<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 September 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.)
2500 Millbrook Drive
Buffalo Grove, Illinois 60089
(Address of Principal Executive Offices) (Zip Code)
(847) 279-6100
(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 2, 1998 there were 18,087,114 shares of common stock, no
par value, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income
Three and nine months ended September 30,
1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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 10
Item 6. Exhibits and Reports on Form 8-K 12
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>
<TABLE>
<CAPTION>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
(UNAUDITED)
September 30, December 31,
1998 1997 *
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 259 $ 2,413
Short-term investments - 96
Accounts receivable, net 9,062 5,429
Inventory 12,690 9,955
Deferred income taxes 517 1,350
Prepaid expenses and other assets 736 390
--------- --------
TOTAL CURRENT ASSETS 23,264 19,633
PRODUCT LICENSES AND OTHER ASSETS 19,580 6,687
PROPERTY, PLANT AND EQUIPMENT, NET 14,890 12,395
--------- --------
TOTAL ASSETS $ 57,734 $ 38,715
========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Short-term borrowings $ - $ 1,750
Current installments of long-term
debt and capital lease obligations 3,725 149
Trade accounts payable 3,060 3,447
Income taxes payable - 462
Accrued compensation 1,160 985
Accrued expenses and other
liabilities 774 1,819
-------- -------
TOTAL CURRENT LIABILITIES 8,719 8,612
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 25,007 9,003
OTHER LONG-TERM LIABILITIES 297 849
SHAREHOLDERS' EQUITY
Common stock 17,513 16,241
Retained earnings 6,198 4,010
-------- --------
TOTAL SHAREHOLDERS' EQUITY 23,711 20,251
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 57,734 $ 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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 15,138 $ 11,058 $ 41,177 $30,102
Cost of goods sold 7,270 6,313 20,046 17,013
-------- -------- -------- -------
GROSS PROFIT 7,868 4,745 21,131 13,089
Selling, general and
administrative expenses 3,408 2,903 9,734 8,584
Amortization of intangibles 652 90 1,740 213
Research and development 1,187 342 3,143 1,071
Purchased research and
development 1,298 - 1,298 -
Relocation charges - - - 1,451
-------- ------ ------- -------
6,545 3,335 15,915 11,319
-------- ------ ------- -------
OPERATING INCOME 1,323 1,410 5,216 1,770
Interest expense (413) (115) (925) (368)
Offering expenses (350) - (350) -
Interest and other
income, net 35 14 33 168
-------- ------- ------ -------
(728) (101) (1,242) (200)
-------- ------- ------ -------
INCOME BEFORE
INCOME TAXES 595 1,309 3,974 1,570
Income taxes 250 484 1,480 581
-------- ------- ------ -------
NET INCOME $ 345 $ 825 $ 2,494 $ 989
======== ======== ======== =======
Per Share:
NET INCOME - BASIC $ 0.02 $ 0.05 $ 0.14 $ 0.06
NET INCOME - DILUTED $ 0.02 $ 0.05 $ 0.13 $ 0.06
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 17,948 16,606 17,829 16,599
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED 18,840 17,031 18,820 16,883
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
Nine months ended September 30,
1998 1997
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,494 $ 989
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization 2,709 1,214
Purchased research and development 1,298 -
Building and equipment write down - 400
Changes in operating assets and
liabilities (7,872) (242)
----------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (1,371) 2,361
INVESTING ACTIVITIES
Purchases of property, plant
and equipment (3,464) (1,233)
Product license acquisitions (12,473) (4,313)
Net maturities of investments 96 192
----------- --------
NET CASH USED IN INVESTING
ACTIVITIES (15,841) (5,354)
FINANCING ACTIVITIES
Repayment of long-term debt (12) (33)
Issuance of long-term debt 16,371 1,500
Proceeds from sale of stock 686 50
Reductions in capital lease
obligations (111) (113)
Short-term borrowings, net (1,750) 905
Debt acquisition costs (126) -
----------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 15,058 2,309
----------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,154) (684)
Cash and cash equivalents at
beginning of period 2,413 1,380
----------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 259 $ 696
=========== =======
</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 nine-month
periods ended September 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 transition period 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.
In July 1998, the Company financed the acquisition of four product
licenses with long-term debt in the amount of $3.332 million.
NOTE C - SUBSEQUENT EVENTS
On October 8, 1998, the Company closed the acquisition, effective
July 1, 1998, of the trade name and other rights to Endosol Extra, a
surgical irrigation solution, from Allergan, Inc. The Company paid
Allergan $1.0 million, with $0.5 million paid upon closing and an
additional $0.5 million payable on the first anniversary of the
closing date.
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
5
<PAGE>
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.
6
<PAGE>
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 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
September 30,
-------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Ophthalmic division $ 7,392 $ 6,535
Injectable division 7,746 4,523
-------- -------
Total net sales $ 15,138 $11,058
======== =======
</TABLE>
Consolidated net sales increased 37% in the quarter ended September
30, 1998 compared to the same period in 1997. Ophthalmic division
sales increased 13%, reflecting new product acquisitions and
introductions as well as growth in the base business. Injectable
division sales increased 71% compared to the same period in 1997,
reflecting strong sales in the base business as well as in acquired
products.
Consolidated gross profit increased 66% during the quarter ended
September 30, 1998 compared to the same period in 1997, with gross
margins increasing from 43% to 52%. Margins for the ophthalmic
division increased from 46% to 54% during the comparable periods,
primarily due to product acquisitions and a shift in sales mix to
higher-margin products. Margins for the injectable division
increased from 38% to 50%, primarily due to sales of acquired
products.
Selling, general and administrative (SG&A) expenses increased 17%
during the quarter ended September 30, 1998 as compared to the same
period in 1997, reflecting increased marketing and promotional
expenses and provisions for contractual and management bonus
obligations. The percentage of SG&A expenses to sales decreased from
26% to 23% despite the spending increases previously noted,
reflecting the ability to leverage existing operations to cover
incremental sales growth.
Research and development (R&D) expense increased 247% in the quarter
ended September 30, 1998, to $1,187,000 from $342,000 for the same
period in 1997. The increase reflects an increased number of
proprietary products under development. Improved gross profits have
allowed the Company to devote substantially greater resources to
developing patented products as part of its long-term growth
strategy.
The Company incurred one-time charges of $1,298,000 for R&D charges
related to the acquisition of Advanced Remedies, Inc. (ARI) in July
1998. The approximately $4,000,000 purchase price included, in
addition to capital equipment, all Abbreviated New Drug Applications
(ANDAs) for any product previously approved for ARI or under review
7
<PAGE>
by the FDA. The purchase price also included regulatory files for
products under development by ARI but not yet filed with the FDA.
The total purchase price was allocated among the acquired assets,
and the price associated with products not yet approved by the FDA
was designated purchased R&D and charged to expense.
Interest expense of $413,000 was higher than the prior-year
quarter's $115,000, primarily due to higher average outstanding debt
balances.
The Company incurred approximately $350,000 in expenses associated
with a proposed offering of 5.5 million shares of common stock.
Market conditions led the Company to request withdrawal of the
registration statement, and the related accounting legal and
printing fees were charged to expense in the quarter ended September
30, 1998.
The Company's effective tax rate for the quarter ended September 30,
1998 was 42% compared to 37% for the prior-year period, resulting
primarily from changes in the state tax provision. The Company
reported net income of $345,000 or $0.02 per diluted share for the
three months ended September 30, 1998. Net income for the
comparable prior-year period was $825,000.
Nine Months Ended September 30, 1998 Compared to 1997
The following table sets forth, for the periods indicated, net sales
by segment, excluding intersegment sales:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
--------- --------
(in thousands)
<S> <C> <C>
Ophthalmic division $ 21,206 $ 18,160
Injectable division 19,971 11,942
-------- --------
Total net sales $ 41,177 $ 30,102
======== ========
</TABLE>
Consolidated net sales increased 37% in the nine months ended
September 30, 1998 compared to the same period in 1997. Ophthalmic
division sales increased 17%, primarily due to product acquisitions
and introductions. Injectable division sales increased 67% compared
to the same period in 1997, due to product acquisitions as well as
strong sales in the base business.
Consolidated gross profit increased 61% during the nine months ended
September 30, 1998 compared to the same period in 1997, with gross
margins increasing from 43% to 51%. Margins for the ophthalmic
division increased from 45% to 51% 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 41% to 52%, primarily due to product
acquisitions.
Selling, general and administrative (SG&A) expenses increased 13%
during the nine months ended September 30, 1998 as compared to the
same period in 1997, reflecting increased marketing and promotional
activities, as well as provisions for employee and management
bonuses. The percentage of SG&A expenses to sales decreased from
8
<PAGE>
29% to 24% despite the increases noted above, reflecting the ability
to leverage existing operations to cover incremental sales growth.
Research and development (R&D) expense increased 194% in the nine
months ended September 30, 1998, to $3,143,000 from $1,071,000 for
the same period in 1997. The increase reflects an increased number
of proprietary products under development. Improved gross profits
have allowed the Company to devote substantially greater resources
to developing patented products as part of its long-term growth
strategy.
The Company incurred one-time charges of $1,298,000 for R&D charges
related to the acquisition of Advanced Remedies, Inc. (ARI) in July
1998. The approximately $4,000,000 purchase price included, in
addition to capital equipment, all Abbreviated New Drug Applications
(ANDAs) for any product previously approved for ARI or under review
by the FDA. The purchase price also included regulatory files for
products under development by ARI but not yet filed with the FDA.
The total purchase price was allocated among the acquired assets,
and the price associated with products not yet approved by the FDA
was designated purchased R&D and charged to expense.
During the nine months ended September 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 increased 151% to $925,000 from $368,000 in the
prior-year period, reflecting higher average debt balances.
The Company incurred approximately $350,000 in expenses associated
with a proposed offering of 5.5 million shares of common stock.
Market conditions led the Company to request withdrawal of the
registration statement, and the related accounting legal and
printing fees were charged to expense in the quarter ended September
30, 1998.
The Company's effective tax rate for the nine months ended September
30, 1998 was 37%, unchanged from the prior-year period. The
Company's average effective tax rate will increase due to the move
to a state with higher tax rates. The Company reported net income
of $2,494,000 or $0.13 per diluted share for the nine months ended
September 30, 1998. Net income for the comparable prior-year period
was $989,000.
FINANCIAL CONDITION AND LIQUIDITY
Working capital at September 30, 1998 was $14.5 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.
The Company borrowed $6.0 million under its line of credit in July
1998 to finance acquisitions. At September 30, 1998 the Company had
$1.9 million of financing available under its line of credit.
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.
9
<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 transition period 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
None.
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.
10
<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: November 2, 1998
11
<PAGE>
Akorn, Inc.
Exhibit 11.1
COMPUTATION OF NET INCOME PER SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------ -------- ------
<S> <C> <C> <C> <C>
Earnings:
Income applicable
to common stock $ 345 $ 825 $ 2,494 $ 989
Weighted average
number of shares
outstanding 17,948 16,606 17,829 16,599
Net income per
share - basic $ 0.02 $ 0.05 $ 0.14 $ 0.06
Additional shares
assuming conversion
of options and warrant 892 425 991 284
Pro forma shares 18,840 17,031 18,820 16,883
Net income per
share - diluted $ 0.02 $ 0.05 $ 0.13 $ 0.06
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 259,237 259,237
<SECURITIES> 0 0
<RECEIVABLES> 9,062,322 9,062,322
<ALLOWANCES> 0 0
<INVENTORY> 12,689,677 12,689,677
<CURRENT-ASSETS> 23,264,570 23,264,570
<PP&E> 25,335,009 25,335,009
<DEPRECIATION> (10,445,184) (10,445,184)
<TOTAL-ASSETS> 57,734,236 57,734,236
<CURRENT-LIABILITIES> 8,718,915 8,718,915
<BONDS> 0 0
0 0
0 0
<COMMON> 17,314,904 17,314,904
<OTHER-SE> 6,396,242 6,396,242
<TOTAL-LIABILITY-AND-EQUITY> 57,734,236 57,734,236
<SALES> 15,138,372 41,176,688
<TOTAL-REVENUES> 15,138,372 41,176,688
<CGS> 7,270,742 20,046,079
<TOTAL-COSTS> 7,270,742 20,046,079
<OTHER-EXPENSES> 5,596,373 14,966,485
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 412,647 925,201
<INCOME-PRETAX> 595,486 3,974,648
<INCOME-TAX> 250,107 1,480,380
<INCOME-CONTINUING> 345,379 2,494,268
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 345,379 2,494,268
<EPS-PRIMARY> .02 .14
<EPS-DILUTED> .02 .13
</TABLE>
