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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 DECEMBER 31, 2003.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
____________.
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
----- ----
As of February 4, 2004, there were 20,058,379 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 31 pages
Exhibit Index on Page 23
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 2003 (unaudited) and
June 30, 2003.................................................3
Consolidated Statements of Income (unaudited)
for the three and six months ended December 31, 2003
and 2002 .....................................................4
Consolidated Statements of Shareholders' Equity
at December 31, 2003 (unaudited) and June 30, 2003............5
Consolidated Statements of Cash Flows (unaudited)
for the six months ended December 31, 2003
and 2002 .....................................................6
Notes to Consolidated Financial
Statements (unaudited)...................................7 - 13
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................13 - 18
ITEM 4. Controls and Procedures..........................................19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................20
ITEM 2. Changes in Securities and Use of Proceeds........................21
ITEM 3. Defaults upon Senior Securities..................................21
ITEM 4. Submission of Matters to a Vote of Security Holders..............21
ITEM 5. Other Information................................................21
ITEM 6. Exhibits and Reports on Form 8-K.................................21
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 12/31/03 06/30/03
- ------ ------------ ------------
CURRENT ASSETS:
Cash $ 8,026,183 $ 3,528,511
Trade accounts receivable (net of allowance of $94,000 and $128,000) 8,348,396 8,516,481
Inventories 10,777,090 8,175,798
Prepaid expenses 737,760 367,400
Deferred tax asset 569,858 569,858
------------ ------------
Total current assets 28,459,287 21,158,048
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 12,610,321 11,885,728
Less accumulated depreciation (5,015,370) (4,477,928)
------------ ------------
7,594,951 7,407,800
------------ ------------
CONSTRUCTION IN PROGRESS 3,685,518 -
------------ ------------
OTHER ASSETS 544,139 496,696
------------ ------------
Total assets $ 40,283,895 $ 29,062,544
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt 1,110,071 718,333
Accounts payable 1,804,994 2,664,616
Accrued expenses 651,186 526,430
Income taxes payable 511,972 63,617
------------ ------------
Total current liabilities 4,078,223 3,972,996
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 6,062,547 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, 20,050,585 shares and 20,025,871 shares, respectively 20,050 20,026
Additional paid-in capital 2,702,167 2,526,077
Retained earnings 26,308,539 19,051,607
------------ ------------
Total shareholders' equity 29,030,756 21,597,710
------------ ------------
Total liabilities and shareholders' equity $ 40,283,895 $ 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 FOR THE SIX MONTHS ENDED
---------------------------- ----------------------------
12/31/03 12/31/02 12/31/03 12/31/02
------------ ------------ ------------ ------------
NET SALES $ 16,573,601 $ 10,183,161 $ 29,795,387 $ 19,309,817
COST OF SALES 6,660,845 3,965,474 11,458,098 7,801,585
------------ ------------ ------------ ------------
Gross profit 9,912,756 6,217,687 18,337,289 11,508,232
RESEARCH AND DEVELOPMENT EXPENSES 1,252,638 529,196 2,139,078 986,007
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,176,608 1,262,633 3,903,200 2,156,158
------------ ------------ ------------ ------------
Operating profit 6,483,510 4,425,858 12,295,011 8,366,067
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income (expense), net of interest income 10,404 (13,321) 2,288 (37,261)
------------ ------------ ------------ ------------
10,404 (13,321) 2,288 (37,261)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES $ 6,493,914 $ 4,412,537 $ 12,297,299 $ 8,328,806
INCOME TAXES $ 2,661,367 $ 1,649,624 $ 5,040,367 $ 3,014,241
NET INCOME $ 3,832,547 $ 2,762,913 $ 7,256,932 $ 5,314,565
============ ============ ============ ============
BASIC INCOME PER SHARE $ 0.19 $ 0.14 $ 0.36 $ 0.26
DILUTED INCOME PER SHARE $ 0.19 $ 0.14 $ 0.36 $ 0.26
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 20,050,145 19,932,496 20,045,113 19,916,745
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 20,275,985 20,123,376 20,272,425 20,108,671
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 SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
-------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL
BALANCE, JUNE 30, 2003 20,025,871 $ 20,026 $ 2,526,077 $ 19,051,607 $21,597,710
Exercise of stock options 20,677 20 127,428 127,448
Shares issued in connection 4,037 4 48,662 48,666
with employee stock option plan
Net Income 7,256,932 7,256,932
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 20,050,585 $ 20,050 $ 2,702,167 $ 26,308,539 $29,030,756
========== ======== =========== ============ ===========
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.
5
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
--------------------------
12/31/03 12/31/02
----------- -----------
OPERATING ACTIVITIES:
Net income $ 7,256,932 $ 5,314,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 543,101 495,459
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable 168,085 (632,471)
Inventories (2,601,292) (1,368,184)
Prepaid expenses and other assets (370,360) (375,024)
Accounts payable (859,622) (240,388)
Accrued expenses 124,756 (334,256)
Income taxes payable 448,355 (726,552)
----------- -----------
Net cash provided by operating activities 4,709,955 2,133,149
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,463,213) (793,612)
Deposits paid on machinery or building additions not placed in service - (290,490)
----------- -----------
Net cash used in investing activities (4,463,213) (1,084,102)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from debt financing 4,445,574 -
Net repayments under line of credit - (202,688)
Repayments of debt (370,758) (425,198)
Proceeds from issuance of stock 176,114 46,467
----------- -----------
Net cash provided by (used in) financing activities 4,250,930 (581,419)
----------- -----------
NET INCREASE IN CASH 4,497,672 467,628
CASH, BEGINNING OF YEAR 3,528,511 -
----------- -----------
CASH, END OF PERIOD $ 8,026,183 $ 467,628
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 14,510 $ 37,261
Income taxes paid during period $ 4,592,012 $ 3,908,362
The accompanying notes to consolidated financial statements are an
integral part of these statements.
6
LANNETT COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 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 SIX MONTHS ENDED
------------------ ----------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Net income, as reported $ 3,832,547 $ 2,762,913 $ 7,256,932 $ 5,314,565
Deduct: Total compensation expense
determined under fair value based
method for all stock awards (323,142) (134,757) (534,339) (269,514)
Add: Tax savings at effective rate 132,488 50,379 219,079 97,538
------------------------------ ------------------------------
Pro forma net income 3,641,893 2,678,535 6,941,672 5,142,589
============================== ==============================
Earnings per share:
Basic, as reported $ .19 $ .14 $ .36 $ .26
Basic, pro forma $ .18 $ .13 $ .35 $ .26
Diluted, as reported $ .19 $ .14 $ .36 $ .26
Diluted, pro forma $ .18 $ .13 $ .34 $ .26
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 80.6% and
79.2%; risk-free interest rates ranging between 4.33% and 4.47% for 2003 and 4%
and 4.47% for 2002, and expected lives of 10 years.
7
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 and six months ended December 31, 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 2003, 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, 2003, 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,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. 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.
8
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:
December 31, June 30,
2003 2003
------------- ------------
(unaudited)
Raw materials $ 3,718,344 $ 2,625,463
Work-in-process 931,384 992,330
Finished goods 5,903,692 4,363,432
Packaging supplies 223,670 194,573
------------ ------------
$ 10,777,090 $ 8,175,798
============= =============
The preceding amounts are net of inventory reserves of $440,065 and $235,246 at
December 31, 2003 and June 30, 2003 respectively.
9
NOTE 4. LONG-TERM DEBT
Long-Term debt consists of the following
December 31, June 30,
2003 2003
------------ --------------
(unaudited)
Tax-exempt Bond Loan $ 2,691,284 $ 3,097,802
Mortgage Loan 2,700,000 -
Equipment Loan 798,000 -
Construction Loan 983,334 -
------------ -------------
$ 7,172,618 $ 3,097,802
Less current portion 1,110,071 718,333
------------ -------------
$ 6,062,547 $ 2,379,469
============ =============
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 December 31, 2003, the Company has $2,691,284 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 December 31,
2003, no portion of the letter of credit has been utilized
On November 26, 2003, the Company exercised its option to purchase the
facility at 9001 Torresdale Avenue. The purchase price of the facility was
approximately $1.9 million. The Company has entered into agreements (the "2003
Loan Financing") with a bank to finance the purchase of the building, the
renovation and setup of the building, and the Company's other anticipated
capital expenditures for Fiscal 2004, including the implementation of its new
Enterprise Resource Planning (ERP) system, and a new fluid bed drying process
center at its current manufacturing plant at 9000 State Road. The 2003 Loan
Financing includes the following:
1) A Mortgage Loan for $2.7 million, used to finance the purchase of the
Torresdale Avenue facility, and certain renovations at the facility.
2) An Equipment Loan for up to $6 million, which will be used to finance
equipment, the ERP system implementation and other capital
expenditures.
3) A Construction Loan for $1 million, used to finance the construction
and fit up of the fluid bed drying process center, which is adjacent to
the Company's current manufacturing plant at 9000 State Road.
From November 26, 2003 to the earlier of November 26, 2004 or the date that
the Philadelphia Industrial Development Corporation lends the Company up to
$1,250,000 as reimbursement for a portion of the acquisition cost of the
facility (the "Conversion Date"), the Company is required to make interest only
payments on the Mortgage Loan. Commencing on the first day of the month
following the Conversion Date, the Company is required to make monthly payments
of principal and interest in amounts sufficient to fully amortize the principal
balance of the
10
Mortgage Loan 15 years after the Conversion Date. The entire outstanding
principal amount of this mortgage loan, along with any accrued interest, shall
be due no later than 15 years from the date of the Conversion Date. As of
December 31, 2003, the Company has a principal balance of $2.7 million under the
Mortgage Loan.
The Equipment Loan is a non-revolving facility in which the Company will
borrow the funds necessary to finance its capital expenditures. Under the
Equipment Loan, the Company will request a bank to reimburse a portion of the
cost incurred to acquire and setup the equipment. The amount advanced to the
Company under the Equipment Loan is limited to no more than 80% of the cost of
such equipment. Each advance under the Equipment Loan will immediately convert
to a term loan with a maturity date of three to five years, depending on the
classification of the equipment acquired. During the term loan, the Company is
required to make equal payments of principal and interest. As of December 31,
2003, the Company has outstanding $798,000 under the Equipment Loan of which
$191,738 is classified as currently due.
Under the Construction Loan, the Company is required to make equal monthly
payments of principal and interest beginning on January 1, 2004 and ending on
November 30, 2008, the maturity date of the loan. As of December 31, 2003, the
Company has outstanding $983,334 under the Construction Loan of which $200,000
is classified as currently due.
The financing facilities under the 2003 Loan Financing bear interest at a
rate equal to the LIBOR Based Rate. The LIBOR Based Rate is the rate per annum,
based on a 30-day interest period, quoted two business days prior to the first
day of such interest period for the offering by leading banks in the London
interbank market of Dollar deposits (2.6175% at December 31, 2003).
The terms of the 2003 Loan Financing require the Company to maintain
certain financial covenants and to comply with certain reporting standards.
The Company has executed a Security Agreement with a bank in which the
Company has agreed to use substantially all of its assets to collateralize the
amounts due to the Bank under the 2003 Loan Financing.
The Company has a $3,000,000 line of credit from a bank. The line of credit
was renewed and extended to November 30, 2004, at which time the Company expects
to renew and extend the due date. At December 31, 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.
NOTE 5. INCOME TAXES
The provision for federal and state income taxes for the three months ended
December 31, 2003 and 2002 was $2,661,367 and $1,649,624 with effective tax
rates of 40.9% and 37.4%, respectively. The provision for federal and state
income taxes for the six months ended December 31, 2003 was $5,040,367 and
$3,014,241 with effective tax rates of 40.9% and 36.2%, respectively.
11
NOTE 6. 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 DECEMBER 31,
2003 2002
------------------------------------ ---------------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $ 3,832,547 20,050,145 $ 2,762,913 19,932,496
Effect of dilutive stock options 225,840 190,880
----------- ----------- ----------- ----------
Diluted earnings per share factors $ 3,832,547 20,275,985 $ 2,762,913 20,123,376
=========== ========== =========== ==========
Basic earnings per share $ 0.19 $ 0.14
Diluted earnings per share $ 0.19 $ 0.14
The number of shares in the prior period have been adjusted for the Company's 3
for 2 stock split in February 2003.
SIX MONTHS ENDED DECEMBER 31,
2003 2002
------------------------------ -----------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $ 7,256,932 20,045,113 $ 5,314,565 19,916,745
Effect of dilutive stock options 227,312 191,926
----------- ----------- ----------- ----------
Diluted earnings per share factors $ 7,256,932 20,272,425 $ 5,314,565 20,108,671
=========== =========== =========== ==========
Basic earnings per share $ 0.36 $ 0.26
Diluted earnings per share $ 0.36 $ 0.26
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 and six months ended December 31, 2003
because the options' exercise price is greater than the average market price of
the common stock. There were no antidulitive shares for the three and six months
ended December 31, 2002.
12
NOTE 7. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $325,807 and $138,000 during the six
months ended December 31, 2003 and 2002, respectively, to a distributor (the
"related party"), the owner of which 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 $68,000
during the six months ended December 31, 2003 and 2002, respectively. Accounts
receivable includes amounts due from the related party of approximately $118,806
and $95,000 at December 31, 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.
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 Company in
Fiscal 2003, and any Current Reports on Form 8-K filed by the Company.
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;
13
- 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.
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 as of and for the six months ended December 31, 2003. The Company did
not make any changes in those policies during the period.
RESULTS OF OPERATIONS --THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED
WITH THREE MONTHS ENDED DECEMBER 31, 2002.
Net sales increased by 63% from $10,183,161 for the three months ended
December 31, 2002 ("Second Quarter Fiscal 2003") to $16,573,601 for the three
months ended December 31, 2003 ("Second 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 due to
increased competition, and the discontinuation of pseudoephedrine hydrochloride
tablets and guaifenesin/ephedrine hydrochloride tablets.
Cost of sales increased by 68% from $3,965,474 for the Second Quarter
Fiscal 2003 to $6,660,845 for the Second Quarter Fiscal 2004. The cost of sales
increase is due to an increase in direct variable costs and certain
14
indirect overhead costs as a result of the increase in sales volume, and related
production activities. These costs include raw materials, labor and benefit
expenses, and depreciation expense. Gross profit margins for the Second Quarter
Fiscal 2004 and the Second Quarter Fiscal 2003 were 60% and 61%, respectively.
The decrease in the gross profit percentage is due to product sales mix and
decreased absorption of fixed overhead costs as a result of decreased production
output due to the Company's success in building and maintaining its inventory
levels prior to the second quarter Fiscal 2004.
Research and development ("R&D") expenses increased by 137% from
$529,196 for the Second Quarter Fiscal 2003 to $1,252,638 for the Second 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.
Selling, general and administrative expenses increased by 73% from
$1,262,633 for the Second Quarter Fiscal 2003 to $2,176,608 for the Second
Quarter Fiscal 2004. This increase is a result of an increase in the following
expenses: payroll and benefits, consulting services, legal, 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 $4,425,858 in Second Quarter Fiscal 2003 to $6,483,510 in Second
Quarter Fiscal 2004.
The Company's net interest decreased from net interest expense of
$13,321 for the Second Quarter Fiscal 2003 to net interest income of $10,404 for
the Second Quarter Fiscal 2004 as a result of principal repayments, reduced
interest rates and increased interest income due to higher cash balances. See
Liquidity and Capital Resources below.
The Company's income tax expense increased from $1,649,624 in the
Second Quarter Fiscal 2003 to $2,661,367 in the Second Quarter Fiscal 2004 as a
result of the increase in income before taxes and an increase in the effective
tax rates. The effective tax rate increased from 37.4% to 40.9% due to the
company's increased activities in higher statutory jurisdictions.
The Company reported net income of $3,832,547 in the Second Quarter
Fiscal 2004, or $0.19 basic and diluted income per share, compared to net income
of $2,762,913 in the Second Quarter Fiscal 2003, or $0.14 basic and diluted
income per share.
RESULTS OF OPERATIONS --SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED
WITH SIX MONTHS ENDED DECEMBER 31, 2002.
Net sales increased by 54% from $19,309,817 for the six months ended
December 31, 2002 to $29,795,387 for the six months ended December 31, 2003.
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 due
to increased competition, and the discontinuation of pseudoephedrine
15
hydrochloride tablets and guaifenesin/ephedrine hydrochloride tablets.
Cost of sales increased by 47% from $7,801,585 for the six months ended
December 31, 2002 to $11,458,098 for the six months ended December 31, 2003. The
cost of sales increase is due to an increase in direct variable costs and
certain indirect overhead costs as a result of the increase in sales volume, and
related production activities. These costs include raw materials, labor and
benefit expenses, and depreciation expense. Gross profit margins for the six
months ended December 31, 2003 and 2002 were 62% and 60%, 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 in the first quarter of fiscal
year 2004.
Research and development ("R&D") expenses increased by 117% from
$986,007 for the six months ended December 31, 2002 to $2,139,078 for the six
months ended December 31, 2003. 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.
Selling, general and administrative expenses increased by 81% from
$2,156,158 for the six months ended December 31, 2002 to $3,903,200 for the six
months ended December 31, 2003. This increase is a result of an increase in the
following expenses: payroll and benefits, consulting services, legal, 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 $8,366,067 for the six months ended December 31, 2002 to $12,295,011
for the six months ended December 31, 2003.
The Company's net interest decreased from net interest expense of
$37,261 for the six months ended December 31, 2002 to net interest income of
$2,288 for the six months ended December 31, 2003 as a result of principal
repayments, reduced interest rates and increased interest income due to higher
cash balances. See Liquidity and Capital Resources below.
The Company's income tax expense increased from $3,014,241 for the six
months ended December 31, 2002 to $5,040,367 for the six months ended December
31, 2003 as a result of the increase in income before taxes and an increase in
the effective tax rate. The effective tax rate increased from 36.2% to 40.9% due
to the company's increased activities in higher statutory jurisdictions.
The Company reported net income of $7,256,932 for the six months ended
December 31, 2003, or $0.36 basic and diluted income per share, compared to net
income of $5,314,565 for the six months ended December 31, 2002, or $0.26 basic
and diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES --
Net cash provided by operating activities of $4,709,955 for the six
months ended December 31, 2003 was attributable to net income of $7,256,932, as
adjusted for the effects of non-cash items of $543,101 and net
16
changes in operating assets and liabilities totaling ($3,090,078). Significant
changes in operating assets and liabilities are comprised of:
1. An increase in inventories of $2,601,292 due to an increase in raw
materials 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;
2. A decrease in accounts payable of $859,622 due to timing of the
receipts and the related payments for finished goods inventory
shipments. In April 2003, the Company launched its sales campaign
for Levothyroxine Sodium tablets. Due to the timing of the
Company's launch, the receipt of significant inventory quantities
and beneficial supplier payment terms, the accounts payable
balance as of June 30, 2003 included significant amounts due to
the supplier of the Levothyroxine Sodium tablets. Subsequent to
June 20, 2003, these invoices have been paid, thereby decreasing
the overall accounts payable balance.
3. An increase in income taxes payable of $448,355 due to higher
taxable income and the accrual of the related state and local
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 $4,463,213 for the six
months ended December 31, 2003 was attributable to the Company's acquisition of
its new facility on Torresdale Avenue, purchases of equipment and payments for
building additions. The Company's anticipated budget for capital expenditures in
Fiscal 2004 is approximately $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.
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 December 31, 2003, the Company has $2,691,284 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 December 31,
2003, no portion of the letter of credit has been utilized
On November 26, 2003, the Company exercised its option to purchase the
facility at 9001 Torresdale Avenue. The purchase price of the facility was
approximately $1.9 million. The Company has entered into agreements (the "2003
Loan Financing") with a bank to finance the purchase of the building, the
renovation and setup of the building, and the Company's other anticipated
capital expenditures for Fiscal 2004, including the implementation of its new
Enterprise Resource Planning (ERP) system, and a new fluid bed drying process
center at its current manufacturing plant at 9000 State Road. The 2003 Loan
Financing includes the following:
1) A Mortgage Loan for $2.7 million, used to finance the purchase of the
Torresdale Avenue facility, and certain renovations at the facility.
17
2) An Equipment Loan for up to $6 million, which will be used to finance
equipment, the ERP system implementation and other capital
expenditures.
3) A Construction Loan for $1 million, used to finance the construction
and fit up of the fluid bed drying process center, which is adjacent to
the Company's current manufacturing plant at 9000 State Road.
From November 26, 2003 to the earlier of November 26, 2004 or the date that
the Philadelphia Industrial Development Corporation lends the Company up to
$1,250,000 as reimbursement for a portion of the acquisition cost of the
facility (the "Conversion Date"), the Company is required to make interest only
payments on the Mortgage Loan. Commencing on the first day of the month
following the Conversion Date, the Company is required to make monthly payments
of principal and interest in amounts sufficient to fully amortize the principal
balance of the Mortgage Loan 15 years after the Conversion Date. The entire
outstanding principal amount of this mortgage loan, along with any accrued
interest, shall be due no later than 15 years from the date of the Conversion
Date. As of December 31, 2003, the Company has a principal balance of $2.7
million under the Mortgage Loan.
The Equipment Loan is a non-revolving facility in which the Company will
borrow the funds necessary to finance its capital expenditures. Under the
Equipment Loan, the Company will request a bank to reimburse a portion of the
cost incurred to acquire and setup the equipment. The amount advanced to the
Company under the Equipment Loan is limited to no more than 80% of the cost of
such equipment. Each advance under the Equipment Loan will immediately convert
to a term loan with a maturity date of three to five years, depending on the
classification of the equipment acquired. During the term loan, the Company is
required to make equal payments of principal and interest. As of December 31,
2003, the Company has outstanding $798,000 under the Equipment Loan of which
$191,738 is classified as currently due.
Under the Construction Loan, the Company is required to make equal monthly
payments of principal and interest beginning on January 1, 2004 and ending on
November 30, 2008, the maturity date of the loan. As of December 31, 2003, the
Company has outstanding $983,334 under the Construction Loan of which $200,000
is classified as currently due.
The financing facilities under the 2003 Loan Financing bear interest at a
rate equal to the LIBOR Based Rate. The LIBOR Based Rate is the rate per annum,
based on a 30-day interest period, quoted two business days prior to the first
day of such interest period for the offering by leading banks in the London
interbank market of Dollar deposits (2.6175% at December 31, 2003).
The terms of the 2003 Loan Financing require the Company to maintain
certain financial covenants and to comply with certain reporting standards.
The Company has executed a Security Agreement with a bank in which the
Company has agreed to use substantially all of its assets to collateralize the
amounts due to the Bank under the 2003 Loan Financing.
The Company has a $3,000,000 line of credit from a bank. The line of credit
was renewed and extended to November 30, 2004, at which time the Company expects
to renew and extend the due date. At December 31, 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
December 31, 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.
18
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.
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 six
months ended December 31, 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.
19
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
20
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 October 29, 2003, the Company filed a Form 8-K disclosing in item
7 and 12 thereof and including as an exhibit the press release
announcing its results of operations for the first quarter of its
Fiscal 2004 year.
(c) On November 26, 2003, the Company filed a Form 8-K disclosing in Item
2 the acquisition of a facility located at 9001 Torresdale Avenue,
Philadelphia, Pa. The facility was purchased for approximately
$1,900,000. The Company executed loans with a bank to finance the
facility purchase and additional capital projects planned in the 2004
Fiscal year.
21
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LANNETT COMPANY, INC.
Dated: February 13, 2004 By: /s/ Larry Dalesandro
---------------------------
Larry Dalesandro
Chief Financial Officer
By: /s/ William Farber
---------------------------
William Farber
Chairman of the Board and
Chief Executive Officer
22
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 Bedrosian on Form 10-KSB for Fiscal Year Ending June 30,
2003
23
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 25-26
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 27-28
Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed Herewith 29-30
Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Filed Herewith 31
Executive Officer and Chief
Financial Officer Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002
24