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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended April 30, 2003

Commission File Number 0-20424

Hi-Tech Pharmacal Co., Inc.

(Name of small business issuer in its charter)

369 Bayview Avenue, Amityville, New York 11701

(Address of principal executive offices) (Zip Code)

(631) 789-8228

Issuer’s telephone number

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.01 par value

(Title of Class)

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act):    Yes  ¨    No  x

The registrant’s revenues for its most recent fiscal year ended April 30, 2003 were $47,446,000.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 31, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter was $45,522,000, based upon the closing price of the common stock on that date, as reported by NASDAQ. Shares of common stock known to be owned by directors and executive officers of the registrant subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. No determination has been made that such persons are “affiliates” within the meaning of Rule 12b-2 under the Exchange Act. The number of shares of common stock of the registrant outstanding as of July 24, 2003 was 8,353,476.

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HI-TECH PHARMACAL CO., INC.

INDEX TO FORM 10-K

FOR THE YEAR ENDED APRIL 30, 2003

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K and certain information incorporated herein by reference contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K include, without limitation, statements regarding operating results, product development, marketing initiatives, business plans and anticipated trends. The forward-looking statements in this Annual Report on Form 10-K are based on information available to the Company on the date hereof. The Company assumes no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.

PART I

General

Hi-Tech Pharmacal Co., Inc. (the “Company”), a Delaware corporation incorporated in April 1983, is a growing specialty manufacturer and marketer of prescription, over-the-counter and nutritional products.

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 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^® and Nasal Ease^®.

The Company’s primary business is the manufacture of liquid, cream and ointment pharmaceutical formulations. The Company also specializes in the manufacture of products in its state of the art sterile facility capable of producing ophthalmic, otic and inhalation products.

The Company’s customers include chain drug stores, drug wholesalers, managed care purchasing organizations, certain Federal government agencies, generic distributors, mass merchandisers, hospitals and mail-order pharmacies. Some of the Company’s key customers include Walgreens, CVS, Cardinal Distribution L.P., Bergen-Brunswig, Eckerds, K-Mart, McKesson, Rugby Labs, a Division of Watson Pharmaceuticals, and Wal-Mart. The Company produces a wide range of products for various disease states, including asthma, bronchial disorders, dermatological disorders, allergies, pain, stomach, oral care and neurological disorders and other conditions.

The Company currently markets more than 70 products to approximately 100 customers. For the fiscal year ended April 30, 2003 the Company’s sales breakdown was as follows: 86% generic manufacturing and 14% branded products. The Steri-Med Division (sterile products) contributed approximately $3.4 million, which is included in generic manufacturing, of which 88% was from the sales of two albuterol inhalation products.

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The Company’s Health Care Products Division (“HCP”) is a leading marketer of branded products that include over-the-counter and nutritional, as well as prescription, products primarily for people with diabetes. In fiscal 2003, HCP introduced three products: Multi-betic^®, a daily multi-vitamin and mineral supplement formula; DiabetiDerm^® Foot Rejuvenating Cream; and Diabetic Tussin^® Sore Throat Spray. These products supplement the Company’s existing products, including its flagship brand Diabetic Tussin^® which is available in several formulations, including DM, Maximum 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^®. The Company plans to introduce at least five new products for people with diabetes in fiscal 2004. The Company most recently introduced DiabetiTrim^® Shakes, a formula to provide the essential nutrients to help diabetics stay fit and maintain a healthy lifestyle.

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, of which 10 million are already diagnosed and 800,000 new cases are diagnosed 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.

HCP also continues to market its Kosher Care^® brand of products, as well as Nasal Ease^®.

The Company has received Abbreviated New Drug Application (“ANDA”) approvals for 27 products. Most recently, in February, 2003, the Company received approval from the Food and Drug Administration (“FDA”) to market its 15mg/5ml Prednisolone Syrup, the generic equivalent of Muro’s Prelone^® and, in March 2003 the Company received approval from the FDA to market its EQ 5mg base/5ml Prednisolone Sodium Phosphate Oral Solution, the generic equivalent of Celltech’s Pediapred^® Sodium Phosphate Oral Solution, intended for the treatment of endocrine, rheumatic and dermatological disorders and allergic states in adults and children. In September 2002, the Company received ANDA approval to market Timolol Maleate Opthalmic Solution 0.5%, the generic equivalent of Merck’s Timoptic^® Opthalmic Solution 0.5%, the Company’s first sterile ophthalmic approval, and in June 2002, the Company received ANDA approval to market Fluoxetine Oral Solution 20mg/5ml, the generic equivalent of Eli Lilly’s Prozac^® Oral Solution.

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.

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Research and Product Development

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. Additionally, the Company co-develops products through arrangements with other companies. New generic product approvals are obtained from the FDA through the ANDA process, which requires the Company to demonstrate bioequivalence to a reference brand product. Generic products are generally introduced to the marketplace at the expiration of patent protection for the brand product or at the end of a period of non-patent market exclusivity. However, if an ANDA applicant is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to a reference drug product, that generic equivalent may be able to be marketed prior to the expiration of patent protection for the brand product. Such certification, commonly referred to as a Paragraph IV certification, results in a period of generic marketing exclusivity.

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This exclusivity lasts for 180 days during which the FDA cannot grant final approval to any other generic equivalent. To date, the Company has not filed for a Paragraph IV certification but may in the future.

The Company’s product development strategies depend in part upon its ability to formulate and develop such generic drug products 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 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 expects to market several years in the future. The ANDA approval process is generally less time-consuming and complex than the New Drug Application (“NDA”) approval process. It does not require new preclinical and clinical studies because it relies on the studies establishing safety and efficacy conducted for the drug previously approved through the NDA process. The ANDA process does, however, occasionally, require one or more bioequivalency studies to show that the ANDA drug is bioequivalent to the previously approved drug. Bioequivalence compares the bioavailability of one drug product with that of the referenced brand formulation containing the same active ingredient. When established, bioequivalency confirms that the rate of absorption and levels of concentration in the bloodstream of a formulation of the previously approved drug and the generic drug are equivalent. Bioavailability indicates the rate and extent of absorption and levels of concentration of a drug product in the bloodstream needed to produce the same therapeutic effect. Over the next few years, patent protection on a large number of brand drugs is expected to expire. These patent expirations should provide additional generic product opportunities.

The Company intends to concentrate its generic product development activities on brand products with significant US sales as well as niche, specialized or growing markets, such as liquid forms, sterile products and semi-solids, in areas that offer significant opportunities and other competitive advantages. In February 2003, the Company received approval from the FDA to market its 15mg/5ml Prednisolone Syrup, the generic equivalent of Muro’s Prelone^®, and in March 2003, the Company received approval from the FDA to market its EQ 5mg base/5ml Prednisolone Sodium Phosphate Oral Solution, the generic equivalent of Celltech’s Pediapred^® Sodium Phosphate Oral Solution, intended for the treatment of endocrine, rheumatic and dermatological disorders and allergic states in adults and children. In September 2002, the Company received ANDA approval to market Timolol Maleate Opthalmic Solution 0.5%, the generic equivalent of Merck’s Timoptic^® Opthalmic Solution 0.5%, the Company’s first sterile ophthalmic approval, and in June 2002, the Company received approval from the FDA to market Fluoxetine Oral Solution 20mg/5ml, the generic equivalent of Eli Lilly’s Prozac^® Oral Solution.

For the fiscal years ended April 30, 2003 and 2002, total research and development expenditures were $2,095,000 and $1,747,000, respectively. The Company has six products currently submitted to the FDA for approval and has another 15 products in various stages of development, which belong to different therapeutic categories and if 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.

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The Company’s research and development strategy focuses on the following product development areas:

All applications for FDA approval must contain information relating to product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. Information to support the bioequivalence of generic drug products or the safety and effectiveness of new drug products for their intended use is also required to be submitted. The Company files ANDAs when approval is sought to market a generic equivalent of a drug product previously approved under an NDA. One requirement for FDA approval of ANDAs is that the Company’s manufacturing procedures and operations conform to FDA requirements and guidelines, generally referred to as current Good Manufacturing Practices (“cGMP”). The requirements for FDA approval encompass all aspects of the production process, including validation and record keeping, and involve changing and evolving standards.

The Company has the approval of the Drug Enforcement Agency (“DEA”) to sell certain generic pharmaceutical products containing narcotics. The Company is currently manufacturing 6 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 sterile 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 6 different products in its sterile facility. The Company intends to use the ANDA procedure to obtain FDA approval for the manufacture of additional products in this facility. The Company currently manufactures over-the-counter eye drops, eye wash and artificial tears and 2 sterile Albuterol inhalation products previously approved by the FDA, as well as an FDA approved product for a pharmaceutical company.

Customers and Marketing

The Company markets its products to chain drug stores, drug wholesalers, managed care purchasing organizations, certain Federal government agencies, generic distributors, mass merchandisers, hospitals and mail order pharmacies. The Company sells its generic products to over 100 active accounts located throughout the United States. For the fiscal year ended April 30, 2003, Walgreens and Cardinal Distribution L.P. accounted for

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net sales of approximately 14% and 11%, respectively. These customers represented approximately 23% of the outstanding trade receivables at April 30, 2003. The Company’s top ten customers accounted for 64% and 53% of the Company’s total sales for each of the fiscal years ended April 30, 2003 and 2002, 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 utilizes its state of the art facilities and laboratories to offer contract manufacturing services that include research and development programs, to its existing as well as potential customers.

Consistent with industry practice, the Company has a return policy that allows its customers to return product within a specified period of the expiration date. The Company has arrangements with certain indirect customers to establish contract pricing for certain products. The indirect customer then independently selects a wholesaler from which to actually purchase the products at these contracted prices. The Company provides a chargeback credit to its wholesale customers for the difference between its invoice price to the wholesaler and the indirect customer’s contract price.

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, EX, 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. In fiscal 2003, HCP launched Multi-betic^®, a daily multi-vitamin and mineral supplement formula, DiabetiDerm^® Foot Rejuvenating Cream, and Diabetic Tussin^® Sore Throat Spray. The Company recently introduced DiabetiTrim^®, a nutritional shake, and intends to introduce at least 5 new products in fiscal 2004.

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 markets its 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 14% and 18% of the Company’s total sales for fiscal 2003 and fiscal 2002, respectively.

The Company markets its products using various marketing strategies, which include professional and consumer sampling programs, telemarketing efforts, coupon promotions and more contemporary packaging to improve point-of-purchase impact, media, and trade and consumer journal advertising. The Company has expanded its marketing strategy with programs

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to include marketing ventures with several 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 9 full time employees in sales and marketing and 2 independent commission sales representative organizations. The Company has also developed a telemarketing effort which targets diabetes educators and pharmacists.

The Company is focused on growth, 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.

Manufacturing

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.

Facilities

The Company is operating from five buildings on one site in Amityville, New York totaling approximately 141,000 square feet.

Building 1 - This 40,000 sq. ft. facility is dedicated to liquid and semi-solid production which consists of a compounding facility, 7 high speed filling lines and raw material warehousing space and pharmacy.

Building 2 - This 21,500 sq. ft. facility consists of narcotic manufacturing and cream and ointment filling, quality control and microbiology laboratories and the Company’s Steri-Med Unit for sterile manufacturing with 2 high speed sterile liquid filling lines and 1 high speed sterile ointment filling line.

Building 3 - This 21,500 sq. ft. facility is used for research and development laboratories and warehousing of components.

Building 4 - This 50,000 sq. ft. facility is used for warehousing space and as a distribution center.

Building 5 - This 8,000 sq. ft. facility is used for administrative offices.

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The Company believes the current facilities will be adequate for the next several years.

Raw Materials

The Company’s raw materials are generally readily available from multiple suppliers, and the Company is generally not dependent upon any single supplier for its needs, with the exception of certain products. However, in some cases, the raw materials used to manufacture pharmaceutical products are only available from a single FDA-approved supplier. Even when more than one supplier exists, the Company may elect to list, and in some cases has only listed, one supplier in its applications with the FDA. Any change in a supplier not previously approved must then be submitted through a formal approval process with the FDA.

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.

Competition

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.

Government Regulation

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. Facilities, procedures, operations and/or testing of products are subject to periodic inspection by the FDA, the Drug Enforcement Agency and other authorities. In addition, the FDA conducts pre-approval and post-approval reviews and plant inspections to determine whether the Company’s systems and processes are in compliance with cGMP and other FDA regulations. Certain of the Company’s suppliers are subject to similar regulations and periodic inspections. The Company has had several FDA inspections including its most recent which took place from December 12, 2002 through December 23, 2002. The Company believes the issues cited during the inspection were adequately addressed by the Company. Most recently, in February 2003, the Company received approval from the FDA to market its 15mg/5ml Prednisolone Syrup, the generic equivalent of Muro’s Prelone^® Syrup and in March 2003 the Company received approval from the FDA to market its EQ 5mg base/5ml Prednisolone Sodium Phosphate Oral Solution, the generic equivalent of Celltech’s Pediapred^® Sodium Phosphate Oral Solution, intended for the treatment of endocrine, rheumatic and dermatological disorders and allergic states in adults and children. In September, 2002 the Company received an approval to market Timolol Maleate Opthalmic Solution 0.5%, the generic equivalent of Merck’s Timoptic^® Opthalmic Solution 0.5%, the Company’s first sterile ophthalmic approval, and in June 2002 the Company received ANDA approval to market Fluoxetine Oral Solution 20 mg/5 ml, the generic equivalent of Eli Lilly’s Prozac^® Oral Solution.

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Although many of the products currently manufactured and marketed by the Company do not require prior specific approval of the FDA, certain products which the Company currently markets and intends to market under its product development program require prior FDA approval using the ANDA procedure prior to being marketed. The Company currently has pending submissions for FDA approval of 6 generic products and has 27 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 ANDA process is abbreviated in that the FDA waives the requirement of conducting complete preclinical and clinical studies and, instead, relies on bioequivalence studies.

A sponsor of an NDA is required to identify in its application any patent that claims the drug or a use of the drug, which is the subject of the application. Upon NDA approval, the FDA lists the approved drug product and these patents in the Orange Book. Any applicant who files an ANDA seeking approval of a generic equivalent version of a referenced brand drug before expiration of the referenced patent(s) must certify to the FDA that the listed patent is either not infringed or that it is invalid or unenforceable (a Paragraph IV certification). If the holder of the NDA sues claiming infringement, the FDA may not approve the ANDA application until a court decision favorable to the ANDA applicant has been rendered or the expiration of a 30-month litigation period. The Company has not utilized the Paragraph IV certification process but may in the future.

In addition to patent exclusivity, the holder of the NDA for the listed drug may be entitled to a period of non-patent, market exclusivity, during which the FDA cannot approve an application for a bioequivalent product. If the listed drug is a new chemical entity, the FDA may not accept an ANDA for a bioequivalent product for up to five years following approval of the NDA for the new chemical entity. If it is not a new chemical entity but the holder of the NDA conducted clinical trials essential to approval of the NDA or a supplement thereto, the FDA may not approve an ANDA for a bioequivalent product before expiration of three years. Certain other periods of exclusivity may be available if the listed drug is indicated for treatment of a rare disease or is studied for pediatric indications.

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.

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The DEA also has extensive enforcement powers, including the power to seize and prohibit the manufacture and sale of noncomplying products.

Medicaid, Medicare and other reimbursement legislation or programs govern reimbursement levels and require all pharmaceutical manufacturers to rebate a percentage of their revenues arising from Medicaid-reimbursed drug sales to individual states. The required rebate is currently 11% of the average manufacturer’s price for sales of Medicaid-reimbursed products marketed under ANDAs. The Company believes that Federal or state governments may continue to enact measures aimed at reducing the cost of drugs to the public. For example, the extension of prescription drug coverage to all Medicare recipients has gained significant political support.

Seasonality

The Company experiences seasonal variations in the demand for its cough and cold products. Therefore, no one quarter’s performance can be used to indicate the full year results. The Company’s revenues are typically lower during the first and fourth quarters of its fiscal year. The Company expects this seasonality to continue in the future.

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.

Environment

The Company believes that its operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on the Company’s earnings or competitive position.

Product Liability

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. The Company currently is a defendant in two product liability actions. See Item 3. Legal Proceedings for a complete description of such actions. The Company currently maintains a product liability insurance policy which provides coverage in the amount of $10,000,000 per claim and in the aggregate, with a $25,000 deductible.

Employees

As of April 30, 2003, the Company employed 190 full-time persons and 6 part-time persons, of whom 23 were engaged in executive, financial and administrative capacities; 16 in marketing, sales and service; 92 full-time employees and 6 part-time employees in production, warehousing and distribution; and 59 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.

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Risk Factors

The following risk factors could have a material adverse effect on the Company’s business, financial position or results of operations. These risk factors may not include all of the important factors that could affect the Company’s business or its industry or that could cause its future financial results to differ materially from historic or expected results or cause the market price of its common stock to fluctuate or decline.

Risk of New Product Introductions

The Company’s future revenue growth and profitability are dependent in part, upon its ability to develop and introduce new products on a timely basis in relation to its competitors’ product introductions. The Company’s failure to do so successfully could have a material adverse effect on its financial position and results of operations.

FDA approval is required before any drug product, including generic drug products, can be marketed. The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time-consuming, costly and largely unpredictable. The Company may be unable to obtain requisite FDA approvals on a timely basis for new generic products that it may develop. The timing and cost of obtaining FDA approvals could adversely affect the Company’s product introduction plans, financial position and results of operations.

The ANDA process often results in the FDA granting final approval to a number of ANDAs for a given product. The Company may face immediate competition when it introduces a generic product into the market. These circumstances could result in significantly lower prices, as well as reduced margins, for generic products compared to brand products. New generic market entrants generally cause continued price and margin erosion over the generic product life cycle.

Risk that Approved Products May Not Achieve Expected Levels of Market Acceptance

The Company’s approved products may not achieve expected levels of market acceptance, which could have a material adverse effect on the Company’s profitability, financial position and results of operations.

Even if the Company was able to obtain regulatory approvals of its new pharmaceutical products, generic or brand, the success of those products is dependent upon market acceptance. Levels of market acceptance for new products could be impacted by several factors, including:

Some of these factors are not within the Company’s control. New products may not achieve expected levels of market acceptance. Additionally, continuing studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others. Such studies, which increasingly employ sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products. In some cases, these studies have resulted, and may in the future result, in the discontinuance of product marketing. These situations, should they occur, could have a material adverse effect on the Company’s profitability, financial position and results of operations.

Industry is Highly Competitive

The Company faces competition from other pharmaceutical manufacturers that threatens the commercial acceptance and pricing of the Company’s products, which could have a material adverse effect on the Company’s business, financial position and results of operations.

The Company’s competitors may be able to develop products and processes competitive with or superior to the Company’s own for many reasons, including that they may have:

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Each of these factors and others could have a material adverse effect on the Company’s business, financial position and results of operations.

Government Regulation

Because the pharmaceutical industry is heavily regulated, the Company faces significant costs and uncertainties associated with its efforts to comply with applicable regulations. Should the Company fail to comply it could experience material adverse effects on its business, financial position and results of operations.

The pharmaceutical industry is subject to regulation by various Federal and state governmental authorities. For instance, the Company must comply with FDA requirements with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of ANDAs, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although the Company has internal regulatory compliance programs and policies and has had a favorable compliance history, there is no guarantee that it may not be deemed to be deficient in some manner in the future. If the Company were deemed to be deficient in any significant way, it could have a material adverse effect on its business, financial position and results of operations.

In addition to the new drug approval process, the FDA also regulates the facilities and operational procedures that the Company uses to manufacture its products. The Company must register its facilities with the FDA. All products manufactured in those facilities must be made in a manner consistent with current Good Manufacturing Practices (“cGMP”). Compliance with cGMP regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. Failure to comply with cGMP regulations could result in an enforcement action brought by the FDA, which periodically inspects the Company’s manufacturing facilities for compliance, which could include withholding the approval of ANDAs or other product applications of a facility if deficiencies are found at that facility. FDA approval to manufacture a drug is site-specific. If the FDA would cause the Company’s manufacturing facilities to cease or limit production, its business could be adversely affected. Delay and cost in obtaining FDA approval to manufacture at a different facility also could have a material adverse effect on the Company’s business, financial position and results of operations.

The Company is subject, as are generally all manufacturers, to various federal, state and local laws of general applicability, such as laws regulating working conditions, as well as environmental protection laws and regulations, including those governing the discharge of materials into the environment. Although the Company has not incurred significant costs associated with complying with such environmental provisions in the past, if changes to such environmental provisions are made in the future that require significant changes in its operations or if the Company engages in the development and manufacturing of new products requiring new or different environmental controls, the Company may be required to expend significant funds.

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Such changes could have a material adverse effect on the Company’s business, financial position and results of operations.

Limited Number of Major Customers

The Company’s top 10 customers accounted for 64% of the Company’s total sales for fiscal 2003. Any significant reduction of business with any of the Company’s top 5 customers could have a material adverse effect on the Company’s business, financial position and results of operations.

Third Party Suppliers

The active ingredient(s), i.e. the chemical compound(s) and other materials and supplies that the Company uses in its pharmaceutical manufacturing operations, as well as certain finished products, are generally available and purchased from many different foreign and domestic suppliers. Additionally, the Company maintains sufficient raw materials inventory, and in certain cases where it has listed only one supplier in the Company’s applications with the FDA, has received FDA approval to use alternative suppliers should the need arise. However, there is no guarantee that the Company will always have timely and sufficient access to a critical raw material or finished product. A prolonged interruption in the supply of a single-sourced active ingredient or finished product could cause its financial position and results of operations to be materially adversely affected.

Limited Number of Manufacturing Facilities

The Company’s products are produced at its two manufacturing facilities. A significant disruption at these facilities, even on a short-term basis, could impair the Company’s ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on its business, financial position and results of operations.

Consolidation of Customers

A significant amount of the Company’s sales are made to a relatively few drug wholesalers, retail drug chains, managed care purchasing organizations, mail order and hospitals. These customers represent an essential part of the distribution chain of generic pharmaceutical products. These customers have undergone, and are continuing to undergo, significant consolidation. This

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consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing its business. Additionally, the emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on the Company’s products. The result of these developments may have a material adverse effect on the Company’s business, financial position and results of operations.

Indemnification Obligations

In the normal course of business, the Company periodically enters into employment, legal settlement, and other agreements which incorporate indemnification provisions. The Company maintains insurance coverage which it believes will effectively mitigate its obligations under these indemnification provisions. However, should its obligation under an indemnification provision exceed its coverage or should coverage be denied, it could have a material adverse effect on the Company’s business, financial position and results of operations.

Uncertainties of Estimates and Assumptions

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with generally accepted accounting principles (“GAAP”). Any changes in estimates, judgments and assumptions used could have a material adverse effect on the Company’s business, financial position and results of operations.

The financial statements included in the periodic reports the Company files with the Securities and Exchange Commission (“SEC”) are prepared in accordance with GAAP. The preparation of financial statements in accordance with GAAP involves making estimates of expenses and income. This includes, but is not limited to, estimates, judgments and assumptions used in the adoption of the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on the Company’s business, financial position and results of operations.

Securities Exchange Act Reports

Additional information about the Company is available on its website at www.hitechpharm.com. The Company’s Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and any amendments to those Reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available on the Company’s website free of charge as soon as reasonably practicable after they are electronically filed with and furnished to the SEC.

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Information contained on the Company’s website is not incorporated by reference in the Annual Report on Form 10-K and shall not be deemed “filed” under the Securities Exchange Act of 1934.

The Company’s executive offices and manufacturing facilities are located in Amityville, New York. One such facility, aggregating approximately 40,000 square feet, is dedicated to liquid and semi-solid production.

The Company also owns a facility in Amityville, New York of approximately 21,500 square feet, which is used as a sterile manufacturing facility and also contains research and development, chemistry and microbiology laboratories.

The Company also owns an approximately 50,000 square feet facility in Amityville, New York which it uses for the warehousing of finished goods and shipments.

The Company also owns a 21,500 square feet warehouse facility in Amityville, New York.

The Company also owns a 8,000 square foot office building adjacent to its existing facilities which is utilized for administrative offices.

The Company’s five facilities in Amityville, New York total approximately 141,000 square feet.

The Company believes that its properties are adequately covered by insurance and are suitable and adequate for its needs for several years.

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

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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. 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 negotiating final settlement documents with the California Attorney General.

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.

No matters were submitted to a vote of security holders during the quarter ended April 30, 2003.

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PART II

Market Information

The Company’s common stock is traded on the National Market System of the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) under the symbol HITK.

The following table sets forth the high and low closing sales prices per share of the Company’s common stock for the periods indicated on the NASDAQ National

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Market System. The quotations are inter-dealer prices, without retail mark-up, mark-down or commissions paid, and may not necessarily reflect actual transactions.

(1) Adjusted for a 3-for-2 stock split distributed in January 2003.

As of July 28, 2003 the closing price of the Common Stock on the Nasdaq National Market System was $26.80.

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The table below sets forth, as of the end of the fiscal year ended April 30, 2003, for the Hi-Tech Pharmacal Co., Inc. Employee Stock Option Plan and Director 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:

Equity Compensation Plan Information

There are no Company equity compensation plans not approved by the Company’s stockholders.

Common Stock Holders

The Company believes there are approximately 5,916 holders of Common Stock, including shares held in street name by brokers.

Dividends

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.

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The selected financial data presented below for the five years ended April 30, 2003 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.

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GENERAL

The following discussion and analysis should be read in conjunction with the financial Statements and Notes thereto appearing elsewhere in this Report.

The following table sets forth, for all periods indicated, the percentage relationship that items in the Company’s Statements of Operations bear to net sales.

RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 2003 AND 2002

For the fiscal year ended April 30, 2003 (“Fiscal 2003”), net sales increased by $14,164,000, or 43% to $47,446,000 from $33,282,000 for the fiscal year ended April 30, 2002 (“Fiscal 2002”). The increase was primarily the result of the successful introduction of 6 new generic products into the marketplace in Fiscal 2003 and increased shipments to the Company’s existing customers as well as several new customers in Fiscal 2003. The Company’s high levels of customer service and the ability to produce high quality products has also contributed to our results. Some of the leading products that were included in this mix for the past year were Albuterol Sulfate Inhalation Solution and Syrup, Sulfamethoxazole, Trimethoprim, Lactulose solution, Promethazine DM, as well as Promethazine with Codeine, Lidocaine oral syrup, and several other prescription products. No one product accounted for 10% or more of total sales.

Generic pharmaceutical products, which include private label contract manufacturing, had net sales for Fiscal 2003 of $40,815,000, an increase of $13,583,000, or 50%, compared to $27,232,000 in Fiscal 2002. The increase resulted from increased demand and the successful introduction of 6 new generic products into the marketplace in Fiscal 2003.

Health Care Products Division, which markets the Company’s branded products, for Fiscal 2003 and 2002 had net sales of $6,631,000 and $6,050,000, respectively. Net sales increased by $581,000, or 10%.

Cost of sales, as a percentage of net sales, decreased from 53% for Fiscal 2002 to 50% for Fiscal 2003.

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Labor and overhead costs decreased approximately 17%. Units shipped increased 31% and the average unit selling price increased 8%. In the generic drug industry, certain products may contribute significantly to a company’s gross profit. The gross profit on these products may change as market conditions change. If one or more other generic pharmaceutical manufacturers significantly reduce their prices in an effort to gain market share or the supplier of active ingredients increases their prices, the Company’s profitability could be adversely affected.

Selling, General and Administrative expenses, as percentage of net sales, increased from 27% to 28%, an increase of $4,321,000. The increase from $8,941,000 for Fiscal 2002 to $13,262,000 for Fiscal 2003 resulted principally from increased sales commissions, freight expenditures, and professional fees. The Company incurred a non-cash pre-tax charge for options granted in 2000 and 2001 to a consultant who is a director of the Company in the amount of $451,000 for Fiscal 2003. This pre-tax charge was based, in part, on the market value of the Company’s stock, which appreciated substantially over the respective reporting periods.

Research and development costs increased to $2,095,000 or 20% for Fiscal 2003 from $1,747,000 for Fiscal 2002 as a result of, among other things, expenses associated with the filing of Abbreviated New Drug Applications (ANDAs) with the FDA as well as development of non ANDA products for the Company. Certain of the Company’s pharmaceutical products do not require prior approval before marketing. However, many products which the Company introduced and intends to introduce under its product development program will require prior FDA approval using the ANDA procedure before they can be manufactured and marketed. Such products include products to be manufactured in the Company’s sterile facility.

Net income increased 63% or $2,214,000 to $5,727,000 for Fiscal 2003 from net income of $3,513,000 for Fiscal 2002, as a result of the factors noted above.

RESULTS OF OPERATIONS YEARS ENDED APRIL 30, 2002 AND 2001

For fiscal year ended April 30, 2002 (“Fiscal 2002”), net sales increased by $3,633,000 or 12% to $33,282,000 from $29,649,000 for the fiscal year ended April 30, 2001 (“Fiscal 2001”). The increase was primarily the result of the increased shipments to the Company’s existing customers as well as several new customers in Fiscal 2002. Generic pharmaceutical products, which include private label contract manufacturing, had net sales for Fiscal 2002 of $27,232,000, an increase of $3,517,000, or 15%, compared to the Fiscal 2001 respective period. No one product accounted for sales of 10% or more of total sales for each respective period.

Health Care Products Division, which markets the Company’s branded products, for Fiscal 2002 and 2001, had net sales of $6,050,000 and $5,934,000, respectively. Sales of Health Care Products Division increased modestly as a result of a mild cold and flu season.

Cost of sales, as a percentage of net sales, increased from 52% for Fiscal 2001 to 53% for Fiscal 2002. In the generic drug industry, certain products may contribute significantly to a company’s gross profit. The gross profit on these products may change as

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market conditions change. In the aggregate, the costs, as a percentage of sales, for materials increased 2% and labor and overhead decreased 1%. Units shipped increased 4% and the average unit selling price increased 9% which resulted from changes in product mix and competitive conditions. 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.

Selling, General and Administrative expenses, as percentage of net sales decreased from 31%, to 27%, or decreased to $8,941,000 for Fiscal 2002 from $9,197,000 for Fiscal 2001, a decrease of $256,000 resulting principally from reduced advertising and promotion expenditures for the Health Care Products Division as a result of a mild cold and flu season.

Research and development costs increased to $1,747,000 or 5% of sales for Fiscal 2002 from $1,683,000 or 6% of sales for Fiscal 2001 as a result of, among other things, expenses associated with the filing of Abbreviated New Drug Applications (ANDAs) with the FDA as well as development of new products for the Company’s Health Care Products Division. Many of the Company’s pharmaceutical products do not require prior approval before marketing. However, certain products which the Company introduced and intends to introduce under its product development program will require prior FDA approval using the ANDA procedure before they can be manufactured and marketed. Such products include products to be manufactured in the Company’s sterile facility.

Net income increased to $3,513,000 for Fiscal 2002 from net income of $2,391,000 for Fiscal 2001, as a result of the factors noted above.

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LIQUIDITY AND CAPITAL RESOURCES

The Company’s operations are historically financed principally by cash flow from operations and bank borrowing. At April 30, 2003 and April 30, 2002, working capital was approximately $24,085,000 and $17,937,000, respectively.

Cash flows from operating activities were approximately $7,419,000, which was the result principally of net income and depreciation of $7,058,000. Cash flows used in investing activities were approximately $3,412,000 from operating activities funds and was principally payments for fixed assets acquired. Cash flows from the exercise of stock options were $1,245,000.

Accounts payable increased 48% from $3,538,000 for Fiscal 2002 to $5,237,000 for Fiscal 2003 due principally to a greater level of business during the fourth fiscal quarter and the aging of days of payables increasing 23%.

Accrued expenses increased 6% from $2,053,000 for Fiscal 2002 to $2,179,000 for Fiscal 2003 as a result of the increased levels of business.

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. At April 30, 2003 there were no borrowings under the credit facility.

In March 2003, the Company purchased for $1,300,000 a warehouse which it previously leased.

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

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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 the effectiveness of a 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 believes that its financial resources consisting of current working capital, anticipated future operating revenue and its credit line will be sufficient to enable it to meet its working capital requirements for at least the next 12 months.

        In May 1997, the Company announced a stock buy-back program under which the Board of Directors authorized the purchase of up to $500,000 of its common stock. In August 1999, the Company increased the stock buy-back program to an aggregate of $1,000,000. As of April 30, 2003, the Company had purchased 292,050 shares at a cost of $801,000.

New Accounting Pronouncements:

        In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds the requirement that all gains and losses from extinguishment of debt be classified as an extraordinary item. Additionally, SFAS No. 145 requires that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 is effective for the Company beginning in 2003, and the effect of adoption is not expected to have a material impact on the financial statements.

        In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities.” This statement revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Specifically, SFAS 146 requires that companies record the costs to exit an activity or dispose of long-lived assets when those costs are incurred. SFAS 146 requires that the measurement of the liability be at fair value. The provisions of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002 and will impact any exit or disposal activities initiated after such date.

        In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that changes to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require expanded and more prominent disclosures in annual financial statements about the method of accounting for stock based compensation and the proforma effect on reported results of applying the fair value method for entities that use the intrinsic value method. The proforma disclosures are also required to be displayed prominently in interim financial statements. The Company does not intend to change to the fair value method of accounting and has included the disclosure requirements of SFAS 148 in the accompanying financial statements.

        In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosures Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). Fin 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002, but has certain disclosure requirements effective for financial statements of interim or annual periods ending after December 15, 2002. The Company does not currently have any guarantees. The Company does not anticipate that the adoption of the disclosure requirements of FIN 45 will have a material effect on its financial position or results of operations.

        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 these standards 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.

The disclosure required by this Item is not material to the Company because the Company does not currently have any exposure to market rate sensitive instruments, as defined in this Item.

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INDEX

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

Hi-Tech Pharmacal Co., Inc.

Amityville, New York

We have audited the accompanying balance sheets of Hi-Tech Pharmacal Co., Inc. (the “Company”) as of April 30, 2003 and 2002, and the related statements of operations, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended April 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of  Hi–Tech Pharmacal Co., Inc. as of April 30, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended April 30, 2003 in conformity with accounting principles generally accepted in the United States of America.

EISNER LLP

New York, New York

June 27, 2003

With respect to second paragraph of Note P, July 17, 2003

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HI-TECH PHARMACAL CO., INC.

BALANCE SHEETS

See notes to Financial Statements

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HI-TECH PHARMACAL CO., INC.

STATEMENTS OF OPERATIONS (1)

(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.

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HI-TECH PHARMACAL CO., INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (1)

(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.