UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED - MARCH 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO______
COMMISSION FILE NUMBER 333-45241
ELITE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue
Northvale, New Jersey 07647
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 750-2646
Securities registered pursuant to Section
12(b) of the Act: Common Stock - $.01 par value
The Common Stock is listed on the
American Stock Exchange
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
at least the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 3, 2004 was approximately $26,137,608 based upon the
closing price of the registrant's common stock on the American Stock Exchange,
as of June 3, 2004. (For purposes of determining this amount, only directors,
executive officers, and 10% or greater stockholders and their respective
affiliates have been deemed affiliates).
Registrant had 12,104,423 shares of common stock, par value $0.01 per share,
outstanding as of June 1, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
There are no documents incorporated by reference into the Annual Report or any
part of the report.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT, STATEMENTS THAT ARE
NOT STATEMENTS OF CURRENT OR HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "PLAN", "INTEND", "MAY,"
"WILL," "EXPECT," "BELIEVE", "COULD," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR
SIMILAR EXPRESSIONS OR OTHER VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED
TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. EXCEPT AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
TABLE OF CONTENTS
Form 10-K Index
PART I
PAGE
Item 1. Business......................................................... 2
Item 2. Properties....................................................... 21
Item 3. Legal Proceedings................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 22
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 23
Item 6. Selected Financial Data.......................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 27
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................................... 35
Item 8. Financial Statements and Supplementary Data...................... 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 35
Item 9A. Controls and Procedures.......................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant............... 36
Item 11. Executive Compensation........................................... 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters............. 46
Item 13. Certain Relationships and Related Transactions................... 48
Item 14. Principal Accountant Fees and Services........................... 48
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 49
Signatures ................................................................. 53
1
PART I
ITEM 1. BUSINESS
Elite Pharmaceuticals, Inc. ("Elite Pharmaceuticals") was incorporated on
October 1, 1997 under the laws of the State of Delaware, and our wholly-owned
subsidiaries, Elite Laboratories, Inc. ("Elite Labs") and Elite Research, Inc.
("Elite Research") were incorporated on August 23, 1990 and December 20, 2002,
respectively, under the laws of the State of Delaware. Elite Pharmaceuticals,
Elite Labs and Elite Research are referred to herein, collectively, as "Elite",
"we", "us", "our" or the "Company".
On October 24, 1997, Elite Pharmaceuticals merged with and into our
predecessor company, Prologica International, Inc. ("Prologica") an inactive
publicly held corporation formed under the laws of the State of Pennsylvania. At
the same time, Elite Labs merged with a wholly-owned subsidiary of Prologica.
Following these mergers, Elite Pharmaceuticals survived as the parent to its
wholly owned subsidiary, Elite Labs.
On September 30, 2002, we acquired from Elan Corporation, plc and Elan
International Services, Ltd. (together "Elan") Elan's 19.9% interest in Elite
Research, Ltd. ("ERL"), a joint venture formed between Elite and Elan in which
our initial interest was 80.1% of the outstanding capital stock (100% of the
outstanding common stock). As a result of the termination of the joint venture,
we owned 100% of ERL's capital stock. On December 31, 2002, ERL (a Bermuda
Corporation) was merged into Elite Research, our wholly owned subsidiary.
See "Proposed Acquisition" for possible acquisition of Nostrum
Pharmaceuticals Inc.
The address of our principal executive offices and our telephone and
facsimile numbers at that address are:
Elite Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey
07647; Phone No.: (201) 750-2646; Facsimile No.: (201) 750-2755.
We file registration statements, periodic and current reports, proxy
statements and other materials with the Securities and Exchange Commission. You
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including our filings.
- 2 -
BUSINESS OVERVIEW AND STRATEGY
Elite engages primarily in researching, developing and licensing
proprietary controlled release drug delivery systems and products. We are also
equipped to manufacture controlled release products on a contract basis for
third parties and for ourselves if, and when, our products are approved.
Controlled release drug delivery of a pharmaceutical compound offers a safer and
more effective means of administering drugs through releasing a drug into the
bloodstream or delivering it to a certain site in the body at predetermined
rates or predetermined times. The goal is to provide more effective drug therapy
while reducing or eliminating many of the side effects associated with
conventional drug therapy and/or to reduce the frequency of administration.
We have concentrated on developing orally administered controlled release
products. These products include drugs that cover therapeutic areas for pain,
angina, hypertension, allergy and infection. The Food and Drug Administration
(FDA) has not yet approved any of our products and, therefore, currently we do
not market any products. Our products are at various stages of development.
We are focusing our efforts on the following areas: (i) obtaining FDA
approval for one or more of six oral controlled release pharmaceutical products
already in development, either directly or through other companies; (ii)
commercial exploitation of these products either by license and the collection
of royalties, or through the manufacture of tablets and capsules using our
formulations, and (iii) development of new products and the expansion of our
licensing agreements with other pharmaceutical companies, including contract
research and development projects, joint ventures and other collaborations.
In an effort to reduce costs and improve focus and enhance efficiency, we
reduced the number of products that we are actively developing from fifteen to
six. The six products that continue in development were deemed by us to be the
most suitable for continued development given our limited resources.
We are focusing on the development of both branded drug products (which
require new drug applications ("NDA")) and generic drug products (which require
abbreviated new drug applications ("ANDA")).
We intend to continue to collaborate in the development of products with
our current partners. We also plan to seek additional collaborations to develop
more products.
We believe that our business strategy enables us to reduce our risk by
o having a diverse product portfolio that includes both branded and
generic products in various therapeutic categories; and
- 3 -
o building collaborations and establishing licensing agreements with
companies with greater resources thereby allowing us to share costs of
development and to improve cash-flow.
PROPOSED ACQUISITION
Our Board of Directors authorized in August 2003 the negotiation of an
agreement to acquire Nostrum Pharmaceuticals Inc., a privately held corporation
engaged in the development of drug delivery products and systems ("Nostrum"), by
means of a merger with our wholly-owned subsidiary.
If the merger is effected on the terms as initially proposed, the
outstanding shares of Nostrum will be converted into (i) shares of our Common
Stock which will represent in the aggregate 75% of the shares of our Common
Stock to be outstanding immediately after such merger and (ii) options to
purchase a substantial number of additional shares of our Common Stock
exercisable upon satisfaction of certain conditions. No assurance can be given
that the merger will be consummated or if consummated will be effected on
materially the same terms. If an agreement is executed, it is to contain several
conditions to the consummation of the merger, including approval by our
stockholders and that the Company will have immediately prior to effectiveness
of the merger liquid assets of at least $8,000,000. No assurance can be given
that the Agreement will be executed or if executed that the foregoing terms will
not be materially changed adversely to the Company or that it will be approved
by the Company's stockholders.
Nostrum is a specialty pharmaceutical company engaged in the formulation
and commercialization of controlled-release orally-administered generic drugs
utilizing Nostrum's proprietary drug delivery technologies.
RESEARCH AND DEVELOPMENT
During each of the last three fiscal years, we have focused on research
and development activities. We spent $ 2,075,074 in the fiscal year ended March
31, 2004, $2,013,579 in the fiscal year ended March 31, 2003 and $1,609,108 in
the fiscal year ended March 31, 2002 on research and development activities.
It is our general policy not to disclose products in our development
pipeline or the status of such products until a product reaches a stage that we
determine, for competitive reasons, in our discretion, to be appropriate for
disclosure and because the disclosure of such information might suggest the
occurrence of future matters or events that may not occur. In this instance, we
believe that disclosure of the information in the following table is helpful for
the description of the general nature, orientation and activity of the Company,
and the disclosures are made for such purpose. No inference should be made as to
the occurrence of matters or events not specifically described. We may or may
not disclose such information in the future based on competitive reasons and/or
- 4 -
contractual obligations. We believe that the information is helpful on a
one-time basis for the purpose described above.
The following table provides information concerning the controlled release
products that we are developing and to which we are devoting substantial
resources and attention. None of these products has been approved by the FDA and
all are in development ("N/A" means not applicable because there is no branded
product on the market).
- --------------------------------------------------------------------------------------------------------------------
PRODUCT BRANDED PRODUCT(A) APPROX. U.S. APPROX. NDA/ INDICATION
BRAND SALES GROWTH ANDA
(2003)
$MM(B) (%)(C)
- --------------------------------------------------------------------------------------------------------------------
1 Oxycodone CR OxyContin(R) $1,800+ 10% NDA Pain
Once a day twice a day
- --------------------------------------------------------------------------------------------------------------------
2 Abuse Resistance N/A N/A N/A NDA Pain
Product for use with
Oxycodone (or other
opioids)
- --------------------------------------------------------------------------------------------------------------------
3 Diltiazem Cardizem CD(R) $80+ -30% ANDA Cardiovascular
Once a day
- --------------------------------------------------------------------------------------------------------------------
4 Undisclosed product N/A N/A N/A Undisclosed Allergy
with a partner
- --------------------------------------------------------------------------------------------------------------------
5 Undisclosed product with N/A N/A N/A Undisclosed Allergy
partner
- --------------------------------------------------------------------------------------------------------------------
6 Undisclosed Undisclosed $150+ 10% ANDA Infection
Twice a day
- --------------------------------------------------------------------------------------------------------------------
(a) The name of our competitor's branded product.
(b) Indicates the approximate amount of sales of our competitor's product and
not the sales of any of our products.
(c) Indicates the approximate historical growth rate of sales of our
competitor's product and not the growth rate of sales of any of our products.
The following table presents information with respect to the development
stage of our principal products under development. We intend to make NDA filings
under Sections 505(b)(1) or 505(b)(2) of the Drug Price Competition and Patent
Term Restoration Act of 1984 (the "Drug Price Act"). Accordingly, we anticipate
that the development timetable for the products for which such NDA filings are
made would be shorter and less expensive. Completion of development of products
by us depends on
- 5 -
a number of factors, however, and there can be no assurance that specific time
frames will be met during the development process or that the development of any
particular products will be continued.
In the table below, preclinical testing refers to studies done before
initiation of any human studies. Pilot Phase I studies for the NDA products are
generally preliminary studies done in healthy human subjects to assess the
tolerance/safety and pharmacokinetics of the product. Additional larger studies
in humans will be required prior to submission of this product to the FDA for
review. Pilot bioequivalence studies are initial studies done in humans for
generic products and are used to assess the likelihood of achieving
bioequivalence for generic products. Larger pivotal bioequivalence studies will
be required prior to submission of the product to the FDA for review. Our
prelaunch activity indicates that the final activities are being conducted prior
to the product launch.
- -------------------------------------------------------------------------
DEVELOPMENT STAGE NUMBER OF PRODUCTS NDA/ANDA
- -------------------------------------------------------------------------
Preclinical 1 --
- -------------------------------------------------------------------------
Preclinical 1 Undisclosed
- -------------------------------------------------------------------------
Pilot Phase I study 1 NDA
- -------------------------------------------------------------------------
Pilot bioequivalence study 2 ANDA
- -------------------------------------------------------------------------
Prelaunch 1 Undisclosed
- -------------------------------------------------------------------------
MANUFACTURING AND DEVELOPMENT CONTRACTS
In September 1999 Elite entered into an agreement with an undisclosed
partner to co-develop a chrono diltiazem product. A pilot pharmacokinetic study
has been conducted and we and our partner are seeking a license for the product
prior to performing further clinical studies.
In June 2001, we entered into two development contracts with an
undisclosed company pursuant to which it agreed to develop two products in
exchange for development fees, certain payments, royalties and manufacturing
rights. We have manufactured validation batches for one of the products and are
awaiting its launch.
The payments under both agreements for the year ended March 31, 2004 were
not material.
In May 2004 we entered into an agreement with Purdue Pharma LP granting
Purdue the exclusive right to evaluate certain of our abuse resistance
technology and an exclusive option to negotiate a license to develop and
commercialize oxycodone products under the technology.
JOINT VENTURE WITH ELAN
In October 2000, we entered into a joint venture with Elan to develop
products using drug delivery technologies and expertise of both companies. This
joint venture,
- 6 -
ERL, was initially owned 80.1% by us and 19.9% by Elan. ERL funded its research
through capital contributions from its partners based on the partners'
respective ownership percentage.
On September 30, 2002, we entered into an agreement with Elan to terminate
the joint venture (the "Termination Agreement"). Pursuant to the Termination
Agreement, we terminated the joint venture and acquired from Elan its entire
interest in ERL. As a result of the Termination Agreement, the joint venture
terminated and we owned 100 percent of ERL's capital stock. On December 31,
2002, ERL was merged into a new Delaware corporation, Elite Research, our wholly
owned subsidiary.
Under the Termination Agreement, we acquired all proprietary, development
and commercial rights for the worldwide markets for the products developed by
the joint venture. In exchange for this assignment, we agreed to pay Elan a
royalty on certain revenues that may be realized in the future from the
once-a-day Oxycodone product that was in development by the joint venture, if
and when FDA approval is obtained. In the future, we will be solely responsible
for funding product development, which funding we anticipate will be derived
from internal resources or through loans or investment by third parties. The
joint venture had completed the initial Phase I study for its first product, the
once-a-day Oxycodone formulation. Currently there is no once-a-day formulation
for this compound.
The joint venture had also performed work on a second, related product in
the central nervous system therapeutic area. Initial formulation work on a third
product combining Oxycodone with a narcotic antagonist has been performed. We
have the exclusive rights to the proprietary, development and commercial
exploitation for the worldwide markets for these two products developed by ERL.
We will not have to pay Elan royalties on revenues that may be realized from
these products.
Under the joint venture, Elan had received 409,165 shares of our common
stock; warrants exercisable at $18.00 per share for 100,000 shares of our common
stock; and Series A and Series B preferred stock of Elite Labs, which were
convertible into 764,221 shares and 52,089 shares, respectively, of our common
stock. Under the Termination Agreement, Elan and its transferees retained the
securities, and the shares of Series A and Series B preferred stock were
converted into our common stock under the preexisting terms for conversion. We
did not pay, nor did Elan receive, any cash consideration under the Termination
Agreement.
PATENTS
We have secured five United States patents and have pending applications
for five United States patents and seven foreign patents. Two of the United
States issued patents have been assigned for a fee to Colgene Corporation for
the pulsed release delivery of methylphenidate.
The pending patent applications relate to four different control release
pharmaceutical products on which we are working. Included among these patent
- 7 -
applications are applications for U.S. patents relating to formulations for
delayed and sustained release of drugs. In addition, an application for a U.S.
patent for a narcotic antagonist product that we are developing to be used with
Oxycodone and other narcotics to minimize the abuse potential for the narcotics
was filed. We intend to apply for patents for other products in the future;
however, there can be no assurance that any of the pending applications or other
application which we may file will be granted.
Prior to the enactment in the United States of new laws adopting certain
changes mandated by the General Agreement on Tariffs and Trade (GATT), the
exclusive rights afforded by a U.S. Patent were for a period of 17 years
measured from the date of grant. Under these new laws, the term of any U.S.
Patent granted on an application filed subsequent to June 8, 1995, terminates 20
years from the date on which the patent application was filed in the United
States or the first priority date, whichever occurs first. Future patents
granted on an application filed before June 8, 1995, will have a term that
terminates 20 years from such date, or 17 years from the date of grant,
whichever date is later.
Under the Drug Price Act, a U.S. Product patent or use patent may be
extended for up to five years under certain circumstances to compensate the
patent holder for the time required for FDA regulatory review of the product.
The benefits of this act are available only to the first approved use of the
active ingredient in the drug product and may be applied only to one patent per
drug product. There can be no assurance that we will be able to take advantage
of this law.
Also, different countries have different procedures for obtaining patents,
and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us in one country of a patent
covering an invention will be followed by the issuance in other countries of
patents covering the same invention, or that any judicial interpretation of the
validity, enforceability, or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Furthermore, even if our patents are
determined to be valid, enforceable, and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with us using the resulting alternative technology.
We also rely upon unpatented proprietary and trade secret technology that
we seek to protect, in part, by confidentiality agreements with our
collaborative partners, employees, consultants, outside scientific
collaborators, sponsored researchers, and other advisors. There can be no
assurance that these agreements provide meaningful protection or that they will
not be breached, that we will have adequate remedies for any such breach, or
that our trade secrets, proprietary know-how, and technological advances will
not otherwise become known to others. In addition, there can be no assurance
that, despite precautions taken by us, others have not and will not obtain
access to our proprietary technology.
- 8 -
TRADEMARKS
We have received Notices of Allowance from the U.S. Patent and Trademark
Office granting trademark protection for the following trademarks: Albulite CR,
Nifelite CR, Diltilite CD, Ketolite CR, Verelite CR and Glucolite CR. However,
since we currently plan to license our products to marketing partners and not to
sell under our brand name, we do not currently intend to register or maintain
any trademarks.
GOVERNMENT REGULATION AND APPROVAL
The design, development and marketing of pharmaceutical compounds, on
which our success depends, are intensely regulated by governmental regulatory
agencies, including the FDA. Non-compliance with applicable requirements can
result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecution based on products or
manufacturing practices that violate statutory requirements. In addition,
administrative remedies can involve voluntary withdrawal of products, as well as
the refusal of the FDA to approve ANDAs and NDAs. The FDA also has the authority
to withdraw approval of drugs in accordance with statutory due process
procedures.
Before a drug may be marketed, it must be approved by the FDA. The FDA
approval procedure for an ANDA relies on bioequivalency tests which compare the
applicant's drug with an already approved reference drug, rather than with
clinical studies. Because we concentrated, during our first few years of
business operations, on developing products which are intended to be
bioequivalent to existing controlled-release formulations, we expect that such
drug products will require ANDA filings and not clinical efficacy and safety
studies, which are generally more expensive and time-consuming.
The FDA approval procedure for an NDA is generally a two-step process.
During the Initial Product Development stage, an investigational new drug
application ("IND") for each product is filed with the FDA. A 30-day waiting
period after the filing of each IND is required by the FDA prior to the
commencement of initial clinical testing. If the FDA does not comment on or
question the IND within such 30-day period, initial clinical studies may begin.
If, however, the FDA has comments or questions, the questions must be answered
to the satisfaction of the FDA before initial clinical testing can begin. In
some instances this process could result in substantial delay and expense. These
initial clinical studies generally constitute Phase I of the NDA process and are
conducted to demonstrate the product tolerance/safety and pharmacokinetic in
healthy subjects.
After Phase I testing, extensive efficacy and safety studies in patients
must be conducted. After completion of the required clinical testing, an NDA is
filed, and its approval, which is required for marketing in the United States,
involves an extensive review process by the FDA. The NDA itself is a complicated
and detailed application and must include the results of extensive clinical and
other testing, the cost of which is substantial. However, the NDA filings
contemplated by us on already marketed drugs would be made under Sections 505
(b)(1) or 505 (b)(2) of the Drug Price Act, which do
- 9 -
not require certain studies that would otherwise be necessary; accordingly, the
development timetable would be shorter. While the FDA is required to review
applications within a certain timeframe in the review process, the FDA
frequently requests that additional information be submitted. The effect of such
request and subsequent submission can significantly extend the time for the NDA
review process. Until an NDA is actually approved, there can be no assurance
that the information requested and submitted will be considered adequate by the
FDA to justify approval. The packaging and labeling of our developed products
are also subject to FDA regulation. It is impossible to anticipate the amount of
time that will be needed to obtain FDA approval to market any product.
Whether or not FDA approval has been obtained, approval of the product by
comparable regulatory authorities in any foreign country must be obtained prior
to the commencement of marketing of the product in that country. All marketing
in territories other than the United States will be conducted through other
pharmaceutical companies based in those countries. The approval procedure varies
from country to country, can involve additional testing, and the time required
may differ from that required for FDA approval. Although there are some
procedures for unified filings for certain European countries, in general each
country has its own procedures and requirements, many of which are time
consuming and expensive. Thus, there can be substantial delays in obtaining
required approvals from both the FDA and foreign regulatory authorities after
the relevant applications are filed. After such approvals are obtained, further
delays may be encountered before the products become commercially available.
All facilities and manufacturing techniques used for the manufacture of
products for clinical use or for sale must be operated in conformity with Good
Manufacturing Practice ("GMP") regulations issued by the FDA. In the event the
Company engages in manufacturing on a commercial basis for distribution of
products, it will be required to operate its facilities in accordance with GMP
regulations. If we hire another company to perform contract manufacturing for
us, we must ensure that our contractor's facilities conform to GMP regulations.
Under the Generic Drug Enforcement Act, ANDA applicants (including
officers, directors and employees) who are convicted of a crime involving
dishonest or fraudulent activity (even outside the FDA regulatory context) are
subject to debarment. Debarment is disqualification from submitting or
participating in the submission of future ANDAs for a period of years or
permanently. The Generic Drug Enforcement Act also authorizes the FDA to refuse
to accept ANDAs from any company which employs or uses the services of a
debarred individual. We do not believe that we receive any services from any
debarred person.
We are also subject to federal, state, and local laws of general
applicability, such as laws relating to working conditions. We are also licensed
by, registered with, and subject to periodic inspection and regulation by the
DEA and New Jersey state agencies, pursuant to federal and state legislation
relating to drugs and narcotics. Certain drugs that we may develop in the future
may be subject to regulations under the Controlled Substances Act and related
statutes. At such time as we begin manufacturing products, we may become subject
to the Prescription Drug Marketing Act, which regulates wholesale distributors
of prescription drugs.
- 10 -
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are subject to comprehensive federal, state and local environmental
laws and regulations that govern, among other things, air polluting emissions,
waste water discharges, solid and hazardous waste disposal, and the remediation
of contamination associated with current or past generation handling and
disposal activities, including the past practices of corporations as to which we
are the successor. We do not expect that compliance with such environmental laws
will have a material effect on our capital expenditures, earnings or competitive
position in the foreseeable future. There can be no assurance, however, that
future changes in environmental laws or regulations, administrative actions or
enforcement actions, or remediation obligations arising under environmental laws
will not have a material adverse effect on our capital expenditures, earnings or
competitive position.
COMPETITION
We compete in two related but distinct areas: we perform contract research
and development work regarding controlled-release drug technology for other
pharmaceutical companies, and we seek to develop and market (either on our own
or by license to other companies) proprietary controlled-release pharmaceutical
products. In both areas, our competition consists of those companies which
develop controlled-release drugs and alternative drug delivery systems.
In recent years, an increasing number of pharmaceutical companies have
become interested in the development and commercialization of products
incorporating advanced or novel drug delivery systems. We expect that
competition in the field of drug delivery will significantly increase in the
future since smaller specialized research and development companies are
beginning to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of these companies have greater financial and other resources as well as more
experience than we do in commercializing pharmaceutical products. Certain
companies have a track record of success in developing controlled-release drugs.
Significant among these are Alpharma, Inc., Andrx Corporation, Elan Corporation
Plc, Biovail Corporation, Ethypharm S.A., Eurand, Impax Laboratories, Inc., K-V
Pharmaceutical Company, Penwest Pharmaceuticals Company and Skyepharma Plc. Each
of these companies has developed expertise in certain types of drug delivery
systems, although such expertise does not carry over to developing a
controlled-release version of all drugs. Such companies may develop new drug
formulations and products or may improve existing drug formulations and products
more efficiently than we can. In addition, almost all of our competitors have
vastly greater resources than we do. While our product development capabilities
and patent protection may help us to maintain our market position in the field
of advanced drug delivery, there can be no assurance that others will not be
able to develop such capabilities or alternative technologies outside the scope
of our patents, if any, or that even if patent protection is obtained, such
patents will not be successfully challenged in the future.
- 11 -
SOURCES AND AVAILABILITY OF RAW MATERIALS; MANUFACTURING
We are not currently in the manufacturing phase of any product and
therefore we do not require significant amounts of raw materials. We currently
obtain the raw materials that we need from over twenty suppliers.
We have acquired pharmaceutical manufacturing equipment with the intention
of manufacturing products that we develop and, on a contract basis, products
developed by other pharmaceutical companies. In anticipation of this
manufacturing, we have registered our facilities with the FDA and the Drug
Enforcement Agency (DEA).
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Each year we have had some customers that have accounted for a large
percentage of our sales. If our contracts with these customers terminate or
expire, we will lose substantially all of our revenues. We are constantly
working to develop new relationships with existing or new customers, but despite
these efforts we may not, at the time that any of our current contracts expire,
have other contracts in place generating similar revenue.
EMPLOYEES
As of June 25, 2004, we had 15 full-time employees and three part-time
employees. Both full-time and part-time employees are engaged in administration,
research and development. None of our employees is represented by a labor union
and we have never experienced a work stoppage. We believe our relationship with
our employees to be good. However, our ability to achieve our financial and
operational objectives depends in large part upon our continuing ability to
attract, integrate, retain and motivate highly qualified personnel, and upon the
continued service of our senior management and key personnel.
RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in Elite and in analyzing our forward-looking statements.
OUR CONTINUING LOSSES ENDANGER OUR VIABILITY AS A GOING-CONCERN AND HAVE CAUSED
OUR AUDITORS TO ISSUE A "GOING CONCERN" ANNUAL AUDIT REPORT.
We reported net losses of $6,514,217, $4,061,422, $1,774,527 and
$13,964,981 for the fiscal years ended March 31, 2004, 2003, 2002 and 2001,
respectively. At March 31, 2004, we had an accumulated deficit of approximately
$35.1 million, consolidated assets of approximately $7.9 million, stockholders'
equity of approximately
- 12 -
$4.0 million, and working capital of approximately $1.3 million. Our products
are in the development and early deployment stage and have not generated any
significant revenue to date. Our independent auditors have issued a "going
concern" audit report for our financial statements for each of the fiscal years
ended March 31, 2004 and March 31, 2003.
WE HAVE A RELATIVELY LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR FUTURE PROSPECTS.
Although we have been in operation since 1990, we have a relatively short
operating history and limited financial data upon which you may evaluate our
business and prospects. In addition, our business model is likely to continue to
evolve as we attempt to expand our product offerings and enter new markets. As a
result, our potential for future profitability must be considered in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies that are attempting to move into new markets and continuing to
innovate with new and unproven technologies. Some of these risks relate to our
potential inability to:
o develop new products;
o obtain regulatory approval of our products;
o manage our growth, control expenditures and align costs with
revenues;
o attract, retain and motivate qualified personnel; and
o respond to competitive developments.
If we do not effectively address the risks we face, our business model may
become unworkable and we may not achieve or sustain profitability or
successfully develop any products.
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
To date, we have not been profitable, and since our inception in 1990, we
have not generated any significant revenues. We may never be profitable or, if
we become profitable, we may be unable to sustain profitability. We have
sustained losses in each year since our incorporation in 1990. We incurred net
losses of $6,514,217, $4,061,422, $1,774,527 and $13,964,981 for the years ended
March 31, 2004, 2003, 2002 and 2001, respectively. We expect to realize
significant losses for the current year of operation. We expect to continue to
incur losses until we are able to generate sufficient revenues to support our
operations and offset operating costs.
- 13 -
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE
2003 ALL OF HIS POSITIONS WITH ELITE, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT
ON US.
On June 3, 2003, Dr. Atul M. Mehta, our founder and former President and
Chief Executive Officer resigned from all of his positions with Elite. In the
past, we have been reliant on Dr. Mehta's scientific expertise in developing our
products. There can be no assurance that we will successfully replace Dr.
Mehta's expertise. In addition, the loss of Dr. Mehta's services may adversely
affect our relationships with our contract partners.
Under the settlement of a litigation initiated by Dr. Mehta in July 2003
for alleged breach of his employment agreement we paid Dr. Mehta $400,000 and
certain expense reimbursements, and the Company received a short term option for
it or its designees to acquire all of the shares of Common Stock owned by Dr.
Mehta and his affiliate at $2.00 per share. As part of the settlement the
Company also extended the expiration date of options to purchase 770,000 shares
of Common Stock held by Dr. Mehta and he relinquished any rights to the
Company's intellectual property and agreed to certain non-disclosure and
non-competition covenants. The Company also provided him with certain
"piggyback" registration rights with respect to the 770,000 shares issuable upon
exercise of the foregoing options granted by the Company.
WE HAVE NOT YET SUCCESSFULLY DEVELOPED A PRODUCT FOR COMMERCIAL USE, AND IF WE
ARE UNABLE TO DO SO OUR BUSINESS MAY NOT CONTINUE.
We have not yet developed a product to the stage of generating commercial
sales. Our research activities are characterized by the inherent risk that the
research will not yield results that will receive FDA approval or otherwise be
suitable for commercial exploitation. Of the products currently under
development and on which we are devoting substantial attention, we have had one
product in prelaunch state, one product in pilot Phase I study, one product in
bioequivalence stage and two additional products in preclinical testing.
Additional studies including either pivotal bioequivalence or efficacy studies
will be required before commercialization.
Successful completion of pivotal biostudies is required for us to file an
ANDA with the FDA, and successful completion of pivotal clinical trials is
required for us to file a NDA with the FDA. ANDAs are filed with respect to
generic versions of existing FDA approved products while NDAs are filed with
respect to new products. In order for any of our products to be commercialized,
FDA approval is required.
IF WE NEED ADDITIONAL FINANCING IN ORDER TO SATISFY OUR SIGNIFICANT CAPITAL
REQUIREMENTS, AND ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, IT WOULD IMPAIR OUR
ABILITY TO CONTINUE TO DO BUSINESS.
- 14 -
We completed a private placement in December 2003 of 1,645,000 shares of
our common stock yielding gross proceeds of $3,290,000 before commissions and
expenses. We anticipate, based on our assumptions relating to our operations,
and assuming the consummation of a financing and refinancing of equipment
purchases currently being negotiated and consummation of a private placement of
shares of our common stock which is the subject of a non-binding agreement in
principle with a broker-dealer, that we have sufficient capital to satisfy our
contemplated cash requirements through March 31, 2005. After that time, we may
require additional financing. In particular, we expect to make substantial
expenditures as we further develop and seek to commercialize our products. We
also expect that our rate of spending will accelerate as the result of increased
costs and expenses associated with seeking regulatory approval and
commercialization of products now in development. One of the conditions to
consummation of a proposed acquisition (see "Proposed Acquisition") as currently
proposed is that we have liquid assets of approximately $8,000,000. We have no
current arrangements; however, (i) we are currently negotiating an equipment
purchase financing agreement, which we anticipate closing in the reasonably
forseeable future, (ii) we have entered into a non-binding agreement in
principle with a broker-dealer to effect a private placement of shares of our
Common Stock and (iii) there is the potential exercise of options and warrants
that are currently outstanding. We have no way of knowing whether any of the
options or warrants will be exercised. We do not currently have commitments for
other financing, and so do not know whether additional financing would be
available to us on favorable terms, or at all. Our inability to obtain
additional financing when needed would impair our ability to continue our
business and to consummate the proposed acquisition on the terms proposed. If
any future financing involves the sale of our securities, our then-existing
stockholders' equity could be substantially diluted. On the other hand, if we
incurred debt, we would be subject to risks associated with indebtedness,
including the risk that interest rates might fluctuate and cash flow would be
insufficient to pay principal and interest on such indebtedness. If our plans
change, or our assumptions change or prove to be inaccurate, or our cash flow
proves to be insufficient to fund our operations due to unanticipated expenses
or problems, we would be required to seek additional financing sooner than
anticipated.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND AVOID CLAIMS
THAT WE INFRINGED ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR ABILITY TO
CONDUCT BUSINESS MAY BE IMPAIRED.
Our success, competitive position and amount of royalty income will depend
in part on our ability to obtain patent protection in various jurisdictions
related to our technologies, processes and products. We intend to file patent
applications seeking such protection, but we cannot be certain that these
applications will result in the issuance of patents. If patents are issued,
third parties may sue us to challenge such patent protection, and although we
know of no reason why they should prevail, it is possible that they could. It is
likewise possible that our patents may not prevent third parties from developing
similar or competing products. In addition, although we are not aware of any
threatened or pending actions by third parties asserting that we have infringed
on their patents, and are not aware of any actions we have taken that would lead
to such a claim, it is possible that we might be sued for infringement. The cost
involved in bringing suits against others for infringement of our patents, or in
defending any suits brought against us, can be substantial. We may not possess
sufficient funds to prosecute or defend such suits. If our products were found
to infringe upon patents
- 15 -
issued to others, we would be prohibited from manufacturing or selling such
products and we could be required to pay substantial damages.
In addition, we may be required to obtain licenses to patents, or other
proprietary rights of third parties, in connection with the development and use
of our products and technologies as they relate to other persons' technologies.
At such time as we discover a need to obtain any such license, we will need to
establish whether we will be able to obtain such a license on favorable terms.
The failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products.
We also rely upon trade secrets and proprietary know-how. We seek to
protect this know-how in part by confidentiality agreements. We consistently
require our employees and potential business partners to execute confidentiality
agreements prior to doing business with us. However, it is possible that an
employee would disclose confidential information in violation of his or her
agreement, or that our trade secrets would otherwise become known or be
independently developed in such a manner that we will have no practical
recourse.
We are not engaged in any litigation, nor contemplating any, with regard
to a claim that someone has infringed one of our patents, revealed any of our
trade secrets, or otherwise misused our confidential information.
See also the risk under the heading "OUR FOUNDER AND FORMER PRESIDENT AND
CHIEF EXECUTIVE OFFICER RESIGNED IN JUNE 2003 ALL OF HIS POSITIONS WITH ELITE,
WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON US".
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE FDA REGULATION AND FOREIGN
REGULATION, WHICH PRESENTS NUMEROUS RISKS TO US.
The manufacturing and marketing of pharmaceutical products in the United
States and abroad are subject to stringent governmental regulation. The sale of
any of our products for use in humans in the United States will require the
prior approval of the FDA. Similar approvals by comparable agencies are required
in most foreign countries. The FDA has established mandatory procedures and
safety standards that apply to the clinical testing, manufacture and marketing
of pharmaceutical products. Obtaining FDA approval for a new therapeutic product
may take several years and involve substantial expenditures. None of our
products has been approved for sale or use in humans in the United States or
elsewhere.
If we or our licensees fail to obtain or maintain requisite governmental
approvals or fail to obtain or maintain approvals of the scope requested, it
will delay or preclude us or our licensees or marketing partners from marketing
our products. It could also limit the commercial use of our products.
- 16 -
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE, WHICH COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR BUSINESS MODEL.
The pharmaceutical industry is highly competitive, and we may be unable to
compete effectively. In addition, it is undergoing rapid and significant
technological change, and we expect competition to intensify as technical
advances in each field are made and become more widely known. An increasing
number of pharmaceutical companies have been or are becoming interested in the
development and commercialization of products incorporating advanced or novel
drug delivery systems. We expect that competition in the field of drug delivery
will increase in the future as other specialized research and development
companies begin to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Many
of our competitors have longer operating histories and greater financial,
research and development, marketing and other resources than we do. Such
companies may develop new formulations and products, or may improve existing
ones, more efficiently than we can. Our success, if any, will depend in part on
our ability to keep pace with the changing technology in the fields in which we
operate.
IF OTHER KEY PERSONNEL WERE TO LEAVE ELITE OR IF WE ARE UNSUCCESSFUL IN
ATTRACTING QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP PRODUCTS COULD BE
MATERIALLY HARMED.
Our success depends in large part on our ability to attract and retain
highly qualified scientific, technical and business personnel experienced in the
development, manufacture and marketing of controlled release drug delivery
systems and products. Our business and financial results could be materially
harmed by the inability to attract or retain qualified personnel.
WE HAVE BEEN DEPENDENT ON CONTRACTS WITH A FEW MAJOR CUSTOMERS FOR SUBSTANTIALLY
ALL OF OUR REVENUES, AND IF THOSE CONTRACTS TERMINATE OR EXPIRE, WE WILL BE
WITHOUT THE STREAMS OF REVENUE THAT THEY HAVE REPRESENTED, UNLESS WE ARE ABLE TO
NEGOTIATE OTHER CONTRACTS WITH OTHER CUSTOMERS THAT GENERATE SIMILAR REVENUES.
Each year we had some customers that accounted for a large percentage of
our sales. If our contracts with these customers terminate or expire, we will
lose substantially all of our revenues. As a result of inadequate funds to
conduct research and development we were unable to generate material revenues
under existing contracts for the year ended March 31, 2004, we had only $258,250
of revenues, of which $108,250 were research and development fees earned in
conjunction with our distinct development, license and manufacture agreements.
There can be no assurance that at the time that any of our current contracts
expire, other contracts will be in place generating similar revenue.
- 17 -
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.
The design, development and manufacture of our products involve an
inherent risk of product liability claims. We have procured product liability
insurance having a maximum limit of $1,000,000; however, a successful claim
against us in excess of the policy limits could be very expensive to us,
damaging our financial position. Our insurance coverage may be materially below
the coverage maintained by many of the other companies engaged in similar
activities. To the best of our knowledge, no product liability claim has been
made against us as of May 31, 2004.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical companies, including ours. For the twelve months
ended March 31, 2004, the closing sale price on the American Stock Exchange of
our common stock fluctuated from a high of $3.80 per share to a low of $1.34 per
share. The per share price of our Common Stock may not remain at or exceed
current levels. The market price for our Common Stock, an and for the stock of
pharmaceutical companies generally, has been highly volatile. The market price
of our Common Stock may be affected by:
o Results of our clinical trials;
o Approval or disapproval of abbreviated new drug applications or new
drug applications;
o Announcements of innovations, new products or new patents by us or
by our competitors;
o Governmental regulation;
o Patent or proprietary rights developments;
o Proxy contests or litigation;
o News regarding the efficacy of, safety of or demand for drugs or
drug technologies;
o Economic and market conditions, generally and related to the
pharmaceutical industry;
o Healthcare legislation;
o Changes in third-party reimbursement policies for drugs; and
- 18 -
o Fluctuations in our operating results.
IF ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AVAILABLE FOR ISSUANCE OR
SHARES ELIGIBLE FOR FUTURE SALE WERE INTRODUCED INTO THE MARKET, IT COULD HURT
OUR STOCK PRICE AND MAKE A CHANGE OF CONTROL MORE DIFFICULT TO ACHIEVE.
As of June 22, 2004, there were 25,000,000 shares of our Common Stock
authorized of which 12,104,423 shares of our Common Stock were issued and
outstanding. In addition, as of that date there were 5,071,289 shares eligible
for issuance upon exercise of currently outstanding options and warrants,
although options for 790,000 of those shares of stock had not yet vested. If
every warrant and option holder exercised his or her rights, once all the
currently unvested options vested, there would be 17,175,712 shares of Common
Stock outstanding. An amendment to our Certificate of Incorporation which would
increase the authorized shares of capital stock from 25,000,000 shares of Common
Stock to 65,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock is being considered by our stockholders for approval at the adjourned
Annual Meeting of Stockholders scheduled to be held on July 19, 2004.
Currently, more than 11,030,000 outstanding shares are eligible for resale
and 150,000 shares are registered for resale upon exercise of certain
outstanding warrants and options. We are unable to estimate the amount, timing
or nature of future sales of outstanding Common Stock. Sales of substantial
amounts of the Common Stock in the public market by these holders or perceptions
that such sales may take place may lower the Common Stock's market price.
The authorized but unissued shares of the Company's Common Stock or if the
proposed amendment to our Certificate of Incorporation is approved by
stockholders the issuance of one or more series of Preferred Shares could be
used to make a change of control of the Company more difficult and expensive.
Under certain circumstances, such shares could be used to create impediments to
or frustrate persons seeking to cause a takeover or to gain control of the
Company. Such shares could be sold to purchasers who might side with the Board
in opposing a takeover bid that the Board determines not to be in the best
interests of its stockholders. The Amendment, if approved, might also have the
effect of discouraging an attempt by another person or entity, through the
acquisition of a substantial number of shares of the Company's Common Stock to
acquire control of the Company with a view to consummating a merger, sale of all
or part of the Company's assets, or a similar transaction, since the issuance of
new shares could be used to dilute the stock ownership of such person or entity.
IF PENNY STOCK REGULATIONS BECOME APPLICABLE TO OUR COMMON STOCK THEY WILL
IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK, THE ABILITY OF OUR
STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED.
- 19 -
The SEC has adopted regulations that generally define a "penny stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share subject to certain exceptions.
Exceptions include equity securities issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for more than three years, or (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require that prior to
any transaction involving a penny stock, a risk of disclosure schedule must be
delivered to the buyer explaining the penny stock market and its risks. Our
Common Stock is currently trading at under $5.00 per share. Although we
currently fall under one of the exceptions, if at a later time we fail to meet
one of the exceptions, tour Common Stock will be considered a penny stock. As
such the market liquidity for our Common Stock will be limited to the ability of
broker-dealers to sell it in compliance with the above-mentioned disclosure
requirements.
You should be aware that, according to the SEC, the market for penny
stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
o Control of the market for the security by one or a few
broker-dealers;
o "Boiler room" practices involving high-pressure sales tactics;
o Manipulation of prices through prearranged matching of purchases and
sales;
o The release of misleading information;
o Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
o Dumping of securities by broker-dealers after prices have been
manipulated to a desired level, which hurts the price of the stock
and causes investors to suffer loss.
We are aware of the abuses that have occurred in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.
Section 203 of the Delaware General Corporation Law prohibits a merger
with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include,
for example, approval by the holders of two-thirds of the outstanding shares
(not counting the 15%
- 20 -
shareholder), or approval by the Board prior to the 15% shareholder acquiring
its 15% ownership. This provision makes it difficult for a potential acquirer to
force a merger with or takeover of the Company, and could thus limit the price
that certain investors might be willing to pay in the future for shares of our
Common Stock.
ITEM 2. PROPERTIES
Our facility, which we own, is located at 165 Ludlow Avenue, Northvale,
New Jersey, and contains approximately 20,000 square feet of floor space. This
real property and the improvements thereon are encumbered by a mortgage in favor
of the New Jersey Economic Development Authority (NJEDA) as security for a loan
through tax-exempt bonds from the NJEDA to Elite. The mortgage document contains
certain customary provisions including, without limitation, the right of NJEDA
to foreclose upon a default by Elite.
We are currently using our facilities as a laboratory and office space and
intend to use it in the future for manufacturing, as well. Properties used in
our operations are considered suitable for the purposes for which they are used
and are believed to be adequate to meet our needs for the reasonably foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may be party to litigation from
time to time.
We had an employment agreement ("Employment Agreement") with our former
President and Chief Executive Officer, Dr. Atul M. Mehta.
On June 3, 2003, Dr. Mehta resigned from all positions, including as a
director, that he held with us, while reserving his rights under his Employment
Agreement and under common law. On July 3, 2003, Dr. Mehta instituted litigation
against the Company and one of our directors, Mr. Moore, in the Superior Court
of New Jersey for, among other things, allegedly breaching his Employment
Agreement and for defamation, and claims that he is entitled to receive his
salary through June 6, 2006. His salary would total approximately $1,000,000
through June 6, 2006.
Prior to Dr. Mehta's resignation, a majority of the members of the
Company's Board of Directors had notified Dr. Mehta that they believed that
sufficient grounds existed for the termination of his employment for "severe
cause" pursuant to his Employment Agreement. We filed counterclaims against Dr.
Mehta and a motion to dismiss Mehta's claims and, as part of that motion, sought
to compel Mehta to assign and transfer to the Company all patents in Mehta's
name which were developed during his employment with us. Mr. Moore's motion to
dismiss Mehta's claim against him individually was granted.
- 21 -
In November 2003, the parties settled the action. In April 2004, the
parties closed upon the settlement. Under the settlement the Company paid to
Mehta $400,000 and certain expense reimbursements and the Company received a
short term option in favor of the Company or its designees to acquire all of
Mehta's shares of common stock of the Company (including those held by his
affiliates) at $2.00 per share. The Company paid $100,000 into escrow which
shall be released to Mehta if the option to purchase the shares of common stock
held by Mehta and his affiliates is not exercised within a specified time. As
part of the settlement, the Company extended expiration dates of options to
purchase 770,000 shares held by Mehta including options with respect to 70,000
shares which had expired and Mehta relinquished any rights to the Company's
intellectual property, and Mehta agreed to certain non-disclosure and
non-competition covenants. Under the settlement the Company also provided Mehta
with certain "piggyback" registration rights with respect to shares not sold
pursuant to the options granted to him by the Company.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of our fiscal year ended March 31, 2004. However at the Annual Meeting
of Stockholders held on June 22, 2004 the stockholders (i) elected as its four
Directors Messrs. Bernard Beck, Harmon Aronson, John A. Moore and Eric L.
Sichel; (ii) approved our 2004 Stock Option Plan; (iii) ratified the actions of
the Board of Director's amending certain outstanding options and warrants and
(iv) approved our sale of an aggregate of 70,000 shares of Common Stock to a
Director and an affiliate of a Director. The Meeting was adjourned to July 19,
2004 for additional time for the stockholders to consider the proposal to
approve the Amendment to Article Fourth of the Certificate of Incorporation to
increase the authorized capital stock from 25,000,000 shares of Common Stock,
par value $.01 per share, to 65,000,000 shares of Common Stock, par value $.01
per share, and 5,000,000 shares of Preferred Stock, par value $.01 per share.
- 22 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the American Stock Exchange under the symbol
"ELI". The following table shows, for the periods indicated, the high and low
sales prices per share of our common stock as reported by the American Stock
Exchange.
COMMON STOCK
QUARTER ENDED HIGH LOW
FISCAL YEAR
ENDING MARCH 31, 2004:
March 31, 2004........................................ $3.80 $2.40
December 30, 2003..................................... $3.30 $2.70
September 30, 2003.................................... $3.49 $2.05
June 30, 2003 ........................................ $3.49 $1.25
FISCAL YEAR
ENDING MARCH 31, 2003:
March 31, 2003........................................ $2.20 $1.45
December 31, 2002..................................... $3.15 $1.80
September 30, 2002.................................... $5.25 $2.41
June 30, 2002......................................... $7.75 $4.50
FISCAL YEAR
ENDING MARCH 31, 2002:
March 31, 2002........................................ $8.30 $5.65
December 31, 2001..................................... $7.75 $5.90
September 30, 2001.................................... $11.50 $5.10
June 30, 2001......................................... $11.45 $4.85
As of June 21, 2004, the last reported sale price of our common stock, as
reported by the American Stock Exchange, was $2.34 per share.
As of June 23, 2004, there were approximately 130 holders of record and
approximately 1600 beneficial owners of our common stock. We are informed and
believe that as of April 20, 2004, Cede & Co. held 7,069,228 shares of our
common stock as nominee for Depository Trust Company, 55 Water Street, New York,
New York 10004. It is our understanding that Cede & Co. and Depository Trust
Company both disclaim any beneficial ownership therein and that such shares are
held for the account of numerous other persons.
- 23 -
We have never paid cash dividends on our capital stock. We currently
anticipate that we will retain all available funds for use in the operation and
expansion of our business, and do not anticipate paying any cash dividends in
the foreseeable future.
We issued in 2003 nontransferable Class C Warrants to the record holders
of our Class A Warrants on November 30,2002, their expiration date, on a
one-for-one basis. The Class C Warrants are exercisable for the same number of
shares of Common Stock as the Class A Warrants, have an exercise price of $5.00
per share (subject to adjustment in certain circumstances), expire November 30,
2005, and have substantially all of the same terms and conditions as the Class A
Warrants. The issuance was exempt from registration under the Securities Act of
1933, as amended (the "Act") by virtue of the provisions of Section 3(a)(9).
On February 6, 2004 the Board of Directors authorized the extension of the
expiration date from June 30, 2004 to November 30, 2005 of the outstanding Class
B Warrants to purchase an aggregate of 681,002 shares of our Common Stock at a
price of $5.00 per share. The Class B Warrants were originally issued as part of
units of shares of Common Stock and Class B Warrants in a private placement to a
group of investors. Included among the holders of the Class B Warrants are
Richard A. Brown, then a Director, who holds, along with his son and an
affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge Ventures
Inc., a consultant to the Company since December, 2003, which holds 25,000 Class
B Warrants.
In December 2003, Elite completed a placement to a group of investors of
1,645,000 shares of Common Stock at a price of $2.00 per share for aggregate
gross proceeds of $3,290,000. We paid Montauk Financial Group Inc., the
Placement Agent cash commissions of $72,000 and granted the Placement Agent and
its associates five year warrants to purchase an aggregate of 50,000 shares of
our Common Stock at a price of $2.00 per share. The issuance of the shares and
warrants was exempt from registration under the Act by virtue of the provisions
of Section 4(2).
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about compensation plans
(including individual compensation arrangements) under which our equity
securities are authorized for issuance to employees or non-employees (such as
directors and consultants), as of March 31, 2004:
- 24 -
Plan category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance
warrants and rights* rights
(a) (b) (c)
Equity compensation approved 1,133,300 $2.68 70,700
by security holders of a
subsidiary
Equity compensation plans not 1,283,750 $4.63 N/A
approved by security holders
--------- ---------
Total 2,417,050 $3.70 70,700
- -----------
* Exclusive of Class B and Class C Warrants.
Our stockholders approved on June 22,2004 the adoption by the Board of
Directors of the 2004 Stock Option Plan which provides that 1,500,000 shares of
our Common Stock are subject to options to be granted under the Plan. If options
granted under the Plan lapse without being exercised, other options may be
granted covering the shares not purchased under such lapsed options. Options may
be granted pursuant to the Plan to employees, officers, Directors of and
consultants to Elite. The Plan permits the Company to grant both incentive stock
options ("Incentive Stock Options" or "ISOs") within the meaning of Section 422
of the Code, and other options which do not qualify as Incentive Stock Options
(the "Non-Qualified Options").
The aggregate number of shares of Common Stock reserved for issuance under
the Plan is 1,500,000, of which incentive stock options with respect to 123,300
shares with an exercise price of $2.34 per share were granted on June 22, 2004
to employee holders of outstanding options previously granted by the Company
having on the date of the grant a higher exercise price; such grants subject to
the cancellation of the previously granted options. To the extent that stock
options previously granted are not surrendered for cancellation then options
exercisable for that same number of shares of Common Stock will be available for
grant under the Plan. Such grants may be deemed repricing of the outstanding
options and will result in charges to earnings of the Company equal to the
difference between (i) the fair value of the vested portion of the new options
granted, utilizing the Black-Scholes options pricing model on each grant date
and (ii) the charges to earnings previously made as a result of the grants of
the options being replaced, which will have a dilutive effect on the earnings
per share and, as a result, will likely have an adverse effect on the market
price of the Common Stock of the Company.
Options to purchase 30,000 shares of Common Stock were granted on June 22,
2004 to each of the Company's four Directors under the Pan exercisable at $2.34
per share.
- 25 -
Unless earlier terminated by the Board of Directors, the Plan (but not
outstanding options) terminates on March 1, 2014, after which no further awards
may be granted under the Plan. The Plan is administered by the full Board of
Directors or, at the Board's discretion, by a committee of the Board consisting
of at least two persons who are "disinterested persons" defined under Rule
16b-2(c)(ii) under the Securities Exchange Act of 1934, as amended (the
"Committee").
Recipients of options under the Plan ("Optionees") are selected by the
Board or the Committee. The Board or Committee determines the terms of each
option grant including (1) the purchase price of shares subject to options, (2)
the dates on which options become exercisable and (3) the expiration date of
each option (which may not exceed ten years from the date of grant). The minimum
per share purchase price of options granted under the Plan for Incentive Stock
Options is the fair market value (as defined in the Plan) or for Nonqualified
Options is 85% of Fair Market Value of one share of the Common Stock on the date
the option is granted.
Optionees will have no voting, dividend or other rights as stockholders
with respect to shares of Common Stock covered by options prior to becoming the
holders of record of such shares. The purchase price upon the exercise of
options may be paid in cash, by certified bank or cashier's check, by tendering
stock held by the Optionee, as well as by cashless exercise either through the
surrender of other shares subject to the option or through a broker. The total
number of shares of Common Stock available under the Plan, and the number of
shares and per share exercise price under outstanding options will be
appropriately adjusted in the event of any stock dividend, reorganization,
merger or recapitalization of the Company or similar corporate event.
The Board of Directors may at any time terminate the Plan or from time to
time make such modifications or amendments to the Plan as it may deem advisable
and the Board or Committee may adjust, reduce, cancel and regrant an unexercised
option if the fair market value declines below the exercise price except as may
be required by any national stock exchange or national market association on
which the Common Stock is then listed. In no event may the Board, without the
approval of stockholders, amend the Plan to increase the maximum number of
shares of Common Stock for which options may be granted under the Plan or change
the class of persons eligible to receive options under the Plan.
Subject to limitations set forth in the Plan, the terms of option
agreements will be determined by the Board or Committee, and need not be uniform
among Optionees.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and for
the last five fiscal years, should be read in conjunction with our Consolidated
Financial Statements and related Notes thereto appearing elsewhere in this
Annual Report on Form 10-K. The consolidated selected financial data are derived
from our consolidated financial statements that have been audited by Miller,
Ellin & Company, LLP, our independent auditors, as
- 26 -
indicated in their report included herein. The selected financial data provided
below is not necessarily indicative of our future results of operations or
financial performance.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net Revenues $ 258,250 $ 630,310 $ 1,197,507 $ 95,246 $ 10,315
Net (loss) $ (6,514,217) $ (4,061,422) $ (1,774,527) $(13,964,981) $ (2,976,392)
Net (loss) per $ (0.58) $ (0.40) $ (0.19) $ (1.53) $ (0.35)
common share
Total Assets $ 7,853,434 $ 8,696,222 $ 12,724,498 $ 12,350,301 $ 9,162,383
Long-term obligations $ 2,495,000 $ 2,720,000 $ 3,788,148 $ 2,765,000 $ 2,885,000
Weighted average 11,168,618 10,069,991 9,561,299 9,135,369 8,287,648
number of shares
outstanding
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The following discussion and analysis should be read with the financial
statements and accompanying notes, included elsewhere in this Annual Report on
Form 10-K. It is intended to assist the reader in understanding and evaluating
our financial position.
OVERVIEW
We are involved in the development of controlled drug delivery systems and
products. Our products are in varying stages of development and testing. We also
conduct research and development, from time to time, on behalf of other
pharmaceutical companies although these activities have generated only limited
revenue to date.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion addresses our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of
- 27 -
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates and judgment, including those related to bad debts, intangible
assets, income taxes, workers compensation, and contingencies and litigation.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Our most critical
accounting policies include the recognition of revenue upon completion of
certain phases of projects under research and development contracts. The Company
also assesses a need for an allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. The Company
assesses the recoverability of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. The Company assesses its exposure to current commitments
and contingencies. It should be noted that actual results may differ from these
estimates under different assumptions or conditions.
During the year ended March 31, 2003, we elected to prospectively
recognize the fair value of stock options granted to employees and members of
the Board of Directors, effective as of the beginning of the fiscal year, which
resulted in our taking a charge of $20,550 and $1,166,601 during the years ended
March 31, 2003 and 2004, respectively. The fair value of stock options held by
employees and members of the Board of Directors which have been granted or
repriced subsequent to March 31, 2004 is expected to continue to affect the
results of operations of future periods, as we continue to grant or reprice
stock options to reward our management team.
YEAR ENDED MARCH 31, 2004 VS. YEAR ENDED MARCH 31, 2003
Our Auditor's Report on the accompanying financial statements states that
such financial statements have been prepared assuming that we will continue as a
going concern. We have incurred a significant loss and negative cash flows
during our fiscal year ended March 31, 2004 which have significantly decreased
our working capital and increased our accumulated deficit. Our auditors have
stated in their report that these conditions raise substantial doubt about our
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of the assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty. Management believes that
cost reductions already implemented will reduce losses in the future, and with
our existing working capital levels, anticipate that we will be able to continue
our operations at least through the end of our current fiscal year.
- 28 -
Our revenues for the year ended March 31, 2004 were $258,250, a decrease
of $372,060 over the comparable prior year, or approximately 59% from the prior
year. For the year ended March 31, 2003, revenues consisted of product
formulation fees of $187,810 earned in conjunction with our joint venture in ERL
which terminated on September 30, 2002. Of our revenues for the years ended
March 31, 2004 and March 31, 2003, $108,500 and $442,500, respectively, were
research and development and testing fees earned in conjunction with our
distinct development, license and manufacturing agreements.
General and administrative expenses for the year ended March 31, 2004 were
$2,549,846, an increase of $691,777, or approximately 37% from the prior year.
The increase in general and administrative expenses was substantially due to
increases in legal and consulting fees as well as approximately $550,000 in
expenses including $400,000 as compensation, resulting from a settlement of
litigation instituted by our former President with respect to the termination of
his employment agreement.
Research and development costs for the year ended March 31, 2004, were
$2,075,074, an increase of $61,495 or approximately 3% from the prior year, due
primarily due to increased research and development wages, additional
biostudies, laboratory supplies and raw materials used in our research and
development processes. We expect our research and development costs to continue
to increase in future periods as a result of the ERL joint venture termination
as we will be solely responsible to fund product development, which we will do
from internal resources or through loans or investment by third parties.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties associated with the development of
controlled release drug delivery products as described in this report.
Other expenses for the year ended March 31, 2004 were $1,813,711, an
increase of $1,304,903, or approximately 256% from the prior year. The increase
was primarily due to charges related to the modification of the warrant exchange
offer, the issuance of stock options and warrants valued at $1,926,908 (an
increase of $1,664,020) and the reduction in interest income due to lower rates
and compensating balances in the amount of $72,927, partially offset by
increases in sale of New Jersey Tax losses of $79,353 and the related settlement
of vendor litigation for $150,000.
- 29 -
Our net loss for the year ended March 31, 2004 was $6,514,217 as compared
to $4,061,422 in the prior year, or an increase of approximately 60% from the
prior year, primarily due to the decrease in net revenues, and increases in
research and development and administrative expenses, including increased
charges of $1,664,020 due to the issuance of stock options, warrants and the
modification of warrant exchange offer.
YEAR ENDED MARCH 31, 2003 VS. YEAR ENDED MARCH 31, 2002
Revenues for the year ended March 31, 2003 were $630,310, a decrease of
$567,197 over the comparable prior year, or approximately 47.4% from the prior
year. For the years ended March 31, 2003 and 2002, revenues consisted of product
formulation fees of $187,810 and $601,057, respectively, earned in conjunction
with our joint venture in ERL. Revenues also consisted of research and
development, and testing fees of $442,500 and $593,000, respectively, earned in
conjunction with our distinct development, license and manufacturing agreements.
ERL had no revenue after our acquisition of Elan's interest in it on September
30, 2002. Elan's obligation to make payments to us or to ERL terminated upon the
termination of the joint venture with Elan. The absence of payments from Elan
will affect revenues for periods subsequent to September 30, 2002.
General and administrative expenses for the year ended March 31, 2003 were
$1,858,069, an increase of $1,094,382, or approximately 143% from the prior
year. The increase in general and administrative expenses was substantially due
to increases in legal and consulting fees as well as approximately $600,000 in
expenses resulting from a consent solicitation and a proxy solicitation with
regard to the election of our directors.
Research and development costs for the year ended March 31, 2003, were
$2,013,579, an increase of $404,471 or approximately 25% from the prior year.
Research and development costs have increased primarily from the result of
increased research and development wages, additional biostudies, laboratory
supplies and raw materials used in our research and development processes. We
expect our research and development costs to increase in future periods as a
result of the ERL joint venture termination as we will be solely responsible to
fund product development, which we will do from internal resources or through
loans or investment by third parties.
We are unable to provide a break-down of the specific costs associated
with the research and development of each product on which we devoted resources
because a significant portion of the costs are generally associated with
salaries, laboratory supplies, laboratory and manufacturing expenses, utilities
and similar expenses. We have not historically allocated these expenses to any
particular product. In addition, we cannot estimate the additional costs and
expenses that may be incurred in order to potentially complete the development
of any product, nor can we estimate the amount of time that might be involved in
such development because of the uncertainties
- 30 -
associated with the development of controlled release drug delivery products as
described in this report.
Other expenses for the year ended March 31, 2003 were $580,482, an
increase of $112,774, or approximately 24% from the prior year. A decrease in
equity loss in joint venture of $321,261 due to its termination was more than
offset by charges related to the exchange of warrants and the issuance of stock
options in the amount of $262,888 and the reduction in interest income due to
lower rates and compensating balances in the amount of $163,363.
Our net loss for the year ended March 31, 2003 was $4,061,422 as compared
to $1,774,527 in the prior year, an increase of 129% over the prior year. The
increase in the net loss was primarily due to the decrease in net revenues, and
an increase in research and development and administrative expenses associated
with the consent solicitation and proxy solicitation with regard to the election
of our directors. Our net loss included our 80.1% equity loss in ERL, which was
$186,379 and $507,640, respectively, for the years ended March 31, 2003 and
2002. ERL's net loss for the years ended March 31, 2003 and 2002 was $232,682
and $633,642, respectively.
MATERIAL CHANGES IN FINANCIAL CONDITION
Our working capital (total current assets less total current liabilities),
which was $2,950,513 as of March 31, 2003, decreased to $1,289,764 as of March
31, 2004, or approximately 56% from the prior year. The decrease is primarily
due to our net loss from operations and deposits on equipment, partially offset
by net proceeds of $3,179,000 from the sale of common stock through a private
placement and the receipt of $30,000 from the exercise of stock options.
We experienced negative cash flow from operations of $3,658,321 for the
year ended March 31, 2004, primarily due to our net loss from operations of
$6,514,217 offset by non-cash charges of $2,259,744. Non-cash charges included,
but were not limited to $1,166,601 in connection with the issuance of stock
options, a charge of $587,983 in connection with the issuance of warrants, and a
charge related to modification of warrant exchange offer of $172,324.
The Company recently completed a Good Manufacturing Practices ("GMP")
batch for a product currently licensed with a pharmaceutical company under a
development and license agreement entered into June 2001. The Company received
$30,000 under the Agreement and expects to complete two additional GMP batches
in the near future under the terms of the licensing agreement. The Company
expects to manufacture the product with revenues projected to be generated in
the second quarter of fiscal year ended March 31, 2005. The Company projects
earning additional milestone payments under the Agreement subject to completion
of the GMP batches.
On May 10, 2004, Elite Labs entered into an agreement with Purdue Pharma,
L.P. ("Purdue") through which Purdue was granted the exclusive right to evaluate
- 31 -
certain abuse resistance drug formulation technology of the Company and an
exclusive option to negotiate a license to develop and commercialize Oxycodone
products under the Company's technology pursuant to which the Company received
$150,000 in the first quarter of fiscal year ended March 31, 2005. Should Purdue
agree to proceed with licensing, the Company would receive significant upfront
licensing fees. The Company estimates that the sales market for Oxycodone
exceeds $2 billion annually.
The Company is also negotiating an agreement for the financing and
refinancing of equipment purchases and has entered into a non-binding agreement
in principle with a broker-dealer to effect a private placement of shares of its
Common Stock.
No assurance can be given that the Company will consummate any of the
transactions discussed above other than the foregoing $150,000 receipt or that
any of the agreements will result in any material revenues.
LIQUIDITY AND CAPITAL RESOURCES
For our fiscal year ended March 31, 2004 our operations did not generate
positive cash flow. We have financed our operations primarily through the
private sale of our equity securities. We had working capital (current assets
less current liabilities) of $1.3 million at March 31, 2004 compared with $3.0
million at March 31, 2003. Cash and cash equivalents at March 31, 2004 were $2.1
million, a decrease of $1.2 million from the $3.3 million at March 31, 2003.
Net cash used in operating activities was $3,658,000 during the year ended
March 31, 2004, compared to $2,573,000 for the year ended March 31, 2003. Net
cash used in operating activities during the year ended March 31, 2004 resulted
primarily from our net loss of $6.5 million, offset in part by an increase in
accounts payable and certain non-cash expenses. Net cash used in operating
activities during the year ended March 31, 2003 resulted primarily from a net
loss of $4.1 million, offset in part by a reduction in accounts receivable from
joint venture and certain non-cash expenses.
Investing activities utilized net cash of $495,000 during the year ended
March 31, 2004 and utilized net cash of $469,000 during the year ended March 31,
2003. Net cash used in investing activities during the year ended March 31, 2004
resulted primarily from equipment deposits, patent filings and an increase in
restricted cash. Net cash used in investing activities during the year ended
March 31, 2003 resulted primarily from the acquisition of property and
equipment, offset in part by a decrease in restricted cash and the maturity of
short term investments.
Financing activities provided net cash of $2,994,000 during the year ended
March 31, 2004 and utilized net cash of $546,000 during the year ended March 31,
2003. Net cash provided by financing activities during the year ended March 31,
2004 resulted primarily from the issuance of common stock through a private
placement offset by the repayment of indebtedness. Net cash used in financing
activities during the year ended March 31, 2003 resulted from the repurchase of
stock and the repayment of indebtedness, offset in part by the sale of common
stock and warrants.
Our capital expenditures aggregated $398,580 and $679,000 for the years
ended March 31, 2004 and 2003, respectively. Such expenditures consisted
primarily
- 32 -
of the acquisition of property and equipment necessary to support our existing
operations and expected growth. The Company is in process of aggressively
seeking financing for this equipment. As discussed below, in June 2004 we are
negotiating an agreement with a financial institution for a partial financing
and refinancing of our equipment purchases and we have entered into a
non-binding agreement in principle with a broker-dealer to attempt a private
placement of our shares of Common Stock. We anticipate that our capital
expenditures in addition to the foregoing financing for our fiscal year ending
March 31, 2005 will be limited to expenditures that can be funded entirely by
development contracts that include provisions for such funding for these
expenditures. These expenditures substantially would relate to the acquisition
of property and equipment in connection with our operations.
As described in Note 6 to our consolidated financial statements, we have
outstanding $2,495,000 in aggregate amount of bonds. The bonds bear interest at
a rate of 7.75% per annum and are due on various dates between 2004 and
thereafter. The bonds are secured by a first lien on our facility in Northvale,
New Jersey. Pursuant to the terms of the bonds, several restricted cash accounts
have been established for the payment of bond principal and interest. Bond
proceeds were utilized for the refinancing of the land and building we currently
own, for the purchase of certain manufacturing equipment and related building
improvements and the maintenance of a $300,000 debt service reserve. All of the
restricted cash, other than the debt service reserve, is expected to be expended
within twelve months and is therefore categorized as a current asset on our
consolidated balance sheet as of March 31, 2004. Pursuant to terms of the bond
indenture agreement pursuant to which the bonds were issued, we are required to
observe certain covenants, including covenants relating to the incurrence of
additional indebtedness, the granting of liens and the maintenance of certain
financial covenants. As of March 31, 2004, we were in compliance with the
covenants contained in the bond indenture agreement.
In August 2003, our Board of Directors authorized the negotiation with
Nostrum Pharmaceuticals Inc., a privately held corporation, of an agreement to
acquire Nostrum through a merger with our wholly-owned subsidiary; such
acquisition to be subject to several conditions including the approval by the
stockholders of the Company and the Company's having liquid assets of at least
$8,000,000. The agreement if consummated on the proposed terms will result in
the issuance of three times the number of shares outstanding at the time of
closing and options to purchase a substantial additional number of shares. No
assurance can be given that any agreement will be executed, that the merger will
be consummated or, if consummated, that it will be consummated of the foregoing
terms.
As a result of the significant expenditures associated with potential
mergers and acquisitions in our fiscal year ended March 31, 2004, and other
legal, accounting and consulting expenses, quarterly cash expenses far exceeded
our generated revenues in 2004. In order to conserve cash in fiscal year 2005,
we intend to continue to limit the number of products under active development
to six. The six products that continue in development were deemed by management
to be the most suitable for continued development given the Company's limited
resources. However, while we anticipate having adequate capital to support our
operations
- 33 -
for the fiscal year ended March 31, 2005, we will need to raise capital and/or
generate additional revenues in order to support our operations beyond that
time. To the extent that revenues do not meet expectations or our cost cutting
measures do not become effective, we will need to raise additional capital
sooner.
Elite Labs is currently negotiating with a financial institution an
agreement in order to finance the purchase of certain machinery and equipment
and to recast the outstanding balance due to a bank in the approximate amount of
$212,000. Under the terms of the proposed agreement, Elite Labs will borrow
$612,000 payable in 36 monthly installments of $20,917, including principal plus
interest at 14% per annum. The loan is to be secured by two pieces of equipment
and the guaranty of the Company. In addition, restricted cash currently held as
collateral under the note payable in the amount of $225,000 will be released to
the lender, of which $125,500 is to be utilized to prepay the first six monthly
payments under the loan. The balance is to be held as a security deposit which
will be released if the Company raises certain proceeds from the sale of its
securities or other licensing fees. No assurance can be given that an agreement
will be executed or that if executed it will provide for materially the same
terms.
The Company has entered into a non-binding agreement in principle with a
registered broker-dealer to attempt a private placement of shares of its Common
Stock. Should Purdue Pharma decide to proceed with the terms of its licensing
agreement with the Company, the terms of the agreement provide for the Company
to receive significant milestone payments before March 31, 2005.
No assurance can be given that the Company will consummate any of the
transactions discussed above or that any material funds will be derived
therefrom.
We also, from time to time, consider potential strategic transactions
including acquisitions, strategic alliances, joint ventures and licensing
arrangements with other pharmaceutical companies. The Company retained an
investment banking firm to assist with its efforts. There can be no assurance
that any such transaction will be available or consummated in the future.
Reference is made to "Risk Factors" under "Item 1 -- Business" for a
description of certain risks that may affect the achievement of our objectives
and results discussed herein.
As of March 31, 2004, our principal source of liquidity was approximately
$2,105,000 of cash and cash equivalents. Additionally, we may have access to
funds of approximately $200,000 that may be generated from the potential sale of
New Jersey tax losses. There can be no assurance that the sale of tax losses
will be effected or be material.
The following table depicts our obligations and commitments to make future
payments under existing contracts and contingent commitments.
- 34 -
Payments Due by Period
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS
-----
Note payable 225,000 75,000 150,000 -- --
EDA Bonds payable 2,495,000 150,000 530,000 430,000 1,385,000
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or own any market risk sensitive instruments entered
into for trading purposes or for purposes other than trading purposes. All loans
to us have been made at fixed interest rates and; accordingly, the market risk
to us prior to maturity is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K are
our Consolidated Financial Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
- 35 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, as of June 22, 2004, and their
biographical information are set forth below:
- --------------------------------------------------------------------------------
NAME AGE POSITION
- --------------------------------------------------------------------------------
Bernard Berk 55 Chairman of the Board, Chief Executive Officer
- --------------------------------------------------------------------------------
John A. Moore 39 Director
- --------------------------------------------------------------------------------
Harmon Aronson 60 Director
- --------------------------------------------------------------------------------
Eric L. Sichel, M.D. 44 Director
- --------------------------------------------------------------------------------
Mark I. Gittelman 43 Chief Financial Officer, Secretary and Treasurer
- --------------------------------------------------------------------------------
The principal occupations and employment of each such person during the
past five years is set forth below. In each instance in which dates are not
provided in connection with the person's business experience, he has held the
position indicated for at least the past five years.
Bernard Berk was appointed the Chief Executive Officer of the Company in
June 2003, a Director in February 2004 and Chairman of the Board on May 12,
2004. Mr. Berk has been the President and Chief Executive Officer of Michael
Andrews Corporation, a pharmaceutical management consultant firm, since 1996.
Mr. Berk devotes and is to devote during his employment substantially all of his
time to the operations of the Company. From 1994 until 1996, Mr. Berk was
President and Chief Executive Officer of Nale Pharmaceutical Corporation. From
1989 until 1994, Mr. Berk was Senior Vice President of Sales, Marketing and
Business Development of Par Pharmaceuticals, Inc. Mr. Berk holds a B.S. from New
York University.
John A. Moore was Chairman of the Board from June 2003 until his
resignation on May 12, 2004. He has been Chief Executive Officer and President
of Edson Moore Healthcare Ventures, an investment entity, since July 2002. Mr.
Moore had been Chief Executive Officer and President from 1994 through June 2001
and since 1994 a director of Optimer, Inc., a research based polymer development
company. He is also a director and Chairman of ImaRx Therapeutics, Inc., a
privately-held company engaged in medical technology development and a director
of Medi-Hut Co., Inc., a publicly traded medical products company. Mr. Moore
holds a B.A. in history from Rutgers University.
Harmon Aronson, Ph.D. has been employed since 1997 as the President of
Aronson Kaufman Associates, Inc., a New Jersey-based consulting firm that
provides manufacturing, FDA regulatory and compliance services to pharmaceutical
and biotechnology companies. Its clients include United States and international
firms
- 36 -
manufacturing bulk drugs and finished pharmaceutical dosage products who are
seeking FDA approval for their products for the U.S. Market. Prior to 1997, Dr.
Aronson was employed by Biocraft Laboratories, a leading generic drug
manufacturer, rising to the position of Vice President of Quality Management;
prior to that he held the position of Vice President of Non-Antibiotic
Operations, where he was responsible for the manufacturing of all the firm's
non-antibiotic products. Dr. Aronson holds a Ph.D. in Physics from the
University of Chicago. He is also a director of Elite Research, Ltd. Other than
Elite Research Ltd., no company with which Dr. Aronson was affiliated in the
past was a parent, subsidiary or other affiliate of the Company.
Eric L. Sichel, M.D. has been since 1997, owner and President of Sichel
Medical Ventures, Inc., a company that provides biotechnology company
assessments and investment banking services. From 1995 through 1996, Dr. Sichel
was a senior analyst in the biotechnology field for Alex Brown & Sons, Inc.
Prior to that, Dr. Sichel was affiliated with Sandoz Pharmaceuticals Corp. in
various capacities, including associate director of transplantation/immunology.
Dr. Sichel holds an M.B.A. from Columbia University and an M.D. from UMDNJ--New
Jersey Medical School, and is licensed to practice medicine by the State of New
York.
Mark I. Gittelman, CPA, our Chief Financial Officer, Secretary and
Treasurer, is the President of Gittelman & Co., P.C., an accounting firm. Prior
to forming Gittelman & Co., P.C. in 1984, he worked as a certified public
accountant with the international accounting firm of KPMG Peat Marwick, LLP. Mr.
Gittelman holds a B.S. in accounting from New York University and a Masters of
Science in Taxation from Farleigh Dickinson University. He is a Certified Public
Accountant licensed in New Jersey and New York, and is a member of the American
Institute of Certified Public Accountants ("AICPA") and the New Jersey and New
York States Societies of CPAs.
Each director holds office (subject to our By-Laws) until the next annual
meeting of shareholders and until such director's successor has been elected and
qualified. All of our executive officers are serving until the next annual
meeting of directors and until their successors have been duly elected and
qualified. There are no family relationships between any of our directors and
executive officers.
AUDIT COMMITTEE
Our Board of Directors has an Audit Committee and, since March 2004, a
Nominating Committee. The Board has no other standing committees. The Audit
Committee members are John A. Moore, Harmon Aronson and Eric L. Sichel. The
Audit Committee had two meetings during the fiscal year ended March 31, 2004.
The Company's Board of Directors has adopted a written charter for the Audit
Committee, a copy of which was included as an appendix to the Company's proxy
statement sent to stockholders in connection with the annual meeting of
stockholders held October 11, 2001.
Other than Mr. Moore, we deem the members of its Audit Committee to be
independent as independence is defined in Section 121(A) of the American Stock
- 37 -
Exchange Listing Standards, as amended effective December 1, 2003. The Board
determined that Mr. Sichel, an independent director, qualifies as the audit
committee financial expert within the meaning of that term under the applicable
regulations under the Securities Exchange Act of 1934.
Audit Committee Report: The following is the Audit Committee Report made
by all its members.
The Audit Committee reviewed and discussed the audited financial
statements with management. The Audit Committee discussed with the independent
auditors of the Company the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AU 380), as modified or
supplemented. The Audit Committee received the written disclosures and the
letter from the independent accountants required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as modified or supplemented. The Audit
Committee discussed with the independent accountant the independent accountant's
independence. Based upon the foregoing review and discussions, the Audit
Committee recommended to the Board of Directors of the Company that the audited
financial statements of the Company be included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2004 as filed with the
Commission.
HARMON ARONSON
JOHN A. MOORE
ERIC L. SICHEL
NOMINATING COMMITTEE
The Nominating Committee appointed, on June 22, 2004, is authorized to
select the nominees of the Board of Directors for election as directors. The
members are John A. Moore, Harmon Aronson and Bernard Berk. In selecting
nominees the Committee identifies and evaluates the current Directors and their
commitment to the policy of the Company and each individual's qualifications and
availability. The Committee believes that a nominee for director of the Company
should have an appropriate level of sophistication, knowledge and understanding
of the Company and the industry, stockholder relations and finance and
accounting for publicly held companies. The Committee also considers the need to
select a nominee who has the appropriate experience and financial background who
could qualify as an "audit committee financial expert" within the meaning of the
rules under the Securities Exchange Act of 1934 and of the American Stock
Exchange. The Company has not engaged any third party to assist in the process
of identifying or evaluating candidates.
The Company currently does not have a process for considering candidates
put forward by stockholders other than those who are directors of the Company.
In view of the recent effectiveness of the requirements under the Securities
Exchange Act of 1934 as to a policy with respect to the consideration of
- 38 -
candidates put forward by stockholders other than those who are directors of the
Company, the adoption of such policy and the procedures for stockholders to
submit candidates is under consideration by the recently elected Board.
MEETINGS
During the fiscal year ended March 31, 2004, our Board of Directors held
nine meetings. Each director attended 75 percent or more of the aggregate number
of meetings and committees of which he was a member that were held during the
period of his service as a director.
The Company does not have a formal policy regarding attendance by members
of the Board of Directors at the Company's annual meeting of stockholders,
although it does encourage attendance by the directors. Historically, more than
a majority of the directors have attended the annual meeting.
CODE OF CONDUCT
At the first meeting of the Board of Directors following the Annual
Meeting of Stockholders held on June 22, 2004 it adopted a Code of Business
Conduct and Ethics for its directors, officers and employees which it believes
complies with the requirements for a company code of ethics for financial
officers that were promulgated by the SEC pursuant to the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act") as well as for the members of our Board of
Directors. The directors will be surveyed annually regarding their compliance
with the policies as set forth in the Code of Conduct for Directors. A copy of
the Code of Business Conduct and Ethics may be obtained without charge by a
written request addressed to the Treasurer, Elite Pharmaceuticals, Inc., 165
Ludlow Avenue, Northvale, New Jersey 07647. We intend to disclose any amendment
to, or waiver of, a provision of the Business Conduct and Ethics for Directors
in a report filed under the Securities Exchange Act of 1934 within five business
days of the amendment or waiver.
STOCKHOLDER COMMUNICATIONS
Stockholders who wish to send communications to the Board of Directors
should address their communication to Elite Pharmaceuticals Inc., 165 Ludlow
Avenue, Northvale, New Jersey 07647, attention Mark I. Gittelman, Secretary. Mr.
Gittelman has been instructed to collect and organize stockholder communications
and forward copies to each of the Directors. If a communication relates to the
Secretary, such communication should be sent to the same address, attention
Bernard Berk, Chairman.
Typically, we do not forward to our directors communications from our
stockholders or other communications which are of a personal nature or not
related to the duties and responsibilities of the Board, including:
o Junk mail and mass mailings
- 39 -
o New product suggestions
o Resumes and other forms of job inquiries
o Opinion surveys and polls
o Business solicitations or advertisements
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers and persons who own more than ten percent
of a registered class of our equity securities (collectively, "Reporting
Persons") to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities of Elite.
Reporting Persons are required by SEC regulation to furnish Elite with copies of
all Section 16(a) forms that they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us, we believe that during
fiscal year ended March 31, 2004 all Reporting Persons complied with all
applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The Company entered into a three-year employment agreement effective July
23, 2003 with Mr. Berk providing for (i) his full time employment as Chief
Executive Officer at an annual base salary of $200,000, (ii) the grant to him of
options which vest immediately to purchase 300,000 shares of Common Stock at a
price of $2.01 per share, the closing share price on the American Stock Exchange
on the date of grant and (iii) the grant of options to purchase an additional
300,000 shares at the $2.01 per share to vest on consummation of a "strategic
transaction" while he is employed as Chief Executive Officer. The consummation
of such transaction will result in the increase of his base annual salary to
$310,140 effective with the consummation. A strategic transaction is defined as
any one of the following transactions provided that the net value of the
consideration to the Company or its stockholders determined in good faith by the
Board of Directors is at least $10,000,000: (i) the sale of all or substantially
all of the assets of the Company, (ii) a merger or consolidation or business
combination, or (iii) the sale by the Company of debt or equity securities.
Either party upon notice may terminate Mr. Berk's employment except that a
termination by the Company without cause or because of his permanent disability
or a termination by him for cause will result in severance pay in the form of
the continuation of his base salary for the balance of the term or two years,
whichever is longer, less in the event of termination for permanent disability
the amount of payments under a disability insurance policy maintained by the
Company. The Company is also to
- 40 -
continue to pay during the foregoing period the premiums for life and disability
insurance policies. Furthermore, in the event that Mr. Berk terminates his
employment following a "change of control" event he is to receive, payable in 24
monthly installments, an amount which will depend on the fair value of the
consideration determined in good faith by the Board of Directors received by the
Company or stockholders from the "change of control" event less related expenses
("Net Fair Value") -- $500,000 if the Net Fair Value is $10 million or less; the
greater of $500,000 or twice his then base annual salary, if the Net Fair Value
is greater than $10 million but not more than $20 million, or $1,000,000 if the
Net Fair Value is greater than $20 million. A "change of control" event is (i) a
merger or consolidation in which securities possessing more than 50% of the
voting power is issued to persons other than the holders of voting securities of
the Company immediately prior to the event, (ii) the sale, transfer or
disposition of all or substantially all the assets of the Company, or (iii) the
sale by the Company of securities to a third party.
The agreement contains Mr. Berk's non-competition covenant for a period of
one year from termination.
The Company is a party to an agreement dated February 26, 1998 whereby
fees are paid to Gittelman & Co., P.C., a firm wholly-owned by Mark I.
Gittelman, the Company's Chief Financial Officer, Secretary and Treasurer, in
consideration for services rendered by the firm as internal accountant and
financial and management consultant. The firm's services include the services
rendered by Mr. Gittelman in his capacity as Chief Financial Officer, Secretary
and Treasurer. For the fiscal years ended March 31, 2004, 2003 and 2002, the
fees paid by the Company under the agreement were $168,750, $167,544 and
$91,260, respectively. The services rendered by the firm to the Company averaged
128, 127 and 69 hours per month, respectively, of which an average of 30 hours
per month were services rendered by him in his capacity as an officer of the
Company.
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the three years ended March 31,
2004, awarded or paid to, or earned by Bernard Berk, our President and Chief
Executive Officer since June 2003 and our former President and Chief Executive
Officer, Dr. Atul M. Mehta. Dr. Mehta resigned as an employee and as a director
of Elite as of June 3, 2003. No other executive officer of the Company received
compensation exceeding $100,000 during those periods.
- 41 -
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Fiscal Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal Year(1) ------ ----- Compensa- Stock Awards Underlying Payouts Compensa-
Position ------- tion(3) ------------ Options ------- tion
-------- ------------ ---------- ---------
- -------------------------------------------------------------------------------------------------------------------------
Bernard Berk, 2003-04 $166,667 -- -- -- 300,000(4) -- --
President and
Chief
Executive
Officer
- -------------------------------------------------------------------------------------------------------------------------
Atul M. Mehta, 2003-04 $ 53,684 -- $ 3,040 -- --(5) -- --
Ph.D. former 2002-03 $330,140 -- $ 3,040 -- -- -- --
President and 2001-02 $272,855 -- $ 83,856 -- 50,000(6) -- --
Chief
executive
Officer(2)
- -------------------------------------------------------------------------------------------------------------------------
(1) The Company's fiscal year begins on April 1 and ends on March 31. The
information is provided for each fiscal year beginning April 1.
(2) Dr. Mehta resigned as an employee and as a director of Elite as of
June 3, 2003.
(3) Other Annual Compensation represents use of a company car, premiums
paid by the Company for life insurance on Dr. Mehta's life for the benefit of
his wife and the purchase price of $80,856 for options acquired from Dr. Mehta.
(4) Does not include 300,000 options which are exercisable only upon
occurrence of a "strategic transaction".
(5) See "Item 3 - Legal Proceedings" for settlement of a litigation
providing for extension of expiration dates of options granted prior to April 1,
2001 to him to purchase 770,000 shares.
(6) By action on February 21, 2002, our Board of Directors corrected a
clerical error in options for 425,000 shares of our common stock granted to Dr.
Mehta. This correction did not result in any additional shares being subject to
options held by Dr. Mehta, any change in the exercise price or a change in any
other material terms.
Option Grants to and Exercised by Executive Officers in Last Fiscal Year
Options granted to executive officers of the Company named in the Summary
Compensation Table during the fiscal year ended March 31, 2004 were as follows:
- 42 -
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF
SHARES % OF TOTAL EXERCISE EXPIRATION POTENTIAL REALIZED VALUE AT
UNDERLYING OPTIONS GRANTED PRICE DATE ASSUMED ANNUAL RATES OF
NAME OPTIONS TO EMPLOYEES IN STOCK PRICE APPRECIATION
GRANTED FISCAL YEAR FOR OPTION TERM
5% 10%
Bernard Berk 300,000(1) 41.4% $2.01 6/2/13 $982,223 $1,564,027
Atul M. Mehta(2) -- -- -- -- -- --
(1) Does not include options to purchase 300,000 shares at $2.01 per share which
are exercisable only upon occurrence of a "strategic transaction". See
"Executive Officers".
(2) See "Item 3 - Legal Proceedings" for settlement of litigation providing for
extension of expiration dates of options to purchase 770,000 shares granted
prior to year ended March 31, 2002 while he was an executive officer.
No options were exercised by executive officers during the fiscal year
ended March 31, 2004.
SHARES VALUE NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME EXERCISED REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR-END (1)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Atul M. -0- -0- 270,000 -0- $0 --
Mehta(2) -0- -0- 100,000 -0- $0 --
-0- -0- 100,000 -0- $48,000 --
-0- -0- 100,000 -0- $98,000 --
-0- -0- 100,000 -0- $148,000 --
-0- -0- 100,000 -0- $198,000 --
Bernard
Berk (3) -0- -0- 300,000 300,000 $291,000 $291,000
(1) The dollar values are calculated by determining the difference between $2.98
per share, the fair market value of the common stock at March 31, 2004, and the
exercise price of the respective options.
(2) Dr. Mehta resigned as an officer/employee and director as of June 3, 2003.
(3) Mr. Berk entered the employ of the Company in June 2003.
- 43 -
COMPENSATION OF DIRECTORS
Each non-affiliated director receives $2,000 as compensation for each
meeting attended.
On February 6, 2004, the Board of Directors authorized the payment of a
fee of $125,000 per annum retroactive to January 1, 2004 to Mr. Moore as
compensation for his services as Chairman of the Board. The fee is based on the
substantial duties the Board has assigned to him, principally to assist the
Chief Executive Officer in the management of the Company's operations, and the
time required to perform such duties. Mr. Moore earned $46,875 under the
authorization for the period through May 12, 2004, the date of his resignation
as Chairman.
OPTIONS AND WARRANTS
In October 2003, the American Stock Exchange (the "Amex") amended its
Rules to require stockholder approval of material amendments to a stock option
plan or other equity compensation arrangements pursuant to which options or
stock may be acquired by officers, director or employees, subject to certain
limited exceptions.
Our stockholders approved at its meeting held on June 22, 2004 the
following amendments by our Board of Directors of the provisions of outstanding
options and warrants issued to officers, directors or employees of, or
consultants to, the Company.
On June 6, 2003 our Board of Directors reduced the exercise price of
options to purchase 30,000 shares of the Company's Common Stock granted on
January 31, 2003 to each of the following persons, each of whom was then a
Director: Messrs. Harmon Aronson, Richard A. Brown, John P. deNeufville, John A.
Moore, Donald S. Pearson and Eric L. Sichel from $6.50 to $2.21 per share, which
was 110% of the closing per share sale price of the Common Stock on the American
Stock Exchange on the date of the amendment. These options vest as follows:
10,000 shares on December 12, 2003, 10,000 shares on December 12, 2004 and
10,000 shares on December 12, 2005. The options expire at the earlier to occur
of: (1) January 31, 2013; or (2) the date one year after the optionee ceases to
be a director of or a consultant or advisor of the Company. On February 6, 2004,
the Board of Directors authorized a further amendment to all the options held by
Messrs. Brown (30,000 shares), deNeufville (55,000 shares) and Pearson (90,000
shares) to extend their expiration date to a date two years following the June
22, 2004 Annual Meeting. On March 8, 2004 our Board of Directors amended those
options held by then Directors which contained an exercise price greater than
$2.21 to reduce their exercise price to $2.21 per share.
- 44 -
Name Shares Subject Date of Original Expiration
---- To Amended Options Grant Exercise Price Date
------------------ ----- -------------- ----
Donald Pearson 30,000 7/1/99 $6.00 6/22/06
30,000 1/2/01 $6.50 6/22/06
Harmon Aronson 30,000 7/1/99 $6.00 9/1/09
30,000 1/2/01 $6.50 1/1/11
Eric Sichel 30,000 8/2/01 $10.00 8/2/11
On May 12, 2004 our Board of Director also authorized an amendment to the
expiration dates of options to purchase 330,000 shares held by Mr. Moore, of
which 30,000 options granted in January 2003 and exercisable at $2.21 have an
expiration date of January 13, 2003 and 300,000 options granted in June 2003 and
exercisable at $2.01 per share have an expiration date of June 13, 2013. Similar
to the above amendment of the options held by Messrs Pearson, Aronson and
Sichel, the options will terminate on the earlier of their current expiration
date or a date two years after Mr. Moore ceases to be a director of the Company.
On March 8, 2004, the Board of Directors confirmed the reduction to $2.21
per share of the $3.31 per share exercise price of options of purchase 30,000
shares granted on June 13, 2003 to each of three employees. Such options vest in
three equal annual installments commencing with the date of grant.
On February 6, 2004 the Board of Directors authorized the extension of the
expiration date from June 30, 2004 to November 30, 2005 of the outstanding Class
B Warrants to purchase an aggregate of 681,002 shares of our Common Stock at a
price of $5.00 per share. The Class B Warrants were originally issued as part of
units of shares of Common Stock and Class B Warrants in a private placement to a
group of investors. Included among the holders of the Class B Warrants are
Richard A. Brown, a Director at the time, who holds, along with his son and an
affiliated trust, an aggregate of 156,250 Class B Warrants and Bridge Ventures
Inc., a consultant to the Company since December, 2003, which holds 25,000 Class
B Warrants.
The Board of Directors authorized the foregoing amendments for the
purposes of hopefully generating additional funds through the exercise of the
options or warrants, and restoring a principal purpose or purposes of the
original grants of the options or warrants to officers, directors and employees,
namely a reasonable opportunity for the holder to acquire or increase a
proprietary interest in the Company and to restore a meaningful form of noncash
compensation.
As described under "Item 3 - Legal Proceedings" a settlement of a
litigation with Dr. Atul Mehta, includes provisions for the extension of the
expiration dates to June 13, 2005 of options previously issued to Dr. Mehta to
purchase 770,000 shares of Common Stock, including options with respect to
70,000 shares which had previously expired. The number and exercise prices are
as follows:
- 45 -
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
270,000* $10.00
100,000 3.00
100,000 2.50
100,000 2.00
100,000 1.50
100,000 1.00
- ----------
* Includes the 70,000 which had expired
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 30, 2004 by (i) each director and
named executive officer, (ii) all executive officers and current directors as a
group and (iii) the persons known to us to own beneficially more than 5% of the
outstanding shares of our Common Stock. On such date, we had 12,104,423 shares
of common stock outstanding. Shares not outstanding but deemed beneficially
owned by virtue of the right of any individual to acquire shares within 60 days
are treated as outstanding only when determining the amount and percentage of
common stock owned by such individual. Each person has sole voting and
investment power with respect to the shares shown, except as noted. Unless
otherwise indicated, the address of the person named is c/o Elite
Pharmaceuticals, Inc., 165 Ludlow Avenue, Northvale, New Jersey 07647.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS
---------------- ---------------- -------------------
Bernard Berk, Chairman of the Board and Chief 300,000(1) 2.4%
Executive Officer
Harmon Aronson, Director* 70,000(2) **
Eric L. Sichel, Director* 60,000(3) **
John A. Moore, Director* 1,224,218(4) 9.9%
Mark I. Gittelman, CFO, Treasurer and Secretary 10,000(5) **
300 Colfax Avenue
Clifton, New Jersey 07013
Dr. Atul Mehta 2,257,700(6) 17.5%
c/o Andrew Giles Freda, Esq.
Edwards & Caldwell LLC
1600 Route 208
North Hawthorne, NJ 07647
Edson Moore Healthcare Ventures, Inc. 914,218(7) 7.5%
403 Marsh Lane
Wilmington, Delaware 19804
- 46 -
Jerome Belson 905,100(8) 7.5%
495 Broadway
New York, NY 10012
ALL DIRECTORS AND OFFICERS AS A GROUP 1,664,218(9) 13.0%
* See "Item 10 - Directors and Executive Officers of the Registrant" for his
address
** Less than 1% of outstanding shares
(1) Comprised of options to purchase 3000,000 shares.
(2) Comprised of options to purchase 70,000 shares.
(3) Represents options to purchase 40,000 shares and 20,000 shares owned as
co-tenant with Dana Cernea.
(4) Represents (i) options personally held by Mr. Moore to purchase 310,000
shares and (ii) 914,218 shares of common stock beneficially owned by Edson Moore
Healthcare Ventures, Inc. ("Edson Moore"), of which he is president and
principal stockholder. The 914,218 shares of common stock are comprised of (i)
764,218 shares of common stock issued to Edson Moore upon the exchange of 12,915
shares of Series A Preferred Stock, par value $1.00 per share, of Elite
Laboratories, Inc., (ii) 100,000 shares issuable upon exercise of a warrant
(exercisable through October 17, 2005) at an exercise price of $18.00 per share
and (iii) 50,000 shares acquired in a recent private placement.
(5) Comprised of options to purchase 10,000 shares.
(6) Based on the terms of the settlement of a litigation with Dr. Mehta and
includes options to purchase 770,000 shares (see "Item 3 - Legal Proceedings"),
and 312, 600 shares owned by his wife, members of his family or an affiliate.
(7) See clause (ii) of note 4 above.
(8) Based on information contained in a Schedule 13D, as amended, filed by
Jerome Belson on November 15, 2002. Includes (i) 535,200 shares held by Jerome
Belson, (ii) 53,900 shares held by Maxine Belson, wife of Jerome Belson, (iii)
7,000 shares held by Brianne Goldstein, daughter of Jerome Belson, (iv) 28,000
shares held by Majorie Belson, daughter-in-law of Jerome Belson, (v) 25,000
shares owned by the grandchildren of Jerome Belson and (vi) warrants to purchase
256,000 shares of common stock.
(9) Includes options and warrants to purchase an aggregate of 730,000 shares.
Except as otherwise set forth, information on the stock ownership of each
person was provided to the Company by such person.
Other than our 2004 Stock Option Plan, we do not have any compensation
plans or arrangements benefiting employees or non-employees under which equity
securities
- 47 -
of the Company are authorized for issuance in exchange for consideration in the
form of goods or services.
The Company is informed and believes that as of April 20, 2004, Cede & Co.
held 7,069,228 shares of the Company's common stock as nominee for Depository
Trust Company, 55 Water Street, New York, New York 10004. It is our
understanding that Cede & Co. and Depository Trust Company both disclaim any
beneficial ownership therein and that such shares are held for the account of
numerous other persons, no one of whom is believed to beneficially own five
percent or more of the common stock of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We had a contractual relationship with Donald Pearson, a former Director,
which expired on November 30, 2003, providing for Mr. Pearson to (i) refer
potential customers who will license or collaborate in the development or
purchase of the technology of the Company and (ii) render financial consulting
services to the Company. Under the arrangement, Mr. Pearson received consulting
fees aggregating $28,800, $38,400 and $12,800 for fiscal years ended March 31,
2004, 2003 and 2002, respectively. The referral fees were to be a percentage
ranging from 5% to 1% of the first $5,000,000 of revenues generated by his
referrals after deducting expenses and a credit for the consulting fees. No
revenues were generated under the arrangement. The Company also has a similar
customer referral arrangement with Mr. Harmon Aronson, a Director, to pay him a
percentage of net revenues generated by customers referred by him. No fees have
been earned under his arrangement.
See Item 10 "Directors and Executive Officer of Registrant" for
information as to employment or engagement agreements with Bernard Berk and an
affiliate of Mark I. Gittelman.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a description of the fees paid by the Company to Miller,
Ellin & Co., LLP ("Miller Ellin") during the fiscal years ended March 31, 2004
and March 31, 2003:
Audit Fees: The Company paid fees of approximately $150,000 and $119,000
to Miller Ellin in connection with its audit of the Company's financial
statements for the fiscal years ended March 31, 2004 and March 31, 2003,
respectively, its review of the Company's interim financial statements included
in the Company's Quarterly Reports on Form 10-Q during each of the fiscal years
ended March 31, 2004 and March 31, 2003.
Financial Information Systems Design and Implementation Fees: The Company
did not engage Miller Ellin during either of the years ended March 31, 2004 and
March 31, 2003 to provide advice to the Company regarding financial information
systems design and implementation.
- 48 -
Other fees: The Company did not pay any fee to Miller Ellin to perform
non-audit services during either of the years ended March 31, 2004 and March 31,
2003.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
See Financial Statements included after the signature page beginning at
page F-1.
(2) Financial statement schedules
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or the notes
thereto.
(3) List of Exhibits
See Index to Exhibits in paragraph (c) below.
(b) REPORTS ON FORM 8-K. We filed the following Current Reports on Form 8-K with
the Securities and Exchange Commission during the period from January 1, 2004
through May 31, 2004.
1. Report filed on January 8, 2004 reporting under Items 5 and 7 issuance of a
press release announcing an agreement to utilize Elite's proprietary drug
delivery technology for the development of a controlled release product.
2. Report filed on January 29, 2004 reporting under Items 5 and 7 issuance of a
press release announcing the filing of a U.S. patent application.
3. Report filed on March 5, 2004 under Items 5 and 7 reporting issuance of a
press release announcing completion of validation batches for once-a-day product
which treat allergies and their symptoms.
4. Report filed on March 10, 2004 under Items 5 and 7 reporting issuance of a
press release announcing extension by our Board of Directors of the expiration
dates of our Class B Warrants from June 23, 2004 to November 30, 2005.
5. Report filed on April 2, 2004 under Items 5 and 7 reporting issuance of a
press release disclosing the ruling by the Superior Court of New Jersey to
enforce the
- 49 -
settlement of the litigation between Elite and its former President and Chief
Executive Officer.
6. Report filed on April 16, 2004 under Item 5 disclosing a change in scheduled
date for Annual Meeting of Stockholders.
7. Report filed on May 4, 2004 under Items 5 and 7 reporting issuance of a press
release announcing closing of the settlement of the litigation with Dr. Mehta.
8. Report filed on May 10, 2004 under Items 5 and 7 reporting issuance of a
press release disclosing agreement granting Purdue Pharma L.P. exclusive rights
to evaluate certain of our abuse resistance drug formulation technology and the
option to negotiate a license to develop and commercialize oxycodone products
under the technology.
9. Report filed on May 17, 2004 under Items 5 and 7 disclosing issuance of a
press release announcing appointment of Mr. Berk as Chairman of the Board of
Directors.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. We will furnish to our
stockholders a copy of any of the exhibits listed below upon payment of $.25 per
page to cover the costs of the Company of furnishing the exhibits.
Exhibit No. Description
3.2 By-Laws of the Company, as amended, incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form
SB-2 (Reg. No. 333-90633) made effective on February 28, 2000
(the "Form SB-2").
4.1 Certificate of incorporation of the Company, together with all
amendments thereto, as filed with the Secretary of State of
the State of Delaware, incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-4 (Reg. No.
333-101686), filed with the SEC on December 6, 2002 (the "Form
S-4").
4.1(a) Form of specimen certificate for common stock of the Company,
incorporated by reference to Exhibit 4.1 to the Form SB-2.
4.2 Form of Class C Common Stock Purchase Warrant Certificate. *
4.3 Form of Class B Common Stock Purchase Warrant Certificate. *
4.4 Registration Rights Agreement by and between Prologica
International, Inc. and each of the persons, whose name
appears on the signature pages attached thereto, incorporated
by reference to Exhibit 4.4 to the Form SB-2.
10.1 Settlement Agreement, dated October 23, 2002, among Elite,
Harris Freedman, Sharon Will, Michael H. Freedman and certain
of their respective
- 50 -
affiliates, incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 1, 2002
(the "November 2002 Form 8-K").
10.2 Commercial Lease made between Serex, Inc. and Elite executed
September 7, 1993, incorporated by reference to Exhibit 10.4
to the Form SB-2.
10.3 2004 Employee Stock Option Plan approved by stockholders on
June 22, 2004, incorporated by reference to Exhibit A to the
Proxy Statement filed on Schedule 14A with respect to the
Annual Meeting of Stockholders held on June 22, 2004.
10.4 Form of Confidentiality Agreement (corporate), incorporated by
reference to Exhibit 10.7 to the Form SB-2.
10.5 Form of Confidentiality Agreement (employee), incorporated by
reference to Exhibit 10.8 to the Form SB-2.
10.6 Employment Agreement dated as of July 23, 2003 between Bernard
Berk and the Company incorporated by reference to Exhibit 10.6
to Report on Form 10-Q for three months ended June 30, 2003
(the "June 30, 2003 10Q Report")
10.7 Option Agreement between Bernard Berk and the Company dated as
of July 23, 2003 incorporated by reference to Exhibit 10.7 to
the June 30, 2003 10Q Report.
10.8 Option Agreement between Bernard Berk and the Company dated as
of July 23, 2003 incorporated by reference to Exhibit 10.8 to
the June 30, 2003 10Q Report.
10.9 Option Agreement between John A. Moore and the Company dated
as of July 23, 2003 incorporated by reference to Exhibit 10.9
to the June 30, 2003 10Q Report.
10.10 Engagement letter dated February 26, 1998, between Gittelman &
Co. P.C. and the Company. *
21 Subsidiaries of the Company.*
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.*
32.1** Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
32.2** Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
- ----------
* Filed herewith
- 51 -
** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with
this Annual Report on Form 10-K and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of Elite
Pharmaceuticals, Inc. under the Securities Act of 1933 or the Securities
Exchange Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in any such filings.
- 52 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELITE PHARMACEUTICALS, INC.
By: /s/ Bernard Berk
------------------------------
Bernard Berk
Chief Executive Officer
Dated: June 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Bernard Berk Chief Executive Officer June 28, 2004
- -------------------------- (Principal Executive
Bernard Berk Officer)
/s/ Mark I. Gittelman Chief Financial Officer June 28, 2004
- -------------------------- and Treasurer (Principal
Mark I. Gittelman Financial and Accounting
Officer)
/s/ Harmon Aronson Director June 28, 2004
- --------------------------
Harmon Aronson
/s/ John A. Moore Director June 28, 2004
- --------------------------
John A. Moore
/s/ Eric L. Sichel Director June 28, 2004
- --------------------------
Eric L. Sichel
- 53 -
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2 - F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5 - F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-30
INDEPENDENT AUDITORS' REPORT
To Elite Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Elite
Pharmaceuticals, Inc. and Subsidiaries (the "Company") as of March 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended March 31, 2004, 2003 and
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elite
Pharmaceuticals, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2004, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has experienced significant losses and negative cash
flows, resulting in decreased working capital and accumulated deficits. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are described in Note 2.
/s/ MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
June 8, 2004, except for
the fourth and fifth paragraphs of
Note 13, as to which
the date is June 24, 2004
F-1
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
ASSETS
2004 2003
---- ----
CURRENT ASSETS:
Cash and cash equivalents $2,104,869 $3,264,081
Accounts and accrued interest receivable 153,250 4,681
Restricted cash 203,995 99,380
Prepaid expenses and other current assets 137,892 132,092
---------- ----------
Total current assets 2,600,006 3,500,234
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 4,090,250 4,390,553
INTANGIBLE ASSETS - net of accumulated amortization 102,196 104,842
OTHER ASSETS:
Deposit on equipment 398,580 --
Restricted cash - debt service 300,000 300,000
Restricted cash - note payable 225,000 250,000
EDA bond offering costs, net of accumulated
amortization of $60,458 and $47,267, respectively 137,402 150,593
---------- ----------
Total other assets 1,060,982 700,593
---------- ----------
$7,853,434 $8,696,222
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
---- ----
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 150,000 140,000
Accounts payable and accrued expenses 1,085,242 334,721
------------ ------------
Total current liabilities 1,310,242 549,721
------------ ------------
LONG TERM LIABILITIES:
Note payable - net of current portion 150,000 225,000
EDA bonds - net of current portion 2,345,000 2,495,000
------------ ------------
Total long-term liabilities 2,495,000 2,720,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 12,204,423 and 10,544,423 in
2004 and 2003, respectively 122,044 105,444
Additional paid-in capital 39,338,140 34,218,832
Accumulated deficit (35,105,151) (28,590,934)
------------ ------------
4,355,033 5,733,342
Treasury stock (306,841) (306,841)
------------ ------------
Total stockholders' equity 4,048,192 5,426,501
------------ ------------
Total liabilities and stockholders' equity $ 7,853,434 $ 8,696,222
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
---------------------
2004 2003 2002
---- ---- ----
REVENUES:
Research and development $ 258,250 $ 442,500 $ 593,000
Product formulation fees -- 187,810 601,057
Consulting and test fees -- -- 3,450
------------ ------------ ------------
Total revenues 258,250 630,310 1,197,507
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 2,075,074 2,013,579 1,609,108
General and administrative 2,549,846 1,858,069 763,687
Depreciation and amortization 332,836 310,876 266,919
------------ ------------ ------------
4,957,756 4,182,524 2,639,714
------------ ------------ ------------
LOSS FROM OPERATIONS (4,699,506) (3,552,214) (1,442,207)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 23,765 96,692 260,055
Litigation Settlement 150,000 -- --
Sale of NJ Tax Losses 151,027 71,674 137,818
Interest expense (211,595) (227,907) (220,123)
Equity in loss of joint venture -- (186,379) (507,640)
Charge relating to issuance of stock options (1,166,601) (20,550) --
Charge relating of issuance of stock warrants (587,983) -- --
Charge relating to warrant exchange offer (172,324) (242,338) --
------------ ------------ ------------
(1,813,711) (508,808) (329,890)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (6,513,217) (4,061,022) (1,772,097)
PROVISION FOR INCOME TAXES 1,000 400 2,430
------------ ------------ ------------
NET LOSS $ (6,514,217) $ (4,061,422) $ (1,774,527)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.58) $ (0.40) $ (0.19)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 11,168,618 10,069,991 9,561,299
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCE AT APRIL 1, 2001 -- $ -- 9,376,389 $ 93,764 $ 18,071,503
Issuance of shares through
exercise of warrants -- -- 298,179 2,981 1,301,606
Issuance of shares and warrants
through exercise of placement
agent warrants -- -- 16,272 163 58,416
Issuance of shares and warrants
through exercise of options -- -- 20,000 200 37,939
Issuance of Series B convertible
exchangeable preferred stock 200,000 200,000 -- -- --
Dividends declared - Series A
preferred stock -- -- -- -- --
Net loss for year ended March 31, 2002 -- -- -- -- --
------- ------------ --------- ------------ ------------
BALANCE AT MARCH 31, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $ 19,469,464
------- ------------ --------- ------------ ------------
TREASURY STOCK
--------------
STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCE AT APRIL 1, 2001 ($21,000,013) $ (2,834,746)
Issuance of shares through
exercise of warrants -- 1,304,587
Issuance of shares and warrants
through exercise of placement
agent warrants -- 58,579
Issuance of shares and warrants
through exercise of options -- 38,139
Issuance of Series B convertible
exchangeable preferred stock -- 200,000
Dividends declared - Series A
preferred stock (853,148) (853,148)
Net loss for year ended March 31, 2002 -- -- (1,774,527) (1,774,527)
-------- -------- ------------ ------------
BALANCE AT MARCH 31, 2002 -- $ -- ($23,627,688) $ (3,861,116)
-------- -------- ------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCE AT APRIL 1, 2002 200,000 $ 200,000 9,710,840 $ 97,108 $ 19,469,464
Issuance of shares through
exercise of warrants -- -- 2,603 26 13,004
Issuance of shares and warrants
through exercise of placement
agent warrants -- -- 14,670 147 52,666
Issuance of convertible
exchangeable preferred stock 559,000 559,000 -- -- --
Dividends - declared - Series B
preferred stock -- -- -- -- --
Dividends - declared - Series A
preferred stock -- -- -- -- --
Preferred stock issued to satisfy
accrued dividends 14,000 14,000 -- -- --
Conversion of convertible
exchangeable preferred stock into
common stock (773,000) (773,000) 816,310 8,163 14,520,810
Purchase of treasury stock -- -- (100,000) -- --
Charge relating to exchange of
warrants -- -- -- -- 242,338
Charge relating to issuance of
stock options -- -- -- -- 20,550
Fees relating to Warrant Exchange
Offer -- -- -- -- (100,000)
Net loss for the year ended March
31, 2003 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 2003 -- $ -- 10,444,423 $ 105,444 $ 34,218,832
============ ============ ============ ============ ============
TREASURY STOCK
--------------
STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCE AT APRIL 1, 2002 -- $ -- $(23,627,688) $ (3,861,116)
Issuance of shares through
exercise of warrants -- 13,030
Issuance of shares and warrants
through exercise of placement
agent warrants -- 52,813
Issuance of convertible
exchangeable preferred stock -- 559,000
Dividends - declared - Series B
preferred stock (14,000) (14,000)
Dividends - declared - Series A
preferred stock -- -- (887,824) (887,824)
Preferred stock issued to satisfy
accrued dividends -- 14,000
Conversion of convertible
exchangeable preferred stock into
common stock -- -- -- 13,755,973
Purchase of treasury stock 100,000 (306,841) -- (306,841)
Charge relating to exchange of
warrants -- -- -- 242,338
Charge relating to issuance of
stock options -- -- -- 20,550
Fees relating to Warrant Exchange
Offer -- -- -- (100,000)
Net loss for the year ended March
31, 2003 -- -- (4,061,422) (4,061,422)
---------- ---------- ------------ ------------
BALANCE AT MARCH 31, 2003 100,000 $ (306,841) $(28,590,934) $ 5,426,501
========== ========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK COMMON STOCK
--------------- ------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ -------
BALANCE AT APRIL 1, 2003 -- $ -- 10,444,423 $ 105,444 $ 34,218,832
Modification of warrant exchange
offer -- -- -- -- 172,324
Issuance of stock options -- -- -- -- 1,166,601
Issuance of stock warrants -- -- -- -- 587,983
Proceeds from exercising stock
options -- -- 15,000 150 29,850
Net proceeds from private placement -- -- 1,645,000 16,450 3,162,550
Previous rounding differences -- -- -- --
Net loss for the year ended March
31, 2004 -- -- -- -- --
--------- --------- ------------ ------------ ------------
BALANCE AT MARCH 31, 2004 -- $ -- 12,104,423 $ 122,044 $ 39,338,140
========= ========= ============ ============ ============
TREASURY STOCK
--------------
STOCKHOLDERS'
ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------ ------ ------- ---------
BALANCE AT APRIL 1, 2003 100,000 $ (306,841) $(28,590,934) $ 5,426,501
Modification of warrant exchange
offer -- -- -- 172,324
Issuance of stock options -- -- -- 1,166,601
Issuance of stock warrants -- -- -- 587,983
Proceeds from exercising stock
options -- -- -- 30,000
Net proceeds from private placement -- -- -- 3,179,000
Previous rounding differences -- -- -- --
Net loss for the year ended March
31, 2004 -- -- (6,514,217) (6,514,217)
------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 2004 100,000 $ (306,841) $(35,105,151) $ 4,048,192
============ ============ ============ ============
F-7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
---------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,514,217) $ (4,061,422) $ (1,774,527)
Adjustments to reconcile net loss to cash
used in operating activities:
Write off of accounts receivable and patents -- -- 5,057
Depreciation and amortization 332,836 310,876 266,919
Charge relating to Warrant Exchange Offer 172,324 242,338 --
Charge relating to issuance of stock options 1,166,601 20,550 --
Charge relating to issuance of stock warrants 587,983 -- --
Equity in loss of joint venture -- 186,379 507,640
Changes in assets and liabilities:
Contract revenue receivable (148,569) 35,307 (26,674)
Prepaid expenses and other current assets (5,800) (26,010) (24,350)
Amount receivable from Joint Venture -- 525,259 (444,444)
Accounts payable and accrued expenses and other current
Liabilities 750,521 193,009 (78,508)
------------ ------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES (3,658,321) (2,573,714) (1,568,887)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) redemptions of short-term investments -- 100,000 (100,000)
Payments for patent and trademark filings (16,696) (69,517) (6,920)
Restricted cash (79,615) 114,284 (157,624)
Receivable from sale of New Jersey tax losses -- 66,077 80,055
Payment of deposit for manufacturing equipment (398,580) -- (123,396)
Purchases of property and equipment -- (679,485) (223,801)
------------ ------------ ------------
NET CASH (USED IN) INVESTING ACTIVITIES (494,891) (468,641) (531,686)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fees relating to Warrant Exchange Offer (100,000) --
Proceeds under bank note -- -- 375,000
Principal repayments of bank note (75,000) (75,000) --
Purchase of treasury stock -- (306,841) --
Proceeds from issuance of common stock and warrants 3,209,000 65,843 1,401,305
Principal repayments of EDA bonds (140,000) (130,000) (120,000)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,994,000 (545,998) 1,656,305
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,159,212) (3,588,353) (444,268)
CASH AND CASH EQUIVALENTS - beginning of period 3,264,081 6,852,434 7,296,702
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end of period $ 2,104,869 $ 3,264,081 $ 6,852,434
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 214,199 $ 228,938 $ 218,938
Cash paid (received) for income taxes (150,027) (71,274) 2,430
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Utilization of equipment deposit towards purchase of equipment $ -- $ 123,396 $ --
Issuance of Preferred Stock (including stock dividend payable
of $14,000 and subscription receivable of $67,000) for interest in
joint venture -- 573,000 200,000
Conversion of preferred stock to common stock -- 8,163 --
Conversion of preferred stock to additional paid in capital -- 14,520,810 --
Satisfaction of amounts due to joint venture -- 622,133 136,619
Reduction in (addition to) investment in joint venture -- 63,381 (63,381)
Dividends accrued on preferred stock -- 899,923 853,148
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elite
Pharmaceuticals, Inc. and its wholly-owned subsidiaries, (the "Company").
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company consolidates all entities that it controls. The Company did
not consolidate companies it did not control. The Company used the equity
method to account for its investments in companies in which it did not
have the ability to exercise significant influence over operating and
financial policies.
NATURE OF BUSINESS
Elite Pharmaceuticals, Inc. ("Elite") was incorporated on October 1, 1997
under the Laws of the State of Delaware, and its wholly-owned subsidiary
Elite Laboratories, Inc. ("Elite Labs") was incorporated on August 23,
1990 under the Laws of the State of Delaware, in order to engage in
research and development activities for the purpose of obtaining Food and
Drug Administration approval, and, thereafter, commercially exploiting
generic and new controlled-release pharmaceutical products. The Company
also engages in contract research and development on behalf of other
pharmaceutical companies.
On October 24, 1997, Elite merged with Prologica International, Inc.
("Prologica") a Pennsylvania Corporation, a publicly traded inactive
corporation, with Elite surviving the merger. In addition, Elite Labs
merged with a wholly-owned subsidiary of Prologica, with the Company's
subsidiary surviving this merger. The former shareholders of the Company's
subsidiary exchanged all of their shares of Class A voting common stock
for shares of the Company's voting common stock in a tax free
reorganization under Internal Revenue Code Section 368. The result of the
merger activity qualified as a reverse acquisition. In connection with the
reverse acquisition, options exercisable for shares of Class A voting and
Class B nonvoting common stock of the Company's subsidiary were exchanged
for options exercisable for shares of the Company's voting common stock.
On September 30, 2002, the Company acquired from Elan Corporation, plc and
Elan International Services, Ltd. (together "Elan") Elan's 19.9% interest
in Elite Research, Ltd. ("ERL"), a joint venture formed between the
Company and Elan where the Company's interest originally was 80.1%.
On December 31, 2002, the Company entered into an agreement of merger
whereby ERL (a Bermuda Corporation) was merged into a new Delaware
Corporation, Elite Research, Inc. ("ERI"), a wholly owned subsidiary of
the Company. As a result of the merger, ERI became the owner of all of the
assets and liabilities of ERL. The merger was accounted for as a tax free
reorganization.
F-9
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market instruments.
The Company places its cash and cash equivalents with high-quality, U.S.
financial institutions and, to date, has not experienced losses on any of its
balances.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method based on the estimated useful lives of the respective
assets which range from five to forty years. Major repairs or improvements
are capitalized. Minor replacements and maintenance and repairs which do
not improve or extend asset lives are expensed currently.
Upon retirement or other disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss, if any, is recorded.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the fair value of long-lived assets
whenever events or changes in circumstances indicate that its carrying
amounts may not be recoverable. Accordingly, any impairment of value will
be recognized when the carrying amount of a long-lived asset exceeds its
fair value in accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Management has determined that no impairment of long-lived assets has
occurred.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
PATENTS AND TRADEMARKS
Effective April 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets." The adoption of SFAS No. 142
required an initial impairment assessment involving a comparison of the
fair value of patents and trademarks to current carrying value. No
impairment was determined to exist. The Company reviews such trademarks
and patents with definite lives for impairment to ensure they are
appropriately valued if conditions exist that may indicate the carrying
value may not be recoverable. Such conditions may include an economic
downturn or a change in the assessment of future operations.
Costs incurred for the application of patents and trademarks are
capitalized and amortized on the straight-line method, based on their
estimated useful lives ranging from five to fifteen years, commencing upon
approval of the patent and trademarks. These costs are charged to expense
if the patent or trademark is unsuccessful.
F-10
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company derives substantially all of its revenues from contracts with
other pharmaceutical companies, subject to licensing and research and
development agreements.
The Company maintains cash balances in its bank, which, at times, may
exceed the limits of the Federal Deposit Insurance Corp.
The Company extends credit to its customers pursuant to contract terms in
the normal course of business and performs ongoing credit evaluations. As
of March 31, 2004 and 2003, no allowance for doubtful accounts was
considered necessary, based on historical trends, economic conditions and
the credit worthiness of customers. Amounts are written off when they are
deemed uncollectible. The Company has not experienced significant
write-offs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates made by management include, but are not
limited to, the recognition of revenue and the fair value of intangible
assets and stock-based awards.
INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts
in the financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they occur.
LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing net loss by the
weighted average number of shares outstanding during each period
presented. Common stock equivalents, consisting of options, warrants and
convertible securities, have not been included, as their effect would be
antidilutive. For the three years ended March 31, the following
potentially dilutive securities were not included in the computation of
diluted loss per share:
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Stock options 2,417,050 $ 3.70 2,266,850 $ 5.74 2,056,850 $ 5.82
Warrants 2,654,239 $ 4.72 733,752 $12.33 2,669,477 $ 5.47
Convertible preferred shares -- -- -- 816,310 --
---------- ---------- ----------
5,071,289 3,000,602 5,542,637
F-11
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues derived from providing research and development services under
contracts with other pharmaceutical companies are recognized when earned.
These contracts provide for non-refundable upfront and milestone payments.
Because no discrete earnings event has occurred when the upfront payment
is received, that amount is deferred until the achievement of a defined
milestone. Each nonrefundable milestone payment is recognized as revenue
when the performance criteria for that milestone has been met. Under each
contract, the milestones are defined, substantive effort is required to
achieve the milestone, the amount of the non-refundable milestone payment
is reasonable, commensurate with the effort expended, and achievement of
the milestone is reasonably assured.
Revenues earned by licensing certain pharmaceutical products developed by
Elite are recognized at the beginning of a license term when Elite's
customer has legal right to the use of the product. To date, no revenues
have been earned by licensing products and there are no continuing
obligations under any licensing agreements.
INVESTMENT IN JOINT VENTURE
The equity method of accounting was used to account for the Company's
investment in its joint venture with Elan. Under the equity method, the
Company recognized its share in the net earnings or losses of the joint
venture as they occurred. While Elite owned 100% of the outstanding common
stock of ERL, Elite's equity in the loss of ERL was based on 100% of ERL's
losses, less the amounts funded by Elan. Elan funded 19.9% of ERL's
losSes. Once Elite's investment was reduced to zero, further losses were
recognized to the extent of Elite's commitment to fund the losses. The
joint venture was terminated effective September 30, 2002, as further
discussed in Note 7.
F-12
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
The Company records common shares purchased and held in treasury at cost.
STOCK-BASED COMPENSATION
Under various qualified and non-qualified plans, the Company may grant
stock options to officers, selected employees, as well as members of the
board of directors and advisory board members, as further described in
Note 11. Effective April 1, 2002, the Company adopted the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and selected the prospective method of adoption described in
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123." Prior to April 1, 2002, the
Company measured stock-based compensation for its employee compensation
plans using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. No stock-based employee compensation expense for
stock options was reflected in net loss for the year ended March 31, 2002
as all stock options granted under those plans had an exercise price equal
to the fair market value of the underlying common stock on the date of
grant.
During the years ended March 31, 2003 and 2004 the Company issued 210,000
and 1,024,000, respectively options to purchase common stock to employees
and to members of the board of directors. The options have an exercise
price ranging from $2.01 to $5.00 per share and all vest over three years
except 610,000 shares issued in 2004 which vested upon grant date. The
options expire between five and ten years from the date of grant. The
Company has recorded compensation expense of $20,550 and $1,166,601 for
the years ended March 31, 2003 and 2004 which represents the fair value of
the options vested, utilizing the Black-Scholes options pricing model on
each grant date.
On June 22, 2004 the Company's Stockholders approved the 2004 Stock Option
Plan and ratified the amendments of the terms of outstanding options and
warrants, including the repricing of options to certain Directors and
employees (See Note 13). The Company will record a significant
compensation expense in future periods, based on the fair value of the
options after reflecting the repricing and amendments to the terms of the
options.
The following table illustrates the effect on net loss and loss per share
as if the Company had applied the fair value recognition provisions of
SFAS No. 123 to all outstanding and unvested awards in each year
presented:
2004 2003 2002
---- ---- ----
Net loss as reported $(6,514,217) $(4,061,422) $(1,774,527)
Add: Stock-based compensation expense
included in reported net loss, net of related
tax effects 1,166,601 20,550 --
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, net of related tax effects (865,255) (1,070,651) (1,779,338)
----------- ----------- -----------
Pro forma net loss (6,212,871) (5,111,523) (3,553,865)
Loss per share as reported (0.58) (0.40) (0.19)
Pro-forma loss per share (0.56) (0.51) (0.38)
F-13
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and liabilities approximate fair
value due to the short-term nature of these instruments. The carrying
amounts of noncurrent assets are reasonable estimates of their fair values
based on management's evaluation of future cash flows. The long-term
liabilities are carried at amounts that approximate fair value based on
borrowing rates available to the Company for obligations with similar
terms, degrees of risk and remaining maturities.
RECLASSIFICATIONS
Certain accounts and amounts in the 2003 and 2002 financial statements
have been reclassified in order to conform with the 2004 presentation.
These reclassifications have no effect on net income.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $6,514,217, $4,061,422 and $1,774,527
for the fiscal years ended March 31, 2004, 2003 and 2002, respectively. At
March 31, 2004, the Company had an accumulated deficit of approximately
$35.1 million, consolidated assets of approximately $7.9 million,
stockholders' equity of approximately $4.0 million, and working capital of
approximately $1.3 million. The Company has not generated any significant
revenue to date.
In an effort to reduce costs in fiscal 2003, the Company has reduced the
number of products being actively developed from approximately fifteen to
six. The six products that continue in development were deemed by
management to be the most suitable for continued development given the
Company's limited resources. The Company has also settled certain
litigation with its former CEO which will significantly reduce its legal
fees.
The primary strategy remains to develop the Company's oral control release
pharmaceutical products, with emphasis in the area of pain management, for
FDA approval, and once developed, to commercially exploit these products
either by licensing or through the development of collaborations with
strategic partners.
The Company also retained an investment banking firm in fiscal 2003 to
assist the Company in connection with potential strategic transactions,
including acquisitions. The Company may receive additional cash proceeds
from the exercise of outstanding options and warrants, as well as through
the continued sale of its New Jersey State tax losses. However, there is
no assurance that any options or warrants will be exercised, that any sale
of tax losses will be completed or that the Company will be able to raise
additional capital.
In the event Purdue proceeds with its option to license the Company's
Oxycodone product pursuant to the option agreement entered into on May 14,
2004 (See Note 13), the terms of the licensing agreement provide for the
Company to receive significant milestone payments on or before March 31,
2005.
See Note 13 for information as to the Company's efforts to effect a
financing of equipment purchases and a private placement of shares of its
Common Stock. No representation can be made that the efforts will be
successful or that if successful that the resulting proceeds will be
material.
There is also no assurance that the Company's current business strategies
will be successfully implemented or that it will raise the necessary funds
to allow it to continue its operations. Management believes that cost
reductions already implemented will reduce losses in the future, and with
the Company's existing working capital levels, anticipates that the
Company will be able to continue its operations at least through the end
of fiscal year 2005, assuming it is successful in consummating the
transactions discussed above.
F-14
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2004 and 2003 consists of the
following:
2004 2003
---- ----
Laboratory manufacturing, and warehouse equipment $3,140,250 $3,140,250
Office equipment 32,981 32,981
Furniture and fixtures 51,781 51,781
Land, building and improvements 2,097,668 2,097,668
Equipment under capital lease 168,179 168,179
---------- ----------
5,490,859 5,490,859
Less: Accumulated depreciation and amortization 1,400,609 1,100,306
---------- ----------
$4,090,250 $4,390,553
========== ==========
Depreciation and amortization expense amounted to $300,303, $278,348 and
$249,338 for the years ended March 31, 2004, 2003 and 2002, respectively.
The Company's obligations under capital leases were satisfied prior to
March 31, 2003.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2004 and 2003, consist of the following:
2004 2003
---- ----
Patents $145,830 $129,134
Trademarks 8,120 8,120
-------- --------
153,950 137,254
Less: Accumulated amortization 51,754 32,412
-------- --------
$102,196 $104,842
======== ========
Amortization of intangible assets amounted to $19,342, $19,344 and $4,390
for the years ended March 31, 2004, 2003 and 2002, respectively.
Aggregate amortization expense of intangible assets for the next five
fiscal years is estimated to be as follows:
YEARS ENDING MARCH 31,
----------------------
2005 $ 19,340
2006 19,340
2007 19,340
2008 19,340
2009 8,140
F-15
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 5 - NOTE PAYABLE
On February 26, 2002, the Company closed a bank loan totaling $375,000 to
finance the purchase and installation of machinery and equipment. Interest
is fixed at 5.70% per annum calculated on a 360 day year. The loan is due
in 60 equal monthly installments of $6,250 plus interest, with the first
payment commencing on April 1, 2002, and is secured by the machinery and
equipment purchased under this facility and a certificate of deposit in
the amount of $225,000 held as collateral. This certificate of deposit has
been classified as noncurrent restricted cash. The note payable consists
of the following at March 31:
2004 2003
---- ----
Bank note payable $ 225,000 $ 300,000
Current portion (75,000) (75,000)
--------- ---------
Long-term portion, net of current maturities $ 150,000 $ 225,000
========= =========
Future principal maturities under this loan are as follows:
YEARS ENDING MARCH 31,
----------------------
2005 $ 75,000
2006 75,000
2007 75,000
---------
$ 225,000
=========
NOTE 6 - BOND FINANCING OFFERING
On September 2, 1999, the Company completed the issuance of tax exempt
bonds by the New Jersey Economic Development Authority. The aggregate
principal proceeds of the fifteen year term bonds were $3,000.000.
Interest on the bonds accrues at 7.75% per annum. The proceeds, net of
offering costs of $60,000, are being used by the Company to refinance the
land and building it currently owns, and for the purchase of certain
manufacturing equipment and related building improvements.
Offering costs in connection with the bond issuance totaled $197,860,
including the $60,000 mentioned above which were paid from bond proceeds.
Offering costs included underwriter fees equal to $90,000 (three percent
(3%) of the par amount of the bonds).
The bonds are collateralized by a first lien on the building, which
includes property and equipment.
Several restricted cash accounts are maintained in connection with the
issuance of these bonds. These include amounts restricted for payment of
bond principal and interest, for the refinancing of the land and building
the Company currently owns, for the purchase of certain manufacturing
equipment and related building improvements as well as the maintenance of
a $300,000 Debt Service Reserve.
F-16
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 6 - BOND FINANCING OFFERING (CONTINUED)
All restricted accounts other than the $300,000 Debt Service Reserve are
expected to be expended within twelve months and are therefore categorized
as current assets. Bond financing consisted of the following at March 31:
2004 2003
---- ----
EDA Bonds $ 2,495,000 $ 2,635,000
Current portion (150,000) (140,000)
----------- -----------
Long term portion, net of current maturities 2,345,000 2,495,000
=========== ===========
Future principal maturities required under the bond agreement are as
follows:
YEARS ENDING MARCH 31,
----------------------
2005 $ 150,000
2006 165,000
2007 175,000
2008 190,000
2009 205,000
Thereafter 1,610,000
-----------
$ 2,495,000
===========
F-17
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES
In October 2000, the Company entered into a joint development and
operating agreement with Elan Corporation, plc, and Elan International
Services, Ltd. (together "Elan") to develop products using drug delivery
technologies and expertise of both companies. This joint venture, Elite
Research, Ltd. ("ERL"), a Bermuda corporation, was initially owned 80.1%
by the Company and 19.9% by Elan. ERL was to fund its research through
capital contributions from its partners based on the partners' respective
ownership percentage. ERL subcontracted research and development efforts
to the Company, Elan and others. It was anticipated that the Company would
provide most of the formulation and development work. The Company had
commenced work for three products. The joint venture terminated on
September 30,2002. For the years ended March 31, 2003 and 2002, the
Company charged $187,810 and $601,057, respectively, to ERL which was
reflected in product formulation fees. Intercompany profits and losses
were eliminated.
ERL was initially capitalized with $15,000,000 which included the issuance
of 6,000 voting common shares, par value $1.00 per share, and 6,000
non-voting convertible preferred shares, par value $1.00 per share. All of
the voting shares were held by the Company, with the non-voting
convertible preferred shares held by both the Company and Elan, being
split 3,612 shares and 2,388 shares, respectively. Elite's and Elan's
respective ownership in ERL did not change during the term of the joint
venture.
While the Company initially owned 80.1% of the outstanding capital stock
(100% of the outstanding common stock) of ERL until September 30, 2002,
Elan and its subsidiaries retained significant minority investor rights
that were considered "participating rights" as defined in the Emerging
Issues Task Force Consensus No. 96-16. Accordingly, the Company did not
consolidate the financial statements of ERL until September 30, 2002 but
instead accounted for its investment in ERL under the equity method of
accounting until the Joint Venture was terminated, effective September 30,
2002.
For the year ended March 31, 2002 and the period beginning April 1, 2002
through September 30, 2002, ERL recognized net losses of $633,642 and
$232,742, respectively, and the Company recognized 80.1% of these losses,
or $507,640 and $186,379, respectively. The product formulation fees
$187,810 and $601,057 earned by the Company for services rendered to ERL
for the years ended March 31, 2003 and 2002, respectively, are included in
ERL's expenses. During fiscal year 2001, ERL paid $15,000,000 to Elan for
a license providing ERL non-exclusive rights to use certain Elan
in-process drug delivery technologies. The Elan technology rights acquired
relate to very early stage technology that, in the opinion of management,
have not reached technological feasibility and have no future alternative
uses. Through the date of its termination, ERL completed in-vivo (pilot
clinical trial) on the first product and began formulation and development
of two additional products.
During fiscal year 2003, the Company consummated a termination agreement
(the "Termination Agreement") with Elan to acquire all of Elan's interest
in ERL. As further discussed in Note 10, the joint venture was terminated
effective September 30, 2002.
F-18
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
Under the Termination Agreement, among other things, the Company acquired
all proprietary, development and commercial rights for the worldwide
markets for the products developed by ERL. In exchange for the assignment,
ERL agreed to pay Elan a royalty on certain revenues that may be realized
from the once-a-day Oxycodone product that has been developed by ERL.
Effective October 1, 2002, the Company is solely responsible to fund ERL's
product development.
The Company did not pay, nor did Elan receive any cash consideration under
the Termination Agreement. Furthermore, the Company has the exclusive
rights to the proprietary, development and commercial rights for the
worldwide markets for two other products developed by ERL. The Company is
not required to pay Elan royalties on revenues that may be realized from
these products.
The Company accounted for this acquisition by consolidating ERL as a
wholly-owned subsidiary as of September 30, 2002. As more specifically
described in Note 10, Elan converted 773,000 shares of Series B Preferred
Stock, according to their terms, into 52,089 shares of the Company's
common stock. This resulted in an increase in common stock of $521 and an
increase in additional paid in capital of $772,479. As a result, the
Series B Preferred Stock was eliminated.
As further disclosed in Note 10, the acquisition resulted in the
conversion of 13,756 shares of Series A Preferred Stock into 764,221
shares of Elite's common stock in accordance with their terms. The Company
accounted for this conversion by increasing common stock in the amount of
$7,642 and by a corresponding increase in additional paid in capital of
$13,748,332. As a result, the Series A Preferred Stock was eliminated.
As a result of the Termination Agreement, ERL became a wholly owned
subsidiary of the Company as of September 30, 2002. Elan retained certain
securities of Elite it had obtained in connection with the joint venture
and transferred other such securities to a third-party, as further
discussed in Note 10.
The following is a condensed balance sheet of ERL on September 30, 2002
(the date of acquisition):
CURRENT ASSETS
Cash $ 1,084
---------
Total assets $ 1,084
=========
CURRENT LIABILITIES
Accounts payable $ 84,597
---------
Total liabilities 84,597
Shareholders' deficit (83,513)
---------
$ 1,084
=========
F-19
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
The following are unaudited pro-forma consolidated results of operations
for the years ended March 31, 2003 and 2002, assuming the acquisition was
completed on April 1, 2001.
YEAR ENDED MARCH 31,
--------------------
2003 2002
---- ----
(Unaudited) (Unaudited)
Revenue $ 442,500 $ 596,450
Proforma net (loss) available to common
shareholders $(4,107,785) $(1,900,529)
Proforma net (loss) available to common
shareholders per share -
basic and diluted $ (0.40) $ (0.19)
Unaudited pro-forma data may not be indicative of the results that would
have been obtained had these events actually occurred at the beginning of
the periods presented, nor does it intend to be a projection of future
results.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
--------------------------------------
2004 2003 2002
---- ---- ----
Federal:
Current $ -- $ -- $ --
Deferred -- -- --
------ ------ ------
-- -- --
------ ------ ------
State:
Current 1,000 400 2,430
Deferred -- -- --
------ ------ ------
1,000 400 2,430
------ ------ ------
$1,000 $ 400 $2,430
====== ====== ======
In the year ended March 31, 2001, the Company received approval for the
sale of $4,872,267 of New Jersey net operating losses under the Technology
Tax Certificate Transfer Program sponsored by the New Jersey Economic
Development Authority (NJEDA). The total tax benefit approved for receipt
by the Company during the year ended March 31, 2002 was $368,343 of which
$222,211 and $146,132 was received in 2002 and in 2003, respectively.
F-20
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 8 - INCOME TAXES (CONTINUED)
During the year ended March 31, 2003, the Company received approval for
the sale of an additional $1,822,989 of New Jersey net-operating losses
under the Technology Tax Certificate Transfer Program sponsored by the New
Jersey Economic Development Authority (NJEDA). The total tax benefit
approved for receipt by the Company during the year ended March 31, 2003
was $137,818, of which $71,741 was received in November 2002. The
remaining balance of $66,077 was received in 2003.
During the year ended March 31, 2004, the Company received approval for
the sale of an additional $1,928,817 of New Jersey net-operating losses
under the Technology Tax Certificate Transfer Program sponsored by the New
Jersey Economic Development Authority (NJEDA). The total tax benefit
received during the year ended March 31, 2004 was $151,027 and is recorded
as other income in the accompanying financial statements.
The major components of deferred tax assets at March 31, 2004 and 2003 are
as follows:
2004 2003
---- ----
Net operating loss carry forwards $ 6,736,336 $ 4,486,167
Valuation allowance (6,736,336) (4,486,167)
----------- -----------
$ -- $ --
=========== ===========
At March 31, 2004, a 100% valuation allowance is provided, as it is
uncertain if the deferred tax assets will be utilized. The valuation
allowance increased during 2004, 2003 and 2002 by $2,250,169, $1,357,792
and $304,375, respectively.
At March 31, 2004, for federal income tax purposes, the Company has unused
net operating loss carryforwards of approximately $20,518,995 expiring in
2007 through 2015. For state tax purposes, the Company has $11,011,302 of
unused net operating losses, which are net of the $9,539,503 of New Jersey
net-operating losses sold, as discussed above.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company had an employment agreement ("Employment Agreement") with its
former President/CEO, Atul M. Mehta.
On June 3, 2003, Dr. Mehta resigned from all positions that he held with
the Company, while reserving his rights under his Employment Agreement and
under common law. On July 3, 2003, Dr. Mehta instituted litigation against
Elite and one of its directors, in the Superior Court of New Jersey, for,
among other things, allegedly breaching his Employment Agreement and for
defamation, and claims that he is entitled to receive his salary through
June 6, 2006.
F-21
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company and Dr. Mehta settled their litigation subsequent to March 31,
2004 (See Note 13). The Company accrued $400,000 for compensation owed to
Dr. Mehta as of March 31, 2004, in accordance with the settlement
agreement.
On July 23, 2003, the Company entered into an agreement with its new Chief
Executive Officer, Bernard Berk. The initial terms of this agreement is
three years. Pursuant to this agreement:
- Mr. Berk is entitled to receive a base salary of $200,000 per annum,
subject to increase to $330,140 if and when the Company consummates
a Strategic Transaction (as defined in the employment agreement);
- The Company confirmed its grant to Mr. Berk on June 3, 2003 of
options to purchase 300,000 shares of the Company's common stock
at$2.01 per share. All of these options are vested.
- The Company granted Mr. Berk options to purchase an additional
300,000 shares of its common stock, with an exercise price equal to
$2.15, the closing price of the Company's common stock on the date
of grant. These options will vest solely upon consummation of a
Strategic Transaction.
- Mr. Berk will be appointed as a director of the Company if he is
serving as its Chief Executive Officer following the consummation of
a Strategic Transaction.
- Mr. Berk will be entitled to receive severance in accordance with
the employment agreement if he is terminated without cause or
because of his death or permanent disability or if he terminates his
employment for good reason or following a "change-of-control." The
severance will be payable in accordance with the terms of his
employment agreement.
CONSULTING AGREEMENTS
The Company entered into one year consulting agreements with each of Saggi
Capital Corp. and Bridge Ventures Inc. on November 4, 2003. The
consultants' services will include, but not be limited to, advice with
respect to overall strategic planning, financing opportunities,
acquisition policy, commercial and investment banking relationships and
stockholders matters. In consideration of each consultant's services, the
Company agrees to pay it $75,000 payable in monthly installments of $6,250
and to issue to the consultant a warrant to purchase 100,000 shares of the
Company's common stock. For the year ended March 31, 2004, consulting
expenses under both agreements aggregated $30,000 plus approximately
$470,000 attributable to the issuance of warrants.
On July 3, 2003, the Company entered into an agreement with Leerink Swann
& Company to provide a Valuation and a Fairness Opinion in order for the
Company to complete a proposed acquisition for which it received a
non-refundable retainer fee of $50,000. If and when the Board of Directors
requests a Fairness Opinion, Leerink's compensation shall be $50,000. For
the year ended March 31, 2004, consulting expenses under this agreement
amounted to the $50,000 non-refundable retainer fee.
F-22
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
REFERRAL AGREEMENTS
On January 29, 2002, the Company entered into a Referral Agreement with a
Director (Referring Party) whereby Elite will pay the Referring Party a
fee based upon payments received by Elite from sales of products,
development fees, licensing fees and royalties generated as a direct
result of the Referring Party identifying customers for Elite. These
amounts shall be reduced by the cost of goods sold directly incurred in
the manufacturing or development of products as well as any direct
expenses associated with these efforts. Elite will pay Referring Party a
referral fee each year equal to:
PERCENTAGE OF REFERRAL
BASE FROM TO
---- ---- --
5% $ 0 $1,000,000
4% 1,000,000 2,000,000
3% 2,000,000 3,000,000
2% 3,000,000 4,000,000
1% 4,000,000 5,000,000
NO AMOUNTS HAD BEEN EARNED THROUGH MARCH 31, 2004.
On August 1, 1998, the Company entered into a consulting agreement (the
"1998 Agreement") with a company owned by a Director for the purpose of
providing management, marketing and financial consulting services for an
unspecified term. Terms of the agreement provided for a nonrefundable
monthly fee of $2,000. This compensation was applied against amounts due
pursuant to a business referral agreement entered into on April 8, 1997
(the "1997 Agreement") with the same party.
Terms of the 1997 Agreement provided for payments by the Company based
upon a formula, as defined, for an unspecified term. On November 14, 2000,
the Company amended its 1997 Agreement to provide certain consulting
services for the period beginning November 1, 2000 through October 31,
2003. The Company previously advanced $20,000 under the 1997 Agreement in
addition to a payment of $50,000 made during the year ended March 31,
2001. The 1997 Agreement called for 25 monthly installments of $3,200
beginning on December 1, 2001.
Consulting expense under the 1997 and 1998 Agreements amounted to $28,800,
$38,400 and $12,800 for the years ended March 31, 2004, 2003 and 2002,
respectively. The agreement terminated on November 30, 2003.
F-23
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS
On December 18, 2003, the Company and Pivotal Development, L.L.C. entered
into an agreement to develop a controlled release product utilizing
Elite's proprietary drug delivery technology. The product is a generic
equivalent to a drug losing patent exclusivity with addressable market
revenues of approximately $150 million per year. The agreement will also
provide an option to develop a controlled release NDA product.
Under the collaboration agreement, Pivotal Development will be responsible
for taking the Elite formulation through clinical development and the FDA
regulatory approval process. The partners will seek a license during the
development cycle from a pharmaceutical company which has the resources to
effectively market the product and share the cost of defining the product
against any lawsuits.
Elite and Pivotal will bear costs in their respective areas of
responsibility. In addition, Pivotal shall pay Elite $750,000 upon
attainment of certain milestones outlined in the agreement.
In June 2001, the Company entered into two separate and distinct
development and license agreements with another pharmaceutical company
("partner"). The Company is developing two drug compounds for the partner
in exchange for certain payments and royalties. The Company also reserves
the right to manufacture the compounds. The Company received $250,000 and
$300,000, respectively, on these two agreements, which were earned during
the year ended March 31, 2002. The Company is currently proceeding with
the development and formulation for both products as specified in the
development agreements. During the years ended March 31, 2004 and 2003,
the Company earned revenues of $105,000 and $85,000, respectively, for
additional development and formulation for both products.
On September 13, 2002, the Company, entered into a manufacturing agreement
with Ethypharm S.A. ("Ethypharm"). Under the terms of this agreement, the
Company has initiated the manufacturing of a new prescription drug product
for Ethypharm. The Company received an upfront manufacturing fee for the
first phase of the technology transfer and billed an additional amount
upon the completion of the first phase of manufacturing. The Company is
entitled to receive additional fees in advance for the final phase of the
manufacturing. In addition, if and when FDA approval is obtained and if
requested by Ethypharm, the Company will manufacture commercial batches of
the product on terms to be agreed upon. As of March 31, 2004, the Company
billed and earned revenues of $280,000 under this agreement, all if which
was billed and earned during the year ended March 31, 2003, in accordance
with the substantive milestone method of revenue recognition. Under this
method, the milestone payments are considered to be payments received for
the accomplishment of a discrete, substantive earnings event. Accordingly,
the non-refundable milestone payments are recognized in full when the
milestone is achieved. In addition to milestone payments, the Company
billed and recognized $75,000 in additional revenues as a result of the
manufacturing and delivery of additional batches during the year ended
March 31, 2003.
F-24
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
TREASURY STOCK TRANSACTIONS
At a special meeting of the Company's Board of Directors held on June 27,
2002, the Board authorized the Company to purchase up to 100,000 shares of
its common stock in the open market no later than December 31, 2002. As of
March 31, 2003, the Company had purchased 100,000 shares of common stock
for total consideration of $306,841.
PUBLIC OFFERINGS
In July 1998 the Company filed a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, for the purpose of registering
securities previously sold to and held by various corporations and
individuals. The Company did not receive any proceeds upon filing of this
Form SB-2. The securities registered consisted of 3,725,000 shares of the
Company's $.01 par value common stock, including 1,525,000 redeemable
common stock purchase warrants.
In March 2000, the Company filed a registration statement on Form SB-2
under the Securities Act of 1933, as amended, for the purpose of
registering securities previously sold to and held by various corporations
and individuals. The Company did not receive any proceeds upon filing of
this Form SB-2. The securities registered consisted of 3,297,539 shares of
the Company's $.01 par value common stock, 2,022,537 underlying Class A
and Class B common stock purchase warrants, and 317,250 Class A common
stock purchase warrants.
PRIVATE PLACEMENT OFFERINGS
In a private placement offering dated May 17, 1999, the Company raised
$4,462,500 from the sale of 12.75 units of its securities; each unit
consisting of 100,000 shares of common stock of the Company and 50,000
warrants, each warrant entitling the holder to purchase one share of
common stock at an exercise price of $5.00 per share during the five year
period commencing with the date of closing of the private placement
memorandum (June 16, 1999). The price per unit was $350,000. This resulted
in the issuance of 1,275,000 shares of common stock and 637,500 warrants
to purchase common stock, at an exercise price of $5.00 per share.
In a private placement offering concluded in December 2003 the Company
sold 1,645,000 shares of Common Stock for aggregate proceeds of
$3,290,000. It paid a cash commission of $75,000 to the Placement Agent
and issued to the agent and its associates five year warrants to purchase
50,000 shares of Common Stock at a price of $2.00 per share. The Company
granted to the purchasers and the Placement Agent piggyback registration
rights.
PREFERRED STOCK
As further discussed in Note 7, on October 16, 2000, Elite entered into an
agreement (the "Joint Venture Agreement") with Elan International
Services, Ltd. and Elan Corporation, plc. (together "Elan"), under which
the parties formed a joint venture, Elite Research, Ltd. ("ERL"). Under
the terms of the Joint Venture Agreement, 409,165 shares of the Company's
common stock and 12,015 shares of a newly created Series A Convertible
Exchangeable Preferred Stock ("Series A Preferred Stock") were issued to
Elan for consideration of $5,000,000 and $12,015,000, respectively.
Proceeds from the sale of the Series A Preferred Stock were used to fund
the Company's 80.1% share of ERL, as further discussed in Note 7.
F-25
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
PREFERRED STOCK (CONTINUED)
The Series A Preferred Stock accrued a dividend of 7% per annum,
compounded annually and payable in shares of Series A Preferred Stock.
Dividends accrued and compounded annually beginning on October 16, 2001.
As of September 30, 2002 (the termination date of the Joint Venture), the
Company had accrued dividends of $1,740,973 on the Series A Preferred
Stock. During the year ended March 31, 2003, the Company issued preferred
stock to satisfy accrued dividends.
On October 17, 2000, the Company authorized 7,250,000 shares of newly
created Series B Preferred Stock of which 4,806,000 was designated for
issuance to Elan for a total consideration of $4,806,000. These shares
were issuable from time to time to fund the Company's 80.1% portion of
capital contributions to ERL and for funding of the research and
development activities for ERL.
The Series B Preferred Stock accrued a dividend of 7% per annum of the
original issue price, compounded on each succeeding twelve month
anniversary of the first issuance and payable solely by the issuance of
additional shares of Series B Preferred Stock, at a price per share equal
to the original issue price. Dividends were accrued and compounded
commencing one year after issuance. As of September 30, 2002 (the
termination date of the joint venture), the Company had accrued dividends
of $14,000 on the Series B Preferred Stock. During the year ended March
31, 2003, the Company issued preferred stock to satisfy accrued dividends.
During the fiscal year ended March 31, 2003, the Company made capital
contributions to ERL in the amount of $573,000. These contributions were
financed by the proceeds from the issuance to Elan of 573,000 shares of
Series B Preferred Stock. These contributions were in addition to a
capital contribution in the amount of $200,000 made by the Company to ERL
during the fiscal year ended March 31, 2002.
JOINT-VENTURE TERMINATION
In addition to the issuance of shares as described above, on October 17,
2000 the Company issued to Elan 100,000 warrants to purchase the Company's
common stock at an exercise price of $18 per share. The warrants are
exercisable at any time on or before October 17, 2005. Subject to a
Termination Agreement between the Company and Elan dated September 30,
2002, the Company acquired Elan's 19.9% interest in ERL, and Elan
transferred its warrants and its 12,015 shares of Series A Preferred Stock
to a third party along with accrued dividends of 1,741 shares. On November
6, 2002, under a transfer and assignment among the Company, Elan and a
third party purchaser, all 13,756 shares of Series A Preferred Stock have
been converted, according to their terms, into 764,221 shares of the
Company's common stock using the $18 per share price. Elan retained
409,165 shares of the Company's common stock and 773,000 shares of Series
B Preferred Stock, the latter of which was converted into 52,089 shares of
the Company's common stock. Both of the Series A and Series B preferred
stock were converted into the Company's common stock in accordance with
their terms. The warrants remain unexercised at March 31, 2004.
F-26
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
JOINT-VENTURE TERMINATION (CONTINUED)
For the period of one year after the issuance of the above shares of
common stock, Elan and the third party purchaser have the right to require
registration under the Securities Act of 1933, as amended ("the Securities
Act") of all or part of these securities. All registration expenses would
be borne by the requesting party. Elan and the third party purchaser also
have the right to piggyback registration if at any time the Company
proposes to register shares of its common stock under the Securities Act.
WARRANTS
To date, the Company has authorized the issuance of common stock purchase
warrants, with terms of five to six years, to various corporations and
individuals, in connection with the sale of securities, loan agreements
and consulting agreements. Exercise prices range from $2.00 to $18.00 per
warrant. The warrants expire at various times through October 17, 2005.
A summary of warrant activity for the fiscal years indicated below were as
follows:
2004 2003 2002
---- ---- ----
Beginning balance 733,752 2,669,477 2,983,928
Warrants issued 200,000 -- --
Warrants issued pursuant to Placement Agent
Agreement 50,000 8,136 2,260
Placement Agent Warrants Exercised -- (158,652) (24,408)
Class C Warrants 1,723,237 -- --
Warrants exercised or expired (52,750) (1,829,957) (298,179)
---------- ---------- ----------
Ending balance 2,654,239 733,752 2,669,477
========== ========== ==========
CLASS A WARRANT EXCHANGE OFFER
On October 23, 2002, the Company entered into a Settlement Agreement with
various parties in order to end a Consent Solicitation and various
litigation initiated by the Company. The Agreement provided, among other
things, an agreement to commence an exchange offer (the "Exchange Offer")
whereby holders of the Company's Class A Warrants which expired on
November 30, 2002 (the "Old Warrants") had the opportunity to exchange
those warrants for new warrants (The "New Warrants") upon payment to the
Company of $0.10 per share of common stock issuable upon the exercise of
the old warrants. In September 2003 the Company issued New Warrants to the
record holders as of November 30, 2002 of the Old Warrants without
requiring any cash payment.
Each New Warrant is exercisable for the same number of shares of common
stock as the Old Warrants at an exercise price of $5.00 per share, and
expires on November 30, 2005. The New Warrants are not transferable except
pursuant to operation of law.
F-27
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)
During the year ending March 31, 2003, the Company expensed $242,338
relating to the Exchange Offer, which represents the fair value of the New
Warrants,. The per share weighted-average fair value of each warrant on
the date of grant was $1.10 using the Black-Scholes option pricing model
with the following weighted-average assumptions: no dividend yield;
expected volatility of 73.77%; risk-free interest rate of 2.88%; and
expected lives of 3 years. The elimination of the $0.10 per share fee
resulted in an additional charge of $172,324 during the year ended March
31, 2004.
For the year ended March 31, 2003 the Company incurred legal fees and
other costs amounting to approximately $100,000, in connection with the
Exchange Offer, which has been charged to additional paid-in capital.
NOTE 11 - STOCK OPTION PLANS
Under various plans, the Company may grant stock options to officers,
selected employees, as well as members of the board of directors and
advisory board members. All options have generally been granted at a price
equal to or greater than the fair market value of the Company's common
stock at the date of grant. Generally, options are granted with a vesting
period of up to three years and expire ten years from the date of grant.
Transactions under the various stock option and incentive plans for the
years indicated were as follows:
2004 2003 2002
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
Outstanding at
beginning of year 2,266,850 $5.74 2,056,850 $5.82 2,009,064 $5.64
Granted 1,024,000 2.23 210,000 5.00 113,000 9.22
Exercised (15,000) 2.00 -- -- (20,000) 6.00
Expired (858,800) 7.38 -- -- (25,000) 7.80
Purchased for
retirement -- -- -- -- (20,214) 4.00
---------- ----- ---------- ----- ---------- -----
Outstanding at
end of year 2,417,050 $3.70 2,266,850 $5.74 2,056,850 $5.82
========== ===== ========== ===== ========== =====
F-28
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 2004:
WEIGHTED AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ ----- ----------- -----
$1.00 -- $2.00 503,750 1.40 $ 1.70 503,750 $ 1.70
2.01 -- 4.00 1,209,000 5.47 2.20 810,000 2.20
4.01 - 6.00 311,000 8.15 5.55 156,000 5.55
6.01 - 8.00 60,300 6.75 6.50 60,300 6.50
8.01 - 10.00 333,000 6.27 10.00 122,000 10.00
------------- ---------- ----- ------ ---------- ------
$1.00 - 10.00 2,417,050 5.11 $ 3.10 1,652,080 $ 3.10
------------- ---------- ----- ------ ---------- ------
The per share weighted-average fair value of each option granted during
fiscal 2004, 2003 and 2002 ranged from $1.03 to $2.68, $1.28, and $8.38,
respectively, on the date of grant using the Black-Scholes options pricing
model with the following weighted-average assumptions; no dividend yield;
expected volatility ranging from 75.47% to 77.97%, 75.40%, and 76.69% for
fiscal years 2004, 2003, and 2002, respectively; risk-free interest rate
of 4.0% in 2004, 4.0% in 2003 and rates ranging from 4.55% to 4.875% in
2002, and expected lives ranging from five to ten years.
NOTE 12 - MAJOR CUSTOMERS
For the years ended March 31, revenues from major customers are as
follows:
2004 2003 2002
---- ---- ----
Customer A -- 29.79% 50.19%
Customer B -- 56.32% --
Customer C 40.70% 13.49% --
Customer D 59.30% -- --
Customer A represents ERL, a joint-venture until September 30, 2002, when
it became a wholly-owned subsidiary of the Company, as further discussed
in Note 7. Revenues after September 30, 2002, are eliminated in
consolidation.
F-29
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
NOTE 13 - SUBSEQUENT EVENTS
On April 21, 2004, the Company settled the litigation between Dr. Atul
Mehta, its former president and chief executive officer of the Company.
Under the settlement agreement, Dr. Mehta relinquished any rights to the
Company's patents and intellectual properties and agreed to certain
non-disclosure and certain limited non-competition covenants. The Company
agreed to pay Dr. Mehta $400,000 and certain expense reimbursements in
accordance with the settlement agreement, and received a short term option
for the Company or its designees to acquire all of the shares of the
common stock of the Company held by Dr. Mehta and his affiliates at $2.00
per share. The Company paid $100,000 into escrow which will be released to
Dr. Mehta if the Company option is not exercised within 90 days. As part
of the settlement, the Company extended expiration dates of certain
options to purchase 770,000 shares of Common Stock held by Dr. Mehta and
also provided him with certain "piggyback" registration rights with
respect to shares underlying his options.
On May 10, 2004, Elite Labs entered into an agreement with Purdue Pharma
L.P. ("Purdue") through which Purdue was granted the exclusive right to
evaluate certain abuse resistance drug formulation technology of the
Company and an exclusive option to negotiate a license to develop and
commercialize oxycodone products under the Company's technology. The
Company's proprietary abuse resistance technology is designed to
discourage and reduce abuse of narcotic analgesic medications by making
the products more difficult to abuse when crushed, damaged or otherwise
manipulated.
On May 14, 2004, the Company's Board of Directors appointed Bernard Berk,
its Chief Executive Officer and President, to the additional position of
Chairman of the Board of Directors.
On June 22, 2004 the Company's stockholders approved the 2004 Stock Option
Plan providing for grants of incentive and nonqualified stock option with
respect to 1,500,000 shares including shares which are to be subject to
options to be granted to employees in replacement of outstanding options
held by them. The stockholders also ratified the amendments of terms of
outstanding options and warrants including the repricing of options with
respect to 420,000 shares which will result in a significant charge to
earnings. A proposal to amend the Certificate of Incorporation of the
Company to increase the authorized 25,000,000 shares of Common Stock to
65,000,000 shares of Common Stock and 5,000,000 shares of Preferred stock
is to be considered at the adjourned meeting scheduled to be held on July
19, 2004.
Elite Labs is currently negotiating an agreement with a financial
institution to finance the purchase of certain machinery and equipment and
to recast the outstanding balance due to a bank in the approximate amount
of $212,000. Under the terms of the proposed agreement, Elite Labs is to
borrow $612,000 payable in 36 monthly installments of $20,917, including
principal plus interest at 14% per annum. The proposed agreement is to
provide that the (i) loan will be secured by two pieces of equipment and
the guaranty of the Company, (ii) restricted cash currently held as
collateral under the note payable in the amount of $225,000 is to be
released to the lender, of which $125,500 will be utilized to prepay the
first six monthly payments under the loan and (iii) the balance will be
held as a security deposit which is to be released if the Company raises
certain proceeds from the sale of its securities or other licensing fees.
No assurance can be given that the proposed agreement will be executed or
if the agreement is executed that the agreement will provide the foregoing
terms.
F-30