LANNETT CO INC
10QSB, 1999-02-12
PHARMACEUTICAL PREPARATIONS
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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 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>


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