<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, 1999
[ ] 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 (IRS Employer Identification
of incorporation or organization) No.)
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 - 4,393,000 shares as of December 11, 1999.
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, 1999 and
April 30, 1999.
Condensed statements of operations--Three month and six month
periods ended October 31, 1999 and 1998.
Condensed statements of cash flows--Six month
periods ended October 31, 1999 and 1998.
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
<TABLE>
<CAPTION>
October 31, April 30,
1999 1999
-------------- -------------
(unaudited) (From Audited
Financial
Statements)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,305,000 4,204,000
Accounts receivable, less allowances of
$180,000 at October 31, 1999 and $305,000
at April 30, 1999 4,606,000 4,214,000
Inventories 5,351,000 4,285,000
Prepaid expenses and other receivables 937,000 1,098,000
------------ -----------
TOTAL CURRENT ASSETS 15,199,000 13,801,000
PROPERTY, PLANT AND EQUIPMENT -net 9,470,000 9,204,000
OTHER ASSETS 487,000 205,000
------------ -----------
TOTAL ASSETS $ 25,156,000 23,210,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion - Long-term debt $ 447,000 447,000
Accounts payable and accrued expenses 4,854,000 3,415,000
------------ -----------
TOTAL CURRENT LIABILITIES 5,301,000 3,862,000
LONG-TERM DEBT 780,000 1,003,000
DEFERRED TAXES 1,038,000 1,038,000
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, 1999 and April 30,
1999 45,000 45,000
Additional capital 8,804,000 8,634,000
Retained earnings 9,739,000 8,965,000
Treasury stock, 133,800 and 82,700 shares
of common stock, at cost October 31, 1999
and April 30, 1999, respectively (551,000) (337,000)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 18,037,000 17,307,000
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY $24,156,000 23,210,000
============ ===========
</TABLE>
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,
------------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $6,736,000 6,005,000 11,463,000 10,392,000
Cost of goods sold 3,642,000 3,481,000 6,373,000 6,131,000
---------- ---------- ---------- ----------
Gross profit 3,094,000 2,524,000 5,090,000 4,261,000
Selling, general, administrative
expenses 2,112,000 1,553,000 3,487,000 2,767,000
Research & product development costs 344,000 275,000 635,000 531,000
Contract research (income) (143,000) (147,000) (171,000) (263,000)
Interest expense 31,000 59,000 62,000 124,000
Interest (income) (71,000) (45,000) (161,000) (84,000)
---------- ---------- ---------- ----------
Total 2,273,000 1,695,000 3,852,000 3,075,000
INCOME BEFORE INCOME TAXES 821,000 829,000 1,238,000 1,186,000
Provision for income taxes 308,000 360,000 464,000 500,000
---------- ---------- ---------- ----------
NET EARNINGS $ 513,000 469,000 774,000 686,000
========== ========== ========== ==========
Basic and diluted net earnings
per common share $ 0.12 0.10 0.17 0.15
========== ========== ========== ==========
Weighted average common shares
outstanding - basic income per share 4,399,000 4,496,000 4,416,000 4,505,000
Effect of potential common shares 44,000 8,000 38,000 53,000
---------- --------- ---------- ----------
Weighted average common shares
outstanding - diluted income per
share 4,443,000 4,504,000 4,454,000 4,558,000
========== ========== ========== ==========
</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,
-------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $1,516,000 1,472,000
CASH FLOWS USED IN FINANCING ACTIVITIES
Working capital bank loan - 815,000
Mortgaged property - repayments (95,000) (95,000)
Repayments of equipment debt (128,000) (239,000)
Purchase of common stock (214,000) (125,000)
------------ ----------
CASH (USED IN) PROVIDED (437,000) 356,000
BY FINANCING ACTIVITIES
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and
equipment (947,000) (583,000)
Other assets (31,000) 18,000
------------ ----------
CASH USED IN INVESTING ACTIVITIES (978,000) (565,000)
NET INCREASE (DECREASE) IN CASH 101,000 1,263,000
Cash at beginning of the period 4,204,000 2,604,000
------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,305,000 3,867,000
============ ==========
Supplemental disclosures of cash flow information:
Interest $ 57,000 122,000
Income taxes $ 29,000 250,000
See notes to condensed financial statements
5
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999
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, 1999 are not necessarily indicative of the results that may be expected for
the year ended April 30, 2000. For further information, refer to the financial
statements and footnotes thereto for the year ended April 30, 1999 on Form 10-
KSB.
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 of approximately 433,000 for the six month period ended October 31, 1999,
and approximately 417,000 for the six month period ended October 31, 1998 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, 1999
INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
1999 1999
------------ ---------
Raw materials $ 2,717,000 2,481,000
Finished products and work in process 2,634,000 1,804,000
------------ ---------
$ 5,351,000 4,285,000
============ =========
FIXED ASSETS
The components of net plant and equipment consist of the
following:
October 31, April 30,
1999 1999
------------ -----------
Land and Building $ 4,968,000 4,936,000
Machinery and equipment 10,533,000 10,325,000
Transportation equipment 13,000 13,000
Computer equipment 459,000 428,000
Furniture and fixtures 271,000 266,000
------------ -----------
16,244,000 15,968,000
Depreciation and amortization 7,445,000 6,764,000
------------ -----------
TOTAL FIXED ASSETS 8,799,000 9,204,000
Construction in progress 671,000 -
------------ -----------
$ 9,470,000 9,204,000
============ ===========
7
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999
WORKING CAPITAL REVOLVING LOAN
On June 1, 1999 the Company's working capital credit line expired. The Company
expects to execute a new agreement with the same lender with the same basic
terms. At April 25, 1999 the rate was 6.7% and the balance outstanding was paid.
Borrowings under the line were limited to 80% of eligible receivables and were
collateralized by inventory, accounts receivable and all other assets. The
agreement contained covenants with respect to working capital, net worth and
certain ratios, as well as other covenants and prohibited the payment of cash
dividends.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses consist of the
following:
October 31, April 30,
1999 1999
----------- ---------
Accounts payable $ 3,482,000 2,104,000
Accrued expenses 1,372,000 1,311,000
----------- ---------
$ 4,854,000 3,415,000
=========== =========
CONTINGENCIES AND OTHER MATTERS
In March 1999, the Food & Drug Administration, ("FDA") completed and issued Form
483, "Inspectional Observations", for their inspection of the Company's
facilities. On March 31, 1999, the Company responded to these observations. In
July 1999 the FDA issued a "Warning Letter" which indicated certain areas of
particular concern. The Company responded to the FDA with its Corrective Action
Plan as a result of the Warning Letter. The plan includes the hiring of
additional personnel in certain areas of the Company's operations which will
result in additional overhead expense. In October, the FDA commenced a new
inspection. The Company believes that the results of this inspection and such
additional expense resulting from the Corrective Action Plan will not have a
material adverse affect on the Company's operations or financial condition.
Zenith Goldline Laboratories, an Ivax company, accounted in the aggregate for
approximately 12% of the gross sales and Watson Pharmaceuticals (formerly Rugby
Laboratories) accounted for approximately 11% of the gross sales during the
quarter ended July 31, 1999. These customers aggregated approximately 17% of the
outstanding trade receivables at October 31, 1999.
The Company has invested approximately $210,000 in a joint venture for the
marketing and development of a nutritional supplement. In addition, the Company
has 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. Mr. Reuben Seltzer is the son of Mr. Bernard
Seltzer, Chairman of the Board of the Company.
8
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1999
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. In August 1999 the Company increased the stock buy-back program to an
aggregate of $1,000,000. As of October 31, 1999 the Company had purchased
133,800 shares at a cost of $551,000.
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 no longer has a presence in Connecticut and discontinued
the production and marketing of certain products.
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.
NEW FACILITY
The Company has started the construction of an 8000 square feet building which
will contain its excutive and administrative offices. The estimated cost of this
building is $600,000 and will be financed by a mortgage upon its completion
expected in April 2000.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS October 31, 1999
RESULTS OF OPERATIONS
For the six months ended October 31, 1999 net sales increased by $1,071,000, or
10%, compared to the fiscal 1999 respective period. Total six months net sales
were $11,463,000 for the period ended October 31, 1999. For the three months
ended October 31, 1999 net sales increased by $731,000, or 12%, compared to the
fiscal 1999 respective period. Total three months net sales were $6,736,000 for
the period ended October 31, 1999. Goldline Laboratories accounted for
approximately 9% of the shipments during the quarter, a decrease from 10% for
the quarter ended October 31, 1998. Rugby Laboratories accounted for
approximately 10% of the shipments during the quarter, an increase from 7% for
the respective quarter in fiscal 1999. These customers represented approximately
17% of the outstanding trade receivables at October 31, 1999.
Health Care Products division for the three months ended October 31, 1999 and
1998 had sales of $1,829,000 and $1,425,000, respectively. Health Care Products
division for the six months ended October 31, 1999 and 1998 had sales of
$2,788,000 and $1,858,000, respectively.
Cost of sales, as a percentage of net sales, decreased from 59.0% to 55.6% for
the six months ended October 31, 1999 compared to the six months ended October
31, 1998 and decreased from 58.0% to 54.1% for the three months ended October
31, 1999 compared to the three months ended October 31, 1998. During the six
months ended October 31, 1999 this decrease was principally the result of a
change in product mix.
Research and product development costs for the three months ended October 31,
1999 increased $69,000, or 25.1%, and Contract research income decreased $4,000
compared to the fiscal 1999 respective period.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 31.4% from 25.8% for the respective three month period ended
October 31, 1999 and 1998. This was the result on increased advertising and
additional sales personnel.
Net income for the three months ended October 31, 1999 and 1998 was $513,000 and
$469,000 respectively, an increase of $44,000, because of the factors noted
above. Net income for the six months ended October 31, 1999 and 1998 was
$774,000 and $686,000, respectively, an increase of $88,000, because of the
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations are financed principally by cash flow from operations.
During the period ended October 31, 1999, working capital decreased to
$9,898,000 from $9,939,000 at April 30, 1999. During the six months ended
October 31, 1999 the Company invested $947,000 in fixed assets.
On June 1, 1999 the Company's working capital credit line expired. The Company
expects to execute a new agreement with the same lender with the same basic
terms. At April 25, 1999 the rate was 6.7% and the balance outstanding was paid.
Borrowings under the line were limited to 80% of eligible receivables and were
collateralized by inventory, accounts receivable and all other assets. The
agreement contained covenants with respect to working capital, net worth and
certain ratios, as well as other covenants and prohibited the payment of cash
dividends.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS October 31, 1999 (continued)
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. In August 1999 the Company increased the stock buy-back program to an
aggregate of $1,000,000. As of October 31, 1999 the Company had purchased
133,800 shares at a cost of $551,000.
YEAR 2000 COMPLIANCE
As the millennium approaches, the Company has assessed all of its computer
systems to ensure that they are "Year 2000" compliant. Management of the Company
has completed 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 has replaced or
upgraded certain systems which were not Year 2000 compliant in order to meet its
internal needs and those of its customers. The Company has completed its Year
2000 project 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
did not have a material financial impact.
The Company's program included 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 has completed its
contingency plan with respect to its key vendors. 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 has developed contingency
plans for an alternate source of supply.
Non EDP costs to the Company, excluding costs due to unanticipated third party
Year 2000 problems, have consisted of internal staff costs which are not
material.
The Company has incurred internal costs as well as consulting and other expenses
related to the Year 2000 problem. Results could differ materially from the
Company's expectations due to unanticipated technological difficulties, vendor
delays, and vendor cost overruns. Costs associated with new hardware and
software have been capitalized and amortized consistent with the Company's
accounting policies. Consulting and other costs have been expensed as incurred.
All Year 2000 costs will be paid in cash generated from the Company's
operations. The Company has completed its Year 2000 program.
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 and operating
revenues 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 8, 1999. The
Company solicited proxies and 3,909,054 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 3,894,632 14,422
David S. Seltzer 3,779,632 129,422
Reuben Seltzer 3,779,632 129,422
Martin M. Goldwyn 3,780,132 128,922
Yashar Hirshaut,M.D. 3,779,962 129,092
(ii) 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
--------- ------- -------
3,781,454 123,900 3,700
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 11, 1999
By:
/s/ David Seltzer
- -------------------------------------------
David Seltzer,
(President and Chief Executive Officer)
Date December 11, 1999
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> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 4305
<SECURITIES> 0
<RECEIVABLES> 4786
<ALLOWANCES> (180)
<INVENTORY> 5351
<CURRENT-ASSETS> 937
<PP&E> 16915
<DEPRECIATION> (7,445)
<TOTAL-ASSETS> 25156
<CURRENT-LIABILITIES> 5301
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 17992
<TOTAL-LIABILITY-AND-EQUITY> 25149
<SALES> 6736
<TOTAL-REVENUES> 6736
<CGS> 3642
<TOTAL-COSTS> 5884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 821
<INCOME-TAX> 308
<INCOME-CONTINUING> 513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513
<EPS-BASIC> $0.12
<EPS-DILUTED> $0.12
</TABLE>
