(cid:10)
10-K(cid:10)
1(cid:10)
c43317_10k.txt(cid:10)
(cid:10)
UNITED STATES(cid:10)
SECURITIES AND EXCHANGE COMMISSION(cid:10)
WASHINGTON, D.C. 20549(cid:10)
FORM 10-K(cid:10)
(MARK ONE)(cid:10)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES(cid:10)
EXCHANGE ACT OF 1934(cid:10)
FOR THE FISCAL YEAR ENDED - March 31, 2006(cid:10)
OR(cid:10)
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES(cid:10)
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)
-------- ----------(cid:10)
(State or other jurisdiction (IRS Employer(cid:10)
of incorporation) Identification No.)(cid:10)
165 Ludlow Avenue, Northvale, New Jersey 07647(cid:10)
----------------------------------------------(cid:10)
(Address of principal executive offices)(cid:10)
(201) 750-2646(cid:10)
--------------(cid:10)
(Registrant's telephone number, including area code)(cid:10)
Securities registered pursuant to Common Stock - $.01 par value(cid:10)
Section 12(b) of the Act: The Common Stock is listed on The(cid:10)
American Stock Exchange(cid:10)
Securities registered pursuant to None(cid:10)
Section 12(g) of the Act:(cid:10)
Indicate by check mark if the registrant is a well-known seasoned issuer, as(cid:10)
defined in Rule 405 of the Securities Act. Yes [ ] No [X](cid:10)
Indicate by check mark if the registrant is not required to file reports(cid:10)
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X](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(cid:10)
(cid:10)
period that registrant was required to file such reports) and (2) has been(cid:10)
subject to such filing requirements for at least the past 90 days.(cid:10)
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 a large accelerated filer, an(cid:10)
accelerated filer, or a non-accelerated filer. See definition of "accelerated(cid:10)
file and larger accelerated filer" in Rule 12b-2 of the Exchange Act.(cid:10)
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X](cid:10)
Indicate by check mark whether the registrant is a shell company (as defined in(cid:10)
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 26, 2006 was approximately $27,141,156 based upon the(cid:10)
closing price of the registrant's Common Stock on the American Stock Exchange,(cid:10)
as of June 26, 2006. (For purposes of determining this amount, only directors,(cid:10)
executive officers, and, based on Schedule 13(d) filings as of June 10, 2006 10%(cid:10)
or greater stockholders and their respective affiliates have been deemed(cid:10)
affiliates).(cid:10)
Registrant had 19,202,598 shares of common stock, par value $0.01 per share,(cid:10)
outstanding as of June 15, 2006.(cid:10)
DOCUMENTS INCORPORATED BY REFERENCE(cid:10)
List hereunder the following documents if incorporated by reference and the Part(cid:10)
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is(cid:10)
incorporated: (1) Any annual report to security holders; (2) Any proxy or(cid:10)
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or(cid:10)
(c) under the Securities Act of 1933. The listed documents should be clearly(cid:10)
described for identification purposes (e.g., annual report to security holders(cid:10)
for fiscal year ended December 24, 1980). N/A(cid:10)
ii(cid:10)
(cid:10)
FORWARD LOOKING STATEMENTS(cid:10)
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN CONTAIN(cid:10)
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES(cid:10)
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND(cid:10)
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL(cid:10)
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE(cid:10)
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS(cid:10)
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS(cid:10)
ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT(cid:10)
MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING,(cid:10)
THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD,"(cid:10)
"ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER(cid:10)
VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH(cid:10)
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON(cid:10)
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT(cid:10)
AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY(cid:10)
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE(cid:10)
EVENTS OR OTHERWISE.(cid:10)
ANY REFERENCE TO "ELITE", THE "COMPANY"," WE", "US", "OUR" OR THE "REGISTRANT"(cid:10)
MEANS ELITE PHARMACEUTICALS INC. AND ITS SUBSIDIARIES.(cid:10)
iii(cid:10)
(cid:10)
TABLE OF CONTENTS(cid:10)
Form 10-K Index(cid:10)
(cid:10)
(cid:10)
PAGE(cid:10)
PART I(cid:10)
(cid:10)
Item 1. Business.....................................................................................1(cid:10)
Item 1A. Risk Factors................................................................................11(cid:10)
Item 1B. Unresolved Staff Comments...................................................................18(cid:10)
Item 2. Properties..................................................................................19(cid:10)
Item 3. Legal Proceedings...........................................................................19(cid:10)
Item 4. Submission of Matters to a Vote of Security Holders.........................................19(cid:10)
PART II(cid:10)
Item 5. Market for Company's Common Equity and Related Stockholder Matters..........................20(cid:10)
Item 6. Selected Financial Data.....................................................................22(cid:10)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation........23(cid:10)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................28(cid:10)
Item 8. Financial Statements and Supplementary Data.................................................28(cid:10)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........29(cid:10)
Item 9A. Controls and Procedures.....................................................................29(cid:10)
Item 9B. Other Information...........................................................................29(cid:10)
PART III(cid:10)
Item 10. Directors and Executive Officers of the Company.............................................30(cid:10)
Item 11. Executive Compensation........................................................................(cid:10)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related(cid:10)
Stockholder Matters.........................................................................40(cid:10)
Item 13. Certain Relationships and Related Transactions..............................................41(cid:10)
Item 14. Principal Accounting Fees and Services......................................................41(cid:10)
PART IV(cid:10)
Item 15. Exhibits, Financial Statements and Schedules................................................42(cid:10)
Signatures ............................................................................................48(cid:10)
Consolidated Financial Statements........................................................................F-1(cid:10)
(cid:10)
iv(cid:10)
(cid:10)
PART I(cid:10)
ITEM 1. BUSINESS(cid:10)
GENERAL(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 Pennsylvania corporation. At the same time, Elite Labs merged with(cid:10)
a wholly-owned subsidiary of Prologica. Following these mergers, Elite(cid:10)
Pharmaceuticals survived as the parent to its wholly-owned subsidiary, Elite(cid:10)
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)
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 in the allergy therapeutic area currently being sold commercially by our(cid:10)
marketing partner, ECR Pharmaceuticals. Elite also has a pipeline of eight(cid:10)
additional drug products under development in the therapeutic areas that include(cid:10)
pain management, allergy, cardiovascular, and infection. The addressable market(cid:10)
for Elite's pipeline of products exceeds $6 billion in the aggregate.(cid:10)
(cid:10)
Elite's current facility in Northvale, New Jersey is a Good Manufacturing(cid:10)
Practice (GMP) and DEA registered facility for research, development, and(cid:10)
manufacturing.(cid:10)
STRATEGY(cid:10)
We are focusing our efforts on the following areas: (i) manufacturing(cid:10)
of Lodrane 24(R) product; (ii) the development of the other products in our(cid:10)
pipeline; and (iii) commercial exploitation of our products either by license(cid:10)
and the collection of royalties, or through the manufacture of tablets and(cid:10)
capsules using our formulations, and (iv) development of new products and the(cid:10)
expansion of our licensing agreements with other pharmaceutical companies,(cid:10)
including co-development projects, joint ventures and other collaborations.(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 an Patent Term Restoration Act of 1984 (the "Drug Price Act").(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 $4,343,980 in the fiscal year ended March(cid:10)
31, 2006, $2,698,641 in the fiscal year ended March 31, 2005 and $2,075,074 in(cid:10)
the fiscal year ended March 31, 2004 on research and development activities.(cid:10)
Of our eight controlled release products in the pipeline, two are for(cid:10)
pain (ELI 216 is an abuse resistant oxycodone and ELI 154 is a once daily(cid:10)
oxycodone), one is for an allergy indication (we already have one allergy(cid:10)
product on the market), two (doxycycline and nitrofurantoin) are for(cid:10)
anti-infective indications, one is for gastrointestinal disorders, one is for an(cid:10)
undisclosed indication and one (diltiazem) is for cardiovascular indications.(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)
2(cid:10)
(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.(cid:10)
(cid:10)
(cid:10)
PRODUCT BRANDED APPROX. U.S. SALES NDA/ PARTNER INDICATION(cid:10)
PRODUCT(a) FOR BRAND AND/OR ANDA(cid:10)
GENERIC PRODUCTS(cid:10)
(2005)(cid:10)
$MM(b)(cid:10)
(cid:10)
ELI 154 OxyContin(R) $2,000 NDA None Pain Management(cid:10)
Once Daily Oxycodone(cid:10)
twice a day(c)(cid:10)
ELI 216 N/A(f) N/A(f) NDA None Pain Management(cid:10)
Twice daily(cid:10)
oxycodone with abuse(cid:10)
resistant technology(cid:10)
(ART(TM))(cid:10)
Undisclosed product N/A(f) N/A(f) Undisclosed ECR Pharmaceuticals Allergy(cid:10)
with partner (Richmond, VA)(cid:10)
Nitrofurantoin Macrobid(R) $48 ANDA Pliva US, Inc. (East Infection(cid:10)
Hanover, NJ)(cid:10)
Undisclosed Undisclosed $100 ANDA Orit Laboratories, Undisclosed(cid:10)
Inc.(e).(cid:10)
(East Hanover, NJ)(cid:10)
Lansoprazole Prevacid(R) $3,800 ANDA IntelliPharmacutics Gastrointestinal(cid:10)
(Toronto, Canada) disorders(d)(cid:10)
Diltiazem Cardizem CD(R) $230 ANDA None Cardiovascular(cid:10)
Once a day(cid:10)
Doxycycline Doryx(R) $110 ANDA Tish Technologies, Infection(cid:10)
Inc.(e) East Hanover,(cid:10)
NJ)(cid:10)
and Harris(cid:10)
Pharmaceuticals (Ft.(cid:10)
Meyers, FL)(cid:10)
(cid:10)
---------------------(cid:10)
(a) The name of our competitor's branded product.(cid:10)
(b) Indicates the approximate amount of sales of our competitor's product(cid:10)
and any generics (if there are any). It is not the sales of any of our(cid:10)
products.(cid:10)
(c) An IND was filed and accepted by the FDA with respect to the Twice a(cid:10)
day.(cid:10)
(d) This includes an agreement that grants to Elite a percent of payments(cid:10)
paid to its Canadian partner for commercial sale of a generic of this(cid:10)
product.(cid:10)
(e) Orit Laboratories and Tish Technologies are affiliates(cid:10)
(f) N/A means not applicable because there is no branded product on the(cid:10)
market(cid:10)
3(cid:10)
(cid:10)
The table below presents information with respect to the development of(cid:10)
eight 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)
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)
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA(cid:10)
----------------- ------------------ --------(cid:10)
Preclinical 2 ANDA(cid:10)
Pilot Phase I study 2 NDA(cid:10)
Pilot bioequivalence study 3 ANDA(cid:10)
Pre-Launch 1 (1)(cid:10)
----------------(cid:10)
(1) The partner is handling the FDA and other regulatory filings(cid:10)
in connection with the product. Elite is working with its(cid:10)
partner and is targeting to launch this product prior to(cid:10)
December 31, 2006 before the end of this calendar year.(cid:10)
COMMERCIAL PRODUCT(cid:10)
Elite manufactures a once daily allergy product, Lodrane 24(R), that(cid:10)
was co-developed with our partner, ECR Pharmaceuticals. The product is being(cid:10)
marketed by ECR which also has the responsibility for regulatory matters. In(cid:10)
addition to receiving revenues for manufacture of the product, Elite also(cid:10)
receives a royalty on in-market sales.(cid:10)
MANUFACTURING, CO-DEVELOPMENT AND LICENSE AGREEMENTS(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 and for the year ended March 31, 2006 aggregated(cid:10)
$550,697. The payments under the foregoing agreements for the year ended March(cid:10)
31, 2004 were not material. Development of the second product continues and is(cid:10)
targeted for launch before December 31, 2006.(cid:10)
4(cid:10)
(cid:10)
On March 30, 2005, we entered into a three party agreement with Tish(cid:10)
Technologies, Inc. and Harris Pharmaceuticals, Inc. ("Harris") for the(cid:10)
co-development and license of a controlled release product that is a generic(cid:10)
equivalent of a commercial product sold as Doryx(R). Upon its development and(cid:10)
the securing of the required FDA approval by the formulation development(cid:10)
company, Elite is to manufacture and sell the commercially developed drug to the(cid:10)
marketing company for distribution. In addition to the transfer price to the(cid:10)
marketing company, we are to share the profits, if any, realized upon sales. On(cid:10)
June 19, 2006, we received written notice from Harris of Harris' intent to(cid:10)
terminate the agreement in accordance with Section 9.3 of the agreement. Elite(cid:10)
is in discussions to continue the development of this product with Tish(cid:10)
Technologies with the intent to license the product to a third party for(cid:10)
distribution. As the date hereof, there have been no material revenues earned(cid:10)
under the Agreement.(cid:10)
On June 21, 2005, Elite entered into a product development and(cid:10)
commercialization agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately(cid:10)
held, specialty pharmaceutical Canadian company that develops generic controlled(cid:10)
release drug products. It is affiliated with IntelliPharmaCeutics, Ltd. The(cid:10)
agreement provides for the co-development and commercialization of a controlled(cid:10)
released product that is the generic equivalent of a commercial product sold as(cid:10)
Prevacid(R). IntelliPharmaCeutics has taken a formulation for the product into a(cid:10)
pilot bioequivalence biostudy. Elite with IntelliPharmaCeutics intends to scale(cid:10)
up the product, complete additional biostudies and secure the required FDA(cid:10)
approval for commercialization of the product. Upon commercialization, Elite is(cid:10)
to share the profits, if any, realized upon sales.(cid:10)
On June 22, 2005, Elite entered into a Product Development and License(cid:10)
Agreement with Pliva, Inc., providing, for the development and license of a(cid:10)
controlled released product that is a generic equivalent to a commercial product(cid:10)
sold as Macrobid(R). Under the agreement, Pliva is to make upfront and milestone(cid:10)
payments in the aggregate of $550,000 to the Elite. We are to manufacture and(cid:10)
Pliva is to market and sell the product. The development costs will be paid by(cid:10)
Pliva and Elite and the profits will be shared equally.(cid:10)
On December 12, 2005, Elite and IPC amended their obligations to(cid:10)
suspend their obligations under the IPC Agreement with respect to the(cid:10)
development and commercialization of the controlled release drug product in(cid:10)
Canada. IPC, in turn, entered into an agreement with ratiopharm, a Canadian(cid:10)
company, for the development and commercialization for the product in Canada and(cid:10)
will pay Elite a certain percentage of any payments received by IPC with respect(cid:10)
to the commercial sale of this product by ratiopharm in Canada.(cid:10)
On January 10, 2006, Elite entered into an agreement with Orit(cid:10)
Laboratories LLC, an affiliate of Tish Technologies LLC, providing that Elite(cid:10)
and Orit will co-develop and commercialize an extended release drug product for(cid:10)
treatment of anxiety, and, upon completion of development, may license it for(cid:10)
manufacture and sale. The parties intend to develop all dose strengths of the(cid:10)
product. Elite is to share in the profits, if any from the sales of the drug.(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)
5(cid:10)
(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 also performed work on a second, related product in(cid:10)
the central nervous system therapeutic area and initial formulation work on a(cid:10)
third product combining Oxycodone with a narcotic antagonist. We have the(cid:10)
exclusive rights to the proprietary, development and commercial exploitation for(cid:10)
the worldwide markets for these two products developed by ERL. We will not have(cid:10)
to pay Elan royalties on revenues that may be realized from these products.(cid:10)
Under the joint venture, Elan had received 409,165 shares of our Common(cid:10)
Stock; warrants exercisable at $18.00 per share for 100,000 shares of our Common(cid:10)
Stock; and Series A and Series B preferred stock of Elite Labs, which were upon(cid:10)
termination of the joint venture converted into 764,221 shares and 52,089(cid:10)
shares, respectively, of our Common Stock. We did not pay, nor did Elan receive,(cid:10)
any cash consideration under the Termination Agreement.(cid:10)
PATENTS(cid:10)
Since our incorporation, we have secured six United States patents of(cid:10)
which two have been assigned for a fee to another pharmaceutical company. In(cid:10)
addition, we have pending applications for two United States patents and four(cid:10)
foreign patents.(cid:10)
The pending patent applications relate to two different controlled(cid:10)
release pharmaceutical products on which we are working. One is a U.S. patent(cid:10)
for an opioid agonist and antagonist product that we are developing to be used(cid:10)
with oxycodone and other opioids to minimize the abuse potential for theopioids.(cid:10)
A second is a U.S. patent for formulation of oral sustained release opioids(cid:10)
intended to improve the delivery of the opioids. 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)
6(cid:10)
(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)
TRADEMARKS(cid:10)
We have received Notices of Allowance from the U.S. Patent and(cid:10)
Trademark Office granting trademark protection for one trademark. However, since(cid:10)
we currently plan to license our products to marketing partners and not to sell(cid:10)
under our brand name, we do not currently intend to register or maintain any(cid:10)
additional 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,(cid:10)
7(cid:10)
(cid:10)
they must be answered to the satisfaction of the FDA before initial clinical(cid:10)
testing can begin. In some instances this process could result in substantial(cid:10)
delay and expense. These initial clinical studies generally constitute Phase I(cid:10)
of the NDA process and are conducted to demonstrate the product tolerance/safety(cid:10)
and pharmacokinetic in healthy subjects.(cid:10)
After Phase I testing, extensive efficacy and safety studies in(cid:10)
patients must be conducted. After completion of the required clinical testing,(cid:10)
an NDA is filed, and its approval, which is required for marketing in the United(cid:10)
States, involves an extensive review process by the FDA. The NDA itself is a(cid:10)
complicated and detailed application and must include the results of extensive(cid:10)
clinical and other testing, the cost of which is substantial. However, the NDA(cid:10)
filings contemplated by us on already marketed drugs would be made under(cid:10)
Sections 505 (b)(1) or 505 (b)(2) of the Drug Price Act, which do not require(cid:10)
certain studies that would otherwise be necessary; accordingly, the development(cid:10)
timetable should be shorter. While the FDA is required to review applications(cid:10)
within a certain timeframe in the review process, the FDA frequently requests(cid:10)
that additional information be submitted. The effect of such request and(cid:10)
subsequent submission can significantly extend the time for the NDA review(cid:10)
process. Until an NDA is actually approved, there can be no assurance that the(cid:10)
information requested and submitted will be considered adequate by the FDA to(cid:10)
justify approval. The packaging and labeling of our developed products are also(cid:10)
subject to FDA regulation. It is impossible to anticipate the amount of time(cid:10)
that will be needed to obtain FDA approval to market any product.(cid:10)
Whether or not FDA approval has been obtained, approval of the product(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(cid:10)
8(cid:10)
(cid:10)
statutes. As we manufacture such products, we may become subject to the(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-release drugs.(cid:10)
Significant among these are Alpharma, Inc., Andrx Corporation, Mylan(cid:10)
Laboratories, Inc., Par Pharmaceuticals, Inc., Teva Pharmaceuticals Industries(cid:10)
Ltd., Biovail Corporation, Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V(cid:10)
Pharmaceutical Company and Penwest Pharmaceuticals Company. Each of these(cid:10)
companies has developed expertise in certain types of drug delivery systems,(cid:10)
although such expertise does not carry over to developing a controlled-release(cid:10)
version of all drugs. Such companies may develop new drug formulations and(cid:10)
products or may improve existing drug formulations and products more efficiently(cid:10)
than we can. In addition, almost all of our competitors have vastly greater(cid:10)
resources than we do. While our product development capabilities and, if(cid:10)
obtained, patent protection may help us to maintain our market position in the(cid:10)
field of advanced drug delivery, there can be no assurance that others will not(cid:10)
be able to develop such capabilities or alternative technologies outside the(cid:10)
9(cid:10)
(cid:10)
scope of our patents, if any, or that even if patent protection is obtained,(cid:10)
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 or(cid:10)
material revenue.(cid:10)
EMPLOYEES(cid:10)
As of June 15, 2006, we had 26 full-time employees and no part-time(cid:10)
employees. Full-time employees are engaged in administration, research and(cid:10)
development. None of our employees is represented by a labor union and we have(cid:10)
never experienced a work stoppage. We believe our relationship with our(cid:10)
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)
10(cid:10)
(cid:10)
ITEM 1A. 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 the Company and in analyzing the Company's forward-looking(cid:10)
statements.(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)
insignificant operating history and limited financial data upon which you may(cid:10)
evaluate our business and prospects. In addition, our business model is likely(cid:10)
to continue to evolve as we attempt to expand our product offerings and enter(cid:10)
new markets. As a result, our potential for future profitability must be(cid:10)
considered in light of the risks, uncertainties, expenses and difficulties(cid:10)
frequently encountered by companies that are attempting to move into new markets(cid:10)
and continuing to innovate with new and unproven technologies. Some of these(cid:10)
risks 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)
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 $6,883,914, $5,906,890, $6,514,217, $4,061,422, and $1,774,527 for the(cid:10)
years ended March(cid:10)
11(cid:10)
(cid:10)
31, 2006, 2005, 2004, 2003 and 2002, respectively. We expect to realize(cid:10)
significant losses for the current year of operation and to continue to incur(cid:10)
losses until we are able to generate sufficient revenues to support our(cid:10)
operations and offset operating costs.(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, 2006, we have entered into agreements with respect to(cid:10)
the marketing upon development of four drugs. Each agreement provides that we(cid:10)
are to commercially develop or co-develop the product with the partner and upon(cid:10)
securing by a partner or partners having FDA approval or other regulatory(cid:10)
approval, if required, we are to manufacture the product and sell it to a(cid:10)
partner or marketing partner for distribution. The commercial development of one(cid:10)
of the four drugs has been completed. No assurance can be given that sales, if(cid:10)
any, by any marketing partner will result in profit for Elite from the product.(cid:10)
We have also entered into two additional co-development agreements.(cid:10)
These products are currently in development. No assurance can be given that we(cid:10)
will be successful in developing these products, and, if successful, that an(cid:10)
agreement can be reached with a marketing partner for the sale of the products(cid:10)
or that any sales of the products will result in profit for Elite.(cid:10)
We are also developing three additional products on our own. Two are in(cid:10)
pilot Phase I studies and one is in the pilot bioequivalence stage. Additional(cid:10)
studies including either pivotal bioequivalence or efficacy studies will be(cid:10)
required for these products before commercialization.(cid:10)
In order for any of these products to be commercialized, the FDA(cid:10)
requires successful completion of pivotal biostudies to file an ANDA and(cid:10)
successful completion of pivotal clinical trials before filing a NDA. The FDA(cid:10)
next requires successful completion of comparative studies for drug listed(cid:10)
products. ANDAs are filed with respect to generic versions of existing FDA(cid:10)
approved products while NDAs are filed with respect to new 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 being developed and are available for(cid:10)
partnering, we intend to pursue product-specific licensing, marketing(cid:10)
agreements, co-development opportunities and other partnering arrangements in(cid:10)
connection with the products. We have entered into partnership arrangements as(cid:10)
to six products but no assurance can be given that we will be able to locate(cid:10)
partners for our other products or that any arrangement is or will be suitable.(cid:10)
In addition, assuming we identify suitable partners, the process of effectively(cid:10)
entering into these arrangements involves risks such that our management's(cid:10)
attention may be diverted from other business concerns and that we may have(cid:10)
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(cid:10)
12(cid:10)
(cid:10)
clinical trials that these products are safe and effective for use. We have(cid:10)
limited experience in conducting and supervising clinical trials. The process of(cid:10)
completing clinical trials and preparing an NDA may take several years and(cid:10)
requires substantial resources. Our studies and filings may not result in FDA(cid:10)
approval to market our new drug products and, if the FDA grants approval, we(cid:10)
cannot predict the timing 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 safety and efficacy of the products. We may not be able to(cid:10)
obtain authority from the FDA or other regulatory agencies to commence or(cid:10)
complete these clinical 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(cid:10)
potential 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(cid:10)
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(cid:10)
communication problems;(cid:10)
o the relative instability of some foreign governments and(cid:10)
economies;(cid:10)
13(cid:10)
(cid:10)
o interim price volatility based on labor unrest, materials or(cid:10)
equipment shortages, export duties, restrictions on the(cid:10)
transfer of funds, or fluctuations in currency exchange rates;(cid:10)
and(cid:10)
o uncertainty regarding recourse to a dependable legal system(cid:10)
for the 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 THE COMPANY IS UNABLE TO OBTAIN ADDITIONAL FINANCING NEEDED FOR THE(cid:10)
EXPENDITURES FOR THE DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY'S DRUG(cid:10)
PRODUCTS, IT WOULD IMPAIR THE COMPANY'S ABILITY TO CONTINUE TO MEET ITS BUSINESS(cid:10)
OBJECTIVES.(cid:10)
On March 15, 2006, the Company completed a private placement, for(cid:10)
aggregate gross proceeds of $10,000,000, of 10,000 shares of its Series B(cid:10)
Preferred Stock convertible into 4,444,444 shares of Common Stock and five year(cid:10)
warrants to purchase an aggregate of 2,222,222 shares of Common Stock. 50% of(cid:10)
such warrants have an exercise price of $2.75 and 50% have an exercise price of(cid:10)
$3.25. Additionally, the placement agent received five year warrants to purchase(cid:10)
355,555 shares of Common Stock with an exercise price of $2.25.(cid:10)
As of March 31, 2006, the Company had aggregate cash and cash(cid:10)
equivalents of approximately $9,000,000, which the Company anticipates is(cid:10)
adequate to finance its operations through the next 12 to 18 months. Thereafter,(cid:10)
the Company will require additional financing to insure that the Company will be(cid:10)
able to meet the expenditures to develop and commercialize its products for(cid:10)
which requirement the Company has no current arrangements. Other possible(cid:10)
sources of the required financing are the cash exercise of the Long Term(cid:10)
Warrants issued in the October 2004 private placement, the Replacement Warrants(cid:10)
issued in the December 2005 private placement and other warrants and options(cid:10)
that are currently outstanding. No representation can be made that the Company(cid:10)
will be able to obtain additional financing or if obtained it will be on(cid:10)
favorable terms, or at all. No assurance can be given that any offering if(cid:10)
undertaken will be successfully concluded or that if concluded the proceeds will(cid:10)
be material. The Company's inability to obtain additional financing when needed(cid:10)
would impair its ability to continue its business.(cid:10)
Any further sale of the Company's equity could result in the(cid:10)
substantial dilution of the Company's then-existing stockholders' equity. On the(cid:10)
other hand, if the Company incurred debt, the Company would be subject to risks(cid:10)
associated with indebtedness, including the risk that interest rates might(cid:10)
fluctuate and cash flow would be insufficient to pay principal and interest on(cid:10)
such indebtedness.(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 revenues, principally(cid:10)
royalty income, if any, will depend in part on our ability to obtain patent(cid:10)
protection in various jurisdictions related to our technologies, processes and(cid:10)
products. We intend to file patent applications seeking such protection, but(cid:10)
14(cid:10)
(cid:10)
we cannot be certain that these applications will result in the issuance of(cid:10)
patents. If patents are issued, third parties may sue us to challenge such(cid:10)
patent protection, and although we know of no reason why they should prevail, it(cid:10)
is possible that they could. It is likewise possible that our patents may not(cid:10)
prevent third parties from developing similar or competing products. In(cid:10)
addition, although we are not aware of any threatened or pending actions by(cid:10)
third parties asserting that we have infringed on their patents, and are not(cid:10)
aware of any actions we have taken that would lead to such a claim, it is(cid:10)
possible that we might be sued for infringement. The cost involved in bringing(cid:10)
suits against others for infringement of our patents, or in defending any suits(cid:10)
brought against us, can be substantial. We may not possess sufficient funds to(cid:10)
prosecute or defend such suits. If our products were found to infringe upon(cid:10)
patents issued to others, we would be prohibited from manufacturing or selling(cid:10)
such products and we could be required to pay substantial damages.(cid:10)
In addition, we may be required to obtain licenses to patents or other(cid:10)
proprietary rights of third parties in connection with the development and use(cid:10)
of our products and technologies as they relate to other persons' technologies.(cid:10)
At such time as we discover a need to obtain any such licenses or rights, we(cid:10)
will need to establish whether we will be able to obtain them on favorable(cid:10)
terms. The failure to obtain the necessary licenses or other rights could(cid:10)
preclude the sale, manufacture or distribution of our products.(cid:10)
We also rely upon trade secrets and proprietary know-how. We seek to(cid:10)
protect this know-how in part by confidentiality agreements. We consistently(cid:10)
require our employees and potential business partners to execute confidentiality(cid:10)
agreements prior to doing business with us. However, it is possible that an(cid:10)
employee would disclose confidential information in violation of his or her(cid:10)
agreement, or that our trade secrets would otherwise become known or be(cid:10)
independently developed in such a manner that we will have no practical(cid:10)
recourse.(cid:10)
We are not engaged in any litigation, nor contemplating any, with(cid:10)
regard to a claim that someone has infringed one of our patents, revealed any of(cid:10)
our trade 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 eight 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)
15(cid:10)
(cid:10)
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND(cid:10)
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT(cid:10)
OUR BUSINESS MODEL.(cid:10)
The pharmaceutical industry is highly competitive, and we may be unable(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)
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, 2006.(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, 2006, the closing sale price on the American Stock Exchange of(cid:10)
our Common Stock fluctuated from a high of $4.42 per share to a low of $1.68 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(cid:10)
or new drug applications;(cid:10)
o Announcements of innovations, new products or new patents by(cid:10)
us or by our competitors;(cid:10)
16(cid:10)
(cid:10)
o Governmental regulation;(cid:10)
o Patent or proprietary rights developments;(cid:10)
o Proxy contests or litigation;(cid:10)
o News regarding the efficacy of, safety of or demand for drugs(cid:10)
or drug technologies;(cid:10)
o Economic and market conditions, generally and related to the(cid:10)
pharmaceutical industry;(cid:10)
o Healthcare legislation;(cid:10)
o Changes in third-party reimbursement policies for drugs; and(cid:10)
o Fluctuations in our operating results.(cid:10)
As of this date sales of substantial amounts of the Common Stock in the public(cid:10)
market are eligible for sale by these holders pursuant to exemption or(cid:10)
registration under the Securities Act. Perceptions that substantial sales may(cid:10)
take place in the future may lower the Common Stock's 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)
On January 4, 2006, the Company received a letter from the American(cid:10)
Stock Exchange ("AMEX") notifying it that, based on the Company's unaudited(cid:10)
financial statements as of September 30, 2005, the Company is not in compliance(cid:10)
with the continued listing standards set forth in the AMEX Company Guide in that(cid:10)
under one listing standard its shareholders' equity is less than $4,000,000 and(cid:10)
it had losses from continuing operations and/or net losses in three of its four(cid:10)
most recent fiscal years and under another listing standard its shareholders'(cid:10)
equity is less than $6,000,000 and it had losses from continuing operations(cid:10)
and/or net losses in its five most recent fiscal years. The Company, at the(cid:10)
request of AMEX, submitted a plan on February 3, 2006 advising AMEX of action,(cid:10)
it has taken, and will take, to bring it in compliance with the continued(cid:10)
listing standards within a maximum of 18 months from January 4, 2006. On March(cid:10)
15, 2006, the Company completed a private placement of its Series B Preferred(cid:10)
Stock and warrants to purchase Common Stock. The Company received $10,000,000 in(cid:10)
gross proceeds from the private placement. On March 21, 2006, the Company(cid:10)
submitted an update to the plan it had previously submitted on February 6, 2006.(cid:10)
Upon notice of the recent private placement and the acceptance of the updated(cid:10)
plan, AMEX provided the Company with an extension until July 3, 2007 to regain(cid:10)
compliance with the continued listing standards. AMEX will allow the Company to(cid:10)
maintain its AMEX listing through the plan period, subject to periodic review of(cid:10)
the Company's progress by the AMEX staff. If the Company is not in compliance(cid:10)
with the continued listing standards or does not make progress consistent with(cid:10)
such plan during the plan period, AMEX may then initiate delisting proceedings.(cid:10)
The failure to maintain listing of the Common Stock on AMEX will have an adverse(cid:10)
effect on the market and the market price for the Common Stock.(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(cid:10)
17(cid:10)
(cid:10)
part of the Company's assets, or a similar transaction, since the issuance of(cid:10)
new shares could be used to dilute the stock ownership of such person or entity.(cid:10)
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL(cid:10)
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK 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(cid:10)
broker-dealers;(cid:10)
o "Boiler room" practices involving high-pressure sales tactics;(cid:10)
o Manipulation of prices through prearranged matching of(cid:10)
purchases and sales;(cid:10)
o The release of misleading information;(cid:10)
o Excessive and undisclosed bid-ask differentials and markups by(cid:10)
selling broker-dealers; and(cid:10)
o Dumping of securities by broker-dealers after prices have been(cid:10)
manipulated to a desired level, which hurts the price of the(cid:10)
stock and causes investors to suffer loss.(cid:10)
We are aware of the abuses that have occurred in the penny stock market.(cid:10)
Although we do not expect to be in a position to dictate the behavior of the(cid:10)
market or of broker-dealers who participate in the market, we will strive within(cid:10)
the confines of practical limitations to prevent such abuses with respect to our(cid:10)
Common Stock.(cid:10)
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM(cid:10)
ACQUIRING US.(cid:10)
Section 203 of the Delaware General Corporation Law prohibits a merger(cid:10)
with a 15% shareholder within three years of the date such shareholder acquired(cid:10)
15%, unless the merger meets one of several exceptions. The exceptions include,(cid:10)
for example, approval by the holders of two-thirds of the outstanding shares(cid:10)
(not counting the 15% 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 1B. UNRESOLVED STAFF COMMENTS.(cid:10)
Not applicable.(cid:10)
18(cid:10)
(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 contains certain(cid:10)
customary provisions including, without limitation, the right of NJEDA to(cid:10)
foreclose upon a default by Elite. See "Note 6. - Long Term Debt".(cid:10)
On July 15, 2005, we entered into a lease for two years commencing on(cid:10)
July 1, 2005 for a portion of a one-story warehouse for the storage of finished(cid:10)
and raw material of pharmaceutical products and equipment.(cid:10)
We are currently using our facilities as a laboratory, manufacturing,(cid:10)
storage and office space. Properties used in our operations are considered(cid:10)
suitable for the purposes for which they are used and are believed to be(cid:10)
adequate to meet our needs for the reasonably foreseeable future.(cid:10)
ITEM 3. LEGAL PROCEEDINGS.(cid:10)
In the ordinary course of business the Company may be subject to(cid:10)
litigation from time to time. There is no past, pending or, to the Company's(cid:10)
knowledge, threatened litigation or administrative action (including litigation(cid:10)
or action involving the Company's officers, directors or other key personnel)(cid:10)
which in the Company's opinion has or is expected to have, a material adverse(cid:10)
effect upon its business, prospects financial condition or operations.(cid:10)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.(cid:10)
No matters were submitted to a vote of security holders during the(cid:10)
three months ended March 31, 2006.(cid:10)
19(cid:10)
(cid:10)
PART II(cid:10)
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER(cid:10)
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 ENDING MARCH 31, 2006:(cid:10)
March 31, 2006.......................................$2.49 $1.85(cid:10)
December 31, 2005....................................$3.02 $1.69(cid:10)
September 30, 2005...................................$3.05 $2.62(cid:10)
June 30, 2005 .......................................$4.42 $2.67(cid:10)
FISCAL YEAR 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 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)
On June 20, 2006, the last reported sale price of our Common Stock, as(cid:10)
reported by the American Stock Exchange, was $2.00 per share.(cid:10)
As of June 20, 2006, there were approximately 109 holders of record(cid:10)
and, we believe, approximately 2114 beneficial owners of our Common Stock. We(cid:10)
are informed and believe that as of June 20, 2006, Cede & Co. held 17,482,412(cid:10)
shares of our Common Stock as nominee for Depository Trust Company, 55 Water(cid:10)
Street, New York, New York 10004. It is our understanding that Cede & Co. and(cid:10)
Depository Trust Company both disclaim any beneficial ownership therein and that(cid:10)
such shares are held for the account of numerous other persons.(cid:10)
We have never paid cash dividends on our common stock. We paid on May(cid:10)
1, 2006 a dividend in the aggregate principal amount of $33,333.33 on our Series(cid:10)
B Convertible Preferred Stock. We currently anticipate that we will retain all(cid:10)
available funds for use in the operation and expansion of our business.(cid:10)
Please see our Quarterly Reports on Form 10-Q for the three month(cid:10)
periods ending June 30, 2005, September 30, 2005 and December 31, 2005 and our(cid:10)
Current Reports on Form 8-K dated September 2, 2005, December 14, 2005, December(cid:10)
31, 2005 and March 15, 2006 for information concerning our issuances of(cid:10)
unregistered securities during the 12 months ended March 31, 2006.(cid:10)
20(cid:10)
(cid:10)
EQUITY COMPENSATION PLAN INFORMATION(cid:10)
As of March 31, 2006, we had authorized the issuance of 4,000,000(cid:10)
shares of Common Stock upon exercise of options pursuant to our Stock Option(cid:10)
Plan (the "Plan") approved by our stockholders on June 22, 2004 and amended by(cid:10)
our stockholders on June 28, 2006 to increase to 7,000,000 the number of shares(cid:10)
subject to the Plan. As of March 31, 2006, there was an aggregate of 2,397,500(cid:10)
shares of Common Stock issuable upon exercise of outstanding options under the(cid:10)
Plan having a weighted average exercise price of $2.38. In addition, there was(cid:10)
an aggregate of 573,750 shares of Common Stock issuable upon exercise of other(cid:10)
outstanding options granted to employees and directors having a weighted average(cid:10)
exercise price of $2.28.(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 to employees, officers, Directors of and(cid:10)
consultants to Elite. The Plan permits the Company to grant both incentive stock(cid:10)
options ("Incentive Stock Options" or "ISOs") within the meaning of Section 422(cid:10)
of the Code, and other options which do not qualify as Incentive Stock Options(cid:10)
(the "Non-Qualified Options").(cid:10)
Of the ISOs outstanding, options for 93,300 shares with an exercise(cid:10)
price of $2.34 per share were granted under the Plan 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. Such grants are deemed repricing(cid:10)
of the outstanding options and resulted in charges to earnings of the Company(cid:10)
equal to the difference between (i) the fair value of the vested portion of the(cid:10)
new options granted, utilizing the Black-Scholes options pricing model on each(cid:10)
grant date and (ii) the charges to earnings previously made as a result of the(cid:10)
grants of the options being replaced, which will have a dilutive effect on the(cid:10)
earnings per share and, as a result, will likely have an adverse effect on the(cid:10)
market price of the Common Stock of the Company.(cid:10)
Options to purchase 30,000 shares of Common Stock exercisable at $2.34(cid:10)
per share were granted under the Plan on June 22, 2004 to each of Bernard Berk,(cid:10)
our Chief Executive Officer and a Director, and Mr. John A. Moore, Mr. Harmon(cid:10)
Aronson, and Dr. Eric L. Sichel, each of whom was then a Director of the(cid:10)
Company.(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, 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(cid:10)
21(cid:10)
(cid:10)
price upon the exercise of options may be paid in cash, by certified bank or(cid:10)
cashier's check, by tendering stock held by the Optionee, as well as by cashless(cid:10)
exercise either through the surrender of other shares subject to the option or(cid:10)
through a broker. The total number of shares of Common Stock available under the(cid:10)
Plan, and the number of shares and per share exercise price under outstanding(cid:10)
options will be appropriately adjusted in the event of any stock dividend,(cid:10)
reorganization, merger or recapitalization of the Company or similar corporate(cid:10)
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, amend the Plan to increase the maximum(cid:10)
number of shares of Common Stock for which options may be granted under the Plan(cid:10)
or change the class of persons eligible to receive options under the Plan.(cid:10)
Subject to limitations set forth in the Plan, the terms of option(cid:10)
agreements will be determined by the Board or Committee, and need not be uniform(cid:10)
among Optionees.(cid:10)
ITEM 6. SELECTED FINANCIAL DATA(cid:10)
The following consolidated selected financial data, at the end of and(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)
2006 2005 2004 2003 2002(cid:10)
---- ---- ---- ---- ----(cid:10)
(cid:10)
Net revenues $ 550,697 $ 301,480 $ 258,250 $ 630,310 $ 1,197,507(cid:10)
Net (loss) $(6,883,914) $(5,906,890) $(6,514,217) $(4,061,422) $(1,774,527)(cid:10)
Net (loss) per $ (0.49) $ (0.47) $ (0.58) $ (0.40) $ (0.19)(cid:10)
common share(cid:10)
Total assets $15,702,241 $ 9,245,292 $ 7,853,434 $ 8,696,222 $12,724,498(cid:10)
Long-term obligations $ 3,980,000 $ 2,367,128 $ 2,495,000 $ 2,720,000 $ 3,788,148(cid:10)
Weighted average 18,463,514 12,869,924 11,168,618 10,069,991 9,561,299(cid:10)
number of shares(cid:10)
outstanding(cid:10)
(cid:10)
22(cid:10)
(cid:10)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION(cid:10)
AND RESULTS 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 manufacturing of oral, controlled-release(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, capsules or tablets. Elite has one product currently being(cid:10)
sold commercially and a pipeline of eight drug products under development in the(cid:10)
therapeutic areas that include pain management, allergy, cardiovascular and(cid:10)
infection. The addressable market for Elite's current products exceeds $6(cid:10)
billion in the aggregate. Elite also has a GMP and DEA registered facility for(cid:10)
research, development, and manufacturing located in Northvale, New Jersey.(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 charges of $1,166,601, $370,108 and $902,967 during the(cid:10)
23(cid:10)
(cid:10)
years ended March 31, 2004, 2005 and 2006, respectively. The fair value of stock(cid:10)
options held by employees and members of the Board of Directors which have been(cid:10)
granted subsequent to March 31, 2003 is expected to continue to affect the(cid:10)
results of operations of future periods, as we continue to grant or reprice(cid:10)
stock options to reward our management team.(cid:10)
YEAR ENDED MARCH 31, 2006 VS. YEAR ENDED MARCH 31, 2005(cid:10)
Our revenues for the year ended March 31, 2006 were $550,697, an(cid:10)
increase of $249,217 or approximately 83%, over revenues for the comparable(cid:10)
prior year, and consisted of $494,231 in manufacturing fees and $56,466 in(cid:10)
royalty fees. Revenues for the year ended March 31, 2005, consisted of a(cid:10)
$150,000 non-refundable payment received from Purdue Pharma L.P. granting it the(cid:10)
right to evaluate certain abuse resistant drug formulation technology, $125,739(cid:10)
in manufacturing fees, $24,291 in royalty fees and $1,450 in testing fees.(cid:10)
Research and development costs for the year ended March 31, 2006, were(cid:10)
$4,343,890, an increase of $1,645,249, or approximately 61%, from $2,698,641 of(cid:10)
such costs for the comparable period of the prior year, primarily the result of(cid:10)
increased 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 developing and testing of products(cid:10)
currently in our pipeline.(cid:10)
General and administrative expenses (G&A) for the year ended March 31,(cid:10)
2006, were $1,726,626, a decrease of $433,044, or approximately 20% from G&A for(cid:10)
the prior year. The decrease was attributable to a decrease in litigation costs,(cid:10)
bad debt expense, auditing and legal fees, somewhat offset by increases in(cid:10)
salaries and staff.(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)
Depreciation and amortization increased by $130,249 from $356,438 for(cid:10)
the prior year to $486,687. The increase was the result of writing off the(cid:10)
balance of the prior EDA Bond Offering costs as a result of the refinancing.(cid:10)
24(cid:10)
(cid:10)
Other income (expenses) for the year ended March 31, 2006 were(cid:10)
($876,408), a decrease of $116,213, or approximately 12%, from ($992,621) for(cid:10)
the prior year due to (i) a reduction by $105,923 in charges related to the(cid:10)
issuances of stock options and warrants, (ii) an increase of $13,329 in sale of(cid:10)
New Jersey tax losses, and (iii) additional interest income of $50,930, due to(cid:10)
higher compensating balances as a result of the private placement, partially(cid:10)
offset by an increase of $53,969 in interest expense resulting from an increase(cid:10)
in NJEDA Bonds outstanding.(cid:10)
As a result of the foregoing, the Company's net loss for the year ended(cid:10)
March 31, 2006 was $6,883,914 compared to $5,906,890 for the year ended March(cid:10)
31, 2005.(cid:10)
YEAR ENDED MARCH 31, 2005 VS. YEAR ENDED MARCH 31, 2004(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 revenues of $258,250 for the(cid:10)
prior year. The year ended March 31, 2005 revenues consisted of a $150,000(cid:10)
non-refundable payment received from Purdue Pharma L.P. granting it the right to(cid:10)
evaluate certain abuse resistant drug formulation technology, $125,739 of(cid:10)
manufacturing fees, $24,291 of royalty fees and $1,450 of testing fees. Revenues(cid:10)
for the year ended March 31, 2004 consisted of research and development fees(cid:10)
earned in conjunction with our distinct development, license and manufacturing(cid:10)
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 (approximately 30%) from $2,075,074 of such(cid:10)
costs for the prior year, primarily the result of increased wages, raw(cid:10)
materials, laboratory and manufacturing supplies and consulting fees.(cid:10)
General and administrative expenses (G&A) for the year ended March 31,(cid:10)
2005, were $2,159,670, a decrease of $390,176, or approximately 15% from of G&A(cid:10)
for the prior year, attributable to a decrease in litigation costs partially(cid:10)
offset by increases in salaries and staff, consulting fees and the write-off of(cid:10)
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 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)
Depreciation and amortization increased by $23,602 from $332,836 for(cid:10)
the year ended March 31, 2004 to $356,438 for the year ended March 31, 2005.(cid:10)
Other income (expenses) for the year ended March 31, 2005 were(cid:10)
($992,621), a decrease of $821,090, or approximately 45%, from ($1,813,711) for(cid:10)
the prior year. The decrease was due to (i) a reduction of $1,143,466 in charges(cid:10)
related to the issuances of stock options and warrants, (ii) a charge of(cid:10)
$172,324 in the prior year related to the warrant exchange offer, offset(cid:10)
partially by a charge of $397,732 in the year ended March 31, 2005 relating to(cid:10)
the repricing of stock options, (iii) an increase of $54,765 in the sale of New(cid:10)
Jersey tax losses and (iv) the litigation settlement expense of $150,000 for the(cid:10)
prior year partially offset by a $16,167 increase in interest expenses.(cid:10)
25(cid:10)
(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.(cid:10)
MATERIAL CHANGES IN FINANCIAL CONDITION(cid:10)
The Company's working capital (total current assets less total current(cid:10)
liabilities), increased from $3,328,583 as of March 31, 2005, to $8,615,287 as(cid:10)
of March 31, 2006, primarily due to net proceeds approximating $8,600,000(cid:10)
received from the sale of Series B 8% Preferred Stock partially offset by the(cid:10)
net loss of $5,494,300 from operations, exclusive of non-cash charges of(cid:10)
$1,389,614.(cid:10)
The Company experienced negative cash flows from operations of(cid:10)
($4,625,549) for the year ended March 31, 2006, primarily due to the Company's(cid:10)
net loss from operations of $6,883,914, less non-cash charges of $1,389,614,(cid:10)
which included $902,927 in connection with the issuance of stock options, and(cid:10)
$486,687 in depreciation and amortization expenses.(cid:10)
On November 15, 2004, Elite's partner, ECR, launched LODRANE 24(R) 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(R) in exchange for manufacturing(cid:10)
margin and royalties on product revenues. Royalty income earned for the year(cid:10)
ended March 31, 2006 was $56,466. The Company expects future cash flows from(cid:10)
royalties to provide additional cash 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 hopes to achieve some of(cid:10)
the milestones by the end of the quarter ending June 30, 2007.(cid:10)
On March 30, 2005, the Company entered into a product, development,(cid:10)
manufacturing and distribution agreement with Harris Pharmaceutical, Inc.(cid:10)
("Harris") and Tish Technologies, LLC (Tish") with respect to a controlled(cid:10)
release generic anti-infective drug. The product is a generic equivalent to a(cid:10)
branded drug which the Company estimates has addressable market revenues of(cid:10)
approximately $80 million per year. The agreement provides for (1) the(cid:10)
development of the drug by Elite with costs of development to be shared by Elite(cid:10)
and the marketing company, (2) the manufacture of the product by Elite and its(cid:10)
sale to the marketing company for distribution and (3) the boutique development(cid:10)
company to be responsible for any requisite submissions to the FDA relating to(cid:10)
the product. Elite is to share in the profits generated from sales of the(cid:10)
product by the marketing company. On June 19, 2006, we received written notice(cid:10)
from Harris of Harris' intent to terminate the agreement in accordance with(cid:10)
Section 9.3 of the agreement. In the letter, Harris states that Tishtech did not(cid:10)
use commercially reasonable efforts to develop the product in accordance with(cid:10)
the development activities set forth in the Agreement. As the date hereof, there(cid:10)
have been no material revenues earned under the Agreement.(cid:10)
On June 21, 2005, the Company and IntelliPharmaCeutics Corp. ("IPC"),(cid:10)
entered into an agreement for the development and commercialization of a(cid:10)
controlled released generic drug for certain anti-infective diseases by the(cid:10)
parties. The Company estimates that the product had an addressable market in the(cid:10)
U.S. of approximately $4 billion in 2004. The Company is to share in the(cid:10)
profits, if any, from the sales of the drug. On December 12, 2005, the agreement(cid:10)
was amended with respect to the development and commercialization of the(cid:10)
controlled release drug product in Canada. Since IPC intended to enter into an(cid:10)
agreement with a Canadian company with respect to the development, distribution(cid:10)
and sale of the drug product in Canada, the parties agreed to suspend their(cid:10)
obligations under the agreement with respect to the development and(cid:10)
commercialization of the controlled release drug product in Canada. IPC agreed(cid:10)
to pay(cid:10)
26(cid:10)
(cid:10)
the Company a certain percentage of any payments received by IPC with respect(cid:10)
the commercialization of the controlled release drug product by such Canadian(cid:10)
company.(cid:10)
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered into a(cid:10)
Product Development and License Agreement providing for the development and(cid:10)
license of a controlled released generic anti-infective drug formulated by the(cid:10)
Company. The Company is to manufacture and Pliva will market and sell the(cid:10)
product. Under the agreement, the partner is to make milestone payments to the(cid:10)
Company. The development costs are to be paid both by Pliva and the Company, and(cid:10)
the profits are to be shared equally.(cid:10)
On January 10, 2006, the Company entered into a Product Development and(cid:10)
Commercialization Agreement with Orit Laboratories LLC ("ORIT") providing that(cid:10)
the Company and Orit will co-develop and commercialize an extended release drug(cid:10)
product for treatment of anxiety, and upon completion of development, the(cid:10)
possible licensing of the product for manufacture and sale. The parties intend(cid:10)
to develop all dose strengths of the product. The Company is to share in the(cid:10)
profits, if any from the sales of the drug. The term of the agreement is for the(cid:10)
longer of (i) 15 years from the date the product is first commercially sold to a(cid:10)
third party, or (ii) the life of the applicable patent(s), if any. The agreement(cid:10)
is automatically renewable for 3-year periods unless terminated by either party(cid:10)
by providing the other party with twelve (12) months written notice prior to any(cid:10)
renewal period.(cid:10)
In January 2006, the Food and Drug Administration accepted the(cid:10)
Company's investigational - new drug application for OxyQD(TM), its once-a-day(cid:10)
oxycodone painkiller. Under the new drug application, the Company will begin its(cid:10)
development program with an early stage study to evaluate OxyQD(TM)'s sustained(cid:10)
release formation. Currently there is no once-daily oxycodone available; the(cid:10)
Company estimates that the U.S. market for sustained release, twice-daily(cid:10)
oxycodone was about $2 billion as of September, 2005.(cid:10)
No assurance can be given that the Company will consummate any of the(cid:10)
transactions discussed above or that any material revenues will be generated for(cid:10)
Elite therefrom.(cid:10)
LIQUIDITY AND CAPITAL RESOURCES(cid:10)
For the year ended March 31, 2006, the Company recorded positive cash(cid:10)
flow and financed its operations through utilization of its existing cash. In(cid:10)
March 2006, the Company raised net cash approximating $8,600,000 from its(cid:10)
private placement of its Series B 8% Preferred Stock. The Company's working(cid:10)
capital at March 31, 2006 was $8.6 million compared with working capital of $3.3(cid:10)
million at March 31, 2005. Cash and cash equivalents at March 31, 2006 were $8.9(cid:10)
million, an increase of $5.0 million from the $3.9 million at March 31, 2005.(cid:10)
The Company spent approximately $450,000 on improvements and machinery(cid:10)
and equipment during the year ended March 31, 2006. Proceeds generated from the(cid:10)
Company's refinancing, discussed below, were used to pay for these additions.(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.(cid:10)
On August 31, 2005, the Company successfully completed a refinancing(cid:10)
through the issuance of the tax-exempt bonds (the "Bonds") by the New Jersey(cid:10)
Economic Development Authority (the "Authority"). The refinancing involved the(cid:10)
borrowing of $4,155,000, evidenced by a 6.5% Series A Note in the principal(cid:10)
amount of $3,660,000 maturing on September 1, 2030 and a 9% Series B Note in the(cid:10)
principal amount of $495,000 maturing on September 1, 2012. The net proceeds,(cid:10)
after payment of(cid:10)
27(cid:10)
(cid:10)
issuance costs, were or will be used (i) to redeem the outstanding tax-exempt(cid:10)
Bonds originally issued by the Authority on September 2, 1999, (ii) refinance(cid:10)
other former equipment financing and (iii) for the purchase of certain equipment(cid:10)
to be used in the manufacture of pharmaceutical products.(cid:10)
Interest is payable semiannually on March 1 and September 1 of each(cid:10)
year. The Bonds are collateralized by a first lien on the Company's facility and(cid:10)
equipment acquired with the proceeds of the original and refinanced Bonds. The(cid:10)
related Indenture requires the maintenance of a $415,500 Debt Service Reserve(cid:10)
Fund consisting of $366,000 from the Series A Bonds proceeds and $49,500 from(cid:10)
the Series B proceeds. $1,274,311 of the proceeds has been deposited in a(cid:10)
short-term restricted cash account to fund the future purchase of manufacturing(cid:10)
equipment and development of the Company's facility.(cid:10)
On March 15, 2006, the Company completed a $10,000,000 private(cid:10)
placement of to a group of institutional and other private investors of its(cid:10)
Series B Preferred Stock at a price of $1,000 per share, each share initially(cid:10)
convertible at $2.25 into 4,444,444 shares of Common Stock, or an aggregate of(cid:10)
4,444,444 shares of Common Stock. The investors received two classes of(cid:10)
five-year common stock purchase warrants. One Class represents the right to(cid:10)
purchase an aggregate of 1,111,111 shares of Common Stock at an exercise price(cid:10)
of $2.75 per share and the other class represents the right to purchase an(cid:10)
aggregate of 1,111,111 shares of Common Stock at an exercise price of $3.25 per(cid:10)
share. The Company expects that the approximate $8,600,000 of net proceeds will(cid:10)
contribute materially to the Company's efforts to advance their portfolio of(cid:10)
pain products through the clinic as well as accelerate the development of other(cid:10)
Company controlled release products which utilize the Company's proprietary oral(cid:10)
drug delivery systems and abuse resistant technology.(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)
As of March 31, 2006, our principal source of liquidity was(cid:10)
approximately $8,900,000 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)
PAYMENTS DUE BY PERIOD(cid:10)
(cid:10)
(cid:10)
Contractual Obligations TOTAL LESS THAN 1YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS(cid:10)
----- --------------- --------- --------- -------------(cid:10)
(cid:10)
NJEDA Bonds payable $4,155,000 $175,000 $595,000 $470,000 $2,915,000(cid:10)
(cid:10)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK(cid:10)
We do not invest in or own any market risk sensitive instruments(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)
28(cid:10)
(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(cid:10)
AND FINANCIAL DISCLOSURE(cid:10)
None.(cid:10)
ITEM 9A. CONTROLS AND PROCEDURES(cid:10)
Within the 90 days prior to the date of this report, 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 completed, its assessment of internal(cid:10)
controls over financial reporting.(cid:10)
ITEM 9B. OTHER INFORMATION.(cid:10)
None.(cid:10)
29(cid:10)
(cid:10)
PART III(cid:10)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.(cid:10)
DIRECTORS AND EXECUTIVE OFFICERS(cid:10)
Our directors and executive officers, as of March 31, 2006, and their(cid:10)
biographical information are set forth below:(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
NAME AGE POSITION(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Bernard Berk 57 Chairman of the Board, Chief Executive Officer(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Edward Neugeboren 37 Director(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Barry Dash, PhD 74 Director(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Dr. Melvin Van Woert 75 Director(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Mark I. Gittelman 46 Chief Financial Officer, Secretary and Treasurer(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Dr. Charan Behl 55 Executive Vice President and Chief Scientific Officer(cid:10)
---------------------- --- -----------------------------------------------------(cid:10)
Chris Dick 51 Executive Vice President of Corporate Development(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)
Mr. Bernard Berk was appointed the Chief Executive Officer of the(cid:10)
Company in June 2003 and a Director in February 2004. Mr. Berk has been the(cid:10)
President and Chief Executive Officer of Michael Andrews Corporation, a(cid:10)
pharmaceutical management consultant firm, since 1996. Mr. Berk was from 1994(cid:10)
until 1996, President and Chief Executive Officer of Nale Pharmaceutical(cid:10)
Corporation and from 1989 until 1994, Senior Vice President of Sales, Marketing(cid:10)
and Business Development of Par Pharmaceuticals, Inc. Mr. Berk holds a B.S. from(cid:10)
New York University.(cid:10)
Mr. Edward Neugeboren has been a Managing Partner of IndiGo Ventures(cid:10)
LLC, an investment-banking firm based in New York, since January 2003. From May(cid:10)
2001 to January 2004, Mr. Neugeboren was a managing partner of Third Ridge(cid:10)
Capital Management, LLC, a U.S. equity hedge fund. He was from October 2000 to(cid:10)
April 2001 the Chief Administrative Officer of Soceron, a then emerging Silicon(cid:10)
Alley based media software company, and from 1998 to 2000 the Chief(cid:10)
Administrative Officer and director of Equity Research Operations at Lehman(cid:10)
Brothers. He was from 1996 to 1998 deputy director of Equity Research at UBS(cid:10)
Warburg, formerly Warburg, Dillon Read, and director of Equity Research(cid:10)
Operations from 1995 to 1996. Mr. Neugeboren began his career in 1992 as an(cid:10)
equity research analyst covering the specialty pharmaceuticals industry,(cid:10)
constituting generic drugs and drug delivery, at Dillon Read & Co., Kidder,(cid:10)
Peabody & Co. and Furman Selz, Inc. Mr. Neugeboren is a Director of KineMed,(cid:10)
Inc. a platform based drug development and advanced medical diagnostics company(cid:10)
based in San Francisco, California.(cid:10)
Dr. Barry Dash has been since 1995 President and Managing Member of(cid:10)
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(cid:10)
30(cid:10)
(cid:10)
six separate departments: Medical and Clinical Affairs, Regulatory Affairs,(cid:10)
Technical Affairs, Research and Development, Analytical R&D and Quality(cid:10)
Management/Q.C. He had previously been employed by the Whitehall Robins(cid:10)
Healthcare Division from 1960 to 1976, during which time he served as Director(cid:10)
of Product Development Research, Assistant Vice President of Product Development(cid:10)
and Vice President of Scientific Affairs. Dr. Dash had been employed by J.B.(cid:10)
Williams Company (Nabisco Brands, Inc.) from 1978 to1982, during which time he(cid:10)
helped introduce more than 14 national and test market brands. From 1976 to1978(cid:10)
he was Vice President, Director of Laboratories of the Consumer Products(cid:10)
Division of American Can Company. He is a director of GeoPharma, Inc. Dr. Dash(cid:10)
holds a Ph.D. from the University of Florida and M.S. and B.S. degrees from(cid:10)
Columbia University at which he was Assistant Professor at the College of(cid:10)
Pharmaceutical Sciences from 1956 to 1960. He is a member of the American(cid:10)
Pharmaceutical Association, The American Association for the Advancement of(cid:10)
Science and the Society of Cosmetic Chemist.(cid:10)
Dr. Melvin Van Woert, an internist, has been since 1974, a member of(cid:10)
the staff of Mount Sinai Medical Center where since 1978 he has also been a(cid:10)
Professor in the Department of Neurology and Pharmacology at Mount Sinai School(cid:10)
of Medicine. Dr. Van Woert had been a consultant for Neuropharmacological Drug(cid:10)
Products to the Food and Drug Administration from 1974 to 1980; Associate Editor(cid:10)
of Journal of the Neurological Sciences; Member of the Editorial Board of(cid:10)
Journal of Clinical Neurphamacology; and Medical Director of National(cid:10)
Organization for Rare Disorders for which he received in 1993 the Humanitarian(cid:10)
Award. His other awards include the U.S. Public Health Service Award for(cid:10)
Exceptional Achievement in Orphan Products Development and the National(cid:10)
Myoclonus Foundation Award. He has authored and co-authored more than 150(cid:10)
articles appearing in pharmacological, medical and other professional journals(cid:10)
or publications.(cid:10)
Mark I. Gittelman, Chief Financial Officer, Secretary and Treasurer of(cid:10)
the Company, is the President of Gittelman & Co., P.C., an accounting firm in(cid:10)
Clifton, New Jersey. Prior to forming Gittelman & Co., P.C. in 1984, he worked(cid:10)
as a certified public accountant with the international accounting firm of KPMG(cid:10)
Peat Marwick, LLP. Mr. Gittelman holds a B.S. in accounting from New York(cid:10)
University and a Masters of Science in Taxation from Farleigh Dickinson(cid:10)
University. He is a Certified Public Accountant licensed in New Jersey and New(cid:10)
York, and is a member of the American Institute of Certified Public Accountants(cid:10)
("AICPA"), and the New Jersey State and New York State Societies of CPAs. Other(cid:10)
than Elite Labs, no company with which Mr. Gittelman had been affiliated was a(cid:10)
parent, subsidiary or other affiliate of the Company.(cid:10)
Chris Dick, who is employed on an "at-will" basis, was appointed(cid:10)
Executive Vice President of Corporate Development in March, 2006. Since November(cid:10)
2002, the Company has engaged Mr. Dick to direct its licensing and business(cid:10)
development activities. From 1999 to 2002, Mr. Dick served as Director of(cid:10)
Business Development for Elan Drug Delivery, Inc., responsible for licensing and(cid:10)
business development of Elan's portfolio of drug delivery technologies. From(cid:10)
1997 to 1999, he was Manager of Business Development and Marketing for EnTec, a(cid:10)
drug delivery business unit within FMC Corporation's Pharmaceutical Division.(cid:10)
Prior thereto he held various other business and technical positions at FMC(cid:10)
Corporation, including Manager of Marketing for its pharmaceutical functional(cid:10)
coatings product line. Mr. Dick holds an M.B.A from the Stern School of(cid:10)
Business, New York University, and a B.S. and a M.S. in Chemical Engineering(cid:10)
from Cornell University.(cid:10)
Dr. Charan Behl was appointed in March, 2006 Executive Vice President(cid:10)
and Chief Scientific Officer of the Company. Dr. Behl has provided the Company(cid:10)
since June 2003 consulting technological services as an independent contractor.(cid:10)
He was from January 1995 to July 1998 Vice President of R&D and from July 1988(cid:10)
to January 2001 Executive Vice President of R&D of Nastech Pharmaceutical(cid:10)
Corporation, Inc. From April 1981 to November 1994, Dr. Behl was employed by(cid:10)
Hoffman La Roche,(cid:10)
31(cid:10)
(cid:10)
where he held a number of positions, including research leader of its(cid:10)
Pharmaceutical R&D Department. During his tenure at Roche and Nastech, Dr. Behl(cid:10)
created intellectual property in the area of drug delivery. His patent portfolio(cid:10)
includes over 40 patents issued, pending and in preparation. Dr. Behl holds a(cid:10)
B.S. in Pharmaceutical Sciences from BITS, Pilani, India, an M.S. in(cid:10)
Pharmaceutics from Duquesne University, under the mentorship of Dr. Alvin M.(cid:10)
Galinsky, and a Ph.D. in Pharmaceutical Sciences from the University of(cid:10)
Michigan, under the mentorship of Dr. William I. Higuchi. Dr. Behl was an(cid:10)
Assistant Research Scientist from 1978 to 1981 at the University of Michigan.(cid:10)
Dr. Behl is internationally known for his scientific and professional(cid:10)
activities. He has coauthored over 200 publications, including research(cid:10)
articles, book chapters, and abstracts, and has made numerous presentations at(cid:10)
national and international conferences and workshops. In conjunction with(cid:10)
associates from academia and industry and representatives of the FDA, Dr. Behl(cid:10)
has co-organized several workshops and symposia. He was the founding chair of(cid:10)
the Nasal Drug Delivery Focus Group formed in 1995 under the auspices of the(cid:10)
American Association of Pharmaceutical Scientists ("AAPS"), and served as its(cid:10)
Chairman from 1995 to 2001. Dr. Behl is a fellow of the AAPS.(cid:10)
Each director holds office (subject to our By-Laws) until the next(cid:10)
annual meeting of stockholders and until such director's successor has been(cid:10)
elected and qualified. Except for Mr. Berk who is employed pursuant to an(cid:10)
employment agreement, 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 June 22, 2004,(cid:10)
a 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, 2006. 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, we deem the members of the prior and the current(cid:10)
Audit Committees to be independent as independence is defined in Section 121(A)(cid:10)
of the American Stock Exchange Listing Standards, as amended effective December(cid:10)
1, 2003. The Board determined that Mr. Sichel, an independent director, with(cid:10)
respect to the prior Committee qualified and Mr. Edward Neugeboren with respect(cid:10)
to the current Audit Committee qualifies as the Audit Committee Financial Expert(cid:10)
within the meaning of that term under the applicable regulations under the(cid:10)
Securities Exchange Act 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 independent accountant's(cid:10)
independence. Based upon the foregoing review and discussions, the Audit(cid:10)
Committee recommended to the Board of(cid:10)
32(cid:10)
(cid:10)
Directors of the Company that the audited financial statements of the Company be(cid:10)
included in the Company's Annual Report on Form 10-K for the fiscal year ended(cid:10)
March 31, 2006 as 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 initially John A. Moore, Harmon Aronson and Bernard(cid:10)
Berk with Barry Dash and Melvin Van Woert replacing Messrs. Aronson and Moore as(cid:10)
of April 15, 2005. In selecting nominees the Committee identifies and evaluates(cid:10)
the 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 at least one 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 Board.(cid:10)
MEETINGS(cid:10)
During the fiscal year ended March 31, 2006, our Board of Directors(cid:10)
held three 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)
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 officers and employees which it believes complies(cid:10)
with the requirements for a company code of ethics for financial officers that(cid:10)
were promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2002 (the(cid:10)
"Sarbanes-Oxley Act") as well as for the members of our Board of Directors. The(cid:10)
directors will be surveyed annually regarding their compliance with the policies(cid:10)
as set forth in the Code of Conduct for Directors. A copy of the Code of(cid:10)
Business Conduct and Ethics is available on our website www.elitepharma.com. We(cid:10)
intend to disclose(cid:10)
33(cid:10)
(cid:10)
any amendment to, or waiver of, a provision of the Business Conduct and Ethics(cid:10)
for Directors in a report filed under the Securities Exchange Act of 1934 within(cid:10)
five business days of the amendment or waiver.(cid:10)
STOCKHOLDER COMMUNICATIONS(cid:10)
Stockholders who wish to send communications to the Board of Directors(cid:10)
should address their communication to Elite Pharmaceuticals Inc., 165 Ludlow(cid:10)
Avenue, Northvale, New Jersey 07647, attention Mark I. Gittelman, Secretary. Mr.(cid:10)
Gittelman has been instructed to collect and organize stockholder communications(cid:10)
and forward copies to each of the Directors. If a communication relates to the(cid:10)
Secretary, such communication should be sent to the same address, attention(cid:10)
Bernard Berk, Chairman.(cid:10)
Typically, we do not forward to our directors communications from our(cid:10)
stockholders or other communications which are of a personal nature or not(cid:10)
related to the duties and responsibilities of the Board, including:(cid:10)
o Junk mail and mass mailings(cid:10)
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, we believe that during(cid:10)
fiscal year ended March 31, 2006 all Reporting Persons complied with all(cid:10)
applicable filing requirements other than Mr. Neugeboren who did not timely file(cid:10)
a Form 4.(cid:10)
ITEM 11. EXECUTIVE COMPENSATION.(cid:10)
EXECUTIVE OFFICER COMPENSATION(cid:10)
Mr. Berk is employed pursuant to an employment agreement, dated as of(cid:10)
June 23, 2003, as amended and restated on September 2, 2005 (the "RESTATED(cid:10)
EMPLOYMENT AGREEMENT"), providing for him to serve as the Company's Chief(cid:10)
Executive Officer through August 31, 2009. Mr. Berk's salary was increased to(cid:10)
$330,140 as a result of the occurrence of a Strategic Transaction pursuant to(cid:10)
the terms of the Restated Employment Agreement - the increase from $200,000 was(cid:10)
effective May 1, 2005 but not payable until November 1, 2005. Additionally, Mr.(cid:10)
Berk is entitled to an annual bonus as determined by the Compensation Committee.
34(cid:10)
(cid:10)
Pursuant to the Restated Employment Agreement, Mr. Berk (i) waived his(cid:10)
rights to 75,000 of the 300,000 options granted to him under the agreement on(cid:10)
June 23, 2003 and the Company determined that the remaining 225,000 options(cid:10)
fully vested as a result of the occurrence of a Strategic Transaction and (ii)(cid:10)
was granted on September 2, 2005 under its 2004 Stock Option Plan (the "PLAN")(cid:10)
ten year options to purchase 600,000 shares of common stock at $2.69, the fair(cid:10)
market value of the Common Stock as of the time of the grant, of which 100,000(cid:10)
vest on September 2, 2006, 100,000 vest on September 2, 2007 and the remaining(cid:10)
400,000 vest as follows: (a) 50,000 shares upon the closing of each product(cid:10)
license or product sale transaction (on a product by product basis and only once(cid:10)
for each product) in which the Company receives an aggregate of at least(cid:10)
$5,000,000 in net cash proceeds (including royalties and signing, license and(cid:10)
milestone payments) in connection with such product transaction; (b) 10,000(cid:10)
shares upon the filing by the Company (in the Company's name) with the United(cid:10)
States Food and Drug Administration (the "FDA") of either an abbreviated new(cid:10)
drug application (an "ANDA") OR a new drug application (including an application(cid:10)
filed with the FDA under Section 505(b)(2) of the Federal Food, Drug, and(cid:10)
Cosmetic Act, 21 U.S.C. Section 301 et seq.) (collectively, a "NDA"), for a(cid:10)
product not covered by a previous FDA application; and (c) 40,000 shares upon(cid:10)
the approval by the FDA of any ANDA or NDA (filed in the Company's name) for a(cid:10)
product not previously approved by the FDA.(cid:10)
The Company also agreed that in the event that options to purchase the(cid:10)
above 400,000 shares have fully vested, it will grant him under the Plan fully(cid:10)
vested additional options to purchase shares at the fair market value on the(cid:10)
date of grant as follows: (a) 50,000 options upon the closing of each product(cid:10)
license or product sale transaction (on a product by product basis and only once(cid:10)
for each product) in which the Company receives an aggregate of at least(cid:10)
$5,000,000 in net cash proceeds (including royalties and signing, license and(cid:10)
milestone payments) in connection with such product transaction; (b) 10,000(cid:10)
options upon the filing by the Company (in the Company's name) with the FDA of(cid:10)
either an ANDA or NDA for a product not covered by a previous FDA application;(cid:10)
and (c) 40,000 options upon the approval by the FDA of any ANDA, NDA or(cid:10)
505(b)(2) application filed in the Company's name for a product not previously(cid:10)
approved by the FDA.(cid:10)
The Restated Employment Agreement provides that if the Company(cid:10)
terminates Mr. Berk's employment without cause or Mr. Berk terminates his(cid:10)
employment for good reason, Mr. Berk shall be entitled to the following(cid:10)
severance: (i) any earned but unpaid base salary plus any unpaid reimbursable(cid:10)
expenses as of the effective date of termination of his employment, (ii) the(cid:10)
then-current base salary and reimbursement of the cost to replace the life and(cid:10)
disability insurance coverages afforded to Mr. Berk under the Company's benefit(cid:10)
plans with substantially similar coverages, following the effective date of(cid:10)
termination of his employment, for a period equal to the greater of (x) the(cid:10)
remainder of the then-current term, or (y) two years following the effective(cid:10)
date of termination and (iii) payment by the Company of premiums for health(cid:10)
insurance for the period during which Mr. Berk is entitled to continued health(cid:10)
insurance coverage as specified in the Comprehensive Omnibus Budget(cid:10)
Reconciliation Act. In the event that the Company terminates Mr. Berk's(cid:10)
employment because of his permanent disability, Mr. Berk is to be entitled to(cid:10)
the severance specified above, less any amounts actually received by him under(cid:10)
any disability insurance coverage provided for and paid by the Company. In the(cid:10)
event that the Company terminates Mr. Berk's employment for cause or Mr. Berk(cid:10)
terminates his employment with the Company without good reason, Mr. Berk shall(cid:10)
be entitled to any earned but unpaid base salary plus any unpaid reimbursable(cid:10)
expenses as of the effective date of termination of his employment.(cid:10)
The Restated Employment Agreement provides that in the event of a(cid:10)
change of control in lieu of any severance that may otherwise be payable to Mr.(cid:10)
Berk if Mr. Berk elects to terminate his employment for any reason within 90(cid:10)
days thereof, or the Company elects to terminate his employment within 180 days(cid:10)
thereof, other than for cause, he is to be entitled to the following: (i) any(cid:10)
earned but unpaid base(cid:10)
35(cid:10)
(cid:10)
salary plus any unpaid reimbursable expenses as of the effective date of(cid:10)
termination of his employment, (ii) $1,000,000, (iii) the then-current base(cid:10)
salary for a period of 12 months following the effective date of termination,(cid:10)
(iv) reimbursement of the cost, for a period equal to the 12 months following(cid:10)
the effective date of termination, of replacing the life and disability(cid:10)
insurance coverage afforded to Mr. Berk under the Company's benefit plans with(cid:10)
substantially similar coverage and (v) payment by the Company of premiums for(cid:10)
health insurance for the period during which Mr. Berk is entitled to continued(cid:10)
health insurance coverage as specified in the Comprehensive Omnibus Budget(cid:10)
Reconciliation Act.(cid:10)
The Restated Employment Agreement contains Mr. Berk's non-competition(cid:10)
covenant for a period 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, 2006, 2005, and 2004, the(cid:10)
fees paid by the Company under the agreement were $154,704, $111,312, and(cid:10)
$168,750 respectively. The services rendered by the firm to the Company averaged(cid:10)
103, 84, and 128 hours per month, respectively, of which an average of 25 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 and fees(cid:10)
for services in all capacities to the Company for each of the years in the three(cid:10)
year period ended March 31, 2006, awarded or paid to, or earned by our President(cid:10)
and Chief Executive Officer during the year and those executive officers who(cid:10)
earned at least $100,000 during the year, including Mr. Chris Dick and Dr.(cid:10)
Charan Behl who were elected officers in March 2006. Dr. Behl's compensation for(cid:10)
the years ended March 31, 2004, 2005 and 2006 consisted of consulting fees at(cid:10)
the rate of $200 per hour.(cid:10)
Summary Compensation Table(cid:10)
--------------------------(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 Restricted Securities(cid:10)
Principal Fiscal Other Annual Stock Underlying LTIP All Other(cid:10)
Position Year(1) Salary Bonus Compensation Awards Options Payouts Compensation(cid:10)
-------- ------- ------ ----- ------------ ------ ------- ------- ------------(cid:10)
(cid:10)
Bernard Berk, 2005-06 $344,295 $150,000 -- -- -- --(cid:10)
President and 2004-05 $200,000 $50,000 -- -- 30,000 -- --(cid:10)
Chief Executive 2003-04 $166,667 -- -- -- 525,000 -- --(cid:10)
Officer(cid:10)
Atul M. Mehta, 2005-06 -- -- -- -- -- -- --(cid:10)
Ph.D. former 2004-05 -- -- -- -- -- -- --(cid:10)
President and 2003-04 $53,684 -- $3,040(3) -- -- -- --(cid:10)
Chief Executive(cid:10)
Officer (2)(cid:10)
Chris Dick 2005-06 $150,000 $25,000 -- -- -- --(cid:10)
Executive Vice 2004-05 $140,250 $25,000 -- -- -- --(cid:10)
President of 2003-04 $137,000 -- -- -- 30,000 -- --(cid:10)
Corporate(cid:10)
Development(cid:10)
Charan Behl 2005-06 $450,000 -- -- -- -- --(cid:10)
Executive Vice 2004-05 $392,455 -- -- -- -- --(cid:10)
President and 2003-04 (4) -- -- -- -- --(cid:10)
Chief Scientific $151,114(cid:10)
Officer(cid:10)
(cid:10)
36(cid:10)
(cid:10)
-------------------------(cid:10)
(1) The information is provided for each fiscal year which begins on April(cid:10)
1 and ends on March 31.(cid:10)
(2) Dr. Mehta resigned as an employee and as a director of the Company as(cid:10)
of June 3, 2003.(cid:10)
(3) Represents the value of the use of a company car and premiums paid by(cid:10)
the Company for life insurance on Dr. Mehta's life for the benefit of(cid:10)
his wife.(cid:10)
(4) Includes $229,325 of fees paid by the value of units issued to him by(cid:10)
the Company in the Series A Preferred private placement, each(cid:10)
consisting of (i) a share of Series A Preferred Stock convertible into(cid:10)
ten shares of Common Stock and (ii) ten common stock purchase warrants,(cid:10)
at the rate of $12.30 per unit.(cid:10)
OPTION GRANTS TO AND EXERCISED BY EXECUTIVE OFFICERS IN LAST FISCAL YEAR(cid:10)
Options granted during the fiscal year ended March 31, 2006 to the executive(cid:10)
officers named in the Summary Compensation Table were as follows:(cid:10)
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 2006(cid:10)
(cid:10)
(cid:10)
POTENTIAL REALIZED VALUE AT(cid:10)
NUMBER OF SHARES % OF TOTAL OPTIONS ASSUMED ANNUAL RATES OF(cid:10)
UNDERLYING GRANTED TO EMPLOYEES EXERCISE EXPIRATION STOCK PRICE APPRECIATION(cid:10)
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE DATE FOR OPTION TERM(cid:10)
---- ---------------- -------------------- -------- ---------- ---------------------------(cid:10)
5% 10%(cid:10)
-- ---(cid:10)
(cid:10)
Bernard Berk 30,000 3.1% $2.75 8/30/2015 $39,300 $111,200(cid:10)
600,000 61.9% $2.69 9/02/2015 $822,000 $2,262,000(cid:10)
Atul M. Mehta --- --- --- --- --- ---(cid:10)
Chris Dick 40,000 4.1% $2.80 7/14/2015 $50,400 $146,400(cid:10)
Charan Behl --- --- --- --- --- ---(cid:10)
Mark Gittelman 20,000 2.1% $2.80 7/14/2015 $25,200 $73,200(cid:10)
(cid:10)
No options were exercised by executive officers during the fiscal years(cid:10)
ended March 31, 2005 and 2006.(cid:10)
(cid:10)
(cid:10)
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY(cid:10)
NAME OPTIONS AT MARCH 31, 2006 OPTIONS AT MARCH 31, 2006 (1)(cid:10)
---- --------------------------------------- ---------------------------------(cid:10)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(cid:10)
----------- ------------- ----------- -------------(cid:10)
(cid:10)
Atul M. Mehta (2) 170,000 -0- $25,500 -0-(cid:10)
100,000 -0- -0- -0-(cid:10)
100,000 -0- -0- -0-(cid:10)
100,000 -0- $49,000 -0-(cid:10)
100,000 -0- $99,000 -0-(cid:10)
(cid:10)
-------------------(cid:10)
(1) The dollar values are calculated by determining the difference between(cid:10)
$2.49 per share, the fair market value of the Common Stock at March 31,(cid:10)
2006, and the exercise price of the respective options.(cid:10)
(2) Dr. Mehta resigned as an officer/employee and director as of June 3,(cid:10)
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 a fee of $2,000 for each meeting(cid:10)
attended.(cid:10)
Mr. John A. Moore for the period from January 1, 2004 through May 12,(cid:10)
2004, when he resigned, while he was Chairman of the Board received $46,875 as(cid:10)
compensation for the substantial duties the Board assigned to him, principally(cid:10)
to assist the Chief Executive Officer in the management of the Company's(cid:10)
operations, and the time required to perform such duties.(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. The options vested in equal 10,000(cid:10)
share installments on December 12, 2003, December 12, 2004 and December 12, 2005(cid:10)
and expire at the earlier of: (1) January 31, 2013; or (2) the date one year(cid:10)
after the optionee ceases to be a director of or a consultant or advisor of the(cid:10)
Company. On February 6, 2004, the Board of Directors authorized a further(cid:10)
amendment to all the options held by Messrs. Brown(cid:10)
38(cid:10)
(cid:10)
(30,000 shares), deNeufville (55,000 shares) and Pearson (90,000 shares) to(cid:10)
extend their expiration date to a date two years following the June 22, 2004(cid:10)
Annual Meeting.(cid:10)
On March 8, 2004 our Board of Directors amended those options held by(cid:10)
then Directors which contained an exercise price greater than $2.21 to reduce(cid:10)
their exercise price to $2.21 per share as follows:(cid:10)
Shares Subject Date of Original Expiration(cid:10)
Name To Amended Options Grant Exercise Price Date(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)
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 terminate on the earlier of their current expiration date or(cid:10)
a date two years after Mr. Moore ceased to be a director of the Company (January(cid:10)
24, 2007).(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)
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)
The outstanding Class B Warrants and C Warrants to purchase an(cid:10)
aggregate of 2,404,239 shares of our Common Stock at a price of $5.00 per share(cid:10)
expired on November 30, 2005. Included among the holders of the Class B Warrants(cid:10)
were Richard A. Brown, a Director at the time, who held, along with his son and(cid:10)
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 held(cid:10)
25,000 Class B Warrants.(cid:10)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(cid:10)
AND RELATED STOCKHOLDER MATTERS(cid:10)
The following table sets forth certain information regarding(cid:10)
beneficial ownership of our Common Stock as of the March 31, 2006 by (i) each(cid:10)
director and executive officer named under the Summary Compensation Table, (ii)(cid:10)
all executive officers and current directors as a group and (iii) the persons(cid:10)
known to us to own beneficially more than 5% of the outstanding shares of our(cid:10)
Common Stock. On such date, we had 19,190,159 shares of Common Stock(cid:10)
outstanding. (The 10,000 shares of Series B Preferred Stock outstanding are(cid:10)
nonvoting and none of the individuals listed below beneficially owns any shares(cid:10)
of Series B Preferred Stock). Shares not outstanding but deemed beneficially(cid:10)
owned by virtue of(cid:10)
39(cid:10)
(cid:10)
the right of any individual to acquire shares within 60 days of the foregoing(cid:10)
date are treated as outstanding only in 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)
Amount %(cid:10)
Bernard Berk 1,352,300(1) 7.04(cid:10)
Director and Chief Executive Officer(cid:10)
Edward Neugeboren 221,063(2) 1.15(cid:10)
Director(cid:10)
Barry Dash, Ph.D 30,000(3) **(cid:10)
Director(cid:10)
Dr. Melvin Van Woert 30,000(3) **(cid:10)
Director(cid:10)
Dr. Charan Behl 546,000(4) 2.77(cid:10)
Executive Vice President and Chief Scientific(cid:10)
Officer(cid:10)
Chris Dick 135,377(5) **(cid:10)
Executive Vice President of Corporate(cid:10)
Development(cid:10)
Mark I. Gittelman 100,000(3) **(cid:10)
Chief Financial Officer, Treasurer and(cid:10)
Secretary(cid:10)
Dr. Atul Mehta 570,000(3) 2.89(cid:10)
c/o Katten Muchin Zavis Rosenman(cid:10)
575 Madison Avenue(cid:10)
New York, NY 10022(cid:10)
Trellus Management Company, LLC 996,400(6) 5.5%(cid:10)
Adam Usdan(cid:10)
350 Madison Avenue, 9th Floor(cid:10)
New York, New York 10017(cid:10)
Mark Fain 1,145,333(7) 5.9%(cid:10)
237 Park Avenue, Suite 900(cid:10)
New York, NY 10017(cid:10)
Chad Comiteau 1,151,765(8) 5.9%(cid:10)
237 Park Avenue, Suite 900(cid:10)
New York, NY 10017(cid:10)
All Directors and Officers as a group (12) 2,984,740(9) 13.07(cid:10)
-------------------------(cid:10)
* See "Election of Directors - Board of Directors Nominees" for his(cid:10)
address.(cid:10)
40(cid:10)
(cid:10)
** Less than 1%(cid:10)
(1) Includes options to purchase 1,185,000 shares. See "Executive Officers"(cid:10)
(2) Includes options and warrants to purchase an aggregate of 190,571(cid:10)
shares.(cid:10)
(3) Represents options.(cid:10)
(4) Includes warrants to purchase 130,000 shares.(cid:10)
(5) Includes options to purchase 100,000 shares of Common Stock and(cid:10)
warrants held by Mr. Dick and Hedy Rogers as joint tenants to purchase(cid:10)
10,569 shares of Common Stock.(cid:10)
(6) Based on information in the Schedule 13G filed February 15, 2006 of(cid:10)
Trellus Management Company and Adam Usdan who share voting and(cid:10)
dispositve power.(cid:10)
(7) Based on information provided by Mark Fain and Chad Comiteau in their(cid:10)
Schedule 13G filed May 17, 2006. Includes (i) 33,333 convertible shares(cid:10)
beneficially owned by Mr. Fain over which he has sole voting power and(cid:10)
sole dispositive power, (ii) 33,000 shares beneficially owned by(cid:10)
Stratford Management Money Purchase Pension Plan over which Messrs.(cid:10)
Fain and Comiteau have shared voting power and shared dispositive(cid:10)
power, and (iii) 750,000 shares and 150,000 convertible shares(cid:10)
beneficially owned by Stratford Partners, L.P. of which Messrs. Fain(cid:10)
and Comiteau are Managing Members, and over which they have shared(cid:10)
voting power and shared dispositive power.(cid:10)
(8) Based on information provided by Mark Fain and Chad Comiteau in their(cid:10)
Schedule 13G filed May 17, 2006. Includes (i) 32,655 convertible shares(cid:10)
beneficially owned by Mr. Comiteau over which he has sole voting power(cid:10)
and sole dispositive power, and (ii) the shares and convertible shares(cid:10)
described in footnote 7 which are beneficially owned by Stratford(cid:10)
Management Money Purchase Pension Plan and Stratford Partners, L.P.(cid:10)
over which Messrs. Fain and Comiteau have shared voting power and(cid:10)
shared dispositive power.(cid:10)
(9) Includes options and warrants to purchase an aggregate of 2,246,140(cid:10)
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)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.(cid:10)
We entered into a placement agent agreement with Indigo Securities LLC(cid:10)
in March 2006 for Indigo to provide financial advisory services and act as a(cid:10)
placement agent in to us in connection with the Company's private placement(cid:10)
transactions which occurred during the fiscal year ended March 31, 2006. This(cid:10)
agreement superceded all prior agreements with us. In December 2005, Indigo(cid:10)
received $76,418 cash compensation and placement agent warrants to purchase(cid:10)
25,473 shares of common stock in connection with acting as the placement agent(cid:10)
for the warrant exchange offer. In March 2006, Indigo received $800,000 cash(cid:10)
compensation and placement agent warrants to purchase 355,555 shares of common(cid:10)
stock in connection with acting as placement agent for the offering of our(cid:10)
Series B Preferred Stock. Edward Neugeboren, one of our directors, is an(cid:10)
employee of Indigo Securities, LLC.(cid:10)
See "Item 10 - Directors and Executive Officers of Registrant" for(cid:10)
information as to employment or engagement agreements with Bernard Berk, Chris(cid:10)
Dick, Charan Behl and an affiliate of Mark I. Gittelman.(cid:10)
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.(cid:10)
The following table presents fees, including reimbursements for(cid:10)
expenses, for professional audit services rendered by Miller Ellin & Company,(cid:10)
LP. ("Miller Ellin") for the audits of our annual financial(cid:10)
41(cid:10)
(cid:10)
statements and interim reviews of our quarterly financial statements for the(cid:10)
years ended March 31, 2006 and March 31, 2005 and fees billed for other services(cid:10)
rendered by Miller Ellin during those periods.(cid:10)
FISCAL 2006 FISCAL 2005(cid:10)
Audit fees (1) $ 69,923 $ 127,561(cid:10)
Audit-Related fees (2) $ -- $ --(cid:10)
Tax fees (3) $ -- $ --(cid:10)
All other fees (4) $ -- $ --(cid:10)
Total $ 69,923 $ 127,561(cid:10)
====== =======(cid:10)
-------------------(cid:10)
(1) Audit fees consist of fees billed for professional services rendered(cid:10)
for the audit of the Company's consolidated annual financial statements(cid:10)
and review of the interim consolidated financial statements included in(cid:10)
quarterly reports and services that are normally provided by Miller(cid:10)
Ellin. in connection with statutory and regulatory filings or(cid:10)
engagements.(cid:10)
(2) Audit-Related fees consist of fees billed for assurance and related(cid:10)
services that are reasonably related to the performance of the audit or(cid:10)
review of the Company's consolidated financial statements and are not(cid:10)
reported under "Audit Fees."(cid:10)
(3) Tax fees consist of fees billed for professional services rendered for(cid:10)
tax compliance, tax advice and tax planning.(cid:10)
(4) All other fees consist of fees for services other than the services(cid:10)
reported above.(cid:10)
PART IV(cid:10)
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES.(cid:10)
(a) Documents filed as part of this Report(cid:10)
(1) The financial statements listed in the Index to Consolidated(cid:10)
Financial Statements are filed as part of this report(cid:10)
(2) The financial statements listed in the Index are filed a part(cid:10)
of this report.(cid:10)
(3) List of Exhibits(cid:10)
See Index to Exhibits in paragraph (b) below.(cid:10)
The Exhibits are filed with or incorporated by reference in this(cid:10)
report.(cid:10)
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.(cid:10)
42(cid:10)
(cid:10)
EXHIBIT NO. DESCRIPTION(cid:10)
3.1(a) 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)
3.1(b) Certificate of Designations, Preferences and Rights of Series A(cid:10)
Preferred Stock, as filed with the Secretary of the State of(cid:10)
Delaware, incorporated by reference to Exhibit 4.5 to the Form 8-K(cid:10)
dated October 6, 2004, and filed with the SEC on October 12, 2004.(cid:10)
3.1(c) Certificate of Retirement with the Secretary of the State of the(cid:10)
Delaware to retire 516,558 shares of the Series A Preferred Stock,(cid:10)
as filed with the Secretary of State of Delaware, incorporated by(cid:10)
reference to Exhibit 3.1 to the Form 8-K dated March 10, 2006, and(cid:10)
filed with the SEC on March 14, 2006.(cid:10)
3.1(d) Certificate of Designations, Preferences and Rights of Series B 8%(cid:10)
Convertible Preferred Stock, as filed with the Secretary of the(cid:10)
State of Delaware, incorporated by reference to Exhibit 3.1 to the(cid:10)
Form 8-K dated March 15, 2006, and filed with the SEC on March 16,(cid:10)
2006.(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 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 specimen certificate for Series A 8% Convertible Preferred(cid:10)
Stock of the Company, incorporated by reference to Exhibit 4.5 to(cid:10)
the Form 8-K, dated October 6, 2004, and filed with the SEC on(cid:10)
October 12, 2004.(cid:10)
4.3 Form of specimen certificate for Series B 8% Convertible Preferred(cid:10)
Stock of the Company, incorporated by reference to Exhibit 4.1 to(cid:10)
the Form 8-K, dated March 15, 2006 and filed with the SEC on March(cid:10)
16, 2006(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 to purchase shares of Common Stock issued to(cid:10)
designees of lender with respect to financing of an equipment loan(cid:10)
incorporated by reference to Exhibit 10.2 to the Form 10-Q for the(cid:10)
period ended June 30, 2004.(cid:10)
4.7 Form of Short Term Warrant to purchase shares of Common Stock(cid:10)
issued to purchasers in the private placement which initially(cid:10)
closed on October 6, 2004 (the "Series A Financing"), incorporated(cid:10)
by reference to Exhibit 4.6 to the Form 8-K, dated October 6,(cid:10)
2004, and filed with the SEC on October 12, 2004.(cid:10)
43(cid:10)
(cid:10)
4.8 Form of Long Term Warrant to purchase shares of Common Stock(cid:10)
issued to purchasers in the Series A Financing, incorporated by(cid:10)
reference to Exhibit 4.7 to the Form 8-K, dated October 6, 2004,(cid:10)
and filed with the SEC on October 12, 2004.(cid:10)
4.9 Form of Warrant to purchase shares of Common Stock issued to the(cid:10)
Placement Agent, in connection with the Series A Financing,(cid:10)
incorporated by reference to Exhibit 4.8 to the Form 8-K, dated(cid:10)
October 6, 2004, and filed with the SEC on October 12, 2004.(cid:10)
4.10 Form of Replacement Warrant to purchase shares of Common Stock in(cid:10)
connection with the offer to holders of Warrants in the Series A(cid:10)
Financing (the "Warrant Exchange"), incorporated by reference as(cid:10)
Exhibit 4.1 to the Form 8-K, dated December 14, 2005, and filed(cid:10)
with the SEC on December 20, 2005.(cid:10)
4.11 Form of Warrant to purchase shares of Common Stock to the(cid:10)
Placement Agent, in connection with the Warrant Exchange, "),(cid:10)
incorporated by reference as Exhibit 4.2 to the Form 8-K, dated(cid:10)
December 14, 2005, and filed with the SEC on December 20, 2005.(cid:10)
4.12 Form of Warrant to purchase shares of Common Stock issued to(cid:10)
purchasers in the private placement which closed on March 15, 2006(cid:10)
(the "Series B Financing"), incorporated by reference to Exhibit(cid:10)
4.2 to the Form 8-K, dated March 15, 2006 and filed with the SEC(cid:10)
on March 16, 2006.(cid:10)
4.13 Form of Warrant to purchase shares of Common Stock issued to(cid:10)
purchasers in the Series B Financing, incorporated by reference to(cid:10)
Exhibit 4.3 to the Form 8-K, dated March 15, 2006 and filed with(cid:10)
the SEC on March 16, 2006.(cid:10)
4.14 Form of Warrant to purchase shares of Common Stock issued to the(cid:10)
Placement Agent, in connection with the Series B Financing,(cid:10)
incorporated by reference to Exhibit 4.4 to the Form 8-K, dated(cid:10)
March 15, 2006 and filed with the SEC on March 16, 2006(cid:10)
10.1 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)
10.2 Form of Confidentiality Agreement (corporate), incorporated by(cid:10)
reference to Exhibit 10.7 to the Form SB-2.(cid:10)
10.3 Form of Confidentiality Agreement (employee), incorporated by(cid:10)
reference to Exhibit 10.8 to the Form SB-2.(cid:10)
10.4 Amended and Restated Employment Agreement dated as of September 2,(cid:10)
2005 between Bernard Berk and the Company, incorporated by(cid:10)
reference to Exhibit 10.1 to Form 8-K, dated September 2, 2005,(cid:10)
and filed with the SEC on September 9, 2005.
10.5 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)
Report on Form 10-Q for three months ended June 30, 2003 (the(cid:10)
"June 30, 2003 10Q Report").(cid:10)
44(cid:10)
(cid:10)
10.6 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)
10.7 Amendment, dated as of September 2, 2005, by and between, the(cid:10)
Company and Bernard Berk, to the Stock Option Agreement, dated as(cid:10)
of July 23, 2003, incorporated by reference to Exhibit 10.2 to(cid:10)
Form 8-K, dated September 2, 2005, and filed with the SEC on(cid:10)
September 9, 2005.(cid:10)
10.8 Stock Option Agreement, dated as of September 2, 2005, by and(cid:10)
between the Company and Bernard Berk, incorporated by reference to(cid:10)
Exhibit 10.3 to Form 8-K, dated September 2, 2005, and filed with(cid:10)
the SEC on September 9, 2005.(cid:10)
10.9 Stock Option Agreement, dated as of September 2, 2005, by and(cid:10)
between the Company and Bernard Berk, incorporated by reference to(cid:10)
Exhibit 10.4 to Form 8-K, dated September 2, 2005, and filed with(cid:10)
the SEC on September 9, 2005.(cid:10)
10.10 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, by and among Elite Laboratories, Inc.,(cid:10)
a Delaware corporation and wholly-owned subsidiary of the Company(cid:10)
("Elite Labs"), Harris Pharmaceuticals, Inc. and Tish Technologies(cid:10)
LLC, incorporated by reference as Exhibit 10.1 to the Form 8-K,(cid:10)
dated March 30, 2005, originally filed with the SEC on April 5,(cid:10)
2005, as amended on the Form 8-K/A filed May 10, 2005, as further(cid:10)
amended by the Form 8-K/A filed June 13, 2005, as further amended(cid:10)
by the Form 8-K/A filed July 20, 2005, as further amended by the(cid:10)
Form 8-K/A filed August 23, 2005, as further amended by the Form(cid:10)
8-K/A filed September 27, 2005, as further amended by the Form(cid:10)
8-K/A filed December 7, 2005 (Confidential Treatment granted 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, between the Company and IntelliPharmaceutics,(cid:10)
Corp., incorporated by reference as Exhibit 10.1 to the Form 8-K,(cid:10)
dated June 21, 2005 and originally filed with the SEC on June 27,(cid:10)
2005, as amended on the Form 8-K/A filed September 7, 2005, as(cid:10)
further amended by the Form 8-K/A filed December 7, 2005(cid:10)
(Confidential Treatment granted with respect to portions of the(cid:10)
Agreement).(cid:10)
10.13 Product Development and License Agreement, dated as of June 22,(cid:10)
2005, between the Company and Pliva, Inc., incorporated by(cid:10)
reference as Exhibit 10.1 to the Form 8-K, dated June 22, 2005 and(cid:10)
originally filed with the SEC on June 28, 2005, as amended on the(cid:10)
Form 8-K/A filed September 6, 2005, as further amended by the Form(cid:10)
8-K/A filed December 7, 2005 (Confidential Treatment granted with(cid:10)
respect to portions of the Agreement).(cid:10)
10.14 Agreement, dated December 12, 2005, by and among the Company,(cid:10)
Elite Labs, and IntelliPharmaCeutics Corp., incorporated by(cid:10)
reference as Exhibit 10.1 to the Form 8-K, dated(cid:10)
45(cid:10)
(cid:10)
December 12, 2005, and originally filed with the SEC on December(cid:10)
16, 2005, as amended by the Form 8-K/A filed March 7, 2006(cid:10)
(Confidential Treatment granted with respect to portions of the(cid:10)
Agreement).(cid:10)
10.15 Product Development and Commercialization Agreement, dated January(cid:10)
10, 2006, by and among the Company, Elite Laboratories, Inc., its(cid:10)
wholly-owned subsidiary and Orit Laboratories LLC, incorporated by(cid:10)
reference as Exhibit 10.1 to the Form 8-K, dated January 10, 2006,(cid:10)
and filed with the SEC on January 17, 2006. (Confidential(cid:10)
Treatment granted with respect to portions of the Agreement).(cid:10)
10.16 Loan Agreement, dated as of August 15, 2005, between New Jersey(cid:10)
Economic Development Authority ("NJEDA") and the Company,(cid:10)
incorporated by reference to Exhibit 10.1 to the Form 8-K, dated(cid:10)
August 31, 2005 and filed with the SEC on September 6, 2005.(cid:10)
10.17 Series A Note in the aggregate principal amount of $3,660,000.00(cid:10)
payable to the order of the NJEDA, incorporated by reference to(cid:10)
Exhibit 10.2 to the Form 8-K, dated August 31, 2005 and filed with(cid:10)
the SEC on September 6, 2005.(cid:10)
10.18 Series B Note in the aggregate principal amount of $495,000.00(cid:10)
payable to the order of the NJEDA, incorporated by reference to(cid:10)
Exhibit 10.3 to the Form 8-K, dated August 31, 2005 and filed with(cid:10)
the SEC on September 6, 2005.(cid:10)
10.19 Mortgage from the Company to the NJEDA, incorporated by reference(cid:10)
to Exhibit 10.4 to the Form 8-K, dated August 31, 2005 and filed(cid:10)
with the SEC on September 6, 2005.(cid:10)
10.20 Indenture between NJEDA and the Bank of New York as Trustee, dated(cid:10)
as of August 15,2005, incorporated by reference to Exhibit 10.5 to(cid:10)
the Form 8-K, dated August 31, 2005 and filed with the SEC on(cid:10)
September 6, 2005.(cid:10)
10.21 Form of Warrant Exercise Agreement, between the Registrant and the(cid:10)
signatories thereto, incorporated by reference to Exhibit 10.1 to(cid:10)
the Form 8-K, dated December 14, 2005 and filed with the SEC on(cid:10)
December 20, 2005(cid:10)
10.22 Form of Registration Rights Agreement, between the Registrant and(cid:10)
signatories thereto, incorporated by reference to Exhibit 10.2 to(cid:10)
the Form 8-K, dated December 14, 2005 and filed with the SEC on(cid:10)
December 20, 2005.(cid:10)
10.23 Form of Securities Purchase Agreement, between the Registrant and(cid:10)
the signatories thereto, incorporated by reference to Exhibit 10.1(cid:10)
to the Form 8-K, dated March 15, 2006 and filed with the SEC on(cid:10)
March 16, 2006.(cid:10)
10.24 Form of Registration Rights Agreement, between the Registrant and(cid:10)
the signatories thereto, incorporated by reference to Exhibit 10.1(cid:10)
to the Form 8-K, dated March 15, 2006 and filed with the SEC on(cid:10)
March 16, 2006.(cid:10)
10.21 Form of Placement Agent Agreement, the Company and Indigo(cid:10)
Securities, LLC, incorporated by reference as Exhibit 10.3 to the(cid:10)
Form 8-K dated March 15, 2006, and filed with the SEC on March 16,(cid:10)
2006.(cid:10)
46(cid:10)
(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(cid:10)
with this Annual Report on Form 10-K and are not deemed filed with the(cid:10)
Securities and Exchange Commission and are not incorporated by reference in any(cid:10)
filing of Elite Pharmaceuticals, Inc. under the Securities Act of 1933 or the(cid:10)
Securities Exchange Act of 1934, whether made before or after the date hereof(cid:10)
and irrespective of any general incorporation language in any such filings.(cid:10)
(c) Financial statements required by Regulation S-X which are excluded from(cid:10)
the annual report to shareholders by Rule 14a-3(b).(cid:10)
47(cid:10)
(cid:10)
SIGNATURES(cid:10)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange(cid:10)
Act of 1934, the registrant has duly caused this report to be signed on its(cid:10)
behalf by the undersigned, thereunto duly authorized.(cid:10)
ELITE PHARMACEUTICALS, INC.(cid:10)
By: /s/ Bernard Berk(cid:10)
-------------------------------(cid:10)
Bernard Berk(cid:10)
Chief Executive Officer(cid:10)
Dated: June 29, 2006(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)
/s/ Bernard Berk Chief Executive Officer June 29, 2006(cid:10)
-------------------------- (Principal Executive(cid:10)
Bernard Berk Officer)(cid:10)
/s/ Mark Gittelman Chief Financial Officer June 29, 2006(cid:10)
-------------------------- and Treasurer (Principal(cid:10)
Mark I. Gittelman Financial and Accounting(cid:10)
Officer)(cid:10)
/s/ Edward Neugeboren Director June 29, 2006(cid:10)
--------------------------(cid:10)
Edward Neugeboren(cid:10)
/s/ Barry Dash Director June 29, 2006(cid:10)
--------------------------(cid:10)
Barry Dash(cid:10)
/s/ Melvin Van Woert Director June 29, 2006(cid:10)
--------------------------(cid:10)
Melvin Van Woert(cid:10)
48(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
FOR THE YEARS ENDED MARCH 31, 2006, 2005 AND 2004(cid:10)
CONTENTS(cid:10)
PAGE(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 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, 2006 and(cid:10)
2005, and the related consolidated statements of operations, stockholders'(cid:10)
equity and cash flows for the years ended March 31, 2006, 2005 and 2004. These(cid:10)
financial statements are the responsibility of the Company's management. Our(cid:10)
responsibility is to express an opinion on these financial statements based on(cid:10)
our 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, 2006 and 2005, and the(cid:10)
results of their operations and their cash flows for each of the three years(cid:10)
ended March 31, 2006, 2005 and 2004 in conformity with accounting principles(cid:10)
generally accepted in the United States of America.(cid:10)
/s/ MILLER, ELLIN & COMPANY, LLP(cid:10)
CERTIFIED PUBLIC ACCOUNTANTS(cid:10)
New York, New York(cid:10)
June 5, 2006(cid:10)
F-2(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2006 AND 2005(cid:10)
ASSETS(cid:10)
(cid:10)
(cid:10)
2006 2005(cid:10)
---- ----(cid:10)
(cid:10)
CURRENT ASSETS:(cid:10)
Cash and cash equivalents $ 8,919,354 $ 3,902,003(cid:10)
Accounts receivable, net of allowance for doubtful accounts of(cid:10)
$153,250 as of March 31, 2006 and 2005 --- 142,113(cid:10)
Current portion of restricted cash - capital project fund 1,173,896 113,425(cid:10)
Prepaid expenses and other current assets 470,633 346,905(cid:10)
------------ ------------(cid:10)
Total current assets 10,563,883 4,504,446(cid:10)
PROPERTY AND EQUIPMENT- net of accumulated(cid:10)
depreciation and amortization 4,308,969 4,194,437(cid:10)
INTANGIBLE ASSETS - net of accumulated amortization 59,457 81,184(cid:10)
OTHER ASSETS:(cid:10)
Deferred charges --- 41,013(cid:10)
Security deposit 6,980 ---(cid:10)
Restricted cash - debt service 415,500 300,000(cid:10)
EDA bond offering costs, net of accumulated(cid:10)
amortization of $7,000 and $73,468, respectively. 347,452 124,212(cid:10)
------------ ------------(cid:10)
Total other assets 769,932 465,225(cid:10)
------------ ------------(cid:10)
TOTAL ASSETS $ 15,702,241 $ 9,245,292(cid:10)
============ ============(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-3(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED BALANCE SHEETS(cid:10)
MARCH 31, 2006 AND 2005(cid:10)
(CONTINUED)(cid:10)
LIABILITIES AND STOCKHOLDERS' EQUITY(cid:10)
(cid:10)
(cid:10)
2006 2005(cid:10)
---- ----(cid:10)
(cid:10)
CURRENT LIABILITIES:(cid:10)
Current portion - note payable $ --- $ 127,946(cid:10)
Current portion of EDA bonds 175,000 165,000(cid:10)
Accounts payable and accrued expenses 1,740,263(cid:10)
882,917(cid:10)
Dividends payable 33,333 ---(cid:10)
------------ ------------(cid:10)
Total current liabilities 1,948,596 1,175,863(cid:10)
------------ ------------(cid:10)
LONG TERM DEBT:(cid:10)
Note payable - net of current portion --- 187,128(cid:10)
EDA bonds - net of current portion 3,980,000 2,180,000(cid:10)
------------ ------------(cid:10)
Total long-term liabilities 3,980,000 2,367,128(cid:10)
------------ ------------(cid:10)
Total liabilities 5,928,596 3,542,991(cid:10)
------------ ------------(cid:10)
COMMITMENTS AND CONTINGENCIES(cid:10)
STOCKHOLDERS' EQUITY:(cid:10)
Preferred stock - $.01 par value;(cid:10)
Authorized - 4,483,442 (originally 5,000,000 shares of which 516,558(cid:10)
shares of Series A Preferred retired) and 0 shares at March 31, 2006(cid:10)
and 2005, respectively Authorized - 10,000 Convertible Series B(cid:10)
Preferred Stock - issued and outstanding - 10,000 shares and 0(cid:10)
shares, respectively 100 ---(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 - 19,190,159 and 18,022,183(cid:10)
shares in 2006 and 2005, respectively 191,902 180,222(cid:10)
Additional paid-in capital 60,105,107 47,006,379(cid:10)
Accumulated deficit (50,216,623) (41,177,459)(cid:10)
----------- ------------(cid:10)
10,080,486 6,009,142(cid:10)
Treasury stock, at cost (100,000 shares) (306,841) (306,841)(cid:10)
------------ ------------(cid:10)
Total stockholders' equity 9,773,645 5,702,301(cid:10)
------------ ------------(cid:10)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,702,241 $ 9,245,292(cid:10)
============ ============(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-4(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF OPERATIONS(cid:10)
(cid:10)
(cid:10)
YEARS ENDED MARCH 31,(cid:10)
-------------------------------------------------(cid:10)
2006 2005 2004(cid:10)
---- ---- ----(cid:10)
(cid:10)
REVENUES:(cid:10)
Licensing fees $ --- $ 150,000 $ ---(cid:10)
Manufacturing fees 494,231 125,739 ---(cid:10)
Royalties 56,466 24,291 ---(cid:10)
Research and development --- --- 258,250(cid:10)
Consulting and test fees --- 1,450 ---(cid:10)
----------- ----------- -----------(cid:10)
Total revenues 550,697 301,480 258,250(cid:10)
----------- ----------- -----------(cid:10)
COST OF OPERATIONS:(cid:10)
Research and development 4,343,890 2,698,641 2,075,074(cid:10)
General and administrative 1,726,626 2,159,670 2,549,846(cid:10)
Depreciation and amortization 486,687 356,438 332,836(cid:10)
----------- ----------- -----------(cid:10)
6,557,203 5,214,749 4,957,756(cid:10)
----------- ----------- -----------(cid:10)
LOSS FROM OPERATIONS (6,006,506) (4,913,269) (4,699,506)(cid:10)
----------- ----------- -----------(cid:10)
OTHER INCOME (EXPENSES):(cid:10)
Interest income 90,862 39,932 23,765(cid:10)
Litigation settlement --- --- 150,000(cid:10)
Sale of New Jersey tax losses 219,121 205,792 151,027(cid:10)
Interest expense (283,464) (229,495) (211,595)(cid:10)
Compensation satisfied by issuance of(cid:10)
stock options and warrants (902,927) (1,008,850) (1,754,584)(cid:10)
Expenses relating to warrant exchange offer --- --- (172,324)(cid:10)
----------- ----------- -----------(cid:10)
(876,408) (992,621) (1,813,711)(cid:10)
----------- ----------- -----------(cid:10)
LOSS BEFORE PROVISION FOR INCOME(cid:10)
TAXES (6,882,914) (5,905,890) (6,513,217)(cid:10)
PROVISION FOR INCOME TAXES(cid:10)
1,000 1,000 1,000(cid:10)
----------- ----------- -----------(cid:10)
NET LOSS (6,883,914) (5,906,890) (6,514,217)(cid:10)
Preferred Stock Dividends (2,155,250) (165,418) ---(cid:10)
----------- ----------- -----------(cid:10)
NET LOSS ATTRIBUTABLE TO COMMON(cid:10)
SHAREHOLDERS $(9,039,164) $(6,072,308) $(6,514,217)(cid:10)
=========== =========== ===========(cid:10)
BASIC AND DILUTED LOSS PER COMMON(cid:10)
SHARE $ (.49) $ (0.47) $ (0.58)(cid:10)
=========== =========== ===========(cid:10)
WEIGHTED AVERAGE NUMBER OF(cid:10)
COMMON SHARES OUTSTANDING 18,463,514 12,869,924 11,168,618(cid:10)
=========== =========== ===========(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-5(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-6(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10)
(cid:10)
(cid:10)
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK(cid:10)
--------------- ------------ PAID-IN -------------- ACCUMULATED STOCKHOLDERS'(cid:10)
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY(cid:10)
------ ------ ------ ------ ---------- ------ ------ ------- ------(cid:10)
(cid:10)
BALANCES AT(cid:10)
APRIL 1, 2004 --- $ --- 12,204,423 $ 122,044 $ 39,338,140 (100,000) $(306,841) $ (35,105,151) $4,048,192(cid:10)
Net proceeds from(cid:10)
issuance of Series A(cid:10)
8% Convertible(cid:10)
Preferred Stock(cid:10)
and warrants 516,558 5,166 --- --- 5,786,436 --- --- --- 5,791,602(cid:10)
Issuance of Common(cid:10)
Stock for(cid:10)
consulting services --- --- 26,500 265 58,035 --- --- --- 58,300(cid:10)
Issuance of Common(cid:10)
Stock upon conversion(cid:10)
of Series A 8%(cid:10)
Convertible Preferred(cid:10)
Stock (516,558) (5,166) 5,165,580 51,656 (46,490) --- --- --- ---(cid:10)
Non-cash compensation(cid:10)
satisfied by(cid:10)
the issuance of(cid:10)
stock, options(cid:10)
and warrants 1,008,850 1,008,850(cid:10)
Common Stock issued as(cid:10)
dividend on(cid:10)
Series A 8%(cid:10)
Convertible Preferred(cid:10)
Stock --- --- 99,936 1,000 164,418 --- --- (165,418) ---(cid:10)
Exercise of stock(cid:10)
options and(cid:10)
warrants --- --- 525,744 5,257 579,250 --- --- --- 584,507(cid:10)
Proceeds - Short(cid:10)
swing profits --- --- --- --- 117,740 --- --- --- 117,740(cid:10)
Net loss --- --- --- --- --- --- --- (5,906,890) (5,906,890)(cid:10)
----- -------- ---------- --------- ------------ --------- ---------- ------------- ----------(cid:10)
BALANCES AT(cid:10)
MARCH 31, 2005 --- $ --- 18,022,183 $ 180,222 $ 47,006,379 (100,000) $(306,841) $(41,177,459) $5,702,301(cid:10)
===== ======== ========== ========= ============ ========= ========== ============= ==========(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-7(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-8(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
CONSOLIDATED STATEMENTS OF CASH FLOWS(cid:10)
(cid:10)
(cid:10)
YEARS ENDED MARCH 31,(cid:10)
---------------------------------------------(cid:10)
2006 2005 2004(cid:10)
---- ---- ----(cid:10)
(cid:10)
CASH FLOWS FROM OPERATING ACTIVITIES:(cid:10)
Net loss $(6,883,914) $(5,906,890) $(6,514,217)(cid:10)
Adjustments to reconcile net loss to cash(cid:10)
used in operating activities:(cid:10)
Provision for doubtful accounts --- 153,250 ---(cid:10)
Depreciation and amortization 486,687 356,438 332,836(cid:10)
Non-cash compensation satisfied by issuance of stock,(cid:10)
options and warrants 902,927 1,067,150 1,926,908(cid:10)
Changes in assets and liabilities:(cid:10)
Accounts receivable 142,113 (142,113) (148,569)(cid:10)
Prepaid expenses and other current assets (123,728) (209,013) (5,800)(cid:10)
Security Deposit (6,980) --- ---(cid:10)
Accounts payable, accrued expenses and other current 857,346 (202,325) 750,521(cid:10)
----------- ----------- -----------(cid:10)
NET CASH USED IN OPERATING ACTIVITIES (4,625,549) (4,883,503) (3,658,321)(cid:10)
----------- ----------- -----------(cid:10)
CASH FLOWS FROM INVESTING ACTIVITIES:(cid:10)
Purchase of patent --- --- (16,696)(cid:10)
Deposits to restricted cash (1,175,971) --- (79,615)(cid:10)
Release of restricted cash --- 315,570 ---(cid:10)
Payment of deposit for manufacturing equipment --- --- (398,580)(cid:10)
Purchases of property and equipment (448,280) (27,843) ---(cid:10)
----------- ----------- -----------(cid:10)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,624,251) 287,727 (494,891)(cid:10)
----------- ----------- -----------(cid:10)
CASH FLOWS FROM FINANCING ACTIVITIES:(cid:10)
Principal bank note payments --- (225,000) (75,000)(cid:10)
Proceeds from issuance of Common Stock and warrants --- --- 3,209,000(cid:10)
Principal repayments of NJEDA bonds (2,345,000) (150,000) (140,000)(cid:10)
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)
Proceeds - NJEDA Tax Exempt Bonds 4,155,000 --- ---(cid:10)
Payment - NJEDA Bond Offering Costs (354,452) --- ---(cid:10)
Proceeds from issuance of Series B 8% Convertible Preferred(cid:10)
stock and warrants 8,792,669 --- ---(cid:10)
Principal equipment note payments (315,074) (84,926) ---(cid:10)
Prepaid interest 41,013 (41,013) ---(cid:10)
Proceeds from exercise of stock options 40,000 100,000 ---(cid:10)
Proceeds from exercise of stock warrants 1,252,995 484,507 ---(cid:10)
Proceeds from short swing profits --- 117,740 ---(cid:10)
----------- ----------- -----------(cid:10)
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,267,151 6,392,910 2,994,000(cid:10)
----------- ----------- -----------(cid:10)
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,017,351 1,797,134 (1,159,212)(cid:10)
CASH AND CASH EQUIVALENTS - beginning of period 3,902,003 2,104,869 3,264,081(cid:10)
----------- ----------- -----------(cid:10)
CASH AND CASH EQUIVALENTS - end of period $ 8,919,354 $ 3,902,003 $ 2,104,869(cid:10)
=========== =========== ===========(cid:10)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:(cid:10)
Cash paid for interest $ 275,071 $ 230,464 $ 214,199(cid:10)
Cash received for income taxes (218,121) (204,792) (150,027)(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 ---(cid:10)
Dividends accrued on preferred stock 33,333 --- ---(cid:10)
Beneficial conversion 2,121,917 --- ---(cid:10)
(cid:10)
The accompanying notes are an integral part of the(cid:10)
consolidated financial statements.(cid:10)
F-9(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(cid:10)
PRINCIPLES OF CONSOLIDATION(cid:10)
The consolidated financial statements include the accounts of(cid:10)
Elite Pharmaceuticals, Inc. and its wholly-owned subsidiaries,(cid:10)
(the "Company"). All significant intercompany accounts and(cid:10)
transactions have been eliminated in consolidation.(cid:10)
NATURE OF BUSINESS(cid:10)
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October(cid:10)
1, 1997 under the laws of the State of Delaware, and its(cid:10)
wholly-owned subsidiary Elite Laboratories, Inc. ("Elite Labs")(cid:10)
was incorporated on August 23, 1990 under the laws of the State(cid:10)
of Delaware. Elite Labs engages primarily in researching,(cid:10)
developing and licensing proprietary controlled release drug(cid:10)
delivery systems and products. The Company is also equipped to(cid:10)
manufacture controlled release products on a contract basis for(cid:10)
third parties and itself if and when the products are approved;(cid:10)
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(cid:10)
Food and Drug Administration approval, and, thereafter,(cid:10)
commercially exploiting generic and new controlled-release(cid:10)
pharmaceutical products. The Company also engages in contract(cid:10)
research and development on behalf of other pharmaceutical(cid:10)
companies.(cid:10)
CASH AND CASH EQUIVALENTS(cid:10)
The Company considers all highly liquid investments with an(cid:10)
original maturity of three months or less to be cash equivalents.(cid:10)
Cash and cash equivalents consist of cash on deposit with banks(cid:10)
and money market instruments. The Company places its cash and(cid:10)
cash equivalents with high-quality, U.S. financial institutions(cid:10)
and, to date, has not experienced losses on any of its balances.(cid:10)
LONG-LIVED ASSETS(cid:10)
The Company periodically evaluates the fair value of long-lived(cid:10)
assets, which include property and equipment and intangibles,(cid:10)
whenever events or changes in circumstances indicate that its(cid:10)
carrying amounts may not be recoverable. Such conditions may(cid:10)
include an economic downturn or a change in the assessment of(cid:10)
future operations. A charge for impairment is recognized whenever(cid:10)
the carrying amount of a long-lived asset exceeds its fair value.(cid:10)
Management has determined that no impairment of long-lived assets(cid:10)
has occurred.(cid:10)
F-10(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
LONG-LIVED ASSETS (CONTINUED)(cid:10)
Property and equipment are stated at cost. Depreciation is(cid:10)
provided on the straight-line method based on the estimated(cid:10)
useful lives of the respective assets which range from five to(cid:10)
forty years. Major repairs or improvements are capitalized. Minor(cid:10)
replacements and maintenance and repairs which do not improve or(cid:10)
extend asset lives are expensed currently.(cid:10)
Upon retirement or other disposition of assets, the cost and(cid:10)
related accumulated depreciation are removed from the accounts(cid:10)
and the resulting gain or loss, if any, is recognized in income.(cid:10)
Costs incurred to acquire intangible assets such as for the(cid:10)
application of patents and trademarks are capitalized and(cid:10)
amortized on the straight-line method, based on their estimated(cid:10)
useful lives ranging from five to fifteen years, commencing upon(cid:10)
approval of the patent and trademarks. Such costs are charged to(cid:10)
expense if the patent or trademark is unsuccessful.(cid:10)
RESEARCH AND DEVELOPMENT(cid:10)
Research and development expenditures are charged to expense as(cid:10)
incurred.(cid:10)
CONCENTRATION OF CREDIT RISK(cid:10)
The Company derives substantially all of its revenues from(cid:10)
licensing and research and development agreements with other(cid:10)
pharmaceutical companies.(cid:10)
The Company maintains cash balances, which, at times, may exceed(cid:10)
the amounts insured by the Federal Deposit Insurance Corp.(cid:10)
Management does not believe that there is any significant risk of(cid:10)
losses.(cid:10)
The Company in the normal course of business extends credit to(cid:10)
its customers based on contract terms and performs ongoing credit(cid:10)
evaluations. An allowance for doubtful accounts was established(cid:10)
based on historical collection experience and current credit(cid:10)
evaluations at March 31, 2006 and 2005, due to uncertainty of(cid:10)
collectibility. Amounts are written off when payment is not(cid:10)
received after exhaustive collection efforts.(cid:10)
F-11(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
USE OF ESTIMATES(cid:10)
The preparation of financial statements in conformity with(cid:10)
generally accepted accounting principles requires management to(cid:10)
make estimates and assumptions that affect the reported amounts(cid:10)
of assets and liabilities and disclosure of contingent assets and(cid:10)
liabilities at the date of the financial statements and the(cid:10)
reported amounts of revenues and expenses during the reporting(cid:10)
period. Actual results could differ from those estimates.(cid:10)
Significant estimates made by management include, but are not(cid:10)
limited to, the recognition of revenue, the amount of the(cid:10)
allowance for doubtful accounts receivable and the fair value of(cid:10)
intangible assets and stock-based awards.(cid:10)
INCOME TAXES(cid:10)
The Company uses the liability method for reporting income taxes,(cid:10)
under which current and deferred tax liabilities and assets are(cid:10)
recorded in accordance with enacted tax laws and rates. Deferred(cid:10)
income taxes reflect the net tax effects of temporary differences(cid:10)
between the carrying amounts of assets and liabilities for(cid:10)
financial reporting purposes and the amounts used for income tax(cid:10)
purposes. Under the liability method, the amounts of deferred tax(cid:10)
liabilities and assets at the end of each period are determined(cid:10)
using the tax rate expected to be in effect when taxes are(cid:10)
actually paid or recovered. Further tax benefits are recognized(cid:10)
when it is more likely than not that such benefits will be(cid:10)
realized. Valuation allowances are provided to reduce deferred(cid:10)
tax assets to the amount considered likely to be realized.(cid:10)
EARNINGS PER COMMON SHARE(cid:10)
Basic earnings per common share is calculated by dividing net(cid:10)
earnings by the weighted average number of shares outstanding(cid:10)
during each period presented. Diluted earnings per share is(cid:10)
calculated by dividing earnings by the weighted average number of(cid:10)
shares and common stock equivalents. The Company's common stock(cid:10)
equivalents, consist of options, warrants and convertible(cid:10)
securities.(cid:10)
REVENUE RECOGNITION(cid:10)
Revenues derived from providing research and development services(cid:10)
under contracts with other pharmaceutical companies are(cid:10)
recognized when earned. These contracts provide for(cid:10)
non-refundable upfront and milestone payments. Because no(cid:10)
discrete earnings event has occurred when the upfront payment is(cid:10)
received, that amount is deferred until the achievement of a(cid:10)
defined milestone. Each nonrefundable milestone payment is(cid:10)
recognized as revenue when the performance criteria for that(cid:10)
milestone have been met. Under each contract, the milestones are(cid:10)
defined, substantive effort is required to achieve the milestone,(cid:10)
the 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)
F-12(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)(cid:10)
REVENUE RECOGNITION (CONTINUED)(cid:10)
Revenues earned by licensing certain pharmaceutical products(cid:10)
developed by Elite are recognized at the beginning of a license(cid:10)
term when Elite's customer has legal right to the use of the(cid:10)
product. To date, no revenues have been earned by licensing(cid:10)
products and there are no continuing obligations under any(cid:10)
licensing agreements.(cid:10)
Revenues derived from royalties to the extent that they cannot be(cid:10)
reasonably estimated are recognized when the payment is received.(cid:10)
Revenues earned under manufacturing agreements with other(cid:10)
pharmaceutical companies are recognized when product is shipped.(cid:10)
TREASURY STOCK(cid:10)
The Company records common shares purchased and held in treasury(cid:10)
at cost.(cid:10)
FAIR VALUE OF FINANCIAL INSTRUMENTS(cid:10)
The carrying amounts of current assets and liabilities(cid:10)
approximate fair value due to the short-term nature of these(cid:10)
instruments. The carrying amounts of noncurrent assets are(cid:10)
reasonable estimates of their fair values based on management's(cid:10)
evaluation of future cash flows. The long-term liabilities are(cid:10)
carried at amounts that approximate fair value based on borrowing(cid:10)
rates available to the Company for obligations with similar(cid:10)
terms, degrees of risk and remaining maturities.(cid:10)
RECLASSIFICATIONS(cid:10)
Certain accounts and amounts in the 2004 and 2005 financial(cid:10)
statements have been reclassified in order to conform with the(cid:10)
2006 presentation. These reclassifications have no effect on net(cid:10)
income.(cid:10)
F-13(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS(cid:10)
The Company reported net losses of $6,883,914, $5,906,890 and(cid:10)
$6,514,217 for the fiscal years ended March 31, 2006, 2005 and(cid:10)
2004, respectively. At March 31, 2006, the Company had an(cid:10)
accumulated deficit of approximately $48.1 million, consolidated(cid:10)
assets of approximately $15.7 million, stockholders' equity of(cid:10)
approximately $9.8 million, and working capital of approximately(cid:10)
$8.6 million. The Company has not generated any significant(cid:10)
revenue to date. During 2006, the Company raised $8,792,669 of(cid:10)
net proceeds from the sale of Series B Preferred Stock.(cid:10)
Management plans to use these net proceeds over the next twelve(cid:10)
to twenty-four months to fund its research and development(cid:10)
activities.(cid:10)
The Company's strategy is to continue to be engaged in the(cid:10)
development and manufacturing of oral controlled-release(cid:10)
products. It will continue to develop generic versions of(cid:10)
controlled release drug products with high barriers to entry and(cid:10)
assist partner companies in the life cycle management of(cid:10)
products to improve off patent drug products. The Company has(cid:10)
one product currently being sold commercially and a pipeline of(cid:10)
eight products under development.(cid:10)
The Company retained an investment banking firm to 2006 to(cid:10)
assist the Company in connection with potential acquisitions,(cid:10)
strategic alliances with other pharmaceutical companies, advice(cid:10)
to future financings and introductions to key parties in capital(cid:10)
markets.(cid:10)
As of March 31, 2006, the Company's principal source of(cid:10)
liquidity was approximately $8,900,000 of cash and cash(cid:10)
equivalents. The Company may also receive funds through the(cid:10)
exercise of outstanding stock options and warrants in addition(cid:10)
to funds that may be generated from the potential sale of New(cid:10)
Jersey tax losses. There can be no assurance that proceeds from(cid:10)
the sale of the tax losses and from the exercise, if any, of(cid:10)
outstanding warrants or options will be material.(cid:10)
There is no assurance that the Company's business strategy will(cid:10)
be successfully implemented, however with the Company's existing(cid:10)
working capital levels, it will be able to continue operations(cid:10)
at least through the end of fiscal 2007.(cid:10)
See "Note 8 - Stockholders Equity (Deficit)" for description of(cid:10)
Series B Convertible Preferred Stock.(cid:10)
F-14(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 3- PROPERTY AND EQUIPMENT(cid:10)
Property and equipment at March 31, 2006 and 2005 consists of the(cid:10)
following:(cid:10)
(cid:10)
(cid:10)
2006 2005(cid:10)
---- ----(cid:10)
(cid:10)
Laboratory manufacturing, and warehouse equipment $3,763,163 $3,566,674(cid:10)
Office equipment 32,981 32,981(cid:10)
Furniture and fixtures 51,781 51,781(cid:10)
Land, building and improvements 2,349,459 2,097,668(cid:10)
Equipment under capital lease 168,179 168,179(cid:10)
---------- ----------(cid:10)
6,365,563 5,917,283(cid:10)
Less: Accumulated depreciation and amortization 2,056,594 1,722,846(cid:10)
---------- ----------(cid:10)
$4,308,969 $4,194,437(cid:10)
========== ==========(cid:10)
(cid:10)
Depreciation and amortization expense amounted to $333,748,(cid:10)
$300,303 and $278,348 for the years ended March 31, 2006, 2005(cid:10)
and 2004, respectively.(cid:10)
NOTE 4 - INTANGIBLE ASSETS(cid:10)
Intangible assets at March 31, 2006 and 2005, consist of the(cid:10)
following:(cid:10)
(cid:10)
Amortization of intangible assets amounted to $21,727, $21,012(cid:10)
and $19,342 for the years ended March 31, 2006, 2005 and 2004,(cid:10)
respectively.(cid:10)
F-15(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 5 - LONG TERM DEBT(cid:10)
On September 2, 1999, the Company completed the issuance of tax(cid:10)
exempt bonds by the New Jersey Economic Development Authority(cid:10)
("NJEDA" or the "Authority"). The aggregate proceeds from the(cid:10)
issuance of the fifteen year term bonds was $3,000,000. Interest(cid:10)
on the bonds accrues at 7.75% per annum. A portion of the(cid:10)
proceeds were used by the Company to refinance its land and(cid:10)
building, and the remaining proceeds were intended to be used for(cid:10)
the purchase of manufacturing equipment and building(cid:10)
improvements.(cid:10)
On August 31, 2005, the Company successfully completed a(cid:10)
refinancing of the 1999 bond issue through the issuance of new(cid:10)
tax-exempt bonds (the "Bonds"). The refinancing involved(cid:10)
borrowing $4,155,000, evidenced by a 6.5% Series A Note in the(cid:10)
principal amount of $3,660,000 maturing on September 1, 2030 and(cid:10)
a 9% Series B Note in the principal amount of $495,000 maturing(cid:10)
on September 1, 2012. The net proceeds, after payment of issuance(cid:10)
costs, were or will be used (i) to redeem the outstanding(cid:10)
tax-exempt Bonds originally issued by the Authority on September(cid:10)
2, 1999, (ii) refinance other equipment financing and (iii) for(cid:10)
the purchase of certain equipment to be used in the manufacture(cid:10)
of pharmaceutical products.(cid:10)
Interest is payable semiannually on March 1 and September 1 of(cid:10)
each year. The Bonds are collateralized by a first lien on the(cid:10)
Company's facility and equipment acquired with the proceeds of(cid:10)
the original and refinanced Bonds. The related Indenture requires(cid:10)
the maintenance of a $415,500 Debt Service Reserve Fund(cid:10)
consisting of $366,000 from the Series A Notes proceeds and(cid:10)
$49,500 from the Series B Notes proceeds. The Debt Service(cid:10)
Reserve is maintained in restricted cash accounts that are(cid:10)
classified in Other Assets. $1,274,311 of the proceeds has been(cid:10)
deposited in a short-term restricted cash account to fund the(cid:10)
future purchase of manufacturing equipment and development of the(cid:10)
Company's facility.(cid:10)
Bond issue costs of $354,000 were paid from the bond proceeds and(cid:10)
are being amortized over the life of the bonds. Amortization of(cid:10)
bond financing costs amounted to $7,000 for the year ended March(cid:10)
31, 2006.(cid:10)
Bond issue costs of the 1999 bonds were being amortized over the(cid:10)
term of those bonds. Such amortization amounted to $5,500,(cid:10)
$13,190 and $13,190 in the years ending March 31, 2006, 2005 and(cid:10)
2004, respectively. Upon the refinancing the remaining(cid:10)
unamortized issue costs of $118,712 were charged to expenses.(cid:10)
F-16(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 5 - LONG TERM DEBT (CONTINUED)(cid:10)
As of March 31, 2006, $115,772 has been requisitioned and been(cid:10)
deposited into operating accounts to fund the purchase of(cid:10)
equipment and to upgrade and manufacturing facility.(cid:10)
Bond financings consisted of the following at March 31:(cid:10)
(cid:10)
(cid:10)
2006 2005(cid:10)
---- ----(cid:10)
(cid:10)
Refinanced NJEDA Bonds $4,155,000 $ ---(cid:10)
EDA Bonds --- 2,345,000(cid:10)
---------- ----------(cid:10)
4,155,000 2,345,000(cid:10)
Current portion (175,000) (165,000)(cid:10)
---------- ----------(cid:10)
Long term portion, net of current maturities $3,980,000 $2,180,000(cid:10)
========== ==========(cid:10)
(cid:10)
Maturities of Bonds for the next five years follow:(cid:10)
YEAR ENDING MARCH 31, AMOUNT(cid:10)
--------------------- ------(cid:10)
2007 $ 175,000(cid:10)
2008 185,000(cid:10)
2009 200,000(cid:10)
2010 210,000(cid:10)
2011 225,000(cid:10)
Thereafter 3,160,000(cid:10)
----------(cid:10)
$4,155,000(cid:10)
==========(cid:10)
In 2004, the Company entered into a loan and financing agreement(cid:10)
to purchase machinery and equipment. The $400,000 loan was(cid:10)
payable in 36 monthly installments of $13,671, each, including(cid:10)
principal and interest at 14% annum. As part of the agreement,(cid:10)
the Company issued to the lender's designees warrants to purchase(cid:10)
50,000 shares of the Company's Common Stock at $4.20 per share.(cid:10)
The warrants vested immediately and their cost of $41,252 was(cid:10)
charged to expense in the year ended March 31, 2005. Proceeds(cid:10)
from the refinancing of the Company's EDA Bonds were used to pay(cid:10)
off the unpaid portion of the loan.(cid:10)
F-17(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 6 - INCOME TAXES(cid:10)
The components of the provision for income taxes are as follows:(cid:10)
YEAR ENDED MARCH 31,(cid:10)
--------------------------------------(cid:10)
2006 2005 2004(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 1,000(cid:10)
Deferred --- --- ---(cid:10)
------ ------ ------(cid:10)
1,000 1,000 1,000(cid:10)
------ ------ ------(cid:10)
$1,000 $1,000 $1,000(cid:10)
====== ====== ======(cid:10)
During the years ended March 31, 2006, 2005 and 2004 the Company(cid:10)
received approval for the sale of an additional $2,798,478,(cid:10)
$2,628,257 and $1,928,817 of New Jersey net-operating losses(cid:10)
under the Technology Tax Certificate Transfer Program sponsored(cid:10)
by the New Jersey Economic Development Authority (NJEDA). The(cid:10)
total tax benefits received during the year ended March 31, 2006,(cid:10)
2005 and 2004 were $219,121, $205,792 and $151,027, respectively(cid:10)
and are recorded as other income in the statements of operations.(cid:10)
The major components of deferred tax assets at March 31, 2006 and(cid:10)
2005 are as follows:(cid:10)
2006 2005(cid:10)
---- ----(cid:10)
Net operating loss carry forwards $ 10,785,800 $ 8,422,225(cid:10)
Valuation allowance (10,785,800) (8,422,225)(cid:10)
------------ -----------(cid:10)
$ --- $ ---(cid:10)
============ ===========(cid:10)
At March 31, 2006 and 2005, a 100% valuation allowance is(cid:10)
provided, as it is uncertain if the deferred tax assets will(cid:10)
provide any future benefits because of the uncertainty about the(cid:10)
Company's ability to generate the future taxable income necessary(cid:10)
to use the net operating loss carryforwards. The valuation(cid:10)
allowance increased during 2006, 2005 and 2004 by $2,363,575,(cid:10)
$1,685,889 and $2,250,169, respectively.(cid:10)
At March 31, 2006, for federal income tax purposes, the Company(cid:10)
has unused net operating loss carryforwards of approximately(cid:10)
$29,150,810 expiring in 2007 through 2025. For state tax(cid:10)
purposes, the Company has $11,018,094 of unused net operating(cid:10)
losses, which are net of the $14,966,238 of the New Jersey(cid:10)
net-operating losses sold, as discussed above.(cid:10)
F-18(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 7 - COMMITMENTS AND CONTINGENCIES(cid:10)
EMPLOYMENT AGREEMENTS(cid:10)
The Company had an employment agreement ("Employment Agreement")(cid:10)
with its former President/CEO, Atul M. Mehta.(cid:10)
On June 3, 2003, Dr. Mehta resigned from all positions that he(cid:10)
held with the Company, while reserving his rights under his(cid:10)
Employment Agreement and under common law. On July 3, 2003, Dr.(cid:10)
Mehta instituted litigation against Elite and one of its(cid:10)
directors, in the Superior Court of New Jersey, for, among other(cid:10)
things, the alleged breach of his Employment Agreement and for(cid:10)
defamation. He also claimed that he was entitled to receive his(cid:10)
salary through June 6, 2006. The Company made certain counter(cid:10)
claims against Mehta.(cid:10)
Under a settlement agreement, dated April 21, 2004, Mehta(cid:10)
relinquished any rights to the Company's patents and intellectual(cid:10)
properties and agreed to certain non-disclosure and certain(cid:10)
limited non-competition covenants. The Company paid Mehta(cid:10)
$400,000 and certain expense reimbursements, and in return(cid:10)
received a short-term option for the Company or its designees to(cid:10)
acquire all of the shares of the Common Stock of the Company held(cid:10)
by Mehta and his affiliates at $2.00 per share. The Company paid(cid:10)
$100,000 into escrow which was released to Mehta because the(cid:10)
option was not exercised in full. As part of the settlement, the(cid:10)
Company extended the expiration dates of certain options held by(cid:10)
Mehta to purchase 770,000 shares of Common Stock at prices(cid:10)
ranging from $1.00 to $10.00 per share. The Company also provided(cid:10)
him with certain "piggyback" registration rights with respect to(cid:10)
shares underlying his options and entered into an agreement dated(cid:10)
October 7, 2004 with Mehta pursuant to which 100,000 of the(cid:10)
$10.00 options were terminated, the expiration dates of the other(cid:10)
670,000 options were extended from June 13, 2005 to December 31,(cid:10)
2007 and the exercise price of 170,000 options were reduced from(cid:10)
$10.00 to $2.34 per share. The agreement also obligated the(cid:10)
Company to bear Mehta's legal and other expenses not to exceed(cid:10)
$50,000 for the two year period from the litigation settlement.(cid:10)
On July 23, 2003, the Company entered into an agreement with its(cid:10)
new Chief Executive Officer, Bernard Berk. The initial term of(cid:10)
this agreement was three years. Pursuant to this agreement:(cid:10)
- Mr. Berk is entitled to receive a base salary of $200,000(cid:10)
per annum, subject to increase to $330,140 if and when the(cid:10)
Company consummates a Strategic Transaction (as defined in(cid:10)
the employment agreement);(cid:10)
- The Company confirmed its June 3, 2003 grant to Mr. Berk of(cid:10)
options to purchase 300,000 shares of the Company's Common(cid:10)
Stock at $2.01 per share. All of these options are vested.(cid:10)
F-19(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
EMPLOYMENT AGREEMENTS (CONTINUED)(cid:10)
- The Company granted Mr. Berk options to purchase an(cid:10)
additional 300,000 shares of its Common Stock, with an(cid:10)
exercise price equal to $2.15, the closing price of the(cid:10)
Company's Common Stock on the date of grant. These options(cid:10)
will vest solely upon consummation of a Strategic(cid:10)
Transaction.(cid:10)
- Mr. Berk will be entitled to receive severance in accordance(cid:10)
with the employment agreement if he is terminated without(cid:10)
cause or because of his death or permanent disability or if(cid:10)
he terminates his employment for good reason or following a(cid:10)
"change-of-control". The severance will be payable in(cid:10)
accordance with the terms of his employment agreement.(cid:10)
On September 2, 2005, the Company entered into an amended and(cid:10)
restated Employment Agreement ("Restated Agreement") with Mr.(cid:10)
Berk, providing for him to continue to serve as the Company's(cid:10)
Chief Executive Officer through August 31, 2009. The Restated(cid:10)
Agreement provides for an annual bonus as determined by the(cid:10)
Compensation Committee of the Company's Board of Directors.(cid:10)
Pursuant to the Restated Agreement:(cid:10)
- Mr. Berk waived his rights to 75,000 of 300,000 options(cid:10)
granted to him on July 23, 2003. The Company determined that(cid:10)
the remaining 225,000 options are fully vested.(cid:10)
- Mr. Berk's salary was increased to $330,140 effective May 1,(cid:10)
2005 but not payable until November 1, 2005.(cid:10)
- Under the Company's 2004 Stock Option Plan, Mr. Berk was(cid:10)
granted ten-year options to purchase 600,000 shares of(cid:10)
Common Stock at $2.69, the fair market value of Common Stock(cid:10)
as of the time of grant.(cid:10)
- Mr. Berk will be entitled to receive severance in accordance(cid:10)
with the employment agreement if he is terminated without(cid:10)
cause or because of his death or permanent disability or if(cid:10)
he terminates his employment for good reason or as a result(cid:10)
of a "change of control" (as defined in the employment(cid:10)
agreement).(cid:10)
F-20(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
CONSULTING AGREEMENTS(cid:10)
The Company has two one year renewable consulting agreements for(cid:10)
consulting services that include advice with respect to overall(cid:10)
strategic planning, financing opportunities, acquisition policy,(cid:10)
commercial and investment banking relationships and stockholders(cid:10)
matters. In consideration for the services, the Company paid(cid:10)
$75,000 and issued a warrant to purchase 100,000 shares of the(cid:10)
Company's Common Stock to each of the two consultants. Consulting(cid:10)
expenses under both agreements aggregated $75,000 and $165,000(cid:10)
for the years ended March 31, 2006 and 2005 respectively and(cid:10)
$30,000 plus approximately $470,000 attributable to the issuance(cid:10)
of the warrants for the year ended March 31, 2004. These(cid:10)
agreements were extended as to the consultants' services for an(cid:10)
additional year to November 2005 at $75,000 each.(cid:10)
REFERRAL AGREEMENTS(cid:10)
On January 29, 2002, the Company entered into a Referral(cid:10)
Agreement with a Director whereby Elite will pay referral fees(cid:10)
based upon payments net of direct costs received by Elite from(cid:10)
sales of products, development fees, licensing fees and royalties(cid:10)
generated as a direct result of this Director identifying(cid:10)
customers for Elite. The referral fee each year is roughly based(cid:10)
on the percentages of from 1% to 5% applied inversely to the(cid:10)
total amount gross margins attributable to the referrals. No(cid:10)
amounts had been earned through March 31, 2006.(cid:10)
COLLABORATIVE AGREEMENTS(cid:10)
On January 10, 2006, the Company entered into a Product(cid:10)
Development and Commercialization Agreement with Orit(cid:10)
Laboratories LLC ("ORIT") providing that the Company and Orit(cid:10)
will co-develop an extended release drug product for the(cid:10)
treatment of anxiety, and upon completion of development,(cid:10)
commercialize the possibility of licensing the product for(cid:10)
manufacture and sale. The parties intend to develop all dose(cid:10)
strengths of the product. The Company is to share in the profits,(cid:10)
if any from the sales of the drug. The initial term of the(cid:10)
agreement is for the longer of (i) 15 years from the date the(cid:10)
product is first commercially sold to a third party, or (ii) the(cid:10)
life of the applicable patent(s), if any. After the initial term,(cid:10)
the agreement is automatically renewable for 3-year periods(cid:10)
unless terminated by either party by providing the other party(cid:10)
with twelve (12) months written notice prior to any renewal(cid:10)
period.(cid:10)
F-21(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)(cid:10)
COLLABORATIVE AGREEMENTS (CONTINUED)(cid:10)
On June 21, 2005, the Company and IntelliPharmaCeutics Corp.(cid:10)
("IPC"), entered into an agreement for the development and(cid:10)
commercialization of a controlled released generic drug for(cid:10)
certain gastric diseases. The Company is to share in the profits,(cid:10)
if any, from the sales of the drug. This agreement was amended on(cid:10)
December 12, 2005, whereby IPC and a Canadian company with(cid:10)
marketing and distribution capabilities in Canada, have agreed to(cid:10)
develop and commercialize the product for Canada. Elite and IPC(cid:10)
will share their proceeds of commercialization in Canada on the(cid:10)
same terms as in the June 21, 2005 Agreement.(cid:10)
On June 22, 2005, the Company and Pliva, Inc. ("Pliva") entered(cid:10)
into a Product Development and License Agreement, providing for(cid:10)
the development and license of a controlled released generic(cid:10)
anti-infective drug formulated by the Company. The Company is to(cid:10)
manufacture and Pliva is to market and sell the product. The(cid:10)
development costs are to be paid by Pliva and the Company and the(cid:10)
profits are to be shared equally. Pliva is to make milestone(cid:10)
payments to the Company.(cid:10)
On March 30, 2005, the Company entered into a product,(cid:10)
development, manufacturing and distribution agreement with Harris(cid:10)
Pharmaceutical, Inc. ("Harris") and Tish Technologies LLC(cid:10)
("Tish") with respect to a controlled release generic(cid:10)
anti-infective drug. The product is a generic equivalent to a(cid:10)
branded drug. The agreement provides for (i) the drug development(cid:10)
by Elite with costs of development to be shared by Elite and(cid:10)
Harris, (ii) the manufacture of the product by Elite and its sale(cid:10)
to Harris for distribution, and (iii) Tish to be responsible for(cid:10)
any requisite submissions to the FDA relating to the product.(cid:10)
Elite is to share in the profits, if any, generated from the sale(cid:10)
of the product.(cid:10)
The aforementioned agreements are in their infancy stages.(cid:10)
The Company is a party to two separate and distinct development(cid:10)
and license agreements with ECR, another pharmaceutical company.(cid:10)
The Company developed Lodrante 24(R) which is now being sold by(cid:10)
ECR. The Company is also developing a second drug compound for(cid:10)
ECR in exchange for certain payments and royalties. The Company(cid:10)
is manufacturing Lodrane 24(R) and also, per the agreement,(cid:10)
reserves the right to manufacture the second product. The Company(cid:10)
received an aggregate of $550,000 under these two agreements,(cid:10)
which were earned during the year ended March 31, 2002.(cid:10)
F-22(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY(cid:10)
During 2005, the Certificate of Incorporation was amended to(cid:10)
increase the number of authorized shares of capital stock from(cid:10)
25,000,000 shares 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(cid:10)
value of $.01 per share.(cid:10)
LOSS PER COMMON SHARE(cid:10)
Basic net loss per common share has been calculated by dividing(cid:10)
the net loss by the weighted average number of shares outstanding(cid:10)
during the periods presented. Diluted earnings per share is not(cid:10)
presented because the effect of the Company's common stock(cid:10)
equivalents is antidilutive. For the three years ended March 31,(cid:10)
the following potentially dilutive securities were not included(cid:10)
in the computation of diluted loss per share:(cid:10)
(cid:10)
F-23(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)(cid:10)
SERIES B 8% CONVERTIBLE PREFERRED STOCK(cid:10)
On March 15, 2006, the Company sold in a private placement 10,000(cid:10)
shares of Series B 8% Convertible Preferred Stock (the "Series B(cid:10)
Preferred Stock"), for gross proceeds of $10,000,000. The Series(cid:10)
B Preferred Stock is convertible at $2.25 per share, into(cid:10)
4,444,444 shares of Common stock. In connection with the issuance(cid:10)
of the Series B Preferred Stock, the Company also issued two(cid:10)
class of warrants are exercisable for a period of five years and(cid:10)
represent the right to purchase an aggregate of 1,111,111 shares(cid:10)
of Common Stock at an exercise price of $2.75 per share and the(cid:10)
second class of warrants are exercisable for a period of five(cid:10)
years and represent the right to purchase an aggregate of(cid:10)
1,111,111 shares of Common stock at an exercise price of $3.25(cid:10)
per share. Based on the relative fair values, the Company has(cid:10)
attributed $2,033,029 of the total proceeds to the warrants and(cid:10)
has recorded the warrants as additional paid-in capital. The(cid:10)
remaining portion of the proceeds of $7,966,971 was used to(cid:10)
determine the value of the 4,444,444 shares of the Company Common(cid:10)
Stock underlying the Series B Preferred Stock, or $1.7925 per(cid:10)
share. Since the value was $0.4774 lower than the fair market(cid:10)
value of the Company's Common Stock on March 15, 2006, the(cid:10)
$2,121,917 instrinsic value of the conversion option resulted in(cid:10)
the recognition of a preferred stock dividend and an increase to(cid:10)
additional paid-in capital.(cid:10)
The Series B Preferred Stock accrues dividends at the rate of 8%(cid:10)
per annum on their purchase price of $1,000 per share (increasing(cid:10)
to 15% per annum after March 15, 2008) payable quarterly on(cid:10)
January 1, April 1, July 1 and October 1, payable in cash or(cid:10)
shares of Common Stock (each valued at 95% of the average of the(cid:10)
value weighted average price (VWAP) as defined in the Certificate(cid:10)
of Designations, Preferences and Rights of the Series B Preferred(cid:10)
Stock (the "Preferred Certificate").(cid:10)
Each share of Series B Preferred Stock is entitled to a(cid:10)
preference equal to the per share purchase price ($1,000 subject(cid:10)
to adjustment) plus any accrued but unpaid dividends thereon and(cid:10)
any other fees or liquidated damages owing thereon upon the(cid:10)
liquidation, dissolution or winding-up of the Company, which(cid:10)
preference is senior to any other capital stock ranked junior to(cid:10)
the Series B Preferred Stock.(cid:10)
F-24(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10)
The holders of Series B Preferred Stock do not have any voting(cid:10)
rights except as specifically provided in the Preferred(cid:10)
Certificate or as required by law. The Company may not without(cid:10)
the prior affirmative vote of holders of at least 70% of the then(cid:10)
outstanding shares of Series B Preferred Stock: (i) alter or(cid:10)
change adversely the powers, preferences or rights given to the(cid:10)
Series B Preferred Stock or alter or amend the Preferred(cid:10)
Certificate, (ii) authorize or create any class of stock ranking(cid:10)
as to dividends, redemption or distribution of assets upon a(cid:10)
Liquidation senior to or otherwise PARI PASSU with the Series B(cid:10)
Preferred Stock, (iii) amend its certificate of incorporation,(cid:10)
bylaws or other charter documents in any manner that adversely(cid:10)
affects any rights of the holders of the Series B Preferred(cid:10)
Stock, (iv) increase the authorized number of shares of Series B(cid:10)
Preferred Stock, (v) enter into any agreement with respect to any(cid:10)
of the foregoing, (vi) other than Permitted Indebtedness (as(cid:10)
defined in the Preferred Certificate) until March 15, 2009, incur(cid:10)
any indebtedness for borrowed money of any kind, (vii) other than(cid:10)
Permitted Liens (as defined in the Preferred Certificate) until(cid:10)
March 15, 2009, incur any liens of any kind, (viii) repay or(cid:10)
repurchase other than more than a de minimis number of shares of(cid:10)
Common Stock or securities convertible or exchangeable into(cid:10)
Common Stock, other than as permitted by the Preferred(cid:10)
Certificate, (ix) pay cash dividends or distributions on any(cid:10)
securities of the Registrant junior to the Series B Preferred(cid:10)
Stock or (x) enter into any agreement or understanding to effect(cid:10)
the clauses (iii), (vi), (vii), or (viii). Actions(cid:10)
notwithstanding the above, the Company may issue any security(cid:10)
issued in connection with a Strategic Transaction (as defined in(cid:10)
the Preferred Certificate) that ranks as to dividends, redemption(cid:10)
or distribution of assets upon a Liquidation PARI PASSU with or(cid:10)
junior to the Series B Preferred Stock without the prior(cid:10)
affirmative vote of holders of at least 70% of the then(cid:10)
outstanding shares of Series B Preferred Stock.(cid:10)
If the Company does not meet its share delivery requirements with(cid:10)
respect to conversion set forth in the Preferred Certificate, the(cid:10)
holders of Preferred Stock are entitled to (i) liquidated(cid:10)
damages, payable in cash, and (ii) cash equal to the amount by(cid:10)
which such holder's total purchase price for the shares of Common(cid:10)
Stock exceeds the product of (1) the aggregate number of shares(cid:10)
of Common Stock that such holder was entitled to receive from the(cid:10)
conversion at issue multiplied by (2) the actual sale price at(cid:10)
which the sell order giving rise to such purchase obligation was(cid:10)
executed.(cid:10)
F-25(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
SERIES B 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10)
The Company may force conversion of the Series B Preferred Stock(cid:10)
in the event it provides written notice to the holders of the(cid:10)
Series B Preferred Stock that the VWAP for each 20 consecutive(cid:10)
trading day period during a Threshold Period (as defined in the(cid:10)
Preferred Certificate) of Common Stock exceeded $5.38 (subject to(cid:10)
adjustment) and the volume for each trading day during such(cid:10)
Threshold Period exceed 50,000 shares (subject to adjustment for(cid:10)
forward and reverse stock splits, recapitalizations, stock(cid:10)
dividends and the like).(cid:10)
Upon the occurrence of certain Triggering Events (as defined in(cid:10)
the Preferred Certificate), the Company is required to redeem(cid:10)
each share of Series B Preferred Stock for cash in an amount(cid:10)
equal to 130% of the stated value, all accrued but unpaid(cid:10)
dividends thereon and all liquidated damages and other costs,(cid:10)
expenses or amounts due in respect of the Series B Preferred(cid:10)
Stock (the "TRIGGERING REDEMPTION AMOUNT"). Upon certain(cid:10)
Triggering Events, the Company is required to redeem each share(cid:10)
of Series B Preferred Stock for shares of Common Stock equal to(cid:10)
the number of shares of Common Stock equal to the Triggering(cid:10)
Redemption Amount divided by 85% of the average of the VWAP for(cid:10)
the 10 consecutive trading days immediately prior to the date of(cid:10)
the redemption.(cid:10)
The Registrant may redeem all of the Series B Preferred Stock(cid:10)
outstanding, at any time after March 15, 2008 for a redemption(cid:10)
price, payable in cash, for each share of Series B Preferred(cid:10)
Stock equal to (i) 150% of the stated value, (ii) accrued but(cid:10)
unpaid dividends thereon and (iii) all liquidated damages and(cid:10)
other amounts due in respect of the Series B Preferred Stock.(cid:10)
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION(cid:10)
In October 2004, the Company completed a private placement(cid:10)
through Indigo Securities LLC, the Placement Agent, for aggregate(cid:10)
gross proceeds of $6,600,000 of 516,558 shares of Series A(cid:10)
Preferred Stock, par value $0.01 per share ("PREFERRED SHARES")(cid:10)
convertible into 5,165,580 shares of Common Stock. The Preferred(cid:10)
Shares were accompanied by warrants to purchase an aggregate of(cid:10)
5,165,580 shares of Common Stock at exercise prices ranging from(cid:10)
$1.54 to $1.84 per share. The Company paid commissions(cid:10)
aggregating $633,510 and issued five year warrants to purchase(cid:10)
494,931 shares of Common Stock to the Placement Agent. The(cid:10)
Company also paid legal fees and expenses of the Agent's counsel(cid:10)
of $75,000 and legal fees and expenses of one counsel for the(cid:10)
investors in the private placement of $25,000.(cid:10)
The holders of the Preferred Shares (the "INVESTORS") were(cid:10)
entitled to dividends at the rate of 8% of the original issue(cid:10)
price of $12.30 per share payable on December 1 and June 1 of(cid:10)
each year in(cid:10)
F-26(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
SERIES A 8% CONVERTIBLE PREFERRED STOCK TRANSACTION (CONTINUED)(cid:10)
cash or shares of Common Stock. Holders were entitled to elect(cid:10)
one Director, were entitled to ten votes per share, and vote with(cid:10)
the Common Stockholders as one class on all other matters. Each(cid:10)
Preferred Share is convertible into ten shares of Common Stock.(cid:10)
The purchaser of the Preferred Shares received for each Preferred(cid:10)
Share acquired two Common Stock Purchase Warrants, one(cid:10)
exercisable on or prior to December 31, 2005 ("SHORT-TERM(cid:10)
WARRANTS") and the other exercisable on or prior to December 28,(cid:10)
2009 ("LONG-TERM WARRANTS"). Each warrant represents the right to(cid:10)
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(cid:10)
aggregate of 3,791,220 shares of Common Stock accompanied by(cid:10)
Short-Term Warrants and Long-Term Warrants to purchase at $1.54(cid:10)
per share an aggregate of 3,791,220 shares of Common Stock. The(cid:10)
second tranche involved the sale on October 12, 2004 of 119,286(cid:10)
Preferred Shares at a price of $14.00 per share convertible into(cid:10)
1,192,860 shares of Common Stock accompanied by Short-Term and(cid:10)
Long-Term Warrants to purchase an aggregate of 1,192,860 shares(cid:10)
of Common Stock at a price of $1.75 per share. The third tranche(cid:10)
involved the sale on October 26, 2004 of 18,150 Preferred Shares(cid:10)
at a price of $14.70 per share convertible in to 181, 500 shares(cid:10)
of Common Stock accompanied by Short Term and Long Term Warrants(cid:10)
to purchase at a price of $1.84 per share an aggregate of 181,500(cid:10)
shares of Common Stock(cid:10)
Pursuant to the Placement Agent Agreement, the Company issued to(cid:10)
the Placement Agent and its designees Long Term Warrants to(cid:10)
purchase 357,495 shares of Common Stock at $1.23 per share,(cid:10)
119,286 shares of Common Stock at a price of $1.40 per share, and(cid:10)
18,150 shares of Common Stock at a price of $1.47 per share,(cid:10)
respectively.(cid:10)
The Company has registered at its expense under the Securities(cid:10)
Act of 1933 (the "ACT") for resale by the Investors of the shares(cid:10)
of Common Stock issuable upon conversion of the Preferred Shares,(cid:10)
exercise of the warrants (including the Placement Agent's(cid:10)
warrants) and as payment of dividends on the Preferred Shares.(cid:10)
Each Investor has represented that the Investor is an "accredited(cid:10)
investor" and has agreed that the securities issued in the(cid:10)
private placement are to bear a restrictive legend against resale(cid:10)
without registration under the Act. The Preferred Shares and(cid:10)
warrants were sold by Registrant pursuant to the exemption from(cid:10)
registration afforded by Section 4(2) of the Act and Registration(cid:10)
D thereunder.(cid:10)
Dr. Charan Behl, the Company's Chief Scientific Advisor,(cid:10)
purchased at $12.30 per share 20,000 Preferred Shares and(cid:10)
received warrants to purchase 200,000 shares of Common Stock. His(cid:10)
payment consisted of $16,675 in cash and the release of the(cid:10)
Company's obligation to pay him $229,325 for consulting fees for(cid:10)
services rendered through September 30, 2004.(cid:10)
F-27(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
COMMON STOCK TRANSACTIONS(cid:10)
Pursuant to the Certificate of Designation of the Series A(cid:10)
Preferred Stock of the Corporation, all outstanding 21,922 shares(cid:10)
of Preferred Stock were automatically converted on March 7, 2005(cid:10)
into 219,200 shares of Common Stock, par value $0.01 upon the(cid:10)
Corporation as a result of the Company's written notice to(cid:10)
holders of Preferred Stock certifying that the Current Market(cid:10)
Price of the Common Stock for 30 consecutive Trading Days from(cid:10)
January 18, 2005 through and including March 1, 2005 exceeded(cid:10)
$3.69 (300% of the Initial Conversion Price of $1.23 per share)(cid:10)
and the average daily trading volume of the Common Stock for such(cid:10)
30 consecutive Trading Days equaled or exceeded 50,000 shares per(cid:10)
day.(cid:10)
Accordingly, the Corporation has issued an aggregate of 5,265,516(cid:10)
shares of Common Stock with respect to the issuance of conversion(cid:10)
shares and dividend shares. Pursuant to the terms of an Exchange(cid:10)
Offer, the Company sold on or before the expiration date of(cid:10)
December 31, 2005, an aggregate of 735,674 shares of common stock(cid:10)
upon the exercise for cash of Short Term Warrants for aggregate(cid:10)
gross proceeds of $1,172,912 and issued five year Replacement(cid:10)
Warrants to purchase at a price of $3.00 per share an aggregate(cid:10)
220,705 shares of the Company's Common Stock. The Exchange Agent(cid:10)
received cash commissions aggregating $76,418 and five-year(cid:10)
placement warrants to purchase an aggregate of 25,473 shares of(cid:10)
Common Stock at a price of $3.00 per share. The remaining(cid:10)
unexercised Short Term Warrants, issued as part of the Private(cid:10)
Placement in October 2004, expired on December 31, 2005.(cid:10)
During the year ended March 31, 2006, there were cashless(cid:10)
exercises of 1,066,612 warrants resulting in the issuance of(cid:10)
310,678 shares of Common Stock.(cid:10)
On May 18, 2005, $40,000 were received from the exercise of stock(cid:10)
options previously granted to purchase 20,000 shares of Common(cid:10)
Stock at $2.00 per share.(cid:10)
On May 24, 2005 $156,503 were received and 101,625 shares of(cid:10)
Common Stock were issued upon 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 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(cid:10)
corporation in consideration for its rendering for a six-month(cid:10)
period of investor relation consulting services, including the(cid:10)
distribution of the Company's press releases, the provision of(cid:10)
related strategic advice and the inclusion of the Company on the(cid:10)
consultant's website. The Company agreed to provide the holder(cid:10)
with "piggy-back" registration rights with respect to the shares.(cid:10)
F-28(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
INSIDER TRADING(cid:10)
During fiscal 2005, the former Chairman of the Board remitted(cid:10)
$117,740 to the Company to return his gain under Section 16(b) of(cid:10)
the Securities Exchange Act of 1934, from the purchase and sale,(cid:10)
of the Company's equity securities within a period of six months.(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(cid:10)
from registration pursuant to Section 4(2) and Regulation D under(cid:10)
the Act. In connection with the offering, the Company paid a cash(cid:10)
commission of $75,000 to First Montauk Group Inc., as Placement(cid:10)
Agent and issued to it a five year warrant to purchase 50,000(cid:10)
shares of Company's Common Stock at a price of $2.00 per share.(cid:10)
Legal fees approximating $36,000 were also incurred in connection(cid:10)
with this private placement. Pursuant to its agreement with the(cid:10)
purchasers, the Company at its expense registered the shares(cid:10)
issued and the shares issuable upon exercise of the warrant under(cid:10)
the Act.(cid:10)
TREASURY STOCK TRANSACTIONS(cid:10)
During fiscal 2003, the Company purchased 100,000 shares of(cid:10)
Common Stock in the open market for a total consideration of(cid:10)
$306,841 pursuant to the authorization by the Board of Directors(cid:10)
on June 27, 2002.(cid:10)
F-29(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(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(cid:10)
prices range from $2.00 to $4.20 per warrant. The warrants expire(cid:10)
at various times through March 15, 2011.(cid:10)
A summary of warrant activity for the fiscal years indicated(cid:10)
below were as follows:(cid:10)
(cid:10)
CLASS A WARRANT EXCHANGE OFFER(cid:10)
On October 23, 2002, the Company entered into a Settlement(cid:10)
Agreement with various parties in order to end a Consent(cid:10)
Solicitation and various litigation initiated by the Company. The(cid:10)
Agreement provided, among other things, an agreement to commence(cid:10)
an exchange offer (the "Exchange Offer") whereby holders of the(cid:10)
Company's Class A Warrants which expired on November 30, 2002(cid:10)
(the "Old Warrants") had the opportunity to exchange those(cid:10)
warrants for new warrants (The "New Warrants") upon payment to(cid:10)
the Company of $0.10 per share of Common Stock issuable upon the(cid:10)
exercise of the old warrants. In September 2003 the Company(cid:10)
issued the New Warrants to the record holders as of November 30,(cid:10)
2002 of the Old Warrants without requiring any cash payment.(cid:10)
F-30(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)(cid:10)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)(cid:10)
The New Warrants expired on November 30, 2005.(cid:10)
The per share weighted-average fair value of each warrant on the(cid:10)
date of grant was $1.10 using the Black-Scholes option pricing(cid:10)
model with the following weighted-average assumptions: no(cid:10)
dividend yield; expected volatility of 73.77%; risk-free interest(cid:10)
rate of 2.88%; and expected lives of 3 years. The elimination of(cid:10)
the $0.10 per share fee resulted in an additional charge of(cid:10)
$172,324 during the year ended March 31, 2004.(cid:10)
CLASS B WARRANTS(cid:10)
The Company's Class B Warrants originally issued in a private(cid:10)
placement in September 1998 expired on November 30, 2005, their(cid:10)
amended expiration date.(cid:10)
NOTE 9 - STOCK OPTION PLANS(cid:10)
STOCK-BASED COMPENSATION(cid:10)
During the years ended March 31, 2004, 2005 and 2006 the Company(cid:10)
issued 1,024,000, 120,000 and 969,200, respectively options to(cid:10)
purchase Common Stock to employees and to members of the board of(cid:10)
directors. The options have an exercise price ranging from $2.69(cid:10)
to $3.00 per share and all vest over three years except 610,000(cid:10)
options issued in 2004 and 120,000 issued for year ended March(cid:10)
31, 2005 which vested upon grant date and 75,000 issued for the(cid:10)
year ending March 31, 2006 which vest pro-rata over a 6 month(cid:10)
period. The options expire between five and ten years from the(cid:10)
date of grant. The Company has recorded compensation expense of(cid:10)
$1,166,601, $370,108 and $902,927 for the years ended March 31,(cid:10)
2004, 2005 and 2006, respectively, which represents the fair(cid:10)
value of the options vested computed using the Black-Scholes(cid:10)
options pricing model on each grant date.(cid:10)
On June 22, 2004 the Company's stockholders approved the 2004(cid:10)
Stock Option Plan and ratified amendments of the terms of(cid:10)
outstanding options and warrants, including the repricing of(cid:10)
options to certain Directors and employees. The Company will(cid:10)
record a significant compensation expense in the future periods(cid:10)
in which the options vest based on the fair value of the options(cid:10)
after reflecting the repricing and amendments to the terms of the(cid:10)
options.(cid:10)
F-31(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 9 - STOCK OPTION PLANS (CONTINUED)(cid:10)
STOCK-BASED COMPENSATION (CONTINUED)(cid:10)
Under its 2004 Stock Option Plan and prior option plans, the(cid:10)
Company may grant stock options to officers, selected employees,(cid:10)
as well as members of the board of directors and advisory board(cid:10)
members. All options have generally been granted at a price equal(cid:10)
to or greater than the fair market value of the Company's Common(cid:10)
Stock at the date of grant. Generally, options are granted with a(cid:10)
vesting period of up to three years and expire ten years from the(cid:10)
date of grant. Transactions under the plans for the years(cid:10)
indicated were as follows:(cid:10)
(cid:10)
F-32(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 9 - STOCK OPTION PLANS (CONTINUED)(cid:10)
STOCK-BASED COMPENSATION (CONTINUED)(cid:10)
The per share weighted-average fair value of each option granted(cid:10)
during fiscal 2006, 2005 and 2004 ranged from $1.48 to $1.70(cid:10)
during fiscal 2006, $1.91 during fiscal 2005 and from $1.03 to(cid:10)
$2.68 during fiscal 2004, on the date of grant using the(cid:10)
Black-Scholes options pricing model with the following(cid:10)
weighted-average assumptions; no dividend yield; expected(cid:10)
volatility of 97.84% for fiscal year 2006, 76.69% for fiscal year(cid:10)
2005 and 75.47% to 77.97% for fiscal year 2004; risk-free(cid:10)
interest rates of 4.18% in 2006, 4.00% in 2005, 4.0% in 2004 and(cid:10)
expected lives ranging from five to ten years.(cid:10)
There are 1,602,520 options available for future grant under our(cid:10)
Stock Option Plan.(cid:10)
NOTE 10 - MAJOR CUSTOMERS(cid:10)
For the years ended March 31, revenues from its three major(cid:10)
customers are as follows:(cid:10)
2006 2005 2004(cid:10)
---- ---- ----(cid:10)
Customer A - 100% 49.80% 40.70%(cid:10)
Customer B - --- --- 59.30%(cid:10)
Customer C - --- 49.80% ---(cid:10)
NOTE 11 - SUBSEQUENT EVENTS(cid:10)
In April 2006, the Company's registration statement on Form S-3(cid:10)
registering under the Securities Act of 1933, as amended for(cid:10)
reoffering up to 9,876,022 shares of Common Stock which may be(cid:10)
acquired upon conversion of the outstanding shares of Series B(cid:10)
Preferred Stock, upon payment of Preferred Stock dividends and(cid:10)
upon exercise of the Common Stock Purchase Warrants issued in the(cid:10)
March 2006 private placement was declared effective by the(cid:10)
Commission.(cid:10)
In April 2006, the Company's registration statement on Form S-3(cid:10)
registering under the Securities Act of 1933, as amended for(cid:10)
reoffering up to 246,175 shares of Common Stock which may be(cid:10)
acquired upon exercise of the Common Stock Purchase Warrants(cid:10)
issued in the December 2005 private placement was declared(cid:10)
effective by the Commission.(cid:10)
F-33(cid:10)
(cid:10)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES(cid:10)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(cid:10)
MARCH 31, 2006, 2005 AND 2004(cid:10)
NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)(cid:10)
On May 3, 2006, the Company granted options to purchase 70,000(cid:10)
shares of common stock with and exercise price of $2.26 per share(cid:10)
to its chief financial officer, one-third of the options vests on(cid:10)
May 3, 2007, a second third which vests on May 3, 2008 and the(cid:10)
final third vests on May 3, 2009.(cid:10)
On May 22, 2006, a holder of 250 shares of Series B 8% Preferred(cid:10)
Stock converted his shares and accrued dividends through the date(cid:10)
of conversion into 112,429 shares of Common Stock.(cid:10)
On May 23, 2006, the Company signed an agreement ("the(cid:10)
"Agreement") with Oppenheimer & Co., Inc. ("Oppenheimer") to(cid:10)
render financial advisory services to the Company in connection(cid:10)
with potential acquisitions by the Company, strategic alliances(cid:10)
with other pharmaceutical companies, advice with respect to(cid:10)
future financings to be undertaken by the Company and(cid:10)
introductions to key parties in the capital markets. In(cid:10)
consideration for its services, Oppenheimer received from the(cid:10)
Company a cash fee of $60,000.(cid:10)
On June 1, 2006, the Registrant entered into a one year(cid:10)
consulting agreement with David Filer, whereby Dr. Filer is to(cid:10)
provide financial advisory services to the Company. In(cid:10)
consideration for his services, Dr. Filer received options to(cid:10)
purchase 10,000 shares of common stock exercisable from June 1,(cid:10)
2006 to June 1, 2009, with an exercise price of $3.00 per share.(cid:10)
On June 19, 2006, the Company received written notice from Harris(cid:10)
Pharmaceuticals, Inc. ("HARRIS") of Harris' intent to terminate(cid:10)
the Product Development, Manufacturing and Distribution(cid:10)
Agreement, dated as of March 30, 2005 (the "Agreement"), among(cid:10)
Elite Laboratories, Inc., Harris and Tish Technologies LLC(cid:10)
("TISH") in accordance with Section 9.3 of the Agreement. As the(cid:10)
date hereof, there have been no material revenues earned under(cid:10)
the Agreement.(cid:10)
F-34(cid:10)
(cid:10)
Exhibit 21(cid:10)
Subsidiaries of the Company(cid:10)
Elite Laboratories, Inc., a Delaware corporation(cid:10)
Elite Research, Inc., a Delaware corporation(cid:10)
(cid:10)
(cid:10)
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