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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, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File No. 0-9036
LANNETT COMPANY, INC.
(Name of small business issuer in its charter)
STATE OF DELAWARE 23-0787-699
State of Incorporation I.R.S. Employer I.D. No.
9000 STATE ROAD
PHILADELPHIA, PENNSYLVANIA 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered under Section 12(b) of the
Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer had net sales of $11,553,457 for the fiscal year ended June
30, 2000.
As of September 1, 2000, the aggregate market value of the voting stock
held by non-affiliates was approximately $8,319,860 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 1, 2000, there were 13,206,128 shares of the issuer's
common stock, $.001 par value, outstanding.
Page 1 of 41 pages
Exhibit Index on Page 35
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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. In addition, the Company contract manufactures and private labels
pharmaceutical products for other companies.
The use of the Company's manufacturing capacity remained consistent as
compared to the prior year. Certain manufacturing departments are operating at
full utilization (utilizing one shift) and certain departments are operating on
a limited second shift. The hiring of additional personnel will allow for
increased efficiency and utilization of equipment and should be sufficient to
accommodate increased production needs during Fiscal 2001. On December 19, 1997,
the Company entered into a three-year and three-month lease for a 23,500 square
foot facility. This new facility houses research and development, and
warehousing operations. See Item 2, "Description of Property."
PRINCIPAL PRODUCTS.
During Fiscal 2000, the Company manufactured and distributed seven products: (i)
Butalbital Compound Capsules ("BCC"), a generic version of Novartis
Pharmaceutical Corporation's Fiorinal(R); an analgesic primarily used for the
treatment of migraine headaches, (ii) Primidone, a generic version of American
Home Product's Mysoline(R), an anti-convulsant, (iii) Dicyclomine Hydrochloride
USP, 10-mg capsules, and (iv) 20-mg tablets, generic versions of Hoechst Marion
Roussel's Bentyl(R), an antispasmodic and anticholinergic agent, (v)
Acetazolamide Tablets USP, a generic version of Wyeth-Ayerst's Diamox(R), an
enzyme inhibitor used to treat congestive heart failure, and other conditions,
(vi) Pseudoephedrine Hydrochloride 60-mg tablets and (vii) Guafenesin/Ephedrine
25/200-mg tablets, both cough/cold preparations.
Fourteen additional products are currently under development. Three of
these products are being developed and manufactured for another company; and the
other eleven products are being developed as part of the Lannett product line.
One of the Lannett products has been redeveloped and submitted to the Federal
Drug Administration ("FDA") for supplemental approval. Four additional products
represent previously approved Abbreviated New Drug Applications ("ANDA's") which
the Company is planning to reintroduce. The other six Lannett products represent
new products that the Company is planning to introduce. Since the Company has no
control over the FDA review process, management is unable to anticipate whether
or when it will be able to begin producing and shipping additional products.
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RAW MATERIALS.
The raw materials used by the Company in the manufacture of
pharmaceutical products consist of pharmaceutical chemicals in various forms.
FDA approval is required in connection with the process of selecting active
ingredient suppliers. Three suppliers, BI Chemicals Inc., Ganes Chemicals, and
Test-Pak accounted for approximately 41%, 15%, and 12%, respectively of the
Company's raw material purchases in Fiscal 2000. Four suppliers, BI Chemicals
Inc., Ganes Chemicals, Penn Bottle and Supply Co. and Flavine International
accounted for approximately 27%, 23%, 15% and 11%, respectively of the Company's
raw material purchases in Fiscal 1999. The raw materials purchased from these
suppliers are available from a number of vendors.
DISTRIBUTION.
The Company sells its pharmaceutical products primarily to wholesalers,
distributors, warehousing chains, retail chains and other pharmaceutical
companies. Sales of the Company's pharmaceutical products are made on an
individual order basis. Two customers accounted for approximately 42% and 11%,
respectively, of net sales in Fiscal 2000. The same two customers accounted for
approximately 39% and 19%, respectively, of net sales in Fiscal 1999. As the
Company introduces additional products, it expects to broaden its customer base.
COMPETITION.
The manufacture and distribution of pharmaceutical products is a highly
competitive industry. Competition in the pharmaceutical industry is primarily
based on quality, price and service. The Company intends to compete primarily on
this basis, as well as flexibility, availability of inventory, and by the fact
that the Company's products are only available from limited competitors. The
Company's efforts of continual modernization of its facilities, hiring of
experienced staff, implementation of inventory and quality control programs 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 other federal regulatory bodies and state
governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substance
Act and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing,
advertising and promotion of the Company's generic drug products. Noncompliance
with applicable regulations can result in fines, recall and seizure of products,
total or partial suspension of production, personal and/or corporate prosecution
and debarment, and refusal of the government to enter into supply contracts or
to approve new drug applications. The FDA also has the authority to revoke
previously approved drug products.
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FDA approval is required before any "new" prescription drug can be
marketed. The approval procedures are generally quite burdensome. A new drug is
one not generally recognized by qualified experts as safe and effective for its
intended use. Generally, a drug, which is the generic equivalent of a previously
approved prescription drug, will be treated as a new generic drug requiring FDA
approval. Furthermore, each dosage form of a specific generic drug product
requires separate approval by the FDA. However, less burdensome approval
procedures may be used for generic equivalents. Although generic equivalents of
many over-the-counter drugs generally do not require affirmative FDA
pre-approval, there are instances where FDA pre-approval is required. There are
currently three ways to obtain FDA approval of a new drug.
New Drug Applications ("NDA"). Unless one of the two procedures
discussed in the following paragraphs is available, a manufacturer must conduct
and submit to the FDA complete clinical studies to establish a drug's safety and
efficacy.
Abbreviated New Drug Applications ("ANDA"). An ANDA is similar to an
NDA, except that the FDA waives the requirement of complete clinical studies of
safety and efficacy, although it may require bioavailability and bioequivalence
studies. "Bioavailability" indicates the rate of absorption and levels of
concentration of a drug in the blood stream needed to produce a therapeutic
effect. "Bioequivalence" compares one drug product with another, and when
established, indicates that the rate of absorption and the levels of
concentration of a generic drug in the body are within prescribed statistical
limits to those of a previously approved equivalent drug. Under the Drug Price
Act, an ANDA may be submitted for a drug on the basis that it is the equivalent
of an approved drug, regardless of when such other drug was approved. The Drug
Price Act, in addition to establishing a new ANDA procedure, created statutory
protections for approved brand name drugs. Under the Drug Price Act, an ANDA for
a generic drug may not be made effective until all relevant products and use
patents for the equivalent brand name drug have expired or have been determined
to be invalid. Prior to enactment of the Drug Price Act, the FDA gave no
consideration to the patent status of a previously approved drug. Additionally,
the Drug Price Act extends for up to five years the term of a product or use
patent covering a drug to compensate the patent holder for the reduction of the
effective market life of a patent due to federal regulatory review. With respect
to certain drugs not covered by patents, the Drug Price Act sets specified time
periods of two to ten years during which ANDA's for generic drugs cannot become
effective or, under certain circumstances, cannot be filed if the equivalent
brand name drug was approved after December 31, 1981.
Paper New Drug Applications ("Paper NDA"). For drugs which are
identical to a drug first approved after 1962, a prospective manufacturer need
not go through the full NDA procedure, but instead may demonstrate safety and
efficacy by reliance on published literature and reports, and must also submit,
if the FDA so requires, bioavailability or bioequivalence data illustrating that
the generic drug formulation produces, within an acceptable range, the same
effects as the previously approved equivalent drug. Because published literature
to support the safety and efficacy of post-1962 drugs may not be generally
available, this procedure is of limited utility to generic drug manufacturers.
Moreover, the utility of Paper NDA's has been even further diminished by the
recently broadened availability of the abbreviated new drug application as
described above.
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Among the requirements for new drug approval is the requirement that
the prospective manufacturer's methods conform to the FDA's current good
manufacturing practices ("CGMP Regulations"). The CGMP Regulations must be
followed at all times during which the approved drug is manufactured. In
complying with the standards set forth in the CGMP regulations, the Company must
continue to expend time, money and effort in the areas of production and quality
control to ensure full technical compliance. Failure to comply with the CGMP
regulations risks possible FDA action such as the seizure of noncomplying drug
products or, through the Department of Justice, enjoining the manufacture of
such products.
The Company is also subject to federal, state and local laws of general
applicability, such as laws regulating working conditions, and, to the extent
that its business operations entail the generation, storage, transportation or
discharge of items that may be considered hazardous substances, hazardous waste
or environmental contaminants, the Company may be subject to various federal,
state and local environmental protection laws and regulations. The Company
monitors its compliance with all environmental laws. Any compliance costs, which
may be incurred, are contingent upon the results of future site monitoring and
will be charged against operations when incurred. The Company incurred no
monitoring costs during the years ended June 30, 2000 and 1999.
RESEARCH AND DEVELOPMENT.
During Fiscal 2000 and Fiscal 1999, the Company incurred research and
development costs of approximately $731,000 and $915,000, respectively.
EMPLOYEES.
The Company currently employs 84 employees, all of whom are full-time.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's general business offices, laboratory and manufacturing
and distribution facilities are located in a facility owned by the Company at
9000 State Road, Philadelphia, Pennsylvania. This facility was extensively
renovated during Fiscal 1993 and Fiscal 1992 and is approximately 31,000 square
feet, located on four and one half (4-1/2) acres. The Company had increased its
warehousing activities beyond the capacity of its current facility. As a result,
on December 19, 1997, it entered into a three-year and three-month lease for a
23,500 square foot facility located at 500 State Road, Bensalem Bucks County,
Pennsylvania. The leased facility is located approximately 1.5 miles from its
main operating facility. This new leased facility houses research and
development, and warehousing operations. The lease contains an option for the
Company to renew its tenancy on a monthly basis. As the lease-term nears
expiration, the Company expects to renew the lease for a period of time.
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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.
Employee Claim. A claim of retaliatory discrimination has been filed by
a former employee with the Pennsylvania Human Relations Commission ("PHRC"), and
the Equal Employment Opportunity Commission ("EEOC"). The Company has denied
liability in this matter. The PHRC has made an initial determination that the
complaint against the Company should be dismissed because the facts do not
establish probable cause of the allegations of discrimination. Management
believes that the outcome of this claim will not have a material adverse impact
on the financial position of the Company.
A claim of sexual harassment and retaliation also has been filed
against the Company by another former employee. The claim was cross-filed with
the PHRC and with the Equal Employment Opportunity Commission, which already has
closed its file on the charge. The Company has filed an answer with the PHRC
denying the charge, and the PHRC is investigating the claim pursuant to its
normal procedures. Management believes that the outcome of this claim also will
not have a material adverse impact on the financial position of the Company.
DES Cases. The Company is currently engaged in several civil actions as
a co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a
synthetic hormone. Prior litigation established that the Company's pro rata
share of any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which the
Company maintained coverage during the time period that damages were alleged to
have occurred. The insurance company denied coverage of actions filed after
January 1, 1992. With respect to these actions, the Company paid nominal damages
or stipulated to its pro rata share of any liability. The Company has either
settled or is currently defending over 500 such claims. Management believes that
the outcome will not have a material adverse impact on the financial position of
the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the Company's security
holders during the quarter ended June 30, 2000 and since the annual meeting of
shareholders held February 23, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION.
The Company's common stock trades in the over-the-counter market
through the use of the inter-dealer "pink-sheets" published by Pink Sheets LLC.
The following table sets forth certain information with respect to the high and
low bid prices of the Company's common stock during Fiscal 2000 and 1999 as
quoted by Pink Sheets LLC. Such quotations reflect inter-dealer prices without
retail mark-up, markdown or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
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FISCAL YEAR ENDED JUNE 30, 2000
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HIGH LOW
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<S> <C> <C>
First quarter........................................................
$1.25 $0.81
Second quarter.......................................................
$1.22 $0.63
Third quarter........................................................
$1.22 $0.75
Fourth quarter.......................................................
$1.06 $0.63
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1999
HIGH LOW
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<S> <C> <C>
First quarter........................................................ $2.50 $1.31
Second quarter....................................................... 1.88 1.13
Third quarter........................................................ 1.31 1.00
Fourth quarter....................................................... 1.44 1.00
</TABLE>
HOLDERS.
The number of holders of record of the Company's common stock as of
September 1, 2000 is 493.
DIVIDENDS.
The Company did not pay any cash dividends in Fiscal 2000 or 1999. The
Company intends to use all available funds for the Company's working capital and
does not anticipate paying cash dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information, this Form 10-KSB contains
forward-looking information. The forward-looking information is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to,
those discussed in the following section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date of this Form 10-KSB. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances which arise later.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly reports on Form 10-QSB to be filed by the Company in
Fiscal 2000, and any Current Reports on Form 8-K filed by the Company.
RESULTS OF OPERATIONS - FISCAL 2000 TO FISCAL 1999.
Net sales for Fiscal 2000 increased by 9.2% to $11,553,457 from net
sales of $10,580,568 in Fiscal 1999. Sales increased during Fiscal 2000 due to
increased sales of the Company's Over-The-Counter ("OTC") product line, offset
partially by a decrease in sales of the Company's prescription products. OTC
sales increased by $4.1 million from Fiscal 1999 to Fiscal 2000. Sales of
prescription products decreased by approximately $3.1 million from Fiscal 1999
to Fiscal 2000. Net sales derived from the contract development and
manufacturing agreement represents approximately $42,000 and $168,000 for Fiscal
2000 and Fiscal 1999, respectively. As the Company introduces additional
products, it expects to increase prescription product sales.
Cost of sales increased by 19.2%, to $7,890,972 in Fiscal 2000 from
$6,619,837 in Fiscal 1999. The cost of sales increase is due to an increase in
variable costs, and lower absorption of fixed overhead. As a result of the
increase in sales from Fiscal 1999 to Fiscal 2000, the variable costs of goods
sold, such as raw material costs, increased proportionately. In addition, the
Company had a lower level of capitalization, or absorption of fixed overhead
costs into inventory as it streamlined its work-in-process and finished goods
carrying levels. Gross profit margins for Fiscal 2000 and Fiscal 1999 were 32%
and 37%, respectively. The decrease in the gross profit percentage is primarily
due to lower capitalization of fixed overhead costs, and the product sales mix.
Research and development expenses decreased by 20.1% to $730,654 in
Fiscal 2000 from $914,654 in Fiscal 1999 due to a reduction in employees.
Selling, general and administrative expenses increased by 11.6% to $1,356,806 in
Fiscal 2000 from $1,216,170 in Fiscal 1999 due to an increase in sales
commission expense.
As a result of the foregoing, the Company reported an operating profit
of $1,575,025 for Fiscal 2000, as compared to an operating profit of $1,829,907
for Fiscal 1999.
The Company's interest expense decreased to $823,310 in Fiscal 2000
from $911,579 in Fiscal 1999 due to the conversion of a $2,000,000 principal
note debenture into 8,000,000 shares of the Company's common stock in December
1999 by the majority shareholder and Chairman of the Board. See Liquidity and
Capital Resources below.
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During Fiscal 2000 and Fiscal 1999 the Company recorded net income tax
benefits of $465,330 and $368,100, respectively.
The Company reported net income of $1,350,097 for Fiscal 2000, $0.15
basic income per share, $0.15 on a diluted basis, compared to net income of
$1,308,138 for Fiscal 1999, $0.25 basic income per share, $0.10 on a diluted
basis.
LIQUIDITY AND CAPITAL RESOURCES -
Net cash provided from operating activities of $1,404,942 during Fiscal
2000 was attributable to net income of $1,350,097 as adjusted for the effects of
non-cash items of $151,105 and changes in operating assets and liabilities
totaling ($96,260). Significant changes in operating assets and liabilities are
comprised of: i) a decrease in accounts receivable of $555,085 due to better
collection terms in Fiscal 2000, ii) an increase in inventories of $325,798 due
to increases in raw materials and finished goods in anticipation of increased
sales levels in Fiscal 2001, and iii) an increase in prepaid expenses and other
assets of $429,443 due primarily to the Company's capitalization of fees
associated with a lawsuit that the Company has settled subsequent to June 30,
2000. The Company has obtained the right to receive income sufficient to match
these associated fees in the fiscal year ending June 30, 2001.
The net cash used in investing activities consisted of $772,248
expended during Fiscal 2000 primarily for machinery and equipment. The Company
has budgeted for $1,500,000 in capital expenditures in Fiscal 2001. The
anticipated additional capital expenditure requirements will support the Company
growth from new product introductions. As of June 30, 2000, approximately
$2,026,000 from the proceeds of the two bonds issued during Fiscal 1999, which
are described below, was available in financing restricted for certain future
capital expenditures.
The Company has a $4,250,000 revolving line of credit from a
shareholder who is also the Chairman of the Board ("Shareholder Line of
Credit"). At June 30, 2000, the Company has $4,225,000 outstanding and $25,000
available under this line of credit. The maturity date on the Shareholder Line
of Credit was extended to October 1, 2001. Accrued interest at June 30, 2000,
and June 30, 1999 was $22,977 and $0, respectively.
The Company also had a convertible debenture made available to it by
William Farber. The maturity date of the shareholder debenture was December 23,
1999. On December 22, 1999, William Farber elected to convert the debenture into
shares of common stock of the Company. The shareholder debenture and accrued
interest was convertible at the rate of 4,000 shares of common stock for each
$1,000 of outstanding indebtedness. The principal balance on the debenture at
the time of conversion was $2,000,000, and the interest on the debenture was
paid to date; therefore the transaction converted the $2,000,000 of indebtedness
to 8,000,000 shares of the Company's common stock.
In April 1999, the Company entered into a loan agreement (the
"Agreement") with a governmental authority (the "Authority") to finance future
construction and growth projects of the Company. The Authority has issued
$3,700,000 in tax-exempt variable rate demand and fixed rate
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revenue bonds to provide the funds to finance such growth projects pursuant to a
trust indenture ("the "Trust indenture"). A portion of the Company's proceeds
from the bonds was used to pay for bond issuance costs of approximately
$170,000. The remainder of the proceeds was deposited into a money market
account, which is restricted to future plant and equipment needs of the Company
as specified in the Agreement. The Trust Indenture requires the Company to repay
the Authority loan through installment payments beginning in May 2003 and
continuing through May 2014, the year the bonds mature. At June 30, 2000, the
Company has $3,700,000 outstanding on the Authority loan, which is classified as
a long-term liability. In April 1999, an irrevocable letter of credit of
$3,770,000 was issued by a bank to secure payment of the Authority Loan and a
portion of the related accrued interest. At June 30, 2000, no portion of the
letter of credit has been utilized.
In April 1999, the Company authorized and directed the issuance of
$2,300,000 in taxable variable rate demand and fixed rate revenue bonds pursuant
to a trust indenture between the Company and a bank as trustee (the "Trust
Indenture"). From the proceeds of the bonds, $750,000 was utilized to pay
deferred interest owed to the principal shareholder of the Company and
approximately $1,440,000 was paid to a bank to refinance a mortgage term loan
and equipment term loans. The remainder of the proceeds was used to pay bond
issuance costs of approximately $109,000. The Trust Indenture requires the
Company to repay the bonds through installment payments beginning in June 1999
and continuing through May 2003, the year the bonds mature. At June 30, 2000,
the Company has $1,597,846 outstanding on the bonds, of which $692,496 is
classified as currently due. In April 1999, an irrevocable letter of credit of
approximately $1,690,000 was issued by a bank to secure payment of the bonds and
a portion of the related accrued interest. At June 30, 2000, no portion of the
letter of credit has been utilized.
The Company has a $2,000,000 line of credit from a bank. The line of
credit is due October 31, 2000, at which time the Company expects to renew and
extend the due date. The line of credit is limited to 80% of qualified accounts
receivable and 50% of qualified inventory. At June 30, 2000, the Company had
$1,058,524 outstanding under the line of credit, including $112,124 of
commercial drafts outstanding not yet presented for payment to the bank. At June
30, 2000, the Company had $941,476 available under the line of credit.
The Company believes that cash generated from its operations and the
balances available under the Company's existing loans and lines of credit as of
June 30, 2000, are sufficient to finance its level of operations and currently
anticipated capital expenditures.
Except as set forth in this report, the Company is not aware of any
trends, events or uncertainties that have or are reasonably likely to have a
material adverse impact on the Company's short-term or long-term liquidity or
financial condition.
PROSPECTS FOR THE FUTURE
As described above, fourteen additional products are currently under
development. Three of these products are being developed and manufactured for
another company; and the other eleven products are being developed as part of
the Lannett product line. One of the Lannett products has been redeveloped and
submitted to the Federal Drug Administration ("FDA") for supplemental
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approval. Four additional products represent previously approved Abbreviated New
Drug Applications ("ANDA's") which the Company is planning to reintroduce. The
other six Lannett products represent new products that the Company is planning
to introduce. Since the Company has no control over the FDA review process,
management is unable to anticipate when it will be able to begin producing and
shipping additional products.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements for the years ended June 30, 2000
and 1999 and Independent Auditor Report filed as a part of this Form 10-KSB are
listed in the "Index to Financial Statements" filed herewith.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On December 10, 1999, the Company's independent accountants who
previously audited the Company's financial statements for the fiscal years ended
June 30, 1999 and 1998, Deloitte & Touche LLP, were notified that the Company
had elected not to utilize their services in connection with the audit of the
Company's 2000 financial statements. Deloitte & Touche LLP's reports on the
Company's financial statements for the fiscal years ended June 30, 1999 and June
30, 1998 did not contain an adverse opinion or a disclaimer of opinion: nor were
such reports qualified or modified as to uncertainty, audit scope or accounting
principles. During the Company's two most recent fiscal years ended June 30,
1999 and June 30, 1998 and the interim period preceding December 10, 1999, there
were no disagreements between the Company and Deloitte & Touche LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of Deloitte & Touche LLP would have caused it to make reference to
the subject matter of the disagreement in connection with its report. The
Company did not experience any of the events listed in Item 304 of regulation
S-B as defined as "reportable events" within the Company's two most recent
fiscal years ended June 30, 1999 and June 30, 1998 and the interim period
preceding December 10, 1999. The Form 8-K was filed on December 10, 1999.
On December 17, 1999 the Company filed on Form 8-K notification of the
engagement of Grant Thornton LLP as the Company's new independent accountant to
audit the Company's financial statements as of June 30, 2000 and for the year
then ended.
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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:
<TABLE>
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Age Position
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Directors:
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William Farber 69 Chairman of the Board
David Farber(1) 41 Director
Marvin Novick 69 Director
Arthur P. Bedrosian 53 Director
Other Executive Officers:
------------------------
Larry Dalesandro 28 Chief Operating Officer
Alan Saidel 41 Vice President - Operations & Manufacturing
Eugene Livshits 48 Vice President - Technical Affairs
</TABLE>
(1) 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 of the Company.
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 had been
the President and owner of Vital Foods, Inc., an 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.
12
<PAGE> 13
MARVIN NOVICK was elected a Director of the Company in February 2000.
Mr. Novick has been an advisor, consultant and financial planner for multiple
companies in the past thirty-five years. He is currently President of R&M
Resources, Inc., an investment company. Previously, he has held the positions of
Vice Chairman of Dura Corporation, a major automotive supplier, Partner of
international accounting firm J.K. Lasser & Co., and Touche Ross & Co., Chief
Financial Officer and Director of Meadowbrook Insurance Group, and Senior Vice
President of Michigan Blue Shield, a major healthcare organization. Mr. Novick
holds Bachelor's and Master's Degrees from two prominent universities, and is a
member of the American Institute of Certified Public Accountants.
ARTHUR P. BEDROSIAN, J.D. was elected a Director of the Company in
February 2000. Mr. Bedrosian has operated generic drug manufacturing, sales, and
marketing businesses in the healthcare industry for many years. He currently
operates Pharmaceutical Ventures. Ltd, a healthcare consultancy and Interal
Corporation, a computer consultancy to Fortune 100 companies. Mr. Bedrosian
holds a Bachelor of Arts Degree in Political Science from Queens College of the
City University of New York and a Juris Doctorate from Newport University in
California. Currently, Mr. Bedrosian is President and Chief Executive Officer of
Trinity Laboratories, Inc., a medical device and drug manufacturer.
LARRY DALESANDRO was elected Chief Operating Officer of the Company in
November 1999. Mr. Dalesandro joined Lannett Company in January 1999 to manage
the Company's financial operations. Previously, he was the Chief Financial
Officer of Criterion Communications, Inc., a technology and new media services
firm, Controller of Crown Contractors, Inc., a contract construction company,
and Senior Auditor for Grant Thornton LLP, an international professional
services firm. Mr. Dalesandro graduated Magna Cum Laude with a Bachelor's of
Science Degree in Accountancy from Villanova University, and is a Certified
Public Accountant.
ALAN SAIDEL was elected Vice President Operations & Manufacturing in
July 1998. Mr. Saidel joined the Company in February 1996 as Director of
Operations & Manufacturing. Mr. Saidel has 18 years of experience in the
pharmaceutical industry. Mr. Saidel has previously been employed at Barr
Laboratories Inc., Mutual Pharmaceuticals Inc. and Pal-Pak Inc, where he held
the position of Director of Operations.
EUGENE LIVSHITS was elected Vice President Technical Affairs in
November 1999. Dr. Livshits joined the Company in February 1997 as Director of
Analytical Services. Dr. Livshits has 25 years of experience in Analytical
Services and Technical Affairs in the pharmaceutical industry. Dr. Livshits has
previously been employed at Mutual Pharmaceutical Inc., PharmaKinetics Labs,
Pal-Pak Inc., Glenwood-Palisades Inc., where he held management and Director
positions in Analytical Services. Dr. Livshits holds a Ph.D. from Moscow
University.
To the best of the Company's knowledge, there have been no events under
any bankruptcy act, no criminal proceedings and no judgments or injunctions that
are material to the evaluation of the ability or integrity of any director or
executive officer during the past five years.
13
<PAGE> 14
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 2000, Fiscal 1999 and Fiscal
1998. 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 2000.
<TABLE>
<CAPTION>
===============================================================================================================================
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
-------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Restricted LTIP All Other
Principal Fiscal Other Annual Stock Options/S Payouts Compensation
Position Year Salary Bonus Compensation Award(s) ARs Amount Amount
-------- ---- ------ ----- ------------ -------- --- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Farber 2000 0 0 0 0 0 0 0
Chairman of
the Board 1999 0 0 0 0 0 0 0
1998 0 0 0 0 0 0 0
Larry 2000 78,951 5,000 3,600(1) 0 10,000(7) 0 0
Dalesandro(5)
1999 0 0 0 0 0 0 0
Chief
Operating 1998 0 0 0 0 0 0 0
Officer
Eugene 2000 96,043(3) 2,000 2,631(1) 0 12,000(7) 0 0
Livshits(5)
1999 0 0 0 0 0 0 0
Vice
President/Tech 1998 0 0 0 0 0 0 0
nical Affairs
Vlad Mikijanic 2000 45,454 0 0 0 0
Vice President/
Technical
Affairs(2)
1999 121,528(3) 2,000 7,200(1) 0 0 0 0
1998 113,980(3) 1,500 7,200(1) 0 0 0 0
===============================================================================================================================
Jeffrey M. 2000 74,338(3) 3,000(1) 0 0 0 0
Moshal
Chief Operating
Officer(2)
1999 122,768(3) 2,000 7,200(1) 0 100,000(4) 0 0
1998 108,150(3) 1,500 7,200(1) 0 100,000(4) 0 0
===============================================================================================================================
Alan Saidel(5) 2000 125,458(3) 2,500 7,200(1) 0 50,000(4) 0 13,000(6)
Vice President/ 1999 113,526(3) 2,000 7,200(1) 0 50,000(4) 13,000(6)
Manufacturing
& Operations 1998 105,175(3) 1,500 7,200(1) 0 50,000(4) 13,000(6)
</TABLE>
(1) Represents auto allowance.
(2) Mr. Mikijanic's employment with the Company was terminated on May 14,
1999. His salary for fiscal year 2000 represents severance pay. Mr.
Moshal's employment with the Company was terminated on November 23,
1999.
(3) Includes payments to the Company's 401(k) Plan (3% of eligible
compensation).
(4) The options represent 100,000 and 50,000 incentive stock options which
were granted to Mr. Moshal and Mr. Saidel, respectively on October 13,
1997 pursuant to the Company's 1993 Long Term Incentive Stock Plan.
The options are exercisable as follows: one-third on or after October
13, 1998, one-third on or after October 13, 1999 and one-third on or
after October 13, 2000. Mr. Moshal forfeited his options as a result
of his termination from the Company. The forefeiture was effective on
February 23, 2000. At June 30, 2000, the aggregate market value of
these restricted stock holdings is $201,563 (computed by reference to
the average closing bid and ask prices of such stock as quoted by Pink
Sheets LLC).
(5) Mr. Dalesandro was elected as an officer of the Company on November 1,
1999. Mr. Livshits was elected as an officer of the Company on
November 1, 1999. Mr. Saidel was elected as an officer of the Company
on July 13, 1998.
(6) Represents compensation for living expenses.
(7) The options represent 10,000 and 12,000 incentive stock options which
were granted to Mr. Dalesandro and Mr. Livshits, respectively on
November 1, 1999 pursuant to the Company's 1993 Long Term Incentive
Stock Plan. The options are exercisable as follows: one-third on or
after November 1, 2000, one-third on or after November 1, 2001 and
one-third on or after November 1, 2002. At June 30, 2000, the
aggregate market value of these restricted stock holdings is $201,563
(computed by reference to the average closing bid and ask prices of
such stock as quoted by Pink Sheets LLC).
14
<PAGE> 15
OPTION EXERCISES AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
===============================================================================================================================
(a) (b) (c) (d) (e)
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED OPTIONS AT FY-END FY-END
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------------------------
===============================================================================================================================
<S> <C> <C> <C> <C>
Larry Dalesandro - - 0(2)/ -
Chief Operating Officer 10,000(2) -
===============================================================================================================================
Eugene Livshits
Vice President-of - - 0(2)/ -
Technical Affairs 12,000(2) -
===============================================================================================================================
Alan Saidel - - 16,667(1) -
Vice President-of 33,333(1) -
Manufacturing and
Operations
===============================================================================================================================
</TABLE>
(1)
The options represent 50,000 incentive stock options which were granted
to Mr. Saidel on October 13, 1997 pursuant to the Company's 1993 Long Term
Incentive Stock Plan. The options are exercisable as follows: one-third on or
after October 13, 1998, one-third on or after October 13, 1999 and one-third on
or after October 13, 2000.
(2)
The options represents an aggregate of 10,000 and 12,000 incentive
stock options which were granted to Mr. Dalesandro and Mr. Livshits,
respectively on November 1, 1999 pursuant to the Company's 1993 Long Term
Incentive Stock Plan. The options are exercisable as follows: one-third on or
after November 1, 2000, one-third on or after November 1, 2001 and one-third on
or after November 1, 2002.
15
<PAGE> 16
COMPENSATION OF DIRECTORS.
Directors received compensation of $300 per meeting attended, for
services provided as directors of the Company during Fiscal 2000. Directors are
reimbursed for expenses incurred in attending Board meetings.
EMPLOYMENT CONTRACTS.
There were no employment contracts in existence at the end of
Fiscal 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of September 1, 1999, 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:
<TABLE>
<CAPTION>
===============================================================================================================================
Excluding Options Including Options
and Debentures and Debentures
-------------- --------------
Name and Address of Number Percent Number Percent of
Beneficial Owner Office of Shares of Class of Shares Class --
---------------- ------ --------- -------- --------- -----
Directors/Executive Officers:
----------------------------
<S> <C> <C> <C> <C> <C>
Arthur Bedrosian Director 168,400(1) 1.28% 168,400(1) 1.26%
9000 State Road
Philadelphia, PA 19136
Larry Dalesandro Chief 0 0 3,333(4) .02%
9000 State Road Operating
Philadelphia, PA 19136 Officer
David Farber(2) Director 71,872(3) .54% 71,872(3) .54%
9000 State Road
Philadelphia, PA 19136
William Farber(2) Chairman of 9,049,986 68.53% 9,049,986 67.82%
9000 State Road the Board
Philadelphia, PA 19136
---------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
===============================================================================================================================
Excluding Options Including Options
and Debentures and Debentures
-------------- --------------
Name and Address of Number Percent Number Percent of
Beneficial Owner Office of Shares of Class of Shares Class
---------------- ------ --------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Eugene Livshits Vice President 0 0% 4,000(5) .03%
9000 State Road Technical
Philadelphia, PA 19136 Affairs
Marvin Novick Director 60,000(9) .45% 90,000(6) .67%
9000 State Road
Philadelphia, PA 19136
Alan Saidel Vice President 0 0% 100,000(7) .75%
9000 State Road Manufacturing
Philadelphia, PA 19136 and Operations
All directors and 9,350,258 70.80% 9,487,591 71.10%
executive officers as a group
(5 persons)
Other 5% Shareholders:
---------------------
Samuel Gratz 839,896(8) 6.36% 839,896(7) 6.30%
1139 Kerper Street
Philadelphia, PA 19111
===============================================================================================================================
</TABLE>
(1) Includes 9,400 shares owned by the spouse of Mr. Bedrosian.
(2) William Farber is the father of David Farber and the husband of Audrey
Farber, the Secretary of the Company.
(3) Includes 4,992 shares held by David Farber's minor child, 10,580 shares
held in an individual retirement account and 1,900 shares held by David
Farber's wife.
(4) Represents 3,333 options to purchase common stock exercisable within
sixty days at an exercise price of $1.13 per share.
(5) Represents 4,000 options to purchase common stock exercisable within
sixty days at an exercise price of $1.13 per share.
(6) Includes 30,000 options to purchase common stock exercisable within sixty
days at an exercise price of $1.38 per share.
(7) Represents 100,000 options to purchase common stock exercisable within
sixty days at an exercise price of $1.38 per share.
(8) Includes 496 shares which are held by the wife of Samuel Gratz,
(9) Includes 16,000 shares owned by the spouse of Mr. Novick.
* Assumes that all options and debentures exercisable within sixty days have
been exercised, which results in 13,343,461 shares outstanding.
17
<PAGE> 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described above, William Farber, the majority shareholder and
Chairman of the Board of the Company, had provided the Company with a financing
package aggregating $6,250,000, which the Company has used to renovate its
manufacturing facility, to acquire new equipment, to retain new management and
to provide working capital. The financing package consisted of a $4,250,000
revolving line of credit due October 1, 2001 and a $2,000,000 convertible
debenture, which Mr. Farber converted to common shares of the Company on
December 22, 1999. See MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and
Capital Resources." Mr. Farber is currently the holder of 9,000,000 shares of
common stock of the Company, or approximately 70% of the Company's issued and
outstanding shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The Company had sales of approximately $4,856,000 and $4,153,000 during the
years ended June 30, 2000 and 1999, respectively, to a distributor (the "related
party") in which the owner is a relative of the Chairman of the Board of
Directors and principal shareholder of the Company. The Company also incurred
sales commissions payable to the related party of approximately $262,000 during
the year ended June 30, 2000. Accounts receivable includes amounts due from the
related party of approximately $13,000 and $408,000 at June 30, 2000 and June
30, 1999, respectively. Accrued expenses includes amounts due to the related
party of approximately $71,000 and $0 at June 30, 2000 and June 30, 1999,
respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-B to
be filed as a part of this Form 10-KSB is shown on the Exhibit
Index filed herewith.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 2000.
18
<PAGE> 19
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, 2000 By: /s/ William Farber
------------------- ---------------------
William Farber,
Chairman of the Board
Date: September 26, 2000 By: /s/ Larry Dalesandro
------------------- ----------------------
Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William Farber Chairman of the Board September 26, 2000
--------------------------------------
William Farber
/s/ David Farber Director September 26, 2000
------------------------------------
David Farber
/s/ Marvin Novick Director September 26, 2000
-------------------------------------
Marvin Novick
/s/ Arthur Bedrosian Director September 26, 2000
------------------------------------
Arthur Bedrosian
</TABLE>
19
<PAGE> 20
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
Lannett Company, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Lannett
Company, Inc. and Subsidiary as of June 30, 2000, and the related consolidated
statements of operations, shareholders' equity/(deficiency) and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing principles
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Lannett Company, Inc. and Subsidiary as of June 30, 2000, and the
consolidated results of their operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States of America.
Grant Thornton LLP
Philadelphia, Pennsylvania
August 31, 2000
20
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Lannett Company, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of Lannett
Company, Inc. and subsidiary (the "Company") as of June 30, 1999, and the
related consolidated statements of operations, shareholders' deficiency, and
cash flows for the year 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 audit.
We conducted our audit 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 that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1999,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 24, 1999
21
<PAGE> 22
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-79258 of Lannett Company, Inc. and subsidiary on Form S-8 of our report
dated September 24, 1999 relating to the consolidated financial statements of
Lannett Company, Inc. and subsidiary for the year ended June 30, 1999,
appearing in this Annual Report on Form 10-KSB of Lannett Company, Inc. and
subsidiary for the year ended June 30, 2000.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 25, 2000
22
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash $ -- $ 117,004
Trade accounts receivable (net of allowance of $63,000 and $165,000) 1,047,518 1,602,603
Inventories 2,950,176 2,624,378
Prepaid expenses and other assets 495,961 68,736
Deferred Tax Asset 46,137 --
------------ ------------
Total current assets 4,539,792 4,412,721
PROPERTY, PLANT AND EQUIPMENT 7,652,539 6,880,291
Less accumulated depreciation 2,698,355 2,063,543
------------ ------------
4,954,184 4,816,748
RESTRICTED CASH 2,026,445 2,584,321
OTHER ASSETS 266,947 308,542
DEFERRED TAX ASSET 1,026,599 545,216
------------ ------------
TOTAL ASSETS $ 12,813,967 $ 12,667,548
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY)
CURRENT LIABILITIES:
Line of credit $ 1,058,524 $ --
Accounts payable 747,200 797,018
Deferred interest payable - shareholder (including convertible
deferred interest payable of $0 and $385,659) -- 385,659
Accrued expenses 494,499 340,785
Convertible note payable - shareholder -- 2,000,000
Current portion of long-term debt 692,496 658,368
------------ ------------
Total current liabilities 2,992,719 4,181,830
LONG-TERM DEBT, LESS CURRENT PORTION 4,605,350 5,297,917
LINE OF CREDIT -- 1,322,000
LINE OF CREDIT AND DEFERRED INTEREST - SHAREHOLDER 4,225,000 4,225,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY/(DEFICIENCY):
Common stock - authorized 50,000,000 shares, par value $0.001; issued and
outstanding, 13,206,128 shares and 5,206,128 shares 13,206 5,206
Additional paid-in capital 2,312,575 320,575
Accumulated deficit (1,334,883) (2,684,980)
------------ ------------
Total shareholders' equity/(deficiency) 990,898 (2,359,199)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIENCY) $ 12,813,967 $ 12,667,548
============ ============
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
NET SALES $ 11,553,457 $ 10,580,568
COST OF SALES 7,890,972 6,619,837
------------ ------------
Gross profit 3,662,485 3,960,731
RESEARCH AND DEVELOPMENT EXPENSES 730,654 914,654
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,356,806 1,216,170
------------ ------------
Operating profit 1,575,025 1,829,907
------------ ------------
OTHER INCOME/(EXPENSE):
Interest income 133,052 21,710
Interest expense, including $488,632 and
$560,193 to shareholder (823,310) (911,579)
------------ ------------
(690,258) (889,869)
------------ ------------
INCOME BEFORE INCOME TAX BENEFIT 884,767 940,038
INCOME TAX BENEFIT 465,330 368,100
------------ ------------
NET INCOME $ 1,350,097 $ 1,308,138
============ ============
Basic earnings per common share $ 0.15 $ 0.25
============ ============
Diluted earnings per common share $ 0.15 $ 0.10
============ ============
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY/(DEFICIENCY)
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT EQUITY/(DEFICIENCY)
----------- ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1998 5,206,128 $ 5,206 $ 320,575 $(3,993,118) $(3,667,337)
Net income
1,308,138 1,308,138
----------- -----------
BALANCE, JUNE 30, 1999 5,206,128 5,206 320,575 (2,684,980) (2,359,199)
Conversion of Shareholder 8,000,000 8,000 1,992,000 2,000,000
Debenture
Net income 1,350,097 1,350,097
----------- -----------
BALANCE, JUNE 30, 2000 13,206,128 $13,206 $2,312,575 $(1,334,883) $ 990,898
========== ======= ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,350,097 $ 1,308,138
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 678,625 585,603
Deferred tax benefit (527,520) (395,216)
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable 555,085 (245,472)
Inventories (325,798) (552,432)
Prepaid expenses and other assets (429,443) 82,908
Accounts payable (49,818) 165,769
Accrued expenses 153,714 159,844
------------- -------------
Net cash provided by operating activities 1,404,942 1,109,142
------------- -------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (772,248) (1,068,428)
------------- -------------
Net cash used in investing activities (772,248) (1,068,428)
------------- -------------
FINANCING ACTIVITIES:
Net borrowings under line of credit - shareholder - 300,000
Net (Repayments)/borrowings under line of credit (263,476) 72,000
Repayments of accrued interest - shareholder (385,659) (1,190,337)
Payment of debt issuance costs - (273,277)
Repayments of debt (658,439) (2,264,470)
Proceeds from debt, net of restricted cash 557,876 3,415,679
------------- -------------
Net cash provided by/(used in) financing activities (749,698 59,595
------------- -------------
NET INCREASE (DECREASE) IN CASH (117,004) 100,309
CASH, BEGINNING OF YEAR 117,004 16,695
------------- -------------
CASH, END OF YEAR $ - $ 117,004
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 1,227,363 $ 2,101,915
============= =============
Income taxes paid $ 11,448 $ 7,116
============= =============
</TABLE>
Cash paid for interest during the year ended June 30, 2000 includes $43,343 of
capitalized interest costs related to property and plant additions. See notes to
consolidated financial statements.
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lannett Company, Inc. and subsidiary (the "Company"), a Delaware
corporation, manufactures and distributes, throughout the United States,
pharmaceutical products sold under generic names ("competitive
pharmaceutical products") and, historically, has manufactured and
distributed pharmaceutical products sold under its trade or brand names. In
addition, the Company manufactures and develops pharmaceutical products for
other companies.
The Company is engaged in an industry which is subject to considerable
government regulation related to the development, manufacturing and
marketing of pharmaceutical products. In the normal course of business, the
Company periodically responds to inquiries or engages in administrative and
judicial proceedings involving regulatory authorities, particularly the
U.S. Food and Drug Administration (FDA) and the Drug Enforcement Agency
(DEA).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Lannett Company, Inc. and its inactive wholly
owned subsidiary, Astrochem Corporation. All intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION - The Company recognizes revenue when its products are
shipped. Under a contract in which product development occurs, the Company
recognizes revenue when services are rendered.
INVENTORIES - Inventories are valued at the lower of cost (determined
under the first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated
at cost. Depreciation and amortization are provided for by the
straight-line and accelerated methods over estimated useful lives of the
assets. Depreciation expense for the years ended June 30, 2000 and 1999
was approximately $635,000 and $561,000, respectively.
DEFERRED DEBT ACQUISITION COSTS - Costs incurred in connection with
obtaining financing are amortized by the straight-line method over the
term of the loan arrangements. Amortization expense for the years ended
June 30, 2000 and 1999 was approximately $44,000 and $24,000,
respectively.
RESEARCH AND DEVELOPMENT - Research and development expenses are charged
to operations as incurred.
ADVERTISING COSTS - The Company charges advertising costs to operations as
incurred.
INCOME TAXES - The Company uses the liability method specified by
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.
LONG-LIVED ASSETS - SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, provides
guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. No impairment losses were recognized
during the years ended June 30, 2000 and 1999.
EARNINGS PER COMMON SHARE - SFAS No. 128, Earnings Per Share, requires a
dual presentation of basic and diluted earnings per share on the face of
the Company's consolidated statement of income and a reconciliation of the
computation of basic earnings per share to diluted earnings per share.
Basic earnings per share excludes the dilutive impact of common stock
equivalents and is computed by dividing net income by the weighted-average
number of shares of common stock outstanding for the period. Diluted
earnings per share includes the effect of potential dilution from the
exercise of outstanding common stock equivalents into common stock using
the treasury stock method. Earnings per share amounts for all periods
presented have been calculated in accordance with the requirements of SFAS
No. 128. A reconciliation of the Company's basic and diluted earnings per
share follows:
27
<PAGE> 28
<TABLE>
<CAPTION>
2000 1999
---------------------------------- -------------------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
<S> <C> <C> <C> <C>
Basic earnings per share factors $ 1,350,097 5,206,128 $ 1,308,138 5,206,128
Effect of December 22, 1999 conversion 86,000 4,186,301 - -
----------- ---------- ----------- ---------
Basic earnings per share factors, post conversion 1,436,097 9,392,429 1,308,138 5,206,128
Effect of potentially dilutive option
plans and debentures:
Interest on debentures - - 180,000 -
Conversion on debentures - - - 9,542,636
Employee stock options - - - -
----------- ---------- ----------- ---------
Diluted earnings per share factors $ 1,436,097 9,392,429 $ 1,488,138 14,748,764
=========== ========== =========== ==========
Basic earnings per share $ 0.15 $ 0.25
Diluted earnings per share $ 0.15 $ 0.10
</TABLE>
Options to purchase 136,700 shares, 80,000 shares and 1,550 shares of
common stock at $1.125 per share, $1.38 per share and $3.78 per share,
respectively, were outstanding at June 30, 2000 and options to purchase
180,000 shares, 5,200 shares and 4,000 shares of common stock at $1.38 per
share, $3.78 per share and $4.38 per share, respectively, were outstanding
at June 30, 1999, but were not included in the computation of diluted
earnings per share because to do so would be antidilutive. These
securities could potentially be dilutive in the future.
STOCK OPTION PLAN - SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation in accordance
with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, under which no compensation cost has been
recognized.
SEGMENT INFORMATION - The Company reports segment information in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. The Company operates one business segment,
generic pharmaceuticals. In accordance with SFAS No. 131, the Company
aggregates all products and reports one operating segment.
CONCENTRATION OF CREDIT RISK -- Two customers accounted for approximately
$4,856,000 (42%) and $1,247,000 (11%)respectively of net sales for the
fiscal year ended June 30, 2000. One of these customers is a distributor
which is a related party (see Note 14.) The same two customers accounted
for approximately $4,153,000 (39%) and $1,994,000 (19%) of net sales in
the fiscal year ended June 30, 1999. The Company performs ongoing credit
evaluations of its customers' financial condition and has experienced no
significant collection problems to date. Generally, the Company requires
no collateral from its customers. One of the Company's products accounted
for approximately $7,956,000 (69%) and $4,096,000 (39%) of net sales for
the fiscal years ended June 30, 2000 and 1999, respectively. The Company
expects this percentage to decrease as it begins to market additional
products.
USE OF ESTIMATES - 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.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. This
statement, as amended by SFAS No. 137 Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is in the process of analyzing the impact
of adopting SFAS No. 133 will have on its consolidated financial position
and results of operations when such statement is adopted.
RECLASSIFICATIONS - Certain reclassifications were made to the 1999
consolidated financial statements to conform to the 2000 presentation.
28
<PAGE> 29
2. INVENTORIES
Inventories at June 30, 2000 and 1999 consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Raw materials $ 785,795 $ 643,052
Work-in-process 1,023,521 1,011,640
Finished goods 899,686 661,055
Packaging supplies 241,174 308,631
----------- -----------
$ 2,950,176 $ 2,624,378
=========== ===========
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2000 and 1999 consist of the
following:
<TABLE>
<CAPTION>
USEFUL LIVES 2000 1999
-------------- ----------- -----------
<S> <C> <C> <C>
Land - $ 33,414 $ 33,414
Building and improvements 10 - 39 years 1,960,181 1,846,202
Machinery and equipment 5 - 10 years 5,550,019 4,929,751
Furniture and fixtures 5 - 7 years 108,925 70,924
----------- -----------
$ 7,652,539 $ 6,880,291
</TABLE>
4. RESTRICTED CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity date of three months or
less from purchase date to be cash equivalents. At June 30, 2000 the
Company had restricted cash equivalents of $2,026,445 which represents
proceeds from debt invested in a money market account and is restricted for
(i) the construction of a manufacturing-related facility as an addition to
the Company's existing facility or, alternatively, the acquisition and
renovation of an existing manufacturing and manufacturing-related facility
and (ii) the acquisition of equipment for installation and use in either of
the facilities mentioned above (see Note 6).
5. BANK LINE OF CREDIT
The Company has a $2,000,000 line of credit from a bank that bears interest
at prime plus .50% per annum (10% at June 30, 2000). The line of credit is
due October 31, 2000. On March 11, 1999, the line of credit agreement was
modified to increase the line of credit, extend the maturity date and
reduce the interest rate. The Company expects to extend the maturity date
before the scheduled due date. The line of credit is limited to 80% of
qualified accounts receivable and 50% of qualified inventory. At June 30,
2000, the Company had $1,058,524 outstanding under the line of credit,
including $112,124 of commercial drafts outstanding not yet presented for
payment to the bank. At June 30, 2000 the Company had $941,476 available
under the line of credit. The line of credit is collateralized by
substantially all Company assets and a personal guarantee of the major
shareholder. Further, the line of credit and a related letter of credit
contain certain financial covenants (see Note 6).
29
<PAGE> 30
6. LONG-TERM DEBT
Long-term debt at June 30, 2000 and 1999 consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Tax-exempt Bond Loan $ 3,700,000 $ 3,700,000
Taxable Bond Loan 1,597,846 2,256,285
----------- -----------
5,297,846 5,956,285
Less current portion 692,496 658,368
----------- -----------
$ 4,605,350 $ 5,297,917
=========== ===========
</TABLE>
In April 1999, the Company entered into a loan agreement (the "Agreement")
with a governmental authority (the "Authority") to finance future
construction and growth projects of the Company. The Authority has issued
$3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds
to provide the funds to finance such growth projects pursuant to a trust
indenture (the "Trust Indenture"). The bonds were issued under and secured
by a Trust Indenture between the Authority and a bank, as trustee. A
portion of the Company's proceeds from the bonds was used to pay for bond
issuance costs of approximately $170,000. The remainder of the proceeds was
deposited into a money market account which is restricted to future plant
and equipment needs of the Company as specified in the Agreement (see Note
4). The Agreement requires the Company to repay the Authority loan through
installment payments beginning in May 2003 and continuing through May 2014,
the year the bonds mature. Such payments will be deposited into an
interest-bearing debt service money market account. The bonds bear interest
at the floating variable rate determined by the organization responsible
for selling the bonds (the "remarketing agent"). The interest rate
fluctuates on a weekly basis. The effective interest rate at June 30, 2000
was 4.95%. The Company has an option to convert the bonds to a fixed rate
of interest under certain conditions. At June 30, 2000, the Company has
$3,700,000 outstanding on the Authority loan, which is classified as a
long-term liability. In April 1999, an irrevocable letter of credit of
$3,770,000 was issued by a bank to secure payment of the Authority loan and
a portion of the related accrued interest. At June 30, 2000, no portion of
the letter of credit has been utilized.
In April 1999, the Company authorized and directed the issuance of
$2,300,000 in taxable variable rate demand and fixed rate revenue bonds
pursuant to a trust indenture between the Company and a bank, as trustee
(the "Trust Indenture"). From the proceeds of the bonds, $750,000 was
utilized to pay deferred interest owed to the principal shareholder of the
Company and approximately $1,440,000 was paid to a bank to refinance a
mortgage term loan and equipment term loans. The remainder of the proceeds
was used to pay bond issuance costs of approximately $109,000. The Trust
Indenture requires the Company to repay the bonds through installment
payments beginning in May 2000 and continuing through May 2003, the year
the bonds mature. Such payments will be deposited into an interest-bearing
debt service money market account. The bonds bear interest at the floating
variable rate determined by the organization responsible for selling the
bonds (the "remarketing agent"). The interest rate fluctuates on a weekly
basis. The effective interest rate at June 30, 2000 was 6.78%. The Company
has an option to convert the bonds to a fixed rate of interest under
certain conditions. At June 30, 2000, the Company has $1,597,846
outstanding on the bonds, of which $692,496 is classified as currently due.
In April 1999, an irrevocable letter of credit of approximately $1,690,000
was issued by a bank to secure payment of the bonds and a portion of the
related accrued interest. At June 30, 2000, no portion of the letter of
credit has been utilized.
The letters of credit and bank line of credit require the Company, among
other things, to meet certain covenants with respect to financial ratios
and financial reporting. At June 30, 2000, the Company was not in
compliance with certain covenants. On September 27, 2000, the Company
obtained an appropriate waiver from the institution for these violations as
of June 30, 2000 and the letters of credit and bank line of credit were
amended to revise certain covenants.
At June 30, 1998, the Company had a mortgage term loan with an interest
rate of 9.25% per annum. The mortgage term loan was collateralized by
substantially all Company assets and a personal guarantee of the major
shareholder. It was also cross-collateralized with the bank line of credit
and equipment term loans. At June 30, 1998, the Company also had six
equipment term loans with interest rates ranging from 8.5% to 10.0%. These
loans were collateralized by the equipment purchased with the proceeds from
the borrowing, substantially all Company assets and a personal guarantee of
the major shareholder. The loans were also cross-collateralized with the
bank mortgage and the bank line of credit. The balances of the mortgage
term loan and the equipment term loans were refinanced during the year
ended June 30, 1999 (see discussion above).
Annual repayments of debt, including sinking fund requirements and amounts
payable to shareholder (Notes 7 and 8) as of June 30, 2000 are as follows:
30
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDING AMOUNTS PAYABLE AMOUNTS PAYABLE
JUNE 30, TO INSTITUTIONS TO SHAREHOLDER
------------ --------------- ---------------
<S> <C> <C>
2001 (including line of credit) $ 1,751,020
2002 704,330 4,225,000
2003 334,770
2004 806,250
2005 732,498
Thereafter 2,027,502
----------- ----------
$ 6,356,370 $4,225,000
=========== ==========
</TABLE>
7. LINE OF CREDIT PAYABLE TO SHAREHOLDER
On December 31, 1999, a debt modification agreement was consummated, by and
between the Company and its principal shareholder relating to the line of
credit agreement described below. The Company and its principal shareholder
had previously modified the debt agreement relating to the line of credit
and convertible debenture agreements described below and in Note 8 as of
March 15, 1993, August 1, 1994, May 15, 1995, December 31, 1995, June 30,
1996, November 1, 1996, September 9, 1997, June 30, 1998 and December 30,
1998. In each of the modifications the maturity date of the debt was
extended and/or the date of the payment of accrued interest was deferred.
The modifications did not include forgiveness of debt or forgiveness of
related interest.
The Company has a $4,250,000 revolving line of credit from a shareholder
who is also the Chairman of the Board. At June 30, 2000, the Company had
$4,225,000 outstanding and $25,000 available under this line of credit. The
principal is due October 1, 2001.
The line of credit bears interest at the prime rate published by Michigan
National Bank plus 1% per annum. The effective rate at June 30, 2000 and
1999 was 10.5% and 8.75%, respectively. Interest expense during the years
ended June 30, 2000 and 1999 was approximately $403,000, and $380,000,
respectively. Accrued interest at June 30, 2000 and June 30, 1999 was
$22,977 and $0, respectively.
The line of credit is collateralized by substantially all Company assets,
is cross-collateralized with all loans from the shareholder (Note 8) and is
subordinated to the bank letters of credit and line of credit.
8. CONVERTIBLE DEBENTURE AND DEFERRED INTEREST PAYABLE TO SHAREHOLDER
The Company also had a convertible debenture made available to it by the
principal shareholder. The maturity date of the shareholder debenture was
December 23, 1999. The convertible debenture and deferred interest payable
was collaterialized by substantially all Company assets, was
cross-collateralized with all loans from this shareholder (Note 7) and was
subordinated to the bank letters of credit and line of credit. On December
22, 1999, William Farber elected to convert the debenture into shares of
common stock of the Company. The shareholder debenture and accrued interest
was convertible at the rate of 4,000 shares of common stock for each $1,000
of outstanding indebtedness. The principal balance on the debenture at the
time of conversion was $2,000,000, and the interest on the debenture was
paid to date; therefore the transaction converted the $2,000,000 of
indebtedness to 8,000,000 shares of the Company's common stock. Interest
expense during the years ended June 30, 2000 and 1999 was $86,000 and
$180,000, respectively.
9. OTHER ASSETS
The Company included approximately $302,000 in deferred legal costs in
Prepaid Expenses and Other Assets at June 30, 2000. These fees are directly
related to a lawsuit in which the Company, as the plaintiff, and the
defending party agreed to settle out of court. The
31
<PAGE> 32
agreed-upon settlement terms provided that the Company will receive
proceeds of an amount in excess of $302,000, payable monthly in varying
amounts during fiscal year ended June 30, 2001. The deferred legal fees
will be charged to operations during the fiscal year ending June 30, 2001.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Current $ 62,190 $ 293,990
Deferred (527,520) (395,216)
Benefit of operating loss carryforwards - (266,874)
---------- ----------
$ (465,330) $ (368,100)
========== ==========
</TABLE>
A reconciliation of the differences between the effective rates and
statutory rates is as follows:
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Federal income tax at statutory rate 35.0% 35.0%
State and local income tax, net 10.7 6.5
Change in the beginning of the year balance
of the valuation allowance (101.7) (39.2)
Other 3.4
Use of net operating loss carryforward - (41.5)
----- -----
Benefit for income taxes (52.6)% (39.2)%
===== =====
</TABLE>
The principal types of differences between assets and liabilities for
financial statement and tax return purposes are net operating loss
carryforwards and accumulated depreciation. A deferred tax asset is
recorded for net operating losses being carried forward for tax purposes.
The Company has federal net operating loss carryforwards of approximately
$4,725,000, expiring through June 2008, that are available to offset future
taxable income. The annual utilization of tax loss carryforwards is subject
to limitations defined in the Internal Revenue Code.
Temporary differences which give rise to deferred tax assets and
liabilities are as follows as of June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 21,567 $ 23,000
Net operating loss carryforward 1,606,505 1,793,126
Other 24,570 103,190
----------- ----------
1,652,642 1,919,316
Valuation allowance - (900,100)
----------- ----------
Total 1,652,642 1,019,216
Deferred tax liability - Property, plant and equipment 579,906 474,000
----------- ----------
Net deferred tax asset $ 1,072,736 $ 545,216
=========== ==========
</TABLE>
32
<PAGE> 33
11. STOCK OPTIONS
In fiscal 1993, the Company adopted the 1993 Long-Term Incentive Plan (the
"Plan"). Pursuant to the Plan, officers and key employees of the Company
may be granted stock options which qualify as incentive stock options as
well as stock options which are nonqualified. The exercise price of the
options is at least the fair market value of the common stock on the date
of grant. The options vest over a three-year period and expire no later
than 10 years from the date of grant. There are 2,000,000 shares reserved
under the Plan. Options for 1,781,750 shares remain unissued as of June 30,
2000.
The Company accounts for the Plan in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for the Plan been determined consistent with SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income would have been reduced
by $55,586 and $45,877 for the years ended June 30, 2000 and 1999,
respectively, and earnings per share would have been reduced by $0.01 per
share for the years ended June 30, 2000 and 1999.
A summary of the status of the Company's option plan as of June 30, 2000
and 1999 and the changes during the years then ended is represented below:
<TABLE>
<CAPTION>
2000 1999
---------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 189,200 $ 1.50 191,350 $ 1.54
Granted 150,450 1.13
Terminated 121,400 1.52 2,150 4.06
------- -------- ------- --------
Outstanding, end of year 218,250 $ 1.24 189,200 $ 1.50
======= ======== ======= ========
Options exercisable at year-end 54,883 $ 1.45 69,199 $ 1.73
======= ======== ======= ========
</TABLE>
The weighted average fair value of options granted during the year ended
June 30, 2000 was $97,032. The fair value of the options granted were
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for grants during the year ended June 30,
2000: risk-free interest rate of 6%, expected volatility of 68%, dividend
yield of 0%, and expected life of 5 years.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF EXERCISE PRICES CONTRACTUAL EXERCISE
OPTIONS LIFE IN YEARS PRICE
------- ------------- --------
<S> <C> <C> <C>
$1.13 136,700 9.3 $ 1.13
$1.38 80,000 7.3 $ 1.38
$3.78 1,550 3.8 $ 3.78
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "Plan") covering
substantially all employees. The Company is required to contribute amounts
pursuant to employee salary reduction agreements and a matching
contribution equal to each employee's contribution not to exceed 3% of the
employee's compensation for the Plan year. Contributions to the Plan during
the years ended June 30, 2000 and 1999 were $55,788 and $48,464,
respectively.
13. CONTINGENCIES
The Company monitors its compliance with all environmental laws. Any
compliance costs which may be incurred are contingent upon the results of
future site monitoring and will be charged to operations when incurred. No
monitoring costs were incurred during the years ended June 30, 2000 and
1999.
33
<PAGE> 34
The Company is currently engaged in several civil actions as a co-defendant
with many other manufacturers of Diethylstilbestrol ("DES"), a synthetic
hormone. Prior litigation established that the Company's pro rata share of
any liability is less than one-tenth of one percent. The Company was
represented in many of these actions by the insurance company with which
the Company maintained coverage (subject to limits of liability) during the
time period that damages were alleged to have occurred. The Company has
either settled or is currently defending over 500 such claims. Management
believes that the outcome will not have a material adverse impact on the
consolidated financial position of the Company.
In addition to the matters reported herein, the Company is involved in
litigation which arises in the normal course of business. In the opinion of
management, the resolution of these lawsuits will not have a material
adverse effect on the consolidated financial position or results of
operations.
14. COMMITMENTS
In January 1998, the Company entered into an operating lease that includes
an escalation clause, for its warehouse and research and development
facility. The lease expires in March, 2001. The Company also has another
operating lease, expiring in 2005, for office equipment. Future minimum
lease payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
-------------------- ---------
<S> <C>
2001 $ 90,270
2002 13,020
2003 13,020
2004 13,020
2005 11,935
---------
$ 141,265
=========
</TABLE>
Rental expense for the years ended June 30, 2000 and 1999 was $116,000 and
$90,000, respectively.
15. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $4,856,000 and $4,153,000 during the
years ended June 30, 2000 and 1999, respectively, to a distributor (the
"related party") in which the owner is a relative of the Chairman of the
Board of Directors and principal shareholder of the Company. In January
2000, the Company began to ship certain OTC products directly to the
related party's customers, thereby eliminating the usage of the related
party as a wholesaler. However, the Company incurred additional commission
expense payable to the related party for their sales brokerage services and
customer service. The Company incurred sales commissions payable to the
related party of approximately $262,000 during the year ended June 30,
2000. Accounts receivable includes amounts due from the related party of
approximately $13,000 and $408,000 at June 30, 2000 and June 30, 1999,
respectively. Accrued expenses includes amounts due to the related party of
approximately $71,000 and $0 at June 30, 2000 and June 30, 1999,
respectively.
34
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
3(a) Articles of Incorporation Incorporated by reference to the Proxy Statement -
filed with respect to the Annual Meeting of
Shareholders held on December 6, 1991 (the "1991
Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to -
Stock Form 8 dated April 23, 1993 (Amendment No. 3 to
Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report -
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to -
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(c) to -
dated August 1, 1994 the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to -
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e) to -
dated December 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to -
dated June 30, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(g) Amendment #6 to Loan Agreement Incorporated by reference to Exhibit 10(g) to
dated November 1, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1997 ("1997 Form 10-KSB")
10(h) Amendment #7 to Loan Agreement Incorporated by reference to Exhibit 10(h) to
dated September 9, 1997 the Annual Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement Incorporated by reference to Exhibit 10(i) to
dated June 30, 1998 the Annual Report on 1998 Form 10-KSB
10(j) Amendment #9 to Loan Agreement Incorporated by reference to Exhibit 10(j) to
dated December 31, 1998 the Quarterly Report on for the period ended
December 31, 1998
10(k) Amendment #10 to Loan Agreement Filed Herewith 38
dated December 31, 1998
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(l) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(c) to -
between the Company and Meridian the 1993 Form 10-K
Bank
10(m) Amendment to Loan Documents Incorporated by reference to Exhibit 10(e) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of December 8, 1993 1994 ("1994 Form 10-K")
10(n) Letter Agreement between the Incorporated by reference to Exhibit 10(f) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
December 21, 1993 1994 ("1994 Form 10-K")
10(o) Third Amendment to Loan Incorporated by reference to Exhibit 10(g) to -
Agreement dated as of June 9, the Annual Report on Form 10-KSB f/y/e June 30,
1994 1994 ("1994 Form 10-K")
10(p) Fourth Amendment to Loan Incorporated by reference to Exhibit 10(i) to -
Documents between the Company the Annual Report on Form 10-KSB f/y/e June 30,
and Meridian Bank as of October 1995 ("1995 Form 10-K")
27, 1994
10(q) Letter Agreement between the Incorporated by reference to Exhibit 10(j) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
October 27, 1994 1995 ("1995 Form 10-K")
10(r) Letter Agreement between the Incorporated by reference to Exhibit 10(k) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
July 10, 1995 1995 ("1995 Form 10-K")
10(s) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of July 31, 1995 1995 ("1995 Form 10-K")
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(t) Line of Credit Note dated July Incorporated by reference to Exhibit 10(m) to -
31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(u) Fifth Amendment to Loan Incorporated by reference to Exhibit 10(n) to -
Agreement dated July 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(v) Amendment to Loan agreement Incorporated by reference to Exhibit 10(q) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank, dated March 5, 1996. 1996 ("1996 Form 10-K")
10(w) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March
20, 1997.
10(x) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March
20, 1997.
10(y) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated May
23, 1997.
10(z) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated September
24, 1997.
10(aa) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(ab) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ac) Amendment to Loan agreement Incorporated by reference to Exhibit 10(aa) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June
11, 1998.
10(ad) Amendment to Loan agreement Incorporated by reference to Exhibit 10(ab) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 1998.
10(ae) Line of Credit Note dated March Incorporated by reference to Exhibit 10(ad) to
11, 1999 the Annual Report on 1999 Form 10-KSB
10(af) Taxable Variable Rate Incorporated by reference to Exhibit 10(ae) to
Demand/Fixed Rate Revenue Bonds, the Annual Report on 1999 Form 10-KSB
Series of 1999
10(ag) Philadelphia Authority for Incorporated by reference to Exhibit 10(af) to
Industrial Development the Annual Report on 1998 Form 10-KSB
Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds
(Lannett Company, Inc. Project)
Series of 1999
10(ah) Letter of Credit and Agreements Incorporated by reference to Exhibit 10(ag) to
supporting bond issues the Annual Report on 1998 Form 10-KSB
10(ai) Employment agreement between the Incorporated by reference to Exhibit 10(i) to
Company and Vlad Mikijanic the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(aj) Supply Agreement dated January Incorporated by reference to Exhibit 10(ad) to
14, 1997 the Annual Report on 1998 Form 10-KSB
10(ak) Supply Agreement dated January Incorporated by reference to Exhibit 10(ae) to
17, 1997 the Annual Report on 1998 Form 10-KSB
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(al) Supply Agreement dated January Incorporated by reference to Exhibit 10(af) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(am) Supply Agreement dated February Incorporated by reference to Exhibit 10(ag) to
11, 1997 the Annual Report on 1998 Form 10-KSB
10(an) Supply Agreement dated May 27, Incorporated by reference to Exhibit 10(ah) to
1997 the Annual Report on 1998 Form 10-KSB
11 Computation of Earnings
Per Share Filed Herewith 39
22 Subsidiaries of the Company Incorporated by reference to the Annual Report
on Form 10-K f/y/e June 30, 1990
23 Consent of Deloitte & Touche Incorporated by reference to Exhibit 23 to the
Annual Report on 1999 Form 10-KSB
27 Financial Data Schedule Filed Herewith 40
</TABLE>
39
