UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1998.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO ____________.
Commission File No. 0-9036
LANNETT COMPANY, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
State of Delaware 23-0787-699
(State of Incorporation) (I.R.S. Employer I.D. No.)
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No_____
As of May 6, 1998, there were 5,206,128 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 19 pages
Exhibit Index on Page 15
<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and
June 30, 1997............................................3
Consolidated Statements of Operations
for the three months and nine months
ended March 31, 1998
and 1997 (unaudited).....................................4
Consolidated Statements of Cash Flows
for the nine months ended March 31, 1998
and 1997 (unaudited).....................................5
Notes to Consolidated Financial
Statements (unaudited)...................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................13
Item 5. Other Information.........................................13
Item 6. Exhibits and Reports on Form 8-K..........................13
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 03/31/98 06/30/97
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash $ 20,473 $ 15,509
Trade accounts receivable (net of
allowance of $59,000 and $20,000
at March 31, 1998 and June 30, 1997,
respectively) 1,442,834 1,007,902
Inventories 1,661,002 1,418,440
Prepaid expenses 50,406 46,523
----------- -----------
Total current assets 3,174,715 2,488,374
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 5,478,077 3,782,324
Less accumulated depreciation (1,406,056) (1,165,891)
----------- -----------
Net 4,072,021 2,616,433
----------- -----------
OTHER ASSETS 61,891 5,425
----------- -----------
Total assets $ 7,308,627 $ 5,110,232
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Line of credit $ 1,000,000 $ 1,323,688
Current maturities of long-term debt 391,261 107,238
Note payable and accrued interest - shareholder 2,519,000 --
Accounts payable 588,328 549,069
Accrued interest payable - shareholder 292,759 162,181
Accrued liabilities 137,302 251,524
----------- -----------
Total current liabilities 4,928,650 2,393,700
----------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,416,852 522,421
----------- -----------
NOTE PAYABLE AND ACCRUED INTEREST - SHAREHOLDER -- 2,353,500
----------- -----------
LINE OF CREDIT AND ACCRUED INTEREST - SHAREHOLDER 4,633,543 4,533,670
----------- -----------
SHAREHOLDERS' DEFICIENCY
Common stock,
50,000,000 shares authorized, par value
$.001; 5,206,128 shares
issued and outstanding 5,206 5,206
Additional paid-in capital 320,575 320,575
Accumulated deficit (3,996,199) (5,018,840)
----------- -----------
Total shareholders' deficiency (3,670,418) (4,693,059)
----------- -----------
Total liabilities and shareholders'
deficiency $ 7,308,627 $ 5,110,232
=========== ===========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
03/31/98 03/31/97 03/31/98 03/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 2,690,126 $ 1,139,634 $ 7,633,506 $ 2,788,749
COST OF SALES 1,853,313 628,755 4,818,160 1,646,587
------------ ------------ ------------ ------------
Gross profit 836,813 510,879 2,815,346 1,142,162
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 366,156 324,117 1,204,006 859,257
------------ ------------ ------------ ------------
Operating profit 470,657 186,762 1,611,340 282,905
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET
Other 4,035 -- 9,432 (1,899)
Interest expense (203,753) (161,461) (598,131) (480,760)
------------ ------------ ------------ ------------
(199,718) (161,461) (588,699) (482,659)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 270,939 $ 25,301 $ 1,022,641 $ (199,754)
============ ============ ============ ============
BASIC INCOME (LOSS) PER SHARE $ 0.05 $ -- $ 0.20 $ (0.04)
DILUTED INCOME PER SHARE $ 0.02 $ -- $ 0.07 $ --
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 5,206,128 5,206,128 5,206,128 5,206,128
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 15,282,128 14,666,128 15,282,128 14,666,128
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
03/31/98 03/31/97
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,022,641 $ (199,754)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 247,314 152,020
Increase in trade accounts receivable (434,932) (105,764)
Increase in inventories (242,562) (347,777)
Increase in prepaid expenses and other assets (63,167) (12,382)
Increase in accounts payable 39,259 65,647
Decrease in accrued liabilities (114,222) (68,867)
Increase in accrued interest 345,951 375,548
----------- -----------
Net cash provided by (used in)
operating activities 800,282 (141,329)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,700,084) (364,833)
----------- -----------
Net cash used in investing activities (1,700,084) (364,833)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit - shareholder 50,000 50,000
Proceeds from debt 1,004,885 530,301
Repayments of debt (150,119) (40,371)
----------- -----------
Net cash provided by financing activities 904,766 539,930
----------- -----------
NET INCREASE IN CASH 4,964 33,768
CASH, BEGINNING OF PERIOD 15,509 25,258
----------- -----------
CASH, END OF PERIOD $ 20,473 $ 59,026
=========== ===========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements
</TABLE>
5
<PAGE>
LANNETT COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and the results of operations and cash flows.
The results of operations for the nine months ended March 31, 1998 and
1997 are not necessarily indicative of results for the full year.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1997.
Note 2.
On December 15, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No.128, "Earnings Per Share". SFAS
128 eliminates the primary and fully diluted earnings per share and
requires the presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings. Basic earnings per share excludes the dilution and is computed
by dividing income available to common shareholders by the weighted
average number of shares outstanding during the period. Dilutive earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and
converted into common stock. Prior periods income (loss) per share
calculations have been restated to reflect the adoption of SFAS No. 128.
Note 3.
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
Raw materials $ 537,013 $ 515,279
Work-in-process 702,867 505,563
Finished goods 245,862 281,315
Packaging supplies 175,260 116,283
---------- ----------
$1,661,002 $1,418,440
========== ==========
</TABLE>
Note 4.
The 1998 provision for federal income taxes was eliminated by the application
of tax benefits of net operating loss carryforwards.
6
<PAGE>
Note 5.
Two customers accounted for approximately 33% and 32%, respectively, of net
sales for the nine month period ended March 31, 1998. Three customers
accounted for approximately 22%, 13%, and 11%, respectively, of net sales for
the nine month period ended March 31, 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations.
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity
presented in its accompanying consolidated financial statements. This
discussion should be read in conjunction with the 1997 Annual Report. Current
performance does not guarantee, assure, or may not be indicative of similar
performance in the future.
In addition to historical information, this Form 10-QSB contains
forward-looking information. The forward-looking information contained herein
is subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Results of Operations and Financial Condition." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publically revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
decribed in other documents the Corporation files from time to time with the
Securities and Exchange Commission, including the Quarterly reports on Form
10-QSB to be filed by the Corporation in Fiscal 1998, and any Current Reports
on Form 8-K filed by the corporation.
Three months ended March 31, 1998 compared with three months ended March 31,
1997
Net sales for the three months ended March 31, 1998 (Third Quarter
Fiscal 1998) increased by 136% to $2,690,126 from net sales of $1,139,634 for
the three months ended March 31, 1997 (Third Quarter Fiscal 1997). Sales
increased during Third Quarter Fiscal 1998 due to increased sales of the
Company's products through additional private label supply agreements and
increased contract manufacturing.
Cost of sales increased by 195%, to $1,853,313 in Third Quarter
Fiscal 1998 from $628,755 in Third Quarter Fiscal 1997. The cost of sales
increase is a result of the increase in sales over Third Quarter Fiscal 1997
as well as an increase in personnel and related costs. Gross profit margins
for Third Quarter Fiscal 1998 and Third Quarter Fiscal 1997 were 31% and 45%,
respectively. The decrease in the gross profit percentage is primarily due to
the variance in the sales mix and an increase in contract manufacturing with
lower gross margins.
Selling, general and administrative expenses increased by 13% to
$366,156 in Third Quarter Fiscal 1998 from $324,117 in Third Quarter Fiscal
1997. This increase is due to increases in research and development costs and
increases in various administration costs as a result of the growth of the
Company during Third Quarter Fiscal 1998.
As a result of the foregoing, the Company reported an operating
profit of $470,657 for Third Quarter Fiscal 1998, as compared to an operating
profit of $186,762 for Third Quarter Fiscal 1997.
The Company's interest expense increased to $203,753 in Third
Quarter Fiscal 1998 from $161,461 in Third Quarter Fiscal 1997 primarily due
to increased borrowings on the Company's lines of credit and term loans. See
Liquidity and Capital Resources below.
The Company reported net income of $270,939 for Third Quarter Fiscal 1998,
$0.05 basic income per share, $0.02 on a diluted basis, compared to net
income of $25,301 for Third Quarter Fiscal 1997, ($0.00 earnings per share).
8
<PAGE>
Nine months ended March 31, 1998 compared with nine months ended March 31,
1997
Net sales for the nine months ended March 31, 1998 increased by 174%
to $7,633,506 from net sales of $2,788,749 for the nine months ended March
31, 1997. Sales increased during the nine months ended March 31, 1998 due to
increased sales of the Company's products through additional private label
supply agreements and increased contract manufacturing.
Cost of sales increased by 193%, to $4,818,160 for the nine months
ended March 31, 1998 from $1,646,587 for the nine months ended March 31,
1997. The cost of sales increase is due primarily to the increase in sales as
well as an increase in personnel and related costs. Gross profit margins for
the nine months ended March 31, 1998 and March 31, 1997 were 37% and 41%,
respectively. The decrease in the gross profit percentage is primarily due to
the variance in the sales mix and increased contract manufacturing with lower
gross profit margins.
Selling, general and administrative expenses increased by 40% to
$1,204,006 for the nine months ended March 31, 1998 from $859,257 for the
nine months ended March 31, 1997. This increase is due to increases in
overall administrative costs associated with the growth of the Company during
the nine months ended March 31, 1998.
As a result of the foregoing, the Company reported an operating
profit of $1,611,340 for the nine months ended March 31, 1998, as compared to
an operating profit of $282,905 for the nine months ended March 31, 1997.
The Company's interest expense increased to $598,131 in the nine
months ended March 31, 1998 from $480,760 in the nine months ended March 31,
1997, primarily due to increased borrowings on the Company's lines of credit
and term loans. See Liquidity and Capital Resources below.
The Company reported net income of $1,022,641 for the nine months
ended March 31, 1998, $0.20 basic income per share; $0.07 on a diluted basis,
compared to a net loss of $199,754, or $0.04 basic loss per share, for the
nine months ended March 31, 1997.
Liquidity and Capital Resources -
The Company generated $800,282 and used $141,329 of cash in
operations during the nine months ended March 31, 1998 and 1997,
respectively. Net cash generated from operations increased during the nine
months ended March 31, 1998 as compared to the nine months ended March 31,
1997 as a result of higher net income. Accounts receivable increased as a
result of increased sales levels during the nine months ended March 31, 1998
offset partially by a higher accounts receivable turnover. Inventory levels
increased to support anticipated continued increases in sales levels. Other
assets increased due to deposits being made on equipment and deposits on a
leased facility. Accrued expenses decreased due to litigation settlement
costs previously accrued being paid. Accrued interest increased as a result
of payments on the shareholder deferred interest becoming current.
The Company expended $1,700,084 for property, plant and equipment
during the nine months ended March 31, 1998 compared to $364,833 expended
during the nine months ended March 31, 1997. The Company has budgeted for an
additional $300,000 in capital expenditures in Fiscal 1998 and is currently
negotiating to obtain the necessary financing. The increase in capital
expenditures and anticipated additional capital expenditure requirements are
necessary to support the growth from the contract manufacturing and private
label supply agreements, and to support new product introductions.
Net cash provided by financing activities increased to $904,766
during the nine months ended March
9
<PAGE>
31, 1998 from $539,930 provided by financing activities during the nine
months ended March 31, 1997. This increase in cash provided by financing
activities was primarily used to finance capital expenditures.
As a result of the foregoing, the Company experienced a $4,964
increase in cash available from the beginning to the end of the nine months
ended March 31, 1998, resulting in $20,473 cash available at the end of the
Third Quarter Fiscal 1998.
Except as set forth in this report, the Company is not aware of any
known trends, events or uncertainties that have or are reasonably likely to
have a material impact on the Company's net sales or income from continuing
operations.
From Fiscal 1987 through Fiscal 1994, the Company incurred operating
losses and suffered cash flow restraints. The Company suspended manufacturing
operations from August 1991 through October 1992. The Company obtained the
needed capital to renovate its manufacturing facility, to acquire new
equipment, to remove hazardous waste materials, to retain new management and
to provide working capital, primarily from a financing facility made
available to the Company by William Farber, a principal shareholder and
Chairman of the Board of Directors, in August 1991.
This financing facility originally consisted of a $2,000,000
revolving line of credit ("shareholder line of credit") and a $2,000,000 9%
convertible debenture ("shareholder debenture"). The shareholder line of
credit and the shareholder debenture are secured by substantially all of the
Company's assets and are subordinated to the bank lines of credit, term loans
and mortgage term loan payable. In March 1993, at the Company's request,
William Farber increased the aggregate credit available under the shareholder
line of credit to $3,500,000. The Company requested the additional financing
to provide working capital while the Company reformulated products and
obtained supplemental approvals from the FDA. During First Quarter Fiscal
1998, the Company increased the aggregate credit available under the
shareholder line of credit to $4,250,000. The Company requested the
additional financing to finance equipment purchases and to provide working
capital to support anticipated growth.
The shareholder line of credit bears interest at the prime rate
published by Michigan National Bank plus 1% per annum. The principal is due
October 1, 1999. Accrued interest from April 1, 1995 to June 30, 1996 is
payable in equal monthly installments of $17,530 commencing January 15,
1998 and continuing on the fifteenth day of each month thereafter with the
balance due October 1, 1999. Accrued interest from July 1, 1996 to June 30,
1997 is payable in equal monthly installments of $14,297, commencing July
15, 1998 and continuing on the fifteenth day of each month thereafter, with
the balance due October 1, 1999. Interest accrued on the outstanding
principal balance from and after July 1, 1997 is payable in equal monthly
installments, commencing July 15, 1998 and continuing on the fifteenth day of
each month thereafter with the balance due October 31, 1999. At March 31,
1998 accrued interest was approximately $1,001,000 of which $709,000 is
included in the long-term outstanding balance. At March 31, 1998 $292,000 was
classified as currently due. At March 31, 1998 there was $325,000 available
under the shareholder line of credit.
The shareholder debenture bears interest at 9% per annum. The
shareholder debenture is due December 23, 1998. The shareholder debenture and
accrued interest is convertible at any time prior to payment in full at the
conversion rate of 4,000 shares of common stock for each $1,000 of
outstanding indebtedness (adjusted for the Company's 4 for 1 stock splits in
April 1992 and March 1993). Accrued interest from April 1, 1995 to June 30,
1996 is payable in equal monthly installments of $9,500, commencing January
15, 1998 and continuing on the fifteenth day of each month thereafter with
the balance due December 23, 1998. Accrued interest from July 1, 1996 to June
30, 1997 is payable in equal monthly installments of $7,604, commencing
July 15, 1998 and continuing on the fifteenth day of each month thereafter,
with the balance due December 23, 1998. Interest accrued on the outstanding
principal balance from and after July 1, 1997 is payable in equal monthly
installments, commencing July 15, 1998 and continuing on the fifteenth day of
each month thereafter with the balance due December 23, 1998. At March 31,
1998 accrued interest was $519,000 and was classified as currently due.
10
<PAGE>
Management expects to have sufficient operating income during Fiscal
1998 to make the required monthly interest payments.
In May 1993, the Company obtained a $500,000 mortgage term loan from
a Bank that provides for monthly principal installments of approximately
$2,800 plus interest at 9.25% per annum. A final balloon payment of $302,778
is due in May 2000. The Company has a $1,250,000 line of credit from the Bank
that bears interest at prime plus 1.25% per annum. The line of credit is
limited to 80% of qualified accounts receivable and 50% of finished goods
inventory. At March 31, 1998, $250,000 was available under the line of
credit. Both loans are secured by substantially all of the Company's assets
and the mortgage term loan is guaranteed by Mr. Farber, who has subordinated
his loans to the Company to those of the Bank.
On July 31, 1995, the Company secured a $300,000 bank revolving line
of credit for equipment financing. Advances are limited to 80% of equipment
costs. On April 1, 1996, $93,881 of borrowings under this line were converted
into a secured term loan payable in forty-eight equal monthly installments.
This term loan bears interest at 8.85% per annum. On April 1, 1997, $206,119
of borrowings under this line of credit and an additional $3,101 advance was
converted into a secured term loan payable in forty-eight even monthly
installments. This term loan of $209,220 bears interest at prime plus 1.5%.
At March 31, 1998, there was no availability under the revolving line of
credit for equipment financing. The term loan is collateralized by all of the
Company's present and future equipment. It is also cross-collateralized with
the bank mortgage term loan payable and the line of credit.
On March 20, 1997, the Company secured a $350,000 bank revolving
line of credit for equipment financing expiring July 1, 1997. Advances are
limited to 80% of equipment costs. The line of credit bears interest at prime
plus 1.5%. On December 10, 1997, $323,688 of borrowings under this line of
credit were converted into a secured term loan payable in forty-eight equal
monthly installments. This term loan of $323,688 bears interest at 8.5% per
annum and is collateralized by all of the Company's present and future
equipment. It is also cross-collateralized with the bank mortgage term loan
payable and the line of credit.
On September 24, 1997, the Company secured a $400,000 term loan to
be used to purchase certain specified equipment. The term loan is payable in
59 equal monthly installments of principal and interest with a final payment
of all outstanding principal and interest due in the 60th month. This term
loan bears interest at 8.9% per annum and is collateralized by all equipment
purchased under the facility and cross-collateralized by all of the Company's
present and future equipment.
On December 10, 1997, the Company secured a $615,000 term loan to be
used to purchase certain specific equipment. The term loan is payable in 59
equal monthly installments of principal and interest with a final payment of
all outstanding principal and interest due in the 60th month. This term loan
bears interest at 8.5% per annum and is collateralized by equipment purchased
under the facility. It is also cross-collateralized with the bank mortgage
term loan payable and the line of credit.
Management currently believes the balances available under the
Company's existing lines of credit and working capital generated by increased
sales activity will be adequate to fund the Company's working capital
requirements under current sales conditions. The introduction of new
products, increased research and development activities, increased sales from
contract manufacturing and anticipated capital expenditures, will result in
the Company having to increase its lines of credit to provide the necessary
working capital and capital expenditure financing to support the Company's
growth. The Company is currently negotiating with the bank to further
increase its borrowing capacity.
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 impact on the Company's short-term or long-term liquidity or
financial condition.
Prospects for the Future
11
<PAGE>
As of March 31, 1998, the Company was manufacturing and marketing
three products, BCC, Primidone, and Dicyclomine. Ten additional products are
under development at this time. Five of these products are being developed
and manufactured for other companies, while the other five products are being
developed as part of the Lannett product line. One of the Lannett products
has been redeveloped and submitted to the FDA for supplemental approval. Two
additional products represent previously approved ANDA's that the Company is
planning to reintroduce. The remaining two Lannett products represent new
product introductions as part of the Company's commitment to a research and
development program, one of which has completed a bio-study and has recently
been submitted to the FDA for review. Since the Company has no control over
the FDA review process, management is unable to anticipate when it will
commence production and begin shipping other new products.
During Fiscal 1997, the Company signed a number of major contract
manufacturing supply agreements. The high quality of Lannett production
facilities, equipment and staff offers attractive alternatives for contract
development and manufacturing for other pharmaceutical companies and Lannett
intends to further pursue this area of business. In addition the Company also
signed a number of private label supply agreements with larger generic
pharmaceutical companies to increase market share of its current product line
by utilizing the sales and marketing strengths of these larger companies.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computers systems as the millennium (Year 2000) approaches. The
"Year 2000" issue is pervasive and complex, as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to "00". The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for Year 2000 compliance. It is
anticipated that all programming efforts will be complete by December 31,
1998, allowing adequate time for testing. Management has not yet assessed the
Year 2000 compliance expense and related potential effect on the Company's
earnings.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Regulatory Proceedings.
The Company is engaged in an industry which is subject to considerable
government regulation relating to developing, manufacturing and marketing
of pharmaceutical products. Accordingly, incidental to its business, the
Company periodically responds to inquiries or engages in administrative
and judicial proceedings involving regulatory authorities, particularly
the FDA and the Drug Enforcement Agency.
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. For a discussion of these cases, see the Company's
Annual Report on Form 10-KSB for the Fiscal Year Ended June 30, 1997.
Employee Claim.
A claim has been filed by a former employee with the Pennsylvania
Human Relations Commission. The Company has denied liability in this matter;
management believes that the outcome will not have a material adverse impact
on the financial position of the Company.
ITEM 5. OTHER INFORMATION
The Company has increased its activities beyond the capacity of its
current facility. As a result on December 19, 1997, it entered into a three
year lease for a 23,500 square foot facility located at 500 State Road,
Bensalem Bucks County, Pennsylvania. The base rent is $90,000 per year. The
facility is located approximately 1.5 miles from its main operating facility.
This new facility will house research and development, administration and
warehousing operations
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-B
to be filed as a part of this Form 10-QSB is shown on the
Exhibit Index filed herewith.
(b) The Company did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
13
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LANNETT COMPANY, INC.
Dated: May 6, 1998 By: / s / Jeffrey M. Moshal
-----------------
Jeffrey M. Moshal
Vice President - Finance and Treasurer
14
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3(a) Articles of Incorporation Incorporated by reference to the Proxy
Statement filed with respect to the Annual
Meeting of Shareholders held on December 6,
1991 (the "1991 Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to
Stock Form 8 dated April 23, 1993 (Amendment No. 3
to Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-KSB")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(C)
dated August 1, 1994 to the Annual Report on Form 10-KSB f/y/e
June 30, 1994 ("1994 Form 10-KSB")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-KSB")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e)
dated December 31, 1995 to the Annual Report on Form 10-KSB f/y/e
June 30, 1996 ("1996 Form 10-KSB")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to
dated June 30, 1996 the Annual Report on 1996 Form 10-KSB
10(g) Amendment #6 to Loan Agreement Incorporated by reference to Exhibit 10(g)
dated November 1, 1996 to the Annual Report on Form 10-KSB f/y/e
June 30, 1997 ("1997 Form 10-KSB")
10(h) Amendment #7 to Loan Agreement Incorporated by reference to Exhibit 10(h) to
dated September 9, 1997 the Annual Report on 1997 Form 10-KSB
10(i) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(C)to the
between the Company and Meridian 1993 Form 10-KSB
Bank
15
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10(j) Amendment to Loan Documents Incorporated by reference to Exhibit 10(e) to
between the Company and Meridian the Annual Report on 1994 Form 10-KSB
Bank dated as of December 8, 1993
10(k) Letter Agreement between the Incorporated by reference to Exhibit 10(f) to
Company and Meridian Bank dated the Annual Report on 1994 Form 10-KSB
December 21, 1993
10(l) Third Amendment to Loan Incorporated by reference to Exhibit 10(g) to
Agreement dated as of June 9, the Annual Report on 1994 Form 10-KSB
1994
10(m) Fourth Amendment to Loan Incorporated by reference to Exhibit 10(i) to
Documents between the Company the Annual Report on 1995 Form 10-KSB
and Meridian Bank as of October
27, 1994
10(n) Letter Agreement between the Incorporated by reference to Exhibit 10(j) to
Company and Meridian Bank dated the Annual Report on 1995 Form 10-KSB
October 27, 1994
10(o) Letter Agreement between the Incorporated by reference to Exhibit 10(k) to
Company and Meridian Bank dated the Annual Report on 1995 Form 10-KSB
July 10, 1995
10(p) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to
between the Company and Meridian the Annual Report on 1995 Form 10-KSB
Bank dated as of July 31, 1995
10(q) Line of Credit Note dated July Incorporated by reference to Exhibit 10(m) to
31, 1995 the Annual Report on 1995 Form 10-KSB
10(r) Fifth Amendment to Loan Incorporated by reference to Exhibit 10(n) to
Agreement dated July 31, 1995 the Annual Report on 1995 Form 10-KSB
10(s) Amendment to Loan agreement Incorporated by reference to Exhibit 10(q) to
between the Company and Meridian the Annual Report on 1996 Form 10-KSB
Bank, dated March 5, 1996.
10(t) Amendment to Loan agreement Incorporated by reference to Exhibit 10(t) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(u) Amendment to Loan agreement Incorporated by reference to Exhibit 10(u) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
16
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10(v) Amendment to Loan agreement Incorporated by reference to Exhibit 10(v) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated May 23,
1997.
10(w) Amendment to Loan agreement Incorporated by reference to Exhibit 10(w) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated September
24, 1997.
10(x) Amendment to Loan agreement Incorporated by reference to Exhibit 10(x) to
between the Company and the Quarterly Report on Form 10-QSB for the
Corestates Bank, dated December period ended December 31, 1997
10, 1997.
10(y) Amendment to Loan agreement Incorporated by reference to Exhibit 10(y) to
between the Company and the Quarterly Report on Form 10-QSB for the
Corestates Bank, dated December period ended December 31, 1997
10, 1997.
10(z) Amendment to Loan agreement Incorporated by reference to Exhibit 10(z) to
between the Company and the Quarterly Report on Form 10-QSB for the
Corestates Bank, dated December period ended December 31, 1997
10, 1997.
10(aa) Employment agreement between the Incorporated by reference to Exhibit 10(i) to
Company and Vlad Mikijanic the Annual Report on 1994 Form 10-KSB
11 Computation of Per Share Earnings Filed Herewith
22 Subsidiaries of the Company Incorporated by reference to the Annual Report
on Form 10-K f/y/e June 30, 1997
27 Financial Data Schedule Filed Herewith
</TABLE>
17
Exhibit 11
18
<PAGE>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year ended March 31
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Shares used in computing earnings per share:
Weighted average number of shares outstanding 5,206,128 5,206,128
Income:
Net income 270,939 25,301
----------- -----------
Basic income per common share $ 0.05 $ 0.00
----------- -----------
Diluted income per share:
Shares used in computing earnings per share:
Diluted weighted average number of shares outstanding 15,282,128 14,666,128
Income (loss):
Net income (loss) 1,022,641 (199,754)
Interest expense - convertible debenture 137,500 --
Tax rate- 34% (46,580) --
----------- -----------
90,420 --
----------- -----------
1,113,061 --
Diluted income per share $ 0.07 --
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF
EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> $ 20,473
<SECURITIES> 0
<RECEIVABLES> 1,442,834
<ALLOWANCES> 59,000
<INVENTORY> 1,661,002
<CURRENT-ASSETS> 3,174,715
<PP&E> 5,478,077
<DEPRECIATION> 1,406,056
<TOTAL-ASSETS> 7,308,627
<CURRENT-LIABILITIES> 4,928,650
<BONDS> 6,050,395
<COMMON> 5,206
0
0
<OTHER-SE> (3,675,624)
<TOTAL-LIABILITY-AND-EQUITY> 7,308,627
<SALES> 7,633,506
<TOTAL-REVENUES> 7,633,506
<CGS> 4,818,160
<TOTAL-COSTS> 6,022,166
<OTHER-EXPENSES> (9,432)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 598,131
<INCOME-PRETAX> 1,022,641
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,022,641
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.07
</TABLE>
