(cid:10) (cid:10)10-K(cid:10) 1(cid:10) c38078_10-k.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(cid:10) EXCHANGE ACT OF 1934(cid:10) FOR THE FISCAL YEAR ENDED - MARCH 31, 2005(cid:10) OR(cid:10) |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE(cid:10) SECURITIES EXCHANGE 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 (201) 750-2646(cid:10) area code:(cid:10) Securities registered pursuant Common Stock - $.01 par value(cid:10) to Section 12(b) of the Act: The Common Stock is listed(cid:10) on the American Stock Exchange(cid:10) Securities registered pursuant to Section None(cid:10) 12(g) of the Act:(cid:10) Indicate by check mark whether the Registrant (1) has filed all reports required(cid:10) to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during(cid:10) the preceding 12 months (or for such shorter period that Registrant was required(cid:10) to file such reports)(cid:10) (cid:10)(cid:10) and (2) has been subject to such filing requirements for at least the past 90(cid:10) days. Yes [X] No [_](cid:10) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405(cid:10) of Regulation S-K is not contained herein, and will not be contained, to the(cid:10) best of registrant's knowledge, in definitive proxy or information statements(cid:10) incorporated by reference in Part III of this Form 10-K. [_](cid:10) Indicate by check mark whether the registrant is an accelerated filer (as(cid:10) defined in Rule 12b-2 of the Act). Yes [_] No [X](cid:10) The aggregate market value of the voting common equity held by non-affiliates of(cid:10) the registrant as of June 20, 2005 was approximately $51,126,066 based upon the(cid:10) closing price of the registrant's Common Stock on the American Stock Exchange,(cid:10) as of June 20, 2005. (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 18,178,167 shares of Common Stock, par value $0.01 per share,(cid:10) outstanding as of June 20, 2005.(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....................................................... 23(cid:10) Item 3. Legal Proceedings................................................ 23(cid:10) Item 4. Submission of Matters to a Vote of Security Holders.............. 24(cid:10) PART II(cid:10) Item 5. Market for the Registrant's Common Equity and(cid:10) Related Stockholder Matters................................ 25(cid:10) Item 6. Selected Financial Data.......................................... 28(cid:10) Item 7. Management's Discussion and Analysis of Financial................ 28(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.......................................... 36(cid:10) PART III(cid:10) Item 10. Directors and Executive Officers of the Registrant............... 37(cid:10) Item 11. Executive Compensation........................................... 42(cid:10) Item 12. Security Ownership of Certain Beneficial Owners(cid:10) and Management and Related Stockholder Matters............. 48(cid:10) Item 13. Certain Relationships and Related Transactions................... 49(cid:10) Item 14. Principal Accountant Fees and Services........................... 50(cid:10) PART IV(cid:10) Item 15. Exhibits, Financial Statement Schedules and Reports(cid:10) on Form 8-K................................................ 50(cid:10) Signatures .............................................................. 54(cid:10) (cid:10) PART I(cid:10) ITEM 1. BUSINESS(cid:10) Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated(cid:10) on October 1, 1997 under the laws of the State of Delaware, and our wholly-owned(cid:10) subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.(cid:10) ("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,(cid:10) respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,(cid:10) Elite Labs and Elite Research are referred to herein, collectively, as "Elite",(cid:10) "we", "us", "our" or the "Company".(cid:10) On October 24, 1997, Elite Pharmaceuticals merged with and into our(cid:10) predecessor company, Prologica International, Inc. ("Prologica") an inactive(cid:10) publicly held corporation formed under the laws of the State of Pennsylvania. At(cid:10) the same time, Elite Labs merged with a wholly-owned subsidiary of Prologica.(cid:10) Following these mergers, Elite Pharmaceuticals survived as the parent to its(cid:10) wholly-owned subsidiary, Elite Labs.(cid:10) On September 30, 2002, we acquired from Elan Corporation, plc and Elan(cid:10) International Services, Ltd. (together "Elan") Elan's 19.9% interest in Elite(cid:10) Research, Ltd. ("ERL"), a joint venture formed between Elite and Elan in which(cid:10) our initial interest was 80.1% of the outstanding capital stock (100% of the(cid:10) outstanding Common Stock). As a result of the termination of the joint venture,(cid:10) we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda(cid:10) Corporation) was merged into Elite Research, our wholly-owned subsidiary.(cid:10) The address of our principal executive offices and our telephone and(cid:10) facsimile numbers at that address are:(cid:10) Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey(cid:10) 07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.(cid:10) We file registration statements, periodic and current reports, proxy(cid:10) statements and other materials with the Securities and Exchange Commission. You(cid:10) may read and copy any materials we file with the SEC at the SEC's Public(cid:10) Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain(cid:10) information on the operation of the Public Reference Room by calling the SEC at(cid:10) 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains(cid:10) reports, proxy and information statements and other information regarding(cid:10) issuers that file electronically with the SEC, including our filings.(cid:10) 2(cid:10) (cid:10) BUSINESS OVERVIEW AND STRATEGY(cid:10) Elite is a specialty pharmaceutical company principally engaged in the(cid:10) development and manufacture of oral, controlled release products. Elite develops(cid:10) controlled release products using proprietary technology and licenses these(cid:10) products. The Company's strategy includes developing generic versions of(cid:10) controlled release drug products with high barriers to entry and assisting(cid:10) partner companies in the life cycle management of products to improve off-patent(cid:10) drug products. Elite's technology is applicable to develop delayed, sustained or(cid:10) targeted release pellets, capsules, tablets, granules and powders. Elite has one(cid:10) product currently being sold commercially and a pipeline of six drug products(cid:10) under development in the therapeutic areas that include cardiovascular, pain(cid:10) management, allergy and infection. The addressable market for Elite's pipeline(cid:10) of products exceeds $2 billion. Elite's current facility in Northvale, New(cid:10) Jersey also is a Good Manufacturing Practice (GMP) and DEA registered facility(cid:10) for research, development, and manufacturing.(cid:10) We have concentrated on developing orally administered controlled(cid:10) release drug products. These products include drugs that cover therapeutic areas(cid:10) for pain, angina, hypertension, allergy and infection. One of our products,(cid:10) 24(R), has been commercially developed and is being marketed by ECR(cid:10) Pharmaceuticals, our partner for this product. An additional controlled release(cid:10) product is under development for marketing by the same company. A third product(cid:10) is to be developed pursuant to a recent agreement with another pharmaceutical(cid:10) company.(cid:10) We are focusing our efforts on the following areas: (i) manufacturing(cid:10) of Lodrane 24(R) and the development and manufacture of two of the other(cid:10) products with partners referred to above; (ii) commercial exploitation of our(cid:10) products either by license and the collection of royalties, or through the(cid:10) manufacture of tablets and capsules using our formulations, and (iii)(cid:10) development of new products and the expansion of our licensing agreements with(cid:10) other pharmaceutical companies, including contract research and development(cid:10) projects, joint ventures and other collaborations.(cid:10) In an effort to reduce costs and improve focus and enhance efficiency,(cid:10) we reduced the number of products that we are actively developing from fifteen(cid:10) to seven. The seven products, one of which had been commercially developed and(cid:10) six that are in development, were deemed by us to be the most suitable for(cid:10) development given our limited resources.(cid:10) We are focusing on the development of various types of drug products,(cid:10) including, generic drug products (which require abbreviated new drug(cid:10) applications ("ANDA")) as well as branded drug products (which require new drug(cid:10) applications ("NDA") under Section 505(b)(1) or 505(b)(2) of the Drug Price(cid:10) Competition and Patent Term Restoration Act of 1984 (the "Drug Price Act").(cid:10) 3(cid:10) (cid:10) We intend to continue to collaborate in the development of additional(cid:10) products with our current partners. We also plan to seek additional(cid:10) collaborations to develop more drug products.(cid:10) We believe that our business strategy enables us to reduce our risk by(cid:10) having a diverse product portfolio that includes both branded and generic(cid:10) products in various therapeutic categories; and building collaborations and(cid:10) establishing licensing agreements with companies with greater resources thereby(cid:10) allowing us to share costs of development and to improve cash-flow.(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 $2,698,641 in the fiscal year ended March(cid:10) 31, 2005, $2,075,074 in the fiscal year ended March 31, 2004 and $2,013,579 in(cid:10) the fiscal year ended March 31, 2003 on research and development activities.(cid:10) Of our seven controlled release products, two are for pain (the(cid:10) Oxycodone CR and a related abuse resistant product), one (diltiazem) is for(cid:10) cardiovascular indications, two are for allergy indications, one is for an(cid:10) anti-infective indication and one is for an undisclosed indication. One of the(cid:10) allergy products has been developed and is being marketed by a pharmaceutical(cid:10) company which has the responsibility for regulatory matters and is to market the(cid:10) second drug for allergy indications upon completion of its commercial(cid:10) development. The drug for the undisclosed indication is to be developed by us(cid:10) pursuant to a March 30, 2005 agreement. See "Manufacturing and Development(cid:10) Contracts".(cid:10) It is our general policy not to disclose products in our development(cid:10) pipeline or the status of such products until a product reaches a stage that we(cid:10) determine, for competitive reasons, in our discretion, to be appropriate for(cid:10) disclosure and because the disclosure of such information might suggest the(cid:10) occurrence of future matters or events that may not occur. In this instance, we(cid:10) believe that disclosure of the information in the following table is helpful for(cid:10) the description of the general nature, orientation and activity of the Company,(cid:10) and the disclosures are made for such purpose. No inference should be made as to(cid:10) the occurrence of matters or events not specifically described. We may or may(cid:10) not disclose such information in the future based on competitive reasons and/or(cid:10) contractual obligations. We believe that the information is helpful on a(cid:10) one-time basis for the purpose described above.(cid:10) The following table provides information concerning the controlled(cid:10) release 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) 4(cid:10) (cid:10) --------------------------------------------------------------------------------(cid:10) PRODUCT BRANDED APPROX. U.S. NDA/ INDICATION(cid:10) PRODUCT(A) SALES FOR BRANCD ANDA(cid:10) AND/OR GENERIC(cid:10) PRODUCTS(cid:10) (2004)(cid:10) $MM(B)(cid:10) --------------------------------------------------------------------------------(cid:10) 1 Oxycodone CR OxyContin(R) $2,000 NDA Pain(cid:10) Once a day twice a day(cid:10) --------------------------------------------------------------------------------(cid:10) 2 Product using abuse N/A N/A NDA Pain(cid:10) resistant technology(cid:10) (ART) for use with(cid:10) Oxycodone (or other(cid:10) opioids)(cid:10) Once a day(cid:10) Twice a day(c)(cid:10) --------------------------------------------------------------------------------(cid:10) 3 Diltiazem Cardizem CD(R) $300 ANDA Cardiovascular(cid:10) Once a day(cid:10) --------------------------------------------------------------------------------(cid:10) 4 Undisclosed product Undisclosed $80 ANDA Undisclosed(cid:10) with a partner(cid:10) --------------------------------------------------------------------------------(cid:10) 5 Undisclosed product N/A N/A Undisclosed Allergy(cid:10) with partner(cid:10) --------------------------------------------------------------------------------(cid:10) 6 Undisclosed Undisclosed $100 ANDA Infection(cid:10) Twice a day(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) An IND was filed and accepted by the FDA with respect to the Twice a day.(cid:10) The table below presents information with respect to the development of(cid:10) six of the products under development. For some of the products, we intend to(cid:10) make NDA filings under Sections 505(b)(1) or 505(b)(2) of the Drug Price Act.(cid:10) Accordingly, we anticipate, as to which there is no assurance, that the(cid:10) development timetable for the products for which such NDA filings are made would(cid:10) be shorter and less expensive. Completion of development of products by us(cid:10) depends on a number of factors, however, and there can be no assurance that(cid:10) specific time frames will be met during the development process or that the(cid:10) development of any particular products will be continued.(cid:10) 5(cid:10) (cid:10) In the table, Pilot Phase I studies for the NDA products are generally(cid:10) 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 the product to the FDA for(cid:10) review. Pilot bioequivalence studies are initial studies done in humans for(cid:10) generic products and are used to assess the likelihood of achieving(cid:10) bioequivalence for generic products. Larger pivotal bioequivalence studies will(cid:10) be required prior to submission of the product to the FDA for review.(cid:10) --------------------------------------------------------------------------------(cid:10) DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA(cid:10) --------------------------------------------------------------------------------(cid:10) Preclinical 1 ANDA(cid:10) --------------------------------------------------------------------------------(cid:10) Pilot Phase I study 2 NDA(cid:10) --------------------------------------------------------------------------------(cid:10) Pilot bioequivalence study 2 ANDA(cid:10) --------------------------------------------------------------------------------(cid:10) Pre-Clinical 1 (1)(cid:10) --------------------------------------------------------------------------------(cid:10) (1) The partner is handling the FDA and other regulatory filings in connection(cid:10) with the product.(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, but until we have additional resources to devote to this(cid:10) product and locate a partner, we will not perform further clinical studies.(cid:10) In June 2001, we entered into two development contracts pursuant to(cid:10) which we agreed to commercially develop two products in exchange for development(cid:10) fees, certain payments, royalties and manufacturing rights. One product, Lodrane(cid:10) 24(R), was first commercially offered in November 2004, and our revenues for(cid:10) manufacturing the product and a royalty on sales for the year ended March 31,(cid:10) 2005 aggregated $150,030. Development of the second product continues.(cid:10) The payments under the foregoing agreements for the years ended March(cid:10) 31, 2004 and 2005 were not material.(cid:10) On March 30, 2005, we entered into a three party agreement with a(cid:10) marketing company and a formulation development company pursuant to which we are(cid:10) to commercially develop a drug with the marketing company to share in the(cid:10) development costs. Upon its development and the securing of the required FDA(cid:10) approval by the formulation development company, we are to manufacture and sell(cid:10) the commercially developed drug to the marketing company for distribution. In(cid:10) addition to the transfer price to the marketing company, we are to share the(cid:10) profits, if any, realized upon sales.(cid:10) 6(cid:10) (cid:10) JOINT VENTURE WITH ELAN(cid:10) A joint research venture with Elan (ERL) was funded through capital(cid:10) contributions from its partners based on the partners' respective ownership(cid:10) percentage.(cid:10) The joint venture was terminated on December 31, 2002 and ERL was(cid:10) merged into a new Delaware corporation, Elite Research, our wholly-owned(cid:10) subsidiary.(cid:10) Under the Termination Agreement, we acquired all proprietary,(cid:10) development and commercial rights for the worldwide markets for the products(cid:10) developed by the joint venture. In exchange for this assignment, we agreed to(cid:10) pay Elan a royalty on certain revenues that may be realized in the future from(cid:10) the once-a-day Oxycodone product that was in development by the joint venture,(cid:10) if and when FDA approval is obtained. In the future, we will be solely(cid:10) responsible for funding product development, which funding we anticipate will be(cid:10) derived from internal resources or through loans or investment by third parties.(cid:10) The joint venture had completed the initial Phase I study for its first product,(cid:10) the once-a-day Oxycodone formulation. Currently there is no once-a-day(cid:10) formulation for this compound on the market. This compound is part of our(cid:10) development pipeline.(cid:10) The joint venture had also performed work on a second, related product(cid:10) in the central nervous system therapeutic area. Initial formulation work on a(cid:10) third product combining Oxycodone with a narcotic antagonist has been performed.(cid:10) We 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) Since our incorporation, we have secured five United States patents.(cid:10) Two have been assigned for a fee to another pharmaceutical company. In addition(cid:10) one patent has been allowed, but not yet issued and we have pending applications(cid:10) for three United States patents and five foreign patents.(cid:10) The pending patent applications relate to three different control(cid:10) release pharmaceutical products on which we are working. Included among these(cid:10) patent applications is an application for a U.S. patent for a narcotic agonist(cid:10) and antagonist product that we are developing to be used with oxycodone and(cid:10) other narcotics to(cid:10) 7(cid:10) (cid:10) minimize the abuse potential for the narcotics. We intend to apply for patents(cid:10) for other products in the future; however, there can be no assurance that any of(cid:10) the pending applications or other applications which we may file will be(cid:10) granted.(cid:10) Prior to the enactment in the United States of new laws adopting(cid:10) certain changes mandated by the General Agreement on Tariffs and Trade (GATT),(cid:10) the exclusive rights afforded by a U.S. Patent were for a period of 17 years(cid:10) measured from the date of grant. Under GAAT, the term of any U.S. Patent granted(cid:10) on an application filed subsequent to June 8, 1995, terminates 20 years from the(cid:10) date on which the patent application was filed in the United States or the first(cid:10) priority date, whichever occurs first. Future patents granted on an application(cid:10) filed before June 8, 1995, will have a term that terminates 20 years from such(cid:10) date, or 17 years from the date of grant, 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(cid:10) patents, 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(cid:10) that 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(cid:10) Trademark Office granting trademark protection for four trademarks. 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) NDAS AND NDAS UNDER SECTION 505(B) OF THE DRUG PRICE ACT(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, they must be answered to the(cid:10) satisfaction of the FDA before initial clinical testing can begin. In some(cid:10) 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. After Phase I testing, extensive efficacy and safety studies(cid:10) in patients must be conducted. After completion of the required clinical(cid:10) testing, an NDA is filed, and its approval, which is required for marketing in(cid:10) the United States, involves an extensive review process by the FDA. The NDA(cid:10) itself is a complicated and detailed application and must include the results of(cid:10) extensive clinical and other testing, the cost of which is substantial. However,(cid:10) the NDA filings contemplated by us on already marketed drugs(cid:10) 9(cid:10) (cid:10) would be made under Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Act,(cid:10) which do not require certain studies that would otherwise be necessary;(cid:10) accordingly, the development timetable should be shorter. While the FDA is(cid:10) required to review applications within a certain timeframe in the review(cid:10) process, the FDA frequently requests that additional information be submitted.(cid:10) The effect of such request and subsequent submission can significantly extend(cid:10) the time for the NDA review process. Until an NDA is actually approved, there(cid:10) can be no assurance that the information requested and submitted will be(cid:10) considered adequate by the FDA to justify approval. The packaging and labeling(cid:10) of our developed products are also subject to FDA regulation. It is impossible(cid:10) to anticipate the amount of time that will be needed to obtain FDA approval to(cid:10) market any product.(cid:10) Whether or not FDA approval has been obtained, approval of the product(cid:10) by comparable regulatory authorities in any foreign country must be obtained(cid:10) prior to the commencement of marketing of the product in that country. The(cid:10) Company intends to conduct all marketing in territories other than the United(cid:10) States through other pharmaceutical companies based in those countries. The(cid:10) approval procedure varies from country to country, can involve additional(cid:10) testing, and the time required may differ from that required for FDA approval.(cid:10) Although there are some procedures for unified filings for certain European(cid:10) countries, in general each country has its own procedures and requirements, many(cid:10) of which are time consuming and expensive. Thus, there can be substantial delays(cid:10) in obtaining required approvals from both the FDA and foreign regulatory(cid:10) authorities after the relevant applications are filed. After such approvals are(cid:10) obtained, further delays may be encountered before the products become(cid:10) commercially available.(cid:10) ANDAS(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) CONTROLLED SUBSTANCES(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) Drug Enforcement Agency (DEA) and New Jersey state agencies, pursuant to federal(cid:10) and state legislation relating to drugs and narcotics. Certain drugs that we(cid:10) currently develop or may develop in the future may be subject to regulations(cid:10) under the Controlled Substances Act and related statutes. As we manufacture such(cid:10) products, we may become subject to the(cid:10) 10(cid:10) (cid:10) Prescription Drug Marketing Act, which regulates wholesale distributors of(cid:10) prescription drugs.(cid:10) GMP(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 GMP(cid:10) regulations issued by the FDA. The Company engages in manufacturing on a(cid:10) commercial basis for distribution of products, and operates its facilities in(cid:10) accordance with GMP regulations. If we hire another company to perform contract(cid:10) manufacturing for us, we must ensure that our contractor's facilities conform to(cid:10) GMP regulations.(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 legally or in possession. We do not expect that compliance(cid:10) with such environmental laws will have a material effect on our capital(cid:10) expenditures, earnings or competitive position in the foreseeable future. There(cid:10) can be no assurance, however, that future changes in environmental laws or(cid:10) regulations, administrative actions or enforcement actions, or remediation(cid:10) obligations arising under environmental laws will not have a material adverse(cid:10) effect on our capital expenditures, earnings or competitive position.(cid:10) COMPETITION(cid:10) We have competition with respect to our two principal areas of(cid:10) operation. We develop and manufacture products using controlled-release drug(cid:10) technology for other pharmaceutical companies, and we develop and market (either(cid:10) on our own or by license to other companies) proprietary controlled-release(cid:10) pharmaceutical products. In both areas, our competition consists of those(cid:10) companies which develop controlled-release drugs and alternative drug delivery(cid:10) 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-(cid:10) 11(cid:10) (cid:10) release drugs. Significant among these are Alpharma, Inc., Andrx Corporation,(cid:10) Mylan Laboratories, Inc., Par Pharmaceuticals, Inc., Teva Pharmaceuticals(cid:10) Industries Ltd., Biovail Corporation, Ethypharm S.A., Eurand, Impax(cid:10) Laboratories, Inc., K-V Pharmaceutical Company and Penwest Pharmaceuticals(cid:10) Company. Each of these companies has developed expertise in certain types of(cid:10) drug delivery systems, although such expertise does not carry over to developing(cid:10) a 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, if obtained, patent protection may help us to maintain our market position(cid:10) in the field of advanced drug delivery, there can be no assurance that others(cid:10) will not be able to develop such capabilities or alternative technologies(cid:10) outside the scope of our patents, if any, or that even if patent protection is(cid:10) obtained, such patents will not be successfully challenged in the future.(cid:10) SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING(cid:10) We manufacture for commercial sale by our partner, ECR Pharmaceuticals,(cid:10) one product, Lodrane 24(R) and for which to date we have obtained sufficient(cid:10) amounts of the raw materials for its production. We are not currently in the(cid:10) manufacturing phase for any other products and do not expect that significant(cid:10) amounts of raw materials will be required for their production. We currently(cid:10) obtain the raw materials that we need from over twenty suppliers.(cid:10) We have acquired pharmaceutical manufacturing equipment for(cid:10) manufacturing our products. We have registered our facilities with the FDA and(cid:10) the DEA.(cid:10) DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS(cid:10) Each year we have had one or a few customers that have accounted for a(cid:10) large percentage of our limited sales therefore the termination of a contract(cid:10) with a customer may result in the loss of substantially all of our revenues. We(cid:10) are constantly working to develop new relationships with existing or new(cid:10) customers, but despite these efforts we may not, at the time that any of our(cid:10) current contracts expire, have other contracts in place generating similar(cid:10) revenue.(cid:10) EMPLOYEES(cid:10) As of June 20, 2005, we had 16 full-time employees and 2 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) 12(cid:10) (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 "GOING CONCERN" ANNUAL AUDIT REPORTS.(cid:10) We reported net losses of $5,906,890, $6,514,217 and $4,061,422 for the(cid:10) fiscal years ended March 31, 2005, 2004 and 2003, respectively. At March 31,(cid:10) 2005, we had an accumulated deficit of approximately $41.1 million, consolidated(cid:10) assets of approximately $9.2 million, stockholders' equity of approximately $5.7(cid:10) million, and working capital of approximately $3.3 million. Our products are in(cid:10) the development and early deployment stage and have not generated any(cid:10) significant revenue to date. Our independent auditors have issued a "going(cid:10) concern" audit report for our financial statements for each of the fiscal years(cid:10) ended March 31, 2005, 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(cid:10) short operating history and limited financial data upon which you may evaluate(cid:10) our business and prospects. In addition, our business model is likely to(cid:10) continue to evolve as we attempt to expand our product offerings and enter new(cid:10) markets. As a result, our potential for future profitability must be considered(cid:10) in light of the risks, uncertainties, expenses and difficulties frequently(cid:10) encountered by companies that are attempting to move into new markets and(cid:10) continuing to innovate with new and unproven technologies. Some of these risks(cid:10) relate to our 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) 13(cid:10) (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,(cid:10) we have not generated any significant revenues. We may never be profitable or,(cid:10) if 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 $5,906,890, $6,514,217, $4,061,422, and $1,774,527 for the years ended(cid:10) March 31, 2005, 2004, 2003 and 2002, 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) 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(cid:10) and Chief Executive Officer resigned from all of his positions with Elite. In(cid:10) the past, we relied 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) Pursuant to an agreement in April 2004 and a related agreement in(cid:10) October 2004, to settle a litigation initiated by Dr. Mehta in July 2003 for(cid:10) alleged breach of his employment agreement, the Company extended the expiration(cid:10) dates to November 30, 2007 of options to purchase 670,000 shares of Common Stock(cid:10) held by Dr. Mehta and reduced the exercise price of certain of the options and(cid:10) he relinquished any rights to the Company's intellectual property and agreed to(cid:10) certain non-disclosure and non-competition covenants. The Company also provided(cid:10) him with certain "piggyback" registration rights with respect to the shares(cid:10) issuable upon exercise of the foregoing options granted by the Company. Dr.(cid:10) Mehta and members of his family sold in October 2004 an aggregate of 1,362,200(cid:10) shares of Common Stock representing all of his and his affiliates holdings of(cid:10) securities of the Company except for the foregoing options.(cid:10) OUR RESEARCH ACTIVITIES ARE CHARACTERIZED BY INHERENT RISK AND WE MAY NOT BE(cid:10) ABLE TO SUCCESSFULLY DEVELOP PRODUCTS FOR COMMERCIAL USE THAT ARE IN OUR(cid:10) PIPELINE.(cid:10) 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.(cid:10) As of March 31, 2005, we have entered into agreements with respect to(cid:10) the marketing upon development of three drugs. Each agreement provides that we(cid:10) are to commercially develop the product and upon securing by a partner or(cid:10) partners having FDA approval or other regulatory approval, if required, we will(cid:10) manufacture the product and sell it to a partner or marketing partner for(cid:10) distribution. The commercial development of one of the three drugs has been(cid:10) completed and the two other drugs are(cid:10) 14(cid:10) (cid:10) under development. No assurance can be given that sales, if any, by any(cid:10) marketing partner will result in profit for Elite from the product.(cid:10) Of the four additional products and on which we are devoting(cid:10) substantial attention, two are in pilot Phase I studies and two are in the pilot(cid:10) bioequivalence stage. Additional studies including either pivotal bioequivalence(cid:10) or efficacy studies will be required for these products before(cid:10) commercialization.(cid:10) In order for any of these four products to be commercialized, the FDA(cid:10) requires successful completion of pivotal biostudies to file an ANDA followed by(cid:10) successful completion of pivotal clinical trials before filing a ND. The FDA(cid:10) next requires successful completion of comparative studies for drug listed(cid:10) products are required. ANDAs are filed with respect to generic versions of(cid:10) existing FDA approved products while NDAs are filed with respect to new(cid:10) products.(cid:10) WE COULD EXPERIENCE DIFFICULTY IN DEVELOPING AND INTEGRATING STRATEGIC(cid:10) ALLIANCES, CO-DEVELOPMENT OPPORTUNITIES AND OTHER RELATIONSHIPS.(cid:10) With respect to products that are developed and are available for(cid:10) commercial sale, we intend to pursue product-specific licensing, marketing(cid:10) agreements, co-development opportunities and other partnering arrangements in(cid:10) connection with the distribution of the product. We have entered into(cid:10) partnership arrangements as to three products but no assurance can be given that(cid:10) we will be able to locate other partners or that the arrangement will be(cid:10) suitable. In addition, assuming we identify suitable partners, the process of(cid:10) effectively entering into these arrangements involves risks such that our(cid:10) management's attention may be diverted from other business concerns and that we(cid:10) may have difficulty integrating the new arrangements into our existing business.(cid:10) OUR LIMITED EXPERIENCE IN CONDUCTING CLINICAL TRIALS AND SUBMITTING NDAS AND THE(cid:10) UNCERTAINTIES INHERENT IN CLINICAL TRIALS COULD RESULT IN DELAYS IN PRODUCT(cid:10) DEVELOPMENT AND COMMERCIALIZATION.(cid:10) Prior to seeking FDA approval for the commercial sale of any drug we(cid:10) develop, which does not qualify for the FDA's abbreviated application(cid:10) procedures, we or our partner must demonstrate through clinical trials that(cid:10) these products are safe and effective for use. We have limited experience in(cid:10) conducting and supervising clinical trials. The process of completing clinical(cid:10) trials and preparing an NDA may take several years and requires substantial(cid:10) resources. Our studies and filings may not result in FDA approval to market our(cid:10) new drug products and, if the FDA grants approval, we cannot predict the timing(cid:10) of any approval.(cid:10) IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL OR TAKE LONGER TO COMPLETE THAN WE(cid:10) EXPECT, WE MAY NOT BE ABLE TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.(cid:10) In order to obtain regulatory approvals for the commercial sale of our(cid:10) potential products, we will be required to complete clinical trials in humans to(cid:10) demonstrate the(cid:10) 15(cid:10) (cid:10) safety and efficacy of the products. We may not be able to obtain authority from(cid:10) the FDA or other regulatory agencies to commence or complete these clinical(cid:10) trials.(cid:10) The results from preclinical testing of a product that is under(cid:10) development may not be predictive of results that will be obtained in human(cid:10) clinical trials. In addition, the results of early human clinical trials may not(cid:10) be predictive of results that will be obtained in larger scale advanced stage(cid:10) clinical trials. Furthermore, we or the FDA may suspend clinical trials at any(cid:10) time if the subjects participating in such trials are being exposed to(cid:10) unacceptable health risks, or for other reasons.(cid:10) The rate of completion of clinical trials is dependent in part upon the(cid:10) rate of enrollment of subjects. A favorable clinical trial result is a function(cid:10) of many factors including the size of the subject population, the proximity of(cid:10) subjects to clinical sites, the eligibility criteria for the study and the(cid:10) existence of competitive clinical trials. Delays in planned subject enrollment(cid:10) may result in increased costs and program delays.(cid:10) We may not be able to successfully complete any clinical trial of a(cid:10) potential product within any specified time period. In some cases, we may not be(cid:10) able to complete the trial at all. Moreover, clinical trials may not show any(cid:10) potential product to be safe or efficacious. Thus, the FDA and other regulatory(cid:10) authorities may not approve any of our potential products for any indication.(cid:10) Our business, financial condition, or results of operations could be(cid:10) materially adversely affected if:(cid:10) o we are unable to complete a clinical trial of one of our potential(cid:10) products;(cid:10) o the results of any clinical trial are unfavorable; or(cid:10) o the time or cost of completing the trial exceeds our expectations.(cid:10) WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS FOR OUR RAW MATERIALS, AND ANY(cid:10) DELAY OR UNAVAILABILITY OF RAW MATERIALS CAN MATERIALLY ADVERSELY AFFECT OUR(cid:10) ABILITY TO PRODUCE PRODUCTS.(cid:10) The FDA requires identification of raw material suppliers in(cid:10) applications for approval of drug products. If raw materials were unavailable(cid:10) from a specified supplier, FDA approval of a new supplier could delay the(cid:10) manufacture of the drug involved. In addition, some materials used in our(cid:10) products are currently available from only one supplier or a limited number of(cid:10) suppliers. Further, a significant portion of our raw materials may be available(cid:10) only from foreign sources. Foreign sources can be subject to the special risks(cid:10) of doing business abroad, including:(cid:10) o greater possibility for disruption due to transportation or communication(cid:10) problems;(cid:10) o the relative instability of some foreign governments and economies;(cid:10) 16(cid:10) (cid:10) o interim price volatility based on labor unrest, materials or equipment(cid:10) shortages, export duties, restrictions on the transfer of funds, or(cid:10) fluctuations in currency exchange rates; and(cid:10) o uncertainty regarding recourse to a dependable legal system for the(cid:10) enforcement of contracts and other rights.(cid:10) In addition, recent changes in patent laws in certain foreign(cid:10) jurisdictions (primarily in Europe) may make it increasingly difficult to obtain(cid:10) raw materials for research and development prior to expiration of applicable(cid:10) United States or foreign patents. Any inability to obtain raw materials on a(cid:10) timely basis, or any significant price increases that cannot be passed on to(cid:10) customers, could have a material adverse effect on us.(cid:10) The delay or unavailability of raw materials can materially adversely(cid:10) affect our ability to produce products. This can materially adversely affect our(cid:10) business and operations.(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) We completed a $6,600,000 private placement in October 2004 of (i)(cid:10) 516,558 shares of our Series A Preferred Stock convertible into shares of Common(cid:10) Stock, (ii) warrants ("Short Term Warrants") expiring December 31, 2005 to(cid:10) purchase an aggregate of 2,582,790 shares of Common Stock at prices ranging from(cid:10) $1.54 to $1.84, (iii) warrants ("Long Term Warrants") expiring December 27, 2009(cid:10) to purchase 2,582,790 shares of Common Stock at prices ranging from $1.54 to(cid:10) $1.84 per share, and (iv) additional Long Term Warrants issued to the Placement(cid:10) Agent to purchase 494,931 shares of Common Stock at prices ranging from $1.23 to(cid:10) $1.47 per share. All of the shares of the Series A Preferred Stock have been(cid:10) converted into an aggregate of 5,265,516 shares of Common Stock, including(cid:10) 26,961 shares of Common Stock issued as payment of the accrued dividend on(cid:10) December 1, 2004. Based on our currently proposed plans and assumptions relating(cid:10) to our operations, we anticipate that we will have sufficient capital to satisfy(cid:10) our contemplated cash requirements through March 31, 2006. After that time, we(cid:10) may require additional financing. In particular, we expect to make substantial(cid:10) expenditures as we further develop and seek to commercialize our products. As of(cid:10) March 31, 2005, our cash position was $3.9 million. Based on current(cid:10) expenditures, we are depleting cash at the rate of $300,000 per month. We expect(cid:10) that our rate of spending will accelerate as the result of increased costs and(cid:10) expenses associated with seeking regulatory approval and commercialization of(cid:10) products now in development. We have no current arrangements with respect to(cid:10) additional financings other than the potential exercise of the Short Term and(cid:10) Long Term Warrants issued in the October 2004 private placement, the Class B and(cid:10) Class C Warrants and other warrants and options that are currently outstanding.(cid:10) We have no way of knowing whether any of the options or warrants will be(cid:10) exercised and if so the extent by which their exercise will be pursuant to(cid:10) cashless exercise provisions. We do not currently(cid:10) 17(cid:10) (cid:10) have commitments for their exercise or other financing, and so do not know(cid:10) whether additional financing would be available to us on favorable terms, or at(cid:10) all. Our inability to obtain additional financing when needed would impair our(cid:10) ability to continue our business.(cid:10) If any future financing involves the further sale of our securities,(cid:10) our then-existing stockholders' equity could be substantially diluted. On the(cid:10) other hand, if we incurred debt, we would be subject to risks associated with(cid:10) indebtedness, including the risk that interest rates might fluctuate and cash(cid:10) flow would be insufficient to pay principal and interest on such indebtedness.(cid:10) If our plans change, or our assumptions change or prove to be inaccurate, or our(cid:10) cash flow proves to be insufficient to fund our operations due to unanticipated(cid:10) expenses or problems, we would be required to seek additional financing sooner(cid:10) than anticipated.(cid:10) IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS(cid:10) THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO(cid:10) CONDUCT BUSINESS MAY BE IMPAIRED.(cid:10) Our success, competitive position and amount of royalty income, if any,(cid:10) will depend in part on our ability to obtain patent protection in various(cid:10) jurisdictions related to our technologies, processes and products. We intend to(cid:10) file patent applications seeking such protection, but we cannot be certain that(cid:10) these applications will result in the issuance of patents. If patents are(cid:10) issued, third parties may sue us to challenge such patent protection, and(cid:10) although we know of no reason why they should prevail, it is possible that they(cid:10) could. It is likewise possible that our patents may not prevent third parties(cid:10) from developing similar or competing products. In addition, although we are not(cid:10) aware of any threatened or pending actions by third parties asserting that we(cid:10) have infringed on their patents, and are not aware of any actions we have taken(cid:10) that would lead to such a claim, it is possible that we might be sued for(cid:10) infringement. The cost involved in bringing suits against others for(cid:10) infringement of our patents, or in defending any suits brought against us, can(cid:10) be substantial. We may not possess sufficient funds to prosecute or defend such(cid:10) suits. If our products were found to infringe upon patents issued to others, we(cid:10) would be prohibited from manufacturing or selling such products and we could be(cid:10) 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 protect(cid:10) this know-how in part by confidentiality agreements. We consistently require our(cid:10) employees and potential business partners to execute confidentiality agreements(cid:10) prior to doing business with us. However, it is possible that an employee would(cid:10) disclose confidential(cid:10) 18(cid:10) (cid:10) information in violation of his or her agreement, or that our trade secrets(cid:10) would otherwise become known or be independently developed in such a manner that(cid:10) we will have no practical recourse.(cid:10) We are not engaged in any litigation, nor contemplating any, with regard to a(cid:10) claim that someone has infringed one of our patents, revealed any of our trade(cid:10) secrets, or otherwise misused our confidential information.(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(cid:10) United States and abroad are subject to stringent governmental regulation. The(cid:10) sale of any of our products for use in humans in the United States will require(cid:10) the 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. The six products(cid:10) currently under development have not yet been approved for sale or use in humans(cid:10) in the United States or elsewhere.(cid:10) If we or our licensees fail to obtain or maintain requisite(cid:10) governmental approvals or fail to obtain or maintain approvals of the scope(cid:10) requested, it will delay or preclude us or our licensees or marketing partners(cid:10) from marketing our products. It could also limit the commercial use of our(cid:10) products.(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(cid:10) to 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) 19(cid:10) (cid:10) IF KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN ATTRACTING(cid:10) QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE MATERIALLY HARMED.(cid:10) Our success depends in large part on our ability to attract and retain(cid:10) highly qualified scientific, technical and business personnel experienced in the(cid:10) development, manufacture and marketing of controlled release drug delivery(cid:10) systems and products. Our business and financial results could be materially(cid:10) harmed by the inability to attract or retain qualified personnel.(cid:10) 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 $5,000,000; 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. The amount of our insurance coverage, which has(cid:10) been limited due to our limited financial resources, may be materially below the(cid:10) 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 March 31, 2005.(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, 2005, the closing sale price on the American Stock Exchange of(cid:10) our Common Stock fluctuated from a high of $4.79 per share to a low of $1.05 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, 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 by(cid:10) our competitors;(cid:10) o Governmental regulation;(cid:10) o Patent or proprietary rights developments;(cid:10) o Proxy contests or litigation;(cid:10) 20(cid:10) (cid:10) o News regarding the efficacy of, safety of or demand for drugs or drug(cid:10) technologies;(cid:10) o Economic and market conditions, generally and related to the(cid:10) pharmaceutical industry;(cid:10) o Healthcare legislation;(cid:10) o Changes in third-party reimbursement policies for drugs; and(cid:10) o Fluctuations in our operating results.(cid:10) All of the 516,558 shares of Series A Preferred Stock originally issued in the(cid:10) private placement of October 2004 have been converted into an aggregate of(cid:10) 5,238,555 shares of Common Stock and have been registered under the Securities(cid:10) Act of 1933 for resale. In addition, we have registered under the Securities Act(cid:10) of 1933, as amended for reoffering 5,660,511 shares of Common Stock which may be(cid:10) acquired upon exercise of the Short Term Warrants, Long Term Warrants and the(cid:10) Placement Agent Warrants as well as 670,000 shares which may be acquired upon(cid:10) exercise of options at prices ranging from $1.00 to $3.00 per share granted to(cid:10) Dr. Atul Mehta. As of this date sales of substantial amounts of the Common Stock(cid:10) in the public market are eligible for sale by these holders. Perceptions that(cid:10) substantial sales may take place in the future may lower the Common Stock's(cid:10) market price.(cid:10) THE FAILURE TO MAINTAIN THE AMERICAN STOCK EXCHANGE LISTING OF THE COMMON STOCK(cid:10) WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET FOR THE COMMON STOCK AND ITS(cid:10) MARKET PRICE.(cid:10) One of the requirements for the continued listing of Common Stock on(cid:10) the American Stock Exchange for a company that has net losses for its five most(cid:10) recent fiscal years is that it have a stockholders' equity of at least(cid:10) $6,000,000. The Company has sustained a net loss for the year ending March 31,(cid:10) 2005, and as a result will have sustained net losses in its five most recent(cid:10) fiscal years. As of March 31, 2005, the Company had stockholders equity of(cid:10) approximately $5.7 million. The related provision of the American Stock Exchange(cid:10) guide provides that the Exchange will not normally consider removing a stock(cid:10) from listing if the total value of the Company's market capitalization as of the(cid:10) end of its most recent fiscal year is at least $50,000,000 as well as satisfying(cid:10) other conditions which the Company meets and expects to meet. The failure to(cid:10) maintain listing of the Common Stock on the Exchange will have an adverse effect(cid:10) on the market and the market price for the Common Stock.(cid:10) 21(cid:10) (cid:10) THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK OR OUR PREFERRED STOCK(cid:10) COULD MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.(cid:10) The issuance of additional shares of the Company's Common Stock or the(cid:10) issuance of shares of an additional series of Preferred Stock could be used to(cid:10) make a change of control of the Company more difficult and expensive. Under(cid:10) certain circumstances, such shares could be used to create impediments to or(cid:10) frustrate persons seeking to cause a takeover or to gain control of the Company.(cid:10) Such shares could be sold to purchasers who might side with the Board in(cid:10) opposing a takeover bid that the Board determines not to be in the best(cid:10) interests of its stockholders. It might also have the effect of discouraging an(cid:10) attempt by another person or entity through the acquisition of a substantial(cid:10) number of shares of the Company's Common Stock to acquire control of the Company(cid:10) with a view to consummating a merger, sale of all or part of the Company's(cid:10) assets, or a similar transaction, since the issuance of new shares could be used(cid:10) 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 AND THE ABILITY OF(cid:10) OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.(cid:10) The SEC has adopted regulations that generally define a "penny stock"(cid:10) to be an equity security that has a market price of less than $5.00 per share or(cid:10) an exercise price of less than $5.00 per share subject to certain exceptions.(cid:10) Exceptions include equity securities issued by an issuer that has (i) net(cid:10) tangible assets of at least $2,000,000, if such issuer has been in continuous(cid:10) operation for more than three years, or (ii) net tangible assets of at least(cid:10) $5,000,000, if such issuer has been in continuous operation for less than three(cid:10) years, or (iii) average revenue of at least $6,000,000 for the preceding three(cid:10) years. Unless an exception is available, the regulations require that prior to(cid:10) any transaction involving a penny stock, a risk of disclosure schedule must be(cid:10) delivered to the buyer explaining the penny stock market and its risks. Our(cid:10) Common Stock is currently trading at under $5.00 per share. Although we(cid:10) currently fall under one of the exceptions, if at a later time we fail to meet(cid:10) one of the exceptions, our Common Stock will be considered a penny stock. As(cid:10) such the market liquidity for 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 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) 22(cid:10) (cid:10) o Excessive and undisclosed bid-ask differentials and markups by selling(cid:10) broker-dealers; and(cid:10) o Dumping of securities by broker-dealers after prices have been(cid:10) manipulated to a desired level, which hurts the price of the stock and(cid:10) causes investors to suffer loss.(cid:10) 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% shareholder), or approval by the Board prior to the 15%(cid:10) shareholder acquiring its 15% ownership. This provision makes it difficult for a(cid:10) potential acquirer to force a merger with or takeover of the Company, and could(cid:10) thus limit the price that certain investors might be willing to pay in the(cid:10) future for shares of our 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, manufacturing(cid:10) and office space. Properties used in our operations are considered suitable for(cid:10) the purposes for which they are used and are believed to be adequate to meet our(cid:10) needs for the reasonably foreseeable future.(cid:10) ITEM 3. LEGAL PROCEEDINGS(cid:10) In the ordinary course of business, we may be party to litigation(cid:10) from time to time.(cid:10) 23(cid:10) (cid:10) The Company and Dr. Mehta, the Company's former President and Chief(cid:10) Executive Officer entered into a settlement agreement in April 2004 and a(cid:10) related agreement in October 2004, to settle a litigation initiated by Dr. Mehta(cid:10) in July 2003 for alleged breach of his employment agreement. The agreements(cid:10) provide for the extension of the expiration dates to December 31, 2007 of(cid:10) options to purchase 670,000 shares of Common Stock held by Dr. Mehta, the(cid:10) reduction of the exercise price of 170,000 options from $10.00 to $2.34 per(cid:10) share and his relinquishment of any rights to the Company's intellectual(cid:10) property and agreement to certain non-disclosure and non-competition covenants.(cid:10) The Company also provided him with certain "piggyback" registration rights with(cid:10) respect to the shares issuable upon exercise of the foregoing options granted by(cid:10) the Company. Dr. Mehta and members of his family sold in October 2004 an(cid:10) aggregate of 1,362,200 shares of Common Stock representing all of his and his(cid:10) affiliates holdings of Common Stock of the Company and the Company has(cid:10) registered for resale the 670,000 shares of Common Stock which may be issued(cid:10) upon exercise of the options.(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, 2005. However at the Annual Meeting(cid:10) of Stockholders held on April 15, 2005 the stockholders (i) elected as its four(cid:10) Directors Mr. Bernard Berk, Mr. Edward Neugeboren, Dr. Melvin Van Woert and Mr.(cid:10) Barry Dash, Ph. D; (ii) approved an amendment to our 2004 Stock Option Plan(cid:10) increasing the number of shares subject to the Plan to 4,000,000 shares; (iii)(cid:10) ratified the actions of the Board of Director's amending an option granted to a(cid:10) former officer and director and the issuance of warrants granted to a consultant(cid:10) and (iv) ratified the engagement of Miller Ellin & Co., LLP as the Company's(cid:10) independent auditors for the year ending March 31, 2005.(cid:10) 24(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(cid:10) symbol "ELI". The following table shows, for the periods indicated, the high and(cid:10) low 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, 2005:(cid:10) March 31, 2005.............................................$4.79 $1.15(cid:10) December 31, 2004..........................................$4.01 $1.20(cid:10) September 30, 2004.........................................$2.35 $1.05(cid:10) June 30, 2004 .............................................$4.31 $2.15(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) On June 20, 2005, the last reported sale price of our Common Stock, as(cid:10) reported by the American Stock Exchange, was $2.84 per share.(cid:10) 25(cid:10) (cid:10) As of June 20, 2005, there were approximately 122 holders of record and(cid:10) approximately 1,650 beneficial owners of our Common Stock. We are informed and(cid:10) believe that as of June 20, 2005, Cede & Co. held 15,846,250 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) 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) Please see our Quarterly Report on Form 10-Q for the three month(cid:10) periods ending June 30, 2004, September 30, 2004 and December 31, 2004 and our(cid:10) Current Reports on Form 8-K dated October 6, 2004, October 12, 2004 and October(cid:10) 26, 2004 for information concerning our issuances of unregistered securities(cid:10) during the 12 months ended March 31, 2005.(cid:10) EQUITY COMPENSATION PLAN INFORMATION(cid:10) As of March 31, 2005, we had authorized the issuance of 1,500,000(cid:10) shares of Common Stock upon exercise of options pursuant to our Stock Option(cid:10) Plan (which was approved by our stockholders on June 22, 2004 and amended by our(cid:10) stockholders on April 15, 2005 to increase to 4,000,000 the number of shares(cid:10) subject to our Stock Option Plan). As of March 31, 2005, under the 2004 Stock(cid:10) Option Plan, there was an aggregate of 93,300 shares of Common Stock issuable(cid:10) upon exercise of outstanding options having a weighted average exercise price of(cid:10) $2.34. In addition, there was an aggregate of 2,005,000 shares of Common Stock(cid:10) issuable upon exercise of other outstanding options granted to employees and(cid:10) directors having a weighted average exercise price of $2.16.(cid:10) If options granted under the Plan lapse without being exercised, other(cid:10) options may be granted covering the shares not purchased under such lapsed(cid:10) options. Options may be granted pursuant to the Plan to employees, officers,(cid:10) Directors of and consultants to Elite. The Plan permits the Company to grant(cid:10) both incentive stock options ("Incentive Stock Options" or "ISOs") within the(cid:10) meaning of Section 422 of the Code, and other options which do not qualify as(cid:10) Incentive Stock Options (the "Non-Qualified Options").(cid:10) Of the incentive stock options outstanding, options for 93,300 shares(cid:10) with an exercise price of $2.34 per share were granted on June 22, 2004 to(cid:10) employee holders of outstanding options previously granted by the Company having(cid:10) on the date of the grant a higher exercise price; such grants subject to the(cid:10) cancellation of the previously granted options. To the extent that stock options(cid:10) previously granted are not surrendered for cancellation then options exercisable(cid:10) for that same number of shares of Common Stock will be available for grant under(cid:10) the Plan. Such grants may be deemed(cid:10) 26(cid:10) (cid:10) repricing of the outstanding options and will result in charges to earnings of(cid:10) the Company equal to the difference between (i) the fair value of the vested(cid:10) portion of the new options granted, utilizing the Black-Scholes options pricing(cid:10) model on each grant date and (ii) the charges to earnings previously made as a(cid:10) result of the grants of the options being replaced, which will have a dilutive(cid:10) effect on the earnings per share and, as a result, will likely have an adverse(cid:10) effect on the market price of the Common Stock of the Company.(cid:10) Options to purchase 30,000 shares of Common Stock were granted under(cid:10) the Plan on June 22, 2004 to each of Bernard Berk, our Chief Executive Officer(cid:10) and a Director, and Mr. John A. Moore, Mr. Harmon Aronson, and Dr. Eric L.(cid:10) Sichel, each of whom was then a Director of the Company, exercisable at $2.34(cid:10) per share.(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"). As of March 31, 2005, the full Board of Directors administers the(cid:10) Plan and no Committee has been appointed.(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(cid:10) to time make such modifications or amendments to the Plan as it may deem(cid:10) advisable and the Board or Committee may adjust, reduce, cancel and regrant an(cid:10) unexercised option if the fair market value declines below the exercise price(cid:10) except as may be required by any national stock exchange or national market(cid:10) association on which the Common Stock is then listed. In no event may the Board,(cid:10) without the approval of stockholders,(cid:10) 27(cid:10) (cid:10) amend the Plan to increase the maximum number of shares of Common Stock for(cid:10) which options may be granted under the Plan or change the class of persons(cid:10) 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(cid:10) for the last five fiscal years, should be read in conjunction with our(cid:10) Consolidated Financial Statements and related Notes thereto appearing elsewhere(cid:10) in this Annual Report on Form 10-K. The consolidated selected financial data are(cid:10) derived from our consolidated financial statements that have been audited by(cid:10) Miller, Ellin & Company, LLP, our independent auditors, as indicated in their(cid:10) report included herein. The selected financial data provided below is not(cid:10) necessarily indicative of our future results of operations or financial(cid:10) performance.(cid:10) (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) Elite Pharmaceuticals is a specialty pharmaceutical company principally(cid:10) engaged in the development and manufacture of oral, controlled release products.(cid:10) Elite(cid:10) 28(cid:10)(cid:10) 2005 2004 2003 2002 2001(cid:10) ---- ---- ---- ---- ----(cid:10) (cid:10) Net Revenues $301,480 $ 258,250 $ 630,310 $ 1,197,507 $ 95,246(cid:10) Net (loss) $(5,906,890) $(6,514,217) $(4,061,422) $(1,774,527) $(13,964,981)(cid:10) Net (loss) per $(0.47) $(0.58) $(0.40) $(0.19) $(1.53)(cid:10) common share(cid:10) Total Assets $9,245,292 $7,853,434 $8,696,222 $12,724,498 $12,350,301(cid:10) Long-term obligations $2,367,128 $2,495,000 $2,720,000 $3,788,148 $2,765,000(cid:10) Weighted average 12,869,924 11,168,618 10,069,991 9,561,299 9,135,369(cid:10) number of shares(cid:10) outstanding(cid:10) (cid:10) develops controlled release products using proprietary technology and(cid:10) licenses these products. The Company's strategy includes developing generic(cid:10) versions of controlled release drug products with high barriers to entry and(cid:10) assisting partner companies in the life cycle management of products to improve(cid:10) off-patent drug products. Elite's technology is applicable to develop delayed,(cid:10) sustained or targeted release pellets, capsules, tablets, granules and powders.(cid:10) Elite has one product currently being sold commercially and a pipeline of six(cid:10) drug products under development in the therapeutic areas that include(cid:10) cardiovascular, pain management, allergy and infection. The addressable market(cid:10) for Elite's pipeline of products exceeds $2 billion. Elite's current facility in(cid:10) Northvale, New Jersey also is a GMP and DEA registered facility for research,(cid:10) development, and manufacturing.(cid:10) CRITICAL ACCOUNTING POLICIES AND ESTIMATES(cid:10) Management's discussion addresses our consolidated financial(cid:10) statements, which have been prepared in accordance with accounting principles(cid:10) generally accepted in the United States of America. The preparation of these(cid:10) financial statements requires management to make estimates and assumptions that(cid:10) affect the reported amounts of assets and liabilities, the disclosure of(cid:10) contingent assets and liabilities at the date of financial statements and the(cid:10) reported amounts of revenues and expenses during the reporting period. On an(cid:10) ongoing basis, management evaluates its estimates and judgment, including those(cid:10) related to bad debts, intangible assets, income taxes, workers compensation, and(cid:10) contingencies and litigation. Management bases its estimates and judgments on(cid:10) historical experience and on various other factors that are believed to be(cid:10) reasonable under the circumstances, the results of which form the basis for(cid:10) making judgments about the carrying values of assets and liabilities that are(cid:10) not readily apparent from other sources. Actual results may differ from these(cid:10) estimates under different assumptions or conditions.(cid:10) Management believes the following critical accounting policies, among(cid:10) others, affect its more significant judgments and estimates used in the(cid:10) preparation of its consolidated financial statements. Our most critical(cid:10) accounting policies include the recognition of revenue upon completion of(cid:10) certain phases of projects under research and development contracts. The Company(cid:10) also assesses a need for an allowance to reduce its deferred tax assets to the(cid:10) amount that it believes is more likely than not to be realized. The Company(cid:10) assesses the recoverability of long-lived assets and intangible assets whenever(cid:10) events or changes in circumstances indicate that the carrying value of the asset(cid:10) may not be recoverable. The Company assesses its exposure to current commitments(cid:10) and contingencies. It should be noted that actual results may differ from these(cid:10) estimates under different assumptions or conditions.(cid:10) 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, $1,166,601 and $370,108 during the(cid:10) years ended March 31, 2003, 2004 and 2005, respectively. The fair value of stock(cid:10) options held by employees and(cid:10) 29(cid:10) (cid:10) members of the Board of Directors which have been granted or repriced subsequent(cid:10) to March 31, 2005 is expected to continue to affect the results of operations of(cid:10) future periods, as we continue to grant or reprice stock options to reward our(cid:10) management team.(cid:10) YEAR ENDED MARCH 31, 2005 VS. YEAR ENDED MARCH 31, 2004(cid:10) Our Auditor's Report on the accompanying financial statements state(cid:10) that such financial statements have been prepared assuming that we will continue(cid:10) as a going concern. We have incurred significant losses during our fiscal years(cid:10) ended March 31, 2005 and March 31, 2004. Although proceeds were raised during(cid:10) our latest private placement, our Auditor's continued to state in their report(cid:10) that conditions raise substantial doubt about our ability to continue as a going(cid:10) concern. The financial statements do not include any adjustments to reflect the(cid:10) possible future effects on the recoverability and classification of the assets(cid:10) or the amounts and classification of liabilities that may result from the(cid:10) outcome of this uncertainty. Management believes that cost reductions already(cid:10) implemented will reduce losses in the future, and with our existing working(cid:10) capital levels, anticipate that we will be able to continue our operations at(cid:10) least through the end of our current fiscal year.(cid:10) Our revenues for the year ended March 31, 2005 were $301,480, an(cid:10) increase of $43,230 or approximately 17%, over the comparable prior year. For(cid:10) the year ended March 31, 2005, revenues consisted of a $150,000 non-refundable(cid:10) payment received from Purdue Pharma L.P. granting it the right to evaluate(cid:10) certain abuse resistant drug formulation technology, $125,739 in manufacturing(cid:10) fees, $24,291 in royalty fees and $1,450 in testing fees. Revenues for the year(cid:10) ended March 31, 2004 consisted of research and development fees earned in(cid:10) conjunction with our distinct development, license and manufacturing agreements.(cid:10) Research and development costs for the year ended March 31, 2005, were(cid:10) $2,698,641 an increase of $623,567 or approximately 30% from $2,075,074 for the(cid:10) comparable period of the prior year, primarily the result of an increase(cid:10) relating to wages, raw materials, laboratory and manufacturing supplies and(cid:10) consulting fees. We expect our research and development costs to continue to(cid:10) increase in future periods as a result of the ERL joint venture termination as(cid:10) we will be solely responsible to fund product development, which we will do from(cid:10) the internal resources or through loans or investment by third parties.(cid:10) General and administrative expenses for the year ended March 31, 2005,(cid:10) were $2,159,670, a decrease of $390,176, or approximately 18% from the prior(cid:10) year. The decrease was attributable to a decrease in litigation costs offset(cid:10) somewhat by increases in salaries and staff, consulting fees and the write-off(cid:10) of a bad debt relating to accounts receivable.(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(cid:10) 30(cid:10) (cid:10) significant portion of the costs are generally associated with salaries,(cid:10) laboratory supplies, laboratory and manufacturing expenses, utilities and(cid:10) 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) Depreciation and amortization increased by $23,602 from $332,836 to(cid:10) $356,438.(cid:10) Other expenses for the year ended March 31, 2005 were $992,621, a(cid:10) decrease of $821,090, or approximately 45% from $1,813,711 for the prior year.(cid:10) The decrease was due to a reduction by $1,143,466 in charges related to the(cid:10) issuances of stock options and warrants and a charge of $172,324 in the prior(cid:10) year related to the warrant exchange offer, offset partially by a charge in the(cid:10) year ended March 31, 2005 relating to the repricing of stock options in the(cid:10) amount of $397,732. Additional interest income, due to higher compensating(cid:10) balances as a result of the private placement, was offset by increases in(cid:10) interest expense resulting from the equipment financing.(cid:10) As a result of the foregoing, the Company's net loss for the year ended(cid:10) March 31, 2005 was $5,906,890 compared to $6,514,217 for the year ended March(cid:10) 31, 2004. Increases in operating expenses of $256,993, were more than offset by(cid:10) decreases in other expenses of $821,090.(cid:10) YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003(cid:10) Our Auditor's Report on the accompanying financial statements for the(cid:10) years ended March 31, 2005 and 2004 and a prior Report for the year ended March(cid:10) 2003 states that such financial statements have been prepared assuming that we(cid:10) will continue as a going concern. We incurred a significant loss and negative(cid:10) cash flow during our fiscal year ended March 31, 2004 which significantly(cid:10) decreased our working capital and increased our accumulated deficit.(cid:10) Our revenues for the year ended March 31, 2004 were $258,250, a(cid:10) decrease of $372,060 or approximately 59% from the comparable prior year. For(cid:10) the year ended March 31, 2004 our revenues consisted of research and development(cid:10) fees earned in conjunction with our distinct development, license and(cid:10) manufacturing agreements. For the year ended March 31, 2003, revenues consisted(cid:10) of product formulation fees of $187,810 earned in conjunction with our joint(cid:10) venture in ERL which terminated on September 30, 2002. Of our revenues for the(cid:10) years ended March 31, 2004 and March 31, 2003, $108,500 and $442,500,(cid:10) respectively, were research and development and testing fees earned in(cid:10) conjunction with our distinct development, license and manufacturing agreements.(cid:10) 31(cid:10) (cid:10) General and administrative expenses for the year ended March 31, 2004(cid:10) were $2,549,846, an increase of $691,777, or approximately 37% from the prior(cid:10) year. The increase was substantially due to increases in legal and consulting(cid:10) fees as well as approximately $550,000 in expenses, including $400,000 as(cid:10) compensation, resulting from a settlement of litigation instituted by our former(cid:10) President with respect to the termination of 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,(cid:10) primarily due to increased research and development wages, laboratory supplies(cid:10) and raw materials used in our research and development processes and additional(cid:10) biostudies.(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 settlement of(cid:10) vendor litigation for $150,000.(cid:10) Our net loss for the year ended March 31, 2004 was $6,514,217 as(cid:10) compared to $4,061,422 in the prior year, or an increase of approximately 60%(cid:10) from the prior year, primarily due to the decrease in net revenues, and(cid:10) increases in research and development and administrative expenses, including(cid:10) increased charges of $1,664,020 due to the issuance of stock options, warrants(cid:10) and the modification of warrant exchange offer.(cid:10) MATERIAL CHANGES IN FINANCIAL CONDITION(cid:10) The Company's working capital (total current assets less total current(cid:10) liabilities), which was $1,289,764 as of March 31, 2004, increased to $3,328,583(cid:10) as of March 31, 2005, primarily due to net proceeds of $5,791,600 received from(cid:10) the sale of Series A Preferred Stock partially offset by the net loss of(cid:10) $4,883,302 from operations, exclusive of non-cash charges of $1,423,588.(cid:10) 32(cid:10) (cid:10) The Company experienced negative cash flows from operations of(cid:10) ($4,883,503) for the year ended March 31, 2005, primarily due to the Company's(cid:10) net loss from operations of $5,906,890, less non-cash charges of $1,423,588,(cid:10) which included, but were not limited to, the charges of $397,732 in connection(cid:10) with the repricing of stock options, $370,108 in connection with the issuance of(cid:10) stock options, and $241,010 in connection with the issuance of stock warrants.(cid:10) The Company recently completed a Good Manufacturing Practices ("GMP")(cid:10) batch for a product currently licensed with a pharmaceutical company under s(cid:10) development and license agreement entered into June 2001. The Company received(cid:10) $30,000 in November 2003 under the Agreement and expects to complete two(cid:10) additional GMP batches in the near future under the terms of the licensing(cid:10) agreement. On November 15, 2004, Elite's partner, ECR, launched LODRANE 24, once(cid:10) a day allergy product, utilizing Elite's extended release technology to provide(cid:10) for once daily dosing. Under its agreement with ECR, Elite is currently(cid:10) manufacturing commercial batches of LODRANE 24 in exchange for royalties on(cid:10) product revenues. The Company expects these royalties to provide additional cash(cid:10) to help fund its operations.(cid:10) The Company recently entered into a development agreement with Pivotal(cid:10) Development, L.L.C. pursuant to which the Company is to receive an aggregate of(cid:10) $750,000 upon attaining certain milestones. The Company anticipates that some of(cid:10) the milestones will be achieved the first quarter of the year March 2006.(cid:10) The Company in April 2005 announced the entry into an agreement with a(cid:10) specialty marketing company and a boutique formulation development company, for(cid:10) the manufacture and distribution of a controlled release drug product. The(cid:10) product is a generic equivalent to a branded drug which has addressable market(cid:10) revenues of approximately $80 million per year. The agreement provides for (1)(cid:10) the development of the drug by Elite with costs of development to be shared by(cid:10) Elite and the marketing company, (2) the manufacture by Elite and its sale to(cid:10) the marketing company for distribution and (3) the boutique development company(cid:10) to be responsible for any requisite submissions to the FDA relating to the(cid:10) product. Elite is to share in the profits generated from the sale of the(cid:10) product.(cid:10) No assurance can be given that the Company will consummate any of the(cid:10) transactions discussed above or that any material revenues will be generated for(cid:10) Elite therefrom.(cid:10) LIQUIDITY AND CAPITAL RESOURCES(cid:10) For the year ended March 31, 2005, the Company recorded positive cash(cid:10) flow and financed its operations through utilization of its existing cash. In(cid:10) October 2004, the Company raised net cash of $5,791,000 from its private(cid:10) placement of its Series A Preferred Stock. The Company's working capital at(cid:10) March 31, 2005 was $3.3 million compared with working capital of $1.3 million at(cid:10) March 31, 2004. Cash and cash(cid:10) 33(cid:10) (cid:10) equivalents at March 31, 2005 were $3.9 million, an increase of $1.8 million(cid:10) from the $2.1 million at March 31, 2004.(cid:10) The Company's purchase of machinery and equipment of approximately(cid:10) $426,000 during the year ending March 31, 2005 was fully financed except for(cid:10) minor expenditures. No capital expenditures were made during the year ended(cid:10) March 31, 2004.(cid:10) The Company had bonds of $2,345,000 outstanding as of March 31, 2005.(cid:10) The bonds bear interest at a rate of 7.75% per annum and are due on various(cid:10) dates between 2005 and thereafter. The bonds are secured by a first lien on the(cid:10) Company's facility in Northvale, New Jersey. Pursuant to the terms of the bonds,(cid:10) several restricted cash accounts have been established for the payment of bond(cid:10) principal and interest. Bonds proceeds were utilized for the refinancing of the(cid:10) land and building the Company currently own, the purchase of certain(cid:10) manufacturing equipment and related building improvements and the maintenance of(cid:10) a $300,000 debt service reserve. All of the restricted cash, other than the debt(cid:10) service reserve, is expected to be expended within twelve months and is(cid:10) therefore categorized as a current asset on the Company's consolidated balance(cid:10) sheet as of March 31, 2005. Pursuant to the terms of the related bond indenture(cid:10) agreement, the Company is required to observe certain covenants, including(cid:10) covenants relating to the incurrence of additional indebtedness, the granting of(cid:10) liens and the maintenance of certain financial covenants. As of March 31, 2005(cid:10) the Company was in compliance with the covenants contained in the bond indenture(cid:10) agreement.(cid:10) On July 8, 2004, Elite Labs entered into a loan and financing agreement(cid:10) in order to finance the purchase of certain machinery and equipment. Elite Labs(cid:10) borrowed $400,000 payable in 36 monthly installments each of $13,671, including(cid:10) principal and interest at 14% per annum. The first four and the last three(cid:10) months of scheduled payments are being held by the lender and were and are to be(cid:10) applied to the principal balance when due. The loan is secured by two pieces of(cid:10) equipment and the guaranty of the Company. In addition, the Company issued to(cid:10) designees of the lender 50,000 warrants, which vest immediately, to purchase(cid:10) 50,000 shares of the Company's Common Stock at $4.20 per share. A charge of(cid:10) $41,252 for the cost of these warrants is reflected in the year ended March 31,(cid:10) 2005.(cid:10) The Company from time to time will consider potential strategic(cid:10) transactions including acquisitions, strategic alliances, joint ventures and(cid:10) licensing arrangements with other pharmaceutical companies. The Company retained(cid:10) an 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) In October 2004, the Company effected a private placement of 516,558(cid:10) shares of its Series A Convertible Preferred Stock and the short and long term(cid:10) warrants for gross proceeds of $6,600,000, before payment of commission of(cid:10) $623,520 and other expenses. The Series A Preferred Shareholders were entitled(cid:10) to a preferential dividend(cid:10) 34(cid:10) (cid:10) of 8% per annum of the original issue price of $12.30 per share payable on(cid:10) December 1 and June 1 of each year and at the time of conversion. Dividends are(cid:10) payable in cash or shares of Common Stock valued at their fair market value as(cid:10) defined. The December 1, 2004 dividend of $75,076 was paid by the issuance of(cid:10) 26,961 shares of Common Stock. As of March 7, 2005, all of the shares have been(cid:10) converted at the holder's option or by mandatory conversion pursuant to their(cid:10) terms. An aggregate of 5,265,516 shares of Common Stock have been issued,(cid:10) including 26,961 shares of Common Stock issued to satisfy payment of $75,076(cid:10) accrued dividend on December 1, 2004. The Company believes that the net proceeds(cid:10) of the placement have provided sufficient cash to fund the Company's operations(cid:10) and capital requirements through at least March 31, 2006.(cid:10) As of March 31, 2005, our principal source of liquidity was(cid:10) approximately $3,900,000 of cash and cash equivalents. Additionally, we may have(cid:10) access to funds through the exercise of outstanding stock options and warrants(cid:10) in addition to funds that may be generated from the potential sale of New Jersey(cid:10) tax losses. There can be no assurance that the sale of tax losses or that any(cid:10) proceeds generated by the exercise of outstanding warrants or options will(cid:10) provide sufficient cash.(cid:10) The following table depicts our obligations and commitments to make(cid:10) future payments under existing contracts or contingent commitments.(cid:10) (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(cid:10) entered into for trading purposes or for purposes other than trading purposes.(cid:10) All loans to us have been made at fixed interest rates and; accordingly, the(cid:10) market risk 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(cid:10) are 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) 35(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) Equipment note payable 315,074 127,946 187,128 - -(cid:10) EDA Bonds payable 2,345,000 165,000 570,000 460,000 1,150,000(cid:10) (cid:10) ITEM 9A. CONTROLS AND PROCEDURES(cid:10) Within the 90 days prior to the date of this report, based on an(cid:10) evaluation of the Company's disclosure controls and procedures (as defined in(cid:10) Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the(cid:10) Chief Executive and Chief Financial Officer of the Company have concluded that(cid:10) the Company's disclosure controls and procedures are effective for ensuring that(cid:10) information required to be disclosed by the Company in its Exchange Act reports(cid:10) is recorded, processed, summarized and reported within the applicable time(cid:10) periods specified by the SEC's rules and forms. The Company also concluded that(cid:10) information required to be disclosed in such reports is accumulated and(cid:10) communicated to the Company's management, including its principal executive and(cid:10) principal financial officer, as appropriate to allow timely decisions regarding(cid:10) required disclosure. There was no change in the Company's internal controls over(cid:10) financial reporting that occurred during the most recent fiscal quarter that(cid:10) materially affected or is reasonably likely to materially affect the Company's(cid:10) internal controls over financial reporting. The Company's management has not yet(cid:10) completed, and is not yet required to have have completed, its assessment of(cid:10) internal control over financial reporting.(cid:10) 36(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, 2005, and their(cid:10) biographical information are set forth below:(cid:10) -------------------------------------- --------- -------------------------------(cid:10) NAME AGE POSITION(cid:10) -------------------------------------- --------- -------------------------------(cid:10) Bernard Berk 56 Chairman of the Board, Chief(cid:10) Executive Officer(cid:10) -------------------------------------- --------- -------------------------------(cid:10) Edward Neugeboren 36 Director(cid:10) -------------------------------------- --------- -------------------------------(cid:10) Barry Dash, Ph.D 73 Director(cid:10) -------------------------------------- --------- -------------------------------(cid:10) Dr. Melvin Van Woert 74 Director(cid:10) -------------------------------------- --------- -------------------------------(cid:10) Mark I. Gittelman 44 Chief Financial Officer,(cid:10) Secretary and Treasurer(cid:10) -------------------------------------- --------- -------------------------------(cid:10) The principal occupations and employment of each such person during at(cid:10) least the past five years is set forth below. In each instance in which dates(cid:10) are not provided in connection with the person's business experience, he has(cid:10) held the position indicated for at least the past five years.(cid:10) Bernard Berk was appointed the Chief Executive Officer of the Company(cid:10) in 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, he was Senior Vice President of Sales, Marketing and Business(cid:10) Development of Par Pharmaceuticals, Inc. Mr. Berk holds a B.S. from New York(cid:10) University.(cid:10) Mr. Edward Neugeboren has been a Managing Partner of IndiGo Ventures(cid:10) LLC, a boutique investment-banking firm based in New York since January 2003.(cid:10) From April 2001 to January 2004, he was a Managing Partner of Third Ridge(cid:10) Capital Management, LLC, a U.S. equity hedge fund. From October 2000 to April(cid:10) 2001, he was Chief Administrative Officer of Soceron, an emerging Silicon Alley(cid:10) based media software company, responsible for managing corporate operations. He(cid:10) aided in capital raising, business development and strategic planning and(cid:10) tactical operations. Mr. Neugeboren as Chief Administrative Officer and Director(cid:10) of Equity Research Operations at Lehman Brothers from 1998 to 2000 was a senior(cid:10) member of the management team responsible for department operations, including(cid:10) technology, finance, editorial and production, human resources, and compliance.(cid:10) He managed the equity research business of Lehman's strategic alliance with(cid:10) Fidelity Investments. He also managed the hard dollar broker-dealer research(cid:10) business with P&L responsibility. Additionally, he was the investment-banking(cid:10) liaison. He was from 1996 to 1998 Deputy Director of(cid:10) 37(cid:10) (cid:10) Equity Research and from 1995 to 1996 Director of Equity Research Operations at(cid:10) UBS Warburg, formerly Warburg, Dillon Read. He was a senior member of the(cid:10) management team as well as the Investment Policy & Equity Commitment Committees.(cid:10) Mr. Neugeboren began his career in 1992 as an equity research analyst covering(cid:10) the Specialty Pharmaceuticals industry, including generic drugs and drug(cid:10) delivery, at Dillon Read & Co., Kidder, Peabody & Co. and Furman Selz, Inc. He(cid:10) was a member of top ranked Greenwich Associates Mid-Cap Pharmaceuticals Team. He(cid:10) graduated with a B. S. in Economics from Union College in 1992. Mr. Neugeboren(cid:10) serves on the Board of Directors of KineMed, Inc. a platform based drug(cid:10) development and advanced medical diagnostics company based in Emeryville,(cid:10) California.(cid:10) Barry Dash Ph.D. has been since 1995 President and Managing Member(cid:10) of Dash Associates, L.L.C., an independent consultant to the pharmaceutical and(cid:10) health and beauty aid industries. From 1983 to 1996 he was employed by American(cid:10) Home Products Corporation, its Whitehall-Robins Healthcare Division, initially(cid:10) as Vice President of Scientific Affairs, then Senior Vice President of(cid:10) Scientific Affairs and then Senior Vice President of Advanced Technologies(cid:10) during which time he personally supervised six separate departments: Medical and(cid:10) Clinical Affairs, Regulatory Affairs, Technical Affairs, Research and(cid:10) Development, Analytical R&D and Quality Management/Q.C. He had previously been(cid:10) employed by the Whitehall Robins Healthcare Division from 1960 to 1976, during(cid:10) which time he served as Director of Product Development Research, Assistant Vice(cid:10) President of Product Development and Vice President of Scientific Affairs. Dr.(cid:10) Dash had been employed by J.B. Williams Company (Nabisco Brands, Inc.) from 1978(cid:10) to1982, during which time he helped introduce more than 14 national and test(cid:10) market brands. From 1976 to1978 he was Vice President, Director of Laboratories(cid:10) of the Consumer Products Division of American Can Company. He is a director of(cid:10) GeoPharma, Inc. He holds a Ph.D. from the University of Florida and M.S. and(cid:10) B.S. degrees from Columbia University at which he was Assistant Professor at the(cid:10) College of Pharmaceutical Sciences from 1956 to 1960. Dr. Dash is a member of(cid:10) the American Pharmaceutical Association, The American Association for the(cid:10) Advancement of Science and the Society of Cosmetic Chemist.(cid:10) Dr. Melvin Van Woert, a neurologist, has been since 1974, a member(cid:10) of the staff of Mount Sinai Medical Center where he has been a Professor of the(cid:10) Department of Neurology and Pharmacology at Mount Sinai School of Medicine since(cid:10) 1978. Dr. Van Woert had been a consultant for Neuropharmacological Drug Products(cid:10) to the Food and Drug Administration from 1974 to 1980; Associate Editor for(cid:10) Journal of the Neurological Sciences; Member of the Editorial Board of Journal(cid:10) of Clinical Neurphamacology; and Medical Director of National Organization for(cid:10) Rare Disorders for which he received in 1993 the Humanitarian Award. His other(cid:10) awards include the U.S. Public Health Service Award for Exceptional Achievement(cid:10) in Orphan Products Development and the National Myoclonus Foundation Award. He(cid:10) has authored and co-authored more than 150 articles appearing in(cid:10) pharmacological, medical and other professional journals or publications.(cid:10) 38(cid:10) (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(cid:10) annual meeting of shareholders and until such director's successor has been(cid:10) elected and qualified. All of our executive officers are serving until the next(cid:10) annual meeting of directors and until their successors have been duly elected(cid:10) and qualified. There are no family relationships between any of our directors(cid:10) and 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 current(cid:10) Audit Committee, appointed on April 15, 2005, consists of Edward Neugeboren, Dr.(cid:10) Melvin Van Woert and Barry Dash, Ph.D. The prior Audit Committee members were(cid:10) John A. Moore, Harmon Aronson and Eric L. Sichel. The Audit Committee had one(cid:10) meeting during the fiscal year ended March 31, 2005. The Company's Board of(cid:10) Directors has adopted a written charter for the Audit Committee, a copy of which(cid:10) was included as an appendix to the Company's proxy statement sent to(cid:10) stockholders in connection with the annual meeting of stockholders held October(cid:10) 11, 2001.(cid:10) Other than Mr. Moore, and each of the current members of the Audit(cid:10) Committee, we deem the members of the prior and the current Audit Committees to(cid:10) be independent as independence is defined in Section 121(A) of the American(cid:10) Stock Exchange Listing Standards, as amended effective December 1, 2003. The(cid:10) Board determined that Mr. Sichel, an independent director, with respect to the(cid:10) prior Committee and Mr. Edward Neugeboren with respect to the current Audit(cid:10) Committee qualified as the Audit Committee Financial Expert within the meaning(cid:10) of that term under the applicable regulations under the Securities Exchange Act(cid:10) of 1934.(cid:10) Audit Committee Report: The following is the Audit Committee Report(cid:10) made 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(cid:10) 39(cid:10) (cid:10) independent accountant's independence. Based upon the foregoing review and(cid:10) discussions, the Audit Committee recommended to the Board of Directors of the(cid:10) Company that the audited financial statements of the Company be included in the(cid:10) Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as(cid:10) filed with the Commission.(cid:10) Edward Neugeboren(cid:10) Dr. Melvin Van Woert(cid:10) Barry Dash, Ph.D.(cid:10) NOMINATING COMMITTEE(cid:10) The Nominating Committee, initially appointed on June 22, 2004, is(cid:10) authorized to select the nominees of the Board of Directors for election as(cid:10) directors. The members were John A. Moore, Harmon Aronson and Bernard Berk with(cid:10) Barry Dash and Melvin Van Woert replacing Messrs. Aronson and Moore as of April(cid:10) 15, 2005. In selecting nominees the Committee identifies and evaluates the(cid:10) current Directors and their commitment to the policy of the Company and each(cid:10) individual's qualifications and availability. The Committee believes that a(cid:10) nominee for director of the Company should have an appropriate level of(cid:10) sophistication, knowledge and understanding of the Company and the industry,(cid:10) stockholder relations and finance and accounting for publicly held companies.(cid:10) The Committee also considers the need to select a nominee who has the(cid:10) appropriate experience and financial background who could qualify as an "audit(cid:10) committee financial expert" within the meaning of the rules under the Securities(cid:10) Exchange Act of 1934 and of the American Stock Exchange. The Company has not(cid:10) engaged any third party to assist in the process of identifying or evaluating(cid:10) candidates.(cid:10) The Company currently does not have a process for considering(cid:10) candidates put forward by stockholders other than those who are directors of the(cid:10) Company. In view of the recent effectiveness of the requirements under the(cid:10) Securities Exchange Act of 1934 as to a policy with respect to the consideration(cid:10) of candidates put forward by stockholders other than those who are directors of(cid:10) the 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, 2005, our Board of Directors(cid:10) held four meetings and acted by unanimous written consent on other occasions.(cid:10) Each director attended 75 percent or more of the aggregate number of meetings(cid:10) and committees of which he was a member that were held during the period of his(cid:10) service as a director.(cid:10) The Company does not have a formal policy regarding attendance by(cid:10) members of the Board of Directors at the Company's annual meeting of(cid:10) stockholders, although it does encourage attendance by the directors.(cid:10) Historically, more than a majority of the directors have attended the annual(cid:10) meeting.(cid:10) 40(cid:10) (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 is available on our website(cid:10) www.elitepharma.com. We intend to disclose any amendment to, or waiver of, a(cid:10) provision of the Business Conduct and Ethics for Directors in a report filed(cid:10) under the Securities Exchange Act of 1934 within five business days of the(cid:10) 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) 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,(cid:10) requires our directors and executive officers and persons who own more than ten(cid:10) percent 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,(cid:10) 41(cid:10) (cid:10) we believe that during fiscal year ended March 31, 2005 all Reporting Persons(cid:10) complied with all applicable filing requirements other than Mr. Neugeboren who(cid:10) did not timely file his Form 3.(cid:10) Section 16(b) of the Securities Exchange Act of 1934, as amended, requires an(cid:10) insider, as defined, to disgorge any gain on the purchase and sale, or sale and(cid:10) purchase of an issuer's equity securities within any six month period. During(cid:10) fiscal 2005, the former Chairman of our Board of Directors remitted $117,740 to(cid:10) Elite to return his gain based on the applicable provisions of law.(cid:10) ITEM 11. EXECUTIVE COMPENSATION(cid:10) EXECUTIVE OFFICER COMPENSATION(cid:10) The Company entered into a three-year employment agreement effective(cid:10) July 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 price, the closing share price on the American Stock(cid:10) Exchange on the date of grant and (iii) the grant of options to purchase an(cid:10) additional 300,000 shares at the $2.01 per share to vest on consummation of a(cid:10) "strategic transaction" while he is employed as Chief Executive Officer. The(cid:10) consummation of such transaction will result in the increase of his base annual(cid:10) salary to $310,140 effective with the consummation. A strategic transaction is(cid:10) defined as any one of the following transactions provided that the net value of(cid:10) the consideration to the Company or its stockholders determined in good faith by(cid:10) the Board of Directors is at least $10,000,000: (i) the sale of all or(cid:10) substantially all of the assets of the Company, (ii) a merger or consolidation(cid:10) or business combination, or (iii) the sale by the Company of debt or equity(cid:10) securities.(cid:10) Either party upon notice may terminate Mr. Berk's employment except(cid:10) that a termination by the Company without cause or because of his permanent(cid:10) disability or a termination by him for cause will result in severance pay in the(cid:10) form of the continuation of his base salary for the balance of the term or two(cid:10) years, whichever is longer, less in the event of termination for permanent(cid:10) disability the amount of payments under a disability insurance policy maintained(cid:10) by the Company. The Company is also to continue to pay during the foregoing(cid:10) period the premiums for life and disability insurance policies. Furthermore, in(cid:10) the event that Mr. Berk terminates his employment following a "change of(cid:10) control" event he is to receive, payable in 24 monthly installments, an amount(cid:10) which will depend on the fair value of the consideration determined in good(cid:10) faith by the Board of Directors received by the Company or stockholders from the(cid:10) "change of control" event less related expenses ("Net Fair Value") -- $500,000(cid:10) if the Net Fair Value is $10 million or less; the greater of $500,000 or twice(cid:10) his then base annual salary, if the Net Fair Value is greater than $10 million(cid:10) but not more than $20 million, or $1,000,000 if the Net Fair Value is greater(cid:10) than $20 million. A "change of control" event is (i) a merger or consolidation(cid:10) in which securities possessing more than 50% of the voting power is issued to(cid:10) persons other than the holders of voting securities of the Company immediately(cid:10) prior to the event, (ii) the sale, transfer or(cid:10) 42(cid:10) (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(cid:10) of 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, 2005, 2004 and 2003, the(cid:10) fees paid by the Company under the agreement were $111,312, $168,750 and(cid:10) $167,544 respectively. The services rendered by the firm to the Company averaged(cid:10) 84, 128 and 127 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(cid:10) for services in all capacities to the Company for the three years ended March(cid:10) 31, 2005, 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) SUMMARY COMPENSATION TABLE(cid:10) (cid:10)
(cid:10) 43(cid:10)(cid:10) ----------------------------------------------------------------------- ---------------------------------------------------------(cid:10) ANNUAL COMPENSATION LONG TERM COMPENSATION(cid:10) ----------------------------------------------------------------------- ---------------------------------------------------------(cid:10) (a) (b) (c) (d) (e) (f) (g) (h) (i)(cid:10) Name and Fiscal SALARY BONUS Other Restricted Securities LTIP All Other(cid:10) Principal YEAR(1) Annual Stock Underlying PAYOUTS COMPENSATION(cid:10) POSITION COMPENSATION(3) AWARDS OPTIONS(cid:10) ----------------- ------------ ------------ ----------- --------------- ------------ -------------- ---------- ---------------(cid:10) (cid:10) Bernard Berk, 2004-05 $200,000 $50,000 -- -- 30,000 -- --(cid:10) President and 2003-04 $166,667 -- -- -- 300,000(4) -- --(cid:10) Chief Executive(cid:10) Officer(cid:10) ----------------- ------------ ------------ ----------- ------------ --------------- -------------- ---------- ---------------(cid:10) Atul M. Mehta, 2004-05 -- -- -- -- --(5) -- --(cid:10) Ph.D. former 2003-04 $ 53,684 -- $ 3,040 -- -- -- --(cid:10) President and 2002-03 $330,140 -- $ 3,040 -- -- -- --(cid:10) Chief executive(cid:10) Officer(2)(cid:10) ----------------- ------------ ------------ ----------- ------------ --------------- -------------- ---------- ---------------(cid:10) (cid:10) (1) The Company's fiscal year begins on April 1 and ends on March 31. The(cid:10) information is provided for each fiscal year beginning April 1.(cid:10) (2) Dr. Mehta resigned as an employee and as a director of Elite as of June 3,(cid:10) 2003.(cid:10) (3) Other Annual Compensation represents use of a company car, premiums paid by(cid:10) the Company for life insurance on Dr. Mehta's life for the benefit of his wife(cid:10) 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 occurrence(cid:10) of a "strategic transaction".(cid:10) (5) See "Item 3 - Legal Proceedings" for settlement of a litigation providing(cid:10) for extension of expiration dates of options granted prior to April 1, 2001 to(cid:10) him to purchase 670,000 shares and a reduction of the exercise prices of certain(cid:10) of the options..(cid:10) OPTION GRANTS TO AND EXERCISED BY EXECUTIVE OFFICERS IN LAST FISCAL YEAR(cid:10) OPTION GRANTS IN LAST FISCAL YEAR(cid:10) Options granted to Executive Officers of the Company named in the(cid:10) Summary Compensation Table during the fiscal year ended March 31, 2005 were as(cid:10) follows:(cid:10) (cid:10)
(cid:10) No options were exercised by executive officers during the fiscal year(cid:10) ended March 31, 2005.(cid:10)(cid:10) POTENTIAL REALIZED VALUE AT(cid:10) NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF(cid:10) SHARES OPTIONS GRANTED EXERCISE EXPIRATION STOCK PRICE APPRECIATION(cid:10) UNDERLYING TO EMPLOYEES IN PRICE DATE FOR OPTION TERM(cid:10) NAME OPTIONS FISCAL YEAR -------- --------- ----------------------------(cid:10) ---- GRANTED ---------------(cid:10) ----------(cid:10) 5% 10%(cid:10) -- ---(cid:10) (cid:10) Bernard Berk 30,000 50% $2.34 6/22/14 $45,966.96 $121,721.58(cid:10) (cid:10)
(cid:10) 44(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) ---- --------- -------- ------------------------------- ---------------------------------(cid:10) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(cid:10) ----------- ------------- ----------- -------------(cid:10) (cid:10) Atul M. Mehta -0- -0- 170,000 -0- $350,200 --(cid:10) (2) -0- -0- 100,000 -0- $340,000 --(cid:10) -0- -0- 100,000 -0- $290,000 --(cid:10) -0- -0- 100,000 -0- $240,000 --(cid:10) -0- -0- 100,000 -0- $190,000 --(cid:10) -0- -0- 100,000 -0- $140,000 --(cid:10) Bernard -0- -0- 30,000 -0- $ 61,800 --(cid:10) Berk (3) -0- -0- 300,000 300,000 $717,000 $717,000(cid:10) (cid:10) (1) The dollar values are calculated by determining the difference between $4.40(cid:10) per share, the fair market value of the Common Stock at March 31, 2005, 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) 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 who was(cid:10) then a Director, as compensation for his services as Chairman of the Board. The(cid:10) fee is based on the substantial duties the Board assigned to him, principally to(cid:10) assist the Chief Executive Officer in the management of the Company's(cid:10) operations, and the time required to perform such duties. Mr. Moore earned(cid:10) $46,875 under the authorization for the period through May 12, 2004, the date of(cid:10) his resignation 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(cid:10) 45(cid:10) (cid:10) which contained an exercise price greater than $2.21 to reduce their exercise(cid:10) price to $2.21 per share.(cid:10) (cid:10)
(cid:10) On May 12, 2004 our Board of Directors also authorized an amendment to(cid:10) the 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(cid:10) $2.21 per share of the $3.31 per share exercise price of options of purchase(cid:10) 30,000 shares granted on June 13, 2003 to each of three employees. Such options(cid:10) vest in three equal annual installments commencing with the date of grant.(cid:10) On February 6, 2004 the Board of Directors authorized the extension of(cid:10) the expiration date from June 30, 2004 to November 30, 2005 of the outstanding(cid:10) Class B Warrants to purchase an aggregate of 681,002 shares of our Common Stock(cid:10) at a price of $5.00 per share. The Class B Warrants were originally issued as(cid:10) part of units of shares of Common Stock and Class B Warrants in a private(cid:10) placement to a group of investors. Included among the holders of the Class B(cid:10) Warrants are Richard A. Brown, a Director at the time, who holds, along with his(cid:10) son and an affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge(cid:10) Ventures Inc., a consultant to the Company since December, 2003, which holds(cid:10) 25,000 Class 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 December 31, 2007 of options previously issued to Dr. Mehta(cid:10) to purchase 670,000 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) 46(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) NUMBER OF OPTIONS EXERCISE PRICE(cid:10) ----------------- --------------(cid:10) 100,000 $3.00(cid:10) 100,000 $2.50(cid:10) 170,000* $2.34(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) 47(cid:10) (cid:10) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND(cid:10) RELATED STOCKHOLDER MATTERS(cid:10) The following table sets forth certain information regarding beneficial(cid:10) ownership of our Common Stock as of March 31 2005 by (i) each director and named(cid:10) executive officer, (ii) all executive officers and current directors as a group(cid:10) 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 18,022,183 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) NAME AND ADDRESS COMMON STOCK(cid:10) ---------------- ------------(cid:10) AMOUNT % *(cid:10) ------ ----(cid:10) Bernard Berk, Director and Chief Executive Officer 765,300 (1) 4.2(cid:10) c/o Elite Pharmaceuticals Inc.(cid:10) 165 Ludlow Avenue(cid:10) Northvale, NJ 07647(cid:10) Edward Neugeboren 188,094 (2) 1.0(cid:10) 282 New Norwalk Road,(cid:10) New Canaan, CT 06840(cid:10) Barry Dash -- --(cid:10) 168 Wood Road(cid:10) Englewood Cliffs, NJ 07632(cid:10) Melvin Van Woert -- --(cid:10) Mount Sinai Medical Center, P.O. Box 1137(cid:10) One Gustave L. Levy Place(cid:10) New York, NY 10029-6576(cid:10) SAC Capital Associates LLC 1,152,838 (3) 6.1%(cid:10) P.O. Box 58(cid:10) Victoria House, The Valley(cid:10) Antigua, BVI(cid:10) Jerome Belson 969,000 (4) 5.4%(cid:10) 495 Broadway(cid:10) New York, New York 10012(cid:10) All Directors and Officers as a group (5) 1,105,625 (5) 5.9(cid:10) (1) Includes options to purchase 630,000 shares of Common Stock of which options(cid:10) to purchase 300,000 shares are not exercisable until occurrence of a "strategic(cid:10) event". See "Executive Officers"(cid:10) (2) Includes 147,363 shares issuable upon exercise of outstanding warrants; but(cid:10) does not include 40,650 shares issuable upon exercise of warrants owned by his(cid:10) father.(cid:10) 48(cid:10) (cid:10) (3) Includes 813,010 shares issuable upon exercise of warrants.(cid:10) (4) Based on information provided by Mr. Belson for inclusion in the Company's(cid:10) Prospectus dated December 28, 2004. Includes (i) 281,000 shares issuable upon(cid:10) exercise of warrants, (ii) 53,900 shares held by Maxine Belson, wife of Jerome(cid:10) Belson, (iii) 63,300 shares held by other members of his family, and (iv) 50,000(cid:10) shares held by the Jerome Belson Foundation. (5) Represents shares of Common(cid:10) Stock issuable upon exercise of options.(cid:10) (5) Includes options and warrants to purchase an aggregate of 940,000 shares.(cid:10) Except as otherwise set forth, information on the stock ownership of(cid:10) each 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 of the Company are authorized for issuance in exchange for(cid:10) consideration in the form of goods or services.(cid:10) The Company is informed and believes that as of June 20, 2005, Cede &(cid:10) Co. held 15,846,250 shares of the Company's Common Stock as nominee for(cid:10) Depository 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(cid:10) Director, which expired on November 30, 2003, providing for Mr. Pearson to (i)(cid:10) refer 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 and $38,400 for fiscal years ended March 31, 2004 and(cid:10) 2003, respectively. The referral fees were to be a percentage ranging from 5% to(cid:10) 1% of the first $5,000,000 of revenues generated by his referrals after(cid:10) deducting expenses and a credit for the consulting fees. No revenues were(cid:10) generated under the arrangement. The Company also has a similar customer(cid:10) referral arrangement with Mr. Harmon Aronson, a former 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 Officers 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) 49(cid:10) (cid:10) ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES(cid:10) The following is a description of the fees paid by the Company to(cid:10) Miller, Ellin & Company, LLP ("Miller Ellin") during the fiscal years ended(cid:10) March 31, 2005, March 31, 2004 and March 31, 2003:(cid:10) Audit Fees: The Company paid fees of approximately $123,000, $150,000(cid:10) and $119,000 to Miller Ellin in connection with its audit of the Company's(cid:10) financial statements for the fiscal years ended March 31, 2005, March 31, 2004(cid:10) and March 31, 2003, respectively, and its review of the Company's interim(cid:10) financial statements included in the Company's Quarterly Reports on Form 10-Q(cid:10) during each of the fiscal years ended March 31, 2005, March 31, 2004 and March(cid:10) 31, 2003.(cid:10) Financial Information Systems Design and Implementation Fees: The(cid:10) Company did not engage Miller Ellin during any of the years ended March 31,(cid:10) 2005, 2004 and 2003 to provide advice to the Company regarding financial(cid:10) information systems design and implementation.(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, 2005, March 31,(cid:10) 2004 and March 31, 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 - See Financial Statements included after the(cid:10) signature page beginning at page F-1.(cid:10) (2) Financial statement schedules - All schedules are omitted because(cid:10) they are not applicable or the required information is shown in the consolidated(cid:10) financial statements or the notes thereto.(cid:10) (3) List of Exhibits - 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, 2005(cid:10) through the date of the filing of this Annual Report on Form 10-K.(cid:10) Form 8-K filed January 26, 2005 relating to items 5.02 and 9.01(cid:10) Form 8-K filed March 10, 2005 relating to items 3.03 and 9.01(cid:10) Form 8-K filed April 5, 2005, Form 8-K/A filed May 10, 2005 and Form(cid:10) 8-K/A filed June 13, 2005 relating to items 1.01 and 9.01(cid:10) 50(cid:10) (cid:10) Form 8-K filed April 29, 2005 relating to item 7.01 and 8.01(cid:10) Form 8-K filed May 31, 2005 relating to items 8.01 and 9.01(cid:10) Form 8-K filed June 27, 2005 relating to items 1.01 and 9.01(cid:10) Form 8-K filed June 28, 2005 relating to items 1.01 and 9.01(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 to(cid:10) Exhibit 3.2 to the Company's Registration Statement on Form SB-2(cid:10) (Reg. No. 333-90633) made effective on February 28, 2000 (the(cid:10) "Form SB-2").(cid:10) 4.1 Certificate of incorporation of the Company, together with all(cid:10) other amendments thereto, as filed with the Secretary of State of(cid:10) the State of Delaware, incorporated by reference to (a) 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") and (b) Exhibit 4.1 to the Company's Report on Form 8-K(cid:10) dated July 28, 2004.(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) incorporated by reference as Exhibit 4.2 to the Form 10-K for the(cid:10) period ended March 31, 2004, filed with the SEC on June 29, 2004.(cid:10) 4.3 Form of Class B Common Stock Purchase Warrant Certificate,(cid:10) incorporated by reference as Exhibit 4.3 to the Form 10-K for the(cid:10) period ended March 31, 2004, filed with the SEC on June 29, 2004.(cid:10) 4.4 Warrant to purchase 100,000 shares of Common Stock issued to DH(cid:10) Blair Investment Banking Corp., incorporated by reference to(cid:10) Exhibit 10.2 to the Form 10-Q for the period ended September 30,(cid:10) 2004.(cid:10) 4.5 Warrant to purchase 50,000 shares of Common Stock issued to Jason(cid:10) Lyons incorporated by reference to Exhibit 10.3 to the Form 10-Q(cid:10) for the period ended June 30, 2004.(cid:10) 4.6 Form of Warrant issued to designees of lender with respect to(cid:10) financing of an equipment loan incorporated by reference to(cid:10) Exhibit 10.2 to the Form 10-Q for the period ended June 30, 2004.(cid:10) 51(cid:10) (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 to(cid:10) the Form SB-2.(cid:10) 10.3 2004 Employee Stock Option Plan approved by stockholders on June(cid:10) 22, 2004, incorporated by reference to Exhibit A to the Proxy(cid:10) Statement filed on Schedule 14A with respect to the Annual Meeting(cid:10) of Stockholders held on June 22, 2004.(cid:10) 10.3 (a) Amendment to 2004 Stock Option Plan approved by the(cid:10) stockholders on April 15, 2005 incorporated by reference to the(cid:10) Proxy Statement filed on Schedule 14A with respect to the Annual(cid:10) Meeting of the Stockholders held on April 15, 2005.(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 to(cid:10) Report on Form 10-Q for three months ended June 30, 2003 (the(cid:10) "June 30, 2003 10Q Report")(cid:10) 10.7 Option Agreement between Bernard Berk and the Company dated as of(cid:10) July 23, 2003 incorporated by reference to Exhibit 10.7 to the(cid:10) June 30, 2003 10Q Report.(cid:10) 10.8 Option Agreement between Bernard Berk and the Company dated as of(cid:10) July 23, 2003 incorporated by reference to Exhibit 10.8 to the(cid:10) June 30, 2003 10Q Report.(cid:10) 10.9 Engagement letter dated February 26, 1998, between Gittelman & Co.(cid:10) P.C. and the Company incorporated by reference to Exhibit 10.10 to(cid:10) the Form 10-K for the period ended March 31, 2004 filed with the(cid:10) SEC on June 29, 2004.(cid:10) 10.11 Product Development Manufacturing and Distribution Agreement,(cid:10) dated as of March 30, 2005, incorporated by reference as Exhibit(cid:10) 10.1 to the Form 8-K originally filed April 5, 2005, as amended on(cid:10) the Form 8-K/A filed May 10, 2005, as further amended by the Form(cid:10) 8-K/A filed June 13, 2005 (Confidential Treatment Sought with(cid:10) respect to portions of the Agreement)(cid:10) 10.12 Product Development and Commercialization Agreement, dated as of(cid:10) June 21, 2005, incorporated by reference as Exhibit 10.1 to the(cid:10) Form 8-K filed June 27, 2005 (Confidential Treatment Sought with(cid:10) respect to portions of the(cid:10) 52(cid:10) (cid:10) Agreement)(cid:10) 10.13 Product Development and License Agreement, dated as of June 22,(cid:10) 2005, incorporated by reference as Exhibit 10.1 to the Form 8-K(cid:10) filed June 28, 2005 (Confidential Treatment Sought with respect to(cid:10) portions of the Agreement)(cid:10) 21 Subsidiaries of the Company.*(cid:10) 31.1* Certification of Chief Executive Officer pursuant to Section 302(cid:10) of the Sarbanes-Oxley Act of 2002*(cid:10) 31.2* Certification of Chief Financial Officer pursuant to Section 302(cid:10) of the Sarbanes-Oxley Act of 2002*(cid:10) 32.1** Certification of Chief Executive Officer pursuant to Section 906(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) 32.2** Certification of Chief Financial Officer pursuant to Section 906(cid:10) of the Sarbanes-Oxley Act of 2002.*(cid:10) ----------------------(cid:10) * Filed herewith(cid:10) ** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with(cid:10) this Annual Report on Form 10-K and are not deemed filed with the Securities and(cid:10) Exchange Commission and are not incorporated by reference in any filing of Elite(cid:10) Pharmaceuticals, Inc. under the Securities Act of 1933 or the Securities(cid:10) Exchange Act of 1934, whether made before or after the date hereof and(cid:10) irrespective of any general incorporation language in any such filings.(cid:10) 53(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, 2005(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, 2005(cid:10) -------------------------- (Principal Executive(cid:10) Bernard Berk Officer)(cid:10) /s/ Mark Gittelman Chief Financial Officer June 28, 2005(cid:10) -------------------------- and Treasurer (Principal(cid:10) Mark I. Gittelman Financial and Accounting(cid:10) Officer)(cid:10) /s/ Edward Neugeboren Director June 28, 2005(cid:10) --------------------------(cid:10) Edward Neugeboren(cid:10) /s/ Barry Dash Director June 28, 2005(cid:10) --------------------------(cid:10) Barry Dash(cid:10) /s/ Melvin Van Woert Director June 28, 2005(cid:10) --------------------------(cid:10) Melvin Van Woert(cid:10) 54(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED FINANCIAL STATEMENTS(cid:10) FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003(cid:10) CONTENTS(cid:10) PAGE(cid:10) ----(cid:10) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F - 2(cid:10) CONSOLIDATED BALANCE SHEETS F - 3(cid:10) CONSOLIDATED STATEMENTS OF OPERATIONS F - 5(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F - 6(cid:10) CONSOLIDATED STATEMENTS OF CASH FLOWS F - 9(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 10(cid:10) F-1(cid:10) (cid:10) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM(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, 2005 and(cid:10) 2004, and the related consolidated statements of operations, stockholders'(cid:10) equity (deficit) and cash flows for the years ended March 31, 2005, 2004 and(cid:10) 2003. 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, 2005 and 2004, and the(cid:10) results of their operations and their cash flows for each of the three years(cid:10) ended March 31, 2005, 2004 and 2003 in conformity with accounting principles(cid:10) 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) May 19, 2005(cid:10) F-2(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED BALANCE SHEETS(cid:10) MARCH 31, 2005 AND 2004(cid:10) ASSETS(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) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) CURRENT ASSETS:(cid:10) Cash and cash equivalents $ 3,902,003 $ 2,104,869(cid:10) Accounts receivable, net of allowance for doubtful accounts of(cid:10) $153,250 and $0, respectively 142,113 153,250(cid:10) Current portion of restricted cash - debt service 113,425 203,995(cid:10) Prepaid expenses and other current assets 346,905 137,89(cid:10) ------------ ------------(cid:10) Total current assets 4,504,446 2,600,006(cid:10) PROPERTY AND EQUIPMENT- net of accumulated(cid:10) depreciation and amortization 4,194,437 4,090,250(cid:10) INTANGIBLE ASSETS - net of accumulated amortization 81,184 102,196(cid:10) OTHER ASSETS:(cid:10) Deferred charges 41,013 --(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(cid:10) EDA bond offering costs, net of accumulated(cid:10) amortization of $73,648 and $60,458, respectively.(cid:10) 124,212 137,402(cid:10) ------------ ------------(cid:10) Total other assets(cid:10) 465,225 1,060,982(cid:10) ------------ ------------(cid:10) TOTAL ASSETS $ 9,245,292 $ 7,853,434(cid:10) ============ ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED BALANCE SHEETS(cid:10) MARCH 31, 2005 AND 2004(cid:10) (CONTINUED)(cid:10) LIABILITIES AND STOCKHOLDERS' EQUITY(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) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) CURRENT LIABILITIES:(cid:10) Current portion - note payable(cid:10) $ 127,946 $ 75,000(cid:10) Current portion of EDA bonds 165,000 150,000(cid:10) Accounts payable and accrued expenses 882,917 1,085,242(cid:10) ------------ ------------(cid:10) Total current liabilities 1,175,863 1,310,242(cid:10) ------------ ------------(cid:10) LONG TERM LIABILITIES:(cid:10) Note payable - net of current portion 187,128 150,000(cid:10) EDA bonds - net of current portion(cid:10) 2,180,000 2,345,000(cid:10) ------------ ------------(cid:10) Total long-term liabilities 2,367,128 2,495,000(cid:10) ------------ ------------(cid:10) Total liabilities 3,542,991 3,805,242(cid:10) ------------ ------------(cid:10) COMMITMENTS AND CONTINGENCIES(cid:10) STOCKHOLDERS' EQUITY:(cid:10) Preferred stock - $.01 par value;(cid:10) Authorized - 5,000,000 and 0 shares at(cid:10) March 31, 2005 and 2004, respectively -- --(cid:10) Common Stock - $.01 par value;(cid:10) Authorized - 65,000,000 and 25,000,000(cid:10) shares, respectively(cid:10) Issued and outstanding - 18,022,183 and 12,204,423 in(cid:10) 2005 and 2004, respectively. 180,222 122,044(cid:10) Additional paid-in capital 47,006,379 39,338,140(cid:10) Accumulated deficit (41,177,459) (35,105,151)(cid:10) ------------ ------------(cid:10) 6,009,142 4,355,033(cid:10) Treasury stock, at cost (100,000 shares) (306,841) (306,841)(cid:10) ------------ ------------(cid:10) Total stockholders' equity 5,702,301 4,048,192(cid:10) ------------ ------------(cid:10) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,245,292 $ 7,853,434(cid:10) ============ ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF OPERATIONS(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) YEARS ENDED MARCH 31,(cid:10) ---------------------(cid:10) 2005 2004 2003(cid:10) ----- ----- ----(cid:10) (cid:10) REVENUES:(cid:10) Licensing fees $ 150,000 $ -- $ --(cid:10) Manufacturing fees 125,739 -- --(cid:10) Royalties 24,291 -- --(cid:10) Research and development -- 258,250 442,500(cid:10) Product formulation fees -- -- 187,810(cid:10) Consulting and test fees 1,450 -- --(cid:10) ----------- ----------- -----------(cid:10) Total revenues 301,480 258,250 630,310(cid:10) ----------- ----------- -----------(cid:10) COST OF OPERATIONS:(cid:10) Research and development 2,698,641 2,075,074 2,013,579(cid:10) General and administrative 2,159,670 2,549,846 1,858,069(cid:10) Depreciation and amortization 356,438 332,836 310,876(cid:10) ----------- ----------- -----------(cid:10) 5,214,749 4,957,756 4,182,524(cid:10) ----------- ----------- -----------(cid:10) LOSS FROM OPERATIONS (4,913,269) (4,699,506) (3,552,214)(cid:10) ----------- ----------- -----------(cid:10) OTHER INCOME (EXPENSES):(cid:10) Interest income 39,932 23,765 96,692(cid:10) Litigation settlement -- 150,000 --(cid:10) Sale of New Jersey tax losses 205,792 151,027 71,674(cid:10) Interest expense (229,495) (211,595) (227,907)(cid:10) Equity in loss of joint venture -- -- (186,379)(cid:10) Compensation satisfied by issuance of(cid:10) stock, options and warrants (1,008,850) (1,754,584) (20,550)(cid:10) Expenses relating to warrant exchange offer -- (172,324) (242,338)(cid:10) ----------- ----------- -----------(cid:10) (992,621) (1,813,711) (508,808)(cid:10) ----------- ----------- -----------(cid:10) LOSS BEFORE PROVISION FOR INCOME(cid:10) TAXES (5,905,890) (6,513,217) (4,061,022)(cid:10) PROVISION FOR INCOME TAXES(cid:10) 1,000 1,000 400(cid:10) ----------- ----------- -----------(cid:10) NET LOSS (5,906,890) (6,514,217) (4,061,422)(cid:10) Preferred Stock Dividends (165,418) -- --(cid:10) ----------- ----------- -----------(cid:10) NET LOSS ATTRIBUTABLE TO COMMON(cid:10) SHAREHOLDERS $(6,072,308) $(6,514,217) $(4,061,422)(cid:10) =========== =========== ===========(cid:10) BASIC AND DILUTED LOSS PER COMMON(cid:10) SHARE $ (0.47) $ (0.58) $ (0.40)(cid:10) =========== =========== ===========(cid:10) WEIGHTED AVERAGE NUMBER OF(cid:10) COMMON SHARES OUTSTANDING 12,869,924 11,168,618 10,069,991(cid:10) =========== =========== ===========(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(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) 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) BALANCES 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) - - - - -(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 - - - - -(cid:10) Expenses relating to exchange of(cid:10) warrants - - - - 242,338(cid:10) Expenses relating to issuance of(cid:10) stock options - - - - 20,550(cid:10) Expenses relating to Warrant(cid:10) Exchange Offer - - - - (100,000)(cid:10) Net loss - - - - -(cid:10) -------- ---------- ---------- ---------- -----------(cid:10) BALANCES AT MARCH 31, 2003 - $ - 10,544,423 $ 105,444 $34,218,832(cid:10) ======== ========== ========== ========== ===========(cid:10) (cid:10) TREASURY STOCK(cid:10) -------------- STOCKHOLDERS'(cid:10) ACCUMULATED EQUITY(cid:10) SHARES AMOUNT DEFICIT (DEFICIT)(cid:10) ------ ------ ------- ---------(cid:10) (cid:10) BALANCES 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(cid:10) - 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) Expenses relating to exchange of(cid:10) warrants - - - 242,338(cid:10) Expenses relating to issuance of(cid:10) stock options - - - 20,550(cid:10) Expenses relating to Warrant(cid:10) Exchange Offer - - - (100,000)(cid:10) Net loss - - (4,061,422) (4,061,422)(cid:10) -------- ---------- ------------- ------------(cid:10) BALANCES AT MARCH 31, 2003 (100,000) $ (306,841) $ (28,590,934) $ 5,426,501(cid:10) ======== ========== ============= ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(cid:10) (cid:10)
(cid:10) The accompanying notes are an integral part of the consolidated financial(cid:10) statements.(cid:10) F-7(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) BALANCES AT APRIL 1, 2003(cid:10) - $ - 10,544,423 $ 105,444 $34,218,832(cid:10) Expenses relating to modification(cid:10) of warrant exchange offer - - - - 172,324(cid:10) Expenses relating to issuance of(cid:10) stock options - - - - 1,166,601(cid:10) Expenses relating to issuance of(cid:10) 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) Net loss - - - - -(cid:10) -------- ---------- ---------- ---------- -----------(cid:10) BALANCES AT MARCH 31, 2004 - $ - 12,204,423 $ 122,044 $39,338,140(cid:10) ======== ========== ========== ========== ===========(cid:10) (cid:10) TREASURY STOCK(cid:10) -------------- STOCKHOLDERS'(cid:10) ACCUMULATED EQUITY(cid:10) SHARES AMOUNT DEFICIT (DEFICIT)(cid:10) ------ ------ ------- ---------(cid:10) (cid:10) BALANCES AT APRIL 1, 2003 (100,000) $ (306,841) $ (28,590,934) $ 5,426,501(cid:10) Expenses relating to modification(cid:10) of warrant exchange offer - - - 172,324(cid:10) Expenses relating to issuance of(cid:10) stock options - - - 1,166,601(cid:10) Expenses relating to issuance of(cid:10) 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) Net loss - - (6,514,217) (6,514,217)(cid:10) -------- ---------- ------------- ------------(cid:10) BALANCES AT MARCH 31, 2004 (100,000) $ (306,841) $ (35,105,151) $ 4,048,192(cid:10) ======== ========== ============= ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(cid:10) (cid:10)
(cid:10) F-8(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) BALANCES AT APRIL 1, 2004 - $ - 12,204,423 $ 122,044 $39,338,140(cid:10) Net proceeds from issuance of(cid:10) Series A 8% Convertible(cid:10) Preferred Stock and warrants 516,558 5,166 --- --- 5,786,436(cid:10) Issuance of Common Stock for(cid:10) consulting services --- --- 26,500 265 58,035(cid:10) Issuance of Common Stock upon(cid:10) conversion of Series A 8%(cid:10) Convertible Preferred Stock (516,558) (5,166) 5,165,580 51,656 (46,490)(cid:10) Compensation satisfied by the(cid:10) issuance of stock, options(cid:10) and warrants 1,008,850(cid:10) Common Stock issued as dividend on(cid:10) Series A 8% Convertible(cid:10) Preferred Stock --- --- 99,936 1,000 164,418(cid:10) Exercise of stock options and(cid:10) warrants --- --- 525,744 5,257 579,250(cid:10) Proceeds - Short swing profits --- --- --- --- 117,740(cid:10) Net loss(cid:10) --- --- --- --- ---(cid:10) -------- ---------- ---------- ---------- -----------(cid:10) BALANCES AT MARCH 31, 2005 --- $ - 18,022,183 $ 180,222 47,006,379(cid:10) ======== ========== ========== ========== ===========(cid:10) (cid:10) TREASURY STOCK(cid:10) -------------- STOCKHOLDERS'(cid:10) ACCUMULATED EQUITY(cid:10) SHARES AMOUNT DEFICIT (DEFICIT)(cid:10) ------ ------ ------- ---------(cid:10) (cid:10) BALANCES AT APRIL 1, 2004 (100,000) $ (306,841) $ (35,105,151) $ 4,048,192(cid:10) Net proceeds from issuance of(cid:10) Series A 8% Convertible(cid:10) Preferred Stock and warrants --- --- --- ---(cid:10) Issuance of Common Stock for(cid:10) consulting services --- --- --- 58,300(cid:10) Issuance of Common Stock upon(cid:10) conversion of Series A 8%(cid:10) Convertible Preferred Stock --- --- --- ---(cid:10) Compensation satisfied by the(cid:10) issuance of stock, options(cid:10) and warrants 1,008,850(cid:10) Common Stock issued as dividend on(cid:10) Series A 8% Convertible(cid:10) Preferred Stock --- --- (165,418) ---(cid:10) Exercise of stock options and(cid:10) warrants --- --- --- 584,507(cid:10) Proceeds - Short swing profits --- --- --- 117,740(cid:10) Net loss(cid:10) --- --- (5,906,890) (5,906,890)(cid:10) -------- ---------- ------------- ------------(cid:10) BALANCES AT MARCH 31, 2005 (100,000) $ (306,841) $ (41,177,459) $ 5,702,301(cid:10) ======== ========== ============= ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:10) (cid:10)
(cid:10) The accompanying notes are an integral part of the consolidated financial(cid:10) statements.(cid:10) F-9(cid:10)(cid:10) YEARS ENDED MARCH 31,(cid:10) ---------------------(cid:10) 2005 2004 2003(cid:10) ---- ---- ----(cid:10) (cid:10) CASH FLOWS FROM OPERATING ACTIVITIES:(cid:10) Net loss $ (5,906,890) $ (6,514,217) $ (4,061,422)(cid:10) Adjustments to reconcile net loss to cash used in operating activities:(cid:10) Provision for doubtful accounts 153,250 --- ---(cid:10) Depreciation and amortization 356,438 332,836 310,876(cid:10) Non-cash compensation satisfied by issuance of stock,(cid:10) options and warrants 1,067,150 1,926,908 262,888(cid:10) Equity in loss of joint venture --- --- 186,379(cid:10) Changes in assets and liabilities:(cid:10) Accounts receivable (142,113) (148,569) 35,307(cid:10) Prepaid expenses and other current assets (209,013) (5,800) (26,010)(cid:10) Amount receivable from Joint Venture --- --- 525,259(cid:10) Accounts payable, accrued expenses and other current (202,325) 750,521 193,009(cid:10) ------------ ------------ ------------(cid:10) NET CASH USED IN OPERATING ACTIVITIES (4,883,503) (3,658,321) (2,573,714)(cid:10) ------------ ------------ ------------(cid:10) CASH FLOWS FROM INVESTING ACTIVITIES:(cid:10) Redemptions of short-term investments --- --- 100,000(cid:10) Purchase of patent --- (16,696) (69,517)(cid:10) Released from restrictions 315,570 (79,615) 114,284(cid:10) Receivable from sale of New Jersey tax losses --- --- 66,077(cid:10) Payment of deposit for manufacturing equipment --- (398,580) ---(cid:10) Purchases of equipment (27,843) --- (679,485)(cid:10) ------------ ------------ -----------(cid:10) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 287,727 (494,891) (486,641)(cid:10) ------------ ------------ ------------(cid:10) CASH FLOWS FROM FINANCING ACTIVITIES:(cid:10) Fees relating to Warrant Exchange Offer --- --- (100,000)(cid:10) Principal bank note payments (225,000) (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(cid:10) Principal repayments of EDA bonds (150,000) (140,000) (130,000)(cid:10) Net proceeds from issuance of Series A 8% Convertible Preferred(cid:10) stock and warrants 5,791,602 --- ---(cid:10) Proceeds from equipment loan 400,000 --- ---(cid:10) Principal equipment note payments (84,926) --- ---(cid:10) Prepaid interest (41,013) --- ---(cid:10) Proceeds from exercise of stock options 100,000 --- ---(cid:10) Proceeds from exercise of stock warrants(cid:10) 484,507 --- ---(cid:10) Proceeds from short swing profits 117,740 --- ---(cid:10) ------------ ------------ ------------(cid:10) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,392,910 2,994,000 (545,998)(cid:10) ------------ ------------ ------------(cid:10) NET CHANGE IN CASH AND CASH EQUIVALENTS 1,797,134 (1,159,212) (3,588,353)(cid:10) CASH AND CASH EQUIVALENTS - beginning of period(cid:10) 2,104,869 3,264,081 6,852,434(cid:10) ------------ ------------ ------------(cid:10) CASH AND CASH EQUIVALENTS - end of period $ 3,902,003 $ 2,104,869 $ 3,264,081(cid:10) ============ ============ ============(cid:10) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:(cid:10) Cash paid for interest $ 230,464 $ 214,199 $ 228,938(cid:10) Cash received for income taxes (204,792) (150,027) (71,274)(cid:10) SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:(cid:10) Preferred Stock dividends of $120,675 paid by issuance of(cid:10) 64,033 shares of Common Stock $ 165,418 $ --- $ ---(cid:10) Utilization of equipment deposit towards purchase of equipment 398,580 --- 123,396(cid:10) Issuance of Preferred Stock (including stock dividend payable of $14,000(cid:10) and subscription receivable of $67,000) for interest in(cid:10) joint venture --- --- 573,000(cid:10) Conversion of preferred stock to Common Stock --- --- 14,528,973(cid:10) Satisfaction of amounts due to joint venture --- --- 622,133(cid:10) Reduction in investment in joint venture --- --- 63,381(cid:10) Dividends accrued on preferred stock --- --- 899,923(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cid:10) PRINCIPLES OF CONSOLIDATION(cid:10) The consolidated financial statements include the accounts of Elite(cid:10) Pharmaceuticals, Inc. and its wholly-owned subsidiaries, (the(cid:10) "Company"). All significant intercompany accounts and transactions(cid:10) have been eliminated in consolidation.(cid:10) The Company consolidates all entities that it controls. The Company(cid:10) did not consolidate companies it did not control. The Company used the(cid:10) equity method to account for its investments in companies in which it(cid:10) did not have the ability to exercise significant influence over(cid:10) operating and financial policies.(cid:10) NATURE OF BUSINESS(cid:10) Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1,(cid:10) 1997 under the laws of the State of Delaware, and its wholly-owned(cid:10) subsidiary Elite Laboratories, Inc. ("Elite Labs") was incorporated on(cid:10) August 23, 1990 under the laws of the State of Delaware. Elite Labs(cid:10) engages primarily in researching, developing and licensing proprietary(cid:10) controlled release drug delivery systems and products. The Company is(cid:10) also equipped to manufacture controlled release products on a contract(cid:10) basis for third parties and itself if and when the products are(cid:10) approved, however the Company has recently concentrated on developing(cid:10) orally administered controlled release products. These products(cid:10) include drugs that cover therapeutic areas for pain, angina,(cid:10) hypertension, allergy and infection. The Company also engages in(cid:10) research and development activities for the purpose of obtaining Food(cid:10) and Drug Administration approval, and, thereafter, commercially(cid:10) exploiting generic and new controlled-release pharmaceutical products.(cid:10) The Company also engages in contract research and development on(cid:10) behalf of other 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(cid:10) Company's subsidiary exchanged all of their shares of Class A voting(cid:10) Common Stock for shares of the Company's voting Common Stock in a tax(cid:10) free reorganization under Internal Revenue Code Section 368. The(cid:10) result of the merger activity qualified as a reverse acquisition. In(cid:10) connection with the reverse acquisition, options exercisable for(cid:10) shares of Class A voting and Class B nonvoting Common Stock of the(cid:10) Company's subsidiary were exchanged for options exercisable for shares(cid:10) of the Company's voting Common Stock.(cid:10) On September 30, 2002, the Company acquired from Elan Corporation, plc(cid:10) and Elan International Services, Ltd. (together "Elan") Elan's 19.9%(cid:10) interest in Elite Research, Ltd. ("ERL"), a joint venture formed(cid:10) between the Company and Elan where the Company's interest originally(cid:10) was 80.1%.(cid:10) On December 31, 2002, the Company entered into an agreement of merger(cid:10) whereby ERL (a Bermuda Corporation) was merged into a new Delaware(cid:10) Corporation, Elite Research, Inc. ("ERI"), a wholly-owned subsidiary(cid:10) of the Company. As a result of the merger, ERI became the owner of all(cid:10) of the assets and liabilities of ERL. The merger was accounted for as(cid:10) a tax free reorganization.(cid:10) F-10(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(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(cid:10) instruments. The Company places its cash and cash equivalents with(cid:10) high-quality, U.S. financial institutions and, to date, has not(cid:10) experienced losses on any of its balances.(cid:10) PROPERTY AND EQUIPMENT(cid:10) Property and equipment are stated at cost. Depreciation is provided on(cid:10) the straight-line method based on the estimated useful lives of the(cid:10) respective assets which range from five to forty years. Major repairs(cid:10) or improvements are capitalized. Minor replacements and maintenance(cid:10) and repairs which do not improve or extend asset lives are expensed(cid:10) currently.(cid:10) Upon retirement or other disposition of assets, the cost and related(cid:10) accumulated depreciation are removed from the accounts and the(cid:10) resulting gain or loss, if any, is recorded.(cid:10) 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(cid:10) will be recognized when the carrying amount of a long-lived asset(cid:10) exceeds its fair value in accordance with Statement of Financial(cid:10) Accounting Standards No. 144, "Accounting for the Impairment or(cid:10) Disposal of Long-Lived Assets." Management has determined that no(cid:10) impairment of long-lived assets has occurred.(cid:10) RESEARCH AND DEVELOPMENT(cid:10) Research and development expenditures are charged to expense as(cid:10) incurred.(cid:10) PATENTS AND TRADEMARKS(cid:10) Effective April 1, 2002, the Company adopted the provisions of SFAS(cid:10) No. 142, "Goodwill and Other Intangible Assets." The adoption of SFAS(cid:10) No. 142 required an initial impairment assessment involving a(cid:10) comparison of the fair value of patents and trademarks to current(cid:10) carrying value. No impairment was determined to exist. The Company(cid:10) reviews such trademarks and patents with definite lives for impairment(cid:10) to ensure they are appropriately valued if conditions exist that may(cid:10) indicate the carrying value may not be recoverable. Such conditions(cid:10) may include an economic downturn or a change in the assessment of(cid:10) future operations.(cid:10) Costs incurred for the application of patents and trademarks are(cid:10) capitalized and amortized on the straight-line method, based on their(cid:10) estimated useful lives ranging from five to fifteen years, commencing(cid:10) upon approval of the patent and trademarks. These costs are charged to(cid:10) expense if the patent or trademark is unsuccessful.(cid:10) F-11(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) CONCENTRATION OF CREDIT RISK(cid:10) The Company derives substantially all of its revenues from contracts(cid:10) with other pharmaceutical companies, subject to licensing and research(cid:10) and development agreements.(cid:10) The Company maintains cash balances in its bank, which, at times, may(cid:10) exceed the limits of the Federal Deposit Insurance Corp.(cid:10) The Company extends credit to its customers pursuant to contract terms(cid:10) in the normal course of business and performs ongoing credit(cid:10) evaluations. An allowance for doubtful accounts was considered(cid:10) necessary at March 31, 2005, due to uncertainty of collectibility.(cid:10) Amounts are written off when they are deemed uncollectible.(cid:10) USE OF ESTIMATES(cid:10) The preparation of financial statements in conformity with generally(cid:10) accepted accounting principles requires management to make estimates(cid:10) and assumptions that affect the reported amounts of assets and(cid:10) liabilities and disclosure of contingent assets and liabilities at the(cid:10) date of the financial statements and the reported amounts of revenues(cid:10) and expenses during the reporting period. Actual results could differ(cid:10) from those estimates. Significant estimates made by management(cid:10) include, but are not limited to, the recognition of revenue, allowance(cid:10) for doubtful accounts receivable, the fair value of intangible assets(cid:10) and stock-based awards.(cid:10) INCOME TAXES(cid:10) The Company adopted SFAS No. 109, "Accounting for Income Taxes," which(cid:10) requires the use of the liability method of accounting for income(cid:10) taxes. The liability method measures deferred income taxes by applying(cid:10) enacted statutory rates in effect at the balance sheet date to the(cid:10) differences between the tax bases of assets and liabilities and their(cid:10) reported amounts in the financial statements. The resulting deferred(cid:10) tax assets or liabilities are adjusted to reflect changes in tax laws(cid:10) as they occur. Valuation allowances are used to reduce deferred tax(cid:10) assets to the amount considered likely to be realized.(cid:10) LOSS PER COMMON SHARE(cid:10) Net loss per common share is calculated by dividing net loss by the(cid:10) weighted average number of shares outstanding during each period(cid:10) presented. Common Stock equivalents, consisting of options, warrants(cid:10) and convertible securities, have not been included, as their effect(cid:10) would be antidilutive. For the three years ended March 31, the(cid:10) following potentially dilutive securities were not included in the(cid:10) computation of diluted loss per share:(cid:10) (cid:10)
(cid:10) F-12(cid:10)(cid:10) 2005 2004 2003(cid:10) WEIGHTED- WEIGHTED- WEIGHTED-(cid:10) AVERAGE AVERAGE AVERAGE(cid:10) EXERCISE EXERCISE EXERCISE(cid:10) SHARES PRICE SHARES PRICE SHARES PRICE(cid:10) (cid:10) Stock options 2,277,050 $ 2.16 2,417,050 $ 3.70 2,266,850 $ 5.74(cid:10) Warrants 8,035,875 $ 2.69 2,654,239 $ 4.72 733,752 $ 12.33(cid:10) ---------- ---------- ----------(cid:10) 10,312,925 5,071,289 3,000,602(cid:10) ========== ========== ==========(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) REVENUE RECOGNITION(cid:10) Revenues derived from providing research and development services(cid:10) under contracts with other pharmaceutical companies are recognized(cid:10) when earned. These contracts provide for non-refundable upfront and(cid:10) milestone payments. Because no discrete earnings event has occurred(cid:10) when the upfront payment is received, that amount is deferred until(cid:10) the achievement of a defined milestone. Each nonrefundable milestone(cid:10) payment is recognized as revenue when the performance criteria for(cid:10) that milestone has been met. Under each contract, the milestones are(cid:10) defined, substantive effort is required to achieve the milestone, the(cid:10) amount of the non-refundable milestone payment is reasonable,(cid:10) commensurate with the effort expended, and achievement of the(cid:10) milestone is reasonably assured.(cid:10) Revenues earned by licensing certain pharmaceutical products developed(cid:10) by Elite are recognized at the beginning of a license term when(cid:10) Elite's customer has legal right to the use of the product. To date,(cid:10) no revenues have been earned by licensing products and there are no(cid:10) continuing obligations under any licensing agreements.(cid:10) Revenues derived from royalties to the extent that they cannot be(cid:10) reasonably estimated are recognized when the cash is received.(cid:10) Revenues earned under manufacturing agreements with other(cid:10) pharmaceutical companies are recognized when product is shipped.(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,(cid:10) the Company recognized its share in the net earnings or losses of the(cid:10) joint venture as they occurred. While Elite owned 100% of the(cid:10) outstanding Common Stock of ERL, Elite's equity in the loss of ERL was(cid:10) based on 100% of ERL's losses, less the amounts funded by Elan. Elan(cid:10) funded 19.9% of ERL's losses. Once Elite's investment was reduced to(cid:10) zero, further losses were recognized to the extent of Elite's(cid:10) commitment to fund the losses. The joint venture was terminated(cid:10) effective September 30, 2002, as further discussed in Note 7.(cid:10) F-13(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) TREASURY STOCK(cid:10) The Company records common shares purchased and held in treasury at(cid:10) cost.(cid:10) STOCK-BASED COMPENSATION(cid:10) Under various qualified and non-qualified plans, the Company may grant(cid:10) stock options to officers, selected employees, as well as members of(cid:10) the board of directors, as further described in Note 11. Effective(cid:10) April 1, 2002, the Company adopted the fair value recognition(cid:10) provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"(cid:10) and selected the prospective method of adoption described in SFAS No.(cid:10) 148, "Accounting for Stock-Based Compensation - Transition and(cid:10) Disclosure - an amendment of SFAS No. 123." Prior to April 1, 2002,(cid:10) the Company measured stock-based compensation for its employee(cid:10) compensation plans using the intrinsic value method prescribed by(cid:10) Accounting Principles Board Opinion No. 25 (APB25), "Accounting for(cid:10) Stock Issued to Employees" and related interpretations.(cid:10) During the years ended March 31, 2003, 2004 and 2005 the Company(cid:10) issued 210,000 1,024,000 and 120,000, respectively options to purchase(cid:10) Common Stock to employees and to members of the board of directors.(cid:10) The options have an exercise price ranging from $2.01 to $5.00 per(cid:10) share and all vest over three years except 610,000 options issued in(cid:10) 2004 and 120,000 issued for year ended March 31, 2005 which vested(cid:10) upon grant date. The options expire between five and ten years from(cid:10) the date of grant. The Company has recorded compensation expense of(cid:10) $20,550, $1,166,601 and $370,108 for the years ended March 31, 2003,(cid:10) 2004 and 2005 which represents the fair value of the options vested(cid:10) computed using the Black-Scholes options pricing model on each grant(cid:10) date.(cid:10) On June 22, 2004 the Company's stockholders approved the 2004 Stock(cid:10) Option Plan and ratified amendments of the terms of outstanding(cid:10) options and warrants, including the repricing of options to certain(cid:10) Directors and employees. The Company will record a significant(cid:10) compensation expense in the future periods in which the options vest(cid:10) based on the fair value of the options after reflecting the repricing(cid:10) and amendments to the terms of the options.(cid:10) The following table illustrates the effect on net loss and loss per(cid:10) share as if the Company had applied the fair value recognition(cid:10) provisions of SFAS No. 123 to all outstanding and unvested awards in(cid:10) each year presented:(cid:10) (cid:10)
(cid:10) F-14(cid:10)(cid:10) 2005 2004 2003(cid:10) ---- ---- ----(cid:10) (cid:10) Net loss as reported $ (5,906,890) $(6,514,217) $ (4,061,422(cid:10) Add: Stock-based compensation expense(cid:10) included in reported net loss, net of related(cid:10) tax effects 1,008,850 1,754,584 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 effect (68,880) (865,255) (1,070,651)(cid:10) ------------ ----------- ------------(cid:10) Pro forma net loss (4,966,920) (5,624,888) (5,111,523)(cid:10) ============ =========== ============(cid:10) Loss per share as reported (0.46) (0.58) (0.40)(cid:10) Pro-forma loss per share (0.39) (0.50) (0.51)(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10) FAIR VALUE OF FINANCIAL INSTRUMENTS(cid:10) The carrying amounts of current assets and liabilities approximate(cid:10) fair value due to the short-term nature of these instruments. The(cid:10) carrying amounts of noncurrent assets are reasonable estimates of(cid:10) their fair values based on management's evaluation of future cash(cid:10) flows. The long-term liabilities are carried at amounts that(cid:10) approximate fair value based on borrowing rates available to the(cid:10) Company for obligations with similar terms, degrees of risk and(cid:10) remaining maturities.(cid:10) RECLASSIFICATIONS(cid:10) Certain accounts and amounts in the 2003 financial statements have(cid:10) been reclassified in order to conform with the 2005 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 $5,906,890, $6,514,217 and(cid:10) $4,061,422 for the fiscal years ended March 31, 2005, 2004 and 2003,(cid:10) respectively. At March 31, 2005, the Company had an accumulated(cid:10) deficit of approximately $41.1 million, consolidated assets of(cid:10) approximately $9.2 million, stockholders' equity of approximately $5.7(cid:10) million, and working capital of approximately $3.3 million. The(cid:10) Company has not generated any significant revenue to date.(cid:10) In an effort to reduce costs in fiscal 2003, the Company has reduced(cid:10) the number of products being actively developed from approximately(cid:10) fifteen to six. The six products that continue in development were(cid:10) deemed by management to be the most suitable for continued development(cid:10) given the Company's limited resources. The Company has also settled(cid:10) certain litigation with its former CEO which will significantly reduce(cid:10) its legal fees.(cid:10) The primary strategy remains to develop the Company's oral control(cid:10) release pharmaceutical products, with emphasis in the area of pain(cid:10) management, for FDA approval, and once developed, to commercially(cid:10) exploit these products either by licensing or through the development(cid:10) of collaborations with 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(cid:10) transactions, including acquisitions. The Company may receive(cid:10) additional cash proceeds from the exercise of outstanding options and(cid:10) warrants, as well as through the continued sale of its New Jersey(cid:10) State tax losses. However, there is no assurance that any options or(cid:10) warrants will be exercised, that any sale of tax losses will be(cid:10) completed or that the Company will be able to raise additional(cid:10) capital.(cid:10) There is also no assurance that the Company's current business(cid:10) strategies will be successfully implemented or that it will raise the(cid:10) necessary funds to allow it to continue its operations. Management(cid:10) believes that cost reductions already implemented will reduce losses(cid:10) in the future, and with the Company's existing working capital levels,(cid:10) anticipates that the Company will be able to continue its operations(cid:10) at least through the end of fiscal year 2006, assuming it is(cid:10) successful in consummating the transactions discussed above.(cid:10) F-15(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 3 - PROPERTY AND EQUIPMENT(cid:10) Property and equipment at March 31, 2005 and 2004 consists of the(cid:10) following:(cid:10) (cid:10)
(cid:10) Depreciation and amortization expense amounted to $322,237, $300,303(cid:10) and $278,348 for the years ended March 31, 2005, 2004 and 2003,(cid:10) respectively. The Company's obligations under capital leases were(cid:10) satisfied prior to March 31, 2004.(cid:10) NOTE 4 - INTANGIBLE ASSETS(cid:10) Intangible assets at March 31, 2005 and 2004, consist of the(cid:10) following:(cid:10)(cid:10) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) Laboratory manufacturing, and warehouse equipment $ 3,566,674 $ 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) 5,917,283 5,490,859(cid:10) Less: Accumulated depreciation and amortization 1,722,846 1,400,609(cid:10) ------------ ------------(cid:10) $ 4,194,437 $ 4,090,250(cid:10) ============ ============(cid:10) (cid:10)
(cid:10) Amortization of intangible assets amounted to $21,012, $19,342 and(cid:10) $19,344 for the years ended March 31, 2005, 2004 and 2003,(cid:10) 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) 2006 $ 21,012(cid:10) 2007 21,012(cid:10) 2008 21,012(cid:10) 2009 8,140(cid:10) 2010 8,140(cid:10) F-16(cid:10)(cid:10) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) Patents $ 145,830 $ 145,830(cid:10) Trademarks 8,120 8,120(cid:10) 153,950 153,950(cid:10) Less: Accumulated amortization(cid:10) 72,766 51,754(cid:10) ------------ ------------(cid:10) $ 81,184 $ 102,196(cid:10) ============ ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 5 - NOTE PAYABLE(cid:10) During the year ended March 31, 2005, the unpaid portion of a $375,000(cid:10) 5.90% bank note was satisfied by the proceeds of a $225,000 maturing(cid:10) certificate of deposit.(cid:10) On July 8, 2004, Elite Labs entered into a loan and financing(cid:10) agreement in order to finance the purchase of certain machinery and(cid:10) equipment. Elite Labs borrowed $ 400,000 payable in 36 monthly(cid:10) installments of $13,671, each, including principal and interest at 14%(cid:10) annum. The loan is secured by two pieces of equipment and the guaranty(cid:10) of the Company.(cid:10) The notes payable consisted of the following at March 31:(cid:10) (cid:10)
(cid:10) Future principal maturities under this loan are as follows:(cid:10) YEARS ENDING MARCH 31,(cid:10) ----------------------(cid:10) 2005 $ 127,946(cid:10) 2006 147,054(cid:10) 2007(cid:10) 40,074(cid:10) -----------(cid:10) $ 315,074(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 net proceeds are(cid:10) being used by the Company to refinance the land and building it(cid:10) currently owns, and for the purchase of certain manufacturing(cid:10) equipment and related building improvements.(cid:10) Offering costs in connection with the bond issuance totaling $197,860(cid:10) were paid from bond proceeds and underwriter fees equal to $90,000(cid:10) (three percent (3%) of the par amount of the bonds) are being(cid:10) amortized over the term of the bonds. Amortization expense was $13,190(cid:10) in each of the three years ended March 31, 2005.(cid:10) The bonds are collateralized by a first lien on the building, which(cid:10) includes property and equipment.(cid:10) Several restricted cash accounts are maintained in connection with the(cid:10) issuance of these bonds. These include amounts restricted for payment(cid:10) of bond principal and interest, for the refinancing of the land and(cid:10) building the Company currently owns, for the purchase of certain(cid:10) manufacturing equipment and related building improvements as well as(cid:10) the maintenance of a $300,000 Debt Service Reserve.(cid:10) F-17(cid:10)(cid:10) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) Note payable $ 315,074 $ 225,000(cid:10) Current portion (127,946) (75,000)(cid:10) ------------ ------------(cid:10) Long-term portion, net of current maturities $187,128 $ 150,000(cid:10) ============ ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 6 - BOND FINANCING OFFERING (CONTINUED)(cid:10) All restricted accounts other than the $300,000 Debt Service Reserve(cid:10) are expected to be expended within twelve months and are therefore(cid:10) categorized as current assets. Bond financing consisted of the(cid:10) following at March 31:(cid:10) (cid:10)
(cid:10) Future principal maturities required under the bond agreement are(cid:10) as follows:(cid:10) YEARS ENDING MARCH 31,(cid:10) ----------------------(cid:10) 2006 $ 165,000(cid:10) 2007 175,000(cid:10) 2008 190,000(cid:10) 2009 205,000(cid:10) 2010 220,000(cid:10) Thereafter 1,390,000(cid:10) ------------(cid:10) $ 2,345,000(cid:10) ============(cid:10) F-18(cid:10)(cid:10) 2005 2004(cid:10) ---- ----(cid:10) (cid:10) EDA Bonds $ 2,345,000 $ 2,495,000(cid:10) Current portion(cid:10) (165,000) (150,000)(cid:10) ------------ ------------(cid:10) Long term portion, net of current maturities 2,180,000 2,345,000(cid:10) ============ ============(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 7 - JOINT VENTURE ACTIVITIES(cid:10) In October 2000, the Company entered into a joint development and(cid:10) operating agreement with Elan Corporation, plc, and Elan International(cid:10) Services, Ltd. (together "Elan") to develop products using drug(cid:10) delivery technologies and expertise of both companies. This joint(cid:10) venture, Elite Research, Ltd. ("ERL"), a Bermuda corporation, was(cid:10) initially owned 80.1% by the Company and 19.9% by Elan. ERL was to(cid:10) fund its research through capital contributions from its partners(cid:10) based on the partners' respective ownership percentage. ERL(cid:10) subcontracted research and development efforts to the Company, Elan(cid:10) and others. It was anticipated that the Company would provide most of(cid:10) the formulation and development work. The Company had commenced work(cid:10) for three products. The joint venture terminated on September 30,2002.(cid:10) For the years ended March 31, 2003 and 2002, the Company charged(cid:10) $187,810 and $601,057, respectively, to ERL which was reflected in(cid:10) product formulation fees. Intercompany profits and losses were(cid:10) eliminated.(cid:10) ERL was initially capitalized with $15,000,000 which included the(cid:10) issuance of 6,000 voting common shares, par value $1.00 per share, and(cid:10) 6,000 non-voting convertible preferred shares, par value $1.00 per(cid:10) share. All of the voting shares were held by the Company, with the(cid:10) non-voting convertible preferred shares held by both the Company and(cid:10) Elan, being split 3,612 shares and 2,388 shares, respectively. Elite's(cid:10) and Elan's respective ownership in ERL did not change during the term(cid:10) of the joint venture.(cid:10) While the Company initially owned 80.1% of the outstanding capital(cid:10) stock (100% of the outstanding Common Stock) of ERL until September(cid:10) 30, 2002, Elan and its subsidiaries retained significant minority(cid:10) investor rights that were considered "participating rights" as defined(cid:10) in the Emerging Issues Task Force Consensus No. 96-16. Accordingly,(cid:10) the Company did not consolidate the financial statements of ERL until(cid:10) September 30, 2002 but instead accounted for its investment in ERL(cid:10) under the equity method of accounting until the Joint Venture was(cid:10) terminated, effective September 30, 2002.(cid:10) For the year ended March 31, 2002 and the period beginning April 1,(cid:10) 2002 through September 30, 2002, ERL recognized net losses of $633,642(cid:10) and $232,742, respectively, and the Company recognized 80.1% of these(cid:10) losses, or $507,640 and $186,379, respectively. The product(cid:10) formulation fees of $187,810 and $601,057 earned by the Company for(cid:10) services rendered to ERL for the years ended March 31, 2003 and 2002,(cid:10) respectively, are included in ERL's expenses. During fiscal year 2001,(cid:10) ERL paid $15,000,000 to Elan for a license providing ERL non-exclusive(cid:10) rights to use certain Elan in-process drug delivery technologies. The(cid:10) Elan technology rights acquired relate to very early stage technology(cid:10) that, in the opinion of management, have not reached technological(cid:10) feasibility and have no future alternative uses. Through the date of(cid:10) its termination, ERL completed in-vivo (pilot clinical trial) on the(cid:10) first product and began formulation and development of two additional(cid:10) products.(cid:10) During fiscal year 2003, the Company consummated a termination(cid:10) agreement (the "Termination Agreement") with Elan to acquire all of(cid:10) Elan's interest in ERL. As further discussed in Note 10, the joint(cid:10) venture was terminated effective September 30, 2002.(cid:10) F-19(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)(cid:10) Under the Termination Agreement, among other things, the Company(cid:10) acquired all proprietary, development and commercial rights for the(cid:10) worldwide markets for the products developed by ERL. In exchange for(cid:10) the assignment, ERL agreed to pay Elan a royalty on certain revenues(cid:10) that may be realized from the once-a-day Oxycodone product that has(cid:10) been developed by ERL. Effective October 1, 2002, the Company is(cid:10) solely responsible to fund ERL's product development.(cid:10) The Company did not pay, nor did Elan receive any cash consideration(cid:10) under the Termination Agreement. Furthermore, the Company has the(cid:10) exclusive rights to the proprietary, development and commercial rights(cid:10) for the worldwide markets for two other products developed by ERL. The(cid:10) Company is not required to pay Elan royalties on revenues that may be(cid:10) realized from these two other products.(cid:10) The Company accounted for this acquisition by consolidating ERL as a(cid:10) wholly-owned subsidiary as of September 30, 2002. As more specifically(cid:10) described in Note 10, Elan converted 773,000 shares of Series B(cid:10) Preferred Stock, according to their terms, into 52,089 shares of the(cid:10) Company's Common Stock. This resulted in an increase in Common Stock(cid:10) of $521 and an increase in additional paid in capital of $772,479. As(cid:10) a result, the Series B Preferred Stock was eliminated.(cid:10) As further disclosed in Note 10, the acquisition resulted in the(cid:10) conversion of 13,756 shares of Series A Preferred Stock into 764,221(cid:10) shares of Elite's Common Stock in accordance with their terms. The(cid:10) Company accounted for this conversion by increasing Common Stock in(cid:10) the amount of $7,642 and by a corresponding increase in additional(cid:10) paid in capital of $13,748,332. As a result, the Series A Preferred(cid:10) Stock was eliminated.(cid:10) As a result of the Termination Agreement, ERL became a wholly-owned(cid:10) subsidiary of the Company as of September 30, 2002. Elan retained(cid:10) certain securities of Elite that it had obtained in connection with(cid:10) the joint venture and transferred other such securities to a(cid:10) third-party, as further discussed in Note 10.(cid:10) The following is unaudited pro-forma consolidated results of(cid:10) operations for the year ended March 31, 2003, assuming the acquisition(cid:10) was completed on April 1, 2002.(cid:10) 2003(cid:10) ----(cid:10) (Unaudited)(cid:10) Revenue $ 442,500(cid:10) Proforma net (loss) available to common(cid:10) shareholders $ (4,107,785)(cid:10) Proforma net (loss) available to common(cid:10) shareholders per share -(cid:10) basic and diluted $ (0.40)(cid:10) Unaudited pro-forma data may not be indicative of the results that(cid:10) would have been obtained had these events actually occurred at the(cid:10) beginning of the periods presented, nor does it intend to be a(cid:10) projection of future results.(cid:10) F-20(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(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) 2005 2004 2003(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 1,000 400(cid:10) Deferred -- -- --(cid:10) ----------- ---------- ----------(cid:10) 1,000 1,000 400(cid:10) ----------- ---------- ----------(cid:10) $ 1,000 $ 1,000 $ 400(cid:10) =========== ========== ==========(cid:10) During the year ended March 31, 2003, the Company received approval(cid:10) for the sale of $1,822,989 of New Jersey net-operating losses under(cid:10) 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,(cid:10) 2003 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(cid:10) for the sale of an additional $1,928,817 of New Jersey net-operating(cid:10) losses under the Technology Tax Certificate Transfer Program sponsored(cid:10) by the New Jersey Economic Development Authority (NJEDA). The total(cid:10) tax benefit received during the year ended March 31, 2004 was $151,027(cid:10) and is recorded as other income in the accompanying financial(cid:10) statements.(cid:10) During the year ended March 31, 2005, the Company received approval(cid:10) for the sale of an additional $2,628,257 of New Jersey net-operating(cid:10) losses under the Technology Tax Certificate Transfer Program sponsored(cid:10) by the New Jersey Economic Development Authority (NJEDA). The total(cid:10) tax benefit received during the year ended March 31, 2005 was $205,792(cid:10) and is recorded as other income in the accompanying financial(cid:10) statements.(cid:10) F-21(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 8 - INCOME TAXES (CONTINUED)(cid:10) The major components of deferred tax assets at March 31, 2005 and 2004(cid:10) are as follows:(cid:10) 2005 2004(cid:10) ---- ----(cid:10) Net operating loss carry forwards $ 8,422,225 $ 6,736,336(cid:10) Valuation allowance (8,422,225) (6,736,336)(cid:10) ------------ -----------(cid:10) $ -- $ --(cid:10) ============ ===========(cid:10) At March 31, 2005 and 2004, a 100% valuation allowance is provided, as(cid:10) it is uncertain if the deferred tax assets will provide any benefits(cid:10) because of the uncertainty of generating the future taxable income(cid:10) necessary to use the net operating loss carryforwards. The valuation(cid:10) allowance increased during 2005, 2004 and 2003 by $1,685,889,(cid:10) $2,250,169, and $1,357,792, respectively.(cid:10) At March 31, 2005, for federal income tax purposes, the Company has(cid:10) unused net operating loss carryforwards of approximately $23,192,444(cid:10) expiring in 2007 through 2025. For state tax purposes, the Company has(cid:10) $10,360,986 of unused net operating losses, which are net of the(cid:10) $12,167,760 of the New Jersey net-operating losses sold, as discussed(cid:10) above.(cid:10) NOTE 9 - COMMITMENTS AND CONTINGENCIES(cid:10) EMPLOYMENT AGREEMENTS(cid:10) The Company had an employment agreement ("Employment Agreement") with(cid:10) its former President/CEO, Atul M. Mehta.(cid:10) On June 3, 2003, Dr. Mehta resigned from all positions that he held(cid:10) with the Company, while reserving his rights under his Employment(cid:10) Agreement and under common law. On July 3, 2003, Dr. Mehta instituted(cid:10) litigation against Elite and one of its directors, in the Superior(cid:10) Court of New Jersey, for, among other things, the alleged breach of(cid:10) his Employment Agreement and for defamation. He also claimed that he(cid:10) was entitled to receive his salary through June 6, 2006. The Company(cid:10) made certain counter claims against Mehta.(cid:10) Under a settlement agreement, dated April 21, 2004, Mehta relinquished(cid:10) any rights to the Company's patents and intellectual properties and(cid:10) agreed to certain non-disclosure and certain limited non-competition(cid:10) covenants. The Company paid Mehta $400,000 and certain expense(cid:10) reimbursements, and received a short-term option for the Company or(cid:10) its designees to acquire all of the shares of the Common Stock of the(cid:10) Company held by Mehta and his affiliates at $2.00 per share. The(cid:10) Company paid $100,000 into escrow which was released to Mehta because(cid:10) the option was not exercised in full. As part of the settlement, the(cid:10) Company extended expiration dates of certain options to purchase(cid:10) 770,000 shares of Common Stock at prices ranging from $1.00 to $10.00(cid:10) per share held by Mehta and also provided him with certain "piggyback"(cid:10) registration rights with respect to shares underlying his options. The(cid:10) Company entered into an agreement dated October 7, 2004 with Mehta(cid:10) pursuant to which 100,000 of the $10.00 options were terminated, the(cid:10) expiration dates of the other 670,000 options were extended from June(cid:10) 13, 2005 to December 31, 2007 and the exercise price of 170,000(cid:10) options were reduced from $10.00 to $2.34 per share. The agreement(cid:10) also obligates the Company to bear Mehta's legal and other expenses(cid:10) not to exceed $50,000 for the two year period from the litigation(cid:10) settlement.(cid:10) F-22(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) EMPLOYMENT AGREEMENTS(cid:10) On July 23, 2003, the Company entered into an agreement with its new(cid:10) Chief Executive Officer, Bernard Berk. The initial terms of this(cid:10) agreement is three years. Pursuant to this agreement:(cid:10) - Mr. Berk is entitled to receive a base salary of $200,000 per(cid:10) annum, subject to increase to $330,140 if and when the Company(cid:10) consummates a Strategic Transaction (as defined in the employment(cid:10) 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 at(cid:10) $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 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(cid:10) his employment for good reason or following a "change-of-control".(cid:10) The 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(cid:10) Saggi Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The(cid:10) consultants' services include, but are not limited to, advice with(cid:10) respect to overall strategic planning, financing opportunities,(cid:10) acquisition policy, commercial and investment banking relationships(cid:10) and stockholders matters. In consideration of each consultant's(cid:10) services, the Company agreed to pay each consultant $75,000 payable in(cid:10) monthly installments of $6,250 and to issue to each consultant a(cid:10) warrant to purchase 100,000 shares of the Company's Common Stock.(cid:10) Consulting expenses under both agreements aggregated $165,000 for year(cid:10) ended March 31, 2005 and $30,000 plus approximately $470,000(cid:10) attributable to the issuance of the warrants for the year ended March(cid:10) 31, 2004. These agreements were extended as to the consultants'(cid:10) services for an additional year at $75,000 each.(cid:10) On July 3, 2003, the Company entered into an agreement with Leerink(cid:10) Swann & Company to provide a Valuation and a Fairness Opinion in order(cid:10) for the Company to complete a proposed acquisition for which it(cid:10) received a non-refundable retainer fee of $50,000. If and when the(cid:10) Board of Directors requests a Fairness Opinion, Leerink's compensation(cid:10) shall be $50,000. For the year ended March 31, 2005 and 2004,(cid:10) consulting expenses under this agreement amounted to the $50,000(cid:10) non-refundable retainer fee.(cid:10) F-23(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(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(cid:10) with a Director (Referring Party) whereby Elite will pay the Referring(cid:10) Party a fee based upon payments received by Elite from sales of(cid:10) products, development fees, licensing fees and royalties generated as(cid:10) a direct result of the Referring Party identifying customers for(cid:10) Elite. These amounts are to be reduced by the cost of goods sold(cid:10) directly incurred in the manufacturing or development of products as(cid:10) well as any direct expenses associated with these efforts. The(cid:10) referral fee each year is to equal:(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, 2005.(cid:10) On August 1, 1998, the Company entered into a consulting agreement(cid:10) (the "1998 Agreement") with a company owned by a then Director for the(cid:10) purpose of providing management, marketing and financial consulting(cid:10) services for an unspecified term. Terms of the agreement provided for(cid:10) a nonrefundable monthly fee of $2,000. This compensation was applied(cid:10) against amounts due pursuant to a business referral agreement entered(cid:10) into on April 8, 1997 (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,(cid:10) 2000, the Company amended its 1997 Agreement to provide certain(cid:10) consulting services for the period beginning November 1, 2000 through(cid:10) October 31, 2003. The Company previously advanced $20,000 under the(cid:10) 1997 Agreement in addition to a payment of $50,000 made during the(cid:10) year ended March 31, 2001. The 1997 Agreement provided for 25 monthly(cid:10) installments of $3,200 beginning on December 1, 2001.(cid:10) Consulting expense under the 1997 and 1998 Agreements amounted to(cid:10) $28,800 for the year ended March 31, 2004 and no expense incurred for(cid:10) the year ended March 31, 2003. The agreement terminated on November(cid:10) 30, 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, 2005, 2004 AND 2003(cid:10) NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10) COLLABORATIVE AGREEMENTS(cid:10) On March 30, 2005, the Company entered into a product, development,(cid:10) manufacturing and distribution agreement with Harris Pharmaceutical,(cid:10) Inc. and Tish Technologies LLC with respect to a generic controlled(cid:10) release drug delivery system in an undisclosed area. The product is a(cid:10) generic equivalent to a branded drug with addressable market revenues(cid:10) of approximately $80 million per year. The agreement provides for (i)(cid:10) the drug development by Elite with costs of development to be shared(cid:10) by Elite and the marketing company, (ii) the manufacture by Elite and(cid:10) its sale to the marketing company for distribution, and (iii) Tish(cid:10) Technologies LLC to be responsible for any requisite submissions to(cid:10) the FDA relating to the product. Elite is to share in the profits, if(cid:10) any, generated from the sale of the product.(cid:10) On December 18, 2003, the Company and Pivotal Development, L.L.C.(cid:10) entered into an agreement to develop a controlled release product(cid:10) utilizing Elite's proprietary drug delivery technology. The product is(cid:10) a generic equivalent to a drug losing patent exclusivity with(cid:10) addressable market revenues of approximately $150 million per year.(cid:10) The agreement also provides a future option to develop a controlled(cid:10) release NDA product.(cid:10) Under the collaboration agreement, Pivotal Development is responsible(cid:10) for taking the Elite formulation through clinical development and the(cid:10) FDA regulatory approval process. The partners will seek a license(cid:10) during the development cycle from a pharmaceutical company which has(cid:10) the resources to effectively market the product and share the cost of(cid:10) defining the product against any lawsuits.(cid:10) Elite and Pivotal are to bear costs in their respective areas of(cid:10) responsibility. In addition, Pivotal is to pay Elite $750,000 upon(cid:10) attainment of certain milestones outlined in the agreement.(cid:10) Pivotal has not raised the capital required to move forward with the(cid:10) development agreement and did not go forward under the terms of the(cid:10) agreement. Elite is attempting to identify other partners for this(cid:10) project.(cid:10) In June 2001, the Company entered into two separate and distinct(cid:10) development and license agreements with ECR, another pharmaceutical(cid:10) company. The Company is developing two drug compounds for ECR in(cid:10) exchange for certain payments and royalties. The Company also reserves(cid:10) the right to manufacture the compounds. The Company received $250,000(cid:10) and $300,000, respectively, on these two agreements, which were earned(cid:10) during the year ended March 31, 2002. The Company is currently(cid:10) proceeding with the development and formulation for both products as(cid:10) specified in the development agreements. The Company is currently(cid:10) manufacturing commercial batches for promotion by ECR for which Elite(cid:10) will receive a royalty on product revenues. Manufacturing fees and(cid:10) royalties amounted to $125,739 and $24,291, respectively, for the year(cid:10) ended March 31, 2005.(cid:10) On September 13, 2002, the Company, entered into a manufacturing(cid:10) agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of this(cid:10) agreement, the Company initiated the manufacturing of a new(cid:10) prescription drug product for Ethypharm. The Company received an(cid:10) upfront manufacturing fee for the first phase of the technology(cid:10) transfer and billed an additional amount upon the completion of the(cid:10) first phase of manufacturing. The Company is entitled to receive(cid:10) additional fees in advance for the final phase of the manufacturing.(cid:10) In addition, if and when FDA approval is obtained and if requested by(cid:10) Ethypharm, the Company is to manufacture commercial batches of the(cid:10) product on terms to be agreed upon. There were no amounts earned for(cid:10) years ended March 31, 2005 and 2004.(cid:10) F-25(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)(cid:10) The shareholders at the Annual Meeting of Stockholders adjourned to(cid:10) July 21, 2004, approved the amendment to the Certificate of(cid:10) Incorporation increasing the number of authorized shares of capital(cid:10) stock from 25,000,000 of Common Stock to 65,000,000 shares of Common(cid:10) Stock and 5,000,000 shares of Preferred Stock, each with a par value(cid:10) of $.01 per share.(cid:10) SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION(cid:10) In October 2004, the Company completed a private placement through(cid:10) Indigo Securities LLC, the Placement Agent, for aggregate gross(cid:10) proceeds of $6,600,000 of 516,558 shares of Series A Preferred Stock,(cid:10) par value $0.01 per share ("Preferred Shares") convertible into(cid:10) 5,165,580 shares of Common Stock. The Preferred Shares were(cid:10) accompanied by warrants to purchase an aggregate of 5,165,580 shares(cid:10) of Common Stock at exercise prices ranging from $1.54 to $1.84 per(cid:10) share. The Company paid commissions aggregating $633,510 and issued(cid:10) five year warrants to purchase 494,931 shares of Common Stock to the(cid:10) Placement Agent. The Company also paid legal fees and expenses of the(cid:10) Agent's counsel of $75,000 and legal fees and expenses of one counsel(cid:10) for the investors in the private placement of $25,000.(cid:10) The holders of the Preferred Shares were entitled to dividends at the(cid:10) rate of 8% of the original issue price of $12.30 per share payable on(cid:10) December 1 and June 1 of each year in cash or shares of Common Stock.(cid:10) Holders were entitled to elect one Director, were entitled to ten(cid:10) votes per share, and vote with the Common Stockholders as one class on(cid:10) all other matters. Each Preferred Share is convertible into ten shares(cid:10) of Common Stock. The purchaser of the Preferred Shares (the(cid:10) "INVESTORS") received for each Preferred Share acquired two Common(cid:10) Stock Purchase Warrants, one exercisable on or prior to December 31,(cid:10) 2005 ("SHORT-TERM WARRANTS") and the other exercisable on or prior to(cid:10) December 28, 2009 ("LONG-TERM WARRANTS"). Each warrant represents the(cid:10) right to purchase five shares of Common Stock.(cid:10) The private placement was effected in three tranches. The first(cid:10) tranche involved the sale on October 6, 2004 of 379,122 Preferred(cid:10) Shares at a price of $12.30 per share convertible into an aggregate of(cid:10) 3,791,220 shares of Common Stock accompanied by Short-Term Warrants(cid:10) and Long-Term Warrants to purchase at $1.54 per share an aggregate of(cid:10) 3,791,220 shares of Common Stock. The second tranche involved the sale(cid:10) on October 12, 2004 of 119,286 Preferred Shares at a price of $14.00(cid:10) per share convertible into 1,192,860 shares of Common Stock(cid:10) accompanied by Short-Term and Long-Term Warrants to purchase an(cid:10) aggregate of 1,192,860 shares of Common Stock at a price of $1.75 per(cid:10) share. The third tranche involved the sale on October 26, 2004 of(cid:10) 18,150 Preferred Shares at a price of $14.70 per share convertible in(cid:10) to 181, 500 shares of Common Stock accompanied by Short Term and Long(cid:10) Term Warrants to purchase at a price of $1.84 per share an aggregate(cid:10) of 181,500 shares of Common Stock.(cid:10) Pursuant to the Placement Agent Agreement, the Company issued to the(cid:10) Placement Agent and its designees Long Term Warrants to purchase(cid:10) 357,495 shares of Common Stock at $1.23 per share, 119,286 shares of(cid:10) Common Stock at a price of $1.40 per share, and 18,150 shares of(cid:10) Common Stock at a price of $1.47 per share, respectively.(cid:10) F-26(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (Continued)(cid:10) Holders of the Preferred Shares were provided demand and piggy-back(cid:10) registration rights at the Company's expense. The Company registered(cid:10) under the Securities Act of 1933 (the "ACT") for resale the shares of(cid:10) Common Stock issuable upon conversion of the Preferred Shares,(cid:10) exercise of the warrants (including the Placement Agent's warrants)(cid:10) and as payment of dividends on the Preferred Shares.(cid:10) Each of the purchasers of the Preferred Shares has represented that(cid:10) the purchaser is an "accredited investor" and has agreed that the(cid:10) securities issued in the private placement are to bear a restrictive(cid:10) legend against resale without registration under the Act. The(cid:10) Preferred Shares and warrants were sold by Registrant pursuant to the(cid:10) exemption from registration afforded by Section 4(2) of the Act and(cid:10) Registration D thereunder.(cid:10) Dr. Charan Behl, the Company's Chief Scientific Advisor, purchased at(cid:10) $12.30 per share 20,000 Preferred Shares and received warrants to(cid:10) purchase 200,000 shares of Common Stock. His payment consisted of(cid:10) $16,675 in cash and the release of the Company's obligation of(cid:10) $229,325 due to Dr. Charan Behl for consulting fees for services(cid:10) rendered through September 30, 2004.(cid:10) Under the Certificate of Designation of the Series A Preferred Stock(cid:10) of the Corporation, all outstanding shares of Preferred Stock(cid:10) automatically convert into shares of Common Stock, par value $0.01(cid:10) upon the Corporation providing written notice to holders of Preferred(cid:10) Stock certifying that the Current Market Price of the Common Stock for(cid:10) 30 consecutive Trading Days exceeded $3.69 and the average daily(cid:10) trading volume of the Common Stock for such 30 consecutive Trading(cid:10) Days equaled or exceeded 50,000 shares per day.(cid:10) On March 3, 2005, the Corporation certified that the Current Market(cid:10) Price of the Common Stock for each Trading Day during the 30(cid:10) consecutive Trading Days from January 18, 2005 through and including(cid:10) March 1, 2005 exceeded $3.69, which represented 300% of the Initial(cid:10) Conversion Price of $1.23 per share, and the average daily volume of(cid:10) the Common Stock during the 30 Day Trading Period exceeded 50,000(cid:10) shares.(cid:10) As a result of the above, the remaining outstanding shares of(cid:10) convertible Series A Preferred Stock (21,922 shares), par value $0.01(cid:10) per share were converted into 219,220 shares of Common of the(cid:10) Corporation as of March 7, 2005. Accordingly, the Corporation has(cid:10) issued an aggregate of 5,265,516 shares of Common Stock with respect(cid:10) to the issuance of conversion shares and dividend shares.(cid:10) COMMON STOCK TRANSACTION(cid:10) On July 6, 2004, the Company issued 26,500 shares of Common Stock(cid:10) valued at $58,300 and agreed to pay $10,000 per month to a corporation(cid:10) in consideration for the rendering for a six-month period of investor(cid:10) relation consulting services, including the distribution of the(cid:10) Company's press releases, the provision of related strategic advice(cid:10) and the inclusion of the Company on the consultant's website. The(cid:10) Company agreed to provide the holder with "piggy-back" registration(cid:10) rights with respect to the shares.(cid:10) F-27(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) INSIDER TRADING(cid:10) Under Section 16(b) of the Securities Exchange Act of 1934, an(cid:10) insider, as defined, is required to disgorge any gain on the purchase(cid:10) and sale, or sale and purchase of an issuer's equity securities within(cid:10) any period of six months. During fiscal 2005, the former Chairman of(cid:10) the Board remitted $117,740 to the Company to return his gain based on(cid:10) the applicable provisions of law.(cid:10) DECEMBER 2003 PRIVATE PLACEMENT(cid:10) The Company completed in December 2003 a private placement of(cid:10) 1,645,000 shares of its Common Stock at $2.00 per share, exempt from(cid:10) registration pursuant to Section 4(2) and Regulation D under the Act.(cid:10) In connection with the offering, the Company paid a cash commission of(cid:10) $75,000 to First Montauk Group Inc., as Placement Agent and issued to(cid:10) the agent a five year warrant to purchase 50,000 shares of Company's(cid:10) Common Stock at a price of $2.00 per share. Legal fees approximating(cid:10) $36,000 were also incurred in connection with this private placement.(cid:10) Pursuant to its agreement with the purchasers, the Company at its(cid:10) expense registered the shares issued and the shares issuable upon(cid:10) exercise of the warrant under the Act(cid:10) TREASURY STOCK TRANSACTIONS(cid:10) During fiscal 2003, the Company purchased 100,000 shares of Common(cid:10) Stock in the open market for a total consideration of $306,841(cid:10) pursuant to the authorization by the Board of Directors on June 27,(cid:10) 2002.(cid:10) PUBLIC OFFERINGS(cid:10) A registration statement on Form SB-2, declared effective on July 6,(cid:10) 2004 under the Securities Act of 1933, as amended, registered the(cid:10) following:(cid:10) 1) 1,530,000 shares acquired in a private placement and 50,000(cid:10) shares to be offered upon exercise of warrants issued to the(cid:10) Placement Agent and its associates.(cid:10) 2) Shares to be offered upon exercise of stock options held by a(cid:10) former Chief Executive Officer at the exercise price of $1.00 per(cid:10) share.(cid:10) A registration statement on Form SB-2, declared effective December 28,(cid:10) 2004, under the Securities Act of 1933, as amended, registered the(cid:10) following securities:(cid:10) F-28(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) PUBLIC OFFERINGS (Continued)(cid:10) 1) 5,165,580 Shares of Common Stock which may be offered upon(cid:10) conversion of the outstanding 516,558 shares of Series A(cid:10) Preferred Stock (a current conversion rate of 10 shares of Common(cid:10) Stock for each Series A Preferred share) plus 26,961 shares of(cid:10) Common Stock issued as the December 1, 2004 dividend and up to an(cid:10) additional 765,455 shares of Common Stock, which may be issued as(cid:10) subsequent dividends or pursuant to the conversion rate on(cid:10) outstanding shares of Series A Preferred Stock;(cid:10) 2) 2,582,790 shares of Common Stock which may be offered upon(cid:10) exercise of Common Stock Purchase Warrants expiring December 31,(cid:10) 2005 issued in a private placement by the Company.(cid:10) 3) 3,077,721 shares of Common Stock which may be offered upon(cid:10) exercise of Common Stock Purchase Warrants expiring December 27,(cid:10) 2009 issued in the foregoing private placement;(cid:10) 4) 1,362,200 shares of Common Stock which have been acquired from(cid:10) Dr. Atul Mehta and his family by the stockholders.(cid:10) 5) 670,000 shares of Common Stock which may be issued upon an(cid:10) exercise of outstanding options held by Dr. Mehta and 50,000(cid:10) shares of Common Stock which may be issued upon exercise of(cid:10) Common Stock Purchase Warrants held by Mr. Jason Lyons;(cid:10) 6) 26,500 outstanding shares of Common Stock which had been issued(cid:10) to CEOcast, Inc.(cid:10) F-29(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) PREFERRED STOCK(cid:10) As further discussed in Note 7, on October 16, 2000, Elite entered(cid:10) into an agreement (the "Joint Venture Agreement") with Elan(cid:10) International Services, Ltd. and Elan Corporation, plc. (together(cid:10) "Elan"), under which the parties formed a joint venture, Elite(cid:10) Research, Ltd. ("ERL"). Under the terms of the Joint Venture(cid:10) Agreement, 409,165 shares of the Company's Common Stock and 12,015(cid:10) shares of a newly created Series A Convertible Exchangeable Preferred(cid:10) Stock ("Series A Preferred Stock") were issued to Elan for(cid:10) consideration of $5,000,000 and $12,015,000, respectively. Proceeds(cid:10) from the sale of the Series A Preferred Stock were used to fund the(cid:10) Company's 80.1% share of ERL, as further discussed in Note 7.(cid:10) The Series A Preferred Stock accrued a dividend of 7% per annum,(cid:10) compounded annually and payable in shares of Series A Preferred Stock.(cid:10) Dividends accrued and compounded annually beginning on October 16,(cid:10) 2001. As of September 30, 2002 (the termination date of the Joint(cid:10) Venture), dividends of $1,740,973 on the Series A Preferred Stock had(cid:10) accrued. During the year ended March 31, 2003, the Company issued(cid:10) Series A Preferred Stock to satisfy the 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 dividends of 7% per annum of the(cid:10) original issue price, compounded on each succeeding twelve month(cid:10) anniversary of the first issuance and payable solely by the issuance(cid:10) of additional shares of Series B Preferred Stock, at a price per share(cid:10) equal to the original issue price. Dividends were accrued and(cid:10) compounded commencing one year after issuance. As of September 30,(cid:10) 2002 (the termination date of the joint venture), dividends of $14,000(cid:10) on the Series B Preferred Stock had accrued. During the year ended(cid:10) March 31, 2003, the Company issued Series B Preferred Stock to satisfy(cid:10) 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(cid:10) were financed by the proceeds from the issuance to Elan of 573,000(cid:10) shares of Series B Preferred Stock. These contributions were in(cid:10) addition to a capital contribution in the amount of $200,000 made by(cid:10) the Company to ERL during the fiscal year ended March 31, 2002.(cid:10) JOINT-VENTURE TERMINATION(cid:10) In addition to the issuance of shares as described above, on October(cid:10) 17, 2000 the Company issued to Elan 100,000 warrants to purchase the(cid:10) Company's Common Stock at an exercise price of $18 per share. The(cid:10) warrants are exercisable at any time on or before October 17, 2005.(cid:10) Subject to a Termination Agreement between the Company and Elan dated(cid:10) September 30, 2002, the Company acquired Elan's 19.9% interest in ERL,(cid:10) and Elan transferred its warrants and its 12,015 shares of Series A(cid:10) Preferred Stock to a third party along with accrued dividends of 1,741(cid:10) shares. On November 6, 2002, under a transfer and assignment among the(cid:10) Company, Elan and a third party purchaser, all 13,756 shares of Series(cid:10) A Preferred Stock have been converted, according to their terms, into(cid:10) 764,221 shares of the Company's Common Stock using the $18 per share(cid:10) price.(cid:10) F-30(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) JOINT-VENTURE TERMINATION (CONTINUED)(cid:10) Elan retained 409,165 shares of the Company's Common Stock and 773,000(cid:10) shares of Series B Preferred Stock, the latter of which was converted(cid:10) into 52,089 shares of the Company's Common Stock. Both of the Series A(cid:10) and Series B Preferred Stock were converted into the Company's Common(cid:10) Stock in accordance with their terms. The warrants remain unexercised(cid:10) at March 31, 2004 and 2005.(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(cid:10) require registration under the Securities Act of 1933, as amended(cid:10) ("the Securities Act") of all or part of these securities. All(cid:10) registration expenses would be borne by the requesting party. Elan and(cid:10) the third party purchaser also have the right to piggyback(cid:10) registration if at any time the Company proposes to register shares of(cid:10) its Common Stock under the Securities Act.(cid:10) WARRANTS(cid:10) To date, the Company has authorized the issuance of Common Stock(cid:10) purchase warrants, with terms of five to six years, to various(cid:10) corporations and individuals, in connection with the sale of(cid:10) securities, loan agreements and consulting agreements. Exercise prices(cid:10) range from $2.00 to $18.00 per warrant. The warrants expire at various(cid:10) times through November 30, 2005.(cid:10) A summary of warrant activity for the fiscal years indicated below(cid:10) were as follows:(cid:10) (cid:10)
(cid:10) CLASS A WARRANT EXCHANGE OFFER(cid:10) On October 23, 2002, the Company entered into a Settlement Agreement(cid:10) with various parties in order to end a Consent Solicitation and(cid:10) various litigation initiated by the Company. The Agreement provided,(cid:10) among other things, an agreement to commence an exchange offer (the(cid:10) "Exchange Offer") whereby holders of the Company's Class A Warrants(cid:10) which expired on November 30, 2002 (the "Old Warrants") had the(cid:10) opportunity to exchange those warrants for new warrants (The "New(cid:10) Warrants") upon payment to the Company of $0.10 per share of Common(cid:10) Stock issuable upon the exercise of the old warrants. In September(cid:10) 2003 the Company issued New Warrants to the record holders as of(cid:10) November 30, 2002 of the Old Warrants without requiring any cash(cid:10) payment.(cid:10) F-31(cid:10)(cid:10) 2005 2004 2003(cid:10) ---- ---- ----(cid:10) (cid:10) Beginning balance 2,654,239 733,752 2,669,477(cid:10) Warrants issued 200,000 200,000 ---(cid:10) Warrants issued pursuant to Placement Agent(cid:10) Agreement 519,931 50,000 8,136(cid:10) Warrants issued pursuant to Private Placement 5,165,580 -- ---(cid:10) Placement Agent Warrants Exercised (7,500) -- (158,652)(cid:10) Class C Warrants -- 1,723,237 ---(cid:10) Warrants exercised or expired (496,375) (52,750) (1,829,957)(cid:10) --------- --------- ----------(cid:10) Ending balance 8,035,875 2,654,239 733,752(cid:10) ========= ========= ==========(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10) CLASS A WARRANT EXCHANGE OFFER (CONTINUED)(cid:10) Each New Warrant is exercisable for the same number of shares of(cid:10) Common Stock as the Old Warrants at an exercise price of $5.00 per(cid:10) share, and expires on November 30, 2005. The New Warrants are not(cid:10) transferable except pursuant to operation of law.(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(cid:10) New Warrants. The per share weighted-average fair value of each(cid:10) warrant on the date of grant was $1.10 using the Black-Scholes option(cid:10) pricing model with the following weighted-average assumptions: no(cid:10) dividend yield; expected volatility of 73.77%; risk-free interest rate(cid:10) of 2.88%; and expected lives of 3 years. The elimination of the $0.10(cid:10) per share fee resulted in an additional charge of $172,324 during the(cid:10) year ended March 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(cid:10) the Exchange Offer, which has been charged to additional paid-in(cid:10) capital.(cid:10) CLASS B WARRANTS(cid:10) In September 2003, the Company amended the expiration date of the(cid:10) Class B Warrants to November 30, 2005.(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(cid:10) price equal to or greater than the fair market value of the Company's(cid:10) Common Stock at the date of grant. Generally, options are granted with(cid:10) a vesting period of up to three years and expire ten years from the(cid:10) date of grant. Transactions under the various stock option and(cid:10) incentive plans for the years indicated were as follows:(cid:10) (cid:10)
(cid:10) F-32(cid:10)(cid:10) 2005 2004 2003(cid:10) AVERAGE AVERAGE AVERAGE(cid:10) WEIGHTED WEIGHTED WEIGHTED(cid:10) EXERCISE EXERCISE EXERCISE(cid:10) OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE(cid:10) ------- ----- ------- ----- ------- -----(cid:10) (cid:10) Outstanding at(cid:10) beginning of year(cid:10) 2,417,050 $ 3.70 2,266,850 $ 5.74 2,056,850 $ 5.82(cid:10) Granted 120,000 2.34 1,024,000 2.23 210,000 5.00(cid:10) Exercised (100,000) 1.00 (15,000) 2.00 -- --(cid:10) Expired (160,000) 7.13 (858,800) 7.38 -- --(cid:10) --------- -------- --------- ----------- --------- --------(cid:10) Outstanding at(cid:10) end of year 2,277,050 $ 2.16 2,417,050 $ 3.70 2,266,850 $ 5.74(cid:10) ========= ======== ========= =========== ========= ========(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 11 - STOCK OPTION PLANS (CONTINUED)(cid:10) The following table summarizes information about stock options(cid:10) outstanding at March 31, 2005:(cid:10) (cid:10)
(cid:10) The per share weighted-average fair value of each option granted(cid:10) during fiscal 2005, 2004 and 2003 ranged from $1.91, $1.03 to $2.68(cid:10) and $1.28, respectively, on the date of grant using the Black-Scholes(cid:10) options pricing model with the following weighted-average assumptions;(cid:10) no dividend yield; expected volatility ranging from 76.69%, 75.47% to(cid:10) 77.97% and 75.40%, for fiscal years 2005, 2004 and 2003, respectively;(cid:10) risk-free interest rate of 4.0% in 2005, 4.0% in 2004, 4.0% in 2003(cid:10) and expected lives ranging from five to ten years.(cid:10) There are 1,722,950 options available for future grant under our Stock(cid:10) Option Plan.(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) 2005 2004 2003(cid:10) ---- ---- ----(cid:10) Customer A -- -- 29.79%(cid:10) Customer B -- -- 56.32%(cid:10) Customer C 49.80% 40.70% 13.49%(cid:10) Customer D -- 59.30% --(cid:10) Customer E 49.80% -- --(cid:10) Customer A represents ERL, a joint-venture until September 30, 2002,(cid:10) when it became a wholly-owned subsidiary of the Company, as further(cid:10) discussed in Note 7. Revenues after September 30, 2002, are eliminated(cid:10) in consolidation.(cid:10) F-33(cid:10)(cid:10) WEIGHTED AVERAGE WEIGHTED- WEIGHTED(cid:10) REMAINING AVERAGE AVERAGE(cid:10) RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE(cid:10) EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE(cid:10) -------------- ----------- ------------ ----- ----------- -----(cid:10) (cid:10) $1.00 -- $2.00 403,750 0.45 $ 1.88 403,750 $ 1.88(cid:10) $2.01 - $4.00 1,873,000 5.24 2.22 1,344,300 2.23(cid:10) ------------- --------- ----- ------- --------- ------(cid:10) $1.00 - 4.00 2,277,050 $4.39 $ 2.16 1,748,050 $ 2.14(cid:10) ------------- --------- ----- ------- --------- ------(cid:10) (cid:10) ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10) MARCH 31, 2005, 2004 AND 2003(cid:10) NOTE 13 - SUBSEQUENT EVENTS(cid:10) The Board of Directors in January 2005 adopted, and the stockholders(cid:10) of the Company approved on April 15, 2005, an amendment to the(cid:10) Company's Stock Option Plan ("the Plan") to increase the number of(cid:10) shares subject to the Plan from 1,500,000 to 4,000,000 shares. The(cid:10) Plan authorizes the grant of options to employees and directors of the(cid:10) Company or its subsidiaries and individuals performing consulting(cid:10) services to the Company or a subsidiary.(cid:10) On May 26, 2005, the Company announced that the FDA has approved the(cid:10) Company's investigational new drug ("IND") application for its abuse -(cid:10) resistant technology ("ART (TM)"), incorporating an opioid antagonist(cid:10) designed to discourage and reduce abuse of narcotic analgesic(cid:10) medications by making the product more difficult to abuse when(cid:10) crushed, damaged or otherwise manipulated.(cid:10) Elite's ART(TM) can be applied not only to the $2 billion addressable(cid:10) market of oxycodone, but also to many other opiods, thereby(cid:10) potentially addressing a greater overall market. The technology is(cid:10) protected by a patent pending.(cid:10) On May 18, 2005, proceeds of $40,000 were received from the exercise(cid:10) of stock options previously granted to purchase 20,000 shares of(cid:10) Common Stock at $2.00 per share.(cid:10) On May 24, 2005 proceeds of $156,503 were received and 101,625 shares(cid:10) of Common Stock were issued from the exercise of 101,625 Long-Term(cid:10) Warrants granted at an exercise price of $1.54, as part of the(cid:10) Company's private placement in October, 2004.(cid:10) On April 22, 2005, the Company retained the investment banking firm(cid:10) Ryan Beck & Co., as its placement agent with respect to Elite's(cid:10) refinancing of the 1999 A tax exempt bond issuance with the New Jersey(cid:10) Economic Development Authority ("NJEDA").(cid:10) The Company intends to refund and refinance its current bonds in the(cid:10) aggregate amount of approximately $4,200,000 and intends to use net(cid:10) proceeds, after refunding and issuance costs, to purchase machinery(cid:10) and equipment needed to expand its manufacturing facility. Under the(cid:10) terms of the agreement with the Placement Agent, it is on a best(cid:10) efforts basis, to undertake to structure and place a new bond with the(cid:10) NJEDA.(cid:10) The Placement Agent's fee for these services will be $30 per $1,000 of(cid:10) principal amount of refunding bonds issued, payable upon the(cid:10) successful closing of the refunding bond issue. Furthermore, the(cid:10) Placement Agent will pay the fees and expenses of any counsel retained(cid:10) by it.(cid:10) There can be no assurance that Elite will be successful in closing(cid:10) this bond refunding program.(cid:10) On June 21, 2005, the Company and Intelli PharmaCeutics Corp., a(cid:10) specialty pharmaceutical company, entered into an agreement for the(cid:10) development and commercialization of a controlled released generic(cid:10) drug by the parties. The Company is to share in the profits, if any(cid:10) from the sales of the drug.(cid:10) On June 22, 2005, the Company and Pliva, Inc. entered into a Product(cid:10) Development and License Agreement. The agreement provides for the(cid:10) development and license of a controlled released(cid:10) F-34(cid:10) (cid:10) generic drug formulated by the Company. Under the agreement, Pliva(cid:10) will make upfront and milestone payments to the Company. The Company(cid:10) will manufacture the product and Pliva will market and sell the(cid:10) product. The development costs will be paid by Pliva and the Company(cid:10) and the profits will be shared equally.(cid:10) F-36(cid:10)