U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(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, 2001
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 $12,090,993 for the fiscal year ended June
30, 2001.
As of September 10, 2001, the aggregate market value of the voting
stock held by non-affiliates was approximately $23,045,000 computed by reference
to the average of the bid and asked prices of such stock as quoted by the
National Quotations Bureau, Inc.
As of August 10, 2001, there were 13,206,128 shares of the issuer's
common stock, $.001 par value, outstanding.
Page 1 of 38 pages
Exhibit Index on Page 33
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 administrative
offices and manufacturing facilities of the Company are located at 9000 State
Road, Philadelphia, Pennsylvania.
The Company manufactures and distributes pharmaceutical products sold
under generic names ("competitive pharmaceutical products") and historically has
manufactured and distributed pharmaceutical products sold under its trade or
brand names. In addition, the Company contract manufactures and private labels
pharmaceutical products for other companies.
During the year ended June 30, 2001, the use of the Company's
manufacturing capacity remained consistent as compared to the prior year.
Certain manufacturing departments are operating at full utilization (utilizing
one shift) and certain departments are operating on a limited second shift. The
hiring of additional personnel, and the renovation of excess storage space to be
used for manufacturing purposes will allow for increased efficiency and
utilization of equipment and should be sufficient to accommodate increased
production needs during Fiscal 2002. On December 19, 1997, the Company entered
into a three-year and three-month lease for a 23,500 square foot facility. In
January 2001, the Company extended this lease through April 30, 2004. This
facility houses research and development, and warehousing operations; and is an
addition to the Company's primary manufacturing facility located at the
Company's headquarters.
PRINCIPAL PRODUCTS.
During Fiscal 2001, the Company manufactured and distributed nine
products: (i) Butalbital Compound Capsules ("BCC"), a generic version of
Novartis Pharmaceutical Corporation's Fiorinal(R); an analgesic primarily used
for the treatment of migraine headaches, (ii) Primidone, 250-mg tablets, and
(iii) 50-mg tablets, generic versions of American Home Product's Mysoline(R) an
anti-convulsant, (iv) Dicyclomine Hydrochloride USP, 10-mg capsules, and (v)
20-mg tablets, generic versions of Hoechst Marion Roussel's Bentyl(R), an
antispasmodic and anticholinergic agent, (vi) Acetazolamide Tablets USP, a
generic version of Wyeth-Ayerst's Diamox(R), an enzyme inhibitor used to treat
congestive heart failure, and other conditions, (vii) Pseudoephedrine
Hydrochloride 60-mg tablets, (viii) Pseudoephedrine Hydrochloride 30-mg tablets
and (ix) Guafenesin/Ephedrine 25/200-mg tablets, both cough/cold preparations.
In addition to these nine products, Lannett also distributed five other
products, under its label, which were manufactured by another company.
Twenty-two additional products are currently under development. Three
of these products are being developed and manufactured for another company; and
the other nineteen products are being developed as part of the Lannett product
line. Five of the Lannett products have been
2
redeveloped and submitted to the Food and Drug Administration ("FDA") for
supplemental approval. Seven additional products represent previously approved
Abbreviated New Drug Applications ("ANDA's") which the Company is planning to
reintroduce. The other seven Lannett products represent 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 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. Two suppliers, Ganes
Chemicals and BI Chemicals Inc., accounted for approximately 27% and 24%, and
15% and 41%, respectively, of the Company's raw material purchases in Fiscal
2001 and Fiscal 2000. 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. One customer accounted for approximately 24% of net
sales in Fiscal 2001. Two customers accounted for approximately 42% and 11%,
respectively, of net sales in Fiscal 2000. As the Company introduces additional
products, it expects to broaden its customer base.
COMPETITION.
The manufacture and distribution of pharmaceutical products is a highly
competitive industry. Competition in the pharmaceutical industry 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.
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
3
enter into supply contracts or to approve new drug applications. The FDA also
has the authority to revoke previously approved drug products.
FDA approval is required before any "new" 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. Generally, a drug, which is the generic equivalent of a previously
approved prescription drug, will be treated as a new generic drug requiring FDA
approval. Furthermore, each dosage form of a specific generic drug product
requires separate approval by the FDA. However, less burdensome approval
procedures may be used for generic equivalents. Although generic equivalents of
many over-the-counter drugs generally do not require affirmative FDA
pre-approval, there are instances where FDA pre-approval is required. 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
blood stream 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.
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.
4
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, 2001 and 2000.
RESEARCH AND DEVELOPMENT.
During Fiscal 2001 and Fiscal 2000, the Company incurred research and
development costs of approximately $1,403,000 and $1,277,000, respectively.
EMPLOYEES.
The Company currently employs 94 employees, all of whom are full-time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's general business offices, laboratory and manufacturing
and distribution facilities are located in a facility owned by the Company at
9000 State Road, Philadelphia, Pennsylvania. This facility was extensively
renovated during Fiscal 1993 and Fiscal 1992 and 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,
on December 19, 1997, it 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
main operating facility. This new leased facility houses research and
development, and warehousing operations. The Company has renewed and extended
the lease term through April 30, 2004.
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
5
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 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 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.
Management believes that the outcome of these cases will not have a material
adverse impact on the financial position 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.
6
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, 2001 and since the annual meeting of
shareholders held March 1, 2001.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION.
The Company's common stock trades 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 bid prices of the Company's common stock during Fiscal 2001 and 2000 as
quoted by Pink Sheets LLC. Such quotations reflect inter-dealer prices without
retail mark-up, markdown or commission and may not represent actual
transactions.
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
FISCAL YEAR ENDED JUNE 30, 2000
HIGH LOW
---- ---
First quarter........................................................ $1.25 $0.81
Second quarter....................................................... 1.22 0.63
Third quarter........................................................ 1.22 0.75
Fourth quarter....................................................... 1.06 0.63
HOLDERS.
The number of holders of record of the Company's common stock as of
August 21, 2001 was 399.
DIVIDENDS.
The Company did not pay any cash dividends in Fiscal 2001 or 2000. 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 2001, and any Current Reports on Form 8-K filed by the Company.
RESTATEMENT
The Company restated results for Fiscal 2000 and 2001 due to the
correction of an error resulting from the improper deferral of legal fees
incurred associated with the favorable settlement of a lawsuit. This resulted in
a reduction in net income of $305,128 or $.02 per diluted share in Fiscal 2000,
and an increase in net income of $305,128, or $.02 per diluted share in Fiscal
2001, respectively. This impact is reflected in the reported results herein.
RESULTS OF OPERATIONS - FISCAL 2001 TO FISCAL 2000.
Net sales for Fiscal 2001 increased by 4.7% to $12,090,993 from net
sales of $11,553,457 in Fiscal 2000. Sales increased during Fiscal 2001 due to
increased sales of the Company's prescription (Rx) product line, offset
partially by a decrease in sales of the Company's Over-The-Counter ("OTC")
products. In the fourth quarter of Fiscal 2001, the Company increased its sales
volume by successfully marketing a new product and increasing its volume on
certain other Rx products. Rx sales increased from $3,117,764 in Fiscal 2000 to
$7,299,273 in Fiscal 2001. Sales of OTC products decreased from $8,435,693 in
Fiscal 2000 to $4,791,717 in Fiscal 2001 due to increased competition. Net sales
derived from the contract development and manufacturing agreement represents
approximately $9,000 and $42,000 for Fiscal 2001 and Fiscal 2000, respectively.
As the Company introduces additional products, it expects to continue increasing
Rx product sales.
Cost of sales decreased by 9.1%, to $6,534,764 in Fiscal 2001 from
$7,186,289 in Fiscal 2000. The cost of sales decrease is due to a decrease in
raw material costs as a result of the change in the product sales mix. Gross
profit margins for Fiscal 2001 and Fiscal 2000 were 46.0% and 37.8%,
respectively. The increase in the gross profit percentage is due to the change
in the product sales mix.
9
Research and development expenses increased by 9.9% to $1,402,900 in
Fiscal 2001 from $1,277,075 in Fiscal 2000 due to more aggressive new product
development activities. Selling, general and administrative expenses increased
by 10.6% to $2,014,004 in Fiscal 2001 from $1,820,196 in Fiscal 2000 due to
increases in sales commission expense, and service charges related to banking
activities.
As a result of the foregoing, the Company reported an operating profit
of $2,139,325 for Fiscal 2001, as compared to an operating profit of $1,269,897
for Fiscal 2000.
The Company's interest expense, net of interest income, remained
relatively constant at $680,962 for Fiscal 2001 compared to $690,258 for Fiscal
2000. See Liquidity and Capital Resources below.
Included in other income during Fiscal 2001 is $1,475,814 in income
from the settlement of a lawsuit. 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 the proceeds in First Quarter
Fiscal 2001. The Company incurred approximately $305,000 in legal fees relating
to the lawsuit, which were expensed to operations in Fiscal 2000.
During Fiscal 2001, the Company provided for federal and state income
tax expense of $1,007,522. During Fiscal 2000, the Company recorded net income
tax benefits of $465,330. Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes requires companies to record deferred tax
assets and liabilities on the balance sheet, including the effect of operating
loss carryforwards, net of the effect of a valuation allowance. The purpose of
the valuation allowance is to reduce the deferred asset to a value that "more
likely than not" the Company will have taxable income in its future to offset
such operating loss carryforwards. Lannett renewed its Research and Development
plan, committing additional resources toward the identification and development
of new generic drug products. In Fiscal Year 2001, Lannett was able to receive
FDA approval for 2 new products. As a result of the Company's revived focus on
development of new drug products, management expected the Company would achieve
gains in sales, operating profits and taxable income in future years. This
expectation led to management's decision to reduce its valuation allowance for
the tax asset recorded because it believed that "more likely than not", the
Company would achieve the taxable income to offset against past operating loss
carryforwards.
The Company reported net income of $1,829,915 for Fiscal 2001, $0.14
basic income per share, $0.14 on a diluted basis, compared to net income of
$1,044,969 for Fiscal 2000, $0.08 basic income per share, $0.08 on a diluted
basis.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities of $452,843 during Fiscal
2001 was attributable to net income of $1,829,915 as adjusted for the effects of
non-cash items of $1,594,405 and a negative net change in operating assets and
liabilities totaling $2,971,477. Significant changes in operating assets and
liabilities are comprised of:
10
an increase in accounts receivable of $3,269,069 due to a significant increase
in sales in the last quarter of Fiscal 2001, compared to the last quarter of
Fiscal 2000. During Fiscal Year 2000, the total sales of 11,553,457 occurred
relatively equally over the course of the entire year. Sales for Fiscal year
2001 were skewed more toward the end of the year. Specifically, sales for the
final quarter in Fiscal 2001 were $5,401,489, which is significantly higher than
sales in the first three quarters of Fiscal 2001. Due to the timing of cash
payments pursuant to our credit terms, a significant portion of our sales of
this final quarter were still in accounts receivable at June 30, 2001. The
reasons for the increase in sales in the final quarter of Fiscal 2001 were: the
introduction in May 2001 of a new product, Primidone 50 mg tablets, onto the
marketplace for the first time in the Company's history, and increases in sales
volume on other products due to favorable market conditions and aggressive
marketing efforts. The addition of Primidone 50 mg tablets to Lannett's line of
products allowed the Company to open many new customer accounts, including major
chains and wholesalers. Lannett succeeded in increasing its market share for
certain other items that it sold during this time period.
ii) an increase in inventories of $205,933 due to an increase of raw materials
in anticipation of increased sales levels in Fiscal 2002.
The net cash used in investing activities consisted mainly of
$1,488,741 expended during Fiscal 2001 primarily for machinery and equipment.
The Company has budgeted for $1,300,000 in capital expenditures in Fiscal 2002.
The anticipated additional capital expenditure requirements will support the
Company's growth related to new product introductions. As of June 30, 2001,
approximately $1,226,000 from the proceeds of the bonds issued during Fiscal
1999 was available in financing restricted for certain future capital
expenditures.
The Company has a $4,250,000 revolving line of credit from its
principal shareholder, William Farber, who is also the Chairman of the Board
("Shareholder Line of Credit"). At June 30, 2001, the Company has $4,225,000
outstanding and $25,000 available under this line of credit. The maturity date
on the Shareholder Line of Credit was extended to December 1, 2001. Accrued
interest at June 30, 2001, and June 30, 2000 was $0 and $22,977, respectively.
The Company also had a convertible debenture available to it by Mr.
Farber. The maturity date of the shareholder debenture was December 23, 1999. On
December 22, 1999, William Farber elected to convert the debenture into shares
of common stock of the Company. The shareholder debenture and accrued interest
was convertible at the rate of 4,000 shares of common stock for each $1,000 of
outstanding indebtedness. The principal balance on the debenture at the time of
conversion was $2,000,000, and the interest on the debenture was paid to date;
therefore the transaction converted the $2,000,000 of indebtedness to 8,000,000
shares of the Company's common stock.
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, 2001, the Company has $3,700,000 outstanding
on the Authority loan, which is classified as a long-term liability. In April
1999, an irrevocable letter of credit of
11
$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, 2001, 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 Mr. Farber 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, 2001, the Company has $848,222 outstanding on the
bonds, of which $728,330 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, 2001, no portion of the letter of credit has been utilized.
The Company has a $2,000,000 line of credit from a bank. The line of
credit is due November 30, 2001, at which time the Company plans 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, 2001, the Company had
$2,000,000 outstanding and no further availability 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, 2001, are sufficient to finance its level of operations and currently
anticipated capital expenditures.
Except as set forth in this report, the Company is not aware of any
trends, events or uncertainties that have or are reasonably likely to have a
material adverse impact on the Company's short-term or long-term liquidity or
financial condition.
PROSPECTS FOR THE FUTURE
As described above, twenty-two additional products are currently under
development. Three of these products are being developed and manufactured for
another company; and the other nineteen products are being developed as part of
the Lannett product line. Five of the Lannett products have been redeveloped and
submitted to the Food and Drug Administration ("FDA") for supplemental approval.
Seven additional products represent previously approved Abbreviated New Drug
Applications ("ANDA's") which the Company is planning to reintroduce. The other
seven Lannett products represent 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 whether or when it will be able to begin
producing and shipping additional products.
12
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements for the years ended June 30, 2001
and 2000 and Independent Auditor Report filed as a part of this Form 10-KSB are
listed in the "Index to Financial Statements" filed herewith.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
13
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 70 Chairman of the Board
Marvin Novick 70 Director
Arthur P. Bedrosian 54 Director
Other Executive Officers:
------------------------
Larry Dalesandro 29 Chief Operating Officer
Alan Saidel 42 Vice President - Operations & Manufacturing
Eugene Livshits 46 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.
ARTHUR P. BEDROSIAN, J.D. was elected a Director of the Company in
February 2000. Mr. Bedrosian has operated generic drug manufacturing, sales, and
marketing businesses in the
14
healthcare industry for many years. He currently operates 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. Currently, Mr.
Bedrosian is President and Chief Executive Officer of Trinity Laboratories,
Inc., a medical device and drug manufacturer.
LARRY DALESANDRO was elected Chief Operating Officer of the Company in
November 1999. Mr. Dalesandro joined Lannett 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.
ALAN SAIDEL was elected Vice President Operations & Manufacturing in
July 1998. Mr. Saidel joined the Company in February 1996 as Director of
Operations & Manufacturing. Mr. Saidel has 18 years of experience in the
pharmaceutical industry. Mr. Saidel has previously been employed at Barr
Laboratories Inc., Mutual Pharmaceuticals Inc. and Pal-Pak Inc, where he held
the position of Director of Operations. Mr. Saidel's employment with the Company
was terminated on December 29, 2000.
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 25 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 2001, Fiscal 2000 and Fiscal
1999. 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 2001.
15
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 2001 0 0 0 0 0 0 0
Chairman of the 2000 0 0 0 0 0 0 0
Board 1999 0 0 0 0 0 0 0
Larry Dalesandro(5) 2001 102,049(3) 5,000 3,600(1) 0 10,000(7) 0 0
Chief Operating 2000 78,951(3) 5,000 3,600(1) 0 10,000(7) 0 0
Officer 1999 0 0 0 0 0 0
Eugene Livshits(5) 2001 109,669(3) 5,000 3,600(1) 0 12,000(7) 0 0
Vice 2000 96,043(3) 2,000 2,631(1) 0 12,000(7) 0 0
President/Technical 1999 0 0 0 0 0 0 0
Affairs
Vlad Mikijanic 2001 0 0 0 0 0 0 0
Vice President/ 2000 45,454(3) 0 0 0 0 0 0
Technical 1999 121,528(3) 2,000 7,200(1) 0 0 0 0
Affairs(2)
Jeffrey M. Moshal 2001 0 0 0 0 0 0 0
Chief Operating 2000 74,338(3) 0 3,000(1) 0 0 0 0
Officer(2) 1999 122,768(3) 2,000 7,200(1) 0 100,000(4) 0 0
16
Alan Saidel(2) 2001 65,879(3) 2,000 3,876(1) 0 50,000(4) 0 6,500(6)
Vice President/ 2000 125,458(3) 2,500 7,200(1) 0 50,000(4) 13,000(6)
Manufacturing 1999 113,526(3) 2,000 7,200(1) 0 50,000(4) 13,000(6)
& Operations
(1) Represents auto allowance.
(2) Mr. Mikijanic's employment with the Company was terminated on
May 14, 1999. His salary for fiscal year 2000 represents
severance pay. Mr. Moshal's employment with the Company was
terminated on November 23, 1999. Mr. Saidel's employment with
the Company was terminated on December 29, 2000.
(3) Includes payments to the Company's 401(k) Plan (3% of eligible
compensation).
(4) The options represent 100,000 and 50,000 incentive stock
options which were granted to Mr. Moshal and Mr. Saidel,
respectively on October 13, 1997 pursuant to the Company's
1993 Long Term Incentive Stock Plan. The options are
exercisable as follows: one-third on or after October 13,
1998, one-third on or after October 13, 1999 and one-third on
or after October 13, 2000. Mr. Moshal forfeited his options as
a result of his termination from the Company. The forfeiture
was effective on February 23, 2000. Mr. Saidel forfeited his
options as a result of his termination from the Company. The
forfeiture was effective on March 30, 2001.
(5) Mr. Dalesandro was elected as an officer of the Company on
November 1, 1999. Mr. Livshits was elected as an officer of
the Company on November 1, 1999.
(6) Represents compensation for living expenses.
(7) 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. At August 10, 2001, the aggregate
market value of these restricted stock holdings is $38,390
(computed by reference to the average closing bid and ask
prices of such stock as quoted by Pink Sheets LLC).
17
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 - - 3,333(1)/ -
Chief Operating Officer 6,667(1) -
Eugene Livshits 4,000(1)/ -
Vice President - of - - 8,000(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 $300 per meeting attended, for
services provided as directors of the Company during Fiscal 2001. Directors are
reimbursed for expenses incurred in attending Board meetings.
EMPLOYMENT CONTRACTS.
There were no employment contracts in existence at the end of
Fiscal 2001.
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 10, 2001, 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 of
Beneficial Owner Office of Shares of Class of Shares Class
---------------- ------ --------- -------- --------- -----
Directors/Executive Officers:
----------------------------
Arthur Bedrosian Director 189,400(1) 1.43% 189,400(1) 1.43%
9000 State Road
Philadelphia, PA 19136
Larry Dalesandro Chief Operating 0 0 3,333(2) .03%
9000 State Road Officer
Philadelphia, PA 19136
William Farber Chairman of the 9,234,486(3) 69.93% 9,234,486(3) 69.55%
9000 State Road Board
Philadelphia, PA 19136
Eugene Livshits Vice President 0 0% 4,000(2) .03%
9000 State Road Technical
Philadelphia, PA 19136 Affairs
Marvin Novick Director 65,000(4) .49% 95,000(5) .72%
9000 State Road
Philadelphia, PA 19136
All directors and 9,488,886 71.85% 9,526,219 71.75%
executive officers as a group
(5 persons)
Gilda Gratz(6) 758,167 5.74% 758,167 5.71%
1139 Kerper Street
Philadelphia, PA 19111
(1) Includes 9,400 shares owned by the spouse of Mr. Bedrosian.
(2) Represents 3,333 and 4,000 vested options for Larry Dalesandro and Eugene
Livshits, respectively, to purchase common stock at an exercise price of
$0.80 per share.
(3) Includes 300,000 shares owned jointly by William Farber and Audrey Farber,
the Secretary of the Company and William's Farber's spouse.
(4) Includes 16,000 shares owned by the spouse of Mr. Novick.
(5) Includes 30,000 vested options to purchase common stock at an exercise price
of $1.38 per share.
(6) Gilda Gratz is the spouse of Sam Gratz, the founder of Lannett Company, Inc.
19
* Assumes that all options and debentures exercisable within sixty days
have been exercised, which results in 13,277,411 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 financing
package aggregating $6,250,000, which the Company has used to renovate its
manufacturing facility, to acquire new equipment, to retain new management and
to provide working capital. The financing package consisted of a $4,250,000
revolving line of credit due October 1, 2001 and a $2,000,000 convertible
debenture, which Mr. Farber converted to common shares of the Company on
December 22, 1999. See MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and
Capital Resources." Mr. Farber is currently the holder of 9,234,486 shares of
common stock of the Company, or approximately 70% of the Company's issued and
outstanding shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The Company had sales of approximately $111,000 and $4,856,000 during the
years ended June 30, 2001 and 2000, respectively, to a distributor (the "related
party") in which the owner is a relative of the Chairman of the Board of
Directors and principal shareholder of the Company. The Company also incurred
sales commissions payable to the related party of approximately $369,000 and
$262,000 during the years ended June 30, 2001 and 2000, respectively. Accounts
receivable includes amounts due from the related party of approximately $34,000
and $13,000 at June 30, 2001 and June 30, 2000, respectively. Accrued expenses
includes amounts due to the related party of approximately $29,000 and $71,000
at June 30, 2001 and June 30, 2000, 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) No reports on Form 8-K were filed during the quarter ended
June 30, 2001.
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: August 21, 2002 By: /s/ William Farber
------------------- ---------------------
William Farber,
Chairman of the Board
Date: August 21, 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 Title Date
--------- ----- ----
/s/ William Farber Chairman of the Board August 21, 2002
--------------------------------------
William Farber
/s/ Marvin Novick Director August 21, 2002
-------------------------------------
Marvin Novick
/s/ Arthur Bedrosian Director August 21, 2002
------------------------------------
Arthur Bedrosian
21
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, 2001 and 2000, 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 audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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, 2001 and 2000, 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.
As discussed in Note 1 to the consolidated financial statements, the Company
restated its fiscal 2001 operating results due to a correction of an error.
Grant Thornton LLP
Philadelphia, Pennsylvania
August 8, 2001
22
CONSOLIDATED BALANCE SHEETS, AS RESTATED
JUNE 30, 2001 AND 2000
ASSETS 2001 2000
(RESTATED) (RESTATED)
CURRENT ASSETS:
Cash $ -- $ --
Trade accounts receivable (net of allowance of $25,000 and $13,000) 4,366,587 1,097,518
Inventories 3,156,109 2,950,176
Prepaid expenses and other assets 112,736 190,833
Deferred tax asset 983,403 46,137
------------ ------------
Total current assets 8,618,835 4,284,664
PROPERTY, PLANT AND EQUIPMENT 8,667,955 7,652,539
Less accumulated depreciation 3,089,735 2,698,355
------------ ------------
5,578,220 4,954,184
RESTRICTED CASH 1,225,649 2,026,445
OTHER ASSETS 242,913 266,947
DEFERRED TAX ASSET -- 1,026,599
------------ ------------
TOTAL ASSETS $ 15,665,617 $ 12,558,839
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,000,000 $ 1,058,524
Line of credit-shareholder 4,225,000 --
Accounts payable 917,397 747,200
Accrued expenses 569,919 544,499
Income taxes payable 248,109 --
Current portion of long-term debt 728,330 692,496
------------ ------------
Total current liabilities 8,688,755 3,042,719
LONG-TERM DEBT, LESS CURRENT PORTION 3,819,892 4,605,350
LINE OF CREDIT - SHAREHOLDER -- 4,225,000
DEFERRED TAX LIABILITY 641,285 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock - authorized 50,000,000 shares, par value $0.001;
issued and outstanding, 13,206,128 shares 13,206 13,206
Additional paid-in capital 2,312,575 2,312,575
Retained earnings/(accumulated deficit) 189,904 (1,640,011)
------------ ------------
Total shareholders' equity 2,515,685 685,770
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 15,665,617 $ 12,558,839
============ ============
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF OPERATIONS, AS RESTATED
YEARS ENDED JUNE 30, 2001 AND 2000
2001 2000
(RESTATED) (RESTATED)
NET SALES $ 12,090,993 $ 11,553,457
COST OF SALES 6,534,764 7,186,289
------------ ------------
Gross profit 5,556,229 4,367,018
RESEARCH AND DEVELOPMENT EXPENSES 1,402,900 1,277,075
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,014,004 1,820,196
------------ ------------
Operating profit 2,139,325 1,269,897
------------ ------------
OTHER INCOME/(EXPENSE):
Income from settlement of lawsuit, net of fees 1,475,814 --
Loss on sale of assets (18,902) --
Loss on impairment of assets (77,838) --
Interest income 97,046 133,052
Interest expense, including $411,850 and
$488,632 to shareholder (778,008) (823,310)
------------ ------------
698,112 (690,258)
------------ ------------
INCOME BEFORE INCOME TAX (EXPENSE)/BENEFIT 2,837,437 579,639
INCOME TAX (EXPENSE)/BENEFIT (1,007,522) 465,330
------------ ------------
NET INCOME $ 1,829,915 $ 1,044,969
============ ============
Basic earnings per common share $ 0.14 $ 0.08
============ ============
Diluted earnings per common share $ 0.14 $ 0.08
============ ============
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY/(DEFICIENCY), AS RESTATED
YEARS ENDED JUNE 30, 2001 AND 2000
COMMON STOCK
------------------------- ADDITIONAL
SHARES PAID-IN RETAINED EARNINGS/ SHAREHOLDERS'
ISSUED AMOUNT CAPITAL (ACCUMULATED EQUITY
DEFICIT)
BALANCE, JULY 1, 1999 5,206,128 $ 5,206 $ 320,575 $(2,684,980) $(2,359,199)
Conversion of Shareholder 8,000,000 8,000 1,992,000 2,000,000
Debenture
Net income (restated) 1,044,969 1,044,969
----------- ----------- ----------- -----------
BALANCE, JUNE 30, 2000 13,206,128 13,206 2,312,575 (1,640,011) 685,770
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
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS, AS RESTATED
YEARS ENDED JUNE 30, 2001 AND 2000
2001 2000
(RESTATED) (RESTATED)
OPERATING ACTIVITIES:
Net income $ 1,829,915 $ 1,044,969
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 767,047 678,625
Loss/Impairment on disposal of assets 96,740 --
Deferred tax expense/(benefit) 730,618 (527,520)
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable (3,269,069) 505,085
Inventories (205,933) (325,798)
Prepaid expenses and other assets 59,799 (124,315)
Accounts payable 170,197 (49,818)
Accrued expenses 25,420 203,714
Income taxes payable 248,109 --
----------- -----------
Net cash provided by operating activities 452,843 1,404,942
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,488,741) (772,248)
Proceeds from sale of property, plant and equipment, net 43,250 --
----------- -----------
Net cash used in investing activities (1,445,491) (772,248)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings/(repayments) under line of credit 941,476 (263,476)
Repayments of accrued interest - shareholder -- (385,659)
Repayments of debt (749,624) (658,439)
Proceeds from debt, net of restricted cash released 800,796 557,876
----------- -----------
Net cash provided by/(used in) financing activities 992,648 (749,698)
----------- -----------
NET INCREASE (DECREASE) IN CASH -- (117,004)
CASH, BEGINNING OF YEAR -- 117,004
----------- -----------
CASH, END OF YEAR $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid during year $ 800,171 $ 1,227,363
=========== ===========
Income taxes paid $ 54,682 $ 11,448
=========== ===========
Cash paid for interest during the year ended June 30, 2000 includes $43,343 of
capitalized interest costs related to property and plant additions.
See notes to consolidated financial statements
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001 AND 2000.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lannett Company, Inc. and subsidiary (the "Company"), a Delaware
corporation, manufactures and distributes, throughout the United States,
pharmaceutical products sold under generic names ("competitive
pharmaceutical products") and, historically, has manufactured and
distributed pharmaceutical products sold under its trade or brand names. In
addition, the Company manufactures and develops pharmaceutical products for
other companies.
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 restated results for Fiscal 2000 and 2001 due to
the correction of an error resulting from the improper deferral of legal
fees incurred associated with the favorable settlement of a lawsuit. This
resulted in a reduction in net income of $305,128 or $.02 per diluted share
in Fiscal 2000, and an increase in net income of $305,128, or $.02 per
diluted share in Fiscal 2001, respectively. This impact is reflected in the
reported results herein.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Lannett Company, Inc. and its inactive wholly
owned subsidiary, Astrochem Corporation. 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 properly reflect future
activity, its net sales, gross profit, net income and earnings per share
could decrease. However, management believes that these estimates do
properly reflect future activity.
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, 2001 and 2000
was approximately $725,000 and $635,000, respectively.
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, 2001 and 2000 was approximately $42,000 and $44,000,
respectively.
RESEARCH AND DEVELOPMENT - Research and development expenses are charged
to operations as incurred.
ADVERTISING COSTS - The Company charges advertising costs to operations as
incurred.
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. There was $77,838 in impairment
losses recognized during the year ended June 30, 2001. No impairment
losses were recognized during the year ended June 30, 2000.
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:
27
2001 2000
--------------------------- ---------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $1,829,915 13,206,128 $1,044,969 13,206,128
Effect of potentially dilutive option
plans and debentures
---------- ---------- ---------- ----------
Diluted earnings per share factors $1,829,915 13,206,128 $1,044,969 13,206,128
========== ========== ========== ==========
Basic earnings per share $ 0.14 $ 0.08
Diluted earnings per share $ 0.14 $ 0.08
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
and options to purchase 136,700 shares, 80,000 shares and 1,550 shares of
common stock at $1.125 per share, $1.38 per share and $3.78 per share,
respectively, were outstanding at June 30, 2000, but were not included in
the computation of diluted earnings per share because to do so would be
antidilutive. These securities could potentially be dilutive in the
future.
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.
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 tablet or capsule pills 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 Lannett 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, 2001 and 2000, Rx sales were $7,299,273 and $3,117,764
respectively. For its Fiscal years ended June 30, 2001 and 2000, OTC sales
were $4,791,717 and $8,435,693 respectively.
CONCENTRATION OF CREDIT RISK - One customer accounted for approximately
$2,905,000 (24%) of net sales in the fiscal year ended June 30, 2001. Two
customers accounted for approximately $4,856,000 (42%) and $1,247,000
(11%) of net sales in the fiscal year ended June 30, 2000. One of these
customers is a distributor which is a related party (see Note 15). 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. 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. One of
the Company's products accounted for approximately $7,956,000 (69%) of net
sales in fiscal year ended June 30, 2000. The Company expects these
percentages to decrease as it begins 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
28
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 - In June 1998, the Financial Accounting
Standards Board (FASB) issued 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, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company has adopted SFAS No. 133 and there was no
effect on its consolidated financial position and results of operations.
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These
statements are expected to result in significant modifications relative to
the Company's accounting for goodwill and other intangible assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2001
must be accounted for under the purchase method of accounting. SFAS No. 141
was effective upon issuance. SFAS No. 142 modifies the accounting for all
purchased goodwill and intangible assets. SFAS No. 142 includes
requirements to test goodwill and indefinite lived intangibles assets for
impairment rather than amortize them. SFAS No. 142 will be effective for
fiscal years beginning after December 31, 2001 and early adoption is not
permitted except for business combinations entered into after June 30,
2001. The Company is currently evaluating the provisions of SFAS No. 142,
but its preliminary assessment is that these Statements will not have a
material impact on the Company's financial position or results of
operations.
RECLASSIFICATIONS - Certain reclassifications were made to the 2000
consolidated financial statements to conform to the 2001 presentation.
2. INVENTORIES
Inventories at June 30, 2001 and 2000 consist of the following:
2001 2000
Raw materials $1,516,030 $ 785,795
Work-in-process 686,359 1,023,521
Finished goods 712,992 899,686
Packaging supplies 240,728 241,174
---------- ----------
$3,156,109 $2,950,176
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2001 and 2000 consist of the
following:
USEFUL LIVES 2001 2000
Land - $ 33,414 $ 33,414
Building and improvements 10 - 39 years 2,388,841 1,960,181
Machinery and equipment 5 - 10 years 6,136,775 5,550,019
Furniture and fixtures 5 - 7 years 108,925 108,925
----------- -----------
$ 8,667,955 $ 7,652,539
=========== ===========
4. RESTRICTED 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. At June 30, 2001 the
Company had restricted cash equivalents of $1,225,649 which represents
proceeds from debt invested in a money market account and is restricted for
(i) the construction of a manufacturing-related facility as an addition to
the Company's existing facility or, alternatively, the acquisition and
renovation of an existing manufacturing and manufacturing-related facility
and (ii) the acquisition of equipment for installation and use in either of
the facilities mentioned above (see Note 6).
29
5. BANK LINE OF CREDIT
The Company has a $2,000,000 line of credit from the bank that bears
interest at prime plus .50% per annum (7.25% at June 30, 2001). The line of
credit is due November 30, 2001. 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,
2001, the Company had $2,000,000 outstanding under the line of credit. At
June 30, 2001 the Company had $0 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).
6. LONG-TERM DEBT
Long-term debt at June 30, 2001 and 2000 consists of the following:
2001 2000
Tax-exempt Bond Loan $3,700,000 $3,700,000
Taxable Bond Loan 848,222 1,597,846
---------- ----------
4,548,222 5,297,846
Less current portion 728,330 692,496
---------- ----------
$3,819,892 $4,605,350
========== ==========
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, 2001
was 2.85%. The Company has an option to convert the bonds to a fixed rate
of interest under certain conditions. At June 30, 2001, the Company has
$3,700,000 outstanding on the Authority loan, which 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, 2001, 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, 2001 was 4.06%. The Company
has an option to convert the bonds to a fixed rate of interest under
certain conditions. At June 30, 2001, the Company has $848,222 outstanding
on the bonds, of which $728,330 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, 2001, no portion of the letter of
credit has been utilized.
Annual repayments of debt, including sinking fund requirements and amounts
payable to shareholder (Notes 7 and 8) as of June 30, 2001 are as follows:
30
YEAR ENDING AMOUNTS PAYABLE AMOUNTS PAYABLE
JUNE 30, TO INSTITUTIONS TO SHAREHOLDER
2002 $ 2,728,330 $ 4,225,000
2003 253,642
2004 806,250
2005 732,498
2006 672,498
Thereafter 1,355,004
------------ -----------
$ 6,548,222 $ 4,225,000
============ ===========
7. LINE OF CREDIT PAYABLE TO SHAREHOLDER
On October 1, 2000, 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
and convertible debenture agreements described below and in Note 8 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
and December 31, 1999. 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, 2001, the Company had
$4,225,000 outstanding and $25,000 available under this line of credit. The
principal is due December 1, 2001.
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, 2001 was
7.75%. Interest expense during the years ended June 30, 2001 and 2000 was
approximately $412,000, and $489,000, respectively. Accrued interest at
June 30, 2001 and June 30, 2000 was $0.
The line of credit is collateralized by substantially all Company assets,
is cross-collateralized with all loans from the shareholder (Note 8) and is
subordinated to the bank letters of credit and line of credit.
8. CONVERTIBLE DEBENTURE AND DEFERRED INTEREST PAYABLE TO SHAREHOLDER
The Company also had a convertible debenture made available to it by
William Farber. The maturity date of the shareholder debenture was December
23, 1999. The convertible debenture and deferred interest payable is
collaterialized by substantially all Company assets, is
cross-collateralized with all loans from this shareholder (Note 7) and is
subordinated to the bank letters of credit and line of credit. On December
22, 1999, William Farber elected to convert the debenture into shares of
common stock of the Company. The shareholder debenture and accrued interest
was convertible at the rate of 4,000 shares of common stock for each $1,000
of outstanding indebtedness. The principal balance on the debenture at the
time of conversion was $2,000,000, and the interest on the debenture was
paid to date; therefore the transaction converted the $2,000,000 of
indebtedness to 8,000,000 shares of the Company's common stock. Interest
expense during the years ended June 30, 2001 and 2000 was $0 and $86,000,
respectively.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended June 30, 2001 and 2000.
2001 2000
Current $ 276,904 $ 62,190
Deferred 730,618 (527,520)
----------- -----------
$ 1,007,522 $ (465,330)
=========== ===========
31
A reconciliation of the differences between the effective rates and
statutory rates is as follows:
2001 2000
Federal income tax at statutory rate 34.0 % 35.0 %
State and local income tax, net 6.8 10.7
Change in the beginning of the year balance
of the valuation allowance (101.7)
Other (1.0) 3.4
------- ------
Income taxes expense/(benefit) 39.8 % (52.6)%
======= ======
The principal types of differences between assets and liabilities for
financial statement and tax return purposes are net operating loss
carryforwards and accumulated depreciation. A deferred tax asset is
recorded for net operating losses being carried forward for tax purposes.
The Company has federal net operating loss carryforwards of approximately
$2,457,000, expiring through June 2008, that are available to offset future
taxable income. The annual utilization of tax loss carryforwards is subject
to limitations defined in the Internal Revenue Code.
Temporary differences which give rise to deferred tax assets and
liabilities are as follows as of June 30, 2001 and 2000:
2001 2000
Deferred tax assets:
Accrued expenses $ 34,091 $ 21,567
Net operating loss carryforward 835,700 1,606,505
Other 113,612 24,570
---------- ----------
983,403 1,652,642
Valuation allowance -- --
---------- ----------
Total 983,403 1,652,642
Deferred tax liability - Property, plant and equipment 641,285 579,906
---------- ----------
Net deferred tax asset $ 342,118 $1,072,736
========== ==========
10. 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 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 1,848,750 shares remain unissued as of June 30,
2001.
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 $63,358 and $55,586 for the years ended June 30, 2001 and 2000,
respectively, and earnings per share would have been reduced by $0.01 per
share for the years ended June 30, 2001 and 2000.
A summary of the status of the Company's option plan as of June 30, 2001
and 2000 and the changes during the years then ended is represented below:
32
2001 2000
--------------------------- ----------------------------
WEIGHTED AVG. WEIGHTED AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Outstanding, beginning of year 218,250 $ 1.24 189,200 $ 1.50
Granted 105,500 0.80 150,450 1.13
Terminated (172,500) 1.08 (121,400) 1.52
-------- --------
Outstanding, end of year 151,250 $ 1.09 218,250 $ 1.24
======== ======== ======== ========
Options exercisable at year-end 71,284 $ 1.20 54,883 $ 1.45
======== ======== ======== ========
Weighted average fair value of options
Granted during the year $ 0.47 $ 0.84
======== ========
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 year ended June 30, 2001: risk-free interest rate of
5.42%, expected volatility of 57.5%, dividend yield of 0%, and expected
life of 5 years.
OPTIONS OUTSTANDING
-----------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF EXERCISE PRICES CONTRACTUAL EXERCISE
OPTIONS LIFE IN YEARS PRICE
$0.80 - $1.125 119,950 8.3 $ 0.99
$1.38 30,000 6.3 $ 1.38
$3.78 1,300 2.8 $ 3.78
11. 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% of the
employee's compensation for the Plan year. Contributions to the Plan during
the years ended June 30, 2001 and 2000 were $70,891 and $55,788,
respectively.
12. 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, 2001 and
2000.
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 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.
33
13. COMMITMENTS
In January 1998, the Company entered into an operating lease that includes
an escalation clause, for its warehouse and research and development
facility. 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
2002 $ 132,255
2003 132,255
2004 112,380
2005 11,935
-----------
$ 388,825
===========
Rental expense for the years ended June 30, 2001 and 2000 was $123,000 and
$116,000, respectively.
14. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $111,000 and $4,856,000 during the
years ended June 30, 2001 and 2000, respectively, to a distributor (the
"related party") in which the owner is a relative of the Chairman of the
Board of Directors and principal shareholder of the Company. The Company
also incurred sales commissions payable to the related party of
approximately $369,000 and $262,000 during the years ended June 30, 2001
and 2000, respectively. Accounts receivable includes amounts due from the
related party of approximately $34,000 and $13,000 at June 30, 2001 and
June 30, 2000, respectively. Accrued expenses includes amounts due to the
related party of approximately $29,000 and $71,000 at June 30, 2001 and
June 30, 2000, respectively.
34
EXHIBIT INDEX
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
3(a) Articles of Incorporation Incorporated by reference to the Proxy Statement -
filed with respect to the Annual Meeting of
Shareholders held on December 6, 1991 (the "1991
Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to -
Stock Form 8 dated April 23, 1993 (Amendment No. 3 to
Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report -
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to -
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(c) to -
dated August 1, 1994 the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to -
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e) to -
dated December 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to -
dated June 30, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(g) Amendment #6 to Loan 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,
1997 ("1997 Form 10-KSB")
35
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
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 1998 Form 10-KSB
10(j) Amendment #9 to Loan Agreement Incorporated by reference to Exhibit 10(j) to
dated December 31, 1998 the Quarterly Report on for the period ended
December 31, 1998
10(k) Amendment #10 to Loan Agreement Filed Herewith 42
dated December 31, 1998
10(l) 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(m) 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(n) 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(o) 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(p) 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(q) 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")
36
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(r) 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(s) 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(t) 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")
10(u) 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(v) 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(w) 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(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 May 23,
1997.
37
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
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 September
24, 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 December
10, 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(aa) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 11,
1998.
10(ad) Amendment to Loan agreement Incorporated by reference to Exhibit 10(ab) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 1998.
10(ae) 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(af) 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(ag) Philadelphia Authority for Incorporated by reference to Exhibit 10(af) to
Industrial Development the Annual Report on 1998 Form 10-KSB
Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds
(Lannett Company, Inc. Project)
Series of 1999
10(ah) Letter of Credit and Agreements Incorporated by reference to Exhibit 10(ag) to
supporting bond issues the Annual Report on 1998 Form 10-KSB
38
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
10(ai) Employment agreement between the Incorporated by reference to Exhibit 10(i) to
Company and Vlad Mikijanic the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(aj) Supply Agreement dated January Incorporated by reference to Exhibit 10(ad) to
14, 1997 the Annual Report on 1998 Form 10-KSB
10(ak) Supply Agreement dated January Incorporated by reference to Exhibit 10(ae) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(al) Supply Agreement dated January Incorporated by reference to Exhibit 10(af) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(am) Supply Agreement dated February Incorporated by reference to Exhibit 10(ag) to
11, 1997 the Annual Report on 1998 Form 10-KSB
10(an) 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 Earnings Per Share Filed Herewith 43
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
39