U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to________________
Commission File No. 0-9036
LANNETT COMPANY, INC.
(Name of small business issuer in its charter)
State of Delaware 23-0787-699
State of Incorporation I.R.S. Employer I.D. No.
9000 State Road
Philadelphia, Pennsylvania 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes_X_ No____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB._X_
The issuer had net sales of $3,819,595 for the fiscal year ended June
30, 1996.
As of September 10, 1996, the aggregate market value of the voting stock
held by non-affiliates was approximately $4,739,955 computed by reference to
the average of the bid and asked prices of such stock as quoted by the National
Quotations Bureau, Inc.
As of September 10, 1996, there were 5,206,128 shares of the issuer's
common stock, $.001 par value, outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General.
Lannett Company, Inc. (the "Company") was incorporated in 1942 under the
laws of the Commonwealth of Pennsylvania. In 1991, the Company merged into
Lannett Company, Inc., a Delaware corporation. The sole purpose of the merger
was to reincorporate the Company as a Delaware corporation. The administrative
offices and manufacturing facilities of the Company are located at 9000 State
Road, Philadelphia, Pennsylvania.
The Company manufactures and distributes pharmaceutical products sold
under generic names ("competitive pharmaceutical products") and historically
has manufactured and distributed pharmaceutical products sold under its trade
or brand names ("pharmaceutical specialties"). In addition, the Company
packages and distributes competitive pharmaceutical products manufactured by
other companies.
In August 1991, the Company temporarily suspended manufacturing
operations in order to upgrade its facilities and operations and to
systematically review its approved new drug applications, systems and
procedures. The Company completed the modernization of its facilities and
operations, instituted inventory and quality control programs, and implemented
a multi-pronged remedial action plan to assure compliance with applicable
governmental regulations and industry standards. The Company resumed
manufacturing on a limited product basis in October 1992.
Principal Products.
During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company
manufactured and distributed five products, Butalbital Compound Capsules
("BCC"), a generic version of Sandoz's Fiorinal(R), which the Company began
manufacturing and distributing in October 1992, Primidone, a generic version
of Wyeth-Ayerst's Mysoline(R) an anti-convulsant, which the Company began
manufacturing and distributing in November 1993 and Dicyclomine Hydrochloride
USP, 10-mg capsules, a generic version of Marion Merrell Dow's Bentyl(R), an
antispasmodic and anticholinergic agent, which the Company began manufacturing
and distributing in July 1994. In June 1996 the Company began manufacturing
and distributing Prednisone 5mg and Prednisone 20mg tablets, both of which are
steroidal anti-inflammatory agents. In addition in April 1996 the Company
received an "AB" rating from the FDA for Dicyclomine Hydrochloride 10mg
capsules, making it fully interchangeable with Marion Merrell Dow's Bentyl(R)
and fully reimbursable under Federal Government programs.
The Company has continued producing test batches of other products to
determine whether they meet the Company's new quality control standards and
the highest industry standards. As a result of its testing, management decided
to reformulate a number of products, to modify some manufacturing processes
and to add new raw material suppliers, all of which require supplemental
approval from the Food and Drug Administration ("FDA"). Obtaining such
approval has delayed the re-introduction of such reformulated products.
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Twelve additional products are under development at this time; three of
these products have been redeveloped and submitted to the FDA for supplemental
approval; seven others are currently in various stages of development,
revalidation or preparation for submission to the agency, and two of these
products represent new product introductions as part of the Company's
commitment to a research and development program, of which one is currently
involved in a biostudy for submission. Lannett is aggressively pursuing
alternative product lines designed to compliment the Company's existing
products. In addition to research an development undertakings, the Company
is actively pursuing contract manufacturing and contract packaging. Subsequent
to the year ended June 30, 1996 the Company received approval from the FDA for
Acetazolamide USP 250mg tablets, a carbonic anhydrase inhibitor, the generic
version of Lederle Laboratories, Diamox(R), used in the treatment of some
types of convulsive disorders (epilepsy), certain types of glaucoma, and
in the treatment of cardiac edema. The Company is currently in the process
of obtaining a new raw material source for this product. Lannett is also
pursuing key strategic alliances to jointly market its current product base.
Since the Company has no control over the FDA review process, management
is unable to anticipate with certainty when it will commence production
and shipping additional products. Management hopes to introduce a
number of products by the end of Fiscal 1997.
Raw Materials.
The raw materials used by the Company in the manufacture of
pharmaceutical products consist of pharmaceutical chemicals in various forms
which are available from various sources. FDA approval is required in
connection with the process of selecting suppliers. Two suppliers, Ganes
Chemicals Inc. and Upjohn Company, accounted for approximately 34% and 18%,
respectively of the Company's raw material purchases in Fiscal 1996. One
supplier, Ganes Chemicals Inc., accounted for approximately 45% of the
Company's raw material purchases in Fiscal 1995. As the number of approved
products increases, the Company expects the percentage of raw material
purchased from any one supplier to decrease. Currently the Company is
operating at approximately two-thirds of its full capacity on a one shift
basis. Production levels have increased with the introduction of each
additional product, it is estimated that the Company will reach full
production capacity after the introduction of approximately two additional
products, depending on the demand of the products introduced.
Distribution.
The Company historically sold its pharmaceutical products either through
wholesale distributors or directly to retail pharmacies, physicians, hospitals
and other institutions throughout the United States and, to a limited extent,
some foreign countries. In the future, the Company expects to sell its
pharmaceutical products primarily to wholesalers, distributors, governmental
agencies and warehousing chains. Sales of the Company's pharmaceutical
products are made on an individual order basis. The Company has no long-term
contracts to sell its pharmaceutical products. The Company historically has
had a broad customer base and has not been dependent on one or a few major
customers. Two customers accounted for approximately 21% and 13% respectively,
of net sales in Fiscal 1996. Three customers accounted for approximately 16%,
13% and 11%, respectively, of the Company's sales in Fiscal 1995. As the
Company reintroduces additional products, the Company once again expects its
customer base to broaden.
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Competition.
The manufacture and distribution of pharmaceutical products is a highly
competitive industry. Competition in the pharmaceutical industry is primarily
based on quality and price and, in the case of pharmaceutical specialties,
advertising and marketing activities. The Company intends to compete
primarily on the basis of price and quality, service and availability of
inventory and that the Company's products are only available from limited
competitors. The modernization of its facilities, implementation of
inventory and quality control programs and introduction of new products
have improved the Company's competitive position.
Government Regulation.
Pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA and the Drug Enforcement Agency
("DEA"), and, to a lesser extent, by state governments. The Federal Food, Drug
and Cosmetic Act, the Controlled Substance Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, pricing, advertising and promotion of the
Company's generic drug products. Noncompliance with applicable regulations can
result in fines, recall and seizure of products, total or partial suspension
of production, personal and/or corporate prosecution and debarment, and
refusal of the government to enter into supply contracts or to approve new
drug applications. The FDA also has the authority to revoke previously
approved drug products.
FDA approval is required before any "new" prescription drug can be
marketed. The approval procedures are generally quite burdensome. A new drug
is one not generally recognized by qualified experts as safe and effective for
its intended use. Generally, a drug which is the generic equivalent of a
previously approved prescription drug will be treated as a new generic drug
requiring FDA approval. Furthermore, each dosage form of a specific generic
drug product requires separate approval by the FDA. However, less burdensome
approval procedures may be used for generic equivalents. Although generic
equivalents of many over-the-counter drugs generally do not require
affirmative FDA pre-approval, there are instances where FDA pre-approval
is required. There are currently three ways to obtain FDA approval of a
new drug.
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New Drug Applications ("NDA"). Unless one of the two procedures
discussed in the following paragraphs is available, a manufacturer must
conduct and submit to the FDA complete clinical studies to establish a drug's
safety and efficacy.
Abbreviated New Drug Applications ("ANDA"). An ANDA is similar to an
NDA, except that the FDA waives the requirement of complete clinical studies
of safety and efficacy, although it may require bioavailability and
bioequivalence studies. "Bioavailability" indicates the rate of absorption and
levels of concentration of a drug in the blood stream needed to produce a
therapeutic effect. "Bioequivalence" compares one drug product with another,
and when established, indicates that the rate of absorption and the levels of
concentration of a generic drug in the body are within prescribed statistical
limits to those of a previously approved equivalent drug. Under the Drug Price
Act, an ANDA may be submitted for a drug on the basis that it is the equivalent
of an approved drug, regardless of when such other drug was approved. The Drug
Price Act, in addition to establishing a new ANDA procedure, created statutory
protections for approved brand name drugs. Under the Drug Price Act, an ANDA
for a generic may not be made effective until all relevant product and use
patents for the equivalent brand name drug have expired or have been
determined to be invalid. Prior to enactment of the Drug Price Act, the FDA
gave no consideration to the patent status of a previously approved drug.
Additionally, the Drug Price Act extends for up to five years the term of a
product or use patent covering a drug to compensate the patent holder for the
reduction of the effective market life of a patent due to federal regulatory
review. With respect to certain drugs not covered by patents, the Drug Price
Act sets specified time periods of two to ten years during which ANDA's for
generic drugs cannot become effective or, under certain circumstances, be
filed if the equivalent brand name drug was approved after December 31, 1981.
Paper New Drug Applications ("Paper NDA"). For drugs which are identical
to a drug first approved after 1962, a prospective manufacturer need not go
through the full NDA procedure, but instead may demonstrate safety and
efficacy by reliance on published literature and reports, and must also
submit, if the FDA so requires, bioavailability or bioequivalence data
illustrating that the generic drug formulation produces, within an acceptable
range, the same effects as the previously approved equivalent drug. Because
published literature to support the safety and efficacy of post-1962 drugs may
not be generally available, this procedure is of limited utility to generic
drug manufacturers. Moreover, the utility of Paper NDA's has been even further
diminished by the recently broadened availability of the abbreviated new drug
application as described above.
Among the requirements for new drug approval is the requirement that the
prospective manufacturer's methods conform to the FDA's current good
manufacturing practices ("CGMP Regulations"). The CGMP Regulations must be
followed at all times during which the approved drug is manufactured. In
complying with the standards set forth in the CGMP regulations, the Company
must continue to expend time, money and effort in the areas of production and
quality control to ensure full technical compliance. Failure to comply risks
possible FDA action such as the seizure of noncomplying drug products or,
through the Department of Justice, enjoining the manufacture of such products.
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The Company is also subject to federal, state and local laws of general
applicability, such as laws regulating working conditions, and, to the extent
that its business operations entail the generation, storage, transportation or
discharge of items that may be considered hazardous substances, hazardous
waste or environmental contaminants, to various federal, state and local
environmental protection laws and regulations. The Company monitors its
compliance with all environmental laws. Any compliance costs which may be
incurred, are contingent upon the results of future site monitoring and
will be charged against operations when incurred. During each of the years
ended June 30, 1996 and 1995, the Company incurred monitoring costs of
approximately $10,000.
Research and Development.
During Fiscal 1996 the Company incurred research and development costs
of approximately $253,000 relating to the reformulation of existing products
and development of two new products. During Fiscal 1995 the Company incurred
research and development costs of approximately $272,000. Approximately
$240,000 is expected to be incurred on bioequivalency studies for the two new
products during Fiscal 1997.
Employees.
The Company currently employs 38 employees, all of whom are full-time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's general business offices, laboratory, manufacturing
and distribution facilities are located in a facility owned by the Company
at 9000 State Road, Philadelphia, Pennsylvania. This facility was extensively
renovated during Fiscal 1993 and Fiscal 1992 and contains approximately 31,000
square feet, located on four and one half (4-1/2) acres.
The Company's facility is subject to a mortgage in favor of Meridian
Bank pursuant to an Open-End Mortgage dated May 4, 1993, as amended by
amendments dated December 8, 1993, December 21, 1993, June 9, 1994, October
27, 1994, July 31, 1995 and March 5, 1996 and a mortgage in favor of William
Farber pursuant to a Mortgage dated August 30, 1991, as amended by Amendments
#1, # 2 #3, #4 and #5 dated March 15, 1993, August 1, 1994, March 15, 1995,
December 31, 1995 and June 30, 1996, respectively. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS -- Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
Regulatory Proceedings. The Company is engaged in an industry which is
subject to considerable government regulation relating to the development,
manufacturing and marketing of pharmaceutical products. Accordingly,
incidental to its business, the Company periodically responds to inquiries or
engages in administrative and judicial proceedings involving regulatory
authorities, particularly the FDA and the DEA.
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DES Cases. The Company is currently engaged in several civil actions as
a co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a
synthetic hormone. Prior litigation established that the Company's pro rata
share of any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which the
Company maintained coverage during the time period that damages were alleged
to have occurred. The insurance company has denied coverage of actions filed
after January 1, 1992. With respect to these actions, the Company paid nominal
damages or stipulated to its pro rata share of any liability. The Company has
either settled or is currently defending over 500 such claims. Recently, the
Company persuaded its insurance carriers to resume defense and indemnification
of most DES claims, has recovered from its insurers some of the amounts the
Company previously expended in these cases, and is negotiating recovery of the
balance of such amounts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the Company's security
holders since the annual meeting of shareholders held April 12, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information.
The Company's common stock trades in the over-the-counter market through
the use of the inter-dealer "pink-sheets" published by the National Quotations
Bureau, Inc. (the "NQB"). The following table sets forth certain information
with respect to the high and low bid prices of the Company's common stock
during Fiscal 1996 and 1995 as quoted by the NQB. Such quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may
not represent actual transactions.
- ------------------------------------------------------------------------------
Fiscal Year Ended June 30, 1996
-------------------------------
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High Low
---- ---
First quarter.................................. $2.75 $1.5
Second quarter................................. 3 2.5
Third quarter.................................. 2.94 2
Fourth quarter................................. 2.13 1.5
Fiscal Year Ended June 30, 1995
-------------------------------
High Low
First quarter ................................. $ 3.75 $ 2.25
Second quarter ................................ 3.25 2
Third quarter.................................. 2.5 1.5
Fourth quarter ............................... 2.5 1.38
- ------------------------------------------------------------------------------
Holders.
The number of holders of record of the Company's common stock as of
September 10, 1996 is 537.
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Dividends.
The Company did not pay any cash dividends in Fiscal 1996 or 1995. The
Company intends to utilize all available funds for the Company's working
capital and does not anticipate paying cash dividends in the foreseeable
future.
The Company is prohibited from declaring or paying any dividends, other
than stock splits or dividends payable solely in the Company's common stock,
or making any other distributions on any of its securities, pursuant to the
terms of a Loan Agreement dated May 4, 1993 between Meridian Bank and the
Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and Capital
Resources."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations - Fiscal 1996 to Fiscal 1995.
Net sales decreased by 11.2% to $3,819,595 in Fiscal 1996 from net sales
of $4,303,468 in Fiscal 1995. The Company's net sales during Fiscal 1996 were
derived from the sale of BCC, Primidone, Dicyclomine, Prednisone 5mg and
Prednisone 20mg (which the Company began manufacturing and distributing in
June 1996). The Company's net sales during Fiscal 1995 were derived from the
sale of BCC, Primidone and Dicyclomine (which the Company began manufacturing
and distributing in July 1994). In addition during Fiscal 1995 the Company
performed a limited amount of contract packaging. Sales decreased in Fiscal
1996 due to a decrease in contract packaging, increased competition for one of
the Company's products and more competitive pricing.
Cost of sales decreased by 1.8%, to $1,867,908 in Fiscal 1996 from
$1,903,117 in Fiscal 1995. Cost of sales decreased slightly as compared to the
decrease in sales from Fiscal 1995 to Fiscal 1996, due to a large portion of
cost of sales being fixed costs and due to the introduction of Prednisone 5mg
and Prednisone 20mg which have high raw material and manufacturing costs.
Gross profit margins for Fiscal 1996 and Fiscal 1995 were 51.1% and 55.8%,
respectively. The decrease in the gross profit percentage is primarily due to
the decrease in sales during Fiscal 1996 as a result of less fixed costs being
absorbed during this period. In addition the Company introduced Prednisone
5mg and Prednisone 20mg during the quarter ended June 30, 1996, which have
lower gross profit margins.
Selling, general and administrative expenses decreased by 8.6%, to
$1,260,351 in Fiscal 1996 from $1,378,312 in Fiscal 1995. The decrease is
primarily due to a reduction in legal costs.
The Company reported an operating profit of $691,336 for Fiscal 1996, as
compared to an operating profit of $1,022,039 for Fiscal 1995.
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The Company's interest expense increased to $599,907 for Fiscal 1996
from $578,062 for Fiscal 1995 primarily due to increased borrowings on the
Company's lines of credit. See Liquidity and Capital Resources below.
Other income for Fiscal 1996 and 1995 comprised principally of insurance
proceeds received.
During Fiscal 1995 the Company had provided for Pennsylvania corporate
income tax of approximately 11% of taxable income. Due to tax law changes, the
Company could not utilize its net operating loss carry forward deduction for
Pennsylvania corporate income tax during Fiscal 1995. The 1993 Pennsylvania
Tax Act reactivated the net operating loss carryforward deduction for taxable
fiscal years after 1995, therefore, no provision for Pennsylvania corporate
income tax was made during Fiscal 1996.
The Company reported net income of $137,066 for Fiscal 1996, or $.03 per
share, $.02 on a fully diluted basis, compared to net income of $316,086 or
$0.06 per share, $.03 on a fully diluted basis, for Fiscal 1995.
Liquidity and Capital Resources - Fiscal 1996 to Fiscal 1995
The Company used $185,880 and $16,067 of cash in operations during
Fiscal 1996 and Fiscal 1995, respectively. Net cash used in operations
increased from Fiscal 1995 to Fiscal 1996 due to lower net income in Fiscal
1996 and an increase in inventory as a result of new product introductions.
Accrued interest increased as a result of the Company deferring accrued
interest from April 1, 1995 to June 30, 1996, which is payable in twenty-four
monthly installments, commencing August 15, 1996.
The Company expended $220,714 for property, plant and equipment during
Fiscal 1996 compared to $257,031 expended during Fiscal 1995. The Company has
not made any material commitments, but has budgeted up to $500,000, for
capital expenditures in Fiscal 1997.
Net cash provided by financing activities increased to $351,877 during
Fiscal 1996 from $147,466 provided by financing activities during Fiscal 1995.
This increase in cash provided by financing activities was primarily used to
finance inventory and working capital needs.
As a result of the foregoing, the Company experienced a $13,717 decrease
in cash available from the beginning to the end of Fiscal 1996, resulting in
$25,258 cash available at the end of the fiscal year.
Except as set forth herein, the Company is not aware of any known
trends, events or uncertainties that have or are reasonably likely to have a
material impact on the Company's net sales or income from continuing
operations.
From Fiscal 1987 through Fiscal 1994, the Company incurred operating
losses and suffered cash flow restraints. As noted above, the Company
suspended manufacturing operations from August 1991 through October 1992. The
Company obtained the needed capital to renovate its manufacturing
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facility, to acquire new equipment, to remove hazardous waste materials, to
retain new management and to provide working capital, primarily from a
financing facility made available to the Company by William Farber, a
principal shareholder and Chairman of the Board of Directors, in August 1991.
This investment has resulted in an operating profit for the Company for the
Fiscal years 1996 and 1995.
This financing facility originally consisted of a $2,000,000 revolving
line of credit and a $2,000,000 9% convertible debenture. The revolving line
of credit and the debenture are secured by substantially all of the Company's
assets and are subordinated to the bank lines of credit and mortgage term loan
payable. In March 1993, at the Company's request, William Farber increased the
aggregate credit available under the revolving line of credit to $3,500,000.
The Company requested the additional financing to provide working capital
while the Company reformulated products and obtained supplemental approvals
from the FDA.
The line of credit bears interest at the prime rate published by
Michigan National Bank plus 1% per annum. The effective rate at June 30, 1996
and 1995 was 9.25% and 10%, respectively. The principal is due July 1, 1998.
Accrued interest through June 30, 1994 is payable in twenty-four equal monthly
installments, commencing August 15, 1994 and continuing on the fifteenth day
of each month thereafter until paid in full. Accrued interest from April 1,
1995 to June 30, 1996 is payable in twenty-four equal monthly installments,
commencing August 15, 1996 and continuing on the fifteenth day of each month
thereafter with the balance due July 1, 1998. Accrued interest from July 1,
1996 to June 30, 1997 is payable in twenty-four equal monthly installments,
commencing August 15, 1997 and continuing on the fifteenth day of each month
thereafter, with the balance due July 1, 1998. At June 30, 1996 accrued
interest was approximately $432,000 of which $228,000 is included in the
long-term outstanding balance. At June 30, 1996 $204,000 was classified as
currently due.
The debenture bears interest at 9% per annum. The debenture is due
December 23, 1998 and is convertible at any time prior to payment in full at
the conversion rate of 4,000 shares of common stock for each $1,000 of
outstanding indebtedness (adjusted for the Company's 4 for 1 stock splits in
April 1992 and March 1993). Accrued interest through June 30, 1994 is payable
in twenty-four equal monthly installments, commencing August 15, 1994 and
continuing on the fifteenth day of each month thereafter. Accrued interest
from April 1, 1995 to June 30, 1996 is payable in twenty-four equal monthly
installments, commencing August 15, 1996 and continuing on the fifteenth day
of each month thereafter until paid in full. Accrued interest from July 1,
1996 to June 30, 1997 is payable in twenty-four equal monthly installments,
commencing August 15, 1997 and continuing on the fifteenth day of each month
thereafter, with the balance due December 23, 1998. At June 30, 1995 accrued
interest was approximately $245,000, of which $123,000 is included in the
long-term outstanding balance. At June 30, 1995 $122,000 was classified as
currently due.
At June 30, 1996, there was no additional borrowing capacity available
under the revolving line of credit. Management expects to have sufficient
operating income during Fiscal 1997 to make the required monthly interest
payments.
In May 1993, the Company obtained a $500,000 mortgage term loan from
a Bank which provides for monthly principal installments of approximately
$2,800 plus interest at 9.25% per
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annum. A final balloon payment of $302,778 is due in May 2000. The Company
also obtained a $500,000 line of credit from the Bank which bears interest
at prime plus 1.5% per annum. The effective rate at June 30, 1996 and
1995 was 9.5% and 10.25%, respectively. The line of credit is limited to 80%
of qualified accounts receivable. At June 30, 1996, no funds were available
under the line of credit. Both loans are secured by substantially all of the
Company's assets and the mortgage term loan is guaranteed by Mr. Farber, who
has subordinated his loans to the Company to those of the Bank. The Bank's
lien against the Company's realty is to be released on payment in full of the
mortgage term loan.
On July 31, 1995, the Company secured a $300,000 bank revolving line of
credit for equipment financing, expiring October 31, 1996. Advances are
limited to 80% of equipment costs. On April 1, 1996, $93,881 of borrowings
under this line was converted into a secured term loan payable in forty-eight
equal monthly installments. This line of credit bears interest at prime plus
1.5%. The effective rate at June 30, 1996 was 9.75%. At June 30, 1996,
$158,000 was available to the Company under the revolving line of credit for
equipment financing. The line of credit is collateralized by all of the
Company's present and future equipment. It is also cross-collateralized with
the bank mortgage term loan payable and the line of credit.
In Fiscal 1996 and Fiscal 1995 working capital has been primarily
provided through sales and borrowings under the lines of credit. The Company's
working capital increased to $505,730 at June 30, 1996 from $19,404 at June
30, 1995, mainly due to increases in inventory resulting from new product
introductions. In addition accounts receivable increased due to increased
sales levels during the quarter ended June 30, 1996 as compared to June 30,
1995.
Management currently believes the balances available under the Company's
existing lines of credit, and working capital generated by increased sales
activity, will be adequate to fund the Company's working capital requirements
under current sales conditions. The introduction of new products with high raw
material costs, and increased research and development activities may result
in the Company having to increase its lines of credit to provide the working
capital to support the increased levels of sales and increased research and
development activities. The Company is currently negotiating to increase its
borrowing capacity under the shareholder line of credit.
Except as set forth herein, the Company is not aware of any known
trends, events or uncertainties that have or are reasonably likely to have a
material impact on the Company's short-term or long-term liquidity or
financial condition.
Prospects for the Future
As of June 30, 1996, the Company was manufacturing and marketing five
products, BCC, Primidone, Dicyclomine, Prednisone 5mg and Prednisone 20mg. As
described above, twelve additional products are under development at this
time; three of these products have been redeveloped and submitted to the FDA
for supplemental approval; seven others are currently in various stages of
development, revalidation or preparation for submission to the agency, and two
represent new product introductions as part of the Company's commitment to a
research and development program, of which one is currently involved in a
biostudy for submission. Lannett is aggressively pursuing alternative product
lines designed to compliment the Company's existing products. In addition to
research and
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development undertakings, the Company is actively pursuing contract
manufacturing and contract packaging. Subsequent to the year ended June 30,
1996, the Company received approval from the FDA for Acetazolamide USP 250mg
tablets, a carbonic anhydrase inhibitor, the generic version of Lederle
Laboratories, Diamox(R), used in the treatment of some types of convulsive
disorders (epilepsy), certain types of glaucoma, and in the treatment of
cardiac edema. The Company is currently in the process of obtaining a new raw
material source for this product. Lannett is also pursuing key strategic
alliances to jointly market its current product base. In addition the
Company is actively pursuing to increase contract manufacturing and
packaging on behalf of other companies. Since the Company has no
control over the FDA review process, management is unable to anticipate
with certainty when it will commence production and shipping additional
products. Management hopes to introduce a number of products by the end of
Fiscal 1997.
With a modern manufacturing facility, a highly qualified and motivated
work force and management team, and inventory and quality control programs in
place, management believes the Company is positioned to regain a competitive
position in the market as it reintroduces additional products and approaches
full production capacity. Management anticipates a continuation of
profitability during Fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and report of independent certified public
accountants filed as a part of this Form 10-KSB are listed in the "Index to
Financial Statements" filed herewith.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no matters required to be reported hereunder.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
Directors and Executive Officers.
The directors and executive officers of the Company are set forth below:
==============================================================================
Age Position
Directors:
Roy English 65 Director
Donald Epstein 63 Director
David Farber<F1>1 37 Director
William Farber 65 Chairman of the Board
Gerald Levinson 65 Director
Other Executive Officers:
- -------------------------
Vlad Mikijanic 45 Vice President of Technical
Affairs
Jeffrey Moshal 31 Vice President - Finance and
Treasurer
===============================================================================
Roy English has served as a Director of the Company since February
1993. Mr. English is a pharmacist by profession. For many years prior to
1987, Mr. English owned and operated Major Pharmaceuticals - Kentucky
(formerly Murray Drug Corp.), a generic drug distributor. In 1987, Mr.
English sold Murray Drug Corp. From 1987 through 1989, Mr. English served as
President of Major Pharmaceuticals - Kentucky. Mr. English provided
consulting services to Major Pharmaceuticals from 1989 to August 1993. In
1988, Mr. English formed English Farms, Inc., a closely-held family
corporation which sells food products and is currently Chairman of its
Board. In 1991, Mr. English purchased 50% of Southeastern Book Co., an
entity which buys and sells used college text books. He has retired as
President but still serves as a director of such Company.
Donald Epstein has served as a Director of the Company since 1989. From
1989 to the present, Mr. Epstein has acted as a financial consultant. From
1976 through 1989, Mr. Epstein served as President of Little Donnie's Inc., a
Philadelphia-based food distribution company. During the past 23 years, Mr.
Epstein has owned and operated a number of food distribution companies for
various
- ---------
<F1>1David Farber is the son of William Farber.
14
<PAGE>
lengths of time, including A. Epstein, Inc. and McCray & Hunter, Inc., and
several companies in the business of owning and operating restaurants in
Pennsylvania and New Jersey, including H.A. Winston's, Watson's and Gibson's
restaurants.
David Farber was elected a Director of the Company in August 1991. In
November 1994, Mr. Farber sold Vital Foods, Inc. and formed the TVO Inc,
where he is serving in the capacity of president. Up until 1990, Mr. Farber
has been the President and owner of Vital Foods, Inc., a eight store
chain of health food stores in the Detroit, Michigan area. Prior to that, Mr.
Farber was employed by Michigan Pharmacal Corporation for 13 years; the most
recent six years as Executive Vice President and prior to that, as Production
Manager. David Farber is the son of William Farber.
William Farber was elected as Chairman of the Board of Directors in
August 1991. From April 1993 to the end of 1993, Mr. Farber was the
President and a director of Auburn Pharmaceutical Company. From 1990 through
March 1993, Mr. Farber served as Director of Purchasing for Major
Pharmaceutical Corporation. From 1965 through 1990, Mr. Farber was the Chief
Executive Officer of Michigan Pharmacal Corporation. Mr. Farber is a
registered pharmacist in the State of Michigan. William Farber is the father
of David Farber and the husband of Audrey Farber, Secretary and Treasurer of
the Company.
Gerald Levinson has served as a Director of the Company since 1979. Mr.
Levinson has been a financial consultant for over twenty years and was
Assistant to the Chairman of the Board of Directors of Tabas Enterprises, a
privately-held diversified company, for almost twenty years. Mr. Levinson is
currently a member of the Board of Directors of First Republic Bancorp, Inc.,
a bank holding company, and its subsidiary, First Republic Bank.
Vlad Mikijanic was elected Vice President of Technical Affairs in August
1991. For the prior 17 years, Mr. Mikijanic was employed by Zenith
Laboratories in various positions including Corporate Director of Quality
Control/Quality assurance, a position which he held at Zenith for three years.
Jeffrey Moshal was elected Vice President - Finance and Treasurer in
April 1996. Mr. Moshal joined the Company in August 1994 as Director of
Financial Operations. For the prior seven years, Mr. Moshal was employed by
Grant Thornton LLP, primarily serving manufacturing clients. Mr. Moshal is a
Certified Public Accountant.
To the best of the Company's knowledge, there have been no events under
any bankruptcy act, no criminal proceedings and no judgments or injunctions
that are material to the evaluation of the ability or integrity of any
director or executive officer during the past five years.
Section 16(a) Compliance.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
and certain written representations furnished to the Company during Fiscal
1996, the Company is not aware of the failure to file on a timely basis, any
of the reports required by Section 16(a) of the Securities Exchange Act of
1934.
15
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes all compensation paid to or earned by the
Executive Officers of the Company for Fiscal 1996, Fiscal 1995 and Fiscal
1994. There are no other executive officers whose total salary and bonus for
services rendered to the Company or any subsidiary exceeded $100,000 during
Fiscal 1995.
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
- -------------------------------------------------------- ----------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted LTIP All Other
Principal Fiscal Annual Stock Options Payouts Compensation
Position Year Salary Bonus<F1>1 Compensation Award (s) /SARs Amount Amount
-------- ---- ------ ------ ------------- ------------ ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William 1996 0 0 0 0 0 0 0
Farber
Chairman
of the
Board
Barry 1996 169,343 10,760 20,000<F2>2 0 0 0 27,850<F3>3
Weisberg
President/
CEO -
resigned
January 1,
1996
1995 163,262 10,760 20,000<F2>2 0 20,000<F4>4 0 27,850<F5>5
1994 158,556 10,883 20,000<F2>2 0 20,000<F4>4 0 22,458<F7>7
Vlad 1996 104,284 1,200 7,200<F2>2 0 0 0 3,345<F6>6
Mikijanic
Vice
President/
Technical
Affairs
1995 101,038 0 7,200<F2>2 0 0 0 3,268<F8>8
16
<PAGE>
<FN>
- ---------
1 The Company contributed $9,240, $9240 and $9,117 in Fiscal 1996, Fiscal
1995 and Fiscal 1994, respectively, on Mr. Weisberg's behalf to the Company's
401(k) Plan. Pursuant to his employment agreement, Mr. Weisberg earned an
additional bonus of $10,760, $10,760 and $10,883 in Fiscal 1996, Fiscal 1995
and Fiscal 1994, respectively.
2 Includes $20,000 paid to Mr. Weisberg, and $7,200 paid to Mr.
Mikijanic for automobile leasing and expenses for all periods presented.
3 Includes $13,740 paid to the Company's 401(k) Plan (including
$9,240 contributed pursuant to Mr. Weisberg's bonus arrangement and an
additional contribution of up to 3% of Mr. Weisberg's salary), $8,624 paid for
life insurance premiums, and $5,486 paid for long term disability insurance
4 Upon termination of Employee's employment for any reason other
than cause, death, retirement, or disability, this Option may be exercised, to
the extent it was otherwise exercisable on the date of termination of
employment, within ninety days of such termination of employment. No options
have been exercised.
5 Includes $13,740 paid to the Company's 401(k) Plan (including
$9,240 contributed pursuant to Mr. Weisberg's bonus arrangement and an
additional contribution of up to 3% of Mr. Weisberg's salary), $8,624 paid for
life insurance premiums, and $5,486 paid for long term disability insurance.
6 Represents $3,345 paid to the Company's 401(k) Plan ( a Company
contribution of up to 3% of Mr. Mikijanic's salary).
7 Includes $13,831 paid to the Company's 401(k) Plan (including
$9,117 contributed pursuant to Mr. Weisberg's bonus arrangement and an
additional contribution of up to 3% of Mr. Weisberg's salary)and $8,627 paid
for life insurance premiums.
8 Represents $3,268 paid to the Company's 401(k) Plan ( a Company
contribution of up to 3% of Mr. Mikijanic's salary).
</TABLE>
17
<PAGE>
Option Exercises and Year End Option Values
(a) (b) (c) (d) (e)
Value of
Number of Securities Unexercised
Underlying In-the-Money
Shares Unexercised Options at
Acquired Options at FY-End FY-End
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable *
---- -------- -------- -------------------- ---------------
Vlad Mikijanic -- -- 6,666 $0
Vice President 1,333 $0
of Technical
Affairs
* Computed by reference to the average of the bid and asked prices of
such stock as quoted by the NQB.
Compensation of Directors.
Directors received compensation of $300 per meeting attended, for
services provided as directors of the Company during Fiscal 1996. Directors
are reimbursed for expenses incurred in attending Board meetings.
Employment Contracts.
Effective January 1, 1996, Barry Weisberg resigned as President and a
director of the Company.
The Company and Vlad Mikijanic entered into a five-year Employment
Agreement as of February 1, 1994, which provided for an initial salary of
$100,000 with annual salary increases of 3% and an automobile allowance of
$7,200 per annum.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of September 10, 1996 information
regarding the security ownership of the directors and certain executive
officers of the Company and persons known to the Company to be beneficial
owners of more than five (5%) percent of the Company's common stock:
18
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Excluding Options Including Options
and Debentures and Debentures
----------------- --------------------
Name and Address of Number Percent Number Percent
Beneficial Owner Office of Shares of Class of Shares of Class
- ---------------- ------ ----------- -------- ------------- --------
Directors/Executive Officers:
<S> <C> <C> <C> <C> <C>
Roy English Director 34,000<F1>1 .65% 34,000<F1>1 .65%
9000 State Road
Philadelphia, PA
19136
Donald Epstein
9000 State Road Director 181,616 3.49% 181,616 3.49%
Philadelphia, PA
19136
David Farber<F2>2 Director 59,472<F3>3 1.14% 59,472<F3>3 1.14%
9000 State Road
Philadelphia, PA
19136
William Farber<F2>2 Chairman 1,005,486 19.31% 9,005,486<F4>4 68.19%
9000 State Road of the
Philadelphia, PA Board
19136
Gerald Levinson Director 138,800<F5>5 2.67% 138,800<F5>5 2.67%
9000 State Road
Philadelphia, PA
19136
Vlad Mikijanic
9000 State Road Vice 0 0 6,666<F6>6 .05%
Philadelphia, PA President
19136 of
Technical
Affairs
<FN>
- ---------
1 Includes 3,500 shares owned by the spouse of Mr. English.
2 William Farber is the father of David Farber and the husband of Audrey
Farber, the Secretary and Treasurer of the Company.
3 Includes 6,192 shares held by David Farber's minor child and 4,000
shares held in an individual retirement account.
4 Includes 8,000,000 shares of common stock subject to issuance upon
conversion of the debenture held by Mr. Farber. Mr. Farber may convert all or
any portion of such indebtedness at any time prior to payment in full of the
outstanding indebtness represented by the debenture at a rate of 4000 shares
of common stock for each $1,000 of outstanding indebtness (adjusted to reflect
the Company's 4 for 1 stock splits in April 1992 and March 1993), subject to
anti-dilution provisions. The current outstanding indebtness represented by
the debenture is $2,000,000.
5 Includes 400 shares held by Mr. Levinson's child, who resides in
the same household.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Jeffrey Moshal Vice -- -- -- --
9000 State Road President
Philadelphia, PA - Finance
19136 and
Treasurer
All directors and 1,419,374 27.26% 9,429,372<F7>7 71.38%
executive officers
as a group (7
persons)
<CAPTION>
Other 5% Shareholders:
<S> <C> <C> <C> <C>
Samuel Gratz 978,724<F8>8 18.8 % 978,724<F8>8 19.8 %
1139 Kerper Street
Philadelphia, PA
19111
<FN>
- ---------
6 Represents 4,000 shares of common stock subject to currently
exercisable options to purchase shares at an exercise price of $4.375 per
share, and 2,666 shares of common stock subject to currently exercisable
options to purchase shares at an exercise price of $3.78125 per share.
7 Includes 4,000 shares of common stock subject to currently
exercisable options to purchase shares at an exercise price of $4.375 per
share, and 2,666 shares of common stock subject to currently exercisable
options to purchase shares at an exercise price of $3.78125 and 8,000,000
shares of common stock subject to issuance on the conversion of the debenture
held by William Farber.
8 Includes 496 shares which are held by the wife of Samuel Gratz.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described above, William Farber, a principal shareholder and a
director of the Company, has provided the Company with a financing package
aggregating $5,500,000, which the Company has used to renovate its
manufacturing facility, to acquire new equipment, to remove hazardous waste
materials, to retain new management and to provide working capital. The
financing package was the Company's primary source of funds with which to
operate during Fiscal 1993. The financing package consists of a $3,500,000
revolving line of credit and a $2,000,000 convertible debenture. See
MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and Capital Resources."
During Fiscal 1996 the Company amended the shareholder revolving line of
credit to extend the due date to July 1, 1998 and to defer interest from July
1, 1996 to June 30, 1997 which is payable in twenty-four equal monthly
installments, commencing August 15, 1997 and continuing on the fifteenth day
of each month
20
<PAGE>
thereafter, with the balance due July 1, 1998. During Fiscal 1996 the Company
amended the convertible debenture agreement to defer interest accrued from
July 1, 1996 to June 30, 1997 which is payable in twenty-four equal monthly
installments, commencing August 15, 1997 and continuing on the fifteenth day
of each month thereafter until paid in full. Mr. Farber is currently the
holder of 1,005,486 shares of common stock of the Company, or approximately
19.31% of the Company's issued and outstanding shares. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Mr. Farber also has the right to
acquire an additional 8,000,000 shares of the Company's common stock upon
conversion of the debenture.
Prior to the election of Mr. Farber as a director, the Company's Board
of Directors determined that the value of the debenture at the time of its
issuance did not exceed its face amount. In making such determination, the
directors considered the prices at which the Company's stock had been trading
immediately prior to Mr. Farber's purchase of a significant block of such
stock, the Company's dim prospects without the financing facility and the
valuation placed on the Company by an investment banker engaged by Mr. Farber.
At the time of issuance, the inter-dealer prices quoted for the Company's
stock exceeded the conversion price for the Debenture. If Mr. Farber exercises
the conversion feature of the Debenture, the per share earnings will be
significantly diluted. It is likely that Mr. Farber will exercise the
conversion feature prior to its expiration so long as quoted market prices for
the Company's stock continue to exceed the conversion price.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-B to
be filed as a part of this Form 10-KSB is shown on the Exhibit
Index filed herewith.
(b) The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this report.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LANNETT COMPANY, INC.
Date: September 26, 1996 By: /s/ William Farber
--------------------------------
William Farber,
Chairman of the Board
Date: September 26, 1996 By: /s/ Jeffrey M. Moshal
--------------------------------
Jeffrey M. Moshal
Vice President - Finance and Treasurer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William Farber Chairman of the Board September 26, 1996
- -------------------
William Farber
/s/ Roy English Director September 17, 1996
- -------------------
Roy English
/s/ Donald Epstein Director September 18, 1996
- -------------------
Donald Epstein
/s/ David Farber Director September 18, 1996
- -------------------
David Farber
/s/ Gerald Levinson Director September 18, 1996
- -------------------
Gerald Levinson
22
<PAGE>
Index to Financial Statements
Lannett Company, Inc. and Subsidiary
Page
----
1. Report of Independent Certified Public Accountants 24
2. Consolidated Balance Sheet as of June 30, 1996 25
3. Consolidated Statements of Earnings f/y/e June 30, 1996 and 1995 26
4. Consolidated Statements of Changes in Shareholders' Deficiency
f/y/e June 30, 1996 and 1995 27
5. Consolidated Statements of Cash Flows f/y/e June 30, 1996 and 1995 28
6. Notes to Consolidated Financial Statements f/y/e June 30, 1996
and 1995 29
23
<PAGE>
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
Lannett Company, Inc. and Subsidiary
We have audited the consolidated balance sheets of Lannett Company, Inc.
and Subsidiary as of June 30, 1996 and 1995 and the related consolidated
statements of earnings, changes in shareholders' deficiency and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lannett
Company, Inc. and Subsidiary as of June 30, 1996 and 1995 and the consolidated
results of their operations, the consolidated results of their changes in
shareholders' deficiency and their consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
August 23, 1996
24
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
CURRENT ASSETS
Cash $ 25,258 $ 38,975
Trade accounts receivable
(net of allowance of $9,000 and $3,000
at June 30, 1996 and 1995, respectively) 892,081 609,708
Inventories 874,219 420,907
Prepaid expenses 46,395 43,376
------------ ------------
Total current assets 1,837,953 1,112,966
----------- -------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 2,822,010 2,669,988
Less accumulated depreciation 961,738 784,684
----------- -------------
1,860,272 1,885,304
------------ ------------
OTHER ASSETS 7,958 10,824
------------ ------------
$ 3,706,183 $ 3,009,094
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
<S> <C> <C>
Line of credit $ 548,092 $ 307,000
Current maturities of long-term debt 61,356 52,665
Accounts payable 260,591 227,861
Accrued interest payable - shareholder 325,827 370,432
Accrued expenses 136,357 135,604
----------- ------------
Total current liabilities 1,332,223 1,093,562
----------- ------------
LONG-TERM DEBT, LESS CURRENT MATURITIES 426,285 397,222
----------- ------------
NOTE PAYABLE AND ACCRUED INTEREST -
SHAREHOLDER 2,123,500 2,045,500
----------- ------------
LINE OF CREDIT AND ACCRUED INTEREST -
SHAREHOLDER 3,727,894 3,513,595
----------- ------------
SHAREHOLDERS' DEFICIENCY
Common stock
Authorized 50,000,000 shares,
par value $.001; 5,206,128
shares issued and outstanding 5,206 5,206
Additional paid-in capital 320,575 320,575
Accumulated deficit (4,229,500) (4,366,566)
----------- ------------
Total shareholders' deficiency (3,903,719) (4,040,785)
----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS'DEFICIENCY $ 3,706,183 $ 3,009,094
=========== ============
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended June 30,
1996 1995
---- ----
<S> <C> <C>
NET SALES $ 3,819,595 $ 4,303,468
COST OF SALES 1,867,908 1,903,117
----------- -----------
Gross profit 1,951,687 2,400,351
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,260,351 1,378,312
----------- -----------
Operating profit 691,336 1,022,039
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (599,907) (578,062)
Loss on disposal of fixed assets (481) (16,506)
Sundry 46,118 51,115
Settlement of legal suit -- (127,500)
----------- -----------
(554,270) (670,953)
----------- -----------
Income before income taxes 137,066 351,086
Income taxes -- 35,000
----------- -----------
NET INCOME $ 137,066 $ 316,086
=========== ===========
Earnings per common share
Primary
Net earnings $ 0.03 $ 0.06
=========== ===========
Fully diluted
Net earnings $ 0.02 $ 0.03
=========== ===========
Weighted average number of common
shares outstanding
Primary 5,206,128 5,206,128
=========== ===========
Fully diluted 13,206,128 13,206,128
=========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
Years ended June 30, 1996 and 1995
Common stock
------------------------ Additional Shareholder
Shares paid-in Accumulated note Shareholders'
issued Amount capital deficit receivable deficiency
------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 5,206,128 $ 5,206 $320,575 $(4,682,652) $(67,500) $(4,424,371)
Payment of shareholder
note receivable - - - - 67,500 67,500
Net income for the year - - - 316,086 - 316,086
---------- -------- -------- ----------- -------- -----------
Balance at June 30, 1995 5,206,128 5,206 320,575 (4,366,566) - (4,040,785)
Net income for the year - - - 137,066 - 137,066
---------- -------- -------- ----------- -------- -----------
Balance at June 30, 1996 5,206,128 5,206 $320,575 $(4,229,500) $ - $(3,903,719)
========== ======== ======== =========== ======== ===========
<FN>
The accompanying notes are an integral part of this
statement.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 137,066 $316,086
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 204,265 192,280
Loss on sale of property, plant and equipment 481 16,506
Increase in trade accounts receivable (282,373) (306,211)
Increase in inventories (453,312) (140,419)
Increase in prepaid expenses and other assets (153) (3,048)
Increase in accounts payable 32,730 94,147
Increase (decrease) in accrued expenses 753 (16,287)
Increase (decrease) in accrued interest 174,663 (169,121)
------------ --------
Net cash used in operating activities (185,880) (16,067)
------------ --------
Cash flows from investing activities
Purchases of property, plant and equipment, net (220,714) (257,031)
Proceeds from sale of property, plant and equipment 41,000 31,281
------------ --------
Net cash used in investing activities (179,714) (225,750)
------------ --------
Cash flows from financing activities
Borrowings under line of credit - shareholder 73,031 -
Borrowings under line of credit 241,092 135,000
Repayments of debt (56,127) (55,334)
Proceeds from debt 93,881 -
Payment of shareholder note receivable - 67,500
------------ --------
Net cash provided by financing activities 351,877 147,166
------------ --------
NET DECREASE IN CASH (13,717) (94,651)
Cash at beginning of year 38,975 133,626
============ ========
Cash at end of year $ 25,258 $ 38,975
============ ========
Supplemental disclosure of cash flow information
Interest paid $ 417,617 $741,081
============ ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
28
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lannett Company, Inc. (the Company), a Delaware corporation, manufactures
and distributes, throughout the nation, pharmaceutical products sold under
generic names ("competitive pharmaceutical products") and, historically,
has manufactured and distributed pharmaceutical products sold under its
trade or brand names ("pharmaceutical specialties"). In addition, the
Company packages pharmaceutical products manufactured by other companies.
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 DEA.
The accounting policies of the Company and its inactive wholly-owned
subsidiary, Astrochem Corporation, conform to generally accepted accounting
principles. The preparation of financial statements in conformity with
generally accepted accounting principles 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.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its inactive wholly-owned subsidiary, Astrochem Corporation. All
intercompany accounts and transactions have been eliminated.
2. Financial Instruments
On July 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial
Instruments," which requires all entities to disclose the estimated
fair value of their assets and liabilities considered to be financial
instruments. Financial instruments for the Company consist primarily
of debt arrangements.
3. Revenue Recognition
The Company recognizes revenue when its products are shipped.
4. Inventories
Inventories are valued at the lower of cost (determined under the first-in,
first-out method) or market.
(Continued)
29
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Depreciation
Depreciation and amortization are provided for by the straight-line and
accelerated methods over estimated useful lives of the assets as follows:
Years
Buildings and improvements 10 - 39
Machinery and equipment 7 - 10
Furniture and fixtures 5 - 7
Costs incurred in connection with obtaining financing are being amortized
by the straight-line method over the term of the loan arrangements.
Depreciation and amortization expense for the years ended June 30, 1996 and
1995 was approximately $204,000 and $192,000, respectively.
6. Research and Development
Research and development expenses are charged to operations as incurred.
Research and development costs for the years ended June 30, 1996 and 1995
were approximately $253,000 and $272,000, respectively.
7. Advertising Costs
The Company expenses advertising cost to operations as incurred.
8. Income Taxes
The Company uses the liability method specified by SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and liabilities. The principal
types of differences between assets and liabilities for financial statement
and tax return purposes are net operating loss carryforwards and
accumulated depreciation. A deferred tax asset is recorded for net
operating losses being carried forward for tax purposes. At June 30, 1996
and 1995, the net deferred tax asset has been reduced to zero by a
valuation allowance.
(Continued)
30
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company has federal and state net operating loss carryforwards of
approximately $5,700,000 and $1,600,000, respectively, expiring through
June 2008, that are available to offset future taxable income for financial
reporting purposes. The annual utilization of tax loss carryforward is
subject to limitations as defined in the Internal Revenue Code and state
regulations.
9. Earnings Per Common Share
Primary earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding for each period. Fully
diluted earnings per share assumes the maximum dilutive effect from shares
issued pursuant to currently exercisable options, if applicable, and the
conversion equivalents of the 9% convertible debenture due 1998 (note E).
NOTE B - INVENTORIES
Inventories consist of the following:
1996 1995
---------- ---------
Raw materials $ 309,051 $ 115,875
Work-in-process 253,887 236,345
Finished goods 260,816 24,945
Packaging supplies 50,465 43,742
---------- ----------
$ 874,219 $ 420,907
========== ==========
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (at cost):
1996 1995
--------- --------
Land $ 33,414 $ 33,414
Building and improvements 1,406,627 1,340,414
Machinery and equipment 1,317,458 1,231,649
Furniture and fixtures 64,511 64,511
---------- ----------
$2,822,010 $2,669,988
========== ==========
31
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE D - CREDIT ARRANGEMENTS
The Company has a $3,500,000 revolving line of credit from a shareholder
who is also the Chairman of the Board. This line of credit bears interest
at the prime rate published by Michigan National Bank, plus 1% per annum.
The effective rate at June 30, 1996 and 1995 was 9.25% and 10.00%,
respectively. The principal is due July 1, 1998. Accrued interest through
June 30, 1994 is payable in twenty-four equal monthly installments,
commencing August 15, 1994 and continuing on the fifteenth day of each
month thereafter until paid in full. Accrued interest from April 1, 1995 to
June 30, 1996 is payable in twenty-four equal monthly installments,
commencing August 15, 1996 and continuing on the fifteenth day of each
month thereafter, with the balance due July 1, 1998. Accrued interest from
July 1, 1996 to June 30, 1997 is payable in twenty-four equal monthly
installments, commencing August 15, 1997 and continuing on the fifteenth
day of each month thereafter, with the balance due July 1, 1998. Interest
expense during the years ended June 30, 1996 and 1995 was approximately
$334,000 and $325,000, respectively. At June 30, 1996, accrued interest was
approximately $432,000, of which $228,000 is included in the long-term
outstanding balance. At June 30, 1996, $204,000 was classified as currently
due. At June 30, 1996, there was no additional Borrowing capacity available
under the line of credit. The line of credit is collateralized by
substantially all Company assets, is cross-collateralized with all loans
from the shareholder (note E) and is subordinated to the bank lines of
credit and mortgage term loan payable. The revolving line of credit
requires the Company, among other things, to meet certain financial
reporting objectives.
The Company has a $500,000 bank line of credit, limited to 80% of qualified
accounts receivable, which contains certain minimum financial covenants,
including restrictions on payment of dividends. This line of credit bears
interest at prime plus 1.25%. The effective rate at June 30, 1996 and 1995
was 9.50% and 10.25%, respectively. At June 30, 1996, there was no
additional borrowing capacity available to the Company. The line of
credit is collateralized by substantially all Company assets and a
personal guarantee of the above-mentioned shareholder. It is also
cross-collateralized with the bank mortgage term loan payable (note F).
On July 31, 1995, the Company secured a $300,000 bank revolving line of
credit for equipment financing, expiring October 31, 1995. Advances are
limited to 80% of equipment costs. On April 1, 1996, $93,881 of borrowings
under this line was converted into a secured term loan payable in
forty-eight even monthly installments. This line of credit bears interest
at prime plus 1.5%. The effective rate at June 30, 1996 was 9.75%. At June
30, 1996, $158,000 was available to the Company under the revolving line of
credit for equipment financing, expiring October 31, 1996. The line of
credit is collateralized by all of the Company's present and future
equipment. It is also cross-collateralized with the bank mortgage term loan
payable (note F) and line of credit.
32
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE E - NOTE PAYABLE - SHAREHOLDER
The convertible debenture, due December 23, 1998, bears interest at 9% per
annum and provides that no principal payments are to be made prior to
maturity without the written consent of the shareholders. Accrued interest
through June 30, 1994 is payable in twenty-four equal monthly installments,
commencing August 15, 1994 and continuing on the fifteenth day of each
month thereafter until paid in full. Accrued interest from April 1, 1995 to
June 30, 1996 is payable in twenty-four equal monthly installments,
commencing August 15, 1996 and continuing on the fifteenth day of each
month thereafter until paid in full. Accrued interest from July 1, 1996 to
June 30, 1997 is payable in twenty-four equal monthly installments,
commencing August 15, 1997 and continuing on the fifteenth day of each
month thereafter, with the balance due December 23, 1998. The debenture is
convertible into shares of common stock of the Company at a rate of 4,000
shares per $1,000 of principal amount of debentures, with anti-dilution
provisions. The shareholder is permitted to convert the debenture to shares
of common stock at any time. Accordingly, 8,000,000 shares are reserved for
this conversion. The note is cross-collateralized with all loans from this
shareholder (note D) and is subordinated to the bank lines of credit and
mortgage term loan payable. Interest expense during the years ended June
30, 1996 and 1995 was approximately $182,500. At June 30, 1996, accrued
interest was approximately $245,000, of which $123,000 is included in the
long-term outstanding balance. At June 30, 1996, $122,000 was classified
as currently due.
NOTE F - LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1996 1995
-------- ----------
<S> <C> <C>
Mortgage term loan payable in the amount of $500,000 payable in
monthly principal installments of approximately $2,800 plus
interest at 9.25% per annum, commencing in June 1993; final
balloon payment of $302,778 is due in May 2000; the loan is
collateralized by substantially all Company assets and a personal
guarantee of a shareholder; it is also cross-collateralized with
the bank line of credit (note D); the loan is subject to a minimum
capital funds covenant $397,222 $430,555
</TABLE>
(Continued)
33
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE F - LONG-TERM DEBT - Continued
1996 1995
-------- ----------
<S> <C> <C>
Term loan payable in the amount of $93,881 payable in monthly
principal installments of $2,335 including interest at 8.85%
per annum, commencing in April 1996; the loan is collateralized
by all of the Company's present and future equipment; it is
also cross-collateralized with the bank's mortgage term
loan payable and all lines of credit $ 90,419 $ -
Unsecured note payable to a bank which represents borrowings
under a note originally due September 1990; the Company
made monthly principal payments of $2,000 plus interest
at the bank's prime rate plus .5% per annum; the effective
rate at June 30, 1995 was 9.5% - 19,332
-------- ----------
487,641 449,887
Less current maturities 61,356 52,665
-------- ----------
$426,285 $ 397,222
======== ==========
<CAPTION>
Annual principal payments of long-term debt (including amounts payable to
shareholder) as of June 30, 1996 are as follows:
<S> <C>
Year ending June 30,
--------------------
1997 $ 61,356
1998 61,356
1999 5,561,357
2000 303,572
2001 and thereafter -
----------
$5,987,641
==========
</TABLE>
The mortgage term loan requires the Company, among other things, to meet
certain objectives with respect to financial ratios and financial
reporting.
NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS
For long-term debt, less current maturities; notes payable; and outstanding
lines of credit, the recorded book values of $426,285, $2,123,500 and
$3,727,894, respectively, approximate fair value at June 30, 1996. The
carrying amount of accrued interest payable approximates fair value.
34
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE H - INCOME TAXES
The provision for income taxes is as follows:
1996 1995
---- ----
Current
<S> <C> <C>
U.S. Federal, net of tax benefit of net operating loss
carryforwards of $41,000 and $221,200 in 1996 and 1995, $ - $ -
respectively State, net of tax benefit of net operating loss
carryforwards of $12,000 and $-0- in 1996 and 1995, - 35,000
respectively ---------- ---------
- 35,000
----------- -----------
Deferred
U.S. Federal - -
----------- ----------
State - -
----------- ----------
- -
---------- ----------
$ - $ 35,000
=========== ==========
<CAPTION>
A reconciliation of the differences between the effective rates
and statutory rates is as follows:
1996 1995
---- ----
<S> <C> <C>
Federal income tax at statutory rate $ 46,600 $ 119,000
State income tax, net 9,000 -
Change in the beginning of the year balance of the valuation
allowance for deferred tax assets allocated to income taxes (60,000) (94,000)
Other 4,400 10,000
----------- ----------
Income taxes $ - $ 35,000
=========== ==========
<CAPTION>
At June 30, 1996 and 1995, deferred income taxes, net, consist of
the following:
1996 1995
---- ----
<S> <C> <C>
Tax depreciation over book depreciation $ (137,058) $ (123,192)
Vacation payable 7,509 4,696
Net operating loss carryforward 2,083,750 2,134,140
Other 2,520 1,260
----------- ----------
1,956,721 2,016,904
Valuation allowance (1,956,721) (2,016,904)
------------ -----------
$ - $ -
=========== ==========
</TABLE>
35
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE I - STOCK OPTIONS
In fiscal 1993, the Company adopted the 1993 Long-Term Incentive Plan (the
Plan). Pursuant to the Plan, stock options may be granted to officers and
key employees of the Company which qualify as incentive stock options as
well as stock options which are non-qualified. The exercise price of
options is at least the fair market value of the common stock on the date
of grant. The options vest over a three-year period and expire no later
than ten years from the date of grant. There are 2,000,000 shares reserved
under the Plan. Options for 1,943,800 shares remain unissued as of June 30,
1996.
The Financial Accounting Standards Board issued a new standard, SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a
fair value-based method for valuing stock-based compensation that
entities may use, 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, the standard permits entities to continue accounting
for employee stock options and similar equity instruments under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earning per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. Management anticipates that the Company
will continue to follow APB Opinion No. 25. The Company will be required to
adopt the new standard for its year ending June 30, 1997.
The following is a summary of stock options:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Outstanding at beginning of year
Shares 56,200 56,200
Price $3.78 - 4.38 $3.78 - 4.38
Granted
Shares - -
Price $ - $ -
Exercised
Shares - -
Price $ - $ -
</TABLE>
(Continued)
36
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE I - STOCK OPTIONS - Continued
1996 1995
------------- ------------
<S> <C> <C>
Canceled
Shares - -
Price $ - $ -
Outstanding at end of year
Shares 56,200 56,200
Price $3.78 - 4.38 $3.78 - 4.38
</TABLE>
NOTE J - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution pension plan covering substantially
all employees. The Company is required to contribute amounts pursuant to
employee salary reduction agreements and a matching contribution equal to
each employee's contribution not to exceed 3% of the employee's
compensation for the plan year. Contributions to the plan during the years
ended June 30, 1996 and 1995 were approximately $18,500 and $16,000,
respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Hazardous Waste Removal
The Company monitors its compliance with all environmental laws. Any
compliance costs which may be incurred are contingent upon the
results of future site monitoring and will be charged against operations
when incurred. During the years ended June 30, 1996 and 1995, the Company
incurred monitoring costs of approximately $10,000.
(Continued)
37
<PAGE>
Lannett Company, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1996 and 1995
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
2. Civil Class Actions
The Company is currently engaged in several civil actions as a co-defendant
with many other manufacturers of Diethylstilbestrol (DES), a synthetic
hormone. Prior litigation established that the Company's pro rata share of
any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which
the Company maintained coverage during the time period that damages were
alleged to have occurred. This insurance company has denied coverage for
actions filed after January 1, 1992. With respect to these actions, the
Company paid nominal damages or stipulated to its pro rata share of any
liability. The Company has either settled or is currently defending over
500 such claims. Recently, the Company persuaded its insurance carriers to
resume defense and indemnification of most DES claims, has recovered from
its insurers some of the amounts the Company previously expended in these
cases, and is negotiating recovery of the balance of such amounts.
Management is uncertain at this time as to the outcome of this action;
however, management believes the ultimate impact will not be significant to
the consolidated financial statements.
3. Employment Contracts
Claims have been filed by certain employees with the Pennsylvania Human
Relations Commission. These claims are being reviewed; management
believes that the outcome will not have a material adverse impact on the
financial position of the Company.
The Company has an employment contract with one executive officer.
Aggregate approximate future commitments under this contract are $115,000
in 1997, $118,000 in 1998 and $71,000 in 1999.
NOTE L - MAJOR CUSTOMER AND VENDOR INFORMATION
Two customers accounted for approximately 21% and 13%, respectively, of net
sales in fiscal 1996. Three customers accounted for approximately 16%, 13%
and 11%, respectively, of the Company's sales in fiscal 1995. Two vendors
accounted for approximately 34% and 18%, respectively, of the Company's
purchases in fiscal 1996. One vendor accounted for approximately 45% of the
Company's purchases in fiscal 1995.
38
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit
Number Description Method of Filing Page
<S> <C> <C> <C>
3(a) Articles of Incorporated by reference to the -
Incorporation Proxy Statement filed with respect
to the Annual Meeting of
Shareholders held on December 6,
1991 (the "1991 Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the -
1991 Proxy Statement.
4(a) Specimen Certificate Incorporated by reference to -
for Common Stock Exhibit 4(a) to Form 8 dated
April 23, 1993 (Amendment No. 3
to Form 10-K f/y/e June 30, 1992)
("Form 8")
10(a) Loan Agreement dated Incorporated by reference to the -
August 30, 1991 Annual Report on Form 10-K f/y/e
between the Company June 30, 1991
and William Farber
10(b) Amendment #1 to Loan Incorporated by reference to -
Agreement dated March Exhibit 10(b) to the Annual
15, 1993 Report on Form 10-KSB f/y/e June
30, 1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Incorporated by reference to -
Agreement dated August Exhibit 10(c) to the Annual
1, 1994 Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Incorporated by reference to -
Agreement dated May Exhibit 10(d) to the Annual
15, 1995 Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Filed herewith 42
Agreement dated
December 31, 1995
10(f) Amendment #5 to Loan Filed herewith 44
Agreement dated June
30, 1996
39
<PAGE>
10(g) Loan Agreement dated Incorporated by reference to -
May 4, 1993 between Exhibit 10(c) to the 1993 Form
the Company and 10-K
Meridian Bank
10(h) Amendment to Loan Incorporated by reference to -
Documents between the Exhibit 10(e) to the Annual
Company and Meridian Report on Form 10-KSB f/y/e June
Bank dated as of 30, 1994 ("1994 Form 10-K")
December 8, 1993
10(i) Letter Agreement Incorporated by reference to -
between the Company Exhibit 10(f) to the Annual
and Meridian Bank Report on Form 10-KSB f/y/e June
dated December 21, 1993 30, 1994 ("1994 Form 10-K")
10(j) Third Amendment to Incorporated by reference to -
Loan Agreement dated Exhibit 10(g) to the Annual
as of June 9, 1994 Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
10(k) Fourth Amendment to Incorporated by reference to -
Loan Documents between Exhibit 10(i) to the Annual
the Company and Report on Form 10-KSB f/y/e June
Meridian Bank as of 30, 1995 ("1995 Form 10-K")
October 27, 1994
10(l) Letter Agreement Incorporated by reference to -
between the Company Exhibit 10(j) to the Annual
and Meridian Bank Report on Form 10-KSB f/y/e June
dated October 27, 1994 30, 1995 ("1995 Form 10-K")
10(m) Letter Agreement Incorporated by reference to -
between the Company Exhibit 10(k) to the Annual
and Meridian Bank Report on Form 10-KSB f/y/e June
dated July 10, 1995 30, 1995 ("1995 Form 10-K")
10(n) Amendment to Security Incorporated by reference to -
Agreement between the Exhibit 10(l) to the Annual
Company and Meridian Report on Form 10-KSB f/y/e June
Bank dated as of July 30, 1995 ("1995 Form 10-K")
31, 1995
10(o) Line of Credit Note Incorporated by reference to -
dated July 31, 1995 Exhibit 10(m) to the Annual
Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
40
<PAGE>
10(p) Fifth Amendment to Incorporated by reference to -
Loan Agreement dated Exhibit 10(n) to the Annual
July 31, 1995 Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
10(q) Amendment to Loan Filed herewith 46
Agreement between the
Company and Meridian
Bank.
10(r) Employment agreement Incorporated by reference to
between the Company Exhibit 10(i) to the Annual
and Vlad Mikijanic Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
11 Computation of Per Filed herewith 53
Share Earnings
22 Subsidiaries of the Incorporated by reference to the -
Company Annual Report on Form 10-K f/y/e
June 30, 1990
23 Consent of Grant Filed herewith 55
Thornton
27 Financial Data Filed herewith
Schedule
41
</TABLE>
Exhibit 10 (e)
Amendment #4 to Loan Agreement
dated December 31, 1995
42
<PAGE>
William Farber
32640 Whatley
Franklin, Michigan 48025
December 31, 1995
Mr. Jeffrey Moshal
Lannett Company, Inc.
9000 State Road
Philadelphia, Pennsylvania 19136
Re: Loan Agreement between William Farber ("Lender") and Lannett
Company, Inc., a Delaware corporation ("Borrower") dated August 30, 1991, as
amended by Amendment #1 to Loan Agreement dated as of March 15, 1993, and by
letter agreements dated August 1, 1994, May 15, 1995 (the "Loan Agreement").
Dear Jeffrey:
This letter confirms that the Maturity Date (as defined in the Loan
Agreement) for the Revolving Credit Loan is extended to July 1, 1997.
Very Truly Yours,
/s/ William Farber
-------------------
William Farber
AGREED TO AND ACCEPTED:
LANNETT COMPANY, INC.
By:/s/ Jefffrey M. Moshal
---------------------
Jeffrey Moshal, Director of Financial Operations
43
Exhibit 10 (f)
Amendment #5 to Loan Agreement
dated June 30, 1996
44
<PAGE>
William Farber
32640 Whatley
Franklin, Michigan 48025
June 30, 1996
Mr. Jeffrey Moshal
Lannett Company, Inc.
9000 State Road
Philadelphia, Pennsylvania 19136
Re: Loan Agreement between William Farber ("Lender") and Lannett
Company, Inc., a Delaware corporation ("Borrower") dated August 30, 1991, as
amended by Amendment #1 to Loan Agreement dated as of March 15, 1993, and by
letter agreements dated August 1, 1994, May 15, 1995, December 31, 1995 and
June 30, 1996.
Dear Jeffrey:
This letter confirms that the Maturity Date (as defined in the Loan
Agreement) for the Revolving Credit Loan is extended to July 1, 1998. This
letter also confirms that the Lender will not declare an Event of Default
under the Loan Agreement or any promissory note or other document executed and
delivered in connection with the Loan Agreement if Borrower fails to pay
interest accrued from July 1, 1996 to June 30, 1997 on the Revolving Credit
Loan (as defined in the Loan Agreement) or the Term Loan (as defined in the
Loan Agreement) in monthly installments as currently provided in the Loan
Agreement; provided that (i) Borrower pays such accrued interest in
twenty-four (24) equal monthly installments, commencing August 15, 1997 and
continuing on the fifteenth day of each month thereafter until paid in full,
and (ii) any such accrued interest shall in any event be paid in full on the
maturity date of the respective Loans.
Very Truly Yours,
/s/ William Farber
-------------------
William Farber
AGREED TO AND ACCEPTED:
LANNETT COMPANY, INC.
By:/s/ Jefffrey M. Moshal
---------------------
Jeffrey M Moshal, Vice President - Finance and Treasurer
45
Exhibit 10 (q)
Amendment to Loan Agreement
between the Company
and Meridian Bank
dated March 5, 1996
46
<PAGE>
March 5, 1996
[LETTERHEAD OF MERIDIAN BANK]
Mr. Jeffrey M. Moshal
Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
Dear Mr. Moshal:
We are pleased to advise you that Meridian Bank (hereafter
referred to as "Bank") has approved a credit accommodation to Lannett Company,
Inc., (hereafter referred to as "Borrower") as follows:
Accommodation A:
Amount: Five Hundred Thousand Dollars ($500,000).
Interest Rate: The credit accommodation will bear interest at an annual rate
equal to the Bank's National Commercial Rate plus one and one quarter percent
(1.25%). The Bank's National Commercial Rate (i) is a floating annual rate of
interest that is designated from time to time by the Bank as the "National
Commercial Rate" and is used by the Bank as a reference base with respect to
different interest rates charged to borrowers; (ii) the rate of interest
payable shall change simultaneously and automatically upon the Bank's
designation of any change in such referenced rate; and (iii) the Bank's
determination and designation from time to time of the referenced rate shall
not in any way preclude the Bank from making loans to other borrowers at a
rate which is higher of lower than or different from the referenced rate.
Term: The line of credit will be available until October 31, 1996 at which
time continuation of the line may be considered by the Bank on the basis of
the Borrower's financial statements for the year ended June 30, 1996 and any
other information available to Bank or which Bank may reasonably request.
47
<PAGE>
Mr. Jeffrey M. Moshal -2- March 5, 1996
Use of Proceeds: The advances under the credit accommodation shall be used to
finance working capital
Repayment Method: Interest on the unpaid principal will be due and payable
monthly. The full sum of the unpaid principal and interest will be due and
payable on demand or the maturity/review date if indicated on the promissory
note to be executed to evidence this credit.
Interest Billing Year Base: Interest will be calculated on the basis of the
actual number of days in the current calendar year divided by 360.
Loan Fees: .50% commitment fee ($2,500).
Expenses: Any and all charges, expenses and costs incurred by the Bank
relating to the preparation and completion of loan documents and/or the
maintenance of the credit accommodation, including but not limited to legal
fees and expenses, are the responsibility of the borrower.
Collateral: The credit accommodation shall be collateralized by the following:
The first priority security interest perfected under the Uniform Commercial
Code in all of the Borrower's corporate assets, including present, and future
accounts, chattel paper, contracts, documents, equipment (including, but not
limited to fixtures, office equipment and furniture, and motor vehicles),
accessions, all general intangibles, instruments, inventory, and any products
and proceeds of the foregoing.
A first priority security interest perfected under the Uniform Commercial Code
and in all of the Borrower's present and future equipment (including, but not
limited to, fixtures, office equipment and furniture and motor vehicles) and
accessions, all general intangibles, and all documents relating to any of the
foregoing, and all products and proceeds thereof.
Covenants: Advance formula: 80% of domestic A/R less than 60 days past due and
50% on finished goods inventory limited to $150,000 maximum.
Field Audits: The completion by the Bank of annual field examinations to
satisfy the Bank as to the adequacy of collateral and the Borrower's financial
condition. The fee for each field audit will be $500.00.
Accommodation B:
Amount: Two Hundred Six Thousand One Hundred Twenty Dollars ($206,120).
Interest Rate: The credit accommodation will bear interest at an annual rate
equal to the Bank's National Commercial Rate plus one and one half of one
percent (1.50%). The Bank's National Commercial Rate (i) is a floating annual
rate of interest that is designated from time to time by the Bank as the
"National Commercial Rate" and is used by the Bank as a reference base with
respect to different interest rates charged to borrowers; (ii) the
48
<PAGE>
Mr. Jeffrey M. Moshal -3- March 5, 1996
rate of interest payable shall change simultaneously and automatically upon
the Bank's designation of any change such referenced rate; and upon the Bank's
determination and designation from time to time of the referenced rate shall
not in any way preclude the Bank from making loans to other borrowers at a
rate which is higher or lower than or different from the referenced rate.
Terms: The term commitment will be available until October 31, 1996 at which
time continuation of the line may be considered by the Bank on the basis of
the Borrower's financial statements for the year ended June 30, 1996 and other
information available to Bank or which Bank may reasonable request.
Use of Proceeds: The advances under the credit accommodation shall be used to
finance equipment. Advances are based on 80% of invoice.
Repayment Method: Interest on the unpaid principal will be due and payable
monthly. The full sum of the unpaid principal and interest will be due and
payable on demand or the maturity/review date if indicated on the promissory
not to be executed to evidence this credit accommodation.
Loan Fees: $250.00 Documentation fee for each advance under this revolving
term commitment.
Collateral: A first priority security interest perfected under the Uniform
Commercial Code and in all of the Borrower's equipment to be purchased
(including, but not limited to, fixtures, office equipment and furniture and
motor vehicles) and accessions, all general intangibles, and all documentation
relating to any of the foregoing, and all products and proceeds thereof.
Covenants: Each advance will be greater than or equal to $5,000 and in
increments of $1,000.
Amount financed will be 80% of costs as evidenced by invoices.
Accommodation C:
Amount: Ninety Three Thousand Eight Hundred Eighty One Dollars ($93,881).
Interest Rate: The credit accommodation will bear interest at an annual fixed
interest rate of eight point eight-five percent (8.85%)
Term: Four years (48 months).
Use of Proceeds: Proceeds of this credit accommodation will be used to term
out the existing balance currently on the revolving term commitment.
49
<PAGE>
Mr. Jeffrey M. Moshal -4- March 5, 1996
Repayment Method: Principal and interest will be due and payable in 48
consecutive monthly installments of $2,335.29 each. One final payment of any
remaining unpaid principal and interest will be due and payable within four
years (48 months) of the closing date of this credit accommodation.
Loan Fees: None
Collateral: A first priority security interest perfected under the Uniform
Commercial Code and in all of the Borrower's present and future equipment
(including, but not limited to, fixtures, office equipment and furniture and
motor vehicles) and accessions, all general intangibles, and all documents
relating to any of the foregoing, and all products and proceeds thereof.
THE FOLLOWING WILL APPLY TO ACCOMMODATIONS A, B, & C
Insurance Requirements: The Borrower will provide and maintain for the term of
the credit accommodation physical damage insurance satisfactory to the Bank
covering corporate assets located at 9000 State Road, Philadelphia, PA 19136.
Financial Statement Requirements: On a monthly basis the Borrower shall
Furnish the Bank with borrowing base certifications, A/R and A/P agings.
On a quarterly basis, the Borrower shall furnish the Bank with quarterly
company-prepared financial statements.
On an annual basis, the Borrower shall furnish the Bank with annual accountant
prepared audited financial statements.
Copies of all reports and filings with SEC (10-QSB, 10K).
Covenants: Financial Covenants to be tested quarterly as per GAAP.
Tangible Net Worth plus the less of (i) subordinated debt or (ii) $5,550,000
must be at least: $1,000,000 plus the greater of (i) 50% of retained earnings
after 6/30/94, if positive or (ii) $0.00 if negative.
No additional funded debt except subordinated debt that is approved by the
Bank.
No investments, mergers, acquisitions, or divestitures.
No dividends or stock redemption/repurchase (excluding stock split and stock
dividends).
No asset sales (except Borrower may sell up to $500,000 of obsolete equipment
per year).
Capital expenditures are limited to $500,000 per year.
William Farber must remain active in the management of the company.
50
<PAGE>
Mr. Jeffrey M. Moshal -5- March 5, 1996
All loans will be cross-collateralized and cross-defaulted.
Subordinated Debt: Subordination of officer debt ($5,559,000 at 6/30/95).
Due Authorization: The Borrower will obtain all necessary authorization of its
board of directors and shareholders to enter into the agreement evidenced by
this letter prior to the making of the loan.
Warranties: The Borrower will submit to the Bank the usual warranties and
representations appropriate when financing transactions similar to this credit
accommodation.
Adjustment of Terms and Rates, Cancellation, Continuation: This credit
accommodation may be reviewed by the Bank at any time hereafter, and from time
to time, to adjust the terms and conditions, or to discontinue the credit
accommodation should the Bank in the reasonable exercise of its sole
discretion deem it necessary to do so.
Bank: Meridian Bank
7500 Bustleton Avenue
Philadelphia, PA 19152
Borrower: Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
Survival: The terms and conditions of this commitment will survive the
execution and delivery of the loan documents, to the extent not inconsistent
therewith.
Assignability: This commitment letter is not assignable by the operation of
law, or otherwise, without the Bank's prior written consent.
Conditions of funding: Borrower will be required to execute and cause to be
delivered those such documents, instruments and agreements as Bank might
reasonably request in connection with the closing of this loan. The Bank has
not attempted in this letter to define all of the legal terms of the
transaction. The form and substance of all instruments and documents shall be
subject to the Bank's approval, and may require the execution of documents and
instruments containing representations, warranties, conditions and covenants.
Credit Accommodation Expiration/Settlement Date: Availability of this credit
accommodation will expire on April 30, 1996 unless accepted in its entirety in
writing as evidenced by executing the acknowledgment below.
Deposit Relationship: The Bank will be maintained as the Borrower's primary
bank of account during the term of the loan, and this relationship will begin
prior to the closing of this credit accommodation.
51
<PAGE>
Mr. Jeffrey M. Moshal -6- March 5, 1996
Please acknowledge your concurrence with the terms and
conditions set forth in this letter by signing, dating and returning the
enclosed copy of this letter.
This financing proposal is available through April 30, 1996.
Sincerely,
/s/ William J Gill
Assistant Vice President
WJG/bf
ACKNOWLEDGEMENT:
Acknowledged and accepted this 9th day of April, 1996
Borrower: Lannett Company, Inc.
By: /s/Jeffrey M. Moshal
___________________
Jeffrey M. Moshal
Director of Financial Operations
By: /s/Vlad Mikijanic
___________________
Vlad Mikijanic
Vic President Technical Affairs
52
Exhibit 11
Computation of Per Share Earnings
53
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year ended June 30
1996 1995
---------- ----------
Primary earnings per share:
<S> <C> <C>
Shares used in computing earnings per share:
Weighted average number of shares outstanding 5,206,128 5,206,128
Earnings:
Net income 137,066 316,086
---------- ----------
Earnings per common share $0.03 $0.06
---------- ----------
Fully diluted earnings per share:
Shares used in computing earnings per share:
Weighted average number of shares outstanding 13,206,128 13,206,128
Earnings:
Net income 137,066 316,086
Interest expense - convertible debenture 182,500 182,500
Tax rate- 34% (62,050) (62,050)
---------- ----------
257,516 436,536
Fully diluted earnings per share $0.02 $0.03
---------- ----------
</TABLE>
54
Exhibit 23
Consent of Grant Thornton
55
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated August 23, 1996 accompanying the
consolidated financial statements incorporated by reference in the Annual
report of Lannett Company, Inc. and Subsidiary on Form 10-KSB for the year
ended June 30, 1996. We hereby consent to the incorporation by reference
of said report in the Registration Statement of Lannett Company, Inc. and
Subsidiary on Form S-8 (File No. 33-79258, effective May 23, 1994).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 25, 1996
56
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> $ 25,258
<SECURITIES> 0
<RECEIVABLES> 892,081
<ALLOWANCES> (9,000)
<INVENTORY> 874,219
<CURRENT-ASSETS> 1,837,953
<PP&E> 2,822,010
<DEPRECIATION> 961,738
<TOTAL-ASSETS> 3,706,183
<CURRENT-LIABILITIES> 1,332,223
<BONDS> 6,277,679
<COMMON> 5,206
0
0
<OTHER-SE> (3,908,925)
<TOTAL-LIABILITY-AND-EQUITY> 3,706,183
<SALES> 3,819,595
<TOTAL-REVENUES> 3,819,595
<CGS> 1,867,908
<TOTAL-COSTS> 3,128,259
<OTHER-EXPENSES> (45,637)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599,907
<INCOME-PRETAX> 137,066
<INCOME-TAX> 0
<INCOME-CONTINUING> 137,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,066
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
