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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended to
Commission File Number: 333-45241
ELITE PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3542636
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 Ludlow Avenue, Northvale, New Jersey 07647
- ----------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(201) 750-2646
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
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 the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the common stock, $.01 par value,
as of October 25, 2002: 9,780,205.
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 (unaudited) and
March 31, 2002 1 - 2
Consolidated Statements of Operations for the three and six months
ended September 30, 2002 and September 30, 2001 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the
six months ended September 30, 2002 and September 30, 2001
(unaudited) 4
Consolidated Statements of Cash Flows for the three and six months
ended September 30, 2002 and September 30, 2001 (unaudited) 5
Notes to Form 10-Q 6 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II OTHER INFORMATION 19 - 21
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 22 - 26
EXHIBITS
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, March 31,
2002 2002
------------------ -----------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,651,957 $ 6,852,434
Short-term investments --- 100,000
Accounts receivable 110,000 39,988
Restricted cash 30,100 213,664
Due from Joint Venture --- 525,259
Prepaid expenses and other current assets 88,512 106,082
------------------ -----------------
Total current assets 5,880,569 7,837,427
------------------ -----------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 3,921,235 3,865,771
------------------ -----------------
INTANGIBLE ASSETS - net of accumulated amortization 71,563 54,669
------------------ -----------------
OTHER ASSETS:
Deposit on Equipment 246,792 123,396
Investment in Joint Venture --- 63,381
Amount receivable from sale of state tax losses 66,077 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 $40,526 and $34,076, respectively 157,327 163,777
------------------ -----------------
Total other assets 1,020,196 966,631
------------------ -----------------
Total assets $ 10,893,563 $ 12,724,498
================== =================
The accompanying notes are an integral part of the consolidated
financial statements.
-1-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, March 31,
2002 2002
-------------- --------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Current portion - Note payable $ 75,000 $ 75,000
Current portion of EDA bonds 140,000 130,000
Accounts payable and accrued expenses 234,406 141,712
Deferred income 60,000 ---
Due to Joint Venture --- 435,754
-------------- --------------
Total current liabilities 509,406 782,466
-------------- --------------
LONG TERM LIABILITIES:
Dividends payable - Preferred Series A 841,050 853,148
Note payable - net of current portion 262,500 300,000
EDA bonds - net of current portion 2,495,000 2,635,000
-------------- --------------
Total long-term liabilities 3,598,550 3,788,148
-------------- --------------
Total liabilities 4,107,956 4,570,614
-------------- --------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
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 12,015,000 12,015,000
Preferred stock - $1.00 par value; 7,250,000 shares
authorized; Series B convertible preferred stock;
4,806,000 shares designated, 200,000 shares issued and
outstanding at March 31, 2002 --- 200,000
Subscription Receivable (83,636) ---
Common stock - $.01 par value;
Authorized - 25,000,000 shares
Issued and outstanding - 9,780,205 and 9,710,840 shares,
Respectively 97,802 97,108
Additional paid-in capital 20,307,613 19,469,464
Accumulated deficit (25,364,150) (23,627,688)
-------------- --------------
6,972,629 8,153,884
Cost of 51,900 shares of common stock held by the Company
at September 30, 2002 (187,022) ---
-------------- --------------
Total stockholders' equity 6,785,607 8,153,884
-------------- --------------
Total liabilities and stockholder's equity $ 10,893,563 $ 12,724,498
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
-2-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
----- ----- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Research and Development $ 215,000 $ 250,000 $ 215,000 $ 250,000
Product Formulation Revenues 82,799 133,713 187,810 209,511
Testing Fees --- 3,450 --- 3,450
----------- ----------- ----------- -----------
Total revenues 297,799 387,163 402,810 462,961
Research and development 460,221 319,443 893,481 630,066
General and administrative 623,462 175,023 847,022 305,296
Depreciation and amortization 78,210 70,848 156,420 141,696
----------- ----------- ----------- -----------
1,161,893 565,314 1,896,923 1,077,058
----------- ----------- ----------- -----------
(864,094) (178,151) (1,494,113) (614,097)
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSES):
Interest income 26,753 68,205 62,718 176,035
Interest expense (62,813) (55,122) (116,385) (111,019)
Equity in loss of Joint Venture (67,429) (107,105) (186,379) (167,819)
----------- ----------- ----------- -----------
(103,489) (94,022) (240,046) (102,803)
LOSS BEFORE PROVISION FOR INCOME TAXES (967,583) (272,173) (1,734,159) (716,900)
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES --- --- 400 2,255
----------- ----------- ----------- -----------
NET LOSS $ (967,583) $ (272,173) $(1,734,559) $ (719,155)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.10) $ (.03) $ (.18) $ (.08)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,728,682 9,543,556 9,727,607 9,476,443
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
SERIES A SERIES B SUB- ADDITIONAL STOCK-
-------- -------- ---- ---------- ------
PREFERRED STOCK PREFERRED STOCK SCRIPTIONS COMMON STOCK PAID-IN TREASURY ACCUMULATED HOLDERS'
--------------- --------------- ---------- ------------ ------- -------- ----------- -------
SHARES AMOUNT EQUITY SHARES RECEIVABLE SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
------ ------ ------ ------ ---------- ------ ------ ------- ------- ------- -------
BALANCE AT
MARCH 31, 2001 12,015 12,015,000 - $ - $ - 9,376,389 $ 93,764 $18,071,503 $ - $(21,000,013)$9,180,254
Issuance of Shares
through exercise
of warrants - - - - - 217,286 2,173 1,081,100 - - 1,083,273
Issuance of shares
and warrants
through exercise
of placement
agent warrants - - - - - 15,522 155 57,524 - - 57,679
Issuance of shares
and warrants
through exercise
of options - - - - - 20,000 200 37,939 - - 38,139
Issuance of Series
B convertible
exchangeable
Preferred Stock - - 200,000 200,000 - - - - - - 200,000
Net loss for six
months ended
September 30,
2001 - - - - - - - - - (719,155) (719,155)
------ ---------- ------- ------- ---------- --------- ------- ---------- -------- ----------- ---------
BALANCE AT SEP-
TEMBER 30, 2001 12,015 $12,015,000 200,000 $ 200,000 $ - 9,629,197 $ 96,292 19,248,066 $ - (21,719,168)$9,840,190
====== ========== ======= ======= ========== ========= ======= ========== ======== =========== ==========
BALANCE AT
MARCH 31, 2002 12,015 $12,015,000 200,000 $ 200,000 $ - 9,710,840 $ 97,108 19,469,464 $ - $(23,627,688)$8,153,884
Issuance of shares
through exercise
of warrants - - - - - 2,606 26 13,004 - - 13,030
Issuance of shares
and warrants
through exercise
of placement
agent warrants - - - - - 14,670 147 52,666 - - 52,813
Issuance of Series
B convertible
exchangeable
Preferred Stock - - 492,000 492,000 - - - - - - 492,000
Subscriptions
Receivable - - 67,000 67,000 (83,636) - - - - - (16,636)
Dividends -
declared - - - - - - - - - (1,903) (1,903)
Dividends -
issued - - 14,000 14,000 - - - - - - 14,000
Conversion of
Series B
Convertible
exchangeable
Preferred stock
into common
stock - -(773,000) (773,000) - 52,089 521 772,479 - - -
Purchase of
Treasury Stock - - - - - - - - (187,022) - (187,022)
Net loss for six
months ended
September 30,
2002 - - - - - - - - - (1,734,559)(1,734,559)
------ ---------- ------- ------- ---------- --------- ------ ---------- -------- ----------- ----------
BALANCE AT
SEPTEMBER 30,
2002 12,015 $12,015,000 - $ - $ (83,636)9,780,205 $ 97,802 $20,307,613 $(187,022)$(25,364,150)$6,785,607
====== ========== ======= ======= ========== ========= ====== ========== ======== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
-4-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
SEPTEMBER 30,
2002 2001
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,734,559) $ (719,155)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and Amortization 156,420 141,696
Equity in loss of Joint Venture 186,379 167,819
Changes in assets and liabilities:
Contract revenue receivable (70,012) 13,314
Prepaid expenses and other current assets 17,570 4,330
Amount receivable from Joint Venture 442,460 (52,781)
Accounts payable, accrued expenses and other current liabilities 92,694 (150,483)
Amount payable to Joint Venture --- (95)
Deferred income 60,000 ---
------------- -------------
NET CASH (USED IN) OPERATING ACTIVITIES (849,048) (595,355)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investment 100,000 ---
Purchase of property and equipment (203,654) (51,690)
Payment for deposit on property and equipment (123,396) ---
Purchase of patent (19,264) ---
Restricted cash 183,564 156,163
------------- -------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (62,750) 104,473
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants 65,843 1,179,091
Principal bank note payments (37,500) ---
Principal repayments of NJEDA Bonds (130,000) (120,000)
Purchase of Treasury Stock (187,022) ---
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (288,679) 1,059,091
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,200,477) 568,209
CASH AND CASH EQUIVALENTS - beginning of period 6,852,434 7,296,702
------------- -------------
CASH AND CASH EQUIVALENTS - end of period $ 5,651,957 $ 7,864,911
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 116,385 $ 111,794
Cash paid for income taxes 400 2,255
SUPPLEMENTAL SCHEDULE NON-CASH TRANSACTIONS
Issuance of Preferred Stock Series B (including stock dividend payable of
$14,000 and subscription receivable of $67,000) $ 573,000 $ 200,000
Conversion of Preferred Stock Series B to Common Stock (521) ---
Conversion of Preferred Stock to Additional Paid In Capital (772,479) ---
Subscription receivable - Elan International Services, Ltd. 16,636 ---
Paydown of Amounts Due to Joint Venture (622,133) (125,447)
Reduction (Additional) Investment in Joint Venture 63,381 (74,553)
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The information in this Form 10-Q includes the results of
operations of Elite Pharmaceuticals, Inc. ("the Company") and
its wholly-owned subsidiary, Elite Laboratories, Inc. ("Elite
Labs"), for the three and six months ended September 30, 2002
and 2001. 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%. Proforma
results of operations are presented as part of Note 4. As of
September 30, 2002, the balance sheets of all entities are
consolidated and all significant intercompany accounts are
eliminated upon consolidation. The accompanying unaudited
consolidated financial statements have been prepared pursuant to
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of financial positions, results and
operations and cash flows for the periods presented have been
included. The financial results for the interim periods are not
necessarily indicative of the results to be expected for the
full year or future interim periods.
The accounting policies utilized in the preparation of this Form
10-Q are the same as those set forth in the Company's annual
report on Form 10K for the fiscal year ended March 31, 2002 and
should be read in conjunction with the disclosures presented
therein.
The Company does not anticipate being profitable for fiscal year
2003, therefore a current provision for income tax was not
established for the six months ended September 30, 2002. Only
the minimum corporation tax liability required for state
purposes is reflected.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are based on the weighted average number of
shares outstanding during each period presented. Common stock
equivalents have not been included as their effect would be
anti-dilutive.
-6-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 3 - 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 restricted accounts include accounts restricted for
payments 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 for the maintenance of a $300,000 Debt
Service Reserve. All restricted amounts other than the $300,000
Debt Service Reserve are expected to be expended within twelve
months and are therefore categorized as current assets.
NOTE 4 - JOINT VENTURE ACTIVITIES
In October 2000, the Company and Elite Labs 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 Elite Labs, Elan and others. It was
anticipated that Elite Labs would provide most of the
formulation and development work. Elite Labs has commenced work
for three products. For the six months ended September 30, 2002
and 2001, Elite Labs charged $187,810 and $209,511,
respectively, to ERL which is reflected in product formulation
revenues. For the three months ending September 30, 2002 and
2001, Elite Labs charged $82,799 and $133,713, respectively, to
ERL which is reflected in product formulation fees.
While the Company initially owned 80.1% 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 six months ended September 30, 2002 and 2001, ERL
recognized net losses of $232,682 and $209,511, respectively.
The net losses included $187,810 and $209,511 due to Elite Labs
for services rendered to ERL for the six months ended September
30, 2002 and 2001, respectively. The Company recognized 80.1% of
ERL's losses, or $186,379 and $167,819, respectively, for the
six months ended September 30, 2002 and 2001. For the three
months ended September 30, 2002 and 2001, Elite's share of ERL's
losses amounted to $67,429 and $107,105, respectively. To date,
ERL has not recognized any revenue.
-7-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 4 - JOINT VENTURE ACTIVITIES (Continued)
In December 2000, ERL was 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 September 30, 2002, ERL completed in-vivo
(pilot clinical trial) on the first product and began
formulation and development of two additional products.
As of September 30, 2001, the Company owed ERL $435,754,
representing its 80.1% of unfunded contributions to ERL to cover
ERL's expenses through September 30, 2001.
On September 30, 2002, the Company consummated a termination
agreement (the "Termination Agreement") with Elan to acquire all
of Elan's interest in ERL. As a result of the Termination
Agreement, the joint venture terminated and the Company now owns
100 percent of ERL.
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. In the future,
the Company will be solely responsible to fund ERL's product
development, which it will do from internal resources or through
loans or investment by third parties.
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 will not have to pay Elan
royalties on revenues that may be realized from these products.
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. See Note 6.
The following unaudited pro-forma consolidated results of
operations for the three and six months ended September 30, 2002
and 2001, assuming the acquisition was completed on April 1,
2001.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 215,000 $ 253,450 $ 215,000 $ 253,450
Net (loss) available to common
Shareholders $ (984,334) $ 298,781) $(1,780,862) $(760,847)
Net (loss) available to common
shareholders per share -
basic and diluted $ (.10) $ (.03) $ (.18) $ (.08)
-8-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 4 - JOINT VENTURE ACTIVITIES (Continued)
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 5 - COMMITMENTS AND CONTINGENCIES
As described in the Company's annual report on Form 10-K, on
August 1, 1998, Elite Labs entered into a consulting 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.
Terms of the business referral agreement provide, among other
things, for payments by Elite Labs based upon a formula, as
defined, for an unspecified term. On November 14, 2000, Elite
Labs amended the referral agreement to provide certain
consulting services for the period of November 1, 2000 through
October 31, 2003. Elite Labs previously advanced $20,000 under
the April 8, 1997 agreement in addition to a payment of $50,000
made during the year ended March 31, 2001. The agreement calls
for 25 monthly installments of $3,200 beginning on December 1,
2001.
For the six months ended September 30, 2002 and 2001, consulting
expense under this agreement amounted to $19,200 and $0,
respectively, and for the three months ended September 30, 2002
and 2001, consulting expense under this agreement was $9,600 and
$0, respectively.
Referral Agreement
As described in the Company's annual report on Form 10-K, on
January 29, 2002, the Company entered into a Referral Agreement
with an individual (Referring Party) whereby Elite Labs will pay
the Referring Party a fee based upon payments received by Elite
Labs from sales of products, development fees, licensing fees
and royalties generated as a direct result of the Referring
Party identifying customers for Elite Labs. 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 Labs 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
-9-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------
Collaborative Agreements
As described in the Company's annual report on Form 10-K, on
June 27, 2001, Elite Labs entered into two separate and distinct
development and license agreements with another pharmaceutical
company ("partner"). Elite Labs will develop two drug compounds
for the partner in exchange for certain payments and royalties.
Elite Labs also reserves the right to manufacture the compounds.
Elite Labs received $250,000 and $300,000, respectively, on
these two agreements. These amounts have been earned as of March
31, 2002. Elite Labs is currently proceeding with development
and formulation for both products as specified in the
development agreements. During the six months ended September
30, 2002 Elite Labs earned revenues of $75,000 for additional
development and formulation for both products.
On September 13, 2002, Elite Labs, entered into a manufacturing
agreement with Ethypharm S.A. ("Ethypharm"). Under the terms of
this agreement, Elite Labs has initiated the manufacturing of a
new prescription drug product for Ethypharm. Elite Labs 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. Elite Labs is
entitled to receive additional fees in advance for the final
phase of the manufacturing. In addition, upon FDA approval and
if requested by Ethypharm, Elite Labs will manufacture
commercial batches of the product on terms to be agreed upon.
As of September 30, 2002, Elite Labs earned revenues of $140,000
under this agreement and deferred revenues of $60,000. Total
billings under this agreement were $200,000.
Contingency
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 perform properly and
complete certain pharmaceutical tests and studies for which
Elite Labs paid approximately $950,000.
The defendants brought a counterclaim of approximately $418,000
allegedly due for services rendered to Elite Labs by the
defendants. Elite Labs will vigorously contest the counterclaim.
The action and counterclaim are proceeding in pretrial discovery
under a Case Management Order entered by the court. If such
action or counterclaim is in favor of the defendants, the
recovery, if any, is not expected to 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 provision for liability, if any, has been
provided in the accompanying consolidated financial statements.
-10-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY
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 September 30, 2002, the
Company had purchased 51,900 shares of common stock for total
consideration of $187,022.
Joint Venture Subscription Offering
On October 16, 2000, Elite entered into an agreement (the "Joint
Venture Agreement") with Elan International Services, Ltd.
("EIS") and Elan Corporation, plc. (together with EIS, "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 common stock and 12,015 shares of
a newly created Elite Labs Series A Convertible Exchangeable
Preferred Stock ("Series A Preferred Stock") were issued to EIS
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 Elite Lab's 80.1% share of ERL.
The Series A Preferred Stock accrues 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, Elite Labs had
accrued dividends of $841,050 on the Series A Preferred Stock.
On October 17, 2000, the Company authorized 7,250,000 shares of
newly created Elite Labs Series B Preferred Stock of which
4,806,000 was designated for issuance to EIS for a total
consideration of $4,806,000. These shares were issuable from
time to time upon demand by Elite Labs to fund Elite Lab's
80.10% 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, Elite Labs
had accrued dividends of $14,000 on the Series B Preferred
Stock.
During the period ended September 30, 2002, Elite Labs made
capital contributions to ERL in the amount of $492,000. These
contributions were financed by the proceeds from the issuance to
EIS of 492,000 shares of Series B Preferred Stock of Elite Labs.
These contributions were in addition to a capital contribution
in the amount of $200,000 made by Elite Labs to ERL in fiscal
year ended March 31, 2002.
In additional to the issuance of shares as described above, on
October 17, 2000 the Company issued EIS 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. These warrants were never exercised.
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 Elite Labs Series A Preferred Stock to a third
party along with accrued dividends of 1,741 shares. Elan
retained 409,165 shares of Elite common stock and 773,000 shares
of Elite Labs Series B Preferred Stock (the latter of which is
convertible into 52,089 shares of Elite common stock). Both of
the Series A and Series B preferred stock are being converted to
Elite Common stock in accordance with their terms.
-11-
ELITE PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' EQUITY
Joint Venture Subscription Offering (Continued)
For the period of one year after the issuance of the above
securities, EIS 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 will be borne by the
requesting party. EIS 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.
At September 30, 2002, Elite had outstanding approximately
2,056,850 options with exercise prices ranging from $2.00 to
$10.00. At September 30, 2002, Elite had outstanding warrants
with exercise prices ranging from $2.00 to $18.00.
NOTE 7 - SUBSEQUENT EVENTS
Collaborative Agreement
On October 20, 2002, Elite Labs entered into an agreement with
Ethypharm to develop a new prescription drug product. Under the
terms of the agreement, Elite Labs shall receive a one-time
development fee for the first phase of feasibility study. Upon
satisfactory results in the initial phase, the parties plan to
enter a further development program.
Treasury Stock Transactions
As of October 31, 2002, the Company had purchased an additional
11,100 shares of its common stock pursuant to its stock
re-purchase program for total consideration of $31,913.
Preferred Stock Series A Conversion
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 their
terms, into 764,221 shares of the Company's common stock, using
the $18 per share price.
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 provides, among other things, an agreement to commence
an exchange offer (the "Exchange Offer") to which holders of the
Company's Class A Warrants which expire 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 $0.10 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, will 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. The
effect on the Company's results of operations has not yet been
determined.
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.
-12-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2002 (the "10-K") and the
Unaudited Consolidated Financial Statements and related Notes to Consolidated
Financial Statements included in Item 1 of Part I of this Quarterly Report on
Form 10-Q.
The Company has included in this Quarterly Report certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning the Company's business, operations and
financial condition. "Forward-looking statements" consist of all non-historical
information, and the analysis of historical information, including the
references in this Quarterly Report to future revenue growth, future expense
growth, future credit exposure, EBITDA, future profitability, anticipated cash
resources, anticipated capital expenditures, capital requirements, and the
Company's plans for future periods. In addition, the words "could", "expects",
"anticipates", "objective", "plan", "may affect", "may depend", "believes",
"estimates", "projects" and similar words and phrases are also intended to
identify such forward-looking statements.
Actual results could differ materially from those projected in the
Company's forward-looking statements due to numerous known and unknown risks and
uncertainties, including, among other things, unanticipated technological
difficulties, the volatile and competitive environment for drug delivery
products, changes in domestic and foreign economic, market and regulatory
conditions, the inherent uncertainty of financial estimates and projections, the
difficulties of integrating businesses which were previously operated as
stand-alone units, the creditworthiness of the Company's customers, the
uncertainties involved in certain legal proceedings, instabilities arising from
terrorist actions and responses thereto, and other considerations described as
"Risk Factors" in other filings by the Company's with the SEC including the Form
10-K. Such factors may also cause substantial volatility in the market price of
the Company's common stock. All such forward-looking statements are current only
as of the date on which such statements were made. The Company does not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement is
made or to reflect the occurrence of unanticipated events.
Critical Accounting Policies and Estimates
Management's discussion addresses the Company's 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.
-13-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
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. The Company's 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.
Overview
The Company is involved in the development of drug delivery products.
It is engaged in developing over fifteen oral controlled release pharmaceutical
products which are at varying stages of the development and testing process. In
addition, Elite Labs has also conducted several research and development
projects on behalf of several large pharmaceutical companies although these
activities have generated only limited revenue for Elite Labs to date.
The Company operates out of its manufacturing facility in Northvale,
N.J. which is both Federal Drug Administration ("FDA") and Drug Enforcement
Agency ("DEA") registered and will allow the Company to manufacture
pharmaceutical products in batches in sizes sufficient to file for FDA approval.
In October 2000, Elite Labs 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 funded its research through capital contributions from its partners based on
the partners' respective ownership percentage. ERL subcontracted research and
development efforts to Elite Labs, Elan and others. The in-vivo (pilot
bioavailability) was completed on the first product formulated by Elite Labs.
Elite Labs had begun to develop formulation for the two additional products.
On September 30, 2002, the Company consummated a termination agreement
with Elan to acquire all of Elan's interest in ERL. As a result of the
agreement, the joint venture terminated and the Company now owns 100 percent of
ERL. Accordingly, ERL became a wholly owned subsidiary of the Company as of
September 30, 2002.
Under the termination agreement, the Company acquired all proprietary,
development and commercial rights for the worldwide markets for the products
developed by ERL. In exchange for this assignment, ERL has agreed to pay Elan a
royalty on certain revenues that may be realized from the once-a-day Oxycodone
product only that has been developed by ERL. In the future, the Company will be
solely responsible to fund product development, which it will do from internal
resources or through loans or investment by third parties.
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 will not
have to pay Elan royalties on revenues that may be realized from these products.
-14-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
(CONTINUED)
In November 2001, Elite Labs received approval of its application to
sell an additional $1,822,929 in New Jersey Net Operating Tax Losses under the
New Jersey Economic Development Agency's Technology Business Tax Certificate
Program. Elite Labs expects to receive $137,818 of which $71,741 was received
during the quarter ended December 31, 2001. Elite Labs expects to receive the
remaining balance of $66,077 during the quarter ended December 31, 2002.
In June 2001, the Company 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. Also, in September 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, upon FDA approval and if requested by Ethypharm, the Company will
manufacture commercial batches of the product on terms to be agreed upon. During
the three- and six month periods ended September 30, 2002, the Company
recognized total revenues of $215,000, pursuant to these agreements. While the
Company believes that these arrangements will generate significant additional
revenues in future periods, payments under these arrangements are dependent on a
number of factors, including the successful development and commercialization of
new products, which are uncertain and over which the Company has little or no
control. Accordingly, stockholders are encouraged not to place undue reliance on
these arrangements in evaluating the Company's business and prospects.
The Company plans to focus its efforts on the following areas: (i) to
receive FDA approval for one or more of its fifteen oral controlled release
pharmaceutical products already developed, either directly or through other
companies; (ii) to commercially exploit these products either by licensure and
the collection of royalties, or through the manufacture of tablets and capsules
using the formulations developed by the Company, and (iii) to continue the
development of new products and the expansion of its licensing agreements with
other large multinational pharmaceutical companies including contract research
and development projects, joint ventures and other collaborations. The Company
has been issued three patents to date and has filed for two more patents. One of
the patents was assigned to Celgene which has now licensed it to Novartis.
Results of Consolidated Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
The Company's revenues for the three months ended September 30, 2002
were $297,799, a decrease of $89,364 over the comparable period of the prior
year. For the three months ended September 30, 2002 and 2001, revenues consisted
of product formulation fees of $82,799 and $133,713, respectively, earned in
conjunction with the Company's joint venture in ERL. Revenues also consisted of
research, development, and testing fees of $215,000 and $253,450, respectively,
earned in conjunction with its distinct development, license, and manufacturing
agreements. Elan's obligation to make payments to the Company or to ERL
terminated upon the termination of the joint venture. The absence of payments
from Elan may impact revenues for periods subsequent to September 30, 2002.
-15-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
(CONTINUED)
General and administrative expenses for the three months ended
September 30, 2002 were $623,462, an increase of $448,439 or 256% from the
comparable period of the prior year. The increase in general and administrative
expenses was substantially due to increases in legal and consulting fees as well
as $272,874 in expenses resulting from a consent solicitation and a proxy
solicitation with regard to the election of the Company's directors.
Research and development costs for the three months ended September 30,
2002 were $460,221, an increase of $140,778 or approximately 44% from the
comparable period of the prior year. Research and development costs have
increased primarily from the result of increased research and development wages,
additional biostudies, laboratory supplies and raw materials used in the
manufacturing and testing processes.
The Company's net loss for the three months ended September 30, 2002
was $967,583 as compared to $272,173 for the comparable period of the prior
year. The increase in the net loss was primarily due to the increase in research
and development and administrative expenses associated with a consent
solicitation and a proxy solicitation with regard to the election of the
Company's directors.
Six Months Ended September 30, 2002 vs. Six Months Ended September 30, 2001
The Company's revenues for the six months ended September 30, 2002 were
$402,810, a decrease of $60,151 over the comparable period of the prior year.
For the six months ended September 30, 2002 and 2001, revenues consisted of
product formulation fees of $187,810 and $209,511, respectively, earned in
conjunction with the Company's joint venture in ERL. Revenues also consisted of
research and development, and testing fees of $215,000 and $253,450,
respectively, earned in conjunction with its distinct development, license and
manufacturing agreements. Elan's obligation to make payments to the Company or
to ERL terminated upon the termination of the joint venture. The absence of
payments from Elan may impact revenues for periods subsequent to September 30,
2002.
General and administrative expenses for the six months ended September
30, 2002 were $847,022, an increase of $541,726, or approximately 177% from the
comparable period of the prior year. The increase in general and administrative
expenses was substantially due to increases in legal and consulting fees as well
as $272,874 in expenses resulting from a consent solicitation and a proxy
solicitation with regard to the election of the Company's directors.
Research and development costs for the six months ended September 30,
2002, were $893,481, an increase of $263,415 or approximately 42% from the
comparable period of the prior year. Research and development costs have
increased primarily from the result of increased research and development wages,
additional biostudies, laboratory supplies and raw materials used in the
manufacturing and testing processes.
The Company's net loss for six months ended September 30, 2002 was
$1,734,559 as compared to $719,155 for the comparable period of the prior year.
The increase in the net loss was primarily due to the increase in research and
development and administrative expenses associated with a consent solicitation
and a proxy solicitation with regard to the election of the Company's directors.
-16-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
(CONTINUED)
Material Changes in Financial Condition
The Company's working capital (total current assets less total current
liabilities), which was $7,054,961 as of March 31, 2002, decreased to $5,371,163
as of September 30, 2002. The decrease in working capital is primarily due to
the Company's net loss from operations partially offset by the receipt of
$65,843 from the issuance of common stock and warrants in connection with the
exercise of certain of the Company's Class A Warrants, and certain placement
agent warrants issued in connection with the Company's 1997 private placement.
The Company experienced negative cash flow from operations of $849,048
for the six months ended September 30, 2002, primarily due to the Company's net
loss from operations of $1,734,559.
Liquidity and Capital Resources
To date, the Company's operations have not generated sufficient cash
flow to satisfy the Company's capital needs. The Company has financed its
operations primarily through the private sale of its equity and debt securities.
The Company had working capital [current assets less current liabilities] of
$5.4 million at September 30, 2002 compared with $7.1 million at September 30,
2001. Cash and cash equivalents at September 30, 2002 were $5.7 million, a
decrease of $1.2 million from the $6.9 million reported at September 30, 2001.
Net cash used in operating activities was $849,000 during the six
months ended September 30, 2002, compared to $600,000 for the six months ended
September 30, 2001. Net cash used in operating activities during the six months
ended September 30, 2002 resulted primarily from the Company's net loss of $1.7
million, offset in part by a reduction in accounts receivable, and certain
non-cash expenses. Net cash used in operating activities during the six months
ended September 30, 2001 resulted primarily from a net loss of $719,000 and
lower accounts payable, offset in part by certain non-cash expenses.
Investing activities utilized net cash of $63,000 during the six months
ended September 30, 2002 and provided net cash of $104,000 during the six months
ended September 30, 2002. Net cash used in investing activities during the six
months ended September 30, 2002 resulted primarily from the acquisition of
property and equipment to support the Company's growth, offset in part by an
increase in restricted cash and the maturity of short-term investments. Net cash
provided by investing activities during the six months ended September 30, 2001
resulted primarily from an increase in restricted cash, partially offset by the
acquisition of property and equipment.
Financing activities utilized net cash of $289,000 during the six
months ended September 30, 2002 and provided net cash of $1.1 million during the
six months ended September 30, 2001. Net cash used in financing activities
during the six months ended September 30, 2002 resulted primarily from the
repurchase of treasury 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 six months ended September 30, 2001 resulted primarily
from the sale of common stock and warrants, offset in part by the repayment of
indebtedness.
The Company's capital expenditures aggregated $327,000 and $52,000 for
the six-month periods ended September 30, 2002 and 2001, respectively. Such
expenditures consisted primarily of the acquisition of property and equipment
necessary to support the Company's existing operations and expected growth. The
Company anticipates that its capital expenditures will be approximately $550,000
for all of fiscal 2002, substantially all of which will relate to the
acquisition of property and equipment to support the Company's operations.
-17-
ELITE PHARMACEUTICALS, INC.
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO
THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 2001
(CONTINUED)
As described in Note 3 to the Company's consolidated financial
statements, the Company has 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 2005 and thereafter. The bonds are secured by a first lien on the
Company's 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 the Company currently owns, 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, are expected to be expended within twelve months and are
therefore categorized as current assets on the Company's consolidated balance
sheet as of September 30, 2002. Pursuant to terms of the bond indenture
agreement pursuant to which the bonds were issued, the Company is 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 September 30, 2002, the Company was in compliance
with the covenants contained in the bond indenture agreement.
The Company believes that its cash and cash equivalents will be
sufficient to fund its operations for at least the next twelve months.
-18-
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no investments in marketable securities as of
September 30, 2002 or assets and liabilities which are
denominated in a currency other than U.S. dollars or involve
commodity price risks.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them
to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant
changes in the Company's 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 2002, Harris Freedman, Sharon Will, Michael H.
Freedman and certain of their respective affiliates (the
"Freedman Group") commenced a consent solicitation (the
"Consent Solicitation") to solicit consents in favor of the
removal of Harmon Aronson, Donald S. Pearson and Eric L.
Sichel as directors of the Company and in favor of the
election of Harris Freedman, Sharon Will and Michael H.
Freedman as directors. The Company opposed the Consent
Solicitation as not being in the Company's best interests. The
Consent Solicitation ended on October 4, 2002 with the
Freedman Group failing to obtain the approval of the Company's
stockholders who held a majority of the Company's common
stock. In a consent solicitation, unless the consents received
by the participants in the solicitation are actually submitted
to an inspector for tabulation, it is not possible to know the
actual number of stockholders who consented. In the Consent
Solicitation, the Freedman Group did not submit the written
consents that it received to the firm retained by the Company
to tabulate the consents received. Thus, the Company does not
know how many consents were obtained by the Freedman Group.
The Freedman Group publicly acknowledged that it did not
obtain consents from stockholders holding a majority of the
Company's outstanding stock.
Following the Consent Solicitation, the Freedman Group filed a
preliminary proxy statement with the Securities and Exchange
Commission and expressed an intention to solicit proxies in
favor of its nominees for director and to contest the election
of directors at the Company's annual meeting of stockholders.
The Freedman Group terminated its proxy solicitation on
October 23, 2002 pursuant to the terms of a settlement
agreement among the Company and the members of the Freedman
Group (the "Settlement Agreement").
On August 27, 2002 in connection with the Consent
Solicitation, the Company commenced an action in the United
States District Court for the District of New Jersey (the
"Action") against (i) the individual members of the Freedman
Group, (ii) additional individuals whose identities, we
contended, the Freedman Group was required to disclose but who
were not listed in any of the Freedman Group's SEC filings and
(iii) other unnamed defendants who were acting in concert with
the disclosed and undisclosed members of the Freedman Group
(collectively, the "Defendants"). The complaint sought
injunctive relief against the Defendants on the basis that the
Defendants violated the federal securities laws and the rules
promulgated by the SEC there under by, among other things,
filing a Schedule 13D more than ten days after the Defendants
formed a "group" for purposes of Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), by
failing to disclose all persons acting in concert with the
Freedman Group and by acquiring additional shares of our stock
during a period that is prohibited by the Act.
-19-
PART II. OTHER INFORMATION (CONTINUED)
The Company also alleged that the Defendants violated Section
14(a) of the Exchange Act by filing a false and misleading
proxy solicitation which failed to identify all the
participants of the Freedman Group's consent solicitation. The
complaint also alleged that the Defendants violated the SEC's
proxy rules in conducting their consent solicitation by
representing to the Company's stockholders the outcome of the
consent solicitation process. The Company contended that the
Freedman Group violated these stockholder-protection
provisions of the federal securities laws in order to advance
its efforts to take control of the Company.
On August 27, 2002, the Company applied to the Court for a
temporary restraining order barring Defendants from any
further contacts with the Company's stockholders, barring
Defendants from any further violation of the federal
securities laws, and compelling corrective disclosures to
remedy the Section 13(d) and Section 14(a) violations. On
September 6, 2002, the Court denied the Company's application
for a temporary restraining order and granted the Company's
motion for expedited discovery. On October 1, 2002, the Court
denied the Company's request for a preliminary restraining
order. The Action was dismissed with prejudice by the Company
on October 24, 2002 pursuant to the terms of the Settlement
Agreement.
The Settlement Agreement provides that:
(i) the Freedman Group agreed to terminate its proxy
solicitation immediately and to support the election of
the seven nominees for director recommended by the
Company's Board of Directors for election at the
Company's annual meeting of stockholders scheduled for
December 12, 2002.
(ii) the Company agreed to commence an exchange offer
pursuant to which holders of the Company's Class A
Warrants which expire 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 $0.10 per share of common
stock issuable upon the exercise of the Old
Warrants. The New Warrants will (a) be exercisable
for the same number of shares of common stock as the
Old Warrants, (b) have an exercise price of $5.00 per
share (subject to adjustment in certain
circumstances), (c) expire on November 30, 2005, and
(d) except as set forth herein will have substantially
all of the same other terms and conditions as the Old
Warrants. The Exchange Offer will be made to
eligible warrant holders irrespective of whether the
Old Warrants have expired by their terms when the
Exchange Offer is consummated. The New Warrants
will not be transferable except pursuant to
operation of law. 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.
(iii) The Company agreed not to withdraw the nomination for
directors for election at the Annual Meeting of Richard
A. Brown, John A. Moore or John P. de Neufville unless
any of such nominees dies, resigns or refuses to stand
for election.
(iv) The Company and the Freedman Group exchanged releases
regarding the Consent Solicitation, the Action and
other matters related thereto.
The Company estimates that the cost of fulfilling its
obligations pursuant to the Settlement Agreement will
be approximately $100,000. In connection with the
Company's opposition to the Consent Solicitation and
the preparation of the Company's preliminary proxy
statement to oppose the Freedman Group's proxy
solicitation, the Company incurred approximately
$272,000 in expenses associated with advertising,
printing, fees of attorneys, financial advisors, proxy
solicitors, accountants, public relations,
transportation, litigation and related expenses and
filing fees. All of these expenses were borne by the
Company. Such costs do not include the amount
represented by salaries and wages of regular employees
and officers.
Because this section is a summary, it does not describe
every aspect of the Settlement Agreement. This summary
is subject to and qualified in its entirety by
reference to all of the provisions of the Settlement
Agreement which is attached as Exhibit 10.1 to our
Current Report on Form 8-K filed with the SEC on
November 1, 2002.
-20-
PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See Item 1 of Part II-Legal Proceedings
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1 Certification by Atul M. Mehta pursuant to
Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification by Mark I. Gittelman
pursuant to Section 1350, Chapter 63 of Title 18,
United States Code, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 24, 2002 the Company announced that its Class A
Warrants that expire on November 30, 2002 would not be
extended.
On October 10, 2002, the Company announced that the
consent solicitation of Harris freedman, Sharon Will
and Michael H. Freedman, and their affiliates ended
without sufficient consents being obtained to replace
independent directors of Elite Pharmaceuticals, Inc.
On October 11, 2002 the Company announced that it had
entered into an agreement with Elan Corporation, plc
("Elan"), to acquire all of Elan's interest in a joint
venture company between the Company and Elan, Elite
Research Ltd, effective September 30, 2002.
On November 1, 2002 the Company announced that it had
entered into a Settlement Agreement with Harris
Freedman, Sharon Will, Michael H. Freedman and their
affiliates regarding a proxy solicitation, a lawsuit
brought by the Company and related matters.
-21-
CERTIFICATION AND SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 2002 By: /s/Atul M. Mehta
--------------------- ----------------------------
Atul M. Mehta
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2002 By: /s/Mark I. Gittelman
--------------------- ----------------------------
Mark I. Gittelman
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
-22-
CERTIFICATION
I, Atul M. Mehta, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elite
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
6. The registrant's other certifying officers and I have
indicated in this quarterly 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.
November 12, 2002 /s/ Atul M. Mehta
- ------------------------- -------------------------------------
Date Atul M. Mehta
President and Chief Executive Officer
-23-
CERTIFICATION
I, Mark I. Gittelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elite
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
6. The registrant's other certifying officers and I have
indicated in this quarterly 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.
November 12, 2002 /s/ Mark I. Gittelman
- ------------------------- -------------------------------------
Date Mark I. Gittelman
Chief Financial Officer and Treasurer
-24-