<PAGE> 1
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, 1999
( ) 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 October 31, 1999 there were 18,412,574 shares of common stock, no par value,
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Page
----
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 6
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
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
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AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
(UNAUDITED)
September 30, December 31,
1999 1998*
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 705 $ 736
Trade accounts receivable, net 15,061 11,165
Inventory 14,531 11,004
Prepaid expenses and other current assets 1,741 2,043
------- -------
TOTAL CURRENT ASSETS 32,038 24,948
OTHER ASSETS 19,742 20,608
PROPERTY, PLANT AND EQUIPMENT, NET 19,212 15,860
------- -------
TOTAL ASSETS $70,992 $61,416
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Current installments of long-term debt
and capital lease obligations $ 3,728 $ 7,445
Trade accounts payable 4,715 3,476
Accrued compensation 1,212 858
Accrued expenses and other current liabilities 4,422 2,129
------- -------
TOTAL CURRENT LIABILITIES 14,077 13,908
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 24,698 20,490
OTHER LONG-TERM LIABILITIES 738 738
SHAREHOLDERS' EQUITY
Common stock 18,316 17,952
Retained earnings 13,163 8,328
------- -------
TOTAL SHAREHOLDERS' EQUITY 31,479 26,280
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $70,992 $61,416
======= =======
*Condensed from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
2
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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,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 16,795 $ 15,138 $ 47,604 $ 41,177
Cost of goods sold 7,863 7,270 22,913 20,046
-------- -------- -------- --------
GROSS PROFIT 8,932 7,868 24,691 21,131
Selling, general and
administrative expenses 4,648 3,394 12,906 9,720
Amortization of intangibles 356 682 1,539 1,771
Research and development 603 1,187 1,703 3,143
-------- -------- -------- --------
5,607 5,263 16,148 14,634
======== ======== ======== ========
OPERATING INCOME 3,325 2,605 8,543 6,497
Interest expense (506) (413) (1,338) (925)
Offering expenses - (350) - (350)
Interest and other income, net (6) 35 405 33
======== ======== ======== ========
(512) (728) (933) (1,242)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,813 1,877 7,610 5,255
Income taxes 1,111 788 2,775 2,018
-------- -------- -------- --------
NET INCOME $ 1,702 $ 1,088 $ 4,835 $ 3,237
======== ======== ======== ========
Per Share:
NET INCOME - BASIC $ 0.09 $ 0.06 $ 0.26 $ 0.18
======== ======== ======== ========
NET INCOME - DILUTED $ 0.09 $ 0.06 $ 0.26 $ 0.17
======== ======== ======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC 18,477 17,948 18,273 17,829
======== ======== ======== ========
- DILUTED 18,881 18,840 18,702 18,820
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
<PAGE> 5
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
Nine months ended September 30,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 4,835 $ 3,237
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,823 2,725
Changes in operating assets and liabilities (3,874) (7,334)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,784 (1,372)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,288) (2,919)
Net maturities of investments 0 96
Product licensing/acquisition costs (529) (13,017)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,817) (15,840)
FINANCING ACTIVITIES
Repayment of long-term debt (13,642) (12)
Proceeds from issuance of long-term debt 14,400 16,371
Proceeds from sale of stock 364 686
Reductions in capital lease obligations (120) (111)
Repayment of short-term borrowings, net - (1,750)
Debt acquisition costs - (126)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,002 15,058
-------- --------
DECREASE IN CASH AND
CASH EQUIVALENTS (31) (2,154)
Cash and cash equivalents at beginning of period 736 2,413
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 705 $ 259
======== ========
See notes to condensed consolidated financial statements.
4
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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).
Effective July 1, 1999, the Company merged Taylor Pharmaceuticals, Inc. into
Akorn, Inc. and spun off its Somerset, New Jersey operation forming a wholly
owned subsidiary Akorn (New Jersey), Inc., an Illinois corporation. 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, 1999 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, 1998, included in the Company's Annual Report on Form 10-K.
NOTE B - NONCASH TRANSACTIONS
During the first quarter of 1999, the Company settled an outstanding $685,000
account receivable with one of its customers. In conjunction with this
settlement, the Company reversed a specific allowance for doubtful account of
$300,000, received production equipment with a fair market value of $640,000 and
$223,000 in cash. The Company recognized a gain on this transaction of $178,000.
The Company received an additional $97,000 in cash in the second quarter and
recognized an additional gain equal to the cash payment.
On August 26, 1999, a former employee exercised options for 23,352 shares of the
Company's common stock. The individual tendered approximately 8,800 shares of
the Company's outstanding stock as consideration for the option exercise, which
was recorded as treasury stock. The net effect of this transaction was to
increase common stock and paid in capital by $35,028 and increase treasury stock
by $35,028.
5
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AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
Three Months Ended
September 30,
1999 1998
-----------------------
(in thousands)
Ophthalmic segment $ 8,162 $ 7,392
Injectable segment 8,633 7,746
------- -------
Total net sales $16,795 $15,138
======= =======
Consolidated net sales increased 11% in the quarter ended September 30, 1999
compared to the same period in 1998. Ophthalmic segment sales increased 10%,
reflecting prior year product acquisitions as well as growth in the base
business. Injectable segment sales increased 11% compared to the same period in
1998 due to prior year product acquisitions, growth in national account sales
and increased contract development and manufacturing activity.
Consolidated gross profit increased 14% during the quarter, with gross margins
increasing from 52% to 53%. Margins for the ophthalmic segment decreased from
54% to 40%, reflecting prior year product acquisitions as well as a
higher-margin sales mix, offset by under absorption of plant overhead expenses
in the Somerset, NJ operation, which was acquired in the third quarter of 1998.
Margins for the injectable segment increased from 50% to 66%, primarily due to
over absorption of plant overhead expenses due to increased manufacturing volume
at the Decatur location. Total net manufacturing variances were immaterial.
Management expects the Decatur facility to operate at full absorption levels for
the remainder of the year, but the Somerset facility should continue to produce
unfavorable variances until additional product approvals are obtained at the
facility.
Selling, general and administrative (SG&A) expenses increased 37% during the
quarter ended September 30, 1999 as compared to the same period in 1998,
reflecting increased compensation related expenses and product promotion as well
as administrative expenses related to the Buffalo Grove and Somerset facilities.
The percentage of SG&A expenses to sales increased from 22% to 28%, reflecting
the increases noted above. Amortization of intangibles decreased from $682,000
to $356,000, or 48% from the prior year quarter, reflecting the expiration of a
purchased patent.
Research and development (R&D) expense decreased 49% in the quarter, to $603,000
from $1,187,000 for the same period in 1998. The decrease reflects timing of
expenses for clinical trials rather than a change in the number of products
under development. Management expects R&D expenses 1999 to increase in the
fourth quarter and through the next fiscal year.
Interest expense of $506,000 reflects interest on bank debt used to grow
operations.
The Company's effective tax rate for the quarter was 40% compared to 42% for the
prior-year period. The Company reported net income of $1,702,000 or $0.09 per
diluted share for the three months ended September 30, 1999, compared to
$1,088,000 or $0.06 per diluted share for the comparable prior year quarter.
6
<PAGE> 8
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
Nine Months Ended
September 30,
--------------------------
1999 1998
-------- --------
(in thousands)
Ophthalmic segment $23,900 $21,206
Injectable segment 23,704 19,971
------- -------
Total net sales $47,604 $41,177
======= =======
Consolidated net sales increased 16% in the six months ended June 30, 1999
compared to the same period in 1998. Ophthalmic segment sales increased 13%,
reflecting prior year acquisitions as well as growth in the base business.
Injectable segment sales increased 32% compared to the same period in 1998,
primarily due to prior year product acquisitions and increased contract
manufacturing activity.
Consolidated gross profit increased 17% during the six months ended June 30,
1999 compared to the same period in 1998, with gross margins increasing from 51%
to 52%. Margins for the ophthalmic segment decreased from 51% to 48% during the
comparable periods, primarily due under-absorption of plant overhead expenses in
the Somerset, New Jersey location. Margins for the injectable segment increased
from 52% to 53%, primarily due to a shift in sales mix and over absorbed
overhead at the Decatur location.
Selling, general and administrative (SG&A) expenses increased 33% during the
nine months ended September 30, 1999 as compared to the same period in 1998.
This increase is due to increased compensation related expenses and product
promotion activity as well as additional facility related expenses for Buffalo
Grove and Somerset. The percentage of SG&A expenses to sales increased from 24%
to 27%, reflecting the increases noted above. Amortization of intangibles
decreased from $1,771,000 to $1,539,000 or 15% over the prior year quarter,
reflecting the expiration of a purchased patent.
Research and development (R&D) expense decreased 46% in the six months to
$1,703,000 from $3,143,000 for the same period in 1998. 1998 R&D spending
included expenses for clinical trials associated with TP-1000, the company's
potential migraine product. Akorn did not engage in any clinical trials during
most of the first nine months of 1999, with patient enrollment for the third
piroxicam trial beginning in September. Management expects R&D expenses for the
remainder of 1999 to increase.
Interest expense increased 45% to $1,338,000 from $925,000 for the same period
in 1998 due to higher average outstanding debt balances. Other income of
$405,000 relates primarily to a gain on the settlement of an outstanding
contract manufacturing customer debt. The customer settled the debt with a
combination of manufacturing equipment and cash, the fair market value of which
exceeded the book value of the debt by approximately $275,000. Also included
within other income is a gain on sale of assets of $96,000.
The Company's effective tax rate for the nine months ended September 30, 1999
was 36% compared to 38% for the prior-year period. The effective rate reflects
the effect of amended returns filed in 1999 for prior years. Management expects
the effective rate for the remaining quarters of 1999 to approximate 40%. The
Company reported net income of $4,835,000 or $0.26 per diluted share for the
nine months ended September 30, 1999, compared to $3,237,000 or $0.17 per
diluted share for the comparable prior period.
7
<PAGE> 9
FINANCIAL CONDITION AND LIQUIDITY
Working capital at September 30, 1999 was $18.0 million compared to $11.0
million at December 31, 1998. At September 30, 1999 the Company had $0.4 million
of financing available under its line of credit. Management believes that
existing cash and cash flows from operations are sufficient to handle the
Company's working capital requirements for the immediate future, but that
additional financing will be necessary for acquisitions. There is no guarantee
that such financing will be available or available at an acceptable cost.
For the nine months ended September 30, 1999, the Company generated $3,784,000
in cash from operations primarily due to increased net income. Investing
activities, which include the purchase of product related intangibles as well as
equipment, required $4,817,000 in cash. Cash provided by financing activities, a
net increase of $1,002,000, was primarily funded through an increase in
long-term debt.
YEAR 2000 ISSUES
The Company faces exposure to Year 2000 issues in its information technology
systems, embedded systems in its manufacturing equipment and facilities, and in
the systems utilized by its customers and suppliers. A discussion of each of
these exposures follows. The Company does not expect Year 2000 issues to have a
material adverse effect on its financial condition or results of operations.
The Company utilizes information technology systems to store and process its
business transactions. Lack of Year 2000 compliance in any of these systems
could result in disruption of routine accounts payable, accounts receivable and
inventory transactions which could in turn effect operating cash flows. The
Company utilizes commercially available financial software, and has no
internally developed programming which would require modification. To become
Year 2000 compliant, the Company's information technology systems required
upgrading the server software at its Decatur location and the installation of
Year 2000 compliant financial software in its Buffalo Grove location. The
Company is dependent upon the representations of its hardware and software
vendors to ensure Year 2000 compliance, and has received such representations.
The Company currently has a substantial number of inventory items with product
expiration dates in the year 2000 and beyond and has experienced no problems
with system misclassification of such products as expired. The cost of the
required software upgrade and conversion is estimated at $600,000, of which
approximately $600,000 had been incurred through September 30, 1999.
The Company utilizes various automated production equipment and facilities
components such as telecommunications systems, alarms and sprinkling systems in
the course of normal operations. Lack of Year 2000 compliance in any of these
embedded systems could result in business interruptions relating to production
delays and disruption of customer service and telesales functions, which could
in turn effect operating profits and cash from operations. The Company is
dependent upon the representations of its vendors to ensure Year 2000
compliance, and has received such representations. The most reasonably likely
worst-case scenario would involve manual system overrides and added personnel to
perform otherwise automated functions.
The Company's customers utilize various systems to process transactions in the
normal course of business. Smaller customers tend to utilize manual accounting
systems and therefore present less risk. Wholesalers and other larger customers
tend to rely on automated processing systems for inventory control and accounts
payable. Lack of Year 2000 compliance in these customer systems could result in
erroneous product returns for short-dated product and disruption of payments of
outstanding invoices, which would in turn effect operating cash flows. The
Company is dependent upon representations of its customers to ensure Year 2000
compliance, and has received such representations. The Company has already sold
a substantial amount of product with expiration dates in the year 2000 and
beyond and has experienced no problems with erroneous returns of such product
for short-dating. The most reasonably likely worst-case scenario would involve
added personnel to perform otherwise automated functions.
The Company's vendors and suppliers utilize various systems to process
transactions in the normal course of business. Lack of Year 2000 compliance in
these vendor systems could result in shortages of required
8
<PAGE> 10
components and raw materials due to misclassification of ship dates or
expiration dates as well as disruption of supply or service due to
misclassification of invoices as past due, which would in turn effect operating
profits and cash from operations. The Company is dependent upon the
representations of its vendors and suppliers to ensure Year 2000 compliance, and
has received such representations. The Company has already purchased a
substantial amount of raw material with expiration dates in the year 2000 and
beyond and has experienced no apparent shortages of materials due to erroneous
expiration dates. The most reasonably likely worst-case scenario would involve
added personnel to perform otherwise automated functions.
The Company's utilities and freight suppliers use various automated systems to
route power and telecommunications signals and to schedule shipments and
deliveries. Lack of Year 2000 compliance in these suppliers' systems could
result in business interruptions due to production delays and disruption of
customer service, telesales and distribution functions, which could in turn
effect operating profits and cash from operations. The Company is dependent upon
the representations of its suppliers to ensure Year 2000 compliance, and has
received such representations. The most reasonably likely worst-case scenario
would involve manual system overrides and added personnel to locate viable
carriers.
The Company has completed installation of its Year 2000 compliant financial
system in the Buffalo Grove location, and began parallel processing in the
fourth quarter of 1998. Conversion to the live compliant system was begun in
January 1999, and has been completed. Upgrade of the server in the Decatur
location has been completed. Surveys of customer and supplier compliance have
been completed and will continue when new suppliers are added.
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, 1998 and in Note Q 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.
9
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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: October 31, 1999
10
<PAGE> 1
AKORN, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- -------
Earnings:
Income applicable to common stock $ 1,702 $ 1,088 $ 4,835 $ 3,237
======= ======= ======= =======
Weighted average number of shares
outstanding 18,477 17,948 18,273 17,829
Net income per share - basic $ 0.09 $ 0.06 $ 0.26 $ 0.18
Additional shares assuming conversion
of options and warrants 404 892 429 991
------- ------- ------- -------
Pro forma shares 18,881 18,840 18,702 18,820
======= ======= ======= =======
Net income per share - diluted $ 0.09 $ 0.06 $ 0.26 $ 0.17
======= ======= ======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 705,108
<SECURITIES> 0
<RECEIVABLES> 15,262,924
<ALLOWANCES> (201,575)
<INVENTORY> 14,530,793
<CURRENT-ASSETS> 32,037,455
<PP&E> 25,798,526
<DEPRECIATION> (11,651,795)
<TOTAL-ASSETS> 70,991,904
<CURRENT-LIABILITIES> 14,077,416
<BONDS> 0
0
0
<COMMON> 18,316,131
<OTHER-SE> 13,162,763
<TOTAL-LIABILITY-AND-EQUITY> 70,991,904
<SALES> 47,603,920
<TOTAL-REVENUES> 47,603,920
<CGS> 22,912,581
<TOTAL-COSTS> 22,912,581
<OTHER-EXPENSES> 15,743,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,337,982
<INCOME-PRETAX> 7,610,043
<INCOME-TAX> 2,774,825
<INCOME-CONTINUING> 4,835,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,835,218
<EPS-BASIC> .26
<EPS-DILUTED> .26
</TABLE>
