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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, 2000
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)
(631) 789-8228
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year ended April 30, 2000 were
$26,414,000.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on July 26, 2000, based upon the price at which such stock was sold on
that date, was $10,385,499. The number of shares of Common Stock of the issuer
outstanding as of July 26, 2000 was 4,527,342.
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. (the "Company") a Delaware corporation,
incorporated in April 1983, is a growing specialty manufacturer and marketer of
prescription, over-the-counter and nutritional products.
The Company manufactures and distributes its products from facilities
at Amityville N.Y. The Company sells its products in three similar markets:
1) Generic pharmaceuticals, 2) Branded products and 3) Contract manufacturing.
The Company markets its generic pharmaceuticals under the brand names H-T/TM/
and RX Choice/TM/. The Company markets a line of branded products primarily for
people with Diabetes, including Diabetic Tussin/R/, DiabetiDerm/R/,
DiabetiSweet/TM/, DiabetiGest/TM/ and DiabetiRinse/TM/. In addition, the Company
markets other niche over the counter brands to the general healthcare
marketplace under such brands as Kosher Care/TM/, Nasal Ease/TM/, and Soothing
Comfort/TM/.
The Company specializes in the manufacture of liquid, cream and
ointment formulations. The Company also manufactures products in a state of the
art sterile facility capable of producing ophthalmic, otic and inhalation
products.
The Company's customers include chain drug stores, drug wholesalers,
generic distributors, mass merchandisers, mail-order pharmacies and certain
Federal government agencies. Some of the Company's key customers include Bergen-
Brunswig, CVS, Eckerds, K-Mart, McKesson, Rite-Aid, Rugby Labs/Div of Watson,
Walgreen's, Wal-Mart and Zenith-Goldline-Ivax. The Company produces a wide range
of products for various disease states including cough and cold, allergies,
pain, stomach and neurological disorders and others.
The Company currently markets more than 70 products to approximately
100 customers. For the fiscal year ended April 30, 2000 the Company's sales
breakdown was as follows: 75% generic and contract manufacturing and 25%
branded products. The Steri-Med Division contributed approximately $1.8 million
of which 80% was from the sales of two Albuterol Inhalation products.
The Company's Health Care Products Division markets branded products
that include over-the-counter, as well as prescription products primarily to
people with diabetes. These products include the Company's flagship brand
Diabetic Tussin/R/ which is available in several formulations, including DM, Max
Strength, EX, and Allergy. The Company has recently launched its first branded
prescription item Diabetic Tussin-C for severe coughs.
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The Company's division also markets the following brands: DiabetiDerm/TM/ Cream
and Lotion for severe dry skin; DiabetSweet/TM/ - a sugar substitute which is
aspartane free and heat stable for baking and cooking; DiabetiGest/TM/ - an
antacid calcium supplement; and DiabetiRinse/TM/ - a mouthrinse for people with
diabetes. The Company will continue to aggressively develop and market new items
for the diabetic market. There are estimated to be more than 16 million
diabetics in the United States alone; 10 million diagnosed and 800,000 new cases
per year. There are more than 100 million cases worldwide. The Company is
confident that it can maintain its leadership position in the area of improving
the lifestyle of people with diabetes and will devote a significant portion of
its resources to continuing its penetration of this market. The Company also
recently launched its Kosher Care/TM/ brand of over-the-counter products,
designed for the rapidly growing kosher consumer market. The Company has
received Abbreviated New Drug Application ("ANDA") approvals for 22 products.
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All of the products listed below are marketed under the Company's
brand names H-T/TM/ or RX Choice/TM/ and in certain cases under private label.
The following table sets forth the principal products marketed by the Company
and the names of certain national brands with which these products compete.
<TABLE>
<CAPTION>
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Examples of Competing
Company Product National Products
<S> <C>
Prescription Drugs
Carbofed-DM Syrup & Drops Rondec/R/-DM
Triple Tannate Pediatric Suspension Rynatan/R/
Promethazine HCI & Dextromethorphan Hbr Syrup* Phenergan/R/
Albuterol Sulfate Inhalation 0.5% Proventil/R/ Inhalation Solution
Albuterol Sulfate Syrup Ventolin/R/ Syrup
Albuterol Sulfate Inhalation 0.83% Proventil/R/ Inhalation Solution
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/
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 Solution Tylenol/R/ with Codeine
Chlorhexidine Gluconate 0.12% Oral Rinse Peridex/R/
Cimetidine Hydrochloride Oral Solution Tagamet/R/ Oral Solution, 300 mg/5mL
</TABLE>
4
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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Examples of Competing
Company Product National Products
<S> <C>
Over-The Counter Pharmaceuticals
Branded 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
DiabetiRinse/TM/
DiabetiGest/TM/
DiabetiSweet/R/ - Aspartane Free Sugar Substitute
Kosher Care/TM/ - Tussin DM
Kosher Care/TM/ - Pain and Fever Relief
Kosher Care/TM/ - Allergy Relief
NasalEase/TM/ Moisturizing Nasal Spray
Vitamins and Nutritional Supplements
------------------------------------
Poly-Vitamin Drops Poly-Vi-Sol/R/ Drops
Poly-Vitamin Drops with Iron Poly-Vi-Sol/R/ with Iron
Golden Age Liquid Vitamins & Minerals Centrum/R/ Liquid
Ferrous Sulfate Solution Drops Fer-in-Sol/R/ Drops
Dalyvite Syrup Vi-daylin/R/ Syrup
Cough/Cold/Decongestant/Other Products/Private Label
----------------------------------------------------
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/
Minoxidil Topical Solution 2% Rogaine/R/
Loperamide HCL Imodium A-D/R/
</TABLE>
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5
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Research and Product Development
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.
The Company's product development strategies depend upon its ability
to formulate and develop generic drug products equivalent to brand name drugs
for which, in some cases, patent protection is expiring or has already expired
and to obtain FDA approval using the ANDA procedure for the manufacture and sale
of such products.
The completion of a prospective product's formulation, testing and FDA
approval generally takes up to 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.
In February 1999, the Company received ANDA approval from the FDA to
manufacture and market Albuterol Sulfate Solution for Inh., 0.083%.
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.
For the fiscal years ended April 30, 2000 and 1999, total R&D
expenditures were $1,367,000 and $1,124,000. As of May 1, 2000, the Company
hired Pudpong Poolsuk as Senior Director of Science. She brings 20 years of
experience to the R&D staff. The Company currently has several products in
various stages of development, which belong to different therapeutic categories
and when approved by the FDA, may represent a large potential market for the
Company. The Company expects to place increasing emphasis on its R&D activities
and increase its R&D budget in the next several years.
The Company has the approval of the DEA to sell certain generic
pharmaceutical products containing narcotics. The Company is currently
manufacturing six preparations containing narcotics. In order to manufacture
and sell products containing narcotics, the Company has implemented stringent
security
6
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precautions to insure that the narcotics are accounted for and properly stored.
The Company is currently developing other products which contain narcotics.
The Company's Steri-Med Facilities is currently manufacturing
ophthalmic, otic and inhalation products. The manufacture of ophthalmic, otic
and other products requires a sterile environment, validation of the
manufacturing process and special equipment and trained personnel. The Company
has executed contract manufacturing agreements to develop and manufacture ANDA
and other pharmaceutical products in its sterile facility. The Company has
produced nine different products in its sterile facility. The Company intends to
use the ANDA procedure to obtain FDA approval for the manufacture of certain
other products in this facility. The Company currently manufactures over-the-
counter eye drops, eye wash and artificial tears and two sterile Albuterol
inhalation products previously approved by the FDA.
The Company and Reuben Seltzer, a director of the Company, each has a
21.25% interest in Marco Hi-Tech JV Ltd. ("Marco Hi-Tech"), a New York
corporation, which markets raw materials for nutraceutical products and has
licensed the patent rights to Huperzine and analogues from the Mayo Clinic.
Huperzine is a naturally derived compound belonging to a class known as
acetylcholinesterase inhibitors. Huperzine has been shown to inhibit the enzyme
responsible for the breakdown of acetylcholine, a neurotransmitter or brain
chemical, which is believed to be critical in learning and memory. Marco
Hi-Tech is currently distributing Huperzine as a dietary supplement under the
Dietary Supplement Health and Education Act of 1994 and developing analogues and
derivatives to Huperzine. Marco Hi-Tech has entered into a supply arrangement
for its Huperzine product with a multi-national leader in the nutraceutical
market. It is also developing other products for the nutraceutical market.
7
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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 100 active accounts
located throughout the United States. For the fiscal year ended April 30, 2000,
one customer, Rugby Laboratories, a division of Watson Laboratories, accounted
for approximately 14% of the Company's sales. For the fiscal year ended April
30, 1999, Rugby Laboratories accounted for approximately 11% 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 61% and 54% of the Company's total sales
for each of the fiscal years ended April 30, 2000 and 1999, respectively. If any
of the Company's top five 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 utilizes its state of the art facilities and laboratories
to offer contract manufacturing which includes research and development
programs, to its existing as well as potential customers.
The Company's Health Care Products Line, created in fiscal 1993,
currently includes branded over-the-counter products marketed to the diabetic
consumer. The Company's products are Diabetic Tussin/R/, its flagship brand
available in several formulations, including Diabetic Tussin/R/ DM, Maximum
Strength, Children's Formula and Allergy Formula. The Company's Diabetic
Tussin/R/ DM is the best 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 Lotion.
Recently, the Company introduced DiabetiSweet/TM/, an aspartane free heat stable
sugar substitute formulated for use in baking, cooking and sweetening beverages;
DiabetiGest/TM/ antacid formulation-calcium supplement; and DiabetiRinse/TM/
mouthwash formulation. The Company also markets several other niche over-the-
counter brands, including Nasal Ease/TM/, a nasal moisturizer, which contains
zinc and Kosher Care - a new line of products certified as Kosher. The Company
intends to continue its focus on introducing branded over-the-counter
formulations targeted to the diabetic market. The Company is in the process of
introducing its first ever branded prescription product, Diabetic Tussin-C, a
formulation for severe coughs by prescription only. Products sold through the
Health Care Products Division accounted for approximately 25% and 20% of the
Company's total sales for fiscal 2000 and fiscal 1999, respectively.
8
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The Company markets its products using various marketing tools, which
include more contemporary packaging to improve point-of-purchase impact, media,
trade and consumer journal advertising, as well as coupon promotions and
professional and consumer sampling programs and telemarketing efforts. The
Company has expanded its marketing strategy with programs to include marketing
ventures with major companies selling popular non-competing diabetic
medications, pharmacy programs and via the Internet using a website. As part of
its marketing strategy, the Company places increasing emphasis on the Internet
which it views as a very efficient tool in educating and reaching out to
millions of people with diabetes. The Company's website is registered under the
domain name diabeticproducts.com. The Company has recently signed a co-marketing
agreement with Diabetic.com, an Internet site designed to improve the health and
lifestyle of people with diabetes. All sales efforts are conducted by Company
employees and three independent commission sales representative organizations.
The Company will focus on growth and will continue to develop new
branded and generic products, and also will devise new marketing strategies to
aggressively penetrate the market. In order to maximize its growth and
shareholder value, the Company is seeking to complement this internal effort by
acquiring products for future marketing, as well as licensing rights to
proprietary products and technologies for development and commercialization. The
Company will place increasing emphasis on establishing co-development and co-
marketing agreements with strategic partners. To facilitate the implementation
of this aggressive growth strategy, the Company has engaged the services of an
investment banker - The Nassau Group (the "Group"), Westport, CT. Based on their
extensive expertise in financial and business consulting, the Group will work
with the Company's management to evaluate its strategic options including
potential acquisition opportunities. The goal is to work out the financial and
business model for the Company that would enhance its visibility and ultimately
increase its shareholder value.
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 adjust on-line production in order to meet customer requirements.
9
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Manufacturing and Facilities
The Company is operating from four buildings on one site in
Amityville, New York totaling approximately 133,000 square feet.
Building 1 - This 40,000 sq. ft. facility is dedicated to liquid and
semi-solid production which consists of a compounding
facility, 5 high speed filling lines and raw material
warehousing space and pharmacy.
Building 2 - This 21,500 sq. ft. facility consists of narcotic
manufacturing and cream and ointment filling, quality
control and microbiology laboratories and the Company's
Steri-Med Unit for sterile manufacturing and filling.
Building 3 - This 21,500 sq. ft. facility is used for research and
development laboratories and warehousing of components.
Building 4 - This 50,000 sq. ft. facility is used for warehousing
space and distribution center.
The Company owns all of its' buildings except for its' 50,000 square
foot warehouse for which it has a lease purchase agreement in place on favorable
terms.
The Company is constructing a brand new 8,000 square foot office
building to be occupied by the middle of September. The Company believes the
current facilities will be adequate for the next several years.
Raw Materials
The Company's raw materials are readily available from multiple
suppliers, and the Company is not dependent upon any single supplier for its
needs, with the exception of certain ANDA products. The Company believes it has
good, cooperative working relationships with its suppliers and has not
experienced any difficulty in obtaining its raw materials. If a supplier were
unable to supply the Company, the Company believes it could locate an
alternative supplier. However, any change in suppliers of a raw material could
cause significant delays in the manufacture of such product.
The Company is in the process of identifying alternative sources of
various tannate raw materials used in the manufacturing of a number of products.
There are a limited number of such suppliers and the exclusive supplier used by
the Company has recently stopped its delivery. The Company is currently
negotiating with one such alternative source.
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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.
11
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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. In July 1999, the Company
received a warning letter from the FDA, alleging certain non-compliance issues
based upon a previously conducted investigation. In response to the warning
letter, the Company promptly met with the FDA, hired a highly qualified
compliance consultant and prepared and submitted a corrective action plan on
October 14, 1999 outlining its remediation efforts. The Company continues to
voluntarily provide quarterly updates to the FDA regarding its further
compliance efforts. As of the date hereof, the Company is taking
corrective action in order to bring the Company into substantial compliance with
applicable FDA regulations. As of July 2000, FDA is conducting a re-evaluation
of the Company's compliance efforts.
Although many of the products currently manufactured and marketed by
the Company do not require prior specific approval of the FDA, certain products
which the Company currently markets and intends to market under its product
development program will require prior FDA approval using the ANDA procedure
before they can be marketed. The Company currently has pending submissions for
FDA approval of five generic formulations and has 22 approved products.
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 eighteen months 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.
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The Company is also subject to regulation by the DEA, which regulates
the sale of pharmaceutical products that contain narcotics. The Company has
received DEA approval and is manufacturing and selling six products containing
narcotics. The DEA also has extensive enforcement powers, including the power
to seize and prohibit the manufacture and sale of noncomplying products.
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, 2000, the Company employed 141 full-time persons and 2
part-time persons, of whom 22 were engaged in executive, financial and
administrative capacities; 9 in marketing, sales and service; 64 full-time
employees and 2 part-time employees in production, warehousing and distribution;
and 46 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
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shipments. The Company has an option to purchase this facility. The current
annual base rent is $194,000.
The Company also owns a 21,000 square feet warehouse facility in
Amityville, New York which it purchased in February 1994 for a purchase price of
$500,000. There is a first mortgage on the property in the original amount of
$375,000. The Company's four facilities in Amityville, New York total
approximately 133,000 square feet.
The Company is also developing vacant land with the construction of
approximately 8,000 square foot office building to be utilized by the Company
for administrative offices.
The Company believes that its properties are adequately covered by
insurance and are suitable and adequate for its needs for several years.
ITEM 3. LEGAL PROCEEDINGS.
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, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK.
Market Information
The following table sets forth the high and low sales prices for the
Company's common stock for the periods indicated, as reported by Nasdaq. The
quotations are inter-dealer prices, without retail mark-up, mark-down or
commissions paid, and may not necessarily reflect actual transactions.
Quarter Ended High Low
Fiscal 1999
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July 31, 1998 6.44 5.00
October 31, 1998 5.38 3.50
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January 31, 1999 5.13 3.88
April 30, 1999 5.00 3.44
Fiscal 2000
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July 31, 1999 4.63 3.75
October 31, 1999 5.44 3.56
January 31, 2000 5.43 3.75
April 30, 2000 8.69 3.81
As of July 26, 2000 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 1065 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.
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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.
<TABLE>
YEAR ENDED APRIL 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Net Sales............................................... 100.0% 100.0%
Cost of Sales........................................... 56.7% 56.8%
--------------- -------------
Gross profit............................................ 43.3% 43.2%
Selling, general & administrative expense............... 29.4% 26.9%
Research & development costs............................ 5.2% 4.8%
Contract research (income).............................. -1.1% -1.4%
Interest expense........................................ 0.5% 0.9%
Interest (income) and other............................. -1.0% -0.9%
--------------- -------------
Total expenses.......................................... 33.0% 30.3%
--------------- -------------
Income before tax provision............................. 10.3% 12.9%
Income tax provision.................................... 3.9% 4.8%
--------------- -------------
Net income.............................................. 6.4% 8.1%
=============== =============
</TABLE>
RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 2000 AND 1999
---------------------------------------------------------
For the fiscal year ended April 30, 2000 ("Fiscal 2000"), net sales
increased by $3,148,000, or 13.5% to $26,414,000 from $23,266,000 for the fiscal
year ended April 30, 1999 ("Fiscal 1999"). The increase was primarily the
result of the increased shipments to our existing customers as well as
increasing the variety of products they bought in Fiscal 2000. Of the $3,148,000
increase in sales, approximately $2,200,000 was from the Health Care Products
Division.
Cost of sales, as a percentage of net sales, decreased from 56.8% for Fiscal
1999 to 56.7% for Fiscal 2000. In the aggregate, labor and overhead including
the sterile manufacturing facility, expense increased less
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than increased sales.
Selling General and Administrative expenses, as a percentage of net sales
increased from 26.9% to 29.5%, or increased to $7,786,000 for Fiscal 2000 from
$6,262,000 for Fiscal 1999 resulting principally from increased advertising and
sales promotions of $788,000.
Research and development costs increased to $1,367,000 or 5.2% of sales for
Fiscal 2000 from $1,124,000 or 4.8% of sales for Fiscal 1999 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 decreased to $1,692,000 for Fiscal 2000 from net income of
$1,878,000 for Fiscal 1999, 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, 2000 and April 30, 1999,
working capital was approximately $10,676,000 and $9,939,000, respectively.
Accounts payable increased 59% from $2,104,000 for Fiscal 1999 to $3,335,000
for Fiscal 2000 due principally from increased purchasing activity in the last
fiscal quarter.
Accrued expenses increased 33% from $1,311,000 for Fiscal 1999 to $1,746,000
for Fiscal 1999 as a result of the increased levels of sales promotion and
support expenses.
Cash flows from operating activities were approximately $3,195,000, which
was the result principally of net income and depreciation of $3,047,000. Cash
flows used in investing activities was approximately $1,511,000 from operating
activities funds and was principally payments for fixed assets acquired. Cash
flows used for financing activities approximated $707,000 and resulted from the
retirement of $447,000 of debt and the acquisition of Treasury stock in the
amount of $260,000.
On February 2, 2000 the Company renewed its $6,000,000 working capital
credit line. At April 30, 2000 the rate for borrowings was 7.6% and there was no
balance outstanding. Borrowings under the line are collateralized by inventory,
accounts receivable and all other assets. The agreement contains covenants with
respect to working capital, net worth and certain ratios, as well as other
covenants and prohibited the payment of cash dividends.
The Company believes that its financial resources consisting of current
working capital, anticipated future operating revenue and its credit line will
be sufficient to enable it to meet its working capital requirements for at least
the next 12 months.
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended April 30,
2000 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>
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales............................. $26,414,000 23,266,000 22,366,000 20,534,000 19,140,000
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Costs of goods sold................... 14,979,000 13,210,000 13,084,000 13,278,000 11,785,000
Research and development.............. 1,367,000 1,124,000 1,003,000 960,000 933,000
Selling, general and
administrative........................ 7,786,000 6,262,000 5,497,000 4,862,000 4,601,000
Contract research (income)............ (279,000) (336,000) (228,000) (178,000) (467,000)
Interest expense...................... 126,000 220,000 268,000 340,000 149,000
Interest (income) and other........... (277,000) (210,000) (93,000) (55,000) (67,000)
------------ ----------- ----------- ----------- -----------
$23,702,000 20270000 19531000 19207000 16934000
------------ ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes...................... 2,712,000 2,996,000 2,835,000 1,327,000 2,206,000
Provision for income taxes............ 1,020,000 1,118,000 1,100,000 510,000 871,000
------------ ----------- ----------- ----------- -----------
Net income............................ $ 1,692,000 1,878,000 1,735,000 817,000 1,335,000
============ =========== =========== =========== ===========
Basic earnings per share.............. $0.38 $0.42 $0.38 $0.18 $0.30
============ =========== =========== =========== ===========
Diluted earnings per share............ $0.38 $0.42 $0.38 $0.18 $0.29
============ =========== =========== =========== ===========
Weighted average common shares
outstanding basic earnings
per share 4,401,000 4,487,000 4,516,000 4,526,000 4,411,000
Effect of potential common shares 57,000 32,000 64,000 73,000 156,000
------------ ----------- ----------- ----------- -----------
Weighted average common shares
outstanding basic earnings per share 4,458,000 4,519,000 4,580,000 4,599,000 4,567,000
============ =========== =========== =========== ===========
APRIL 30,
---------------------------------------------------------------------------
2000 1999 1998 (1) 1997 (1) 1996
----------- ----------- ----------- ----------- -----------
Balance sheet data:
Working capital $10,676,000 9,939,000 8,321,000 6,422,000 5,417,000
Total assets $25,829,000 23,210,000 21,622,000 21,282,000 20,487,000
Long-term debt $ 556,000 1,003,000 1,450,000 1,896,000 2,427,000
Stockholders' equity $18,739,000 17,307,000 15,685,000 14,001,000 13,171,000
</TABLE>
(1) Certain balance sheet accounts and disclosures have been changed to conform
to current year classification
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX PAGE NUMBER
____________________________________________________________ _____________
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to 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, 2000 and 1999, and the related 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, 2000 and 1999 and the results of its operations and its 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, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
BALANCE SHEETS
APRIL 30,
--------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents $ 5,181,000 4,204,000
Accounts receivable (less allowances for doubtful accounts of $240,000 at April
30, 2000 and $305,000 at April 30, 1999) 4,798,000 4,214,000
Inventory 4,922,000 4,285,000
Prepaid taxes 704,000 669,000
Other current assets 599,000 429,000
----------------- -----------------
TOTAL CURRENT ASSETS $ 16,204,000 13,801,000
Property and equipment at cost, net of accumulated depreciation and amortization 9,360,000 9,204,000
Other assets 265,000 205,000
----------------- -----------------
T O T A L $ 25,829,000 23,210,000
================= =================
L I A B I L I T I E S
CURRENT LIABILITIES:
Current portion of long-term debt $ 447,000 447,000
Accounts payable 3,335,000 2,104,000
Accrued expenses 1,746,000 1,311,000
----------------- -----------------
TOTAL CURRENT LIABILITIES $ 5,528,000 3,862,000
Long-term debt (less current portion) 556,000 1,003,000
Deferred taxes 1,006,000 1,038,000
----------------- -----------------
TOTAL LIABILITIES $ 7,090,000 5,903,000
----------------- -----------------
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 8,634,000
Retained earnings 10,657,000 8,965,000
Treasury stock, 144,300 and 82,700 shares of common stock, at cost April 30,
2000 and 1999, respectively (597,000) (337,000)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY $ 18,739,000 17,307,000
----------------- -----------------
T O T A L $ 25,829,000 23,210,000
================= =================
See notes to Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
---------------------------------------------
<S> <C> <C>
2000 1999
----------- ----------
NET SALES $26,414,000 23,266,000
Cost of goods sold 14,979,000 13,210,000
-------------------- -------------------
GROSS PROFIT 11,435,000 10,056,000
-------------------- -------------------
Selling, general and
Administrative expense 7,786,000 6,262,000
Research and product
development costs 1,367,000 1,124,000
Contract research (income) (279,000) (336,000)
Interest expense 126,000 220,000
Interest (income) and other (277,000) (210,000)
-------------------- -------------------
T O T A L 8,723,000 7,060,000
-------------------- -------------------
Income before income taxes 2,712,000 2,996,000
Provision for income taxes 1,020,000 1,118,000
NET INCOME $ 1,692,000 1,878,000
==================== ===================
BASIC INCOME PER SHARE $0.38 0.42
==================== ===================
DILUTED INCOME PER SHARE $0.38 0.42
==================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC
INCOME PER SHARE
4,401,000 4,487,000
EFFECT OF POTENTIAL COMMON SHARES
57,000 32,000
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED
INCOME PER SHARE 4,458,000 4,519,000
==================== ===================
See notes to Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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, 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 expense 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
Net income - - - 1,692,000 - 1,692,000
Treasury stock - - - - (260,000) (260,000)
------------ ------- --------- ---------- -------- ----------
BALANCE - APRIL 30, 2000 4,526,000 $45,000 8,634,000 10,657,000 (597,000) 18,739,000
============ ======= ========= ========== ========= ==========
</TABLE>
See notes to Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
HI-TECH PHARMACAL CO., INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30,
-------------------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,692,000 1,878,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,355,000 1,355,000
Valuation of options for consulting - 30,000
Deferred income taxes (32,000) 108,000
Provision for doubtful accounts (65,000) 79,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (519,000) (160,000)
Inventory (637,000) 398,000
Prepaid taxes (35,000) (602,000)
Other current assets (170,000) (38,000)
Other assets (60,000) 2,000
Accounts payable 1,231,000 (53,000)
Accrued expenses 435,000 358,000
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,195,000 3,355,000
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,511,000) (1,022,000)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES $(1,511,000) (1,022,000)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments - long-term debt and notes payable (447,000) (447,000)
Purchase of treasury stock (260,000) (286,000)
--------------- ----------------
NET CASH USED IN FINANCING ACTIVITIES $ (707,000) (733,000)
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 977,000 1,600,000
Cash and cash equivalents at beginning of year 4,204,000 2,604,000
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,181,000 4,204,000
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 128,000 226,000
Income taxes $ 758,000 1,631,000
See notes to Financial Statements.
</TABLE>
F-6
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(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] Inventory:
----------
Inventories are valued at the lower of cost (first-in first-out or average cost)
or market.
[3] Property and equipment:
-----------------------
Property and equipment is stated at cost less accumulated depreciation.
Estimated accumulated depreciation and amortization of the respective assets is
computed using the straight-line method over their estimated useful lives.
[4] Income taxes:
-------------
The Company uses the liability method to account for deferred income taxes in
accordance with statement of financial accounting standards ("SFAS") No. 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.
[5] 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.
[6] Advertising Expense:
--------------------
Advertising costs are expensed when first shown. Advertising expense for the
years ended April 30, 2000 and 1999 amounted to $1,888,000 and $1,100,000,
respectively.
[7] Cash and cash equivalents:
--------------------------
The Company considers U.S. Treasury bills and goverment agency obligations with
a maturity of three months or less when purchased to be cash equivalents.
[8] Net income per share:
---------------------
Net income per common share is computed based on the weighted average number of
common shares outstanding for basic earnings per share and on the weighted
average number of common shares and common share equivalents (stock options)
outstanding for diluted earnings per share.
(continued)
F-7
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
[9] Long-lived assets:
------------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company records impairment losses on long-lived assets used
in operations, including intangible assets, when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such losses have been recorded.
[10] Use of estimates:
-----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[11] Stock-based compensation:
-------------------------
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-
Based Compensation ("SFAS No. 123"). SFAS No. 123 established a fair-value-based
method of accounting for stock-based compensation plans. The Company has adopted
the disclosure requirements of SFAS No. 123 and has presented the proforma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted,
as well as certain other information (see Note L[4]).
[12] Research and development expense:
---------------------------------
Research and development costs are expensed when incurred.
(NOTE B) Inventory:
---------------------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
April 30,
--------------------------------------
<S> <C> <C>
2000 1999
---- ----
Finished goods and work in process $ 2,176,000 1,804,000
Raw materials 2,746,000 2,481,000
----------- ---------
Total $ 4,922,000 4,285,000
=========== =========
</TABLE>
(continued)
F-8
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(NOTE C) Property and Equipment:
----------------------------------
The components of net property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------------------------
2000 1999
------------------------ ------------------------
<S> <C> <C>
Land and building and improvements $ 5,446,000 $ 4,936,000
Machinery and equipment 11,125,000 10,325,000
Transportation equipment 13,000 13,000
Computer equipment 586,000 428,000
Furniture and fixtures 294,000 266,000
------------------------ ------------------------
$ 17,464,000 $ 15,968,000
Accumulated depreciation and amortization 8,104,000 6,764,000
------------------------ ------------------------
Total property and equipment $ 9,360,000 $ 9,204,000
======================== ========================
</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 $141,000 and is accounted for under the equity method of
accounting. 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. Bernad Seltzer,
Chairman of the Board of the Company. The results of operations of the joint
venture were not material to the results of operations of the Company and the
Company uses the equity method of accounting.
(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 February 2, 2000 the Company renewed its working capital credit line at
$6,000,000. At April 30, 2000 the rate for borrowings was 7.6% and there was no
balance outstanding. Borrowings under the line are collateralized by inventory,
accounts receivable and all other assets. The agreement contains covenants with
respect to working capital, net worth and certain ratios, as well as other
covenants and prohibits the payment of cash dividends.
(continued)
F-9
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(NOTE G) Long-Term Debt:
--------------------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30,
--------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Mortgage payable (1) $ 144,000 181,000
Mortgage payable (2) 307,000 400,000
Mortgage payable (3) 145,000 205,000
Equipment term loan-collateralized by the
related equipment purchased, inventory,
and accounts receivable and other assets (4) 407,000 664,000
---------- ---------
Total $1,003,000 1,450,000
Less current portion 447,000 447,000
---------- ---------
Long-term debt $ 556,000 1,003,000
========== =========
</TABLE>
[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, 9.50% at April 30,
2000.
[2] The mortgage is payable in monthly installments of approximately $8,000
plus interest at a varying rate of 1/2% above the bank's prime rate, 9.50% at
April 30, 2000.
[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, 9.50% or 1.5 % above the Libor rate, 7.6% at April 30, 2000. The
loan requires monthly payments of principal in the amount of $21,429 plus
interest.
(continued)
F-10
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(NOTE G) Long-Term Debt: (continued)
-----------------------------------------
Long-term debt is payable as follows:
<TABLE>
<S> <C>
2001........................................... $ 447,000
2002........................................... 340,000
2003........................................... 154,000
2004........................................... 62,000
----------
Total...................................... $1,003,000
</TABLE>
(NOTE H) Related Party Transactions:
--------------------------------------
The Company has an employment agreement, expiring April 30, 2004 with the Chief
Executive Officer, who is a stockholder of the Company, which provides for
annual base salary of $300,000 for the year ended April 30, 2000 plus annual
increases of 5% per annum thereafter. In addition, the agreement provides for a
guaranteed bonus equal to three percent of pre-tax net income as defined in
excess of $2,000,000 plus a discretionary bonus.
The Company utilizes the services of Reuben Seltzer, an attorney and a director,
and the son of the Company's Chairman of the Board. He provided legal and new
business development services throughout the year. For each of the fiscal years
2000 and 1999 he received fees and expense reimbursements of $93,000 and
$50,000, respectively. In addition, in fiscal 1999 the Company granted him an
option to purchase 25,000 shares of the Company's common stock at an exercise
price of $3.69 and vesting at 20% per annum excercisable through April 1, 2009.
The Company valued this option at $30,000 which was charged to operations.
(continued)
F-11
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(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.
In July 1999 the FDA issued a "Warning Letter" which indicated certain areas
of particular concern. The Company responded to the FDA with its Corrective
Action Plan as a result of the Warning Letter. The plan includes the hiring of
additional personnel in certain areas of the Company's operations which has
resulted in additional overhead expense. The Company believes that the results
of this inspection and such additional expense resulting from the Corrective
Action Plan will not have a material adverse affect on the Company's operations
or financial condition. The Company is taking corrective action in order to
bring the Company into substantial compliance with applicable FDA regulation. In
July 2000 the FDA commenced a re-inspection of the Company's facilities and at
this time has not submitted its findings.
In March 2000 the Company began a recall of one of its products because of a
possible defect. The cost of this action did not have a material adverse effect.
[2] Employment agreements:
----------------------
The Company has a two year employment agreement with an employee which provides
for an annual salary of $125,000 plus annual cost of living increases, which
expires July 31, 2000.
See Note H for other employment agreements.
(continued)
F-12
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
[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, 2000
was approximately $194,000 and was $202,000 for the fiscal year ended April 30,
1999.
Future minimum payments by year are as follows:
<TABLE>
<S> <C>
2001 $183,000
2002 190,000
2003 148,000
--------
Total $521,000
========
</TABLE>
[4] Litigation:
-----------
On June 30,1999, the Company and its Chairman were found not liable for any
damages with regard to an action commenced by a shareholder in November 1994.
The Company is involved in litigation arising in the ordinary course of
business. In the opinion of management, the outcome of such proceedings and
litigation currently pending will not materially affect the Company's financial
statements.
[5] Consulting Agreement:
--------------------
On July 7, 2000 the Company engaged the services of a strategic and financial
advisor. The one year agreement provides for the payment of $100,000 payable in
quarterly installments of $25,000 and a five year warrant to purchase 50,000
shares of common stock at an exercise price of $5.50. The warrant vests 50%
immediately and the remainder vests upon the closing of a transaction as
defined. In connection therewith the Company will record a charge based on the
fair value of 25,000 warrants at date of grant and an additional charge based on
the fair value of 25,000 warrants at the closing of a transaction as defined.
(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.
(continued)
F-13
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(NOTE K) Income Taxes:
------------------------
[1] The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
2000 1999
---------- ---------
<S> <C> <C>
Current:
Federal $ 946,000 940,000
State 106,000 70,000
Deferred:
Federal (29,000) 99,000
State (3,000) 9,000
---------- ---------
Total $1,020,000 1,118,000
========== =========
</TABLE>
[2] Expected tax expense based on the statutory rate is reconciled with actual
tax expense as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Statutory rate 34.0% 34.0%
State income tax, net of federal income tax benefit 2.6% 2.6%
Other 1.0% 0.7%
----- -----
Effective tax rate 37.6% 37.3%
===== =====
</TABLE>
[3] Deferred tax expense is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
2000 1999
-------- -------
<S> <C> <C>
Depreciation and amortization $(42,000) 100,000
Inventory uniform capitalization 10,000 -
Other, net - 8,000
-------- -------
$(32,000) 108,000
======== =======
</TABLE>
(continued)
F-14
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(Note K) Income Taxes (continued):
[4] The deferred tax liability at April 30, 2000 and 1999 relates principally
to depreciation and inventory uniform capitalization.
(continued)
F-15
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(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.
[2] Additional information with respect to the 1992 Stock Option Plan is as
------------------------------------------------------------------------
follows:
--------
<TABLE>
<CAPTION>
Options Exercisable Options
------------------------------------- -------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Price Of Price
Shares Per Share Shares Per Share
-------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
Outstanding at April 30, 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 $ 5.040 456,763 5.40
============= ==============
Cancelled (14,350) $ 4.610
-------------- ------------------
Outstanding at April 30, 2000 766,775 $ 4.950 568,538 5.20
============== ================== ============= ==============
</TABLE>
As of April 30, 2000, 390,625 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding options
is 5.8 years and the range of exercise prices are 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, 2000 and April 30, 1999
(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 Exercise Number Exercise
of Price Of Price
Shares Per Share Shares Per Share
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at April 30, 1998 37,000 $ 6.038 12,000 $ 6.680
====== =======
Granted 10,000 $ 4.250
------ -------
Outstanding at April 30, 1999 47,000 $ 5.640 22,250 $ 5.580
====== =======
Granted 10,000 $ 4.500
------
Outstanding at April 30, 2000 57,000 $ 5.430 30,625 $ 6.090
====== ======= ====== =======
</TABLE>
As of April 30, 2000, 44,500 shares were available for future grant under the
Plan. The weighted average remaining contractual life of the outstanding options
is 7.1 years and the range of exercise prices are from $4.25 to $6.75.
[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, 2000 and April 30, 1999, would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Net income:
As reported $1,692,000 $1,878,000
Proforma under SFAS 123 1,509,000 $1,712,000
Earnings per share:
As reported $ 0.38 $ 0.42
Proforma under SFAS 123 $ 0.34 $ 0.38
</TABLE>
(continued)
F-17
<PAGE>
HI-TECH PHARMACAL CO., INC.
Notes to Financial Statements
For the Years Ended April 30, 2000 and April 30, 1999
(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:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Risk-free interest rate 6.03% 4.12%-5.10%
Expected life of options 5.00 5.00
Expected stock price volatility 61.00% 67.00%
Expected dividend yield 0.00% 0.00%
</TABLE>
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 2000 and 1999 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 $2.60 in
fiscal 2000 and $2.24 in fiscal 1999.
[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 $1,000,000 of its common
stock. As of April 30, 2000 the Company had purchased 144,300 shares at a cost
of $597,000.
(NOTE M) Significant Customers and Concentration of Credit Risk:
------------------------------------------------------------------
One major customer accounted for net sales of approximately 14% for the year
ended April 30, 2000 and 11% for the year ended April 30, 1999. This customer
represented approximately 20% of the outstanding trade receivables at April 30,
2000. 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, 2000 and April 30, 1999
(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 $71,000 and $69,000, respectively, for fiscal
years 2000 and 1999.
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 to
Name of Director and other Directorships Age the Board
<S> <C> <C> <C>
Bernard Seltzer Bernard Seltzer has been Chairman of the 76 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>
19
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Principal Occupation Elected to
Name of Director and other Directorships Age the Board
<S> <C> <C> <C>
David S. Seltzer David S. Seltzer has been Chief Executive 40 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 44 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 48 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
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Principal Occupation Elected to
Name of Director and other Directorships Age the Board
<S> <C> <C> <C>
and a Juris Doctor from New York Law School in
1977.
Yashar Hirshaut, M.D. Yashar Hirshaut has been a Director of the 62 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>
21
<PAGE>
Executive Officers
The executive officers of the Company are set forth in the table
below. All executive officers are elected at the annual meeting or interim
meetings of the Board of Directors. No arrangements or understanding exists
between any executive officer and any other person pursuant to which he was
elected as an executive officer.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Name Age Position and Period Served
<S> <C> <C>
Bernard Seltzer 76 Chairman of the Company since January 1990.
David S. Seltzer 40 Chief Executive Officer and President of the Company
since May 1, 1998 and a Director, Secretary and
Treasurer since February 1992. Mr. Seltzer served as
Executive Vice President of Administration since
February 1992.
Elan Bar-Giora 56 Executive Vice President-Operations of the Company
since July 1992 and Vice President-Operations of the
Company since August 1990.
Arthur S. Goldberg 58 Vice President-Finance and Chief Financial Officer of
the Company since September 1991.
Significant Employees
------------------------------------------------------------------------------------------
Name Age Position and Period Served
<S> <C> <C>
Gennaro P. Caccavale 53 Director of Operations since February 1992.
Michael McConnell 42 Director of Product Development since January 1992.
Gary M. April 43 President of Health Care Products Division since
May 1998 and Divisional Vice President of Sales
since January 1993.
Suzanne Fenton 45 Director of Compliance since September 1995.
Jesse Kirsh 41 Director of Quality Assurance since March 1994.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Name Age Position and Period Served
<S> <C> <C>
Pudpong Poolsuk 56 Senior Director of Science since May 2000.
Joanne Curri 60 Director of Regulatory Affairs since January 1993.
</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, 2000,
1999 and 1998, the compensation paid or accrued by the Company to or for each of
the executive officers of the Company.
23
<PAGE>
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------
Awards
-------------------------------------------------------------------------------------------------------------------
Other Annual All Other
Name and Principal Salary Bonus Compensation (1) Compensation (3)
Position Year ($) ($) ($) Options (#) (2) ($)
<S> <C> <C> <C> <C> <C> <C>
Bernard Seltzer 2000 230,000 -0- -- -0- -0-
Chairman 1999 216,000 9,000 -- -0- 4,420
1998 186,000 18,000 -- -0- 3,910
David S. Seltzer 2000 325,000 -0- -- 50,000 3,241
President, Chief 1999 289,000 9,000 -- 50,000 3,300
Executive Officer, 1998 236,000 18,000 B 50,000 3,207
Secretary and Treasurer
Martin S. Knopf (4) 2000 144,000 -0- -- -0- 100,000
Chief Operating 1999 106,000 -0- -- -0- -0-
Officer 1998 -0- -0- -- -0- -0-
Elan Bar-Giora 2000 140,000 -0- -- 10,000 1,702
Executive Vice 1999 121,000 -0- -- 10,000 1,715
President-Operations 1998 100,000 17,000 -- 10,000 1,475
Arthur S. Goldberg 2000 125,000 -0- -- 7,500 --
Vice President of 1999 119,000 -0- -- 7,500 --
Finance and Chief 1998 110,000 -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, 2000, 1999 and 1998 with respect to term life
insurance for the benefit of the named executive officer.
[(4) Mr. Knopf's employment with the Company terminated as of January 7, 2000.
He received a severance payment in the amount of $100,000.]
24
<PAGE>
Option Exercises And Holdings
The following table sets forth information with respect to the named
executives concerning the exercise of options during Fiscal Year 2000 and
unexercised options held as of the end of Fiscal Year 2000.
III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money Options
Options at Fiscal at Fiscal Year-End
Year-End (#)(1) ($)(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- 225,000/75,875 36,719/30,469
Elan Bar-Giora -0- -0- 67,500/15,000 15,781/6,094
Arthur S. Goldberg -0- -0- 51,750/11,250 10,148/4,570
</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, 2000 less the exercise price.
25
<PAGE>
Employment Contracts and Termination of Employment
Bernard Seltzer and David S. Seltzer serve as Chairman of the Board
and as President and Chief Executive Officer, Chief Operating Officer, Secretary
and Treasurer, respectively, of the Company. Mr. Bernard Seltzer's employment
agreement, as amended, effective as of May 1, 1992 expires April 30, 2001,
pursuant to which he agreed to serve in his capacities. The Company has amended
and restated the employment agreement with David Seltzer effective as of May 1,
1999 and expiring May 19, 2004. 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 provide that the annual base salary for each of Bernard
Seltzer and David Seltzer would be $230,000 and $300,000, respectively, for the
fiscal year commencing May 1, 1999 through April 30, 2000. The increase in
annual base salary for each fiscal year thereafter for Bernard Seltzer and David
S. Seltzer is determined by multiplying their respective annual base salary for
the prior fiscal year by the greater of 5% or the increase in the Consumer Price
Index as of May 1 of each such year over the index as of May 1 of the prior
year. The Board of Directors in its discretion will determine the annual bonus,
if any, to be received by Bernard Seltzer and David S. Seltzer. The employment
agreements also contain standard confidentiality provisions and a non-compete
provision for a term of one year after the termination of their employment.
Under the employment agreements for each of Bernard Seltzer and David
S. Seltzer, the Company will pay to each person's estate upon his death, his
base salary for a period of twelve (12) months after the end of the month in
which death occurred. In the event of total disability, each will continue to
receive his base salary for the remaining term of his employment agreement. In
addition to base salary, Bernard Seltzer and David S. Seltzer each will be paid
an amount equal to a percentage of the bonus, if any, based on the portion of
such year in which death, total disability or termination of employment
occurred. If termination is for cause, total disability or because he
wrongfully leaves his employment, then, upon such occurrence, the employment
agreement shall be deemed terminated and the Company shall be released from all
obligations.
Arthur S. Goldberg serves as Vice President-Finance and Chief
Financial Officer of the Company pursuant to a two year employment agreement
ending on August 31, 2000. The Company is in the process of negotiating a new
employment agreement for Mr. Goldberg. Mr. Goldberg's annual base salary is
26
<PAGE>
$125,000 for the period commencing on September 1, 1999 through August 31, 2000.
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 $500 per meeting. Each member of the Board is reimbursed for expenses
incurred in connection with each Board or Committee meeting attended.
Stock Option Plans
The Amended and Restated Stock Option Plan (the "Plan")
The Company's Amended and Restated Stock Option Plan provides for a
total of 1,175,000 shares of Common Stock authorized to be granted under such
Plan. During Fiscal 2000, the Company did not grant options to purchase shares
of Common Stock at. During Fiscal 2000, 14,350 options were cancelled or
expired, and 390,625 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 28, 2000, 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 $5.21, $4.80, $5.09
per share, respectively.
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.
27
<PAGE>
The exercise price for shares purchased upon the exercise of
non-statutory options granted under the Plan is determined by the Stock Option
Committee as of the date of the grant.
The exercise price of an incentive stock option must be at least equal
to the fair market value of the Common Stock on the date such option is granted
(110% of the fair market value for shareholders who, at the time the option is
granted, own more than 10% of the total combined classes of stock of the Company
or any subsidiary). No employees may be granted incentive stock options in any
year for shares having a fair market value, determined as of the date of grant,
in excess of $100,000.
No incentive option may have a term of more than ten years (in the
case of incentive stock options, five years for shareholders holding 10% or more
of the Common Stock of the Company). Options generally may be exercised only if
the option holder remains continuously associated with the Company or a
subsidiary from the date of grant to the date of exercise. However, options may
be exercised upon termination of employment or upon the death or disability of
any employee within certain specified periods.
Directors Plan
The Company's 1994 Directors Stock Option Plan ("Directors Plan")
provides for a total of 100,000 shares of Common Stock authorized to be granted
under the Directors Plan. Through July 28, 2000, the Company has granted non-
statutory options to purchase 20,000 shares to each of two directors and 17,000
shares to one director at an average exercise price of $5.06 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 5,000 shares of Common Stock
(which was increased from 3,000 commencing in 2001 fiscal year) 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
28
<PAGE>
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.
29
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------- ----------------------------- ---------------------
1999
Amount and Nature of Percent of Common
Beneficial Ownership (1) Stock
Name and Address of Beneficial Owner
<S> <C> <C>
Bernard Seltzer..................................................... 586,432 (2) 12.95%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
David S. Seltzer.................................................... 772,818 (3) 16.38%
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...................................................... 481,435 (4) 10.63%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Arthur S. Goldberg.................................................. 46,125 (5) 1%
c/o Hi-Tech Pharmacal Co., Inc.
369 Bayview Avenue
Amityville, New York 11701
Elan Bar-Giora...................................................... 60,000 (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................................................ 12,250 (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)......... 2,083,695 (9) 42.26%
</TABLE>
___________________________
30
<PAGE>
* Amount represents less than one percent of Common Stock including shares
issuable to such beneficial owner under options which are presently
exercisable or will become exercisable within 60 days.
(1) Unless otherwise indicated, each person has sole voting and investment
power with respect to the shares shown as beneficially owned by such
person.
(2) Amount does not include 60,000 shares of Common Stock owned by Mr.
Seltzer's wife, as to which Bernard Seltzer disclaims beneficial ownership.
(3) Amount includes options to purchase 190,625 shares of Common Stock
exercisable within 60 days of July 28, 2000 and 147,406 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(4) Amount includes options to purchase 46,125 shares of Common Stock
exercisable within 60 days of July 28, 2000 and 142,028 shares of Common
Stock owned by Mr. Seltzer's wife and children.
(5) Amount represents options to purchase 46,125 shares of Common Stock
exercisable within 60 days of July 28, 2000.
(6) Amount represents options to purchase 60,000 shares of Common Stock
exercisable within 60 days of July 28, 2000.
(7) Amount represents options to purchase 19,625 shares of Common Stock
exercisable within 60 days of July 28, 2000.
(8) Amount includes options to purchase 12,250 shares of Common Stock
exercisable within 60 days of July 28, 2000.
(9) Amount includes options to purchase 385,875 shares of Common Stock
exercisable within 60 days of July 28, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended April 30, 2000, Mr. Reuben Seltzer was
engaged by the Company to provide new business development and legal services.
For such services, Mr. Reuben Seltzer received $93,000. 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 21.25% interest in Marco
Hi-Tech JV Ltd., a New York corporation ("Marco Hi-Tech"), which markets raw
materials for nutraceutical products and has licensed the patent rights to
Huperzine and analogues from the Mayo Clinic. Huperzine is a naturally derived
compound belonging to a class known as acetylcholinesterase inhibitors.
Huperzine has been shown to inhibit the enzyme responsible for the breakdown of
acetylcholine, a neurotransmitter or brain chemical, which is believed to be
critical in learning and memory. Marco Hi-Tech is manufacturing and distributing
Huperzine as a dietary supplement under the Dietary Supplement Health and
Education Act of 1994 and is developing analogues and derivatives to Huperzine.
31
<PAGE>
It is currently marketing its own brand of Huperzine through its subsidiary
under the tradename Cerebra/TM/ and is developing other products for the
nutraceutical market.
The Company believes that material affiliated transactions between the
Company and its directors, officers, principal stockholders or any affiliates
thereof have been, and will be in the future, on terms no less favorable than
could be obtained from unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page Number
-----------
(a) Exhibit Foot-
Number Description of Document Notes
-------------------------------------------------------------------------------------------------
<C> <S> <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 *Amended and Restated Employment Agreement with
David S. Seltzer
10.3 Employment Agreement with Arthur S. Goldberg (6)
10.4 Agreement, dated June 2, 1993, by and between Bernard Seltzer
and the Company (7)
10.5 Agreement, dated June 2, 1993, by and between David S. Seltzer
and the Company (8)
10.6 * Revolving Credit Agreement with Fleet Bank, N.A., dated as of
February 2, 2000 in the amount of $6,000,000
10.7 * $449,973 Term Loan Facility with Fleet Bank, N.A., dated as of
February 2, 2000
10.8 Mortgage between National Westminster Bank USA and the Company
dated September 1, 1992 (9)
10.9 Mortgage Note and Supplemental Mortgage and Mortgage Spreader
Consolidating Modification and Extension Agreement between the
Company and National Westminster Bank dated
July 29, 1993 (10)
10.10 Lease Agreement by and between Hi-Tech Pharmacal Co., Inc. and
Chigi Realty Corp. dated July 18, 1996 (11)
23. *Consent of Richard A. Eisner & Company LLP
27. *Financial Data Schedule
</TABLE>
--------------------
* Filed herewith
32
<PAGE>
(1) Filed as Exhibit 3.0 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-Q for the quarterly period ended October 31, 1994 and incorporated herein
by reference.
(2) Filed as Exhibit 10.1 to Hi-Tech Pharmacal Co., Inc. Registration Statement
on Form S-1 (No. 33-47860) and incorporated herein by reference.
(3) Filed as Exhibit 10.2 to Hi-Tech Pharmacal Co., Inc. Registration Statement
on Form S-1 (No. 33-47860) and incorporated herein by reference.
(4) Filed as Exhibit 10.1 to Hi-Tech Pharmacal Co., Inc. Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1994 and incorporated
herein by reference.
(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 10.5 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.
(7) 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.
(8) 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.
(9) 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.
(10) Filed as Exhibit to Hi-Tech Pharmacal Co., Inc. Quarterly Report on Form
10-QSB for the quarterly period ended July 31, 1992 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 July 31, 1993 and incorporated herein
by reference.
_________________________
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
33
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 28, 2000 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 July 28, 2000
-----------------------------------
Bernard Seltzer, Chairman
of the Board
/s/David S. Seltzer July 28, 2000
-----------------------------------
David S. Seltzer, Director,
Chief Executive Officer, President,
Treasurer, Secretary
July 28, 2000
-----------------------------------
Reuben Seltzer, Director
/s/Martin M. Goldwyn July 28, 2000
-----------------------------------
Martin M. Goldwyn, Director
July 28, 2000
-----------------------------------
Yashar Hirshaut, M.D., Director
34
