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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
____________.
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- -----
As of October 20, 2003, there were 20,050,144 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 26 pages
Exhibit Index on Page 19
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INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and
June 30, 2003..............................................................................3
Consolidated Statements of Income (unaudited)
for the three months ended September 30, 2003
and 2002...................................................................................4
Consolidated Statements of Cash Flows (unaudited)
for the three months ended September 30, 2003
and 2002...................................................................................5
Notes to Consolidated Financial
Statements (unaudited).................................................................6 - 9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..............................................................................10 -- 14
ITEM 4. Controls and Procedures.......................................................................15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..........................................................................16-17
ITEM 2. Changes in Securities and Use of Proceeds.....................................................17
ITEM 3. Defaults upon Senior Securities...............................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................17
ITEM 5. Other Information.............................................................................17
ITEM 6. Exhibits and Reports on Form 8-K..............................................................17
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 9/30/03 6/30/03
- ------ ------- -------
CURRENT ASSETS:
Cash $ 8,951,688 $ 3,528,511
Trade accounts receivable (net of allowances of $55,000 and $128,000) 6,295,550 8,516,481
Inventories 9,940,835 8,175,798
Prepaid expenses 455,015 367,400
Deferred tax asset 569,858 569,858
------------ ------------
Total current assets 26,212,946 21,158,048
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 13,077,720 11,885,728
Less accumulated depreciation (4,733,632) (4,477,928)
------------ ------------
8,344,088 7,407,800
------------ ------------
OTHER ASSETS 420,909 496,696
------------ ------------
Total assets $ 34,977,943 $ 29,062,544
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 718,333 $ 718,333
Accounts payable 1,353,156 2,664,616
Accrued expenses 2,039,881 526,430
Income taxes payable 2,440,408 63,617
------------ ------------
Total current liabilities 6,551,778 3,972,996
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 2,176,462 2,379,469
------------ ------------
DEFERRED TAX LIABILITY 1,112,369 1,112,369
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -
authorized 50,000,000 shares par value $.001:
issued and outstanding, 20,043,189 and 20,025,871 shares, respectively 20,043 20,026
Additional paid-in capital 2,641,299 2,526,077
Retained earnings 22,475,992 19,051,607
------------ ------------
Total shareholders' equity 25,137,334 21,597,710
------------ ------------
Total liabilities and shareholders' equity $ 34,977,943 $ 29,062,544
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
3
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
9/30/03 9/30/02
------- -------
NET SALES $ 13,221,786 $ 9,126,656
COST OF SALES 4,797,253 3,836,110
------------ ------------
Gross profit 8,424,533 5,290,546
RESEARCH AND DEVELOPMENT EXPENSES 886,440 456,811
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,726,592 893,525
------------ ------------
Operating profit 5,811,501 3,940,210
------------ ------------
OTHER EXPENSE:
Interest expense, net of interest income (8,116) (23,940)
------------ ------------
(8,116) (23,940)
------------ ------------
NET INCOME BEFORE TAXES 5,803,385 3,916,270
------------ ------------
INCOME TAXES 2,379,000 1,364,617
------------ ------------
NET INCOME $ 3,424,385 $ 2,551,653
============ ============
BASIC INCOME PER SHARE $ 0.17 $ 0.13
============ ============
DILUTED INCOME PER SHARE $ 0.17 $ 0.13
============ ============
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 20,043,189 19,905,904
============ ============
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 20,267,518 20,038,881
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT,
EFFECTIVE FEBRUARY 14, 2003.
4
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
9/30/03 9/30/02
------- -------
OPERATING ACTIVITIES:
Net income $ 3,424,385 $ 2,551,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 258,056 258,474
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable 2,220,931 (942,978)
Inventories (1,765,037) (57,601)
Prepaid expenses and other assets (87,615) (137,136)
Accounts payable 1,311,460 525,173
Accrued expenses 1,513,451 35,291
Income taxes payable 2,376,791 914,021
------------ ------------
Net cash provided by operating activities 6,629,502 3,146,897
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,118,557) (583,862)
Deposits paid on machinery and equipment not placed in service - (241,568)
------------ ------------
Net cash used in investing activities (1,118,557) (825,430)
------------ ------------
FINANCING ACTIVITIES:
Net repayments under line of credit - (202,688)
Repayments of debt (203,007) (244,125)
Proceeds from issuance of stock 115,239 8,658
------------ ------------
Net cash used in financing activities (87,768) (438,155)
------------ ------------
NET INCREASE IN CASH 5,423,177 1,883,312
CASH, BEGINNING OF PERIOD 3,528,511 -
------------ ------------
CASH, END OF PERIOD $ 8,951,688 $ 1,883,312
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 8,639 $ 23,940
Income taxes paid during period $ 2,209 $ 450,596
The accompanying notes to consolidated financial statements are an
integral part of these statements.
5
LANNETT COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the operating parent company, Lannett Company, Inc., its
inactive wholly owned subsidiary, Astrochem Corporation and its wholly owned
subsidiary, Lannett Holdings, Inc. All intercompany accounts and transactions
have been eliminated.
STOCK OPTIONS - At September 30, 2003, the Company had two stock-based
employee compensation plans. The Company accounts for stock options under SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148. Under this statement, companies may use a fair value-based method for
valuing stock-based compensation, which measures compensation cost at the
grant date, based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue accounting for
employee stock options and similar equity instruments under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion 25 are
required to make pro forma disclosures of net income and earnings per share,
as if the fair value-based method of accounting defined in SFAS No.123 had
been applied. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
Net income, as reported $ 3,424,385 $ 2,551,653
Deduct: Total compensation expense
determined under fair value-based
method for all stock awards (211,197) (130,882)
Add: Tax savings at effective rate 86,591 45,809
----------- -----------
Pro forma net income 3,299,779 2,466,580
=========== ===========
Earnings per share:
Basic, as reported $ 0.17 $ 0.13
=========== ===========
Basic, pro forma $ 0.16 $ 0.12
=========== ===========
Diluted, as reported $ 0.17 $ 0.13
=========== ===========
Diluted, pro forma $ 0.16 $ 0.12
=========== ===========
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT,
EFFECTIVE FEBRUARY 14, 2003.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used for grants in 2003 and 2002: expected volatility of 96.2% and
79.2%; risk-free interest rate of 4.47% for both quarters; and expected lives of
10 years.
6
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position and the results
of operations and cash flows.
The results of operations for the three months ended September 30, 2003 and 2002
are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2003.
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002. The adoption of this statement did not have a
significant impact on the financial condition or results of operations of the
Company.
In January 2002, the FASB issued FASB Interpretation 46 (FIN 46),Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 are required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2002, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2002, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2002. The adoption of FIN 46 did
not have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company has not historically issued
guarantees and, as such, the adoption of FIN 45 did not have a material effect
on the Company's consolidated financial statements.
7
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of SFAS No. 148 had been adopted by the Company during the
quarter ended March 31, 2003. See Note 1.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 affects the issuer's
accounting for three types of freestanding financial instruments:
- mandatorily redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets;
- instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets, including put
options and forward purchase contracts; and
- obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers'
shares.
SFAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 3. INVENTORIES
Inventories consist of the following:
September 30, June 30,
2003 2003
------------ ------------
(unaudited)
Raw materials $ 4,221,011 $ 2,625,463
Work-in-process 1,083,241 992,330
Finished goods 4,416,328 4,363,432
Packaging supplies 220,255 194,573
------------ ------------
$ 9,940,835 $ 8,175,798
============ ============
8
NOTE 4. INCOME TAXES
The provision for federal and state income taxes for the three months ended
September 30, 2003 and 2002 was $2,379,000 and $1,364,617, respectively.
NOTE 5. EARNINGS PER 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:
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
---------------------------- -----------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $3,424,385 20,040,102 $2,551,653 19,905,904
Effect of dilutive stock options 227,416 132,977
---------- ---------- ---------- ----------
Diluted earnings per share factors $3,424,385 20,267,518 $2,551,653 20,038,881
========== ========== ========== ==========
Basic earnings per share $ 0.17 $ 0.13
Diluted earnings per share $ 0.17 $ 0.13
The number of shares in the prior period have been adjusted for the Company's 3
for 2 stock split in February 2003.
7,500 anti-dilutive weighted average shares have been excluded in the
computation of diluted EPS for the three months ended September 30, 2003 because
the options' exercise price is greater than the average market price of the
common stock. No such shares were excluded in the computation of diluted EPS for
the three months ended September 30, 2002.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $138,000 and $27,000 during the
three months ended September 30, 2003 and 2002, respectively, to a distributor
(the "related party") in which the owner is a relative of the Chairman of the
Board of Directors and principal shareholder of the Company. The Company also
incurred sales commissions payable to the related party of $0 and approximately
$65,000 during the three months ended September 30, 2003 and 2002, respectively.
Accounts receivable includes amounts due from the related party of approximately
$114,000 and $95,000 at September 30, 2003 and June 30, 2003, respectively. In
the Company's opinion, the terms of these transactions were not more favorable
than would have been from a non-related party.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The following information should be read in conjunction with the
consolidated financial statements and notes in Part I, Item 1 of this Quarterly
Report and with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2003.
In addition to historical information, this Form 10-Q contains
forward-looking information. The forward-looking information contained herein is
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the following section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of this Form
10-Q. The Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances which arise later.
Readers should carefully review the risk factors described in other documents
the Corporation files from time to time with the Securities and Exchange
Commission, including the Annual report on Form 10-KSB filed by the Corporation
in Fiscal 2003, and any Current Reports on Form 8-K filed by the corporation.
In addition to the risks and uncertainties posed generally by the
generic drug industry, the Company faces the following risks and uncertainties:
- competition from other manufacturers of generic drugs;
- potential declines in revenues and profits from individual generic
pharmaceutical products due to competitors' introductions of their own
generic equivalents;
- new products or treatments by other manufacturers that could render the
Company's products obsolete;
- the value of the Company's common stock has fluctuated widely in the
past, which could lead to investment losses for shareholders;
- intense regulation by government agencies may delay the Company's
efforts to commercialize new drug products; and
- dependence on third parties to supply raw materials and certain
finished goods inventory; any failure to obtain a sufficient supply of
raw materials from these suppliers could materially and adversely
affect the Company's business.
Because of the foregoing and other factors, the Company may experience
material fluctuations in future operating results on a quarterly or annual basis
which could materially adversely affect the business, financial condition,
operating results and the Company's stock price.
10
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
Note 1 to the consolidated financial statements included in this Quarterly
Report and in Note 1 to the consolidated financial statements included in the
Company's Annual Report on Form 10-KSB for the year ended June 30, 2003 filed
with the Securities and Exchange Commission. Certain accounting policies are
particularly important to the portrayal of the Company's financial position and
results of operations and require the application of significant judgment by
management. As a result, these policies are subject to an inherent degree of
uncertainty. In applying these policies, management makes estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. The Company bases its estimates and judgments
on historical experience, terms of existing contracts, observance of trends in
the industry, information received from customers and outside sources, and on
various other assumptions that management believes to be reasonable and
appropriate under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our critical accounting policies, including inventory valuation, revenue
recognition, accounts receivable allowances for chargebacks, rebates, and
similar items, and income taxes are each discussed in more detail in our Annual
Report on Form 10-KSB for the year ended June 30, 2003. The Company has reviewed
and determined that those policies remain the Company's critical accounting
policies for the three months ended September 30, 2003. The Company did not make
any changes in those policies during the period.
RESULTS OF OPERATIONS --THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED
WITH THREE MONTHS ENDED SEPTEMBER 30, 2002.
Net sales increased by 45% from $9,126,656 for the three months ended
September 30, 2002 ("First Quarter Fiscal 2003") to $13,221,786 for the three
months ended September 30, 2003 ("First Quarter Fiscal 2004"). Sales increased
as a result of additions to the Company's prescription line of products,
including Digoxin tablets, first marketed in September 2002, Levothyroxine
Sodium tablets, first marketed in April 2003 and Unithroid tablets, first
marketed in August 2003. Additionally, sales of a portion of the Company's
previously marketed products increased due to new customer accounts, increased
unit sales, and increased unit revenues. The increase in sales of a portion of
the Company's products was partially offset by a decrease in sales of certain
other products, including butalbital, aspirin and caffeine capsules,
pseudoephedrine hydrochloride tablets and guaifenesin/ephedrine hydrochloride
tablets, due to increased competition for these products.
Cost of sales increased by 25% from $3,836,110 for the First Quarter
Fiscal 2003 to $4,797,253 for the First Quarter Fiscal 2004. The cost of sales
increase is due to an increase in direct variable costs and certain indirect
overhead costs as a result of the increase in sales volume, and related
production activities. These costs include raw materials, labor and benefit
expenses, and depreciation expense. Gross profit margins for First Quarter
Fiscal 2004 and First Quarter Fiscal 2003 were 64% and 58%, respectively. The
increase in the gross profit percentage is due to improved average profit
margins for the product sales mix, and increased absorption of fixed overhead
costs as a result of increased production output.
Research and development ("R&D") expenses increased by 94% from
$456,811 for the First Quarter Fiscal 2003 to $886,440 for the First Quarter
Fiscal 2004. This increase is a result of an increase in the number of chemists
in the R&D laboratory and the related payroll and benefits expenses, and an
increase in costs related to clinical testing fees for new product
bioequivalence tests.
11
Selling, general and administrative expenses increased by 93% from
$893,525 for the First Quarter Fiscal 2003 to $1,726,592 for the First Quarter
Fiscal 2004. This increase is a result of an increase in the following expenses:
payroll and benefits, consulting services, travel and entertainment expenses,
investor relations expenses, and advertising. These increases were due to the
hiring of additional administrative employees and a general increase in
administrative expenses due to the growth of the Company in terms of employees,
production volume and sales. These increases were partially offset by a decrease
in commissions expense to outside sales representatives. In Fiscal 2002, the
Company created its own internal sales and marketing department, replacing the
service previously performed by outside sales brokers.
As a result of the foregoing, the Company increased its operating
profit from $3,940,210 in First Quarter Fiscal 2003 to $5,811,501 in First
Quarter Fiscal 2004.
The Company's net interest expense decreased from $23,940 for the First
Quarter Fiscal 2003 to $8,116 for the First Quarter Fiscal 2004 as a result of
principal repayments and reduced interest rates along with increased interest
income with higher cash balances. See Liquidity and Capital Resources below.
The Company's income tax expense increased from $1,364,617 in First
Quarter Fiscal 2003 to $2,379,000 in First Quarter Fiscal 2004 as a result of
the increase in net income before taxes.
The Company reported net income of $3,424,385 in First Quarter Fiscal
2004, or $0.17 basic and diluted income per share, compared to net income of
$2,551,653 in First Quarter Fiscal 2003, or $0.13 basic and diluted income per
share.
LIQUIDITY AND CAPITAL RESOURCES --
Net cash provided by operating activities of $6,629,502 for First
Quarter Fiscal 2004 was attributable to net income of $3,424,385, as adjusted
for the effects of non-cash items of $258,056 and net changes in operating
assets and liabilities totaling $2,947,061. Significant changes in operating
assets and liabilities are comprised of:
1. a decrease in accounts receivable of $2,220,931 due to an
improvement in timely collections, and the launch of the Company's
new product sales campaign for Levothyroxine Sodium tablets in
April 2003. Typically, when a new product is offered, customers
are given incentive credit opportunities, including price
discounts and extended dating on invoices. The purposes of these
incentive programs are to motivate the customers to stock and sell
the Company's new product, increase the distribution network and
expose consumers to the product's availability. The Company's
initial sales campaign and the related customer incentive programs
had the effect of increasing the overall accounts receivable
balance at June 30, 2003, compared to the balance in accounts
receivable at September 30, 2003;
2. an increase in inventories of $1,765,037 due to an increase in raw
materials, work-in-process and finished goods inventory. Due to
the Company's sales growth and the increase in the quantity of new
products under development, additional investments were made in
raw material and finished goods inventory. It is the Company's
goal to stock an adequate inventory of finished goods and raw
materials. Such a strategy will allow the Company to minimize
stock-outs and back-orders, and to provide a high level of
customer order fulfillment. Additionally, the Company has
increased its inventory carrying amounts of certain raw materials
and finished products to ensure supply continuity;
12
3. a decrease in accounts payable of $1,311,460 due to the payment of
invoices for certain finished goods inventory received in the last
quarter of Fiscal 2003. In April 2003, the Company launched its
sales campaign for Levothyroxine Sodium tablets. Due to the timing
of the Company's receipt of finished goods inventory related to
this new product launch and extended credit payment terms for
initial stocking orders, the Company's accounts payable balance at
June 30, 2003 included a significant amount due to the supplier of
Levothyroxine sodium tablets. These invoices were paid in the
First Quarter Fiscal 2004, thereby decreasing the overall accounts
payable balance;
4. an increase in accrued expenses of 1,513,451 due to the accrual of
certain incentive compensation costs, and a general increase in
operating expenses
5. an increase in income taxes payable of $2,376,791 due to higher
taxable income and the accrual of the related income taxes, which
will be paid when the Company's quarterly estimated tax payments
and/or annual income tax returns or extension payments are due.
The net cash used in investing activities of $1,118,557 for First
Quarter Fiscal 2004 was attributable to purchases of equipment and payments for
building additions. The Company's anticipated budget for capital expenditures in
Fiscal 2004 is just under $10 million. The anticipated capital expenditure
requirements will support the Company's growth related to new product
introductions and increased production output due to expected higher sales
levels. Included in this capital expenditure forecast is a new facility. On July
1, 2003, the Company entered into a lease for a 62,000 square foot facility at
9001 Torresdale Avenue, Philadelphia, Pennsylvania, approximately 1 mile from
the Company's headquarters. The lease expires on November 30, 2003; and the
Company has the contractual right and option to purchase the facility at any
time during the lease term. The purchase price for the facility is $1.9 million.
The Company currently expects to exercise this purchase option prior to the
lease termination date of November 30, 2003. Prior to the expiration of the
lease term at 500 State Road, the Company is planning to move all operations
currently performed at 500 State Road to 9001 Torresdale Avenue. In addition to
the laboratory research, warehousing and distribution operations currently
performed at 500 State Road, other operational functions may be moved from the
Company headquarters to 9001 Torresdale Avenue. This move will occur gradually,
and will allow the Company to maximize its FDA approved production facility at
9000 State Road for production output. As of September 30, 2003, none of the
financing proceeds received from the bonds issued during Fiscal 1999 were
available for future capital expenditures. However approximately $258,000 was
paid by the Company prior to September 30, 2003 as a deposit for the new
facility on Torresdale Avenue. This balance is included in Other Assets, as a
long-term asset, at September 30, 2003.
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 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 was restricted for future plant
and equipment needs of the Company, as specified in the Agreement. The Trust
Indenture requires that the Company repay the Authority loan through installment
payments beginning in May 2003 and continuing through May 2014, the year the
bonds mature. At September 30, 2003, the Company has $2,894,795 outstanding on
the Authority loan, of which $718,333 is classified as currently due. The
remainder is classified as a long-term liability. In April 1999, an irrevocable
letter of credit of $3,770,000 was issued by a bank to secure payment of the
Authority Loan and a portion of the related accrued interest. At September 30,
2003, no portion of the letter of credit has been utilized.
The Company has a $3,000,000 line of credit from a bank. The line of
credit was renewed and extended to November 30, 2003, at which time the Company
expects to renew and extend the due date. At September 30,
13
2003, the Company had $0 outstanding and $3,000,000 available under the line of
credit. The line of credit is collateralized by substantially all Company
assets. Further, the line of credit and a related letter of credit contain
certain financial covenants.
The Company believes that cash generated from its operations and the
balances available under the Company's existing loans and line of credit as of
September 30, 2003, are sufficient to finance its level of operations and
currently anticipated capital expenditures. However, to benefit from the low
interest rates in the current financial markets, the Company is planning to
finance some or all of the capital expenditures in Fiscal 2004.
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
Additional products are currently under development. One of these
products has been redeveloped and submitted to the FDA for supplemental
approval. Another is a new ANDA submitted to the FDA for approval. The remainder
of the products in development represent previously approved ANDAs which the
Company is planning to reintroduce, or new formulations which the Company will
submit ANDAs for FDA approval. In addition to the efforts of its internal
product development group, Lannett has contracted with outside firms for the
formulation and development of new generic drug products. The products under
development are at various stages in the development cycle--formulation,
scale-up, and/or clinical testing. 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.
14
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Management necessarily applies its
judgment in assessing the costs and benefits of such controls and procedures,
which, by their nature, can provide only reasonable assurance regarding
management's control objectives.
With the participation of management, the Company's Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures at the conclusion of the
three months ended September 30, 2003. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective in ensuring that material
information required to be disclosed is included in the reports that it files
with the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or, to the
knowledge of management of the Company, in other factors that could
significantly affect internal controls subsequent to the date of the Company's
most recent evaluation of its disclosure controls and procedures utilized to
compile information included in this filing.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Regulatory Proceedings
The Company is engaged in an industry which is subject to considerable
government regulation relating to the development, manufacturing and marketing
of pharmaceutical products. Accordingly, incidental to its business, the Company
periodically responds to inquiries or engages in administrative and judicial
proceedings involving regulatory authorities, particularly the FDA and the Drug
Enforcement Agency.
Employee Claims
A claim of retaliatory discrimination has been filed by a former
employee with the Pennsylvania Human Relations Commission ("PHRC") and the Equal
Employment Opportunity Commission ("EEOC"). The Company was notified of the
complaint in March 1997. The Company has denied liability in this matter. The
PHRC has made a determination that the complaint against the Company should be
dismissed because the facts do not establish probable cause of the allegations
of discrimination. The matter is still pending before the EEOC. At this time,
management is unable to estimate a range of loss, if any, related to this
action. Management believes that the outcome of this claim will not have a
material adverse impact on the financial position or results of operations of
the Company.
A claim of discrimination has been filed against the Company with the
EEOC and the PHRC. The Company was notified of the complaint in June 2001. The
Company has filed an answer with the EEOC denying the allegations. The EEOC 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 PHRC has also closed its file in this matter. At this time,
management is unable to estimate a range of loss, if any, related to this
action. Management believes that the outcome of this claim will not have a
material adverse impact on the financial position or results of operations of
the Company.
A claim of discrimination has been filed against the Company with the
PHRC and the EEOC. The Company was notified of the complaint in July 2001. The
Company has filed an answer with the PHRC denying the allegations. The PHRC has
made a determination that the complaint against the Company should be dismissed
because the facts do not establish probable cause of the allegations of
discrimination. The matter is still pending before the EEOC. At this time,
management is unable to estimate a range of loss, if any, related to this
action. Management believes that the outcome of this claim will not have a
material adverse impact on the financial position or results of operations of
the Company.
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
16
to have occurred. The insurance company denies coverage for actions alleging
involvement of the Company 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 or
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-K to be
filed as a part of this Form 10-Q is shown on the Exhibit Index filed
herewith.
(b) On August 25, 2003, the Company filed a Form 8-K disclosing in Item 9
thereof and including as an exhibit the press release announcing its
results of operations for the fourth quarter ended and the fiscal
year ended June 30, 2003.
17
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LANNETT COMPANY, INC.
Dated: November 11, 2003 By: /s/ Larry Dalesandro
--------------------
Larry Dalesandro
Chief Financial Officer
By: /s/ William Farber
------------------
William Farber
Chairman of the Board and Chief Executive
Officer
18
EXHIBIT INDEX
3.1 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").
3.2 By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4 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-KSB for Fiscal 1992) ("Form 8")
10.1 Line of Credit Note dated March Incorporated by reference to Exhibit 10(ad) to -
11, 1999 the Annual Report on 1999 Form 10-KSB
10.2 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
10.3 Philadelphia Authority for Incorporated by reference to Exhibit 10(af) to -
Industrial Development the Annual Report on 1999 Form 10-KSB
Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds
(Lannett Company, Inc. Project)
Series of 1999
10.4 Letter of Credit and Agreements Incorporated by reference to Exhibit 10(ag) to -
supporting bond issues the Annual Report on 1999 Form 10-KSB
10.5 2003 Stock Option Plan Incorporated by reference to the Proxy Statement -
for Fiscal Year Ending June 30, 2002
10.6 Terms of Employment Agreement Incorporated by reference to the Annual Report -
with Kevin Smith on Form 10-KSB for Fiscal Year Ending June 30,
2003
10.7 Terms of Employment Agreement Incorporated by reference to the Annual Report -
with Arthur on Form 10-KSB for Fiscal Year
19
Bedrosian Ending June 30, 2003
10.8 Terms of Employment Agreement Incorporated by reference to the Annual Report -
with Larry Dalesandro on Form 10-KSB for Fiscal Year Ending June 30,
2003
11 Computation of Per Share Earnings Filed Herewith 22
13 Annual Report on Form 10-KSB Incorporated by reference to the Annual Report -
on Form 10-KSB for Fiscal Year Ending June 30,
2003
21 Subsidiaries of the Company Incorporated by reference to the Annual Report -
on Form 10-KSB for Fiscal Year Ending June 30,
2003
31.1 Certification of Chief Executive Filed Herewith 23-24
Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed Herewith 25-26
Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Filed Herewith 27
Executive Officer and Chief
Financial Officer Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
20