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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 -- -- 28,953,335
Conversion of preferred stock (20,845) -- -- --
Conversion of debt 2,148,693 -- -- 2,149,953
Cash dividends on preferred stock (274,559) -- -- (274,559)
Stock-based compensation 145,000 -- (145,000) --
Amortization of unearned stock-based
compensation -- -- 69,522 69,522
Tax benefit on stock options 1,776,000 -- -- 1,776,000
Net income -- 8,487,548 -- 8,487,548
------------- ------------- ------------- -------------
Balance at December 31, 2003 $ 116,060,210 ($ 39,295,941) ($ 150,078) $ 76,781,973
============= ============= ============= =============
See accompanying notes to financial statements.
28
ABLE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 8,487,548 $ 23,445,940 $ (4,472,907)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Gain on settlement of put liability -- -- (26,472)
Deferred income tax expense (benefit) 4,640,000 (15,880,000) --
State tax benefit for stock options 307,000 370,000 --
Loss on investment in RxBazaar -- 1,993,403 2,730,000
Loss on early retirement of debt 241,999 -- --
Stock, options and warrants issued for services -- -- 1,242,436
Amortization of unearned compensation 69,522 37,300 --
Depreciation and amortization 2,185,139 1,049,101 912,617
(Increase) decrease in operating assets:
Accounts receivable (752,497) (3,227,323) (4,710,139)
Inventory (3,448,669) (8,185,030) (3,619,990)
Prepaid expenses and other current assets (1,490,964) 660,378 (384,478)
Deposits and other assets (321,986) (69,964) (367,218)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (5,278,912) 5,116,712 2,813,414
------------ ------------ ------------
Net cash provided by (used for) operating activities 4,638,180 5,310,517 (5,882,737)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (11,042,935) (6,376,122) (1,549,946)
Purchase of LiquiSource net assets (4,163,798) -- --
Purchase of RxBazaar note receivable -- (2,250,000) --
Proceeds from sale of subsidiaries -- -- 4,800,000
Proceeds from sale of investment in RxBazaar securities -- 950,000
------------ ------------ ------------
Net cash provided by (used for) investing activities (15,206,733) (8,626,122) 4,200,054
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from stock warrants and options 928,399 284,451 400
Net proceeds from private stock placements 28,953,335 -- 10,207,507
Redemption of preferred stock -- -- (2,193,419)
Net proceeds from debt obligations 11,589,422 5,246,745 1,645,000
Payment of debt obligations (12,226,146) (1,143,974) (1,235,966)
Net change in line of credit -- -- (5,959,405)
Preferred stock dividends paid (412,336) (425,756) --
------------ ------------ ------------
Net cash provided by financing activities 28,832,674 3,961,466 2,464,117
------------ ------------ ------------
Net change in cash and cash equivalents 18,264,121 645,861 781,434
Cash and cash equivalents at beginning of year 1,801,127 1,155,266 373,832
------------ ------------ ------------
Cash and cash equivalents at end of year $ 20,065,248 $ 1,801,127 $ 1,155,266
============ ============ ============
Supplemental cash flow information:
Interest paid $ 456,970 $ 414,988 $ 850,478
Income taxes paid 770,500 137,976 --
Conversion of debt and accrued interest into common stock 2,149,953 -- 115,000
Conversion of debt into preferred stock -- -- 775,000
Preferred stock issued for investment securities -- -- 4,720,000
Conversion of put liability to notes payable -- -- 750,000
Additional cash flow information is included in Notes 2 and 6.
See accompanying notes to financial statements.
29
ABLE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The financial statements include the accounts of Able Laboratories,
Inc. ("Able"), which is engaged in the development, manufacture and sale of
generic pharmaceuticals. On February 23, 2001, we completed the sale of our
former subsidiary, Superior Pharmaceutical Company to RxBazaar, Inc. (see Note
2). On May 18, 2001, we merged our wholly-owned subsidiary, Able Laboratories,
Inc., into our parent company, DynaGen, Inc. and changed DynaGen's name to Able
Laboratories, Inc. In 2001, all significant inter-company balances and
transactions were eliminated in consolidation.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and reported amounts of revenues and expenses during the reporting
period. Material estimates, that are particularly susceptible to significant
change in the near term, relate to the carrying values of receivables, including
allowances for chargebacks, rebates and returns, inventory, investment in
RxBazaar securities and note receivable and the valuation of deferred income tax
assets. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents include interest-bearing deposits with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
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. They 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 arrangements and, to a lesser extent, historical chargeback
experience. We continually monitor the wholesaler inventory levels and the
corresponding reserves 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.
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.
30
INVENTORY
Inventory is valued at the lower of average cost or market on a
first-in first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation expense is
provided over the estimated useful lives of the assets using the straight-line
method. Leasehold improvements are amortized on the straight-line method over
the shorter of the estimated useful life of the asset or the life of the related
lease term.
DEBT FINANCING COSTS
Debt financing costs are being amortized on a straight-line basis over
the term of the debt. The related amortization expense for 2003, 2002 and 2001
was $11,136, $14,400 and $220,178, respectively.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
We continually evaluate whether events and circumstances have occurred
that indicate that the remaining estimated useful life of long-lived assets may
require revision or that the remaining net book value may not be recoverable.
When factors indicate that an asset may be impaired, we use various methods to
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized based on the excess of the carrying amount over the estimated fair
value of the asset. Any impairment amount is charged to operations.
Goodwill is evaluated using a two-step impairment process, which we
perform annually, as well as when an event triggering impairment may have
occurred. The first step tests for impairment while the second step, if
necessary, measures the impairment. We have elected to perform the required
annual impairment test of our goodwill on the first day of our fiscal fourth
quarter.
REVENUE RECOGNITION
Revenues from product sales are principally recognized when products
are shipped and in certain cases revenues are recognized when shipments are
received by customers. Revenues from sales may be subject to agreements allowing
chargebacks, rebates, rights of return and other allowances. We provide
allowances for potential uncollectible accounts, chargebacks, rebates, returns
and other allowances. Allowances for chargebacks, rebates, returns and other
allowances are established concurrently with the recognition of revenue.
Shipping and handling fees billed to customers are recognized in net
sales. Shipping and handling costs we incur are included in cost of sales.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred. Advertising
expense for 2003, 2002 and 2001 was $1,390,889, $113,603 and $424,889,
respectively.
31
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.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" encourages all entities to adopt a
fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under our
stock option plans generally have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them. We do not plan
to adopt the fair value accounting model for stock-based employee compensation
under SFAS No. 123.
At December 31, 2003, we had two stock-based compensation plans and
stock options issued outside of the plans, which are described more fully in
Note 10. We apply APB Opinion No. 25 and related Interpretations in accounting
for stock options issued to employees and directors. Had compensation cost for
stock options issued to employees and directors been determined based on the
fair value at the grant dates consistent with SFAS No. 123, our net income
(loss) and net income (loss) per share would have been adjusted to the pro forma
amounts indicated below:
Years Ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) as reported $ 8,487,548 $ 23,445,940 $ (4,472,907)
Add stock-based compensation under APB No. 25 69,522 37,300 269,403
Deduct stock-based compensation under SFAS No. 123 (957,330) (366,910) (1,500,868)
------------ ------------ ------------
Pro forma net income (loss) 7,599,740 23,116,330 (5,704,372)
Less returns to preferred stockholders 274,559 481,143 9,060,024
------------ ------------ ------------
Pro forma net income (loss) applicable to common
stockholders $ 7,325,181 $ 22,635,187 $(14,764,396)
============ ============ ============
Net income (loss) per share:
Basic - as reported $ 0.56 $ 1.98 $ (1.57)
============ ============ ============
Basic - Pro forma $ 0.50 $ 1.95 $ (1.71)
============ ============ ============
Diluted - as reported $ 0.46 $ 1.44 $ (1.57)
============ ============ ============
Diluted - Pro forma $ 0.41 $ 1.42 $ (1.71)
============ ============ ============
EARNINGS PER SHARE
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income applicable to common stockholders
that would result from the assumed issuance.
For 2001, options, warrants and convertible securities were
anti-dilutive and excluded from the diluted earnings per share computations.
32
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain statements,
however, require entities to report specific changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale securities, as a
separate component of the equity section of the balance sheet. Such items, along
with net income, are components of comprehensive income. There were no other
items of comprehensive income during 2003, 2002 and 2001.
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.
2. BUSINESS ACQUISITION AND DISPOSITION
ACQUISITION OF LIQUISOURCE, INC.
On November 17, 2003, we acquired substantially all the net assets of
LiquiSource, Inc. for cash of $4,163,798. LiquiSource was a privately held
developer and manufacturer of prescription generic liquid pharmaceuticals. The
acquisition has been accounted for as a purchase and the results of operations
of LiquiSource have been included in our financial statements since the date of
acquisition. We acquired inventory of $250,000, property and equipment of
$68,565 and other assets totaling $30,000, net of accounts payable and accrued
expenses of $88,861. We recorded goodwill of $3,904,094 for the excess of the
purchase price over the net assets acquired, which includes acquisition costs of
$45,209. Goodwill will not be amortized but will be tested at least annually for
impairment. For income tax purposes, we expect the full amount of the goodwill
to be deductible over its fifteen-year amortization period.
Unaudited pro forma operating results, assuming the acquisition of
LiquiSource had been made as of the beginning of 2002, are as follows:
Unaudited
------------------------------
Year Ended December 31,
------------------------------
2003 2002
------------ ------------
Sales, net $ 79,488,499 $ 53,541,999
============ ============
Net income applicable to common stockholders $ 8,659,385 $ 23,004,518
============ ============
Net income per share:
Basic $ 0.59 $ 1.99
============ ============
Diluted $ 0.49 $ 1.44
============ ============
33
SUPERIOR PHARMACEUTICAL COMPANY
On June 18, 1997, we acquired Superior Pharmaceutical Company
("Superior"). The acquisition was accounted for as a purchase and we allocated a
portion of the purchase price to customer lists, which was being amortized on a
straight-line basis over five years. Amortization of customer lists amounted to
$128,218 for 2001.
On October 20, 2000, we entered into an agreement to sell Superior to
RxBazaar, Inc. ("RxBazaar"). RxBazaar was founded in October 1999 by two of our
directors and others. As of December 31, 2000, we owned 1,700,000 shares of
RxBazaar's common stock which we received for services. In addition, RxBazaar
issued us a five year warrant to purchase 1,200,000 shares of common stock at
$2.50 per share in September 2000 for services. We did not record any income on
receipt of these securities.
On February 23, 2001, we sold Superior to RxBazaar for a cash payment
of $4,000,000 and the assumption by RxBazaar of our existing 13.5% senior
subordinated debt in the amount of $2,248,875. We remained liable for the debt
as a guarantor and we issued contingent stock purchase warrants to the debt
holders. The warrants would have allowed the debt holders to purchase 166,667
shares of our common stock at $.15 per share if the debt was still outstanding
on June 17, 2002. In connection with the sale of Superior, we sold accounts
receivable of $3,572,730, inventory of $4,790,316, property and equipment of
$191,715 and miscellaneous assets totaling $391,387 net of accounts payable and
accrued expenses of $4,596,654. We deferred the gain of $1,296,597 on the sale
due to our continuing ownership interest in RxBazaar and our guarantee of the
debt.
In February and March 2001, we received $4,700,000 of RxBazaar Series A
Preferred stock plus accrued dividends of $20,000 in exchange for our Series O
Preferred Stock (see Note 10). RxBazaar redeemed $l,000,000 of this Series A
Preferred Stock for $950,000 in February 2001. As of December 31, 2001, we owned
1,700,000 shares or approximately 7% of RxBazaar's common stock and $3,700,000
of RxBazaar's Series A Preferred Stock. As of December 31, 2001, we recorded a
loss of $2,680,000 on our investment in RxBazaar as a result of our impairment
analysis.
On June 14, 2002, we purchased the senior subordinated debt of RxBazaar
for $2,250,000 and the contingent stock purchase warrants were cancelled. In
addition, we applied $1,040,000 of the deferred gain against the carrying value
of our investment in RxBazaar securities and the $256,597 balance of the
deferred gain was applied to the carrying value of the $2,250,000 notes
receivable from RxBazaar. The notes mature on June 17, 2004, bear interest at
13.5% payable monthly, are secured by a second lien on substantially all assets
of RxBazaar and are subject to an inter-creditor agreement with RxBazaar's
asset-based lender. We have the right to convert the notes into common stock of
RxBazaar at the current market value of RxBazaar's common stock. Interest income
on the notes for 2003 and 2002 was $303,750 and $166,219, respectively. RxBazaar
is current with its interest payments on this obligation but is in default of
certain loan covenants. Due to RxBazaar's financial condition at December 31,
2002, management increased its reserve for the notes receivable to cover the
full carrying value of the notes, resulting in a $1,993,403 charge to income.
On July 26, 2002, RxBazaar completed a merger with a "public shell"
company, that is, a company that did not conduct operations but which had
completed a public offering under the Securities Act. As a result of RxBazaar's
merger and related reverse stock split, the 1,700,000 shares of RxBazaar common
stock held by us were converted into 238,000 shares of RxBazaar common stock and
our investment in RxBazaar Series A Preferred stock is now convertible into
345,333 shares of RxBazaar common stock. Our warrant to purchase 1,200,000
shares was converted into the right to purchase 168,000 shares at $17.86 per
share.
In addition, in September 2002, we received 239,841 shares of RxBazaar
common stock in payment of $479,682 in accrued dividends on the Series A
Preferred stock. We are entitled to receive additional shares of common stock if
we receive less than $479,682 in proceeds on the sale of the 239,841 dividend
shares. After we receive $479,682 in proceeds from the sale of dividend shares,
any unsold dividend shares will be returned to RxBazaar. We have waived our
rights to future dividends on the Series A Preferred stock in exchange for
RxBazaar agreeing to register the dividend shares, the common stock held by us
and the common stock issuable on conversion of the Series A Preferred. The
RxBazaar registration statement was declared effective on September 30, 2002. We
did not record any income on receipt of the dividend shares due to the
uncertainty of our ability to realize any benefit from these shares as there is
currently no active trading market for RxBazaar's common stock.
34
We have agreed that we will not convert any securities into shares of
RxBazaar common stock, if, immediately after such conversion, we would own more
than 4.9% of the issued and outstanding common stock of RxBazaar.
A summary of Superior's historical condensed results of operations
included in the accompanying consolidated financial statements for the period
ended February 23, 2001 is as follows:
Sales, net $ 3,067,567
Cost of sales 2,812,726
------------
Gross profit 254,841
Selling, general and administrative expense 581,292
------------
Operating loss (326,451)
Miscellaneous income 120
------------
Net loss $ (326,331)
============
Net loss per share - basic $ (0.04)
============
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31,
-----------------------------
2003 2002
------------ ------------
Accounts receivable $ 32,633,606 $ 20,927,772
Allowances for returns and price adjustments (24,003,684) (12,412,541)
Allowance for doubtful accounts (3,899) (641,705)
------------ ------------
Accounts receivable, net $ 8,626,023 $ 7,873,526
============ ============
A summary of the activity in accounts receivable allowances is as
follows:
Returns and
Price Doubtful Total
Adjustments Accounts Allowances
------------ ------------ ------------
Balance at December 31, 2000 $ -- $ 485,068 $ 485,068
Additions charged to net sales 19,806,388 -- 19,806,388
Additions charged to operating expenses -- 192,953 192,953
Deductions allowed to customers (11,840,151) -- (11,840,151)
Writeoff of uncollectible accounts -- (527,436) (527,436)
------------ ------------ ------------
Balance at December 31, 2001 7,966,237 150,585 8,116,822
Additions charged to net sales 56,097,504 -- 56,097,504
Additions charged to operating expenses -- 491,120 491,120
Deductions allowed to customers (51,651,200) -- (51,651,200)
Writeoff of uncollectible accounts -- -- --
------------ ------------ ------------
Balance at December 31, 2002 12,412,541 641,705 13,054,246
Additions charged to net sales 95,914,875 -- 95,914,875
Additions charged (recoveries credited) to
operating expenses -- (89,805) (89,805)
Deductions allowed to customers (84,323,732) -- (84,323,732)
Writeoff of uncollectible accounts -- (548,001) (548,001)
------------ ------------ ------------
Balance at December 31, 2003 $ 24,003,684 $ 3,899 $ 24,007,583
============ ============ ============
35
4. INVENTORY
Inventory consists of the following:
December 31,
----------------------------
2003 2002
------------ ------------
Raw materials $ 9,247,553 $ 8,623,114
Work-in-progress 2,153,363 1,549,239
Finished goods 5,201,692 2,731,586
------------ ------------
$ 16,602,608 $ 12,903,939
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
----------------------------- Estimated
2003 2002 Useful Lives
------------ ------------ ------------
Machinery and equipment $ 10,671,907 $ 6,962,823 3-10 years
Furniture, fixtures and computers 1,678,832 869,227 1-7 years
Building and leasehold improvements 9,107,877 4,190,768 1-10 years
Land 561,000 --
Construction in process 1,535,981 421,279
------------ ------------
23,555,597 12,444,097
Less accumulated depreciation and amortization (4,601,853) (2,511,574)
------------ ------------
$ 18,953,744 $ 9,932,523
============ ============
Depreciation and amortization expense for 2003, 2002 and 2001 was
$2,090,279, $939,110 and $564,221, respectively.
6. DEBT
Debt consists of the following:
December 31,
----------------------------
2003 2002
------------ ------------
Equipment loans and revolving credit agreement $ 3,000,000 $ 2,890,078
NJEDA bonds 1,030,000 1,790,000
Unsecured notes payable, net of discount 144,038 2,020,277
------------ ------------
Total 4,174,038 6,700,355
Less current portion 239,038 617,012
------------ ------------
Long-term debt $ 3,935,000 $ 6,083,343
============ ============
BRIDGE LOANS
In July 2001, we issued $775,000 in 8% convertible subordinated secured
notes to several investors as part of a bridge financing. A director, who is
Able's president, and the former Chairman of the Board of Directors, each
advanced $250,000 to us in this transaction. In August 2001, the notes were
converted into Series Q Preferred Stock (see Note 10).
36
EQUIPMENT LOANS AND REVOLVING CREDIT AGREEMENT
On February 16, 2001, we borrowed $770,000 in an equipment financing
transaction. The borrowed amount was payable over a five-year term at an
interest rate of 15%. Interest expense for 2002 and 2001 was $76,216 and
$86,625, respectively. In October 2002, we repaid the loan.
In October 2002, we entered into a $4,000,000 equipment loan agreement
with a commercial bank. On February 24, 2003, we entered into a new $4,000,000
revolving credit agreement and increased the equipment loan to $5,800,000 by
amending the existing loan agreement. In early April 2003, we increased the
amount available under our revolving credit agreement from $4,000,000 to
$5,900,000. In addition, later in April, we increased the amount available under
our revolving credit agreement from $5,900,000 to $10,000,000 (see Note 9) and
increased the amount available under our equipment loan from $5,800,000 to
$10,000,000.
The equipment loan and revolver are secured by substantially all of our
assets including accounts receivable, inventory, furniture, fixtures, equipment
and intellectual property. The loans are subject to certain financial covenants,
including a fixed charge coverage ratio, a leverage ratio and a current ratio.
We were in compliance with these covenants at December 31, 2003. In July 2003,
we repaid the equipment loan in full. The revolver currently bears interest at
2.64% at December 31, 2003 (LIBOR plus 1.5% based upon our current leverage
ratio), requires no monthly principal payments and matures in June 2005.
Interest expense for 2003 and 2002 was $211,930 and $23,803, respectively.
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.
The revolver is secured by substantially all of our assets including
accounts receivable, inventory, furniture, fixtures, equipment and intellectual
property. The loans are subject to certain financial covenants, including a
fixed charge coverage ratio, a leverage ratio and a current ratio.
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 (see note 9).
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY BONDS
On June 23, 1999, we completed an Industrial Development Revenue Bond
offering issued by the New Jersey Economic Development Authority. The bonds
consist of series 1999A $1,700,000, 8% non-taxable and series 1999B $300,000,
8.25% taxable. Series 1999A bonds will mature in 15 years and series 1999B bonds
will mature in 4 years. Interest expense for 2003, 2002 and 2001 was $105,594,
$147,121 and $163,691, respectively. The total cost of the bond issue was
$216,140 and the net proceeds were used for the acquisition, installation and
commissioning of equipment and machinery. The bond cost is being amortized over
15 years. Amortization expense for 2003, 2002 and 2001 was $11,136, $14,400 and
$14,400, respectively. In May 2003, we repurchased $670,000 of outstanding bonds
for $656,600 upon completion of a tender offer. We recorded a loss on early
retirement of debt of $51,962 after the write-off of $65,362 of deferred debt
financing costs. At December 31, 2003, maturities of the bonds are as follows:
$95,000 in 2004, $105,000 in 2005, $115,000 in 2006, $125,000 in 2007, $135,000
in 2008 and $455,000 thereafter. The Series 1999A bonds are subject to
redemption at our option at 102% on June 1, 2004, at 101% on June 1, 2005, and
thereafter at 100%.
In connection with these bonds, we entered into various agreements with
the New Jersey Economic Development Authority and the bondholders, including an
escrow agreement pursuant to which we have deposited amounts intended to cover
our obligations under the bond indenture. These amounts are included in other
assets.
37
WORKING CAPITAL LOAN
We had a revolving loan agreement with a bank based upon eligible
accounts receivable and inventory. This loan was paid off on February 23, 2001
in connection with of the sale of Superior (see Note 2). Interest expense for
2001 was $136,926, amortization of deferred expenses was $42,439 and early
termination fees were $120,000.
SENIOR SUBORDINATED DEBT AND WARRANT PUT LIABILITY
In June 1997, we obtained senior subordinated debt financing of
$3,000,000 bearing interest at 13.5% payable monthly. The principal was payable
upon maturity at the end of five years. In 1999, we converted $750,000 of this
debt into 10,000 shares of Series L Preferred Stock. We also issued warrants to
purchase 2,667 shares of common stock at $1.50 per share exercisable for five
years to the investors. These warrants were subject to put features that allowed
the holders to sell two-thirds of the warrants to us after three years for
$667,000 and all of the warrants after five years for $1,500,000. We were
accruing the put value of the warrants to their redemption amounts over their
respective terms. In connection with the sale of Superior on February 23, 2001,
the senior subordinated debt was assumed by RxBazaar, and we settled the warrant
put liability obligation by paying $300,000 and issuing $750,000 of 13.5% notes
payable maturing February 2002. Interest expense on the debt and the put notes
for 2002 and 2001 was $6,079 and $112,034, respectively.
UNSECURED NOTES PAYABLE
In June 2002, we borrowed $2,300,000 from existing institutional and
accredited investors, including certain officers of Able and RxBazaar, all of
whom are related parties. The unsecured notes mature on June 14, 2004 and bear
interest at 12% payable monthly. We also issued immediately exercisable
three-year warrants to purchase 170,200 shares of common stock at $5.10 per
share to the investors. Proceeds of $375,314 were allocated to the warrants
based on their estimated fair value and credited to additional paid-in capital.
This amount was reflected as a discount against the notes payable and is being
amortized, as a component of interest expense, over the life of the notes.
Proceeds of this financing were used to purchase the 13.5% senior subordinated
notes receivable from RxBazaar. In June 2003, we converted $2,150,000 of notes
into 126,097 shares of common stock at $17.05 per share, the fair value of the
stock on the transaction date, and repaid $47 of notes in cash. We also wrote
off $190,037 of unamortized discount on the notes as a loss on early retirement
of debt. Interest expense for 2003 and 2002 was $128,870 and $150,267,
respectively. Discount amortization for 2003 and 2002 was $83,724 and $95,591,
respectively.
7. INCOME TAXES
There was no provision or benefit for income taxes for 2001, due to our
net operating losses and a valuation reserve on the deferred income tax asset.
In 2002, we recorded an income tax benefit due to our assessment that it is more
likely than not that deferred tax assets (resulting primarily from net operating
losses) would be realized in the future. Allocation of federal and state income
taxes between current and deferred portions is as follows:
Years Ended December 31,
----------------------------
2003 2002
------------ ------------
Current tax provision:
Federal $ 142,000 $ --
State 630,000 750,000
------------ ------------
Total current 772,000 750,000
------------ ------------
Deferred tax provision (benefit):
Federal 4,333,000 (15,850,000)
State 307,000 (30,000)
------------ ------------
Total deferred 4,640,000 (15,880,000)
------------ ------------
Total provision (benefit) $ 5,412,000 $(15,130,000)
============ ============
38
The reasons for the differences between the statutory federal income
tax rate and the effective tax rates are summarized as follows:
Years Ended December 31,
-----------------------------------
2003 2002 2001
-------- -------- --------
Statutory rate 34.0% 34.0% (34.0)%
Increase (decrease) resulting from:
Change in valuation reserve -- (202.0) 34.0
State taxes, net of federal tax benefit 4.4 6.0 --
Rate differential and other, net 0.5 (19.9) --
-------- -------- --------
Effective tax rates 38.9% (181.9)% 0.0%
======== ======== ========
The components of the net deferred tax asset are as follows:
December 31,
-----------------------------
2003 2002
------------ ------------
Deferred tax asset:
Federal $ 19,451,000 $ 22,630,000
State 1,784,000 1,930,000
------------ ------------
21,235,000 24,560,000
Valuation reserve (6,766,000) (6,920,000)
------------ ------------
Net deferred tax asset $ 14,469,000 $ 17,640,000
============ ============
The current portion of the deferred tax asset includes the benefit for
the utilization of a portion of the net operating loss carryforwards and other
current temporary differences. The valuation reserve is allocated between the
current and non-current classifications pro-rata based upon when the underlying
temporary differences are expected to reverse.
The following differences give rise to deferred income taxes:
December 31,
-----------------------------
2003 2002
------------ ------------
Net operating loss carryforward $ 16,205,000 $ 18,425,000
Capital loss carryforward 3,040,000 3,190,000
Research and investment tax credit carryforward 580,000 635,000
Other, net 1,410,000 2,310,000
------------ ------------
21,235,000 24,560,000
Valuation reserve (6,766,000) (6,920,000)
------------ ------------
Net deferred tax asset $ 14,469,000 $ 17,640,000
============ ============
There was no significant change to the valuation reserve in 2003.
39
As of December 31, 2003, we have the following tax carryforwards:
Net Operating Losses Federal
-------------------- Tax
Federal State Credits
-------- -------- --------
(In thousands)
December 31, 2004 $ -- $ -- $ 31
December 31, 2005 -- 67 20
December 31, 2006 -- 2,981 100
December 31, 2007 -- 2,689 170
December 31, 2008 -- 3,403 138
December 31, 2009 2,413 3,118 121
December 31, 2010 5,162 3,462 --
December 31, 2011 4,446 -- --
December 31, 2017 10,783 -- --
December 31, 2018 5,862 -- --
December 31, 2019 6,349 -- --
December 31, 2020 7,534 -- --
December 31, 2021 2,630 -- --
-------- -------- --------
Total $ 45,179 $ 15,720 $ 580
======== ======== ========
In addition, we have alternative minimum tax credit carryforwards of
approximately $142,000 at December 31, 2003.
Use of net operating loss and tax credit carryforwards may be subject,
in future periods, to annual limitations based on ownership changes in our
common stock as defined by the Internal Revenue Code. The capital loss
carryforward of approximately $7,920,000 expires on December 31, 2006. We
determined that the future utilization of the state net operating loss, the
capital loss carryforwards and the tax credits is less than "more likely than
not" and therefore a substantial portion of the valuation reserve has been
allocated to these items.
8. RELATED PARTY TRANSACTIONS
Subsequent to the sale of Superior to RxBazaar (see Note 2), we
continued to sell products to RxBazaar. Net sales to RxBazaar were approximately
$6,658,000, or 34% of net sales, for 2001. Net sales to RxBazaar were
approximately $506,000, or 1% of net sales, for 2002. Net sales to RxBazaar were
approximately $679,000, or 1% of net sales, for 2003.
9. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
We lease offices and warehouse facilities under operating leases
expiring in various years through September 16, 2015 that require us to pay
certain costs such as maintenance and insurance. The following is a schedule of
future minimum lease payments for all operating leases (with initial or
remaining terms in excess of one year) as of December 31, 2003:
Years Ending December 31, Amount
------------------------- -------------
2004 $ 1,270,915
2005 1,451,028
2006 1,287,632
2007 1,287,632
2008 1,287,632
Thereafter 8,638,600
------------
Total minimum future lease payments $ 15,223,439
============
40
Rent expense, net of subleases for 2003, 2002 and 2001, was $812,320,
$572,631 and $417,707, respectively.
LETTER OF CREDIT
During September 2003, our bank issued a letter of credit for
$1,287,632 as a security deposit under a new lease agreement. The letter of
credit will expire in September 2004, at which time we have the option to post a
new letter of credit or provide a cash deposit. The amount available under our
revolving credit agreement (see Note 6) is reduced by the full amount of the
letter of credit.
EMPLOYMENT AGREEMENTS
As of December 31, 2003, we have employment agreements with certain of
our officers that provide for minimum annual salaries, reimbursement of business
related expenses and participation in other employee benefit programs. The
agreements also include confidentiality, non-disclosure, severance, automatic
renewal and non-competition provisions. Salary levels are subject to periodic
review by the Compensation Committee.
CONTINGENCIES
Legal claims arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on our
financial position or results of operations.
10. PREFERRED STOCK, COMMON STOCK, OPTIONS AND WARRANTS
PREFERRED STOCK
The Series B had a stated dividend of $7.00 per share per annum. The
Series B was converted into common stock at discounted percentages of the
effective price decreasing from 80% to 75% over time. During 2001, the balance
of 400 shares was converted into 15,486 shares of common stock.
In March 1998, we issued 10,500 shares of Series E and 1,500 shares of
Series F in connection with our acquisition of Generic Distributors, Inc. The
Series E and F were convertible into common stock at the market price on the
date of conversion. On March 14, 2001, pursuant to a settlement agreement, we
agreed to issue 207,333 shares of common stock and pay $105,000 in cash in
settlement of the Series E and Series F.
In 1998, we sold 19,000 shares of Series H for $1,900,000. The Series H
was convertible after twelve months into common stock at 67% of the average
closing bid price for the preceding five days. During 2001, the balance of 650
shares was converted into 23,347 shares of common stock.
In 1999, we received $2,000,000 from the issuance of 20,000 shares of
Series K. The Series K was convertible into common stock at 80% of the average
price for the three days preceding conversion. The conversion price decreased to
75% and then to 70% over time. During 2001, the balance of 6,500 shares was
converted into 349,360 shares of common stock.
In November 1999, we issued 10,000 shares of Series L in exchange for
the cancellation of $750,000 of senior subordinated debt. The Series L was
convertible into common stock at the average of the closing bid price for the
three trading days prior to conversion and accrued dividends at the rate of
13.5% per annum. In January 2002, the balance of Series L was converted into
96,556 shares of common stock.
During July 2000, we issued 25,600 shares of Series M for gross
proceeds of $2,560,000. The Series M carried a dividend of 4% and was
convertible into common stock at 80% of the average of the three lowest prices
per share during the five trading days prior to conversion. During 2001, the
balance of 12,850 shares was converted into 562,357 shares of common stock.
On November 2, 2000, we issued 13,000 shares of Series N for gross
proceeds of $1,300,000. The Series N did not carry a dividend and was
convertible into common stock at 80% of the five day average price per share
preceding the conversion if the conversion occurred between sixty-one days and
one hundred and twenty-one days
41
after the issue date. This conversion price decreased to 75% if conversion
occurred after one hundred and twenty-one days. During 2001, 12,950 shares of
Series N were converted into 425,328 shares of common stock. In December 2001,
we redeemed 50 shares of Series N for $6,666.
On February 15, 2001, we entered into an agreement with equity
investors of RxBazaar. The agreement gave the RxBazaar investors the right to
exchange shares of RxBazaar's Series A Preferred Stock for shares of our Series
O. On February 22, 2001, an investor converted $1,000,000 of Series A Preferred
Stock into $1,000,000 of Series O. In March 2001, the investors exchanged the
remaining $3,700,000 of Series A Preferred Stock plus accrued dividends for
$3,720,000 of Series O.
The Series O carried an 8% dividend and was convertible to common stock
at the lesser of $5.25 per share or 75% of the average of the three lowest per
share prices in the ten trading days prior to conversion during the first 149
days and 70% on or after 150 days. In June 2001, we received an additional
$250,000 from the sale of 2,500 shares of Series O. During 2001, 34,122 shares
of Series O were converted into 1,407,372 shares of common stock. In December
2001, we redeemed 15,578 shares of Series O for $2,081,752.
In May and June 2001, we received $350,000 from the sale of 3,500
shares of Series P. The Series P was convertible after six months at 80% of the
average of the three-day closing bid price prior to conversion. The Series P did
not carry any dividend. During 2001, the 3,500 shares were converted into 93,333
shares of common stock and we registered these shares on February 14, 2002.
In August 2001, we sold 61,150 shares of Series Q for $6,115,000 in
cash and conversion of outstanding debt. Net proceeds were $5,702,220 after
placement costs of $412,780. We also issued a five year warrant to purchase
13,333 shares of common stock at $3.75 per share to the placement agent. We
valued these warrants at $34,000. The Series Q carries an 8% dividend and is
convertible into common stock at approximately 58.70 shares of common stock for
each share of Series Q. During 2002, 8,000 shares of Series Q were converted
into 469,608 shares of common stock. During 2003, 36,125 shares of Series Q were
converted into 2,120,579 shares of common stock. The outstanding 17,025 shares
of Series Q are convertible into approximately 999,388 shares of common stock.
We registered the shares of common stock issuable on conversion of the Series Q
in July 2002. On or after the fifth anniversary date, provided that no floating
rate convertibles are outstanding, we have the option of converting all
outstanding shares of Series Q into the applicable number of common stock.
Certain series of preferred stock had conversion features that were in
the money at the date of issue ("beneficial conversion feature"). The beneficial
conversion features were recognized in the financial statements by allocating a
portion of the proceeds equal to the intrinsic value of the conversion feature
to additional paid-in capital. The intrinsic value was calculated at the date of
issue of the convertible preferred stock as the difference between the proceeds
received for the convertible preferred stock and the fair value of the common
stock into which the securities are convertible. A summary of the amounts
allocated to the beneficial conversion feature for 2001 is as follows:
Series N $ 216,666
Series O 2,117,720
Series P 87,500
Series Q 6,115,000
-----------
$ 8,536,886
===========
The discount resulting from the allocation of proceeds to the
beneficial conversion feature has been recognized as a return to the preferred
shareholders from the date of issuance through the date the security is first
convertible. The discounts for 2001 were amortized by a charge against
additional paid-in capital because we had no accumulated earnings at those
dates.
COMMON STOCK
On May 29, 2002, our stockholders approved an amendment to our
certificate of incorporation to decrease the number of shares of authorized
common stock from 225,000,000 to 25,000,000 shares in connection with our
1-for-15 reverse stock split.
42
In December 2001, we sold 1,406,333 shares of common stock at $3.60 per
share for gross proceeds of $5,062,800 with commissions and expenses of
$379,513. The market price of the common stock was $4.35 per share, or an
aggregate fair value of approximately $6,118,000, on the closing date. We
registered these shares on February 14, 2002.
In June 2003, we sold 1,600,000 shares of common stock at $19.00 per
share for gross proceeds of $30,400,000. Net proceeds were $28,473,000 after
commissions and expenses. We granted the investors rights to purchase up to an
additional 440,000 shares at $19.00 per share. In August 2003, investors
exercised rights to purchase 27,500 additional shares for net proceeds of
$480,335 after commissions and expenses. The balance of the rights expired on
October 14, 2003.
STOCK OPTION PLANS
We have adopted four stock option plans and reserved shares of common
stock for issuance to employees, officers, directors and consultants. Two of the
plans were terminated during 2001. Under the plans, the Board of Directors may
grant options and establish the terms of the grant in accordance with the
provisions of the plans. Plan options are exercisable for up to ten years from
the date of issuance and certain options contain a net exercise provision. The
following table summarizes the activity of options granted under the plans:
Years Ended December 31,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- -------- -------- -------
Outstanding at beginning of year 53,334 $ 1.88 57,467 $1.95 66,813 $2.10
Granted 75,000 18.27 -- -- -- --
Exercised (6,666) 1.88 (4,133) 2.71 (2,666) 0.15
Canceled (1) 1.88 -- -- (6,680) 3.15
-------- -------- -------
Outstanding at end of year 121,667 11.98 53,334 1.88 57,467 1.95
======== ======== =======
Exercisable at end of year 46,667 1.88 53,334 1.88 57,467 1.95
======== ======== =======
Reserved for future grants at end of year 605,333 80,333 80,333
======== ======== =======
Weighted average fair value of options
granted during the year 8.73 -- --
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during 2003; dividend yield of 0%; risk-free
interest rates of 3%; expected volatility of 59%; and expected lives of 4 years.
Information pertaining to stock options outstanding at December 31,
2003 is as follows:
Outstanding Exercisable
------------------------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ---- ----- ----------- -----
$1.88 46,667 4.2 years $ 1.88 46,667 $ 1.88
$17.53 30,000 9.8 years 17.53 -- --
$18.77 45,000 9.9 years 18.77 -- --
-------- --------
121,667 7.7 years $ 11.98 46,667 $ 1.88
======== ========
CONSULTANT STOCK PLAN
We adopted the Consultant Stock Plan in June 1998 which provides for
stock grants for services rendered to us. We reserved 166,667 shares of common
stock for issuance and registered the shares. During 2001, we issued 12,000
shares of common stock under this Plan and recorded expenses based on the fair
value of the common stock issued. At December 31, 2003, we had 43,567 shares
reserved under this plan.
43
OTHER STOCK OPTIONS AND WARRANTS
In April 2000, we issued options to purchase 33,333 shares of common
stock at $3.75 per share to two new directors. Half of these options vested in
the year 2000 and the balance vested on December 31, 2001. We valued these
options at $140,000 and recognized $70,000 in expense in 2001.
In May 2000, we issued options to purchase 66,667 shares of common
stock at $2.70 per share to two directors. These options vested on December 31,
2001. We valued these options at $170,000 and recognized $85,000 in expense in
2001.
In February 2001, we issued warrants to purchase a total of 10,000
shares of common stock at $2.55 per share for public relations services. We also
issued a warrant to purchase 6,667 shares of common stock at $4.50 per share for
investor relations services. We valued these warrants at $32,149 and expensed
them in 2001.
In February 2001, we granted seven year options to purchase a total of
750,000 shares of common stock at $3.30 per share to our directors. These
options vested during 2001. The weighted average fair value of these options was
$1.05 per share on the date of grant.
In 2001, we granted stock options to purchase 242,000 shares of common
stock at $3.75 per share to forty employees. These options vest over periods of
one to five years. We recognized expense of $114,403 in 2001 related to these
grants. The weighted average fair value of these options was $2.40 per share on
the date of grant.
During 2002, we granted stock options to purchase 336,600 shares to
employees and directors at a weighted average exercise price of $5.31 per share.
The weighted average fair value of these options was $2.86 per share on the date
of grant. We also recorded unearned stock-based compensation of $111,900 for
certain of these options which were granted at below market prices. The unearned
stock-based compensation is being amortized over the vesting periods of the
options.
During 2003, we granted stock options to purchase 238,000 shares to
employees and directors at a weighted average price of $11.15 per share. The
weighted average fair value of these options was $6.80 per share on the grant
date. We also recorded unearned stock-based compensation of $145,000 for certain
of these options which were granted at below market prices. The unearned
stock-based compensation is being amortized over the vesting periods of the
options.
A summary of the activity for other stock option and warrant shares,
including warrants issued in connection with debt and equity placements, is
presented below:
Years Ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
Outstanding at beginning of year 2,200,326 2,737,015 1,874,815
Granted 238,000 506,800 1,022,000
Exercised (372,454) (986,130) (47,333)
Expired/Canceled (20,970) (57,359) (112,467)
---------- ---------- ----------
Outstanding at end of year 2,044,902 2,200,326 2,737,015
========== ========== ==========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants during 2003, 2002 and 2001, respectively; dividend
yield of 0%; risk-free interest rates of 3%, 4% and 5%, respectively; expected
volatility of 77%, 65% and 84%, respectively; and expected lives of 4, 3.96 and
1.25 years, respectively.
44
Information pertaining to other stock options and warrants outstanding
at December 31, 2003 is as follows:
Outstanding Exercisable
------------------------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ---- ----- ----------- -----
$1.88 - $3.30 482,165 4.7 years $ 3.01 482,165 $ 3.01
$3.75 - $8.30 1,294,070 5.2 years 4.32 1,100,018 4.16
$10.20 - $22.50 268,667 8.1 years 11.59 77,767 12.09
---------- ----------
2,044,902 5.5 years $ 4.96 1,659,950 $ 4.20
========== ==========
COMMON STOCK RESERVED
We reserved shares of common stock at December 31, 2003 as follows:
Stock option plans 727,000
Preferred stock conversion 999,388
Other stock options and warrants 2,044,902
Consultant Stock Plan 43,567
----------
Total 3,814,857
==========
11. SEGMENT INFORMATION, MAJOR CUSTOMERS AND MAJOR SUPPLIERS
We operate in one principal business segment, the manufacturing and
sale of generic pharmaceuticals. During 2003, approximately 12% of net sales was
to one major customer. During 2002, approximately 37% of net sales was to one
major customer. During 2001, approximately 34% and 20% of net sales were to two
major customers.
During 2003, we had one major supplier that provided us with
approximately $12,516,000 of raw materials or 30% of cost of sales. During 2002,
we had two major suppliers that provided us with approximately $6,334,000 and
$5,360,000 of raw materials or 23% and 20%, respectively, of cost of sales.
During 2001, we had one major supplier that provided us with $3,286,000 of raw
materials or 26% of cost of sales.
12. EMPLOYEE BENEFIT PLAN
We have a Section 401(k) Profit Sharing Plan (the "401(k) Plan") for
all employees. Employees who have attained the age of 21 may elect to reduce
their current compensation, subject to certain limitations, and have that amount
contributed to the 401(k) Plan. We match up to 25% of employee contributions not
to exceed 6% of employee compensation, subject to certain limitations. Employee
contributions to the 401(k) Plan are fully vested at all times and all company
contributions become vested over a period of five years.
For 2003, 2002 and 2001, we made matching contributions of $63,725,
$52,521 and $44,426, respectively. We did not make any profit-sharing
contributions in 2003, 2002 or 2001.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2003 and 2002, our financial instruments include notes
receivable from and investments in RxBazaar securities (see Note 2) and debt
obligations (see Note 6). The carrying value of the notes receivable approximate
their fair value based on RxBazaar's current financial condition. The carrying
value of our investment securities in RxBazaar approximate their fair value
based on current marketability and financial condition of RxBazaar. The carrying
value of debt obligations approximate fair values based on their maturities and
interest rates.
45
14. QUARTERLY DATA (UNAUDITED)
Years Ended December 31,
---------------------------------------------------------------------------------------------------
2003 2002
----------------------------------------------- -----------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
Sales, net $ 22,752 $ 20,865 $ 18,944 $ 15,000 $ 16,101 $ 15,025 $ 12,500 $ 9,304
Cost of sales 12,073 10,887 9,943 8,452 8,102 7,677 6,568 5,015
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 10,679 9,978 9,001 6,548 7,999 7,348 5,932 4,289
Selling, general and
administrative 3,309 2,699 2,274 2,415 2,650 1,756 1,803 1,545
Research and development 3,741 3,069 2,276 2,126 2,002 2,215 1,708 1,020
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 3,629 4,210 4,451 2,007 3,347 3,377 2,421 1,724
Loss on investment securities -- -- -- -- (1,993) -- -- --
Loss on debt retirement -- -- (242) -- -- -- -- --
Interest and financing expense (55) (68) (220) (201) (149) (175) (114) (80)
Miscellaneous income (expense) 251 97 52 (11) 52 (196) 43 59
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 3,825 4,239 4,041 1,795 1,257 3,006 2,350 1,703
Income tax provision (benefit) 1,394 1,693 1,614 711 (15,130) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income 2,431 2,546 2,427 1,084 16,387 3,006 2,350 1,703
Less returns to preferred
stockholders 43 54 76 102 113 121 120 127
-------- -------- -------- -------- -------- -------- -------- --------
Net income applicable to
common stock $ 2,388 $ 2,492 $ 2,351 $ 982 $ 16,274 $ 2,885 $ 2,230 $ 1,576
======== ======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic $ 0.14 $ 0.16 $ 0.17 $ 0.08 $ 1.37 $ 0.25 $ 0.19 $ 0.14
======== ======== ======== ======== ======== ======== ======== ========
Diluted $ 0.13 $ 0.13 $ 0.14 $ 0.06 $ 0.98 $ 0.19 $ 0.15 $ 0.10
======== ======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding:
Basic 16,537 15,965 13,516 12,763 11,838 11,587 11,524 11,397
======== ======== ======== ======== ======== ======== ======== ========
Diluted 19,301 19,447 17,471 17,144 16,728 15,871 16,097 16,414
======== ======== ======== ======== ======== ======== ======== ========
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item in connection with directors and
officers is hereby incorporated by reference to the information set forth under
the captions "Election of Directors," "Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our definitive proxy statement for
the 2004 annual meeting of stockholders, which we expect to file on or before
April 29, 2004 (the "2004 Annual Meeting Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive
compensation is hereby incorporated by reference to the information set forth
under the caption "Executive Officer Compensation" in the 2004 Annual Meeting
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item with respect to security
ownership is hereby incorporated by reference to the information set forth under
the captions "Security Ownership of Certain Beneficial Owners and Management"
and "Equity Compensation Plans" in the 2004 Annual Meeting Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item with respect to certain
relationships and related transactions is hereby incorporated by reference to
the information set forth under the caption "Certain Relationships and Related
Transactions" in the 2004 Annual Meeting Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND EXPENSES
The information required by this item with respect to principal
accountant fees and expenses is hereby incorporated by reference to the
information set forth under the caption "Principal Accountant Fees and Expenses"
in the 2004 Annual Meeting Proxy Statement.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. See Item 8 for an index to the consolidated financial statements.
2. There are no financial statement schedules included in this report.
3. Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Restated Certificate of Incorporation dated June 11, 1998 (filed
as Exhibit 3a to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, as amended on September 14, 1998, and
incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May
31, 2000 (filed as Exhibit 3.2 to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000, and incorporated
herein by reference).
3.3 Amended and Restated By-laws dated May 26, 2000 (filed as Exhibit
3.3 to our Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2000, and incorporated herein by reference).
3.4 Certificate of Designations, Preferences and Rights of Series Q
Preferred Stock dated August 15, 2001 (filed as Exhibit 4.1 to our
Current Report on Form 8-K, filed with the SEC on August 31, 2001,
and incorporated herein by reference).
3.5 Certificate of Amendment of Certificate of Incorporation dated May
9, 2001 (filed as Exhibit 3.3 to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001, and incorporated
herein by reference).
3.6 Certificate of Ownership and Merger dated May 18, 2001 (filed as
Exhibit 99.1 to our Current Report on Form 8-K, filed with the SEC
on May 24, 2001, and incorporated herein by reference).
3.7 Certificate of Amendment of Certificate of Incorporation dated May
31, 2002 (filed as Exhibit 3.7 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, and incorporated herein
by reference).
4.1 Specimen common stock certificate (filed as Exhibit 4a to our
Registration Statement on Form S-18, SEC File No. 33-31836-B, and
incorporated herein by reference).
4.2 Form of Additional Investment Right dated June 2003 (filed as
Exhibit 4.1 to our Current Report on Form 8-K, filed with the SEC
on June 30, 2003, and incorporated herein by reference).
10.1 *Employment Agreement dated May 29, 2002 with Dhananjay G. Wadekar
(filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, and incorporated herein by
reference).
10.2 *Employment Agreement dated November 18, 2003 with Raju Vegesna.
10.3 *Amended and Restated Employment Agreement dated March 1, 2004
with Nitin Kotak.
48
10.4 *Amended and Restated Employment Agreement dated March 1, 2004
with Robert Weinstein.
10.5 *Amended and Restated Employment Agreement dated March 1, 2004
with Shailesh Daftari.
10.6 *Amended and Restated Employment Agreement dated March 1, 2004
with Shashikant Shah.
10.7 *Amended and Restated Employment Agreement dated March 1, 2004
with Hemanshu N. Pandya.
10.8 *Amended and Restated Employment Agreement dated March 1, 2004
with Konstantin Ostaficiuk.
10.9 *Amended and Restated Employment Agreement dated March 1, 2004
with Kamlesh Haribhakti.
10.10 *Amended and Restated Employment Agreement dated March 1, 2004
with Iva Klemick.
10.11 *Amended and Restated Employment Agreement dated March 1, 2004
with Howard Schneider.
10.12 *1998 Stock Option Plan (filed as Appendix A to our proxy
statement, filed with the SEC on January 30, 1998, and
incorporated herein by reference).
10.13 *1998 Consultant Stock Plan (filed as Exhibit 4.3 to our
Registration Statement on Form S-8, SEC File No. 33-57249, and
incorporated herein by reference).
10.14 *2003 Stock Incentive Plan (filed as Appendix A to our proxy
statement, filed with the SEC on April 28, 2003, and incorporated
herein by reference).
10.15 *Stock Option issued to Harry Silverman dated April 20, 2000
(filed as Exhibit 10.39 to our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2000, and incorporated herein
by reference).
10.16 *Stock Option issued to Harry Silverman dated May 31, 2000 (filed
as Exhibit 10.40 to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000, and incorporated herein by
reference).
10.17 *Stock Option issued to Dhananjay G. Wadekar dated October 13,
2000 (filed as Exhibit 10.1 to our Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2000, and incorporated herein
by reference).
10.18 *Stock Option issued to F. Howard Schneider dated February 24,
2001 (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, and incorporated herein by
reference).
10.19 *Stock Option issued to Harry Silverman dated February 24, 2001
(filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, and incorporated herein by
reference).
10.20 *Stock Option issued to Dhananjay Wadekar dated February 24, 2001
(filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, and incorporated herein by
reference).
10.21 *Stock Option issued to Dhananjay G. Wadekar dated August 24, 2002
(filed as Exhibit 10.16 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, and incorporated herein by
reference).
49
10.22 *Stock Option issued to Harry Silverman dated August 24, 2002
(filed as Exhibit 10.18 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.23 *Stock Option issued to F. Howard Schneider dated August 24, 2002
(filed as Exhibit 10.19 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.24 *Stock Option issued to Jerry Treppel dated October 28, 2002
(filed as Exhibit 10.20 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.25 *Stock Option issued to Robert Weinstein dated November 25, 2002
(filed as Exhibit 10.21 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.26 Lease dated September 26, 2001 with Kennedy Montrose, L.L.C. for
3601 Kennedy Road, South Plainfield, New Jersey (filed as Exhibit
10.3 to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, and incorporated herein by reference).
10.27 Lease dated April 25, 2002 with P&R Fasteners, Inc. for 5
Hollywood Court, South Plainfield, New Jersey (filed as Exhibit
10.7 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference).
10.28 Lease dated July 17, 2002 with Jay F. Antenen, Jr., Jay F.
Antenen, Sr., and Donald M. Houpt, III for 11590 Century
Boulevard, Cincinnati, Ohio (filed as Exhibit 10.5 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
and incorporated herein by reference).
10.29 Lease dated July 24, 2002 with Kennedy Montrose, L.L.C. for 600
Montrose Avenue, South Plainfield, New Jersey (filed as Exhibit
10.4 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference).
10.30 Lease Agreement with Matrix Cranbury Associates, LLC dated
September 17, 2003 for One Able Drive, Cranbury, New Jersey (filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for our
quarter ended September 30, 2003, and incorporated herein by
reference).
10.31 Lease Agreement for 789 Jersey Avenue, New Brunswick, New Jersey
with HMCJ Realty, L.L.C. dated October 6, 2000.
10.32 Purchase and Sale Agreement for 6 Hollywood Court, South
Plainfield, New Jersey with C.V.N. Associates, L.P. dated
September 2003.
10.33 Asset Purchase Agreement dated November 14, 2003 with LiquiSource,
Inc.
10.34 Stock Purchase Agreement for Series Q Preferred Stock dated August
15, 2001 (filed as Exhibit 4.2 to our Current Report on Form 8-K,
filed with the SEC on August 31, 2001, and incorporated herein by
reference).
10.35 Registration Rights Agreement for Series Q Preferred Stock dated
August 15, 2001 (filed as Exhibit 4.3 to our Current Report on
Form 8-K, filed with the SEC on August 31, 2001, and incorporated
herein by reference).
10.36 Securities Purchase Agreement with the purchasers listed on the
signatory page dated June 30, 2003 (filed as Exhibit 10.1 to our
Current Report on Form 8-K, filed with the SEC on June 30, 2003,
and incorporated herein by reference).
50
10.37 Loan Agreement with New Jersey Economic Development Authority
dated June 1, 1999 (filed as Exhibit 10.8 to our Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
10.38 $2,000,000 Promissory Note dated June 1, 1999 issued to New Jersey
Economic Development Authority (filed as Exhibit 10.9 to our
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999, and incorporated herein by reference).
10.39 Leasehold Mortgage Security Agreement, Assignment of Rents and
Financing Statement dated June 1, 1999 with New Jersey Economic
Development Authority (filed as Exhibit 10.10 to our Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
10.40 Guaranty dated June 1, 1999 in favor of New Jersey Economic
Development Authority (filed as Exhibit 10.11 to our Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
10.41 Credit Agreement with Citizens Bank of Massachusetts dated October
24, 2002 (filed as Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference).
10.42 Non-Restoring Credit Facility Note issued to Citizens Bank of
Massachusetts dated October 24, 2002 (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated herein by reference).
10.43 Master Note issued to Citizens Bank of Massachusetts dated October
24, 2002 (filed as Exhibit 10.3 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference).
10.44 Security Agreement with Citizens Bank of Massachusetts dated
October 24, 2002 (filed as Exhibit 10.4 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference).
10.45 First Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated February 21, 2003 (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.46 Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated February 21, 2003 (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
10.47 Amended and Restated Master Note with Citizens Bank of
Massachusetts dated February 21, 2003 (filed as Exhibit 10.3 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.48 Second Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated April 10, 2003 (filed as Exhibit 99.1 to our
Current Report on Form 8-K, filed with the SEC on April 15, 2003,
and incorporated herein by reference).
10.49 Amended and Restated Revolving Credit Note in favor of Citizens
Bank of Massachusetts dated April 10, 2003 (filed as Exhibit 99.2
to our Current Report on Form 8-K, filed with the SEC on April 15,
2003, and incorporated herein by reference).
10.50 Third Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated April 30, 2003 (filed as Exhibit 10.7 to our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
51
10.51 Amended and Restated Master Note with Citizens Bank of
Massachusetts dated April 30, 2003 (filed as Exhibit 10.8 to our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.52 Amended and Restated Revolving Credit Note in favor of Citizens
Bank of Massachusetts dated April 30, 2003 (filed as Exhibit 10.9
to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2003, and incorporated herein by reference).
10.53 Credit Agreement with Citizens Bank of Massachusetts dated March
2, 2004.
10.54 Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated March 2, 2004.
10.55 Security Agreement with Citizens Bank of Massachusetts dated March
2, 2004.
10.56 Pledge Agreement dated March 2, 2004 in favor of Citizens Bank of
Massachusetts.
10.57 Form of Subscription Agreement for the 12% Unsecured Promissory
Notes and Warrants dated June 5, 2002 (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, and incorporated herein by reference).
10.58 Form of 12% Unsecured Promissory Note dated June 14, 2002 (filed
as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by
reference).
10.59 Form of Warrant to Purchase Stock dated June 14, 2002 (filed as
Exhibit 4.9 to our Registration Statement on Form S-3, SEC File
No. 333-90654, and incorporated herein by reference).
10.60 Form of Conversion Agreement (filed as Exhibit 10.9 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
and incorporated herein by reference).
23.1 Consent of Wolf & Company, P.C.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of the Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of the Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Reports on Form 8-K
On November 4, 2003, we filed current reports under Item 12 of Form 8-K,
attaching our earnings release for the quarter ended September 30, 2003.
On November 19, 2003, we filed a current report under Items 7 and 9 of
Form 8-K, announcing our acquisition of the assets of LiquiSource, Inc.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ABLE LABORATORIES, INC.
By: /s/ Dhananjay G. Wadekar
---------------------------------------
Dhananjay G. Wadekar
President, Chief Executive Officer
and Secretary
March 15, 2004
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated; and each of the undersigned officers
and directors of Able Laboratories, Inc. hereby severally constitute and appoint
Dhananjay G. Wadekar and Robert Weinstein our true and lawful attorney-in-fact
and agent, with full power to sign for us and in our names in the capacity
indicated below, all amendments to such report on Form 10-K, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys to
such report and any and all amendments thereto.
SIGNATURE DATE TITLE
- ----------------------------------------- -------------- -------------------------------------------------
/S/ DHANANJAY G. WADEKAR March 15, 2004 Chief Executive Officer, President, Secretary and
- ----------------------------------------- Director (PRINCIPAL EXECUTIVE OFFICER)
DHANANJAY G. WADEKAR
/S/ ROBERT WEINSTEIN March 15, 2004 Vice President, Chief Financial Officer and
- ----------------------------------------- Treasurer
ROBERT WEINSTEIN (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/S/ ELLIOT F. HAHN March 15, 2004 Director
- -----------------------------------------
ELLIOT F. HAHN
/S/ HARRY SILVERMAN March 15, 2004 Director
- -----------------------------------------
HARRY SILVERMAN
/S/ JERRY TREPPEL March 15, 2004 Director
- -----------------------------------------
JERRY TREPPEL
53
ABLE LABORATORIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation dated June 11, 1998 (filed
as Exhibit 3a to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, as amended on September 14, 1998, and
incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation dated May
31, 2000 (filed as Exhibit 3.2 to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000, and incorporated
herein by reference).
3.3 Amended and Restated By-laws dated May 26, 2000 (filed as Exhibit
3.3 to our Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2000, and incorporated herein by reference).
3.4 Certificate of Designations, Preferences and Rights of Series Q
Preferred Stock dated August 15, 2001 (filed as Exhibit 4.1 to our
Current Report on Form 8-K, filed with the SEC on August 31, 2001,
and incorporated herein by reference).
3.5 Certificate of Amendment of Certificate of Incorporation dated May
9, 2001 (filed as Exhibit 3.3 to our Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001, and incorporated
herein by reference).
3.6 Certificate of Ownership and Merger dated May 18, 2001 (filed as
Exhibit 99.1 to our Current Report on Form 8-K, filed with the SEC
on May 24, 2001, and incorporated herein by reference).
3.7 Certificate of Amendment of Certificate of Incorporation dated May
31, 2002 (filed as Exhibit 3.7 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2002, and incorporated herein
by reference).
4.1 Specimen common stock certificate (filed as Exhibit 4a to our
Registration Statement on Form S-18, SEC File No. 33-31836-B, and
incorporated herein by reference).
4.2 Form of Additional Investment Right dated June 2003 (filed as
Exhibit 4.1 to our Current Report on Form 8-K, filed with the SEC
on June 30, 2003, and incorporated herein by reference).
10.1 *Employment Agreement dated May 29, 2002 with Dhananjay G. Wadekar
(filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, and incorporated herein by
reference).
10.2 *Employment Agreement dated November 18, 2003 with Raju Vegesna.
10.3 *Amended and Restated Employment Agreement dated March 1, 2004
with Nitin Kotak.
10.4 *Amended and Restated Employment Agreement dated March 1, 2004
with Robert Weinstein.
54
10.5 *Amended and Restated Employment Agreement dated March 1, 2004
with Shailesh Daftari.
10.6 *Amended and Restated Employment Agreement dated March 1, 2004
with Shashikant Shah.
10.7 *Amended and Restated Employment Agreement dated March 1, 2004
with Hemanshu N. Pandya.
10.8 *Amended and Restated Employment Agreement dated March 1, 2004
with Konstantin Ostaficiuk.
10.9 *Amended and Restated Employment Agreement dated March 1, 2004
with Kamlesh Haribhakti.
10.10 *Amended and Restated Employment Agreement dated March 1, 2004
with Iva Klemick.
10.11 *Amended and Restated Employment Agreement dated March 1, 2004
with Howard Schneider.
10.12 *1998 Stock Option Plan (filed as Appendix A to our proxy
statement, filed with the SEC on January 30, 1998, and
incorporated herein by reference).
10.13 *1998 Consultant Stock Plan (filed as Exhibit 4.3 to our
Registration Statement on Form S-8, SEC File No. 33-57249, and
incorporated herein by reference).
10.14 *2003 Stock Incentive Plan (filed as Appendix A to our proxy
statement, filed with the SEC on April 28, 2003, and incorporated
herein by reference).
10.15 *Stock Option issued to Harry Silverman dated April 20, 2000
(filed as Exhibit 10.39 to our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2000, and incorporated herein
by reference).
10.16 *Stock Option issued to Harry Silverman dated May 31, 2000 (filed
as Exhibit 10.40 to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000, and incorporated herein by
reference).
10.17 *Stock Option issued to Dhananjay G. Wadekar dated October 13,
2000 (filed as Exhibit 10.1 to our Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2000, and incorporated herein
by reference).
10.18 *Stock Option issued to F. Howard Schneider dated February 24,
2001 (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, and incorporated herein by
reference).
10.19 *Stock Option issued to Harry Silverman dated February 24, 2001
(filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, and incorporated herein by
reference).
10.20 *Stock Option issued to Dhananjay Wadekar dated February 24, 2001
(filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, and incorporated herein by
reference).
10.21 *Stock Option issued to Dhananjay G. Wadekar dated August 24, 2002
(filed as Exhibit 10.16 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.22 *Stock Option issued to Harry Silverman dated August 24, 2002
(filed as Exhibit 10.18 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
55
10.23 *Stock Option issued to F. Howard Schneider dated August 24, 2002
(filed as Exhibit 10.19 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.24 *Stock Option issued to Jerry Treppel dated October 28, 2002
(filed as Exhibit 10.20 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.25 *Stock Option issued to Robert Weinstein dated November 25, 2002
(filed as Exhibit 10.21 to our Annual Report on Form 10-K for
fiscal year ended December 31, 2002, and incorporated herein by
reference).
10.26 Lease dated September 26, 2001 with Kennedy Montrose, L.L.C. for
3601 Kennedy Road, South Plainfield, New Jersey (filed as Exhibit
10.3 to our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, and incorporated herein by reference).
10.27 Lease dated April 25, 2002 with P&R Fasteners, Inc. for 5
Hollywood Court, South Plainfield, New Jersey (filed as Exhibit
10.7 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference).
10.28 Lease dated July 17, 2002 with Jay F. Antenen, Jr., Jay F.
Antenen, Sr., and Donald M. Houpt, III for 11590 Century
Boulevard, Cincinnati, Ohio (filed as Exhibit 10.5 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
and incorporated herein by reference).
10.29 Lease dated July 24, 2002 with Kennedy Montrose, L.L.C. for 600
Montrose Avenue, South Plainfield, New Jersey (filed as Exhibit
10.4 to our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, and incorporated herein by reference).
10.30 Lease Agreement with Matrix Cranbury Associates, LLC dated
September 17, 2003 for One Able Drive, Cranbury, New Jersey (filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for our
quarter ended September 30, 2003, and incorporated herein by
reference).
10.31 Lease Agreement for 789 Jersey Avenue, New Brunswick, New Jersey
with HMCJ Realty, L.L.C. dated October 6, 2000.
10.32 Purchase and Sale Agreement for 6 Hollywood Court, South
Plainfield, New Jersey with C.V.N. Associates, L.P. dated
September 2003.
10.33 Asset Purchase Agreement dated November 14, 2003 with LiquiSource,
Inc.
10.34 Stock Purchase Agreement for Series Q Preferred Stock dated August
15, 2001 (filed as Exhibit 4.2 to our Current Report on Form 8-K,
filed with the SEC on August 31, 2001, and incorporated herein by
reference).
10.35 Registration Rights Agreement for Series Q Preferred Stock dated
August 15, 2001 (filed as Exhibit 4.3 to our Current Report on
Form 8-K, filed with the SEC on August 31, 2001, and incorporated
herein by reference).
10.36 Securities Purchase Agreement with the purchasers listed on the
signatory page dated June 30, 2003 (filed as Exhibit 10.1 to our
Current Report on Form 8-K, filed with the SEC on June 30, 2003,
and incorporated herein by reference).
10.37 Loan Agreement with New Jersey Economic Development Authority
dated June 1, 1999 (filed as Exhibit 10.8 to our Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
56
10.38 $2,000,000 Promissory Note dated June 1, 1999 issued to New Jersey
Economic Development Authority (filed as Exhibit 10.9 to our
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1999, and incorporated herein by reference).
10.39 Leasehold Mortgage Security Agreement, Assignment of Rents and
Financing Statement dated June 1, 1999 with New Jersey Economic
Development Authority (filed as Exhibit 10.10 to our Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
10.40 Guaranty dated June 1, 1999 in favor of New Jersey Economic
Development Authority (filed as Exhibit 10.11 to our Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999, and
incorporated herein by reference).
10.41 Credit Agreement with Citizens Bank of Massachusetts dated October
24, 2002 (filed as Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference).
10.42 Non-Restoring Credit Facility Note issued to Citizens Bank of
Massachusetts dated October 24, 2002 (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated herein by reference).
10.43 Master Note issued to Citizens Bank of Massachusetts dated October
24, 2002 (filed as Exhibit 10.3 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, and incorporated
herein by reference).
10.44 Security Agreement with Citizens Bank of Massachusetts dated
October 24, 2002 (filed as Exhibit 10.4 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference).
10.45 First Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated February 21, 2003 (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.46 Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated February 21, 2003 (filed as Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
10.47 Amended and Restated Master Note with Citizens Bank of
Massachusetts dated February 21, 2003 (filed as Exhibit 10.3 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.48 Second Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated April 10, 2003 (filed as Exhibit 99.1 to our
Current Report on Form 8-K, filed with the SEC on April 15, 2003,
and incorporated herein by reference).
10.49 Amended and Restated Revolving Credit Note in favor of Citizens
Bank of Massachusetts dated April 10, 2003 (filed as Exhibit 99.2
to our Current Report on Form 8-K, filed with the SEC on April 15,
2003, and incorporated herein by reference).
10.50 Third Amendment to Credit Agreement with Citizens Bank of
Massachusetts dated April 30, 2003 (filed as Exhibit 10.7 to our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
10.51 Amended and Restated Master Note with Citizens Bank of
Massachusetts dated April 30, 2003 (filed as Exhibit 10.8 to our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, and incorporated herein by reference).
57
10.52 Amended and Restated Revolving Credit Note in favor of Citizens
Bank of Massachusetts dated April 30, 2003 (filed as Exhibit 10.9
to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2003, and incorporated herein by reference).
10.53 Credit Agreement with Citizens Bank of Massachusetts dated March
2, 2004.
10.54 Revolving Credit Note in favor of Citizens Bank of Massachusetts
dated March 2, 2004.
10.55 Security Agreement with Citizens Bank of Massachusetts dated March
2, 2004.
10.56 Pledge Agreement dated March 2, 2004 in favor of Citizens Bank of
Massachusetts.
10.57 Form of Subscription Agreement for the 12% Unsecured Promissory
Notes and Warrants dated June 5, 2002 (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, and incorporated herein by reference).
10.58 Form of 12% Unsecured Promissory Note dated June 14, 2002 (filed
as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, and incorporated herein by
reference).
10.59 Form of Warrant to Purchase Stock dated June 14, 2002 (filed as
Exhibit 4.9 to our Registration Statement on Form S-3, SEC File
No. 333-90654, and incorporated herein by reference).
10.60 Form of Conversion Agreement (filed as Exhibit 10.9 to our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
and incorporated herein by reference).
23.1 Consent of Wolf & Company, P.C.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of the Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of the Chief Financial Officer
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
58