(cid:10)
10-K(cid:10)
1(cid:10)
c32755_10k.txt(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 ACT(cid:10)
OF 1934(cid:10)
FOR THE FISCAL YEAR ENDED - MARCH 31, 2004(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 07647(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 Section(cid:10)
12(b) of the Act: Common Stock - $.01 par value(cid:10)
The Common Stock is listed on the(cid:10)
American Stock Exchange(cid:10)
Securities registered pursuant to Section(cid:10)
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) and (2) has been subject to such filing requirements for(cid:10)
at least the past 90 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 June 3, 2004 was approximately $26,137,608 based upon the(cid:10)
closing price of the registrant's common stock on the American Stock Exchange,(cid:10)
as of June 3, 2004. (For purposes of determining this amount, only directors,(cid:10)
executive officers, and 10% or greater stockholders and their respective(cid:10)
affiliates have been deemed affiliates).(cid:10)
Registrant had 12,104,423 shares of common stock, par value $0.01 per share,(cid:10)
outstanding as of June 1, 2004.(cid:10)
DOCUMENTS INCORPORATED BY REFERENCE(cid:10)
There are no documents incorporated by reference into the Annual Report or any(cid:10)
part of the report.(cid:10)
(cid:10)
FORWARD LOOKING STATEMENTS(cid:10)
THIS ANNUAL REPORT ON FORM 10-K CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE(cid:10)
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH(cid:10)
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND(cid:10)
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF(cid:10)
THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE(cid:10)
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH(cid:10)
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT, STATEMENTS THAT ARE(cid:10)
NOT STATEMENTS OF CURRENT OR HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING(cid:10)
STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "PLAN", "INTEND", "MAY,"(cid:10)
"WILL," "EXPECT," "BELIEVE", "COULD," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR(cid:10)
SIMILAR EXPRESSIONS OR OTHER VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED(cid:10)
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE(cid:10)
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE(cid:10)
DATE HEREOF. EXCEPT AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO(cid:10)
UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,(cid:10)
FUTURE 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....................................................... 21(cid:10)
Item 3. Legal Proceedings................................................ 21(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........................ 27(cid:10)
Item 7A. Quantitative and Qualitative Disclosures(cid:10)
About Market Risk.......................................... 35(cid:10)
Item 8. Financial Statements and Supplementary Data...................... 35(cid:10)
Item 9. Changes in and Disagreements with Accountants(cid:10)
on Accounting and Financial Disclosure..................... 35(cid:10)
Item 9A. Controls and Procedures.......................................... 35(cid:10)
PART III(cid:10)
Item 10. Directors and Executive Officers of the Registrant............... 36(cid:10)
Item 11. Executive Compensation........................................... 40(cid:10)
Item 12. Security Ownership of Certain Beneficial Owners(cid:10)
and Management and Related Stockholder Matters............. 46(cid:10)
Item 13. Certain Relationships and Related Transactions................... 48(cid:10)
Item 14. Principal Accountant Fees and Services........................... 48(cid:10)
PART IV(cid:10)
Item 15. Exhibits, Financial Statement Schedules and Reports(cid:10)
on Form 8-K................................................ 49(cid:10)
Signatures ................................................................. 53(cid:10)
1(cid:10)
(cid:10)
PART I(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)
See "Proposed Acquisition" for possible acquisition of Nostrum(cid:10)
Pharmaceuticals Inc.(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, allergy and infection. The Food and Drug Administration(cid:10)
(FDA) has not yet approved any of our products and, therefore, currently we do(cid:10)
not market 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)
formulations, and (iii) development of new products and the expansion of our(cid:10)
licensing agreements with other pharmaceutical companies, including contract(cid:10)
research and development projects, joint ventures and other collaborations.(cid:10)
In an effort to reduce costs and improve focus and enhance efficiency, we(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 focusing on the development of both branded drug products (which(cid:10)
require new drug applications ("NDA")) and generic drug products (which require(cid:10)
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)
PROPOSED ACQUISITION(cid:10)
Our Board of Directors authorized in August 2003 the negotiation of an(cid:10)
agreement to acquire Nostrum Pharmaceuticals Inc., a privately held corporation(cid:10)
engaged in the development of drug delivery products and systems ("Nostrum"), by(cid:10)
means of a merger with our wholly-owned subsidiary.(cid:10)
If the merger is effected on the terms as initially proposed, the(cid:10)
outstanding shares of Nostrum will be converted into (i) shares of our Common(cid:10)
Stock which will represent in the aggregate 75% of the shares of our Common(cid:10)
Stock to be outstanding immediately after such merger and (ii) options to(cid:10)
purchase a substantial number of additional shares of our Common Stock(cid:10)
exercisable upon satisfaction of certain conditions. No assurance can be given(cid:10)
that the merger will be consummated or if consummated will be effected on(cid:10)
materially the same terms. If an agreement is executed, it is to contain several(cid:10)
conditions to the consummation of the merger, including approval by our(cid:10)
stockholders and that the Company will have immediately prior to effectiveness(cid:10)
of the merger liquid assets of at least $8,000,000. No assurance can be given(cid:10)
that the Agreement will be executed or if executed that the foregoing terms will(cid:10)
not be materially changed adversely to the Company or that it will be approved(cid:10)
by the Company's stockholders.(cid:10)
Nostrum is a specialty pharmaceutical company engaged in the formulation(cid:10)
and commercialization of controlled-release orally-administered generic drugs(cid:10)
utilizing Nostrum's proprietary drug delivery technologies.(cid:10)
RESEARCH AND DEVELOPMENT(cid:10)
During each of the last three fiscal years, we have focused on research(cid:10)
and development activities. We spent $ 2,075,074 in the fiscal year ended March(cid:10)
31, 2004, $2,013,579 in the fiscal year ended March 31, 2003 and $1,609,108 in(cid:10)
the fiscal year ended March 31, 2002 on 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)
- 4 -(cid:10)
(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 ("N/A" means not applicable because there is no branded(cid:10)
product on the market).(cid:10)
(cid:10)
(cid:10)
--------------------------------------------------------------------------------------------------------------------(cid:10)
PRODUCT BRANDED PRODUCT(A) APPROX. U.S. APPROX. NDA/ INDICATION(cid:10)
BRAND SALES GROWTH ANDA(cid:10)
(2003)(cid:10)
$MM(B) (%)(C)(cid:10)
--------------------------------------------------------------------------------------------------------------------(cid:10)
(cid:10)
1 Oxycodone CR OxyContin(R) $1,800+ 10% 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) $80+ -30% ANDA Cardiovascular(cid:10)
Once a day(cid:10)
--------------------------------------------------------------------------------------------------------------------(cid:10)
4 Undisclosed product N/A N/A N/A Undisclosed Allergy(cid:10)
with a partner(cid:10)
--------------------------------------------------------------------------------------------------------------------(cid:10)
5 Undisclosed product with N/A N/A N/A Undisclosed Allergy(cid:10)
partner(cid:10)
--------------------------------------------------------------------------------------------------------------------(cid:10)
6 Undisclosed Undisclosed $150+ 10% ANDA Infection(cid:10)
Twice a day(cid:10)
--------------------------------------------------------------------------------------------------------------------(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 historical growth rate of sales of our(cid:10)
competitor's product 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"). Accordingly, we anticipate(cid:10)
that the development timetable for the products for which such NDA filings are(cid:10)
made would be shorter and less expensive. Completion of development of products(cid:10)
by us depends on(cid:10)
- 5 -(cid:10)
(cid:10)
a number of factors, however, and there can be no assurance that specific time(cid:10)
frames will be met during the development process or that the development of any(cid:10)
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. Our(cid:10)
prelaunch activity indicates that the final activities are being conducted prior(cid:10)
to the product launch.(cid:10)
-------------------------------------------------------------------------(cid:10)
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA(cid:10)
-------------------------------------------------------------------------(cid:10)
Preclinical 1 --(cid:10)
-------------------------------------------------------------------------(cid:10)
Preclinical 1 Undisclosed(cid:10)
-------------------------------------------------------------------------(cid:10)
Pilot Phase I study 1 NDA(cid:10)
-------------------------------------------------------------------------(cid:10)
Pilot bioequivalence study 2 ANDA(cid:10)
-------------------------------------------------------------------------(cid:10)
Prelaunch 1 Undisclosed(cid:10)
-------------------------------------------------------------------------(cid:10)
MANUFACTURING AND DEVELOPMENT CONTRACTS(cid:10)
In September 1999 Elite entered into an agreement with an undisclosed(cid:10)
partner to co-develop a chrono diltiazem product. A pilot pharmacokinetic study(cid:10)
has been conducted and we and our partner are seeking a license for the product(cid:10)
prior to performing further clinical studies.(cid:10)
In June 2001, we entered into two development contracts with an(cid:10)
undisclosed 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. We have manufactured validation batches for one of the products and are(cid:10)
awaiting its launch.(cid:10)
The payments under both agreements for the year ended March 31, 2004 were(cid:10)
not material.(cid:10)
In May 2004 we entered into an agreement with Purdue Pharma LP granting(cid:10)
Purdue the exclusive right to evaluate certain of our abuse resistance(cid:10)
technology and an exclusive option to negotiate a license to develop and(cid:10)
commercialize oxycodone products under the technology.(cid:10)
JOINT VENTURE WITH ELAN(cid:10)
In October 2000, we entered into a joint venture with Elan to develop(cid:10)
products using drug delivery technologies and expertise of both companies. This(cid:10)
joint venture,(cid:10)
- 6 -(cid:10)
(cid:10)
ERL, was initially owned 80.1% by us and 19.9% by Elan. ERL funded its research(cid:10)
through capital contributions from its partners based on the partners'(cid:10)
respective ownership percentage.(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. Currently there is no once-a-day formulation(cid:10)
for this compound.(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 worldwide markets for these two products developed by ERL.(cid:10)
We will not have to pay Elan royalties on revenues that may be realized from(cid:10)
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)
PATENTS(cid:10)
We have secured five United States patents and have pending applications(cid:10)
for five United States patents and seven foreign patents. Two of the United(cid:10)
States issued patents have been assigned for a fee to Colgene Corporation for(cid:10)
the pulsed release delivery of methylphenidate.(cid:10)
The pending patent applications relate to four different control release(cid:10)
pharmaceutical products on which we are working. Included among these patent(cid:10)
- 7 -(cid:10)
(cid:10)
applications are applications for U.S. patents relating to formulations for(cid:10)
delayed and sustained release of drugs. In addition, an application for a U.S.(cid:10)
patent for a narcotic antagonist product that we are developing to be used with(cid:10)
Oxycodone and other narcotics to minimize the abuse potential for the narcotics(cid:10)
was filed. We intend to apply for patents for other products in the future;(cid:10)
however, there can be no assurance that any of the pending applications or other(cid:10)
application which we may file will be granted.(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)
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)
- 8 -(cid:10)
(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. However,(cid:10)
since we currently plan to license our products to marketing partners and not to(cid:10)
sell under our brand name, we do not currently intend to register or maintain(cid:10)
any trademarks.(cid:10)
GOVERNMENT REGULATION AND APPROVAL(cid:10)
The design, development and marketing of pharmaceutical compounds, on(cid:10)
which 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 not clinical efficacy and safety(cid:10)
studies, which are generally more expensive and 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(cid:10)
- 9 -(cid:10)
(cid:10)
not require certain studies that would otherwise be necessary; accordingly, the(cid:10)
development timetable would be shorter. While the FDA is required to review(cid:10)
applications within a certain timeframe in the review process, the FDA(cid:10)
frequently requests that additional information be submitted. The effect of such(cid:10)
request and subsequent submission can significantly extend the time for the NDA(cid:10)
review process. Until an NDA is actually approved, there can be no assurance(cid:10)
that the information requested and submitted will be considered adequate by the(cid:10)
FDA to justify approval. The packaging and labeling of our developed products(cid:10)
are also subject to FDA regulation. It is impossible to anticipate the amount of(cid:10)
time that will be 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 manufacturing on a commercial basis for distribution of(cid:10)
products, it will be required to operate its facilities in accordance with GMP(cid:10)
regulations. If we hire another company to perform contract manufacturing for(cid:10)
us, we must ensure 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)
- 10 -(cid:10)
(cid:10)
COMPLIANCE WITH ENVIRONMENTAL LAWS(cid:10)
We are subject to comprehensive federal, state and local environmental(cid:10)
laws and regulations that govern, among other things, air polluting emissions,(cid:10)
waste water discharges, solid and hazardous waste disposal, and the remediation(cid:10)
of contamination associated with current or past generation handling and(cid:10)
disposal activities, including the past practices of corporations as to which we(cid:10)
are the successor. We do not expect that compliance with such environmental laws(cid:10)
will 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 and development companies are(cid:10)
beginning 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 these companies have greater financial and other resources as well as more(cid:10)
experience than we do in commercializing pharmaceutical products. Certain(cid:10)
companies have a track record of success in developing controlled-release drugs.(cid:10)
Significant among these are Alpharma, Inc., Andrx Corporation, Elan Corporation(cid:10)
Plc, Biovail Corporation, Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V(cid:10)
Pharmaceutical Company, Penwest Pharmaceuticals Company and Skyepharma Plc. Each(cid:10)
of these companies has developed expertise in certain types of drug delivery(cid:10)
systems, although such expertise does not carry over to developing a(cid:10)
controlled-release version of all drugs. Such companies may develop new drug(cid:10)
formulations and products or may improve existing drug formulations and products(cid:10)
more efficiently than we can. In addition, almost all of our competitors have(cid:10)
vastly greater resources than we do. While our product development capabilities(cid:10)
and patent protection may help us to maintain our market position in the field(cid:10)
of advanced drug delivery, there can be no assurance that others will not be(cid:10)
able to develop such capabilities or alternative technologies outside the scope(cid:10)
of our patents, if any, or that even if patent protection is obtained, such(cid:10)
patents will not be successfully challenged in the future.(cid:10)
- 11 -(cid:10)
(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. If our contracts with these customers terminate or(cid:10)
expire, we will lose substantially all of our revenues. We are constantly(cid:10)
working to develop new relationships with existing or new customers, but despite(cid:10)
these efforts we may not, at the time that any of our current contracts expire,(cid:10)
have other contracts in place generating similar revenue.(cid:10)
EMPLOYEES(cid:10)
As of June 25, 2004, we had 15 full-time employees and three 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" ANNUAL AUDIT REPORT.(cid:10)
We reported net losses of $6,514,217, $4,061,422, $1,774,527 and(cid:10)
$13,964,981 for the fiscal years ended March 31, 2004, 2003, 2002 and 2001,(cid:10)
respectively. At March 31, 2004, we had an accumulated deficit of approximately(cid:10)
$35.1 million, consolidated assets of approximately $7.9 million, stockholders'(cid:10)
equity of approximately(cid:10)
- 12 -(cid:10)
(cid:10)
$4.0 million, and working capital of approximately $1.3 million. Our products(cid:10)
are in the development and early deployment stage and have not generated any(cid:10)
significant revenue to date. Our independent auditors have issued a "going(cid:10)
concern" audit report for our financial statements for each of the fiscal years(cid:10)
ended March 31, 2004 and 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(cid:10)
revenues;(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 $6,514,217, $4,061,422, $1,774,527 and $13,964,981 for the years ended(cid:10)
March 31, 2004, 2003, 2002 and 2001, respectively. We expect to realize(cid:10)
significant losses for the current year of operation. We expect to continue to(cid:10)
incur losses until we are able to generate sufficient revenues to support our(cid:10)
operations and offset operating costs.(cid:10)
- 13 -(cid:10)
(cid:10)
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE(cid:10)
2003 ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT(cid:10)
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)
Under the settlement of a litigation initiated by Dr. Mehta in July 2003(cid:10)
for alleged breach of his employment agreement we paid Dr. Mehta $400,000 and(cid:10)
certain expense reimbursements, and the Company received a short term option for(cid:10)
it or its designees to acquire all of the shares of Common Stock owned by Dr.(cid:10)
Mehta and his affiliate at $2.00 per share. As part of the settlement the(cid:10)
Company also extended the expiration date of options to purchase 770,000 shares(cid:10)
of Common Stock held by Dr. Mehta and he relinquished any rights to the(cid:10)
Company's intellectual property and agreed to certain non-disclosure and(cid:10)
non-competition covenants. The Company also provided him with certain(cid:10)
"piggyback" registration rights with respect to the 770,000 shares issuable upon(cid:10)
exercise of the foregoing options granted by the Company.(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 and on which we are devoting substantial attention, we have had one(cid:10)
product in prelaunch state, one product in pilot Phase I study, one product in(cid:10)
bioequivalence stage and two additional products 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 an(cid:10)
ANDA with the FDA, and successful completion of pivotal clinical trials is(cid:10)
required for us to file a NDA with the FDA. ANDAs are filed with respect to(cid:10)
generic versions of existing FDA approved products while NDAs 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)
- 14 -(cid:10)
(cid:10)
We completed a private placement in December 2003 of 1,645,000 shares of(cid:10)
our common stock yielding gross proceeds of $3,290,000 before commissions and(cid:10)
expenses. We anticipate, based on our assumptions relating to our operations,(cid:10)
and assuming the consummation of a financing and refinancing of equipment(cid:10)
purchases currently being negotiated and consummation of a private placement of(cid:10)
shares of our common stock which is the subject of a non-binding agreement in(cid:10)
principle with a broker-dealer, that we have sufficient capital to satisfy our(cid:10)
contemplated cash requirements through March 31, 2005. After that time, we may(cid:10)
require additional financing. In particular, we expect to make substantial(cid:10)
expenditures as we further develop and seek to commercialize our products. We(cid:10)
also expect that our rate of spending will accelerate as the result of increased(cid:10)
costs and expenses associated with seeking regulatory approval and(cid:10)
commercialization of products now in development. One of the conditions to(cid:10)
consummation of a proposed acquisition (see "Proposed Acquisition") as currently(cid:10)
proposed is that we have liquid assets of approximately $8,000,000. We have no(cid:10)
current arrangements; however, (i) we are currently negotiating an equipment(cid:10)
purchase financing agreement, which we anticipate closing in the reasonably(cid:10)
forseeable future, (ii) we have entered into a non-binding agreement in(cid:10)
principle with a broker-dealer to effect a private placement of shares of our(cid:10)
Common Stock and (iii) there is the potential exercise of options and warrants(cid:10)
that are currently outstanding. We have no way of knowing whether any of the(cid:10)
options or warrants will be exercised. We do not currently have commitments for(cid:10)
other financing, and so do not know whether additional financing would be(cid:10)
available to us on favorable terms, or at all. Our inability to obtain(cid:10)
additional financing when needed would impair our ability to continue our(cid:10)
business and to consummate the proposed acquisition on the terms proposed. If(cid:10)
any future financing involves the sale of our securities, our then-existing(cid:10)
stockholders' equity could be substantially diluted. On the other hand, if we(cid:10)
incurred debt, we would be subject to risks associated with indebtedness,(cid:10)
including the risk that interest rates might fluctuate and cash flow would be(cid:10)
insufficient to pay principal and interest on such indebtedness. If our plans(cid:10)
change, or our assumptions change or prove to be inaccurate, or our cash flow(cid:10)
proves to be insufficient to fund our operations due to unanticipated expenses(cid:10)
or problems, we would be required to seek additional financing sooner than(cid:10)
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(cid:10)
- 15 -(cid:10)
(cid:10)
issued to others, we would be prohibited from manufacturing or selling such(cid:10)
products and we could be required to pay substantial damages.(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)
We are not engaged in any litigation, nor contemplating any, with regard(cid:10)
to a claim that someone has infringed one of our patents, revealed any of our(cid:10)
trade secrets, or otherwise misused our confidential information.(cid:10)
See also the risk under the heading "OUR FOUNDER AND FORMER PRESIDENT AND(cid:10)
CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE 2003 ALL OF HIS POSITIONS WITH ELITE,(cid:10)
WHICH 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)
- 16 -(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 or are 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 WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN(cid:10)
ATTRACTING QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE(cid:10)
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 HAVE BEEN DEPENDENT ON CONTRACTS WITH A FEW MAJOR CUSTOMERS FOR SUBSTANTIALLY(cid:10)
ALL OF OUR REVENUES, AND IF THOSE CONTRACTS TERMINATE OR EXPIRE, WE WILL BE(cid:10)
WITHOUT THE STREAMS OF REVENUE THAT THEY HAVE REPRESENTED, UNLESS WE ARE ABLE TO(cid:10)
NEGOTIATE OTHER CONTRACTS WITH OTHER CUSTOMERS THAT GENERATE SIMILAR REVENUES.(cid:10)
Each year we had some customers that accounted for a large percentage of(cid:10)
our sales. If our contracts with these customers terminate or expire, we will(cid:10)
lose substantially all of our revenues. As a result of inadequate funds to(cid:10)
conduct research and development we were unable to generate material revenues(cid:10)
under existing contracts for the year ended March 31, 2004, we had only $258,250(cid:10)
of revenues, of which $108,250 were research and development fees earned in(cid:10)
conjunction with our distinct development, license and manufacture agreements.(cid:10)
There can be no assurance that at the time that any of our current contracts(cid:10)
expire, other contracts will be in place generating similar revenue.(cid:10)
- 17 -(cid:10)
(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)
The design, development and manufacture of our products involve an(cid:10)
inherent risk of product liability claims. We have procured product liability(cid:10)
insurance having a maximum limit of $1,000,000; however, a successful claim(cid:10)
against us in excess of the policy limits could be very expensive to us,(cid:10)
damaging our financial position. Our insurance coverage may be materially below(cid:10)
the coverage maintained by many of the other companies engaged in similar(cid:10)
activities. To the best of our knowledge, no product liability claim has been(cid:10)
made against us as of May 31, 2004.(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. For the twelve months(cid:10)
ended March 31, 2004, the closing sale price on the American Stock Exchange of(cid:10)
our common stock fluctuated from a high of $3.80 per share to a low of $1.34 per(cid:10)
share. The per share price of our Common Stock may not remain at or exceed(cid:10)
current levels. The market price for our Common Stock, an and for the stock of(cid:10)
pharmaceutical companies generally, has been highly volatile. The market price(cid:10)
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(cid:10)
by 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(cid:10)
drug 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)
- 18 -(cid:10)
(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 AND MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.(cid:10)
As of June 22, 2004, there were 25,000,000 shares of our Common Stock(cid:10)
authorized of which 12,104,423 shares of our Common Stock were issued and(cid:10)
outstanding. In addition, as of that date there were 5,071,289 shares eligible(cid:10)
for issuance upon exercise of currently outstanding options and warrants,(cid:10)
although options for 790,000 of those shares of stock had not yet vested. If(cid:10)
every warrant and option holder exercised his or her rights, once all the(cid:10)
currently unvested options vested, there would be 17,175,712 shares of Common(cid:10)
Stock outstanding. An amendment to our Certificate of Incorporation which would(cid:10)
increase the authorized shares of capital stock from 25,000,000 shares of Common(cid:10)
Stock to 65,000,000 shares of Common Stock and 5,000,000 shares of Preferred(cid:10)
Stock is being considered by our stockholders for approval at the adjourned(cid:10)
Annual Meeting of Stockholders scheduled to be held on July 19, 2004.(cid:10)
Currently, more than 11,030,000 outstanding shares are eligible for resale(cid:10)
and 150,000 shares are registered for resale upon exercise of certain(cid:10)
outstanding warrants and options. We are unable to estimate the amount, timing(cid:10)
or nature of future sales of outstanding Common Stock. Sales of substantial(cid:10)
amounts of the Common Stock in the public market by these holders or perceptions(cid:10)
that such sales may take place may lower the Common Stock's market price.(cid:10)
The authorized but unissued shares of the Company's Common Stock or if the(cid:10)
proposed amendment to our Certificate of Incorporation is approved by(cid:10)
stockholders the issuance of one or more series of Preferred Shares could be(cid:10)
used to make a change of control of the Company more difficult and expensive.(cid:10)
Under certain circumstances, such shares could be used to create impediments to(cid:10)
or frustrate persons seeking to cause a takeover or to gain control of the(cid:10)
Company. Such shares could be sold to purchasers who might side with the Board(cid:10)
in opposing a takeover bid that the Board determines not to be in the best(cid:10)
interests of its stockholders. The Amendment, if approved, might also have the(cid:10)
effect of discouraging an attempt by another person or entity, through the(cid:10)
acquisition of a substantial number of shares of the Company's Common Stock to(cid:10)
acquire control of the Company with a view to consummating a merger, sale of all(cid:10)
or part of the Company's assets, or a similar transaction, since the issuance of(cid:10)
new shares could be used to dilute the stock ownership of such person or entity.(cid:10)
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL(cid:10)
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK, THE ABILITY OF OUR(cid:10)
STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.(cid:10)
- 19 -(cid:10)
(cid:10)
The SEC has adopted regulations that generally define a "penny stock" to(cid:10)
be 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, tour Common Stock will be considered a penny stock. As(cid:10)
such the market liquidity for our 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(cid:10)
stocks has suffered in recent years from patterns of fraud and abuse. Such(cid:10)
patterns include:(cid:10)
o Control of the market for the security by one or a few(cid:10)
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(cid:10)
selling 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(cid:10)
and causes investors to suffer loss.(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(cid:10)
with a 15% shareholder within three years of the date such shareholder acquired(cid:10)
15%, unless the merger meets one of several exceptions. The exceptions include,(cid:10)
for example, approval by the holders of two-thirds of the outstanding shares(cid:10)
(not counting the 15%(cid:10)
- 20 -(cid:10)
(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)
ITEM 2. PROPERTIES(cid:10)
Our facility, which we own, is located at 165 Ludlow Avenue, Northvale,(cid:10)
New Jersey, and contains approximately 20,000 square feet of floor space. This(cid:10)
real property and the improvements thereon are encumbered by a mortgage in favor(cid:10)
of 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(cid:10)
time to time.(cid:10)
We had an employment agreement ("Employment Agreement") with our former(cid:10)
President and Chief Executive Officer, Dr. Atul M. Mehta.(cid:10)
On June 3, 2003, Dr. Mehta resigned from all positions, including as a(cid:10)
director, that he held with us, while reserving his rights under his Employment(cid:10)
Agreement and under common law. On July 3, 2003, Dr. Mehta instituted litigation(cid:10)
against the Company and one of our directors, Mr. Moore, in the Superior Court(cid:10)
of New Jersey for, among other things, allegedly breaching his Employment(cid:10)
Agreement and for defamation, and claims that he is entitled to receive his(cid:10)
salary through June 6, 2006. His salary would total approximately $1,000,000(cid:10)
through June 6, 2006.(cid:10)
Prior to Dr. Mehta's resignation, a majority of the members of the(cid:10)
Company's Board of Directors had notified Dr. Mehta that they believed that(cid:10)
sufficient grounds existed for the termination of his employment for "severe(cid:10)
cause" pursuant to his Employment Agreement. We filed counterclaims against Dr.(cid:10)
Mehta and a motion to dismiss Mehta's claims and, as part of that motion, sought(cid:10)
to compel Mehta to assign and transfer to the Company all patents in Mehta's(cid:10)
name which were developed during his employment with us. Mr. Moore's motion to(cid:10)
dismiss Mehta's claim against him individually was granted.(cid:10)
- 21 -(cid:10)
(cid:10)
In November 2003, the parties settled the action. In April 2004, the(cid:10)
parties closed upon the settlement. Under the settlement the Company paid to(cid:10)
Mehta $400,000 and certain expense reimbursements and the Company received a(cid:10)
short term option in favor of the Company or its designees to acquire all of(cid:10)
Mehta's shares of common stock of the Company (including those held by his(cid:10)
affiliates) at $2.00 per share. The Company paid $100,000 into escrow which(cid:10)
shall be released to Mehta if the option to purchase the shares of common stock(cid:10)
held by Mehta and his affiliates is not exercised within a specified time. As(cid:10)
part of the settlement, the Company extended expiration dates of options to(cid:10)
purchase 770,000 shares held by Mehta including options with respect to 70,000(cid:10)
shares which had expired and Mehta relinquished any rights to the Company's(cid:10)
intellectual property, and Mehta agreed to certain non-disclosure and(cid:10)
non-competition covenants. Under the settlement the Company also provided Mehta(cid:10)
with certain "piggyback" registration rights with respect to shares not sold(cid:10)
pursuant to the options granted to him by the Company.(cid:10)
We are not currently a party to any material legal proceedings.(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(cid:10)
quarter of our fiscal year ended March 31, 2004. However at the Annual Meeting(cid:10)
of Stockholders held on June 22, 2004 the stockholders (i) elected as its four(cid:10)
Directors Messrs. Bernard Beck, Harmon Aronson, John A. Moore and Eric L.(cid:10)
Sichel; (ii) approved our 2004 Stock Option Plan; (iii) ratified the actions of(cid:10)
the Board of Director's amending certain outstanding options and warrants and(cid:10)
(iv) approved our sale of an aggregate of 70,000 shares of Common Stock to a(cid:10)
Director and an affiliate of a Director. The Meeting was adjourned to July 19,(cid:10)
2004 for additional time for the stockholders to consider the proposal to(cid:10)
approve the Amendment to Article Fourth of the Certificate of Incorporation to(cid:10)
increase the authorized capital stock from 25,000,000 shares of Common Stock,(cid:10)
par value $.01 per share, to 65,000,000 shares of Common Stock, par value $.01(cid:10)
per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share.(cid:10)
- 22 -(cid:10)
(cid:10)
PART II(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". The following table shows, for the periods indicated, the high and low(cid:10)
sales prices per share of our common stock as reported by the American Stock(cid:10)
Exchange.(cid:10)
COMMON STOCK(cid:10)
QUARTER ENDED HIGH LOW(cid:10)
FISCAL YEAR(cid:10)
ENDING MARCH 31, 2004:(cid:10)
March 31, 2004........................................ $3.80 $2.40(cid:10)
December 30, 2003..................................... $3.30 $2.70(cid:10)
September 30, 2003.................................... $3.49 $2.05(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 June 21, 2004, the last reported sale price of our common stock, as(cid:10)
reported by the American Stock Exchange, was $2.34 per share.(cid:10)
As of June 23, 2004, there were approximately 130 holders of record and(cid:10)
approximately 1600 beneficial owners of our common stock. We are informed and(cid:10)
believe that as of April 20, 2004, Cede & Co. held 7,069,228 shares of our(cid:10)
common stock as nominee for Depository Trust Company, 55 Water Street, New York,(cid:10)
New York 10004. It is our understanding that Cede & Co. and Depository Trust(cid:10)
Company both disclaim any beneficial ownership therein and that such shares are(cid:10)
held for the account of numerous other persons.(cid:10)
- 23 -(cid:10)
(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)
We issued in 2003 nontransferable Class C Warrants to the record holders(cid:10)
of our Class A Warrants on November 30,2002, their expiration date, on a(cid:10)
one-for-one basis. The Class C Warrants are exercisable for the same number of(cid:10)
shares of Common Stock as the Class A Warrants, have an exercise price of $5.00(cid:10)
per share (subject to adjustment in certain circumstances), expire November 30,(cid:10)
2005, and have substantially all of the same terms and conditions as the Class A(cid:10)
Warrants. The issuance was exempt from registration under the Securities Act of(cid:10)
1933, as amended (the "Act") by virtue of the provisions of Section 3(a)(9).(cid:10)
On February 6, 2004 the Board of Directors authorized the extension of the(cid:10)
expiration date from June 30, 2004 to November 30, 2005 of the outstanding Class(cid:10)
B Warrants to purchase an aggregate of 681,002 shares of our Common Stock at a(cid:10)
price of $5.00 per share. The Class B Warrants were originally issued as part of(cid:10)
units of shares of Common Stock and Class B Warrants in a private placement to a(cid:10)
group of investors. Included among the holders of the Class B Warrants are(cid:10)
Richard A. Brown, then a Director, who holds, along with his son and an(cid:10)
affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge Ventures(cid:10)
Inc., a consultant to the Company since December, 2003, which holds 25,000 Class(cid:10)
B Warrants.(cid:10)
In December 2003, Elite completed a placement to a group of investors of(cid:10)
1,645,000 shares of Common Stock at a price of $2.00 per share for aggregate(cid:10)
gross proceeds of $3,290,000. We paid Montauk Financial Group Inc., the(cid:10)
Placement Agent cash commissions of $72,000 and granted the Placement Agent and(cid:10)
its associates five year warrants to purchase an aggregate of 50,000 shares of(cid:10)
our Common Stock at a price of $2.00 per share. The issuance of the shares and(cid:10)
warrants was exempt from registration under the Act by virtue of the provisions(cid:10)
of Section 4(2).(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, 2004:(cid:10)
- 24 -(cid:10)
(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 approved 1,133,300 $2.68 70,700(cid:10)
by security holders of a(cid:10)
subsidiary(cid:10)
Equity compensation plans not 1,283,750 $4.63 N/A(cid:10)
approved by security holders(cid:10)
--------- ---------(cid:10)
Total 2,417,050 $3.70 70,700(cid:10)
(cid:10)
-----------(cid:10)
* Exclusive of Class B and Class C Warrants.(cid:10)
Our stockholders approved on June 22,2004 the adoption by the Board of(cid:10)
Directors of the 2004 Stock Option Plan which provides that 1,500,000 shares of(cid:10)
our Common Stock are subject to options to be granted under the Plan. If options(cid:10)
granted under the Plan lapse without being exercised, other options may be(cid:10)
granted covering the shares not purchased under such lapsed options. Options may(cid:10)
be granted pursuant to the Plan to employees, officers, Directors of and(cid:10)
consultants to Elite. The Plan permits the Company to grant both incentive stock(cid:10)
options ("Incentive Stock Options" or "ISOs") within the meaning of Section 422(cid:10)
of the Code, and other options which do not qualify as Incentive Stock Options(cid:10)
(the "Non-Qualified Options").(cid:10)
The aggregate number of shares of Common Stock reserved for issuance under(cid:10)
the Plan is 1,500,000, of which incentive stock options with respect to 123,300(cid:10)
shares with an exercise price of $2.34 per share were granted on June 22, 2004(cid:10)
to employee holders of outstanding options previously granted by the Company(cid:10)
having on the date of the grant a higher exercise price; such grants subject to(cid:10)
the cancellation of the previously granted options. To the extent that stock(cid:10)
options previously granted are not surrendered for cancellation then options(cid:10)
exercisable for that same number of shares of Common Stock will be available for(cid:10)
grant under the Plan. Such grants may be deemed repricing of the outstanding(cid:10)
options and will result in charges to earnings of the Company equal to the(cid:10)
difference between (i) the fair value of the vested portion of the new options(cid:10)
granted, utilizing the Black-Scholes options pricing model on each grant date(cid:10)
and (ii) the charges to earnings previously made as a result of the grants of(cid:10)
the options being replaced, which will have a dilutive effect on the earnings(cid:10)
per share and, as a result, will likely have an adverse effect on the market(cid:10)
price of the Common Stock of the Company.(cid:10)
Options to purchase 30,000 shares of Common Stock were granted on June 22,(cid:10)
2004 to each of the Company's four Directors under the Pan exercisable at $2.34(cid:10)
per share.(cid:10)
- 25 -(cid:10)
(cid:10)
Unless earlier terminated by the Board of Directors, the Plan (but not(cid:10)
outstanding options) terminates on March 1, 2014, after which no further awards(cid:10)
may be granted under the Plan. The Plan is administered by the full Board of(cid:10)
Directors or, at the Board's discretion, by a committee of the Board consisting(cid:10)
of at least two persons who are "disinterested persons" defined under Rule(cid:10)
16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the(cid:10)
"Committee").(cid:10)
Recipients of options under the Plan ("Optionees") are selected by the(cid:10)
Board or the Committee. The Board or Committee determines the terms of each(cid:10)
option grant including (1) the purchase price of shares subject to options, (2)(cid:10)
the dates on which options become exercisable and (3) the expiration date of(cid:10)
each option (which may not exceed ten years from the date of grant). The minimum(cid:10)
per share purchase price of options granted under the Plan for Incentive Stock(cid:10)
Options is the fair market value (as defined in the Plan) or for Nonqualified(cid:10)
Options is 85% of Fair Market Value of one share of the Common Stock on the date(cid:10)
the option is granted.(cid:10)
Optionees will have no voting, dividend or other rights as stockholders(cid:10)
with respect to shares of Common Stock covered by options prior to becoming the(cid:10)
holders of record of such shares. The purchase price upon the exercise of(cid:10)
options may be paid in cash, by certified bank or cashier's check, by tendering(cid:10)
stock held by the Optionee, as well as by cashless exercise either through the(cid:10)
surrender of other shares subject to the option or through a broker. The total(cid:10)
number of shares of Common Stock available under the Plan, and the number of(cid:10)
shares and per share exercise price under outstanding options will be(cid:10)
appropriately adjusted in the event of any stock dividend, reorganization,(cid:10)
merger or recapitalization of the Company or similar corporate event.(cid:10)
The Board of Directors may at any time terminate the Plan or from time to(cid:10)
time make such modifications or amendments to the Plan as it may deem advisable(cid:10)
and the Board or Committee may adjust, reduce, cancel and regrant an unexercised(cid:10)
option if the fair market value declines below the exercise price except as may(cid:10)
be required by any national stock exchange or national market association on(cid:10)
which the Common Stock is then listed. In no event may the Board, without the(cid:10)
approval of stockholders, amend the Plan to increase the maximum number of(cid:10)
shares of Common Stock for which options may be granted under the Plan or change(cid:10)
the class of persons eligible to receive options under the Plan.(cid:10)
Subject to limitations set forth in the Plan, the terms of option(cid:10)
agreements will be determined by the Board or Committee, and need not be uniform(cid:10)
among Optionees.(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(cid:10)
- 26 -(cid:10)
(cid:10)
indicated in their report included herein. The selected financial data provided(cid:10)
below is not necessarily indicative of our future results of operations or(cid:10)
financial performance.(cid:10)
(cid:10)
(cid:10)
2004 2003 2002 2001 2000(cid:10)
---- ---- ---- ---- ----(cid:10)
(cid:10)
Net Revenues $ 258,250 $ 630,310 $ 1,197,507 $ 95,246 $ 10,315(cid:10)
Net (loss) $ (6,514,217) $ (4,061,422) $ (1,774,527) $(13,964,981) $ (2,976,392)(cid:10)
Net (loss) per $ (0.58) $ (0.40) $ (0.19) $ (1.53) $ (0.35)(cid:10)
common share(cid:10)
Total Assets $ 7,853,434 $ 8,696,222 $ 12,724,498 $ 12,350,301 $ 9,162,383(cid:10)
Long-term obligations $ 2,495,000 $ 2,720,000 $ 3,788,148 $ 2,765,000 $ 2,885,000(cid:10)
Weighted average 11,168,618 10,069,991 9,561,299 9,135,369 8,287,648(cid:10)
number of shares(cid:10)
outstanding(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 Annual Report on(cid:10)
Form 10-K. It is intended to assist the reader in understanding and evaluating(cid:10)
our financial 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(cid:10)
- 27 -(cid:10)
(cid:10)
assets and liabilities, the disclosure of contingent assets and liabilities at(cid:10)
the date of financial statements and the reported amounts of revenues and(cid:10)
expenses during the reporting period. On an ongoing basis, management evaluates(cid:10)
its estimates and judgment, including those related to bad debts, intangible(cid:10)
assets, income taxes, workers compensation, and contingencies and litigation.(cid:10)
Management bases its estimates and judgments on historical experience and on(cid:10)
various other factors that are believed to be reasonable under the(cid:10)
circumstances, the results of which form the basis for making judgments about(cid:10)
the carrying values of assets and liabilities that are not readily apparent from(cid:10)
other sources. Actual results may differ from these estimates under different(cid:10)
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)
During the year ended March 31, 2003, we elected to prospectively(cid:10)
recognize the fair value of stock options granted to employees and members of(cid:10)
the Board of Directors, effective as of the beginning of the fiscal year, which(cid:10)
resulted in our taking a charge of $20,550 and $1,166,601 during the years ended(cid:10)
March 31, 2003 and 2004, respectively. The fair value of stock options held by(cid:10)
employees and members of the Board of Directors which have been granted or(cid:10)
repriced subsequent to March 31, 2004 is expected to continue to affect the(cid:10)
results of operations of future periods, as we continue to grant or reprice(cid:10)
stock options to reward our management team.(cid:10)
YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003(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, 2004 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)
- 28 -(cid:10)
(cid:10)
Our revenues for the year ended March 31, 2004 were $258,250, a decrease(cid:10)
of $372,060 over the comparable prior year, or approximately 59% from the prior(cid:10)
year. For the year ended March 31, 2003, revenues consisted of product(cid:10)
formulation fees of $187,810 earned in conjunction with our joint venture in ERL(cid:10)
which terminated on September 30, 2002. Of our revenues for the years ended(cid:10)
March 31, 2004 and March 31, 2003, $108,500 and $442,500, respectively, were(cid:10)
research and development and testing fees earned in conjunction with our(cid:10)
distinct development, license and manufacturing agreements.(cid:10)
General and administrative expenses for the year ended March 31, 2004 were(cid:10)
$2,549,846, an increase of $691,777, or approximately 37% from the prior year.(cid:10)
The increase in general and administrative expenses was substantially due to(cid:10)
increases in legal and consulting fees as well as approximately $550,000 in(cid:10)
expenses including $400,000 as compensation, resulting from a settlement of(cid:10)
litigation instituted by our former President with respect to the termination of(cid:10)
his employment agreement.(cid:10)
Research and development costs for the year ended March 31, 2004, were(cid:10)
$2,075,074, an increase of $61,495 or approximately 3% from the prior year, due(cid:10)
primarily due to increased research and development wages, additional(cid:10)
biostudies, laboratory supplies and raw materials used in our research and(cid:10)
development processes. We expect our research and development costs to continue(cid:10)
to increase in future periods as a result of the ERL joint venture termination(cid:10)
as we will be solely responsible to fund product development, which we will do(cid:10)
from internal resources or through loans or investment by third parties.(cid:10)
We are unable to provide a break-down of the specific costs associated(cid:10)
with 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, 2004 were $1,813,711, an(cid:10)
increase of $1,304,903, or approximately 256% from the prior year. The increase(cid:10)
was primarily due to charges related to the modification of the warrant exchange(cid:10)
offer, the issuance of stock options and warrants valued at $1,926,908 (an(cid:10)
increase of $1,664,020) and the reduction in interest income due to lower rates(cid:10)
and compensating balances in the amount of $72,927, partially offset by(cid:10)
increases in sale of New Jersey Tax losses of $79,353 and the related settlement(cid:10)
of vendor litigation for $150,000.(cid:10)
- 29 -(cid:10)
(cid:10)
Our net loss for the year ended March 31, 2004 was $6,514,217 as compared(cid:10)
to $4,061,422 in the prior year, or an increase of approximately 60% from the(cid:10)
prior year, primarily due to the decrease in net revenues, and increases in(cid:10)
research and development and administrative expenses, including increased(cid:10)
charges of $1,664,020 due to the issuance of stock options, warrants and the(cid:10)
modification of warrant exchange offer.(cid:10)
YEAR ENDED MARCH 31, 2003 VS. YEAR ENDED MARCH 31, 2002(cid:10)
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)
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(cid:10)
with 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(cid:10)
- 30 -(cid:10)
(cid:10)
associated with the development of controlled release drug delivery products as(cid:10)
described in this report.(cid:10)
Other expenses for the year ended March 31, 2003 were $580,482, an(cid:10)
increase of $112,774, or approximately 24% from the prior year. A decrease in(cid:10)
equity loss in joint venture of $321,261 due to its termination was more than(cid:10)
offset by charges related to the exchange of warrants and the issuance of stock(cid:10)
options in the amount of $262,888 and the reduction in interest income due to(cid:10)
lower rates 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, an increase of 129% over the prior year. The(cid:10)
increase in the net loss was primarily due to the decrease in net revenues, and(cid:10)
an increase in research and development and administrative expenses associated(cid:10)
with the consent solicitation and proxy solicitation with regard to the election(cid:10)
of our directors. Our net loss included our 80.1% equity loss in ERL, which was(cid:10)
$186,379 and $507,640, respectively, for the years ended March 31, 2003 and(cid:10)
2002. ERL's net loss for the years ended March 31, 2003 and 2002 was $232,682(cid:10)
and $633,642, respectively.(cid:10)
MATERIAL CHANGES IN FINANCIAL CONDITION(cid:10)
Our working capital (total current assets less total current liabilities),(cid:10)
which was $2,950,513 as of March 31, 2003, decreased to $1,289,764 as of March(cid:10)
31, 2004, or approximately 56% from the prior year. The decrease is primarily(cid:10)
due to our net loss from operations and deposits on equipment, partially offset(cid:10)
by net proceeds of $3,179,000 from the sale of common stock through a private(cid:10)
placement and the receipt of $30,000 from the exercise of stock options.(cid:10)
We experienced negative cash flow from operations of $3,658,321 for the(cid:10)
year ended March 31, 2004, primarily due to our net loss from operations of(cid:10)
$6,514,217 offset by non-cash charges of $2,259,744. Non-cash charges included,(cid:10)
but were not limited to $1,166,601 in connection with the issuance of stock(cid:10)
options, a charge of $587,983 in connection with the issuance of warrants, and a(cid:10)
charge related to modification of warrant exchange offer of $172,324.(cid:10)
The Company recently completed a Good Manufacturing Practices ("GMP")(cid:10)
batch for a product currently licensed with a pharmaceutical company under a(cid:10)
development and license agreement entered into June 2001. The Company received(cid:10)
$30,000 under the Agreement and expects to complete two additional GMP batches(cid:10)
in the near future under the terms of the licensing agreement. The Company(cid:10)
expects to manufacture the product with revenues projected to be generated in(cid:10)
the second quarter of fiscal year ended March 31, 2005. The Company projects(cid:10)
earning additional milestone payments under the Agreement subject to completion(cid:10)
of the GMP batches.(cid:10)
On May 10, 2004, Elite Labs entered into an agreement with Purdue Pharma,(cid:10)
L.P. ("Purdue") through which Purdue was granted the exclusive right to evaluate(cid:10)
- 31 -(cid:10)
(cid:10)
certain abuse resistance drug formulation technology of the Company and an(cid:10)
exclusive option to negotiate a license to develop and commercialize Oxycodone(cid:10)
products under the Company's technology pursuant to which the Company received(cid:10)
$150,000 in the first quarter of fiscal year ended March 31, 2005. Should Purdue(cid:10)
agree to proceed with licensing, the Company would receive significant upfront(cid:10)
licensing fees. The Company estimates that the sales market for Oxycodone(cid:10)
exceeds $2 billion annually.(cid:10)
The Company is also negotiating an agreement for the financing and(cid:10)
refinancing of equipment purchases and has entered into a non-binding agreement(cid:10)
in principle with a broker-dealer to effect a private placement of shares of its(cid:10)
Common Stock.(cid:10)
No assurance can be given that the Company will consummate any of the(cid:10)
transactions discussed above other than the foregoing $150,000 receipt or that(cid:10)
any of the agreements will result in any material revenues.(cid:10)
LIQUIDITY AND CAPITAL RESOURCES(cid:10)
For our fiscal year ended March 31, 2004 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 securities. We had working capital (current assets(cid:10)
less current liabilities) of $1.3 million at March 31, 2004 compared with $3.0(cid:10)
million at March 31, 2003. Cash and cash equivalents at March 31, 2004 were $2.1(cid:10)
million, a decrease of $1.2 million from the $3.3 million at March 31, 2003.(cid:10)
Net cash used in operating activities was $3,658,000 during the year ended(cid:10)
March 31, 2004, compared to $2,573,000 for the year ended March 31, 2003. Net(cid:10)
cash used in operating activities during the year ended March 31, 2004 resulted(cid:10)
primarily from our net loss of $6.5 million, offset in part by an increase in(cid:10)
accounts payable and certain non-cash expenses. Net cash used in operating(cid:10)
activities during the year ended March 31, 2003 resulted primarily from a net(cid:10)
loss of $4.1 million, offset in part by a reduction in accounts receivable from(cid:10)
joint venture and certain non-cash expenses.(cid:10)
Investing activities utilized net cash of $495,000 during the year ended(cid:10)
March 31, 2004 and utilized net cash of $469,000 during the year ended March 31,(cid:10)
2003. Net cash used in investing activities during the year ended March 31, 2004(cid:10)
resulted primarily from equipment deposits, patent filings and an increase in(cid:10)
restricted cash. Net cash used in investing activities during the year ended(cid:10)
March 31, 2003 resulted primarily from the acquisition of property and(cid:10)
equipment, offset in part by a decrease in restricted cash and the maturity of(cid:10)
short term investments.(cid:10)
Financing activities provided net cash of $2,994,000 during the year ended(cid:10)
March 31, 2004 and utilized net cash of $546,000 during the year ended March 31,(cid:10)
2003. Net cash provided by financing activities during the year ended March 31,(cid:10)
2004 resulted primarily from the issuance of common stock through a private(cid:10)
placement offset by the repayment of indebtedness. Net cash used in financing(cid:10)
activities during the year ended March 31, 2003 resulted from the repurchase of(cid:10)
stock and the repayment of indebtedness, offset in part by the sale of common(cid:10)
stock and warrants.(cid:10)
Our capital expenditures aggregated $398,580 and $679,000 for the years(cid:10)
ended March 31, 2004 and 2003, respectively. Such expenditures consisted(cid:10)
primarily(cid:10)
- 32 -(cid:10)
(cid:10)
of the acquisition of property and equipment necessary to support our existing(cid:10)
operations and expected growth. The Company is in process of aggressively(cid:10)
seeking financing for this equipment. As discussed below, in June 2004 we are(cid:10)
negotiating an agreement with a financial institution for a partial financing(cid:10)
and refinancing of our equipment purchases and we have entered into a(cid:10)
non-binding agreement in principle with a broker-dealer to attempt a private(cid:10)
placement of our shares of Common Stock. We anticipate that our capital(cid:10)
expenditures in addition to the foregoing financing for our fiscal year ending(cid:10)
March 31, 2005 will be limited to expenditures that can be funded entirely by(cid:10)
development contracts that include provisions for such funding for these(cid:10)
expenditures. These expenditures substantially would relate to the acquisition(cid:10)
of property and equipment in connection with our operations.(cid:10)
As described in Note 6 to our consolidated financial statements, we have(cid:10)
outstanding $2,495,000 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 2004 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, 2004. 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, 2004, we were in compliance with the(cid:10)
covenants contained in the bond indenture agreement.(cid:10)
In August 2003, our Board of Directors authorized the negotiation with(cid:10)
Nostrum Pharmaceuticals Inc., a privately held corporation, of an agreement to(cid:10)
acquire Nostrum through a merger with our wholly-owned subsidiary; such(cid:10)
acquisition to be subject to several conditions including the approval by the(cid:10)
stockholders of the Company and the Company's having liquid assets of at least(cid:10)
$8,000,000. The agreement if consummated on the proposed terms will result in(cid:10)
the issuance of three times the number of shares outstanding at the time of(cid:10)
closing and options to purchase a substantial additional number of shares. No(cid:10)
assurance can be given that any agreement will be executed, that the merger will(cid:10)
be consummated or, if consummated, that it will be consummated of the foregoing(cid:10)
terms.(cid:10)
As a result of the significant expenditures associated with potential(cid:10)
mergers and acquisitions in our fiscal year ended March 31, 2004, and other(cid:10)
legal, accounting and consulting expenses, quarterly cash expenses far exceeded(cid:10)
our generated revenues in 2004. In order to conserve cash in fiscal year 2005,(cid:10)
we intend to continue to limit the number of products under active development(cid:10)
to six. The six products that continue in development were deemed by management(cid:10)
to be the most suitable for continued development given the Company's limited(cid:10)
resources. However, while we anticipate having adequate capital to support our(cid:10)
operations(cid:10)
- 33 -(cid:10)
(cid:10)
for the fiscal year ended March 31, 2005, we will need to raise capital and/or(cid:10)
generate additional revenues in order to support our operations beyond that(cid:10)
time. To the extent that revenues do not meet expectations or our cost cutting(cid:10)
measures do not become effective, we will need to raise additional capital(cid:10)
sooner.(cid:10)
Elite Labs is currently negotiating with a financial institution an(cid:10)
agreement in order to finance the purchase of certain machinery and equipment(cid:10)
and to recast the outstanding balance due to a bank in the approximate amount of(cid:10)
$212,000. Under the terms of the proposed agreement, Elite Labs will borrow(cid:10)
$612,000 payable in 36 monthly installments of $20,917, including principal plus(cid:10)
interest at 14% per annum. The loan is to be secured by two pieces of equipment(cid:10)
and the guaranty of the Company. In addition, restricted cash currently held as(cid:10)
collateral under the note payable in the amount of $225,000 will be released to(cid:10)
the lender, of which $125,500 is to be utilized to prepay the first six monthly(cid:10)
payments under the loan. The balance is to be held as a security deposit which(cid:10)
will be released if the Company raises certain proceeds from the sale of its(cid:10)
securities or other licensing fees. No assurance can be given that an agreement(cid:10)
will be executed or that if executed it will provide for materially the same(cid:10)
terms.(cid:10)
The Company has entered into a non-binding agreement in principle with a(cid:10)
registered broker-dealer to attempt a private placement of shares of its Common(cid:10)
Stock. Should Purdue Pharma decide to proceed with the terms of its licensing(cid:10)
agreement with the Company, the terms of the agreement provide for the Company(cid:10)
to receive significant milestone payments before March 31, 2005.(cid:10)
No assurance can be given that the Company will consummate any of the(cid:10)
transactions discussed above or that any material funds will be derived(cid:10)
therefrom.(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. The Company retained an(cid:10)
investment banking firm to assist with its efforts. There can be no assurance(cid:10)
that any such transaction will be available or consummated in the future.(cid:10)
Reference is made to "Risk Factors" under "Item 1 -- Business" for a(cid:10)
description of certain risks that may affect the achievement of our objectives(cid:10)
and results discussed herein.(cid:10)
As of March 31, 2004, our principal source of liquidity was approximately(cid:10)
$2,105,000 of cash and cash equivalents. Additionally, we may have access to(cid:10)
funds of approximately $200,000 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 be effected or be material.(cid:10)
The following table depicts our obligations and commitments to make future(cid:10)
payments under existing contracts and contingent commitments.(cid:10)
- 34 -(cid:10)
(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 225,000 75,000 150,000 -- --(cid:10)
EDA Bonds payable 2,495,000 150,000 530,000 430,000 1,385,000(cid:10)
(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)
ITEM 9A. 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)
- 35 -(cid:10)
(cid:10)
PART III(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 22, 2004, and their(cid:10)
biographical information are set forth below:(cid:10)
--------------------------------------------------------------------------------(cid:10)
NAME AGE POSITION(cid:10)
--------------------------------------------------------------------------------(cid:10)
Bernard Berk 55 Chairman of the Board, Chief Executive Officer(cid:10)
--------------------------------------------------------------------------------(cid:10)
John A. Moore 39 Director(cid:10)
--------------------------------------------------------------------------------(cid:10)
Harmon Aronson 60 Director(cid:10)
--------------------------------------------------------------------------------(cid:10)
Eric L. Sichel, M.D. 44 Director(cid:10)
--------------------------------------------------------------------------------(cid:10)
Mark I. Gittelman 43 Chief Financial Officer, Secretary and Treasurer(cid:10)
--------------------------------------------------------------------------------(cid:10)
The principal occupations and employment of each such person during the(cid:10)
past five years is set forth below. In each instance in which dates are not(cid:10)
provided in connection with the person's business experience, he has held the(cid:10)
position indicated for at least the past five years.(cid:10)
Bernard Berk was appointed the Chief Executive Officer of the Company in(cid:10)
June 2003, a Director in February 2004 and Chairman of the Board on May 12,(cid:10)
2004. Mr. Berk has been the President and Chief Executive Officer of Michael(cid:10)
Andrews Corporation, a pharmaceutical management consultant firm, since 1996.(cid:10)
Mr. Berk devotes and is to devote during his employment substantially all of his(cid:10)
time to the operations of the Company. From 1994 until 1996, Mr. Berk was(cid:10)
President and Chief Executive Officer of Nale Pharmaceutical Corporation. From(cid:10)
1989 until 1994, Mr. Berk was Senior Vice President of Sales, Marketing and(cid:10)
Business Development of Par Pharmaceuticals, Inc. Mr. Berk holds a B.S. from New(cid:10)
York University.(cid:10)
John A. Moore was Chairman of the Board from June 2003 until his(cid:10)
resignation on May 12, 2004. He has been Chief Executive Officer and President(cid:10)
of Edson Moore Healthcare Ventures, an investment entity, since July 2002. Mr.(cid:10)
Moore had been Chief Executive Officer and President from 1994 through June 2001(cid:10)
and since 1994 a director of Optimer, Inc., a research based polymer development(cid:10)
company. He is also a director and Chairman of ImaRx Therapeutics, Inc., a(cid:10)
privately-held company engaged in medical technology development and a director(cid:10)
of Medi-Hut Co., Inc., a publicly traded medical products company. Mr. Moore(cid:10)
holds a B.A. in history from Rutgers University.(cid:10)
Harmon Aronson, Ph.D. has been employed since 1997 as the President of(cid:10)
Aronson Kaufman Associates, Inc., a New Jersey-based consulting firm that(cid:10)
provides manufacturing, FDA regulatory and compliance services to pharmaceutical(cid:10)
and biotechnology companies. Its clients include United States and international(cid:10)
firms(cid:10)
- 36 -(cid:10)
(cid:10)
manufacturing bulk drugs and finished pharmaceutical dosage products who are(cid:10)
seeking FDA approval for their products for the U.S. Market. Prior to 1997, Dr.(cid:10)
Aronson was employed by Biocraft Laboratories, a leading generic drug(cid:10)
manufacturer, rising to the position of Vice President of Quality Management;(cid:10)
prior to that he held the position of Vice President of Non-Antibiotic(cid:10)
Operations, where he was responsible for the manufacturing of all the firm's(cid:10)
non-antibiotic products. Dr. Aronson holds a Ph.D. in Physics from the(cid:10)
University of Chicago. He is also a director of Elite Research, Ltd. Other than(cid:10)
Elite Research Ltd., no company with which Dr. Aronson was affiliated in the(cid:10)
past was a parent, subsidiary or other affiliate of the Company.(cid:10)
Eric L. Sichel, M.D. has been since 1997, owner and President of Sichel(cid:10)
Medical Ventures, Inc., a company that provides biotechnology company(cid:10)
assessments and investment banking services. From 1995 through 1996, Dr. Sichel(cid:10)
was a senior analyst in the biotechnology field for Alex Brown & Sons, Inc.(cid:10)
Prior to that, Dr. Sichel was affiliated with Sandoz Pharmaceuticals Corp. in(cid:10)
various capacities, including associate director of transplantation/immunology.(cid:10)
Dr. Sichel holds an M.B.A. from Columbia University and an M.D. from UMDNJ--New(cid:10)
Jersey Medical School, and is licensed to practice medicine by the State of New(cid:10)
York.(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 and New(cid:10)
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)
AUDIT COMMITTEE(cid:10)
Our Board of Directors has an Audit Committee and, since March 2004, a(cid:10)
Nominating Committee. The Board has no other standing committees. The Audit(cid:10)
Committee members are John A. Moore, Harmon Aronson and Eric L. Sichel. The(cid:10)
Audit Committee had two meetings during the fiscal year ended March 31, 2004.(cid:10)
The Company's Board of Directors has adopted a written charter for the Audit(cid:10)
Committee, a copy of which was included as an appendix to the Company's proxy(cid:10)
statement sent to stockholders in connection with the annual meeting of(cid:10)
stockholders held October 11, 2001.(cid:10)
Other than Mr. Moore, we deem the members of its Audit Committee to be(cid:10)
independent as independence is defined in Section 121(A) of the American Stock(cid:10)
- 37 -(cid:10)
(cid:10)
Exchange Listing Standards, as amended effective December 1, 2003. The Board(cid:10)
determined that Mr. Sichel, an independent director, qualifies as the audit(cid:10)
committee financial expert within the meaning of that term under the applicable(cid:10)
regulations under the Securities Exchange Act of 1934.(cid:10)
Audit Committee Report: The following is the Audit Committee Report made(cid:10)
by all its members.(cid:10)
The Audit Committee reviewed and discussed the audited financial(cid:10)
statements with management. The Audit Committee discussed with the independent(cid:10)
auditors of the Company the matters required to be discussed by SAS 61(cid:10)
(Codification of Statements on Auditing Standards, AU 380), as modified or(cid:10)
supplemented. The Audit Committee received the written disclosures and the(cid:10)
letter from the independent accountants required by Independence Standards Board(cid:10)
Standard No. 1 (Independence Standards Board Standard No. 1, Independence(cid:10)
Discussions with Audit Committees), as modified or supplemented. The Audit(cid:10)
Committee discussed with the independent accountant the independent accountant's(cid:10)
independence. Based upon the foregoing review and discussions, the Audit(cid:10)
Committee recommended to the Board of Directors of the Company that the audited(cid:10)
financial statements of the Company be included in the Company's Annual Report(cid:10)
on Form 10-K for the fiscal year ended March 31, 2004 as filed with the(cid:10)
Commission.(cid:10)
HARMON ARONSON(cid:10)
JOHN A. MOORE(cid:10)
ERIC L. SICHEL(cid:10)
NOMINATING COMMITTEE(cid:10)
The Nominating Committee appointed, on June 22, 2004, is authorized to(cid:10)
select the nominees of the Board of Directors for election as directors. The(cid:10)
members are John A. Moore, Harmon Aronson and Bernard Berk. In selecting(cid:10)
nominees the Committee identifies and evaluates the current Directors and their(cid:10)
commitment to the policy of the Company and each individual's qualifications and(cid:10)
availability. The Committee believes that a nominee for director of the Company(cid:10)
should have an appropriate level of sophistication, knowledge and understanding(cid:10)
of the Company and the industry, stockholder relations and finance and(cid:10)
accounting for publicly held companies. The Committee also considers the need to(cid:10)
select a nominee who has the appropriate experience and financial background who(cid:10)
could qualify as an "audit committee financial expert" within the meaning of the(cid:10)
rules under the Securities Exchange Act of 1934 and of the American Stock(cid:10)
Exchange. The Company has not engaged any third party to assist in the process(cid:10)
of identifying or evaluating candidates.(cid:10)
The Company currently does not have a process for considering candidates(cid:10)
put forward by stockholders other than those who are directors of the Company.(cid:10)
In view of the recent effectiveness of the requirements under the Securities(cid:10)
Exchange Act of 1934 as to a policy with respect to the consideration of(cid:10)
- 38 -(cid:10)
(cid:10)
candidates put forward by stockholders other than those who are directors of the(cid:10)
Company, the adoption of such policy and the procedures for stockholders to(cid:10)
submit candidates is under consideration by the recently elected Board.(cid:10)
MEETINGS(cid:10)
During the fiscal year ended March 31, 2004, our Board of Directors held(cid:10)
nine meetings. Each director attended 75 percent or more of the aggregate number(cid:10)
of meetings and committees of which he was a member that were held during the(cid:10)
period of his service as a director.(cid:10)
The Company does not have a formal policy regarding attendance by members(cid:10)
of the Board of Directors at the Company's annual meeting of stockholders,(cid:10)
although it does encourage attendance by the directors. Historically, more than(cid:10)
a majority of the directors have attended the annual meeting.(cid:10)
CODE OF CONDUCT(cid:10)
At the first meeting of the Board of Directors following the Annual(cid:10)
Meeting of Stockholders held on June 22, 2004 it adopted a Code of Business(cid:10)
Conduct and Ethics for its directors, officers and employees which it believes(cid:10)
complies with the requirements for a company code of ethics for financial(cid:10)
officers that were promulgated by the SEC pursuant to the Sarbanes-Oxley Act of(cid:10)
2002 (the "Sarbanes-Oxley Act") as well as for the members of our Board of(cid:10)
Directors. The directors will be surveyed annually regarding their compliance(cid:10)
with the policies as set forth in the Code of Conduct for Directors. A copy of(cid:10)
the Code of Business Conduct and Ethics may be obtained without charge by a(cid:10)
written request addressed to the Treasurer, Elite Pharmaceuticals, Inc., 165(cid:10)
Ludlow Avenue, Northvale, New Jersey 07647. We intend to disclose any amendment(cid:10)
to, or waiver of, a provision of the Business Conduct and Ethics for Directors(cid:10)
in a report filed under the Securities Exchange Act of 1934 within five business(cid:10)
days of the amendment or waiver.(cid:10)
STOCKHOLDER COMMUNICATIONS(cid:10)
Stockholders who wish to send communications to the Board of Directors(cid:10)
should address their communication to Elite Pharmaceuticals Inc., 165 Ludlow(cid:10)
Avenue, Northvale, New Jersey 07647, attention Mark I. Gittelman, Secretary. Mr.(cid:10)
Gittelman has been instructed to collect and organize stockholder communications(cid:10)
and forward copies to each of the Directors. If a communication relates to the(cid:10)
Secretary, such communication should be sent to the same address, attention(cid:10)
Bernard Berk, Chairman.(cid:10)
Typically, we do not forward to our directors communications from our(cid:10)
stockholders or other communications which are of a personal nature or not(cid:10)
related to the duties and responsibilities of the Board, including:(cid:10)
o Junk mail and mass mailings(cid:10)
- 39 -(cid:10)
(cid:10)
o New product suggestions(cid:10)
o Resumes and other forms of job inquiries(cid:10)
o Opinion surveys and polls(cid:10)
o Business solicitations or advertisements(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, 2004 all Reporting Persons complied with all(cid:10)
applicable filing requirements.(cid:10)
ITEM 11. EXECUTIVE COMPENSATION(cid:10)
EXECUTIVE OFFICER COMPENSATION(cid:10)
The Company entered into a three-year employment agreement effective July(cid:10)
23, 2003 with Mr. Berk providing for (i) his full time employment as Chief(cid:10)
Executive Officer at an annual base salary of $200,000, (ii) the grant to him of(cid:10)
options which vest immediately to purchase 300,000 shares of Common Stock at a(cid:10)
price of $2.01 per share, the closing share price on the American Stock Exchange(cid:10)
on the date of grant and (iii) the grant of options to purchase an additional(cid:10)
300,000 shares at the $2.01 per share to vest on consummation of a "strategic(cid:10)
transaction" while he is employed as Chief Executive Officer. The consummation(cid:10)
of such transaction will result in the increase of his base annual salary to(cid:10)
$310,140 effective with the consummation. A strategic transaction is defined as(cid:10)
any one of the following transactions provided that the net value of the(cid:10)
consideration to the Company or its stockholders determined in good faith by the(cid:10)
Board of Directors is at least $10,000,000: (i) the sale of all or substantially(cid:10)
all of the assets of the Company, (ii) a merger or consolidation or business(cid:10)
combination, or (iii) the sale by the Company of debt or equity securities.(cid:10)
Either party upon notice may terminate Mr. Berk's employment except that a(cid:10)
termination by the Company without cause or because of his permanent disability(cid:10)
or a termination by him for cause will result in severance pay in the form of(cid:10)
the continuation of his base salary for the balance of the term or two years,(cid:10)
whichever is longer, less in the event of termination for permanent disability(cid:10)
the amount of payments under a disability insurance policy maintained by the(cid:10)
Company. The Company is also to(cid:10)
- 40 -(cid:10)
(cid:10)
continue to pay during the foregoing period the premiums for life and disability(cid:10)
insurance policies. Furthermore, in the event that Mr. Berk terminates his(cid:10)
employment following a "change of control" event he is to receive, payable in 24(cid:10)
monthly installments, an amount which will depend on the fair value of the(cid:10)
consideration determined in good faith by the Board of Directors received by the(cid:10)
Company or stockholders from the "change of control" event less related expenses(cid:10)
("Net Fair Value") -- $500,000 if the Net Fair Value is $10 million or less; the(cid:10)
greater of $500,000 or twice his then base annual salary, if the Net Fair Value(cid:10)
is greater than $10 million but not more than $20 million, or $1,000,000 if the(cid:10)
Net Fair Value is greater than $20 million. A "change of control" event is (i) a(cid:10)
merger or consolidation in which securities possessing more than 50% of the(cid:10)
voting power is issued to persons other than the holders of voting securities of(cid:10)
the Company immediately prior to the event, (ii) the sale, transfer or(cid:10)
disposition of all or substantially all the assets of the Company, or (iii) the(cid:10)
sale by the Company of securities to a third party.(cid:10)
The agreement contains Mr. Berk's non-competition covenant for a period of(cid:10)
one year from termination.(cid:10)
The Company is a party to an agreement dated February 26, 1998 whereby(cid:10)
fees are paid to Gittelman & Co., P.C., a firm wholly-owned by Mark I.(cid:10)
Gittelman, the Company's Chief Financial Officer, Secretary and Treasurer, in(cid:10)
consideration for services rendered by the firm as internal accountant and(cid:10)
financial and management consultant. The firm's services include the services(cid:10)
rendered by Mr. Gittelman in his capacity as Chief Financial Officer, Secretary(cid:10)
and Treasurer. For the fiscal years ended March 31, 2004, 2003 and 2002, the(cid:10)
fees paid by the Company under the agreement were $168,750, $167,544 and(cid:10)
$91,260, respectively. The services rendered by the firm to the Company averaged(cid:10)
128, 127 and 69 hours per month, respectively, of which an average of 30 hours(cid:10)
per month were services rendered by him in his capacity as an officer of the(cid:10)
Company.(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)
2004, awarded or paid to, or earned by Bernard Berk, our President and Chief(cid:10)
Executive Officer since June 2003 and 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)
- 41 -(cid:10)
(cid:10)
SUMMARY COMPENSATION TABLE(cid:10)
(cid:10)
(cid:10)
-------------------------------------------------------------------------------------------------------------------------(cid:10)
Annual Compensation Long Term Compensation(cid:10)
------------------- ----------------------(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 All Other(cid:10)
Principal Year(1) ------ ----- Compensa- Stock Awards Underlying Payouts Compensa-(cid:10)
Position ------- tion(3) ------------ Options ------- tion(cid:10)
-------- ------------ ---------- ---------(cid:10)
-------------------------------------------------------------------------------------------------------------------------(cid:10)
(cid:10)
Bernard Berk, 2003-04 $166,667 -- -- -- 300,000(4) -- --(cid:10)
President and(cid:10)
Chief(cid:10)
Executive(cid:10)
Officer(cid:10)
-------------------------------------------------------------------------------------------------------------------------(cid:10)
Atul M. Mehta, 2003-04 $ 53,684 -- $ 3,040 -- --(5) -- --(cid:10)
Ph.D. former 2002-03 $330,140 -- $ 3,040 -- -- -- --(cid:10)
President and 2001-02 $272,855 -- $ 83,856 -- 50,000(6) -- --(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(cid:10)
June 3, 2003.(cid:10)
(3) Other Annual Compensation represents use of a company car, premiums(cid:10)
paid by the Company for life insurance on Dr. Mehta's life for the benefit of(cid:10)
his wife and the purchase price of $80,856 for options acquired from Dr. Mehta.(cid:10)
(4) Does not include 300,000 options which are exercisable only upon(cid:10)
occurrence of a "strategic transaction".(cid:10)
(5) See "Item 3 - Legal Proceedings" for settlement of a litigation(cid:10)
providing for extension of expiration dates of options granted prior to April 1,(cid:10)
2001 to him to purchase 770,000 shares.(cid:10)
(6) 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 granted to Dr.(cid:10)
Mehta. This correction did not result in any additional shares being subject to(cid:10)
options held by Dr. Mehta, any change in the exercise price or a change in any(cid:10)
other material terms.(cid:10)
Option Grants to and Exercised by Executive Officers in Last Fiscal Year(cid:10)
Options granted to executive officers of the Company named in the Summary(cid:10)
Compensation Table during the fiscal year ended March 31, 2004 were as follows:(cid:10)
- 42 -(cid:10)
(cid:10)
OPTION GRANTS IN LAST FISCAL YEAR(cid:10)
(cid:10)
NUMBER OF(cid:10)
SHARES % OF TOTAL EXERCISE EXPIRATION POTENTIAL REALIZED VALUE AT(cid:10)
UNDERLYING OPTIONS GRANTED PRICE DATE ASSUMED ANNUAL RATES OF(cid:10)
NAME OPTIONS TO EMPLOYEES IN STOCK PRICE APPRECIATION(cid:10)
GRANTED FISCAL YEAR FOR OPTION TERM(cid:10)
5% 10%(cid:10)
(cid:10)
Bernard Berk 300,000(1) 41.4% $2.01 6/2/13 $982,223 $1,564,027(cid:10)
Atul M. Mehta(2) -- -- -- -- -- --(cid:10)
(cid:10)
(1) Does not include options to purchase 300,000 shares at $2.01 per share which(cid:10)
are exercisable only upon occurrence of a "strategic transaction". See(cid:10)
"Executive Officers".(cid:10)
(2) See "Item 3 - Legal Proceedings" for settlement of litigation providing for(cid:10)
extension of expiration dates of options to purchase 770,000 shares granted(cid:10)
prior to year ended March 31, 2002 while he was an executive officer.(cid:10)
No options were exercised by executive officers during the fiscal year(cid:10)
ended March 31, 2004.(cid:10)
(cid:10)
(cid:10)
SHARES VALUE NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY(cid:10)
NAME EXERCISED REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR-END (1)(cid:10)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(cid:10)
(cid:10)
Atul M. -0- -0- 270,000 -0- $0 --(cid:10)
Mehta(2) -0- -0- 100,000 -0- $0 --(cid:10)
-0- -0- 100,000 -0- $48,000 --(cid:10)
-0- -0- 100,000 -0- $98,000 --(cid:10)
-0- -0- 100,000 -0- $148,000 --(cid:10)
-0- -0- 100,000 -0- $198,000 --(cid:10)
Bernard(cid:10)
Berk (3) -0- -0- 300,000 300,000 $291,000 $291,000(cid:10)
(cid:10)
(1) The dollar values are calculated by determining the difference between $2.98(cid:10)
per share, the fair market value of the common stock at March 31, 2004, and the(cid:10)
exercise price of the respective options.(cid:10)
(2) Dr. Mehta resigned as an officer/employee and director as of June 3, 2003.(cid:10)
(3) Mr. Berk entered the employ of the Company in June 2003.(cid:10)
- 43 -(cid:10)
(cid:10)
COMPENSATION OF DIRECTORS(cid:10)
Each non-affiliated director receives $2,000 as compensation for each(cid:10)
meeting attended.(cid:10)
On February 6, 2004, the Board of Directors authorized the payment of a(cid:10)
fee of $125,000 per annum retroactive to January 1, 2004 to Mr. Moore as(cid:10)
compensation for his services as Chairman of the Board. The fee is based on the(cid:10)
substantial duties the Board has assigned to him, principally to assist the(cid:10)
Chief Executive Officer in the management of the Company's operations, and the(cid:10)
time required to perform such duties. Mr. Moore earned $46,875 under the(cid:10)
authorization for the period through May 12, 2004, the date of his resignation(cid:10)
as Chairman.(cid:10)
OPTIONS AND WARRANTS(cid:10)
In October 2003, the American Stock Exchange (the "Amex") amended its(cid:10)
Rules to require stockholder approval of material amendments to a stock option(cid:10)
plan or other equity compensation arrangements pursuant to which options or(cid:10)
stock may be acquired by officers, director or employees, subject to certain(cid:10)
limited exceptions.(cid:10)
Our stockholders approved at its meeting held on June 22, 2004 the(cid:10)
following amendments by our Board of Directors of the provisions of outstanding(cid:10)
options and warrants issued to officers, directors or employees of, or(cid:10)
consultants to, the Company.(cid:10)
On June 6, 2003 our Board of Directors reduced the exercise price of(cid:10)
options to purchase 30,000 shares of the Company's Common Stock granted on(cid:10)
January 31, 2003 to each of the following persons, each of whom was then a(cid:10)
Director: Messrs. Harmon Aronson, Richard A. Brown, John P. deNeufville, John A.(cid:10)
Moore, Donald S. Pearson and Eric L. Sichel from $6.50 to $2.21 per share, which(cid:10)
was 110% of the closing per share sale price of the Common Stock on the American(cid:10)
Stock Exchange on the date of the amendment. These options vest as follows:(cid:10)
10,000 shares on December 12, 2003, 10,000 shares on December 12, 2004 and(cid:10)
10,000 shares on December 12, 2005. The options expire at the earlier to occur(cid:10)
of: (1) January 31, 2013; or (2) the date one year after the optionee ceases to(cid:10)
be a director of or a consultant or advisor of the Company. On February 6, 2004,(cid:10)
the Board of Directors authorized a further amendment to all the options held by(cid:10)
Messrs. Brown (30,000 shares), deNeufville (55,000 shares) and Pearson (90,000(cid:10)
shares) to extend their expiration date to a date two years following the June(cid:10)
22, 2004 Annual Meeting. On March 8, 2004 our Board of Directors amended those(cid:10)
options held by then Directors which contained an exercise price greater than(cid:10)
$2.21 to reduce their exercise price to $2.21 per share.(cid:10)
- 44 -(cid:10)
(cid:10)
(cid:10)
(cid:10)
Name Shares Subject Date of Original Expiration(cid:10)
---- To Amended Options Grant Exercise Price Date(cid:10)
------------------ ----- -------------- ----(cid:10)
(cid:10)
Donald Pearson 30,000 7/1/99 $6.00 6/22/06(cid:10)
30,000 1/2/01 $6.50 6/22/06(cid:10)
Harmon Aronson 30,000 7/1/99 $6.00 9/1/09(cid:10)
30,000 1/2/01 $6.50 1/1/11(cid:10)
Eric Sichel 30,000 8/2/01 $10.00 8/2/11(cid:10)
(cid:10)
On May 12, 2004 our Board of Director also authorized an amendment to the(cid:10)
expiration dates of options to purchase 330,000 shares held by Mr. Moore, of(cid:10)
which 30,000 options granted in January 2003 and exercisable at $2.21 have an(cid:10)
expiration date of January 13, 2003 and 300,000 options granted in June 2003 and(cid:10)
exercisable at $2.01 per share have an expiration date of June 13, 2013. Similar(cid:10)
to the above amendment of the options held by Messrs Pearson, Aronson and(cid:10)
Sichel, the options will terminate on the earlier of their current expiration(cid:10)
date or a date two years after Mr. Moore ceases to be a director of the Company.(cid:10)
On March 8, 2004, the Board of Directors confirmed the reduction to $2.21(cid:10)
per share of the $3.31 per share exercise price of options of purchase 30,000(cid:10)
shares granted on June 13, 2003 to each of three employees. Such options vest in(cid:10)
three equal annual installments commencing with the date of grant.(cid:10)
On February 6, 2004 the Board of Directors authorized the extension of the(cid:10)
expiration date from June 30, 2004 to November 30, 2005 of the outstanding Class(cid:10)
B Warrants to purchase an aggregate of 681,002 shares of our Common Stock at a(cid:10)
price of $5.00 per share. The Class B Warrants were originally issued as part of(cid:10)
units of shares of Common Stock and Class B Warrants in a private placement to a(cid:10)
group of investors. Included among the holders of the Class B Warrants are(cid:10)
Richard A. Brown, a Director at the time, who holds, along with his son and an(cid:10)
affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge Ventures(cid:10)
Inc., a consultant to the Company since December, 2003, which holds 25,000 Class(cid:10)
B Warrants.(cid:10)
The Board of Directors authorized the foregoing amendments for the(cid:10)
purposes of hopefully generating additional funds through the exercise of the(cid:10)
options or warrants, and restoring a principal purpose or purposes of the(cid:10)
original grants of the options or warrants to officers, directors and employees,(cid:10)
namely a reasonable opportunity for the holder to acquire or increase a(cid:10)
proprietary interest in the Company and to restore a meaningful form of noncash(cid:10)
compensation.(cid:10)
As described under "Item 3 - Legal Proceedings" a settlement of a(cid:10)
litigation with Dr. Atul Mehta, includes provisions for the extension of the(cid:10)
expiration dates to June 13, 2005 of options previously issued to Dr. Mehta to(cid:10)
purchase 770,000 shares of Common Stock, including options with respect to(cid:10)
70,000 shares which had previously expired. The number and exercise prices are(cid:10)
as follows:(cid:10)
- 45 -(cid:10)
(cid:10)
NUMBER OF OPTIONS EXERCISE PRICE(cid:10)
----------------- --------------(cid:10)
270,000* $10.00(cid:10)
100,000 3.00(cid:10)
100,000 2.50(cid:10)
100,000 2.00(cid:10)
100,000 1.50(cid:10)
100,000 1.00(cid:10)
----------(cid:10)
* Includes the 70,000 which had expired(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 April 30, 2004 by (i) each director and(cid:10)
named executive officer, (ii) all executive officers and current directors as a(cid:10)
group and (iii) the persons known to us to own beneficially more than 5% of the(cid:10)
outstanding shares of our Common Stock. On such date, we had 12,104,423 shares(cid:10)
of common stock outstanding. Shares not outstanding but deemed beneficially(cid:10)
owned by virtue of the right of any individual to acquire shares within 60 days(cid:10)
are treated as outstanding only when determining the amount and percentage of(cid:10)
common stock owned by such individual. Each person has sole voting and(cid:10)
investment power with respect to the shares shown, except as noted. Unless(cid:10)
otherwise indicated, the address of the person named is c/o Elite(cid:10)
Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647.(cid:10)
(cid:10)
(cid:10)
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS(cid:10)
---------------- ---------------- -------------------(cid:10)
(cid:10)
Bernard Berk, Chairman of the Board and Chief 300,000(1) 2.4%(cid:10)
Executive Officer(cid:10)
Harmon Aronson, Director* 70,000(2) **(cid:10)
Eric L. Sichel, Director* 60,000(3) **(cid:10)
John A. Moore, Director* 1,224,218(4) 9.9%(cid:10)
Mark I. Gittelman, CFO, Treasurer and Secretary 10,000(5) **(cid:10)
300 Colfax Avenue(cid:10)
Clifton, New Jersey 07013(cid:10)
Dr. Atul Mehta 2,257,700(6) 17.5%(cid:10)
c/o Andrew Giles Freda, Esq.(cid:10)
Edwards & Caldwell LLC(cid:10)
1600 Route 208(cid:10)
North Hawthorne, NJ 07647(cid:10)
Edson Moore Healthcare Ventures, Inc. 914,218(7) 7.5%(cid:10)
403 Marsh Lane(cid:10)
Wilmington, Delaware 19804(cid:10)
(cid:10)
- 46 -(cid:10)
(cid:10)
(cid:10)
(cid:10)
Jerome Belson 905,100(8) 7.5%(cid:10)
495 Broadway(cid:10)
New York, NY 10012(cid:10)
ALL DIRECTORS AND OFFICERS AS A GROUP 1,664,218(9) 13.0%(cid:10)
(cid:10)
* See "Item 10 - Directors and Executive Officers of the Registrant" for his(cid:10)
address(cid:10)
** Less than 1% of outstanding shares(cid:10)
(1) Comprised of options to purchase 3000,000 shares.(cid:10)
(2) Comprised of options to purchase 70,000 shares.(cid:10)
(3) Represents options to purchase 40,000 shares and 20,000 shares owned as(cid:10)
co-tenant with Dana Cernea.(cid:10)
(4) Represents (i) options personally held by Mr. Moore to purchase 310,000(cid:10)
shares and (ii) 914,218 shares of common stock beneficially owned by Edson Moore(cid:10)
Healthcare Ventures, Inc. ("Edson Moore"), of which he is president and(cid:10)
principal stockholder. The 914,218 shares of common stock are comprised of (i)(cid:10)
764,218 shares of common stock issued to Edson Moore upon the exchange of 12,915(cid:10)
shares of Series A Preferred Stock, par value $1.00 per share, of Elite(cid:10)
Laboratories, Inc., (ii) 100,000 shares issuable upon exercise of a warrant(cid:10)
(exercisable through October 17, 2005) at an exercise price of $18.00 per share(cid:10)
and (iii) 50,000 shares acquired in a recent private placement.(cid:10)
(5) Comprised of options to purchase 10,000 shares.(cid:10)
(6) Based on the terms of the settlement of a litigation with Dr. Mehta and(cid:10)
includes options to purchase 770,000 shares (see "Item 3 - Legal Proceedings"),(cid:10)
and 312, 600 shares owned by his wife, members of his family or an affiliate.(cid:10)
(7) See clause (ii) of note 4 above.(cid:10)
(8) Based on information contained in a Schedule 13D, as amended, filed by(cid:10)
Jerome Belson on November 15, 2002. Includes (i) 535,200 shares held by Jerome(cid:10)
Belson, (ii) 53,900 shares held by Maxine Belson, wife of Jerome Belson, (iii)(cid:10)
7,000 shares held by Brianne Goldstein, daughter of Jerome Belson, (iv) 28,000(cid:10)
shares held by Majorie Belson, daughter-in-law of Jerome Belson, (v) 25,000(cid:10)
shares owned by the grandchildren of Jerome Belson and (vi) warrants to purchase(cid:10)
256,000 shares of common stock.(cid:10)
(9) Includes options and warrants to purchase an aggregate of 730,000 shares.(cid:10)
Except as otherwise set forth, information on the stock ownership of each(cid:10)
person was provided to the Company by such person.(cid:10)
Other than our 2004 Stock Option Plan, we do not have any compensation(cid:10)
plans or arrangements benefiting employees or non-employees under which equity(cid:10)
securities(cid:10)
- 47 -(cid:10)
(cid:10)
of the Company are authorized for issuance in exchange for consideration in the(cid:10)
form of goods or services.(cid:10)
The Company is informed and believes that as of April 20, 2004, Cede & Co.(cid:10)
held 7,069,228 shares of the Company's common stock as nominee for Depository(cid:10)
Trust Company, 55 Water Street, New York, New York 10004. It is our(cid:10)
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, no one of whom is believed to beneficially own five(cid:10)
percent or more of the common stock of the Company.(cid:10)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.(cid:10)
We had a contractual relationship with Donald Pearson, a former Director,(cid:10)
which expired on November 30, 2003, providing for Mr. Pearson to (i) refer(cid:10)
potential customers who will license or collaborate in the development or(cid:10)
purchase of the technology of the Company and (ii) render financial consulting(cid:10)
services to the Company. Under the arrangement, Mr. Pearson received consulting(cid:10)
fees aggregating $28,800, $38,400 and $12,800 for fiscal years ended March 31,(cid:10)
2004, 2003 and 2002, respectively. The referral fees were to be a percentage(cid:10)
ranging from 5% to 1% of the first $5,000,000 of revenues generated by his(cid:10)
referrals after deducting expenses and a credit for the consulting fees. No(cid:10)
revenues were generated under the arrangement. The Company also has a similar(cid:10)
customer referral arrangement with Mr. Harmon Aronson, a Director, to pay him a(cid:10)
percentage of net revenues generated by customers referred by him. No fees have(cid:10)
been earned under his arrangement.(cid:10)
See Item 10 "Directors and Executive Officer of Registrant" for(cid:10)
information as to employment or engagement agreements with Bernard Berk and an(cid:10)
affiliate of Mark I. Gittelman.(cid:10)
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES(cid:10)
The following is a description of the fees paid by the Company to Miller,(cid:10)
Ellin & Co., LLP ("Miller Ellin") during the fiscal years ended March 31, 2004(cid:10)
and March 31, 2003:(cid:10)
Audit Fees: The Company paid fees of approximately $150,000 and $119,000(cid:10)
to Miller Ellin in connection with its audit of the Company's financial(cid:10)
statements for the fiscal years ended March 31, 2004 and March 31, 2003,(cid:10)
respectively, its review of the Company's interim financial statements included(cid:10)
in the Company's Quarterly Reports on Form 10-Q during each of the fiscal years(cid:10)
ended March 31, 2004 and March 31, 2003.(cid:10)
Financial Information Systems Design and Implementation Fees: The Company(cid:10)
did not engage Miller Ellin during either of the years ended March 31, 2004 and(cid:10)
March 31, 2003 to provide advice to the Company regarding financial information(cid:10)
systems design and implementation.(cid:10)
- 48 -(cid:10)
(cid:10)
Other fees: The Company did not pay any fee to Miller Ellin to perform(cid:10)
non-audit services during either of the years ended March 31, 2004 and March 31,(cid:10)
2003.(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 the following Current Reports on Form 8-K with(cid:10)
the Securities and Exchange Commission during the period from January 1, 2004(cid:10)
through May 31, 2004.(cid:10)
1. Report filed on January 8, 2004 reporting under Items 5 and 7 issuance of a(cid:10)
press release announcing an agreement to utilize Elite's proprietary drug(cid:10)
delivery technology for the development of a controlled release product.(cid:10)
2. Report filed on January 29, 2004 reporting under Items 5 and 7 issuance of a(cid:10)
press release announcing the filing of a U.S. patent application.(cid:10)
3. Report filed on March 5, 2004 under Items 5 and 7 reporting issuance of a(cid:10)
press release announcing completion of validation batches for once-a-day product(cid:10)
which treat allergies and their symptoms.(cid:10)
4. Report filed on March 10, 2004 under Items 5 and 7 reporting issuance of a(cid:10)
press release announcing extension by our Board of Directors of the expiration(cid:10)
dates of our Class B Warrants from June 23, 2004 to November 30, 2005.(cid:10)
5. Report filed on April 2, 2004 under Items 5 and 7 reporting issuance of a(cid:10)
press release disclosing the ruling by the Superior Court of New Jersey to(cid:10)
enforce the
- 49 -(cid:10)
(cid:10)
settlement of the litigation between Elite and its former President and Chief(cid:10)
Executive Officer.(cid:10)
6. Report filed on April 16, 2004 under Item 5 disclosing a change in scheduled(cid:10)
date for Annual Meeting of Stockholders.(cid:10)
7. Report filed on May 4, 2004 under Items 5 and 7 reporting issuance of a press(cid:10)
release announcing closing of the settlement of the litigation with Dr. Mehta.(cid:10)
8. Report filed on May 10, 2004 under Items 5 and 7 reporting issuance of a(cid:10)
press release disclosing agreement granting Purdue Pharma L.P. exclusive rights(cid:10)
to evaluate certain of our abuse resistance drug formulation technology and the(cid:10)
option to negotiate a license to develop and commercialize oxycodone products(cid:10)
under the technology.(cid:10)
9. Report filed on May 17, 2004 under Items 5 and 7 disclosing issuance of a(cid:10)
press release announcing appointment of Mr. Berk as Chairman of the Board of(cid:10)
Directors.(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 No. Description(cid:10)
3.2 By-Laws of the Company, as amended, incorporated by reference(cid:10)
to Exhibit 3.2 to the Company's Registration Statement on Form(cid:10)
SB-2 (Reg. No. 333-90633) made effective on February 28, 2000(cid:10)
(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(cid:10)
the State of Delaware, incorporated by reference to Exhibit(cid:10)
4.1 to the Registration Statement on Form S-4 (Reg. No.(cid:10)
333-101686), filed with the SEC on December 6, 2002 (the "Form(cid:10)
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 Class C Common Stock Purchase Warrant Certificate. *(cid:10)
4.3 Form of Class B Common Stock Purchase Warrant Certificate. *(cid:10)
4.4 Registration Rights Agreement by and between Prologica(cid:10)
International, Inc. and each of the persons, whose name(cid:10)
appears on the signature pages attached thereto, incorporated(cid:10)
by reference to Exhibit 4.4 to the Form SB-2.(cid:10)
10.1 Settlement Agreement, dated October 23, 2002, among Elite,(cid:10)
Harris Freedman, Sharon Will, Michael H. Freedman and certain(cid:10)
of their respective(cid:10)
- 50 -(cid:10)
(cid:10)
affiliates, incorporated by reference to Exhibit 10.1 to the(cid:10)
Company's Current Report on Form 8-K dated November 1, 2002(cid:10)
(the "November 2002 Form 8-K").(cid:10)
10.2 Commercial Lease made between Serex, Inc. and Elite executed(cid:10)
September 7, 1993, incorporated by reference to Exhibit 10.4(cid:10)
to the Form SB-2.(cid:10)
10.3 2004 Employee Stock Option Plan approved by stockholders on(cid:10)
June 22, 2004, incorporated by reference to Exhibit A to the(cid:10)
Proxy Statement filed on Schedule 14A with respect to the(cid:10)
Annual Meeting of Stockholders held on June 22, 2004.(cid:10)
10.4 Form of Confidentiality Agreement (corporate), incorporated by(cid:10)
reference to Exhibit 10.7 to the Form SB-2.(cid:10)
10.5 Form of Confidentiality Agreement (employee), incorporated by(cid:10)
reference to Exhibit 10.8 to the Form SB-2.(cid:10)
10.6 Employment Agreement dated as of July 23, 2003 between Bernard(cid:10)
Berk and the Company incorporated by reference to Exhibit 10.6(cid:10)
to Report on Form 10-Q for three months ended June 30, 2003(cid:10)
(the "June 30, 2003 10Q Report")(cid:10)
10.7 Option Agreement between Bernard Berk and the Company dated as(cid:10)
of July 23, 2003 incorporated by reference to Exhibit 10.7 to(cid:10)
the June 30, 2003 10Q Report.(cid:10)
10.8 Option Agreement between Bernard Berk and the Company dated as(cid:10)
of July 23, 2003 incorporated by reference to Exhibit 10.8 to(cid:10)
the June 30, 2003 10Q Report.(cid:10)
10.9 Option Agreement between John A. Moore and the Company dated(cid:10)
as of July 23, 2003 incorporated by reference to Exhibit 10.9(cid:10)
to the June 30, 2003 10Q Report.(cid:10)
10.10 Engagement letter dated February 26, 1998, between Gittelman &(cid:10)
Co. P.C. and the Company. *(cid:10)
21 Subsidiaries of the Company.*(cid:10)
31.1 Certification of Chief Executive Officer pursuant to Section(cid:10)
302 of the Sarbanes-Oxley Act of 2002.*(cid:10)
31.2 Certification of Chief Financial Officer pursuant to Section(cid:10)
302 of the Sarbanes-Oxley Act of 2002.*(cid:10)
32.1** Certification of Chief Executive Officer pursuant to Section(cid:10)
906 of the Sarbanes-Oxley Act of 2002.*(cid:10)
32.2** Certification of Chief Financial Officer pursuant to Section(cid:10)
906 of the Sarbanes-Oxley Act of 2002.*(cid:10)
----------(cid:10)
* Filed herewith(cid:10)
- 51 -(cid:10)
(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)
- 52 -(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: June 28, 2004(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 Officer June 28, 2004(cid:10)
-------------------------- (Principal Executive(cid:10)
Bernard Berk Officer)(cid:10)
/s/ Mark I. Gittelman Chief Financial Officer June 28, 2004(cid:10)
-------------------------- and Treasurer (Principal(cid:10)
Mark I. Gittelman Financial and Accounting(cid:10)
Officer)(cid:10)
/s/ Harmon Aronson Director June 28, 2004(cid:10)
--------------------------(cid:10)
Harmon Aronson(cid:10)
/s/ John A. Moore Director June 28, 2004(cid:10)
--------------------------(cid:10)
John A. Moore(cid:10)
/s/ Eric L. Sichel Director June 28, 2004(cid:10)
--------------------------(cid:10)
Eric L. Sichel(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, 2004, 2003 AND 2002(cid:10)
CONTENTS(cid:10)
PAGE(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 STOCKHOLDERS' EQUITY (DEFICIT) F-5 - F-7(cid:10)
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - 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, 2004 and(cid:10)
2003, and the related consolidated statements of operations, stockholders'(cid:10)
equity (deficit) and cash flows for the years ended March 31, 2004, 2003 and(cid:10)
2002. These financial statements are the responsibility of the Company's(cid:10)
management. Our responsibility is to express an opinion on these financial(cid:10)
statements based on our audits.(cid:10)
We conducted our audits in accordance with standards of the Public Company(cid:10)
Oversight Board (United States). 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, 2004 and 2003, and the(cid:10)
results of their operations and their cash flows for each of the three years in(cid:10)
the period ended March 31, 2004, 2003 and 2002 in conformity with accounting(cid:10)
principles generally accepted 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)
/s/ MILLER, ELLIN & COMPANY, LLP(cid:10)
CERTIFIED PUBLIC ACCOUNTANTS(cid:10)
New York, New York(cid:10)
June 8, 2004, except for(cid:10)
the fourth and fifth paragraphs of(cid:10)
Note 13, as to which(cid:10)
the date is June 24, 2004(cid:10)
F-1(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2004 AND 2003(cid:10)
ASSETS(cid:10)
(cid:10)
(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
(cid:10)
CURRENT ASSETS:(cid:10)
Cash and cash equivalents $2,104,869 $3,264,081(cid:10)
Accounts and accrued interest receivable 153,250 4,681(cid:10)
Restricted cash 203,995 99,380(cid:10)
Prepaid expenses and other current assets 137,892 132,092(cid:10)
---------- ----------(cid:10)
Total current assets 2,600,006 3,500,234(cid:10)
PROPERTY AND EQUIPMENT- net of accumulated(cid:10)
depreciation and amortization 4,090,250 4,390,553(cid:10)
INTANGIBLE ASSETS - net of accumulated amortization 102,196 104,842(cid:10)
OTHER ASSETS:(cid:10)
Deposit on equipment 398,580 --(cid:10)
Restricted cash - debt service 300,000 300,000(cid:10)
Restricted cash - note payable 225,000 250,000(cid:10)
EDA bond offering costs, net of accumulated(cid:10)
amortization of $60,458 and $47,267, respectively 137,402 150,593(cid:10)
---------- ----------(cid:10)
Total other assets 1,060,982 700,593(cid:10)
---------- ----------(cid:10)
$7,853,434 $8,696,222(cid:10)
========== ==========(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-2(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2004 AND 2003(cid:10)
(CONTINUED)(cid:10)
LIABILITIES AND STOCKHOLDERS' EQUITY(cid:10)
(cid:10)
(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
(cid:10)
CURRENT LIABILITIES:(cid:10)
Current portion - Note payable $ 75,000 $ 75,000(cid:10)
Current portion of EDA bonds 150,000 140,000(cid:10)
Accounts payable and accrued expenses 1,085,242 334,721(cid:10)
------------ ------------(cid:10)
Total current liabilities 1,310,242 549,721(cid:10)
------------ ------------(cid:10)
LONG TERM LIABILITIES:(cid:10)
Note payable - net of current portion 150,000 225,000(cid:10)
EDA bonds - net of current portion 2,345,000 2,495,000(cid:10)
------------ ------------(cid:10)
Total long-term liabilities 2,495,000 2,720,000(cid:10)
------------ ------------(cid:10)
COMMITMENTS AND CONTINGENCIES(cid:10)
STOCKHOLDERS' EQUITY:(cid:10)
Common stock - $.01 par value;(cid:10)
Authorized - 25,000,000 shares(cid:10)
Issued and outstanding - 12,204,423 and 10,544,423 in(cid:10)
2004 and 2003, respectively 122,044 105,444(cid:10)
Additional paid-in capital 39,338,140 34,218,832(cid:10)
Accumulated deficit (35,105,151) (28,590,934)(cid:10)
------------ ------------(cid:10)
4,355,033 5,733,342(cid:10)
Treasury stock (306,841) (306,841)(cid:10)
------------ ------------(cid:10)
Total stockholders' equity 4,048,192 5,426,501(cid:10)
------------ ------------(cid:10)
Total liabilities and stockholders' equity $ 7,853,434 $ 8,696,222(cid:10)
============ ============(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-3(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF OPERATIONS(cid:10)
(cid:10)
(cid:10)
YEARS ENDED MARCH 31,(cid:10)
---------------------(cid:10)
2004 2003 2002(cid:10)
---- ---- ----(cid:10)
(cid:10)
REVENUES:(cid:10)
Research and development $ 258,250 $ 442,500 $ 593,000(cid:10)
Product formulation fees -- 187,810 601,057(cid:10)
Consulting and test fees -- -- 3,450(cid:10)
------------ ------------ ------------(cid:10)
Total revenues 258,250 630,310 1,197,507(cid:10)
------------ ------------ ------------(cid:10)
OPERATING EXPENSES:(cid:10)
Research and development 2,075,074 2,013,579 1,609,108(cid:10)
General and administrative 2,549,846 1,858,069 763,687(cid:10)
Depreciation and amortization 332,836 310,876 266,919(cid:10)
------------ ------------ ------------(cid:10)
4,957,756 4,182,524 2,639,714(cid:10)
------------ ------------ ------------(cid:10)
LOSS FROM OPERATIONS (4,699,506) (3,552,214) (1,442,207)(cid:10)
------------ ------------ ------------(cid:10)
OTHER INCOME (EXPENSES):(cid:10)
Interest income 23,765 96,692 260,055(cid:10)
Litigation Settlement 150,000 -- --(cid:10)
Sale of NJ Tax Losses 151,027 71,674 137,818(cid:10)
Interest expense (211,595) (227,907) (220,123)(cid:10)
Equity in loss of joint venture -- (186,379) (507,640)(cid:10)
Charge relating to issuance of stock options (1,166,601) (20,550) --(cid:10)
Charge relating of issuance of stock warrants (587,983) -- --(cid:10)
Charge relating to warrant exchange offer (172,324) (242,338) --(cid:10)
------------ ------------ ------------(cid:10)
(1,813,711) (508,808) (329,890)(cid:10)
------------ ------------ ------------(cid:10)
LOSS BEFORE PROVISION FOR INCOME(cid:10)
TAXES (6,513,217) (4,061,022) (1,772,097)(cid:10)
PROVISION FOR INCOME TAXES 1,000 400 2,430(cid:10)
------------ ------------ ------------(cid:10)
NET LOSS $ (6,514,217) $ (4,061,422) $ (1,774,527)(cid:10)
============ ============ ============(cid:10)
BASIC AND DILUTED LOSS PER COMMON(cid:10)
SHARE $ (0.58) $ (0.40) $ (0.19)(cid:10)
============ ============ ============(cid:10)
WEIGHTED AVERAGE NUMBER OF(cid:10)
COMMON SHARES OUTSTANDING 11,168,618 10,069,991 9,561,299(cid:10)
============ ============ ============(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-4(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(cid:10)
(cid:10)
PREFERRED STOCK COMMON STOCK(cid:10)
--------------- ------------(cid:10)
ADDITIONAL(cid:10)
PAID-IN(cid:10)
SHARES AMOUNT SHARES AMOUNT CAPITAL(cid:10)
------ ------ ------ ------ -------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2001 -- $ -- 9,376,389 $ 93,764 $ 18,071,503(cid:10)
Issuance of shares through(cid:10)
exercise of warrants -- -- 298,179 2,981 1,301,606(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants -- -- 16,272 163 58,416(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of options -- -- 20,000 200 37,939(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 March 31, 2002 -- -- -- -- --(cid:10)
------- ------------ --------- ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $ 19,469,464(cid:10)
------- ------------ --------- ------------ ------------(cid:10)
(cid:10)
TREASURY STOCK(cid:10)
--------------(cid:10)
STOCKHOLDERS'(cid:10)
ACCUMULATED EQUITY(cid:10)
SHARES AMOUNT DEFICIT (DEFICIT)(cid:10)
------ ------ ------- ---------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2001 ($21,000,013) $ (2,834,746)(cid:10)
Issuance of shares through(cid:10)
exercise of warrants -- 1,304,587(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants -- 58,579(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of options -- 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 March 31, 2002 -- -- (1,774,527) (1,774,527)(cid:10)
-------- -------- ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2002 -- $ -- ($23,627,688) $ (3,861,116)(cid:10)
-------- -------- ------------ ------------(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-5(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(cid:10)
(cid:10)
PREFERRED STOCK COMMON STOCK(cid:10)
--------------- ------------(cid:10)
ADDITIONAL(cid:10)
PAID-IN(cid:10)
SHARES AMOUNT SHARES AMOUNT CAPITAL(cid:10)
------ ------ ------ ------ -------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $ 19,469,464(cid:10)
Issuance of shares through(cid:10)
exercise of warrants -- -- 2,603 26 13,004(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants -- -- 14,670 147 52,666(cid:10)
Issuance of 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)
Preferred stock issued to satisfy(cid:10)
accrued dividends 14,000 14,000 -- -- --(cid:10)
Conversion of convertible(cid:10)
exchangeable preferred stock into(cid:10)
common stock (773,000) (773,000) 816,310 8,163 14,520,810(cid:10)
Purchase of treasury stock -- -- (100,000) -- --(cid:10)
Charge relating to exchange of(cid:10)
warrants -- -- -- -- 242,338(cid:10)
Charge relating to issuance of(cid:10)
stock options -- -- -- -- 20,550(cid:10)
Fees relating to Warrant Exchange(cid:10)
Offer -- -- -- -- (100,000)(cid:10)
Net loss for the year ended March(cid:10)
31, 2003 -- -- -- -- --(cid:10)
------------ ------------ ------------ ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2003 -- $ -- 10,444,423 $ 105,444 $ 34,218,832(cid:10)
============ ============ ============ ============ ============(cid:10)
(cid:10)
TREASURY STOCK(cid:10)
--------------(cid:10)
STOCKHOLDERS'(cid:10)
ACCUMULATED EQUITY(cid:10)
SHARES AMOUNT DEFICIT (DEFICIT)(cid:10)
------ ------ ------- ---------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2002 -- $ -- $(23,627,688) $ (3,861,116)(cid:10)
Issuance of shares through(cid:10)
exercise of warrants -- 13,030(cid:10)
Issuance of shares and warrants(cid:10)
through exercise of placement(cid:10)
agent warrants -- 52,813(cid:10)
Issuance of 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)
Preferred stock issued to satisfy(cid:10)
accrued dividends -- 14,000(cid:10)
Conversion of convertible(cid:10)
exchangeable preferred stock into(cid:10)
common stock -- -- -- 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(cid:10)
Charge relating to issuance of(cid:10)
stock options -- -- -- 20,550(cid:10)
Fees relating to Warrant Exchange(cid:10)
Offer -- -- -- (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 100,000 $ (306,841) $(28,590,934) $ 5,426,501(cid:10)
========== ========== ============ ============(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-6(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(cid:10)
(cid:10)
PREFERRED STOCK COMMON STOCK(cid:10)
--------------- ------------(cid:10)
ADDITIONAL(cid:10)
PAID-IN(cid:10)
SHARES AMOUNT SHARES AMOUNT CAPITAL(cid:10)
------ ------ ------ ------ -------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2003 -- $ -- 10,444,423 $ 105,444 $ 34,218,832(cid:10)
Modification of warrant exchange(cid:10)
offer -- -- -- -- 172,324(cid:10)
Issuance of stock options -- -- -- -- 1,166,601(cid:10)
Issuance of stock warrants -- -- -- -- 587,983(cid:10)
Proceeds from exercising stock(cid:10)
options -- -- 15,000 150 29,850(cid:10)
Net proceeds from private placement -- -- 1,645,000 16,450 3,162,550(cid:10)
Previous rounding differences -- -- -- --(cid:10)
Net loss for the year ended March(cid:10)
31, 2004 -- -- -- -- --(cid:10)
--------- --------- ------------ ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2004 -- $ -- 12,104,423 $ 122,044 $ 39,338,140(cid:10)
========= ========= ============ ============ ============(cid:10)
(cid:10)
TREASURY STOCK(cid:10)
--------------(cid:10)
STOCKHOLDERS'(cid:10)
ACCUMULATED EQUITY(cid:10)
SHARES AMOUNT DEFICIT (DEFICIT)(cid:10)
------ ------ ------- ---------(cid:10)
(cid:10)
BALANCE AT APRIL 1, 2003 100,000 $ (306,841) $(28,590,934) $ 5,426,501(cid:10)
Modification of warrant exchange(cid:10)
offer -- -- -- 172,324(cid:10)
Issuance of stock options -- -- -- 1,166,601(cid:10)
Issuance of stock warrants -- -- -- 587,983(cid:10)
Proceeds from exercising stock(cid:10)
options -- -- -- 30,000(cid:10)
Net proceeds from private placement -- -- -- 3,179,000(cid:10)
Previous rounding differences -- -- -- --(cid:10)
Net loss for the year ended March(cid:10)
31, 2004 -- -- (6,514,217) (6,514,217)(cid:10)
------------ ------------ ------------ ------------(cid:10)
BALANCE AT MARCH 31, 2004 100,000 $ (306,841) $(35,105,151) $ 4,048,192(cid:10)
============ ============ ============ ============(cid:10)
(cid:10)
F-7(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:10)
(cid:10)
(cid:10)
YEARS ENDED MARCH 31,(cid:10)
---------------------(cid:10)
2004 2003 2002(cid:10)
---- ---- ----(cid:10)
(cid:10)
CASH FLOWS FROM OPERATING ACTIVITIES:(cid:10)
Net loss $ (6,514,217) $ (4,061,422) $ (1,774,527)(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 332,836 310,876 266,919(cid:10)
Charge relating to Warrant Exchange Offer 172,324 242,338 --(cid:10)
Charge relating to issuance of stock options 1,166,601 20,550 --(cid:10)
Charge relating to issuance of stock warrants 587,983 -- --(cid:10)
Equity in loss of joint venture -- 186,379 507,640(cid:10)
Changes in assets and liabilities:(cid:10)
Contract revenue receivable (148,569) 35,307 (26,674)(cid:10)
Prepaid expenses and other current assets (5,800) (26,010) (24,350)(cid:10)
Amount receivable from Joint Venture -- 525,259 (444,444)(cid:10)
Accounts payable and accrued expenses and other current(cid:10)
Liabilities 750,521 193,009 (78,508)(cid:10)
------------ ------------ ------------(cid:10)
NET CASH (USED IN) OPERATING ACTIVITIES (3,658,321) (2,573,714) (1,568,887)(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 (16,696) (69,517) (6,920)(cid:10)
Restricted cash (79,615) 114,284 (157,624)(cid:10)
Receivable from sale of New Jersey tax losses -- 66,077 80,055(cid:10)
Payment of deposit for manufacturing equipment (398,580) -- (123,396)(cid:10)
Purchases of property and equipment -- (679,485) (223,801)(cid:10)
------------ ------------ ------------(cid:10)
NET CASH (USED IN) INVESTING ACTIVITIES (494,891) (468,641) (531,686)(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) (75,000) --(cid:10)
Purchase of treasury stock -- (306,841) --(cid:10)
Proceeds from issuance of common stock and warrants 3,209,000 65,843 1,401,305(cid:10)
Principal repayments of EDA bonds (140,000) (130,000) (120,000)(cid:10)
------------ ------------ ------------(cid:10)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,994,000 (545,998) 1,656,305(cid:10)
------------ ------------ ------------(cid:10)
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,159,212) (3,588,353) (444,268)(cid:10)
CASH AND CASH EQUIVALENTS - beginning of period 3,264,081 6,852,434 7,296,702(cid:10)
------------ ------------ ------------(cid:10)
CASH AND CASH EQUIVALENTS - end of period $ 2,104,869 $ 3,264,081 $ 6,852,434(cid:10)
============ ============ ============(cid:10)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:(cid:10)
Cash paid for interest $ 214,199 $ 228,938 $ 218,938(cid:10)
Cash paid (received) for income taxes (150,027) (71,274) 2,430(cid:10)
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:(cid:10)
Utilization of equipment deposit towards purchase of equipment $ -- $ 123,396 $ --(cid:10)
Issuance of Preferred Stock (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(cid:10)
Conversion of preferred stock to common stock -- 8,163 --(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 -- 899,923 853,148(cid:10)
(cid:10)
The accompanying notes are an integral part of the consolidated financial(cid:10)
statements.(cid:10)
F-8(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(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 "Company").(cid:10)
All significant intercompany accounts and transactions have been(cid:10)
eliminated in consolidation.(cid:10)
The Company consolidates all entities that it controls. The Company did(cid:10)
not consolidate companies it did not control. The Company used the equity(cid:10)
method to account for its investments in companies in which it did not(cid:10)
have the ability to exercise significant influence over operating and(cid:10)
financial policies.(cid:10)
NATURE OF BUSINESS(cid:10)
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1, 1997(cid:10)
under the Laws of the State of Delaware, and its wholly-owned subsidiary(cid:10)
Elite Laboratories, Inc. ("Elite Labs") was incorporated on August 23,(cid:10)
1990 under the Laws of the State of Delaware, in order to engage in(cid:10)
research and development activities for the purpose of obtaining Food and(cid:10)
Drug Administration approval, and, thereafter, commercially exploiting(cid:10)
generic and new controlled-release pharmaceutical products. The Company(cid:10)
also engages in contract research and development on behalf of other(cid:10)
pharmaceutical companies.(cid:10)
On October 24, 1997, Elite merged with Prologica International, Inc.(cid:10)
("Prologica") a Pennsylvania Corporation, a publicly traded inactive(cid:10)
corporation, with Elite surviving the merger. In addition, Elite Labs(cid:10)
merged with a wholly-owned subsidiary of Prologica, with the Company's(cid:10)
subsidiary surviving this merger. The former shareholders of the Company's(cid:10)
subsidiary exchanged all of their shares of Class A voting common stock(cid:10)
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 the(cid:10)
merger activity qualified as a reverse acquisition. In connection with the(cid:10)
reverse acquisition, options exercisable for shares of Class A voting and(cid:10)
Class B nonvoting common stock of the Company's subsidiary were exchanged(cid:10)
for options exercisable for shares of the Company's voting common stock.(cid:10)
On September 30, 2002, the Company acquired from Elan Corporation, plc and(cid:10)
Elan International Services, Ltd. (together "Elan") Elan's 19.9% interest(cid:10)
in Elite Research, Ltd. ("ERL"), a joint venture formed between the(cid:10)
Company and Elan where the Company's interest originally 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 of(cid:10)
the Company. As a result of the merger, ERI became the owner of all of the(cid:10)
assets and liabilities of ERL. The merger was accounted for as a tax free(cid:10)
reorganization.(cid:10)
F-9(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(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 instruments.(cid:10)
The Company places its cash and cash equivalents with high-quality, U.S.(cid:10)
financial institutions and, to date, has not experienced losses on any of its(cid:10)
balances.(cid:10)
PROPERTY AND EQUIPMENT(cid:10)
Property and equipment are stated at cost. Depreciation is provided on the(cid:10)
straight-line method based on the estimated useful lives of the respective(cid:10)
assets which range from five to forty years. Major repairs or improvements(cid:10)
are capitalized. Minor replacements and maintenance and repairs which do(cid:10)
not improve or extend asset lives are expensed 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 resulting(cid:10)
gain or loss, if any, is recorded.(cid:10)
IMPAIRMENT OF LONG-LIVED ASSETS(cid:10)
The Company periodically evaluates the fair value of long-lived assets(cid:10)
whenever events or changes in circumstances indicate that its carrying(cid:10)
amounts may not be recoverable. Accordingly, any impairment of value will(cid:10)
be recognized when the carrying amount of a long-lived asset exceeds its(cid:10)
fair value in accordance with Statement of Financial Accounting Standards(cid:10)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."(cid:10)
Management has determined that no impairment of long-lived assets has(cid:10)
occurred.(cid:10)
RESEARCH AND DEVELOPMENT(cid:10)
Research and development expenditures are charged to expense as incurred.(cid:10)
PATENTS AND TRADEMARKS(cid:10)
Effective April 1, 2002, the Company adopted the provisions of SFAS No.(cid:10)
142, "Goodwill and Other Intangible Assets." The adoption of SFAS No. 142(cid:10)
required an initial impairment assessment involving a comparison of the(cid:10)
fair value of patents and trademarks to current carrying value. No(cid:10)
impairment was determined to exist. The Company reviews such trademarks(cid:10)
and patents with definite lives for impairment to ensure they are(cid:10)
appropriately valued if conditions exist that may indicate the carrying(cid:10)
value may not be recoverable. Such conditions may include an economic(cid:10)
downturn or a change in the assessment of 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 upon(cid:10)
approval of the patent and trademarks. These costs are charged to expense(cid:10)
if the patent or trademark is unsuccessful.(cid:10)
F-10(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(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 with(cid:10)
other pharmaceutical companies, subject to licensing and research and(cid:10)
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 in(cid:10)
the normal course of business and performs ongoing credit evaluations. As(cid:10)
of March 31, 2004 and 2003, no allowance for doubtful accounts was(cid:10)
considered necessary, based on historical trends, economic conditions and(cid:10)
the credit worthiness of customers. Amounts are written off when they are(cid:10)
deemed uncollectible. The Company has not experienced significant(cid:10)
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 and(cid:10)
assumptions that affect the reported amounts of assets and liabilities and(cid:10)
disclosure of contingent assets and liabilities at the date of the(cid:10)
financial statements and the reported amounts of revenues and expenses(cid:10)
during the reporting period. Actual results could differ from those(cid:10)
estimates. Significant estimates made by management include, but are not(cid:10)
limited to, the recognition of revenue and the fair value of intangible(cid:10)
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 taxes.(cid:10)
The liability method measures deferred income taxes by applying enacted(cid:10)
statutory rates in effect at the balance sheet date to the differences(cid:10)
between the tax bases of assets and liabilities and their reported amounts(cid:10)
in the financial statements. The resulting deferred tax assets or(cid:10)
liabilities are adjusted to reflect changes in tax laws 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 and(cid:10)
convertible securities, have not been included, as their effect would be(cid:10)
antidilutive. For the three years ended March 31, the following(cid:10)
potentially dilutive securities were not included in the computation of(cid:10)
diluted loss per share:(cid:10)
(cid:10)
F-11(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
REVENUE RECOGNITION(cid:10)
Revenues derived from providing research and development services under(cid:10)
contracts with other pharmaceutical companies are recognized when earned.(cid:10)
These contracts provide for non-refundable upfront and milestone payments.(cid:10)
Because no discrete earnings event has occurred when the upfront payment(cid:10)
is received, that amount is deferred until the achievement of a defined(cid:10)
milestone. Each nonrefundable milestone payment is recognized as revenue(cid:10)
when the performance criteria for that milestone has been met. Under each(cid:10)
contract, the milestones are defined, substantive effort is required to(cid:10)
achieve the milestone, the amount of the non-refundable milestone payment(cid:10)
is reasonable, commensurate with the effort expended, and achievement of(cid:10)
the milestone is reasonably assured.(cid:10)
Revenues earned by licensing certain pharmaceutical products developed by(cid:10)
Elite are recognized at the beginning of a license term when Elite's(cid:10)
customer has legal right to the use of the product. To date, no revenues(cid:10)
have been earned by licensing products and there are no continuing(cid:10)
obligations under any licensing agreements.(cid:10)
INVESTMENT IN JOINT VENTURE(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, the(cid:10)
Company recognized its share in the net earnings or losses of the joint(cid:10)
venture as they occurred. While Elite owned 100% of the outstanding common(cid:10)
stock of ERL, Elite's equity in the loss of ERL was based on 100% of ERL's(cid:10)
losses, less the amounts funded by Elan. Elan funded 19.9% of ERL's(cid:10)
losSes. Once Elite's investment was reduced to zero, further losses were(cid:10)
recognized to the extent of Elite's commitment to fund the losses. The(cid:10)
joint venture was terminated effective September 30, 2002, as further(cid:10)
discussed in Note 7.(cid:10)
F-12(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(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 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 the(cid:10)
board of directors and advisory board members, as further described in(cid:10)
Note 11. Effective April 1, 2002, the Company adopted the fair value(cid:10)
recognition provisions of SFAS No. 123, "Accounting for Stock-Based(cid:10)
Compensation" and selected the prospective method of adoption described in(cid:10)
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and(cid:10)
Disclosure - an amendment of SFAS No. 123." Prior to April 1, 2002, the(cid:10)
Company measured stock-based compensation for its employee compensation(cid:10)
plans using the intrinsic value method prescribed by Accounting Principles(cid:10)
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and(cid:10)
related interpretations. No stock-based employee compensation expense for(cid:10)
stock options was reflected in net loss for the year ended March 31, 2002(cid:10)
as all stock options granted under those plans had an exercise price equal(cid:10)
to the fair market value of the underlying common stock on the date of(cid:10)
grant.(cid:10)
During the years ended March 31, 2003 and 2004 the Company issued 210,000(cid:10)
and 1,024,000, respectively options to purchase common stock to employees(cid:10)
and to members of the board of directors. The options have an exercise(cid:10)
price ranging from $2.01 to $5.00 per share and all vest over three years(cid:10)
except 610,000 shares issued in 2004 which vested upon grant date. The(cid:10)
options expire between five and ten years from the date of grant. The(cid:10)
Company has recorded compensation expense of $20,550 and $1,166,601 for(cid:10)
the years ended March 31, 2003 and 2004 which represents the fair value of(cid:10)
the options vested, utilizing the Black-Scholes options pricing model on(cid:10)
each grant date.(cid:10)
On June 22, 2004 the Company's Stockholders approved the 2004 Stock Option(cid:10)
Plan and ratified the amendments of the terms of outstanding options and(cid:10)
warrants, including the repricing of options to certain Directors and(cid:10)
employees (See Note 13). The Company will record a significant(cid:10)
compensation expense in future periods, based on the fair value of the(cid:10)
options after reflecting the repricing and amendments to the terms of the(cid:10)
options.(cid:10)
The following table illustrates the effect on net loss and loss per share(cid:10)
as if the Company had applied the fair value recognition provisions of(cid:10)
SFAS No. 123 to all outstanding and unvested awards in each year(cid:10)
presented:(cid:10)
(cid:10)
(cid:10)
2004 2003 2002(cid:10)
---- ---- ----(cid:10)
(cid:10)
Net loss as reported $(6,514,217) $(4,061,422) $(1,774,527)(cid:10)
Add: Stock-based compensation expense(cid:10)
included in reported net loss, net of related(cid:10)
tax effects 1,166,601 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 (865,255) (1,070,651) (1,779,338)(cid:10)
----------- ----------- -----------(cid:10)
Pro forma net loss (6,212,871) (5,111,523) (3,553,865)(cid:10)
Loss per share as reported (0.58) (0.40) (0.19)(cid:10)
Pro-forma loss per share (0.56) (0.51) (0.38)(cid:10)
(cid:10)
F-13(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(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 fair(cid:10)
value due to the short-term nature of these instruments. The carrying(cid:10)
amounts of noncurrent assets are reasonable estimates of their fair values(cid:10)
based on management's evaluation of future cash flows. The long-term(cid:10)
liabilities are carried at amounts that approximate fair value based on(cid:10)
borrowing rates available to the Company for obligations with similar(cid:10)
terms, degrees of risk and remaining maturities.(cid:10)
RECLASSIFICATIONS(cid:10)
Certain accounts and amounts in the 2003 and 2002 financial statements(cid:10)
have been reclassified in order to conform with the 2004 presentation.(cid:10)
These reclassifications have no effect on net income.(cid:10)
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS(cid:10)
The Company reported net losses of $6,514,217, $4,061,422 and $1,774,527(cid:10)
for the fiscal years ended March 31, 2004, 2003 and 2002, respectively. At(cid:10)
March 31, 2004, the Company had an accumulated deficit of approximately(cid:10)
$35.1 million, consolidated assets of approximately $7.9 million,(cid:10)
stockholders' equity of approximately $4.0 million, and working capital of(cid:10)
approximately $1.3 million. The Company has not generated any significant(cid:10)
revenue to date.(cid:10)
In an effort to reduce costs in fiscal 2003, the Company has reduced the(cid:10)
number of products being actively developed from approximately fifteen to(cid:10)
six. 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. The Company has also settled certain(cid:10)
litigation with its former CEO which will significantly reduce its legal(cid:10)
fees.(cid:10)
The primary strategy remains to develop the Company's oral control release(cid:10)
pharmaceutical products, with emphasis in the area of pain management, for(cid:10)
FDA approval, and once developed, to commercially exploit these products(cid:10)
either by licensing or through the development of collaborations with(cid:10)
strategic partners.(cid:10)
The Company also retained an investment banking firm in fiscal 2003 to(cid:10)
assist the Company in connection with potential strategic transactions,(cid:10)
including acquisitions. The Company may receive additional cash proceeds(cid:10)
from the exercise of outstanding options and warrants, as well as through(cid:10)
the continued sale of its New Jersey State tax losses. However, there is(cid:10)
no assurance that any options or warrants will be exercised, that any sale(cid:10)
of tax losses will be completed or that the Company will be able to raise(cid:10)
additional capital.(cid:10)
In the event Purdue proceeds with its option to license the Company's(cid:10)
Oxycodone product pursuant to the option agreement entered into on May 14,(cid:10)
2004 (See Note 13), the terms of the licensing agreement provide for the(cid:10)
Company to receive significant milestone payments on or before March 31,(cid:10)
2005.(cid:10)
See Note 13 for information as to the Company's efforts to effect a(cid:10)
financing of equipment purchases and a private placement of shares of its(cid:10)
Common Stock. No representation can be made that the efforts will be(cid:10)
successful or that if successful that the resulting proceeds will be(cid:10)
material.(cid:10)
There is also no assurance that the Company's current business strategies(cid:10)
will be successfully implemented or that it will raise the necessary funds(cid:10)
to allow it to continue its operations. Management believes that cost(cid:10)
reductions already implemented will reduce losses in the future, and with(cid:10)
the Company's existing working capital levels, anticipates that the(cid:10)
Company will be able to continue its operations at least through the end(cid:10)
of fiscal year 2005, assuming it is successful in consummating the(cid:10)
transactions discussed above.(cid:10)
F-14(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 3- PROPERTY AND EQUIPMENT(cid:10)
Property and equipment at March 31, 2004 and 2003 consists of the(cid:10)
following:(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
Laboratory manufacturing, and warehouse equipment $3,140,250 $3,140,250(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 5,490,859(cid:10)
Less: Accumulated depreciation and amortization 1,400,609 1,100,306(cid:10)
---------- ----------(cid:10)
$4,090,250 $4,390,553(cid:10)
========== ==========(cid:10)
Depreciation and amortization expense amounted to $300,303, $278,348 and(cid:10)
$249,338 for the years ended March 31, 2004, 2003 and 2002, respectively.(cid:10)
The Company's obligations under capital leases were satisfied prior to(cid:10)
March 31, 2003.(cid:10)
NOTE 4 - INTANGIBLE ASSETS(cid:10)
Intangible assets at March 31, 2004 and 2003, consist of the following:(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
Patents $145,830 $129,134(cid:10)
Trademarks 8,120 8,120(cid:10)
-------- --------(cid:10)
153,950 137,254(cid:10)
Less: Accumulated amortization 51,754 32,412(cid:10)
-------- --------(cid:10)
$102,196 $104,842(cid:10)
======== ========(cid:10)
Amortization of intangible assets amounted to $19,342, $19,344 and $4,390(cid:10)
for the years ended March 31, 2004, 2003 and 2002, respectively.(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)
2005 $ 19,340(cid:10)
2006 19,340(cid:10)
2007 19,340(cid:10)
2008 19,340(cid:10)
2009 8,140(cid:10)
F-15(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 5 - NOTE PAYABLE(cid:10)
On February 26, 2002, the Company closed a bank loan totaling $375,000 to(cid:10)
finance the purchase and installation of machinery and equipment. Interest(cid:10)
is fixed at 5.70% per annum calculated on a 360 day year. The loan is due(cid:10)
in 60 equal monthly installments of $6,250 plus interest, with the first(cid:10)
payment commencing on April 1, 2002, and is secured by the machinery and(cid:10)
equipment purchased under this facility and a certificate of deposit in(cid:10)
the amount of $225,000 held as collateral. This certificate of deposit has(cid:10)
been classified as noncurrent restricted cash. The note payable consists(cid:10)
of the following at March 31:(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
Bank note payable $ 225,000 $ 300,000(cid:10)
Current portion (75,000) (75,000)(cid:10)
--------- ---------(cid:10)
Long-term portion, net of current maturities $ 150,000 $ 225,000(cid:10)
========= =========(cid:10)
Future principal maturities under this loan are as follows:(cid:10)
YEARS ENDING MARCH 31,(cid:10)
----------------------(cid:10)
2005 $ 75,000(cid:10)
2006 75,000(cid:10)
2007 75,000(cid:10)
---------(cid:10)
$ 225,000(cid:10)
=========(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 the(cid:10)
land and building it currently owns, and for the purchase of certain(cid:10)
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 proceeds.(cid:10)
Offering costs included underwriter fees equal to $90,000 (three percent(cid:10)
(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 of(cid:10)
bond principal and interest, for the refinancing of the land and building(cid:10)
the Company currently owns, for the purchase of certain manufacturing(cid:10)
equipment and related building improvements as well as the maintenance of(cid:10)
a $300,000 Debt Service Reserve.(cid:10)
F-16(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 6 - BOND FINANCING OFFERING (CONTINUED)(cid:10)
All restricted accounts other than the $300,000 Debt Service Reserve are(cid:10)
expected to be expended within twelve months and are therefore categorized(cid:10)
as current assets. Bond financing consisted of the following at March 31:(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
EDA Bonds $ 2,495,000 $ 2,635,000(cid:10)
Current portion (150,000) (140,000)(cid:10)
----------- -----------(cid:10)
Long term portion, net of current maturities 2,345,000 2,495,000(cid:10)
=========== ===========(cid:10)
Future principal maturities required under the bond agreement are as(cid:10)
follows:(cid:10)
YEARS ENDING MARCH 31,(cid:10)
----------------------(cid:10)
2005 $ 150,000(cid:10)
2006 165,000(cid:10)
2007 175,000(cid:10)
2008 190,000(cid:10)
2009 205,000(cid:10)
Thereafter 1,610,000(cid:10)
-----------(cid:10)
$ 2,495,000(cid:10)
===========(cid:10)
F-17(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(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 delivery(cid:10)
technologies and expertise of both companies. This joint venture, Elite(cid:10)
Research, Ltd. ("ERL"), a Bermuda corporation, was initially owned 80.1%(cid:10)
by the Company and 19.9% by Elan. ERL was to fund its research through(cid:10)
capital contributions from its partners based on the partners' respective(cid:10)
ownership percentage. ERL subcontracted research and development efforts(cid:10)
to the Company, Elan and others. It was anticipated that the Company would(cid:10)
provide most of the formulation and development work. The Company had(cid:10)
commenced work for three products. The joint venture terminated on(cid:10)
September 30,2002. For the years ended March 31, 2003 and 2002, the(cid:10)
Company charged $187,810 and $601,057, respectively, to ERL which was(cid:10)
reflected in product formulation fees. Intercompany profits and losses(cid:10)
were eliminated.(cid:10)
ERL was initially capitalized with $15,000,000 which included the issuance(cid:10)
of 6,000 voting common shares, par value $1.00 per share, and 6,000(cid:10)
non-voting convertible preferred shares, par value $1.00 per share. All of(cid:10)
the voting shares were held by the Company, with the non-voting(cid:10)
convertible preferred shares held by both the Company and Elan, being(cid:10)
split 3,612 shares and 2,388 shares, respectively. Elite's and Elan's(cid:10)
respective ownership in ERL did not change during the term of the joint(cid:10)
venture.(cid:10)
While the Company initially owned 80.1% of the outstanding capital stock(cid:10)
(100% of the outstanding common stock) of ERL until September 30, 2002,(cid:10)
Elan and its subsidiaries retained significant minority investor rights(cid:10)
that were considered "participating rights" as defined in the Emerging(cid:10)
Issues Task Force Consensus No. 96-16. Accordingly, the Company did not(cid:10)
consolidate the financial statements of ERL until September 30, 2002 but(cid:10)
instead accounted for its investment in ERL under the equity method of(cid:10)
accounting until the Joint Venture was terminated, effective September 30,(cid:10)
2002.(cid:10)
For the year ended March 31, 2002 and the period beginning April 1, 2002(cid:10)
through September 30, 2002, ERL recognized net losses of $633,642 and(cid:10)
$232,742, respectively, and the Company recognized 80.1% of these losses,(cid:10)
or $507,640 and $186,379, respectively. The product formulation fees(cid:10)
$187,810 and $601,057 earned by the Company for services rendered to ERL(cid:10)
for the years ended March 31, 2003 and 2002, respectively, are included in(cid:10)
ERL's expenses. During fiscal year 2001, ERL paid $15,000,000 to Elan for(cid:10)
a license providing ERL non-exclusive rights to use certain Elan(cid:10)
in-process drug delivery technologies. The Elan technology rights acquired(cid:10)
relate to very early stage technology that, in the opinion of management,(cid:10)
have not reached technological feasibility and have no future alternative(cid:10)
uses. Through the date of its termination, ERL completed in-vivo (pilot(cid:10)
clinical trial) on the first product and began formulation and development(cid:10)
of two additional products.(cid:10)
During fiscal year 2003, the Company consummated a termination agreement(cid:10)
(the "Termination Agreement") with Elan to acquire all of Elan's interest(cid:10)
in ERL. As further discussed in Note 10, the joint venture was terminated(cid:10)
effective September 30, 2002.(cid:10)
F-18(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)(cid:10)
Under the Termination Agreement, among other things, the Company acquired(cid:10)
all proprietary, development and commercial rights for the worldwide(cid:10)
markets for the products developed by ERL. In exchange for the assignment,(cid:10)
ERL agreed to pay Elan a royalty on certain revenues that may be realized(cid:10)
from the once-a-day Oxycodone product that has been developed by ERL.(cid:10)
Effective October 1, 2002, the Company is solely responsible to fund ERL's(cid:10)
product development.(cid:10)
The Company did not pay, nor did Elan receive any cash consideration under(cid:10)
the Termination Agreement. Furthermore, the Company has the exclusive(cid:10)
rights to the proprietary, development and commercial rights for the(cid:10)
worldwide markets for two other products developed by ERL. The Company is(cid:10)
not required to pay Elan royalties on revenues that may be realized from(cid:10)
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 Preferred(cid:10)
Stock, according to their terms, into 52,089 shares of the Company's(cid:10)
common stock. This resulted in an increase in common stock of $521 and an(cid:10)
increase in additional paid in capital of $772,479. As a result, the(cid:10)
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 Company(cid:10)
accounted for this conversion by increasing common stock in the amount of(cid:10)
$7,642 and by a corresponding increase in additional paid in capital of(cid:10)
$13,748,332. As a result, the Series A Preferred 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 certain(cid:10)
securities of Elite it had obtained in connection with the joint venture(cid:10)
and transferred other such securities to a third-party, as further(cid:10)
discussed in Note 10.(cid:10)
The following is a condensed balance sheet of ERL on September 30, 2002(cid:10)
(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)
F-19(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)(cid:10)
The following are unaudited pro-forma consolidated results of operations(cid:10)
for the years ended March 31, 2003 and 2002, assuming the acquisition was(cid:10)
completed on April 1, 2001.(cid:10)
YEAR ENDED MARCH 31,(cid:10)
--------------------(cid:10)
2003 2002(cid:10)
---- ----(cid:10)
(Unaudited) (Unaudited)(cid:10)
Revenue $ 442,500 $ 596,450(cid:10)
Proforma net (loss) available to common(cid:10)
shareholders $(4,107,785) $(1,900,529)(cid:10)
Proforma net (loss) available to common(cid:10)
shareholders per share -(cid:10)
basic and diluted $ (0.40) $ (0.19)(cid:10)
Unaudited pro-forma data may not be indicative of the results that would(cid:10)
have been obtained had these events actually occurred at the beginning of(cid:10)
the periods presented, nor does it intend to be a projection of future(cid:10)
results.(cid:10)
NOTE 8 - INCOME TAXES(cid:10)
The components of the provision for income taxes are as follows:(cid:10)
YEAR ENDED MARCH 31,(cid:10)
--------------------------------------(cid:10)
2004 2003 2002(cid:10)
---- ---- ----(cid:10)
Federal:(cid:10)
Current $ -- $ -- $ --(cid:10)
Deferred -- -- --(cid:10)
------ ------ ------(cid:10)
-- -- --(cid:10)
------ ------ ------(cid:10)
State:(cid:10)
Current 1,000 400 2,430(cid:10)
Deferred -- -- --(cid:10)
------ ------ ------(cid:10)
1,000 400 2,430(cid:10)
------ ------ ------(cid:10)
$1,000 $ 400 $2,430(cid:10)
====== ====== ======(cid:10)
In the year ended March 31, 2001, the Company received approval for the(cid:10)
sale of $4,872,267 of New Jersey net operating losses under the Technology(cid:10)
Tax Certificate Transfer Program sponsored by the New Jersey Economic(cid:10)
Development Authority (NJEDA). The total tax benefit approved for receipt(cid:10)
by the Company during the year ended March 31, 2002 was $368,343 of which(cid:10)
$222,211 and $146,132 was received in 2002 and in 2003, respectively.(cid:10)
F-20(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 8 - INCOME TAXES (CONTINUED)(cid:10)
During the year ended March 31, 2003, the Company received approval for(cid:10)
the sale of an additional $1,822,989 of New Jersey net-operating losses(cid:10)
under the 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, 2003(cid:10)
was $137,818, of which $71,741 was received in November 2002. The(cid:10)
remaining balance of $66,077 was received in 2003.(cid:10)
During the year ended March 31, 2004, the Company received approval for(cid:10)
the sale of an additional $1,928,817 of New Jersey net-operating losses(cid:10)
under the Technology Tax Certificate Transfer Program sponsored by the New(cid:10)
Jersey Economic Development Authority (NJEDA). The total tax benefit(cid:10)
received during the year ended March 31, 2004 was $151,027 and is recorded(cid:10)
as other income in the accompanying financial statements.(cid:10)
The major components of deferred tax assets at March 31, 2004 and 2003 are(cid:10)
as follows:(cid:10)
2004 2003(cid:10)
---- ----(cid:10)
Net operating loss carry forwards $ 6,736,336 $ 4,486,167(cid:10)
Valuation allowance (6,736,336) (4,486,167)(cid:10)
----------- -----------(cid:10)
$ -- $ --(cid:10)
=========== ===========(cid:10)
At March 31, 2004, 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 2004, 2003 and 2002 by $2,250,169, $1,357,792(cid:10)
and $304,375, respectively.(cid:10)
At March 31, 2004, for federal income tax purposes, the Company has unused(cid:10)
net operating loss carryforwards of approximately $20,518,995 expiring in(cid:10)
2007 through 2015. For state tax purposes, the Company has $11,011,302 of(cid:10)
unused net operating losses, which are net of the $9,539,503 of New Jersey(cid:10)
net-operating losses sold, as discussed above.(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES(cid:10)
EMPLOYMENT AGREEMENTS(cid:10)
The Company had an employment agreement ("Employment Agreement") with its(cid:10)
former President/CEO, Atul M. Mehta.(cid:10)
On June 3, 2003, Dr. Mehta resigned from all positions that he held with(cid:10)
the Company, while reserving his rights under his Employment Agreement and(cid:10)
under common law. On July 3, 2003, Dr. Mehta instituted litigation against(cid:10)
Elite and one of its directors, in the Superior Court of New Jersey, for,(cid:10)
among other things, allegedly breaching his Employment Agreement and for(cid:10)
defamation, and claims that he is entitled to receive his salary through(cid:10)
June 6, 2006.(cid:10)
F-21(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
EMPLOYMENT AGREEMENTS(cid:10)
The Company and Dr. Mehta settled their litigation subsequent to March 31,(cid:10)
2004 (See Note 13). The Company accrued $400,000 for compensation owed to(cid:10)
Dr. Mehta as of March 31, 2004, in accordance with the settlement(cid:10)
agreement.(cid:10)
On July 23, 2003, the Company entered into an agreement with its new Chief(cid:10)
Executive Officer, Bernard Berk. The initial terms of this agreement is(cid:10)
three years. Pursuant to this agreement:(cid:10)
- Mr. Berk is entitled to receive a base salary of $200,000 per annum,(cid:10)
subject to increase to $330,140 if and when the Company consummates(cid:10)
a Strategic Transaction (as defined in the employment agreement);(cid:10)
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of(cid:10)
options to purchase 300,000 shares of the Company's common stock(cid:10)
at$2.01 per share. All of these options are vested.(cid:10)
- The Company granted Mr. Berk options to purchase an additional(cid:10)
300,000 shares of its common stock, with an exercise price equal to(cid:10)
$2.15, the closing price of the Company's common stock on the date(cid:10)
of grant. These options will vest solely upon consummation of a(cid:10)
Strategic Transaction.(cid:10)
- Mr. Berk will be appointed as a director of the Company if he is(cid:10)
serving as its Chief Executive Officer following the consummation of(cid:10)
a Strategic Transaction.(cid:10)
- Mr. Berk will be entitled to receive severance in accordance with(cid:10)
the employment agreement if he is terminated without cause or(cid:10)
because of his death or permanent disability or if he terminates his(cid:10)
employment for good reason or following a "change-of-control." The(cid:10)
severance will be payable in accordance with the terms of his(cid:10)
employment agreement.(cid:10)
CONSULTING AGREEMENTS(cid:10)
The Company entered into one year consulting agreements with each of Saggi(cid:10)
Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The(cid:10)
consultants' services will include, but not be limited to, advice with(cid:10)
respect to overall strategic planning, financing opportunities,(cid:10)
acquisition policy, commercial and investment banking relationships and(cid:10)
stockholders matters. In consideration of each consultant's services, the(cid:10)
Company agrees to pay it $75,000 payable in monthly installments of $6,250(cid:10)
and to issue to the consultant a warrant to purchase 100,000 shares of the(cid:10)
Company's common stock. For the year ended March 31, 2004, consulting(cid:10)
expenses under both agreements aggregated $30,000 plus approximately(cid:10)
$470,000 attributable to the issuance of warrants.(cid:10)
On July 3, 2003, the Company entered into an agreement with Leerink Swann(cid:10)
& Company to provide a Valuation and a Fairness Opinion in order for the(cid:10)
Company to complete a proposed acquisition for which it received a(cid:10)
non-refundable retainer fee of $50,000. If and when the Board of Directors(cid:10)
requests a Fairness Opinion, Leerink's compensation shall be $50,000. For(cid:10)
the year ended March 31, 2004, consulting expenses under this agreement(cid:10)
amounted to the $50,000 non-refundable retainer fee.(cid:10)
F-22(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
REFERRAL AGREEMENTS(cid:10)
On January 29, 2002, the Company entered into a Referral Agreement with a(cid:10)
Director (Referring Party) whereby Elite will pay the Referring Party a(cid:10)
fee based upon payments received by Elite from sales of products,(cid:10)
development fees, licensing fees and royalties generated as a direct(cid:10)
result of the Referring Party identifying customers for Elite. These(cid:10)
amounts shall be reduced by the cost of goods sold directly incurred in(cid:10)
the manufacturing or development of products as well as any direct(cid:10)
expenses associated with these efforts. Elite will pay Referring Party a(cid:10)
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)
NO AMOUNTS HAD BEEN EARNED THROUGH MARCH 31, 2004.(cid:10)
On August 1, 1998, the Company entered into a consulting agreement (the(cid:10)
"1998 Agreement") with a company owned by a Director for the purpose of(cid:10)
providing management, marketing and financial consulting services for an(cid:10)
unspecified term. Terms of the agreement provided for a nonrefundable(cid:10)
monthly fee of $2,000. This compensation was applied against amounts due(cid:10)
pursuant to a business referral agreement entered into on April 8, 1997(cid:10)
(the "1997 Agreement") with the same party.(cid:10)
Terms of the 1997 Agreement provided for payments by the Company based(cid:10)
upon a formula, as defined, for an unspecified term. On November 14, 2000,(cid:10)
the Company amended its 1997 Agreement to provide certain consulting(cid:10)
services for the period beginning November 1, 2000 through October 31,(cid:10)
2003. The Company previously advanced $20,000 under the 1997 Agreement in(cid:10)
addition to a payment of $50,000 made during the year ended March 31,(cid:10)
2001. The 1997 Agreement called for 25 monthly installments of $3,200(cid:10)
beginning on December 1, 2001.(cid:10)
Consulting expense under the 1997 and 1998 Agreements amounted to $28,800,(cid:10)
$38,400 and $12,800 for the years ended March 31, 2004, 2003 and 2002,(cid:10)
respectively. The agreement terminated on November 30, 2003.(cid:10)
F-23(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
COLLABORATIVE AGREEMENTS(cid:10)
On December 18, 2003, the Company and Pivotal Development, L.L.C. entered(cid:10)
into an agreement to develop a controlled release product utilizing(cid:10)
Elite's proprietary drug delivery technology. The product is a generic(cid:10)
equivalent to a drug losing patent exclusivity with addressable market(cid:10)
revenues of approximately $150 million per year. The agreement will also(cid:10)
provide an option to develop a controlled release NDA product.(cid:10)
Under the collaboration agreement, Pivotal Development will be responsible(cid:10)
for taking the Elite formulation through clinical development and the FDA(cid:10)
regulatory approval process. The partners will seek a license during the(cid:10)
development cycle from a pharmaceutical company which has the resources to(cid:10)
effectively market the product and share the cost of defining the product(cid:10)
against any lawsuits.(cid:10)
Elite and Pivotal will bear costs in their respective areas of(cid:10)
responsibility. In addition, Pivotal shall pay Elite $750,000 upon(cid:10)
attainment of certain milestones outlined in the agreement.(cid:10)
In June 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 partner(cid:10)
in exchange for certain payments and royalties. The Company also reserves(cid:10)
the right to manufacture the compounds. The Company received $250,000 and(cid:10)
$300,000, respectively, on these two agreements, which were earned during(cid:10)
the year ended March 31, 2002. The Company is currently proceeding with(cid:10)
the development and formulation for both products as specified in the(cid:10)
development agreements. During the years ended March 31, 2004 and 2003,(cid:10)
the Company earned revenues of $105,000 and $85,000, respectively, for(cid:10)
additional development and formulation for both products.(cid:10)
On September 13, 2002, the Company, entered into a manufacturing agreement(cid:10)
with Ethypharm S.A. ("Ethypharm"). Under the terms of this agreement, the(cid:10)
Company has initiated the manufacturing of a new prescription drug product(cid:10)
for Ethypharm. The Company received an upfront manufacturing fee for the(cid:10)
first phase of the technology transfer and billed an additional amount(cid:10)
upon the completion of the first phase of manufacturing. The Company is(cid:10)
entitled to receive additional fees in advance for the final phase of the(cid:10)
manufacturing. In addition, if and when FDA approval is obtained and if(cid:10)
requested by Ethypharm, the Company will manufacture commercial batches of(cid:10)
the product on terms to be agreed upon. As of March 31, 2004, the Company(cid:10)
billed and earned revenues of $280,000 under this agreement, all if which(cid:10)
was billed and earned during the year ended March 31, 2003, in accordance(cid:10)
with the substantive milestone method of revenue recognition. Under this(cid:10)
method, the milestone payments are considered to be payments received for(cid:10)
the accomplishment of a discrete, substantive earnings event. Accordingly,(cid:10)
the non-refundable milestone payments are recognized in full when the(cid:10)
milestone is achieved. In addition to milestone payments, the Company(cid:10)
billed and recognized $75,000 in additional revenues as a result of the(cid:10)
manufacturing and delivery of additional batches during the year ended(cid:10)
March 31, 2003.(cid:10)
F-24(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
TREASURY STOCK TRANSACTIONS(cid:10)
At a special meeting of the Company's Board of Directors held on June 27,(cid:10)
2002, the Board authorized the Company to purchase up to 100,000 shares of(cid:10)
its common stock in the open market no later than December 31, 2002. As of(cid:10)
March 31, 2003, the Company had purchased 100,000 shares of common stock(cid:10)
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 under(cid:10)
the Securities Act of 1933, as amended, for the purpose of registering(cid:10)
securities previously sold to and held by various corporations and(cid:10)
individuals. The Company did not receive any proceeds upon filing of this(cid:10)
Form SB-2. The securities registered consisted of 3,725,000 shares of the(cid:10)
Company's $.01 par value common stock, including 1,525,000 redeemable(cid:10)
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 corporations(cid:10)
and individuals. The Company did not receive any proceeds upon filing of(cid:10)
this Form SB-2. The securities registered consisted of 3,297,539 shares of(cid:10)
the Company's $.01 par value common stock, 2,022,537 underlying Class A(cid:10)
and Class B common stock purchase warrants, and 317,250 Class A common(cid:10)
stock purchase warrants.(cid:10)
PRIVATE PLACEMENT OFFERINGS(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 year(cid:10)
period commencing with the date of closing of the private placement(cid:10)
memorandum (June 16, 1999). The price per unit was $350,000. This resulted(cid:10)
in the issuance of 1,275,000 shares of common stock and 637,500 warrants(cid:10)
to purchase common stock, at an exercise price of $5.00 per share.(cid:10)
In a private placement offering concluded in December 2003 the Company(cid:10)
sold 1,645,000 shares of Common Stock for aggregate proceeds of(cid:10)
$3,290,000. It paid a cash commission of $75,000 to the Placement Agent(cid:10)
and issued to the agent and its associates five year warrants to purchase(cid:10)
50,000 shares of Common Stock at a price of $2.00 per share. The Company(cid:10)
granted to the purchasers and the Placement Agent piggyback registration(cid:10)
rights.(cid:10)
PREFERRED STOCK(cid:10)
As further discussed in Note 7, on October 16, 2000, Elite entered into an(cid:10)
agreement (the "Joint Venture Agreement") with Elan International(cid:10)
Services, Ltd. and Elan Corporation, plc. (together "Elan"), under which(cid:10)
the parties formed a joint venture, Elite Research, Ltd. ("ERL"). Under(cid:10)
the terms of the Joint Venture Agreement, 409,165 shares of the Company's(cid:10)
common stock and 12,015 shares of a newly created Series A Convertible(cid:10)
Exchangeable Preferred Stock ("Series A Preferred Stock") were issued to(cid:10)
Elan for consideration of $5,000,000 and $12,015,000, respectively.(cid:10)
Proceeds from the sale of the Series A Preferred Stock were used to fund(cid:10)
the Company's 80.1% share of ERL, as further discussed in Note 7.(cid:10)
F-25(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(CONTINUED)(cid:10)
PREFERRED STOCK (CONTINUED)(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, 2001.(cid:10)
As of September 30, 2002 (the termination date of the Joint Venture), the(cid:10)
Company had accrued dividends of $1,740,973 on the Series A Preferred(cid:10)
Stock. During the year ended March 31, 2003, the Company issued preferred(cid:10)
stock to satisfy accrued dividends.(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 of(cid:10)
additional shares of Series B Preferred Stock, at a price per share equal(cid:10)
to the original issue price. Dividends were accrued and compounded(cid:10)
commencing one year after issuance. As of September 30, 2002 (the(cid:10)
termination date of the joint venture), the Company had accrued dividends(cid:10)
of $14,000 on the Series B Preferred Stock. During the year ended March(cid:10)
31, 2003, the Company issued preferred stock to satisfy accrued dividends.(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 were(cid:10)
financed by the proceeds from the issuance to Elan of 573,000 shares of(cid:10)
Series B Preferred Stock. These contributions were in addition to a(cid:10)
capital contribution in the amount of $200,000 made by the Company to ERL(cid:10)
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 17,(cid:10)
2000 the Company issued to Elan 100,000 warrants to purchase the Company's(cid:10)
common stock at an exercise price of $18 per share. The warrants are(cid:10)
exercisable at any time on or before October 17, 2005. Subject to a(cid:10)
Termination Agreement between the Company and Elan dated September 30,(cid:10)
2002, the Company acquired Elan's 19.9% interest in ERL, and Elan(cid:10)
transferred its warrants and its 12,015 shares of Series A Preferred Stock(cid:10)
to a third party along with accrued dividends of 1,741 shares. On November(cid:10)
6, 2002, under a transfer and assignment among the Company, Elan and a(cid:10)
third party purchaser, all 13,756 shares of Series A Preferred Stock have(cid:10)
been converted, according to their terms, into 764,221 shares of the(cid:10)
Company's common stock using the $18 per share price. Elan retained(cid:10)
409,165 shares of the Company's common stock and 773,000 shares of Series(cid:10)
B Preferred Stock, the latter of which was converted into 52,089 shares of(cid:10)
the Company's common stock. Both of the Series A and Series B preferred(cid:10)
stock were converted into the Company's common stock in accordance with(cid:10)
their terms. The warrants remain unexercised at March 31, 2004.(cid:10)
F-26(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(CONTINUED)(cid:10)
JOINT-VENTURE TERMINATION (CONTINUED)(cid:10)
For the period of one year after the issuance of the above shares of(cid:10)
common stock, Elan and the third party purchaser have the right to require(cid:10)
registration under the Securities Act of 1933, as amended ("the Securities(cid:10)
Act") of all or part of these securities. All registration expenses would(cid:10)
be borne by the requesting party. Elan and the third party purchaser also(cid:10)
have the right to piggyback registration if at any time the Company(cid:10)
proposes to register shares of its common stock under the Securities Act.(cid:10)
WARRANTS(cid:10)
To date, the Company has authorized the issuance of common stock purchase(cid:10)
warrants, with terms of five to six years, to various corporations and(cid:10)
individuals, in connection with the sale of securities, loan agreements(cid:10)
and consulting agreements. Exercise prices range from $2.00 to $18.00 per(cid:10)
warrant. The warrants expire at various times through October 17, 2005.(cid:10)
A summary of warrant activity for the fiscal years indicated below were as(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 with(cid:10)
various parties in order to end a Consent Solicitation and various(cid:10)
litigation initiated by the Company. The Agreement provided, among other(cid:10)
things, an agreement to commence an exchange offer (the "Exchange Offer")(cid:10)
whereby holders of the Company's Class A Warrants which expired on(cid:10)
November 30, 2002 (the "Old Warrants") had the opportunity to exchange(cid:10)
those warrants for new warrants (The "New Warrants") upon payment to the(cid:10)
Company of $0.10 per share of common stock issuable upon the exercise of(cid:10)
the old warrants. In September 2003 the Company issued New Warrants to the(cid:10)
record holders as of November 30, 2002 of the Old Warrants without(cid:10)
requiring any cash payment.(cid:10)
Each New Warrant is exercisable for the same number of shares of common(cid:10)
stock as the Old Warrants at an exercise price of $5.00 per share, and(cid:10)
expires on November 30, 2005. The New Warrants are not transferable except(cid:10)
pursuant to operation of law.(cid:10)
F-27(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)(cid:10)
(CONTINUED)(cid:10)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)(cid:10)
During the year ending March 31, 2003, the Company expensed $242,338(cid:10)
relating to the Exchange Offer, which represents the fair value of the New(cid:10)
Warrants,. The per share weighted-average fair value of each warrant on(cid:10)
the date of grant was $1.10 using the Black-Scholes option pricing model(cid:10)
with the following weighted-average assumptions: no dividend yield;(cid:10)
expected volatility of 73.77%; risk-free interest rate of 2.88%; and(cid:10)
expected lives of 3 years. The elimination of the $0.10 per share fee(cid:10)
resulted in an additional charge of $172,324 during the year ended March(cid:10)
31, 2004.(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 the(cid:10)
Exchange Offer, which has been charged to additional paid-in capital.(cid:10)
NOTE 11 - STOCK OPTION PLANS(cid:10)
Under various plans, the Company may grant stock options to officers,(cid:10)
selected employees, as well as members of the board of directors and(cid:10)
advisory board members. All options have generally been granted at a price(cid:10)
equal to or greater than the fair market value of the Company's common(cid:10)
stock at the date of grant. Generally, options are granted with a vesting(cid:10)
period of up to three years and expire ten years from the date of grant.(cid:10)
Transactions under the various stock option and incentive plans for the(cid:10)
years indicated were as follows:(cid:10)
(cid:10)
F-28(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 11 - STOCK OPTION PLANS (CONTINUED)(cid:10)
The following table summarizes information about stock options outstanding(cid:10)
at March 31, 2004:(cid:10)
(cid:10)
The per share weighted-average fair value of each option granted during(cid:10)
fiscal 2004, 2003 and 2002 ranged from $1.03 to $2.68, $1.28, and $8.38,(cid:10)
respectively, on the date of grant using the Black-Scholes options pricing(cid:10)
model with the following weighted-average assumptions; no dividend yield;(cid:10)
expected volatility ranging from 75.47% to 77.97%, 75.40%, and 76.69% for(cid:10)
fiscal years 2004, 2003, and 2002, respectively; risk-free interest rate(cid:10)
of 4.0% in 2004, 4.0% in 2003 and rates ranging from 4.55% to 4.875% in(cid:10)
2002, and expected lives ranging from five to ten 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)
2004 2003 2002(cid:10)
---- ---- ----(cid:10)
Customer A -- 29.79% 50.19%(cid:10)
Customer B -- 56.32% --(cid:10)
Customer C 40.70% 13.49% --(cid:10)
Customer D 59.30% -- --(cid:10)
Customer A represents ERL, a joint-venture until September 30, 2002, when(cid:10)
it became a wholly-owned subsidiary of the Company, as further discussed(cid:10)
in Note 7. Revenues after September 30, 2002, are eliminated in(cid:10)
consolidation.(cid:10)
F-29(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2004, 2003 AND 2002(cid:10)
NOTE 13 - SUBSEQUENT EVENTS(cid:10)
On April 21, 2004, the Company settled the litigation between Dr. Atul(cid:10)
Mehta, its former president and chief executive officer of the Company.(cid:10)
Under the settlement agreement, Dr. Mehta relinquished any rights to the(cid:10)
Company's patents and intellectual properties and agreed to certain(cid:10)
non-disclosure and certain limited non-competition covenants. The Company(cid:10)
agreed to pay Dr. Mehta $400,000 and certain expense reimbursements in(cid:10)
accordance with the settlement agreement, and received a short term option(cid:10)
for the Company or its designees to acquire all of the shares of the(cid:10)
common stock of the Company held by Dr. Mehta and his affiliates at $2.00(cid:10)
per share. The Company paid $100,000 into escrow which will be released to(cid:10)
Dr. Mehta if the Company option is not exercised within 90 days. As part(cid:10)
of the settlement, the Company extended expiration dates of certain(cid:10)
options to purchase 770,000 shares of Common Stock held by Dr. Mehta and(cid:10)
also provided him with certain "piggyback" registration rights with(cid:10)
respect to shares underlying his options.(cid:10)
On May 10, 2004, Elite Labs entered into an agreement with Purdue Pharma(cid:10)
L.P. ("Purdue") through which Purdue was granted the exclusive right to(cid:10)
evaluate certain abuse resistance drug formulation technology of the(cid:10)
Company and an exclusive option to negotiate a license to develop and(cid:10)
commercialize oxycodone products under the Company's technology. The(cid:10)
Company's proprietary abuse resistance technology is designed to(cid:10)
discourage and reduce abuse of narcotic analgesic medications by making(cid:10)
the products more difficult to abuse when crushed, damaged or otherwise(cid:10)
manipulated.(cid:10)
On May 14, 2004, the Company's Board of Directors appointed Bernard Berk,(cid:10)
its Chief Executive Officer and President, to the additional position of(cid:10)
Chairman of the Board of Directors.(cid:10)
On June 22, 2004 the Company's stockholders approved the 2004 Stock Option(cid:10)
Plan providing for grants of incentive and nonqualified stock option with(cid:10)
respect to 1,500,000 shares including shares which are to be subject to(cid:10)
options to be granted to employees in replacement of outstanding options(cid:10)
held by them. The stockholders also ratified the amendments of terms of(cid:10)
outstanding options and warrants including the repricing of options with(cid:10)
respect to 420,000 shares which will result in a significant charge to(cid:10)
earnings. A proposal to amend the Certificate of Incorporation of the(cid:10)
Company to increase the authorized 25,000,000 shares of Common Stock to(cid:10)
65,000,000 shares of Common Stock and 5,000,000 shares of Preferred stock(cid:10)
is to be considered at the adjourned meeting scheduled to be held on July(cid:10)
19, 2004.(cid:10)
Elite Labs is currently negotiating an agreement with a financial(cid:10)
institution to finance the purchase of certain machinery and equipment and(cid:10)
to recast the outstanding balance due to a bank in the approximate amount(cid:10)
of $212,000. Under the terms of the proposed agreement, Elite Labs is to(cid:10)
borrow $612,000 payable in 36 monthly installments of $20,917, including(cid:10)
principal plus interest at 14% per annum. The proposed agreement is to(cid:10)
provide that the (i) loan will be secured by two pieces of equipment and(cid:10)
the guaranty of the Company, (ii) restricted cash currently held as(cid:10)
collateral under the note payable in the amount of $225,000 is to be(cid:10)
released to the lender, of which $125,500 will be utilized to prepay the(cid:10)
first six monthly payments under the loan and (iii) the balance will be(cid:10)
held as a security deposit which is to be released if the Company raises(cid:10)
certain proceeds from the sale of its securities or other licensing fees.(cid:10)
No assurance can be given that the proposed agreement will be executed or(cid:10)
if the agreement is executed that the agreement will provide the foregoing(cid:10)
terms.(cid:10)
F-30(cid:10)
(cid:10)
(cid:10)
Continue reading text version or see original annual report in PDF
format above