<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 March 31, 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
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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 April 30, 1999 there were 18,166,093 shares of common stock, no par value,
outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Page
----
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 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 7
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998*
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 655 $ 736
Trade accounts receivable, net 14,952 11,165
Inventory 11,200 11,004
Prepaid expenses and other assets 2,010 2,043
------- -------
TOTAL CURRENT ASSETS 28,817 24,948
OTHER ASSETS 20,207 20,608
PROPERTY, PLANT and EQUIPMENT, NET 17,046 15,860
------- -------
TOTAL ASSETS $66,070 $61,416
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Current installments of long-term debt
and capital lease obligations $ 6,788 $ 7,445
Trade accounts payable 4,948 3,476
Accrued compensation 579 858
Accrued expenses and other liabilities 2,303 2,129
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TOTAL CURRENT LIABILITIES 14,618 13,908
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 22,920 20,490
OTHER LONG-TERM LIABILITIES 738 738
SHAREHOLDERS' EQUITY
Common stock 18,009 17,952
Retained earnings 9,785 8,328
------- -------
TOTAL SHAREHOLDERS' EQUITY 27,794 26,280
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $66,070 $61,416
======= =======
</TABLE>
*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
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 14,719 $ 12,051
Cost of sales 7,283 5,809
-------- --------
GROSS PROFIT 7,436 6,242
Selling, general and
administrative expenses 4,002 3,241
Amortization of intangibles 702 504
Research and development 462 728
-------- --------
5,166 4,473
-------- --------
OPERATING INCOME 2,270 1,769
Interest expense (533) (190)
Interest and other income, net 293 1
-------- --------
(240) (189)
-------- --------
INCOME BEFORE INCOME TAXES 2,030 1,580
Income taxes 572 532
-------- --------
NET INCOME $ 1,458 $ 1,048
======== ========
PER SHARE:
NET INCOME - BASIC $ 0.08 $ 0.06
======== ========
NET INCOME - DILUTED $ 0.08 $ 0.06
======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC 18,143 17,686
======== ========
- DILUTED 18,737 18,582
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,458 $ 1,048
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,140 895
Changes in operating assets and liabilities (3,290) (2,840)
------- -------
NET CASH USED BY OPERATING ACTIVITIES (692) (897)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (905) (577)
Net maturities of investments 0 96
Product licensing/acquisition costs (462) (6,908)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,367) (7,389)
FINANCING ACTIVITIES
Repayment of long-term debt (5,140) --
Proceeds from issuance of long-term debt 7,100 8,391
Proceeds from sale of stock 57 334
Reductions in capital lease obligations (39) (36)
Repayment of short-term borrowings, net -- (750)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,978 7,939
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (81) (347)
Cash and cash equivalents at beginning of period 736 2,413
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 655 $ 2,066
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
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, 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.
5
<PAGE> 7
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
Three Months Ended
March 31,
1999 1998
--------------------------
(in thousands)
Ophthalmic segment $ 7,709 $ 6,480
Injectable segment 7,010 5,571
------- -------
Total net sales $14,719 $12,051
======= =======
Consolidated net sales increased 22.1% in the quarter ended March 31, 1999
compared to the same period in 1998. Ophthalmic segment sales increased 19.0%,
reflecting product acquisitions as well as growth in the base business.
Injectable division sales increased 25.8% compared to the same period in 1998
due to product acquisitions, growth in national account sales and increased
contract development activity.
Consolidated gross profit increased 19.1% during the quarter, with gross margins
decreasing from 52% to 51%. Margins for the ophthalmic division increased from
47% to 55%, reflecting product acquisitions as well as a higher-margin sales
mix, partially offset by underabsorption of plant overhead expenses. Margins for
the injectable division decreased from 57% to 45%, primarily due to
underabsorption of plant overhead expenses due to low manufacturing volume. The
Company incurred unfavorable manufacturing variances of $361,000 at its
Somerset, NJ facility and $655,000 at its Decatur, IL facility. 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 23.5% during the
quarter ended March 31, 1999 as compared to the same period in 1998, reflecting
increased compensation related expenses and product promotion, partially offset
by a $300,000 reversal of previously recorded bad debt expense. The percentage
of SG&A expenses to sales increased from 26.9% to 27.2%, reflecting the
increases noted above. Amortization of intangibles increased from $504,000 to
$702,000, or 39.3% over the prior year quarter, reflecting 1998 product
acquisitions. Management expects amortization expense to decrease in the second
half of 1999 due to the expiration of a purchased patent.
Research and development (R&D) expense decreased 36.5% in the quarter, to
$462,000 from $728,000 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 total R&D expenses in 1999 to approximate
prior year levels.
Interest expense of $533,000 was up 180.5% on higher outstanding debt balances
related to prior year product acquisitions. Other income of $293,000 relates
primarily to a gain on the settlement of an outstanding contract manufacturing
customer debt which had previously been partially reserved. 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 $178,000.
The Company's effective tax rate for the quarter was 28.2% compared to 33.6% for
the prior-year period. The unusually low 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
6
<PAGE> 8
Company reported net income of $1,458,000 or $0.08 per diluted share for the
three months ended March 31, 1999, compared to $1,048,000 or $0.06 per diluted
share for the comparable prior year quarter.
FINANCIAL CONDITION AND LIQUIDITY
Working capital at March 31, 1999 was $14.3 million compared to $11.0 million at
December 31, 1998. At March 31, 1999 the Company had $.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 quarter ended March 31, 1999, the Company used $692,000 in cash from
operations to finance its working capital requirements, primarily an increase in
accounts receivable. Investing activities, which include the purchase of product
related intangibles as well as equipment, required $1,367,000 in cash.
Investment activities were primarily funded through a net increase in long-term
debt of $1,978,000.
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 $550,000 had been incurred through March 31, 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 is in the process of receiving 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 is in the process of receiving 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.
7
<PAGE> 9
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 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 is in the process of receiving 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 is in
the process of receiving 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 is expected to be completed by June 1999. Upgrade of the
server in the Decatur location is expected to be completed by June 30, 1999.
Surveys of customer and supplier compliance are expected to be completed by June
1999.
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
No matters were submitted to a vote of security holders during the
quarter ended March 31, 1999.
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.
8
<PAGE> 10
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: April 30, 1999
9
<PAGE> 1
AKORN, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Income:
Income applicable to common stock $ 1,458 $ 1,048
======= =======
Weighted average number of shares outstanding 18,143 17,686
Net income per share - basic $ 0.08 $ 0.06
Additional shares assuming conversion
of options and warrants 594 896
------- -------
Pro forma shares 18,737 18,582
======= =======
Net income per share - diluted $ 0.08 $ 0.06
======= =======
</TABLE>
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 31, 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> MAR-31-1999
<CASH> 654,570
<SECURITIES> 0
<RECEIVABLES> 15,086,886
<ALLOWANCES> (134,699)
<INVENTORY> 11,200,204
<CURRENT-ASSETS> 28,816,800
<PP&E> 24,580,049
<DEPRECIATION> (10,821,092)
<TOTAL-ASSETS> 66,070,334
<CURRENT-LIABILITIES> 14,617,923
<BONDS> 0
0
0
<COMMON> 18,009,317
<OTHER-SE> 9,785,334
<TOTAL-LIABILITY-AND-EQUITY> 66,070,334
<SALES> 14,719,357
<TOTAL-REVENUES> 14,719,357
<CGS> 7,283,575
<TOTAL-COSTS> 7,283,575
<OTHER-EXPENSES> 4,873,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 532,606
<INCOME-PRETAX> 2,029,489
<INCOME-TAX> 571,700
<INCOME-CONTINUING> 1,457,789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,457,789
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
