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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-13976
AKORN, INC.
(Name of issuer as specified in its charter)
LOUISIANA 72-0717400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
(Address of principal executive offices and zip code)
ISSUER'S TELEPHONE NUMBER: (847) 279-6100
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)
Indicate by check mark whether the Registrant (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
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Indicate by check mark 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 Registrant'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 March 15, 2000
was approximately $124,200,000.
The number of shares of the Issuer's common stock, no par value per share,
outstanding as of March 15, 2000 was 18,968,802.
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FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements, including statements
regarding the intent, belief or expectations of the Company or its management
are not guarantees of future performance. These statements involve risks and
uncertainties and actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to:
- the effects of federal, state and other governmental regulation of
the Company's business;
- the Company's success in developing, manufacturing and acquiring new
products;
- the Company's ability to bring new products to market and the effects
of sales of such products on the Company's financial results;
- the effects of competition from generic pharmaceuticals and from
other pharmaceutical companies; and
- other factors referred to in this Form 10-K and the Company's other
SEC filings.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Effect Future Results". The
Company does not intend to update these forward-looking statements.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement (the "Proxy Statement") to be
used in connection with the Registrant's 2000 Annual Meeting of shareholders,
which Proxy Statement will be filed under the Securities Exchange Act of 1934
within 120 days of the Registrant's fiscal year ended December 31, 1999, are
incorporated by reference to Part III of this Annual Report on Form 10-K.
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FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related 8
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures about Market 18
Risk......................................................
Item 8. Financial Statements and Supplemental Data.................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting 34
and Financial Disclosures.................................
PART III
Item 10. Directors................................................... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and 35
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 35
PART IV
Item 14. Exhibits and Financial Statement Schedules.................. 36
Signatures............................................................ 37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Akorn, Inc. ("Akorn" or the "Company") manufactures and markets diagnostic
and therapeutic pharmaceuticals in specialty areas such as ophthalmology,
rheumatology, anesthesia and antidotes, among others. The Company also markets
ophthalmic surgical instruments and related products. Customers include
physicians, optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies. The Company also provides contract manufacturing
services. Akorn is a Louisiana corporation founded in 1971 in Abita Springs,
Louisiana, a suburb of New Orleans. In 1997, the Company relocated its
headquarters and certain operations to Illinois.
In May 1996, the Company acquired Pasadena Research Laboratories, Inc., a
developer and distributor of injectable pharmaceutical products. Subsequently,
the Company reorganized its operations into two segments, ophthalmic and
injectable. For information regarding sales, operating income and identifiable
assets for each of the Company's segments, see Note N to the consolidated
financial statements included in Item 8 of this report.
Ophthalmic Segment. The Company markets an extensive line of diagnostic
and therapeutic ophthalmic pharmaceutical products as well surgical instruments
and related supplies. Diagnostic products, primarily used in the office setting,
include mydriatics and cycloplegics, anesthetics, topical stains, gonioscopic
solutions, angiography dyes and others. Therapeutic products, sold primarily to
wholesalers and other national account customers, include antibiotics,
anti-infectives, steroids, steroid combinations, glaucoma medications,
decongestants/antihistamines and anti-edema medications. Surgical products
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. Non-pharmaceutical products include
various artificial tear solutions, preservative-free lubricating ointments, lid
cleansers, vitamin supplements and contact lens accessories.
Injectable Segment. The Company markets a line of specialty injectable
pharmaceutical products, including anesthesia products used in the treatment of
rheumatoid arthritis and pain management. These products are marketed to
wholesalers and other national account customers as well as directly to medical
specialists. Akorn also provides contract manufacturing services to
pharmaceutical and biotech companies.
Manufacturing. The Company has two manufacturing facilities located in
Decatur, Illinois and Somerset, New Jersey. See "Item 2. Description of
Property." The Company manufactures a diverse group of sterile pharmaceutical
products, including solutions, ointments and suspensions for its ophthalmic and
injectable segments. The Company is also in the process of adding freeze dried
(lyophilized) manufacturing capabilities at its Decatur facility. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Effect Future Results -- Dependence on Development
of Pharmaceutical Products and Manufacturing Capabilities."
Sales and Marketing. While the Company is working to expand its
proprietary product base through internal development and, to a lesser extent,
acquisitions, the majority of current products are non-proprietary. The Company
relies on its efforts in marketing, distribution, development and low cost
manufacturing to maintain and increase market share.
The ophthalmic segment uses a three-tiered sales effort. Outside sales
representatives, with two field managers, sell directly to physicians and group
practices. In-house sales (telemarketing) and customer service (catalog sales)
sell to optometrists and other customers. A national accounts group sells to
wholesalers, retail chains and other group purchasing organizations. This
national accounts group also markets the Company's injectable pharmaceutical
products which the Company also sells through telemarketing and direct mail
activities to individual specialty physicians and hospitals. The injectable
segment does not utilize a field sales force at this time. The segment may add
such a force in the future as it introduces proprietary products. The injectable
segment markets its contract manufacturing services through direct mail, trade
shows and direct industry contacts.
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Research and Development. As of December 31, 1999, the Company had 42
Abbreviated New Drug Applications ("ANDAs") for generic pharmaceuticals in
various stages of development. The Company has filed 14 of these ANDAs and had 4
ANDAs approved in 1999. See "Government Regulation." The Company expects to
continue to file ANDAs on a regular basis as pharmaceutical products of its
competitors come off patent allowing the Company to compete by marketing generic
equivalents. The Company had one New Drug Application ("NDA"), for Paremyd, on
file at December 31, 1999. The Company is also developing four indications for
ophthalmic products for which it currently anticipates filing NDAs. See Note C
to the consolidated financial statements included in Item 8 of this report. One
is an indication for Indocyanine Green to treat age related macular
degeneration. If the Company's developmental efforts are successful, the Company
currently anticipates filing this NDA within the next four years and estimates
the market size for this product to be $350 million. A second anticipated NDA
filing is for a new delivery system for the pharmaceutical Timolol, which is
used in the treatment of glaucoma. If the Company's developmental efforts are
successful, the Company currently anticipates filing this NDA within the next
three years and estimates the market size for this product to be $270 million. A
third anticipated NDA filing is for Piroxicam ophthalmic solution which is an
anti-inflammatory to be used during cataract surgery. The Company began
conducting additional clinical studies on this product in the third quarter of
1999 and anticipates filing an NDA by the end of this year. The Company
estimates the market for this product to be $75 million. Finally, the Company
currently anticipates filing an NDA for an indication for Indocyanine Green to
treat white cataracts. The Company estimates the market for this product to be
$6 to $10 million. Pre-clinical and clinical trials required in connection with
the development of pharmaceutical products are performed by contract research
organizations under the direction of Company personnel. No assurance can be
given as to whether the Company will file these NDAs, or any ANDAs, when
anticipated, will develop marketable products based on these filings or as to
the actual size of the market for any such products. See "Government Regulation"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Effect Future Results--Dependence on
Development of Pharmaceutical Products and Manufacturing Capabilities".
The Company also maintains a business development program which identifies
potential product acquisition or product licensing candidates. The Company has
focused its business development efforts on niche products which complement its
existing product lines and which have few or no competitors in the market.
At December 31, 1999, 22 full-time employees of the Company were involved
in research and development and product licensing.
Research and development costs are expensed as incurred. Such costs
amounted to $2,744,000, $4,010,000 and $1,873,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
Patents and Proprietary Rights. The Company considers the protection of
discoveries in connection with its development activities important to its
business. The Company intends to seek patent protection in the United States and
selected foreign countries where deemed appropriate. To date, the Company has
received three U.S. patents and has four additional U.S. and one international
patent applications pending. There can be no assurance that the Company will
obtain U.S. or foreign patents or, if obtained, that they will provide
substantial protection or be of commercial benefit. The Company also relies upon
trademarks, trade secrets, unpatented proprietary know-how and continuing
technological innovation to maintain and develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
However, there can be no assurance that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Effect Future
Results--Patents and Proprietary Rights".
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Employee Relations. At December 31, 1999, the Company had 349 full-time
employees, of whom 309 were employed by Akorn and 40 by its wholly owned
subsidiary, Akorn (New Jersey), Inc. The Company enjoys good relations with its
employees, none of whom are represented by a collective bargaining agent.
Competition. The marketing and manufacturing of 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 greater financial and other resources,
including greater sales volume, larger sales forces and greater manufacturing
capacity. See "Management's Discussion and Analysis of Operations--Factors That
May Effect Future Results--Competition; Uncertainty of Technological Change."
The companies which compete with the ophthalmic segment include Alcon
Laboratories, Inc., Allergan Pharmaceuticals, Inc., Ciba Vision and Bausch &
Lomb, Inc. ("B&L"). The ophthalmic segment competes primarily on the basis of
price and service. The ophthalmic segment purchases some ophthalmic products
from Steris Pharmaceuticals, Inc. and B&L, who are in direct competition with
the Company in several markets.
The companies which compete with the injectable segment include both
generic and name brand companies such as Abbott Labs, Gensia, Marsam, Steris,
Elkin Sinn and American Regent. The injectable segment competes primarily on the
basis of price. Competitors in the contract manufacturing business include Cook
Imaging, Chesapeake Biological Laboratories, Ben Venue and Oread Laboratories.
The manufacturing of sterile products must be performed under government
mandated Good Manufacturing Practices.
Suppliers and Customers. No unaffiliated supplier of products accounted
for more than 10% of the Company's sales in either segment during 1999, 1998 or
1997. The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components of the Company's products
are active and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available from only a single source and,
in many of the Company's ANDAs and NDAs, only one supplier of raw materials has
been identified. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Effect Future
Results--Dependence on Supply of Raw Materials and Components".
No single customer accounted for more than 10% of the Company's sales in
either segment during 1999, 1998 or 1997.
Government Regulation. Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies, including the Food and
Drug Administration ("FDA"), the Drug Enforcement Agency ("DEA"), the Federal
Trade Commission ("FTC") and other federal, state and local agencies. 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, labeling, storage and promotion of products.
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 to approve new drug applications and criminal
prosecution. The FDA also has the authority to revoke approval of drug products.
With certain exceptions, FDA approval is required before any drug can be
manufactured and marketed. New drugs require the filing of an NDA, including
clinical studies demonstrating the safety and efficacy of the drug. Generic
drugs, which are equivalents of existing brand name drugs, require the filing of
an ANDA, which waives the requirement of conducting clinical studies of safety
and efficacy. Ordinarily, the filing of an ANDA for generic drugs which contain
the same ingredients as drugs already approved for use in the United States
requires data showing that the generic formulation is equivalent to the brand
name drug and that the product is stable in its formulation. The Company has no
control over the time required for the FDA to approve NDA or ANDA filings.
The Company also manufactures and distributes several controlled-drug
substances, the distribution and handling of which are regulated by the DEA.
Failure to comply with DEA regulations can result in fines or
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seizure of product. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Effect Future
Results--Government Regulation".
The Company does not anticipate any material effect from compliance with
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the executive officers of the Company as of
March 15, 2000. Each officer serves as such at the pleasure of the Board of
Directors.
NAME AND AGE POSITION WITH THE COMPANY IN POSITION SINCE
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John N. Kapoor, Ph.D., 56.... Chairman of the Board of the Company since May 1991
1995 and from December 1991 to January 1993, and
acting Chairman of the Board of the Company from
April 1993 to May 1995; Chief Executive Officer
of the Company from May 1996 to November 1998;
Chairman of the Board of Option Care, Inc.
(infusion services and supplies); chief executive
officer of Option Care, Inc. from August 1993 to
April 1996; president of E.J. Financial
Enterprises, Inc., (venture capital company),
since April 1990; director of NeoPharm, Inc.
(specialty pharmaceutical company)
Floyd Benjamin, 57........... President and Chief Executive Officer of the 1998
Company since November 1998; Executive Vice
President of the Company and President of Taylor
Pharmaceuticals, Inc. (a subsidiary of the
Company) from May 1996 to November 1998;
president of Pasadena Research Laboratories, Inc.
("PRL") from October 1994 to May 1996 and
consultant to PRL from October 1993 to October
1994; president and chief executive officer of
Neocrin, Inc. (biomedical venture capital
company) from February 1992 to October 1993;
prior to February 1992, chief operating officer
of Lyphomed, Inc. (injectable pharmaceuticals)
Rita J. McConville, 41....... Vice President, Chief Financial Officer, 1997
Secretary and Treasurer of the Company since
February 1997; Senior Director and Controller of
Option Care, Inc. (infusion services and
supplies) from July 1993 to February 1997
ITEM 2. DESCRIPTION OF PROPERTY
Since August 1998, the Company's headquarters and certain administrative
offices, as well as a finished goods warehouse, have been located in
approximately 24,000 square feet of leased space at 2500 Millbrook Drive,
Buffalo Grove, Illinois. From May 1997 to August 1998, the Company's
headquarters and ophthalmic division offices were located in approximately
11,000 square feet of leased space in Lincolnshire, Illinois. The Company
sub-lets the Lincolnshire space to several tenants. The Company's former
headquarters, consisting of approximately 30,000 square feet located on ten
acres of land in Abita Springs, Louisiana, was sold in February 1999.
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 in Decatur, Illinois. The Company
leases approximately 7,000 square feet of office and warehousing space in San
Clemente, California. The Company's Akorn (New Jersey) subsidiary also leases
approximately 40,000 square feet of space in Somerset, New Jersey. This space is
used for manufacturing, research and development and administrative activities.
The combined space is considered adequate to accommodate growth for the
foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. The amount, if any, of ultimate liability
with respect to such matters cannot be determined. Despite the inherent
uncertainties of litigation, management of the Company at this time does not
believe that such proceedings will have a material adverse impact on the
financial condition or results of operations or cash flows of the Company.
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, 1999.
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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 March 10, 2000, the Company estimated that the number of
holders of its Common Stock was approximately 3,200, including record holders
and individual participants in security position listings.
High and low bid prices per Nasdaq for the periods indicated were:
HIGH LOW
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Year Ended December 31, 1999:
1st Quarter............................................... $5.50 $3.50
2nd Quarter............................................... 5.00 3.69
3rd Quarter............................................... 5.00 3.88
4th Quarter............................................... 4.69 3.78
Year Ended December 31, 1998:
1st Quarter............................................... $6.88 $2.75
2nd Quarter............................................... 9.06 6.03
3rd Quarter............................................... 8.00 3.75
4th Quarter............................................... 6.38 2.63
As of March 15, 2000, there were approximately 600 holders of record of the
Company's Common Stock. Closing price at March 15, 2000 was $9.00 per share as
reported by the Nasdaq National Market.
The Company did not pay cash dividends in 1999, 1998 or 1997, and is
prohibited by its revolving credit agreement with The Northern Trust Company
from doing so.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In October 1996, the Board of Directors of the Company voted to change the
Company's fiscal year from the year ending June 30 to a calendar year. The
following table sets forth selected consolidated financial information for the
Company for the years ended December 31, 1999, 1998 and 1997, the six month
transition period ended December 31, 1996 and the years ended June 30, 1996 and
1995:
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED YEARS ENDED JUNE 30,
---------------------------- DECEMBER 31, --------------------
1999 1998 1997 1996 1996 1995
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PER SHARE
Equity............................ $ 1.85 $ 1.40 $ 1.20 $ 0.98 $ 0.97 $ 0.93
Net income:
Basic........................... $ 0.37 $ 0.26 $ 0.11 $ 0.00 $ 0.05 $ 0.15
Diluted......................... $ 0.36 $ 0.25 $ 0.11 $ 0.00 $ 0.05 $ 0.15
Price: High....................... $ 5.56 $ 9.19 $ 4.50 $ 3.50 $ 3.50 $ 4.00
Low........................ $ 3.50 $ 2.54 $ 1.84 $ 1.63 $ 2.06 $ 2.25
P/E: High........................ 15x 35x 41x NM 70x 27x
Low........................ 10x 10x 17x NM 41x 15x
INCOME DATA (000)
Net sales......................... $64,632 $ 56,667 $42,323 $16,519 $33,925 $37,505
Gross profit...................... 33,477 29,060 18,776 5,758 11,953 15,177
Operating income.................. 12,122 9,444 3,165 130 1,089 3,910
Interest expense.................. (1,921) (1,451) (497) (243) (441) (25)
Pretax income..................... 10,639 7,686 2,844 70 977 3,738
Income taxes...................... 3,969 3,039 1,052 26 189 1,232
Net income........................ $ 6,670 $ 4,647 $ 1,792 $ 44 $ 788 $ 2,506
Weighted average shares
outstanding:
Basic........................... 18,269 17,891 16,614 16,580 16,383 16,236
Diluted......................... 18,573 18,766 16,925 16,763 16,788 16,799
BALANCE SHEET (000)
Current assets.................... $35,851 $ 24,948 $19,633 $13,840 $17,001 $15,474
Net fixed assets.................. 20,812 15,860 12,395 12,833 11,524 11,060
Total assets...................... 76,098 61,416 38,715 28,013 29,567 27,491
Current liabilities............... 9,693 13,908 8,612 5,636 9,351 7,016
Long-term obligations............. 32,015 21,228 9,852 6,003 3,915 4,890
Shareholders' equity.............. $34,390 $ 26,280 $20,251 $16,374 $16,301 $15,585
CASH FLOW DATA (000)
From operations................... $ 131 $ 1,093 $ 64 $ 2,553 $ 10 $ 712
Dividends paid (1)................ -- -- -- -- (583) --
From investing.................... (6,233) (13,668) (6,387) (2,028) (873) (4,943)
From financing.................... 5,391 10,898 7,356 (36) 979 3,112
Change in cash & equivalents...... $ (711) $ (1,677) $ 1,033 $ 489 $ 116 $(1,119)
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(1) Dividends paid pertain to Subchapter S distributions made to former PRL
shareholders for pre-acquisition earnings.
All of the information shown in the table above for the two year period
ended June 30, 1996 has been restated to reflect the combined operations of
Akorn and Pasadena Research Laboratories, Inc. (PRL).
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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 consolidated
financial statements.
RESULTS OF OPERATIONS
The Company's revenues are derived from sales of diagnostic and therapeutic
pharmaceuticals by the ophthalmic and injectable segments, from sales of
surgical instruments and related products by the ophthalmic segment and from
sales of contract manufacturing services by the injectable segment. The
following table sets forth the percentage relationships that certain items from
the Company's Consolidated Statements of Income bear to revenues for the years
ended December 31, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31,
1999 1998 1997
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Revenues
Ophthalmic............................................. 50% 52% 59%
Injectable............................................. 50 48 41
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Total revenues.............................................. 100% 100% 100%
Gross profit................................................ 52 51 44
Selling, general and administrative expenses................ 26 24 28
Amortization of intangibles................................. 3 4 1
Research and development expenses........................... 4 7 4
Operating income............................................ 19 17 8
Net income.................................................. 10% 8% 4%
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Net sales increased 14.1% for the year ended December 31, 1999 compared to
the prior year. Ophthalmic segment sales increased 11.2%, primarily due to
previously acquired products and product licensing agreements entered into in
1999. Injectable segment sales increased 17.1%, primarily due to strong sales of
anesthesia products.
Consolidated gross profit increased 15.2% for the year, with gross margins
increasing from 51.3% to 51.8%. The increase in gross margins was caused by
branded products acquired in 1998 being included in the full year results for
1999 and the resultant shift in sales mix to higher margin products. 1999 cost
of sales includes $1.4 million in unfavorable manufacturing variances resulting
from under-utilization of manufacturing capacity at the Somerset, New Jersey
facility. Management expects the unfavorable manufacturing variances to continue
until additional product approvals are obtained at the Somerset facility.
Selling, general and administrative expenses (SG&A) increased 25.9% from
1998, resulting from new hires in 1999 and the associated salary and salary
related expenses being included in the full year results for 1999 (28.9%) as
well as one time consulting fees (55.5%) and warehouse related expenses (69.5%).
Management expects the growth rate for SG&A expenses to significantly decrease
in 2000.
Amortization of intangibles decreased 18.9% for the year, reflecting the
expiration of a patent in May 1999.
Research and development expenses ("R&D") decreased 31.6%, primarily
reflecting the conclusion of clinical studies on TP-1000, a migraine product, in
December 1998. Since obtaining favorable preliminary clinical data, the Company
has been seeking a partner to continue development of this product. The Company
did not conduct clinical studies in 1999 until late in the third quarter, when a
third Piroxicam trial began. Management expects R&D expenses to increase to
approximately $4,000,000 in 2000, as three additional NDA projects begin to move
through the pipeline. See "Item 1. Description of Business--Research and
Development".
During 1998, the Company recorded $350,000 in charges related to a
cancelled public equity offering.
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Interest expense increased 32.4%, reflecting higher average outstanding
debt balances related to prior year product acquisitions and 1999 capital
spending.
Net income for 1999 was $6,670,000 or $0.36 per diluted share compared to
$4,647,000 or $0.25 per diluted share for the prior year. The increase in
earnings resulted from the above mentioned items.
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased 33.9% for the year ended December 31, 1998 compared to
the prior year. Ophthalmic segment sales increased 17.3%, primarily due to
strong sales of acquired products. Injectable segment sales increased 57.6%,
primarily due to acquired anesthesia products. Injectable segment sales also
benefited from a continuing shortage of certain distributed products.
Consolidated gross profit increased 54.8% for the year, with gross margins
increasing from 44% to 51%. The increase in gross margins was caused by branded
product acquisitions and a shift in sales mix to higher margin products.
Selling, general and administrative expenses (SG&A) increased 11.2%,
reflecting increased provisions for employee performance bonuses and expenses
associated with the new corporate office facility in Buffalo Grove, Illinois.
Amortization of intangibles increased 584.9% for the year, reflecting
significant product acquisitions in 1998.
R&D expenses increased 114.1%, primarily reflecting accelerated development
of TP-1000, a migraine product.
During 1998, the Company recorded $350,000 in charges related to a
cancelled public equity offering. During 1997, the Company recorded $1,451,000
in charges related to the relocation of the ophthalmic division and executive
offices from Abita Springs, Louisiana to the Chicago area. The charges primarily
relate to severance $494,000, and retention bonus payments, $151,000, as well as
a write-down of the Abita Springs facility and equipment to net realizable
value, $378,000 and moving relocations costs, $144,000.
Interest expense increased 192.0%, reflecting higher average outstanding
debt balances related to product acquisitions. Interest income declined 97.6%
due to the liquidation of cash balances to finance acquisition activities.
Net income for 1998 was $4,647,000 or $0.25 per diluted share compared to
$1,792,000 or $0.11 per diluted share for the prior year. The increase in
earnings resulted from the above mentioned items.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1999, the Company had cash and cash equivalents of
$25,000. Working capital at that date was $26,158,000 versus $11,040,000 at
December 31, 1998 resulting primarily from the refinancing of $11,000,000 of
current liabilities with long term debt under the Company's new $45 million
credit facility and an increase in receivables and inventory of $11,999,000. The
Company manages its cash balances to minimize interest expense on its line of
credit borrowing. At December 31, 1999, the Company had $16.8 million available
under its revolving credit facility.
During the year ended December 31, 1999, the Company generated $131,000 in
cash from operations after financing its working capital requirements, primarily
an increase in accounts receivable and inventories
11
13
related to increased sales volume, including acquired products. Management
anticipates additional investment in working capital to finance continued sales
growth, but has active working capital management initiatives in place to reduce
receivables and inventory levels. Investing activities, which include the
purchase of product-related intangible assets as well as equipment required
$6,233,000 in cash. Purchases of equipment for the manufacture of lyophilized
(freeze-dried) pharmaceuticals accounted for $2,507,000 of the $6,233,000 cash
used in investing activities and the Company expects to incur an additional
$5,187,000 for such purchases during 2000. Financing activities provided
$5,391,000 in cash primarily through a net $4,216,000 increase in long-term debt
and $1,337,000 from stock option exercises. The Company's repayment of capital
lease obligations used $162,000 in cash.
Capital expenditures for equipment in 1999 and 1998 principally relate to
the Company's lyophilization project as discussed in Note F to the Consolidated
Financial Statements.
In 1997 the Company entered into a $15 million revolving credit
arrangement, increased to $25 million in 1998, and subsequently increased to $45
million in 1999, subject to certain financial covenants. See Note H to
Consolidated Financial Statement for a description of this indebtedness and
other indebtedness of the Company. Management believes that cash flow from
operations, in conjunction with borrowing availability under its credit
facility, will be sufficient to meet the cash needs of the business for the
foreseeable future, but additional long-term financing may be needed to finance
product development or acquisitions. There are no guarantees that such financing
will be available or available at an acceptable cost.
YEAR 2000 ISSUES
The Company established a process to identify and resolve the business
issues associated with Year 2000 and expended resources to ensure that its
critical processes were Year 2000 compliant. The Company did not experience any
business disruptions associated with Year 2000. The Company will continue to
monitor its computer applications throughout Year 2000 to ensure that any latent
Year 2000 matters are addressed promptly.
SELECTED QUARTERLY DATA (UNAUDITED)
In Thousands, Except Per Share Amounts
NET INCOME (LOSS)
------------------------------
NET GROSS PER SHARE PER SHARE
SALES PROFIT AMOUNT BASIC DILUTED
------- ------- ------ --------- ---------
Year Ended December 31, 1999:
1st Quarter.................................. $14,719 $ 7,436 $1,458 $ 0.08 $ 0.08
2nd Quarter.................................. 16,089 8,323 1,675 0.09 0.09
3rd Quarter.................................. 16,795 8,932 1,702 0.09 0.09
4th Quarter.................................. 17,029 8,786 1,835 0.11 0.10
------- ------- ------ ------ ------
$64,632 $33,477 $6,670 $ 0.37 $ 0.36
======= ======= ====== ====== ======
Year Ended December 31, 1998:
1st Quarter.................................. $12,051 $ 6,242 $1,048 $ 0.06 $ 0.06
2nd Quarter.................................. 13,987 7,021 1,101 0.06 0.06
3rd Quarter.................................. 15,138 7,868 1,088 0.06 0.06
4th Quarter.................................. 15,491 7,929 1,410 0.08 0.08
------- ------- ------ ------ ------
$56,667 $29,060 $4,647 $ 0.26 $ 0.25
======= ======= ====== ====== ======
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FACTORS THAT MAY EFFECT FUTURE RESULTS
Government Regulation
Virtually all aspects of the Company's business are regulated by federal
and state statutes and government agencies. The development, testing,
manufacturing, processing, quality, safety, efficacy, packaging, labeling,
record-keeping, distribution, storage and advertising of the Company's products,
and disposal of waste products arising from such activities, are subject to
regulation by one or more federal agencies, including the Food and Drug
Administration ("FDA"), the Drug Enforcement Agency ("DEA"), the Federal Trade
Commission ("FTC"), the Consumer Product Safety Commission, the Occupational
Safety and Health Administration ("OSHA") and the U.S. Environmental Protection
Agency ("EPA"). These activities are also regulated by similar state and local
agencies. Failure to comply with applicable statutes and government regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, the federal government has
extensive administrative and judicial enforcement powers over the activities of
pharmaceutical manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to, the authority to initiate court action
to seize unapproved or non-complying products, to enjoin non-complying
activities, to halt manufacturing operations that are not in compliance with
current good manufacturing practices ("cGMP"), to recall products which present
a health risk, and to seek civil monetary and criminal penalties. Other
enforcement activities include refusal to approve product applications or the
withdrawal of previously approved applications. Any such enforcement activities,
including the restriction or prohibition on sales of products marketed by the
Company or the halting of manufacturing operations of the Company, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, product recalls may be issued at the
discretion of the Company, the FDA or other government agencies having
regulatory authority for pharmaceutical product sales. Recalls may occur due to
disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that recalls of the Company's pharmaceutical
products will not occur in the future. Any product recall could have a material
adverse effect on the Company's business, financial condition and results of
operations.
All "new drugs" must be the subject of an FDA-approved new drug application
("NDA") before they may be marketed in the United States. Certain prescription
drugs are not currently required to be the subject of an approved NDA but,
rather, may be marketed pursuant to an FDA regulatory enforcement policy
permitting continued marketing of those drugs until the FDA determines whether
they are safe and effective. All generic equivalents to previously approved
drugs or new dosage forms of existing drugs must be the subject of an
FDA-approved abbreviated new drug application ("ANDA") before they may be
marketed in the United States. The FDA has the authority to withdraw existing
NDA and ANDA approvals and to review the regulatory status of products marketed
under the enforcement policy. The FDA may require an approved NDA or ANDA for
any drug product marketed under the enforcement policy if new information
reveals questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with cGMP and drugs subject to an approved NDA or
ANDA must be manufactured, processed, packaged, held, and labeled in accordance
with information contained in the NDA or ANDA.
The Company and its third-party manufacturers are subject to periodic
inspection by the FDA to assure such compliance. The FDA imposes additional
stringent requirements on the manufacture of sterile pharmaceutical products to
ensure the sterilization processes and related control procedures consistently
produce a sterile product. Additional sterile manufacturing requirements include
the submission for expert review of detailed documentation for sterilization
process validation in drug applications beyond those required for general
manufacturing process validation. Various sterilization process requirements are
the subject of detailed FDA guidelines, including requirements for the
maintenance of microbiological control and quality stability. Pharmaceutical
products must be distributed, sampled and promoted in accordance with FDA
requirements. The FDA also regulates drug labeling and the advertising of
prescription drugs. The Company believes its operating facilities and practices
are in compliance with applicable federal and state law. However,
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15
a finding by a governmental agency or court that the Company is not in
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be granted and which
may be subject to a lengthy application process. Any change in the FDA's
enforcement policy or any decision by the FDA to require an approved NDA or ANDA
for a Company product not currently subject to the approved NDA or ANDA
requirements or any delay in the FDA approving an NDA or ANDA for a Company
product could have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of products marketed by the Company are "grandfathered" drugs
which are permitted to be manufactured and marketed without FDA-issued ANDAs or
NDAs on the basis of their having been marketed prior to enactment of relevant
sections of the FDC Act. The regulatory status of these products is subject to
change and/or challenge by the FDA, which could establish new standards and
limitations for manufacturing and marketing such products, or challenge the
evidence of prior manufacturing and marketing upon which grandfathering status
is based. The Company is not aware of any current efforts by the FDA to change
the status of any of its "grandfathered" products, but there can be no assurance
that such initiatives will not occur in the future. Any such change in the
status of the Company's "grandfathered" products could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also manufactures and sells drugs which are "controlled
substances" as defined in the federal Controlled Substances Act and similar
state laws, which establishes, among other things, certain licensing, security
and record keeping requirements administered by the DEA and similar state
agencies, as well as quotas for the manufacture, purchase and sale of controlled
substances. The DEA could limit or reduce the amount of controlled substances
which the Company is permitted to manufacture and market. The Company has not
experienced sanctions or fines for non-compliance with the foregoing
regulations, but no assurance can be given that any such sanctions or fines
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company cannot determine what effect changes in regulations or statutes
or legal interpretation, when and if promulgated or enacted, may have on its
business in the future. Changes could, among other things, require changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuation of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes or new legislation could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Development of Pharmaceutical Products and Manufacturing
Capabilities
The Company's strategy for growth is dependent upon its ability to develop
products that can be promoted through existing marketing and distribution
channels and, when appropriate, the enhancement of such marketing and
distribution channels. The Company currently has 42 ANDAs in various stages of
development and anticipates filing four NDAs. See "Item 1. Description of
Business - Research and Development." The Company may not meet its anticipated
time schedule for the filing of ANDAs and NDAs or may decide not to pursue ANDAs
or NDAs that it has submitted or anticipates submitting. The internal
development of new pharmaceutical products by the Company is dependent upon the
research and development capabilities of the Company's personnel and its
infrastructure. There can be no assurance that the Company will successfully
develop new pharmaceutical products or, if developed, successfully integrate new
products into its existing product lines. In addition, there can be no assurance
that the Company will receive all necessary approvals from the FDA or that such
approvals will not involve delays which adversely affect the marketing and sale
of the Company's products. The Company's failure to develop new products or
receive FDA approval of ANDAs or NDAs, could have a material adverse effect on
the Company's business, financial condition and results of operations. Another
part of the Company's growth strategy is to develop the
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capability to manufacture lyophilized (freeze-dried) pharmaceutical products.
While the Company has devoted resources to developing these capabilities, it may
not be successful in developing these capabilities, or the Company may not
realize the anticipated benefits from developing these capabilities.
Generic Substitution
The Company's branded pharmaceutical products are subject to competition
from generic equivalents and alternative therapies. Generic pharmaceuticals are
the chemical and therapeutic equivalents of brand-name pharmaceuticals and
represent an increasing proportion of pharmaceuticals dispensed in the United
States. There is no proprietary protection for most of the branded
pharmaceutical products sold by the Company and generic and other substitutes
for most of its branded pharmaceutical products are sold by other pharmaceutical
companies. In addition, governmental and cost-containment pressures regarding
the dispensing of generic equivalents will likely result in generic substitution
and competition generally for the Company's branded pharmaceutical products.
Although the Company attempts to mitigate the effect of this substitution
through, among other things, creation of strong brand-name recognition and
product-line extensions for its branded pharmaceutical products, there can be no
assurance that the Company will be successful in these efforts. Increased
competition in the sale of generic pharmaceutical products could have a material
adverse effect on the Company's business, financial condition and results of
operations. Generic substitution is regulated by the federal and state
governments, as is reimbursement for generic drug dispensing. There can be no
assurance that substitution will be permitted for newly-approved generic drugs
or that such products will be subject to government reimbursement.
Dependence on Generic and Off-Patent Pharmaceutical Products
The success of the Company depends, in part, on its ability to anticipate
which branded pharmaceuticals are about to come off patent and thus permit the
Company to develop, manufacture and market equivalent generic pharmaceutical
products. Generic pharmaceuticals must meet the same quality standards as
branded pharmaceuticals, even though these equivalent pharmaceuticals are sold
at prices which are significantly lower than that of branded pharmaceuticals. In
addition, generic products that third parties develop may render the Company's
generic products noncompetitive or obsolete. Although the Company has
successfully brought generic pharmaceutical products to market in a timely
manner in the past, there can be no assurance that the Company will be able to
consistently bring these products to market quickly and efficiently in the
future. An increase in competition in the sale of generic pharmaceutical
products or the Company's failure to bring such products to market before its
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition; Uncertainty of Technological Change
The Company competes with other pharmaceutical companies, including major
pharmaceutical companies with financial resources substantially greater than
those of the Company, in developing, acquiring, manufacturing and marketing
pharmaceutical products. The selling prices of pharmaceutical products typically
decline as competition increases. Further, other products now in use, under
development or acquired by other pharmaceutical companies, may be more effective
or offered at lower prices than the Company's current or future products. The
industry is characterized by rapid technological change which may render the
Company's products obsolete, and competitors may develop their products more
rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner, and therefore, may begin to market their products in
advance of the Company's products. The Company believes that competition in
sales of its products is based primarily on price, service, availability and
product efficacy. There can be no assurance that: (i) the Company will be able
to develop or acquire commercially attractive pharmaceutical products; (ii)
additional competitors will not enter the market; or (iii) competition from
other pharmaceutical companies will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Supply of Raw Materials and Components
The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components
15
17
of the Company's products are active and inactive pharmaceutical ingredients and
certain packaging materials. Many of these components are available from only a
single source and, in many of the Company's ANDAs and NDAs, only one supplier of
raw materials has been identified. Because FDA approval of drugs requires
manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of any new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The qualification of a new
supplier could delay the Company's development and marketing efforts. If for any
reason the Company is unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package its products, it may not
be able to manufacture its products as planned, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Third-Party Manufacturers
The Company derives a significant portion of its net sales from the sale of
products manufactured by third parties, including its competitors in some
instances. There can be no assurance that the Company's dependence on third
parties for the manufacture of such products will not adversely affect the
Company's profit margins or its ability to develop and deliver its products on a
timely and competitive basis. If for any reason the Company is unable to obtain
or retain third-party manufacturers on commercially acceptable terms, it may not
be able to distribute certain of its products as planned. No assurance can be
made that the manufacturers utilized by the Company will be able to provide the
Company with sufficient quantities of its products or that the products supplied
to the Company will meet the Company's specifications. Any delays or
difficulties with third-party manufacturers could adversely affect the marketing
and distribution of certain of the Company's products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Liability
The Company faces exposure to product liability claims in the event that
the use of its technologies or products or those it licenses from third parties
is alleged to have resulted in adverse effects in users thereof. Receipt of
regulatory approval for commercial sale of such products does not mitigate such
product liability risks. While the Company has taken, and will continue to take,
what it believes are appropriate precautions, there can be no assurance that it
will avoid significant product liability exposure. In addition, future product
labeling may include disclosure of additional adverse effects, precautions and
contraindications, which may adversely impact sales of such products. The
Company currently has product liability insurance in the amount of $10.0 million
for aggregate annual claims with a $25,000 deductible per incident and a
$150,000 aggregate annual deductible. However, there can be no assurance that
its insurance coverage will be sufficient to cover fully potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Acquisition and Licensing of Pharmaceutical Products
As part of its growth strategy, the Company plans to purchase or license
pharmaceutical product lines of other pharmaceutical or biotechnology companies.
Other companies, including those with substantially greater financial, marketing
and other resources, compete with the Company for the right to acquire or
license such products. The Company's success in executing this strategy depends,
in part, on its ability to identify potential products that meet the Company's
criteria, including possessing a recognizable brand name or being complementary
to the Company's existing product lines. There can be no assurance that the
Company will have success in identifying potential product acquisitions or
licensing opportunities or that, if identified, it will complete such product
acquisitions or obtain such licenses on acceptable terms or that it will
successfully integrate any acquired or licensed products into its existing
product lines. The inability to complete acquisitions of, or obtain licenses
for, pharmaceutical products could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
there can be no assurance that the Company, once it has obtained rights to a
pharmaceutical product and committed to payment terms, will be able to generate
sales sufficient to create a profit or otherwise avoid a loss. Any inability to
generate such
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sufficient sales or any subsequent reduction of sales could have a material
adverse effect on the Company's business, financial condition and result of
operations.
Patents and Proprietary Rights
The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who: (i) successfully challenge the
Company's patents; (ii) obtain patents that may have an adverse effect on the
Company's ability to conduct business; or (iii) are able to circumvent the
Company's patent position. It is possible that other parties have conducted or
are conducting research and could make discoveries of pharmaceutical
formulations or processes that would precede any discoveries made by the
Company, which could prevent the Company from obtaining patent protection for
these discoveries or marketing products developed therefrom. Consequently, there
can be no assurance that others will not independently develop pharmaceutical
products similar to or obsoleting those that the Company is planning to develop,
or duplicate any of the Company's products. The inability of the Company to
obtain patents for its products and processes or the ability of competitors to
circumvent or obsolete the Company's patents could have a material adverse
effect on the Company's business, financial condition and results of operations.
Need to Attract and Retain Key Personnel in Highly Competitive Marketplace
The Company's performance depends, to a large extent, on the continued
service of its key research and development personnel, other technical
employees, managers and sales personnel and its ability to continue to attract
and retain such personnel. Competition for such personnel is intense,
particularly for highly motivated and experienced research and development and
other technical personnel. The Company is facing increasing competition from
companies with greater financial resources for such personnel. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of highly-skilled personnel in the future, and the inability to do so could have
a material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Key Executive Officers
The Company's success will depend, in part, on its ability to retain its
key executive officers. The loss of one or more of the Company's key executive
officers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Quarterly Fluctuation of Results; Possible Volatility of Stock Price
The Company's results of operations may vary from quarter to quarter due to
a variety of factors including the timing of the development and marketing of
new pharmaceutical products, the failure to develop such products, delays in
obtaining government approvals, including FDA approval of NDAs or ANDAs for
Company products, expenditures incurred to acquire and promote pharmaceutical
products, changes in the Company's customer base, a customer's termination of a
substantial account, the availability and cost of raw materials, interruptions
in supply by third-party manufacturers, the introduction of new products or
technological innovations by the Company's competitors, loss of key personnel,
changes in the mix of products sold by the Company, changes in sales and
marketing expenditures and competitive pricing pressures. There can be no
assurance that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Such fluctuations may
result in volatility in the price of the Company's Common Stock.
Relationships With Other Entities; Conflicts of Interest
Mr. John N. Kapoor, Ph.D., the Company's Chairman of the Board is
affiliated with EJ Financial Enterprises, Inc., a health care investment firm
("EJ Financial"). EJ Financial is involved in the management of health care
companies in various fields, and Dr. Kapoor is involved in various capacities
with the management and operation of these companies. The John N. Kapoor Trust,
the beneficiary of which is Dr. Kapoor, is a principal shareholder of each of
these companies. As a result, Dr. Kapoor devotes limited time to the business of
the Company. Although such companies do not currently compete directly with the
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Company, certain companies with which EJ Financial is involved are in the
pharmaceutical business. Discoveries made by one or more of these companies
could render the Company's products less competitive or obsolete. Potential
conflicts of interest could have a material adverse effect on the Company's
business, financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in interest
rates. The Company's interest rate exposure is limited to interest rate changes
on its revolving credit agreement. The revolving credit agreement bears interest
at rates which fluctuate at the federal funds rate or LIBOR plus an applicable
percentage, depending upon certain financial ratios. All of the Company's
remaining long-term debt is at fixed interest rates. The Company believes that
reasonable possibly near-term changes in interest rates would not have a
material effect on the Company's financial position, results of operations and
cash flows.
The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable and debt. The carrying amount of these instruments,
except debt, approximate fair value due to their short-term nature. The
estimated fair value of the Company's debt instruments is based upon rates
currently available to the Company for debt with similar terms and remaining
maturities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included in Part II, Item 8 of this
Form 10-K.
Report of Independent Auditors.............................. 19
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 20
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... 21
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 23
Notes to Consolidated Financial Statements.................. 24
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REPORT OF 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, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 respects, the financial position of Akorn, Inc. and subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 25, 2000
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AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------
1999 1998
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 25 $ 736
Trade accounts receivable (less allowance for
uncollectibles of $226 and $425 at December 31, 1999
and 1998, respectively)................................ 17,695 11,165
Inventory................................................. 16,473 11,004
Deferred income taxes..................................... 803 932
Prepaid expenses and other assets......................... 855 1,111
------- -------
TOTAL CURRENT ASSETS................................... 35,851 24,948
------- -------
OTHER ASSETS
Intangibles, net.......................................... 19,412 20,541
Other..................................................... 23 67
------- -------
TOTAL OTHER ASSETS..................................... 19,435 20,608
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 20,812 15,860
------- -------
TOTAL ASSETS........................................... $76,098 $61,416
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of long-term debt.................... $ 1,305 $ 7,284
Current portion of capital lease obligations.............. 41 161
Trade accounts payable.................................... 4,523 3,476
Income taxes payable...................................... 1,606 1,472
Accrued compensation...................................... 1,049 858
Accrued expenses and other liabilities.................... 1,169 657
------- -------
TOTAL CURRENT LIABILITIES.............................. 9,693 13,908
------- -------
Long-term debt.............................................. 30,643 20,448
Capital lease obligations................................... -- 42
Deferred income taxes....................................... 1,372 738
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value -- authorized 5,000,000
shares; none issued
Common stock, no par value -- authorized 40,000,000
shares; issued and outstanding 18,650,990 and
18,121,514 shares at December 31, 1999 and 1998,
respectively........................................... 19,392 17,952
Retained earnings......................................... 14,998 8,328
------- -------
TOTAL SHAREHOLDERS' EQUITY............................. 34,390 26,280
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $76,098 $61,416
======= =======
See notes to consolidated financial statements.
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AKORN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
Net sales................................................... $64,632 $56,667 $42,323
Cost of goods sold.......................................... 31,155 27,607 23,547
------- ------- -------
GROSS PROFIT.............................................. 33,477 29,060 18,776
Selling, general and administrative expenses................ 16,733 13,291 11,949
Amortization of intangibles................................. 1,878 2,315 338
Research and development.................................... 2,744 4,010 1,873
Relocation costs............................................ -- -- 1,451
------- ------- -------
21,355 19,616 15,611
------- ------- -------
OPERATING INCOME.......................................... 12,122 9,444 3,165
Interest and other income (expense):
Interest income........................................... 31 1 41
Interest expense.......................................... (1,921) (1,451) (497)
Offering costs............................................ -- (350) --
Gain on sale of fixed assets.............................. 275 -- --
Other income, net......................................... 132 42 135
------- ------- -------
(1,483) (1,758) (321)
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 10,639 7,686 2,844
Income taxes................................................ 3,969 3,039 1,052
------- ------- -------
NET INCOME.................................................. $ 6,670 $ 4,647 $ 1,792
------- ------- -------
NET INCOME PER SHARE:
BASIC................................................... $ 0.37 $ 0.26 $ 0.11
------- ------- -------
DILUTED................................................. $ 0.36 $ 0.25 $ 0.11
======= ======= =======
Weighted average shares outstanding:
Basic..................................................... 18,269 17,891 16,614
======= ======= =======
Diluted................................................... 18,573 18,766 16,925
======= ======= =======
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
Earnings
Income applicable to common stock......................... $ 6,670 $ 4,647 $ 1,792
======= ======= =======
Shares
Weighted average number of shares outstanding............. 18,269 17,891 16,614
Net income per share -- basic............................... $ 0.37 $ 0.26 $ 0.11
======= ======= =======
Additional shares assuming conversion of options.......... 304 875 311
------- ------- -------
Weighted average diluted shares........................... 18,573 18,766 16,925
Net income per share -- diluted............................. $ 0.36 $ 0.25 $ 0.11
======= ======= =======
See notes to consolidated financial statements.
21
23
AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
---------------------
SHARES RETAINED TREASURY
OUTSTANDING AMOUNT EARNINGS STOCK TOTAL
----------- ------- -------- -------- -------
Balances at December 31, 1996................. 16,592 $14,174 $ 2,231 $ (31) $16,374
Net income.................................... 1,792 1,792
Exercise of stock options..................... 22 46 46
Exercise of warrant........................... 1,000 2,000 2,000
Treasury stock reissued....................... 9 (13) 31 18
Employee stock purchase plan.................. 7 21 21
------ ------- ------- ----- -------
Balances at December 31, 1997................. 17,630 16,241 4,010 -- 20,251
Net income.................................... 4,647 4,647
Treasury stock received in lieu of cash....... (56) (465) (465)
Exercise of stock options..................... 484 1,649 1,649
Treasury stock reissued....................... 56 (329) 465 136
Employee stock purchase plan.................. 8 62 -- -- 62
------ ------- ------- ----- -------
Balances at December 31, 1998................. 18,122 17,952 8,328 -- 26,280
Net income.................................... 6,670 6,670
Treasury stock received in lieu of cash....... (9) (35) (35)
Exercise of stock options..................... 478 1,228 1,228
Management bonus paid in stock................ 27 109 109
Treasury stock reissued....................... 9 (6) 35 29
Employee stock purchase plan.................. 32 109 -- -- 109
------ ------- ------- ----- -------
Balances at December 31, 1999................. 18,659 $19,392 $14,998 $ -- $34,390
====== ======= ======= ===== =======
See notes to consolidated financial statements.
22
24
AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- -------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 6,670 $ 4,647 $ 1,792
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,161 3,615 1,515
Gain on disposal of fixed assets....................... (245) -- --
Stock bonus............................................ 109 -- --
Provision for losses on accounts receivable and
inventory............................................ -- -- 1,188
Deferred income taxes.................................. 763 307 34
Write down of building and equipment................... -- -- 400
Other.................................................. (6) -- 43
Changes in operating assets and liabilities:
Accounts receivable.................................. (6,992) (5,736) (4,170)
Inventory, prepaid expenses and other assets......... (5,213) (1,770) (2,235)
Trade accounts payable and accrued expenses.......... 1,750 (980) 1,721
Income taxes payable................................. 134 1,010 461
Pre-funded development costs......................... -- -- (685)
-------- -------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... 131 1,093 64
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (6,157) (4,765) (1,154)
Proceeds from disposal of fixed assets...................... 629 -- --
Product licensing costs..................................... (705) (1,820) (68)
Sales of investments........................................ -- 96 480
Purchase of product intangibles............................. -- (7,179) (5,645)
-------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES....................... (6,233) (13,668) (6,387)
FINANCING ACTIVITIES
Proceeds from exercise of stock options..................... 1,337 1,102 2,085
Repayments of long-term debt................................ (22,584) (2,583) (33)
Proceeds from issuance of long-term debt.................... 26,800 14,404 3,955
Principal payments under capital lease obligations.......... (162) (149) (151)
Short-term borrowings, net.................................. -- (1,750) 1,500
Debt acquisition costs...................................... -- (126) --
-------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 5,391 10,898 7,356
-------- -------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (711) (1,677) 1,033
Cash and cash equivalents at beginning of year.............. 736 2,413 1,380
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 25 $ 736 $ 2,413
======== ======== =======
See notes to consolidated financial statements.
23
25
AKORN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The accompanying consolidated financial statements include
the accounts of Akorn, Inc. and its wholly owned subsidiaries (the Company),
Compass Vision, Inc. (Compass), Spectrum Scientific Pharmaceuticals, Inc.
(Spectrum), Walnut Pharmaceuticals, Inc. (Walnut) and Akorn (New Jersey), Inc.
Balances and activities of Compass, Spectrum and Walnut are immaterial.
Intercompany transactions and balances have been eliminated in consolidation.
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.
Significant estimates and assumptions relate to the reserve for wholesaler
chargebacks, the reserve for slow-moving and obsolete inventory and the carrying
value of intangible assets.
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.
Inventory: Inventory is stated at the lower of cost (average cost method)
or market (see Note E). Provision is made for slow-moving, unsalable or obsolete
items.
Stock Compensation Plans: The Company has an Incentive Compensation Plan
under which any officer or key employee is eligible to receive options as
designated by the Company's Board of Directors. The Company also has a Stock
Option Plan for directors under which directors are granted nonqualified
options.
Intangibles: Intangibles consist primarily of product licensing and other
such costs which are capitalized and amortized on the straight line method over
the lives of the related license periods or the estimated life of the acquired
product, which range from 17 months to 18 years. Accumulated amortization at
December 31, 1999 and 1998 was $4,523,000 and $2,976,000, respectively.
The Company annually assesses the impairment of intangibles based on
several factors, including probable fair market value and anticipated cash
flows.
Property, Plant and Equipment: Property, plant and equipment is 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.
Accrual for Chargebacks: The Company accrues an estimate of the difference
between the gross sales price of certain products sold to wholesalers and
expected resale prices of such products under contractual arrangements with
third parties such as hospitals and group purchasing organizations at the time
of sale. As part of the Company's sales terms to wholesale customers, it agrees
to reimburse wholesalers for such differentials between wholesale prices and
contract prices. Because this accrual relates to amounts not yet collected from
the wholesalers, this accrual is recorded as a reduction of accounts receivable.
Income Taxes: The Company files a consolidated federal income tax return
with all of its subsidiaries. Deferred income taxes are provided in the
financial statements 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.
Fair Value of Financial Instruments: The Company's financial instruments
include cash, accounts receivable, accounts payable and term debt. The fair
values of cash, accounts receivable and accounts payable approximate fair value
because of the short maturity of these instruments. The carrying amounts of the
24
26
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Company's bank borrowings under its credit facility approximate fair value
because the interest rates are reset periodically to reflect current market
rates.
Net Income Per Common Share: Basic net income per common share is based
upon weighted average common shares outstanding. Diluted net income per common
share is based upon the weighted average number of common shares outstanding,
including the dilutive effect of stock options and warrants using the treasury
stock method.
NOTE B -- NONCASH TRANSACTIONS
On August 26, 1999, a former employee exercised options for 23,352 shares
of the Company's common stock. The individual tendered approximately 8,800
shares of the Company's outstanding stock as consideration for the option
exercise, which was recorded as treasury stock. The net effect of this
transaction was to increase common stock and paid in capital by $35,028 and
increase treasury stock by $35,028.
In July 1998, the Company financed the acquisition of four product licenses
with long-term debt in the amount of $3.332 million.
On June 5, 1998, a former employee exercised options for 105,000 shares of
the Company's common stock. The individual tendered approximately 22,000 shares
of the Company's outstanding stock as consideration for the option exercise and
approximately 33,000 shares to satisfy the personal income tax withholding
requirements of the transaction, all of which was recorded as treasury stock.
The net effect of this transaction was to increase accrued liabilities by
$280,000, increase common stock and paid in capital by $185,000, and increase
treasury stock by $465,000.
On March 31, 1998, the Company financed the acquisition of two product
licenses with long-term debt in the amount of $3.905 million.
NOTE C -- PRODUCT AND OTHER ACQUISITIONS
In March 1999, the Company purchased Paredrine from Pharmics for $62,500 in
cash. The acquisition cost has been allocated to intangibles and will be
amortized over 15 years.
On February 1, 1999, the Company paid $400,000 in cash to Eastman Kodak to
license IC Green raw material manufacturing processes. The acquisition cost has
been allocated to intangibles and will be amortized over 15 years.
On August 1, 1998, the Company entered into an agreement to purchase three
ophthalmic products, Fluress, Ful-Glo and Rose Bengal, from Allergan, Inc. The
total purchase price was $4,650,000 with $2,000,000 paid in cash upon closing
and two additional payments of $1,500,000 and $1,150,000 payable on the next two
anniversaries of the closing date. The Company is imputing interest on these
payments with a 7.5 percent interest rate. The acquisition cost has been
allocated to intangibles and will be amortized over 15 years.
In July 1998, the Company acquired certain assets of Advanced Remedies,
Inc. (ARI) for approximately $3,750,000. The purchase price included, in
addition to capital equipment, all Abbreviated New Drug Applications (ANDAs) for
any product previously approved for ARI or under review by the FDA. The purchase
price also included regulatory files for products under development by ARI but
not yet filed with the FDA. The total purchase price was allocated to ANDAs,
$3,000,000 with amortization over 15 years, and tangible assets, $750,000 with
asset depreciation up to ten years.
On January 21, 1998, the Company announced the purchase of the New Drug
Application (NDA), trademark and U.S. trade name rights to Paremyd, a topical
mydriatic combination product, from Allergan. Paremyd had been off the market
for all of 1997 due to a raw material shortage. The Company is awaiting FDA
approval to manufacture the product. The total purchase price was $700,000, with
$500,000 paid in cash upon closing and $200,000 payable upon receipt of an
approved supplement from the FDA or twelve months
25
27
NOTE C -- PRODUCT AND OTHER ACQUISITIONS -- (CONTINUED)
from closing, whichever is sooner. The acquisition cost has been allocated to
intangibles and will be amortized over 15 years.
On January 13, 1998, the Company announced the purchase of two branded
injectable products, Sufenta and Alfenta, from Janssen Pharmaceutica, Inc. The
products are injectable opioid analgesics indicated for use in the induction and
maintenance of general anesthesia. Both were NDA products, and Alfenta remains
covered under patent. The total purchase price was $6,600,000, with $2,200,000
paid in cash upon closing and two additional payments of $2,200,000 payable on
the next anniversary of the closing date and on December 29, 1999, respectively.
The second two payments were secured by irrevocable bank letters of credit,
which were issued under the revolving credit facility (see Note H). The
acquisition cost has been allocated to intangibles and will be amortized for 17
months (patent) and 15 years.
NOTE D -- ALLOWANCE FOR UNCOLLECTIBLES
The activity in the allowance for uncollectibles for the periods indicated
is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
---- ---- -----
Balance at beginning of year................................ $425 $522 $ 359
Provision for bad debts..................................... 161 50 285
Specific reversal of doubtful account....................... (300) -- --
Accounts written off........................................ (60) (147) (122)
---- ---- -----
Balance at end of year...................................... $226 $425 $ 522
==== ==== =====
NOTE E -- INVENTORY
The components of inventory are as follows (in thousands):
DECEMBER 31,
-----------------
1999 1998
------- -------
Finished goods.............................................. $10,316 $ 6,947
Work in process............................................. 2,179 2,635
Raw materials and supplies.................................. 3,978 1,422
------- -------
$16,473 $11,004
======= =======
Inventory at December 31, 1999 and 1998 is reported net of reserves for
slow-moving, unsalable and obsolete items of $134,000 and $572,000,
respectively.
26
28
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
1999 1998
-------- --------
Land........................................................ $ 396 $ 479
Buildings and leasehold improvements........................ 7,763 7,544
Furniture and equipment..................................... 17,955 15,984
Automobiles................................................. 55 32
-------- --------
26,169 24,039
Accumulated depreciation.................................... (11,677) (10,744)
-------- --------
14,492 13,295
Construction in progress.................................... 6,320 2,565
-------- --------
$ 20,812 $ 15,860
======== ========
Construction in progress represents capital expenditures principally
related to the Company's lyophilization project which will enable the Company to
perform processes in-house which are currently being performed by a
sub-contractor. The Company is committed to $1.4 million in additional
construction costs.
NOTE G -- PRE-FUNDED DEVELOPMENT COSTS
As part of a cross-licensing agreement with Pfizer, Inc. (Pfizer), the
Company was paid an advance of $1 million to be used to fund the costs of
developing a non-steroidal anti-inflammatory drug for ophthalmic indications.
During the twelve months ended December 31, 1997, the Company incurred
development costs of $534,696 which were charged against the pre-funded balance.
NOTE H -- FINANCING ARRANGEMENTS
The Company's long-term debt consists of (in thousands):
DECEMBER 31,
-----------------
1999 1998
------- -------
Payable under lines of credit............................... $28,200 $16,700
Mortgages payable secured by real property located in
Decatur, Illinois......................................... 2,678 2,897
Notes payable secured by various assets, with maturities
through 2000 at interest rates ranging from 7.5% to
10.25%.................................................... 1,070 8,135
------- -------
31,948 27,732
Less current portion........................................ 1,305 7,284
------- -------
Long-term debt.............................................. $30,643 $20,448
======= =======
Maturities of debt are as follows (in thousands):
Year ending December 31:
2000........................................................ $ 1,305
2001........................................................ 28,453
2002........................................................ 273
2003........................................................ 293
2004........................................................ 316
Thereafter.................................................. 1,308
-------
Total............................................. $31,948
=======
27
29
In December 1997, the Company entered into a $15,000,000 revolving credit
agreement with The Northern Trust Company, which was increased to $25,000,000 on
June 30, 1998 and to $45,000,000 on December 28, 1999, of which there were
outstanding borrowings of $28,200,000 and letters of credit of $35,000 at
December 31, 1999. The total outstanding principal balance is payable in full on
December 28, 2001. Outstanding borrowings under this facility currently bear
interest at the federal funds rate or LIBOR plus an applicable percentage,
depending on certain financial ratios, which interest rate was 5.365% at
December 31, 1999.
The agreement provides that an annual commitment fee be paid by the Company
based on 0.25% of the average daily unused amount of the facility. The agreement
also requires the Company to maintain certain financial covenants including, but
not limited to: minimum net income, minimum net worth, minimum cash flow
coverage and maximum funded debt to EBITDA. The agreement prohibits the Company
from declaring any cash dividends on its common stock. The revolving credit
facility is secured by substantially all of the assets of the Company and its
subsidiaries, excluding real property located in Decatur, Illinois.
On June 1, 1998, the Company entered into a $3,000,000 mortgage agreement
with Standard Mortgage Investors, LLC of which there were outstanding borrowings
of $2,678,000 at December 31, 1999. The principal balance is amortized over 10
years, with the final payment due in June 2007. The mortgage note bears an
interest rate of 7.375% and is secured by the real property located in Decatur,
Illinois.
On August 1, 1998, the Company entered into an agreement to purchase three
ophthalmic products from Allergan, Inc. The total purchase price was $4,650,000
with $2,000,000 paid in cash upon closing and two additional payments of
$1,500,000 and $1,150,000 payable on the next two anniversaries of the closing
date. The Company is imputing interest on these payments with a 7.5% interest
rate.
NOTE I -- 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 (in thousands):
DECEMBER 31,
-------------
1999 1998
----- -----
Furniture and equipment..................................... $ 806 $ 806
Less accumulated depreciation............................... (697) (540)
----- -----
$ 109 $ 266
===== =====
Depreciation expense provided on these assets was $157,034, for each of the
years ended December 31, 1999, 1998 and 1997.
The following is a schedule, by year, of future minimum lease payments
under these capital leases together with the present value of the net minimum
lease payments (in thousands):
Year ending December 31, 2000............................... $43
---
Total Minimum Lease Payments................................ 43
Less: Amount Representing Interest.......................... (2)
---
Present Value of Net Minimum Lease Payments................. $41
===
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 $906,167, $570,288,
and $289,276 for the years ended December 31, 1999, 1998 and 1997, respectively.
The following is a schedule, by year, of future minimum rental payments
required under these non-cancelable operating leases (in thousands):
28
30
NOTE I -- LEASING ARRANGEMENTS -- (CONTINUED)
Years ended December 31,
2000........................................................ $ 627
2001........................................................ 900
2002........................................................ 606
2003........................................................ 302
2004........................................................ 290
2005........................................................ 286
2006........................................................ 286
2007........................................................ 286
2008........................................................ 24
------
Total Minimum Payments Required............................. $3,607
======
The Company currently sub-lets portions of its leased space. Rental income
under these sub-leases was $211,043 in 1999 and $41,160 in 1998.
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Under the 1988 Incentive Compensation Program (the "Incentive Program") any
officer or key employee of the Company is eligible to receive options as
designated by the Company's Board of Directors. As of December 31, 1999,
4,500,000 shares of the Company's Common Stock are reserved to be issued under
the Incentive Program. The exercise price of the options granted under the
Incentive Program may not be less than 50 percent of the fair market value of
the shares subject to the option on the date of grant, as determined by the
Board of Directors. All options granted under the Incentive Program during the
years ended December 31, 1999, 1998 and 1997 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.
Under the 1991 Stock Option Plan for Directors (the "Directors' Plan")
persons elected as directors of the Company are granted nonqualified options at
the fair market value of the shares subject to option on the date of the grant.
As of December 31, 1999, 500,000 shares of the Company's Common Stock are
reserved to be issued under the Directors' Plan. 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,
1999, 1998 and 1997 and changes during the years ended December 31, 1999, 1998
and 1997 is presented below (shares in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of period.......................... 1,952 $ 3.16 1,899 $2.35 1,281 $2.35
Granted..................................................... 777 $ 4.53 784 $5.18 927 $2.38
Exercised................................................... (478) $ 2.71 (530) $2.20 (22) $2.13
Expired/Canceled............................................ (350) $ 4.19 (201) $5.96 (287) $2.46
------ ------ -----
Outstanding at end of period................................ 1,901 $ 3.64 1,952 $3.16 1,899 $2.35
====== ====== =====
Options exercisable at end of period........................ 1,088 $ 3.19 1,033 $2.87 1,086 $2.35
Options available for future grant.......................... 1,736 2,163 1,246
Weighted average fair value of options granted during the
period.................................................... $ 2.37 $2.58 $1.04
The fair value of each option granted during the year ended December 31,
1999 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 51%, (iii) risk-free interest rate of 6.5% and (iv) expected life
of 5 years.
29
31
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN -- (CONTINUED)
The fair value of each option granted during the year ended December 31,
1998 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 55%, (iii) risk-free interest rate of 5.75% and (iv) expected life
of 5 years.
The fair value of each option granted during the year ended December 31,
1997 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 39%, (iii) risk-free interest rate of 5.75% and (iv) expected life
of 5 years.
The following table summarizes information about stock options outstanding
at December 31, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- ------------------------ -------------- ---------------- ---------------- -------------- ----------------
$1.50....................... 65 0.7 years $ 1.50 65 $ 1.50
$1.75 -- $2.12.............. 5 2.5 years $ 2.12 4 $ 2.12
$2.13 -- $2.20.............. 412 2.3 years $ 2.15 349 $ 2.14
$2.28 -- $2.54.............. 144 2.3 years $ 2.36 112 $ 2.36
$2.63 -- $2.81.............. 134 2.0 years $ 2.73 122 $ 2.73
$2.88 -- $3.94.............. 100 3.9 years $ 3.92 51 $ 3.92
$3.97 -- $4.60.............. 610 3.9 years $ 4.18 236 $ 4.16
$4.69 -- $5.56.............. 411 4.0 years $ 5.13 129 $ 5.22
$8.00 -- $8.38.............. 20 3.4 years $ 8.38 20 $ 8.38
----- --------
1,901 1,088
===== ========
The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option plans.
Had compensation cost for the Company's stock-based compensation plans been
determined based on Statement of Financial Accounting Standards ("SFAS") No.
123, the Company's net income and net income per share for the years ended
December 31, 1999, 1998 and 1997 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- --------
Net income,(loss)......................... $6,670 $5,939 $4,647 $4,110 $1,792 $1,441
====== ====== ====== ====== ====== ======
Net income per share - diluted............ $ 0.36 $ 0.32 $ 0.25 $ 0.22 $ 0.11 $ 0.09
====== ====== ====== ====== ====== ======
The Akorn, Inc. Employee Stock Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions not
exceeding 15% of base wages, at a 15% discount from market price. A maximum of
1,000,000 shares of the Company's common stock may be acquired under the terms
of the Plan. Purchases of shares issued from treasury stock approximated 7,000,
8,000 and 9,000 shares, respectively, during the years ended December 31, 1999,
1998 and 1997. New shares issued under the plan approximated 26,000 in 1999,
8,000 in 1998 and 11,000 in 1997.
NOTE K -- INCOME TAXES
The income tax provision (benefit) consisted of the following (in
thousands):
30
32
NOTE K -- INCOME TAXES -- (CONTINUED)
CURRENT DEFERRED TOTAL
------- -------- ------
Year ended December 31, 1999:
Federal................................................... $2,561 $ 636 $3,197
State..................................................... 645 127 772
------ ----- ------
$3,206 $ 763 $3,969
====== ===== ======
Year ended December 31, 1998:
Federal................................................... $2,124 $ 359 $2,483
State..................................................... 608 (52) 556
------ ----- ------
$2,732 $ 307 $3,039
====== ===== ======
Year ended December 31, 1997:
Federal................................................... $1,005 $ (79) $ 926
State..................................................... 13 113 126
------ ----- ------
$1,018 $ 34 $1,052
====== ===== ======
Income tax expense differs from the "expected" tax expense computed by
applying the U.S. Federal corporate income tax rate of 34% to income before
income taxes as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Computed "expected" tax expense............................. $3,618 $2,613 $ 947
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefits.... 510 371 85
Other, net................................................ (159) 55 20
------ ------ ------
Income tax expense.......................................... $3,969 $3,039 $1,052
====== ====== ======
Deferred tax assets (liabilities) at December 31, 1999 and 1998 include (in
thousands):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Other accrued expenses...................................... $ 432 $ 621
Intangible assets, net...................................... 246 214
Property, plant and equipment, net.......................... (1,735) (1,208)
Other, net.................................................. 488 567
------- -------
$ (569) $ 194
======= =======
The deferred taxes are classified in the accompanying balance sheets as
follows (in thousands):
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Deferred tax asset - current................................ $ 803 $ 932
Deferred tax liability - noncurrent......................... (1,372) (738)
------- -----
$ (569) $ 194
======= =====
NOTE L -- CHANGES IN ACCOUNTING ESTIMATES
The Company accrues an estimate of the difference between the gross sales
price of certain products sold to wholesalers and expected resale prices of such
products under contractual arrangements with third parties such as hospitals and
group purchasing organizations at the time of sale. This reserve is carried as a
reduction
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NOTE L -- CHANGES IN ACCOUNTING ESTIMATES -- (CONTINUED)
of accounts receivable. The Company evaluates the reserve balance against actual
chargebacks processed by wholesalers. Actual chargebacks processed can vary
substantially from period to period. The acquisition of two injectable
anesthesia products from Janssen Pharmaceutica in the third quarter of 1996
resulted in a substantial increase in chargeback activity. Initial receipt of
actual chargeback requests from wholesalers was sporadic during 1996. By
year-end 1997, management felt that chargeback activity for these products had
stabilized and that sufficient data had been obtained to validate adjustments to
chargeback accrual assumptions. During the fourth quarter of the year ended
December 31, 1997, the Company revised its assumptions underlying the reserve
for chargebacks, resulting in an increase in net sales of $1,300,000.
The Company records a reserve for slow-moving and obsolete inventory based
upon evaluation of product dating and unit sales forecasts. In 1999, the Company
incurred $328,000 in charges for unsalable product. Throughout 1999, the Company
evaluated its estimate for unsalable product resulting in an estimate decrease
of approximately $206,000. This reduction in the reserve balance reflects more
timely destruction of obsolete product. During 1998, the Company evaluated its
estimate for unsalable product resulting in an estimate increase of
approximately $665,000.
During the quarter ended December 31, 1997, the Company increased its
estimate for management bonuses by approximately $300,000.
NOTE M -- RETIREMENT PLAN
All employees who have attained the age of 21 with six months of service
are eligible for participation in the Company's 401(k) Plan. The plan-related
expense recognized for the years ended December 31, 1999, 1998 and 1997 totaled
$220,203, $89,020 and $65,704, respectively. The employer's matching
contribution is a percentage of the amount contributed by each employee and is
funded on a current basis.
NOTE N -- INDUSTRY SEGMENT INFORMATION
The Company classifies its operations into two business segments,
ophthalmic and injectable. The ophthalmic segment manufactures, markets and
distributes diagnostic and therapeutic pharmaceuticals and surgical instruments
and related supplies. The injectable segment manufactures, markets and
distributes
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NOTE N -- INDUSTRY SEGMENT INFORMATION -- (CONTINUED)
injectable pharmaceuticals, primarily in niche markets. Selected financial
information by industry segment is presented below (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
NET SALES
Ophthalmic.................................................. $32,467 $29,205 $24,901
Injectable.................................................. 32,165 27,462 17,422
------- ------- -------
Total net sales........................................... $64,632 $56,667 $42,323
======= ======= =======
OPERATING INCOME
Ophthalmic.................................................. $ 4,338 $ 4,219 $ 1,598
Injectable.................................................. 9,208 6,364 2,428
General Corporate........................................... (1,424) (1,139) (861)
------- ------- -------
Total operating income.................................... 12,122 9,444 3,165
Interest and other (expense), net........................... (1,483) (1,758) (321)
------- ------- -------
Income before income taxes.................................. $10,639 $ 7,686 $ 2,844
======= ======= =======
IDENTIFIABLE ASSETS
Ophthalmic.................................................. $38,206 $34,538 $20,957
Injectable.................................................. 37,892 26,878 17,758
------- ------- -------
Total identifiable assets................................. $76,098 $61,416 $38,715
======= ======= =======
DEPRECIATION AND AMORTIZATION
Ophthalmic.................................................. $ 1,738 $ 1,009 $ 516
Injectable.................................................. 1,293 2,632 999
------- ------- -------
Total depreciation and amortization....................... $ 3,031 $ 3,641 $ 1,515
======= ======= =======
For the year ended December 31, 1997, operating income for the ophthalmic
segment includes non-recurring charges of $1,451,000 related to the relocation
of the division from Abita Springs, Louisiana to the Chicago area. The charges
primarily relate to severance, $494,000, and retention bonus payments, $151,000
as well as a write-down of the Abita Springs facility and equipment to net
realizable value, $378,000 and moving relocation costs, $144,000. For the same
period, operating income for the injectable segment includes non-recurring
charges of $213,000 related to a change in an estimate of the timing of
absorption of manufacturing overhead.
The Company records sales between the segments at fully absorbed cost.
NOTE O -- COMMITMENTS AND CONTINGENCIES
The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. Despite the inherent uncertainties of
litigation, management of the Company at this time does not believe that such
proceedings will have a material adverse impact on the consolidated financial
position, results of operations, or cash flows of the Company.
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NOTE P -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
Interest and taxes paid:
Interest.................................................. $1,245 $1,121 $ 592
Income taxes.............................................. 2,860 1,167 788
Noncash investing and financing activities:
Treasury stock received for exercise of stock options..... 35 465 --
Notes issued for product acquisitions..................... -- 6,741 3,250
NOTE Q -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning directors and compliance with Section 16(a) of the
Exchange Act is incorporated by reference to the Company's Definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders. Information concerning
the Company's executive officers is included in Item 1A of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to executive compensation is
hereby incorporated by reference from the information appearing under the
caption "Executive Compensation" in the Company's definitive Proxy Statement
which is to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days of the Company's fiscal year ended December 31,
1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership of management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Transactions with Shareholders and Directors" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1999.
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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.
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
(2.0) 10-K for the fiscal year ended June 30, 1996.
Restated Articles of Incorporation of the Company dated
September 6, 1991, incorporated by reference to Exhibit 3.1
to the Company's report on Form 10-K for the fiscal year
(3.1) ended June 30, 1991.
Articles of Amendment to Articles of Incorporation of the
company dated February 28, 1997, incorporated by reference
to Exhibit 3.2 to the Company's report on Form 10-K for the
(3.2) transition period from July 1, 1996 to December 31, 1996.
Current Composite of By-laws of the Company, incorporated by
reference to Exhibit 3.3 to the Company's report on Form
10-K for the transition period from July 1, 1996 to December
(3.3) 31, 1996.
Specimen Common Stock Certificate, incorporated by reference
to Exhibit 4.1 to the Company's report on Form 10-K for the
(4.1) fiscal year ended June 30, 1988.
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 10.24
to the Company's report on Form 10-K for the fiscal year
(10.1) ended June 30, 1991.
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
(10.2) fiscal year ended June 30, 1992.
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
(10.3) 33-44785.
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
(10.4) dated September 20, 1989.
*Amended and Restated Credit Agreement dated September 15,
1999 among the Company, Akorn (New Jersey), Inc. and The
(10.5) Northern Trust Company (the "Credit Agreement")
*Amendment No. 1 to the Credit Agreement dated December 28,
(10.6) 1999.
(21.1) *Subsidiaries of the Company
(23.1) *Consent of Deloitte & Touche LLP
(27) *Financial Data Schedule
(b) Reports on Form 8-K
None.
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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/ FLOYD BENJAMIN
------------------------------------
Floyd Benjamin
Chief Executive Officer
Date: March 28, 2000
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/ FLOYD BENJAMIN Chief Executive Officer and Director March 28, 2000
- --------------------------------------------- (Principal Executive Officer)
Floyd Benjamin
/s/ RITA J. MCCONVILLE Chief Financial Officer March 28, 2000
- --------------------------------------------- (Principal Financial Officer and
Rita J. McConville Principal Accounting Officer)
/s/ JOHN N. KAPOOR, PH.D. Director March 28, 2000
- ---------------------------------------------
John N. Kapoor, Ph.D.
/s/ DANIEL E. BRUHL, M.D. Director March 28, 2000
- ---------------------------------------------
Daniel E. Bruhl, M.D.
/s/ DOYLE S. GAW Director March 28, 2000
- ---------------------------------------------
Doyle S. Gaw
37