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 DECEMBER 31,
1998.
/ / 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 February 1, 1999, there were 5,206,128 shares of the issuer's common
stock, $.001 par value, outstanding.
Page 1 of 23 pages
Exhibit Index on Page 15
<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 (unaudited) and
June 30, 1998...................................................3
Consolidated Statements of Operations
for the three and six months ended December 31, 1998
and 1997 (unaudited)............................................4
Consolidated Statements of Cash Flows
for the six months ended December 31, 1998
and 1997 (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 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................12
Item 2. Changes in Securities and Use of Proceeds................12
Item 3. Defaults upon Senior Securities..........................12
Item 4. Submission of Matters to a Vote of Security Holders......12
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)
12/31/98 06/30/98
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 0 $ 16,695
Trade accounts receivable (net of allowance
of $70,000 and $20,000) 2,052,169 1,357,131
Inventories 2,323,760 2,071,946
Prepaid expenses 53,939 67,304
----------- -----------
Total current assets 4,429,868 3,513,076
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 6,490,695 5,811,863
Less accumulated depreciation (1,752,371) (1,502,199)
----------- -----------
4,738,324 4,309,664
----------- -----------
OTHER ASSETS 35,790 143,864
DEFERRED TAX ASSET 150,000 150,000
----------- -----------
Total assets $ 9,353,982 $ 8,116,604
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ 1,250,000
Accounts payable 732,582 631,249
Deferred interest payable - shareholder (including 1,667,996 749,357
convertible deferred interest payable of
$628,000 and $445,500)
Accrued expenses 127,071 180,941
Convertible note payable - shareholder 2,000,000 --
Current portion of long-term debt 864,595 863,207
----------- -----------
Total current liabilities 6,892,244 3,674,754
----------- -----------
LONG-TERM DEBT, LESS CURRENT PORTION 1,177,035 1,357,548
----------- -----------
LINE OF CREDIT AND DEFERRED INTEREST - SHAREHOLDER 4,389,724 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 (3,430,802) (3,993,118)
----------- -----------
Total shareholders' deficiency (3,105,021) (3,667,337)
----------- -----------
Total liabilities and shareholders' deficiency $ 9,353,982 $ 8,116,604
=========== ===========
<FN>
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 3,070,512 $ 2,505,516 $ 5,103,997 $ 4,943,380
COST OF SALES 1,860,271 1,444,206 3,190,605 2,964,847
------------ ------------ ------------ ------------
Gross profit 1,210,241 1,061,310 1,913,392 1,978,533
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 473,705 475,065 888,691 837,850
------------ ------------ ------------ ------------
Operating profit 736,536 586,245 1,024,701 1,140,683
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES), NET
Other -- -- -- 5,397
Interest expense (192,637) (201,223) (422,385) (394,378)
------------ ------------ ------------ ------------
(192,637) (201,223) (422,385) (388,981)
------------ ------------ ------------ ------------
NET INCOME BEFORE TAXES $ 543,899 $ 385,022 $ 602,316 $ 751,702
------------ ------------ ------------ ------------
STATE TAXES $ 40,000 $ 0 $ 40,000 $ 0
NET INCOME $ 503,899 $ 385,022 $ 562,316 $ 751,702
============ ============ ============ ============
BASIC INCOME PER SHARE $ .10 $ .07 $ .11 $ .14
DILUTED INCOME PER SHARE $ .03 $ .03 $ .04 $ .05
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES 5,206,128 5,206,128 5,206,128 5,206,128
DILUTED WEIGHTED AVERAGE
NUMBER OF SHARES 15,722,097 15,216,128 15,722,097 15,216,128
<FN>
See notes to the consolidated financial statements
</TABLE>
4
<PAGE>
LANNETT COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
12/31/98 12/31/97
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 562,316 $ 751,702
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 251,855 151,114
Changes in assets and liabilities which provided cash:
Trade accounts receivable (695,038) (291,806)
Inventories (251,814) (697,197)
Prepaid expenses and other assets 120,114 (135,336)
Accounts payable 101,333 233,621
Deferred interest payable - shareholder 256,724 288,822
Accrued expenses (53,870) (101,679)
----------- -----------
Net cash provided by operating activities 291,620 199,241
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (679,190) (1,014,956)
----------- -----------
Net cash used in investing activities (679,190) (1,014,956)
----------- -----------
FINANCING ACTIVITIES:
Borrowings under line of credit - shareholder 300,000 50,000
Borrowings under line of credit 250,000 --
Repayments of debt (179,125) (72,335)
Proceeds from debt 1,015,100
----------- -----------
Net cash provided by financing activities 370,875 992,765
----------- -----------
NET (DECREASE) INCREASE IN CASH (16,695) 177,050
CASH, BEGINNING OF YEAR 16,695 15,509
----------- -----------
CASH, END OF PERIOD $ 0 $ 192,559
=========== ===========
<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 six months ended December 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, 1998.
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.
Note 3. Inventories
- -------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(unaudited)
<S> <C> <C>
Raw materials $ 616,951 $ 652,825
Work-in-process 1,084,167 406,442
Finished goods 308,326 778,246
Packaging supplies 314,316 234,433
---------- ----------
$2,323,760 $2,071,946
========== ==========
</TABLE>
6
<PAGE>
Note 4. Income Taxes
- --------------------
The provision for state income taxes for the six months ended December
31, 1998 was $40,000. The provision for federal income taxes for the six
months ended December 31, 1998 was eliminated by the utilization of federal
net operating loss carryforwards.
Note 5. Accounting for Derivative Instruments and Hedging Activities
- ---------------------------------------------------------------------
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.
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 December 31, 1998 compared
with three months ended December 31, 1997.
Net sales for the three months ended December 1998 ("Second Quarter
Fiscal 1999") increased by 23% to $3,070,512 from net sales of $2,505,516 in
the three months ended December 1997 ("Second Quarter Fiscal 1998). Sales
increased during Second Quarter Fiscal 1999 mainly due to increased
penetration of the Company's product line. The Company's private label supply
agreements accounted for approximately $1.1 million and $1.8 million of
Second Quarter Fiscal 1999 and 1998 net sales, respectively.
Cost of sales increased by 29%, to $1,860,271 in Second Quarter
Fiscal 1999 from $1,444,206 in Second Quarter Fiscal 1998. The cost of sales
percentage increase was higher than the percentage increase in Second Quarter
Fiscal 1999 sales over Second Quarter Fiscal 1998 sales primarily due to the
increase in production costs and quality assurance personnel costs. These
costs increased due to the growth of the Company during Fiscal 1998 and
anticipated growth for Fiscal 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 Second Quarter Fiscal 1999 and
Second Quarter Fiscal 1998 were 39% and 42%, respectively. The decrease in
the gross profit percentage is primarily due to the increase in production
and quality assurance costs in anticipation of increased sales volumes.
Selling, general and administrative expenses remained constant
during second Quarter Fiscal 1999 as compared to Second Quarter Fiscal 1998.
As a result of the foregoing, the Company reported an operating
profit of $736,536 for Second Quarter Fiscal 1999, as compared to an
operating profit of $586,245 for Second Quarter Fiscal 1998.
The Company's interest expense was $192,637 in Second Quarter Fiscal
1999 compared to $201,223 in Second 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 $503,899 for Second
Quarter Fiscal 1999, $0.10 basic income per share, $0.03 on a diluted basis,
compared to net income of $385,022 for Second Quarter Fiscal 1998, $0.07
basic income per share, $0.03 on a diluted basis.
Results of Operations -Six months ended December 31, 1998 compared with Six
months ended December 31, 1997.
Net sales for the six months ended December 1998 increased by 3% to
$5,103,997 from net sales of $4,943,380 in the six months ended December
1997. The Company's private label supply agreements accounted for
approximately $2.5 million and $3.6 million of net sales for the six months
ended December 31, 1998 and 1997, respectively.
Cost of sales increased by 8%, to $3,190,605 in the six months ended
December 31, 1998 from $2,964,847 in the six months ended December 31, 1997.
The cost of sales percentage increase was primarily due to the increase in
production costs and quality assurance personnel costs. These costs increased
as a result of the growth the Company experienced during Fiscal 1998 and
anticipated growth for Fiscal 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 six months ended December 31,
1998 and 1997, were 38% and 40%, respectively. The decrease in the gross
profit percentage is primarily due to the increase in production and quality
assurance costs in anticipation of increased sales volumes.
Selling, general and administrative expenses increased by 6% to
$888,691 in the six months ended December 31, 1998 from $837,850 in the six
months ended December 31, 1997. This increase is due to additional research
and development costs during the six months ended December 31, 1998, for an
expanded product line.
As a result of the foregoing, the Company reported an operating
profit of $1,024,701 for the six months ended December 31, 1998, as compared
to an operating profit of $1,140,683 for the six months ended December 31,
1997.
The Company's interest expense increased to $422,385 in the six
months ended December 31, 1998 from $394,378 in the six months ended December
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 $562,316 for the six
months ended December 31, 1998, $0.11 basic income per share, $0.04 on a
diluted basis, compared to net income of $751,702 for the six months ended
December 31, 1997, $0.14 basic income per share, $0.05 on a diluted basis.
Liquidity and Capital Resources -
The Company generated $291,620 and $199,241 of cash in operations
during the six months ended December 31, 1998 and 1997, respectively. Net
cash provided by operating activities increased from the six months ended
December 31, 1998 as compared to the six months ended December 31, 1997,
primarily as a result of lower increases in inventory levels and decreases in
other assets due to equipment being received for deposits which were
previously made; partially offset by a decrease in net income and increases
in trade accounts receivable. Trade accounts receivable increased as a result
of increased sales during the latter part of Second Quarter Fiscal 1999 due
to quarterly buy-ins.
The Company expended $679,190 for property, plant and equipment
during the six months ended December 31, 1998 compared to $1,014,956 expended
during the six months ended December 31, 1997. The Company is currently
negotiating to obtain the necessary financing for additional capital
expenditures that may be required during Fiscal 1999.
9
<PAGE>
Net cash provided by financing activities was $370,875 during the
six months ended December 31, 1998 as compared to $992,765 provided by
financing activities during the six months ended December 31, 1997. The cash
provided by financing activities was primarily used to finance capital
expenditures.
As a result of the foregoing, the Company experienced a $16,695
decrease in cash from the beginning to the end of the six-month period ended
December 31, 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 adverse impact on the Company's net sales or income from
continuing operations.
At December 31, 1998 the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $11.6
million, including $8.1 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
shareholder debt does not require any payments during Fiscal 1999. Management
expects to have sufficient operating cashflow during Fiscal 1999 to make the
required monthly principal and interest payments.
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 has received local and state approval for a $6,000,000
industrial development revenue bond. Funding is expected to be available
during the quarter ended March 31, 1998. 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 December 31, 1998 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 products represent previously approved Abbreviated
New Drug Applications ("ANDA") that the Company is planning to reintroduce.
The remaining one product represent a new product introduction, which has
completed a bio-study and has been submitted to the FDA for review. 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.
The inventory phase of all business, manufacturing, quality control and plant
systems has been completed and the assessment phase of such systems is nearly
complete. Results to date are encouraging The Company believes that some
costs will be incurred to make certain quality control systems Year 2000
compliant but those costs should not be material as the equipment was slated
to be replaced in Fiscal year 1999. As of December 31, 1998 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 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 limited preliminary information
received by the Company, no significant issues have been disclosed. In the
event that any of the Company's significant suppliers, customers or the FDA
do not successfully achieve Year 2000 compliance on a timely basis, the
Company's business and operations could be materially adversely affected. The
Company currently does not have any contingency plans due to the nature of
limited supplier availability in the pharmaceutical industry. However it
recognizes the need to develop contingency plans and expects to have these
plans secured, where applicable by the end of Fiscal 1999.
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.
11
<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
12
<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 Second
Quarter Fiscal 1999.
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: February 1, 1999 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 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 -
Stock Exhibit 4(a) to Form 8 dated
April 23, 1993 (Amendment No. 3
to Form 10-K f/y/e June 30,
1992) ("Form 8")
10(a) Loan Agreement dated August 30, Incorporated by reference to the -
1991 between the Company and Annual Report on Form 10-K f/y/e
William Farber June 30, 1991
10(b) Amendment #1 to Loan Agreement Incorporated by reference to -
dated March 15, 1993 Exhibit 10(b) to 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 -
dated August 1, 1994 Exhibit 10(c) to 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 -
dated May 15, 1995 Exhibit 10(d) to 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 -
dated December 31, 1995 Exhibit 10(e) to 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 -
dated June 30, 1996 Exhibit 10(f) to 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
to dated November 1, 1996 Exhibit 10(g) 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
dated September 9, 1997 Exhibit 10(h) to the Annual
Report on 1997 Form 10-KSB
10(i) Amendment #8 to Loan Agreement Incorporated by reference to
dated June 30, 1998 Exhibit 10(i) to the Annual Report
on Form 10-KSB f/y/e June 30,
1998 ("1998 Form 10-KSB")
</TABLE>
15
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(j) Amendment #9 to Loan Agreement Filed herewith
dated December 30, 1998
10(k) Loan Agreement dated May 4, 1993 Incorporated by reference to -
between the Company and Meridian Exhibit 10(c) to the 1993 Form
Bank 10-K
10(l) Amendment to Loan Documents Incorporated by reference to -
between the Company and Meridian Exhibit 10(e) to the Annual
Bank dated as of December 8, 1993 Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
10(m) Letter Agreement between the Incorporated by reference to -
Company and Meridian Bank dated Exhibit 10(f) to the Annual
December 21, 1993 Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
10(n) Third Amendment to Loan Incorporated by reference to -
Agreement dated as of June 9, Exhibit 10(g) to the Annual
1994 Report on Form 10-KSB f/y/e June
30, 1994 ("1994 Form 10-K")
10(o) Fourth Amendment to Loan Incorporated by reference to -
Documents between the Company Exhibit 10(i) to the Annual
and Meridian Bank as of October Report on Form 10-KSB f/y/e June
27, 1994 30, 1995 ("1995 Form 10-K")
10(p) Letter Agreement between the Incorporated by reference to -
Company and Meridian Bank dated Exhibit 10(j) to the Annual
October 27, 1994 Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
10(q) Letter Agreement between the Incorporated by reference to -
Company and Meridian Bank dated Exhibit 10(k) to the Annual
July 10, 1995 Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
10(r) Amendment to Security Agreement Incorporated by reference to -
between the Company and Meridian Exhibit 10(l) to the Annual
Bank dated as of July 31, 1995 Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
10(s) Line of Credit Note dated July Incorporated by reference to -
31, 1995 Exhibit 10(m) to 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 -
Agreement dated July 31, 1995 Exhibit 10(n) to the Annual
Report on Form 10-KSB f/y/e June
30, 1995 ("1995 Form 10-K")
</TABLE>
16
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(u) Amendment to Loan agreement Incorporated by reference to -
between the Company and Meridian Exhibit 10(q) to the Annual
Bank, dated March 5, 1996. Report on Form 10-KSB f/y/e June
30, 1996 ("1996 Form 10-K")
10(v) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated March 20, Report on 1997 Form 10-KSB
1997.
10(w) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated March 20, Report on 1997 Form 10-KSB
1997.
10(x) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated May 23, Report on 1997 Form 10-KSB
1997.
10(y) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated September Report on 1997 Form 10-KSB
24, 1997.
10(z) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated December Report on 1997 Form 10-KSB
10, 1997.
10(aa) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(h) to the Annual
Corestates Bank, dated December Report on 1997 Form 10-KSB
10, 1997.
10(ab) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(aa) to the Annual
Corestates Bank, dated June 11, Report on 1998 Form 10-KSB
1998.
10(ac) Amendment to Loan agreement Incorporated by reference to
between the Company and Exhibit 10(ab) to the Annual
Corestates Bank, dated June 1998. Report on 1998 Form 10-KSB
</TABLE>
17
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing Page
------ ----------- ---------------- ----
<S> <C> <C> <C>
10(ad) Employment agreement between the Incorporated by reference to
Company and Vlad Mikijanic Exhibit 10(i) 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
14, 1997 Exhibit 10(ad) to the Annual
Report on 1998 Form 10-KSB
10(af) Supply Agreement dated January Incorporated by reference to
17, 1997 Exhibit 10(ae) to the Annual
Report on 1998 Form 10-KSB
10(ag) Supply Agreement dated January Incorporated by reference to
17, 1997 Exhibit 10(af) to the Annual
Report on 1998 Form 10-KSB
10(ah) Supply Agreement dated February Incorporated by reference to
11, 1997 Exhibit 10(ag) to the Annual
Report on 1998 Form 10-KSB
10(ai) Supply Agreement dated May 27, Incorporated by reference to
1997 Exhibit 10(ah) to 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 -
18
</TABLE>
Exhibit 10(j)
Amendment #9 to Loan Agreement
Dated December 30, 1998
19
<PAGE>
William Farber
32640 Whatley
Franklin, Michigan 48025
December 30, 1998
Mr. Jeffrey M. Moshal
Lannett Company, Inc.
9000 State Road
Philadelphia, Pennsylvania 19136
Re: Loan Agreement between William Farber ("Lender") and Lannett
Company, Inc., a Delaware Corporation ("Borrower") dated August 30, 1991, as
amended by Amendment #1 to Loan Agreement dated as of March 15, 1993, and by
letter agreements dated August 1, 1994, May 15, 1995, December 31, 1995, June
30, 1996, November 1, 1996, September 9, 1997, June 30, 1998 and December 30,
1998.
Dear Jeffrey:
This letter confirms that the Maturity Date for the Revolving Credit Loan (as
defined in the Loan Agreement) is extended to October 1, 2000.
Accrued interest on the Revolving Credit Loan from April 1, 1995 to June 30,
1996 is payable in 6 equal monthly installments of $52,590, commencing
January 15, 1999 and continuing on the fifteenth day of each month thereafter
until paid in full. Accrued interest from July 1, 1996 to June 30, 1997 is
payable in 6 equal monthly installments of $57,188, commencing April 15, 1999
and continuing on the fifteenth day of each month thereafter, until paid in
full. Accrued interest from July 1, 1997 to June 30, 1998 is payable in 6
equal monthly installments of $63,554, commencing July 15, 1999 and
continuing on the fifteenth day of each month thereafter, until paid in full.
Interest accrued on the outstanding principal balance from and after July 1,
1998 is payable in 12 equal monthly installments, commencing July 15, 1999
and continuing on the fifteenth day of each month thereafter, until paid in
full.
Very Truly Yours
By: /s/ William Farber
----------------------
William Farber
AGREED TO AND ACCEPTED:
LANNETT COMPANY, INC.
By: /s/ Jeffrey M. Moshal
- -----------------------------------------
Jeffrey M. Moshal, Vice
President - Finance and Treasurer
Exhibit 11
Computation of Per Share Earnings
21
<PAGE>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended December 31
1998 1998 1997 1997
------------------------------------------------------------------
Net Income Shares Net Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share factors $503,899 5,206,128 $385,022 5,206,128
Effect of potentially dilutive
option plans and debentures:
Interest on debentures $30,360 $30,360
Conversion on debentures 10,512,000 10,010,000
Employee stock options 3,969
-----------------------------------------------------
Diluted earnings per share factors $534,259 15,722,097 415,382 15,216,128
-------- ---------- ------- ----------
Basic earnings per share $ 0.10 $ 0.07
Diluted earnings per share $ 0.03 $ 0.03
</TABLE>
22
<PAGE>
Lannett Company, Inc and Subsidiary
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Six months ended December 31
1998 1998 1997 1997
------------------------------------------------------------
Net Income Shares Net Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share factors $562,316 5,206,128 $751,702 5,206,128
Effect of potentially dilutive
option plans and debentures:
Interest on debentures $ 60,720 $ 60,720
Conversion on debentures 10,512,000 10,010,000
Employee stock options 3,969
--------------------------------------------
Diluted earnings per share factors $623,036 15,722,097 $ 812,422 15,216,128
-------- ---------- --------- ----------
Basic earnings per share $ 0.11 $ 0.14
Diluted earnings per share $ 0.04 $ 0.05
</TABLE>
23
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> $ 0
<SECURITIES> 0
<RECEIVABLES> 2,122,169
<ALLOWANCES> (70,000)
<INVENTORY> 2,323,760
<CURRENT-ASSETS> 4,429,868
<PP&E> 6,490,695
<DEPRECIATION> (1,752,371)
<TOTAL-ASSETS> 9,353,982
<CURRENT-LIABILITIES> 6,892,244
<BONDS> 11,599,350
<COMMON> 5,206
0
0
<OTHER-SE> 320,575
<TOTAL-LIABILITY-AND-EQUITY> 9,353,982
<SALES> 5,103,997
<TOTAL-REVENUES> 5,103,997
<CGS> 3,190,605
<TOTAL-COSTS> 4,079,296
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422,385
<INCOME-PRETAX> 602,316
<INCOME-TAX> 40,000
<INCOME-CONTINUING> 562,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562,316
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.04
</TABLE>