UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO. 0-9036
LANNETT COMPANY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE 23-0787-699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NO.)
9000 STATE ROAD
PHILADELPHIA, PA 19136
(215) 333-9000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
As of May 6, 2004, there were 24,074,335 shares of the issuer's common stock, $.001 par value, outstanding.
Page 1 of 41 pages Exhibit Index on Page 26
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and
June 30, 2003.................................................... 3
Consolidated Statements of Income (unaudited)
for the three and nine months ended March 31, 2004
and 2003 ........................................................ 4
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended March 31, 2004......................... 5
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended March 31, 2004
and 2003 ........................................................ 6
Notes to Consolidated Financial
Statements ...................................................... 7 - 15
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................... 15 - 23
ITEM 4. Controls and Procedures............................................ 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 23 - 24
ITEM 2. Changes in Securities and Use of Proceeds.......................... 25
ITEM 3. Defaults upon Senior Securities.................................... 25
ITEM 4. Submission of Matters to a Vote of Security Holders................ 25
ITEM 5. Other Information.................................................. 25
ITEM 6. Exhibits and Reports on Form 8-K................................... 25
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
3/31/04 06/30/03
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 7,919,190 $ 3,528,511
Trade accounts receivable (net of allowance of $115,000 and $128,000) 12,344,190 8,516,481
Inventories 10,312,357 8,175,798
Prepaid expenses 801,745 367,400
Deferred tax asset 569,858 569,858
------------ ------------
Total current assets 31,947,340 21,158,048
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 12,727,123 11,885,728
Less accumulated depreciation (5,292,995) (4,477,928)
------------ ------------
7,434,128 7,407,800
------------ ------------
CONSTRUCTION IN PROGRESS 5,783,094 -
------------ ------------
OTHER ASSETS 494,660 496,696
------------ ------------
Total assets $ 45,659,222 $ 29,062,544
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,511,000 $ 718,333
Accounts payable 1,895,213 2,664,616
Accrued expenses 1,807,482 526,430
Income taxes payable 654,115 63,617
------------ ------------
Total current liabilities 5,867,810 3,972,996
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 6,267,787 2,379,469
------------ ------------
DEFERRED TAX LIABILITY 1,112,369 1,112,369
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -
authorized 50,000,000 shares par value $.001;
issued and outstanding, 20,071,840 shares and 20,025,871 shares, respectively 20,072 20,026
Additional paid-in capital 2,884,247 2,526,077
Retained earnings 29,506,937 19,051,607
------------ ------------
Total shareholders' equity 32,411,256 21,597,710
------------ ------------
Total liabilities and shareholders' equity $ 45,659,222 $ 29,062,544
============ ============
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The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ----------------------------
3/31/04 3/31/03 3/31/04 3/31/03
------------ ------------ ------------ ------------
NET SALES $ 16,000,251 $ 11,019,906 $ 45,795,638 $ 30,329,723
COST OF SALES 6,947,195 3,976,519 18,405,293 11,778,104
------------ ------------ ------------ ------------
Gross profit 9,053,056 7,043,387 27,390,345 18,551,619
RESEARCH AND DEVELOPMENT EXPENSES 1,361,681 682,869 3,500,759 1,668,876
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,276,780 1,067,551 6,179,980 3,223,709
------------ ------------ ------------ ------------
Operating profit 5,414,595 5,292,967 17,709,606 13,659,034
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Loss on sale of assets - (119,275) - (119,275)
Net interest income (expense) 1,632 (3,978) 3,920 (41,239)
------------ ------------ ------------ ------------
1,632 (123,253) 3,920 (160,514)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 5,416,227 5,169,714 17,713,526 13,498,520
INCOME TAXES 2,217,829 1,914,081 7,258,196 4,928,322
------------ ------------ ------------ ------------
NET INCOME $ 3,198,398 $ 3,255,633 $ 10,455,330 $ 8,570,198
============ ============ ============ ============
BASIC INCOME PER SHARE $ 0.16 $ 0.16 $ 0.52 $ 0.43
DILUTED INCOME PER SHARE $ 0.16 $ 0.16 $ 0.52 $ 0.43
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 20,058,753 19,985,031 20,049,647 19,948,870
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 20,265,833 20,117,795 20,263,146 20,081,634
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The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ----------- ----------- ----------- -------------
BALANCE, JUNE 30, 2003 20,025,871 $ 20,026 $ 2,526,077 $19,051,607 $ 21,597,710
Exercise of stock options 36,492 37 231,797 231,834
Shares issued in connection
with employee stock purchase plan 9,477 9 126,373 126,382
Net Income 10,455,330 10,455,330
---------- ----------- ----------- ----------- -------------
BALANCE, MARCH 31, 2004 20,071,840 $ 20,072 $ 2,884,247 $29,506,937 $ 32,411,256
========== =========== =========== =========== =============
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The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
----------------------------
3/31/04 3/31/03
------------ ------------
OPERATING ACTIVITIES:
Net income $ 10,455,330 $ 8,570,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 815,067 742,449
Loss on sale/disposal of assets - 119,275
Changes in assets and liabilities which provided/(used) cash:
Trade accounts receivable (3,827,709) (4,002,378)
Inventories (2,136,559) (1,860,372)
Prepaid expenses and other assets (90,909) (269,679)
Accounts payable (769,403) 694,564
Accrued expenses 1,281,052 (283,136)
Income taxes payable 590,498 (171,740)
------------ ------------
Net cash provided by operating activities 6,317,367 3,539,181
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (including construction in progress) (6,624,489) (1,704,102)
Deposits paid on machinery or building additions not placed in service (341,400) (456,872)
Proceeds from sale of property, plant and equipment - 375,003
------------ ------------
Net cash used in investing activities (6,965,889) (1,785,971)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from debt financing 5,355,574 -
Net repayments under line of credit - (202,688)
Repayments of debt (674,589) (609,715)
Proceeds from issuance of stock 358,216 165,667
------------ ------------
Net cash provided by (used in) financing activities 5,039,201 (646,736)
------------ ------------
NET INCREASE IN CASH 4,390,679 1,106,474
CASH, BEGINNING OF YEAR 3,528,511 -
------------ ------------
CASH, END OF PERIOD $ 7,919,190 $ 1,106,474
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during period $ 28,999 $ 41,239
Income taxes paid during period $ 6,667,698 $ 5,100,062
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The accompanying notes to consolidated financial statements are an integral part of these statements.
LANNETT COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the operating parent company, Lannett Company, Inc., its inactive wholly owned subsidiary, Astrochem Corporation and its wholly owned subsidiary, Lannett Holdings, Inc. All intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION - The Company recognizes revenue when its products are shipped. At this point, title and risk of loss have transferred to the customer, and provisions for estimates, including rebates, promotional adjustments, price adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable. Accruals for these provisions are presented in the Consolidated Financial Statements as reductions to net sales and accounts receivable. Accounts receivable are presented net of allowances relating to these provisions, which were approximately $3,800,000 and $2,772,000 at March 31, 2004 and June 30, 2003, respectively. Provisions for estimated rebates, promotional and other credits are estimated based on historical payment experience, estimated customer inventory levels and contract terms. Provisions for other customer credits, such as price adjustments, returns and chargebacks require management to make subjective judgments. These provisions are discussed in further detail below. If the historical data the Company uses, and the assumptions management makes to calculate these estimates do not accurately approximate future activity, its net sales, gross profit, net income and earnings per share could change. However, management believes that these estimates are reasonable based upon historical experience and current conditions.
CHARGEBACKS - The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order wholesalers. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as "indirect customers." Lannett enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to actually purchase the products at these agreed-upon prices. Lannett will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler's invoice price. This credit is called a chargeback. The provision for chargebacks is based on expected sell-through levels by the Company's wholesale customers to the indirect customers, and estimated wholesaler inventory levels. The Company continually monitors the reserve for chargebacks and makes adjustments when it believes that actual chargebacks may differ from estimated reserves.
REBATES - Rebates are offered to the Company's key customers to promote customer loyalty and encourage greater product sales. These rebate programs provide customers with rebate credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. At the time of shipment, the Company estimates reserves for rebates and other promotional credit programs based on the specific terms in each agreement.
RETURNS - Consistent with industry practice, the Company has a product returns policy that allows select customers to return product within a specified period prior to and subsequent to the product's lot expiration date, in exchange for a credit to be applied to future purchases. The Company's policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices and credit terms. While such experience has
allowed for reasonable estimations in the past, history may not always be an accurate indicator of future returns. The Company continually monitors the provisions for returns, and makes adjustments when it believes that actual product returns may differ from established reserves.
PRICE ADJUSTMENTS - Price adjustments, also known as "shelf stock adjustments," are credits issued to reflect decreases in the selling prices of the Company's products that customers have remaining in their inventories at the time of the price reduction. Decreases in selling prices are discretionary decisions made by management to reflect competitive market conditions. Amounts recorded for estimated shelf stock adjustments are based upon specified terms with direct customers, estimated declines in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
INVENTORIES - Inventories are valued at the lower of cost (determined under the first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Depreciation and amortization are provided for by the straight-line and accelerated methods over estimated useful lives of the assets. Depreciation expense for the nine month periods ended March 31, 2004 and 2003 were approximately $815,000 and $710,000, respectively.
DEFERRED DEBT ACQUISITION COSTS - Costs incurred in connection with obtaining financing are amortized by the straight-line method over the term of the loan arrangements. Amortization expense for the nine month periods ended March 31, 2004 and 2003 were approximately $8,000 and $32,000, respectively.
RESEARCH AND DEVELOPMENT - Research and development expenses are charged to operations as incurred.
ADVERTISING COSTS - The Company charges advertising costs to operations as incurred. Advertising expense for the nine month periods ended March 31, 2004 and 2003 were approximately $204,000 and $102,000, respectively.
INCOME TAXES - The Company uses the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense/(benefit) is the result of changes in deferred tax assets and liabilities.
SEGMENT INFORMATION - The Company reports segment information in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company operates one business segment--generic pharmaceuticals. In accordance with SFAS No. 131, the Company aggregates its financial information for all products, and reports on one operating segment.
CONCENTRATION OF CREDIT RISK - Five of the Company's products, defined as generics containing the same active ingredient or combination of ingredients, accounted for approximately 30%, 25%, 17%, 14% and 11%, respectively, of net sales for the nine month period ended March 31, 2004. The same five products accounted for 35%, 0%, 34%, 13% and 12%, respectively, of net sales for the nine month period ended March 31, 2003. The Company expects these percentages to decrease as it continues to market additional products.
Credit terms are offered to customers based on evaluations of the customers' financial condition. Generally, collateral is not required from customers. Accounts receivable payment terms vary, and are stated in the financial
statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
STOCK OPTIONS - At March 31, 2004, the Company had two stock-based employee compensation plans. The Company accounts for stock options under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148. Under this statement, companies may use a fair value-based method for valuing stock-based compensation, which measures compensation cost at the grant date, based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No.123 had been applied. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------------- -------------- -------------- --------------
Net income, as reported $ 3,198,398 $ 3,255,633 $ 10,455,330 $ 8,570,198
Deduct: Total compensation expense
determined under fair value based
method for all stock awards (307,847) (134,757) (842,186) (404,271)
Add: Tax savings at effective rate 126,091 49,894 345,120 147,600
-------------- -------------- -------------- --------------
Pro forma net income 3,016,642 3,170,770 9,958,264 8,313,527
============== ============== ============== ==============
Earnings per share:
Basic, as reported $ .16 $ .16 $ .52 $ .43
Basic, pro forma $ .15 $ .16 $ .50 $ .42
Diluted, as reported $ .16 $ .16 $ .52 $ .43
Diluted, pro forma $ .15 $ .16 $ .49 $ .41
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NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions used for grants in 2004 and 2003: expected volatility of 53.1% and 79.5%; risk-free interest rates ranging between 4.47% and 4.52% for 2004 and 3.89% for 2003, and expected lives of 10 years.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows.
The results of operations for the three and nine months ended March 31, 2004 and 2003 are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 2003.
NOTE 2. NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
from other parties. The consolidation requirements of FIN 46 apply immediately
to variable interest entities created after January 31, 2003. The Company
adopted the provisions of FIN 46 effective February 1, 2003 and such adoption
did not have a material impact on the Company's consolidated financial
statements since the Company currently has no variable interest entities.
In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003, which among other things , revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities (SPE). The consolidation requirements apply to all SPE's in the first fiscal year or interim period ending after December 15, 2003. The Company adopted the provisions of FIN 46R effective December 31, 2003 and such adoption did not have a material impact on the Company's consolidated financial statements since the Company currently has no SPE's.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May, 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
NOTE 3. INVENTORIES
Inventories consist of the following:
March 31, June 30,
2004 2003
----------- -----------
(unaudited)
Raw materials $ 4,342,128 $ 2,625,463
Work-in-process 777,510 992,330
Finished goods 4,999,655 4,363,432
Packaging supplies 193,064 194,573
----------- -----------
$10,312,357 $ 8,175,798
=========== ===========
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The preceding amounts are net of inventory reserves of $494,731 and $235,246 at March 31, 2004 and June 30, 2003 respectively.
NOTE 4. LONG-TERM DEBT
Long-Term debt consists of the following
March 31, June 30,
2004 2003
---------- ----------
unaudited)
Tax-exempt Bond Loan $2,487,287 $3,097,802
Mortgage Loan 2,700,000 -
Equipment Loan 1,641,500 -
Construction Loan 950,000 -
---------- ----------
$7,778,787 $3,097,802
Less current portion 1,511,000 718,333
---------- ----------
$6,267,787 $2,379,469
========== ==========
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In April 1999, the Company entered into a loan agreement (the "Agreement") with a governmental authority, the Philadelphia Authority for Industrial Development (the "Authority") to finance future construction and growth projects of the Company. The Authority issued $3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds to provide the funds to finance such growth projects pursuant to a trust indenture ("the "Trust indenture"). A portion of the Company's proceeds from the bonds was used to pay for bond issuance costs of approximately $170,000. The remainder of the proceeds was deposited into a money market account, which was restricted for future plant and equipment needs of the Company, as specified in the Agreement. The Trust Indenture requires that the Company repay the Authority loan through installment payments beginning in May 2003 and continuing through May 2014, the year the bonds mature. The bonds bear interest at the floating variable rate determined by the organization responsible for selling the bonds (the "remarketing agent"). The interest rate fluctuates on a weekly basis. The effective interest rate at March 31, 2004 was 1.21%. At March 31, 2004, the Company has $2,487,287 outstanding on the Authority loan, of which $816,000 is classified as currently due. The remainder is classified as a long-term liability. In April 1999, an irrevocable letter of credit of $3,770,000 was issued by a bank, Wachovia Bank, National Association (Wachovia), to secure payment of the Authority Loan and a portion of the related accrued interest. At March 31, 2004, no portion of the letter of credit has been utilized
On November 26, 2003, the Company exercised its option to purchase the facility at 9001 Torresdale Avenue. The purchase price of the facility was approximately $1.9 million. The Company has entered into agreements (the "2003 Loan Financing") with Wachovia to finance the purchase of the building, the renovation and setup of the building, and the Company's other anticipated capital expenditures for Fiscal 2004, including the implementation of its new Enterprise Resource Planning (ERP) system, and a new fluid bed drying process center at its current manufacturing plant at 9000 State Road. The 2003 Loan Financing includes the following:
1) A Mortgage Loan of $2.7 million, used to finance the purchase of the Torresdale Avenue facility, and certain renovations at the facility.
2) An Equipment Loan for up to $6 million, which will be used to finance equipment, the ERP system implementation and other capital expenditures.
3) A Construction Loan for $1 million, used to finance the construction and fit up of the fluid bed drying process center, which is adjacent to the Company's current manufacturing plant at 9000 State Road.
From November 26, 2003 to the earlier of November 26, 2004 or the date that the Philadelphia Industrial Development Corporation lends the Company up to $1,250,000 as reimbursement for a portion of the acquisition cost of the facility (the "Conversion Date"), the Company is required to make interest only payments on the Mortgage Loan. Commencing on the first day of the month following the Conversion Date, the Company is required to make monthly payments of principal and interest in amounts sufficient to fully amortize the principal balance of the Mortgage Loan 15 years after the Conversion Date. The entire outstanding principal amount of this mortgage loan, along with any accrued interest, shall be due no later than 15 years from the date of the Conversion Date. As of March 31, 2004, the Company has a principal balance of $2.7 million under the Mortgage Loan.
The Equipment Loan is a non-revolving facility in which the Company will borrow the funds necessary to finance its capital expenditures. Under the Equipment Loan, the Company will request Wachovia to reimburse a portion of the cost incurred to acquire and setup the equipment. The amount advanced to the Company under the Equipment Loan is limited to no more than 80% of the cost of such equipment. Each advance under the Equipment Loan will immediately convert to a term loan with a maturity date of three to five years, depending on the classification of the equipment acquired. During the term loan, the Company is required to make equal payments of principal and interest. As of March 31, 2004, the Company has outstanding $1,641,500 under the Equipment Loan of which $495,000 is classified as currently due.
Under the Construction Loan, the Company is required to make equal monthly payments of principal and interest beginning on January 1, 2004 and ending on November 30, 2008, the maturity date of the loan. As of March 31, 2004, the Company has outstanding $950,000 under the Construction Loan of which $200,000 is classified as currently due.
The financing facilities under the 2003 Loan Financing bear interest at a variable rate equal to the LIBOR Rate plus 150 basis points. The LIBOR Rate is the rate per annum, based on a 30-day interest period, quoted two business days prior to the first day of such interest period for the offering by leading banks in the London interbank market of Dollar deposits. As of March 31, 2004, the interest rate for the 2003 Loan Financing was 2.5962%.
The Company has executed a Security Agreement with Wachovia in which the Company has agreed to use substantially all of its assets to collateralize the amounts due to Wachovia under the 2003 Loan Financing.
The Company also has a $3,000,000 line of credit from Wachovia that bears interest at the prime interest rate less 0.25%. The line of credit was renewed and extended to November 30, 2004, at which time the Company expects to renew and extend the due date. At March 31, 2004, the Company had $0 outstanding and $3,000,000 available under the line of credit. The Company does not currently expect to borrow cash under this line of credit in the future due to the available cash on hand, and the cash expected to be provided by its results of operations in the future. The line of credit is collateralized by substantially all Company assets.
The terms of the line of credit, the Agreement, the related letter of credit and the 2003 Loan Financing require that the Company meet certain financial covenants and reporting standards, including the attainment of standard financial liquidity and net worth ratios. As of March 31, 2004, the Company has complied with such terms, and successfully met its financial covenants. Additionally, it is the Company's opinion that such covenants are not material in nature.
NOTE 5. INCOME TAXES
The provision for federal, state and local income taxes for the three months ended March 31, 2004 and 2003 was $2,217,829 and $1,914,081, with effective tax rates of 40.9% and 37.0%, respectively. The provision for federal, state and local income taxes for the nine months ended March 31, 2004 and 2003 was $7,258,196 and $4,928,322, with effective tax rates of 40.9% and 36.5%, respectively.
NOTE 6. EARNINGS PER SHARE
SFAS No. 128, Earnings Per Share, requires a dual presentation of basic
and diluted earnings per share on the face of the Company's consolidated
statement of income and a reconciliation of the computation of basic earnings
per share to diluted earnings per share. Basic earnings per share excludes the
dilutive impact of common stock equivalents and is computed by dividing net
income by the weighted-average number of shares of common stock outstanding for
the period. Diluted earnings per share includes the effect of potential dilution
from the exercise of outstanding common stock equivalents into common stock
using the treasury stock method. Earnings per share amounts for all periods
presented have been calculated in accordance with the requirements of SFAS No.
128. A reconciliation of the Company's basic and diluted earnings per share
follows:
THREE MONTHS ENDED MARCH 31,
2004 2003
-------------------------- --------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $ 3,198,398 20,058,753 $ 3,255,633 19,985,031
Effect of dilutive stock options 207,080 132,764
----------- ------------- ----------- -------------
Diluted earnings per share factors $ 3,198,398 20,265,833 $ 3,255,633 20,117,795
=========== ============= =========== =============
Basic earnings per share $ 0.16 $ 0.16
Diluted earnings per share $ 0.16 $ 0.16
|
The number of shares in the prior period have been adjusted for the Company's 3 for 2 stock split in February 2003.
NINE MONTHS ENDED MARCH 31,
2004 2003
-------------------------- --------------------------
NET INCOME SHARES NET INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
Basic earnings per share factors $10,455,330 20,049,647 $ 8,570,198 19,948,870
Effect of dilutive stock options 213,499 132,764
----------- ------------- ----------- -------------
Diluted earnings per share factors $10,455,330 20,263,146 $ 8,570,198 20,081,634
=========== ============= =========== =============
Basic earnings per share $ 0.52 $ 0.43
Diluted earnings per share $ 0.52 $ 0.43
|
The number of shares in the prior period have been adjusted for the Company's 3 for 2 stock split in February 2003.
178,500 and 40,815 anti-dilutive weighted average shares have been excluded in the computation of diluted earnings per share for the three months ended March 31, 2004 and 2003, respectively, because the options' exercise price is greater than the average market price of the common stock. 7,500 and 40,815 anti-dilutive weighted average shares have been excluded in the computation of diluted earnings per share for the nine months ended March 31, 2004 and 2003, respectively, because the options' exercise price is greater than the average market price of the common stock.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company had sales of approximately $455,617 and $236,000 during the nine months ended March 31, 2004 and 2003, respectively, to a distributor (the "related party"), in which the owner, Jeffrey Farber, is the son of the Chairman of the Board of Directors and principal shareholder of the Company, William Farber. The Company also incurred sales commissions payable to the related party of $0 and approximately $68,000 during the nine months ended March 31, 2004 and 2003, respectively. Accounts receivable includes amounts due from the related party of approximately $99,840 and $95,000 at March 31, 2004 and June 30, 2003, respectively. In the Company's opinion, the terms of these transactions were not more favorable to the related party than would have been to a non-related party.
Stuart Novick, the son of Marvin Novick, a Director on the Company's Board of Directors, was employed by two insurance brokerage companies (the "Insurance Companies") that provide insurance agency services to the Company. The Company paid approximately $344,000 and $224,000 during the nine months ended March 31, 2004 and 2003 to the Insurance Companies for various insurance coverage policies. There were no amounts due to the Insurance Companies as of March 31, 2004 and June 30, 2003. In the Company's opinion, the terms of these transactions were not more favorable to the related party than would have been to a non-related party.
NOTE 8. MATERIAL CONTRACT WITH SUPPLIER
On March 23, 2004, the Company entered into an agreement with Jerome Stevens Pharmaceuticals,, Inc. (JSP) for the exclusive distribution rights in the United States to the current line of JSP products, in exchange for four million (4,000,000) shares of the Company's common stock. According to the agreement, which has a term of ten years, JSP will supply the Company with Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules ("BACC"), Digoxin tablets ("Digoxin") and Levothyroxine Sodium tablets, sold under the generic name and the brand name "Unithroid" ("Levothyroxine"). The Agreement was included as an Exhibit in the Form 8-K filed by the Company on May 5, 2004. The obligation of the Company to issue the four million (4,000,000) shares
was subject to the receipt of a fairness opinion issued by a recognized and reputable investment banking firm in opining that the issuance of the four million (4,000,000) shares and the resulting dilution of the ownership interest of the Company's minority shareholders was fair to such shareholders in view of JSP's products' contribution or potential contribution to the Company's profitability. On April 20, 2004, the investment banker, which was selected by the independent Directors of the Company's Board, opined that the issuance of the four million (4,000,000) shares and the resulting dilution of the ownership interest of the Company's minority shareholders was fair to such shareholders in view of JSP's Products' contribution or potential contribution to the Company's profitability. As such, subsequent to April 20, 2004, the Company issued four million (4,000,000) shares to JSP's designees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
The following information should be read in conjunction with the consolidated financial statements and notes in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2003.
In addition to historical information, this Form 10-Q contains forward-looking information. The forward-looking information contained herein is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in the following section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Form 10-Q. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances which arise later. Readers should carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Annual report on Form 10-KSB filed by the Company in Fiscal 2003, and any Current Reports on Form 8-K filed by the Company.
In addition to the risks and uncertainties posed generally by the generic drug industry, the Company faces the following risks and uncertainties:
- competition from other manufacturers of generic drugs;
- potential declines in revenues and profits from individual generic pharmaceutical products due to competitors' introductions of their own generic equivalents;
- new products or treatments by other manufacturers that could render the Company's products obsolete;
- the value of the Company's common stock has fluctuated widely in the past, which could lead to investment losses for shareholders;
- intense regulation by government agencies may delay the Company's efforts to commercialize new drug products; and
- dependence on third parties to supply raw materials and certain finished goods inventory; any failure to obtain a sufficient supply of raw materials from these suppliers could materially and adversely affect the Company's business.
Because of the foregoing and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis which could materially adversely affect the business, financial condition, operating results and the Company's stock price.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in Note 1 to the consolidated financial statements included in this Quarterly Report and in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 2003, filed with the Securities and Exchange Commission. Certain accounting policies are particularly important to the portrayal of the Company's financial position and results of operations and require the application of significant judgment by management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. The Company bases its estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information received from customers and outside sources, and on various other assumptions that management believes to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies, including inventory valuation, revenue recognition, accounts receivable allowances for chargebacks, rebates, and similar items, and income taxes are each discussed in more detail in our Annual Report on Form 10-KSB for the year ended June 30, 2003. The Company has reviewed and determined that those policies remain the Company's critical accounting policies as of and for the nine months ended March 31, 2004. The Company did not make any changes in those policies during the period.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 COMPARED
WITH THREE MONTHS ENDED MARCH 31, 2003.
Net sales increased by 45% from $11,019,906 for the three months ended March 31, 2003 ("Third Quarter Fiscal 2003") to $16,000,251 for the three months ended March 31, 2004 ("Third Quarter Fiscal 2004"). Sales increased as a result of additions to the Company's prescription line of products, including, Levothyroxine Sodium tablets, first marketed in April 2003 and Unithroid tablets, first marketed in August 2003. These product additions had the effect of increasing the total net sales in the Third Quarter Fiscal 2004, compared to the Third Quarter Fiscal 2003, due to the fact that the Company sold the products for longer periods of time in the Third Quarter Fiscal 2004, compared to the Third Quarter Fiscal 2003. These product additions accounted for approximately $3.4 million of the increase in net sales from the Third Quarter Fiscal 2003 to the Third Quarter Fiscal 2004. Additionally, sales of a portion of the Company's previously marketed products, including Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules and Digoxin tablets increased due to new customer accounts and increased unit sales.
Cost of sales increased by 75% from $3,976,519 for the Third Quarter Fiscal 2003 to $6,947,195 for the Third Quarter Fiscal 2004. The cost of sales increase is due to an increase in direct variable costs and certain
indirect overhead costs as a result of the increase in sales volume, and related production activities. These costs include raw materials/cost of finished goods purchased and resold, which increased by approximately $2,305,000, labor and benefit expenses, which increased by approximately $333,000 and other miscellaneous production expenses, which comprised the remainder of the increase in cost of sales. Gross profit margins for the Third Quarter Fiscal 2004 and the Third Quarter Fiscal 2003 were 57% and 64%, respectively. The decrease in the gross profit percentage is due to product sales mix and decreased absorption of fixed overhead costs. During the Third Quarter Fiscal 2004, a larger percentage of the Company's total net sales were of JSP-manufactured products, as compared to the Third Quarter Fiscal 2003. The Company's average gross profit margin for the JSP products are less than the average gross profit margin for products internally manufactured. As such, the change in product sales mix reduced the gross profit percentage in the Third Quarter Fiscal 2004. Depending on future market conditions for each of the Company's products, changes in the future sales product mix may occur. These changes may affect the gross profit percentage in future periods.
Research and development ("R&D") expenses increased by 99% from $682,869 for the Third Quarter Fiscal 2003 to $1,361,681 for the Third Quarter Fiscal 2004. This increase is a result of an increase in the number of chemists in the R&D laboratory and the related payroll and benefits expenses, which increased by approximately $325,000 and an increase in raw materials (of $150,000) and clinical testing fees (of $205,000) for products not yet approved by the FDA.
Selling, general and administrative expenses increased by 113% from
$1,067,551 for the Third Quarter Fiscal 2003 to $2,276,780 for the Third Quarter
Fiscal 2004. This increase is a result of an increase in the following expenses:
payroll/incentive compensation and benefits, which increased by approximately
$763,000, consulting expenses, which increased by approximately $120,000, legal
expenses, which increased by approximately $85,000 and miscellaneous other
expenses, including computer support costs, travel and entertainment expenses,
investor relations expenses, employee recruitment fees and advertising. Such
miscellaneous expenses comprised the remainder of the increase in selling,
general and administrative expenses. The increases were due to the hiring of
additional administrative employees and a general increase in administrative
expenses due to the growth of the Company in terms of employees, production
volume and sales.
As a result of the foregoing, the Company increased its operating profit from $5,292,967 in Third Quarter Fiscal 2003 to $5,414,595 in Third Quarter Fiscal 2004.
The Company's net interest decreased from net interest expense of $3,978 for the Third Quarter Fiscal 2003 to net interest income of $1,632 for the Third Quarter Fiscal 2004 as a result of principal repayments, reduced interest rates and increased interest income due to higher cash balances. See Liquidity and Capital Resources below.
The Company's income tax expense increased from $1,914,081 in the Third Quarter Fiscal 2003 to $2,217,829 in the Third Quarter Fiscal 2004 as a result of the increase in income before taxes and an increase in the effective tax rates. The effective tax rate increased from 37.0% to 40.9% due to the company's increased activities in higher statutory jurisdictions.
The Company reported net income of $3,198,398 in the Third Quarter Fiscal 2004, or $0.16 basic and diluted income per share, compared to net income of $3,255,633 in the Third Quarter Fiscal 2003, or $0.16 basic and diluted income per share.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2004 COMPARED
WITH NINE MONTHS ENDED MARCH 31, 2003.
Net sales increased by 51% from $30,329,723 for the nine months ended March 31, 2003 to $45,795,638 for the nine months ended March 31, 2004. Sales increased as a result of additions to the Company's prescription line of products, including Digoxin tablets, first marketed in September 2002, Levothyroxine Sodium tablets, first marketed in April 2003 and Unithroid tablets, first marketed in August 2003. These product additions had the effect of increasing the total net sales in the nine months ended March 31, 2004, compared to the nine months ended March 31, 2003, due to the fact that the Company sold the products for longer periods of time in the nine months ended March 31, 2004, compared to the nine months ended March 31, 2003. These product additions accounted for approximately $14.0 million of the increase in net sales from the nine months ended March 31, 2003 to the nine months ended March 31, 2004. Additionally, sales of a portion of the Company's previously marketed products, including Primidone tablets, increased due to new customer accounts, increased unit sales, and increased unit sales prices. The Company raised its sales prices for Primidone 50 milligram tablets in Fiscal 2004 subsequent to an increase in the price of the brand named drug. Generally, the Company sells its products at the accepted market prices for such products. If the competitive environment changes, the Company monitors such changes to determine the effect on the market prices for its products. Such changes may include new competitors, fewer competitors, or an increase in the price of the innovator drug. The increase in sales of a portion of the Company's products was partially offset by a decrease in sales of certain other products, including butalbital, aspirin and caffeine capsules (which decreased by $2.4 million) due to increased competition and a discontinuation of pseudoephedrine hydrochloride tablets (which decreased by $681,000).
Cost of sales increased by 56% from $11,778,104 for the nine months ended March 31, 2003 to $18,405,293 for the nine months ended March 31, 2004. The cost of sales increase is due to an increase in direct variable costs and certain indirect overhead costs as a result of the increase in sales volume, and related production activities. These costs include raw materials/cost of finished goods purchased and resold, which increased by approximately $5,096,000, labor and benefits expenses, which increased by approximately $1,126,000, depreciation expense, which increased by approximately $728,000 and other miscellaneous production-related expenses, which increased in total by approximately $803,000. Gross profit margins for the nine months ended March 31, 2004 and 2003 were 60% and 61%, respectively. The decrease in the gross profit percentage is due to product sales mix and decreased absorption of fixed overhead costs.
Research and development ("R&D") expenses increased by 110% from $1,668,876 for the nine months ended March 31, 2003 to $3,500,759 for the nine months ended March 31, 2004. This increase is a result of an increase in the number of chemists in the R&D laboratory and the related payroll and benefits expenses, which increased by approximately $949,000 and an increase in raw materials (of $194,000) and clinical testing fees (of $727,000) for products not yet approved by the FDA. These increases were partially offset by a decrease in miscellaneous other R&D expenses of approximately $38,000.
Selling, general and administrative expenses increased by 92% from $3,223,709 for the nine months ended March 31, 2003 to $6,179,980 for the nine months ended March 31, 2004. This increase is a result of an increase in the following expenses: payroll/incentive compensation and benefits, which increased by approximately $2.1 million, consulting services, which increased by approximately $165,000, legal expenses, which increased by approximately $109,000, computer support costs, which increased by approximately $147,000, advertising expenses, which increased by approximately $104,000 and miscellaneous other expenses, including travel and entertainment expenses, investor relations expenses, employee recruitment fees. Such miscellaneous expenses comprised the remainder of the increase in selling, general and administrative expenses. The increases were due to the hiring of additional administrative employees and a general increase in administrative expenses due to the growth of the Company in terms of employees, production volume and sales.
As a result of the foregoing, the Company increased its operating profit from $13,659,034 for the nine months ended March 31, 2003 to $17,709,606 for the nine months ended March 31, 2004.
The Company's net interest decreased from net interest expense of $41,239 for the nine months ended March 31, 2003 to net interest income of $3,920 for the nine months ended March 31, 2004 as a result of principal repayments, reduced interest rates and increased interest income due to higher cash balances. See Liquidity and Capital Resources below.
The Company's income tax expense increased from $4,928,322 for the nine months ended March 31, 2003 to $7,258,196 for the nine months ended March 31, 2004 as a result of the increase in income before taxes and an increase in the effective tax rate. The effective tax rate increased from 36.5% to 40.9% due to the company's increased activities in higher statutory jurisdictions.
The Company reported net income of $10,455,330 for the nine months ended March 31, 2004, or $0.52 basic and diluted income per share, compared to net income of $8,570,198 for the nine months ended March 31, 2003, or $0.43 basic and diluted income per share.
LIQUIDITY AND CAPITAL RESOURCES -
Net cash provided by operating activities of $6,317,367 for the nine months ended March 31, 2004 was attributable to net income of $10,455,330, as adjusted for the effects of non-cash items of $815,067 and net changes in operating assets and liabilities totaling ($4,953,030). Significant changes in operating assets and liabilities are comprised of:
1. An increase in trade accounts receivable of $3,827,709 due to the increase in sales for the nine months ended March 31, 2004. The Company generally offers credit payment terms to its current and prospective customers.
2. An increase in inventories of $2,136,559 due to an increase in raw materials and finished goods inventory. Due to the Company's sales growth and the increase in the quantity of new products under development, additional investments were made in raw material and finished goods inventory. It is the Company's goal to stock an adequate inventory of finished goods and raw materials. Such a strategy will allow the Company to minimize stock-outs and back-orders, and to provide a high level of customer order fulfillment. Additionally, the Company has increased its inventory carrying amounts of certain raw materials and finished products to ensure supply continuity;
3. A decrease in accounts payable of $769,403 due to timing of the receipts and the related payments for finished goods inventory shipments. In April 2003, the Company launched its sales campaign for Levothyroxine Sodium tablets. Due to the timing of the Company's launch, the receipt of significant inventory quantities and beneficial supplier payment terms, the accounts payable balance as of June 30, 2003 included significant amounts due to the supplier of the Levothyroxine Sodium tablets. Subsequent to June 20, 2003, these invoices have been paid, thereby decreasing the overall accounts payable balance.
4. An increase in accrued expenses of $1,281,052 due to an increase in accrued employee incentive compensation costs and an increase in the accrual for the cost of inventory received, but not yet billed by the supplier.
5. An increase in income taxes payable of $590,498 due to higher taxable income and the accrual of related state and local income taxes.
The net cash used in investing activities of $6,965,889 for the nine months ended March 31, 2004 was attributable to the Company's acquisition of its new facility on Torresdale Avenue, purchases and deposits for equipment and payments for building additions. The Company's anticipated budget for capital expenditures in Fiscal 2004 is approximately $10 million. The anticipated capital expenditure requirements will support the
Company's growth related to new product introductions and increased production output due to expected higher sales levels.
In April 1999, the Company entered into a loan agreement (the "Agreement") with a governmental authority, the Philadelphia Authority for Industrial Development (the "Authority") to finance future construction and growth projects of the Company. The Authority issued $3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds to provide the funds to finance such growth projects pursuant to a trust indenture ("the "Trust indenture"). A portion of the Company's proceeds from the bonds was used to pay for bond issuance costs of approximately $170,000. The remainder of the proceeds was deposited into a money market account, which was restricted for future plant and equipment needs of the Company, as specified in the Agreement. The Trust Indenture requires that the Company repay the Authority loan through installment payments beginning in May 2003 and continuing through May 2014, the year the bonds mature. The bonds bear interest at the floating variable rate determined by the organization responsible for selling the bonds (the "remarketing agent"). The interest rate fluctuates on a weekly basis. The effective interest rate at March 31, 2004 was 1.21%. At March 31, 2004, the Company has $2,487,287 outstanding on the Authority loan, of which $816,000 is classified as currently due. The remainder is classified as a long-term liability. In April 1999, an irrevocable letter of credit of $3,770,000 was issued by a bank, Wachovia Bank, National Association (Wachovia), to secure payment of the Authority Loan and a portion of the related accrued interest. At March 31, 2004 no portion of the letter of credit has been utilized.
On November 26, 2003, the Company exercised its option to purchase the facility at 9001 Torresdale Avenue. The purchase price of the facility was approximately $1.9 million. The Company has entered into agreements (the "2003 Loan Financing") with Wachovia to finance the purchase of the building, the renovation and setup of the building, and the Company's other anticipated capital expenditures for Fiscal 2004, including the implementation of its new Enterprise Resource Planning (ERP) system, and a new fluid bed drying process center at its current manufacturing plant at 9000 State Road. The 2003 Loan Financing includes the following:
1) A Mortgage Loan for $2.7 million, used to finance the purchase of the Torresdale Avenue facility, and certain renovations at the facility.
2) An Equipment Loan for up to $6 million, which will be used to finance equipment, the ERP system implementation and other capital expenditures.
3) A Construction Loan for $1 million, used to finance the construction and fit up of the fluid bed drying process center, which is adjacent to the Company's current manufacturing plant at 9000 State Road.
From November 26, 2003 to the earlier of November 26, 2004 or the date that the Philadelphia Industrial Development Corporation lends the Company up to $1,250,000 as reimbursement for a portion of the acquisition cost of the facility (the "Conversion Date"), the Company is required to make interest only payments on the Mortgage Loan. Commencing on the first day of the month following the Conversion Date, the Company is required to make monthly payments of principal and interest in amounts sufficient to fully amortize the principal balance of the Mortgage Loan 15 years after the Conversion Date. The entire outstanding principal amount of this mortgage loan, along with any accrued interest, shall be due no later than 15 years from the date of the Conversion Date. As of March 31, 2004, the Company has a principal balance of $2.7 million under the Mortgage Loan.
The Equipment Loan is a non-revolving facility in which the Company will borrow the funds necessary to finance its capital expenditures. Under the Equipment Loan, the Company will request Wachovia to reimburse a portion of the cost incurred to acquire and setup the equipment. The amount advanced to the Company under the Equipment Loan is limited to no more than 80% of the cost of such equipment. Each advance under the Equipment Loan will immediately convert to a term loan with a maturity date of three to five years, depending on the classification of the equipment acquired. During the term loan, the Company is required to make equal
payments of principal and interest. As of March 31, 2004, the Company has outstanding $1,641,500 under the Equipment Loan of which $495,000 is classified as currently due.
Under the Construction Loan, the Company is required to make equal monthly payments of principal and interest beginning on January 1, 2004 and ending on November 30, 2008, the maturity date of the loan. As of March 31, 2004, the Company has outstanding $950,000 under the Construction Loan of which $200,000 is classified as currently due.
The financing facilities under the 2003 Loan Financing bear interest at a rate equal to the LIBOR Rate plus 150 basis points. The LIBOR Rate is the rate per annum, based on a 30-day interest period, quoted two business days prior to the first day of such interest period for the offering by leading banks in the London interbank market of Dollar deposits. As of March 31, 2004, the interest rate for the 2003 Loan Financing was 2.5962%.
The Company has executed a Security Agreement with Wachovia in which the Company has agreed to use substantially all of its assets to collateralize the amounts due to Wachovia under the 2003 Loan Financing.
The Company also has a $3,000,000 line of credit from Wachovia that bears interest at the prime interest rate less 0.25%. The line of credit was renewed and extended to November 30, 2004, at which time the Company expects to renew and extend the due date. At March 31, 2004, the Company had $0 outstanding and $3,000,000 available under the line of credit. The Company does not currently expect to borrow cash under this line of credit in the future due to the available cash on hand, and the cash expected to be provided by its results of operations in the future. The line of credit is collateralized by substantially all Company assets.
The terms of the line of credit, the Agreement, the related letter of credit and the 2003 Loan Financing require that the Company meet certain financial covenants and reporting standards, including the attainment of standard financial liquidity and net worth ratios. As of March 31, 2004, the Company has complied with such terms, and successfully met its financial covenants. Additionally, it is the Company's opinion that such covenants are not material in nature.
The Company believes that cash generated from its operations and the balances available under the Company's existing loans and line of credit as of March 31, 2004, are sufficient to finance its level of operations and currently anticipated capital expenditures. However, to benefit from the low interest rates in the current financial markets, the Company is planning to finance some or all of the capital expenditures in Fiscal 2004.
Except as set forth in this report, the Company is not aware of any trends, events or uncertainties that have or are reasonably likely to have a material adverse impact on the Company's short-term or long-term liquidity or financial condition.
PROSPECTS FOR THE FUTURE
The Company has several generic products under development. These products are all orally-administered, solid-dosage (i.e. tablet/capsule) products designed to be generic equivalents to brand named innovator drugs. The Company's developmental drug products are intended to treat a diverse range of indications. One of these developmental products, an orally-administered obesity product, represents a generic ANDA currently owned by the Company, but not currently manufactured and distributed for commercial consumption. As one of the oldest generic drug manufacturers in the country, formed in 1942, Lannett currently owns several ANDAs for products which it
does not manufacture and market. These ANDAs are simply dormant on the Company's records. Occasionally, the Company reviews such ANDAs to determine if the market potential for any of these older drugs has recently changed, so as to make it attractive for Lannett to reconsider manufacturing and selling it. If the Company makes the determination to introduce one of these products into the consumer marketplace, it must review the ANDA and related documentation to ensure that the approved product specifications, formulation and other features are feasible in the Company's current environment. Generally, in these situations, the Company must file a supplement to the FDA for the applicable ANDA, informing the FDA of a significant change in the manufacturing process, the formulation, the raw material supplier or another major feature of the previously-approved ANDA. The Company would then redevelop the product and submit it to the FDA for supplemental approval. The FDA's approval process for ANDA supplements is similar to that of a new ANDA.
Another developmental product is a new ANDA submitted to the FDA in July 2003 for approval. This ANDA is for an orally-administered prescription capsule product to treat obesity. The FDA has recently disclosed that the average amount of time to review and approve a new ANDA is approximately eighteen months. Since the Company has no control over the FDA review process, management is unable to anticipate whether or when it will be able to begin commercially producing and shipping this product.
The remainder of the products in development represent either previously approved ANDAs that the Company is planning to reintroduce (ANDA supplements), or new formulations (new ANDAs). The products under development are at various stages in the development cycle -- formulation, scale-up, and/or clinical testing. Depending on the complexity of the active ingredient's chemical characteristics, the cost of the raw material, the FDA-mandated requirement of bioequivalence studies, the cost of such studies and other developmental factors, the cost to develop a new generic product varies. It can range from $100,000 to $1 million. Some of Lannett's developmental products require bioequivalence studies, while others do not -- depending on the FDA's Orange Book classification. The Orange Book is the FDA's reference list for drug products. Since the Company has no control over the FDA review process, management is unable to anticipate whether or when it will be able to begin producing and shipping additional products.
In addition to the efforts of its internal product development group, Lannett has contracted with two outside firms (Pharmatek Laboratories Inc. in California and The PharmaNetwork LLC in New Jersey) for the formulation and development of several new generic drug products. These outsourced R&D products are at various stages in the development cycle -- formulation, analytical method development and testing and manufacturing scale-up. These products are orally-administered solid dosage products intended to treat a diverse range of medical indications. It is the Company's intention to ultimately transfer the formulation technology and manufacturing process for all of these R&D products to the Company's own commercial manufacturing sites. The Company initiated these outsourced R&D efforts to compliment the progress of its own internal R&D efforts.
The Company is also developing a drug product that does not require FDA approval. The FDA allows generic manufacturers to manufacture and sell products which are equivalent to innovator drugs that are grand-fathered, under FDA rules, prior to the passage of the Hatch-Waxman Act of 1984. The FDA allows generic manufacturers to produce and sell generic versions of such grand-fathered products by simply performing and internally documenting the product's stability over a period of time. Under this scenario, a generic company can forego the time and costs related to a FDA-mandated ANDA approval process. The Company currently has one product under development in this category. The developmental drug is an orally-administered solid dosage prescription product.
The Company has also contracted with Spectrum Pharmaceuticals Inc., based in California, to market generic products developed and manufactured by Spectrum and/or its partners. The first applicable product under this agreement is ciprofloxacin tablets, the generic version of Cipro(R), an anti-bacterial drug marketed by Bayer Corporation prescribed to treat infections. The Company has also initiated discussions with other firms for
similar new product initiatives, in which Lannett will market and distribute products manufactured by third parties. Lannett intends to use its strong customer relationships to build its market share for such products, and increase future revenues and income.
The majority of the Company's R&D projects are being developed in-house under Lannett's direct supervision and with Company personnel. Hence, the Company does not believe that its outside contracts for product development, including those for Pharmatek Laboratories Inc. and The PharmaNetwork LLC, or manufacturing supply, including Spectrum Pharmaceuticals Inc., are material in nature, nor is the Company substantially dependent on the services rendered by such outside firms. Since the Company has no control over the FDA review process, management is unable to anticipate whether or when it will be able to begin producing and shipping such additional products.
ITEM 4 CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives.
With the participation of management, the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures at the conclusion of the nine months ended March 31, 2004. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or, to the knowledge of management of the Company, in other factors that could significantly affect internal controls subsequent to the date of the Company's most recent evaluation of its disclosure controls and procedures utilized to compile information included in this filing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Regulatory Proceedings
The Company is engaged in an industry which is subject to considerable government regulation relating to the development, manufacturing and marketing of pharmaceutical products. Accordingly, incidental to its business, the
Company periodically responds to inquiries or engages in administrative and judicial proceedings involving regulatory authorities, particularly the FDA and the Drug Enforcement Agency.
Employee Claims
A claim of retaliatory discrimination has been filed by a former employee with the Pennsylvania Human Relations Commission ("PHRC") and the Equal Employment Opportunity Commission ("EEOC"). The Company was notified of the complaint in March 1997. The Company has denied liability in this matter. The PHRC has made a determination that the complaint against the Company should be dismissed because the facts do not establish probable cause of the allegations of discrimination. The matter is still pending before the EEOC. At this time, management is unable to estimate a range of loss, if any, related to this action. Management believes that the outcome of this claim will not have a material adverse impact on the financial position or results of operations of the Company.
A claim of discrimination has been filed against the Company with the EEOC and the PHRC. The Company was notified of the complaint in June 2001. The Company has filed an answer with the EEOC denying the allegations. The EEOC has made a determination that the complaint against the Company should be dismissed because the facts do not establish probable cause of the allegations of discrimination. The PHRC has also closed its file in this matter. At this time, management is unable to estimate a range of loss, if any, related to this action. Management believes that the outcome of this claim will not have a material adverse impact on the financial position or results of operations of the Company.
A claim of discrimination has been filed against the Company with the PHRC and the EEOC. The Company was notified of the complaint in July 2001. The Company has filed an answer with the PHRC denying the allegations. The PHRC has made a determination that the complaint against the Company should be dismissed because the facts do not establish probable cause of the allegations of discrimination. The matter is still pending before the EEOC. At this time, management is unable to estimate a range of loss, if any, related to this action. Management believes that the outcome of this claim will not have a material adverse impact on the financial position or results of operations of the Company.
DES Cases.
The Company is currently engaged in several civil actions as a co-defendant with many other manufacturers of Diethylstilbestrol ("DES"), a synthetic hormone. Prior litigation established that the Company's pro rata share of any liability is less than one-tenth of one percent. The Company was represented in many of these actions by the insurance company with which the Company maintained coverage during the time period that damages were alleged to have occurred. The insurance company denies coverage for actions alleging involvement of the Company filed after January 1, 1992. With respect to these actions, the Company paid nominal damages or stipulated to its pro rata share of any liability. The Company has either settled or is currently defending over 500 such claims. At this time, management is unable to estimate a range of loss, if any, related to these actions. Management believes that the outcome of these cases will not have a material adverse impact on the financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q is shown on the Exhibit Index filed herewith.
(b) On January 20, 2004, the Company filed a Form 8-K disclosing in Item 7 and Item 12 thereof and including as an exhibit the press release announcing its results of operations for the quarter ended and the six months ended December 31, 2003.
(c) On February 17, 2004, the Company filed a Form 8-K disclosing in Item 1 that William Farber, the Chief Executive Officer and Chairman of the Board of Lannett Company, Inc has granted an irrevocable option to Perrigo Company to purchase all of his shares (13,306,129 shares which represents 66.27% of the outstanding Common Stock of the Company) of Lannett Company, Inc. for $14.56 per share plus contingent additional consideration. In addition the Form 8-K, disclosed in Item 7 thereof and included as an exhibit the Stock Purchase Option Agreement dated as of February 4, 2004 by and among William Farber, Audrey Farber and Perrigo Company.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LANNETT COMPANY, INC.
Dated: May 10, 2004 By: /s/ Larry Dalesandro
------------------------------------
Larry Dalesandro
Chief Financial Officer
By: /s/ William Farber
------------------------------------
William Farber
Chairman of the Board and Chief Executive Officer
|
EXHIBIT INDEX
2.1 Agreement between Lannett Company, Incorporated by reference to Exhibit 2.1 -
Inc. and Jerome Stevens Pharmaceuticals to Form 8-K dated April 20, 2004
10 Employment Agreement between Lannett Filed Herewith 27-34
Company, Inc. and Arthur Bedrosian
11 Computation of Per Share Earnings Filed Herewith 35-36
31.1 Certification of Chief Executive Officer Filed Herewith 37-38
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Filed Herewith 39-40
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certifications of Chief Executive Officer Filed Herewith 41
and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
EXHIBIT 10
EMPLOYMENT AGREEMENT BETWEEN LANNETT COMPANY, INC. AND ARTHUR BEDROSIAN
This Employment Agreement ("Agreement") is entered into as of April 1, 2004 ("Effective Date") between Lannett Company, Inc. ("Company") and Arthur P. Bedrosian ("Executive").
RECITALS
Company wishes to employ Executive as its President and Executive wishes to accept such employment under the terms and conditions set forth in this Agreement
IT IS AGREED as follows:
1. Employment. Company hereby employs Executive as its President and Executive accepts such employment.
2. Term. The term of employment under this Agreement shall commence on the
Effective Date and shall continue, unless otherwise terminated earlier under
Section 8, until the day before the third anniversary of the Effective Date,
i.e., March 31, 2007 (the "Term"), provided that on the day before each yearly
anniversary of the Effective Date, the Term shall be automatically extended for
successive additional one (1) year periods unless at least ninety (90) days
prior to such anniversary date, either Company or Executive furnishes the other
with written notice that the term is not to be so extended.
3. Duties. Executive shall devote his full-time efforts to the proper and
faithful performance of all duties customarily discharged by a president for a
company doing the type of business engaged in by Company, as well as having
responsibility for the day to day management of the Company, and any additional
duties assigned to him from time to time by the Chief Executive Officer of
Company and/or the Board of Directors of Company, consistent with the provisions
of this Section 3. Executive shall report directly to the Chief Executive
Officer of Company. Executive agrees to use his best efforts and comply with all
fiduciary and professional standards in the performance of his duties hereunder.
To the extent that any additional duties assigned to the Executive include the
provision of services to any subsidiary or affiliate of Company, such services
shall be provided without additional compensation and benefits beyond those set
forth in this Agreement, and any compensation and benefits provided to Executive
for such services shall be a credit with regard to amounts due from Company
under this Agreement. Company, to the best of its knowledge, and Executive
acknowledge that prior to the effective date of this Agreement, Executive has
fulfilled his duties and responsibilities as set forth in this Section 3.
Executive represents and warrants to Company that, at all times during the term
of this Agreement, he will continue to fulfill his duty of loyalty to Company
and will act in the best interest of Company's shareholders. (a) The Executive
has been engaged in the pharmaceutical business for in excess of thirty-five
(35) years and has disclosed to the Company his ownership interests in
Pharmeral, Inc.* and Pharmaceutical Ventures, Ltd., as well as his interest as a
creditor of Liquipharm, Inc. His involvement with respect to these companies has
been disclosed, including but not limited to the sale or licensing of various
products, which transactions have in the past included the Company. The
Executive further agrees to disclose any significant change in his association
with said entities or in the nature of their business
operations if there comes a time when underlying circumstances which have been represented to the Company are materially altered. The Executive maintains a personal investment portfolio which includes various pharmaceutical holdings. In the event Executive's holdings in any one individual company exceeds one percent (1%) of his net worth, said holding will be disclosed in writing to the Company.
4. Base Salary. Executive shall be paid a base salary of Two Hundred Twenty-Five Thousand Dollars ($225,000.00) per annum for the Term payable, less applicable withholding, in equal monthly payments or more frequently in accordance with Company's regular practice. Salary for a portion of any period will be prorated. The Compensation Committee of the Company's Board of Directors (the Compensation Committee") will conduct an annual performance review of Executive and, as part of such review, will consider adjustments to the base salary set forth herein based on the performance of both Executive and Company.
5. Annual Bonus. Executive shall be eligible to participate in the Management Incentive Bonus Plan (the "MIB") administered by the Compensation Committee, or any successor annual bonus plan or arrangement generally made available to the executive officers of Company. The MIB shall provide Executive with a target bonus opportunity for each fiscal year of Company (i.e. July 1 to June 30), regardless of whether or not a bonus is declared for any fiscal year, with a minimum guarantee using the same criteria.
6. Benefits. During the Term Executive shall have the following benefits:
- Executive may participate in all Company sponsored stock option plans, retirement plans, 401(k) plans, life insurance plans, medical insurance plans, disability insurance plans, executive stock ownership plans and such other benefit plans generally available from time to time to other executive employees of Company for which he qualifies under the terms of the plans. Executive's participation in and benefits under any benefit plan shall be on the terms and subject to the conditions specified in such plan.
- Executive will receive four (4) weeks of paid vacation in each calendar year, prorated for periods less than one (1) year.
- Through December 31, 2005 or, if earlier, the date Executive relocates his primary residence, the Executive shall be entitled to reimbursement for temporary housing expenses, travel and other out-of-pocket travel expenses in connection with commuting from his residence in the Pomona, New York area. This reimbursement shall include reasonable expenses for family travel related to searching for a new residence, including but not limited to, expenses incurred in the sale and purchase of a substitute residence, excluding the price of the residence itself. Additionally, if Executive has an apartment lease in the Philadelphia, Pennsylvania area that extends beyond December 31, 2005, Company will pay the cost of such lease through the balance of its term. All such reimbursements shall be subject to Executive's presentation of supporting documentation of such expenses as may be reasonably required by Company.
- Company agrees that it will cooperate with Executive in the establishment of a deferred compensation plan with terms that are mutually agreeable to both parties
to defer until a future date payment of such portion of the Executive's annual compensation as he may elect to defer.
7. Reimbursement of Expenses. Company will reimburse Executive for the reasonable and necessary expenses incurred by him in the performance of his duties under this Agreement in accordance with Company's policies in effect from time to time.
8. Termination of Employment.
a. Executive's employment under this Agreement may be terminated at any time by the Chief Executive Officer and/or the Board of Directors of Company, with or without Cause (as defined below).
b. Executive's employment is "at-will." Executive's employment under this Agreement shall terminate upon expiration of the Term.
c. Executive's employment under this Agreement shall terminate upon his resignation or death.
d. Executive's employment under this Agreement shall terminate upon thirty (30) days written notice by Company to Executive of a termination due to Disability, provided such notice is delivered during the period of Disability. The term "Disability" shall mean, for purposes of this Agreement, the inability of Executive, due to injury, illness, disease or bodily or mental infirmity to engage in the performance of his material duties of employment with Company as contemplated by Section 3 herein for (i) any period of ninety (90) consecutive days or (ii) a period of one hundred fifty days (150) in any consecutive twelve (12) months, provided that interim returns to work of less than ten (10) consecutive business days in duration shall not be deemed to interfere with a determination of consecutive absent days if the reason for absence before and after the interim return are the same. Benefits to which Executive is entitled under any disability policy or plan provided by Company shall reduce the base salary paid to Executive during any period of Disability on a dollar-for-dollar basis.
e. Company shall have the right to terminate Executive's employment for Cause. For purposes of this Agreement, "Cause" shall consist of any of the following:
i. Executive's willful misrepresentation in this Agreement, fraud, willful dishonesty or willful breach of a fiduciary duty or duty of loyalty to Company which directly or indirectly results, in his enrichment, economic or otherwise, at the expense of Company;
ii. willful misconduct; provided, however, that conduct by Executive in good faith and/or ordinary negligence shall not be considered "Cause" under paragraph (8)(ii) or (iii);
iii. Willful or reckless conduct of Executive which has an adverse impact (economic or otherwise) on Company;
iv. Failure to perform Executive's duties or failure to follow any written policy or directive of the Chief Executive Officer and/or the Board of Directors of Company consistent with such duties which is not remedied by Executive after receipt by him of a written notice from Company's Chief Executive Officer and/or the Board of Directors of Company specifying the required action and a
reasonable time period within which the action must be taken, which period shall not be less than three (3) business days;
v. Willful violation of any law, rule or regulation relating to the operation of Company or any of its subsidiaries or affiliates;
vi. The order of any court or supervising governmental agency with jurisdiction over the affairs of Company or any subsidiary or affiliate;
vii. Executive's willful violation of any provision of this Agreement, including without limitation violation of Sections 9,10,11 or 12;
viii. Executive's conviction or no contest plea to a felony or crime involving moral turpitude;
ix. Abuse of illegal drugs or other controlled substances or habitual intoxication; or
x. Willful violation by Executive of Company's published business conduct guidelines, code of ethics, conflict of interest or other similar policies.
f. If Executive's employment terminates pursuant to paragraphs
(b), (c), (d) or (i) of this Section 8 or for Cause, Company
shall be obligated only to continue to pay Executive's salary
and, to the extent earned, accrued and unpaid, annual cash
bonus and long term incentive compensation and furnish the
then existing benefits under Section 6 up to the date of
termination.
g. If Executive's employment is terminated by Company without
Cause, in addition to the amounts payable under Section 8(f),
Executive shall be entitled to receive (i) Six Hundred and
Seventy-Five Thousand Dollars ($675,000) in a lump sum no
later than thirty (30) days following the termination date,
(ii) insurance coverage provided to him on the date of
termination or, if ineligible for continued coverage under
Company policies, reimbursement of the cost of comparable
coverage for a period of eighteen (18) months (iii) a pro
rated annual cash bonus for the then current calendar year
calculated as if all targets and goals are achieved (but no
other incentive compensation beyond the date of termination)
at the times and frequency regularly paid, and (iv) the
Company shall cause all outstanding Company stock options
awarded Executive prior to termination of his employment to be
one hundred percent (100%) vested at termination. As a
condition to the receipt of the payments, insurance coverage
continuation under this Section 8(g), Executive must first
execute and deliver to Company, in a form prepared by Company,
a release of all claims against Company and other appropriate
parties, excluding Company's performance under this Section
8(g) and Executive's vested rights under Company sponsored
retirement plans, 401 (k) plans and stock ownership plans, and
the Company's indemnification obligations pursuant to Section
18 below.
h. The termination of Executive's employment with Company, for any reason and irrespective as to whether initiated by Executive or Company, shall be considered a contemporaneous resignation by Executive from the position of Company's President Company and shall be deemed a termination from employment with all entities related to Company.
i. The Executive may terminate his employment hereunder at any time for any reason by giving the Company prior written notice not less than thirty (30) days prior to such termination. Termination by the Executive pursuant to this clause shall be deemed a termination entitling the Executive to compensation pursuant to Section 8(f) above.
9. Confidential Information. During Executive's employment with Company and at all times after the termination of such employment, regardless of the reason for such termination, Executive shall hold all Confidential Information relating to Company in strict confidence and in trust for Company and shall not disclose or otherwise communicate, provide or reveal in any manner whatsoever any of the Confidential Information to anyone other than Company without the prior written consent of Company. "Confidential Information" includes, without limitation, financial information, related trade secrets (including, without limitation, Company's business plan, methods and/or practices) and other proprietary business information of Company which may include, without limitation, market studies, customer and client lists, referral lists and other items relative to the business of Company. "Confidential Information" shall not include information which is or becomes in the public domain through no action by Executive or information which is generally disclosed by Company to third parties without restrictions on such third parties.
10. Solicitation of Customers. During his employment with Company and for a period of three (3) years after the termination of Executive's employment, regardless of the reason for the termination (the "Non-Competition Period"), Executive shall not, whether directly or indirectly, for his own benefit or for the benefit of any other person or entity, or as a partner, stockholder, member, manager, officer, director, proprietor, employee, consultant, representative, agent of any entity other than Company, solicit, directly or indirectly, any customer of Company, or induce any customer of Company to terminate any association with Company, in connection with those certain products being offered for sale by Company or in its research and development pipeline on the date of termination of Executive's employment (the "Restricted Products") or otherwise attempt to provide services to any customer of Company in connection with the Restricted Products. Executive shall prevent such solicitation to the extent he has authority to prevent same and otherwise shall not interfere with the relationship between Company and its customers. This provision shall not be interpreted to prohibit, prevent or otherwise impair the Executive's ability and right to seek and obtain employment from a competitor of the Company, even if said competitor is currently selling products to the Company's customers, which products are similar or identical to the Company's. While the Executive shall be unrestricted in seeking to sell products to the Company's customers that are different, it is the intent of this paragraph to preclude the Executive from having said competitor replace the Company as a supplier of a product or otherwise take existing sales from the Company for the period in question.
11. Solicitation of Executives and Others. During his employment with Company and during the Non-Competition Period, Executive shall not, whether directly or indirectly, for his own benefit or for the benefit of any other person or entity, or as a partner, stockholder, member, manager, officer, director, proprietor, employee, consultant, representative, agent of any entity other than Company, solicit, for purposes of employment or association, any Executive or agent of Company ("Solicited Person"), or induce any Solicited Person to terminate such employment or association for purposes of becoming employed or associated elsewhere, or hire or otherwise engage any Solicited Person as an Executive or agent of an entity with whom Executive may be affiliated or permit such, or otherwise interfere with the relationship between Company and its employees and agents. For purposes of this Agreement, an employee or agent of Company shall mean an individual employed or retained by Company during the Term and/or who terminates such association with Company within a period of six (6) months after the termination of Executive's employment with Company.
12. Non-Competition. Without the written consent of the Chief Executive Officer, during his employment with Company, Executive shall not directly or indirectly, as an officer, director, shareholder, member, partner, joint venturer, Executive, independent contractor, consultant, or in any other capacity: Engage, own or have any interest in, manage, operate, join, participate in, accept employment with, render advice to, or become interest in or be connected with; Furnish consultation or advice to; or permit his name to be used in connection with; any person or entity engaged in a business in the United States or Canada which is engaged in the manufacture distribution or sale of the Restricted Products or which otherwise competes with the business of Company as it exists from time to time and, in the case of termination of this Agreement, as it exists on the termination date. Notwithstanding the foregoing, holding one percent (1%) or less of an interest in the equity, stock options or debt of any publicly traded company shall not be considered a violation of this Section 12.
13. Disclosure and Ownership of Workproduct and Information. Executive agrees to disclose promptly to Company all ideas, inventions (whether patentable or not), improvements, copyrightable works of original authorship (including but not limited to computer programs, compilations of information, generation of data, graphic works, audio-visual materials, technical reports and the like), trademarks, know- how, trade secrets, processes and other intellectual property, developed or discovered by Executive in the course of his employment relating to the business of Company, or to the prospective business of Company, or which utilizes Company's information or staff services (collectively, "Workproduct"). Work product created by Executive within the scope of Executive's employment, on Company time, or using Company resources (including but not limited to facilities, staff, Information, time and funding), belongs to Company and is not owned by Executive individually. Executive agrees that all works of original authorship created during his employment are "works made for hire" as that term is used in connection with the U.S. Copyright Act. To the extent that, by operation of law, you retain any intellectual property rights in any Workproduct, Executive hereby assigns to Company all right, title and interest in all such Workproduct, including copyrights, patents, trade secrets, trademarks and know-how. Executive agrees to cooperate with Company, at Company's expense, in the protection of Company's information and the securing of Company's proprietary rights, including signing any documents necessary to secure such rights, whether during or after your employment with Company, and regardless of the fact of any employment with a new company.
14. Enforcement of Agreement; Injunctive Relief; Attorneys' Fees and Expenses. Executive acknowledges that violation of this Agreement will cause immediate and irreparable damage to Company, entitling it to injunctive relief. Executive specifically consents to the issuance of temporary, preliminary, and permanent injunctive relief to enforce the terms of this Agreement. In addition to injunctive relief, Company is entitled to all money damages available under the law. If Executive violates this Agreement, in addition to all other remedies available to Company at law, in equity, and under contract, Executive agrees that Executive is obligated to pay all Company's costs of enforcement of this Agreement, including attorneys' fees and expenses. Company acknowledges that violation of this Agreement will cause immediate and irreparable damage to Executive, entitling him to injunctive relief. Company specifically consents to the issuance of temporary, preliminary, and permanent injunctive relief to enforce the terms of this Agreement. In addition to injunctive relief, Executive is entitled to all money damages available under the law. If Company violates this Agreement, in addition to all other remedies available to Executive at law, in equity, and under contract, Company agrees that Company is
obligated to pay all Executive's costs of enforcement of this Agreement, including attorneys' fees and expenses.
15. Severability and Savings. Each provision in this Agreement is separate. If necessary to effectuate the purpose of a particular provision, the Agreement shall survive the termination of Executive's employment with Company. If any provision of this Agreement, in whole or in part, is held to be invalid or unenforceable, the parties agree that any such provision shall be deemed modified to make such provision enforceable to the maximum extent permitted by applicable law. As to any provision held to be invalid or unenforceable, the remaining provisions of this Agreement shall remain in effect
16. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of Company and its successors and assigns. This Agreement shall be binding upon and inure to the benefit of Executive, his heirs and personal representatives. This Agreement is not assignable by Executive.
17. Statute of Limitations. Executive agrees not to initiate any action or suit relating directly or indirectly to employment with Company or the termination of such employment more man one (1) year after the effective date of termination of employment. Executive expressly waives any other longer statute of limitations. However, Executive agrees that any shorter statute(s) of limitations remain in effect.
18. Indemnification. To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold harmless the Executive from and against any and all claims, demands, actions, causes of action, liabilities, losses, judgments, fines, costs and expenses (including reasonable attorneys' fees and settlement expenses) arising from or relating to his service or status as an officer, director, employee, agent or representative of the Company or any affiliate of the Company or in any other capacity in which the Executive serves or has served at the request of, or for the benefit of, the Company or its affiliates. The Company's obligations under this section shall be in addition to, and not in derogation of, any other rights the Executive may have against the Company to indemnification or advancement of expenses, whether by statute, contract or otherwise, and the Company's obligations pursuant to tins Section 18 shall survive termination of the Executive's employment.
19. Miscellaneous.
The Company agrees to pay any and all reasonable costs and counsel fees incurred by the Executive in connection with the negotiation, preparation and entry into the within agreement up to a total of Ten Thousand Dollars ($10,000). No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Company and Executive. The waiver or nonenforcement by Company of a breach by Executive of any provision of this Agreement shall not be construed as a waiver of any subsequent breach by Executive. This Agreement is the parties' entire agreement relating to the subject matter hereof and any and all prior agreements, representations or promises, oral or otherwise, express or implied, are superseded by and/or merged into this Agreement.
Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or
sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice): To Company: Lannett Company, Inc., 9000 State Road, Philadelphia, PA 19136 Attn.: Chairman of the Board; To the Executive: Arthur P. Bedrosian, JD, P O Box D1400, Pomona, NY 10970 with a copy to Steven L. Davis, Schiffman, Berger, Abraham, Kaufman & Ritter PC, Three University Plaza, P.O. Box 568, Hackensack, NJ 07602-0568. All notices shall be deemed effective upon receipt. The failure to accept mail forwarded through the U.S. Postal Service, certified, return receipt requested, shall be deemed received as of the earlier of the first date such delivery is refused or, alternatively, if notices are provided of attempts to deliver, the date on which said first notice was provided to the Company.
This Agreement shall be governed by the laws of the State of Pennsylvania.
Although this Agreement was drafted by Company, the parties agree that it accurately reflects the intent and understanding of each party and should not be construed against Company for the sole reason that it was the drafter if there is any dispute over the meaning or intent of any provisions. Executive agrees that this Agreement is confidential and Executive will not disclose the terms and conditions of this Agreement to any Company employee or other third party, other than Executive's attorney, accountant, professional advisors and members of his immediate family, except as may be permitted by applicable law.
This Agreement may be executed in counterparts, which together shall constitute one Agreement.
By their signatures below, the parties acknowledge that they have had sufficient opportunity to read and consider, and that they have carefully read and considered, each provision of this Agreement and that they are voluntarily signing this Agreement.
The parties have executed this Agreement as of the Effective Date.
/s/Arthur P. Bedrosian --------------------------- Arthur P. Bedrosian |
Lannett Company, Inc.
/s/William Farber --------------------------- William Farber Its: Chairman of the Board |
.
.
.
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
LANNETT COMPANY, INC AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED MARCH 31
2004 2004 2003 2003
---------- ---------- ---------- ----------
Net Income Shares Net Income Shares
Basic earnings per share factors $3,198,398 20,058,753 $3,255,633 19,985,031
Effect of potentially dilutive
option plans and debentures:
Employee stock options 207,080 132,764
---------- ---------- ---------- ----------
Diluted earnings per share factors $3,198,398 20,265,833 $3,255,633 20,117,795
========== ========== ========== ==========
Basic earnings per share $ 0.16 $ 0.16
Diluted earnings per share $ 0.16 $ 0.16
|
Options to purchase 7,775 shares, 10,001 shares, 42,125 shares, 280,203 shares, 33,125 shares, 7,500 shares and 171,000 shares of common stock at $0.75 per share, $2.30 per share, $4.63 per share, $7.97 per share, $11.27 per share, $18.72 per share and $17.36 per share respectively, were outstanding at March 31, 2004. Of these options, 373,229 shares were included in the calculation of outstanding shares for the purpose of calculating diluted earnings per share. Options to purchase 15,900 shares, 10,001 shares, 50,625 shares, 292,755 shares, and 40,815 shares, of common stock at $0.75 per share, $2.30 per share, $4.63 per share, $7.97 per share and $11.27 per share respectively, were outstanding at March 31, 2003. Of these options, 369,281 shares were included in the calculation of outstanding shares for the purpose of calculating diluted earnings per share.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
LANNETT COMPANY, INC AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
NINE MONTHS ENDED MARCH 31
2004 2004 2003 2003
----------- ---------- ---------- ----------
Net Income Shares Net Income Shares
Basic earnings per share factors $10,455,330 20,049,647 $8,570,198 19,948,870
Effect of potentially dilutive
option plans and debentures:
Employee stock options 213,499 132,764
----------- ---------- ---------- ----------
Diluted earnings per share factors $10,455,330 20,263,146 $8,570,198 20,081,634
=========== ========== ========== ==========
Basic earnings per share $ 0.52 $ 0.43
Diluted earnings per share $ 0.52 $ 0.43
|
Options to purchase 7,775 shares, 10,001 shares, 42,125 shares, 280,203 shares and 33,125 shares, 7,500 shares and 171,000 shares of common stock at $0.75 per share, $2.30 per share, $4.63 per share, $7.97 per share, $11.27 per share, $18.72 per share and $17.36 per share respectively, were outstanding at March 31, 2004. Of these options, 544,229 shares were included in the calculation of outstanding shares for the purpose of calculating diluted earnings per share. Options to purchase 15,900 shares, 10,001 shares, 50,625 shares, 292,755 shares, and 40,815 shares, of common stock at $0.75 per share, $2.30 per share, $4.63 per share, $7.97 per share, $11.27 per share respectively, were outstanding at March 31, 2003. Of these options, 369,281 shares were included in the calculation of outstanding shares for the purpose of calculating diluted earnings per share.
NOTE: ALL SHARE AMOUNTS HAVE BEEN RESTATED TO REFLECT A 3 FOR 2 STOCK SPLIT, EFFECTIVE FEBRUARY 14, 2003.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William Farber, certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders' equity, and cash flows the Company, as of, and for, the periods presented in this report;
4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors;
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: May 10, 2004 /s/William Farber ----------------------- Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Larry Dalesandro, certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders' equity, and cash flows the Company, as of, and for, the periods presented in this report;
4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors;
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: May 10, 2004 /s/Larry Dalesandro ----------------------- Chief Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 USC, SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Lannett Company, Inc. (the
"Company") on Form 10-Q for the quarter ended March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
Farber, the Chief Executive Officer of the Company, and I, Larry Dalesandro, the
Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 10, 2004 /s/William Farber
---------------------------
William Farber,
Chief Executive Officer
Dated: May 10, 2004 /s/Larry Dalesandro
---------------------------
Larry Dalesandro,
Chief Financial Officer
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