UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- ----
As of April 19, 2002, there were 13,221,460 shares of the issuer's common stock,
$.001 par value, outstanding.
Page 1 of 22 pages
Exhibit Index on Page 15
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and
June 30, 2001..................................................................................3
Consolidated Statements of Operations
for the three and nine months ended March 31, 2002
and 2001, as Restated (unaudited)..............................................................4
Consolidated Statements of Cash Flows
for the nine months ended March 31, 2002
and 2001, as Restated (unaudited)..............................................................5
Notes to Consolidated Financial
Statements (unaudited).....................................................................6 - 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................................9 - 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................13
ITEM 2. Changes in Securities and Use of Proceeds.....................................................13
ITEM 3. Defaults upon Senior Securities...............................................................14
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................14
ITEM 5. Other Information.............................................................................14
ITEM 6. Exhibits and Reports on Form 8-K..............................................................14
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 3/31/02 06/30/01
------ ------- --------
CURRENT ASSETS:
Cash $ -- $ --
Trade accounts receivable (net of allowance of $644,590 and $291,314)
For bad debts, chargebacks, rebates and other adjustments 6,299,818 4,100,273
Inventories 4,214,298 3,156,109
Prepaid expenses 119,765 112,736
Deferred tax asset 147,703 983,403
------------ ------------
Total current assets 10,781,584 8,352,521
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 10,155,307 8,667,955
Less accumulated depreciation (3,654,586) (3,089,735)
------------ ------------
6,500,721 5,578,220
------------ ------------
RESTRICTED CASH -- 1,225,649
OTHER ASSETS 484,993 437,726
------------ ------------
Total assets $ 17,767,298 $ 15,399,303
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 441,567 $ 2,000,000
Line of credit-shareholder 1,871,439 4,225,000
Accounts payable 481,372 917,397
Accrued expenses 700,884 303,605
Income taxes payable 1,770,854 248,109
Current portion of long-term debt 728,330 728,330
------------ ------------
Total current liabilities 5,994,446 8,422,441
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 3,386,948 3,819,892
------------ ------------
DEFERRED TAX LIABILITY 641,285 641,285
------------ ------------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Common stock - authorized 50,000,000 shares par value $.001;
issued and outstanding, 13,221,460 shares 13,222 13,206
Additional paid-in capital 2,327,444 2,312,575
Retained earnings 5,403,953 189,904
------------ ------------
Total shareholders' equity 7,744,619 2,515,685
------------ ------------
Total liabilities and shareholders' equity $ 17,767,298 $ 15,399,303
============ ============
See notes to consolidated financial statements
3
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -------------------------------
3/31/02 3/31/01 3/31/02 3/31/01
------------ ------------ ------------ ------------
(Restated)
NET SALES $ 8,638,229 $ 2,640,448 $ 18,102,402 $ 6,689,504
COST OF SALES 2,075,856 1,425,882 5,859,014 4,468,081
------------ ------------ ------------ ------------
Gross profit 6,562,373 1,214,566 12,243,388
2,221,423
RESEARCH AND DEVELOPMENT EXPENSES 551,215 314,422 1,265,691 1,036,658
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,072,342 449,367 2,506,316 1,265,199
------------ ------------ ------------ ------------
Operating profit/(loss) 4,938,816 450,777 8,471,381 (80,434)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Income from settlement of lawsuit, net of fees -- -- -- 1,478,277
Interest income-restricted 4,463 25,158 23,098 82,022
Interest expense (36,715) (209,089) (249,149) (604,694)
------------ ------------ ------------ ------------
(32,252) (183,931) (226,051) 955,605
------------ ------------ ------------ ------------
INCOME BEFORE TAXES $ 4,906,564 $ 266,846 $ 8,245,330 $ 875,171
------------ ------------ ------------ ------------
INCOME TAX EXPENSE $ 1,862,281 $ 91,000 $ 3,031,281 $ 227,000
NET INCOME $ 3,044,283 $ 175,846 $ 5,214,049 $ 648,171
============ ============ ============ ============
BASIC INCOME PER SHARE $ .23 $ .01 $ .39 $ .05
DILUTED INCOME PER SHARE $ .23 $ .01 $ .39 $ .05
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 13,220,345 13,206,128 13,215,163 13,206,128
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 13,321,429 13,206,128 13,306,779 13,206,128
See notes to the consolidated financial statements
4
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
---------------------------------
3/31/02 3/31/01
----------- -----------
(Restated)
OPERATING ACTIVITIES:
Net income $ 5,214,049 $ 648,171
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 604,170 562,092
Write-off of capitalized interest 35,773 --
Deferred income tax expense 835,700 173,115
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable (2,562,821) (621,809)
Inventories (1,058,189) (184,733)
Prepaid expenses and other assets (280,858) 46,716
Accounts payable (436,025) (374,086)
Accrued expenses 760,555 (179,424)
Income taxes payable 1,522,745 --
----------- -----------
Net cash provided by operating activities 4,635,099 70,042
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,530,695) (931,769)
----------- -----------
Net cash used in investing activities (1,530,695) (931,769)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings/(repayments) under line of credit (1,558,433) 847,709
Repayments under line of credit -- shareholder (2,353,561) --
Repayments of debt (432,944) (338,069)
Proceeds from debt, net of restricted cash released 1,225,649 352,087
Proceeds from issuance of stock 14,885 --
----------- -----------
Net cash provided by/(used in) financing activities (3,104,404) 861,727
----------- -----------
NET CHANGE IN CASH -- --
CASH, BEGINNING OF YEAR -- --
----------- -----------
CASH, END OF PERIOD $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 161,433 $ 306,763
Income taxes paid during period $ 672,836 $ 0
See notes to the consolidated financial statements
5
LANNETT COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and the results of operations and cash flows.
The results of operations for the three and nine months ended March 31, 2002
and 2001 are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2001.
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2000, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133, was effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. There has been no accounting, or financial effect
on the Company for the three and nine months ended March 31, 2002 with respect
to this Statement. The Company will continue to analyze the impact, if any, of
adopting SFAS No. 133 will have on its consolidated financial position and
results of operations.
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
- all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001.
6
- 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 management is still reviewing the provisions of these Statements, its
preliminary assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. This Statement also applies, for example, to a
company that operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when it cease
operation of that plant. A liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability and can be
reasonably estimated. The initial recording should be at fair value. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, with earlier application encouraged. The provisions of the Statement
are not expected to have a material impact on the financial condition or results
of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this statement is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
NOTE 3. INVENTORIES
Inventories consist of the following:
March 31, June 30,
2002 2001
------------- -------------
(unaudited)
Raw materials $ 1,792,437 $ 1,516,030
Work-in-process 847,924 686,359
Finished goods 1,368,124 712,992
Packaging supplies 205,813 240,728
------------- -------------
$ 4,214,298 $ 3,156,109
============= =============
7
NOTE 4. INCOME TAXES
The provision for federal and state income taxes for the three months ended
March 31, 2002 and 2001 was $1,862,281 and $91,000, respectively. The provision
for federal and state income taxes for the nine months ended March 31, 2002 and
2001 was $3,031,281 and $227,000, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $103,000 and $76,000 during the nine
months ended March 31, 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 $169,000 and
$297,000 during the nine months ended March 31, 2002 and 2001, respectively.
Accounts receivable includes amounts due from the related party of approximately
$38,000 and $34,000 at March 31, 2002 and June 30, 2001, respectively. Accrued
expenses include amounts due to the related party of approximately $13,000 and
$29,000 at March 31, 2002 and June 30, 2001, respectively.
NOTE 6. SETTLEMENT OF LAWSUIT
Included in other income for the nine months ended March 31, 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. Lannett alleged that the breach of contract delayed
the introduction of one of its products into the marketplace. Consequently, the
Company and the defending party settled the suit out of court. The Company
received the proceeds in First Quarter Fiscal 2001. The Company incurred
approximately $305,000 in legal fees relating to the lawsuit. These fees were
expensed to operations in Fiscal 2000.
NOTE 7. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
In addition to historical information, this Form 10-QSB contains forward-looking
information. The forward-looking information contained herein is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to,
those discussed in the following section entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date of this Form 10-QSB. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances which arise later.
Readers should carefully review the risk factors described in other documents
the Corporation files from time to time with the Securities and Exchange
Commission, including the Annual report on Form 10-KSB filed by the Corporation
in Fiscal 2001, and any Current Reports on Form 8-K filed by the corporation.
RESULTS OF OPERATIONS --THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE
MONTHS ENDED MARCH 31, 2001.
Net sales for the three months ended March 31, 2002 ("Third Quarter Fiscal
2002") increased by 227% to $8,638,229 from net sales of $2,640,448 for the
three months ended March 31, 2001 ("Third Quarter Fiscal 2001"). Sales increased
as a result of additions to the Company's prescription (Rx) 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. During the current fiscal year, one of the
Company's competitors suspended production and distribution of a generic product
which Lannett continued to produce and market. Consequently, Lannett was able to
increase its sales output to meet the unchanged demand for the item. Lannett
increased the total revenue earned related to the product, thereby increasing
total sales for the period compared to the prior period. The increase in Rx
sales was offset by a decrease in over-the-counter (OTC) product sales, due to
increased competition. Rx sales increased by approximately $6,238,000 from Third
Quarter Fiscal 2001 to Third Quarter Fiscal 2002. OTC product sales decreased by
approximately $241,000 from Third Quarter Fiscal 2001 to Third Quarter Fiscal
2002.
Cost of sales increased by 46%, to $2,075,856 in Third Quarter Fiscal 2002 from
$1,425,882 in Third Quarter 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 Third
Quarter Fiscal 2002 and Third Quarter Fiscal 2001 were 76% 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 increased by 75% to $551,215 in Third Quarter
Fiscal 2002 from $314,422 in Third Quarter Fiscal 2001. This increase is a
result of increased payroll and benefits expenses due to the
9
hiring of additional employees, and 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 increased by 131% to $1,036,569 in
Third Quarter Fiscal 2002 from $449,367 in Third Quarter Fiscal 2001. This
increase is a result of increases 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 profit from
$450,777 in Third Quarter Fiscal 2001to $4,938,816 in Third Quarter Fiscal 2002.
The Company's interest expense decreased from $209,089 in Third Quarter Fiscal
2001 to $36,715 in Third Quarter Fiscal 2002 as a result of principal repayments
and reduced interest rates.
The Company's income tax expense increased from $91,000 in Third Quarter Fiscal
2001 to $1,862,281 in Third Quarter Fiscal 2002 as a result of the increase in
taxable income.
The Company reported net income of $3,044,283 for Third Quarter Fiscal 2002, or
$0.23 basic and diluted income per share, compared to net income of $175,846 for
Third Quarter Fiscal 2001, or $0.01 basic and diluted income per share.
RESULTS OF OPERATIONS --NINE MONTHS ENDED MARCH 31, 2002 COMPARED WITH NINE
MONTHS ENDED MARCH 31, 2001.
Net sales for the nine months ended March 31, 2002 increased by 171% to
$18,102,402 from net sales of $6,689,504 for the nine months ended March 31,
2001. Sales increased as a result of additions to the Company's prescription
(Rx) 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. During the current fiscal year,
one of the Company's competitors suspended production and distribution of a
generic product which Lannett continued to produce and market. Consequently,
Lannett was able to increase its sales output to meet the unchanged demand for
the item. Lannett 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 Rx sales was offset by a decrease in over-the-counter (OTC)
product sales, due to increased competition. Rx sales increased by approximately
$12,145,000 for the nine months ended March 31, 2002 compared to the nine months
ended March 31, 2001. OTC sales decreased by approximately $732,000 for the nine
months ended March 31, 2002 compared to the nine months ended March 31, 2001.
Cost of sales for the nine months ended March 31, 2002 increased by 31% to
$5,859,014, from $4,468,081 for the nine months ended March 31, 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 the nine months ended March 31, 2002 and the nine months
ended March 31, 2001 were 68% and 33%, 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.
10
Research and development expenses increased by 22% to $1,265,691 for the nine
months ended March 31, 2002 from $1,036,658 for the nine months ended March 31,
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 increased by 95% to $2,470,543 for
the nine months ended March 31, 2002 from $1,265,199 for the nine months ended
March 31, 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 a
loss of $80,434 for the nine months ended March 31, 2001to a profit of
$8,507,154 for the nine months ended March 31, 2002.
Included in other income is $1,478,277 in income from the settlement of a
lawsuit, net of fees, for the nine months ended March 31, 2001. The lawsuit was
initiated after a chemical supplier failed to supply the Company with raw
material for its manufacturing process, despite the existence of a signed
five-year supply contract. Lannett alleged that the breach of contract delayed
the introduction of one of its products into the marketplace. Consequently, the
Company and the defending party settled the suit out of court. The Company
received the proceeds in First Quarter Fiscal 2001. The Company incurred
approximately $305,000 in legal fees relating to the lawsuit. These fees were
expensed to operations in Fiscal 2000.
The Company's interest expense decreased from $604,694 for the nine months ended
March 31, 2001 to $249,149 for the nine months ended March 31, 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 $227,000 for the nine months
ended March 31, 2001 to $3,031,281 for the nine months ended March 31, 2002 as a
result of the increase in taxable income.
The Company reported net income of $5,214,049 for the nine months ended March
31, 2002, or $0.39 basic and diluted income per share, compared to net income of
$648,171 for the nine months ended March 31, 2001, or $0.05 basic and diluted
income per share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $4,635,099 for the nine months
ended March 31, 2002 was attributable to net income of $5,214,049 as adjusted
for the effects of non-cash items of $1,475,643 and changes in operating assets
and liabilities totaling ($2,054,593). Significant changes in operating assets
and liabilities are comprised of: i) an increase in trade accounts receivable of
$2,562,821 due to increased sales, and the timing of shipments and related
invoices, ii) an increase in inventories of $1,058,189 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, iii) an increase in prepaid expenses and other assets of $280,858 due
to deposits paid by the Company on certain production related equipment not yet
received, iv) an increase in accrued expenses, net of the decrease in accounts
payable, of $324,530 due to increased operational expenses and capital equipment
purchases and v) an increase in income taxes payable of $1,522,745 due to higher
taxable income and the accrual of the related income taxes, which will be paid
when the Company's estimated tax filings and income tax returns are due.
11
The net cash used in investing activities consisted of $1,530,695 expended
during the nine months ended March 31, 2002 for equipment and building
additions. The Company's anticipated budget for capital expenditures in Fiscal
2002 is $2,000,000. The anticipated additional capital expenditure requirements
will support the Company's growth related to new product introductions and
increased production output due to higher sales levels. As of March 31, 2002,
none of the proceeds of the bonds issued during Fiscal 1999 was available in
financing restricted for future capital expenditures; however approximately
$292,000 was paid by the Company prior to March 31, 2002 for production
equipment expected to arrive, and be placed in service in the Company's fourth
quarter ended June 30, 2002. This balance is included in Other Assets at March
31, 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 March 31,
2002, the Company has $1,871,439 outstanding and $2,378,561 available under this
line of credit. The maturity date on the Shareholder Line of Credit was extended
to December 1, 2002. Accrued interest at March 31, 2002, and June 30, 2001 was
$101,762 and $0, respectively.
In April 1999, the Company entered into a loan agreement (the "Agreement") with
a governmental authority (the "Authority") to finance future construction and
growth projects of the Company. The Authority has issued $3,700,000 in
tax-exempt variable rate demand and fixed rate revenue bonds to provide the
funds to finance such growth projects pursuant to a trust indenture (the "Trust
Indenture"). A portion of the Company's proceeds from the bonds was used to pay
for bond issuance costs of approximately $170,000. The remainder of the proceeds
were deposited into a money market account, which is restricted for future plant
and equipment needs of the Company as specified in the Agreement. The Agreement
requires the Company to repay the Authority loan through installment payments
beginning in May 2003 and continuing through May 2014, the year the bonds
mature. At March 31, 2002, the Company had $3,700,000 outstanding on the
Authority loan, of which $313,052 is classified as currently due. In April 1999,
an irrevocable letter of credit of $3,770,000 was issued by a bank to secure
payment of the Authority Loan and a portion of the related accrued interest. At
March 31, 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. At March 31, 2002, the Company had $415,278
outstanding on the bonds, which is classified as currently due. In April 1999,
an irrevocable letter of credit of approximately $2,349,000 was issued by a bank
to secure payment of the bonds and a portion of the related accrued interest. At
March 31, 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 March 31, 2002, the
Company had $441,567 outstanding and $1,558,433 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 March 31,
2002, are sufficient to finance its level operations and currently anticipated
capital expenditures.
12
Except as set forth in this report, the Company is not aware of any trends,
events or uncertainties that have or are reasonably likely to have a material
adverse impact on the Company's short-term or long-term liquidity or financial
condition.
PROSPECTS FOR THE FUTURE
As of March 31, 2002, several additional products are under development. Four of
these products have been reformulated and submitted to the Food and Drug
Administration ("FDA") for supplemental approval. The remainder of the
developmental products are either previously approved Abbreviated New Drug
Applications ("ANDA's") which the Company is planning to reintroduce, or new
products that the Company is planning to introduce. Since the Company has no
control over the FDA review process, management is unable to anticipate when it
will be able to begin producing and shipping additional products.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Regulatory Proceedings. The Company is engaged in an industry which is subject
to considerable government regulation relating to the development, manufacturing
and marketing of pharmaceutical products. Accordingly, incidental to its
business, the Company periodically responds to inquiries or engages in
administrative and judicial proceedings involving regulatory authorities,
particularly the FDA and the Drug Enforcement Agency.
Employee Claim. A claim of retaliatory discrimination has been filed by a former
employee with the Pennsylvania Human Relations Commission ("PHRC"). The Company
has denied liability in this matter, which is being investigated by the PHRC
pursuant to its normal procedures. At this time, management is unable to
estimate a range of loss, if any, related to this action. However, management
believes that the outcome will not have a material adverse impact on the
financial position of the Company.
A claim of sexual harassment and retaliation also has been filed against the
Company by another former employee. The claim was cross-filed with the PHRC and
with the Equal Employment Opportunity Commission, which already has closed its
file on the charge. The Company has filed an answer with the PHRC denying the
charge, and the PHRC is investigating the claim pursuant to its normal
procedures. At this time, management is unable to estimate a range of loss, if
any, related to this action. However, management believes that the outcome of
this charge also will not have a material adverse impact on the financial
position of the Company.
DES Cases. The Company is currently engaged in several civil actions as a
co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a
synthetic hormone. Prior litigation established that the Company's pro rata
share of any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which the
Company maintained coverage during the time period that damages were alleged to
have occurred. The insurance company denied coverage of actions filed after
January 1,
13
1992. With respect to these actions, the Company paid nominal damages or
stipulated to its pro rata share of any liability. The Company has either
settled or is currently defending over 500 such claims. At this time, management
is unable to estimate a range of loss, if any, related to such actions. However,
management believes that the outcome will not have a material adverse impact on
the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-B to be
filed as a part of this Form 10-QSB is shown on the Exhibit Index filed
herewith.
(b) The Company did not filed any reports on Form 8-K during the Quarter
ended March 31, 2002.
14
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LANNETT COMPANY, INC.
Dated: August 21, 2002 By: /s/ Larry Dalesandro
----------------------
Larry Dalesandro
Chief Operating Officer
15
EXHIBIT INDEX
Exhibit
Number Description Method of Filing Page
---------------------------- ---------------------------------- -------------------------------------------------- -------------
3(a) Articles of Incorporation Incorporated by reference to the Proxy Statement -
filed with respect to the Annual Meeting of
Shareholders held on December 6, 1991 (the "1991
Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to -
Stock Form 8 dated April 23, 1993 (Amendment No. 3 to
Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report -
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to -
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(c) to -
dated August 1, 1994 the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to -
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e) to -
dated December 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to -
dated June 30, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
Amendment #6 to Loan Agreement Incorporated by reference to Exhibit 10(g) to
dated November 1, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
10(g) 1997 ("1997 Form 10-KSB")
10(h) Amendment #7 to Loan Agreement Incorporated by reference to Exhibit 10(h) to
dated September 9, 1997 the Annual Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement Incorporated by reference to Exhibit 10(i) to
dated June 30, 1998 the Annual Report on Form 10-KSB f/y/e June 30,
1998 ("1998 Form 10-KSB")
10(j) Amendment #9 to Loan Incorporated by reference to Exhibit 10(j) to
16
Exhibit
Number Description Method of Filing Page
---------------------------- ---------------------------------- -------------------------------------------------- -------------
Agreement dated December 30, 1998 the Annual Report on Form 10-KSB f/y/e June 30,
1999 ("1999 Form 10-KSB")
10(k) Amendment #10 to Loan Agreement Incorporated by reference to Exhibit 10(k) to
dated December 31, 1999 the Annual Report on Form 10-KSB f/y/e June 30,
1999 ("1999 Form 10-KSB")
10(l) Amendment #11 to Loan Agreement Incorporated by reference to Exhibit 10(l) to
dated October 1, 2000 the Form 10-QSB for Quarter ended December 31,
2000
10(m) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(c) to
between the Company and Meridian the 1993 Form 10-K
Bank
10(n) Amendment to Loan Documents Incorporated by reference to Exhibit 10(e) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of December 8, 1993 1994 ("1994 Form 10-K")
10(o) Letter Agreement between the Incorporated by reference to Exhibit 10(f) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
December 21, 1993 1994 ("1994 Form 10-K")
10(p) Third Amendment to Loan Incorporated by reference to Exhibit 10(g) to -
Agreement dated as of June 9, the Annual Report on Form 10-KSB f/y/e June 30,
1994 1994 ("1994 Form 10-K")
10(q) Fourth Amendment to Loan Incorporated by reference to Exhibit 10(i) to -
Documents between the Company the Annual Report on Form 10-KSB f/y/e June 30,
and Meridian Bank as of October 1995 ("1995 Form 10-K")
27, 1994
10(r) Letter Agreement between the Incorporated by reference to Exhibit 10(j) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
October 27, 1994 1995 ("1995 Form 10-K")
10(s) Letter Agreement between the Incorporated by reference to Exhibit 10(k) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
July 10, 1995 1995 ("1995 Form 10-K")
10(t) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of July 31, 1995 1995 ("1995 Form 10-K")
10(u) Line of Credit Note dated July Incorporated by reference to Exhibit 10(m) to -
31, 1995 the Annual Report on Form 10-KSB f/y/e
June 30, 1995 ("1995 Form 10-K")
17
Exhibit
Number Description Method of Filing Page
---------------------------- ---------------------------------- -------------------------------------------------- -------------
10(v) Fifth Amendment to Loan Incorporated by reference to Exhibit 10(n) to -
Agreement dated July 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(w) Amendment to Loan agreement Incorporated by reference to Exhibit 10(q) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank, dated March 5, 1996. 1996 ("1996 Form 10-K")
10(x) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(y) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(z) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated May 23,
1997.
10(aa) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated September
24, 1997.
10(ab) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ac) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ad) Amendment to Loan agreement Incorporated by reference to Exhibit 10(aa) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 11,
1998.
10(ae) Amendment to Loan Incorporated by reference to Exhibit 10(ab) to
agreement between the the Annual Report on 1998 Form 10-KSB
18
Exhibit
Number Description Method of Filing Page
---------------------------- ---------------------------------- -------------------------------------------------- -------------
Company and Corestates Bank,
dated June 1998.
10(af) Line of Credit Note dated March Incorporated by reference to Exhibit 10(ad) to
11, 1999 the Annual Report on 1999 Form 10-KSB
10(ag) Taxable Variable Rate Incorporated by reference to Exhibit 10(ae) to
Demand/Fixed Rate Revenue Bonds, the Annual Report on 1999 Form 10-KSB
Series of 1999
10(ah) Philadelphia Authority for Incorporated by reference to Exhibit 10(af) to
Industrial Development the Annual Report on 1999 Form 10-KSB
Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds
(Lannett Company, Inc. Project)
Series of 1999
10(ai) Reimbursement and Agreements Incorporated by reference to Exhibit 10(ag) to
supporting bond issues the Annual Report on 1999 Form 10-KSB
10(aj) Amendment No. 1 to Reimbursement Incorporated by reference to Exhibit 10(i) to
Agreement and Waiver the Annual Report on 1999 Form 10-KSB
10(ak) Employment Agreement between the Incorporated by reference to Exhibit 10(ah) to
Company and Vlad Mikijanic the Annual Report on 1994 Form 10-KSB
10(al) Supply Agreement dated January Incorporated by reference to Exhibit 10(ad) to
14, 1997 the Annual Report on 1998 Form 10-KSB
10(am) Supply Agreement dated January Incorporated by reference to Exhibit 10(ae) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(an) Supply Agreement dated January Incorporated by reference to Exhibit 10(af) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(ao) Supply Agreement dated February Incorporated by reference to Exhibit 10(ag) to
11, 1997 the Annual Report on 1998 Form 10-KSB
10(ap) Supply Agreement dated May 27, Incorporated by reference to Exhibit 10(ah) to
1997 the Annual Report on 1998 Form 10-KSB
11 Computation of Per Share Earnings Filed Herewith 20
22 Subsidiaries of the Company Incorporated by reference to the Annual Report
on Form 10-K f/y/e June 30, 1990
23(b) Consent of Deloitte & Touche Incorporated by reference to Exhibit 23(B) to
the Annual Report on 1999 Form 10-KSB
19