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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003.
[_] 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 1-11352
ABLE LABORATORIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3029787
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
6 HOLLYWOOD COURT 07080
SOUTH PLAINFIELD, NJ (Zip Code)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number: (908) 754-2253
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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Common Stock, $.01 par value
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 [ ].
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 or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an "accelerated filer"
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ].
The aggregate market value of the common stock, $0.01 par value per
share held by non-affiliates, based on the last sale price of the common stock
on June 30, 2003, as reported on the Nasdaq National Market, was approximately
$304,595,254.
As of February 25, 2004, there were 16,850,400 outstanding shares of
common stock.
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TABLE OF CONTENTS
Page No.
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PART I.
Item 1. Business .................................................... 4
Item 2. Properties .................................................. 11
Item 3. Legal Proceedings ........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters .... 13
Item 6. Selected Financial Data...................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 23
Item 8. Financial Statements and Supplementary Data.................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................ 24
Item 9A. Controls and Procedures...................................... 24
PART III
Item 10. Directors and Executive Officers and Related Stockholder
Matters.................................................. 47
Item 11. Executive Compensation....................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 47
Item 13. Certain Relationships and Related Transactions............... 47
Item 14. Principal Accountant Fees and Services....................... 47
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................. 48
Signatures................................................................ 53
Exhibit Index............................................................. 54
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2004
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after the end of the registrant's fiscal
year, are incorporated by reference into Items 10, 11, 12, 13 and 14 of this
Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K,
including information with respect to our future business plans, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause our results to differ materially from those indicated by such
forward-looking statements. We cannot guarantee any future results, levels of
activity, performance or achievements. Moreover, we assume no obligation to
update forward-looking statements or update the reasons actual results could
differ materially from those anticipated in forward-looking statements, except
as required by law. You should not place undue reliance on forward-looking
statements. Factors that may cause our actual results to differ materially from
the expectations we describe in our forward-looking statements include those set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this report, under the heading "Certain
Factors That May Affect Future Results."
2
AVAILABLE INFORMATION
We file annual reports, quarterly reports, current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any of our SEC filings at the SEC's public reference room
at 450 Fifth Street, N.W., Washington D.C. 20549. You may call the SEC at
1-800-SEC-0330 for further information about the public reference room. Our SEC
filings are also available to the public on the SEC's website at
http://www.sec.gov. Our principal internet address is www.ablelabs.com. Our
website provides a link to the SEC's website through which our annual, quarterly
and current reports, and amendments to those reports, are available free of
charge. We believe these reports are made available as soon as reasonably
practicable after we electronically file them with, or furnish them to, the SEC.
3
PART I
ITEM 1. BUSINESS
INTRODUCTION
Able Laboratories, Inc., referred to in this Report as "Able," "we" or
"us," develops, makes and sells generic drugs. Generic drugs are the chemical
and therapeutic equivalents of brand-name drugs. They must meet the same
governmental standards as the brand-name drugs they replace, and they must meet
all U.S. Food and Drug Administration, or FDA, guidelines before they can be
made or sold. We can manufacture and market a generic drug only if the patent or
other government-mandated market exclusivity period for the brand-name
equivalent has expired. Generic drugs are typically sold under their generic
chemical names at prices significantly below those of their brand-name
equivalents. We estimate that the U.S. generic or multi-source drug market
approximates $16 billion in annual sales. We believe that this market has grown
due to a number of factors, including:
o a significant number of widely prescribed brand-name drugs are at or
near the end of their period of patent protection, making it legally
permissible for generic manufacturers to produce and market competing
generic drugs;
o managed care organizations, which typically prefer lower-cost generic
drugs to brand-name products, continue to grow in importance and
impact in the U.S. health care market;
o physicians, pharmacists and consumers increasingly accept generic
drugs; and
o the efforts of the federal government and local government agencies to
mandate increased use of generic drugs in order to lower the public
cost of purchasing necessary pharmaceutical products.
OUR STRATEGY
Our strategy is to focus on developing generic drugs that either have
large established markets or are niche products with limited or no competition.
We also intend to focus on products that have extended release dosage forms,
which are difficult to develop and, therefore, likely to face less competition
from other generic drug manufacturers. We also intend to leverage our research
and development efforts of our solid dosage and semi-solid formulations by
developing liquid formulations of some of our currently marketed drugs. We
believe that this approach will allow us to offer our customers a line of
products that reduces their overall acquisition cost.
BACKGROUND
We were organized in 1988 as a Delaware corporation under the name
DynaGen, Inc. In 1996, we acquired Able Laboratories, Inc., our generic drug
development and manufacturing business. In 1997 and 1998, respectively, we
acquired Superior Pharmaceutical Company ("Superior") and Generic Distributors,
Inc. ("GDI"), our former distribution operations.
Our distribution businesses sold mostly our competitors' products.
After careful analysis, we decided to divest our distribution operations and
continue as a generic drug development and manufacturing company selling only
our own products. We sold the assets of GDI, on December 29, 2000 and sold
Superior on February 23, 2001. In 2001, after we completed the sale of the
distribution subsidiaries, we merged Able Laboratories, Inc. into DynaGen, Inc.
and changed our company name to "Able Laboratories, Inc." In November 2003, we
acquired substantially all the assets of LiquiSource, Inc., a privately-held
developer and manufacturer of prescription generic liquid pharmaceuticals.
In the section of this Report entitled "Certain Factors That May Affect
Future Results," we have described several risk factors that we believe are
significant. We consider each of these risks specific to us, although some are
industry or sector related issues that could also impact, to some degree, other
businesses in our market sector. You should give very careful consideration to
these factors when you evaluate our company.
4
PRODUCT LINE INFORMATION
We manufacture and market prescription generic drugs in the form of
tablets, capsules, suppositories and liquids. In November 2000 we received our
first FDA approval to manufacture and sell Diphenoxylate with Atropine Sulfate
tablets. Since then, and as of March 1, 2004, we have received 35 additional
approvals to manufacture and sell generic drugs. Our current FDA-approved
products are listed below:
EQUIVALENT BRAND NAME
PRODUCT INDICATION PRODUCT (1)(2)
- ----------------------------------------------- ------------------------ -----------------------------
Acetaminophen and Codeine Phosphate Tablets, Pain relief Tylenol(R)with Codeine #3
USP 300mg/30mg
Acetaminophen and Codeine Phosphate Tablets, Pain relief Tylenol(R)with Codeine #4
USP 300mg/60mg
Butalbital, Acetaminophen and Caffeine Tablets Tension headaches Fioricet(R)(2)
USP 50mg/325mg/40mg
Butalbital, Acetaminophen and Caffeine Tablets Tension headaches Esgic Plus(R)(2)
USP 50mg/500mg/40mg
Butalbital, Acetaminophen, Caffeine and Codeine Tension headaches Fioricet(R)with codeine
USP 50mg/325mg/40mg/30mg
Carisprodol Tablets, USP Muscle relaxant Soma(R)(2)
Clorazepate Dipotassium Tablets, USP Anxiety disorder Tranxene(R)(2)
Diphenoxylate Hydrochloride and Atropine Anti-diarrhea Lomotil(R)(2)
Sulfate Tablets, USP
Hydrocodone Bitartrate and Acetaminophen Pain relief Vicodin(R)
Tablets USP
Hydrocodone Bitartrate and Acetaminophen Pain relief Lortab(R)
Tablets, USP 10mg/500mg
Hydrocodone Bitartrate and Acetaminophen Pain relief Norco(R)
Tablets, USP
Hydrocodone Bitartrate and Acetaminophen Pain relief Hydrocodone Bitartrate and
Tablets, Acetaminophen Tablets, USP
Hydrocortisone Acetate Suppository Anti-inflammatory Anusol(R)
Hemorrhoids
Indomethacin Capsules, USP Rheumatoid arthritis Indocin(R)
Indomethacin Extended- Release Capsules, USP Rheumatoid arthritis Indocin(R)SR (2)
Lithium Carbonate Capsules, USP Manic-depressive illness Eskalith(R)(2)
Lithium Carbonate Extended-Release Tablets, Manic-depressive illness Lithobid(R)
USP
Methamphetamine HCI, USP 5mg Attention disorder Desoxyn(R)
Methocarbamol Tablets, USP Muscle relaxant Robaxin(R)
Methylphenidate HCl Tablets, USP Attention disorder Ritalin(R)(2)
Methylphenidate HCl Extended- Release Tablets, Attention disorder Metadate-SR(R)(2)
USP
Metronidazole Tablets, USP Bacterial vaginosis Flagyl(R)
5
EQUIVALENT BRAND NAME
PRODUCT INDICATION PRODUCT (1)(2)
- ----------------------------------------------- ------------------------ -----------------------------
Metronidazole ER Tablets Bacterial vaginosis Flagyl ER(R)
Naproxen Sodium Tablets Pain relief Anaprox(R)
Nitrotab(TM)Nitroglycerin Sublingual Tablets, USP Anti-angina Nitrostat(R)
Phenazopyridine HCl Tablets, USP Urinary tract analgesic Pyridium(R)
Phentermine HCl Capsules, USP (beads) Obesity Phentermine Hydrochloride
Capsules (2)
Phentermine HCl Capsules, USP (powder) Obesity Phentermine Hydrochloride
Capsules (2)
Phentermine HCl Tablets, USP Obesity Adipex-P(R)(2)
Prochloroperazine Suppositories, USP Nausea Compazine(R)(2)
Promethazine HCI Suppositories, USP 50 mg Allergies, dermographism Phenergan(R)(2)
anaphylactic reaction,
pre/post-operative sedation,
nausea and vomiting
Proproxyphene Napsylate and Acetaminophen Tablets, Pain relief Darvocet-N(R)(2)
USP
Salsalate Tablets, USP Anti-inflammatory Disalcid(R)
- -----------------------------
(1) All brand names in the table above are trademarks or registered
trademarks of their respective owners.
(2) Refers to the reference listed drug. A reference listed drug (21 CFR
314.94(a) (3)) means the listed drug identified by the FDA as the drug
product upon which an applicant relies in seeking approval of its
Abbreviated New Drug Application.
RESEARCH AND DEVELOPMENT
We are working on developing additional generic products in the form of
tablets, capsules, suppositories and liquids. The research, development,
clinical testing and the FDA review process, leading to approvals, takes
approximately two years for each product. As discussed in the section titled
"Government Regulation," some products require no review or limited laboratory
testing, in which case the time required to complete the process can be less
than two years. Typically, our research and development activities consist of:
o identifying brand-name drugs for which patent protection has
expired or will expire in the near future;
o conducting research (including patent and market research) and
developing new product formulations based upon such drugs;
o developing and testing our formulation in laboratory and human
clinical studies as necessary;
o compiling and submitting all the information to the FDA; and
o obtaining approval from the FDA for our new product formulations.
As part of the approval process, we contract with outside laboratories
to conduct biostudies that are required for FDA approval. We use biostudies to
demonstrate that the rate and extent of absorption of a generic drug are not
significantly different from that achieved by the corresponding brand-name drug.
These biostudies are subject to rigorous standards set by the FDA. They may cost
up to $500,000 each and are a significant part of the overall cost of our drug
development work.
6
As of February 25, 2004, we have sixteen (16) Abbreviated New Drug
Applications ("ANDAs") pending approval at the FDA. Prior to FDA approval of an
ANDA, we generally undergo an on-site inspection, known as a pre-approval
inspection or PAI, by the district office of the FDA. Between January 2001 and
February 25, 2004, we have had six pre-approval inspections, covering several
products. Our product development program includes several active projects in
various stages of completion. We intend to develop and file ANDA applications
covering additional products this year. We can, however, give no assurance that
we will receive approval from the FDA to market the products covered by these
pending and planned applications and, if we do, there is no assurance that we
will be able to penetrate the market and achieve reasonable levels of sales or
profits from the products.
For the fiscal year ended December 31, 2003, we spent $11,212,418 on
research and development activities, compared with $6,944,952 for the fiscal
year ended December 31, 2002 and $2,352,666 for the fiscal year ended December
31, 2001.
SALES AND MARKETING
Our products are sold primarily through direct sales efforts to drug
wholesalers, distributors and retail drug chains. We market our generic drug
products under our "Able Laboratories" label as well as under private label
arrangements. The majority of our sales are to customers who purchase under firm
purchase order commitments. Excluding seasonal trade show purchases, these
purchase orders range from $1,000 to $1,700,000 and are typically filled within
a few days to three months from the time we receive them. Sales to McKesson
Corporation, a wholesaler, were approximately 12% of our sales in 2003. The
gross dollar amount of backlog orders, as of March 1, 2004, was approximately
$4,672,000, compared to a backlog of approximately $4,577,000 as of March 10,
2003. Because the level of our customers' purchases can fluctuate over the
course of an operating period, backlog historically has not been a meaningful
indicator of revenues for a particular period or for future periods.
We have five senior and experienced executives in our sales department,
supported by three associates. From January 2001 to January 2004 we used
Bi-Coastal Pharmaceutical Corporation ("Bi-Coastal") as our representative. The
agreement expired in January 2004 and was not renewed.
SUPPLIERS
We manufacture our generic products at our facilities in South
Plainfield, New Jersey. The principal components used in the manufacture of
generic products are active and inactive pharmaceutical ingredients and certain
packaging materials. The FDA must approve our sources for almost all of the
materials. In many instances, only one source may have been approved. We
purchase active raw material ingredients primarily from United States
distributors of bulk pharmaceutical materials manufactured by the U.S. or
foreign companies. If raw materials from an approved supplier were to become
unavailable, we would have to file a supplement to the applicable regulatory
approval and revalidate the manufacturing process using any new supplier's
materials. Delays in revalidating the manufacturing process or in obtaining new
materials could result in the loss of revenues and could have a material adverse
effect on our business, financial condition and results of operations.
MANUFACTURING FACILITIES
In 2003 we manufactured over 1.1 billion tablets, capsules, and
suppositories at our 6 Hollywood Court, South Plainfield, NJ manufacturing
operation. Our facilities consist of approximately 345,000 square feet of
manufacturing, warehousing, laboratory and office space contained in 8
buildings, which includes our December 2003 purchase of 6 Hollywood Court. Over
the past two years, we have invested approximately $7,300,000 to upgrade our
facilities, including installing new flooring, building additional tablet
compression and packaging rooms and separating manufacturing areas for
phenazopyridine production. We also built a self-contained research and
development facility with its own separate support laboratory. In our production
areas, we built storage vaults required for handling controlled substances.
While we intend to make significant improvements to our facilities, including
our newly leased Cranbury, NJ facility, we expect our current and future
manufacturing and laboratory facilities to increase our capacity 300 to 400%
from current levels. See "Liquidity and Capital Resources" and "Certain Factors
That May Affect Future Results -- We may have difficulty managing our growth"
below.
7
COMPETITION
We compete primarily with other generic manufacturers. Many of our
competitors have substantially greater financial resources than we have, as well
as other resources such as expertise in formulations of technologically advanced
delivery systems and marketing that are required to commercialize a
pharmaceutical product.
In the generic drug market, we compete with other off-patent drug
manufacturers, brand-name pharmaceutical companies that also manufacture
off-patent drugs, the original manufacturers of brand-name drugs, and
manufacturers of new drugs that may be used for the same indications as our
products.
Revenues and gross profit derived from generic drugs tend to follow a
pattern based upon regulatory and competitive factors unique to the generic
pharmaceutical industry. As patents for brand-name products and related
exclusivity periods mandated by regulatory authorities expire, the first generic
manufacturer to receive regulatory approval for generic equivalents of such
products is usually able to achieve relatively high revenues and gross profit.
As other generic manufacturers receive regulatory approvals on competing
products, prices and revenues typically decline. Accordingly, the level of
revenues and gross profit we can achieve from developing and manufacturing
generic products depends, in part, on our ability to develop and introduce new
generic products, the timing of regulatory approvals of our products, and the
number and timing of regulatory approvals of competing products.
Competition in the United States generic pharmaceutical market
continues to intensify as the pharmaceutical industry adjusts to increased
pressures to contain health care costs. Brand-name drug manufacturers are
increasingly selling their products into the generic market directly by
acquiring or forming strategic alliances with generic pharmaceutical companies.
No regulatory approvals are required for a brand-name manufacturer to sell
directly or through a third party to the generic market, nor do such
manufacturers face any other significant barriers to entry into such market.
These competitive factors may have a material adverse effect upon our ability to
sell our generic pharmaceutical products.
Recently several foreign companies, primarily from Europe and India,
have entered the US generic market. These companies have either established
manufacturing subsidiaries or have formed marketing alliances with some of the
leading US generic companies. Foreign companies, especially those from India,
enjoy lower manufacturing costs, labor costs and tax rates. They may also
leverage these advantages over U.S. manufacturers through backward integration,
by combining the research and development talent necessary to develop active
drug ingredients with the ability to efficiently make the finished dosage
products. The result is increased competition and downward pressure on prices.
In certain cases, foreign companies' prices could become so low that competing
U.S. companies could not profitably manufacture certain drugs and therefore be
forced to discontinue the products. The result is increased competition and
downward pressure on prices.
For these reasons, there can be no assurance that we will be able to
successfully compete in the generic drug business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Factors
That May Affect Future Results -- We face intense competition from other
manufacturers of generic drugs."
GOVERNMENT REGULATION
Our products and business activities are highly regulated, principally
by the FDA, the U.S. Drug Enforcement Administration, or DEA, state governments
and governmental agencies of other countries. Federal and state regulations and
statutes impose certain requirements on the testing, manufacturing, labeling,
storage, recordkeeping, approval, advertising and promotion of our products.
Noncompliance with applicable requirements can result in judicially and
administratively imposed sanctions, including seizures of adulterated or
misbranded products, injunction actions, fines and criminal prosecutions.
Administrative enforcement measures can also involve product recalls and the
refusal by the government to approve new drug applications, known as NDAs, or
ANDAs. In order to conduct clinical tests and produce and market products for
human diagnostic and therapeutic use, we must comply with mandatory procedures
and safety standards established by the FDA and comparable state regulatory
agencies. Typically, standards require that products be approved by the FDA as
safe and effective for their intended use prior to being marketed for human
applications. While we believe that we are currently in compliance with all
applicable FDA requirements, we must obtain FDA approval of our new Cranbury,
New Jersey facility before we can initiate the manufacture, analysis,
distribution or storage of our drug products at the facility.
Because we purchase drug substances and manufacture and market drug
products containing controlled substances, we must meet the requirements and
regulations of the Controlled Substances Act which are administered by the DEA.
These regulations include stringent requirements for manufacturing controls and
security to prevent diversion of or unauthorized access to controlled substances
in each stage of the production and distribution process. The DEA also
regulates, based on our historical sales data, allocation of certain raw
materials that we use in the production of controlled substances. While we
believe that we are currently in compliance with all applicable DEA
requirements, we must obtain DEA approval of our new facility in Cranbury, New
Jersey before we can initiate the manufacture, analysis, distribution or storage
of controlled substances there.
8
Reimbursement legislation, such as Medicaid, Medicare, Veterans
Administration and other programs, governs reimbursement levels. All
pharmaceutical manufacturers rebate to individual states a percentage of their
revenues arising from Medicaid-reimbursed drug sales. Generic drug manufacturers
currently rebate 11% of average net sales price for products marketed under
ANDAs. Makers of NDA-approved products are required to rebate the greater of
15.2% of average net sales price or the difference between average net sales
price and the lowest net sales price during a specified period. We believe that
the federal and state governments may continue to enact measures in the future
aimed at reducing the cost of drugs and devices to the public. We cannot predict
the nature of such measures or their impact on our profitability.
ANDA PROCESS
We must obtain FDA approval before we make or sell a generic equivalent
of an existing reference listed drug. We have concentrated primarily on
obtaining this approval by submitting abbreviated new drug applications, or
ANDAs. The process for obtaining an ANDA approval is set by the provisions of
the Hatch-Waxman Act of 1984, which established a statutory procedure for the
submission and FDA review and approval of ANDAs for generic versions of drugs
previously approved by the FDA. Each of our proposed generic drug products must
be therapeutically equivalent to the corresponding referenced listed drug.
Generic drug products are considered therapeutically equivalent if they are
pharmaceutical equivalents, and if they can be proven to have the same clinical
effect and safety profile when administered to patients under the conditions
specified in the labeling.
"Bioavailability" means the rate and extent of absorption and levels of
concentration of a drug product in the blood stream needed to produce a
therapeutic effect. "Bioequivalence" compares the bioavailability of one drug
product with another, and when established, indicates that the rate of
absorption and levels of concentration of a generic drug in the body are the
same as the previously approved reference listed drug. An ANDA may be submitted
for a drug on the basis that it is either the equivalent to a previously
approved referenced listed drug or a new dosage form that is suitable for use
for the indications specified. The FDA waives the requirement of conducting
complete clinical studies of safety and efficacy and, instead, typically
requires the applicant to submit data illustrating that the generic drug
formulation is "bioequivalent" to a previously approved drug. For some drugs,
the FDA may require other means of demonstrating that the generic drug is
bioequivalent to the original drug product. The ANDA approval process can take a
year or longer, though we have received approvals in less than a year, and
involve the expenditure of substantial resources.
The timing of final FDA approval of ANDA applications depends on a
variety of factors, including whether the ANDA applicant challenges any listed
patents for the drug and/or its use and whether the maker of the reference
listed drug is entitled to the protection of one or more statutory exclusivity
periods, during which the FDA is prohibited from approving generic products. The
Hatch-Waxman Act establishes several such statutory exclusivity periods for
certain drugs. Exclusivity periods are available for both patented and
non-patented drug products, and in the case of patented drug products can extend
beyond the life of a patent, and so they can preclude submission, or delay the
approval, of a competing ANDA. Examples of these protections include:
o A provision allowing a five-year market exclusivity period for
NDAs involving new chemical compounds and a three-year market
exclusivity period for NDAs (including different dosage forms)
containing data from new clinical investigations essential to
the approval of the application;
o a provision that extends the term of a patent for up to five
years as compensation for reducing the effective market life
of the patent due to the time involved in the federal
regulatory review process; and
o the so-called pediatric extension, whereby the FDA may extend
the exclusivity of a product by six months past the patent
expiration date if the manufacturer undertakes studies on the
effect of their product in children.
To obtain ANDAs we must also comply with the FDA's current Good
Manufacturing Practices, or cGMP, regulations, relating to the manufacture and
other processing of drugs. The FDA may inspect our facilities to assure
compliance prior to approving an ANDA application or at any other reasonable
time. To comply with the cGMP requirements, we must continue to expend
significant time and resources in the areas of development, production, quality
control and quality assurance.
9
Penalties for failure to comply with eGMP standards can include the
suspension of manufacturing approval, the seizure of drug products or the FDA's
refusal to approve additional applications. Penalties for wrongdoing in
connection with the development or submission of an ANDA were established by the
Generic Drug Enforcement Act of 1992, authorizing the FDA to permanently or
temporarily bar companies or individuals from submitting or assisting in the
submission of an ANDA. The FDA may also temporarily deny approval and suspend
applications to market generic drugs. The FDA may also suspend the distribution
of all drugs approved or developed in connection with certain wrongful conduct
and, under certain circumstances, also has the authority to withdraw approval of
an ANDA and to seek civil penalties. We do not expect the law to have a material
impact on the review or approval of our ANDAs.
We currently manufacture several products that are regulated as Drug
Efficacy Study Implementation, or DESI, products. These products are
grandfathered and do not require the submission of an ANDA or an NDA to the FDA.
These drug products are, however, subject to cGMP compliance. Also, while
products within this DESI classification require no prior approval from the FDA
before marketing, they must comply with applicable FDA monographs which specify,
among other things, required ingredients, dosage levels, label contents and
permitted uses. These monographs may be changed from time to time, in which case
we might be required to change the formulation, packaging or labeling of any
affected product. Changes to monographs normally have a delayed effective date,
so while we may have to incur costs to comply with any such changes, disruption
of distribution is not likely.
The Prescription Drug User Fee Act of 1992, enacted to expedite drug
approval by providing the FDA with resources to hire additional medical
reviewers, imposes three types of user fees on manufacturers of NDA-approved
prescription drugs. Applicants that submit only ANDAs and most other off-patent
drug manufacturers, including Able, are not currently subject to any of the
three user fees. If were to submit NDAs in the future, then we might be subject
to user fees. The FDA can also significantly delay the approval of a pending
ANDA under its "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal
Gratuities Policy."
We can give no assurance that we will obtain the requisite approvals
from the FDA for any of our proposed products or processes, that the process to
obtain such approvals will not be excessively expensive or lengthy, or that we
will have sufficient funds to pursue such approvals. Our failure to receive the
requisite approvals for our products or processes, when and if developed, or
significant delays in obtaining such approvals, would prevent us from
commercializing our products as anticipated and would have a materially adverse
effect on our business, financial condition and results of operations. See
"Certain Factors That May Affect Future Results -- Intense regulation by
government agencies may delay our efforts to commercialize our proposed drug
products."
PRODUCT LIABILITY INSURANCE COVERAGE
We presently maintain product liability insurance in the amount of
$10,000,000 for the products we market. The product liability insurance has a
$150,000 deductible. We also maintain product liability insurance for products
in clinical investigations. Although we intend to obtain product liability
insurance prior to the commercialization of certain products that are not
presently covered, we can give no assurance that we will obtain such insurance
at favorable rates, or that any such insurance, even if obtained, will be
adequate to cover potential liabilities. As a supplement to our product
liability insurance, we have added product recall insurance in the amount of
$1,000,000. The product recall insurance has a $50,000 deductible and covers all
costs associated with the recall in excess of the deductible, up to the policy
limit.
In the event of a successful suit against us, insufficient insurance
coverage could have a materially adverse impact on our operations and financial
condition. Furthermore, the costs of defending or settling a product liability
claim and any attendant negative publicity may have a materially adverse affect
upon us, even if we ultimately prevailed. Furthermore, certain food and drug
retailers require minimum product liability insurance coverage as a precondition
to purchasing or accepting products for commercial distribution. Failure to
satisfy these insurance requirements could impede our ability to achieve broad
commercial distribution of our proposed products, which could have a materially
adverse effect upon our business and financial condition.
10
PROPRIETARY TECHNOLOGY
Our generic business relies upon unpatented trade secrets and
proprietary technologies and processes. There is no assurance that others will
not independently develop substantially equivalent proprietary information and
techniques, or gain access to our trade secrets or proprietary technology, or
that we can meaningfully protect unpatented trade secrets. We require employees,
consultants and other advisors to execute confidentiality agreements. However,
these agreements may not provide meaningful protection for our trade secrets, or
adequate remedies in the event of unauthorized use or disclosure of such
information. The manufacture and sale of certain of our products may also
involve the use of proprietary processes, products or information owned by
others. See "Certain Factors That May Affect Future Results -- We depend on
third parties to supply the raw materials used in our products."
EMPLOYEES
As of February 25, 2004, we had 407 full-time employees, of whom 38
were employed in selling, general and administrative activities, 155 were
employed in quality and regulatory roles, 24 were employed in research and
development and 190 were employed in manufacturing. None of our employees is
represented by a union. We believe our relationship with our employees is good.
ITEM 2. PROPERTIES
Our principal executive offices are located at 6 Hollywood Court, South
Plainfield, New Jersey, the location of our 50,000 square foot manufacturing and
administrative facility.
SQUARE
ADDRESS FOOTAGE USE(S) LEASE EXPIRATION
- ------- ------- ------ ----------------
6 Hollywood Court 50,000 Manufacturing, Administration Owned
S. Plainfield, NJ
One Able Drive 225,000 Manufacturing, Research & September 16, 2015
Cranbury, NJ Development, Administrative
3601 Kennedy Road 22,000 Warehouse September 30, 2004
S. Plainfield, NJ
5 Hollywood Court 12,700 Manufacturing, Research & June 14, 2005
S. Plainfield, NJ Development
600 Montrose Ave. 21,500 Warehouse, Administrative July 31, 2005
S. Plainfield, NJ
11590 Century Blvd. 731 Sales July 31, 2005
Cincinnati, OH
200 Highland Ave. 2,580 Administrative Tenant-at-Will
Needham, MA
789 Jersey Ave. 10,400 Manufacturing October 31, 2005
New Brunswick, NJ
We believe that our present facilities are adequate to meet our current
needs. If new or additional space is required, we believe that adequate
facilities are available at competitive prices in the respective areas.
11
ITEM 3. LEGAL PROCEEDINGS
We are involved in certain legal proceedings from time to time
incidental to our normal business activities. While the outcome of any such
proceedings cannot be accurately predicted, we do not believe the ultimate
resolution of any existing matters should have a material adverse effect on our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
last fiscal quarter of the year ended December 31, 2003.
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of Common Stock
Our common stock is traded on the Nasdaq National Market under the
symbol "ABRX." On February 25, 2004, based upon information from American Stock
Transfer & Trust Company, our transfer agent, there were approximately 2,437
holders of record of common stock. We believe that there are a substantial
number of additional beneficial owners that hold common stock in "street name"
through brokerage firms. The following table sets forth, for the periods
indicated, the range of quarterly high and low sale prices for the common stock
as reported on the OTC Bulletin Board from January 1, 2002 to November 18, 2002,
on the Nasdaq SmallCap Market from November 19, 2002 to February 26, 2003 and on
the Nasdaq National Market from February 27, 2003 to December 31, 2003.
Common Stock(1)
-----------------------------
High Low
Fiscal 2002: ----- -----
- ------------
January 1 to March 31, 2002 $9.00 $4.50
April 1 to June 30, 2002 6.90 4.35
July 1 to September 30, 2002 5.85 4.05
October 1 to December 31, 2002 12.45 4.40
Fiscal 2003:
- ------------
January 1 to March 31, 2003 15.46 10.00
April 1 to June 30, 2003 24.25 13.76
July 1 to September 30, 2003 25.32 18.70
October 1 to December 31, 2003 20.53 17.15
- -----------------------
(1) Prices have been adjusted to reflect a 1-for-15 reverse stock split of our
common stock, effective June 3, 2002.
We have never paid dividends to common stockholders since inception and
do not intend to pay dividends to common stockholders in the foreseeable future.
We intend to retain earnings to finance our operations.
(b) Sales of Unregistered Securities
During the last fiscal quarter of the year ended December 31, 2003, we
issued an aggregate of 11,070 shares of common stock upon exercise of warrants.
These issuances were pursuant to one or more exemptions from the registration
requirements of the Securities Act of 1933, as amended, including the exemptions
under Section 3(a)(9) and 4(2) thereof. We received no cash proceeds from the
issuance of these shares.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from our
audited financial statements. The information set forth below should be read in
conjunction with the financial statements and notes thereto, as well as other
information contained in this Report which could have a material adverse effect
on our financial condition and results of operations. In particular, refer to
the matters described under the heading "Certain Factors That May Affect Future
Results" in this Report.
13
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Sales, net .................................... $ 77,561 $ 52,930 $ 19,594 $ 31,456 $ 29,140
Cost of sales ................................. 41,355 27,362 12,533 25,711 24,378
------------ ------------ ------------ ------------ ------------
Gross profit .............................. 36,206 25,568 7,061 5,745 4,762
Operating expenses ............................ 21,909 14,699 8,262 12,358 11,026
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................... 14,297 10,869 (1,201) (6,613) (6,264)
Other income (expense), net ................... (397) (2,553) (3,272) (1,839) (1,887)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ............. 13,900 8,316 (4,473) (8,452) (8,151)
Income tax provision (benefit) ................ 5,412 (15,130) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) ......................... 8,488 23,446 (4,473) (8,452) (8,151)
Returns to preferred stockholders ............. (275) (481) (9,060) (1,443) (1,914)
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders ............................ $ 8,213 $ 22,965 $ (13,533) $ (9,895) $ (10,065)
============ ============ ============ ============ ============
Net income (loss) per share:
Basic ..................................... $ 0.56 $ 1.98 $ (1.57) $ (1.89) $ (2.95)
============ ============ ============ ============ ============
Diluted ................................... $ 0.46 $ 1.44 $ (1.57) $ (1.89) $ (2.95)
============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic ..................................... 14,709 11,588 8,629 5,232 3,415
============ ============ ============ ============ ============
Diluted ................................... 18,375 16,322 8,629 5,232 3,415
============ ============ ============ ============ ============
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(In thousands)
BALANCE SHEET DATA:
Current assets ................................ $ 51,698 $ 25,617 $ 11,304 $ 11,239 $ 13,785
Total assets .................................. 85,364 51,128 17,638 16,914 21,230
Current liabilities ........................... 4,647 10,353 5,155 15,529 14,912
Long-term debt ................................ 3,935 6,083 2,291 2,700 5,642
Stockholders' equity (deficit) ................ 76,782 34,692 8,895 (1,315) 676
Working capital (deficit) ..................... 47,051 15,264 6,149 (4,290) (1,127)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We develop, make and sell generic drugs. In 1996, we acquired Able
Laboratories, Inc., our generic drug development and manufacturing business. In
1997 and 1998, respectively, we acquired Superior Pharmaceutical Company and
Generic Distributors, Inc., our former distribution operations.
Our distribution businesses sold mostly our competitors' products.
After careful analysis, we decided to divest our distribution operations and
continue only as a generic drug development and manufacturing company selling
only our own products. We sold the assets of Generic Distributors, Inc. on
December 29, 2000 and we sold Superior Pharmaceutical Company on February 23,
2001. On May 18, 2001, we merged our subsidiary, Able Laboratories, Inc., into
our parent company, DynaGen, Inc., and changed DynaGen's name to Able
Laboratories, Inc. In November 2003, we acquired substantially all the assets of
LiquiSource, Inc., a privately-held developer and manufacturer of prescription
liquid pharmaceuticals.
14
In 2004, we expect to continue to increase our sales of generic drug
products by attempting to increase sales of our existing products and by
obtaining ANDA approvals from the FDA for new products. Also, we intend to
develop our liquids formulation ability and position ourselves to add liquids
products to our product line, through our utilization of the assets we acquired
from LiquiSource. See "Certain Factors That May Affect Future Results -- Our
ability to develop liquid formulations is unproven." To accomplish these
objectives, we entered into a long-term lease for our new facility in Cranbury,
New Jersey, which we intend to use for our solid and semi-solid dosage
manufacturing operations and our executive offices. Also, we purchased the
building and leasehold improvements at our facility located at 6 Hollywood
Court, South Plainfield, New Jersey, where we currently house all of our
manufacturing operation and which we intend to use in the future for our liquids
manufacturing business. We expect to spend approximately $15,000,000 in 2004 to
fund these growth initiatives. See "Liquidity and Capital Resources" below.
In the section of this Report entitled "Certain Factors That May Affect
Future Results," we have described several risk factors which we believe are
significant. We consider each of these risks specific to us, although some are
industry or sector related issues which could also impact, to some degree, other
businesses in our market sector. You should give very careful consideration to
these risks when you evaluate us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are more fully described in Note 1
to our financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management. As a result, these policies are subject to an inherent degree of
uncertainty. In applying these policies, our management makes estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. We base our estimates and judgments on our
historical experience, the terms of existing contracts, our observance of trends
in the industry, information that we obtain from our customers and outside
sources, and on various other assumptions that we believe to be reasonable and
appropriate under the circumstances, the results of which form the basis for
making judgments about our reported operating results and 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. Our significant accounting policies include:
INVENTORIES. We state inventories at the lower of average cost or
market, with cost being determined based upon the first-in first-out method. In
evaluating whether inventory is to be stated at cost or market, management
considers such factors as the amount of inventory on hand, estimated time
required to sell existing inventory and expected market conditions, including
levels of competition. We establish reserves, when necessary, for slow-moving
and obsolete inventories based upon our historical experience and management's
assessment of current product demand. We evaluate the adequacy of these reserves
quarterly. If we were to determine that our inventory was overvalued based upon
the above factors, then we would have to increase our reserves.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. We recognize revenue on
product sales when persuasive evidence of an arrangement exists, the price is
fixed and final, delivery has occurred and there is reasonable assurance that we
will collect the sales proceeds. We obtain written purchase authorizations from
our customers for a specified amount of product at a specified price and
consider delivery to have occurred at the time of shipment. Thus, we principally
recognize revenue upon shipment and, in certain cases, recognize revenue when
customers receive shipments.
ALLOWANCES FOR RETURNS AND PRICE ADJUSTMENTS. Our product revenues are
typically subject to agreements with customers allowing chargebacks, rebates,
rights of return, pricing adjustments and other allowances. Based on our
agreements and contracts with our customers, we calculate allowances for these
items when we recognize revenue and we book the allowances as reserves against
accounts receivable. Chargebacks, primarily from wholesalers, are the most
significant of these items. Chargebacks result from arrangements we have with
customers establishing prices for products for which the customers independently
select a wholesaler from which to purchase. A chargeback represents the
difference between our invoice price to the wholesaler, which is typically
stated at wholesale acquisition cost, and the end customer's contract price,
which is lower. We credit the wholesaler for purchases by end customers at the
lower price. Therefore, we record these chargebacks at the time we recognize
revenue in connection with our sales to wholesalers. We base these reserves
primarily on our contractual
15
arrangements and, to a lesser extent, historical chargeback experience. The
majority of our sales are made to wholesalers. For 2003, McKesson Corporation, a
wholesaler, accounted for approximately 12% of our sales. We continually monitor
the wholesaler inventory levels and the corresponding reserve estimates and
compensate for contractual changes, giving consideration to our observations of
current pricing trends and we make adjustments to our provisions for chargebacks
and similar items when we believe that the actual credits will differ from our
original provisions. To date, actual amounts have not differed materially from
our estimates.
Consistent with industry practice, we maintain a policy that allows our
customers to return product. Our estimate of the provision for returns is based
upon our historical experience with actual returns.
Price adjustments, also referred to as "shelf stock adjustments" are
credits issued to reflect decreases in the selling prices of our products which
our customer has remaining in its inventory at the time of the price reduction.
Decreases in our selling prices are discretionary decisions made by us to
reflect market conditions. Amounts recorded for estimated shelf stock
adjustments are based upon specified terms with direct customers, estimated
launch dates of competing products, estimated declines in market price and
estimates of inventory held by the customer.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We have historically provided
financial terms to customers in accordance with what management views as
industry norms. Financial terms, for credit-approved customers, are generally on
a net 30-60 day basis, though most customers are entitled to a prompt payment
discount. Management periodically and regularly reviews customer account
activity in order to assess the adequacy of allowances for doubtful accounts,
considering factors such as economic conditions and each customer's payment
history and creditworthiness. If the financial condition of our customers were
to deteriorate, or if they were otherwise unable to make payments in accordance
with management's expectations, we might have to increase our allowance for
doubtful accounts.
INCOME TAXES. Deferred tax assets and liabilities are recorded for
temporary differences between the financial statement and tax bases of assets
and liabilities using the currently enacted income tax rates expected to be in
effect when the taxes are actually paid or recovered. A deferred tax asset is
also recorded for net operating loss, capital loss and tax credit carryforwards
to the extent their realization is more likely than not. Generally, the deferred
tax benefit or expense for the period represents the change in the deferred tax
asset or liability from the beginning to the end of the period.
As of December 31, 2002, we had a net operating loss carryforward of
approximately $51.6 million for federal income tax purposes. During the fourth
quarter of 2002, management determined that it was more likely than not that
these benefits will be realized in future periods prior to expiration of the
carryforward period. Therefore, we recognized the related deferred tax asset for
this and other temporary differences, which resulted in a net income tax benefit
that increased net income by $15,130,000, or $0.93 per diluted share, for 2002.
Because we recognized this tax benefit during the fourth quarter of 2002, we
intend, in future profitable periods, to report net income as if we were fully
taxed. We do not, however, expect to pay federal income taxes, other than the
alternative minimum tax, until we fully utilize our net operating loss
carryforwards.
If, in future periods, we determine that we are not likely to realize
the tax benefit of the net operating loss carryforwards, then we would increase
our reserve against the asset, the amount of which would be deducted from income
during the period in which we increase the reserve.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
SALES. Sales for the year ended December 31, 2003 were $77,561,115,
compared to $52,930,121 for the year ended December 31, 2002. The increase in
sales of $24,630,994, or 46.5%, is primarily due to a greater number of products
available for sale as well as higher demand for our products. From June 30, 2001
to December 31, 2003, we have received FDA approval for 17 new product families
in 41 different product strengths. During the year ended December 31, 2003, we
had 21 FDA approved product families in 50 different strengths available for
16
sale, compared to 16 FDA approved product families in 32 different strengths
available for sale during the year ended December 31, 2002.
COST OF SALES. Cost of sales was $41,355,192, or 53.3% of sales, for
the year ended December 31, 2003, compared to $27,361,610, or 51.7% of sales,
for the year ended December 31, 2002. The decrease in the gross profit margin to
46.7% from 48.3% is primarily attributable to sub-optimal utilization of the
Company's manufacturing capacity in the first quarter of 2003. A part of our
capacity expansion, the Company's 6 Hollywood Court manufacturing facility
underwent substantial reconfiguration resulting in downtime and unabsorbed labor
costs and other overhead in the first quarter of 2003. All current manufacturing
upgrades, relocations and additional equipment installations to this location
are now complete, allowing the Company to resume normal manufacturing
operations. However, the Company continues to face labor inefficiencies due to
capacity constraints within the 6 Hollywood Court manufacturing facility. These
inefficiencies also contributed to the decrease in gross profit margin. Finally,
the 2003 product mix also contributed to the decline in gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the year ended December 31, 2003 were $10,696,864,
compared to $7,754,153 for the year ended December 31, 2002. Our expenses
increased by $2,942,711 for the year ended December 31, 2003 compared to the
prior year. The increase is primarily due to increases in salaries and benefits,
sales commissions, advertising and trade show expenses, and professional fees of
approximately $667,000, $223,000, $1,389,000 and $663,000, respectively. As of
December 31, 2003, we had 38 full-time employees in selling, general and
administrative positions compared to 35 full-time employees in similar positions
at December 31, 2002. We expect to add additional employees in the future to
support our anticipated sales growth.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 2003 were $11,212,418, compared to $6,944,952 for the
year ended December 31, 2002. A significant portion of these expenses relate to
research which is currently being conducted to develop generic drugs. The
increase of $4,267,466 is primarily due to an increase in laboratory supplies,
milestone payments to raw material suppliers working in conjunction with us to
develop new products and biostudies conducted by independent contract research
organizations of approximately $282,000, $1,110,000 and $658,000, respectively.
The balance of approximately $2,217,000 is due to increased activity in
supporting a higher number of research projects. These support activities
include quality assurance, stability testing and regulatory support. At this
time approximately 40 quality and regulatory employees are providing the support
function for the primary research and development activity. As of December 31,
2003, we had 16 new products pending approval with the FDA and expect to
increase our research and development activities for a broad range of products
over the next several months.
OPERATING INCOME. Our operating income for the year ended December 31,
2003 increased by $3,427,235 to $14,296,641, compared to our operating income of
$10,869,406 for the year ended December 31, 2002. The increase in operating
income resulted from increased net sales and gross margins, which exceeded the
greater operating expenses incurred to support our continued growth.
OTHER INCOME (EXPENSE). Interest and financing expenses for the year
ended December 31, 2003 were $543,849, compared to $517,723 for the year ended
December 31, 2002. Other expenses also includes a $241,999 loss on early
retirement of debt. Miscellaneous income of $388,755 for the year ended December
31, 2003 primarily consists of interest income from cash deposits resulting from
the sale of common stock and the RxBazaar note receivable partially offset by
miscellaneous expenses.
INCOME TAXES. As of December 31, 2002, we had a net operating loss
carryforward for federal income tax purposes of approximately $51.6 million.
During the fourth quarter of 2002, management determined that it was more likely
than not that these benefits will be realized in future periods prior to
expiration of the carryforward period. Therefore, we recognized the related
deferred tax asset for this and other temporary differences, which resulted in a
net income tax benefit that increased net income by $15,130,000, or $0.93 per
diluted share, for 2002.
Income tax expense for the year ended December 31, 2003 was $5,412,000
or $0.29 per diluted share and our effective tax rate was 38.9%. Because of our
ability to use the net operating loss carryforwards, our income tax expense is
primarily a non-cash expense. We do not expect to pay federal income taxes,
other than the alternative minimum tax, until we fully utilize our net operating
loss carryforwards.
17
NET INCOME. We recorded net income of $8,487,548 for the year ended
December 31, 2003, compared to net income of $23,445,940 for the year ended
December 31, 2002. We recorded net income applicable to common stockholders of
$8,212,989, or $0.56 per basic share, for the year ended December 31, 2003,
compared to net income applicable to common stock of $22,964,797, or $1.98 per
basic share, for the year ended December 31, 2002. Diluted earnings per share
were $0.46 for the year ended December 31, 2003, compared to diluted earnings
per share of $1.44 for the year ended December 31, 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
SALES. Sales for the year ended December 31, 2002 were $52,930,121,
compared to $19,594,231 for the year ended December 31, 2001. The sales for 2001
included $3,067,567 in net sales of our distribution subsidiary, Superior
Pharmaceutical, which we sold in February 2001 and which added no revenue in
2002. This $3,067,567 decrease was offset by a significant increase in sales of
our recently approved generic drugs, resulting in an increase in sales of
$33,335,890, or 170%, for the year ended December 31, 2002 as compared to the
year ended December 31, 2001.
COST OF SALES. Cost of sales was $27,361,610, or 52% of sales, for the
year ended December 31, 2002, compared to $12,533,440, or 64% of sales, for the
year ended December 31, 2001. The increase in the gross profit margin to 48%
from 36% is due to manufacturing efficiencies and economies of scale, which were
partially offset by a $300,000 product recall charge to cost of sales. Our gross
profit margin for the first, second, third and fourth quarters of 2002 was 46%,
47%, 49% and 50%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the year ended December 31, 2002 were $7,754,153,
compared to $5,909,245 for the year ended December 31, 2001. Expenses declined
by $581,292 as a result of the February 2001 sale of Superior; however, the
savings were offset by increased selling, general and administrative costs at
our manufacturing facility. Excluding costs related to Superior, our expenses
increased by $2,426,200 for the year ended December 31, 2002 compared to the
prior year. The increase is primarily due to certain non-cash expenses,
additional depreciation and amortization expense and an increase in sales and
administrative personnel to support our growth. As of December 31, 2002, we had
35 full-time employees in selling, general and administrative positions compared
to 19 full-time employees in similar positions at December 31, 2001.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
year ended December 31, 2002 were $6,944,952, compared to $2,352,666 for the
year ended December 31, 2001. The increase in expenses relates to an increased
rate of filings with the FDA for new product approvals. Costs of biostudies and
outside assays, conducted by independent contract research organizations, for
the year ended December 31, 2002 were approximately $587,000 and $2,388,000,
compared to $218,000 and $924,000 for the year ended December 31, 2001,
respectively. Costs of research and development supplies, equipment, and raw
materials increased from approximately $229,000 for the year ended December 31,
2001 to approximately $1,449,000 for the year ended December 31, 2002. As of
December 31, 2002, we had 16 new products pending approval with the FDA.
OPERATING INCOME. Our operating income for the year ended December 31,
2002 increased by $12,070,526 to $10,869,406, compared to our operating loss of
$(1,201,120) for the year ended December 31, 2001. The increase in operating
income resulted from increased net sales and gross margins, which exceeded the
greater operating expenses incurred to support our continued growth.
OTHER INCOME (EXPENSE). Interest and financing expenses for the year
ended December 31, 2002 were $517,723, compared to $1,077,100 for the year ended
December 31, 2001. Our interest and financing expenses decreased by $559,377 as
our senior secured debt was paid off and our senior subordinated debt was
eliminated as a result of the February 23, 2001 sale of Superior. In addition,
we paid off several other debt obligations during the year ended December 31,
2002. Partially offsetting these savings was additional interest incurred on our
June 2002 borrowing of $2,300,000 and our October 2002 equipment credit facility
of $4,000,000. Other expenses also includes a $1,993,403 increase to the
RxBazaar note receivable reserve.
INCOME TAXES. As of December 31, 2002, we had a net operating loss
carryforward for federal income tax purposes of approximately $51.6 million.
During the fourth quarter of 2002, management determined that it was
18
more likely than not that these benefits would be realized in future periods
prior to expiration of the carryforward period. Therefore, we recognized the
related deferred tax asset for this and other temporary differences, which
resulted in a net income tax benefit that increased net income by $15,130,000,
or $0.93 per diluted share, for 2002.
Because we recognized these tax benefits during the fourth quarter of
2002, in future profitable periods, we expect to report our net income as if we
were fully taxed. We do not, however, expect to pay federal income taxes, other
than possibly the alternative minimum tax, until we fully utilize our net
operating loss carryforwards.
NET INCOME. We recorded net income of $23,445,940 for the year ended
December 31, 2002, compared to a net loss of $(4,472,907) for the year ended
December 31, 2001. We recorded net income applicable to common stockholders of
$22,964,797, or $1.98 per share, for the year ended December 31, 2002, compared
to a net loss applicable to common stock of $(13,532,931), or $(1.57) per share,
for the year ended December 31, 2001. Diluted earnings per share were $1.44 for
the year ended December 31, 2002, compared to a diluted loss per share of
$(1.57) for the year ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had working capital of $47,050,765,
compared to working capital of $15,263,713 at December 31, 2002. Cash was
$20,065,248 as of December 31, 2003, compared to $1,801,127 at December 31,
2002. The $31,787,052 increase in our working capital is primarily due to our
net income of $8,487,548 for the year ended December 31, 2003 and net proceeds
of $28,953,335 from our sale of common stock primarily offset by our additional
investment of $11,042,935 in property, plant and equipment. We expect to make
additional investments of approximately $15,000,000 in property and equipment in
2004. Most of the expected $15,000,000 in additional investments in 2004 will be
made on our newly leased Cranbury manufacturing facility. Our new facility
should allow us to expand our current manufacturing capabilities and alleviate
certain current manufacturing constraints. In addition, the new facility should
allow us to consolidate a portion of our existing operations upon expiration of
current lease obligations, which should allow us to reduce manufacturing
expenses in future periods. Accounts receivable was $8,626,023 and inventory was
$16,602,608 at December 31, 2003. The accounts receivable allowance at December
31, 2003 includes allowances for customer chargebacks, rebates, returns, other
pricing adjustments and doubtful accounts. Our allowance consists primarily of
allowances stipulated by contracts with major drug wholesalers that are
customary in the generic drug industry. We establish these allowances as we
recognize the sales and monitor these allowances on an ongoing basis. To date,
actual amounts have not differed materially from our estimates. Management
expects accounts receivable and inventory will continue to increase over the
near term as sales continue to increase. Our stated working capital, accounts
receivable and inventory depend on various estimates and judgments of
management. See "Critical Accounting Policies."
During the year ended December 31, 2003, we sold 1,627,500 shares of
common stock for gross proceeds of $30,922,500, converted $2,150,000 of
unsecured notes payable into common stock, and borrowed an additional
$11,589,422 under our existing equipment loan and revolving credit facility.
During that time we paid off our equipment loan of $7,579,500 and paid down our
revolving credit facility by $3,900,000, in addition to paying down certain
other debt. The remaining proceeds from the issuance of common stock will be
used to support our planned manufacturing investments, as stated above, and the
expansion of our research and development activities over the next several
quarters.
During September 2003, our bank issued a letter of credit for
$1,287,632 as a security deposit under a new lease agreement for the
aforementioned Cranbury facility. Subsequent to year end, we entered into a new
$20 million revolving credit agreement with our existing lender. This new
revolver replaces the existing revolving credit facility of $10 million and
terminates the existing equipment loan. The new revolver bears interest, at
inception, at LIBOR plus 1.25% based upon our current leverage ratio. In
addition, the new revolver is expandable to $30 million upon our request and the
approval of the bank. The revolver expires March 2007.
We used this new revolver to repay the entire outstanding principal
balance under the old revolver of $3.0 million. In addition, we transferred the
existing outstanding letter of credit to the new revolver. The amount available
under our revolving credit agreement is reduced by the full amount of the letter
of credit.
19
A summary of our contractual obligations at December 31, 2003 is as
follows:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005-2006 2007-2008 AFTER 2008
- ----------------------- ------------ ------------ ------------ ------------ ------------
Debt Obligations $ 4,174,038 $ 239,038 $ 3,220,000 $ 260,000 $ 455,000
Operating Leases 15,223,439 1,270,915 2,738,660 2,575,264 8,638,600
------------ ------------ ------------ ------------ ------------
Total $ 19,397,477 $ 1,509,953 $ 5,958,660 $ 2,835,264 $ 9,093,600
============ ============ ============ ============ ============
In addition to the contractual obligations listed in the above chart,
at December 31, 2003 we had several open purchase orders for raw materials,
supplies, and ongoing construction activities. We do not believe the open
purchase orders were materially significant, either individually or in
aggregate, and are a normal part of our daily operations.
We expect to fund our working capital needs from operations and from
amounts available from borrowings under our secured working capital credit
facility. If we need additional working capital to fund future expansion, we
will seek an increase in our line of credit or other debt financing before
selling additional equity securities, although there is no guarantee that we
will be able to secure such financing.
ENVIRONMENTAL LIABILITY
We have no known material environmental violations or assessments.
RECENT ACCOUNTING PRONOUNCEMENT
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. Many of those instruments
were previously classified as equity. SFAS No. 150 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 this statement did not have any impact on our financial
position or results of operations.
Other recent accounting pronouncements include FASB Interpretation No.
46, "Consolidation of Variable Interest Entities," which addresses when a
company should include in its financial statements the assets, liabilities and
activities of another entity and SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Neither of these
accounting pronouncements had an impact on our consolidated financial position,
results of operations or cash flows.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We have been experiencing a period of rapid growth that has been
placing a strain on our resources. Revenue from our operations for the year
ended December 31, 2003 increased by 46.5% to $77,561,115. The number of our
employees increased from 95 in March 2001 to 407 as of February 25, 2004. We
anticipate that our revenues and business activities will continue to grow in
2004. To manage future growth effectively, we must maintain and enhance our
financial and accounting systems and our manufacturing processes and compliance
programs, as well as the operational and administrative tasks associated with
integrating new personnel and managing expanding operations. The challenges
inherent in managing growth are significant. If we are unable to
20
meet these challenges, we could experience a material adverse effect on the
quality of our products, our ability to retain key personnel, our operating
results and financial condition.
IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL OR CONTINUE TO ATTRACT
ADDITIONAL QUALIFIED PROFESSIONALS WE MAY BE UNABLE TO CARRY OUT OUR PLANS
TO MAINTAIN OR EXPAND OUR BUSINESS.
Our future success depends, to a significant degree, on the skill,
experience and efforts of our chief executive officer and the other members of
our senior management team. The loss of any member of our senior management team
could have a material adverse effect on our business. Also, because of the
nature of our business, our ability to develop new generic drug products and to
compete with our current and future competitors depends to a large extent upon
our ability to attract and retain qualified scientific, technical and
professional personnel. The loss of key scientific, technical or professional
personnel or our failure to recruit additional key personnel could materially
and adversely affect our business. There is intense competition for qualified
personnel in the areas of our activities, and we cannot assure you that we will
be able to continue to attract and retain the qualified personnel necessary for
the development of our business.
WE FACE INTENSE COMPETITION FROM OTHER MANUFACTURERS OF GENERIC DRUGS.
In order to succeed in the generic drug business, we need to achieve a
significant share of the market for each generic drug we market. The generic
drug manufacturing and distribution business is highly competitive. We compete
with several companies that are better capitalized than we are and that have
financial and human resources significantly greater than ours. Because we
manufacture generic drugs, our products, by their very nature, are chemically
and biologically equivalent to the products of our larger and profitable
competitors. Also, we believe that, as a rule, the first one or two companies to
bring a generic alternative to the market will capture the highest market share
for that product. We intend to compete by, among other things, being the first
to market certain new generic drug products. These larger companies, with their
greater resources, could bring products to market before us and could capture a
significant share of the market at our expense, preventing us from executing
this business strategy.
Recently several foreign companies, primarily from Europe and India,
have entered the U.S. generic market either by establishing manufacturing
subsidiaries or by forming marketing alliances with U.S. generic companies.
Foreign companies, especially those from India, enjoy lower manufacturing costs,
labor costs and tax rates. They may also leverage these advantages over U.S.
manufacturers through backward integration, by combining the research and
development talent necessary to develop active drug ingredients with the ability
efficiently to make the finished dosage products. The result is increased
competition and downward pressure on prices. In certain cases, foreign
companies' prices could become so low that competing U.S. companies could not
profitably manufacture certain drugs and therefore be forced to discontinue the
products. Almost all these companies also operate in less stringent patent and
intellectual property protection environments and lead US companies in R&D
timings. These factors are present in the US generic drug industry today and are
likely to have continued increasing influence, resulting in intensified
competition, lower prices and lower margins industry-wide over the next several
years. We may seek opportunities to form an alliance with one or more foreign
companies. Whether we would succeed in forming such an agreement, and the exact
nature of any such arrangement, is unknown.
OUR REVENUES AND GROSS PROFIT FROM INDIVIDUAL GENERIC DRUG PRODUCTS ARE
LIKELY TO DECLINE AS COMPETING FIRMS INTRODUCE THEIR OWN GENERIC
EQUIVALENTS.
Revenues and gross profit derived from generic drug products tend to
follow a pattern based on regulatory and competitive factors that we believe to
be unique to the generic pharmaceutical industry. As patents or other
exclusivity periods for brand name products expire, the first generic
manufacturer to receive regulatory approval for a generic equivalent of the
product often is able to capture a substantial share of the market. However, as
other generic manufacturers receive regulatory approvals for the product, the
first manufacturer's market share and the price of the product will typically
decline. Therefore, our revenues and gross profits from individual generic
pharmaceutical products are likely to decline over time as a result of increased
competition. We can give no
21
assurance that we will be able to develop new generic drug products that we
believe will be necessary to achieve sufficient gross profit margins.
IN SOME CIRCUMSTANCES, WE MAY RETROACTIVELY REDUCE THE PRICE OF PRODUCTS
THAT WE HAVE ALREADY SOLD TO CUSTOMERS BUT THAT HAVE NOT BEEN RESOLD BY
SUCH CUSTOMERS.
In some circumstances, we may issue to our customers credits for
products that we previously sold to them but that have not been resold by them.
These credits effectively constitute a retroactive reduction of the price of
products already sold. We estimate and record reserves with respect to these
potential credits based on historical experience, our observations of buying
patterns and current pricing trends. Actual credits claimed by our customers
could differ significantly from those estimates.
OUR ABILITY TO DEVELOP LIQUID FORMULATIONS IS UNPROVEN.
In November 2003, we acquired the assets of LiquiSource, Inc., a
developer of liquid pharmaceutical products. We intend to use the LiquiSource
assets to leverage our ongoing research and development efforts. We will seek
opportunities to develop liquid formulations for solid and semi-solid dosage
products that we currently manufacture. However, we have not previously
developed or sold liquid formulations and we expect that it will be some time
before we can bring any new liquid products to market. We can give no assurance
that we will successfully integrate the LiquiSource business into our ongoing
operations or that we will develop the ability to manufacture and sell liquid
products on a profitable basis.
WE ARE OBLIGATED TO ISSUE A LARGE NUMBER OF SHARES OF COMMON STOCK AT
PRICES LOWER THAN MARKET VALUE.
We are obligated to issue a large number of shares of common stock at
prices below market value. Therefore, our common stock could lose value if a
large number of these shares are issued into the market. As of February 25,
2004, 16,850,400 shares of common stock were issued and outstanding. We have
issued options, warrants and preferred stock, that are exercisable for or
convertible into shares of common stock. As of February 25, 2004, we were
obligated to issue up to 999,388 additional shares of common stock upon the
conversion of our Series Q convertible preferred stock. We have also reserved
2,340,385 shares of common stock for issuance pursuant to options and warrants
granted to our employees, officers, directors, consultants and investors. The
holders of these convertible securities likely would only exercise their rights
to acquire common stock at times when the exercise price is lower than the price
at which they could buy the common stock on the open market. Because we would
likely receive less than current market price for any shares of common stock
issued upon exercise of options and warrants, the exercise of a large number of
these convertible securities could reduce the per-share market price of common
stock held by existing investors.
CONVERSION OF OUTSTANDING SHARES OF CONVERTIBLE PREFERRED STOCK OR THE
EXERCISE OF OTHER DERIVATIVE SECURITIES MAY REDUCE THE MARKET PRICE OF OUR
OUTSTANDING COMMON STOCK.
The conversion of outstanding shares of our Series Q Preferred Stock or
the exercise of other derivative securities could depress the price of our
common stock. Specifically, public resales of shares of our common stock
following exercises or conversions of preferred stock or other derivative
securities may depress the prevailing market price of our common stock. Even
prior to the time of actual conversions of the preferred stock or exercises of
derivative securities, the perception of a significant market "overhang"
resulting from the existence of our obligation to honor such conversions and
exercises could depress the market price of our common stock.
THE VALUE OF OUR COMMON STOCK HAS FLUCTUATED WIDELY AND INVESTORS COULD
LOSE MONEY ON THEIR INVESTMENTS IN OUR STOCK.
The price of our common stock has fluctuated widely in the past and it
is likely that it will continue to do so in the future. The market price of our
common stock could fluctuate substantially based upon a variety of factors
including:
o quarterly fluctuations in our operating results;
o announcements of new products by us or our competitors;
o key personnel losses;
22
o sales of common stock;
o developments or announcements with respect to industry standards,
regulatory matters, patents or proprietary rights; and
o general economic and political conditions.
During 2003, the market price of our common stock fluctuated between
approximately $10.00 and approximately $25.32, and was approximately $18.17 on
February 25, 2004. These broad market fluctuations could adversely affect the
market value of our common stock in that, at the current price, any fluctuation
in the dollar price per share could constitute a significant percentage decrease
in the value of a stockholder's investment.
WE MAY FACE PRODUCT LIABILITY FOR WHICH WE MAY NOT BE ADEQUATELY INSURED.
The testing, marketing and sale of drug products for human use is
inherently risky. Liability might result from claims made directly by consumers
or by pharmaceutical companies or others selling our products. We presently
carry product liability insurance in amounts that we believe to be adequate, but
we can give no assurance that such insurance will remain available at a
reasonable cost or that any insurance policy would offer coverage sufficient to
meet any liability arising as a result of a claim. We can give no assurance that
we will be able to obtain or maintain adequate insurance on reasonable terms or
that, if obtained, such insurance will be sufficient to protect us against such
potential liability or at a reasonable cost. The obligation to pay any product
liability claim or a recall of a product could have a material adverse affect on
our business, financial condition and future prospects.
INTENSE REGULATION BY GOVERNMENT AGENCIES MAY DELAY OUR EFFORTS TO
COMMERCIALIZE OUR PROPOSED DRUG PRODUCTS.
Our products and business activities are highly regulated, principally
by the FDA, the U.S. Drug Enforcement Agency, state governments and governmental
agencies of other countries. Federal and state regulations and statutes impose
certain requirements on the testing, manufacturing, labeling, storage,
recordkeeping, approval, advertising and promotion of our products. Also, some
of our products contain narcotic ingredients. Regulations pertaining to the sale
of such drugs may prove difficult or expensive to comply with, and we and other
pharmaceutical companies may face lawsuits. If we are alleged to be out of
compliance with applicable requirements, then we would face judicial and
administrative sanctions, including seizures of adulterated or misbranded
products, injunction actions, fines and criminal prosecutions. Any of these
events could disrupt our business and our ability to supply products to our
customers.
WE DEPEND ON THIRD PARTIES TO SUPPLY THE RAW MATERIALS USED IN OUR
PRODUCTS; ANY FAILURE TO OBTAIN A SUFFICIENT SUPPLY OF RAW MATERIALS FROM
THESE SUPPLIERS COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Before we can market any generic drug, we must first obtain FDA
approval of our proposed drug and, also, of the active drug raw materials that
we use. We rely on third parties to supply all raw materials used in our
products. All of our third-party suppliers and contractors are subject to FDA
and other regulatory oversight. In many instances, our FDA approvals cover only
one source of raw materials. If raw materials from that approved supplier were
to become unavailable, we would be required to file a supplement to our
Abbreviated New Drug Application to use a different manufacturer and revalidate
the manufacturing process using a new supplier's materials. This could cause a
delay of several months in the manufacture of the drug involved and the
consequent loss of potential revenue and market share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use any derivative financial instruments. All of our direct
sales are in the United States and denominated in U.S. dollars. Our exposure to
market risk for a change in interest rates relates primarily to our debt
instruments. Our debt instruments, at December 31, 2003, are subject to variable
interest rates, which float based upon a spread over LIBOR or U.S. bank prime
rate, and fixed interest rates and principal payments. Management does not
believe that any risk inherent in these instruments is likely to have a material
effect on our financial statements.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our audited financial statements and related independent auditors'
report are presented in the following pages. The financial statements filed in
this Item 8 are as follows:
Independent Auditors' Report...................................... 24
Financial Statements:
Balance Sheets - December 31, 2003 and 2002.................. 25
Statements of Operations -Years Ended December 31, 2003,
2002 and 2001............................................ 26
Statements of Changes in Stockholders' Equity (Deficit) -
Years Ended December 31, 2003, 2002 and 2001............ 27
Statements of Cash Flows - Years Ended December 31, 2003,
2002 and 2001........................................... 28
Notes to Financial Statements.................................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
"Disclosure controls and procedures" are controls and other procedures
designed to ensure that we timely record, process, summarize and report the
information that we are required to disclose in the reports that we file or
submit with the SEC. These include controls and procedures designed to ensure
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
We maintain a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information which is required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Our Chief
Executive Officer and Chief Financial Officer have evaluated this system of
disclosure controls and procedures and have concluded that our disclosure
controls and procedures are effective as of the end of the period covered by
this Annual Report. We have made no changes in our company's internal controls
over financial reporting during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
24
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Able Laboratories, Inc.
South Plainfield, New Jersey
We have audited the accompanying balance sheets of Able Laboratories,
Inc. as of December 31, 2003 and 2002, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2003. 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 financial statements referred to above present
fairly, in all material respects, the financial position of Able Laboratories,
Inc. as of December 31, 2003 and 2002 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/s/WOLF & COMPANY, P.C.
Boston, Massachusetts
February 13, 2004
25
ABLE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------------------
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 20,065,248 $ 1,801,127
Accounts receivable, net of allowances of $24,007,583 and $13,054,246 .... 8,626,023 7,873,526
Inventory ................................................................ 16,602,608 12,903,939
Deferred income tax asset ................................................ 4,760,000 2,915,000
Prepaid expenses and other current assets ................................ 1,644,068 123,104
-------------- --------------
Total current assets ................................................. 51,697,947 25,616,696
-------------- --------------
Property and equipment, net ................................................... 18,953,744 9,932,523
-------------- --------------
Other assets:
Debt financing costs, net of accumulated amortization .................... 91,708 168,206
Cash deposits with bond trustee .......................................... 525,907 517,262
Deferred income tax asset ................................................ 9,709,000 14,725,000
Goodwill ................................................................. 3,904,094 --
Deposits and other assets ................................................ 481,755 168,414
-------------- --------------
Total other assets ................................................... 14,712,464 15,578,882
-------------- --------------
$ 85,364,155 $ 51,128,101
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt ...................... $ 239,038 $ 617,012
Accounts payable ......................................................... 3,293,168 6,896,359
Accrued expenses ......................................................... 1,114,976 2,839,612
-------------- --------------
Total current liabilities ............................................ 4,647,182 10,352,983
Long-term debt, less current portion .......................................... 3,935,000 6,083,343
-------------- --------------
Total liabilities .................................................... 8,582,182 16,436,326
-------------- --------------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $.01 par value, 10,000,000 shares authorized, 17,025 and
53,150 shares of Series Q outstanding (liquidation value $1,702,500 and
$5,315,000) 171 532
Common stock, $.01 par value, 25,000,000 shares authorized, 16,761,216 and
12,554,206 shares issued and outstanding ............................... 167,611 125,542
Additional paid-in capital ............................................... 116,060,210 82,423,790
Accumulated deficit ...................................................... (39,295,941) (47,783,489)
Unearned stock-based compensation ........................................ (150,078) (74,600)
-------------- --------------
Total stockholders' equity ........................................... 76,781,973 34,691,775
-------------- --------------
$ 85,364,155 $ 51,128,101
============== ==============
See accompanying notes to financial statements.
26
ABLE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales, net $ 77,561,115 $ 52,930,121 $ 19,594,231
Cost of sales 41,355,192 27,361,610 12,533,440
------------ ------------ ------------
Gross profit 36,205,923 25,568,511 7,060,791
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 10,696,864 7,754,153 5,909,245
Research and development 11,212,418 6,944,952 2,352,666
------------ ------------ ------------
Total operating expenses 21,909,282 14,699,105 8,261,911
------------ ------------ ------------
Operating income (loss) 14,296,641 10,869,406 (1,201,120)
------------ ------------ ------------
Other income (expense):
Loss on investment in RxBazaar -- (1,993,403) (2,730,000)
Loss on early retirement of debt (241,999) -- --
Interest and financing expense (543,849) (517,723) (1,077,100)
Miscellaneous income (expense), net 388,755 (42,340) 535,313
------------ ------------ ------------
Other income (expense), net (397,093) (2,553,466) (3,271,787)
------------ ------------ ------------
Income (loss) before income taxes 13,899,548 8,315,940 (4,472,907)
Income tax provision (benefit) 5,412,000 (15,130,000) --
------------ ------------ ------------
Net income (loss) 8,487,548 23,445,940 (4,472,907)
Less returns to preferred stockholders:
Beneficial conversion features -- -- 8,536,886
Dividends 274,559 481,143 523,138
------------ ------------ ------------
Net income (loss) applicable to common stockholders $ 8,212,989 $ 22,964,797 $(13,532,931)
============ ============ ============
Net income (loss) per share:
Basic $ 0.56 $ 1.98 $ (1.57)
============ ============ ============
Diluted $ 0.46 $ 1.44 $ (1.57)
============ ============ ============
Weighted average shares outstanding:
Basic 14,709,040 11,587,905 8,629,371
============ ============ ============
Diluted 18,374,894 16,322,234 8,629,371
============ ============ ============
See accompanying notes to financial statements.
27
ABLE LABORATORIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Preferred Stock Common Stock
------------------------------- ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
Balance at December 31, 2000 52,260 $ 522 6,533,468 $ 65,335
Stock options and warrants exercised -- -- 46,258 463
Shares issued in private placements 67,150 672 1,406,333 14,063
Conversion and redemption of preferred stock (98,700) (987) 3,083,917 30,839
Conversion of debt and accrued interest -- -- 43,333 433
Shares issued for investment securities 47,200 472 -- --
Stock, options and warrants issued for -- -- 188,667 1,887
services
Cash dividends on preferred stock -- -- -- --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 2001 67,910 679 11,301,976 113,020
Stock options and warrants exercised -- -- 686,067 6,860
Conversion of preferred stock (14,760) (147) 566,163 5,662
Warrants issued with debt -- -- -- --
Cash dividends on preferred stock -- -- -- --
Stock-based compensation -- -- -- --
Amortization of unearned stock-based
compensation -- -- -- --
Tax benefit on stock options -- -- -- --
Net income -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 2002 53,150 532 12,554,206 125,542
Stock options and warrants exercised -- -- 332,834 3,328
Shares issued in private placement -- -- 1,627,500 16,275
Conversion of preferred stock (36,125) (361) 2,120,579 21,206
Conversion of debt -- -- 126,097 1,260
Cash dividends on preferred stock -- -- -- --
Stock-based compensation -- -- -- --
Amortization of unearned stock-based
compensation -- -- -- --
Tax benefit on stock options -- -- -- --
Net income -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 2003 17,025 $ 171 16,761,216 $ 167,611
============= ============= ============= =============
Unearned
Paid-In Accumulated Stock-Based
Capital Deficit Compensation Total
------------- ------------- ------------- -------------
Balance at December 31, 2000 $ 65,375,440 $ (66,756,522) $ -- $ (1,315,225)
Stock options and warrants exercised (63) -- -- 400
Shares issued in private placements 10,967,772 -- -- 10,982,507
Conversion and redemption of preferred stock (2,223,271) -- -- (2,193,419)
Conversion of debt and accrued interest 114,567 -- -- 115,000
Shares issued for investment securities 4,719,528 -- -- 4,720,000
Stock, options and warrants issued for 1,240,549 -- -- 1,242,436
services
Cash dividends on preferred stock (183,450) -- -- (183,450)
Net loss -- (4,472,907) -- (4,472,907)
------------- ------------- ------------- -------------
Balance at December 31, 2001 80,011,072 (71,229,429) -- 8,895,342
Stock options and warrants exercised 277,591 -- -- 284,451
Conversion of preferred stock (5,515) -- -- --
Warrants issued with debt 375,314 -- -- 375,314
Cash dividends on preferred stock (476,572) -- -- (476,572)
Stock-based compensation 111,900 -- (111,900) --
Amortization of unearned stock-based
compensation -- -- 37,300 37,300
Tax benefit on stock options 2,130,000 -- -- 2,130,000
Net income -- 23,445,940 -- 23,445,940
------------- ------------- ------------- -------------
Balance at December 31, 2002 82,423,790 (47,783,489) (74,600) 34,691,775
Stock options and warrants exercised 925,071 -- -- 928,399
Shares issued in private placement 28,937,060