Hi Tech Pharmacal (HITK) 10-Q 2006 Q1 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number 0-20424

Hi-Tech Pharmacal Co., Inc.

(Exact name of registrant as specified in its charter)

Delaware	11-2638720
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

369 Bayview Avenue, Amityville, New York 11701

(Address of principal executive offices)

631 789-8228

(Registrant’s telephone number including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, $.01 Par Value — 7,875,000 shares outstanding as of September 7, 2005.

INDEX

HI-TECH PHARMACAL CO., INC.

		Page
PART I.FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed balance sheets—July 31, 2005 and April 30, 2005	3
	Condensed statements of operations—Three months ended July 31, 2005 and 2004	4
	Condensed statements of cash flows—Three months ended July 31, 2005 and 2004	5
	Notes to condensed financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	16
	Signatures	17
	Certifications

2

PART I. ITEM 1.

HI-TECH PHARMACAL CO., INC.

CONDENSED BALANCE SHEETS

	July 31, 2005			April 30, 2005
	(unaudited)			(From Audited Financial Statements)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	29,089,000		$	27,127,000
Investments in marketable securities – available for sale		10,000,000			10,000,000
Accounts receivable—net		9,546,000			15,604,000
Inventories		11,149,000			8,849,000
Deferred taxes		2,211,000			2,211,000
Other current assets		977,000			1,014,000
TOTAL CURRENT ASSETS	$	62,972,000		$	64,805,000
Property, plant and equipment—net		13,611,000			13,544,000
Intangible assets - net		7,745,000			2,935,000
Other assets		321,000			328,000
TOTAL ASSETS	$	84,649,000		$	81,612,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	11,252,000		$	10,784,000
Income taxes payable		578,000
TOTAL CURRENT LIABILITIES		11,830,000			10,784,000
Deferred taxes		1,163,000			1,163,000
TOTAL LIABILITIES		12,993,000		$	11,947,000
STOCKHOLDERS’ EQUITY
Preferred stock, par value $.01 per share; authorized 3,000,000 shares, none issued
Common stock, par value $.01 per share; authorized 50,000,000 shares, issued 8,606,000 at July 31, 2005 and 8,514,000 at April 30, 2005		86,000			85,000
Additional capital		40,943,000			40,358,000
Retained earnings		38,573,000			37,168,000
Treasury stock, 734,000 shares of common stock, at cost on July 31, 2005 and April 30, 2005		(7,946,000	)		(7,946,000	)
TOTAL STOCKHOLDERS’ EQUITY	$	71,656,000		$	69,665,000
LIABILITIES AND STOCKHOLDERS’ EQUITY	$	84,649,000		$	81,612,000

See notes to condensed financial statements

3

HI-TECH PHARMACAL CO., INC.

CONDENSED STATEMENTS OF OPERATIONS (unaudited)

	Three months ended July 31,
	2005			2004
NET SALES	$	15,427,000		$	12,140,000
Cost of goods sold		7,210,000			5,925,000
GROSS PROFIT		8,217,000			6,215,000
Selling, general and administrative expenses		5,607,000			3,827,000
Research and product development costs		637,000			1,088,000
Interest expense		5,000			7,000
Interest income and other		(264,000	)		(93,000	)
TOTAL	$	5,985,000		$	4,829,000
Income before provision for income taxes		2,232,000			1,386,000
Provision for income taxes		826,000			517,000
NET INCOME	$	1,406,000		$	869,000
BASIC EARNINGS PER SHARE	$	0.18		$	0.11
DILUTED EARNINGS PER SHARE	$	0.16		$	0.10
Weighted average common shares outstanding—basic		7,808,000			8,082,000
Effect of potential common shares		1,004,000			899,000
Weighted average common shares outstanding—diluted		8,812,000			8,981,000

See notes to condensed financial statements

4

HI-TECH PHARMACAL CO., INC.

CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

	Three months ended July 31,
	2005			2004
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	$	6,391,000		$	3,079,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(524,000	)		(832,000	)
Other assets					(72,000	)
Purchase of intangible assets		(4,491,000	)
Purchase of license agreement					(3,231,000	)
Proceeds from sales of marketable securities					10,005,000
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(5,015,000	)		5,870,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and exercise of options		586,000			47,000
Purchase of treasury stock					(495,000	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		586,000			(448,000	)
NET INCREASE IN CASH		1,962,000			8,501,000
Cash and cash equivalents at beginning of the period		27,127,000			32,627,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD		29,089,000			41,128,000
Supplemental and non cash disclosures of cash flow information:
Payable for acquisition of intangible asset		400,000
Interest paid		5,000			7,000
Income taxes paid		305,000			—

See notes to condensed financial statements

5

HI-TECH PHARMACAL CO., INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

July 31, 2005

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The preparation of the Company’s financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from these estimates and assumptions. Operating results for the three month period ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ending April 30, 2006. For further information, refer to the financial statements and footnotes thereto for the year ended April 30, 2005 on Form 10-K.

BUSINESS

Hi-Tech Pharmacal Co., Inc. (the “Company” or “Hi-Tech”) manufactures and sells prescription and over-the-counter generic drugs, in liquid and semi-solid dosage forms including higher margin prescription products. The Company markets its products in the United States through distributors, retail drug and mass-merchandise chains and mail order companies. Sales of the Company are seasonal and usually peak between September and March of each year, since a significant portion of the Company’s products are pharmaceutical preparations acting on the human respiratory system.

Net sales for generic pharmaceutical products, which include some private label contract manufacturing, for the three months ended July 31, 2005 were $13,939,000, an increase of $3,569,000 or 34%, compared to the fiscal 2004 respective period sales of $10,370,000. The increase is due to strong sales of Tannate 12 D S, Tannate V DM, Tannate DMP/DEX and Urealac, partially offset by declines in sales of in-line products. The Company’s leading generic products for the three months ended July 31, 2005 were Sulfamethoxazole and Trimethoprim with sales of approximately $1,700,000 and Urea 40% with sales of approximately $1,600,000. For the three months ended July 31, 2004 sales of Sulfamethoxazole and Trimethoprim were approximately $1,300,000 and Urea 40% with sales of approximately $2,600,000.

The Health Care Products division, which markets the Company’s branded products, for the three months ended July 31, 2005 and 2004 had net sales of $1,235,000 and $1,450,000, respectively, a decrease of $215,000 or 15%. The decrease was primarily caused by decreased sales of DiabetiDerm^® and DiabetiSweet^® products. Diabetic Tussin^® accounted for sales of approximately $500,000 for the three months ended July 31, 2005 and $400,000 for the three months ended July 31, 2004.

Sales of Naprelan^® totaled $253,000 for the three months ended July 31, 2005, a decrease of $67,000 from the three months ended July 31, 2004. This decrease is primarily due to transitioning the marketing of the 375 mg strength under the agreement with Blansett Pharmacal in February 2005. Revenue for this strength is recorded only on the royalty received from our marketing partner.

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. The Company has estimated sales returns, allowances and discounts. Contract research income is recognized as work is completed and as billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones.

CUSTOMER DEPOSITS AND CONTRACT RESEARCH INCOME

Contract research income is recognized as work is completed and as billable costs are incurred. In certain cases, contract research income is based on attainment of designated milestones. Advance payments may be received to fund certain development costs.

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NET EARNINGS PER SHARE

Net income per common share is computed based on the weighted average number of common shares outstanding for basic earnings per share and on the weighted average number of common shares and share equivalents (stock options) outstanding for diluted earnings per share. For the three months ended July 31, 2005, approximately 15,000 option shares have been excluded from the diluted earnings per share calculation as their effect is anti-dilutive.

WORKING CAPITAL REVOLVING LOAN

The Company has a three year $8,000,000 revolving credit facility dated October 23, 2002. The revolving credit facility bears interest at a rate selected by the Company equal to the Prime Rate or LIBOR plus 1.50%. Loans are collateralized by inventory, accounts receivable and other assets. The agreement contains covenants with respect to working capital, net worth and certain ratios, as well as other covenants, and prohibits the payment of cash dividends. For the three months ended July 31, 2005 there were no borrowings under the credit facility.

7

INVENTORIES

The components of inventory consist of the following:

	July 31, 2005		April 30, 2005
Raw materials	$	5,889,000	$	3,226,000
Finished products and work in process		5,260,000		5,623,000
TOTAL INVENTORY	$	11,149,000	$	8,849,000

FIXED ASSETS

The components of net plant and equipment consist of the following:

	July 31, 2005		April 30, 2005
Land and Building	$	9,044,000	$	8,894,000
Machinery and equipment		16,797,000		16,498,000
Transportation equipment		29,000		29,000
Computer equipment		1,911,000		1,846,000
Furniture and fixtures		894,000		884,000
		28,675,000		28,151,000
Accumulated depreciation and amortization		15,064,000		14,607,000
TOTAL FIXED ASSETS	$	13,611,000	$	13,544,000

INTANGIBLE ASSETS

The components of net intangible assets are as follows:

	July 31, 2005		April 30, 2005
License agreement, net	$	2,854,000	$	2,935,000
Interest in Zostrix® products, net		4,891,000
TOTAL INTANGIBLE ASSETS	$	7,745,000	$	2,935,000

ACQUISITION OF INTANGIBLE ASSET

On July 12, 2005, the Company acquired an interest in Zostrix^® brand products. The purchase price of the intangible asset was $4,400,000 plus $491,000 of closing costs. $4,000,000 was paid at the closing and $400,000 is payable in four equal quarterly installments commencing October 1, 2005. Such payable is included in accrued expenses at July 31, 2005. The purchase price allocation is subject to final valuation.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The components of accounts payable and accrued expenses consist of the following:

	July 31, 2005		April 30, 2005
Accounts payable	$	4,657,000	$	5,410,000
Accrued expenses (including $400,000 payable for acquisition of intangible asset)		6,595,000		5,374,000
TOTAL ACCOUNTS PAYABLE AND ACCRUED EXPENSES	$	11,252,000	$	10,784,000

COMMON STOCK

The Company’s Board of Directors has authorized $13,000,000 to repurchase the Company’s common stock. Pursuant to the terms of a Rule 10b5-1 stock repurchase plan, these repurchases may be made from time to time in the open market or in private transactions as market conditions dictate. To date the Company has purchased 734,000 shares for $7,946,000. During the three months ended July 31, 2005 the Company did not repurchase any shares of the Company’s common stock.

8

FREIGHT EXPENSE

Freight costs are included in selling, general, and administrative expense.

STOCK-BASED COMPENSATION:

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, encourages the use of the fair value based method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows entities to continue to apply the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations and provide pro forma disclosures of net income (loss) and earnings (loss) per share, as if the fair value based method of accounting had been applied to employee awards. The Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by APB Opinion 25 and provide the disclosures required by SFAS No. 123 and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which was released in December 2002 as an amendment of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to stock-based employee compensation.

	Three Months Ended July 31,
	2005			2004
Reported net income	$	1,406,000		$	869,000
Stock-based employee compensation determined under the fair value based method, net of tax		(307,000	)		(221,000	)
Pro forma net income	$	1,099,000		$	648,000
Basic earnings per share:
As reported	$	0.18		$	0.11
Pro forma	$	0.14		$	0.08
Diluted earnings per share:
As reported	$	0.16		$	0.10
Pro forma	$	0.12		$	0.07

CONTINGENCIES AND OTHER MATTERS

The Company’s products and facilities are subject to regulation by a number of Federal and State governmental agencies. The Food & Drug Administration (“FDA”), in particular, maintains oversight of the formulation, manufacture, distribution, packaging and labeling of all of the Company’s products.

During the three months ended July 31, 2005 the Company’s significant customers were McKesson, Cardinal and CVS, which accounted for approximately 16%, 14% and 10% of sales, respectively. At July 31, 2005, trade receivables from these customers were approximately 44% of total receivables.

The Company has a three year $8,000,000 revolving credit facility dated October 23, 2002. The revolving credit facility bears interest at a rate 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. For the three months ended July 31, 2005 there were no borrowings under the credit facility.

The Company has a net investment of approximately $275,000 in Marco Hi-Tech, a joint venture, for the marketing and development of a nutritional supplement. In 2004, the Company invested approximately $89,000 in a Secured Convertible Note from Marco Hi-Tech at an interest rate of 12%, maturing October 1, 2007 which is included in the net investment. Mr. Reuben Seltzer, a director of the Company, has an interest in the joint venture. Mr. Reuben Seltzer is the son of Mr. Bernard Seltzer, Chairman Emeritus of the Board of Directors and the brother of Mr. David Seltzer, President and Chief Executive Officer of the Company.

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. Fact discovery is complete,

9

but no trial date has been set. 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. The Company has no obligation to repay or otherwise issue any credit to such partner for such legal costs.

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 alleged 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. On November 19, 2004 the U.S. Court of Appeals for the Federal Circuit vacated the preliminary injunction. As a result of this decision, the Company commenced shipment of the Tannate 12-D S product in the third quarter. The Company may still be subject to liability based on a claim of patent infringement for sales of Tannate 12-D S.

The Company also filed, in May 2000, a complaint against Jame Fine Chemicals, Inc., D/B/A JFC Technologies, Inc. and MedPointe in the United States District Court for the District of New Jersey which has asserted various claims, including claims of breach of contract, breach of the covenant of good faith and fair dealing, tortious interference with current and prospective contractual relations and for violation of Section 1 of the Sherman Antitrust Act. Hi-Tech is claiming compensatory damages, which claim is subject to trebling. Hi-Tech is further seeking an award of punitive damages against MedPointe. Fact discovery in the litigation concluded on August 1, 2005. The case is anticipated to go to trial in the latter part of 2006.

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 alleged 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. The claims of Roger Grantham and his family, plaintiffs in the Amanda Carrisalez case, in the United States District Court for the Western District of Washington at Seattle against Hi-Tech, have been settled for $20,000. Since three of the claimants are Roger Grantham’s minor daughters, a minor prove-up is in the process of being completed. A Joint Motion for Appointment of a Guardian Ad Litem and proposed Order have been submitted to the court, and the ad litem is currently reveiwing the pleadings and medical records.

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

In December 2004, the Company learned that the staff of the Securities and Exchange Commission (“SEC”) has been conducting a formal investigation of certain trades in the Company’s common stock involving the Company and certain of its officers and directors during the period commencing on or about April 2003 to at least July 2003. The Company has also learned that the staff is investigating trades involving the Company’s common stock by other persons affiliated with the Company. The staff has advised that at this time this is only a fact finding and no conclusion should be reached that the Company or person has violated any law. The Company and its officers and directors are fully cooperating with the SEC in this matter.

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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

With the exception of the historical information contained in this Form 10-Q, the matters described herein may include forward-looking statements (statements which are not historical facts) made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not promises or guarantees and investors are cautioned that all forward-looking statements involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, product demand and market acceptance, new product development, the regulatory environment, including without limitation, the outcome of the SEC staff’s investigation and any conclusions reached by the staff which are adverse to the Company, its officers or directors, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other results and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These statements are based on management’s current expectations and are naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward looking statements which speak only as of the date made. Hi-Tech is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2005 COMPARED TO THREE MONTHS ENDED JULY 31, 2004

Net sales for the three months ended July 31, 2005 were $15,427,000, an increase of $3,287,000 or 27% as compared to the net sales of $12,140,000 for the three months ended July 31, 2004.

Net sales for generic pharmaceutical products, which include some private label contract manufacturing, for the three months ended July 31, 2005 were $13,939,000, an increase of $3,569,000 or 34%, compared to the fiscal 2004 respective period sales of $10,370,000. The increase is due to strong sales of Tannate 12 D S, Tannate V DM, Tannate DMP/DEX and Urealac, partially offset by declines in sales of in-line products. The Company’s leading generic products for the three months ended July 31, 2005 were Sulfamethoxazole and Trimethoprim with sales of approximately $1,700,000 and Urea 40% with sales of approximately $1,600,000. For the three months ended July 31, 2004 sales of Sulfamethoxazole and Trimethoprim were approximately $1,300,000 and Urea 40% with sales of approximately $2,600,000.

The Health Care Products division, which markets the Company’s branded products, for the three months ended July 31, 2005 and 2004 had net sales of $1,235,000 and $1,450,000, respectively, a decrease of $215,000 or 15%. The decrease was primarily caused by decreased sales of DiabetiDerm^® and DiabetiSweet^® products. Diabetic Tussin^® accounted for sales of approximately $500,000 for the three months ended July 31, 2005 and $400,000 for the three months ended July 31, 2004.

Sales of Naprelan^® totaled $253,000 for the three months ended July 31, 2005, a decrease of $67,000 from the three months ended July 31, 2004. This decrease is primarily due to transitioning the marketing of the 375 mg strength under the agreement with Blansett Pharmacal in February 2005. Revenue for this strength is recorded only on the royalty received from our marketing partner.

During the quarter ended July 31, 2005 the Company’s significant customers were McKesson, Cardinal Distribution L.P., and CVS, which accounted for approximately 16%, 14% and 10% of sales, respectively. At July 31, 2005, trade receivables from these customers were approximately 44% of total receivables.

Cost of sales increased to $7,210,000 from $5,925,000, or a decrease of 2% of net sales to 47% in the three months ended July 31, 2005 from 49% in the three months ended July 31, 2004. The decrease in cost of sales as a percentage of net sales is due to strong sales of generic prescription products with higher gross margins during the current quarter.

Research and product development costs for the three months ended July 31, 2005 decreased to $637,000, or 4% of net sales compared to $1,088,000 or 9% of net sales for the same period ended July 31, 2004. The decrease is primarily due to the completion of clinical studies performed in the prior year related to the submission of an ANDA for Fluticasone Propionate, a generic version of GlaxoSmithKline’s Flonase^®. There was no contract research income in the fiscal 2005 or the fiscal 2004 periods.

Selling, general and administrative expense increased to $5,607,000 from $3,827,000, an increase as a percentage of net sales to 36% from 32% for the three months ended July 31, 2005 and 2004. This was primarily the result of increased litigation costs, commission expense, payroll and freight costs.

11

Net income for the three months ended July 31, 2005 and 2004 was $1,406,000 and $869,000, respectively, an increase of $537,000, or 62%. The overall increase is primarily due to the factors noted above.

Fully diluted earnings per share increased 60% to $0.16 per share for the three months ended July 31, 2005 compared to $0.10 for the three months ended July 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operations are historically financed principally by cash flow from operations. At July 31, 2005 and April 30, 2005, working capital was approximately $51,142,000 and $54,021,000, respectively. The decrease of $2,879,000 for the three months ended July 31, 2005 was primarily due to the purchase of the interest in Zostrix^® brand products.

Cash flows from operating activities were approximately $6,391,000, which was the result of net income and depreciation and amortization of $1,862,000 and the reduction of accounts receivable of $6,058,000, partially offset by an increase in accounts payable and accrued expenses and taxes payable of $1,046,000. The decrease in accounts receivable from April 30, 2005 reflects the collection of invoices from the prior period in which there were problems with the timely delivery of invoices through Electronic Data Interchange (EDI) in early 2005. This contributed to delays in collections since our terms of payment are based on the date of delivery of invoices and these delays resulted in increased outstanding customer balances at April 30, 2005. In February 2005, the Company installed an upgraded EDI system to address these problems, and the Company implemented additional controls which management believes will limit these problems in the future.

Cash flows used in investing activities were approximately $5,015,000 and were principally payments for fixed assets acquired and the acquisition of the Zostrix^® brand products. Cash flows provided by financing activities were $586,000 which were primarily due to the net proceeds from the exercise of incentive stock options.

In 2002 the Company entered into a three year $8,000,000 revolving credit facility. The revolving credit facility bears interest at a rate elected by the Company equal to the Prime Rate or the LIBOR 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 July 31, 2005 there were no borrowings under the credit facility.

On July 12, 2005, the Company acquired the United States rights to the brands Zostrix^® and Zostrix^® HP, topical analgesic creams from Rodlen Laboratories, Inc. Hi-Tech paid $4,000,000 in cash to Rodlen Laboratories Inc. and will pay an additional $400,000 subject to adjustments in connection with returns of products and customer continuance provisions. Hi-Tech acquired finished goods and raw material inventory for approximately $400,000. In addition, the Company incurred closing costs in connection with this transaction.

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.

SEASONALITY

Historically, the months of September through March account for a greater portion of the Company’s sales than the other months of the fiscal year. However, this sales pattern can vary significantly depending on the cough, cold and flu season. Accordingly, period-to-period comparisons within the same fiscal year are not necessarily meaningful and should not be relied on as indicative of future results.

CRITICAL ACCOUNTING POLICIES

In preparing financial statements in conformity with generally accepted accounting principles in the United States of America, we are required to make estimates and assumptions that affect 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. As a result, these estimates are subject to an inherent degree of uncertainty. We base our estimates and judgments on our historical experience, the terms of existing contracts, our observance of trends in the industry, information that we obtain from our customers and outside sources, and on various assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments which impact our reported operating results and the carrying values of assets and liabilities. These assumptions include but are not limited to the percentage of new products which may have chargebacks and the percentage of items which will be subject to price decreases. Actual results may differ from these estimates.

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Revenue recognition and accounts receivable, adjustments for returns and price adjustments, allowance for doubtful accounts and carrying value of inventory represent significant estimates made by management.

Revenue Recognition and Accounts Receivable: Revenue is recognized for product sales upon shipment and when risk is passed 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 in determining net sales. 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.

Adjustments for Returns and Price Adjustments: Our product revenues are typically subject to agreements with customers allowing chargebacks, rebates, rights of return, pricing adjustments and other allowances. Based on our agreements and contracts with our customers, we calculate adjustments for these items when we recognize revenue and we book the adjustments against accounts receivable and revenue. Chargebacks, primarily from wholesalers, are the most significant of these items. Chargebacks result from arrangements we have with end users establishing prices for products for which the end user independently selects a wholesaler from which to purchase. A chargeback represents the difference between our invoice price to the wholesaler, which is typically stated at wholesale acquisition cost, and the end customer’s contract price, which is lower. We credit the wholesaler for purchases by end customers at the lower price. Therefore, we record these chargebacks at the time we recognize revenue in connection with our sales to wholesalers.

The reserve for chargebacks is computed by analyzing the number of units sold for the past twenty-four months and the number of units sold through to retailers. The difference represents the inventory which could potentially have chargebacks due to wholesalers. This inventory is multiplied by the historical percentage of units that are charged back and by the price adjustment per unit to arrive at the chargeback accrual. This calculation is performed by product by customer. The Company currently obtains wholesaler inventory data for the wholesalers which represent over 95% of our chargeback activity. This data is used to verify the information calculated in the chargeback accrual.

The calculated amount of chargebacks could be affected by other factors such as:

• A change in retail customer mix

• A change in negotiated terms with retailers

• Product sales mix at the wholesaler

• Retail inventory levels

• Changes in Wholesale Acquisition Cost (WAC)

The Company continually monitors the chargeback activity and adjusts the provisions for chargebacks when we believe that the actual chargebacks will differ from our original provisions.

Consistent with industry practice, the Company maintains a return policy that allows our 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.

Included in the adjustment for sales allowances and returns is a reserve for credits taken by our customers for rebates, return authorizations and other.

Sales discounts are granted for prompt payment. The reserve for sales discounts is based on invoices outstanding and assumes that 100% of available discounts will be taken.

Price adjustments, including shelf stock adjustments, are credits issued from time to time to reflect decreases in the selling prices of our products which our customer has remaining in its inventory at the time of the price reduction. Decreases in our selling prices are discretionary decisions made by us to reflect market conditions. Amounts recorded for estimated price adjustments are based upon specified terms with direct customers, estimated launch dates of competing products, estimated declines in market price and inventory held by the customer. The Company analyzes this on a case by case basis and makes adjustments to reserves as necessary.

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The Company adequately reserves for chargebacks, discounts, allowances and returns in the period in which the sales takes place. No material amounts included in the provision for chargebacks and the provision for sales discounts recorded in the current period relate to sales made in the prior periods. The current provision for sales allowances and returns includes reserves for items sold in the current period, while the ending balance includes reserves for items sold in the current and prior periods. The Company has substantially and consistently used the same estimating methods. We have refined the methods as new data became available. There have been no material differences between the estimates applied and actual results.

The Company determines amounts that are material to the financial statements in consideration of all relevant circumstances including quantitative and qualitative factors. Among the items considered is the impact on individual financial statement classification, operating income and footnote disclosures and the degree of precision that is attainable in estimating judgmental items.

The following table presents the roll forward of each significant estimate as of July 31, 2005 and July 31, 2004 and for the three months then ended, respectively.

	Beginning Balance May 1		Current Provision	Actual Credits in Current Period	Ending Balance July 31
For the three months ended July 31, 2005
Chargebacks	$	3,189,000	4,294,000	4,577,000	2,906,000
Sales Discounts		380,000	429,000	539,000	270,000
Sales Allowances & Returns		5,508,000	3,436,000	3,534,000	5,410,000
Total Adjustment for Returns & Price Allowances	$	9,077,000	8,159,000	8,650,000	8,586,000
For the three months ended July 31, 2004
Chargebacks		1,894,000	4,373,000	3,481,000	2,786,000
Sales Discounts		207,000	389,000	361,000	235,000
Sales Allowances & Returns		1,723,000	2,975,000	2,446,000	2,252,000
Total Adjustment for Returns & Price Allowances		3,824,000	7,737,000	6,288,000	5,273,000

Allowance for Doubtful Accounts: We have historically provided credit terms to customers in accordance with what management views as industry norms. Financial terms for credit-approved customers are generally on either a net 30 or 60 day basis, though most customers are entitled to a prompt payment discount. Management periodically and regularly reviews customer account activity in order to assess the adequacy of allowances for doubtful accounts, considering factors such as economic conditions and each customer’s payment history and creditworthiness. If the financial condition of our customers were to deteriorate, or if they were otherwise unable to make payments in accordance with management’s expectations, we would have to increase our allowance for doubtful accounts.

Inventories: We state inventories at the lower of average cost or market, with cost being determined based upon the average method. In evaluating whether inventory is to be stated at cost or market, management considers such factors as the amount of inventory on hand, estimated time required to sell existing inventory and expected market conditions, including levels of competition. We establish reserves for slow-moving and obsolete inventories based upon our historical experience, product expiration dates and management’s assessment of current product demand.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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 July 31, 2005 we are not involved in any material unconsolidated transactions.

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ITEM 3. 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.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

ITEM 1. 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. Fact discovery is complete, but no trial date has been set. 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. The Company has no obligation to repay or otherwise issue any credit to such partner for such legal costs.

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 alleged 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. On November 19, 2004 the U.S. Court of Appeals for the Federal Circuit vacated the preliminary injunction. As a result of this decision, the Company commenced shipment of the Tannate 12-D S product in the third quarter. The Company may still be subject to liability based on a claim of patent infringement for sales of Tannate 12-D S.

The Company also filed, in May 2000, a complaint against Jame Fine Chemicals, Inc., D/B/A JFC Technologies, Inc. and MedPointe in the United States District Court for the District of New Jersey which has asserted various claims, including claims of breach of contract, breach of the covenant of good faith and fair dealing, tortious interference with current and prospective contractual relations and for violation of Section 1 of the Sherman Antitrust Act. Hi-Tech is claiming compensatory damages, which claim is subject to trebling. Hi-Tech is further seeking an award of punitive damages against MedPointe. Fact discovery in the litigation concluded on August 1, 2005. The case is anticipated to go to trial in the latter part of 2006.

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 alleged 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. The claims of Roger Grantham and his family, plaintiffs in the Amanda Carrisalez case, in the United States District Court for the Western District of Washington at Seattle against Hi-Tech, have been settled for $20,000. Since three of the claimants are Roger Grantham’s minor daughters, a minor prove-up is in the process of being completed. A Joint Motion for Appointment of a Guardian Ad Litem and proposed Order have been submitted to the court, and the ad litem is currently reveiwing the pleadings and medical records.

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

In December 2004, the Company learned that the staff of the Securities and Exchange Commission (“SEC”) has been conducting a formal investigation of certain trades in the Company’s common stock involving the Company and certain of its officers and directors during the period commencing on or about April 2003 to at least July 2003. The Company has also learned that the staff is investigating trades involving the Company’s common stock by other persons affiliated with the Company. The staff has advised that at this time this is only a fact finding and no conclusion should be reached that the Company or person has violated any law. The Company and its officers and directors are fully cooperating with the SEC in this matter.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans (1)
05/01/05 – 05/30/05	0	—	0	$	5,054,000
06/01/05 – 06/30/05	0	—	0	$	5,054,000
07/01/05 – 07/31/05	0	—	0	$	5,054,000

(1) During the three months ended July 31, 2005 the Company did not repurchase any shares of the Company’s common stock. In August 2004, the Company’s Board of Directors authorized the repurchase of up to an additional $10 million of the Company’s common stock. Pursuant to the terms of a Rule 10b5-1 stock repurchase plan, these repurchases may be made from time to time in the open market or in private transactions as market conditions dictate. The Board of Directors previously authorized a total of $3 million for the Company’s repurchase program which has been fully utilized to repurchase approximately 440,000 shares of the Company’s common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Exhibits

10.1	Employment Agreement of William Peters
31.1	Rule 13A-14(a)/15D-14(a) Certification
31.2	Rule 13A-14(a)/15D-14(a) Certification
32	Certification of Officers Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,

the registrant has duly caused this report to be signed on its behalf

by the undersigned thereunto duly authorized.

HI-TECH PHARMACAL CO., INC.

(Registrant)

		Date: September 8, 2005
By:	/s/ DAVID S. SELTZER
	David S. Seltzer (President and Chief Executive Officer)
		Date: September 8, 2005
By:	/s/ WILLIAM PETERS
	William Peters (Vice President and Chief Financial Officer)

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