General

The Company

We market over-the-counter and prescription pharmaceutical and health related products. Our product lines currently include dermatological brands, marketed by our wholly owned subsidiary, Doak Dermatologics, Inc., and nutritional, respiratory, and internal medicine brands, marketed by our Kenwood Therapeutics division. We are currently actively promoting products in the dermatology and gastroenterology and, to a lesser extent, nutritional market. All of our product lines are manufactured and supplied by independent contractors who operate under our quality control standards. Our products are marketed primarily to wholesalers. The wholesalers, in turn, distribute the products to retail outlets and healthcare institutions throughout the United States. We also sell to distributors in selected international markets.

Our growth strategy is to make acquisitions, including through co-marketing and licensing agreements, of products from major pharmaceutical organizations that we believe require intensified marketing and promotional attention. We have acquired, and intend to acquire, rights to manufacture and market pharmaceutical and health related products which are effective and for which a demonstrated market exists, but which are not actively promoted and where the surrounding competitive environment does not necessarily include major pharmaceutical companies. In addition to acquisitions, our growth strategy is to introduce new products through modest research and development of existing chemical entities.

We were incorporated in New Jersey in January 1985 and subsequently reincorporated in Delaware in July 1998. Our principal executive offices are located at 383 Route 46 West, Fairfield, New Jersey 07004, and our telephone number is (973) 882-1505.

Material Product Acquisitions

We commenced operations in January 1985 and through December 2001 we acquired more than 16 product lines from many leading pharmaceutical companies. During this time, we acquired products from Schering-Plough Corporation, Aventis Healthcare, Inc., American Home Products Corporation, Upsher-Smith Laboratories, Inc., and Procter & Gamble Pharmaceuticals, Inc.

In March 1993, we acquired from Tsumura Medical, a division of Tsumura International, Inc., all technical, proprietary and distribution rights to a specialized dermal patch product, TRANS-VER-SAL(r), currently used in the treatment of warts.

In December 1993, we acquired from Berlex Laboratories, a subsidiary of Schering AG, all technical, proprietary rights, including trademarks and registrations to DECONAMINE(r), a chlorpheniramine maleate/ d-pseudoephedrine HCI prescription product line used in connection with coughs, colds, and allergies.

In February 1994, we acquired from the Pharmacia Corporation all U.S. manufacturing, packaging and proprietary rights, including all trademarks and registrations to PAMINE(r), a methscopolamine bromide tablet used in connection with the treatment of peptic ulcers.

In June 1994, we acquired from Hoffmann-La Roche, Inc. all manufacturing, packaging, quality control, stability, drug experience, file history, customers and marketing rights, titles and interests, including all trademarks to CARMOL(r) 10 and CARMOL(r) 20 nonprescription urea-based moisturizers and CARMOL (r) HC, a prescription moisturizer containing hydrocortisone, in the United States and the remaining countries in the Western Hemisphere.

In May 1996, we acquired the trademark rights to the ACIDMANTLE(r) skin treatment line from Novartis Pharmaceuticals Corporation, and the exclusive ACIDMANTLE(r) manufacturing, marketing and distribution rights for the United States and Puerto Rico.

In October 1998, we acquired from Procter & Gamble Pharmaceuticals, the U.S. manufacturing, packaging and proprietary rights, including all trademarks and registrations to BRONTEX(r), a potent cough reliever. In consideration, we agreed to pay Procter & Gamble Pharmaceuticals up to $1,800,000, of which $600,000 was paid during October 1998. The remaining balance was paid in February 2000.

Acquisition of DOAK Subsidiary

During February 1994, we acquired from Doak Dermatologics' principal stockholders, a controlling interest in Doak. The remaining capital stock of Doak was acquired pursuant to a merger consummated in January 1995. Total consideration paid by the Company for Doak was approximately $1.4 million.

Products

The following is a list of major products, by therapeutic category, that we market and distribute as of March 1, 2002. All of our products are available over-the-counter, with the exception of BRONTEX(r), DECONAMINE(r), CARMOL(r) HC, CARMOL(r) 40, CARMOL(r) SCALP LOTION, CARMOL(r) SCALP TREATMENT KIT, GLUTOFAC(r)-ZX, GLUTOFAC(r)-MX, LIDAMANTLE(r), LIDAMANTLE(r) HC, PAMINE(r), and TYZINE(r), each of which is a prescription pharmaceutical.

Dermatological Products Uses ----------------------- ----

ACIDMANTLE(r)/LIDAMANTLE(r)/HC Skin acidifier / Rx Topical Anesthetic

CARMOL(r) 10/20/40/HC Rx and OTC urea-based family of products for a variety of dermatological conditions

CARMOL(r) SCALP TREATMENT Rx and OTC urea-based family of products for a variety of scalp conditions

FORMULA 405(r)/A-H-A/LE PONT(r) Variety of topical products for the skin, hair and nails

TRANS-VER-SAL(r) Wart Remover Kit Unique dermal patch delivery system for (6mm, 12mm, 20mm sizes) wart removal

Nutritional Products Uses -------------------- ----

GLUTOFAC(r)-ZX/MX Rx and OTC vitamin/mineral supplements

Internal Medicine Products Uses -------------------------- ----

PAMINE(r) Rx Anticholinergic/antispasmodic

Respiratory Products Uses -------------------- ----

BRONTEX(r) Rx Antitussive/expectorant (Tablets/Syrup)

DECONAMINE(r) FAMILY Rx Antihistamine/decongestant (SR/Syrup/Tablets)

TYZINE(r) Rx Topical nasal decongestant (Solution/ Nasal Drops)

Product Liability Insurance

We maintain $5,000,000 of product liability insurance on our products. This insurance is in addition to required product liability insurance maintained by the manufacturers of our products. We believe that this amount of insurance coverage is adequate and reasonable. To date no product liability claim has been made against us and we have no reason to believe that any claim is pending or threatened.

Manufacturers and Suppliers

We do not own or operate any manufacturing or production facilities. Rather, approximately 20 independent companies manufacture and supply all of our products. Many of these companies also manufacture and supply products for some of our competitors. We also do not have licensing or other supply agreements with many of these manufacturers or suppliers for our products and therefore, many of them could terminate their relationship with us at any time, thereby hampering our ability to deliver and sell the manufactured product to our customers and negatively affecting our operating margins. From time to time we have experienced some minor delays in shipments from some of our vendors due to production - management problems, which were subsequently shipped without a material impact on our profitability. Although we believe we can obtain replacement manufacturing arrangements, the absence of such agreements with our present suppliers may interrupt our ability to sell our products and seriously affect our present and future sales. Currently, all of the Carmol(r) product lines, except Carmol(r) HC, are contract - manufactured by Groupe Parima, Inc. Any delays in manufacturing or shipping products by Groupe Parima may affect our product supply and ultimately have a negative impact on our sales and profitability.

We generally purchase products from approximately 20 different vendors on open credit terms, which are generally payable in 30 days. For the year ended December 31, 2001, 5 vendors that manufacture and package products for us each accounted for approximately 34%, 13%, 10%, 10%, and 8% of our cost of goods sold. For the year ended December 31, 2000, the same five vendors that manufacture and package products for us each accounted for approximately 13%, 13%, 12%, 11% and 11% each of the Company's cost of goods sold. No other vendor, packager or manufacturer accounted for more than 9% of the Company's cost of goods sold for 2001 and 2000. We currently have no manufacturing facilities of our own and, accordingly, are dependent upon maintaining existing relationships with our vendors or establishing new vendors to supply inventory. There can be no assurance that we would be able to replace our current vendors without any disruption to operations.

With the exception of arrangements relative to BRONTEX(r), CARMOL(r) 10, CARMOL(r) 20, CARMOL(r) 40, CARMOL(r) SCALP TREATMENT, LIDAMANTLE(r), LIDAMANTLE(r) HC, LUBRIN(r), PAMINE(r) and TRANS-VER-SAL(r), we do not have any licensing, manufacturing or other supply agreements with manufacturers or suppliers.

Marketing and Sales

We have acquired established products and product lines, developed line extensions for new products and licensed existing technologies. We concentrate our marketing efforts on the continued promotion of acquired product lines, line extensions to established customers and the expansion of distribution to new customers. Our overall marketing philosophy is to intensify and enhance the promotion of acquired products and line extensions throughout the United States and, where feasible, in selected international markets.

We market and sell products through full time sales personnel and a network of distributors and brokers. Non-prescription products are sold primarily to drug wholesalers, chain and independent pharmacies, chain and independent food stores, mass merchandisers, physician supply houses and hospitals. Prescription products are sold primarily to wholesalers, retail chains and managed care providers. We currently have approximately 1,590 active accounts, of which there are approximately 200 wholesalers, 890 retail chains and stores, 400 doctors and institutional accounts, 30 government entities and 70 managed care providers.

Our DECONAMINE(r) product line (categorized below as respiratory products) accounted for approximately 7%, 12%, 24%, 37%, and 45%, respectively, of 2001, 2000, 1999, 1998 and 1997 net sales. Our BRONTEX(r) product line (categorized below as respiratory products) accounted for 2%, 3%, 9% and 7%, respectively, of 2001, 2000, 1999 and 1998 net sales, respectively.

Doak's CARMOL(r) product line accounted for approximately 45%, 41%, 22%, 15%, and 12% of our 2001, 2000, 1999, 1998 and 1997 net sales, respectively. Changes in the performance of our CARMOL(r) product line, consequently, will have a material effect on future operations. The TRANS-VER-SAL(r) product line accounted for approximately 5%, 7%, 8%, 8% and 10% of our 2001, 2000, 1999, 1998, 1997 net sales, while the ACIDMANTLE(r) product line accounted for approximately 8%, 4%, 6%, 6% and 4% of our 2001, 2000, 1999, 1998 and 1997 net sales. Doak's other products, including Formula 405(r), accounted for approximately 3%, 6%, 7%, 9% and 10%, of our 2001, 2000, 1999, 1998 and 1997 net sales. All of Doak's products are categorized below as dermatologic products.

Our 2001, 2000, 1999, 1998 and 1997 net sales volume percentages by category were as follows:

2001 2000 1999 1998 1997 ---- ---- ---- ---- ----

Dermatologic 60% 59% 43% 40% 40% Internal Medicine 17% 9% 8% 2% 1% Respiratory 14% 19% 39% 49% 50% Nutritional 8% 12% 8% 6% 5% Hygiene 1% 1% 2% 3% 4%

Sales of our DECONAMINE(r) and BRONTEX(r) product lines and other cough/cold/flu products are primarily concentrated in the fall and winter months. Consequently, revenues from these products generally are, and will be, determined by the severity of the cough/cold/flu season.

Our principal marketing focus is on the sales of branded pharmaceutical products. We have a national sales force of over 100 field representatives, which is comprised of both full and part time employees as well as independent contractors whose sole focus is the distribution of samples. Our marketing and sales promotions principally target key high volume prescribing doctors through detailing and sampling to encourage physicians to prescribe or recommend our products.

The sales force is supported and supplemented chiefly by telemarketing and direct mail, and to a lesser extent through advertising in trade publications and participation at regional and national medical conventions. We identify and target physicians through data available from such companies as IMS America, Ltd. and NDC Health, suppliers of prescriber prescription data. We intend to seek new markets in which to promote our product lines and will continue expansion of our field sales force as product growth or product acquisitions warrant.

We have made a strategic decision to concentrate selling and marketing resources on ten principal brands (which represented 92%, 90%, 89% and 92% of 2001, 2000, 1999 and 1998 net sales, respectively) as follows:

Kenwood Brands Specialty -------------- ---------

BRONTEX(r) General Practitioners, DECONAMINE(r) Allergists, Pediatricians, TYZINE(r) Otolaryngologists ENTSOL(r)

PAMINE(r) Gastroenterologists, Internal Medicine

GLUTOFAC(r) FAMILY General Practitioners

Doak Brands Specialty ----------- ---------

CARMOL(r) FAMILY Dermatologists, TRANS-VER-SAL(r) Podiatrists ACIDMANTLE(r)/LIDAMANTLE(r)/HC

To facilitate sales of our products internationally (including Puerto Rico), we have entered into agreements with 35 international pharmaceutical distributors to provide for distribution and promotion of these products. Approximately 7%, 11%, 9%, 11% and 13%, respectively, of our 2001, 2000, 1999, 1998 and 1997 net sales were from international business.

We continue to seek out new distributors and are currently in process of obtaining market approvals in at least 10 new country markets. Although we anticipate receiving the necessary approvals to market our products in these countries, there can be no assurance that such approvals will be received.

We have received product registrations and applied for additional product registrations to distribute products in certain international markets as follows:

OUR INTERNATIONAL MARKETING STATUS CURRENTLY MARKETING

Andorra TRANS-VER-SAL(r)

Argentina TRANS-VER-SAL(r)

Belgium LUBRIN(r)

Brunei ACIDMANTLE(r) BRONTEX(r) CARMOL(r) DECONAMINE(r) DOAK(r) TAR DUADACIN(r) ENTSOL(r) IRCON(r) LIDAMANTLE(r) GLUTOFAC(r) LUBRIN(r) SULFOAM(r) SULPHO-LAC(r) TRANS-VER-SAL(r) TYZINE(r) PAMINE(r)

Canada TRANS-VER-SAL(r)

Chile TRANS-VER-SAL(r)

Cyprus A-H-A LINE IPSATOL(r) KTL(r) LUBRIN(r) TYZINE(r)

Denmark LUBRIN(r)

Dominican Republic APATATE(r) CARMOL(r) GLUTOFAC(r) IRCON(r) I-L-X(r) B12 KTL(r) LUBRIN(r) TRANS-VER-SAL(r)

El Salvador A-H-A LINE CARMOL(r)

Finland LUBRIN(r)

France TRANS-VER-SAL(r)

Germany LUBRIN(r)

Hong Kong ACIDMANTLE(r) A-H-A LINE CARMOL(r) DUADACIN(r) DOAK(r) TAR DECONAMINE(r) FORMULA 405(r) GLUTOFAC(r) TERSASEPTIC(r) TERSA-TAR(r)

Iceland DOAK(r) TAR FORMULA 405(r) LUBRIN(r) TRANS-VER-SAL(r)

Israel LUBRIN(r)

Italy TRANS-VER-SAL(r)

Jordan A-H-A Line CARMOL(r) DOAK(r) TAR FORMULA 405(r) SULPHO-LAC(r)

Malaysia LUBRIN(r)

Mexico A-H-A LINE DOAK(r) TAR FORMULA 405(r) LUBRIN(r) TERSASEPTIC(r) TRANS-VER-SAL(r)

Netherlands LUBRIN(r)

Portugal TRANS-VER-SAL(r)

Puerto Rico COMPLETE BRADLEY LINE

Qatar TRANS-VER-SAL(r)

Saudi Arabia ACIDMANTLE(r) A-H-A LINE CARMOL(r) DOAK(r) TAR FORMULA 405(r) SULFOAM(r) SULPHO-LAC(r) TERSASEPTIC(r) TRANS-VER-SAL(r)

Singapore ENTSOL(r) LUBRIN(r)

South Africa ENTSOL(r)

South Korea LE PONT(r) IRCON(r)

Spain TAR DISTILLATE TRANS-VER-SAL(r)

Sweden A-H-A LINE

Taiwan A-H-A LINE FORMULA 405(r) LE PONT(r) LUBRIN(r) TRANS-VER-SAL(r)

Trinidad & Tobago GLUTOFAC(r)-ZX I-L-X(r) B12

United Arab Emirates A-H-A LINE FORMULA 405(r) TERSASEPTIC(r)

United Kingdom LUBRIN(r)

Yemen A-H-A LINE CARMOL(r) DOAK(r) TAR FORMULA 405(r) TRANS-VER-SAL(r) SULPHO-LAC(r) TERSASEPTIC(r)

Competition

The pharmaceutical industry is highly competitive. We compete primarily in the dermatology and gastroenterology product arenas, and to a lesser extent in respiratory and nutritional supplements. In dermatology, we estimate that currently the market share for Carmol(r) 40 is 6%. In gastroenterology, we estimate that currently the market share for Pamine(r) is 7%. Pamine(r) is a long-acting tablet which is indicated as part of therapy for the treatment of peptic ulcers. In particular, Pamine(r) relieves pain associated with bloating, diarrhea, and cramps. Pamine(r) competes in a $70 million market, which includes the products Robinul(r), Bentyl(r), and others.

Many of our competitors are large, well-established companies in the fields of pharmaceuticals, chemicals, cosmetics and health care. Our competitors include American Home Products, Schering-Plough, Bristol-Myers, Elan Corporation, Plc, First Horizon Pharmaceuticals, Galderma, Dermik Labs, King Pharmaceuticals, Medicis Pharmaceutical, Ortho Pharmaceuticals, ICN Pharmaceuticals, Warner-Lambert, GlaxoSmithKline, Pharmacia, Pfizer and others. Many of these companies have greater resources than we do to devote to marketing, sales, research and development and acquisitions. As a result, they have a greater ability than us to undertake more extensive research and development, marketing and pricing policy programs.

In addition to our facing competition from existing products, it is also possible that our competitors may develop and bring new products to market before us, or may develop new technologies to improve existing products, new products to provide the same benefits as existing products at less cost, or new products to provide benefits superior to those of existing products. These competitors also may develop products which make our current or future products obsolete. Our competitors may also make technological advances reducing their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment. Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins.

Additionally, since our products are generally established and commonly sold, they are subject to competition from products with similar qualities. Our pharmaceutical products may be subject to competition from alternate therapies during the period of patent protection, if applicable, and thereafter from generic equivalents. The manufacturers of generic products typically do not bear the related research and development costs or the invested capital in acquired brands and consequently are able to offer such products at considerably lower price. There are, however, a number of factors that enable products to remain profitable once patent protection has ceased. These include the establishment of a strong brand image with the prescriber or the consumer, supported by the development of a broader range of alternative formulations than the manufacturers of generic products typically supply.

Government Regulation

Virtually all aspects of our activities are regulated by federal and state statutes and government agencies. The manufacturing, processing, formulation, packaging, labeling, distribution and advertising of our products, and disposal of waste products arising from these activities, are subject to regulation by one or more federal agencies, including the FDA, the Drug Enforcement Agency, the Federal Trade Commission, the Consumer Product Safety Commission, the U.S. Department of Agriculture, the Occupational Safety and Health Administration, and the Environmental Protection Agency, as well as by foreign governments in countries where we distribute some of our products.

Noncompliance with applicable FDA policies or requirements could subject us to enforcement actions, such as suspensions of distribution, seizure of products, product recalls, fines, criminal penalties, injunctions, failure to approve pending drug product applications or withdrawal of product marketing approvals. Similar civil or criminal penalties could be imposed by other government agencies or various agencies of the states and localities in which our products are manufactured, sold or distributed and could have ramifications for our contracts with government agencies such as the Veteran's Administration or the Department of Defense. These enforcement actions would detract from management's ability to focus on our daily business and would have an adverse effect on the way we conduct our daily business, which could severely impact future profitability.

All manufacturers, marketers, and distributors of human pharmaceutical products are subject to regulation by the FDA. New drugs must be the subject of an FDA-approved new drug application before they may be marketed in the United States. Some prescription and other drugs are not the subject of an approved marketing application but, rather, are marketed subject to the FDA's regulatory discretion and/or enforcement policies. Any change in the FDA's enforcement discretion and/or policies could alter the way we have to conduct our business and any such change could severely impact our future profitability.

The FDA has the authority and discretion to withdraw existing marketing approvals and to review the regulatory status of marketed products at any time. For example, the FDA may require an approved marketing application for any drug product marketed if new information reveals questions about a drug's safety or efficacy. All drugs must be manufactured in conformity with current agency regulations, and drug products subject to an approved application must be manufactured, processed, packaged, held and labeled in accordance with information contained in the approved application.

Although we believe that all of our currently marketed pharmaceutical products comply with FDA enforcement policies, our marketing is subject to challenge by the FDA at any time. Through various enforcement mechanisms, the FDA can ensure that noncomplying drugs are no longer marketed. In addition, modifications, enhancements, or changes in manufacturing sites of approved products are in many circumstances subject to additional FDA approvals which may or may not be received and which may be subject to a lengthy FDA review process. Our third-party manufacturers are continually subject to inspection by governmental agencies. Manufacturing operations could be interrupted or halted in any of those facilities if a government or regulatory authority is unsatisfied with the results of an inspection. Any interruptions of this type could stop or slow the delivery of our products to our customers.

Certain of our pharmaceutical products are sold over-the-counter. These products are subject to FDA regulations known as monographs, which specify permissible active ingredients, labeling and indications. The monographs are subject to change. No assurance can be given that future FDA enforcement or regulatory decisions or changes to monographs will not hamper our marketing efforts or render our products unlawful for commercial sale, causing us to withdraw our products from the marketplace or spend substantial funds reformulating the products.

Specifically, our DECONAMINE(r) product line, which currently has prescription status, falls under these monographs. Once a final monograph is issued by the FDA with respect to a product, the product historically can remain as a prescription product for up to one additional year. We anticipate that final monographs for our DECONAMINE(r) product line, thereby converting the product line from prescription status to over-the-counter status, may possibly be issued by the FDA at some time in the future. We currently intend to continue to market and distribute the DECONAMINE(r) line of products as prescription products as long as we may lawfully continue to do so. We are presently exploring our marketing and distribution strategy relating to the DECONAMINE(r) product line after final monographs covering these products are issued, and, as such, it is not currently possible to predict how our operations and financial condition will be affected, or whether we will have resources sufficient to aggressively market the DECONAMINE(r) line of products, if, and when, this product line is converted from prescription status to over-the-counter status.

Further, we are required to file an Abbreviated New Drug Application, an ANDA, with the FDA for our DECONAMINE(r) SR product, which is expected to maintain the prescription status of this product beyond the final monograph. The cost of this application is approximately $900,000. We previously entered into an agreement with Phoenix International to perform clinical studies required for the issuance of the ANDA. As of the date of this 10-KSB, we have paid approximately $350,000 with respect to this project. The project is being deferred until regulatory and competitive circumstances warrant completion and submission to the FDA.

We currently are the registered holders of one New Drug Application for PAMINE(r) and two ANDAs for TYZINE(r) and CARMOL(r) HC. These applications, approved by the FDA, permit companies to market products either considered by the FDA to be new drugs or drugs previously approved by the FDA.

Managed Care Organizations

Our operating results and business success depend in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities, such as Medicaid, private health insurers and managed care organizations. A majority of the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to it and the pharmacy benefit managers that serve many of these organizations are important to our business. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. Changes in the reimbursement policies of these entities could prevent our branded pharmaceutical products from competing on a price basis. If our products are not included within an adequate number of formularies or if adequate reimbursement levels are not provided, or if reimbursement policies increasingly favor generic products, our market share, our gross margins, and our overall business and financial condition could be negatively affected.

Moreover, some of our products are not of a type generally eligible for reimbursement, primarily due to either the product's market share being too low to be considered, cheaper generics being available, or because the product is considered over-the-counter. It is also possible that products manufactured by others could have the same effects as our products and be subject to reimbursement. If this were the case, some of our products might be unable to compete on a price basis.

Patents and Trademarks

The products currently sold by us, with the exception of TRANS-VER-SAL(r), ENTSOL(r) Adaptor and CARMOL(r) 40 are not patented and we intend to pursue patents where it is logical, however, we do not currently intend to apply for patents for all of our products. Products with benefits similar to those marketed by us could easily be developed by other companies.

TRANS-VER-SAL(r), CARMOL(r) 40, and ENTSOL(r) Adaptor United States patents expire on October 18, 2005, April 2, 2018, and June 24, 2018, respectively. Patents maintained for LUBRIN(r) and TRANS-VER-SAL(r) in other countries have various expiration dates.

We own all trademarks associated with each of our products including national and international trademark registrations, or common law rights, for each of our material products. No assurance can be given as to the extent or scope of the trademarks or other proprietary protection secured by us on our products. To our knowledge, none of the trademarks owned by us infringe on any trademarks owned or used by others.

Human Resources

As of March 1, 2001, we employed 82 full and 42 part-time associates. We also maintain active independent contractor relationships with various individuals with whom we have consulting agreements. We believe that our relationship with our associates is good. None of our associates are subject to a collective bargaining agreement.

Scientific Advisors

We have formed a group of scientific advisors having extensive experience in the areas in which we market our products to advise us in long-range planning and product development. The following sets forth information with respect to the our Scientific Advisors:

Boni E. Elewski, M.D., is Director of Clinical Research for the Department of Dermatology at the University of Alabama at Birmingham. Dr. Elewski was awarded a B.A. from Miami University and received her M.D. from Ohio State University College of Medicine. Dr. Elewski serves as Vice President of the American Academy of Dermatology, the largest and most influential dermatologic association. Dr. Elewski is currently a professor of Dermatology at the University of Alabama at Birmingham. She has authored more than 130 publications and is a member of the editorial board of the Journal of the American Academy of Dermatology.

Cory A. Golloub, M.D., is a doctor of internal medicine and pediatrics currently practicing in Montville, New Jersey. Dr. Golloub received his B.S. from SUNY Stony Brook and his M.D. from the University of Medicine, Tampico, Mexico with postgraduate affiliations with SUNY Downstate - Brookdale Hospital and UMDNJ - New Jersey Medical School. Dr. Golloub is currently affiliated with UMDNJ-NJMS, University Hospital and Chilton Memorial Hospital in New Jersey.

Stephen M. Gross, Ed.D, is Dean of the Arnold and Marie Schwartz College of Pharmacy & Health Sciences, and of the School of Health Professions, Long Island University. Dr. Gross was awarded a B.S. degree in pharmacy in 1960, and earned his M.A. and Ed.D. degrees in college and university administration in 1969 and 1975, respectively, from Columbia University. Dr. Gross' expertise is in the area of pharmacy administration, where he has authored numerous articles on a variety of subjects, including cost-effectiveness of drug therapy, pharmaceutical advertising, and other educational and pharmacy practice topics. Dr. Gross is also a member of the New York State Board of Pharmacy.

Michael Kaliner, M.D., is a board certified in Allergy and Immunology. Dr. Kaliner is currently the Medical Director for the Institute for Asthma and Allergy and Section Chief for Allergy and Immunology for the Washington Hospital in Washington, D.C. and Clinical Professor of Medicine at George Washington University School of Medicine. He also serves as an officer in several professional organizations. He previously was the President of the American Academy of Allergy, Asthma and Immunology and Chairman of the Board of Allergy and Immunology. He held offices with the World Allergy Organization: Treasurer, Second Vice President and Chairman of the 18th Congress. He has also authored more than 425 articles and books. Dr. Kaliner received his B.S. and M.D. from the University of Maryland.

Lewis H. Kaminester, M.D., F.A.A.D., F.A.C.P., is a dermatologist practicing in North Palm Beach for the past 25 years. Dr. Kaminester graduated Franklin and Marshall College with Honors in Biology and as member of Phi Beta Kappa. He graduated from University of Pennsylvania School of Medicine, where he was also a dermatology resident. He is on the clinical staff at University of Miami School of Medicine, Department of Dermatology and Dermatological Surgery.

James J. Leyden, M.D., is a board certified dermatologist currently on the staff of the Department of Dermatology in the Hospital of the University of Pennsylvania. Dr. Leyden received his B.A. from Saint Joseph's College and his M.D. from The University of Pennsylvania School of Medicine. Dr. Leyden has authored more than 300 publications and served as an editor for publications such as the Journal of the American Academy of Dermatology and The Journal of Microbial Ecology in Health and Disease and has held the position of Editor-in-Chief of Cutaneous Aging and Cosmetic Dermatology. Dr. Leyden is a member of the American Academy of Dermatology, the Society of Investigative Dermatology and the Society of Pediatric Dermatology.

Richard H. Mann, D.P.M., is a doctor of podiatric medicine, board-certified in foot and ankle surgery, microscopic laser surgery of the foot and is a Fellow of the Academy of Ambulatory Foot Surgeons and American College of Foot Surgeons. Dr. Mann received his B.A. from Queens College of the City University of New York and his D.P.M. from the New York College of Podiatric Medicine. Dr.Mann has developed several new pharmaceutical products in a wide variety of medical areas.

Bryan Craig Markinson, D.P.M., is Chief of Podiatric Medicine and Surgery and Assistant Clinical Professor of Orthopedics and Pathology at Mount Sinai School of Medicine. Dr. Markinson also is an adjunct professor, Division of Medical Sciences, for the New York College of Podiatric Medicine. Dr. Markinson was awarded a B.S. from Long Island University and a D.P.M. from the New York College of Podiatric Medicine. Dr. Markinson has served on the staffs of Metropolitan Hospital, New York Methodist Hospital, New York Community Hospital of Brooklyn and Foot Clinics of New York. He is a member of the American Podiatric Medical Association, the New York State Podiatric Medical Association and a Fellow of the American Society of Podiatric Dermatology.

David Parsons, M.D. is a board certified ear, nose and throat surgeon, and a Fellow of the American College of Surgeons. He is a recognized international authority on paranasal sinus disease and has written an authoritative textbook on sinus care. Dr. Parsons enjoyed a 26-year Air Force career, which included serving as the Consultant to the Surgeon General for Head & Neck Surgery, Vice Chairman of the Department of Otolaryngology, Wilford Hall USAF Medical Center, and Clinical Professor of Otolaryngology/Head & Neck Surgery at the University of Texas-San Antonio and at the University of Colorado. Most recently, he was Professor of Surgery and Pediatrics at the University of Missouri-Columbia. Dr. Parsons received his M.D. degree from the University of Texas-Houston, and is now in private practice of Otolaryngology.

Alan R. Shalita, M.D. is a board certified dermatologist and currently Professor and Chairman of the State University of New York Health Science Center at Brooklyn. Dr. Shalita received his B.S. from University of Brussels, Belgium and M.D. from Bowman Gray School of Medicine. Dr. Shalita is also licensed in New Jersey, North Carolina, California and Florida.

Mitchell J. Spirt, M.D. is a doctor of internal medicine currently on faculty as Assistant Clinical Professor of Medicine at the UCLA School of Medicine, California. Dr. Spirt received his B.S. from University of New York at Binghamton and received his M.D. from Mount Sinai Medical Center in New York. Dr. Spirt performed his internship and residency at Mount Sinai Medical Center, New York and a Fellow at the University of California at Los Angeles (UCLA).

Gerald N. Wachs, M.D. is a doctor of dermatology currently practicing in Millburn, New Jersey. Dr. Wachs received his B.S. and M.D. from the University of Illinois. Dr. Wachs is currently affiliated with St. Barnabas Hospital and Overlook Hospital in New Jersey and is a consulting dermatologist for the New Jersey Nets and New Jersey Devils.

Factors That May Affect Future Results

Failure to maintain Carmol(r) as a significant portion of revenue could reduce our profitability.

Our lead product line is the Carmol(r) family of products for the treatment of a variety of dermatological conditions. Carmol(r) 40, the lead product in the group, is a potent tissue softener for the treatment of skin conditions associated with the thickening and hardening of the skin. The Carmol(r) product line predominantly competes in the $150 million mild-to-moderate skin-softening product class, which includes the products Lac-Hydrin(r), Eucerin(r), Amlactin(r), Aquaphor(r), and others.

For the fiscal years ended December 31, 2001, 2000 and 1999, sales of our Carmol(r) product line accounted for approximately 45%, 41%, and 22% respectively, of our net sales. Thus, we depend on our ability to market and sell the Carmol(r) product line. The concentration of our net sales in a single product line makes us particularly dependent on that line. If demand for the Carmol(r) product line or any other material product line decreases and we fail to replace those sales, our revenues and profitability would decrease. Some contributing factors that may reduce the demand for Carmol(r) include increased competition from existing products, introduction of a new product with competitive advantages, and the inability to protect our patent, and government intervention.

Because we rely on independent manufacturers for our products, any regulatory or production problems could affect our product supply.

We do not own or operate any manufacturing or production facilities. Rather, approximately 20 independent companies manufacture and supply all of our products. Many of these companies also manufacture and supply products for some of our competitors. We also do not have licensing or other supply agreements with many of these manufacturers or suppliers for our products and therefore, many of them could terminate their relationship with us at any time, thereby hampering our ability to deliver and sell the manufactured product to our customers and negatively affecting our operating margins. From time to time we have experienced some minor delays in shipments from some of our vendors due to production - management problems, which were subsequently shipped without a material impact on our profitability. Although we believe we can obtain replacement manufacturing arrangements, the absence of such agreements with our present suppliers may interrupt our ability to sell our products and seriously affect our present and future sales. Currently, all of the Carmol(r) product lines, except Carmol(r) HC, are contract - manufactured by Groupe Parima, Inc. Any delays in manufacturing or shipping products by Groupe Parima may affect our product supply and ultimately have a negative impact on our sales and profitability.

We face significant competition within our industry.

The pharmaceutical industry is highly competitive. We compete primarily in the dermatology and gastroenterology product arenas, and to a lesser extent in respiratory and nutritional supplements. In dermatology, we estimate that currently the market share for Carmol(r) 40 is 6%. In gastroenterology, we estimate that currently the market share for Pamine(r) is 7%. Pamine(r) is indicated as part of therapy for the treatment of peptic ulcers. In particular, Pamine(r) relieves pain associated with bloating, diarrhea, and cramps. Pamine(r) competes in a $70 million market, which includes the products Robinul(r), Bentyl(r), and others.

Many of our competitors are large, well-established companies in the fields of pharmaceuticals, chemicals, cosmetics and health care. Our competitors include American Home Products, Schering-Plough, Bristol-Myers, Elan Corporation, Plc, First Horizon Pharmaceuticals, Galderma, Dermik Labs, King Pharmaceuticals, Medicis Pharmaceutical, Ortho Pharmaceuticals, ICN Pharmaceuticals, Warner-Lambert, GlaxoSmithKline, Pharmacia, Pfizer and others. Many of these companies have greater resources than we do to devote to marketing, sales, research and development and acquisitions. As a result, they have a greater ability than us to undertake more extensive research and development, marketing and pricing policy programs.

In addition to our facing competition from existing products, it is also possible that our competitors may develop and bring new products to market before us, or may develop new technologies to improve existing products, new products to provide the same benefits as existing products at less cost, or new products to provide benefits superior to those of existing products. These competitors also may develop products which make our current or future products obsolete. Our competitors may also make technological advances reducing their cost of production so that they may engage in price competition through aggressive pricing policies to secure a greater market share to our detriment. Any of these events could have a significant negative impact on our business and financial results, including reductions in our market share and gross margins.

If we cannot purchase or integrate new companies or products, our business may suffer.

Our principal strategy is to continue to expand our business by acquiring companies and new products, as well as product line extensions, new product development, and increased marketing and distribution activities. We seek products and companies that we believe can be profitable under our management and which are not subject to adverse Food and Drug Administration rulings. There are several factors, which could limit or restrict our ability to implement this acquisition strategy:

* We may not have the financing to acquire an available product, in part because LaSalle Business Credit, Inc. has a security interest on all of our assets;

* We may not be able to achieve our targeted profit margins with certain products available for acquisition;

* Because we must be able to maintain adequate operational, financial and management information systems and motivate and effectively manage an increasing number of employees, we may not manage our acquisitions effectively;

* We may not be able to retain or hire the necessary qualified employees.

Sales of newly acquired products may not be profitable and we may not achieve anticipated sales levels for such products. Moreover, while we anticipate making future acquisitions in accordance with our strategic plan, we might be unable to consummate any future acquisitions or we may not be able to achieve the same rates of return and historical sales levels of any acquired product. Our failure to do so could have a negative effect on the growth of our sales and profitability, and on our operations.

To implement our expansion strategy, we will need to finance new product acquisitions from either:

* The acquisition loan from LaSalle;

* Existing working capital, positive cash flow from operations;

* New borrowings;

* Issuance of equity securities;

* Or by some combination thereof.

Although we are not currently prohibited from other borrowings of money, our loan agreement with LaSalle restricts our ability to grant liens upon, and security interests in, our assets. LaSalle's security interest could limit our ability to secure new asset-based borrowings if necessary. Accordingly, we may not be able to borrow, on commercially reasonable terms or otherwise, any additional funds necessary to finance further acquisitions or support operations.

Our continued growth depends upon our ability to develop new products.

We currently have a variety of new products in various stages of research and development and are working on possible improvements, extensions and reformulations of some existing products. These research and development activities, as well as the clinical testing and regulatory approval process, which must be completed before commercial quantities of these developments can be sold, will require commitments of personnel and financial resources. Delays in the research, development, testing or approval processes will cause a corresponding delay in revenue generation from those products. Regardless of whether they are ever released to the market, the expense of such processes will have already been incurred.

We reevaluate our research and development efforts regularly to assess whether our efforts to develop a particular product or technology are progressing at a rate that justifies our continued expenditures. On the basis of these reevaluations, we have abandoned in the past, and may abandon in the future, our efforts on a particular product or technology. Products we research or develop may never be successfully released to the market. If we fail to take a product or technology to market on a timely basis, we may incur significant expenses without a near-term financial return.

We may in the future, supplement our internal research and development by entering into research and development agreements with other pharmaceutical companies. We may, upon entering into such agreements, be required to make significant up-front payments to fund the project. We cannot be sure, however, that we will be able to locate adequate research partners or that supplemental research will be available on terms acceptable to us in the future. If we are unable to enter into additional research partnership arrangements, we may incur additional costs to continue research and development internally or we may abandon certain projects.

We do not have proprietary protection for most of our branded pharmaceutical products, and our sales could suffer from competition by generic substitutes.

Although most of our revenue is generated by products not subject to competition from generic products, there is no proprietary protection for most of our branded pharmaceutical products, and generic substitutes for most of these products are sold by other pharmaceutical companies. In addition, governmental and other pressure to reduce pharmaceutical costs may result in physicians prescribing products for which there are generic substitutes. Increased competition from the sale of generic pharmaceutical products may cause a decrease in revenue from our branded products, which could have an adverse effect on our business, financial condition and results of operations, which would likely negatively affect the market price of our stock. In addition, our branded products for which there is no generic form available may face competition from different therapeutic agents used for the same indications for which our branded products are used.

We depend on our trademarks, patents, and proprietary rights, and our ability to compete could be limited if they are infringed upon or if we fail to enforce them.

The protection of our trademarks and service marks is an important factor in product recognition, maintaining goodwill and in maintaining or increasing market share. If we do not adequately protect our rights in our various trademarks and service marks from infringement, those marks could be lost or impaired.

We are pursuing several U.S. patent applications covering new and existing dermatology products, and also have acquired rights under certain patents and patent applications from certain of our consultants and officers, including patents issued or applied covering Carmol(r)40, LidaMantle(r), LidaMantle(r)HC, AcidMantle(r), and ENTSOL(r). The ownership of a patent or an interest in a patent does not always provide significant protection and the patents and applications in which we have an interest may be challenged as to their validity or enforceability. Others may independently develop similar technologies or design around the patented aspects of our technology. Challenges may result in potentially significant harm to our business. The cost of responding to these challenges and the inherent costs to defend the validity of our patents, including the prosecution of infringements and the related litigation, could be substantial. Such litigation also could require a substantial commitment of management's time, which would detract from the time available to be spent maintaining and developing our business. We also rely upon unpatented proprietary know-how and continuing technological innovation in developing and manufacturing many of our principal products. We require all of our employees, consultants and advisors to enter into confidentiality agreements prohibiting them from taking or using our proprietary information and technology elsewhere. Nevertheless, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how if they are used or disclosed. Despite all of the precautions we may take, people who are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. In addition, others may independently develop similar or equivalent trade secrets or know-how.

We could be sued regarding the intellectual and proprietary rights of others, which could seriously harm our business and cost us a significant amount of time and money.

We only conduct patent searches to determine whether our products infringe upon any existing patents when we think such searches are appropriate. As a result, the products and technologies we currently market, and those we may market in the future may infringe on patents and other rights owned by others. If we are unsuccessful in any challenge to the marketing and sale of our products or technologies, we may be required to license the disputed rights, if the holder of those rights is willing, or to cease marketing the challenged products, or to modify our products to avoid infringing upon those rights.

We also have acquired rights under our Lubrin(r) patent and several patents issued or applied covering Carmol(r)40, LidaMantle(r), LidaMantle(r)HC, AcidMantle(r) and ENTSOL(r). These patents and patent applications may be subject to claims of rights by third parties. If there are conflicting claims to the same patent or patent application, we may not prevail and, even if we do have some rights in a patent or application, those rights may not be sufficient for the marketing and distribution of products covered by the patent or application.

Although we believe that our product lines do not infringe on the intellectual property rights of others, infringement claims may be asserted against us in the future, and if asserted, an infringement claim might not be successfully defended. The costs of responding to infringement claims could be substantial and could require a substantial commitment of management's time and resources.

Failure to comply with government regulations could affect our ability to operate our business.

Virtually all aspects of our activities are regulated by federal and state statutes and government agencies. The manufacturing, processing, formulation, packaging, labeling, distribution and advertising of our products, and disposal of waste products arising from these activities, are subject to regulation by one or more federal agencies, including the FDA, the Drug Enforcement Agency, the Federal Trade Commission, the Consumer Product Safety Commission, the U.S. Department of Agriculture, the Occupational Safety and Health Administration, and the Environmental Protection Agency, as well as by foreign governments in countries where we distribute some of our products.

Noncompliance with applicable FDA policies or requirements could subject us to enforcement actions, such as suspensions of distribution, seizure of products, product recalls, fines, criminal penalties, injunctions, failure to approve pending drug product applications or withdrawal of product marketing approvals. Similar civil or criminal penalties could be imposed by other government agencies or various agencies of the states and localities in which our products are manufactured, sold or distributed and could have ramifications for our contracts with government agencies such as the Veteran's Administration or the Department of Defense. These enforcement actions would detract from management's ability to focus on our daily business and would have an adverse effect on the way we conduct our daily business, which could severely impact

All manufacturers, marketers, and distributors of human pharmaceutical products are subject to regulation by the FDA. New drugs must be the subject of an FDA-approved new drug application before they may be marketed in the United States. Some prescription and other drugs are not the subject of an approved marketing application but, rather, are marketed subject to the FDA's regulatory discretion and/or enforcement policies. Any change in the FDA's enforcement discretion and/or policies could alter the way we have to conduct our business and any such change could severely impact our future profitability.

The FDA has the authority and discretion to withdraw existing marketing approvals and to review the regulatory status of marketed products at any time. For example, the FDA may require an approved marketing application for any drug product marketed if new information reveals questions about a drug's safety or efficacy. All drugs must be manufactured in conformity with current agency regulations, and drug products subject to an approved application must be manufactured, processed, packaged, held and labeled in accordance with information contained in the approved application.

Although we believe that all of our currently marketed pharmaceutical products comply with FDA enforcement policies, our marketing is subject to challenge by the FDA at any time. Through various enforcement mechanisms, the FDA can ensure that noncomplying drugs are no longer marketed. In addition, modifications, enhancements, or changes in manufacturing sites of approved products are in many circumstances subject to additional FDA approvals which may or may not be received and which may be subject to a lengthy FDA review process. Our third-party manufacturers are continually subject to inspection by governmental agencies. Manufacturing operations could be interrupted or halted in any of those facilities if a government or regulatory authority is unsatisfied with the results of an inspection. Any interruptions of this type could stop or slow the delivery of our products to our customers.

Because we rely on a limited number of wholesalers for the majority of our sales, any further consolidation among wholesalers could require us to reduce our pricing.

The pharmaceutical distribution industry has recently experienced a significant consolidation among wholesalers and chain stores. As a consequence, there are fewer channels for wholesale and retail pharmaceutical distribution than were historically available. Thus, we depend on fewer distributors for our products and we are less able to negotiate price terms with distributors. Although we believe that this consolidation among distributors will ultimately reduce our distribution costs, our inability to aggressively negotiate price terms with them over the long term, could inhibit our efforts to achieve targeted profit margins or sales levels. Notwithstanding our ability to by-pass the wholesale distribution network by distributing our products to end-users directly, the continued or future consolidation among pharmaceutical distributors could limit our ability to compete effectively.

Our five largest customers, who are wholesalers, accounted for an aggregate of approximately 92% and 88% of accounts receivable at December 31, 2001 and 2000, respectively. On December 31, 2001, Quality King, Inc. owed approximately $3,090,000 to the Company or 56% of accounts receivable. The following table presents a summary of sales to significant customers, who are also wholesalers, as a percentage of the Company's total gross sales:

Customer 2001 2000 -------- ---- ---- Cardinal Health, Inc. 20% 27% AmerisourceBergen Corporation 12% 23% Quality King, Inc. 40% 18% McKesson HBOC, Inc. 11% 11%

If we become subject to a product liability claim, we may not have adequate insurance coverage.

Pharmaceutical and health related products, such as those we market, may carry certain health risks. Consequently, consumers may bring product liability claims against us. We maintain a product liability insurance policy providing direct coverage in the aggregate amount of $5,000,000 and our manufacturers' policies also insure us. Our present insurance may not be adequate in the event of an adverse judgment against us. If insurance does not fully fund any product liability claim, or if we are unable to recover damages from the manufacturer of a product that may have caused such injury, we must pay such claims from our own funds. Any such payment could have a detrimental effect on our financial condition. In addition, we may not be able to maintain our liability insurance at reasonable premium rates, if at all.

Changes in the reimbursement policies of managed care organizations and other third-party payors may reduce our gross margins.

Our operating results and business success depend in large part on the availability of adequate third-party payor reimbursement to patients for our prescription-brand products. These third-party payors include governmental entities, such as Medicaid, private health insurers and managed care organizations. A majority of the U.S. population now participates in some version of managed care. Because of the size of the patient population covered by managed care organizations, marketing of prescription drugs to it and the pharmacy benefit managers that serve many of these organizations has become important to our business. Managed care organizations and other third-party payors try to negotiate the pricing of medical services and products to control their costs. Managed care organizations and pharmacy benefit managers typically develop formularies to reduce their cost for medications. Formularies can be based on the prices and therapeutic benefits of the available products. Due to their lower costs, generic products are often favored. The breadth of the products covered by formularies varies considerably from one managed care organization to another, and many formularies include alternative and competitive products for treatment of particular medical conditions. Exclusion of a product from a formulary can lead to its sharply reduced usage in the managed care organization patient population. Payment or reimbursement of only a portion of the cost of our prescription products could make our products less attractive, from a net-cost perspective, to patients, suppliers and prescribing physicians. Changes in the reimbursement policies of these entities could prevent our branded pharmaceutical products from competing on a price basis. If our products are not included within an adequate number of formularies or if adequate reimbursement levels are not provided, or if reimbursement policies increasingly favor generic products, our market share, our gross margins, and our overall business and financial condition could be negatively affected.

Moreover, some of our products are not of a type generally eligible for reimbursement, primarily due to either the product's market share being too low to be considered, cheaper generics being available, or because the product is considered over-the-counter. It is also possible that products manufactured by others could have the same effects as our products and be subject to reimbursement. If this were the case, some of our products might be unable to compete on a price basis.

Our business and growth strategy may cause fluctuating operating results, which could negatively affect the price of our stock.

Our primary strategy for growth is to acquire or license new product lines that we believe require intensive marketing and promotional attention. Our growth strategy also includes developing and introducing new products through modest research and development of existing chemical entities. Our operating results could be negatively affected if the cost of developing, acquiring or licensing new product lines is more than we currently anticipate or if unforeseen delays occur between the time we spend money to acquire new product lines or businesses, and the time we begin to generate revenues from those products or businesses.

A large portion of our business strategy involves intensively marketing newly-acquired or newly-licensed product lines by promoting our products through journal advertising, direct mailings of promotional materials to physicians, field force personnel, telemarketing personnel, and sample distribution. Changes in the amount we spend on such marketing could cause our operating results to fluctuate, thereby negatively affecting the price of our stock.

Unanticipated changes in treatment practices of physicians who currently prescribe our products, or changes in the reimbursement policies of health plans and other health insurers, could have an impact on our operating results and require us to revise our business strategy.

We could experience a significant loss in revenues if we fail to maintain sufficient inventory during our peak selling periods.

We typically experience greater revenues, up to 50%, and correspondingly, greater income during the last month of each fiscal quarter. We try to match our expenditures for inventory with these historical fluctuations in demand. However, if these demand patterns change or we experience even a small delay in delivery of inventory, revenue could be deferred or even lost if products are unavailable to meet peak demand. A deferral of revenue to a later period, or the loss of revenue completely, could cause significant period-to-period fluctuations in our operating results, as a significant portion of our approximately $4.2 million of operating expenses are fixed in the short term. These fluctuations could result in our not meeting earnings expectations, or could result in operating losses for a particular period.

We are subject to chargebacks and rebates when our products are resold to governmental agencies and managed care buying groups which may reduce our future profit margins.

Chargebacks and rebates are the difference between the prices at which we sell our products to wholesalers and the sales price the end-users, such as governmental agencies and managed care buying groups, ultimately pay pursuant to fixed price contracts. We record an estimate of the amount either to be charged back to us or rebated to the end-users at the time of sale to the wholesaler. Over recent years, the pharmaceutical industry in general has accepted the managed care system of chargebacks and rebates. Managed care organizations increasingly began using these chargebacks and rebates as a method to reduce overall costs in drug procurement. Levels of chargebacks and rebates have increased momentum and caused a greater need for more sophisticated tracking and data gathering to confirm sales at contract prices to end-users with respect to related sales to wholesalers. We have implemented procedures, systems and policies which we believe more closely monitor the managed care and government sales areas of our business. We record an accrual for chargebacks and rebates based upon factors including current contract prices, historical chargeback rates and actual chargebacks claimed. The amount of actual chargebacks claimed could, however, be higher than the amounts we accrue, and could reduce our profit margins.

The loss of our key personnel could limit our ability to operate our business successfully.

We are highly dependent on the principal members of our management staff, the loss of whose services we feel would impede the achievement of our acquisition and development objectives. Although we believe that we are adequately staffed in key positions and that we will be successful in retaining skilled and experienced management, operational, scientific and development personnel, we may not be able to attract and retain key personnel on acceptable terms. Many of our key personnel, including Daniel Glassman, President, Chief Executive Officer and Chairman, would be difficult to replace. The loss of our personnel's services could delay the development of contracts and products, especially in light of our recent growth. We do not maintain key-person life insurance on any of our employees. In addition, we do not have employment agreements with any of our key employees.

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