are engaged in sales and administration and three
of whom are engaged in customer service.
Item
2.
Item
2. Properties As of March 31, 2002, the location and general description of
properties owned or leased by the Company are as follows:
The Company believes that its facilities are in good repair and are
suitable for its needs in the foreseeable future.
Item
3.
Item
3. 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 DEA that in 1997 ZetaPharm imported, distributed and purchased
domestically the chemicals pseudoephedrine and ephedrine without registration
required under federal law. No
prosecution has been commenced and ZetaPharm has fully cooperated with the
investigation.
Item
4.
Item
4. Submission of Matters to a Vote of
Security Holders There were no matters
submitted to a shareholder vote during the fourth quarter of the fiscal year
ended March 31, 2002.
Part
II
Item
5.
Item
5. Market for Registrant’s Common
Equity and Related Stockholder Matters The following table sets
forth the high and low bid prices of the Company’s Common Stock for the periods
indicated prior to November, 2000, as reported by the NASDAQ National Market,
and for the periods indicated after November, 2000, as reported by the Over the
Counter Bulletin Board (“OTCBB”). The
quotations presented below reflect inter-dealer prices, without retail
mark-up, markdown or commissions and may not necessarily represent actual
transactions.
The Company’s Common Stock is traded in the over-the-counter market and
quoted on the OTCBB under the symbol “HAUS.OB.” The OTCBB is a regulated quotation service that displays
real-time quotes and last-sale price and volume information with respect to
over-the-counter equity securities.
As of June 10, 2002, there were approximately
533 holders of record of the Company’s Common Stock, which numbers do not
reflect stockholders who beneficially own Common Stock held in nominee or
street name.
On June 11, 2002, the Board of Directors
approved the sale of $50,000 of its Common Stock to Kenneth C. Cleveland at the
price per share of the Company’s Common Stock at the close of trading on June
28, 2002.
In April 2002, the Board of Directors
approved a grant of shares of its Common Stock (the “2002 Restricted Stock”) to
certain of its key employees. The Company
expects to issue up to 150,000 shares
to such employees at no cost to the employees.
If, prior to May 31, 2005 (the “2002 Restricted Period”), any of the
recipients of the 2002 Restricted Stock cease to be an employee of the Company
for any reason, other than due to the death or permanent disability of the
recipient, the 2002 Restricted Stock will be forfeited to the Company. The 2002 Restricted Stock becomes fully
vested and the restrictions imposed thereon lapse on the earlier of the 2002
Restricted Period or the death of the recipient. The Company may elect to waive such forfeitures.
As a condition to the issuances of 2002
Restricted Stock, the recipients will be required to make an 83(b) election
with the Internal Revenue Service.
Making an 83(b) election permits each recipient to include the value of
stock received as taxable income for the recipient’s current tax year (the
“83(b) Election”). The Company will
make a cash payment to each of the recipients equal to the amount necessary to
pay tax liabilities resulting from the 83(b) Election and the
additional tax liability from such
payment. The Company expects the amount
of these payments to be approximately $40,000.
In December 2001, the Company entered into
the Amended Credit Facility with Wells Fargo which required that a fee be paid
to Wells Fargo in the amount of $779,000 (the “Fee”). Initially, Wells Fargo had stated that as further consideration
for entering into the Amended Credit Facility, the Company must issue to Wells
Fargo a warrant to purchase 865,630 shares of the Company’s Common Stock,
representing approximately 12.5% of the Company’s Common Stock on a fully
diluted basis, at an exercise price of $0.01 per share, which would expire
eight years after issuance (the “Warrant”).
Wells Fargo subsequently stated that it would accept the Fee in lieu of
the Warrant, provided that the Fee was paid by a party other than the Company. Wells Fargo would not permit the Company to
reduce its working capital by paying the Fee.
Zatpack, Inc., an international business company organized under the
laws of the British Virgin Islands and a significant shareholder of the Company
(“Zatpack”), agreed to pay the Fee. The
Company, as consideration for such payment, issued the Warrant to Zatpack. The terms of the Warrant were negotiated
solely between the Company and Wells Fargo.
Pursuant to the terms of the Warrant, unless waived by the Company, the
holder thereof may only exercise the Warrant upon 61 days from the date that
written notice of such exercise is received by the Company. On January 31, 2002, Zatpack sold the
Warrant. The Company has not waived the
61-day notice provision.
In February 2001, the Board of Directors
approved a grant of shares of its Common Stock (the “2001 Restricted Stock”) to
certain of its key employees. In June
2001, the Company issued 520,000 shares of the 2001 Restricted Stock to such
employees at no cost to the employee.
As a condition to the issuance, certain of the recipients agreed to
cancel options that had previously been granted to them. If, prior to May 31, 2004 (the “2001
Restricted Period”), any of the recipients of the 2001 Restricted Stock cease
to be an employee of the Company for any reason, other than due to the death or
permanent disability of the recipient, their 2001 Restricted Stock will be
forfeited to the Company. The 2001
Restricted Stock becomes fully vested and the restrictions imposed thereon lapse
on the earlier of the May 31, 2004 or the death of the recipient. The price of the stock on the date of the
issuance was $0.84. The Company may
elect to waive such forfeitures.
In February 2001, the Board of Directors of the Company approved the
sale of 100,000 shares of its Common Stock to Kenneth C. Cleveland for $0.37
per share. As of June 28, 2002, Mr.
Cleveland had not purchased these shares.
If the shares are purchased by Mr. Cleveland, such shares will be
subject to similar terms as the 2001 Restricted Stock.
As a condition to the issuances of the 2001 Restricted Stock, the
recipients were required to make an 83(b) Election. The Company made a cash payment to each of the recipients equal
to the amount necessary to pay tax liabilities resulting from the 83(b)
Election and the additional tax liability from such payment. The amount of these payments totaled
approximately $318,000.
The issuances of the 2002 Restricted Stock, the Warrant and the 2001
Restricted Stock were exempt from registration under the Securities Act of
1933, as amended (“Securities Act”), pursuant to Section 4(2) or because such
issuance were not sales within the meaning of the Securities Act. No underwriters were involved in these
transactions.
Dividend
Policy
The Company has not paid cash dividends in the past and does not intend
to pay cash dividends in the foreseeable future. In addition, the Company’s Amended Credit Facility restricts the
ability of the Company to pay dividends.
See “Item 7. Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” for a summary of the Amended Credit
Facility. The Company presently intends
to retain earnings for use in its business, with any future decision to pay
cash dividends dependent upon the Company’s growth, profitability, financial
condition and other factors the Board of Directors may deem relevant.
Item
6.
Item
6. Selected Financial Data
The following is a summary of selected financial data which the Company
believes highlights trends in its financial condition and results of
operations. The data is as of and for the Company’s fiscal years ended March
31, 2002 and 2001, the eleven months ended March 31, 2000, and the fiscal years
ended April 30, 1999 and 1998.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations OVERVIEW Pursuant to an Agreement and Plan of Merger dated December 8, 1998 (the
“Merger Agreement”), the Company completed a merger (the “Merger”) on June 11,
1999 with three subsidiaries (the “Contributed Subsidiaries”) of Zuellig Group
N.A., Inc. (“ZGNA”) and Zuellig Botanicals, Inc. (“ZBI”). Two subsidiaries of ZGNA, Wilcox and
ZetaPharm, and one subsidiary of ZBI, BIE, merged with three wholly owned
subsidiaries of the Company which were created for the purpose of the Merger. Wilcox, ZetaPharm and BIE were the surviving
corporations and, as a result, became wholly owned subsidiaries of the Company.
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. On December 15, 1999, the number of shares that were issued
to ZGNA was reduced to 2,193,568 in accordance with the terms of the Merger
Agreement. Simultaneously with the
Merger, the Company effected a one-for-four reverse stock split. All share and per share information has been
adjusted for the reverse stock split.
The Company has experienced significant losses from operations
resulting primarily from a worldwide oversupply of dietary supplement
products. As a result, markets for the
Company’s raw materials and finished goods have become more volatile. During fiscal 2002, 2001 and 2000, there
continued to be declines in the wholesale prices for bulk dietary supplement
ingredients forcing the Company to take charges of $212,000, $4.5 million and
$10.7 million, respectively, to reduce its inventory balances to net realizable
value. Market conditions have caused
the Company to assess its long-lived assets for recoverability, resulting in
write-downs of $675,000, $17.7 million and $7.1 million in fiscal 2002, 2001
and 2000, respectively. The Company has
taken actions to reduce costs and streamline operations. This has resulted in restructuring charges
(absent asset impairment charges) of $2.2 million, $100,000 and $2.2 million in
fiscal 2002, 2001 and 2000, respectively.
These actions have included the termination of paclitaxel production;
substantially reducing manufacturing costs while increasing manufacturing
efficiencies; consolidating technical
services operations; and restructuring its administrative activities.
The Company has also sold
selected assets to reduce its leverage and increase its liquidity. These sales include land previously held for
investment purposes and the Hauser Laboratories division of HTS. The sales generated proceeds of $3.8 million
and $790,000, respectively.
The operating losses have
created liquidity issues for the Company resulting in various debt covenant
violations under the Amended Credit Facility and subsequent to March 31, 2002,
only partial payment of a scheduled principal maturity. In April and June 2002, the Company
defaulted under the Amended Credit Facility, which it entered into with Wells
Fargo on December 7, 2001. The defaults
occurred because the Company failed to make $1.9 million of $3.0 million
payment on April 30, 2002, as required by the term note, and was not in
compliance with its cash flow covenant for the quarter ending June 30,
2002. On June 25, 2002, in
consideration of a waiver by Wells Fargo of these events of default, the
Company entered into an Amendment with Wells Fargo. Pursuant to the Amendment, both the term note and the
revolving line of credit
will mature on August 31, 2002.
Specifically, the Amendment extends the maturity date of the term note
from June 30, 2002 to August 31, 2002 and amends the maturity date of the
revolving line of credit from August 31, 2003 to August 31, 2002. The Company is engaged in discussions,
including discussions regarding the sale of Shuster Laboratories, which could
result in the Company obtaining funds to pay the outstanding loans to Wells
Fargo in August 2002 and permit the Company to obtain a new line of credit to
finance operations. There can be no
assurance that the requisite funds will be obtained. These circumstances raise substantial doubt about the ability of
the Company to continue as a going concern.
RESULTS
OF OPERATIONS Comparison of the fiscal year ended March 31, 2002 to
the fiscal year ended March 31, 2001, and the 11 months ended March 31, 2000:
REVENUES. The Company’s three
business segments are: Dietary Supplements, Pharmaceutical and Functional Food
Ingredients, and Technical Services, each having a separate management team and
infrastructure offering different products and services, and utilizing
different marketing strategies to customers.
During the fiscal year ended March 31, 2002, the Company changed the name of its Natural Products segment to Dietary
Supplements, and its Fine Chemicals segment to Pharmaceutical and Functional Food
Ingredients. Further, the
Company reclassified certain product lines to align management responsibilities
with the related products. The Company
now classifies nutritional supplement products, which were formerly classified
as Fine Chemicals, as Dietary Supplements.
In addition, the Company now classifies certain functional food
ingredients, which were formally classified as Natural Products, as
Pharmaceutical and Functional Food Ingredients. The Company has restated the corresponding information for the
prior years to conform to the current composition of the Company’s reportable
segments.
Total revenues in 2002 were $57,622,000 compared to $66,714,000 in
2001, a decrease of 14%. Revenues were
$66,714,000 in 2001 compared to
$81,161,000 in 2000, a decrease of 18%.
In February 1999, the Company entered into a purchase agreement for the
sale of its paclitaxel inventory as part of the planned closure of the
paclitaxel business. Revenues generated through the sale of remaining
paclitaxel inventories during the fiscal years ended March 31, 2002, 2001 and
the 11 months ended March 31, 2000 totaled $0, $671,000 and $8,695,000,
respectively.
Dietary Supplements revenues decreased by 18% in 2002 to $32,059,000
from $39,127,000 in 2001. This decrease can be attributed to a reduction in
sales of natural product extracts.
Natural product extract sales decreased both with respect to pricing and
units. In 2001, Dietary Supplements revenues
decreased by 9% to $39,127,000 from $42,946,000 in the 11 months ended March
31, 2000. The decrease was due to
decreases in sales of both botanical raw materials and natural product
extracts. Fiscal 2000 sales of
botanical raw materials included the liquidation of inventories in connection
with the closure of the Wilcox facilities in March 2000. Prior to fiscal 2000, rapid dietary
supplement growth resulted in a build-up of inventory levels by dietary
supplement manufacturers. As the growth
slowed beginning in 2000, customer demand decreased significantly as customers
liquidated inventories. Reduced customer demand in 2000 through 2002 caused
prices to decrease, which resulted in revenue reduction for the Company.
Pharmaceutical and Functional Food Ingredients revenues decreased by
40% in 2002 to $6,375,000 from $10,670,000 in 2001. Pharmaceutical and Functional Food Ingredients revenues
decreased by 24% in 2001 to $10,670,000 from $14,078,000 in the 11 months ended
March 31, 2000. In July 2000, the
Company was informed that its principal excipient supplier, Blanver, had
elected to sell products directly.
Accordingly, excipient sales decreased significantly from the prior
year. Sales of Blanver products totaled
approximately $4.5 million and $10.5 million during 2001 and 2000,
respectively, while there were none in fiscal 2002.
Technical Services revenues increased by 18% in 2002 to $19,188,000
from $16,246,000 in 2001. This increase
was due to the improved capabilities of the new facility into which the Shuster
Laboratories division of HTS had moved late in the preceding year, and improved
productivity for the entire Technical Services business. Technical Services revenues increased by 5%
in 2001 to $16,246,000 from $15,442,000 in the 11 months ended March 31, 2000. This increase was due to the shorter fiscal
period in the earlier period (eleven months), the effect of which was partially
offset by the decline in revenues experienced during the Shuster Laboratories
move.
GROSS PROFIT. Gross profit
increased by 372% to $12,981,000 in 2002 from $2,752,000 in 2001.
Gross profit decreased by 2% to $2,752,000 in 2001 from $2,818,000 in
the 11 months ended March 31, 2000.
During each of the fiscal years ended March 31, 2002 and 2001, the
Company recorded a charge to write down inventory in the amount of $212,000 and
$4,498,000, respectively. During the 11
months ended March 31, 2000, the Company recorded a charge to write-down
inventory in the amount of $10,671,000, which was partially offset by the
reversal of a reserve of $3,995,000 established in connection with termination
of yew tree cultivation agreements and the discontinuation of paclitaxel. The
inventory write-downs occurred because of market price reductions for both
botanical raw materials and natural product extracts. Additionally, a portion of the inventory write-downs recorded in
2000 related to the closing of the Wilcox facilities. There have not been any significant sales of inventory written
down because it was deemed excess or obsolete.
Sales in each of the fiscal periods include the sale of inventories
previously written down from cost to its lower market value.
Excluding the impact of the above referenced items, the Company’s gross profit as a percentage of revenue
increased to 23% in 2002 from 11% in the fiscal year 2001 and 12% in the 11
months ended March 31, 2000.
Manufacturing cost efficiencies, the ability of the Company to acquire
inventory at lower costs, and a favorable mix of sales of more profitable
products is responsible for the increase. The increase in gross margin also
reflects the sale of inventories previously written down from their original
cost to their lower market values. The
fiscal 2001 and 2000 margins were particularly low due to industry market
conditions, which resulted in reduced sales prices for the Company’s products
sold to dietary supplement manufacturers.
RESEARCH AND DEVELOPMENT.
Research and development costs remained consistent at $2,580,000 and
$2,586,000 in 2002 and 2001, respectively.
Research and development costs increased 223% from $800,000 for the
11months ended March 31, 2000 to $2,586,000 in 2001. As a percentage of revenues, research and development costs were
4.5%, 3.9%, and 1.0% in 2002, 2001 and 2000, respectively. The increase in research and development
expenditures relates to a deliberate increase in expenditures for new product
development, including an increase in the number of employees, and additional
use of outside consultants.
SALES AND MARKETING. Sales and
marketing costs decreased 7% to $3,374,000 in 2002 from $3,621,000 in
2001. As a percentage of sales, sales
and marketing costs were 5.9% and 5.4% in 2002 and 2001, respectively. The decrease in sales and marketing costs
were primarily the result of a decline in sales between periods. The increase in the percentage of revenues
results from fixed marketing costs spread over less revenues. Sales and marketing costs decreased 21% to
$3,621,000 in 2001 from $4,612,000 for the 11months ended March 31, 2000. As a percentage of revenues, sales and
marketing costs were 5.4% in 2001 and 5.7% in 2000. The decrease in sales and marketing costs both as a percentage of
revenues and in absolute dollars resulted from the decline in revenues between
periods and the Company’s cost reduction efforts.
GENERAL AND ADMINISTRATIVE.
General and administrative costs decreased to $8,319,000 (14.4% of
revenues) in 2002 from $11,394,000 (17.1% of revenues) in 2001. The 27% decrease in general and administrative
expenses is a result of the Company’s restructuring and cost reduction
efforts. General and administrative
expenses increased to $11,394,000 from $11,104,000 between 2001 and 2000 as a
result of the short fiscal period in 2000.
As a percentage of revenues, general and administrative expenses
increased to 17.1% in 2001 from 13.7% in 2000 due to significantly less
revenues in fiscal 2001 over which to spread the Company’s fixed costs.
RESTRUCTURING CHARGES AND EXIT COSTS.
Restructuring charges totaled $2,884,000 in 2002 and $17,844,000 in
2001. Charges during fiscal 2002
resulted from a continued effort to reduce operating costs and streamline
operations. The initiatives included a
reduction in headcount (including two senior executive vice president
positions) resulting in contractual severance charges of $1.1 million, the
termination of leases on certain facilities for $1.1 million, and the
impairment of related leasehold improvements of $675,000. The charges during
fiscal 2001, include the impairment of goodwill and long-lived assets and an
additional accrual necessary for the exit from the Paclitaxel business. As a
result of the decline in the dietary supplement industry, among other factors,
the Company deemed the goodwill recorded in connection with the Merger to be
impaired. During the fiscal year ended
March 31, 2001, the Company recorded a charge of $16.5 million to write down
the remaining goodwill balance, which had been initially recorded in connection
with the Merger. The Company believed
the goodwill had no residual value because of the significant losses being
incurred by the Contributed Subsidiaries and the continued oversupply of
dietary supplements in the Company’s markets leading to a reduction in the
demand and prices for the Company’s products. Similarly, long-lived assets were
written down to zero because of their specialized nature and the lack of
alternative use for the equipment resulting in a charge of $1.2 million.
$100,000 of lease termination costs recorded in the prior period were reversed
in fiscal 2001.
Restructuring charges were $9,256,000 in 2000. During fiscal 2000, the
Company terminated the operations of the Wilcox subsidiary and consolidated its
technical services operations in order to gain efficiencies. Wilcox principally purchased wild botanical
raw materials gathered in the United States and sold those materials to
customers in North America, Europe and Asia.
The decision to terminate the operations of Wilcox was made as a result
of the significant decline in market prices for the natural product raw
materials sourced by Wilcox. The restructuring charges included lease
termination costs of $1 million, severance for 14 Wilcox employees of $645,000,
and the write-down of goodwill and long-lived assets related to the operations
of Wilcox of $7.1 million. As part of the consolidation of the technical
services operations, the Company shut
down its laboratory operations in Smyrna, Georgia. The cost to close
the Smyrna operations included lease termination costs of $400,000 and
severance of $100,000 for three employees.
INTEREST EXPENSE. Interest
expense was $1,653,000 in 2002, $2,296,000 in 2001, and $1,879,000 in the 11
months ended March 31, 2000. In fiscal
2002, interest was reduced by repaying a portion of the funds borrowed from
Wells Fargo. During 2001, interest
expense remained consistent with fiscal year 2000 levels after considering the
short (11 month) fiscal period in 2000.
OTHER The Company realized one-time gains of $309,000 and
$1.4 million in fiscal 2002 and 2001,
respectively, from the sale of the Hauser Laboratories division of the
Technical Services business and the sale of land held for investment.
INCOME TAXES. The Company
incurred a benefit of $103,000 and a provision of $94,000 for state income
taxes in 2002 and 2001, respectively. For the 11months ended March 31 ,2000,
the Company incurred a provision of $3.6 million related to additional
valuation allowances against its deferred tax assets. Given the Company’s net
losses, all deferred tax assets have been eliminated through a valuation
allowance.
NET LOSS. Because of the items
discussed above, the Company’s net loss has been reduced from $28.4 million and
$33.3 million in fiscal 2000 and 2001, respectively, to $5.4 million in fiscal
2002.
LIQUIDITY
AND CAPITAL RESOURCES GENERAL. Total cash and cash equivalents were $452,000 at March 31,
2002, compared to $616,000 at March 31, 2001. The Company’s primary cash needs
are for operations, working capital and capital expenditures.
Cash provided by operating activities for the year ended March 31, 2002
was $2,883,000 compared to $4,008,000 for the year ended March 31, 2001. The decrease in cash provided by
operations was primarily the result of cash provided by working capital
reductions of $13.4 million in fiscal 2001 versus $4.3 million in fiscal
2002. The reduction in working capital
for the year ended March 31, 2002 was primarily the result of decreased
inventories and receivables of $2,014,000 and $2,077,000, respectively. The decrease in inventories resulted from
improved inventory management activity and liquidation of excess inventories,
while accounts receivable decreased due to improved collections, and lower
overall revenues. The decrease in
inventories in fiscal 2001 was the result of a liquidation of inventory
balances through one-off bulk sales.
The decrease in working capital was offset by cash used to fund
operations of $1.4 million and $9.4 million in 2002 and 2001, respectively. The reduction in cash used to fund
operations was due to the decreased net loss.
Cash used in investing activities was comprised of additions to
property and equipment of $1,613,000, partially offset by the net proceeds of
$790,000 from the sale of the Hauser Laboratories division of HTS and $116,000
from other asset sales. The Company believes capital expenditures in fiscal
2003 will be consistent with fiscal 2002.
Cash provided by investing activities in fiscal 2001 was comprised of
proceeds equal to $3,799,000 from the sale of land held for investment, which
was partially offset by capital expenditures of $3,514,000.
In fiscal 2002 as well as in 2001, cash used in financing activities
was comprised of repayments of the Amended Credit Facility and long-term
debt. In fiscal 2001, such repayments
were partially offset by proceeds from the sale to Zatpack of a $3 million Note
of the Company, which is subordinate to the Company’s Amended Credit Facility
(the “Zatpack Note”), and proceeds from the issuance of Common Stock and
warrants.
In April and June 2002, the
Company defaulted under the Amended Credit Facility, which it entered into with
Wells Fargo on December 7, 2001. The
defaults occurred because the Company failed to make a $3.0 million payment on
April 30, 2002, as required by the term note, and was not in compliance with
its cash flow covenant for the quarter ending June 30, 2002. On June 25, 2002, in consideration of a
waiver by Wells Fargo of these events of default, the Company entered into the
Amendment. Pursuant to the Amendment,
both the term note and the revolving line of credit will mature on August 31,
2002. Specifically, the Amendment
extends the maturity date of the term note from June 30, 2002 to August 31,
2002 and amends the maturity date of the revolving line of credit from August
31, 2003 to August 31, 2002. The
Company is engaged in discussions, including regarding the sale of Shuster
Laboratories, which could result in the Company obtaining funds to pay the
outstanding loans to Wells Fargo in August 2002 and permit the Company to
obtain a new line of credit to finance operations. There can be no assurance that the requisite funds will be
obtained. Arthur Andersen LLP, auditors
for the Company, has issued a modified opinion in connection with the audit of
the fiscal year March 31, 2002, which states that there is a substantial doubt
about the ability of the Company to continue as a going concern.” See “Report of Independent Public
Accountants” herein.
WORKING CAPITAL. Working capital as of March 31, 2002 was ($11,892,000)
as compared to ($6,272,000) as of March 31, 2001. The change is primarily
attributable to the liquidation of receivables and inventories during 2002.
INCOME TAXES. The Company’s net
deferred income taxes had a net zero balance at March 31, 2002. Additionally, as of March 31, 2002, the
Company had a valuation allowance of approximately $28.1 million. Included in gross deferred tax assets at
March 31, 2002, are federal and state net operating loss carry forwards of
approximately $68 million and $72 million respectively, income tax credits of
approximately $728,000 and alternative minimum tax credits of approximately
$1.5 million. Although the deferred income taxes have been fully reserved, the
reserve may be reversed and a related benefit recorded in the future when and
if the assets are deemed realizable.
BACKLOG. Backlog of unfilled sales orders was $6,542,000 as of March
31, 2002, compared to $5,700,000 as
of March 31, 2001. Backlog consists of
unfilled sales orders for Dietary Supplements, Technical Services and
Pharmaceutical and Functional Food Ingredients.
CRITICAL ACCOUNTING POLICIES
In response to the SEC’s Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles upon which our financial status depends. We determined the critical principles by
considering accounting policies that involve the most complex or subjective
decisions or assessments. We identified
our most critical accounting policies to be those related to revenue
recognition, inventory valuation and impact of impairments of long-lived
assets. We state these accounting
policies in the notes
to the consolidated
financial statements and at relevant sections in this discussion and analysis.
This discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
report.
REVENUE RECOGNITION. Dietary Supplement and Pharmaceutical
and Functional Food Ingredients processing revenues are recognized when title
and risk of ownership passes to the customer, which generally is upon shipment
of product. Technical Services revenues are recognized upon completion of
specified contract requirements.
Anticipated losses from contracts in progress are provided for in the
period the loss is identified.
INVENTORY VALUATION.
Raw
material, work in process, and finished goods inventory, which include costs of
materials, direct labor and manufacturing overhead, are priced at the lower of
average cost or market. Write-downs for price declines, obsolescence, spoilage
and excess inventory are charged to expense in the period when conditions
giving rise to the write-downs are first recognized. The Company purchases raw material inventory during harvest
seasons, generally in the spring and fall.
These purchases may take place well in advance of scheduled production
of finished product, which subjects the Company to risk of price declines,
obsolescence, spoilage and excess inventory.
During the year ended March 31, 2002 and 2001, there continued to be
declines in the wholesale prices for bulk dietary supplement ingredients. As such, the Company reduced the value of
certain of its inventory to its net realizable value and recorded charges of
$212,000, $4,498,000 and $10,671,000 during the years ended March 31, 2002 and
2001, and the 11 months ended March 31, 2000 respectively.
Markets
for the Company’s raw materials and finished goods have become more
volatile. Accordingly, it is reasonably
possible that the Company may record future write-downs of inventory to net
realizable value based on volatile selling prices, and such write-downs could
be material. The timing and amount of
such write downs are subject to considerable judgment by management.
IMPAIRMENT OF LONG-LIVED
ASSETS. The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable from future undiscounted
cash flows. Impairment losses are recorded for the difference between the
carrying value and fair value of the long-lived asset.
During the years ended March 31, 2002 and 2001, and the eleven months
ended March 31, 2000, charges of $675,000, $1,248,000 and $500,000,
respectively, were recorded to write down fixed assets no longer utilized in
the Company’s operations to zero.The fixed assets were written down to zero
because of the abandonment of facilities, their specialized nature, or the lack
of alternative uses for the equipment.
During the year ended March 31, 2001 and the 11 months ended March 31,
2000, the Company wrote-down its goodwill balances by $16.5 million and $6.6 million respectively. The write downs were the result of the
recent history of significant operating losses from the Contributed
Subsidiaries and the closure of the Wilcox operations, respectively. The determination of undiscounted cash flows
and the fair value of impaired assets is subject to considerable judgment by
management.
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 bulk dietary supplements,
extracts and pharmaceutical and functional food ingredients. The Company performs ongoing evaluations
regarding the net realizable value of inventory and writes down such inventory
as appropriate. Historically and as of
March 31, 2002, the Company has not used derivative instruments or engaged in
hedging activities.
With respect to the
Company’s Amended Credit Facility, the interest payable on the Company’s
revolving line of credit and term note with Wells Fargo are variable based on
the prime rate, and are therefore affected by changes in market interest rates.
At March 31, 2002, $9,890,000 was outstanding under the revolving line of
credit with an interest rate of 6.75%,
while $6,549,000 was outstanding under the term note with an interest rate of 7.75%.
In April and June 2002, the Company defaulted under its Amended
Credit Facility. On June 25,
2002, in consideration of a waiver by Wells Fargo of these events of default,
the Company entered into the Amendment. Pursuant to the Amendment, both the
term note and the revolving line of credit will mature on August 31, 2002. The
Company is engaged in discussions, including regarding the sale of Shuster
Laboratories, which could result in the Company obtaining funds to pay the
outstanding loans to Wells Fargo in August 2002 and permit the Company to
obtain a new line of credit to finance operations. There can be no assurance that the requisite funds will be
obtained. However, if obtained, the new
borrowing arrangements may be at interest rates substantially higher than the
Company’s current facility. For
example, if the interest rate on the Company’s revolving line of credit and
term loan had been 2% higher for the year ended March 31, 2001, the Company
would have incurred additional interest expense of approximately $365,000, with
an associated $0.06 increase in the per share loss for the year. 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 Amended
Credit Facility.
FINANCING
ACTIVITY The following summarizes our
contractual obligations at March 31, 2002 and the effect such obligations are
expected to have on our liquidity and cash flows in future periods (in
thousands):
FORWARD-LOOKING STATEMENTS Certain oral and written statements of management of the Company
included in the Form 10-K and elsewhere may contain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, 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.
Item
8.
Item
8. Financial Statements and
Supplementary Data The information required to be presented by
this item is presented commencing on page of this Annual Report on Form
10-K.
Item
9.
Item
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure There
have been no disagreements between the Company and its independent accountants
on any matter of accounting principles or practices or financial statement
disclosure.
PART
III
Item
10.
Item
10. Directors and Executive Officers of
the Registrant Directors
Kenneth C.
Cleveland, 69, has served as Director, President and Chief
Executive Officer of the Company since October 2000. Mr. Cleveland served as
Chief Financial Officer of the Company from July 2000 to October 2000. Mr. Cleveland is President of Kenneth
Cleveland Associates, Inc., a firm that specializes in financial and operational
restructuring for businesses.
Mr. Cleveland has served as President and Chief Executive Officer
of Zuellig Group N.A., Inc. and Zuellig Botanicals, Inc. since October
2000. He also is Chairman of Gel Pak,
LLC, a manufacturer of material for the semiconductor industry. He currently serves as a Director for
Clothestime, Inc., a retailer of women’s apparel, as well as Zuellig Group
N.A., Inc. and Zuellig Botanicals, Inc.
During 1999, Mr. Cleveland served as President of American Security
Distribution, a distributor of door hardware.
From April 1995 through November 1997, Mr. Cleveland has also served as
President of Kroy, Inc., a manufacturer of labeling equipment.
Herbert
Elish, 68, has served as a Director of the Company since June 1999. Mr. Elish was the Chief Executive Officer of
Weirton Steel Corporation from 1987 to December 31, 1995. Currently, Mr. Elish is Director of The
Carnegie Library of Pittsburgh.
James R.
Mellor, 72, has served as a Director of the Company since June 1999. Mr. Mellor was Chairman and Chief Executive
Officer of General Dynamics Corporation before retiring in May 1997. Currently, Mr. Mellor is a Director of
General Dynamics Corporation, Computer Sciences Corporation and
AmerisourceBergen. Mr. Mellor also
serves as a Director and the Chairman of USEC, Inc.
Robert F.
Saydah, 74, has served as a Director of the Company since January 1994. Mr. Saydah retired as a Partner of Heidrick
& Struggles, a publicly held international executive search consulting
firm, in March 2000 where he had been employed since May 1988. Mr. Saydah also has held general management
positions for the Lederle Laboratories Division of American Cyanamid Company.
Harvey L.
Sperry, 72, has served as a Director of the Company since June 1999. Mr. Sperry is a retired Partner of the law
firm of Willkie Farr & Gallagher.
Currently, Mr. Sperry is a Director of Hampshire Group Limited, an
apparel manufacturer, as well as Zatpack, Inc., Zuellig Group N.A., Inc. and
Zuellig Botanicals, Inc.
Executive
Officers of the Company
Executive officers are elected by the Board of Directors and hold
office until their successors have been duly elected and qualified or until
their earlier resignation or removal from office. The executive officers of the Company as of May 31, 2002 are set
forth below. A brief biography of each
executive officer follows (other than Kenneth C. Cleveland, whose biography is
set forth above).
Thomas W.
Hanlon has served as the Chief Financial Officer,
Treasurer and Secretary of the Company since July 2001. Mr. Hanlon has also served as Secretary and
Treasurer of Zuellig Group N.A., Inc. and Zuellig Botanicals, Inc. since July
2001. Mr. Hanlon is responsible for the
finance and administration operations at Hauser. Mr. Hanlon has served in several interim financial management
roles through Thomas Hanlon Associates, a firm that he founded in 1993 which
specializes in financial restructuring, management consulting and interim
financial management. From 1999 to
2000, Mr. Hanlon served as Vice President of Finance at American Security
Distribution. From 1998 to 1999, Mr.
Hanlon served as Managing Director for Irvine Associates, Inc.
Peter
Hafermann has served as Vice President of Sales and Marketing
since June 1999. For the period of May
1997 to June 1999, he served as Vice President of Sales and Marketing for
Botanicals International. Prior to
joining Botanicals International, Mr. Hafermann spent 11 years with FMC
Corporation’s (“FMC”) Food and Pharmaceutical Division. While at FMC, Mr. Hafermann held several
management positions in sales, marketing and business development in Canada,
Belgium and the United States.
Dieter W.
Luelsdorf has served as President and Chief Executive Officer
of ZetaPharm since July 1989. Prior to
joining ZetaPharm, Mr. Luelsdorf served as General Manager of Fine Chemicals
for EM, the U.S. affiliate of E. Merck, Darmstadt.
Philip H. Katz has served as President of
HTS since 1999. As President of HTS, he
has retained his managerial role and position at the Shuster Laboratories
division of HTS. From the period of
1996 to 1999, Mr. Katz served as President of Shuster Laboratories, Inc. and,
from 1993 to 1996, Mr. Katz served as President of Shuster Laboratories, Inc.
Food and Pharmaceutical Division. Prior
to joining Shuster Laboratories, Inc. in 1993, Mr. Katz was employed as a Food
Packaging Technologist at the U.S. Army Natick Laboratories. Mr. Katz is a past Chairman and current
member of the Institute of Food Technologists New England Chapter.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
(“Section 16(a)”), requires the Company’s directors, executive officers and
persons who beneficially own more than 10% of the Common Stock of the Company
to file with the Securities and Exchange Commission (“SEC”) initial reports of
ownership and reports of changes in ownership of the Company’s Common
Stock. Directors, executive officers
and beneficial owners of more than 10% of the Common Stock of the Company are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company’s review of the copies of such forms
furnished to the Company and written representations from the directors,
executive officers and greater than 10% beneficial owners, the Company believes
that all Section 16(a) filing requirements applicable to the Company’s
directors, executive officers and greater than 10% beneficial owners were
complied with during fiscal year ended March 31, 2002, except Mr. Cleveland was
not timely in filing a Form 4 for changes in beneficial ownership that occurred
on February 22, 2001 and except that Zatpack was not timely in filing a Form 4
for changes in beneficial ownership that occurred on October 11, 2000. The changes in beneficial ownership for Mr.
Cleveland were reported on a Form 5 filing on June 17, 2002 and the changes in
beneficial ownership for Zatpack were reported on a Form 4 filing on December
19, 2001.
Item
11.
Item
11. Executive Compensation The following table provides certain summary information concerning
compensation of the Company’s Chief Executive Officer and the four other most
highly compensated executive officers of the Company (the “Named Executive
Officers”) for each of the last three fiscal years.
STOCK OPTION GRANTS IN FISCAL YEAR
ENDED MARCH 31, 2002
During the fiscal year ended March 31, 2002, the Company did not grant
any options to purchase Common Stock.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table shows with respect to the Company’s Named Executive
Officers, (a) the total number of unexercised stock options and (b) the
aggregate dollar value of in-the-money, unexercised options held at the end of
the fiscal year. None of the Named
Executive Officers exercised any options during the last fiscal year.
(1)
Effective June 22, 2001, Mr. Luelsdorf agreed to cancel options to purchase
62,500 shares of common stock. See
“Item 5. Market for Registrant’s Common
Equity and Related Stockholder Matters.”
The fair market value of the Company’s Common Stock at March 31, 2002,
measured as the average between the high and low trade of Common Stock on March
28, 2002, the then most recent date on which the Common Stock traded, was $0.40
per share.
Equity
Compensation Plan Information
DIRECTOR
COMPENSATION
Non-employee directors of the Company receive annual compensation of
$25,000, which is payable quarterly in Common Stock of the Company. The number of shares to which each non-employee
director is entitled each quarter is determined by dividing $6,250 by the
closing price of the Common Stock on the last trading day of the calendar
quarter. Mr. Elish, as the Chairman of
the Board receives additional compensation of $25,000, which is also payable
quarterly in Common Stock of the Company.
In fiscal 2002, the Company’s non-employee directors purchased a total
of 302,936 shares of Common Stock from the Company at an average price of $0.49
per share (100% of fair market value on the date of grant).
EMPLOYMENT
CONTRACTS
Kenneth C. Cleveland is a party to an agreement to provide services to
the Company. See “Item 13. Certain Relationships and Related
Transactions” for a summary of this agreement.
Thomas W. Hanlon is a party to an agreement to provide services to the
Company. See “Item 13. Certain Relationships and Related
Transactions” for a summary of this agreement.
Peter Hafermann and Philip Katz have severance arrangements with the
Company whereby upon termination of their employment, with or without cause,
they will be entitled to receive up to one year of their total compensation.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year ended March 31, 2002, Messrs. Mellor and Sperry
comprised the Company’s Compensation Committee. All were non-employee
directors. None of the members of the
Compensation Committee have ever been officers of the Company.
Item
12.
Item
12. Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth, as of June 10, 2002, information
regarding the beneficial ownership of Common Stock by (i) each stockholder who
the Company knows owns more than 5% of the outstanding shares of Common Stock,
(ii) each director, (iii) each executive officer named in the Summary
Compensation Table and (iv) all directors and executive officers as a group.
* Indicates less than 1%
(1)
Includes the following number of shares
which could be acquired within 60 days through the exercise of stock
options: Mr. Saydah, 3,042; Mr.
Katz, 3,174; and all directors and officers as a group, 6,216.
(2)
Mr. Cleveland’s address is 20710 S. Alameda
Street, Long Beach, CA 90810.
(3)
Mr. Saydah’s address is 2493 Biltmore Drive,
Alamo, CA 94507.
(4)
Mr. Elish’s address is 4400 Forbes Avenue,
Pittsburgh, PA 15231.
(5)
Mr. Mellor’s address is 32161 South Coast
Highway, Laguna Beach, CA 92651.
(6)
Mr. Sperry’s address is 787 Seventh Ave.,
New York, NY 10019.
(7)
Mr. Hanlon’s address is 20710 S. Alameda
Street, Long Beach, CA 90810.
(8)
Mr. Hafermann’s address is 20710 S. Alameda
Street, Long Beach, CA 90810.
(9)
Mr. Luelsdorf’s address is 70 West 36th
Street, New York, NY 10018.
(10)
Mr. Katz’s address is 85 John Road, Canton,
MA 02021.
(11)
Includes immediately exercisable five-year
warrants to purchase 992,789 shares, 988,471 shares owned by ZGNA, and
1,204,955 shares owned by ZBI.
Zatpack has 100 shares of common stock issued and outstanding, which is
divided into the following three classes: 49 shares of Zatpack Class A
common stock are held by the Stephen Zuellig Issue Trust for the benefit of
Stephen Zuellig’s descendants; 49 shares of Zatpack Class B common stock
are held by the Gilbert Zuellig Issue Trust for the benefit of Gilbert
Zuellig’s descendants; and 2 shares of Zatpack Class C common stock are
held by the Peter Zuellig and Thomas Zuellig Trust for the benefit of Peter
Zuellig, the eldest son of Stephen Zuellig, and Thomas Zuellig, the eldest
son of Gilbert Zuellig. The trustee for each trust is the Bermuda Trust
Company.
(12)
Zatpack’s address is Craig Muir Chambers,
P.O. Box 71, Road Town, Tortola, British Virgin Islands.
Item
13.
Item
13. Certain Relationships and Related
Transactions The Company and ZBI are parties to an agreement regarding employees
dated June 11, 1999 pursuant to which ZBI, a seller of bulk raw materials in
the form of powders or similar processed products, shares approximately
one-third of the personnel costs of the Company. Essentially, ZBI purchases
certain inventory, disburses all amounts for shared services and receives
reimbursement from the Company for the amounts disbursed on its behalf.
On June 11, 1999, the Company, ZGNA and ZBI entered into a Governance
Agreement, pursuant to which each party agreed to take all action within their
power to cause the Board of Directors to consist of nine directors, three of
which are to be designated by the directors who served on the Board immediately
prior to the Merger (the “Continuing Directors”), three of which are to
designated by ZGNA (the “ZGNA Directors”) and three of which shall be
independent (the “Independent Directors”).
In addition, pursuant to the Governance Agreement, ZGNA is required to
vote shares of Common Stock beneficially owned by it to elect any successors
designated by a majority of the remaining Continuing Directors if a Continuing
Director resigns and to elect any successors designated by a majority of the
remaining Independent Directors if an Independent Director resigns. The Governance Agreement terminates on the
earlier of June 11, 2004 and the date on which ZGNA ceases to beneficially own
at least 20% of the outstanding Common Stock.
In June 2000, Rudolfo C. Bryce, an Independent Director, resigned from
the Board of Directors. As of May 31,
2002, the remaining Independent Directors had not nominated a replacement
director. In July 2000, William E.
Coleman, a Continuing Director, resigned from the Board of Directors. As of May 31, 2002, the remaining Continuing
Directors had not nominated a replacement director.
In connection with the Amended Credit Facility, Zatpack paid Wells
Fargo the Fee as further consideration for entering into the Amended Credit
Facility with the Company and ZBI. The Company, as consideration for such payment,
issued the Warrant to Zatpack. The
terms of the Warrant were negotiated solely between the Company and Wells
Fargo. Pursuant to the terms of the
Warrant, unless waived by the Company, the holder thereof may only exercise the
Warrant 61 days from the date that written notice of such exercise is received
by the Company. On January 31, 2002,
Zatpack sold the Warrant. The Company
has not waived the 61-day notice provision.
Zatpack caused ZBI to forgive $247,000 of trade payables due from the
Company for its share of the debt issuance costs. As a result, the Company has recorded debt issuance cost of
$532,000. The debt issuance costs will
be amortized to interest expense on a straight-line basis over the term of the
Amended Credit Facility, through August 2002.
ZatPack holds a $3 million Note
of the Company, which is subordinate to the Company’s Amended Credit Facility
with Wells Fargo. The ZatPack Note
accrues interest at 6.5%, is payable in three years and has five-year warrants
attached. The warrants permit ZatPack
to purchase 992,789 shares of Common Stock at a price of $0.5855 per share.
The
Company sells inventory to ZBI. During the fiscal years ended March 31, 2002
and 2001, sales to ZBI totaled $589,000 and $3,219,000 respectively. The
related trade accounts receivable due from ZBI totaled $4,000 and $138,000 at
March 31, 2002 and 2001, respectively.
The
Company has agreements under which certain personnel and facilities costs of
the Company are shared approximately one-third by ZBI, which sells bulk
botanical raw materials in the form of powders or similar processed product.
ZBI purchases certain inventory, disburses all amounts for shared services, and
receives reimbursement from the Company for amounts disbursed on its behalf.
The amounts owed to ZBI under these agreements totaled $2,946,000 and
$2,988,000 at March 31, 2002 and 2001, respectively. For the fiscal years ended
March 31, 2002 and 2001, the amounts recorded as costs and expenses for
inventory, personnel and facilities by the Company under this arrangement
totaled $8,653,000 and $7,067,000, respectively. These amounts are included
with cost of sales and operating expenses in the accompanying statements of
operations.
The Company, Kenneth Cleveland Associates, Inc., a company that
specializes in advising businesses with respect to both financial and
operational restructuring (the “Contractor”), and Kenneth C. Cleveland have
entered into an agreement to provide services to the Company. Pursuant to this agreement, the Contractor
has agreed to provide services to the Company, which services consist of Mr.
Cleveland serving as an officer of the Company, in exchange for a fee of $8,000
per week. Of the $8,000 paid to Mr.
Cleveland per week, the Company is reimbursed by an affiliate to whom Mr.
Cleveland provides services, in the amount of $2,400 per week. The agreement terminates automatically on
August 1, 2004 or upon six months prior notice by either the Contractor or the
Company. Mr. Cleveland is the President
of the Contractor.
The Company, Thomas Hanlon Associates, a sole proprietorship that
specializes in advising businesses with respect to financial and operational
restructuring (“Hanlon Associates”), and Thomas W. Hanlon have entered into an
agreement to provide services to the Company.
Pursuant to this agreement, Hanlon Associates has agreed to provide
services to the Company, which services consist of Mr. Hanlon serving as an
officer of the Company, in exchange for a fee of $4,327 per week. Of the $4,327 paid to Mr. Hanlon per week,
the Company is reimbursed by an affiliate to whom Mr. Hanlon provides services,
in the amount of $1,298 per week. The agreement terminates automatically on
July 12, 2002 or upon 30 days prior notice by either Hanlon Associates or the
Company.
Harvey L. Sperry, a Director, is a retired Partner in the law firm of
Willkie Farr & Gallagher, which acts as counsel to the Company. Mr. Sperry provides consulting services to
the Company in exchange for a fee of $5,000 per month.
PART
IV
Item
14.
Item
14. Exhibits, Financial Statements,
Schedules, and Reports on Form 8-K (a) (1) and (2) The
following financial statements and financial statement schedules are filed as
part of this Report:
Page
Independent Auditors’ Report
Consolidated Statements of
Operations
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000
Consolidated Balance
Sheets as of March 31, 2002 and March 31, 2001
Consolidated Statements of
Cash Flows
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000
Consolidated Statements of
Stockholders’ Equity
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000
Notes to Consolidated
Financial Statements
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000
All other schedules have been omitted because they are not applicable,
not required, or the required information is shown in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the fourth quarter of fiscal year ended March 31, 2002.
(c) Exhibits
The exhibits required to be
filed by Item 601 of Regulation S-K are incorporated herein by reference to the
Exhibit Index of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: June 28, 2002
HAUSER, INC.
By:
/S/
KENNETH C. CLEVELAND
Kenneth
C. Cleveland
Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ KENNETH C. CLEVELAND
Kenneth C. Cleveland
Chief Executive
Officer, President and
Director (Principal Executive Officer)
June
28, 2002
/S/ THOMAS W. HANLON
Thomas W.
Hanlon
Chief Financial Officer
(Principal Accounting Officer)
June
28, 2002
/S/ HERBERT ELISH
Herbert Elish
Director
June
28, 2002
/S/ JAMES R. MELLOR
James R. Mellor
Director
June
28, 2002
/S/ ROBERT F. SAYDAH
Robert F. Saydah
Director
June
28, 2002
/S/ HARVEY L. SPERRY
Harvey L. Sperry
Director
June
28, 2002
EXHIBIT
INDEX
Exhibit No.
Description
2.1
Agreement and Plan of
Merger, by and among Zuellig Group N.A., Inc., Hauser, Inc. and certain other
parties, dated as of December 8, 1998 and amended as of February 11, 1999
(Incorporated by reference to Appendix B to the Company’s definitive proxy
statement dated May 11, 1999).
3.1
Certificate of
Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s
report on Form 10-K for the 11 months ended March 31, 2000).
3.2
Bylaws (Incorporated by
reference to Exhibit 3.2 to the Company’s report on Form 10-K for the 11
months ended March 31, 2000).
10.1
Governance Agreement,
dated as of June 11, 1999, by and between Hauser, Inc., Zuellig Group N.A.,
Inc. and Zuellig Botanicals, Inc. (Incorporated by reference to Appendix C to
the Company’s definitive proxy statement dated May 11, 1999).
10.2
Registration Rights
Agreement, dated as of December 8, 1998, by and between Hauser, Inc., Zuellig
Group N.A., Inc. and Zuellig Botanicals, Inc. (Incorporated by reference to
Exhibit 2.7 to the Company’s report on Form 10-Q for the quarter ended
October 31, 1998).
10.3
Form of Sourcing Agency
Agreement, dated as of June 11, 1999, by and between Hauser, Inc. and Zuellig
Botanicals, Inc. (Incorporated by reference to Exhibit 2.8 to the Company’s
report on Form 10-Q for the quarter ended October 31, 1998).
10.4
Form of Agreement
Regarding Employees, dated as of June 11, 1999, by and between Hauser, Inc.
and Zuellig Botanicals, Inc. (Incorporated by reference to Exhibit 2.2 to the
Company’s report on Form 10-Q for the quarter ended October 31, 1998).
10.5
Paclitaxel Supply
Agreement, dated February 3, 1999 (Incorporated by reference to Exhibit 10.1
to the Company’s report on Form 10-Q for the quarter ended January 31, 1999).
10.6
Amended and Restated
Credit Agreement, dated as of December 7, 2001, among Hauser, Inc., Wells
Fargo Bank, N.A., Hauser Technical Services, Inc., Botanicals International
Extracts, Inc. and Zetapharm, Inc. (Incorporated by reference to Exhibit 10.1
to the Company’s report on Form 8-K dated December 10, 2001).
10.7
Revolving Credit Note,
dated December 7, 2001.
10.8
Term Note, dated December
7, 2001.
10.9
Security Agreement, dated
as of June 11, 1999, among Hauser, Inc., Shuster Laboratories, Inc. and Wells
Fargo Bank, N.A. (Incorporated by reference to Exhibit 10.4 to the Company’s
report on Form 10-K for the fiscal year ended April 30, 1999).
10.10
Amendment No. 1 to the
Security Agreement, dated as of September 1, 2000, by and between Hauser,
Inc., Wells Fargo and certain other parties. (Incorporated by reference to
Exhibit 10.3 to the Company’s report on Form 10-Q for the quarter ended
September 30, 2000).
10.11
Collateral Assignment of
Trademarks, Trademark Applications, Patents and Patent Applications, dated as
of December 7, 2001, by and among Hauser, Inc., Hauser Technical Services,
Inc., Botanicals International Extracts, Inc. and ZetaPharm, Inc.
10.12
Amended and Restated
Security Agreement, dated as of June 11, 1999, among Zuellig Botanical
Extracts, Inc., Wilcox Drug Company, Inc., ZetaPharm, Inc., and Wells Fargo
Bank, N.A. (Incorporated by reference to Exhibit 10.7 to the Company’s report
on Form 10-K for the fiscal year ended April 30, 1999).
10.13
Pledge and Security
Agreement, dated as of June 11, 1999 (Incorporated by reference to Exhibit
10.8 to the Company’s report on Form 10-K for the fiscal year ended April 30,
1999).
10.14
Amendment No.1 to the
Pledge and Security Agreement, dated as of September 1, 2000, by and between
Hauser, Inc., Wells Fargo Bank, N.A., and certain other parties (Incorporated
by reference to Exhibit 10.4 to the Company’s report on Form 10-Q for the
quarter ended September 30, 2000).
10.15
Deed of Trust, Assignment
of Rents, Security Agreement and Financing Statement, dated as of June 11,
1999 (Incorporated by reference to Exhibit 10.9 to the Company’s report on
Form 10-K for the fiscal year ended
April 30, 1999).
10.16
General Release, dated
October 31, 2000, by and between Hauser, Inc., Wells Fargo Bank, N.A. and
certain other parties (Incorporated by reference to Exhibit 10.2 to the
Company’s report on Form 10-Q for the quarter ended September 30, 2000).
10.17
Subordination Agreement,
dated as of October 11, 2000, by and among Hauser, Inc., Zatpack, Inc. and
Wells Fargo (Incorporated by reference to Exhibit 10.7 to the Company’s
report on Form 10-Q for the quarter ended September 30, 2000).
10.18
Acknowledgement and Consent to Amended and
Restated Credit Agreement, dated as of December 7, 2001, by and among Hauser,
Inc., Hauser Technical Services, Inc., Botanical International Extracts,
Inc., ZetaPharm, Inc., Wilcox Natural Products, Inc. and Wells Fargo Bank,
N.A.
10.19
Note Purchase Agreement, dated as of
October 11, 2000, between Hauser, Inc. and Zatpack, Inc. (Incorporated by
reference to Exhibit 10.25 to the Company’s report on Form 10-K for the
fiscal year ended March 31, 2001).
10.20
Warrant to Purchase Common Stock of Hauser,
Inc., dated October 11, 2000, issued to Zatpack, Inc. (Incorporated by
reference to Exhibit 10.24 to the Company’s report on Form 10-K for the
fiscal year ended March 31, 2001).
10.21
Warrant to Purchase Common Stock of Hauser,
Inc., dated as of December 7, 2001, issued to Zatpack, Inc. (Incorporated by
reference to Exhibit 10.2 to the Company’s Report on Form 8-K dated December
10, 2001).
10.22
Agreement to Provide
Services, dated as of August 1, 2000, between Hauser, Inc., Kenneth Cleveland
Associates, Inc. and Kenneth C. Cleveland.
10.23
Amendment No. 1 to
Agreement to Provide Services, dated as of July 12, 2001, between Hauser,
Inc., Kenneth Cleveland Associates, Inc. and Kenneth C. Cleveland.
10.24
Agreement to Provide
Services, dated as of July 12, 2001, between Hauser, Inc., Thomas Hanlon
Associates and Thomas W. Hanlon.
10.25
Hauser, Inc. 1987
Non-Statutory Stock Option Plan as amended (8/27/97).
10.26
Hauser, Inc. 1992
Incentive Stock Option Plan.
10.27
Hauser, Inc. 1999 Stock
Incentive Plan.
23.1
Consent of Arthur Andersen
LLP.
99.1
Letter to Securities and
Exchange Commission Pursuant to Temporary Note 3T dated June 28, 2002.
HAUSER,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.
Consolidated Statements of
Operations
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000.
Consolidated Balance
Sheets
as of March 31, 2002 and 2001.
Consolidated Statements of
Cash Flows
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000.
Consolidated Statements of
Stockholders’ Equity
for the years ended March 31, 2002 and 2001, and the eleven months ended
March 31, 2000.
Notes to Consolidated
Financial Statements
for the years ended March 31, 2002 and
2001, and the eleven months ended March 31, 2000.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders of
Hauser, Inc.:
We have audited the
accompanying consolidated balance sheets of Hauser, Inc. (a Delaware
corporation) and its subsidiaries as of March 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the years ended March 31, 2002 and 2001, and the eleven
months ended March 31, 2000. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hauser, Inc. and its subsidiaries
as of March 31, 2002 and 2001, and the results of their operations and their
cash flows for the years ended March 31, 2002 and 2001, and the eleven months
ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States.
The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
incurred significant losses from operations, has an accumulated deficit of
approximately $95.1 million, was in default on its credit facilities prior to
receiving a waiver from the lender and is dependent on obtaining new financing
to fund operations. These factors raise substantial doubt about the ability of
the Company to continue as a going concern.
Management’s plans in regard to these matters are also described in Note
1. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
Arthur Andersen LLP
Denver, Colorado,
June 25, 2002.
HAUSER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share data)
See
notes to consolidated financial statements.
HAUSER, INC.
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
See notes to consolidated financial statements.
HAUSER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
See notes to consolidated financial statements.
HAUSER,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See notes to consolidated financial statements.
HAUSER, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION AND GOING CONCERN
STATUS
Hauser, Inc., a
Delaware corporation, together with its wholly-owned subsidiaries
(together, “Hauser” or the “Company”),
is a leading supplier of natural product extracts and related products to the
dietary supplement market in the United States. Hauser manufactures extracts from botanical raw materials using
its proprietary technologies in extraction and purification. 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.
The Company has experienced significant losses from operations
resulting from a worldwide oversupply of dietary supplement products coupled
with high fixed costs. The Company has
substantially reduced costs, increased manufacturing efficiencies, consolidated
operations, restructured administrative activities, and reduced operating
assets. Beginning in 2002, the Company began divesting its ownership of parts
of its wholly owned subsidiary Hauser Technical Services, Inc. (“HTS”). In February 2002, the Company sold the
Hauser Laboratories division of HTS.
The proceeds from the sale of Hauser Laboratories were used to reduce
the Company’s bank debt. The Company is
currently seeking potential buyers for the Shuster Laboratories division of
HTS. If a sale of the Shuster
Laboratories division is consummated, the Company expects to use the proceeds
to further reduce the Company’s bank debt
In April and June 2002,
the Company defaulted under the Company’s Amended and Restated Credit Agreement
(the “Amended Credit Facility”), which it entered into with Wells Fargo Bank,
N.A. (“Wells Fargo”) on December 7, 2001.
The defaults occurred because the Company failed to make $1.9 million of
a $3.0 million payment due on April 30, 2002, as required by the term note, and
was not in compliance with its cash flow covenant for the quarter ending June
30, 2002. On June 25, 2002, in
consideration of a waiver by Wells Fargo of these events of default, the
Company amended the terms of the Amended Credit Facility (the
“Amendment”). Pursuant to the
Amendment, both the term note and the revolving line of credit will mature on
August 31, 2002. Specifically, the Amendment
extends the maturity date of the term note from June 30, 2002 to August 31,
2002 and amends the maturity date of the revolving line of credit from August
31, 2003 to August 31, 2002. The
Company is engaged in discussions, including regarding the sale of Shuster
Laboratories, which could result in the Company obtaining funds to pay the
outstanding loans to Wells Fargo in August 2002 and permit the Company to
obtain a new line of credit to finance operations. There can be no assurance that the requisite funds will be
obtained. These circumstances raise
substantial doubt about the ability of the Company to continue as a going
concern.
Sale of Hauser
Laboratories-
During
March of 2002, the assets of the Hauser Laboratories division were sold for
$1,150,000 million. With the sale, the
purchaser also assumed certain liabilities of the seller. The Company incurred
$360,000 in costs to sell the Company, and recognized a gain on the sale of
$309,000 which is included in the accompanying consolidated statement of
operations. Proceeds from the sale were
used to pay down the Company’s debt facilities. The revenues and net operating
losses from the activities of Hauser Laboratories for the years ended March 31,
2002 and 2001, and the eleven months ended March 31, 2000 are as follows (in
thousands):
Discontinuance of
Paclitaxel Activities-
In the third quarter of
fiscal 1999, the Company discontinued the manufacture and sale of
paclitaxel. In February 1999, the
Company entered into a purchase agreement for the sale of its remaining
paclitaxel inventory as part of the planned closure of the paclitaxel business.
Revenues generated through the sale of the remaining paclitaxel inventories
during the fiscal year ended March 31, 2001 and the eleven months ended March
31, 2000 totaled $671,000 and $8,695,000 respectively.
Change in fiscal
year-
During fiscal 2000, the
Company changed its fiscal year-end from April 30 to March 31 to align its
periodic reporting with calendar quarters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of
Consolidation -
The consolidated financial statements include those of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the carrying
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.
Concentration of Credit Risk - The Company is exposed to credit risk
from its cash and cash equivalents and trade receivables. The Company’s policy
is to place cash and cash equivalents in financial institutions it believes to
be financially sound, however amounts
deposited may
exceed balances federally insured by the U.S. Government. The Company generally
grants credit to its customers without collateral. The Company’s creditors are
concentrated in the food processing, dietary supplement and pharmaceutical
industries. During the years ended
March 31 2002 and 2001 and the eleven months ended March 31, 2000, no customer
accounted for more than 10% of the Company’s revenues.
Cash and Cash Equivalents - Cash and cash equivalents include investments in
highly liquid instruments with original maturities of 90 days or less.
Inventory - Raw material, work in process, and finished goods
inventory, which include costs of materials, direct labor and manufacturing
overhead, are priced at the lower of average cost or market. Write-downs for
price declines, obsolescence, spoilage and excess inventory are charged to
expense in the period when conditions giving rise to the write-downs are first
recognized. The Company purchases raw
material inventory during harvest seasons, generally in the spring and
fall. These purchases may take place
well in advance of scheduled production of finished product, which subjects the
Company to risk of price declines, obsolescence, spoilage and excess
inventory. Due to declines in the
wholesale prices for bulk dietary supplement ingredients the Company reduced
the value of certain of its inventory to its net realizable value and recorded
a charge of $212,000, $4,498,000 and $10,671,000 during the years ended March
31, 2002 and 2001, and the eleven months ended March 31, 2000,
respectively. During the eleven months
ended March 31, 2000, the Company reversed a $4 million provision related to
paclitaxel inventory commitments due to the successful cancellation of a
growing contract.
Markets for the
Company’s raw materials and finished goods have become more volatile. Accordingly, it is reasonably possible that
the Company may record future write-downs of inventory to net realizable value
based on volatile selling prices, and such write-downs could be material.
Inventory as of
March 31, 2002 and 2001 consisted of the following (in thousands):
Property and Equipment - Significant additions and improvements are
capitalized at cost, while maintenance and repairs which do not improve or
extend the life of the respective assets are charged to expense as incurred.
Depreciation is recognized on a straight-line basis
over the following estimated useful lives:
Leasehold improvements
are depreciated over the shorter of the useful life or remaining term of the
lease
Depreciation
expense was $1,862,000, $2,905,000 and $3,246,000 for the years ended March 31,
2002 and 2001, and for the eleven months ended March 31, 2000, respectively.
Impairment of Long-Lived Assets - The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived asset.
During the years
ended March 31, 2002 and 2001, and the eleven months ended March 31, 2000,
charges of $675,000, $1,248,000 and $500,000, respectively, were recorded to
write down fixed assets no longer utilized in the Company’s operations to zero.
The fixed assets were written down to zero because of the abandonment of
facilities, their specialized nature, or the lack of alternative uses for the
equipment.
Goodwill - Goodwill is recorded at the date of acquisition at
its allocated cost. Goodwill represents the excess of the cost of businesses
acquired over the aggregate fair value of tangible and intangible net assets at
the date of acquisition. Goodwill resulting from acquisitions is being
amortized using the straight-line method over an estimated useful life of 10
years. Amortization expense of
$222,000, $1,127,000 and $1,165,000 was recorded for the years ended March 31,
2002 and 2001 and the eleven months ended March 31, 2000 respectively.
During the year ended
March 31, 2001 and the eleven month period ended March 31, 2000, the Company
recognized impairment charges of $16,481,000 and $6,561,000, respectively. The remaining goodwill of $726,000 relates
solely to the Shuster Laboratories division of HTS.
Revenue Recognition - Dietary Supplement and Pharmaceutical
and Functional Food Ingredients processing revenues are recognized when title
and risk of ownership passes to the customer, which generally is upon shipment
of product. Technical Services revenues are recognized upon completion of
specified contract requirements. Unbilled receivables result from costs
incurred on time and materials contracts and are included in accounts
receivable in the accompanying consolidated balance sheets. Unbilled accounts
receivable at March 31, 2002 and 2001 were $140,000 and $381,000,
respectively. Anticipated losses from
contracts in progress are provided for in the period the loss is
identified. No losses have been accrued
as of March 31, 2002 or 2001.
Research and Development - Research and development costs are charged to
expense as incurred.
Advertising Costs - The Company expenses advertising costs as incurred.
Income Taxes - The current provision for income taxes represents
actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are
recorded for the estimated future tax effects of temporary differences between
the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, and for operating loss and tax credit
carryforwards. The change in deferred
tax assets and liabilities for the period measures the deferred tax provision
or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company’s net deferred
tax assets have been reduced to zero because it is more likely than not that the
deferred tax assets will not be realized.
Stock-Based Compensation - The Company
accounts for its employee stock option plans in accordance with the provisions
of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock
Issued to Employees” and related interpretations. The Company adopted the disclosure-only requirements of the
Financial Accounting Standards Board’s (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based
Compensation,” which allows entities to continue to apply the provisions of APB
No. 25 for transactions with employees and provide pro forma disclosures for
employee stock option grants made as if the fair value-based method of
accounting in SFAS No. 123 had been applied to these transactions. Any deferred stock compensation calculated
according to APB No. 25 is amortized on a straight-line basis over the vesting
period of the individual options, generally four years.
The Company applies the provisions of SFAS No. 123 and
related interpretations to equity grants to non-employees.
Earnings (Loss) Per Share - Basic earnings or loss per share is computed by
dividing the net earnings or loss by the weighted average number of shares of
common stock outstanding. Diluted earnings or loss per share is determined by
dividing the net earnings or loss by the sum of (1) the weighted average number
of common shares outstanding and (2) if not anti-dilutive, the effect of
outstanding warrants and stock options determined utilizing the treasury stock
method.
In the years ended March
31, 2002 and 2001, and the eleven months ended March 31, 2000, stock options
and warrants totaling 1,980,251, 1,843,364 and 942,293, respectively, were
excluded from the calculation of diluted earnings (loss) per share since the
result would have been anti-dilutive.
Fair Value of Financial Instruments - Due to the short-term nature of the
Company’s accounts receivable and other financial instruments, the fair value
of such financial instruments approximates their carrying amount. The fair value of the Company’s borrowings
approximate there carrying amounts based upon interest rates currently
available to the Company.
Reclassifications - Certain prior year amounts have been reclassified
to conform to the current year presentation.
Reverse Stock Split - On June 11, 1999, the Company’s stockholders
approved a one-for-four reverse stock split. All per share and equivalent share
amounts in the accompanying consolidated financial statements have been
adjusted to reflect the reverse stock split.
Recently Issued
Accounting Standards -
SFAS No. 141 and 142. - In June 2001, the Financial Accounting Standard Board
(“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142,
“Goodwill and Other Intangible Assets.” These statements prohibit pooling-of-interests accounting
for transactions initiated after June 30, 2001, require the use of the purchase
method of accounting for all combinations after June 30, 2001, and establish
new standards for accounting for goodwill and other intangibles acquired in
business combinations. Goodwill will continue to be recognized as an asset, but
will not be amortized as previously required by APB No. 17, “Intangible
Assets.” Certain other intangible assets with indefinite lives, if present, may
also not be amortized. Instead, goodwill and other intangible assets with
indefinite lives will be subject to periodic (at least annual) tests for
impairment, and recognition of impairment losses in the future could be
required based on a new fair value-based methodology for measuring impairments
prescribed by these pronouncements. The revised standards include transition
rules and requirements for identification, valuation and recognition of a much
broader list of intangibles as part of business combinations than prior
practice, most of which will continue to be amortized. The Company does not
believe the initial application of these new impairment tests will have a
material impact on its financial statements. Future amortization will be
reduced by approximately $222,000 annually due to the non-amortization of
goodwill.
SFAS No. 143. -
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations,” which establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No.
143 is not expected to have a material effect on the Company’s financial
position.
SFAS No. 144. - In October 2001, the FASB issued SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of,” and addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of.
This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is in the process of
assessing the effect of adopting SFAS No. 144, which will be effective for the
Company’s fiscal year ending March 31, 2003.
The adoption of SFAS No. 144 could result in the disposal of Hauser
Laboratories, a component of the Technical Services segment, to being reflected
as a discontinued operation in future periods.
SFAS No. 145. - In April 2002, the FASB
issued SFAS No. 145, which rescinds SFAS No. 4, “Reporting Gains and Losses
from Extinguishment of Debt,” and also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or describe
their applicability under changed conditions.
A principal effect will be the prospective characterization of gains and
losses from debt extinguishments used as part of an entity’s risk management
strategy. Under SFAS No. 4, all gains
and losses from early extinguishment of debt were required to be aggregated
and, if material, classified as an extraordinary item, net of related income
tax effect. SFAS No. 145 eliminates
SFAS No. 4. As a result, most gains and
losses from extinguishment of debt will not be classified as extraordinary
items unless they meet much more narrow criteria in APB Opinion No. 30. SFAS No. 145 may be adopted early, but is
otherwise effective for fiscal years beginning after May 15, 2002, and must be
adopted with retroactive effect. SFAS
No. 145 is not expected to have a material effect on the Company’s financial
statements.
Derivative Instruments - In fiscal 2002, the Company
adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities”. SFAS No. 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. The adoption of SFAS No. 133 did not
have a significant impact on the results of operations or financial position of
the Company.
3. RESTRUCTURING CHARGES
During fiscal 2002,
the Company continued to reduce operating costs and streamline operations. The initiatives included a reduction in
headcount (including two senior executive vice president positions) resulting
in contractual severance charges of $1,060,000, the termination of leases on
certain facilities for $1,149,000 and the impairment of related leasehold
improvements of $675,000.
During fiscal
2001, restructuring charges included the impairment of goodwill and long-lived
assets and an additional accrual necessary for the exit from the paclitaxel
business. The Company completed a merger in June of 1999 (the “Merger”) with
three subsidiaries of Zuellig Group N.A., Inc. (“ZGNA”), and Zuellig
Botanicals, Inc. (“ZBI”). As a result of the decline in the dietary supplement
industry, among other factors, the Company deemed the goodwill recorded in
connection with the Merger to be impaired.
During the fiscal year ended March 31, 2001, the Company recorded a
charge of $16,481,000 to write down the remaining goodwill balance, which had
been initially recorded in connection with the Merger. The Company believed the goodwill had no
residual value because of the significant losses being incurred and the
continued oversupply of dietary supplements in the Company’s markets, leading
to a reduction in the demand and prices for the Company’s products. Similarly,
long-lived assets were written down to zero because of their specialized nature
and the lack of alternative use for the equipment resulting in a charge of
$1,248,000. In fiscal 2001, $100,000 in
lease termination costs recorded in the prior period were reversed.
During fiscal
2000, the Company terminated the operations its subsidiary, Wilcox Drug
Company, Inc. (“Wilcox”), and consolidated its technical services operations in
order to
gain operating
efficiencies. Wilcox principally
purchased wild botanical raw materials gathered in the United States and sold
those materials to customers in North America, Europe and Asia. The decision to terminate the operations of
Wilcox was made as a result of the significant decline in market prices for the
natural product raw materials sourced by Wilcox. The restructuring charges
included lease termination costs of $1,050,000, severance for 14 Wilcox
employees of $645,000, and the write-down of goodwill and long-lived assets
related to the operations of Wilcox of $7,061,000. As part of the consolidation
of the technical services operations, the Company shut down its laboratory
operations in Smyrna, Georgia. The cost to close the Smyrna operations included
lease termination costs of $400,000 and severance of $100,000 for three
employees.
Restructuring
charges resulting from the above activities were as follows (in thousands):
A summary of the
accruals related to these restructuring activities follows (in thousands):
The Company
expects to utilize the remaining accruals within the next fiscal year.
4. LONG-TERM DEBT
Notes
payable and long-term debt consists of the following (in thousands):
At March 31, 2002
and 2001, property and equipment includes items under capital leases with a net
book value of $204,000 and $404,000, respectively, and accumulated depreciation
of $457,000 and $615,000, respectively.
Bank Facility - On December 7, 2001, the Company entered into the
Amended Credit Facility with Wells Fargo, which was scheduled to expire in
August 2003. This agreement provided for a total credit facility of $18.6
million comprised of a revolving line of credit of $10.75 million, subject to
borrowing base limitations, bearing interest at 2% over prime (6.75% at March
31, 2002), and a $7.8 million term note with monthly principal and interest
payments of $20,000 and additional principal payments of $3.0 million and $4.7
million due on April 30, 2002 and June 30, 2002 respectively. The Company paid
$1.1 million of the $3 million due on April 30, 2002, with proceeds from the
sale of the Hauser Laboratories division.
The term note bears interest at 3% over prime and had a final maturity
of June 30, 2002. Upon final repayment
of the term note, the interest rate on the line of credit was scheduled to
decrease to 1% over prime. The Amended
Credit Facility is collateralized by all of the Company’s assets. The borrowing base is comprised of 80% and
50% of eligible accounts receivable and inventory, respectively, and totaled
$11,377,000 at March 31, 2002.
In April and June 2002,
the Company defaulted under the Amended Credit Facility. The defaults occurred because the Company
failed to make $1.9 million of the $3.0 million payment due on April 30, 2002,
as required by the term note, and was not in compliance with its cash flow
covenant for the quarter ending June 30, 2002.
On June 25, 2002, in consideration of a waiver by Wells Fargo of these
events of default, the Company entered into the Amendment, pursuant to which,
both the term note and the revolving line of credit will mature on August 31,
2002. Specifically, the Amendment extends
the maturity date of the term note from June 30, 2002 to August 31, 2002 and
amends the maturity date of the
revolving
line of credit from August 31, 2003 to August 31, 2002. The Company is engaged in discussions,
including regarding the sale of Shuster Laboratories, which could result in the
Company obtaining funds to pay the outstanding loans to Wells Fargo in August
2002 and permit the Company to obtain a new line of credit to finance
operations. There can be no assurance that the requisite funds will be
obtained. These circumstances raise
substantial doubt about the ability of the Company to continue as a going
concern.
As a condition to
Wells Fargo entering into the Amended Credit Facility with the Company and a
related party (ZBI), Wells Fargo had required that a fee be paid to Wells Fargo
in the amount of $779,000 (the “Fee”).
Initially, Wells Fargo had stated that as further consideration for
entering into the Amended Credit Facility, the Company must issue to Wells
Fargo a warrant to purchase 865,630
shares of the Company’s Common Stock, representing approximately 12.5% of the
Company’s Common Stock on a fully diluted basis, at an exercise price of $0.01
per share, which would expire eight years after issuance. Wells Fargo subsequently stated that it
would accept the Fee in lieu of the
Warrant, provided that the Fee was paid
by a party other than the Company.
Wells Fargo would not permit the Company to reduce its working capital
by paying the Fee. Zatpack, Inc., is an
international business company organized under the laws of the British Virgin
Islands and a significant shareholder of the Company. (“Zatpack”) agreed to pay the Fee. The Company, as consideration for such payment, issued the
Warrant to Zatpack. Zatpack caused the
related party to forgive $247,000 of trade payables due from the Company for
its share of the debt issuance costs. As a result, the Company has recorded
debt issuance costs of $532,000. The
debt issuance costs will be amortized to interest expense on a straight-line
basis over the term of the Amended Credit Facility, through August 2002.
In October 2000, as a
condition to Wells Fargo entering into an amendment to the Amended credit
facility, the Company sold a $3 million Subordinated Promissory Note (the
“Zatpack Note”) to Zatpack The Zatpack Note is subordinate to the Amended
Credit Facility, accrues interest at a rate of 6.5%, requires no principal 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 $0.5855 per share.
Approximately $2 million of the proceeds of the sale of the Zatpack Note
were used to pay down the line of credit.
The Company has recorded
a discount of $354,000 in connection with the warrants attached to the Zatpack
Note described above. The discount will
be amortized to interest expense on a straight-line basis over the term of the Zatpack
Note, through September 2003. In connection with the amortization of the
discount, interest expense of $118,000 and $59,000 was recorded during the
years ended March 31, 2002 and 2001, respectively.
5. STOCKHOLDERS’ EQUITY
Non-Qualified Stock Options - The Company’s 1987 Stock Option Plan
(the “1987 Plan”), the 1992 Stock Option Plan (the “1992 Plan”), and the 1999
Stock Option Plan (the “1999 Plan”) authorize the granting of non-qualified
stock options for up to 304,680, 175,000, and
850,000 shares,
respectively, of the Company’s Common Stock to directors, employees, and
consultants. As of March 31, 2002, there were 168,095, 0, and 37,500 shares of
Common Stock, respectively, available for grant under these plans. Exercise
terms, ranging from one-to-ten years for options granted under these plans, are
determined by the Board of Directors at the time of grant. A combined summary
of the status of the Company’s Non-Qualified Stock Options from each of the
above plans for the years ended March 31, 2002 and 2001, and the eleven month
period ended March 31, 2000, follows:
Incentive Stock Options - The Company’s 1992 Plan and the 1999 Plan authorize
the granting of incentive stock options for up to 175,000 and 850,000 shares of
the Company’s Common Stock, respectively.
These options are granted to employees at fair market value on the date
of grant. As of March 31, 2002, there were 25,726 and 40,750 shares of Common
Stock, respectively, available for grant under the plans. Exercise terms,
currently
ranging from one
month to ten years, are determined by the Board of Directors at the time of
grant. A combined summary of the
Company’s Incentive Stock Options from each of the above plans for the years
ended March 31, 2002 and 2001, and the eleven month period ended March 31,
2000, follows:
Valuation - The weighted average fair value of
each option grant has been estimated as of the date of grant using the Black-Scholes
option-pricing model using the following assumptions for the years ended March
31, 2002 and 2001, and for the eleven months ended March 31, 2000:
Had compensation
cost been recorded based on the fair value of the option or warrant grants, the
Company’s pro forma net loss and net loss per share would have been as follows
(in thousands):
Warrants - As consideration for payment of the bank facility
fee discussed in Note 4, the Company issued a warrant to purchase 865,630 of
Common Stock at a price of approximately $0.01 per share to Zatpack.
In consideration for
these warrants, Zatpack caused ZBI to forgive $247,000 of trade payables due
from the Company for its share of the debt issuance costs. As a result, the
Company has recorded debt issuance cost of $532,000, which was the amount of
the fee paid on behalf of the Company by Zatpack. The debt issuance costs will be amortized to interest expense on
a straight-line basis over the term of the Amended Credit Facility, through
August 2002. Interest expense of $80,000 was recorded for the year ended March
31, 2002, in connection with the amortization of the debt issuance costs.
During the year-ended
March 31, 2001, the Company sold the $3 million Zatpack Note to Zatpack. The Zatpack Note had five-year warrants
attached which permit Zatpack to purchase 992,789 shares of Hauser’s Common
Stock at a price of approximately $0.5855 per share. This price was the fair market value of the Company’s Common
Stock on the date of issuance.
The Company has
recorded a discount of $354,000 in connection with the warrants attached to the
Zatpack Note described above. The
discount was computed based on the value of the warrants as determined by use
of the Black-Scholes option pricing model using the following assumptions for
the year ended March 31, 2001:
The discount is
being amortized to interest expense on a straight-line basis over the term of
the Zatpack Note, through September 2003.
Interest expense of $119,000 and $59,000 was recorded for the years
ended March 31, 2002 and 2001, respectively, in connection with the
amortization of the discount.
Employee Stock Purchase Plan - On July 26, 1999, the Board adopted,
and the stockholders subsequently approved, the Company’s 1999 Employee Stock
Purchase Plan (the “Purchase Plan”).
The Purchase Plan permits eligible employees of the Company to purchase
shares of Common Stock through payroll deductions. The purchase price for each offering period will be 85% of the
lesser of (1) the fair market value of
the Common Stock on the enrollment date, or (2) the fair market value of the
Common Stock on the exercise date. Up
to 150,000 shares of Common Stock may be sold under the Purchase Plan. Shares sold under the Purchase Plan may be
newly issued shares or shares acquired by the Company in the open market. The Board of Directors may at any time and
for any reason terminate the Purchase Plan.
The Purchase Plan is intended to qualify as an “employee stock purchase
plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and
will be administered in accordance with the limitations set forth in Section
423 and the rules and regulations thereunder.
During Fiscal 2002, the
Company issued 26,090 shares to employees under this plan at purchase prices
ranging from $0.26 to $0.48 per share.
A total of 63,422 shares have been issued under the plan through March
31, 2002.
Director Compensation
- Non-employee
directors of the Company receive annual compensation of $25,000, which is
payable quarterly in Common Stock of the Company. The number of shares to which each non-employee director is entitled
is determined by dividing $6,250 by the closing price of the Common Stock on
the last trading day of the calendar quarter.
The Chairman of the Board receives additional compensation of $25,000,
which is also payable quarterly in Common Stock of the Company. During the year ended March 31, 2002, the
Company’s non-employee directors acquired a total of 302,936 shares of Common
Stock from the Company at an average price of $.58 per share (100% of fair
market value on the date of grant).
Stock Compensation
- In February 2001,
the Board of Directors approved the issuance of shares of restricted Common
Stock (the “2001 Restricted Stock”) to certain of its key employees . In June 2001, the Company issued 520,000
shares of restricted Common Stock to such employees. As a condition to the issuance, certain of the recipients agreed
to cancel options that had previously been granted to them. If any of the recipients of the Restricted
Stock ceases to be
an employee of the Company prior to May 31, 2004 (the “2001 Restricted
Period”), other than due to the death or permanent disability of the recipient,
the Restricted Stock will be forfeited to the Company. The Restricted Stock
becomes fully vested and the restrictions imposed thereon lapse on the earlier
of the Restricted Period or the death of the recipient. The Company may elect to waive such
forfeitures.
In February 2001, the Board
of Directors of the Company approved the sale of 100,000 shares of its Common
Stock to Kenneth C. Cleveland for $.37 per share. As of June 28, 2002, none of
these shares have been purchased. If
these shares are purchased by Mr. Cleveland, such shares will be subject to
similar terms as the 2001 Restricted Stock.
In April 2002, the Board of
Directors approved a grant of shares of its Common Stock (the “2002 Restricted
Stock”) to certain of its key employees.
The Company expects to issue up to 150,000 shares to such employees at no cost to the employee. If, prior to May 31, 2005 (the “2002
Restricted Period”), any of the recipients of the 2002 Restricted Stock cease
to be an employee of the Company for any reason, other than due to the death or
permanent disability of the recipient, the 2002 Restricted Stock will be forfeited
to the Company. The 2002 Restricted
Stock becomes fully vested and the restrictions imposed thereon lapse on the
earlier of the 2002 Restricted Period or the death of the recipient. The Company may elect to waive such
forfeitures..
As a condition to
the issuances of 2001 and 2002 Restricted Stock, the recipients were required
to make an 83(b) election with the Internal Revenue Service. Making an 83(b) election permits each
recipient to include the value of stock received as taxable income for the
recipient’s current tax year. The
Company has agreed to make a cash payment to each of the recipients equal to
the amount necessary to pay tax liabilities resulting from the 83(b) election
and the additional tax liability from such payment.
6. INCOME
TAXES
Income tax expense (benefit) from continuing
operations for the year ended March 31, 2002 and 2001 and the eleven months
ended March 31, 2000, is comprised of the following components (in thousands):
As of March 31, 2002 and 2001, temporary differences,
which result in deferred tax assets and liabilities, are as follows (in
thousands):
The Company has
approximately $68 million of federal and $72 million of state net operating
loss carryforwards that expire in varying amounts through the year 2020. The
Company also has available income tax credits of $728,000, expiring on varying
dates through 2014 and alternative minimum tax credits of $1.5 million, which
do not expire.
A reconciliation of the expected income tax benefit at
the federal statutory income tax rate to the Company’s actual income tax
expense for the years ended March 31, 2002 and 2001, and the eleven months
ended March 31, 2000, is as follows:
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan (the “Plan”) for
all employees who have completed one year of service. Participants may
contribute up to 20% of their annual compensation subject to dollar limitations
of Section 402(g) of the Internal Revenue Code. Under the provisions of the
Plan, the Company will make a matching contribution of 50% of the first 4% of
employee contributions. The Company’s
matching portion vests 20% per year over 5 years. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. The Company
made matching contributions of $157,000 and
$33,000 during the years ended March 31, 2002 and 2001,
respectively. Prior to fiscal 2001, Company
matching contributions were optional at the discretion of the Board of
Directors. No contributions were made
to the Plan for the eleven months ended March 31, 2000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company leases its office and
operating facilities and various equipment under non-cancelable agreements.
Rent expense was
$1,764,000, $1,496,000, and $1,462,000, for the years ended March 31,
2002 and 2001, and the eleven months ended March 31, 2000, respectively.
Future minimum lease payments under operating leases
for the years ending March 31 are as follows (in thousands):
9. INDUSTRY SEGMENTS
Segments
- The Company’s three business segments are: Dietary Supplements,
Pharmaceutical and Functional Food Ingredients, and Technical Services, each
having a separate management team and infrastructure, offering different
products and services, and utilizing different marketing strategies to target
customers. During fiscal year, the Company changed the name of its Natural
Products segment to Dietary Supplements, and its Fine Chemicals segment to
Pharmaceutical and Functional Food Ingredients. Further, the Company reclassified certain product lines to align
management responsibilities with the related products. The Company now
classifies nutritional supplements products, which were formerly classified as
Fine Chemicals, as Dietary Supplements. In addition, the Company now classifies
certain functional food ingredients, which were formally classified as Natural
Products, as Pharmaceutical and Functional Food Ingredients. The Company has
restated the
corresponding information from the prior year to conform to the current
composition of the Company’s reportable segments. Included in Corporate and
Other are the results of the Company’s paclitaxel activities, which have been
terminated. Selected financial information from the Company’s business segments
are as follows (in thousands):
The Company determines
segment results consistent with its consolidated accounting policies. Included
in Dietary Supplements and Corporate and Other for the year-ended March 31,
2002 are charges of $1,295,000 and $1,589,000, respectively, for restructuring
charges related to facility closures and employee terminations incurred during
the year.
Included in Corporate and
Other in the year ended March 31, 2001 is a charge of $17,729,000 in connection
with the write-down of goodwill and impaired fixed assets. Included in Dietary Supplements and
Technical Services operating expenses for the eleven months ended March 31,
2000 are charges of $8,756,000 and $500,000, respectively, for the cessation of
operations at Wilcox Natural Products and the consolidation of laboratory
operations.
Foreign Sales - Export
sales were $2,563,000, $548,000 and $7,371,000 in the years ended March 31,
2002 and 2001 and the eleven months ended March 31, 2000, respectively. The
Company has no foreign assets.
10. RELATED PARTY TRANSACTIONS
The Company and ZBI, a seller of bulk raw materials in the form of
powders or similar processed products, are parties to an agreement dated June
11, 1999, under which certain personnel and facilities costs of the Company are
shared approximately one-third by ZBI. Under the agreement ZBI purchases
certain inventory, disburses all amounts for shared services, and receives
reimbursement from the Company for amounts disbursed on its behalf. The Company also purchases raw materials
from ZBI. The net amounts owed to ZBI
under these agreements totaled $2,946,000 and $2,988,000 at March 31, 2002 and
March 31, 2001, respectively. For the
years ended March 31, 2002 and 2001, and the eleven months ended March 31,
2000, the amounts recorded as costs and expenses for inventory, personnel and
facilities by the Company under this arrangement totaled $8,653,000,
$7,067,000, and $4,332,000, respectively.
These amounts are included with cost of sales and operating expenses in
the accompanying consolidated statements of operations.
In addition, the
Company sells natural product raw materials to ZBI. During the years ended March 31, 2002 and 2001 and the eleven
months ended March 31, 2000, sales to ZBI totaled $589,000, $3,219,000 and
$3,781,000, respectively. There were no receivables due from ZBI at March 31,
2002. The related trade accounts
receivable due from ZBI were $4,000 and $138,000 at March 31, 2002 and 2001,
respectively.
As discussed in
note 4, as a condition to Wells Fargo entering into the Amended Credit
Facility with the Company and ZBI,
Wells Fargo had required that the Fee of $779,000 be paid. Initially, Wells Fargo had stated that as
further consideration for entering into the Amended Credit Facility, the
Company must issue to Wells Fargo the Warrant purchase 865,630 shares of the
Company’s Common Stock, representing approximately 12.5% of the Company’s
Common Stock on a fully diluted basis, at an exercise price of $0.01 per share,
which would expire eight years after issuance.
Wells Fargo subsequently stated that it would accept the Fee in lieu of
the Warrant, provided that the Fee was
paid by a party other than the Company.
Wells Fargo would not permit the Company to reduce its working capital
by paying the Fee. Zatpack agreed to
pay the Fee. The Company, as consideration for such payment, issued the Warrant
to Zatpack. Zatpack caused ZBI to
forgive $247,000 of payables due from the Company for its share of the debt
issuance costs. As a result, the Company has recorded debt issuance costs of
$532,000. The debt issuance costs will
be amortized to interest expense on a straight-line basis over the term of the
Amended Credit Facility, through August 2002.
In addition, Zatpack holds a
$3 million Note of the Company, which is subordinate to the Company’s Amended
Credit Facility with Wells Fargo. The
Zatpack Note accrues interest at 6.5%, is payable in three years and has five-year
warrants attached. The warrants permit
Zatpack to purchase 992,789 shares of Common Stock at a price of $0.5855 per
share.
Harvey L. Sperry, a
Director, is a retired Partner in the law firm of Willkie Farr & Gallagher,
which acts as counsel to the Company.
Mr. Sperry provides consulting services to the Company in exchange for a
fee of $5,000 per month.
11.
QUARTERLY INFORMATION (UNAUDITED)
(1) During the
quarter ended March 31, 2002, the Company recognized restructuring charges of
$1.6 million.
(2) During the
quarter ended December 31, 2001, the Company recognized restructuring charges
of $1.3 million.
(3) During the
quarter ended March 31, 2001, the Company recognized impairment charges of
$17.8 million related to goodwill and certain long-lived assets.