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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2002
¨ |
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to
Commission file number 0-20424
Hi-Tech Pharmacal Co., Inc.
(Exact name of small business issuer as specified in its charter)
| Delaware |
|
112638720 |
| (State or other jurisdiction of |
|
(IRS Employer Identification No.) |
| Incorporation or organization) |
|
|
369 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices)
631 789-8228
(Issuer’s telephone number)
Not applicable
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of
shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Common Stock, $.01 Par Value—4,775,000 shares outstanding as of December 16, 2002.
Transitional Small Business Disclosure Format: Yes ¨ No x
INDEX
HI-TECH PHARMACAL CO., INC.
PART I. FINANCIAL INFORMATION
| Item 1. |
|
Financial Statements (Unaudited) |
| |
| |
|
Condensed balance sheets—October 31, 2002 and April 30, 2002 |
| |
| |
|
Condensed statements of operations—Three month and six month periods ended October 31, 2002 and 2001 |
| |
| |
|
Condensed statements of cash flows—Six month periods ended October 31, 2002 and 2001 |
| |
| |
|
Notes to condensed financial statements |
| |
| Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
PART II. OTHER INFORMATION
| Item 1. |
|
Legal proceedings |
| Item 2. |
|
Changes in securities and use of proceeds |
| Item 3. |
|
Defaults upon senior securities |
| Item 4. |
|
Submission of matters to a vote of security holders |
| Item 5. |
|
Other information |
| Item 6. |
|
Exhibits and Reports on Form 8-K |
2
PART I. ITEM 1
HI-TECH PHARMACAL CO., INC.
CONDENSED BALANCE SHEETS
| |
|
October 31, 2002
|
|
|
April 30, 2002
|
|
| |
|
(unaudited) |
|
|
(From Audited Financial Statements) |
|
| ASSETS |
|
|
|
|
|
|
|
| CURRENT ASSETS |
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
9,987,000 |
|
|
10,487,000 |
|
| Accounts receivable, less allowances of $270,000 at October 31, 2002 and at April 30, 2002 |
|
|
6,611,000 |
|
|
5,550,000 |
|
| Inventories |
|
|
8,234,000 |
|
|
6,020,000 |
|
| Prepaid Taxes |
|
|
824,000 |
|
|
464,000 |
|
| Deferred taxes |
|
|
514,000 |
|
|
514,000 |
|
| Prepaid expenses and other receivables |
|
|
786,000 |
|
|
648,000 |
|
| |
|
|
|
|
|
|
|
| TOTAL CURRENT ASSETS |
|
|
26,956,000 |
|
|
23,683,000 |
|
| Property, Plant and equipment—net |
|
|
9,232,000 |
|
|
9,004,000 |
|
| Other assets |
|
|
495,000 |
|
|
385,000 |
|
| |
|
|
|
|
|
|
|
| TOTAL ASSETS |
|
$ |
36,683,000 |
|
|
33,072,000 |
|
| |
|
|
|
|
|
|
|
| |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| CURRENT LIABILITIES |
|
|
|
|
|
|
|
| Current Portion—Long-term debt |
|
$ |
114,000 |
|
|
155,000 |
|
| Accounts payable and accrued expenses |
|
|
6,567,000 |
|
|
5,591,000 |
|
| |
|
|
|
|
|
|
|
| TOTAL CURRENT LIABILITIES |
|
|
6,681,000 |
|
|
5,746,000 |
|
| Long-term debt |
|
|
13,000 |
|
|
62,000 |
|
| Deferred Taxes |
|
|
1,153,000 |
|
|
1,153,000 |
|
| |
|
|
|
|
|
|
|
| TOTAL LIABILITIES |
|
|
7,847,000 |
|
|
6,961,000 |
|
| |
|
|
|
|
|
|
|
| SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Preferred stock, par value $.01 per share; authorized 3,000,000 shares, none issued |
|
|
— |
|
|
— |
|
| Common stock, par value $.01 per share; authorized 10,000,000 shares, issued 4,769,000 at October 31, 2002 and 4,729,000
at April 30, 2002 |
|
|
48,000 |
|
|
47,000 |
|
| Additional capital |
|
|
10,483,000 |
|
|
10,304,000 |
|
| Retained earnings |
|
|
19,106,000 |
|
|
16,561,000 |
|
| Treasury stock, 194,700 shares of common stock, at cost on October 31, 2002 and April 30, 2002 |
|
|
(801,000 |
) |
|
(801,000 |
) |
| |
|
|
|
|
|
|
|
| TOTAL SHAREHOLDERS’ EQUITY |
|
|
28,836,000 |
|
|
26,111,000 |
|
| |
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
36,683,000 |
|
|
33,072,000 |
|
| |
|
|
|
|
|
|
|
See notes to condensed financial statements
3
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
| |
|
Three months ended October
31,
|
|
|
Six months ended October
31,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| NET SALES |
|
$ |
11,765,000 |
|
|
8,454,000 |
|
|
20,594,000 |
|
|
14,347,000 |
|
| Cost of goods sold |
|
|
5,551,000 |
|
|
4,621,000 |
|
|
9,902,000 |
|
|
7,771,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| GROSS PROFIT |
|
|
6,214,000 |
|
|
3,833,000 |
|
|
10,692,000 |
|
|
6,576,000 |
|
| Selling, general, administrative expenses |
|
|
3,220,000 |
|
|
2,062,000 |
|
|
5,906,000 |
|
|
3,850,000 |
|
| Research & product development costs |
|
|
466,000 |
|
|
375,000 |
|
|
915,000 |
|
|
807,000 |
|
| Contract research income |
|
|
(5,000 |
) |
|
(28,000 |
) |
|
(122,000 |
) |
|
(233,000 |
) |
| Interest expense |
|
|
8,000 |
|
|
15,000 |
|
|
17,000 |
|
|
33,000 |
|
| Interest income and other |
|
|
(29,000 |
) |
|
(32,000 |
) |
|
(83,000 |
) |
|
(110,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| TOTAL |
|
|
3,660,000 |
|
|
2,392,000 |
|
|
6,633,000 |
|
|
4,347,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before provision for income taxes |
|
|
2,554,000 |
|
|
1,441,000 |
|
|
4,059,000 |
|
|
2,229,000 |
|
| Provision for income taxes |
|
|
953,000 |
|
|
563,000 |
|
|
1,514,000 |
|
|
870,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET INCOME |
|
$ |
1,601,000 |
|
|
878,000 |
|
|
2,545,000 |
|
|
1,359,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| BASIC EARNINGS PER SHARE |
|
$ |
0.35 |
|
|
0.20 |
|
|
0.56 |
|
|
0.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| DILUTED EARNINGS PER SHARE |
|
$ |
0.32 |
|
|
0.18 |
|
|
0.50 |
|
|
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding—basic |
|
|
4,562,000 |
|
|
4,462,000 |
|
|
4,558,000 |
|
|
4,408,000 |
|
| Effect of potential common shares |
|
|
487,000 |
|
|
452,000 |
|
|
487,000 |
|
|
426,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding—diluted |
|
|
5,049,000 |
|
|
4,914,000 |
|
|
5,045,000 |
|
|
4,834,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed financial statements
4
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
| |
|
Six months ended October 31,
|
|
| |
|
2002
|
|
|
2001
|
|
| CASH FLOWS FROM OPERATING ACTIVITIES |
|
$ |
298,000 |
|
|
1,880,000 |
|
| |
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
| Mortgaged property—repayments |
|
|
(90,000 |
) |
|
(95,000 |
) |
| Repayments of equipment debt |
|
|
— |
|
|
(129,000 |
) |
| Issuance (Purchase) of common stock—exercise of options |
|
|
180,000 |
|
|
653,000 |
|
| |
|
|
|
|
|
|
|
| CASH FROM FINANCING ACTIVITIES |
|
|
90,000 |
|
|
429,000 |
|
| |
|
|
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
| Purchases of property, plant and equipment |
|
|
(888,000 |
) |
|
(670,000 |
) |
| Proceeds—sale of equipment |
|
|
— |
|
|
25,000 |
|
| Increase in Other assets |
|
|
— |
|
|
61,000 |
|
| |
|
|
|
|
|
|
|
| CASH (USED IN) INVESTING ACTIVITIES |
|
|
(888,000 |
) |
|
(584,000 |
) |
| |
|
|
|
|
|
|
|
| NET INCREASE (DECREASE) IN CASH |
|
|
(500,000 |
) |
|
1,725,000 |
|
| Cash and cash equivalents at beginning of the period |
|
|
10,487,000 |
|
|
7,144,000 |
|
| |
|
|
|
|
|
|
|
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
9,987,000 |
|
|
8,869,000 |
|
| |
|
|
|
|
|
|
|
| Supplemental disclosures of cash flow information: Cash paid for |
|
|
|
|
|
|
|
| Interest |
|
$ |
4,000 |
|
|
17,000 |
|
| Income taxes |
|
$ |
1,860,000 |
|
|
1,126,000 |
|
See notes to condensed financial statements
5
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. The preparation of the Company’s financial statements in conformity with generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expense during the reporting periods. Actual
results could differ from these estimates and assumptions. Operating results for the three and six month periods ended October 31, 2002 are not necessarily indicative of the results that may be expected for the year ended April 30, 2003. For further
information, refer to the financial statements and footnotes thereto for the year ended April 30, 2002 on Form 10-K.
REVENUE
RECOGNITION
Sales are recorded as products are shipped. Estimates are made for sales returns, allowances and
discounts. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations. 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. For generic pharmaceutical products, which includes private label contract manufacturing, net sales for the three months
ended October 31, 2002 and October 31, 2001 were $9,905,000 and $6,597,000, respectively. The Company’s Health Care Products division, which markets the Company’s branded products, for the three months ended October 31, 2002 and October
31, 2001 had net sales of $1,860,000 and $1,857,000, respectively.
NET EARNINGS 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 share equivalents (stock options) outstanding for diluted earnings per share.
WORKING CAPITAL REVOLVING LOAN
On October 23, 2002 the Company replaced its existing
credit facility with a new three year $8,000,000 revolving credit facility. The revolving credit facility bears interest at a rate selected by the Company equal to the Prime Rate or LIBOR Rate plus 1.50%. Loans are collateralized by inventory,
accounts receivable and 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. For the six months ended October 31, 2002
there were no borrowings under the credit facility.
INVENTORIES
The components of inventory consist of the following:
| |
|
October 31, 2002
|
|
April 30, 2002
|
| Raw materials |
|
$ |
3,367,000 |
|
3,353,000 |
| Finished products and work in process |
|
$ |
4,867,000 |
|
2,667,000 |
| |
|
|
|
|
|
| |
|
$ |
8,234,000 |
|
6,020,000 |
| |
|
|
|
|
|
6
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2002
FIXED ASSETS
The components of net plant and equipment consist of the following:
| |
|
October 31, 2002
|
|
April 30, 2002
|
| Land and Building |
|
$ |
5,892,000 |
|
$ |
5,787,000 |
| Machinery and equipment |
|
|
12,911,000 |
|
|
12,294,000 |
| Transportation equipment |
|
|
29,000 |
|
|
13,000 |
| Computer equipment |
|
|
865,000 |
|
|
777,000 |
| Furniture and fixtures |
|
|
539,000 |
|
|
477,000 |
| |
|
|
|
|
|
|
| |
|
|
20,236,000 |
|
|
19,348,000 |
| Accumulated depreciation and amortization |
|
|
11,004,000 |
|
|
10,344,000 |
| |
|
|
|
|
|
|
| TOTAL FIXED ASSETS |
|
$ |
9,232,000 |
|
$ |
9,004,000 |
| |
|
|
|
|
|
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses consist of the following:
| |
|
October 31, 2002
|
|
April 30, 2002
|
| Accounts payable |
|
$ |
3,914,000 |
|
3,538,000 |
| Accrued expenses |
|
|
2,653,000 |
|
2,053,000 |
| |
|
|
|
|
|
| |
|
$ |
6,567,000 |
|
5,591,000 |
| |
|
|
|
|
|
CONTINGENCIES AND OTHER MATTERS
The Company’s products and facilities are subject to regulation by a number of Federal and State governmental agencies. The Food
& Drug Administration (“FDA”), in particular, maintains oversight of the formulation, manufacture, distribution, packaging and labeling of all of the Company’s products. In October 2002, the Company received tentative approval
from the FDA to market its EQ 5mg base/5ml Prednisolone Sodium Phosphate Oral Solution. In September, 2002, the Company received approval from the FDA to market its Timolol Maleate Opthalmic Solution 0.5%. In June 2002, the FDA approved the
Company’s application to manufacture and market its 20mg/ 5ml Fluoxetine Oral Solution. The management of the Company believes that it is substantially in compliance with the law and regulations governing pharmaceutical marketing and
manufacturing.
During the quarter ended October 31, 2002 the Company’s significant customers were Cardinal
Distribution L.P., which accounted for approximately 18% of the gross sales and CVS/Pharmacy which accounted for approximately 13% of gross sales. At October 31, 2002, trade receivables from these customers were approximately 11% and 16%,
respectively.
On October 23, 2002 the Company replaced its existing credit facility with a new three year
$8,000,000 revolving credit facility. The revolving credit facility bears interest at a rate elected by the Company equal to the Prime Rate or the LIBOR Rate plus 1.50%. Loans are collateralized by inventory, accounts receivable and 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. For the six months ended October 31, 2002 there were no borrowings under the
credit facility.
The Company has a net investment of approximately $162,000 in a joint venture for the marketing
and development of a nutritional supplement. Mr. Reuben Seltzer, a director of the Company, has an interest in the joint venture. Mr. Reuben Seltzer is the son of Mr. Bernard Seltzer, Chairman of the Board of the Company.
On or about October 28, 2002 an action was commenced in the United States District Court for the Northern District of Texas, Dallas
Division, against the Company, Wyeth; Wyeth Consumer Healthcare; Bayer Corporation; Bayer A.G.; Novartis Consumer Health, Inc.; Novartis Pharmaceuticals Corporation; Schering-Plough Corporation; The Delaco Company and Chattem, Inc. The complaint
alleges claims for permanent and debilitating injuries as a result of exposure to phenylpropanolamine (hereinafter referred to “PPA”) through ingestion of PPA-containing products designed, formulated, marketed, manufactured, distributed,
and /or sold by the Company and the other defendants. The plaintiffs, individually, seek compensatory damages in the amount of $15 million for actual damages, plus punitive damages. The Company will file an answer to this action and believes it has
meritorious defenses. The Company’s defense costs are being covered under its product liability policy which has a $5 million limit for defense and liability (“Product Liability Policy”). The last date of sale of the limited number of
products containing PPA, by the Company, was December, 2000.
7
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2002
On or about November 15, 2002 an action was commenced against the
Company and Albertson’s Inc., American Drug Stores, Inc., Osco Drug, Inc., Walgreen Co; American Procurement and Logistics Company in the Circuit Court of Cook County, Illinois. The complaint alleges that the defendants sold and supplied
Brometane, and certain other product which allegedly caused plaintiffs to suffer severe and permanent injuries. The plaintiffs’ seek judgment against all defendants, jointly and severally, in amounts in excess of $400,000, together with
interest, costs and disbursements. The Company will file an answer to this action and believes it has meritorious defenses. The Company’s defense costs are being covered under its Product Liability Policy which has a $5 million limit for
defense costs and liability.
In March 2001, the Center for Environmental Health (“CEH”) filed a lawsuit
against several defendants alleging violations of California’s Proposition 65 and Unfair Trade Practices Act for failure to provide clear and reasonable warnings regarding the carcinogenicity and reproductive toxicity of lead and the
reproductive toxicity of cadmium to the users of FDA-approved anti-diarrheal medicines. In December 2001, CEH amended its complaint by adding the Company as a defendant. In January 2002, the California Attorney General served an amended complaint
against the Company and several other defendants covering the same products and asserting similar allegations and damages. The Company has agreed to indemnify several of its customers who are named as defendants in the actions. On January 29, 2002,
the Attorney General filed a motion to consolidate the two actions in San Francisco County Superior Court. The Company’s Answers to the CEH complaint and the Attorney General’s complaint were filed on February 14, 2002 and February 28,
2002, respectively. Settlement discussions are ongoing.
In October 2001, the California Attorney General filed a
lawsuit against the Company and other defendants alleging violations of California’s Proposition 65 and Unfair Trade Practices Act for failure to provide clear and reasonable warnings regarding the carcinogenicity and reproductive toxicity of
mercury compounds to the users of certain FDA-approved nasal sprays. The Company’s answer to the complaint was filed on December 26, 2001. Settlement discussions are ongoing.
The Company believes that the effect of these litigation matters will not be material to the financial position or operations of the Company.
8
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 31, 2002
With the exception of the historical information contained in this Form 10-Q, the matters described herein
may include “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to materially
differ from those projected or implied. These risks include, but are not limited to, regulatory matters, the ability of the Company to grow internally or by acquisition, and to integrate acquired businesses, changing industry and competitive
conditions, and other risks outside the Company’s control referred to in its registration statement and periodic reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to update any forward-looking
statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2001
Net sales for the three months ended October 31, 2002 were $11,765,000, an increase of $3,311,000 or 39.2% as
compared to the net sales for the three months ended October 31, 2001 of $ 8,454,000. Generic pharmaceutical products, which includes some private label contract manufacturing, net sales for the three months ended October 31, 2002 was $9,905,000, an
increase of $3,308,000, or 50.0%, compared to the fiscal 2002 respective period sales of $6,597,000. The Company increased its distribution of our product lines particularly at drug chains, wholesalers and managed care organizations throughout the
country. Three products had sales increases of $800,000 each and four customers increased sales by approximately $500,000 each. The Health Care Products division, which markets the Company’s branded products, for the three months ended October
31, 2002 and 2001 had net sales of $1,860,000 and $1,857,000, respectively.
During the quarter ended October 31,
2002 the Company’s significant customers were Cardinal Distribution L.P., which accounted for approximately 18% of the gross sales and CVS/Pharmacy which accounted for approximately 13% of gross sales. At October 31, 2002, trade receivables
from these customers were approximately 11% and 16%, respectively.
Cost of sales, as a percentage of net sales,
decreased from 54.7% or $4,621,000 for the three months ended October 31, 2001 to 47.2% or $5,551,000 for the three months ended October 31, 2002. The percentage decrease resulted from an increase in units shipped and average unit selling price and
product mix. If one or more other generic pharmaceutical manufacturers significantly reduce their prices in an effort to gain market share, the Company’s profitability could be adversely affected.
Research and product development costs for the three months ended October 31, 2002 increased to $466,000, or 4.0% of net sales compared to
$375,000 or 4.4% of net sales for the same period ended October 31, 2001. Contract research income decreased to $5,000 in the fiscal 2003 period compared to $28,000 in the fiscal 2002 respective period.
Selling, general and administrative expenses, as a percentage of net sales, increased to 27.4% from 24.4%, or $3,220,000 and $2,062,000
for the three months ended October 31, 2002 and 2001, respectively. This was the result of increased advertising expense for new products and enhanced advertising of existing products offset by the increase in sales, and increased professional fees.
Net income for the three months ended October 31, 2002 and 2001 was $1,601,000 and $878,000, respectively, an
increase of $723,000, or 82.4%. The overall increase is due to the increase in units shipped and average unit selling price and the other factors noted above.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 2002 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2001
Net sales for the six months ended October 31, 2002 was $20,594,000, an increase of $6,247,000 or 43.5% as compared to the net sales for the six months ended October 31, 2001 of $ 14,347,000. Generic
pharmaceutical products, which includes some private label contract manufacturing, net sales for the six months ended October 31, 2002 was $17,448,000, an increase of $6,002,000, or 53%, compared to the fiscal 2002 respective period sales of
$11,446,000. The Company increased its distribution of our product lines particularly at drug chains, wholesalers and managed care organizations throughout the country. The Health Care Products division, which markets the Company’s branded
products, for the six months ended October 31, 2002 and 2001 had net sales of $3,146,000 and $2,901,000, respectively, an increase of $245,000 or 8%.
9
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cost of sales, as a percentage of net sales, decreased from 54% or $7,771,000 for the six
months ended October 31, 2001 to 48% or $9,902,000 for the six months ended October 31, 2002. This resulted from an increase in units shipped and average unit selling price. If one or more other generic pharmaceutical manufacturers significantly
reduce their prices in an effort to gain market share, the Company’s profitability could be adversely affected.
Research and product development costs for the six months ended October 31, 2002 increased to $915,000, or 4.4% of net sales compared to $807,000 or 5.6% of net sales for the same period ended October 31, 2001, and Contract research
income decreased to $122,000 in the fiscal 2003 period compared to $233,000 in the fiscal 2002 respective period.
Selling, general and administrative expenses, as a percentage of net sales, increased to 28.7% from 26.8%, or to $5,906,000 from $3,850,000 for the six months ended October 31, 2002 and 2001, respectively. The increase of $2,056,000
was the result of increased advertising expense for new products and enhanced advertising of existing products offset by the increase in sales and increased professional fees.
Net income for the six months ended October 31, 2002 and 2001 was $2,545,000 and $1,359,000, respectively, an increase of $1,186,000, or 87.3%. The overall increase is due
to the increase in units shipped and average unit selling price and the other factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operations are financed principally by cash flow from operations. During the October 31,
2002 period, working capital increased to $20,275,000 from $17,937,000 at April 30, 2002, an increase of $2,338,000. During the six months ended October 31, 2002 the Company invested $888,000 in fixed assets.
On October 23, 2002 the Company replaced its existing credit facility with a new three year $8,000,000 revolving credit facility. The
revolving credit facility bears interest at a rate selected by the Company equal to the Prime Rate or the LIBOR Rate plus 1.50%. Loans are collateralized by inventory, accounts receivable and 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. For the six months ended October 31, 2002 there were no borrowings under the credit facility.
The Company’s products and facilities are subject to regulation by a number of Federal and State governmental agencies. The Food
& Drug Administration, (“FDA”), in particular, maintains oversight of the formulation, manufacture, distribution, packaging and labeling of all of the Company’s products. In October 2002, the Company received approval from the FDA
to market its EQ 5mg dose/5ml Prednisolone Sodium Phosphate Oral Solution. In September 2002, the Company received approval from the FDA to market its Timolol Maleate Opthalmic Solution 0.5%. In June 2002, the FDA approved the Company’s
application to manufacture and market its 20mg/ 5ml Fluoxetine Oral solution. The management of the Company believes that it is substantially in compliance with the law and regulations governing pharmaceutical marketing and manufacturing.
The Company has a net investment of approximately $162,000 in a joint venture for the marketing and development
of a nutritional supplement. Mr. Reuben Seltzer, a director of the Company, has an interest in the joint venture. Mr. Reuben Seltzer is the son of Mr. Bernard Seltzer, Chairman of the Board of the Company.
SEASONALITY
Historically, the months of September through March account for a greater portion of the Company’s sales than the other months of the fiscal year. Accordingly, period-to-period comparisons within the same fiscal year are not
necessarily meaningful and should not be relied on as indicative of future results.
CRITICAL ACCOUNTING POLICIES
In preparing financial statements in conformity with generally accepted accounting principles in the United States of America,
we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the reporting
period covered thereby. Actual results could differ from those estimates. Our estimates for sales returns and allowances, the useful lives of property and equipment and the realization of deferred tax assets represent a significant portion of the
estimates made by management.
10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Sales are recorded as products are shipped. Estimates are made for sales returns and allowances
and discounts. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations. 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.
ITEM 4:
CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of their evaluation.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about October 28, 2002 an
action was commenced in the United States District Court for the Northern District of Texas, Dallas Division, against the Company, Wyeth; Wyeth Consumer Healthcare; Bayer Corporation; Bayer A.G.; Novartis Consumer Health, Inc.; Novartis
Pharmaceuticals Corporation; Schering-Plough Corporation; The Delaco Company and Chattem, Inc. The complaint alleges claims for permanent and debilitating injuries as a result of exposure to phenylpropanolamine (hereinafter referred to
“PPA”) through ingestion of PPA-containing products designed, formulated, marketed, manufactured, distributed, and /or sold by the Company and the other defendants. The plaintiffs seek compensatory damages in the amount of $15 million for
actual damages, plus punitive damages. The Company will file an answer to this action and believes it has meritorious defenses. The Company’s defense costs are being covered under its product liability policy which has a $5 million limit for
defense costs and liability (“Product Liability Policy”). The last date of sale of the limited number of products containing PPA, by the Company, was December, 2000.
On or about November 15, 2002 an action was commenced against the Company and Albertson’s Inc., American Drug Stores, Inc., Osco Drug, Inc., Walgreen Co; American
Procurement and Logistics Company in the Circuit Court of Cook County, Illinois. The complaint alleges that the defendants sold and supplied Brometane, and certain other products which allegedly caused plaintiffs to suffer severe and permanent
injuries. The plaintiffs’ seek judgment against all defendants, jointly and severally, in amounts in excess of $400,000, together with interest, costs and disbursements. The Company will file an answer to this action and believes it has
meritorious defenses. The Company’s defense costs are being covered under its Product Liability Policy which has a $5 million limit for defense costs and liability.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of security holders was held on November 26, 2002. The Company solicited proxies and shares were present in
person and by proxy.
Set forth is the number of votes cast for, against or withheld as to each item voted upon.
| (i) |
|
Election of Directors
|
|
For
|
|
Withhold
|
| |
|
Bernard Seltzer |
|
3,658,281 |
|
552,375 |
| |
|
David S. Seltzer |
|
3,668,456 |
|
542,200 |
| |
|
Reuben Seltzer |
|
3,915,232 |
|
295,424 |
| |
|
Martin M. Goldwyn |
|
3,926,532 |
|
284,124 |
| |
|
Yashar Hirshaut, M.D. |
|
3,926,532 |
|
284,124 |
| |
|
Robert M. Holster |
|
3,925,632 |
|
285,024 |
| |
(ii) |
|
Amendment of the Company’s Amended and Restated Stock Option Plan to increase by 650,000 the number of shares of Common Stock reserved for the issuance
thereunder |
| |
|
For
|
|
Against
|
|
Abstain
|
| |
|
1,942,364 |
|
952,859 |
|
25,425 |
| |
(iii) |
|
Amendment of the Company’s 1994 Directors Stock Option Plan to increase by 100,000 the number of shares of Common Stock reserved for issuance thereunder
and to extend the term of such Plan for an additional ten years |
| |
|
For
|
|
Against
|
|
Abstain
|
| |
|
2,300,504 |
|
595,413 |
|
24,781 |
| |
(iv) |
|
Ratification of the appointment of Eisner,LLP, as the Company’s independent auditors
|
12
| |
for the fiscal year ending April 30, 2003 |
| |
|
For
|
|
Against
|
|
Abstain
|
| |
|
4,204,410 |
|
1,446 |
|
4,800 |
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| |
10.4 |
|
Employment Agreement of Arthur S. Goldberg, Chief Financial Officer and Vice President—Finance |
| |
10.7 |
|
Revolving Credit and Term Loan Agreement dated October 23, 2002 Confidential Treatment has been requested for portions of this agreement.
|
| |
10.8 |
|
First Amendment to the Revolving Credit and Term Loan Agreement dated November 1, 2002 Confidential Treatment has been requested for portions of this agreement.
|
| |
10.9 |
|
Second Amendment to the Revolving Credit and Term Loan Agreement dated November 15, 2002 Confidential Treatment has been requested for portions of this
agreement. |
| |
99.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
99.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to
be signed on its behalf
by the undersigned thereunto duly authorized.
HI-TECH PHARMACAL CO., INC.
(Registrant)
Date December 16, 2002
| |
| By: |
|
/s/ DAVID
SELTZER
|
| |
|
David Seltzer (President and
Chief Executive Officer) |
Date December 16, 2001
| |
| By: |
|
/s/ ARTHUR S.
GOLDBERG
|
| |
|
Arthur S. Goldberg (Vice
President—Finance and Chief Accounting Officer) |
13
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Seltzer, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Hi-Tech Pharmacal Co., Inc. |
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b. |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”); and |
c. |
|
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function): |
a. |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any mataerial weaknesses in internal controls; and |
b. |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6. |
|
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Dated: December 16, 2002
| |
| By: |
|
/s/ DAVID
SELTZER
|
| |
|
David Seltzer Chief Executive
Officer |
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Arthur Goldberg, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Hi-Tech Pharmacal Co., Inc. |
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a. |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b. |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the “Evaluation Date”); and |
c. |
|
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date; |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function): |
a. |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b. |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
6. |
|
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Dated: December 16, 2002
| |
| By: |
|
/s/ ARTHUR
GOLDBERG
|
| |
|
Arthur Goldberg Chief
Financial Officer |