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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
____________________
Commission File Number: 0-13976
____________________
AKORN, INC.
(Name of small business issuer as specified in its charter)
LOUISIANA 72-0717400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 Akorn Drive, Abita Springs, Louisiana 70420
(Address of principal executive offices and zip code)
Issuer's telephone number: (504) 893-9300
____________________
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, No Par Value
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 ____
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and will not be contained, to the best of
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
The aggregate market value of the voting stock held by nonaffiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Issuer's common stock) of the Issuer as of
September 23, 1996 was approximately $27,500,000.
The number of shares of the Issuer's common stock, no par value per share,
outstanding as of September 23, 1996 was 16,573,915.
PART I
Item 1. Description of Business.
General Development of Business
Akorn, Inc. (Akorn or the Company) manufactures, markets and distributes an
extensive line of therapeutic, diagnostic and surgical pharmaceutical and
over-the-counter ophthalmic products. In addition, through its wholly-owned
subsidiary Taylor Pharmaceuticals, Inc. (Taylor), the Company manufactures and
distributes injectable pharmaceutical products and provides sterile contract
manufacturing services to several large and small pharmaceutical companies.
Akorn, a Louisiana corporation founded in 1971, is headquartered in Abita
Springs, Louisiana, a suburb of New Orleans.
Prior to the fiscal year beginning July 1, 1989, the Company purchased its
entire ophthalmic product line on a contract basis from several suppliers, who
packaged and labeled the products under the Company's name. In September
1989, in order to more vertically integrate its operations, the Company
acquired Walnut Pharmaceuticals, Inc. (Walnut), a manufacturing facility in
Los Angeles, California that was capable of manufacturing sterile ophthalmic
solutions, suspensions, and human injectable products, among other products.
This facility operated until mid 1991, at which time the facility was closed
due to current Good Manufacturing Practices (cGMP) concerns.
In January 1992, the Company acquired Taylor of Decatur, Illinois. Akorn
immediately began the process of transferring to Taylor the operations
formerly conducted at the Los Angeles facility while maintaining the sterile
contract manufacturing business conducted by Taylor. In May 1996, the Company
acquired Pasadena Research Laboratories, Inc. (PRL), a developer and
distributor of injectable products, and merged PRL into Taylor, thereby
creating a fully-integrated injectable pharmaceutical company. The merger
also expanded Taylor's current product pipeline.
For information regarding sales, operating income and identifiable assets
for each of the Company's segments, see Note Q to the financial statements
included in Item 8 of this report.
Ophthalmic Distribution Business
The Company distributes a complete line of therapeutic, diagnostic and
over-the-counter ophthalmic pharmaceutical products as well as other surgical
and office-based non-pharmaceutical products. The Company's therapeutic
ophthalmic pharmaceutical product line is extensive and includes antibiotics,
anti-infectives, steroids, steroid combinations, glaucoma medications,
decongestants/antihistamines, and anti-edema medications. Diagnostic products,
primarily for use in doctors' offices, include a complete line of mydriatics
and cycloplegics, anesthetics, topical stains, gonioscopic solutions and
others. Surgical products available from Akorn include surgical knives and
other surgical instruments, balanced salt solution, post-operative kits,
surgical tapes, eye shields, anti-ultraviolet goggles, facial drape supports,
and other supplies. Ophthalmic over-the-counter products include various
artificial tear solutions, preservative-free lubricating ointments, lid
cleansers, vitamin supplements and contact lens accessories.
Injectable Manufacturing and Distribution Business
Taylor markets a line of over 55 niche injectable pharmaceutical products
through the newly acquired operations of PRL. Founded in 1936, PRL had over
50 years of history in the generic small volume parenteral market. The niche
injectable products sold are used in the treatment of a broad spectrum of
indications, including rheumatoid arthritis and pain management.
Contract Manufacturing Business
Taylor also manufactures sterile products, on a contract basis, for third
parties. The majority of Taylor contracts are short-term in nature and
operate on the basis of signed purchase orders. However, Taylor is in the
process of developing longer-term contracts with minimum quantity requirements
in order to strengthen the commitments from its contract customers. Because
of the present nature of Taylor's contracts, its contract manufacturing is
more volatile than the ophthalmic distribution and injectable distribution
segments. Given that sales to contract customers are large in relation to the
distribution segments, sharp reductions in contract manufacturing sales can
occur should customers discontinue the contract for any reason.
Sales and Marketing
While the Company's distributed ophthalmic and injectable product lines
include some unique products, the majority are non-proprietary. As a result,
the Company relies on its expertise in marketing, distribution, development,
and low cost manufacturing in order to maintain and increase market share.
The Company maintains an efficient three-pronged ophthalmic distribution
sales effort. This effort includes 23 outside sales representatives who,
together with two district managers, make personal calls on customers in the
Northeast, Southeast, Midwest and West regions of the country. In addition,
the Company maintains an in-house telemarketing and a customer service sales
group of 25 persons who operate at the Company's facilities in Abita Springs.
The Company also maintains a direct-mail marketing effort. Ophthalmic
distribution customers consist primarily of ophthalmologists, optometrists,
independent pharmacies, and full-service wholesalers whose customers include
hospitals and other institutions.
The Company's sales and marketing efforts in the injectable distribution
business include seven telemarketing and customer service representatives and
direct-mail activities. Injectable distribution customers consist primarily
of hospitals and specialty physicians. In addition, the Company has
established several strategic alliances to help distribute its injectable
products to Group Purchasing Organizations (GPOs). The GPO market is expected
to become a major component of sales to the injectable distribution segment as
the Company aggressively expands its generic injectable product offering to
include more high volume products. The Company also intends to build a key
account sales force for the injectable segment over the next several years as
new products are introduced.
The Company's sales and marketing efforts in the contract manufacturing
business have been limited to personal contact with major pharmaceutical
companies and limited trade journal advertisements. Attendance at
manufacturing trade shows and an aggressive marketing of the full-service
capabilities of Taylor's contract operations will be implemented in fiscal
1997. The Company's contract customers include several large pharmaceutical
companies. Throughout Taylor's history, it has performed contract
manufacturing services for some of the largest pharmaceutical companies.
The Company stresses its service, quality and cost as means to attract and
keep customers.
Research and Development
The acquisition of Taylor provided the Company with resources to begin its
research and development program, which began in the last quarter of fiscal
1992 and has since expanded. As of June 30, 1996, the Company had 4 new
ophthalmic ANDAs on file with the FDA for products which the Company has not
previously manufactured. See "Government Regulation." These products, along
with a recently approved ANDA product which the Company will market upon
patent expiration of the innovator product, have a current aggregate brand
market of approximately $180 million. In addition, by the third quarter of
calendar 1996, the Company had seven products in various stages of development
leading to ANDA submission. These injectable products have a current
aggregate brand market of approximately $300 million. No assurance can be
given as to whether the Company will develop marketable products based on
these filings or as to the size of the market for any such products.
The Company has targeted its research and development efforts over the next
three years on 25 to 30 additional ophthalmic and injectable products, the
patents on which have expired or will expire in the near future. Production
and marketing of any products developed as a result of these efforts are
expected to take several years.
The Company also maintains an aggressive product licensing effort. This
effort allows the Company to use its strength in marketing ophthalmic and
injectable products. The Company also anticipates manufacturing many of the
licensed products.
At June 30, 1996, 19 full-time employees of the Company were involved in
research and development and product licensing. The Company's research and
development expenditures for 1996, 1995 and 1994 were $1.9 million, $1.7
million and $1.4 million, respectively.
The Company expects its research and development expenditures to increase
in fiscal 1997.
Employee Relations
The Company has 282 full-time employees, of whom 75 are employed in the
Abita Springs facility, 167 are employed in Decatur, Illinois, 15 are employed
in San Clemente, CA, and 25 are in outside sales. The Company enjoys good
relations with its employees, none of whom are represented by a collective
bargaining agent.
Competition
The manufacture and distribution of ophthalmic and injectable
pharmaceutical products is highly competitive, with many established
manufacturers, suppliers and distributors actively engaged in all phases of
the business. Most of the Company's competitors have substantially larger
financial and other resources, including a larger volume of sales, more sales
personnel and larger facilities than the Company.
The competitors which are dominant in the ophthalmic distribution industry
are Alcon Laboratories, Inc., Allergan Pharmaceuticals, Inc., Steris
Pharmaceuticals, Inc. (Steris) and Bausch & Lomb, Inc. (B&L). The Company
competes primarily on the basis of price and service. The Company's principal
suppliers, Steris and B&L are in direct competition with the Company in
several markets. Both generic and name brand companies compete in the
injectable generic distribution industry and include Abbott Labs, Gensia,
Marsam, Steris, Elkin Sin and American Regent.
The manufacturing of sterile products must be performed under the most
rigorous FDA-mandated Good Manufacturing Practices. Therefore the barriers to
entry in the manufacturing of sterile products are very high. The number of
independent contract manufacturers of sterile products continues to decline as
a result of these barriers. Taylor's competitors in this area, generally, are
larger companies with greater financial and other resources.
Product Supply
Since the acquisition of Taylor in 1992, the Company has been steadily
regaining control of the supply of its ophthalmic pharmaceutical products,
which had been impacted by the closure of the Los Angeles facility in 1991.
During the fiscal year ended June 30, 1996, approximately 30% of the Company's
net ophthalmic distribution sales were accounted for by products manufactured
at Taylor and approximately 70% by unaffiliated suppliers, the largest of
which is Sight Pharmaceuticals, Inc. (a division of B&L). This company
supplied products accounting for 13% of the Company's net ophthalmic
distribution sales during fiscal 1996. No other supplier supplied products
accounting for more than 10% of the Company's net ophthalmic distribution
sales during fiscal 1996.
The Company uses several suppliers for its injectable distribution
business. Several of the leading products distributed by this segment are in
the process of being transferred to Taylor's manufacturing facilities. The
Company intends to produce the majority of its high volume injectable
distribution products over the next several years.
Government Regulation
All pharmaceutical manufacturers and distributors are subject to extensive
regulation by the federal government, principally by the FDA and, to a lesser
extent, by state governments. The federal Food, Drug and Cosmetic Act (the
FDA Act), the Controlled Substance Act, and other federal statutes and
regulations govern or influence the development, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, pricing, advertising, and
promotion of products by the Company and its subsidiaries. Included among the
requirements of these statutes is that the manufacturer's methods conform to
cGMPs provided for in FDA regulations. Pursuant to its powers under the FDA
Act, the FDA inspects drug manufacturers and storage facilities to determine
compliance with its Good Manufacturing Practice regulations, non-compliance
with which can result in fines, recall and seizure of products, total or
partial suspension of production, refusal of the government to approve new
drug applications, and criminal prosecution. The FDA also has authority to
revoke approval of drug products.
Except in the case of drugs identified as category B in the FDA Act, FDA
approval is required before any drug can be manufactured and marketed. New
drugs require the filing of a New Drug Application (NDA) with the FDA, which
requires clinical studies demonstrating the safety and efficacy of the drug
and compliance with additional regulatory requirements.
Abbreviated procedures are available for obtaining FDA approval for those
generic drugs which are equivalents of existing brand name drugs, such as
certain drugs that had been manufactured at the Los Angeles facility and are
expected to be manufactured by Taylor. In order to obtain approval of a new
generic drug, the Company files an Abbreviated New Drug Application (ANDA)
with the FDA. An ANDA is similar to a NDA, except that the FDA waives the
requirement of conducting clinical studies of safety and efficacy. Instead,
for drugs which contain the same ingredients as drugs already approved for use
in the United States, the FDA ordinarily requires data showing that the
generic drug formulation is equivalent to the brand name drug and that the
product is stable in its formulation.
Over the past several years, the FDA has increased its scrutiny of the
operations of generic drug manufacturers like the Company and has increased
the time required for its approval of ANDAs and NDAs submitted by such
companies. In addition, the Office of Generic Drugs of the FDA, the division
which monitors and approves ANDAs, has increased its scrutiny regarding
concentrations of inactive ingredients for generic drugs as compared to the
innovator drug. This change has resulted in an increase in the time spent on
formulating ANDA products.
In addition, the Company manufactures and distributes several controlled-
drug substances. The distribution and handling of these products are
regulated by the Drug Enforcement Agency (DEA). Strict compliance with DEA
regulations is necessary to continue distribution of controlled drugs.
Failure to comply with regulations can result in fines or seizure of product.
Item 1A. Executive Officers of the Registrant
The executive officers of the Company are listed below. Each officer serves
as such at the pleasure of the Board of Directors.
John N. Kapoor, Ph.D. Dr. Kapoor, age 53, has served as Chief Executive
Officer of the Company since May 1996. He has also been
a director and member of the Executive Committee of the
Company since December 1991. From May 1995, he has
served as Chairman of the Board of the Company. Dr.
Kapoor had served as acting Chairman of the Board of
Directors from April 1993 to May 1995; he served as
Chairman of the Board of the Company from December 1991
to January 1993. Dr. Kapoor also served as Chairman of
the Board and Chief Executive Officer of Option Care,
Inc., a franchiser of home infusion therapy businesses,
from August 1993 to April 1996. Since 1990, he has
served as President of EJ Financial Enterprises, Inc., a
privately held financial services and consulting
company.
Floyd Benjamin Mr. Benjamin, age 53, was elected President of Taylor
and Executive Vice President of the Company on May 31,
1996, upon the merger of PRL and Taylor. Mr. Benjamin
served as President of PRL since October 1994 and as
a consultant to PRL since becoming a shareholder
in October 1993. Prior to joining PRL, Mr. Benjamin
served as President and Chief Executive Officer of
Neocrin, a biomedical venture company, from February
1992 until October 1993. Prior to then, Mr. Benjamin
served as Chief Operating Officer of Lyphomed, Inc., a
manufacturer and distributor of injectable
pharmaceuticals.
Barry D. LeBlanc Mr. LeBlanc, age 41, was elected President, Chief
Executive Officer of the Company in December 1991. In
May 1996, Mr. LeBlanc relinquished his position of CEO
and became President of the Company's Ophthalmic
Division and Executive Vice President of the Company.
From August 1987 to December 1991, Mr. LeBlanc served as
President and Chief Operating Officer of the Company. He
also was a director and member of the Executive
Committee of the Company since August 1987. Prior to
1987, Mr. LeBlanc was principally employed as a
practicing certified public accountant and served as a
financial consultant to the Company. Effective July 3,
1996, Mr. LeBlanc resigned all of his positions with the
Company, including his postion as a director.
Harold O. Koch Mr. Koch, age 47, has served as Senior Vice
President since January 1995. From January 1993 to
December 1994, he served as Vice President - Business
Development. From July 1991 to December 1992, Mr. Koch
coordinated the reorganization of the Company's
manufacturing operations. From November 1988 to June
1991, he acted as an independent consultant in the area
of biotechnology formulation, ophthalmic manufacturing
processes and ophthalmic marketing. From May 1987 to
October 1988, he served as Vice President - Product
Development for the Cooper Company. Prior to this Mr.
Koch served as Director of Product Development for
Cooper Vision Ophthalmics.
Eric M. Wingerter Mr. Wingerter, age 34, has served as Vice President
- Finance and Administration since July 1993 and as Vice
President - Finance from January 1993 through June 1993.
Since September 1988, Mr. Wingerter has been the
Company's Chief Financial Officer. From January 1984 to
September 1988, he practiced as a certified public
accountant in the audit department at Ernst & Young.
Item 2. Description of Property.
The Company's ophthalmic executive offices, sales and distribution center
are based in two adjacent buildings totalling approximately 30,000 square feet
located on ten acres of land in Abita Springs, Louisiana. These buildings are
believed adequate for Akorn's present ophthalmic executive office, sales and
warehousing and distribution activities. The land owned by the Company in
Abita Springs can accommodate growth in Company executive and ophthalmic sales
and distribution operations for the foreseeable future.
Through Taylor, the Company owns a 76,000 square-foot facility located on
15 acres of land in Decatur, Illinois. This facility is currently used for
packaging, distribution, warehousing and office space. In addition, Taylor
owns a 55,000 square-foot manufacturing facility, also in Decatur, Illinois.
Through Taylor, the Company also leases 7,000 square feet of office and
warehousing space in San Clemente, California for use in the injectable
distribution segment, including sales, distribution and executive offices.
This space, along with available space in Decatur, Illinois, is considered
adequate to accomodate growth in the injectable distribution and contract
manufacturing operations for the foreseeable future.
Item 3. Legal Proceedings.
From time to time the Company becomes involved, in the ordinary course of
its business, in legal actions and claims. The amount, if any, of ultimate
liability with respect to such matters cannot be determined. Management
believes, however, that any such liability will not have a material effect on
the Company's consolidated financial statements.
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 June 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol AKRN. On September 15, 1996, the Company estimated that the number
of holders of its Common Stock was approximately 3,000, including record
holders and individual participants in security position listings.
High and low prices for the last two years were:
1996 1995
_____________________________________________________________
Cash Cash
Market Price (1) Dividends Market Price Dividends
Dividends Low High Declared Low High Declared
______________________________________________________________
1st Quarter $ 2.25 $ 2.81 $ - $ 2.38 $ 3.19 $ -
2nd Quarter 2.06 3.13 - 2.94 4.00 -
3rd Quarter 2.44 3.19 - 2.88 3.63 -
4th Quarter 2.53 3.50 - 2.25 3.31 -
Per NASDAQ
The Company's Board of Directors decided to suspend the payment of
dividends in the first fiscal quarter of 1992. Any such future payments will
be, in part, contingent upon the level of the Company's research and
development efforts and expansion of operations. The Company's loan agreement
includes restrictions on the payment of dividends. During fiscal 1996,
dividends paid pertain to Subchapter S distributions made to former PRL
shareholders for pre-acquisition earnings.
Item 6. Selected Consolidated Financial Data.
The following table sets forth selected consolidated financial information
for Akorn, Inc. for the five years ended June 30, 1996.
Years Ended June 30
1996 1995 1994 1993 1992
______________________________________________________________________________________________________
PER SHARE
Equity $ 0.97 $ 0.93 $ 0.76 $ 0.47 $ 0.35
Net income (loss) $ 0.05 $ 0.15 $ 0.14 $ 0.12 $ (0.51)
Price: High $ 3.50 $ 4.00 $ 3.88 $ 3.13 $ 4.13
Low $ 2.06 $ 2.25 $ 1.88 $ 1.50 $ 1.25
P/E: High 58x 27x 28x 26x NM
Low 34x 15x 13x 13x NM
INCOME DATA (000)
Net sales 33,925 37,505 31,266 23,612 20,914
Gross profit 11,953 15,177 13,218 9,699 7,942
Operating income (loss) 1,089 3,910 2,654 1,712 (7,237)
Interest expense (441) (25) (181) (288) (305)
Pretax income (loss) 977 3,738 2,573 1,518 (7,370)
Income taxes (benefit) 189 1,232 158 (263) (521)
Net income (loss) 788 2,506 2,415 1,781 (6,849)
Weighted average
shares outstanding 16,788 16,799 16,711 14,799 13,522
BALANCE SHEET (000)
Current assets 17,251 15,474 15,044 9,209 9,989
Net fixed assets 11,524 11,060 6,346 5,325 5,174
Total assets 29,817 27,491 22,190 15,008 15,692
Current liabilities 9,601 7,016 7,106 3,764 7,559
Long-term obligations 3,915 4,890 2,380 4,328 3,396
Shareholders' equity 16,301 15,585 12,704 6,916 4,737
FUNDS FLOW DATA (000)
From operations 10 712 2,212 (479) (414)
Dividends paid (583) - - - -
From investing (873) (4,943) (3,745) (531) 2,239
From financing 979 3,112 2,313 (26) (1,001)
Change in cash & equivalents 116 (1,119) 780 (1,036) 824
RATIO ANALYSIS
Gross margin 35.2% 40.5% 42.3% 41.1% 38.0 %
Operating margin 3.2% 10.4% 8.5% 7.3% (34.6)%
Pretax margin 2.9% 10.0% 8.2% 6.4% (35.2)%
Effective tax rate 19.3% 33.0% 6.1% (17.3)% NM
Net margin 2.3% 6.7% 7.7% 7.5% (32.7)%
Return on assets 2.8% 10.1% 13.0% 11.6% (39.6)%
Return on equity 4.9% 17.7% 24.6% 30.6% (89.0)%
All of the information shown in the table above has been restated to reflect
the combined operations of Akorn and Pasadena Research Labs, Inc. (PRL). The
information shown in the table for 1992 has been restated to reflect the
combined operations of Akorn and Taylor Pharmaceuticals, Inc. (Taylor).
For information regarding the effects of unusual, infrequently occurring or
year end adjustments on reported results for fiscal 1994 through 1996, see Notes
B, D and O to the financial statements included in Item 8 of this report.
Dividends paid pertain to Subchapter S distributions made to former PRL
shareholders for pre-acquisition earnings.
Includes the reversal of the provision for a litigation judgment ($0.7
million), the reduction of estimated costs of reorganizing manufacturing
operations ($0.4 million), and income tax benefits ($0.3 million).
Includes charges for the reorganization of manufacturing operations ($5.3
million), acquisition costs of Taylor ($1.3 million), and provision for a
litigation judgment ($0.8 million).
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying financial
statements.
Results of Operations
Net Sales
The Company's consolidated net sales declined 10% to $33.9 million in 1996
compared to the prior year. This follows a 20% increase in the prior year as
compared with 1994. The following table sets forth, for the periods
indicated, net sales by segment, excluding intersegment sales:
Years Ended June 30
(In millions)
1996 1995 1994
__________________________________________
Ophthalmic distribution $ 20.8 $ 23.8 $ 20.7
Injectable distribution 4.2 4.6 2.9
Contract manufacturing 8.9 9.1 7.7
__________________________________________
Total net sales $ 33.9 $ 37.5 $ 31.3
==========================================
Ophthalmic distribution sales include a broad range of therapeutic,
diagnostic, surgical and office-based products. Ophthalmic distribution sales
declined 13% in 1996 as compared to 1995 and increased 15% in 1995 as compared
to 1994. The decline in sales for 1996 is attributable primarily to two
factors. These include the loss of sales for AK-Con-A, the Company's
previously best-selling allergy product, and the discontinuance of certain
discounting practices with wholesalers in the fourth quarter of 1996.
As previously announced, AK-Con-A was converted to over-the-counter status
by the FDA, which required the filing of a NDA. Sales of AK-Con-A were
discontinued in October 1994, pending FDA approval of the NDA. The Company
received approval of the OTC version of the product in January 1996. The OTC
version is being marketed through a joint venture with Pfizer Inc (Pfizer).
Royalties earned under this joint venture totalled $333,000 in fiscal 1996.
Sales of AK-Con-A were approximately $2 million and $1.4 million,
respectively, in 1995 and 1994.
In the fourth quarter of 1996, the Company discontinued the practice
employed by the ophthalmic division of giving discounts to wholesalers at the
end of every quarter. The Company was willing to forego the additional sales
in the quarter to try to maintain margins at an acceptable rate in the future.
Because of the discontinuance of this practice, the Company estimates that
sales for the quarter and fiscal year ended June 30, 1996 were negatively
impacted by approximately $1 million.
Excluding the effects of the loss of AK-Con-A and the discontinuance of the
wholesaler discounting practice, sales for the ophthalmic segment were
relatively flat. Continued erosion of generic pricing along with some product
shortages have offset sales increases in other products during 1996. The
Company continues to experience increases in its sales of surgical products
which includes surgical instruments and surgical packs. The surgical products
area will continue to be a major focus for the ophthalmic segment since
margins are generally higher than for generic pharmaceuticals and sales are
controlled more directly by physicians, a customer base which has been
traditionally a strength for Akorn.
In 1995, ophthalmic distribution sales were enhanced by sales of AK-Con-A,
the introduction of several new surgical products, including new surgical
instruments and surgical packs, and sales of the Company's generic
therapeutic products.
Injectable distribution sales (attributable to PRL, which was acquired by
the Company on May 31, 1996 in a pooling of interests transaction) declined 9%
in 1996 as compared to 1995 and increased 59% in 1995 as compared to 1994.
The current year decline is primarily attributable to delays in new product
introductions and additional competition on a few of the Company's injectable
products. The sales increase in 1995 is primarily attributable to an expanded
offering of certain grandfathered products, including this segment's lead
product for the treatment of rheumatoid arthritis. In addition, in 1995, the
Company established several marketing alliances which gave it an entree into
the Group Purchasing Organization (GPO) market for injectables.
Contract manufacturing sales were relatively flat in 1996 versus 1995 and
increased 18% in 1995 as compared to 1994. Contract sales for 1995 were
enhanced by a new contract from Janssen Pharmaceutica, Inc. (Janssen), which
increased sales significantly beginning in the second half of fiscal 1994.
Sales to Janssen accounted for 12% and 13% of consolidated net sales in 1996
and 1995, respectively. Janssen had recently notified the Company that it
would be transferring the production of certain products during fiscal 1996
and 1997 to its own facilities in Puerto Rico. Such products accounted for
$1.3 million and $1.4 million in contract manufacturing sales for 1996 and
1995, respectively.
Effective July 1, 1996, Janssen agreed to transfer to the Company ownership
of three injectable products in the analgesia/anesthesia area, two of which
previously had been produced for Janssen by Taylor, but which Janssen had
determined to discontinue. These products accounted for approximately $2.6
million and $2.9 million in sales for Taylor in 1996 and 1995, respectively.
The acquisition of these products should help maintain plant volume and
provide the injectable distribution segment with two highly recognized
products.
Income and Expenses
The following table sets forth the relationship to sales of various income
statement items:
Years Ended June 30
1996 1995 1994
___________________________________________
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 64.8 59.5 57.8
___________________________________________
Gross margin 35.2 40.5 42.2
Selling, general and administrative
expenses 26.4 27.7 30.8
Research and development 3.6 2.4 2.9
Acquisition and severance costs 2.0 - -
___________________________________________
Operating income 3.2 10.4 8.5
Interest and other income
(expense), net (.3) (.4) (.3)
___________________________________________
Income before income taxes 2.9 10.0 8.2
Income taxes .6 3.3 .5
___________________________________________
Net income 2.3% 6.7% 7.7%
===========================================
Gross Margins
The consolidated gross margin percentage declined by 5.3 percentage points
from 40.5% in 1995 to 35.2% in 1996. The decline in gross margins is
primarily due to continued price pressure in the ophthalmic generic
pharmaceuticals area due to competition, as well as the loss of the the
Company's high margin sales of AK-Con-A. In addition, lower plant throughput,
primarily in the second half of fiscal 1996, resulted in margin declines for
the contract manufacturing segment. Also, in the second half of fiscal 1996,
the Company increased its estimate for unsaleable inventory by approximately
$500,000. In the quarter ended June 30, 1996, the Company increased its
estimate for wholesaler chargebacks by approximately $250,000. These changes
in estimate are reported as a decrease in gross margin. Excluding these
changes, the gross margin for 1996 was 37.4%, a 3.1 percentage point decline
from 1995.
The gross margin percentage declined 1.7 percentage points from 42.2% in
1994 to 40.5% in 1995. The decline in gross margin percentage in 1995 is
primarily due to the effects of price increases from manufacturers (primarily
in the second half of the fiscal year), which were not fully offset by price
increases to customers. In addition, a shift in the mix of lower margin
catalog products added to the decline in gross margin. The decline in gross
margin was more prevalent in the second half of the fiscal year as a result of
the loss of sales from AK-Con-A discussed earlier.
The Company anticipates that gross margins will continue to be impacted by
price erosion on generic pharmaceuticals. However, with anticipated growth in
certain higher margin niche products, the Company's overall gross margins
should remain relatively stable during 1997. As the injectable segment begins
the marketing of more commodity generic products, overall Company margins are
expected to decline beyond 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
declined 1.3 percentage points from 27.7% in 1995 to 26.4% in 1996. In the
quarter ended March 31, 1996, the Company decided to no longer pursue ANDAs
for several ophthalmic products which had been produced in previously-owned
facilities. This decision was based on the cost of the ANDAs versus the
future incremental profit to be derived from the sales of these products,
given changed market conditions. This change in estimate was also based on
the Company's recent decision to enter into the injectable distribution
marketplace and the need to redeploy R&D resources for the pursuit of
injectable ANDAs. The total amount of the accrual reversed was approximately
$316,000 and is included as a reduction in S,G&A expenses. During the
quarter ended March 31, 1995, the Company, based on evaluations made by
management, changed the estimated liability related to aged customer credits.
This resulted in a reduction in S,G&A expenses of approximately $330,000.
The decline in S,G&A expenses as a percentage of net sales, in spite of the
decrease in sales from 1995 to 1996, is primarily due to the decision to
eliminate approximately $1 million to $1.5 million of S,G&A expenses and other
manufacturing operating expenses in response to a slowing in sales growth
during the third quarter of fiscal 1995.
Selling, general and administrative expenses as a percentage of net sales
declined 3.1 percentage points from 30.8% in 1994 to 27.7% in 1995 primarily
due to the Company's operating leverage and the increase in net sales from
1994 to 1995.
Research and Development
Research and development expense increased 36% in 1996 as compared to 1995.
This increase was primarily attributable to the increase in R&D associated
with the recently acquired operations of PRL. Prior to fiscal 1996, PRL had
very little R&D expense. Research and development expense was relatively flat
in 1995 as compared to 1994. In 1995, the Company maintained a stable mix of
new ophthalmic ANDAs and site-transfers from its previous manufacturing
facility in Los Angeles.
Throughout 1995 and the first half of 1996, the Company incurred R&D costs
associated with its NDA for the over-the-counter version of AK-Con-A in
connection with the licensing arrangement with Pfizer. This NDA was approved
in January 1996. Costs associated with this NDA have been capitalized in
connection with the long-term contract for manufacturing and royalty rights.
The Company also continued its work on an NDA for the ophthalmic non-steroidal
anti-inflammatory drug Piroxicam licensed from Pfizer. The first $1 million
of costs associated with this NDA are offset by funds obtained from Pfizer.
Total cash expenditures for all research and development activities were
approximately $1.9 million, $1.7 million and $1.4 million in 1996, 1995 and
1994, respectively.
With the acquisition of PRL, the Company expects to increase its mix of
injectable grandfathered and ANDA products. PRL had several ANDA filings in
process through joint venture arrangements. It is anticipated that these
arrangements would continue and that the Company would also continue to
develop other injectable products for manufacture by Taylor. Several of the
products currently marketed and distributed by the injectable distribution
segment do not require FDA approval and production of such products will be
transferred to the Taylor facilities as soon as practicable. In addition to
injectable and ophthalmic ANDAs, the Company will continue its work on the
ophthalmic NDA for Piroxicam.
The remaining number of products in the R&D pipeline which are being
transferred from the Company's previous manufacturing site in Los Angeles is
minimal at June 30, 1996. The costs associated with these products had been
previously accrued. Accordingly, as the mix of transfer products declines,
R&D expense will increase, given a level amount of R&D expenditures. Due to
the factors noted above, it is anticipated that the Company's R&D expenditures
will increase in 1997. However, the level of R&D will continue to be
monitored in light of operating performance.
Acquisition and Severance Costs
In connection with the merger of PRL and Taylor, the Company recorded
certain charges in the fourth quarter of fiscal 1996 for transaction costs
($110,000) and transitional costs ($568,000) associated with the realignment
of the Company into two separate reporting divisions. The transaction costs
include legal, accounting and other directly related acquisition costs.
Transitional costs consist primarily of provisions for severance related
costs.
Operating Income
Operating income in 1996 of $1.1 million or 3.2% of sales was 72% lower than
1995 operating income of $3.9 million. The decline in operating income for
1996 is attributable to several factors noted above. These include
acquisition and severance costs, the loss of high-margin sales of AK-Con-A,
the Company's decision to discontinue wholesaler discounting practices in the
fourth quarter, and the changes in estimate noted above. In addition, the
overall reduction in gross margins for the Company, primarily associated with
increased price sensitivity for ophthalmic generic pharmaceuticals, reduced
operating margins.
Operating income in 1995 was $3.9 million or 10.4% of sales compared to the
1994 amount of $2.7 million or 8.5% of sales. The increase in 1995 operating
income was primarily the result of increased sales and operating leverage,
coupled with stable research and development expenses. The sales increase was
somewhat offset by the decline in gross margin resulting from cost increases
of products distributed but not manufactured and continued price sensitivity
in the generic ophthalmic pharmaceutical market.
Interest and Other Income (Expense)
Net interest and other expense declined $60,000 from 1995 to 1996. During
these periods, interest income remained relatively constant. Interest expense
increased significantly in 1996 to $441,000 as compared to $25,000 in 1995.
Most interest expense in 1995 was capitalized in connection with construction
at Taylor's facilities in Decatur, Illinois. The increase in interest expense
in 1996 was offset by a gain on the sale of marketable equity securities of
$80,000. In 1995, a $308,000 decline in market value of an equity investment
was determined to be other than temporary. This determination was based on
the significant deterioration in the value of the investment and the
evaluation that a price recovery was not imminent.
From 1994 to 1995, net interest and other expense increased $91,000. During
these periods, interest income remained relatively constant. Interest expense
declined in 1995 from $181,000 to $25,000. As noted above, the majority of
interest expense in 1995 was capitalized. The loss of $308,000 related to the
decline in market value of an equity investment more than offset the decline
in interest expense.
The Company anticipates that interest expense will increase significantly in
1997 as a result of the new long-term debt associated with the Janssen product
acquisition and 1997 anticipated capital improvements. A portion of this
interest is expected to be capitalized during 1997 during validation and
construction periods.
Income Taxes
The Company's consolidated effective income tax rate was 19.3%, 33.0% and
6.1% for 1996, 1995 and 1994, respectively. The effective rate for 1996
varies from the statutory rates primarily due to the inclusion of net income
for PRL prior to the acquisition date as a result of the pooling of interests.
PRL was a Subchapter S corporation and therefore was not subject to corporate
income taxes. The effects of pre-acquisition earnings or loss of PRL did not
have a material effect on the 1995 or 1994 effective rate since such income or
loss was immaterial to consolidated pretax income.
The effective rate for 1994 varies from the statutory rates primarily due to
the effects of adoption of Statement of Financial Accounting Standards Board
(SFAS) No. 109, "Accounting for Income Taxes," effective July 1, 1993. Under
SFAS 109, the Company was able to recognize estimated future tax benefits
attributable to expenses recorded for book purposes but not currently
deductible for tax purposes. In July 1993, the Company recorded a net
deferred tax asset in the amount of $896,000 along with a 100% valuation
reserve to reflect the uncertainties surrounding the ultimate realization of
the benefits. In the fourth quarter of fiscal 1994, the Company decided to
reverse the entire remaining balance of the valuation reserve since
uncertainties regarding the ultimate realization of the benefits were reduced
to a relatively low level. This resulted in the recording of a $384,000 ($.03
cents per share) benefit in the fourth quarter.
The Company has been in discussions with the Internal Revenue Service (IRS)
regarding the examination of tax returns for the periods of 1988 through 1993.
The IRS has proposed adjustments to such returns, some of which the Company
has agreed to and some which the Company has appealed. These adjustments
primarily relate to the timing of deductions taken for tax purposes in
connection with the reorganization of its manufacturing operations in 1991 and
1992. The agreed upon adjustments, which resulted in additional interest and
taxes of approximately $700,000, was paid in fiscal 1996 through a bank line
of credit. The Company had previously accrued the financial statement effects
of these agreed upon adjustments; accordingly, no material financial statement
impact of these adjustments was recorded in 1995 or 1996. With respect to the
appealed items, the Company does not anticipate any adverse financial
statement effect as accruals for these assessments have been previously
recorded.
Net Income
Net income declined $1.7 million or $.10 cents per share from $2.5 million
or $.15 cents per share in 1995. The decline in sales along with certain
unusual, infrequently occurring adjustments noted previously, including
acquisition and severance costs, and certain other changes in accounting
estimates, are the primary reasons for the decline in net income.
Net income increased $100,000 or $.01 cent per share from $2.4 million or
$.14 cents per share in 1994 to $2.5 million or $.15 cents per share in 1995.
This marginal increase, in spite of the significant increase in operating
income in 1995, is due to the lower effective tax rate incurred in 1994 as a
result of the adoption of SFAS 109 and full realization of the benefit of
deferred tax assets.
Financial Condition and Liquidity
Management assesses the Company's liquidity by its ability to generate cash
to fund its operations. The significant components in managing liquidity are:
funds generated by operations; levels of working capital items including
accounts receivable, inventories and accounts payable; capital expenditure
and debt repayment requirements; adequacy of available lines of credit; and
availability of long-term capital at competitive prices.
The Company traditionally has generated cash from operations in excess of
working capital requirements. The net cash provided by operating activities
was $10,000 in 1996 compared to $712,000 in 1995 and $2.2 million in 1994.
The decline in cash provided from operating activities in 1996 and 1995 is
primarily related to the increase in inventory associated with new product
additions and a continual increase in the amount of products produced in-house
which require Akorn to inventory related raw materials and components. Also
in 1996, the majority of new contract manufacturing business requires that the
Company inventory raw materials and components. In 1995, cash provided from
operations was also negatively impacted by a decrease in the average days
outstanding for payables. This decline was due to more timely payments to
vendors by the Company resulting from the availability of working capital
credit lines.
In 1997, the Company will continue to fund the payment of certain previously
accrued research and development activities including the site transfer of
ANDAs from the Company's Los Angeles facility and the development of the NDA
for Piroxicam discussed previously. Management believes that cash flows from
operations, funds received from Pfizer and the available working capital line
of credit are sufficient to handle these short-term needs.
In addition to these short-term needs, the Company may be required to make
payments of additional interest and taxes in connection with the ongoing
appeal resulting from the examination by the IRS of tax returns for the
periods of 1988 through 1993. If unsuccessful in its appeal, the Company
could be liable for additional interest and taxes currently due of
approximately $700,000. The tax portion of the appeal items would be offset
by deferred tax assets; the interest portion of the appeal items is
sufficiently reserved for in the financial statements. The Company continues
to challenge the findings of the IRS through the appeals process. Payment of
the remaining unsettled issues will be based on the timing of the appeals
process and the success of the Company in arguing its position.
Net cash utilized for investing activities in 1996 of $873,000 includes $1.4
million of property, plant and equipment additions associated with the
expansion of the Company's Decatur facilities. These additions were partially
funded by net sales of investments of $659,000. In addition, 1996 net cash
utilized for investing activities includes approximately $200,000 related to
product licensing costs. The Company has plans for capital improvements of
$1.5 million to $2 million in 1997. These improvements are for both
requirements to meet current FDA and DEA regulations as well as upgrades to
the Company's managment information systems. These improvements are expected
to be financed through bank financing, of which approximately $1.2 million is
currently available under previously approved construction lines of credit.
On July 1, 1996, the Company acquired certain high-speed inspection
equipment and the rights to two injectable products in the
anesthesia/analgesia area from Janssen. The total acquisition cost includes
$1.6 million, which was funded primarily through a $1.5 million bank credit
facility. In addition, the Company is required to provide other products to
Janssen, at no cost, estimated not to exceed $100,000, should certain
contingent events occur.
Net cash provided by financing activities of approximately $1.0 million in
1996 primarily consists of the net increase in short-term borrowings.
Increases in long-term debt were offset by 1996 debt service requirements.
Also, in 1996, proceeds from the exercise of options provided $599,000 in
cash, while dividends (representing pre-merger Subchapter S earnings)
totalling $583,000 were paid to the former shareholders of PRL.
On September 30, 1994, the Company entered into a $6.3 million credit
facility with First National Bank of Commerce in New Orleans (FNBC). This
facility was amended in May 1996 which increased the total facility to include
the following:
- - $1.3 million Term loan for the payout of existing debt and reimbursement
for the early payout of a capital lease on the Taylor manufacturing
facility.
- - $2.6 million Term construction loan to finance expansion of the Taylor
facilities.
- - $2.5 million Line of Credit for working capital purposes.
- - $1.5 million financing of Janssen product line.
- - $1.6 million Revolver/Term construction financing to finance 1996 and 1997
capital requirements.
- - $600,000 short-term financing of IRS agreed issues.
The entire Term loans have been drawn as of June 30, 1996 and, as of this
date, $400,000 has been drawn on the Revolver/Term construction loan and
$550,000 on the IRS loan. As of June 30, 1996, $227,000 was outstanding under
the Line of Credit. In addition, as of June 30, 1996, $517,000 was outstanding
under a Line of Credit with PRL's former bank. Any amounts outstanding under
this line were transferred to the FNBC Line of Credit facility subsequent to
year end.
Selected Quarterly Data
In Thousands, Except Per Share Amounts
Net Income(Loss)
Net Gross Per
Sales Profit Amount Share
________________________________________________
1996
1st Quarter $ 8,739 $ 3,305 $ 499 $ 0.03
2nd Quarter 8,210 3,172 296 0.02
3rd Quarter 8,817 3,066 550 0.03
4th Quarter 8,159 2,410 (557) (0.03)
________________________________________________
$ 33,925 $ 11,953 $ 788 $ 0.05
================================================
1995
1st Quarter $ 9,929 $ 4,174 $ 1,043 $ 0.06
2nd Quarter 9,707 4,169 364 0.02
3rd Quarter 8,637 3,225 404 0.02
4th Quarter 9,232 3,609 695 0.04
________________________________________________
$ 37,505 $ 15,177 $ 2,506 $ 0.15
================================================
All of the information shown in the table above has been restated to reflect
the combined operations of Akorn and PRL. For information regarding unusual,
infrequently occurring or year end adjustments, see notes B, D and O to the
financial statements included in Item 8 of this report.
Item 8. Financial Statements and Supplementary Data.
The following financial statements are included in Part II, Item 7 of this
Form 10-K.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 1996 and 1995 . . . . . . . . . . .
Consolidated Statements of Operations for the years ended June 30, 1996, 1995
and 1994. . . . . . . . . . . . . .
Consolidated Statements of Shareholders' Equity for the years ended June 30,
1996, 1995 and 1994. . . . . . . .
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995
and 1994. . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . .
Report of Deloitte & Touche LLP
Independent Auditors
To the Board of Directors and Shareholders of
Akorn, Inc.
We have audited the accompanying consolidated balance sheets of Akorn, Inc.
and subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material aspects, the financial position of Akorn, Inc. and subsidiaries at
June 30, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note N to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1994. Also, as discussed
in Note D to the consolidated financial statements, the Company changed its
method of accounting for certain investments in debt and equity securities in
1995.
New Orleans, Louisiana
September 11, 1996
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30
1996 1995
___________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 891 $ 775
Short-term investments 902 1,569
Trade accounts receivable
(less allowances for uncollectibles of
$339 and $291 in 1996 and 1995,
respectively) 4,916 5,464
Inventory 8,860 6,476
Deferred income taxes 1,157 709
Prepaid expenses and other assets 525 481
____________________________________
TOTAL CURRENT ASSETS 17,251 15,474
OTHER ASSETS
Intangibles, net 848 728
Other 194 229
____________________________________
TOTAL OTHER ASSETS 1,042 957
PROPERTY, PLANT AND EQUIPMENT, NET 11,524 11,060
____________________________________
TOTAL ASSETS $ 29,817 $ 27,491
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,294 $ 288
Current installments of long-term debt 707 513
Current portion of capital lease obligations 151 149
Current portion of pre-funded development costs 650 667
Trade accounts payable 2,680 1,878
Income taxes payable 626 782
Accrued compensation 1,106 905
Accrued reorganization costs 306 727
Deferred royalties 667 -
Accrued expenses and other liabilities 1,414 1,107
____________________________________
TOTAL CURRENT LIABILITIES 9,601 7,016
LONG-TERM DEBT 3,117 3,353
CAPITAL LEASE OBLIGATIONS 427 580
PRE-FUNDED DEVELOPMENT COSTS 174 304
DEFERRED INCOME TAXES 197 327
OTHER LONG-TERM LIABILITIES - 326
SHAREHOLDERS' EQUITY
Common stock, no par value--authorized 20,000,000
shares; issued 16,600,927 shares in 1996 and 16,515,673
shares in 1995; outstanding 16,573,915 shares in
1996 and 16,304,653 shares in 1995 14,174 13,959
Treasury stock, at cost--27,012 shares in
1996 and 211,020 shares in 1995 (92) (291)
Retained earnings 2,219 1,830
Unrealized gain on marketable equity securities - 87
____________________________________
TOTAL SHAREHOLDERS' EQUITY 16,301 15,585
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 29,817 $ 27,491
====================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Data)
Years Ended June 30
1996 1995 1994
__________________________________________________________
Net sales $ 33,925 $ 37,505 $ 31,266
Cost of goods sold 21,972 22,328 18,048
__________________________________________________________
GROSS PROFIT 11,953 15,177 13,218
Selling, general and
administrative expenses 8,974 10,376 9,643
Research and development 1,213 891 921
Acquisition and severance costs 677 - -
__________________________________________________________
10,864 11,267 10,564
__________________________________________________________
OPERATING INCOME 1,089 3,910 2,654
Interest and other income (expense):
Interest income 113 106 84
Interest expense (441) (25) (181)
Gain (loss) on marketable equity securities 80 (308) -
Other income, net 136 55 16
__________________________________________________________
(112) (172) (81)
__________________________________________________________
INCOME BEFORE INCOME TAXES 977 3,738 2,573
Income taxes 189 1,232 158
__________________________________________________________
NET INCOME $ 788 $ 2,506 $ 2,415
==========================================================
NET INCOME PER SHARE $ .05 $ .15 $ .14
==========================================================
Weighted average shares outstanding 16,788 16,799 16,711
==========================================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Common Stock Unrealized
________________________ Retained Gain (Loss)
Share Earnings Treasury on Marketable
Outstanding Amount (Deficit) Stock Equity Securities Total
________________________________________________________________________________
Balances at July 1, 1993 13,715 $ 10,709 $ (3,152) $ (641) $ - $ 6,916
Net income for 1994 2,415 2,415
Exercise of stock options and warrants 2,010 3,000 (1) 20 3,019
Issuance of common stock 467 250 250
Cancellation of shares due to resolution
of manufacturing pre-acquisition
contingencies (52) -
Unrealized loss on marketable equity
securities (32) (32)
Treasury stock reissued 58 19 118 137
________________________________________________________________________________
Balances at June 30, 1994 16,198 13,959 (719) (503) (32) 12,705
Net income for 1995 2,506 2,506
Exercise of stock options 35 8 70 78
Unrealized loss on marketable equity
securities (276) (276)
Reversal of unrealized loss on marketable
equity securities 308 308
Unrealized gain on marketable
equity securities 87 87
Treasury stock reissued 72 35 142 177
_________________________________________________________________________________
Balances at June 30, 1995 16,305 13,959 1,830 (291) 87 15,585
Net income for 1996 788 788
Exercise of stock options 249 215 186 198 599
Treasury stock received in lieu of cash (36) (123) (123)
Dividends paid to Subchapter S shareholders (583) (583)
Reversal of unrealized gain on marketable
equity securities (87) (87)
Treasury stock reissued 56 (2) 124 122
_________________________________________________________________________________
Balances at June 30, 1996 16,574 $ 14,174 $ 2,219 $ (92) $ - $ 16,301
=================================================================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended June 30
1996 1995 1994
______________________________________________________
OPERATING ACTIVITIES
Net income $ 788 $ 2,506 $ 2,415
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 984 980 763
(Gain) loss on marketable equity securities (80) 308 -
Provision for losses on accounts receivable
and inventory 825 160 68
Deferred income taxes (578) 2 (387)
Other - (1) 11
Changes in operating assets and liabilities:
Accounts receivable 424 (350) (2,172)
Inventory, prepaid expenses and other
assets (3,129) (1,420) (1,047)
Refundable income taxes - - 288
Trade accounts payable and accrued
expenses 1,229 (1,514) 1,600
Income taxes payable (155) 70 673
Pre-funded development costs (298) (29) -
_________________________________________________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 10 712 2,212
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,360) (4,818) (1,671)
Product licensing costs (172) (421) (432)
Purchases of investments (1,173) (2,023) (2,625)
Sales of investments 1,832 2,319 983
_________________________________________________________
NET CASH USED IN INVESTING ACTIVITIES (873) (4,943) (3,745)
FINANCING ACTIVITIES
Proceeds from sale of stock 599 256 1,805
Repayments of long-term debt (442) (944) (118)
Proceeds from issuance of long-term debt 400 3,900 -
Pre-funded development receipts 150 - 1,000
Principal payments under capital lease obligations (151) (58) (464)
Short-term borrowings, net 1,006 128 90
Dividends paid (583) - -
Debt acquisition costs - (170) -
_________________________________________________________
NET CASH PROVIDED BY FINANCING
ACTIVITIES 979 3,112 2,313
_________________________________________________________
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 116 (1,119) 780
Cash and cash equivalents at beginning of year 775 1,894 1,114
_________________________________________________________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 891 $ 775 $ 1,894
=========================================================
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Akorn, Inc.
Note A - Summary of Significant Accounting Policies
Consolidation: The accompanying consolidated financial statements include
the accounts of Akorn, Inc. (the Company) and its wholly owned subsidiaries,
Spectrum Scientific Pharmaceuticals, Inc. (Spectrum), Walnut Pharmaceuticals,
Inc. (Walnut) and Taylor Pharmaceuticals, Inc. (Taylor, formerly Akorn
Manufacturing, Inc.). Intercompany transactions and balances have been
eliminated in consolidation.
The Company acquired Pasadena Research Laboratories, Inc. (PRL) effective
May 31, 1996 in a business combination accounted for as a pooling of
interests. The acquired operations of PRL were merged into Taylor's
operations subsequent to the acquisition (see Note B). Accordingly, all
financial information presented has been restated to include the operations of
PRL.
Revenue Recognition: The Company recognizes sales upon the shipment of
goods.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less, when purchased, to be cash equivalents.
Investments: Effective July 1, 1994, the Company adopted Statement of
Financial Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." The Company records short-term and long-term
investments under the provisions of this Statement (see Note D).
Inventory: Inventory is stated at the lower of cost (average cost method)
or market (see Note F). Provision is made for slow-moving, unsalable and
obsolete items.
Intangibles: Intangibles consist primarily of product licensing costs which
are capitalized at cost and amortized on the straight-line method over the
lives of the related license periods. Amortization expense for the three
years ended June 30, 1996 was $53,328, $144,820 and $82,143, respectively.
Accumulated amortization at June 30, 1996 and 1995 amounted to $269,828 and
$216,500, respectively.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost, less accumulated depreciation. Depreciation is provided using the
straight-line method in amounts considered sufficient to amortize the cost of
the assets to operations over their estimated service lives. The average
estimated service lives of buildings and leasehold improvements, furniture and
equipment, and automobiles are approximately 30, 8, and 5 years, respectively.
Depreciation expense for the three years ended June 30, 1996 was $896,537,
$800,330 and $559,321, respectively.
Under an agreement with Pfizer, Inc. (see Note H) the Company has received
reimbursement for the purchase of certain equipment. As of June 30, 1996 and
1995, the total amount reimbursed was approximately $593,000. The Company has
accounted for these reimbursements by reducing its carrying value of the
associated equipment.
Interest Capitalization: The Company capitalizes interest during periods
of construction of qualifying assets. For the year ended June 30, 1995, the
Company incurred interest costs of $282,007 relating to construction, all of
which was capitalized. No interest was capitalized during 1996 or 1994.
Stock Options: The Company records as an expense the difference, if any,
between the value of stock options granted with an exercise price below the
market value of the Company's stock and the then market value of the Company's
stock on the date the options are granted.
Income Taxes: Deferred income taxes are provided in the financial
statements, where necessary, to account for the tax effects of temporary
differences resulting from reporting revenues and expenses for income tax
purposes in periods different from those used for financial reporting
purposes. The temporary differences result primarily from the use of
different methods of accounting for depreciation and amortization, provisions
for bad debts, inventory reserves and accrued reorganization and severance
costs, and pre-funded development costs.
Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments, including cash, short-term investments, receivables,
payables, and certain accrued liabilities approximate fair market value due to
their short-term nature. The fair value of the Company's long-term debt at
June 30, 1996 and 1995, based upon available market information, approximated
its carrying value.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Effect of Recent Accounting Pronouncements: During March 1995, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121). SFAS No.
121 establishes accounting standards for recording the impairment of long-
lived assets, certain identifiable intangibles, goodwill, and assets to be
disposed of. The Company is required to adopt SFAS No. 121 effective for
fiscal 1997. Management believes that the implementation of SFAS No. 121 will
not have a material impact on the Company's consolidated financial statements.
During October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
SFAS No. 123, which the Company is required to adopt effective for fiscal
1997, provides guidance relating to the recognition, measurement and
disclosure of stock-based compensation. Management does not expect the new
pronouncement to have an impact on the Company's consolidated financial
statements since the intrinsic value-based method prescribed by APB Opinion
No. 25 and also allowed by SFAS No. 123 will continue to be used for the
measurement and recognition of stock-based compensation plans.
Note B - Acquisition of Pasadena Research Laboratories, Inc.
On May 31, 1996, the Company acquired Pasadena Research Laboratories,
Inc. in a business combination accounted for as a pooling of interests. PRL
is a specialized distributor of injectable pharmaceuticals. Pursuant to
the merger agreement, the Company issued 1.4 million shares of its common
stock in exchange for all of the outstanding shares of PRL. As part of the
acquisition, PRL was merged into the operations of Taylor and the Company was
realigned into two separate reporting divisions, an ophthalmic division and
an injectable division.
The Company's financial statements as contained herein have been restated
to include the results of PRL for all periods presented. Combined and
separate results of operations of the Company and PRL during the periods
preceding the merger are presented below.
Akorn PRL Combined
_____________________________________
(in thousands)
Eleven months ended May 31, 1996 (unaudited):
Net sales $ 27,361 $ 3,684 $ 31,045
Net income 675 409 1,084
Fiscal year ended June 30, 1995:
Net sales 32,863 4,642 37,505
Net income 2,280 226 2,506
Fiscal year ended June 30, 1994:
Sales 28,404 2,862 31,266
Net income (loss) 2,721 (306) 2,415
The combined financial results presented above include no significant
adjustments to conform the accounting policies of the two companies.
In connection with the merger, the Company recorded certain charges in the
fourth quarter of fiscal 1996 for transaction costs ($109,534) and
transitional costs ($567,772) associated with the realignment of the Company
into two separate reporting divisions. The transaction costs include legal,
accounting and other directly related acquisition costs. Transitional costs
consist primarily of provisions for severance related costs.
Note C - Acquisition of Manufacturing Operations
On January 15, 1992, the Company acquired Taylor Pharmaceuticals, Inc., in
a business combination accounted for as a pooling of interests. Taylor is a
contract manufacturer of sterile pharmaceuticals, which it produces and
delivers pursuant to contracts with third parties. Pursuant to the merger
agreement, the Company delivered 926,753 shares of its Common Stock in
exchange for all of the outstanding stock of Taylor.
Of the total shares issued in the merger agreement, 922,500 shares were
held in escrow pending the settlement of a default judgment against Taylor
entered on November 8, 1991. During fiscal 1993, a settlement between
Taylor's insurer and the plaintiffs was reached. As a result, in 1993 the
Company reduced its provision for the judgment to $100,000, the approximate
amount of expenses incurred in defending the judgment. In accordance with the
terms of the Taylor acquisition agreement, 51,917 shares valued at $2 per
share were forfeited and returned as treasury stock by the escrow agent during
fiscal 1994 in order to cover these expenses and finally resolve this pre-
acquisition contingency. The remaining shares held in escrow of 870,583 were
distributed to the former Taylor shareholders thereby terminating the escrow
agreement.
As part of the acquisition, the Company paid a finder's fee to an affiliate
of Dr. John N. Kapoor, Chairman of the Board (the affiliate). This finder's
fee was in the form of 250,000 shares of Company Common Stock valued at $3.50
per share. Of the total shares issued, 125,000 were subject to forfeiture if
the market price of the Company's Common Stock did not reach at least $5.00
per share by January 15, 1996. In August 1995, the Company, the affiliate and
Dr. Kapoor entered into an agreement under which (i) the forfeiture period was
extended to January 15, 1998, (ii) forfeiture would not occur in the event
that persons unaffiliated with Dr. Kapoor acquire beneficial ownership of more
than 50% of the outstanding common stock of the Company and (iii) Dr. Kapoor
waived his right to receive $40,000 otherwise payable to him by the Company
for serving as Chairman of the Board in fiscal 1996.
Note D - Investments
Effective July 1, 1994, the Company adopted Statement of Financial
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities". This Statement requires certain securities to be
classified into one of three reporting categories (held-to-maturity,
available-for-sale or trading). The Company has completed a review of its
securities relative to SFAS 115 and has classified its investments in debt
securities (consisting primarily of U.S. Government securities and municipal
bonds with a carrying value of $902,120 and $0, respectively, at June 30, 1996
and $1,136,010 and $303,092, respectively, at June 30, 1995) as held-to-
maturity. Therefore, in accordance with SFAS 115, these investments, all of
which have contractual maturities within one year, are being reported at
amortized cost, which approximates fair market value. The Company has
classified its investment in equity securities as available-for-sale,
requiring that they be carried at fair value with any unrealized gain or loss
reflected as a component of shareholders' equity. Such investments had a fair
market value of approximately $130,000 at June 30, 1995. The Company held no
equity investments at June 30, 1996.
At June 30, 1994, the cost of the Company's marketable equity securities
exceeded the market value by $32,044. Therefore, a valuation allowance was
established by a charge to shareholders' equity representing the net
unrealized loss. During fiscal 1995, this allowance was increased by $275,661
due to the continuous decline in market value. At March 31, 1995, management
determined the loss to be permanent given the significant decline in market
value since June 30, 1994 and the unlikelihood of a recovery in value.
Therefore, the $307,705 unrealized loss previously charged to shareholders'
equity was accounted for as a realized loss in the 1995 statement of
operations. At June 30, 1995, the market value of the marketable equity
securities exceeded the adjusted cost, subsequent to the write-down noted
above, by $87,397; therefore, an unrealized gain was recorded as a component
of shareholders' equity to reflect this increase in value. During fiscal
1996, the Company sold its investment in marketable equity securities for an
amount in excess of adjusted cost. Accordingly, the unrealized gain
previously charged to shareholders' equity was reversed and a realized gain of
$79,859 was recorded in the 1996 statement of operations.
Note E - Allowance for Uncollectibles
The activity in the allowance for uncollectibles is as follows for the
years ended June 30:
1996 1995 1994
____________________________________
(in thousands)
Balance at beginning of year $ 291 $ 272 $ 240
Provision for bad debts 124 60 61
Accounts written off (76) (41) (29)
____________________________________
Balance at end of year $ 339 $ 291 $ 272
====================================
Note F - Inventory
The components of inventory at June 30 are as follows:
1996 1995
_________________________________
(in thousands)
Finished goods $ 5,376 $ 4,239
Work in process 1,311 1,043
Raw materials and supplies 2,173 1,194
_________________________________
$ 8,860 $ 6,476
Inventory for 1996 and 1995 is reported net of reserves of $681,920 and
$352,143, respectively, for slow-moving, unsalable and obsolete items.
The activity in the inventory reserve is as follows for the years ended
June 30:
1996 1995 1994
_______________________________
(in thousands)
Balance at beginning of year $ 352 $ 290 $ 427
Provision for slow-moving, unsalable
and obsolete items 701 100 7
Inventory written off (371) (38) (144)
____________________________________
Balance at end of year $ 682 $ 352 $ 290
====================================
Note G - Property, Plant and Equipment
Property, plant and equipment at June 30 consists of the following:
1996 1995
_______________________________
(in thousands)
Land $ 479 $ 479
Buildings and leasehold improvements 7,738 5,516
Furniture and equipment 10,139 7,880
Automobiles 166 133
_______________________________
18,522 14,008
Accumulated depreciation (7,771) (6,875)
_______________________________
10,751 7,133
Construction in progress 773 3,927
_______________________________
$ 11,524 $ 11,060
===============================
Note H - Pre-Funded Development Costs
In April 1994, the Company entered into a series of agreements with Pfizer
Inc. (Pfizer) regarding the cross-licensing of several ophthalmic
pharmaceutical products. Under this arrangement Akorn granted a license to
Pfizer on an Akorn product then under development (the licensed product), and
agreed to provide manufacturing services and marketing assistance for the
licensed product. In exchange, Akorn received (1) a royalty stream on sales of
the licensed product, (2) an exclusive, royalty-free license to manufacture
and market a Pfizer prescription ophthalmic non-steroidal anti-inflammatory
drug (NSAID), and (3) non-exclusive rights to market an existing Pfizer
ophthalmic antibiotic.
As part of this agreement, in fiscal 1994 Pfizer paid the Company an
advance of $1 million to be used to fund the costs of developing the NSAID,
which are estimated at $1.8 million. The Company intends to recognize the pre-
funded balance as an offset to development costs as these expenses are
incurred. During fiscal 1996 and 1995, the Company incurred $297,463 and
$29,012, respectively, of development costs which were charged against the
pre-funded balance. The Company's current projections indicate that the
remaining costs of development will be paid over the next 15 - 18 months.
In addition, the agreement stipulated that Pfizer would reimburse Akorn for
one-half of the costs to obtain FDA approval on the licensed product,
including the cost of certain agreed upon equipment acquisitions required for
the manufacturing of the licensed product. A New Drug Application (NDA) was
filed for the licensed product on June 8, 1994. During fiscal 1996, the
Company obtained FDA approval of the NDA for the licensed product. Therefore,
in accordance with the agreement, Pfizer paid the Company an advance royalty
of $1 million for the initial year sales of the licensed product. The Company
is recognizing this deferred revenue balance over a one year period beginning
in March 1996.
Note I - Financing Arrangements
The Company's short-term borrowings at June 30 are summarized as follows:
1996 1995
______________________________
(in thousands)
Line of Credit with First National Bank of Commerce;
permitting borrowings up to $2.5 million, interest at
the Chase Manhattan prime rate (8.25% at June 30, 1996) $ 227 $ -
Line of credit with Bank of America; permitting borrowings
up to $600,000, interest at the bank's prime rate plus (%
(9.00% and 9.75% at June 30, 1996 and 1995); secured by the
receivables, inventory and equipment of PRL 517 288
Short-term note payable to First National Bank of Commerce;
due 1997, interest at the bank's prime rate (8.75% at
June 30, 1996), payable in monthly principal installments of
of $50,000 commencing July 1996 550 -
________________________________
$ 1,294 $ 288
================================
The $2.5 million Line of Credit and $550,000 short-term note payable are
pursuant to the credit facility amended during fiscal 1996 as further
described below.
Long-term debt at June 30 consists of:
1996 1995
_________________________________
(in thousands)
Note payable to First National Bank of Commerce; due 1999;
interest at 8.03%, payable in monthly principal installments
of $33,521 commencing December 1995 $ 2,308 $ 2,600
Note payable to First National Bank of Commerce; due 1999;
interest at 10.25%, payable in monthly principal installments
of $10,834 with a final installment of $660,794 due in 1999 1,083 1,213
Note payable to First National Bank of Commerce; due 1999;
interest at (% over the Chase Manhattan prime
rate (9% at June 30, 1996), payable in monthly principal
installments of $12,857 commencing July 1996 400 -
Other obligations 33 53
___________________________________
3,824 3,866
Deduct: Current installments payable within one year (707) (513)
___________________________________
Portion payable after one year $ 3,117 $ 3,353
===================================
Maturities of long-term debt are as follows (in thousands):
Years ending June 30:
1997 $ 707
1998 698
1999 624
2000 1,795
_____________
Total $ 3,824
=============
In September 1992, the Company entered into an agreement to obtain up to
$2.5 million of credit financing from the John N. Kapoor Trust (the Trust), an
affiliate of John N. Kapoor, Chairman of the Board. Under the terms of the
agreement, the Trust, which held warrants to purchase 2 million shares of
stock at prices ranging from $1.50 to $2.00 through November 15, 1995, was
required to exercise 1,666,667 of those warrants at $1.50 per share on or
prior to November 15, 1993. On that date, the Trust exercised the entire two
million warrants for a total of $3 million, of which $1.6 million was used to
repay debt to the Trust and the remaining $1.4 million was received in cash.
Interest expense related to this indebtedness was $61,334 in 1994.
As part of the September 1992 arrangement, the Company granted a new
warrant to the Trust to purchase an additional 1 million shares at $2.00 per
share, exercisable for five years. Upon the issuance of this warrant, Dr.
Kapoor became entitled to designate an additional individual as a director of
the Company.
In 1995 the Company entered into a $6.3 million loan agreement with First
National Bank of Commerce to obtain financing for the expansion of its
manufacturing facilities in Decatur, Illinois and to refinance existing debt.
During fiscal 1996, the loan agreement was amended to provide additional
financing and to adjust the interest rate and principal payment requirements
for certain facilities. The amendments increased the total loan commitment to
$10.1 million including: (1) $2.6 million Term loan, (2) $1.3 million Term
loan, (3) $2.5 million Line of Credit, (4) $1.5 million Term loan for
financing of Janssen acquisition, (see Note U), (5) $1.6 million Revolver/Term
loan, and (6) $600,000 short-term financing for IRS settlements (see Note N).
As of June 30, 1996, all of the Term loans and $400,000 of the Revolver/Term
loan have been drawn. In addition, $550,000 had been borrowed under the
$600,000 IRS facility as of June 30, 1996.
Borrowings under the loan agreements are collateralized by substantially
all of the Company's receivables, inventory and property, plant and equipment.
In addition, the Company is required to comply with positive and negative loan
covenants, including restrictions on the payment of dividends and maintenance
of specified financial covenants, including minimum net worth and cash flow
coverage. The Company failed to meet certain financial covenants specified in
the loan agreement relating to cash flow coverage. Effective August 19, 1996,
the Company obtained the bank's waiver of these events of default which should
enable the Company to comply with the aforementioned provisions of the loan
agreement.
Note J - Leasing Arrangements
The Company leases certain equipment under capital leasing arrangements
which expire through the year 2000.
Property, plant and equipment at June 30 includes the following amounts
relating to such capital leases:
1996 1995
________________________________
(in thousands)
Furniture and equipment $ 806 $ 100
Less accumulated
depreciation (147) (53)
_______________________________
659 47
Construction in progress - 706
_______________________________
$ 659 $ 753
===============================
Depreciation expense provided on these assets was $94,254, $25,822 and
$18,833 during 1996, 1995 and 1994, respectively.
The following is a schedule by years of future minimum lease payments under
these capital leases together with the present value of the net minimum lease
payments (in thousands).
Years ending June 30:
1997 $ 194
1998 177
1999 173
2000 129
____________
Total Minimum Lease Payments 673
Less: Amount Representing Interest (95)
____________
Present Value of Net Minimum Lease Payments $ 578
============
The Company leases real property in the normal course of business under
various operating leases, including non-cancelable and month-to-month
agreements. Payments under these leases were $73,196, $169,825 and $198,072 in
1996, 1995 and 1994, respectively.
The following is a schedule by years of future minimum rental payments
required under these non-cancelable operating leases (in thousands).
Years ended June 30:
1997 $ 74
1998 23
1999 14
2000 6
2001 1
____________
Total Minimum Payments Required $ 118
============
During fiscal 1993, the Company entered into a sublease agreement for one
of its leased facilities. Sublease rentals were $113,326 and $111,164,
respectively, for fiscal years ended June 30, 1995 and 1994. This agreement
expired effective May 1995, in conjunction with the expiration of the primary
lease.
Note K - Stock Option and Stock Purchase Plans
The Company has two stock option plans and one stock purchase plan. The
first stock option plan is the 1988 Incentive Compensation Program (the
Incentive Program). Under the Incentive Program any officer or key employee of
the Company is eligible to receive options when designated by the Company's
Board of Directors. The number of shares of the Company's Common Stock which
may be issued under the Incentive Program upon the exercise of options may not
exceed 2,000,000 shares. The exercise price of the options granted under the
Incentive Program will be determined by the Board of Directors but may not be
less than 50% of the fair market value of the shares subject to the option on
the date of grant. All options granted under the Incentive Program during
fiscal 1996, 1995 and 1994 have exercise prices equivalent to the market value
of the Company's Common Stock on the date of grant.
The second stock option plan is the Akorn, Inc. Stock Option Plan for
Directors (the Directors' Plan). The Directors' Plan provides for the grant of
nonqualified options to persons elected as directors of the Company at the
fair market value of the shares subject to option on the date of grant. The
total number of shares of the Company's Common Stock for which stock options
may be granted under the Directors' Plan may not exceed 500,000 shares.
All employees who have been employed by the Company for twelve continuous
months are eligible to participate in the Akorn, Inc. Employee Stock Purchase
Plan (the Purchase Plan). Participating employees may elect to contribute up
to 15% of their gross compensation towards the purchase of Company's Common
Stock. At the end of each quarter, the amount contributed is applied to
acquire, on behalf of the participating employees, the Company's Common Stock
at a purchase price equal to 85% of the current market price. A maximum of
1,000,000 shares of the Company's Common Stock may be acquired under the terms
of the Purchase Plan. Purchases of shares were issued from treasury stock
under the Purchase Plan and amounted to 56,000, 72,000 and 58,000 shares,
respectively, in fiscal 1996, 1995 and 1994.
Note L - Stock Options and Warrants
The summary of activity in stock options and warrants for each of the three
years ended June 30, 1996 is as follows:
Outstanding at July 1, 1993 (at prices ranging from $1.50 to
to $3.88 per share) 4,241,386
Granted (at prices ranging from $2.00 to $3.50 per share) 228,000
Exercised (at prices ranging from $1.50 to $1.94 per share) (2,010,000)
___________
Outstanding at June 30, 1994 (at prices ranging from $1.50 to
$3.88 per share) 2,459,386
Granted (at prices ranging from $2.81 to $3.50 per share) 238,000
Exercised (at prices ranging from $2.00 to $2.81 per share) (73,000)
___________
Outstanding at June 30, 1995 (at prices ranging from $1.50 to
$3.88 per share) 2,624,386
Granted (at $2.75 per share) 215,000
Exercised (at prices ranging from $2.00 to $2.88 per share) (249,500)
Expired (at prices ranging from $2.00 to $3.88 per share) (346,500)
___________
Outstanding at June 30, 1996 (at prices ranging from $1.50 to
$3.50 per share) 2,243,386
===========
The amount of options and warrants exercisable at year end was 2,133,586,
2,368,843 and 2,236,762 for 1996, 1995 and 1994, respectively. All of these
options were exercisable at prices ranging from $1.50 to $3.50 per share.
Note M - Earnings Per Share
Earnings per share is based upon the weighted average number of common
shares outstanding. The computation of the weighted average number of shares
outstanding includes the effect of dilutive stock options and warrants using
the treasury stock method. The weighted average number of shares outstanding
used in the per share computations was 16,787,635 shares in 1996, 16,799,350
shares in 1995 and 16,710,885 shares in 1994.
Note N - Income Taxes
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This standard
requires recognition of future tax benefits, attributable to deductible
temporary differences between the financial statement and income tax bases of
assets and liabilities, to the extent that realization of such benefits is
more likely than not. Financial statements of prior years were not restated
and the cumulative effect of the accounting change was not material due to the
uncertainties that existed at July 1, 1993 concerning the ultimate realization
of future tax benefits. As indicated at Note O, uncertainties regarding the
ultimate realization of future tax benefits were reduced to a relatively low
level by the fourth quarter of fiscal 1994, thereby justifying removal of the
valuation allowance applicable to the deferred tax asset.
The components of income tax expense (benefit) are as follows:
1996 1995 1994
__________________________________________________
(in thousands)
Current:
Federal $ 756 $ 1,177 $ 481
State 11 53 61
__________________________________________________
767 1,230 542
__________________________________________________
Deferred:
Federal (516) 2 (343)
State (62) - (41)
__________________________________________________
(578) 2 (384)
__________________________________________________
$ 189 $ 1,232 $ 158
==================================================
A reconciliation of income tax expense at the federal statutory rate to
income tax expense at the Company's effective rate is as follows:
1996 1995 1994
(in thousands)
Computed tax expense at
expected statutory rate $ 332 $ 1,271 $ 875
State income tax expense,
net of federal tax benefits 4 32 41
Pre-merger (earnings)/loss of PRL (139) (84) 98
Change in valuation allowance
applicable to deferred tax assets - - (896)
Other (8) 13 40
_______________________________________
Income tax expense $ 189 $ 1,232 $ 158
_______________________________________
Effective tax rate 19.3% 33.0% 6.1%
=======================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of June 30, 1996 and
1995 are as follows:
1996 1995
_______________________________
Deferred Tax Assets: (in thousands)
Reserves for reorganization costs not currently
deductible $ 118 376
Other reserves not currently deductible 658 380
Difference between book and tax bases of
intangible assets 436 43
Pre-funded development costs 305 -
Other 133 103
_______________________________
Total 1,650 902
Deferred Tax Liabilities:
Difference between book and tax bases of property,
plant and equipment $ (478) $ (367)
Other (212) (153)
_______________________________
Total (690) (520)
_______________________________
Net deferred tax asset $ 960 $ 382
===============================
The net deferred tax asset is classified in the accompanying
balance sheet as follows:
Deferred income
tax asset-current $ 1,157 $ 709
Deferred income tax liability
non-current (197) (327)
_______________________________
$ 960 $ 382
===============================
Income taxes refunded during 1996 and 1994 were $178,690 and $282,641,
respectively.
The Company is currently in discussions with the Internal Revenue Service
(IRS) regarding the examination of tax returns for years 1988 through 1993.
The IRS has proposed adjustments to such returns, some of which the Company
has agreed to and some of which the Company has appealed. The agreed upon
adjustments resulted in additional taxes and interest due of approximately
$700,000, all of which was paid in fiscal 1996. The Company does not currently
anticipate any adverse financial statement effect from the appealed assessment
as accruals for the financial statement effects of these proposed adjustments
have been previously recorded.
Note O - Changes in Accounting Estimate
During the fourth quarter of fiscal 1996, the Company revised its estimate
for recording chargeback accruals. As a result, a reduction in net sales of
$250,000 ($.01 per share, net of tax) was recorded during the quarter ended
June 30, 1996.
In addition, during the quarters ended March 31, and June 30 1996, the
Company increased its estimate for unsaleable inventory by approximately
$300,000 ($.01 per share, net of tax) and $200,000 ($.01 per share net of
tax), respectively. These changes in estimate are reported as an increase in
cost of goods sold.
In the quarter ended March 31, 1996, the Company decided to no longer
pursue Abbreviated New Drug Applications (ANDAs) for certain products which
had been produced in previously-owned facilities, and for which estimated
costs of transferring such ANDAs had been accrued. This decision was based on
a reevaluation of the costs of developing such products as compared to their
potential market, given the emergence of alternate suppliers, since the
Company suspended their production. This change in estimate was also based on
the Company's recent decision to enter into the injectable distribution
marketplace and the need to redeploy R&D resources for the pursuit of
injectable ANDAs. The total amount of the accrual reversed was approximately
$316,000 ($.01 per share, net of tax).
During the quarter ended March 31, 1995, an evaluation by the Company
resulted in a change in the estimated liability related to aged customer
credits. This change resulted in a reduction of S,G&A expenses of
approximately $330,000 ($.01 per share net of tax) for the quarter ended March
31, 1995.
As a consequence of sustained growth in sales and profitability, in
particular during the latter part of the year, the Company recorded a
reduction of $384,298 ($.03 per share, net of tax) to its valuation allowance
for deferred tax assets in the fourth quarter of fiscal 1994.
Note P - Supplemental Disclosures of Cash Flow Information
The following is a summary of supplemental cash flow and noncash investing
and financing information for the years ended June 30:
1996 1995 1994
__________________________________________
(in thousands)
Cash paid for:
Interest, net of amount
capitalized $ 442 $ 25 $ 176
Income taxes 867 1,150 91
Noncash investing and financing
activities:
Treasury stock received for exercise
of stock options 123 - -
Conversion of debt to common stock - - 1,600
Issuance of capital lease obligation - 706 49
Note Q - Industry Segment Information
The Company classifies its operations into three core business segments:
(1) ophthalmic distribution, (2) injectable distribution, and (3) contract
manufacturing. The ophthalmic distribution segment includes the marketing and
distribution of an extensive line of ophthalmic products, including diagnostic
and therapeutic pharmaceuticals, over-the-counter products and surgical
instruments and supplies. The injectable distribution segment includes the
market and distribution of specialized injectable products. The contract
manufacturing segment consists of the manufacture of sterile pharmaceuticals,
including human injectable products and ophthalmic solutions pursuant to
contracts with others.
Selected financial information by industry segment for fiscal years ended
June 30 is presented as follows:
1996 1995 1994
____________________________________________________
(in thousands)
NET SALES
Ophthalmic distribution $ 20,833 $ 23,791 $ 20,694
Injectable distribution 4,160 4,642 2,862
Contract manufacturing:
Sales to unaffiliated
customers 8,932 9,072 7,710
Sales to affiliated
customer 2,395 2,521 1,666
____________________________________________________
36,320 40,026 32,932
Eliminations (2,395) (2,521) (1,666)
____________________________________________________
Total net sales $ 33,925 $ 37,505 $ 31,266
====================================================
OPERATING INCOME
Ophthalmic distribution $ 1,037 $ 3,515 $ 2,821
Injectable distribution 670 238 (280)
Contract manufacturing 324 1,228 1,155
General corporate (942) (1,071) (1,042)
____________________________________________________
Total operating income 1,089 3,910 2,654
Interest and other income
(expense), net (112) (172) (81)
____________________________________________________
Income before income taxes $ 977 $ 3,738 $ 2,573
====================================================
IDENTIFIABLE ASSETS
Ophthalmic distribution $ 13,287 $ 13,044 $ 12,817
Injectable distribution 1,525 1,235 968
Contract manufacturing 14,863 13,085 8,296
General corporate 142 127 108
____________________________________________________
Total identifiable
assets $ 29,817 $ 27,491 $ 22,189
====================================================
DEPRECIATION AND
AMORTIZATION
Ophthalmic distribution $ 323 $ 339 $ 286
Injectable distribution 14 33 37
Contract manufacturing 639 552 433
General corporate 8 56 7
____________________________________________________
Total depreciation
and amortization $ 984 $ 980 $ 763
====================================================
CAPITAL ADDITIONS
Ophthalmic distribution $ 340 $ 354 $ 465
Injectable distribution 5 - 35
Contract manufacturing 1,001 5,162 1,216
General corporate 14 8 4
____________________________________________________
Total capital additions $ 1,360 $ 5,524 $ 1,720
====================================================
Fiscal 1996 operating income for the ophthalmic distribution segment was
affected by the changes in accounting estimates related to accrued costs of
transferring ANDAs, chargeback accruals and inventory reserves (see Note O).
In addition, fiscal 1996 operating income for the ophthalmic distribution and
contract manufacturing segments, includes the effects of transaction and
transitional costs associated with the realignment of the Company into two
separate divisions (see Note B) totalling $385,000 and $292,000, respectively.
Fiscal 1995 operating income for the ophthalmic distribution segment
includes a reduction in selling, general and administrative expense of
approximately $330,000 related to a change in accounting estimate for aged
customer credits.
During fiscal 1996 and 1995, the Company reported sales to one customer,
Janssen Pharmaceutica, Inc., (Janssen) which accounted for approximately 12%
and 13%, respectively, of consolidated net sales. The net sales attributable
to Janssen were accounted for in the contract manufacturing segment. In 1995
this customer notified the Company that it will be transferring the production
of certain products to its own facilities in Puerto Rico during 1997. Such
products accounted for $1.3 and $1.4 million, respectively, in contract
manufacturing sales for 1996 and 1995. In addition, this customer notified
the Company that it will be discontinuing the sale of two other products
previously produced by the contract manufacturing segment. These products
accounted for approximately $2.6 and $2.9 million in sales during 1996 and
1995, respectively. Following this notification, the Company entered into
discussions with this customer to assume the licenses to distribute these two
injectable products and another injectable product. Effective July 1, 1996,
an agreement was reached whereby Akorn acquired ownership of these NDA's, as
well as the trade names and trademarks in the United States (see Note U).
During 1994, the Company did not derive ten percent or more of its revenues
from any single customer.
The Company records sales between the segments at fully absorbed cost.
Note R - Concentration of Credit Risk
The Company specializes in the manufacturing, marketing and distribution of
ophthalmic and injectable products to companies and doctors in the healthcare
industry. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
generally due within 60 days. Credit losses have consistently been within
management's expectations.
Note S - Defined Contribution Plan
The Company sponsors a qualified defined contribution plan which was
established under the provisions of Internal Revenue Code Section 401(k). The
plan covers all employees with six months of employment and who are 21 years
of age or older. The employees can defer a portion of their compensation up to
the maximum allowed by the Internal Revenue Code regulations. The plan
provides for discretionary contributions by the Company on behalf of the
employees. Beginning January 1994, the Company has made a discretionary
matching contribution on a quarterly basis. During fiscal years 1996, 1995 and
1994, the Company recorded expenses related to the plan of $100,615, $86,296
and $12,274, respectively.
Note T - Reorganization of Manufacturing Operations
Following the Taylor acquisition in January 1992, the Company began the
process of transferring the manufacture of its product line from previously-
owned manufacturing facilities to the Taylor facility. At that time, the
Company estimated the cost of completing the FDA approval process at Taylor
for products previously manufactured elsewhere and recorded a provision for
reorganization costs.
As of June 30, 1996 and 1995, the balances remaining in accrued
reorganization costs associated with the transfer process were $306,000 and
$727,000, respectively. It is anticipated that the filing of all such product
approvals will be completed by fiscal 1997.
Note U - Subsequent Event
Effective July 1, 1996, the Company entered into an agreement with Janssen
Pharmaceutica, Inc. (Janssen) to acquire the rights to distribute an
injectable product line in the anesthesia/analgesia area. As part of this
agreement, the Company also acquired certain high-speed inspection equipment.
Pursuant to the agreement, the acquisition transfers ownership of the NDAs for
the three products, as well as the trade names and trademarks in the United
States. In exchange for these product licenses, the Company paid Janssen $1.6
million on the effective date of the agreement. Of this balance, $1.5 million
in cash was obtained through the issuance of a separate note payable with the
same commercial bank which maintains the Company's existing credit facility
(see Note I). This note payable bears interest at 8.5% and provides for
monthly principal payments of $25,000, commencing August 1996. The balance is
due July 2001. In addition, in accordance with the agreement, Akorn will be
required to provide certain other products to Janssen, at no cost, having a
value expected not to exceed $100,000. The portion of the acquisition costs
allocated to the acquired products will be amortized over 15 years.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There was no change in the principal independent accountant of the Company
or any significant subsidiary of the Company during the Company's fiscal years
ended June 30, 1996, 1995 or 1994.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Information concerning directors is incorporated by reference to the
Company's Definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders. Information concerning the Company's executive officers is
included in Item 1A (Executive Officers of the Registrant) of Part I hereof.
Item 11. Executive Compensation.
The information called for by Item 11 is incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 12 is incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions.
The information called for by Item 13 is incorporated by reference to the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.
PART IV
Item 14. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith
and listed in the Exhibit Index which appears immediately before the first
such exhibit; the other exhibits are incorporated herein by reference, as
indicated in the following list.
( 2.0) Agreement and Plan of Merger dated December 17, 1991, by and
among the Company, Aksub, Inc., Taylor Pharmacal Company
(currently named Taylor Pharmaceuticals, Inc.) and certain
shareholders of Taylor Pharmmacal, Inc., incorporated by
reference to the Company's report on Form 8-K dated January 15,
1992.
( 2.1) *Agreement and Plan of Merger among Akorn, Inc., Akorn
Manufacturing, Inc. (currently named Taylor Pharmaceuticals,
Inc. and referred to hereinafter as "Taylor") and Pasadena
Research Laboratories, Inc. dated May 7, 1996.
( 3.1) Restated Articles of Incorporation of the Company dated
September 6, 1991, incorporated by reference to Exhibit 3.1 to
the Company's report on Form 10-K for the fiscal year ended June
30, 1991.
( 3.2) *Composite of By-laws of the Company, including amendment
approved on May 3, 1996.
( 4.1) Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 to the Company's report on Form 10-K for the fiscal
year ended June 30, 1988.
(10.1) Akorn, Inc. Savings and Retirement Plan effective July 1, 1984,
incorporated by reference to Form 10-K for the fiscal year ended
June 30, 1987.
(10.2) Stock Purchase Agreement dated November 15, 1990 by and between
the John N. Kapoor Trust dated September 20, 1989, and the
Company, incorporated by reference to Exhibit 10.21 to the
Company's report on Form 10-K for the fiscal year ended June 30,
1991.
(10.3) Common Stock Purchase Warrant dated November 15, 1990 between
the John N. Kapoor Trust dated September 20, 1989 and the
Company, incorporated by reference to Exhibit 10.22 to the
Company's report on Form 10-K for the fiscal year ended June 30,
1991.
(10.4) Consulting Agreement dated November 15, 1990 by and between E.
J. Financial Enterprises, Inc., a Delaware corporation, and the
Company, incorporated by reference to Exhibit 10.23 to the
Company's report on Form 10-K for the fiscal year ended June 30,
1991.
(10.5) Stock Registration Rights Agreement dated November 15, 1990 by
and between the John N. Kapoor Trust dated September 20, 1989
and the Company, incorporated by reference to Exhibit 10.24 to
the Company's report on Form 10-K for the fiscal year ended June
30, 1991.
(10.6) Agreement dated February 15, 1991 amending Stock Purchase
Agreement dated November 15, 1990 by and between the John N.
Kapoor Trust dated September 20, 1989, and the Company,
incorporated by reference to Exhibit 10.25 to the Company's
report on Form 10-K for the fiscal year ended June 30, 1991.
(10.7) Akorn, Inc. Stock Option Plan for Directors, incorporated by
reference to Exhibit 4.4 to the Company's registration statement
on Form S-8, registration number 33-24970.
(10.8) Form of Akorn, Inc. Letter Agreement between the Company and its
directors under the Stock Option Plan for Directors,
incorporated by reference to Exhibit 4.5 to the Company's
registration statement on Form S-8, registration number 33-
24970.
(10.9) Akorn, Inc. 1988 Incentive Compensation Program, incorporated by
reference to Exhibit 4.6 to the Company's registration statement
on Form S-8, registration number 33-24970.
(10.10) Form of Akorn, Inc., Letter Agreement between the Company and
its key employees and executives under the 1988 Incentive
Compensation Program, incorporated by reference to Exhibit 4.7
to the Company's registration statement on Form S-8,
registration number 33-24970.
(10.11) Amended and Restated Akorn, Inc. 1988 Incentive Compensation
Program, incorporated by reference to Exhibit 10.32 to the
Company's report on Form 10-K for the fiscal year ended June 30,
1992.
(10.12) Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
Incentive Compensation Program, incorporated by reference to
Exhibit 10.33 to the Company's report on Form 10-K for the
fiscal year ended June 30, 1992.
(10.13) Form of Stock Option Agreement under Amendment No. 1 to Amended
and Restated Incentive Compensation Program, incorporated herein
by reference to the Company's registration statement on Form S-
8, registration number 33-70686.
(10.14) 1991 Akorn, Inc. Stock Option Plan for Directors, incorporated
by reference to Exhibit 4.3 to the Company's registration
statement on Form S-8, registration number 33-44785.
(10.15) Form of Pledge Agreement between the Company and each
shareholder of Taylor, incorporated by reference to Exhibit 10.1
of the Company's report on Form 8-K dated January 15, 1992.
(10.16) Form of Employment Agreement between Taylor and five key
employees, incorporated by reference to Exhibit 10.2 of the
Company's report on Form 8-K dated January 15, 1992.
(10.17) Agreement dated January 15, 1992 among the Company, the John N.
Kapoor Trust dated September 20, 1989, John N. Kapoor and EJ
Financial Enterprises, Inc., incorporated by reference to
Exhibit 10.37 of the Company's report on Form 10-K for the
fiscal year ended June 30, 1992.
(10.18) Business Promissory Note of Taylor payable to First National
Bank of Decatur and Loan Modification Agreement dated January
15, 1992 by and between Taylor and First National Bank of
Decatur, incorporated by reference to Exhibit 10.4 of the
Company's report on Form 8-K dated January 15, 1992.
(10.19) Amendment and Restated Lease Agreement dated January 15, 1991
between Taylor Building Corporation as Landlord and Taylor as
tenant, incorporated by reference to Exhibit 10.5 of the
Company's report on Form 8-K dated January 15, 1992.
(10.20) Loan Agreement dated September 3, 1992, between the Company and
the John N. Kapoor Trust dated September 20, 1989, incorporated
by reference to Exhibit No. 6 to Amendment No. 3 to Schedule 13D
filed by John N. Kapoor and the John N. Kapoor Trust dated
September 20, 1989, dated September 10, 1992.
(10.21) Common Stock Purchase Warrant dated September 3, 1992, issued by
the Company to the John N. Kapoor Trust dated September 20,
1989, incorporated by reference to Exhibit No. 7 to Amendment
No. 3 to Schedule 13D, dated September 10, 1992, filed by John
N. Kapoor and the John N. Kapoor Trust dated September 20, 1989.
(10.22) Agreement, Waiver and Release, dated September 3, 1992, between
the Company and the John N. Kapoor Trust dated September 20,
1989, incorporated by reference to Exhibit 10.44 of the
Company's report on Form 10-K for the fiscal year ended June 30,
1992.
(10.23) Amendment No. 1 to Agreement dated January 15, 1992 among the
Company, the John N. Kapoor Trust dated September 20, 1989, John
N. Kapoor and EJ Financial Enterprises, Inc., incorporated by
reference to Exhibit 10.23 of the Company's report on Form 10-K
of the fiscal year ended June 30, 1995.
(10.24) *Employment Agreement among Akorn, Inc., Taylor and Floyd
Benjamin dated May 31, 1996
(10.25) *Employment Agreement between Akorn, Inc. and Barry D. LeBlanc
dated as of January 1, 1996.
(10.26) *Separation Agreement between Akorn, Inc. and Barry D. LeBlanc
dated July 3, 1996.
(10.27) *Employment Agreement between Akorn, Inc. and Eric M. Wingerter
dated as of January 1, 1996.
(10.28) *Employment Agreement between Akorn, Inc. and Harold O. Koch
dated January 1, 1996.
(10.29) *Employment Agreement between Taylor and Tim J. Toney dated as
of January 1, 1996.
(11.1) *Computation of Earnings Per Share.
(21.1) *Subsidiaries of the Company.
(23.1) *Consent of Deloitte & Touche LLP.
(24.1) *Power of Attorney of Floyd Benjamin.
(24.2) *Power of Attorney of Daniel E. Bruhl, M.D.
(24.3) *Power of Attorney of J. Ed Campbell, M.D.
(24.4) *Power of Attorney of George S. Ellis, M.D.
(24.5) *Power of Attorney of Doyle S. Gaw.
(24.6) *Power of Attorney of David H. Turner, M.D.
(24.7) *Power of Attorney of Lawrence A. Yannuzzi, M.D.
(27) *Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
By: /s/ John N. Kapoor, Ph.D.
_______________________________
John N. Kapoor, Ph.D.
Chief Executive Officer
Date: September 23, 1996
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant, and in
the capacities and on the dates indicated.
Signature Title Date
/s/ John N. Kapoor, Ph.D. Chief Executive September 23, 1996
John N. Kapoor, Ph.D. Officer and
Director (Principal
Executive Officer)
/s/ Eric M. Wingerter Vice President - September 23, 1996
Eric M. Wingerter Finance and Administration
(Principal Financial
Officer and Principal
Accounting Officer)
* /s/ Floyd Benjamin Director September 23, 1996
Floyd Benjamin
* /s/ Daniel E. Bruhl, M.D. Director September 23, 1996
Daniel E. Bruhl, M.D.
* /s/ J. Ed Campbell, M.D. Director September 23, 1996
J. Ed Campbell, M.D.
* /s/ George S. Ellis, M.D. Director September 23, 1996
George S. Ellis, M.D.
* /s/ Doyle S. Gaw Director September 23, 1996
Doyle S. Gaw
* /s/ David H. Turner, M.D. Director September 23, 1996
David H. Turner, M.D.
* /s/ Lawrence A. Yannuzzi, M.D. Director September 23, 1996
Lawrence A. Yannuzzi, M.D.
*By: /s/ Eric M. Wingerter
Eric M. Wingerter
Attorney-in-fact