<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________to_____________
Commission file number 0-20424
Hi-Tech Pharmacal Co., Inc.
(Exact name of small business issuer as specified in its charter)
__________________Delaware____________________________112638720_________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
369 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices)
_________________516 789-8228__________________
(Issuer's telephone number)
___________________________________Not applicable______________________________
(Former name, former address and former fiscal year, if changed since
last report)
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 xx No
____ ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
____ ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.01 Par Value - 4,481,800 shares as of December 11, 1998.
Transitional Small Business Disclosure Format: Yes ; No x
____ ____
<PAGE>
INDEX
HI-TECH PHARMACAL CO.,INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets--October 31, 1998 and April 30, 1998.
Condensed statements of operations--Three month and six month
periods ended October 31, 1998 and 1997.
Condensed statements of cash flows--Six month periods ended
October 31, 1998 and 1997.
Notes to condensed financial statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings
Item 2. Changes in securities
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of security holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I. ITEM 1
HI-TECH PHARMACAL CO., INC.
CONDENSED BALANCE SHEETS
October 31, April 30,
1998 1998
------------ -------------
(unaudited) (From Audited
Financial
Statements)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,867,000 2,604,000
Accounts receivable, less allowances of
$256,000 at October 31, 1998 and $226,000
at April 30, 1998 3,876,000 4,133,000
Inventories 4,992,000 4,683,000
Prepaid expenses and other receivables 279,000 458,000
------------ ----------
TOTAL CURRENT ASSETS 13,014,000 11,878,000
PROPERTY, PLANT AND EQUIPMENT -net 9,461,000 9,537,000
OTHER ASSETS 189,000 207,000
------------ ----------
TOTAL ASSETS $ 22,664,000 21,622,000
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable: Bank $ 815,000 -
Current Portion - Long-term debt 447,000 447,000
Accounts payable and accrued expenses 3,000,000 3,110,000
------------ ----------
TOTAL CURRENT LIABILITIES 4,262,000 3,557,000
LONG-TERM DEBT 1,226,000 1,450,000
Deferred taxes 930,000 930,000
SHAREHOLDERS' EQUITY
Preferred stock, par value $ .01 per share;
authorized 3,000,000 shares - -
Common stock, par value $ .01 per share;
authorized 10,000,000 shares, issued
4,526,000 at October 31, 1998
and April 30, 1998 45,000 45,000
Additional capital 8,604,000 8,604,000
Retained earnings 7,773,000 7,087,000
Treasury stock, 41,900 and 13,500
shares of common stock, at cost
October 31 and April 30, 1998 (176,000) (51,000)
------------ ----------
TOTAL SHAREHOLDERS' EQUITY 16,246,000 15,685,000
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,664,000 21,622,000
============ ==========
See notes to condensed financial statements
3
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
October 31, October 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $6,005,000 5,814,000 10,392,000 10,522,000
Cost of goods sold 3,481,000 3,450,000 6,131,000 6,655,000
---------- --------- ---------- ----------
Gross profit 2,524,000 2,364,000 4,261,000 3,867,000
Selling, general, administrative
expenses 1,552,000 1,408,000 2,767,000 2,448,000
Research & product development costs 275,000 236,000 531,000 415,000
Contract research (income) (147,000) (41,000) (263,000) (42,000)
Interest expense 59,000 70,000 124,000 144,000
Interest (income) (44,000) (18,000) (84,000) (39,000)
---------- -------- ---------- ----------
Total 1,695,000 1,655,000 3,075,000 2,926,000
INCOME BEFORE INCOME TAXES 829,000 709,000 1,186,000 941,000
Provision for income taxes 360,000 270,000 500,000 357,000
---------- -------- ---------- ----------
NET EARNINGS $ 469,000 439,000 686,000 584,000
========== ========= ========== ==========
Basic and diluted Net earnings
per common share $ 0.10 0.10 0.15 0.13
========== ========= ========== ==========
Weighted average common shares
outstanding - basic income per
share 4,496,000 4,513,000 4,505,000 4,518,000
Effect of potential common shares 8,000 84,000 53,000 44,000
---------- -------- ---------- ----------
Weighted average common shares
outstanding - diluted income per
share 4,504,000 4,597,000 4,558,000 4,562,000
========== ========= ========== ==========
</TABLE>
See notes to condensed financial statements
4
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended
October 31,
------------------------
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $1,472,000 804,000
CASH FLOWS USED IN FINANCING ACTIVITIES
Working capital bank loan 815,000 -
Mortgaged property - repayments (95,000) (95,000)
Repayments of equipment debt (239,000) (173,000)
Purchase of common stock (125,000) (51,000)
---------- -----------
CASH PROVIDED BY (USED IN) FINANCING 356,000 (319,000)
ACTIVITIES
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and (583,000) (492,000)
equipment
Other assets 18,000 (79,000)
---------- -----------
CASH USED IN INVESTING ACTIVITIES (565,000) (571,000)
NET INCREASE (DECREASE) IN CASH 1,263,000 (86,000)
Cash at beginning of the period 2,604,000 1,985,000
---------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $3,867,000 1,899,000
========== ===========
Supplemental disclosures of cash flow information:
Interest $ 122,000 137,000
Income taxes $ 250,000 50,000
See notes to condensed financial statements
5
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1998
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The preparation of the Company's consolidated financial
statements in conformity with generally accepted principles necessarily 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 balance sheet dates and the reported amounts of revenues and expense during
the reporting periods. Actual results could differ from these estimates and
assumptions. Operating results for the three and six month periods ended October
31, 1998 are not necessarily indicative of the results that may be expected for
the year ended April 30, 1999. For further information, refer to the financial
statements and footnotes thereto for the year ended April 30, 1998 on Form
10-KSB.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Rose Laboratories Inc. In consolidation, all
significant intercompany transactions and balances have been eliminated.
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.
NET EARNINGS PER SHARE
During the fiscal quarter ended January 31, 1998, the Company 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 presented and, where necessary, restated to conform to the
requirements of SFAS No. 128.
Employees' stock options outstanding to purchase shares of the Company's Common
Stock were approximately 417,000 for the six month period ended October 31,
1998, and approximately 294,000 for the six month period ended October 31, 1997
and were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the shares of common
stock.
6
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1998
INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
1998 1998
------------ ---------
Raw materials $ 2,650,000 2,654,000
Finished products and work in process 2,342,000 2,029,000
------------ ---------
$ 4,992,000 4,683,000
============ =========
FIXED ASSETS
The components of net plant and equipment consist of the following:
October 31, April 30,
1998 1998
------------ -----------
Land and Building $ 4,706,000 4,638,000
Machinery and equipment 10,179,000 9,755,000
Transportation equipment 13,000 13,000
Computer equipment 409,000 375,000
Furniture and fixtures 223,000 165,000
------------ -----------
15,530,000 14,946,000
Depreciation and amortization 6,069,000 5,409,000
------------ ----------
TOTAL FIXED ASSETS $ 9,461,000 9,537,000
============ ==========
WORKING CAPITAL REVOLVING LOAN
The Company has a working capital credit line of $5,000,000 with a bank which
expires in June 1999 and bears interest at the libor rate plus 175 basis points,
7.44% at October 31, 1998.
7
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1998
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses consist of the
following:
October 31, April 30,
1998 1998
----------- ---------
Accounts payable $ 2,268,000 2,157,000
Accrued expenses 732,000 953,000
----------- ---------
$ 3,000,000 3,110,000
=========== =========
CONTINGENCIES AND OTHER MATTERS
Bergen Brunswig accounted for approximately 12.6% of the shipments during the
quarter, an increase from 3.3% for the respective quarter in fiscal 1998, Rugby
Laboratories accounted for approximately 7.6% of the shipments during the
quarter, a decrease from 15.9% for the respective quarter in fiscal 1998.
Goldline Laboratories accounted for approximately 10.4% of the shipments during
the quarter, a decrease from 10.7% for the quarter ended October 31, 1997. These
customers represented approximately 33% of the outstanding trade receivables at
October 31, 1998.
The Company has invested approximately $210,000 in a joint venture for the
marketing and development of a nutritional supplement. In addition, the Company
guaranteed $1,500,000 of revolving debt of this joint venture to its commercial
lender. Mr. Reuben Seltzer, a director of the Company, has an interest in the
joint venture.
In May 1997, the Company announced a stock buy-back program under which the
Board of Directors authorized the purchase of up to $500,000 of its common
stock. As of October 31, 1998 the Company had purchased 41,900 shares at a cost
of $176,000.
On September 1, 1998, the Company sold to the management of Rose Laboratories,
Inc., ("Rose"), inventory used to make certain Rose products and the name "Rose
Laboratories, Inc". In addition, the parties executed Royalty, Confidentiality
and Non-Compete agreements. The Company received $200,000 for the inventory and
relocated certain equipment and inventory for the production of certain Rose
products to its plant in Amityville, NY. The management of Rose Laboratories
resigned and terminated the lease for the plant in Madison, Ct. As a result of
the sale, the Company will no longer have a presence in Connecticut or produce
or market certain products and will not use the name Rose Laboratories, Inc.
LEASED FACILITY
On July 18, 1996, the Company executed a lease for a 50,000 square foot building
in Amityville, New York. The lease commenced on August 1, 1996 and expires
January 31, 2003. The initial annual base rent is $157,000 and is payable in
monthly installments of $13,125. 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.
8
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
October 31, 1998
RESULTS OF OPERATIONS
For the six months ended October 31, 1998 net sales decreased by $130,000, or
1.2%, compared to the fiscal 1998 respective period. Total six months net sales
were $10,392,000 for the period ended October 31, 1998. For the three months
ended October 31, 1998 net sales increased by $ 191,000, or 3.3%, compared to
the fiscal 1998 respective period. Total three months net sales were $6,005,000
for the period ended October 31, 1998. Bergen Brunswig accounted for
approximately 12.6% of the shipments during the quarter, an increase from 3.3%
for the respective quarter in fiscal 1998, Rugby Laboratories accounted for
approximately 7.6% of the shipments during the quarter, a decrease from 15.9%
for the respective quarter in fiscal 1998. Goldline Laboratories accounted for
approximately 10.4% of the shipments during the quarter, a decrease from 10.7%
for the quarter ended October 31, 1997. These customers represented
approximately 33% of the outstanding trade receivables at October 31, 1998.
Health Care Products division for the three months ended October 31, 1998 and
1997 had sales of $1,494,000 and $1,139,000, respectively. Rose Laboratories had
sales of $68,000 and $293,000, respectively, for the three months ended October
31, 1998 and 1997.
Health Care Products division for the six months ended October 31, 1998 and 1997
had sales of $1,951,000 and $1,945,000, respectively. Rose Laboratories had
sales of $78,000 and $573,000, respectively, for the six months ended October
31, 1998 and 1997. However, $407,000 of product were shipped from Amityville
which previously would have been shipped by Rose.
Cost of sales, as a percentage of net sales, decreased from 63.2% to 59.0% for
the six months ended October 31, 1998 compared to the six months ended October
31, 1997 and decreased from 59.3% to 58.0% for the three months ended October
31, 1998 compared to the three months ended October 31, 1997. During the six
months ended October 31, 1998 this decrease was principally the result of a
change in product mix and lower per unit labor and overhead costs.
Research and product development costs for the three months ended October 31,
1998 increased $39,000, or 16.5%, and Contract research income increased
$106,000 compared to the fiscal 1997 respective period.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 25.8% from 24.2% for the respective three month period ended
October 31, 1998 and 1997.
Net income for the three months ended October 31, 1998 and 1997 was $469,000 and
$439,000 respectively, an increase of $30,000, because of the factors noted
above. Net income (loss) for the six months ended October 31, 1998 and 1997 was
$686,000 and $584,000, respectively, an increase of $102,000, because of the
factors noted above.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
October 31, 1998 (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations are financed principally by cash flow from operations.
During the period ended October 31, 1998, working capital increased to
$8,752,000 from $8,321,000 at April 30, 1998. During the six months ended
October 31, 1998 the Company invested $583,000 in fixed assets.
The Company has a working capital credit line with a bank of $5,000,000 which
expires in June 1999 and bears interest at the libor rate plus 175 basis points,
7.44% at October 31, 1998.
In May 1997, the Company announced a stock buy-back program under which the
Board of Directors authorized the purchase of up to $500,000 of its common
stock. As of October 31, 1998 the Company had purchased 41,900 shares at a cost
of $176,000.
YEAR 2000 COMPLIANCE
The Company relies 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. Management of the Company has initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the Year 2000, as
well as to identify any other Year 2000 operational issues. 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.
The Company is inventorying all of its non EDP systems and applications and is
currently assessing the impact of the Year 2000 on them. The Company does not
anticipate that the costs to rectify any Year 2000 issues as they relate to non
EDP systems and applications will have a material impact on the Company's
operations or financial condition. The Company is addressing the potential
impact to the Company of non-compliance by any of its key suppliers or clients.
The Company's program includes communications with the Company's significant
vendors to determine the extent to which the Company is vulnerable to any
failures by them to address the Year 2000 issue. The Company is currently
reviewing their responses and preparing follow-up requests where needed. The
Company is expected to complete its contingency plan with respect to its key
vendors by the end of the 3rd quarter of 1999. On a case by case basis, where
the Company determines that it may be at a material adverse risk due to
non-compliance by any of its key vendors, the Company will develop contingency
plans for an alternate source of supply.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
October 31, 1998 (continued)
The Company is in the process of developing a plan to address Year 2000 issues
as they relate to our customers. Non EDP costs to the Company, excluding costs
due to unanticipated third party Year 2000 problems, will principally consist of
internal staff costs, which are not expected to be material.
The Company will incur internal costs as well as consulting and other expenses
related to the Year 2000 problem. Actual results could differ materially from
the Company's expectations due to unanticipated technological difficulties,
vendor delays, and vendor cost overruns. The Company estimates that the cost of
resolving the Year 2000 issues will be less than $250,000 not including internal
staff. Costs associated with new hardware and software are expected to be
capitalized and amortized consistent with the Company's accounting policies.
Consulting and other costs will be expensed as incurred. All Year 2000 costs
will be paid in cash generated from the Company's operations. The Company is
expected to substantially complete its Year 2000 program by the end of the 3rd
quarter of 1999. The cost of the Company's Year 2000 program and the dates
herein are based upon management's best estimates, which were derived utilizing
numerous assumptions of future events, many of which are beyond the Company's
control.
The failure to correct a material Year 2000 problem could result in an
interruption in certain normal business activities or operations of the Company.
Such interruptions could materially and adversely affect the Company's financial
condition, results of operations and cash flows. Based upon current plans and
assumptions, the Company does not expect that the Year 2000 problem will have an
adverse impact on the Company as a whole. Due to the general uncertainty
inherent in the Year 2000 problem, however, there can be no assurance that all
Year 2000 problems will be anticipated and corrected in a timely basis or that
no material disruption to the Company's operations will occur.
Statements in this report that are not descriptions of historical facts may be
forward- looking statements that are made pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements involve
various risks and uncertainties. Actual results could differ materially from
those currently anticipated.
The Company's management believes that its financial resources, operating
revenue and credit line will be sufficient to meet its expected working capital
requirements.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of security holders was held on December 3,
1998. The Company solicited proxies and 3,820,617 shares were
present in person and by proxy.
Set forth is the number of votes cast for, against or withheld
as to each item voted upon.
(i) Election of Directors For Withhold
--------------------- --------- ---------
Bernard Seltzer 3,561,517 259,100
David S. Seltzer 3,561,517 259,100
Reuben Seltzer 3,561,067 259,550
Martin M. Goldwyn 3,561,517 259,100
Yashar Hirshaut,M.D. 3,498,408 322,209
(ii) Approval of the Amendment to the Company's Amended and Restated Stock
---------------------------------------------------------------------
Option Plan
-----------
For Against Abstain
--------- ------- -------
2,120,402 382,611 12,177
(iii) Ratification of the appointment of Richard A. Eisner &
-------------------------------------------------------
Company LLP as the Company's independent auditors for the
---------------------------------------------------------
fiscal year ending April 30, 1999
---------------------------------
For Against Abstain
--------- ------- --------
3,808,993 7,000 4,624
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HI-TECH PHARMACAL CO.,INC.
(Registrant)
Date December 10, 1998
By:
/s/ David Seltzer
- -------------------------------------------
David Seltzer,
(President and Chief Executive Officer)
Date December 10, 1998
By:
/s/ Arthur S. Goldberg
- ------------------------------------------
Arthur S. Goldberg
(Vice President - Finance and Chief Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 3867
<SECURITIES> 0
<RECEIVABLES> 4132
<ALLOWANCES> (256)
<INVENTORY> 4992
<CURRENT-ASSETS> 279
<PP&E> 15530
<DEPRECIATION> (6,069)
<TOTAL-ASSETS> 22664
<CURRENT-LIABILITIES> 4262
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 16201
<TOTAL-LIABILITY-AND-EQUITY> 22664
<SALES> 10392
<TOTAL-REVENUES> 10392
<CGS> 6131
<TOTAL-COSTS> 9082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> 1186
<INCOME-TAX> 500
<INCOME-CONTINUING> 686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 686
<EPS-PRIMARY> $0.15
<EPS-DILUTED> $0.15
</TABLE>
