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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended April 30, 1997
Commission File Number 0-20424
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Hi-Tech Pharmacal Co., Inc.
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(Name of small business issuer in its charter)
Delaware 11-2638720
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
369 Bayview Avenue, Amityville, New York 11701
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(Address of principal executive offices) (Zip Code)
(516) 789-8228
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year ended April 30, 1997 were
$20,534,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on August 4, 1997, based upon the price at which such stock was sold on
that date, was $14,347,590. The number of shares of Common Stock of the issuer
outstanding as of August 4, 1997 was 4,526,717.
Transitional Small Business Disclosure Format: Yes ; No X
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PART I
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ITEM 1. BUSINESS.
GENERAL
Hi-Tech Pharmacal Co., Inc., a Delaware corporation, incorporated in April
1983, develops, manufactures and markets over 100 pharmaceutical products in
liquid and semi-solid form, comprised of over-the-counter (non-prescription)
pharmaceuticals, prescription drug products and nutritional preparations,
primarily for the generic drug industry. The Company operates through three
primary business divisions: (i) the Company's initial and core division of
generic over-the-counter and prescription liquid and semi-solid pharmaceuticals;
(ii) the Health Care Products Division, which develops, manufactures and markets
brand name products, including Diabetic Tussin(R), a liquid cough/cold remedy
targeted towards diabetic customers; and (iii) the Steri-Med Division, which
began production in February 1996 of sterile ophthalmic and otic (ear) products
in its state-of-the-art sterile ophthalmic facility. The Company's customers
are generic distributors, drug wholesalers, chain drug stores, mass merchandise
chains and mail order companies, including Albertsons, American Drug Stores,
Bergen-Brunswig, Eckerds, K-Mart, Kroger, McKesson, Revco, Rite-Aid, Rugby
Laboratories, Schein Pharmaceuticals, Target, Vons, Walgreens, WalMart and
Zenith/Goldline Laboratories. The Company produces a wide range of products
which include cough and cold remedies, decongestants, analgesics, nutritional
products, antacids and neurological products. The Company manufactures its
over-the-counter and prescription drug products in liquid and semi-solid
(creams, ointments, suppositories and gels) dosage forms.
PRODUCTS
The Company currently markets in excess of 100 generic products to
approximately 200 customers. For the fiscal year ended April 30, 1997 the
Company's sales were approximately 65% for the private label market,
approximately 18% for the brand name H-T/tm/ and approximately 17% through
Company brand name under its Health Care Products division. Steri-Med began
shipping products in the spring of 1996 and markets through private label
customers and under brand names. Approximately 5% of the Company's revenues for
the fiscal year ended April 30, 1997 were from the sale of one generic drug
product. The Company is currently engaged in contract manufacturing for various
customers of various products to meet customer specifications.
The Company manufactures most of the products in its generic drug line
under its own brand names, H-T/tm/ and RX Choice. Sales of the Company's own
brand name products, H-T/tm/, Sooth-it(R), DiabetiDerm/tm/ and Diabetic
Tussin(R), accounted for approximately 35% of the Company's revenues for the
fiscal year ended April 30, 1997.
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The Company's Health Care Products division is currently marketing over-the
- -counter products under various brands directly to the diabetic consumer. These
products include Diabetic Tussin(R), a cough/cold remedy, a Diabetic Tussin(R)
formulation for allergy relief, a Diabetic Tussin(R) formulation for children's
cough suppressant/expectorant, DiabetiDerm/tm/ Cream, a moisturizing skin cream,
DiabetiDerm/tm/ Lotion, a moisturizing skin lotion, which are targeted to the
diabetic market and Diabeti Sweet(R), a sugar substitute. Sales of the Health
Care Products division accounted for approximately 17% of the Company's revenues
for the fiscal year ended April 30, 1997. The Company introduced three products,
Diabetic Tussin(R) Maximum Strength Cough Syrup, a liquid cough/cold remedy,
Diabetic Tussin(R) Softgels, a liquid gel cough/cold remedy and Diabeti
Sweet(R), a sugar substitute, in fiscal 1996.
The Company's Steri-Med Division completed the validation process of the
sterile facility and entered into contract manufacturing agreements for the
manufacture of sterile products in the facility. The Company currently
manufactures four over-the-counter products consisting of two redness relief eye
drops, an eye wash and artificial tears formula. The Company also manufactures
sterile prescription products. The Company currently has six products under
development and manufacture in its sterile facility and also has contracts for
two additional sterile products. The Company is pursuing other potential
contract manufacturing arrangements.
The Company used the ANDA procedure to obtain FDA approval for the
manufacture of six new products in fiscal 1997. In December 1996, the Company
received FDA approval for Minoxidil Topical Solution 2%, equivalent to
Rogaine(R), manufactured by Pharmacia Upjohn and used for hair growth. In
November 1996, the Company supplemented its ANDAs for Albuterol Sulfate
Inhalation Solution 0.5% and Albuterol Sulfate Inhalation Solution .083% with
product manufactured in its sterile facility. These products are generic
equivalents of Proventil(R) used in the treatment of asthma and currently
manufactured by Schering Plough and its Warwick Division. In October 1996, the
Company received ANDA approval from the FDA for its first dermatological
product, Erythro-Statin 2% (Erythromycin Topical Solution USP), equivalent to T-
Stat(R) Solution 2%, manufactured by Westwood Squibb Pharmaceuticals, Inc. and
used in the treatment of acne. In August 1996, the Company received ANDA
approvals from the FDA for Thioridazine Hydrochloride Oral Solution USP
(concentrate), 30 mg/mL, equivalent to Mellaril(R) Oral Solution, 30 mg/mL
manufactured by Sandoz Pharmaceuticals Corp., and Thioridazine Hydrochloride
Oral Solution USP (Concentrate), 100 mg/mL, equivalent to Mellaril(R) Oral
Solution, 100 mg/mL manufactured by Sandoz Pharmaceuticals Corp. and used in the
treatment of psychotic episodes. In May 1996, the Company received ANDA
approval from the FDA for Acetaminophen and Codeine Phosphate Oral Solution USP,
the generic form of Tylenol(R) with Codeine Oral Solution, manufactured by
McNeil's Consumer Products Company and used for the relief of pain.
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The following table sets forth the principal products marketed by the
Company under private label brands and where meaningful, the names of certain of
the national brands with which these products compete. All of the products
listed below are also marketed under the Company's brand name, H-T/tm/. The
Company's other trademarks are Sooth-it(R), Diabetic Tussin(R), Diabeti
Sweet(R), and DiabetiDerm/tm/.
EXAMPLES OF COMPETING
COMPANY PRODUCT NATIONAL PRODUCTS
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OVER-THE-COUNTER PHARMACEUTICALS
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COUGH/COLD/DECONGESTANT
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Bromtapp Elixir Dimetapp(R) Elixir
Diphenhydramine HCL Cough Syrup * Benylin(R) Cough Syrup
Guaiatussin-DM Robitussin(R) DM
Tri-Fedrine Syrup Triaminic(R) Syrup
Tri-Fedrine Expectorant Triaminic(R) Expectorant
Nite-Time Cough Medicine Nyquil(R)
Children's Allergy Medicine Benadryl(R) Elixir
Active Syrup Actifed(R) Syrup
Oxymetazoline Nasal Spray Afrin(R) Nasal Spray
Chlor-Al Allergy Syrup Chlortrimeton(R) Allergy Syrup
HEALTH CARE PRODUCTS
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Diabetic Tussin(R)-Formula DM
Diabetic Tussin(R)-Formula EX
Diabetic Tussin(R) Allergy Relief Formula
Diabetic Tussin(R) Children's Formula
DiabetiDerm/tm/ Moisturizing Lotion for Severe Dry Skin
DiabetiDerm/tm/ Moisturizing Cream for Severe Dry Skin
Diabeti Sweet(R)
VITAMINS AND NUTRITIONAL SUPPLEMENTS
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Poly-Vitamin Drops Poly-Vi-Sol(R) Drops
Poly-Vitamin Drops with Iron Poly-Vi-Sol(R) with Iron
Golden Age Liquid Vitamins & Minerals Centrum(R) Liquid
Ferrous Sulfate Solution Drops Fer-in-Sol(R) Drops
Dalyvite Syrup Vi-daylin(R) Syrup
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* ANDA approved pharmaceutical product
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EXAMPLES OF COMPETING
COMPANY PRODUCT NATIONAL PRODUCTS
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ANALGESICS
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Apap Drops Tylenol(R) Drops
Apap Elixir Tylenol(R) Elixir
ANTACIDS
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Equalizer Gas Relief Drops Mylicon(R) Drops
K-Pec with Attapulgite Kaopectate(R)
Bismuth Liquid Pepto-Bismol(R)
OTHER PRODUCTS
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Ache-Eze Mineral Ice Mineral Ice(R)
Calhist Caladryl(R)
Calhist Clear Caladryl Clear(R)
Sooth-it(R) Hygienic Pre-Moistened Tucks(R) Pads
Cleansing Pads
Sooth-it(R) Medicated Cleansing Pads -
Glycerin Adult and Infant Laxative
Suppositories Squibb Glycerin Suppositories
Bisacodyl Dulcolax
AnuRx Suppositories and Ointment Anusol
AnuRx HC Suppositories and Ointment Anusol - HC
RectoRx Suppositories and Ointment Preparation H
Menthyl Salicylate Cream and Ointment Ben-Gay
Menthol & Aloe Gel Flex-All
Maximum Strength Gel Flex-All
Odorless Liniment Aspercreme
Nonoxynol-9 Suppositories Semicid
Nonoxynol-9 Gel Gynol II
Oil of Rose Lotion Oil of Olay
Oil of Rose Cream Oil of Olay
Hydrocortisone 1% Cortisone 10
Minoxidil Topical Solution 2%* Rogaine(R)
PRESCRIPTION DRUGS
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COUGH/COLD/DECONGESTANTS
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Carbofed-DM Syrup & Drops Rondec(R)-DM Syrup & Drops
Nalphen Pediatric Drops & Syrup Naldecon(R) Pediatric Drops & Syrup
Quad-Tuss Tannate Pediatric Suspension Rynatuss(R) Pediatric Suspension
Triple Tannate Pediatric Suspension Rynatan(R) Pediatric Suspension
Triple Tannate-S Pediatric Suspension Rynatan(R)-S Pediatric Suspension
Promethazine HCI & Dextromethorphan Phenergan(R)
HBr Syrup*
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* ANDA approved pharmaceutical product
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VITAMINS
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Poly-Vitamin Drops with Iron & Fluoride
0.25 Poly-Vi-Flor(R) w/Iron
Poly-Vitamin Drops with Fluoride
(0.25)(0.5) Poly-Vi-Flor(R)
Tri-Vitamin Drops with Fl(.25)(.5) Tri-Vi-Flor(R)
OTHER PRODUCTS
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Hyco Drops Levsin(R) Drops
Hyco Elixir Levsin(R) Elixir
Valproic Acid Syrup USP/tm/ Depakene(R) Syrup
Hydroxyzine Hydrochloride Syrup USP* Atarax(R)
Amantadine Hydrochloride Syrup* Symmetrel(R) Syrup
Lidocaine 2% Solution USP* Xylocaine(R) 2%
Lactulose Solution USP* Chronulac(R), Cephulac(R)
Loperamide HCL* Imodium A-D(R)
Acetaminophen & Codeine Phosphate Oral Tylenol(R) with Codeine
Solution*
Chlorhexidine Gluconate 0.12% Oral Peridex(R)
Rinse*
Erythro-Statin (erythromycin) 2% Top. T-Stat Solution 2%(R)
Solution*
Thioridazine HCI Oral Solution (Conc.), Mellaril(R) Oral Solution
30 mg/mL*
Thioridazine HCI Oral Solution (Conc.), Mellaril(R) Oral Solution
100 mg/mL*
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* ANDA approved pharmaceutical product
RESEARCH AND PRODUCT DEVELOPMENT
The Company's primary product development strategy emphasizes
developing, manufacturing and marketing generic drugs which are equivalent to
nationally advertised brand name products which offer significant opportunities
for the Company. The Company is also developing products to suit its consumer
brand division, Health Care Products. The Company also manufactures and markets
generic products for niche markets. Although certain niche markets may be too
small and,
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therefore, uneconomical for large pharmaceutical companies, such markets
sometimes present valuable opportunities for the Company.
The Company's research and development activities consist of new
generic drug product development efforts and manufacturing process improvements.
New product activities are primarily directed at conducting research studies to
develop generic drug formulations, reviewing and testing such formulations for
therapeutic equivalence to brand name products and development of brand name
products for its Health Care Products division and its Steri-Med division. For
the fiscal years ended April 30, 1997 and 1996, total research and development
expenditures were $960,000 and $933,000, respectively.
Many of the Company's product development strategies depend upon the
Company's ability to formulate and develop generic drug products equivalent to
brand name drugs for which, in some cases, patent protection is expiring and to
obtain FDA approval using the ANDA procedure for the manufacture and sale of
such products. In December 1996, the Company received FDA approval for Minoxidil
Topical Solution 2%, equivalent to Rogaine(R), manufactured by Pharmacia Upjohn
and used for hair growth. In November 1996, the Company supplemented its ANDAs
for Albuterol Sulfate Inhalation Solution 0.5% and Albuterol Sulfate Inhalation
Solution 0.083% with product manufactured in its sterile facility. These
products are generic equivalents of Proventil(R) used in the treatment of asthma
and currently manufactured by Schering Plough and its Warwick Division. In
October 1996, the Company received ANDA approval from the FDA for its first
dermatological product, Erythro-Statin 2% (Erythromycin Topical Solution USP),
equivalent to T-Stat(R) Solution 2%, manufactured by Westwood Squibb
Pharmaceuticals, Inc. and used in the treatment of acne. In August 1996, the
Company received ANDA approvals from the FDA for Thioridazine Hydrochloride Oral
Solution USP (concentrate), 30 mg/mL, equivalent to Mellaril(R) Oral Solution,
30 mg/mL manufactured by Sandoz Pharmaceuticals Corp., and Thioridazine
Hydrochloride Oral Solution USP (Concentrate), 100 mg/mL, equivalent to
Mellaril(R) Oral Solution, 100 mg/mL manufactured by Sandoz Pharmaceuticals
Corp. and used in the treatment of psychotic episodes. In May 1996, the Company
received ANDA approval from the FDA for Acetaminophen and Codeine Phosphate Oral
Solution USP, the generic form of Tylenol(R) with Codeine Oral Solution,
manufactured by McNeil's Consumer Products Company and used for the relief of
pain.
The completion of a prospective product's formulation, testing and FDA
approval generally takes several years. Development activities for each generic
product could begin several years in advance of the patent expiration date,
which may include bioequivalency studies which are a significant cost of such
ANDA submissions. Consequently, the Company is presently selecting and will
continue to select and develop drugs it expects to market several years in the
future.
The Company has obtained approval of the DEA to sell certain generic
pharmaceutical products containing narcotics. The Company is currently
manufacturing eleven preparations containing Class V narcotics. In order to
manufacture and sell products containing narcotics, the Company has implemented
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stringent security precautions to insure that the narcotics are accounted for
and properly stored. One of these products requires prior FDA approval. The
Company has filed ANDAs for additional products which contain codeine.
The Company's Steri-Med Division is currently selecting and developing
ophthalmic and otic products to be manufactured in its sterile manufacturing
facility. The Company has completed the validation process of its sterile
facility, adjacent to its current facility for, among other things, the
manufacture of generic ophthalmic and otic products and certain other products
which require a sterile manufacturing environment. The manufacture of ophthalmic
and otic products requires a sterile environment, validation of the
manufacturing process and special equipment and trained personnel. The Company
has executed contract manufacturing agreements to develop and manufacture ANDA
and generic pharmaceutical products in its sterile facility and commenced
production, marketing and shipping sterile products in February, 1996. The
Company produced six products in its sterile facility for private and controlled
labels. The Company intends to use the ANDA procedure to obtain FDA approval
for the manufacture of certain other products. The Company currently
manufactures over-the-counter eye drops, eye wash and artificial tears and two
prescription products for the treatment of glaucoma. The Company plans to
introduce a lubricating ointment in the near future.
The Company's Rose Laboratories Division extends the Company's product
line to include suppositories, creams and ointments and strengthens its product
development programs. Rose manufactures generic equivalents of products, such
as Squibb's Glycerine Suppositories, American Home Products' Preparation H
Suppositories and Creams, Parke Davis' Anusol, Thompson Medical's Cortisone 10
and CIBA Consumer Products' Dulcolax Suppositories. Rose's sales in fiscal 1997
were approximately $1,115,000.
CUSTOMERS AND MARKETING
The Company markets its products primarily to generic distributors,
drug wholesalers, chain drug stores, mass merchandise chains, mail order
distributors and local, state and Federal government agencies. The Company
sells its generic products to over 200 active accounts located throughout the
United States. For the fiscal year ended April 30, 1997, two customers, Rugby
Laboratories and Zenith/Goldline Laboratories, accounted for approximately 24%
and 16%, respectively, of the Company's sales. For the fiscal year ended April
30, 1996, Rugby Laboratories and Zenith/Goldline Laboratories accounted for
approximately 21% and 16%, respectively, of the Company's sales. Each of the
Company's other major customers accounted for less than 10% of the Company's
total revenues for such periods. The Company's top ten customers accounted for
approximately 59% and 60% of the Company's total sales for each of the fiscal
years ended April 30, 1997 and 1996, respectively. If any of the Company's top
five customers discontinues or substantially reduces its purchases from the
Company, it could have a material adverse effect on the Company's business and
financial condition, or if any other of the Company's
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major customers discontinues or substantially reduces its purchases from the
Company, it may have a material adverse effect on the Company's business and
financial condition. The Company believes, however, that it has good
relationships with its customers.
The Company also markets substantially all of its products under its
H-T/tm/ brand name. The Health Care Products division sells and markets its
products under the Company's brand names. For the fiscal year ended April 30,
1997, the products sold under the H-T/tm/ brand name and under the Health Care
Products division accounted for approximately 18% and 17% of the Company's total
sales.
The Company utilizes its state of the art facilities and laboratories
to offer contract manufacturing to its customers, as well as research and
development programs.
The Company's Health Care Products division, created in fiscal 1993,
utilizes national brand marketing methods to market the Company's current and
new brand name products. This division is marketing Diabetic Tussin(R) Softgels,
a liquid gel cough/cold remedy, Diabetic Tussin(R), a liquid cough/cold remedy,
Diabetic Tussin(R) Maximum Strength Cough Syrup, a cough syrup, Diabetic
Tussin(R) Cough Drops, both in menthol and cherry flavors, DiabetiDerm/tm/
Moisturizing Cream, a skin cream, DiabetiDerm/tm/ Moisturizing Lotion, a skin
lotion, and Diabeti Sweet(R), a sugar substitute, all of which are targeted to
the diabetic market. Products sold through the Health Care Products division
accounted for approximately 17% and 13% of the Company's total sales for fiscal
1997 and fiscal 1996. The Company markets such products by, among other things,
more contemporary packaging to improve point-of-purchase impact, media, trade
and consumer journal advertising to increase consumer appeal, as well as
extensive price, display, packaging, bonus, multi-pak and coupon promotions. The
Company has expanded its marketing strategy with programs to include marketing
ventures with major companies selling popular prescription medications, pharmacy
programs and through the Internet using a website. All marketing and sales
efforts are conducted by Company employees and 12 independent commission sales
representatives.
MANUFACTURING
The Company's manufacturing capabilities are designed to be flexible
in order to allow the low cost production of a variety of products of different
dosages, sizes, packagings and quantities while maintaining a high level of
quality and customer service. This flexible production capability allows the
Company to change on-line production to allow for different size production runs
and to allow the Company to respond quickly to changes in customer needs.
During fiscal 1996, the Company installed an additional high speed liquid
filling line for a total of five liquid filling lines for its non-sterile
operations, enabling the Company to meet the increasing demands of its customers
while improving overall packaging efficiencies.
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In July 1993 the Company expanded its existing facility by
approximately 20,000 square feet, primarily to expand its production capacity.
In September 1992, the Company purchased and renovated an approximately 21,500
square feet adjacent facility, which is being used primarily as a sterile
facility for the manufacture of generic ophthalmic and otic products. Such
renovation was completed in the last quarter of fiscal 1994. In the first
quarter of fiscal 1995, the Company manufactured trial runs of sterile
ophthalmic and otic products. In the fourth quarter of fiscal 1996, the Company
began manufacturing for shipment sterile ophthalmic and otic products. In
addition, in February 1994, the Company purchased a building in Amityville, New
York of approximately 21,000 square feet which is used primarily for warehouse
space. In November 1994, in connection with the Company's acquisition of Rose,
the Company leased the facility in Madison, Connecticut previously used by Rose
for the manufacture of suppositories and other products. In August 1996, the
Company leased an approximately 50,000 square foot facility in Amityville. The
Company uses the space for finished goods and shipments and intends to use a
portion of the space to accommodate the Rose Laboratories Division. The Company
intends to consolidate the operations of the Rose Laboratories Division into its
facilities in Amityville, New York in the winter of 1997.
The Company's raw materials are readily available from multiple
suppliers, and the Company is not dependent upon any single supplier for its
needs. The Company has good, cooperative working relationships with its
suppliers and has not experienced any difficulty in obtaining its raw materials.
If a supplier were unable to supply the Company, the Company believes it could
locate an alternative supplier. However, any change in suppliers of a raw
material could cause significant delays in the manufacture of such product.
Although many of the products currently manufactured and marketed by
the Company do not require prior specific product FDA approval, certain products
which the Company intends to introduce under its product development program are
subject to the ANDA process which requires the raw material suppliers of a
product to be listed in the ANDA. If raw materials from a specified supplier
were to become unavailable, FDA approval of a new supplier would be required.
Even if the new supplier is qualified by the FDA and its manufacturing process
meets FDA standards, approval of a new supplier could cause delays in the
manufacture of the drug involved.
COMPETITION
The market for generic private label pharmaceuticals is highly
competitive. The Company's direct competition consists of numerous generic drug
manufacturers, many of which have greater financial and other resources than the
Company. If one or more other generic pharmaceutical manufacturers
significantly reduce their prices in an effort to gain market share, the
Company's profitability or market position could be adversely affected.
Competition is based principally on price, quality of products, customer
service, reputation and marketing support.
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The Company's products also compete with those of companies marketing
nationally advertised brand name products. Many of the national brand companies
have resources substantially greater than those of the Company. These national
brand manufacturers compete from time to time with generic pharmaceutical
manufacturers and some have acquired generic pharmaceutical manufacturers which
compete more directly with the Company by manufacturing private label products.
Since entering the sterile ophthalmic and otic market, the Company has
been competing with companies marketing nationally advertised ophthalmic and
otic brand name and generic products. Many of the national brand companies and
some of the generic manufacturers have resources substantially greater than
those of the Company. Competition is based principally on price, quality and
customer service.
GOVERNMENT REGULATION
The Company's products and facilities are subject to regulation by a
number of Federal and state governmental agencies. The FDA, in particular,
maintains oversight of the formulation, manufacture, distribution, packaging and
labeling of all of the Company's products. The Company believes that its
products comply in all material respects with existing regulations.
The FDA has promulgated regulations known as "Current Good
Manufacturing Practice for Finished Pharmaceuticals" which govern the drug
manufacturing operations of the Company's facility. These practices include
strict quality control standards at all stages of production, including the
receipt of raw materials, storage, manufacturing and labeling. Pursuant to
these practices, raw materials are sampled and tested in the Company's
laboratory facilities, products are sampled and tested during production and
quality levels are continuously monitored. In addition, sanitation and other
standards applicable to the Company's non-drug products (including vitamins) are
regulated pursuant to the Federal Food, Drug, and Cosmetics Act of 1938, as
amended.
Although many of the products currently manufactured and marketed by
the Company do not require prior specific approval of the FDA, certain products
which the Company intends to introduce under its product development program
will require prior FDA approval using the ANDA procedure before they can be
marketed. The Company currently has pending submissions for FDA approval of
eleven generic formulations. The Company has received, as of July 1997, through
the ANDA procedure, approval for six products. Such approved products are
Minoxidil Topical Solution 2%, the generic equivalent of Rogaine(R),
manufactured by Pharmacia Upjohn, which is used for hair growth; Promethazine HC
and Dextromethorphan HBr Syrup, the generic equivalent of Phenergan(R),
manufactured by Wyesth Ayerst, which is used for the treatment of coughs and
colds; Chlorhexidine Gluconate 0.12% Oral Rinse, the generic equivalent of
Peridex(R), manufactured by Procter & Gamble, which is used for the treatment of
gingivitis; Erythrostatin 2% (Erythromycin Topical Solution USP), the generic
equivalent of T-Stat Solution 2%, manufactured by Westwood Squibb
Pharmaceuticals, Inc., which is used in the treatment of acne; Thioridazine
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Hydrochloride Oral Solution USP (Concentrate), 30 mg/mL and 100 mg/mL, generic
equivalents of Mellaril(R) Oral Solution, 30 mg/mL and 100 mg/mL manufactured by
Sandoz Pharmaceuticals Corp., which is used in the treatment of psychotic
episodes; and Acetaminophen and Codeine Phosphate Oral Solution USP, the generic
equivalent of Tylenol(R) with Codeine, manufactured by McNeil's Consumer
Products Company which is used for the relief of pain. In general, an ANDA can
be filed for a drug which is the equivalent of a product previously approved by
the FDA. Under the ANDA procedure, applicants are required to demonstrate
through studies that, among other things, the drug product is chemically
equivalent to the previously approved drug, that its facilities and personnel
meet FDA standards for the manufacture of such product, and that its production
procedures will consistently adhere to FDA quality standards, and, in certain
cases, the applicant is required to demonstrate the bioequivalency of its
product (the rate and extent of absorption of a drug's active ingredient and/or
its availability at the site of drug action). Use of the ANDA procedure
substantially reduces the expense of securing FDA approval and may reduce the
time for approval from five years or more for a New Drug Application to two to
three years for an ANDA.
The FDA has extensive enforcement powers, including the power to seize
noncomplying products, to seek court action to prohibit their sale and to seek
criminal penalties for noncomplying manufacturers. Although it has no statutory
power to force the recall of products, the FDA usually accomplishes a recall as
a result of the threat of judicially imposed seizure, injunction and/or criminal
penalties.
The Company believes that it is in substantial compliance with the
FDA's Good Manufacturing Practices.
The Company is also subject to regulation by the DEA, which regulates
the sale of pharmaceutical products that contain narcotics. The Company has
received DEA approval and is manufacturing and selling eleven cough syrup
products containing codeine. The DEA also has extensive enforcement powers,
including the power to seize and prohibit the manufacture and sale of
noncomplying products. The narcotic products which the Company presently
manufactures and markets do not require specific FDA approval.
PRODUCT LIABILITY
The sale of pharmaceutical products can expose the manufacturer of
such products to product liability claims by consumers. A product liability
claim, if successful and in excess of the Company's insurance coverage, could
have a material adverse effect on the Company's financial condition. No product
liability suit has ever been filed against the Company. The Company maintains a
product liability insurance policy which provides coverage in the amount of
$5,000,000 per claim and in the aggregate, with a $100,000 deductible.
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EMPLOYEES
As of April 30, 1997, the Company employed 135 full-time and 14 part-
time persons, of whom 21 were engaged in executive, financial and administrative
capacities; 4 in marketing, sales and service; 71 full-time and 14 part-time
employees in production, warehousing and distribution; and 39 in research and
development and quality control functions. The Company is not a party to a
collective bargaining agreement. The management of the Company considers its
relations with its employees to be satisfactory.
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing facility are located
in Amityville, New York. The Company currently occupies such facility,
aggregating approximately 38,000 square feet. There is a first mortgage on the
property in the original principal amount of $922,500. The Company also owns a
facility in Amityville, New York of approximately 21,500 square feet, which is
used as a sterile manufacturing facility and also contains research and
development, chemistry and microbiology laboratories. There is a first mortgage
on the property in the original principal amount of $600,000.
The Company leases an approximately 50,000 square foot facility in
Amityville, New York which it uses for the warehousing of finished goods and
shipments and will be used to accommodate the Rose Laboratories Division. The
current annual base rent is $157,500.
The Company also owns a 21,000 square foot warehouse facility in
Amityville, New York which it purchased in February 1994 for a purchase price of
$500,000. There is a first mortgage on the property in the amount of $375,000.
The Company's four facilities in Amityville, New York total approximately
130,000 square feet.
The Company leases an approximately 17,000 square foot facility in
Madison, Connecticut under a month-to-month lease. The current annual base rent
for such premises is $24,000. The landlord of such facility is comprised of the
former principal shareholders of Rose. Such facility was formerly used by
Rose's predecessor company.
The Company believes that its properties are adequately covered by
insurance and are suitable and adequate for their present needs.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to an action commenced in November 1994 in the
Supreme Court, State of California, in which the plaintiff, an investor who
purchased various securities through a broker-defendant, alleges, among other
things, that the Company and Bernard Seltzer advised the broker-defendant of
certain non-public information concerning the Company which the plaintiff relied
upon to purchase securities of the Company, which securities subsequently
diminished in value. Management believes that this action is without merit and
it has meritorious defenses to this action. In June, 1996, a motion to quash
service was filed. Demurs on behalf of the Company were sustained. The
attorneys for the plaintiff have filed an appeal which is currently pending. A
respondent brief was filed and the Company is waiting for a reply from the
plaintiff.
The Company is not a party to any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
quarter ended April 30, 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK.
MARKET INFORMATION
The following table sets forth the high and low sales prices for the
Company's common stock for the periods indicated, as reported by Nasdaq. The
quotations are inter-dealer prices, without retail mark-up, mark-down or
commissions paid, and may not necessarily reflect actual transactions.
Quarter Ended High Low
-------------------- ---- ---
Fiscal 1996
-----------
July 31, 1995 8.13 4.75
October 31, 1995 9.38 6.75
January 31, 1996 8.75 6.63
April 30, 1996 9.63 7.63
Fiscal 1997
-----------
July 31, 1996 9.88 4.63
October 31, 1996 7.38 4.50
January 31, 1997 6.00 3.63
April 30, 1997 4.75 3.25
As of August 4, 1997 the closing price of the common stock on the Nasdaq
National Market System was $5.00.
COMMON STOCK HOLDERS
The Company believes there are approximately 1,316 holders of Common
Stock, including shares held in street name by brokers.
DIVIDENDS
The Company has never declared or paid any cash dividends, and it does
not anticipate that it will pay cash dividends in the foreseeable future. The
declaration of dividends by the Company in the future is subject to the sole
discretion of the Company's Board of Directors and will depend upon the
operating results, capital requirements and financial position of the Company,
general economic conditions and other pertinent conditions or restrictions
relating to any financing. The Company's current loan agreement prohibits the
payment of cash dividends by the Company.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Report.
The following table sets forth, for all periods indicated, the
percentage relationship that items in the Company's Statements of Operations
bear to net sales.
YEAR ENDED APRIL 30,
---------------------
1997 1996
---------------------
Net Sales 100.0% 100.0%
Cost of Sales 64.7% 61.6%
Gross profit ------ ------
35.3% 38.4%
Selling, general & administrative expense 23.7% 24.0%
Research & development costs 4.7% 4.9%
Contract research (income) (0.9)% (2.4)%
Interest expense 1.7% 0.8%
Interest (income) and other (0.3)% (0.4)%
Total expenses ------ ------
28.9% 26.9%
Income before tax provision 6.5% 11.5%
Income tax provision 2.5% 4.5%
------ ------
Net income 4.0% 7.0%
====== ======
RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 1997 AND 1996
For the fiscal year ended April 30, 1997 ("Fiscal 1997"), net sales
increased by $1,394,000, or 7.3% to $20,534,000 from $19,140,000 for the fiscal
year ended April 30, 1996 ("Fiscal 1996"). The increase was primarily the
result of the introduction of new products, greater distribution of existing
products, and market penetration of a broader product line in Fiscal 1997 to a
broader customer base. Sales, however, did not meet management's expectations
due to a mild flu season which caused less demand for cough and cold products.
Of the $1,394,000 increase in sales, approximately $700,000 was from the Health
Care Products Division.
16
<PAGE>
Cost of sales, as a percentage of net sales, increased from 61.6% for
Fiscal 1996 to 64.7% for Fiscal 1997. This was a result of increased labor and
overhead costs such as: Depreciation $311,000; Factory supplies and expense
$125,000; Utilities $83,000. These increases were principally the result of the
start-up of the Company's sterile facility. In the aggregate, labor and
overhead increased 12.7% while net sales increased 7.3%.
Selling expenses increased 17.5% and general and administrative expenses
decreased 2.5% while general and administrative wages decreased 5.6%. In the
aggregate, such expenses increased to $4,862,000 for Fiscal 1997 from $4,601,000
for Fiscal 1996 and as a percentage of net sales decreased from 24.0% to 23.7%.
Research and development costs increased to $960,000 or 4.7% of sales for
Fiscal 1997 from $933,000 or 4.9% of sales for Fiscal 1996 as a result of, among
other things, expenses associated with the filing of Abbreviated New Drug
Applications (ANDAs) with the FDA. The majority of the Company's pharmaceutical
products do not require prior approval before marketing. However, certain
products which the Company introduced and intends to introduce under its product
development program will require prior FDA approval using the ANDA procedure
before they can be manufactured and marketed. Such products include products to
be manufactured in the Company's sterile facility. There can be no assurance
that the FDA will approve such products or, if approved, when such approval will
be received.
Net income decreased to $817,000 for Fiscal 1997 from net income of
$1,335,000 for Fiscal 1996, as a result of expenses associated with the
introduction of new products and greater distribution. In addition, net sales
did not meet management's expectations due to a mild flu season which caused
less demand for cough and cold products. Additional expenses were incurred as a
result of the start-up of the sterile facility.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operations are historically financed principally by cash flow
from operations and bank borrowings. At April 30, 1997 and April 30, 1996,
working capital was approximately $5,912,000 and $5,164,000, respectively.
Accounts payable increased 5.1% from $2,269,000 for Fiscal 1996 to
$2,384,000 for Fiscal 1997 principally as a result of the increased levels of
business activity.
Accrued expenses increased 25.4% from $723,000 for Fiscal 1996 to $907,000
for Fiscal 1997 as a result of the increased levels of business activity.
Cash flows from operating activities were approximately $1,409,000, which
was the result principally of net income and depreciation of $2,055,000. Cash
flows from investing activities consumed approximately $582,000 from operating
17
<PAGE>
activities funds and was comprised of payments for fixed assets acquired. Cash
flows used for financing activities approximated $588,000 and resulted
principally from proceeds of $13,000 from common stock issued from the exercise
of stock warrants and the retirement of $601,000 of debt.
The Company has constructed a sterile manufacturing facility for the
purpose of manufacturing ophthalmic and otic products. This facility and the
required systems and procedures were completed in the last three months of
Fiscal 1996. Although the Company has not previously manufactured sterile
products, the Company believes that it will be able to operate this facility
profitably over the long term. However, the Company will incur additional
expense over the start-up period.
The Company extended its working capital credit line of $2,000,000 bearing
interest at the bank's prime rate, 8.5% at April 30, 1997, to August 31, 1997.
The Company is in the final stages of effecting a new working capital credit
line of $3,000,000. The Company's outstanding balance was $815,000 at April 30,
1997. Borrowings under the line are limited to 80% of eligible receivables and
are collateralized by inventory, accounts receivable and other assets of the
Company. The loan agreement contains covenants with respect to working capital,
net worth and certain financial ratios as well as other covenants and prohibits
the payment of cash dividends.
The Company believes that its financial resources consisting of anticipated
future operating revenue and its existing credit line will be sufficient to
enable it to meet its working capital requirements for at least the next 12
months.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended April
30, 1997 are derived from the audited financial statements of the Company. This
data is qualified in its entirety by reference to, and should be read in
conjunction with, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Company's financial statements and related
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales.................... $20,534,000 19,140,000 16,406,000 13,297,000 10,664,000
---------- ----------- ----------- ------------ -------------
Costs and expenses:
Costs of goods sold.......... 13,278,000 11,785,000 9,691,000 7,708,000 6,199,000
Research and development..... 960,000 933,000 711,000 646,000 374,000
Selling, general and
administrative............. 4,862,000 4,601,000 3,419,000 3,205,000 2,325,000
Contract research (income)... (178,000) (467,000) (293,000) (253,000) -
Nonrecurring compensation
charge..................... - - - 2,925,000 -
Abandoned merger expense..... - - - 193,000 -
Interest expense............. 340,000 149,000 157,000 25,000 22,000
Interest (income) and other.. (55,000) (67,000) (82,000) (52,000) (88,000)
---------- ----------- ----------- ------------ -------------
19,207,000 16,934,000 13,603,000 14,397,000 8,832,000
---------- ----------- ----------- ------------ -------------
Income (loss) before provision
for income taxes............. 1,327,000 2,206,000 2,803,000 (1,100,000) 1,832,000
Provision for income taxes...... 510,000 871,000 1,072,000 (100,000) 679,000
---------- ----------- ----------- ------------ -------------
Net income (loss)............... $ 817,000 $ 1,335,000 1,731,000 (1,000,000) 1,153,000
========== =========== =========== ============ =============
Net income (loss) per common
share (1).................... $0.18 $0.29 $0.38 $(0.24) $0.31
========== =========== =========== ============ =============
Weighted average number of
shares outstanding (1)....... 4,575,000 4,664,000 4,579,000 4,213,000 3,675,000
========== =========== =========== ============ =============
April 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ----------- ------------ -------------
Balance sheet data:
Working capital.............. $ 5,912,000 $ 5,164,000 4,241,000 2,826,000 752,000
Total assets................. $20,806,000 $20,234,000 18,404,000 15,239,000 3,739,000
Long-term debt............... $ 1,896,000 $ 2,427,000 3,026,000 1,955,000 595,000
Stockholders' equity......... $14,001,000 $13,171,000 11,266,000 10,040,000 1,397,000
(1) Reflects the 3-for-2 stock
split payable on November 1,
1993.
</TABLE>
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX PAGE NUMBER
- ---------------------------------------- -----------------
Report of Independent Auditors ................ F-2
Consolidated Balance Sheets ................... F-3
Consolidated Statements of Operations ......... F-4
Consolidated Statements of Cash Flows ......... F-5
Consolidated Statements of Changes in
Stockholders' Equity ........................ F-6
Notes to Consolidated Financial Statements .... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders
Hi-Tech Pharmacal Co., Inc.
Amityville, New York
We have audited the accompanying consolidated balance sheets of Hi-
Tech Pharmacal Co., Inc. and subsidiary as at April 30, 1997 and April 30, 1996,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. 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 generally accepted auditing
standards. 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 financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of Hi-Tech
Pharmacal Co., Inc. and subsidiary at April 30, 1997 and April 30, 1996 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/S/RICHARD A. EISNER & COMPANY, LLP
- -----------------------------------
RICHARD A. EISNER & COMPANY, LLP
New York, New York
July 29, 1997
F-2
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
-----------------------
1997 1996
----------- ----------
A S S E T S
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note A[7])................................ $ 1,985,000 1,746,000
Accounts receivable (less allowances for doubtful 4,034,000 3,699,000
accounts of $160,000 and $160,000 at April 30, 1997
and April 30, 1996).................................................
Inventory (Notes A[3] and B)......................................... 4,014,000 3,646,000
Income taxes receivable (Notes A[5] and J)........................... - 207,000
Other current assets................................................. 548,000 272,000
----------- ----------
Total current assets................................................. 10,581,000 9,570,000
Property and equipment at cost, net of accumulated 10,106,000 10,598,000
depreciation and amortization (Notes A[4], and C)...................
Other assets......................................................... 119,000 66,000
----------- ----------
T O T A L............................................................ $20,806,000 20,234,000
=========== ==========
L I A B I L I T I E S
Current liabilities:
Note payable - bank (Note E)......................................... $ 815,000 815,000
Current portion of long-term debt (Note F)........................... 529,000 599,000
Accounts payable..................................................... 2,384,000 2,269,000
Accrued expenses..................................................... 907,000 723,000
Income taxes payable (Notes A[4] and J).............................. 34,000 -
----------- ----------
Total current liabilities............................................ 4,669,000 4,406,000
Long-term debt (less current portion) (Note F)....................... 1,896,000 2,427,000
Deferred taxes (Note J).............................................. 240,000 230,000
----------- ----------
Total liabilities.................................................... 6,805,000 7,063,000
Commitments and contingencies (Note H)
STOCKHOLDERS' EQUITY (Note K)
Preferred stock, par value $.01 per share; authorized - -
3,000,000 shares, none issued........................................
Common stock - $.01 par value; 10,000,000 shares
authorized, 4,526,000, and 4,472,000 shares issued
and outstanding at April 30, 1997 and April 30, 1996................ 45,000 45,000
Additional paid-in capital........................................... 8,604,000 8,591,000
Retained earnings.................................................... 5,352,000 4,535,000
----------- ----------
Total stockholders' equity........................................... 14,001,000 13,171,000
----------- ----------
T O T A L............................................................ $20,806,000 20,234,000
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part
hereof.
F-3
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
NET SALES (Notes A[6] and L).................................... $20,534,000 19,140,000
Cost of goods sold.............................................. 13,278,000 11,785,000
----------- ----------
GROSS PROFIT.................................................... 7,256,000 7,355,000
----------- ----------
Selling, general and administrative expense..................... 4,862,000 4,601,000
Research & product development costs............................ 960,000 933,000
Contract research (income) (Notes A[6] and D)................... (178,000) (467,000)
Interest expense................................................ 340,000 149,000
Interest (income) and other..................................... (55,000) (67,000)
----------- ----------
T O T A L....................................................... 5,929,000 5,149,000
----------- ----------
Income before income taxes...................................... 1,327,000 2,206,000
Provision for income taxes (Notes A[5] and J)................... 510,000 871,000
----------- ----------
NET INCOME...................................................... $ 817,000 1,335,000
=========== ==========
NET INCOME PER COMMON SHARE (Note A[8])......................... $0.18 0.29
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................... 4,575,000 4,664,000
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 817,000 1,335,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 1,238,000 841,000
Deferred income taxes............................. 10,000 106,000
Capitalized interest.............................. - (247,000)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable............................. (335,000) (481,000)
Inventory....................................... (368,000) (805,000)
Other current assets............................ (276,000) (10,000)
Other assets.................................... (53,000) (4,000)
Accounts payable................................ (49,000) 427,000
Customer deposit .............................. - (100,000)
Accrued expenses................................ 184,000 117,000
Taxes payable................................... 241,000 (80,000)
---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................................. 1,409,000 1,099,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for fixed assets.............................. (582,000) (1,079,000)
---------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments - long-term debt and notes payable .......... (539,000) (539,000)
Repayment of loans from officers and stockholders..... (62,000) (86,000)
Proceeds - issuance of common stock - net............. 13,000 570,000
---------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES....... (588,000) (55,000)
NET INCREASE (DECREASE) IN CASH.......................... 239,000 (35,000)
Cash at beginning of period.............................. 1,746,000 1,781,000
---------- ----------
CASH AT END OF PERIOD.................................... $1,985,000 1,746,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................ $ 305,000 396,000
Income taxes........................................ $ 259,000 835,000
</TABLE>
At April 30, 1997, property and equipment of approximately $164,000 had been
purchased and unpaid.
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------ ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance - April 30, 1995..................................... 4,348,000 $43,000 8,023,000 3,200,000 11,266,000
Net income................................................... - - - 1,335,000 1,335,000
Exercise of stock warrants.................................. 119,000 1,000 546,000 - 547,000
Exercise of stock options.................................... 5,000 1,000 22,000 - 23,000
------------ ----------- --------- ------------ ----------
Balance - April 30, 1996..................................... 4,472,000 45,000 8,591,000 4,535,000 13,171,000
Net income................................................... - - - 817,000 817,000
Issuance - Contingent shares -Acquisition Rose Labs.......... 51,000 - - - -
Exercise of stock options.................................... 3,000 - 13,000 - 13,000
------------ ----------- --------- ------------ ----------
Balance - April 30, 1997..................................... 4,526,000 $45,000 8,604,000 5,352,000 14,001,000
============ =========== ========= ============ ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE A) - The Company and Summary of Significant Accounting Policies:
- ----------------------------------------------------------------------
[1] Business:
--------
Hi-Tech Pharmacal Co., Inc. manufactures and sells prescription and over-the-
counter generic drugs, in liquid and semi-solid dosage forms. The Company
markets its products in the United States through distributors, retail drug and
mass-merchandise chains and mail order companies.
[2] Principles of Consolidation:
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Rose Laboratories Inc. In consolidation, all
significant intercompany transactions and balances have been eliminated.
[3] Inventory:
---------
Inventories are valued at the lower of cost (first-in first-out or average cost)
or market.
[4] Property and equipment:
----------------------
Property and equipment is stated at cost. Depreciation and amortization of the
respective assets is computed using the straight-line method over their
estimated useful lives.
[5] Income taxes:
------------
Provision for income taxes is based on income and expenses reported in the
financial statements. Deferred income taxes result from temporary differences
in reporting certain income and expense items for financial and tax purposes.
The Company uses the liability method to account for deferred income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") 109.
[6] Revenue recognition:
-------------------
Sales are recorded as products are shipped. Estimated sales returns and
discounts are provided for. Contract research income is recognized as work is
completed and as billable costs are incurred. In some cases, contract research
income is based on attainment of certain designated milestones.
[7] Cash and cash equivalents:
-------------------------
The Company considers U.S. Treasury bills and Commercial Paper with a maturity
of three months or less when purchased to be cash equivalents.
[8] Net income per share:
--------------------
Net income per share is computed based on the weighted average number of common
shares and equivalents outstanding for each period. The effect of outstanding
options and warrants is computed, if dilutive, using the "treasury stock"
method.
(continued)
F-7
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE A) - The Company and Summary of Significant Accounting Policies:
- ---------------------------------------------------------------------
(continued)
[9] Long-lived assets:
-----------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company records impairment losses on long-lived assets used
in operations, including intangible assets, when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such losses have been recorded.
[10] Use of estimates:
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
[11] Stock-based compensation:
-------------------------
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation ("SFAS No. 123"), which is effective
for fiscal years beginning after December 15, 1995. SFAS No. 123 established a
fair-value-based method of accounting for stock-based compensation plans. The
Company has adopted the disclosure of the proforma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted, as well as certain other
information (see Note K[4]).
[12] New accounting pronouncements:
------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". SFAS 128
established new standards for computing and presenting earnings per share. SFAS
128 is effective for periods ending after December 15, 1997. The Company has not
yet quantified what effect, if any, the adoption of SFAS 128 will have on its
net earnings per share of common stock.
The Financial Accounting Standards Board has recently issued statements of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure," No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The above
pronouncements will not have a significant effect on the information presented
in the consolidated financial statements.
(continued)
F-8
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE B) - Inventory:
- ---------------------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
April 30,
-----------------------
<S> <C> <C>
1997 1996
Finished goods and ----------- ----------
work in process.............................................. $ 1,507,000 1,266,000
Raw materials................................................ 2,507,000 2,380,000
----------- ---------
T o t a l.................................................... $ 4,014,000 3,646,000
=========== =========
(NOTE C) - Property and Equipment:
- ----------------------------------
The components of net property and equipment consist of the
following:
April 30,
-----------------------
1997 1996
----------- ---------
Land and building and improvements........................... $ 4,564,000 4,342,000
Machinery and equipment...................................... 9,180,000 8,751,000
Transportation equipment..................................... 13,000 13,000
Computer equipment........................................... 354,000 305,000
Furniture and fixtures....................................... 142,000 96,000
----------- ---------
14,253,000 13,507,000
Accumulated depreciation and amortization.................... 4,147,000 2,909,000
----------- ---------
Total property and equipment................................. $10,106,000 10,598,000
=========== ==========
</TABLE>
Total interest incurred for the years ended April 30, 1997 and 1996 aggregated
$340,000 and $396,000, respectively. Of these amounts $ 0 and $247,000,
respectively, have been capitalized.
(NOTE D) - Customer Deposits and Contract Research Income:
- ---------------------------------------------------------
Contract research income is recognized as work is completed and as billable
costs are incurred. In some cases, contract research income is based on
attainment of certain designated milestones. Advance payments may be received to
fund certain development costs.
(continued)
F-9
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE E) - Note Payable - Bank:
- ------------------------------
The Company extended its working capital credit line of $2,000,000 bearing
interest at the bank's prime rate (8.50% at April 30, 1997) to August 31, 1997.
The Company's outstanding balance was $815,000 at April 30, 1997. Borrowings
under the line are limited to 80% of eligible receivables and are collateralized
by inventory, accounts receivable and all other assets. The agreement contains
covenants with respect to working capital, net worth and certain ratios, as well
as other covenants and prohibits the payment of cash dividends.
(NOTE F) - Long-Term Debt:
- --------------------------
Long-term debt consists of the following:
April 30,
------------------------
1997 1996
------------ ---------
Equipment loans - collateralized by the
related equipment purchased,
inventory, and accounts receivable and
other assets (1).......................... $ 82,000 173,000
Note payable - stockholder (2)............. - 62,000
Mortgage payable (3)....................... 256,000 294,000
Mortgage payable (4)....................... 584,000 677,000
Mortgage payable (5)....................... 325,000 385,000
Equipment loan - collateralized by the
related equipment purchased,
inventory, and accounts receivable and
other assets (6).......................... 1,178,000 1,435,000
---------- ----------
T o t a l 2,425,000 3,026,000
Less current portion....................... 529,000 599,000
---------- ---------
Long-term debt............................. $1,896,000 2,427,000
========== =========
[1] The equipment loan bears interest at a fixed rate of 6.95% per annum. Such
loan is payable in monthly installments of $7,500, plus interest, and expires
March 1998.
[2] The note payable to the stockholder was payable in monthly installments of
$8,000 through December 1996. Interest on the note payable has been imputed at
9.5% per annum. As at April 30, 1997, the note had been paid.
[3] The mortgage is payable over ten years in monthly installments of $3,125
plus interest at the rate of 1/2% over the bank's prime rate, 8.50% at April 30,
1997.
[4] The mortgage is payable in monthly installments of approximately $8,000 and
interest at a varying rate of 1/2% above the bank's prime rate, 8.50% at April
30, 1997.
[5] The mortgage is payable in monthly installments of $5,000 plus interest at
8.26% per annum through September 2002.
(continued)
F-10
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE F) - Long-Term Debt: (continued)
- -------------------------
[6] As of October 31, 1994 the Company executed a new $1,800,000 term loan for
a seven-year period at an interest rate 1/2% above the bank's prime lending
rate, 8.50% at April 30, 1997. The loan requires monthly payments of principal
in the amount of $21,429 plus interest.
Long-term debt is payable as follows:
---------------------------------------
1998................................... $ 529,000
1999................................... 447,000
2000................................... 447,000
2001................................... 447,000
2002................................... 340,000
2003................................... 215,000
----------
T o t a l.............................. $2,425,000
==========
(NOTE G) - Related Party Transactions:
- -------------------------------------
The Company has employment agreements, as amended, expiring April 30, 2000 with
the Chief Executive Officer and the Chief Operating Officer, who are also
stockholders of the Company, which provide for annual base salaries of $186,000
and $186,000 for the year ended April 30, 1997 plus annual cost of living
increases thereafter. Commencing on the sixth year, August 1, 1997, of the
employment agreement, each of the salaries was increased by $50,000 annually.
In fiscal year 1997 the Company engaged the services of Reuben Seltzer, an
attorney and a director, and the son of the Company's Chief Executive Officer.
He provided legal and new business development services throughout the year. For
the 1997 fiscal year he received fees and expense reimbursements of
$61,000.
The Company leases an approximately 17,000 square foot facility in Madison,
Connecticut month to month. The current annual base rate for such premises is
$24,000. The landlord of such facility is comprised of the former principal
shareholders of Rose.
(NOTE H) - Commitments and Contingencies:
- ----------------------------------------
[1] Government regulation:
---------------------
The Company's products and facilities are subject to regulation by number of
Federal and State governmental agencies. The FDA, in particular, maintains
oversight of the formulation, manufacture, distribution, packaging and labeling
of all of the Company's products.
(continued)
F-11
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE H) - Commitments and Contingencies (continued):
- ----------------------------------------------------
[2] Employment agreements:
---------------------
The Company has a three year employment agreement with an employee which
provides for an annual salary of $95,000 plus annual cost of living increases,
which expires in August 1998.
The Company has an employment agreement with an employee commencing May 1, 1996
and expiring April 30, 1999 which provides for annual payments of approximately
$104,000, and bonuses based on performance goals established in the agreements.
See Note G for other employment agreements.
[3] Leased property:
----------------
On July 18, 1996, the Company executed a lease for a 50,000 square foot building
in Amityville, New York. The lease commenced on August 1, 1996 and expires
January 31, 2003. The Company is responsible for all operating costs of this
facility and has the option to purchase the premises at the end of the lease for
$1,300,000. The rental expense for the fiscal year ended April 30, 1997 was
approximately $88,000.
Future minimum payments by year are as follows:
1998................................. $ 162,000
1999................................. 169,000
2000................................. 176,000
2001................................. 183,000
2002................................. 190,000
Thereafter........................... 148,000
----------
T o t a l............................ $1,028,000
==========
[4] Other matters:
-------------
The Company is subject to various regulatory requirements in the normal course
of its business. Pending regulatory matters are not expected to have a material
effect on the Company's financial condition.
[5] Litigation:
----------
The Company is a party to an action commenced by a shareholder in November 1994
which makes certain allegations against the Company and the President of the
Company. The Company believes that the action is without merit.
The Company is not a party to any other material litigation.
(continued)
F-12
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE I) - Fair Value of Financial Instruments:
- ----------------------------------------------
The carrying amounts of certain financial instruments such as cash and cash
equivalents, accounts receivable, accounts payable, short-term borrowings and
long-term debt approximate their fair values. The fair value of the long-term
debt is estimated using discounted cash flow analysis and the Company's current
incremental borrowing rates for similar types of arrangements.
(NOTE J) - Income Taxes:
[1] The provision for income taxes is composed of the following:
Year ended April 30,
------------------------
1997 1996
---------- ------------
Current:
Federal...................................... $442,000 670,000
State........................................ 58,000 95,000
Deferred:
Federal...................................... 9,000 90,000
State........................................ 1,000 16,000
-------- --------
T o t a l....................................... $510,000 871,000
======== ========
[2] Expected tax expense based on the statutory rate is reconciled with
actual tax expense as follows:
Year Ended April 30,
--------------------
1997 1996
------- ------
Statutory rate........................................... 34.0% 34.0%
State income tax, net of federal income tax benefit...... 3.0% 5.0%
Other.................................................... 1.4% 0.4%
------- ------
Effective tax rate....................................... 38.4% 39.4%
======= ======
(continued)
F-13
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE J) - Income Taxes (continued) :
- ------------------------------------
[3] Deferred tax expense is composed of the following:
Year Ended April 30,
--------------------
1997 1996
--------- ---------
Depreciation and amortization..... $ 175,000 122,000
Inventory uniform capitalization.. (165,000) -
Other, net........................ - (16,000)
--------- ---------
$ 10,000 106,000
========= =========
[4] The Company's income tax return for the fiscal year 1995 are being audited
by the Internal Revenue Service.
[5] Deferred tax liability at April 30, 1997 and 1996 consist principally of
temporary differences in the deductibility of depreciation and inventory uniform
capitalization.
(NOTE K) - Common Stock:
- -----------------------
[1] Stock Option Plans:
------------------
The Company's 1992 Stock Option Plan (the "Plan") provides for the issuance of
either incentive stock options or nonqualified options. The maximum number of
shares of common stock for which options may be granted is 675,000 shares. All
stock options granted are exercisable at a price determined by the stock option
committee of the Plan. However, Incentive Stock Options ("ISOs"), as defined
by the Internal Revenue Code, must not be less than the fair market value of the
stock, at the date of grant. All options are exercisable in installments
commencing one year from date of grant and must be exercised within ten years of
date of grant, except for ISOs granted to persons owning more than 10% of the
Company's common stock which must be exercised within five years of the date of
the grant.
In August 1994 the Company adopted the 1994 Directors Stock Option Plan and
reserved 100,000 shares of common stock for issuance thereunder. The plan
provides for the annual grant of options to purchase 3,000 shares of common
stock (plus 500 additional shares for committee chairpersons) to nonemployee
directors at fair market value at the date of grant.
(continued)
F-14
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
(NOTE K) - Common Stock (continued):
- -----------------------------------
[2] Additional information with respect to the 1992 Stock Option Plan is as
-----------------------------------------------------------------------
follows:
- --------
<TABLE>
<CAPTION>
Options Exercisable Options
---------------------- ------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Price of Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at April 30, 1995..................... 318,750 $5.300 171,560 $4.83
========= =========
Granted........................................... 92,700 $6.625
Cancelled......................................... (1,000) $5.250
Exercised......................................... (5,600) $4.080
--------- ---------
Outstanding at April 30, 1996..................... 404,850 $5.620 220,913 $5.07
========= ========= ========= =========
Granted........................................... 132,800 $4.000
Cancelled......................................... (3,200) $5.940
Exercised......................................... (3,300) $4.000
--------- ---------
Outstanding at April 30, 1997..................... 531,150 $5.220 285,250 $5.31
========= ========= ========= =========
</TABLE>
As of April 30, 1997, 126,300 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding
options is 7.4 years.
F-15
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
[3] Additional information with respect to the 1994 Directors Stock Option Plan
---------------------------------------------------------------------------
is as follows:
- --------------
<TABLE>
<CAPTION>
Options Exercisable Options
---------------------- ------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Price of Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at April 30, 1995......... 6,500 $6.750 0 -
========= =========
Granted............................... 9,500 $7.625
Cancelled............................. - -
Exercised............................. - -
-------- --------
Outstanding at April 30, 1996......... 16,000 $7.270 1,625 $6.75
======== ======== ========= =========
Granted............................... 9,500 $4.625
Cancelled............................. - -
Exercised............................. - -
-------- --------
Outstanding at April 30, 1997......... 25,500 $6.280 5,625 $7.12
======== ======== ========= =========
</TABLE>
As of April 30, 1997, 74,500 shares were available for future grant under
the Plan. The weighted average remaining contractual life of the
outstanding options is 8.6 years.
[3] The Company applies APB 25 in accounting for its stock option plan, which
requires the recognition of compensation expense for the difference between the
fair value of the underlying common stock and the grant price of the option at
the grant date. Had the compensation expense been determined based upon the fair
value at the grant date, as prescribed under SFAS No. 123, the Company's net
profit for the years ended April 30, 1997 and April 30, 1996 would have been as
follows:
Year Ended April 30,
--------------------
1997 1996
-------- ----------
Net income:
As reported $817,000 1,335,000
Proforma under SFAS 123 $710,000 1,311,000
Earnings per share:
As reported $ 0.18 0.29
Proforma under SFAS 123 $ 0.16 0.28
(continued)
F-16
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended April 30, 1997 and April 30, 1996
The fair value of each option is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average assumptions:
1997 1996
------------ -------------
Risk-free interest rate 6.29% 5.37% - 5.81%
Expected life of options 5 5
Expected stock price volatility 52% - 54% 50% - 55%
Expected dividend yield 0.00% 0.00%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. The proforma effect on
net income in fiscal 1997 and 1996 is not representative of the proforma effect
on net income in future years because it does not take into consideration
proforma compensation expense related to grants made prior to fiscal 1996. The
weighted average fair value of options granted is $2.13 in fiscal 1997 and $3.39
in fiscal 1996.
[4] Warrants:
----------
The Company has outstanding warrants to purchase 61,000 shares of common stock
for $4.60 per share for up to four years, commencing August 1993.
(NOTE L) - Significant Customers and Concentration of Credit Risk:
- -----------------------------------------------------------------
Two major customers accounted for net sales of approximately 24% and 16% for
the year ended April 30, 1997 and 21% and 16% for the year ended April 30, 1996,
respectively. These two customers represented approximately 45% of the
outstanding trade receivables at April 30, 1997. Cash in excess of Federal
Deposit Insurance Company limitations is held in certain banks.
(NOTE M) - Savings Plan:
- -----------------------
The Company has a defined contribution plan that qualifies under Section 401(k)
of the Internal Revenue Code for the benefit of substantially all full-time,
eligible employees. Employees may contribute between 1% and 15% of their salary
up to the dollar maximum allowed by the Internal Revenue Service. Company
contributions are voluntary and are made at the discretion of the Board of
Directors. The Company expensed $50,000 and $35,000, respectively, for fiscal
years 1997 and 1996.
(NOTE N) - Subsequent Events:
- ----------------------------
The Board of Directors authorized, on May 28, 1997, a common stock buy-back
program under which the Company intends to purchase up to $500,000 of its common
stock.
F-17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Board of Directors consists of five members. All Directors are
elected at each Annual Meeting of Shareholders and hold office until the next
Annual Meeting of Shareholders when their respective successors are duly elected
and qualified.
Set forth below is the name and age of each Director, his position
with the Company and his principal occupation during the past five years and the
year in which each Director was first elected as a Director of the Company.
<TABLE>
<CAPTION>
Principal Occupation Elected
Name of Director and other Directorships Age to
the Board
- --------------------- -------------------------------------------- --- ----------
<S> <C> <C> <C>
Bernard Seltzer Bernard Seltzer has been Chairman, Chief 73 1983
Executive Officer and President of the
Company since January 1990. From
May 1983 to January 1990, Mr. Seltzer was
Vice President of Sales of the Company.
Prior thereto, Mr. Seltzer was the Vice
President of Sales and Marketing of
Ketchum Laboratories, Inc., a
pharmaceutical manufacturer and the
predecessor of the Company.
</TABLE>
37
<PAGE>
<TABLE>
Principal Occupation Elected
Name of Director and other Directorships Age to
the Board
- ------------------- ----------------------------------------- --- ----------
<S> <C> <C> <C>
David S. Seltzer David S. Seltzer has been Executive Vice 37 1992
President-Administration since July 1992,
Vice President-Administration and Chief
Operating Officer of the Company since
March 1992 and a Director, Secretary and
Treasurer since February 1992. From
September 1986 to February 1990
Mr. Seltzer was employed as an account
executive. Mr. Seltzer received a B.A. in
Economics from Queens College in 1984.
David S. Seltzer is the son of Bernard
Seltzer.
Reuben Seltzer Reuben Seltzer has been a Director of the 41 1992
Company since April 1992 and is currently
serving as a consultant to the Company on
legal matters and special projects. Mr.
Seltzer has been president of R.M. Realty
Services Inc., an investment and consulting
company since May 1988. From May 1983 to
May 1988 Mr. Seltzer was a vice president and
attorney with Merrill Lynch Hubbard Inc., a
real estate investment subsidiary of Merrill
Lynch and Company. Mr. Seltzer received a
B.A. in Economics from Queens College in
1978, a Juris Doctor from the Benjamin N.
Cardozo School of Law in 1981 and a L.L.M.
from the New York University School of Law
in 1987. Reuben Seltzer is the son of
Bernard Seltzer.
Martin M. Goldwyn Martin M. Goldwyn was elected a Director of 45 1992
the Company in May 1992. Mr. Goldwyn is a
member in the law firm of Tashlik, Kreutzer
& Goldwyn P.C. Mr. Goldwyn received a
B.A. in finance from New York University in
1974 and a Juris Doctor from New York Law
School in 1977.
</TABLE>
38
<PAGE>
<TABLE>
Principal Occupation Elected
Name of Director and other Directorships Age to
the Board
- --------------------- ------------------------------------------- --- ----------
<S> <C> <C> <C>
Yashar Hirshaut, M.D. Yashar Hirshaut has been a Director of the 59 1992
Company since September 1992.
Dr. Hirshaut is a practicing medical
oncologist. He is president of Immuno-
Sciences Inc., a biopharmaceutical
Company engaged in the production of
immuno-therapeutic products used in the
treatment of cancer since August 1988.
Since July 1986, he has been a Research
Professor of Biology at Yeshiva University.
In addition, he has served as editor-in-chief
of the Professional Journal of Cancer
Investigation since July 1981. Dr. Hirshaut
received a B.A. from Yeshiva University in
1959 and his medical degree from Albert
Einstein College of Medicine in 1963.
</TABLE>
39
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are set forth in the table
below. All executive officers are elected at the annual meeting or interim
meetings of the Board of Directors. No arrangements or understanding exists
between any executive officer and any other person pursuant to which he was
elected as an executive officer.
Name Age Position and Period Served
- ----------------------- --- --------------------------------------------------
Bernard Seltzer 73 Chairman, Chief Executive Officer and President of
the Company since January 1990.
David S. Seltzer 37 Executive Vice President-Administration since July
1992, Vice President-Administration and Chief
Operating Officer of the Company since March 1992
and a Director, Secretary and Treasurer since
February 1992.
Elan Bar-Giora 53 Executive Vice President-Operations of the Company
since July 1992 and Vice President- Operations of
the Company since August 1990.
Arthur S. Goldberg 55 Vice President-Finance and Chief Financial
Officer of the Company since September 1991.
SIGNIFICANT EMPLOYEES
Name Age Position and Period Served
- ----------------------- --- --------------------------------------------------
Gennaro P. Caccavale 50 Director of Operations since February 1992.
Michael McConnell 39 Director of Product Development since
January 1992.
Gary M. April 40 Divisional Vice President of Sales since
January 1993.
Yih Ming Hsiao 57 Director of Special Projects since January
1993.
Suzanne Fenton 42 Director of Compliance since September
1995.
Jesse Kirsh 38 Director of Quality Assurance since March
1994.
40
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors and Executive Officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, Directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file. The Company believes that all
Section 16(a) filing requirements were met during Fiscal 1997 except for the
filing of a Form 5 for Yashar Hirshaut, M.D., which was not timely filed. In
making this statement, the Company has relied on the written representations of
its incumbent Directors and officers and copies of the reports that they have
filed with the Securities and Exchange Commission and Nasdaq.
41
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows, for the fiscal years ended April 30, 1997,
1996 and 1995, the compensation paid or accrued by the Company to or for each of
the executive officers of the Company.
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------------- -------------
Awards
------------
Other Annual All Other
Name and Principal Salary Bonus Compensation Compensation
Position Year ($) ($) (1) ($) Options (#) (2) (3) ($)
- ----------------------- ---- ------- ------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bernard Seltzer 1997 186,000 16,000 -0- 3,910
President, Chief 1996 186,000 20,000 -- -0- 3,408
Executive Officer 1995 210,000 30,000 -- -0- 2,912
David S. Seltzer 1997 186,000 16,000 50,000 3,175
Executive Vice President 1996 186,000 25,000 -- 37,500 1,040
- Administration, Chief 1995 136,500 30,000 -- 37,500 2,231
Operating Officer,
Secretary and Treasurer
Elan Bar-Giora 1997 102,000 0 10,000 1,475
Executive Vice 1996 100,000 0 -- 10,000 -0-
President- Operations 1995 100,000 2,500 -- 5,000 1,090
Arthur S. Goldberg 1997 101,000 0 -- 7,500 --
Vice President of 1996 93,000 0 -- 7,500 --
Finance and Chief 1995 89,000 0 -- 3,000 --
Financial Officer
</TABLE>
- ----------
(1) The named executive officers received various perquisites, the cost of which
did not exceed the lesser of $50,000 or 10% of annual salary plus bonus.
(2) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(3) Represents the dollar value of the premium paid by the Company during the
fiscal years ended April 30, 1997, 1996 and 1995 with respect to term life
insurance for the benefit of the named executive officer.
42
<PAGE>
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's Amended and Restated Stock Option Plan ("Plan") to
the named executive officers of the Company during Fiscal Year 1997.
II. OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/Sh) Date
(#)(1)(2)
- -------------------- --------------- ----------------- --------------- ----------
<S> <C> <C> <C> <C>
Bernard Seltzer -0- -0- -0- -0-
David S. Seltzer 50,000 37.7% 4.00 1/21/01
Elan Bar-Giora 10,000 7.5% 4.00 1/21/01
Arthur S. Goldberg 7,500 5.6% 4.00 1/21/01
</TABLE>
- --------------------
(1) Options granted in Fiscal Year 1997 are scheduled to vest and become
execisable in yearly increments of 25% beginning on January 21, 1998, with
full vesting occurring on January 21, 2001. Options expire ten years after
grant under the terms of the Company's Plan.
(2) Granted January 21, 1997.
43
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the named
executives concerning the exercise of options during Fiscal Year 1997 and
unexercised options held as of the end of Fiscal Year 1997.
III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at Fiscal at Fiscal Year-End
Year-End (#)(1) ($)(2)
----------------- --------------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- ------------------ --------------- -------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Bernard Seltzer -0- -0- 0/0 0/0
David S. Seltzer -0- -0- 103,125/96,875 0/0
Elan Bar-Giora -0- -0- 42,500/20,000 0/0
Arthur S. Goldberg -0- -0- 34,125/13,875 0/0
</TABLE>
- ------------
(1) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(2) Amounts reflect the market value of the underlying shares of Common Stock
on April 30, 1997 less the exercise price.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
Bernard Seltzer and David S. Seltzer serve as President and Chief
Executive Officer and Executive Vice President-Administration, Chief Operating
Officer, Secretary and Treasurer, respectively, of the Company pursuant to
employment agreements, as amended, effective as of May 1, 1992 and expiring
April 30, 2000, pursuant to which they have agreed to serve in their respective
capacities. Such employment agreements were modified to provide that the annual
base salary for each of Bernard Seltzer and David Seltzer would be $186,000 for
the fiscal year commencing May 1, 1996 through April 30, 1997. The increase in
annual base salary for each fiscal year thereafter for Bernard Seltzer and David
S. Seltzer is determined by multiplying their respective annual base salary for
the prior fiscal year by the greater of 5% or the increase in the Consumer Price
Index as of May 1 of each such year over the index as of May 1 of the prior
year. Commencing on the sixth year of the employment agreement, each of the
salaries of Bernard Seltzer and David S. Seltzer will be increased by $50,000.
The Board of Directors in its discretion will
44
<PAGE>
determine the annual bonus, if any, to be received by Bernard Seltzer and David
S. Seltzer. The employment agreements also contain standard confidentiality
provisions and a non-compete provision for a term of one year after the
termination of their employment.
Under the employment agreements for each of Bernard Seltzer and
David S. Seltzer, the Company will pay to each person's estate upon his death,
his base salary for a period of twelve (12) months after the end of the month in
which death occurred. In the event of total disability, each will continue to
receive his base salary for the remaining term of his employment agreement. In
addition to base salary, Bernard Seltzer and David S. Seltzer each will be paid
an amount equal to a percentage of the bonus, if any, based on the portion of
such year in which death, total disability or termination of employment
occurred. If termination is for cause, total disability or because he wrongfully
leaves his employment, then, upon such occurrence, the employment agreement
shall be deemed terminated and the Company shall be released from all
obligations.
Arthur S. Goldberg serves as Vice President-Finance and Chief Financial
Officer of the Company pursuant to a three year employment agreement ending on
August 3, 1998. Mr. Goldberg's annual base salary is $85,000 for the period
commencing on August 4, 1995 through August 3, 1998. Such annual salary shall be
adjusted annually, commencing September 1, 1996, by the annual change in the
Consumer Price Index or an agreed upon substitute but no less than 5% per annum.
The Board of Directors in its discretion will determine the annual bonus, if
any, to be received by Mr. Goldberg. Such employment agreement contains standard
confidentiality provisions.
DIRECTOR COMPENSATION
For their service on the Board, the Company pays each Director a fee of
$300 per meeting. Each member of the Board is reimbursed for expenses incurred
in connection with each Board or Committee meeting attended.
STOCK OPTION PLANS
THE AMENDED AND RESTATED STOCK OPTION PLAN (THE "PLAN")
The Company's Amended and Restated Stock Option Plan provides for a
total of 675,000 shares of Common Stock authorized to be granted under such
Plan. During Fiscal 1997, the Company granted options to purchase 132,800 shares
of Common Stock at an exercise price of $4.00 having exercise dates ranging from
January 1997 to December 2006. During Fiscal 1997, 3,200 options were cancelled
or expired, and 126,300 shares are available for future grant under such Plan.
The Company's Plan provides for the grant of options to its key employees and
directors in order to give such employees a greater personal interest in the
success of the
45
<PAGE>
Company and an added incentive to continue and advance in their employment. The
Company's Plan provides for a fifteen year expiration period for non-statutory
options and ten years for incentive stock options granted thereunder and allows
for the exercise of options by delivery by the optionee of previously owned
Common Stock of the Company having a fair market value equal to the option
price, or by a combination of cash and Common Stock.
As of August 4, 1997, the Company has granted options to purchase
200,000 shares to David S. Seltzer, 62,500 shares to Elan Bar-Giora, and 48,000
shares to Arthur S. Goldberg at an average exercise price of $5.31 per share.
The Plan is administered by the Stock Option Committee of the Board of
Directors. The Committee has broad discretion in determining the recipients of
options and numerous other terms and conditions of the options.
The exercise price for shares purchased upon the exercise of non-
statutory options granted under the Plan is determined by the Stock Option
Committee as of the date of the grant.
The exercise price of an incentive stock option must be at least equal
to the fair market value of the Common Stock on the date such option is granted
(110% of the fair market value for shareholders who, at the time the option is
granted, own more than 10% of the total combined classes of stock of the Company
or any subsidiary). No employees may be granted incentive stock options in any
year for shares having a fair market value, determined as of the date of grant,
in excess of $100,000.
No incentive option may have a term of more than ten years (in the case
of incentive stock options, five years for shareholders holding 10% or more of
the Common Stock of the Company). Options generally may be exercised only if the
option holder remains continuously associated with the Company or a subsidiary
from the date of grant to the date of exercise. However, options may be
exercised upon termination of employment or upon the death or disability of any
employee within certain specified periods.
DIRECTORS PLAN
The Company's 1994 Directors Stock Option Plan ("Directors Plan")
provides for a total of 100,000 shares of Common Stock authorized to be granted
under the Directors Plan. Through August 4, 1997, the Company has granted non-
statutory options to purchase 8,000 shares to each of two directors and 9,500
shares to one director at an average exercise price of $6.28 per share.
The Directors Plan provides for the automatic annual grant of options
to non-employee directors and is administered by the Board of Directors. Each
non-employee director will be automatically granted 3,000 shares of Common Stock
46
<PAGE>
on the date of each annual meeting of the Company's shareholders. A non-employee
director who chairs the audit or other committees of the Board of Directors will
be automatically granted annually an option to purchase an additional 500 shares
of Common Stock.
To remain eligible, a non-employee director must continue to be a
member of the Board of Directors. Each option granted is exercisable in
increments of 25% per year commencing on the first anniversary date of the date
of grant. The exercise price for all options may not be less than the fair
market value of the Common Stock on the date of grant. Options under the
Directors Plan have a term of 10 years and may be exercised for limited periods
after a person ceases to serve as a director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table identifies each person known to the Company to be
the beneficial owner of more than five percent of the Company's Common Stock,
each director of the Company, and all directors and officers of the Company as a
group, and sets forth the number of shares of the outstanding Common Stock
beneficially owned by each such person and such group and the percentage of the
shares of the outstanding Common Stock owned by each such person and such group.
Except as noted below, the named person has sole voting power and sole
investment power over the securities.
AMOUNT AND PERCENT
NATURE OF
OF BENEFICIAL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP STOCK
- ------------------------------------------ ------------- -------
Bernard Seltzer........................... 816,468 (1) 17.2%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
David S. Seltzer.......................... 606,882 (2) 12.8%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Reuben Seltzer............................ 358,224 (3) 7.6%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
47
<PAGE>
AMOUNT AND PERCENT
NATURE OF
OF BENEFICIAL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP STOCK
- -------------------------------------- ------------- -------
Arthur S. Goldberg................... 33,375 (4) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Elan Bar-Giora........................ 42,500 (6) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Martin M. Goldwyn..................... 12,250 (7) *
c/o Tashlik, Kreutzer & Goldwyn P.C.
833 Northern Boulevard
Great Neck, New York 11021
Yashar Hirshaut, M.D. ................ 4,250 (8) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
All Directors and Executive Officers as a
group (7 persons) 1,873,949 (9) 39.5%
___________________________
* Amount represents less than one percent of Common Stock.
(1) Amount does not include 60,000 shares of Common Stock owned by Mr.
Seltzer's wife, as to which Bernard Seltzer disclaims beneficial ownership.
(2) Amount includes options to purchase 103,125 shares of Common Stock
exercisable within 60 days of August 4, 1997, and 82,406 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(3) Amount includes options to purchase 21,250 shares of Common Stock
exercisable within 60 days of August 4, 1997 and 78,028 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(4) Amount represents options to purchase 33,375 shares of Common Stock
exercisable within 60 days of August 4, 1997.
(6) Amount represents options to purchase 42,500 shares of Common Stock
exercisable within 60 days of August 4, 1997.
(7) Amount represents options to purchase 12,250 shares of Common Stock
exercisable within 60 days of August 4, 1997.
(8) Amount includes options to purchase 4,250 shares of Common Stock
exercisable within 60 days of August 4, 1997.
48
<PAGE>
(9) Amount includes options to purchase 216,750 shares of Common Stock
exercisable within 60 days of August 4, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended April 30, 1997, Mr. Reuben Seltzer was
engaged by the Company to provide new business development and legal services.
For such services, Mr. Reuben Seltzer received $61,000. Mr. Reuben Seltzer is a
director of the Company and the son of Mr. Bernard Seltzer, the Company's
President, Chief Executive Officer and Chairman of the Board.
49
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page Number
(a) Exhibit ------------
Number Description of Document Footnotes
- ----------- ---------------------------------------------------------------- ------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation and By-Laws (1)
4.1 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Plan (2)
4.2 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Agreement (3)
4.3 Copy of 1994 Directors Stock Option Plan (4)
10.1 Employment Agreement with Bernard Seltzer (5)
10.2 Employment Agreement with David S. Seltzer (6)
10.3 Employment Agreement with Arthur S. Goldberg (7)
10.4 Agreement, dated June 2, 1993, by and between Bernard Seltzer
and the Company (8)
10.5 Agreement, dated June 2, 1993, by and between David S. Seltzer
and the Company (9)
10.6 Revolving Credit Agreement with National Westminster Bank USA,
as amended (10)
10.7 Second Amendment to Revolving Credit Agreement with National
Westminster Bank USA (11)
10.8 Third Amendment to Revolving Credit Agreement with National
Westminster Bank USA (12)
*10.9 Fourth Amendment to Revolving Credit Agreement with Fleet
Bank, N.A., formerly National Westminster Bank USA
10.10 $1,800,000 Term Loan Agreement with National Westminster Bank (13)
USA, dated as of October 31, 1994
10.11 Fixed Rate Term Note in the amount of $450,000 to National (14)
Westminster Bank dated March 5, 1993
10.12 Mortgage between National Westminster Bank USA and the (15)
Company dated September 1, 1992
10.13 Mortgage Note and Supplemental Mortgage and Mortgage
Spreader Consolidating Modification and Extension Agreement
Between the Company and National Westminster Bank dated (16)
July 29, 1993
10.14 Lease Agreement by and between Hi-Tech Pharmacal Co., Inc. (17)
and Chigi Realty Corp. dated July 18, 1996
*11. Computation of Earnings per Common Share and Common Share
Equivalents for year ended April 30, 1997
*22. Subsidiaries of Hi-Tech Pharmacal Co., Inc.
*27. Financial Data Schedule
</TABLE>
- ----------
* Filed herewith
(1) Filed as Exhibit 3.0 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1994 and incorporated
herein by reference.
(2) Filed as Exhibit 10.1 to Hi-Tech Pharmacal Co., Inc. Registration Statement
on Form S-1 (No. 33-47860) and incorporated herein by reference.
(3) Filed as Exhibit 10.2 to Hi-Tech Pharmacal Co., Inc. Registration Statement
on Form S-1 (No. 33-47860) and incorporated herein by reference.
(4) Filed as Exhibit 10.1 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1994 and incorporated
herein by reference.
50
<PAGE>
(5) Filed as Exhibit 10.3 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860) and
incorporated herein by reference.
(6) Filed as Exhibit 10.4 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860) and
incorporated herein by reference.
(7) Filed as Exhibit 10.5 to Hi-Tech Pharmacal Co., Inc. Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-47860) and
incorporated herein by reference.
(8) Filed as Exhibit 10.4 to Hi-Tech Pharmacal Co., Inc. Annual Report on Form
10-KSB for fiscal year ended April 30, 1993 and incorporated herein by
reference.
(9) Filed as Exhibit 10.5 to Hi-Tech Pharmacal Co., Inc. Annual Report on Form
10-KSB for fiscal year ended April 30, 1993 and incorporated herein by
reference.
(10) Filed as Exhibit 10.8 to Hi-Tech Pharmacal Co., Inc. Registration Statement
on Form S-1 (No. 3347860) and incorporated herein by reference.
(11) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-QSB for the quarterly period ended January 31, 1994 and incorporated
herein by reference.
(12) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-QSB for the quarterly period ended October 31, 1994 and incorporated
herein by reference.
(13) Filed as Exhibit 10.3 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1994 and
incorporated herein by reference.
(14) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-QSB for the quarterly period ended January 31, 1993 and incorporated
herein by reference.
(15) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-Q for the quarterly period ended July 31, 1992 and incorporated herein
by reference.
(16) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-QSB for the quarterly period ended July 31, 1993 and incorporated herein
by reference.
(17) Filed as Exhibit 10.14 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-QSB for the quarterly period ended October 31, 1996 and
incorporated herein by reference.
_________________________
(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
51
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 10, 1997
HI-TECH PHARMACAL CO., INC.
By: /s/Bernard Seltzer
------------------------
Bernard Seltzer,
Chairman of the Board,
Chief Executive Officer,
President
By: /s/Arthur S. Goldberg
------------------------
Arthur S. Goldberg
Chief Financial Officer
In accordance with 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.
/s/Bernard Seltzer
- -------------------------------- August 10, 1997
Bernard Seltzer, Chairman
of the Board, Chief Executive
Officer, President
/s/David S. Seltzer
- -------------------------------- August 10, 1997
David S. Seltzer, Director,
Executive Vice President-
Administration, Treasurer,
Secretary, Chief Operating Officer
/s/Reuben Seltzer
- -------------------------------- August 10, 1997
Reuben Seltzer, Director
/s/Martin M. Goldwyn
- -------------------------------- August 10, 1997
Martin M. Goldwyn, Director
- -------------------------------- August __, 1997
Yashar Hirshaut, M.D., Director
52
<PAGE>
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
----------------------------------------------
FOURTH AMENDMENT entered into as of January 29, 1997 between HI-TECH
PHARMACAL CO., INC. (the "Company") and FLEET BANK, N.A., formerly known as
National Westminster Bank USA (the "Bank").
WHEREAS, the Company and the Bank are parties to a Revolving Credit
Agreement dated as of January 23, 1992, as amended by a First Amendment dated as
of May 1, 1992, a Second Amendment dated December 6, 1993 and a Third Amendment
dated as of October 31, 1994 (collectively the "Loan"); and
WHEREAS, the Company has requested that the Bank extend the Credit Period
to August 31, 1997 and modify certain of the terms set forth in the Agreement
and the Bank is willing to comply with such requests but only upon and subject
to the following terms and conditions.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The Agreement is hereby amended as follows:
(A) The preamble to the Agreement is hereby amended by deleting "New
York corporation" appearing therein and substituting "Delaware corporation"
therefor.
(B) Section 1 of the Agreement is hereby amended to read as follows:
"1. The Credit. From time to time after the execution of this
----------
Agreement to and including August 31, 1997 (the "Credit Period"), the Bank,
in reliance on the representations and warranties contained herein, agrees
to extend credit to the Company by making revolving credit loans to the
Company or issuing Letters of Credit, as hereinafter defined, for the
account of the Company, in the aggregate principal amount up to but not
exceeding the lesser of $2,000,000.00 or the Borrowing Base, as hereinafter
defined (the "Credit") and Letters of Credit at any one time outstanding
shall not exceed $100,000. The obligation of the Bank to make the Credit
available is hereinafter called the "Commitment". During the Credit
Period, the Company may use the Credit by (i) borrowing, paying and
prepaying in whole or in part and reborrowing and (ii) for the issuance of
Letters of Credit, all in accordance with the terms and conditions
<PAGE>
hereof. The Commitment and the Credit are subject to the terms and
conditions of this Agreement and the Note (Note) which evidences the
Credit. The Credit is secured by any collateral specified in the schedule
hereto (Schedule) under the heading "Collateral" and any other collateral
granted to the Bank and is guaranteed by any parties specified in the
Schedule under the heading "Guaranties". The Credit is subject to the
following terms and conditions:"
(C) In order to conform to the amendment hereinabove set forth in
paragraph (B), the Note evidencing the Credit is hereby substituted for and
replaced with the Amended Note in the form of Exhibit 1 hereto.
(D) A new Section 1.5 is inserted in the Agreement to read as follows:
"1.5 Letters of Credit. Subject to the limitations of Section 1
-----------------
hereof and as herein provided, the Borrower may from time to time during
the Credit Period, upon one day's notice, request the issuance by the Bank,
for the account of the Borrower, of documentary letters of credit which
shall be issued to facilitate the purchase of goods by it in transactions
involving the importation, exportation or domestic shipment of such goods
(the "Letters of Credit").
(a) Letter of Credit Fees. The Borrower agrees to pay the fees
---------------------
for the issuance of each Letter of Credit, the fees for drawings on same
and any other standard fees and commissions routinely charged in connection
therewith in accordance with the Bank's schedule of fees and commissions in
effect from time to time.
(b) Reimbursement. In the event the Bank makes payment to the
-------------
beneficiary of any Letter of Credit in accordance with the terms thereof,
the Borrower agrees to reimburse the Bank therefor on the same day such
payment is made, all as more fully set forth in, and subject to the terms
and conditions of, any applicable Letter of Credit Application and
Agreement, each of which Letter of Credit
-2-
<PAGE>
Application and Agreement is fully incorporated herein by reference
thereto."
(E) Section 4 (f) of the Agreement is hereby amended to delete the
language contained therein and to substitute the following therefor:
"(f) Corporate Standing; Business. Maintain its corporate
----------------------------
existence in good standing and remain or become duly licensed or qualified
and in good standing in each jurisdiction in which the conduct of its
business or ownership of its property requires such qualification or
licensing and wherein the failure to be so licensed or qualified would have
a material adverse effect on the Company; conduct its business in
substantially the same manner and in substantially the same fields as such
business is now carried on and conducted; and cause each Consolidated
Subsidiary to comply with this paragraph, provided, however, this covenant
shall not restrict any Consolidated Subsidiary formed hereafter from
merging or consolidating with any other Consolidated Subsidiary formed
hereafter or with the Company, provided that if the Company shall be
involved in any such transaction, it shall be the surviving corporation and
provided further, however, this covenant shall not restrict any
Consolidated Subsidiary formed hereafter from merging with the Company even
if the Company is not the surviving corporation if the sole purpose of such
merger is to change the jurisdiction of incorporation of the Company from
New York to Delaware."
(F) Section 5(g) of the Agreement is hereby amended to delete the
language contained therein and to substitute the following therefor:
"(g) Mergers. Merge or consolidate with or into any other firm
-------
or corporation or enter into any joint venture or partnership with any
other person, firm or corporation except for joint venture marketing
arrangements with Circa Pharmaceuticals Inc., presently known as Watson
Pharmaceuticals Inc., which have been disclosed to and approved by the Bank
and provided the Bank will not unreasonably withhold its consent to a
merger of Dr. Rose, Inc. ("Rose") into the Company or a
-3-
<PAGE>
Consolidated Subsidiary of the Company provided the financial condition,
including but not limited to liabilities and contingent liabilities, of
Rose immediately prior to any such merger, is in all respects satisfactory
to the Bank and no event shall occur and be continuing which constitutes,
or with notice or lapse of time or both, would constitute an Event of
Default and provided further, however, this covenant shall not restrict any
Consolidated Subsidiary formed hereafter from merging with the Company even
if the Company is not the surviving corporation if the sole purpose of such
merger is to change the jurisdiction of incorporation of the Company from
New York to Delaware."
2. The Company and the Bank hereby agree that the Note and the Security
Agreement are amended to change any references to the Company as a New York
corporation to a Delaware corporation.
3. Application of the covenant set forth in Section 5(g) of the Agreement
prior to this amendment is hereby waived with respect to non-compliance by
reason of the merger of Hi Tech Pharmacal Co., Inc., a New York corporation,
into Hi Tech Pharmacal Co., Inc., a Delaware corporation pursuant to a plan of
merger dated October 9, 1996.
4. The Company hereby represents and warrants to the Bank that:
(A) Each and every one of the representations and warranties set forth
in the Agreement is true as of the date hereof and with the same effect as
though made on the date hereof, and is hereby incorporated herein in full by
reference as if fully restated herein in its entirety.
(B) No Default or Event of Default and no event or condition which,
with the giving of notice or lapse of time or both, would constitute such a
Default or Event of Default, now exists or would exist.
5. All capitalized terms used herein, unless otherwise defined herein,
have the same meanings provided therefor in the Agreement.
6. It is expressly understood and agreed that all collateral security for
the Credit and other extensions of credit set forth in the Agreement prior to
the amendment provided for herein is and shall continue to be collateral
security for the Credit and other extensions of credit provided in the Agreement
as herein amended. Without limiting the generality of the foregoing, the Company
-4-
<PAGE>
hereby absolutely and unconditionally confirms that (i) each document and
instrument executed by the Company pursuant to the Agreement continues in full
force and effect, is ratified and confirmed and is and shall continue to be
applicable to the Agreement (as herein amended), and (ii) the Note is hereby
ratified and confirmed and shall remain in full force and effect in accordance
with its terms.
7. By its execution of this amendment in the space provided below, the
guarantor indicated below hereby consents to this Amendment and reaffirms its
continuing liability under its guarantee, in respect of the Agreement as amended
hereby and all the documents, instruments and agreements executed pursuant
thereto or in connection therewith, without offset, defense or counterclaim (any
such offset, defense or counterclaim as may exist being hereby irrevocably
waived by such guarantor).
8. This Fourth Amendment shall become effective on such date as all of
the following conditions shall be satisfied:
(A) The Bank shall have received copies of the Agreement and Plan of
Merger pursuant to which the Company will be merged into a Delaware Subsidiary
and the certificate of incorporation and by-laws of the successor Delaware
corporation under which the Company's businesses would be conducted after the
merger, certified as true and correct by the Secretary of the Company together
with a certificate of the Secretary of the Company certifying that such merger
is effective.
(B) The Bank shall have received evidence of payment of all of the
Bank's attorneys fees and disbursements in connection with this Fourth
Amendment.
(C) All legal matters incident to this Fourth Amendment shall be
satisfactory to counsel to the Bank.
9. This Fourth Amendment is dated for convenience as of January 29, 1997
and shall be effective on the date of satisfaction of the conditions precedent
contained in paragraph 8 hereof and delivery by the Bank of an executed
counterpart hereof to the Company. This Fourth Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
10. The amendments set forth herein are limited precisely as written and
shall not be deemed to (a) be a consent to or a waiver of any other term or
condition of the Agreement or any of the documents referred to therein or (b)
prejudice any right or rights which the Bank may now have or may have in the
future under or in connection with the Agreement or any documents referred to
therein.
-5-
<PAGE>
Whenever the Agreement is referred to in the Agreement or any of the
instruments, agreements or other documents or papers executed and delivered in
connection therewith, it shall be deemed to mean the Agreement as modified by
this Fourth Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
be duly executed and delivered by their respective duly authorized officers as
of the date first above written.
HI-TECH PHARMACAL CO., INC.
/s/ Bernard Seltzer
By:_____________________
Name: Bernard Seltzer
Title: President
FLEET BANK, N.A.
/s/ Patricia A. Calcado
By:_______________________
Patricia A. Calcado
Vice President
The guarantor indicated below hereby consents to this Fourth Amendment and
reaffirms its continuing liability under its guarantee in respect of the
Agreement as amended hereby and all the documents, instruments and agreements
executed pursuant thereto or in connection therewith, without offset, defense or
counterclaim (any such offset, defense or counterclaim as may exist being hereby
irrevocably waived by such guarantor).
ROSE LABORATORIES, INC.,
formerly known as H-T Acquisition Corp.
/s/ Bernard Seltzer
By:______________________
Name: Bernard Seltzer
Title: President
-6-
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 9th day of April, 1997, before me personally came Bernard Seltzer,
to me known, who, being by me duly sworn, did depose and say that he resides at
707 Virginia Street, Far Rockaway, NY 11691; that he is the President of HI-TECH
PHARMACAL CO., INC., the corporation described in and which executed the
foregoing instrument; and that he signed his name thereto by order of the board
of directors of said corporation.
/s/ Joan C. Fitzsimons
-------------------------
Notary Public
Joan C. Fitzsimons
Notary Public, State of New York
No. 01F15060916
Qualified in Nassau County
Commission Expires May 28, 1998
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 9th day of April, 1997, before me personally came PATRICIA A.
CALCADO, to me known, who, being by me duly sworn, did depose and say that she
resides at c/o 300 Broad Hollow Road, Melville, New York; that she is a Vice
President of FLEET BANK, N.A., the banking institution described in and which
executed the foregoing instrument; and that she signed her name thereto by order
of the board of directors of said corporation.
/s/ Joan C. Fitzsimons
-------------------------
Notary Public
Joan C. Fitzsimons
Notary Public, State of New York
No. 01F15060916
Qualified in Nassau County
Commission Expires May 28, 1998
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 9th day of April, 1997, before me personally came Bernard Seltzer,
to me known, who, being by me duly sworn, did depose and say that he resides at
707 Virginia Street, Far Rockaway, NY 11691; that he is the President of ROSE
LABORATORIES, INC., formerly known as H-T Acquisition Corp., the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the board of directors of said corporation.
/s/ Joan C. Fitzsimons
-------------------------
Notary Public
Joan C. Fitzsimons
Notary Public, State of New York
No. 01F15060916
Qualified in Nassau County
Commission Expires May 28, 1998
-7-
<PAGE>
EXHIBIT 1
---------
AMENDED REVOLVING CREDIT NOTE
$2,000,000.00 MELVILLE, NEW YORK AS OF JANUARY 29, 1997
FOR VALUE RECEIVED, HI-TECH PHARMACAL CO., INC., a corporation formed under
the laws of the State of Delaware ("Company") promises to pay to the order of
FLEET BANK, N.A. ("Bank") at its office located at 300 Broad Hollow Road,
Melville, New York the principal sum of the lesser of: (a) Two Million and
00/100 ($2,000,000.00) Dollars; or (b) the aggregate unpaid principal amount of
all advances made by Bank to Company pursuant to the Agreement hereinafter
referred to, on August 31, 1997.
Company shall also pay interest on the unpaid balance from time to time
outstanding, at said office at a rate per annum equal to the Prime Rate, as
hereinafter defined. Interest on payments which are past due whether at the
stated maturity or by acceleration or otherwise shall accrue at the otherwise
applicable rate per annum plus three (3%) percent. "Prime Rate" shall mean and
refer to the floating rate of interest per annum announced by the Bank from time
to time as being the so called "Prime Rate" of interest charged by the Bank.
Such interest rates shall change when and as the Prime Rate is changed, and any
such change in the Prime Rate shall become effective on the day such change is
adopted. In no event shall interest be required in excess of the maximum rate
permitted by New York law. Interest shall be payable in arrears on the 1st day
of each calendar month commencing February 1, 1997 at maturity, by acceleration
or otherwise and after such maturity, on demand. All computations of interest
hereunder shall be made on the basis of a 360 day year for the actual number of
days elapsed.
All payments including prepayments on this Note shall be made in lawful
money of the United States of America in immediately available funds. If a
payment becomes due and payable on a Saturday, Sunday, or public or other
banking holiday under the laws of the State of New York, the maturity thereof
shall be extended to the next succeeding business day, and interest shall be
payable thereon at the rate herein specified during such extension.
Company hereby authorizes Bank to enter from time to time the amount of
each Advance to Company on the schedule annexed hereto and made a part hereof.
Failure of Bank to record such information on such schedule shall not in any way
affect the obligation of Company to pay any amount due under this Note.
This Note is the promissory note referred to in that certain Revolving
Credit Agreement between Company and Bank dated as of January 23, 1992 as
amended by agreements dated as of May 1, 1992, as of December 6, 1993, as of
October 31, 1994 and as of January
<PAGE>
29, 1997 (collectively, the "Agreement") as such Agreement may be further
amended from time to time, and is subject to prepayment and its maturity is
subject to acceleration upon the terms contained in said Agreement. This Note is
secured by the Collateral specified in the Agreement.
If any action or proceeding be commenced to collect this Note or enforce
any of its provisions, Company further agrees to pay all costs and expenses of
such action or proceeding and reasonable attorneys' fees and further expressly
waives any and every right to interpose any counterclaim in any such action or
proceeding. Company hereby submits to the jurisdiction of the Supreme Court of
the State of New York and agrees with Bank that personal jurisdiction over
Company shall rest with the Supreme Court of the State of New York for purposes
of any action on or related to this Note or the enforcement of same. Company
hereby expressly waives any and every right to a trial by jury in any action on
or related to this Note or the enforcement of the same.
Bank may transfer this Note and may deliver the security or any part
thereof to any transferee or transferees, who shall thereupon become vested with
all the powers and rights above given to Bank in respect thereto, and Bank shall
thereafter be forever relieved and fully discharged from any liability or
responsibility in the matter except for any liability or responsibility which
arose prior to the date of such transfer. The failure of any holder of this
Note to insist upon strict performance of each and/or all of the terms and
conditions hereof shall not be construed or deemed to be a waiver of any such
term or condition.
Company and all endorsers and guarantors hereof waive presentment and
demand for payment, notice of non-payment, protest, and notice of protest.
This Note and its provisions shall be construed in accordance with the laws
of the State of New York.
HI-TECH PHARMACAL CO., INC.
/s/ Bernard Seltzer
By:______________________
President
Address: 369 Bayview Avenue
Amityville, NY 11701
Exhibit 1-2
<PAGE>
HI-TECH PHARMACAL CO., INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME PER COMMON SHARE
EXHIBIT 11
APRIL 30,
------------------------
1997 1996
----------- -----------
PRIMARY
-------
Net income....................................... $ 817,000 1,335,000
========== ==========
Weighted average number of shares
outstanding: 4,526,421 4,411,421
Shares issuable upon exercise of dilutive stock
options and warrants net of shares assumed to
be repurchased (at the average market price for
the period) from exercise proceeds.............. 49,001 238,274
Contingent shares - Dr. Rose acquisition......... -- 14,516
---------- ----------
Shares used for computation...................... 4,575,422 4,664,211
========== ==========
Primary net income
per common share $ .18 $ .29
========== ==========
FULLY DILUTED
-------------
Net income....................................... $ 817,000 $1,335,000
========== ==========
Weighted average number of
shares outstanding: 4,526,421 4,411,421
Shares issuable upon exercise of dilutive
stock options and warrants net of shares
assumed to be repurchased (at end market
price for the period) from exercise proceeds.... 49,001 242,939
Contingent shares - Dr. Rose acquisition........ -- 15,843
---------- ----------
Shares used for computation $4,575,422 4,670,203
========== ==========
Fully diluted net
income per common share (a) $ .18 $ .29
========== ==========
(a) Not presented because dilution from primary net income per common share
amount is less than 3%.
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF HI-TECH
PHARMACAL CO., INC.
Dr Rose d/b/a Rose Laboratories, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 1985
<SECURITIES> 0
<RECEIVABLES> 4,194
<ALLOWANCES> (160)
<INVENTORY> 4,014
<CURRENT-ASSETS> 548
<PP&E> 14,253
<DEPRECIATION> (4,147)
<TOTAL-ASSETS> 20,806
<CURRENT-LIABILITIES> 4,669
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 13,956
<TOTAL-LIABILITY-AND-EQUITY> 20,806
<SALES> 20,534
<TOTAL-REVENUES> 20,534
<CGS> 13,278
<TOTAL-COSTS> 18,867
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> 1,327
<INCOME-TAX> 510
<INCOME-CONTINUING> 817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 817
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0
</TABLE>
