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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
____________.
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- ----
As of February 3, 2003, there were 13,342,210 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 22 pages
Exhibit Index on Page 19
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INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 2002 (unaudited) and
June 30, 2002....................................................3
Consolidated Statements of Operations
for the three and six months ended December 31, 2002
and 2001 (unaudited).............................................4
Consolidated Statements of Cash Flows
for the six months ended December 31, 2002
and 2001 (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...................................................14
ITEM 2. Changes in Securities and Use of Proceeds...........................14
ITEM 3. Defaults upon Senior Securities.....................................14
ITEM 4. Submission of Matters to a Vote of Security Holders.................15
ITEM 5. Other Information...................................................15
ITEM 6. Exhibits and Reports on Form 8-K....................................15
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 12/31/02 06/30/02
-------- --------
CURRENT ASSETS:
Cash $ 467,628 $ -
Trade accounts receivable (net of allowance of $113,000 and $42,000) 5,098,356 4,465,885
Inventories 6,305,391 4,937,207
Prepaid expenses 481,194 106,170
Deferred tax asset 300,368 300,368
------------- -------------
Total current assets 12,652,937 9,809,630
------------- -------------
PROPERTY, PLANT AND EQUIPMENT 10,938,580 10,144,968
Less accumulated depreciation (4,090,337) (3,616,044)
------------- -------------
6,848,243 6,528,924
OTHER ASSETS 639,273 369,949
------------- --------------
Total assets $ 20,140,453 $ 16,708,503
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ - $ 202,688
Current portion of long-term debt 730,008 596,517
Accounts payable 493,596 733,984
Accrued expenses 323,635 657,891
Income taxes payable - 726,552
------------- -------------
Total current liabilities 1,547,239 2,917,632
------------- -------------
LONG-TERM DEBT, LESS CURRENT PORTION 2,784,644 3,343,333
------------- -------------
DEFERRED TAX LIABILITY 681,489 681,489
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -
authorized 50,000,000 shares par value $.001;
issued and outstanding, 13,306,976 shares and 13,263,838 shares,
respectively 13,307 13,263
Additional paid-in capital 2,413,315 2,366,892
Retained earnings 12,700,459 7,385,894
------------- -------------
Total shareholders' equity 15,127,081 9,766,049
------------- -------------
Total liabilities and shareholders' equity $ 20,140,453 $ 16,708,503
============= =============
See notes to consolidated financial statements
3
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
12/31/02 12/31/01 12/31/02 12/31/01
-------- -------- -------- --------
NET SALES $ 10,183,161 $ 5,391,341 $ 19,309,817 $ 9,464,173
COST OF SALES 3,965,474 2,236,715 7,801,585 3,783,159
------------- ------------- ------------ -----------
Gross profit 6,217,687 3,154,626 11,508,232 5,681,014
RESEARCH AND DEVELOPMENT EXPENSES 529,196 367,670 986,007 714,474
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,262,633 768,670 2,156,158 1,433,974
------------- ------------- ------------ -----------
Operating profit 4,425,858 2,018,286 8,366,067 3,532,566
------------- ------------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest income-restricted - 6,732 - 18,635
Interest expense (13,321) (91,136) (37,261) (212,434)
------------- ------------- ------------ -----------
(13,321) (84,404) (37,261) (193,799)
------------- ------------- ------------ -----------
INCOME BEFORE INCOME TAXES $ 4,412,537 $ 1,933,882 $ 8,328,806 $ 3,338,767
------------- ------------- ------------ -----------
INCOME TAX EXPENSE $ 1,649,624 $ 677,290 $ 3,014,241 $ 1,169,000
NET INCOME $ 2,762,913 $ 1,256,592 $ 5,314,565 $ 2,169,767
============= ============= ============ ===========
BASIC INCOME PER SHARE $ 0.21 $ 0.10 $ 0.40 $ 0.16
DILUTED INCOME PER SHARE $ 0.21 $ 0.09 $ 0.40 $ 0.16
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 13,288,331 13,219,127 13,277,830 13,212,628
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 13,415,584 13,303,645 13,405,781 13,297,146
See notes to the consolidated financial statements
4
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------
12/31/02 12/31/01
-------- --------
OPERATING ACTIVITIES:
Net income $ 5,314,565 $ 2,169,767
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 495,459 400,732
Deferred tax expense - 835,700
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable (632,471) 309,595
Inventories (1,368,184) (304,475)
Prepaid expenses and other assets (375,024) (252,318)
Accounts payable (240,388) 477,637
Accrued expenses (334,256) 69,157
Income taxes payable (726,552) 33,745
------------- -------------
Net cash provided by operating activities 2,133,149 3,739,540
------------- -------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (793,612) (1,042,506)
Deposits paid on machinery or building additions not placed in service (290,490) -
------------- -------------
Net cash used in investing activities (1,084,102) (1,042,506)
------------- -------------
FINANCING ACTIVITIES:
Net repayments under line of credit (202,688) (683,310)
Repayments under line of credit -- shareholder - (2,353,561)
Repayments of debt (425,198) (295,610)
Proceeds from debt, net of restricted cash released - 623,187
Proceeds from issuance of stock 46,467 12,260
------------- -------------
Net cash used in financing activities (581,419) (2,697,034)
------------- -------------
NET INCREASE IN CASH 467,628 -
CASH, BEGINNING OF YEAR - -
------------- -------------
CASH, END OF PERIOD $ 467,628 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 37,261 $ 114,549
Income taxes paid during period $ 3,908,362 $ 299,555
See notes to the consolidated financial statements
5
LANNETT COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and the results of operations and cash flows.
The results of operations for the three and six months ended December 31,
2002 and 2001 are not necessarily indicative of results for the full fiscal
year.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2002.
NOTE 2. NEW ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
- 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.
Management's assessment is that these Statements did not have a material impact
on the Company's financial position or results of operations.
6
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that results from acquisition, construction or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. This Statement also applies, for example, to a
company that operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when it cease
operation of that plant. A liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability and can be
reasonably estimated. The initial recording should be at fair value. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, with earlier application encouraged. The provisions of this Statement
do not have a material impact on the financial condition or results of
operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this statement does not have
a significant impact on the financial condition or results of operations of the
Company.
In April 2002, FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB No. 13, and Technical Corrections. SFAS No. 145 changes
the accounting principles governing extraordinary items by clarifying and, to
some extent, modifying the existing definition and criteria, specifying
disclosure for extraordinary items and specifying disclosure requirements for
other unusual or infrequently occurring events and transactions that are not
extraordinary items. SFAS 145 is effective for financial statements issued for
fiscal years beginning after June 15, 2002, with early adoption encouraged. The
adoption of this statement does not have a significant impact on the financial
condition or results of operations of the Company.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002. As the provisions of SFAS 146 are to be applied
prospectively after adoption date, the Company cannot determine the potential
effects that the adoption of SFAS 146 will have on its consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 are effective beginning in the quarter
ended March 29, 2003 and are not expected to have a material impact on the
Company's financial position or results of operations.
7
NOTE 3. INVENTORIES
Inventories consist of the following:
December 31, June 30,
2002 2002
------------ ------------
(unaudited)
Raw materials $ 2,943,948 $ 2,479,344
Work-in-process 1,151,518 691,346
Finished goods 2,021,124 1,560,029
Packaging supplies 188,801 206,488
------------- -------------
$ 6,305,391 $ 4,937,207
============= =============
NOTE 4. INCOME TAXES
The provision for federal and state income taxes for the three months ended
December 31, 2002 and 2001 was $1,649,624 and $677,290, respectively. The
provision for federal and state income taxes for the six months ended December
31, 2002 and 2001 was $3,014,241 and $1,169,000, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $138,000 and $62,000 during the six
months ended December 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 expense to the related party of approximately $68,000 and
$112,000 during the six months ended December 31, 2002 and 2001, respectively.
Accounts receivable includes amounts due from the related party of approximately
$60,000 and $59,000 at December 31, 2002 and June 30, 2002, respectively.
Accrued expenses include amounts due to the related party of approximately $0
and $8,000 at December 31, 2002 and June 30, 2002, respectively. In the
Company's opinion, the terms of these transactions were not more favorable than
would have been from a non-related party.
NOTE 6. 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 2002, and any Current Reports on Form 8-K filed by the corporation.
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 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
9
the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
INVENTORIES
The Company values its inventory at the lower of cost or market and
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements. The Company's estimates of future product
demand may prove to be inaccurate, in which case it may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if the Company's inventory is determined to be overvalued, the Company
would be required to recognize such costs in cost of goods sold at the time of
such determination. Likewise, if inventory is determined to be undervalued, the
Company may have recognized excess cost of goods sold in previous periods and
would be required to recognize such additional operating income at the time of
sale.
RESULTS OF OPERATIONS --THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH THREE
MONTHS ENDED DECEMBER 31, 2001.
Net sales for the three months ended December 31, 2002 ("Second Quarter
Fiscal 2003") increased by 89% to $10,183,161 from net sales of $5,391,341 for
the three months ended December 31, 2001 ("Second Quarter Fiscal 2002"). Sales
increased during Second Quarter Fiscal 2003 as a result of higher sales of a
portion of the Company's products, including Butalbital, Aspirin, Caffeine with
Codeine Capsules, which was first marketed in December 2001, and Digoxin
Tablets, which was first marketed in September 2002. Additionally, sales
increased due to improved marketing activities, new customer accounts, favorable
market conditions, and increased unit sales on a portion of the Company's line
of products.
Cost of sales increased by 77%, to $3,965,474 in Second Quarter Fiscal
2003 from $2,236,715 in Second Quarter Fiscal 2002. The cost of sales increase
is due to an increase in direct variable costs and certain indirect overhead
costs as a result of the increase in sales volume, and related production
activities. These costs include raw materials, labor and benefit expenses, and
depreciation expense. Gross profit margins for Second Quarter Fiscal 2003 and
Second Quarter Fiscal 2002 were 61% and 59%, respectively. The increase in the
gross profit percentage is due to the product sales mix, a higher absorption of
fixed overhead and production costs, and improved unit profit margins on a
portion of the Company's line of products.
Research and development expenses increased by 44% to $529,196 in
Second Quarter Fiscal 2003 from $367,670 in Second Quarter Fiscal 2002. 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, and an
increase in fees related to the services performed by external research and
development firms.
Selling, general and administrative expenses increased by 64% to
$1,262,633 in Second Quarter Fiscal 2003 from $768,670 in Second Quarter Fiscal
2002. This increase is a result of increased payroll and benefit expenses due to
the hiring of additional administrative employees, higher professional services
fees, and increased marketing and advertising expenses, partially offset by a
decrease in commission expenses due to the Company's reduction of fees related
to sales brokerage agreements.
As a result of the foregoing, the Company increased its operating
profit to $4,425,858 for Second Quarter Fiscal 2003, from $2,018,286 for Second
Quarter Fiscal 2002.
10
The Company's interest expense decreased to $13,321 in Second Quarter
Fiscal 2003 from $91,136 in Second Quarter 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 $677,290 in Second
Quarter Fiscal 2002 to $1,649,624 in Second Quarter Fiscal 2003 as a result of
the increase in taxable income.
The Company reported net income of $2,762,913 for Second Quarter Fiscal
2003, or $0.21 basic and diluted income per share, compared to net income of
$1,256,592 for Second Quarter Fiscal 2002, or $0.10 basic and $0.09 diluted
income per share.
RESULTS OF OPERATIONS --SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH SIX
MONTHS ENDED DECEMBER 31, 2001.
Net sales for the six months ended December 31, 2002 increased by 104%
to $19,309,817 from net sales of $9,464,173 for the six months ended December
31, 2001. Sales increased during the six months ended December 31, 2002 as a
result of higher sales of a portion of the Company's products, including
Butalbital, Aspirin, Caffeine with Codeine Capsules, which was first marketed in
December 2001, and Digoxin Tablets, which was first marketed in September 2002.
Additionally, sales increased due to improved marketing activities, new customer
accounts, favorable market conditions, and increased unit sales on a portion of
the Company's line of products.
Cost of sales for the six months ended December 31, 2002 increased by
106%, to $7,801,585 from $3,783,159 for the six months ended December 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
benefit expenses, and depreciation expense. Gross profit margins for the six
months ended December 31, 2002 and December 31, 2001 were each 60%.
Research and development expenses increased by 38% to $986,007 for the
six months ended December 31, 2002 from $714,474 for the six months ended
December 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, and an increase in fees related to the services performed
by external research and development firms.
Selling, general and administrative expenses increased by 50% to
$2,156,158 for the six months ended December 31, 2002 from $1,433,974 for the
six months ended December 31, 2001. This increase is a result of increased
payroll and benefit expenses due to the hiring of additional administrative
employees, higher professional services fees, and increased marketing and
advertising expenses, partially offset by a decrease in commission expenses due
to the Company's reduction of fees related to sales brokerage agreements.
As a result of the foregoing, the Company increased its operating
profit to $8,366,067 for the six months ended December 31, 2002, from $3,532,566
for the six months ended December 31, 2001.
The Company's interest expense decreased from $212,434 for the six
months ended December 31, 2001 to $37,261 for the six months ended December 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 $1,169,000 for the six
months ended December 31, 2001 to $3,014,241 for the six months ended December
31, 2002 as a result of the increase in taxable income.
11
The Company reported net income of $5,314,565 for the six months ended
December 31, 2002, or $0.40 basic and diluted income per share, compared to net
income of $2,169,767 for the six months ended December 31, 2001, or $0.16 basic
and diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities of $2,133,149 for the six
months ended December 31, 2002 was attributable to net income of $5,314,565 as
adjusted for the effects of non-cash items of $495,459 and changes in operating
assets and liabilities totaling $3,676,875. Significant changes in operating
assets and liabilities are comprised of: i) an increase in trade accounts
receivable of $632,471 due to increased sales, ii) an increase in inventories of
$1,368,184 due to increases in raw materials, work-in-process and finished
goods--due to the Company's decision to increase its inventory carrying levels
to amounts sufficient to maximize customer fulfillment and minimize customer
back-orders, iii) an increase in prepaid expenses and other assets of $375,024
due to deposits and advance payments made by the Company for equipment
maintenance plans, and the prepayment of income taxes related to the Company's
annual tax return extension forms, iv) a decrease in accounts payable of
$240,388 due to the timing and receipts of certain inventory shipments, and
reduced capital equipment purchases, v) a decrease in accrued expenses of
$334,256 due to reduced capital equipment purchases, and the payment of accrued
insurance premium costs and vi) a decrease in income taxes payable of $726,552
due to the payments of the Company's estimated tax liabilities.
The net cash used in investing activities of $1,084,102 for the six
months ended December 31, 2002 was attributable to $793,612 expended for
equipment and building additions and $290,490 in deposits paid for equipment not
yet received or placed in service, or building additions not yet completed. The
Company's anticipated budget for capital expenditures in Fiscal 2003 is
approximately $1,700,000. 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 December 31, 2002, none of the financing proceeds received from
the bonds issued during Fiscal 1999 were available for future capital
expenditures; however approximately $290,490 was paid by the Company prior to
December 31, 2002 for production equipment expected to arrive, or be placed in
service during the Fiscal Year 2003. This balance is included in Other Assets at
December 31, 2002.
The net cash used in financing activities of $581,419 for the six
months ended December 31, 2002 was attributable to principal repayments on a
bank line of credit of $202,688, principal repayments on bond debt of $425,198,
and cash proceeds of $46,467 related to the Company's sale of common stock
pursuant to the exercise of employee stock options.
In April 1999, the Company entered into a loan agreement (the
"Agreement") with a governmental authority (the "Authority") to finance future
construction and growth projects of the Company. The Authority has issued
$3,700,000 (the "Authority Loan") in tax-exempt variable rate demand and fixed
rate revenue bonds to provide the funds to finance such growth projects pursuant
to a trust indenture ("the "Trust Indenture"). A portion of the Company's
proceeds from the bonds was used to pay for bond issuance costs of approximately
$170,000. The remainder of the proceeds was deposited into a money market
account, which is restricted to future plant and equipment needs of the Company
as specified in the Agreement. The Trust Indenture requires the Company to repay
the Authority Loan through installment payments beginning in May 2003 and
continuing through May 2014, the year the bonds mature. At December 31, 2002,
the Company has $3,514,652 outstanding on the Authority Loan, of which $730,008
is classified as currently due. The remainder is classified as a long-term
liability. In April 1999, an irrevocable letter of credit of $3,770,000 was
issued by a bank to secure payment
12
of the Authority Loan and a portion of the related accrued interest. At December
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. From the
proceeds of the bonds, $750,000 was utilized to pay deferred interest owed to
Mr. Farber, the Chairman of the Board of Directors and Chief Executive Officer
of the Company, and approximately $1,440,000 was paid to a bank to refinance a
mortgage term loan and equipment term loans. The remainder of the proceeds was
used to pay bond issuance costs of approximately $109,000. The Trust Indenture
requires the Company to repay the bonds through installment payments beginning
in June 1999 and continuing through May 2003, the year the bonds mature. During
the Second Quarter Fiscal 2003, the Company repaid the balance of these bonds in
full.
The Company has a $3,000,000 line of credit from a bank. The line of
credit is due December 1, 2003, at which time the Company may renew and extend
the due date. At December 31, 2002, the Company had $0 outstanding and
$3,000,000 available under the line of credit.
The Company believes that cash generated from its operations and the
balances available under the Company's existing loans and lines of credit as of
December 31, 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 of December 31, 2002, there are several new products 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 contracted for and initiated the services of outside research
and development firms to supplement the Company's internal research and
development efforts. Since the Company has no control over the FDA review
process, management is unable to anticipate whether or when it will be able to
begin producing and shipping additional products.
13
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 Claims. A claim of retaliatory discrimination has been filed by a
former employee with the Pennsylvania Human Relations Commission ("PHRC"), and
the Equal Employment Opportunity Commission ("EEOC"). The Company has denied
liability in this matter. The PHRC has made a determination that the complaint
against the Company should be dismissed because the facts do not establish
probable cause of the allegations of discrimination. The matter is still pending
before the EEOC. At this time, management is unable to estimate a range of loss,
if any, related to this action. However, management believes that the outcome
will not have a material adverse impact on the financial position of the
Company.
Additionally, two separate claims of discrimination have been filed
against the Company with the PHRC and the EEOC. The Company was notified of the
Complaints in June 2001 and July 2001, respectively. The Company has denied
liability in these matters. The EEOC has made a determination that the former
Complaint should be dismissed because the EEOC was unable to conclude that the
information obtained during its investigation establishes violations of the
relevant statutes. The matter is still pending before the EEOC. The latter
Complaint is being investigated by the PHRC and EEOC pursuant to their normal
procedures. At this time, management is unable to estimate a range of loss, if
any, related to these actions. However, management believes that the outcomes
will not have a material adverse impact on the financial position of the
Company.
DES Cases. The Company is currently engaged in several civil actions as a
co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a
synthetic hormone. Prior litigation established that the Company's pro rata
share of any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which the
Company maintained coverage during the time period that damages were alleged to
have occurred. The insurance company denied coverage of actions filed after
January 1, 1992. With respect to these actions, the Company paid nominal damages
or stipulated to its pro rata share of any liability. The Company has either
settled or is currently defending over 500 such claims. At this time, management
is unable to estimate a range of loss, if any, related to these actions.
However, management believes that the outcomes will not have a material adverse
impact on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
14
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 file any reports on Form 8-K during the six months
ended December 31, 2002.
15
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: February 3, 2003 By: / s / Larry Dalesandro
-----------------------
Larry Dalesandro
Chief Operating Officer
Dated: February 3, 2003 By: / s / William Farber
--------------------
William Farber
Chairman of the Board and Chief
Executive Officer
16
I, Larry Dalesandro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lannett
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant'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 registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant'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 registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicted in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 3, 2003
/s/Larry Dalesandro
-----------------------
Chief Operating Officer
17
I, William Farber, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lannett
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant'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 registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial date and have identified for the
registrant'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 registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicted in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 3, 2003
/s/William Farber
-----------------------
Chief Executive Officer
18
EXHIBIT INDEX
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
11 Computation of Per Share Earnings Filed Herewith
99.1 Certification Pursuant to 18 USC Filed Herewith
Section 1350
19