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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
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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)
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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 20, 2000 there were 19,228,549 shares of common stock, no par value,
outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Page
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 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 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
1
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AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999*
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 448 $ 25
Trade accounts receivable, net 23,185 17,695
Inventory 17,102 16,473
Prepaid expenses and other current assets 1,835 1,658
--------- ---------
TOTAL CURRENT ASSETS 42,570 35,851
OTHER ASSETS 20,494 19,435
PROPERTY, PLANT AND EQUIPMENT, NET 28,105 20,812
-------- --------
TOTAL ASSETS $91,169 $76,098
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Current installments of long-term debt
and capital lease obligations $ 249 $ 1,346
Trade accounts payable 4,294 4,523
Accrued compensation 625 1,049
Accrued expenses and other current liabilities 2,396 2,775
--------- ---------
TOTAL CURRENT LIABILITIES 7,564 9,693
LONG-TERM DEBT AND
CAPITAL LEASE OBLIGATIONS 40,454 30,643
OTHER LONG-TERM LIABILITIES 1,373 1,372
SHAREHOLDERS' EQUITY
Common stock 22,387 19,392
Retained earnings 19,391 14,998
-------- --------
TOTAL SHAREHOLDERS' EQUITY 41,778 34,390
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 91,169 $ 76,098
========== =========
</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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 16,878 $ 16,795 $ 51,842 $ 47,604
Cost of goods sold 9,782 7,863 26,547 22,913
---------- ---------- ---------- ----------
GROSS PROFIT 7,096 8,932 25,295 24,691
Selling, general and
administrative expenses 4,230 4,648 12,439 12,906
Amortization of intangibles 380 356 1,139 1,539
Research and development 1,074 603 2,804 1,703
---------- ---------- ---------- ----------
5,684 5,607 16,382 16,148
---------- ---------- ---------- ----------
OPERATING INCOME 1,412 3,325 8,913 8,543
Interest expense (638) (506) (1,782) (1,338)
Interest and other income, net (104) (6) (19) 405
---------- ---------- ---------- ----------
(742) (512) (1,801) (933)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 670 2,813 7,112 7,610
Income taxes 255 1,111 2,719 2,775
---------- ---------- ---------- ----------
NET INCOME $ 415 $ 1,702 $ 4,393 $ 4,835
========== ========== ========== ==========
Per Share:
NET INCOME - BASIC $ 0.02 $ 0.09 $ 0.23 $ 0.26
========== ========== ========== ==========
NET INCOME - DILUTED $ 0.02 $ 0.09 $ 0.22 $ 0.26
========== ========== ========== ==========
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC 19,081 18,477 18,961 18,273
========== ========== ========== ==========
- DILUTED 20,013 18,881 19,804 18,702
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,393 $ 4,835
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Deferred taxes (131) -
Depreciation and amortization 2,516 2,823
Changes in operating assets and liabilities (7,195) (3,874)
---------- ---------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (417) 3,784
INVESTING ACTIVITIES
Purchases of property, plant and equipment (8,669) (4,288)
Product licensing/acquisition costs (2,200) (529)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (10,869) (4,817)
FINANCING ACTIVITIES
Repayment of borrowings, primarily under line of credit (18,345) (13,642)
Increased borrowings, primarily under line of credit 27,100 14,400
Proceeds from exercise of stock options 2,995 364
Reductions in capital lease obligation (41) (120)
---------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 11,709 1,002
---------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 423 (31)
Cash and cash equivalents at beginning of period 25 736
---------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 448 $ 705
========== =========
</TABLE>
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").
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, 2000 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, 1999, included in the Company's Annual Report on
Form 10-K.
NOTE B - INVENTORY
The components of inventory are as follows (in thousands):
September 30, 2000 December 31, 1999
Finished goods $ 8,482 $ 10,316
Work in process 2,910 2,179
Raw materials and supplies 5,710 3,978
-------- --------
$ 17,102 $ 16,473
======== ========
Inventory at September 30, 2000 and December 31, 1999 is reported net of
reserves for slow-moving, unsalable and obsolete items of $538,000 and $134,000,
respectively.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
September 30, 2000 December 31, 1999
------------------ -----------------
Land $ 396 $ 396
Buildings and leasehold improvements 8,110 7,763
Furniture and equipment 19,883 17,955
Automobiles 55 55
-------- --------
28,444 26,169
Accumulated depreciation (13,054) (11,677)
-------- --------
15,390 14,492
Construction in progress 12,715 6,320
-------- --------
$ 28,105 $ 20,812
======== ========
Construction in progress primarily represents capital expenditures related to
the Company's freeze-drying project that will enable the Company to perform
processes in-house that are currently being performed by a sub-contractor and
implementation of a new ERP system scheduled to be in service by the end of the
year.
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NOTE D - INDUSTRY SEGMENT INFORMATION
The Company classifies its operations into two business segments, ophthalmic and
injectable. The ophthalmic segment manufactures, markets and distributes
diagnostic and therapeutic pharmaceuticals and surgical instruments and related
supplies. The injectable segment manufactures, markets and distributes
injectable pharmaceuticals, primarily in niche markets. Selected financial
information by industry segment is presented below (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET SALES
Ophthalmic $ 7,188 $ 8,162 $ 21,656 $ 23,900
Injectable 9,690 8,633 30,186 23,704
-------- -------- -------- --------
Total net sales $ 16,878 $ 16,795 $ 51,842 $ 47,604
======== ======== ======== ========
OPERATING INCOME
Ophthalmic $ 138 $ 1,190 $ 1,865 $ 2,995
Injectable 1,767 2,487 8,410 6,629
General Corporate (493) (352) (1,362) (1,081)
-------- -------- -------- --------
Total operating income 1,412 3,325 8,913 8,543
Interest and other expense, net (742) (512) (1,801) (933)
-------- -------- -------- --------
Income before income taxes $ 670 $ 2,813 $ 7,112 $ 7,610
======== ======== ======== ========
</TABLE>
NOTE E - PRODUCT ACQUISITION
On April 26, 2000, the Company entered into a worldwide license agreement with
The Johns Hopkins University Applied Physics Laboratory. This license provides
the Company exclusive rights to two patents covering the methodology and
instrumentation for a method of treating age-related macular degeneration. Upon
signing the agreement, the Company made an initial payment under the agreement
of $1,484,500. Future payments of up to $7,215,500 are contingent upon the
achievement of specifically defined milestones. There are no payments presently
due under the terms of the agreement.
6
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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, 2000 COMPARED TO 1999
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
Three Months Ended
September 30,
---------------------------
2000 1999
--------- ---------
(in thousands)
Ophthalmic segment $ 7,188 $ 8,162
Injectable segment 9,690 8,633
-------- -------
Total net sales $ 16,878 $16,795
======== =======
Consolidated net sales increased marginally in the quarter ended September 30,
2000 compared to the same period in 1999. Ophthalmic segment sales decreased
11.9%, reflecting a decrease in sales of generic glaucoma, antibiotic and
allergy products. Injectable segment sales increased 12.2% compared to the same
period in 1999 due to improved sales in antidote products as well as increased
contract development and manufacturing activity.
Consolidated gross profit decreased 20.6% during the quarter, with gross margins
decreasing from 53.2% to 42.0%. Margins for the ophthalmic segment increased
from 40.1% to 42.8%, reflecting improved absorption of plant overhead expenses
in the Somerset, NJ operation. Margins for the injectable segment decreased from
65.6% to 41.4%, primarily due to a decrease in sales of high margin products and
an increase of non-product related overhead expenses in the Decatur, IL
facility.
Selling, general and administrative (SG&A) expenses decreased 9.0% during the
quarter ended September 30, 2000 as compared to the same period in 1999,
primarily due to lower personnel related expenses. The percentage of SG&A
expenses to sales decreased from 27.7% to 25.1%. Amortization of intangibles
increased from $356,000 to $380,000, or 6.7% from the prior year quarter,
reflecting the incremental amortization of product licenses acquired.
Research and development (R&D) expense increased 78.1% in the quarter, to
$1,074,000 from $603,000 for the same period in 1999. The increase reflects
renewed clinical study enrollment for piroxicam as well as costs associated with
preparing for submission of the Company's Investigational New Drug Application
for AK-1003 for age-related macular degeneration. Management expects R&D
expenses for the remainder of 2000 to continue to increase.
Interest expense of $638,000 was up 26.1% on higher interest rates and higher
debt balances, partially offset by capitalized interest related to certain major
capital projects.
The Company's effective tax rate for the quarter was 38.1% compared to 39.5% for
the prior-year period. The Company reported net income of $415,000 or $0.02 per
diluted share for the three months ended September 30, 2000, compared to
$1,702,000 or $0.09 per diluted share for the comparable prior year quarter.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO 1999
The following table sets forth, for the periods indicated, net sales by segment,
excluding intersegment sales:
Nine Months Ended
September 30,
---------------------------
2000 1999
--------- ---------
(in thousands)
Ophthalmic segment $21,656 $ 23,900
Injectable segment 30,186 23,704
------- --------
Total net sales $51,842 $ 47,604
======= ========
Consolidated net sales increased 8.9% in the nine months ended September 30,
2000 compared to the same period in 1999. Ophthalmic segment sales decreased
9.4%, reflecting a decrease in sales of generic glaucoma, antibiotic and allergy
products. Injectable segment sales increased 27.3% compared to the same period
in 1999, primarily due to strong anesthesia and antidote sales and increased
contract development and manufacturing activity.
Consolidated gross profit increased 1.3% during the nine months ended September
30, 2000 compared to the same period in 1999, with gross margins decreasing from
51.9% to 48.8%. Margins for the ophthalmic segment decreased from 47.7% to 45.0%
during the comparable periods, primarily due to a lower-margin sales mix.
Margins for the injectable segment decreased from 53.4% to 51.5%.
Selling, general and administrative (SG&A) expenses decreased 3.6% during the
nine months ended September 30, 2000 as compared to the same period in 1999. The
percentage of SG&A expenses to sales decreased from 27.1% to 24.0%, primarily
due to lower personnel related expenses. Amortization of intangibles decreased
from $1,539,000 to $1,139,000 or 26.0% from the prior year period, reflecting
expiration of a purchased patent in 1999, partly offset by the incremental
amortization of product licenses acquired.
Research and development (R&D) expense increased 64.7% in the nine months to
$2,804,000 from $1,703,000 for the same period in 1999. Akorn had not been
engaged in any clinical trials during the first half of 1999. Management expects
R&D expenses for the remainder of 2000 to continue to increase.
Interest expense of $1,782,000 was up 33.2% on higher interest rates and higher
debt balances, partially offset by capitalized interest related to certain major
capital projects.
The Company's effective tax rate for the nine months ended September 30, 2000
was 38.2% compared to 36.5% for the prior-year period. The Company reported net
income of $4,393,000 or $0.23 per diluted share for the nine months ended
September 30, 2000, compared to $4,835,000 or $0.26 per diluted share for the
comparable prior period.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 2000,
the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of FASB Statement No. 133". These
statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedge activities. They generally require that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. These
statements, as amended, are effective January 1, 2001. The Company is in the
process of evaluating the effect of the Statement on its financial statements.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". This
bulletin, as amended, provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. This bulletin,
as amended, is effective no later than the fourth quarter of fiscal years
beginning after December 15, 1999. The Company is in the process of evaluating
the effect of this bulletin on its financial statements.
8
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FINANCIAL CONDITION AND LIQUIDITY
Working capital at September 30, 2000 was $35.0 million compared to $26.2
million at December 31, 1999. At September 30, 2000, the Company had $6.8
million of financing available under its line of credit. Management believes
that existing cash and expected cash flows from operations are sufficient to
handle the Company's working capital requirements for the near 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, 2000, the Company used $417,000 in cash
from operations primarily for increases in accounts receivable and inventory and
decreases in accounts payable. Investing activities, which include the purchase
of product related intangibles as well as equipment, required $10,869,000 in
cash. Cash provided by financing activities, a net increase of $11,709,000, was
primarily funded through an increase in long-term debt and the exercise of stock
options.
YEAR 2000 ISSUES
The Company established a process to identify and resolve the business issues
associated with Year 2000 and expended resources to ensure that its critical
processes were Year 2000 compliant. The Company did not experience any business
disruptions associated with Year 2000. The Company will continue to monitor its
computer applications throughout Year 2000 to ensure that any latent Year 2000
matters are addressed promptly.
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.
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, 1999 and in Note O 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.
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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: November 10, 2000
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