UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
--------- ----------
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
-----
As of January 28, 2002, there were 13,219,127 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 22 pages
Exhibit Index on Page 15
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 2001 (unaudited) and
June 30, 2001................................................................................3
Consolidated Statements of Operations
for the three and six months ended December 31, 2001
and 2000, as Restated (unaudited)............................................................4
Consolidated Statements of Cash Flows
for the six months ended December 31, 2001
and 2000, as Restated (unaudited)............................................................5
Notes to Consolidated Financial
Statements (unaudited)...................................................................6 - 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................................8 - 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................12
ITEM 2. Changes in Securities and Use of Proceeds.....................................................12
ITEM 3. Defaults upon Senior Securities...............................................................13
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................13
ITEM 5. Other Information.............................................................................13
ITEM 6. Exhibits and Reports on Form 8-K..............................................................13
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 12/31/01 06/30/01
------ -------- --------
CURRENT ASSETS:
Cash $ -- $ --
Trade accounts receivable (net of allowance of $15,000 and $25,000) 4,056,992 4,366,587
Inventories 3,460,584 3,156,109
Prepaid expenses 149,075 112,736
Deferred tax asset 147,703 983,403
------------ ------------
Total current assets 7,814,354 8,618,835
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 9,710,461 8,667,955
Less accumulated depreciation (3,469,301) (3,089,735)
------------ ------------
6,241,160 5,578,220
------------ ------------
RESTRICTED CASH 602,462 1,225,649
OTHER ASSETS 437,726 242,913
------------ ------------
Total assets $ 15,095,702 $ 15,665,617
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,316,690 $ 2,000,000
Line of credit-shareholder 1,871,439 4,225,000
Accounts payable 1,395,034 917,397
Accrued expenses 639,076 569,919
Income taxes payable 281,854 248,109
Current portion of long-term debt 728,330 728,330
------------ ------------
Total current liabilities 6,232,423 8,688,755
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 3,524,282 3,819,892
------------ ------------
DEFERRED TAX LIABILITY 641,285 641,285
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -
authorized 50,000,000 shares par value $.001:
issued and outstanding, 13,219,127 shares 13,219 13,206
Additional paid-in capital 2,324,822 2,312,575
Retained earnings 2,359,671 189,904
------------ ------------
Total shareholders' equity 4,697,712 2,515,685
------------ ------------
Total liabilities and shareholders' equity $ 15,095,702 $ 15,665,617
============ ============
See notes to consolidated financial statements
3
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
12/31/01 12/31/00 12/31/01 12/31/00
-------- -------- -------- --------
(Restated)
-----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 5,391,341 $ 2,285,091 $ 9,464,173 $ 4,049,056
COST OF SALES 2,236,715 1,881,320 3,783,159 3,042,199
------------ ------------ ------------ ------------
Gross profit 3,154,626 403,771 5,681,014 1,006,857
RESEARCH AND DEVELOPMENT EXPENSES 367,670 376,756 714,474 722,236
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 768,670 403,204 1,433,974 815,835
------------ ------------ ------------ ------------
Operating profit/(loss) 2,018,286 (376,189) 3,532,566 (531,211)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Income from settlement of lawsuit, net of fees -- -- -- 1,478,277
Interest income-restricted 6,732 27,342 18,635 56,864
Interest expense (91,136) (187,069) (212,434) (395,605)
------------ ------------ ------------ ------------
(84,404) (159,727) (193,799) 1,139,536
------------ ------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES $ 1,933,882 $ (535,916) $ 3,338,767 $ 608,325
------------ ------------ ------------ ------------
INCOME TAX EXPENSE/(BENEFIT) $ 677,290 $ (120,885) $ 1,169,000 $ 136,000
NET INCOME/(LOSS) $ 1,256,592 $ (415,031) $ 2,169,767 $ 472,325
============ ============ ============ ============
BASIC INCOME/(LOSS) PER SHARE $ .10 $ (.03) $ .16 $ .04
DILUTED INCOME/(LOSS) PER SHARE $ .09 $ (.03) $ .16 $ .04
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 13,219,127 13,206,128 13,212,628 13,206,128
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 13,303,645 13,206,128 13,297,146 13,206,128
See notes to the consolidated financial statements
4
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------
12/31/01 12/31/00
-------- --------
(Restated)
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 2,169,767 $ 472,325
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 400,732 376,384
Deferred tax expense 835,700 106,115
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable 309,595 55,934
Inventories (304,475) (317,273)
Prepaid expenses and other assets (252,318) 86,451
Accounts payable 477,637 (490,432)
Accrued expenses 69,157 (175,312)
Income taxes payable 33,745 --
----------- -----------
Net cash provided by operating activities 3,739,540 114,192
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,042,506) (825,083)
----------- -----------
Net cash used in investing activities (1,042,506) (825,083)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings/(repayments) under line of credit (683,310) 557,074
Repayments under line of credit -- shareholder (2,353,561) --
Repayments of debt (295,610) (220,889)
Proceeds from debt, net of restricted cash released 623,187 374,706
Proceeds from issuance of stock 12,260 --
----------- -----------
Net cash provided by/(used in) financing activities (2,697,034) 710,891
----------- -----------
NET INCREASE/(DECREASE) IN CASH -- --
CASH, BEGINNING OF YEAR -- --
----------- -----------
CASH, END OF PERIOD $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 114,549 $ 306,763
Income taxes paid during period $ 299,555 $ 0
See notes to the consolidated financial statements
5
LANNETT COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and the results of operations and cash flows.
The results of operations for the three and six months ended December 31,
2001 and 2000 are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2001.
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2000, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133, was effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. There has been no accounting, or financial effect
on the Company for the three and six months ended December 31, 2001 with respect
to this Statement. The Company will continue to analyze the impact, if any, of
adopting SFAS No. 133 will have on its consolidated financial position and
results of operations.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
- all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001.
- intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability
6
- goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective July 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
- effective July 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator
- all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Although management is still reviewing the provisions of these Statements, its
preliminary assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. This Statement also applies, for example, to a
company that operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when it cease
operation of that plant. A liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability and can be
reasonably estimated. The initial recording should be at fair value. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, with earlier application encouraged. The provisions of the Statement
are not expected to have a material impact on the financial condition or results
of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets). SFAS No. 144 retains the existing requirements
to recognize and measure the impairment of long-lived assets to be held and used
or to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this statement is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
NOTE 3. INVENTORIES
Inventories consist of the following:
December 31, June 30,
2001 2001
------------- -------------
(unaudited)
Raw materials $ 1,689,923 $ 1,516,030
Work-in-process 309,632 686,359
Finished goods 1,256,355 712,992
Packaging supplies 204,674 240,728
------------- -------------
$ 3,460,584 $ 3,156,109
============= =============
7
NOTE 4. INCOME TAXES
The provision for federal and state income taxes for the three months ended
December 31, 2001 was $677,290. The benefit recognized for federal and state
income taxes for the three months ended December 31, 2000 was $120,885. The
provision for federal and state income taxes for the six months ended December
31, 2001 and 2000 was $1,169,000 and $136,000, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $62,000 and $39,000 during the six months
ended December 31, 2001 and 2000, respectively, to a distributor (the "related
party") in which the owner is a relative of the Chairman of the Board of
Directors and principal shareholder of the Company. The Company also incurred
sales commissions payable to the related party of approximately $112,000 and
$225,000 during the six months ended December 31, 2001 and 2000, respectively.
Accounts receivable includes amounts due from the related party of approximately
$22,000 and $34,000 at December 31, 2001 and June 30, 2001, respectively.
Accrued expenses include amounts due to the related party of approximately
$14,000 and $29,000 at December 31, 2001 and June 30, 2001, respectively.
NOTE 6. SETTLEMENT OF LAWSUIT
Included in other income for the six months ended December 31, 2000 is
$1,478,277 in income from the settlement of a lawsuit, net of fees. The lawsuit
was initiated after a chemical supplier failed to supply the Company with raw
material for its manufacturing process, despite the existence of a signed
five-year supply contract. Lannett alleged that the breach of contract delayed
the introduction of one of its products into the marketplace. Consequently, the
Company and the defending party settled the suit out of court. The Company
received the proceeds in First Quarter Fiscal 2001. The Company incurred
approximately $300,000 in legal fees relating to the lawsuit. These fees were
expensed to operations in Fiscal 2000.
NOTE 7. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
In addition to historical information, this Form 10-QSB contains forward-looking
information. The forward-looking information contained herein is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to,
those discussed in the following section entitled
8
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this Form 10-QSB. The Company undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances which arise later. Readers should carefully review the risk
factors described in other documents the Corporation files from time to time
with the Securities and Exchange Commission, including the Annual report on Form
10-KSB filed by the Corporation in Fiscal 2001, and any Current Reports on Form
8-K filed by the corporation.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED
WITH THREE MONTHS ENDED DECEMBER 31, 2000.
Net sales for the three months ended December 31, 2001 ("Second Quarter
Fiscal 2002") increased by 135.9% to $5,391,341 from net sales of $2,285,091 for
the three months ended December 31, 2000 ("Second Quarter Fiscal 2001"). Sales
increased as a result of higher sales of the Company's prescription (Rx) line of
products, including Primidone 50 mg tablets, which was first marketed in May of
2001. The increase is also due to improved marketing activities, new customer
accounts, increased unit sales, and increased unit revenues on a portion of the
Company's niche line of products, which are sold to distributors, wholesalers
and retail chains throughout the nation. The increase in Rx sales was offset by
a decrease in over-the-counter (OTC) product sales, due to increased
competition. Rx sales increased by approximately $3,338,000 from Second Quarter
Fiscal 2001 to Second Quarter Fiscal 2002. OTC product sales decreased by
approximately $232,000 from Second Quarter Fiscal 2001 to Second Quarter Fiscal
2002.
Cost of sales increased by 18.9%, to $2,236,715 in Second Quarter
Fiscal 2002 from $1,881,320 in Second Quarter Fiscal 2001. The cost of sales
increase is due to an increase in certain direct variable costs and indirect
overhead costs incurred as a result of the increase in sales, and production
activities. These costs include labor and other benefits related expenses,
depreciation expense, and manufacturing and laboratory supplies. Gross profit
margins for Second Quarter Fiscal 2002 and Second Quarter Fiscal 2001 were 58.5%
and 17.7%, respectively. The increase in the gross profit percentage is due to
the product sales mix, a higher absorption of fixed overhead and production
costs, and improved unit profit margins on the Company's niche line of products.
During the current fiscal year, one of the Company's competitors suspended
production and distribution of a generic product in which Lannett competed.
Consequently, Lannett was able to increase its sales output to meet the
unchanged demand for the item. For these reasons, Lannett increased its unit
sales output and the total revenue earned for the product, thereby increasing
Lannett's total sales for the period compared to the prior period. With its
fixed overhead cost structure unchanged, the gross profit margin increased as a
result of the higher revenue per unit, and a higher absorption of fixed overhead
and production costs.
Selling, general and administrative expenses increased by 90.6% to
$768,670 in Second Quarter Fiscal 2002 from $403,204 in Second Quarter Fiscal
2001. This increase is a result of increases in commissions to sales
representatives for incremental sales programs, payroll and other benefits
related expenses, professional service fees related to the Company's creation of
its subsidiary, Lannett Holdings, Inc., and marketing expenses.
As a result of the foregoing, the Company reported an operating profit
of $2,018,286 for Second Quarter Fiscal 2002, as compared to an operating loss
of $376,189 for Second Quarter Fiscal 2001.
The Company's interest expense decreased from $187,069 in Second
Quarter Fiscal 2001 to $91,136 in Second Quarter Fiscal 2002 as a result of
principal repayments, and reduced interest rates.
The Company's income tax expense increased from a benefit of $120,885
in Second Quarter Fiscal 2001 to an expense of $677,290 in Second Quarter Fiscal
2002 as a result of the increase in taxable income.
9
The Company reported net income of $1,256,592 for Second Quarter Fiscal
2002, or $0.10 basic and $0.09 diluted income per share, compared to a net loss
of $415,031 for Second Quarter Fiscal 2001, or $0.03 basic and diluted loss per
share.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH SIX
MONTHS ENDED DECEMBER 31, 2000.
Net sales for the six months ended December 31, 2001 increased by
133.7% to $9,464,173 from net sales of $4,049,056 for the six months ended
December 31, 2000. Sales increased during this period as a result of higher
sales of the Company's prescription (Rx) line of products, including Primidone
50 mg tablets, which was first marketed in May of 2001. The increase is also due
to improved marketing activities, new customer accounts, increased unit sales,
and increased unit revenues on a portion of the Company's niche line of
products. The increase in Rx sales was offset by a decrease in over-the-counter
(OTC) product sales, due to increased competition. Rx sales increased by
approximately $5,906,000 from the six months ended December 31, 2000 to the six
months ended December 31, 2001. OTC product sales decreased by approximately
$491,000 from the six months ended December 31, 2000 to the six months ended
December 31, 2001.
Cost of sales for the six months ended December 31, 2001 increased by
24.4%, to $3,783,159 from $3,042,199 for the six months ended December 31, 2000.
The cost of sales increase is due to an increase in direct variable costs and
certain indirect overhead costs incurred as a result of the increase in sales,
and production activities. These costs include labor and other benefits related
expenses, depreciation expense, manufacturing and laboratory supplies, and raw
materials. Gross profit margins for the six months ended December 31, 2001 and
December 31, 2000 were 60.0% and 24.9%, respectively. The increase in the gross
profit percentage is due to the product sales mix, a higher absorption of fixed
overhead and production costs, and increased unit profit margins on the
Company's niche line of products. During the current fiscal year, one of the
Company's competitors suspended production and distribution of a generic product
in which Lannett competed. Consequently, Lannett was able to increase its sales
output to meet the unchanged demand for the item. For these reasons, Lannett
increased its unit sales output and the total revenue earned for the product,
thereby increasing Lannett's total sales for the period compared to the prior
period. With its fixed overhead cost structure unchanged, the gross profit
margin increased as a result of the higher revenue per unit, and a higher
absorption of fixed overhead and production costs.
Selling, general and administrative expenses increased by 75.8% to
$1,433,974 for the six months ended December 31, 2001 from $815,835 for the six
months ended December 31, 2000. This increase is a result of increases in sales
commissions, payroll and other benefits related expenses, professional service
fees related to the Company's creation of its subsidiary, Lannett Holdings,
Inc., and marketing expenses.
As a result of the foregoing, the Company reported an operating profit
of $3,532,566 for the six months ended December 31, 2001, as compared to an
operating loss of $531,211 for the six months ended December 31, 2000.
Included in other income for the six months ended December 31, 2000 is
$1,478,277 in income from the settlement of a lawsuit, net of fees. The lawsuit
was initiated after a chemical supplier failed to supply the Company with raw
material for its manufacturing process, despite the existence of a signed
five-year supply contract. Lannett alleged that the breach of contract delayed
the introduction of one of its products into the marketplace. Consequently, the
Company and the defending party settled the suit out of court. The Company
received the proceeds in First Quarter Fiscal 2001. The Company incurred
approximately $305,000 in legal fees relating to the lawsuit. These fees were
expensed to operations in Fiscal 2000.
10
The Company's interest expense decreased from $395,605 for the six
months ended December 31, 2000 to $212,434 for the six months ended December 31,
2001 as a result of principal repayments, and reduced interest rates. See
Liquidity and Capital Resources below.
The Company's income tax expense increased from $136,000 for the six
months ended December 31, 2000 to $1,169,000 for the six months ended December
31, 2001 as a result of the increase in taxable income.
The Company reported net income of $2,169,767 for the six months ended
December 31, 2001, or $0.16 basic and diluted income per share, compared to net
income of $472,325 for the six months ended December 31, 2000, or $0.04 basic
and diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES -
Net cash provided by operating activities of $3,739,540 for the six
months ended December 31, 2001 was attributable to net income of $2,169,767 as
adjusted for the effects of non-cash items of $1,236,432 and changes in
operating assets and liabilities totaling $333,341. Significant changes in
operating assets and liabilities are comprised of: i) a decrease in trade
accounts receivable due to receivable collections, and the timing of shipments
and related invoices, ii) an increase in inventories of $304,475 due to
increases in raw materials and finished goods, offset by a decrease in
work-in-process, iii) an increase in prepaid expenses and other assets of
$252,318 due to deposits paid by the Company on certain production related
equipment not yet received, iv) an increase in accounts payable due to increased
operational expenses and capital equipment purchases, and v) an increase in
income taxes payable of $33,745 due to higher taxable income and the accrual of
the related income taxes, which will be paid when the Company's estimated tax
filings and income tax returns are due.
The net cash used in investing activities consisted of $1,042,506
expended during the six months ended December 31, 2001 for equipment and
building additions. The Company has increased its budget for capital
expenditures in Fiscal 2002 to $2,000,000. The anticipated additional capital
expenditure requirements will support the Company's growth related to new
product introductions and increased production output due to higher sales
levels. As of December 30, 2001, approximately $602,000 from the proceeds of the
bonds issued during Fiscal 1999 was available in financing restricted for
certain future capital expenditures.
The Company has a $4,250,000 revolving line of credit from a
shareholder who is also the Chairman of the Board ("Shareholder Line of
Credit"). At December 31, 2001, the Company has $1,871,439 outstanding and
$2,378,561 available under this line of credit. The maturity date on the
Shareholder Line of Credit was extended to December 1, 2002. Accrued interest at
December 31, 2001, and June 30, 2001 was $111,931 and $0, respectively.
In April 1999, the Company entered into a loan agreement (the
"Agreement") with a governmental authority (the "Authority") to finance future
construction and growth projects of the Company. The Authority has issued
$3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds to
provide the funds to finance such growth projects pursuant to a trust indenture
(the "Trust Indenture"). A portion of the Company's proceeds from the bonds was
used to pay for bond issuance costs of approximately $170,000. The remainder of
the proceeds were deposited into a money market account, which is restricted for
future plant and equipment needs of the Company as specified in the Agreement.
The Agreement requires the Company to repay the Authority loan through
installment payments beginning in May 2003 and continuing through May 2014, the
year the bonds mature. At December 31, 2001, the Company had $3,700,000
outstanding on the Authority loan, of which $175,718 is classified as currently
due. In April 1999, an irrevocable letter of credit of $3,770,000 was issued by
a bank to secure payment of the Authority Loan and a portion of the related
accrued interest. At December 31, 2001, no portion of the letter of credit has
been utilized.
11
In April 1999, the Company authorized and directed the issuance of
$2,300,000 in taxable variable rate demand and fixed rate revenue bonds pursuant
to a trust indenture between the Company and a bank as trustee (the "Trust
Indenture"). From the proceeds of the bonds, $750,000 was utilized to pay
deferred interest owed to the principal shareholder of the Company and
approximately $1,440,000 was paid to a bank to refinance a mortgage term loan
and equipment term loans. The remainder of the proceeds was used to pay bond
issuance costs of approximately $109,000. The Trust Indenture requires the
Company to repay the bonds through installment payments beginning in May 2000
and continuing through May 2003, the year the bonds mature. At December 31,
2001, the Company had $552,612 outstanding on the bonds, which is classified as
currently due. In April 1999, an irrevocable letter of credit of approximately
$2,349,000 was issued by a bank to secure payment of the bonds and a portion of
the related accrued interest. At December 31, 2001 no portion of the letter of
credit has been utilized.
The Company has a $2,000,000 line of credit from a bank. The line of
credit was renewed and extended to November 30, 2002, at which time the Company
expects to renew and extend the due date. The line of credit is limited to 80%
of qualified accounts receivable and 50% of qualified inventory. At December 31,
2001, the Company had $1,316,690 outstanding and $683,310 available under the
line of credit.
The Company believes that cash generated from its operations and the
balances available under the Company's existing loans and lines of credit as of
December 31, 2001, are sufficient to finance its level operations and currently
anticipated capital expenditures.
Except as set forth in this report, the Company is not aware of any
trends, events or uncertainties that have or are reasonably likely to have a
material adverse impact on the Company's short-term or long-term liquidity or
financial condition.
PROSPECTS FOR THE FUTURE
As of December 31, 2001, several additional products are under
development. One of these products is being developed and manufactured for
another company; and the remainder are being developed as part of the Lannett
product line. Three of the Lannett products have been redeveloped and submitted
to the Food and Drug Administration ("FDA") for supplemental approval. The
remainder of the developmental products are either previously approved
Abbreviated New Drug Applications ("ANDA's") which the Company is planning to
reintroduce, or new products that the Company is planning to introduce. Since
the Company has no control over the FDA review process, management is unable to
anticipate when it will be able to begin producing and shipping additional
products
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
12
Regulatory Proceedings. The Company is engaged in an industry which is subject
to considerable government regulation relating to the development, manufacturing
and marketing of pharmaceutical products. Accordingly, incidental to its
business, the Company periodically responds to inquiries or engages in
administrative and judicial proceedings involving regulatory authorities,
particularly the FDA and the Drug Enforcement Agency.
Employee Claims. A claim of retaliatory discrimination has been filed by a
former employee with the Pennsylvania Human Relations Commission ("PHRC"), and
the Equal Employment Opportunity Commission ("EEOC"). The Company has denied
liability in this matter. The PHRC has made a determination that the complaint
against the Company should be dismissed because the facts do not establish
probable cause of the allegations of discrimination. The matter is still pending
before the EEOC. At this time, management is unable to estimate a range of loss,
if any, related to this action. However, management believes that the outcome
will not have a material adverse impact on the financial position of the
Company.
Additionally, two separate claims of discrimination have been filed
against the Company with the PHRC and the EEOC. The Company was notified of the
Complaints in June 2001 and July 2001, respectively. The Company has filed
answers with the PHRC and EEOC denying the allegations. The PHRC and the EEOC
are investigating the claims pursuant to their normal procedures. At this time,
management is unable to estimate a range of loss, if any, related to these
actions. However, management believes that the outcomes will not have a material
adverse impact on the financial position of the Company.
DES Cases. The Company is currently engaged in several civil actions as a
co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a
synthetic hormone. Prior litigation established that the Company's pro rata
share of any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which the
Company maintained coverage during the time period that damages were alleged to
have occurred. The insurance company denied coverage of actions filed after
January 1, 1992. With respect to these actions, the Company paid nominal damages
or stipulated to its pro rata share of any liability. The Company has either
settled or is currently defending over 500 such claims. At this time, management
is unable to estimate a range of loss, if any, related to these actions.
However, management believes that the outcomes will not have a material adverse
impact on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-B to be
filed as a part of this Form 10-QSB is shown on the Exhibit Index filed
herewith.
(b) The Company did not file any reports on Form 8-K during the six months
ended December 31, 2001.
14
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LANNETT COMPANY, INC.
Dated: August 21, 2002 By: /s/ Larry Dalesandro
--------------------
Larry Dalesandro
Chief Operating Officer
15
EXHIBIT INDEX
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
3(a) Articles of Incorporation Incorporated by reference to the Proxy Statement -
filed with respect to the Annual Meeting of
Shareholders held on December 6, 1991 (the "1991
Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to -
Stock Form 8 dated April 23, 1993 (Amendment No. 3 to
Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report -
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to -
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(c) to -
dated August 1, 1994 the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to -
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e) to -
dated December 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to -
dated June 30, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(g) Amendment #6 to Loan Incorporated by reference to Exhibit 10(g) to
Agreement dated November 1, the Annual Report on Form 10-KSB f/y/e
1996 1997 June 30, 199 ("1997 Form 10-KSB")
10(h) Amendment #7 to Loan Agreement Incorporated by reference to Exhibit 10(h) to
dated September 9, 1997 the Annual Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement Incorporated by reference to Exhibit 10(i) to
dated June 30, 1998 the Annual Report on Form 10-KSB f/y/e June 30,
1998 ("1998 Form 10-KSB")
10(j) Amendment #9 to Loan Incorporated by reference to Exhibit 10(j) to
16
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
Agreement dated December 30, the Annual Report on Form 10-KSB f/y/e June 30,
1998 1999 ("1999 Form 10-KSB")
10(k) Amendment #10 to Loan Agreement Incorporated by reference to Exhibit 10(k) to
dated December 31,1999 the Annual Report on Form 10-KSB f/y/e June 30,
1999 ("1999 Form 10-KSB")
10(l) Amendment #11 to Loan Agreement Filed Herewith 22
dated December 1, 2001
10(m) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(c) to -
between the Company and Meridian the 1993 Form 10-K
Bank
10(n) Amendment to Loan Documents Incorporated by reference to Exhibit 10(e) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of December 8, 1993 1994 ("1994 Form 10-K")
10(o) Letter Agreement between the Incorporated by reference to Exhibit 10(f) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
December 21, 1993 1994 ("1994 Form 10-K")
10(p) Third Amendment to Loan Incorporated by reference to Exhibit 10(g) to -
Agreement dated as of June 9, the Annual Report on Form 10-KSB f/y/e June 30,
1994 1994 ("1994 Form 10-K")
10(q) Fourth Amendment to Loan Incorporated by reference to Exhibit 10(i) to -
Documents between the Company the Annual Report on Form 10-KSB f/y/e June 30,
and Meridian Bank as of October 1995 ("1995 Form 10-K")
27, 1994
10(r) Letter Agreement between the Incorporated by reference to Exhibit 10(j) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
October 27, 1994 1995 ("1995 Form 10-K")
10(s) Letter Agreement between the Incorporated by reference to Exhibit 10(k) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
July 10, 1995 1995 ("1995 Form 10-K")
10(t) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of July 31, 1995 1995 ("1995 Form 10-K")
10(u) Line of Credit Note dated July Incorporated by reference to Exhibit 10(m) to -
31, 1995 the Annual Report on Form 10-KSB f/y/e
June 30, 1995 ("1995 Form 10-K")
17
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(v) Fifth Amendment to Loan Incorporated by reference to Exhibit 10(n) to -
Agreement dated July 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(w) Amendment to Loan agreement Incorporated by reference to Exhibit 10(q) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank, dated March 5, 1996. 1996 ("1996 Form 10-K")
10(x) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(y) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(z) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated May 23,
1997.
10(aa) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated September
24, 1997.
10(ab) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ac) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ad) Amendment to Loan agreement Incorporated by reference to Exhibit 10(aa) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 11,
1998.
10(ae) Amendment to Loan agreement Incorporated by reference to Exhibit 10(ab) to
between the the Annual Report on 1998 Form 10-KSB
18
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
Company and Corestates Bank,
dated June 1998.
10(af) Line of Credit Note dated March Incorporated by reference to Exhibit 10(ad) to
11, 1999 the Annual Report on 1999 Form 10-KSB
10(ag) Taxable Variable Rate Incorporated by reference to Exhibit 10(ae) to
Demand/Fixed Rate Revenue Bonds, the Annual Report on 1999 Form 10-KSB
Series of 1999
10(ah) Philadelphia Authority for Incorporated by reference to Exhibit 10(af) to
Industrial Development the Annual Report on 1999 Form 10-KSB
Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds
(Lannett Company, Inc. Project)
Series of 1999
10(ai) Reimbursement and Agreements Incorporated by reference to Exhibit 10(ag) to
supporting bond issues the Annual Report on 1999 Form 10-KSB
10(aj) Amendment No. 1 to Reimbursement Incorporated by reference to Exhibit 10(i) to
Agreement and Waiver the Annual Report on 1999 Form 10-KSB
10(ak) Employment Agreement between the Incorporated by reference to Exhibit 10(ah) to
Company and Vlad Mikijanic the Annual Report on 1994 Form 10-KSB
10(al) Supply Agreement dated January Incorporated by reference to Exhibit 10(ad) to
14, 1997 the Annual Report on 1998 Form 10-KSB
10(am) Supply Agreement dated January Incorporated by reference to Exhibit 10(ae) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(an) Supply Agreement dated January Incorporated by reference to Exhibit 10(af) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(ao) Supply Agreement dated February Incorporated by reference to Exhibit 10(ag) to
11, 1997 the Annual Report on 1998 Form 10-KSB
10(ap) Supply Agreement dated May 27, Incorporated by reference to Exhibit 10(ah) to
1997 the Annual Report on 1998 Form 10-KSB
11 Computation of Per Share Earnings Filed Herewith 20
22 Subsidiaries of the Company Incorporated by reference to the Annual Report
on Form 10-K f/y/e June 30, 1990
23(b) Consent of Deloitte & Touche Incorporated by reference to Exhibit 23(B) to
the Annual Report on 1999 Form 10-KSB
19