U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
Commission File No. 0-9036
LANNETT COMPANY, INC.
(Name of small business issuer in its charter)
STATE OF DELAWARE 23-0787-699
State of Incorporation I.R.S. Employer I.D. No.
9000 STATE ROAD
PHILADELPHIA, PENNSYLVANIA 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer had net sales of $25,126,214 for the fiscal year ended
June 30, 2002.
As of September 3, 2002, the aggregate market value of the voting
stock held by non-affiliates was approximately $116,456,000 computed by
reference to the closing price of the stock on the American Stock Exchange.
As of September 3, 2002, there were 13,263,838 shares of the issuer's
common stock, $.001 par value, outstanding.
Page 1 of 47 pages
Exhibit Index on Page 40
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL.
Lannett Company, Inc. (the "Company") was incorporated in 1942 under
the laws of the Commonwealth of Pennsylvania. In 1991, the Company merged into
Lannett Company, Inc., a Delaware corporation. The sole purpose of the merger
was to reincorporate the Company as a Delaware corporation. The Company
develops, manufactures, packages, markets and distributes pharmaceutical
products sold under generic chemical names. In addition, the Company contract
manufactures and private labels pharmaceutical products for other companies.
Currently, the Company manufactures only solid oral dosage forms, including
tablets and capsules; but the Company is pursuing partnerships and research
contracts for the development and production of other dosage forms, including
liquids and injectable products.
The Company's headquarters, administrative offices, quality control
laboratory, manufacturing and production facilities, consisting of approximately
31,000 square feet, are located at 9000 State Road, Philadelphia, Pennsylvania.
In December 1997, the Company entered into a three-year and three-month lease
for a 23,500 square foot facility located at 500 State Road, Bensalem Bucks
County, Pennsylvania. The leased facility is located approximately 1.5 miles
from its headquarters in Philadelphia. In January 2001, the Company extended
this lease through April 30, 2004. This facility houses research, development,
warehousing and distribution operations.
PRODUCTS.
As of the date of this filing, the Company manufactured and/or distributed
fifteen products:
NAME OF PRODUCT MEDICAL INDICATION EQUIVALENT BRAND
NAME PRODUCT
1.) Butalbital, Aspirin and
Caffeine Capsules Migraine Headache Fiorinal(R)
2.) Butalbital, Aspirin, Caffeine
with Codeine Capsules Migraine Headache Fiorinal(R) with Codeine
3.) Digoxin .125 mg Tablets Heart Failure Lanoxin(R)
4.) Digoxin .25 mg Tablets Heart Failure Lanoxin(R)
5.) Primidone 50 mg Tablets Epilepsy Mysoline(R)
6.) Primidone 250 mg Tablets Epilepsy Mysoline(R)
7.) Dicyclomine 10 mg Capsules Irritable Bowels Bentyl(R)
8.) Dicyclomine 20 mg Tablets Irritable Bowels Bentyl(R)
9.) Acetazolamide 250 mg Tablets Glaucoma Diamox(R)
10.) Prednisolone 5 mg Tablets Antibacterial steroid Not applicable
11.) Diphenoxylate with Atropine
Sulfate Tablets Diarrhea Lomotil(R)
12.) Methylprednisolone Tablets Steroid Medrol(R)
13.) Isoniazid 300 mg Tablets Tuberculosis Not applicable
14.) Pseudoephedrine 30 mg Tablets Allergies Sudafed(R)
15.) Guaifenesin with Ephedrine
Tablets Allergies Not applicable
2
Additional products are also currently under development. Five of
these products have been redeveloped and submitted to the Food and Drug
Administration ("FDA") for supplemental approval. The remainder of 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 begun solicitation of quotes from outside contract development
companies 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.
RAW MATERIALS.
The raw materials used by the Company in the manufacture of
pharmaceutical products consist of pharmaceutical chemicals in various forms,
which are available from various sources. FDA approval is required in connection
with the process of selecting active ingredient suppliers. One supplier
accounted for approximately 30% of the Company's raw material purchases in
Fiscal 2002. That supplier and an additional supplier accounted for
approximately 27% and 24% of the Company's raw material purchases in Fiscal
2001. The raw materials purchased from these suppliers are available from a
number of vendors.
DISTRIBUTION.
The Company sells its pharmaceutical products primarily to
wholesalers, distributors, warehousing chains, retail chains and other
pharmaceutical companies. Sales of the Company's pharmaceutical products are
made on an individual order basis. Two customers accounted for approximately 22%
and 19%, respectively, of net sales in Fiscal 2002. One of these customers
accounted for approximately 24% of net sales in Fiscal 2001. As the Company
introduces additional products and opens new customer accounts, it expects to
broaden its customer base.
COMPETITION.
The manufacture and distribution of generic pharmaceutical products
is a highly competitive industry. Competition is primarily based on quality,
price and service. The Company intends to compete primarily on this basis, as
well as flexibility, availability of inventory, and by the fact that the
Company's products are only available from a limited number of competitors. The
modernization of its facilities, hiring of experienced staff, and implementation
of inventory and quality control programs have improved the Company's
competitive position over the past five years.
3
GOVERNMENT REGULATION.
Pharmaceutical manufacturers are subject to extensive regulation by
the federal government, principally by the FDA and the Drug Enforcement Agency
("DEA"), and, to a lesser extent, by other federal regulatory bodies and state
governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substance
Act and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing,
advertising and promotion of the Company's generic drug products. Noncompliance
with applicable regulations can result in fines, recall and seizure of products,
total or partial suspension of production, personal and/or corporate prosecution
and debarment, and refusal of the government to approve new drug applications.
The FDA also has the authority to revoke previously approved drug products.
FDA approval is required before any prescription drug can be
marketed. The approval procedures are generally quite burdensome. A new drug is
one not generally recognized by qualified experts as safe and effective for its
intended use. New drugs are typically developed and submitted to the FDA by
companies expecting to brand the product and sell it as a new medical treatment.
The FDA review process for new drugs is very extensive; and it requires the
submitting entity to make substantial investments in researching and testing the
drug candidate. However, less burdensome approval procedures may be used for
generic equivalents. Typically, the investment by a generic drug manufacturer in
developing and submitting to the FDA an application for a generic drug is much
less costly. There are currently three ways to obtain FDA approval of a new
drug.
NEW DRUG APPLICATIONS ("NDA"). Unless one of the two procedures
discussed in the following paragraphs is available, a manufacturer must conduct
and submit to the FDA complete clinical studies to establish a drug's safety and
efficacy.
ABBREVIATED NEW DRUG APPLICATIONS ("ANDA"). An ANDA is similar to an
NDA, except that the FDA waives the requirement of complete clinical studies of
safety and efficacy, although it may require bioavailability and bioequivalence
studies. This process normally takes approximately 18 months. "Bioavailability"
indicates the rate of absorption and levels of concentration of a drug in the
bloodstream needed to produce a therapeutic effect. "Bioequivalence" compares
one drug product with another, and when established, indicates that the rate of
absorption and the levels of concentration of a generic drug in the body are
within prescribed statistical limits to those of a previously approved
equivalent drug. Under the Drug Price Act, an ANDA may be submitted for a drug
on the basis that it is the equivalent of an approved drug, regardless of when
such other drug was approved. The Drug Price Act, in addition to establishing a
new ANDA procedure, created statutory protections for approved brand name drugs.
Under the Drug Price Act, an ANDA for a generic drug may not be made effective
until all relevant products and use patents for the equivalent brand name drug
have expired or have been determined to be invalid. Prior to enactment of the
Drug Price Act, the FDA gave no consideration to the patent status of a
previously approved drug. Additionally, the Drug Price Act extends for up to
five years the term of a product or use patent covering a drug to compensate the
patent holder for the reduction of the effective market life of a patent due to
federal regulatory review. With respect to certain drugs not covered by patents,
the Drug Price Act sets specified time periods of two to ten years during which
ANDA's for generic drugs cannot become effective or, under certain
circumstances, cannot be filed if the equivalent brand name drug was approved
after December 31, 1981.
4
PAPER NEW DRUG APPLICATIONS ("PAPER NDA"). For drugs which are
identical to a drug first approved after 1962, a prospective manufacturer need
not go through the full NDA procedure, but instead may demonstrate safety and
efficacy by reliance on published literature and reports, and must also submit,
if the FDA so requires, bioavailability or bioequivalence data illustrating that
the generic drug formulation produces, within an acceptable range, the same
effects as the previously approved equivalent drug. Because published literature
to support the safety and efficacy of post-1962 drugs may not be generally
available, this procedure is of limited utility to generic drug manufacturers.
Moreover, the utility of Paper NDA's has been even further diminished by the
recently broadened availability of the abbreviated new drug application as
described above.
Among the requirements for new drug approval is the requirement that
the prospective manufacturer's methods conform to the FDA's current good
manufacturing practices ("CGMP Regulations"). The CGMP Regulations must be
followed at all times during which the approved drug is manufactured. In
complying with the standards set forth in the CGMP regulations, the Company must
continue to expend time, money and effort in the areas of production and quality
control to ensure full technical compliance. Failure to comply with the CGMP
regulations risks possible FDA action such as the seizure of noncomplying drug
products or, through the Department of Justice, enjoining the manufacture of
such products.
The Company is also subject to federal, state and local laws of
general applicability, such as laws regulating working conditions, and, to the
extent that its business operations entail the generation, storage,
transportation or discharge of items that may be considered hazardous
substances, hazardous waste or environmental contaminants, the Company may be
subject to various federal, state and local environmental protection laws and
regulations. The Company monitors its compliance with all environmental laws.
Any compliance costs, which may be incurred, are contingent upon the results of
future site monitoring and will be charged against operations when incurred. The
Company incurred no monitoring costs during the years ended June 30, 2002 and
2001.
RESEARCH AND DEVELOPMENT.
During Fiscal 2002 and Fiscal 2001, the Company incurred research and
development costs of approximately $1,749,000 and $1,403,000, respectively.
EMPLOYEES.
The Company currently employs 135 employees, all of whom are
full-time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters, administrative offices, quality control laboratory,
manufacturing and production facilities are located at 9000 State Road,
Philadelphia, Pennsylvania. This facility is approximately 31,000 square feet,
located on four and one half (4-1/2) acres. The Company had increased its
warehousing activities beyond the capacity of its current facility. As a result,
in December 1997, the Company entered into a three-year and three-month lease
for a 23,500
5
square foot facility located at 500 State Road, Bensalem Bucks County,
Pennsylvania. The leased facility is located approximately 1.5 miles from its
headquarters in Philadelphia. In January 2001, the Company extended this lease
through April 30, 2004. This facility houses research, development, warehousing
and distribution operations.
ITEM 3. 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 DEA.
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. Management believes that the outcome of this claim will not have
a material adverse impact on the financial position or results of operations 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. Management believes that the outcomes of these claims also will not
have material adverse impacts on the financial position or results of operations
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,
6
management is unable to estimate a range of loss, if any, related to these
actions. Management believes that the outcome of these cases will not have a
material adverse impact on the financial position or results of operations of
the Company.
CONTRACT DISPUTE
The Company was engaged in a civil lawsuit as the plaintiff based on
a contract dispute regarding raw material for use in one of the Company's new
products in development. 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. The Company alleged
that the breach of contract delayed the introduction of one of its products into
the marketplace. The Company and the defending party settled the suit prior to
trial. The Company received approximately $1.5 million in First Quarter Fiscal
2001. The Company incurred approximately $305,000 in legal fees relating to the
lawsuit in Fiscal 2000. These fees were expensed to operations as they were
incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the Company's security
holders during the quarter ended June 30, 2002.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION.
On April 15, 2002, the Company's common stock began trading on the
American Stock Exchange. Prior to this, the Company's common stock traded in the
over-the-counter market through the use of the inter-dealer "pink-sheets"
published by Pink Sheets LLC. The following table sets forth certain information
with respect to the high and low daily closing prices of the Company's common
stock during Fiscal 2002 and 2001 as quoted by the American Stock Exchange (on
and after April 15, 2002) and Pink Sheets LLC (prior to April 15, 2002). Such
quotations reflect inter-dealer prices without retail mark-up, markdown or
commission and may not represent actual transactions.
---------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 2002
---------------------------------------------------------------------------------------------------------------
HIGH LOW
---- ---
First quarter.................................................................... $1.99 $1.03
Second quarter................................................................... $4.04 $1.70
Third quarter.................................................................... $5.65 $3.20
Fourth quarter................................................................... $12.00 $5.25
FISCAL YEAR ENDED JUNE 30, 2001
-------------------------------
HIGH LOW
---- ---
First quarter.................................................................... $0.63 $0.53
Second quarter................................................................... $0.81 $0.44
Third quarter.................................................................... $0.75 $0.44
Fourth quarter................................................................... $1.25 $0.61
HOLDERS
The number of holders of record of the Company's common stock as of
August 10, 2002 was 385.
DIVIDENDS.
The Company did not pay any cash dividends in Fiscal 2002 or 2001.
The Company intends to use all available funds for the Company's working capital
and does not anticipate paying cash dividends in the foreseeable future.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Form 10-KSB contains
forward-looking information. The forward-looking information 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-KSB. 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 Company files from time to time with the Securities and Exchange Commission,
including the Quarterly reports on Form 10-QSB to be filed by the Company in
Fiscal 2002, and any Current Reports on Form 8-K filed by the Company.
RESTATEMENT
The Company has corrected and restated its Fiscal 2001 financial
statements due to the correction of an error resulting from the improper
deferral of legal fees at June 30, 2000 incurred associated with the favorable
settlement of a lawsuit. The effect of the restatement as of and for the year
ended June 30, 2001 was to increase other income and previously reported net
income by $305,128, or $.02 per diluted share. This impact is reflected in the
reported results herein.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our 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
us 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. We believe that
our 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
9
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 - FISCAL 2002 TO FISCAL 2001.
Net sales in Fiscal 2002 increased by 108% to $25,126,214 from net
sales of $12,090,993 for Fiscal 2001. Sales increased as a result of additions
to the Company's prescription line of products, including Primidone 50 mg
tablets, first marketed in May 2001, Prednisolone tablets, first marketed in
October 2001, Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules,
first marketed in December 2001, and Isoniazid tablets, first marketed in
January 2002. Additionally, sales increased due to improved marketing
activities, new customer accounts, favorable market conditions, increased unit
sales, and increased unit revenues on a portion of the Company's niche line of
products. In the last quarter of Fiscal 2001, one of the Company's competitors
suspended production and distribution of a generic product which the Company
continued to produce and market. Consequently, the Company was able to increase
its sales output to meet the unchanged demand for the item. The Company
increased the total revenue earned related to the product, thereby increasing
the total sales for the period compared to the prior period. The increase in
prescription sales was offset by a decrease in over-the-counter (OTC) product
sales, due to increased competition. Prescription sales increased by
approximately $14,597,000 for Fiscal 2002 compared to Fiscal 2001. OTC sales
decreased by approximately
10
$1,562,000 for Fiscal 2002 compared to Fiscal 2001. As the Company introduces
additional products, it expects to continue increasing Rx product sales.
Cost of sales in Fiscal 2002 increased by 30% to $8,452,677, from
$6,534,764 in Fiscal 2001. 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 and laboratory supplies. Gross profit margins for Fiscal 2002 and
Fiscal 2001 were 66% and 46%, respectively. The increase in the gross profit
percentage is due to a more profitable product sales mix, higher absorption of
fixed overhead and production costs, and improved unit profit margins on the
Company's niche line of products.
Research and development expenses in Fiscal 2002 increased by 25% to
$1,748,631, from $1,402,900 for Fiscal 2001. This increase is a result of an
increase in the cost of materials related to the development and formulation of
new products not yet approved by the FDA.
Selling, general and administrative expenses in Fiscal 2002 increased
by 61% to $3,298,564, from $2,014,004 for Fiscal 2001. This increase is a result
of an increase in commissions to sales representatives for incremental sales
programs, increased payroll and benefits expenses due to the hiring of
additional administrative employees, and a general increase in other
administrative expenses due to the growth of the Company, in terms of employees,
production volume and sales.
As a result of the foregoing, the Company increased its operating
income from $2,139,325 for Fiscal 2001 to $11,626,342 for Fiscal 2002.
Included in other income for Fiscal 2001 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. The Company 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.
The Company's interest expense decreased from $778,008 for Fiscal
2001 to $270,493 for Fiscal 2002 as a result of principal repayments and reduced
interest rates. See Liquidity and Capital Resources below.
The Company's income tax expense increased from $1,007,522 for Fiscal
2001 to $3,984,135 for Fiscal 2002 as a result of the increase in taxable
income.
The Company reported net income of $7,195,990 for Fiscal 2002, or
$0.54 basic and diluted income per share, compared to net income of $1,829,915
for Fiscal 2001, or $0.14 basic and diluted income per share.
11
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $7,436,861 for Fiscal
2002 was attributable to net income of $7,195,990, as adjusted for the effects
of non-cash items of $1,713,402 and changes in operating assets and liabilities
totaling ($1,472,531). Significant changes in operating assets and liabilities
are comprised of: (i) an increase in inventories of $1,781,098 due primarily to
the increases in raw materials and finished goods as a result of higher sales
volume and the related inventory production, and larger buy-in's of certain raw
materials, (ii) a decrease in accounts payable, net of the increase in accrued
expenses, of $95,441 due to increased operational expenses and capital equipment
purchases and (iii) an increase in income taxes payable of $478,443 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 of $2,086,200 for Fiscal
2002 was attributable to $1,952,535 expended for equipment and building
additions, $187,665 in deposits paid for equipment not yet received, and
($54,000) in cash proceeds from the sale of equipment. The Company's anticipated
budget for capital expenditures in Fiscal 2003 is approximately $1,600,000. The
anticipated additional capital expenditure requirements will support the
Company's growth related to new product introductions and increased production
output due to expected higher sales levels. As of June 30, 2002, none of the
financing proceeds received from the bonds issued during Fiscal 1999 were
available for future capital expenditures; however approximately $188,000 was
paid by the Company prior to June 30, 2002 for production equipment expected to
arrive, and be placed in service in the Company's six months ended December 31,
2002. This balance is included in Other Assets at June 30, 2002.
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 June 30, 2002, the Company has no amount outstanding and $4,250,000
available under this line of credit. The maturity date on the Shareholder Line
of Credit was extended to December 1, 2002. There was no accrued interest at
June 30, 2002 and June 30, 2001.
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 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 June 30, 2002, the Company has $3,700,000 outstanding
on the Authority loan, of which $356,667 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 June 30, 2002,
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
12
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 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. At June 30, 2002,
the Company has $239,850 outstanding on the bonds, which is classified as
currently due. In April 1999, an irrevocable letter of credit of approximately
$1,690,000 was issued by a bank to secure payment of the bonds and a portion of
the related accrued interest. At June 30, 2002, 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 June 30,
2002, the Company had $202,668 outstanding and $1,797,332 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
June 30, 2002, 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 described above, additional products are also currently under
development. Five of these products have been redeveloped and submitted to the
Food and Drug Administration ("FDA") for supplemental approval. The remainder of
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 begun solicitation of quotes from outside contract development
companies 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.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements for the years ended June 30,
2002 and 2001 and Independent Auditor Report filed as a part of this Form 10-KSB
are listed in the "Index to Financial Statements" filed herewith.
13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are set forth
below:
-----------------------------------------------------------------------------------------------------
Age Position
-----------------------------------------------------------------------------------------------------
Directors:
---------
William Farber 71 Chairman of the Board
Marvin Novick 71 Director
Ronald A. West 68 Director
Executive Officers:
------------------
Arthur P. Bedrosian 55 President
Larry Dalesandro 30 Chief Operating Officer
Eugene Livshits 50 Vice President - Technical Affairs
WILLIAM FARBER was elected as Chairman of the Board of Directors in
August 1991. From April 1993 to the end of 1993, Mr. Farber was the President
and a director of Auburn Pharmaceutical Company. From 1990 through March 1993,
Mr. Farber served as Director of Purchasing for Major Pharmaceutical
Corporation. From 1965 through 1990, Mr. Farber was the Chief Executive Officer
of Michigan Pharmacal Corporation. Mr. Farber is a registered pharmacist in the
State of Michigan.
MARVIN NOVICK was elected a Director of the Company in February 2000.
Mr. Novick has been an advisor, consultant and financial planner for multiple
companies in the past thirty-five years. He is currently President of R&M
Resources, Inc., an investment company. Previously, he has held the positions of
Vice Chairman of Dura Corporation, a major automotive supplier, Partner of
international accounting firm J.K. Lasser & Co., and Touche Ross & Co., Chief
Financial Officer and Director of Meadowbrook Insurance Group, and Senior Vice
President of Michigan Blue Shield, a major healthcare organization. Mr. Novick
holds Bachelor's and Master's Degrees, and is a member of the American Institute
of Certified Public Accountants.
RONALD A. WEST was elected a Director of the Company in January 2002.
Mr. West is currently a Director of Beecher Associates, an industrial real
estate investment company, R&M Resources, an investment and consulting services
company and North East Staffing, Inc., an
15
employee services company. Mr. West previously served as Chairman and Chief
Executive Officer of Dura Corporation, an original equipment manufacturer of
automotive products, including convertible tops, electrical and manual window
regulators, truck utility step bumpers and other engineered equipment
components. Prior to his service at Dura Corporation, Mr. West served in various
financial management positions with TRW, Inc., Marlin Rockwell Corporation and
National Machine Products Group. Mr. West studied Business Administration at
Michigan State University and the University of Detroit.
ARTHUR P. BEDROSIAN, J.D. was elected President of the Company in May
2002. Prior to this, he served as the Company's Vice President of Business
Development from January 2002 to April 2002, and as a Director from February
2000 to January 2002. Mr. Bedrosian has operated generic drug manufacturing,
sales, and marketing businesses in the healthcare industry for many years. Prior
to joining the Company, Mr. Bedrosian served as President and Chief Executive
Officer of Trinity Laboratories, Inc., a medical device and drug manufacturer.
Mr. Bedrosian also operated Pharmaceutical Ventures Ltd, a healthcare
consultancy and Interal Corporation, a computer consultancy to Fortune 100
companies. Mr. Bedrosian holds a Bachelor of Arts Degree in Political Science
from Queens College of the City University of New York and a Juris Doctorate
from Newport University in California.
LARRY DALESANDRO was elected Chief Operating Officer of the Company in
November 1999. Mr. Dalesandro joined the Company in January 1999 to manage the
Company's financial operations. Previously, he was the Chief Financial Officer
of Criterion Communications, Inc., a technology and new media services firm,
Controller of Crown Contractors, Inc., a contract construction company, and
Senior Auditor of Grant Thornton LLP, an international professional services
firm. Mr. Dalesandro graduated Magna Cum Laude with a Bachelor's of Science
Degree in Accountancy from Villanova University, and is a Certified Public
Accountant.
EUGENE LIVSHITS was elected Vice President Technical Affairs in
November 1999. Dr. Livshits joined the Company in February 1997 as Director of
Analytical Services. Dr Livshits has 27 years of experience in Analytical
Services and Technical Affairs in the pharmaceutical industry. Dr. Livshits has
previously been employed at Mutual Pharmaceutical Inc., PharmaKinetics Labs,
Pal-Pak Inc., and Glenwood-Palisades Inc., where he held management and Director
positions in Analytical Services. Dr. Livshits holds a Ph.D. from Moscow
University.
To the best of the Company's knowledge, there have been no events
under any bankruptcy act, no criminal proceedings and no judgments or
injunctions that are material to the evaluation of the ability or integrity of
any director or executive officer during the past five years.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation paid to or earned by
the executive officers of the Company for Fiscal 2002, Fiscal 2001 and Fiscal
2000. There are no other executive officers whose total salary and bonus for
services rendered to the Company or any subsidiary exceeded $100,000 during
Fiscal 2002.
16
=================================================================================================================================
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
Name and Restricted LTIP All Other
Principal Fiscal Other Annual Stock Options/ Payouts Compensation
Position Year Salary Bonus Compensation Award(s) SARs Amount Amount
-------- ---- ------ ----- ------------ -------- ---- ------ ------
William Farber 2002 0 0 0 0 0 0 0
Chairman of the 2001 0 0 0 0 0 0 0
Board of Directors
and Chief Executive 2000 0 0 0 0 0 0 0
Officer
Arthur P. Bedrosian(3) 2002 64,385 0 3,000(1) 0 0 0 0
President 2001 0 0 0 0 0 0 0
2000 0 0 0 0 0 0 0
Larry Dalesandro(3) 2002 116,698(2) 25,000 7,200(1) 0 0 0 0
Chief Operating 2001 102,049(2) 5,000 3,600(1) 0 10,000(4) 0 0
Officer
2000 78,951(2) 5,000 3,600(1) 0 0 0 0
Eugene Livshits(3) 2002 126,715(2) 25,000 7,200(1) 0 0 0 0
Vice 2001 109,669(2) 5,000 3,600(1) 0 12,000(4) 0 0
President/Technical
Affairs 2000 96,043(2) 2,000 2,631(1) 0 0 0 0
(1) Represents auto allowance.
(2) Includes payments to the Company's 401(k) Plan (3% of eligible
compensation).
(3) Mr. Bedrosian was elected as an officer of the Company on
January 24, 2002. Mr. Dalesandro and Mr. Livshits were elected
as officers of the Company on November 1, 1999.
17
(4) The options represent 10,000 and 12,000 incentive stock
options, which were granted to Mr. Dalesandro and Mr.
Livshits, respectively on November 1, 2000 pursuant to the
Company's 1993 Long Term Incentive Stock Plan. The options are
exercisable as follows: one-third on or after November 1,
2000, one-third on or after November 1, 2001 and one-third on
or after November 1, 2002.
OPTION EXERCISES AND YEAR END OPTION VALUES
==================================================================================================================================
(a) (b) (c) (d) (e)
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED OPTIONS AT FY-END FY-END
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------------------
==================================================================================================================================
Larry Dalesandro 6,666 $69,993 0(1)/ 0(1)/
Chief Operating Officer 3,334(1) 31,340(1)
==================================================================================================================================
Eugene Livshits 0(1)/ 0(1)/
Vice President - of 8,000 $68,800 4,000(1) 37,600(1)
Technical Affairs
==================================================================================================================================
(1) The options represents an aggregate of 10,000 and 12,000 incentive stock
options which were granted to Mr. Dalesandro and Mr. Livshits, respectively on
November 1, 2000 pursuant to the Company's 1993 Long Term Incentive Stock Plan.
The options are exercisable as follows: one-third on or after November 1, 2000,
one-third on or after November 1, 2001 and one-third on or after November 1,
2002.
COMPENSATION OF DIRECTORS.
Directors received compensation of $1,000 per meeting attended, for
services provided as directors of the Company during Fiscal 2002. Directors are
reimbursed for expenses incurred in attending Board meetings.
EMPLOYMENT CONTRACTS.
There were no employment contracts in existence at the end
of Fiscal 2002.
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 10, 2002, information
regarding the security ownership of the directors and certain executive officers
of the Company and persons known to the Company to be beneficial owners of more
than five (5%) percent of the Company's common stock:
===========================================================================================================================
Excluding Options Including Options
and Debentures and Debentures
---------------------- -----------------------
Name and Address of Number Percent Number Percent
Beneficial Owner Office of Shares of Class of Shares of Class
---------------- ------ --------- -------- --------- --------
Directors/Executive Officers:
----------------------------
Arthur Bedrosian President 302,750(1) 1.81% 302,750(1) 1.80%
9000 State Road
Philadelphia, PA 19136
Larry Dalesandro Chief Operating 6,666 0.05% 6,666 .05%
9000 State Road Officer
Philadelphia, PA 19136
William Farber Chairman of the 9,134,486(2) 68.87% 9,134,486(2) 68.38%
9000 State Road Board
Philadelphia, PA 19136
Eugene Livshits Vice President 8,000 0.06% 8,000 .06%
9000 State Road Technical Affairs
Philadelphia, PA 19136
Marvin Novick Director 52,200 .43% 82,200(3) .65%
9000 State Road
Philadelphia, PA 19136
Ronald A. West Director 150 0.00% 150 0.00%
9000 State Road
Philadelphia, PA 19136
All directors and 9,504,252 71.22% 9,534,252 70.94%
executive officers as a group
(6 persons)
(1) Includes 34,750 shares owned jointly by Arthur Bedrosian and Shari
Bedrosian, Arthur Bedrosian's spouse, and 8,000 shares owned by Talin Bedrosian,
Arthur Bedrosian's daughter.
(2) Includes 300,000 shares owned jointly by William Farber and Audrey Farber,
the Secretary of the Company and William's Farber's spouse.
(3) Includes 30,000 vested options to purchase common stock at an exercise price
of $1.38 per share.
19
* Assumes that all options and debentures exercisable within sixty days
have been exercised, which results in 13,358,737 shares outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described above, William Farber, the majority shareholder and
Chairman of the Board of the Company, had provided the Company with a revolving
line of credit due December 1, 2002 of $4,250,000, which the Company has used to
renovate its manufacturing facility, to acquire new equipment, to retain new
management and to provide working capital. See MANAGEMENT'S DISCUSSION AND
ANALYSIS -- Liquidity and Capital Resources." Mr. Farber is currently the holder
of 9,134,486 shares of common stock of the Company, or approximately 69% of the
Company's issued and outstanding shares. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
The Company had sales of approximately $174,000 and $111,000 during the
years ended June 30, 2002 and 2001, respectively, to a distributor (the "related
party") in which the owner is the son of William Farber, 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
$221,000 and $369,000 during the years ended June 30, 2002 and 2001,
respectively. Accounts receivable includes amounts due from the related party of
approximately $59,000 and $34,000 at June 30, 2002 and June 30, 2001,
respectively. Accrued expenses include amounts due to the related party of
approximately $8,000 and $29,000 at June 30, 2002 and June 30, 2001,
respectively. In the Company's opinion, the terms of these transactions were not
more favorable than would have been from a non-related party.
ITEM 13. 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-KSB is shown on the
Exhibit Index filed herewith.
(b) The Company filed two reports on Form 8-K during the Quarter
ended June 30, 2002. On April 16, 2002 the Company filed Form
8-K to disclose the fact that as of April 15th, 2002, the
Company's common stock began trading on the American Stock
Exchange. On May 10, 2002 the Company filed Form 8-K to
disclose the fact that the Board of Directors elected Arthur
Bedrosian as President of the Company.
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LANNETT COMPANY, INC.
Date: September 14, 2002 By: /s/ William Farber
------------------ ---------------------
William Farber,
Chairman of the Board and
Chief Executive Officer
Date: September 14, 2002 By: /s/ Larry Dalesandro
------------------ ----------------------
Larry Dalesandro,
Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Date
--------- ----
/ s / William Farber September 14, 2002
--------------------------------------
William Farber,
Chairman of the Board of Directors and
Chief Executive Officer
I, William Farber and I, Larry Dalesandro, certify that:
1. I have reviewed this report on Form 10-KSB of the Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial information included in this report, and
the financial statements on which the financial information is based, fairly
present in all material respects the financial condition, results of operations,
changes in shareholders' equity, and cash flows the Company, as of, and for, the
periods presented in this report;
21
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 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 report
(the "Evaluation Date"); and
c) presented in this 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 data 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 indicated in this 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: September 25, 2002
/s/ William Farber
-------------------------
Chairman of the Board of Directors and Chief Executive Officer
/s/ Larry Dalesandro
-------------------------
Chief Operating Officer
22
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
Lannett Company, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Lannett
Company, Inc. and Subsidiary as of June 30, 2002 and 2001, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lannett Company, Inc. and Subsidiary as of June 30, 2002 and 2001, and the
consolidated results of their operations and cash flows for each of the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
Grant Thornton LLP
Philadelphia, Pennsylvania
August 14, 2002
23
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
-----------------------------------------------------------------------------------------------------------
ASSETS 2002 2001
(RESTATED)
CURRENT ASSETS:
Cash $ -- $ --
Trade accounts receivable (net of allowance of $42,000 and $25,000) 4,465,885 4,366,587
Inventories 4,937,207 3,156,109
Prepaid expenses and other assets 106,170 112,736
Deferred tax asset 300,368 983,403
----------- -----------
Total current assets 9,809,630 8,618,835
PROPERTY, PLANT AND EQUIPMENT 10,144,968 8,667,955
Less accumulated depreciation 3,616,044 3,089,735
----------- -----------
6,528,924 5,578,220
RESTRICTED CASH -- 1,225,648
OTHER ASSETS 369,949 242,913
DEFERRED TAX ASSET -- --
----------- -----------
TOTAL ASSETS $16,708,503 $15,665,617
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 202,688 $ 2,000,000
Line of credit-shareholder -- 4,225,000
Current portion of long-term debt 596,517 728,330
Accounts payable 733,984 917,397
Accrued expenses 657,891 569,919
Income taxes payable 726,552 248,109
----------- -----------
Total current liabilities 2,917,632 8,688,755
LONG-TERM DEBT, LESS CURRENT PORTION 3,343,333 3,819,892
DEFERRED TAX LIABILITY 681,489 641,285
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock - authorized 50,000,000 shares, par value $0.001;
issued and outstanding, 13,263,838 and 13,206,128 shares, respectively 13,263 13,206
Additional paid-in capital 2,366,892 2,312,575
Retained earnings 7,385,894 189,904
----------- -----------
Total shareholders' equity 9,766,049 2,515,685
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $16,708,503 $15,665,617
=========== ===========
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002 AND 2001
-----------------------------------------------------------------------------------
2002 2001
(RESTATED)
NET SALES $ 25,126,214 $ 12,090,993
COST OF SALES 8,452,677 6,534,764
------------ ------------
Gross profit 16,673,537 5,556,229
RESEARCH AND DEVELOPMENT EXPENSES 1,748,631 1,402,900
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,298,564 2,014,004
------------ ------------
Operating profit 11,626,342 2,139,325
------------ ------------
OTHER INCOME/(EXPENSE):
Income from settlement of lawsuit, net of fees -- 1,475,814
Loss on sale of assets (63,682) (18,902)
Loss on abandonment of assets (137,177) (77,838)
Interest income 25,135 97,046
Interest expense, including $131,245 and
$411,850 to shareholder (270,493) (778,008)
------------ ------------
446,217 698,112
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 11,180,125 2,837,437
INCOME TAX EXPENSE 3,984,135 1,007,522
------------ ------------
NET INCOME $ 7,195,990 $ 1,829,915
============ ============
Basic earnings per common share $ 0.54 $ 0.14
============ ============
Diluted earnings per common share $ 0.54 $ 0.14
============ ============
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY/(DEFICIENCY)
YEARS ENDED JUNE 30, 2002 AND 2001
---------------------------------------------------------------------------------------------------------------------
COMMON STOCK
--------------------------- ADDITIONAL
SHARES PAID-IN RETAINED EARNINGS/ SHAREHOLDERS'
ISSUED AMOUNT CAPITAL (ACCUMULATED DEFICIT) EQUITY
BALANCE, JULY 1, 2000 $13,206,128 13,206 $ 2,312,575 $(1,640,011) $ 685,770
(RESTATED)
Net income (Restated) 1,829,915 1,829,915
----------- -----------
BALANCE, JUNE 30, 2001 13,206,128 13,206 2,312,575 189,904 2,515,685
Exercise of stock options 57,710 57 54,317 -- 54,374
Net income 7,195,990 7,195,990
----------- -----------
BALANCE, JUNE 30, 2002 13,263,838 $ 13,263 $ 2,366,892 $ 7,385,894 $ 9,766,049
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002 AND 2001
------------------------------------------------------------------------------------------------
2002 2001
(RESTATED)
OPERATING ACTIVITIES:
Net income $ 7,195,990 $ 1,829,915
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 789,304 767,047
Loss/Impairment on disposal of assets 200,859 96,740
Deferred tax expense/(benefit) 723,239 730,618
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable (99,298) (3,269,069)
Inventories (1,781,098) (205,933)
Prepaid expenses and other assets 24,863 59,799
Accounts payable (183,413) 170,197
Accrued expenses 87,972 25,420
Income taxes payable 478,443 248,109
----------- -----------
Net cash provided by operating activities 7,436,861 452,843
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,952,535) (1,488,741)
Deposits paid on machinery and equipment not yet received (187,665) --
Proceeds from sale of property, plant and equipment 54,000 43,250
----------- -----------
Net cash used in investing activities (2,086,200) (1,445,491)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings/(repayments) under line of credit (1,797,312) 941,476
Repayments under line of credit - shareholder (4,225,000)
Repayments of debt (608,372) (749,624)
Proceeds from debt, net of restricted cash released 1,225,649 800,796
Proceeds from issuance of stock 54,374 --
----------- -----------
Net cash provided by/(used in) financing activities (5,350,661) 992,648
----------- -----------
NET INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF YEAR -- --
----------- -----------
CASH, END OF YEAR $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid during year $ 293,323 $ 800,171
=========== ===========
Income taxes paid $ 2,782,453 $ 54,682
=========== ===========
See notes to consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lannett Company, Inc. and subsidiaries (the "Company"), a Delaware corporation,
develops, manufactures, packages, markets and distributes pharmaceutical
products sold under generic chemical names. In addition, the Company contract
manufactures and private labels pharmaceutical products for other companies.
Currently, the Company manufactures only solid oral dosage forms, including
tablets and capsules; but the Company is pursuing partnerships and research
contracts for the development and production of other dosage forms, including
liquids and injectable products.
The Company is engaged in an industry which is subject to considerable
government regulation related to the development, manufacturing and marketing of
pharmaceutical products. In the normal course of business, the Company
periodically responds to inquiries or engages in administrative and judicial
proceedings involving regulatory authorities, particularly the Food and Drug
Administration (FDA) and the Drug Enforcement Agency (DEA).
RESTATEMENT - The Company has corrected and restated its Fiscal 2001 financial
statements due to the correction of an error resulting from the improper
deferral of legal fees at June 30, 2000 incurred associated with the favorable
settlement of a lawsuit. The effect of the restatement for the year ended June
30, 2001 was to increase other income and previously reported net income by
$305,128, or $.02 per diluted share. This impact is reflected in the reported
results herein. There was no effect of the restatement as of June 30, 2001 in
total assets, total liabilities, or retained earnings.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Lannett Company, Inc., its inactive wholly owned subsidiary,
Astrochem Corporation and its wholly owned subsidiary, Lannett Holdings, Inc.
All intercompany accounts and transactions have been eliminated.
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.
INVENTORIES - Inventories are valued at the lower of cost (determined under the
first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation and amortization are provided for by the straight-line and
accelerated methods over estimated useful lives of the assets. Depreciation
expense for the years ended June 30, 2002 and 2001 was approximately $789,000
and $725,000, respectively.
28
DEFERRED DEBT ACQUISITION COSTS - Costs incurred in connection with obtaining
financing are amortized by the straight-line method over the term of the loan
arrangements. Amortization expense for the years ended June 30, 2002 and 2001
was approximately $42,000.
RESEARCH AND DEVELOPMENT - Research and development expenses are charged to
operations as incurred.
ADVERTISING COSTS - The Company charges advertising costs to operations as
incurred. Advertising expense for the years ended June 30, 2002 and 2001 was
approximately $16,000 and $4,000, respectively.
INCOME TAXES - The Company uses the liability method specified by Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense (benefit) is the result of changes in deferred tax
assets and liabilities.
LONG-LIVED ASSETS - SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, provides guidance on when to
recognize and how to measure impairment losses of long-lived assets and certain
identifiable intangibles and how to value long-lived assets to be disposed of.
Impairment losses recognized during the years ended June 30, 2002 and 2001 were
$225,256 and $77,838, respectively (See NEW ACCOUNTING PRONOUNCEMENTS).
EARNINGS PER COMMON SHARE - SFAS No. 128, Earnings Per Share, requires a dual
presentation of basic and diluted earnings per share on the face of the
Company's consolidated statement of income and a reconciliation of the
computation of basic earnings per share to diluted earnings per share. Basic
earnings per share excludes the dilutive impact of common stock equivalents and
is computed by dividing net income by the weighted-average number of shares of
common stock outstanding for the period. Diluted earnings per share includes the
effect of potential dilution from the exercise of outstanding common stock
equivalents into common stock using the treasury stock method. Earnings per
share amounts for all periods presented have been calculated in accordance with
the requirements of SFAS No. 128. A reconciliation of the Company's basic and
diluted earnings per share follows:
29
2002 2001
----------------------------- --------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $7,195,990 13,263,838 $1,829,915 13,206,128
Effect of potentially dilutive option
plans and debentures 81,861
---------- -------------- ---------- ----------
Diluted earnings per share factors $7,195,990 13,345,699 $1,829,915 13,206,128
========== ============== ========== ==========
Basic earnings per share $ 0.54 $ 0.14
Diluted earnings per share $ 0.54 $ 0.14
Options to purchase 44,355 shares, 15,835 shares, 10,000 shares, 30,000 shares
and 1,050 shares of common stock at $1.125 per share, $0.80 per share, $3.45 per
share, $1.38 per share and $3.78 per share, respectively, were outstanding at
June 30, 2002. Options to purchase 68,450 shares, 51,500 shares, 30,000 shares
and 1,300 shares of common stock at $1.125 per share, $0.80 per share, $1.38 per
share and $3.78 per share, respectively, were outstanding at June 30, 2001, but
were not included in the computation of diluted earnings per share because to do
so would be antidilutive.
STOCK OPTION PLAN - SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
under which no compensation cost has been recognized (See Note 10).
SEGMENT INFORMATION - The Company reports segment information in accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The Company operates one business segment--generic pharmaceuticals.
In accordance with SFAS No. 131, the Company aggregates all products and reports
one operating segment. Within this segment, the Company manufactures and sells a
line of both prescription (Rx) and over-the-counter (OTC) drug products. All of
these products are either tablets or capsules sold generically to the drug
distribution industry. The only difference in the product line is the status
that the Food and Drug Administration gives the product--either prescription
status in which a doctor prescribes or authorizes the consumer to obtain the
product, or over-the-counter status, which allows consumers to purchase the
product directly from retailers without a doctor's prescription. There are no
operating differences for the Company in the manufacture of such lines of
product that would require the Company to perform separate profitability
analyses, or segregate income and loss activities by its status, as described
above. Additionally, management does not prepare separate income and loss
statements, forecasts and/or budget plans for its Rx versus OTC product lines.
For its Fiscal years ended June 30, 2002 and 2001, Rx sales were $21,806,156 and
$7,299,273 respectively. For its Fiscal years ended June 30, 2002 and 2001, OTC
sales were $3,320,058 and $4,791,717 respectively.
30
CONCENTRATION OF CREDIT RISK - Two customers accounted for approximately
$5,488,000 (22%) and $4,886,000 (19%) of net sales, respectively, in the fiscal
year ended June 30, 2002. One customer accounted for approximately $2,905,000
(24%) of net sales in the fiscal year ended June 30, 2001. The Company performs
ongoing credit evaluations of its customers' financial condition and has
experienced no significant collection problems to date. Generally, the Company
requires no collateral from its customers. One of the Company's products
accounted for approximately $13,461,000 (54%) of net sales in fiscal year ended
June 30, 2002. Two of the Company's products accounted for approximately
$4,445,000 (37%) and $4,167,000 (34%) of net sales in fiscal year ended June 30,
2001. The Company expects these percentages to decrease as it continues to
market additional products.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
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
- 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 it is still reviewing the provisions of these Statements, management's
preliminary assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
31
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.
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 is not expected to have a significant impact on the
financial condition or results of operations of the Company.
RECLASSIFICATIONS - Certain reclassifications were made to the 2001 consolidated
financial statements to conform to the 2002 presentation.
32
2. INVENTORIES
Inventories at June 30, 2002 and 2001 consist of the following:
2002 2001
Raw materials $2,479,344 $1,516,030
Work-in-process 691,346 686,359
Finished goods 1,560,029 712,992
Packaging supplies 206,488 240,728
---------- ----------
$4,937,207 $3,156,109
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2002 and 2002 consist of the
following:
USEFUL LIVES 2002 2001
Land - $ 33,414 $ 33,414
Building and improvements 10 - 39 years 3,124,268 2,388,841
Machinery and equipment 5 - 10 years 6,877,429 6,136,775
Furniture and fixtures 5 - 7 years 109,857 108,925
----------- -----------
$10,144,968 $ 8,667,955
=========== ===========
4. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity date of three months or less from purchase
date to be cash equivalents.
5. BANK LINE OF CREDIT
The Company has a $2,000,000 line of credit with a bank that bears interest at
prime plus .50% per annum (5.25% at June 30, 2002). The line of credit is due
November 30, 2002. The Company expects to extend the maturity date before the
scheduled due date. The line of credit is limited to 80% of qualified accounts
receivable and 50% of qualified inventory. At June 30, 2002, the Company had
$202,688 outstanding, and $1,797,312 available under the line of credit. The
line of credit is collateralized by substantially all Company assets and a
personal guarantee of the major shareholder. Further, the line of credit and a
related letter of credit contain certain financial covenants (see Note 6).
33
6. LONG-TERM DEBT
Long-term debt at June 30, 2002 and 2001 consists of the following:
2002 2001
Tax-exempt Bond Loan $3,700,000 $3,700,000
Taxable Bond Loan 239,850 848,222
---------- ----------
3,939,850 4,548,222
Less current portion 596,517 728,330
---------- ----------
$3,343,333 $3,819,892
========== ==========
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"). The bonds were issued under and secured by a Trust Indenture
between the Authority and a bank, as trustee. 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 (see Note 4). 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. Such payments will
be deposited into an interest-bearing debt service money market account. The
bonds bear interest at the floating variable rate determined by the organization
responsible for selling the bonds (the "remarketing agent"). The interest rate
fluctuates on a weekly basis. The effective interest rate at June 30, 2002 was
2.85%. The Company has an option to convert the bonds to a fixed rate of
interest under certain conditions. At June 30, 2002, the Company has $3,700,000
outstanding on the Authority loan, of which $356,667 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
June 30, 2002, 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 (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. Such payments will be deposited into an
interest-bearing debt service money market account. The bonds bear interest at
the floating variable rate determined by the organization responsible for
selling the bonds (the "remarketing agent"). The interest rate fluctuates on a
weekly basis. The effective interest rate at June 30, 2002 was 4.06%. The
Company has an option to convert the bonds to a fixed rate of interest under
certain conditions. At June 30, 2002, the Company has $239,850 outstanding on
the bonds, which is classified as currently due. In April 1999, an irrevocable
letter of credit of approximately $1,690,000 was
34
issued by a bank to secure payment of the bonds and a portion of the related
accrued interest. At June 30, 2002, no portion of the letter of credit has been
utilized.
Annual repayments of debt, including sinking fund requirements, as of June 30,
2002 are as follows:
YEAR ENDING AMOUNTS PAYABLE
JUNE 30, TO INSTITUTIONS
2003 $ 596,517
2004 718,333
2005 706,667
2006 678,333
2007 300,000
Thereafter 940,000
----------
$3,939,850
==========
7. LINE OF CREDIT PAYABLE TO SHAREHOLDER
On October 1, 2001, a debt modification agreement was consummated, by and
between, the Company and its principal shareholder relating to the line of
credit agreement described below. The Company and its principal shareholder had
previously modified the debt agreement relating to the line of credit as of
March 15, 1993, August 1, 1994, May 15, 1995, December 31, 1995, June 30, 1996,
November 1, 1996, September 9, 1997, June 30, 1998, December 30, 1998, December
31, 1999 and October 1, 2000. In each of the modifications, the maturity date of
the debt was extended.
The Company has a $4,250,000 revolving line of credit from a shareholder who is
also the Chairman of the Board. At June 30, 2002, the Company had $0 outstanding
and $4,250,000 available under this line of credit. The expiration date of the
line is December 1, 2002.
The line of credit bears interest at the prime rate published by Michigan
National Bank plus 1% per annum. The effective rate at June 30, 2002 was 5.75%.
Interest expense during the years ended June 30, 2002 and 2001 was approximately
$132,245, and $412,000, respectively. Accrued interest at June 30, 2002 and June
30, 2001 was $0.
The line of credit is collateralized by substantially all Company assets, and is
subordinated to the bank letters of credit and line of credit.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the years
ended June 30, 2002 and 2001.
35
2002 2001
Current $3,260,896 $ 276,904
Deferred 723,239 730,618
---------- ----------
$3,984,135 $1,007,522
========== ==========
A reconciliation of the differences between the effective rates and statutory
rates is as follows:
2002 2001
Federal income tax at statutory rate 34.0 % 34.0 %
State and local income tax, net 3.1 6.8
Change in the beginning of the year balance
of the valuation allowance
Other (1.5) (1.0)
---- ----
Income taxes expense/(benefit) 35.6 % 39.8 %
==== ====
The principal types of differences between assets and liabilities for financial
statement and tax return purposes are net operating loss carryforwards and
accumulated depreciation. As of June 30, 2002, the Company has utilized all of
its available federal net operating loss carryforwards of approximately
$2,457,000. A deferred tax liability is recorded for the future liability
created by different depreciation methods for financial statement and tax return
purposes.
Temporary differences which give rise to deferred tax assets and liabilities are
as follows as of June 30, 2002 and 2002:
2002 2001
Deferred tax assets:
Accrued expenses $ 38,370 $ 34,091
Net operating loss carryforward 835,700
Other 261,998 113,612
--------- ---------
300,368 983,403
Valuation allowance -- --
--------- ---------
Total 300,368 983,403
Deferred tax liability - Property, plant and equipment 681,489 641,285
--------- ---------
Net deferred tax asset/(liability) $(381,121) $ 342,118
========= =========
9. STOCK OPTIONS
In fiscal 1993, the Company adopted the 1993 Long-Term Incentive Plan (the
"Plan"). Pursuant to the Plan, officers and key employees of the Company may be
granted stock options which qualify as incentive stock options as well as stock
options which are nonqualified. The exercise
36
price of the options is at least the fair market value of the common stock on
the date of grant. The options vest over a three-year period and expire no later
than 10 years from the date of grant. There are 2,000,000 shares reserved under
the Plan. Options for 1,822,915 shares remain unissued as of June 30, 2002.
The Company accounts for the Plan in accordance with APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Plan been determined consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income would have been reduced by $90,302 and
$75,175 for the years ended June 30, 2002 and 2001, respectively, and earnings
per share would have been reduced by $0.01 per share for the years ended June
30, 2002 and 2001.
A summary of the status of the Company's option plan as of June 30, 2002 and
2001 and the changes during the years then ended is represented below:
2002 2001
------------------------------- -------------------------
WEIGHTED AVG. WEIGHTED AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Outstanding, beginning of year 151,250 $ 1.09 218,250 $ 1.24
Granted 10,000 3.45 105,500 0.80
Exercised (56,676) 0.95 0 0.00
Terminated (3,334) 0.80 (172,500) 1.08
-------- --------
Outstanding, end of year 101,240 $ 1.41 151,250 $ 1.09
======== ======== ======== ========
Options exercisable at year-end 95,933 $ 1.15 71,284 $ 1.20
======== ======== ======== ========
Weighted average fair value of options
granted during the year $ 3.45 $ 0.00
======== ========
The fair value of the options granted were estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
for grants during the years ended June 30, 2002 and 2001: risk-free interest
rate of 5.15% and 5.42%, expected volatility of 70.6% and 57.5%, dividend
yield of 0%, and expected life of 5 years.
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF EXERCISE PRICES CONTRACTUAL EXERCISE
OPTIONS LIFE IN YEARS PRICE
$0.80 - $1.125 60,190 7.3 $ 1.04
$1.38 30,000 5.3 $ 1.38
$3.45 10,000 9.5 $ 3.45
$3.78 1,050 1.8 $ 3.78
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "Plan") covering substantially
all employees. The Company is required to contribute amounts pursuant to
employee salary reduction agreements and a matching contribution equal to each
employee's contribution not to exceed 3%
37
of the employee's compensation for the Plan year. Contributions to the Plan
during the years ended June 30, 2002 and 2001 were $86,222 and $70,891,
respectively.
11. CONTINGENCIES
The Company monitors its compliance with all environmental laws. Any compliance
costs which may be incurred are contingent upon the results of future site
monitoring and will be charged to operations when incurred. No monitoring costs
were incurred during the years ended June 30, 2002 and 2001.
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 (subject to limits of liability) during the time period that damages
were alleged to have occurred. The Company has either settled or is currently
defending over 500 such claims. Management believes that the outcome will not
have a material adverse impact on the consolidated financial position or results
of operations of the Company.
In addition to the matters reported herein, the Company is involved in
litigation which arises in the normal course of business. In the opinion of
management, the resolution of these lawsuits will not have a material adverse
effect on the consolidated financial position or results of operations.
12. COMMITMENTS
In January 1998, the Company entered into an operating lease for additional
space. Currently, this leased facility houses the shipping and receiving
department, warehousing, and the research and development laboratory. The lease
was extended through April 30, 2004. The Company also has another operating
lease, expiring in 2005, for office equipment. Future minimum lease payments
under these agreements are as follows:
YEAR ENDING JUNE 30, AMOUNT
2003 $ 132,255
2004 112,380
2005 11,935
---------
$ 256,570
=========
Rental expense for the years ended June 30, 2002 and 2001 was $124,000 and
$123,000, respectively.
38
13. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $174,000 and $111,000 during the years
ended June 30, 2002 and 2001, 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 $221,000 and
$369,000 during the years ended June 30, 2002 and 2001, respectively. Accounts
receivable includes amounts due from the related party of approximately $59,000
and $34,000 at June 30, 2002 and June 30, 2001, respectively. Accrued expenses
include amounts due to the related party of approximately $8,000 and $29,000 at
June 30, 2002 and June 30, 2001, respectively.
39
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 Stock Incorporated by reference to Exhibit 4(a) to 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, 1991 Incorporated by reference to the Annual Report on Form -
between the Company and William Farber 10-K f/y/e June 30, 1991
10(b) Amendment #1 to Loan Agreement dated Incorporated by reference to Exhibit 10(b) to the Annual -
March 15, 1993 Report on Form 10-KSB f/y/e June 30, 1993 ("1993 Form
10-K")
10(c) Amendment #2 to Loan Agreement dated Incorporated by reference to Exhibit 10(c) to the Annual -
August 1, 1994 Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form
10-K")
10(d) Amendment #3 to Loan Agreement dated Incorporated by reference to Exhibit 10(d) to the Annual -
May 15, 1995 Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
10-K")
10(e) Amendment #4 to Loan Agreement dated Incorporated by reference to Exhibit 10(e) to the Annual -
December 31, 1995 Report on Form 10-KSB f/y/e June 30, 1996 ("1996 Form
10-K")
10(f) Amendment #5 to Loan Agreement dated Incorporated by reference to Exhibit 10(f) to the Annual -
June 30, 1996 Report on Form 10-KSB f/y/e June 30, 1996 ("1996 Form
10-K")
40
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(g) Amendment #6 to Loan Agreement dated Incorporated by reference to Exhibit 10(g) to the Annual
November 1, 1996 Report on Form 10-KSB f/y/e June 30, 1997 ("1997 Form
10-KSB")
10(h) Amendment #7 to Loan Agreement dated Incorporated by reference to Exhibit 10(h) to the Annual
September 9, 1997 Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement dated Incorporated by reference to Exhibit 10(i) to the Annual
June 30, 1998 Report on 1998 Form 10-KSB
10(j) Amendment #9 to Loan Agreement dated Incorporated by reference to Exhibit 10(j) to the
December 31, 1998 Quarterly Report on for the period ended December 31, 1998
10(k) Amendment #10 to Loan Agreement dated Incorporated by reference to Exhibit 10(k) to the Annual -
December 31, 1998 Report on Form 10-KSB for Fiscal Year 2001
10(l) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(c) to the 1993 -
between the Company and Meridian Bank Form 10-K
10(m) Amendment to Loan Documents between Incorporated by reference to Exhibit 10(e) to the Annual -
the Company and Meridian Bank dated as Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form
of December 8, 1993 10-K")
10(n) Letter Agreement between the Company Incorporated by reference to Exhibit 10(f) to the Annual -
and Meridian Bank dated December 21, Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form
1993 10-K")
10(o) Third Amendment to Loan Agreement Incorporated by reference to Exhibit 10(g) to the Annual -
dated as of June 9, 1994 Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form
10-K")
10(p) Fourth Amendment to Loan Documents Incorporated by reference to Exhibit 10(i) to the Annual -
between the Company and Meridian Bank Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
as of October 27, 1994 10-K")
41
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(q) Letter Agreement between the Company Incorporated by reference to Exhibit 10(j) to the Annual -
and Meridian Bank dated October 27, Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
1994 10-K")
10(r) Letter Agreement between the Company Incorporated by reference to Exhibit 10(k) to the Annual -
and Meridian Bank dated July 10, 1995 Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
10-K")
-
10(s) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to the Annual
between the Company and Meridian Bank Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
dated as of July 31, 1995 10-K")
10(t) Line of Credit Note dated July 31, 1995 Incorporated by reference to Exhibit 10(m) to the Annual -
Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
10-K")
10(u) Fifth Amendment to Loan Agreement Incorporated by reference to Exhibit 10(n) to the Annual -
dated July 31, 1995 Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form
10-K")
10(v) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(q) to the Annual -
the Company and Meridian Bank, dated Report on Form 10-KSB f/y/e June 30, 1996 ("1996 Form
March 5, 1996. 10-K")
10(w) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
March 20, 1997.
10(x) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
March 20, 1997.
42
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(y) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
May 23, 1997.
10(z) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
September 24, 1997.
10(aa) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
December 10, 1997.
10(ab) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(h) to the Annual
the Company and Corestates Bank, dated Report on 1997 Form 10-KSB
December 10, 1997.
10(ac) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(aa) to the Annual
the Company and Corestates Bank, dated Report on 1998 Form 10-KSB
June 11, 1998.
10(ad) Amendment to Loan agreement between Incorporated by reference to Exhibit 10(ab) to the Annual
the Company and Corestates Bank, dated Report
on 1998 Form 10-KSB June 1998.
10(ae) Line of Credit Note dated March 11, Incorporated by reference to Exhibit 10(ad) to the Annual
1999 Report on 1999 Form 10-KSB
10(af) Taxable Variable Rate Demand/Fixed Incorporated by reference to Exhibit 10(ae) to the Annual
Rate Revenue Bonds, Series of 1999 Report on 1999 Form 10-KSB
10(ag) Philadelphia Authority for Industrial Incorporated by reference to Exhibit 10(af) to the Annual
Development Tax-Exempt Variable Rate Report on 1998 Form 10-KSB
Demand/Fixed Revenue Bonds (Lannett
Company, Inc. Project) Series of 1999
43
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(ah) Letter of Credit and Agreements Incorporated by reference to Exhibit 10(ag) to the Annual
supporting bond issues Report on 1998 Form 10-KSB
10(ai) Employment agreement between the Incorporated by reference to Exhibit 10(i) to the Annual
Company and Vlad Mikijanic Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form
10-K")
10(aj) Supply Agreement dated January 14, 1997 Incorporated by reference to Exhibit 10(ad) to the Annual
Report on 1998 Form 10-KSB
10(ak) Supply Agreement dated January 17, 1997 Incorporated by reference to Exhibit 10(ae) to the Annual
Report on 1998 Form 10-KSB
10(al) Supply Agreement dated January 17, 1997 Incorporated by reference to Exhibit 10(af) to the Annual
Report on 1998 Form 10-KSB
10(am) Supply Agreement dated February 11, Incorporated by reference to Exhibit 10(ag) to the Annual
1997 Report on 1998 Form 10-KSB
10(an) Supply Agreement dated May 27, 1997 Incorporated by reference to Exhibit 10(ah) to the Annual
Report on 1998 Form 10-KSB
11 Computation of Earnings Per Share Filed Herewith 45
22 Subsidiaries of the Company Incorporated by reference to the Annual Report on Form -
10-K f/y/e June 30, 1990
23 Consent of Deloitte & Touche Incorporated by reference to Exhibit 23 to the Annual
Report on 1999 Form 10-KSB
24 Certification Pursuant to 18 USC Filed Herewith 46
Section 1350
44