<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q/A
(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> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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> 3
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
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 21,392 6,687
PROPERTY, PLANT AND EQUIPMENT, NET 14,359 12,395
------- -------
TOTAL ASSETS $59,015 $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 477 462
Accrued compensation 1,160 985
Accrued expenses and other
liabilities 835 1,819
------- -------
TOTAL CURRENT LIABILITIES 9,257 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 6,941 4,010
------- -------
TOTAL SHAREHOLDERS' EQUITY 24,454 20,251
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $59,015 $38,715
======= =======
</TABLE>
*Condensed from audited consolidated financial statements.
See notes to condensed consolidated financial statements.
2
<PAGE> 4
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
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 3,394 2,903 9,720 8,584
Amortization of intangibles 682 90 1,771 213
Research and development 1,187 342 3,143 1,071
Relocation charges -- -- -- 1,451
-------- -------- -------- --------
5,263 3,335 14,634 11,319
-------- -------- -------- --------
OPERATING INCOME 2,605 1,410 6,497 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 1,877 1,309 5,255 1,570
Income taxes 788 484 2,018 581
-------- -------- -------- --------
NET INCOME $ 1,088 $ 825 $ 3,237 $ 989
======== ======== ======== ========
Per Share:
NET INCOME - BASIC $ 0.06 $ 0.05 $ 0.18 $ 0.06
======== ======== ======== ========
NET INCOME - DILUTED $ 0.06 $ 0.05 $ 0.17 $ 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> 5
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,237 $ 989
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization 2,725 1,214
Building and equipment write down -- 400
Changes in operating assets and
liabilities (7,334) (242)
-------- --------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (1,372) 2,361
INVESTING ACTIVITIES
Purchases of property, plant
and equipment (2,919) (1,233)
Product license acquisitions (13,017) (4,313)
Net maturities of investments 96 192
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (15,840) (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> 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- 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 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.
5
<PAGE> 7
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> 8
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXPLANATORY NOTE
This amendment amends form 10-Q filed with the Securities and Exchange
Commission on November 2, 1998. The cover page, Part I, items 1 and 2, Part II,
item 6, and the signatory page have been changed to reflect the new guidance
from the SEC in relation to (1)in-process research and development write-offs,
which the Company had recorded in the third quarter of fiscal 1998 as part of
the Advanced Remedies, Inc. asset acquisition and (2) disclosures regarding Year
2000 issues.
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 22% 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.
In July 1998, the Company acquired certain assets of Advanced Remedies, Inc.
(ARI) for approximately $3,750,000. The 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
7
<PAGE> 9
the FDA. The total purchase price was allocated to ANDAs, $3,000,000 with
amortization over 15 years, and tangible assets, $750,000 with asset
depreciation up to ten years.
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 $1,088,000 or
$0.06 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 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.
In July 1998, the Company acquired certain assets of Advanced Remedies, Inc.
(ARI) for approximately $3,750,000. The 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
8
<PAGE> 10
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 to
ANDAs, $3,000,000 with amortization over 15 years, and tangible assets, $750,000
with asset depreciation up to ten years.
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 $3,237,000 or $0.17 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.
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
9
<PAGE> 11
estimated at $600,000, of which approximately $400,000 had been incurred through
September 30, 1998.
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 flows 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 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 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 flows 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 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 Company has completed installation of its Year 2000 compliant financial
system in the Buffalo Grove location, and has concluded parallel processing in
the fourth quarter of 1998. Conversion to the live compliant system began 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
10
<PAGE> 12
customer and supplier compliance are expected to be completed by June 1999.
ORIGINAL MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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
11
<PAGE> 13
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 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
12
<PAGE> 14
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.
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.
13
<PAGE> 15
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: March 10,1999
14
<PAGE> 1
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 $ 1,088 $ 825 $ 3,237 $ 989
======= ======= ======= =======
Weighted average number of shares
outstanding 17,948 16,606 17,829 16,599
Net income per share - basic $ 0.06 $ 0.05 $ 0.18 $ 0.06
Additional shares assuming conversion
of options and warrants 892 425 991 284
------- ------- ------- -------
Pro forma shares 18,840 17,031 18,820 16,883
======= ======= ======= =======
Net income per share - diluted $ 0.06 $ 0.05 $ 0.17 $ 0.06
======= ======= ======= =======
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 259,237
<SECURITIES> 0
<RECEIVABLES> 9,586,669
<ALLOWANCES> (524,347)
<INVENTORY> 12,689,677
<CURRENT-ASSETS> 23,264,570
<PP&E> 23,000,110
<DEPRECIATION> (10,431,563)
<TOTAL-ASSETS> 59,014,768
<CURRENT-LIABILITIES> 9,256,738
<BONDS> 0
0
0
<COMMON> 17,513,093
<OTHER-SE> 6,940,762
<TOTAL-LIABILITY-AND-EQUITY> 59,014,768
<SALES> 41,176,688
<TOTAL-REVENUES> 41,176,688
<CGS> 20,046,079
<TOTAL-COSTS> 20,046,079
<OTHER-EXPENSES> 14,950,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 925,201
<INCOME-PRETAX> 5,255,180
<INCOME-TAX> 2,018,203
<INCOME-CONTINUING> 3,236,977
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,236,977
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
