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 July 31, 2003
| ¨ | | 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 Incorporation or organization) | | (IRS Employer Identification No.) |
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 ¨
Indicate by checkmark whether the registrant is accelerated (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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—8,356,776 shares outstanding as of September 12, 2003.
INDEX
HI-TECH PHARMACAL CO., INC.
2
3
PART I. ITEM 1
HI-TECH PHARMACAL CO., INC.
CONDENSED BALANCE SHEETS
| | | July 31,
2003
| | April 30,
2003
|
| | | (unaudited) | | (From Audited
Financial
Statements) |
| ASSETS | | | | | | |
| | |
CURRENT ASSETS | | | | | | |
| | |
Cash and cash equivalents | | $ | 39,292,000 | | $ | 15,584,000 |
| | |
Accounts receivable, less allowances of $270,000 at July 31, 2003 and at April 30, 2003 | | | 5,840,000 | | | 5,609,000 |
| | |
Inventories | | | 8,358,000 | | | 6,824,000 |
| | |
Prepaid Taxes | | | 2,276,000 | | | 1,881,000 |
| | |
Deferred taxes | | | 718,000 | | | 718,000 |
| | |
Prepaid expenses and other receivables | | | 800,000 | | | 947,000 |
| | |
|
| |
|
|
TOTAL CURRENT ASSETS | | $ | 57,284,000 | | $ | 31,563,000 |
| | |
Property, Plant and equipment—net | | | 11,884,000 | | | 11,571,000 |
| | |
Other assets | | | 828,000 | | | 694,000 |
| | |
|
| |
|
|
TOTAL ASSETS | | $ | 69,996,000 | | $ | 43,828,000 |
| | |
|
| |
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| | |
CURRENT LIABILITIES | | | | | | |
| | |
Current Portion—Long-term debt | | $ | 30,000 | | $ | 62,000 |
| | |
Accounts payable and accrued expenses | | | 7,851,000 | | | 7,416,000 |
| | |
|
| |
|
|
TOTAL CURRENT LIABILITIES | | $ | 7,881,000 | | $ | 7,478,000 |
| | |
Long-term debt | | | | | | |
| | |
Deferred Taxes | | | 1,310,000 | | | 1,310,000 |
| | |
|
| |
|
|
TOTAL LIABILITIES | | $ | 9,191,000 | | $ | 8,788,000 |
| | |
|
| |
|
|
SHAREHOLDERS’ EQUITY(1) | | | | | | |
| | |
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 8,349,000 at July 31, 2003 and 7,432,000 at April 30, 2003 | | | 83,000 | | | 74,000 |
| | |
Additional capital | | | 38,282,000 | | | 13,479,000 |
4
Retained earnings | | | 23,241,000 | | | | 22,288,000 | |
| | |
Treasury stock, 292,000 shares of common stock, at cost on July 31, 2003 and April 30, 2003 | | | (801,000 | ) | | | (801,000 | ) |
| | |
|
|
| |
|
|
|
TOTAL SHAREHOLDERS’ EQUITY | | $ | 60,805,000 | | | $ | 35,040,000 | |
| | |
|
|
| |
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 69,996,000 | | | $ | 43,828,000 | |
| | |
|
|
| |
|
|
|
| (1) | | The number of shares outstanding, per share amounts, common stock and additional capital for all periods has been adjusted to reflect a three for two stock split distributed in January 2003. |
See notes to condensed financial statements
5
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
| | | Three months ended July 31,
| |
| | | 2003
| | | 2002
| |
NET SALES | | $ | 9,264,000 | | | $ | 8,829,000 | |
Cost of goods sold | | | 4,516,000 | | | | 4,351,000 | |
| | |
|
|
| |
|
|
|
GROSS PROFIT | | | 4,748,000 | | | | 4,478,000 | |
Selling, general, administrative expenses | | | 2,946,000 | | | | 2,686,000 | |
Research & product development costs | | | 563,000 | | | | 449,000 | |
Contract research income | | | (250,000 | ) | | | (117,000 | ) |
Interest expense | | | 7,000 | | | | 9,000 | |
Interest income and other | | | (38,000 | ) | | | (54,000 | ) |
| | |
|
|
| |
|
|
|
TOTAL | | $ | 3,228,000 | | | $ | 2,973,000 | |
| | |
|
|
| |
|
|
|
Income before provision for income taxes | | | 1,520,000 | | | | 1,505,000 | |
Provision for income taxes | | | 567,000 | | | | 561,000 | |
| | |
|
|
| |
|
|
|
NET INCOME | | $ | 953,000 | | | $ | 944,000 | |
| | |
|
|
| |
|
|
|
BASIC EARNINGS PER SHARE(1) | | $ | .13 | | | $ | .14 | |
| | |
|
|
| |
|
|
|
DILUTED EARNINGS PER SHARE(1) | | $ | .11 | | | $ | .13 | |
| | |
|
|
| |
|
|
|
Weighted average common shares outstanding—basic | | | 7,298,000 | | | | 6,831,000 | |
Effect of potential common shares | | | 1,110,000 | | | | 653,000 | |
| | |
|
|
| |
|
|
|
Weighted average common shares outstanding—diluted | | | 8,408,000 | | | | 7,484,000 | |
| | |
|
|
| |
|
|
|
| (1) | | The number of shares outstanding, per share amounts, common stock and additional capital for all periods has been adjusted to reflect a three for two stock split distributed in January 2003. |
See notes to condensed financial statements
6
HI-TECH PHARMACAL CO., INC.
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
| | | Three months ended July 31,
| |
| | | 2003
| | | 2002
| |
CASH FLOWS FROM OPERATING ACTIVITIES | | $ | 416,000 | | | $ | 976,000 | |
| | |
|
|
| |
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Mortgaged property—repayments | | | (32,000 | ) | | | (47,000 | ) |
Issuance of common stock | | | 23,817,000 | | | | 89,000 | |
| | |
|
|
| |
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES | | $ | 23,785,000 | | | $ | 42,000 | |
| | |
|
|
| |
|
|
|
Purchases of property, plant and equipment | | | (359,000 | ) | | | (561,000 | ) |
Increase in Other assets | | | (134,000 | ) | | | (99,000 | ) |
| | |
|
|
| |
|
|
|
CASH (USED IN) INVESTING ACTIVITIES | | $ | (493,000 | ) | | $ | (660,000 | ) |
| | |
|
|
| |
|
|
|
NET INCREASE IN CASH | | | 23,708,000 | | | | 358,000 | |
Cash and cash equivalents at beginning of the period | | | 15,584,000 | | | | 10,487,000 | |
| | |
|
|
| |
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 39,292,000 | | | $ | 10,845,000 | |
| | |
|
|
| |
|
|
|
Supplemental disclosures of cash flow information: Cash paid for | | | | | | | | |
Interest | | $ | 6,000 | | | $ | 3,000 | |
Income taxes | | $ | — | | | $ | 473,000 | |
See notes to condensed financial statements
7
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 July 31, 2003 are not necessarily indicative of the results that may be expected for the year ended April 30, 2004. For further information, refer to the financial statements and footnotes thereto for the year ended April 30, 2003 on Form 10-K.
REVENUE RECOGNITION
Revenue is recognized for product sales upon shipment 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. The Company has estimated sales returns, allowances and discounts. 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.
For generic pharmaceutical products, which includes private label contract manufacturing, net sales for the three months ended July 31, 2003 and July 31, 2002 were $8,404,000 and $7,543,000 respectively. The Company’s Health Care Products division, which markets the Company’s branded products, for the three months ended July 31, 2003 and July 31, 2002 had net sales of $860,000 and $1,286,000, respectively.
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.
The number of shares outstanding, per share amounts, common stock and additional capital for all periods has been adjusted to reflect a three for two stock split distributed in January 2003.
WORKING CAPITAL REVOLVING LOAN
The Company has a 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 three months ended July 31, 2003 there were no borrowings under the credit facility.
INVENTORIES
The components of inventory consist of the following:
| | | July 31, 2003
| | April 30, 2003
|
Raw materials | | $ | 4,895,000 | | $ | 3,955,000 |
Finished products and work in process | | | 3,463,000 | | | 2,869,000 |
| | |
|
| |
|
|
| | | $ | 8,358,000 | | $ | 6,824,000 |
| | |
|
| |
|
|
8
HI-TECH PHARMACAL CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
July 31, 2003
FIXED ASSETS
The components of net plant and equipment consist of the following:
| | | July 31, 2003
| | April 30, 2003
|
Land and Building | | $ | 7,048,000 | | $ | 7,037,000 |
Machinery and equipment | | | 14,791,000 | | | 14,239,000 |
Transportation equipment | | | 29,000 | | | 29,000 |
Computer equipment | | | 1,083,000 | | | 990,000 |
Furniture and fixtures | | | 698,000 | | | 651,000 |
| | |
|
| |
|
|
| | | $ | 23,649,000 | | $ | 22,946,000 |
Accumulated depreciation and amortization | | | 11,765,000 | | | 11,375,000 |
| | |
|
| |
|
|
TOTAL FIXED ASSETS | | $ | 11,884,000 | | $ | 11,571,000 |
| | |
|
| |
|
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The components of accounts payable and accrued expenses consist of the following:
| | | July 31, 2003
| | April 30, 2003
|
Accounts payable | | $ | 6,112,000 | | $ | 5,237,000 |
Accrued expenses | | | 1,739,000 | | | 2,179,000 |
| | |
|
| |
|
|
| | | $ | 7,851,000 | | $ | 7,416,000 |
| | |
|
| |
|
|
Common Stock
On July 17, 2003 the Company entered into a definitive agreement with certain accredited investors with respect to the private placement of 860,000 shares of its common stock at a purchase price of $29.21 per share, for net proceeds of approximately $23.8 million. In addition, the private placement investors have a right to purchase up to an additional 258,000 shares of common stock at $29.21 per share. The additional investment rights are exercisable upon closing and will expire 90 trading days after August 20,2003, the effective date of the registration statement for the resale of the common stock. The net proceeds will be used mainly for the funding of future acquisitions, research and development and for general corporate purposes.
Stock-based compensation:
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, encourages the use of the fair value based method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows entities to continue to apply the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion 25, “Accounting for Issued to Employees”, and related interpretations and provide pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value based method of accounting had been applied to employee awards. The Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by APB Opinion 25 and provide the disclosures required by SFAS No. 123 and SFAF No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which was released in December 2002 as an amendment of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to stock-based employee compensation.
9
| | | Three Months
2003
| | | Ended July
31, 2002
| |
Reported net income | | $ | 953,000 | | | $ | 944,000 | |
Stock-based employee compensation determined under the fair value based method, net of tax | | | (120,000 | ) | | | (42,000 | ) |
| | |
|
|
| |
|
|
|
Pro forma net income | | $ | 833,000 | | | $ | 902,000 | |
| | |
|
|
| |
|
|
|
Basic earnings per share: | | | | | | | | |
As reported | | $ | 0.13 | | | $ | 0.14 | |
Pro forma | | $ | 0.11 | | | $ | 0.13 | |
| | |
Diluted earnings per share: | | | | | | | | |
As reported | | $ | 0.11 | | | $ | 0.13 | |
Pro forma | | $ | 0.10 | | | $ | 0.12 | |
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.
During the quarter ended July 31, 2003 the Company’s significant customers were Walgreens, which accounted for approximately 13% of the net sales and Cardinal Distribution L.P which accounted for approximately 10% of net sales. At July 31, 2003, trade receivables from these customers were approximately 22%.
The Company has a 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 three months ended July 31, 2003 there were no borrowings under the credit facility.
The Company has a net investment of approximately $172,000 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 filed 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.
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
10
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. On May 14, 2002, the Company received a settlement proposal from the plaintiffs offering to settle the matter against the Company. The Company has not accepted this settlement offer and has agreed with the Attorney General to submit this matter to mediation by the court. The Company believes that the final settlement offer will not be in excess of $75,000.
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 has reached a settlement in the amount of approximately $8,000, which is subject to court approval.
The Company believes that the effect of these litigation matters will not be material to the financial position or operations of the Company.
11
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
July 31, 2003
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 JULY 31, 2003 COMPARED TO THREE MONTHS ENDED July 31, 2002
Net sales for the three months ended July 31, 2003 were $9,264,000, an increase of $435,000 or approximately 5%, as compared to the net sales for the three months ended July 31, 2002 of $ 8,829,000. Net sales for generic pharmaceutical products, which includes private label contract manufacturing, for the three months ended July 31, 2003 was $ 8,404,000, an increase of $861,000, or 11%, compared to the fiscal 2002 respective period sales of $7,543,000 as a result of increased sales of its core products to existing customers. The units shipped increased approximately 12% while the average selling price decreased approximately 1%. The Health Care Products division, which markets the Company’s branded products, for the three months ended July 31, 2003 and 2002 had net sales of $860,000 and $1,286,000 respectively, a decrease of $426,000 primarily as a result of higher product returns and a discontinued product. The Company does not expect any additional significant returns due to this discontinued product.
During the quarter ended July 31, 2003 the Company’s significant customers were Walgreens, which accounted for approximately 13% of the gross sales and Cardinal Distribution L.P. which accounted for approximately 10% of gross sales. At July 31,2003, trade receivables from these customers were approximately 22%.
Cost of sales, as a percentage of net sales, remained 49% or $4,516,000 for the three months ended July 31, 2003 compared to 49% or $4,351,000 for the three months ended July 31, 2002. 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 July 31, 2003 increased to $563,000, or 6% of net sales compared to $449,000 or 5% of net sales for the same period ended July 31, 2002. Contract research income increased to $250,000 in the fiscal 2003 period compared to $117,000 in the fiscal 2002 respective period.
Selling, general and administrative expenses, as a percentage of net sales, increased to 32% from 30%, or $2,946,000 and $2,686,000 for the three months ended July 31, 2003 and 2002, respectively. This was the result of increased selling expenses.
Net income for the three months ended July 31, 2003 and 2002 was $ 953,000 and $ 944,000, respectively, an increase of $9,000, or 1.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s operations are financed principally by cash flow from operations. During the July 31, 2003 period, working capital increased to $49,403,000 from $24,085,000 at April 30, 2003, an increase of $25,318,000, which was primarily due to the sale of 860,000 shares of the Company’s common stock in a private placement on July 17, 2003 resulting in net proceeds of approximately $23,800,000. During the three months ended July 31, 2003 the Company invested $ 359,000 in fixed assets. The Company has started an expansion of a warehouse facility which is expected to cost approximately $700,000.
On July 17, 2003 the Company entered into a definitive agreement with certain accredited investors with respect to the private placement of 860,000 shares of its common stock at a purchase price of $29.21 per share, for net proceeds of approximately $23.8 million. In addition, the private placement investors have a right to purchase up to an additional 258,000 shares of common stock at $29.21 per share. The additional investment rights are exercisable upon closing and will expire 90 trading days after August 20,2003, the effective date of the registration statement for the resale of the common stock. The net proceeds will be used mainly for the funding of future acquisitions, research and development and for general corporate purposes.
The Company has a 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
12
well as other covenants and prohibits the payment of cash dividends. For the three months ended July 31, 2003, 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.
The Company has a net investment of approximately $172,000 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.
New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations.
Management does not anticipate that adoption of this standard will have a material impact on the Company’s financial position or results of operations.
Revenue Recognition
Revenue is recognized for product sales upon shipment 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.
Returns – Consistent with industry practice, the Company maintains a return policy that allows its customers to return product within a specified period prior to expiration. The Company’s estimate for returns is based upon its historical experience with actual returns. While such experience has allowed for reasonable estimations in the past, history may not always be an accurate indicator of future returns. The Company continually monitors its estimates for returns and makes adjustments when it believes that actual product returns may differ from the established accruals.
Chargebacks – The Company markets products directly to wholesalers, distributors, retail pharmacy chains, mail order pharmacies and group purchasing organizations. The Company also markets products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and pharmacy benefit management companies, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers and enters into agreements with its wholesalers to establish contract pricing for certain products. Indirect customers then independently select a wholesaler from which to actually purchase the products at these contracted prices. The Company will provide credit to the wholesaler for any difference between the contracted price and the wholesaler’s invoice price. Such credit is called a chargeback. The estimate for chargebacks is based on expected and historical sell-through levels by its wholesaler customers to contracted customers. The Company continually monitors its provision for chargebacks and makes adjustments when it believes that actual chargebacks may differ from established estimates.
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.
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.
13
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 filed an answer to this action and believes it has meritorious defenses. The Company’s defense costs, after its deductible, are being covered under its product liability policy which had 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 has filed an answer to this action and believes it has meritorious defenses. The Company’s defense costs, after its deductible, are being covered under its Product Liability Policy which had 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. On May 14, 2002, the Company received a settlement proposal from the plaintiffs offering to settle the matter against the Company. The Company has not accepted this settlement offer and has agreed with the Attorney General to submit this matter to mediation by the court. The Company believes that the final settlement offer will not be in excess of $75,000.
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 has reached a settlement in the amount of approximately $8,000, which is subject to court approval.
The Company believes that these litigation matters will not have a material effect on the financial position of the Company.
From time to time, the Company becomes involved in various legal matters in addition to the above described matters, that the Company considers to be in the ordinary course of business. While the Company is not presently able to determine the potential liability, if any, related to such matters, the Company believes none of such matters, individually or in the aggregate, will have a material adverse effect on its financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of security holders was held on June 5, 2003. 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 the item voted upon.
Proposal to amend the Company’s certification of incorporation from 10,000,000 shares to 50,000,000 shares the aggregate number of shares of common stock authorized to be issued by the Company.
For
| | Against
| | Abstain
|
6,252,980 | | 826,463 | | 14,471 |
14
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| 10 | | Employment Agreement of William Peters, Vice President – Corporate Development |
| 31.1 | | Rule 13A-14 (a)/15D-14(a) Certification |
| 31.2 | | Rule 13A-14 (a)/15D-14(a) Certification |
| 32 | | Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Form 8-K filed with the SEC (“Securities and Exchange Commission”) on July 11, 2003
Form 8-K filed with the SEC on July 16, 2003
Form 8-K filed with the SEC on July 17, 2003
Form 8-K filed with the SEC on July 23, 2003
15
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: September 15, 2003
| |
By: | | /s/ DAVID SELTZER
|
| | | David Seltzer (President and Chief Executive Officer) |
Date: September 15, 2003
| |
By: | | /s/ ARTHUR S. GOLDBERG
|
| | | Arthur S. Goldberg (Vice President—Finance and Chief Accounting Officer) |
16
