UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 0-13976
AKORN, INC.
(Exact Name of Registrant as specified in its Charter)
LOUISIANA 72-0717400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 Akorn Drive
Abita Springs, Louisiana 70420
(Address of Principal Executive Offices) (Zip Code)
(504) 893-9300
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
At May 3, 1996 there were 15,076,427 shares of common stock, no par
value, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
The following financial statements are provided on the page numbers
indicated below:
Condensed Consolidated Balance Sheets -
March 31, 1996 and June 30, 1995 2
Condensed Consolidated Statements of Income -
Three months and nine months ended
March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations
The information called for by this item is provided on page 9.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1996 1995*
____________ _____________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,183,471 $ 767,286
Short-term investments 892,290 1,568,793
Accounts receivable
(less allowance for bad debts of
$267,611 and $266,329 at March 31
and June 30, respectively) 5,218,825 4,918,753
Inventory 7,392,390 5,979,707
Prepaid expenses and other assets 1,638,839 1,068,338
____________ _____________
TOTAL CURRENT ASSETS 16,325,815 14,302,877
OTHER ASSETS 1,031,209 957,099
PROPERTY, PLANT AND EQUIPMENT 18,228,049 13,820,135
Accumulated depreciation (7,342,308) (6,750,743)
____________ _____________
10,885,741 7,069,392
Construction in progress 636,534 3,926,553
____________ _____________
11,522,275 10,995,945
____________ _____________
TOTAL ASSETS $28,879,299 $26,255,921
============ =============
<PAGE>
March 31, June 30,
1996 1995*
____________ _____________
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 550,000 $ -
Current installments of long-term
debt and capital lease obligations 813,705 641,994
Current portion of pre-funded
development costs 600,000 667,000
Trade accounts payable 2,114,914 1,718,893
Income taxes payable 707,015 781,824
Accrued payroll and commissions 503,407 625,839
Accrued reorganization costs 383,780 727,423
Deferred royalty 916,667 -
Accrued expenses and other liabilities 1,636,163 1,237,232
____________ _____________
TOTAL CURRENT LIABILITIES 8,225,651 6,400,205
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 3,730,361 3,900,389
OTHER LONG-TERM LIABILITIES 609,484 957,043
SHAREHOLDERS' EQUITY
Common stock, no par value--
authorized 20,000,000 shares; issued
15,115,673 shares at March 31 and
June 30; outstanding 14,976,427 and
14,904,653 shares at March 31 and
June 30, respectively 13,701,845 13,701,845
Treasury stock, at cost--139,246 and
211,020 shares at March 31 and
June 30, respectively (147,519) (291,067)
Retained earnings 2,759,477 1,500,109
Unrealized gain on marketable
equity securities - 87,397
____________ _____________
TOTAL SHAREHOLDERS' EQUITY 16,313,803 14,998,284
____________ _____________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $28,879,299 $26,255,921
============ =============
*Condensed from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months ended Nine Months ended
March 31 March 31
1996 1995 1996 1995
_____________ ____________ ___________ ___________
Net sales $7,624,835 $7,502,580 $22,900,600 $24,427,958
Cost of sales 5,299,188 4,791,289 14,877,026 14,484,222
_____________ ____________ ___________ ___________
GROSS PROFIT 2,325,647 2,711,291 8,023,574 9,943,736
Selling, general and
administrative
expenses 1,525,783 1,936,062 5,426,698 6,654,320
Research and development 225,794 211,254 689,383 561,618
_____________ ____________ ___________ ___________
1,751,577 2,147,316 6,116,081 7,215,938
_____________ ____________ ___________ ___________
OPERATING INCOME 574,070 563,975 1,907,493 2,727,798
Interest expense (121,847) - (306,511) -
Interest and other
income, net 112,028 (237,834) 393,827 (186,176)
_____________ ____________ ___________ ___________
(9,819) (237,834) 87,316 (186,176)
INCOME BEFORE
INCOME TAXES 564,251 326,141 1,994,809 2,541,622
Income taxes 208,774 97,842 738,290 922,206
_____________ ____________ ___________ ___________
NET INCOME $355,477 $228,299 $1,256,519 $1,619,416
============= ============ =========== ===========
Per Share:
NET INCOME $ .02 $ .01 $ .08 $ .10
============ ============ =========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 15,416,397 15,519,988 15,326,343 15,447,119
============ ============ =========== ===========
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION> Common Stock Unrealized Loss
_______________________ Retained on Noncurrent
Shares Earnings Treasury Marketable
Outstanding Amount (Deficit) Stock Equity Securities Total
_____________ ____________ _____________ ___________ _________________ ____________
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended March 31, 1995:
Balances at July 1, 1994 14,798,217 $13,701,845 $(822,806) $(503,939) $ (32,044) $12,343,056
Net income for the nine months
ended March 31 1,619,416 1,619,416
Additional unrealized loss on noncurrent
marketable equity securities (275,661) (275,661)
Write-down of noncurrent
marketable equity securities to market
value 307,705 307,705
Exercise of stock options 34,917 8,824 69,834 78,658
Shares issued from treasury in
connection with the Company's
Employee Stock Purchase Plan 52,083 35,072 104,166 139,238
_____________ ____________ _____________ ___________ _________________ ____________
Balances at March 31, 1995 14,885,217 $13,701,845 $840,506 $ (329,939) $ - $14,212,412
============= ============ ============= =========== ================= ============
Nine Months Ended March 31, 1994:
Balances at July 1, 1993 12,781,317 $10,701,845 $(3,561,768) $ (641,573) $ - $ 6,498,504
Net income for the nine months
ended March 31 1,222,621 1,222,621
Exercise of stock options and
warrants 2,010,000 3,000,000 (700) 20,000 3,019,300
Shares issued from treasury in
connection with the Company's
Employee Stock Purchase Plan 43,509 13,760 87,018 100,778
_____________ ____________ _____________ ___________ _________________ ____________
Balances at March 31, 1994 14,834,826 $13,701,845 $(2,326,087) $ (534,555) $ - $ 10,841,203
============= ============ ============= =========== ================= ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended March 31,
1996 1995
_____________ _____________
OPERATING ACTIVITIES
Net income $1,256,519 $1,619,416
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 628,489 731,077
Gain on sale of investments (79,859) -
Realized loss on noncurrent marketable
equity securities - 307,705
Changes in operating assets and liabilities (1,620,247) (3,284,838)
_____________ _____________
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 184,902 (626,640)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,117,895) (4,047,143)
Net maturities of investments 668,965 322,791
Product licensing costs (17,867) (376,729)
_____________ _____________
NET CASH USED IN INVESTING ACTIVITIES (466,797) (4,101,081)
FINANCING ACTIVITIES
Repayment of long-term debt (288,727) (905,341)
Proceeds from sale of stock 146,397 217,896
Proceeds from issuance of long-term debt 400,000 3,900,000
Reductions in capital lease obligations (109,590) (15,627)
Short-term borrowings, net 550,000 343,000
_____________ _____________
NET CASH PROVIDED BY
FINANCING ACTIVITIES 698,080 3,539,928
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 416,185 (1,187,793)
Cash and cash equivalents at beginning of period 767,286 1,914,735
_____________ _____________
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $1,183,471 $ 726,942
============= =============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Interest paid, net of amount capitalized $ 306,303 $ -
============= =============
Income taxes paid, net of refunds $ 706,874 $1,092,750
============= =============
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements include the accounts of Akorn, Inc. (the Company) and
its wholly owned subsidiaries, Spectrum Scientific
Pharmaceuticals, Inc. , Walnut Pharmaceuticals, Inc. and Akorn
Manufacturing, Inc. Intercompany transactions and balances have
been eliminated in consolidation.
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the nine-month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for
the year ending June 30, 1996. For further information, refer to
the consolidated financial statements and footnotes for the year
ended June 30, 1995, included in the Company's Annual Report on
Form 10-KSB.
NOTE B - INCOME TAXES
The Company is currently in discussions with the Internal Revenue
Service (IRS) regarding the examination of tax returns for years
1988 through 1993. The IRS has proposed adjustments to such
returns which would result in additional taxes and interest due
of approximately $1.5 million. Although the Company has agreed
with approximately $550,000 of the proposed adjustments, (all of
which was paid during the quarter ended March 31, 1996 and funded
by short-term bank financing), the Company is currently appealing
the remainder of the assessment. The Company does not currently
anticipate that the ultimate resolution of this matter will have
a material adverse effect on the financial statements.
NOTE C - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of
common shares outstanding. The computation of the weighted
average number of shares outstanding for all periods presented
includes the dilutive effect of stock options and warrants using
the treasury stock method.
NOTE D - INVENTORY
The components of inventory are as follows:
March 31, June 30,
1996 1995
_____________ _____________
Finished goods $3,760,467 $3,742,411
Work in process 1,618,783 1,042,922
Raw materials and supplies 2,013,140 1,194,374
_____________ _____________
$7,392,390 $5,979,707
============= =============
<PAGE>
The inventories are reported net of reserves for unsaleable items
of $493,441 and $344,443 as of March 31, 1996 and June 30, 1995,
respectively.
NOTE E - INVESTMENTS
At March 31, 1995, the cost of the Company's noncurrent
marketable equity securities exceeded the market value by
$307,705. Given the significant decline in market value since
June 30, 1994, and Management's assessment that a significant
reversal was not imminent, the loss was determined to be
permanent. Therefore, the unrealized loss previously charged to
shareholders' equity was reversed, and the Company recorded a
realized loss to recognize the decline in value. This loss is
included in interest and other income (expense) for the quarter
and nine months ended March 31, 1995.
At June 30, 1995, the market value of the Company's marketable
equity securities exceeded the cost by $87,397; therefore, an
unrealized gain was recorded as a component of shareholders'
equity to reflect this increase in value. Subsequent to year
end, the Company sold the investment and recorded a realized gain
of $79,859 during the first quarter of fiscal 1996. This amount
is included in interest and other income, net in the accompanying
statement of income for the nine months ended March 31, 1996.
NOTE F - INTEREST CAPITALIZATION
Interest incurred during construction periods is capitalized as
part of the cost of the expansion project. During the nine-month
periods ended March 31, 1996 and 1995, the Company capitalized
$34,682 and $179,499, respectively, in interest costs. During the
quarter ended March 31, 1995, interest costs totaling $135,774
were capitalized. No interest costs were capitalized during the
third quarter of fiscal 1996.
NOTE G - LITIGATION
The Company is involved in various litigation and claims arising
in the normal course of business. The Company's management
believes that any liability the Company may have in these matters
would not have a material effect on the consolidated financial
statements.
NOTE H - PROPOSED ACQUISITION OF INJECTABLE DISTRIBUTION BUSINESS
On May 7, 1996, the Company signed a definitive agreement to
acquire all of the outstanding common stock of Pasadena Research
Laboratories, Inc. ("PRL") in exchange for 1.4 million shares of
Akorn, Inc. Common Stock, in a transaction expected to be
accounted for as a pooling-of-interests. The expected date for
closing of this transaction is June 30, 1996. PRL is a
distributor of niche injectable products. Akorn plans to utilize
the PRL operations to distribute its own line of injectable
products, while continuing the sale of PRL label products.
<PAGE>
Following is selected unaudited financial information on a pro-
forma basis, assuming the acquisition of PRL was consummated as
of the date of the financial statements currently reported on:
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
_________ _________ _________ _________
(In thousands, except per Share amounts)
Net sales $ 8,815 $8,636 $25,764 $28,274
========= ========= ========= =========
Net income $ 611 $ 403 $ 1,470 $ 1,795
========= ========= ========= =========
Earnings per share $ .04 $ .02 $ .09 $ .11
========= ========= ========= =========
NOTE I - CHANGE IN ACCOUNTING ESTIMATES
During the quarter ended March 31, 1996, the Company increased
its estimate for unsaleable inventory by approximately $300,000
($189,000 or one cent per share, net of tax). This change in
estimate is reported as an increase in cost of goods sold.
Also, during the quarters ended March 31, 1995 and 1996, an
evaluation by the Company resulted in a change in the estimated
liability related to aged customer credits. This change resulted
in a reduction of selling general and administrative expenses of
approximately $330,000 ($231,000 or one cent per share, net of
tax) for the quarter ended March 31, 1995. For the same period
in 1996, the reduction to S,G&A expenses was $85,000 ($54,000 or
less than one cent per share, net of tax).
In the quarter ended March 31, 1996, the Company decided to no
longer pursue Abbreviated New Drug Applications (ANDAs) for
several products which had been produced in previously-owned
facilities, and for which estimated costs of transferring such
ANDAs had been accrued. This decision was based on a
reevaluation of the costs of developing such products as compared
to their potential market, given the emergence of alternate
suppliers, since the Company suspended their production. This
change in estimate was also based on the Company's recent
decision to enter into the injectable distribution marketplace
and the need to free up R&D resources for the pursuit of
injectable ANDAs. The total amount of the accrual reversed was
approximately $316,000 ($199,000 or one cent per share, net of
tax). This is included as a reduction in S,G&A expense.
NOTE J - DEFERRED ROYALTY
In March 1996, the Company received $1 million of prepaid
royalties from Pfizer, representing the guaranteed amount of
first year royalties under the licensing agreement with Pfizer.
The Company will recognize this royalty on a straight-line basis
over one year. One month of royalties, or $83,333 was recognized
in the quarter ended March 31, 1996
<PAGE>
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
The following table sets forth, for the periods indicated, net
sales by segment (in thousands), excluding intersegment sales:
Three Months Ended Nine Months Ended
March 31, March 31,
1996 1995 1996 1995
__________ _________ _________ __________
Ophthalmic distribution $ 5,161 $5,382 $16,282 $17,740
Contract manufacturing 2,464 2,121 6,619 6,688
__________ _________ _________ __________
Total net sales $ 7,625 $7,503 $22,901 $ 24,428
========== ========= ========= ==========
Net sales increased 2% in the quarter ended March 31, 1996,
compared to the same period in 1995, with sales of $7.6 million
versus $7.5 million. For the first nine months of fiscal 1996,
sales of $22.9 million were 6% lower than the prior-year sales of
$24.4 million. The decline in sales for the nine month period is
primarily due to the absence of the Company's lead allergy
product, AK-Con-A, since the second quarter of fiscal 1995.
For the quarter ended March 31, 1996, ophthalmic distribution
sales declined 4% over the comparable period in 1995. For the
nine month period ended March 31, 1996, net sales for this
segment declined 8% as compared to the same period in the prior
fiscal year. The decline for the quarter is primarily related to
a weakness in sales of generic ophthalmic products in the retail
sector. This was partially due to the effect of harsh weather,
throughout the second and third fiscal quarters, resulting in
higher than expected inventory levels at several wholesalers.
The decline for the nine-month period was primarily related to
the absence of AK-Con-A which accounted for approximately $2
million in sales for the prior year nine month period.
Ophthalmic distribution sales, exclusive of AK-Con-A sales, were
$15.7 million, for the nine-month period ended March 31, 1995.
Excluding AK-Con-A sales, ophthalmic distribution sales for the
nine-month period ended March 31, 1996 were 3% greater than the
same period in 1995. The low rate of growth for the nine-month
period is partially due to the overstocking in wholesalers noted
above.
As previously announced, AK-Con-A was converted to over-the-
counter (OTC) from prescription status by the Food and Drug
Administration (FDA). The Company recently obtained approval of
its OTC version of AK-Con-A which has been licensed to Pfizer
Inc.(Pfizer). In March 1996, the Company received $1 million of
prepaid royalties from Pfizer for the first year under the
agreement. The Company will recognize this royalty on a straight-
line basis over one year. One month of prepaid royalty was
recognized in the quarter ended March 31, 1996. The Company also
recognized some manufacturing sales in this quarter.
<PAGE>
The Company has recently received several Abbreviated New Drug
Application approvals (ANDAs) for ophthalmic products at its
Akorn Manufacturing, Inc. (AMI) facilities. These approvals are
expected to add incremental revenues to the ophthalmic
distribution segment commencing in the fourth quarter of fiscal
1996, as the Company plans to introduce "commodity generic"
labels for these products. Some of these incremental sales,
however, may be offset by continued increase in competition in
the ophthalmic generic market.
For the quarter ended March 31, 1996, contract manufacturing
sales increased 16% over the comparable period in 1995. For the
nine-month period ended March 31, 1996, this segment's sales were
relatively flat as compared to the same period in 1995. The
increase in the third quarter was primarily related to the
inclusion of contract sales to Pfizer and Jordan Pharmaceuticals
under a previously announced contract agreement. Contract sales
will continue to vary from quarter to quarter as a result of
fluctuations in ordering patterns from contract customers which
is common to this segment. In addition, declines in contract
revenues have occurred due to a recent shift by several contract
customers who, based on economic evaluation, have opted to
transfer the manufacture of their injectable products in-house,
or to discontinue the product line entirely.
As noted in previous Company disclosures, one of these customers
is Akorn's largest contract customer, which accounted for 10% and
13% of consolidated net sales for the quarter and nine-month
periods ended March 31, 1996, respectively. This customer has
transferred a portion of its contract business to its own
facilities and has decided to discontinue the remaining products
currently being manufactured by AMI.
The transferred and discontinued products accounted for
approximately $1.4 million and $2.9 million in sales,
respectively, for AMI in fiscal 1995. The Company is in late
stage negotiations to acquire the discontinued products. In the
meantime, this customer has agreed to continue to order these
products and keep them in the marketplace. The acquisition of
these products would help to continue the current plant
throughput, while obtaining some incremental distribution
profits.
In October, 1995, the Company signed a contract manufacturing
agreement with Jordan Pharmaceuticals, Inc. (Jordan) to develop
and manufacture three new generic injectable pharmaceutical
products. In addition, the agreement secured the long-term
manufacture of three generic injectables currently produced by
AMI for Jordan. The three new products are exempt from FDA
approval under "grandfather" rules, and, as such, the first of
the three new products should be in commercial production during
the fourth quarter of fiscal 1996. The combined contractual
payments in the first year of the contract, including fees for
product development, are expected to approximate $2 million.
Previously, Jordan represented approximately $900,000 of the
Company's contract business. This additional throughput will
help offset declines from other contract customers noted above.
The Jordan agreement allows for Akorn to use information
supporting the development of the products to pursue recently
announced strategies in the injectable marketplace. The
agreement further provides that best efforts will be used by both
parties to add two new products each year to the agreement, under
the same terms and conditions.
<PAGE>
On May 7, 1996 the Company signed a definitive agreement to
acquire Pasadena Research Labs, Inc. (PRL), a specialized
distributor of injectables, based in southern California. Under
the proposed transaction, Akorn will issue 1.4 million shares of
its common stock, in exchange for all of the outstanding shares
of PRL, in a pooling-of-interests transaction. It is anticipated
that the transaction will be closed in June 1996. The acquisition
of PRL would form the cornerstone of Akorn's strategy to expand
its presence in the injectable market. This, together with
Akorn's current injectable contract manufacturing operations,
will create a $13 - $14 million injectable division presently.
Commensurate with the signing of the definitive agreement, the
Company has reorganized its operations into two distinct
divisions, the Ophthalmic Division and the Injectable Division.
It is anticipated that in future filings, separate segment
reporting will be made for these two divisions.
Gross Profit
Consolidated gross profit declined 14% to $2.3 million in the
quarter ended March 31, 1996 compared to $2.7 million for the
same period of the previous year. For the first nine months of
fiscal 1996, gross profit of $8.0 million was 19% lower than the
comparable fiscal 1995 amount of $9.9 million.
During the quarter ended March 31, 1996, the Company increased
its estimate for unsaleable inventory by approximately $300,000.
This change in estimate is reported as an increase in cost of
goods sold. Excluding this change in estimate, gross profit for
the quarter and nine-month period ended March 31, 1996 was
approximatley $2.6 million and $8.3 million, respectively.
Exclusive of the change in estimate, gross profit declined 3%
(150 basis points) and 16% (430 basis points), respectively for
the quarter and nine-month periods ended March 31, 1996 as
compared to the same periods in 1995.
The loss of AK-Con-A sales, (Akorn's highest margin product at
75%), and higher product costs imposed by some suppliers, were
the primary reasons for the decline in gross profit and margins
for the nine months ended March 31, 1996. In addition, continued
increases in competition, resulting in price suppression in the
ophthalmic generic market effected gross profit and margins in
the current quarter and nine month periods. For the quarter
ended March 31, 1996, the Company's gross margin was also
impacted by a higher percentage of wholesaler chargebacks to
gross sales. Gross margins are expected to remain relatively
stable for the remainder of fiscal 1996 as the royalties from
Pfizer are expected to offset any negative impact of price
competition.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses declined 21%
during the quarter ended March 31, 1996, as compared to the same
period in 1995. For the first nine months of fiscal 1996, S,G&A
expenses were 18% lower than the comparable period in fiscal
1995.
During the quarters ended March 31, 1996 and 1995, the Company,
based on evaluations made by management, changed the estimated
liability related to aged customer credits. This resulted in a
reduction in S,G&A expenses of approximately $85,000 and $330,000
for the respective periods. Also, in the quarter ended March 31,
1996, the Company decided to no longer pursue Abbreviated New
Drug Applications (ANDAs) for several products which had been
produced in previously-owned facilities, and for which estimated
costs of transferring such ANDAs had been accrued. This decision
was based on the cost of the ANDAs versus the future incremental
profit to be derived from the sales of these products, given the
emergence of alternate suppliers, since the Company suspended
production.
<PAGE>
This change in estimate was also based on the Company's recent
decision to enter into the injectable distribution marketplace
and the need to free up R&D resources for the pursuit of
injectable ANDAs. The total amount of the accrual reversed was
approximately $316,000 and is included as a reduction in S,G&A
expense.
Without these changes in estimate, the Company would have
realized S,G&A expenses of $1.9 million and $2.3 million for the
quarters ended March 31, 1996 and 1995, respectively, a 15%
decline. For the nine months ended March 31, 1996 and 1995,
S,G&A, exclusive of these adjustments would have been $5.8
million and $7.0 million, respectively, representing a 17%
decline. The reduction in S,G&A expenses is partly due to lower
sales and partly due to the plan, implemented in the quarter
ended March 31, 1995, to reduce certain S,G&A expenses.
The percentage of S,G&A expenses to sales, excluding the effects
of the changes in estimates, were 25% and 30% for the quarters
ended March 31, 1996 and 1995, respectively. These percentages
were 25% and 29% for the nine- month periods ended March 31, 1996
and 1995, respectively. The Company continues to monitor the
required level of S,G&A expenses in relation to sales
performance.
Research and Development
Research and development expenses increased 7% and 23%,
respectively for the quarter and nine months ended March 31,
1996, as compared to the same periods in 1995. This increase
reflects the change in the mix of products under development to a
lower concentration of products for which costs have been
previously accrued.
The Company also continues its development of a non-steroidal
anti-inflammatory drug for ophthalmic use licensed from Pfizer.
It is anticipated that the majority of these development costs,
which are expected to be funded substantially by monies obtained
from Pfizer, will be incurred over the next 12 to 15 months.
With the acquisition of PRL, the Company expects to increase its
mix of injectable ANDA filings. PRL has several filings underway
through joint venture arrangements. It is anticipated that these
arrangements would continue and that the Company would also
continue to develop other injectable ANDAs for manufacture at its
Decatur facilities. Due to the factors noted above, it is
anticipated that the Company's R&D expenditures will increase
over the next twelve months. However, the level of R&D will
continue to be monitored in light of operating performance.
Interest and Other Income/Expense
Interest costs incurred during the entire prior fiscal year and
through July 1995 were capitalized as part of the cost of
construction related to the Company's expansion project at AMI.
The expansion is now complete and the first production of product
from the new clean room began in the current quarter. In
addition, the Company has under construction, additions related
to the expansion of its R&D facilities and the installation of a
hot loop for its water for injection. The R&D additions are
substantially complete and the hot loop project should be
completed over the next two quarters. A portion of interest
expense associated with this project is expected to be
capitalized during the construction period.
<PAGE>
March 31, 1996 are $90,000 and $240,000, respectively, in fees
associated with the international licensing of certain
technologies in two separate agreements. Under the agreements,
Akorn will provide product information to be used in obtaining
approvals for these products for manufacture and distribution
internationally. In addition, Akorn will manufacture the product
for international distribution for a period of time and will
receive a royalty stream on international sales of the product.
The Company is in discussions with other companies regarding
similar arrangements in other international markets.
Also included in interest and other income (expense) for the nine
month period ended March 31, 1996 is a gain of $80,000 recognized
on the sale of the Company's only equity investment. The prior
year quarter and nine month periods include a $308,000 loss
related to an other than temporary decline in the fair market
value of this equity investment.
Income Taxes
The effective tax rates for the quarter ended March 31, 1996 and
1995 was 37% and 30%, respectively. For the nine month periods
ended March 31, 1996 and 1995, the effective rate was 37% and
36%, respectively. The decline in the effective rate for the
quarter ended March 31, 1995 as compared to the current year
rate, reflects changes associated with lower anticipated income
levels for fiscal year 1995 and minor adjustments related to
filed tax returns.
The Company has been in discussions with the Internal Revenue
Service (IRS) regarding the examination of tax returns for the
periods of 1988 through 1993. The IRS has proposed adjustments to
such returns, some of which the Company has agreed to and some
which the Company will appeal. The agreed issues were paid in
full in the quarter ended March 31, 1996. Short-term bank debt
totaling $550,000 was used to pay these agreed items. The
Company does not currently anticipate that the ultimate
resolution of the unagreed matters will have a material adverse
effect on the financial statements.
Net Income
As a result of the factors noted above, net income for the
quarter ended March 31, 1996 increased to $355,000 or two cents
per share compared to the prior year amount of $228,000 or one
cent per share. Net income for the first nine months of fiscal
1996 declined to $1.3 million or eight cents per share versus
$1.6 million or ten cents per share in the comparable 1995
period. Weighted average shares used in the calculation of per
share amounts were relatively unchanged from year to year.
Financial Condition and Liquidity
The net cash provided by operating activities for the nine months
ended March 31, 1996 was $185,000 compared to net cash used of
$627,000 for the corresponding period in 1995. While the Company
remains profitable, significant investments in inventory,
primarily for raw materials and components associated with new
ophthalmic products and research and development efforts have
been made. In addition, several contract customers have recently
required AMI to inventory some components which were previously
supplied by these customers. Prior to the introduction of
ophthalmics, raw material and component inventories were
relatively insignificant, as such inventories were generally
supplied by contract customers. All ophthalmic manufacturing,
however, requires AMI to inventory the raw materials and
components, thus resulting in the noted increases. Further
increases in raw material and component inventory will be based
on future product approvals.
<PAGE>
In 1996, the Company will continue to fund the payment of certain
previously accrued research and development activities, including
the site transfer of ANDAs and development of the NSAID discussed
previously. Management believes that existing cash, cash flows
from operations, and available working capital lines of credit
are sufficient to handle these short-term needs.
In addition to these short-term needs, the Company may be
required to pay additional interest and taxes in connection with
the examination by the IRS of tax returns for the periods of 1988
through 1993. The proposed adjustments by the IRS would result
in additional interest and taxes currently due of approximately
$1.5 million. To date, the Company and the IRS have agreed upon
issues resulting in approximately $600,000 of current net taxes
and interest due. Payment of the agreed upon items was made in
the current quarter and has been financed with short-term bank
debt. Payment of the remaining unsettled issues, if any, would be
based on the timing of the appeals process and the success of the
Company in arguing its position with the IRS. The Company does
not currently anticipate any adverse financial statement effect
from this proposed assessment.
The Company invested $1.1 million in new property, plant and
equipment during the nine-month period ended March 31, 1996,
compared to $4.0 million in the prior year comparable period.
The current year additions were primarily related to expansion of
the Company's R&D facilities and the hot loop noted above, while
the prior year additions were associated with the expansion of
the Company's manufacturing facilities, including the addition of
a high-speed ophthalmic line.
The Company has the following availability under existing bank
financing arrangements:
- A $2.0 million Line of Credit for working capital purposes.
This is expected to increase to $2.5 million in availability
as a result of the PRL acquisition.
- $1,250,000 remaining available under construction loan
agreements and commitments.
The Company has plans for capital improvements of approximately
$1.5 million to $2 million for the remainder of calendar 1996.
Such expenditures will be financed through internal cash flows
and $1,250,000 remaining available under bank commitments. The
timing of expenditures will be staged to ensure compliance with
debt covenant requirements.
Financing activities provided $698,000 and $3.5 million in the
nine-month periods ended March 31, 1996 and 1995, respectively.
The increases in both periods is primarily related to draws on
the various bank financing arrangements in support of the
Company's capital projects and working capital needs.
In connection with the negotiations with its lead contract
customer, discussed previously, the Company has a commitment from
its commercial bank to lend up to $1.5 million for the product
line acquisition should it occur.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain legal proceedings in which the registrant, Akorn,
Inc. (the "Company"), is involved are described in Item 3
to the Company's Form 10-KSB for the fiscal year ended
June 30, 1995 and in Note R to the consolidated financial
statements included in that report.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Press release issued by Akorn, Inc. on May 7, 1996
announcing its third quarter 1996 financial results
and the acquisition of Pasadena Research Labs, Inc.,
incorporated by reference to Form 8-K dated May 9, 1996.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AKORN, INC.
/s/ Barry D. LeBlanc
____________________________
Barry D. LeBlanc
Executive Vice President
(Duly Authorized Officer)
/s/ Eric M. Wingerter
_______________________________
Eric M. Wingerter
Vice President - Finance and Administration
(Principal Financial Officer)
Date: May 7, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
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