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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, 2003
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 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 750-2646
Securities registered pursuant to Common Stock - $.01 par value
Section 12(b) of the Act: 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 September 30, 2002 was approximately $33,642,000 based upon
the closing price of the registrant's common stock on the American Stock
Exchange, as of the last business day of the most recently completed second
fiscal quarter (September 30, 2002). (For purposes of determining this amount,
only directors, executive officers, and 10% or greater stockholders have been
deemed affiliates).
Registrant had 10,554,426 shares of common stock, par value $0.01 per share,
outstanding as of June 30, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). N/A
FORWARD LOOKING STATEMENTS
--------------------------
This Annual Report on Form 10-K and the documents incorporated herein 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......................................................... 22
Item 3. Legal Proceedings.................................................. 22
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.......................... 28
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk............................................ 36
Item 8. Financial Statements and Supplementary Data........................ 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant................. 37
Item 11. Executive Compensation............................................. 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters............... 42
Item 13. Certain Relationships and Related Transactions..................... 44
Item 14. Controls and Procedures............................................ 44
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................. 45
Signatures.................................................................. 48
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.
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 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
developed 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 efficiency, we have
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 also 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
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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.
RESEARCH AND DEVELOPMENT
During each of the last two fiscal years, we have focused on research and
development activities. We spent approximately $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
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.
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
PRODUCT BRANDED PRODUCT(a) APPROX. APPROX. NDA/ INDICATION
BRAND SALES GROWTH ANDA
$MM(b) (%)(c)
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
1 Oxycodone CR OxyContin(R) $1,300+ 20% 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) $150+ -40% ANDA Cardiovascular
Once a day
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
4 Chrono Diltiazem N/A N/A N/A NDA Cardiovascular
Once a day
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
5 Undisclosed product N/A N/A N/A NDA Allergy
with partner
Once a day
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
6 Undisclosed Undisclosed $100+ 10% ANDA Infection
Twice a day
- ---- --------------------- -------------------- --------------- -------------- ----------- ------------------
4
(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 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"), which does not require
certain studies that would otherwise be necessary for FDA approval. 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 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.
------------------------------ ---------------- ---------------------
NUMBER OF
DEVELOPMENT STAGE PRODUCTS NDA/ANDA
------------------------------ ---------------- ---------------------
Preclinical 1 --
------------------------------ ---------------- ---------------------
Pilot Phase I study 3 NDA
------------------------------ ---------------- ---------------------
Pilot bioequivalence study 2 ANDA
------------------------------ ---------------- ---------------------
MANUFACTURING AND DEVELOPMENT CONTRACTS
On September 13, 2002 we entered into a manufacturing agreement with
Ethypharm S.A. for the manufacture of a new prescription drug product. We
received
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an upfront manufacturing fee for the first phase of the technology transfer and
are entitled to receive fees in advance for each phase of the manufacturing. In
addition, if and when FDA approval is obtained and if requested by Ethypharm, we
will manufacture commercial batches of the product on terms to be agreed.
In June 2001, we entered into two development contracts with a U.S.
pharmaceutical company pursuant to which it agreed to develop two products in
exchange for development fees, certain payments, royalties and manufacturing
rights. In June 2003 a pre-IND meeting was held with the FDA to discuss the
product development plan. Development continues as planned under this agreement.
COLLABORATIONS
In October 2000, we entered into a joint development and operating
agreement with Elan to develop products using drug delivery technologies and
expertise of both companies. This joint venture, 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. ERL
subcontracted research and development efforts to us, Elan and others. The
in-vivo (pilot bioavailability) was completed on the first product formulated by
us. Development on formulation for two additional products has begun. Both of
these products are in the early stages of development.
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. The study compared the once a day formulation
against the twice-daily reference product that is currently marketed. Currently
there is no once-a-day formulation for this compound. The product is proceeding
to the next stage of development.
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
6
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.
PROPRIETARY RIGHTS
PATENTS
We presently own two United States patents for controlled-release
formulations of nifedipine and methods for preparing them (U.S. Patents Nos.
5,871,776 and 5,902,632). A third U.S. patent arising from work done at Elite,
U.S. Patent No. 5,837,284 for pulsed-released delivery systems for
methylphenidate, the compound sold under the Ritalin(C)brand, was assigned to
Celgene Corporation and was subsequently licensed by Celgene Corporation to
Novartis. We received a development fee from Celgene in connection with this
patent and obtained a license under this patent for applications other than
methylphenidate and continue to develop other applications based on this
technology.
In addition five U.S. and six foreign patent applications have been filed
relating to three different control release pharmaceutical products on which we
are working. Included among these patent applications are applications for U.S.
patents relating to formulations designed for chrono delivery and 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. All of these patent applications are currently pending. We
intend to apply for patents for other products in the future; however, there can
be no assurance that these or any future patents will be granted.
All of the currently pending patent applications were filed in the name of
the inventor, our former President and Chief Executive Officer, Atul M. Mehta.
Dr. Mehta was also the inventor on the applications that issued as U.S. Patents
Nos. 5,871,776 and 5,902,632, and assigned those patents to us after they
issued. However, Dr. Mehta has not similarly executed assignments to us of the
currently pending patent applications, nor has Dr. Mehta executed an agreement
to assign inventions made while he was working for us, for which patent
applications have not yet been filed. Our oxycodone once a day formulation would
be included in such an invention assignment. We have requested that Dr. Mehta
deliver those assignments to us, and intend to consider all available legal
alternatives in obtaining those assignments if Dr. Mehta refuses to provide them
voluntarily.
7
In addition, Dr. Mehta's employment agreement contains a provision to the
effect that if he terminates his employment because of, among other reasons,
substantial interference with the discharge of his responsibilities or Elite's
purported change of his duties and responsibilities without Dr. Mehta's consent,
he would have non-exclusive inventorship rights and copyrights in all
inventions, including compounds, formulations, processes and work product, that
were developed by Elite in the 12 months prior to the termination of employment,
through Dr. Mehta's efforts. Dr. Mehta claims that he terminated his employment
with Elite because of substantial interference with the discharge of his
responsibilities and Elite's purported change of his duties and responsibilities
without Dr. Mehta's consent.
We maintain that Dr. Mehta does not own any of our intellectual property.
We also intend to oppose vigorously any effort by Dr. Mehta to enforce the
provision in his employment agreement that provides for non-exclusive
inventorship rights to Dr. Mehta. In the event that we are forced to take legal
action against Dr. Mehta to have the patent applications and other intellectual
property formally assigned to us, there is no assurance that we will be
successful in such action. With respect to our oxycodone once a day formulation,
another one of our former employees has also been requested to sign and deliver
to us an invention assignment agreement in order to confirm that he has no
ownership interest in it and that we own whatever intellectual property was
created by that employee during the term of his employment. As with Dr. Mehta,
in the event that we are forced to take legal action against the employee to
have the assignment executed, there is no assurance that we will be successful
in such action. If we are not successful in our claims regarding Dr. Mehta and
the intellectual property, it would have a material adverse effect on our
business and our results of operations.
Subsequent to Dr. Mehta's departure, we retained a consultant to review and
evaluate all of our technology and proprietary rights and to analyze the manner
and extent to which such technology and rights comport with our current strategy
and planning. This analysis will include a review and evaluation of rights to
which Dr. Mehta asserts a claim.
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.
8
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.
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.
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
9
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 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
10
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.
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
11
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.
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. Currently, we have two contracts with Ethypharm, S.A.
and one with another U.S. pharmaceutical company that account for substantially
all of our revenues. 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.
12
EMPLOYEES
As of June 30, 2003, we had 17 full-time employees and two 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" EXCEPTION IN THEIR ANNUAL AUDIT REPORT.
We reported net losses of $4,061,422, $1,774,527 and $13,964,981 for the
fiscal years ended March 31, 2003, 2002 and 2001, respectively. At March 31,
2003, we had an accumulated deficit of approximately $28.6 million, consolidated
assets of approximately $8.7 million, stockholders' equity of approximately $5.4
million, and working capital of approximately $3.0 million. Our products are in
the development and early deployment stage and have not generated any
significant revenue to date. Our independent auditors have included a "going
concern" exception in their audit report for our financial statements for the
fiscal year ended 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;
13
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 $4,061,422, $1,774,527 and $13,964,981 for the years ended March 31,
2003, 2002 and 2001, respectively. We expect to realize significant losses in
the next 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.
OUR FOUNDER AND FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER RECENTLY RESIGNED
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.
On July 3, 2003, Dr. Mehta instituted litigation against us and one of our
directors, John 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 for that period would be approximately one million dollars.
We believe Dr. Mehta's claims are without merit and intend to vigorously
contest this action. Prior to Dr. Mehta's resignation, a majority of our Board
of Directors had notified Dr. Mehta that it believed that sufficient grounds
existed for the termination of his employment for "Severe cause" pursuant to his
employment agreement. If we are ordered to pay Dr. Mehta, it would have a
material adverse effect on our financial condition and results of operations.
In addition, all of our patent applications were made in the name of the
inventor, our former President and Chief Executive Officer, Dr. Mehta. The
patents that were granted were assigned by Dr. Mehta to us. However, Dr. Mehta
has not similarly executed assignments to us of the pending patent applications.
Nor has Dr. Mehta
14
executed an agreement to assign inventions made while he was working for us,
including our oxycodone once a day product, for which patent applications have
not yet been filed. We have requested that Dr. Mehta deliver those assignments
to us, and intend to consider all available legal alternatives in obtaining
those assignments if Dr. Mehta refuses to provide them voluntarily. In addition,
Dr. Mehta's employment agreement contains a provision to the effect that if he
terminates his employment because of, among other reasons, substantial
interference with the discharge of his responsibilities or Elite's purported
change of his duties and responsibilities without Dr. Mehta's consent, he would
have non-exclusive inventorship rights and copyrights in all inventions,
including compounds, formulations, processes and work product, that were
developed by Elite in the 12 months prior to the termination of employment,
through Dr. Mehta's efforts. Dr. Mehta claims that he terminated his employment
with Elite because of substantial interference with the discharge of his
responsibilities and Elite's purported change of his duties and responsibilities
without Dr. Mehta's consent.
We maintain that Dr. Mehta does not own any of our intellectual property.
We also intend to oppose vigorously any efforts by Dr. Mehta to enforce the
provision in his employment agreement that provides for non-exclusive
inventorship rights to Dr. Mehta. In the event that we are forced to take legal
action against Dr. Mehta to have the patent applications and other intellectual
property formally assigned to us, there is no assurance that we will be
successful in such action. If we are not successful in our claims regarding Dr.
Mehta and the intellectual property, it would have a material adverse effect on
our business and our results of operations.
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 as described in this report and on which we are devoting substantial
attention, we have had three products in pilot Phase I studies, two products in
bioequivalence stage and an additional product 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
abbreviated drug applications with the FDA, and successful completion of pivotal
clinical trials is required for us to file new drug applications with the FDA.
Abbreviated new drug applications are filed with respect to generic versions of
existing FDA approved products while new drug applications 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.
15
We anticipate, based on our currently proposed plans and assumptions
relating to our operations, that we have sufficient capital to satisfy our
contemplated cash requirements for our fiscal year ending March 31, 2004. 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. We have no current
arrangements with respect to additional financing other than 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. 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 issued to others, we would be prohibited from
manufacturing or selling such products and we could be required to pay
substantial damages.
With respect to our oxycodone once a day formulation, in addition to Dr.
Mehta, one of our former employees has also been requested to sign and deliver
to us an invention assignment agreement in order to confirm that he has no
ownership interest in it and that we own whatever intellectual property was
created by that employee
16
during the term of his employment. As with Dr. Mehta, in the event that we are
forced to take legal action against the employee to have the assignment
executed, there is no assurance that we will be successful in such action.
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.
Other than with regard to our claim against Dr. Mehta and our other former
employee as described in this report, at this time, 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 RECENTLY RESIGNED 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.
17
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 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 IN ADDITION TO DR. MEHTA 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 ARE 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 REPRESENT, UNLESS WE ARE ABLE TO NEGOTIATE
OTHER CONTRACTS WITH OTHER CUSTOMERS THAT GENERATE SIMILAR REVENUES.
Each year we have had some customers that have accounted for a large
percentage of our sales. Currently, we have two contracts with Ethypharm, S.A.
and one with another U.S. pharmaceutical company that account for substantially
all of our revenues. If our contracts with these customers terminate or expire,
we will lose a substantially all of our revenues. 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.
IF WE WERE SUED ON A PRODUCT LIABILITY CLAIM, AN AWARD COULD EXCEED OUR
INSURANCE COVERAGE AND COST US SIGNIFICANTLY.
18
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. To the best of our knowledge, no product liability claim has
been made against us as of June 30, 2003.
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. In 2002, the closing
price of our common stock fluctuated from a per share high of $8.10 to a low of
$1.84 per share. In addition, in 2003 for the period ended March 31, 2003, the
closing price of our common stock fluctuated from a per share closing price high
of $2.17 to a low of $1.48. The per share price of our common stock may not
remain at or exceed current levels. The market price for our common stock, 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
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.
We are authorized to issue 25,000,000 shares of common stock. As of March
31, 2003, there were 10,554,426 shares of our common stock issued and
outstanding. In addition, as of that date there were 3,000,602 shares eligible
for issuance upon
19
exercise of currently outstanding options and warrants, although options for
592,700 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 13,555,025 shares of stock outstanding.
Currently, with the exception of approximately 100,000 shares of stock that
were issued upon exercise of options or warrants within the last twelve months,
all 10,554,426 outstanding shares of common stock are eligible for resale. 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.
IF PENNY STOCK REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR
COMMON STOCK, THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD
BE IMPAIRED.
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, our common stock will be considered a penny stock. As
such the market liquidity for the 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.
20
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 two-thirds of the shareholders (not counting the 15%
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.
RECENT DEVELOPMENTS
On June 3, 2003, Dr. Atul M. Mehta, our founder, notified us that he was
resigning immediately from all positions that he held with us. Following Dr.
Mehta's resignation, the Board of Directors appointed John A. Moore as Chairman
of the Board and we retained Bernard Berk as our new Chief Executive Officer.
On July 3, 2003, Dr. Mehta instituted litigation against us and one of our
directors, John Moore, in the Superior Court of New Jersey, for, among other
things, allegedly breaching his employment agreement and for defamation. See
Item 3, "LEGAL PROCEEDINGS".
21
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 are not currently a party to any material legal proceedings, except
as described in this section of this report.
On June 3, 2003, Dr. Atul M. Mehta resigned from all positions 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 us and one
of our directors, John 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 for that period would be approximately one million dollars.
We believe Dr. Mehta's claims are without merit and intend to vigorously
contest this action. Prior to Dr. Mehta's resignation, a majority of our Board
of Directors had notified Dr. Mehta that it believed that sufficient grounds
existed for the termination of his employment for "Severe cause" pursuant to his
employment agreement. If we are ordered to pay Dr. Mehta, it would have a
material adverse effect on our financial condition and results of operations.
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, 2003.
22
PART II
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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" and our Class A Warrants were quoted on the over-the-counter market under
the symbol "ELIPZ.OB" prior to their expiration on November 30, 2002. The Class
A warrants first began trading on September 11, 1998. 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 and the high and low sales
prices per warrant of our Class A Warrants as reported on the over-the-counter
market prior to November 30, 2002.
COMMON STOCK
QUARTER ENDED HIGH LOW
FISCAL YEAR
ENDING MARCH 31, 2004:
September 30, 2003 (through July 11, 2003) .......... $3.32 $2.88
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 July 11, 2003, the last reported sale price of our common stock, as
reported by the American Stock Exchange, was $3.29 per share.
23
CLASS A WARRANTS
QUARTER ENDED HIGH LOW
FISCAL YEAR
ENDING MARCH 31, 2003:
December 31, 2002 (through November 30, 2002)........ $0.80 $0.15
September 30, 2002................................... $1.70 $0.25
June 30, 2002........................................ $1.75 $0.81
FISCAL YEAR
ENDING MARCH 31, 2002:
March 31, 2002....................................... $1.10 $0.86
December 31, 2001.................................... $2.50 $1.20
September 30, 2001................................... $6.21 $1.40
June 30, 2001........................................ $6.00 $2.00
As of November 30, 2002, the last reported sale price of our Class A
Warrants, as reported by the over-the-counter market, was $.15 per warrant.
As of June 30, 2003, there were approximately 83 holders of record (and
approximately 1,800 beneficial owners) of our common stock, and 23 holders of
record of the Company's Class B warrants. We are informed and believe that as of
June 30, 2003, Cede & Co. held 6,509,229 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.
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.
Pursuant to the terms of a Settlement Agreement dated October 23, 2002
among Elite, Harris Freedman and his respective affiliates, we agreed to
commence an exchange offer pursuant to which holders of our Class A Warrants,
which expired on November 30, 2002 (the "Old Warrants"), will have the
opportunity to exchange their Old Warrants for new warrants (the "New Warrants")
upon payment to us of 10 cents per share of common stock issuable upon exercise
of the Old Warrants. The New Warrants will be exercisable for the same number of
shares of common stock as the Old Warrants, have an exercise price of $5.00 per
share (subject to adjustment in certain circumstances), expire November 30,
2005, and, except as set forth in the Settlement Agreement, will have
substantially all of the same terms and conditions as the Old Warrants except
the New Warrants will not be registered with the Securities and Exchange
Commission. The exchange offer must be registered under applicable federal and
state securities laws and will only be made pursuant to an effective
registration statement meeting applicable legal requirements.
24
In 1997, we undertook a private placement of our securities. In connection
with the private placement, we issued Placement Agent Warrants (the "Placement
Agent Warrants") exercisable for 200,000 shares of our common stock and 100,000
of our Class A Warrants to those placement agents assisting in the private
placement. The Placement Agent Warrants were exercisable at $3.60 for one share
of common stock and one-half a Class A Warrant. The Placement Agent Warrants
expired November 1, 2002. As of October 31, 2002, Placement Agent Warrants
exercisable for 64,786 shares of common stock and 32,393 Class A Warrants had
been exercised, leaving Placement Agent Warrants exercisable for 135,214 shares
of common stock and 67,607 Class A Warrants outstanding in the hands of
placement agents.
On October 24, 2002, our Board of Directors approved the issuance to the
placement agents still holding unexercised Placement Agent Warrants, effective
November 1, 2002, Class A Warrants exercisable for the same aggregate number of
shares of common stock as the Class A Warrants that were underlying the
unexercised Placement Agent Warrants.
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, 2003:
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 plans 373,100 $7.00 830,900
approved by security holders
Equity compensation plans not 1,893,750 $5.52 N/A
approved by security holders
Total 2,266,850 $5.74 830,900
Our Incentive Stock Option Plan ("Plan"), adopted in 1997, provides that
1,250,000 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 and officers
of Elite. Members of our Board of Directors who are not officers of employees of
Elite are not eligible to
25
receive options under the Plan. The granting of options under the Plan will be
entirely discretionary. The exercise price of an option pursuant to the Plan
will not be less than 100% of the fair market value (to be determined by our
Board of Directors in good faith) of the common stock at the time the option was
granted; provided, an option granted to a person who, with his affiliates,
directly or through other entities, owns more than 10% of the voting power of
our common voting stock ("a Substantial Shareholder") will have an exercise
price not less than 110% of the fair market value of our common stock at the
time the option was granted. For any person, "Affiliates" will mean that
person's siblings, spouse, ancestors and lineal descendants. No person to whom
options are granted pursuant to the Plan will receive options first exercisable
during any single calendar year for shares, the fair market value of which
exceeds $100,000 (determined at the time the options are granted). Options
issued pursuant to the Plan expire ten years from the date granted, except that
options granted pursuant to the Plan to Substantial Shareholders expire five
years from the date of grant (in either case, the "Expiration Date"). If, prior
to the Expiration Date, (i) the employee's employment with the Company ends for
reasons other than death or retirement, any options will terminate; (ii) the
employee retires at normal retirement age or, with our consent, earlier on
account of disability, the options will expire at the end of three months after
such retirement; (iii) the employee dies, his estate will have six months to
exercise the options, provided that the exercise period will never extend beyond
the Expiration Date.
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 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.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net Revenues $ 630,310 $ 1,197,507 $ 95,246 $ 10,315 $ 150,412
Net income (loss) $(4,061,422) $ (1,774,527) $(13,964,981) $(2,976,392) $(1,661,881)
Net income (loss) per $(0.40) $(0.19) $(1.53) $(0.35) $(0.23)
common share
Total Assets $ 8,696,222 $12,724,498 $12,350,301 $9,162,383 $3,076,582
Long-term obligations $ 2,720,000 $3,788,148 $2,765,000 $2,885,000 ---
26
Weighted average 10,069,991 9,561,299 9,135,369 8,287,648 7,237,613
number of shares
outstanding
27
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 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 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.
28
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. As a result, the prospective method allowed by
the Financial Accounting Standards Board and related charge did not materially
effect our results of operations. The fair value of stock options granted to
employees and members of the Board of Directors for fiscal years ended after
March 31, 2003 may significantly effect the results of operations of future
periods, as these awards vest.
YEAR ENDED MARCH 31, 2003 VS. YEAR ENDED MARCH 31, 2002
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, 2003, 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.
Our 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.
29
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 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, or approximately 128.9% from 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.
YEAR ENDED MARCH 31, 2002 VS. YEAR ENDED MARCH 31, 2001
Our revenues for the year ended March 31, 2002 were $1,197,507, an increase
of $1,102,261, or approximately 1157% over the prior year. Net revenues include
research and development fees totaling $593,000 of which $550,000 was earned in
conjunction with two separate and distinct development and licensing agreements
with another pharmaceutical company, product formulation fees of $601,057 earned
in conjunction with our joint venture in ERL and $3,450 of consulting and
testing fees. Comparable prior period revenues were $0, $80,932, and $14,314,
respectively, for the above components that comprise total revenues. ERL had no
revenues for either period.
30
General and administrative expenses for the year ended March 31, 2002 were
$763,687, a decrease of $13,431, or approximately 1.7%, from the prior year. The
decrease in general and administrative expenses was substantially due to a
decrease in consulting fees. General and administrative expenses expressed as a
percentage of revenues were approximately 64% for the year ended March 31, 2002
as compared to 816% for the comparable period of the prior year.
Research and development costs for the year ended March 31, 2002 were
$1,609,108, an increase of $133,621, or approximately 9%, from the prior year.
Research and development costs increased as we undertook certain biostudies that
were not undertaken in the prior year. Research and development expenses
expressed as a percentage of revenues were 134% and 1549%, respectively, for the
years ended March 31, 2002 and March 31, 2001.
Other expenses for the year ended March 31, 2002 were $467,708, a decrease
of $11,509,837, or approximately 96.1% from the prior year. We had incurred a
one time expense of $12,015,000 in the fiscal year ended March 31, 2001 for our
share of the payment to Elan from ERL for a technology license.
Our net loss for the year ended March 31, 2002 was $(1,774,527), as
compared to $(13,964,981) for the prior year. The decrease in the net loss was
primarily due to the decrease of $11,572,187 in equity loss of our 80.1% owned
joint venture, which included a one time charge of $12,015,000 in the prior
comparable period for our share of the $15,000,000 payment to Elan for a
technology license. ERL had a loss of $633,642 for the year ended March 31, 2002
and a loss of $15,080,931 for the period of October 6, 2000 through March 31,
2001
MATERIAL CHANGES IN FINANCIAL CONDITION
Our working capital (total current assets less total current liabilities),
which was $7,054,961 as of March 31, 2002, decreased to $2,950,513 as of March
31, 2003, or approximately 58.2% from the prior year. The decrease in working
capital is primarily due to our net loss from operations, our purchase of
property and equipment, and the acquisition of our stock on the open market
pursuant to our previously announced stock repurchase program, offset by the
receipt of $65,843 from the issuance of common stock and warrants in connection
with the exercise of certain of our Class A Warrants, certain placement agent
warrants issued in connection with our 1997 private placement and our receipt of
the receivable from the sale of New Jersey Tax Losses.
We experienced negative cash flow from operations of $2,573,714 for the
year ended March 31, 2003, primarily due to our net loss from operations of
$4,061,422.
Our balance sheet as of March 31, 2002 and statements of redeemable
preferred stock and shareholders' equity (net capital deficiency) for the years
ended March 31, 2002 and 2001 have been restated to present our Series A
convertible exchangeable preferred stock (the "Series A Preferred Stock"), with
a carrying amount
31
of $12,015,000, outside of permanent shareholders' equity, as a result of the
application of Emerging Issues Task Force (EITF) Topic No. D-98, Classification
of and Measurement of Redeemable Securities (Topic No. D-98). We issued the
Series A Preferred Stock in connection with the formation of the joint venture
with Elan in ERL. Shares of the Series A Preferred Stock were exchangeable for a
portion of our investment in ERL. The Series A Preferred Stock was converted
into shares of our common stock during our fiscal year ended March 31, 2003. The
effect of this restatement was to reduce total shareholders' equity by
$12,015,000 for the periods presented and is set forth in the table below.
March 31,
----------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------
Stockholders Equity, as
originally reported at March
31, 2002 and 2001 $ 5,426,501 $ 8,153,884 $ 9,180,254
Redeemable Convertible
Exchangeable Preferred
Stock (Series A) $ (12,015,000) $ (12,015,000)
- --------------------------------------------------------------------------------------------------
Stockholders Equity, as
Restated at March 31,
2002 and 2001 $ 5,426,501 $ (3,861,116) $ (2,834,746)
==================================================================================================
LIQUIDITY AND CAPITAL RESOURCES
For our fiscal year ended March 31, 2003 our operations did not generate
positive cash flow. We have financed our operations primarily through the
private sale of our equity and debt securities. We had working capital (current
assets less current liabilities) of $3.0 million at March 31, 2003 compared with
$7.1 million at March 31, 2002. Cash and cash equivalents at March 31, 2003 were
$3.3 million, a decrease of $3.6 million from the $6.9 million reported at March
31, 2002.
Net cash used in operating activities was $2,573,000 during the year ended
March 31, 2003, compared to $1,569,000 for the year ended March 31, 2002. Net
cash used in operating activities during the year ended March 31, 2003 resulted
primarily from our net loss of $4.1 million, offset in part by a reduction in
accounts receivable from joint venture and certain non-cash expenses. Net cash
used in operating activities during the year ended March 31, 2002 resulted
primarily from a net loss of $1.8 million and lower accounts payable, offset in
part by certain non-cash expenses.
Investing activities utilized net cash of $469,000 during the year ended
March 31, 2003 and utilized net cash of $532,000 during the year ended March 31,
2002. 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
32
restricted cash and the maturity of short-term investments. Net cash used in
investing activities during the year ended March 31, 2002 resulted primarily
from equipment deposits and the acquisition of property and equipment and the
increase in restricted cash.
Financing activities utilized net cash of $546,000 during the year ended
March 31, 2003 and provided net cash of $1.7 million during the year ended March
31, 2002. Net cash used in financing activities during the year ended March 31,
2003 resulted primarily from the repurchase of stock and the repayment of
indebtedness, offset in part by the sale of common stock and warrants. Net cash
provided by financing activities during the year ended March 31, 2002 resulted
primarily from the sale of common stock and warrants and proceeds of bank note,
offset in part by the repayment of indebtedness.
Our capital expenditures aggregated $679,000 and $224,000 for the years
ended March 31, 2003 and 2002, respectively. Such expenditures consisted
primarily of the acquisition of property and equipment necessary to support our
existing operations and expected growth. We anticipate that our capital
expenditures for our fiscal year ending March 31, 2004 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 $2,635,000 in aggregate amount of bonds. The bonds bear interest at
a rate of 7.75% per annum and are due on various dates between 2003 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, 2003. 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, 2003, we were in compliance with the
covenants contained in the bond indenture agreement.
As a result of the significant expenditures associated with the proxy
solicitation in our fiscal year ended March 31, 2003, the joint venture
termination and other legal and accounting expenses, quarterly cash expenses far
exceeded our generated revenues in 2003. In order to conserve cash in fiscal
year 2004, we intend to reduce costs by reducing the number of products under
active development to six. However, while we anticipate having adequate capital
to support our operations through at least the end of our current fiscal year,
we will need to raise capital and/or generate additional revenues
33
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.
We also, from time to time, consider potential strategic transactions
including acquisitions, strategic alliances, joint ventures and licensing
arrangements with other pharmaceutical companies. There can be no assurance that
any such transaction will be available or consummated in the future.
Reference is made to "Risk Factors" for a description of certain risks that
may affect the achievement of our objectives and results discussed herein.
As of March 31, 2003, our principal source of liquidity was approximately
$3,264,000 of cash and cash equivalents. Additionally, we may have access to
funds of approximately $180,000 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 materialize or come to fruition or that such funds will become available.
The following table depicts our obligations and commitments to make future
payments under existing contracts and contingent commitments.
Payments Due by Period
LESS THAN 1 AFTER 5
CONTRACTUAL OBLIGATIONS Total YEAR 1-3 YEARS 4-5 YEARS YEARS
-----
Note payable 300,000 75,000 225,000 - -
EDA Bonds payable 2,635,000 140,000 490,000 395,000 1,610,000
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associates with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The requirements of SFAS No. 146
apply prospectively to activities that are initiated after December 31. 2002
and, as a result, we cannot reasonably estimate the impact of adopting these new
rules until and unless we undertake relevant activities in future periods.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which clarifies the required
disclosures to be made by a guarantor in their interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN No. 45 also requires a
34
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken. We are required to adopt the disclosure
requirements of FIN No. 45 for financial statements of interim and annual
periods ending after December 15, 2002. We are required to adopt and accordingly
have adopted prospectively the initial recognition and measurement provisions of
FIN No.45 for guarantees issued or modified after December 31, 2002 and, as a
result, we cannot reasonably estimate the impact of adopting these new rules
until and unless we undertake relevant activities in future periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123." This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The adoption of the provisions of
SFAS No. 148 did not have a material impact on our financial position or results
of operations during the year ended March 31, 2003. We cannot reasonably
estimate the impact of applying the prospective method of accounting for
stock-based compensation on future periods until and unless we grant or modify
stock-based awards.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," which clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. First, FIN No. 46 will require identification of our
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIEs that are deemed significant, even if consolidation
is not required. As we do not participate in VIEs, we do not anticipate that the
provisions of FIN No. 46 will have a material impact on our financial position
or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
Statement established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify certain financial instruments, such
as mandatorily redeemable stock, as liabilities. Some instruments do not require
the issuer to transfer assets to settle the obligation but, instead,
unconditionally require the issuer to settle the obligation either by
transferring assets or by issuing a variable number of its equity shares. These
35
instruments, which may have previously been classified as equity, would be
classified as liabilities in accordance with SFAS No.150. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of the provisions of SFAS No. 150 is
not expected to have material impact on our financial position or results of
operations.
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.
36
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Our directors and executive officers, as of June 30, 2003, and their
biographical information are set forth below:
- ------------------------- -------- ----------------------------------------------------
NAME AGE POSITION
- ------------------------- -------- ----------------------------------------------------
Bernard Berk 54 Chief Executive Officer
- ------------------------- -------- ----------------------------------------------------
John A. Moore 38 Chairman of the Board
- ------------------------- -------- ----------------------------------------------------
Donald S. Pearson 67 Director
- ------------------------- -------- ----------------------------------------------------
Harmon Aronson 60 Director
- ------------------------- -------- ----------------------------------------------------
Eric L. Sichel, M.D. 44 Director
- ------------------------- -------- ----------------------------------------------------
John P. de Neufville 62 Director
- ------------------------- -------- ----------------------------------------------------
Richard A. Brown 54 Director
- ------------------------- -------- ----------------------------------------------------
Mark I. Gittelman 43 Chief Financial Officer, Secretary and Treasurer
- ------------------------- -------- ----------------------------------------------------
Bernard Berk was appointed Chief Executive Officer in June 2003. Mr. Berk
has been President and Chief Executive Officer of Michael Andrews Corporation, a
pharmaceutical management consultant firm, since 1996. From 1993 until 1996 Mr.
Berk was President and Chief Executive Officer of Nale Pharmaceutical
Corporation. Mr. Berk holds a B.S. in education from New York University.
John A. Moore was appointed Chairman of the Board of Directors in June 2003
and has been a director since December 2002. Mr. Moore has been Chief Executive
Officer and President of Edson Moore Healthcare Ventures, an investment entity,
since July 2002. Since 1994, Mr. Moore has been Chief Executive Officer and
President of Optimer, Inc., a research based polymer development company. Mr.
Moore holds a B.A. in history from Rutgers University.
Donald S. Pearson, a director since 1999, has been employed since 1997 as
the President of Pearson & Associates, Inc., a company that provides consulting
services to the pharmaceutical industry. Prior to starting Pearson & Associates,
Mr. Pearson served for five years as the Director of Licensing at Elan
Pharmaceuticals, and prior to that he was employed by Warner-Lambert for thirty
years in various marketing, business development and licensing capacities. Mr.
Pearson holds a B.S. in Chemistry from the University of Arkansas and studied
steroid chemistry at St. John's University.
Harmon Aronson, Ph.D., a director since 1999, 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 the pharmaceutical and biotechnology companies. Its clients include
United States and international firms manufacturing bulk drugs and finished
pharmaceutical dosage products who are seeking FDA approval for their products
for the US Market. Prior to
37
1997, Dr. Aronson was employed by Biocraft Laboratories, a leading generic drug
manufacturer, most recently in 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.
Eric L. Sichel, M.D., a director since August 2001, is President of Sichel
Medical Ventures, Inc., a company that provides biotechnology company
assessments and investment banking services. Dr. Sichel has been the owner and
President of Sichel Medical Ventures, Inc. since 1997. 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.
John P. de Neufville, a director since December 2002, has been the Chief
Executive Officer and President of Voltaix, Inc., a supplier of electronic
chemicals, since 1986. Mr. de Neufville had been a member of Elite's board of
advisors since 1997 before becoming a director in 2002. He holds a Ph.D. in
applied physics and an M.S. in geology from Harvard University and a B.S. in
geology from Yale University.
Richard A. Brown, a director since December 2002, has been Chairman of the
Board of Directors of Niadyne, Inc., a pharmaceutical development company, since
1997. From 1986 to the present, Mr. Brown also has been President of Eagle
Ventures, a healthcare venture capital and investment banking company. Mr. Brown
also worked in the securities field for Tucker Anthony from 1972 to 1984 and
Healthcare Ventures from 1984 to 1986. Mr. Brown holds an A.B. from Hamilton
College.
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 State 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.
38
The board of the Company has a Compensation Committee, which is comprised
of Donald Pearson, Harmon Aronson, John de Neufville and Richard Brown.
The board of the Company has an Audit Committee which is comprised of
Richard Brown, John Moore and Eric Sichel.
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, 2003 all Reporting Persons complied with all
applicable filing requirements, except for Richard A. Brown who was late in
filing a report on Form 3 with the Securities and Exchange Commission when he
became a director of the Company on December 12, 2002.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
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,
2003, awarded or paid to, or earned by 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.
39
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 Payouts All Other
Principal year (1) Compensation(5) Stock Underlying Compensation
Position Awards Options
- ---------------- ----------- ----------- ---------- ---------------- ----------- ---------------- ------------- ---------------
Atul M. Mehta, 2002-03 $330,140 -- $ 3,040 -- -- -- --
Ph.D. former 2001-02 $272,855 -- $ 83,856 -- 50,000 -- --
President and 2000-01 $248,050 $ 45,000 $ 3,040 -- 425,000(3)(4) -- --
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) On December 15, 2000, Dr. Mehta surrendered options for 425,000 shares
of our common stock (exercisable at $7.00 per share) and in return received
options for 425,000 shares of our common stock exercisable on January 2, 2001
and expiring January 1, 2006. The exercise price is 110% of the opening price of
our common stock on January 2, 2001 adjusted upward to the nearest half dollar
of $7.00. On January 2, 2001, our stock opened at $6.25 per share, therefore the
exercise price for the stock subject to these options is $7.00 per share.
(4) By action on February 21, 2002, our Board of Directors corrected a
clerical error in options for 425,000 shares of our common stock previously
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.
(5) Other Annual Compensation represents use of a company car and premiums
paid by the Company for life insurance on Dr. Mehta's life for the benefit of
his wife paid by the Company.
Reported below in this report is the purchase by the Company of options
from Dr. Mehta. The purchase price for those options of $80,856 is included
above in "Other Annual Compensation."
40
OPTION GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
No options were granted to executive officers of the Company during the
fiscal year ended March 31, 2003.
NAME SHARES VALUE NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
- ---- EXERCISED REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR-END (1)
--------- -------- ------------------------------- -----------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Atul M.
Mehta (2) -0- $0 1,025,000 450,000 $0 $0
(1) The dollar values are calculated by determining the difference between
$1.53 per share, the fair market value of the common stock at March 31, 2003,
and the exercise price of the respective options.
(2) Dr. Mehta resigned as an employee and as a director of Elite as of June 3,
2003.
Under Dr. Mehta's employment agreement, his vested options are exercisable
for the one year period after his employment with Elite ended. His employment
agreement also contains a provision to the effect that if his employment is
terminated by Elite, all of his unvested options become vested. Because Dr.
Mehta resigned from Elite and Elite did not terminate his employment, we believe
that none of Dr. Mehta's unvested options will vest in the future. However, Dr.
Mehta claims in his lawsuit that he is entitled to all of the options granted
pursuant to his employment agreement. We believe that Dr. Mehta's claim is
without merit and intend to contest vigorously any effort by Dr. Mehta to keep
unvested options. We cannot predict whether Dr. Mehta will have the right to
exercise any unvested options.
COMPENSATION OF DIRECTORS
Each non-affiliated director receives $2,000 as compensation for each
meeting attended.
OPTIONS TO DIRECTORS
On January 31, 2003 each member of the board of directors of the Company
other than Dr. Mehta was awarded an option to purchase 30,000 shares of common
stock of the Company at a price of $6.50 per share. These options granted to
each director 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.
41
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 June 30, 2003 by (i) each person known by us
to own beneficially more than 5% of the outstanding shares of our common stock
(ii) each director, named executive officer and (iii) all executive officers and
directors as a group. On such date, we had 10,554,426 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.
NUMBER OF SHARES PERCENTAGE OF CLASS
---------------- -------------------
Donald S. Pearson, Director (1) 78,750(1) *
1251 7th Avenue #309
Naples, Florida 34102
Harmon Aronson, Director 60,000(2) *
26 Monterey Drive
Wayne, New Jersey 07470
Eric L. Sichel, Director 30,000(3) *
411 Highview Road
Englewood, New Jersey 07631
John P. de Neufville, Director 766,100(4) 7.2%
197 Meister Avenue
North Branch, New Jersey 08876
John A. Moore, Chairman of the Board 1,164,218(5) 10.6%
c/o Elite Pharmaceuticals, Inc.
165 Ludlow Avenue
Northvale, New Jersey 06830
Richard A. Brown, Director 461,500(6) 4.3%
P.O. Box 870
Longboat Key, Florida 34228
Mark I. Gittelman, CFO, Treasurer and Secretary 10,000(7) *
300 Colfax Avenue
Clifton, New Jersey 07013
Bernard Berk, Chief Executive Officer 300,000(8) 2.7%
c/o Elite Pharmaceuticals, Inc.
165 Ludlow Avenue
Northvale, New Jersey 06830
42
Dr. Atul M. Mehta 2,487,700(9) 20.0%
c/o Andrew Giles Freda, Esq.
Edwards & Caldwell LLC
1600 Route 208 North
Hawthorne, New Jersey 07647
Jerome Belson 905,100(10) 8.6%
495 Broadway
New York, New York 10012
Bakul and Dilip Mehta 630,000 6.0%
P.O. Box 438
Muscat, Sultanate of Oman
All Directors and Officers as a group 2,870,568 24.9%
* Less than 1% of outstanding shares
(1) Includes options to purchase 60,000 shares.
(2) Comprised of options to purchase 60,000 shares.
(3) Comprised of options to purchase 30,000 shares.
(4) Comprised of (i) 331,100 shares held in trust for the benefit of John P. de
Neufville; (ii) 410,000 shares held in trust for David T. de Neufville; and
(iii) options personally held by John P. de Neufville to purchase 25,000 shares.
(5) Represents (i) options personally held by John Moore to purchase 300,000
shares; and (ii) 864,218 shares of common stock beneficially owned by Edson
Moore Healthcare Ventures, Inc. (formerly known as Edson Moore Corp.). These
shares of common stock are comprised of (i) 764,218 shares of common stock
issued to Edson Moore Corp. upon the exchange of 12,915 shares of the Series A
Preferred Stock, par value $1.00 per share, of Elite Laboratories; and (ii) the
exercise of a warrant to purchase 100,000 shares of common stock (exercisable
through October 17, 2005) at an exercise price of $18.00 per share. The Series A
Preferred Stock of Elite Laboratories became exchangeable into shares of our
common stock on October 17, 2002 and November 5, 2002.
(6) Comprised of (i) 125,000 Class B Warrants held by Richard A. Brown, (ii)
261,500 shares of common stock held by Richard A. Brown, (iii) 50,000 shares of
common stock held by the Alexander Brown Trust and (iv) 25,000 Class B Warrants
held by the Alexander Brown Trust.
(7) Comprised of options to purchase 10,000 shares.
(8) Comprised of options to purchase 300,000 shares.
43
(9) Based on information contained in a Schedule 13D filed on July 3, 2003 by
Atul M. Mehta. Includes 312,700 shares on which Dr. Mehta has shared voting
power and power to dispose of, along with his wife, Asha Mehta.
(10) Based on information contained in a Schedule 13D, as amended, filed by the
foregoing person 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 for
256,000 shares of common stock.
Except as otherwise set forth, information on the stock ownership of these
persons was provided to the Company by the persons.
The Company does not have any compensation plans or arrangements benefiting
employees or non-employees under which equity securities of the Company are
authorized for issuance in exchange for consideration in the form of good
services.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We are a party to an agreement whereby fees are paid to Gittelman & Co.,
P.C., a company wholly owned by Mark I. Gittelman, our Chief Financial Officer,
Secretary and Treasurer, in consideration for services rendered by Mr. Gittelman
in his capacity as Chief Financial Officer and Treasurer. For the fiscal years
ended March 31, 2003 and 2002, the fees paid to that company were $167,544 and
$91,260, respectively.
We also have contractual relationships with Harmon Aronson and Donald
Pearson, directors or the Company, or entities that they control, with respect
to referral and consulting arrangements. For the fiscal years ended March 31,
2003 and 2002, we paid $0 to Mr. Aronson, and $38,400 and $12,800 to Mr.
Pearson, respectively for these services. The arrangement with Mr. Pearson will
expire in December 2003.
ITEM 14. 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.
44
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 one current report on Form 8-K during the
last quarter of our fiscal year ended March 31, 2003, as well as one current
report on Form 8-K during our first fiscal quarter ending June 30, 2003, as
follows:
1. Report filed with the SEC on February 3, 2003, reporting under Items 7 and 9,
letters to shareholders and warrantholders and disclosure required under
Regulation FD in connection with the settlement reached with Harris Freedman,
Sharon Will, Michael H. Freedman and their affiliates.
2. Report filed with the SEC on June 5, 2003, reporting under Items 5 and 6, the
issuance of a press release on June 3, 2003 respecting the resignation of Dr.
Atul Mehta, our former President and Chief Executive Officer.
(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
45
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 Common Stock Purchase Warrant Certificate, incorporated by
reference to Exhibit 4.2 to the Form SB-2.
4.4 Registration Rights Agreement by and between Prologica International,
Inc. and the person 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 affiliates, incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K dated November 1, 2002 (the
"Form 8-K").
10.2 Amended and Restated Employment Agreement, dated March 31, 2000,
between Atul M. Mehta and Elite, incorporated by reference to Exhibit
10.2 to the Form 8-K.
10.3 Amendment, dated July 18, 2002, to Amended and Restated Employment
Agreement, dated March 31, 2000, between Atul M. Mehta and Elite,
incorporated by reference to Exhibit 10.3 to the Form 8-K.
10.4 Commercial Lease made between Serex, Inc. and Elite executed September
7, 1993, incorporated by reference to Exhibit 10.4 to the Form SB-2.
10.6 1997 Incentive Stock Option Plan, adopted August 7, 1997, authorizing
1,250,000 shares of common stock for issuance pursuant to the Plan,
incorporated by reference to Exhibit No. 10.6 to the Form SB-2.
10.7 Form of Confidentiality Agreement (corporate), incorporated by
reference to Exhibit 10.7 to the Form SB-2.
10.8 Form of Confidentiality Agreement (employee), incorporated by
reference to Exhibit 10.8 to the Form SB-2.
21 Subsidiaries of the Company.*
46
23.1.1 Consent of Miller, Ellin & Company, LLP.*
23.1.2 Consent of KPMG, LLP.*
99.1** Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2** Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
- ----------------------
* Filed herewith
** 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.
47
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: July 15, 2003
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 July 15, 2003
- -------------------------- Officer
Bernard Berk (Principal Executive
Officer)
/s/ Mark I. Gittelman Executive Vice President, July 15, 2003
- -------------------------- Chief Financial Officer and
Mark I. Gittelman Treasurer (Principal
Financial and Accounting
Officer)
/s/ Harmon Aronson Director July 14, 2003
- --------------------------
Harmon Aronson
/s/ Donald S. Pearson Director July 14, 2003
- --------------------------
Donald S. Pearson
/s/ Eric L. Sichel Director July 14, 2003
- --------------------------
Eric L. Sichel
48
/s/ John P. de Neufville Director July 14, 2003
- --------------------------
John P. de Neufville
/s/ John A. Moore Director July 14, 2003
- --------------------------
John Moore
/s/ Richard A. Brown Director July 14, 2003
- --------------------------
Richard A. Brown
49
CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Bernard Berk, certify that:
1. I have reviewed this annual report on Form 10-K of Elite Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
50
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ Bernard Berk
- ---------------------------
Chief Executive Officer
51
I, Mark I. Gittelman, certify that:
1. I have reviewed this annual report on Form 10-K of Elite Pharmaceuticals,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
52
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 15, 2003
/s/ Mark I. Gittelman
- --------------------------------------
Chief Financial Officer and Treasurer
53
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS F-2 - F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) F-5 - F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - 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, 2003 and
2002, and the related consolidated statements of operations, redeemable
preferred stock and stockholders' equity (net capital deficiency) and cash flows
for the years ended March 31, 2003, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the
results of their operations and their cash flows for the years ended March 31,
2003, 2002 and 2001 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.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation during the year
ended March 31, 2003, and has restated its consolidated balance sheet as of
March 31, 2002, and its consolidated statements of redeemable preferred stock
and stockholders' equity (net capital deficiency) for the years ended March 31,
2002 and 2001.
/s/ MILLER, ELLIN & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
June 9, 2003, except for
the second and third paragraphs
of Note 13, as to which the
date is July 3, 2003
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
ASSETS
2003 2002
---- ----
(RESTATED)
CURRENT ASSETS:
Cash and cash equivalents $ 3,264,081 $ 6,852,434
Short-term investments --- 100,000
Accounts and accrued interest receivable 4,681 39,988
Restricted cash 99,380 213,664
Due from Joint Venture --- 525,259
Prepaid expenses and other current assets 132,092 106,082
------------ ------------
Total current assets 3,500,234 7,837,427
PROPERTY AND EQUIPMENT- net of accumulated
depreciation and amortization 4,390,553 3,865,771
INTANGIBLE ASSETS - net of accumulated amortization 104,842 54,669
OTHER ASSETS:
Deposit on Equipment --- 123,396
Investment in Joint Venture --- 63,381
Amount receivable from sale of state tax losses --- 66,077
Restricted cash - Debt Service Reserve 300,000 300,000
Restricted cash - Note payable 250,000 250,000
EDA bond offering costs, net of accumulated
amortization of $47,267 and $34,083, respectively. 150,593 163,777
------------ ------------
Total other assets 700,593 966,631
------------ ------------
$ 8,696,222 $ 12,724,498
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
F-2
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
2003 2002
---- ----
(Restated)
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 140,000 130,000
Accounts payable and accrued expenses 334,721 141,712
Due to joint venture --- 435,754
------------ ------------
Total current liabilities 549,721 782,466
------------ ------------
LONG TERM LIABILITIES:
Dividends payable -Series A preferred stock --- 853,148
Note payable - net of current portion 225,000 300,000
EDA bonds - net of current portion 2,495,000 2,635,000
------------ ------------
Total long-term liabilities 2,720,000 3,788,148
------------ ------------
Preferred stock at liquidating value of $1,000 per share-
$1.00 par value; 20,000 shares authorized; Series A
convertible exchangeable preferred stock; 12,015 issued
and outstanding at March 31, 2002. --- 12,015,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - $1.00 par value; 7,250,000 shares
authorized; Series B convertible preferred stock;
4,806,000 shares designated, and 200,000 shares
issued and outstanding at March 31, 2002. --- 200,000
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 10,544,426 and 9,710,840 in
2003 and 2002, respectively. 105,444 97,108
Additional paid-in capital 34,218,832 19,469,464
Accumulated deficit (28,590,934) (23,627,688)
------------ ------------
5,733,342 (3,861,116)
Treasury stock, 100,000 and -0- shares, respectively (306,841) ---
------------ ------------
Total stockholders' equity (deficit) 5,426,501 (3,861,116)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 8,696,222 $ 12,724,498
============ ============
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,
---------------------
2003 2002 2001
----- ----- ----
REVENUES:
Research and development $ 442,500 $ 593,000 $ ---
Product formulation fees 187,810 601,057 80,932
Consulting and test fees --- 3,450 14,314
----------- ----------- ------------
Total revenues 630,310 1,197,507 95,246
----------- ----------- ------------
OPERATING EXPENSES:
Research and development 2,013,579 1,609,108 1,475,487
General and administrative 1,858,069 763,687 777,118
Depreciation and amortization 310,876 266,919 194,038
----------- ----------- ------------
4,182,524 2,639,714 2,446,643
----------- ----------- ------------
LOSS FROM OPERATIONS (3,552,214) (1,442,207) (2,351,397)
----------- ----------- ------------
OTHER INCOME (EXPENSES):
Interest income 96,692 260,055 329,583
Interest expense (227,907) (220,123) (227,301)
Charge relating to exchange of warrants (242,338) --- ---
Charge relating to issuance of stock options (20,550) --- ---
Equity in loss of joint venture (186,379) (507,640) (12,079,827)
----------- ----------- ------------
(580,482) (467,708) (11,977,545
----------- ----------- ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (4,132,696) (1,909,915) (14,328,942)
BENEFIT FOR INCOME TAXES (71,274) (135,388) (363,961)
----------- ----------- ------------
NET LOSS $(4,061,422) $(1,774,527) $(13,964,981)
=========== =========== ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (0.40) $ (0.19) $ (1.53)
=========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 10,069,991 9,561,299 9,135,369
=========== =========== ============
The accompanying notes are an integral part of the consolidated financial statements.
F-4
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(RESTATED)
REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
BALANCE AT APRIL 1, 2000 - $ - - $ - 8,855,519 $88,555
Issuance of shares - - - - 409,165 4,092
Issuance of shares through
exercise of warrants - - - - 88,435 884
Issuance of shares through
exercise of options - - - - 18,750 188
Issuance of shares and warrants
through exercise of placement
agent warrants - - - - 4,520 45
Issuance of Series A convertible
exchangeable preferred stock,
restated 12,015 12,015,000 - - - -
Net loss for year ended
March 31, 2001 - - - - - -
------- ----------- -------- -------- ---------- -------
BALANCE AT MARCH 31, 2001, as
restated 12,015 $12,015,000 - $ - 9,376,389 $93,764
Issuance of shares through
exercise of warrants - - - - 298,179 2,981
Issuance of shares and warrants
through exercise of placement
agent warrants - - - - 16,272 163
Issuance of shares and warrants
through exercise of options - - - - 20,000 200
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, as
restated 12,015 $12,015,000 200,000 $200,000 9,710,840 $97,108
------- ----------- -------- -------- ---------- -------
TREASURY STOCK STOCKHOLDERS'
ADDITIONAL -------------- EQUITY (NET
PAID-IN ACCUMULATED CAPITAL
CAPITAL SHARES AMOUNT DEFICIT DEFICIENCY)
------- ------ ------ ------- -----------
BALANCE AT APRIL 1, 2000 $12,511,080 ($ 7,035,032) $ 5,564,603
Issuance of shares 4,995,908 - 5,000,000
Issuance of shares through
exercise of warrants 510,975 - 511,859
Issuance of shares through
exercise of options 37,313 - 37,501
Issuance of shares and warrants
through exercise of placement
agent warrants 16,227 - 16,272
Issuance of Series A convertible
exchangeable preferred stock,
restated - - -
Net loss for year ended
March 31, 2001 - (13,964,981) (13,964,981)
----------- ------------ ------------
BALANCE AT MARCH 31, 2001, as
restated $18,071,503 ($21,000,013) $ (2,834,746)
Issuance of shares through
exercise of warrants 1,301,606 - 1,304,587
Issuance of shares and warrants
through exercise of placement
agent warrants 58,416 - 58,579
Issuance of shares and warrants
through exercise of options 37,939 - 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, as
restated $19,469,464 - $ - ($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 REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(RESTATED)
REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
BALANCE AT APRIL 1, 2002, as
restated 12,015 $12,015,000 200,000 $200,000 9,710,840 $ 97,108
Issuance of shares through
exercise of warrants - - - - 2,606 26
Issuance of shares and warrants
through exercise of placement
agent warrants - - - - 14,670 147
Issuance of Series B convertible
exchangeable preferred stock - - 559,000 559,000 - -
Dividends - declared - Series B
preferred stock - - - - - -
Dividends - declared - Series A
preferred stock - - - - - -
Series A and B preferred stock
issued to satisfy accrued dividends 1,741 1,740,973 14,000 14,000 - -
Conversion of Series A and B
convertible exchangeable preferred
stock into common stock (13,756) (13,755,973) (773,000) (773,000) 816,310 8,163
Purchase of treasury stock - - - - (100,000) -
Charge relating to exchange of
warrants - - - - - -
Charge relating to issuance of
stock options - - - - - -
Fees relating to Warrant Exchange
Offer - - - - - -
Net loss for the year ended March
31, 2003 - - - - - -
-------- ----------- -------- -------- ---------- ---------
BALANCE AT MARCH 31, 2003 - $ - - $ - 10,444,426 $ 105,444
======== =========== ======== ======== ========== =========
TREASURY STOCK STOCKHOLDERS'
ADDITIONAL -------------- EQUITY (NET
PAID-IN ACCUMULATED CAPITAL
CAPITAL SHARES AMOUNT DEFICIT DEFICIENCY)
------- ------ ------ ------- -----------
BALANCE AT APRIL 1, 2002, as
restated $19,469,464 - $ - ($23,627,688) $(3,861,116)
Issuance of shares through
exercise of warrants 13,004 - 13,030
Issuance of shares and warrants
through exercise of placement
agent warrants 52,666 - 52,813
Issuance of Series B 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)
Series A and B preferred stock
issued to satisfy accrued dividends - - 14,000
Conversion of Series A and B
convertible exchangeable preferred
stock into common stock 14,520,810 - - - 13,755,973
Purchase of treasury stock - 100,000 (306,841) - (306,841)
Charge relating to exchange of
warrants 242,338 - - - 242,338
Charge relating to issuance of
stock options 20,550 - - - 20,550
Fees relating to Warrant Exchange
Offer (100,000) - - - (100,000)
Net loss for the year ended March
31, 2003 - - - (4,061,422) (4,061,422)
----------- ------- --------- ------------ -----------
BALANCE AT MARCH 31, 2003 $34,218,832 100,000 $(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 CASH FLOWS
YEARS ENDED MARCH 31,
---------------------
2003 2002 2001
----- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,061,422) $ (1,774,527) $ (13,964,981)
Adjustments to reconcile net loss to cash
used in operating activities:
Write off of accounts receivable and patents --- 5,057 ---
Depreciation and amortization 310,876 266,919 194,038
Charge relating to Warrant Exchange Offer 242,338 --- ---
Charge relating to issuance of stock options 20,550 --- ---
Equity in loss of joint venture 186,379 507,640 12,079,827
Changes in assets and liabilities:
Contract revenue receivable 35,307 (26,674) (13,314)
Prepaid expenses and other current assets (26,010) (24,350) 256,938
Amount receivable from Joint Venture 525,259 (444,444) (80,932)
Accounts payable and accrued expenses and other current
Liabilities 193,009 (78,508) (377,560)
------------ ------------ -------------
NET CASH (USED IN) OPERATING ACTIVITIES (2,573,714) (1,568,887) (1,905,984)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) redemptions of short-term investments 100,000 (100,000) ---
Payments for patent and trademark filings (69,517) (6,920) (30,788)
Restricted cash 114,284 (157,624) 265,690
Receivable from sale of New Jersey tax losses 66,077 80,055 (146,132)
Payment of deposit for manufacturing equipment --- (123,396) ---
Purchases of property and equipment (679,485) (223,801) (273,933)
------------ ------------ -------------
NET CASH (USED IN) INVESTING ACTIVITIES (468,641) (531,686) (185,163)
------------ ------------ -------------
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) --- ---
Purchase of treasury stock (306,841) --- ---
Proceeds from issuance of common stock and warrants 65,843 1,401,305 5,565,632
Principal repayments of EDA bonds (130,000) (120,000) (115,000)
------------ ------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (545,998) 1,656,305 5,450,632
------------ ------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,588,353) (444,268) 3,359,485
CASH AND CASH EQUIVALENTS - beginning of period 6,852,434 7,296,702 3,937,217
------------ ------------ -------------
CASH AND CASH EQUIVALENTS - end of period $ 3,264,081 $ 6,852,434 $ 7,296,702
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 228,938 $ 218,938 $ 228,044
Cash paid (received) for income taxes (71,274) 2,430 4,380
SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Utilization of equipment deposit towards purchase of equipment $ 123,396 $ --- $ 1,315,710
Issuance of Preferred Stock Series B (including stock dividend payable
of $14,000 and subscription receivable of $67,000) for interest in
joint venture 573,000 $ 200,000 $ 12,015,000
Conversion of preferred stock Series B to common stock (521) --- ---
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 - Series A 899,923 853,148 ---
Conversion of Series A to common stock (7,642) --- ---
The accompanying notes are an integral part of the consolidated financial statements.
F-7
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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.
MERGER ACTIVITIES
Concurrent with its private placement offering, 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 qualifies 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT OF FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 2002 and statements of
redeemable preferred stock and stockholders' equity (net capital
deficiency) for the years ended March 31, 2002 and 2001 have been
restated to present the Company's Series A convertible exchangeable
preferred stock ("Series A Preferred Stock"), with a carrying amount
of $12,015,000, outside of permanent stockholders' equity, as a result
of the application of Emerging Issues Task Force (EITF) Topic No.
D-98, Classification of and Measurement of Redeemable Securities
(Topic No. D-98). The Company issued the Series A Preferred Stock in
connection with the formation of its joint venture, ERL, with Elan.
Shares of the Series A Preferred Stock were exchangeable for a portion
of the Company's investment in ERL. The effect of this restatement is
to reduce total stockholders' equity by $12,015,000 for the
aforementioned periods. During the year ended March 31, 2003, the
Series A Preferred Stock was converted into common stock of the
Company. See Note 10 to Financial Statements, Redeemable Preferred
Stock and Stockholders' Equity (Net Capital Deficiency).
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.
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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, 2003 and 2002, 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:
2003 2002 2001
------------------------- ------------------------- -------------------------
Shares Weighted- Shares Weighted- Shares Weighted-
Average Average Average
Exercise Exercise Exercise
Price Price Price
--------- ------------ --------- ------------ --------- ------------
Stock options 2,266,850 $ 5.74 2,056,850 $ 5.82 2,009,064 $ 5.64
Warrants 733,752 $ 12.33 2,669,477 $ 5.47 2,983,928 $ 5.31
Convertible preferred shares - - 816,310 - 816,310 -
--------- --------- ---------
3,000,602 5,542,637 5,809,302
========= ========= =========
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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.
INVESTMENTS
Short-term investments consist of certificates of deposit at a bank
with initial maturities of one year. The Company places its
certificates of deposit with high quality, U.S. financial institutions
and, to date, has not experienced losses on any of its balances. The
Company records its certificates of deposit at amortized cost, which
approximates the fair value. At March 31, 2002, $100,000 was
classified as held-to-maturity, bearing interest at 4.07% and matured
on September 13, 2002.
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 loses. 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.
VALUATION OF EXCHANGE OPTION OF SERIES A PREFERRED STOCK
The Company periodically monitored the redemption value of the Series
A Preferred Stock, as measured by the fair value of the joint venture
that Elan would receive, less any cash payable to the Company, upon
exchange by Elan. If the redemption value of the Series A Preferred
Stock exceeded its then current carrying value, the Company would
accrete the carrying value of the Series A Preferred Stock to the
redemption value and recognize a corresponding dividend to the Series
A Preferred shareholder. The Company would recognize subsequent
increases or decreases in redemption value of the Series A Preferred
Stock; however, decreases would be limited to amounts previously
recorded as increases, so as not to reduce the carrying amount of the
Series A Preferred Stock below the original basis of $12.0 million.
The determination of fair value of the joint venture required the
Company to make estimates and assumptions that related, in part, to
the potential success of the joint venture's ongoing research and
development activities. On September 30, 2002, the joint venture was
terminated and the Series A Preferred Stock was converted into common
shares, as further discussed in Notes 7 and 10.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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 years ended March 31,
2002 and 2001 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 year ended March 31, 2003, the Company issued 210,000
options to purchase common stock to an employee and to members of the
board of directors. The options have an exercise price of $5.00 per
share and vest over three years. The options expire ten years from the
date of grant. The Company has taken a charge of $20,550 for the year
ended March 31, 2003, which represents the fair value of the options
vested, utilizing the Black-Scholes options pricing model on each
grant date.
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:
2003 2002 2001
---- ---- ----
Net loss as reported $ (4,061,422) $ (1,774,527) $ (13,964,981)
Add: Stock-based compensation expense
included in reported net loss, net of related
tax effects 20,550 - -
Deduct: Total stock-based compensation
expense determined under fair value method
for all awards, net of related tax effects
(1,070,651) (1,779,338) (1,831,869)
-------------- -------------- --------------
Pro forma net loss (5,111,523) (3,553,865) (15,796,850)
Loss per share as reported (0.40) (0.19) (1.53)
Pro-forma loss per share (0.51) (0.38) (1.73)
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146, "Accounting for Costs Associates with Exit or
Disposal Activities," (SFAS No. 146) which addresses financial
accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. The requirements of SFAS No. 146 apply
prospectively to activities that are initiated after December 31. 2002
and, as a result, the Company cannot reasonably estimate the impact of
adopting these new rules until and unless it undertakes relevant
activities in future periods.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which
clarifies the required disclosures to be made by a guarantor in their
interim and annual financial statements about its obligations under
certain guarantees that it has issued. FIN No. 45 also requires a
guarantor to recognize, at the inception of the guarantee, a liability
for the fair value of the obligation undertaken. The Company is
required to adopt the disclosure requirements of FIN No. 45 for
financial statements of interim and annual periods ending after
December 15, 2002. The Company is required to adopt and accordingly
has adopted prospectively the initial recognition and measurement
provisions of FIN No.45 for guarantees issued or modified after
December 31, 2002 and, as a result, the Company cannot reasonable
estimate the impact of adopting these new rules until and unless it
undertakes relevant activities in future periods.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
SFAS No. 123." This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The adoption of the provisions of SFAS No. 148 did not have a material
impact on the Company's financial position or results of operations
during the year ended March 31, 2003. The Company cannot reasonably
estimate the impact of applying the prospective method of accounting
for stock-based compensation on future periods until and unless it
grants or modifies stock-based awards.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," relating to consolidation of certain entities. First, FIN
No. 46 will require identification of the Company's participation in
variable interests entities ("VIEs"), which are defined as entities
with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand alone basis, or whose
equity holders lack certain characteristics of a controlling financial
interest. For entities identified as VIEs, FIN No. 46 sets forth a
model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to
its expected losses, or stands to gain from a majority of its expected
returns. FIN No. 46 also sets forth certain disclosures regarding
interests in VIEs that are deemed significant, even if consolidation
is not required. As the Company does not participate in VIEs, it does
not anticipate that the provisions of FIN No. 46 will have a material
impact on its financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities
and Equity." This Statement established standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify certain financial instruments, such as mandatorily
redeemable stock, as liabilities. Some instruments do not require the
issuer to transfer assets to settle the obligation but, instead,
unconditionally require the issuer to settle the obligation either by
transferring assets or by issuing a variable number of its equity
shares. These instruments, which may have previously been classified
as equity, would be classified as liabilities in accordance with SFAS
No.150. This Statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
The adoption of the provisions of SFAS No. 150 is not expected to have
material impact on the Company's financial position or results of
operations.
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS
The Company reported net losses of $4,061,422, $1,774,527 and
$13,964,981 for the fiscal years ended March 31, 2003, 2002 and 2001,
respectively. At March 31, 2003, the Company had an accumulated
deficit of approximately $28.6 million, consolidated assets of
approximately $8.7 million, stockholders' equity of approximately $5.4
million, and working capital of approximately $3.0 million. The
Company has not generated any significant revenue to date.
In an effort to reduce costs, 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 primary strategy remains to develop the Company's oral control
release pharmaceutical products for FDA approval, and once developed,
to commercially exploit these products either by licensing or through
the development of collaborations with strategic partners.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 2 - MANAGEMENT'S LIQUIDITY PLANS (CONTINUED)
The Company also recently retained an investment banking firm 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.
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, anticipate that the Company will be able to continue its
operations at least through the end of fiscal year 2004.
NOTE 3- PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2003 and 2002 consists of the
following:
2003 2002
---- ----
Laboratory manufacturing, and warehouse equipment $ 3,140,250 $ 2,337,120
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 4,687,729
Less: Accumulated depreciation and amortization 1,100,306 821,958
------------ ------------
$ 4,390,553 $ 3,865,771
============ ============
Depreciation and amortization expense amounted to $278,348, $249,338
and $177,662 for the years ended March 31, 2003, 2002 and 2001,
respectively. The Company's obligations under capital leases were
satisfied prior to March 31, 2002.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at March 31, 2003 and 2002, consists of the
following:
2003 2002
---- ----
Patents $ 129,134 $ 59,617
Trademarks 8,120 8,120
------------ ------------
137,254 67,737
Less: Accumulated amortization 32,412 13,068
------------ ------------
$ 104,842 $ 54,669
============ ============
Amortization of intangible assets amounted to $19,344, $4,390 and
$3,179 for the years ended March 31, 2003, 2002 and 2001,
respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 4 - INTANGIBLE ASSETS (CONTINUED)
Aggregate amortization expense of intangible assets for the next five
fiscal years is estimated to be as follows:
YEARS ENDING MARCH 31,
----------------------
2004 $ 19,340
2005 19,340
2006 19,340
2007 19,340
2008 19,340
NOTE 5 - NOTE PAYABLE
On January 25, 2002, the Company closed on 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 and is secured by the machinery and equipment purchased
under this facility and a certificate of deposit in the amount of
$250,000 held as collateral. This certificate of deposit has been
classified as noncurrent restricted cash. The note payable consists of
the following at March 31:
2003 2002
---- ----
Bank note payable $ 300,000 $ 375,000
Current portion (75,000) (75,000)
----------- -----------
Long-term portion, net of current maturities $ 225,000 $ 300,000
=========== ===========
Principal maturities under this loan are as follows:
YEARS ENDING MARCH 31,
----------------------
2004 $ 75,000
2005 75,000
2006 75,000
2007 75,000
----------
$ 300,000
==========
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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.
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:
2003 2002
---- ----
EDA Bonds $ 2,635,000 $ 2,765,000
Current portion (140,000) (130,000)
------------ ------------
Long term portion, net of current maturities $ 2,495,000 $ 2,635,000
============ ============
Principal maturities required under the bond agreement are as follows:
YEARS ENDING MARCH 31,
----------------------
2004 $ 140,000
2005 150,000
2006 165,000
2007 175,000
2008 190,000
Thereafter 1,815,000
------------
$ 2,635,000
============
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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. For the years ended March 31, 2003, 2002 and 2001,
the Company charged $187,810, $601,057 and $80,932, 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 years ended March 31, 2003, 2002 and 2001, ERL recognized net
losses of $232,742, $633,642 and $15,080,931, respectively. The
Company recognized 80.1% of ERL's losses, or $186,379, $507,640 and
$12,079,827, respectively, for the years ended March 31, 2003, 2002
and 2001. The product formulation fees of $187,810, $601,057 and
$80,931 earned by the Company for services rendered to ERL for the
years ended March 31, 2003, 2002 and 2001, 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 had
not recognized any revenue.
In December 2000, ERL approved one product for development at its
first organizational meeting. In March 2001, the management committee
of ERL met to finalize its budget and business plan and to complete a
preliminary formulation of the drug product. As of March 31, 2003, ERL
completed in-vivo (pilot clinical trial) on the first product and
began formulation and development of two additional products.
As of March 31, 2002, the Company owed ERL $435,754, representing its
80.1% of unfunded contributions to ERL through March 31, 2002.
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
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 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
===========
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 7 - JOINT VENTURE ACTIVITIES (CONTINUED)
The following are unaudited pro-forma consolidated results of
operations for the years ended March 31, 2003, 2002 and 2001, assuming
the acquisition was completed on April 1, 2000.
YEAR ENDED MARCH 31,
-------------------------------------------------------
2003 2002 2001
----- ----- ----
(Unaudited) (Unaudited) (Unaudited)
Revenue $ 442,500 $ 596,450 $ 14,314
Net (loss) available to common
Shareholders $ (4,107,785) $ (1,900,529) $ (16,966,085)
Net (loss) available to common
shareholders per share -
basic and diluted $ (0.40) $ (0.19) $ (1.85)
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 (benefit) for income taxes are as
follows:
YEAR ENDED MARCH 31,
-----------------------------------------------
2003 2002 2001
---- ---- ----
Federal:
Current $ - $ - $ -
Deferred - - -
---------- --------- ---------
State:
Current 400 2,430 4,382
Deferred - - -
Sale of New Jersey net operating losses (71,674) (137,818) (368,343)
---------- --------- ---------
(71,274) (135,388) (363,961)
---------- --------- ---------
$ (71,274) $(135,388) $(363,961)
========== ========= =========
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,
2001 was $368,343 of which $222,211 and $146,132 was received in 2001
and in 2002, respectively.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 8 - INCOME TAXES
During the year ended March 31, 2002, 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, 2002 was $137,818, of which $71,741 was received in November
2001. The remaining balance of $66,077 was received in 2003.
During the year ended March 31, 2003, the Company received approval
for the sale of an additional $915,430 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 in 2003 was $71,674.
The major components of deferred tax assets at March 31, 2003 and 2002
are as follows:
2003 2002
---- ----
Net operating loss carry forwards $ 4,486,167 $ 3,128,375
Valuation allowance (4,486,167) (3,128,375)
------------ ------------
$ --- $ ---
============ ============
At March 31, 2003, a 100% valuation allowance is provided, as it is
uncertain if the deferred tax assets will be utilized. The valuation
allowance increased during 2003, 2002 and 2001 by $1,357,792, $304,375
and $259,000, respectively.
At March 31, 2003, for federal income tax purposes, the Company has
unused net operating loss carryforwards of approximately $14,004,778
expiring in 2007 through 2015. For state tax purposes, the Company has
$6,275,875 of unused net operating losses, which are net of the
$7,610,686 of New Jersey net-operating losses sold, as discussed
above.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
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. His salary would
total approximately $1 million through June 6, 2006.
The Company believes Dr. Mehta's claims are without merit and intends
to vigorously contest this action. 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. If Elite is ordered to pay Dr. Mehta, it
would have a material adverse effect on the Company's financial
condition and results of operations.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENT (CONTINUED)
In addition, Dr. Mehta's Employment Agreement contains a provision to
the effect that if he terminates his employment because of, among
other reasons, substantial interference with the discharge of his
responsibilities or Elite's purported change of his duties and
responsibilities without Dr. Mehta's consent, he would have
non-exclusive inventorship rights and copyrights in all inventions
that were developed by Elite in the twelve months prior to the
termination of employment, through Dr. Mehta's efforts. Dr. Mehta
claims that he terminated his employment with Elite because of
substantial interference with the discharge of his responsibilities
and Elite's purported change of his duties and responsibilities
without Dr. Mehta's consent. The Company maintains that Dr. Mehta does
not own any of its intellectual property and intends to oppose
vigorously any effort by Dr. Mehta to enforce the provision in his
Employment Agreement that provides for non-exclusive inventorship
rights to Dr. Mehta. However, there is no assurance that the Company's
position will be upheld. If the Company is not successful in its
claims regarding Dr. Mehta and the intellectual property, it would
have a material adverse effect on the Company's financial position and
its results of operations.
CONSULTING AGREEMENTS
On August 1, 1997, the Company entered into agreements with two
corporations, one of which is a shareholder, to provide various
consulting services for a period of three years. Terms of the
agreements include the following:
a. Combined monthly fees of $15,000.
b. The issuance of 350,000 warrants to purchase common stock at an
exercise price of $6.00 per share for a period of five (5) years.
Such agreements terminated on July 31, 2000. The Company entered into
two new agreements (the "2000 Agreements") with these Companies
commencing on September 1, 2000 and terminating on December 31, 2000.
Such agreements called for combined monthly fees of $7,500. One
agreement was extended through December 31, 2001 and then terminated
and the other agreement was subsequently extended until March 31,
2002, calling for payments of $5,000 per month.
Consulting expenses under the 2000 Agreements amounted to $15,000,
$67,500 and $97,500, for the years ended March 31, 2003, 2002 and
2001, respectively.
On August 1, 1998, the Company entered into a consulting agreement
(the "1998 Agreement") with a company for the purpose of providing
management, marketing and financial consulting services for an
unspecified term. Terms of the agreement provide for a nonrefundable
monthly fee of $2,000. This compensation will be applied against
amounts due pursuant to a business referral agreement entered into on
April 8, 1997 (the "1997 Agreement") with the same party.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENTS (CONTINUED)
Terms of the 1997 Agreement provide 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 calls for 25 monthly
installments of $3,200 beginning on December 1, 2001.
Consulting expense under the 1997 and 1998 Agreements amounted to
$38,400, $12,800 and $50,000 for the years ended March 31, 2003, 2002
and 2001, respectively.
REFERRAL AGREEMENT
On January 29, 2002, the Company entered into a Referral Agreement
with an individual (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
COLLABORATIVE AGREEMENTS
On June 27, 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.
These amounts have been earned as of March 31, 2002. The Company is
currently proceeding with the development and formulation for both
products as specified in the development agreements. During the year
ended March 31, 2003, the Company earned revenues of $85,000 for
additional development and formulation for both products.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COLLABORATIVE AGREEMENTS (CONTINUED)
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, 2003, the Company
billed and earned revenues of $280,000 under this agreement, 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.
CONTINGENCIES
Elite Labs is the plaintiff in a civil action brought in the Superior
Court of New Jersey on November 20, 2000 against three parties to
recover damages in an unspecified amount based on the alleged failure
of the defendants to properly perform and complete certain
pharmaceutical tests and studies for which Elite paid approximately
$950,000.
The defendants have brought a counterclaim of approximately $250,000
allegedly due for services rendered to Elite by the defendants for the
completion of bioequivalency studies and for the storage of laboratory
samples. Elite is vigorously contesting the counterclaim.
The action and counterclaim are proceeding in pretrial discovery under
a Case Management Order entered by the court. All discovery is
expected to be completed by July 15, 2003. If such action or
counterclaim is in favor of defendants, the recovery, if any, would
not have a material effect on the Company's financial condition or
results of operations. Legal counsel is unable to predict the outcome
of these actions. Accordingly, no provisions for liability, if any,
has been provided in the accompanying consolidated financial
statements.
The Company's former President/CEO instituted litigation against the
Company and one of its directors in the Superior Court of New Jersey
on July 3, 2003, as further discussed above under "Employment
Agreement" and in Note 13.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
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 OFFERING
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.
SERIES A 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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY) (CONTINUED)
SERIES A PREFERRED STOCK (CONTINUED)
The Series A Preferred Stock was exchangeable at the option of the
holder for that amount of the preferred shares of ERL which would
allow Elan to own a total of 50% of the issued and outstanding common
and preferred shares of ERL. Because of this exchange feature, the
Company has classified its Series A Preferred Stock, in the amount of
$12,015,000, outside of permanent equity at March 31, 2001 and 2002,
in accordance with EITF Topic No. D-98. The preferred shares were
non-voting and had a liquidation preference equal to their original
issue price.
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.
SERIES B PREFERRED STOCK
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 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, 2003.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY) (CONTINUED)
JOINT-VENTURE TERMINATION (CONTINUED)
For the period of one year after the issuance of the above 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 years indicated were are
follows:
2003 2002 2001
---- ---- ----
Beginning balance 2,669,477 2,983,928 3,020,869
Warrants issued 100,000
Warrants issued pursuant to Placement Agent
Agreement 52,884 8,136 2,260
Placement Agent Warrants Exercised (158,652) (24,408) (50,766)
Warrants exercised or expired (1,829,957) (298,179) (88,435)
------------ ----------- -----------
Ending balance 733,752 2,669,477 2,983,928
------------ ----------- -----------
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") to which holders of the Company's Class A Warrants
which expired on November 30, 2002 (the "Old Warrants") will have the
opportunity to exchange those warrants for new warrants (The "New
Warrants") upon payment to the Company of $.10 per share of common
stock issuable upon the exercise of the old warrants.
The New Warrants will be exercisable for the same number of shares of
common stock as the Old Warrants, have an exercise price of $5.00 per
share, will expire on November 30, 2005 and will not be transferable
except pursuant to operation of law.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 10 - REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY) (CONTINUED)
CLASS A WARRANT EXCHANGE OFFER (CONTINUED)
The Exchange Offer must be registered under applicable federal and
state securities laws and will only be made pursuant to an effective
registration statement meeting applicable legal requirements. A
registration statement was filed with the Securities and Exchange
Commission on December 6, 2002, with respect to the Exchange Offer,
but has not yet been declared effective by the SEC.
During the year ending March 31, 2003, the Company has taken a charge
of $242,338 relating to the exchange offer, which represents the fair
value of the new warrants, net of anticipated proceeds, assuming all
Class A Warrants will be exchanged. 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.
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 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. 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:
2003 2002 2001
-------------------------- ------------------------ --------------------------
AVERAGE AVERAGE AVERAGE
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at 2,056,850 $ 5.82 2,009,064 $ 5.64 1,935,714 $ 5.56
beginning of year
Granted 210,000 5.00 113,000 9.22 518,100 6.94
Exercised --- --- (20,000) 6.00 (18,750) 2.00
Expired --- --- (25,000) 7.80 (426,000) 7.00
Purchased for
retirement --- --- (20,214) 4.00 --- ---
----------- ----------- ---------- ------------ ------------ -------------
Outstanding at
end of year 2,266,850 $ 5.74 2,056,850 $ 5.82 2,009,064 $ 5.64
=========== =========== ========== ============ ============ =============
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 11 - STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding at March 31, 2003:
WEIGHTED AVERAGE WEIGHTED- WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- ------------ ----- ----------- -----
$ 2.00 718,750 2.76 $ 2.00 718,750 $ 2.00
5.00 210,000 4.75 5.00 --- ---
6.00 - 7.00 725,100 3.93 6.26 714,400 6.24
8.25 50,000 2.25 8.25 10,000 8.25
9.00 - 10.00 563,000 7.17 10.00 231,000 10.00
------------- --------------- ----------------- ------------- ------------ -----------
$2.00 - 10.00 2,266,850 4.40 $ 5.74 1,674,150 $ 4.95
------------- -------------- ----------------- ------------- ------------ -----------
The per share weighted-average fair value of each option granted
during fiscal 2003, 2002 and 2001 was $1.28, $8.38 and $6.12,
respectively, on the date of grant using the Black-Scholes options
pricing model with the following weighted-average assumptions; no
dividend yield; expected volatility of 75.40%, 76.69% and 87.29% for
fiscal years 2003, 2002 and 2001, respectively; risk-free interest
rate of 4.0% in 2003 and rates ranging from 4.55% to 4.875% in 2002,
and 5.12% to 6.20% in 2001; and expected lives of approximately five
years.
NOTE 12 - MAJOR CUSTOMERS
For the years ended March 31, revenues from major customers are as
follows:
2003 2002 2001
---- ---- ----
Customer A 29.79% 50.19% 84.90%
Customer B -- -- 13.90
Customer C 56.32% -- --
Customer D 13.49% -- --
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.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
NOTE 13 - SUBSEQUENT EVENTS
On June 3, 2003, the Company's founder and former president and chief
executive officer resigned from all of his positions with the Company.
Following his resignation, the Board of Directors appointed a new
Chairman and Chief Executive Officer. The Company's new president and
CEO shall be paid a base salary of $200,000 per annum and was granted
options to purchase 300,000 shares of the Company's common stock. Such
options vested immediately and have an exercise price equal to $2.01,
the closing price of a share of common stock on June 3, 2003.
On July 3, 2003, the Company entered into an agreement with an
investment banking firm to assist the Company in connection with
potential strategic transactions, including acquisitions. This
agreement provides for a $50,000 non-refundable retainer and
additional compensation aggregating $100,000 if and when certain
evaluations and reports are completed in the future.
As further discussed in Note 9, the Company's former President/CEO
instituted litigation against the Company and one of its directors, on
July 3, 2003, 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.
[LOGO] KPMG
Chartered Accountants
Crown House Mail Address: Telephone (441) 295 5063
4 Par-la-Ville Road P.O. Box HM 906 Fax (441) 295 9132
Hamilton HM 08 Hamilton HM DX Email kpmg@kpmg.bm
Bermuda Bermuda
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Elite Research, Ltd.
We have audited the accompanying balance sheet of Elite Research, Ltd. as at
March 31, 2002 and the related statement of operations, changes in shareholders'
equity and cash flows for the year ended March 31, 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Elite Research, Ltd. as at
March 31, 2002, and the results of its operations and its cash flows for the
year ended March 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG
Chartered Accountants
Hamilton, Bermuda
June 11, 2002
ELITE RESEARCH, LTD.
FINANCIAL STATEMENTS
September 30, 2002
ELITE RESEARCH, LTD.
Balance Sheets
- ---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, MARCH 31,
2002 MARCH 31, 2001
(UNAUDITED) 2002 (UNAUDITED)
----------- ---- -----------
ASSETS
Cash and cash equivalents $ 1,084 $ 63,478 $ ---
----------- ------------- ------------
Total assets $ 1,084 $ 63,478 $ ---
----------- ------------- ------------
LIABILITIES
Deferred capital contributions $ --- $ 62,990 $ ---
Accounts payable to related parties (Note 3) 82,799 544,012 80,931
Accounts payable - other 1,798 --- ---
----------- ------------- ------------
Total liabilities 84,597 607,002 80,931
----------- ------------- ------------
SHAREHOLDERS' EQUITY
Voting common shares (Note 5)
Authorized, issued and fully paid
6,000 shares of par value $1.00 each 6,000 6,000 6,000
Non-voting convertible preferred shares
Authorized, issued and fully paid
6,000 shares of par value $1.00 each (Note 5) 6,000 6,000 6,000
Additional paid-in capital (Note 6) 15,851,742 15,159,049 14,988,000
Retained deficit (15,947,255) (15,714,573) (15,080,931)
----------- ------------- ------------
Total shareholders' equity (83,513) (543,524) (80,931)
----------- ------------- ------------
Total liabilities and shareholders' equity $ 1,084 $ 63,478 $ ---
=========== ============= ============
See accompanying notes to financial statements
F-33
ELITE RESEARCH, LTD.
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------
FOR YEAR ENDED
MARCH 31,
2003 2002 2001
---- ---- ----
(UNAUDITED) (AUDITED) (UNAUDITED)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,
SEPTEMBER 30, DATE OF
2002) INCORPORATION, TO
MARCH 31)
INCOME
Interest income $ --- $ 48 $ ---
-------------- -------------- ---------------
Total income --- 48 ---
-------------- -------------- ---------------
EXPENSES
Research and development (Note 3) 191,667 619,693 80,931
General and administrative 41,015 13,997 ---
License fee (Note 4) --- --- 15,000,000
-------------- -------------- ---------------
Total operating expenses 232,682 633,690 15,080,931
-------------- -------------- ---------------
Net (loss) $ (232,682) $ (633,642) $ (15,080,931)
============== ============== ===============
See accompanying notes to financial statements
F-34
ELITE RESEARCH, LTD.
Statements of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------
FOR YEAR ENDED
MARCH 31,
2003 2002 2001
---- ---- ----
(UNAUDITED) (AUDITED) (UNAUDITED)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,
SEPTEMBER 30, DATE OF
2002) INCORPORATION, TO
MARCH 31)
VOTING COMMON SHARES
Balance at beginning of period $ 6,000 $ 6,000 $ ---
Shares issued during the period (Note 5) --- --- 6,000
------------- -------------- -------------
Balance at end of period 6,000 6,000 6,000
------------- -------------- -------------
NON-VOTING CONVERTIBLE PREFERRED
SHARES
Balance at beginning of period 6,000 6,000 ---
Shares issued during the period (Note 5) --- --- 6,000
------------- -------------- -------------
Balance at end of period 6,000 6,000 6,000
------------- -------------- -------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 15,159,049 14,988,000 ---
Additional paid-in capital during the
period (Note 6) 692,693 171,049 14,988,000
------------- -------------- -------------
Balance at end of period 15,851,742 15,159,049 14,988,000
------------- -------------- -------------
DEFICIT
Balance at beginning of period (15,714,573) (15,080,931) ---
Net loss for the period (232,682) (633,642) (15,080,931)
------------- -------------- -------------
Balance at end of period (15,947,255) (15,714,573) (15,080,931)
------------- -------------- -------------
TOTAL SHAREHOLDERS' DEFICIT $ (83,513) $ (543,524) $ (80,931)
============= =============== =============
See accompanying notes to financial statements
F-35
ELITE RESEARCH, LTD.
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------
FOR YEAR ENDED
MARCH 31,
2003 2002 2001
---- ---- ----
(UNAUDITED) (AUDITED) (UNAUDITED)
(APRIL 1, 2002 TO (OCTOBER 6, 2000,
SEPTEMBER 30, DATE OF
2002) INCORPORATION, TO
MARCH 31)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (232,682) $ (633,642) $ (15,080,931)
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred capital contributions (62,990) --- ---
Due to related parties (461,213) 463,081 80,931
Accounts payable - other 1,798 --- ---
------------- -------------- -------------
Cash used in operating activities (755,087) (170,561) (15,000,000)
------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional paid-in capital 692,693 234,039 ---
Proceeds from issuance of common stock --- --- 7,500,000
Proceeds from issuance of non-voting
convertible preferred shares --- --- 7,500,000
------------- -------------- -------------
Cash provided by financing activities 692,693 234,039 15,000,000
------------- -------------- -------------
Net change in cash and cash equivalents (62,394) 63,478 ---
Cash and cash equivalents at beginning of
period 63,478 --- ---
------------- -------------- -------------
Cash and cash equivalents at end of period $ 1,084 $ 63,478 $ ---
============= ============== =============
See accompanying notes to financial statements
F-36
ELITE RESEARCH, LTD.
Notes to Financial Statements
September 30, 2002
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL
Elite Research, Ltd. (the "Company") ("ERL") was incorporated on
October 6, 2000 under the Laws of Bermuda, 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
using the technologies of the joint venture partners of the Company.
The Company was owned by Elite Pharmaceuticals, Inc. ("Elite") and
Elan International Services, Ltd. ("EIS"), a wholly owned subsidiary
of Elan Corporation plc, holding 80.1% and 19.9% (non-voting shares)
of the shares respectively, until September 30, 2002 when the owners
consummated a termination agreement (the "Termination Agreement")
whereby Elite acquired all of Elan's interest in the Company. As a
result of the Termination Agreement, the joint venture terminated and
Elite owned 100 percent of ERL's stock. Accordingly, ERL became a
wholly owned subsidiary of Elite as of September 30, 2002. All
proprietary development and commercial rights for worldwide markets
for products developed by ERL was acquired by Elite. In exchange for
the assignment, the Company 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.
On December 31, 2002, ERL was merged into a new Delaware corporation,
Elite Research, Inc. ("ERI"), a wholly owned subsidiary of Elite. The
merger was accounted for as a tax-free reorganization.
The Company was subject to the terms and conditions of a joint
development and operating agreement between Elite Laboratories, Inc.
("Elite Labs"), a wholly owned subsidiary of Elite, and Elan to
develop products using drug delivery technologies and expertise of
both Elite and Elan. The Company funded its research through capital
contributions from its partners based on the partner's ownership
percentage. The Company subcontracted research and development efforts
to Elite Labs and Elan. Elite Labs provided most of the formulation
and development work. Elite Labs had completed in-vivo (pilot clinical
trial) on the once-a-day Oxycodone product the Company had formulated
and began formulation and development of two additional products as of
September 30, 2002.
The Company was initially capitalized with $15,000,000, which included
the issuance of 6,000 Voting Common Shares and 6,000 Non-Voting
Convertible Preferred Shares. The proceeds of $15,000,000 were used to
pay a licensing fee to Elan, under the terms of a license agreement
entered into between Elan and the Company as fully described in Note
4.
F-37
ELITE RESEARCH, LTD.
Notes to Financial Statements (Continued)
September 30, 2002
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL (continued)
As of September 30, 2002, the Company had a deficit of $15,947,255.
The Company was in the research and development stage, and hence was
not yet generating revenue. The Company's shareholders had, by way of
Joint Development and Operating Agreement, agreed to provide
additional funding. As a result of the termination agreement, Elite
Labs will provide all additional funding.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements of ERL are presented for the periods during
which it was an unconsolidated subsidiary of Elite Pharmaceuticals,
Inc. As of October 1, 2002, all transactions and results of operations
were included in consolidated financial statements of Elite
Pharmaceuticals, Inc.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid short-term investments purchased
with initial maturities of three months or less to be cash
equivalents.
RESEARCH AND DEVELOPMENT COSTS
Research costs are charged as an expense of the period in which they
are incurred.
REVENUE RECOGNITION
To date, the Company had not generated revenues, however, it expects
that future revenues, if any, will be earned primarily by licensing
certain pharmaceutical products. Such revenues will be recorded as
certain projected goals are attained, as defined in the individual
contract.
Future revenues related to the licensing of certain pharmaceutical
products to the Company's customers, which have been developed by the
Company, will be recognized at the time the customer obtains the legal
right to the use of the product.
USE OF ESTIMATES
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America which require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
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ELITE RESEARCH, LTD.
Notes to Financial Statements (Continued)
September 30, 2002
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts payable and accrued expenses
approximate fair value due to the short-term maturity of these items.
RECLASSIFICATIONS
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year financial statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
For the period April 1, 2002 through September 30, 2002, for the year
ended March 31, 2002 and for the period of October 6, 2000 (date of
incorporation) through March 31, 2001, ERL recognized net losses of
$232,682, $633,642 and $15,080,931, respectively. The net loss for the
period April 1, 2002 through September 30, 2002, (date operations
ceased) included research and development services rendered by Elite
Labs and Elan in the amounts of $187,810 and $3,857, respectively. The
net loss for the year ended March 31, 2002 included research and
development services rendered by Elite Labs and Elan in the amounts of
$600,940 and $18,753, respectively.
The net loss for the period ended March 31, 2001 included a
$15,000,000 payment to Elan for a technology license fee, as well as
$80,931 due to Elite Labs for services rendered to ERL.
As of September 30, 2002, March 31, 2002 and 2001, the Company had
outstanding accounts payable to Elite Labs for research and
development services in the amounts of $82,799, $525,259 and $80,931,
respectively.
As of September 30, 2002, March 31, 2002 and 2001, the Company had
outstanding accounts payable to Elan for research and development
services in the amounts of $798, $18,753 and $0, respectively.
NOTE 4 - LICENSE AGREEMENT
In October 2000, the Company entered into a license agreement with
Elan Corporation, plc ("Elan") whereby Elan licensed certain patents
and intellectual property to the Company in consideration of a
non-refundable license fee of $15 million. The fee was not subject to
future performance obligations of Elan to the Company and was taken as
a charge to operations in the period ended March 31, 2001.
F-39
ELITE RESEARCH, LTD.
Notes to Financial Statements (Continued)
September 30, 2002
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NOTE 5 - NON-VOTING CONVERTIBLE PREFERRED SHARES
Voting common shares, of par value
US $1.00 per share
6,000 shares authorized;
6,000 shares issued and fully paid $ 6,000
Non-voting convertible preferred shares, of
Par value US $1.00 per share
6,000 shares authorized;
6,000 shares issued and fully paid
6,000
-----------
$ 12,000
===========
All of the voting common shares were held by Elite, with the
non-voting convertible preference shares held by both Elite and Elan,
being split 3,612 shares and 2,388 shares respectively.
The Preferred shares were convertible at the option of the holders on
a one-for-one basis into common shares of the Company at any time
after two years from the date of issuance of the preferred stock. The
Preferred shares were non-voting, did not bear a dividend and had a
liquidation preference equal to their original issue price.
NOTE 6 - ADDITIONAL PAID-IN CAPITAL
Certain amounts were provided to fund the operations of the Company as
agreed by the shareholders on a pro rata basis based on their equity
participation. In addition, within three years from the date of
incorporation, the shareholders could provide the Company, on a pro
rata basis in accordance with the shareholders respective percentage
ownership of capital, up to an aggregate maximum of $6,000,000, as
agreed upon by the shareholders, by way of contributed surplus or
loans. During the period ended September 30, 2002 and the year ended
March 31, 2002, the shareholders contributed an additional $629,703
and $234,039, respectively. As further described in Note 1, the
Company was initially capitalized with $15 million. After allocating
$6,000 to each of common and preferred shares, $14,988,000 was
recognized as additional paid-in capital.
NOTE 7 - TAXES
Under current Bermuda law, the Company was not required to pay any
taxes in Bermuda on either income or capital gains. The Company has
received an undertaking from the Minister of Finance in taxation until
the year 2016.
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