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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