United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)
| Delaware | 11-2638720 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
369 Bayview Avenue, Amityville, New York 11701
(Address of principal executive offices)
631 789-8228
(Registrant’s telephone number including area code)
Not applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act). Yes x No ¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate 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 — 7,791,522 shares outstanding as of December 7, 2004.
HI-TECH PHARMACAL CO., INC.
| Page | ||||
| Item 1. |
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| Condensed balance sheets—October 31, 2004 and April 30, 2004 |
3 | |||
| Condensed statements of operations—Three and six month ended October 31, 2004 and 2003 |
4 | |||
| Condensed statements of cash flows—Six month periods ended October 31, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||
| Item 3. |
12 | |||
| Item 4. |
12 | |||
| Item 1. |
13 | |||
| Item 2. |
14 | |||
| Item 3. |
14 | |||
| Item 4. |
14 | |||
| Item 5. |
15 | |||
| Item 6. |
16 | |||
| Certifications |
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CONDENSED BALANCE SHEETS
| October 31, 2004 |
April 30, 2004 |
|||||||
| (unaudited) | (From Audited Statements) |
|||||||
| ASSETS |
||||||||
| CURRENT ASSETS |
||||||||
| Cash and cash equivalents |
$ | 35,708,000 | $ | 32,627,000 | ||||
| Investments in marketable securities – available for sale |
— | 10,005,000 | ||||||
| Accounts receivable—net |
13,075,000 | 9,849,000 | ||||||
| Inventories |
9,486,000 | 7,104,000 | ||||||
| Prepaid taxes |
— | 1,039,000 | ||||||
| Deferred taxes |
1,077,000 | 1,077,000 | ||||||
| Other current assets |
1,222,000 | 1,277,000 | ||||||
| TOTAL CURRENT ASSETS |
$ | 60,568,000 | $ | 62,978,000 | ||||
| Property, plant and equipment—net |
13,083,000 | 12,321,000 | ||||||
| License agreement-net |
3,096,000 | — | ||||||
| Other assets |
324,000 | 253,000 | ||||||
| TOTAL ASSETS |
$ | 77,071,000 | $ | 75,552,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES |
||||||||
| Accounts payable and accrued expenses |
$ | 8,829,000 | $ | 7,206,000 | ||||
| TOTAL CURRENT LIABILITIES |
8,829,000 | 7,206,000 | ||||||
| Deferred taxes |
1,558,000 | 1,558,000 | ||||||
| TOTAL LIABILITIES |
$ | 10,387,000 | $ | 8,764,000 | ||||
| STOCKHOLDERS’ EQUITY |
||||||||
| Preferred stock, par value $.01 per share; authorized 3,000,000 shares, none issued |
||||||||
| Common stock, par value $.01 per share; authorized 50,000,000 shares, issued 8,409,000 at October 31, 2004 and 8,386,000 at April 30, 2004 |
84,000 | 84,000 | ||||||
| Additional capital |
39,177,000 | 38,822,000 | ||||||
| Retained earnings |
32,067,000 | 28,880,000 | ||||||
| Treasury stock, 540,329 and 303,050 shares of common stock, at cost on October 31, 2004 and April 30, 2004 |
(4,644,000 | ) | (998,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY |
$ | 66,684,000 | $ | 66,788,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 77,071,000 | $ | 75,552,000 | ||||
See notes to condensed financial statements
3
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
| Three months ended October 31, |
Six months ended October 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| NET SALES |
$ | 16,734,000 | $ | 15,653,000 | $ | 28,874,000 | $ | 24,917,000 | ||||||||
| Cost of goods sold |
7,347,000 | 7,047,000 | 13,272,000 | 11,563,000 | ||||||||||||
| GROSS PROFIT |
9,387,000 | 8,606,000 | 15,602,000 | 13,354,000 | ||||||||||||
| Selling, general and administrative expenses |
4,330,000 | 4,171,000 | 8,157,000 | 7,117,000 | ||||||||||||
| Research and product development costs |
1,579,000 | 853,000 | 2,667,000 | 1,416,000 | ||||||||||||
| Contract research income |
(25,000 | ) | (173,000 | ) | (25,000 | ) | (423,000 | ) | ||||||||
| Interest expense |
5,000 | 6,000 | 12,000 | 13,000 | ||||||||||||
| Interest income and other |
(175,000 | ) | (83,000 | ) | (268,000 | ) | (121,000 | ) | ||||||||
| TOTAL |
$ | 5,714,000 | $ | 4,774,000 | $ | 10,543,000 | $ | 8,002,000 | ||||||||
| Income before provision for income taxes |
3,673,000 | 3,832,000 | 5,059,000 | 5,352,000 | ||||||||||||
| Provision for income taxes |
1,355,000 | 1,430,000 | 1,872,000 | 1,997,000 | ||||||||||||
| NET INCOME |
$ | 2,318,000 | $ | 2,402,000 | $ | 3,187,000 | $ | 3,355,000 | ||||||||
| BASIC EARNINGS PER SHARE |
$ | 0.29 | $ | 0.30 | $ | 0.40 | $ | 0.44 | ||||||||
| DILUTED EARNINGS PER SHARE |
$ | 0.27 | $ | 0.27 | $ | 0.36 | $ | 0.38 | ||||||||
| Weighted average common shares outstanding—basic |
7,940,000 | 8,066,000 | 8,011,000 | 7,686,000 | ||||||||||||
| Effect of potential common shares |
739,000 | 971,000 | 762,000 | 1,040,000 | ||||||||||||
| Weighted average common shares outstanding—diluted |
8,679,000 | 9,037,000 | 8,773,000 | 8,726,000 | ||||||||||||
See notes to condensed financial statements
4
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
| Six months ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
$ | 1,155,000 | $ | (1,276,000 | ) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Purchases of property, plant and equipment |
(1,235,000 | ) | (828,000 | ) | ||||
| Other assets |
(71,000 | ) | 221,000 | |||||
| Purchase of license agreement |
(3,231,000 | ) | — | |||||
| Proceeds from sales of marketable securities |
10,005,000 | — | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
$ | 5,468,000 | $ | (607,000 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Mortgaged property—repayments |
(49,000 | ) | ||||||
| Issuance of common stock and exercise of options |
104,000 | 23,825,000 | ||||||
| Purchase of treasury stock |
(3,646,000 | ) | — | |||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
$ | (3,542,000 | ) | $ | 23,776,000 | |||
| NET INCREASE IN CASH |
3,081,000 | 21,893,000 | ||||||
| Cash and cash equivalents at beginning of the period |
32,627,000 | 15,584,000 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 35,708,000 | $ | 37,477,000 | ||||
| Supplemental disclosures of cash flow information: Cash paid for |
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| Interest |
12,000 | 7,000 | ||||||
| Income taxes |
320,000 | — | ||||||
See notes to condensed financial statements
5
NOTES TO CONDENSED FINANCIAL STATEMENTS
October 31, 2004
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 month periods ended October 31, 2004 are not necessarily indicative of the results that may be expected for the year ending April 30, 2005. For further information, refer to the financial statements and footnotes thereto for the year ended April 30, 2004 on Form 10-K.
REVENUE RECOGNITION
Revenue is recognized for product sales upon shipment and passing of risk to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable. Estimated sales returns, allowances and discounts are provided for. Contract research income is recognized as work is completed and billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones.
Net sales for generic pharmaceutical products, which include private label contract manufacturing, for the three months ended October 31, 2004 and October 31, 2003 were $14,167,000 and $13,967,000, respectively. The Company’s Health Care Products division, which markets the Company’s branded products, for the three months ended October 31, 2004 and October 31, 2003 had net sales of $2,567,000 and $1,686,000, respectively.
NAPRELAN® LICENSE AGREEMENT
In June, 2004 Hi-Tech Pharmacal Co., Inc. acquired exclusive rights to market and distribute Naprelan® (naproxen sodium) controlled-release tablets in the United States, its territories and Puerto Rico. Elan Pharmaceuticals, Inc. (“Elan”) had provided the underlying rights to Stat-Trade, Inc. (“STI”), a company providing biomedical product development support and regulatory services to biotechnology and pharmaceutical companies, and STI simultaneously assigned its rights to the license to the Company. The Agreement covers all FDA approved strengths of Naprelan®. Under the terms of a supply agreement, Elan will manufacture Naprelan® for Hi-Tech.
As consideration for the acquisition, the Company paid $3 million in cash and an additional approximately $400,000 for the existing product inventory, plus expenses related to the acquisition of approximately $231,000. The license and acquisitions costs are being amortized over the remaining life of the patent, a ten year period. For future consulting services, Hi-Tech will be paying STI an on – going fee based on net profits on the sales generated by Naprelan®. Net sales of Naprelan® for the six month period ended October 31, 2004 were approximately $842,000.
CUSTOMER DEPOSITS AND CONTRACT RESEARCH INCOME
Contract research income is recognized as work is completed and as billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones. Advance payments may be received to fund certain development costs.
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. For the three months ended October 31, 2004, approximately 394,000 option shares have been excluded from the diluted earnings per share calculation as their effect is anti-dilutive.
6
WORKING CAPITAL REVOLVING LOAN
The Company has a three year $8,000,000 revolving credit facility dated October 23, 2002. The revolving credit facility bears interest at a rate selected by the Company equal to the Prime Rate or LIBOR 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, 2004 there were no borrowings under the credit facility.
INVENTORIES
The components of inventory consist of the following:
| October 31, 2004 |
April 30, 2004 | |||||
| Raw materials |
$ | 5,009,000 | $ | 4,861,000 | ||
| Finished products and work in process |
4,477,000 | 2,243,000 | ||||
| TOTAL INVENTORY |
$ | 9,486,000 | $ | 7,104,000 | ||
FIXED ASSETS
The components of net plant and equipment consist of the following:
| October 31, 2004 |
April 30, 2004 | |||||
| Land and Building |
$ | 8,296,000 | $ | 7,819,000 | ||
| Machinery and equipment |
16,248,000 | 15,393,000 | ||||
| Transportation equipment |
29,000 | 29,000 | ||||
| Computer equipment |
1,371,000 | 1,171,000 | ||||
| Furniture and fixtures |
858,000 | |||||