2 0 0 5
A N N U A L
R E P O R T
Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
(215) 333-9000, (800) 325-9994
Fax (215) 333-9004
P R O D U C I N G & D I S T R I B U T I N G O U R O W N L I N E O F H I G H Q U A L I T Y P H A R M A C E U T I C A L P R O D U C T S
COMPANY PROFILE
Lannett Company, Inc. (AMEX: LCI) develops,
manufactures and distributes a line of prescription
drug products in tablet, capsule and oral liquid
forms to customers throughout the United States.
MANAGEMENT TEAM AND DIRECTORS
CORPORATE INFORMATION
Arthur P. Bedrosian
President, Chief Executive Officer, Director
Brian Kearns
Chief Financial Officer, Vice President—
Finance, Treasurer, Secretary
Bernard Sandiford
Vice President—Operations
William Schreck
Vice President—Logistics
Kevin Smith
Vice President—Sales & Marketing
William Farber
Chairman of the Board
Ronald West
Director, Vice Chairman
Garnet Peck
Director
Kenneth Sinclair
Director
Albert Wertheimer
Director
Myron Winkelman
Director
Executive Offices
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
Mailing Address
9000 State Road
Philadelphia, PA 19136
Registrar and Transfer Company
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Legal Counsel
Fox, Rothschild, O’Brien & Frankel, LLP
Philadelphia, PA
Inquiries
Communications concerning stock transfer
requirements, lost certificates or change of
address should be addressed to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Annual Report and Form 10-K
Additional copies of this annual report
and the Company’s Form 10-K may be
obtained without charge and the exhibits
to the Form 10-K may be obtained for a
nominal fee by writing to:
Lannett Company, Inc.
Investor Relations
9000 State Road
Philadelphia, PA 19136
From Left to Right:
Ron West, Director, Dr. Kenneth P. Sinclair, Director, Dr. Albert Wertheimer,
Director, Myron Winkelman, Director, Dr. Garnet Peck, Director and
William Farber, R. PH., Chairman of the Board
FINANCIAL HIGHLIGHTS
2005
2004
2003
2002
Net Sales
Gross Profit
$ 44,901,645
$ 63,781,219
$42,486,758
$25,126,214
13,484,737
36,924,344
26,228,964
16,673,537
Operating (Loss)/Income
(53,825,499)
20,830,969
19,060,106
11,425,483
Net (Loss)/Income
(32,779,597)
13,215,454
11,666,887
7,195,990
Basic (Loss)/Earnings
Per Share
Diluted (Loss)/Earnings
Per Share
Total Assets
(1.36)
(1.36)
0.63
0.63
0.58
0.58
0.36
0.36
94,917,060
131,904,084
31,834,544
17,338,503
MISSION STATEMENT
Lannett is committed to providing high quality, cost-effective pharmaceutical products. Its
focus is the development and manufacturing of bio-equivalent generic substitutes for
branded products with a wide range of medical indications. Armed with scientific expert-
ise, market savvy, and a certified manufacturing facility, the ultimate goal of Lannett is to
maximize its profits, and increase shareholder value while reducing the cost of healthcare.
1
DEAR SHAREHOLDERS:
IT IS APPROPRIATE TO REFLECT ON OUR RECENTLY COMPLETED 2005 FISCAL YEAR
ENDING JUNE AND TO TAKE A MOMENT TO THINK ABOUT OUR COMPANY IN TERMS OF
WHERE WE’VE BEEN, WHERE WE ARE TODAY, AND WHERE WE ARE GOING IN THE FUTURE.
AS WE ALL KNOW, LANNETT IS THE OLDEST GENERIC DRUG COMPANY IN THE NATION.
WE HAVE PROVIDED HEALTH CARE PRODUCTS AND SERVICES SINCE WORLD WAR II.
Over the past year, Lannett delivered several positive achievements as well as success-
fully faced several threats to our business. Lannett successfully acquired, built-out, and
moved into a new facility at 9001 Torresdale Avenue. Our Company realized improvements
and increased efficiencies through a new warehouse, new packaging operations and a new
laboratory. We also freed up valuable space by moving some administrative functions to
the new building. Lannett launched several new products to market including: phentermine
for weight loss; terbutaline for asthma; hydromorphone for pain management; and
ciprofloxacin to treat bacterial infections.
During fiscal 2005, Lannett was recognized by the Healthcare Distribution Management
Association (HDMA) as the “Best Overall Pharmaceutical Products Manufacturer with Sales
to HDMA Distributors Under $300 Million.” In an impressive public acknowledgement of
our efforts, Lannett was recognized in October 2004 by Forbes Magazine as being ranked
number three on their “Top 200 Best Small Companies” list. We should all be very proud of
these accomplishments. Our challenge will be to build on this impressive foundation with a
new list of accomplishments over the next year.
We also faced some of the most severe competitive threats of Lannett’s history.
Aggressive price cutting by many generic pharmaceutical companies hurt profitability for
the entire industry. Fortunately, the culture of our Company and character of our employ-
ees allowed Lannett to weather this difficult competitive environment. Lannett made a sig-
nificant investment in a potentially profitable drug to treat thyroid disorders, levothyroxine
sodium. While there is still upside opportunity to this investment, it did not work out as we
had hoped because the FDA approval for marketing of this drug was granted in full six
months later than we expected. This delayed FDA approval put Lannett at a serious
competitive disadvantage.
These threats notwithstanding, Lannett still ended the year with more cash in the bank
than when we started the year as we generated $8 million in cash flow from operations from
$45 million in sales. We also added a number of very capable and energetic employees to
the Lannett team along with a list of new and improved equipment to compliment our new
facilities and help our business grow.
2
WILLIAM FARBER, R.PH.
Chairman
ARTHUR P. BEDROSIAN
President and CEO
I am pleased to inform you that Lannett successfully passed Sarbanes-Oxley regulatory
compliance testing at year end. This regulation ensures that publicly traded companies, like
Lannett, have an appropriate level of internal controls in place to prevent fraud and finan-
cial misconduct. Through the hard work of many employees, Lannett sailed through this
compliance process with great success.
We continue to automate our business with the goal of achieving a paperless office.
While this goal may seem impossible at times, I assure you that we are making progress.
The successful implementation of the SAP system will help us move forward with increased
efficiency as we improve the way we capture and communicate data and results of our
operations. This system will help us to make intelligent business decisions and become
more competitive in the future.
In anticipation of future growth, Lannett’s Board of Directors recently added two new
members to the Board to increase the level of expertise in a variety of areas. Dr. Garnet
Peck, a professor from Purdue University, has been appointed to the Board. Dr. Peck will
bring a high level of industry expertise and pharmaceutical operations consulting back-
ground to Lannett. Dr. Kenneth Sinclair, chair of accounting at Lehigh University, has also
been added to the Lannett Board. Dr. Sinclair will bring his cost analysis and manufactur-
ing accounting expertise to Lannett. We are excited to have such qualified individuals
agree to join our Board and participate in our future growth.
Lannett’s opportunity for future growth is stronger now than at any time over the last
year. Most recently, Lannett launched two new and exciting products. Esterified estrogen
and methyltestosterone has tremendous opportunity for growth. Lannett also launched the
generic version of Bactrim, which further expands our product line up and makes our
Company more attractive to do business with for large national drugstore chains.
It is a combination of our significant R&D effort, our new equipment, systems and facilities,
and the tireless effort of our valuable employees that will allow Lannett to make the exciting
transition from being a good company to becoming a great company.
Sincerely,
William Farber
Chairman
Lannett Company, Inc.
Arthur P. Bedrosian
President and CEO
3
EMPLOYEE LIST
Patricia Adamson
Aurea Almazan
Benito Amado
Jessica Banff
Sheryl Banks
Partha Basumallik
Arthur Bedrosian
Donna Bennett
Scott Bertolami
Manish Bhagat
Joshua Birch
Amin Bowman
Renee Brown
Joyce Bustard
Paul Butts
Theresa Carroll
Luvina Carter
Sandra Caserta
Thomas Chacko
Michael Clark
Irma Claudio
John Cook
Ralph Cooper
Staci Copman
Philip Cristiano
Deborah Daniels
Juanita Davie
Valerie Davis
Simon Daw
Lilia Delgado
Loc (Jeremy) Dinh
Frederick Dinnini
Derek Dobson
Dan Dominquez
Robin Dornewass
Jason Edwards
Steve Ellingson
John Ewald
Denise Fairman
Johnson Fernandez
Wallace Ferrell
Romeo Fider
Nina Fleysh
Robert Foley
Henry Furlong
Christine Gagne
Alla Gampel
Tslina Gampel
Anthony Gawronski
Mathew George
Edward Glover
Daniel Gottlieb
Jeffrey Guadagno
Allison Haddock
Mulugetta Haile
Lionel Hampton
Jennifer Hernandez
Kevin Higgins
Jamie Holt
James Horan
Abraham Jacob
Desiree Jefferies
Michael Jones
Brian Kearns
Shaheen Khan
Sofia Kipnis
Christine Kirn
Jeremy Klein
Marie Klein
Michael Kobel
Anthony Kozar
Hilda Krekevich
Michael Krekevich
Sabu Kuriakose
Sam Kurian
Marc Kurtzman
Duc Lam
Beryldene Liburd
Yuh-Herng Lin
Gregory Liscio
Joseph Lock
Lorraine Locke
Sun Loesch
Christopher Lucas
Arezu Madani
Carol Maio
Beatrice Marengo
Christopher Marks
Richard Matchett
Thomas Mathew
Varghese Mattammel
Steven Mays
Patricia McBride
Lynn McBride-Lazicki
Michael McCormick
James McMonagle
Rita Melendez
Michelle Miller
John Morales
Mayietta Morris-Moore
Asa Mosby
Daniel Moser
Denise Murphy
Herbert Murphy
John Murphy
Brian Myers
Joseph Naluparayil
Varsha Nariewala
Barbara Ney
James Nichols
David Oliver
Henry Ortiz
Ravindra Oza
Chintan Patel
Nileshkumar Patel
Elena Pena
Zhong Peng
Michael Perreault
Thomas Peters
Michael Phares
Alan Phillips
Barbara Pierce
Subhash Poreddy
Kevin Porter
Suresh Potti
Elizabeth Powers
Saudy Ramos
Heather Regitko
MaryBeth Reilly
Adam Reuter
James Riddick
DelRoy Roach
Scott Rodman
John Ryman
Ernest Sabo
4
Carlos Sacanell
Raisa Saltisky
Bernard Sandiford
Caroline Sandlin
Thomas Santella
William Schreck
Daniel Septak
Haroun Sillah
Kevin Smith
Linda Soroka
Francis Spires Jr.
Steven Stein
Thomas Stein
Kristie Stephens
Catherine Stoklosa
Paulette Strand
Elena Streltsova
Carmen Suarez del Villar
Jenumon Thomas
Amy Trinidad
Chau Truong
Anthony Tursi
Andrew Uerkwitz
Adam Valvano
Rony Varughese
Mark Velardo
Nelli Vorobyeva
Bradley Wagner
Kevin Walker
Michael Walker
Katherine Weaver
George Wei
Ronald Wenger
Kenneth White
Joyce Williams
Brian Wilson
Mary Witt
Mary Wojtiw
Gerald Woolf
Valeria Yelkin
Steven Youmans
Varghese Zachariah
Ping Zhong
Isaak Zilberman
Denise Zobnowski
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
[ X ]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2005
OR
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 0-9036
LANNETT COMPANY, INC.
(Exact name of registrant as specified in its charter)
State of Delaware
State of Incorporation
23-0787-699
I.R.S. Employer I.D. No.
9000 State Road
Philadelphia, Pennsylvania 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes No X
Act).
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Yes X No __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the
Exchange Act). Yes __ No X
Aggregate market value of Common stock held by non-affiliates of the Registrant, as of December 31, 2004
was $99,942,641 based on the closing price of the stock on the American Stock Exchange.
As of August 25, 2005, there were 24,118,674 shares of the issuer's common stock, $.001 par value,
outstanding.
PART I
ITEM 1.
DESCRIPTION OF BUSINESS
General
Lannett Company, Inc. (the "Company,” “Lannett,” “we,” or “us”) was incorporated in 1942 under
the laws of the Commonwealth of Pennsylvania. In 1991, the Company merged into Lannett
Company, Inc., a Delaware corporation. The sole purpose of the merger was to reincorporate the
Company as a Delaware corporation. The Company develops, manufactures, packages, markets and
distributes pharmaceutical products sold under generic chemical names. References herein to a
fiscal year refer to the Company’s fiscal year ending June 30.
Historically, the Company has competed for an increasing share of the generic market. Although
net sales and operating income declined in fiscal 2005, the Company plans to improve future
financial performance as a result of additions to the Company’s line of generic products, additional
sales to current customers, higher unit sales and a management focus on minimizing unnecessary
overhead and administrative costs. Some of the new generic products sold by Lannett were
developed and are manufactured by Lannett while others are manufactured by others. The products
manufactured by Lannett and those manufactured by others are identified in the section entitled
“Products” in Item 1 of this Form 10-K.
Over the past several years, Lannett has consistently devoted resources to research and
development (R&D) projects, including new generic product offerings. The costs of these R&D
efforts are expensed during the periods incurred. The Company believes that such investments
may be paid back in future years as it submits applications to the Food and Drug Administration
(FDA), and when it receives marketing approval from the FDA to distribute such products. In
addition to using cash generated from its operations, the Company has entered into a number of
financing agreements with third parties to provide for additional cash when it is needed. These
financing agreements are more fully described in the section entitled “Liquidity and Capital
Resources” in Item 7 of this Form 10-K. The Company has embarked on an industrious plan to
grow in future years. In addition to organic growth to be achieved through its own R&D efforts,
the Company has also initiated marketing projects with other companies in order to expand
future revenue projections. The Company expects that its growing list of generic drugs under
development will drive future growth. The Company also intends to use the infrastructure it has
created, and to continually devote resources to additional R&D projects. The following
strategies highlight Lannett’s plan:
Research and Development
There are numerous stages in the generic drug development process:
1.) Formulation and Analytical Method Development: Once a drug candidate is selected for
future sales, product development scientists perform various experiments on the
incorporation of active ingredients into a dosage form. These experiments include the
creation of a number of product formulations to determine which formula will be most
1
suitable for the Company’s subsequent development process. Various formulations, are
tested in the laboratory to measure results against the innovator drug. During this time,
the Company may use reverse engineering methods on samples of the innovator drug to
determine the type and quantity of inactive ingredients. During the formulation phase,
the Company’s research and development chemists begin to develop an analytical,
laboratory testing method. The successful development of this test method will allow the
Company to test developmental and commercial batches of the product in the future. All
of the information used in the final formulation, including the analytical test methods
adopted for the generic drug candidate, will be included as part of the Chemical,
Manufacturing and Controls section of the Abbreviated New Drug Application (ANDA)
submitted to the FDA in the generic drug application
2.) Scale-up: After the product development scientists and the R&D chemists agree on a
final formulation to use in moving the drug candidate forward in the developmental
process, the Company will attempt to increase the batch size of the product. The batch
size represents the standard magnitude to be used in manufacturing a batch of the
product. The determination of batch size will affect the amount of raw material that is
input into the manufacturing process, and the number of expected tablets or capsules to
be created during the production cycle. The Company attempts to determine batch size
based on the amount of active ingredient in each dosage, the available production
equipment and unit sales projections. The scaled-up batch is then generally produced in
the Company’s commercial manufacturing facilities. During this manufacturing process,
the Company will document the equipment used, the amount of time in each major
processing step and any other steps needed to consistently produce a batch of that
product. This information, generally referred to as the validated manufacturing process,
will be included in the Company’s generic drug application submitted to the FDA.
3.) Clinical testing: After a successful scale-up of the generic drug batch, the Company then
schedules and performs clinical testing procedures on the product if required by the FDA.
These procedures, which are generally outsourced to third parties, include testing the
absorption of the generic product in the human bloodstream, compared to the absorption
of the innovator drug. The results of this testing are then documented and reported to the
Company to determine the “success” of the generic drug product. Success, in this
context, means the successful comparison of the Company’s product related to the
innovator product. Since bioequivalence and a stable formula are the primary
requirements for a generic drug approval (assuming the manufacturing plant is in
compliance with the FDA’s manufacturing quality standards), lengthy and costly clinical
trials proving safety and efficacy, which are generally required by the FDA for innovator
drug approvals, are unnecessary for generic companies. If the results are successful, the
Company will continue the collection of documentation and information for assembly of
the drug application.
4.) Submission of the ANDA for FDA review and approval: The ANDA process became
formalized under The Drug Price Competition and Patent Term Restoration Act of 1984,
also known as the Hatch-Waxman Act. An ANDA represents a generic drug company’s
application to the FDA to manufacture and/or distribute a drug that is the generic
Once
equivalent
bioequivalence studies are complete, the generic drug company submits an ANDA to the
FDA for marketing approval.
to an already-approved brand named
(“innovator”) drug.
2
In a presentation to the Generic Pharmaceutical Association on February 26, 2005, Lester M.
Crawford, D.V.M., Ph.D., and the Acting Commissioner of Food and Drugs at the FDA, said that
the median approval time for a new ANDA for the FDA’s Fiscal 2004 year was 16.2 months.
However, there is no guarantee that the FDA will approve a company’s ANDA or that any
approval will be given within this time frame.
When a generic drug company files an ANDA to the FDA, it must certify that no patents are
listed in the Orange Book, the FDA’s reference listing of approved drugs, or listed patents have
expired. If there are patents covering some aspect of the innovator drug, the applicant must state
whether it is seeking approval for marketing after the expiration of the Orange Book patents; or
the patents listed therein are invalid, unenforceable, or not infringed—usually referred to as a
Paragraph IV Certification. ANDAs containing Paragraph IV certifications frequently result in
legal actions by the innovator drug companies. These legal activities can trigger an automatic 30
month stay of our ANDA if the innovator company files a claim and it will delay the approval of
the generic company’s ANDA. Currently, Lannett has not filed two Paragraph IV certifications
in its ANDAs.
Over the past several years, the Company has hired additional personnel in product development,
production, formulation and the R&D laboratory. Lannett believes that its ability to select
appropriate products for development, develop such products on a timely basis, obtain FDA
approval, and achieve economies in production will be critical for its success in the generic
industry. The strategy involves a combination of decisions focusing on long-term profitability
and a secure market position with fewer challenges from competitors.
Competition in generic pharmaceutical manufacturing will continue to grow as more
pharmaceutical products lose patent protection. However, the Company believes that with
strong technical know-how, low overhead expenses, and efficient product development,
manufacturing and marketing, it can remain competitive. It is the intention of the Company to
reinvest as much capital as possible to develop new products since the success of any generic
pharmaceutical manufacturer depends on its ability to continually introduce new generic
products to the market. Over time, if a generic drug market for a specific product remains stable
and consumer demand remains consistent, it is likely that additional generic manufacturing
companies will pursue the generic product by developing it, submitting an ANDA, and
potentially receiving marketing approval from the FDA. If this occurs, the generic competition
for the drug increases, and a company’s market share may drop. In addition to reduced unit
sales, the unit selling price may also drop due to the product’s availability from additional
suppliers. This may have the effect of reducing a generic company’s future net sales of the
product. Due to these factors that may potentially affect a generic company’s future results of
operations, the ability to properly assess the competitive effect of new products, including
market share, the number of competitors and the generic unit price erosion, is critical to a generic
company’s R&D plan. A generic company may be able to reduce the potential exposure to
competitive influences that negatively affect its sales and profits by having several drug
candidates in its R&D pipeline. As such, a generic company may be able to avoid becoming
materially dependent on the sales of one drug. Unlike the branded, innovator companies,
Lannett currently does not own proprietary drug patents. However, the typical intellectual
property in the generic drug industry are the ANDAs that generic drug companies own.
3
Validated Pharmaceutical Capabilities
Lannett’s manufacturing facility consists of 31,000 square feet on 3.5 acres owned by the
Company. In July 2003, the Company signed a lease/purchase option agreement for a 63,000
square foot building located at 9001 Torresdale Avenue, Philadelphia, Pennsylvania. On
November 26, 2003, the Company exercised its option to purchase the facility. The initial
renovation of the building is complete and the Company moved some of its staff and operations
into that building in the fall of 2004. Lannett currently plans to move certain additional non
manufacturing personnel into the 9001 Torresdale building over the next year.
Many FDA regulations relating to cGMP (current Good Manufacturing Practices) have been
adopted by the Company in the last several years. In designing its facilities, full attention was
given to material flow, equipment and automation, quality control and inspection. A granulator,
an automatic film coating machine, high-speed tablet presses, blenders, encapsulators, fluid bed
dryers, high shear mixers and high-speed bottle filling are a few examples of the sophisticated
product development, manufacturing and packaging equipment the Company uses. In addition,
the Company’s Quality Control laboratory facilities are equipped with high precision
instruments, like automated high-pressure liquid chromatographs, gas chromatographs and laser
particle sizers.
Lannett continues to pursue its comprehensive plan for improving and maintaining quality
control and quality assurance programs for its pharmaceutical development and manufacturing
facilities. The FDA periodically inspects the Company’s production facilities to determine the
Company’s compliance with the FDA’s manufacturing standards. Typically, after the FDA
completes its inspection, it will issue the Company a report, entitled a Form 483, containing the
FDA’s observations of possible violations of cGMP. Such observations may be minor or severe
in nature. The degree of severity of the observation is generally determined by the time
necessary to remediate the cGMP violation, any consequences upon the consumer of the
Company’s drug products, and whether the observation is subject to a Warning Letter from the
FDA. By strictly enforcing the various FDA guidelines, namely Good Laboratory Practices,
Standard Operating Procedures and cGMP, the Company has successfully reduced the number of
observations in its latest FDA inspection. The Company believes that such observations are
minor in nature, and will be remediated in a timely fashion with no material effect on its future
results of operations.
Sales and Customer Relationships
The Company sells its pharmaceutical products to generic pharmaceutical distributors, drug
wholesalers, chain drug retailers, private label distributors, mail-order pharmacies, other
pharmaceutical manufacturers, managed care organizations, hospital buying groups and health
maintenance organizations. It promotes its products through direct sales, trade shows, trade
publications, and bids. The Company also licenses the marketing of its products to other
manufacturers and/or marketers in private label agreements.
Despite the decline of Company sales in Fiscal 2005, the Company continues to expand its sales
to the major chain drug stores, including CVS, Brooks, Rite Aid and Walgreen’s. The mail order
segment continued to be one of the fastest growing classes in the Company’s distribution efforts.
Such companies, as Medco Health, Express Scripts and Caremark are leaders in sales growth in
4
the pharmaceutical market. Lannett also increased distribution in the wholesaler segment led by
Cardinal Health and McKesson Corporation. Lannett is recognized by its customers as a
dependable supplier of high quality generic pharmaceuticals. The Company’s policy of
maintaining an adequate inventory and fulfilling orders in a timely manner has contributed to
this reputation.
Management
As the Company continues to grow, additional managers will be hired to complement the skilled
team. These new managers will serve in a variety of functions, including Research, Sales,
Finance, Quality Control, Quality Assurance, Regulatory Compliance and Production.
Ultimately, the execution of a sound business strategy requires a capable and knowledgeable
management team.
Products
As of the date of this filing, the Company manufactured and/or distributed sixteen products:
Name of Product
1) Acetazolamide Tablets
2) Butalbital, Aspirin and Caffeine
Capsules
3) Butalbital, Aspirin, Caffeine with
Codeine Phosphate Capsules
4) Ciprofloxacin Tablets
5) Digoxin Tablets
6) Dicyclomine Tablets/Capsules
7) Diphenoxylate with Atropine Sulfate
Tablets
8) Hydromorphone HCl Tablets
9) Levothyroxine Sodium Tablets
10) Methocarbamol Tablets
11) Methyltestoterone/Esterified
Estrogens Tablets
12) Phentermine HCl Tablets
13) Phenylpropanolamine Tablets-Vet
14) Primidone Tablets
15) Terbutaline Sulfate Tablets
16) Unithroid Tablets
Equivalent
Brand
Diamox®
Fiorinal®
Fiorinal w/
Codeine #3®
Cipro®
Lanoxin®
Bentyl®
Lomotil®
Dilaudid
Levoxyl®/
Synthroid®
Robaxin®
Estratest®
Adipex-P®
Propagest®
Mysoline®
Brethine®
N/A
Manufacture
Source
Medical Indication
Lannett
Lannett
Glaucoma
Migraine Headache
JSP
Migraine Headache
Antibiotic
Congestive Heart
Failure
Irritable Bowels
Diarrhea
Pain Management
Thyroid Deficiency
Muscle Relaxer
Hormone
Replacement
Weight Loss
Incontinence
Epilepsy
Bronchospasms
Thyroid Deficiency
Spectrum
JSP
Lannett
Lannett
Lannett
JSP
Lannett
Lannett
Lannett
Lannett
Lannett
Lannett
JSP
5
All of the products currently manufactured and/or sold by the Company are prescription products.
Of the products listed above, Unithroid and those containing butalbital, digoxin, primidone and
levothyroxine sodium were the Company’s key products, contributing to more than 93%, 97% and
95% of the Company’s total net sales in Fiscal 2005, 2004 and 2003, respectively.
The Company has two products containing butalbital. One of the products, Butalbital with Aspirin
and Caffeine capsules has been manufactured and sold by Lannett for more than seven years. The
other butalbital product, Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules is
manufactured by JSP. Lannett began buying this product from JSP and selling it to its customers in
December 2001. Both products, which are in orally administered capsule dosage forms, are
prescribed to treat tension headaches caused by contractions of the muscles in the neck and shoulder
area and migraine. The drug is prescribed primarily for adults of various demographic backgrounds.
Migraine headache is an increasingly prevalent condition in the United States. As conditions
continue to grow, the demand for effective medical treatments will continue to grow. Common side
effects of drugs which contain butalbital include dizziness and drowsiness. The Company notes that
although new innovator drugs to treat migraine headaches have been introduced by brand name drug
companies, there is still a loyal following of doctors and consumers who prefer to use butalbital
products for treatment. As the brand name companies continue to promote products containing
butalbital, like Fiorinal®, the Company expects to continue to produce and sell its generic butalbital
products.
Digoxin tablets are produced and marketed with two different potencies (0.125 and 0.25 milligrams
per tablet). This product is manufactured by JSP. Lannett began buying this product from JSP, and
selling it to its customers in September 2002. Digoxin tablets are used to treat congestive heart
failure in patients of various ages and demographic backgrounds. The beneficial effects of Digoxin
result from direct actions on the cardiac muscle, as well as indirect actions on the cardiovascular
system mediated by effects on the autonomic nervous system. Side effects of Digoxin may include
apathy, blurred vision, changes in heartbeat, confusion, dizziness, headaches, loss of appetite,
nausea, vomiting and weakness.
Primidone tablets are produced and marketed with two different potencies (50 and 250 milligrams
per tablet). This product was developed and manufactured by Lannett. Lannett has been
manufacturing and selling Primidone 250-milligram tablets for more than seven years. Lannett
began selling Primidone 50-milligram tablets in June 2001. Both products, which are in orally
administered tablet dosage forms, are prescribed to treat convulsion and seizures in epileptic patients
of all ages and demographic backgrounds. Common side effects of primidone include lack of
muscle coordination, vertigo and severe dizziness.
The Company’s products containing Levothyroxine Sodium tablets are produced and marketed
with eleven different potencies (0.025, 0.05, 0.075, 0.088, 0.1, 0.112, 0.125, 0.15, 0.175, 0.2, and
0.3 milligrams per tablet). In addition to generic Levothyroxine Sodium tablets, the Company
also markets and distributes Unithroid tablets, a branded version of Levothyroxine Sodium
tablets, which is produced and marketed with eleven different potencies. Both Levothyroxine
Sodium products are manufactured by JSP. Lannett began buying generic Levothyroxine Sodium
tablets from JSP, and selling it to its customers in April 2003. In September 2003, the Company
began buying the branded Unithroid tablets from JSP and selling it to its customers. Levothyroxine
Sodium tablets are used to treat hypothyroidism and other thyroid disorders. It remains one of
the most prescribed drugs in the United States with over 13 million patients of various ages and
6
demographic backgrounds. Side effects from Levothyroxine Sodium are rare, but may include
allergic reactions, such as rash or hives. In late June of 2004, JSP received a letter from the FDA
approving its supplemental application for generic bioequivalence to Levoxyl®. In December 2004,
JSP received a letter from the FDA approving its supplemental application for generic
bioequivalence to Synthroid®. With its distribution of these products, Lannett competes in a
market which is currently controlled by two branded Levothyroxine Sodium tablet products—
Abbott Laboratories’ Synthroid® and Monarch Pharmaceutical’s Levoxyl® as well as generic
competition from Mylan Laboratories and Sandoz.
In April 2005, Lannett received a letter from the FDA with approval to market and launch
Phentermine Hydrochloride tablets 37.5 mg., which is a central nervous system stimulant and
anorexiant. Phentermine HCl tablets are the generic version of Adipex-P manufactured and sold by
TEVA through its Gate Pharmaceutical division. It is indicated for the short-term management of
obesity.
In March 2005, Lannett received approval from the FDA for the ANDA of Terbutaline Sulfate
tablets 2.5mg and 5 mg. Terbutaline Sulfate is indicated for the prevention and reversal of
bronchospasm in patients 12 years of age and older with asthma and reversible bronchospasm
associated with bronchitis and emphysema, and is the generic equivalent of Brethine(R) tablets
marketed by Novartis Pharmaceuticals and aaiPharma Inc.
Additional products are currently 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. The products under development are at various stages in the development cycle—
formulation, scale-up, clinical testing and FDA review.
The cost associated with each product currently under development is dependent on numerous
factors not limited to the following: the complexity of the active ingredient’s chemical
characteristics, the price of the raw materials, the FDA-mandated requirement of bioequivalence
studies—depending on the FDA’s Orange Book classification and other developmental factors. The
overall cost to develop a new generic product varies in range from $100,000 to $1 million.
In addition, 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, to
make it attractive for Lannett to reconsider manufacturing and selling them. 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 factors meet current FDA requirements for the marketing of that drug.
Generally, in these situations, the Company must file a supplement to the FDA for the applicable
ANDA, informing the FDA of any significant changes 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.
In addition to the efforts of its internal product development group, Lannett has contracted with
several outside firms for the formulation and development of several new generic drug products.
7
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 complement the progress of its own internal
R&D efforts.
The Company has 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®,
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 these third party
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 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.
The following table summarizes key information related to the Company’s R&D products. The
column headings are defined as follows:
1.) Stage of R&D – Defines the current stage of the R&D product in the development process, as of
the date of this filing.
2.) Regulatory Requirement – Defines whether the R&D product is or is expected to be a new
ANDA submission, an ANDA supplement, or a grand-fathered product not requiring specific
FDA approval.
3.) Number of Products – Defines the number of products in R&D at the stage noted. In this
context, a product means any finished dosage form, including all potencies, containing the same
API or combination of APIs and which represents a generic version of the same Reference
Listed Drug (RLD) or innovator drug, identified in the FDA’s Orange Book.
Stage of R&D
FDA Review
FDA Review
Clinical Testing
Scale-Up
Scale-Up
Scale-Up
Formulation/Method Development
Regulatory Requirement Number of Products
ANDA
ANDA supplement
ANDA
Grand-fathered
ANDA supplement
ANDA
ANDA
11
3
7
2
0
0
25
8
Raw Material(s) and Finished Good(s) Inventory Suppliers
The raw materials used by the Company in the production process consist of pharmaceutical
chemicals in various forms and are generally available from several sources. FDA approval is
required in connection with the process of using active ingredient suppliers. In addition to the raw
materials purchased for the production process, the Company purchases certain finished dosage
inventories, including capsule, tablet, and oral liquid products. The Company then sells these
finished dosage products directly to its customers along with the finished dosage products internally
manufactured. If suppliers of a certain material or finished product are limited, the Company will
generally take certain precautionary steps to avoid a disruption in supply.
The Company’s primary finished product inventory supplier is Jerome Stevens Pharmaceuticals, Inc.
(JSP), in Bohemia, New York. Purchases of finished goods inventory from JSP accounted for
approximately 42% of the Company’s inventory purchases in Fiscal 2005, 81% in Fiscal 2004 and
62% in Fiscal 2003. On March 23, 2004, the Company entered into an agreement with 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. The JSP products covered under
the agreement included Butalbital, Aspirin, Caffeine with Codeine Phosphate capsules, Digoxin
tablets and Levothyroxine Sodium tablets, sold generically and under the brand name Unithroid®.
The term of the agreement is ten years, beginning on March 23, 2004 and continuing through
March 22, 2014. Refer to the Materials Contract footnote for more information on the terms,
conditions, and financial impact of this agreement.
During the term of the agreement, the Company is required to use commercially reasonable
efforts to purchase minimum dollar quantities of JSP’s products being distributed by the
Company. The minimum quantity to be purchased in the first year of the agreement is $15
million. Thereafter, the minimum quantity to be purchased increases by $1 million per year up
to $24 million for the last year of the ten-year contract. The Company has met the minimum
purchase requirement for the first year of the contract, but there is no guarantee that the
Company will be able to continue to do so in the future. If the Company does not meet the
minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.
The Company has also contracted with Spectrum Pharmaceuticals (Spectrum), based in
California, to purchase and distribute Ciprofloxacin tablets which are manufactured by Spectrum
and/or its partners. Ciprofloxacin tablets are the generic version of the brand Cipro®, an anti-
bacterial drug marketed by Bayer Corporation and prescribed to treat infections. The Company
began selling Ciprofloxacin tablets in February 2005.
In October 2004, the Company signed an agreement with Orion Pharma (Orion), based in
Finland, to purchase and distribute three drug products. Under the terms of the agreement, Orion
will supply Lannett with the finished products and all laboratory documentation, and Lannett
will coordinate the completion of the clinical biostudies necessary to submit Abbreviated New
Drug Applications (ANDAs) to the FDA.
9
Another supplier, Siegfried (USA), Inc. (Siegfried), supplies primidone and butalbital, the raw
materials in the Company’s commercial products of the same name, and accounted for 4% of the
Company’s inventory purchases in Fiscal 2005, 6% in Fiscal 2004 and 12% in Fiscal 2003. This
includes building a satisfactory inventory level, and obtaining contractual supply commitments.
The agreement is a standard supply agreement evidencing the terms of the supply of material. There
are no guaranteed purchase volume commitments; however the agreement does require Lannett to
purchase 100% of its primidone raw material requirements from Siegfried. The price of the material
may vary depending on the quantity of material purchased during the term of the agreement. The
term of the agreement was October 1, 2002 through December 31, 2003. As of June 30, 2005, a new
agreement with Siegfried had not yet been executed. The Company continues to purchase raw
materials from Siegfried under the terms of the expired purchase agreement which is included in
Exhibit 10.9 of the Company’s Form 10-KSB for the year ended June 30, 2004. The Company is in
the process of finalizing a new agreement with Siegfried.
The Company has also contracted with API Provider for the supply of raw materials and oral
dosage forms relating to future products. The agreements are standard supply agreements
evidencing the terms of the supply of material. There are no guaranteed purchase volume
commitments. The price of the material may vary depending on the quantity of material purchased
during the term of the agreement.
Customers and Marketing
The Company sells its products primarily to wholesale distributors, generic drug distributors, mail-
order pharmacies, group purchasing organizations, drug chains, and other pharmaceutical
companies. The wholesale distributors McKesson, Cardinal Health, and Amerisource Bergen
accounted for 17%, 14%, and 9%, respectively, of net sales in Fiscal 2005. The Company performs
ongoing credit evaluations of its customers’ financial condition, and has experienced no
significant collection problems to date. Generally, the Company requires no collateral from its
customers.
Sales to these wholesale customers include “indirect sales,” which represent sales to third-party
entities, such as 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. For more information on chargebacks, refer to
the section entitled “Chargebacks” in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Form 10-K. These indirect sale
transactions are recorded on Lannett’s books as sales to the wholesale customers. This has the
effect of over-emphasizing the sales volume attributable to such wholesaler customers.
10
The Company believes that retail-level consumer demand dictates the total volume of sales for
various products. In the event that wholesale and retail customers adjust their purchasing
volumes, the Company believes that consumer demand will be fulfilled by other wholesale or
retail sources of supply. As such, Lannett attempts to obtain strong relationships with most of
the major retail chains, wholesale distributors, and mail-order pharmacies in order to facilitate
the supply of the Company’s products through whatever channel the consumer prefers.
Although the Company has agreements with customers governing the transaction terms of its
sales, there are no minimum purchase quantities with these agreements.
The Company promotes its products through direct sales, trade shows, trade publications, and
bids. The Company also markets its products through private label arrangements, whereby
Lannett produces its products with a label containing the name and logo of a customer. This
practice is commonly referred to as private label business. It allows the Company to expand on
its own internal sales efforts by using the marketing services from other well-respected
pharmaceutical dosage suppliers. The focus of the Company’s sales efforts is the relationships it
creates with its customer accounts. Strong customer relationships have created a positive
platform for Lannett to increase its sales volumes. Advertising in the generic pharmaceutical
industry is generally limited to trade publications, read by retail pharmacists, wholesale
purchasing agents and other pharmaceutical decision-makers. Historically and in Fiscal 2005,
2004 and 2003, the Company’s advertising expenses were immaterial. When the customer and the
Company’s sales representatives make contact, the Company will generally offer to supply the
customer its products at fixed prices. If accepted, the customer’s purchasing department will
coordinate the purchase, receipt and distribution of the products throughout its distribution
centers and retail outlets. Once a customer accepts the Company’s supply of product, the
customer generally expects a high standard of service. This service standard includes shipping
product in a timely manner on receipt of customer purchase orders, maintaining convenient and
effective customer service functions, and retaining a mutually beneficial dialogue of
communication. The Company believes that although the generic pharmaceutical industry is a
commodity industry, where price is the primary factor for sales success, these additional service
standards are equally important to the customers that rely on a consistent source of supply.
Competition
The manufacture and distribution of generic pharmaceutical products is a highly competitive
industry. Competition is based primarily on price, service and quality. The Company competes
primarily on this basis, as well as by flexibility (reacting to customer needs quickly and decisively—
for example shipping product via overnight delivery when the customer is in critical need of
inventory), availability of inventory, and by the fact that the Company’s products are available only
from a limited number of suppliers. The modernization of its facilities, hiring of experienced staff,
and implementation of inventory and quality control programs have improved the Company’s
competitive position over the past five years.
The Company competes with other manufacturers and marketers of generic and brand drugs. Each
product manufactured and/or sold by Lannett has a different set of competitors. The list below
identifies the companies with which Lannett primarily competes for each of its major products.
11
Product
Primary Competitors
Butalbital with Aspirin and
Caffeine, with and without Codeine
Phosphate Capsules
Watson Pharmaceuticals, Breckenridge
Pharmaceutical mfd. by Anabolic Laboratories
Digoxin Tablets
Levothyroxine Sodium Tablets
GlaxoSmithKline, Amide (marketed by Bertek
Pharmaceuticals), Caraco Pharmaceutical
Laboratories
Abbott Laboratories, Monarch Pharmaceuticals,
Mylan Laboratories, Sandoz
Methyltestoterone/Esterified
Estrogens Tablets
Solvay Pharmaceuticals, Syntho Pharmaceuticals
(marketed by Breckenridge Pharmaceutical)
Phentermine HCL Tablets
Primidone Tablets
Unithroid Tablets
Government Regulation
Eon Laboratories, Amide Pharmaceutical,
Purepac Pharmaceutical Co.
Watson Pharmaceuticals, Qualitest
Pharmaceuticals
Abbott Laboratories, Monarch Pharmaceuticals,
Mylan Laboratories, Sandoz
Pharmaceutical manufacturers are subject to extensive regulation by the federal government,
principally by the FDA and the Drug Enforcement Agency (DEA) and to a lesser extent, by other
federal regulatory bodies and state governments. The Federal Food, Drug and Cosmetic Act, the
Controlled Substance Act, and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing, advertising, and promotion
of the Company's generic drug products. Noncompliance with applicable regulations can result in
fines, recall and seizure of products, total or partial suspension of production, personal and/or
corporate prosecution and debarment, and refusal of the government to approve new drug
applications. The FDA also has the authority to revoke previously approved drug products.
Generally, FDA approval is required before a prescription drug can be marketed. A new drug is one
not generally recognized by qualified experts as safe and effective for its intended use. New drugs
are typically developed and submitted to the FDA by companies expecting to brand the product and
sell it as a new medical treatment. The FDA review process for new drugs is very extensive and
requires a substantial investment to research and test the drug candidate. However, less burdensome
approval procedures may be used for generic equivalents. Typically, the investment required to
develop a generic drug is less costly than the brand innovator drug.
12
There are currently three ways to obtain FDA approval of a drug:
• New Drug Applications (NDA): Unless one of the two procedures discussed in the
following paragraphs is available, a manufacturer must conduct and submit to the FDA
complete clinical studies to establish a drug's safety and efficacy.
• Abbreviated New Drug Applications (ANDA): An ANDA is similar to an NDA except that
the FDA generally waives the requirement of complete clinical studies of safety and
efficacy. However, it may require bioavailability and bioequivalence studies. Bioavailability
indicates the rate of absorption and levels of concentration of a drug in the bloodstream
needed to produce a therapeutic effect. Bioequivalence compares one drug product with
another and indicates if the rate of absorption and the levels of concentration of a generic
drug in the body are within prescribed statistical limits to those of a previously approved
drug. Under the Drug Price Act, an ANDA may be submitted for a drug on the basis that it
is the equivalent of an approved drug regardless of when such other drug was approved. In
addition to establishing a new ANDA procedure, this act created statutory protections for
approved brand name drugs. Under the act, an ANDA for a generic drug may not be made
effective until all relevant product and use patents for the brand name drug have expired or
have been determined to be invalid. Prior to this act, the FDA gave no consideration to the
patent status of a previously approved drug. Additionally, the Drug Price Act extends for up
to five years the term of a product or use patent covering a drug to compensate the patent
holder for the reduction of the effective market life of a patent due to federal regulatory
review. With respect to certain drugs not covered by patents, the act sets specified time
periods of two to ten years during which ANDAs for generic drugs cannot become effective
or, under certain circumstances, cannot be filed if the branded drug was approved after
December 31, 1981. Lannett, like most other generic drug companies, uses the ANDA
process for the submission of its developmental generic drug candidates.
• Paper New Drug Applications (Paper NDA): For a drug that is identical to a drug first
approved after 1962, a prospective manufacturer need not go through the full NDA
procedure. Instead, it may demonstrate safety and efficacy by relying on published literature
and reports. The manufacturer must also submit, if the FDA so requires, bioavailability or
bioequivalence data illustrating that the generic drug formulation produces the same effects,
within an acceptable range, as the previously approved innovator drug. Because published
literature to support the safety and efficacy of post-1962 drugs may not be available, this
procedure is of limited utility to generic drug manufacturers. Moreover, the utility of Paper
NDAs has been further diminished by the recently broadened availability of the ANDA
process, as described above.
Among the requirements for new drug approval is the requirement that the prospective
manufacturer's methods conform to the FDA's current Good Manufacturing Practices (cGMP
Regulations). The cGMP Regulations must be followed at all times during which the approved drug
is manufactured. In complying with the standards set forth in the cGMP Regulations, the Company
must continue to expend time, money, and effort in the areas of production and quality control to
ensure full technical compliance. Failure to comply with the cGMP Regulations risks possible FDA
action, including but not limited to, the seizure of noncomplying drug products or, through the
Department of Justice, enjoining the manufacture of such products.
13
The Company is also subject to federal, state, and local laws of general applicability, such as laws
regulating working conditions and the storage, transportation, or discharge of items that may be
considered hazardous substances, hazardous waste, or environmental contaminants. The Company
monitors its compliance with all environmental laws.
Research and Development
The Company incurred research and development expenses of approximately $6,266,000 in 2005,
$5,896,000 in 2004 and $2,575,000 in 2003.
Employees
The Company currently has 172 employees, of which 167 are full-time.
Securities Exchange Act Reports
The Company maintains an Internet website at the following address: www.lannett.com. The
Company makes available on or through its Internet website certain reports and amendments to
those reports that are filed with the Securities and Exchange Commission (SEC) in accordance
with the Securities Exchange Act of 1934. These include annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K. This information is available on the
Company’s website free of charge as soon as reasonably practicable after the Company
electronically files the information with, or furnishes it to, the SEC. The contents of the
Company’s website are not incorporated by reference in this Form 10-K and shall not be deemed
“filed” under the Securities Exchange Act of 1934.
14
ITEM 2.
DESCRIPTION OF PROPERTY
The Company’s headquarters, administrative offices, quality control laboratory, and manufacturing
and production facilities, consisting of approximately 31,000 square feet, are located at 9000 State
Road, Philadelphia, Pennsylvania.
On July 1, 2003, the Company entered into a lease/purchase option agreement for a 63,000 square
foot facility at 9001 Torresdale Avenue, Philadelphia, Pennsylvania, approximately 1 mile from the
Company’s headquarters. On November 26, 2003, the Company exercised its option to purchase the
facility. The Company’s research laboratory, warehousing and distribution operations, and sales and
accounting departments are now housed there.
In December 1997, the Company entered into a three-year and three-month lease for a 23,500 square
foot facility located at 500A State Road, Bensalem, Pennsylvania. This facility housed laboratory
research, warehousing and distribution operations. The leased facility is located approximately 2
miles from the Company headquarters. In January 2001, the Company extended this lease through
April 30, 2004. After that time, the Company renewed the lease again through April 30, 2005. The
Company no longer utilizes nor has any lease obligations related to the 500A State Road, Bensalem,
Pennsylvania facility.
15
ITEM 3.
LEGAL PROCEEDINGS
Regulatory Proceedings
The Company is engaged in an industry which is subject to considerable government regulation
relating to the development, manufacturing and marketing of pharmaceutical products. Accordingly,
incidental to its business, the Company periodically responds to inquiries or engages in
administrative and judicial proceedings involving regulatory authorities, particularly the FDA and
the DEA.
In 2004 and 2005, the Company entered into three, separate confidential agreements with
ThePharmaNetwork, LLC (TPN) pursuant to which the company agreed to collaborate to
develop, manufacture, supply, and commercialize a certain generic pharmaceutical drug product.
In August 2005, TPN filed a lawsuit against various defendants, including the Company,
seeking, among other things, to terminate the three agreements between the Company and TPN.
The matter is currently pending before the United States District Court for the District of New
Jersey. The Company has filed an answer denying the allegations. The Company has also filed
counterclaims against TPN and its principal, Jonathan B. Rome, for, among other things, breach
of contract. Because of the confidential nature of the agreements and the generic pharmaceutical
drug product at issue, the Company has requested that the Court place all documents under seal
to prevent the wrongful disclosure of the Company’s sensitive, confidential, and proprietary
information. The Company's request for a temporary restraining order was granted. As a result,
TPN is temporarily restrained from competing against Lannett or collaborating with Lannett's
competitors with respect to the drug product at issue. TPN is also temporarily restrained from
using, disclosing or disseminating any confidential information about this drug product until
after the hearing on the preliminary injunction, which is scheduled for Sept. 14, 2005.
TPN received a temporary restraining order prohibiting Lannett from disclosing TPN's
"confidential information" until after the preliminary injunction hearing on Sept. 14, 2005. 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 litigation will not have a material adverse impact
on the financial position or results of operation 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.
16
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the Company's security holders during the quarter
ended June 30, 2005.
17
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
On April 15, 2002, the Company’s common stock began trading on the American Stock Exchange.
Prior to this, the Company's common stock traded in the over-the-counter market through the use of
the inter-dealer "pink-sheets" published by Pink Sheets LLC. The following table sets forth certain
information with respect to the high and low daily closing prices of the Company's common stock
during Fiscal 2005 and 2004, as quoted by the American Stock Exchange. Such quotations reflect
inter-dealer prices without retail mark-up, markdown, or commission and may not represent actual
transactions.
Fiscal Year Ended June 30, 2005
High
First quarter...............................................................................
$15.19
Second quarter ..........................................................................
$12.80
Third quarter .............................................................................
$10.05
Fourth quarter ...........................................................................
$6.45
Fiscal Year Ended June 30, 2004
High
First quarter...............................................................................
$25.09
Second quarter ..........................................................................
$18.88
Third quarter .............................................................................
$19.00
Fourth quarter ...........................................................................
$17.00
Low
$9.50
$8.25
$5.95
$3.88
Low
$15.65
$16.40
$15.10
$13.18
Holders
As of August 25, 2005, there were approximately 249 holders of record of the Company's common
stock.
Dividends
The Company did not pay cash dividends in Fiscal 2005, Fiscal 2004 or Fiscal 2003. The Company
intends to use available funds for working capital, plant and equipment additions, and various
product extension ventures. The Company does not expect to pay, nor should shareholders expect to
receive, cash dividends in the foreseeable future.
18
Equity Compensation Plan Information
The following table summarizes the equity compensation plans as of June 30, 2005.
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(a)
857,108
(b)
$13.72
(c)
1,395,267
-
-
-
Equity
Compensation
plans approved
by security
holders
Equity
Compensation
plans not
approved by
security holders
Total
857,108
$13.72
1,395,267
19
ITEM 6.
SELECTED FINANCIAL DATA
Lannett Company, Inc. and Subsidiaries
Financial Highlights
As of, or for the Year
Ended June 30,
Operating Highlights
2005
2004
2003
2002
2001
Net Sales
$ 44,901,645
$ 63,781,219
$ 42,486,758
$ 25,126,214
$ 13,484,737
$ (53,825,499)
$ (32,779,597)
$ (1.36)
$ 36,924,344
$ 20,830,969
$ 13,215,454
$ 0.63
$ 26,228,964
$ 19,060,106
$ 11,666,887
$ 0.58
$ 16,673,537
$ 11,425,483
$ 7,195,990
$ 0.36
$ 12,090,993
$ 5,556,229
$ 2,042,585
$ 1,829,915
$ 0.14
$ (1.36)
$ 0.63
$ 0.58
$ 0.36
$ 0.14
24,097,472
20,831,750
19,968,633
19,895,757
13,206,128
24,097,472
21,053,944
20,121,314
20,018,548
13,206,128
Gross Profit
Operating (Loss)/Income
Net (Loss)/Income
Basic (Loss)/Earnings Per
Share
Diluted (Loss)/Earnings Per
Share
Weighted Average Shares
Outstanding, Basic
Weighted Average Shares
Outstanding, Diluted
Balance Sheet Highlights
Current Assets
Working Capital*
Total Assets
Total Debt
Deferred Tax Liabilities
Total Stockholders’ Equity
*Working capital equals current assets less current liabilities
$ 33,938,115
$ 17,542,553
$ 94,917,060
$ 9,532,448
$ 2,009,582
$ 69,249,244
$ 48,862,443
$ 28,923,814
$ 131,904,084
$ 10,092,857
$ 1,614,323
$ 102,246,991
$ 23,930,048
$ 17,185,052
$ 31,834,544
$ 3,097,802
$ 1,112,369
$ 21,597,710
$ 10,439,630
$ 6,891,998
$ 17,338,503
$ 4,142,538
$ 681,489
$ 9,766,049
$ 8,884,835
$ (69,920)
$ 15,931,617
$ 10,773,222
$ 641,285
$ 2,515,685
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements made in this report that are not statements of historical fact or that refer to
estimated or anticipated future events are forward-looking statements. We have based our
forward-looking statements on our management’s beliefs and assumptions based on information
available to them at this time. Such forward-looking statements reflect our current perspective
of our business, future performance, existing trends and information as of the date of this filing.
These include, but are not limited to, our beliefs about future revenue and expense levels and
growth rates, prospects related to our strategic initiatives and business strategies, express or
implied assumptions about government regulatory action or inaction, anticipated product
approvals and launches, business initiatives and product development activities, assessments
related to clinical trial results, product performance and competitive environment, and
anticipated financial performance. Without limiting the generality of the foregoing, words such
as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,”
“continue,” or “pursue,” or the negative other variations thereof or comparable terminology, are
intended to identify forward-looking statements. The statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are difficult to predict.
We caution the reader that certain important factors may affect our actual operating results and
could cause such results to differ materially from those expressed or implied by forward-looking
statements. We believe the risks and uncertainties discussed under the Section entitled “Risks
20
Related to Our Business,” and other risks and uncertainties detailed herein and from time to time
in our Securities and Exchange Commission filings, may affect its actual results.
We disclaim any obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law. We also may
make additional disclosures in our quarterly reports on Form 10-Q and current reports on Form
8-K that we may file from time to time with the SEC. Other factors besides those listed here
could also adversely affect us. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
Risks Related to Our Business
We operate in a rapidly changing environment that involves a number of risks, some of which
are beyond our control. The following discussion highlights some of these risks and others are
discussed elsewhere in this report. These and other risks could materially and adversely affect
our business, financial condition, operating results or cash flows
RISKS ASSOCIATED WITH INVESTING IN THE BUSINESS OF LANNETT
If we are unable to successfully develop or commercialize new products, our operating
results will suffer.
Our future results of operations will depend to a significant extent upon our ability to
successfully commercialize new generic products in a timely manner. There are numerous
difficulties in developing and commercializing new products, including:
• developing, testing and manufacturing products in compliance with regulatory standards in a
timely manner;
• receiving requisite regulatory approvals for such products in a timely manner;
• the availability, on commercially reasonable terms, of raw materials, including active
pharmaceutical ingredients and other key ingredients;
• developing and commercializing a new product is time consuming, costly and subject to
numerous factors that may delay or prevent the successful commercialization of new
products;
• experiencing delays or unanticipated costs; and
• commercializing generic products may be substantially delayed by the listing with the FDA
of patents that have the effect of potentially delaying approval of the off-patent product by
up to 30 months, and in some cases, such patents have issued and been listed with the FDA
after the key chemical patent on the branded drug product has expired or been litigated,
causing additional delays in obtaining approval.
As a result of these and other difficulties, products currently in development by Lannett may or
may not receive the regulatory approvals necessary for marketing. If any of our products, when
developed and approved, cannot be successfully or timely commercialized, our operating results
could be adversely affected. We cannot guarantee that any investment we make in developing
products will be recouped, even if we are successful in commercializing those products.
21
Our gross profit may fluctuate from period to period depending upon our product sales
mix, our product pricing, and our costs to manufacture or purchase products.
Our future results of operations, financial condition and cash flows depend to a significant extent
upon our product sales mix. Our sales of products that we manufacture tend to create higher
gross margins than do the products we purchase and resell. As a result, our sales mix will
significantly impact our gross profit from period to period. Factors that may cause our sales mix
to vary include:
• the amount of new product introductions;
• marketing exclusivity, if any, which may be obtained on certain new products;
• the level of competition in the marketplace for certain products;
• the availability of raw materials and finished products from our suppliers; and
• the scope and outcome of governmental regulatory action that may involve us.
The profitability of our product sales is also dependent upon the prices we are able to charge for
our products, the costs to purchase products from third parties, and our ability to manufacture
our products in a cost effective manner.
If branded pharmaceutical companies are successful in limiting the use of generics through
their legislative and regulatory efforts, our sales of generic products may suffer.
Many branded pharmaceutical companies increasingly have used state and federal legislative and
regulatory means to delay generic competition. These efforts have included:
• pursuing new patents for existing products which may be granted just before the expiration of
one patent which could extend patent protection for additional years or otherwise delay the
launch of generics;
• using the Citizen Petition process to request amendments to FDA standards;
• seeking changes to U.S. Pharmacopoeia, an organization which publishes industry recognized
compendia of drug standards;
• attaching patent extension amendments to non-related federal legislation; and
• engaging in state-by-state initiatives to enact legislation that restricts the substitution of some
generic drugs, which could have an impact on products that we are developing.
If branded pharmaceutical companies are successful in limiting the use of generic products
through these or other means, our sales may decline. If we experience a material decline in
product sales, our results of operations, financial condition and cash flows will suffer.
Third parties may claim that we infringe their proprietary rights and may prevent us from
manufacturing and selling some of our products.
The manufacture, use and sale of new products that are the subject of conflicting patent rights
have been the subject of substantial litigation in the pharmaceutical industry. These lawsuits
relate to the validity and infringement of patents or proprietary rights of third parties. We may
have to defend against charges that we violated patents or proprietary rights of third parties.
This is especially true in the case of generic products on which the patent covering the branded
product is expiring, an area where infringement litigation is prevalent, and in the case of new
branded products where a competitor has obtained patents for similar products. Litigation may
22
be costly and time-consuming, and could divert the attention of our management and technical
personnel. In addition, if we infringe on the rights of others, we could lose our right to develop
or manufacture products or could be required to pay monetary damages or royalties to license
proprietary rights from third parties. Although the parties to patent and intellectual property
disputes in the pharmaceutical industry have often settled their disputes through licensing or
similar arrangements, the costs associated with these arrangements may be substantial and could
include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would
be available to us on terms we believe to be acceptable. As a result, an adverse determination in
a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us
from manufacturing and selling a number of our products, which could harm our business,
financial condition, results of operations and cash flows.
If we are unable to obtain sufficient supplies from key suppliers that in some cases may be
the only source of finished products or raw materials, our ability to deliver our products to
the market may be impeded.
We are required to identify the supplier(s) of all the raw materials for our products in our
applications with the FDA. To the extent practicable, we attempt to identify more than one
supplier in each drug application. However, some products and raw materials are available only
from a single source and, in some of our drug applications, only one supplier of products and raw
materials has been identified, even in instances where multiple sources exist. To the extent any
difficulties experienced by our suppliers cannot be resolved within a reasonable time, and at
reasonable cost, or if raw materials for a particular product become unavailable from an
approved supplier and we are required to qualify a new supplier with the FDA, our profit
margins and market share for the affected product could decrease, as well as delay our
development and sales and marketing efforts.
Our policies regarding returns, allowances and chargebacks, and marketing programs
adopted by wholesalers, may reduce our revenues in future fiscal periods.
Based on industry practice, generic product manufacturers, including us, have liberal return
policies and have been willing to give customers post-sale inventory allowances. Under these
arrangements, from time to time, we give our customers credits on our generic products that our
customers hold in inventory after we have decreased the market prices of the same generic
products. Therefore, if new competitors enter the marketplace and significantly lower the prices
of any of their competing products, we would likely reduce the price of our product. As a result,
we would be obligated to provide credits to our customers who are then holding inventories of
such products, which could reduce sales revenue and gross margin for the period the credit is
provided. Like our competitors, we also give credits for chargebacks to wholesale customers
that have contracts with us for their sales to hospitals, group purchasing organizations,
pharmacies or other retail customers. A chargeback is the difference between the price the
wholesale customer pays and the price that the wholesale customer’s end-customer pays for a
product. Although we establish reserves based on our prior experience and our best estimates of
the impact that these policies may have in subsequent periods, we cannot ensure that our reserves
are adequate or that actual product returns, allowances and chargebacks will not exceed our
estimates.
23
The design, development, manufacture and sale of our products involves the risk of
product liability claims by consumers and other third parties, and insurance against such
potential claims is expensive and may be difficult to obtain.
The design, development, manufacture and sale of our products involve an inherent risk of
product liability claims and the associated adverse publicity. Insurance coverage is expensive
and may be difficult to obtain, and may not be available in the future on acceptable terms, or at
all. Although we currently maintain product liability insurance for our products in amounts we
believe to be commercially reasonable, if the coverage limits of these insurance policies are not
adequate, a claim brought against Lannett, whether covered by insurance or not, could have a
material adverse effect on our business, results of operations, financial condition and cash flows.
Rising insurance costs could negatively impact profitability.
The cost of insurance, including workers compensation, product liability and general liability
insurance, have risen in prior years and may increase in the future. In response, we may increase
deductibles and/or decrease certain coverages to mitigate these costs. These increases, and our
increased risk due to increased deductibles and reduced coverages, could have a negative impact
on our results of operations, financial condition and cash flows.
The loss of our key personnel could cause our business to suffer.
The success of our present and future operations will depend, to a significant extent, upon the
experience, abilities and continued services of key personnel. If the employment of any of our
current key personnel is terminated, we cannot assure you that we will be able to attract and
replace the employee with the same caliber of key personnel. As such, we have entered into
employment agreements with most of our senior executive officers.
Significant balances of intangible assets, including product rights acquired, are subject to
impairment testing and may result in impairment charges, which will adversely affect our
results of operations and financial condition.
Our acquired contractual rights to market and distribute JSP’s products are stated at cost, less
accumulated amortization and related impairment charges identified to date. We determined the
initial cost by referring to the original fair value of the assets exchanged. Future amortization
periods for product rights are based on our assessment of various factors impacting estimated
useful lives and cash flows of the acquired products. Such factors include the product’s position
in its life cycle, the existence or absence of like products in the market, various other competitive
and regulatory issues and contractual terms. Significant changes to any of these factors would
require us to perform an additional impairment test on the affected asset and, if evidence of
impairment exists, we would be required to take an impairment charge with respect to the asset.
Such a charge would adversely affect our results of operations and financial condition.
24
RISKS RELATING TO INVESTING IN THE PHARMACEUTICAL INDUSTRY
Extensive industry regulation has had, and will continue to have, a significant impact on
our business, especially our product development, manufacturing and distribution
capabilities.
All pharmaceutical companies, including Lannett, are subject to extensive, complex, costly and
evolving regulation by the federal government, principally the FDA and to a lesser extent by the
DEA and state government agencies. The Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other federal statutes and regulations govern or influence the testing,
manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising,
promotion, sale and distribution of our products.
Under these regulations, we are subject to periodic inspection of our facilities, procedures and
operations and/or the testing of our products by the FDA, the DEA and other authorities, which
conduct periodic inspections to confirm that we are in compliance with all applicable
regulations. In addition, the FDA conducts pre-approval and post-approval reviews and plant
inspections to determine whether our systems and processes are in compliance with current
Good Manufacturing Practice, or cGMP, and other FDA regulations. Following such
inspections, the FDA may issue notices on Form 483 and warning letters that could cause us to
modify certain activities identified during the inspection. A Form 483 notice is generally issued
at the conclusion of a FDA inspection and lists conditions the FDA inspectors believe may
violate cGMP or other FDA regulations. FDA guidelines specify that a warning letter is issued
only for violations of “regulatory significance” for which the failure to adequately and promptly
achieve correction may be expected to result in an enforcement action. Any such sanctions, if
imposed, could materially harm our operating results and financial condition. Under certain
circumstances, the FDA also has the authority to revoke previously granted drug approvals.
Similar sanctions as detailed above may be available to the FDA under a consent decree,
depending upon the actual terms of such decree. Although we have instituted internal
compliance programs, if these programs do not meet regulatory agency standards or if
compliance is deemed deficient in any significant way, it could materially harm our business.
Certain of our vendors are subject to similar regulation and periodic inspections.
The process for obtaining governmental approval to manufacture and market pharmaceutical
products is rigorous, time-consuming and costly, and we cannot predict the extent to which we
may be affected by legislative and regulatory developments. We are dependent on receiving
FDA and other governmental or third-party approvals prior to manufacturing, marketing and
shipping our products. Consequently, there is always the chance that we will not obtain FDA or
other necessary approvals, or that the rate, timing and cost of such approvals, will adversely
affect our product introduction plans or results of operations. We carry inventories of certain
product(s) in anticipation of launch, and if such product(s) are not subsequently launched, we
may be required to write-off the related inventory.
Federal regulation of arrangements between manufacturers of branded and generic
products could adversely affect our business.
As part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
companies are now required to file with the Federal Trade Commission and the Department of
Justice certain types of agreements entered into between brand and generic pharmaceutical
25
companies related to the manufacture, marketing and sale of generic versions of branded drugs.
This new requirement could affect the manner in which generic drug manufacturers resolve
intellectual property litigation and other disputes with branded pharmaceutical companies and
could result generally in an increase in private-party litigation against pharmaceutical companies
or additional investigations or proceedings by the FTC or other governmental authorities. The
impact of this new requirement and the potential private-party lawsuits associated with
arrangements between brand name and generic drug manufacturers is uncertain, and could
adversely affect our business.
The pharmaceutical industry is highly competitive.
We face strong competition in our generic product business. Revenues and gross profit derived
from the sales of generic pharmaceutical products tend to follow a pattern based on certain
regulatory and competitive factors. As patents for brand name products and related exclusivity
periods expire, the first generic manufacturer to receive regulatory approval for generic
equivalents of such products is generally able to achieve significant market penetration. As
competing off-patent manufacturers receive regulatory approvals on similar products or as brand
manufacturers launch generic versions of such products (for which no separate regulatory
approval is required), market share, revenues and gross profit typically decline, in some cases
dramatically. Accordingly, the level of market share, revenue and gross profit attributable to a
particular generic product is normally related to the number of competitors in that product’s
market and the timing of that product’s regulatory approval and launch, in relation to competing
approvals and launches. Consequently, we must continue to develop and introduce new products
in a timely and cost-effective manner to maintain our revenues and gross margins.
Sales of our products may continue to be adversely affected by the continuing consolidation
of our distribution network and the concentration of our customer base.
Our principal customers are wholesale drug distributors and major retail drug store chains.
These customers comprise a significant part of the distribution network for pharmaceutical
products in the U.S. This distribution network is continuing to undergo significant consolidation
marked by mergers and acquisitions among wholesale distributors and the growth of large retail
drug store chains. As a result, a small number of large wholesale distributors control a
significant share of the market, and the number of independent drug stores and small drug store
chains has decreased. We expect that consolidation of drug wholesalers and retailers will
increase pricing and other competitive pressures on drug manufacturers, including Lannett.
For the year ended June 30, 2005, our three largest customers accounted for 17%, 14% and 9%
respectively, of our net revenues. The loss of any of these customers could materially adversely
affect our business, results of operations and financial condition and our cash flows. In addition,
the Company has no long-term supply agreements with its customers which would require them
to purchase our products.
26
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Form 10-K contains forward-looking information. The
forward-looking information is subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to, those discussed in the
following section, entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management’s analysis only as of the date of this Form 10-K.
The Company undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that may occur. Readers should carefully review the
risk factors described in other documents the Company files from time to time with the SEC,
including the quarterly reports on Form 10-Q to be filed by the Company in Fiscal 2006, and any
current reports on Form 8-K filed by the Company. All share and per share amounts on this Form
10-K have been adjusted to reflect a three-for-two stock split effective on February 14, 2003.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities
at the date of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties and potentially result in materially different results under different assumptions and
conditions. We believe that our critical accounting policies include those described below. For a
detailed discussion on the application of these and other accounting policies, refer to Note 1 in
the Notes to the Consolidated Financial Statements included herein.
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 rebates and chargebacks payable and reductions to net
sales. The change in the reserves for various sales adjustments may not be proportionally equal
to the change in sales because of changes in both the product and the customer mix. Increased
sales to wholesalers will generally require additional rebates. Incentives offered to secure sales
vary from product to product. Provisions for estimated rebates and promotional and other credits
are estimated based on historical payment experience, customer inventory levels, and contract
terms. Provisions for other customer credits, such as price adjustments, returns, and
chargebacks, require management to make subjective judgments. Unlike branded innovator drug
companies, Lannett does not use information about product levels in distribution channels from
third-party sources, such as IMS and NDC Health, in estimating future returns and other credits.
27
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 pharmacies. 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 if the price sold to the indirect customer is lower than the direct price to the
wholesaler. 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. As sales to the large wholesale customers, such as
Cardinal Health, AmerisourceBergen, and McKesson, increase, the reserve for chargebacks will
also generally increase. However, the size of the increase depends on the product mix. The
Company continually monitors the reserve for chargebacks and makes adjustments when
management 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. The reserve for rebates increases as
sales to certain wholesale and retail customers increase. However, these rebate programs are
tailored to the customers’ individual programs. Hence, the reserve will depend on the mix of
customers that comprise such rebate programs.
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 management believes that actual product returns may differ from established reserves.
Generally, the reserve for returns increases as net sales increase. The reserve for returns is
included in the rebates and chargebacks payable account on the balance sheet.
Other Adjustments – Other adjustments consist primarily of price adjustments, also known as
“shelf stock adjustments,” which 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. Other
adjustments are included in the rebates and chargebacks payable account on the balance sheet.
28
The following tables identify the reserves for each major category of revenue allowance and a
summary of the activity for the years ended June 30, 2005 and 2004:
For the Year Ended
June 30, 2005
Reserve Category
Chargebacks
Rebates
Returns
Other
Total
Reserve Balance as of
June 30, 2004
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2004
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2005
Additional Reserves Charged to
Net Sales During Fiscal 2005
Reserve Balance as of
June 30, 2005
For the Year Ended
June 30, 2004
$ 6,484,500
$ 1,864,200
$ 448,000
$ 88,300
$ 8,885,000
(4,978,300)
(1,970,000)
(523,100)
(95,800)
(7,567,200)
(14,534,600)
(5,965,500)
(1,166,800)
(586,400)
(22,253,300)
21,028,100
7,100,100
2,933,900
623,400
31,685,500
$ 7,999,700
$ 1,028,800
$1,692.000
$ 29,500
$10,750,000
Reserve Category
Chargebacks
Rebates
Returns
Other
Total
Reserve Balance as of
June 30, 2003
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2003
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2004
Additional Reserves Charged to
Net Sales During Fiscal 2004
Reserve Balance as of
June 30, 2004
$ 1,638,000
$ 889,900
$ 210,200
$ 33,900
$ 2,772,000
(1,604,000)
(1,166,400)
(182,700)
-
(2,953,100)
(12,447,000)
(2,723,200)
(60,100)
(410,000)
(15,640,300)
18,897,500
4,863,900
480,600
464,400
24,706,400
$ 6,484,500
$ 1,864,200
$ 448,000
$ 88,300
$ 8,885,000
The Company ships its products to the warehouses of its wholesale and retail chain customers.
When the Company and a customer come to an agreement for the supply of a product, the
customer will generally continue to purchase the product, stock its warehouse(s), and resell the
product to its own customers. The Company’s customer will continually reorder the product as
its warehouse is depleted. The Company generally has no minimum size orders for its
customers. Additionally, most warehousing customers prefer not to stock excess inventory
levels due to the additional carrying costs and inefficiencies created by holding excess inventory.
As such, the Company’s customers continually reorder the Company’s products. It is common
for the Company’s customers to order the same products on a monthly basis. For generic
pharmaceutical manufacturers, it is critical to ensure that customers’ warehouses are adequately
stocked with its products. This is important due to the fact that several generic competitors
29
compete for the consumer demand for a given product. Availability of inventory ensures that a
manufacturer’s product is considered. Otherwise, retail prescriptions would be filled with
competitors’ products. For this reason, the Company periodically offers incentives to its
customers to purchase its products. These incentives are generally up-front discounts off its
standard prices at the beginning of a generic campaign launch for a newly-approved or newly-
introduced product, or when a customer purchases a Lannett product for the first time.
Customers generally inform the Company that such purchases represent an estimate of expected
resale for a period of time. This period of time is generally up to three months. The Company
records this revenue, net of any discounts offered and accepted by its customers at the time of
shipment. The Company’s products have either 24 months or 36 months of shelf-life at the time
of manufacture. The Company monitors its customers’ purchasing trends to attempt to identify
any significant lapses in purchasing activity. If the Company observes a lack of recent activity,
inquiries will be made to such customer regarding the success of the customer’s resale efforts.
The Company attempts to minimize any potential return (or shelf life issues) by maintaining an
active dialogue with the customers.
The products that the Company sells are generic versions of brand named drugs. The consumer
markets for such drugs are well-established markets with many years of historically-confirmed
consumer demand. Such consumer demand may be affected by several factors, including
alternative treatments, cost, etc. However, the effects of changes in such consumer demand for
the Company’s products, like generic products manufactured by other generic companies, are
gradual in nature. Any overall decrease in consumer demand for generic products generally
occurs over an extended period of time. This is because there are thousands of doctors,
prescribers, third-party payers, institutional formularies and other buyers of drugs that must
change prescribing habits and medicinal practices before such a decrease would affect a generic
drug market. If the historical data the Company uses and the assumptions management makes to
calculate its estimates of future returns, chargebacks, and other credits 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.
Accounts Receivable - The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current credit worthiness, as
determined by a review of current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for estimated credit
losses based upon historical experience and any specific customer collection issues that have
been identified. While such credit losses have historically been within the both Company’s
expectations and the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
Inventories - The Company values its inventory at the lower of cost (determined by the first-in,
first-out method) or market, regularly reviews inventory quantities on hand, and records a
provision for excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements. The Company’s estimates of future product demand may
prove to be inaccurate, in which case it may have understated or overstated the provision
required for excess and obsolete inventory. In the future, if the Company’s inventory is
determined to be overvalued, the Company would be required to recognize such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is determined to be
30
undervalued, the Company may have recognized excess cost of goods sold in previous periods
and would be required to recognize such additional operating income at the time of sale.
Intangible Asset – On March 23, 2004, the Company entered into an agreement with Jerome
Stevens Pharmaceuticals, Inc. (JSP) for the exclusive marketing and 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. As a result of the JSP agreement, the Company recorded an
intangible asset of $67,040,000 for the exclusive marketing and distribution rights obtained from
JSP. The intangible asset was recorded based upon the fair value of the four million (4,000,000)
shares at the time of issuance to JSP. An impairment charge was recorded against this
intangible asset in the current fiscal year. The agreement was included as an Exhibit in the
Form 8-K filed by the Company on May 5, 2004, as subsequently amended.
In June 2004, JSP’s Levothyroxine Sodium tablet product received from the FDA an AB rating
to the brand drug Levoxyl®. In December 2004, the product received from the FDA a second
AB rating to the brand drug Synthroid®. As a result of the dual AB ratings, the Company was
required to pay JSP an additional $1.5 million in cash to reimburse JSP for expenses related to
obtaining the AB ratings. As of March 31, 2005, the Company recorded an addition to the
intangible asset of $1.5 million.
Management believes that events occurred during Fiscal 2005 which indicated that the carrying
value of the intangible asset was not recoverable. In accordance with Statement of Financial
Accounting Standards No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long-
Lived Assets, the Company engaged a third party valuation specialist to assist in the performance
of an impairment test for the quarter ended March 31, 2005. The impairment test was performed
by discounting forecasted future net cash flows for the JSP products covered under the
agreement and then comparing the discounted present value of those cash flows to the carrying
value of the asset (inclusive of the $1.5 million paid to JSP for the duel AB ratings). As a result
of the testing, the Company determined that the intangible asset was impaired as of March 31,
2005. In accordance with FAS 144, the Company recorded a non-cash impairment loss of
approximately $46,093,000 to write the asset down to its fair value of approximately
$16,062,000 as of the date of the impairment. This impairment loss is shown on the statement of
operations as a component of operating loss. Management concluded that, as of June 30, 2005,
the intangible asset is correctly stated at fair value and, therefore, no adjustment was required.
New Accounting Pronouncements – In November 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS No. 151),
Inventory Costs – an amendment of ARB No. 43, Chapter 4. Paragraph 5 of ARB 43, Chapter 4
previously stated that “…under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges…” SFAS No. 151 requires that those items be recognized as
current period charges regardless of whether they meet the criterion of “so abnormal.” The
adoption of SFAS No. 151 did not have a material effect on the Company’s consolidated
financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an
amendment of APB Opinion No. 29 (SFAS No. 153). APB Opinion No. 29 requires a
nonmonetary exchange of assets be accounted for at fair value, recognizing any gain or loss, if
the exchange meets a commercial substance criterion and fair value is determinable. The
31
commercial substance criterion is assessed by comparing the entity’s expected cash flows
immediately before and after the exchange. SFAS No. 153 eliminates the “similar productive
assets exception,” which accounts for the exchange of assets at book value with no recognition
of gain or loss. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153
will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R),
which requires companies to expense the fair value of stock options and other equity-based
compensation to employees. It also provides guidance for determining whether an award is a
liability-classified award or an equity-classified award, and determining fair value. SFAS No.
123R applies to all unvested stock-based payment awards outstanding as of the adoption date.
Pursuant to a rule announced by the Securities and Exchange Commission in April 2005, SFAS
No. 123R must be adopted no later than the beginning of the first fiscal year that begins after
June 15, 2005. We have not completed an assessment of the impact on our financial statements
resulting from potential modifications to our equity-based compensation structure or the use of
an alternative fair value model in anticipation of adopting SFAS No. 123R. The Company plans
to adopt SFAS No. 123R for the quarter ended September 30, 2005.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which replaces
APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting
of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle, and also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. SFAS No. 154 does not change the transition
provisions of any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of SFAS No. 154. We do not believe the adoption of SFAS No. 154
will have a material impact on our financial statements.
In March 2005, the FASB issued FIN 47 “Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a
conditional retirement obligation refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and (or) method of
settlement. Accordingly, an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The liability should be recognized when incurred, generally upon acquisition,
construction or development of the asset. FIN 47 is effective no later than the end of the fiscal
years ending after December 15, 2005. We have not completed an assessment of the impact that
adoption of FIN 47 will have on our financial statements.
32
Results of Operations – Fiscal 2005 compared to Fiscal 2004
Net sales decreased by 30%, from $63,781,219 in Fiscal 2004 to $44,901,645 in Fiscal 2005. The
decrease was generally due to increased competition in the generic drug market that affected most of
the Company’s products. The increased competition, both from existing competitors and new
entrants, has resulted in significant price pressures. Sales of the Levothyroxine Sodium line of
products declined by $4,948,000 due in part to a delay in the AB rating, which gave the competition
a market advantage. The sales of Unithroid tablets declined $2,036,000. Sales of Butalbital with
Aspirin and Caffeine capsules declined $3,240,000. Sales of Primidone tablets, seeing competition
for the first time, declined $4,390,000. Sales of Digoxin tablets declined $3,480,000.
The Company sells its products to customers in various categories. The table below identifies the
Company’s net sales to each category.
Customer Category
Fiscal 2005 Net
Sales
Fiscal 2004 Net
Sales
Fiscal 2003 Net
Sales
Wholesaler/Distributor
$24.8 million
$43.0 million
$20.6 million
Retail Chain
$10.5 million
$12.1 million
$9.9 million
Mail-Order Pharmacy
$5.9 million
$4.3 million
$2.6 million
Private Label
$3.7 million
$4.4 million
$9.4 million
Total
$44.9 million
$63.8 million
$42.5 million
Sales in every category, with the exception of ‘Mail Order Pharmacy,’ decreased the past year. This
is a result of the factors described in the previous paragraph. Sales to mail order pharmacy increased
due to an increase in product line, and a general increase across the business sector. Sales to
wholesalers/distributors declined mainly due to the loss of primary position on the Amerisource
Bergen pro-generic contract and a decrease in pricing with all wholesalers and distributors due to the
competitive market.
Cost of sales increased by 17%, from $26,856,875 in Fiscal 2004 to $31,416,908 in Fiscal 2005.
These costs include raw materials/cost of finished goods purchased and resold, which increased
approximately $4,071,000, shipping expense, which increased by approximately $199,000 and other
miscellaneous production-related expenses which increased in total by approximately $290,000.
Gross margin decreased from 58% in Fiscal 2004 to 30% in Fiscal 2005. The decrease in gross
profit margin is a result of a decrease in net weighted average prices from some of the Company’s
products due to increased market competition, increases in direct and indirect costs as well as a
change in the product sales mix. 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 6%, from $5,895,096 in Fiscal 2004 to
$6,265,522 in Fiscal 2005. The increase in R&D is a result of contracting formulation development
out to a third party laboratory for product development for $940,000 in Fiscal 2005, and an increase
of raw material consumption of approximately $1,200,000 used in the development and formulation
33
of new products not yet approved by the FDA. These costs were offset by a decrease in Bio studies
of $1,185,000 from Fiscal 2004 to Fiscal 2005.
Selling, general and administrative expenses increased by 4%, from $8,863,966 in Fiscal 2004 to
$9,194,377 in Fiscal 2005. This increase is primarily a result of Sarbanes-Oxley related
accounting and consulting costs of approximately $520,000 and an increase in insurance of
$160,000. These increases were partially offset by savings in various other expense accounts.
The Company’s interest expense increased from approximately $45,000 in Fiscal 2004 to
approximately $351,000 in Fiscal 2005 as a result of the borrowing under the “2003 Loan
Financing” which included a mortgage loan, equipment loan and construction loan, each of which
started in Fiscal 2005. Interest income increased from approximately $24,000 in Fiscal 2004 to
approximately $165.622 in Fiscal 2005, as a result of investment of excess cash in marketable
securities and a higher cash balance.
On March 23, 2004, the Company entered into an agreement with Jerome Stevens
Pharmaceuticals, Inc. (JSP) for the exclusive marketing and 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. As a result of the JSP agreement, the Company recorded an
intangible asset of $67,040,000 for the exclusive marketing and distribution rights obtained from
JSP. An impairment charge was recorded against this intangible asset in the current fiscal year.
The intangible asset was recorded based upon the fair value of the four million (4,000,000)
shares at the time of issuance to JSP. The agreement was included as an Exhibit in the Current
Report on Form 8-K filed by the Company on May 5, 2004, as subsequently amended.
In June 2004, JSP’s Levothyroxine Sodium tablet product received from the FDA an AB rating
to the brand drug Levoxyl®. In December 2004, the product received from the FDA a second
AB rating to the brand drug Synthroid®. As a result of the dual AB ratings, the Company was
required to pay JSP an additional $1.5 million in cash to reimburse JSP for expenses related to
obtaining the AB ratings. As of June 30, 2005, the Company had recorded an addition to the
intangible asset of $1.5 million.
Management believed that events (as described in the next paragraph) occurred during Fiscal
2005 which indicated that the carrying value of the intangible asset was not recoverable. In
accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company engaged a third party
valuation specialist to assist in the performance of an impairment test for the quarter ended
March 31, 2005. The impairment test was performed by discounting forecasted future net cash
flows for the JSP products covered under the agreement and then comparing the discounted
present value of those cash flows to the carrying value of the asset (inclusive of the $1.5 million
paid to JSP for the dual AB ratings). As a result of the testing, the Company determined that the
intangible asset was impaired as of March 31, 2005. In accordance with FAS 144, the Company
recorded a non-cash impairment loss of approximately $46,093,000 to write the asset down to its
fair value of approximately $16,062,000 as of March 31, 2005. This impairment loss is shown
on the statement of operations as a component of operating loss.
Several factors contributed to the impairment of this asset. In December 2004, the
Levothyroxine Sodium tablet product received the AB rating to Synthroid®. The expected sales
increase as a result of the AB rating did not occur in the third quarter of 2005. The delay in
34
receiving the AB rating to Synthroid® caused the Company to be competitively disadvantaged
with its Levothyroxine Sodium tablet product and to lose market share to competitors whose
products had already received AB ratings to both major brand thyroid deficiency drugs.
Additionally, the generic market for thyroid deficiency drugs turned out to be smaller than it was
anticipated to be as a result of a lower brand-to-generic substitution rate. Increased competition
in the generic drug market, both from existing competitors and new entrants, has resulted in
significant pricing pressure on other products supplied by JSP. The combination of these factors
has resulted in diminished forecasted future net cash flows which, when discounted, yield a
lower present value than the carrying value of the asset before impairment.
For the remaining nine years of the contract, the Company will incur annual amortization
expense of approximately $1,785,000. Amortization expense for the Fiscal year ended June 30,
2005 and 2004 was approximately $5,517,000 and $1,315,000, respectively.
As a result of the items discussed above, the Company’s financial results changed from an operating
income of $20,830,969 in Fiscal 2004 to an operating loss of ($53,639,659) in Fiscal 2005.
The Company’s income tax classification changed from an income tax expense of $7,594,316 in
Fiscal 2004 to an income tax benefit of ($21,045,902) in Fiscal 2005 as a result of the Company’s
pre-tax loss. The effective tax rate increased slightly from 36.5% in 2004 to 39.1% in 2005.
The Company reported net loss of ($32,779,596) for Fiscal 2005, or ($1.36) basic and diluted loss
per share, compared to net income of $13,215,454 for Fiscal 2004, or $0.63 basic and diluted
earnings per share.
Results of Operations – Fiscal 2004 compared to Fiscal 2003
Net sales increased by 50%, from $42,486,758 in Fiscal 2003 to $63,781,219 in Fiscal 2004. Sales
increased as a result of additions to the Company’s prescription line of products, including Digoxin
tablets, first marketed in September 2002, Levothyroxine Sodium tablets, first marketed in April
2003 and Unithroid tablets, first marketed in August 2003. These product additions had the effect of
increasing the total net sales for Fiscal 2004 as compared to Fiscal 2003 due to the fact the Company
sold the products for longer periods of time in the twelve months ended June 30, 2004. These
product additions accounted for approximately $20.5 million of the increase in net sales from Fiscal
2003 to Fiscal 2004. Additionally, sales of a portion of the Company’s previously marketed
products, such as Primidone tablets, Butalbital with Aspirin and Caffeine capsules and Dicyclomine
HCL tablets and capsules increased by approximately $4.8 million from Fiscal 2003 to Fiscal 2004
as a result of new customer accounts, increased unit sales and increased unit sales prices. The
Company from time to time will raise its sales prices if there is 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 with Aspirin and Caffeine capsules (which decreased $3.9
million) due to increased competition and a discontinuation of Pseudoephedrine Hydrochloride
tablets (which resulted in a loss of sales of $681,000).
35
The Company sells its products to customers in various categories. The table below identifies the
Company’s net sales to each category.
Customer Category
Fiscal 2004 Net
Sales
Fiscal 2003 Net
Sales
Fiscal 2002 Net
Sales
Wholesaler/Distributor
$43.0 million
$20.6 million
$10.4 million
Retail Chain
$12.1 million
$9.9 million
$3.3 million
Mail-Order Pharmacy
$4.3 million
$2.6 million
$1.1 million
Private Label
$4.4 million
$9.4 million
$10.3 million
Total
$63.8 million
$42.5 million
$25.1 million
Sales in every category, with the exception of private label, increased each of the past three years.
This is a result of the factors described in the previous paragraph. Sales to private label customers
decreased in Fiscal 2004 and 2003 as a result of the Company’s successful efforts in growing the
Lannett label accounts. Increasing sales to customers that purchased the Lannett label products (i.e.
the wholesale, retail, and mail-order customer categories) had the effect of reducing sales to private
label customers.
Cost of sales increased by 65%, from $16,257,794 in Fiscal 2003 to $26,856,875 in Fiscal 2004.
The cost of sales increase is due to an increase in direct variable costs and certain indirect 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 approximately $8,613,000,
labor and benefits expenses, which increased by approximately $1,641,000 and other miscellaneous
production-related expenses which increased in total by approximately $345,000. Gross margins
decreased from 62% in Fiscal 2003 to 58% in Fiscal 2004. The decrease in gross profit margins is a
result of a decrease in net weighted average prices from some of the Company’s products due to
increased market competition, increases in direct and indirect costs as well as a change in the
product sales mix. During Fiscal 2004, a larger percentage of the Company’s total net sales were
from products supplied by JSP. The Company’s average gross profit margin for products from JSP
is less than the average gross profit margin for products internally manufactured. 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 129%, from $2,575,178 in Fiscal 2003 to
$5,895,096 in Fiscal 2004. This increase is primarily due to an increase in the costs of generic
bioequivalence tests which are commonly required for ANDA submissions. The Company incurred
approximately $2.3 million in Fiscal 2004 for bioequivalence testing fees, compared to
approximately $265,000 in Fiscal 2003. The increase in R&D is also 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 $1.1 million in Fiscal 2004 as compared to Fiscal 2003 and an increase
of raw material consumption of approximately $200,000 used in the development and formulation of
new products not yet approved by the FDA.
36
Selling, general and administrative expenses increased by 104%, from $4,337,558 in Fiscal 2003
to $8,863,966 in Fiscal 2004. This increase is a result of an increase in the following expenses:
payroll/incentive compensation and benefits, which increased by approximately $2.4 million,
consulting services, which increased by approximately $343,000 (including Sarbanes-Oxley
consulting), legal expenses, which increased by approximately $282,000, computer support
costs, which increased by approximately $180,000, advertising expenses, which increased by
approximately $172,000, travel and entertainment expenses, which increased by approximately
investor
$109,000,
relations/marketing expenses, which increased by approximately $85,000, directors fees, which
increased by approximately $174,000 and miscellaneous other expenses, including utilities,
training, general and safety supplies, office supplies, accounting fees, telephone and rent
expense. 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.
increased by approximately $114,000,
insurance expenses, which
inventory supplier
the Company’s only finished product
Currently,
is Jerome Stevens
Pharmaceuticals, Inc. (JSP), in Bohemia, New York. Purchases of finished goods inventory from
JSP accounted for approximately 81% of the Company’s inventory purchases in Fiscal 2004, 62% in
Fiscal 2003 and 26% in Fiscal 2002. On March 23, 2004, the Company entered into an agreement
with 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. The JSP products
covered under the agreement included Butalbital, Aspirin, Caffeine with Codeine Phosphate
capsules, Digoxin tablets and Levothyroxine Sodium tablets, sold generically and under the brand
name Unithroid®. The term of the agreement is ten years, beginning on March 23, 2004 and
continuing through March 22, 2014. Both Lannett and JSP have the right to terminate the
contract if one of the parties does not cure a material breach of the contract within thirty (30)
days of notice from the non-breaching party. During the term of the agreement, the Company is
required to use commercially reasonable efforts to purchase minimum dollar quantities of JSP’s
products being distributed by the Company. The Company projects that it will be able to meet
the minimum purchase requirements, but there is no guarantee that the Company will be able to
do so. If the Company does not meet the minimum purchase requirements, JSP’s sole remedy is
to terminate the agreement. Under the agreement, JSP is entitled to nominate one person to serve
on the Company’s Board of Directors (the Board); provided, however, that the Board shall have
the right to reasonably approve any such nominee in order to fulfill its fiduciary duty by
ascertaining that such person is suitable for membership on the board of a publicly traded
corporation including, but not limited to, complying with the requirements of the Securities and
Exchange Commission, the American Stock Exchange and applicable law including the
Sarbanes-Oxley Act of 2002. 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 from a financial point of view. On April 20, 2004, the
investment banker, Donnelly Penman and Partners, 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, from a financial point of view, in light of JSP’s
products’ contribution or potential contribution to the Company’s profitability. As such,
37
subsequent to April 20, 2004, the Company issued four million (4,000,000) shares to JSP’s
designees. As a result of the transaction, the Company recorded an intangible asset related to the
contract in the amount of $67,040,000. The intangible asset was recorded based upon the fair
value of the (4,000,000) shares at the time of issuance to JSP. An impairment charge was
recorded against this intangible asset in the fiscal year 2005. The Company will incur non-cash
amortization expense for the intangible asset over the term of the contract. For the period April 2004
to June 2004, the Company incurred $1,314,510 of non-cash amortization expense associated with
the JSP intangible asset.
As a result of the items discussed above, the Company increased its operating income by 9%, from
$19,060,106 in Fiscal 2003 to $20,830,969 in Fiscal 2004.
The Company’s income tax expense increased from $7,334,740 in Fiscal 2003 to $7,594,316 in
Fiscal 2004 as a result of the increase in taxable income.
The Company reported net income of $13,215,454 for Fiscal 2004, or $0.63 basic and diluted
income per share, compared to net income of $11,666,887 for Fiscal 2003, or $0.58 basic and diluted
income per share.
Liquidity and Capital Resources
Net cash provided by operating activities of $8,079,212 for the year ended June 30, 2005 was
attributable to net loss of ($32,779,596), as adjusted for the effects of non-cash items of $53,064,168
and net changes in operating assets and liabilities totaling ($12,205,363). Significant changes in
operating assets and liabilities are comprised of:
1. A decrease in trade accounts receivable of $15,370,358 due to cash payments received
by the Company in the first quarter of Fiscal 2005, including the collection of receivables
from customers who had extended payment terms in the fourth quarter of Fiscal 2004
offered by the Company as a result of compatibility issues related to the Company’s
exchange of Electronic Data Interchange (EDI) documents. The decrease in the trade
accounts receivable was also due to a lower level of sales in the current fiscal year.
2. A decrease in net inventory of $2,824,481 primarily due to the increase in inventory
the anticipated expiration of
to
reserve for obsolescence, specifically related
Levothyroxine held in finished goods.
3. An increase in prepaid taxes of $3,075,380 primarily attributable to estimated tax
payments made during Fiscal 2005.
4. An increase in deferred tax assets of $20,229,832 primarily attributable to the
impairment loss of approximately $46,093,000.
5. A decrease in accounts payable of $4,431,906 is due to payments for inventory the
Company purchased in the Fourth Quarter Fiscal 2004.
The net cash used in investing activities of $12,627,198 for the twelve months ended June 30, 2005
was attributable to the Company’s purchase of: $7,913,901 of investment securities, which consist
primarily of U. S. government and agency marketable debt securities, and $3,213,297 of capital
expenditures related to the Company’s renovation of its new facility on Torresdale Avenue and the
purchase and installation of new equipment. The company additionally spent $1,500,000 on an
intangible asset related to an agreement with Jerome Stevens Pharmaceuticals, Inc. (JSP) for
exclusive marketing and distribution rights in the United States.
38
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 June 30, 2005 was 2.44%. At June
30, 2005, the Company has $1,646,000 outstanding on the Authority loan, of which $644,000 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 June 30, 2005, no portion of the letter of credit has been utilized.
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.
As part of the 2003 Loan Financing Agreement, the Philadelphia Industrial Development
Corporation will lend the Company up to $1,250,000 as reimbursement for a portion of the
Mortgage Loan from Wachovia. Until that Conversion Date occurs, 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 loan 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
Conversion Date. As of June 30, 2005, the Conversion date has not taken place and the
Company continues to make interest only payments. As of June 30, 2005, the Company has
outstanding $2.7 million under the Mortgage Loan, of which $95,000 is classified as currently
due.
The Equipment Loan consists of various term loans with maturity dates ranging from three to
five years. The Company as part of the 2003 Loan Financing agreement is required to make
39
equal payments of principal and interest. As of June 30, 2005, the Company has outstanding
$4,487,000 under the Equipment Loan, of which $1,342,000 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, 2005, the Company has outstanding $700,000 under
the Construction Loan, of which $189,000 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 June 30,
2005, the interest rate for the 2003 Loan Financing was 4.93%.
The Company has a $3,000,000 line of credit from Wachovia Bank, N.A. that bears interest at the
prime interest rate less 0.25% (6.00% at June 30, 2005). The line of credit was renewed and
extended to October 30, 2005. At June 30, 2005 and 2004, the Company had $0 outstanding and
$3,000,000 available under the line of credit. The line of credit is collateralized by substantially all
of the Company’s assets. The Company currently has no plans to borrow under this line of credit.
The terms of the line of credit, the loan 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 June 30,
2005, the Company obtained a waiver from the lender due to a violation of one of its covenants.
The Company expects to meet the financial covenants in the future.
In July 2004, the Company received $500,000 of grant funding from the Commonwealth of
Pennsylvania, acting through the Department of Community and Economic Development. The
grant funding program requires the Company to use the funds for machinery and equipment located
at their Pennsylvania locations, hire an additional 100 full-time employees by June 30, 2006, operate
its Pennsylvania locations a minimum of five years and meet certain matching investment
requirements. If the Company fails to comply with any of the requirements above, the Company
would be liable to the full amount of the grant funding ($500,000). The Company will record the
unearned grant funds as a liability until the Company complies with all of the requirements of the
grant funding program. On a quarterly basis, the Company will monitor its progress in fulfilling the
requirements of the grant funding program and will determine the status of the liability. As of June
30, 2005, the Company has recognized the grant funding as a current liability under the caption of
Unearned Grant Funds.
In August 2005, the Company loaned $2 million to an active pharmaceutical ingredient (API)
supplier. The Company also purchased shares of this API supplier from one of the founding
partners for $500,000 cash. Refer to Note 19 for further discussion.
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.
40
Prospects for the Future
The Company has several generic products under development. These products are all orally-
administered, 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. As the
oldest generic drug manufacturer 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
factors meet current FDA requirements for the marketing of that drug. Generally, in these situations,
the Company must file a supplement to the FDA for the applicable ANDA, informing the FDA of
any significant changes in the manufacturing process, the formulation, or the raw material supplier
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.
A majority 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 will require bioequivalence studies, while others will not—depending on the FDA’s
Orange Book classification. 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 an
outside firm 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.
Occasionally the Company will work on 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 which 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 required for FDA ANDA approval.
41
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®,
an anti-bacterial drug, marketed by Bayer Corporation, prescribed to treat infections. The
Company has also initiated discussions with UniChem, of India, and Orion Pharma, of Finland,
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 and 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.
The Company plans to enhance relationships with strategic business partners, including providers of
product development research, raw materials, active pharmaceutical ingredients as well as finished
goods. Management believes that mutually beneficial strategic relationships in such areas, including
potential financing arrangements, partnerships, joint ventures or acquisitions, could allow for
potential competitive advantages in the generic pharmaceutical market. For example, the Company
has entered into prepayment arrangements in exchange for discounted purchase prices on certain
active pharmaceutical ingredients (API) and oral dosage forms. The Company has also arranged for
a loan to a certain API provider that should facilitate the availability of difficult to source material in
the future. The Company plans to continue to explore such areas for potential opportunities to
enhance shareholder value.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Report of the Independent Registered Public Accounting
Firm filed as a part of this Form 10-K are listed in the Exhibit Index filed herewith.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the
“Exchange Act”),, as amended for financial reporting as of June 30, 2005. Based on that
evaluation, our chief executive officer and chief financial officer concluded that these controls
42
and procedures are effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded, processed, summarized,
and reported as specified in Securities and Exchange Commission rules and forms. There were
no changes in these controls or procedures identified in connection with the evaluation of such
controls or procedures that occurred during our last fiscal quarter, or in other factors that have
materially affected, or are reasonably likely to materially affect these controls or procedures.
Our disclosure controls and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the rules and forms of
the Securities and Exchange Commission. These disclosure controls and procedures include,
among other things, controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the
chief executive officer and chief financial officer and effected by the board of directors and
management to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of our management and board of
directors;
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risks that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
June 30, 2005. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment, our management believes that, as of June 30, 2005, our internal control
over financial reporting is effective.
43
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
Directors and Executive Officers
The directors and executive officers of the Company are set forth below:
Age
Position
Directors:
William Farber
Ronald A. West
Myron Winkelman
Albert Wertheimer
Officers:
Arthur P. Bedrosian
Brian J. Kearns
Kevin Smith
Bernard Sandiford
William Schreck
73
71
67
62
59
39
45
76
56
Chairman of the Board and Chief
Executive Officer
Director
Director
Director
President
Vice President of Finance, Treasurer,
Secretary and Chief Financial Officer
Vice President of Sales and Marketing
Vice President of Operations
Vice President of Logistics
William Farber R. Ph. was elected as Chairman of the Board of Directors and Chief Executive
Officer in August 1991. From April 1993 to the end of 1993, Mr. Farber was the President and a
director of Auburn Pharmaceutical Company. From 1990 through March 1993, Mr. Farber served
as Director of Purchasing for Major Pharmaceutical Corporation. From 1965 through 1990, Mr.
Farber was the Chief Executive Officer of Michigan Pharmacal Corporation. Mr. Farber is a
registered pharmacist in the State of Michigan.
Albert I. Wertheimer was elected a Director of the Company in September 2004. Dr.
Wertheimer has a long and distinguished career in various aspects of pharmacy, health care,
education and pharmaceutical research. Since 2000, Dr. Wertheimer has been a professor at the
School of Pharmacy at Temple University, and director of its Center for Pharmaceutical Health
Services Research. From 1997 to 2000, Dr. Wertheimer was Director of Outcomes Research and
Management at Merck & Co., Inc. In addition to his academic responsibilities, he is the author
of 20 books and more than 350 journal articles. Dr. Wertheimer also provides consulting
services to institutions in the pharmaceutical industry. Dr. Wertheimer's academic experience
44
includes professorships and other faculty and administrative positions at several educational
institutions, including the Medical College of Virginia, St. Joseph's University, Philadelphia
College of Pharmacy and Science and the University of Minnesota. Dr. Wertheimer's previous
professional experience includes pharmacy services in commercial and non-profit environments.
Professor Wertheimer is a licensed pharmacist in five states, and is a member of several health
associations, including the American Pharmacists Association and the American Public Health
Association. Dr. Wertheimer is the editor of the “Journal of Pharmaceutical Finance and
Economic Policy”; and he has been on the editorial board of the Journal of Managed
Pharmaceutical Care, Medical Care, and other healthcare journals. Dr. Wertheimer has a
Bachelor of Science Degree in Pharmacy from the University of Buffalo, an Master of Business
Administration from the State University of New York at Buffalo, a Physical Science Doctorate
from Purdue University and a Post Doctoral Fellowship from the University of London, St.
Thomas' Medical School.
Ronald A. West was elected a Director of the Company in January 2002. Mr. West is currently a
Director of Beecher Associates, an industrial real estate investment company, R&M Resources, an
investment and consulting services company and North East Staffing, Inc., an employee services
company. Prior to this, from 1983 to 1987, Mr. West, financial expert for the audit committee at
Lannett, served as Chairman and Chief Executive Officer of Dura Corporation, an original
equipment manufacturer of automotive products and other engineered equipment components. In
1987, Mr. West sold his ownership position in Dura Corporation, at which time he retired from
active management positions. Mr. West was employed at Dura Corporation since 1969. Prior to
this, he served in various financial management positions with TRW, Inc., Marlin Rockwell
Corporation and National Machine Products Group, a division of Standard Pressed Steel Company.
Mr. West studied Business Administration at Michigan State University and the University of
Detroit.
Myron Winkelman, R. Ph. was elected a Director of the Company in June 2003. Mr.
Winkelman has significant career experience in various aspects of pharmacy and health care. He
is currently President of Winkelman Management Consulting (WMC), which provides
consulting services to both commercial and governmental clients. He has served in this position
since 1994. Mr. Winkelman has recently managed multi-state drug purchasing initiatives for
both Medicaid and state entities. Prior to creating WMC, he was a senior executive with
ValueRx, a large pharmacy benefits manager, and served for many years as a senior executive
for the Revco, Rite Aid and Perry Drug chains. While at ValueRx, Mr. Winkelman served on the
Board of Directors of the Pharmaceutical Care Management Association. He belongs to a
number of pharmacy organizations, including the Academy of Managed Care Pharmacy and the
Michigan Pharmacy Association. Mr. Winkelman is a registered pharmacist and holds a
Bachelor of Science Degree in Pharmacy from Wayne State University.
Arthur P. Bedrosian, J.D. was elected President of the Company in May 2002. Prior to this, he
served as the Company’s Vice President of Business Development from January 2002 to April 2002,
and as a Director from February 2000 to January 2002. Mr. Bedrosian has operated generic drug
manufacturing, sales, and marketing businesses in the healthcare industry for many years. Prior to
joining the Company, from 1999 to 2001, Mr. Bedrosian served as President and Chief Executive
Officer of Trinity Laboratories, Inc., a medical device and drug manufacturer. Mr. Bedrosian also
operated Pharmaceutical Ventures Ltd, a healthcare consultancy and Interal Corporation, a computer
consultancy to Fortune 100 companies. Mr. Bedrosian holds a Bachelor of Arts Degree in Political
45
Science from Queens College of the City University of New York and a Juris Doctorate from
Newport University in California.
Brian J. Kearns was elected Vice President of Finance, Treasurer and Chief Financial Officer
of the Company in March 2005 and Secretary in May 2005. Prior to joining the Company, Mr.
Kearns served as the Executive Vice President, Treasurer and Chief Financial Officer of
MedQuist Inc., a healthcare information management company, from 2000 through 2004. Prior
to joining MedQuist, Mr. Kearns was Vice President and Senior Health Care IT analyst at Banc
of America Securities from 1999 trough 2000. Mr. Kearns also held various positions with
Salomon Smith Barney from 1994 through 1998, including Senior Analyst of Business Services
Equity Research. Prior to that, Mr. Kearns held several financial management positions during
his seven years at Johnson & Johnson. Mr. Kearns holds a Bachelor of Science degree in
Finance from Lehigh University and a Master of Business Administration degree from Rider
University, where he matriculated with distinction.
Kevin Smith joined the Company in January 2002 as Vice President of Sales and Marketing. Prior
to this, from 2000 to 2001, he served as Director of National Accounts for Bi-Coastal
Pharmaceutical, Inc., a pharmaceutical sales representation company. Prior to this, from 1999 to
2000, he served as National Accounts Manager for Mova Laboratories Inc., a pharmaceutical
manufacturer. Prior to this, from 1991 to 1999, Mr. Smith served as National Sales Manager at
Sidmak Laboratories, a pharmaceutical manufacturer. Mr. Smith has extensive experience in the
generic sales market, and brings to the Company a vast network of customers, including retail chain
pharmacies, wholesale distributors, mail-order wholesalers and generic distributors. Mr. Smith has a
Bachelor of Science Degree in Business Administration from Gettysburg College.
Bernard Sandiford joined the Company in November 2002 as Vice President of Operations. Prior
to this, from 1998 to 2002, he was the President of Sandiford Consultants, a firm specializing in
providing consulting services to drug manufacturers for Good Manufacturing Practices and process
validations. His previous employment included senior operating positions with Halsey Drug
Company, Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc., and Revlon Health Care Group.
In addition to these positions, Mr. Sandiford performed various consulting assignments regarding
Good Manufacturing Practices for several companies in the pharmaceutical industry. Mr. Sandiford
has a Bachelor of Science Degree in Chemistry from Long Island University.
William Schreck joined the Company in January 2003 as Materials Manager. In May 2004, he was
promoted to Vice President of Logistics. Prior to this, from 1999 to 2001, he served as Vice
President of Operations at Nature’s Products, Inc., an international nutritional and over-the-counter
drug product manufacturing and distribution company. Mr. Schreck’s prior experience also includes
executive management positions at Ivax Pharmaceuticals, Inc., a division of Ivax Corporation,
Zenith-Goldline Laboratories and Rugby-Darby Group Companies, Inc. Mr. Schreck has a Bachelor
of Arts Degree from Hofstra University.
To the best of the Company's knowledge, there have been no events under any bankruptcy act, no
criminal proceedings and no judgments or injunctions that are material to the evaluation of the
ability or integrity of any director, executive officer, or significant employee during the past five
years.
46
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, officers, and
persons who own more than 10% of a registered class of the Company’s equity securities to file with
the SEC reports of ownership and changes in ownership of common stock and other equity securities
of the Company. Officers, directors and greater-than-10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the Company or written
representations that no other reports were required, the Company believes that during Fiscal 2005,
all filing requirements applicable to its officers, directors and greater-than-10% beneficial owners
were complied with, except for the following:
None
Code of Ethics and Financial Expert
The Company has adopted the Code of Professional Conduct (the “code of ethics”), a code of
ethics that applies to the Company’s Chief Executive Officer, Chief Financial Officer, Chief
Accounting Officer and Corporate Controller, and other finance organization employees. The
code of ethics is publicly available on our website at www.lannett.com. If the Company makes
any substantive amendments to the finance code of ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial
Officer, or Chief Accounting Officer and Corporate Controller, we will disclose the nature of
such amendment or waiver on our website or in a report on Form 8-K.
The Board of Directors has determined that Mr. West, current director of Lannett as well as
director of Beecher Associates, an industrial real estate investment company, R&M Resources, an
investment and consulting services company and North East Staffing, Inc., an employee services
company and previously the Chief Executive Officer of Dura Corporation, is the audit committee
financial expert as defined in section 3(a)(58) of the Exchange Act and the related rules of the
Commission.
47
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes all compensation paid to or earned by the named executive officers
of the Company for Fiscal 2005, Fiscal 2004 and Fiscal 2003.
Annual Compensation
Awards
Payouts
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Long Term Compensation
Name and Principal
Position
Fiscal
Year
William Farber
Chairman of the Board
of Directors and Chief
Executive Officer
2005
2004
2003
Other
Annual
Compen-
sation
Restricted
Stock
Award(s)
Salary
Bonus
$ 0
$ 0
$ 0
0
0
0
0
Securities
Under-
lying
Options /
SARs
LTIP
Payout
Amount
All Other
Compen-
sation
Amounts
0
$ 0
$ 44,0004
87,500
37,500
0
177,900
114,600
0
0
0
0
0
0
0
129,595
74,595
0
0
0
0
0
0
0
0
0
0
0
0
0
0
26,0004
3,0004
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Arthur P. Bedrosian2
President
2005
2004
236,7091
168,750
212,5481
240,000
2003
179,175
77,500
Kevin Smith
2005
171,578
95,518
Vice President of Sales
and Marketing
2004
160,488
158,410
2003
156,504
46,500
William Schreck
2005
140,862
73,750
Vice President of
Logistics
2004
2003
103,927
41,1545
37,500
0
Larry Dalesandro3
2005
134,993
99,645
Former Chief Financial
Officer, Treasurer
2004
2003
135,8421
156,000
134,9841
59,675
1
2
Includes matching contribution payments made to the Company’s 401(k) Plan (3%
of eligible compensation) for the benefit of the employee noted.
Mr. Bedrosian joined the Company on January 24, 2002 as Vice President of
Business Development. On May 5, 2002, he was elected President of the Company.
48
3
4
5
Mr. Dalesandro joined the Company on January 11, 1999 as Controller. He was
elected Chief Operating Officer on November 1, 1999. On June 18, 2003, he was
elected Chief Financial Officer, and voluntarily resigned the position of Chief
Operating Officer. Dec. 2, 2004, he resigned from the Company.
These amounts represent payments to Mr. Farber for participation and attendance
at Board of Director Meetings.
Mr. Schreck was hired mid-fiscal year 2003 as Material Manager and then
promoted May 2004 to Vice President of Logistics.
Aggregated Options/SAR Exercises and Fiscal Year-end Options/SAR Values
(a)
(b)
(c)
(d)
Shares
Acquired
On
Value
Name
Exercise
Realized
Number of Securities
Underlying Unexercised
Options at FY-End
Exercisable/
Unexercisable
Kevin Smith
Vice President of Sales
William Farber
Chairman of the Board
of Directors and Chief
Executive Officer
Arthur Bedrosian
10,001
100%
0
0
0
0
Compensation of Directors
0/
0
54,165/
33,335
87,599/
60,301
(e)
Value of
Unexercised
In-the-Money
Options at
FY-End
Exercisable/
Unexercisable
$0/
$0
$0/
$0
$0/
$0
Directors received compensation of $1,000 per Board meeting in Fiscal 2005. Additionally, starting
in January of 2004, directors received compensation of $2,500 per month retainer. There were
thirteen Board meetings held during Fiscal 2005. Additional committees of the Board of Directors
included the Audit Committee, the Compensation Committee and the Strategic Planning Committee.
Committee members received compensation of $1,000 per Committee meeting in Fiscal 2005.
There were six Audit Committee meetings and two Strategic Planning Committee Meetings held
during Fiscal 2005. There were no Compensation Committee Meetings held during Fiscal 2005.
Directors are reimbursed for expenses incurred in attending Board and Committee meetings. In
addition to the Committees noted, in February 2004, the Board of Directors created a Special
Committee, consisting of the three independent Board Directors, to look after the best interests of the
shareholders of the Company. The Committee was created after William Farber entered into an
option agreement with Perrigo Company, Inc. to potentially acquire all of the shares owned by
William Farber and his wife. Special Independent Committee members received $3,000 per
49
meeting. There were seven Special Independent Committee meetings held during Fiscal 2005. The
following table identifies the stock options granted to directors in Fiscal 2005.
(a)
(b)
(c)
(d)
(e)
Name
Number of
Securities
Underlying
Options/SARs
Granted (#)
% of Total
Options/SARs
Granted to
Recipients in
Fiscal Year
Exercise or Base Price
($/Share)
Expiration Date
Albert Wertheimer
20,000
15.2%
20,000 @ $9.02
12/8/2014
Employment Agreements
The Company has entered into employment agreements with Arthur Bedrosian, Brian Kearns, Kevin
Smith, Bill Schreck, and Bernard Sandiford (the “Named Executives”). Each of the agreements
provide for an annual base salary and eligibility to receive a bonus. The salary and bonus amounts
of the Named Executives are determined by the Board of Directors. Additionally, the Named
Executives are eligible to receive stock options, which are granted at the discretion of the Board of
Directors, and in accordance with the Company’s policies regarding stock option grants.
Under the agreements, the Named Executive employees may be terminated at any time with or
without cause, or by reason of death or disability. In certain termination situations, the Company is
liable to pay severance compensation to the Named Executive of between one year and three years.
50
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of June 30, 2005, information regarding the security ownership of
the directors and certain executive officers of the Company and persons known to the Company to
be beneficial owners of more than five (5%) percent of the Company's common stock:
Name and Address of
Beneficial Owner
Office
Number
of Shares
Percent
of Class
Number
of Shares
Percent of
Class
Excluding Options
and Debentures
Including Options (*)
Directors/Executive Officers:
William Farber
9000 State Road
Philadelphia, PA 19136
Albert Wertheimer
9000 State Road
Philadelphia, PA 19136
Myron Winkelman
9000 State Road
Philadelphia, PA 19136
Ronald A. West
9000 State Road
Philadelphia, PA 19136
Arthur Bedrosian
9000 State Road
Philadelphia, PA 19136
Brian Kearns
9000 State Road
Philadelphia, PA 19136
Chairman of the
Board
13,619,1291
56.22%
13,656,6292
56.38%
Director
0
0.00%
20,000
0.08%
Director
1,000
0.00%
1,000
0.00%
Director
7,310
0.03%
17,2583
0.07%
President
448,6974
1.85%
492,9975
2.04%
CFO
0
0.00%
100,000
0.41%
Kevin Smith
9000 State Road
Philadelphia, PA 19136
Vice President of
Sales and
Marketing
Vice President of
Logistics
Vice President of
Operations
William Schreck
9000 State Road
Philadelphia, PA 19136
Bernard Sandiford
9000 State Road
Philadelphia, PA 19136
All directors and
executive officers as a
group (7 persons)
76
0.00%
71,836
0.30%
0
0.00%
17,745
0.07%
287
0.00%
38,167
0.15%
14,076,499
58.43%
14,415,632
59.52%
51
1
Includes 300,000 shares owned jointly by William Farber and his spouse Audrey Farber.
2
per share.
Includes 37,500 vested options to purchase common stock at an exercise price of $7.97
3
share.
Includes 9,948 vested options to purchase common stock at an exercise price of $7.97 per
4
Includes 27,450 shares owned by Arthur Bedrosian’s wife, Shari Bedrosian and 9,000
shares owned by Arthur Bedrosian’s daughter, Talin Bedrosian. Mr. Bedrosian disclaims
beneficial ownership of these shares.
5
Includes 12,000 vested options to purchase common stock at an exercise price of $4.63
per share and 32,300 vested options to purchase common stock at an exercise price of $7.97 per
share.
* Assumes that all options exercisable within sixty days have been exercised, which
results in 24,222,960 shares outstanding.
52
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had sales of approximately $590,000, $590,000 and $348,000 during the years
ended June 30, 2005, 2004 and 2003, respectively, to a generic distributor, Auburn
Pharmaceutical Company (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. Accounts receivable includes amounts due from the related party of approximately
$179,000, and $117,000 at June 30, 2005 and 2004, 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
through January 13, 2005, was employed by two insurance brokerage companies (the “Insurance
Brokers”) that provide insurance agency services to the Company. The Company paid
approximately $732,000, $499,000 and $28,000 during Fiscal 2005, 2004 and 2003,
respectively, to the Insurance brokers for various insurance coverage policies. There was
approximately $71,200 and $9,400 due to the Insurance brokers as of June 30, 2005 and 2004,
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.
In January 2005, Lannett Holdings, Inc. entered into an agreement pursuant which it purchased
for $100,000 and future royalty payments the proprietary rights to manufacture and distribute a
product for which Pharmeral, Inc. owns the ANDA. This agreement is subject to Lannett
Holdings, Inc’s ability to obtain FDA approval to use the proprietary rights. In the event that
such FDA approval cannot be obtained, Pharmeral, Inc. must repay the $100,000 to Lannett
Holdings, Inc. Accordingly, the Company has treated this payment as a prepaid asset. Arthur
Bedrosian, President of Lannett, was formerly the President and Chief Executive Officer and
currently owns 100% of Pharmeral, Inc. This transaction was approved by the Board of
Directors of Lannett and, in its opinion, the terms were not more favorable to the related party
than they would have been to a non-related party.
53
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Grant Thornton LLP served as the independent auditors of the Company during Fiscal 2005,
2004 and 2003. No relationship exists other than the usual relationship between independent
public accountant and client. The following table identifies the fees paid to Grant Thornton LLP
in Fiscal 2005, 2004 and 2003.
Audit Fees
Audit-Related
Fees (1)
Tax Fees
(2)
All Other Fees
(3)
Total Fees
Fiscal 2005:
$110,500
Fiscal 2004:
$92,124
Fiscal 2003:
$72,561
$2,850
$52,475
$203,895
$369,720
$5,000
$29,621
$38,325
$165,070
$7,700
$17,816
$45,343
$143,420
(1) Audit-related fees include fees paid for preparation and participation in Board of Director
meetings, and Audit Committee meetings.
(2) Tax fees include fees paid for preparation of annual federal, state and local income tax returns,
quarterly estimated income tax payments, and various tax planning services. Fiscal 2005 includes
fees paid to Grant Thornton for services rendered during an IRS audit.
(3) Other fees include:
Fiscal 2005 – A large portion of the fees paid were for services rendered in connection with
Sarbanes –Oxley compliance and internal control assessment. Other fees were for review of
various SEC correspondence and fees for services rendered in connection with the
Company’s application to various local and state entities for benefits related to the
Company’s facility expansion.
Fiscal 2004 – Fees paid for services rendered in connection with arbitrage calculations on
certain tax exempt bond issues, review of stock option documentation, review of S-3
registration statement filing for the four million shares granted to JSP, review of various SEC
correspondence and fees for services rendered in connection with the Company’s application
to various local and state entities for benefits related to the Company’s facility expansion.
Fiscal 2003 – Fees paid for services rendered in connection with the Company’s application
to various local and state entities for benefits related to the Company’s facility expansion;
and services rendered in connection with an engagement for interest expense arbitrage
calculations on certain tax exempt bond issues.
The non-audit services provided to the Company by Grant Thornton LLP were pre-approved by
the Company's audit committee. Prior to engaging its auditor to perform non-audit services, the
Company's audit committee reviews the particular service to be provided and the fee to be paid
by the Company for such service and assesses the impact of the service on the auditor's
independence.
54
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)
A list of the exhibits required by Item 601 of Regulation S-K to be filed as of this Form 10-K
is shown on the Exhibit Index filed herewith
(b)
Consolidated Financial Statements and Supplementary Data
The following are included herein:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2005 and 2004
Consolidated Statements of Operations for each of the three years in the period ended June
30, 2005
Consolidated Statements of Cash Flows for each of the three years in the period ended June
30, 2005
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years in
the period ended June 30, 2005
Notes to Consolidated Financial Statements
Supplementary Data (Unaudited)
(c)
On March 21, 2005, the Company filed a Form 8-K disclosing Item 7 and Item 12 thereof
and including as an exhibit the press release announcing its employment agreement with
Brian Kearns.
On Dec. 3, 2004, the Company filed a Form 8-K disclosing Item 2 and Item 7 thereof and
including as an exhibit the agreement and press release announcing that on Dec. 1, 2004 the
Company came to a separation agreement with the CFO Larry Dalesandro.
On August 20, 2004, , the Company filed a Form 8-K disclosing Item 2 and Item 7 thereof
and including as an exhibit and press release, the Company announced its results of
operations for the quarter ended and fiscal year ended June 30, 2004.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 13, 2005
Date: September 13, 2005
Date: September 13, 2005
Date: September 13, 2005
LANNETT COMPANY, INC.
By: / s / William Farber
William Farber,
Chairman of the Board and
Chief Executive Officer
By: / s / Brian Kearns
Brian Kearns,
Vice President of Finance, Treasurer, and
Chief Financial Officer
By: / s / Ronald West
Ronald West,
Director, Chairman of Audit Committee
By: / s / Myron Winkelman
Myron Winkelman,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: September 13, 2005
Date: September 13, 2005
By: / s / William Farber
William Farber,
Chairman of the Board and
Chief Executive Officer
By: / s / Brian Kearns
Brian Kearns,
Vice President of Finance, Treasurer, and
Chief Financial Officer
56
Exhibit 13
Annual Report on Form 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and
Shareholders of Lannett Company, Inc.
We have audited the accompanying consolidated balance sheets of Lannett
Company, Inc. (a Pennsylvania corporation) as of June 30 2005 and 2004, and the
related consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 2005. These financial
statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lannett Company, Inc. as of
June 30, 2005 and 2004, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2005 in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Lannett
Company, Inc.'s internal control over financial reporting as of June 30, 2005, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated September 1, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of internal controls over financial
reporting and an unqualified opinion on the effectiveness of internal control
over financial reporting.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 1, 2005
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Lannett Company, Inc.
We have audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Lannett Company, Inc. (a
Pennsylvania Corporation) maintained effective internal control over financial reporting
as of June 30, 2005, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Lannett Company, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to
express an opinion on management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In our opinion, management's assessment that Lannett Company, Inc. maintained
effective internal control over financial reporting as of June 30, 2005, is fairly stated, in
58
all material respects, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also in our opinion, Lannett Company, Inc. maintained, in all
material respects, effective internal control over financial reporting as of June 30, 2005,
based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Lannett
Company, Inc. as of June 30, 2005 and 2004, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2005 and our report dated September 1, 2005 expressed an unqualified
opinion on those financial statements.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 1, 2005
59
CONSOLIDATED BALANCE SHEETS
JUNE 30,
2005
2004
ASSETS
CURRENT ASSETS
Cash
Trade accounts receivable (net of allowance for doubtful accounts of
$70,000 and $260,000, respectively)
Inventories
Prepaid taxes
Other current assets
Deferred tax assets
Total current assets
PROPERTY, PLANT AND EQUIPMENT
Less accumulated depreciation
CONSTRUCTION IN PROGRESS
INVESTMENT SECURITIES – Available for Sale
DEFERRED TAX ASSETS
INTANGIBLE ASSET (Product rights), net of accumulated amortization
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
Accounts payable
Rebates and chargebacks payable
Accrued expenses
Unearned grant funds
Total current liabilities
$ 4,165,601
10,735,529
$ 8,966,954
24,240,887
9,988,769
3,957,993
12,813,250
882,613
1,966,270 1,016,050
942,689
48,862,443
3,123,953
33,938,115
23,746,161
(7,121,313)
16,624,848
15,259,693
(5,666,798)
9,592,895
2,079,650
7,888,708
18,610,159
15,615,835
159,745
7,352,821
-
166,332
65,725,490
204,103
$ 94,917,060
$ 131,904,084
$ 2,269,776
1,208,148
10,750,000
$ 1,988,716
5,640,054
8,885,000
1,667,638 3,424,859
-
19,938,629
500,000
16,395,562
LONG-TERM DEBT, LESS CURRENT PORTION
DEFERRED TAX LIABILITY
7,262,672
2,009,582
8,104,141
1,614,323
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock - authorized 50,000,000 shares, par value $0.001;
issued and outstanding, 24,111,140 and 24,074,710 shares, respectively
Additional paid-in capital
Retained (deficit) earnings
Accumulated other comprehensive loss
Treasury Stock at Cost – 50,900 and 0 shares, respectively
24,111
70,157,431
(512,535)
(25,193)
69,643,814
394,570
24,075
69,955,855
32,267,061
-
102,246,991
-
Total shareholders' equity
69,249,244
102,246,991
TOTAL LIABILITES AND SHAREHOLDERS’ EQUITY
$ 94,917,060 $ 131,904,084
The accompanying notes to consolidated financial statements are an integral part of these statements.
60
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
NET SALES
COST OF SALES
Gross profit
2005
2004
2003
$ 44,901,645
$ 63,781,219
$ 42,486,758
31,416,908
26,856,875
16,257,794
13,484,737
36,924,344
26,228,964
RESEARCH AND DEVELOPMENT EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
AMORTIZATION EXPENSE
LOSS ON SALE OF ASSETS
LOSS ON IMPAIRMENT/ABANDONMENT OF ASSETS
6,265,522
9,194,377
5,516,417
1,466
5,895,096
8,863,966
1,314,510
19,803
46,146,613 -
2,575,178
4,337,558
-
119,279
136,843
Operating (loss)income
(53,639,658)
20,830,969
19,060,106
OTHER INCOME(EXPENSE):
Interest income
Interest expense
165,622
(351,462)
43,101
(64,300)
2,297
(60,776)
(185,840)
(21,199)
(58,479)
(LOSS)/INCOME BEFORE INCOME TAX EXPENSE(BENEFIT)
(53,825,498)
20,809,770
19,001,627
INCOME TAX (BENEFIT)EXPENSE
(21,045,902)
7,594,316
7,334,740
NET (LOSS)INCOME
$ (32,779,596)
$ 13,215,454
$ 11,666,887
Basic (loss)earnings per common share
$ (1.36)
$ 0.63
$ 0.58
Diluted (loss)earnings per common share
$ (1.36)
$ 0.63
$ 0.58
The accompanying notes to consolidated financial statements are an integral part of these statements.
61
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2005, 2004 AND 2003
Common Stock
Shares
Issued
Amount
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Treasury
Stock
Accum. Other
Comp. Loss
Shareholders'
Equity
BALANCE, JUNE 30, 2002
19,894,257 $ 19,894 $ 2,360,261 $ 7,385,894
$ - $ - $ 9,766,049
Exercise of stock options
Stock Split-shares repurchased
due to odd quantity holders
131,709 132 165,816
(95)
165,948
- - (1,174) - - (1,174)
- - -
Net income
-
-
- 11,666,887 - -
11,666,887
BALANCE, JUNE 30, 2003
20,025,871 $ 20,026 $ 2,526,077 $ 19,051,607
-
$ - $ - $ 21,597,710
Exercise of stock options
36,867 37 232,079 - - -
232,116
Shares issued in connection
with employee stock
purchase plan
Shares issued in connection
with JSP product rights
contract
Net Income
11,972 12 161,699 - - -
161,711
4,000,000 4,000 67,036,000 - - -
67,040,000
-
-
- 13,215,454 - -
13,215,454
BALANCE, JUNE 30, 2004
24,074,710 $ 24,075 $ 69,955,855 $ 32,267,061 $ - $ - $ 102,246,991
Exercise of stock options
Shares issued in connection
with employee stock
purchase plan
Other Comp. Loss
19,136 19 60,892 -
- -
60,911
140,701
17,304 17 140,684 -
- - - - - (25,193) (25,193)
- -
Cost of Treasury Stock
- - - -
(394,570) - (394,570)
Net Loss
-
-
- (32,779,596) - - (32,779,596)
BALANCE, JUNE 30, 2005 24,111,140 $ 24,111 $ 70,157,431 $ (512,535) $ (394,570) $ (25,193) $ 69,249,244
The accompanying notes to consolidated financial statements are an integral part of these statements.
62
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
2005
2004
2003
OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization
Loss on disposal/impairment of assets
Deferred tax (benefit) expense
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable
Inventories
Prepaid taxes
Prepaid expenses and other current assets
Accounts payable
Accrued expenses
Income taxes payable
$ (32,779,596)
$ 13,215,454
$ 11,666,887
6,970,932
46,093,236
(20,229,832)
2,506,427
19,803
(37,209)
982,188
256,122
161,390
15,370,358
2,824,481
(3,075,380)
(905,862)
(4,431,906)
(1,757,219)
-
(12,953,719)
(4,637,452)
(882,613)
(356,057)
9,089,751
2,898,429
(63,617)
(6,137,916)
(3,238,591)
-
(261,230)
4,017,952
(131,461)
(662,935)
Net cash provided by operating activities
8,079,212
8,799,197
6,652,406
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Deposits paid on machinery and equipment not yet received
Purchase of intangible asset
Purchases of AFS investment securities
Proceeds from sale of property, plant and equipment
(3,213,297)
-
(1,500,000)
(7,913,901)
-
(10,749,636)
-
-
-
-
(2,618,936)
-
-
-
375,003
Net cash used in investing activities
(12,627,198)
(10,749,636)
(2,243,933)
FINANCING ACTIVITIES:
Net repayments under line of credit
Repayments of debt
Proceeds from grant funding
Proceeds from debt, net of restricted cash released
Proceeds from issuance of stock
Treasury stock transactions
Payments made in lieu of stock split
-
(2,163,015)
-
(1,085,669)
(202,688)
(842,048)
500,000
1,602,606
201,612
(394,570)
-
-
8,080,724
393,827
-
-
-
-
165,948
-
(1,174)
Net cash (used in)provided by financing activities
(253,367)
7,388,882
(879,962)
NET (DECREASE)/INCREASE IN CASH
(4,801,353)
5,438,443
3,528,511
CASH, BEGINNING OF YEAR
8,966,954 3,528,511
-
CASH, END OF YEAR
$ 4,165,601
$ 8,966,954
$ 3,528,511
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Interest paid
Income taxes paid
$ (351,462)
$ 3,149,620
$ 32,102
$ 8,540,546
$ 57,688
$ 7,436,964
Non-Cash Transaction: In Fiscal 2004, the Company had a non-cash transaction associated with the JSP Product Rights
Contract. For the exclusive rights to all of JSP products, the Company issued 4,000,000 shares to JSP. The Company recorded
an intangible asset in the amount of $67,040,000. No cash was exchanged in the transaction.
The accompanying notes to consolidated financial statements are an integral part of these statements.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Lannett Company, Inc. and subsidiaries (the "Company"), a Delaware corporation, develops,
manufactures, packages, markets and distributes pharmaceutical products sold under generic
chemical names.
The Company is engaged in an industry which is subject to considerable government regulation
related to the development, manufacturing and uymarketing of pharmaceutical products. In the
normal course of business, the Company periodically responds to inquiries or engages in
administrative and judicial proceedings involving regulatory authorities, particularly the Food
and Drug Administration (FDA) and the Drug Enforcement Agency (DEA).
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.
Principles of Consolidation - The consolidated financial statements include the accounts of the
operating parent company, Lannett Company, Inc., its wholly owned subsidiary, Lannett
Holdings, Inc., and its inactive wholly owned subsidiary, Astrochem Corporation. All
intercompany accounts and transactions have been eliminated.
Reclassifications – Certain reclassifications have been made to prior years’ financial information
to conform to the June 30, 2005 presentation.
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 rebates and chargebacks payable and reductions to net
sales. The change in the reserves for various sales adjustments may not be proportionally equal
to the change in sales because of changes in both the product and the customer mix. Increased
sales to wholesalers will generally require additional rebates. Incentives offered to secure sales
vary from product to product. Provisions for estimated rebates and promotional and other credits
are estimated based on historical payment experience, customer inventory levels, and contract
terms. Provisions for other customer credits, such as price adjustments, returns, and
chargebacks, require management to make subjective judgments. Unlike branded innovator drug
companies, Lannett does not use information about product levels in distribution channels from
third-party sources, such as IMS and NDC Health, in estimating future returns and other credits.
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 pharmacies. 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.”
64
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 if the price sold to the indirect customer is lower than the direct price to the
wholesaler. 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. As sales to the large wholesale customers, such as
Cardinal Health, AmerisourceBergen, and McKesson, increase, the reserve for chargebacks will
also generally increase. However, the size of the increase depends on the product mix. The
Company continually monitors the reserve for chargebacks and makes adjustments when
management 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. The reserve for rebates increases as
sales to certain wholesale and retail customers increase. However, these rebate programs are
tailored to the customers’ individual programs. Hence, the reserve will depend on the mix of
customers that comprise such rebate programs.
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 management believes that actual product returns may differ from established reserves.
Generally, the reserve for returns increases as net sales increase. The reserve for returns is
included in the rebates and chargebacks payable account on the balance sheet.
Other Adjustments – Other adjustments consist primarily of price adjustments, also known as
“shelf stock adjustments,” which 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. Other
adjustments are included in the rebates and chargebacks payable account on the balance sheet.
65
The following tables identify the reserves for each major category of revenue allowance and a
summary of the activity for the years ended June 30, 2005 and 2004:
For the Year Ended
June 30, 2005
Reserve Category
Chargebacks
Rebates
Returns
Other
Total
Reserve Balance as of
June 30, 2004
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2004
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2005
Additional Reserves Charged to
Net Sales During Fiscal 2005
Reserve Balance as of
June 30, 2005
For the Year Ended
June 30, 2004
$ 6,484,500
$ 1,864,200
$ 448,000
$ 88,300
$ 8,885,000
(4,978,300)
(1,970,000)
(523,100)
(95,800)
(7,567,200)
(14,534,600)
(5,965,500)
(1,166,800)
(586,400)
(22,253,300)
21,028,100
7,100,100
2,933,900
623,400
31,685,500
$ 7,999,700
$ 1,028,800
$ 1,692.000
$ 29,500
$10,750,000
Reserve Category
Chargebacks
Rebates
Returns
Other
Total
Reserve Balance as of
June 30, 2003
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2003
Actual Credits Issued-Related
To Sales Recorded in Fiscal 2004
Additional Reserves Charged to
Net Sales During Fiscal 2004
Reserve Balance as of
June 30, 2004
$ 1,638,000
$ 889,900
$ 210,200
$ 33,900
$ 2,772,000
(1,604,000)
(1,166,400)
(182,700)
-
(2,953,100)
(12,447,000)
(2,723,200)
(60,100)
(410,000)
(15,640,300)
18,897,500
4,863,900
480,600
464,400
24,706,400
$ 6,484,500
$ 1,864,200
$ 448,000
$ 88,300
$ 8,885,000
The Company ships its products to the warehouses of its wholesale and retail chain customers.
When the Company and a customer come to an agreement for the supply of a product, the
customer will generally continue to purchase the product, stock its warehouse(s), and resell the
product to its own customers. The Company’s customer will continually reorder the product as
its warehouse is depleted. The Company generally has no minimum size orders for its
customers. Additionally, most warehousing customers prefer not to stock excess inventory
levels due to the additional carrying costs and inefficiencies created by holding excess inventory.
As such, the Company’s customers continually reorder the Company’s products. It is common
for the Company’s customers to order the same products on a monthly basis. For generic
pharmaceutical manufacturers, it is critical to ensure that customers’ warehouses are adequately
stocked with its products. This is important due to the fact that several generic competitors
compete for the consumer demand for a given product. Availability of inventory ensures that a
66
manufacturer’s product is considered. Otherwise, retail prescriptions would be filled with
competitors’ products. For this reason, the Company periodically offers incentives to its
customers to purchase its products. These incentives are generally up-front discounts off its
standard prices at the beginning of a generic campaign launch for a newly-approved or newly-
introduced product, or when a customer purchases a Lannett product for the first time.
Customers generally inform the Company that such purchases represent an estimate of expected
resale for a period of time. This period of time is generally up to three months. The Company
records this revenue, net of any discounts offered and accepted by its customers at the time of
shipment. The Company’s products have either 24 months or 36 months of shelf-life at the time
of manufacture. The Company monitors its customers’ purchasing trends to attempt to identify
any significant lapses in purchasing activity. If the Company observes a lack of recent activity,
inquiries will be made to such customer regarding the success of the customer’s resale efforts.
The Company attempts to minimize any potential return (or shelf life issues) by maintaining an
active dialogue with the customers.
The products that the Company sells are generic versions of brand named drugs. The consumer
markets for such drugs are well-established markets with many years of historically-confirmed
consumer demand. Such consumer demand may be affected by several factors, including
alternative treatments, cost, etc. However, the effects of changes in such consumer demand for
the Company’s products, like generic products manufactured by other generic companies, are
gradual in nature. Any overall decrease in consumer demand for generic products generally
occurs over an extended period of time. This is because there are thousands of doctors,
prescribers, third-party payers, institutional formularies and other buyers of drugs that must
change prescribing habits and medicinal practices before such a decrease would affect a generic
drug market. If the historical data the Company uses and the assumptions management makes to
calculate its estimates of future returns, chargebacks, and other credits 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.
Accounts Receivable - The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current credit worthiness, as
determined by a review of current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for estimated credit
losses based upon historical experience and any specific customer collection issues that have
been identified. While such credit losses have historically been within the both Company’s
expectations and the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
Inventories - The Company values its inventory at the lower of cost (determined by the first-in,
first-out method) or market, regularly reviews inventory quantities on hand, and records a
provision for excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements. The Company’s estimates of future product demand may
prove to be inaccurate, in which case it may have understated or overstated the provision
required for excess and obsolete inventory. In the future, if the Company’s inventory is
determined to be overvalued, the Company would be required to recognize such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is determined to be
undervalued, the Company may have recognized excess cost of goods sold in previous periods
and would be required to recognize such additional operating income at the time of sale.
67
Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation
is provided for by the straight-line and accelerated methods over the estimated useful lives of the
assets. Depreciation expense for the years ended June 30, 2005, 2004, and 2003 was
approximately $1,799,000, $1,192,000, and $945,000, respectively.
Investment Securities – The Company’s investment securities consist of marketable debt
securities, primarily in U.S. government and agency obligations. All of the Company’s
marketable debt securities are classified as available-for-sale and recorded at fair value, based on
quoted market prices. Unrealized holding gains and losses are recorded, net of any tax effect, as
a separate component of accumulated other comprehensive loss. No gains or losses on
marketable debt securities are realized until they are sold or a decline in fair value is determined
to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary,
an impairment charge is recorded and a new cost basis in the investment is established. There
were no securities determined by management to be other-than-temporarily impaired for the
twelve month period ended June 30, 2005.
Deferred Debt Acquisition Costs - Costs incurred in connection with obtaining financing are
amortized by the straight-line method over the term of the loan agreements. Amortization
expense for debt acquisition costs for they years ended June 30, 2005, 2004 and 2003 was
approximately $23,000, $35,000 and $37,000, respectively.
Shipping and Handling Costs – The cost of shipping products to customers is recognized at the
time the products are shipped, and is included in Cost of Sales.
Research and Development – Research and development expenses are charged to operations as
incurred.
Intangible Assets – On March 23, 2004, the Company entered into an agreement with Jerome
Stevens Pharmaceuticals, Inc. (JSP) for the exclusive marketing and 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. As a result of the JSP agreement, the Company recorded an
intangible asset of $67,040,000 for the exclusive marketing and distribution rights obtained from
JSP. The intangible asset was recorded based upon the fair value of the four million (4,000,000)
shares at the time of issuance to JSP. An impairment charge was recorded against this intangible
asset in the current fiscal year. The agreement was included as an Exhibit in the Current Report
on Form 8-K filed by the Company on May 5, 2004, as subsequently amended.
In June 2004, JSP’s Levothyroxine Sodium tablet product received from the FDA an AB rating
to the brand drug Levoxyl®. In December 2004, the product received from the FDA a second
AB rating to the brand drug Synthroid®. As a result of the dual AB ratings, the Company is
required to pay JSP an additional $1.5 million in cash to reimburse JSP for expenses related to
obtaining the AB ratings. As of June 30, 2005, the Company had recorded an addition to the
intangible asset of $1.5 million.
Management believes that events occurred (as described in subsequent paragraphs) which
indicated that the carrying value of the intangible asset was not recoverable. In accordance with
Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company engaged a third party valuation
specialist to assist in the performance of an impairment test for the quarter ended March 31,
2005. The impairment test was performed by discounting forecasted future net cash flows for the
68
JSP products covered under the agreement and then comparing the discounted present value of
those cash flows to the carrying value of the asset (inclusive of the $1.5 million payable to JSP
for the second AB rating). As a result of the testing, the Company had determined that the
intangible asset was impaired as of March 31, 2005. In accordance with FAS 144, the Company
recorded a non-cash impairment loss of approximately $46,093,000 to write the asset down to its
fair value of approximately $16,062,000 as of the date of the impairment. This impairment loss
is shown on the statement of operations as a component of operating loss. Management
concluded that, as of June 30, 2005, the intangible asset is correctly stated at fair value and,
therefore, no adjustment was required.
Management believes that several factors contributed to the impairment of this asset. In
December 2004, the Levothyroxine Sodium tablet product received the AB rating to Synthroid®.
The expected sales increase as a result of the AB rating did not occur in the third quarter of 2005.
The delay in receiving the AB rating to Synthroid® caused the Company to be competitively
disadvantaged with its Levothyroxine Sodium tablet product and to lose market share to
competitors whose products had already received AB ratings to both major brand thyroid
deficiency drugs. Additionally, the generic market for thyroid deficiency drugs turned out to be
smaller than it was anticipated to be as a result of a lower brand-to-generic substitution rate.
Increased competition in the generic drug market, both from existing competitors and new
entrants, has resulted in significant pricing pressure on other products supplied by JSP. The
combination of these factors resulted in diminished forecasted future net cash flow which, when
discounted, yield a lower present value than the carrying value of the asset before impairment.
The Company will incur annual amortization expense of approximately $1,785,000 for the
intangible asset over the remaining term of the contract. For the period ending June 30, 2005, the
Company incurred $5,516,000 of non-cash amortization expense associated with the JSP intangible
asset.
Future annual amortization expense of the JSP intangible asset consists of the following:
Year Ending June 30,
Annual Amortization Expense
2006
2007
2008
2009
2010
Thereafter
$ 1,785,000
1,785,000
1,785,000
1,785,000
1,785,000
6,691,000
$ 15,616,000
Advertising Costs - The Company charges advertising costs to operations as incurred.
Advertising expense for the years ended June 30, 2005, 2004 and 2003 was approximately
$157,000, $291,000, and $118,000, respectively.
Income Taxes - The Company uses the liability method specified by Statement of Financial
Accounting Standards No. 109 (FAS), 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.
69
Segment Information – The Company reports segment information in accordance with
Statement of Financial Accounting Standard No. 131 (FAS 131), Disclosures about Segments of
an Enterprise and Related Information. The Company operates one business segment-generic
pharmaceuticals, accordingly the Company has one reporting segment. In accordance with FAS
131, the Company aggregates its financial information for all products and reports on one
operating segment.
Long-Lived Assets - In accordance with Statement of Financial Accounting Standards No. 144
(FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
engaged a third party valuation specialist to assist in the performance of an impairment test on
the JSP product rights intangible asset for the quarter ended March 31, 2005. The impairment
test was performed by discounting forecasted future net cash flows for the JSP products covered
under the agreement and then comparing the discounted present value of those cash flows to the
carrying value of the asset (inclusive of the $1.5 million payable to JSP for the second AB
rating). As a result of the testing, the Company has determined that the intangible asset was
impaired as of March 31, 2005. In accordance with FAS 144, the Company recorded a non-cash
impairment loss of approximately $46,093,000 to write the asset down to its fair value of
approximately $16,062,000 as of March 31, 2005. This impairment loss is shown on the
statement of operations as a component of operating loss. Impairment losses recognized during
the years ended June 30, 2005, 2004 and 2003 were $46,093,000, $0 and $137,000, respectively.
Concentration of Market and Credit Risk – Five of the Company’s products, defined as
generics containing the same active ingredient or combination of ingredients, accounted for
approximately 31%, 24%, 16%, 10% and 12%, respectively, of net sales for the fiscal year ended
June 30, 2005; and 22%, 21%, 17%, 15%, and 10%, respectively, of net sales for the fiscal year
ended June 30, 2004.
Three of the Company’s customers accounted for 17%, 14%, and 9%, respectively, of net sales
for the fiscal year ended June 30, 2005; and 17%, 17%, and 10%, respectively, of net sales for
the fiscal year ended June 30, 2004.
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 remaining 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 June 30, 2005, the Company had two stock-based employee compensation
plans (See Note 9). The Company accounts for stock options under Statement of Financial
Accounting Standards 123 (FAS 123), Accounting for Stock-Based Compensation, as amended
by Statement of Financial Accounting Standards No. 148 (FAS 148), Accounting for Stock Based
Compensation – Transition and Disclosure. 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
70
service period, which is usually the vesting period. Alternatively, FAS 123 permits entities to
continue accounting for employee stock options and similar equity instruments under
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Entities that continue to account for stock options using APB 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 FAS 123 had been applied. The following table illustrates the
effect on net income and earnings per share as if the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee compensation.
Net (loss)/income, as reported
Deduct: Total compensation expense
determined under fair value-based
method for all stock awards
Add: Tax savings at effecive rate
Fiscal Year Ended June 30,
2004
13,215,454
2005
(32,779,597)
$
$
2003
11,666,887
$
(2,616,888)
1,023,203
(950,658)
346,933
(539,029)
208,065
Pro forma net (loss)/income
$
(34,373,282)
$
12,611,729
$
11,335,923
(Loss)/Earnings per share:
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
$
$
$
$
(1.36)
(1.43)
(1.36)
(1.43)
$
$
$
$
0.63
0.61
0.63
0.60
$
$
$
$
0.58
0.57
0.58
0.56
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 2005,
2004 and 2003: expected volatility of 42.6%, 31.2% and 79.1%, respectively; risk-free interest
rates between 4.13% and 4.52% for 2005, 4.36% and 4.79% for 2004 and 3.89% and 4.47% for
2003; and expected lives of ten years.
In December 2004, the FASB revised FAS 123. This Statement supersedes APB 25 and its related
implementation guidance and eliminates the alternative to use APB 25’s intrinsic value method of
accounting that was provided in FAS 123 as originally issued. Under APB 25, issuing stock options
to employees generally resulted in recognition of no compensation cost. FAS 123 (revised) requires
entities to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. That cost will be recognized over the
period during which an employee is required to provide service in exchange for the award – the
requisite service period (usually the vesting period). The Company plans to adopt FAS 123R
(revised) for the quarter ended September 30, 2005 and is currently assessing the impact of this
adoption. For further discuss, refer to Note 2.
Unearned Grant Funds – The Company records all grant funds received as a liability until the
Company fulfills all the requirements of the grant funding program.
71
Note 2. New Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151 (SFAS No. 151), Inventory Costs – an amendment of
ARB No. 43, Chapter 4. Paragraph 5 of ARB 43, Chapter 4 previously stated that “…under
some circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges…” SFAS
No. 151 requires that those items be recognized as current period charges regardless of whether
they meet the criterion of “so abnormal.” The adoption of SFAS No. 151 did not have a material
effect on the Company’s consolidated financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an
amendment of APB Opinion No. 29 (SFAS No. 153). APB Opinion No. 29 requires a
nonmonetary exchange of assets be accounted for at fair value, recognizing any gain or loss, if
the exchange meets a commercial substance criterion and fair value is determinable. The
commercial substance criterion is assessed by comparing the entity’s expected cash flows
immediately before and after the exchange. SFAS No. 153 eliminates the “similar productive
assets exception,” which accounts for the exchange of assets at book value with no recognition
of gain or loss. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153
will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R),
which requires companies to expense the fair value of stock options and other equity-based
compensation to employees. It also provides guidance for determining whether an award is a
liability-classified award or an equity-classified award, and determining fair value. SFAS No.
123R applies to all unvested stock-based payment awards outstanding as of the adoption date.
Pursuant to a rule announced by the Securities and Exchange Commission in April 2005, SFAS
No. 123R must be adopted no later than the beginning of the first fiscal year that begins after
June 15, 2005. We have not completed an assessment of the impact on our financial statements
resulting from potential modifications to our equity-based compensation structure or the use of
an alternative fair value model in anticipation of adopting SFAS No. 123R. The Company plans
to adopt SFAS No. 123R for the quarter ended September 30, 2005.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which replaces
APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for and reporting
of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle, and also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 will be effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. SFAS No. 154 does not change the transition
provisions of any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of SFAS No. 154. We do not believe the adoption of SFAS No. 154
will have a material impact on our financial statements.
72
In March 2005, the FASB issued FIN 47 “Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143.” This Interpretation clarifies that a
conditional retirement obligation refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and (or) method of
settlement. Accordingly, an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability can be reasonably
estimated. The liability should be recognized when incurred, generally upon acquisition,
construction or development of the asset. FIN 47 is effective no later than the end of the fiscal
years ending after December 15, 2005. We have not completed an assessment of the impact that
adoption of FIN 47 will have on our financial statements.
Note 3. Inventories
Inventories at June 30, 2005 and 2004 consist of the following:
2005
2004
Raw Materials
$ 5,091,883
$ 4,195,255
Work-in-process
1,351,112
626,647
Finished Goods
3,303,478
7,854,975
Packaging Supplies
242,296
136,373
$ 9,988,769
$ 12,813,250
The preceding amounts are net of inventory obsolescence reserves of $5,300,000 and $515,000
at June 30, 2005 and 2004, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at June 30, 2005 and 2004 consist of the following:
Land
Building and Improvements
Machinery and equipment
Furniture and fixtures
Useful Lives
–
10 – 39 years
5 – 10 years
5 – 7 years
2005
2004
$ 233,414
9,339,706
13,347,416
825,625
$ 33,414
3,526,003
11,504,877
195,399
$ 23,746,161
$ 15,259,693
73
Note 5. Bank Line of Credit
The Company has a $3,000,000 line of credit from Wachovia that bears interest at the prime
interest rate less 0.25% (6.00% at June 30, 2005). The line of credit was renewed and extended
to October 2005, at which time the Company expects to renew and extend the due date. At June
30, 2005 and 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.
Note 6. Long-Term Debt
Long-term debt at June 30, 2005 and 2004 consists of the following
2005
2004
Tax-exempt Bond Loan
Mortgage Loan
Equipment Loan
Construction Loan
Less current portion
$ 1,645,720
2,700,000
4,486,729
699,999
$ 9,532,448
2,269,776
$ 7,262,672
$ 2,287,802
2,700,000
4,205,055
900,000
$ 10,092,857
1,988,716
$ 8,104,141
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 June 30, 2005 was 2.44%. At June
30, 2005, the Company has $1,646,000 outstanding on the Authority loan, of which $644,000 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 June 30, 2005, no portion of the letter of credit has been utilized.
74
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.
As part of the 2003 Loan Financing Agreement, the Philadelphia Industrial Development
Corporation will lend the Company up to $1,250,000 as reimbursement for a portion of the
Mortgage Loan from Wachovia. Until that Conversion Date occurs, 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 loan 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
Conversion Date. As of June 30, 2005, the Conversion date has not taken place and the
Company continues to make interest only payments. As of June 30, 2005, the Company has
outstanding $2.7 million under the Mortgage Loan, of which $95,000 is classified as currently
due.
The Equipment Loan consists of various term loans with maturity dates ranging from three to
five years. The Company as part of the 2003 Loan Financing agreement is required to make
equal payments of principal and interest. As of June 30, 2005, the Company has outstanding
$4,487,000 under the Equipment Loan, of which $1,342,000 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 June 30, 2005, the Company has outstanding $700,000 under the
Construction Loan, of which $189,000 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 June 30,
2005, the interest rate for the 2003 Loan Financing was 4.93%.
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.
75
The terms of the line of credit, the loan 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 June 30, 2005,
the Company obtained a waiver from the lender due to a violation of one of its covenants. The
Company expects to meet the financial covenants in the future. Annual repayments of debt,
including sinking fund requirements, as of June 30, 2005 are as follows:
Amounts Payable
Year Ending
to Institutions
June 30,
2006
2007
2008
2009
2010
Thereafter
$
2,269,776
1,666,991
1,388,022
1,318,736
307,951
2,580,972
$
9,532,448
Note 7. Income Taxes
The provision for income taxes consists of the following for the years ended June 30.
Current Income Taxes
Federal
State and Local Taxes
Total
Deferred Income Taxes
Federal
State and Local Taxes
Total
2005
2004
2003
$
(815,930)
$
(815,930)
6,054,428
1,577,097
7,631,525
$
5,928,720
1,244,630
7,173,350
(16,861,925)
(3,368,047)
(20,229,972)
(35,349)
(1,860)
(37,209)
153,320
8,070
161,390
Total
$
(21,045,902)
$
7,594,316
$
7,334,740
A reconciliation of the differences between the effective rates and statutory rates is as follows:
Federal income tax at statutory rate
State and local income tax, net
Disqualifying dispositions
Other
Income taxes expense
2005
2004
2003
35.0%
4.1%
0.0%
0.0%
39.1%
35.0%
4.9%
-0.8%
-2.6%
36.5%
35.0%
6.5%
-
-2.9%
38.6%
The principal types of differences between assets and liabilities for financial statement and tax
return purposes are accruals, reserves, impairment of intangibles, accumulated amortization and
accumulated depreciation. A deferred tax asset is recorded for the future benefits created by the
timing of accruals and reserves and the application of different amortization lives for financial
statement and tax return purposes. A deferred tax liability is recorded for the future liability
created by different depreciation methods for financial statement and tax return purposes.
76
As of June 30, 2005 and 2004, temporary differences which give rise to deferred tax assets and
liabilities are as follows:
Deferred tax assets:
Accrued expenses
Reserves for Accounts Receivable and Inventory
Intangible impairment
State net operating loss
Accumulated Amortization on Intangible Asset
Valuation allowance
Total
Deferred tax liabilities:
Prepaid Expenses
Property, Plant and Equipment
2005
2004
$
14,069
3,109,884
17,976,270
158,517
475,512
21,734,252
-
21,734,252
103,479
1,906,103
$
7,020
935,669
166,332
1,109,021
-
1,109,021
1,614,323
Net Deferred Tax Asset/(Liability)
$
19,724,670
$
(505,302)
Note 8. Earnings Per Share
Earnings per Common Share – SFAS No. 128, Earnings Per Share, requires a dual presentation
of basic and diluted earnings per share on the face of the Company's consolidated statement of
income and a reconciliation of the computation of basic earnings per share to diluted earnings
per share. Basic earnings per share excludes the dilutive impact of common stock equivalents
and is computed by dividing net income by the weighted-average number of shares of common
stock outstanding for the period. Diluted earnings per share includes the effect of potential
dilution from the exercise of outstanding common stock equivalents into common stock using
the treasury stock method. Earnings per share amounts for all periods presented have been
calculated in accordance with the requirements of SFAS No. 128. A reconciliation of the
Company's basic and diluted earnings per share follows:
77
2005
2004
2003
Net (Loss)/Income
Shares
Net Income
Shares
Net Income
Shares
(Numerator)
(Denominator)
(Numerator)
(Denominator)
(Numerator)
(Denominator)
$
(32,779,597)
24,097,472
$
13,215,454
20,831,750
$
11,666,887
19,968,633
222,194
152,681
$
(32,779,597)
24,097,472
$
13,215,454
21,053,944
$
11,666,887
20,121,314
$
(1.36)
$
0.63
$
0.58
$
(1.36)
$
0.63
$
0.58
Basic (loss)/earnings per
share factors
Effect of potentially dilutive
option plans
Diluted (loss)/earnings per
share factors
Basic (loss)/earnings per
share
Diluted (loss)/earnings per
share
Dilutive shares have been excluded in the weighted average shares used for the calculation of
earnings per share in periods of net loss because the effect of such securities would be anti-
dilutive. The number of anti-dilutive weighted average shares that have been excluded in the
computation of diluted earnings per share for the year ended June 30, 2005, 2004 and 2003 were
857,108, 178,500, and 0, respectively.
Note 9. Stock Options
In Fiscal 1993, the Company adopted the 1993 Long-Term Incentive Plan (the "1993 Plan").
Pursuant to the 1993 Plan and its amendments, employees and non-employees of the Company
may be granted stock options, which qualify as incentive stock options, as well as stock options
which are nonqualified. The exercise price of the options granted were at least equal to the fair
market value of the common stock on the date of grant. There were 2,000,000 shares originally
reserved for under the 1993 Plan. Of this amount, options for 390,419 shares were granted, and
were either exercised by the recipient, or are currently outstanding. Pursuant to the plan
provisions, the 1993 Plan terminated on February 13, 2003. No additional shares were granted
under this Plan after this date.
In February 2003, the Company adopted the 2003 Incentive Stock Option Plan (the “2003
Plan”). Pursuant to the 2003 Plan, employees and non-employees of the Company may be
granted stock options which may qualify as incentive stock options, as well as stock options
which are nonqualified. The exercise price of the incentive stock options is at least the fair
market value of the common stock on the date of grant. The exercise price of nonqualified
options may be above or below the fair market value of the common stock on the date of the
grant. The options generally vest over a three-year period and expire no later than 10 years from
the date of grant. There are 1,125,000 shares reserved for under the 2003 Plan. Of this amount,
options for 131,017 and 428,570 shares were granted in Fiscal 2005 and 2004, respectively, and
were either exercised by the recipient, or are currently outstanding. Options for 1,395,267 shares
remain available for grants under the Plan.
78
A summary of the status of the combined options for both the 1993 Plan and the 2003 Plan, as of
June 30, 2004 and 2003, and the changes during the years then ended is represented below:
2005
2004
2003
Weighted Avg.
Weighted Avg.
Shares
801,424
131,070
(19,126)
(56,260)
Exercise
Price
$
12.45
7.42
3.70
14.02
Shares
409,721
428,570
(36,867)
-
Exercise
Price
$
7.47
16.69
6.29
-
Weighted Avg.
Exercise
Price
$
0.94
7.82
1.26
3.74
Shares
151,860
398,820
(131,709)
(9,250)
Outstanding, beginning of year
Granted
Exercised
Terminated
Outstanding, end of year
857,108
$
13.72
801,424
$
12.45
409,721
$
7.47
Options exercisable at year-end
386,271
$
12.85
179,184
$
7.39
98,025
$
6.82
Weighted average fair value of options
granted during the year
$
7.23
$
8.75
$
6.48
Exercise
Price
Options Outstanding at June 30, 2005
Average
Average
Exercise Price
Life
# of
Shares
$0.75
$2.30
$4.63
$6.75
$6.75
$7.48
$7.97
$9.02
$10.99
$11.27
$18.72
$17.36
$16.86
$16.04
2,375
0
29,125
100,000
3,260
3,260
257,703
20,000
4,550
33,125
7,500
156,000
27,710
212,500
857,108
4.4
6.5
7.0
10.0
10.0
10.0
7.3
9.5
10.0
7.7
8.2
8.3
8.8
8.9
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.75
2.30
4.63
6.75
6.75
7.48
7.97
9.02
10.99
11.27
18.72
17.36
16.86
16.04
Options Exercisable at June 30, 2005
Average
Life
Average
Exercise Price
# of
Shares
2,375
0
19,417
0
0
0
187,617
6,667
0
33,125
5,000
52,000
9,237
70,833
386,271
4.4
6.5
7.0
10.0
10.0
10.0
7.3
9.5
10.0
8.7
8.2
8.3
8.8
8.9
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.75
2.30
4.63
6.75
6.75
7.48
7.97
9.02
10.99
11.27
18.72
17.36
16.86
16.04
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. Starting in the first quarter of Fiscal year
2006, the Company will account for stock options under SFAS no. 123R, “Share-Based
Payment”. For further discussion refer to Note 2, “New Accounting Standards”.
79
Note 10. Employee Stock Purchase Plan
In February 2003, the Company’s shareholders approved an Employee Stock Purchase Plan
(“ESPP”). Employees eligible to participate in the ESPP may purchase shares of the Company’s
stock at 85% of the lower of the fair market value of the common stock on the first day of the
calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can
authorize the Company to withhold up to 10% of their compensation during any quarterly
offering period, subject to certain limitations. The ESPP was implemented on April 1, 2003 and
is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized
an aggregate total of 1,125,000 shares of the Company’s common stock for issuance under the
ESPP. As of June 30, 2005, 29,293 shares have been issued under the ESPP.
Note 11. Employee Benefit Plan
The Company has a defined contribution 401k plan (the “Plan”) covering substantially all
employees. Pursuant to the Plan provisions, the Company is required to make matching
contributions equal to each employee's contribution, but not to exceed 3% of the employee’s
compensation for the Plan year. Contributions to the Plan during the years ended June 30, 2005,
2004 and 2003 were $246,000, $187,000 and $103,000, respectively.
Note 12. Contingencies
The Company monitors its compliance with all environmental laws. Any compliance costs
which may be incurred are contingent upon the results of future site monitoring and will be
charged to operations when incurred. No monitoring costs were incurred during the years ended
June 30, 2005, 2004 and 2003.
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. Due to
the fact that prior litigation established the “market share” method of prorating liability amongst
the companies that manufactured DES during the drug’s commercial distribution, which ended in
1971, management has accepted this method as the most reasonably expected method of
determining liability for future outcomes of claims. The Company was represented in many of
these actions by the insurance company with which the Company maintained coverage (subject
to limits of liability) during the time period that damages were alleged to have occurred. The
Company has either settled or had dismissed approximately 250 claims. An additional 283
claims are currently being defended. Prior settlements have been in the range of $500 to $3,500.
Management believes that the outcome will not have a material adverse impact on the
consolidated financial position or results of operations of the Company.
In 2004 and 2005, the Company entered into three, separate confidential agreements with
ThePharmaNetwork, LLC (TPN) pursuant to which the company agreed to collaborate to
develop, manufacture, supply, and commercialize a certain generic pharmaceutical drug product.
In August 2005, TPN filed a lawsuit against various defendants, including the Company,
seeking, among other things, to terminate the three agreements between the Company and TPN.
The matter is currently pending before the United States District Court for the District of New
Jersey. The Company has filed an answer denying the allegations. The Company has also filed
counterclaims against TPN and its principal, Jonathan B. Rome, for, among other things, breach
80
of contract. Because of the confidential nature of the agreements and the generic pharmaceutical
drug product at issue, the Company has requested that the Court place all documents under seal
to prevent the wrongful disclosure of the Company’s sensitive, confidential, and proprietary
information. The Company's request for a temporary restraining order was granted. As a result,
TPN is temporarily restrained from competing against Lannett or collaborating with Lannett's
competitors with respect to the drug product at issue. TPN is also temporarily restrained from
using, disclosing or disseminating any confidential information about this drug product until
after the hearing on the preliminary injunction, which is scheduled for Sept. 14, 2005.
TPN received a temporary restraining order prohibiting Lannett from disclosing TPN's
"confidential information" until after the preliminary injunction hearing on Sept. 14, 2005. 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 litigation will not have a material adverse impact
on the financial position or results of operation of the Company.
In addition to the matters reported herein, the Company is involved in litigation which arises in
the normal course of business. In the opinion of management, the resolution of these lawsuits
will not have a material adverse effect on the consolidated financial position or results of
operations.
Note 13. Commitments
Leases
The Company’s headquarters, administrative offices, quality control laboratory, and manufacturing
and production facilities, consisting of approximately 31,000 square feet, are located at 9000 State
Road, Philadelphia, Pennsylvania.
In December 1997, the Company entered into a three-year and three-month lease for a 23,500 square
foot facility located at 500 State Road, Bensalem Bucks County, Pennsylvania. This facility houses
laboratory research, warehousing and distribution operations. The leased facility is located
approximately 2 miles from the Company headquarters. In January 2001, the Company extended
this lease through April 30, 2004. After that time, the Company renewed the lease again through
April 30, 2005. The move to 9001 Torresdale Ave, Philadelphia, PA was completed in January
2005.
On July 1, 2003, the Company entered into a lease/purchase option agreement for a 63,000 square
foot facility at 9001 Torresdale Avenue, Philadelphia, Pennsylvania, approximately 1 mile from the
Company’s headquarters. On November 26, 2003, the Company exercised its option to purchase the
facility. The Company’s laboratory research, warehousing and distribution operations, sales and
accounting departments are now housed there. The Company no longer utilizes nor has any lease
obligations to the 500 State Road facility.
In addition to the above, the Company has operating leases, expiring in 2008, for office equipment.
Future minimum lease payments under these agreements are as follows:
Year ended June 30,
2006
2007
2008
Total
Amount
$ 30,132
30,132
30,132
$ 90,396
81
Rental expense for the years ended June 30, 2005, 2004 and 2003 was approximately 50,000,
$321,000 and $138,000, respectively.
Employment Agreements
The Company has entered into employment agreements with Arthur Bedrosian, Brian Kearns, Kevin
Smith and Bernard Sandiford (the “Named Executives”). Each of the agreements provide for an
annual base salary and eligibility to receive a bonus. The salary and bonus amounts of the Named
Executives are determined by the Board of Directors. Additionally, the Named Executives are
eligible to receive stock options, which are granted at the discretion of the Board of Directors, and in
accordance with the Company’s policies regarding stock option grants.
Under the agreements, the Named Executive employees may be terminated at any time with or
without cause, or by reason of death or disability. In certain termination situations, the Company is
liable to pay severance compensation to the Named Executive of between one year and three years.
Note 14. Related Party Transactions
The Company had sales of approximately $590,000, $590,000 and $348,000 during the years
ended June 30, 2005, 2004 and 2003, respectively, to a generic distributor, Auburn
Pharmaceutical Company (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. Accounts receivable includes amounts due from the related party of approximately
$179,000, and $117,000 at June 30, 2005 and 2004, 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
through January 13, 2005, was employed by two insurance brokerage companies (the “Insurance
Brokers”) that provide insurance agency services to the Company. The Company paid
approximately $732,200, $499,000 and $28,000 during Fiscal 2005, 2004 and 2003,
respectively, to the Insurance Companies for various insurance coverage policies. There was
approximately $17,200 and $9,400 due to the Insurance Companies as of June 30, 2005 and
2004, 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.
In January 2005, Lannett Holdings, Inc. entered into an agreement pursuant which it purchased
for $100,000 and future royalty payments the proprietary rights to manufacture and distribute a
product for which Pharmeral, Inc. owns the ANDA. This agreement is subject to Lannett
Holdings, Inc’s ability to obtain FDA approval to use the proprietary rights. In the event that
such FDA approval cannot be obtained, Pharmeral, Inc. must repay the $100,000 to Lannett
Holdings, Inc. Accordingly, the Company has treated this payment as a prepaid asset. Arthur
Bedrosian, President of Lannett, was formerly the President and Chief Executive Officer and
currently owns 100% of Pharmeral, Inc. This transaction was approved by the Board of
Directors of Lannett and, in its opinion, the terms were not more favorable to the related party
than they would have been to a non-related party.
82
Note 15. Material Contract with Supplier
The Company’s primary finished product inventory supplier is Jerome Stevens Pharmaceuticals, Inc.
(JSP), in Bohemia, New York. Purchases of finished goods inventory from JSP accounted for
approximately 62% of the Company’s inventory purchases in Fiscal 2005, 81% in Fiscal 2004 and
62% in Fiscal 2003. On March 23, 2004, the Company entered into an agreement with 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. The JSP products covered under
the agreement included Butalbital, Aspirin, Caffeine with Codeine Phosphate capsules, Digoxin
tablets and Levothyroxine Sodium tablets, sold generically and under the brand name Unithroid®.
The term of the agreement is ten years, beginning on March 23, 2004 and continuing through
March 22, 2014. Both Lannett and JSP have the right to terminate the contract if one of the
parties does not cure a material breach of the contract within thirty (30) days of notice from the
non-breaching party.
During the term of the agreement, the Company is required to use commercially reasonable
efforts to purchase minimum dollar quantities of JSP’s products being distributed by the
Company. The minimum quantity to be purchased in the first year of the agreement is $15
million. Thereafter, the minimum quantity to be purchased increases by $1 million per year up
to $24 million for the last year of the ten-year contract. The Company has met the minimum
purchase requirement for the first year of the contract, but there is no guarantee that the
Company will be able to continue to do so in the future. If the Company does not meet the
minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.
Under the agreement, JSP is entitled to nominate one person to serve on the Company’s Board of
Directors (the “Board”) provided, however, that the Board shall have the right to reasonably
approve any such nominee in order to fulfill its fiduciary duty by ascertaining that such person is
suitable for membership on the board of a publicly traded corporation. Suitability is determined
by, but not limited to, the requirements of the Securities and Exchange Commission, the
American Stock Exchange, and other applicable laws, including the Sarbanes-Oxley Act of
2002. As of June 30, 2005, JSP has not exercised the nomination provision of the agreement.
The agreement was included as an Exhibit in the Current Report on Form 8-K filed by the
Company on May 5, 2004, as subsequently amended.
Management determined that the intangible product rights asset created by this agreement was
impaired as of March 31, 2005. Refer to Note 1 – intangible assets for additional disclosure and
discussion of this impairment.
83
Note 16. Unearned Grant Funds
In July 2004, the Company received $500,000 of grant funding from the Commonwealth of
Pennsylvania, acting through the Department of Community and Economic Development. The
grant funding program requires the Company to use the funds for machinery and equipment located
at their Pennsylvania locations, hire an additional 100 full-time employees by June 30, 2006, operate
its Pennsylvania locations a minimum of five years and meet certain matching investment
requirements. If the Company fails to comply with any of the requirements above, the Company
would be liable to repay the full amount of the grant funding ($500,000). The Company records the
unearned grant funds as a liability until the Company complies with all of the requirements of the
grant funding program. On a quarterly basis, the Company will monitor its progress in fulfilling the
requirements of the grant funding program and will determine the status of the liability. As of June
30, 2005, the Company has recognized the grant funding as a short term liability under the caption of
Unearned Grant Funds.
Note 17. Investment Securities - Available-for-Sale
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s available-
for-sale securities as of June 30, 2005 are summarized as follows (there were no investment
securities as of June 30, 2004):
Available for Sale Securities
June 30, 2005
U.S. Government Treasury
U.S. Government Agency
Mortgage-Backed Securities
Asset-Backed Securities
Amortized
Cost
$
-
6,582,022
363,429
985,245
7,930,696
$
Gross
Unrealized
Gains
$
-
8,970
-
5,361
14,331
$
Gross
Unrealized
Losses
-
$
(35,794)
(10,105)
(10,421)
(56,320)
$
Fair Value
$
-
6,555,198
353,324
980,185
7,888,708
$
The amortized cost and fair value of the Company’s current available-for-sale securities by
contractual maturity at June 30, 2005 are summarized as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
June 30, 2005
Available for Sale
Amortized
Cost
$
-
5,136,208
791,760
2,002,728
7,930,696
$
Fair
Value
-
$
5,115,807
792,426
1,980,475
7,888,708
$
The Company uses the specific identification method to determine the cost of securities sold. For the
year ended June 30, 2005, the Company had realized losses of $1,466. There were no realized losses
for the year ended June 30, 2004.
84
There were no securities held from a single issuer that represented more than 10% of shareholders’
equity. The Company adopted Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other than Temporary Impairment and Its Application to Certain Investments as of June 30, 2004.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for
investment securities accounted for under Statement of Financial Accounting Standards No. 115
(FAS 115), Accounting for Certain Investments in Debt and Equity Securities, that are impaired at
the balance sheet date, but an other-than temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for financial statements for years ending after December
15, 2003 and are included in these financial statements.
The table below indicates the length of time individual securities have been in a continuous
unrealized loss position as of June 30, 2005:
Description of
Securities
Number of
Securities
Less than 12 months
Fair
Value
Unrealized
Loss
12 months or longer
Fair
Value
Unrealized
Loss
Total
Fair
Value
Unrealized
Loss
U.S. Government Agency
Mortgage-Backed Securities
Asset-Backed Securities
Total temporarily impaired
investment securities
26
3
7
$
4,272,375
353,325
316,619
$
(35,794)
(10,105)
(10,421)
-
$
-
-
-
$
-
-
$
4,272,375
353,325
316,619
$
(35,794)
(10,105)
(10,421)
36
$
4,942,319
$
(56,320)
$ - $ -
$
4,942,319
$
(56,320)
There were no securities determined by management to be other-than-temporarily impaired for
the year ended June 30, 2005.
Note 18. Comprehensive Income
The Company’s other comprehensive loss is comprised of unrealized losses on investment securities
classified as available-for-sale. The components of comprehensive income and related taxes
consisted of the following as of June 30, 2005 and 2004:
COMPREHENSIVE (LOSS) INCOME
For Year Ended:
Other Comprehensive Loss:
Unrealized Holding Loss on Securities
Add: Tax savings at effective rate
6/30/2005
6/30/2004
$
(41,989)
16,796
-
$
-
Total Unrealized Loss on Securities, Net
(25,193)
Total Other Comprehensive Loss
Net (Loss) Income
(25,193)
(32,779,596)
-
-
13,215,454
Total Comprehensive (Loss) Income
$
(32,804,789)
$
13,215,454
There were no items of other comprehensive income in Fiscal years 2004 and 2003.
85
Note 19. Subsequent Event
In August 2005, the Company loaned $2 million to an active pharmaceutical ingredient (API)
supplier. Terms of the loan included an initial annual interest rate of 10%, payable interest only
on an annual basis for the first three years of the loan. The loan then converts to an interest rate
of Prime rate plus 500 basis points for monthly payments for year four, when the remaining
interest and entire principal amount is scheduled to be paid down. The Company received
warrants associated with this loan that may be exercised at a future date. The Company also
purchased shares of this API supplier from one of the founding partners for $500,000 cash. This
founding partner has an option to buy back these shares at any time over the next 30 months for
$600,000. The combined total of the shares associated with the warrants and the equity purchase
represents a minority position in this API supplier.
Note 20. Quarterly Financial Information (unaudited)
Lannett’s unaudited quarterly consolidated results of operations and market price information are
shown below:
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fiscal Year 2005
Net Sales
Cost of Goods Sold
Gross Profit
Other Operating Expenses
Operating Income
Other Expense
Income Taxes
Net (Loss) Income
Basic (Loss) Earnings Per Share
Diluted (Loss) Earnings Per Share
Fiscal Year 2004
Net Sales
Cost of Goods Sold
Gross Profit
Other Operating Expenses
Operating Income
Other Income/(Expense)
Income Taxes
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,368,438
12,443,756
(3,075,318)
5,620,448
(8,695,766)
40,145
(3,010,067)
(5,725,844)
(0.24)
(0.24)
17,985,581
8,451,582
9,533,999
6,412,636
3,121,363
(25,119)
336,120
2,760,124
0.12
0.12
7,603,189
4,266,839
3,336,350
51,888,438
(48,552,088)
45,194
(19,438,914)
(29,158,368)
(1.21)
(1.21)
16,000,251
6,947,195
9,053,056
3,638,461
5,414,595
1,632
2,217,829
3,198,398
0.16
0.16
12,918,522
7,085,479
5,833,043
4,466,319
1,366,724
54,326
524,921
787,477
0.03
0.03
16,573,601
6,660,845
9,912,756
3,429,246
6,483,510
10,404
2,661,367
3,832,547
0.19
0.19
15,011,496
7,620,834
7,390,662
5,149,190
2,241,472
46,175
878,156
1,317,141
0.05
0.05
13,221,786
4,797,253
8,424,533
2,613,032
5,811,501
(8,116)
2,379,000
3,424,385
0.17
0.17
$
$
$
$
$
$
$
$
86
Fiscal Year 2003
Net Sales
Cost of Goods Sold
Gross Profit
Other Operating Expenses
Operating Income
Other Expense
Income Taxes
Net Income
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
12,157,035
4,479,690
7,677,345
2,156,995
5,520,350
17,244
2,406,418
$
11,019,906
3,976,519
7,043,387
1,869,699
5,173,688
3,974
1,914,081
$
10,183,161
3,965,474
6,217,687
1,791,829
4,425,858
13,321
1,649,624
$
9,126,656
3,836,110
5,290,546
1,350,336
3,940,210
23,940
1,364,617
3,096,688
3,255,633
2,762,913
2,551,653
Basic Earnings Per Share
Diluted Earnings Per Share
$
$
0.15
0.15
$
$
0.16
0.16
$
$
0.14
0.14
$
$
0.13
0.13
87
Exhibit 11
Computation of Earnings Per Share
Lannett Company, Inc. and Subsidiaries
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
2005
2004
2003
Net (Loss)/Income
(Numerator)
Shares
(Denominator)
Net Income
(Numerator)
Shares
(Denominator)
Net Income
(Numerator)
Shares
(Denominator)
$
(32,779,597)
24,097,472
$
13,215,454
20,831,750
$
11,666,887
19,968,633
$
(32,779,597)
24,191,578
$
13,215,454
21,053,944
$
11,666,887
20,121,314
222,194
152,681
$
(1.36)
$
0.63
$
0.58
$
(1.36)
$
0.63
$
0.58
Basic (loss)/earnings per
share factors
Effect of potentially
dilutive option plan
share factors
Basic (loss)/earnings per
share
Diluted (loss)/earnings per
share
Dilutive shares have been excluded in the weighted average shares used for the calculation of
earnings per share in periods of net loss because the effect of such securities would be anti-
dilutive. The number of anti-dilutive weighted average shares that have been excluded in the
computation of diluted earnings per share for the year ended June 30, 2005, 2004 and 2003 were
857,108, 178,500, and 0, respectively.
88
Exhibit 33
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated September 1, 2005 accompanying the consolidated financial statements and
management's assessment of the effectiveness of internal control over financial reporting included in the
Annual Report of Lannett Company, Inc. and Subsidiaries on Form 10-K for the year ended June 30, 2005.
We hereby consent to the inclusion of said reports in the Registration Statement of Lannett Company, Inc.
and Subsidiaries on Form S-3 (File No. 333-115746, effective May 21, 2004) and on Form S-8 (File No. 33-
79258, effective May 23, 1994, File No. 001-31298, effective April 9, 2002, File No. 33-103235, effective
February 14, 2003, and File No. 33-103236, effective February 14, 2003).
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
September 1, 2005
89
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COMPANY PROFILE
Lannett Company, Inc. (AMEX: LCI) develops,
manufactures and distributes a line of prescription
drug products in tablet, capsule and oral liquid
forms to customers throughout the United States.
MANAGEMENT TEAM AND DIRECTORS
CORPORATE INFORMATION
Arthur P. Bedrosian
President, Chief Executive Officer, Director
Brian Kearns
Chief Financial Officer, Vice President—
Finance, Treasurer, Secretary
Bernard Sandiford
Vice President—Operations
William Schreck
Vice President—Logistics
Kevin Smith
Vice President—Sales & Marketing
William Farber
Chairman of the Board
Ronald West
Director, Vice Chairman
Garnet Peck
Director
Kenneth Sinclair
Director
Albert Wertheimer
Director
Myron Winkelman
Director
Executive Offices
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
Mailing Address
9000 State Road
Philadelphia, PA 19136
Registrar and Transfer Company
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Legal Counsel
Fox, Rothschild, O’Brien & Frankel, LLP
Philadelphia, PA
Inquiries
Communications concerning stock transfer
requirements, lost certificates or change of
address should be addressed to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Annual Report and Form 10-K
Additional copies of this annual report
and the Company’s Form 10-K may be
obtained without charge and the exhibits
to the Form 10-K may be obtained for a
nominal fee by writing to:
Lannett Company, Inc.
Investor Relations
9000 State Road
Philadelphia, PA 19136
From Left to Right:
Ron West, Director, Dr. Kenneth P. Sinclair, Director, Dr. Albert Wertheimer,
Director, Myron Winkelman, Director, Dr. Garnet Peck, Director and
William Farber, R. PH., Chairman of the Board
2 0 0 5
A N N U A L
R E P O R T
Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
(215) 333-9000, (800) 325-9994
Fax (215) 333-9004
P R O D U C I N G & D I S T R I B U T I N G O U R O W N L I N E O F H I G H Q U A L I T Y P H A R M A C E U T I C A L P R O D U C T S