<PAGE>
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 JUNE 30, 1998
( ) 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 TRI-STATE INTERNATIONAL, STE. 100
LINCOLNSHIRE, ILLINOIS 60069
(Address of Principal Executive Offices) (Zip Code)
(847) 236-3800
(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 July 21, 1998 there were 17,927,063 shares of common stock, no par value,
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Page
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial
Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
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.
1
<PAGE>
<TABLE>
<CAPTION>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
(UNAUDITED)
June 30, December 31,
1998 1997 *
-------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 594 $ 2,413
Short-term investments - 96
Accounts receivable, net 8,908 5,429
Inventory 11,922 9,955
Deferred income taxes 517 1,350
Prepaid expenses and other assets 387 390
------- -------
TOTAL CURRENT ASSETS 22,328 19,633
PRODUCT LICENSES AND OTHER ASSETS 13,373 6,687
PROPERTY, PLANT AND EQUIPMENT, NET 12,519 12,395
------- -------
TOTAL ASSETS $48,220 $38,715
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 250 $ 1,750
Current installments of long-term debt and
capital lease obligations 3,722 149
Trade accounts payable 3,680 3,447
Income taxes payable 333 462
Accrued compensation 881 985
Accrued expenses and other liabilities 2,032 1,819
------- -------
TOTAL CURRENT LIABILITIES 10,898 8,612
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 13,763 9,003
OTHER LONG-TERM LIABILITIES 297 849
SHAREHOLDERS' EQUITY
Common stock 17,104 16,241
Retained earnings 6,158 4,010
------- -------
TOTAL SHAREHOLDERS' EQUITY 23,262 20,251
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 48,220 $ 38,715
------- -------
------- -------
</TABLE>
*Condensed from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 13,987 $ 10,176 $ 26,038 $19,044
Cost of goods sold 6,966 5,260 12,775 10,700
-------- -------- -------- -------
GROSS PROFIT 7,021 4,916 13,263 8,344
Selling, general and
administrative expenses 3,675 3,246 7,420 5,804
Research and development 1,246 368 1,974 729
Relocation charges - - - 1,451
-------- -------- -------- -------
4,921 3,614 9,394 7,984
-------- -------- -------- -------
OPERATING INCOME 2,100 1,302 3,869 360
Interest expense (301) (138) (492) (254)
Interest and other income, net - 14 2 155
-------- -------- -------- -------
(301) (124) (490) (99)
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 1,799 1,178 3,379 261
Income taxes 698 436 1,230 97
-------- -------- -------- -------
NET INCOME $1,101 $742 $2,149 $164
-------- -------- -------- -------
-------- -------- -------- -------
Per Share:
NET INCOME - BASIC $0.06 $0.04 $0.12 $0.01
-------- -------- -------- -------
-------- -------- -------- -------
NET INCOME - DILUTED $0.06 $0.04 $0.11 $0.01
-------- -------- -------- -------
-------- -------- -------- -------
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC 17,850 16,598 17,769 16,596
-------- -------- -------- -------
-------- -------- -------- -------
- DILUTED 19,094 16,800 18,837 16,802
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
Six months ended June 30,
1998 1997
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,149 $ 164
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization 1,846 809
Building and equipment write down - 400
Changes in operating assets and liabilities (4,669) 1,724
-------- -------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (674) 3,097
INVESTING ACTIVITIES
Purchases of property, plant and equipment (950) (981)
Product license acquisitions (7,580) (4,305)
Net maturities of investments 96 -
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,434) (5,286)
FINANCING ACTIVITIES
Repayment of long-term debt - (21)
Issuance of long-term debt 8,405 1,500
Proceeds from sale of stock 583 13
Reductions in capital lease obligations (73) (78)
Short-term borrowings, net (1,500) 132
Debt acquisition costs (126) -
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,289 1,546
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,819) (643)
Cash and cash equivalents at beginning of period 2,413 1,380
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 594 $ 737
-------- -------
-------- -------
</TABLE>
See notes to condensed consolidated financial statements.
4
<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- and six-month periods ended
June 30, 1998 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 year ended December 31, 1997,
included in the Company's Annual Report on Form 10-K.
NOTE B - NONCASH TRANSACTIONS
On June 5, 1998, a former employee exercised options for 105,000 shares of
the Company's common stock. The individual tendered approximately 22,000
shares of the Company's outstanding stock as consideration for the option
exercise and approximately 33,000 shares to satisfy the personal income tax
withholding requirements of the transaction, all of which was recorded as
treasury stock. The net effect of this transaction was to increase accrued
liabilities by $280,000, increase common stock and paid in capital by
$185,000, and increase treasury stock by $465,000.
NOTE C - SUBSEQUENT EVENTS
On July 14, 1998, the Company announced the acquisition of three ophthalmic
diagnostic products from Allergan, Inc. The Company paid Allergan $4.65
million, with $2.0 million paid upon closing, $1.5 million payable one year
from the closing and $1.15 million payable two years from the closing.
On July 16, 1998, the Company announced the acquisition of the Advanced
Remedies, Inc. ophthalmic manufacturing and development operation from Sidmak
Laboratories, Inc. The Company paid Sidmak approximately $4.0 million cash,
financed through the Company's line of credit.
NOTE D - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires all items of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Other comprehensive income may include
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. The
accumulated balance of other comprehensive income must be displayed
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company has adopted
this accounting standard January 1, 1998, as required. Currently, the
Company does not have any items that qualify as "other comprehensive income."
Accordingly, no separate statement has been presented herein.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company will adopt
this accounting standard as of December 31, 1998, as required. The Company
expects to continue reporting on ophthalmic and injectable segments.
5
<PAGE>
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Ophthalmic division $ 7,334 $ 5,949
Injectable division 6,653 4,227
-------- --------
Total net sales $ 13,987 $ 10,176
-------- --------
-------- --------
</TABLE>
Consolidated net sales increased 37% in the quarter ended June 30, 1998
compared to the same period in 1997. Ophthalmic division sales increased
23%, reflecting new product acquisitions and introductions as well as growth
in the base business. Injectable division sales increased 57% compared to
the same period in 1997 due to product acquisitions and increased contract
manufacturing activity.
Consolidated gross profit increased 43% during the quarter ended June 30,
1998 compared to the same period in 1997, with gross margins increasing from
48% to 50%. Margins for the ophthalmic division increased from 46% to 52%
during the comparable periods, primarily due to product acquisitions and a
shift in sales mix to higher-margin products. Margins for the injectable
division decreased from 52% to 49%, with increases due to product
acquisitions partially offset by changes in product mix in the base business.
Selling, general and administrative (SG&A) expenses increased 13% during the
quarter ended June 30, 1998 as compared to the same period in 1997. This
increase is primarily due to increased amortization of intangibles related to
product acquisitions as well as increased marketing and promotional expenses
and provisions for contractual bonus obligations. The percentage of SG&A
expenses to sales decreased from 32% to 26%, despite the spending increases
previously noted.
Research and development (R&D) expense increased 239% in the quarter ended
June 30, 1998, to $1,246,000 from $368,000 for the same period in 1997. The
increase reflects an increased number of products under development.
Improved gross profits have allowed the Company to devote substantial
resources to developing patented products as part of its long-term growth
strategy.
Interest expense of $301,000 was up 118% on higher average outstanding debt
balances.
The Company's effective tax rate for the quarter ended June 30, 1998 was 39%
compared to 37% for the prior-year period, resulting primarily from changes
in the state tax provision. The Company reported net income of $1,101,000 or
$0.06 per diluted share for the three months ended June 30, 1998. Net income
for the comparable prior-year period was $742,000 or $0.04 per diluted share.
6
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Ophthalmic division $13,815 $ 11,625
Injectable division 12,223 7,419
-------- --------
Total net sales $26,038 $ 19,044
-------- --------
-------- --------
</TABLE>
Consolidated net sales increased 37% in the six months ended June 30, 1998
compared to the same period in 1997. Ophthalmic division sales increased
19%, reflecting new product introductions and acquisitions as well as growth
in the base business. Injectable division sales increased 65% compared to
the same period in 1997, primarily due to product acquisitions and increased
contract manufacturing activity.
Consolidated gross profit increased 59% during the six months ended June 30,
1998 compared to the same period in 1997, with gross margins increasing from
44% to 51%. Margins for the ophthalmic division increased from 45% to 49%
during the comparable periods, primarily due to product acquisitions and
introductions and a shift in sales mix to higher-margin products. Margins for
the injectable division increased from 42% to 53%, primarily due to product
acquisitions. During the six months ended June 30, 1997, injectable cost of
sales was increased by an $84,000 inventory adjustment and a $213,000 charge
for a change in the timing of overhead absorption. Excluding these charges,
margins for the injectable segment increased from 46% to 53%.
Selling, general and administrative (SG&A) expenses increased 28% during the
six months ended June 30, 1998 as compared to the same period in 1997. This
increase is due to increased amortization of intangibles related to product
acquisitions as well as increased marketing and promotional expenses and
provisions for contractual bonus obligations. The percentage of SG&A
expenses to sales decreased to 28%.
Research and development (R&D) expense increased 171% in the six months ended
June 30, 1998, to $1,974,000 from $729,000 for the same period in 1997. The
increase reflects a greater number of products under development. Improved
gross profits have allowed the Company to devote substantial resources to
developing patented products as part of its long-term growth strategy.
During the six months ended June 30, 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.
Interest expense of $492,000 was up 94% on higher average outstanding debt
balances.
The Company's effective tax rate for the six months ended June 30, 1998 was
36% compared to 37% for the prior-year period. The Company reported net
income of $2,149,000 or $0.11 per diluted share for the six months ended June
30, 1998. Net income for the comparable prior-year period was $164,000 or
$0.01 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
Working capital at June 30, 1998 was $11.4 million compared to $11.0 million
at December 31, 1997. The Company amended its bank credit facilities in July
1998 to allow for additional financing. At June 30, 1998 the Company had
$10.3 million available under its line of credit. The Company borrowed $6.0
million under its line of credit in July 1998 to finance acquisitions. 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 immediate
future.
7
<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 year ended December 31, 1997 and in Note P 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 May 15,
1998. Daniel E. Bruhl, M.D. was elected to the Board of Directors
with 16,029,603 votes for and 27,979 votes abstaining. Floyd
Benjamin was elected to the Board of Directors with 16,033,225
votes for and 24,357 votes abstaining. Doyle S. Gaw was elected to
the Board of Directors with 16,032,225 votes for and 25,357 votes
abstaining. John N. Kapoor, Ph.D. was elected to the Board of
Directors with 16,033,094 votes for and 24,488 votes abstaining.
The proposal to amend the company's amended and restated 1988
Incentive Compensation Program increasing the number of shares
issuable from 3.0 million to 4.5 million and to revise the
definition of Fair Market Value to reflect current practice was
approved with 10,107,571 votes for, 884,331 votes against and
70,722 votes abstaining.
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.
8
<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: July 21, 1998
<PAGE>
AKORN, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ---------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Earnings:
Income applicable to common stock $1,101 $742 $ 2,149 $164
------ ------ ------- -------
------ ------ ------- -------
Weighted average number of shares
outstanding 17,850 16,598 17,769 16,596
Net income per share - basic $ 0.06 $ 0.04 $ 0.12 $ 0.01
Additional shares assuming conversion
of options and warrants 1,244 202 1,068 206
------ ------ ------- -------
Pro forma shares 19,094 16,800 18,837 16,802
------ ------ ------- -------
------ ------ ------- -------
Net income per share - diluted $ 0.06 $ 0.04 $ 0.11 $ 0.01
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> MAR-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 593,584 593,584
<SECURITIES> 0 0
<RECEIVABLES> 8,908,291 8,908,291
<ALLOWANCES> 0 0
<INVENTORY> 11,921,664 11,921,664
<CURRENT-ASSETS> 22,327,572 22,327,572
<PP&E> 22,951,819 22,951,819
<DEPRECIATION> (10,432,548) (10,432,548)
<TOTAL-ASSETS> 48,220,387 48,220,387
<CURRENT-LIABILITIES> 10,897,973 10,897,973
<BONDS> 0 0
0 0
0 0
<COMMON> 17,569,383 17,569,383
<OTHER-SE> 5,693,510 5,693,510
<TOTAL-LIABILITY-AND-EQUITY> 48,220,387 48,220,387
<SALES> 13,987,401 26,038,314
<TOTAL-REVENUES> 13,987,401 26,038,314
<CGS> 6,966,439 12,775,336
<TOTAL-COSTS> 6,966,439 12,775,336
<OTHER-EXPENSES> 4,921,715 9,394,024
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 300,994 490,616
<INCOME-PRETAX> 1,798,254 3,379,163
<INCOME-TAX> 698,000 1,230,273
<INCOME-CONTINUING> 1,100,254 2,148,890
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,100,254 2,148,890
<EPS-PRIMARY> 0.06 0.12
<EPS-DILUTED> 0.06 0.11
</TABLE>
