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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[x] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from July 1, 1996 to December 31, 1996
____________________
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 February 28, 1997 was approximately $27,479,000.
The number of shares of the Issuer's common stock, no par value per
share, outstanding as of February 28, 1997 was 16,591,918.
The information contained in this document, other than historical
information, consists of forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially
from those described in such statements. Such statements regarding the
timing of acquiring and developing new products, of bringing them on
line and of deriving revenues and profits from them, as well as the
effects of those revenues and profits on the company's margins and
financial position, is uncertain because many of the factors affecting
the timing of those items are beyond the company's control.
PART 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 Akorn Manufacturing, Inc., doing
business as Taylor Pharmaceuticals (Taylor), the Company manufactures
and distributes injectable pharmaceutical products and provides sterile
contract manufacturing services to a number of large and small
pharmaceutical companies. Akorn is a Louisiana corporation founded in
1971. For most of its 25 year history, the Company has been
headquartered in Abita Springs, Louisiana, a suburb of New Orleans.
Recently, the Company announced that it would be moving its headquarters
and most of its Ophthalmic Division operations to Lincolnshire,
Illinois, a suburb of Chicago.
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 line.
Upon its acquisition of PRL, the Company reorganized its
operations into two divisions, the Ophthalmic Division and the
Injectable Division. The Ophthalmic Division, which operates through
Akorn, consists of the marketing and distribution of ophthalmic
products. The Injectable Division, which is operated through Taylor,
consists of the injectable products manufacturing and distribution
business and contract manufacturing business. For information regarding
sales, operating income and identifiable assets for each of the
Company's segments, see Note R 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 24 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 21 persons and 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 significant
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 have
recently begun. 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 December 31, 1996,
the Company had three new ophthalmic Abbreviated New Drug Applications
(ANDAs) in various stages of development 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 $150 million. In
addition, by December 31, 1996, the Company had eleven injectable
products in various stages of development. These injectable products
have a current aggregate brand market of approximately $500 million.
Several of these products require ANDA submission while others are
considered Category B products (see "Government Regulation") and
therefore do not require FDA approval. 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. No assurance can be given as to whether any Company products
will be developed as a result of these efforts or as to when any such
products may be produced and marketed by the Company. Production and
marketing of any such products 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 December 31, 1996, 15 full-time employees of the Company were
involved in research and development and product licensing. The
Company's research and development expenditures for the six month period
ended December 31, 1996 were $948,000. For the twelve month periods
ended June 30, 1996, 1995 and 1994 these expenditures totaled $1.9
million, $1.7 million and $1.4 million, respectively.
The Company expects its research and development expenditures to
increase in calendar 1997.
Employee Relations
The Company has 295 full-time employees, of whom 95 are employed in
its Ophthalmic Division, 198 are employed in its Injectable Division,
and 2 are employed in its Corporate Division. 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 of ophthalmic products, 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. The only unaffiliated supplier of products
which accounted for more than 10% of the Company's ophthalmic
distribution sales during the six month period ended December 31, 1996
was Sight Pharmaceuticals, Inc. (a division of B&L). This company
supplied products accounting for approximately 15% of the Company's net
ophthalmic distribution sales for the period.
The Company uses several suppliers for its injectable distribution
business, none of which accounted for 10% or more of net injectable
distribution sales in 1996. 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, record keeping,
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.
The Company also manufactures and distributes several controlled-drug
substances, the distribution and handling of which 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 following table sets forth the executive officers of the Company
as of February 28, 1997. Each officer serves as such at the pleasure of
the Board of Directors.
Officer Name Age Position with the Company
- ------------- ----- --------------------------
John N. Kapoor, Ph.D. 53 Chairman of the Board and Chief
Executive Officer
Floyd Benjamin 53 Executive Vice President of the
Company and President of the Injectable
Division
R. Scott Zion 46 Senior Vice President of the Company
and General Manager of the Ophthalmic
Division
Rita J. McConville 38 Vice President of the Company, Chief
Financial Officer and Secretary
Item 2. Description of Property.
Currently, the Company's ophthalmic executive offices, sales and
distribution center are based in two adjacent buildings totaling
approximately 30,000 square feet located on ten acres of land in Abita
Springs, Louisiana. The Company plans to sell and/or lease these
facilities once the relocation of these operations to Lincolnshire,
Illinois is completed.
The Company recently signed a lease for approximately 11,000 square
feet of office space in Lincolnshire, Illinois. This space will be used
primarily for the Ophthalmic Division sales and marketing and financial
accounting operations, along with all corporate operations of the
Company. Additional space will also be available for certain sales and
marketing activities of the Injectable Division.
The Company also 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, the
Company owns a 55,000 square-foot manufacturing facility, also in
Decatur, Illinois. 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 accommodate 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 financial position.
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 December 31, 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 February 28, 1997, 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 per NASDAQ for the periods indicated were:
Low High
------ -------
Six Months Ended December 31, 1996:
1st Quarter $ 2.06 $ 3.50
2nd Quarter 1.63 2.44
Fiscal Year Ended June 30, 1996:
1st Quarter $ 2.25 $ 2.81
2nd Quarter 2.06 3.13
3rd Quarter 2.44 3.19
4th Quarter 2.53 3.50
Fiscal Year Ended June 30, 1995:
1st Quarter $ 2.38 $ 3.19
2nd Quarter 2.94 4.00
3rd Quarter 2.88 3.63
4th Quarter 2.25 3.31
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 of $583,000 pertain to Subchapter S
distributions made to former PRL shareholders for pre-acquisition
earnings.
Item 6. Selected Consolidated Financial Data.
In October 1996, the Board of Directors of the Company determined to
change the Company's fiscal year from the year ending June 30 to the
year ending December 31. The following table sets forth selected
consolidated financial information for the Company for the six month
transition period ended December 31, 1996 and for the five years ended
June 30, 1996:
Six months ended Years ended
December 31 June 30
1996(1) 1996(1) 1995(1) 1994(1) 1993(3) 1992(4)
- --------------------------------------------------------------------------------------------------------
PER SHARE
Equity $ .98 $ 0.97 $ 0.93 $ 0.76 $ 0.47 $ 0.35
Net income (loss) $ .00 $ 0.05 $ 0.15 $ 0.14 $ 0.12 $ (0.51)
Price: High $ 3.50 $ 3.50 $ 4.00 $ 3.88 $ 3.13 $ 4.13
Low $ 1.63 $ 2.06 $ 2.25 $ 1.88 $ 1.50 $ 1.25
P/E: High NM 70x 27x 28x 26x NM
Low NM 41x 15x 13x 13x NM
INCOME DATA (000)
Net sales 16,519 33,925 37,505 31,266 23,612 20,914
Gross profit 5,758 11,953 15,177 13,218 9,699 7,942
Operating income (loss) 130 1,089 3,910 2,654 1,712 (7,237)
Interest expense (243) (441) (25) (181) (288) (305)
Pretax income (loss) 70 977 3,738 2,573 1,518 (7,370)
Income taxes (benefit) 26 189 1,232 158 (263) (521)
Net income (loss) 44 788 2,506 2,415 1,781 (6,849)
Weighted average shares
outstanding 16,763 16,788 16,799 16,711 14,799 13,522
BALANCE SHEET (000)
Current assets 16,921 17,251 15,474 15,044 9,209 9,989
Net fixed assets 12,833 11,524 11,060 6,346 5,325 5,174
Total assets 31,094 29,817 27,491 22,190 15,008 15,692
Current liabilities 8,717 9,601 7,016 7,106 3,764 7,559
Long-term obligations 6,003 3,915 4,890 2,380 4,328 3,396
Shareholders' equity 16,374 16,301 15,585 12,704 6,916 4,737
FUNDS FLOW DATA (000)
From operations 2,553 10 712 2,212 (479) (414)
Dividends paid (2) - (583) - - - -
From investing (2,028) (873) (4,943) (3,745) (531) 2,239
From financing (36) 979 3,112 2,313 (26) (1,001)
Change in cash & equivalents 489 116 (1,119) 780 (1,036) 824
RATIO ANALYSIS
Gross margin 34.9% 35.2% 40.5% 42.3% 41.1% 38.0%
Operating margin .8% 3.2% 10.4% 8.5% 7.3% (34.6)%
Pretax margin .4% 2.9% 10.0% 8.2% 6.4% (35.2)%
Effective tax rate 37.1% 19.3% 33.0% 6.1% (17.3)% NM
Net margin .3% 2.3% 6.7% 7.7% 7.5% (32.7)%
Return on assets .1% 2.8% 10.1% 13.0% 11.6% (39.6)%
Return on equity .3% 4.9% 17.7% 24.6% 30.6% (89.0)%
All of the information shown in the table above for the five year period
ended June 30, 1996 has been restated to reflect the combined operations
of Akorn and Pasadena Research Laboratories, Inc. (PRL). The information
shown in the table for 1992 has been restated to reflect the combined
operations of Akorn and Taylor.
(1) For information regarding the effects of unusual, infrequently occurring
or year end adjustments on reported results for the twelve month periods
ended June 30, 1994 through 1996, and for the six month period ended
December 31, 1996, see Notes B, E and P to the financial statements
included in Item 8 of this report.
(2) Dividends paid pertain to Subchapter S distributions made to former PRL
shareholders for pre-acquisition earnings.
(3) 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).
(4) 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
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
Effective July 1, 1996, the Company changed its fiscal year end from
June 30 to December 31. The table below includes the summary income
statement for the six month periods ended December 31, 1996 and 1995
which should be considered for the discussions which follow.
Six Months Ended December 31
1996 1995
_____________________________
(in thousands, except per share amounts)
Net Sales:
Ophthalmic distribution $ 10,271 $ 11,119
Injectable distribution 3,119 1,673
Contract manufacturing 3,129 4,157
____________ _____________
16,519 16,949
Cost of goods sold 10,761 10,472
____________ _____________
GROSS PROFIT 5,758 6,477
Selling, general and administrative expenses 4,819 4,701
Research and development 809 478
____________ _____________
5,628 5,179
____________ _____________
OPERATING INCOME 130 1,298
Interest and other income (expense) net (60) (9)
____________ _____________
INCOME BEFORE INCOME TAXES 70 1,289
Income taxes 26 493
____________ _____________
NET INCOME $ 44 $ 796
============ =============
NET INCOME PER SHARE $ - $ .05
============ =============
Net Sales
The Company's consolidated net sales declined 3% to $16.5 million for
the six months ended December 31, 1996 as compared to the same period in
1995. Ophthalmic distribution sales declined 8% from the comparable
period in 1995. This decline is primarily related to the effect of the
Company's decision to discontinue its practice of giving discounts to
wholesalers at the end of every quarter effective with the quarter ended
June 30, 1996. The effect of this decision was mainly realized in the
quarter ended September 30, 1996, as sales for this division for the
quarter ended December 31, 1996 were $5.4 million, or flat with sales
for the quarter ended December 31, 1995.
While this decision has resulted in lower sales volumes, it is
expected to have a positive impact on margins in the future and it has
allowed for the better management and projection of sales for the
division. The generic pharmaceutical market continues to experience
price erosion which has impacted sales and margins. However, the patent
of the most significant therapeutic ophthalmic pharmaceutical product
(Timolol Maleate) will expire in late March 1997. As previously
announced, the Company has received pre-approval from the FDA to
manufacture and sell this product as a generic pharmaceutical and is
aggressively pursuing negotiations with wholesalers and chain pharmacies
for the stocking of this product once patent expiration occurs. The
Company's core business of sales to practitioners remains solid and
margins are relatively stable. Efforts of the ophthalmic division sales
and marketing group, now headed by the recently hired General Manager R.
Scott Zion, will continue to be focused in this area.
For the six months ended December 31, 1996, injectable distribution
sales nearly doubled as compared to the same period in 1995. This
increase includes the effects of the acquisition of an injectable
product line from Janssen Pharmaceutica, Inc. (Janssen) on July 1, 1996.
Prior to the acquisition, sales of this product line were reported as
contract manufacturing sales. Sales of the Janssen product line for the
six month period ended December 31, 1996 were $1.1 million. In addition,
the injectable distribution segment has experienced growth on several of
its high-margin niche products.
Since the merger of Taylor with Pasadena Research Laboratories, Inc.
(PRL) in May 1996, the Company has redirected a significant amount of
its R&D efforts towards the development of generic injectable products
that will enhance the current product portfolio offering of the
injectable distribution segment. Several Category B products are
expected to be available for sale in early 1997, pending the outcome of
the Company's R&D efforts.
For the six months ended December 31, 1996, contract manufacturing
sales declined 25% from the comparable period in 1995. This decline is
primarily attributable to the transfer of sales of the Janssen product
line to the injectable distribution segment as noted above. Since the
merger with PRL, and the addition of new management, the Company has
increased its marketing efforts in the area of contract manufacturing.
This marketing effort focuses on Taylor's ability to provide a full
range of services, including product development, regulatory and sterile
manufacturing. These efforts are expected to help establish more long-
term relationships with contract customers.
Gross Profit
Consolidated gross profit declined 10% to $5.8 million in the six
months ended December 31, 1996 compared to $6.5 million for the same
period of the previous year, with gross profit margin declining
approximately three percentage points to 34.9%. Gross profit margin for
the ophthalmic distribution segment improved slightly by one percentage
point. While gross profit margin improved in the injectable distribution
segment, reduced volume in the contract manufacturing segment resulted
in an overall decline in consolidated gross profit margin due to
underabsorption of overhead.
In August 1996, the Company took steps to reduce a significant portion
of its fixed and variable costs in the manufacturing operations.
However, low plant volume related to weakness in the contract
manufacturing segment and lower ophthalmic production due to high
inventory levels caused by the change in wholesaler discounting
policies, had a negative impact on manufacturing margins.
In the quarter ended December 31, 1996, the Company increased its
reserve for estimated unsaleable inventory by approximately $260,000.
This change in estimate is reported as a decrease in gross profit.
Excluding this change in estimate, the gross margin of the six months
ended December 31, 1996 and 1995 was 36.4% and 38.2%, respectively.
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 (S,G&A) expenses increased 3%
during the six months ended December 31, 1996 as compared to the same
period in 1995. This slight increase is primarily associated with
changes in the timing of certain large promotional expenses for the
Ophthalmic Division and enhanced sales and marketing efforts in the
contract manufacturing and injectable distribution segments.In the
quarter ended December 31, 1996, the Company reduced its reserve for
products being transferred from the Company's previous manufacturing
facilities (site transfers) by $207,000, primarily due to the decision
not to pursue an exclusive raw material source on one of these products.
The percentage of S,G&A expenses to sales increased to 29.2% for the
six months ended December 31, 1996 from 27.7% in the comparable prior
year period.
Research and Development
Research and development (R&D) expense for the six months ended
December 31, 1996 increased by 69% to $809,000, compared to $478,000 for
the same period in 1995. This increase reflects a change in the mix of
products under development due to a reduced emphasis on site transfers.
The estimated cost of these site transfers has been previously accrued
and therefore does not have an effect on R&D expense as reported in the
statements of income. In addition, through most of the six months ended
December 31, 1996, the Company continued the aggressive R&D efforts that
had been ongoing at PRL through contractual arrangements
As noted previously, the Company has redirected a significant portion
of its R&D efforts to injectable products in response to the PRL merger.
These efforts include development of new products and the in-house
manufacture of products distributed by the injectable distribution
segment. The Company also continues the development of a non-steroidal,
anti-inflammatory drug (NSAID) for ophthalmic use which was licensed
from Pfizer Inc. (Pfizer). Phase III studies for the NSAID are expected
to begin in early 1997. As of December 31, 1996, approximately $600,000
of funds received from Pfizer remain available for the financing of this
project. Based on the above, it is anticipated that R&D expense will
increase in 1997. However, the Company will continue to monitor such
expenses in light of operating performance.
Interest and other income/expense
Interest and other expense, net increased $51,000 for the six months
ended December 31, 1996 as compared to the same period in 1995. This
increase is primarily related to the increase in interest expense
associated with a greater average outstanding loan balance on the
Company's term debt. The primary increase in the term debt resulted
from the borrowing of $1.5 million in July 1996 in connection with the
acquisition of the Janssen product line which included certain
production equipment for the products.
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 effective tax rate for the six months ended December 31, 1996 and
1995 was 36.9% and 38.2%, respectively. The Company has reached a
preliminary settlement with the Internal Revenue Service (IRS) regarding
proposed adjustments made during the examination of tax returns for the
periods of 1988 through 1993 which the Company appealed. These proposed
adjustments primarily related to the timing of deductions taken for tax
purposes in connection with the reorganization of the Company's
manufacturing operations in 1991. The settlement which has been obtained
through the appeals process must be approved by the Joint Committee on
Taxation. Adjustments to reflect the proposed settlement, primarily
related to interest of approximately $300,000 to $400,000 have been made
in previous financial statements.
Net Income
Net income for the six months ended December 31, 1996 was
approximately break-even compared to the prior year income of $796,000
or five cents per share, primarily due to the low overhead absorption in
the Company's manufacturing facility and the increase in R&D
expenditures noted above.
COMPARISON OF THE TWELVE MONTHS ENDED JUNE 30, 1996, 1995 AND 1994
In the following discussions, references to financial results during a
given year relate to the twelve-month period ending June 30 of that
year, unless otherwise indicated.
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
1996 1995 1994
_________________________________________
(In millions)
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 discussed above.
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. Royalties earned under this joint venture totaled $333,000
in fiscal 1996. Sales of AK-Con-A were approximately $2 million and
$1.4 million, respectively, in 1995 and 1994.
As discussed above, 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 in an effort 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, 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.
As noted above, 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 will help maintain plant volume from these products and
has provided 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 Profit
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 profit
margin is primarily due to continued price pressure in the ophthalmic
generic pharmaceuticals area due to competition, as well as the loss of
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.
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 site transfer products. 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
R&D 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 NSAID 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.
As noted above, with the acquisition of PRL, the Company expects to
increase its mix of injectable Category B and ANDA products. PRL had
several ANDA filings in process through joint venture arrangements.
Some of these arrangements have continued subsequent to the acquisition
and some of the projects have been brought in house. The Company has
also continued 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
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.
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.
Net Income
Net income declined $1.7 million or $.10 cents per share in 1996 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, wholesaler chargeback
accruals and accounts payable; capital expenditure and debt repayment
requirements; adequacy of available lines of credit; and availability of
long-term capital at competitive prices.
In December 1996, the Company successfully obtained the restructuring
of its existing debt facilities. The restructuring , which was
completed in March 1997, included the following:
* an increase in the current working capital line of credit from $2.5
million to $3.0 million
* a consolidation of all term debt into one note, with an increase in
available term funding from $1.2 million to $2.0 million, resulting in
maximum term financing of $7 million
* reduction in the interest rate on all the facilities to prime rate
* postponement of principal repayments on the term facility until
January 1998
* Restructuring of loan covenants based on current financial condition
and cash flow of the Company
With this restructuring in place, the Company is confident that it can
meet its capital requirements for 1997.
The Company traditionally has generated cash from operations in excess
of working capital requirements. The net cash provided by operating
activities was $2.5 million for the six months ended December 31, 1996.
For the twelve months ended June 30, 1996, 1995 and 1994, net cash
provided by operating activities was $10,000, $712,000, and $2.2
million, respectively. The increase in cash provided by operating
activities for the six months ended December 31, 1996 is primarily
related to the increase in accruals for wholesaler chargebacks (see Note
A to the financial statements). This increase in the chargeback accrual
is primarily related to the Janssen product line which has a significant
price difference between the wholesale price and the majority of
contract prices for the products. This accrual has stabilized as of
December 31, 1996.
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.
The Company recently announced that it would be moving its Corporate
offices and the majority of its Ophthalmic Distribution offices to
Lincolnshire, Illinois. The costs of this relocation, for which a
charge will be made in the quarter ended March 31, 1997, are estimated
to be in the range of $850,000 to $950,000 after taxes. These costs
include severance, asset write downs and relocation costs, the cash
portion of which are expected to be financed by current cash, available
lines of credit, and operating cash flows. In 1997, the Company will
also continue to fund the development of the NDA for Piroxicam discussed
previously which will be funded primarily from funds received from
Pfizer.
In addition to these short-term needs, the Company will be required to
make payments of additional interest and taxes, currently estimated to
be approximately $300,000 to $400,000, in connection with the
anticipated settlement of the IRS appeal discussed above. The timing of
the payment of this settlement will be based on the length of the Joint
Committee approval process. Also, in connection with the Janssen
product line acquisition, the Company is required to provide certain
products to Janssen in 1997, at no cost, estimated not to exceed
$100,000, should certain contingent events occur.
Net cash utilized for investing activities during the six month period
ended December 31, 1996 of approximately $2.0 million, includes $2.0
million of property, plant and equipment additions, primarily for
equipment acquired for the Janssen products, and $340,000 for the
allocated portion of the product line itself. These additions were
partially offset by net sales of investments of $326,000. The remainder
of these investing activities were funded through $1.5 million of bank
financing. 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 management information systems. These improvements
will be financed through available term debt financing through the
Company's prime banking institution.
The Company used net cash of $36,000 in its financing activities
during the six months ended December 31, 1996, as principal repayments
on capital leases, and both long-term and short-term debt slightly
exceeded the $1.5 million of borrowings for the Janssen product line
acquisition.
SELECTED QUARTERLY DATA
In Thousands, Except Per Share Amounts
Net Income (loss)
-------------------------------------------------
Net Gross Per
Sales Profit Amount Share
-------------------------------------------------
Six Months Ended December 31, 1996:
1st Quarter $ 8,101 $ 2,969 $ 35 $ -
2nd Quarter 8,418 2,789 9 -
_________________________________________________
$ 16,519 $ 5,758 $ 44 $ -
=================================================
Fiscal Year Ended June 30, 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
=================================================
Fiscal Year Ended June 30, 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 for the two years
ended June 30, 1996 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, E and P 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.............................................. 18
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996
and 1995.................................................................... 19
Consolidated Statements of Operations for the six months ended December
31, 1996 and for the years ended June 30, 1996, 1995 and 1994............... 20
Consolidated Statements of Shareholders' Equity for the six months ended
December 31, 1996 and for the years ended June 30, 1996, 1995 and 1994...... 21
Consolidated Statements of Cash Flows for the six months ended December
31, 1996 and for the years ended June 30, 1996, 1995 and 1994............... 22
Notes to Consolidated Financial Statements.................................. 23
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 December 31, 1996, and June 30, 1996 and
1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the six months ended December
31, 1996 and 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 December 31 1996, and June 30, 1996 and 1995, and the
results of their operations and their cash flows for the six months
ended December 31, 1996 and for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note O to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1994.
Also, as discussed in Note E 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
March 7, 1997
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31 June 30
1996 1996 1995
______________________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,380 $ 891 $ 775
Certificates of deposit 576 - -
Short-term investments - 902 1,569
Trade accounts receivable
(less allowances for uncollectibles of $359 at
December 31, 1996 and $339 and $291 at June 30,
1996 and 1995, respectively) 4,625 4,916 5,464
Inventory 8,838 8,860 6,476
Deferred income taxes 1,101 1,157 709
Prepaid expenses and other assets 401 525 481
------------------------------------------------
TOTAL CURRENT ASSETS 16,921 17,251 15,474
OTHER ASSETS
Intangibles, net 1,162 848 728
Other 178 194 229
------------------------------------------------
TOTAL OTHER ASSETS 1,340 1,042 957
PROPERTY, PLANT AND EQUIPMENT, NET 12,833 11,524 11,060
------------------------------------------------
TOTAL ASSETS $ 31,094 $ 29,817 $27,491
================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 250 $ 1,294 $ 288
Current installments of long-term debt 19 707 513
Current portion of capital lease obligations 151 151 149
Current portion of pre-funded development costs 685 650 667
Trade accounts payable 1,892 2,680 1,878
Income taxes payable 1 626 782
Accrued compensation 885 1,106 905
Accrued reorganization costs 108 306 727
Accrued chargebacks 3,081 250 -
Deferred royalties 167 667 -
Accrued expenses and other liabilities 1,478 1,164 1,107
-------------------------------------------------
TOTAL CURRENT LIABILITIES 8,717 9,601 7,016
LONG-TERM DEBT 4,858 3,117 3,353
CAPITAL LEASE OBLIGATIONS 353 427 580
PRE-FUNDED DEVELOPMENT COSTS - 174 304
DEFERRED INCOME TAXES 792 197 327
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 16,591,918, 16,573,915
and 16,304,653 shares at December 31, 1996,
and June 30, 1996 and 1995, respectively 14,174 14,174 13,959
Treasury stock, at cost -- 9,009, 27,012
and 211,020 shares at December 31, 1996,
and June 30, 1996 and 1995, respectively (31) (92) (291)
Retained earnings 2,231 2,219 1,830
Unrealized gain on marketable equity securities - - 87
---------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 16,374 16,301 15,585
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 31,094 $ 29,817 $27,491
==============================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except per Share Data)
Six Months Years Ended June 30
Ended December 31
1996 1996 1995 1994
------------------------------------------------------------
Net sales $ 16,519 $ 33,925 $ 37,505 $ 31,266
Cost of goods sold 10,761 21,972 22,328 18,048
_____________________________________________________________
GROSS PROFIT 5,758 11,953 15,177 13,218
Selling, general and
administrative expenses 4,819 8,974 10,376 9,643
Research and development 809 1,213 891 921
Acquisition and severance costs - 677 - -
_____________________________________________________________
5,628 10,864 11,267 10,564
_____________________________________________________________
OPERATING INCOME 130 1,089 3,910 2,654
Interest and other income (expense):
Interest income 33 113 106 84
Interest expense (243) (441) (25) (181)
Gain (loss) on marketable equity
securities - 80 (308) -
Other income, net 150 136 55 16
_____________________________________________________________
(60) (112) (172) (81)
INCOME BEFORE INCOME TAXES 70 977 3,738 2,573
Income taxes 26 189 1,232 158
____________________________________________________________
NET INCOME $ 44 $ 788 $ 2,506 $ 2,415
============================================================
NET INCOME PER SHARE $ .00 $ .05 $ .15 $ .14
============================================================
Weighted average shares outstanding 16,763 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)
Shares 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, net of tax 308 308
Unrealized gain on marketable
equity securities, net of tax 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, net of tax (87) (87)
Treasury stock reissued 56 (2) 124 122
______________________________________________________________________________________
Balances at June 30, 1996 16,574 14,174 2,219 (92) - 16,301
Net income for six months ended
December 31, 1996 44 44
Treasury stock reissued 18 (32) 61 29
_____________________________________________________________________________________
Balances at December 31, 1996 16,592 $ 14,174 $ 2,231 $ (31) $ - $16,374
=====================================================================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six months
Ended December 31 Years Ended June 30
1996 1996 1995 1994
----------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 44 $ 788 $ 2,506 $ 2,415
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 720 984 980 763
(Gain) loss on marketable
equity securities - (80) 308 -
Provision for losses on
accounts receivable
and inventory 303 825 160 68
Deferred income taxes 651 (578) 2 (387)
Other 26 - (1) 11
Changes in operating assets
and liabilities:
Accounts receivable 267 424 (350) (2,172)
Inventory, prepaid expenses and
other assets (132) (3,129) (1,420) (1,047)
Refundable income taxes - - - 288
Trade accounts payable and
accrued expenses 1,438 1,229 (1,514) 1,600
Income taxes payable (625) (155) 70 673
Pre-funded development costs (139) (298) (29) -
_________________________________________________________
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,553 10 712 2,212
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (1,986) (1,360) (4,818) (1,671)
Product licensing costs (28) (172) (421) (432)
Purchases of investments (576) (1,173) (2,023) (2,625)
Sales of investments 902 1,832 2,319 983
Purchase of Janssen injectable products (340) - - -
__________________________________________________________
NET CASH USED IN INVESTING
ACTIVITIES (2,028) (873) (4,943) (3,745)
FINANCING ACTIVITIES
Proceeds from sale of stock 29 599 256 1,805
Repayments of long-term debt (447) (442) (944) (118)
Proceeds from issuance of
long-term debt 1,500 400 3,900 -
Pre-funded development receipts - 150 - 1,000
Principal payments under capital
lease obligations (74) (151) (58) (464)
Short-term borrowings, net (1,044) 1,006 128 90
Dividends paid - (583) - -
Debt acquisition costs - - (170) -
_________________________________________________________
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (36) 979 3,112 2,313
________________________________________________________
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 489 116 (1,119) 780
Cash and cash equivalents at
beginning of year 891 775 1,894 1,114
________________________________________________________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,380 $ 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 Akorn Manufacturing, Inc.,
doing business as Taylor Pharmaceuticals (Taylor). 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.
Change in Fiscal Year End: Effective July 1, 1996, the Company
changed its fiscal year end from June 30 to December 31. The following
table sets forth the results of operations for the transition period
ended December 31, 1996 and the unaudited results of operations for the
six months ended December 31, 1995, the prior period comparable to the
transition period:
(Unaudited)
Six Months Six Months
Ended Ended
December 31 December 31
1996 1995
________________________________________
(in thousands, except per share amounts)
Net sales $ 16,519 $ 16,949
Gross profit 5,758 6,477
Income before income taxes 70 1,289
Provision for income taxes 26 493
Net income 44 796
Net income per share $ - $ .05
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 E).
Inventory: Inventory is stated at the lower of cost (average cost
method) or market (see Note G). 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, which range from 5 years
to 15 years. For the six month period ended December 31, 1996,
amortization expense was $54,001. Amortization expense for the years
ended June 30, 1996, 1995 and 1994 was $53,328, $144,820 and $82,143,
respectively. Accumulated amortization at December 31, 1996 and June
30, 1996 and 1995 was $323,829, $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 six months ended December 31, 1996 and for the years ended June
30, 1996, 1995 and 1994 was $650,629, $896,537, $800,330 and $559,321,
respectively.
Under an agreement with Pfizer, Inc. (see Note I) the Company
received reimbursement for the purchase of certain equipment. The total
amount reimbursed was approximately $593,000, which was received by June
30, 1995. The Company accounted for these reimbursements by reducing its
carrying value of the associated equipment.
Accrual for Chargebacks: The Company records an estimate for the
difference between gross sales of certain products to wholesalers and
expected resales of such products under contractual arrangements with
third parties such as hospitals and group purchasing organizations as a
reduction of sales. As part of the Company's sale terms with wholesalers,
it agrees to reimburse wholesalers for such differentials between
wholesale prices and contract prices. The portion of this accrual
which relates to wholesaler sales that have not yet been collected is
reported as a reduction to accounts receivable. The portion of this
accrual which relates to wholesaler sales which have been collected is
reported as a liability in the balance sheet. For the products acquired
from Janssen (Note D), the wholesale price is significantly greater than
the contract prices. Accordingly, the liability for accrued chargebacks
increased significantly at December 31, 1996.
Interest Capitalization: The Company capitalizes interest during
periods of construction of qualifying assets. For the six months ended
December 31, 1996 and for the year ended June 30, 1995, the Company
capitalized interest costs of $39,880 and $282,007, respectively
relating to construction. No interest was capitalized during years
ended June 30, 1996 or 1994.
Stock-Based Compensation: Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compansation," (SFAS
123) encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and related interpretations and has adopted the disclosure-only
provisions of SFAS 123. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock. See Note L.
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 December 31, 1996 and 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.
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 for each of the three years in the
period ended June 30, 1996, 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 the fiscal year ended June 30, 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 - Reorganization of Manufacturing Operations
On January 15, 1992, the Company acquired Akorn Manufacturing, Inc.,
which does business as Taylor Pharmaceuticals (Taylor), 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.
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.
Following the Taylor acquisition, 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 December 31, 1996 and June 30, 1996 and 1995, the balances
remaining in accrued reorganization costs associated with the transfer
process were $108,000, $306,000 and $727,000, respectively. It is
anticipated that the filing of all such product approvals will be
completed by the end of 1997.
Note D - Acquisition of Injectable Product Line
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 and equipment, the Company paid Janssen $1.6 million on
the effective date of the agreement which was financed primarily through
a $1.5 million credit facility with the Company's commercial bank. 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 ($340,000) will be amortized over 15 years.
Note E - 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 completed a
review of its securities relative to SFAS 115 and classified its
investments in debt securities as held-to-maturity. As of June 30, 1996
and 1995, investments of $902,000 and $1,439,000, respectively include
U.S. government securities and municipal bonds which have contractual
maturities within one year and are being reported at amortized cost,
which approximates fair market value.
The Company 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
December 31, 1996 or 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 F - Allowance for Uncollectibles
The activity in the allowance for uncollectibles is as follows for
the periods indicated:
Six months ended
December 31 Years ended June 30
1996 1996 1995 1994
_________________________________________________________
(in thousands)
Balance at beginning of year $ 339 $ 291 $ 272 $ 240
Provision for bad debts 24 124 60 61
Accounts written off (4) (76) (41) (29)
_________________________________________________________
Balance at end of year $ 359 $ 339 $ 291 $ 272
=========================================================
Note G - Inventory
The components of inventory are as follows:
December 31 June 30
1996 1996 1995
__________________________________________
(in thousands)
Finished goods $ 5,181 $ 5,376 $ 4,239
Work in process 1,375 1,311 1,043
Raw materials and supplies 2,282 2,173 1,194
__________________________________________
$ 8,838 $ 8,860 $ 6,476
==========================================
Inventory at December 31, 1996 and June 30, 1996 and 1995 is reported
net of reserves of $589,007, $681,920 and $352,143, respectively, for
slow-moving, unsalable and obsolete items.
The activity in the inventory reserve is as follows for the periods
indicated:
Six months
ended December 31 Years ended June 30
1996 1996 1995 1994
__________________________________________________
(in thousands)
Balance at beginning of year $ 682 $ 352 $ 290 $ 427
Provision for slow-moving, unsalable
and obsolete items 279 701 100 7
Inventory written off (372) (371) (38) (144)
_________________________________________________
Balance at end of year $ 589 $ 682 $ 352 $ 290
=================================================
Note H - Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31 June 30
1996 1996 1995
____________________________________________
(in thousands)
Land $ 479 $ 479 $ 479
Buildings and leasehold
improvements 8,217 7,738 5,516
Furniture and equipment 11,238 10,139 7,880
Automobiles 135 166 133
______________________________________________
20,069 18,522 14,008
Accumulated depreciation (8,415) (7,771) (6,875)
______________________________________________
11,654 10,751 7,133
Construction in progress 1,179 773 3,927
______________________________________________
$ 12,833 $ 11,524 $11,060
==============================================
Note I - 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 the six months ended December 31,
1996 and during fiscal 1996 and 1995, the Company incurred $138,829,
$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 the year ended June 30, 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 J - Financing Arrangements
The Company's short-term borrowings are summarized as follows:
December 31 June 30
1996 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 .75%
(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 (8.25% and 8.75%
respectively, at December 31, 1996 and June 30, 1996),
payable in monthly principal installments of
$50,000 commencing July 1996 250 550 -
_________________________________________
$ 250 $ 1,294 $ 288
=========================================
The $2.5 million Line of Credit and the short-term note payable are
pursuant to the credit facility amended during fiscal 1996 as further
described below.
Long-term debt consists of:
December 31 June 30
1996 1996 1995
________________________________________
(in thousands)
Note payable to First National Bank of Commerce; due 2000;
interest at the Chase Manhattan prime rate (8.25% at
December 31, 1996), payable in monthly principal
installments of $83,333 commencing January 1998 $4,855 $ - $ -
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
December 31 June 30
1996 1996 1995
________________________________________
(in thousands)
Note payable to First National Bank of Commerce; due 1999;
interest at .75% 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 22 33 53
________________________________________
4,877 3,824 3,866
Deduct: Current installments payable within one year (19) (707) (513)
________________________________________
Portion payable after one year $ 4,858 $ 3,117 $3,353
========================================
Maturities of long-term debt are as follows (in thousands):
Years ending December 31:
1997 $ 19
1998 1,002
1999 1,000
2000 2,856
_________
Total $4,877
=========
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 D), (5) $1.6 million Revolver/Term loan, and (6) $600,000
short-term financing for IRS settlements (see Note O).
In March 1997, the loan agreement was further amended with an
effective date of December 31, 1996. This amendment provided for (1)
the consolidation of the term facilities into one revolver/term loan of
$7 million, (2) the deferral of principal payments on the revolver/term
loan until January 1998, (3) an increase in the line of credit to $3.0
million, and (4) the reduction in the interest rate on all facilities to
prime rate. As of December 31, 1996, $2 million remained available to
be drawn under the revolver/term loan.
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 working capital. Accordingly, as of
December 31, 1996, the Company is prohibited from paying dividends
without the prior approval by the bank.
Note K- Leasing Arrangements
The Company leases certain equipment under capital leasing
arrangements which expire through the year 2000.
Property, plant and equipment includes the following amounts relating
to such capital leases:
December 31 June 30
1996 1996 1995
____________________________________________
(in thousands)
Furniture and equipment $ 806 $ 806 $ 100
Less accumulated
depreciation (226) (147) (53)
_____________________________________________
580 659 47
Construction in progress - - 706
_____________________________________________
$ 580 $ 659 $ 753
=============================================
Depreciation expense provided on these assets was $78,517, $94,254,
$25,822 and $18,833 for the six months ended December 31, 1996 and for
the years ended June 30, 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 December 31:
1997 $ 186
1998 173
1999 173
2000 43
___________
Total Minimum Lease Payments 575
Less: Amount Representing Interest (71)
___________
Present Value of Net Minimum Lease Payments $ 504
===========
The Company leases real and personal property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Payments under these leases were $38,051,
$73,196, $169,825 and $198,072 for the six month period ended December
31, 1996 and for the years ended June 30, 1996, 1995 and 1994,
respectively. 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.
The following is a schedule by years of future minimum rental
payments required under these non-cancelable operating leases (in
thousands).
Years ended December 31:
1997 $ 49
1998 19
1999 8
___________
Total Minimum Payments Required $ 76
===========
Note L - Stock Options and Warrants
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. As of December 31, 1996, 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. This maximum allowable shares was increased to 3,000,000 shares
by way of vote of shareholders effective February 28, 1997. 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 the six
months ended December 31, 1996 and the years ended June 30, 1996, 1995
and 1994 have exercise prices equivalent to the market value of the
Company's Common Stock on the date of grant. Options granted under the
Incentive Program, generally vest over a period of three years and
expire within a period of five years.
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. Options granted under the Directors' Plan vest
immediately and expire five years from the date of grant.
A summary of the status of the Company's stock options as of December
31, 1996 and June 30, 1996, 1995 and 1994 and changes during the six
months ended December 31, 1996 and the years ended June 30, 1996, 1995
and 1994 is presented below (shares in thousands):
December 31 June 30
1996 1996 1995 1994
____________________________________________________________
Wgtd Wgtd Wgtd Wgtd
Avg Avg Avg Avg
Exer Exer Exer Exer
Shares Price Shares Price Shares Price Shares Price
____________________________________________________________
Outstanding at beginning of period 1,243 $2.47 1,624 $2.56 1,459 $2.51 1,241 $2.47
Granted 401 $2.19 215 $2.75 238 $2.93 228 $2.66
Exercised - - (250) $2.40 (73) $2.34 (10) $1.94
Expired/Canceled (363) $3.00 (346) $3.00 - - - -
_____ ______ ______ ______
Outstanding at end of period 1,281 $2.35 1,243 $2.57 1,624 $2.56 1,459 $2.51
====== ====== ====== ======
Options exercisable at end of period 870 $2.33 1,134 $2.56 1,348 $2.67 1,237 $2.54
Options available for future grant 886 924 793 1,031
Weighted average fair value of options
granted during the period $ .83 $1.04
The fair value of each option granted during the six months ended
December 31, 1996 and the fiscal year ended June 30, 1996 is estimated
on the date of grant using the Black-Scholes option pricing model with
the following assumptions: (I) dividend yield of 0%, (ii) expected
volatility of 28%, (iii) risk-free interest rate of 6.5%, and (iv)
expected life of 5 years.
The following table summarizes information about stock options
outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable
___________________________________________ _______________________________
Weighted Avg
Range of Number Remaining Weighted Avg Number Weighted Avg
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
__________ _____________ _____________ _____________ _______________ _______________
$1.50 87 3.4 yrs $1.50 87 $1.50
$1.75-$2.12 321 1.6 yrs $1.92 308 $1.91
$2.13 356 4.8 yrs $2.13 89 $2.13
$2.25 135 .6 yrs $2.25 135 $2.25
$2.63-$2.81 177 3.8 yrs $2.74 82 $2.75
$2.88-$3.50 205 2.4 yrs $3.49 169 $3.49
_________ _____________
1,281 870
========= =============
In accordance with APB 25 no stock-based expense was recorded during
any of the periods presented herein. Had compensation cost for the
Company's grants for stock-based compensation plans for the six months
ended December 31, 1996 and the fiscal year ended June 30, 1996 been
determined consistent with SFAS 123, the Company's net income and net
income per share for these respective periods would approximate the
following proforma amounts (in thousands, except per share data):
Six months ended Years ended
December 31, 1996 June 30, 1996
__________________________________________
As As
Reported Proforma Reported Proforma
________ _________ _________ _________
Net income, (loss) $ 44 $ (40) $ 788 $ 769
======== ========= ========= =========
Net income per share $ - $ - $ .05 $ .05
======== ========= ========= =========
In addition to these plans, the Company has issued a total of 3
million warrants ranging from $1.50 to $2.00 per share, in connection
with several transactions (See Note J). As of December 31, 1996, 1
million of these warrants remain outstanding and exercisable at $2.00
per share.
Note M - Employee Stock Purchase Plan
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 the 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 18,000, 56,000, 72,000, and 58,000
shares, respectively, during the six months ended December 31, 1996 and
the years ended June 30, 1996, 1995 and 1994.
Note N - 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 16,763,740, 16,787,635, 16,799,350 and 16,710,885 shares for the six
month period ended December 31, 1996 and for the years ended June 30,
1996, 1995 and 1994, respectively.
Note O - 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 P, 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:
Six months ended
December 31 Years ended June 30
1996 1996 1995 1994
________________________________________________
(in thousands)
Current:
Federal $(557) $ 756 $ 1,177 $ 481
State (68) 11 53 61
________________________________________________
(625) 767 1,230 542
________________________________________________
Deferred:
Federal 581 (516) 2 (343)
State 70 (62) - (41)
_________________________________________________
651 (578) 2 (384)
_________________________________________________
$ 26 $ 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:
Six months ended
December 31 Years ended June 30
1996 1996 1995 1994
_______________________________________________
(in thousands)
Computed tax expense at
expected statutory rate $ 24 $ 332 $ 1,271 $ 875
State income tax expense,
net of federal tax benefits 2 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 $ 26 $ 189 $ 1,232 $ 158
______________________________________________
Effective tax rate 37.1% 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 are as follows:
December 31 June 30
1996 1996 1995
_______________________________________
Deferred Tax Assets: (in thousands)
Reserves for reorganization costs
not currently deductible $ 40 $ 118 $ 376
Other reserves not currently deductible 711 658 380
Difference between book and tax bases
of intangible assets - 436 43
Pre-funded development costs 253 305 -
Other 132 133 103
_______________________________________
Total 1,136 1,650 902
Deferred Tax Liabilities:
Difference between book and tax bases
of property, plant and equipment $ (537) $ (478) $ (367)
Difference between book and tax bases
of intangible assets (99)
Other (191) (212) (153)
________________________________________
Total (827) (690) (520)
________________________________________
Net deferred tax asset $ 309 $ 960 $ 382
========================================
The net deferred tax asset is classified in the accompanying balance
sheets as follows:
December 31 June 30
1996 1996 1995
___________________________________
(in thousands)
Deferred income
tax asset-current $ 1,101 $ 1,157 $ 709
Deferred income tax liability
non-current (792) (197) (327)
____________________________________
$ 309 $ 960 $ 382
=====================================
Income taxes refunded during the years ended June 30, 1996 and 1994
were $178,690 and $282,641, respectively.
The Company has reached a preliminary settlement with the Internal
Revenue Service (IRS) regarding proposed adjustments made during the
examination of tax returns for the periods of 1988 through 1993 which
the Company has been appealing. These proposed adjustments primarily
related to the timing of deductions taken for tax purposes in connection
with the reorganization of the Company's manufacturing operations in
1991. The preliminary settlement which has been obtained through the
appeals process must be approved by the Joint Committee of the IRS.
Adjustments to reflect the proposed settlement have been made in
previous financial statements.
Note P - Changes in Accounting Estimates
During the fourth quarter of the year ended June 30, 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, June 30 and December
31, 1996, the Company increased its estimate for unsaleable inventory by
approximately $300,000 ($.01 per share, net of tax), $200,000 ($.01 per
share net of tax), and $260,000 ($.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 (transferred
products), 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
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). In addition, in the quarter ended December 31,
1996, the Company decided not to pursue exclusive raw material source
arrangements on one transferred product. This resulted in a reduction
of the estimated cost of transferring this product by approximately
$200,000 ($.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 Q - Supplemental Disclosures of Cash Flow Information
The following is a summary of supplemental cash flow and non-cash
investing and financing information for the periods indicated:
Six months ended
December 31 Years ended June 30
1996 1996 1995 1994
___________________________________________
(in thousands)
Cash paid for:
Interest, net of amount
capitalized $ 189 $ 442 $ 25 $ 176
Income taxes - 867 1,150 91
Non-cash 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 R - 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 marketing
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 is presented as
follows:
Six months ended
December 31 Years ended June 30
1996 1996 1995 1994
____________________________________________________
(in thousands)
NET SALES
Ophthalmic distribution $10,271 $20,833 $ 23,791 $ 20,694
Injectable distribution 3,119 4,160 4,642 2,862
Contract manufacturing:
Sales to unaffiliated
customers 3,129 8,932 9,072 7,710
Sales to affiliated customer 1,082 2,395 2,521 1,666
____________________________________________________
17,601 36,320 40,026 32,932
Eliminations (1,082) (2,395) (2,521) (1,666)
____________________________________________________
Total net sales $ 16,519 $33,925 $37,505 $ 31,266
====================================================
OPERATING INCOME
Ophthalmic distribution $ 691 $ 1,037 $ 3,515 $ 2,821
Injectable distribution 1,370 670 238 (280)
Contract manufacturing (1,562) 324 1,228 1,155
General corporate (369) (942) (1,071) (1,042)
____________________________________________________
Total operating income 130 1,089 3,910 2,654
Interest and other income
(expense), net (60) (112) (172) (81)
____________________________________________________
Income before income taxes $ 70 $ 977 $ 3,738 $ 2,573
====================================================
IDENTIFIABLE ASSETS
Ophthalmic distribution $12,365 $13,287 $13,044 $12,817
Injectable distribution 2,027 1,525 1,235 968
Contract manufacturing 16,551 14,863 13,085 8,296
General corporate 151 142 127 108
____________________________________________________
Total identifiable assets $31,094 $29,817 $ 27,491 $22,189
====================================================
DEPRECIATION AND
AMORTIZATION
Ophthalmic distribution $ 209 $ 323 $ 339 $ 286
Injectable distribution 11 14 33 37
Contract manufacturing 495 639 552 433
General corporate 5 8 56 7
____________________________________________________
Total depreciation and
amortization $ 720 $ 984 $ 980 $ 763
====================================================
CAPITAL ADDITIONS
Ophthalmic distribution $ 176 $ 340 $ 354 $ 465
Injectable distribution 18 5 - 35
Contract manufacturing 1,783 1,001 5,162 1,216
General corporate 9 14 8 4
____________________________________________________
Total capital additions $ 1,986 $1,360 $ 5,524 $ 1,720
====================================================
For the year ended June 30, 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 P). In addition, for the same period,
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) totaling $110,000 and $568,000,
respectively.
For the year ended June 30, 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 the years ended June 30, 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 the years ended June 30, 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 the years ended June
30, 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 D). During the six
month period ended December 31, 1996 and the year ended June 30, 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 S - 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 T - 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. Since January 1994, the Company
has made a discretionary matching contribution on a quarterly basis.
During the six month period ended December 31, 1996 and the years ended
June 30, 1996, 1995 and 1994, the Company recorded expenses related to
the plan of $34,805, $100,615, $86,296 and $12,274, respectively.
Note U - Subsequent Events
Subsequent to the year ended December 31, 1996, the Company's board
of directors decided to relocate the Ophthalmic Division operations to
the Chicago area from Abita Springs, Louisiana. The Company expects to
incur severance and related expenses associated with the relocation, as
well as a write-down to the estimated net realizable value of the
Louisiana facility. This charge, estimated to approximate $850,000 to
$950,000 after taxes, will be recorded in the first quarter of calendar
1997.
The Company will also change the timing of overhead absorption in its
manufacturing operations, resulting in a one-time charge in the first
quarter of calendar 1997 of approximately $250,000 to $350,000 after
taxes. Management does not expect these charges to affect compliance
with the Company's loan covenants.
On February 28 , 1997, shareholders of the Company approved two
amendments to the Company's articles of incorporation which allowed for
(1) an increase in the number of authorized common shares from 20
million to 40 million and (2) the issuance of up to 5 million shares of
preferred stock at the discretion of the Company's Board of Directors.
Note V - Litigation
The Company is a party in legal proceedings and potential claims
arising in the ordinary course of its business. Management does not
believe these matters will materially effect the Company's consolidated
financial statements.
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 six
month transition period ended December 31, 1996 or the 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 1997 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 1997 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 1997 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 1997 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 doing business as Taylor
Pharmaceuticals and referred to hereinafter as "Taylor")
and certain former shareholders of Taylor, 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., Taylor,
and Pasadena Research Laboratories, Inc. dated May 7,
1996, incorporated by reference to the Company's report on
Form 10-K for the fiscal year ended June 30, 1996.
( 3.1) *Composite Articles of Incorporation of the Company as
amended through February 28, 1997.
( 3.2) *Composite of By-laws of the Company, including amendments
approved through October 26, 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 dated December 7, 1991, 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) Amended and Restated Akorn, Inc. 1988 Incentive Compensation
Program dated October 26, 1996, incorporated by reference to
Exhibit B to the Company's definitive Proxy Statement dated
January 10, 1997.
(10.15) 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.
(10.16) 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.
(10.17) 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) 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.
(10.19) 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.
(10.20) 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.
(10.21) 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 for the fiscal year ended
June 30, 1995.
(10.22) Employment Agreement among Akorn, Inc., Taylor and Floyd
Benjamin dated May 31, 1996, incorporated by reference to
Exhibit 10.24 of the Company's report on Form 10-K for the
fiscal year ended June 30, 1996.
(10.23) Employment Agreement between Akorn, Inc. and Barry D.
LeBlanc dated as of January 1, 1996, incorporated by
reference to Exhibit 10.25 of the Company's report on Form
10-K for the fiscal year ended June 30, 1996.
(10.24) Separation Agreement between Akorn, Inc. and Barry D.
LeBlanc dated July 3, 1996, incorporated by reference to
Exhibit 10.26 of the Company's report on Form 10-K for the
fiscal year ended June 30, 1996.
(10.25) Employment Agreement between Akorn, Inc. and Eric M.
Wingerter dated as of January 1, 1996, incorporated by
reference to Exhibit 10.27 of the Company's report on Form
10-K for the fiscal year ended June 30, 1996.
(10.26) Employment Agreement between Akorn, Inc. and Harold O.
Koch dated January 1, 1996, incorporated by reference to
Exhibit 10.28 of the Company's report on Form 10-K for the
fiscal year ended June 30, 1996.
(10.27) Employment Agreement between Taylor and Tim J. Toney dated
as of January 1, 1996, incorporated by reference to
Exhibit 10.29 of the Company's report on Form 10-K for the
fiscal year ended June 30, 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 Doyle S. Gaw.
(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: March 19, 1997
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 March 19, 1997
John N. Kapoor, Ph.D. Officer and
Director (Principal
Executive Officer)
/s/ Rita J. McConville Chief Financial Officer March 19, 1997
Rita J. McConville (Principal Financial
Officer and Principal
Accounting Officer)
* /s/ Floyd Benjamin Director March 19, 1997
Floyd Benjamin
* /s/ Daniel E. Bruhl, M.D. Director March 19, 1997
Daniel E. Bruhl, M.D.
* /s/ Doyle S. Gaw Director March 19, 1997
Doyle S. Gaw
*By: /s/ Rita J. McConville
Rita J. McConville
Attorney-in-fact