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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, 1998
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
----- -----
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. (X)
The issuer's revenues for its most recent fiscal year ended April 30, 1998 were
$22,366,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on July 28, 1998, based upon the price at which such stock was sold on
that date, was $23,195,750. The number of shares of Common Stock of the issuer
outstanding as of July 28, 1998 was 4,526,000.
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, is a growing manufacturer and marketer of prescription, over-the-
counter and nutritional products under various brand names such as H-T(TM) and
Rx Choice(TM), as well as a broad line of branded products, including Diabetic
Tussin(R), DiabetiDerm(TM), DiabetiSweet(R) and Nasal Ease(TM), designed for the
diabetic and general health marketplace. These products are sold in liquid and
semi-solid (creams, ointments, suppositories and gels) dosage forms. The Company
also is a leading manufacturer of sterile ophthalmic, otic and inhalation
products and provides sterile manufacturing contract services. 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; and (iii) the Steri-Med Division,
which produces sterile products in its state-of-the-art sterile 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, a division of Watson 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.
PRODUCTS
The Company currently markets in excess of 100 generic products to
approximately 200 customers. For the fiscal year ended April 30, 1998 the
Company's sales were approximately 61% for the private label market,
approximately 21% for the brand names H-T(TM) and Rx Choice(TM) and
approximately 18% through the Company's brand names under its Health Care
Products Division. The Company's Steri-Med Division manufactures and markets
products under its Steri-Optic(R) and Steri-Med(R) labels as well as customer
private labels. Approximately 25% of the Company's revenues of the Steri-Med
Division for the fiscal year ended April 30, 1998 were from the sale of one
generic drug product. The Company's Steri-Med Division is currently engaged in
contract manufacturing for various customers of various products to meet
customer specifications.
The Company's Health Care Products Division currently markets branded
over-the-counter products to the diabetic consumer. These products include
Diabetic Tussin(R), its flagship brand available in several formulations,
including Diabetic Tussin(R) DM, Maximum Strength, Children's Formula,
Expectorant, Allergy
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Formula and Herbal Cold Formula. The Company's Diabetic Tussin(R) DM is the
leading selling sugar free over-the-counter cough medication in the United
States. The Company also markets dermatological moisturizers under the brand
name DiabetiDerm(TM), which include DiabetiDerm(TM) Cream and DiabetiDerm(TM)
Lotion. The Company also markets DiabetiSweet(R), a sweetener formulated for use
in baking, cooking and sweetening beverages, and Nasal Ease(TM), a nasal
moisturizer, which contains zinc. The Company intends to continue to introduce
branded over-the-counter formulations targeted to the diabetic market.
The Company's Steri-Med Division provides sterile manufacturing
contract services for the manufacture of sterile products in its sterile
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 four products under development and manufacture in its
sterile facility and also has contracts for six additional sterile products.
The Company is pursuing other potential contract manufacturing arrangements.
The Company has received Abbreviated New Drug Application ("ANDA")
approvals for 20 products. The Company used the ANDA procedure to obtain FDA
approval for the manufacture of five new products in fiscal 1998. In December
1998, the Company received ANDA approvals from the FDA to manufacture and market
Albuterol Sulfate Syrup, 2mg (base)/5mL, equivalent to Ventolin(R) Syrup,
manufactured by Glaxo Wellcome, Inc., and Albuterol Sulfate Inhalation 0.5%,
equivalent to Proventil(R) Inhalation Solution, manufactured by Schering Corp.,
each used in the treatment of asthma. In December 1997, the Company received FDA
approval for Sulfamethoxazole and Trimethoprin Pediatric Suspension, equivalent
to Bactrim(R) Pediatric Suspension, manufactured by Hoffman LaRoche and used in
the treatment of urinary tract infection. In October 1997, the Company received
FDA approval for Cimetidine Hydrochloride Oral Solution, 300 mg (base)/5 mL,
equivalent to Tagamet Oral Solution, 300 mg/5mL, manufactured by SmithKline
Beecham Pharmaceuticals and used in the short term treatment of active duodenal
ulcers and maintenance of healing ulcers. In August 1997, the Company received
FDA approval for Promethazine HCL and Codeine, equivalent to Phenergan(R) with
Codeine Syrup, manufactured by Wyesth Ayerst and used in the treatment of
temporary relief of coughs and upper respiratory symptoms associated with
allergy or the common cold.
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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 names, H-T(TM) or RX
Choice(TM). The Company's other trademarks are Sooth-it(R), Diabetic Tussin(R),
DiabetiSweet(R), DiabetiDerm(TM), DiabetiRinse(TM) and NasalEase(TM).
<TABLE>
<CAPTION>
EXAMPLES OF COMPETING
COMPANY PRODUCT NATIONAL PRODUCTS
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PRESCRIPTION DRUGS
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<S> <C>
COUGH/COLD/DECONGESTANTS/ASTHMA
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Carbofed-DM Syrup & Drops Rondec(R)-DM Syrup & Drops
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 Hbr Syrup* Phenergan(R)
Albuterol Sulfate Inhalation 0.5% Proventil(R) Inhalation Solution
Albuterol Sulfate Syrup Ventolin(R) Syrup
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* 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)
Acetaminophen & Codeine Phosphate Oral Tylenol(R) with Codeine
Solution*
Chlorhexidine Gluconate 0.12% Oral Peridex(R)
Rinse*
Erythro-Statin (erythromycin) 2% Top. Solution* T-Stat Solution 2%(R)
Thioridazine HCI Oral Solution (Conc.), 30 mg/mL* Mellaril(R) Oral Solution
Thioridazine HCI Oral Solution (Conc.), 100 mg/mL* Mellaril(R) Oral Solution
Cimetidine Hydrochloride Oral Solution Tagamet(R) Oral Solution,
300 mg/5mL* 300 mg/5mL
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</TABLE>
* ANDA approved pharmaceutical product
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<TABLE>
<CAPTION>
EXAMPLES OF COMPETING
COMPANY PRODUCT NATIONAL PRODUCTS
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OVER-THE-COUNTER PHARMACEUTICALS
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HEALTH CARE PRODUCTS
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<S> <C>
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
DiabetiSweet(R)
NasalEase(TM) Moisturizing Nasal Spray
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
COUGH/COLD/DECONGESTANT/OTHER PRODUCTS/PRIVATE LABEL
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Bromtapp Elixir Dimetapp(R) Elixir
Guaiatussin-DM Robitussin(R) DM
Tri-Fedrine Triaminic(R)
Nite-Time Cough Medicine Nyquil(R)
Children's Allergy Medicine Benadryl(R)
Oxymetazoline Nasal Spray Afrin(R) Nasal Spray
Apap Drops Tylenol(R) Drops
Apap Elixir Tylenol(R) Elixir
Equalizer Gas Relief Drops Mylicon(R) Drops
K-Pec with Attapulgite Kaopectate(R)
Bismuth Liquid Pepto-Bismol(R)
Minoxidil Topical Solution 2% Rogaine(R)
Loperamide HCL* Imodium A-D(R)
Hemorrhoidal Suppositories Preparation H
Hemorrhoidal Ointment Preparation H
</TABLE>
* ANDA approved pharmaceutical product
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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 develops generic products
for niche markets. Although certain niche markets may be too small and,
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, 1998 and 1997, total research and development
expenditures were $1,003,000 and $960,000, 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 1998, the Company received ANDA approvals from the
FDA to manufacture and market Albuterol Sulfate Syrup, 2mg (base)/5mL,
equivalent to Ventolin(R) Syrup, manufactured by Glaxo Wellcome, Inc., and
Albuterol Sulfate Inhalation 0.5%, equivalent to Proventil(R) Inhalation
Solution, manufactured by Schering Corp., each used in the treatment of asthma.
In December 1997, the Company received FDA approval for Sulfamethoxazole and
Trimethoprin Pediatric Suspension, equivalent to Bactrim(R) Pediatric
Suspension, manufactured by Hoffman LaRoche and used in the treatment of urinary
tract infection. In October 1997, the Company received FDA approval for
Cimetidine Hydrochloride Oral Solution, 300 mg (base)/5 mL, equivalent to
Tagamet Oral Solution, 300 mg/5mL, manufactured by SmithKline Beecham
Pharmaceuticals and used in the short term treatment of active duodenal ulcers
and maintenance of healing ulcers. In August 1997, the Company received FDA
approval for Promethazine HCL and Codeine, equivalent to Phenergan(R) with
Codeine Syrup, manufactured by Wyesth Ayerst and used in the treatment of
temporary relief of coughs and upper respiratory symptoms associated with
allergy or the common cold.
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.
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The Company has obtained approval of the DEA to sell certain generic
pharmaceutical products containing narcotics. The Company is currently
manufacturing eleven preparations containing narcotics. In order to manufacture
and sell products containing narcotics, the Company has implemented stringent
security precautions to insure that the narcotics are accounted for and properly
stored. Two of these products requires prior FDA approval. The Company is
currently developing products which contain narcotics.
The Company's Steri-Med Division is currently manufacturing
ophthalmic, otic and inhalation products in its sterile manufacturing facility.
The Company's sterile facility, adjacent to its current facility, is used for,
among other things, the manufacture of ophthalmic, otic, inhalation and
intranasal products and certain other products which might 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 other
pharmaceutical products in its sterile facility. The Company has 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'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 1998
were approximately $1,218,000.
The Company and Reuben Seltzer, a director of the Company, each has a
23.3% interest in Marco Hi-Tech JV Ltd., a New York corporation, which markets
raw materials for nutraceutical products and has licensed the patent rights to
Huperzine and analogues from the Mayo Clinic. Huperzine is a naturally derived
compound belonging to a class known as acetylcholinesterase inhibitors.
Huperzine has been shown to inhibit the enzyme responsible for the breakdown of
acetylcholine, a neurotransmitter or brain chemical, which is believed to be
critical in learning and memory. Marco Hi-Tech JV Ltd. plans to manufacture and
distribute Huperzine as a dietary supplement under the Dietary Supplement Health
and Education Act of 1994 and to develop analogues and derivatives to Huperzine.
It also plans to develop other products for the nutraceutical market.
CUSTOMERS AND MARKETING
The Company markets its products primarily to chain drug stores, drug
wholesalers, generic distributors, mass merchandise chains, mail order
pharmacies, managed care providers, and local, state and Federal government
agencies. The
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Company sells its generic products to over 200 active accounts located
throughout the United States. For the fiscal year ended April 30, 1998, two
customers, Rugby Laboratories, a division of Watson Laboratories, and
Zenith/Goldline Laboratories, accounted for approximately 21% and 11%,
respectively, of the Company's sales. For the fiscal year ended April 30, 1997,
Rugby Laboratories, a division of Watson Laboratories, and Zenith/Goldline
Laboratories accounted for approximately 24% 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 60% and 59% of the Company's total sales
for each of the fiscal years ended April 30, 1998 and 1997, 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
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) and Rx Choice(TM) brand names. The Health Care Products Division sells
and markets its products under the Company's brand names. For the fiscal year
ended April 30, 1998, the products sold under the H-T(TM) brand name and under
the Health Care Products Division accounted for approximately 38% and 18% of the
Company's total sales, respectively.
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,
currently markets branded over-the-counter products to the diabetic consumer.
The Company's products include Diabetic Tussin(R), its flagship brand available
in several formulations, including Diabetic Tussin(R) DM, Maximum Strength,
Children's Formula, Expectorant, Allergy Formula and Herbal Cold Formula. The
Company's Diabetic Tussin(R) DM is the leading selling sugar free over-the-
counter cough medication in the United States. The Company also markets
dermatological moisturizers under the brand name DiabetiDerm(TM), which include
DiabetiDerm(TM) Cream and DiabetiDerm(TM) Lotion and DiabetiSweet(R), a
sweetener formulated for use in baking, cooking and sweetening beverages. The
Company also manufactures and markets Nasal Ease(TM), a nasal moisturizer, which
contains zinc. The Company intends to continue its focus on introducing branded
over-the-counter formulations targeted to the diabetic market. Products sold
through the Health Care Products Division accounted for approximately 18% and
17% of the Company's total sales for fiscal 1998 and fiscal 1997, respectively.
The Company markets such products by, among other things, more
contemporary packaging to improve point-of-purchase impact, media, trade and
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consumer journal advertising to increase consumer appeal, as well as extensive
price, display, packaging, bonus, multi-pak, coupon promotions and professional
and consumer sampling programs. The Company has expanded its marketing strategy
with programs to include marketing ventures with major companies selling popular
prescription medications, pharmacy programs and via the Internet using a
website. The Company's website is www.diabeticproducts.com. All marketing and
sales efforts are conducted by Company employees and six independent commission
sales representative organizations.
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. The
Company has a total of five high speed liquid filling lines in its non-sterile
operations, enabling the Company to meet the increasing demands of its customers
while improving overall packaging efficiencies.
The Company's 40,000 square feet facility is used for the production
of its generic pharmaceutical line. The Company's approximately 21,500 square
feet adjacent facility is being used primarily as a sterile facility for the
manufacture of generic ophthalmic, otic and inhalation products. The Company
also utilizes approximately 21,000 square feet of its facility primarily for
warehouse space as well as a research and development facility and leases a
facility in Madison, Connecticut for the manufacture of suppositories and other
products. The Company also leases an approximately 50,000 square feet facility
in Amityville which it uses for the storage of finished goods and shipments and
intends to use a portion of the space to accommodate the Rose Laboratories
Division. The Company is in the process of consolidating the operations of the
Rose Laboratories Division into its facilities in Amityville, New York.
The Company's raw materials are readily available from multiple
suppliers, and the Company is not dependent upon any single supplier for its
needs, with the exception of certain ANDA products. The Company believes it 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.
COMPETITION
The market for generic pharmaceuticals is highly competitive. The
Company's direct competition consists of numerous generic drug manufacturers,
many
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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.
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, otic and inhalation markets,
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 Company's manufacturing process as well as the
distribution of the Company's final 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.
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 currently markets and intends to market 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 eight generic formulations. The Company has received, as of
July 1998, through the ANDA procedure, approval for 20 products. Some of such
approved products include Albuterol Sulfate Syrup 2mg (base)/5mL, the generic
equivalent to Ventolin(R) Syrup, manufactured by Glaxo Wellcome, Inc., which is
used for the treatment of asthma; Cimetidine Hydrochloride Oral Solution, 300
mg(base)/5mL, the equivalent to Tagamet Oral Solution, 300 mg/5mL, manufactured
by SmithKline Beecham Pharmaceuticals, which is used in the short term treatment
of active duodenal ulcers and maintenance of healing ulcers; 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),
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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
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
Novartis Pharmaceuticals (formerly known as 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
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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.
EMPLOYEES
As of April 30, 1998, the Company employed 124 full-time and 7 part-
time persons, of whom 21 were engaged in executive, financial and administrative
capacities; 4 in marketing, sales and service; 62 full-time and 7 part-time
employees in production, warehousing and distribution; and 37 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 40,000 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 feet 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
Company has an option to purchase this facility. The current annual base rent
is $164,000.
The Company also owns a 21,000 square feet 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 feet 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.
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The Company believes that its properties are adequately covered by
insurance and are suitable and adequate for their present needs.
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, 1998.
13
<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 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
Fiscal 1998
- ---------------------
July 31, 1997 5.25 3.50
October 31, 1997 6.38 3.50
January 31, 1998 6.50 4.50
April 30, 1998 7.50 5.63
As of July 28, 1998 the closing price of the Common Stock on the
Nasdaq National Market System was $5.13.
COMMON STOCK HOLDERS
The Company believes there are approximately 1,119 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,
14
<PAGE>
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.
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,
--------------------
1998 1997
-------- -------
Net Sales 100.0% 100.0%
Cost of Sales 58.5% 64.7%
Gross profit
-------- --------
41.5% 35.3%
Selling, general & administrative expense 24.5% 23.6%
Research & development costs 4.5% 4.7%
Contract research (income) (1.0)% (0.9)%
Interest expense 1.2% 1.7%
Interest (income) and other (0.4)% (0.3)%
-------- --------
Total expenses 28.8% 28.8%
-------- --------
Income before tax provision 12.7% 6.5%
Income tax provision 4.9% 2.5%
-------- --------
Net income 7.8% 4.0%
======== ========
RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 1998 AND 1997
For the fiscal year ended April 30, 1998 ("Fiscal 1998"), net sales
increased by $1,832,000, or 8.9% to $22,366,000 from $20,534,000 for the fiscal
year ended April 30, 1997 ("Fiscal 1997"). The increase was primarily the
result of the
15
<PAGE>
introduction of new products in Fiscal 1998. Of the $1,832,000 increase in
sales, approximately $750,000 was from the Health Care Products Division.
Cost of sales, as a percentage of net sales, decreased from 64.7% for
Fiscal 1997 to 58.5% for Fiscal 1998. In the aggregate, labor and overhead
including the sterile manufacturing facility, expense remained unchanged while
units produced increased approximately 10%. Future sterile manufacturing and
sales could reduce the unit cost of sales.
Selling expenses increased to $5,497,000 for Fiscal 1998 from
$4,862,000 for Fiscal 1997 and as a percentage of net sales increased from 23.6%
to 24.5%.
Research and development costs increased to $1,003,000 or 4.5% of
sales for Fiscal 1998 from $960,000 or 4.7% of sales for Fiscal 1997 as a result
of, among other things, expenses associated with the filing of Abbreviated New
Drug Applications (ANDAs) with the FDA as well as development of new products
for the Company's Health Care Products Division. 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 increased to $1,735,000 for Fiscal 1998 from net income of
$817,000 for Fiscal 1997, as a result of the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's operations are historically financed principally by cash
flow from operations and bank borrowings. At April 30, 1998 and April 30, 1997,
working capital was approximately $8,312,000 and $6,422,000, respectively.
Accounts payable decreased 10% from $2,384,000 for Fiscal 1997 to
$2,157,000 for Fiscal 1998.
Accrued expenses increased 5% from $907,000 for Fiscal 1997 to
$953,000 for Fiscal 1998 as a result of the increased levels of business
activity.
Cash flows from operating activities were approximately $2,706,000,
which was the result principally of net income and depreciation of $2,997,000.
Cash flows from investing activities was approximately $693,000 from operating
activities funds and was principally payments for fixed assets acquired. Cash
flows used for financing activities approximated $1,394,000 and resulted from
the retirement of $1,343,000 of debt.
16
<PAGE>
The Company amended its working capital credit line, increasing the
line to $5,000,000 and changing the basis for computing interest to the Libor
rate plus 1.75% and the maturity date to June 1, 1999. At April 30, 1998 the
rate was 7.35% and the balance outstanding had been paid but subsequently re-
borrowed. 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 certain financial ratio and other covenants
and prohibits the payment of cash dividends.
The Company believes that its financial resources consisting of
current working capital, 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.
YEAR 2000 COMPLIANCE
- --------------------
The Company relies significantly on computer technology throughout its
business to effectively carry out its day-to-day operations. As the millennium
approaches, the Company is assessing all of its computer systems to ensure that
they are "Year 2000" compliant. In this process the Company may replace or
upgrade certain systems which are not Year 2000 compliant, in order to meet its
internal needs and those of its customers. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company may rely also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Company's systems. The cost to the Company of
such changes are difficult to estimate but are not expected to have a material
financial impact. Actual results could differ materially from the Company's
expectations due to unanticipated technological difficulties, vendor delays, and
vendor cost overruns.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended April
30, 1998 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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales............................. $22,366,000 20,534,000 19,140,000 16,406,000 13,297,000
-------------- ----------- ------------- ----------- ----------
Costs and expenses:
Costs of goods sold................... 13,084,000 13,278,000 11,785,000 9,691,000 7,708,000
Research and development.............. 1,003,000 960,000 933,000 711,000 646,000
Selling, general and
administrative...................... 5,497,000 4,862,000 4,601,000 3,419,000 3,205,000
Contract research (income)............ (228,000) (178,000) (467,000) (293,000) (253,000)
Nonrecurring compensation
charge.............................. - - - - 2,925,000
Abandoned merger expense.............. - - - - 193,000
Interest expense...................... 268,000 340,000 149,000 157,000 25,000
Interest (income) and other........... (93,000) (55,000) (67,000) (82,000) (52,000)
-------------- ----------- ------------- ----------- ----------
19,531,000 19,207,000 16,934,000 13,603,000 14,397,000
-------------- ----------- ------------- ----------- ----------
Income (loss) before provision
for income taxes...................... 2,835,000 1,327,000 2,206,000 2,803,000 (1,100,000)
Provision for income taxes............... 1,100,000 510,000 871,000 1,072,000 (100,000)
-------------- ----------- ------------- ----------- ----------
Net income (loss)........................ $ 1,735,000 817,000 $ 1,335,000 1,731,000 (1,000,000)
============== =========== ============= =========== ==========
Basic earnings (loss) per share (1) $0.38 $0.18 $0.30 $0.39 $(0.24)
============== =========== ============= =========== ==========
Diluted earnings (loss) per share (1) $0.38 $0.18 $0.29 $0.38 $(0.24)
============== =========== ============= =========== ==========
Weighted average common shares
outstanding basic earnings
per share(1)............................. 4,516,000 4,526,000 4,411,000 4,450,000 4,213,000
Effect of potential common shares........ 64,000 73,000 156,000 141,000 -
Weighted average common shares
outstanding basic earnings -------------- ----------- ------------- ----------- ----------
per share(1)............................. 4,580,000 4,599,000 4,567,000 4,591,000 4,213,000
-------------- ----------- ------------- ----------- ----------
APRIL 30,
-----------------------------------------------------------------------
1998 1997(2) 1996 (2) 1995 1994
-----------------------------------------------------------------------
Balance sheet data:
Working capital....................... $ 8,321,000 6,422,000 5,417,000 4,241,000 2,826,000
Total assets.......................... $21,622,000 21,282,000 20,487,000 18,404,000 15,239,000
Long-term debt........................ $ 1,450,000 1,896,000 2,427,000 3,026,000 1,955,000
Stockholders' equity.................. $15,685,000 14,001,000 13,171,000 11,266,000 10,040,000
(1) Reflects the 3-for-2 stock split
payable on November 1, 1993.
(2) Certain balance sheet accounts and
disclosures have been changed to
conform to current year classification
</TABLE>
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX PAGE NUMBER
- ------------------------------------------------------------ -------------
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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 of April 30, 1998 and 1997, 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 as of April 30, 1998 and 1997 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 7, 1998
F - 2
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30,
------------------------------------------------
1998 1997
------------------------------------------------
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 2,604,000 1,985,000
Accounts receivable (less allowances for doubtful accounts of $226,000
at April 30, 1998 and $160,000 at April 30, 1997)................. 4,133,000 4,034,000
Inventory.......................................................... 4,683,000 4,014,000
Prepaid taxes...................................................... 67,000 476,000
Other current assets............................................... 391,000 548,000
--------------------------- ------------------
TOTAL CURRENT ASSETS............................................... 11,878,000 11,057,000
Property and equipment at cost, net of accumulated depreciation and
amortization...................................................... 9,537,000 10,106,000
Other assets....................................................... 207,000 119,000
--------------------------- ------------------
T O T A L.......................................................... $ 21,622,000 21,282,000
=========================== ==================
L I A B I L I T I E S
CURRENT LIABILITIES:
Note payable - bank................................................ - 815,000
Current portion of long-term debt.................................. 447,000 529,000
Accounts payable................................................... 2,157,000 2,384,000
Accrued expenses................................................... 953,000 907,000
--------------------------- ------------------
TOTAL CURRENT LIABILITIES.......................................... 3,557,000 4,635,000
Long-term debt (less current portion).............................. 1,450,000 1,896,000
Deferred taxes..................................................... 930,000 750,000
--------------------------- ------------------
TOTAL LIABILITIES.................................................. 5,937,000 7,281,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
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,
Shares issued...................................................... 45,000 45,000
Additional paid-in capital......................................... 8,604,000 8,604,000
Retained earnings.................................................. 7,087,000 5,352,000
Treasury stock, 13,500 shares of common stock, at cost............. (51,000) -
--------------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY......................................... 15,685,000 14,001,000
--------------------------- ------------------
T O T A L.......................................................... $ 21,622,000 21,282,000
=========================== ==================
</TABLE>
See notes to Consolidated Financial Statements.
F - 3
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
NET SALES.................. $22,366,000 20,534,000
Cost of goods sold......... 13,084,000 13,278,000
-------------- ------------
GROSS PROFIT............... 9,282,000 7,256,000
-------------- ------------
Selling, general and
administrative expense.... 5,497,000 4,862,000
Research & product
development costs......... 1,003,000 960,000
Contract research (income). (228,000) (178,000)
Interest expense........... 268,000 340,000
Interest (income) and other (93,000) (55,000)
-------------- ------------
T O T A L.................. 6,447,000 5,929,000
-------------- ------------
Income before income taxes. 2,835,000 1,327,000
Provision for income taxes. 1,100,000 510,000
-------------- ------------
NET INCOME................. $ 1,735,000 817,000
============== ============
BASIC INCOME PER SHARE..... $0.38 0.18
============== ============
DILUTED INCOME PER SHARE $0.38 0.18
============== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
BASIC INCOME PER SHARE... 4,516,000 4,526,000
EFFECT OF POTENTIAL COMMON
SHARES.................... 64,000 73,000
-------------- ------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
DILUTED INCOME PER
SHARE................... 4,580,000 4,599,000
============== ============
</TABLE>
See notes to Consolidated Financial Statements.
F - 4
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TREASURY TOTAL
COMMON STOCK PAID IN RETAINED STOCK STOCKHOLDERS'
---------------------
SHARES AMOUNT CAPITAL EARNINGS AT COST EQUITY
----------- --------- -------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
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 51,000 - - - - -
shares
Acquisition Rose Labs....
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
----------- --------- -------------- ---------- ---------- -----------
Net income................. - - - 1,735,000 - 1,735,000
Treasury stock............. - - - - (51,000) (51,000)
----------- --------- -------------- ---------- ---------- -----------
BALANCE - APRIL 30, 1998... 4,526,000 45,000 8,604,000 7,087,000 (51,000) 15,685,000
=========== ========= ============== ========== ========== ===========
</TABLE>
See notes to Consolidated Financial Statements.
F - 5
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
1998 1997
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 1,735,000 817,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 1,262,000 1,238,000
Deferred income taxes.......................... 180,000 267,000
Provision for bad debts........................ 66,000 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable.......................... (165,000) (335,000)
Inventory.................................... (669,000) (368,000)
Prepaid taxes................................ 409,000 (16,000)
Other current assets......................... 157,000 (276,000)
Other assets................................. (88,000) (53,000)
Accounts payable............................. (227,000) (49,000)
Accrued expenses............................. 46,000 184,000
NET CASH PROVIDED BY OPERATING ------------- ----------
ACTIVITIES............................... 2,706,000 1,409,000
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for fixed assets........................... (693,000) (582,000)
------------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES.... (693,000) (582,000)
------------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments - long-term debt and notes payable........ (1,343,000) (539,000)
Repayment of loans from officers and stockholders.. - (62,000)
Proceeds - issuance of common stock - net.......... - 13,000
Payment for treasury stock......................... (51,000) -
------------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES.... (1,394,000) (588,000)
------------- ----------
NET INCREASE IN CASH.................................. 619,000 239,000
Cash and cash equivalents at beginning of period...... 1,985,000 1,746,000
------------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 2,604,000 1,985,000
============= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................... $ 258,000 305,000
Income taxes..................................... $ 511,000 259,000
</TABLE>
At April 30, 1998 and 1997, property and equipment of approximately
$164,000 had been purchased and unpaid.
See notes to Consolidated Financial Statements.
F - 6
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(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. ("Rose"). 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:
------------
The Company uses the liability method to account for deferred income taxes in
accordance with statement of financial accounting standards ("SFAS") 109.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements. The resulting asset or liability is adjusted to reflect
changes in the tax law as they occur.
[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:
--------------------
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share (EPS)," which replaced the previously reported primary
and fully diluted EPS with basic and diluted EPS. Unlike primary EPS, basic EPS
excludes any dilutive effects of options, warrants and convertible securities.
Diluted EPS is similar to the previously reported fully diluted EPS. All EPS
amounts for all fiscal periods have been restated to conform to the
requirements of SFAS No. 128.
(continued)
F - 7
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(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". The
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-
Based Compensation ("SFAS No. 123"). SFAS No. 123 established a fair-value-based
method of accounting for stock-based compensation plans. The Company has adopted
the disclosure requirements of SFAS No. 123 and has presented 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 L[4]).
[12] New accounting pronouncements:
------------------------------
The Financial Accounting Standards Board has recently issued statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
and No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." These pronouncements will not have a significant effect on the
information presented in the consolidated financial statements.
[13] Reclassification:
-----------------
Certain balance sheet accounts and related disclosures have been changed to
conform to current year classification.
(continued)
F - 8
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE B) - Inventory:
- ---------------------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------------------
1998 1997
---------------------- ----------
<S> <C> <C>
Finished goods and
work in process................................... $ 2,029,000 1,507,000
Raw materials..................................... 2,654,000 2,507,000
---------------------- ----------
T o t a l......................................... $ 4,683,000 4,014,000
====================== ==========
</TABLE>
(NOTE C) - Property and Equipment:
- ---------------------------------
The components of net property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------------
1998 1997
--------------------- ----------
<S> <C> <C>
Land and building and improvements................ $ 4,638,000 4,564,000
Machinery and equipment........................... 9,755,000 9,180,000
Transportation equipment.......................... 13,000 13,000
Computer equipment................................ 375,000 354,000
Furniture and fixtures............................ 165,000 142,000
--------------------- ----------
14,946,000 14,253,000
Accumulated depreciation and amortization......... 5,409,000 4,147,000
--------------------- ----------
Total property and equipment...................... $ 9,537,000 10,106,000
==================== ===========
</TABLE>
(NOTE D) - Other Assets:
- -----------------------
Included in other assets is the Company's investment in a joint venture for the
marketing and development of a nutritional supplement. The net investment is
approximately $125,000.
(NOTE E) - 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, 1998 AND APRIL 30, 1997
(NOTE F) - Note Payable - Bank:
- ------------------------------
On April 29, 1998 the Company amended its working capital credit line which is
now $5,000,000 bearing interest at the Libor rate plus 1.75%(7.35% at April 30,
1998) and expires June 1, 1999. The outstanding balance was paid on April 30,
1998 but subsequently re-borrowed. Borrowings under the line are limited to 80%
of eligible receivables and are collateralized by inventory, accounts receivable
and all other assets. The agreement contains covenants with respect to working
capital, net worth and certain ratios, as well as other covenants and prohibits
the payment of cash dividends.
(NOTE G) - Long-Term Debt:
- --------------------------
<TABLE>
<CAPTION>
Long-term debt consists of the following: APRIL 30,
---------------------------------
1998 1997
--------- -----------
<S> <C> <C>
Equipment loans - collateralized by the related
equipment purchased, inventory, and accounts
receivable and other assets (1).................. - 82,000
Mortgage payable (2)............................. 219,000 256,000
Mortgage payable (3)............................. 492,000 584,000
Mortgage payable (4)............................. 265,000 325,000
Equipment loan - collateralized by the related
equipment purchased, inventory, and accounts
receivable and other assets (5).................. 921,000 1,178,000
---------- -----------
T o t a l 1,897,000 2,425,000
Less current portion............................. 447,000 529,000
---------- -----------
Long-term debt...................................$ 1,450,000 1,896,000
========== ===========
</TABLE>
[1] The equipment loan bears interest at a fixed rate of 6.95% per annum. Such
loan was payable in monthly installments of $7,500, plus interest, and expired
March 1998.
[2] 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, 9.00% at April 30,
1998.
[3] 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, 9.00% at April
30, 1998.
[4] The mortgage is payable in monthly installments of $5,000 plus interest at
8.26% per annum through September 2002.
[5] 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, 9.00% at April 30, 1998. The loan requires monthly payments of principal
in the amount of $21,429 plus interest.
(continued)
F - 10
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE G) - Long-Term Debt: - (continued)
----------------------------------------
Long-term debt is payable as follows:
----------------------------------------
1999.................................. $ 447,000
2000.................................. 447,000
2001.................................. 447,000
2002.................................. 340,000
2003.................................. 154,000
2004.................................. 62,000
-------------
T o t a l............................. $1,897,000
=============
(NOTE H) - Related Party Transactions:
- -------------------------------------
The Company has employment agreements, as amended, expiring April 30, 2000 with
the Chairman of the Board and Chief Executive Officer, who are also stockholders
of the Company, which provide for annual base salaries of $199,000 and $236,000
for the year ended April 30, 1998 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 Chairman of the Board. He
provided legal and new business development services throughout the year. For
the fiscal years 1998 and 1997 he received fees and expense reimbursements of
$50,000 and $61,000, respectively.
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 I) - 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. Pending regulatory matters are not expected to
have a material effect on the Company's financial condition.
(continued)
F - 11
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE I) - Commitments and Contingencies (continued):
- ----------------------------------------------------
[2] Employment agreements:
---------------------
The Company has a two year employment agreement with an employee which
provides for an annual salary of $116,000 plus annual cost of living increases,
which expires in August, 2000.
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 agreement.
See Note H for other employment agreements.
[3] Leased property:
----------------
On July 18, 1996, the Company executed an operating lease for a 50,000 square
foot building in Amityville, New York. The lease commenced 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,
1998 was approximately $177,000.
Future minimum payments by year are as follows:
1999............................................. $169,000
2000............................................. 176,000
2001............................................. 183,000
2002............................................. 190,000
Thereafter....................................... 148,000
---------
T o t a l........................................ $866,000
=========
[4] 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 litigated.
(continued)
F - 12
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE J) - 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 K) - Income Taxes:
- -----------------------
[1] The provision for income taxes is composed of the following:
YEAR ENDED APRIL 30,
------------------------------------------
1998 1997
------------------ --------------------
Current:
Federal....................... $ 841,000 215,000
State......................... 79,000 28,000
Deferred:
Federal....................... 169,000 251,000
State......................... 11,000 16,000
------------------ --------------------
T o t a l........................ $ 1,100,000 510,000
================== ====================
[2] Expected tax expense based on the statutory rate is reconciled with actual
tax expense as follows:
YEAR ENDED
APRIL 30,
-------------------
1998 1997
------- -----
Statutory rate...................................... 34.0% 34.0%
State income tax, net of federal income tax benefit 2.1% 2.1%
Other............................................... 2.7% 2.3%
------- -----
Effective tax rate.................................. 38.8% 38.4%
======= =====
(continued)
F - 13
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE K) - Income Taxes (continued) :
- ------------------------------------
[3] Deferred tax expense is composed of the following:
YEAR ENDED APRIL 30,
-----------------------
1998 1997
------------ ----------
Depreciation and amortization..... $125,000 360,000
Inventory uniform capitalization.. (4,000) (95,000)
Other, net........................ 59,000 2,000
------------ ----------
$180,000 267,000
============ ==========
[4] The deferred tax liability at April 30, 1998 and 1997 relates principally
to depreciation and inventory uniform capitalization.
(NOTE L) - 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, 1998 AND APRIL 30, 1997
(NOTE L) - 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 OF EXERCISE NUMBER OF EXERCISE
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
-------------------------------------------------------
<S> <C> <C> <C> <C>
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
------------ ========== ========== =============
Granted 136,750 $5.250
Cancelled (20,475) $5.570
------------ ----------
Outstanding at April 30, 1998 647,425 $5.220 353,288 $5.36
============ ========== ========== =============
</TABLE>
As of April 30, 1998, 9,975 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding options
is 7.3 years and the range of exercise prices are from $4.00 to $7.17.
F - 15
(continued)
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE L) - Common Stock (continued):
- -----------------------------------
[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 OF EXERCISE NUMBER OF EXERCISE
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
---------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
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
---------- ========== ========== ==================
Granted 9,500 $5.375
Cancelled - -
---------- -----------
Outstanding at April 30, 1998 35,000 $6.038 12,000 $6.68
---------- ========== ========== ==================
</TABLE>
As of April 30, 1998, 65,000 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding options
is 8.1 years and the range of exercise prices are from $4.63 to $7.63.
[4] 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 Compnay's net
profit for the years ended April 30, 1998 and April 30, 1997, would have been as
follows:
YEAR ENDED APRIL
30,
-------------------
1998 1997
-------------------
Net income:
As reported $1,735,000 817,000
Proforma under SFAS 123 $1,619,000 710,000
Earnings per share:
As reported $ 0.38 0.18
Proforma under SFAS 123 $ 0.36 0.16
(continued)
F - 16
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
(NOTE L) - Common Stock (continued):
- -----------------------------------
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:
1998 1997
--------- ---------
Risk-free interest rate 5.36% 6.29%
Expected life of options 5.00 5.00
Expected stock price volatility 65.00% 52%- 54%
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 1998 and 1997 is not necessarily 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 1997. The weighted average fair value of options granted is $3.13 in
fiscal 1998 and $2.13 in fiscal 1997.
(NOTE M) - Significant Customers and Concentration of Credit Risk:
- -----------------------------------------------------------------
Two major customers accounted for net sales of approximately 21% and 11% for the
year ended April 30, 1998 and 24% and 16% for the year ended April 30, 1997,
respectively. These two customers represented approximately 43% of the
outstanding trade receivables at April 30, 1998. Cash in excess of Federal
Deposit Insurance Company limitations is held in certain banks.
(NOTE N) - 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 $49,000 and $50,000, respectively, for fiscal
years 1998 and 1997.
(NOTE O) - YEAR 2000 COMPLIANCE
- -------------------------------
The Company relies significantly on computer technology throughout its business
to effectively carry out its day-to-day operations. As the millennium
approaches, the Company is assessing all of its computer systems to ensure that
they are "Year 2000" compliant. In this process the Company may replace or
upgrade certain systems which are not Year 2000 compliant, in order to meet its
internal needs and those of its customers. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company may rely also will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Company's systems. The cost to the Company of such
changes are difficult to estimate but are not expected to have a material
financial impact. Actual results could differ materially from the Company's
expectations due to unanticipated technological difficulties, vendor delays, and
vendor cost overruns.
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 to
Name of Director and other Directorships Age the Board
- ------------------------------ --------------------------------- ------ -------------
<S> <C> <C> <C>
Bernard Seltzer Bernard Seltzer has been Chairman of 74 1983
the Company since January 1990. As of
May 1, 1998 Mr. Seltzer resigned as
President and Chief Executive Officer of
the Company. 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>
19
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Elected to
Name of Director and other Directorships Age the Board
- ------------------------------ --------------------------------- ------ -------------
<S> <C> <C> <C>
David S. Seltzer David S. Seltzer has been Chief 38 1992
Executive Officer and President of the
Company since May 1, 1998 and a
Director, Secretary and Treasurer since
February 1992. From July 1992 to
May 1, 1998 Mr. Seltzer was Executive
Vice President-Administration and since July
1992, Vice President - Administration
and Chief Operating Officer of the
Company since March 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 42 1992
the Company since April 1992.
Mr. Seltzer 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., a real estate 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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Elected to
Name of Director and other Directorships Age the Board
- ------------------------------ --------------------------------- ------ -------------
<S> <C> <C> <C>
Martin M. Goldwyn Martin M. Goldwyn was elected a Director of 46 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.
Yashar Hirshaut, M.D. Yashar Hirshaut has been a Director of 60 1992
the Company since September 1992.
Dr. Hirshaut is a practicing medical
oncologist and is currently an Associate
Clinical Professor of Medicine at Cornell
University Medical College. 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>
21
<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 74 Chairman of the Company since January 1990.
David S. Seltzer 38 Chief Executive Officer and President of the Company
since May 1, 1998 and a Director, Secretary and
Treasurer since February 1992. Mr. Seltzer served as
Executive Vice President of Administration since
February 1992.
Elan Bar-Giora 54 Executive Vice President-Operations of the Company
since July 1992 and Vice President- Operations of the
Company since August 1990.
Arthur S. Goldberg 56 Vice President-Finance and Chief Financial Officer of
the Company since September 1991.
SIGNIFICANT EMPLOYEES
Name Age Position and Period Served
- ------------------ ----- ----------------------------------------------------
Gennaro P. Caccavale 51 Director of Operations since February 1992.
Michael McConnell 40 Director of Product Development since
January 1992.
Gary M. April 41 President of Health Care Products Division
since May 1998 and Divisional Vice President
of Sales since January 1993.
Suzanne Fenton 43 Director of Compliance since September
1995.
Jesse Kirsh 39 Director of Quality Assurance since March
1994.
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
22
<PAGE>
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 1998. 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.
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows, for the fiscal years ended April 30, 1998,
1997 and 1996, the compensation paid or accrued by the Company to or for each of
the executive officers of the Company.
23
<PAGE>
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> <C>
Bernard Seltzer 1998 199,000 18,000 -- -0- 4,420
Chairman 1997 186,000 16,000 -- -0- 3,910
1996 186,000 20,000 -- -0- 3,408
David S. Seltzer 1998 236,000 18,000 -- 50,000 3,207
President, Chief 1997 186,000 16,000 -- 50,000 3,175
Executive Officer, 1996 186,000 25,000 -- 37,500 1,040
Secretary and Treasurer
Elan Bar-Giora 1998 100,000 17,000 -- 10,000 1,715
Executive Vice 1997 102,000 0 -- 10,000 1,475
President- Operations 1996 100,000 0 -- 10,000 -0-
Arthur S. Goldberg 1998 110,000 0 -- 7,500 --
Vice President of 1997 101,000 0 -- 7,500 --
Finance and Chief 1996 93,000 0 -- 7,500 --
Financial Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) The named executive officers received various perquisites, the cost of
which did not exceed the lesser of $50,000 or 10% of annual salary plus
bonus.
(2) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(3) Represents the dollar value of the premium paid by the Company during the
fiscal years ended April 30, 1998, 1997 and 1996 with respect to term life
insurance for the benefit of the named executive officer.
24
<PAGE>
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's Amended and Restated Stock Option Plan ("Plan") to
the named executive officers of the Company during Fiscal Year 1998.
II. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- --------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Granted Fiscal Year ($/Sh) Date
Name (#)(1)(2)
- ---------------- ------------- ----------------- -------------- -----------
Bernard Seltzer -0- -0- -0- -0-
David S. Seltzer 50,000 36.6% 5.25 1/15/08
Elan Bar-Giora 10,000 7.3% 5.25 1/15/08
Arthur S. Goldberg 7,500 5.6% 5.25 1/15/08
- ---------------------------
(1) Options granted in Fiscal Year 1998 are scheduled to vest and become
exercisable in yearly increments of 25% beginning on January 15, 1999, with
full vesting occurring on January 15, 2002. Options expire ten years after
grant under the terms of the Company's Plan.
(2) Granted January 15, 1998.
25
<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 1998 and
unexercised options held as of the end of Fiscal Year 1998.
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- 143,750/106,250 150,000/108,125
Elan Bar-Giora - 0- - 0- 50,000/25,000 78,125/32,500
Arthur S. Goldberg - 0- - 0- 38,625/16,875 47,718/20,156
</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, 1998 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. Bernard Seltzer resigned as President and Chief Executive Officer
effective as of May 1, 1998. David Seltzer was elected to serve as President and
Chief Executive Officer effective May 1, 1998. Such employment agreements were
modified to provide that the annual base salary for each of Bernard Seltzer and
David Seltzer would be $199,000 and $236,000 for the fiscal year commencing May
1, 1997 through April 30, 1998, respectively. 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
26
<PAGE>
the prior year. Commencing on the sixth year of the employment agreement, each
of the salaries of Bernard Seltzer and David S. Seltzer was increased by
$50,000. The Board of Directors in its discretion will 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 two year employment agreement
ending on August 31, 2000. Mr. Goldberg's annual base salary is $116,000 for
the period commencing on September 1, 1997 through August 31, 1998. Such annual
salary shall be adjusted annually, commencing September 1, 1998, 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 1998, the Company granted options to purchase 136,750 shares
of Common Stock at an exercise price of $5.25 having exercise dates ranging from
January 1998 to December 2007. During Fiscal 1998, 20,425 options were
cancelled or expired, and 9,975 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 Company and an added incentive to continue and advance in their
employment. The
27
<PAGE>
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 July 29, 1998, the Company has granted options to purchase
250,000 shares to David S. Seltzer, 72,500 shares to Elan Bar-Giora, and 55,500
shares to Arthur S. Goldberg at an average exercise price of $4.36 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 July 29, 1998, the Company has granted non-
statutory options to purchase 3,500 shares to each of two directors and 3,000
shares to one director at an average exercise price of $5.375 per share.
28
<PAGE>
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
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 NATURE PERCENT OF
OF BENEFICIAL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) STOCK
- -------------------------------------- ----------------- -----------
Bernard Seltzer 728,832 (2) 15.2%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
David S. Seltzer 678,893 (3) 14.2%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Reuben Seltzer 406,985 (4) 8.5%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
29
<PAGE>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) STOCK
- -------------------------------------- ----------------- -----------
Arthur S. Goldberg 38,625 (5) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Elan Bar-Giora 50,000 (6) 1.0%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Martin M. Goldwyn 16,500 (7) *
c/o Tashlik, Kreutzer & Goldwyn P.C.
833 Northern Boulevard
Great Neck, New York 11021
Yashar Hirshaut, M.D. 8,250 (8) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
All Directors and Executive Officers 1,928,085 (9) 40.2%
as a group (7 persons)
___________________________
* Amount represents less than one percent of Common Stock including shares
issuable to such beneficial owner under options which are presently
exercisable or will become exercisable within 60 days.
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to the shares shown as beneficially owned by such
person.
(2) Amount does not include 60,000 shares of Common Stock owned by Mr.
Seltzer's wife, as to which Bernard Seltzer disclaims beneficial ownership.
(3) Amount includes options to purchase 143,750 shares of Common Stock
exercisable within 60 days of July 28, 1998 and 102,406 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(4) Amount includes options to purchase 35,750 shares of Common Stock
exercisable within 60 days of July 28, 1998 and 98,028 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(5) Amount represents options to purchase 38,625 shares of Common Stock
exercisable within 60 days of July 28, 1998.
(6) Amount represents options to purchase 50,000 shares of Common Stock
exercisable within 60 days of July 28, 1998.
30
<PAGE>
(7) Amount represents options to purchase 16,500 shares of Common Stock
exercisable within 60 days of July 28, 1998.
(8) Amount includes options to purchase 8,250 shares of Common Stock
exercisable within 60 days of July 28, 1998.
(9) Amount includes options to purchase 294,000 shares of Common Stock
exercisable within 60 days of July 28, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended April 30, 1998, Mr. Reuben Seltzer a
director of the Company was engaged by the Company to provide new business
development and legal services. For such services, Mr. Reuben Seltzer received
$50,000. Mr. Reuben Seltzer is a director of the Company and the son of Mr.
Bernard Seltzer, the Company's Chairman of the Board.
The Company and Reuben Seltzer each has a 23.3% interest in
Marco Hi-Tech JV Ltd., a New York corporation, which markets raw materials for
nutraceutical products and has licensed the patent rights to Huperzine and
analogues from the Mayo Clinic. Huperzine is a naturally derived compound
belonging to a class known as acetylcholinesterase inhibitors. Huperzine has
been shown to inhibit the enzyme responsible for the breakdown of acetylcholine,
a neurotransmitter or brain chemical, which is believed to be critical in
learning and memory. Marco Hi-Tech JV Ltd. plans to manufacture and distribute
Huperzine as a dietary supplement under the Dietary Supplement Health and
Education Act of 1994 and to develop analogues and derivatives to Huperzine. It
also plans to develop other products for the nutraceutical market.
The Company believes that material affiliated transactions between the
Company and its directors, officers, principal stockholders or any affiliates
thereof have been, and will be in the future, on terms no less favorable than
could be obtained from unaffiliated third parties.
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page Number
(a) Exhibit ------------
Number Description of Document Foot Notes
- ----------- ------------------------------------------------------------------- ---------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation and By-Laws (1)
4.3 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Plan (2)
4.4 Copy of Hi-Tech Pharmacal Co., Inc. Stock Option Agreement (3)
4.5 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)
*10.10 Second Amendment, dated as of April 29, 1998, to Term Loan
Agreement, dated as of October 31, 1994, with Fleet Bank, N.A.
*10.11 Sixth Amendment, dated as of April 29, 1998, to Revolving Credit
Agreement, dated as of January 23, 1992, with Fleet Bank, N.A.
10.12 $1,800,000 Term Loan Agreement with National Westminster Bank
USA, dated as of October 31, 1994
10.13 Fixed Rate Term Note in the amount of $450,000 to National
Westminster Bank dated March 5, 1993 (13)
10.14 Mortgage between National Westminster Bank USA and the
Company dated September 1, 1992 (14)
10.15 Mortgage Note and Supplemental Mortgage and Mortgage
Spreader Consolidating Modification and Extension Agreement (15)
Between the Company and National Westminster Bank dated
July 29, 1993
10.16 Lease Agreement by and between Hi-Tech Pharmacal Co., Inc.
and Chigi Realty Corp. dated July 18, 1996 (16)
*22. Subsidiaries of Hi-Tech Pharmacal Co., Inc.
*23. Consent of Richard A. Eisner & Company, LLP
</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.
32
<PAGE>
(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.
(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.
_________________________
(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
33
<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: July 29, 1998 HI-TECH PHARMACAL CO., INC.
By: /s/ David Seltzer
---------------------------------------
David Seltzer, Chief Executive
Officer, President, Secretary &
Treasurer
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
- -----------------------------------------
Bernard Seltzer, Chairman July 29, 1998
of the Board
/s/ David S. Seltzer
- -----------------------------------------
David S. Seltzer, Director, July 29, 1998
Chief Executive Officer, President,
Treasurer, Secretary
/s/ Reuben Seltzer
- -----------------------------------------
Reuben Seltzer, Director July 29, 1998
/s/ Martin M. Goldwyn
- -----------------------------------------
Martin M. Goldwyn, Director July 29, 1998
- ------------------------------------------
Yashar Hirshaut, M.D., Director July 29, 1998
34
<PAGE>
EXHIBIT 10.10
SECOND AMENDMENT TO TERM LOAN AGREEMENT
---------------------------------------
SECOND AMENDMENT entered into as of April 29, 1998 between HI-TECH
PHARMACAL CO., INC. (the "Company") and FLEET BANK, N.A., successor to NatWest
Bank N.A., formerly known as National Westminster Bank USA (the "Bank").
WHEREAS, the Company and the Bank are parties to a Term Loan Agreement
dated as of October 31, 1994, as amended by a First Amendment dated as of May
21, 1997 (collectively, the "Agreement"); and
WHEREAS, the Company has requested that the Bank 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. Section 5(c) of the Agreement is hereby amended to read as follows:
"(c) Guaranties. Become a guarantor, surety or otherwise become
----------
liable for the debts or other obligations of any other person, firm or
corporation, whether by agreement to purchase indebtedness, or agreement
for furnishing funds through the purchase of goods, supplies or services
(or by way of stock purchase, capital contribution, advance or loan) for
the purpose of paying or discharging the indebtedness or obligation of any
other person, firm or corporation, or otherwise, except as (i) an indorser
of instruments for the payment of money deposited to its bank accounts for
collection; (ii) indemnities and guaranties given in connection with
Permitted Encumbrances and Permitted Borrowings; (iii) indemnities given to
the Bank in connection with indebtedness incurred
<PAGE>
to the Bank; (iv) indemnities of officers and directors pursuant to
applicable certificates of incorporation, by-laws or resolutions of the
Company's Board of Directors; (v) guarantees and indemnities existing on
the date hereof as may specified in the Schedule under the heading
"Permitted Guaranties", all in the ordinary course of business; and (vi)
guarantees limited to $1,500,000 of principal amount of the obligations of
Marco Hi-Tech JV Ltd. to Brown Brothers Harriman & Co. or other
institutional investor or lender."
2. 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) Except as disclosed in the undertaking letter of even date, 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.
3. All capitalized terms used herein, unless otherwise defined herein,
have the same meanings provided therefor in the Agreement.
4. It is expressly understood and agreed that all collateral security for
the Term Loan 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 Term Loan and other extensions of credit provided in the
Agreement as herein amended. Without limiting the generality of the foregoing,
the Company 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
<PAGE>
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.
5. 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).
6. This Second Amendment shall become effective on such date as all of
the following conditions shall be satisfied:
(A) The Bank shall have received an officers' certificate together
with board of directors resolutions authorizing the execution and delivery of
this amendment.
(B) The Bank shall have received an opinion of Company counsel in form
and substance acceptable to the Bank's counsel.
(C) All legal matters incident to this Second Amendment shall be
satisfactory to counsel to the Bank.
7. This Second Amendment is dated for convenience as of April 29, 1998
and shall be effective on the date of satisfaction of the conditions precedent
contained in paragraph 6 hereof and delivery by the Bank of an executed
counterpart hereof to the Company. This Second 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.
8. 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
<PAGE>
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. 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 Second Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Second 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:_____________________
Bernard Seltzer
President
FLEET BANK, N.A.
/s/ Patricia A. Calcado
By:_______________________
Patricia A. Calcado
Vice President
The guarantor indicated below hereby consents to this Second 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:______________________
Bernard Seltzer
President
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 29th day of April, 1998, 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, New York 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/ Joanne D. Neville
-------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 29th day of April, 1998, 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/ Joanne D. Neville
-------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK)
On the 29th day of April, 1998, 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, New York 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
<PAGE>
by order of the board of directors of said corporation.
/s/ Joanne D. Neville
-------------------------
Notary Public
<PAGE>
EXHIBIT 10.11
SIXTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
---------------------------------------------
SIXTH AMENDMENT entered into as of April 29, 1998 between HI-TECH PHARMACAL
CO., INC. (the "Company") and FLEET BANK, N.A., successor to NatWest 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, a Third Amendment
dated as of October 31, 1994, a Fourth Amendment dated as of January 29, 1997
and a Fifth Amendment dated as of May 21, 1997 (collectively, the "Agreement");
and
WHEREAS, the Company has requested that the Bank extend the Credit Period
to June 1, 1999 and increase the Credit, 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) 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 June 1, 1999 (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 $5,000,000.00 or the Borrowing Base, as hereinafter
defined (the "Credit") and Letters of Credit at
<PAGE>
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 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:"
(B) In order to conform to the amendment hereinabove set forth in
paragraph (A), the Note evidencing the Credit is hereby substituted for and
replaced with the Amended and Restated Note in the form of Exhibit 1 hereto.
(C) Section 5(c) of the Agreement is hereby amended to read as
follows:
"(c) Guaranties. Become a guarantor, surety or otherwise become
----------
liable for the debts or other obligations of any other person, firm or
corporation, whether by agreement to purchase indebtedness, or agreement
for furnishing funds through the purchase of goods, supplies or services
(or by way of stock purchase, capital contribution, advance or loan) for
the purpose of paying or discharging the indebtedness or obligation of any
other person, firm or corporation, or otherwise, except as (i) an indorser
of instruments for the payment of
<PAGE>
money deposited to its bank accounts for collection; (ii) indemnities and
guaranties given in connection with Permitted Encumbrances and Permitted
Borrowings; (iii) indemnities given to the Bank in connection with
indebtedness incurred to the Bank; (iv) indemnities of officers and
directors pursuant to applicable certificates of incorporation, by-laws or
resolutions of the Company's Board of Directors; (v) guarantees and
indemnities existing on the date hereof as may specified in the Schedule
under the heading "Permitted Guaranties", all in the ordinary course of
business; and (vi) a guarantee limited to $1,500,000 of principal amount of
the obligations of Marco Hi-Tech JV Ltd. to Brown Brothers Harriman & Co.
or other institutional investor or lender."
2. 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) Except as disclosed in the undertaking letter of even date, 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.
3. All capitalized terms used herein, unless otherwise defined herein,
have the same meanings provided therefor in the Agreement.
4. 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
<PAGE>
limiting the generality of the foregoing, the Company 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.
5. 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).
6. This Sixth Amendment shall become effective on such date as all of the
following conditions shall be satisfied:
(A) The Bank shall have received the Amended and Restated Note duly
executed by the Company.
(B) The Bank shall have received an officers' certificate together
with board of directors resolutions authorizing the execution and delivery of
this amendment and the Note and the borrowings thereunder.
(C) The Bank shall have received an opinion of Company counsel in form
and substance acceptable to the Bank's counsel.
(D) All legal matters incident to this Sixth Amendment shall be
satisfactory to counsel to the Bank.
7. This Sixth Amendment is dated for convenience as of April 29, 1998 and
shall be effective on the date of satisfaction of the conditions precedent
contained in paragraph 7 hereof and delivery by the Bank of an executed
counterpart hereof to the Company. This Sixth Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of
<PAGE>
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
8. 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. 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 Sixth Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth 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:_____________________
Bernard Seltzer
President
FLEET BANK, N.A.
/s/ Patricia A. Calcado
By:_______________________
Patricia A. Calcado
Vice President
<PAGE>
The guarantor indicated below hereby consents to this Sixth 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:______________________
Bernard Seltzer
President
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 29th day of April, 1998, 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, New York 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/ Joanne D. Neville
-------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK )
On the 29th day of April, 1998, 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/ Joanne D. Neville
-------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF SUFFOLK)
On the 29th day of April, 1998, 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, New York 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
<PAGE>
by order of the board of directors of said corporation.
/s/ Joanne D. Neville
-------------------------
Notary Public
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF HI-TECH
PHARMACAL CO., INC.
Dr Rose d/b/a Rose Laboratories, Inc.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statement on
Form S-8 of Hi-Tech Pharmacal Co., Inc. and subsidiary (the "Company") of our
report dated July 7, 1998 relating to our audit on the consolidated balance
sheets of the Company as of April 30, 1998 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended, included in the Company's annual report on Form 10-KSB for the
fiscal year ended April 30, 1998.
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 29, 1998
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