(cid:10)
10-K(cid:10)
1(cid:10)
g10k-31374.txt(cid:10)
10-K(cid:10)
(cid:10)
(cid:10)
UNITED STATES(cid:10)
SECURITIES AND EXCHANGE COMMISSION(cid:10)
WASHINGTON, D.C. 20549(cid:10)
FORM 10-K(cid:10)
(MARK ONE)(cid:10)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE(cid:10)
ACT OF 1934(cid:10)
FOR THE FISCAL YEAR ENDED - MARCH 31, 2003(cid:10)
OR(cid:10)
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE(cid:10)
ACT OF 1934(cid:10)
FOR THE TRANSITION PERIOD FROM ______ TO______(cid:10)
COMMISSION FILE NUMBER 333-45241(cid:10)
ELITE PHARMACEUTICALS, INC.(cid:10)
(Exact name of registrant as specified in its charter)(cid:10)
Delaware 22-3542636(cid:10)
(State or other jurisdiction of (I.R.S. Employer Identification No.)(cid:10)
incorporation or organization)(cid:10)
165 Ludlow Avenue(cid:10)
Northvale, New Jersey 06830(cid:10)
(Address of principal executive offices) (Zip Code)(cid:10)
Registrant's telephone number, including area code: (201) 750-2646(cid:10)
Securities registered pursuant to Common Stock - $.01 par value(cid:10)
Section 12(b) of the Act: The Common Stock is listed on the(cid:10)
American Stock Exchange(cid:10)
Securities registered pursuant to Section 12(g) of the Act: None(cid:10)
Indicate by check mark whether the Registrant (1) has filed all reports required(cid:10)
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during(cid:10)
the preceding 12 months (or for such shorter period that Registrant was required(cid:10)
to file such reports)(cid:10)
(cid:10)
and (2) has been subject to such filing requirements for at least the past 90(cid:10)
days. Yes [X] No [_](cid:10)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405(cid:10)
of Regulation S-K is not contained herein, and will not be contained, to the(cid:10)
best of registrant's knowledge, in definitive proxy or information statements(cid:10)
incorporated by reference in Part III of this Form 10-K. [_](cid:10)
Indicate by check mark whether the registrant is an accelerated filer (as(cid:10)
defined in Rule 12b-2 of the Act). Yes [_] No [X](cid:10)
The aggregate market value of the voting common equity held by non-affiliates of(cid:10)
the registrant as of September 30, 2002 was approximately $33,642,000 based upon(cid:10)
the closing price of the registrant's common stock on the American Stock(cid:10)
Exchange, as of the last business day of the most recently completed second(cid:10)
fiscal quarter (September 30, 2002). (For purposes of determining this amount,(cid:10)
only directors, executive officers, and 10% or greater stockholders have been(cid:10)
deemed affiliates).(cid:10)
Registrant had 10,554,426 shares of common stock, par value $0.01 per share,(cid:10)
outstanding as of June 30, 2003.(cid:10)
DOCUMENTS INCORPORATED BY REFERENCE(cid:10)
List hereunder the following documents if incorporated by reference and the Part(cid:10)
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is(cid:10)
incorporated: (1) Any annual report to security holders; (2) Any proxy or(cid:10)
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or(cid:10)
(c) under the Securities Act of 1933. The listed documents should be clearly(cid:10)
described for identification purposes (e.g., annual report to security holders(cid:10)
for fiscal year ended December 24, 1980). N/A(cid:10)
(cid:10)
FORWARD LOOKING STATEMENTS(cid:10)
--------------------------(cid:10)
This Annual Report on Form 10-K and the documents incorporated herein contain(cid:10)
"forward-looking statements" within the meaning of the Private Securities(cid:10)
Litigation Reform Act of 1995. Such forward-looking statements involve known and(cid:10)
unknown risks, uncertainties and other factors which may cause the actual(cid:10)
results, performance or achievements of the Company, or industry results, to be(cid:10)
materially different from any future results, performance or achievements(cid:10)
expressed or implied by such forward-looking statements. When used in this(cid:10)
Annual Report, statements that are not statements of current or historical fact(cid:10)
may be deemed to be forward-looking statements. Without limiting the foregoing,(cid:10)
the words "plan", "intend", "may," "will," "expect," "believe", "could,"(cid:10)
"anticipate," "estimate," or "continue" or similar expressions or other(cid:10)
variations or comparable terminology are intended to identify such(cid:10)
forward-looking statements. Readers are cautioned not to place undue reliance on(cid:10)
these forward-looking statements, which speak only as of the date hereof. Except(cid:10)
as required by law, the Company undertakes no obligation to update any(cid:10)
forward-looking statements, whether as a result of new information, future(cid:10)
events or otherwise.(cid:10)
(cid:10)
TABLE OF CONTENTS(cid:10)
Form 10-K Index(cid:10)
PART I(cid:10)
PAGE(cid:10)
Item 1. Business........................................................... 2(cid:10)
Item 2. Properties......................................................... 22(cid:10)
Item 3. Legal Proceedings.................................................. 22(cid:10)
Item 4. Submission of Matters to a Vote of Security Holders................ 22(cid:10)
PART II(cid:10)
Item 5. Market for the Registrant's Common Equity and(cid:10)
Related Stockholder Matters.................................. 23(cid:10)
Item 6. Selected Financial Data............................................ 26(cid:10)
Item 7. Management's Discussion and Analysis of Financial(cid:10)
Condition and Results of Operations.......................... 28(cid:10)
Item 7A. Quantitative and Qualitative Disclosures(cid:10)
About Market Risk............................................ 36(cid:10)
Item 8. Financial Statements and Supplementary Data........................ 36(cid:10)
Item 9. Changes in and Disagreements with Accountants(cid:10)
on Accounting and Financial Disclosure....................... 36(cid:10)
PART III(cid:10)
Item 10. Directors and Executive Officers of the Registrant................. 37(cid:10)
Item 11. Executive Compensation............................................. 39(cid:10)
Item 12. Security Ownership of Certain Beneficial Owners(cid:10)
and Management and Related Stockholder Matters............... 42(cid:10)
Item 13. Certain Relationships and Related Transactions..................... 44(cid:10)
Item 14. Controls and Procedures............................................ 44(cid:10)
PART IV(cid:10)
Item 15. Exhibits, Financial Statement Schedules and Reports(cid:10)
on Form 8-K.................................................. 45(cid:10)
Signatures.................................................................. 48(cid:10)
1(cid:10)
(cid:10)
PART I(cid:10)
------(cid:10)
ITEM 1. BUSINESS(cid:10)
Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated on(cid:10)
October 1, 1997 under the laws of the State of Delaware, and our wholly-owned(cid:10)
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.(cid:10)
("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,(cid:10)
respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,(cid:10)
Elite Labs and Elite Research are referred to herein, collectively, as "Elite",(cid:10)
"we", "us", "our" or the "Company".(cid:10)
On October 24, 1997, Elite Pharmaceuticals merged with and into our(cid:10)
predecessor company, Prologica International, Inc. ("Prologica") an inactive(cid:10)
publicly held corporation formed under the laws of the State of Pennsylvania. At(cid:10)
the same time, Elite Labs merged with a wholly-owned subsidiary of Prologica.(cid:10)
Following these mergers, Elite Pharmaceuticals survived as the parent to its(cid:10)
wholly owned subsidiary, Elite Labs.(cid:10)
On September 30, 2002, we acquired from Elan Corporation, plc and Elan(cid:10)
International Services, Ltd. (together "Elan") Elan's 19.9% interest in Elite(cid:10)
Research, Ltd. ("ERL"), a joint venture formed between Elite and Elan in which(cid:10)
our initial interest was 80.1% of the outstanding capital stock (100% of the(cid:10)
outstanding common stock). As a result of the termination of the joint venture,(cid:10)
we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda(cid:10)
Corporation) was merged into Elite Research, our wholly owned subsidiary.(cid:10)
The address of our principal executive offices and our telephone and(cid:10)
facsimile numbers at that address are:(cid:10)
Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey(cid:10)
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.(cid:10)
We file registration statements, periodic and current reports, proxy(cid:10)
statements and other materials with the Securities and Exchange Commission. You(cid:10)
may read and copy any materials we file with the SEC at the SEC's Public(cid:10)
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain(cid:10)
information on the operation of the Public Reference Room by calling the SEC at(cid:10)
1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains(cid:10)
reports, proxy and information statements and other information regarding(cid:10)
issuers that file electronically with the SEC, including our filings.(cid:10)
2(cid:10)
(cid:10)
BUSINESS OVERVIEW AND STRATEGY(cid:10)
Elite engages primarily in researching, developing and licensing(cid:10)
proprietary controlled release drug delivery systems and products. We are also(cid:10)
equipped to manufacture controlled release products on a contract basis for(cid:10)
third parties and for ourselves if, and when, our products are approved.(cid:10)
Controlled release drug delivery of a pharmaceutical compound offers a safer and(cid:10)
more effective means of administering drugs through releasing a drug into the(cid:10)
bloodstream or delivering it to a certain site in the body at predetermined(cid:10)
rates or predetermined times. The goal is to provide more effective drug therapy(cid:10)
while reducing or eliminating many of the side effects associated with(cid:10)
conventional drug therapy and/or to reduce the frequency of administration.(cid:10)
We have concentrated on developing orally administered controlled release(cid:10)
products. These products include drugs that cover therapeutic areas for pain,(cid:10)
angina, hypertension and infection. The Food and Drug Administration (FDA) has(cid:10)
not yet approved any of our products and, therefore, currently we do not market(cid:10)
any products. Our products are at various stages of development.(cid:10)
We are focusing our efforts on the following areas: (i) obtaining FDA(cid:10)
approval for one or more of six oral controlled release pharmaceutical products(cid:10)
already in development, either directly or through other companies; (ii)(cid:10)
commercial exploitation of these products either by license and the collection(cid:10)
of royalties, or through the manufacture of tablets and capsules using our(cid:10)
developed formulations, and (iii) development of new products and the expansion(cid:10)
of our licensing agreements with other pharmaceutical companies, including(cid:10)
contract research and development projects, joint ventures and other(cid:10)
collaborations.(cid:10)
In an effort to reduce costs and improve focus and efficiency, we have(cid:10)
reduced the number of products that we are actively developing from fifteen to(cid:10)
six. The six products that continue in development were deemed by us to be the(cid:10)
most suitable for continued development given our limited resources.(cid:10)
We are also focusing on the development of both branded drug products(cid:10)
(which require new drug applications ("NDA")) and generic drug products (which(cid:10)
require abbreviated new drug applications ("ANDA")).(cid:10)
We intend to continue to collaborate in the development of products with(cid:10)
our current partners. We also plan to seek additional collaborations to develop(cid:10)
more products.(cid:10)
We believe that our business strategy enables us to reduce our risk by(cid:10)
o having a diverse product portfolio that includes both branded and(cid:10)
generic products in various therapeutic categories; and(cid:10)
3(cid:10)
(cid:10)
o building collaborations and establishing licensing agreements with(cid:10)
companies with greater resources thereby allowing us to share costs of(cid:10)
development and to improve cash-flow.(cid:10)
RESEARCH AND DEVELOPMENT(cid:10)
During each of the last two fiscal years, we have focused on research and(cid:10)
development activities. We spent approximately $2,013,579 in the fiscal year(cid:10)
ended March 31, 2003 and $1,609,108 in the fiscal year ended March 31, 2002, on(cid:10)
research and development activities.(cid:10)
It is our general policy not to disclose products in our development(cid:10)
pipeline or the status of such products until a product reaches a stage that we(cid:10)
determine, for competitive reasons, in our discretion, to be appropriate for(cid:10)
disclosure and because the disclosure of such information might suggest the(cid:10)
occurrence of future matters or events that may not occur. In this instance, we(cid:10)
believe that disclosure of the information in the following table is helpful for(cid:10)
the description of the general nature, orientation and activity of the Company,(cid:10)
and the disclosures are made for such purpose. No inference should be made as to(cid:10)
the occurrence of matters or events not specifically described. We may or may(cid:10)
not disclose such information in the future based on competitive reasons and/or(cid:10)
contractual obligations. We believe that the information is helpful on a(cid:10)
one-time basis for the purpose described above.(cid:10)
The following table provides information concerning the controlled release(cid:10)
products that we are developing and to which we are devoting substantial(cid:10)
resources and attention. None of these products has been approved by the FDA and(cid:10)
all are in development.(cid:10)
(cid:10)
(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
PRODUCT BRANDED PRODUCT(a) APPROX. APPROX. NDA/ INDICATION(cid:10)
BRAND SALES GROWTH ANDA(cid:10)
$MM(b) (%)(c)(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
(cid:10)
1 Oxycodone CR OxyContin(R) $1,300+ 20% NDA Pain(cid:10)
Once a day twice a day(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
2 Abuse Resistance N/A N/A N/A NDA Pain(cid:10)
Product for use with(cid:10)
Oxycodone (or other(cid:10)
opioids)(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
3 Diltiazem Cardizem CD(R) $150+ -40% ANDA Cardiovascular(cid:10)
Once a day(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
4 Chrono Diltiazem N/A N/A N/A NDA Cardiovascular(cid:10)
Once a day(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
5 Undisclosed product N/A N/A N/A NDA Allergy(cid:10)
with partner(cid:10)
Once a day(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
6 Undisclosed Undisclosed $100+ 10% ANDA Infection(cid:10)
Twice a day(cid:10)
---- --------------------- -------------------- --------------- -------------- ----------- ------------------(cid:10)
(cid:10)
4(cid:10)
(cid:10)
(a) The name of our competitor's branded product.(cid:10)
(b) Indicates the approximate amount of sales of our competitor's product and(cid:10)
not the sales of any of our products.(cid:10)
(c) Indicates the approximate growth rate of sales of our competitor's product(cid:10)
and not the growth rate of sales of any of our products.(cid:10)
The following table presents information with respect to the development(cid:10)
stage of our principal products under development. We intend to make NDA filings(cid:10)
under Sections 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent(cid:10)
Term Restoration Act of 1984 (the "Drug Price Act"), which does not require(cid:10)
certain studies that would otherwise be necessary for FDA approval. Accordingly,(cid:10)
we anticipate that the development timetable for the products for which such NDA(cid:10)
filings are made would be shorter and less expensive. Completion of development(cid:10)
of products by us depends on a number of factors, however, and there can be no(cid:10)
assurance that specific time frames will be met during the development process(cid:10)
or that the development of any particular products will be continued.(cid:10)
In the table below, preclinical testing refers to studies done before(cid:10)
initiation of any human studies. Pilot Phase I studies for the NDA products are(cid:10)
generally preliminary studies done in healthy human subjects to assess the(cid:10)
tolerance/safety and pharmacokinetics of the product. Additional larger studies(cid:10)
in humans will be required prior to submission of this product to the FDA for(cid:10)
review. Pilot bioequivalence studies are initial studies done in humans for(cid:10)
generic products and are used to assess the likelihood of achieving(cid:10)
bioequivalence for generic products. Larger pivotal bioequivalence studies will(cid:10)
be required prior to submission of the product to the FDA for review.(cid:10)
------------------------------ ---------------- ---------------------(cid:10)
NUMBER OF(cid:10)
DEVELOPMENT STAGE PRODUCTS NDA/ANDA(cid:10)
------------------------------ ---------------- ---------------------(cid:10)
Preclinical 1 --(cid:10)
------------------------------ ---------------- ---------------------(cid:10)
Pilot Phase I study 3 NDA(cid:10)
------------------------------ ---------------- ---------------------(cid:10)
Pilot bioequivalence study 2 ANDA(cid:10)
------------------------------ ---------------- ---------------------(cid:10)
MANUFACTURING AND DEVELOPMENT CONTRACTS(cid:10)
On September 13, 2002 we entered into a manufacturing agreement with(cid:10)
Ethypharm S.A. for the manufacture of a new prescription drug product. We(cid:10)
received(cid:10)
5(cid:10)
(cid:10)
an upfront manufacturing fee for the first phase of the technology transfer and(cid:10)
are entitled to receive fees in advance for each phase of the manufacturing. In(cid:10)
addition, if and when FDA approval is obtained and if requested by Ethypharm, we(cid:10)
will manufacture commercial batches of the product on terms to be agreed.(cid:10)
In June 2001, we entered into two development contracts with a U.S.(cid:10)
pharmaceutical company pursuant to which it agreed to develop two products in(cid:10)
exchange for development fees, certain payments, royalties and manufacturing(cid:10)
rights. In June 2003 a pre-IND meeting was held with the FDA to discuss the(cid:10)
product development plan. Development continues as planned under this agreement.(cid:10)
COLLABORATIONS(cid:10)
In October 2000, we entered into a joint development and operating(cid:10)
agreement with Elan to develop products using drug delivery technologies and(cid:10)
expertise of both companies. This joint venture, ERL, was initially owned 80.1%(cid:10)
by us and 19.9% by Elan. ERL funded its research through capital contributions(cid:10)
from its partners based on the partners' respective ownership percentage. ERL(cid:10)
subcontracted research and development efforts to us, Elan and others. The(cid:10)
in-vivo (pilot bioavailability) was completed on the first product formulated by(cid:10)
us. Development on formulation for two additional products has begun. Both of(cid:10)
these products are in the early stages of development.(cid:10)
On September 30, 2002, we entered into an agreement with Elan to terminate(cid:10)
the joint venture (the "Termination Agreement"). Pursuant to the Termination(cid:10)
Agreement, we terminated the joint venture and acquired from Elan its entire(cid:10)
interest in ERL. As a result of the Termination Agreement, the joint venture(cid:10)
terminated and we owned 100 percent of ERL's capital stock. On December 31,(cid:10)
2002, ERL was merged into a new Delaware corporation, Elite Research, our wholly(cid:10)
owned subsidiary.(cid:10)
Under the Termination Agreement, we acquired all proprietary, development(cid:10)
and commercial rights for the worldwide markets for the products developed by(cid:10)
the joint venture. In exchange for this assignment, we agreed to pay Elan a(cid:10)
royalty on certain revenues that may be realized in the future from the(cid:10)
once-a-day Oxycodone product that was in development by the joint venture, if(cid:10)
and when FDA approval is obtained. In the future, we will be solely responsible(cid:10)
for funding product development, which funding we anticipate will be derived(cid:10)
from internal resources or through loans or investment by third parties. The(cid:10)
joint venture had completed the initial Phase I study for its first product, the(cid:10)
once-a-day Oxycodone formulation. The study compared the once a day formulation(cid:10)
against the twice-daily reference product that is currently marketed. Currently(cid:10)
there is no once-a-day formulation for this compound. The product is proceeding(cid:10)
to the next stage of development.(cid:10)
The joint venture had also performed work on a second, related product in(cid:10)
the central nervous system therapeutic area. Initial formulation work on a third(cid:10)
product combining Oxycodone with a narcotic antagonist has been performed. We(cid:10)
have the exclusive rights to the proprietary, development and commercial(cid:10)
exploitation for the(cid:10)
6(cid:10)
(cid:10)
worldwide markets for these two products developed by ERL. We will not have to(cid:10)
pay Elan royalties on revenues that may be realized from these products.(cid:10)
Under the joint venture, Elan had received 409,165 shares of our common(cid:10)
stock; warrants exercisable at $18.00 per share for 100,000 shares of our common(cid:10)
stock; and Series A and Series B preferred stock of Elite Labs, which were(cid:10)
convertible into 764,221 shares and 52,089 shares, respectively, of our common(cid:10)
stock. Under the Termination Agreement, Elan and its transferees retained the(cid:10)
securities, and the shares of Series A and Series B preferred stock were(cid:10)
converted into our common stock under the preexisting terms for conversion. We(cid:10)
did not pay, nor did Elan receive, any cash consideration under the Termination(cid:10)
Agreement.(cid:10)
PROPRIETARY RIGHTS(cid:10)
PATENTS(cid:10)
We presently own two United States patents for controlled-release(cid:10)
formulations of nifedipine and methods for preparing them (U.S. Patents Nos.(cid:10)
5,871,776 and 5,902,632). A third U.S. patent arising from work done at Elite,(cid:10)
U.S. Patent No. 5,837,284 for pulsed-released delivery systems for(cid:10)
methylphenidate, the compound sold under the Ritalin(C)brand, was assigned to(cid:10)
Celgene Corporation and was subsequently licensed by Celgene Corporation to(cid:10)
Novartis. We received a development fee from Celgene in connection with this(cid:10)
patent and obtained a license under this patent for applications other than(cid:10)
methylphenidate and continue to develop other applications based on this(cid:10)
technology.(cid:10)
In addition five U.S. and six foreign patent applications have been filed(cid:10)
relating to three different control release pharmaceutical products on which we(cid:10)
are working. Included among these patent applications are applications for U.S.(cid:10)
patents relating to formulations designed for chrono delivery and formulations(cid:10)
for delayed and sustained release of drugs. In addition, an application for a(cid:10)
U.S. patent for a narcotic antagonist product that we are developing to be used(cid:10)
with Oxycodone and other narcotics to minimize the abuse potential for the(cid:10)
narcotics was filed. All of these patent applications are currently pending. We(cid:10)
intend to apply for patents for other products in the future; however, there can(cid:10)
be no assurance that these or any future patents will be granted.(cid:10)
All of the currently pending patent applications were filed in the name of(cid:10)
the inventor, our former President and Chief Executive Officer, Atul M. Mehta.(cid:10)
Dr. Mehta was also the inventor on the applications that issued as U.S. Patents(cid:10)
Nos. 5,871,776 and 5,902,632, and assigned those patents to us after they(cid:10)
issued. However, Dr. Mehta has not similarly executed assignments to us of the(cid:10)
currently pending patent applications, nor has Dr. Mehta executed an agreement(cid:10)
to assign inventions made while he was working for us, for which patent(cid:10)
applications have not yet been filed. Our oxycodone once a day formulation would(cid:10)
be included in such an invention assignment. We have requested that Dr. Mehta(cid:10)
deliver those assignments to us, and intend to consider all available legal(cid:10)
alternatives in obtaining those assignments if Dr. Mehta refuses to provide them(cid:10)
voluntarily.(cid:10)
7(cid:10)
(cid:10)
In addition, Dr. Mehta's employment agreement contains a provision to the(cid:10)
effect that if he terminates his employment because of, among other reasons,(cid:10)
substantial interference with the discharge of his responsibilities or Elite's(cid:10)
purported change of his duties and responsibilities without Dr. Mehta's consent,(cid:10)
he would have non-exclusive inventorship rights and copyrights in all(cid:10)
inventions, including compounds, formulations, processes and work product, that(cid:10)
were developed by Elite in the 12 months prior to the termination of employment,(cid:10)
through Dr. Mehta's efforts. Dr. Mehta claims that he terminated his employment(cid:10)
with Elite because of substantial interference with the discharge of his(cid:10)
responsibilities and Elite's purported change of his duties and responsibilities(cid:10)
without Dr. Mehta's consent.(cid:10)
We maintain that Dr. Mehta does not own any of our intellectual property.(cid:10)
We also intend to oppose vigorously any effort by Dr. Mehta to enforce the(cid:10)
provision in his employment agreement that provides for non-exclusive(cid:10)
inventorship rights to Dr. Mehta. In the event that we are forced to take legal(cid:10)
action against Dr. Mehta to have the patent applications and other intellectual(cid:10)
property formally assigned to us, there is no assurance that we will be(cid:10)
successful in such action. With respect to our oxycodone once a day formulation,(cid:10)
another one of our former employees has also been requested to sign and deliver(cid:10)
to us an invention assignment agreement in order to confirm that he has no(cid:10)
ownership interest in it and that we own whatever intellectual property was(cid:10)
created by that employee during the term of his employment. As with Dr. Mehta,(cid:10)
in the event that we are forced to take legal action against the employee to(cid:10)
have the assignment executed, there is no assurance that we will be successful(cid:10)
in such action. If we are not successful in our claims regarding Dr. Mehta and(cid:10)
the intellectual property, it would have a material adverse effect on our(cid:10)
business and our results of operations.(cid:10)
Subsequent to Dr. Mehta's departure, we retained a consultant to review and(cid:10)
evaluate all of our technology and proprietary rights and to analyze the manner(cid:10)
and extent to which such technology and rights comport with our current strategy(cid:10)
and planning. This analysis will include a review and evaluation of rights to(cid:10)
which Dr. Mehta asserts a claim.(cid:10)
Prior to the enactment in the United States of new laws adopting certain(cid:10)
changes mandated by the General Agreement on Tariffs and Trade (GATT), the(cid:10)
exclusive rights afforded by a U.S. Patent were for a period of 17 years(cid:10)
measured from the date of grant. Under these new laws, the term of any U.S.(cid:10)
Patent granted on an application filed subsequent to June 8, 1995, terminates 20(cid:10)
years from the date on which the patent application was filed in the United(cid:10)
States or the first priority date, whichever occurs first. Future patents(cid:10)
granted on an application filed before June 8, 1995, will have a term that(cid:10)
terminates 20 years from such date, or 17 years from the date of grant,(cid:10)
whichever date is later.(cid:10)
Under the Drug Price Act, a U.S. Product patent or use patent may be(cid:10)
extended for up to five years under certain circumstances to compensate the(cid:10)
patent holder for the time required for FDA regulatory review of the product.(cid:10)
The benefits of this act are available only to the first approved use of the(cid:10)
active ingredient in the drug product and may be applied only to one patent per(cid:10)
drug product. There can be no assurance that we will be able to take advantage(cid:10)
of this law.(cid:10)
8(cid:10)
(cid:10)
Also, different countries have different procedures for obtaining patents,(cid:10)
and patents issued by different countries provide different degrees of(cid:10)
protection against the use of a patented invention by others. There can be no(cid:10)
assurance, therefore, that the issuance to us in one country of a patent(cid:10)
covering an invention will be followed by the issuance in other countries of(cid:10)
patents covering the same invention, or that any judicial interpretation of the(cid:10)
validity, enforceability, or scope of the claims in a patent issued in one(cid:10)
country will be similar to the judicial interpretation given to a corresponding(cid:10)
patent issued in another country. Furthermore, even if our patents are(cid:10)
determined to be valid, enforceable, and broad in scope, there can be no(cid:10)
assurance that competitors will not be able to design around such patents and(cid:10)
compete with us using the resulting alternative technology.(cid:10)
We also rely upon unpatented proprietary and trade secret technology that(cid:10)
we seek to protect, in part, by confidentiality agreements with our(cid:10)
collaborative partners, employees, consultants, outside scientific(cid:10)
collaborators, sponsored researchers, and other advisors. There can be no(cid:10)
assurance that these agreements provide meaningful protection or that they will(cid:10)
not be breached, that we will have adequate remedies for any such breach, or(cid:10)
that our trade secrets, proprietary know-how, and technological advances will(cid:10)
not otherwise become known to others. In addition, there can be no assurance(cid:10)
that, despite precautions taken by us, others have not and will not obtain(cid:10)
access to our proprietary technology.(cid:10)
TRADEMARKS(cid:10)
We have received Notices of Allowance from the U.S. Patent and Trademark(cid:10)
Office granting trademark protection for the following trademarks: Albulite CR,(cid:10)
Nifelite CR, Diltilite CD, Ketolite CR, Verelite CR and Glucolite CR.(cid:10)
GOVERNMENT REGULATION AND APPROVAL(cid:10)
The design, development and marketing of pharmaceutical compounds, on which(cid:10)
our success depends, are intensely regulated by governmental regulatory(cid:10)
agencies, including the FDA. Non-compliance with applicable requirements can(cid:10)
result in fines and other judicially imposed sanctions, including product(cid:10)
seizures, injunction actions and criminal prosecution based on products or(cid:10)
manufacturing practices that violate statutory requirements. In addition,(cid:10)
administrative remedies can involve voluntary withdrawal of products, as well as(cid:10)
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority(cid:10)
to withdraw approval of drugs in accordance with statutory due process(cid:10)
procedures.(cid:10)
Before a drug may be marketed, it must be approved by the FDA. The FDA(cid:10)
approval procedure for an ANDA relies on bioequivalency tests which compare the(cid:10)
applicant's drug with an already approved reference drug, rather than with(cid:10)
clinical studies. Because we concentrated, during our first few years of(cid:10)
business operations, on developing products which are intended to be(cid:10)
bioequivalent to existing controlled-release formulations, we expect that such(cid:10)
drug products will require ANDA filings and(cid:10)
9(cid:10)
(cid:10)
not clinical efficacy and safety studies, which are generally more expensive and(cid:10)
time-consuming.(cid:10)
The FDA approval procedure for an NDA is generally a two-step process.(cid:10)
During the Initial Product Development stage, an investigational new drug(cid:10)
application ("IND") for each product is filed with the FDA. A 30-day waiting(cid:10)
period after the filing of each IND is required by the FDA prior to the(cid:10)
commencement of initial clinical testing. If the FDA does not comment on or(cid:10)
question the IND within such 30-day period, initial clinical studies may begin.(cid:10)
If, however, the FDA has comments or questions, the questions must be answered(cid:10)
to the satisfaction of the FDA before initial clinical testing can begin. In(cid:10)
some instances this process could result in substantial delay and expense. These(cid:10)
initial clinical studies generally constitute Phase I of the NDA process and are(cid:10)
conducted to demonstrate the product tolerance/safety and pharmacokinetic in(cid:10)
healthy subjects.(cid:10)
After Phase I testing, extensive efficacy and safety studies in patients(cid:10)
must be conducted. After completion of the required clinical testing, an NDA is(cid:10)
filed, and its approval, which is required for marketing in the United States,(cid:10)
involves an extensive review process by the FDA. The NDA itself is a complicated(cid:10)
and detailed application and must include the results of extensive clinical and(cid:10)
other testing, the cost of which is substantial. However, the NDA filings(cid:10)
contemplated by us on already marketed drugs would be made under Sections 505(cid:10)
(b)(1) or 505 (b)(2) of the Drug Price Act, which do not require certain studies(cid:10)
that would otherwise be necessary; accordingly, the development timetable would(cid:10)
be shorter. While the FDA is required to review applications within a certain(cid:10)
timeframe in the review process, the FDA frequently requests that additional(cid:10)
information be submitted. The effect of such request and subsequent submission(cid:10)
can significantly extend the time for the NDA review process. Until an NDA is(cid:10)
actually approved, there can be no assurance that the information requested and(cid:10)
submitted will be considered adequate by the FDA to justify approval. The(cid:10)
packaging and labeling of our developed products are also subject to FDA(cid:10)
regulation. It is impossible to anticipate the amount of time that will be(cid:10)
needed to obtain FDA approval to market any product.(cid:10)
Whether or not FDA approval has been obtained, approval of the product by(cid:10)
comparable regulatory authorities in any foreign country must be obtained prior(cid:10)
to the commencement of marketing of the product in that country. All marketing(cid:10)
in territories other than the United States will be conducted through other(cid:10)
pharmaceutical companies based in those countries. The approval procedure varies(cid:10)
from country to country, can involve additional testing, and the time required(cid:10)
may differ from that required for FDA approval. Although there are some(cid:10)
procedures for unified filings for certain European countries, in general each(cid:10)
country has its own procedures and requirements, many of which are time(cid:10)
consuming and expensive. Thus, there can be substantial delays in obtaining(cid:10)
required approvals from both the FDA and foreign regulatory authorities after(cid:10)
the relevant applications are filed. After such approvals are obtained, further(cid:10)
delays may be encountered before the products become commercially available.(cid:10)
All facilities and manufacturing techniques used for the manufacture of(cid:10)
products for clinical use or for sale must be operated in conformity with Good(cid:10)
Manufacturing Practice ("GMP") regulations issued by the FDA. In the event the(cid:10)
Company engages in(cid:10)
10(cid:10)
(cid:10)
manufacturing on a commercial basis for distribution of products, it will be(cid:10)
required to operate its facilities in accordance with GMP regulations. If we(cid:10)
hire another company to perform contract manufacturing for us, we must ensure(cid:10)
that our contractor's facilities conform to GMP regulations.(cid:10)
Under the Generic Drug Enforcement Act, ANDA applicants (including(cid:10)
officers, directors and employees) who are convicted of a crime involving(cid:10)
dishonest or fraudulent activity (even outside the FDA regulatory context) are(cid:10)
subject to debarment. Debarment is disqualification from submitting or(cid:10)
participating in the submission of future ANDAs for a period of years or(cid:10)
permanently. The Generic Drug Enforcement Act also authorizes the FDA to refuse(cid:10)
to accept ANDAs from any company which employs or uses the services of a(cid:10)
debarred individual. We do not believe that we receive any services from any(cid:10)
debarred person.(cid:10)
We are also subject to federal, state, and local laws of general(cid:10)
applicability, such as laws relating to working conditions. We are also licensed(cid:10)
by, registered with, and subject to periodic inspection and regulation by the(cid:10)
DEA and New Jersey state agencies, pursuant to federal and state legislation(cid:10)
relating to drugs and narcotics. Certain drugs that we may develop in the future(cid:10)
may be subject to regulations under the Controlled Substances Act and related(cid:10)
statutes. At such time as we begin manufacturing products, we may become subject(cid:10)
to the Prescription Drug Marketing Act, which regulates wholesale distributors(cid:10)
of prescription drugs.(cid:10)
COMPLIANCE WITH ENVIRONMENTAL LAWS(cid:10)
We are subject to comprehensive federal, state and local environmental laws(cid:10)
and regulations that govern, among other things, air polluting emissions, waste(cid:10)
water discharges, solid and hazardous waste disposal, and the remediation of(cid:10)
contamination associated with current or past generation handling and disposal(cid:10)
activities, including the past practices of corporations as to which we are the(cid:10)
successor. We do not expect that compliance with such environmental laws will(cid:10)
have a material effect on our capital expenditures, earnings or competitive(cid:10)
position in the foreseeable future. There can be no assurance, however, that(cid:10)
future changes in environmental laws or regulations, administrative actions or(cid:10)
enforcement actions, or remediation obligations arising under environmental laws(cid:10)
will not have a material adverse effect on our capital expenditures, earnings or(cid:10)
competitive position.(cid:10)
COMPETITION(cid:10)
We compete in two related but distinct areas: we perform contract research(cid:10)
and development work regarding controlled-release drug technology for other(cid:10)
pharmaceutical companies, and we seek to develop and market (either on our own(cid:10)
or by license to other companies) proprietary controlled-release pharmaceutical(cid:10)
products. In both areas, our competition consists of those companies which(cid:10)
develop controlled-release drugs and alternative drug delivery systems.(cid:10)
In recent years, an increasing number of pharmaceutical companies have(cid:10)
become interested in the development and commercialization of products(cid:10)
incorporating advanced or novel drug delivery systems. We expect that(cid:10)
competition in the field of drug delivery will significantly increase in the(cid:10)
future since smaller specialized research(cid:10)
11(cid:10)
(cid:10)
and development companies are beginning to concentrate on this aspect of the(cid:10)
business. Some of the major pharmaceutical companies have invested and are(cid:10)
continuing to invest significant resources in the development of their own drug(cid:10)
delivery systems and technologies and some have invested funds in such(cid:10)
specialized drug delivery companies. Many of these companies have greater(cid:10)
financial and other resources as well as more experience than we do in(cid:10)
commercializing pharmaceutical products. Certain companies have a track record(cid:10)
of success in developing controlled-release drugs. Significant among these are(cid:10)
Alpharma, Inc., Andrx Corporation, Elan Corporation Plc, Biovail Corporation,(cid:10)
Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V Pharmaceutical Company,(cid:10)
Penwest Pharmaceuticals Company and Skyepharma Plc. Each of these companies has(cid:10)
developed expertise in certain types of drug delivery systems, although such(cid:10)
expertise does not carry over to developing a controlled-release version of all(cid:10)
drugs. Such companies may develop new drug formulations and products or may(cid:10)
improve existing drug formulations and products more efficiently than we can. In(cid:10)
addition, almost all of our competitors have vastly greater resources than we(cid:10)
do. While our product development capabilities and patent protection may help us(cid:10)
to maintain our market position in the field of advanced drug delivery, there(cid:10)
can be no assurance that others will not be able to develop such capabilities or(cid:10)
alternative technologies outside the scope of our patents, if any, or that even(cid:10)
if patent protection is obtained, such patents will not be successfully(cid:10)
challenged in the future.(cid:10)
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING(cid:10)
We are not currently in the manufacturing phase of any product and(cid:10)
therefore we do not require significant amounts of raw materials. We currently(cid:10)
obtain the raw materials that we need from over twenty suppliers.(cid:10)
We have acquired pharmaceutical manufacturing equipment with the intention(cid:10)
of manufacturing products that we develop and, on a contract basis, products(cid:10)
developed by other pharmaceutical companies. In anticipation of this(cid:10)
manufacturing, we have registered our facilities with the FDA and the Drug(cid:10)
Enforcement Agency (DEA).(cid:10)
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS(cid:10)
Each year we have had some customers that have accounted for a large(cid:10)
percentage of our sales. Currently, we have two contracts with Ethypharm, S.A.(cid:10)
and one with another U.S. pharmaceutical company that account for substantially(cid:10)
all of our revenues. If our contracts with these customers terminate or expire,(cid:10)
we will lose substantially all of our revenues. We are constantly working to(cid:10)
develop new relationships with existing or new customers, but despite these(cid:10)
efforts we may not, at the time that any of our current contracts expire, have(cid:10)
other contracts in place generating similar revenue.(cid:10)
12(cid:10)
(cid:10)
EMPLOYEES(cid:10)
As of June 30, 2003, we had 17 full-time employees and two part-time(cid:10)
employees. Both full-time and part-time employees are engaged in administration,(cid:10)
research and development. None of our employees is represented by a labor union(cid:10)
and we have never experienced a work stoppage. We believe our relationship with(cid:10)
our employees to be good. However, our ability to achieve our financial and(cid:10)
operational objectives depends in large part upon our continuing ability to(cid:10)
attract, integrate, retain and motivate highly qualified personnel, and upon the(cid:10)
continued service of our senior management and key personnel.(cid:10)
RISK FACTORS(cid:10)
In addition to the other information contained in this report, the(cid:10)
following risk factors should be considered carefully in evaluating an(cid:10)
investment in Elite and in analyzing our forward-looking statements.(cid:10)
OUR CONTINUING LOSSES ENDANGER OUR VIABILITY AS A GOING-CONCERN AND HAVE CAUSED(cid:10)
OUR AUDITORS TO ISSUE A "GOING CONCERN" EXCEPTION IN THEIR ANNUAL AUDIT REPORT.(cid:10)
We reported net losses of $4,061,422, $1,774,527 and $13,964,981 for the(cid:10)
fiscal years ended March 31, 2003, 2002 and 2001, respectively. At March 31,(cid:10)
2003, we had an accumulated deficit of approximately $28.6 million, consolidated(cid:10)
assets of approximately $8.7 million, stockholders' equity of approximately $5.4(cid:10)
million, and working capital of approximately $3.0 million. Our products are in(cid:10)
the development and early deployment stage and have not generated any(cid:10)
significant revenue to date. Our independent auditors have included a "going(cid:10)
concern" exception in their audit report for our financial statements for the(cid:10)
fiscal year ended March 31, 2003.(cid:10)
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO(cid:10)
EVALUATE OUR FUTURE PROSPECTS.(cid:10)
Although we have been in operation since 1990, we have a relatively short(cid:10)
operating history and limited financial data upon which you may evaluate our(cid:10)
business and prospects. In addition, our business model is likely to continue to(cid:10)
evolve as we attempt to expand our product offerings and enter new markets. As a(cid:10)
result, our potential for future profitability must be considered in light of(cid:10)
the risks, uncertainties, expenses and difficulties frequently encountered by(cid:10)
companies that are attempting to move into new markets and continuing to(cid:10)
innovate with new and unproven technologies. Some of these risks relate to our(cid:10)
potential inability to:(cid:10)
o develop new products;(cid:10)
o obtain regulatory approval of our products;(cid:10)
o manage our growth, control expenditures and align costs with revenues;(cid:10)
13(cid:10)
(cid:10)
o attract, retain and motivate qualified personnel; and(cid:10)
o respond to competitive developments.(cid:10)
If we do not effectively address the risks we face, our business model may(cid:10)
become unworkable and we may not achieve or sustain profitability or(cid:10)
successfully develop any products.(cid:10)
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.(cid:10)
To date, we have not been profitable, and since our inception in 1990, we(cid:10)
have not generated any significant revenues. We may never be profitable or, if(cid:10)
we become profitable, we may be unable to sustain profitability. We have(cid:10)
sustained losses in each year since our incorporation in 1990. We incurred net(cid:10)
losses of $4,061,422, $1,774,527 and $13,964,981 for the years ended March 31,(cid:10)
2003, 2002 and 2001, respectively. We expect to realize significant losses in(cid:10)
the next year of operation. We expect to continue to incur losses until we are(cid:10)
able to generate sufficient revenues to support our operations and offset(cid:10)
operating costs.(cid:10)
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RECENTLY RESIGNED(cid:10)
ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON US.(cid:10)
On June 3, 2003, Dr. Atul M. Mehta, our founder and former President and(cid:10)
Chief Executive Officer resigned from all of his positions with Elite. In the(cid:10)
past, we have been reliant on Dr. Mehta's scientific expertise in developing our(cid:10)
products. There can be no assurance that we will successfully replace Dr.(cid:10)
Mehta's expertise. In addition, the loss of Dr. Mehta's services may adversely(cid:10)
affect our relationships with our contract partners.(cid:10)
On July 3, 2003, Dr. Mehta instituted litigation against us and one of our(cid:10)
directors, John Moore, in the Superior Court of New Jersey, for, among other(cid:10)
things, allegedly breaching his employment agreement and for defamation, and(cid:10)
claims that he is entitled to receive his salary through June 6, 2006. His(cid:10)
salary for that period would be approximately one million dollars.(cid:10)
We believe Dr. Mehta's claims are without merit and intend to vigorously(cid:10)
contest this action. Prior to Dr. Mehta's resignation, a majority of our Board(cid:10)
of Directors had notified Dr. Mehta that it believed that sufficient grounds(cid:10)
existed for the termination of his employment for "Severe cause" pursuant to his(cid:10)
employment agreement. If we are ordered to pay Dr. Mehta, it would have a(cid:10)
material adverse effect on our financial condition and results of operations.(cid:10)
In addition, all of our patent applications were made in the name of the(cid:10)
inventor, our former President and Chief Executive Officer, Dr. Mehta. The(cid:10)
patents that were granted were assigned by Dr. Mehta to us. However, Dr. Mehta(cid:10)
has not similarly executed assignments to us of the pending patent applications.(cid:10)
Nor has Dr. Mehta(cid:10)
14(cid:10)
(cid:10)
executed an agreement to assign inventions made while he was working for us,(cid:10)
including our oxycodone once a day product, for which patent applications have(cid:10)
not yet been filed. We have requested that Dr. Mehta deliver those assignments(cid:10)
to us, and intend to consider all available legal alternatives in obtaining(cid:10)
those assignments if Dr. Mehta refuses to provide them voluntarily. In addition,(cid:10)
Dr. Mehta's employment agreement contains a provision to the effect that if he(cid:10)
terminates his employment because of, among other reasons, substantial(cid:10)
interference with the discharge of his responsibilities or Elite's purported(cid:10)
change of his duties and responsibilities without Dr. Mehta's consent, he would(cid:10)
have non-exclusive inventorship rights and copyrights in all inventions,(cid:10)
including compounds, formulations, processes and work product, that were(cid:10)
developed by Elite in the 12 months prior to the termination of employment,(cid:10)
through Dr. Mehta's efforts. Dr. Mehta claims that he terminated his employment(cid:10)
with Elite because of substantial interference with the discharge of his(cid:10)
responsibilities and Elite's purported change of his duties and responsibilities(cid:10)
without Dr. Mehta's consent.(cid:10)
We maintain that Dr. Mehta does not own any of our intellectual property.(cid:10)
We also intend to oppose vigorously any efforts by Dr. Mehta to enforce the(cid:10)
provision in his employment agreement that provides for non-exclusive(cid:10)
inventorship rights to Dr. Mehta. In the event that we are forced to take legal(cid:10)
action against Dr. Mehta to have the patent applications and other intellectual(cid:10)
property formally assigned to us, there is no assurance that we will be(cid:10)
successful in such action. If we are not successful in our claims regarding Dr.(cid:10)
Mehta and the intellectual property, it would have a material adverse effect on(cid:10)
our business and our results of operations.(cid:10)
WE HAVE NOT YET SUCCESSFULLY DEVELOPED A PRODUCT FOR COMMERCIAL USE, AND IF WE(cid:10)
ARE UNABLE TO DO SO OUR BUSINESS MAY NOT CONTINUE.(cid:10)
We have not yet developed a product to the stage of generating commercial(cid:10)
sales. Our research activities are characterized by the inherent risk that the(cid:10)
research will not yield results that will receive FDA approval or otherwise be(cid:10)
suitable for commercial exploitation. Of the products currently under(cid:10)
development as described in this report and on which we are devoting substantial(cid:10)
attention, we have had three products in pilot Phase I studies, two products in(cid:10)
bioequivalence stage and an additional product in preclinical testing.(cid:10)
Additional studies including either pivotal bioequivalence or efficacy studies(cid:10)
will be required before commercialization.(cid:10)
Successful completion of pivotal biostudies is required for us to file(cid:10)
abbreviated drug applications with the FDA, and successful completion of pivotal(cid:10)
clinical trials is required for us to file new drug applications with the FDA.(cid:10)
Abbreviated new drug applications are filed with respect to generic versions of(cid:10)
existing FDA approved products while new drug applications are filed with(cid:10)
respect to new products. In order for any of our products to be commercialized,(cid:10)
FDA approval is required.(cid:10)
IF WE NEED ADDITIONAL FINANCING IN ORDER TO SATISFY OUR SIGNIFICANT CAPITAL(cid:10)
REQUIREMENTS, AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, IT WOULD IMPAIR OUR(cid:10)
ABILITY TO CONTINUE TO DO BUSINESS.(cid:10)
15(cid:10)
(cid:10)
We anticipate, based on our currently proposed plans and assumptions(cid:10)
relating to our operations, that we have sufficient capital to satisfy our(cid:10)
contemplated cash requirements for our fiscal year ending March 31, 2004. After(cid:10)
that time, we may require additional financing. In particular, we expect to make(cid:10)
substantial expenditures as we further develop and seek to commercialize our(cid:10)
products. We also expect that our rate of spending will accelerate as the result(cid:10)
of increased costs and expenses associated with seeking regulatory approval and(cid:10)
commercialization of products now in development. We have no current(cid:10)
arrangements with respect to additional financing other than the potential(cid:10)
exercise of options and warrants that are currently outstanding. We have no way(cid:10)
of knowing whether any of the options or warrants will be exercised. We do not(cid:10)
currently have commitments for other financing, and so do not know whether(cid:10)
additional financing would be available to us on favorable terms, or at all. Our(cid:10)
inability to obtain additional financing when needed, would impair our ability(cid:10)
to continue our business. If any future financing involves the sale of our(cid:10)
securities, our then-existing stockholders' equity could be substantially(cid:10)
diluted. On the other hand, if we incurred debt, we would be subject to risks(cid:10)
associated with indebtedness, including the risk that interest rates might(cid:10)
fluctuate and cash flow would be insufficient to pay principal and interest on(cid:10)
such indebtedness. If our plans change, or our assumptions change or prove to be(cid:10)
inaccurate, or our cash flow proves to be insufficient to fund our operations(cid:10)
due to unanticipated expenses or problems, we would be required to seek(cid:10)
additional financing sooner than anticipated.(cid:10)
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS(cid:10)
THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO(cid:10)
CONDUCT BUSINESS MAY BE IMPAIRED.(cid:10)
Our success, competitive position and amount of royalty income will depend(cid:10)
in part on our ability to obtain patent protection in various jurisdictions(cid:10)
related to our technologies, processes and products. We intend to file patent(cid:10)
applications seeking such protection, but we cannot be certain that these(cid:10)
applications will result in the issuance of patents. If patents are issued,(cid:10)
third parties may sue us to challenge such patent protection, and although we(cid:10)
know of no reason why they should prevail, it is possible that they could. It is(cid:10)
likewise possible that our patents may not prevent third parties from developing(cid:10)
similar or competing products. In addition, although we are not aware of any(cid:10)
threatened or pending actions by third parties asserting that we have infringed(cid:10)
on their patents, and are not aware of any actions we have taken that would lead(cid:10)
to such a claim, it is possible that we might be sued for infringement. The cost(cid:10)
involved in bringing suits against others for infringement of our patents, or in(cid:10)
defending any suits brought against us, can be substantial. We may not possess(cid:10)
sufficient funds to prosecute or defend such suits. If our products were found(cid:10)
to infringe upon patents issued to others, we would be prohibited from(cid:10)
manufacturing or selling such products and we could be required to pay(cid:10)
substantial damages.(cid:10)
With respect to our oxycodone once a day formulation, in addition to Dr.(cid:10)
Mehta, one of our former employees has also been requested to sign and deliver(cid:10)
to us an invention assignment agreement in order to confirm that he has no(cid:10)
ownership interest in it and that we own whatever intellectual property was(cid:10)
created by that employee(cid:10)
16(cid:10)
(cid:10)
during the term of his employment. As with Dr. Mehta, in the event that we are(cid:10)
forced to take legal action against the employee to have the assignment(cid:10)
executed, there is no assurance that we will be successful in such action.(cid:10)
In addition, we may be required to obtain licenses to patents, or other(cid:10)
proprietary rights of third parties, in connection with the development and use(cid:10)
of our products and technologies as they relate to other persons' technologies.(cid:10)
At such time as we discover a need to obtain any such license, we will need to(cid:10)
establish whether we will be able to obtain such a license on favorable terms.(cid:10)
The failure to obtain the necessary licenses or other rights could preclude the(cid:10)
sale, manufacture or distribution of our products.(cid:10)
We also rely upon trade secrets and proprietary know-how. We seek to(cid:10)
protect this know-how in part by confidentiality agreements. We consistently(cid:10)
require our employees and potential business partners to execute confidentiality(cid:10)
agreements prior to doing business with us. However, it is possible that an(cid:10)
employee would disclose confidential information in violation of his or her(cid:10)
agreement, or that our trade secrets would otherwise become known or be(cid:10)
independently developed in such a manner that we will have no practical(cid:10)
recourse.(cid:10)
Other than with regard to our claim against Dr. Mehta and our other former(cid:10)
employee as described in this report, at this time, we are not engaged in any(cid:10)
litigation, nor contemplating any, with regard to a claim that someone has(cid:10)
infringed one of our patents, revealed any of our trade secrets, or otherwise(cid:10)
misused our confidential information.(cid:10)
See also the risk under the heading "OUR FOUNDER AND FORMER PRESIDENT AND(cid:10)
CHIEF EXECUTIVE OFFICER RECENTLY RESIGNED ALL OF HIS POSITIONS WITH ELITE, WHICH(cid:10)
MAY HAVE A MATERIAL ADVERSE EFFECT ON US".(cid:10)
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN(cid:10)
REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US.(cid:10)
The manufacturing and marketing of pharmaceutical products in the United(cid:10)
States and abroad are subject to stringent governmental regulation. The sale of(cid:10)
any of our products for use in humans in the United States will require the(cid:10)
prior approval of the FDA. Similar approvals by comparable agencies are required(cid:10)
in most foreign countries. The FDA has established mandatory procedures and(cid:10)
safety standards that apply to the clinical testing, manufacture and marketing(cid:10)
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product(cid:10)
may take several years and involve substantial expenditures. None of our(cid:10)
products has been approved for sale or use in humans in the United States or(cid:10)
elsewhere.(cid:10)
If we or our licensees fail to obtain or maintain requisite governmental(cid:10)
approvals or fail to obtain or maintain approvals of the scope requested, it(cid:10)
will delay or preclude us or our licensees or marketing partners from marketing(cid:10)
our products. It could also limit the commercial use of our products.(cid:10)
17(cid:10)
(cid:10)
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND(cid:10)
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT(cid:10)
OUR BUSINESS MODEL.(cid:10)
The pharmaceutical industry is highly competitive, and we may be unable to(cid:10)
compete effectively. In addition, it is undergoing rapid and significant(cid:10)
technological change, and we expect competition to intensify as technical(cid:10)
advances in each field are made and become more widely known. An increasing(cid:10)
number of pharmaceutical companies have been becoming interested in the(cid:10)
development and commercialization of products incorporating advanced or novel(cid:10)
drug delivery systems. We expect that competition in the field of drug delivery(cid:10)
will increase in the future as other specialized research and development(cid:10)
companies begin to concentrate on this aspect of the business. Some of the major(cid:10)
pharmaceutical companies have invested and are continuing to invest significant(cid:10)
resources in the development of their own drug delivery systems and technologies(cid:10)
and some have invested funds in such specialized drug delivery companies. Many(cid:10)
of our competitors have longer operating histories and greater financial,(cid:10)
research and development, marketing and other resources than we do. Such(cid:10)
companies may develop new formulations and products, or may improve existing(cid:10)
ones, more efficiently than we can. Our success, if any, will depend in part on(cid:10)
our ability to keep pace with the changing technology in the fields in which we(cid:10)
operate.(cid:10)
IF OTHER KEY PERSONNEL IN ADDITION TO DR. MEHTA WERE TO LEAVE ELITE OR IF WE ARE(cid:10)
UNSUCCESSFUL IN ATTRACTING QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS(cid:10)
COULD BE MATERIALLY HARMED.(cid:10)
Our success depends in large part on our ability to attract and retain(cid:10)
highly qualified scientific, technical and business personnel experienced in the(cid:10)
development, manufacture and marketing of controlled release drug delivery(cid:10)
systems and products. Our business and financial results could be materially(cid:10)
harmed by the inability to attract or retain qualified personnel.(cid:10)
WE ARE DEPENDENT ON CONTRACTS WITH A FEW MAJOR CUSTOMERS FOR SUBSTANTIALLY ALL(cid:10)
OF OUR REVENUES, AND IF THOSE CONTRACTS TERMINATE OR EXPIRE, WE WILL BE WITHOUT(cid:10)
THE STREAMS OF REVENUE THAT THEY REPRESENT, UNLESS WE ARE ABLE TO NEGOTIATE(cid:10)
OTHER CONTRACTS WITH OTHER CUSTOMERS THAT GENERATE SIMILAR REVENUES.(cid:10)
Each year we have had some customers that have accounted for a large(cid:10)
percentage of our sales. Currently, we have two contracts with Ethypharm, S.A.(cid:10)
and one with another U.S. pharmaceutical company that account for substantially(cid:10)
all of our revenues. If our contracts with these customers terminate or expire,(cid:10)
we will lose a substantially all of our revenues. There can be no assurance that(cid:10)
at the time that any of our current contracts expire, other contracts will be in(cid:10)
place generating similar revenue.(cid:10)
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR(cid:10)
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.(cid:10)
18(cid:10)
(cid:10)
The design, development and manufacture of our products involve an inherent(cid:10)
risk of product liability claims. We have procured product liability insurance(cid:10)
having a maximum limit of $1,000,000; however, a successful claim against us in(cid:10)
excess of the policy limits could be very expensive to us, damaging our(cid:10)
financial position. To the best of our knowledge, no product liability claim has(cid:10)
been made against us as of June 30, 2003.(cid:10)
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.(cid:10)
There has been significant volatility in the market prices for publicly(cid:10)
traded shares of pharmaceutical companies, including ours. In 2002, the closing(cid:10)
price of our common stock fluctuated from a per share high of $8.10 to a low of(cid:10)
$1.84 per share. In addition, in 2003 for the period ended March 31, 2003, the(cid:10)
closing price of our common stock fluctuated from a per share closing price high(cid:10)
of $2.17 to a low of $1.48. The per share price of our common stock may not(cid:10)
remain at or exceed current levels. The market price for our common stock, and(cid:10)
for the stock of pharmaceutical companies generally, has been highly volatile.(cid:10)
The market price of our common stock may be affected by:(cid:10)
o Results of our clinical trials;(cid:10)
o Approval or disapproval of abbreviated new drug applications or new(cid:10)
drug applications;(cid:10)
o Announcements of innovations, new products or new patents by us or by(cid:10)
our competitors;(cid:10)
o Governmental regulation;(cid:10)
o Patent or proprietary rights developments;(cid:10)
o Proxy contests or litigation;(cid:10)
o News regarding the efficacy of, safety of or demand for drugs or drug(cid:10)
technologies;(cid:10)
o Economic and market conditions, generally and related to the(cid:10)
pharmaceutical industry;(cid:10)
o Healthcare legislation;(cid:10)
o Changes in third-party reimbursement policies for drugs; and(cid:10)
o Fluctuations in our operating results.(cid:10)
IF ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AVAILABLE FOR ISSUANCE OR(cid:10)
SHARES ELIGIBLE FOR FUTURE SALE WERE INTRODUCED INTO THE MARKET, IT COULD HURT(cid:10)
OUR STOCK PRICE.(cid:10)
We are authorized to issue 25,000,000 shares of common stock. As of March(cid:10)
31, 2003, there were 10,554,426 shares of our common stock issued and(cid:10)
outstanding. In addition, as of that date there were 3,000,602 shares eligible(cid:10)
for issuance upon(cid:10)
19(cid:10)
(cid:10)
exercise of currently outstanding options and warrants, although options for(cid:10)
592,700 of those shares of stock had not yet vested. If every warrant and option(cid:10)
holder exercised his or her rights, once all the currently unvested options(cid:10)
vested, there would be 13,555,025 shares of stock outstanding.(cid:10)
Currently, with the exception of approximately 100,000 shares of stock that(cid:10)
were issued upon exercise of options or warrants within the last twelve months,(cid:10)
all 10,554,426 outstanding shares of common stock are eligible for resale. We(cid:10)
are unable to estimate the amount, timing or nature of future sales of(cid:10)
outstanding common stock. Sales of substantial amounts of the common stock in(cid:10)
the public market by these holders or perceptions that such sales may take place(cid:10)
may lower the common stock's market price.(cid:10)
IF PENNY STOCK REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR(cid:10)
COMMON STOCK, THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD(cid:10)
BE IMPAIRED.(cid:10)
The SEC has adopted regulations that generally define a "penny stock" to be(cid:10)
an equity security that has a market price of less than $5.00 per share or an(cid:10)
exercise price of less than $5.00 per share subject to certain exceptions.(cid:10)
Exceptions include equity securities issued by an issuer that has (i) net(cid:10)
tangible assets of at least $2,000,000, if such issuer has been in continuous(cid:10)
operation for more than three years, or (ii) net tangible assets of at least(cid:10)
$5,000,000, if such issuer has been in continuous operation for less than three(cid:10)
years, or (iii) average revenue of at least $6,000,000 for the preceding three(cid:10)
years. Unless an exception is available, the regulations require that prior to(cid:10)
any transaction involving a penny stock, a risk of disclosure schedule must be(cid:10)
delivered to the buyer explaining the penny stock market and its risks. Our(cid:10)
common stock is currently trading at under $5.00 per share. Although we(cid:10)
currently fall under one of the exceptions, if at a later time we fail to meet(cid:10)
one of the exceptions, our common stock will be considered a penny stock. As(cid:10)
such the market liquidity for the common stock will be limited to the ability of(cid:10)
broker-dealers to sell it in compliance with the above-mentioned disclosure(cid:10)
requirements.(cid:10)
You should be aware that, according to the SEC, the market for penny stocks has(cid:10)
suffered in recent years from patterns of fraud and abuse. Such patterns(cid:10)
include:(cid:10)
o Control of the market for the security by one or a few broker-dealers;(cid:10)
o "Boiler room" practices involving high-pressure sales tactics;(cid:10)
o Manipulation of prices through prearranged matching of purchases and(cid:10)
sales;(cid:10)
o The release of misleading information;(cid:10)
o Excessive and undisclosed bid-ask differentials and markups by selling(cid:10)
broker-dealers; and(cid:10)
o Dumping of securities by broker-dealers after prices have been(cid:10)
manipulated to a desired level, which hurts the price of the stock and(cid:10)
causes investors to suffer loss.(cid:10)
20(cid:10)
(cid:10)
We are aware of the abuses that have occurred in the penny stock market.(cid:10)
Although we do not expect to be in a position to dictate the behavior of the(cid:10)
market or of broker-dealers who participate in the market, we will strive within(cid:10)
the confines of practical limitations to prevent such abuses with respect to our(cid:10)
common stock.(cid:10)
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM(cid:10)
ACQUIRING US.(cid:10)
Section 203 of the Delaware General Corporation Law prohibits a merger with(cid:10)
a 15% shareholder within three years of the date such shareholder acquired 15%,(cid:10)
unless the merger meets one of several exceptions. The exceptions include, for(cid:10)
example, approval by two-thirds of the shareholders (not counting the 15%(cid:10)
shareholder), or approval by the Board prior to the 15% shareholder acquiring(cid:10)
its 15% ownership. This provision makes it difficult for a potential acquirer to(cid:10)
force a merger with or takeover of the Company, and could thus limit the price(cid:10)
that certain investors might be willing to pay in the future for shares of our(cid:10)
common stock.(cid:10)
RECENT DEVELOPMENTS(cid:10)
On June 3, 2003, Dr. Atul M. Mehta, our founder, notified us that he was(cid:10)
resigning immediately from all positions that he held with us. Following Dr.(cid:10)
Mehta's resignation, the Board of Directors appointed John A. Moore as Chairman(cid:10)
of the Board and we retained Bernard Berk as our new Chief Executive Officer.(cid:10)
On July 3, 2003, Dr. Mehta instituted litigation against us and one of our(cid:10)
directors, John Moore, in the Superior Court of New Jersey, for, among other(cid:10)
things, allegedly breaching his employment agreement and for defamation. See(cid:10)
Item 3, "LEGAL PROCEEDINGS".(cid:10)
21(cid:10)
(cid:10)
ITEM 2. PROPERTIES(cid:10)
Our facility, which we own, is located at 165 Ludlow Avenue, Northvale, New(cid:10)
Jersey, and contains approximately 20,000 square feet of floor space. This real(cid:10)
property and the improvements thereon are encumbered by a mortgage in favor of(cid:10)
the New Jersey Economic Development Authority (NJEDA) as security for a loan(cid:10)
through tax exempt bonds from the NJEDA to Elite. The mortgage document contains(cid:10)
certain customary provisions including, without limitation, the right of NJEDA(cid:10)
to foreclose upon a default by Elite.(cid:10)
We are currently using our facilities as a laboratory and office space and(cid:10)
intend to use it in the future for manufacturing, as well. Properties used in(cid:10)
our operations are considered suitable for the purposes for which they are used(cid:10)
and are believed to be adequate to meet our needs for the reasonably foreseeable(cid:10)
future.(cid:10)
ITEM 3. LEGAL PROCEEDINGS(cid:10)
In the ordinary course of business, we may be party to litigation from time(cid:10)
to time. We are not currently a party to any material legal proceedings, except(cid:10)
as described in this section of this report.(cid:10)
On June 3, 2003, Dr. Atul M. Mehta resigned from all positions that he held(cid:10)
with us, while reserving his rights under his employment agreement and under(cid:10)
common law. On July 3, 2003, Dr. Mehta instituted litigation against us and one(cid:10)
of our directors, John Moore, in the Superior Court of New Jersey, for, among(cid:10)
other things, allegedly breaching his employment agreement and for defamation,(cid:10)
and claims that he is entitled to receive his salary through June 6, 2006. His(cid:10)
salary for that period would be approximately one million dollars.(cid:10)
We believe Dr. Mehta's claims are without merit and intend to vigorously(cid:10)
contest this action. Prior to Dr. Mehta's resignation, a majority of our Board(cid:10)
of Directors had notified Dr. Mehta that it believed that sufficient grounds(cid:10)
existed for the termination of his employment for "Severe cause" pursuant to his(cid:10)
employment agreement. If we are ordered to pay Dr. Mehta, it would have a(cid:10)
material adverse effect on our financial condition and results of operations.(cid:10)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(cid:10)
No matter was submitted to a vote of stockholders during the fourth quarter(cid:10)
of our fiscal year ended March 31, 2003.(cid:10)
22(cid:10)
(cid:10)
PART II(cid:10)
-------(cid:10)
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(cid:10)
Our common stock is quoted on the American Stock Exchange under the symbol(cid:10)
"ELI" and our Class A Warrants were quoted on the over-the-counter market under(cid:10)
the symbol "ELIPZ.OB" prior to their expiration on November 30, 2002. The Class(cid:10)
A warrants first began trading on September 11, 1998. The following table shows,(cid:10)
for the periods indicated, the high and low sales prices per share of our common(cid:10)
stock as reported by the American Stock Exchange and the high and low sales(cid:10)
prices per warrant of our Class A Warrants as reported on the over-the-counter(cid:10)
market prior to November 30, 2002.(cid:10)
COMMON STOCK(cid:10)
QUARTER ENDED HIGH LOW(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2004:(cid:10)
September 30, 2003 (through July 11, 2003) .......... $3.32 $2.88(cid:10)
June 30, 2003 ....................................... $3.49 $1.25(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2003:(cid:10)
March 31, 2003....................................... $2.20 $1.45(cid:10)
December 31, 2002.................................... $3.15 $1.80(cid:10)
September 30, 2002................................... $5.25 $2.41(cid:10)
June 30, 2002........................................ $7.75 $4.50(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2002:(cid:10)
March 31, 2002....................................... $8.30 $5.65(cid:10)
December 31, 2001.................................... $7.75 $5.90(cid:10)
September 30, 2001................................... $11.50 $5.10(cid:10)
June 30, 2001........................................ $11.45 $4.85(cid:10)
As of July 11, 2003, the last reported sale price of our common stock, as(cid:10)
reported by the American Stock Exchange, was $3.29 per share.(cid:10)
23(cid:10)
(cid:10)
CLASS A WARRANTS(cid:10)
QUARTER ENDED HIGH LOW(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2003:(cid:10)
December 31, 2002 (through November 30, 2002)........ $0.80 $0.15(cid:10)
September 30, 2002................................... $1.70 $0.25(cid:10)
June 30, 2002........................................ $1.75 $0.81(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2002:(cid:10)
March 31, 2002....................................... $1.10 $0.86(cid:10)
December 31, 2001.................................... $2.50 $1.20(cid:10)
September 30, 2001................................... $6.21 $1.40(cid:10)
June 30, 2001........................................ $6.00 $2.00(cid:10)
As of November 30, 2002, the last reported sale price of our Class A(cid:10)
Warrants, as reported by the over-the-counter market, was $.15 per warrant.(cid:10)
As of June 30, 2003, there were approximately 83 holders of record (and(cid:10)
approximately 1,800 beneficial owners) of our common stock, and 23 holders of(cid:10)
record of the Company's Class B warrants. We are informed and believe that as of(cid:10)
June 30, 2003, Cede & Co. held 6,509,229 shares of our common stock as nominee(cid:10)
for Depository Trust Company, 55 Water Street, New York, New York 10004. It is(cid:10)
our understanding that Cede & Co. and Depository Trust Company both disclaim any(cid:10)
beneficial ownership therein and that such shares are held for the account of(cid:10)
numerous other persons.(cid:10)
We have never paid cash dividends on our capital stock. We currently(cid:10)
anticipate that we will retain all available funds for use in the operation and(cid:10)
expansion of our business, and do not anticipate paying any cash dividends in(cid:10)
the foreseeable future.(cid:10)
Pursuant to the terms of a Settlement Agreement dated October 23, 2002(cid:10)
among Elite, Harris Freedman and his respective affiliates, we agreed to(cid:10)
commence an exchange offer pursuant to which holders of our Class A Warrants,(cid:10)
which expired on November 30, 2002 (the "Old Warrants"), will have the(cid:10)
opportunity to exchange their Old Warrants for new warrants (the "New Warrants")(cid:10)
upon payment to us of 10 cents per share of common stock issuable upon exercise(cid:10)
of the Old Warrants. The New Warrants will be exercisable for the same number of(cid:10)
shares of common stock as the Old Warrants, have an exercise price of $5.00 per(cid:10)
share (subject to adjustment in certain circumstances), expire November 30,(cid:10)
2005, and, except as set forth in the Settlement Agreement, will have(cid:10)
substantially all of the same terms and conditions as the Old Warrants except(cid:10)
the New Warrants will not be registered with the Securities and Exchange(cid:10)
Commission. The exchange offer must be registered under applicable federal and(cid:10)
state securities laws and will only be made pursuant to an effective(cid:10)
registration statement meeting applicable legal requirements.(cid:10)
24(cid:10)
(cid:10)
In 1997, we undertook a private placement of our securities. In connection(cid:10)
with the private placement, we issued Placement Agent Warrants (the "Placement(cid:10)
Agent Warrants") exercisable for 200,000 shares of our common stock and 100,000(cid:10)
of our Class A Warrants to those placement agents assisting in the private(cid:10)
placement. The Placement Agent Warrants were exercisable at $3.60 for one share(cid:10)
of common stock and one-half a Class A Warrant. The Placement Agent Warrants(cid:10)
expired November 1, 2002. As of October 31, 2002, Placement Agent Warrants(cid:10)
exercisable for 64,786 shares of common stock and 32,393 Class A Warrants had(cid:10)
been exercised, leaving Placement Agent Warrants exercisable for 135,214 shares(cid:10)
of common stock and 67,607 Class A Warrants outstanding in the hands of(cid:10)
placement agents.(cid:10)
On October 24, 2002, our Board of Directors approved the issuance to the(cid:10)
placement agents still holding unexercised Placement Agent Warrants, effective(cid:10)
November 1, 2002, Class A Warrants exercisable for the same aggregate number of(cid:10)
shares of common stock as the Class A Warrants that were underlying the(cid:10)
unexercised Placement Agent Warrants.(cid:10)
EQUITY COMPENSATION PLAN INFORMATION(cid:10)
The following table provides information about compensation plans(cid:10)
(including individual compensation arrangements) under which our equity(cid:10)
securities are authorized for issuance to employees or non-employees (such as(cid:10)
directors and consultants), as of March 31, 2003:(cid:10)
(cid:10)
(cid:10)
Plan category Number of securities to be Weighted average exercise Number of securities(cid:10)
issued upon exercise of price of outstanding remaining available for(cid:10)
outstanding options, options, warrants and future issuance(cid:10)
warrants and rights rights(cid:10)
(a) (b) (c)(cid:10)
(cid:10)
Equity compensation plans 373,100 $7.00 830,900(cid:10)
approved by security holders(cid:10)
Equity compensation plans not 1,893,750 $5.52 N/A(cid:10)
approved by security holders(cid:10)
Total 2,266,850 $5.74 830,900(cid:10)
(cid:10)
Our Incentive Stock Option Plan ("Plan"), adopted in 1997, provides that(cid:10)
1,250,000 shares of our common stock are subject to options to be granted under(cid:10)
the Plan. If options granted under the Plan lapse without being exercised, other(cid:10)
options may be granted covering the shares not purchased under such lapsed(cid:10)
options. Options may be granted pursuant to the Plan to employees and officers(cid:10)
of Elite. Members of our Board of Directors who are not officers of employees of(cid:10)
Elite are not eligible to(cid:10)
25(cid:10)
(cid:10)
receive options under the Plan. The granting of options under the Plan will be(cid:10)
entirely discretionary. The exercise price of an option pursuant to the Plan(cid:10)
will not be less than 100% of the fair market value (to be determined by our(cid:10)
Board of Directors in good faith) of the common stock at the time the option was(cid:10)
granted; provided, an option granted to a person who, with his affiliates,(cid:10)
directly or through other entities, owns more than 10% of the voting power of(cid:10)
our common voting stock ("a Substantial Shareholder") will have an exercise(cid:10)
price not less than 110% of the fair market value of our common stock at the(cid:10)
time the option was granted. For any person, "Affiliates" will mean that(cid:10)
person's siblings, spouse, ancestors and lineal descendants. No person to whom(cid:10)
options are granted pursuant to the Plan will receive options first exercisable(cid:10)
during any single calendar year for shares, the fair market value of which(cid:10)
exceeds $100,000 (determined at the time the options are granted). Options(cid:10)
issued pursuant to the Plan expire ten years from the date granted, except that(cid:10)
options granted pursuant to the Plan to Substantial Shareholders expire five(cid:10)
years from the date of grant (in either case, the "Expiration Date"). If, prior(cid:10)
to the Expiration Date, (i) the employee's employment with the Company ends for(cid:10)
reasons other than death or retirement, any options will terminate; (ii) the(cid:10)
employee retires at normal retirement age or, with our consent, earlier on(cid:10)
account of disability, the options will expire at the end of three months after(cid:10)
such retirement; (iii) the employee dies, his estate will have six months to(cid:10)
exercise the options, provided that the exercise period will never extend beyond(cid:10)
the Expiration Date.(cid:10)
ITEM 6. SELECTED FINANCIAL DATA(cid:10)
The following consolidated selected financial data, at the end of and for(cid:10)
the last five fiscal years, should be read in conjunction with our Consolidated(cid:10)
Financial Statements and related Notes thereto appearing elsewhere in this(cid:10)
Annual Report on Form 10-K. The consolidated selected financial data are derived(cid:10)
from our consolidated financial statements that have been audited by Miller,(cid:10)
Ellin & Company, LLP, our independent auditors, as indicated in their report(cid:10)
included herein. The selected financial data provided below is not necessarily(cid:10)
indicative of our future results of operations or financial performance.(cid:10)
(cid:10)
(cid:10)
2003 2002 2001 2000 1999(cid:10)
---- ---- ---- ---- ----(cid:10)
(cid:10)
Net Revenues $ 630,310 $ 1,197,507 $ 95,246 $ 10,315 $ 150,412(cid:10)
Net income (loss) $(4,061,422) $ (1,774,527) $(13,964,981) $(2,976,392) $(1,661,881)(cid:10)
Net income (loss) per $(0.40) $(0.19) $(1.53) $(0.35) $(0.23)(cid:10)
common share(cid:10)
Total Assets $ 8,696,222 $12,724,498 $12,350,301 $9,162,383 $3,076,582(cid:10)
Long-term obligations $ 2,720,000 $3,788,148 $2,765,000 $2,885,000 ---(cid:10)
(cid:10)
26(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
Weighted average 10,069,991 9,561,299 9,135,369 8,287,648 7,237,613(cid:10)
number of shares(cid:10)
outstanding(cid:10)
(cid:10)
27(cid:10)
(cid:10)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS(cid:10)
OF OPERATION(cid:10)
GENERAL(cid:10)
The following discussion and analysis should be read with the financial(cid:10)
statements and accompanying notes, included elsewhere in this Form 10-K. It is(cid:10)
intended to assist the reader in understanding and evaluating our financial(cid:10)
position.(cid:10)
OVERVIEW(cid:10)
We are involved in the development of controlled drug delivery systems and(cid:10)
products. Our products are in varying stages of development and testing. We also(cid:10)
conduct research and development, from time to time, on behalf of other(cid:10)
pharmaceutical companies although these activities have generated only limited(cid:10)
revenue to date.(cid:10)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES(cid:10)
Management's discussion addresses our consolidated financial statements,(cid:10)
which have been prepared in accordance with accounting principles generally(cid:10)
accepted in the United States of America. The preparation of these financial(cid:10)
statements requires management to make estimates and assumptions that affect the(cid:10)
reported amounts of assets and liabilities, the disclosure of contingent assets(cid:10)
and liabilities at the date of financial statements and the reported amounts of(cid:10)
revenues and expenses during the reporting period. On an ongoing basis,(cid:10)
management evaluates its estimates and judgment, including those related to bad(cid:10)
debts, intangible assets, income taxes, workers compensation, and contingencies(cid:10)
and litigation. Management bases its estimates and judgments on historical(cid:10)
experience and on various other factors that are believed to be reasonable under(cid:10)
the circumstances, the results of which form the basis for making judgments(cid:10)
about the carrying values of assets and liabilities that are not readily(cid:10)
apparent from other sources. Actual results may differ from these estimates(cid:10)
under different assumptions or conditions.(cid:10)
Management believes the following critical accounting policies, among(cid:10)
others, affect its more significant judgments and estimates used in the(cid:10)
preparation of its consolidated financial statements. Our most critical(cid:10)
accounting policies include the recognition of revenue upon completion of(cid:10)
certain phases of projects under research and development contracts. The Company(cid:10)
also assesses a need for an allowance to reduce its deferred tax assets to the(cid:10)
amount that it believes is more likely than not to be realized. The Company(cid:10)
assesses the recoverability of long-lived assets and intangible assets whenever(cid:10)
events or changes in circumstances indicate that the carrying value of the asset(cid:10)
may not be recoverable. The Company assesses its exposure to current commitments(cid:10)
and contingencies. It should be noted that actual results may differ from these(cid:10)
estimates under different assumptions or conditions.(cid:10)
28(cid:10)
(cid:10)
During the year ended March 31, 2003, we elected to prospectively recognize(cid:10)
the fair value of stock options granted to employees and members of the Board of(cid:10)
Directors, effective as of the beginning of the fiscal year, which resulted in(cid:10)
our taking a charge of $20,550. As a result, the prospective method allowed by(cid:10)
the Financial Accounting Standards Board and related charge did not materially(cid:10)
effect our results of operations. The fair value of stock options granted to(cid:10)
employees and members of the Board of Directors for fiscal years ended after(cid:10)
March 31, 2003 may significantly effect the results of operations of future(cid:10)
periods, as these awards vest.(cid:10)
YEAR ENDED MARCH 31, 2003 VS. YEAR ENDED MARCH 31, 2002(cid:10)
Our Auditor's Report on the accompanying financial statements states that(cid:10)
such financial statements have been prepared assuming that we will continue as a(cid:10)
going concern. We have incurred a significant loss and negative cash flows(cid:10)
during our fiscal year ended March 31, 2003, which have significantly decreased(cid:10)
our working capital and increased our accumulated deficit. Our auditors have(cid:10)
stated in their report that these conditions raise substantial doubt about our(cid:10)
ability to continue as a going concern. The financial statements do not include(cid:10)
any adjustments to reflect the possible future effects on the recoverability and(cid:10)
classification of the assets or the amounts and classification of liabilities(cid:10)
that may result from the outcome of this uncertainty. Management believes that(cid:10)
cost reductions already implemented will reduce losses in the future, and with(cid:10)
our existing working capital levels, anticipate that we will be able to continue(cid:10)
our operations at least through the end of our current fiscal year.(cid:10)
Our revenues for the year ended March 31, 2003 were $630,310, a decrease of(cid:10)
$567,197 over the comparable prior year, or approximately 47.4% from the prior(cid:10)
year. For the years ended March 31, 2003 and 2002, revenues consisted of product(cid:10)
formulation fees of $187,810 and $601,057, respectively, earned in conjunction(cid:10)
with our joint venture in ERL. Revenues also consisted of research and(cid:10)
development, and testing fees of $442,500 and $593,000, respectively, earned in(cid:10)
conjunction with our distinct development, license and manufacturing agreements.(cid:10)
ERL had no revenue after our acquisition of Elan's interest in it on September(cid:10)
30, 2002. Elan's obligation to make payments to us or to ERL terminated upon the(cid:10)
termination of the joint venture with Elan. The absence of payments from Elan(cid:10)
will affect revenues for periods subsequent to September 30, 2002.(cid:10)
General and administrative expenses for the year ended March 31, 2003 were(cid:10)
$1,858,069, an increase of $1,094,382, or approximately 143% from the prior(cid:10)
year. The increase in general and administrative expenses was substantially due(cid:10)
to increases in legal and consulting fees as well as approximately $600,000 in(cid:10)
expenses resulting from a consent solicitation and a proxy solicitation with(cid:10)
regard to the election of our directors.(cid:10)
Research and development costs for the year ended March 31, 2003, were(cid:10)
$2,013,579, an increase of $404,471 or approximately 25% from the prior year.(cid:10)
29(cid:10)
(cid:10)
Research and development costs have increased primarily from the result of(cid:10)
increased research and development wages, additional biostudies, laboratory(cid:10)
supplies and raw materials used in our research and development processes. We(cid:10)
expect our research and development costs to increase in future periods as a(cid:10)
result of the ERL joint venture termination as we will be solely responsible to(cid:10)
fund product development, which we will do from internal resources or through(cid:10)
loans or investment by third parties.(cid:10)
We are unable to provide a break-down of the specific costs associated with(cid:10)
the research and development of each product on which we devoted resources(cid:10)
because a significant portion of the costs are generally associated with(cid:10)
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities(cid:10)
and similar expenses. We have not historically allocated these expenses to any(cid:10)
particular product. In addition, we cannot estimate the additional costs and(cid:10)
expenses that may be incurred in order to potentially complete the development(cid:10)
of any product, nor can we estimate the amount of time that might be involved in(cid:10)
such development because of the uncertainties associated with the development of(cid:10)
controlled release drug delivery products as described in this report.(cid:10)
Other expenses for the year ended March 31, 2003 were $580,482, an increase(cid:10)
of $112,774, or approximately 24% from the prior year. A decrease in equity loss(cid:10)
in joint venture of $321,261 due to its termination was more than offset by(cid:10)
charges related to the exchange of warrants and the issuance of stock options in(cid:10)
the amount of $262,888 and the reduction in interest income due to lower rates(cid:10)
and compensating balances in the amount of $163,363.(cid:10)
Our net loss for the year ended March 31, 2003 was $4,061,422 as compared(cid:10)
to $1,774,527 in the prior year, or approximately 128.9% from the prior year.(cid:10)
The increase in the net loss was primarily due to the decrease in net revenues,(cid:10)
and an increase in research and development and administrative expenses(cid:10)
associated with the consent solicitation and proxy solicitation with regard to(cid:10)
the election of our directors. Our net loss included our 80.1% equity loss in(cid:10)
ERL, which was $186,379 and $507,640, respectively, for the years ended March(cid:10)
31, 2003 and 2002. ERL's net loss for the years ended March 31, 2003 and 2002(cid:10)
was $232,682 and $633,642, respectively.(cid:10)
YEAR ENDED MARCH 31, 2002 VS. YEAR ENDED MARCH 31, 2001(cid:10)
Our revenues for the year ended March 31, 2002 were $1,197,507, an increase(cid:10)
of $1,102,261, or approximately 1157% over the prior year. Net revenues include(cid:10)
research and development fees totaling $593,000 of which $550,000 was earned in(cid:10)
conjunction with two separate and distinct development and licensing agreements(cid:10)
with another pharmaceutical company, product formulation fees of $601,057 earned(cid:10)
in conjunction with our joint venture in ERL and $3,450 of consulting and(cid:10)
testing fees. Comparable prior period revenues were $0, $80,932, and $14,314,(cid:10)
respectively, for the above components that comprise total revenues. ERL had no(cid:10)
revenues for either period.(cid:10)
30(cid:10)
(cid:10)
General and administrative expenses for the year ended March 31, 2002 were(cid:10)
$763,687, a decrease of $13,431, or approximately 1.7%, from the prior year. The(cid:10)
decrease in general and administrative expenses was substantially due to a(cid:10)
decrease in consulting fees. General and administrative expenses expressed as a(cid:10)
percentage of revenues were approximately 64% for the year ended March 31, 2002(cid:10)
as compared to 816% for the comparable period of the prior year.(cid:10)
Research and development costs for the year ended March 31, 2002 were(cid:10)
$1,609,108, an increase of $133,621, or approximately 9%, from the prior year.(cid:10)
Research and development costs increased as we undertook certain biostudies that(cid:10)
were not undertaken in the prior year. Research and development expenses(cid:10)
expressed as a percentage of revenues were 134% and 1549%, respectively, for the(cid:10)
years ended March 31, 2002 and March 31, 2001.(cid:10)
Other expenses for the year ended March 31, 2002 were $467,708, a decrease(cid:10)
of $11,509,837, or approximately 96.1% from the prior year. We had incurred a(cid:10)
one time expense of $12,015,000 in the fiscal year ended March 31, 2001 for our(cid:10)
share of the payment to Elan from ERL for a technology license.(cid:10)
Our net loss for the year ended March 31, 2002 was $(1,774,527), as(cid:10)
compared to $(13,964,981) for the prior year. The decrease in the net loss was(cid:10)
primarily due to the decrease of $11,572,187 in equity loss of our 80.1% owned(cid:10)
joint venture, which included a one time charge of $12,015,000 in the prior(cid:10)
comparable period for our share of the $15,000,000 payment to Elan for a(cid:10)
technology license. ERL had a loss of $633,642 for the year ended March 31, 2002(cid:10)
and a loss of $15,080,931 for the period of October 6, 2000 through March 31,(cid:10)
2001(cid:10)
MATERIAL CHANGES IN FINANCIAL CONDITION(cid:10)
Our working capital (total current assets less total current liabilities),(cid:10)
which was $7,054,961 as of March 31, 2002, decreased to $2,950,513 as of March(cid:10)
31, 2003, or approximately 58.2% from the prior year. The decrease in working(cid:10)
capital is primarily due to our net loss from operations, our purchase of(cid:10)
property and equipment, and the acquisition of our stock on the open market(cid:10)
pursuant to our previously announced stock repurchase program, offset by the(cid:10)
receipt of $65,843 from the issuance of common stock and warrants in connection(cid:10)
with the exercise of certain of our Class A Warrants, certain placement agent(cid:10)
warrants issued in connection with our 1997 private placement and our receipt of(cid:10)
the receivable from the sale of New Jersey Tax Losses.(cid:10)
We experienced negative cash flow from operations of $2,573,714 for the(cid:10)
year ended March 31, 2003, primarily due to our net loss from operations of(cid:10)
$4,061,422.(cid:10)
Our balance sheet as of March 31, 2002 and statements of redeemable(cid:10)
preferred stock and shareholders' equity (net capital deficiency) for the years(cid:10)
ended March 31, 2002 and 2001 have been restated to present our Series A(cid:10)
convertible exchangeable preferred stock (the "Series A Preferred Stock"), with(cid:10)
a carrying amount(cid:10)
31(cid:10)
(cid:10)
of $12,015,000, outside of permanent shareholders' equity, as a result of the(cid:10)
application of Emerging Issues Task Force (EITF) Topic No. D-98, Classification(cid:10)
of and Measurement of Redeemable Securities (Topic No. D-98). We issued the(cid:10)
Series A Preferred Stock in connection with the formation of the joint venture(cid:10)
with Elan in ERL. Shares of the Series A Preferred Stock were exchangeable for a(cid:10)
portion of our investment in ERL. The Series A Preferred Stock was converted(cid:10)
into shares of our common stock during our fiscal year ended March 31, 2003. The(cid:10)
effect of this restatement was to reduce total shareholders' equity by(cid:10)
$12,015,000 for the periods presented and is set forth in the table below.(cid:10)
(cid:10)
(cid:10)
March 31,(cid:10)
----------------------------------------------------------------------------------(cid:10)
2003 2002 2001(cid:10)
--------------------------------------------------------------------------------------------------(cid:10)
(cid:10)
Stockholders Equity, as(cid:10)
originally reported at March(cid:10)
31, 2002 and 2001 $ 5,426,501 $ 8,153,884 $ 9,180,254(cid:10)
Redeemable Convertible(cid:10)
Exchangeable Preferred(cid:10)
Stock (Series A) $ (12,015,000) $ (12,015,000)(cid:10)
--------------------------------------------------------------------------------------------------(cid:10)
Stockholders Equity, as(cid:10)
Restated at March 31,(cid:10)
2002 and 2001 $ 5,426,501 $ (3,861,116) $ (2,834,746)(cid:10)
==================================================================================================(cid:10)
(cid:10)
LIQUIDITY AND CAPITAL RESOURCES(cid:10)
For our fiscal year ended March 31, 2003 our operations did not generate(cid:10)
positive cash flow. We have financed our operations primarily through the(cid:10)
private sale of our equity and debt securities. We had working capital (current(cid:10)
assets less current liabilities) of $3.0 million at March 31, 2003 compared with(cid:10)
$7.1 million at March 31, 2002. Cash and cash equivalents at March 31, 2003 were(cid:10)
$3.3 million, a decrease of $3.6 million from the $6.9 million reported at March(cid:10)
31, 2002.(cid:10)
Net cash used in operating activities was $2,573,000 during the year ended(cid:10)
March 31, 2003, compared to $1,569,000 for the year ended March 31, 2002. Net(cid:10)
cash used in operating activities during the year ended March 31, 2003 resulted(cid:10)
primarily from our net loss of $4.1 million, offset in part by a reduction in(cid:10)
accounts receivable from joint venture and certain non-cash expenses. Net cash(cid:10)
used in operating activities during the year ended March 31, 2002 resulted(cid:10)
primarily from a net loss of $1.8 million and lower accounts payable, offset in(cid:10)
part by certain non-cash expenses.(cid:10)
Investing activities utilized net cash of $469,000 during the year ended(cid:10)
March 31, 2003 and utilized net cash of $532,000 during the year ended March 31,(cid:10)
2002. Net cash used in investing activities during the year ended March 31, 2003(cid:10)
resulted primarily from the acquisition of property and equipment, offset in(cid:10)
part by a decrease in(cid:10)
32(cid:10)
(cid:10)
restricted cash and the maturity of short-term investments. Net cash used in(cid:10)
investing activities during the year ended March 31, 2002 resulted primarily(cid:10)
from equipment deposits and the acquisition of property and equipment and the(cid:10)
increase in restricted cash.(cid:10)
Financing activities utilized net cash of $546,000 during the year ended(cid:10)
March 31, 2003 and provided net cash of $1.7 million during the year ended March(cid:10)
31, 2002. Net cash used in financing activities during the year ended March 31,(cid:10)
2003 resulted primarily from the repurchase of stock and the repayment of(cid:10)
indebtedness, offset in part by the sale of common stock and warrants. Net cash(cid:10)
provided by financing activities during the year ended March 31, 2002 resulted(cid:10)
primarily from the sale of common stock and warrants and proceeds of bank note,(cid:10)
offset in part by the repayment of indebtedness.(cid:10)
Our capital expenditures aggregated $679,000 and $224,000 for the years(cid:10)
ended March 31, 2003 and 2002, respectively. Such expenditures consisted(cid:10)
primarily of the acquisition of property and equipment necessary to support our(cid:10)
existing operations and expected growth. We anticipate that our capital(cid:10)
expenditures for our fiscal year ending March 31, 2004 will be limited to(cid:10)
expenditures that can be funded entirely by development contracts that include(cid:10)
provisions for such funding for these expenditures. These expenditures(cid:10)
substantially would relate to the acquisition of property and equipment in(cid:10)
connection with our operations.(cid:10)
As described in Note 6 to our consolidated financial statements, we have(cid:10)
outstanding $2,635,000 in aggregate amount of bonds. The bonds bear interest at(cid:10)
a rate of 7.75% per annum and are due on various dates between 2003 and(cid:10)
thereafter. The bonds are secured by a first lien on our facility in Northvale,(cid:10)
New Jersey. Pursuant to the terms of the bonds, several restricted cash accounts(cid:10)
have been established for the payment of bond principal and interest. Bond(cid:10)
proceeds were utilized for the refinancing of the land and building we currently(cid:10)
own, for the purchase of certain manufacturing equipment and related building(cid:10)
improvements and the maintenance of a $300,000 debt service reserve. All of the(cid:10)
restricted cash, other than the debt service reserve, is expected to be expended(cid:10)
within twelve months and is therefore categorized as a current asset on our(cid:10)
consolidated balance sheet as of March 31, 2003. Pursuant to terms of the bond(cid:10)
indenture agreement pursuant to which the bonds were issued, we are required to(cid:10)
observe certain covenants, including covenants relating to the incurrence of(cid:10)
additional indebtedness, the granting of liens and the maintenance of certain(cid:10)
financial covenants. As of March 31, 2003, we were in compliance with the(cid:10)
covenants contained in the bond indenture agreement.(cid:10)
As a result of the significant expenditures associated with the proxy(cid:10)
solicitation in our fiscal year ended March 31, 2003, the joint venture(cid:10)
termination and other legal and accounting expenses, quarterly cash expenses far(cid:10)
exceeded our generated revenues in 2003. In order to conserve cash in fiscal(cid:10)
year 2004, we intend to reduce costs by reducing the number of products under(cid:10)
active development to six. However, while we anticipate having adequate capital(cid:10)
to support our operations through at least the end of our current fiscal year,(cid:10)
we will need to raise capital and/or generate additional revenues(cid:10)
33(cid:10)
(cid:10)
in order to support our operations beyond that time. To the extent that revenues(cid:10)
do not meet expectations or our cost cutting measures do not become effective,(cid:10)
we will need to raise additional capital sooner.(cid:10)
We also, from time to time, consider potential strategic transactions(cid:10)
including acquisitions, strategic alliances, joint ventures and licensing(cid:10)
arrangements with other pharmaceutical companies. There can be no assurance that(cid:10)
any such transaction will be available or consummated in the future.(cid:10)
Reference is made to "Risk Factors" for a description of certain risks that(cid:10)
may affect the achievement of our objectives and results discussed herein.(cid:10)
As of March 31, 2003, our principal source of liquidity was approximately(cid:10)
$3,264,000 of cash and cash equivalents. Additionally, we may have access to(cid:10)
funds of approximately $180,000 that may be generated from the potential sale of(cid:10)
New Jersey tax losses. There can be no assurance that the sale of tax losses(cid:10)
will materialize or come to fruition or that such funds will become available.(cid:10)
The following table depicts our obligations and commitments to make future(cid:10)
payments under existing contracts and contingent commitments.(cid:10)
(cid:10)
(cid:10)
Payments Due by Period(cid:10)
LESS THAN 1 AFTER 5(cid:10)
CONTRACTUAL OBLIGATIONS Total YEAR 1-3 YEARS 4-5 YEARS YEARS(cid:10)
-----(cid:10)
(cid:10)
Note payable 300,000 75,000 225,000 - -(cid:10)
EDA Bonds payable 2,635,000 140,000 490,000 395,000 1,610,000(cid:10)
(cid:10)
NEW ACCOUNTING PRONOUNCEMENTS(cid:10)
-----------------------------(cid:10)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs(cid:10)
Associates with Exit or Disposal Activities," which addresses financial(cid:10)
accounting and reporting for costs associated with exit or disposal activities,(cid:10)
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition(cid:10)
for Certain Employee Termination Benefits and Other Costs to Exit an Activity(cid:10)
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires(cid:10)
that a liability for a cost associated with an exit or disposal activity be(cid:10)
recognized when the liability is incurred. The requirements of SFAS No. 146(cid:10)
apply prospectively to activities that are initiated after December 31. 2002(cid:10)
and, as a result, we cannot reasonably estimate the impact of adopting these new(cid:10)
rules until and unless we undertake relevant activities in future periods.(cid:10)
In November 2002, the FASB issued Interpretation ("FIN") No. 45(cid:10)
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including(cid:10)
Indirect Guarantees of Indebtedness of Others," which clarifies the required(cid:10)
disclosures to be made by a guarantor in their interim and annual financial(cid:10)
statements about its obligations under certain guarantees that it has issued.(cid:10)
FIN No. 45 also requires a(cid:10)
34(cid:10)
(cid:10)
guarantor to recognize, at the inception of the guarantee, a liability for the(cid:10)
fair value of the obligation undertaken. We are required to adopt the disclosure(cid:10)
requirements of FIN No. 45 for financial statements of interim and annual(cid:10)
periods ending after December 15, 2002. We are required to adopt and accordingly(cid:10)
have adopted prospectively the initial recognition and measurement provisions of(cid:10)
FIN No.45 for guarantees issued or modified after December 31, 2002 and, as a(cid:10)
result, we cannot reasonably estimate the impact of adopting these new rules(cid:10)
until and unless we undertake relevant activities in future periods.(cid:10)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based(cid:10)
Compensation - Transition and Disclosure - an amendment of SFAS No. 123." This(cid:10)
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to(cid:10)
provide alternative methods of transition for a voluntary change to the fair(cid:10)
value based method of accounting for stock-based employee compensation. In(cid:10)
addition, this Statement amends the disclosure requirements of SFAS No. 123 to(cid:10)
require prominent disclosures in both annual and interim financial statements(cid:10)
about the method of accounting for stock-based employee compensation and the(cid:10)
effect of the method used on reported results. The adoption of the provisions of(cid:10)
SFAS No. 148 did not have a material impact on our financial position or results(cid:10)
of operations during the year ended March 31, 2003. We cannot reasonably(cid:10)
estimate the impact of applying the prospective method of accounting for(cid:10)
stock-based compensation on future periods until and unless we grant or modify(cid:10)
stock-based awards.(cid:10)
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable(cid:10)
Interest Entities," which clarifies the application of Accounting Research(cid:10)
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation(cid:10)
of certain entities. First, FIN No. 46 will require identification of our(cid:10)
participation in variable interests entities ("VIEs"), which are defined as(cid:10)
entities with a level of invested equity that is not sufficient to fund future(cid:10)
activities to permit them to operate on a stand alone basis, or whose equity(cid:10)
holders lack certain characteristics of a controlling financial interest. For(cid:10)
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential(cid:10)
consolidation based on an assessment of which party to the VIE, if any, bears a(cid:10)
majority of the exposure to its expected losses, or stands to gain from a(cid:10)
majority of its expected returns. FIN No. 46 also sets forth certain disclosures(cid:10)
regarding interests in VIEs that are deemed significant, even if consolidation(cid:10)
is not required. As we do not participate in VIEs, we do not anticipate that the(cid:10)
provisions of FIN No. 46 will have a material impact on our financial position(cid:10)
or results of operations.(cid:10)
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain(cid:10)
Financial Instruments with Characteristics of Both Liabilities and Equity." This(cid:10)
Statement established standards for how an issuer classifies and measures(cid:10)
certain financial instruments with characteristics of both liabilities and(cid:10)
equity. It requires that an issuer classify certain financial instruments, such(cid:10)
as mandatorily redeemable stock, as liabilities. Some instruments do not require(cid:10)
the issuer to transfer assets to settle the obligation but, instead,(cid:10)
unconditionally require the issuer to settle the obligation either by(cid:10)
transferring assets or by issuing a variable number of its equity shares. These(cid:10)
35(cid:10)
(cid:10)
instruments, which may have previously been classified as equity, would be(cid:10)
classified as liabilities in accordance with SFAS No.150. This Statement is(cid:10)
effective for financial instruments entered into or modified after May 31, 2003,(cid:10)
and otherwise is effective at the beginning of the first interim period(cid:10)
beginning after June 15, 2003. The adoption of the provisions of SFAS No. 150 is(cid:10)
not expected to have material impact on our financial position or results of(cid:10)
operations.(cid:10)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(cid:10)
We do not invest in or own any market risk sensitive instruments entered(cid:10)
into for trading purposes or for purposes other than trading purposes. All loans(cid:10)
to us have been made at fixed interest rates and; accordingly, the market risk(cid:10)
to us prior to maturity is minimal.(cid:10)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(cid:10)
Attached hereto and filed as a part of this Annual Report on Form 10-K are(cid:10)
our Consolidated Financial Statements, beginning on page F-1.(cid:10)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND(cid:10)
FINANCIAL DISCLOSURE(cid:10)
None.(cid:10)
36(cid:10)
(cid:10)
PART III(cid:10)
--------(cid:10)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(cid:10)
Directors and Executive Officers(cid:10)
Our directors and executive officers, as of June 30, 2003, and their(cid:10)
biographical information are set forth below:(cid:10)
(cid:10)
(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
NAME AGE POSITION(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
(cid:10)
Bernard Berk 54 Chief Executive Officer(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
John A. Moore 38 Chairman of the Board(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
Donald S. Pearson 67 Director(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
Harmon Aronson 60 Director(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
Eric L. Sichel, M.D. 44 Director(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
John P. de Neufville 62 Director(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
Richard A. Brown 54 Director(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
Mark I. Gittelman 43 Chief Financial Officer, Secretary and Treasurer(cid:10)
------------------------- -------- ----------------------------------------------------(cid:10)
(cid:10)
Bernard Berk was appointed Chief Executive Officer in June 2003. Mr. Berk(cid:10)
has been President and Chief Executive Officer of Michael Andrews Corporation, a(cid:10)
pharmaceutical management consultant firm, since 1996. From 1993 until 1996 Mr.(cid:10)
Berk was President and Chief Executive Officer of Nale Pharmaceutical(cid:10)
Corporation. Mr. Berk holds a B.S. in education from New York University.(cid:10)
John A. Moore was appointed Chairman of the Board of Directors in June 2003(cid:10)
and has been a director since December 2002. Mr. Moore has been Chief Executive(cid:10)
Officer and President of Edson Moore Healthcare Ventures, an investment entity,(cid:10)
since July 2002. Since 1994, Mr. Moore has been Chief Executive Officer and(cid:10)
President of Optimer, Inc., a research based polymer development company. Mr.(cid:10)
Moore holds a B.A. in history from Rutgers University.(cid:10)
Donald S. Pearson, a director since 1999, has been employed since 1997 as(cid:10)
the President of Pearson & Associates, Inc., a company that provides consulting(cid:10)
services to the pharmaceutical industry. Prior to starting Pearson & Associates,(cid:10)
Mr. Pearson served for five years as the Director of Licensing at Elan(cid:10)
Pharmaceuticals, and prior to that he was employed by Warner-Lambert for thirty(cid:10)
years in various marketing, business development and licensing capacities. Mr.(cid:10)
Pearson holds a B.S. in Chemistry from the University of Arkansas and studied(cid:10)
steroid chemistry at St. John's University.(cid:10)
Harmon Aronson, Ph.D., a director since 1999, has been employed since(cid:10)
1997 as the President of Aronson Kaufman Associates, Inc., a New Jersey-based(cid:10)
consulting firm that provides manufacturing, FDA regulatory and compliance(cid:10)
services to the pharmaceutical and biotechnology companies. Its clients include(cid:10)
United States and international firms manufacturing bulk drugs and finished(cid:10)
pharmaceutical dosage products who are seeking FDA approval for their products(cid:10)
for the US Market. Prior to(cid:10)
37(cid:10)
(cid:10)
1997, Dr. Aronson was employed by Biocraft Laboratories, a leading generic drug(cid:10)
manufacturer, most recently in the position of Vice President of Quality(cid:10)
Management; prior to that he held the position of Vice President of(cid:10)
Non-Antibiotic Operations, where he was responsible for the manufacturing of all(cid:10)
the firm's non-antibiotic products. Dr. Aronson holds a Ph.D. in Physics from(cid:10)
the University of Chicago.(cid:10)
Eric L. Sichel, M.D., a director since August 2001, is President of Sichel(cid:10)
Medical Ventures, Inc., a company that provides biotechnology company(cid:10)
assessments and investment banking services. Dr. Sichel has been the owner and(cid:10)
President of Sichel Medical Ventures, Inc. since 1997. From 1995 through 1996,(cid:10)
Dr. Sichel was a senior analyst in the biotechnology field for Alex, Brown &(cid:10)
Sons, Inc. Prior to that, Dr. Sichel was affiliated with Sandoz Pharmaceuticals(cid:10)
Corp. in various capacities, including associate director of(cid:10)
transplantation/immunology. Dr. Sichel holds an M.B.A. from Columbia University(cid:10)
and an M.D. from UMDNJ--New Jersey Medical School, and is licensed to practice(cid:10)
medicine by the State of New York.(cid:10)
John P. de Neufville, a director since December 2002, has been the Chief(cid:10)
Executive Officer and President of Voltaix, Inc., a supplier of electronic(cid:10)
chemicals, since 1986. Mr. de Neufville had been a member of Elite's board of(cid:10)
advisors since 1997 before becoming a director in 2002. He holds a Ph.D. in(cid:10)
applied physics and an M.S. in geology from Harvard University and a B.S. in(cid:10)
geology from Yale University.(cid:10)
Richard A. Brown, a director since December 2002, has been Chairman of the(cid:10)
Board of Directors of Niadyne, Inc., a pharmaceutical development company, since(cid:10)
1997. From 1986 to the present, Mr. Brown also has been President of Eagle(cid:10)
Ventures, a healthcare venture capital and investment banking company. Mr. Brown(cid:10)
also worked in the securities field for Tucker Anthony from 1972 to 1984 and(cid:10)
Healthcare Ventures from 1984 to 1986. Mr. Brown holds an A.B. from Hamilton(cid:10)
College.(cid:10)
Mark I. Gittelman, CPA, our Chief Financial Officer, Secretary and(cid:10)
Treasurer, is the President of Gittelman & Co., P.C., an accounting firm. Prior(cid:10)
to forming Gittelman & Co., P.C. in 1984, he worked as a certified public(cid:10)
accountant with the international accounting firm of KPMG Peat Marwick, LLP. Mr.(cid:10)
Gittelman holds a B.S. in accounting from New York University and a Masters of(cid:10)
Science in Taxation from Farleigh Dickinson University. He is a Certified Public(cid:10)
Accountant licensed in New Jersey and New York, and is a member of the American(cid:10)
Institute of Certified Public Accountants ("AICPA") and the New Jersey State and(cid:10)
New York States Societies of CPAs.(cid:10)
Each director holds office (subject to our By-Laws) until the next annual(cid:10)
meeting of shareholders and until such director's successor has been elected and(cid:10)
qualified. All of our executive officers are serving until the next annual(cid:10)
meeting of directors and until their successors have been duly elected and(cid:10)
qualified. There are no family relationships between any of our directors and(cid:10)
executive officers.(cid:10)
38(cid:10)
(cid:10)
The board of the Company has a Compensation Committee, which is comprised(cid:10)
of Donald Pearson, Harmon Aronson, John de Neufville and Richard Brown.(cid:10)
The board of the Company has an Audit Committee which is comprised of(cid:10)
Richard Brown, John Moore and Eric Sichel.(cid:10)
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934(cid:10)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires(cid:10)
our directors and executive officers and persons who own more than ten percent(cid:10)
of a registered class of our equity securities (collectively, "Reporting(cid:10)
Persons") to file with the SEC initial reports of ownership and reports of(cid:10)
changes in ownership of our common stock and other equity securities of Elite.(cid:10)
Reporting Persons are required by SEC regulation to furnish Elite with copies of(cid:10)
all Section 16(a) forms that they file. To our knowledge, based solely on a(cid:10)
review of the copies of such reports furnished to us, we believe that during(cid:10)
fiscal year ended March 31, 2003 all Reporting Persons complied with all(cid:10)
applicable filing requirements, except for Richard A. Brown who was late in(cid:10)
filing a report on Form 3 with the Securities and Exchange Commission when he(cid:10)
became a director of the Company on December 12, 2002.(cid:10)
ITEM 11. EXECUTIVE COMPENSATION(cid:10)
EXECUTIVE OFFICER COMPENSATION(cid:10)
The following table sets forth the annual and long-term compensation for(cid:10)
services in all capacities to the Company for the three years ended March 31,(cid:10)
2003, awarded or paid to, or earned by our former President and Chief Executive(cid:10)
Officer, Dr. Atul M. Mehta. Dr. Mehta resigned as an employee and as a director(cid:10)
of Elite as of June 3, 2003. No other executive officer of the Company received(cid:10)
compensation exceeding $100,000 during those periods.(cid:10)
39(cid:10)
(cid:10)
(cid:10)
(cid:10)
SUMMARY COMPENSATION TABLE(cid:10)
-------------------------------------------------------------------- ----------------------------------------------------------(cid:10)
Annual Compensation Long Term compensation(cid:10)
-------------------------------------------------------------------- ----------------------------------------------------------(cid:10)
(a) (b) (c) (d) (e) (f) (g) (h) (i)(cid:10)
Name and Fiscal Salary Bonus Other Annual Restricted Securities LTIP Payouts All Other(cid:10)
Principal year (1) Compensation(5) Stock Underlying Compensation(cid:10)
Position Awards Options(cid:10)
---------------- ----------- ----------- ---------- ---------------- ----------- ---------------- ------------- ---------------(cid:10)
(cid:10)
Atul M. Mehta, 2002-03 $330,140 -- $ 3,040 -- -- -- --(cid:10)
Ph.D. former 2001-02 $272,855 -- $ 83,856 -- 50,000 -- --(cid:10)
President and 2000-01 $248,050 $ 45,000 $ 3,040 -- 425,000(3)(4) -- --(cid:10)
Chief(cid:10)
executive(cid:10)
Officer (2)(cid:10)
---------------- ----------- ----------- ---------- ---------------- ----------- ---------------- ------------- ---------------(cid:10)
(cid:10)
(1) The Company's fiscal year begins on April 1 and ends on March 31. The(cid:10)
information is provided for each fiscal year beginning April 1.(cid:10)
(2) Dr. Mehta resigned as an employee and as a director of Elite as of June(cid:10)
3, 2003.(cid:10)
(3) On December 15, 2000, Dr. Mehta surrendered options for 425,000 shares(cid:10)
of our common stock (exercisable at $7.00 per share) and in return received(cid:10)
options for 425,000 shares of our common stock exercisable on January 2, 2001(cid:10)
and expiring January 1, 2006. The exercise price is 110% of the opening price of(cid:10)
our common stock on January 2, 2001 adjusted upward to the nearest half dollar(cid:10)
of $7.00. On January 2, 2001, our stock opened at $6.25 per share, therefore the(cid:10)
exercise price for the stock subject to these options is $7.00 per share.(cid:10)
(4) By action on February 21, 2002, our Board of Directors corrected a(cid:10)
clerical error in options for 425,000 shares of our common stock previously(cid:10)
granted to Dr. Mehta. This correction did not result in any additional shares(cid:10)
being subject to options held by Dr. Mehta, any change in the exercise price or(cid:10)
a change in any other material terms.(cid:10)
(5) Other Annual Compensation represents use of a company car and premiums(cid:10)
paid by the Company for life insurance on Dr. Mehta's life for the benefit of(cid:10)
his wife paid by the Company.(cid:10)
Reported below in this report is the purchase by the Company of options(cid:10)
from Dr. Mehta. The purchase price for those options of $80,856 is included(cid:10)
above in "Other Annual Compensation."(cid:10)
40(cid:10)
(cid:10)
OPTION GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR(cid:10)
No options were granted to executive officers of the Company during the(cid:10)
fiscal year ended March 31, 2003.(cid:10)
(cid:10)
(cid:10)
NAME SHARES VALUE NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY(cid:10)
---- EXERCISED REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR-END (1)(cid:10)
--------- -------- ------------------------------- -----------------------(cid:10)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(cid:10)
----------- ------------- ----------- -------------(cid:10)
(cid:10)
Atul M.(cid:10)
Mehta (2) -0- $0 1,025,000 450,000 $0 $0(cid:10)
(cid:10)
(1) The dollar values are calculated by determining the difference between(cid:10)
$1.53 per share, the fair market value of the common stock at March 31, 2003,(cid:10)
and the exercise price of the respective options.(cid:10)
(2) Dr. Mehta resigned as an employee and as a director of Elite as of June 3,(cid:10)
2003.(cid:10)
Under Dr. Mehta's employment agreement, his vested options are exercisable(cid:10)
for the one year period after his employment with Elite ended. His employment(cid:10)
agreement also contains a provision to the effect that if his employment is(cid:10)
terminated by Elite, all of his unvested options become vested. Because Dr.(cid:10)
Mehta resigned from Elite and Elite did not terminate his employment, we believe(cid:10)
that none of Dr. Mehta's unvested options will vest in the future. However, Dr.(cid:10)
Mehta claims in his lawsuit that he is entitled to all of the options granted(cid:10)
pursuant to his employment agreement. We believe that Dr. Mehta's claim is(cid:10)
without merit and intend to contest vigorously any effort by Dr. Mehta to keep(cid:10)
unvested options. We cannot predict whether Dr. Mehta will have the right to(cid:10)
exercise any unvested options.(cid:10)
COMPENSATION OF DIRECTORS(cid:10)
Each non-affiliated director receives $2,000 as compensation for each(cid:10)
meeting attended.(cid:10)
OPTIONS TO DIRECTORS(cid:10)
On January 31, 2003 each member of the board of directors of the Company(cid:10)
other than Dr. Mehta was awarded an option to purchase 30,000 shares of common(cid:10)
stock of the Company at a price of $6.50 per share. These options granted to(cid:10)
each director vest as follows: 10,000 shares on December 12, 2003, 10,000 shares(cid:10)
on December 12, 2004 and 10,000 shares on December 12, 2005. The options expire(cid:10)
at the earlier to occur of: (1) January 31, 2013; or (2) the date one year after(cid:10)
the optionee ceases to be a director of or a consultant or advisor of the(cid:10)
Company.(cid:10)
41(cid:10)
(cid:10)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND(cid:10)
RELATED STOCKHOLDER MATTERS(cid:10)
The following table sets forth certain information regarding beneficial(cid:10)
ownership of our common stock as of June 30, 2003 by (i) each person known by us(cid:10)
to own beneficially more than 5% of the outstanding shares of our common stock(cid:10)
(ii) each director, named executive officer and (iii) all executive officers and(cid:10)
directors as a group. On such date, we had 10,554,426 shares of common stock(cid:10)
outstanding. Shares not outstanding but deemed beneficially owned by virtue of(cid:10)
the right of any individual to acquire shares within 60 days are treated as(cid:10)
outstanding only when determining the amount and percentage of common stock(cid:10)
owned by such individual. Each person has sole voting and investment power with(cid:10)
respect to the shares shown, except as noted.(cid:10)
(cid:10)
(cid:10)
NUMBER OF SHARES PERCENTAGE OF CLASS(cid:10)
---------------- -------------------(cid:10)
(cid:10)
Donald S. Pearson, Director (1) 78,750(1) *(cid:10)
1251 7th Avenue #309(cid:10)
Naples, Florida 34102(cid:10)
Harmon Aronson, Director 60,000(2) *(cid:10)
26 Monterey Drive(cid:10)
Wayne, New Jersey 07470(cid:10)
Eric L. Sichel, Director 30,000(3) *(cid:10)
411 Highview Road(cid:10)
Englewood, New Jersey 07631(cid:10)
John P. de Neufville, Director 766,100(4) 7.2%(cid:10)
197 Meister Avenue(cid:10)
North Branch, New Jersey 08876(cid:10)
John A. Moore, Chairman of the Board 1,164,218(5) 10.6%(cid:10)
c/o Elite Pharmaceuticals, Inc.(cid:10)
165 Ludlow Avenue(cid:10)
Northvale, New Jersey 06830(cid:10)
Richard A. Brown, Director 461,500(6) 4.3%(cid:10)
P.O. Box 870(cid:10)
Longboat Key, Florida 34228(cid:10)
Mark I. Gittelman, CFO, Treasurer and Secretary 10,000(7) *(cid:10)
300 Colfax Avenue(cid:10)
Clifton, New Jersey 07013(cid:10)
Bernard Berk, Chief Executive Officer 300,000(8) 2.7%(cid:10)
c/o Elite Pharmaceuticals, Inc.(cid:10)
165 Ludlow Avenue(cid:10)
Northvale, New Jersey 06830(cid:10)
(cid:10)
42(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
Dr. Atul M. Mehta 2,487,700(9) 20.0%(cid:10)
c/o Andrew Giles Freda, Esq.(cid:10)
Edwards & Caldwell LLC(cid:10)
1600 Route 208 North(cid:10)
Hawthorne, New Jersey 07647(cid:10)
Jerome Belson 905,100(10) 8.6%(cid:10)
495 Broadway(cid:10)
New York, New York 10012(cid:10)
Bakul and Dilip Mehta 630,000 6.0%(cid:10)
P.O. Box 438(cid:10)
Muscat, Sultanate of Oman(cid:10)
All Directors and Officers as a group 2,870,568 24.9%(cid:10)
* Less than 1% of outstanding shares(cid:10)
(cid:10)
(1) Includes options to purchase 60,000 shares.(cid:10)
(2) Comprised of options to purchase 60,000 shares.(cid:10)
(3) Comprised of options to purchase 30,000 shares.(cid:10)
(4) Comprised of (i) 331,100 shares held in trust for the benefit of John P. de(cid:10)
Neufville; (ii) 410,000 shares held in trust for David T. de Neufville; and(cid:10)
(iii) options personally held by John P. de Neufville to purchase 25,000 shares.(cid:10)
(5) Represents (i) options personally held by John Moore to purchase 300,000(cid:10)
shares; and (ii) 864,218 shares of common stock beneficially owned by Edson(cid:10)
Moore Healthcare Ventures, Inc. (formerly known as Edson Moore Corp.). These(cid:10)
shares of common stock are comprised of (i) 764,218 shares of common stock(cid:10)
issued to Edson Moore Corp. upon the exchange of 12,915 shares of the Series A(cid:10)
Preferred Stock, par value $1.00 per share, of Elite Laboratories; and (ii) the(cid:10)
exercise of a warrant to purchase 100,000 shares of common stock (exercisable(cid:10)
through October 17, 2005) at an exercise price of $18.00 per share. The Series A(cid:10)
Preferred Stock of Elite Laboratories became exchangeable into shares of our(cid:10)
common stock on October 17, 2002 and November 5, 2002.(cid:10)
(6) Comprised of (i) 125,000 Class B Warrants held by Richard A. Brown, (ii)(cid:10)
261,500 shares of common stock held by Richard A. Brown, (iii) 50,000 shares of(cid:10)
common stock held by the Alexander Brown Trust and (iv) 25,000 Class B Warrants(cid:10)
held by the Alexander Brown Trust.(cid:10)
(7) Comprised of options to purchase 10,000 shares.(cid:10)
(8) Comprised of options to purchase 300,000 shares.(cid:10)
43(cid:10)
(cid:10)
(9) Based on information contained in a Schedule 13D filed on July 3, 2003 by(cid:10)
Atul M. Mehta. Includes 312,700 shares on which Dr. Mehta has shared voting(cid:10)
power and power to dispose of, along with his wife, Asha Mehta.(cid:10)
(10) Based on information contained in a Schedule 13D, as amended, filed by the(cid:10)
foregoing person on November 15, 2002. Includes (i) 535,200 shares held by(cid:10)
Jerome Belson; (ii) 53,900 shares held by Maxine Belson, wife of Jerome Belson;(cid:10)
(iii) 7,000 shares held by Brianne Goldstein, daughter of Jerome Belson; (iv)(cid:10)
28,000 shares held by Majorie Belson, daughter-in-law of Jerome Belson; (v)(cid:10)
25,000 shares owned by the grandchildren of Jerome Belson; and (vi) warrants for(cid:10)
256,000 shares of common stock.(cid:10)
Except as otherwise set forth, information on the stock ownership of these(cid:10)
persons was provided to the Company by the persons.(cid:10)
The Company does not have any compensation plans or arrangements benefiting(cid:10)
employees or non-employees under which equity securities of the Company are(cid:10)
authorized for issuance in exchange for consideration in the form of good(cid:10)
services.(cid:10)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.(cid:10)
We are a party to an agreement whereby fees are paid to Gittelman & Co.,(cid:10)
P.C., a company wholly owned by Mark I. Gittelman, our Chief Financial Officer,(cid:10)
Secretary and Treasurer, in consideration for services rendered by Mr. Gittelman(cid:10)
in his capacity as Chief Financial Officer and Treasurer. For the fiscal years(cid:10)
ended March 31, 2003 and 2002, the fees paid to that company were $167,544 and(cid:10)
$91,260, respectively.(cid:10)
We also have contractual relationships with Harmon Aronson and Donald(cid:10)
Pearson, directors or the Company, or entities that they control, with respect(cid:10)
to referral and consulting arrangements. For the fiscal years ended March 31,(cid:10)
2003 and 2002, we paid $0 to Mr. Aronson, and $38,400 and $12,800 to Mr.(cid:10)
Pearson, respectively for these services. The arrangement with Mr. Pearson will(cid:10)
expire in December 2003.(cid:10)
ITEM 14. CONTROLS AND PROCEDURES(cid:10)
Within the 90 days prior to the date of this report, we carried out an(cid:10)
evaluation, under the supervision and with the participation of our management,(cid:10)
including our Chief Executive Officer and Chief Financial Officer, of the(cid:10)
effectiveness of the design and operation of our disclosure controls and(cid:10)
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that(cid:10)
evaluation, our Chief Executive Officer and Chief Financial Officer concluded(cid:10)
that our disclosure controls and procedures are effective in timely alerting(cid:10)
them to material information relating to us (including our consolidated(cid:10)
subsidiaries) required to be included in our periodic SEC filings. There have(cid:10)
been no significant changes in our internal controls or in other factors that(cid:10)
could significantly affect internal controls subsequent to the date of their(cid:10)
evaluation, including any corrective actions with regard to significant(cid:10)
deficiencies and material weaknesses.(cid:10)
44(cid:10)
(cid:10)
PART IV(cid:10)
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K(cid:10)
(a) Documents filed as part of this Report(cid:10)
(1) Financial Statements(cid:10)
See Financial Statements included after the signature page beginning at(cid:10)
page F-1.(cid:10)
(2) Financial statement schedules(cid:10)
All schedules are omitted because they are not applicable or the required(cid:10)
information is shown in the consolidated financial statements or the notes(cid:10)
thereto.(cid:10)
(3) List of Exhibits(cid:10)
See Index to Exhibits in paragraph (c) below.(cid:10)
(b) REPORTS ON FORM 8-K. We filed one current report on Form 8-K during the(cid:10)
last quarter of our fiscal year ended March 31, 2003, as well as one current(cid:10)
report on Form 8-K during our first fiscal quarter ending June 30, 2003, as(cid:10)
follows:(cid:10)
1. Report filed with the SEC on February 3, 2003, reporting under Items 7 and 9,(cid:10)
letters to shareholders and warrantholders and disclosure required under(cid:10)
Regulation FD in connection with the settlement reached with Harris Freedman,(cid:10)
Sharon Will, Michael H. Freedman and their affiliates.(cid:10)
2. Report filed with the SEC on June 5, 2003, reporting under Items 5 and 6, the(cid:10)
issuance of a press release on June 3, 2003 respecting the resignation of Dr.(cid:10)
Atul Mehta, our former President and Chief Executive Officer.(cid:10)
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. We will furnish to our(cid:10)
stockholders a copy of any of the exhibits listed below upon payment of $.25 per(cid:10)
page to cover the costs of the Company of furnishing the exhibits.(cid:10)
Exhibit(cid:10)
No. Description(cid:10)
3.2 By-Laws of the Company, as amended, incorporated by reference to(cid:10)
Exhibit 3.2 to the Company's Registration Statement on Form SB-2 (Reg.(cid:10)
No. 333-90633) made effective on February 28, 2000 (the "Form SB-2").(cid:10)
4.1 Certificate of incorporation of the Company, together with all(cid:10)
amendments thereto, as filed with the Secretary of State of the State(cid:10)
of Delaware, incorporated by reference to Exhibit 4.1 to the(cid:10)
Registration Statement on(cid:10)
45(cid:10)
(cid:10)
Form S-4 (Reg. No. 333-101686), filed with the SEC on December 6, 2002(cid:10)
(the "Form S-4").(cid:10)
4.1(a) Form of specimen certificate for common stock of the Company,(cid:10)
incorporated by reference to Exhibit 4.1 to the Form SB-2.(cid:10)
4.2 Form of Common Stock Purchase Warrant Certificate, incorporated by(cid:10)
reference to Exhibit 4.2 to the Form SB-2.(cid:10)
4.4 Registration Rights Agreement by and between Prologica International,(cid:10)
Inc. and the person whose name appears on the signature pages attached(cid:10)
thereto, incorporated by reference to Exhibit 4.4 to the Form SB-2.(cid:10)
10.1 Settlement Agreement, dated October 23, 2002, among Elite, Harris(cid:10)
Freedman, Sharon Will, Michael H. Freedman and certain of their(cid:10)
respective affiliates, incorporated by reference to Exhibit 10.1 to(cid:10)
the Company's Current Report on Form 8-K dated November 1, 2002 (the(cid:10)
"Form 8-K").(cid:10)
10.2 Amended and Restated Employment Agreement, dated March 31, 2000,(cid:10)
between Atul M. Mehta and Elite, incorporated by reference to Exhibit(cid:10)
10.2 to the Form 8-K.(cid:10)
10.3 Amendment, dated July 18, 2002, to Amended and Restated Employment(cid:10)
Agreement, dated March 31, 2000, between Atul M. Mehta and Elite,(cid:10)
incorporated by reference to Exhibit 10.3 to the Form 8-K.(cid:10)
10.4 Commercial Lease made between Serex, Inc. and Elite executed September(cid:10)
7, 1993, incorporated by reference to Exhibit 10.4 to the Form SB-2.(cid:10)
10.6 1997 Incentive Stock Option Plan, adopted August 7, 1997, authorizing(cid:10)
1,250,000 shares of common stock for issuance pursuant to the Plan,(cid:10)
incorporated by reference to Exhibit No. 10.6 to the Form SB-2.(cid:10)
10.7 Form of Confidentiality Agreement (corporate), incorporated by(cid:10)
reference to Exhibit 10.7 to the Form SB-2.(cid:10)
10.8 Form of Confidentiality Agreement (employee), incorporated by(cid:10)
reference to Exhibit 10.8 to the Form SB-2.(cid:10)
21 Subsidiaries of the Company.*(cid:10)
46(cid:10)
(cid:10)
23.1.1 Consent of Miller, Ellin & Company, LLP.*(cid:10)
23.1.2 Consent of KPMG, LLP.*(cid:10)
99.1** Certification of Chief Executive Officer pursuant to Section 906 of(cid:10)
the Sarbanes-Oxley Act of 2002.*(cid:10)
99.2** Certification of Chief Financial Officer pursuant to Section 906 of(cid:10)
the Sarbanes-Oxley Act of 2002.*(cid:10)
----------------------(cid:10)
* Filed herewith(cid:10)
** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with(cid:10)
this Annual Report on Form 10-K and are not deemed filed with the Securities and(cid:10)
Exchange Commission and are not incorporated by reference in any filing of Elite(cid:10)
Pharmaceuticals, Inc. under the Securities Act of 1933 or the Securities(cid:10)
Exchange Act of 1934, whether made before or after the date hereof and(cid:10)
irrespective of any general incorporation language in any such filings.(cid:10)
47(cid:10)
(cid:10)
SIGNATURES(cid:10)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange(cid:10)
Act of 1934, the registrant has duly caused this report to be signed on its(cid:10)
behalf by the undersigned, thereunto duly authorized.(cid:10)
ELITE PHARMACEUTICALS, INC.(cid:10)
By: /s/ Bernard Berk(cid:10)
----------------------------(cid:10)
Bernard Berk(cid:10)
Chief Executive Officer(cid:10)
Dated: July 15, 2003(cid:10)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report(cid:10)
has been signed by the following persons on behalf of the registrant and in the(cid:10)
capacities and on the dates indicated.(cid:10)
Signature Title Date(cid:10)
--------- ----- ----(cid:10)
/s/ Bernard Berk Chief Executive July 15, 2003(cid:10)
-------------------------- Officer(cid:10)
Bernard Berk (Principal Executive(cid:10)
Officer)(cid:10)
/s/ Mark I. Gittelman Executive Vice President, July 15, 2003(cid:10)
-------------------------- Chief Financial Officer and(cid:10)
Mark I. Gittelman Treasurer (Principal(cid:10)
Financial and Accounting(cid:10)
Officer)(cid:10)
/s/ Harmon Aronson Director July 14, 2003(cid:10)
--------------------------(cid:10)
Harmon Aronson(cid:10)
/s/ Donald S. Pearson Director July 14, 2003(cid:10)
--------------------------(cid:10)
Donald S. Pearson(cid:10)
/s/ Eric L. Sichel Director July 14, 2003(cid:10)
--------------------------(cid:10)
Eric L. Sichel(cid:10)
48(cid:10)
(cid:10)
/s/ John P. de Neufville Director July 14, 2003(cid:10)
--------------------------(cid:10)
John P. de Neufville(cid:10)
/s/ John A. Moore Director July 14, 2003(cid:10)
--------------------------(cid:10)
John Moore(cid:10)
/s/ Richard A. Brown Director July 14, 2003(cid:10)
--------------------------(cid:10)
Richard A. Brown(cid:10)
49(cid:10)
(cid:10)
CERTIFICATIONS(cid:10)
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002(cid:10)
I, Bernard Berk, certify that:(cid:10)
1. I have reviewed this annual report on Form 10-K of Elite Pharmaceuticals,(cid:10)
Inc.;(cid:10)
2. Based on my knowledge, this annual report does not contain any untrue(cid:10)
statement of a material fact or omit to state a material fact necessary to make(cid:10)
the statements made, in light of the circumstances under which such statements(cid:10)
were made, not misleading with respect to the period covered by this annual(cid:10)
report;(cid:10)
3. Based on my knowledge, the financial statements, and other financial(cid:10)
information included in this annual report, fairly present in all material(cid:10)
respects the financial condition, results of operations and cash flows of the(cid:10)
registrant as of, and for, the periods presented in this annual report;(cid:10)
4. The registrant's other certifying officers and I are responsible for(cid:10)
establishing and maintaining disclosure controls and procedures (as defined in(cid:10)
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:(cid:10)
a) designed such disclosure controls and procedures to ensure that(cid:10)
material information relating to the registrant, including its consolidated(cid:10)
subsidiaries, is made known to us by others within those entities, particularly(cid:10)
during the period in which this annual report is being prepared;(cid:10)
b) evaluated the effectiveness of the registrant's disclosure controls(cid:10)
and procedures as of a date within 90 days prior to the filing date of this(cid:10)
annual report (the "Evaluation Date"); and(cid:10)
c) presented in this annual report our conclusions about the(cid:10)
effectiveness of the disclosure controls and procedures based on our evaluation(cid:10)
as of the Evaluation Date;(cid:10)
5. The registrant's other certifying officers and I have disclosed, based on(cid:10)
our most recent evaluation, to the registrant's auditors and the audit committee(cid:10)
of registrant's board of directors (or persons performing the equivalent(cid:10)
functions):(cid:10)
a) all significant deficiencies in the design or operation of internal(cid:10)
controls which could adversely affect the registrant's ability to record,(cid:10)
process, summarize and report financial data and have identified for the(cid:10)
registrant's auditors any material weaknesses in internal controls; and(cid:10)
50(cid:10)
(cid:10)
b) any fraud, whether or not material, that involves management or other(cid:10)
employees who have a significant role in the registrant's internal controls; and(cid:10)
6. The registrant's other certifying officers and I have indicated in this(cid:10)
annual report whether or not there were significant changes in internal controls(cid:10)
or in other factors that could significantly affect internal controls subsequent(cid:10)
to the date of our most recent evaluation, including any corrective actions with(cid:10)
regard to significant deficiencies and material weaknesses.(cid:10)
Date: July 15, 2003(cid:10)
/s/ Bernard Berk(cid:10)
---------------------------(cid:10)
Chief Executive Officer(cid:10)
51(cid:10)
(cid:10)
I, Mark I. Gittelman, certify that:(cid:10)
1. I have reviewed this annual report on Form 10-K of Elite Pharmaceuticals,(cid:10)
Inc.;(cid:10)
2. Based on my knowledge, this annual report does not contain any untrue(cid:10)
statement of a material fact or omit to state a material fact necessary to make(cid:10)
the statements made, in light of the circumstances under which such statements(cid:10)
were made, not misleading with respect to the period covered by this annual(cid:10)
report;(cid:10)
3. Based on my knowledge, the financial statements, and other financial(cid:10)
information included in this annual report, fairly present in all material(cid:10)
respects the financial condition, results of operations and cash flows of the(cid:10)
registrant as of, and for, the periods presented in this annual report;(cid:10)
4. The registrant's other certifying officers and I are responsible for(cid:10)
establishing and maintaining disclosure controls and procedures (as defined in(cid:10)
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:(cid:10)
a) designed such disclosure controls and procedures to ensure that(cid:10)
material information relating to the registrant, including its consolidated(cid:10)
subsidiaries, is made known to us by others within those entities, particularly(cid:10)
during the period in which this annual report is being prepared;(cid:10)
b) evaluated the effectiveness of the registrant's disclosure controls(cid:10)
and procedures as of a date within 90 days prior to the filing date of this(cid:10)
annual report (the "Evaluation Date"); and(cid:10)
c) presented in this annual report our conclusions about the(cid:10)
effectiveness of the disclosure controls and procedures based on our evaluation(cid:10)
as of the Evaluation Date;(cid:10)
5. The registrant's other certifying officers and I have disclosed, based on(cid:10)
our most recent evaluation, to the registrant's auditors and the audit committee(cid:10)
of registrant's board of directors (or persons performing the equivalent(cid:10)
functions):(cid:10)
a) all significant deficiencies in the design or operation of internal(cid:10)
controls which could adversely affect the registrant's ability to record,(cid:10)
process, summarize and report financial data and have identified for the(cid:10)
registrant's auditors any material weaknesses in internal controls; and(cid:10)
b) any fraud, whether or not material, that involves management or other(cid:10)
employees who have a significant role in the registrant's internal controls; and(cid:10)
52(cid:10)
(cid:10)
6. The registrant's other certifying officers and I have indicated in this(cid:10)
annual report whether or not there were significant changes in internal controls(cid:10)
or in other factors that could significantly affect internal controls subsequent(cid:10)
to the date of our most recent evaluation, including any corrective actions with(cid:10)
regard to significant deficiencies and material weaknesses.(cid:10)
Date: July 15, 2003(cid:10)
/s/ Mark I. Gittelman(cid:10)
--------------------------------------(cid:10)
Chief Financial Officer and Treasurer(cid:10)
53(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001(cid:10)
CONTENTS(cid:10)
PAGE(cid:10)
----(cid:10)
INDEPENDENT AUDITORS' REPORT F-1(cid:10)
CONSOLIDATED BALANCE SHEETS F-2 - F-3(cid:10)
CONSOLIDATED STATEMENTS OF OPERATIONS F-4(cid:10)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED(cid:10)
STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) F-5 - F-6(cid:10)
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-30(cid:10)
(cid:10)
INDEPENDENT AUDITORS' REPORT(cid:10)
To Elite Pharmaceuticals, Inc.(cid:10)
We have audited the accompanying consolidated balance sheets of Elite(cid:10)
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2003 and(cid:10)
2002, and the related consolidated statements of operations, redeemable(cid:10)
preferred stock and stockholders' equity (net capital deficiency) and cash flows(cid:10)
for the years ended March 31, 2003, 2002 and 2001. These financial statements(cid:10)
are the responsibility of the Company's management. Our responsibility is to(cid:10)
express an opinion on these financial statements based on our audits.(cid:10)
We conducted our audits in accordance with auditing standards generally accepted(cid:10)
in the United States of America. Those standards require that we plan and(cid:10)
perform the audit to obtain reasonable assurance about whether the financial(cid:10)
statements are free of material misstatement. An audit includes examining, on a(cid:10)
test basis, evidence supporting the amounts and disclosures in the financial(cid:10)
statements. An audit also includes assessing the accounting principles used and(cid:10)
significant estimates made by management, as well as evaluating the overall(cid:10)
financial statement presentation. We believe that our audits provide a(cid:10)
reasonable basis for our opinion.(cid:10)
In our opinion, the consolidated financial statements referred to above present(cid:10)
fairly, in all material respects, the financial position of Elite(cid:10)
Pharmaceuticals, Inc. and Subsidiaries as of March 31, 2003 and 2002, and the(cid:10)
results of their operations and their cash flows for the years ended March 31,(cid:10)
2003, 2002 and 2001 in conformity with accounting principles generally accepted(cid:10)
in the United States of America.(cid:10)
The accompanying consolidated financial statements have been prepared assuming(cid:10)
that the Company will continue as a going concern. As shown in the financial(cid:10)
statements, the Company has experienced significant losses and negative cash(cid:10)
flows, resulting in decreased working capital and accumulated deficits. These(cid:10)
conditions raise substantial doubt about its ability to continue as a going(cid:10)
concern. Management's plans regarding those matters are described in Note 2.(cid:10)
As discussed in Note 1 to the consolidated financial statements, the Company(cid:10)
changed its method of accounting for stock-based compensation during the year(cid:10)
ended March 31, 2003, and has restated its consolidated balance sheet as of(cid:10)
March 31, 2002, and its consolidated statements of redeemable preferred stock(cid:10)
and stockholders' equity (net capital deficiency) for the years ended March 31,(cid:10)
2002 and 2001.(cid:10)
/s/ MILLER, ELLIN & COMPANY, LLP(cid:10)
CERTIFIED PUBLIC ACCOUNTANTS(cid:10)
New York, New York(cid:10)
June 9, 2003, except for(cid:10)
the second and third paragraphs(cid:10)
of Note 13, as to which the(cid:10)
date is July 3, 2003(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2003 AND 2002(cid:10)
ASSETS(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(RESTATED)(cid:10)
(cid:10)
CURRENT ASSETS:(cid:10)
Cash and cash equivalents $ 3,264,081 $ 6,852,434(cid:10)
Short-term investments --- 100,000(cid:10)
Accounts and accrued interest receivable 4,681 39,988(cid:10)
Restricted cash 99,380 213,664(cid:10)
Due from Joint Venture --- 525,259(cid:10)
Prepaid expenses and other current assets 132,092 106,082(cid:10)
------------ ------------(cid:10)
Total current assets 3,500,234 7,837,427(cid:10)
PROPERTY AND EQUIPMENT- net of accumulated(cid:10)
depreciation and amortization 4,390,553 3,865,771(cid:10)
INTANGIBLE ASSETS - net of accumulated amortization 104,842 54,669(cid:10)
OTHER ASSETS:(cid:10)
Deposit on Equipment --- 123,396(cid:10)
Investment in Joint Venture --- 63,381(cid:10)
Amount receivable from sale of state tax losses --- 66,077(cid:10)
Restricted cash - Debt Service Reserve 300,000 300,000(cid:10)
Restricted cash - Note payable 250,000 250,000(cid:10)
EDA bond offering costs, net of accumulated(cid:10)
amortization of $47,267 and $34,083, respectively. 150,593 163,777(cid:10)
------------ ------------(cid:10)
Total other assets 700,593 966,631(cid:10)
------------ ------------(cid:10)
$ 8,696,222 $ 12,724,498(cid:10)
============ ============(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-2(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2003 AND 2002(cid:10)
(CONTINUED)(cid:10)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(Restated)(cid:10)
(cid:10)
CURRENT LIABILITIES:(cid:10)
Current portion - Note payable $ 75,000 $ 75,000(cid:10)
Current portion of EDA bonds 140,000 130,000(cid:10)
Accounts payable and accrued expenses 334,721 141,712(cid:10)
Due to joint venture --- 435,754(cid:10)
------------ ------------(cid:10)
Total current liabilities 549,721 782,466(cid:10)
------------ ------------(cid:10)
LONG TERM LIABILITIES:(cid:10)
Dividends payable -Series A preferred stock --- 853,148(cid:10)
Note payable - net of current portion 225,000 300,000(cid:10)
EDA bonds - net of current portion 2,495,000 2,635,000(cid:10)
------------ ------------(cid:10)
Total long-term liabilities 2,720,000 3,788,148(cid:10)
------------ ------------(cid:10)
Preferred stock at liquidating value of $1,000 per share-(cid:10)
$1.00 par value; 20,000 shares authorized; Series A(cid:10)
convertible exchangeable preferred stock; 12,015 issued(cid:10)
and outstanding at March 31, 2002. --- 12,015,000(cid:10)
------------ ------------(cid:10)
COMMITMENTS AND CONTINGENCIES(cid:10)
STOCKHOLDERS' EQUITY (DEFICIT):(cid:10)
Preferred stock - $1.00 par value; 7,250,000 shares(cid:10)
authorized; Series B convertible preferred stock;(cid:10)
4,806,000 shares designated, and 200,000 shares(cid:10)
issued and outstanding at March 31, 2002. --- 200,000(cid:10)
Common stock - $.01 par value;(cid:10)
Authorized - 25,000,000 shares(cid:10)
Issued and outstanding - 10,544,426 and 9,710,840 in(cid:10)
2003 and 2002, respectively. 105,444 97,108(cid:10)
Additional paid-in capital 34,218,832 19,469,464(cid:10)
Accumulated deficit (28,590,934) (23,627,688)(cid:10)
------------ ------------(cid:10)
5,733,342 (3,861,116)(cid:10)
Treasury stock, 100,000 and -0- shares, respectively (306,841) ---(cid:10)
------------ ------------(cid:10)
Total stockholders' equity (deficit) 5,426,501 (3,861,116)(cid:10)
------------ ------------(cid:10)
Total liabilities and stockholders' equity (deficit) $ 8,696,222 $ 12,724,498(cid:10)
============ ============(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-3(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF OPERATIONS(cid:10)
YEARS ENDED MARCH 31,(cid:10)
---------------------(cid:10)
2003 2002 2001(cid:10)
----- ----- ----(cid:10)
(cid:10)
REVENUES:(cid:10)
Research and development $ 442,500 $ 593,000 $ ---(cid:10)
Product formulation fees 187,810 601,057 80,932(cid:10)
Consulting and test fees --- 3,450 14,314(cid:10)
----------- ----------- ------------(cid:10)
Total revenues 630,310 1,197,507 95,246(cid:10)
----------- ----------- ------------(cid:10)
OPERATING EXPENSES:(cid:10)
Research and development 2,013,579 1,609,108 1,475,487(cid:10)
General and administrative 1,858,069 763,687 777,118(cid:10)
Depreciation and amortization 310,876 266,919 194,038(cid:10)
----------- ----------- ------------(cid:10)
4,182,524 2,639,714 2,446,643(cid:10)
----------- ----------- ------------(cid:10)
LOSS FROM OPERATIONS (3,552,214) (1,442,207) (2,351,397)(cid:10)
----------- ----------- ------------(cid:10)
OTHER INCOME (EXPENSES):(cid:10)
Interest income 96,692 260,055 329,583(cid:10)
Interest expense (227,907) (220,123) (227,301)(cid:10)
Charge relating to exchange of warrants (242,338) --- ---(cid:10)
Charge relating to issuance of stock options (20,550) --- ---(cid:10)
Equity in loss of joint venture (186,379) (507,640) (12,079,827)(cid:10)
----------- ----------- ------------(cid:10)
(580,482) (467,708) (11,977,545(cid:10)
----------- ----------- ------------(cid:10)
LOSS BEFORE BENEFIT FOR INCOME TAXES (4,132,696) (1,909,915) (14,328,942)(cid:10)
BENEFIT FOR INCOME TAXES (71,274) (135,388) (363,961)(cid:10)
----------- ----------- ------------(cid:10)
NET LOSS $(4,061,422) $(1,774,527) $(13,964,981)(cid:10)
=========== =========== ============(cid:10)
BASIC AND DILUTED LOSS PER COMMON(cid:10)
SHARE $ (0.40) $ (0.19) $ (1.53)(cid:10)
=========== =========== ============(cid:10)
WEIGHTED AVERAGE NUMBER OF(cid:10)
COMMON SHARES OUTSTANDING 10,069,991 9,561,299 9,135,369(cid:10)
=========== =========== ============(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-4(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK(cid:10)
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(cid:10)
(RESTATED)(cid:10)
REDEEMABLE(cid:10)
PREFERRED STOCK PREFERRED STOCK COMMON STOCK(cid:10)
--------------- --------------- ------------(cid:10)
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT(cid:10)
------ ------ ------ ------ ------ ------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2000 - $ - - $ - 8,855,519 $88,555(cid:10)
Issuance of shares - - - - 409,165 4,092(cid:10)
Issuance of shares through(cid:10)
exercise of warrants - - - - 88,435 884(cid:10)
Issuance of shares through(cid:10)
exercise of options - - - - 18,750 188(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants - - - - 4,520 45(cid:10)
Issuance of Series A convertible(cid:10)
exchangeable preferred stock,(cid:10)
restated 12,015 12,015,000 - - - -(cid:10)
Net loss for year ended(cid:10)
March 31, 2001 - - - - - -(cid:10)
------- ----------- -------- -------- ---------- -------(cid:10)
BALANCE AT MARCH 31, 2001, as(cid:10)
restated 12,015 $12,015,000 - $ - 9,376,389 $93,764(cid:10)
Issuance of shares through(cid:10)
exercise of warrants - - - - 298,179 2,981(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants - - - - 16,272 163(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of options - - - - 20,000 200(cid:10)
Issuance of Series B convertible(cid:10)
exchangeable preferred stock - - 200,000 200,000 - -(cid:10)
Dividends declared - Series A(cid:10)
preferred stock - - - - - -(cid:10)
Net loss for year ended(cid:10)
March 31, 2002 - - - - - -(cid:10)
------- ----------- -------- -------- ---------- -------(cid:10)
BALANCE AT MARCH 31, 2002, as(cid:10)
restated 12,015 $12,015,000 200,000 $200,000 9,710,840 $97,108(cid:10)
------- ----------- -------- -------- ---------- -------(cid:10)
(cid:10)
TREASURY STOCK STOCKHOLDERS'(cid:10)
ADDITIONAL -------------- EQUITY (NET(cid:10)
PAID-IN ACCUMULATED CAPITAL(cid:10)
CAPITAL SHARES AMOUNT DEFICIT DEFICIENCY)(cid:10)
------- ------ ------ ------- -----------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2000 $12,511,080 ($ 7,035,032) $ 5,564,603(cid:10)
Issuance of shares 4,995,908 - 5,000,000(cid:10)
Issuance of shares through(cid:10)
exercise of warrants 510,975 - 511,859(cid:10)
Issuance of shares through(cid:10)
exercise of options 37,313 - 37,501(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants 16,227 - 16,272(cid:10)
Issuance of Series A convertible(cid:10)
exchangeable preferred stock,(cid:10)
restated - - -(cid:10)
Net loss for year ended(cid:10)
March 31, 2001 - (13,964,981) (13,964,981)(cid:10)
----------- ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2001, as(cid:10)
restated $18,071,503 ($21,000,013) $ (2,834,746)(cid:10)
Issuance of shares through(cid:10)
exercise of warrants 1,301,606 - 1,304,587(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants 58,416 - 58,579(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of options 37,939 - 38,139(cid:10)
Issuance of Series B convertible(cid:10)
exchangeable preferred stock - - 200,000(cid:10)
Dividends declared - Series A(cid:10)
preferred stock - (853,148) (853,148)(cid:10)
Net loss for year ended(cid:10)
March 31, 2002 - - - (1,774,527) (1,774,527)(cid:10)
----------- ------ ------ ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2002, as(cid:10)
restated $19,469,464 - $ - ($23,627,688) $ (3,861,116)(cid:10)
----------- ------ ------ ------------ ------------(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-5(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK(cid:10)
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(cid:10)
(RESTATED)(cid:10)
REDEEMABLE(cid:10)
PREFERRED STOCK PREFERRED STOCK COMMON STOCK(cid:10)
--------------- --------------- ------------(cid:10)
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT(cid:10)
------ ------ ------ ------ ------ ------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2002, as(cid:10)
restated 12,015 $12,015,000 200,000 $200,000 9,710,840 $ 97,108(cid:10)
Issuance of shares through(cid:10)
exercise of warrants - - - - 2,606 26(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants - - - - 14,670 147(cid:10)
Issuance of Series B convertible(cid:10)
exchangeable preferred stock - - 559,000 559,000 - -(cid:10)
Dividends - declared - Series B(cid:10)
preferred stock - - - - - -(cid:10)
Dividends - declared - Series A(cid:10)
preferred stock - - - - - -(cid:10)
Series A and B preferred stock(cid:10)
issued to satisfy accrued dividends 1,741 1,740,973 14,000 14,000 - -(cid:10)
Conversion of Series A and B(cid:10)
convertible exchangeable preferred(cid:10)
stock into common stock (13,756) (13,755,973) (773,000) (773,000) 816,310 8,163(cid:10)
Purchase of treasury stock - - - - (100,000) -(cid:10)
Charge relating to exchange of(cid:10)
warrants - - - - - -(cid:10)
Charge relating to issuance of(cid:10)
stock options - - - - - -(cid:10)
Fees relating to Warrant Exchange(cid:10)
Offer - - - - - -(cid:10)
Net loss for the year ended March(cid:10)
31, 2003 - - - - - -(cid:10)
-------- ----------- -------- -------- ---------- ---------(cid:10)
BALANCE AT MARCH 31, 2003 - $ - - $ - 10,444,426 $ 105,444(cid:10)
======== =========== ======== ======== ========== =========(cid:10)
(cid:10)
TREASURY STOCK STOCKHOLDERS'(cid:10)
ADDITIONAL -------------- EQUITY (NET(cid:10)
PAID-IN ACCUMULATED CAPITAL(cid:10)
CAPITAL SHARES AMOUNT DEFICIT DEFICIENCY)(cid:10)
------- ------ ------ ------- -----------(cid:10)
BALANCE AT APRIL 1, 2002, as(cid:10)
restated $19,469,464 - $ - ($23,627,688) $(3,861,116)(cid:10)
Issuance of shares through(cid:10)
exercise of warrants 13,004 - 13,030(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants 52,666 - 52,813(cid:10)
Issuance of Series B convertible(cid:10)
exchangeable preferred stock - - 559,000(cid:10)
Dividends - declared - Series B(cid:10)
preferred stock - (14,000) (14,000)(cid:10)
Dividends - declared - Series A(cid:10)
preferred stock - - - (887,824) (887,824)(cid:10)
Series A and B preferred stock(cid:10)
issued to satisfy accrued dividends - - 14,000(cid:10)
Conversion of Series A and B(cid:10)
convertible exchangeable preferred(cid:10)
stock into common stock 14,520,810 - - - 13,755,973(cid:10)
Purchase of treasury stock - 100,000 (306,841) - (306,841)(cid:10)
Charge relating to exchange of(cid:10)
warrants 242,338 - - - 242,338(cid:10)
Charge relating to issuance of(cid:10)
stock options 20,550 - - - 20,550(cid:10)
Fees relating to Warrant Exchange(cid:10)
Offer (100,000) - - - (100,000)(cid:10)
Net loss for the year ended March(cid:10)
31, 2003 - - - (4,061,422) (4,061,422)(cid:10)
----------- ------- --------- ------------ -----------(cid:10)
BALANCE AT MARCH 31, 2003 $34,218,832 100,000 $(306,841) $(28,590,934) $ 5,426,501(cid:10)
=========== ======= ========= ============ ===========(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-6(cid:10)
(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:10)
YEARS ENDED MARCH 31,(cid:10)
---------------------(cid:10)
2003 2002 2001(cid:10)
----- ----- ----(cid:10)
(cid:10)
CASH FLOWS FROM OPERATING ACTIVITIES:(cid:10)
Net loss $ (4,061,422) $ (1,774,527) $ (13,964,981)(cid:10)
Adjustments to reconcile net loss to cash(cid:10)
used in operating activities:(cid:10)
Write off of accounts receivable and patents --- 5,057 ---(cid:10)
Depreciation and amortization 310,876 266,919 194,038(cid:10)
Charge relating to Warrant Exchange Offer 242,338 --- ---(cid:10)
Charge relating to issuance of stock options 20,550 --- ---(cid:10)
Equity in loss of joint venture 186,379 507,640 12,079,827(cid:10)
Changes in assets and liabilities:(cid:10)
Contract revenue receivable 35,307 (26,674) (13,314)(cid:10)
Prepaid expenses and other current assets (26,010) (24,350) 256,938(cid:10)
Amount receivable from Joint Venture 525,259 (444,444) (80,932)(cid:10)
Accounts payable and accrued expenses and other current(cid:10)
Liabilities 193,009 (78,508) (377,560)(cid:10)
------------ ------------ -------------(cid:10)
NET CASH (USED IN) OPERATING ACTIVITIES (2,573,714) (1,568,887) (1,905,984)(cid:10)
------------ ------------ -------------(cid:10)
CASH FLOWS FROM INVESTING ACTIVITIES:(cid:10)
(Purchases) redemptions of short-term investments 100,000 (100,000) ---(cid:10)
Payments for patent and trademark filings (69,517) (6,920) (30,788)(cid:10)
Restricted cash 114,284 (157,624) 265,690(cid:10)
Receivable from sale of New Jersey tax losses 66,077 80,055 (146,132)(cid:10)
Payment of deposit for manufacturing equipment --- (123,396) ---(cid:10)
Purchases of property and equipment (679,485) (223,801) (273,933)(cid:10)
------------ ------------ -------------(cid:10)
NET CASH (USED IN) INVESTING ACTIVITIES (468,641) (531,686) (185,163)(cid:10)
------------ ------------ -------------(cid:10)
CASH FLOWS FROM FINANCING ACTIVITIES:(cid:10)
Fees relating to Warrant Exchange Offer (100,000) --- ---(cid:10)
Proceeds under bank note --- 375,000 ---(cid:10)
Principal repayments of bank note (75,000) --- ---(cid:10)
Purchase of treasury stock (306,841) --- ---(cid:10)
Proceeds from issuance of common stock and warrants 65,843 1,401,305 5,565,632(cid:10)
Principal repayments of EDA bonds (130,000) (120,000) (115,000)(cid:10)
------------ ------------ -------------(cid:10)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (545,998) 1,656,305 5,450,632(cid:10)
------------ ------------ -------------(cid:10)
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,588,353) (444,268) 3,359,485(cid:10)
CASH AND CASH EQUIVALENTS - beginning of period 6,852,434 7,296,702 3,937,217(cid:10)
------------ ------------ -------------(cid:10)
CASH AND CASH EQUIVALENTS - end of period $ 3,264,081 $ 6,852,434 $ 7,296,702(cid:10)
============ ============ =============(cid:10)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:(cid:10)
Cash paid for interest $ 228,938 $ 218,938 $ 228,044(cid:10)
Cash paid (received) for income taxes (71,274) 2,430 4,380(cid:10)
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:(cid:10)
Utilization of equipment deposit towards purchase of equipment $ 123,396 $ --- $ 1,315,710(cid:10)
Issuance of Preferred Stock Series B (including stock dividend payable(cid:10)
of $14,000 and subscription receivable of $67,000) for interest in(cid:10)
joint venture 573,000 $ 200,000 $ 12,015,000(cid:10)
Conversion of preferred stock Series B to common stock (521) --- ---(cid:10)
Conversion of preferred stock to additional paid in capital (14,520,810) --- ---(cid:10)
Satisfaction of amounts due to joint venture (622,133) (136,619)(cid:10)
Reduction in (addition to) investment in joint venture 63,381 (63,381) ---(cid:10)
Dividends accrued on preferred stock - Series A 899,923 853,148 ---(cid:10)
Conversion of Series A to common stock (7,642) --- ---(cid:10)
The accompanying notes are an integral part of the consolidated financial statements.(cid:10)
F-7(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cid:10)
PRINCIPLES OF CONSOLIDATION(cid:10)
The consolidated financial statements include the accounts of Elite(cid:10)
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, (the(cid:10)
"Company"). All significant intercompany accounts and transactions(cid:10)
have been eliminated in consolidation.(cid:10)
The Company consolidates all entities that it controls. The Company(cid:10)
did not consolidate companies it did not control. The Company used the(cid:10)
equity method to account for its investments in companies in which it(cid:10)
did not have the ability to exercise significant influence over(cid:10)
operating and financial policies.(cid:10)
NATURE OF BUSINESS(cid:10)
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1,(cid:10)
1997 under the Laws of the State of Delaware, and its wholly-owned(cid:10)
subsidiary Elite Laboratories, Inc. ("Elite Labs") was incorporated on(cid:10)
August 23, 1990 under the Laws of the State of Delaware, in order to(cid:10)
engage in research and development activities for the purpose of(cid:10)
obtaining Food and Drug Administration approval, and, thereafter,(cid:10)
commercially exploiting generic and new controlled-release(cid:10)
pharmaceutical products. The Company also engages in contract research(cid:10)
and development on behalf of other pharmaceutical companies.(cid:10)
MERGER ACTIVITIES(cid:10)
Concurrent with its private placement offering, Elite merged with(cid:10)
Prologica International, Inc. ("Prologica") a Pennsylvania(cid:10)
Corporation, a publicly traded inactive corporation, with Elite(cid:10)
surviving the merger. In addition, Elite Labs merged with a(cid:10)
wholly-owned subsidiary of Prologica, with the Company's subsidiary(cid:10)
surviving this merger. The former shareholders of the Company's(cid:10)
subsidiary exchanged all of their shares of Class A voting common(cid:10)
stock for shares of the Company's voting common stock in a tax free(cid:10)
reorganization under Internal Revenue Code Section 368. The result of(cid:10)
the merger activity qualifies as a reverse acquisition. In connection(cid:10)
with the reverse acquisition, options exercisable for shares of Class(cid:10)
A voting and Class B nonvoting common stock of the Company's(cid:10)
subsidiary were exchanged for options exercisable for shares of the(cid:10)
Company's voting common stock.(cid:10)
On September 30, 2002, the Company acquired from Elan Corporation, plc(cid:10)
and Elan International Services, Ltd. (together "Elan") Elan's 19.9%(cid:10)
interest in Elite Research, Ltd. ("ERL"), a joint venture formed(cid:10)
between the Company and Elan where the Company's interest originally(cid:10)
was 80.1%.(cid:10)
On December 31, 2002, the Company entered into an agreement of merger(cid:10)
whereby ERL (a Bermuda Corporation) was merged into a new Delaware(cid:10)
Corporation, Elite Research, Inc. ("ERI"), a wholly owned subsidiary(cid:10)
of the Company. As a result of the merger, ERI became the owner of all(cid:10)
of the assets and liabilities of ERL. The merger was accounted for as(cid:10)
a tax free reorganization.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
RESTATEMENT OF FINANCIAL INFORMATION(cid:10)
The accompanying balance sheet as of March 31, 2002 and statements of(cid:10)
redeemable preferred stock and stockholders' equity (net capital(cid:10)
deficiency) for the years ended March 31, 2002 and 2001 have been(cid:10)
restated to present the Company's Series A convertible exchangeable(cid:10)
preferred stock ("Series A Preferred Stock"), with a carrying amount(cid:10)
of $12,015,000, outside of permanent stockholders' equity, as a result(cid:10)
of the application of Emerging Issues Task Force (EITF) Topic No.(cid:10)
D-98, Classification of and Measurement of Redeemable Securities(cid:10)
(Topic No. D-98). The Company issued the Series A Preferred Stock in(cid:10)
connection with the formation of its joint venture, ERL, with Elan.(cid:10)
Shares of the Series A Preferred Stock were exchangeable for a portion(cid:10)
of the Company's investment in ERL. The effect of this restatement is(cid:10)
to reduce total stockholders' equity by $12,015,000 for the(cid:10)
aforementioned periods. During the year ended March 31, 2003, the(cid:10)
Series A Preferred Stock was converted into common stock of the(cid:10)
Company. See Note 10 to Financial Statements, Redeemable Preferred(cid:10)
Stock and Stockholders' Equity (Net Capital Deficiency).(cid:10)
CASH AND CASH EQUIVALENTS(cid:10)
The Company considers all highly liquid investments with an original(cid:10)
maturity of three months or less to be cash equivalents. Cash and cash(cid:10)
equivalents consist of cash on deposit with banks and money market(cid:10)
instruments. The Company places its cash and cash equivalents with(cid:10)
high-quality, U.S. financial institutions and, to date, has not(cid:10)
experienced losses on any of its balances.(cid:10)
PROPERTY AND EQUIPMENT(cid:10)
Property and equipment are stated at cost. Depreciation is provided on(cid:10)
the straight-line method based on the estimated useful lives of the(cid:10)
respective assets which range from five to forty years. Major repairs(cid:10)
or improvements are capitalized. Minor replacements and maintenance(cid:10)
and repairs which do not improve or extend asset lives are expensed(cid:10)
currently.(cid:10)
Upon retirement or other disposition of assets, the cost and related(cid:10)
accumulated depreciation are removed from the accounts and the(cid:10)
resulting gain or loss, if any, is recorded.(cid:10)
RESEARCH AND DEVELOPMENT(cid:10)
Research and development expenditures are charged to expense as(cid:10)
incurred.(cid:10)
PATENTS AND TRADEMARKS(cid:10)
Effective April 1, 2002, the Company adopted the provisions of SFAS(cid:10)
No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS(cid:10)
No. 142 required an initial impairment assessment involving a(cid:10)
comparison of the fair value of patents and trademarks to current(cid:10)
carrying value. No impairment was determined to exist. The Company(cid:10)
reviews such trademarks and patents with definite lives for impairment(cid:10)
to ensure they are appropriately valued if conditions exist that may(cid:10)
indicate the carrying value may not be recoverable. Such conditions(cid:10)
may include an economic downturn or a change in the assessment of(cid:10)
future operations.(cid:10)
Costs incurred for the application of patents and trademarks are(cid:10)
capitalized and amortized on the straight-line method, based on their(cid:10)
estimated useful lives ranging from five to fifteen years, commencing(cid:10)
upon approval of the patent and trademarks. These costs are charged to(cid:10)
expense if the patent or trademark is unsuccessful.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
CONCENTRATION OF CREDIT RISK(cid:10)
The Company derives substantially all of its revenues from contracts(cid:10)
with other pharmaceutical companies, subject to licensing and research(cid:10)
and development agreements.(cid:10)
The Company maintains cash balances in its bank, which, at times, may(cid:10)
exceed the limits of the Federal Deposit Insurance Corp.(cid:10)
The Company extends credit to its customers pursuant to contract terms(cid:10)
in the normal course of business and performs ongoing credit(cid:10)
evaluations. As of March 31, 2003 and 2002, no allowance for doubtful(cid:10)
accounts was considered necessary, based on historical trends,(cid:10)
economic conditions and the credit worthiness of customers. Amounts(cid:10)
are written off when they are deemed uncollectible. The Company has(cid:10)
not experienced significant write-offs.(cid:10)
USE OF ESTIMATES(cid:10)
The preparation of financial statements in conformity with generally(cid:10)
accepted accounting principles requires management to make estimates(cid:10)
and assumptions that affect the reported amounts of assets and(cid:10)
liabilities and disclosure of contingent assets and liabilities at the(cid:10)
date of the financial statements and the reported amounts of revenues(cid:10)
and expenses during the reporting period. Actual results could differ(cid:10)
from those estimates. Significant estimates made by management(cid:10)
include, but are not limited to, the recognition of revenue and the(cid:10)
fair value of intangible assets and stock-based awards.(cid:10)
INCOME TAXES(cid:10)
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which(cid:10)
requires the use of the liability method of accounting for income(cid:10)
taxes. The liability method measures deferred income taxes by applying(cid:10)
enacted statutory rates in effect at the balance sheet date to the(cid:10)
differences between the tax bases of assets and liabilities and their(cid:10)
reported amounts in the financial statements. The resulting deferred(cid:10)
tax assets or liabilities are adjusted to reflect changes in tax laws(cid:10)
as they occur.(cid:10)
LOSS PER COMMON SHARE(cid:10)
Net loss per common share is calculated by dividing net loss by the(cid:10)
weighted average number of shares outstanding during each period(cid:10)
presented. Common stock equivalents, consisting of options, warrants(cid:10)
and convertible securities, have not been included, as their effect(cid:10)
would be antidilutive. For the three years ended March 31, the(cid:10)
following potentially dilutive securities were not included in the(cid:10)
computation of diluted loss per share:(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
REVENUE RECOGNITION(cid:10)
Revenues derived from providing research and development services(cid:10)
under contracts with other pharmaceutical companies are recognized(cid:10)
when earned. These contracts provide for non-refundable upfront and(cid:10)
milestone payments. Because no discrete earnings event has occurred(cid:10)
when the upfront payment is received, that amount is deferred until(cid:10)
the achievement of a defined milestone. Each nonrefundable milestone(cid:10)
payment is recognized as revenue when the performance criteria for(cid:10)
that milestone has been met. Under each contract, the milestones are(cid:10)
defined, substantive effort is required to achieve the milestone, the(cid:10)
amount of the non-refundable milestone payment is reasonable,(cid:10)
commensurate with the effort expended, and achievement of the(cid:10)
milestone is reasonably assured.(cid:10)
Revenues earned by licensing certain pharmaceutical products developed(cid:10)
by Elite are recognized at the beginning of a license term when(cid:10)
Elite's customer has legal right to the use of the product. To date,(cid:10)
no revenues have been earned by licensing products and there are no(cid:10)
continuing obligations under any licensing agreements.(cid:10)
INVESTMENTS(cid:10)
Short-term investments consist of certificates of deposit at a bank(cid:10)
with initial maturities of one year. The Company places its(cid:10)
certificates of deposit with high quality, U.S. financial institutions(cid:10)
and, to date, has not experienced losses on any of its balances. The(cid:10)
Company records its certificates of deposit at amortized cost, which(cid:10)
approximates the fair value. At March 31, 2002, $100,000 was(cid:10)
classified as held-to-maturity, bearing interest at 4.07% and matured(cid:10)
on September 13, 2002.(cid:10)
The equity method of accounting was used to account for the Company's(cid:10)
investment in its joint venture with Elan. Under the equity method,(cid:10)
the Company recognized its share in the net earnings or losses of the(cid:10)
joint venture as they occurred. While Elite owned 100% of the(cid:10)
outstanding common stock of ERL, Elite's equity in the loss of ERL was(cid:10)
based on 100% of ERL's losses, less the amounts funded by Elan. Elan(cid:10)
funded 19.9% of ERL's loses. Once Elite's investment was reduced to(cid:10)
zero, further losses were recognized to the extent of Elite's(cid:10)
commitment to fund the losses. The joint venture was terminated(cid:10)
effective September 30, 2002, as further discussed in Note 7.(cid:10)
VALUATION OF EXCHANGE OPTION OF SERIES A PREFERRED STOCK(cid:10)
The Company periodically monitored the redemption value of the Series(cid:10)
A Preferred Stock, as measured by the fair value of the joint venture(cid:10)
that Elan would receive, less any cash payable to the Company, upon(cid:10)
exchange by Elan. If the redemption value of the Series A Preferred(cid:10)
Stock exceeded its then current carrying value, the Company would(cid:10)
accrete the carrying value of the Series A Preferred Stock to the(cid:10)
redemption value and recognize a corresponding dividend to the Series(cid:10)
A Preferred shareholder. The Company would recognize subsequent(cid:10)
increases or decreases in redemption value of the Series A Preferred(cid:10)
Stock; however, decreases would be limited to amounts previously(cid:10)
recorded as increases, so as not to reduce the carrying amount of the(cid:10)
Series A Preferred Stock below the original basis of $12.0 million.(cid:10)
The determination of fair value of the joint venture required the(cid:10)
Company to make estimates and assumptions that related, in part, to(cid:10)
the potential success of the joint venture's ongoing research and(cid:10)
development activities. On September 30, 2002, the joint venture was(cid:10)
terminated and the Series A Preferred Stock was converted into common(cid:10)
shares, as further discussed in Notes 7 and 10.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
TREASURY STOCK(cid:10)
The Company records common shares purchased and held in treasury at(cid:10)
cost.(cid:10)
STOCK-BASED COMPENSATION(cid:10)
Under various qualified and non-qualified plans, the Company may grant(cid:10)
stock options to officers, selected employees, as well as members of(cid:10)
the board of directors and advisory board members, as further(cid:10)
described in Note 11. Effective April 1, 2002, the Company adopted the(cid:10)
fair value recognition provisions of SFAS No. 123, "Accounting for(cid:10)
Stock-Based Compensation" and selected the prospective method of(cid:10)
adoption described in SFAS No. 148, "Accounting for Stock-Based(cid:10)
Compensation - Transition and Disclosure - an amendment of SFAS No.(cid:10)
123." Prior to April 1, 2002, the Company measured stock-based(cid:10)
compensation for its employee compensation plans using the intrinsic(cid:10)
value method prescribed by Accounting Principles Board Opinion No. 25,(cid:10)
"Accounting for Stock Issued to Employees" and related(cid:10)
interpretations. No stock-based employee compensation expense for(cid:10)
stock options was reflected in net loss for the years ended March 31,(cid:10)
2002 and 2001 as all stock options granted under those plans had an(cid:10)
exercise price equal to the fair market value of the underlying common(cid:10)
stock on the date of grant.(cid:10)
During the year ended March 31, 2003, the Company issued 210,000(cid:10)
options to purchase common stock to an employee and to members of the(cid:10)
board of directors. The options have an exercise price of $5.00 per(cid:10)
share and vest over three years. The options expire ten years from the(cid:10)
date of grant. The Company has taken a charge of $20,550 for the year(cid:10)
ended March 31, 2003, which represents the fair value of the options(cid:10)
vested, utilizing the Black-Scholes options pricing model on each(cid:10)
grant date.(cid:10)
The following table illustrates the effect on net loss and loss per(cid:10)
share as if the Company had applied the fair value recognition(cid:10)
provisions of SFAS No. 123 to all outstanding and unvested awards in(cid:10)
each year presented:(cid:10)
(cid:10)
(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
(cid:10)
Net loss as reported $ (4,061,422) $ (1,774,527) $ (13,964,981)(cid:10)
Add: Stock-based compensation expense(cid:10)
included in reported net loss, net of related(cid:10)
tax effects 20,550 - -(cid:10)
Deduct: Total stock-based compensation(cid:10)
expense determined under fair value method(cid:10)
for all awards, net of related tax effects(cid:10)
(1,070,651) (1,779,338) (1,831,869)(cid:10)
-------------- -------------- --------------(cid:10)
Pro forma net loss (5,111,523) (3,553,865) (15,796,850)(cid:10)
Loss per share as reported (0.40) (0.19) (1.53)(cid:10)
Pro-forma loss per share (0.51) (0.38) (1.73)(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
FAIR VALUE OF FINANCIAL INSTRUMENTS(cid:10)
The carrying amounts of current assets and liabilities approximate(cid:10)
fair value due to the short-term nature of these instruments. The(cid:10)
carrying amounts of noncurrent assets are reasonable estimates of(cid:10)
their fair values based on management's evaluation of future cash(cid:10)
flows. The long-term liabilities are carried at amounts that(cid:10)
approximate fair value based on borrowing rates available to the(cid:10)
Company for obligations with similar terms, degrees of risk and(cid:10)
remaining maturities.(cid:10)
NEW ACCOUNTING PRONOUNCEMENTS(cid:10)
In June 2002, the Financial Accounting Standards Board (FASB) issued(cid:10)
Statement No. 146, "Accounting for Costs Associates with Exit or(cid:10)
Disposal Activities," (SFAS No. 146) which addresses financial(cid:10)
accounting and reporting for costs associated with exit or disposal(cid:10)
activities, and nullifies Emerging Issues Task Force Issue No. 94-3,(cid:10)
"Liability Recognition for Certain Employee Termination Benefits and(cid:10)
Other Costs to Exit an Activity (including Certain Costs Incurred in a(cid:10)
Restructuring)." SFAS No. 146 requires that a liability for a cost(cid:10)
associated with an exit or disposal activity be recognized when the(cid:10)
liability is incurred. The requirements of SFAS No. 146 apply(cid:10)
prospectively to activities that are initiated after December 31. 2002(cid:10)
and, as a result, the Company cannot reasonably estimate the impact of(cid:10)
adopting these new rules until and unless it undertakes relevant(cid:10)
activities in future periods.(cid:10)
In November 2002, the FASB issued Interpretation ("FIN") No. 45(cid:10)
"Guarantor's Accounting and Disclosure Requirements for Guarantees,(cid:10)
Including Indirect Guarantees of Indebtedness of Others," which(cid:10)
clarifies the required disclosures to be made by a guarantor in their(cid:10)
interim and annual financial statements about its obligations under(cid:10)
certain guarantees that it has issued. FIN No. 45 also requires a(cid:10)
guarantor to recognize, at the inception of the guarantee, a liability(cid:10)
for the fair value of the obligation undertaken. The Company is(cid:10)
required to adopt the disclosure requirements of FIN No. 45 for(cid:10)
financial statements of interim and annual periods ending after(cid:10)
December 15, 2002. The Company is required to adopt and accordingly(cid:10)
has adopted prospectively the initial recognition and measurement(cid:10)
provisions of FIN No.45 for guarantees issued or modified after(cid:10)
December 31, 2002 and, as a result, the Company cannot reasonable(cid:10)
estimate the impact of adopting these new rules until and unless it(cid:10)
undertakes relevant activities in future periods.(cid:10)
In December 2002, the FASB issued SFAS No. 148, "Accounting for(cid:10)
Stock-Based Compensation - Transition and Disclosure - an amendment of(cid:10)
SFAS No. 123." This Statement amends SFAS No. 123, "Accounting for(cid:10)
Stock-Based Compensation", to provide alternative methods of(cid:10)
transition for a voluntary change to the fair value based method of(cid:10)
accounting for stock-based employee compensation. In addition, this(cid:10)
Statement amends the disclosure requirements of SFAS No. 123 to(cid:10)
require prominent disclosures in both annual and interim financial(cid:10)
statements about the method of accounting for stock-based employee(cid:10)
compensation and the effect of the method used on reported results.(cid:10)
The adoption of the provisions of SFAS No. 148 did not have a material(cid:10)
impact on the Company's financial position or results of operations(cid:10)
during the year ended March 31, 2003. The Company cannot reasonably(cid:10)
estimate the impact of applying the prospective method of accounting(cid:10)
for stock-based compensation on future periods until and unless it(cid:10)
grants or modifies stock-based awards.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)(cid:10)
In January 2003, the FASB issued FIN No. 46, "Consolidation of(cid:10)
Variable Interest Entities," which clarifies the application of(cid:10)
Accounting Research Bulletin No. 51, "Consolidated Financial(cid:10)
Statements," relating to consolidation of certain entities. First, FIN(cid:10)
No. 46 will require identification of the Company's participation in(cid:10)
variable interests entities ("VIEs"), which are defined as entities(cid:10)
with a level of invested equity that is not sufficient to fund future(cid:10)
activities to permit them to operate on a stand alone basis, or whose(cid:10)
equity holders lack certain characteristics of a controlling financial(cid:10)
interest. For entities identified as VIEs, FIN No. 46 sets forth a(cid:10)
model to evaluate potential consolidation based on an assessment of(cid:10)
which party to the VIE, if any, bears a majority of the exposure to(cid:10)
its expected losses, or stands to gain from a majority of its expected(cid:10)
returns. FIN No. 46 also sets forth certain disclosures regarding(cid:10)
interests in VIEs that are deemed significant, even if consolidation(cid:10)
is not required. As the Company does not participate in VIEs, it does(cid:10)
not anticipate that the provisions of FIN No. 46 will have a material(cid:10)
impact on its financial position or results of operations.(cid:10)
In May 2003, the FASB issued Statement No. 150, "Accounting for(cid:10)
Certain Financial Instruments with Characteristics of Both Liabilities(cid:10)
and Equity." This Statement established standards for how an issuer(cid:10)
classifies and measures certain financial instruments with(cid:10)
characteristics of both liabilities and equity. It requires that an(cid:10)
issuer classify certain financial instruments, such as mandatorily(cid:10)
redeemable stock, as liabilities. Some instruments do not require the(cid:10)
issuer to transfer assets to settle the obligation but, instead,(cid:10)
unconditionally require the issuer to settle the obligation either by(cid:10)
transferring assets or by issuing a variable number of its equity(cid:10)
shares. These instruments, which may have previously been classified(cid:10)
as equity, would be classified as liabilities in accordance with SFAS(cid:10)
No.150. This Statement is effective for financial instruments entered(cid:10)
into or modified after May 31, 2003, and otherwise is effective at the(cid:10)
beginning of the first interim period beginning after June 15, 2003.(cid:10)
The adoption of the provisions of SFAS No. 150 is not expected to have(cid:10)
material impact on the Company's financial position or results of(cid:10)
operations.(cid:10)
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS(cid:10)
The Company reported net losses of $4,061,422, $1,774,527 and(cid:10)
$13,964,981 for the fiscal years ended March 31, 2003, 2002 and 2001,(cid:10)
respectively. At March 31, 2003, the Company had an accumulated(cid:10)
deficit of approximately $28.6 million, consolidated assets of(cid:10)
approximately $8.7 million, stockholders' equity of approximately $5.4(cid:10)
million, and working capital of approximately $3.0 million. The(cid:10)
Company has not generated any significant revenue to date.(cid:10)
In an effort to reduce costs, the Company has reduced the number of(cid:10)
products being actively developed from approximately fifteen to six.(cid:10)
The six products that continue in development were deemed by(cid:10)
management to be the most suitable for continued development given the(cid:10)
Company's limited resources.(cid:10)
The primary strategy remains to develop the Company's oral control(cid:10)
release pharmaceutical products for FDA approval, and once developed,(cid:10)
to commercially exploit these products either by licensing or through(cid:10)
the development of collaborations with strategic partners.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS (CONTINUED)(cid:10)
The Company also recently retained an investment banking firm to(cid:10)
assist the Company in connection with potential strategic(cid:10)
transactions, including acquisitions. The Company may receive(cid:10)
additional cash proceeds from the exercise of outstanding options and(cid:10)
warrants as well as through the continued sale of its New Jersey State(cid:10)
tax losses. However, there is no assurance that any options or(cid:10)
warrants will be exercised, that any sale of tax losses will be(cid:10)
completed or that the Company will be able to raise additional(cid:10)
capital.(cid:10)
There is also no assurance that the Company's current business(cid:10)
strategies will be successfully implemented or that it will raise the(cid:10)
necessary funds to allow it to continue its operations. Management(cid:10)
believes that cost reductions already implemented will reduce losses(cid:10)
in the future, and with the Company's existing working capital(cid:10)
levels, anticipate that the Company will be able to continue its(cid:10)
operations at least through the end of fiscal year 2004.(cid:10)
NOTE 3- PROPERTY AND EQUIPMENT(cid:10)
Property and equipment at March 31, 2003 and 2002 consists of the(cid:10)
following:(cid:10)
(cid:10)
(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(cid:10)
Laboratory manufacturing, and warehouse equipment $ 3,140,250 $ 2,337,120(cid:10)
Office equipment 32,981 32,981(cid:10)
Furniture and fixtures 51,781 51,781(cid:10)
Land, building and improvements 2,097,668 2,097,668(cid:10)
Equipment under capital lease 168,179 168,179(cid:10)
------------ ------------(cid:10)
5,490,859 4,687,729(cid:10)
Less: Accumulated depreciation and amortization 1,100,306 821,958(cid:10)
------------ ------------(cid:10)
$ 4,390,553 $ 3,865,771(cid:10)
============ ============(cid:10)
(cid:10)
Depreciation and amortization expense amounted to $278,348, $249,338(cid:10)
and $177,662 for the years ended March 31, 2003, 2002 and 2001,(cid:10)
respectively. The Company's obligations under capital leases were(cid:10)
satisfied prior to March 31, 2002.(cid:10)
NOTE 4 - INTANGIBLE ASSETS(cid:10)
Intangible assets at March 31, 2003 and 2002, consists of the(cid:10)
following:(cid:10)
(cid:10)
Amortization of intangible assets amounted to $19,344, $4,390 and(cid:10)
$3,179 for the years ended March 31, 2003, 2002 and 2001,(cid:10)
respectively.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 4 - INTANGIBLE ASSETS (CONTINUED)(cid:10)
Aggregate amortization expense of intangible assets for the next five(cid:10)
fiscal years is estimated to be as follows:(cid:10)
YEARS ENDING MARCH 31,(cid:10)
----------------------(cid:10)
2004 $ 19,340(cid:10)
2005 19,340(cid:10)
2006 19,340(cid:10)
2007 19,340(cid:10)
2008 19,340(cid:10)
NOTE 5 - NOTE PAYABLE(cid:10)
On January 25, 2002, the Company closed on a bank loan totaling(cid:10)
$375,000 to finance the purchase and installation of machinery and(cid:10)
equipment. Interest is fixed at 5.70% per annum calculated on a 360(cid:10)
day year. The loan is due in 60 equal monthly installments of $6,250(cid:10)
plus interest and is secured by the machinery and equipment purchased(cid:10)
under this facility and a certificate of deposit in the amount of(cid:10)
$250,000 held as collateral. This certificate of deposit has been(cid:10)
classified as noncurrent restricted cash. The note payable consists of(cid:10)
the following at March 31:(cid:10)
(cid:10)
(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(cid:10)
Bank note payable $ 300,000 $ 375,000(cid:10)
Current portion (75,000) (75,000)(cid:10)
----------- -----------(cid:10)
Long-term portion, net of current maturities $ 225,000 $ 300,000(cid:10)
=========== ===========(cid:10)
(cid:10)
Principal maturities under this loan are as follows:(cid:10)
YEARS ENDING MARCH 31,(cid:10)
----------------------(cid:10)
2004 $ 75,000(cid:10)
2005 75,000(cid:10)
2006 75,000(cid:10)
2007 75,000(cid:10)
----------(cid:10)
$ 300,000(cid:10)
==========(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 6 - BOND FINANCING OFFERING(cid:10)
On September 2, 1999, the Company completed the issuance of tax exempt(cid:10)
bonds by the New Jersey Economic Development Authority. The aggregate(cid:10)
principal proceeds of the fifteen year term bonds were $3,000.000.(cid:10)
Interest on the bonds accrues at 7.75% per annum. The proceeds, net of(cid:10)
offering costs of $60,000, are being used by the Company to refinance(cid:10)
the land and building it currently owns, and for the purchase of(cid:10)
certain manufacturing equipment and related building improvements.(cid:10)
Offering costs in connection with the bond issuance totaled $197,860,(cid:10)
including the $60,000 mentioned above which were paid from bond(cid:10)
proceeds. Offering costs included underwriter fees equal to $90,000(cid:10)
(three percent (3%) of the par amount of the bonds).(cid:10)
The bonds are collateralized by a first lien on the building, which(cid:10)
includes property and equipment.(cid:10)
Several restricted cash accounts are maintained in connection with the(cid:10)
issuance of these bonds. These include amounts restricted for payment(cid:10)
of bond principal and interest, for the refinancing of the land and(cid:10)
building the Company currently owns, for the purchase of certain(cid:10)
manufacturing equipment and related building improvements as well as(cid:10)
the maintenance of a $300,000 Debt Service Reserve.(cid:10)
All restricted accounts other than the $300,000 Debt Service Reserve(cid:10)
are expected to be expended within twelve months and are therefore(cid:10)
categorized as current assets. Bond financing consisted of the(cid:10)
following at March 31:(cid:10)
(cid:10)
(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(cid:10)
EDA Bonds $ 2,635,000 $ 2,765,000(cid:10)
Current portion (140,000) (130,000)(cid:10)
------------ ------------(cid:10)
Long term portion, net of current maturities $ 2,495,000 $ 2,635,000(cid:10)
============ ============(cid:10)
(cid:10)
Principal maturities required under the bond agreement are as follows:(cid:10)
YEARS ENDING MARCH 31,(cid:10)
----------------------(cid:10)
2004 $ 140,000(cid:10)
2005 150,000(cid:10)
2006 165,000(cid:10)
2007 175,000(cid:10)
2008 190,000(cid:10)
Thereafter 1,815,000(cid:10)
------------(cid:10)
$ 2,635,000(cid:10)
============(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 7 - JOINT VENTURE ACTIVITIES(cid:10)
In October 2000, the Company entered into a joint development and(cid:10)
operating agreement with Elan Corporation, plc, and Elan International(cid:10)
Services, Ltd. (together "Elan") to develop products using drug(cid:10)
delivery technologies and expertise of both companies. This joint(cid:10)
venture, Elite Research, Ltd. ("ERL"), a Bermuda corporation, was(cid:10)
initially owned 80.1% by the Company and 19.9% by Elan. ERL was to(cid:10)
fund its research through capital contributions from its partners(cid:10)
based on the partners' respective ownership percentage. ERL(cid:10)
subcontracted research and development efforts to the Company, Elan(cid:10)
and others. It was anticipated that the Company would provide most of(cid:10)
the formulation and development work. The Company had commenced work(cid:10)
for three products. For the years ended March 31, 2003, 2002 and 2001,(cid:10)
the Company charged $187,810, $601,057 and $80,932, respectively, to(cid:10)
ERL which was reflected in product formulation fees. Intercompany(cid:10)
profits and losses were eliminated.(cid:10)
ERL was initially capitalized with $15,000,000 which included the(cid:10)
issuance of 6,000 voting common shares, par value $1.00 per share, and(cid:10)
6,000 non-voting convertible preferred shares, par value $1.00 per(cid:10)
share. All of the voting shares were held by the Company, with the(cid:10)
non-voting convertible preferred shares held by both the Company and(cid:10)
Elan, being split 3,612 shares and 2,388 shares, respectively. Elite's(cid:10)
and Elan's respective ownership in ERL did not change during the term(cid:10)
of the joint venture.(cid:10)
While the Company initially owned 80.1% of the outstanding capital(cid:10)
stock (100% of the outstanding common stock) of ERL until September(cid:10)
30, 2002, Elan and its subsidiaries retained significant minority(cid:10)
investor rights that were considered "participating rights" as defined(cid:10)
in the Emerging Issues Task Force Consensus No. 96-16. Accordingly,(cid:10)
the Company did not consolidate the financial statements of ERL until(cid:10)
September 30, 2002 but instead accounted for its investment in ERL(cid:10)
under the equity method of accounting until the Joint Venture was(cid:10)
terminated, effective September 30, 2002.(cid:10)
For the years ended March 31, 2003, 2002 and 2001, ERL recognized net(cid:10)
losses of $232,742, $633,642 and $15,080,931, respectively. The(cid:10)
Company recognized 80.1% of ERL's losses, or $186,379, $507,640 and(cid:10)
$12,079,827, respectively, for the years ended March 31, 2003, 2002(cid:10)
and 2001. The product formulation fees of $187,810, $601,057 and(cid:10)
$80,931 earned by the Company for services rendered to ERL for the(cid:10)
years ended March 31, 2003, 2002 and 2001, respectively, are included(cid:10)
in ERL's expenses. During fiscal year 2001, ERL paid $15,000,000 to(cid:10)
Elan for a license providing ERL non-exclusive rights to use certain(cid:10)
Elan in-process drug delivery technologies. The Elan technology rights(cid:10)
acquired relate to very early stage technology that, in the opinion of(cid:10)
management, have not reached technological feasibility and have no(cid:10)
future alternative uses. Through the date of its termination, ERL had(cid:10)
not recognized any revenue.(cid:10)
In December 2000, ERL approved one product for development at its(cid:10)
first organizational meeting. In March 2001, the management committee(cid:10)
of ERL met to finalize its budget and business plan and to complete a(cid:10)
preliminary formulation of the drug product. As of March 31, 2003, ERL(cid:10)
completed in-vivo (pilot clinical trial) on the first product and(cid:10)
began formulation and development of two additional products.(cid:10)
As of March 31, 2002, the Company owed ERL $435,754, representing its(cid:10)
80.1% of unfunded contributions to ERL through March 31, 2002.(cid:10)
During fiscal year 2003, the Company consummated a termination(cid:10)
agreement (the "Termination Agreement") with Elan to acquire all of(cid:10)
Elan's interest in ERL. As further discussed in Note 10, the joint(cid:10)
venture was terminated effective September 30, 2002.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)(cid:10)
Under the Termination Agreement, among other things, the Company(cid:10)
acquired all proprietary, development and commercial rights for the(cid:10)
worldwide markets for the products developed by ERL. In exchange for(cid:10)
the assignment, ERL agreed to pay Elan a royalty on certain revenues(cid:10)
that may be realized from the once-a-day Oxycodone product that has(cid:10)
been developed by ERL. Effective October 2002, the Company is solely(cid:10)
responsible to fund ERL's product development.(cid:10)
The Company did not pay, nor did Elan receive any cash consideration(cid:10)
under the Termination Agreement. Furthermore, the Company has the(cid:10)
exclusive rights to the proprietary, development and commercial rights(cid:10)
for the worldwide markets for two other products developed by ERL. The(cid:10)
Company is not required to pay Elan royalties on revenues that may be(cid:10)
realized from these products.(cid:10)
The Company accounted for this acquisition by consolidating ERL as a(cid:10)
wholly-owned subsidiary as of September 30, 2002. As more specifically(cid:10)
described in Note 10, Elan converted 773,000 shares of Series B(cid:10)
Preferred Stock, according to their terms, into 52,089 shares of the(cid:10)
Company's common stock. This resulted in an increase in common stock(cid:10)
of $521 and an increase in additional paid in capital of $772,479. As(cid:10)
a result, the Series B Preferred Stock was eliminated.(cid:10)
As further disclosed in Note 10, the acquisition resulted in the(cid:10)
conversion of 13,756 shares of Series A Preferred Stock into 764,221(cid:10)
shares of Elite's common stock in accordance with their terms. The(cid:10)
Company accounted for this conversion by increasing common stock in(cid:10)
the amount of $7,642 and by a corresponding increase in additional(cid:10)
paid in capital of $13,748,332. As a result, the Series A Preferred(cid:10)
Stock was eliminated.(cid:10)
As a result of the Termination Agreement, ERL became a wholly owned(cid:10)
subsidiary of the Company as of September 30, 2002. Elan retained(cid:10)
certain securities of Elite it had obtained in connection with the(cid:10)
joint venture and transferred other such securities to a third-party,(cid:10)
as further discussed in Note 10.(cid:10)
The following is a condensed balance sheet of ERL on September 30,(cid:10)
2002 (the date of acquisition):(cid:10)
Current Assets(cid:10)
Cash $ 1,084(cid:10)
------------(cid:10)
Total assets $ 1,084(cid:10)
============(cid:10)
Current Liabilities(cid:10)
Accounts payable $ 84,597(cid:10)
-----------(cid:10)
Total liabilities 84,597(cid:10)
Shareholders' deficit (83,513)(cid:10)
------------(cid:10)
$ 1,084(cid:10)
===========(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)(cid:10)
The following are unaudited pro-forma consolidated results of(cid:10)
operations for the years ended March 31, 2003, 2002 and 2001, assuming(cid:10)
the acquisition was completed on April 1, 2000.(cid:10)
(cid:10)
(cid:10)
YEAR ENDED MARCH 31,(cid:10)
-------------------------------------------------------(cid:10)
2003 2002 2001(cid:10)
----- ----- ----(cid:10)
(Unaudited) (Unaudited) (Unaudited)(cid:10)
(cid:10)
Revenue $ 442,500 $ 596,450 $ 14,314(cid:10)
Net (loss) available to common(cid:10)
Shareholders $ (4,107,785) $ (1,900,529) $ (16,966,085)(cid:10)
Net (loss) available to common(cid:10)
shareholders per share -(cid:10)
basic and diluted $ (0.40) $ (0.19) $ (1.85)(cid:10)
(cid:10)
Unaudited pro-forma data may not be indicative of the results that(cid:10)
would have been obtained had these events actually occurred at the(cid:10)
beginning of the periods presented, nor does it intend to be a(cid:10)
projection of future results.(cid:10)
NOTE 8 - INCOME TAXES(cid:10)
The components of the provision (benefit) for income taxes are as(cid:10)
follows:(cid:10)
(cid:10)
(cid:10)
YEAR ENDED MARCH 31,(cid:10)
-----------------------------------------------(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
(cid:10)
Federal:(cid:10)
Current $ - $ - $ -(cid:10)
Deferred - - -(cid:10)
---------- --------- ---------(cid:10)
State:(cid:10)
Current 400 2,430 4,382(cid:10)
Deferred - - -(cid:10)
Sale of New Jersey net operating losses (71,674) (137,818) (368,343)(cid:10)
---------- --------- ---------(cid:10)
(71,274) (135,388) (363,961)(cid:10)
---------- --------- ---------(cid:10)
$ (71,274) $(135,388) $(363,961)(cid:10)
========== ========= =========(cid:10)
(cid:10)
In the year ended March 31, 2001, the Company received approval for(cid:10)
the sale of $4,872,267 of New Jersey net operating losses under the(cid:10)
Technology Tax Certificate Transfer Program sponsored by the New(cid:10)
Jersey Economic Development Authority (NJEDA). The total tax benefit(cid:10)
approved for receipt by the Company during the year ended March 31,(cid:10)
2001 was $368,343 of which $222,211 and $146,132 was received in 2001(cid:10)
and in 2002, respectively.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 8 - INCOME TAXES(cid:10)
During the year ended March 31, 2002, the Company received approval(cid:10)
for the sale of an additional $1,822,989 of New Jersey net-operating(cid:10)
losses under the Technology Tax Certificate Transfer Program sponsored(cid:10)
by the New Jersey Economic Development Authority (NJEDA). The total(cid:10)
tax benefit approved for receipt by the Company during the year ended(cid:10)
March 31, 2002 was $137,818, of which $71,741 was received in November(cid:10)
2001. The remaining balance of $66,077 was received in 2003.(cid:10)
During the year ended March 31, 2003, the Company received approval(cid:10)
for the sale of an additional $915,430 of New Jersey net-operating(cid:10)
losses under the Technology Tax Certificate Transfer Program sponsored(cid:10)
by the New Jersey Economic Development Authority (NJEDA). The total(cid:10)
tax benefit received in 2003 was $71,674.(cid:10)
The major components of deferred tax assets at March 31, 2003 and 2002(cid:10)
are as follows:(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
Net operating loss carry forwards $ 4,486,167 $ 3,128,375(cid:10)
Valuation allowance (4,486,167) (3,128,375)(cid:10)
------------ ------------(cid:10)
$ --- $ ---(cid:10)
============ ============(cid:10)
At March 31, 2003, a 100% valuation allowance is provided, as it is(cid:10)
uncertain if the deferred tax assets will be utilized. The valuation(cid:10)
allowance increased during 2003, 2002 and 2001 by $1,357,792, $304,375(cid:10)
and $259,000, respectively.(cid:10)
At March 31, 2003, for federal income tax purposes, the Company has(cid:10)
unused net operating loss carryforwards of approximately $14,004,778(cid:10)
expiring in 2007 through 2015. For state tax purposes, the Company has(cid:10)
$6,275,875 of unused net operating losses, which are net of the(cid:10)
$7,610,686 of New Jersey net-operating losses sold, as discussed(cid:10)
above.(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES(cid:10)
EMPLOYMENT AGREEMENT(cid:10)
The Company had an employment agreement ("Employment Agreement") with(cid:10)
its former President/CEO, Atul M. Mehta.(cid:10)
On June 3, 2003, Dr. Mehta resigned from all positions that he held(cid:10)
with the Company, while reserving his rights under his Employment(cid:10)
Agreement and under common law. On July 3, 2003, Dr. Mehta instituted(cid:10)
litigation against Elite and one of its directors, in the Superior(cid:10)
Court of New Jersey, for, among other things, allegedly breaching his(cid:10)
Employment Agreement and for defamation, and claims that he is(cid:10)
entitled to receive his salary through June 6, 2006. His salary would(cid:10)
total approximately $1 million through June 6, 2006.(cid:10)
The Company believes Dr. Mehta's claims are without merit and intends(cid:10)
to vigorously contest this action. Prior to Dr. Mehta's resignation, a(cid:10)
majority of the members of the Company's Board of Directors had(cid:10)
notified Dr. Mehta that they believed that sufficient grounds existed(cid:10)
for the termination of his employment for "Severe cause" pursuant to(cid:10)
his Employment Agreement. If Elite is ordered to pay Dr. Mehta, it(cid:10)
would have a material adverse effect on the Company's financial(cid:10)
condition and results of operations.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
EMPLOYMENT AGREEMENT (CONTINUED)(cid:10)
In addition, Dr. Mehta's Employment Agreement contains a provision to(cid:10)
the effect that if he terminates his employment because of, among(cid:10)
other reasons, substantial interference with the discharge of his(cid:10)
responsibilities or Elite's purported change of his duties and(cid:10)
responsibilities without Dr. Mehta's consent, he would have(cid:10)
non-exclusive inventorship rights and copyrights in all inventions(cid:10)
that were developed by Elite in the twelve months prior to the(cid:10)
termination of employment, through Dr. Mehta's efforts. Dr. Mehta(cid:10)
claims that he terminated his employment with Elite because of(cid:10)
substantial interference with the discharge of his responsibilities(cid:10)
and Elite's purported change of his duties and responsibilities(cid:10)
without Dr. Mehta's consent. The Company maintains that Dr. Mehta does(cid:10)
not own any of its intellectual property and intends to oppose(cid:10)
vigorously any effort by Dr. Mehta to enforce the provision in his(cid:10)
Employment Agreement that provides for non-exclusive inventorship(cid:10)
rights to Dr. Mehta. However, there is no assurance that the Company's(cid:10)
position will be upheld. If the Company is not successful in its(cid:10)
claims regarding Dr. Mehta and the intellectual property, it would(cid:10)
have a material adverse effect on the Company's financial position and(cid:10)
its results of operations.(cid:10)
CONSULTING AGREEMENTS(cid:10)
On August 1, 1997, the Company entered into agreements with two(cid:10)
corporations, one of which is a shareholder, to provide various(cid:10)
consulting services for a period of three years. Terms of the(cid:10)
agreements include the following:(cid:10)
a. Combined monthly fees of $15,000.(cid:10)
b. The issuance of 350,000 warrants to purchase common stock at an(cid:10)
exercise price of $6.00 per share for a period of five (5) years.(cid:10)
Such agreements terminated on July 31, 2000. The Company entered into(cid:10)
two new agreements (the "2000 Agreements") with these Companies(cid:10)
commencing on September 1, 2000 and terminating on December 31, 2000.(cid:10)
Such agreements called for combined monthly fees of $7,500. One(cid:10)
agreement was extended through December 31, 2001 and then terminated(cid:10)
and the other agreement was subsequently extended until March 31,(cid:10)
2002, calling for payments of $5,000 per month.(cid:10)
Consulting expenses under the 2000 Agreements amounted to $15,000,(cid:10)
$67,500 and $97,500, for the years ended March 31, 2003, 2002 and(cid:10)
2001, respectively.(cid:10)
On August 1, 1998, the Company entered into a consulting agreement(cid:10)
(the "1998 Agreement") with a company for the purpose of providing(cid:10)
management, marketing and financial consulting services for an(cid:10)
unspecified term. Terms of the agreement provide for a nonrefundable(cid:10)
monthly fee of $2,000. This compensation will be applied against(cid:10)
amounts due pursuant to a business referral agreement entered into on(cid:10)
April 8, 1997 (the "1997 Agreement") with the same party.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
CONSULTING AGREEMENTS (CONTINUED)(cid:10)
Terms of the 1997 Agreement provide for payments by the Company based(cid:10)
upon a formula, as defined, for an unspecified term. On November 14,(cid:10)
2000, the Company amended its 1997 Agreement to provide certain(cid:10)
consulting services for the period beginning November 1, 2000 through(cid:10)
October 31, 2003. The Company previously advanced $20,000 under the(cid:10)
1997 Agreement in addition to a payment of $50,000 made during the(cid:10)
year ended March 31, 2001. The 1997 Agreement calls for 25 monthly(cid:10)
installments of $3,200 beginning on December 1, 2001.(cid:10)
Consulting expense under the 1997 and 1998 Agreements amounted to(cid:10)
$38,400, $12,800 and $50,000 for the years ended March 31, 2003, 2002(cid:10)
and 2001, respectively.(cid:10)
REFERRAL AGREEMENT(cid:10)
On January 29, 2002, the Company entered into a Referral Agreement(cid:10)
with an individual (Referring Party) whereby Elite will pay the(cid:10)
Referring Party a fee based upon payments received by Elite from sales(cid:10)
of products, development fees, licensing fees and royalties generated(cid:10)
as a direct result of the Referring Party identifying customers for(cid:10)
Elite. These amounts shall be reduced by the cost of goods sold(cid:10)
directly incurred in the manufacturing or development of products as(cid:10)
well as any direct expenses associated with these efforts. Elite will(cid:10)
pay Referring Party a referral fee each year equal to:(cid:10)
PERCENTAGE OF REFERRAL(cid:10)
BASE FROM TO(cid:10)
---- ---- --(cid:10)
5% $ 0 $ 1,000,000(cid:10)
4% 1,000,000 2,000,000(cid:10)
3% 2,000,000 3,000,000(cid:10)
2% 3,000,000 4,000,000(cid:10)
1% 4,000,000 5,000,000(cid:10)
COLLABORATIVE AGREEMENTS(cid:10)
On June 27, 2001, the Company entered into two separate and distinct(cid:10)
development and license agreements with another pharmaceutical company(cid:10)
("partner"). The Company is developing two drug compounds for the(cid:10)
partner in exchange for certain payments and royalties. The Company(cid:10)
also reserves the right to manufacture the compounds. The Company(cid:10)
received $250,000 and $300,000, respectively, on these two agreements.(cid:10)
These amounts have been earned as of March 31, 2002. The Company is(cid:10)
currently proceeding with the development and formulation for both(cid:10)
products as specified in the development agreements. During the year(cid:10)
ended March 31, 2003, the Company earned revenues of $85,000 for(cid:10)
additional development and formulation for both products.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
COLLABORATIVE AGREEMENTS (CONTINUED)(cid:10)
On September 13, 2002, the Company, entered into a manufacturing(cid:10)
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of this(cid:10)
agreement, the Company has initiated the manufacturing of a new(cid:10)
prescription drug product for Ethypharm. The Company received an(cid:10)
upfront manufacturing fee for the first phase of the technology(cid:10)
transfer and billed an additional amount upon the completion of the(cid:10)
first phase of manufacturing. The Company is entitled to receive(cid:10)
additional fees in advance for the final phase of the manufacturing.(cid:10)
In addition, if and when FDA approval is obtained and if requested by(cid:10)
Ethypharm, the Company will manufacture commercial batches of the(cid:10)
product on terms to be agreed upon. As of March 31, 2003, the Company(cid:10)
billed and earned revenues of $280,000 under this agreement, in(cid:10)
accordance with the substantive milestone method of revenue(cid:10)
recognition. Under this method, the milestone payments are considered(cid:10)
to be payments received for the accomplishment of a discrete,(cid:10)
substantive earnings event. Accordingly, the non-refundable milestone(cid:10)
payments are recognized in full when the milestone is achieved. In(cid:10)
addition to milestone payments, the Company billed and recognized(cid:10)
$75,000 in additional revenues as a result of the manufacturing and(cid:10)
delivery of additional batches.(cid:10)
CONTINGENCIES(cid:10)
Elite Labs is the plaintiff in a civil action brought in the Superior(cid:10)
Court of New Jersey on November 20, 2000 against three parties to(cid:10)
recover damages in an unspecified amount based on the alleged failure(cid:10)
of the defendants to properly perform and complete certain(cid:10)
pharmaceutical tests and studies for which Elite paid approximately(cid:10)
$950,000.(cid:10)
The defendants have brought a counterclaim of approximately $250,000(cid:10)
allegedly due for services rendered to Elite by the defendants for the(cid:10)
completion of bioequivalency studies and for the storage of laboratory(cid:10)
samples. Elite is vigorously contesting the counterclaim.(cid:10)
The action and counterclaim are proceeding in pretrial discovery under(cid:10)
a Case Management Order entered by the court. All discovery is(cid:10)
expected to be completed by July 15, 2003. If such action or(cid:10)
counterclaim is in favor of defendants, the recovery, if any, would(cid:10)
not have a material effect on the Company's financial condition or(cid:10)
results of operations. Legal counsel is unable to predict the outcome(cid:10)
of these actions. Accordingly, no provisions for liability, if any,(cid:10)
has been provided in the accompanying consolidated financial(cid:10)
statements.(cid:10)
The Company's former President/CEO instituted litigation against the(cid:10)
Company and one of its directors in the Superior Court of New Jersey(cid:10)
on July 3, 2003, as further discussed above under "Employment(cid:10)
Agreement" and in Note 13.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL(cid:10)
DEFICIENCY)(cid:10)
TREASURY STOCK TRANSACTIONS(cid:10)
At a special meeting of the Company's Board of Directors held on June(cid:10)
27, 2002, the Board authorized the Company to purchase up to 100,000(cid:10)
shares of its common stock in the open market no later than December(cid:10)
31, 2002. As of March 31, 2003, the Company had purchased 100,000(cid:10)
shares of common stock for total consideration of $306,841.(cid:10)
PUBLIC OFFERINGS(cid:10)
In July 1998 the Company filed a registration statement on Form SB-2(cid:10)
under the Securities Act of 1933, as amended, for the purpose of(cid:10)
registering securities previously sold to and held by various(cid:10)
corporations and individuals. The Company did not receive any proceeds(cid:10)
upon filing of this Form SB-2. The securities registered consisted of(cid:10)
3,725,000 shares of the Company's $.01 par value common stock,(cid:10)
including 1,525,000 redeemable common stock purchase warrants.(cid:10)
In March 2000, the Company filed a registration statement on Form SB-2(cid:10)
under the Securities Act of 1933, as amended, for the purpose of(cid:10)
registering securities previously sold to and held by various(cid:10)
corporations and individuals. The Company did not receive any proceeds(cid:10)
upon filing of this Form SB-2. The securities registered consisted of(cid:10)
3,297,539 shares of the Company's $.01 par value common stock,(cid:10)
2,022,537 underlying Class A and Class B common stock purchase(cid:10)
warrants, and 317,250 Class A common stock purchase warrants.(cid:10)
PRIVATE PLACEMENT OFFERING(cid:10)
In a private placement offering dated May 17, 1999, the Company raised(cid:10)
$4,462,500 from the sale of 12.75 units of its securities; each unit(cid:10)
consisting of 100,000 shares of common stock of the Company and 50,000(cid:10)
warrants, each warrant entitling the holder to purchase one share of(cid:10)
common stock at an exercise price of $5.00 per share during the five(cid:10)
year period commencing with the date of closing of the private(cid:10)
placement memorandum (June 16, 1999). The price per unit was $350,000.(cid:10)
This resulted in the issuance of 1,275,000 shares of common stock and(cid:10)
637,500 warrants to purchase common stock, at an exercise price of(cid:10)
$5.00 per share.(cid:10)
SERIES A PREFERRED STOCK(cid:10)
As further discussed in Note 7, on October 16, 2000, Elite entered(cid:10)
into an agreement (the "Joint Venture Agreement") with Elan(cid:10)
International Services, Ltd. and Elan Corporation, plc. (together(cid:10)
"Elan"), under which the parties formed a joint venture, Elite(cid:10)
Research, Ltd. ("ERL"). Under the terms of the Joint Venture(cid:10)
Agreement, 409,165 shares of the Company's common stock and 12,015(cid:10)
shares of a newly created Series A Convertible Exchangeable Preferred(cid:10)
Stock ("Series A Preferred Stock") were issued to Elan for(cid:10)
consideration of $5,000,000 and $12,015,000, respectively. Proceeds(cid:10)
from the sale of the Series A Preferred Stock were used to fund the(cid:10)
Company's 80.1% share of ERL, as further discussed in Note 7.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY(cid:10)
(NET CAPITAL DEFICIENCY) (CONTINUED)(cid:10)
SERIES A PREFERRED STOCK (CONTINUED)(cid:10)
The Series A Preferred Stock was exchangeable at the option of the(cid:10)
holder for that amount of the preferred shares of ERL which would(cid:10)
allow Elan to own a total of 50% of the issued and outstanding common(cid:10)
and preferred shares of ERL. Because of this exchange feature, the(cid:10)
Company has classified its Series A Preferred Stock, in the amount of(cid:10)
$12,015,000, outside of permanent equity at March 31, 2001 and 2002,(cid:10)
in accordance with EITF Topic No. D-98. The preferred shares were(cid:10)
non-voting and had a liquidation preference equal to their original(cid:10)
issue price.(cid:10)
The Series A Preferred Stock accrued a dividend of 7% per annum,(cid:10)
compounded annually and payable in shares of Series A Preferred Stock.(cid:10)
Dividends accrued and compounded annually beginning on October 16,(cid:10)
2001. As of September 30, 2002 (the termination date of the Joint(cid:10)
Venture), the Company had accrued dividends of $1,740,973 on the(cid:10)
Series A Preferred Stock.(cid:10)
SERIES B PREFERRED STOCK(cid:10)
On October 17, 2000, the Company authorized 7,250,000 shares of newly(cid:10)
created Series B Preferred Stock of which 4,806,000 was designated for(cid:10)
issuance to Elan for a total consideration of $4,806,000. These shares(cid:10)
were issuable from time to time to fund the Company's 80.1% portion of(cid:10)
capital contributions to ERL and for funding of the research and(cid:10)
development activities for ERL.(cid:10)
The Series B Preferred Stock accrued a dividend of 7% per annum of the(cid:10)
original issue price, compounded on each succeeding twelve month(cid:10)
anniversary of the first issuance and payable solely by the issuance(cid:10)
of additional shares of Series B Preferred Stock, at a price per share(cid:10)
equal to the original issue price. Dividends were accrued and(cid:10)
compounded commencing one year after issuance. As of September 30,(cid:10)
2002 (the termination date of the joint venture), the Company had(cid:10)
accrued dividends of $14,000 on the Series B Preferred Stock.(cid:10)
During the fiscal year ended March 31, 2003, the Company made capital(cid:10)
contributions to ERL in the amount of $573,000. These contributions(cid:10)
were financed by the proceeds from the issuance to Elan of 573,000(cid:10)
shares of Series B Preferred Stock. These contributions were in(cid:10)
addition to a capital contribution in the amount of $200,000 made by(cid:10)
the Company to ERL during the fiscal year ended March 31, 2002.(cid:10)
JOINT-VENTURE TERMINATION(cid:10)
In addition to the issuance of shares as described above, on October(cid:10)
17, 2000 the Company issued to Elan 100,000 warrants to purchase the(cid:10)
Company's common stock at an exercise price of $18 per share. The(cid:10)
warrants are exercisable at any time on or before October 17, 2005.(cid:10)
Subject to a Termination Agreement between the Company and Elan dated(cid:10)
September 30, 2002, the Company acquired Elan's 19.9% interest in ERL,(cid:10)
and Elan transferred its warrants and its 12,015 shares of Series A(cid:10)
Preferred Stock to a third party along with accrued dividends of 1,741(cid:10)
shares. On November 6, 2002, under a transfer and assignment among the(cid:10)
Company, Elan and a third party purchaser, all 13,756 shares of Series(cid:10)
A Preferred Stock have been converted, according to their terms, into(cid:10)
764,221 shares of the Company's common stock using the $18 per share(cid:10)
price. Elan retained 409,165 shares of the Company's common stock and(cid:10)
773,000 shares of Series B Preferred Stock, the latter of which was(cid:10)
converted into 52,089 shares of the Company's common stock. Both of(cid:10)
the Series A and Series B preferred stock were converted into the(cid:10)
Company's common stock in accordance with their terms. The warrants(cid:10)
remain unexercised at March 31, 2003.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY(cid:10)
(NET CAPITAL DEFICIENCY) (CONTINUED)(cid:10)
JOINT-VENTURE TERMINATION (CONTINUED)(cid:10)
For the period of one year after the issuance of the above common(cid:10)
stock, Elan and the third party purchaser have the right to require(cid:10)
registration under the Securities Act of 1933, as amended ("the(cid:10)
Securities Act") of all or part of these securities. All registration(cid:10)
expenses would be borne by the requesting party. Elan and the third(cid:10)
party purchaser also have the right to piggyback registration if at(cid:10)
any time the Company proposes to register shares of its common stock(cid:10)
under the Securities Act.(cid:10)
WARRANTS(cid:10)
To date, the Company has authorized the issuance of common stock(cid:10)
purchase warrants, with terms of five to six years, to various(cid:10)
corporations and individuals, in connection with the sale of(cid:10)
securities, loan agreements and consulting agreements. Exercise prices(cid:10)
range from $2.00 to $18.00 per warrant. The warrants expire at various(cid:10)
times through October 17, 2005.(cid:10)
A summary of warrant activity for the years indicated were are(cid:10)
follows:(cid:10)
(cid:10)
CLASS A WARRANT EXCHANGE OFFER(cid:10)
On October 23, 2002, the Company entered into a Settlement Agreement(cid:10)
with various parties in order to end a Consent Solicitation and(cid:10)
various litigation initiated by the Company. The Agreement provided,(cid:10)
among other things, an agreement to commence an exchange offer (the(cid:10)
"Exchange Offer") to which holders of the Company's Class A Warrants(cid:10)
which expired on November 30, 2002 (the "Old Warrants") will have the(cid:10)
opportunity to exchange those warrants for new warrants (The "New(cid:10)
Warrants") upon payment to the Company of $.10 per share of common(cid:10)
stock issuable upon the exercise of the old warrants.(cid:10)
The New Warrants will be exercisable for the same number of shares of(cid:10)
common stock as the Old Warrants, have an exercise price of $5.00 per(cid:10)
share, will expire on November 30, 2005 and will not be transferable(cid:10)
except pursuant to operation of law.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY(cid:10)
(NET CAPITAL DEFICIENCY) (CONTINUED)(cid:10)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)(cid:10)
The Exchange Offer must be registered under applicable federal and(cid:10)
state securities laws and will only be made pursuant to an effective(cid:10)
registration statement meeting applicable legal requirements. A(cid:10)
registration statement was filed with the Securities and Exchange(cid:10)
Commission on December 6, 2002, with respect to the Exchange Offer,(cid:10)
but has not yet been declared effective by the SEC.(cid:10)
During the year ending March 31, 2003, the Company has taken a charge(cid:10)
of $242,338 relating to the exchange offer, which represents the fair(cid:10)
value of the new warrants, net of anticipated proceeds, assuming all(cid:10)
Class A Warrants will be exchanged. The per share weighted-average(cid:10)
fair value of each warrant on the date of grant was $1.10 using the(cid:10)
Black-Scholes option pricing model with the following weighted-average(cid:10)
assumptions: no dividend yield; expected volatility of 73.77%;(cid:10)
risk-free interest rate of 2.88%; and expected lives of 3 years.(cid:10)
For the year ended March 31, 2003 the Company incurred legal fees and(cid:10)
other costs amounting to approximately $100,000, in connection with(cid:10)
the Exchange Offer, which has been charged to additional paid-in(cid:10)
capital.(cid:10)
NOTE 11 - STOCK OPTION PLANS(cid:10)
Under various qualified and non-qualified plans, the Company may grant(cid:10)
stock options to officers, selected employees, as well as members of(cid:10)
the board of directors and advisory board members. All options have(cid:10)
generally been granted at a price equal to or greater than the fair(cid:10)
market value of the Company's common stock at the date of grant.(cid:10)
Generally, options are granted with a vesting period of up to three(cid:10)
years and expire ten years from the date of grant. Transactions under(cid:10)
the various stock option and incentive plans for the years indicated(cid:10)
were as follows:(cid:10)
(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 11 - STOCK OPTION PLANS (CONTINUED)(cid:10)
The following table summarizes information about stock options(cid:10)
outstanding at March 31, 2003:(cid:10)
(cid:10)
The per share weighted-average fair value of each option granted(cid:10)
during fiscal 2003, 2002 and 2001 was $1.28, $8.38 and $6.12,(cid:10)
respectively, on the date of grant using the Black-Scholes options(cid:10)
pricing model with the following weighted-average assumptions; no(cid:10)
dividend yield; expected volatility of 75.40%, 76.69% and 87.29% for(cid:10)
fiscal years 2003, 2002 and 2001, respectively; risk-free interest(cid:10)
rate of 4.0% in 2003 and rates ranging from 4.55% to 4.875% in 2002,(cid:10)
and 5.12% to 6.20% in 2001; and expected lives of approximately five(cid:10)
years.(cid:10)
NOTE 12 - MAJOR CUSTOMERS(cid:10)
For the years ended March 31, revenues from major customers are as(cid:10)
follows:(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
Customer A 29.79% 50.19% 84.90%(cid:10)
Customer B -- -- 13.90(cid:10)
Customer C 56.32% -- --(cid:10)
Customer D 13.49% -- --(cid:10)
Customer A represents ERL, a joint-venture until September 30, 2002,(cid:10)
when it became a wholly-owned subsidiary of the Company, as further(cid:10)
discussed in Note 7. Revenues after September 30, 2002, are eliminated(cid:10)
in consolidation.(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2003, 2002 AND 2001(cid:10)
NOTE 13 - SUBSEQUENT EVENTS(cid:10)
On June 3, 2003, the Company's founder and former president and chief(cid:10)
executive officer resigned from all of his positions with the Company.(cid:10)
Following his resignation, the Board of Directors appointed a new(cid:10)
Chairman and Chief Executive Officer. The Company's new president and(cid:10)
CEO shall be paid a base salary of $200,000 per annum and was granted(cid:10)
options to purchase 300,000 shares of the Company's common stock. Such(cid:10)
options vested immediately and have an exercise price equal to $2.01,(cid:10)
the closing price of a share of common stock on June 3, 2003.(cid:10)
On July 3, 2003, the Company entered into an agreement with an(cid:10)
investment banking firm to assist the Company in connection with(cid:10)
potential strategic transactions, including acquisitions. This(cid:10)
agreement provides for a $50,000 non-refundable retainer and(cid:10)
additional compensation aggregating $100,000 if and when certain(cid:10)
evaluations and reports are completed in the future.(cid:10)
As further discussed in Note 9, the Company's former President/CEO(cid:10)
instituted litigation against the Company and one of its directors, on(cid:10)
July 3, 2003, in the Superior Court of New Jersey, for, among other(cid:10)
things, allegedly breaching his Employment Agreement and for(cid:10)
defamation, and claims that he is entitled to receive his salary(cid:10)
through June 6, 2006.(cid:10)
(cid:10)
[LOGO] KPMG(cid:10)
Chartered Accountants(cid:10)
Crown House Mail Address: Telephone (441) 295 5063(cid:10)
4 Par-la-Ville Road P.O. Box HM 906 Fax (441) 295 9132(cid:10)
Hamilton HM 08 Hamilton HM DX Email kpmg@kpmg.bm(cid:10)
Bermuda Bermuda(cid:10)
INDEPENDENT AUDITORS' REPORT(cid:10)
The Board of Directors and Shareholders of(cid:10)
Elite Research, Ltd.(cid:10)
We have audited the accompanying balance sheet of Elite Research, Ltd. as at(cid:10)
March 31, 2002 and the related statement of operations, changes in shareholders'(cid:10)
equity and cash flows for the year ended March 31, 2002. These financial(cid:10)
statements are the responsibility of the company's management. Our(cid:10)
responsibility is to express an opinion on these financial statements based on(cid:10)
our audit.(cid:10)
We conducted our audit in accordance with auditing standards generally accepted(cid:10)
in the United States of America. Those standards require that we plan and(cid:10)
perform the audit to obtain reasonable assurance about whether the financial(cid:10)
statements are free of material misstatement. An audit includes examining, on a(cid:10)
test basis, evidence supporting the amounts and disclosures in the financial(cid:10)
statements. An audit also includes assessing the accounting principles used and(cid:10)
significant estimates made by management, as well as evaluating the overall(cid:10)
financial statement presentation. We believe that our audit provides a(cid:10)
reasonable basis for our opinion.(cid:10)
In our opinion, the financial statements referred to above present fairly, in(cid:10)
all material respects, the financial position of Elite Research, Ltd. as at(cid:10)
March 31, 2002, and the results of its operations and its cash flows for the(cid:10)
year ended March 31, 2002 in conformity with accounting principles generally(cid:10)
accepted in the United States of America.(cid:10)
/s/ KPMG(cid:10)
Chartered Accountants(cid:10)
Hamilton, Bermuda(cid:10)
June 11, 2002(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
FINANCIAL STATEMENTS(cid:10)
September 30, 2002(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Balance Sheets(cid:10)
---------------------------------------------------------------------------------------------------------(cid:10)
SEPTEMBER 30, MARCH 31,(cid:10)
2002 MARCH 31, 2001(cid:10)
(UNAUDITED) 2002 (UNAUDITED)(cid:10)
----------- ---- -----------(cid:10)
(cid:10)
ASSETS(cid:10)
Cash and cash equivalents $ 1,084 $ 63,478 $ ---(cid:10)
----------- ------------- ------------(cid:10)
Total assets $ 1,084 $ 63,478 $ ---(cid:10)
----------- ------------- ------------(cid:10)
LIABILITIES(cid:10)
Deferred capital contributions $ --- $ 62,990 $ ---(cid:10)
Accounts payable to related parties (Note 3) 82,799 544,012 80,931(cid:10)
Accounts payable - other 1,798 --- ---(cid:10)
----------- ------------- ------------(cid:10)
Total liabilities 84,597 607,002 80,931(cid:10)
----------- ------------- ------------(cid:10)
SHAREHOLDERS' EQUITY(cid:10)
Voting common shares (Note 5)(cid:10)
Authorized, issued and fully paid(cid:10)
6,000 shares of par value $1.00 each 6,000 6,000 6,000(cid:10)
Non-voting convertible preferred shares(cid:10)
Authorized, issued and fully paid(cid:10)
6,000 shares of par value $1.00 each (Note 5) 6,000 6,000 6,000(cid:10)
Additional paid-in capital (Note 6) 15,851,742 15,159,049 14,988,000(cid:10)
Retained deficit (15,947,255) (15,714,573) (15,080,931)(cid:10)
----------- ------------- ------------(cid:10)
Total shareholders' equity (83,513) (543,524) (80,931)(cid:10)
----------- ------------- ------------(cid:10)
Total liabilities and shareholders' equity $ 1,084 $ 63,478 $ ---(cid:10)
=========== ============= ============(cid:10)
(cid:10)
See accompanying notes to financial statements(cid:10)
F-33(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Statements of Operations(cid:10)
---------------------------------------------------------------------------------------------------------------(cid:10)
FOR YEAR ENDED(cid:10)
MARCH 31,(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
(UNAUDITED) (AUDITED) (UNAUDITED)(cid:10)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,(cid:10)
SEPTEMBER 30, DATE OF(cid:10)
2002) INCORPORATION, TO(cid:10)
MARCH 31)(cid:10)
(cid:10)
INCOME(cid:10)
Interest income $ --- $ 48 $ ---(cid:10)
-------------- -------------- ---------------(cid:10)
Total income --- 48 ---(cid:10)
-------------- -------------- ---------------(cid:10)
EXPENSES(cid:10)
Research and development (Note 3) 191,667 619,693 80,931(cid:10)
General and administrative 41,015 13,997 ---(cid:10)
License fee (Note 4) --- --- 15,000,000(cid:10)
-------------- -------------- ---------------(cid:10)
Total operating expenses 232,682 633,690 15,080,931(cid:10)
-------------- -------------- ---------------(cid:10)
Net (loss) $ (232,682) $ (633,642) $ (15,080,931)(cid:10)
============== ============== ===============(cid:10)
(cid:10)
See accompanying notes to financial statements(cid:10)
F-34(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Statements of Changes in Shareholders' Equity(cid:10)
-----------------------------------------------------------------------------------------------------------------------(cid:10)
FOR YEAR ENDED(cid:10)
MARCH 31,(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
(UNAUDITED) (AUDITED) (UNAUDITED)(cid:10)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,(cid:10)
SEPTEMBER 30, DATE OF(cid:10)
2002) INCORPORATION, TO(cid:10)
MARCH 31)(cid:10)
(cid:10)
VOTING COMMON SHARES(cid:10)
Balance at beginning of period $ 6,000 $ 6,000 $ ---(cid:10)
Shares issued during the period (Note 5) --- --- 6,000(cid:10)
------------- -------------- -------------(cid:10)
Balance at end of period 6,000 6,000 6,000(cid:10)
------------- -------------- -------------(cid:10)
NON-VOTING CONVERTIBLE PREFERRED(cid:10)
SHARES(cid:10)
Balance at beginning of period 6,000 6,000 ---(cid:10)
Shares issued during the period (Note 5) --- --- 6,000(cid:10)
------------- -------------- -------------(cid:10)
Balance at end of period 6,000 6,000 6,000(cid:10)
------------- -------------- -------------(cid:10)
ADDITIONAL PAID-IN CAPITAL(cid:10)
Balance at beginning of period 15,159,049 14,988,000 ---(cid:10)
Additional paid-in capital during the(cid:10)
period (Note 6) 692,693 171,049 14,988,000(cid:10)
------------- -------------- -------------(cid:10)
Balance at end of period 15,851,742 15,159,049 14,988,000(cid:10)
------------- -------------- -------------(cid:10)
DEFICIT(cid:10)
Balance at beginning of period (15,714,573) (15,080,931) ---(cid:10)
Net loss for the period (232,682) (633,642) (15,080,931)(cid:10)
------------- -------------- -------------(cid:10)
Balance at end of period (15,947,255) (15,714,573) (15,080,931)(cid:10)
------------- -------------- -------------(cid:10)
TOTAL SHAREHOLDERS' DEFICIT $ (83,513) $ (543,524) $ (80,931)(cid:10)
============= =============== =============(cid:10)
(cid:10)
See accompanying notes to financial statements(cid:10)
F-35(cid:10)
(cid:10)
(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Statements of Cash Flows(cid:10)
-----------------------------------------------------------------------------------------------------------------------(cid:10)
FOR YEAR ENDED(cid:10)
MARCH 31,(cid:10)
2003 2002 2001(cid:10)
---- ---- ----(cid:10)
(UNAUDITED) (AUDITED) (UNAUDITED)(cid:10)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,(cid:10)
SEPTEMBER 30, DATE OF(cid:10)
2002) INCORPORATION, TO(cid:10)
MARCH 31)(cid:10)
(cid:10)
CASH FLOWS FROM OPERATING ACTIVITIES(cid:10)
Net (loss) $ (232,682) $ (633,642) $ (15,080,931)(cid:10)
Adjustments to reconcile net income to net(cid:10)
cash provided by operating activities:(cid:10)
Deferred capital contributions (62,990) --- ---(cid:10)
Due to related parties (461,213) 463,081 80,931(cid:10)
Accounts payable - other 1,798 --- ---(cid:10)
------------- -------------- -------------(cid:10)
Cash used in operating activities (755,087) (170,561) (15,000,000)(cid:10)
------------- -------------- -------------(cid:10)
CASH FLOWS FROM FINANCING ACTIVITIES(cid:10)
Additional paid-in capital 692,693 234,039 ---(cid:10)
Proceeds from issuance of common stock --- --- 7,500,000(cid:10)
Proceeds from issuance of non-voting(cid:10)
convertible preferred shares --- --- 7,500,000(cid:10)
------------- -------------- -------------(cid:10)
Cash provided by financing activities 692,693 234,039 15,000,000(cid:10)
------------- -------------- -------------(cid:10)
Net change in cash and cash equivalents (62,394) 63,478 ---(cid:10)
Cash and cash equivalents at beginning of(cid:10)
period 63,478 --- ---(cid:10)
------------- -------------- -------------(cid:10)
Cash and cash equivalents at end of period $ 1,084 $ 63,478 $ ---(cid:10)
============= ============== =============(cid:10)
(cid:10)
See accompanying notes to financial statements(cid:10)
F-36(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Notes to Financial Statements(cid:10)
September 30, 2002(cid:10)
--------------------------------------------------------------------------------(cid:10)
NOTE 1 - GENERAL(cid:10)
Elite Research, Ltd. (the "Company") ("ERL") was incorporated on(cid:10)
October 6, 2000 under the Laws of Bermuda, in order to engage in(cid:10)
research and development activities for the purpose of obtaining Food(cid:10)
and Drug Administration approval, and thereafter, commercially(cid:10)
exploiting generic and new controlled-release pharmaceutical products(cid:10)
using the technologies of the joint venture partners of the Company.(cid:10)
The Company was owned by Elite Pharmaceuticals, Inc. ("Elite") and(cid:10)
Elan International Services, Ltd. ("EIS"), a wholly owned subsidiary(cid:10)
of Elan Corporation plc, holding 80.1% and 19.9% (non-voting shares)(cid:10)
of the shares respectively, until September 30, 2002 when the owners(cid:10)
consummated a termination agreement (the "Termination Agreement")(cid:10)
whereby Elite acquired all of Elan's interest in the Company. As a(cid:10)
result of the Termination Agreement, the joint venture terminated and(cid:10)
Elite owned 100 percent of ERL's stock. Accordingly, ERL became a(cid:10)
wholly owned subsidiary of Elite as of September 30, 2002. All(cid:10)
proprietary development and commercial rights for worldwide markets(cid:10)
for products developed by ERL was acquired by Elite. In exchange for(cid:10)
the assignment, the Company agreed to pay Elan a royalty on certain(cid:10)
revenues that may be realized from the once-a-day Oxycodone product(cid:10)
that has been developed by ERL.(cid:10)
On December 31, 2002, ERL was merged into a new Delaware corporation,(cid:10)
Elite Research, Inc. ("ERI"), a wholly owned subsidiary of Elite. The(cid:10)
merger was accounted for as a tax-free reorganization.(cid:10)
The Company was subject to the terms and conditions of a joint(cid:10)
development and operating agreement between Elite Laboratories, Inc.(cid:10)
("Elite Labs"), a wholly owned subsidiary of Elite, and Elan to(cid:10)
develop products using drug delivery technologies and expertise of(cid:10)
both Elite and Elan. The Company funded its research through capital(cid:10)
contributions from its partners based on the partner's ownership(cid:10)
percentage. The Company subcontracted research and development efforts(cid:10)
to Elite Labs and Elan. Elite Labs provided most of the formulation(cid:10)
and development work. Elite Labs had completed in-vivo (pilot clinical(cid:10)
trial) on the once-a-day Oxycodone product the Company had formulated(cid:10)
and began formulation and development of two additional products as of(cid:10)
September 30, 2002.(cid:10)
The Company was initially capitalized with $15,000,000, which included(cid:10)
the issuance of 6,000 Voting Common Shares and 6,000 Non-Voting(cid:10)
Convertible Preferred Shares. The proceeds of $15,000,000 were used to(cid:10)
pay a licensing fee to Elan, under the terms of a license agreement(cid:10)
entered into between Elan and the Company as fully described in Note(cid:10)
4.(cid:10)
F-37(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Notes to Financial Statements (Continued)(cid:10)
September 30, 2002(cid:10)
--------------------------------------------------------------------------------(cid:10)
NOTE 1 - GENERAL (continued)(cid:10)
As of September 30, 2002, the Company had a deficit of $15,947,255.(cid:10)
The Company was in the research and development stage, and hence was(cid:10)
not yet generating revenue. The Company's shareholders had, by way of(cid:10)
Joint Development and Operating Agreement, agreed to provide(cid:10)
additional funding. As a result of the termination agreement, Elite(cid:10)
Labs will provide all additional funding.(cid:10)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES(cid:10)
BASIS OF PRESENTATION(cid:10)
The financial statements of ERL are presented for the periods during(cid:10)
which it was an unconsolidated subsidiary of Elite Pharmaceuticals,(cid:10)
Inc. As of October 1, 2002, all transactions and results of operations(cid:10)
were included in consolidated financial statements of Elite(cid:10)
Pharmaceuticals, Inc.(cid:10)
CASH AND CASH EQUIVALENTS(cid:10)
The Company considers highly liquid short-term investments purchased(cid:10)
with initial maturities of three months or less to be cash(cid:10)
equivalents.(cid:10)
RESEARCH AND DEVELOPMENT COSTS(cid:10)
Research costs are charged as an expense of the period in which they(cid:10)
are incurred.(cid:10)
REVENUE RECOGNITION(cid:10)
To date, the Company had not generated revenues, however, it expects(cid:10)
that future revenues, if any, will be earned primarily by licensing(cid:10)
certain pharmaceutical products. Such revenues will be recorded as(cid:10)
certain projected goals are attained, as defined in the individual(cid:10)
contract.(cid:10)
Future revenues related to the licensing of certain pharmaceutical(cid:10)
products to the Company's customers, which have been developed by the(cid:10)
Company, will be recognized at the time the customer obtains the legal(cid:10)
right to the use of the product.(cid:10)
USE OF ESTIMATES(cid:10)
The accompanying financial statements are prepared in accordance with(cid:10)
accounting principles generally accepted in the United States of(cid:10)
America which require management to make estimates and assumptions(cid:10)
that affect the reported amounts of assets and liabilities and(cid:10)
disclosures of contingent assets and liabilities at the date of the(cid:10)
financial statements and the reported amounts of revenue and expenses(cid:10)
during the reporting period. Actual results could differ from those(cid:10)
estimates.(cid:10)
F-38(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Notes to Financial Statements (Continued)(cid:10)
September 30, 2002(cid:10)
--------------------------------------------------------------------------------(cid:10)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)(cid:10)
FAIR VALUE OF FINANCIAL INSTRUMENTS(cid:10)
The carrying amounts of cash, accounts payable and accrued expenses(cid:10)
approximate fair value due to the short-term maturity of these items.(cid:10)
RECLASSIFICATIONS(cid:10)
Certain accounts in the prior year financial statements have been(cid:10)
reclassified for comparative purposes to conform with the presentation(cid:10)
in the current year financial statements.(cid:10)
NOTE 3 - RELATED PARTY TRANSACTIONS(cid:10)
For the period April 1, 2002 through September 30, 2002, for the year(cid:10)
ended March 31, 2002 and for the period of October 6, 2000 (date of(cid:10)
incorporation) through March 31, 2001, ERL recognized net losses of(cid:10)
$232,682, $633,642 and $15,080,931, respectively. The net loss for the(cid:10)
period April 1, 2002 through September 30, 2002, (date operations(cid:10)
ceased) included research and development services rendered by Elite(cid:10)
Labs and Elan in the amounts of $187,810 and $3,857, respectively. The(cid:10)
net loss for the year ended March 31, 2002 included research and(cid:10)
development services rendered by Elite Labs and Elan in the amounts of(cid:10)
$600,940 and $18,753, respectively.(cid:10)
The net loss for the period ended March 31, 2001 included a(cid:10)
$15,000,000 payment to Elan for a technology license fee, as well as(cid:10)
$80,931 due to Elite Labs for services rendered to ERL.(cid:10)
As of September 30, 2002, March 31, 2002 and 2001, the Company had(cid:10)
outstanding accounts payable to Elite Labs for research and(cid:10)
development services in the amounts of $82,799, $525,259 and $80,931,(cid:10)
respectively.(cid:10)
As of September 30, 2002, March 31, 2002 and 2001, the Company had(cid:10)
outstanding accounts payable to Elan for research and development(cid:10)
services in the amounts of $798, $18,753 and $0, respectively.(cid:10)
NOTE 4 - LICENSE AGREEMENT(cid:10)
In October 2000, the Company entered into a license agreement with(cid:10)
Elan Corporation, plc ("Elan") whereby Elan licensed certain patents(cid:10)
and intellectual property to the Company in consideration of a(cid:10)
non-refundable license fee of $15 million. The fee was not subject to(cid:10)
future performance obligations of Elan to the Company and was taken as(cid:10)
a charge to operations in the period ended March 31, 2001.(cid:10)
F-39(cid:10)
(cid:10)
ELITE RESEARCH, LTD.(cid:10)
Notes to Financial Statements (Continued)(cid:10)
September 30, 2002(cid:10)
--------------------------------------------------------------------------------(cid:10)
NOTE 5 - NON-VOTING CONVERTIBLE PREFERRED SHARES(cid:10)
Voting common shares, of par value(cid:10)
US $1.00 per share(cid:10)
6,000 shares authorized;(cid:10)
6,000 shares issued and fully paid $ 6,000(cid:10)
Non-voting convertible preferred shares, of(cid:10)
Par value US $1.00 per share(cid:10)
6,000 shares authorized;(cid:10)
6,000 shares issued and fully paid(cid:10)
6,000(cid:10)
-----------(cid:10)
$ 12,000(cid:10)
===========(cid:10)
All of the voting common shares were held by Elite, with the(cid:10)
non-voting convertible preference shares held by both Elite and Elan,(cid:10)
being split 3,612 shares and 2,388 shares respectively.(cid:10)
The Preferred shares were convertible at the option of the holders on(cid:10)
a one-for-one basis into common shares of the Company at any time(cid:10)
after two years from the date of issuance of the preferred stock. The(cid:10)
Preferred shares were non-voting, did not bear a dividend and had a(cid:10)
liquidation preference equal to their original issue price.(cid:10)
NOTE 6 - ADDITIONAL PAID-IN CAPITAL(cid:10)
Certain amounts were provided to fund the operations of the Company as(cid:10)
agreed by the shareholders on a pro rata basis based on their equity(cid:10)
participation. In addition, within three years from the date of(cid:10)
incorporation, the shareholders could provide the Company, on a pro(cid:10)
rata basis in accordance with the shareholders respective percentage(cid:10)
ownership of capital, up to an aggregate maximum of $6,000,000, as(cid:10)
agreed upon by the shareholders, by way of contributed surplus or(cid:10)
loans. During the period ended September 30, 2002 and the year ended(cid:10)
March 31, 2002, the shareholders contributed an additional $629,703(cid:10)
and $234,039, respectively. As further described in Note 1, the(cid:10)
Company was initially capitalized with $15 million. After allocating(cid:10)
$6,000 to each of common and preferred shares, $14,988,000 was(cid:10)
recognized as additional paid-in capital.(cid:10)
NOTE 7 - TAXES(cid:10)
Under current Bermuda law, the Company was not required to pay any(cid:10)
taxes in Bermuda on either income or capital gains. The Company has(cid:10)
received an undertaking from the Minister of Finance in taxation until(cid:10)
the year 2016.(cid:10)
F-40(cid:10)
(cid:10)
(cid:10)
Continue reading text version or see original annual report in PDF
format above