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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER: 0-13976
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AKORN, INC.
(Exact Name of Registrant as Specified in its Charter)
LOUISIANA 72-0717400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2500 MILLBROOK DRIVE
BUFFALO GROVE, ILLINOIS 60089
(Address of Principal Executive Offices) (Zip Code)
(847) 279-6100
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The financial statements included in this Form 10-Q have not been
reviewed by independent public accountants in accordance with Rule 10-01(d) of
Regulation S-X. See Explanatory Note on Page 2.
At July 22, 2002 there were 19,617,467 shares of common stock, no par
value, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE
----
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001................... 3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2002 and 2001..... 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001............... 5
Notes to Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 17
ITEM 2. Changes in Securities and Use of Proceeds.................... 17
ITEM 3. Default Upon Senior Securities............................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 18
ITEM 5. Other Information............................................ 18
ITEM 6. Exhibits and Reports on Form 8-K............................. 18
1
EXPLANATORY NOTE
The Securities and Exchange Commission ("SEC") has previously informed the
Company of a proposed enforcement action (See Part II Item 1. "Legal
Proceedings"), which alleges that the Company's accounts receivable were
overstated as of December 31, 2000. On August 14, 2002, the Company reached
agreement with the Office of Chief Accountant ("OCA") of the SEC to restate the
Company's financial statements for the years ended 2000 and 2001. As a result,
pending the restatement, the previously issued financial statements for those
periods, including any interim periods within such periods, as well as the audit
report covering the financial statements for the calendar years ended December
31, 2000 and 1999, should not be relied upon. Further, until such restatement is
complete, the Company's auditors, Deloitte & Touche LLP, are unwilling to give
an opinion on the Company's consolidated financial statements and notes thereto
for December 31, 2001 and 2000 and the years then ended or to review the
Company's interim financial statements for the period ended March 31, 2002 and
the three and six month period ended June 30, 2002. As a result, independent
public accountants have not reviewed the financial statements and notes thereto
included in this Form 10-Q in accordance with Rule 10-01(d) of Regulation S-X.
In addition, while the Company believes that the unaudited consolidated
financial statements and notes to consolidated financial statements included
herewith contain all the information and necessary adjustments for a fair
presentation of these financial statements and footnotes, because of the need to
restate the financial statements for 2001, the Company is unable to provide the
certification required by Section 906 of the Sarbanes-Oxley Act of 2002.
However, as the restatement relates to matters in prior fiscal years, it is not
anticipated that the restatement will have any material impact on the Company's
Consolidated Balance Sheet as of June 30, 2002 or on the Company's future
operating results.
2
PART I. FINANCIAL INFORMATION
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................................. $ 4,900 $ 5,355
Trade accounts receivable (less allowance
for uncollectibles of $1,292 and $3,706) ........................... 5,493 5,902
Inventory .............................................................. 10,173 8,135
Deferred income taxes .................................................. 2,069 2,069
Income taxes recoverable ............................................... 666 6,540
Prepaid expenses and other assets ...................................... 748 579
-------- --------
TOTAL CURRENT ASSETS ............................................... 24,049 28,580
OTHER ASSETS
Intangibles, net ....................................................... 17,097 18,485
Investment in Novadaq Technologies Inc. ................................ 6,040 -
Deferred income taxes .................................................. 3,813 3,765
Other .................................................................. 113 113
-------- --------
TOTAL OTHER ASSETS ................................................. 27,063 22,363
PROPERTY, PLANT AND EQUIPMENT, NET ............................................ 34,964 33,518
-------- --------
TOTAL ASSETS ....................................................... $ 86,076 $ 84,461
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of long-term debt ................................. $ 39,483 $ 45,072
Trade accounts payable ................................................. 5,627 3,035
Accrued compensation ................................................... 948 760
Accrued expenses and other liabilities ................................. 2,260 4,070
-------- --------
TOTAL CURRENT LIABILITIES .......................................... 48,318 52,937
LONG-TERM DEBT ................................................................ 8,847 8,861
DEFERRED REVENUE .............................................................. 5,350 -
OTHER LONG-TERM LIABILITIES ................................................... 444 205
-------- --------
TOTAL LIABILITIES .................................................. 62,959 62,003
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock ........................................................... 25,127 24,884
Retained earnings ...................................................... (2,010) (2,426)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ......................................... 23,117 22,458
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $ 86,076 $ 84,461
======== ========
See notes to condensed consolidated financial statements.
3
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Revenues ................................... $ 14,445 $ 10,637 $ 28,038 $ 16,713
Cost of goods sold ......................... 7,799 8,128 14,893 19,987
-------- -------- -------- --------
GROSS PROFIT (LOSS) ..................... 6,646 2,509 13,145 (3,274)
Selling, general and administrative expenses 4,635 10,754 9,240 23,585
Amortization of intangibles ................ 355 362 698 719
Research and development ................... 562 642 982 1,799
-------- -------- -------- --------
TOTAL OPERATING EXPENSES ................ 5,552 11,758 10,920 26,103
-------- -------- -------- --------
OPERATING INCOME (LOSS) ................. 1,094 (9,249) 2,225 (29,377)
Interest expense ........................... (762) (870) (1,585) (1,585)
Interest and other income (expense), net ... - (2) - (87)
-------- -------- -------- --------
INTEREST EXPENSE AND OTHER .............. (762) (872) (1,585) (1,672)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ....... 332 (10,121) 640 (31,049)
Income tax expense (benefit) ............... 107 (3,846) 224 (11,797)
-------- -------- -------- --------
NET INCOME (LOSS) ....................... $ 225 $ (6,275) $ 416 $(19,252)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE
- BASIC ................................. $ 0.01 $ (0.33) $ 0.02 $ (1.00)
======== ======== ======== ========
- DILUTED ............................... $ 0.01 $ (0.33) $ 0.03 $ (1.00)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
- BASIC ................................. 19,566 19,301 19,545 19,286
======== ======== ======== ========
- DILUTED ............................... 20,054 19,301 21,016 19,286
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income (loss) ................................. $ 416 $(19,252)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .............. 2,157 2,085
Deferred income taxes ...................... (48) -
Writedown of long-lived assets ............. - 1,407
Amortization of bond discount .............. 131 -
Changes in operating assets and liabilities 5,285 17,006
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 7,941 1,246
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........ (2,905) (2,506)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............. (2,905) (2,506)
FINANCING ACTIVITIES
Repayment of long-term debt ....................... (5,734) (1,024)
Increased borrowings under bank credit agreement .. -- 1,300
Proceeds from exercise of stock options ........... 243 268
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (5,491) 544
DECREASE IN CASH AND CASH EQUIVALENTS ............. (455) (716)
Cash and cash equivalents at beginning of period .. 5,355 807
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........ $ 4,900 $ 91
======== ========
See notes to condensed consolidated financial statements.
5
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Akorn, Inc. and its wholly owned subsidiary (the
"Company"). Intercompany transactions and balances have been eliminated in
consolidation. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
accordingly do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the financial statements included herein have not been reviewed by an
independent public accountant using professional standards and procedures for
conducting such reviews, as required by the rules of the SEC, because of an
on-going proposed SEC enforcement action against the Company (See Note G). On
August 14, 2002, the Company reached agreement with the SEC to restate its
financial statements for the calendar years ended December 31, 2000 and 2001,
with the result that the previously issued financial statements for those
periods, including any interim periods within such periods, as well as the audit
report covering the financial statements for the calendar years ended December
31, 2000 and 1999, should not be relied upon. In the opinion of management, all
adjustments, except those adjustments necessary as a result of the
aforementioned restatement, (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three- and six-month periods ended June 30, 2002 are not necessarily indicative
of the results that may be expected for a full year. For further information,
refer to the consolidated financial statements and footnotes for the year ended
December 31, 2001, included in the Company's Annual Report on Form 10-K. At such
time as the restatement is complete, and the Company's independent public
accountants have delivered their audit report, the Company will file appropriate
amendments to such of its annual reports on Forms 10-K and quarterly reports on
Form 10-Q as are impacted by the restatement.
NOTE B - INVENTORY
The components of inventory are as follows (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
---- ----
Finished goods .................... $ 3,597 $ 2,906
Work in process ................... 1,956 1,082
Raw materials and supplies......... 4,620 4,147
------- -------
$10,173 $ 8,135
======= =======
Inventory at June 30, 2002 and December 31, 2001 is reported net of
reserves for slow-moving, unsaleable and obsolete items of $1,760,000 and
$1,845,000 respectively, primarily related to finished goods.
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
---- ----
Land ............................... $ 396 $ 396
Buildings and leasehold improvements 8,256 8,208
Furniture and equipment ............ 26,694 25,724
Automobiles ........................ 55 55
-------- --------
35,401 34,383
Accumulated depreciation ........... (17,900) (16,440)
-------- --------
17,501 17,943
Construction in progress ........... 17,463 15,575
-------- --------
$ 34,964 $ 33,518
======== ========
Construction in progress primarily represents capital expenditures
related to the Company's freeze-drying project that will enable the Company to
perform processes in-house that are currently being performed by a
sub-contractor.
6
NOTE D - INDUSTRY SEGMENT INFORMATION
During the third quarter of 2001, the Company changed how it evaluates
its operations. The Company now classifies its operations into three business
segments: ophthalmic, injectable and contract services. Previously, the Company
evaluated its business as two segments, ophthalmic and injectable. The
ophthalmic segment manufactures, markets and distributes diagnostic and
therapeutic pharmaceuticals and surgical instruments and related supplies. The
injectable segment manufactures, markets and distributes injectable
pharmaceuticals, primarily in niche markets. The contract services segment
provides manufacturing services to unaffiliated companies in the ophthalmic and
injectable markets. Selected financial information by industry segment is
presented below (in thousands). Prior period information has been restated to
reflect the change in segments.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Ophthalmic ............................. $ 7,202 $ 5,683 $ 14,095 $ 5,748
Injectable ............................. 4,489 818 8,319 3,588
Contract Services ...................... 2,754 4,136 5,624 7,377
-------- -------- -------- --------
Total revenues ...................... $ 14,445 $ 10,637 $ 28,038 $ 16,713
======== ======== ======== ========
GROSS PROFIT
Ophthalmic ............................. $ 3,801 $ 2,371 $ 7,574 $ (3,194)
Injectable ............................. 2,665 (934) 4,547 (1,307)
Contract Services ...................... 180 1,072 1,024 1,227
-------- -------- -------- --------
Total gross profit .................. 6,646 2,509 13,145 (3,274)
Operating expenses ..................... 5,552 11,758 10,920 26,103
-------- -------- -------- --------
Total operating income (loss) ....... 1,094 (9,249) 2,225 (29,377)
Interest and other income (expense), net (762) (872) (1,585) (1,672)
Income (loss) before income taxes ... $ 332 $(10,121) $ 640 $(31,049)
======== ======== ======== ========
NOTE E - DISCONTINUED PRODUCT
In May 2001, the Company decided to no longer sell one of its products
due to uncertainty of product availability from a third-party manufacturer,
rising manufacturing costs and delays in obtaining FDA approval to manufacture
the product in-house. The Company recorded an asset impairment charge of
$1,170,000 related to manufacturing equipment specific to the product and an
asset impairment charge of $140,000 related to the remaining balance of the
product acquisition intangible asset during the first quarter of 2001.
NOTE F - CHANGE IN ACCOUNTING ESTIMATES
In May 2001, the Company completed an analysis of its March 31, 2001
allowance for chargebacks and rebates and determined that an increase from the
allowance of $3,296,000 at December 31, 2000 was necessary. In performing such
analysis, the Company utilized recently obtained reports of wholesalers'
inventory information, which had not been previously obtained or utilized. Based
on the wholesalers' March 31, 2001 inventories and historical chargeback and
rebate activity, the Company recorded an allowance of $6,961,000, which resulted
in a total reduction of gross sales of $12,000,000 for the three months ended
March 31, 2001.
7
During the quarter ended June 30, 2001, the Company further refined its
estimates of the chargeback and rebate liability. The effect of this change was
an increase to the allowance of $2,250,000. This additional increase to the
allowance was necessary to reflect the continuing shift of sales to customers
who purchase their products through group purchasing organizations and buying
groups.
The Company recorded a reduction of gross sales of $7,320,000 and
$19,320,000 for the three- and six-month period ended June 30, 2001,
respectively, related to chargebacks and rebates. This compares to a reduction
of gross sales for the three and six months ended June 30, 2002 of $3,089,000
and $6,904,000, respectively, which represents the normal level of chargeback
accrual activity relative to the Company's sales for the periods.
Based on the wholesalers' inventory information, the Company also
increased its allowance for potential product returns to $1,993,000 at June 30,
2001 from $232,000 at December 31, 2000. The reduction of gross sales related to
returns for the three and six months ended June 30, 2001 was $286,000 and
$2,845,000, respectively. This compares to a reduction of gross sales related to
returns for the three and six months ended June 30, 2002 of $588,000 and
$1,032,000, respectively, which represents the normal level of return accrual
activity relative to the Company's sales for the periods.
Based upon its unsuccessful efforts to collect past due balances, the
Company updated its analysis of potentially uncollectible accounts receivable
balances and increased the allowance to $12,928,000 at June 30, 2001 from
$801,000 at December 31, 2000. The expense recorded in the three and six month
period ended June 30, 2001 was $4,610,000 and $12,130,000, respectively. The
allowance for doubtful accounts is $1,292,000 as of June 30, 2002.
Based on sales trends and forecasted sales activity by product, the
Company increased its reserve for slow-moving, unsaleable and obsolete inventory
items to $4,084,000 at June 30, 2001 from $3,171,000 at December 31, 2000. The
Company recorded expense of $1,500,000 related to slow-moving, unsaleable and
obsolete inventory during the first quarter of 2001.
NOTE G - LEGAL PROCEEDINGS
After the close of business on March 27, 2002, the Company received a
letter informing it that the staff of the Securities and Exchange Commission's
regional office in Denver, Colorado, plans to recommend to the Commission that
it bring an enforcement action for injunctive relief against the Company. The
proposed enforcement action concerns the Company's alleged misstatement, in
quarterly and annual Securities and Exchange Commission ("SEC") filings and
earnings press releases, of its income for fiscal year 2000 by failing to
reserve for doubtful accounts receivable and overstating its accounts receivable
balances. The Company has also learned that certain of its former officers and
current employee have received similar notifications. The Company disagrees with
the staffs proposed recommendation and allegations and has submitted its views
as to why an enforcement should not be brought. On August 14, 2002, the Company
reached agreement with the Office of Chief Accountant ("OCA") of the SEC to
restate the Company's financial statements for the calendar years ended December
31, 2000 and 2001. The Company has agreed to work with its independent auditors
to accomplish the restatement in a timely manner. Pending the Company's
restatement, the previously issued financial statements for the calendar years
ended December 31, 2000 and 2001, including any interim periods within such
periods, as well as the audit report covering the financial statements for the
calendar years ended December 31, 2000 and 1999, should not be relied upon. As
the restatement relates to matters in prior fiscal years, it is not anticipated
to have a material impact on the Company's Consolidated Balance Sheet as of June
30, 2002 or on the future results.
The Company was party to a License Agreement with The Johns Hopkins
University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and
amended effective July 15, 2001. Pursuant to the License Agreement, the Company
licensed two patents from JHE/APL for the development and commercialization of a
diagnosis and treatment for age-related macular degeneration ("AMD") using
Indocyanine Green ("ICG"). A dispute arose between the Company and JHU/APL
concerning the License Agreement. Specifically, JHU/APL challenged the Company's
performance under the License Agreement. The Company denied JHU/APL's
allegations and asserted that it had performed in accordance with the terms of
the License Agreement. As a result of the dispute, on March 29, 2002, the
Company commenced a lawsuit in the U.S. District Court for Northern Illinois,
seeking declaratory and other relief against JHU/APL. On July 3, 2002, the
Company reached an agreement with JHU/APL with regard to the dispute that had
risen between the two parties. The Company and JHU/APL mutually agreed to
terminate their license agreement. As a result, the Company no longer has any
rights to the JHU/APL patent rights as defined in the license agreement. In
exchange for relinquishing its rights to the JHU/APL patent rights, the Company
received an abatement of the $300,000 due to JHU/APL at March 31, 2002 and a
payment of $125,000 to be received by August 3, 2002. The Company also has the
right to receive 15% of
8
all cash payments and 20% of all equity received by JHU/APL from any licensee of
the JHU/APL patent rights less any cash or equity returned by JHU/APL to such
licensee. The combined total of all such cash and equity payments are not to
exceed $1,025,000. The $125,000 payment received is considered an advance
towards cash payments due from JHU/APL and will be credited against any future
cash payments due the Company as a result of JHU/APL's licensing efforts. The
Company has a $1,984,000 net intangible asset recorded on the balance sheet as
of June 30, 2002 that relates to the agreement with JHU/APL. As a result of the
resolved dispute discussed above, the company will record an asset impairment
charge of $1,559,000 in the third quarter of 2002. This amount represents the
June 30,2002 net value of the asset on the balance sheet of the Company less the
$300,000 payment abated by JHU/APL and the $125,000 payment from JHU/APL. The
$125,000 payment was received on August 3, 2002.
On March 6, 2002, the Company received a letter for the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970 and regulations
promulgated under the Act. The Company continues to have discussions with the
United States Attorneys Office and anticipates that any action under this matter
will not have a material impact on its financial statements.
On April 4, 2001, the International Court of Arbitration (the "ICA") of
the International Chamber of Commerce notified the Company that Novadaq
Technologies, Inc. ("Novadaq") had filed a Request for Arbitration with the ICA
on April 2, 2001. Akorn and Novadaq had previously entered into an Exclusive
Cross-Marketing Agreement dated July 12, 2000 (the "Agreement"), providing for
their joint development and marketing of certain devices and procedures for use
in fluorescence angiography (the "Products"). Akorn's drug indocyanine green
("ICG") would be used as part of the angiographic procedure. The United States
Food and Drug Administration ("FDA") had requested that the parties undertake
clinical studies prior to obtaining FDA approval. In its Request for
Arbitration, Novadaq asserted that under the terms of the Agreement, Akorn
should be responsible for the costs of performing the requested clinical trials,
which are estimated to cost approximately $4,400,000. Alternatively, Novadaq
sought a declaration that the Agreement should be terminated as a result of
Akorn's alleged breach. Finally, in either event, Novadaq sought unspecified
damages as a result of any failure or delay on Akorn's part in performing its
alleged obligations under the Agreement. In its response, Akorn denied Novadaq's
allegation and alleged that Novadaq had breached the agreement. On January 25,
2002, the Company and Novadaq reached a settlement of the dispute. Under terms
of a revised agreement entered into as part of the settlement, Novadaq assumed
all further costs associated with development of the technology. The Company, in
consideration of foregoing any share of future net profits, obtained an equity
ownership interest in Novadaq and the right to be the exclusive supplier of ICG
for use in Novadaq's diagnostic procedures. In addition, Antonio R. Pera,
Akorn's then President and Chief Operating Officer, was named to Novadaq's Board
of Directors. Upon Mr. Pera's departure from the Company in June 2002, Ben J.
Pothast, the Company's Chief Financial Officer, was named to the Novadaq Board
of Directors. In conjunction with the revised agreement, Novadaq and the Company
each withdrew their respective arbitration proceedings.
The Company is 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, results of operations or cash flows of the Company.
NOTE H - FINANCIAL ARRANGEMENTS
On July 12, 2001, the Company entered into a Forbearance Agreement with
its senior lenders under which the lenders agreed to forbear from taking action
against Company to enforce their rights under the currently existing Amended and
Restated Credit Agreement until January 1, 2002. The Company has received three
extensions to the Forbearance Agreement to February 1, 2002, March 1, 2002 and
March 15, 2002, respectively.
On April 12, 2002, in lieu of further extending the Forbearance
Agreement, the Company entered into an amendment to the Credit Agreement (the
"Amendment"), effective as of January 1, 2002. The Amendment included, among
other things, extension of the term of the agreement, establishment of a payment
schedule and the amendment and addition of certain covenants. The new covenants
include minimum level of cash receipts, limitations on capital
9
expenditures, a $750,000 per quarter limitation on product returns and required
amortization of the loan principal. The agreement also prohibits the Company
from declaring any cash dividends on its common stock and identifies certain
conditions in which the principal and interest on the credit agreement would
become immediately due and payable. The conditions include: (a) filing of an
action by the FDA which results in partial or total suspension of production or
shipment of products, (b) failure to invite the FDA in for re-inspection of the
Decatur manufacturing facilities by June 1, 2002, (c) failure to make a written
response, within 10 days, to the FDA, with a copy to the lender, with respect to
any written communication received from the FDA after January 1, 2002 that
raises any deficiencies, (d) imposition of fines against the Company, after
January 1, 2002 in an aggregate amount greater that $250,000, (e) a cessation in
public trading of Akorn stock other than a cessation of trading generally in the
United States securities markets, (f) restatement of or adjustment to the
operating results of the Company in an amount greater than $27,000,000, (g)
failure to enter into an engagement letter with an investment banker for the
underwriting of an offering of equity securities by June 15, 2002, (h) failure
to have an engagement letter in effect at any time after June 15, 2002 or (i) at
any time after April 12, 2002, experience any material adverse action taken by
the FDA, the SEC, the DEA or any other Governmental Authority based on an
alleged failure to comply with laws or regulations. The Company's senior lenders
agreed to extend the Amendment through July 31, 2002 and the Company and its
senior lenders are in discussions to further extend the Amendment through August
31, 2002. The extensions entered into contain the same covenants and reporting
requirements except that the Company is not required to comply with conditions
(g) and (h) which relate to the offering of equity securities. The Company
anticipates that the Amendment will continue to be extended on a monthly basis
until the issues surrounding the SEC and FDA investigation are resolved. The
current balance of the credit facility is $39.2 million.
Management believes it will be able to comply with the covenants during
2002. In the event the Company is not in compliance with the covenants during
2002, and does not negotiate amended covenants or obtain a waiver thereto, then
the debt holder, at its option, may demand immediate payment of all outstanding
amounts due it. The Amendment required a minimum payment of $5.6 million from
the estimated tax refund, which amount was paid on May 8, 2002.
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combination" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method be used for all business combinations
initiated after June 30, 2001 and does not permit the pooling-of -interests
method for business combinations initiated after June 30, 2001. SFAS No. 142
establishes the accounting and reporting standards for intangible assets and
goodwill. SFAS No. 142 requires that goodwill and certain intangible assets no
longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill and certain intangibles will cease upon the required
adoption of SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 141 and
SFAS No. 142 on January 1, 2002 did not have a material impact on the Company's
financial condition or results of operation.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
a cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company has
adopted SFAS 143 as of January 1, 2002. The adoption of this new standard did
not have a material impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the Company
on January 1, 2002. SFAS No. 144 addresses the accounting and reporting for the
impairment and disposal of long-lived assets, including discontinued operations,
and establishes a single accounting model for long-lived assets to be disposed
of by sale. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on the Company's financial condition or results of operation.
In May 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement eliminates the requirement under SFAS No. 4,
10
"Reporting Gains and Losses from Extinguishment of Debt", to report gains and
losses from extinguishment of debt as extraordinary items in the income
statement. Accordingly, gains or losses from extinguishment of debt for fiscal
years beginning after May 15, 2002 shall not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". Upon adoption of
this pronouncement, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods presented that does not
meet the criteria of Opinion 30 for such classification should be reclassified
to conform with the provisions of SFAS No. 14. This statement is effective for
fiscal years beginning after May 15, 2002. The Company is currently evaluating
the impact of SFAS No. 145 on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting associated with exit or disposal activities. Under SFAS
146, costs associated with an exit or disposal activity shall be recognized and
measured at their fair value in the period in which the liability is incurred
rather than the date of a commitment to an exit or disposal plan. SFAS is
effective for all exit and disposal activities initiated after December 31,
2002. The Company is currently evaluating the impact of SFAS No. 146 on its
consolidated financial statements.
NOTE J - 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, warrants and convertible debt using the treasury stock
method.
The following table shows basic and diluted earnings per share
computations for the three and six month periods ended June 30, 2001 and June
30, 2002 (in thousands, except per share information):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) per share - basic:
Net income (loss) ...................................... $ 225 $ (6,275) $ 416 $(19,252)
Weighted average number of shares outstanding .......... 19,566 19,301 19,545 19,286
-------- -------- -------- --------
Net income (loss) per share - basic .................... $ 0.01 $ (0.33) $ 0.02 $ (1.00)
======== ======== ======== ========
Net income (loss) per share - diluted:
Net income (loss) ...................................... $ 225 $ (6,275) $ 416 $(19,252)
Net income (loss) adjustment for interest on debt....... 70 - 133 -
-------- -------- -------- --------
Net income (loss), as adjusted ......................... $ 295 $ (6,275) $ 549 $(19,252)
Weighted average number of shares outstanding .......... 19,566 19,301 19,545 19,286
Additional shares assuming conversion of
convertible debt and convertible interest on debt... 360 - 854 -
Additional shares assuming conversion of warrants ...... 39 - 245 -
Additional shares assuming conversion of options ....... 89 - 372 -
-------- -------- -------- --------
Weighted average number of shares
outstanding, as adjusted ........................... 20,054 19,301 21,016 19,286
Net income (loss) per share - diluted .................. $ 0.01 $ (0.33) $ 0.03 $ (1.00)
======== ======== ======== ========
Certain warrants and options are not included in the earnings per share
calculation when the exercise price is greater that the average market price for
the period. In addition, options outstanding during the three and six month
period ended June 30, 2001 were not considered in the computation of diluted
earnings per share since the Company reported a loss from operations. The number
of warrants and options excluded in each period is reflected in the following
table.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Anti-dilutive warrants not included
in earnings per share calculation................ 1,000 - - -
Anti-dilutive options not included
in earnings per share calculation................ 2,182 2,506 1,948 2,506
11
NOTE K - NON-CASH TRANSACTIONS
As part of the settlement between the Company and Novadaq Technologies,
Inc., ("Novadaq") (See Note G), the Company received an equity ownership in
Novadaq. The Company had previously advanced $690,000 to Novadaq for development
costs and recorded these advances as an intangible asset. Based on the
settlement, the Company has revalued the intangible to zero, recorded an
investment in Novadaq of $6,040,000 and recorded deferred revenue of $5,350,000.
The investment in Novadaq was valued at $1.51 per share, the price of a recently
completed equity offering by Novadaq. The deferred revenue reflects the value of
the exclusive supply agreement for indocyanine green ("ICG") entered into
between Novadaq and the Company as part of the settlement.
NOTE L - RESTRUCTURING CHARGES
During the second quarter of 2001, the Company adopted a restructuring
program with aggressive actions to properly size its operations to then current
business conditions. These actions were designed to reduce costs and improve
operating efficiencies. The program included, among other items, severance of
employees, plant-closing costs related to the San Clemente, CA sales office and
rent for unused facilities under lease in San Clemente and Lincolnshire, IL. The
restructuring, affecting all business segments, reduced the Company's current
workforce by approximately 50 employees, representing 12.5% of the total
workforce. Activities previously executed in San Clemente were relocated to the
Company's headquarters. The restructuring program costs were included in
selling, general and administrative expenses in the accompanying condensed
consolidated statement of income and resulted in a charge to operations of
approximately $1,117,000 encompassing severance, $398,000, lease costs, $625,000
and other costs, $94,000. At June 30, 2002, the amount remaining in the accruals
for the restructuring program was approximately $172,000, representing the
remaining balance of lease commitments, which expire in April 2003.
NOTE M - SUBSEQUENT EVENT
On July 3, 2002, the Company reached an agreement with The Johns
Hopkins University, Applied Physics Laboratory ("JHU/APL") with regard to the
dispute that had risen between the two parties (see Note G). The Company and
JHU/APL mutually agreed to terminate the license agreement between the two
parties. As a result, the Company no longer has any rights to the JHU/APL patent
rights as defined in the license agreement. In exchange for relinquishing its
rights to the JHU/APL patent rights, the Company received an abatement of the
$300,000 due to JHU/APL at March 31, 2002 and a payment of $125,000 to be
received by August 3, 2002. The Company also has the right to receive 15% of all
cash payments and 20% of all equity received by JHU/APL from any licensee of the
JHU/APL patent rights less any cash or equity returned by JHU/APL to such
licensee. The combined total of all such cash and equity payments are not to
exceed $1,025,000. The $125,000 payment is considered an advance towards cash
payments due from JHU/APL and will be credited against any future cash payments
due the Company as a result of JHU/APL's licensing efforts. The Company has a
$1,984,000 net intangible asset recorded on the balance sheet as of June 30,
2002 that relates to the agreement with JHU/APL. As a result of the resolved
dispute discussed above, the Company will record an asset impairment charge of
$1,559,000 in the third quarter of 2002. This amount represents the June 30,
2002 net value of the asset on the balance sheet of the Company less the
$300,000 payment abated by JHU/APL and the $125,000 payment from JHU/APL. The
$125,000 payment was received on August 3, 2002.
On August 14, 2002, the Company reached agreement with the Office of
Chief Accountant of the Securities and Exchange Commission ("SEC") to restate
the Company's financial statements for the calendar years ended December 31,
2000 and 2001. This restatement is related to a proposed enforcement action by
the SEC, which is still pending, which alleges that the Company's accounts
receivable were overstated as of December 31, 2000. The Company intends to work
with its independent auditors to accomplish the necessary restatement in a
timely manner. Pending the Company's restatement, the previously issued
financial statements for the calendar years ended December 31, 2000 and 2001,
including any interim periods within such periods, as well as the audit report
covering the financial statements for the calendar years ended December 31, 2000
and 1999, should not be relied upon.
12
AKORN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO 2001
The following table sets forth, for the periods indicated, revenues by
segment, excluding intersegment sales.
THREE MONTHS ENDED
JUNE 30,
2002 2001
---- ----
(IN THOUSANDS)
Ophthalmic segment ...... $ 7,202 $ 5,683
Injectable segment ...... 4,489 818
Contract Services segment 2,754 4,136
------- -------
Total revenues .......... $14,445 $10,637
======= =======
Consolidated revenues increased 35.8% in the quarter ended June 30,
2002 compared to the same period in 2001 due primarily to the fact that the net
sales for the 2001 period were negatively impacted by non-recurring charges
related to chargebacks (See Note F) and sharply reduced sales attributable to
excessive wholesaler inventories during 2001 that were reduced during the
quarter without compensating purchases made by the wholesalers. Excluding the
effect of the non-recurring charges related to chargebacks, consolidated
revenues would have increased 12.1%. Ophthalmic segment revenues increased
26.7%, primarily reflecting the aforementioned charges and strong angiography
and ointment product sales. Injectable revenues increased 448.8% compared to the
same period in 2001. The sharp increase is attributable to excessive wholesaler
inventories during 2001 that were reduced during the quarter without
compensating purchases made by the wholesalers as well as the aforementioned
charges related to chargebacks. Contract services revenues decreased 33.4%
compared to the same period in 2001 due mainly to customer concerns about the
status of the FDA inspection ongoing at the Company's Decatur, IL facility. The
Company anticipates that contract services revenue will continue to lag
historical sales levels until the issues surrounding the FDA review are
resolved.
Consolidated gross profit increased 164.9% during the quarter, with
gross margins increasing from 23.6% to 46.0%. Excluding non-recurring charges,
primarily related to the chargeback adjustment discussed above, the second
quarter 2001 gross profit was 4,896,000 or 38.0%. Improvements in gross margin
resulted from the Company's continued focus on manufacturing costs and
operational efficiencies and a shift in product mix to higher gross margin
products in the angiography, antidote and ointment product lines.
Selling, general and administrative (SG&A) expenses decreased 56.9%
during the quarter ended June 30, 2002 as compared to the same period in 2001,
primarily reflecting a $4,610,000 charge for bad debt exposure as well as
non-recurring and restructuring related charges of $1,117,000, primarily
severance and lease costs. Without these charges SG&A would have decreased 7.8%,
reflecting the effects of the restructuring program employed during the third
quarter of 2001. Amortization of intangibles decreased from $362,000 to
$355,000, or 2.0% over the prior year quarter, reflecting the exhaustion of
certain product intangibles. Research and development (R&D) expense decreased
12.5% in the quarter, to $562,000 from $642,000 for the same period in 2001. The
Company has scaled back its research activities and is focusing on strategic
product niches in which it believes it will be able to add value, primarily in
the areas of controlled substances and ophthalmic products. Management expects
R&D expenses for the remainder of 2002 to continue at this level.
Interest expense of $762,000 was down 12.4% primarily on lower interest
rates.
The Company's effective tax rate for the quarter was 32.2% compared to
38.0% for the prior-year period, primarily due to a refinement in the
calculation used by the Company to compute its income tax liability. The
13
Company reported net income of $225,000 or $0.01 per share for the three months
ended June 30, 2002, compared to a net loss of $6,275,000 or $0.33 per share for
the comparable prior year quarter.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO 2001
The following table sets forth, for the periods indicated, revenues by
segment, excluding intersegment sales.
SIX MONTHS ENDED
JUNE 30,
2002 2001
---- ----
(IN THOUSANDS)
Ophthalmic segment ...... $14,095 $ 5,748
Injectable segment ...... 8,319 3,588
Contract Services segment 5,624 7,377
------- -------
Total revenues .......... $28,038 $16,713
======= =======
Consolidated revenues increased 67.8% in the six-month period ended
June 30, 2002 compared to the same period in 2001, due primarily to the fact
that the net sales for the 2001 period were negatively impacted by non-recurring
charges related to chargebacks, rebates and returns (See Note F) and sharply
reduced sales attributable to excessive wholesaler inventories that were reduced
during the period without compensating purchases made by the wholesalers.
Excluding the effect of the non-recurring charges related to chargebacks,
rebates and returns, consolidated revenues would have increased 1.3%. Ophthalmic
segment sales increased 145.2%, primarily reflecting the aforementioned charges
and strong angiography and ointment product sales. Excluding the effect of the
non-recurring charges related to chargebacks, rebates and returns, ophthalmic
revenues would have increased 50.9%. Injectable sales increased 131.9% compared
to the same period in 2001 primarily due to the increases in the allowances for
chargebacks and rebates and returns (See Note F) and a sharp reduction in
anesthesia and antidote product sales, both occurring during 2001. The sharp
reduction is attributable to excessive wholesaler inventories that were reduced
during the period without compensating purchases made by the wholesalers.
Excluding the effect of the non-recurring charges related to chargebacks,
rebates and returns, injectable revenues would have decreased 20.8%. This
decrease would have been significantly more severe if not offset by a sharp
increase in sales of cyanide antidote kits. Contract services revenues decreased
23.8% compared to the same period in 2001 due mainly to customer concerns about
the status of the FDA inspection ongoing at the Company's Decatur facility. The
Company anticipates that contract services revenue will continue to lag
historical sales levels until the issues surrounding the FDA review are
resolved.
Consolidated gross profit was $13,145,000 or 46.9% for the six-month
period ended June 30, 2002, as compared to gross loss of $3,274,000 for the
six-months ended June 30, 2001, reflecting the effects of the aforementioned
decline in net sales, as well as an increase in the reserve for slow-moving,
unsaleable and obsolete inventory items (See Note F). Excluding non-recurring
charges, primarily related to the chargeback, rebate, return and inventory
obsolescence adjustments discussed above, the gross profit for the six-month
period ended June 30, 2001 was 9,353,000 or 33.8%. Improvements in gross margin
resulted from the Company's continued focus on manufacturing costs and
operational efficiencies and a shift in product mix to higher gross margin
products in the angiography, antidote and ointment product lines.
Selling, general and administrative (SG&A) expenses decreased 60.8%
during the six-month period ended June 30, 2002 as compared to the same period
in 2001, primarily reflecting a $11,930,000 charge for bad debt exposure, asset
impairment charges of $1,410,000 and non-recurring and restructuring related
charges of $1,117,000, primarily severance and lease costs. Without these
charges SG&A would have increased 1.2% reflecting increased compensation and
legal expenses offset by the effect of the restructuring program implemented
during the third quarter of 2001. Amortization of intangibles decreased from
$719,000 to $698,000, or 2.9% over the prior year quarter, reflecting the
exhaustion of certain product intangibles.
Research and development (R&D) expense decreased 45.4% in the six-month
period ended June 30, 2002, to $982,000 from $1,799,000 for the same period in
2001. The Company has scaled back its research activities and is focusing on
strategic product niches in which it believes it will be able to add value,
primarily in the areas of controlled substances and ophthalmic products.
Management expects R&D expenses for the second half of 2002 to be consistent
14
with spending over the first six months of the year.
Interest expense of $1,585,000 was unchanged on lower interest rates
offset by higher average debt balances.
The Company's effective tax rate for the period was 35.0% compared to
38.0% for the prior-year period, primarily due to a refinement in the
calculation used by the Company to compute its income tax liability. The Company
reported net income of $416,000, or $0.02 per share, for the six months ended
June 30, 2002, compared to a net loss of $19,252,000, or $1.00 per share, for
the comparable prior year quarter.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combination" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method be used for all business combinations
initiated after June 30, 2001 and does not permit the pooling-of -interests
method for business combinations initiated after June 30, 2001. SFAS No. 142
establishes the accounting and reporting standards for intangible assets and
goodwill. SFAS No. 142 requires that goodwill and certain intangible assets no
longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill and certain intangibles will cease upon the required
adoption of SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 141 and
SFAS No. 142 on January 1, 2002 did not have a material impact on the Company's
financial condition or results of operation.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". This statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity capitalizes
a cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company has
adopted SFAS 143 as of January 1, 2002. The adoption of this new standard did
not have a material impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the Company
on January 1, 2002. SFAS No. 144 addresses the accounting and reporting for the
impairment and disposal of long-lived assets, including discontinued operations,
and establishes a single accounting model for long-lived assets to be disposed
of by sale. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on the Company's financial condition or results of operation.
In May 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement eliminates the requirement under SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", to report gains and
losses from extinguishment of debt as extraordinary items in the income
statement. Accordingly, gains or losses from extinguishment of debt for fiscal
years beginning after May 15, 2002 shall not be reported as extraordinary items
unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". Upon adoption of
this pronouncement, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods presented that does not
meet the criteria of Opinion 30 for such classification should be reclassified
to conform with the provisions of SFAS No. 14. This statement is effective for
fiscal years beginning after May 15, 2002. The Company is currently evaluating
the impact of SFAS No. 145 on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting associated with exit or disposal activities. Under SFAS
146, costs associated with an exit or disposal activity shall be recognized and
measured at their fair value in the period in which the liability is incurred
rather than the date of a commitment to an exit or disposal plan. SFAS is
effective for all exit and disposal activities initiated after December 31,
2002. The Company is currently evaluating the impact of SFAS No. 146 on its
consolidated financial statements.
15
FINANCIAL CONDITION AND LIQUIDITY
Working capital at June 30, 2002 was a deficiency of $24,269,000
compared to a deficiency of $24,357,000 at December 31, 2001. Working capital is
negative primarily due to the $39,200,000 in debt that is due within twelve
months of the balance sheet reporting date of June 30, 2002. The existing cash
balance as of June 30, 2002 was $4,900,000. Future working capital needs will be
highly dependent upon the Company's ability to improve gross margins, improve
gross income, control expenses and collect its receivables. Management believes
that existing cash, cash flow from operations and the subordinated debt proceeds
will be sufficient to meet the cash needs of the business for the immediate
future, but that additional financing will be needed to refund the current bank
debt. If available funds, cash generated from operations and subordinated debt
proceeds, if any, are insufficient to meet immediate liquidity requirements,
further financing and/or reductions of existing operations will be required.
There are no guarantees that such financing will be available or available on
acceptable terms. Further, such additional financing may require the granting of
rights, preferences or privileges senior to those rights of the common stock and
existing stockholders may experience substantial dilution of their ownership
interests. The Company will need to refinance or extend the maturity of the bank
credit agreement, as it does not anticipate sufficient cash to make the
anticipated August 31, 2002 scheduled payment. For the six months ended June 30,
2002, the Company provided $7,941,000 in cash from operations to finance its
working capital requirements, primarily from the receipt of a $5,580,000 million
tax refund (subsequently used to pay down the bank debt) and an increase in
current liabilities. Investing activities, which primarily relate to purchase of
equipment and in progress construction, required $2,905,000 in cash. Investment
activities used $5,491,000 in cash primarily reflecting the payment of
$5,600,000 dollars against current bank debt.
THE INFORMATION CONTAINED IN THIS FILING, OTHER THAN HISTORICAL INFORMATION,
CONSISTS OF FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY
CAUTIONS READERS THAT THERE ARE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN SUCH STATEMENTS. SUCH
STATEMENTS REGARDING THE TIMING OF ACQUIRING, DEVELOPING AND FINANCING NEW
PRODUCTS, OF BRINGING THEM ON LINE AND OF DERIVING REVENUES AND PROFITS FROM
THEM, AS WELL AS THE EFFECT OF THOSE REVENUES AND PROFITS ON THE COMPANY'S
MARGINS AND FINANCIAL POSITION, OR OF THE COMPANY'S ABILITY TO RAISE ADDITIONAL
CAPITAL OR TO REFINANCE OR EXTEND ITS CURRENT DEBT, ARE UNCERTAIN BECAUSE MANY
OF THE FACTORS AFFECTING THE TIMING OF THOSE ITEMS ARE BEYOND THE COMPANY'S
CONTROL, OR ARE OTHERWISE SUBJECT TO RISKS, INCLUDING, BUT NOT LIMITED TO, THOSE
REFERENCED UNDER THE HEADING "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
After the close of business on March 27, 2002, the Company
received a letter informing it that the staff of the Securities and Exchange
Commission's regional office in Denver, Colorado, plans to recommend to the
Commission that it bring an enforcement action for injunctive relief against the
Company. The proposed enforcement action concerns the Company's alleged
misstatement, in quarterly and annual Securities and Exchange Commission filings
and earnings press releases, of its income for fiscal year 2000 by allegedly
failing to reserve for doubtful accounts receivable and overstating its accounts
receivable balances. The Company has also learned that certain of its former
officers and current employee have received similar notifications. The Company
disagrees with the staffs proposed recommendation and allegations and has
submitted its views as to why an enforcement should not be brought. On August
14, 2002, the Company reached agreement with the Office of Chief Accountant
("OCA") of the SEC to restate the Company's financial statements for the
calendar years ended December 31, 2000 and 2001. The Company has agreed to work
with its independent auditors to accomplish the restatement in a timely manner.
As the restatement relates to matters in prior fiscal years, it is not
anticipated to have a material impact on the Company's Consolidated Balance
Sheet as of June 30, 2002 or on the Company's future results. Pending the
Company's restatement, the previously issued financial statements for the
calendar years ended December 31, 2000 and 2001, including any interim periods
within such periods, as well as the audit report covering the financial
statements for the calendar years ended December 31, 2000 and 1999, should not
be relied upon.
The Company was party to a License Agreement with The Johns
Hopkins University, Applied Physics Laboratory ("JHU/APL") effective April 26,
2000, and amended effective July 15, 2001. Pursuant to the License Agreement,
the Company licensed two patents from JHE/APL for the development and
commercialization of a diagnosis and treatment for age-related macular
degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute arose between
the Company and JHU/APL concerning the License Agreement. Specifically, JHU/APL
challenged the Company's performance under the License Agreement. The Company
denied JHU/APL's allegations and asserted that it had performed in accordance
with the terms of the License Agreement. As a result of the dispute, on March
29, 2002, the Company commenced a lawsuit in the U.S. District Court for
Northern Illinois, seeking declaratory and other relief against JHU/APL. On July
3, 2002, the Company reached an agreement with JHU/APL with regard to the
dispute that had risen between the two parties. The Company and JHU/APL mutually
agreed to terminate their license agreement. As a result, the Company no longer
has any rights to the JHU/APL patent rights as defined in the license agreement.
In exchange for relinquishing its rights to the JHU/APL patent rights, the
Company received an abatement of the $300,000 due to JHU/APL at March 31, 2002
and a payment of $125,000 to be received by August 3, 2002. The Company also has
the right to receive 15% of all cash payments and 20% of all equity received by
JHU/APL from any licensee of the JHU/APL patent rights less any cash or equity
returned by JHU/APL to such licensee. The combined total of all such cash and
equity payments are not to exceed $1,025,000. The $125,000 payment received is
considered an advance towards cash payments due from JHU/APL and will be
credited against any future cash payments due the Company as a result of
JHU/APL's licensing efforts. The Company has a $1,984,000 net intangible asset
recorded on the balance sheet as of June 30, 2002 that relates to the agreement
with JHU/APL. As a result of the resolved dispute discussed above, the Company
will record an asset impairment charge of $1,559,000 in the third quarter of
2002. This amount represents the June 30,2002 net value of the asset on the
balance sheet of the Company less the $300,000 payment abated by JHU/APL and the
$125,000 payment from JHU/APL. The $125,000 payment was received on August 3,
2002.
On March 6, 2002, the Company received a letter for the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970 and regulations
promulgated under the Act. The Company continues to have discussions with the
United States Attorneys Office and anticipates that any action under this matter
will not have a material impact on the its financial statements.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended June 30, 2002.
ITEM 5. OTHER INFORMATION
On June 24, 2002, Nasdaq notified the Company that a Nasdaq Listing
Qualification Panel had issued an order delisting Akorn securities from the
Nasdaq National Market effective at the opening of business on June 25, 2002.
The action taken by Nasdaq is due to the fact that the Company does not
comply with the Nasdaq report filing requirements with respect to its Form 10-K
filing with the SEC for the year ended December 31, 2001. The Company reported
the action taken by Nasdaq on Form 8-K on June 27, 2002 (See Item 6. "Exhibits
and Reports on Form 8-K").
The Company had originally intended to hold its annual meeting of
shareholders in August 2002. Due to the inability of the Company to obtain
audited financial statements from its independent public accountants (See
Explanatory Note on Page 2 above) and then provide those audited financial
statements to shareholders in an annual report proceeding or accompanying the
Company's proxy solicitation materials, the Company will be required to delay
its annual meeting until such time as audited financial statements are
available, which delay is anticipated to be at least 30 days. Accordingly, the
Company, in compliance with Securities and Exchange Commission Rule 14a-5(f),
hereby provides notice of such delay and advises shareholders that shareholder
proposals for inclusion in the Company's proxy materials will continue to be
accepted until 90 calendar days prior to the date the Company begins to print
and mail its proxy materials.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarterly period ended June 30, 2002, the Company filed a
Report on Form 8-K on June 27, 2002 reporting that a Nasdaq Listing
Qualifications Panel had issued an order delisting Akorn securities from the
Nasdaq National Market effective at the opening of business on June 25, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 2002
/s/ BEN J. POTHAST
-------------------------------------
Ben J. Pothast
Vice President, Chief Financial
Officer and Secretary
(Principal Financial and
Accounting Officer)
19