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, 1997
( ) 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 9, 1997 there were 16,597,696 shares of common stock, no par value,
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
The information contained in this filing, other than historical information,
consists of forward-looking statements that involve risks and uncertainties
that could cause actual results to differ materially from those described in
such statements. Such statements regarding the timing of acquiring,
developing and financing new products, of bringing them on line and of
deriving revenues and profits from them, as well as the effect of those
revenues and profits on the company's margins and financial position, is
uncertain because many of the factors affecting the timing of those items are
beyond the company's control.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
(UNAUDITED)
March 31, December 31,
1997 1996*
--------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,938 $ 1,380
Short-term investments 576 576
Accounts receivable, net 5,423 4,625
Inventory 8,548 8,838
Prepaid expenses and other assets 1,803 1,502
-------- --------
TOTAL CURRENT ASSETS 19,288 16,921
OTHER ASSETS 1,368 1,340
PROPERTY, PLANT and EQUIPMENT, NET 12,589 12,833
-------- --------
TOTAL ASSETS $ 33,245 $ 31,094
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 100 $ 250
Current installments of long-term debt and
capital lease obligations 414 170
Trade accounts payable 3,323 1,892
Accrued compensation 882 885
Accrued expenses and other liabilities 7,128 5,520
-------- --------
TOTAL CURRENT LIABILITIES 11,847 8,717
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 4,911 5,211
OTHER LONG-TERM LIABILITIES 690 792
SHAREHOLDERS' EQUITY
Common stock 14,143 14,143
Retained earnings 1,654 2,231
-------- --------
TOTAL SHAREHOLDERS' EQUITY 15,797 16,374
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 33,245 $ 31,094
======== ========
*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
March 31,
1997 1996
--------- --------
Net sales $ 8,869 $ 8,817
Cost of sales 5,441 5,751
--------- --------
GROSS PROFIT 3,428 3,066
Selling, general and
administrative expenses 2,558 1,906
Research and development 361 388
Relocation expenses 1,451 -
--------- --------
4,370 2,294
--------- --------
OPERATING INCOME (LOSS) (942) 772
Interest expense (116) (127)
Interest and other income, net 141 114
--------- --------
25 (13)
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES (917) 759
Income taxes (benefit) (340) 209
--------- --------
NET INCOME (LOSS) $ (577) $ 550
========= ========
Per Share:
NET INCOME (LOSS) $ ( 0.03) $ 0.03
========= ========
WEIGHTED AVERAGE
SHARES OUTSTANDING 16,592 16,816
========= ========
See notes to condensed consolidated financial statements.
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
Three months ended March 31,
1997 1996
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ (577) $ 550
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 376 271
Building and equipment write down 400 -
Changes in operating assets and liabilities 1,985 (242)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,184 579
INVESTING ACTIVITIES
Purchases of property, plant and equipment (360) (594)
Net maturities of investments - 604
Product licensing costs (60) (25)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (420) (15)
FINANCING ACTIVITIES
Repayment of long-term debt (16) (138)
Issuance of long-term debt - 400
Proceeds from sale of stock - 25
Pre-funded development receipts - 137
Reductions in capital lease obligations (40) (66)
Repayment of short-term borrowings, net (150) (235)
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (206) 123
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,558 687
Cash and cash equivalents at beginning of period 1,380 483
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,938 $ 1,170
======== ========
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. These financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and accordingly 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 March 31,
1997 are not necessarily indicative of the results that may be expected for a
full year. For further information, refer to the consolidated financial
statements and footnotes for the transition period ended December 31, 1996,
included in the Company's Annual Report on Form 10-K.
NOTE B - RELOCATION EXPENSES
During the quarter ended March 31, 1997, the Company recorded $1,451,000 in
charges related to the relocation of the ophthalmic division and executive
offices from Abita Springs, Louisiana to the Chicago area. The charges
primarily relate to severance and retention bonus payments as well as a
write-down of the Abita Springs facility and equipment to net realizable
value.
NOTE C - SUBSEQUENT EVENTS
Effective April 1, 1997, the Company entered into an agreement with Becton
Dickinson and Company to acquire the rights to distribute three products.
Two of the products, ICG Cardio-Green and BAL in Oil, are New Drug
Application Products with no generic competition. The third product, Indigo
Carmine, is a grandfathered product with several competitors in the market-
place. The acquisition transfers ownership of the NDAs and regulatory files,
as well as the trade names and trademarks for the products. In exchange
for the products, the Company paid Becton Dickinson and Company $4.0
million plus the cost of existing product inventory. Payment consisted
of $2.7 million cash at closing, a $1.5 million promissory note secured
by an irrevocable letter of credit and a final cash payment for the
remaining inventory value due August 1, 1997. The cash payment was
financed with existing cash balances and a $1.5 million draw on the
Company's line of credit.
NOTE D - CHANGE IN ACCOUNTING ESTIMATES
During the quarter ended March 31, 1997, the Company increased its
estimate for unsaleable inventory by $84,000 and changed the timing of
absorption of manufacturing overhead expenses, resulting in a one-time
charge of $213,000. These changes in estimates are reported as an
increase in cost of goods sold.
During the quarter ended March 31, 1996, the Company increased its
estimate for unsaleable inventory by approximately $300,000. This change
in estimate was reported as an increase in cost of goods sold. During the
same quarter, an evaluation by the Company resulted in a change in the
estimated liability related to aged customer credits, resulting in a
reduction of selling, general and administrative expenses of $85,000. A
decision 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, resulted in a $316,000 reduction of selling, general and
administrative expenses.
<PAGE>
NOTE E - RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128 "Earnings per
Share" ("SFAS 128") which changes the method of calculating earnings per
share (EPS). SFAS 128 requires the presentation of "basic" EPS and
"diluted" EPS on the face of the statement of operations. Basic EPS is
computed by dividing the net income available to common shareholders by
the weighted averages shares of outstanding common stock. The
calculation of diluted EPS is similar to basic EPS except that the
denominator includes dilutive common stock equivalents such as stock
options and warrants. The statement is effective for financial statements
for periods ending after December 15, 1997. The Company will adopt
SFAS 128 in the fourth quarter of 1997. The Company's current EPS
calculation significantly conforms to basic EPS Diluted EPS is not
expected to be materially different from basic EPS since potential
common shares in the form of common stock options and warrants are not
estimated to be materially dilutive.
<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 Akorn
Manufacturing, Inc., DBA Taylor Pharmaceuticals (Taylor). All
financial information presented for the period ended March 31, 1996
has been restated to include the operations of PRL.
Three Months Ended March 31, 1997 Compared to 1996
The following table sets forth, for the periods indicated, net sales
by segment, excluding intersegment sales:
Three Months Ended
March 31,
1997 1996
------ ------
(in thousands)
Ophthalmic distribution $ 5,676 $ 5,161
Injectable distribution 1,569 1,192
Contract manufacturing 1,624 2,464
------- -------
Total net sales $ 8,869 $ 8,817
======= =======
Consolidated net sales were relatively flat in the quarter ended March
31, 1997 compared to the same period in 1996. Ophthalmic distribution
sales increased 10% despite the ongoing effect of the Company's decision
to discontinue its practice of giving discounts to wholesalers at the end
of every quarter. The growth in sales is attributable to the surgical
instrument and diagnostic product lines, as well as initial shipments of
the Company's generic version of Timolol Maleate, which went off patent
March 25, 1997.
Injectable distribution sales increased 32% compared to the same period in
1996, reflecting sales of the injectable product line acquired from Janssen
Pharmaceutica, Inc. in July 1996. Sales of the Janssen products during the
quarter were $422,000. Prior to the acquisition, sales of this product line
were reported as contract manufacturing sales. For the quarter ended March 31,
1997, contract manufacturing sales declined 34% over the comparable period in
1996. This decline reflects the transfer of the Janssen product line to the
injectable distribution segment as well as weakness in other contract sales.
Simultaneously, intercompany contract manufacturing sales, which are eliminated
in consolidation, increased from $448,000 to $1,200,000 for the quarters ended
March 31, 1996 and 1997, respectively. The Company has increased its marketing
efforts in the area of contract manufacturing, focusing on Taylor's ability to
provide a full range of services including product development, regulatory and
sterile manufacturing.
Consolidated gross profit increased 12% during the quarter ended March 31, 1997
compared to the same period in 1996, with gross margins increasing from 35% to
39%. Margins for the ophthalmic segment increased from 32% to 44% during the
comparable periods, primarily due to a $300,000 inventory adjustment charge
taken in 1996. Excluding the inventory adjustment, gross margins for the
ophthalmic segment increased from 38% to 44%, reflecting the discontinuation of
wholesaler discounts, renegotiated product royalties and the introduction of
timolol late in the quarter. Margins for the injectable segment (including
both injectable distribution and contract manufacturing) declined from 38% to
29%, primarily due to an $84,000 inventory adjustment and a $213,000 charge
for a change in the timing of overhead absorption taken in the quarter ended
March 31, 1997. Excluding these charges, margins for the injectable segment
showed a slight increase from 38% to 39% in the comparable periods.
<PAGE>
Selling, general and administrative (SG&A) expenses increased 34% during the
quarter ended March 31, 1997 as compared to the same period in 1996. This
increase is primarily due to a $400,000 reduction in estimated accrued expenses
reversed in 1996. Excluding these reversals, SG&A expenses increased 11%
during the quarter, reflecting increased marketing and promotional activities
in both segments. The percentage of SG&A expenses to sales, after exclusion of
the 1996 expense reversals, increased from 26% to 29%, reflecting the increased
marketing and promotional activities noted above.
Research and development (R&D) expense declined 7% in the quarter ended March
31, 1997, to $361,000 from $388,000 for the same period in 1996. The decrease
reflects timing of research activities rather than a change in the Company's
strategy. Management expects R&D expenses in 1997 to increase over prior year
levels.
During the quarter ended March 31, 1997, the Company recorded $1,451,000 in
charges related to the relocation of the ophthalmic division and executive
offices from Abita Springs, Louisiana to the Chicago area. The charges
primarily relate to severance and retention bonus payments as well as a write-
down of the Abita Springs facility and equipment to net realizable value.
Net interest and other income of $25,000 was higher than the prior-year
quarter's $13,000 expense, primarily due to increased licensing fees and
slightly reduced interest expense on lower outstanding debt balances.
The Company's effective tax rate for the quarter ended March 31, 1997 was 37%
compared to 28% for the prior-year period. The lower effective rate in 1996
reflects the fact that PRL was a subchapter S corporation and not subject to
corporate income taxes. The Company reported a loss of $577,000 or $0.03 per
share for the three months ended March 31, 1997, due to the charge for the
relocation of the ophthalmic division and executive offices to Chicago and the
change in timing of manufacturing absorption of overhead expenses. Net income
for the comparable prior-year period was $550,000 or $0.03 per share.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128 "Earnings per Share" ("SFAS 128")
which changes the method of calculating earnings per share (EPS). SFAS 128
requires the presentation of "basic" EPS and "diluted" EPS on the face of the
statement of operations. Basic EPS is computed by dividing the net income
available to common shareholders by the weighted averages shares of outstanding
common stock. The calculation of diluted EPS is similar to basic EPS except
that the denominator includes dilutive common stock equivalents such as stock
options and warrants. The statement is effective for financial statements for
periods ending after December 15, 1997. The Company will adopt SFAS 128 in the
fourth quarter of 1997. The Company's current EPS calculation significantly
conforms to basic EPS Diluted EPS is not expected to be materially different
from basic EPS since potential common shares in the form of common stock
options and warrants are not estimated to be materially dilutive
FINANCIAL CONDITION AND LIQUIDITY
Working capital at March 31, 1997 was $7.4 million compared to $8.2 million in
the comparable prior year. The Company restructured its bank credit facilities
in February 1997 to lower its short-term debt service requirements and to allow
for additional financing. At March 31, 1997 the Company had $3.0 million of
working capital financing available under its line of credit in addition to
$2.0 million of construction and equipment financing. The Company borrowed
$1.5 million under its line of credit on April 1, 1997 to finance a product
purchase from Becton Dickinson and Company. See Note B of Notes to Condensed
Consolidated Financial Statements. Management believes that existing cash,
cash flows from operations and available bank credit are sufficient to handle
the Company's requirements for the foreseeable future.
<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 interim
period ended December 31, 1996 and in Note W to the consolidated financial
statements included in that report.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on February 28, 1997.
Daniel E. Bruhl, M.D. was elected to the Board of Directors with 12,550,029
votes for and 1,031,186 votes abstaining. Floyd Benjamin was elected to the
Board of Directors with 13,178,474 votes for and 402,741 votes abstaining.
Doyle S. Gaw was elected to the Board of Directors with 12,550,978 votes for
and 1,030,237 votes abstaining. John N. Kapoor, Ph.D. was elected to the
Board of Directors with 13,175,357 votes for and 405,858 votes abstaining.
The motion to approve the amendment to the Company's articles of incor-
poration to increase the authorized shares of common stock from 20 million
shares to 40 million shares was approved with 12,251,151 votes for,
1,279,114 votes against and 50,950 votes abstaining. The motion to approve
the amendment of the Company's articles of incorporation to authorize 5 million
shares of preferred stock was approved by 7,712,734 votes for, 2,478,723 votes
against, 73,874 votes abstaining and 3,315,884 shares not voting. The motion to
approve the amendment of the Company's 1988 Incentive Compensation Program to
increase the number of shares issuable through the Program by 1 million and to
allow grants to consultants was approved with 8,202,920 votes for, 2,161,195
votes against, 102,309 votes abstaining and 3,114,791 shares not voting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11.1) Computation of Earnings (Loss) per Share
(27) Financial Data Schedule
(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/ Rita J. McConville
----------------------
Rita J. McConville
Vice President, Chief Financial Officer and Secretary
(Duly Authorized and Principal Financial Officer)
Date: May 9, 1997
<PAGE>
Akorn, Inc.
Exhibit 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In Thousands, Except Per Share Data)
Three Months Ended March 31,
1997 1996
----------- -----------
Earnings (Loss):
Income (loss) applicable to common stock $ (577) $ 550
Shares:
Weighted average number of shares outstanding 16,592 16,728
Additional shares assuming conversion
of options and warrants - 88
------ ------
Pro forma shares 16,592 16,816
====== ======
Net income (loss) per share $ (0.03) $ 0.03
====== ======
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,937,567
<SECURITIES> 576,000
<RECEIVABLES> 5,422,563
<ALLOWANCES> 0
<INVENTORY> 8,548,317
<CURRENT-ASSETS> 19,287,769
<PP&E> 21,332,819
<DEPRECIATION> 8,743,616
<TOTAL-ASSETS> 33,245,366
<CURRENT-LIABILITIES> 11,847,290
<BONDS> 0
<COMMON> 14,143,755
0
0
<OTHER-SE> 1,653,144
<TOTAL-LIABILITY-AND-EQUITY> 33,245,366
<SALES> 8,868,780
<TOTAL-REVENUES> 8,868,780
<CGS> 5,440,895
<TOTAL-COSTS> 5,440,895
<OTHER-EXPENSES> 4,369,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,629
<INCOME-PRETAX> (917,277)
<INCOME-TAX> (339,383)
<INCOME-CONTINUING> (577,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (577884)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
