Back to GetFilings.com

Table of Contents

U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

For fiscal year ended April 30, 2004

Commission File Number 0-20424

Hi-Tech Pharmacal Co., Inc.

(Exact name of Registrant as specified in its charter)

369 Bayview Avenue, Amityville, New York 11701

(Address of principal executive offices, including zip code)

(631) 789-8228

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(Title of Class)

Name of each exchange on which registered:  NASDAQ

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 of 1934 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  x    No  ¨

The registrant’s revenues for its most recent fiscal year ended April 30, 2004 were $56,366,000.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 31, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was $123,385,000, 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 12, 2004 was 8,388,552.

DOCUMENTS INCORPORATED BY REFERENCE:  None

Table of Contents

HI-TECH PHARMACAL CO., INC.

INDEX TO FORM 10-K

FOR THE YEAR ENDED APRIL 30, 2004

2

Table of Contents

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

ITEM 1. BUSINESS.

General

Hi-Tech Pharmacal Co., Inc. (“Hi-Tech”, the “Company”, which may be referred to as “we”, “us” or “our”) a Delaware corporation, incorporated in April 1983, is a growing specialty manufacturer and marketer of prescription, over-the-counter and nutritional products.

We develop, manufacture and market generic and branded products. Most of our generic products are prescription items and include oral solutions and suspensions, as well as topical creams and ointments. We also specialize in the manufacture of products in our state of the art sterile facility capable of producing liquid ophthalmic, otic and inhalation products. Our Health Care Products Division markets a line of branded products primarily for people with diabetes, including Diabetic Tussin^®, DiabetiDerm^®, DiabetiSweet^®, DiabetiTrim^® and Multi-betic^®.

Our customers include chain drug stores, drug wholesalers, managed care purchasing organizations, certain Federal government agencies, generic distributors, mass merchandisers, and mail-order pharmacies. Some of our key customers include Walgreens, McKesson Corporation, Cardinal Health, Inc., CVS, AmeriSourceBergen Corporation and Wal-Mart. We produce a wide range of products for various disease states, including asthma, bronchial disorders, dermatological disorders, allergies, pain, stomach, oral care, neurological disorders and other conditions.

We currently market more than 100 products to over 100 customers. For the fiscal year ended April 30, 2004 sales of generic pharmaceuticals represented 89% of total sales and branded products represented 11% of total sales.

3

Table of Contents

Recent Approvals and Product Launches

We have 29 prescription products approved for marketing by the Food and Drug Administration (the “FDA”). In addition, we have six products submitted to the FDA and pending approval, and approximately 20 products in various stages of development.

We received Abbreviated New Drug Application (“ANDA”) approvals for the following products in fiscal 2004:

Additionally, we received tentative ANDA approval for the following product in fiscal 2004 and, in May 2004, received final approval upon patent expiration of the brand product:

In our fiscal 2004, we launched the following products:

Top Products

Our top 5 selling generic products in fiscal 2004 were:

Health Care Products Division

Our Health Care Products Division (“HCP”) is a leading marketer of branded products that include over-the-counter, nutritional, and prescription products, primarily for people with diabetes. The Company’s leading brand, Diabetic Tussin^®, is available in several formulations, including DM, Maximum Strength, EX, Allergy and Cough Drops. HCP also markets dermatological products for people with diabetes under the brand name

4

Table of Contents

DiabetiDerm^®. This is our fastest growing brand and includes DiabetiDerm^® Foot Rejuvenating Cream, DiabetiDerm^® Cream and DiabetiDerm^® Lotion. HCP also markets Multi-betic^®, a daily multi-vitamin and mineral supplement formula, DiabetiSweet^®, a unique sugar substitute which is aspartame free and heat stable for baking and cooking. In 2004, HCP introduced, through a licensing agreement with Medifast, DiabetiTrim^® shake, a formula that provides the essential nutrients to assist diabetics to stay fit and maintain a healthy lifestyle. HCP expanded the DiabetiTrim^® line with the introduction of DiabetiTrim^® nutritional bars.

The Company also markets Diabetic Tussin-C^®, a prescription formulation for severe coughs, through a marketing arrangement with Syncom Pharmaceuticals.

Growth Strategy

Management believes that growth in the generic pharmaceutical industry is driven by several factors which should continue in the coming years. These factors include:

Management hopes to exploit these macroeconomic trends by making strategic decisions which will result in the Company’s growth. Our growth strategy is based on the following:

Product Development Strategy

We have identified over $3 billion of brand name drugs in the liquid, sterile, and semi-solid dosage forms which will lose patent protection over the next five years. We are currently developing drugs with branded sales of over $2 billion and plan to take advantage of this opportunity.

Our product development strategy focuses on products in the following areas:

5

Table of Contents

Research and Development

The Company obtains new generic pharmaceutical products primarily through internal product development and from strategic arrangements with other pharmaceutical companies.

For the fiscal years ended April 30, 2004 and 2003, total R&D expenditures were $3,820,000 and $2,095,000, respectively. The increase is primarily the result of increased costs of product development including bioequivalency studies and other services performed by outside laboratories. The Company has entered into agreements for two studies on a product Hi-Tech has under current development. The total commitment under the agreements is $2.1 million which is expected to be paid by April 30, 2005.

We have six ANDA applications pending at the FDA that address over $300 million in annual product sales in the United States according to IMS Health. One of the ANDA submissions was submitted under a Paragraph IV Certification. In August 2003, the FDA accepted for filing our ANDA submission for a bioequivalent version of Quixin^® ophthalmic solution 0.5% which is used for the treatment of bacterial infections and is currently being marketed by Santen Inc. under a license from Daiichi Pharmaceutical Co., Ltd. On December 18, 2003, Daiichi Pharmaceutical Co., Ltd. filed a complaint against the Company in the United States District Court for the District of New Jersey alleging infringement of its patent for the drug. The Company believes it has meritorious defenses to the allegations in the Complaint. The Company has a partner responsible for the legal defense in this litigation. See Section “Legal Proceedings.”

Customers and Marketing

We market our products to chain drug stores, drug wholesalers, managed care purchasing organizations, certain Federal government agencies, generic distributors, mass merchandisers and mail order pharmacies. We sell our generic products to over 100 active accounts located throughout the United States. For the fiscal year ended April 30, 2004, Walgreens and McKesson Corporation accounted for net sales of approximately 14% and 11%, respectively. These customers represented approximately 31% of the outstanding accounts receivable at April 30, 2004. Our top five customers accounted for approximately 47% and 46% of the Company’s total sales for each of the fiscal years ended April 30, 2004 and 2003, respectively. If any of our top five customers discontinues or substantially reduces its purchases from the Company, it may have a material adverse effect on our business and financial condition. We believe, however, that we have good relationships with our customers.

We utilize our state of the art manufacturing facilities and laboratories to offer contract manufacturing, which includes research and development programs, to our existing as well as potential customers.

Consistent with industry practice, we have a return policy that allows our customers to return product within a specified period. We have 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. We provide a chargeback credit to our wholesale customers for the difference between our invoice price to the wholesaler and the indirect customer’s contract price.

We market our 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. We use trade journals to introduce new

6

Table of Contents

products as well as telemarketing to gain awareness of our generic products among pharmacies and buyers. We have expanded our marketing strategy with programs to include marketing ventures with several companies selling popular non-competing diabetic medications, pharmacy programs and via the Internet using our website. As part of our marketing strategy, we place increasing emphasis on the Internet which we view as a very efficient tool in educating and reaching out to millions of people with diabetes. Our website is registered under the domain name diabeticproducts.com and is linked to other diabetic based websites.

Health Care Products currently employs 5 full time employees in sales and marketing and 2 independent commission sales representative organizations. We have also developed a telemarketing effort which targets diabetic educators and pharmacists.

We are focused on growth, will continue to develop new branded and generic products and also will devise new marketing strategies to penetrate our markets. In order to maximize our potential growth and shareholder value, we are 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. We will place increasing emphasis on establishing co-development and co-marketing agreements with strategic partners.

In June 2004 we acquired the rights to Naprelan^® from Elan Pharmaceuticals and are currently exploring various marketing arrangements for this product. Naprelan^® is a non-steroidal anti-inflammatory agent that has been specially formulated using Elan’s patented IPDAS^TM (Intestinal Protective Drug Absorption System) technology. Naprelan^® offers the convenience of once-daily dosing and is indicated in the treatment of rheumatoid arthritis, osteoarthritis, ankylosing, spondylitis, tendonitis, bursitis, acute gout, primary dysmenorrhea and mild to moderate pain.

Manufacturing

Our manufacturing facilities are designed to be flexible in order to allow for 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 us to adjust on-line production in order to meet customer requirements. In the fiscal year ended April 30, 2004, we added one high speed sterile filler bringing the number of sterile fillers to three and subsequently added two high speed non-sterile filling lines bringing our total to eight.

Facilities

We are operating from five buildings owned by the company on one site in Amityville, New York, totaling approximately 153,500 square feet. The Company is currently constructing additional production space on our existing property to meet our anticipated sales growth requirements.

Raw Materials/Active Pharmaceutical Ingredients

The active compounds for our products, also called active pharmaceutical ingredients or APIs, are purchased from specialized manufacturers and are essential to our business and success. API manufacturers are required to file a Drug Master File with the FDA. Each individual API must be approved by the FDA as part of the ANDA approval process. API manufacturers are also regularly inspected by the FDA.

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 most 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.

7

Table of Contents

It is crucial for the business to select suppliers that meet Current Good Manufacturing Procesess (“cGMP”) requirements, are reliable and offer competitive prices. We are proactive in maintaining good relationships with our API suppliers because we believe that these relationships allow us to save crucial time and be cost competitive. For new products in development, the timely selection of the right API suppliers who have access to cutting-edge chemical and process technologies, and in some cases offer proprietary and patented methods for chemical synthesis and manufacturing processes, can potentially give us a significant advantage over our competitors.

We believe we have good, cooperative working relationships with our suppliers and are not experiencing any difficulty in obtaining raw materials. If a supplier were unable to supply us, we believe we 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. Our direct competition consists of numerous generic drug manufacturers, many of which have greater financial and other resources than we do. If one or more other generic pharmaceutical manufacturers significantly reduce their prices in an effort to gain market share, our profitability or market position could be adversely affected. Competition is based principally on price, quality of products, customer service levels, reputation and marketing support.

Seasonality

We experience seasonal variations in the demand for our cough and cold products. Therefore, no one quarter’s performance can be used to indicate a full year results. Our revenues are typically lower during the first and fourth quarters of our fiscal year. We expect this seasonality to continue in the future.

Government Regulation

FDA Oversight

Our products and facilities are subject to regulation by a number of Federal and state governmental agencies. The FDA, in particular, maintains oversight of our manufacturing process as well as the distribution of our products. Facilities, procedures, operations and/or testing of products are subject to periodic inspection by the FDA, the Drug Enforcement Administration and other authorities. In addition, the FDA conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems and processes are in compliance with cGMP and other FDA regulations. Certain of our suppliers are subject to similar regulations and periodic inspections. We have had several FDA inspections including our most recent which took place in April 2004. We believe the issues cited during the inspection were adequately addressed by the Company.

A sponsor of a New Drug Application (“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.

8

Table of Contents

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.

ANDA Process

Although many of the products we currently manufacture and market do not require prior specific approval of the FDA, certain products which we currently market and intend to market under our product development program require prior FDA approval using the ANDA procedure prior to being marketed. We currently have 29 approved products, 6 products pending FDA approval, and 20 products in active development, of which the majority will require ANDA submissions.

The ANDA approval process is generally less time-consuming and complex than the NDA approval process. It generally does not require new preclincal 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 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. Such studies are not generally required to be performed for solutions (oral, ophthalmic, or solutions for inhalation). Suspensions and certain types of topical products do require bioequiovalency testing. In certain cases, such as nasal spray suspensions, clinical studies are required in addition to bioequivalency studies to show efficacy compared to the branded product. Such studies, though not as extensive as corresponding studies conducted by innovator companies as part of their NDA process, could require substantial funding.

The completion of a prospective product’s formulation, testing and FDA approval generally takes several years. Development activities could begin several years in advance of the patent expiration date, and may include bioequivalency and clinical studies. Consequently, we are presently selecting and will continue to select and develop drugs we expect to market several years in the future.

The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and/or its use and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods. Pending the resolution of any such issues the FDA is prohibited from granting final approval to generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, the FDA may now extend the exclusivity of a product by six months past the date of patent expiry if the manufacturer undertakes studies on the effect of their product in children (“pediatric extension”). See “Patent Challenge Process.”

9

Table of Contents

Before approving a product, the FDA also requires that a company’s procedures and operations conform to cGMP regulations, as defined in the U.S. Code of Federal Regulations. The Company must follow the cGMP regulations at all times during the manufacture of its products.

If the FDA concludes that all substantive ANDA requirements (chemistry, bioequivalency, labeling and manufacturing) have been satisfied, but a final ANDA approval cannot be granted because of patent or exclusivity-related considerations, the FDA may issue a tentative approval.

Patent Challenge Process

The Hatch-Waxman Act provides incentives for generic pharmaceutical manufacturers to challenge patents on branded pharmaceutical products, their methods of use, specific formulations, as well as to develop non-infringing forms of the patented subject matter. The purpose of the Hatch-Waxman Act is to stimulate competition by providing incentives to generic companies to introduce their products early, and at the same time to ensure that such suits are not frivolous.

If there is a patent listed in the FDA’s Orange Book at the time of filing an ANDA with the FDA and the generic drug company intends to market the generic equivalent prior to the expiration of that patent, the generic company files with its ANDA a certification asserting that the patent is invalid, unenforceable and/or not infringed (“Paragraph IV certification”). After receiving notice from the FDA that its application is acceptable for filing, the generic company sends the patent holder and the holder of the New Drug Application (“NDA”) for the brand-name drug a notice explaining why it believes that the patents in question are invalid, unenforceable or not infringed. Upon receipt of the notice from the generic company, the patent holder has 45 days during which to bring a patent infringement suit in federal district court against the generic company. The discovery, trial and appeals process in such suits can take several years and have high legal costs.

If a suit is commenced by the patent holder, the Hatch-Waxman Act provides for an automatic stay on the FDA’s ability to grant final approval of the ANDA for the generic product. The period during which the FDA may not approve the ANDA and the patent challenger therefore may not market the generic product is 30 months, or such shorter or longer period as may be ordered by the court. The 30-month period may or may not, and often does not, coincide with the timing of the resolution of the lawsuit or the expiration of a patent, but if the patent challenge is successful or the challenged patent expires during the 30-month period, the FDA may approve the generic drug for marketing, assuming there are no other obstacles to approval such as exclusivities given to the NDA holder.

Under the Hatch-Waxman Act, the developer of a proposed generic drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a Paragraph IV certification, may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs and to build its market share before competitors can enter the market.

Medicaid and Medicare

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. We believe 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.

10

Table of Contents

DEA

Because the Company sells and develops products containing controlled substances, it must meet the requirements and regulations of the Controlled Substances Act which are administered by the Drug Enforcement Agency (“DEA”). These regulations include stringent requirements for manufacturing controls and security to prevent diversion of or unauthorized access to the drugs in each stage of the production and distribution process. We have the approval of the DEA to sell certain generic pharmaceutical products containing narcotics. We are currently manufacturing 7 preparations containing narcotics and are developing other products that contain narcotics.

In order to manufacture and sell products containing narcotics, we have implemented stringent security precautions to insure that the narcotics are accounted for and properly stored. We believe that the Company is currently in compliance with all applicable DEA requirements.

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, determination of impairment of long-lived assets, impact of legal matters and the realization of deferred tax assets represent a significant portion of the estimates made by management.

Revenue is recognized for product sales upon shipment and passing of risk to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable. Estimated sales returns, allowances and discounts are provided for. Contract research income is recognized as work is completed and billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones.

Returns – Consistent with industry practice, the Company maintains a return policy that allows its customers to return product within a specified period. The Company’s estimate for returns is based upon its historical experience with actual returns. While such experience has allowed for reasonable estimation 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

11

Table of Contents

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.

Environment

We believe that our 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 our 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 our insurance coverage, could have a material adverse effect on our financial condition. We are currently a defendant in one product liability action. See Item 3. “Legal Proceedings” for a complete description of such actions. We maintain a product liability insurance policy which provides coverage in the amount $10,000,000 per claim and in the aggregate.

Employees

As of April 30, 2004, we employed 181 full-time persons and 19 part-time persons, of whom 23 were engaged in executive, financial and administrative capacities; 13 in marketing, sales and service; 91 full-time employees and 19 part-time employees in production, warehousing and distribution; and 54 in research and development and quality control functions. We are not a party to a collective bargaining agreement. The management of the Company considers its relations with its employees to be satisfactory.

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 our business or our industry or that could cause our future financial results to differ materially from historic or expected results or cause the market price of our common stock to fluctuate or decline.

Risk of New Product Introductions

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

Many products require FDA approval prior to being marketed. The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time-consuming, costly and largely unpredictable. We may be unable to obtain requisite FDA approvals on a timely basis for new generic products that we may develop. The timing and cost of obtaining FDA approvals could adversely affect our product introduction plans, financial position and results of operations.

12

Table of Contents

The ANDA process often results in the FDA granting final approval to a number of ANDAs for a given product. We may face immediate competition when we introduce 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

Our approved products may not achieve expected levels of market acceptance, which could have a material adverse effect on our profitability, financial position and results of operations.

Even if we were able to obtain regulatory approvals of our 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 our 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 our profitability, financial position and results of operations.

Industry is Highly Competitive

We face competition from other pharmaceutical manufacturers that threatens the commercial acceptance and pricing of our products, which could have a material adverse effect on our business, financial position and results of operations.

Our competitors may be able to develop products and processes competitive with or superior to our own for many reasons, including that they may have:

13

Table of Contents

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

Government Regulation

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

The pharmaceutical industry is subject to regulation by various federal and state governmental authorities. For instance, we 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 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 we have internal regulatory compliance programs and policies and have had a favorable compliance history, there is no guarantee that we may not be deemed to be deficient in some manner in the future. If we were deemed to be deficient in any significant way, it could have a material adverse effect on our 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 we use to manufacture our products. We must register our 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 our 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 our manufacturing facilities to cease or limit production, our 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 our business, financial position and results of operations.

We are 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 we have 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 our operations or if we engage in the development and manufacturing of new products requiring new or different environmental controls, we may be required to expend significant funds. Such changes could have a material adverse effect on our business, financial position and results of operations.

14

Table of Contents

Limited Number of Major Customers

Our top 5 customers accounted for 47% of our total sales for fiscal 2004. Any significant reduction of business with any of our top 5 customers could have a material adverse effect on our business, financial position and results of operations.

Third Party Suppliers

Active pharmaceutical ingredients, packaging components, and other materials and supplies that we use in our pharmaceutical manufacturing operations, as well as certain finished products, are generally available and purchased from many different foreign and domestic suppliers. Additionally, we maintain sufficient raw materials inventory, and in certain cases where we have listed only one supplier in our applications with the FDA, we have received FDA approval to use alternative suppliers should the need arise. However, there is no guarantee that we 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 our financial position and results of operations to be materially adversely affected.

Limited Number of Manufacturing Facilities

Our generic products are produced at our two manufacturing facilities located at one site. A significant disruption at these facilities, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.

Consolidation of Customers

A significant amount of our sales are made to a relatively small number of 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 consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our 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 our products. The result of these developments may have a material adverse effect on our business, financial position and results of operations.

Indemnification Obligations

In the normal course of business, we periodically enter into employment, legal settlements, and other agreements which incorporate indemnification provisions. We maintain insurance coverage which we believe will effectively mitigate our obligations under these indemnification provisions. However, should our obligation under an indemnification provision exceed our coverage or should coverage be denied, it could have a material adverse effect on our business, financial position and results of operations.

15

Table of Contents

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 accounting principles generally accepted in the United States of America (“GAAP”). Any changes in estimates, judgments and assumptions used could have a material adverse effect on our business, financial position and results of operations.

The financial statements included in the periodic reports we file 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 No. 148, Accounting for Stock-Based Compensation - Transaction 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 our business, financial position and results of operations.

Website Access to Filings with the Securities and Exchange Commission

Additional information about the Company is available on our website at www.hitechpharm.com. All of our electronic filings with the SEC including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available on our website free of charge as soon as reasonably practicable after they are electronically filed with and furnished to the SEC. Our SEC filings are also available through the SEC’s website at www.sec.gov. Information contained on our 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.

ITEM 2. PROPERTIES.

Our executive offices and manufacturing facilities are owned by the Company and located in Amityville, New York. They are comprised of five buildings with approximately 153,500 square feet, and include:

16

Table of Contents

We believe that our properties are adequately covered by insurance and are suitable and adequate for our needs for several years.

ITEM 3. LEGAL PROCEEDINGS.

On December 18, 2003, Daiichi Pharmaceutical Co., Ltd. filed a complaint against the Company in the United States District Court for the District of New Jersey alleging infringement of its patent for a drug known as Levofloxacin, which it has sublicensed exclusively to Santen Inc. for use in certain ophthalmic pharmaceutical preparations. The plaintiff seeks a permanent injunction against the Company from engaging in the marketing within the United States of Levofloxacin Opthalmic Solution, described in the Company’s new drug application with the United States Food and Drug Administration. On February 17, 2004, the Company filed an Answer and Counterclaim to the Complaint denying infringement of any valid claim in the patent suit, seeking a judicial declaration that the patent is invalid and not infringed. The Company believes it has meritorious defenses to the allegations in the Complaint. Legal costs in connection with this complaint are being paid for by a business partner.

On or about November 24, 2003 MedPointe Healthcare, Inc. (“MedPointe”) filed a Verified Complaint and Application for Order to Show Cause with Temporary Restraints against the Company in the United States District Court for the District of New Jersey, Trenton vicinage. The suit alleges willful infringement by the Company of MedPointe’s patent No. 6,417,206 as a result of the Company’s offering to sell its Tannate 12-D S product, as a generic equivalent to MedPointe’s Tussi-12®D S. On December 1, 2003 the Court entered Temporary Restraints against the Company pending the return date of the Order to Show Cause. On March 1, 2004 the Court issued a preliminary injunction enjoining the Company from marketing its Tannate 12-D S product. The Company will therefore not commence shipment of the Tannate 12-D S product until a final decision of the Court on the patent infringement claim has been reached. The Company has filed an appeal of this ruling. It is impossible to predict with certainty the outcome of this litigation.

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 as “PPA”) through ingestion of PPA-containing products designed, formulated, marketed, distributed and/or sold by the Company and the other defendants. One plaintiff, Roger Grantham, claims he ingested a PPA-containing product manufactured by the Company. Mr. Grantham is a plaintiff in the Amanda Carrisalez case, which was originally filed in the United States District Court for the Northern District of Texas and was then transferred to the Multidistrict Litigation in Seattle. The plaintiffs, individually, seek compensatory damages in the amount of $15 million for actual damages, plus punitive damages. The Company filed an answer to this action and believes it has meritorious defenses. The Company’s defense costs, after its deductible, are being covered under its product liability policy which has a $5 million limit for defense costs and liability (“Product Liability Policy”). The last date of sale of the limited number of products containing PPA by the Company was December 2000.

17

Table of Contents

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. In May 2004, the Company signed a settlement agreement, subject to Court approval. The settlement agreement provides that the Company may sell a reformulated product or the original formulated product with certain warnings. The Company believes that its liability in this matter will not exceed approximately $75,000.

The Company believes that these litigation matters will not have a material effect on the financial position of the Company.

From time to time, the Company becomes involved in various legal matters in addition to the above described matters that the Company considers to be in the ordinary course of business. While the Company is not presently able to determine the potential liability, if any, related to such matters, the Company believes none of such matters, individually or in the aggregate, will have a material adverse effect on its financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the quarter ended April 30, 2004.

18

Table of Contents

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

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

As of July 12, 2004 the closing price of the Common Stock on the Nasdaq National Market System was $16.93.

19

Table of Contents

There were no purchases by the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s Common Stock during the fourth quarter of the Company’s fiscal year ended April 30, 2004.

Recent Sales of Unregistered Shares

On July 17, 2003, the Company recieved net proceeds of approximately $23.6 million through a private placement of 860,000 shares of our common stock at a purchase price of $29.21 per share. The proceeds will be used mainly for the funding of future acquisitions, research and development and for general corporate purposes. The private placement was made under an exemption from the registration requirements of the Securities Act of 1933, as amended, and purchasers may not offer or sell the securities sold in the offering in the absence of an effective registration statement or exemption from registration requirements. As part of the transaction, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of all of the common stock issued in the private placement.

The table below sets forth, as of the end of the fiscal year ended April 30, 2004, 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.

20

Table of Contents

Common Stock Holders

The Company believes there are approximately 15,000 holders of Common Stock, not including shares held in street name by brokers and nominees.

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.

21

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below for the five years ended April 30, 2004 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.

22

Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 FOR YEARS ENDED APRIL 30, 2004 AND 2003

For the fiscal year ended April 30, 2004 (“Fiscal 2004”), net sales increased by $8,920,000, or 19% to $56,366,000 from $47,446,000 for the fiscal year ended April 30, 2003 (“Fiscal 2003”). The increase was primarily the result of the successful introduction of five new generic products into the marketplace and increased shipments to the Company’s existing customers. The Company’s high level of customer service and the ability to produce high quality products have also contributed to our results. The Company’s five leading products in Fiscal 2004 were Urea Cream and Lotion, Sulfamethoxazole and Trimethoprim, Promethazine with Codeine and Promethazine DM, Albuterol Sulfate Inhalation Solution and Syrup, and Lactulose Solution. Sales of Urea Cream and Lotion accounted for 13% of sales while sales of Sulfamethoxazole and Trimethoprim accounted for 11% of sales for Fiscal 2004.

Generic pharmaceutical products, which include private label contract manufacturing, had net sales for Fiscal 2004 of $50,307,000, an increase of $9,492,000, or 23%, compared to $40,815,000 in Fiscal 2003. The increase resulted from increased demand and the successful introduction of five new generic products into the marketplace in Fiscal 2004 which helped offset a significant decrease in sales of Tannate based products. Sales were particularly strong for Urea Cream and Lotion which recorded net sales of approximately $7,500,000 in its first year.

23

Table of Contents

The Company’s Tannate based products experienced lower sales as market demand shifted towards a new formulation, Tussi-12^® D S marketed by MedPointe. The Company was not able to ship its version of Tussi 12^® D S because of a suit brought against it by MedPointe, which resulted in a Temporary Restraining Order against the Company. The Company has filed an appeal of this ruling.

Health Care Products Division, which markets the Company’s branded products, had net sales of $6,059,000 and $6,631,000 for Fiscal 2004 and 2003, respectively. Net sales decreased by $572,000, or 9%. This decrease is primarily the result of exported Health Care products which were improperly returned to the domestic market during the first half of the year. The Company has taken the necessary steps to minimize the impact of this diversion and believes that its consequences are limited.

Cost of sales, as a percentage of net sales, decreased from 50% for Fiscal 2003 to 47% for Fiscal 2004. The decrease in cost of sales as a percentage of sales was primarily driven by sales of certain new products, which have a higher gross margin than the average product in our portfolio. 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.

Selling, General and Administrative expenses, as a percentage of net sales, increased from 28% to 30%, an increase of $3,496,000. The increase from $13,262,000 for Fiscal 2003 to $16,758,000 for Fiscal 2004 resulted principally from increased sales commissions, freight expenditures, and professional fees related to patents and legal defenses. 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 $258,000 for Fiscal 2004 compared to $451,000 in Fiscal 2003. This pre-tax charge was based, in part, on the market value of the Company’s stock, which appreciated over the respective reporting periods.

Research and development costs increased to $3,820,000 or 82% for Fiscal 2004 from $2,095,000 for Fiscal 2003 as a result of, among other things, expenses associated with the filing of ANDAs with the FDA as well as development of non ANDA products for the Company. Expenses increased due to significant costs associated with developing a steroidal nasal spray which requires both bioequivalency studies and clinical studies. Expenses associated with developing steroidal nasal sprays will continue into fiscal year 2005. Additionally, the number of projects in development increased from 15 to 20.

Net income increased 15% or $865,000 to $6,592,000 for Fiscal 2004 from net income of $5,727,000 for Fiscal 2003, due to increased sales and gross margins, partially offset by higher research and development and selling, general, and administrative expenditures.

Diluted earnings per share for Fiscal 2004 were $0.74, unchanged from $0.74 for the prior year due to the factors mentioned above and increased shares outstanding, due to 860,000 shares issued in a private placement and the exercise of outstanding options.

RESULTS OF OPERATIONS FOR 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,

24

Table of Contents

Sulfamethoxazole and Trimethoprim, Lactulose Solution, Promethazine DM, as well as Promethazine with Codeine, Lidocaine and several other prescription products. No one product accounted for sales of 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 the 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. Labor and overhead 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 its prices, the Company’s profitability could be adversely affected.

Selling, General and Administrative expenses, as percentage of its 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operations are historically financed principally by cash flow from operations. At April 30, 2004 and April 30, 2003, working capital was approximately $55,772,000 and $24,085,000, respectively. The increase of $31,687,000 was primarily due to the private placement of 860,000 shares of common stock in July 2003 with net proceeds of $23,600,000, and cash flow from operations.

Cash flows from operating activities were approximately $5,573,000, which was the result principally of net income and depreciation of $8,067,000 partially offset by an increase in accounts receivable of $4,245,000. The increase in accounts receivable is due to slower payments from customers. The Company has taken measures to add staff and increase collection efforts to manage the increase in accounts receivable. The Company expects to continue increasing expenditures in research and development in the future. Cash flows used in investing activities were approximately $12,230,000 and were principally payments for fixed assets acquired and investments in marketable securities. Cash flows from financing activities were $23,700,000 and resulted principally from the private placement of 860,000 shares of common stock in July 2003 with net proceeds of $23,598,000 and $361,000 from the net proceeds exercise of incentive stock options.

25

Table of Contents

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 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, 2004 there were no borrowings under the credit facility.

On July 17, 2003 the Company entered into a definitive agreement with certain accredited investors with respect to the private placement of 860,000 shares of its common stock at a purchase price of $29.21 per share, for net proceeds after offering costs, of approximately $23.6 million. The net proceeds will be used mainly for the funding of future acquisitions, research and development and for general corporate purposes.

In June 2004, the Company acquired exclusive rights to market and distribute Naprelan^® (naproxen sodium) controlled release tablets in the United States, its territories, and Puerto Rico. Elan Pharmaceuticals, Inc. had provided the underlying rights to Stat-Trade, Inc. (“STI”) and STI simultaneously assigned its rights to the license to Hi-Tech. As consideration for the acquisition, Hi-Tech paid $3.6 million in cash for the license, inventory and related acquisition costs. Hi-Tech will pay STI consulting fees on an ongoing basis based on net profits on the sales generated by Naprelan^®.

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 $1,000,000 of its common stock. In November 2003, the Company increased the stock buy-back program to an aggregate of $3,000,000. As of April 30, 2004, the Company had purchased 303,000 shares at a cost of $998,000.

NEW ACCOUNTING PRONOUNCEMENTS:

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which was issued May 2003, will require redeemable preferred stock to be classified, in certain circumstances, as a liability, upon adoption by a public company at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 provides that mandatorily redeemable preferred stock should be classified as a liability if it embodies an unconditional obligation requiring the issuer to redeem the shares by transferring its assets at a specified or determinable date or upon an event certain to occur. The Company does not currently have any financial instruments with these characteristics. SFAS No. 150 had no effect on the Company’s results of operations and financial position.

In May 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“FAS 149”). FAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have any impact on the Company’s financial position or results of operations.

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

26

Table of Contents

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 January 2003, the FASB issued FASB Interpretation 46 (“FIN 46”), Consolidation of Variable Interest Entities which was revised in December 2003. 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. Entities that have interests in variable interest entities or special purpose entities, FIN 46 applies for periods ending after December 15, 2003. Application of this interpretation for all other public entities other than small business issuers is effective for periods ending after March 15, 2004. The adoption of FIN 46 had no impact upon the financial condition or results of operations of the Company.

REVENUE RECOGNITION

Revenue is recognized for product sales upon shipment and passing of risk to the customer and when estimates of discounts, rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable, collection is reasonably assured and the Company has no further performance obligations. These estimates are presented in the financial statements as reductions to net revenues and accounts receivable. Estimated sales returns, allowances and discounts are provided for. Contract research income is recognized as work is completed and billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones.

Returns – Consistent with industry practice, the Company maintains a return policy that allows its customers to return product within a specified period. 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.

27

Table of Contents

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Company has entered into agreements for two studies on a product Hi-Tech has under current development. The total commitment under the agreements is $2.1 million which is expected to be paid by April 30, 2005.

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of April 30, 2004 we are not involved in any material unconsolidated transactions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company’s existing credit facility bears interest at a rate selected by the Company equal to the Prime Rate or LIBOR plus 1.50%. This facility is exposed to market rate fluctuations and may impact the interest paid on any borrowings under the credit facility. Currently, the Company has no borrowings under this facility; however, an increase in interest rates would impact interest expense on future borrowings.

The Company invests in U.S. treasury notes, government asset backed securities and corporate bonds, all of which are exposed to interest rate fluctuations. The interest earned on these investments may vary based on fluctuations in the interest rate.

In June 2004, the Company acquired rights to market and distribute Naprelan^® (naproxen sodium) controlled release tablets in the United States, its territories, and Puerto Rico, from Elan Pharmaceuticals, Inc. (“Elan”), a company based in Ireland. Elan had provided the underlying rights to Stat-Trade, Inc. (“STI”) and STI simultaneously assigned its rights to the license to Hi-Tech. Future purchases of the product from Elan are locked in at a predetermined price in US dollars and are not subject to fluctuations in foreign currency exchange rates for a period of five years.

28

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 Company, Inc. (the “Company”) as of April 30, 2004 and 2003, and the related statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 referred to above present fairly, in all material respects, the financial position of the Company as of April 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2004, in conformity with U.S. generally accepted accounting principles.

EISNER LLP

New York, New York

June 17, 2004

F-2

Table of Contents

HI-TECH PHARMACAL CO., INC.

BALANCE SHEETS

F-3

Table of Contents

HI-TECH PHARMACAL CO., INC.

See notes to Financial Statements

F-4

Table of Contents

HI-TECH PHARMACAL CO., INC.

STATEMENTS OF OPERATIONS

See notes to Financial Statements

F-5

Table of Contents

HI-TECH PHARMACAL CO., INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

See notes to Financial Statements

F-6

Table of Contents

HI-TECH PHARMACAL CO., INC.

STATEMENTS OF CASH FLOWS