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21 Manzanita Avenue #1000 · San Rafael, CA 94901 · Tel: (415) 454-6985 · Fax: (415) 455-0295 D. Paul Cohen, President · www.cohenresearch.com · E-mail [email protected] SCOLR, Inc, DDD (Amex) $3.24 April 19, 2004 BUY Intermediate Term Target Price Range $6.96 Quarterly and Annual EPS Reported and Estimated EPS* * All forecasted estimates are made by Cohen Independent Research Group, Inc. (CIRG) and have not been reviewed or approved by the company. Mar Jun Sep Dec FY EPS EPS Growth 2002 -0.04 -0.02 -0.03 -0.04 -0.13 FY05 -$0.04 2003 -0.02 -0.03 -0.06 -0.31 -0.41 FY06 $0.01 117.9% 2004 E 0.00 -0.01 -0.01 -0.01 -0.03 FY07 $0.14 2005.5% (This report may not be reproduced.) 2005 E -0.01 -0.01 -0.01 -0.01 -0.04 FY08 $0.33 135.3% Cohen Independent Research Group SCOLR INC DDD Fiscal Year: Industry: Input Price: Exchange: 2003 Last Report Date: #VALUE! MED-BIOMED/GENE Next Report Date: /-/- 3.25 Sales - LTM: PE Next 12M consensus Frc: Market Cap based on Input Prc:97.7 Dividend Payout Rate: AMEX #REF! 6,594.1 Sales Growth - LTM: 1.2% EPS Growth - LTM: #REF! EBITDA Growth - LTM: #DIV/0! Dividend Yield:0.00% Dividend Growth - LTM: #DIV/0! SCOLR Inc. is a biopharmaceutical company leveraging specialized knowledge, proprietary and patented products and technologies, such th t t d CDT® C t ll d D li T h l l tf t i t d di ti ti d l OTC d t i ti d d Share Data & Employees Latest Sell-Side Target Prices Latest Shares Outstanding (million) 29.89 Number of Employees Price & Volume ( USD ) 10 Today Price 0.00 # of Analysts in Price Target Consensus 0.00 Price Related ( USD ) 3.25 Price Date Mean Short Term Target Price (6-12 mos) 4/20/04 Market Capitalization on 04/20/04 Today 97.14 Price to Cash Flow 12M High (closing price) $3.97 Price to Sales 10.6 12M Low (closing price) $2.99 Price/Book (Sharehldr Equity) 22.8 52 Week % Price Change 0% P/E, 12 Month Forward Consensus Est 0.0 Daily Average Volume (20 days) 120,565 P/E, using 12M EPS 0.0 Daily Average Volume (60 days) 110,167 P/E 12M 5Y Average 0.0 Financial Strength Latest Available Quick Ratio 0.84 Current Ratio Latest Basic EPS - LFY -$0.41 Diluted EPS - LFY -$0.41 LT Debt/Equity 0.00% Diluted EPS (before non-recurr) - LFY -$0.41 Total LT Liab/Total Capital 1.21% Sales per Share - LTM Profitability Ratios Operating Margin - LFY 1.34 Per Share ( US$ ) LFY & Latest Qtr #REF! Net Margin - LFY $0.31 #REF! Book Value per Share - LQ $0.14 Tangible Book Value per Share $0.13 Operating Margin - LQ #REF! Tangible Assets per Share $0.24 Net Margin - LQ #REF! Cash per Share - LQ $0.06 Cash Flow per Share - LTM $0.00 Income Statement -132.58% Dividend Payout Ratio Latest 12 Months Management Latest ROE - LTM #REF! ROI -LTM #REF! Pretax Earnings - LTM ROA - LTM #REF! Net Income -LTM Balance Sheet (USD) Latest Net Income, Excl Extra. Items Cash 1282.66 Diluted EPS -LTM Tangible Assets 5148.53 Total Assets 5507.94 Revenue -LTM 6594.07 EBITDA Margin -LTM Income Statement - Quarter 0.00% Dec 03 Revenues - LQ Ownership 1,173.19 EBITDA Margin - LQ 0.00% Institutions Own % Shares Out Insiders Own % Shares Out Pretax Earnings - LQ #REF! Short Interest - LM Net Income #REF! Short Interest - 1M ago Diluted EPS - LQ #REF! % Change Short Interest - 1M Dividend Yield 0.00% Short Ratio Latest 0.13 0 247,829 8,882 2690.24 2.27 Cohen Independent Research Group TABLE OF CONTENTS THE COMPANY .......................................................................................................................................2 Company History .............................................................................................................................................. 2 Bull Case........................................................................................................................................................... 2 Bear Case ......................................................................................................................................................... 3 Controlled Drug Delivery................................................................................................................................... 3 Recent Events................................................................................................................................................... 4 Rationale for Developing Controlled Delivery Dosage Forms .......................................................................... 5 Table 1.......................................................................................................................................................... 6 THE SCIENCE BEHIND THE PRODUCTS..............................................................................................6 Introduction ...........................................................................................................................................6 Why Programmable, Slow Release Drug Delivery Is Important ....................................................................... 6 Figure 1......................................................................................................................................................... 7 Figure 2......................................................................................................................................................... 8 Review of Delivery Technologies - How diffusion, reservoir, swelling control relate to DDD’s technology...... 9 Desirable Characteristics for Controlled Delivery ........................................................................................... 10 Figure 3....................................................................................................................................................... 10 CDT and How It Works ................................................................................................................................... 12 Advantages of the CDT Platform .................................................................................................................... 13 Developed CDT Products ............................................................................................................................... 13 Table 2........................................................................................................................................................ 14 Industry Demand for Sustained Release Technologies ................................................................................. 15 Industry Demand for Controlled Release Systems......................................................................................... 16 Recent Business Segment Performance........................................................................................................ 17 Sale of Manufacturing Unit.............................................................................................................................. 17 Glucosamine & Chondroitin ................................................................................................................17 Licensing, R&D and Royalties ........................................................................................................................ 19 Alliance with ADM ........................................................................................................................................... 19 CAPITALIZATION ..................................................................................................................................20 Q3 Quarterly Report 9/30/03........................................................................................................................... 21 CASH FLOW ANALYSIS .......................................................................................................................22 Risks ............................................................................................................................................................... 23 Looking Forward ............................................................................................................................................. 23 VALUATION ...........................................................................................................................................24 Table 3........................................................................................................................................................ 25 CONCLUSION........................................................................................................................................25 APPENDIX .............................................................................................................................................27 THE COMPETITION...........................................................................................................................27 The Pharmaceutical Drug-Delivery Market..................................................................................................... 27 GLOSSARY............................................................................................................................................29 DISCLAIMER: ........................................................................................................................................31 FINANCIAL STATEMENTS ...................................................................................................................32 i Cohen Independent Research Group SCOLR, Inc. DDD $3.24 AMEX provides it with the ability to work with insoluble and poorly soluble compounds, which account for over 40% of all newly discovered drugs and a large number of existing drugs. ___________ THE COMPANY SCOLR, Inc. is building its future as a specialty pharmaceutical company in the oral drug delivery industry. It has developed/licensed several novel and patented sustained release drug delivery technologies for the pharmaceutical, over-thecounter (OTC) and nutritional supplement industries. This includes the rights to three patented oral drug delivery technologies. Until January, 2004, the Company had historically been a developer and manufacturer of probiotics. SCOLR recently completed the sale of this business in order to become a pure play in the larger and growing specialty pharma / drug delivery marketplace. * Words in bold are defined in the glossary at the end of this report. Company History The Company was incorporated in 1994 under the name Caddy Systems, Inc. From April, 1995 to July, 2002, the Company operated under the name Nutraceutix, Inc. In July, 2002, the Company changed its name to SCOLR, Inc, which is an acronym for Self Correcting Oral Linear Release. The current name more adequately reflects the Company’s focus on the specialty pharma / drug delivery business. Sustained release technology platforms allow for programmed release of drugs or supplements when taken orally. For a large number of active compounds, immediate release formulations may lead to undesirable effects, often resulting from rapid release and elimination in the body. This “burst” and “tailing” effect is minimized or eliminated with SCOLR’s patented controlled delivery technologies (CDT). The first supplement using this technology (glucosamine/chondroitin) was introduced in Canada in 2002, and is now sold in more than 6,000 U.S. retail outlets including Wal-Mart, Rite Aid, Trader Joe’s and GNC stores. SCOLR is pursuing additional strategic alliances to incorporate the CDT for licensing and/or manufacturing of nutritional supplements, in addition to ethical and over-thecounter drugs. Health supplement application of CDT will continue to provide increasing near-term revenue. The home-run potential, however, lies in the OTC and prescription drug applications. In addition, SCOLR’s most recent patent (amino acids) Bull Case 2 • Oral administration is the preferred method of delivery for pharmaceutical drugs, OTC products and nutraceuticals because it is less expensive and more convenient than injections or intravenous infusions. • DDD’s technology results in increased patient compliance to the treatment regimen, improved safety of the drug, improved efficacy of the drug and greater efficiency of drug delivery. • DDD has the rights to three patented oral drug delivery technologies. • The home-run potential targets massive markets: OTC and prescription drug applications. Cohen Independent Research Group • • SCOLR’s CDT technology platform provides a programmable platform that is recognized, simple, easy to manufacture, and a low cost alternative methodology to deliver therapeutic agents over a wide range of profiles. • SCOLR’s CDT platform includes the unique ‘self-correcting’ feature, which enables the system to correct for the release rate and erosional impact among many other features. • The benefits to the pharmaceutical manufacturer may also be the extension of a patented products’ life cycle by creating an extended release formulation. This is a significant incentive in a pharmaceutical market estimated to be worth over $50 billion U.S. dollars annually. • Bear Case The market for drug delivery technology is expected to reach $29.2 billion in 2005, a 46.7% increase from the $19.9 billion in 2000. The amino acid-based technology of DDD’s third patent is designed to transport and control the release of poorly soluble drugs that are difficult and costly to formulate with existing approaches while providing DDD the ability to work with insoluble and poorly soluble compounds. • SCOLR has transitioned from providing a solution to an existing need, to providing a solution to a broad range of existing and emerging needs in the industry. The Company will ultimately require additional financing to implement the development of its drug delivery business. Funds will be required for Research & Development and to commercialize drug delivery products. • The Company will partner with other companies to share in the cost of these projects. Without partners it will need to use its own capital to develop products. Future financings may not be available. • Pharmaceutical re-formulation with controlled delivery systems requires FDA approval. It is uncertain if those drugs will receive approvals in a timely manner. • Future financing would cause dilution to current shareholders Controlled Drug Delivery For a product that is not a prescription drug, a patented delivery system can both lengthen a product life cycle and add product differentiation. An advantage for retailers is the increased product sell-through (in comparison with comparative immediate release products) that results from fewer consumer missed dosages • • For the past several years the Company’s primary focus has been on developing and optimizing its CDT platform. Applications include nutritional supplements, nutraceuticals (biologically active materials), ethical drugs (branded and generics), over-the-counter and pharmaceuticals. In 1998 SCOLR exclusively licensed a patent pending controlled drug delivery technology from Temple University School of Pharmacy for the specialty nutritional and sports supplements industries. This was the first step in the transition to bring drug delivery technology to the Company. Since then, SCOLR has acquired worldwide rights/licenses to the first patent, which was subsequently issued. The Company has expanded its technology platform with two additional issued patents and is currently developing others. Currently there are three patents within the platform of technologies. The “electrolyte” platform and “dual polymer” platform patents issued in 2001 and 3 Cohen Independent Research Group prescribed ingestion plan, and/or enhanced safety from a lack of excessive dosing. The benefits to the pharmaceutical manufacturer may be the extension of a patented products’ life cycle by creating an extended release formulation and/or adding value. In our experience, the nutritional supplement product life cycle is inherently much shorter primarily due to a highly fractured market with tough competition and poor product differentiation. With the lack of branding for many nutritional compounds, product differentiation with a patented delivery system can both lengthen a product life cycle and add product differentiation. An advantage for retailers is the increased product sell-through (in comparison with comparative immediate release products) that results from fewer consumer missed dosages. 2002 respectively and are exclusively licensed to SCOLR from Temple University. In January of 2003, the Company received its third drug delivery patent which is for an amino acid-based technology. This third patent (“amino acid”) is significant from both a business and a scientific standpoint. It is the first patent assigned directly to the Company, drawing attention to the quality of its research. It is also important because it answers an urgent and current need of the pharmaceutical industry. The amino acid-based technology is designed to transport and control the release of poorly soluble drugs that are difficult and costly to formulate with existing approaches. With the development of this technology, SCOLR has transitioned from providing a solution to an existing need, to providing a solution to a broad range of existing and emerging needs in the industry. Recent Events There are several methods of oral controlled delivery, the majority of which have evolved from proven and common practices over 40 years ago. SCOLR has gone back to the beginning and developed a technology which is rooted in hydrophilic systems, the most widely applied and understood form of drug delivery. SCOLR’s CDT technology provides a recognized, elegantly simple, easy to manufacture, low cost alternative methodology that is programmable to deliver therapeutic agents over a wide range of profiles. Therapeutic profiles can differ in duration, solubility, payload, and therapeutic window, or the optimal range of the API (active pharmaceutical ingredient). Several widely used technologies contain some of these capabilities -- but at a materially higher cost -- and each of these technologies has important limitations(s). (See competition section.) 4/5/04 – SCOLR identifies 12-hour ibuprofen as first internal development target for application of its CDT platform. For the first time, the Company will simultaneously pursue additional potential drug delivery development relationships and accelerate the development of CDT-based products by independently selecting targets for development on its own timetable. 3/23/04 – SCOLR files 10-K for the year ended 12/31/03. 2/24/04 – SCOLR completes $10.4 million institutional private placement of common stock and warrants to accelerate its drug delivery development. Use of proceeds allows the Company to simultaneously pursue multiple routes towards bringing its patented CDT technology to market in the form of OTC products and prescription drugs. Using a controlled release formulation for some drugs or supplements has several distinct advantages. Benefits to the patient may include improved efficacy, better compliance with a 2/23/04 – CDT glucosamine/chondroitin available in GNC stores. 4 Cohen Independent Research Group C, glucosamine hydrochloride, glucosamine/chondroitin/MSM, glucosamine hydrochloride-sulfate complex, and caffeine. 2/6/04 – SCOLR’s stock trades on the American Stock Exchange. 1/20/04 – SCOLR closes sale of Probiotics under the terms previously announced. 10/08/03– SCOLR announced the operation of a new R&D laboratory and administration complex. 1/5/04 – SCOLR signs Asset Purchase Agreement to sell its probiotics development and manufacturing business for $2.72 million. The sale will position DDD as a pure play drug delivery company and allow it to focus all its attention and assets on the potential offered through its portfolio of patented CDT technologies. 10/08/03 – SCOLR files 10Q for the quarter ending 6/30/03. 9/30/03 – SCOLR receives notification from the US Patent and Trademark Office of the issuance of a patent, “Tablets Containing Heat Sensitive Materials and Method for Forming Thereof.” 12/13/03 - SCOLR expands CDT line with the order for two new health supplement products, 12-hour Niacin and 12-hour EsterC®. The Company expects orders for several other new CDT supplements in Q1, 04. 9/02/03 – David T. Howard, the former President and CEO, is named Chairman of the Board. 8/8/03 – Daniel O. Wilds is announced as the new CEO and President. Previously Mr. Wilds served in Vice President and President roles at Baxter International (NYSE: BAX). He has also held President and CEO positions in three early stage health care companies. 11/21/03 – SCOLR announces the successful completion of Feasibility Study and its acceptance by its Fortune 100 client. SCOLR is in negotiations with the same client to initiate feasibility studies on several other candidate compounds. Rationale for Developing Controlled Delivery Dosage Forms 11/12/03 – SCOLR announced the appointment of two new Board members, Dr. Reza Fassihi and Robert C. Schroeder, and the retirement of Board member, Daniel B. Ward. Dr. Fassihi is Professor of Biopharmaceutics and Industrial Pharmacy, Temple University, School of Pharmacy, and the inventor of the CDT technology. SCOLR exercises its right to force conversion of $5.3 million in Notes into common stock. There are both medical and marketing reasons for developing drugs in controlled-versus immediate release dosage forms (Table 1). Improving the delivery of drugs to the system can lower dosage requirements, enhance the safety and efficacy of the drug, and reduce the cost of the drug, in part by eliminating waste. Market reasons for developing improved drug delivery technology include extending patent protection on a drug and increased revenue—a significant incentive in a pharmaceutical market estimated to be worth over $50 billion U.S. dollars annually. 11/6/03 – SCOLR reported on the successful presentations made at AAPS (American Association of Pharmaceutical Scientists) conference made in association with Dr. Reza Fassihi. 1/5/03 – SCOLR announced the expansion of its line of CDT nutritional supplements with the introduction of six new products: Vitamin C, Ester 5 Cohen Independent Research Group Table 1 Rationale for Developing Controlled Delivery Dosage Forms MEDICAL BENEFITS MARKETING BENEFITS • • Increased patient compliance to the treatment regimen Preference of the pharmaceutical market for fewer doses Improved safety of the drug Patent extension Improved efficacy of the drug Product differentiation Greater efficiency of drug delivery Greater rate of return on investment SCOLR’s CDT platform includes the unique ‘selfcorrecting’ feature, which enables the system to correct for the release rate and erosional impact among many other features. “Depot” formulations may provide treatment for a month (e.g., Lupron Depot), and implants may provide drug for as long as five years (Norplant). Other delivery routes include buccal, inhalable, injectable and transdermal solutions. THE SCIENCE BEHIND THE PRODUCTS Introduction Although drugs may be delivered via various routes, oral administration is the preferred method of delivery for pharmaceutical drugs, OTC products and nutraceuticals because it is less expensive and more convenient than injections or intravenous infusions. The tablet or capsule dissolves, typically in the stomach. The active ingredient can then be absorbed into the bloodstream and is carried to tissues throughout the body. “Controlled delivery” of oral drugs is the process of regulating the duration or timing of the release of a given active ingredient (i.e., the medication, vitamin, etc.) from a dosage form. These can be achieved in a variety of ways. Some terms used to describe types of controlled delivery may include but are not limited to; timed-, prolonged-, sustained-, and extended-release. These types of delivery all extend the time that the active ingredient is released for use by the body. Most of these forms of controlled delivery provide for the release of an active ingredient over a prolonged time period so that pills need only be taken once or twice a day -- but other timeframes are possible. Some controlled delivery technologies target a particular site in the body, using a variety of principles including the use of antibodies to cell surface molecules (antigens) found only in specific tissues. Effervescence and fast-dissolving systems, which actually hasten delivery of the product to the system, are also types of controlled delivery. There are a variety of novel and interesting emerging trends in controlled drug delivery but we will only discuss prolonged-release technologies. Why Programmable, Slow Release Drug Delivery Is Important If a drug or compound does not reach the appropriate part of the body in therapeutic amounts (i.e., is not bioavailable), it can be of no benefit, and the purchase cost is wasted. The bioavailability of a 6 Cohen Independent Research Group With immediate release dosage forms, concentrations of the active ingredient in the blood increase soon after administration and then decrease again before the next dose (Figure 1). An important concept in controlled delivery is that of the therapeutic window. The therapeutic window is the safe and efficacious range of drug concentrations in the blood (the serum level). Above the therapeutic window, undesired and potentially serious side effects may occur, while below the range, drug levels are too low be fully effective (Figure 2). To combat this peak-and-trough effect and maintain constant levels, medication would have to be administered constantly (e.g., intravenously in a hospital) or at frequent, short intervals around the clock. The former is too costly for any except immediately life-threatening events, and the latter is hugely inconvenient. drug is broadly defined as the proportion of the administered dose that is absorbed into the bloodstream. The delivery system is critical to seeing that this happens. Determining the best delivery system for a drug, and maximizing its efficacy and safety, requires an understanding of its pharmacokinetics—measurements of drugs within biological systems, as affected by uptake, distribution, binding, elimination, and biotransformation (metabolism, degradation), particularly the rates of such movements. Literally, the term means the study of the motion, acceleration, or rate of change (kinetics) of drugs (pharmaco). One of the major benefits of controlled delivery is the ability to maintain stable concentrations of the active ingredient in the body, which is particularly important in the treatment of chronic conditions. Figure 1 Drug Levels In Blood After a Single Administration Dissolution Profiles Plasm a Profiles 180 % Dissolved 120 160 100 140 80 120 60 100 80 40 60 20 40 0 20 0 5 10 15 20 0 25 0 Tim e (hours) 5 10 15 20 25 T i me ( ho ur s) Here is an image that shows the release rate of a drug and how that correlates to plasma levels after absorption. 7 Cohen Independent Research Group Figure 2 The Therapeutic Window Source: PMPS article by Stephen Turner, et al., Autumn 2002 therapeutic window, reducing the potential for undesirable side effects or breakthrough disease symptoms. There are numerous ways to release a drug or compound that change the way it works in the body. See the attached figures of the various release rates available. Zero Order Controlled Delivery - selected and steady release of the drug into the system over extended periods of time is one of the many capabilities of CDT - may increase the safety and effectiveness of a pharmaceutical drug by keeping the levels of the active ingredient within the 8 Cohen Independent Research Group which the active agent is released. Drug release for many of these devices is based on osmosis. In some such systems, the influx of gastrointestinal (GI) fluids forces the active ingredient through orifices in the outer layer; in other reservoir delivery systems, the influx of GI fluids dissolves the inner core of active ingredient, which then diffuses out. In reservoir systems, drug release remains fairly constant, reducing the likelihood of variable bioavailability. These systems suffer from complexity and high costs of production. Another benefit of controlled delivery is increased patient compliance. A product must be taken to be effective. The adverse effect of frequent dosing on patient compliance is well documented. Less frequent administration allowed by CDT promotes better compliance to the treatment regimen, thus increasing the effectiveness. Thus, the drug delivery system is critically as important, from both a medical and a marketing standpoint, as the efficacy and safety of the active ingredient itself. Swelling-controlled delivery systems are based on changes in the physical structure. They are designed so that the drug cannot be released until it enters a particular environment. These systems begin tightly packed and dry. In the body, they absorb fluid and swell, which increases the amount of solvent and the mesh size, allowing the drug to diffuse out. These systems are usually based on hydrogels that are sensitive to the environment—i.e., swelling may be triggered by a change in pH, ionic strength, enzymatic conversion, changes in temperature, or electrical field. One advantage of some such systems is reversibility—another change in the environment reverses the swelling, stopping the diffusion. A system such as this might be useful for a drug that is required in the intestines, which has a high pH (is alkaline), so it will remain intact during passage through the acidic (low-pH) environment of the stomach. These systems are generally useful only for drugs with flexible dosing requirements—i.e., a wide therapeutic window—because gel formation is not constant, which causes variations in bioavailability. The major disadvantage of slow release dosage forms is the inability to quickly terminate administration if an acute adverse event occurs. Review of Delivery Technologies - How diffusion, reservoir, swelling control relate to DDD’s technology Slow-release delivery systems work primarily by three basic methods: diffusion, degradation, or swelling/diffusion. A single given system may utilize one or all methods. In diffusion, the active agent is released by passing through the delivery device. In a matrix diffusion system, the active agent is mixed with the delivery agent into a homogenous matrix. The drug diffuses out through pores in the polymer matrix or between polymer chains. The primary disadvantage of matrix diffusion systems is an inconsistent rate of release. The rate of release decreases as the drug is released, because drug at the center of the matrix must travel further to get out of the matrix. In diffusion systems, the delivery device remains constant in size. One advantage of diffusion systems is the enhanced release of the active ingredient. In biodegradable systems, the active agent is released when the delivery device is broken down by natural metabolic processes within the body. Microparticles are the most common formulation for biodegradable systems. In these systems, the active ingredient is contained within enteric-coated A reservoir device is a type of diffusion system that contains the active ingredient surrounded by a film or membrane (e.g., a layer of polymer) through 9 Cohen Independent Research Group removable (e.g., for implanted devices). The delivery system must have an appropriate physical structure that is not subject to undesired aging and degradation. microspheres; many microspheres are contained within a single capsule. After ingestion, the capsule breaks apart and the microspheres spill out. The enteric coating is dissolved by stomach acids, releasing the active ingredient. The microspheres can be engineered to release active ingredient at different times over an extended period by varying the thickness of the enteric coating or the use of additives. These delivery systems have the advantage of releasing active ingredient into the circulation over a long period of time and a resulting reduced dosage requirement; the major disadvantage is that they are complex and costly to produce. SCOLR’s CDT systems have a wide range of capabilities including zero order and are elegantly simple. In zero-order kinetics, the rate does not depend on the concentration of the reactant: a precise quantity of active ingredient is released during each unit of time over the entire course of the release pattern until 100% of the drug or nutraceutical is released, and the plot is, therefore, linear (Figure 3). There are no bursts or lag phases in the release pattern. For certain classes of drugs, zeroorder kinetics may be necessary to ensure that the drug remains at constant, therapeutic levels. Unfortunately, most drug-delivery systems, including controlled-release devices, have first-order or mixed kinetics and those that have zero-order kinetics are complex. Desirable Characteristics for Controlled Delivery The components and their breakdown products, if any, must be pharmacologically inert, causing minimal or no adverse reactions; the drug must be safe from accidental release. The formulation must be simple to administer and, where applicable, Figure 3 Plot of Zero-Order Kinetics vs. First-Order Kinetics Source: http://science.widener.edu/~svanbram/chem146/ch15/lm_c15_graphs.pdf 10 Cohen Independent Research Group Sustained (First Order) Release % Release 1.0000 0.0000 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 Tim e (hr) Linear (Zero Order) Relea se % Released 100 0 0 12 T im e (h r ) Prolonge d (Ne a r Line a r) Re le a se % Released 100 0 0 12 Tim e (hr) Finally, the ideal controlled delivery system would be easily produced at a low cost. Developing controlled delivery can be costly, and that cost is passed on to the consumer. Cost is less of an issue 11 Cohen Independent Research Group rates. Combining the polymers slows the diffusion of the active ingredient for up to 24 hours. The granulation step allows for the combining of active ingredients having poor flow properties with polymers and granulation agents having better flow properties, resulting in a tablet that is more easily manufactured. This technology may also be used with active ingredients having other characteristics that increase the difficulty of making acceptable oral dosage forms. For example, drugs that are poorly compressible or require a high drug load for therapeutic effectiveness may be combined with more compressible materials and viscous polymers to allow for the manufacture of a lower-volume dosage form than is possible with other matrix technologies. with branded pharmaceutical drugs than with generics or nutraceuticals. To keep costs down, the manufacturing process of a controlled delivery formulation should be as similar as possible to the standard manufacturing method. Again, CDT provides a materially lower cost alternative, partly because it allows products to be manufactured with standard equipment in a simple two- or three-step manufacturing process. CDT and How It Works The focus of SCOLR’s oral drug delivery business is the development and licensing of its Controlled Delivery Technology (CDT) -- a system of three patented, self-correcting, drug delivery methodologies applicable to modified oral dosage forms for prescription drugs, OTC products, and nutraceuticals. The size of the oral controlled delivery market (US) in 2002 was $32 billion and is estimated to grow to $45 billion by 2005 (Datamonitor, 2002). • Each of SCOLR’s three CDT platform methodologies focuses on overcoming specific barriers to optimize drug administration. Advantages are discussed in the Competition Section. • Dual Polymer Platform (US Patent #6,337,091; Issued Jan. 8, 2002). The “Dual Polymer” patent was developed specifically for the controlled release of highly soluble active ingredients, such as Propranolol, Diltiazem, Verapamil, Theophylline and Metformin. Highly water soluble drugs are dissolved, metabolized, and excreted too quickly. A controlled delivery system that prolongs the time they take to dissolve and extends the time they are available to the body could improve their efficacy. The active ingredient is granulated with one or more polymers or gums that have different swelling characteristics, ionic properties and hydration 12 Electrolyte Platform (US Patent #6,090,411; Issued Jul. 18, 2001). The electrolyte patent uses the colloidal chemistry phenomenon of “salting-out” to regulate the swelling and erosion kinetics of a non-ionic polymer matrix containing the active ingredient and one or more electrolytes (ionizable salts). The presence of the ionizable salts results in the formation of diffusion channels that will not collapse. Other past attempts at using non-ionizable agents failed because the diffusion channels were unpredictable, which resulted in lack of control and poor release profiles. The electrolytes also help to enhance or suppress the solubility, as appropriate, of the active ingredient itself. As the matrix hydrates, the electrolytes and polymer compete for water with the active ingredient, making it possible to “program” the rate of release. The result is a system that has the potential to achieve zero-order kinetics (among other profiles); release of the active ingredient is independent of its own solubility and is unaffected by the pH of the environment. Furthermore, the matrix does not involve Cohen Independent Research Group covalent bonds, so manufacturing is basically a simple, two-step process: dry-blending followed by direct compression. The two-step process allows for the manufacture of a simple, monolithic tablet with cost advantages comparable to a simple wax-matrix but with release profiles comparable to those of a more complex osmotic pump or multi-layer tablet. • Amino Acid Platform (US Patent #6,517,868; Issued Feb. 11, 2003). The most recent patent also applied the principles of colloidal chemistry. The matrix consists of a granulated active ingredient, one or more ionic resins or gums, and one or more amino acids. Upon hydration the hydrophobic drug reacts with the amino acids to form weak complexes that greatly facilitate solubility and controlled release from the matrix. In addition to enhancing the solubility of drugs, the formulation can be tailored for site specific release, including the colon and may enhance the permeability of some drugs. With this technology, additional compression-aiding excipients are not needed. These reproducible hydrophobic and ionic interactions between the drug and the releasecontrolling constituents will allow for the controlled release of an active ingredient over 24-hours, independent of solubility. SCOLR’s anticipated ability to increase the permeability and solubility of select compounds will then be explored in order to determine their potential applicability to permeability limited drugs. • The capability of delivering precise amounts of active ingredients over a “programmable” time period • Achievability of zero-order kinetics – Suppression of the burst effect – No “tailing-off” of release of the active ingredient at the end of the dosing interval • Simple, low-cost and cost-effective formulation, development, scale-up, and manufacturing – Reduced time from bench to production – Twostep processing: dry blend and direct compression – Ability to use standard, widely available processing equipment allows production of controlled release formulation at costs comparable to immediate-release formulations of the same active ingredient and significantly less expensive than other controlled release methods • Exclusive use of excipients generally regarded as safe and approved by the FDA for use in pharmaceuticals • Ruggedness and flexibility, allowing application to dietary supplements, OTC products, or prescription pharmaceuticals • High pay load • As demonstrated in vitro, a release rate that is not adversely affected by ionic strength, tablet hardness, pH, hydrodynamics, and other parameters characteristic of the GI tract Developed CDT Products Advantages of the CDT Platform The first products developed after obtaining the license for Patent No. 1 consisted of controlled release tablets of glucosamine, glucosamine/chondroitin, and other difficult compounds and branded ingredients (Table 1). The three proprietary components of SCOLR’s CDT drug delivery platform have a number of advantages compared with other currently available sustainedrelease technologies: 13 Cohen Independent Research Group Table 2 Pharmaceuticals Developed with CDT Technology Stage of Development (Pre-Clinical) Compound Dose (mg) Duration/Profile Formulation Target† Diltiazem HCl 60, 240 24 hr/near-linear Dilacor XR® Feasibility Bench Complete* Development Complete X Propranolol HCl 70, 100 18 hr/near-linear Inderal-LA® X Verapamil HCl 100, 120 X 24 hr/near-linear Veralan PM™ Metoprolol Tartarte 100 24 hr/first-order Glipizide 11 24 hr/near-linear Glocotrol ™ XL Tramadol HCl 100, 200 12, 24 hr/nearlinear Ultram™ (IR product) Theophylline 100 12 hr/bi-modal Slo-Bid™, Theo 24® Pseudoephedrine/ 120/5, 12, 24 hr/nearLoratadine 240/10 linear Pseudoephedrine HCl 120, 240 Toprol XL™ X X X X Claritin-D™ X 12 hr/first-order, Sudafed® 12hr. X 24 hr/near-linear Sudafed®/Efidac® 24hr. Niacin 500, 750, 1000 18 hr/near-linear Niaspan™ Ondansetron HCl 25 24 hr/bi-modal Zofran™ (IR product) Dimenhydrinate 150 24 hr/bi-modal N/A Nifedipine 30, 60, 24 hr/near-linear Procardia™ XL 90 X X X X †Formulated target used as a reference for in vitro dissolution only. *Feasibility testing measures how the formulation reacts in vitro compared to the reference product tested. Dilacor XR® is a registered trademark of Watson Pharmaceuticals Inderal-LA® is a registered trademark of Wyeth-Ayerst Veralan PM™ is a trademark of Elan Corporation Toprol XL™ is a registered trademark of AstraZenaca LP Glucotrol ™ XL is a registered trademark of Pfizer, Inc. Ultram™ is a trademark of Ortho-McNeil Pharmaceutical Theo-24® is a registered trademark of UCB Pharma Inc. Claritin™ is a trademark of Schering Corporation Niaspan™ is a trademark of KOS Pharmaceuticals Zofran™ (IR product) is a trademark of GlaxoSmithKline Corporation Procardia™ XL is a registered trademark of Pfizer, Inc. 14 Cohen Independent Research Group Nutraceuticals Developed with CDT Technology ACTIVE INGREDIENT CLASSIFICATION Novasoy® DailyTM Dietary Supplement GlucosamineGlucosamine/chondroitin Dietary Supplement Osteoarthritis Glucosamine Dietary Supplement Dietary Supplement Dietary Supplement Osteoarthritis Glucosamine/Chondroitin/MSM EsterC® Niacin Vitamin C Dietary Supplement Dietary Supplement THERAPEUTIC USE Multiple health benefits Osteoarthritis Prevent common cold, cancer; other uses Cholesterol regulation Antioxidant STATUS Marketed Europe, U.S. Marketed Canada and U.S. Introduction into Asia in 2004. Marketed in U.S. Marketed in U.S. Marketed in U.S. Marketed in the U.S. Marketed in the U.S. million glucosamine trial that is expected to be completed in 2005. Glucosamine is a Class 1 compound (as classified by the Biopharmaceutical Classification System), meaning that is has high permeability/solubility characteristics and is rapidly cleared from the bloodstream. Nearly all BCS Class1 compounds benefit from a slow-release delivery system. Because of its rapid removal from the bloodstream, the recommended dosage regimen is 500 mg taken 3 times daily. The CDT release formulations of glucosamine or glucosamine with chondroitin have 12- and 24-hour release profiles, allowing once or twice daily dosing. The nearly linear 12-hour release profile of CDT vitamin C is more convenient with increased therapeutic benefit and fewer side effects (e.g., acid stomach, heartburn) than the immediate release product. The traditional formulation of tramadol (Ultram®) is a prescription non-narcotic analgesic with such a short plasma half-life that it must currently be taken four times daily. In contrast, the controlled-release formulation of tramadol has near zero-order in vitro release kinetics with release over 12-24 hours. Glucosamine and glucosamine with chondroitin have become very popular in both human and veterinary medicine over the past few years and is used to maintain joint flexibility and treat osteoarthritis. Indeed, glucosamine has been demonstrated to be more effective than ibuprofen to control the symptoms of osteoarthritis. The National Institutes of Health is currently conducting a $6.6 Industry Demand for Sustained Release Technologies Controlled or sustained release technologies have been in the market place for decades, but have received increased emphasis recently. The large 15 Cohen Independent Research Group delivery, an optimal drug-delivery system would provide flexibility of formulation and cost-effective production. SCOLR’s CDT technology does exactly that—reducing manufacturing costs, reducing time from the bench to market, and requiring only standard and widely available manufacturing equipment. capital expenditures necessary for research and development of new drugs have encouraged pharmaceutical companies to maximize the return on the small percentage of compounds that become marketable products. Industry wide, pharmaceutical companies are incorporating the sustained delivery technologies as another strategy to extend product life cycles. Generic and over-the-counter manufacturers are also integrating these technologies to gain market share, improve profitability and differentiate products. When segmenting the total pharmaceutical market by drug delivery method, oral is the largest segment, commanding a 61% market share. The table below examines the drug delivery portion of the oral pharmaceutical market. Our interest is in the Controlled Release Systems. Controlled delivery technologies are widely used in the OTC and pharmaceutical drug industry but far less common in the nutraceuticals industry, largely due to the cost of manufacturing to utilize controlled delivery technology. SCOLR’s low cost controlled delivery technology provides the same benefits to nutraceuticals that it can provide to OTC and pharmaceutical drugs. In addition to the improved efficacy, safety, and convenience of controlled Industry Demand for Controlled Release Systems Oral Pharmaceutical Demand ($billion) % Delivery Systems in Demand Dollars 1990 $18.4 13.4% 1995 $31.3 28.3% $2.5 $8.9 $22.0 $33.3 $48.0 $1.6 $0.9 $7.7 $1.2 $19.9 $2.1 $29.2 $4.1 $40 $8.0 $12.2 $9.3 158.4% 46.7% $10.8 37.0% Total Oral Drug Delivery Demand ($billion) Controlled Release Systems (incl. CDT) Other Dollar Increase in Cont Release Systems Growth in Controlled Release Systems $6.1 381.3% 2000 2005 $55.1 $83.6 40.0% 39.8% 2010 $124.6 38.5% value for each category of drug delivery system. SCOLR’s is a “diffusion” based system and deeply rooted in simple hydrophilic matrices. Hydrophillic matrices, among all other classes of drug delivery, are the most widely accepted and understood due to the age of this class and the number of approved drugs on the market, when compared to the other methodologies. The market for drug delivery technology is expected to reach $29.2 billion in 2005, a 46.7% increase from the $19.9 billion in 2000. There are three broad categories of controlled release systems for the oral marketplace: Coated Bead, Diffusion, and Reservoir. A fourth category, other is used to include several other methodologies. The graph below identifies the historical and projected dollar 16 Cohen Independent Research Group Demand for Controlled Release Systems ($) Billions 20 15 10 5 0 1990 1995 Coated Bead 2000 Diffusion 2005 Reservoir 2010 Other Recent Business Segment Performance The diversity of technological approaches to the drug delivery issue ensures that competitors can have some degree of success. What works for one drug or food supplement may not be the best for another approach. Different active agents, molecular size of the API, and degrees of solubility are just some of the determinants in selecting the appropriate controlled release system. Historically, SCOLR had segmented its business into two revenue generating centers: (a) Manufacturing and (b) Licensing/ R&D/ Royalties. The manufacturing segment was sold as of December 31, 2003. Hence, we will focus on the remaining drug delivery-related segment. Historical Revenue Breakdown in Recent Quarters ($) Manufacturing License, R&D, Royal % of % of % of Total 2Q03 Total 3Q03 Total 4Q03 1Q03 1,596,983 93.7% 1,909,211 90.0% 1,457,970 91.4% 1,007,956 108,278 6.3% 211,143 10.0% 137,297 8.6% 165,235 Total Revenues 1,705,261 2,120,354 1,595,267 % of Total 85.9% 14.1% 1,173,191 owner including inventories, equipment and lease obligations. In connection with sale of the Probiotics unit, the company retired a line of credit and a $1 million loan from a shareholder. Sale of Manufacturing Unit Effective 12/31/03, the Company sold the Probiotics development and manufacturing business to the Company’s former VP of Operations, CFO, and General Manager. The Company received $722,756 in cash and a deferred purchase payment agreement of $2 million. The deferred payments will come from CDT Royalties and 0% to 10% of revenues from the sold operations over four years. Over $2.3 million in net assets were transferred to the new Glucosamine & Chondroitin Glucosamine & chondroitin, the first commercial CDT dietary supplement product, was introduced into the Canadian market in 2002. In Q1 ’03, it was introduced in the U.S. and the product is currently 17 Cohen Independent Research Group chondroitin product achieves this and more. The sustained release formulation may extend the product life cycle. We expect revenue growth from the glucosamine and chondroitin to continue its strong growth for several more quarters. Such growth could more than offset the anticipated revenue decline in Fermentation. sold by Wal-Mart, Trader Joe’s, Rite-Aid and GNC \ stores in the U.S. Revenues from glucosamine & chondroitin formulation have been strong. The importance of the new glucosamine and chondroitin is illustrated below. Addressing a market with short product cycles mandates new product introduction. The glucosamine & Glucosamine & Chondroitin Royalty Revenues Q103 Q203 Q303 Q403 $102,706 $514,108 $182,875 $60,187 Total $859,876 Beneficial effects of glucosamine & chondroitin to the patient require an initial three to six week dosing period and continual daily dosing. SCOLR appears to have hit a home run on this product introduction. Visibility gained from the glucosamine & chondroitin revenues will benefit the Company’s discussions with additional parties who are interested in the CDT. We believe quarterly royalty revenues will not display an orderly sequential pattern for several more quarters. This short term variability in revenues from Glucosamine & Chondroitin is due to the inventory build at customer sites for a new product. Within the next four quarters, a more normalized pattern should emerge. 18 Cohen Independent Research Group Licensing, R&D and Royalties This unit pursues agreements with third parties. Licensing, R&D and Royalties Revenues ($) Q1 Q2 Q3 Q4 Total 2002 992 54,000 0 0 54,992 2003 108,278 211,143 137,297 165,235 621,953 would contemplate the advancement of the commercialization of the molecule utilizing SCOLR’s sustained-release CDT. We expect similar alliances and/or partnership announcements in the next 18 months regarding royalty and contracted research. Contract R&D revenues were $0 in 2003, compared with $54,000 in the first nine months of 2002. This was due to the expiration of prior research contracts. All revenues in the first three quarters of 2003 were from royalties. The royalty revenues resulted from sales of glucosamine & chondroitin and the European sale of the ADM product, Novasoy® DailyTM. Alliance with ADM SCOLR has formed an alliance with ADM to develop and market dietary supplements that will deploy the CDT controlled delivery technology. The agreement provides ADM with exclusive rights to use the CDT technology and a right of first refusal on certain dietary supplements and nutraceutical products. This business segment is expected to ultimately dwarf all other income to become the dominant revenue and profit generator in years to come. Prior to royalty income being generated by products, the Company will receive licensing fees, milestone payments, grants, along with R&D contracts for research and product development prior to product launch. The Company has recently initiated its inhouse development program while simultaneously pursuing agreements with pharmaceutical companies for the development and eventual commercialization of pharmaceutical and OTC formulations utilizing the CDT technology. The first product introduced by ADM was Novasoy® Daily™. Novasoy® is an established brand used in more than 50 nutrition supplemental products. It is marketed for maintaining cardiovascular and bone health, lowering cholesterol and reducing menopausal symptoms. Dosing with CDT technology is reduced from three times to once a day. This product improves the bioavailability of soy isoflavones to the body. To accomplish this, the Novasoy® protein carrier of the two soy isoflavones is protected from the harsh acidic environment in the stomach. A key milestone in the Company’s progress is SCOLR’s recently announced successful completion and acceptance of its feasibility study for a particular product molecule. The Fortune 100 client and the product molecule are not yet disclosed due to a client confidentiality request. The next agreement 19 Cohen Independent Research Group the convertible issue was intended to be equity, it indicates that the Company had to offer a return component in the form of interest payments to raise the funds. This is not unusual for a young Company that has yet to post a meaningful profit. On November 21, the Company announced the forced conversion of the Notes into stock as of December 15, 2003. The Novasoy® product was launched in September 2002 in Europe. ADM has ceased sales of Novasoy® Daily while it reformulates the product and establishes clinical trial data before its U.S. introduction. ADM has publicly expressed its desire to become a consumer brand name. We expect future announcements from ADM regarding additional CDT-based products. In May 2003, $550,000 of subordinated notes were issued along with warrants to purchase 235,722 shares of stock. An additional 20,357 shares were issued for placement services. The subordinated shares were retired with the issue of the convertible notes, but the warrants are still outstanding. CAPITALIZATION The Company is a developmental stage technology based firm that is dependent on equity and debt financing to meet research, development, and corporate expenses. Recent financings include the following. Total shares outstanding after the recent financing is 29.66 million shares. Currently there are a total of 2.5 million options outstanding and 2.5 million warrants outstanding. If all are executed, they create a dilution factor of 16.9% of total shares outstanding. In the course of exercising options and warrants, the company will receive $7.6 million. The timing of such exercises is highly uncertain. In February, 2004, the Company issued 3.2 million shares and warrants to purchase 801,636 shares. The common stock was sold at $3.25 per share, raising $10.4 million. This amount is not shown on liquidity or cash flow displays as it will not be reported on a financial statement until the 1Q04 is reported. The warrants issued are exercisable at $4.75 per share with a termination date in February 2009. DDD may call the warrants 12 months after issuance if the stock trades above $8.00 for 20 consecutive days. The recent boost to equity is quite positive for the Company’s capitalization structure. SCOLR has enough cash for at least the next year. Convertible Notes – SCOLR issued $5.3 million of convertible notes on 6/25/03. Interest was accrued at 6% annually, payable quarterly. The conversion price was $1.05. In December 2003 the Company forced conversion of the Notes into equity. Since Leverage Ratios 12/31/03 1.65% 0.99% 56.02% Total LT Liab / Total Equity Total LT Liab / Tangible Assets Common Equity / Assets 20 12/31/02 88.83% 34.25% 30.69% 12/31/01 40.69% 15.72% 31.96% Cohen Independent Research Group Dec-03 1.65% 0.99% 56.02% Total LT Liab / Total Equity Total LT Liab / Tangible Assets Common Equity / Assets Sep-03 61.57% 31.79% 46.55% Jun-03 58.19% 30.96% 48.96% Mar-03 137.87% 30.21% 18.05% receivables relative to current assets is the result of the sale of the Probiotics unit. The absolute level of receivables has declined in the past few quarters, and more importantly, their quality has improved. The Company notes that the allowance for doubtful receivables is $0, which reflects the royalty revenues from the sales of CDT products. For a developmental stage Company, asset management has been good. Declining cash balances and poor working capital were rescued with the infusion of cash from the last two financings in FY03. In connection with the sale of the Probiotics unit (manufacturing business), the Company paid off a Line of Credit and a long term loan from a shareholder, thereby reducing long term liabilities. The capital structure for SCOLR has improved dramatically in the past year. The Company currently has no long term debt, and high cash balances. The only long term liabilities are capital lease obligations. The recent increase in Liquidity Metrics 12/31/03 40.2% 23.3% 817.11 22.5% Cash / Current Assets Cash / Total Assets Working Capital Receivables/Current Assets Cash / Current Assets Cash / Total Assets Working Capital Receivables/Current Assets Dec-03 40.2% 23.3% 817.11 22.5% 12/31/02 15.6% 6.4% (41.87) 29.6% Sep-03 37.2% 27.0% 3,562.03 14.3% 12/31/01 4.3% 1.9% (559.00) 45.1% Jun-03 49.0% 38.0% 5,183.88 16.7% Mar-03 2.5% 1.2% (368.55) 46.0% Gross profit margins increased 320bp from 3Q02 to 3Q03. SG&A expenses increased as the result of retaining Health Advances for consulting on prospective agreements with pharmaceutical companies. Increased travel and advertising expense to market the company’s CDT technologies will continue in coming quarters. Q3 Quarterly Report 9/30/03 Revenues declined 3% due to the decline in Fermentation revenues discussed above. Manufacturing revenues from Dietary and Supplements improved 24.5% in the quarter, primarily due to Glucosamine and Chondroitin revenues. This increase was not enough to offset the decline in Fermentation revenues. The Cash Burn rate fluctuates from $0.5 million to $1.4 million per quarter. It is reasonable to expect it to be close to $1 million per quarter for the next two 21 Cohen Independent Research Group reporting quarters, and decline as a function of profit improvements from manufacturing and royalties. CASH FLOW ANALYSIS A valuable measure of whether a Company is generating cash from operations is the derived Net Cash Flow from Operations. This cash flow measurement is a good barometer of the operating health of the Company. When NCFO is positive, the Company is not burning cash on an operating basis. It is not unusual for this metric to be negative for a developmental stage Company. The large increase in 4Q03 was the result of the Probiotics sale. The decline in working capital, primarily from the decline in inventories and other current assets, decreases the requirement for cash. This causes the NCFO to improve. Such one time events will not repeat, and we expect NCFO to be negative in the coming quarters. This is expected for a development stage company. The size of NCFO is a good indicator of the quarterly cash burn rate. With the new business and capital structure after the Probiotics sale, we expect the ongoing NCFO will be in the $3 million range for FY04 excluding any work on new compounds. We expect this new R&D will incur a $750,000 cost per year. The Company has sufficient cash reserves to fund more than two years of operations. At the end of FY05 or the beginning of FY06, the Company will become cash flow positive and not require additional financing. Q404 Report The primary event of the 4Q04 was the sale of the Probiotics business. The company will no longer receive revenues from the manufacturing business. The Probiotics business was sold to the former Vice President of Operations, CFO and General Manager. Operating margins declined due to a decline in the gross margin and the large increase in General and Administrative costs. The large increase in General and Administrative costs was due primarily to the accelerated vesting of stock options for employees terminated in connection with the sale of the Probiotics business. In connection with the sale of the Probiotics business, the Company repaid the line of credit and a $1million loan. Accounts receivable have increased in the past year, but have steadily declined in the past three quarters. The Company reports that there are no doubtful accounts. This is because the high quality receivables are related to the royalty and licensing business. Cash Flow Metrics NCFO FCF / A Dec-03 1,895.35 -121.68% Sep-03 (505.20) -15.90% Jun-03 (2,213.48) -5.08% Mar-03 (13.00) -4.45% Dec-02 (810.01) -22.50% year displays improvement. The 9/30/03 decline in FCF/A is partly attributed to the change in accounting for warrants as interest expense, which lowers net income. If we net out this non-cash charge in interest expense, FCF/A would be –9.5% for 3Q03. The decline in FCF/A is not considered The FCF/A is the Free Cash Flow relative to Total Assets. This is a measure of how well assets are managed to generate free cash flow. It is not unusual for it to be negative for a Company such as SCOLR. The negative value indicates there is a cash burn. More importantly, the general trend in the past 22 Cohen Independent Research Group favorable for the stock price of the company in the short term. The positive trend during the four quarters prior to 3Q03 correlates to improving returns on investments for the Company. For SCOLR, the positive trend means the Company’s investments are losing less than before. The large drop in FCF/A in 4Q03 indicates the adjustment to the new capitalization structure. Total assets declined over 26% in 4Q03 from 3Q03 after declining 21% in 3Q03 compared to 2Q03. The 3Q03 asset decline was primarily due to a reduction in cash, whereas the 4Q03 decline was due to the sale of the Probiotics business. The FCF/A calculated for 4Q03 is the new baseline for which to measure the company’s ability to generate cash. We do not expect DDD to generate positive cash until FY06 or FY07. Combined with the changing cash balances typical for a development stage company, the quarter to quarter trend in this metric may easily be volatile and not indicative of the company’s progress towards commercialization of the CDT technology. Monitoring this metric over a longer timeframe, such as a LTM (latest twelve month) will most likely prove to be more accurate of DDD’s progress in the next few years. • The Company will ultimately additional financing to implement the development of drug delivery business. Funds will be required for Research & Development and to commercialize drug delivery products. The Company develop its own products and will partner with other companies to share in the cost of these projects. Without partners there is a need to raise substantial additional capital. • Pharmaceutical re-formulation with controlled delivery systems requires FDA approval. It is uncertain if those drugs will receive approvals in a timely manner. • Additional financing would cause dilution to current shareholders. • Additional financing would cause dilution to current shareholders. Looking Forward The need for drug delivery systems continues to grow. Pharmaceutical companies are actively pursuing strategies to lengthen product life cycles. According to Data Monitor, 42 of 52 blockbuster pharmaceuticals worth $82 billion in annual revenue will come off patent by 2007. All of these are candidates for implementation of a controlled delivery technology. The market potential is large. The benefits to a small firm with innovative technology are enormous. As the large cash balance that will be reported in 1Q04 is used for R&D and marketing expenses, the FCF/A metric will improve with stable Royalty Revenues. Any future cash infusion will cause the FCF/A to decline in that quarter. Given these issues surrounding this metric for a developmental stage company, we still find it useful when tracking the Company' SCOLR is making progress in establishing the CDT suite of Controlled Delivery Technology platforms for the pharmaceutical industry. During the past year the Company completed human clinical trials which establishes the clinical proof-of-concept for CDT. It is important to note that SCOLR is now both actively developing products itself and pursuing collaborations with pharmaceutical companies, including those that face patent expiration of core products within the next several years. The first prescription drug using CDT is Risks There are various risks associated with investing in a company that has promising technology, yet is dependent on external financing for survival. We itemize certain risks. 23 Cohen Independent Research Group introduction would not occur for another two to four years. However, during that period SCOLR would receive revenue in the forms of research and license fees, and milestone payments with royalties to follow when the products are on the market. We also expect announcements in the over-thecounter/generic drug marketplace and nutritional supplement arena that could lead to new products in two to three years. expected to be brought to market 2006 or later. The Company can expect to generate earlier stage drugdelivery revenues for research, licensing fees, milestone payments and, ultimately royalties. In August, 2003, SCOLR has announced that the Company has entered into an Evaluation Agreement for its drug delivery technology with a leading Fortune 100 technology-based company. On November 21st it announced the evaluation had been successfully completed and accepted by its Fortune 100 client. The two companies are negotiating the completion of the first prototype. The Company further announced that it was negotiating to work with its client on Evaluation Agreements for several additional compounds with the goal of ultimately bringing several new CDT products to market. The Fortune 100 Company requests anonymity at this time due to competitive reasons. The Company indicates working on several new The focus is to employ known compounds with benefits. VALUATION We forecast cash flows to identify a fair valuation for the stock, and discount the future cash flows back to the present. We expect total royalty revenues to be approximately $2.5 million in FY04, and increasing slightly in FY05. We expect the Ibuprofen CDT formulation the Company is working on will be introduced in the second half of FY06. Since many users of ibuprofen ingest this popular anti-inflammatory several times daily when needed, we believe that the CDT version can capture a 15% market share within two years of introduction. We believe the CDT ibuprofen will eventually take a 20% to 25% share in the total ibuprofen market. The following table outlines our revenue forecasts for Ibuprofen. it has plans to begin molecules during FY04. the CDT technology to documented therapeutic In the nutritional supplement marketplace, SCOLR expects to pursue agreements similar to the contract with Wal-Mart, Trader Joe’s, Rite Aid and GNC. Ibuprofen Forecast ($ Thousands) The dietary supplement market is $20 billion. The relatively low cost of SCOLR’s CDT points to more opportunities here. Effective controlled delivery mechanisms are rare in this marketplace. The success with the glucosamine & chondroitin formulation bodes well for implementation with other products. Market growth Market Size Market Penetration Total Ibuprofen Rev Royalty DDD Revenues FY08 FY07 FY06 2.0% 2.0% 2.0% 1,040,400 1,020,000 1,000,000 15.0% 8.0% 2.0% 156,060 81,600 20,000 6% 6% 6% 9,364 4,896 1,200 Other compounds the Company is working on should have deliverable products in the FY06 to FY07 timeframe. Since agreements are not disclosed, we assume the company will introduce a CDT version for $1 billion drug in the second half of Over the next 18 months, we expect multiple announcements regarding specific OTC and pharmaceutical drug platforms that are pursuing the implementation of CDT technology. Product 24 Cohen Independent Research Group The following graph displays the range of price targets based on the long term growth rate and our free cash flow forecasts. FY07 and another in the second half of FY07. For each compound, we estimate higher royalties because the Company is funding most of the initial clinical tests. We expect that SCOLR will immediately gain a 1% market share in the initial fiscal year of introduction, and increase market share by 2% in each of the next two years. These conservative forecasts result in revenue forecasts outlined below. Table 3 Target Price vs. Long Term Growth 12 $10.94 Target Price ($) 10 Revenue Forecast ($ Thousands) Current Royalties Ibuprofen Other Compounds Total Revenue FY08 3,200 9,364 6,565 19,129 FY07 3,200 4,896 1,300 9,396 FY06 3,000 1,200 0 4,200 FY05 2,800 0 0 2,800 FY04 2,500 0 0 2,500 FY07 50% 4,726 4,632 $0.14 34,000 FY06 5% 211 190 $0.01 32,000 FY05 -41% (1,148) (1,212) -$0.04 31,125 $6.96 6 $5.63 $4.31 4 $2.98 0 0 10 20 30 40 50 Long Term Growth We believe that SCOLR has the potential to grow in the 30% to 35% range beyond our forecast time horizon. A 30% to 35% growth rate justifies a target price of $8.29 to $9.26. Due to the delay of positive earnings and positive cash flows until the end of FY06, we believe that investors will tend to be conservative and only award a 25% growth rate. This lower growth rate justifies a $6.96 stock price. Free Cash Flow and EPS Forecast($ Thousands, except EPS, Shares in Thousands) FY08 70% 11,451 11,489 $0.33 35,000 $8.29 8 2 Since the company plans on licensing its technology, operating margins will be high. We expect margins to expand in the years beyond our forecast timeframe. The following table outlines operating margins, EPS and free cash flow for the next five years. Operating Margin Net Income Free Cash Flow EPS Shares Outstanding $9.61 A slight change in the assessment of future growth can have a large impact on the stock price. We believe the stock price could easily exceed our fair value price as news regarding additional research contracts and feasibility studies are announced. FY04 -39% (1,006) (1,731) -$0.03 30,040 To determine the value associated with these forecasts we discount the future cash flows using a discount rate derived from the 10 year Treasury Bond yield, the equity risk premium, and the volatility of the stock. The discount rate used is 12.4%. This high rate is justified by the volatility in the stock and the uncertainty of the timing of when new compounds will receive CDT approval from the FDA. CONCLUSION We believe the Company is an attractive long-term investment. The technology SCOLR has developed is best-of-breed, innovative, cost effective and beneficial for consumers and the pharmaceutical industry (both prescription and generics). The current products utilizing CDT technology affirm that it is a viable mechanism for sustained release formulations. As many blockbuster drugs lose their 25 Cohen Independent Research Group (1) adoption of CDT for additional nutritional supplements, (2) in-house developed compounds, (3) research and development agreements with generic pharmaceutical manufacturers, (4) research and development agreements with multi-national pharmaceuticals, and (5) additional royalty agreements. We recommend shares of DDD common for long-term biotech growth investors. patent protection, controlled release formulations are becoming the de-facto method for extending product life cycles. The company is now a pure play in the controlled drug delivery technology industry. We believe that the announced partnership with its Fortune 100 technology client indicates that this technology will be adopted in the future. We expect the news over the next 18 months to be favorable for SCOLR. The company has identified 12-hour ibuprofen and other compounds for its independent development, accelerating the ultimate introduction of OTC and/or pharma CDT products. It has also successfully completed a feasibility study for a particular product molecule accepted by its Fortune 100 technology partner, and completed the sale of its probiotics business. We expect an agreement for the commercialization of the partnerproduct molecule is forthcoming. We expect to hear announcements and definitive agreements regarding GG/Cohen Independent Research Group, Inc. D. Paul Cohen 21 Manzanita Ave. #1000 San Rafael, California 94901 Tel: 415 454 6985 Fax: 415 455 0295 Email: [email protected] www.cohenresearch.com 26 Cohen Independent Research Group Acyclovir Cream, Enalopril, Carbemazepine, Citalopram CR, and5-fluorouracil. APPENDIX THE COMPETITION • Skyepharma PLC is a UK-based drug-delivery company with a dual focus on developing proprietary formulations of non-proprietary (offpatent) drugs as well as developing formulations of proprietary compounds in collaboration with corporate partners. Their controlled-release technology is applied primarily to solving many of the problems associated with injectable drugs, which comprise about 15% of the drug delivery market. The company also has a technology, IDD®, that can be used to adjust solubility to achieve optimal release characteristics from the encapsulated formulation. • Elan Corporation, PLC, is involved in the discovery, development, manufacturing, selling and marketing of novel therapeutic products in neurology, pain management and autoimmune diseases. Elan is an example of coated beadbased systems with some work also in diffusionbased systems. Its drug delivery business unit is NanoSystems. NanoSystems recently announced a license agreement giving BristolMyers Squibb the right to develop and commercialize products for the use of Elan’s NanoCrystal technology. NanoCrystal technology transforms poorly water-soluble drugs into nanometer-sized particles. The nanoform of the drug can then be incorporated into common dosage forms. Many developed drugs must be discarded each year because their poor water solubility characteristics make them impossible to formulate using traditional drugdelivery approaches. Elan hopes that its NanoCrystal technology can help to rescue a significant fraction of these compounds. • Andrx, Inc. uses its drug-technology platforms to create bioequivalent (generic) versions of controlled-release brand name and specialty, The Nutraceuticals/Probiotics Market Currently, SCOLR has no competition in the development of controlled delivery systems for tableted probiotics. The Pharmaceutical Drug-Delivery Market SCOLR’s primary competitors in the drug-delivery field are: Alza Corporation; Biovail, Inc.,; Skyepharma PLC; Elan, Andrx, Inc; Impax Laboratories; and Labopharm, as well as Flamel, DepoMed and PenWest. • Alza Corporation, which has been acquired by Johnson & Johnson, is one of the pioneers in innovative drug-delivery technologies. Their OROS (oral osmotic) controlled-release system is unsuitable for drugs with a high-load requirement and, unlike SCOLR, manufacturing requires specialized equipment and is extremely expensive. • Biovail, Inc markets a wide range of pharmaceutical products for use in cardiology, depression, central nervous system (consisting of the brain and spinal cord) and more. Their product portfolio includes controlled-release products developed by Biovail as well as products that have been licensed from other companies. For example, CARDIZEM® LA (diltiazem hydrochlorideis a slow-release formulation of the calcium channel blocker, diltiazem, for 24-hour control of blood pressure. Biovail has over 20 promising NDA (branded) and ANDA (generic) products in development, including controlled-release Buspirone, Bupropion, Metformin, Tramadol, Diltiazem, 27 Cohen Independent Research Group will be on licensing, acquisition, and internal development products used for treating disorders of the central nervous system (CNS) and using their drug delivery technologies to develop modified or controlled-release formulations of off-patent drugs that they will market as branded products. niche and immediate-release pharmaceutical products, including oral contraceptives. Andrx is also widening its generic research and development efforts to immediaterelease/niche/specialty pharmaceuticals without patent lawsuits. Andrx has 10 proprietary drugdelivery technologies that have been patented for certain applications or for which patent protection is being sought for certain applications. Andrx is involved in coated bead classes and has some diffusion-based system. • IMPAX Laboratories, Inc., a Delaware corporation with headquarters in Hayward, CA, and a commercial center in Philadelphia, PA, was formed in December 1999 by a merger between IMPAX Pharmaceuticals, Inc. and Global Pharmaceutical. The company is involved in the development, manufacturing, and marketing of specialty prescription pharmaceutical products utilizing their proprietary drug-delivery technologies. IMPAX is focusing on three key areas: - Drug-Delivery Technology using a variety of polymers and other materials to encapsulate or entrap the active drug compound. IMPAX has 1 issued U.S. patent and has filed two additional U.S. patent applications and various foreign patent applications relating to its drug delivery technologies. Niche Multi-source Pharmaceutical Products that are difficult to develop or have special handling requirements. Their rationale here is that lack of competition in this niche market will result in higher profit margins. They are also targeting select brands with a lower level of sales. Their first controlledrelease product, Pentoxifylline ExtendedRelease Tablets, received ANDA approval in 1999. The company has five applications under review by FDA and 15 additional products under development.Branded Pharmaceutical Products is a newer initiative. The initial focus 28 • Labopharm, a Canadian firm headquartered in Laval, Quebec, has seven issued U.S. patents on its core technology Contramid®. Contramid is a controlled-release, hydrophilic starch platform for oral and implantable products in a wide range of therapeutic categories. Its core product is a controlled-release formulation of tramadol, which is in Phase III trial in the US. Its diffusion systems have limitations when it comes to supply of its specialized polymer and issues of compatibility of the polymer to a wide class of drugs. • KV Pharmaceutical Co., based in St. Louis, MO, develops and markets branded and generic drugs, together with several drug delivery systems. KV operates through three subsidiaries: - Particle Dynamics produces specialty raw materials; • ETHEX applies KV's drug delivery technologies towards developing and marketing generic products that, in general, had technological barriers to entry. Their current product line includes more than 65 products. Its core therapeutic lines are in the cardiovascular, women’s health, pain management, and respiratory fields, but they also market 11 additional products in the GI, dermatological, and general nutritional categories;- Ther-Rx markets branded prescription products and has introduced 6 products (2 acquired, 4 developed internally), including Gynazole-1, the only onedose prescription treatment for vaginal yeast infections. This subsidiary focuses on Cohen Independent Research Group an amount of a substance to be lost through biological processes. cardiovascular and women’s health products, based on the theory that they can compete successfully with a smaller and focused sales force in specialty markets. Ionic: Relating to an ion, an atom or group of atoms carrying an electric charge (i.e., not electrically neutral) due to the gain or loss of one or more electrons; anions have a negative charge, cations have a positive charge. Development and commercialization of controlled delivery prescription drugs can take four to six years and cost tens of millions of dollars to conduct research and clinical trials. Although SCOLR’s competitors have better funding and equipment, SCOLR has demonstrated important and significant advantages based on its three CDT patents: (a) quicker product development, (b) faster-to-market capabilities, and (c) lower cost of manufacturing. Monolithic: As used here, characterized by uniformity; consolidated. Synonyms: unvaried, consistent, constant, continuous, even, homogeneous, invariable, of a piece, pure and simple, regular, rigid. Monolithic as used by SCOLR has a dual meaning: (1) the tablet contains only a single, homogenous layer, and compression is performed in a single process; and (2) the process of drug release occurs from the tablet as a whole, with the tablet dissolving uniformly, rather than in layers. Uniformity translates into predictability. GLOSSARY Bioavailability: The proportion of the administered dose that is actually absorbed into the bloodstream so that can be carried to various parts of the body (i.e., “available”). Nutraceutical: Biologically active materials that are formulated as dietary supplements to provide specific health benefits for humans or to increase productivity in animals. Nutraceuticals may be synthesized or derived from plant, microbial, or animal sources. The active ingredients in nutraceuticals may consist of a complex mixture of organic molecules, small molecules, oligosaccharides, lactic acid probiotics, fungi, minerals, and other microbial secondary metabolites. Calcium channel blockers (calcium antagonists): Pharmaceutical drugs (e.g., nifedipine, diltiazem, and verapamil) prescribed to treat patients with a variety of conditions (chronic angina pectoris, hypertension, coronary artery disease, hypertrophic cardiomyopathy, certain heart arrhythmias) that increase their risk for heart attack. Calcium channel blockers prevent the flow of calcium ions into the muscle cells of the heart and blood vessels, causing them to widen and relax, which lowers blood pressure, improves circulation, and reduces the workload of the heart. Osmolality: The concentration of a solution expressed in osmoles of solute particles per kilogram of soluent. Compliance: The consistency and accuracy with which a patient follows the prescribed treatment regimen. Synonym: adherence. Osmole: The molecular weight of a solute, in grams, divided by the number of ions or particles into which it dissociates in solution. Half-life: Generally, the period of time in which the measured quantity decreases by half; in pharmacokinetics, the time required for one half of Osmosis: The process by which solvent moves through a semipermeable membrane from a solution 29 Cohen Independent Research Group of lower osmolal concentration to one of higher osmolal concentration. Polymer: A substance of high molecular weight, consisting of a long chain of repeated units. Pathogenic: Disease-causing. Probiotics: A subset of nutraceuticals; live microorganisms that naturally occur in the digestive system and are taken as supplements to stimulate the immune system, protect against harmful bacteria or viruses, and aid the body’s assimilation of nutrients. pH: A measure of acidity or alkalinity that goes from 1 (completely acid) to 14 (completely alkaline, also termed basic). The “neutral” pH of a solution, in which acidity and alkalinity are balanced, is 7.0 at 22ºC (room temperature), 6.8 at 37ºC (body temperature). The pH of arterial blood is 7.4. “Optimal pH” is the pH at which a reaction or process is most effective. Serum: More specific than the term “plasma”—the clear fluid that is left after coagulation of the blood and removal of fibrin clot and the cells Therapeutic window: The range of concentrations in the blood that is effective and safe. Some drugs have a narrow therapeutic window (e.g., cyclosporine), while others have a very wide therapeutic window. Pharmacokinetics: Measurements of drugs within biological systems, as affected by uptake, distribution, binding, elimination, and biotransformation (metabolism), particularly the rates of such movements. Literally, the study of motion, acceleration, or rate of change (kinetics) of drugs (pharmaco). Plasma: The fluid portion of the circulating blood; everything except the cells. 30 Cohen Independent Research Group Disclaimer: This report/release is for informational purposes only. All information contained herein is based on public information. All forecasted estimates are made by Cohen Independent Research Group, Inc. (CIRG) and have not been reviewed or approved by the company. The company has paid a fee to CIRG for the distribution of this report. 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Buy Recommendations = 100% 31 Cohen Independent Research Group FINANCIAL STATEMENTS Annual Data Net Sales COGS Depreciation ($mil) Gross Profit Marketing & Selling Research & Development ($mil) General & Administrative EBITDA EBIT Interest Expense (-) Operating Income Non-Operating Income (Expense) (+) Pretax Income Provision for Income Taxes (-) Minority Interest (-) Other Income (+) Income from Continuing Operations Extras & Discontinued Operations (+) Net Income Earnings Per Share Diluted Net EPS Diluted EPS (Before Non-recurring items) Common Dividend Dividend per Share Average Shares Average Shares (diluted) Estimated 12/31/2003 12/31/2004 3,395.69 2,548.92 0.00 0.00 0.00 0.00 3,395.69 2,548.92 740.00 630.00 1,525.00 1,325.00 1,700.00 1,600.00 -569.31 -1006.08 (569) (1,006) 0.00 0.00 (569.31) (1,006.08) 0.00 0.00 (569.31) (1,006.08) 0.00 0.00 0.00 0.00 0.00 0.00 (569.31) (1,006.08) 0.00 0.00 (569.31) (1006.08) (0.02) (0.03) (0.02) (0.03) (0.02) (0.03) 0 0 0 0 31,125 30,040 31,125 30,040 32 Reported 12/31/2002 6,594.07 4,576.68 0.00 2,017.39 479.71 403.19 4,193.29 -3058.80 (3,059) 5,698.38 (8,757.18) 14.65 (8,742.54) 0.00 0.00 0.00 (8,742.54) 0.00 (8742.54) (0.41) (0.41) (0.41) 0 0 21,519 21,519 12/31/2001 6,514.24 5,136.61 0.00 1,377.63 372.72 540.83 2,470.29 -2006.21 (2,006) 328.92 (2,335.13) (222.20) (2,557.33) 0.00 0.00 0.00 (2,557.33) 0.00 (2557.33) -0.13 (0.13) (0.12) 0 0 20,124 20,124 Cohen Independent Research Group FINANCIAL STATEMENTS Quarterly Data Net Sales COGS Depreciation ($mil) Gross Profit Marketing & Selling Research & Development ($mil) General & Administrative EBITDA Interest Expense (-) Operating Income Non-Operating Income (Expense) (+) Pretax Income Provision for Income Taxes (-) Minority Interest (-) Other Income (+) Income from Continuing Operations Extras & Discontinued Operations (+) Net Income Earnings Per Share Diluted Net EPS Diluted EPS (Before Non-recurring items) Common Dividend Dividend per Share Average Shares Average Shares (diluted) Dec-05 699.72 0.00 0.00 699.72 185.00 350.00 425.00 -260.28 0.00 (260.28) 0.00 -260.28 0.00 0.00 0.00 -260.28 0.00 -260.28 -0.01 -0.01 -0.01 0.00 0.00 31500.00 31500.00 Sep-05 656.53 0.00 0.00 656.53 185.00 350.00 425.00 -303.47 0.00 (303.47) 0.00 -303.47 0.00 0.00 0.00 -303.47 0.00 -303.47 -0.01 -0.01 -0.01 0.00 0.00 31250.00 31250.00 33 Jun-05 730.29 0.00 0.00 730.29 185.00 400.00 425.00 -279.71 0.00 (279.71) 0.00 -279.71 0.00 0.00 0.00 -279.71 0.00 -279.71 -0.01 -0.01 -0.01 0.00 0.00 31000.00 31000.00 Mar-05 Dec-04 Sep-04 Jun-04 Mar-04 730.44 636.11 596.84 657.92 658.05 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 730.44 636.11 596.84 657.92 658.05 185.00 160.00 160.00 160.00 150.00 425.00 425.00 425.00 300.00 175.00 425.00 400.00 400.00 400.00 400.00 -304.56 -348.89 -388.16 -202.08 -66.95 0.00 0.00 0.00 0.00 0.00 (304.56) (348.89) (388.16) (202.08) (66.95) 0.00 0.00 0.00 0.00 0.00 -304.56 -348.89 -388.16 -202.08 -66.95 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -304.56 -348.89 -388.16 -202.08 -66.95 0.00 0.00 0.00 0.00 0.00 -304.56 -348.89 -388.16 -202.08 -66.95 -0.01 -0.01 -0.01 -0.01 0.00 -0.01 -0.01 -0.01 -0.01 0.00 -0.01 -0.01 -0.01 -0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 30750.00 30500.00 30200.00 29800.00 29660.00 30750.00 30500.00 30200.00 29800.00 29660.00 Cohen Independent Research Group FINANCIAL STATEMENTS Annual Balance Sheet Assets Cash & Marketable Securities Receivables Inventories Notes Receivable Other Current Assets Total Current Assets 12/31/2003 1,282.66 716.68 0.00 961.85 227.36 3,188.55 12/31/2002 257.38 486.42 493.54 166.15 242.27 1,645.77 12/31/2001 93.08 974.84 745.10 184.49 163.96 2,161.47 Gross Property/Plant/Equipment Accumulated Depreciation Net Property/Plant/Equipment Investments & Advances Deferred Charges Intangibles Other Non-Current Assets Other Assets Total Assets 0.00 0.00 29.37 0.00 0.00 359.41 1,660.62 0.00 5,507.94 0.00 0.00 1,494.32 0.00 0.00 818.37 55.39 0.00 4,013.84 0.00 0.00 1,706.98 0.00 0.00 853.68 221.54 0.00 4,943.66 Liabilities & Shareholders Equity Accounts Payable Notes Payable Current Long-Term Debt Current Capital Leases Accrued Expenses Income Taxes Payable Other Current Liabilities Total Current Liabilities 544.25 155.49 989.32 52.80 529.58 0.00 100.00 2,371.44 782.39 296.39 168.87 215.35 124.65 0.00 100.00 1,687.63 728.12 1,118.28 255.03 221.27 0.00 0.00 397.77 2,720.47 Mortgages Deferred Charges Non-Current Capital Leases Minority Interest Convertible Debt Total Long-Term Debt Other Long-Term Liabilities Other Liabilities Total Long Term Liabilities Total Liabilities 0.00 0.00 50.98 0.00 0.00 0.00 0.00 0.00 50.98 2,422.42 0.00 0.00 327.27 0.00 0.00 56.65 0.00 710.37 1,094.30 2,781.93 0.00 0.00 433.64 0.00 0.00 209.36 0.00 0.00 643.00 3,363.47 0.00 26.46 24,735.76 (21,676.70) 0.00 3,085.52 0.00 3,085.52 0.00 21.20 14,041.05 (12,830.34) 0.00 1,231.91 0.00 1,231.91 0.00 18.01 11,871.18 (10,273.02) (35.98) 1,580.20 0.00 1,580.20 5,507.94 4,013.84 4,943.66 Preferred Stock Net Common Stock Capital Surplus Retained Earnings Other Equity Adjustments Common Equity Treasury Stock Shareholders' Equity Total Liabilities and Equity 34 Cohen Independent Research Group FINANCIAL STATEMENTS Quarterly Balance Sheet Dec-03 1,282.66 716.68 0.00 961.85 227.36 3,188.55 Sep-03 2,015.42 774.82 953.49 196.92 1,472.82 5,413.46 Jun-03 3,579.27 1,219.57 883.31 238.46 1,388.25 7,308.86 Mar-03 51.37 936.93 598.26 266.15 184.28 2,036.99 Gross Property/Plant/Equipment Accumulated Depreciation Net Property/Plant/Equipment Investments & Advances Deferred Charges Intangibles Other Non-Current Assets Other Assets Total Assets 0.00 0.00 29.37 0.00 0.00 359.41 1,660.62 0.00 5,507.94 0.00 0.00 1,318.64 0.00 0.00 735.63 0.00 0.00 7,467.73 0.00 0.00 1,359.80 0.00 0.00 751.91 0.00 0.00 9,420.58 0.00 0.00 1,421.81 0.00 0.00 743.01 13.85 0.00 4,215.65 Liabilities & Shareholders Equity Accounts Payable Notes Payable Current Long-Term Debt Current Capital Leases Accrued Expenses Income Taxes Payable Other Current Liabilities Total Current Liabilities 544.25 155.49 989.32 52.80 529.58 0.00 100.00 2,371.44 236.88 97.14 913.29 196.60 0.00 0.00 407.53 1,851.44 832.53 479.99 117.27 234.41 0.00 0.00 460.78 2,124.98 1,087.40 467.65 113.16 227.45 0.00 0.00 509.89 2,405.54 Mortgages Deferred Charges Non-Current Capital Leases Minority Interest Convertible Debt Total Long-Term Debt Other Long-Term Liabilities Other Liabilities Total Long Term Liabilities Total Liabilities 0.00 0.00 50.98 0.00 0.00 0.00 0.00 0.00 50.98 2,422.42 0.00 0.00 160.77 0.00 1,968.57 10.81 0.00 0.00 2,140.15 3,991.59 0.00 0.00 203.63 0.00 1,665.71 21.20 0.00 793.12 2,683.67 4,808.65 0.00 0.00 261.37 0.00 0.00 36.04 0.00 751.75 1,049.16 3,454.70 0.00 26.46 24,735.76 (21,676.70) 0.00 3,085.52 0.00 3,085.52 0.00 21.38 18,532.84 (15,078.07) 0.00 3,476.15 0.00 3,476.15 0.00 21.29 18,424.01 (13,833.37) 0.00 4,611.93 0.00 4,611.93 0.00 21.20 14,041.05 (13,301.30) 0.00 760.95 0.00 760.95 5,507.94 7,467.73 9,420.58 4,215.65 Assets Cash & Marketable Securities Receivables Inventories Notes Receivable Other Current Assets Total Current Assets Preferred Stock Net Common Stock Capital Surplus Retained Earnings Other Equity Adjustments Common Equity Treasury Stock Shareholders' Equity Total Liabilities and Equity 35