UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.
o 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 April 17, 2003, there were 20,025,479 shares of the issuer's common stock,
$.001 par value, outstanding.
Page 1 of 25 pages
Exhibit Index on Page 22
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and
June 30, 2002.............................................................................3
Consolidated Statements of Operations (unaudited)
for the three and nine months ended March 31, 2003
and 2002..................................................................................4
Consolidated Statements of Shareholders' Equity at March 31, 2003 (unaudited)
and June 30, 2002.........................................................................5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 2003
and 2002..................................................................................6
Notes to Consolidated Financial
Statements (unaudited)...............................................................7 - 12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..........................................................................12 - 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings......................................................................17 - 18
ITEM 2. Changes in Securities and Use of Proceeds...................................................18
ITEM 3. Defaults upon Senior Securities.............................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders.........................................18
ITEM 5. Other Information...........................................................................18
ITEM 6. Exhibits and Reports on Form 8-K............................................................18
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 3/31/03 06/30/02
------ ------- --------
CURRENT ASSETS:
Cash $ 1,106,474 $ --
Trade accounts receivable (net of allowance of $85,000 and $42,000) 8,468,263 4,465,885
Inventories 6,797,579 4,937,207
Prepaid expenses 375,849 106,170
Deferred tax asset 300,368 300,368
------------ ------------
Total current assets 17,048,533 9,809,630
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 11,125,862 10,144,968
Less accumulated depreciation (4,101,342) (3,616,044)
------------ ------------
7,024,520 6,528,924
------------ ------------
OTHER ASSETS 798,600 369,949
------------ ------------
Total assets $ 24,871,653 $ 16,708,503
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 202,688
Current portion of long-term debt 730,008 596,517
Accounts payable 1,428,548 733,984
Accrued expenses 374,755 657,891
Income taxes payable 554,812 726,552
------------ ------------
Total current liabilities 3,088,123 2,917,632
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 2,600,127 3,343,333
------------ ------------
DEFERRED TAX LIABILITY 681,489 681,489
------------ ------------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Common stock - authorized 50,000,000 shares par value $.001;
issued and outstanding, 20,025,479 and 19,895,756 shares, respectively 20,025 19,895
Additional paid-in capital 2,525,797 2,360,260
Retained earnings 15,956,092 7,385,894
------------ ------------
Total shareholders' equity 18,501,914 9,766,049
------------ ------------
Total liabilities and shareholders' equity $ 24,871,653 $ 16,708,503
============ ============
Note: All share amounts have been restated to reflect a 3 for 2 stock split
effective February 14, 2003.
See notes to consolidated financial statements
3
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
3/31/03 3/31/02 3/31/03 3/31/02
------- ------- ------- -------
NET SALES $ 11,019,906 $ 8,638,229 $ 30,329,723 $ 18,102,402
COST OF SALES 3,976,519 2,075,856 11,778,104 5,859,014
------------ ------------ ------------ ------------
Gross profit 7,043,387 6,562,373 18,551,619 12,243,388
RESEARCH AND DEVELOPMENT EXPENSES 682,869 551,215 1,668,876 1,265,691
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,067,551 1,072,342 3,223,709 2,506,316
------------ ------------ ------------ ------------
Operating profit 5,292,967 4,938,816 13,659,034 8,471,381
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of assets (119,275) -- (119,275) --
Interest income-restricted -- 4,463 -- 23,098
Interest expense (3,978) (36,715) (41,239) (249,149)
------------ ------------ ------------ ------------
(123,253) (32,252) (160,514) (226,051)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES $ 5,169,714 $ 4,906,564 $ 13,498,520 $ 8,245,330
------------ ------------ ------------ ------------
INCOME TAX EXPENSE $ 1,914,081 $ 1,862,281 $ 4,928,322 $ 3,031,281
NET INCOME $ 3,255,633 $ 3,044,283 $ 8,570,198 $ 5,214,049
============ ============ ============ ============
BASIC INCOME PER SHARE $ .16 $ .15 $ .43 $ .26
DILUTED INCOME PER SHARE $ .16 $ .15 $ .43 $ .26
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 19,985,031 19,830,518 19,948,870 19,822,745
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 20,117,795 19,982,144 20,081,634 19,960,169
Note: All share amounts have been restated to reflect a 3 for 2 stock split
effective February 14, 2003.
See notes to the consolidated financial statements
4
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
--------------------- ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT PAID-IN EARNINGS EQUITY
CAPITAL
BALANCE AT JUNE 30, 2002 19,895,756 19,895 $ 2,360,260 $ 7,385,894 $ 9,766,049
Net income 8,570,198 8,570,198
Shares issued in connection 129,723 130 165,537 - 165,667
----------- -----------
with employee stock option plan
BALANCE AT MARCH 31, 2003 20,025,479 $ 20,025 $ 2,525,797 $15,956,092 $18,501,914
=========== ========= =========== =========== ===========
Note: All share amounts have been restated to reflect a 3 for 2 stock split
effective February 14, 2003.
See notes to the consolidated financial statements
5
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
3/31/03 3/31/02
------- -------
OPERATING ACTIVITIES:
Net income $ 8,570,198 $ 5,214,049
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 742,449 604,170
Loss on sale/disposal of assets 119,275 35,773
Deferred income tax expense -- 835,700
Bad debt expense 43,000 17,000
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable (4,045,378) (2,579,821)
Inventories (1,860,372) (1,058,189)
Prepaid expenses and other assets (269,679) (280,858)
Accounts payable 694,564 (436,025)
Accrued expenses (283,136) 760,555
Income taxes payable (171,740) 1,522,745
----------- -----------
Net cash provided by operating activities 3,539,181 4,635,099
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,704,102) (1,530,695)
Deposits paid on machinery and equipment not yet received (456,872) --
Proceeds from sale of property, plant and equipment 375,003 --
----------- -----------
Net cash used in investing activities (1,785,971) (1,530,695)
----------- -----------
FINANCING ACTIVITIES:
Net repayments under line of credit (202,688) (1,558,433)
Repayments under line of credit -- shareholder -- (2,353,561)
Repayments of debt (609,715) (432,944)
Proceeds from debt, net of restricted cash released -- 1,225,649
Proceeds from issuance of stock 165,667 14,885
----------- -----------
Net cash used in financing activities (646,736) (3,104,404)
----------- -----------
NET CHANGE IN CASH 1,106,474 --
CASH, BEGINNING OF YEAR -- --
----------- -----------
CASH, END OF PERIOD $ 1,106,474 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 41,239 $ 161,433
Income taxes paid during period $ 5,100,062 $ 672,836
See notes to the consolidated financial statements
6
LANNETT COMPANY, INC. AND SUBSIDIARIES
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 nine months ended March 31, 2003 and
2002 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, 2002.
NOTE 2. NEW ACCOUNTING STANDARDS
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:
o 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.
o 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.
o goodwill, as well as intangible assets with indefinite lives, acquired after
June 30, 2001, are not amortized. Effective July 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives are no longer
subject to amortization.
o Effective July 1, 2002, goodwill and intangible assets with indefinite lives
are to be tested for impairment annually and whenever there is an impairment
indicator.
o all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
Management's assessment is that these Statements did 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 results 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
7
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 this Statement
do not 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 does not have
a significant impact on the financial condition or results of operations of the
Company.
In April 2002, FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB No. 13, and Technical Corrections. SFAS No. 145 changes
the accounting principles governing extraordinary items by clarifying and, to
some extent, modifying the existing definition and criteria, specifying
disclosure for extraordinary items and specifying disclosure requirements for
other unusual or infrequently occurring events and transactions that are not
extraordinary items. SFAS 145 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, with early adoption encouraged. The
adoption of this statement does not have a significant impact on the financial
condition or results of operations of the Company.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002. As the provisions of SFAS 146 are to be applied
prospectively after the adoption date, the Company cannot determine the
potential effects that the adoption of SFAS 146 will have on its consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 have been adopted by the Company during
the quarter ended March 31, 2003.
8
NOTE 3. INVENTORIES
Inventories consist of the following:
March 31, June 30,
2003 2002
--------- ----------
(unaudited)
Raw materials $ 3,087,184 $ 2,479,344
Work-in-process 1,234,855 691,346
Finished goods 2,283,778 1,560,029
Packaging supplies 191,762 206,488
------------- -------------
$ 6,797,579 $ 4,937,207
============= =============
NOTE 4. INCOME TAXES
The provision for federal and state income taxes for the three months ended
March 31, 2003 and 2002 was $1,914,081 and $1,862,281, respectively. The
provision for federal and state income taxes for the nine months ended March 31,
2003 and 2002 was $4,928,322 and $3,031,281, respectively.
NOTE 5. EARNINGS PER SHARE
Our calculation of earnings per share (EPS) in accordance with SFAS No. 128,
"Earnings Per Share," is as follows:
Three Months Ended March 31, 2003
---------------------------------
Income Shares Per Share
(Numerator (Denominator) Amount
Basic EPS:
Net Earnings available to stockholders $3,255,633 19,985,031 $ 0.16
Effect of Dilutive Securities Options 132,764
----------
Diluted EPS:
Net Earnings available to stockholders plus
assumed conversions $3,255,633 20,117,795 $ 0.16
========== ========== ========
40,815 anti-dilutive weighted shares have been excluded in the computation of
the three months ended March 31, 2003 diluted EPS because the options' exercise
price is greater than the average market price of the common stock.
9
Nine Months Ended March 31, 2003
--------------------------------
Income Shares Per Share
(Numerator)(Denominator) Amount
Basic EPS:
Net Earnings available to stockholders $8,570,198 19,948,870 $ 0.43
Effect of Dilutive Securities Options 132,764
----------
Diluted EPS:
Net Earnings available to stockholders plus
assumed conversions $8,570,198 20,081,634 $ 0.43
========== ========== ========
40,815 anti-dilutive weighted shares have been excluded in the computation of
the three months ended March 31, 2003 diluted EPS because the options' exercise
price is greater than the average market price of the common stock.
Three Months Ended March 31, 2002
----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Net Earnings available to stockholders $3,044,283 19,930,518 $ 0.15
Effect of Dilutive Securities Options 151,626
----------
Diluted EPS:
Net Earnings available to stockholders plus
assumed conversions $3,044,283 19,982,144 $ 0.15
========== ========== ========
1,950 anti-dilutive weighted shares have been excluded in the computation of the
three months ended March 31, 2002 diluted EPS because the options' exercise
price is greater than the average market price of the common stock.
Nine Months Ended March 31, 2002
--------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Net Earnings available to stockholders $5,214,049 19,822,745 $ 0.26
Effect of Dilutive Securities Options 137,424
----------
Diluted EPS:
Net Earnings available to stockholders plus
assumed conversions $5,214,049 19,960,169 $ 0.26
========== ========== ========
1,950 anti-dilutive weighted shares have been excluded in the computation of the
three months ended March 31, 2002 diluted EPS because the options' exercise
price is greater than the average market price of the common stock.
10
NOTE 6. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue accounting for employee stock options and similar equity instruments
under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued
to Employees". Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share, as if the fair value-based method of accounting defined in SFAS
No. 123 had been applied.
At March 31, 2003, the Company has two stock-based employee compensation plans.
The Company accounts for these plans under the recognition and measurement
principles of APB No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Stock-based employee compensation costs are not
reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, to stock-based employee compensation.
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
Net income, as reported 3,255,633 3,044,283 8,570,198 5,214,049
Less: stock-based compensation
costs determined under fair value
based method for all awards 190,119 22,576 329,369 67,726
Net income, pro forma 3,065,514 3,021,707 8,240,829 5,146,323
Earnings per share of stock - basic:
As reported $ 0.16 $ 0.15 $ 0.43 $ 0.26
Pro forma $ 0.15 $ 0.15 $ 0.41 $ 0.26
Earnings per share of stock - diluted:
As reported $ 0.16 $ 0.15 $ 0.43 $ 0.26
Pro forma $ 0.15 $ 0.15 $ 0.41 $ 0.26
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2003 and 2002: expected volatility of 79.5% and
70.6%; risk-free interest rates ranging between 3.89% and 6%; and expected lives
of 10 years.
11
NOTE 7. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $236,000 and $103,000 during the nine
months ended March 31, 2003 and 2002, 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 $68,000 and
$169,000 during the nine months ended March 31, 2003 and 2002, respectively.
Accounts receivable includes amounts due from the related party of approximately
$93,000 and $59,000 at March 31, 2003 and June 30, 2002, respectively. Accrued
expenses include amounts due to the related party of approximately $0 and $8,000
at March 31, 2003 and June 30, 2002, respectively. In the Company's opinion, the
terms of these transactions were not more favorable than would have been from a
non-related party.
NOTE 8. 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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 2002, and any Current Reports on Form 8-K filed by the corporation.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
12
believes that its critical accounting policies include those described below.
For a detailed discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated Financial Statements
included herein.
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped. Under a contract
in which product development occurs, the Company recognizes revenue when
services are rendered. There are no inventory consignments held at customers'
locations. Provisions for estimated rebates, chargebacks, returns and other
adjustments are provided for in the period the related sales are recorded. If
the historical data the Company uses to calculate these estimates does not
accurately approximate future activity, its net sales, gross profit, net income
and earnings per share could decrease. However, management believes that these
estimates are reasonable based upon historical experience and current
conditions.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current credit
worthiness, as determined by a review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within the Company's
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same credit loss rates that it has in the
past.
INVENTORIES
The Company values its inventory at the lower of cost or market and regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on estimated forecasts of product demand and
production requirements. The Company's estimates of future product demand may
prove to be inaccurate, in which case it may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if the
Company's inventory is determined to be overvalued, the Company would be
required to recognize such costs in cost of goods sold at the time of such
determination. Likewise, if inventory is determined to be undervalued, the
Company may have recognized excess cost of goods sold in previous periods and
would be required to recognize such additional operating income at the time of
sale.
RESULTS OF OPERATIONS --THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE
MONTHS ENDED MARCH 31, 2002
Net sales for the three months ended March 31, 2003 ("Third Quarter Fiscal
2003") increased by 28% to $11,019,906 from net sales of $8,638,229 for the
three months ended March 31, 2002 ("Third Quarter Fiscal 2002"). Sales increased
during Third Quarter Fiscal 2003 as a result of higher sales on a portion of the
Company's products, including Digoxin Tablets, which was first marketed in
September 2002. Sales also increased due to improved marketing activities, new
customer accounts, favorable market conditions, and increased unit sales/market
share on a portion of the Company's line of products.
Cost of sales increased by 92%, to $3,976,519 in Third Quarter Fiscal 2003 from
$2,075,856 in Third Quarter Fiscal 2002. The cost of sales increase is due to an
increase in direct variable costs and certain indirect overhead costs as a
result of the increase in sales volume, and related production activities. These
costs include raw
13
materials, labor and benefit expenses, and depreciation expense. Gross profit
margins for Third Quarter Fiscal 2003 and Third Quarter Fiscal 2002 were 64% and
76%, respectively. The decrease in the gross profit percentage is due to the
product sales mix, and less inventory capitalization of overhead and production
costs in Third Quarter Fiscal 2003 compared to Third Quarter Fiscal 2002. Due to
delays in the Company's receipt of certain pharmaceutical ingredients in the
Second Quarter Fiscal 2002, the Company entered the Third Quarter Fiscal 2002
with very little inventory on hand. When the Company received the back-ordered
material in the Third Quarter Fiscal 2002, it produced enough inventory to
fulfill customers' back-orders, and to attain a certain amount of inventory
safety stock. This heightened production activity had the effect of an increase
in the capitalization of certain production costs into inventory for the Third
Quarter Fiscal 2002. Such productivity was greater than the Company's normal
production levels, which are defined by the forecasted demand, and a reasonable
inventory build-up.
Research and development expenses increased by 24% to $682,869 in Third Quarter
Fiscal 2003 from $551,215 in Third Quarter Fiscal 2002. This increase is a
result of an increase in fees related to the services performed by external
research and development firms and an increase in labor and benefits related
expenses.
Selling, general and administrative expenses decreased slightly to $1,067,551 in
Third Quarter Fiscal 2003 from $1,072,342 in Third Quarter Fiscal 2002.
As a result of the foregoing, the Company increased its operating profit from
$4,938,816 in Third Quarter Fiscal 2002 to $5,292,967 in Third Quarter Fiscal
2003.
The Company's income tax expense increased from $1,862,281 in Third Quarter
Fiscal 2002 to $1,914,081 in Third Quarter Fiscal 2003 as a result of the
increase in taxable income.
The Company reported net income of $3,255,633 for Third Quarter Fiscal 2003, or
$0.16 basic and diluted income per share, compared to net income of $3,044,283
for Third Quarter Fiscal 2002, or $0.15 basic and diluted income per share.
RESULTS OF OPERATIONS --NINE MONTHS ENDED MARCH 31, 2003 COMPARED WITH NINE
MONTHS ENDED MARCH 31, 2002
Net sales for the nine months ended March 31, 2003 increased by 68% to
$30,329,723 from net sales of $18,102,402 for the nine months ended March 31,
2002. Sales increased as a result of higher sales on a portion of the Company's
products, including Prednisolone tablets, first marketed in October 2001,
Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules, first marketed
in December 2001, Isoniazid tablets, first marketed in January 2002, and Digoxin
Tablets, first marketed in September 2002. Sales also increased due to improved
marketing activities, new customer accounts, favorable market conditions, and
increased unit sales/market share on a portion of the Company's line of
products.
Cost of sales for the nine months ended March 31, 2003 increased by 101% to
$11,778,104, from $5,859,014 for the nine months ended March 31, 2002. The cost
of sales increase is due to an increase in direct variable costs and certain
indirect overhead costs as a result of the increase in sales volume, and related
production activities. These costs include raw materials, labor and benefits
expenses, depreciation expense, and manufacturing supplies. Gross profit margins
for the nine months ended March 31, 2003 and the nine months ended March 31,
2002 were 61% and 68%, respectively. The decrease in the gross profit percentage
is due to the product sales mix, and less inventory capitalization of overhead
and production costs in the nine months ended March 31, 2003 compared to the
nine months ended March 31, 2002. Due to delays in the Company's receipt of
certain pharmaceutical ingredients in the six months ended December 31, 2001,
the Company entered the Third Quarter
14
Fiscal 2002 with very little inventory on hand. When the Company received the
back-ordered material in the Third Quarter Fiscal 2002, it produced enough
inventory to fulfill customers' back-orders, and to attain a certain amount of
inventory safety stock. This heightened production activity had the effect of an
increase in the capitalization of certain production costs into inventory for
the nine months ended March 31, 2002. Such productivity was greater than the
Company's normal production levels, which are defined by the forecasted demand,
and a reasonable inventory build-up.
Research and development expenses increased by 32% to $1,668,876 for the nine
months ended March 31, 2003 from $1,265,691 for the nine months ended March 31,
2002. This increase is a result of an increase in fees related to the services
performed by external research and development firms and an increase in labor
and benefits related expenses.
Selling, general and administrative expenses increased by 29% to $3,223,709 for
the nine months ended March 31, 2003 from $2,506,316 for the nine months ended
March 31, 2002. This increase is a result of increased payroll and benefit
expenses due to the hiring of additional administrative employees, higher
professional services fees, and increased marketing and advertising expenses,
partially offset by a decrease in commission expenses due to the Company's
reduction of fees related to sales brokerage agreements.
As a result of the foregoing, the Company increased its operating income from
$8,471,381 for the nine months ended March 31, 2002 to $13,659,034 for the nine
months ended March 31, 2003.
The Company's interest expense decreased from $249,149 for the nine months ended
March 31, 2002 to $41,239 for the nine months ended March 31, 2003 as a result
of principal repayments, and reduced interest rates. See Liquidity and Capital
Resources below.
The Company's income tax expense increased from $3,031,281 for the nine months
ended March 31, 2002 to $4,928,322 for the nine months ended March 31, 2003 as a
result of the increase in taxable income.
The Company reported net income of $8,570,198 for the nine months ended March
31, 2003, or $0.43 basic and diluted income per share, compared to net income of
$5,214,049 for the nine months ended March 31, 2002, or $0.26 basic and diluted
income per share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $3,539,181 for the nine months
ended March 31, 2003 was attributable to net income of $8,570,198 as adjusted
for the effects of non-cash items of $861,724 and net negative changes in
operating assets and liabilities totaling $5,892,741. Significant changes in
operating assets and liabilities are comprised of: i) an increase in trade
accounts receivable of $4,002,378 due to increased sales, ii) an increase in
inventories of $1,860,372 due to increases in raw materials, work-in-process and
finished goods--due to the Company's decision to increase its inventory carrying
levels to amounts sufficient to maximize customer fulfillment and minimize
customer back-orders, and iii) an increase in accounts payable of $694,564 due
to the increases in inventory, capital equipment purchases and operating
expenses.
The net cash used in investing activities of $1,785,971 for the nine months
ended March 31, 2003 was attributable to $1,704,102 expended for equipment and
building additions, and $456,872 in deposits paid for equipment not yet received
or placed in service, and building additions not yet completed, offset by
$375,003 in proceeds received from the sale of equipment. The Company's
anticipated budget for capital expenditures in Fiscal 2003 is approximately
$2,200,000. The anticipated additional capital expenditures will support the
15
Company's growth related to new product introductions and increased production
output due to expected higher sales levels. As of March 31, 2003, none of the
financing proceeds received from the bonds issued during Fiscal 1999 were
available for future capital expenditures; however $456,872 was paid by the
Company prior to March 31, 2003 for production equipment expected to arrive, or
be placed in service during the Fiscal Year 2003. This balance is included in
Other Assets at March 31, 2003.
The net cash used in financing activities of $646,736 for the nine months ended
March 31, 2003 was attributable to principal repayments on a bank line of credit
of $202,688, principal repayments on bond debt of $609,715, and cash proceeds of
$165,667 related to the Company's sale of common stock pursuant to the exercise
of employee stock options.
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 (the
"Authority Loan") 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 was deposited into a money market account, which is
restricted to future plant and equipment needs of the Company as specified in
the Agreement. The Trust Indenture 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 March 31, 2003, the Company has
$3,330,135 outstanding on the Authority Loan, of which $730,008 is classified as
currently due. The remainder is classified as a long-term liability. 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 March 31, 2003, no portion of the letter of credit has been
utilized.
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. From the proceeds of the
bonds, $750,000 was utilized to pay deferred interest owed to Mr. Farber, the
Chairman of the Board of Directors and Chief Executive Officer 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 June 1999
and continuing through May 2003, the year the bonds mature. During the Second
Quarter Fiscal 2003, the Company repaid the balance of these bonds in full.
The Company has a $3,000,000 line of credit from a bank. The line of credit is
due December 1, 2003, at which time the Company may renew and extend the due
date. At March 31, 2003, the Company had $0 outstanding and $3,000,000 available
under the line of credit.
The Company believes that its cash on hand, the cash generated from its
operations and the balances available under the Company's existing loans and
lines of credit as of March 31, 2003, are sufficient to finance its level of
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.
16
PROSPECTS FOR THE FUTURE
As of March 31, 2003, there are several new products under development. The
products in development represent either previously approved Abbreviated New
Drug Applications ("ANDA's") which the Company is planning to reintroduce, or
new formulations which the Company will submit ANDA's for FDA approval. The
Company has also contracted for, and initiated the services of outside research
and development firms to supplement the Company's internal research and
development efforts. Since the Company has no control over the FDA review
process, management is unable to anticipate whether or when it will be able to
begin producing and shipping additional products.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 Claim. 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 denied liability in
these matters. The EEOC has made a determination that the former Complaint
should be dismissed because the EEOC was unable to conclude that the information
obtained during its investigation establishes violations of the relevant
statutes. The PHRC also has dismissed the Complaint. The latter Complaint is
being investigated by the PHRC and EEOC 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.
17
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
The results of voting at the Annual Meeting of Shareholders held on February 13,
2003 are as follows:
Votes Cast Absentees
---------- & Broker
For Against Withheld Non-Votes
---------------------------- ---------
Election of Directors:
William Farber 12,456,505 -- 14,705 --
Marvin Novick 12,455,505 -- 15,705 --
Ronald West 12,453,967 -- 17,243 --
Proposal to approve the 2003 Stock Option Plan 9,789,440 60,667 -- 24,244
Proposal to approve the 2003 Employee Stock
Purchase Plan 9,808,663 36,728 -- 28,960
Ratification of the appointment of Grant Thornton LLP
As independent auditors 12,442,675 14,810 -- 13,725
The Company had 13,307,010 shares outstanding on December 27, 2002, the record
date for the voting rights for the Annual Meeting noted above.
ITEM 5. OTHER INFORMATION
NONE
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 nine months
ended March 31, 2003.
18
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: May 12, 2003 By: /s/ Larry Dalesandro
----------------
Larry Dalesandro
Chief Operating Officer
Dated: May 12, 2003 By: /s / William Farber
--------------
William Farber
Chairman of the Board and
Chief Executive Officer
19
I, Larry Dalesandro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lannett
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial date and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers and I have indicted in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/Larry Dalesandro
-------------------
Chief Operating Officer
20
I, William Farber, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lannett
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial date and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers and I have indicted in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/William Farber
-----------------
Chief Executive Officer
21
EXHIBIT INDEX
Exhibit
Number Description Method of Filing Page
------- ----------- ---------------- ----
11 Computation of Per Share Filed Herewith 23-24
Earnings
99.1 Certification Pursuant to 18 Filed Herewith 25
USC Section 1350
22