HI TECH PHARMACAL CO INC - 10-K Annual 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 if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

The Company manufactures and distributes its products from facilities at Amityville, NY. The Company sells its products in two primary markets: 1) Generic pharmaceuticals and 2) Branded products. The Company markets its generic pharmaceuticals primarily under the Hi-Tech brand name. The Company also markets a line of branded products primarily for people with diabetes, including Diabetic Tussin^®, DiabetiDerm^®, DiabetiSweet^® and Multi-betic^®. In addition, the Company markets other niche over the counter brands to the general healthcare marketplace under such brands as Kosher Care^™, Nasal Ease^™, and Soothing Comfort^™.

The Company’s customers include chain drug stores, drug wholesalers, generic distributors, mass merchandisers, mail-order pharmacies and certain Federal government agencies. Some of the Company’s key customers include Bergen-Brunswig, CVS, Eckerds, K-Mart, McKesson, Rite-Aid, Rugby Labs, a Division of Watson Pharmaceuticals, Walgreens, Wal-Mart and Ivax Pharmaceuticals. The Company produces a wide range of products for various disease states including asthma, cough and cold, allergies, pain, stomach, oral care and neurological disorders and others.

The Company currently markets more than 70 products to approximately 100 customers. For the fiscal year ended April 30, 2002 the Company’s sales breakdown was as follows: 79% generic manufacturing and 21% branded products. The Steri-Med Division (sterile products) contributed approximately $3.9 million of which 87% was from the sales of two albuterol inhalation products.

The Company’s Health Care Products Division (“HCP”) is a leading marketer of branded products that include over-the-counter, as well as prescription products primarily for people with diabetes. HCP recently introduced 3 new products: Multi-betic^®, a multi-vitamin and mineral supplement formula; DiabetiDerm^® Foot Rejuvenating Cream; and DiabeticTussin^®Sore Throat Spray. These new products supplement the Company’s existing products, including its flagship brand Diabetic Tussin^® which is available in several formulations, including DM, Max Strength, EX, Allergy and Cough Drops. The Company also markets Diabetic Tussin-C, a prescription formulation for severe coughs, through a joint venture with TEAMM Pharmaceuticals.

HCP also markets DiabetiSweet^®—a unique sugar substitute which is aspartame free and heat stable for baking and cooking. DiabeticSweet^® has become HCP’s number two selling product after Diabetic Tussin^®. HCP also markets the following products: DiabetiDerm^® Cream and Lotion for severe dry skin. The Company plans to introduce at least two new brands for people with diabetes in this fiscal year.

HCP will continue to aggressively develop and market new items for the diabetic market. There are estimated to be more than 16 million diabetics in the United States alone; 10 million diagnosed and 800,000 new cases per year. There are more than 100 million cases worldwide. The Company is confident that it can maintain its leadership position in the area of improving the lifestyle of people with diabetes and will continue its penetration of this market.

The following table sets forth the principal products marketed by the Company and the names of certain national brands with which these products compete. All of the products listed below are marketed under the Company’s brand names H-T^™ or RX Choice^™ or through its HCP Division and in certain cases under private label.

Company Product		Examples of Competing National Products

Prescription Drugs
Carbofed DM Syrup & Drops		Rondec^®-DM
Triple Tannate Pediatric Suspension		Rynatan^®
Quad-Tuss Tannate Pediatric Suspension		Rynatuss Pediatric Suspension
Promethazine HCI & Dextromethorphan Hbr Syrup		Phenergan^® w/ Dextromethorphan Syrup
Promethazine HCL & Codeine		Phenegran^® with Codeine
Albuterol Sulfate Inhalation 0.5% (Sterile)		Proventil^® Inhalation Solution
Albuterol Sulfate Syrup		Ventolin^® Syrup
Albuterol Sulfate Inhalation 0.83% (Sterile)		Proventil^® Inhalation Solution

Tri-Vitamin Drops with Iron & Fluoride (0.25)		Tri-Vi-Flor^® w/Iron
Tri-Vitamin Drops with Fluoride (0.25)(0.5)		Tri-Vi-Flor^®
Tri-Vitamin Drops with Fl(.25)(.5)		Tri-Vi-Flor^®
Poly-Vitamin Drops with Fluoride (0.25)(0.5)		Poly-Vi-Flor^®
Poly-Vitamin Drops with Iron & Fluoride (0.25)(0.5)		Poly-Vi-Flor^®
Valproic Acid Syrup		Depakene^® Syrup
Hydroxyzine Hydrochloride Syrup		Atarax^®
Amantadine Hydrochloride Syrup		Symmetrel^® Syrup
Lidocaine HCL Oral Topical Solution		Xylocaine^®
Lactulose Solution USP		Chronulac^®, Cephulac^®
APAP with Codeine Oral Solution		Tylenol^® with Codeine
Chlorhexidine Gluconate Oral Rinse		Peridex^®
Cimetidine Hydrochloride Oral Solution		Tagamet^® Oral Solution300 mg/5mL
Tannate-12 Suspension		Tussi-12^®
Erythromycin Topical Soln.		T-Stat Solution 2%^®
Sulfamethoxazole & Trimethoprim
Oral Susp. Grape & Cherry		Bactrim Pediatric Susp.^®
Brometane DX		Dimetane DX^®
H-T Tussin DM 20/2000		Dura Tuss DM^®
Luride Drops		Sodium Fluoride Drops^®


Vitamins and Nutritional Supplements
Tri-Vitamin Drops		Tri-Vi-Sol^® Drops
Poly-Vitamin Drops		Poly-Vi-Sol^® Drops
Poly-Vitamin Drops with Iron		Poly-Vi-Sol^® with Iron
Golden Age Liquid Vitamins & Minerals		Centrum^® Liquid
Ferrous Sulfate Drops		Fer-in-Sol^® Drops
Ferrous Sulfate Elixir		Feosol Exlixir
Vitamin C Liquid		Vitamin C Liquid

Company Product		Examples of Competing National Products
Over-The-Counter Pharmaceuticals Branded Health Care Products
Diabetic Tussin^®-Formula DM
Diabetic Tussin^®-Formula DM Maximum Strength
Diabetic Tussin^®-Formula EX
Diabetic Tussin^® Allergy Relief Formula
Diabetic Tussin^® Children’s Formula Diabetic Tussin^® Sore Throat Spray DiabetiDerm^™ Moisturizing Lotion for Severe Dry Skin
DiabetiDerm^™ Moisturizing Cream for Severe Dry Skin
DiabetiDerm^™ Foot Rejuvenating Cream
DiabetiSweet^®—Aspartane Free Sugar Substitute
Multi-betic^®
Kosher Care^™—Tussin DM
Kosher Care^™—Pain and Fever Relief
Kosher Care^™—Allergy Relief
NasalEase^™ Moisturizing Nasal Spray

Company Product		Examples of Competing National Products

Over-The-Counter Products
Active Syrup		Actifed Syrup
Hygienol		Balneol
Aromatic Cascara Sagrada		Cascara Sagrada
Bromtapp Elixir Alcohol Free		Dimetapp^® Elixir
Bromtapp DM Elixir Alcohol Free		Dimetapp^® DM Elixir
Guaiatussin-DM		Robitussin^® DM
Guaiatussin DAC (CV)		Robitussin DAC (CV)
Guaiatussin AC (CV)		Robitussin AC (CV)
Guaiatussin (Alcohol Free)		Robitussin (Alcohol Free)
Children’s Allergy Medicine		Benadryl^®
Oxymetazoline Nasal Spray		Afrin^® Nasal Spray
Apap Drops		Tylenol^® Drops
Apap Elixir		Tylenol^® Elixir
Equalizer Gas Relief Drops		Mylicon^® Drops
K-Pec with Attapulgite		Kaopectate^®
Minoxidil Topical Solution 2%		Rogaine^®
Loperamide HCL Oral Solution		Imodium A-D^®
Geri-Tonic		Gevrabon
Nausea Control Cherry Flavor		Emetrol Cherry
Peri-Docu Syrup		Peri-Colace
Docu Syrup		Colace Syrup
Docu Liquid		Colace Liquid
Eye Wash/Irrigating Solution		Eyewash
Hypotonic Tears		HypoTears
Redness Reliever Eye Drops		Visine^®
Calcium Glubionate Syrup		Neo-Calglucon

The Company’s research and development activities consist of new generic drug product development efforts and manufacturing process improvements. New product activities are primarily directed at conducting research studies to develop generic drug formulations, reviewing and testing such formulations for therapeutic equivalence to brand name products and development of unique products for its Health Care Products Division.

The Company’s product development strategies depend upon its ability to formulate and develop generic drug products equivalent to brand name drugs for which, in some cases, patent protection is expiring or has already expired and to obtain FDA approval using the ANDA procedure for the manufacture and sale of such products.

The completion of a prospective product’s formulation, testing and FDA approval generally takes up to several years. Development activities for each generic product could begin several years in advance of the patent expiration date, which may include bioequivalency studies which are a significant cost of such ANDA submissions. Consequently, the Company is presently selecting and will continue to select and develop drugs it

For the fiscal years ended April 30, 2002 and 2001, total R&D expenditures were $1,747,000 and $1,683,000, respectively. The Company currently has several products in various stages of development, which belong to different therapeutic categories and when approved by the FDA, may represent a large potential market for the Company. The Company continues to place increasing emphasis on its R&D activities. The Company has 8 products currently submitted to the FDA for approval and in addition has another 15 products in various stages of development.

The Company has the approval of the DEA to sell certain generic pharmaceutical products containing narcotics. The Company is currently manufacturing six preparations containing narcotics. In order to manufacture and sell products containing narcotics, the Company has implemented stringent security precautions to insure that the narcotics are accounted for and properly stored. The Company is currently developing other products that contain narcotics.

The Company’s Steri-Med Division is manufacturing ophthalmic, otic and inhalation products. The manufacture of ophthalmic, otic, and other products requires a sterile environment, validation of the manufacturing process and special equipment and trained personnel. The Company is currently producing 10 different products in its sterile facility. The Company intends to use the ANDA procedure to obtain FDA approval for the manufacture of certain products in this facility. In addition, the Company has several contract manufacturing agreements for products at various stages of development to be manufactured in its sterile facility. The Company currently manufactures over-the-counter eye drops, eye wash and artificial tears and two sterile Albuterol inhalation products previously approved by the FDA, as well as an FDA approved product for a pharmaceutical company.

The Company and Reuben Seltzer, a director of the Company, each have a 21.25% interest in Marco Hi-Tech JV Ltd. (“Marco Hi-Tech”), a New York corporation, which markets raw materials for nutraceutical products and has licensed the patent rights to Huperzine and analogues from the Mayo Clinic. Huperzine is a naturally derived compound belonging to a class known as acetyl cholinesterase inhibitors. Huperzine has been shown to inhibit the enzyme responsible for the breakdown of acetylcholine, a neurotransmitter or brain chemical, that is believed to be critical in learning and memory. Marco Hi-Tech is currently distributing Huperzine as a dietary supplement under the Dietary Supplement Health and Education Act of 1994 and developing Huperzine A and derivatives for a pharmaceutical application. Marco Hi-Tech has entered into a supply arrangement for its Huperzine product with a multi-national leader in the nutraceutical market. It is also developing other products for the nutraceutical market.

The Company markets its products to chain drug stores, drug wholesalers, generic distributors, mass merchandise chains, mail order pharmacies, managed care providers, and local, state and Federal government agencies. The Company sells its generic products to over 100 active accounts located throughout the United States. For the fiscal year ended April 30, 2002, no customer accounted for 10% or more of the Company’s net sales. For the fiscal year ended April 30, 2001, one customer, Rugby Labs, a division of Watson Laboratories, accounted for net sales of approximately 10%. The Company’s top ten customers accounted for approximately 53% and 58% of the Company’s total sales for each of the fiscal years ended April 30, 2002 and 2001, respectively. If any of the Company’s top five customers discontinues or substantially reduces its purchases from the Company, it may have a material adverse effect on the Company’s business and financial condition. The Company believes, however, that it has good relationships with its customers.

The Company’s Health Care Products Division (“HCP”) currently markets over the counter, nutritional and cosmetic products for the diabetic consumer. The Company’s products are Diabetic Tussin^®, its flagship brand available in several formulations, including Diabetic Tussin^® DM, Maximum Strength, Children’s Formula and Allergy Formula and Cough Drops and Diabetic Tussin^® Sore Throat Spray. The Company’s Diabetic Tussin^® DM is the best selling sugar free over-the-counter cough medication in the United States. HCP also markets dermatological moisturizers under the brand name DiabetiDerm^®, which include DiabetiDerm^® Cream and Lotion and DiabetiDerm^® Foot Rejuvenating Cream. HCP’s DiabetiSweet^® is a unique aspartame free heat stable sugar substitute formulated for use in baking and cooking. HCP recently launched Multi-betic^®, a multi-vitamin and mineral supplement formula, DiabetiDerm^® Foot Rejuvenating Cream and Diabetic Tussin^® Sore Throat Spray.

HCP also markets several other niche over-the-counter brands, including Nasal Ease^™, a nasal moisturizer, which contains zinc and Kosher Care—a line of over-the-counter products certified as Kosher. HCP intends to continue its focus on introducing branded over-the-counter formulations targeted to the diabetic market as well as other niche markets. HCP introduced its first ever branded prescription product, Diabetic Tussin-C, a formulation for severe coughs by prescription only. This product is being detailed to physicians through a joint venture with TEAMM Pharmaceuticals. Products sold through the Health Care Products Division accounted for approximately 18%, 20% and 24% of the Company’s total net sales for fiscal 2002, fiscal 2001 and fiscal 2000, respectively.

The Company markets its products using various marketing strategies, which include more contemporary packaging to improve point-of-purchase impact, media, trade and consumer journal advertising, as well as coupon promotions, professional and consumer sampling programs, as well as telemarketing efforts. The Company has expanded its marketing strategy with programs to include marketing ventures with major companies selling popular non-competing diabetic medications, pharmacy programs and via the Internet using a website. As part of its marketing strategy, the Company places increasing emphasis on the Internet which it views as a very efficient tool in educating and reaching out to millions of people with diabetes. The Company’s website is registered under the domain name diabeticproducts.com and is linked to other diabetic based websites. HCP currently employs 6 full time employees in sales and marketing and 2 independent commission sales representative organizations. The Company has recently hired a director of marketing to assist in efficiently planning and implementing the Company’s marketing program.

The Company is focused on growth and will continue to develop new branded and generic products, and also will devise new marketing strategies to penetrate its markets. In order to maximize its growth and shareholder value, the Company is seeking to complement this internal effort by acquiring products for future marketing, as well as licensing rights to proprietary products and technologies for development and commercialization. The Company will place increasing emphasis on establishing co-development and co-marketing agreements with strategic partners.

The Company’s manufacturing facilities are designed to be flexible in order to allow the low cost production of a variety of products of different dosages, sizes, packagings and quantities while maintaining a high level of quality and customer service. This flexible production capability allows the Company to adjust on-line production in order to meet customer requirements.

The Company’s raw materials are readily available from multiple suppliers, and the Company is not dependent upon any single supplier for its needs, with the exception of certain products. The Company believes it has good, cooperative working relationships with its suppliers and is not experiencing any difficulty in obtaining its raw materials. If a supplier were unable to supply the Company, the Company believes it could locate an alternative supplier. However, any change in suppliers of a raw material could cause significant delays and cost increases in the manufacture of such product.

The market for generic pharmaceuticals is highly competitive. The Company’s direct competition consists of numerous generic drug manufacturers, many of which have greater financial and other resources than the Company. If one or more other generic pharmaceutical manufacturers significantly reduce their prices in an effort to gain market share, the Company’s profitability or market position could be adversely affected. Competition is based principally on price, quality of products, customer service, reputation and marketing support.

The Company’s products and facilities are subject to regulation by a number of Federal and state governmental agencies. The FDA, in particular, maintains oversight of the Company’s manufacturing process as well as the distribution of the Company’s products. In July 1999, the Company received a warning letter from the FDA, alleging certain non-compliance issues based upon a previously conducted investigation. In

response to the warning letter, the Company promptly met with the FDA, hired a highly qualified compliance consultant and prepared and submitted a corrective action plan on October 14, 1999 outlining its remediation efforts. The Company has since had several FDA inspections including its most recent which took place from February 11, 2002 through March 13, 2002. The Company believes the issues cited during the inspection were adequately addressed by the Company. On June 28, 2002 the Company received an approval from the FDA for its ANDA for Fluoxetine Oral Solution 20 mg/5 ml, which is the Company’s first approval since receiving a warning letter in July 1999.

Although some of the products currently manufactured and marketed by the Company do not require prior specific approval of the FDA, many products which the Company currently markets and intends to market under its product development program will require prior FDA approval using the ANDA procedure prior to being marketed. The Company currently has pending submissions for FDA approval of 8 generic products and has 23 approved products.

An ANDA can be filed for a drug which is the equivalent of a product previously approved by the FDA. Under the ANDA procedure, applicants are required to demonstrate through studies that, among other things, the drug product is chemically equivalent to the previously approved drug, that its facilities and personnel meet standards for the manufacture of such product, and that its production procedures will consistently adhere to FDA quality standards, and, in certain cases, the applicant is required to demonstrate the bioequivalency of its product (the rate and extent of absorption of a drug’s active ingredient and/or its availability at the site of drug action).

The FDA has extensive enforcement powers, including the power to seize noncomplying products, to seek court action to prohibit their sale and to seek criminal penalties for noncomplying manufacturers. Although it has no statutory power to force the recall of products, the FDA usually accomplishes a recall as a result of the threat of judicially imposed seizure, injunction and/or criminal penalties.

The Company is also subject to regulation by the DEA, which regulates the sale of pharmaceutical products that contain narcotics. The Company has received DEA approval and is manufacturing and selling 6 products containing narcotics. The DEA also has extensive enforcement powers, including the power to seize and prohibit the manufacture and sale of noncomplying products.

The sale of pharmaceutical products can expose the manufacturer of such products to product liability claims by consumers. A product liability claim, if successful and in excess of the Company’s insurance coverage, could have a material adverse effect on the Company’s financial condition. No product liability suit has ever been filed against the Company. The Company maintains a product liability insurance policy which provides coverage in the amount of $5,000,000 per claim and in the aggregate, with a $100,000 deductible.

As of April 30, 2002, the Company employed 155 full-time persons and 9 part-time persons, of whom 21 were engaged in executive, financial and administrative capacities; 12 in marketing, sales and service; 74 full-time employees and 9 part-time employees in production, warehousing and distribution; and 48 in research and development and quality control functions. The Company is not a party to a collective bargaining agreement. The management of the Company considers its relations with its employees to be satisfactory.

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. 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 reproductive toxicity of mercury compounds to the users of certain FDA-approved nasal sprays. The Company accepted a settlement offer which would require the Company to pay under $10,000 and is currently awaiting final settlement documents from the California Attorney General.

The table below sets forth, as of the end of the fiscal year ended April 30, 2002, for the Hi-Tech Pharmacal Co., Inc. Employee Stock Option Plan (“Plan”) the number of securities to be issued upon the exercise of outstanding options, warrants and rights, the weighted average exercise price of the outstanding options, and other than securities to be issued upon the exercise of the outstanding options, the number of securities remaining for future issuance under the Plan:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holder	986,575	$5.73	93,675
Equity compensation plans not approved by security holders	25,000	$5.50	—
Total	1,011,575		93,675

The Company has never declared or paid any cash dividends, and it does not anticipate that it will pay cash dividends in the foreseeable future. The declaration of dividends by the Company in the future is subject to the sole discretion of the Company’s Board of Directors and will depend upon the operating results, capital requirements and financial position of the Company, general economic conditions and other pertinent conditions or restrictions relating to any financing. The Company’s loan agreement prohibits the payment of cash dividends by the Company.

The selected financial data presented below for the five years ended April 30, 2002 are derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s financial statements and related notes thereto included elsewhere herein.

	Year Ended April 30,
	2002			2001		2000		1999		1998
Statement of operations data:
Net sales	$	33,282,000		29,649,000		26,414,000		23,266,000		22,366,000

Costs and expenses:
Costs of goods sold		17,507,000		15,315,000		14,979,000		13,210,000		13,084,000
Research and development		1,747,000		1,683,000		1,367,000		1,124,000		1,003,000
Selling, general and administrative		8,941,000		9,197,000		7,786,000		6,262,000		5,497,000
Contract research (income)		(368,000	)	(250,000	)	(279,000	)	(336,000	)	(228,000	)
Interest expense		55,000		104,000		126,000		220,000		268,000
Interest (income) and other		(202,000	)	(319,000	)	(277,000	)	(210,000	)	(93,000	)

	$	27,680,000

Delaware		11-2638720
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

Quarter Ended	High	Low
Fiscal 2001
July 31, 2000	4.81	3.75
October 31, 2000	5.19	3.25
January 31, 2001	4.50	3.69
April 30, 2001	6.06	4.00

Fiscal 2002
July 31, 2001	15.15	5.79
October 31, 2001	12.10	6.88
January 31, 2002	13.82	8.40
April 30, 2002	13.35	10.07