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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended April 30, 1999
Commission File Number 0-20424
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Hi-Tech Pharmacal Co., Inc.
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(Name of small business issuer in its charter)
Delaware 11-2638720
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(State or other jurisdiction of (I.R.S.Employer Identification
incorporation or organization) Number)
369 Bayview Avenue, Amityville, New York 11701
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(Address of principal executive offices) (Zip Code)
(516) 789-8228
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _____
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year ended April 30, 1999 were
$23,266,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on July 28, 1999, based upon the price at which such stock was sold on
that date, was $12,360,305. The number of shares of Common Stock of the issuer
outstanding as of July 28, 1999 was 4,526,717.
Transitional Small Business Disclosure Format: Yes _____; No X
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PART I
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ITEM 1. BUSINESS.
General
Hi-Tech Pharmacal Co., Inc., a Delaware corporation, incorporated in
April 1983, 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), primarily for
the diabetic marketplace. These products are sold in liquid and semi-solid
(creams, ointments, suppositories and gels) dosage forms. The Company also is a
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
chain drug stores, drug wholesalers, generic distributors, 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, cold and asthma remedies,
decongestants, analgesics, nutritional products, antacids and neurological
products.
Products
The Company currently markets in excess of 75 generic products to
approximately 200 customers. For the fiscal year ended April 30, 1999 the
Company's sales were approximately 43% for the private label market,
approximately 38% for the brand names H-T(TM) and Rx Choice(TM) and
approximately 19% 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 61% of the Company's revenues of the Steri-Med
Division for the fiscal year ended April 30, 1999 were from the sale of one
generic drug product. The Company's Steri-Med Division is currently engaged in
contract manufacturing for customers of various products to meet customer
specifications.
The Company's Health Care Products Division currently is a leading
marketer and distributor of 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 Formula and Herbal Cold
Formula. The Company's
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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 22 products. The Company used the ANDA procedure to obtain FDA
approval for the manufacture of two new products in fiscal 1999. In October
1998, the Company received ANDA approval from the FDA to manufacture and market
Promethazine Hydrochloride Syrup USP 6.25mg/5ml, equivalent to Phenergan(R)
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. In February 1998, the Company received FDA approval for Albuterol
Sulfate Inhalation 0.83%, equivalent to Proventil(R) Inhalation Solution,
manufactured by Schering Corp., and used in the treatment of asthma. 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)/5mL,
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>
<S> <C>
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Examples of Competing
Company Product National Products
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Prescription Drugs
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Cough/Cold/Decongestants/Asthma
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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 Inhalation 0.83%* Proventil(R) Inhalation Solution
Albuterol Sulfate Syrup* Ventolin(R) Syrup
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Vitamins - Prescription
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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)
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Other Products
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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*
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* ANDA approved pharmaceutical product
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------- -----------------------------
Examples of Competing
Company Product National Products
- -------------------------------------------------- -----------------------------
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
Sulfamethoxazole and Trimethoprin Pediatric Bactrim(R) Pediatric Suspension
Suspension*
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Over-the-Counter Pharmaceuticals
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Vitamins and Nutritional Supplements
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Poly-Vitamin Drops Poly-Vi-Sol(R) Drops
Poly-Vitamin Drops with Iron Poly-Vi-Sol(R) with Iron
Golden Age Liquid Vitamins & Minerals Centrum(R) Liquid
Ferrous Sulfate Solution Drops Fer-in-Sol(R) Drops
Dalyvite Syrup Vi-daylin(R) Syrup
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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>
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* ANDA approved pharmaceutical product
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Company Product
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Branded Products
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Health Care Products
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
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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
prescription pharmaceutical 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, 1999 and 1998, total research and development
expenditures were $1,124,000 and $1,003,000, 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 recent years the Company has realized significant
opportunities from its research and development efforts, including ANDA approval
from the FDA in October 1998 to manufacture and market Promethazine
Hydrochloride Syrup USP 6.25 mg/5ml, equivalent to Phenergan(R) Syrup,
manufactured by Wyesth Ayerst and used in the treatment of temporary relief of
coughs and upper respiratory symptoms associated with allergy and the common
cold. In addition, in February 1998, the Company received FDA approval for
Albuterol Sulfate Inhalation 0.83%, equivalent to Proventil(R) Inhalation
Solution, manufactured by Schering Corp. and used in the treatment of asthma.
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
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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.
The Company has 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. Several of these products require 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, otic and other
products requires a sterile environment. The Company has executed contract
manufacturing agreements to develop and manufacture ANDA and other
pharmaceutical products in its sterile facility. The Company has produced
twelve 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's Steri-Med Division
currently manufactures two of its leading prescription asthma products,
Albuterol Sulfate Inhalation 0.5% and Albuterol Sulfate Inhalation 0.83%, as
well as several over-the-counter opthalmic products in its state of the art
sterile facility. The Company expects to manufacture many products in this
facility in the future.
The Company's product line includes suppositories, other than
glycerine, creams and ointments and strengthens its product development
programs. The Company manufactures generic equivalents of products, such as
American Home Products' Preparation H Suppositories and Creams, Parke Davis'
Anusol, Thompson Medical's Cortisone 10 and CIBA Consumer Products' Dulcolax
Suppositories. The Company's sales from these products in fiscal 1999 were
approximately $719,000.
The Company and Reuben Seltzer, a director of the Company, each has a
22.85% 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-A and analogues from the Mayo Clinic. Huperzine-A is a naturally
derived compound belonging to a class known as acetylcholinesterase inhibitors.
Huperzine-A has been shown to inhibit the enzyme responsible for the breakdown
of acetylcholine,
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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-A as a dietary supplement under the Dietary Supplement
Health and Education Act of 1994 and to develop analogues and derivatives to
Huperzine-A. Marco Hi-Tech JV Ltd. is currently marketing its own brand of
Huperzine-A under the tradename Cerebra(TM) and 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 Company sells its generic products to over 200 active accounts
located throughout the United States. For the fiscal year ended April 30, 1999,
Rugby Laboratories, a division of Watson Laboratories, accounted for
approximately 11% of the Company's sales. For the fiscal year ended April 30,
1998, Rugby Laboratories, a division of Watson Laboratories, and Zenith/Goldline
Laboratories accounted for approximately 21% and 11%, 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 56% and 61% of the Company's total
sales for each of the fiscal years ended April 30, 1999 and 1998, 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 prescription
pharmaceutical products under H-T(TM) and its generic over-the-counter products
under Rx Choice(TM). The Health Care Products Division sells and markets its
products under the Company's brand names. For the fiscal year ended April 30,
1999, the products sold under the H-T(TM) brand name and under the Health Care
Products Division accounted for approximately 38% and 19% 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. Services offered range from research and development to
finished product distribution.
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
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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 19% and 18% of the Company's
total sales for fiscal 1999 and fiscal 1998, respectively.
The Company markets such products by, among other things, more
contemporary packaging to improve point-of-purchase impact, media, trade and
consumer journal advertising to increase consumer appeal, as well as extensive
price, display, packaging, bonus, multi-pak, coupon promotions and professional
and consumer sampling programs. The Company has expanded its marketing strategy
with programs to include a major telemarketing campaign and Internet strategy.
The Company's websites are www.hitechpharm.com. and 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 respond quickly to changes in customer needs. The Company has a
total of six 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 has completed a $1
million capital expansion and improvement program which includes the purchase of
additional mixing tanks, holding tanks and a new high speed automated liquid
filling line.
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. 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 uses a portion of the space
to accommodate the Rose Laboratories Division. The Company has consolidated 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,
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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 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
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marketed. The Company currently has pending submissions for FDA approval of
eight generic formulations. The Company has received, as of July 1999, through
the ANDA procedure, approval for 22 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), 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
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received DEA approval and is manufacturing and selling eleven cough syrup
products containing codeine. The DEA also has extensive enforcement powers,
including the power to seize and prohibit the manufacture and sale of
noncomplying products. The narcotic products which the Company presently
manufactures and markets do not require specific FDA approval.
Product Liability
The sale of pharmaceutical products can expose the manufacturer of
such products to product liability claims by consumers. A product liability
claim, if successful and in excess of the Company's insurance coverage, could
have a material adverse effect on the Company's financial condition. No product
liability suit has ever been filed against the Company. The Company maintains a
product liability insurance policy which provides coverage in the amount of
$5,000,000 per claim and in the aggregate, with a $100,000 deductible.
Employees
As of April 30, 1999, the Company employed 134 full-time persons, of
whom 22 were engaged in executive, financial and administrative capacities; 4 in
marketing, sales and service; 71 full-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 is 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
13
<PAGE>
$500,000. There is a first mortgage on the property in the original amount of
$375,000. The Company's four facilities in Amityville, New York total
approximately 130,000 square feet.
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 was 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, alleged, 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. In June 1999 the Court of Appeals of the State of
California affirmed the lower court's demurrer and dismissal of the claim
against the Company.
The Company is not a party to any 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, 1999.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK.
Market Information
The following table sets forth the high and low sales prices for the
Company's common stock for the periods indicated, as reported by Nasdaq. The
quotations are inter-dealer prices, without retail mark-up, mark-down or
commissions paid, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
Fiscal 1998
-----------
<S> <C> <C>
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
Fiscal 1999
-----------
July 31, 1998 6.44 5.00
October 31, 1998 5.38 3.50
January 31, 1999 5.13 3.88
April 30, 1999 5.00 3.44
</TABLE>
As of July 28, 1999 the closing price of the Common Stock on the
Nasdaq National Market System was $4.25.
Common Stock Holders
The Company believes there are approximately 1,150 holders of Common
Stock, including shares held in street name by brokers.
Dividends
The Company has never declared or paid any cash dividends, and it does
not anticipate that it will pay cash dividends in the foreseeable future. The
declaration of dividends by the Company in the future is subject to the sole
discretion of the Company's Board of Directors and will depend upon the
operating results, capital requirements and financial position of the Company,
general economic conditions and other pertinent conditions or restrictions
relating to any financing. The Company's loan agreement prohibited the
payment of cash dividends by the Company.
15
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
- --------
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Report.
The following table sets forth, for all periods indicated, the
percentage relationship that items in the Company's Statements of Operations
bear to net sales.
YEAR ENDED APRIL 30,
----------------------
1999 1998
-------- -------
Net Sales 100.0% 100.0%
Cost of Sales 56.8% 58.5%
-------- --------
Gross profit 43.2% 41.5%
Selling, general & administrative expense 26.9% 24.5%
Research & development costs 4.8% 4.5%
Contract research (income) (1.4)% (1.0)%
Interest expense 0.9% 1.2%
Interest (income) and other (0.9)% (0.4)%
-------- --------
Total expenses 30.3% 28.8%
-------- --------
Income before tax provision 12.9% 12.7%
Income tax provision 4.8% 4.9%
-------- --------
Net income 8.1% 7.8%
======== ========
RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 1999 AND 1998
For the fiscal year ended April 30, 1999 ("Fiscal 1999"), net sales
increased by $900,000, or 4.0% to $23,266,000 from $22,366,000 for the fiscal
year ended April 30, 1998 ("Fiscal 1998"). The increase was primarily the result
of the introduction of new products in Fiscal 1999. Of the $900,000 increase in
sales, approximately $600,000 was from the Health Care Products Division.
Cost of sales, as a percentage of net sales,decreased from 58.5% for
Fiscal 1998 to 56.8% for Fiscal 1999. In the aggregate, labor and overhead
expense, including the sterile manufacturing facility, increased less than
increased sales as a result of the mix of products sold. Future sterile
manufacturing and sales could reduce the unit cost of sales.
16
<PAGE>
Selling General and Administrative expenses, as percentage of net
sales increased from 24.6% to 26.9%, or increased to $6,262,000 for Fiscal 1999
from $5,497,000 for Fiscal 1998 resulting from increased advertising and sales
promotions.
Research and development costs increased to $1,124,000 or 4.8% of
sales for Fiscal 1999 from $1,003,000 or 4.5% of sales for Fiscal 1998 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 $1,878,000 for Fiscal 1999 from net income
of $1,735,000 for Fiscal 1998, 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, 1999 and April 30, 1998,
working capital was approximately $9,939,000 and $8,321,000, respectively.
Accounts payable decreased 2% from $2,157,000 for Fiscal 1998 to $2,104,000 for
Fiscal 1999.
Accrued expenses increased 38% from $953,000 for Fiscal 1998 to
$1,311,000 for Fiscal 1999 as a result of the increased levels of sales
promotion and support expenses.
Cash flows from operating activities were approximately $3,355,000,
which was the result principally of net income and depreciation of $3,233,000.
Cash flows used in investing activities were approximately $1,022,000 from
operating activities funds and were principally payments for fixed assets
acquired. Cash flows used for financing activities approximated $733,000 and
resulted from the retirement of $447,000 of debt and the acquisition of Treasury
stock in the amount of $286,000.
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.
The Company believes that its financial resources consisting of
current working capital, anticipated future operating revenue and its expected
credit line will be sufficient to enable it to meet its working capital
requirements for at least the next 12 months.
17
<PAGE>
YEAR 2000 COMPLIANCE
- --------------------
The Company relies on computer technology throughout its business to effectively
carry out its day-to-day operations. 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 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 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 September 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.
The Company is in the process of developing a plan to address Year 2000 issues
as they relate to its 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 is expected to substantially complete its Year 2000 program by the
end of September 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.
18
<PAGE>
YEAR 2000 COMPLIANCE (continued)
- -------------------------------
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.
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.
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended
April 30, 1999 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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales............................. $23,266,000 22,366,000 20,534,000 19,140,000 16,406,000
-------------- ----------- ------------- ----------- ----------
Costs and expenses:
Costs of goods sold................... 13,210,000 13,084,000 13,278,000 11,785,000 9,691,000
Research and development.............. 1,124,000 1,003,000 960,000 933,000 711,000
Selling, general and
administrative...................... 6,262,000 5,497,000 4,862,000 4,601,000 3,419,000
Contract research (income)............ (336,000) (228,000) (178,000) (467,000) (293,000)
Interest expense...................... 220,000 268,000 340,000 149,000 157,000
Interest (income) and other........... (210,000) (93,000) (55,000) (67,000) (82,000)
-------------- ----------- ------------- ----------- ----------
20,270,000 19,531,000 19,207,000 16,934,000 13,603,000
-------------- ----------- ------------- ----------- ----------
Income (loss) before provision
for income taxes...................... 2,996,000 2,835,000 1,327,000 2,206,000 2,803,000
Provision for income taxes............... 1,118,000 1,100,000 510,000 871,000 1,072,000
-------------- ----------- ------------- ----------- ----------
Net income (loss)........................ $ 1,878,000 1,735,000 817,000 1,335,000 1,731,000
============== =========== ============= =========== ==========
Basic earnings (loss) per share (1) $0.42 $0.38 $0.18 $0.30 $ 0.39
============== =========== ============= =========== ==========
Diluted earnings (loss) per share (1) $0.42 $0.38 $0.18 $0.29 $ 0.38
============== =========== ============= =========== ==========
Weighted average common shares
outstanding basic earnings
per share(1)............................. 4,487,000 4,516,000 4,526,000 4,411,000 4,450,000
Effect of potential common shares........ 32,000 64,000 73,000 156,000 141,000
Weighted average common shares
outstanding basic earnings -------------- ----------- ------------- ----------- ----------
per share(1)............................. 4,519,000 4,580,000 4,599,000 4,567,000 4,591,000
-------------- ----------- ------------- ----------- ----------
APRIL 30,
-----------------------------------------------------------------------
1999 1998(1) 1997 (1) 1995 1994
-----------------------------------------------------------------------
Balance sheet data:
Working capital....................... $ 9,939,000 8,321,000 6,422,000 5,417,000 4,241,000
Total assets.......................... $23,210,000 21,622,000 21,282,000 20,487,000 18,404,000
Long-term debt........................ $ 1,003,000 1,450,000 1,896,000 2,427,000 3,026,000
Stockholders' equity.................. $17,307,000 15,685,000 14,001,000 13,171,000 11,266,000
</TABLE>
(1) Certain balance sheet accounts and disclosures have been changed to
conform to current year classification
20
<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 balance sheets of Hi-Tech Pharmacal
Co., Inc. as of April 30, 1999 and April 30, 1998 (consolidated) 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 financial position of Hi-Tech Pharmacal
Co., Inc. as of April 30, 1999 and April 30, 1998 (consolidated) 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 14, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
BALANCE SHEETS
APRIL 30,
------------------------------------------------
1999 1998
-------------------------- -------------------
(Consolidated)
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 4,204,000 2,604,000
Accounts receivable (less allowances for doubtful accounts of $305,000
at April 30, 1999 and $226,000 at April 30, 1998)................. 4,214,000 4,133,000
Inventory.......................................................... 4,285,000 4,683,000
Prepaid taxes...................................................... 669,000 67,000
Other current assets............................................... 429,000 391,000
------------------------- ------------------
TOTAL CURRENT ASSETS............................................... 13,801,000 11,878,000
Property and equipment at cost, net of accumulated depreciation and
amortization...................................................... 9,204,000 9,537,000
Other assets....................................................... 205,000 207,000
------------------------- ------------------
T O T A L.......................................................... $ 23,210,000 21,622,000
========================= ==================
L I A B I L I T I E S
CURRENT LIABILITIES:
Note payable - bank................................................ - -
Current portion of long-term debt.................................. 447,000 447,000
Accounts payable................................................... 2,104,000 2,157,000
Accrued expenses................................................... 1,311,000 953,000
------------------------- ------------------
TOTAL CURRENT LIABILITIES.......................................... 3,862,000 3,557,000
Long-term debt (less current portion).............................. 1,003,000 1,450,000
Deferred taxes..................................................... 1,038,000 930,000
------------------------- ------------------
TOTAL LIABILITIES.................................................. 5,903,000 5,937,000
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......................................... 8,634,000 8,604,000
Retained earnings.................................................. 8,965,000 7,087,000
Treasury stock, 82,700 and 13,500 shares of common stock, at cost
April 30, 1999 and 1998, respectively............................. (337,000) (51,000)
------------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY......................................... 17,307,000 15,685,000
------------------------- ------------------
T O T A L.......................................................... $ 23,210,000 21,622,000
========================= ==================
See notes to Financial Statements.
</TABLE>
F-3
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
-----------------------------------
1999 1998
-------------- ------------
NET SALES.................. $23,266,000 22,366,000
Cost of goods sold......... 13,210,000 13,084,000
-------------- ------------
GROSS PROFIT............... 10,056,000 9,282,000
-------------- ------------
Selling, general and
administrative expense.... 6,262,000 5,497,000
Research and product
development costs......... 1,124,000 1,003,000
Contract research (income). (336,000) (228,000)
Interest expense........... 220,000 268,000
Interest (income) and other (210,000) (93,000)
-------------- ------------
T O T A L.................. 7,060,000 6,447,000
-------------- ------------
Income before income taxes. 2,996,000 2,835,000
Provision for income taxes. 1,118,000 1,100,000
-------------- ------------
NET INCOME................. $ 1,878,000 1,735,000
============== ============
BASIC INCOME PER SHARE..... $0.42 0.38
============== ============
DILUTED INCOME PER SHARE $0.42 0.38
============== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
BASIC INCOME PER SHARE... 4,487,000 4,516,000
EFFECT OF POTENTIAL COMMON
SHARES.................... 32,000 64,000
-------------- ------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
DILUTED INCOME PER
SHARE................... 4,519,000 4,580,000
============== ============
See notes to Financial Statements.
F-4
<PAGE>
HI-TECH PHARMACAL CO., INC.
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, 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
----------- --------- -------------- ---------- ---------- -----------
Net income................. - - - 1,878,000 1,878,000
Consulting exspense attributable
to options................. - - 30,000 - - 30,000
Treasury stock............. - - - - (286,000) (286,000)
----------- --------- -------------- ---------- ---------- -----------
BALANCE - APRIL 30, 1999... 4,526,000 $ 45,000 8,634,000 8,965,000 (337,000) 17,307,000
=========== ========= ============== ========== ========== ===========
</TABLE>
See notes to Financial Statements.
F-5
<PAGE>
HI-TECH PHARMACAL CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30,
-------------------------
1999 1998
------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 1,878,000 1,735,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................. 1,355,000 1,262,000
Valuation of options for consulting............ 30,000 -
Deferred income taxes.......................... 108,000 180,000
Provision for doubtful accounts................ 79,000 66,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable.......................... (160,000) (165,000)
Inventory.................................... 398,000 (669,000)
Prepaid taxes................................ (602,000) 409,000
Other current assets......................... (38,000) 157,000
Other assets................................. 2,000 (88,000)
Accounts payable............................. (53,000) (227,000)
Accrued expenses............................. 358,000 46,000
NET CASH PROVIDED BY OPERATING ------------- ----------
ACTIVITIES............................... 3,355,000 2,706,000
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for fixed assets........................... (1,022,000) (693,000)
------------- ----------
NET CASH (USED IN) INVESTING ACTIVITIES.... (1,022,000) (693,000)
------------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments - long-term debt and notes payable........ (447,000) (1,343,000)
Repayment for treasury stock....................... (286,000) (51,000)
------------- ----------
NET CASH (USED IN) FINANCING ACTIVITIES.... (733,000) (1,394,000)
------------- ----------
NET INCREASE IN CASH.................................. 1,600,000 619,000
Cash and cash equivalents at beginning of period...... 2,604,000 1,985,000
------------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 4,204,000 2,604,000
============= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................... $ 226,000 258,000
Income taxes..................................... $ 1,631,000 511,000
See notes to Financial Statements.
F-6
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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:
---------------------------
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, no longer
produces, or markets certain products or uses the name Rose Laboratories, Inc.
The financial statements include the accounts of the Company and
its wholly owned subsidiary, Rose Laboratories Inc. ("Rose") though the date of
sale. 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.
(continued)
F-7
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
[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] Advertising Expense:
-------------------
Advertising costs are exspensed when first shown. Advertising expense for the
years ended April 30, 1999 and 1998 amounted to $1,100,000 and $896,000,
respectively.
[8] Cash and cash equivalents:
-------------------------
The Company considers U.S. Treasury bills and government agency obligations with
a maturity of three months or less when purchased to be cash equivalents.
[9] Net income per share:
--------------------
In a prior year 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. EPS amounts for fiscal periods prior to adoption of SFAS 128 have
been restated to conform to the requirements of SFAS No. 128.
[10] 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.
[11] 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 reporting period.
Actual results could differ from those estimates.
(continued)
F-8
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
[12] 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]).
(NOTE B) - Inventory:
- ---------------------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Finished goods and
work in process................................... $1,804,000 2,029,000
Raw materials..................................... 2,481,000 2,654,000
---------- ---------
T o t a l......................................... $4,285,000 4,683,000
========== =========
</TABLE>
(continued)
F-9
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(NOTE C) - Property and Equipment:
- ---------------------------------
The components of net property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Land and building and improvements................ $ 4,936,000 4,638,000
Machinery and equipment........................... 10,325,000 9,755,000
Transportation equipment.......................... 13,000 13,000
Computer equipment................................ 428,000 375,000
Furniture and fixtures............................ 266,000 165,000
----------- ----------
15,968,000 14,946,000
Accumulated depreciation and amortization......... 6,764,000 5,409,000
----------- ----------
Total property and equipment...................... $ 9,204,000 9,537,000
=========== ==========
</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 $137,000. The Company has guaranteed $1,500,000 of revolving debt
of this joint venture to its lender. Mr. Reuben Seltzer, a director of the
Company, has an ownership interest in the joint venture and is the son of Mr.
Bernard Seltzer, Chairman of the Board of the Company. The operations of the
joint venture were not material.
(continued)
F-10
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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.
(NOTE F) - Note Payable - Bank:
- ------------------------------
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.
(NOTE G) - Long-Term Debt:
- --------------------------
Long-term debt consists of the following: APRIL 30,
------------------------
1999 1998
--------- ----------
Mortgage payable (1)............................. 181,000 219,000
Mortgage payable (2)............................. 400,000 492,000
Mortgage payable (3)............................. 205,000 265,000
Equipment term loan - collateralized by the
related equipment purchased, inventory,
and accounts receivable and other assets (4)..... 664,000 921,000
---------- ----------
T o t a l 1,450,000 1,897,000
Less current portion............................. 447,000 447,000
---------- ----------
Long-term debt...................................$ 1,003,000 1,450,000
========== ==========
[1] 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, 7.75% at
April 30, 1999.
[2] 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, 7.75% at
April 30, 1999.
[3] The mortgage is payable in monthly installments of $5,000 plus interest at
8.26% per annum through September 2002.
[4] The equipment term loan bears interest at 1/2% above the bank's prime
lending rate, 7.75% at April 30, 1999. The loan requires monthly payments
of principal in the amount of $21,429 plus interest.
(continued)
F-11
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(NOTE G) - Long-Term Debt: - (continued)
----------------------------------------
Long-term debt is payable as follows:
----------------------------------------
2000.................................. 447,000
2001.................................. 447,000
2002.................................. 340,000
2003.................................. 154,000
2004.................................. 62,000
----------
T o t a l............................. $1,450,000
==========
(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 $216,000 and $289,000
for the year ended April 30, 1999 plus annual cost of living increases
thereafter.
The Company utilizes the services of Reuben Seltzer, 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 each of the fiscal years 1999 and
1998 he received fees and expense reimbursements of $50,000. In addition the
Company granted him 25,000 stock options at an exercise price of $3.69 and
vesting at 20% per annum and exercisable through April 1, 2009. The Company
valued these options at $30,000 which was charged to operations.
(continued)
F-12
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(NOTE I) - Commitments and Contingencies:
- ----------------------------------------
[1] Government regulation:
---------------------
The Company's products and facilities are subject to regulation by a number of
Federal and State governmental agencies. The FDA, in particular, maintains
oversight of the formulation, manufacture, distribution, packaging and labeling
of all of the Company's products. Pending regulatory matters are not expected to
have a material effect on the Company's financial condition.
[2] Employment agreements:
---------------------
The Company has a 30 month employment agreement ending April 30, 2000 with an
employee which provides for an annual initial salary of $200,000 through October
20, 1999. In addition, it provides for a bonus based upon the net sales and net
after tax profits of the Company.
The Company has a two year employment agreement with an employee which provides
for an annual salary of $119,000 plus annual cost of living increases, which
expires in August, 2000.
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. Rental expense for the fiscal year ended April 30, 1999
was approximately $202,000.
Future minimum payments by year are as follows:
2000............................................. 176,000
2001............................................. 183,000
2002............................................. 190,000
2003 ............................................ 148,000
---------
T o t a l........................................ $697,000
=========
[4] Litigation:
----------
On June 30,1999, the Company and its President were found not liable for any
damages with regard to an action commenced by a shareholder in November 1994.
The Company is not a party to any material litigation.
(continued)
F-13
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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,
----------------------------------
1999 1998
---------------- ------------
Current:
Federal....................... $ 940,000 841,000
State......................... 70,000 79,000
Deferred:
Federal....................... 99,000 169,000
State......................... 9,000 11,000
---------------- ------------
T o t a l........................ $ 1,118,000 1,100,000
================ ============
[2] Expected tax expense based on the statutory rate is reconciled with actual
tax expense as follows:
YEAR ENDED
APRIL 30,
-------------------
1999 1998
------- -----
Statutory rate...................................... 34.0% 34.0%
State income tax, net of federal income tax benefit 2.6% 2.1%
Other............................................... 0.7% 2.7%
------- -----
Effective tax rate.................................. 37.3% 38.8%
======= =====
(continued)
F-14
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(NOTE K) - Income Taxes (continued) :
- ------------------------------------
[3] Deferred tax expense is composed of the following:
YEAR ENDED APRIL 30,
-----------------------
1999 1998
------------ ----------
Depreciation and amortization..... $100,000 125,000
Inventory uniform capitalization.. - ( 4,000)
Other, net........................ 8,000 59,000
------------ ----------
$108,000 180,000
============ ==========
[4] The deferred tax liability at April 30, 1999 and 1998 relates principally
to depreciation and inventory uniform capitalization.
(NOTE L) - Common Stock:
- -----------------------
[1] Stock Option Plans:
------------------
The Company's 1992 Stock Option Plan, as amended, (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 1,175,000
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-15
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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, 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
======= =====
Granted 139,850 $3.688
Cancelled ( 6,150) $5.050
------- ------
Outstanding at April 30, 1999 781,125 $4.950 456,763 $5.40
======== ====== ======= =====
</TABLE>
As of April 30, 1999, 376,275 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding options
is 6.9 years and the range of exercise prices is from $3.69 to $7.17.
(continued)
F-16
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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, 1997 25,500 $6.280 5,625 $7.12
Granted 10,000 $5.375
---------- ---------
Outstanding at April 30, 1998 35,500 $6.038 12,000 $6.68
Granted 10,000 $4.250
---------- ---------
Outstanding at April 30, 1999 45,500 $5.17 22,250 $5.58
---------- ========= ========== =====
</TABLE>
As of April 30, 1999, 54,500 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding
options is 7.6 years and the range of exercise prices is from $4.25 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 Company's
net profit for the years ended April 30, 1999 and April 30, 1998, would have
been as follows:
YEAR ENDED APRIL
30,
--------------------
1999 1998
---------- ---------
Net income:
As reported $1,878,000 1,735,000
Proforma under SFAS 123 $1,712,000 1,619,000
Earnings per share:
As reported $ 0.42 0.38
Proforma under SFAS 123 $ 0.38 0.36
(continued)
F-17
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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:
1999 1998
----------- ---------
Risk-free interest rate 4.12%-5.12% 5.36%
Expected life of options 5.00 5.00
Expected stock price volatility 67.00% 65.00%
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 1999 and 1998 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 1998. The weighted average fair value of options granted is $2.24 in
fiscal 1999 and $3.13 in fiscal 1998.
[5] Stock buy-back program:
- ---------------------------
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 April 30, 1999 the Company had purchased 82,700 shares at a cost of
$337,000.
(NOTE M) - Significant Customers and Concentration of Credit Risk:
- -----------------------------------------------------------------
One major customer accounted for net sales of approximately 11% and 21% for the
years ended April 30, 1999 and April 30, 1998, respectively. This customer
represented approximately 9% of the outstanding trade receivables at April 30,
1999. In 1998 a second customer accounted for approximately 11% of sales. Cash
in excess of Federal Deposit Insurance Company limitations may be held in
certain banks.
(continued)
F-18
<PAGE>
HI-TECH PHARMACAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1999 AND APRIL 30, 1998
(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 contributed $69,000 and $49,000, respectively, for fiscal
years 1999 and 1998.
(NOTE O) - YEAR 2000 COMPLIANCE
- -------------------------------
The Company relies significantly on computer technology throughout its business
to effectively carry out its day-to-day operations. 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-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Board of Directors consists of five members. All Directors are
elected at each Annual Meeting of Shareholders and hold office until the next
Annual Meeting of Shareholders when their respective successors are duly elected
and qualified.
Set forth below is the name and age of each Director, his position
with the Company and his principal occupation during the past five years and the
year in which each Director was first elected as a Director of the Company.
<TABLE>
<CAPTION>
Principal Occupation Elected
Name of Director and other Directorships Age to the
Board
- ------------------------ ------------------------------ -------- ------------
<S> <C> <C> <C>
Bernard Seltzer Bernard Seltzer has been Chairman of the 75 1983
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>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Elected
Name of Director and other Directorships Age to the
Board
- ------------------------ ------------------------------ -------- ------------
<S> <C> <C> <C>
David S. Seltzer David S. Seltzer has been Chief Executive 39 1992
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 the 43 1992
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.
Martin M. Goldwyn Martin M. Goldwyn was elected a Director of 47 1992
the Company in May 1992. Mr. Goldwyn is a
member in the law firm of Tashlik, Kreutzer
& Goldwyn P.C. Mr. Goldwyn received a
B.A. in finance from New York University in
1974 and a Juris Doctor from New York Law
School in 1977.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Elected
Name of Director and other Directorships Age to the
Board
- ------------------------ ------------------------------ -------- ------------
<S> <C> <C> <C>
Yashar Hirshaut, M.D. Yashar Hirshaut has been a Director of the 61 1992
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>
23
<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.
<TABLE>
<CAPTION>
Name Age Position and Period Served
- -------------------- ------- -----------------------------------------------------------
<S> <C> <C>
Bernard Seltzer 75 Chairman of the Company since January 1990.
David S. Seltzer 39 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.
Martin S. Knopf 53 Chief Operating Officer of the Company since October
1998. Mr. Knopf held the position of President and
Chief Executive Officer of the health care consulting
firm of Knopf Associates from 1987 to 1998. Mr.
Knopf also served as President and Chief Operating
Officer of two related companies, Permeable
Technologies, Inc. and The LifeStyle Company, Inc.
and Executive Vice President and Chief Operating
Officer of PolyVue Technologies from 1987 to 1998.
Elan Bar-Giora 55 Executive Vice President-Operations of the Company
since July 1992 and Vice President-Operations of the
Company since August 1990.
Arthur S. Goldberg 57 Vice President-Finance and Chief Financial Officer of
the Company since September 1991.
</TABLE>
Significant Employees
<TABLE>
<CAPTION>
Name Age Position and Period Served
- -------------------- ------ -------------------------------------------------------
<S> <C> <C>
Gennaro P. Caccavale 52 Director of Operations since February
1992.
Michael McConnell 41 Director of Product Development since January
1992.
Gary M. April 42 President of Health Care Products Division
since May 1998 and Divisional Vice
President of Sales since January 1993.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name Age Position and Period Served
- -------------------- ------ -------------------------------------------------------
<S> <C> <C>
Suzanne Fenton 44 Director of Compliance since September 1995.
Jesse Kirsh 40 Director of Quality Assurance since March 1994.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors and Executive Officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, Directors and greater than ten percent shareholders are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file. The Company believes that all
Section 16(a) filing requirements were met during Fiscal 1999, except for a
filing of Form 5 by Yashar Hirshaut MD which was not timely filed. In making
this statement, the Company has relied on the written representations of its
incumbent directors and officers and copies of the reports that they have filed
with the Securities and Exchange Commission and Nasdaq.
ITEM 10. EXECUTIVE COMPENSATION.
The following table shows, for the fiscal years ended April 30, 1999,
1998 and 1997, the compensation paid or accrued by the Company to or for each of
the executive officers of the Company.
25
<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 1999 216,000 9,000 -- 0 0
Chairman 1998 199,000 18,000 -- 0 4,420
1997 186,000 16,000 -- 0 3,910
David S. Seltzer 1999 289,000 9,000 -- 50,000 3,300
President, Chief 1998 236,000 18,000 -- 50,000 3,207
Executive Officer, 1997 186,000 16,000 -- 50,000 3,175
Secretary and Treasurer
Martin S. Knopf (4) 1999 106,000 0 -- 0 0
Chief Operating Officer 1998 0 0 -- 0 0
1997 0 0 -- 0 0
Elan Bar-Giora 1999 121,000 0 -- 10,000 1,715
Executive Vice 1998 100,000 17,000 -- 10,000 1,715
President- 1997 102,000 0 -- 10,000 1,475
Operations
Arthur S. Goldberg 1999 119,000 0 -- 7,500 --
Vice President of 1998 110,000 0 -- 7,500 --
Finance and Chief 1997 101,000 0 -- 7,500 --
Financial Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) The named executive officers received various perquisites, the cost of
which did not exceed the lesser of $50,000 or 10% of annual salary plus
bonus.
(2) Adjusted to reflect a 3-for-2 stock split declared on November 1, 1993.
(3) Represents the dollar value of the premium paid by the Company during the
fiscal years ended April 30, 1999, 1998 and 1997 with respect to term life
insurance for the benefit of the named executive officer.
(4) Mr. Knopf has been the Chief Operating Officer of the Company since October
19, 1998. The compensation listed above represents compensation for the
period commencing on such date and ending April 30, 1999.
26
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options under the Company's Amended and Restated Stock Option Plan ("Plan") to
the named executive officers of the Company during Fiscal Year 1999.
II. OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------- ------------- ---------------- ---------------- ------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price Expiration
Name Granted Fiscal Year ($/Sh) Date
(#)(1)(2)
- -------------------- ------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Bernard Seltzer 0 0 0 0
David S. Seltzer 50,000 35.8% 3.6875 4/1/09
Martin S. Knopf 0 0 0 0
Elan Bar-Giora 10,000 7.2% 3.6875 4/1/09
Arthur S. Goldberg 7,500 5.4% 3.6875 4/1/09
</TABLE>
- -----------------------------------------
(1) Options granted in Fiscal Year 1999 are scheduled to vest and become
exercisable in yearly increments of 25% beginning on April 1, 2000, with
full vesting occurring on April 1, 2003. Options expire ten years after
grant under the terms of the Company's Plan.
(2) Granted April 1, 1999.
27
<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 1999 and
unexercised options held as of the end of Fiscal Year 1999.
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 0 178,125/121,875 0/15,625
Martin S. Knopf 0 0 0/0 0/0
Elan Bar-Giora 0 0 57,500/25,000 0/3,125
Arthur S. Goldberg 0 0 44,250/18,750 0/2,344
</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, 1999 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 $216,000 and $289,000, respectively, for the fiscal
year commencing May 1, 1998 through April 30, 1999. 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
28
<PAGE>
5% or the increase in the Consumer Price Index as of May 1 of each such year
over the index as of May 1 of the prior year. Commencing on the sixth year of
the employment agreement, each of the salaries of Bernard Seltzer and David S.
Seltzer 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.
Martin S. Knopf serves as Chief Operating Officer of the Company
pursuant to a thirty (30) month employment agreement ending April 30, 2000. Mr.
Knopf's annual base salary is $200,000 for the period commencing on October 21,
1998 through October 20, 1999. Mr. Knopf may also receive a bonus based upon
the net sales and net after tax profits of the Company. The employment agreement
contains standard confidentiality provisions and a non-compete provision for a
term of eighteen (18) months after the termination of Mr. Knopf's employment.
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 $119,000 for
the period commencing on September 1, 1998 through August 31, 1999. Such annual
salary shall be adjusted annually, commencing September 1, 1999, 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.
29
<PAGE>
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 1,175,000 shares of Common Stock authorized to be granted under such
Plan. During Fiscal 1999, the Company granted options to purchase 139,850 shares
of Common Stock at an exercise price of $3.69 having exercise dates ranging from
April 1, 2000 to April 2009. During Fiscal 1999, 5,150 options were cancelled
or expired, and 376,275 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 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, 1999, the Company has granted options to purchase
300,000 shares to David S. Seltzer, 82,500 shares to Elan Bar-Giora, and 63,000
shares to Arthur S. Goldberg at an average exercise price of $5.12 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.
30
<PAGE>
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, 1999, 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 $4.25 per share.
The Directors Plan provides for the automatic annual grant of options
to non-employee directors and is administered by the Board of Directors. Each
non-employee director will be automatically granted 3,000 shares of Common Stock
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.
31
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Percent of
of Beneficial Common
Name and Address of Beneficial Owner Ownership (1) Stock
- ----------------------------------------- -------------------------- -----------
<S> <C> <C>
Bernard Seltzer................................. 651,032 (2) 14.4%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
David S. Seltzer................................ 744,318 (3) 15.8%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Martin S. Knopf................................. 1,000 *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Reuben Seltzer.................................. 451,185 (4) 9.9%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Arthur S. Goldberg.............................. 44,250 (5) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Elan Bar-Giora.................................. 57,500 (6) 1.3%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Martin M. Goldwyn............................... 19,625 (7) *
c/o Tashlik, Kreutzer & Goldwyn P.C.
833 Northern Boulevard
Great Neck, New York 11021
Yashar Hirshaut, M.D............................ 11,500 (8) *
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
All Directors and Executive Officers as a group (8 persons) 1,980,410 (9) 40.5%
</TABLE>
___________________________
* 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.
32
<PAGE>
(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 178,125 shares of Common Stock
exercisable within 60 days of July 28, 1999 and 127,406 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(4) Amount includes options to purchase 51,000 shares of Common Stock
exercisable within 60 days of July 28, 1999 and 122,028 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(5) Amount represents options to purchase 44,250 shares of Common Stock
exercisable within 60 days of July 28, 1999.
(6) Amount represents options to purchase 57,500 shares of Common Stock
exercisable within 60 days of July 28, 1999.
(7) Amount represents options to purchase 19,625 shares of Common Stock
exercisable within 60 days of July 28, 1999.
(8) Amount includes options to purchase 11,500 shares of Common Stock
exercisable within 60 days of July 28, 1999.
(9) Amount includes options to purchase 362,000 shares of Common Stock
exercisable within 60 days of July 28, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended April 30, 1999, Mr. Reuben Seltzer was
engaged by the Company to provide new business development and legal services.
For such services, Mr. Reuben Seltzer received $50,000. In addition, Mr.
Seltzer received 25,000 stock options valued by the Company at $30,000. 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 22.85% 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-A and
analogues from the Mayo Clinic. Huperzine-A is a naturally derived compound
belonging to a class known as acetylcholinesterase inhibitors. Huperzine-A 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-A as a dietary supplement under the Dietary Supplement Health and
Education Act of 1994 and to develop analogues and derivatives to Huperzine-A.
It is currently marketing its own brand of Huperzine-A under the tradename
Cerebra(TM) and plans to develop other products for the nutraceutical market.
33
<PAGE>
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.
34
<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 Employment Agreement with Martin S. Knopf
10.5 Agreement, dated June 2, 1993, by and between Bernard Seltzer
and the Company (8)
10.6 Agreement, dated June 2, 1993, by and between David S. Seltzer
and the Company (9)
10.7 Revolving Credit Agreement with National Westminster Bank USA,
as amended (10)
10.8 Second Amendment to Revolving Credit Agreement with National
Westminster Bank USA (11)
10.9 Third Amendment to Revolving Credit Agreement with National
Westminster Bank USA (12)
10.10 Fourth Amendment to Revolving Credit Agreement with Fleet Bank,
N.A., formerly National Westminster Bank USA (13)
10.11 Second Amendment, dated as of April 29, 1998, to Term Loan
Agreement, dated as of October 31, 1994, with Fleet Bank, N.A. (14)
10.12 Sixth Amendment, dated as of April 29, 1998, to Revolving Credit
Agreement, dated as of January 23, 1992, with Fleet Bank, N.A. (15)
10.13 $1,800,000 Term Loan Agreement with National Westminster Bank
USA, dated as of October 31, 1994 (16)
10.14 Fixed Rate Term Note in the amount of $450,000 to National
Westminster Bank dated March 5, 1993 (17)
10.15 Mortgage between National Westminster Bank USA and the
Company dated September 1, 1992 (18)
10.16 Mortgage Note and Supplemental Mortgage and Mortgage
Spreader Consolidating Modification and Extension Agreement
Between the Company and National Westminster Bank dated
July 29, 1993 (19)
10.17 Lease Agreement by and between Hi-Tech Pharmacal Co., Inc.
and Chigi Realty Corp. dated July 18, 1996 (20)
*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.
(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.
35
<PAGE>
(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 10.9 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1997 and incorporated herein by
reference.
(14) Filed as Exhibit to 10.10 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1998 and incorporated herein by
reference.
(15) Filed as Exhibit to 10.11 to Hi-Tech Pharmacal Co., Inc. Annual Report on
Form 10-KSB for fiscal year ended April 30, 1998 and incorporated herein by
reference.
(16) 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.
(17) 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.
(18) 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.
(19) 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.
(20) 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.
36
<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, 1999 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, 1999
of the Board
/s/ David S. Seltzer
- ------------------------------
David S. Seltzer, Director, July 29, 1999
Chief Executive Officer,
President, Treasurer,
Secretary
July 29, 1999
- ------------------------------
Reuben Seltzer, Director
/s/Martin M. Goldwyn July 29, 1999
- ------------------------------
Martin M. Goldwyn, Director
July 29, 1999
- ------------------------------
Yashar Hirshaut, M.D., Director
37
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT, dated as of October__ , 1998, by and between
HI-TECH PHARMACAL CO., INC., a Delaware corporation with offices at 369 Bayview
Avenue, Amityville, New York 11701 (the "Corporation"), and MARTIN KNOPF, an
individual residing at 6 Shadowbrook Drive, Colts Neck, NJ 07722 (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Corporation desires to secure the services of the
Executive upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive desires to render services to the Corporation
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties mutually agree as follows:
Section 1. Employment. The Corporation hereby employs the
----------
Executive and the Executive hereby accepts such employment, as an executive of
the Corporation, subject to the terms and conditions set forth in this
Agreement.
Section 2. Duties. Executive shall serve as the Chief Opearating
------
Officer of the Corporation and shall properly perform such duties as may be
assigned to him from time to time by the President, Chief Executive Officer and
Board of Directors of the Corporation. If requested by the Corporation, the
Executive shall serve on any committee of the Board of Directors without
additional compensation. Commencing on May 1, 1999, the Executive may serve as
the President of the Corporation, subject to the approval of the Corporation's
Board of Directors. During the term of this Agreement, the Executive shall
devote all of his business time to the
<PAGE>
performance of his duties hereunder unless otherwise authorized by the Board of
Directors.
Section 3. Term of Employment. The term of the Executive's employment
------------------
shall commence on October 21, 1998 and shall continue for a period of thirty
(30) months until April 30, 2000, or until earlier terminated pursuant to
Section 5 hereof (the "Term").
Section 4. Compensation of Executive.
-------------------------
4.1 Compensation. The Corporation shall pay to the Executive as
-----------
annual compensation for his services hereunder a base salary ("Base Salary") in
the amount equal to Two Hundred Thousand ($200,000) dollars per annum. The Base
Salary shall be payable bi-weekly less such deductions as shall be required to
be withheld by applicable law and regulations.
4.2 Bonus. (a) In addition to his annual Base Salary, the
-----
Executive shall receive a bonus ("Bonus") with respect to each year of his
employment hereunder equal to (i) one (1%) percent of the amount by which the
Corporation's Net Sales for a fiscal year during the term of this Agreement
exceeds the Corporation's Net Sales for its preceding fiscal year; and (ii)
three (3%) percent of the amount by which the Corporation's Net After Tax
Profits for a fiscal year during the term of this Agreement exceeds the
Corporation's Net After Tax Profits for its preceding fiscal year. During the
fiscal year of the Corporation ending April 30, 1999, Net Sales and Net After
Tax Profits for such period shall be pro-rated based on the Net Sales and Net
After Tax Profits for the period of Executive's employment during such fiscal
year as compared to the respective period for the preceding fiscal year. For
example, if Executive is employed for six (6) months during the fiscal year
ending April 30, 1999,
2
<PAGE>
for purposes of determining the Bonus the Net Sales and Net After Tax Profit for
such fiscal year and for the preceding fiscal year shall be multiplied by 50%
(12 divided by 6).
(b) For purposes of this Agreement, the calculation of Net Sales and
Net After Tax Profits shall be determined by the Chief Financial Officer of the
Corporation. In the event of any dispute Executive shall give written notice to
the Corporation within twenty (20) days after Executive's receipt of the
Corporation's calculation of Net Sales and Net After Tax Profits. The
Corporation's independent certified public accountants ("Accountants") shall
then be required to make a determination of such Net Sales and Net After Tax
Profits, and such determination shall be final, conclusive and binding upon the
parties to this Agreement.
(c) The Bonus shall be payable to the Executive within thirty (30)
days after delivery to the Corporation of its certified financial statements by
its Accountants.
4.3 Expenses. The Corporation shall pay or reimburse the Executive
--------
for all reasonable and necessary out-of-pocket business, travel or other upon
proper documentation thereof, actually incurred or paid by the Executive during
the term of this Agreement in connection with the rendition of Executive's
services contemplated hereunder. In addition, the Corporation shall pay the
Executive an amount of up to Five Thousand ($5,000) Dollars for the actual
expenses incurred by him in relocating his residence in close proximity to the
George Washington Bridge, including real estate brokerage fees.
4.4 Benefits. During the term shall be entitled to participate in such
--------
pension, profit sharing, group insurance, of this Agreement, the
hospitalization, and group health benefit plans and all other benefits and plans
as the
3
<PAGE>
Corporation provides to its senior executives. During the term of his
employment hereunder, the Executive shall be entitled to receive the amount of
$600 per month for automobile payments and associated maintenance and insurance
payments.
4.5 Performance Shares. During the term of this Agreement, the
------------------
Executive shall be eligible to receive a maximum aggregate amount of twenty-five
(25,000) thousand shares of the Corporation's common stock ("Performance
Shares"). Executive shall receive five thousand (5,000) Performance Shares on
the first occasion that the Corporation's common stock has an average closing
price during any thirty (30) day trading period as follows:
Number of
30 Day Average Performance
Closing Price Shares Granted
$ 7.00 5,000
8.00 5,000
9.00 5,000
10.00 5,000
11.00 5,000
4.6 Discretionary Payments. Nothing herein shall preclude the
----------------------
Corporation from paying the Executive such bonus or bonuses or other
compensation, as the Board of Directors, in its discretion, may authorize from
time to time.
Section 5. Termination.
-----------
5.1 Base Salary and Bonus Payments. This Agreement shall
------------------------------
terminate upon the death, Total Disability, as hereinafter defined, or
termination of employment of the Executive. The Corporation shall pay to the
Executive, any person designated in writing or if no such person is designated,
to his estate, as the case may be,
4
<PAGE>
the aggregate amount of the Base Salary up to the end of the month in which
death, Total Disability, or termination of employment occurs. In addition to
Base Salary, and in the event Executive is not terminated For Cause, as
hereinafter defined, in the event the Executive shall be entitled to a Bonus,
then the Executive, his designee or his estate shall be paid within thirty (30)
days after the Corporation's accountants have determined the Net Sales and Net
After Tax Profits of the Corporation, an amount equal to the product of (i) the
Bonus, for such fiscal year in which death, Total Disability or termination of
employment occurred and (ii) a fraction, the numerator of which is the number of
months during the year of such death, Total Disability or termination of
employment during which the Executive was employed by the Corporation through
and including the month of his death, Total Disability or termination of
employment, and the denominator of which is twelve (12).
5.2 Termination For Cause. In terminated For Cause, as
---------------------
hereinafter defined, Total Disability or because Executive the event Executive
is wrongfully leaves his employment hereunder, then, upon such occurrence, this
Agreement shall be deemed terminated and the Corporation shall be released from
all obligations to Executive with respect to this Agreement, except as provided
in Section 5.1 hereof.
5.3 Termination Without Cause. In the event of a termination
-------------------------
without Cause, the Executive shall be entitled to continue to participate in the
hospitalization, group health benefit and disability plans of the Corporation on
the same terms and conditions as immediately prior to his termination for a
period equal to the earlier of (i) the date the Executive commences employment
elsewhere or (ii) the date the Term would have expired pursuant to Section 3 of
this Agreement had
5
<PAGE>
the Executive not been terminated. Executive shall receive, at the Corporation's
option, his Base Salary for the balance of the Term either in a lump sum payment
discounted to present value, the percentage of discount to be determined by the
Accountants, or his Base Salary pursuant to Section 4.1 of this Agreement.
5.4 Voluntary Termination. In the event that the Executive
---------------------
voluntarily terminates his employment hereunder, upon the giving of thirty (30)
days prior written notice thereof to the Corporation, then, the Executive's
right to all compensation hereunder shall terminate as of the date of such
termination, except that the Executive shall be entitled to receive any Base
Salary and Bonus earned and accrued.
5.5 Definitions. As used herein, the term "For Cause" shall
-----------
mean (i) the Executive's conviction in a court of law of any crime or offense
which constitutes a felony in the jurisdiction involved, or (ii) willful
misconduct, or (iii) material breach of his responsibilities under this
Agreement.
Section 6. Disability.
----------
6.1 Total Disability. In the event the Executive is mentally or
----------------
physically incapable or unable to perform his regular and customary duties of
employment with the Corporation for a period of ninety (90) days the Executive
shall be deemed to be suffering from a "Total Disability".
6.2 Payment During Disability. In the event the Executive is
-------------------------
unable to perform his duties hereunder by reason of a disability, which
disability does not constitute Total Disability, the Corporation shall continue
to pay the Executive his Base Salary during the continuance of such disability.
6
<PAGE>
Section 7. Vacations. The Executive shall be entitled to a
---------
vacation of three (3) weeks per year, during which period his Base Salary shall
be paid in full. The Executive shall take his vacation at such time or times as
the Executive and the Corporation shall determine is mutually convenient.
Section 8. Disclosure of Confidential Information.
--------------------------------------
8.1 Disclosure. The Executive recognizes that he will have
----------
access to secret and confidential information regarding the Corporation, its
products, know-how, customers and plans. The Executive acknowledges that such
information is of great value to the Corporation, is the sole property of the
Corporation and has been and will be acquired by him in confidence. In
consideration of the obligations undertaken by the Corporation herein, the
Executive will not, at any time, during or after his employment hereunder,
reveal, divulge or make known to any person, any information acquired by the
Executive during the course of his employment, which is treated as confidential
by the Corporation and not otherwise in the public domain except for information
which was known to Executive on a non-confidential basis prior to its disclosure
by the Corporation as shown by documentary evidence prior to the date of this
Agreement.
8.2 Non-Competition. The Executive covenants and agrees that
---------------
for a period commencing on the date hereof and expiring eighteen (18) months
from and after the date of termination of this Agreement (the "Restricted
Period"), the Executive will not, directly or indirectly, in the Territory (as
hereinafter defined), own, manage, operate, control or engage or participate in
the ownership, management, operation or control of, or be connected as a
stockholder, agent, partner, joint venturer, employee, officer, director,
consultant
7
<PAGE>
or otherwise with, any business or organization any part of which engages in the
manufacture, marketing or sale of products competitive with the products of the
Corporation existing or in the development or production stage during the term
of this Agreement. During the Restricted Period, the Executive will not directly
solicit, or in any manner attempt to induce, any employee of the Corporation to
leave the employ of the Corporation or to work for the Executive. During the
Restricted Period, the Executive, directly or indirectly, will not solicit,
raid, entice, induce or contact, or attempt to solicit, raid, entice, induce or
contact, any person that is a customer, supplier or distributor of the
Corporation to terminate such person's contractual or business relationship with
the Corporation or directly or indirectly solicit or attempt to solicit the
business of, enter into any written or oral agreement with, or otherwise deal
with any customers of the Corporation, except in regard to businesses outside
the scope of the business of the Corporation. The parties hereto agree that if a
court of competent jurisdiction determines that this covenant is unenforceable
in any respect, the remainder of this covenant shall not thereby be affected and
shall be given full effect, without regard to any invalid portions, and this
covenant may be modified by such court in any necessary respect in order to
render it enforceable in its least reduced form. As used herein, the term
"Territory" shall mean North America.
8.3 Survival. The provisions of this Section 8 shall survive
--------
the Executive's employment hereunder.
Section 9. Miscellaneous.
-------------
9.1 Injunctive Relief. The Executive agrees that any
-----------------
breach or threatened breach by him of Section 8 of this Agreement shall entitle
the Corporation, in addition to all other legal remedies available to it, to
apply to any court of competent
8
<PAGE>
jurisdiction to enjoin such breach or threatened breach. The parties understand
and intend that each restriction agreed to by the Executive hereinabove shall be
construed as separable and divisible from every other restriction, that the
unenforceability of any restriction shall not limit the enforceability, in whole
or in part, of any other restriction, and that one or more or all of such
restrictions may be enforced in whole or in part as the circumstances warrant.
In the event that any restriction in this Agreement is more restrictive than
permitted by law in the jurisdiction in which the Corporation seeks enforcement
thereof, such restriction shall be limited to the extent permitted by law.
9.2 Assignment. Neither the Executive nor the Corporation may
----------
assign or delegate any of his or their rights or duties under this Agreement.
9.3 Entire Agreement. This Agreement constitutes and embodies
----------------
the full and complete understanding and agreement of the parties with respect to
the Executive's employment by the Corporation, supersedes all prior
understandings and agreements, if any, whether oral or written, between the
Executive and the Corporation and shall not be amended, modified or changed
except by an instrument in writing executed by the party to be charged. The
invalidity or partial invalidity of one or more provisions of this Agreement
shall not invalidate any other provision of this Agreement. No waiver by either
party of any provision or condition to be performed shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or any prior or
subsequent time.
9.4 Binding Effect. This Agreement shall inure to the benefit
--------------
of, be binding upon and enforceable against, the parties hereto and their
respective successors and permitted assigns.
9
<PAGE>
9.5 Captions. The captions contained in this Agreement are for
--------
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.6 Notices. All notices, requests, demands and other
-------
communications required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given when personally delivered or sent by
certified mail, postage prepaid, or overnight delivery to the party at the
address set forth above or to such other address as either party may hereafter
give notice of in accordance with the provisions hereof.
9.7 Counterparts. This Agreement may be executed in
------------
counterparts, all of which shall together constitute one and the same
instrument. All documents and signatures required hereunder may be delivered or
exchanged by telecopy and telecopied signatures shall be effective as originals
thereof.
9.8 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
HI-TECH PHARMACAL CO., INC.
By: /s/Bernard Seltzer
------------------------------
Title: Chairman of the Board
/s/ Martin Knopf
-----------------------------------
MARTIN KNOPF
10
<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
of Hi-Tech Pharmacal Co., Inc. on Form S-8 (File No. 333-35425) of our report,
dated July 14, 1999, on our audits of the financial statements of the Company as
of April 30, 1999 and 1998 and for the years ended April 30, 1999 and 1998 which
report is included in this Annual Report on Form 10-KSB. We also consent to the
reference of our firm under the caption "Experts" in the prospectus.
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 27, 1999
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