-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AqSnhVUKsud6+1/9a+GKYKpshSTnkwd7sKH4hDAtoa5mZEW+j2pyS5PORchdDFvE SnWkhRmNUiSEMi11qZqkMA== 0000950009-96-000446.txt : 19960930 0000950009-96-000446.hdr.sgml : 19960930 ACCESSION NUMBER: 0000950009-96-000446 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANNETT CO INC CENTRAL INDEX KEY: 0000057725 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 230787699 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-09036 FILM NUMBER: 96636240 BUSINESS ADDRESS: STREET 1: 9000 STATE RD CITY: PHILADELPHIA STATE: PA ZIP: 19136 BUSINESS PHONE: 2153339000 MAIL ADDRESS: STREET 1: 9000 STATE ROAD STREET 2: 9000 STATE ROAD CITY: PHLADELPHIA STATE: PA ZIP: 19136 FORMER COMPANY: FORMER CONFORMED NAME: NETHERLANDS SECURITIES INC DATE OF NAME CHANGE: 19660629 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Mark One) [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________ to________________ Commission File No. 0-9036 LANNETT COMPANY, INC. (Name of small business issuer in its charter) State of Delaware 23-0787-699 State of Incorporation I.R.S. Employer I.D. No. 9000 State Road Philadelphia, Pennsylvania 19136 (215) 333-9000 (Address of principal executive offices and telephone number) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.001 Par Value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No____ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB._X_ The issuer had net sales of $3,819,595 for the fiscal year ended June 30, 1996. As of September 10, 1996, the aggregate market value of the voting stock held by non-affiliates was approximately $4,739,955 computed by reference to the average of the bid and asked prices of such stock as quoted by the National Quotations Bureau, Inc. As of September 10, 1996, there were 5,206,128 shares of the issuer's common stock, $.001 par value, outstanding. PART I ITEM 1. DESCRIPTION OF BUSINESS General. Lannett Company, Inc. (the "Company") was incorporated in 1942 under the laws of the Commonwealth of Pennsylvania. In 1991, the Company merged into Lannett Company, Inc., a Delaware corporation. The sole purpose of the merger was to reincorporate the Company as a Delaware corporation. The administrative offices and manufacturing facilities of the Company are located at 9000 State Road, Philadelphia, Pennsylvania. The Company manufactures and distributes pharmaceutical products sold under generic names ("competitive pharmaceutical products") and historically has manufactured and distributed pharmaceutical products sold under its trade or brand names ("pharmaceutical specialties"). In addition, the Company packages and distributes competitive pharmaceutical products manufactured by other companies. In August 1991, the Company temporarily suspended manufacturing operations in order to upgrade its facilities and operations and to systematically review its approved new drug applications, systems and procedures. The Company completed the modernization of its facilities and operations, instituted inventory and quality control programs, and implemented a multi-pronged remedial action plan to assure compliance with applicable governmental regulations and industry standards. The Company resumed manufacturing on a limited product basis in October 1992. Principal Products. During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company manufactured and distributed five products, Butalbital Compound Capsules ("BCC"), a generic version of Sandoz's Fiorinal(R), which the Company began manufacturing and distributing in October 1992, Primidone, a generic version of Wyeth-Ayerst's Mysoline(R) an anti-convulsant, which the Company began manufacturing and distributing in November 1993 and Dicyclomine Hydrochloride USP, 10-mg capsules, a generic version of Marion Merrell Dow's Bentyl(R), an antispasmodic and anticholinergic agent, which the Company began manufacturing and distributing in July 1994. In June 1996 the Company began manufacturing and distributing Prednisone 5mg and Prednisone 20mg tablets, both of which are steroidal anti-inflammatory agents. In addition in April 1996 the Company received an "AB" rating from the FDA for Dicyclomine Hydrochloride 10mg capsules, making it fully interchangeable with Marion Merrell Dow's Bentyl(R) and fully reimbursable under Federal Government programs. The Company has continued producing test batches of other products to determine whether they meet the Company's new quality control standards and the highest industry standards. As a result of its testing, management decided to reformulate a number of products, to modify some manufacturing processes and to add new raw material suppliers, all of which require supplemental approval from the Food and Drug Administration ("FDA"). Obtaining such approval has delayed the re-introduction of such reformulated products. 2 Twelve additional products are under development at this time; three of these products have been redeveloped and submitted to the FDA for supplemental approval; seven others are currently in various stages of development, revalidation or preparation for submission to the agency, and two of these products represent new product introductions as part of the Company's commitment to a research and development program, of which one is currently involved in a biostudy for submission. Lannett is aggressively pursuing alternative product lines designed to compliment the Company's existing products. In addition to research an development undertakings, the Company is actively pursuing contract manufacturing and contract packaging. Subsequent to the year ended June 30, 1996 the Company received approval from the FDA for Acetazolamide USP 250mg tablets, a carbonic anhydrase inhibitor, the generic version of Lederle Laboratories, Diamox(R), used in the treatment of some types of convulsive disorders (epilepsy), certain types of glaucoma, and in the treatment of cardiac edema. The Company is currently in the process of obtaining a new raw material source for this product. Lannett is also pursuing key strategic alliances to jointly market its current product base. Since the Company has no control over the FDA review process, management is unable to anticipate with certainty when it will commence production and shipping additional products. Management hopes to introduce a number of products by the end of Fiscal 1997. Raw Materials. The raw materials used by the Company in the manufacture of pharmaceutical products consist of pharmaceutical chemicals in various forms which are available from various sources. FDA approval is required in connection with the process of selecting suppliers. Two suppliers, Ganes Chemicals Inc. and Upjohn Company, accounted for approximately 34% and 18%, respectively of the Company's raw material purchases in Fiscal 1996. One supplier, Ganes Chemicals Inc., accounted for approximately 45% of the Company's raw material purchases in Fiscal 1995. As the number of approved products increases, the Company expects the percentage of raw material purchased from any one supplier to decrease. Currently the Company is operating at approximately two-thirds of its full capacity on a one shift basis. Production levels have increased with the introduction of each additional product, it is estimated that the Company will reach full production capacity after the introduction of approximately two additional products, depending on the demand of the products introduced. Distribution. The Company historically sold its pharmaceutical products either through wholesale distributors or directly to retail pharmacies, physicians, hospitals and other institutions throughout the United States and, to a limited extent, some foreign countries. In the future, the Company expects to sell its pharmaceutical products primarily to wholesalers, distributors, governmental agencies and warehousing chains. Sales of the Company's pharmaceutical products are made on an individual order basis. The Company has no long-term contracts to sell its pharmaceutical products. The Company historically has had a broad customer base and has not been dependent on one or a few major customers. Two customers accounted for approximately 21% and 13% respectively, of net sales in Fiscal 1996. Three customers accounted for approximately 16%, 13% and 11%, respectively, of the Company's sales in Fiscal 1995. As the Company reintroduces additional products, the Company once again expects its customer base to broaden. 3 Competition. The manufacture and distribution of pharmaceutical products is a highly competitive industry. Competition in the pharmaceutical industry is primarily based on quality and price and, in the case of pharmaceutical specialties, advertising and marketing activities. The Company intends to compete primarily on the basis of price and quality, service and availability of inventory and that the Company's products are only available from limited competitors. The modernization of its facilities, implementation of inventory and quality control programs and introduction of new products have improved the Company's competitive position. Government Regulation. Pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally by the FDA and the Drug Enforcement Agency ("DEA"), and, to a lesser extent, by state governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substance Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, pricing, advertising and promotion of the Company's generic drug products. Noncompliance with applicable regulations can result in fines, recall and seizure of products, total or partial suspension of production, personal and/or corporate prosecution and debarment, and refusal of the government to enter into supply contracts or to approve new drug applications. The FDA also has the authority to revoke previously approved drug products. FDA approval is required before any "new" prescription drug can be marketed. The approval procedures are generally quite burdensome. A new drug is one not generally recognized by qualified experts as safe and effective for its intended use. Generally, a drug which is the generic equivalent of a previously approved prescription drug will be treated as a new generic drug requiring FDA approval. Furthermore, each dosage form of a specific generic drug product requires separate approval by the FDA. However, less burdensome approval procedures may be used for generic equivalents. Although generic equivalents of many over-the-counter drugs generally do not require affirmative FDA pre-approval, there are instances where FDA pre-approval is required. There are currently three ways to obtain FDA approval of a new drug. 4 New Drug Applications ("NDA"). Unless one of the two procedures discussed in the following paragraphs is available, a manufacturer must conduct and submit to the FDA complete clinical studies to establish a drug's safety and efficacy. Abbreviated New Drug Applications ("ANDA"). An ANDA is similar to an NDA, except that the FDA waives the requirement of complete clinical studies of safety and efficacy, although it may require bioavailability and bioequivalence studies. "Bioavailability" indicates the rate of absorption and levels of concentration of a drug in the blood stream needed to produce a therapeutic effect. "Bioequivalence" compares one drug product with another, and when established, indicates that the rate of absorption and the levels of concentration of a generic drug in the body are within prescribed statistical limits to those of a previously approved equivalent drug. Under the Drug Price Act, an ANDA may be submitted for a drug on the basis that it is the equivalent of an approved drug, regardless of when such other drug was approved. The Drug Price Act, in addition to establishing a new ANDA procedure, created statutory protections for approved brand name drugs. Under the Drug Price Act, an ANDA for a generic may not be made effective until all relevant product and use patents for the equivalent brand name drug have expired or have been determined to be invalid. Prior to enactment of the Drug Price Act, the FDA gave no consideration to the patent status of a previously approved drug. Additionally, the Drug Price Act extends for up to five years the term of a product or use patent covering a drug to compensate the patent holder for the reduction of the effective market life of a patent due to federal regulatory review. With respect to certain drugs not covered by patents, the Drug Price Act sets specified time periods of two to ten years during which ANDA's for generic drugs cannot become effective or, under certain circumstances, be filed if the equivalent brand name drug was approved after December 31, 1981. Paper New Drug Applications ("Paper NDA"). For drugs which are identical to a drug first approved after 1962, a prospective manufacturer need not go through the full NDA procedure, but instead may demonstrate safety and efficacy by reliance on published literature and reports, and must also submit, if the FDA so requires, bioavailability or bioequivalence data illustrating that the generic drug formulation produces, within an acceptable range, the same effects as the previously approved equivalent drug. Because published literature to support the safety and efficacy of post-1962 drugs may not be generally available, this procedure is of limited utility to generic drug manufacturers. Moreover, the utility of Paper NDA's has been even further diminished by the recently broadened availability of the abbreviated new drug application as described above. Among the requirements for new drug approval is the requirement that the prospective manufacturer's methods conform to the FDA's current good manufacturing practices ("CGMP Regulations"). The CGMP Regulations must be followed at all times during which the approved drug is manufactured. In complying with the standards set forth in the CGMP regulations, the Company must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. Failure to comply risks possible FDA action such as the seizure of noncomplying drug products or, through the Department of Justice, enjoining the manufacture of such products. 5 The Company is also subject to federal, state and local laws of general applicability, such as laws regulating working conditions, and, to the extent that its business operations entail the generation, storage, transportation or discharge of items that may be considered hazardous substances, hazardous waste or environmental contaminants, to various federal, state and local environmental protection laws and regulations. The Company monitors its compliance with all environmental laws. Any compliance costs which may be incurred, are contingent upon the results of future site monitoring and will be charged against operations when incurred. During each of the years ended June 30, 1996 and 1995, the Company incurred monitoring costs of approximately $10,000. Research and Development. During Fiscal 1996 the Company incurred research and development costs of approximately $253,000 relating to the reformulation of existing products and development of two new products. During Fiscal 1995 the Company incurred research and development costs of approximately $272,000. Approximately $240,000 is expected to be incurred on bioequivalency studies for the two new products during Fiscal 1997. Employees. The Company currently employs 38 employees, all of whom are full-time. ITEM 2. DESCRIPTION OF PROPERTY The Company's general business offices, laboratory, manufacturing and distribution facilities are located in a facility owned by the Company at 9000 State Road, Philadelphia, Pennsylvania. This facility was extensively renovated during Fiscal 1993 and Fiscal 1992 and contains approximately 31,000 square feet, located on four and one half (4-1/2) acres. The Company's facility is subject to a mortgage in favor of Meridian Bank pursuant to an Open-End Mortgage dated May 4, 1993, as amended by amendments dated December 8, 1993, December 21, 1993, June 9, 1994, October 27, 1994, July 31, 1995 and March 5, 1996 and a mortgage in favor of William Farber pursuant to a Mortgage dated August 30, 1991, as amended by Amendments #1, # 2 #3, #4 and #5 dated March 15, 1993, August 1, 1994, March 15, 1995, December 31, 1995 and June 30, 1996, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS Regulatory Proceedings. The Company is engaged in an industry which is subject to considerable government regulation relating to the development, manufacturing and marketing of pharmaceutical products. Accordingly, incidental to its business, the Company periodically responds to inquiries or engages in administrative and judicial proceedings involving regulatory authorities, particularly the FDA and the DEA. 6 DES Cases. The Company is currently engaged in several civil actions as a co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a synthetic hormone. Prior litigation established that the Company's pro rata share of any liability is less than one-tenth of one percent. The Company was represented in many of these actions by the insurance company with which the Company maintained coverage during the time period that damages were alleged to have occurred. The insurance company has denied coverage of actions filed after January 1, 1992. With respect to these actions, the Company paid nominal damages or stipulated to its pro rata share of any liability. The Company has either settled or is currently defending over 500 such claims. Recently, the Company persuaded its insurance carriers to resume defense and indemnification of most DES claims, has recovered from its insurers some of the amounts the Company previously expended in these cases, and is negotiating recovery of the balance of such amounts. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters have been submitted to a vote of the Company's security holders since the annual meeting of shareholders held April 12, 1996. 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information. The Company's common stock trades in the over-the-counter market through the use of the inter-dealer "pink-sheets" published by the National Quotations Bureau, Inc. (the "NQB"). The following table sets forth certain information with respect to the high and low bid prices of the Company's common stock during Fiscal 1996 and 1995 as quoted by the NQB. Such quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not represent actual transactions. - ------------------------------------------------------------------------------ Fiscal Year Ended June 30, 1996 ------------------------------- - ------------------------------------------------------------------------------ High Low ---- --- First quarter.................................. $2.75 $1.5 Second quarter................................. 3 2.5 Third quarter.................................. 2.94 2 Fourth quarter................................. 2.13 1.5 Fiscal Year Ended June 30, 1995 ------------------------------- High Low First quarter ................................. $ 3.75 $ 2.25 Second quarter ................................ 3.25 2 Third quarter.................................. 2.5 1.5 Fourth quarter ............................... 2.5 1.38 - ------------------------------------------------------------------------------ Holders. The number of holders of record of the Company's common stock as of September 10, 1996 is 537. 8 Dividends. The Company did not pay any cash dividends in Fiscal 1996 or 1995. The Company intends to utilize all available funds for the Company's working capital and does not anticipate paying cash dividends in the foreseeable future. The Company is prohibited from declaring or paying any dividends, other than stock splits or dividends payable solely in the Company's common stock, or making any other distributions on any of its securities, pursuant to the terms of a Loan Agreement dated May 4, 1993 between Meridian Bank and the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and Capital Resources." ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations - Fiscal 1996 to Fiscal 1995. Net sales decreased by 11.2% to $3,819,595 in Fiscal 1996 from net sales of $4,303,468 in Fiscal 1995. The Company's net sales during Fiscal 1996 were derived from the sale of BCC, Primidone, Dicyclomine, Prednisone 5mg and Prednisone 20mg (which the Company began manufacturing and distributing in June 1996). The Company's net sales during Fiscal 1995 were derived from the sale of BCC, Primidone and Dicyclomine (which the Company began manufacturing and distributing in July 1994). In addition during Fiscal 1995 the Company performed a limited amount of contract packaging. Sales decreased in Fiscal 1996 due to a decrease in contract packaging, increased competition for one of the Company's products and more competitive pricing. Cost of sales decreased by 1.8%, to $1,867,908 in Fiscal 1996 from $1,903,117 in Fiscal 1995. Cost of sales decreased slightly as compared to the decrease in sales from Fiscal 1995 to Fiscal 1996, due to a large portion of cost of sales being fixed costs and due to the introduction of Prednisone 5mg and Prednisone 20mg which have high raw material and manufacturing costs. Gross profit margins for Fiscal 1996 and Fiscal 1995 were 51.1% and 55.8%, respectively. The decrease in the gross profit percentage is primarily due to the decrease in sales during Fiscal 1996 as a result of less fixed costs being absorbed during this period. In addition the Company introduced Prednisone 5mg and Prednisone 20mg during the quarter ended June 30, 1996, which have lower gross profit margins. Selling, general and administrative expenses decreased by 8.6%, to $1,260,351 in Fiscal 1996 from $1,378,312 in Fiscal 1995. The decrease is primarily due to a reduction in legal costs. The Company reported an operating profit of $691,336 for Fiscal 1996, as compared to an operating profit of $1,022,039 for Fiscal 1995. 9 The Company's interest expense increased to $599,907 for Fiscal 1996 from $578,062 for Fiscal 1995 primarily due to increased borrowings on the Company's lines of credit. See Liquidity and Capital Resources below. Other income for Fiscal 1996 and 1995 comprised principally of insurance proceeds received. During Fiscal 1995 the Company had provided for Pennsylvania corporate income tax of approximately 11% of taxable income. Due to tax law changes, the Company could not utilize its net operating loss carry forward deduction for Pennsylvania corporate income tax during Fiscal 1995. The 1993 Pennsylvania Tax Act reactivated the net operating loss carryforward deduction for taxable fiscal years after 1995, therefore, no provision for Pennsylvania corporate income tax was made during Fiscal 1996. The Company reported net income of $137,066 for Fiscal 1996, or $.03 per share, $.02 on a fully diluted basis, compared to net income of $316,086 or $0.06 per share, $.03 on a fully diluted basis, for Fiscal 1995. Liquidity and Capital Resources - Fiscal 1996 to Fiscal 1995 The Company used $185,880 and $16,067 of cash in operations during Fiscal 1996 and Fiscal 1995, respectively. Net cash used in operations increased from Fiscal 1995 to Fiscal 1996 due to lower net income in Fiscal 1996 and an increase in inventory as a result of new product introductions. Accrued interest increased as a result of the Company deferring accrued interest from April 1, 1995 to June 30, 1996, which is payable in twenty-four monthly installments, commencing August 15, 1996. The Company expended $220,714 for property, plant and equipment during Fiscal 1996 compared to $257,031 expended during Fiscal 1995. The Company has not made any material commitments, but has budgeted up to $500,000, for capital expenditures in Fiscal 1997. Net cash provided by financing activities increased to $351,877 during Fiscal 1996 from $147,466 provided by financing activities during Fiscal 1995. This increase in cash provided by financing activities was primarily used to finance inventory and working capital needs. As a result of the foregoing, the Company experienced a $13,717 decrease in cash available from the beginning to the end of Fiscal 1996, resulting in $25,258 cash available at the end of the fiscal year. Except as set forth herein, the Company is not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on the Company's net sales or income from continuing operations. From Fiscal 1987 through Fiscal 1994, the Company incurred operating losses and suffered cash flow restraints. As noted above, the Company suspended manufacturing operations from August 1991 through October 1992. The Company obtained the needed capital to renovate its manufacturing 10 facility, to acquire new equipment, to remove hazardous waste materials, to retain new management and to provide working capital, primarily from a financing facility made available to the Company by William Farber, a principal shareholder and Chairman of the Board of Directors, in August 1991. This investment has resulted in an operating profit for the Company for the Fiscal years 1996 and 1995. This financing facility originally consisted of a $2,000,000 revolving line of credit and a $2,000,000 9% convertible debenture. The revolving line of credit and the debenture are secured by substantially all of the Company's assets and are subordinated to the bank lines of credit and mortgage term loan payable. In March 1993, at the Company's request, William Farber increased the aggregate credit available under the revolving line of credit to $3,500,000. The Company requested the additional financing to provide working capital while the Company reformulated products and obtained supplemental approvals from the FDA. The line of credit bears interest at the prime rate published by Michigan National Bank plus 1% per annum. The effective rate at June 30, 1996 and 1995 was 9.25% and 10%, respectively. The principal is due July 1, 1998. Accrued interest through June 30, 1994 is payable in twenty-four equal monthly installments, commencing August 15, 1994 and continuing on the fifteenth day of each month thereafter until paid in full. Accrued interest from April 1, 1995 to June 30, 1996 is payable in twenty-four equal monthly installments, commencing August 15, 1996 and continuing on the fifteenth day of each month thereafter with the balance due July 1, 1998. Accrued interest from July 1, 1996 to June 30, 1997 is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter, with the balance due July 1, 1998. At June 30, 1996 accrued interest was approximately $432,000 of which $228,000 is included in the long-term outstanding balance. At June 30, 1996 $204,000 was classified as currently due. The debenture bears interest at 9% per annum. The debenture is due December 23, 1998 and is convertible at any time prior to payment in full at the conversion rate of 4,000 shares of common stock for each $1,000 of outstanding indebtedness (adjusted for the Company's 4 for 1 stock splits in April 1992 and March 1993). Accrued interest through June 30, 1994 is payable in twenty-four equal monthly installments, commencing August 15, 1994 and continuing on the fifteenth day of each month thereafter. Accrued interest from April 1, 1995 to June 30, 1996 is payable in twenty-four equal monthly installments, commencing August 15, 1996 and continuing on the fifteenth day of each month thereafter until paid in full. Accrued interest from July 1, 1996 to June 30, 1997 is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter, with the balance due December 23, 1998. At June 30, 1995 accrued interest was approximately $245,000, of which $123,000 is included in the long-term outstanding balance. At June 30, 1995 $122,000 was classified as currently due. At June 30, 1996, there was no additional borrowing capacity available under the revolving line of credit. Management expects to have sufficient operating income during Fiscal 1997 to make the required monthly interest payments. In May 1993, the Company obtained a $500,000 mortgage term loan from a Bank which provides for monthly principal installments of approximately $2,800 plus interest at 9.25% per 11 annum. A final balloon payment of $302,778 is due in May 2000. The Company also obtained a $500,000 line of credit from the Bank which bears interest at prime plus 1.5% per annum. The effective rate at June 30, 1996 and 1995 was 9.5% and 10.25%, respectively. The line of credit is limited to 80% of qualified accounts receivable. At June 30, 1996, no funds were available under the line of credit. Both loans are secured by substantially all of the Company's assets and the mortgage term loan is guaranteed by Mr. Farber, who has subordinated his loans to the Company to those of the Bank. The Bank's lien against the Company's realty is to be released on payment in full of the mortgage term loan. On July 31, 1995, the Company secured a $300,000 bank revolving line of credit for equipment financing, expiring October 31, 1996. Advances are limited to 80% of equipment costs. On April 1, 1996, $93,881 of borrowings under this line was converted into a secured term loan payable in forty-eight equal monthly installments. This line of credit bears interest at prime plus 1.5%. The effective rate at June 30, 1996 was 9.75%. At June 30, 1996, $158,000 was available to the Company under the revolving line of credit for equipment financing. The line of credit is collateralized by all of the Company's present and future equipment. It is also cross-collateralized with the bank mortgage term loan payable and the line of credit. In Fiscal 1996 and Fiscal 1995 working capital has been primarily provided through sales and borrowings under the lines of credit. The Company's working capital increased to $505,730 at June 30, 1996 from $19,404 at June 30, 1995, mainly due to increases in inventory resulting from new product introductions. In addition accounts receivable increased due to increased sales levels during the quarter ended June 30, 1996 as compared to June 30, 1995. Management currently believes the balances available under the Company's existing lines of credit, and working capital generated by increased sales activity, will be adequate to fund the Company's working capital requirements under current sales conditions. The introduction of new products with high raw material costs, and increased research and development activities may result in the Company having to increase its lines of credit to provide the working capital to support the increased levels of sales and increased research and development activities. The Company is currently negotiating to increase its borrowing capacity under the shareholder line of credit. Except as set forth herein, the Company is not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on the Company's short-term or long-term liquidity or financial condition. Prospects for the Future As of June 30, 1996, the Company was manufacturing and marketing five products, BCC, Primidone, Dicyclomine, Prednisone 5mg and Prednisone 20mg. As described above, twelve additional products are under development at this time; three of these products have been redeveloped and submitted to the FDA for supplemental approval; seven others are currently in various stages of development, revalidation or preparation for submission to the agency, and two represent new product introductions as part of the Company's commitment to a research and development program, of which one is currently involved in a biostudy for submission. Lannett is aggressively pursuing alternative product lines designed to compliment the Company's existing products. In addition to research and 12 development undertakings, the Company is actively pursuing contract manufacturing and contract packaging. Subsequent to the year ended June 30, 1996, the Company received approval from the FDA for Acetazolamide USP 250mg tablets, a carbonic anhydrase inhibitor, the generic version of Lederle Laboratories, Diamox(R), used in the treatment of some types of convulsive disorders (epilepsy), certain types of glaucoma, and in the treatment of cardiac edema. The Company is currently in the process of obtaining a new raw material source for this product. Lannett is also pursuing key strategic alliances to jointly market its current product base. In addition the Company is actively pursuing to increase contract manufacturing and packaging on behalf of other companies. Since the Company has no control over the FDA review process, management is unable to anticipate with certainty when it will commence production and shipping additional products. Management hopes to introduce a number of products by the end of Fiscal 1997. With a modern manufacturing facility, a highly qualified and motivated work force and management team, and inventory and quality control programs in place, management believes the Company is positioned to regain a competitive position in the market as it reintroduces additional products and approaches full production capacity. Management anticipates a continuation of profitability during Fiscal 1997. ITEM 7. FINANCIAL STATEMENTS The financial statements and report of independent certified public accountants filed as a part of this Form 10-KSB are listed in the "Index to Financial Statements" filed herewith. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no matters required to be reported hereunder. 13 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Directors and Executive Officers. The directors and executive officers of the Company are set forth below: ============================================================================== Age Position Directors: Roy English 65 Director Donald Epstein 63 Director David Farber1 37 Director William Farber 65 Chairman of the Board Gerald Levinson 65 Director Other Executive Officers: - ------------------------- Vlad Mikijanic 45 Vice President of Technical Affairs Jeffrey Moshal 31 Vice President - Finance and Treasurer =============================================================================== Roy English has served as a Director of the Company since February 1993. Mr. English is a pharmacist by profession. For many years prior to 1987, Mr. English owned and operated Major Pharmaceuticals - Kentucky (formerly Murray Drug Corp.), a generic drug distributor. In 1987, Mr. English sold Murray Drug Corp. From 1987 through 1989, Mr. English served as President of Major Pharmaceuticals - Kentucky. Mr. English provided consulting services to Major Pharmaceuticals from 1989 to August 1993. In 1988, Mr. English formed English Farms, Inc., a closely-held family corporation which sells food products and is currently Chairman of its Board. In 1991, Mr. English purchased 50% of Southeastern Book Co., an entity which buys and sells used college text books. He has retired as President but still serves as a director of such Company. Donald Epstein has served as a Director of the Company since 1989. From 1989 to the present, Mr. Epstein has acted as a financial consultant. From 1976 through 1989, Mr. Epstein served as President of Little Donnie's Inc., a Philadelphia-based food distribution company. During the past 23 years, Mr. Epstein has owned and operated a number of food distribution companies for various - --------- 1David Farber is the son of William Farber. 14 lengths of time, including A. Epstein, Inc. and McCray & Hunter, Inc., and several companies in the business of owning and operating restaurants in Pennsylvania and New Jersey, including H.A. Winston's, Watson's and Gibson's restaurants. David Farber was elected a Director of the Company in August 1991. In November 1994, Mr. Farber sold Vital Foods, Inc. and formed the TVO Inc, where he is serving in the capacity of president. Up until 1990, Mr. Farber has been the President and owner of Vital Foods, Inc., a eight store chain of health food stores in the Detroit, Michigan area. Prior to that, Mr. Farber was employed by Michigan Pharmacal Corporation for 13 years; the most recent six years as Executive Vice President and prior to that, as Production Manager. David Farber is the son of William Farber. William Farber was elected as Chairman of the Board of Directors in August 1991. From April 1993 to the end of 1993, Mr. Farber was the President and a director of Auburn Pharmaceutical Company. From 1990 through March 1993, Mr. Farber served as Director of Purchasing for Major Pharmaceutical Corporation. From 1965 through 1990, Mr. Farber was the Chief Executive Officer of Michigan Pharmacal Corporation. Mr. Farber is a registered pharmacist in the State of Michigan. William Farber is the father of David Farber and the husband of Audrey Farber, Secretary and Treasurer of the Company. Gerald Levinson has served as a Director of the Company since 1979. Mr. Levinson has been a financial consultant for over twenty years and was Assistant to the Chairman of the Board of Directors of Tabas Enterprises, a privately-held diversified company, for almost twenty years. Mr. Levinson is currently a member of the Board of Directors of First Republic Bancorp, Inc., a bank holding company, and its subsidiary, First Republic Bank. Vlad Mikijanic was elected Vice President of Technical Affairs in August 1991. For the prior 17 years, Mr. Mikijanic was employed by Zenith Laboratories in various positions including Corporate Director of Quality Control/Quality assurance, a position which he held at Zenith for three years. Jeffrey Moshal was elected Vice President - Finance and Treasurer in April 1996. Mr. Moshal joined the Company in August 1994 as Director of Financial Operations. For the prior seven years, Mr. Moshal was employed by Grant Thornton LLP, primarily serving manufacturing clients. Mr. Moshal is a Certified Public Accountant. To the best of the Company's knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any director or executive officer during the past five years. Section 16(a) Compliance. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto and certain written representations furnished to the Company during Fiscal 1996, the Company is not aware of the failure to file on a timely basis, any of the reports required by Section 16(a) of the Securities Exchange Act of 1934. 15 ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table The following table summarizes all compensation paid to or earned by the Executive Officers of the Company for Fiscal 1996, Fiscal 1995 and Fiscal 1994. There are no other executive officers whose total salary and bonus for services rendered to the Company or any subsidiary exceeded $100,000 during Fiscal 1995.
Long Term Compensation --------------------------------- Annual Compensation Awards Payouts - -------------------------------------------------------- ----------------------- --------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Name and Other Restricted LTIP All Other Principal Fiscal Annual Stock Options Payouts Compensation Position Year Salary Bonus1 Compensation Award (s) /SARs Amount Amount -------- ---- ------ ------ ------------- ------------ ------- -------- ----------- William 1996 0 0 0 0 0 0 0 Farber Chairman of the Board Barry 1996 169,343 10,760 20,0002 0 0 0 27,8503 Weisberg President/ CEO - resigned January 1, 1996 1995 163,262 10,760 20,0002 0 20,0004 0 27,8505 1994 158,556 10,883 20,0002 0 20,0004 0 22,4587 Vlad 1996 104,284 1,200 7,2002 0 0 0 3,3456 Mikijanic Vice President/ Technical Affairs 1995 101,038 0 7,2002 0 0 0 3,2688 16 - --------- 1 The Company contributed $9,240, $9240 and $9,117 in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively, on Mr. Weisberg's behalf to the Company's 401(k) Plan. Pursuant to his employment agreement, Mr. Weisberg earned an additional bonus of $10,760, $10,760 and $10,883 in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. 2 Includes $20,000 paid to Mr. Weisberg, and $7,200 paid to Mr. Mikijanic for automobile leasing and expenses for all periods presented. 3 Includes $13,740 paid to the Company's 401(k) Plan (including $9,240 contributed pursuant to Mr. Weisberg's bonus arrangement and an additional contribution of up to 3% of Mr. Weisberg's salary), $8,624 paid for life insurance premiums, and $5,486 paid for long term disability insurance 4 Upon termination of Employee's employment for any reason other than cause, death, retirement, or disability, this Option may be exercised, to the extent it was otherwise exercisable on the date of termination of employment, within ninety days of such termination of employment. No options have been exercised. 5 Includes $13,740 paid to the Company's 401(k) Plan (including $9,240 contributed pursuant to Mr. Weisberg's bonus arrangement and an additional contribution of up to 3% of Mr. Weisberg's salary), $8,624 paid for life insurance premiums, and $5,486 paid for long term disability insurance. 6 Represents $3,345 paid to the Company's 401(k) Plan ( a Company contribution of up to 3% of Mr. Mikijanic's salary). 7 Includes $13,831 paid to the Company's 401(k) Plan (including $9,117 contributed pursuant to Mr. Weisberg's bonus arrangement and an additional contribution of up to 3% of Mr. Weisberg's salary)and $8,627 paid for life insurance premiums. 8 Represents $3,268 paid to the Company's 401(k) Plan ( a Company contribution of up to 3% of Mr. Mikijanic's salary).
17 Option Exercises and Year End Option Values (a) (b) (c) (d) (e) Value of Number of Securities Unexercised Underlying In-the-Money Shares Unexercised Options at Acquired Options at FY-End FY-End on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable * ---- -------- -------- -------------------- --------------- Vlad Mikijanic -- -- 6,666 $0 Vice President 1,333 $0 of Technical Affairs * Computed by reference to the average of the bid and asked prices of such stock as quoted by the NQB. Compensation of Directors. Directors received compensation of $300 per meeting attended, for services provided as directors of the Company during Fiscal 1996. Directors are reimbursed for expenses incurred in attending Board meetings. Employment Contracts. Effective January 1, 1996, Barry Weisberg resigned as President and a director of the Company. The Company and Vlad Mikijanic entered into a five-year Employment Agreement as of February 1, 1994, which provided for an initial salary of $100,000 with annual salary increases of 3% and an automobile allowance of $7,200 per annum. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 10, 1996 information regarding the security ownership of the directors and certain executive officers of the Company and persons known to the Company to be beneficial owners of more than five (5%) percent of the Company's common stock: 18
========================================================================================== Excluding Options Including Options and Debentures and Debentures ----------------- -------------------- Name and Address of Number Percent Number Percent Beneficial Owner Office of Shares of Class of Shares of Class - ---------------- ------ ----------- -------- ------------- -------- Directors/Executive Officers: Roy English Director 34,0001 .65% 34,0001 .65% 9000 State Road Philadelphia, PA 19136 Donald Epstein 9000 State Road Director 181,616 3.49% 181,616 3.49% Philadelphia, PA 19136 David Farber2 Director 59,4723 1.14% 59,4723 1.14% 9000 State Road Philadelphia, PA 19136 William Farber2 Chairman 1,005,486 19.31% 9,005,4864 68.19% 9000 State Road of the Philadelphia, PA Board 19136 Gerald Levinson Director 138,8005 2.67% 138,8005 2.67% 9000 State Road Philadelphia, PA 19136 Vlad Mikijanic 9000 State Road Vice 0 0 6,6666 .05% Philadelphia, PA President 19136 of Technical Affairs - --------- 1 Includes 3,500 shares owned by the spouse of Mr. English. 2 William Farber is the father of David Farber and the husband of Audrey Farber, the Secretary and Treasurer of the Company. 3 Includes 6,192 shares held by David Farber's minor child and 4,000 shares held in an individual retirement account. 4 Includes 8,000,000 shares of common stock subject to issuance upon conversion of the debenture held by Mr. Farber. Mr. Farber may convert all or any portion of such indebtedness at any time prior to payment in full of the outstanding indebtness represented by the debenture at a rate of 4000 shares of common stock for each $1,000 of outstanding indebtness (adjusted to reflect the Company's 4 for 1 stock splits in April 1992 and March 1993), subject to anti-dilution provisions. The current outstanding indebtness represented by the debenture is $2,000,000. 5 Includes 400 shares held by Mr. Levinson's child, who resides in the same household.
19
Jeffrey Moshal Vice -- -- -- -- 9000 State Road President Philadelphia, PA - Finance 19136 and Treasurer All directors and 1,419,374 27.26% 9,429,3727 71.38% executive officers as a group (7 persons) Other 5% Shareholders: Samuel Gratz 978,7248 18.8 % 978,7248 19.8 % 1139 Kerper Street Philadelphia, PA 19111 - --------- 6 Represents 4,000 shares of common stock subject to currently exercisable options to purchase shares at an exercise price of $4.375 per share, and 2,666 shares of common stock subject to currently exercisable options to purchase shares at an exercise price of $3.78125 per share. 7 Includes 4,000 shares of common stock subject to currently exercisable options to purchase shares at an exercise price of $4.375 per share, and 2,666 shares of common stock subject to currently exercisable options to purchase shares at an exercise price of $3.78125 and 8,000,000 shares of common stock subject to issuance on the conversion of the debenture held by William Farber. 8 Includes 496 shares which are held by the wife of Samuel Gratz.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As described above, William Farber, a principal shareholder and a director of the Company, has provided the Company with a financing package aggregating $5,500,000, which the Company has used to renovate its manufacturing facility, to acquire new equipment, to remove hazardous waste materials, to retain new management and to provide working capital. The financing package was the Company's primary source of funds with which to operate during Fiscal 1993. The financing package consists of a $3,500,000 revolving line of credit and a $2,000,000 convertible debenture. See MANAGEMENT'S DISCUSSION AND ANALYSIS -- Liquidity and Capital Resources." During Fiscal 1996 the Company amended the shareholder revolving line of credit to extend the due date to July 1, 1998 and to defer interest from July 1, 1996 to June 30, 1997 which is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month 20 thereafter, with the balance due July 1, 1998. During Fiscal 1996 the Company amended the convertible debenture agreement to defer interest accrued from July 1, 1996 to June 30, 1997 which is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter until paid in full. Mr. Farber is currently the holder of 1,005,486 shares of common stock of the Company, or approximately 19.31% of the Company's issued and outstanding shares. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Mr. Farber also has the right to acquire an additional 8,000,000 shares of the Company's common stock upon conversion of the debenture. Prior to the election of Mr. Farber as a director, the Company's Board of Directors determined that the value of the debenture at the time of its issuance did not exceed its face amount. In making such determination, the directors considered the prices at which the Company's stock had been trading immediately prior to Mr. Farber's purchase of a significant block of such stock, the Company's dim prospects without the financing facility and the valuation placed on the Company by an investment banker engaged by Mr. Farber. At the time of issuance, the inter-dealer prices quoted for the Company's stock exceeded the conversion price for the Debenture. If Mr. Farber exercises the conversion feature of the Debenture, the per share earnings will be significantly diluted. It is likely that Mr. Farber will exercise the conversion feature prior to its expiration so long as quoted market prices for the Company's stock continue to exceed the conversion price. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) A list of the exhibits required by Item 601 of Regulation S-B to be filed as a part of this Form 10-KSB is shown on the Exhibit Index filed herewith. (b) The Company did not file any reports on Form 8-K during the last quarter of the fiscal year covered by this report. 21 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LANNETT COMPANY, INC. Date: September 26, 1996 By: /s/ William Farber -------------------------------- William Farber, Chairman of the Board Date: September 26, 1996 By: /s/ Jeffrey M. Moshal -------------------------------- Jeffrey M. Moshal Vice President - Finance and Treasurer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ William Farber Chairman of the Board September 26, 1996 - ------------------- William Farber /s/ Roy English Director September 17, 1996 - ------------------- Roy English /s/ Donald Epstein Director September 18, 1996 - ------------------- Donald Epstein /s/ David Farber Director September 18, 1996 - ------------------- David Farber /s/ Gerald Levinson Director September 18, 1996 - ------------------- Gerald Levinson 22 Index to Financial Statements Lannett Company, Inc. and Subsidiary Page ---- 1. Report of Independent Certified Public Accountants 24 2. Consolidated Balance Sheet as of June 30, 1996 25 3. Consolidated Statements of Earnings f/y/e June 30, 1996 and 1995 26 4. Consolidated Statements of Changes in Shareholders' Deficiency f/y/e June 30, 1996 and 1995 27 5. Consolidated Statements of Cash Flows f/y/e June 30, 1996 and 1995 28 6. Notes to Consolidated Financial Statements f/y/e June 30, 1996 and 1995 29 23 Report of Independent Certified Public Accountants Shareholders and Board of Directors Lannett Company, Inc. and Subsidiary We have audited the consolidated balance sheets of Lannett Company, Inc. and Subsidiary as of June 30, 1996 and 1995 and the related consolidated statements of earnings, changes in shareholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lannett Company, Inc. and Subsidiary as of June 30, 1996 and 1995 and the consolidated results of their operations, the consolidated results of their changes in shareholders' deficiency and their consolidated cash flows for the years then ended, in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania August 23, 1996 24
Lannett Company, Inc. and Subsidiary CONSOLIDATED BALANCE SHEETS June 30, ASSETS 1996 1995 ------ ---- ---- CURRENT ASSETS Cash $ 25,258 $ 38,975 Trade accounts receivable (net of allowance of $9,000 and $3,000 at June 30, 1996 and 1995, respectively) 892,081 609,708 Inventories 874,219 420,907 Prepaid expenses 46,395 43,376 ------------ ------------ Total current assets 1,837,953 1,112,966 ----------- ------------- PROPERTY, PLANT AND EQUIPMENT, AT COST 2,822,010 2,669,988 Less accumulated depreciation 961,738 784,684 ----------- ------------- 1,860,272 1,885,304 ------------ ------------ OTHER ASSETS 7,958 10,824 ------------ ------------ $ 3,706,183 $ 3,009,094 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES Line of credit $ 548,092 $ 307,000 Current maturities of long-term debt 61,356 52,665 Accounts payable 260,591 227,861 Accrued interest payable - shareholder 325,827 370,432 Accrued expenses 136,357 135,604 ----------- ------------ Total current liabilities 1,332,223 1,093,562 ----------- ------------ LONG-TERM DEBT, LESS CURRENT MATURITIES 426,285 397,222 ----------- ------------ NOTE PAYABLE AND ACCRUED INTEREST - SHAREHOLDER 2,123,500 2,045,500 ----------- ------------ LINE OF CREDIT AND ACCRUED INTEREST - SHAREHOLDER 3,727,894 3,513,595 ----------- ------------ SHAREHOLDERS' DEFICIENCY Common stock Authorized 50,000,000 shares, par value $.001; 5,206,128 shares issued and outstanding 5,206 5,206 Additional paid-in capital 320,575 320,575 Accumulated deficit (4,229,500) (4,366,566) ----------- ------------ Total shareholders' deficiency (3,903,719) (4,040,785) ----------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS'DEFICIENCY $ 3,706,183 $ 3,009,094 =========== ============ The accompanying notes are an integral part of these statements.
25
Lannett Company, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF EARNINGS Year ended June 30, 1996 1995 ---- ---- NET SALES $ 3,819,595 $ 4,303,468 COST OF SALES 1,867,908 1,903,117 ----------- ----------- Gross profit 1,951,687 2,400,351 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,260,351 1,378,312 ----------- ----------- Operating profit 691,336 1,022,039 ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (599,907) (578,062) Loss on disposal of fixed assets (481) (16,506) Sundry 46,118 51,115 Settlement of legal suit -- (127,500) ----------- ----------- (554,270) (670,953) ----------- ----------- Income before income taxes 137,066 351,086 Income taxes -- 35,000 ----------- ----------- NET INCOME $ 137,066 $ 316,086 =========== =========== Earnings per common share Primary Net earnings $ 0.03 $ 0.06 =========== =========== Fully diluted Net earnings $ 0.02 $ 0.03 =========== =========== Weighted average number of common shares outstanding Primary 5,206,128 5,206,128 =========== =========== Fully diluted 13,206,128 13,206,128 =========== =========== The accompanying notes are an integral part of these statements.
26
Lannett Company, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY Years ended June 30, 1996 and 1995 Common stock ------------------------ Additional Shareholder Shares paid-in Accumulated note Shareholders' issued Amount capital deficit receivable deficiency ------ ------ ---------- ----------- ----------- ------------- Balance at June 30, 1994 5,206,128 $ 5,206 $320,575 $(4,682,652) $(67,500) $(4,424,371) Payment of shareholder note receivable - - - - 67,500 67,500 Net income for the year - - - 316,086 - 316,086 ---------- -------- -------- ----------- -------- ----------- Balance at June 30, 1995 5,206,128 5,206 320,575 (4,366,566) - (4,040,785) Net income for the year - - - 137,066 - 137,066 ---------- -------- -------- ----------- -------- ----------- Balance at June 30, 1996 5,206,128 5,206 $320,575 $(4,229,500) $ - $(3,903,719) ========== ======== ======== =========== ======== =========== The accompanying notes are an integral part of this statement.
27
Lannett Company, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, 1996 1995 ---- ---- Cash flows from operating activities Net income $ 137,066 $316,086 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 204,265 192,280 Loss on sale of property, plant and equipment 481 16,506 Increase in trade accounts receivable (282,373) (306,211) Increase in inventories (453,312) (140,419) Increase in prepaid expenses and other assets (153) (3,048) Increase in accounts payable 32,730 94,147 Increase (decrease) in accrued expenses 753 (16,287) Increase (decrease) in accrued interest 174,663 (169,121) ------------ -------- Net cash used in operating activities (185,880) (16,067) ------------ -------- Cash flows from investing activities Purchases of property, plant and equipment, net (220,714) (257,031) Proceeds from sale of property, plant and equipment 41,000 31,281 ------------ -------- Net cash used in investing activities (179,714) (225,750) ------------ -------- Cash flows from financing activities Borrowings under line of credit - shareholder 73,031 - Borrowings under line of credit 241,092 135,000 Repayments of debt (56,127) (55,334) Proceeds from debt 93,881 - Payment of shareholder note receivable - 67,500 ------------ -------- Net cash provided by financing activities 351,877 147,166 ------------ -------- NET DECREASE IN CASH (13,717) (94,651) Cash at beginning of year 38,975 133,626 ============ ======== Cash at end of year $ 25,258 $ 38,975 ============ ======== Supplemental disclosure of cash flow information Interest paid $ 417,617 $741,081 ============ ======== The accompanying notes are an integral part of these statements.
28 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Lannett Company, Inc. (the Company), a Delaware corporation, manufactures and distributes, throughout the nation, pharmaceutical products sold under generic names ("competitive pharmaceutical products") and, historically, has manufactured and distributed pharmaceutical products sold under its trade or brand names ("pharmaceutical specialties"). In addition, the Company packages pharmaceutical products manufactured by other companies. The Company is engaged in an industry which is subject to considerable government regulation relating to the development, manufacturing and marketing of pharmaceutical products. Accordingly, incidental to its business, the Company periodically responds to inquiries or engages in administrative and judicial proceedings involving regulatory authorities, particularly the FDA and the DEA. The accounting policies of the Company and its inactive wholly-owned subsidiary, Astrochem Corporation, conform to generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. 1. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its inactive wholly-owned subsidiary, Astrochem Corporation. All intercompany accounts and transactions have been eliminated. 2. Financial Instruments On July 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial Instruments," which requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments for the Company consist primarily of debt arrangements. 3. Revenue Recognition The Company recognizes revenue when its products are shipped. 4. Inventories Inventories are valued at the lower of cost (determined under the first-in, first-out method) or market. (Continued) 29 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 5. Depreciation Depreciation and amortization are provided for by the straight-line and accelerated methods over estimated useful lives of the assets as follows: Years Buildings and improvements 10 - 39 Machinery and equipment 7 - 10 Furniture and fixtures 5 - 7 Costs incurred in connection with obtaining financing are being amortized by the straight-line method over the term of the loan arrangements. Depreciation and amortization expense for the years ended June 30, 1996 and 1995 was approximately $204,000 and $192,000, respectively. 6. Research and Development Research and development expenses are charged to operations as incurred. Research and development costs for the years ended June 30, 1996 and 1995 were approximately $253,000 and $272,000, respectively. 7. Advertising Costs The Company expenses advertising cost to operations as incurred. 8. Income Taxes The Company uses the liability method specified by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. The principal types of differences between assets and liabilities for financial statement and tax return purposes are net operating loss carryforwards and accumulated depreciation. A deferred tax asset is recorded for net operating losses being carried forward for tax purposes. At June 30, 1996 and 1995, the net deferred tax asset has been reduced to zero by a valuation allowance. (Continued) 30 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Company has federal and state net operating loss carryforwards of approximately $5,700,000 and $1,600,000, respectively, expiring through June 2008, that are available to offset future taxable income for financial reporting purposes. The annual utilization of tax loss carryforward is subject to limitations as defined in the Internal Revenue Code and state regulations. 9. Earnings Per Common Share Primary earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding for each period. Fully diluted earnings per share assumes the maximum dilutive effect from shares issued pursuant to currently exercisable options, if applicable, and the conversion equivalents of the 9% convertible debenture due 1998 (note E). NOTE B - INVENTORIES Inventories consist of the following: 1996 1995 ---------- --------- Raw materials $ 309,051 $ 115,875 Work-in-process 253,887 236,345 Finished goods 260,816 24,945 Packaging supplies 50,465 43,742 ---------- ---------- $ 874,219 $ 420,907 ========== ========== NOTE C - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (at cost): 1996 1995 --------- -------- Land $ 33,414 $ 33,414 Building and improvements 1,406,627 1,340,414 Machinery and equipment 1,317,458 1,231,649 Furniture and fixtures 64,511 64,511 ---------- ---------- $2,822,010 $2,669,988 ========== ========== 31 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE D - CREDIT ARRANGEMENTS The Company has a $3,500,000 revolving line of credit from a shareholder who is also the Chairman of the Board. This line of credit bears interest at the prime rate published by Michigan National Bank, plus 1% per annum. The effective rate at June 30, 1996 and 1995 was 9.25% and 10.00%, respectively. The principal is due July 1, 1998. Accrued interest through June 30, 1994 is payable in twenty-four equal monthly installments, commencing August 15, 1994 and continuing on the fifteenth day of each month thereafter until paid in full. Accrued interest from April 1, 1995 to June 30, 1996 is payable in twenty-four equal monthly installments, commencing August 15, 1996 and continuing on the fifteenth day of each month thereafter, with the balance due July 1, 1998. Accrued interest from July 1, 1996 to June 30, 1997 is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter, with the balance due July 1, 1998. Interest expense during the years ended June 30, 1996 and 1995 was approximately $334,000 and $325,000, respectively. At June 30, 1996, accrued interest was approximately $432,000, of which $228,000 is included in the long-term outstanding balance. At June 30, 1996, $204,000 was classified as currently due. At June 30, 1996, there was no additional Borrowing capacity available under the line of credit. The line of credit is collateralized by substantially all Company assets, is cross-collateralized with all loans from the shareholder (note E) and is subordinated to the bank lines of credit and mortgage term loan payable. The revolving line of credit requires the Company, among other things, to meet certain financial reporting objectives. The Company has a $500,000 bank line of credit, limited to 80% of qualified accounts receivable, which contains certain minimum financial covenants, including restrictions on payment of dividends. This line of credit bears interest at prime plus 1.25%. The effective rate at June 30, 1996 and 1995 was 9.50% and 10.25%, respectively. At June 30, 1996, there was no additional borrowing capacity available to the Company. The line of credit is collateralized by substantially all Company assets and a personal guarantee of the above-mentioned shareholder. It is also cross-collateralized with the bank mortgage term loan payable (note F). On July 31, 1995, the Company secured a $300,000 bank revolving line of credit for equipment financing, expiring October 31, 1995. Advances are limited to 80% of equipment costs. On April 1, 1996, $93,881 of borrowings under this line was converted into a secured term loan payable in forty-eight even monthly installments. This line of credit bears interest at prime plus 1.5%. The effective rate at June 30, 1996 was 9.75%. At June 30, 1996, $158,000 was available to the Company under the revolving line of credit for equipment financing, expiring October 31, 1996. The line of credit is collateralized by all of the Company's present and future equipment. It is also cross-collateralized with the bank mortgage term loan payable (note F) and line of credit. 32 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE E - NOTE PAYABLE - SHAREHOLDER The convertible debenture, due December 23, 1998, bears interest at 9% per annum and provides that no principal payments are to be made prior to maturity without the written consent of the shareholders. Accrued interest through June 30, 1994 is payable in twenty-four equal monthly installments, commencing August 15, 1994 and continuing on the fifteenth day of each month thereafter until paid in full. Accrued interest from April 1, 1995 to June 30, 1996 is payable in twenty-four equal monthly installments, commencing August 15, 1996 and continuing on the fifteenth day of each month thereafter until paid in full. Accrued interest from July 1, 1996 to June 30, 1997 is payable in twenty-four equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter, with the balance due December 23, 1998. The debenture is convertible into shares of common stock of the Company at a rate of 4,000 shares per $1,000 of principal amount of debentures, with anti-dilution provisions. The shareholder is permitted to convert the debenture to shares of common stock at any time. Accordingly, 8,000,000 shares are reserved for this conversion. The note is cross-collateralized with all loans from this shareholder (note D) and is subordinated to the bank lines of credit and mortgage term loan payable. Interest expense during the years ended June 30, 1996 and 1995 was approximately $182,500. At June 30, 1996, accrued interest was approximately $245,000, of which $123,000 is included in the long-term outstanding balance. At June 30, 1996, $122,000 was classified as currently due. NOTE F - LONG-TERM DEBT
Long-term debt consists of the following: 1996 1995 -------- ---------- Mortgage term loan payable in the amount of $500,000 payable in monthly principal installments of approximately $2,800 plus interest at 9.25% per annum, commencing in June 1993; final balloon payment of $302,778 is due in May 2000; the loan is collateralized by substantially all Company assets and a personal guarantee of a shareholder; it is also cross-collateralized with the bank line of credit (note D); the loan is subject to a minimum capital funds covenant $397,222 $430,555
(Continued) 33
Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE F - LONG-TERM DEBT - Continued 1996 1995 -------- ---------- Term loan payable in the amount of $93,881 payable in monthly principal installments of $2,335 including interest at 8.85% per annum, commencing in April 1996; the loan is collateralized by all of the Company's present and future equipment; it is also cross-collateralized with the bank's mortgage term loan payable and all lines of credit $ 90,419 $ - Unsecured note payable to a bank which represents borrowings under a note originally due September 1990; the Company made monthly principal payments of $2,000 plus interest at the bank's prime rate plus .5% per annum; the effective rate at June 30, 1995 was 9.5% - 19,332 -------- ---------- 487,641 449,887 Less current maturities 61,356 52,665 -------- ---------- $426,285 $ 397,222 ======== ========== Annual principal payments of long-term debt (including amounts payable to shareholder) as of June 30, 1996 are as follows: Year ending June 30, -------------------- 1997 $ 61,356 1998 61,356 1999 5,561,357 2000 303,572 2001 and thereafter - ---------- $5,987,641 ==========
The mortgage term loan requires the Company, among other things, to meet certain objectives with respect to financial ratios and financial reporting. NOTE G - FAIR VALUE OF FINANCIAL INSTRUMENTS For long-term debt, less current maturities; notes payable; and outstanding lines of credit, the recorded book values of $426,285, $2,123,500 and $3,727,894, respectively, approximate fair value at June 30, 1996. The carrying amount of accrued interest payable approximates fair value. 34
Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE H - INCOME TAXES The provision for income taxes is as follows: 1996 1995 ---- ---- Current U.S. Federal, net of tax benefit of net operating loss carryforwards of $41,000 and $221,200 in 1996 and 1995, $ - $ - respectively State, net of tax benefit of net operating loss carryforwards of $12,000 and $-0- in 1996 and 1995, - 35,000 respectively ---------- --------- - 35,000 ----------- ----------- Deferred U.S. Federal - - ----------- ---------- State - - ----------- ---------- - - ---------- ---------- $ - $ 35,000 =========== ========== A reconciliation of the differences between the effective rates and statutory rates is as follows: 1996 1995 ---- ---- Federal income tax at statutory rate $ 46,600 $ 119,000 State income tax, net 9,000 - Change in the beginning of the year balance of the valuation allowance for deferred tax assets allocated to income taxes (60,000) (94,000) Other 4,400 10,000 ----------- ---------- Income taxes $ - $ 35,000 =========== ========== At June 30, 1996 and 1995, deferred income taxes, net, consist of the following: 1996 1995 ---- ---- Tax depreciation over book depreciation $ (137,058) $ (123,192) Vacation payable 7,509 4,696 Net operating loss carryforward 2,083,750 2,134,140 Other 2,520 1,260 ----------- ---------- 1,956,721 2,016,904 Valuation allowance (1,956,721) (2,016,904) ------------ ----------- $ - $ - =========== ==========
35 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE I - STOCK OPTIONS In fiscal 1993, the Company adopted the 1993 Long-Term Incentive Plan (the Plan). Pursuant to the Plan, stock options may be granted to officers and key employees of the Company which qualify as incentive stock options as well as stock options which are non-qualified. The exercise price of options is at least the fair market value of the common stock on the date of grant. The options vest over a three-year period and expire no later than ten years from the date of grant. There are 2,000,000 shares reserved under the Plan. Options for 1,943,800 shares remain unissued as of June 30, 1996. The Financial Accounting Standards Board issued a new standard, SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earning per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Management anticipates that the Company will continue to follow APB Opinion No. 25. The Company will be required to adopt the new standard for its year ending June 30, 1997. The following is a summary of stock options:
1996 1995 ------------ ----------- Outstanding at beginning of year Shares 56,200 56,200 Price $3.78 - 4.38 $3.78 - 4.38 Granted Shares - - Price $ - $ - Exercised Shares - - Price $ - $ -
(Continued) 36
Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE I - STOCK OPTIONS - Continued 1996 1995 ------------- ------------ Canceled Shares - - Price $ - $ - Outstanding at end of year Shares 56,200 56,200 Price $3.78 - 4.38 $3.78 - 4.38
NOTE J - EMPLOYEE BENEFIT PLAN The Company has a defined contribution pension plan covering substantially all employees. The Company is required to contribute amounts pursuant to employee salary reduction agreements and a matching contribution equal to each employee's contribution not to exceed 3% of the employee's compensation for the plan year. Contributions to the plan during the years ended June 30, 1996 and 1995 were approximately $18,500 and $16,000, respectively. NOTE K - COMMITMENTS AND CONTINGENCIES 1. Hazardous Waste Removal The Company monitors its compliance with all environmental laws. Any compliance costs which may be incurred are contingent upon the results of future site monitoring and will be charged against operations when incurred. During the years ended June 30, 1996 and 1995, the Company incurred monitoring costs of approximately $10,000. (Continued) 37 Lannett Company, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1996 and 1995 NOTE K - COMMITMENTS AND CONTINGENCIES - Continued 2. Civil Class Actions The Company is currently engaged in several civil actions as a co-defendant with many other manufacturers of Diethylstilbestrol (DES), a synthetic hormone. Prior litigation established that the Company's pro rata share of any liability is less than one-tenth of one percent. The Company was represented in many of these actions by the insurance company with which the Company maintained coverage during the time period that damages were alleged to have occurred. This insurance company has denied coverage for actions filed after January 1, 1992. With respect to these actions, the Company paid nominal damages or stipulated to its pro rata share of any liability. The Company has either settled or is currently defending over 500 such claims. Recently, the Company persuaded its insurance carriers to resume defense and indemnification of most DES claims, has recovered from its insurers some of the amounts the Company previously expended in these cases, and is negotiating recovery of the balance of such amounts. Management is uncertain at this time as to the outcome of this action; however, management believes the ultimate impact will not be significant to the consolidated financial statements. 3. Employment Contracts Claims have been filed by certain employees with the Pennsylvania Human Relations Commission. These claims are being reviewed; management believes that the outcome will not have a material adverse impact on the financial position of the Company. The Company has an employment contract with one executive officer. Aggregate approximate future commitments under this contract are $115,000 in 1997, $118,000 in 1998 and $71,000 in 1999. NOTE L - MAJOR CUSTOMER AND VENDOR INFORMATION Two customers accounted for approximately 21% and 13%, respectively, of net sales in fiscal 1996. Three customers accounted for approximately 16%, 13% and 11%, respectively, of the Company's sales in fiscal 1995. Two vendors accounted for approximately 34% and 18%, respectively, of the Company's purchases in fiscal 1996. One vendor accounted for approximately 45% of the Company's purchases in fiscal 1995. 38
Exhibit Index Exhibit Number Description Method of Filing Page 3(a) Articles of Incorporated by reference to the - Incorporation Proxy Statement filed with respect to the Annual Meeting of Shareholders held on December 6, 1991 (the "1991 Proxy Statement"). 3(b) By-Laws, as amended Incorporated by reference to the - 1991 Proxy Statement. 4(a) Specimen Certificate Incorporated by reference to - for Common Stock Exhibit 4(a) to Form 8 dated April 23, 1993 (Amendment No. 3 to Form 10-K f/y/e June 30, 1992) ("Form 8") 10(a) Loan Agreement dated Incorporated by reference to the - August 30, 1991 Annual Report on Form 10-K f/y/e between the Company June 30, 1991 and William Farber 10(b) Amendment #1 to Loan Incorporated by reference to - Agreement dated March Exhibit 10(b) to the Annual 15, 1993 Report on Form 10-KSB f/y/e June 30, 1993 ("1993 Form 10-K") 10(c) Amendment #2 to Loan Incorporated by reference to - Agreement dated August Exhibit 10(c) to the Annual 1, 1994 Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form 10-K") 10(d) Amendment #3 to Loan Incorporated by reference to - Agreement dated May Exhibit 10(d) to the Annual 15, 1995 Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form 10-K") 10(e) Amendment #4 to Loan Filed herewith 42 Agreement dated December 31, 1995 10(f) Amendment #5 to Loan Filed herewith 44 Agreement dated June 30, 1996 39 10(g) Loan Agreement dated Incorporated by reference to - May 4, 1993 between Exhibit 10(c) to the 1993 Form the Company and 10-K Meridian Bank 10(h) Amendment to Loan Incorporated by reference to - Documents between the Exhibit 10(e) to the Annual Company and Meridian Report on Form 10-KSB f/y/e June Bank dated as of 30, 1994 ("1994 Form 10-K") December 8, 1993 10(i) Letter Agreement Incorporated by reference to - between the Company Exhibit 10(f) to the Annual and Meridian Bank Report on Form 10-KSB f/y/e June dated December 21, 1993 30, 1994 ("1994 Form 10-K") 10(j) Third Amendment to Incorporated by reference to - Loan Agreement dated Exhibit 10(g) to the Annual as of June 9, 1994 Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form 10-K") 10(k) Fourth Amendment to Incorporated by reference to - Loan Documents between Exhibit 10(i) to the Annual the Company and Report on Form 10-KSB f/y/e June Meridian Bank as of 30, 1995 ("1995 Form 10-K") October 27, 1994 10(l) Letter Agreement Incorporated by reference to - between the Company Exhibit 10(j) to the Annual and Meridian Bank Report on Form 10-KSB f/y/e June dated October 27, 1994 30, 1995 ("1995 Form 10-K") 10(m) Letter Agreement Incorporated by reference to - between the Company Exhibit 10(k) to the Annual and Meridian Bank Report on Form 10-KSB f/y/e June dated July 10, 1995 30, 1995 ("1995 Form 10-K") 10(n) Amendment to Security Incorporated by reference to - Agreement between the Exhibit 10(l) to the Annual Company and Meridian Report on Form 10-KSB f/y/e June Bank dated as of July 30, 1995 ("1995 Form 10-K") 31, 1995 10(o) Line of Credit Note Incorporated by reference to - dated July 31, 1995 Exhibit 10(m) to the Annual Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form 10-K") 40 10(p) Fifth Amendment to Incorporated by reference to - Loan Agreement dated Exhibit 10(n) to the Annual July 31, 1995 Report on Form 10-KSB f/y/e June 30, 1995 ("1995 Form 10-K") 10(q) Amendment to Loan Filed herewith 46 Agreement between the Company and Meridian Bank. 10(r) Employment agreement Incorporated by reference to between the Company Exhibit 10(i) to the Annual and Vlad Mikijanic Report on Form 10-KSB f/y/e June 30, 1994 ("1994 Form 10-K") 11 Computation of Per Filed herewith 53 Share Earnings 22 Subsidiaries of the Incorporated by reference to the - Company Annual Report on Form 10-K f/y/e June 30, 1990 23 Consent of Grant Filed herewith 55 Thornton 27 Financial Data Filed herewith Schedule 41
EX-10.E 2 Exhibit 10 (e) Amendment #4 to Loan Agreement dated December 31, 1995 42 William Farber 32640 Whatley Franklin, Michigan 48025 December 31, 1995 Mr. Jeffrey Moshal Lannett Company, Inc. 9000 State Road Philadelphia, Pennsylvania 19136 Re: Loan Agreement between William Farber ("Lender") and Lannett Company, Inc., a Delaware corporation ("Borrower") dated August 30, 1991, as amended by Amendment #1 to Loan Agreement dated as of March 15, 1993, and by letter agreements dated August 1, 1994, May 15, 1995 (the "Loan Agreement"). Dear Jeffrey: This letter confirms that the Maturity Date (as defined in the Loan Agreement) for the Revolving Credit Loan is extended to July 1, 1997. Very Truly Yours, /s/ William Farber ------------------- William Farber AGREED TO AND ACCEPTED: LANNETT COMPANY, INC. By:/s/ Jefffrey M. Moshal --------------------- Jeffrey Moshal, Director of Financial Operations 43 EX-10.F 3 Exhibit 10 (f) Amendment #5 to Loan Agreement dated June 30, 1996 44 William Farber 32640 Whatley Franklin, Michigan 48025 June 30, 1996 Mr. Jeffrey Moshal Lannett Company, Inc. 9000 State Road Philadelphia, Pennsylvania 19136 Re: Loan Agreement between William Farber ("Lender") and Lannett Company, Inc., a Delaware corporation ("Borrower") dated August 30, 1991, as amended by Amendment #1 to Loan Agreement dated as of March 15, 1993, and by letter agreements dated August 1, 1994, May 15, 1995, December 31, 1995 and June 30, 1996. Dear Jeffrey: This letter confirms that the Maturity Date (as defined in the Loan Agreement) for the Revolving Credit Loan is extended to July 1, 1998. This letter also confirms that the Lender will not declare an Event of Default under the Loan Agreement or any promissory note or other document executed and delivered in connection with the Loan Agreement if Borrower fails to pay interest accrued from July 1, 1996 to June 30, 1997 on the Revolving Credit Loan (as defined in the Loan Agreement) or the Term Loan (as defined in the Loan Agreement) in monthly installments as currently provided in the Loan Agreement; provided that (i) Borrower pays such accrued interest in twenty-four (24) equal monthly installments, commencing August 15, 1997 and continuing on the fifteenth day of each month thereafter until paid in full, and (ii) any such accrued interest shall in any event be paid in full on the maturity date of the respective Loans. Very Truly Yours, /s/ William Farber ------------------- William Farber AGREED TO AND ACCEPTED: LANNETT COMPANY, INC. By:/s/ Jefffrey M. Moshal --------------------- Jeffrey M Moshal, Vice President - Finance and Treasurer 45 EX-10.Q 4 Exhibit 10 (q) Amendment to Loan Agreement between the Company and Meridian Bank dated March 5, 1996 46 March 5, 1996 [LETTERHEAD OF MERIDIAN BANK] Mr. Jeffrey M. Moshal Lannett Company, Inc. 9000 State Road Philadelphia, PA 19136 Dear Mr. Moshal: We are pleased to advise you that Meridian Bank (hereafter referred to as "Bank") has approved a credit accommodation to Lannett Company, Inc., (hereafter referred to as "Borrower") as follows: Accommodation A: Amount: Five Hundred Thousand Dollars ($500,000). Interest Rate: The credit accommodation will bear interest at an annual rate equal to the Bank's National Commercial Rate plus one and one quarter percent (1.25%). The Bank's National Commercial Rate (i) is a floating annual rate of interest that is designated from time to time by the Bank as the "National Commercial Rate" and is used by the Bank as a reference base with respect to different interest rates charged to borrowers; (ii) the rate of interest payable shall change simultaneously and automatically upon the Bank's designation of any change in such referenced rate; and (iii) the Bank's determination and designation from time to time of the referenced rate shall not in any way preclude the Bank from making loans to other borrowers at a rate which is higher of lower than or different from the referenced rate. Term: The line of credit will be available until October 31, 1996 at which time continuation of the line may be considered by the Bank on the basis of the Borrower's financial statements for the year ended June 30, 1996 and any other information available to Bank or which Bank may reasonably request. 47 Mr. Jeffrey M. Moshal -2- March 5, 1996 Use of Proceeds: The advances under the credit accommodation shall be used to finance working capital Repayment Method: Interest on the unpaid principal will be due and payable monthly. The full sum of the unpaid principal and interest will be due and payable on demand or the maturity/review date if indicated on the promissory note to be executed to evidence this credit. Interest Billing Year Base: Interest will be calculated on the basis of the actual number of days in the current calendar year divided by 360. Loan Fees: .50% commitment fee ($2,500). Expenses: Any and all charges, expenses and costs incurred by the Bank relating to the preparation and completion of loan documents and/or the maintenance of the credit accommodation, including but not limited to legal fees and expenses, are the responsibility of the borrower. Collateral: The credit accommodation shall be collateralized by the following: The first priority security interest perfected under the Uniform Commercial Code in all of the Borrower's corporate assets, including present, and future accounts, chattel paper, contracts, documents, equipment (including, but not limited to fixtures, office equipment and furniture, and motor vehicles), accessions, all general intangibles, instruments, inventory, and any products and proceeds of the foregoing. A first priority security interest perfected under the Uniform Commercial Code and in all of the Borrower's present and future equipment (including, but not limited to, fixtures, office equipment and furniture and motor vehicles) and accessions, all general intangibles, and all documents relating to any of the foregoing, and all products and proceeds thereof. Covenants: Advance formula: 80% of domestic A/R less than 60 days past due and 50% on finished goods inventory limited to $150,000 maximum. Field Audits: The completion by the Bank of annual field examinations to satisfy the Bank as to the adequacy of collateral and the Borrower's financial condition. The fee for each field audit will be $500.00. Accommodation B: Amount: Two Hundred Six Thousand One Hundred Twenty Dollars ($206,120). Interest Rate: The credit accommodation will bear interest at an annual rate equal to the Bank's National Commercial Rate plus one and one half of one percent (1.50%). The Bank's National Commercial Rate (i) is a floating annual rate of interest that is designated from time to time by the Bank as the "National Commercial Rate" and is used by the Bank as a reference base with respect to different interest rates charged to borrowers; (ii) the 48 Mr. Jeffrey M. Moshal -3- March 5, 1996 rate of interest payable shall change simultaneously and automatically upon the Bank's designation of any change such referenced rate; and upon the Bank's determination and designation from time to time of the referenced rate shall not in any way preclude the Bank from making loans to other borrowers at a rate which is higher or lower than or different from the referenced rate. Terms: The term commitment will be available until October 31, 1996 at which time continuation of the line may be considered by the Bank on the basis of the Borrower's financial statements for the year ended June 30, 1996 and other information available to Bank or which Bank may reasonable request. Use of Proceeds: The advances under the credit accommodation shall be used to finance equipment. Advances are based on 80% of invoice. Repayment Method: Interest on the unpaid principal will be due and payable monthly. The full sum of the unpaid principal and interest will be due and payable on demand or the maturity/review date if indicated on the promissory not to be executed to evidence this credit accommodation. Loan Fees: $250.00 Documentation fee for each advance under this revolving term commitment. Collateral: A first priority security interest perfected under the Uniform Commercial Code and in all of the Borrower's equipment to be purchased (including, but not limited to, fixtures, office equipment and furniture and motor vehicles) and accessions, all general intangibles, and all documentation relating to any of the foregoing, and all products and proceeds thereof. Covenants: Each advance will be greater than or equal to $5,000 and in increments of $1,000. Amount financed will be 80% of costs as evidenced by invoices. Accommodation C: Amount: Ninety Three Thousand Eight Hundred Eighty One Dollars ($93,881). Interest Rate: The credit accommodation will bear interest at an annual fixed interest rate of eight point eight-five percent (8.85%) Term: Four years (48 months). Use of Proceeds: Proceeds of this credit accommodation will be used to term out the existing balance currently on the revolving term commitment. 49 Mr. Jeffrey M. Moshal -4- March 5, 1996 Repayment Method: Principal and interest will be due and payable in 48 consecutive monthly installments of $2,335.29 each. One final payment of any remaining unpaid principal and interest will be due and payable within four years (48 months) of the closing date of this credit accommodation. Loan Fees: None Collateral: A first priority security interest perfected under the Uniform Commercial Code and in all of the Borrower's present and future equipment (including, but not limited to, fixtures, office equipment and furniture and motor vehicles) and accessions, all general intangibles, and all documents relating to any of the foregoing, and all products and proceeds thereof. THE FOLLOWING WILL APPLY TO ACCOMMODATIONS A, B, & C Insurance Requirements: The Borrower will provide and maintain for the term of the credit accommodation physical damage insurance satisfactory to the Bank covering corporate assets located at 9000 State Road, Philadelphia, PA 19136. Financial Statement Requirements: On a monthly basis the Borrower shall Furnish the Bank with borrowing base certifications, A/R and A/P agings. On a quarterly basis, the Borrower shall furnish the Bank with quarterly company-prepared financial statements. On an annual basis, the Borrower shall furnish the Bank with annual accountant prepared audited financial statements. Copies of all reports and filings with SEC (10-QSB, 10K). Covenants: Financial Covenants to be tested quarterly as per GAAP. Tangible Net Worth plus the less of (i) subordinated debt or (ii) $5,550,000 must be at least: $1,000,000 plus the greater of (i) 50% of retained earnings after 6/30/94, if positive or (ii) $0.00 if negative. No additional funded debt except subordinated debt that is approved by the Bank. No investments, mergers, acquisitions, or divestitures. No dividends or stock redemption/repurchase (excluding stock split and stock dividends). No asset sales (except Borrower may sell up to $500,000 of obsolete equipment per year). Capital expenditures are limited to $500,000 per year. William Farber must remain active in the management of the company. 50 Mr. Jeffrey M. Moshal -5- March 5, 1996 All loans will be cross-collateralized and cross-defaulted. Subordinated Debt: Subordination of officer debt ($5,559,000 at 6/30/95). Due Authorization: The Borrower will obtain all necessary authorization of its board of directors and shareholders to enter into the agreement evidenced by this letter prior to the making of the loan. Warranties: The Borrower will submit to the Bank the usual warranties and representations appropriate when financing transactions similar to this credit accommodation. Adjustment of Terms and Rates, Cancellation, Continuation: This credit accommodation may be reviewed by the Bank at any time hereafter, and from time to time, to adjust the terms and conditions, or to discontinue the credit accommodation should the Bank in the reasonable exercise of its sole discretion deem it necessary to do so. Bank: Meridian Bank 7500 Bustleton Avenue Philadelphia, PA 19152 Borrower: Lannett Company, Inc. 9000 State Road Philadelphia, PA 19136 Survival: The terms and conditions of this commitment will survive the execution and delivery of the loan documents, to the extent not inconsistent therewith. Assignability: This commitment letter is not assignable by the operation of law, or otherwise, without the Bank's prior written consent. Conditions of funding: Borrower will be required to execute and cause to be delivered those such documents, instruments and agreements as Bank might reasonably request in connection with the closing of this loan. The Bank has not attempted in this letter to define all of the legal terms of the transaction. The form and substance of all instruments and documents shall be subject to the Bank's approval, and may require the execution of documents and instruments containing representations, warranties, conditions and covenants. Credit Accommodation Expiration/Settlement Date: Availability of this credit accommodation will expire on April 30, 1996 unless accepted in its entirety in writing as evidenced by executing the acknowledgment below. Deposit Relationship: The Bank will be maintained as the Borrower's primary bank of account during the term of the loan, and this relationship will begin prior to the closing of this credit accommodation. 51 Mr. Jeffrey M. Moshal -6- March 5, 1996 Please acknowledge your concurrence with the terms and conditions set forth in this letter by signing, dating and returning the enclosed copy of this letter. This financing proposal is available through April 30, 1996. Sincerely, /s/ William J Gill Assistant Vice President WJG/bf ACKNOWLEDGEMENT: Acknowledged and accepted this 9th day of April, 1996 Borrower: Lannett Company, Inc. By: /s/Jeffrey M. Moshal ___________________ Jeffrey M. Moshal Director of Financial Operations By: /s/Vlad Mikijanic ___________________ Vlad Mikijanic Vic President Technical Affairs 52 EX-11 5 Exhibit 11 Computation of Per Share Earnings 53
Lannett Company, Inc and Subsidiary STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Year ended June 30 1996 1995 ---------- ---------- Primary earnings per share: Shares used in computing earnings per share: Weighted average number of shares outstanding 5,206,128 5,206,128 Earnings: Net income 137,066 316,086 ---------- ---------- Earnings per common share $0.03 $0.06 ---------- ---------- Fully diluted earnings per share: Shares used in computing earnings per share: Weighted average number of shares outstanding 13,206,128 13,206,128 Earnings: Net income 137,066 316,086 Interest expense - convertible debenture 182,500 182,500 Tax rate- 34% (62,050) (62,050) ---------- ---------- 257,516 436,536 Fully diluted earnings per share $0.02 $0.03 ---------- ----------
54 EX-23 6 Exhibit 23 Consent of Grant Thornton 55 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated August 23, 1996 accompanying the consolidated financial statements incorporated by reference in the Annual report of Lannett Company, Inc. and Subsidiary on Form 10-KSB for the year ended June 30, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statement of Lannett Company, Inc. and Subsidiary on Form S-8 (File No. 33-79258, effective May 23, 1994). GRANT THORNTON LLP Philadelphia, Pennsylvania September 25, 1996 56 EX-27 7 ARTICLE 5 FDS
5 1 YEAR JUN-30-1996 JUN-30-1996 $ 25,258 0 892,081 (9,000) 874,219 1,837,953 2,822,010 961,738 3,706,183 1,332,223 6,277,679 5,206 0 0 (3,908,925) 3,706,183 3,819,595 3,819,595 1,867,908 3,128,259 (45,637) 0 599,907 137,066 0 137,066 0 0 0 137,066 0.03 0.02
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