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 September 30, 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 November 6, 1996 there were 16,582,073 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 -
September 30, 1996 and June 30, 1996 2
Condensed Consolidated Statements of Income -
Three months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
<PAGE>
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 8.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
(UNAUDITED)
September 30, June 30,
1996 1996*
________________ _________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 681 $ 891
Short-term investments 400 902
Accounts receivable
(less allowance for uncollectables of
$359 and $339 at September 30
and June 30, respectively) 4,847 4,916
Inventory 9,481 8,860
Prepaid expenses and other assets 1,709 1,682
________________ _________________
TOTAL CURRENT ASSETS 17,118 17,251
OTHER ASSETS 1,323 1,042
PROPERTY, PLANT AND EQUIPMENT 19,938 18,522
Accumulated depreciation (8,054) (7,771)
_________________ _________________
11,884 10,751
Construction in progress 999 773
_________________ _________________
12,883 11,524
_________________ _________________
TOTAL ASSETS $ 31,324 $ 29,817
================= =================
<PAGE>
September 30, June 30,
1996 1996*
_______________ __________________
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 400 $ 1,294
Current installments of long-term
debt and capital lease
obligations 1,160 858
Trade accounts payable 1,782 2,680
Income taxes payable 641 626
Accrued chargebacks 2,409 -
Accrued expenses and other liabilities 3,880 4,143
________________ ________________
TOTAL CURRENT LIABILITIES 10,272 9,601
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 4,502 3,544
OTHER LONG-TERM LIABILITIES 197 371
SHAREHOLDERS' EQUITY
Common stock, no par value--
authorized 20,000,000 shares; issued
16,600,927 shares at September 30 and
June 30; outstanding 16,582,073 and
16,573,915 shares at September 30 and
June 30, respectively 14,174 14,174
Treasury stock, at cost-- 18,854 and
27,012 shares at September 30 and
June 30, respectively (64) (92)
Retained earnings 2,243 2,219
_______________ ______________
TOTAL SHAREHOLDERS' EQUITY 16,353 16,301
_______________ ______________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 31,324 $ 29,817
=============== ==============
*Condensed from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
Three months ended
September 30,
1996 1995
____________ ___________
Net sales $ 8,101 $ 8,739
Cost of sales 5,132 5,434
____________ ___________
GROSS PROFIT 2,969 3,305
Selling, general and
administrative expenses 2,433 2,305
Research and development 515 249
___________ ___________
2,948 2,554
___________ ___________
OPERATING INCOME 21 751
Interest expense (128) (93)
Interest and other income, net 164 112
___________ ____________
36 19
INCOME BEFORE
INCOME TAXES 57 770
Income taxes 22 271
___________ ___________
NET INCOME $ 35 $ 499
=========== ===========
Per Share:
NET INCOME $ - $ .03
=========== ===========
WEIGHTED AVERAGE
SHARES OUTSTANDING 16,867,228 16,659,700
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
Three months ended September 30,
1996 1995
_____________ _____________
OPERATING ACTIVITIES
Net income $ 35 $499
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 342 208
Gain on sale of investments - (80)
Changes in operating assets and liabilities 512 (350)
_____________ ____________
NET CASH PROVIDED BY OPERATING ACTIVITIES 889 277
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,643) (230)
Net maturities of investments 502 271
Purchase of injectable product line (340) -
Product licensing costs - (28)
_____________ ___________
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES (1,481) 13
FINANCING ACTIVITIES
Repayment of long-term debt and capital leases (240) (72)
Proceeds from sale of stock 16 37
Proceeds from issuance of long-term debt 1,500 -
Repayment of short-term borrowings, net (894) (65)
___________ ____________
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 382 (100)
__________ ____________
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (210) 190
Cash and cash equivalents at beginning of period 891 775
___________ ___________
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 681 $ 965
=========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Interest paid, net of amount capitalized $ 121 $ 93
=========== ===========
Income taxes paid, net of refunds $ - $ 180
=========== ===========
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. and its wholly owned subsidiaries
(the Company). Intercompany transactions and balances have been
eliminated in consolidation.
The Company acquired Pasadena Research Laboratories, Inc. (PRL)
effective May 31, 1996 in a business combination accounted for as a
pooling of interests. The acquired operations of PRL were merged into
the operations of Taylor Pharmaceuticals, Inc., a wholly-owned
subsidiary of the Company, subsequent to the acquisition. Accordingly,
all financial information presented has been restated to include the
operations of PRL.
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 three-month period ended September
30, 1996 are not necessarily indicative of the results that may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes for the year ended June
30, 1996, included in the Company's Annual Report on Form 10-K.
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, some of
which the Company has agreed to and paid, and some which the Company is
currently appealing. The Company does not currently anticipate any
adverse financial statement effect from the appealed assessment as
accruals for the financial statement effects of these proposed
adjustments have been previously recorded.
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 (in thousands):
September 30, June 30,
1996 1996
______________ _______________
Finished goods $ 5,376 $ 5,376
Work in process 1,435 1,311
Raw materials and supplies 2,670 2,173
______________ _______________
$ 9,481 $ 8,860
============== ===============
<PAGE>
The inventories are reported net of reserves for unsaleable items of
$581,134 and $681,920 as of September 30 and June 30, 1996,
respectively.
NOTE E - ACQUISITION OF INJECTABLE PRODUCT LINE
Effective July 1, 1996, the Company entered into an agreement with
Janssen Pharmaceutica, Inc. (Janssen) to acquire the rights to
distribute an injectable product line in the anesthesia/analgesia area.
As part of this agreement, the Company also acquired certain high-speed
inspection equipment. Pursuant to the agreement, the acquisition
transfers ownership of the NDAs for the three products, as well as the
trade names and trademarks in the United States. In exchange for these
product licenses and equipment, the Company paid Janssen $1.6 million on
the effective date of the agreement which was financed primarily through
a $1.5 million credit facility with the Company's commercial bank. In
accordance with the agreement, Akorn will be required to provide certain
other products to Janssen, at no cost, having a value expected not to
exceed $100,000. The portion of the acquisition costs allocated to the
acquired products ($340,000) will be amortized over 15 years.
NOTE F - CHARGEBACK ACCRUAL
The Company records an estimate for the difference between gross sales
of certain products to wholesalers and expected sales of such products
under contractual arrangements with third parties such as hospitals and
group purchasing organizations. The portion of this accrual which
relates to wholesaler sales that have not yet been collected is reported
as a reduction to accounts receivable. The portion of this accrual
which relates to wholesaler sales which have been collected is reported
as a liability in the balance sheet. For the products acquired from
Janssen (Note E), the wholesale price is significantly greater than the
contract prices. Accordingly, the liability for accrued chargebacks
increased significantly from June 30, 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.
<PAGE>
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Effective May 31, 1996, the Company acquired Pasadena Research
Laboratories, Inc. (PRL) in a business combination accounted for as a
pooling of interests. The acquired operations of PRL were merged into
those of the Company's wholly-owned subsidiary Taylor Pharmaceuticals,
Inc. (Taylor). The merger helped establish an injectable distribution
segment for reporting purposes. All financial information presented has
been restated to include the operations of PRL.
Net Sales
The following table sets forth, for the periods indicated, net sales by
segment, excluding intersegment sales:
Three Months Ended
September 30,
1996 1995
__________ ___________
(In thousands)
Ophthalmic distribution $ 4,854 $ 5,616
Injectable distribution 1,902 850
Contract manufacturing 1,345 2,273
___________ __________
Total net sales $ 8,101 $ 8,739
=========== ==========
Consolidated net sales declined 7% in the quarter ended September 30,
1996 compared to the same period in 1995, with sales of $8.1 million
versus $8.7 million.
For the quarter ended September 30, 1996, ophthalmic distribution sales
declined 14% from the comparable period in 1995. This decline is
primarily related to the ongoing effect of the Company's decision to
discontinue its practice of giving discounts to wholesalers at the end
of every quarter. While this decision has resulted in lower sales
volume, it is expected to have a positive impact on margins in the
future. The generic pharmaceutical market continues to experience price
erosion which has impacted sales and margins. However, the patent for
the most significant therapeutic ophthalmic pharmaceutical product
(Timolol Maleate) will expire in March 1997. As previously announced,
the Company has received pre-approval on this product from the FDA. The
Company is aggressively pursuing negotiations with wholesaler and chain
pharmacy customers for the stocking of this product once patent
expiration occurs. The Company's core business of sales to
practitioners remains solid and margins are relatively stable. Efforts
of the ophthalmic division sales and marketing group will continue to be
focused in this area.
For the quarter ended September 30, 1996, injectable distribution sales
more than doubled as compared to the same period in 1995. This increase
includes the effects of the recent acquisition of an injectable product
line from Janssen Pharmaceutica, Inc. (Janssen) on July 1, 1996. Prior
to the acquisition, sales of this product line were reported as contract
manufacturing sales. Sales of the Janssen product for the quarter ended
September 30, 1996 were $617,000. In addition, the injectable
distribution segment has experienced growth on several of its high-
margin niche products.
<PAGE>
Since the merger with PRL, the Company has redirected a significant
amount of its R&D efforts towards the development of generic injectable
products that will enhance the current product portfolio offering of the
injectable distribution segment. Several grandfathered products are
expected to be available for sale in early 1997, pending the outcome of
our R&D efforts.
For the quarter ended September 30, 1996, contract manufacturing sales
declined 41% over the comparable period in 1995. This decline reflects
the transfer of sales of the Janssen product line to the injectable
distribution segment as noted above, and weakness in other contract
sales. Since the merger with PRL and the addition of new management,
the Company has increased its marketing efforts in the area of contract
manufacturing. This marketing effort focuses on Taylor's ability to
provide a full range of services including product development,
regulatory and sterile manufacturing. These efforts are expected to
help establish more long-term relationships with contract customers.
Gross Profit
Consolidated gross profit declined 10% to $3.0 million in the quarter
ended September 30, 1996 compared to $3.3 million for the same period of
the previous year, with gross margins declining slightly by one
percentage point. Margins for the ophthalmic segment were flat during
the comparable periods. While margins improved in the injectable
distribution segment, weakness in the contract manufacturing segment
resulted in an overall decline in consolidated margins due to
underabsorption of overhead.
In August, the Company took steps to reduce a significant portion of its
fixed and variable costs in the manufacturing operations. However, low
plant volume related to weakness in the contract manufacturing segment
and lower ophthalmic volume are expected to continue to have a negative
impact on gross margins in the manufacturing operations for the next
several quarters. The lower ophthalmic volume is attributable to the
Company's decision to discontinue its practice of discounting to
wholesalers noted above. This policy change has resulted in a current
overstock issue for several ophthalmic products.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses increased 6% during
the quarter ended September 30, 1996, as compared to the same period in
1995. This slight increase is primarily associated with changes in the
timing of certain large promotional expenses for the ophthalmic segment
and enhanced sales and marketing efforts in the contract manufacturing
and injectable distribution segments.
The percentage of S,G&A expenses to sales increased to 30.0% for the
quarter ended September 30, 1996 from 26.4% in the comparable prior year
period. This increase is related to the decline in sales and the
increase in certain promotional activities noted above. The Company
continues to monitor the required level of S,G&A expenses in relation to
sales performance.
Research and Development
Research and development (R&D) expense more than doubled to $515,000 for
the quarter ended September 30, 1996, as compared to $249,000 for the
same period in 1995. This increase reflects a change in the mix of
products under development to a lower concentration of ophthalmic
products which are being transferred from the Company's previous
manufacturing facilities (site transfers). The estimated cost of these
site transfers has been previously accrued and therefore does not have
an effect on R&D expense as reported in the statements of income. In
addition, the Company has continued the aggressive R&D efforts that had
been ongoing at PRL through contractual arrangements. The timing of
payments under these arrangements is not as consistent as for internally
generated products.
As noted previously, the Company has redirected a significant portion of
its R&D efforts to injectable products in response to the PRL merger.
These efforts include development of new products and the in-house
manufacture of products currently distributed by the injectable
distribution segment. The Company also continues the development of a
non-steroidal anti-inflammatory drug (NSAID) for ophthalmic use licensed
from Pfizer. Phase III studies for the NSAID are expected to begin in
early 1997. As of September 30, 1996, $657,000 of funds received from
Pfizer remain available for the financing of this project.
<PAGE>
Interest and Other Income/Expense
Interest expense for the quarters ended September 30, 1996 and 1995 was
$128,000 and $93,000, respectively. The increase in interest expense is
primarily due to the $1.5 million increase in debt outstanding resulting
from the acquisition of the Janssen product line and equipment.
Interest and other income for the quarters ended September 30, 1996 and
1995 was $164,000 and $112,000, respectively. Included in the amount
for the quarter ended September 30, 1996 is $150,000 of other income
related to international licensing rights granted on one of the
Company's ophthalmic products. For the quarter ended September 30,
1995, interest and other income includes an $80,000 gain recognized on
the sale of the Company's only equity investment.
Income Taxes
The effective tax rate for the quarters ended September 30, 1996 and
1995 was 38.6% and 35.2%, respectively. The Company has been in
discussions 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 paid, and some which the Company is currently appealing.
These adjustments primarily relate to the timing of deductions taken for
tax purposes in connection with the reorganization of the Company's
manufacturing operations in 1991. With respect to the appealed items,
the Company does not anticipate any adverse financial statement effect
as accruals have been previously recorded.
Net Income
Net income for the quarter ended September 30, 1996 was approximately
break-even compared to the prior year amount of $499,000 or three cents
per share, as a result of the factors noted above.
FINANCIAL CONDITION AND LIQUIDITY
Management assesses the Company's liquidity by its ability to generate
cash to fund its operations. The significant components in managing
liquidity are: funds generated by operations; levels of working capital
items including accounts receivable, inventories and accounts payable;
capital expenditure and debt repayment requirements; adequacy of
available lines of credit; and availability of long-term capital at
competitive prices.
The net cash provided by operating activities for the three months ended
September 30, 1996 was $889,000 compared to $277,000 for the
corresponding period in 1995. During the current quarter, the Company
recognized a significant cash benefit associated with wholesaler
chargebacks for the Janssen product line (see Note E to the financial
statements). This benefit was somewhat offset by declines in trade
accounts payable and increases in inventory. The Company is currently
revising and enhancing its control procedures associated with inventory
control. These changes are expected to help reduce inventory levels
within the Company beginning after the end of the calendar year.
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 the available working capital line 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 currently under negotiation with the IRS would
result in additional interest and taxes due of approximately $300,000.
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.
Net cash used in investing activities in the quarter ended September 30,
1996 of $1.5 million includes $1.6 million of property, plant and
equipment additions, primarily associated with equipment obtained in
the Janssen product line acquisition. The Company also invested
$340,000 in cash which was allocated to the acquired product line.
These uses of funds were somewhat offset by net maturities of
investments of approximately $500,000.
<PAGE>
The Company has plans for capital improvements of $1.5 million to $2
million for the remainder of 1996 and 1997. These improvements are for
both requirements to meet current FDA and DEA regulations as well as
upgrades to the Company's management information systems.
Net cash provided by financing activities for the quarter ended
September 30, 1996 of $382,000 primarily relates to the net effect of
$1.5 million of long-term borrowings associated with the Janssen product
line and equipment acquisition and paydowns on the Company's line of
credit and long-term facilities.
As of September 30, 1996, the Company had $2.5 million of working
capital financing available under its line of credit. In addition, $1.2
million of construction financing is available. The Company is in the
process of restructuring its bank credit facilities to lower its short-
term debt service requirements and to allow the flexibility for
additional financings for currently needed capital improvements and
product acquisitions.
<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-K for the fiscal year ended June 30, 1996 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
(11.1) Computation of Earnings per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
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/ Eric M. Wingerter
Eric M. Wingerter
Vice President - Finance and Administration
(Duly Authorized and Principal
Financial Officer)
Date: November 6, 1996
Akorn, Inc.
Exhibit 11.1
COMPUTATION OF NET INCOME PER SHARE
(In Thousands, Except Per Share Data)
Three Months Ended September 30,
1996 1995
____________ ___________
Earnings:
Income applicable to common stock $ 35 $ 499
=========== ===========
Shares:
Weighted average number of
shares outstanding 16,576 16,310
Additional shares assuming conversion
of options and warrants 291 350
__________ ___________
Pro forma shares 16,867 16,660
========== ===========
Net income per share $ - $ .03
========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE PERIOD ENDING SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 681,374
<SECURITIES> 400,481
<RECEIVABLES> 5,206,132
<ALLOWANCES> (359,442)
<INVENTORY> 9,480,601
<CURRENT-ASSETS> 17,188,258
<PP&E> 20,937,627
<DEPRECIATION> (8,054,700)
<TOTAL-ASSETS> 31,324,145
<CURRENT-LIABILITIES> 10,272,276
<BONDS> 4,501,872
0
0
<COMMON> 14,174,475
<OTHER-SE> 2,178,192
<TOTAL-LIABILITY-AND-EQUITY> 31,324,145
<SALES> 8,100,514
<TOTAL-REVENUES> 8,100,514
<CGS> 5,131,533
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,935,970
<LOSS-PROVISION> 12,00
<INTEREST-EXPENSE> (128,253)
<INCOME-PRETAX> 56,825
<INCOME-TAX> 21,402
<INCOME-CONTINUING> 35,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,423
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
