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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, 1999.
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 7, 1999, there were 5,206,128 shares of the issuer's common stock,
$.001 par value, outstanding.
Page 1 of 22 pages
Exhibit Index on Page 16
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<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and
June 30, 1998..............................................3
Consolidated Statements of Operations
for the three and nine months ended March 31, 1999
and 1998 (unaudited).......................................4
Consolidated Statements of Cash Flows
for the nine months ended March 31, 1999
and 1998 (unaudited).......................................5
Notes to Consolidated Financial
Statements (unaudited).................................6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..............................................8 - 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................13
Item 2. Changes in Securities and Use of Proceeds.....................13
Item 3. Defaults upon Senior Securities...............................13
Item 4. Submission of Matters to a Vote of Security Holders...........13
Item 5. Other Information.............................................14
Item 6. Exhibits and Reports on Form 8-K..............................14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 03/31/99 06/30/98
- ------ -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 0 $ 16,695
Trade accounts receivable (net of allowance
of $70,000 and $50,000) 2,083,689 1,357,131
Inventories 2,329,854 2,071,946
Prepaid expenses 59,254 67,304
----------- -----------
Total current assets 4,472,797 3,513,076
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 6,678,354 5,811,863
Less accumulated depreciation (1,896,299) (1,502,199)
----------- -----------
4,782,055 4,309,664
----------- -----------
OTHER ASSETS 34,796 143,864
DEFERRED TAX ASSET 150,000 150,000
----------- -----------
Total assets $ 9,439,648 $ 8,116,604
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
- ----------------------------------------
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ 1,250,000
Accounts payable 636,356 631,249
Deferred interest payable - shareholder (including 1,637,987 749,357
convertible deferred interest payable of
$585,623 and $262,250)
Accrued expenses 337,749 180,941
Convertible note payable - shareholder 2,000,000 --
Current portion of long-term debt 870,680 863,207
----------- -----------
Total current liabilities 6,982,772 3,674,754
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 1,079,543 1,357,548
----------- -----------
LINE OF CREDIT AND DEFERRED INTEREST - SHAREHOLDER 4,281,712 4,477,889
----------- -----------
CONVERTIBLE NOTE PAYABLE AND DEFERRED INTEREST -
SHAREHOLDER, LESS CURRENT PORTION -- 2,273,750
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIENCY:
Common stock -
authorized 50,000,000 shares par value $.001:
issued and outstanding, 5,206,128 shares 5,206 5,206
Additional paid-in capital 320,575 320,575
Accumulated deficit (3,230,160) (3,993,118)
----------- -----------
Total shareholders' deficiency (2,904,379) (3,667,337)
----------- -----------
Total liabilities and shareholders' deficiency $ 9,439,648 $ 8,116,604
=========== ===========
<FN>
See notes to 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
-------------------------- -------------------------
3/31/99 3/31/98 3/31/99 3/31/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET SALES $ 2,820,526 $ 2,690,126 $ 7,924,523 $ 7,633,506
COST OF SALES 1,956,578 1,853,313 5,147,183 4,818,160
------------ ------------ ------------ ------------
Gross profit 863,948 836,813 2,777,340 2,815,346
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 473,367 366,156 1,361,877 1,204,006
------------ ------------ ------------ ------------
Operating profit 390,581 470,657 1,415,463 1,611,340
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES), NET
Other 181 4,035 -- 9,432
Interest expense (183,002) (203,753) (605,387) (598,131)
------------ ------------ ------------ ------------
(182,821) (199,718) (605,387) (588,699)
------------ ------------ ------------ ------------
NET INCOME BEFORE TAXES $ 207,760 $ 270,939 $ 810,076 $ 1,022,641
------------ ------------ ------------ ------------
TAXES $ 7,116 $ 0 $ 47,116 $ 0
NET INCOME $ 200,644 $ 270,939 $ 762,960 $ 1,022,641
============ ============ ============ ============
BASIC INCOME PER SHARE $ .04 $ .05 $ .15 $ .20
DILUTED INCOME PER SHARE $ .01 $ .02 $ .05 $ .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 15,548,621 15,282,128 15,548,621 15,282,128
<FN>
See notes to the consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
3/31/99 3/31/98
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 762,960 $ 1,022,641
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 394,098 247,314
Changes in assets and liabilities which provided cash:
Trade accounts receivable (726,558) (434,932)
Inventories (257,908) (242,562)
Prepaid expenses and other assets 117,118 (63,167)
Accounts payable 5,107 39,259
Accrued expenses 156,808 (114,222)
----------- -----------
Net cash provided by operating activities 451,625 454,331
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (866,491) (1,700,084)
----------- -----------
Net cash used in investing activities (866,491) (1,700,084)
----------- -----------
FINANCING ACTIVITIES:
Borrowings under line of credit - shareholder 300,000 50,000
Borrowings under line of credit 250,000 --
Change in deferred interest payable - shareholder 118,703 345,951
Repayments of debt (270,532) (150,119)
Proceeds from debt 1,004,885
----------- -----------
Net cash provided by financing activities 398,171 1,250,717
----------- -----------
NET (DECREASE) INCREASE IN CASH (16,695) 4,964
CASH, BEGINNING OF YEAR 16,695 15,509
----------- -----------
CASH, END OF PERIOD $ 0 $ 20,473
=========== ===========
<FN>
See notes to the consolidated financial statements
</TABLE>
5
<PAGE>
LANNETT COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Consolidated Financial Statements
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
and the results of operations and cash flows.
The results of operations for the three and nine months ended March 31,
1999 and 1998 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, 1998.
Management 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. Subsequent to Third Quarter Fiscal 1999, the Company
finalized a $6,000,000 financing agreement through First Union Capital
Markets Group and the Philadelphia Authority for Industrial Development.
The proceeds are to be used to refinance existing term debt, repay
deferred shareholder interest, and to provide additional financing for
capital expenditures. 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. However
there can be no assurance that any of the above will occur.
Note 2. New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
financial statements. This standard is effective for fiscal years beginning
after December 15, 1997. The Company adopted SFAS No. 130 effective July 1,
1998. There was no effect of implementing this standard, as comprehensive
income is the same as net income.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1.
Accounting For the Costs of Computer Software Developed or Obtained for
Internal Use. The SOP is effective for fiscal years beginning after December
15, 1998. The SOP will require the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining
software for internal use. The Company has not yet assessed what the impact
of the SOP will be on the Company's future earnings or financial position.
6
<PAGE>
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
Financial position and measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Adoption of SFAS No. 133 is not anticipated to have a
material impact on the Company's Financial statement. The Company has not yet
assessed what the impact of the SFAS will be on the Company's future earnings
or financial position.
Note 3. Inventories
Inventories consist of the following:
March 31, June 30,
1999 1998
----------- --------
(unaudited)
Raw materials $ 843,421 $ 652,825
Work-in-process 858,416 406,442
Finished goods 282,850 778,246
Packaging supplies 345,167 234,433
------------- -------------
$ 2,329,854 $ 2,071,946
============= =============
Note 4. Income Taxes
The provision for state income taxes for the nine months ended March 31,
1999 was $40,000. The provision for federal income taxes for the nine months
ended March 31, 1999 was eliminated by the utilization of federal net
operating loss carryforwards, with the exception of $7,116.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations.
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 following 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 of this
Form 10-QSB. The Company undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances
which arise later. Readers should carefully review the risk factors described
in other documents the Corporation files from time to time with the
Securities and Exchange Commission, including the Annual report on Form
10-KSB filed by the Corporation in Fiscal 1998, and any Current Reports on
Form 8-K filed by the corporation.
Results of Operations -Three months ended March 31, 1999 compared
with three months ended March 31, 1998.
Net sales for the three months ended March 31, 1999 ("Third Quarter
Fiscal 1999") increased by 4.8% to $2,820,526 from net sales of $2,690,126 in
the three months ended March 31,1998 ("Third Quarter Fiscal 1998). Sales
increased during Third Quarter Fiscal 1999 mainly due to increased
penetration of the Company's product line. The Company's private label supply
agreements accounted for approximately $2.1 million of Third Quarter Fiscal
1999 and Third Quarter Fiscal 1998 net sales.
Cost of sales increased by 5.6%, to $1,956,578 in Third Quarter
Fiscal 1999 from $1,853,313 in Third Quarter Fiscal 1998. The cost of sales
increase is in line with the increase in Third Quarter Fiscal 1999 sales over
Third Quarter Fiscal 1998 sales. Cost of sales for the private label supply
agreements is consistent with the overall cost of sales except for discounts
allowed. Gross profit margins for Third Quarter Fiscal 1999 and Third Quarter
Fiscal 1998 were 30.6% and 31.1%, respectively. The decrease in the gross
profit percentage is primarily due to the increase in production and quality
assurance personnel costs in anticipation of increased sales volumes.
Selling, general and administrative expenses increased by 29.3% to
$473,367 in Third Quarter Fiscal 1999 from $366,156 in Third Quarter Fiscal
1998. This increase is due to increases in depreciation, advertising and
marketing and research and development costs as a result of the growth of the
Company during Fiscal Year 1999.
As a result of the foregoing, the Company reported an operating
profit of $390,581 for Third Quarter Fiscal 1999, as compared to an operating
profit of $470,657 for Third Quarter Fiscal 1998.
The Company's interest expense was $183,002 in Third Quarter Fiscal
1999 compared to $203,753 in Third Quarter Fiscal 1998. Interest expense
decreased due to a lower effective interest rate as a result of deferring the
maturity date on the revolving credit loan to October 1, 2000, in Second
Quarter Fiscal 1999.
8
<PAGE>
The Company reported net income of $200,644 for Third
Quarter Fiscal 1999, $0.04 basic income per share, $0.01 on a diluted basis,
compared to net income of $270,939 for Third Quarter Fiscal 1998, $0.05 basic
income per share, $0.02 on a diluted basis.
Results of Operations -Nine months ended March 31, 1999 compared with Nine
months ended March 31, 1998.
Net sales for the nine months ended March 31, 1999 increased by 3.8%
to $7,924,523 from net sales of $7,633,506 in the nine months ended March 31,
1998. The Company's private label supply agreements accounted for
approximately $4.5 million and $5.7 million of net sales for the nine months
ended March 31, 1999 and 1998, respectively.
Cost of sales increased by 6.8%, to $5,147,183 in the nine months
ended March 31, 1999 from $4,818,160 in the nine months ended March 31, 1998.
The cost of sales percentage increase was primarily due to the increase in
production and quality assurance personnel costs. These costs increased as a
result of the growth the Company experienced during the nine months ended
March 31, 1999. Cost of sales for the private label supply agreements is
consistent with the overall cost of sales except for discounts allowed. Gross
profit margins for the nine months ended March 31, 1999 and 1998, were 35.0%
and 36.9%, respectively. The decrease in the gross profit percentage is
primarily due to the increase in quality assurance costs in anticipation of
increased sales volumes.
Selling, general and administrative expenses increased by 13.1% to
$1,361,877 in the nine months ended March 31, 1999 from $1,204,006 in the
nine months ended March 31, 1998. This increase is due mainly to additional
research and development costs during the nine months ended March 31, 1999,
for an expanded product line.
As a result of the foregoing, the Company reported an operating
profit of $1,415,463 for the nine months ended March 31, 1999, as compared to
an operating profit of $1,611,340 for the nine months ended March 31, 1998.
.
The Company's interest expense increased to $605,387 in the nine
months ended March 31, 1999 from $598,131 in the nine months ended March 31,
1998, 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 $762,960 for the nine months
ended March 31, 1999, $0.15 basic income per share, $0.05 on a diluted basis,
compared to 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.
Liquidity and Capital Resources -
The Company generated $451,625 and $454,331 of cash in operations
during the nine months ended March 31, 1999 and 1998, respectively. Net cash
provided by operating activities remained constant during the nine months
ended March 31, 1999 as compared to the nine months ended March 31, 1998.
The Company expended $866,491 for property, plant and equipment
during the nine months ended March 31, 1999 compared to $1,700,084 expended
during the nine months ended March 31, 1998.
Net cash provided by financing activities was $398,171 during the
nine months ended March 31, 1999 as compared to $1,250,717 provided by
financing activities during the nine months ended March 31, 1998. The cash
provided by financing activities was used to finance capital expenditures.
9
<PAGE>
As a result of the foregoing, the Company experienced a $16,695
decrease in cash from the beginning to the end of the nine-month period ended
March 31, 1999.
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 adverse impact on the Company's net sales or income from
continuing operations.
At March 31, 1999 the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $11.4
million, including $7.9 million owed to a majority shareholder. The estimated
required principal and interest payments on the bank term loans is
approximately $750,000 for the fiscal year ended June 30, 1999. The estimated
interest payments on the shareholder debt is approximately $1,500,000 during
Fiscal 1999. Management expects to have sufficient operating cash flow during
Fiscal 1999 to make the required monthly principal and interest payments.
Management 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. Subsequent to Third Quarter Fiscal 1999, the Company finalized a
$6,000,000 financing agreement through First Union Capital Markets Group and
the Philadelphia Authority for Industrial Development. The proceeds are to be
used to refinance existing term debt, repay deferred shareholder interest,
and to provide additional financing for capital expenditures. 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. However there can be no assurance that any of the above will
occur.
Except as set forth in this report, the Company is not aware of any
trends, events or uncertainties that have or are reasonably likely to have a
material adverse impact on the Company's short-term or long-term liquidity or
financial condition.
Prospects for the Future
As of March 31, 1999, nine additional products are under
development. Four 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 Federal Drug Administration ("FDA") for supplemental
approval. Three additional Lannett products represent previously approved
Abbreviated New Drug Applications ("ANDA") that the Company is planning to
reintroduce. The remaining Lannett product represents a new product
introduction, which has recently been approved by the FDA and is undergoing
validation procedures. Since the Company has no control over the FDA review
process, management is unable to anticipate with certainty when it will
commence producing and shipping additional products.
10
<PAGE>
Year 2000
As in the case with most other businesses, the Company is in the process of
evaluating and addressing Year 2000 compliance of both its information
technology systems and its non-information technology systems (collectively
referred to as "Systems"). Such Year 2000 compliance efforts are designed to
identify, address, and resolve issues that may be created by programs written
to run on microprocessors which reference years as two digit fields rather
than four. Any such programs may recognize a date using "00" as the year 1900
rather than 2000. If this situation occurs, the potential exists for System
failure or miscalculations by computer programs.
The Company continues to make progress in achieving Year 2000 compliance and
is on schedule to be fully compliant by the end of Fiscal Year 1999. Nearly
all of the Company's business systems were purchased as Commercial Off The-
Shelf (COTS) Software and non-programmable electronic systems, which reduces
the need for internal workforce dedication to software redesign. The Company
has not hired any external consultants or incurred any additional costs thus
far in its Year 2000 compliance efforts, other than the employment of an
Management Information Systems Supervisor whose job function includes the
Year 2000 compliance effort. The Company's use of its own information
technology personnel to make the business systems Year 2000 compliant may
delay some other strategic information systems development and implementation
which would have otherwise benefited the Company in various ways and to
varying extents. The Company does not believe that it will be at a
competitive disadvantage as a result of these delays.
In 1997, the Company established a Year 2000 project team to address
outstanding Year 2000 issues. The team has focused its efforts on the
following areas: (1) Information systems hardware and software, (2)
Manufacturing and distribution equipment, (3) Quality control and testing
equipment, (4) Facilities and infrastructure, and (5) Third-party
relationships.
The Year 2000 program consists of five stages: Awareness, Inventory,
Assessment, Correction & Testing, and Implementation & Contingency Planning.
Phase I--Awareness--involves educating the personnel and management of the
Company about the Year 2000 Problem and how it can affect them. Phase
II--Inventory--involves identifying and ranking all of the components of the
Company's systems, equipment and suppliers that may be vulnerable to the Year
2000 Problem. Phase III--Assessment--involves identifying the Year 2000
readiness and options regarding the items inventoried in Phase II. Phase
IV--Correction & Testing--involves obtaining replacements or identifying
remediation strategies for non-compliant systems as well as testing those
solutions in a non-production environment. Phase V--Implementation &
Contingency Planning--involves implementing the solutions obtained in Phase
IV and developing contingencies for the most reasonably likely worst case
scenarios.
As of March 31, 1999 the Company had incurred approximately $40,000 relating
to remediation of the Year 2000 issue. The Company estimates that it will
have total expenditures for remediation of approximately $70,000 in Fiscal
Year 1999 and $40,000 in Fiscal Year 2000. The future remediation costs to be
incurred are based on management's best estimates, which were derived using
assumptions of future events including the continued availability of
resources and the reliability of third party modification plans. There can be
no assurance that this estimate will be achieved and actual results may be
materially different.
The Information systems hardware and software area of the project has
completed Phases I-IV. Phase V involves the implementation of a new version
of the accounting software used by the Company. The Phase V implementation
will be completed by the end of Fiscal Year 1999.
The Manufacturing and distribution equipment area of the project is
completed.
11
<PAGE>
The Quality Control and testing equipment area of the project has completed
Phases I-IV. Phase V involves the implementation of a new laboratory data
collection system to replace the current non-compliant system. The Phase V
implementation will be completed by the end of Fiscal Year 1999.
The Facilities and infrastructure area of the project is completed.
The Third-party relationship area of the project has completed Phases I-III.
The Company is currently pursing Phase IV certification. Phase V contingency
planning is slated to be completed by the end of Fiscal Year 1999.
The Company continues to make inquiries of its vendors, professional
advisors, customers and other constituents whose Year 2000 compliance is
important to its ongoing business. Based on the limited information received
by the Company, no significant issues have been disclosed. The Company has
identified that a significant disruption in the product supply chain
represents the most reasonably likely worst case Year 2000 scenario.
Potential sources of risk include (1) the inability of principal suppliers or
logistics providers to be Year 2000 ready, which could result in delays in
product deliveries from such suppliers, and (2) disruption of the
distribution channel, including ports, transportation vendors, and the
Company's own distribution center as a result of a general failure of systems
and necessary infrastructure such as electric supply. The Company is
preparing plans that could include adjusting raw material and finished goods
levels around an assumed period of disruption to the supply chain to reduce
the impact of significant failure.
The Company is aware of the potential for claims against it and other
companies for damages for products and services that were not Year 2000
compliant. Since the Company is neither a hardware manufacturer nor a
software manufacturer developer, the Company believes that any such claims
against it will be without merit.
While the Company does not believe that the Year 2000 matters discussed above
will have a material impact on its business, financial condition or results
of operations, it is uncertain whether or to what extent the Company may be
affected by such matters.
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 the development,
manufacturing and marketing of pharmaceutical products. Accordingly,
incidental to its business, the Company periodically responds to inquiries or
engages in administrative and judicial proceedings involving regulatory
authorities, particularly the FDA and the Drug Enforcement Agency.
Employee Claim. A claim of retaliatory discrimination has been filed
by a former employee with the Pennsylvania Human Relations Commission
("PHRC"). The Company has denied liability in this matter, which is being
investigated by the PHRC pursuant to its normal procedures. Management
believes that the outcome will not have a material adverse impact on the
financial position of the Company.
A claim of sexual harassment and retaliation also has been filed
against the Company by another former employee. The claim was cross-filed
with the PHRC and with the Equal Employment Opportunity Commission. which
already has closed its file on the charge. The Company has filed an answer
with the PHRC denying the charge, and the PHRC is investigating the claim
pursuant to its normal procedures. Management believes that the outcome of
this charge also will not have a material adverse impact on the financial
position of the Company.
DES Cases. The Company is currently engaged in several civil actions
as a co-defendant with many other manufacturers of Diethylstilbestrol
("DES"), a synthetic hormone. Prior litigation established that the Company's
pro rata share of any liability is less than one-tenth of one percent. The
Company was represented in many of these actions by the insurance company
with which the Company maintained coverage during the time period that
damages were alleged to have occurred. The insurance company denied coverage
of actions filed after January 1, 1992. With respect to these actions, the
Company paid nominal damages or stipulated to its pro rata share of any
liability. The Company has either settled or is currently defending over 500
such claims. The Company persuaded its insurance carriers to resume defense
and indemnification of most DES claims, has recovered from its carriers some
of the amounts the Company previously expended in these cases, and is
negotiating with its carriers for recovery of the balance of such amounts.
Management believes that the outcome will not have a material adverse impact
on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) A list of the exhibits required by Item 601 of Regulation S-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 Third
Quarter Fiscal 1999.
14
<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 7, 1999 By: / s / Jeffrey M. Moshal
-----------------
Jeffrey M. Moshal
Chief Operating Officer
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit
Number Description Method of Filing Page
- ------- ----------- ---------------- ----
<S> <C> <C> <C>
3(a) Articles of Incorporation Incorporated by reference to the Proxy Statement -
filed with respect to the Annual Meeting of
Shareholders held on December 6, 1991 (the "1991
Proxy Statement").
3(b) By-Laws, as amended Incorporated by reference to the 1991 Proxy -
Statement.
4(a) Specimen Certificate for Common Incorporated by reference to Exhibit 4(a) to -
Stock Form 8 dated April 23, 1993 (Amendment No. 3 to
Form 10-K f/y/e June 30, 1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the Annual Report -
1991 between the Company and on Form 10-K f/y/e June 30, 1991
William Farber
10(b) Amendment #1 to Loan Agreement Incorporated by reference to Exhibit 10(b) to -
dated March 15, 1993 the Annual Report on Form 10-KSB f/y/e June 30,
1993 ("1993 Form 10-K")
10(c) Amendment #2 to Loan Agreement Incorporated by reference to Exhibit 10(c) to -
dated August 1, 1994 the Annual Report on Form 10-KSB f/y/e June 30,
1994 ("1994 Form 10-K")
10(d) Amendment #3 to Loan Agreement Incorporated by reference to Exhibit 10(d) to -
dated May 15, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(e) Amendment #4 to Loan Agreement Incorporated by reference to Exhibit 10(e) to -
dated December 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(f) Amendment #5 to Loan Agreement Incorporated by reference to Exhibit 10(f) to -
dated June 30, 1996 the Annual Report on Form 10-KSB f/y/e June 30,
1996 ("1996 Form 10-K")
10(g) Amendment #6 to Loan Agreement Incorporated by reference to Exhibit 10(g)
dated November 1, 1996 to X the Annual Report on Form 10-KSB f/y/e
June 30, 1997 ("1997 Form 10-KSB")
10(h) Amendment #7 to Loan Agreement Incorporated by reference to Exhibit 10(h) to
dated September 9, 1997 the Annual Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement Incorporated by reference to Exhibit 10(i)
dated June 30, 1998 to the Annual Report on Form 10-KSB f/y/e
June 30, 1998 ("1998 Form 10-KSB")
16
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
- ------- ----------- ---------------- ----
<S> <C> <C> <C>
10(j) Amendment #9 to Loan Agreement Incorporated by reference to Exhibit 10(j) on
dated December 30, 1998 Form 10-QSB for the quarter ended December 31,
1998
10(k) Loan Agreement dated May 4, 1993 Incorporated by reference to Exhibit 10(c) to -
between the Company and Meridian the 1993 Form 10-K
Bank
10(l) Amendment to Loan Documents Incorporated by reference to Exhibit 10(e) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of December 8, 1993 1994 ("1994 Form 10-K")
10(m) Letter Agreement between the Incorporated by reference to Exhibit 10(f) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
December 21, 1993 1994 ("1994 Form 10-K")
10(n) Third Amendment to Loan Incorporated by reference to Exhibit 10(g) to -
Agreement dated as of June 9, the Annual Report on Form 10-KSB f/y/e June 30,
1994 1994 ("1994 Form 10-K")
10(o) Fourth Amendment to Loan Incorporated by reference to Exhibit 10(i) to -
Documents between the Company the Annual Report on Form 10-KSB f/y/e June 30,
and Meridian Bank as of October 1995 ("1995 Form 10-K")
27, 1994
10(p) Letter Agreement between the Incorporated by reference to Exhibit 10(j) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
October 27, 1994 1995 ("1995 Form 10-K")
10(q) Letter Agreement between the Incorporated by reference to Exhibit 10(k) to -
Company and Meridian Bank dated the Annual Report on Form 10-KSB f/y/e June 30,
July 10, 1995 1995 ("1995 Form 10-K")
-
10(r) Amendment to Security Agreement Incorporated by reference to Exhibit 10(l) to
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank dated as of July 31, 1995 1995 ("1995 Form 10-K")
10(s) Line of Credit Note dated July Incorporated by reference to Exhibit 10(m) to -
31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
10(t) Fifth Amendment to Loan Incorporated by reference to Exhibit 10(n) to -
Agreement dated July 31, 1995 the Annual Report on Form 10-KSB f/y/e June 30,
1995 ("1995 Form 10-K")
17
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
- ------- ----------- ---------------- ----
<S> <C> <C> <C>
10(u) Amendment to Loan agreement Incorporated by reference to Exhibit 10(q) to -
between the Company and Meridian the Annual Report on Form 10-KSB f/y/e June 30,
Bank, dated March 5, 1996. 1996 ("1996 Form 10-K")
10(v) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(w) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated March 20,
1997.
10(x) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated May 23,
1997.
10(y) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated September
24, 1997.
10(z) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(aa) Amendment to Loan agreement Incorporated by reference to Exhibit 10(h) to
between the Company and the Annual Report on 1997 Form 10-KSB
Corestates Bank, dated December
10, 1997.
10(ab) Amendment to Loan agreement Incorporated by reference to Exhibit 10(aa) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 11,
1998.
10(ac) Amendment to Loan agreement Incorporated by reference to Exhibit 10(ab) to
between the Company and the Annual Report on 1998 Form 10-KSB
Corestates Bank, dated June 1998.
18
<PAGE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
- ------- ----------- ---------------- ----
<S> <C> <C> <C>
10(ad) Employment agreement between the Incorporated by reference to Exhibit 10(i)
Company and Vlad Mikijanic to the Annual Report on Form 10-KSB f/y/e
June 30, 1994 ("1994 Form 10-K")
10(ae) Supply Agreement dated January Incorporated by reference to Exhibit 10(ad) to
14, 1997 the Annual Report on 1998 Form 10-KSB
10(af) Supply Agreement dated January Incorporated by reference to Exhibit 10(ae) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(ag) Supply Agreement dated January Incorporated by reference to Exhibit 10(af) to
17, 1997 the Annual Report on 1998 Form 10-KSB
10(ah) Supply Agreement dated February Incorporated by reference to Exhibit 10(ag) to
11, 1997 the Annual Report on 1998 Form 10-KSB
10(ai) Supply Agreement dated May 27, Incorporated by reference to Exhibit 10(ah) to
1997 the Annual Report on 1998 Form 10-KSB
11 Computation of 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, 1990
23(a) Consent of Grant Thornton Incorporated by reference to Exhibit 23(a) to
the Annual Report on 1998 Form 10-KSB
23(b) Consent of Deloitte & Touche Incorporated by reference to Exhibit 23(B) to
the Annual Report on 1998 Form 10-KSB
27 Financial Data Schedule Filed Herewith -
</TABLE>
19
Exhibit 11
Computation of Per Share Earnings
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Three months ended March 31
1999 1999 1998 1998
-------------------------------------------------------------------
Net Income Shares Net Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share factors $200,644 5,206,128 $270,939 5,206,128
Effect of potentially dilutive
option plans and debentures:
Interest on debentures $29,293 $29,293
Conversion on debentures 10,342,493 10,076,000
Employee stock options --
<CAPTION>
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Diluted earnings per share factors $229,937 15,548,621 $300,232 15,282,128
-------- ---------- -------- ----------
Basic earnings per share $ 0.04 $ 0.05
Diluted earnings per share $ 0.01 $ 0.02
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Nine months ended March 31
1999 1999 1998 1998
------------------------------------------------------------------
Net Income Shares Net Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share factors $762,960 5,206,128 $1,022,641 5,206,128
Effect of potentially dilutive
option plans and debentures:
Interest on debentures $89,181 $90,920
Conversion on debentures 10,342,493 10,076,000
Employee stock options --
------------------------------------------------------------------
Diluted earnings per share factors $852,141 15,548,621 $1,113,561 15,282,128
-------- ---------- ---------- ----------
Basic earnings per share $ 0.15 $ 0.20
Diluted earnings per share $ 0.05 $ 0.07
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF
OPERATIONS 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-30-1999
<PERIOD-END> MAR-31-1999
<CASH> $ 0
<SECURITIES> 0
<RECEIVABLES> 2,083,689
<ALLOWANCES> 70,000
<INVENTORY> 2,329,854
<CURRENT-ASSETS> 4,472,797
<PP&E> 6,678,354
<DEPRECIATION> 1,896,299
<TOTAL-ASSETS> 9,439,648
<CURRENT-LIABILITIES> 6,982,772
<BONDS> 6,225,000
<COMMON> 5,206
0
0
<OTHER-SE> (2,909,585)
<TOTAL-LIABILITY-AND-EQUITY> 9,439,648
<SALES> 7,924,523
<TOTAL-REVENUES> 7,924,523
<CGS> 5,147,183
<TOTAL-COSTS> 6,509,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 605,387
<INCOME-PRETAX> 810,076
<INCOME-TAX> 47,116
<INCOME-CONTINUING> 762,960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 762,960
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.05
</TABLE>
