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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, 1998
[ ] 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 (CHECK) 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 10, 1999
was approximately $20,367,195.
The number of shares of the Issuer's common stock, no par value per share,
outstanding as of March 10, 1999 was 18,147,272.
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The information contained in this document, other than historical
information, consists of forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
described in such statements. Such statements regarding the status of customer
and supplier compliance with Year 2000 issues, the timing of acquiring and
developing new products, of bringing them on line and of deriving revenues and
profits from them, as well as the effects of those revenues and profits on the
company's margins and financial position, are uncertain because many of the
factors affecting the timing of those items are beyond the company's control.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement (the "Proxy Statement") to be
used in connection with the Registrant's 1999 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, 1998, are
incorporated by reference to Part III of this Annual Report on Form 10-K.
FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business..................................... 2
Item 2. Description of Properties................................... 4
Item 3. Legal Proceedings........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders......... 4
PART II
Item 5. Market for Registrant's Common Equity and Related 5
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations.................................
Item 8. Financial Statements and Supplemental Data.................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting 31
and Financial Disclosures.................................
PART III
Item 10. Directors................................................... 32
Item 11. Executive Compensation...................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and 32
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits and Financial Statement Schedules.................. 33
Signatures............................................................ 34
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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 provides contract manufacturing services
through its subsidiary, Taylor Pharmaceuticals, Inc. (Taylor). 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.
(PRL), a developer and distributor of injectable pharmaceutical products, and
merged PRL into Taylor. 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 O to the consolidated financial statements included in Item 8 of this
report.
Ophthalmic Segment. The Company markets an extensive line of diagnostic
and therapeutic pharmaceuticals 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. Taylor markets generic small volume parenteral niche
pharmaceuticals and anesthesia products used in the treatment of specialty
indications including rheumatoid arthritis and pain management. These products
are marketed to wholesalers and other national account customers as well as
directly to medical specialists. Taylor also provides contract manufacturing
services to pharmaceutical and biotech companies.
Sales and Marketing. While the Company is actively working to expand its
proprietary product base through acquisition and internal development, the
majority of current products are non-proprietary. The Company relies on its
expertise 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 three 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.
The injectable segment sells through telemarketing and direct mail
activities to individual specialty physicians and hospitals. National accounts
efforts sell to wholesalers and other group purchasing organizations. 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.
Research and Development. As of December 31, 1998, the Company had 20
Abbreviated New Drug Applications (ANDAs) in various stages of development and
had 5 ANDAs approved in 1998. See "Government Regulation." The Company is also
engaged in clinical studies for 2 proprietary products and expects to file New
Drug Applications (NDAs) for these products over the course of the next two
years. Clinical trials are performed by contract research organizations under
the direction of Company personnel. No
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assurance can be given as to whether the Company will develop marketable
products based on these filings or as to the size of the market for any such
products.
The Company 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 the
existing product line and which have few or no competitors in the market.
At December 31, 1998, 24 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 $4,010,000, $1,873,000, $809,000 and $1,213,000 for the years ended
December 31, 1998 and 1997, six months ended December 31, 1996 and year ended
June 30, 1996, respectively.
Employee Relations. At December 31, 1998, the Company had 313 full-time
employees, of whom 135 are employed by Akorn and 178 by its wholly owned
subsidiary, Taylor Pharmaceuticals. The Company enjoys good relations with its
employees, none of whom are represented by a collective bargaining agent.
Competition. The marketing 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.
The dominant 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 dominant 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, creating barriers to
entry.
Product Supply. No unaffiliated supplier of products accounted for more
than 10% of the Company's sales in either segment during 1998 or 1997. Sight
Pharmaceuticals, Inc., a division of B&L, accounted for approximately 15% of the
Company's ophthalmic sales for the six month period ended December 31, 1996.
No single customer accounted for more than 10% of the Company's sales in
either segment during 1998 or 1997.
Government Regulation. All pharmaceutical manufacturers and distributors
are subject to extensive regulation by the federal government, principally the
Food and Drug Administration (FDA), and to a lesser extent, by state
governments. The federal Food, Drug and Cosmetic Act (the FDA Act), the
Controlled Substance Act and other federal statutes and regulations govern or
influence the development, testing, manufacture, 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
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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 ANDA or NDA filings.
The Company also manufactures and distributes several controlled-drug
substances, the distribution and handling of which are regulated by the Drug
Enforcement Agency (DEA). Failure to comply with DEA regulations can result in
fines or seizure of product.
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 10, 1999. Each officer serves as such at the pleasure of the Board of
Directors.
OFFICER NAME AGE POSITION WITH THE COMPANY
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Floyd Benjamin....................... 56 President and Chief Executive Officer of the Company
R. Scott Zion........................ 48 Senior Vice President of the Company and General
Manager of the Ophthalmic Division
Rita J. McConville................... 40 Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company
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 also
leases approximately 15,000 square feet of warehouse space in Decatur, Illinois.
The Company's Taylor subsidiary leases approximately 7,000 square feet of office
and warehousing space in San Clemente, California. The Company 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.
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 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, 1998.
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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, 1999, 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 closing prices per NASDAQ for the periods indicated were:
HIGH LOW
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Year Ended December 31, 1998:
1st Quarter............................................... $6.88 $3.31
2nd Quarter............................................... 9.00 6.19
3rd Quarter............................................... 8.00 4.00
4th Quarter............................................... 6.38 2.94
Year Ended December 31, 1997:
1st Quarter............................................... $3.19 $1.84
2nd Quarter............................................... 2.63 1.91
3rd Quarter............................................... 3.06 2.03
4th Quarter............................................... 4.50 2.94
Six Months Ended December 31, 1996:
1st Quarter............................................... $3.50 $2.06
2nd Quarter............................................... 2.44 1.63
As of December 31, 1998, there were approximately 700 holders of record of
the Company's Common Stock. Closing price at March 10, 1999 was $3.9375 per
share as reported by the Nasdaq National Market.
On December 31, 1997, 1,000,000 unregistered shares of Company Common Stock
were issued at $2.00 per share pursuant to the exercise of a warrant.
The Company did not pay cash dividends in 1998 or 1997, and is prohibited
by its revolving credit agreement with The Northern Trust Company from doing so.
During fiscal 1996, dividends paid of $583,000 pertain to Subchapter S
distributions made to former PRL shareholders for pre-acquisition earnings.
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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, 1998 and 1997, the six month transition
period ended December 31, 1996 and for the three years ended June 30, 1996:
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEARS ENDED JUNE 30,
------------------ DECEMBER 31, ---------------------------
1998 1997 1996 1996 1995 1994
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PER SHARE
Equity............................... $ 1.40 $ 1.20 $ 0.98 $ 0.97 $ 0.93 $ 0.76
Net income:
Basic.............................. $ 0.26 $ 0.11 $ 0.00 $ 0.05 $ 0.15 $ 0.14
Diluted............................ $ 0.25 $ 0.11 $ 0.00 $ 0.05 $ 0.15 $ 0.14
Price: High.......................... $ 9.19 $ 4.50 $ 3.50 $ 3.50 $ 4.00 $ 3.88
Low........................... $ 2.54 $ 1.84 $ 1.63 $ 2.06 $ 2.25 $ 1.88
P/E: High........................... 35x 41x NM 70x 27x 28x
Low........................... 10x 17x NM 41x 15x 13x
INCOME DATA (000)
Net sales............................ $ 56,667 $42,323 $16,519 $33,925 $37,505 $31,266
Gross profit......................... 29,060 18,776 5,758 11,953 15,177 13,218
Operating income..................... 9,444 3,165 130 1,089 3,910 2,654
Interest expense..................... (1,451) (497) (243) (441) (25) (181)
Pretax income........................ 7,686 2,844 70 977 3,738 2,573
Income taxes......................... 3,039 1,052 26 189 1,232 158
Net income........................... $ 4,647 $ 1,792 $ 44 $ 788 $ 2,506 $ 2,415
Weighted average shares outstanding:
Basic.............................. 17,891 16,614 16,580 16,383 16,236 16,185
Diluted............................ 18,766 16,925 16,763 16,788 16,799 16,711
BALANCE SHEET (000)
Current assets....................... $ 24,533 $19,633 $13,840 $17,001 $15,474 $15,044
Net fixed assets..................... 15,860 12,395 12,833 11,524 11,060 6,346
Total assets......................... 61,001 38,715 28,013 29,567 27,491 22,190
Current liabilities.................. 13,934 8,612 5,636 9,351 7,016 7,106
Long-term obligations................ 20,787 9,852 6,003 3,915 4,890 2,380
Shareholders' equity................. $ 26,280 $20,251 $16,374 $16,301 $15,585 $12,704
FUNDS FLOW DATA (000)
From operations...................... $ 1,093 $ 64 $ 2,553 $ 10 $ 712 $ 2,212
Dividends paid(1).................... -- -- -- (583) -- --
From investing....................... (13,668) (6,387) (2,028) (873) (4,943) (3,745)
From financing....................... 10,898 7,356 (36) 979 3,112 2,313
Change in cash & equivalents......... $ (1,677) $ 1,033 $ 489 $ 116 $(1,119) $ 780
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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 four 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. The information contained in this discussion, other than
historical information, consists of forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those described in such statements. Such statements regarding Year 2000
issues, the timing of acquiring and developing new products, of bringing them on
line and of deriving revenues and profits from them, as well as the effects of
those revenues and profits on the Company's margins and financial position, is
uncertain because many of the factors affecting the timing of those items are
beyond the Company's control.
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, 1998 and 1997, the six months ended December 31, 1996 and
1995 and the year ended June 30, 1996.
SIX MONTHS
YEARS ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
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1998 1997 1996 1995 1996
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Revenues
Ophthalmic............................................ 52% 59% 62% 66% 61%
Injectable............................................ 48 41 38 34 39
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Total revenues.......................................... 100% 100% 100% 100% 100%
Gross profit............................................ 51 44 35 38 35
Selling, general and administrative expenses............ 24 28 29 28 27
Amortization of intangibles............................. 4 1 -- -- 1
Research and development expenses....................... 7 4 5 3 4
Operating income........................................ 17 8 1 7 3
Net income.............................................. 8% 4% 0% 5% 2%
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. Division
management expects the shortages and resultant sales increases to continue at
least through the first quarter of 1999. Management continuously evaluates
opportunities for acquisition of additional products, and expects such
acquisitions to continue in 1999, contingent on acceptable financing.
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.
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Management expects the growth in SG&A expenses to taper off due to the
Company's reorganization along functional rather than divisional lines.
Amortization of intangibles increased 584.9% for the year, reflecting
significant product acquisitions in 1998. Amortization of a patent acquired in
1998 will be completed upon expiration of the patent in May 1999, resulting in
decreased amortization expense in the second half of 1999.
Research and development expenses (R&D) increased 114.1%, primarily
reflecting accelerated development of TP-1000, a migraine product. Since
obtaining favorable preliminary clinical data, the Company is presently seeking
a partner to continue development of this product. Management expects total R&D
spending to remain relatively constant in 1999.
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 and retention bonus payments as well as a write-down of the
Abita Springs facility and equipment to net realizable value.
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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The Company has implemented these statements as required.
See Note S to Consolidated Financial Statements.
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1997 AND JUNE 30, 1996
Net sales increased 24.8% for the year ended December 31, 1997 compared to
the year ended June 30, 1996. Ophthalmic segment sales increased 19.5%,
primarily due to strong performance in the diagnostic and therapeutic product
lines. The acquisition of ICG from Becton Dickinson in April 1997 and the
introduction of the Company's generic version of Timolol Maleate also
contributed to the sales increase. Injectable segment sales increased 33.1%,
primarily due to penetration into the hospital market and strong performance in
rheumatology and antidote products, including Bal in Oil, acquired from Becton
Dickinson in April 1997. Injectable segment sales also benefited from a
continuing shortage of certain distributed products.
Consolidated gross profit increased 57.0% for the year, with gross margins
increasing from 35% to 44%. The increase in gross margins was caused by product
acquisitions, a shift in ophthalmic sales mix to higher margin products and the
re-engineering of production processes to reduce costs of manufacturing. Margins
on the Company's generic version of Timolol Maleate have declined at a faster
than anticipated rate, due to the large number of competitors offering the
product.
Selling, general and administrative expenses (SG&A) increased 36.9%,
reflecting increased marketing and promotional activities in the ophthalmic
segment, provisions for employee performance bonuses and expenses associated
with the new corporate office facility.
Research and development expenses (R&D) increased 54.4%, reflecting a
greater number of products under development. Actual spending on R&D for the
year included approximately $685,000 pre-funded by Pfizer for clinical
development of Piroxicam. The pre-funded development reserve was exhausted
during 1997.
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 and
retention bonus payments as well as a write-down of the Abita Springs facility
and equipment
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to net realizable value. During the year ended June 30, 1996, the Company
recorded $677,000 in charges related to legal, accounting and severance costs
associated with the acquisition of PRL.
Interest expense increased 12.7%, reflecting higher average outstanding
debt balances. Interest income declined 63.7% due to the liquidation of
investments of Piroxicam development funds to finance clinical trials.
Net income for 1997 was $1,792,000 or $0.11 per diluted share compared to
$788,000 or $0.05 per diluted share for the year ended June 30, 1996. The
increase in earnings resulted from the above mentioned items.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." See Note S to Consolidated Financial Statements.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
Net sales declined 2.5% for the six months ended December 31, 1996 as
compared to the same period in 1995. Ophthalmic segment sales declined 7.6%,
primarily due to the Company's decision to discontinue its practice of granting
wholesaler discounts at the end of each quarter. Injectable segment sales
increased 7.2%, primarily due to the acquisition of two anesthesia products from
Janssen Pharmaceutica, Inc. in July 1996.
Consolidated gross profit declined 11.1% compared to the prior year period,
with gross margins declining from 38% to 35%. The decline can be attributed to
underabsorption of plant overhead expenses caused by decreased unit sales volume
in contract manufacturing services.
Selling, general and administrative expenses increased 2.5% over the prior
year period, primarily due to increased marketing and promotional activities in
the ophthalmic segment. Research and development expenses increased 69.2%,
reflecting an increased number of products in development.
Interest and other income (expense) increased due to increased interest
expense on higher average outstanding debt balances.
Net income for the period was $44,000 or $0.00 per diluted share compared
with $796,000 or $0.05 per diluted share in the prior year period. The decline
is primarily due to the underabsorption of manufacturing overhead expenses and
the increase in research and development expenditures.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 1998, the Company had cash and cash equivalents of
$736,000. Working capital at that date was $11,040,000 versus $11,021,000 at
December 31, 1997. The Company manages its cash balances to minimize interest
expense on its line of credit borrowing. At December 31, 1998, the Company had
$2.4 million available under its revolving credit facility.
During the year ended December 31, 1998, the Company generated $1,093,000
in cash from operations after financing its working capital requirements,
primarily an increase in accounts receivable and inventories related to
increased sales volume, including acquired products. Management anticipates
additional investment in working capital to finance continued sales growth.
Investing activities, which include the purchase of product-related intangible
assets as well as equipment required $13,668,000 in cash. Investing activities
were funded through issuance of long-term debt of $14,404,000 and proceeds from
the exercise of stock options of $1,102,000. The Company's repayment of
short-term borrowings and capital lease obligations used $1,899,000 in cash. As
indicated in Note J to the Consolidated Financial Statements, in 1997 the
Company entered into a $15 million revolving credit arrangement, increased to
$25 million in 1998, subject to certain financial covenants. 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 immediate future, but additional long-term financing will be needed to
meet the Company's acquisition plans. There are no guarantees that such
financing will be available or available at an acceptable cost.
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YEAR 2000 ISSUES
The Company faces exposure to Year 2000 issues in its information
technology systems, embedded systems in its manufacturing equipment and
facilities, and in the systems utilized by its customers and suppliers. A
discussion of each of these exposures follows. The Company does not expect Year
2000 issues to have a material adverse effect on its financial condition or
results of operations.
The Company utilizes information technology systems to store and process
its business transactions. Lack of Year 2000 compliance in any of these systems
could result in disruption of routine accounts payable, accounts receivable and
inventory transactions which could in turn effect operating cash flows. The
Company utilizes commercially available financial software, and has no
internally developed programming which would require modification. To become
Year 2000 compliant, the Company's information technology systems required
upgrading the server software at its Decatur location and the installation of
Year 2000 compliant financial software in its Buffalo Grove location. The
Company is dependent upon the representations of its hardware and software
vendors to ensure Year 2000 compliance, and has received such representations.
The Company currently has a substantial number of inventory items with product
expiration dates in the year 2000 and beyond and has experienced no problems
with system misclassification of such products as expired. The cost of the
required software upgrade and conversion is estimated at $600,000, of which
approximately $450,000 had been incurred through December 31, 1998. The most
reasonably likely worst-case scenario would involve capturing transactional data
through commonly used spreadsheets.
The Company utilizes various automated production equipment and facilities
components such as telecommunications systems, alarms and sprinkling systems in
the course of normal operations. Lack of Year 2000 compliance in any of these
embedded systems could result in business interruptions relating to production
delays and disruption of customer service and telesales functions, which could
in turn effect operating profits and cash from operations. The Company is
dependent upon the representations of its vendors to ensure Year 2000
compliance, and is in the process of receiving such representations. The most
reasonably likely worst-case scenario would involve manual system overrides and
added personnel to perform otherwise automated functions.
The Company's customers utilize various systems to process transactions in
the normal course of business. Smaller customers tend to utilize manual
accounting systems and therefore present less risk. Wholesalers and other larger
customers tend to rely on automated processing systems for inventory control and
accounts payable. Lack of Year 2000 compliance in these customer systems could
result in erroneous product returns for short-dated product and disruption of
payments of outstanding invoices, which would in turn effect operating cash
flows. The Company is dependent upon representations of its customers to ensure
Year 2000 compliance, and is in the process of receiving such representations.
The Company has already sold a substantial amount of product with expiration
dates in the year 2000 and beyond and has experienced no problems with erroneous
returns of such product for short-dating. The most reasonably likely worst-case
scenario would involve added personnel to perform otherwise automated functions.
The Company's vendors and suppliers utilize various systems to process
transactions in the normal course of business. Lack of Year 2000 compliance in
these vendor systems could result in shortages of required components and raw
materials due to misclassification of ship dates or expiration dates as well as
disruption of supply or service due to misclassification of invoices as past
due, which would in turn effect operating profits and cash from operations. The
Company is dependent upon the representations of its vendors and suppliers to
ensure Year 2000 compliance, and is in the process of receiving such
representations. The Company has already purchased a substantial amount of raw
material with expiration dates in the year 2000 and beyond and has experienced
no apparent shortages of materials due to erroneous expiration dates. The most
reasonably likely worst-case scenario would involve added personnel to perform
otherwise automated functions.
The Company's utilities and freight suppliers use various automated systems
to route power and telecommunications signals and to schedule shipments and
deliveries. Lack of Year 2000 compliance in these suppliers' systems could
result in business interruptions due to production delays and disruption of
customer
10
12
service, telesales and distribution functions, which could in turn effect
operating profits and cash from operations. The Company is dependent upon the
representations of its suppliers to ensure Year 2000 compliance, and is in the
process of receiving such representations. The most reasonably likely worst-case
scenario would involve manual system overrides and added personnel to locate
viable carriers.
The Company has completed installation of its Year 2000 compliant financial
system in the Buffalo Grove location, and began parallel processing in the
fourth quarter of 1998. Conversion to the live compliant system was begun in
January 1999, and is expected to be completed by June 1999. Upgrade of the
server in the Decatur location is expected to be completed by June 30, 1999.
Surveys of customer and supplier compliance are expected to be completed by June
1999.
SELECTED QUARTERLY DATA
In Thousands, Except Per Share Amounts
NET INCOME (LOSS)
------------------------------
NET GROSS PER SHARE PER SHARE
SALES PROFIT AMOUNT BASIC DILUTED
------- ------- ------ --------- ---------
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 - initial filing................... 15,138 7,868 345 0.02 0.02
3rd Quarter - adjustment....................... - -- 743 0.04 0.04
3rd Quarter - amended filing *................. 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
======= ======= ====== ====== ======
Year Ended December 31, 1997:
1st Quarter.................................... $ 8,869 $ 3,428 $ (577) $(0.03) $(0.03)
2nd Quarter.................................... 10,176 4,916 742 0.04 0.04
3rd Quarter.................................... 11,058 4,745 825 0.05 0.05
4th Quarter.................................... 12,220 5,687 802 0.05 0.05
------- ------- ------ ------ ------
$42,323 $18,776 $1,792 $ 0.11 $ 0.11
======= ======= ====== ====== ======
Six Months Ended December 31, 1996:
1st Quarter.................................... $ 8,101 $ 2,969 $ 35 $ -- $ --
2nd Quarter.................................... 8,418 2,789 9 -- --
------- ------- ------ ------ ------
$16,519 $ 5,758 $ 44 $ -- $ --
======= ======= ====== ====== ======
- ---------------
* The 3rd Quarter amended filing reflects the new guidance from the SEC in
relation to in-process research and development write-offs, which the
Company recorded in the third quarter of fiscal 1998 as part of the Advanced
Remedies, Inc. asset acquisition.
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 possible 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.
11
13
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.............................. 13
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 14
Consolidated Statements of Income for the years ended
December 31, 1998 and 1997, the six months ended December
31, 1996 and the year ended June 30, 1996................. 15
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998 and 1997, the six months
ended December 31, 1996 and the year ended June 30,
1996...................................................... 17
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997, the six months ended December
31, 1996 and the year ended June 30, 1996................. 18
Notes to Consolidated Financial Statements.................. 19
12
14
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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996 and the year
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Akorn, Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years ended December 31, 1998 and 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
February 26, 1999
13
15
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------
1998 1997
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 736 $ 2,413
Certificates of deposit................................... -- 96
Trade accounts receivable (less allowance for
uncollectibles of $425 and $522 at December 31, 1998
and 1997, respectively)................................ 11,165 5,429
Inventory................................................. 11,004 9,955
Deferred income taxes..................................... 932 1,350
Prepaid expenses and other assets......................... 1,111 390
------- -------
TOTAL CURRENT ASSETS................................... 24,948 19,633
------- -------
OTHER ASSETS
Intangibles, net......................................... 20,541 6,588
Other.................................................... 67 99
------- -------
TOTAL OTHER ASSETS..................................... 20,608 6,687
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 15,860 12,395
------- -------
TOTAL ASSETS........................................... $61,416 $38,715
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings..................................... $ -- $ 1,750
Current installments of long-term debt.................... 7,284 --
Current portion of capital lease obligations.............. 161 149
Trade accounts payable.................................... 3,476 3,447
Income taxes payable...................................... 1,472 462
Accrued compensation...................................... 858 985
Accrued reorganization costs.............................. -- 83
Accrued expenses and other liabilities.................... 657 1,736
------- -------
TOTAL CURRENT LIABILITIES.............................. 13,908 8,612
------- -------
Long-term debt.............................................. 20,448 8,800
Capital lease obligations................................... 42 203
Deferred income taxes....................................... 738 849
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 18,121,514 and
17,630,076 shares at December 31, 1998 and 1997,
respectively........................................... 17,952 16,241
Retained earnings......................................... 8,328 4,010
------- -------
TOTAL SHAREHOLDERS' EQUITY............................. 26,280 20,251
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $61,416 $38,715
======= =======
See notes to consolidated financial statement.
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AKORN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1996
------- ------- ------------ ----------
Net sales........................................ $56,667 $42,323 $16,519 $33,925
Cost of goods sold............................... 27,607 23,547 10,761 21,972
------- ------- ------- -------
GROSS PROFIT................................... 29,060 18,776 5,758 11,953
Selling, general and administrative expenses..... 13,291 11,949 4,755 8,855
Amortization of intangibles...................... 2,315 338 64 119
Research and development......................... 4,010 1,873 809 1,213
Relocation costs................................. -- 1,451 -- --
Acquisition and severance costs.................. -- -- -- 677
------- ------- ------- -------
19,616 15,611 5,628 10,864
------- ------- ------- -------
OPERATING INCOME............................... 9,444 3,165 130 1,089
Interest and other income (expense):
Interest income................................ 1 41 33 113
Interest expense............................... (1,451) (497) (243) (441)
Offering costs................................. (350)
Other income, net.............................. 42 135 150 216
------- ------- ------- -------
(1,758) (321) (60) (112)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES....................... 7,686 2,844 70 977
Income taxes..................................... 3,039 1,052 26 189
------- ------- ------- -------
NET INCOME....................................... $ 4,647 $ 1,792 $ 44 $ 788
======= ======= ======= =======
NET INCOME PER SHARE:
BASIC....................................... $ 0.26 $ 0.11 $ -- $ 0.05
======= ======= ======= =======
DILUTED..................................... $ 0.25 $ 0.11 $ -- $ 0.05
======= ======= ======= =======
Weighted average shares outstanding:
Basic.......................................... 17,891 16,614 16,580 16,383
======= ======= ======= =======
Diluted........................................ 18,766 16,925 16,763 16,788
======= ======= ======= =======
15
17
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED YEAR ENDED
----------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1996
------- ------- ------------ ----------
Earnings
Income applicable to common stock.............. $ 4,647 $ 1,792 $ 44 $ 788
======= ======= ======= =======
Shares
Weighted average number of shares
outstanding................................. 17,891 16,614 16,580 16,383
Net income per share -- basic.................... $ 0.26 $ 0.11 $ 0.00 $ 0.05
======= ======= ======= =======
Additional shares assuming conversion of
options..................................... 875 311 183 405
------- ------- ------- -------
Pro forma shares............................... 18,766 16,925 16,763 16,788
Net income per share -- diluted.................. $ 0.25 $ 0.11 $ 0.00 $ 0.05
======= ======= ======= =======
See notes to consolidated financial statements
16
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AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK UNREALIZED
--------------------- GAIN (LOSS)
SHARES RETAINED TREASURY ON MARKETABLE
OUTSTANDING AMOUNT EARNINGS STOCK EQUITY SECURITIES TOTAL
----------- ------- -------- -------- ----------------- -------
Balances at July 1, 1995........... 16,305 $13,959 $1,830 $(291) $ 87 $15,585
Net income......................... 788 788
Exercise of stock options.......... 249 215 186 198 599
Treasury stock received in lieu of
cash............................. (36) (123) (123)
Dividends paid to Subchapter S
shareholders..................... (583) (583)
Reversal of unrealized gain on
marketable equity securities, net
of tax........................... (87) (87)
Treasury stock reissued............ 56 (2) 124 122
------- ------- ------ ----- ----- -------
Balances at June 30, 1996.......... 16,574 14,174 2,219 (92) -- 16,301
Net income......................... 44 44
Treasury stock reissued............ 18 (32) 61 29
------- ------- ------ ----- ----- -------
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
======= ======= ====== ===== ===== =======
See notes to consolidated financial statements.
17
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AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS
YEARS ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------ ------------ ----------
1998 1997 1996 1996
-------- ------- ------------ ----------
OPERATING ACTIVITIES
Net income....................................... $ 4,647 $ 1,792 $ 44 $ 788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 3,615 1,515 720 984
Provision for losses on accounts receivable
and inventory............................. -- 1,188 303 825
Deferred income taxes....................... 307 34 651 (578)
Write down of building and equipment........ -- 400 -- --
Other....................................... -- 43 26 (80)
Changes in operating assets and liabilities:
Accounts receivable....................... (5,736) (4,170) 267 424
Inventory, prepaid expenses and other
assets................................. (1,770) (2,235) (132) (3,129)
Trade accounts payable and accrued
expenses............................... (980) 1,721 1,438 1,229
Income taxes payable...................... 1,010 461 (625) (155)
Pre-funded development costs.............. -- (685) (139) (298)
-------- ------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES....................................... 1,093 64 2,553 10
INVESTING ACTIVITIES
Purchases of property, plant and equipment....... (4,765) (1,154) (1,986) (1,360)
Product licensing costs.......................... (1,820) (68) (28) (172)
Purchases of investments......................... -- -- (576) (1,173)
Sales of investments............................. 96 480 902 1,832
Purchase of product intangibles.................. (7,179) (5,645) (340) --
-------- ------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............ (13,668) (6,387) (2,028) (873)
FINANCING ACTIVITIES
Proceeds from exercise of stock options.......... 1,102 2,085 29 599
Repayments of long-term debt..................... (2,583) (33) (447) (442)
Proceeds from issuance of long-term debt......... 14,404 3,955 1,500 400
Pre-funded development costs..................... -- -- -- 150
Principal payments under capital lease
obligations.................................... (149) (151) (74) (151)
Short-term borrowings, net....................... (1,750) 1,500 (1,044) 1,006
Dividends paid................................... -- -- -- (583)
Debt acquisition costs........................... (126) -- -- --
-------- ------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES..................................... 10,898 7,356 (36) 979
-------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................. (1,677) 1,033 489 116
Cash and cash equivalents at beginning of year... 2,413 1,380 891 775
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR......... $ 736 $ 2,413 $ 1,380 $ 891
======== ======= ======= =======
See notes to consolidated financial statements.
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20
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. (the Company) and its wholly owned subsidiaries,
Compass Vision, Inc. (Compass), Spectrum Scientific Pharmaceuticals, Inc.
(Spectrum), Walnut Pharmaceuticals, Inc. (Walnut) and Taylor Pharmaceuticals,
Inc. (Taylor). Balances and activities of Compass, Spectrum and Walnut are
immaterial. Intercompany transactions and balances have been eliminated in
consolidation.
The Company acquired Pasadena Research Laboratories, Inc. (PRL) effective
May 31, 1996 in a business combination accounted for as a pooling of interests.
The acquired operations of PRL were merged into Taylor's operations subsequent
to the acquisition (see Note B). All financial information presented for periods
prior to the acquisition have been restated to include the operations of PRL.
Change in Fiscal Year End: Effective July 1, 1996, the Company changed its
fiscal year end from June 30 to December 31. The following table sets forth the
results of operations for the transition period ended December 31, 1996 and the
unaudited results of operations for the six months ended December 31, 1995, the
prior period comparable to the transition period:
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net sales................................................... $16,519 $16,949
Gross profit................................................ 5,758 6,477
Income before income taxes.................................. 70 1,289
Provision for income taxes.................................. 26 493
Net income.................................................. 44 796
Net income per share -- basic............................... $ -- $ 0.05
-- diluted........................... $ -- $ 0.05
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 G). 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
19
21
the acquired product, which range from 17 months to 18 years. Accumulated
amortization at December 31, 1998 and 1997 was $2,976,424 and $661,432,
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 short 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 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 March 31, 1998, the Company financed the acquisition of two product
licenses with long-term debt in the amount of $3.905 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.
In July 1998, the Company financed the acquisition of four product licenses
with long-term debt in the amount of $3.332 million.
NOTE C -- ACQUISITION OF PASADENA RESEARCH LABORATORIES, INC.
On May 31, 1996, the Company acquired Pasadena Research Laboratories, Inc.
(PRL) in a business combination accounted for as a pooling of interests. The
Company issued 1.4 million shares of its common stock in exchange for all of the
outstanding shares of PRL. PRL was merged into the operations of Taylor and the
Company was realigned into an ophthalmic division and an injectable division.
20
22
The Company's financial statements have been restated to include the
results of PRL for all periods presented. Combined and separate results of
operations of the Company and PRL during the periods preceding the merger are
presented below.
AKORN PRL COMBINED
------- ---------- --------
(IN THOUSANDS)
Eleven months ended May 31, 1996 (unaudited):
Net sales.............................................. $27,361 $ 3,684 $31,045
Net income............................................. 675 409 1,084
These combined financial results include no significant adjustments to
conform the accounting policies of the two companies.
In connection with the merger, the Company recorded certain charges in the
fourth quarter of the fiscal year ended June 30, 1996 for transaction costs
($109,534) and transitional costs ($567,772) associated with the realignment of
the company into two separate reporting divisions. The transaction costs include
legal, accounting and other directly related acquisition costs. Transitional
costs consist primarily of provisions for severance related costs.
NOTE D -- REORGANIZATION OF MANUFACTURING OPERATIONS
On January 15, 1992, the Company acquired Taylor Pharmaceuticals, Inc. in a
business combination accounted for as a pooling of interests. Taylor was a
contract manufacturer of sterile pharmaceuticals, which it produced and
delivered pursuant to contracts with third parties.
As part of the acquisition of Taylor in 1992, the Company paid a finder's
fee to an affiliate of Dr. John N. Kapoor, Chairman of the Board (the
affiliate). This finder's fee was in the form of 250,000 shares of Company
Common Stock valued at $3.50 per share. Of the total shares issued, 125,000 were
subject to forfeiture if the market price of the Company's Common Stock did not
reach at least $5.00 per share by January 15, 1996. In August 1995, the Company,
the affiliate and Dr. Kapoor entered into an agreement under which (i) the
forfeiture period was extended to January 15, 1998, (ii) forfeiture would not
occur in the event that persons unaffiliated with Dr. Kapoor acquire beneficial
ownership of more than 50% of the outstanding common stock of the Company and
(iii) Dr. Kapoor waived his right to receive $40,000 otherwise payable to him by
the Company for serving as Chairman of the Board in fiscal 1996. In May 1997 the
Company extended the forfeiture period to January 15, 2000 in consideration for
which Dr. Kapoor waived his right to receive $40,000 otherwise payable to him
for serving as Chairman of the Board in 1997. On February 20, 1998, the
Company's common stock closed at $5.1875 with the result that the above
described forfeiture provision was terminated.
NOTE E -- PRODUCT AND OTHER ACQUISITIONS
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 NDA,
trademark and U.S. trade name rights to Paremyd, a topical mydriatic combination
product, from Allergan. Paremyd had been off the
21
23
market for all of 1997 due to a raw material shortage. The Company will, with
Allergan's assistance, move quickly to obtain FDA approval to manufacture the
product at Taylor. 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 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 are 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 are secured by irrevocable bank letters of credit, which
are issued under the revolving credit facility (see Note J). The acquisition
cost has been allocated to intangibles and will be amortized for 17 months
(patent) and 15 years.
Effective December 15, 1997, the Company entered into an agreement with
Advanced Remedies, Inc. (ARI), a subsidiary of Sidmak Laboratories, Inc., to
acquire the ANDAs of two ophthalmic ointments, "Erythromycin Ophthalmic Ointment
USP, 0.5%" and "Bacitracin Zinc & Polymyxin B Sulfate Ophthalmic Ointment USP".
These products were previously purchased by the Company from third party
manufacturers. The total acquisition cost was $1.75 million, payable in seven
equal monthly installments, and is included in the accompanying Balance Sheet as
short term borrowings at December 31, 1997. The acquisition cost has been
allocated to intangibles and will be amortized over 15 years.
Effective April 1, 1997, the Company entered into an agreement with
Becton-Dickinson and Company to acquire the NDAs, ANDAs and the trademarks and
trade names of three products. As part of this agreement, the Company also
acquired certain product inventory. The total acquisition cost was $4.0 million,
of which $2.5 million was paid in cash financed through the Company's revolving
line of credit and $1.5 million was paid with a non-interest bearing note
maturing in April 1999, secured by an irrevocable bank letter of credit. The
Company has imputed interest on the note at an annual rate of 7.5%. The portion
of the acquisition costs allocated to intangibles amounted to $3,725,000 and
will be amortized over 18 years.
Effective July 1, 1996, the Company entered into an agreement with Janssen
Pharmaceutica, Inc. (Janssen) to acquire the NDAs and the U.S. trademarks and
trade names of two injectable products, as well as certain high-speed inspection
equipment. In exchange, the Company paid Janssen $1.6 million, financed
primarily through a $1.5 million commercial credit facility. The portion of the
acquisition costs allocated to intangibles amounted to $340,000 and will be
amortized over 15 years.
NOTE F -- ALLOWANCE FOR UNCOLLECTIBLES
The activity in the allowance for uncollectibles for the periods indicated
is as follows (in thousands):
YEARS ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
------------ DECEMBER 31, JUNE 30,
1998 1997 1996 1996
---- ---- ------------ --------
Balance at beginning of year......................... $522 $359 $339 $291
Provision for bad debts.............................. 50 285 24 124
Accounts written off................................. (147) (122) (4) (76)
---- ---- ---- ----
Balance at end of year............................... $425 $522 $359 $339
==== ==== ==== ====
22
24
NOTE G -- INVENTORY
The components of inventory are as follows (in thousands):
DECEMBER 31,
-----------------
1998 1997
------- ------
Finished goods.............................................. $ 6,947 $6,774
Work in process............................................. 2,635 1,093
Raw materials and supplies.................................. 1,422 2,088
------- ------
$11,004 $9,955
======= ======
Inventory at December 31, 1998 and 1997 is reported net of reserves for
slow-moving, unsalable and obsolete items of $571,566 and $709,957,
respectively.
NOTE H -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
1998 1997
-------- -------
Land........................................................ $ 479 $ 479
Buildings and leasehold improvements........................ 7,544 8,031
Furniture and equipment..................................... 15,984 12,723
Automobiles................................................. 32 133
-------- -------
24,039 21,366
Accumulated depreciation.................................... (10,744) (9,606)
-------- -------
13,295 11,760
Construction in progress.................................... 2,565 635
-------- -------
$ 15,860 $12,395
======== =======
NOTE I -- 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 six months ended December
31, 1996 and during fiscal 1996, the Company incurred development costs of
$534,696, $138,829, and $297,463, respectively, which were charged against the
pre-funded balance.
As part of the same agreement, Pfizer paid the Company an advance royalty
of $1 million. The Company recognized this deferred revenue over a one year
period beginning in March 1996.
NOTE J -- FINANCING ARRANGEMENTS
The Company's short-term borrowings are summarized as follows (in
thousands):
DECEMBER 31,
----------------
1998 1997
------ ------
Payable under lines of credit............................... $ -- $ --
Payable under bank and other notes.......................... -- 1,750
------ ------
$ -- $1,750
====== ======
23
25
Long-term debt consists of (in thousands):
DECEMBER 31,
-----------------
1998 1997
------- ------
Payable under lines of credit............................... $16,700 $7,300
Mortgages payable secured by real property located in
Decatur, Illinois......................................... 2,897 --
Notes payable secured by various assets, with maturities
through 2000 at interest rates ranging from 8% to
10.25%.................................................... 8,135 1,500
------- ------
27,732 8,800
Less current portion........................................ 7,284 --
------- ------
Long-term debt.............................................. $20,448 $8,800
======= ======
Maturities of debt are as follows (in thousands):
YEARS ENDING DECEMBER 31:
1999........................................................ $ 7,284
2000........................................................ 18,005
2001........................................................ 253
2002........................................................ 273
2003........................................................ 293
Thereafter.................................................. 1,624
-------
Total....................................................... $27,732
=======
In April 1997, the Company entered into an agreement to purchase certain
products from Becton-Dickinson and Company (See Note E). As consideration for
this purchase, the Company issued a $1,500,000 non-interest bearing note secured
by an irrevocable bank letter of credit. The Company recognizes interest expense
on the note at an imputed rate of 7.5 percent.
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, of which there were outstanding borrowings of $16,700,000 and
$5,900,000 letters of credit at December 31, 1998. The total outstanding
principal balance is payable in full on December 29, 2000. 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 6.425 percent at December 31, 1998.
The agreement provides that an annual commitment fee be paid by the Company
based on 0.25 percent 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 January 13, 1998, the Company entered into an agreement to purchase two
branded injectable products, Sufenta and Alfenta, from Janssen Pharmaceutica,
Inc. 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
Company is imputing interest on these payments with a 7.5 percent interest rate.
The second two payments are secured by irrevocable bank letters of credit, which
are issued under the revolving credit facility.
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 $2,897,000 at December 31, 1998. 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 percent and is secured by the real property located in
Decatur, Illinois.
24
26
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 percent
interest rate.
NOTE K -- LEASING ARRANGEMENTS
The Company leases certain equipment under capital leasing arrangements
which expire through the year 2000.
Property, plant and equipment includes the following amounts relating to
such capital leases (in thousands):
DECEMBER 31,
--------------
1998 1997
----- -----
Furniture and equipment..................................... $ 806 $ 806
Less accumulated depreciation............................... (540) (383)
----- -----
$ 266 $ 423
===== =====
Depreciation expense provided on these assets was $157,034, $157,034,
$78,517 and $94,254 for the years ended December 31, 1998 and 1997, the six
months ended December 31, 1996 and the year ended June 30, 1996, respectively.
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).
YEARS ENDING DECEMBER 31,
1999........................................................ $ 173
2000........................................................ 43
------
Total Minimum Lease Payments................................ 216
Less: Amount Representing Interest.......................... (12)
------
Present Value of Net Minimum Lease Payments................. $ 204
======
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 $570,288, $289,276,
$38,051 and $73,196 for the years ended December 31, 1998 and 1997, the six
months ended December 31, 1996 and the year ended June 30, 1996, respectively.
The following is a schedule, by year, of future minimum rental payments
required under these non-cancelable operating leases (in thousands):
YEARS ENDED DECEMBER 31,
1999........................................................ $ 511
2000........................................................ 496
2001........................................................ 494
2002........................................................ 362
2003........................................................ 295
2004........................................................ 291
------
Total Minimum Payments Required............................. $2,449
======
The Company currently sub-lets portions of its leased space. Rental income
under these sub-leases was $41,160 in 1998.
25
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NOTE L -- 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, 1998,
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, 1998 and 1997, the six months ended December 31, 1996
and the year ended June 30, 1996 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, 1998, 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,
1998, 1997 and 1996 and June 30, 1996 and changes during the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996 and the year
ended June 30, 1996 is presented below (shares in thousands):
YEARS SIX MONTHS ENDED YEAR
ENDED DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
------------------------------------- ----------------- -----------------
1998 1997 1996 1996
----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ --------
Outstanding at beginning of
period........................ 1,899 $2.35 1,281 $2.35 1,243 $2.57 1,624 $2.56
Granted......................... 784 $5.18 927 $2.38 401 $2.19 215 $2.75
Exercised....................... (530) $2.20 (22) $2.13 -- -- (250) $2.40
Expired/Canceled................ (201) $5.96 (287) $2.46 (363) $3.00 (346) $3.00
----- ----- ----- -----
Outstanding at end of period.... 1,952 $3.16 1,899 $2.35 1,281 $2.35 1,243 $2.57
===== ===== ===== =====
Options exercisable at end of
period........................ 1,033 $2.87 1,086 $2.35 870 $2.33 1,134 $2.56
Options available for future
grant......................... 2,163 1,246 886 924
Weighted average fair value of
options granted during the
period........................ $2.58 $1.04 $0.83
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 fair value of each option granted during the six months ended December
31, 1996 and the year ended June 30, 1996 is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions: (i)
dividend yield of 0%, (ii) expected volatility of 28%, (iii) risk-free interest
rate of 6.5% and (iv) expected life of 5 years.
26
28
The following table summarizes information about stock options outstanding
at December 31, 1998 (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 1998 LIFE PRICE 1998 PRICE
- ------------------------ -------------- ---------------- ---------------- -------------- ----------------
$1.50.................... 88 1.4 years $1.50 88 $1.50
$1.75 -- $2.12........... 85 3.5 years $2.12 42 $2.12
$2.13 -- $2.20........... 504 3.2 years $2.15 298 $2.14
$2.28 -- $2.54........... 326 3.3 years $2.37 158 $2.36
$2.63 -- $2.81........... 183 2.1 years $2.75 152 $2.75
$2.88 -- $3.94........... 159 1.8 years $3.64 130 $3.58
$4.06 -- $4.60........... 347 4.1 years $4.06 85 $4.06
$5.50 -- $5.56........... 240 4.8 years $5.55 60 $5.55
$8.00 -- $8.38........... 20 4.4 years $8.38 20 $8.38
----- -----
1,952 1,033
===== =====
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, 1998 and 1997, the six months ended December 31, 1996 and the year
ended June 30, 1996 would have been the pro forma amounts indicated below (in
thousands, except per share amounts).
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED
----------------------------------------- DECEMBER 31, YEAR ENDED
1998 1997 1996 JUNE 30, 1996
------------------- ------------------- ------------------- -------------------
AS AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- -------- -------- --------
Net income, (loss)....... $4,647 $4,110 $1,792 $1,441 $44 $(40) $ 788 $ 769
====== ====== ====== ====== === ==== ===== =====
Net income per share -
diluted................ $ 0.25 $ 0.22 $ 0.11 $ 0.09 $-- $ -- $0.05 $0.05
====== ====== ====== ====== === ==== ===== =====
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 were issued from treasury stock through the
first half of 1997 and during parts of 1998 and approximated 8,000, 9,000,
18,000, and 56,000 shares, respectively, during the years ended December 31,
1998 and 1997, the six months ended December 31, 1996 and the year ended June
30, 1996. New shares issued under the plan approximated 8,000 in 1998 and 11,000
in 1997.
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NOTE M - INCOME TAXES
The income tax provision (benefit) consisted of the following (in
thousands):
CURRENT DEFERRED TOTAL
------- -------- ------
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
====== ===== ======
Six months ended December 31, 1996:
Federal................................................... $ (557) $ 581 $ 24
State..................................................... (68) 70 2
------ ----- ------
$ (625) $ 651 $ 26
====== ===== ======
Year ended June 30, 1996:
Federal................................................... $ 756 $(516) $ 240
State..................................................... 11 (62) (51)
------ ----- ------
$ 767 $(578) $ 189
====== ===== ======
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 SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
---------------- ---------------- ----------
1998 1997 1996 1996
------ ------ ---------------- ----------
Computed "expected" tax expense.............. $2,613 $ 947 $24 $332
Increase in income taxes resulting from:
State income taxes, net of federal income
tax benefits............................... 371 85 2 4
Pre-merger earnings of PRL................. -- -- -- (139)
Other, net................................. 55 20 -- (8)
------ ------ --- ----
Income tax expense........................... $3,039 $1,052 $26 $189
====== ====== === ====
Deferred tax assets (liabilities) at December 31, 1998 and 1997 include (in
thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Other accrued expenses...................................... $ 621 $517
Intangible assets, net...................................... 214 (288)
Property, plant and equipment, net.......................... (1,208) (374)
Other, net.................................................. 567 646
------- ----
$ 194 $501
======= ====
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30
The net deferred tax asset is classified in the accompanying balance sheets
as follows (in thousands):
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Deferred tax asset - current................................ $ 932 $1,350
Deferred tax liability - noncurrent......................... (738) (849)
------- ------
$ 194 $ 501
======= ======
NOTE N - 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 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.
During the fourth quarter of the year ended June 30, 1996, the Company revised
its assumptions underlying the reserve for chargebacks, resulting in a reduction
of net sales of $250,000.
The Company records a reserve for slow-moving and obsolete inventory based
upon evaluation of product dating and unit sales forecasts. Throughout 1998, the
Company evaluated its estimate for unsalable product resulting in an estimate
increase of approximately $665,000. During the fourth quarter of the year ended
December 31, 1997, the Company increased its estimate for unsalable inventory by
approximately $900,000. During the quarters ended March 31, June 30 and December
31, 1996, the Company increased its estimate for unsalable inventory by
approximately $300,000, $200,000 and $260,000, respectively. These changes in
estimate are reported as an increase in cost of goods sold.
During the quarter ended December 31, 1997, the Company increased its
estimate for management bonuses by approximately $300,000.
NOTE O - 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, 1998 and 1997, the six
months ended December 31, 1996 and the year ended June 30, 1996 totaled $89,020,
$65,704, $34,805 and $100,615, respectively. The employer's matching
contribution is a percentage of the amount contributed by each employee and is
funded on a current basis.
NOTE P -- 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
29
31
injectable pharmaceuticals, primarily in niche markets. Selected financial
information by industry segment is presented below (in thousands).
YEARS ENDED YEAR
DECEMBER 31, SIX MONTHS ENDED ENDED
----------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1996
------- ------- ---------------- --------
NET SALES
Ophthalmic...................................... $29,205 $24,901 $10,271 $20,833
Injectable...................................... 27,462 17,422 6,248 13,092
------- ------- ------- -------
Total net sales............................... $56,667 $42,323 $16,519 $33,925
======= ======= ======= =======
OPERATING INCOME
Ophthalmic...................................... $ 4,219 $ 1,598 $ 691 $ 1,037
Injectable...................................... 6,364 2,428 (192) 994
General Corporate............................... (1,139) (861) (369) (942)
------- ------- ------- -------
Total operating income........................ 9,444 3,165 130 1,089
Interest and other (expense), net............... (1,758) (321) (60) (112)
------- ------- ------- -------
Income before income taxes...................... $ 7,686 $ 2,844 $ 70 $ 977
======= ======= ======= =======
IDENTIFIABLE ASSETS
Ophthalmic...................................... $34,538 $20,957 $12,293 $13,179
Injectable...................................... 26,878 17,758 15,720 16,388
------- ------- ------- -------
Total identifiable assets..................... $61,416 $38,715 $28,013 $29,567
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION
Ophthalmic...................................... $ 1,009 $ 516 $ 214 $ 331
Injectable...................................... 2,632 999 506 653
------- ------- ------- -------
Total depreciation and amortization........... $ 3,641 $ 1,515 $ 720 $ 984
======= ======= ======= =======
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. 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.
For the year ended June 30, 1996, operating income for the ophthalmic and
injectable segments includes non-recurring charges of $385,000 and $292,000,
respectively, related to the acquisition of PRL and the realignment of the
Company into two separate divisions.
The Company records sales between the segments at fully absorbed cost.
NOTE Q -- 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.
30
32
NOTE R -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED YEAR ENDED
--------------- DECEMBER 31, JUNE 30,
1998 1997 1996 1996
------ ------ ----------------- -----------
Interest and taxes paid:
Interest...................................... $1,121 $ 592 $189 $442
Income taxes.................................. 1,167 788 -- 867
Noncash investing and financing activities:
Treasury stock received for exercise of stock
options.................................... 465 -- -- 123
Notes issued for product acquisitions......... 6,741 3,250 -- --
NOTE S -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires all items of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Other comprehensive income may include foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. The accumulated balance of
other comprehensive income must be displayed separately from retained earnings
and additional paid-in capital in the equity section of a statement of financial
position. The Company adopted this accounting standard January 1, 1998, as
required. The Company has no other comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a Company's operating segments. The Company adopted this
accounting standard as of December 31, 1998, as required. The Company believes
its current disclosures comply with this standard.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There was no change in the principal independent auditor of the Company or
any significant subsidiary of the Company during the years ended December 31,
1998 and 1997, the six month transition period ended December 31, 1996 or the
fiscal year ended June 30, 1996.
31
33
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information concerning directors is incorporated by reference to the
Company's Definitive Proxy Statement for its 1999 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
captions "Executive Compensation", "Compensation of Directors", "Election of
Directors -- Compensation Committee Interlocks and Insider Participation", and
"Compensation Committee Report" 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,
1998.
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, 1998.
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 "Certain Relationships and Related Transactions" 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, 1998.
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34
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith
and listed in the Exhibit Index which appears immediately before the first such
exhibit; the other exhibits are incorporated herein by reference, as indicated
in the following list.
(2.0) Agreement and Plan of Merger among Akorn, Inc., Taylor, and
Pasadena Research Laboratories, Inc. dated May 7, 1996,
incorporated by reference to the Company's report on Form
10-K for the fiscal year ended June 30, 1996.
(3.1) Restated Articles of Incorporation of the Company dated
September 6, 1991, incorporated by reference to Exhibit 3.1
to the Company's report on Form 10-K for the fiscal year
ended June 30, 1991.
(3.2) 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
transition period from July 1, 1996 to December 3, 1996.
(3.3) 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
31, 1996.
(4.1) Specimen Common Stock Certificate, incorporated by reference
to Exhibit 4.1 to the Company's report on Form 10-K for the
fiscal year ended June 30, 1988.
(10.1) 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
ended June 30, 1991.
(10.2) Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
Incentive Compensation Program, incorporated by reference to
Exhibit 10.33 to the Company's report on Form 10-K for the
fiscal year ended June 30, 1992.
(10.3) 1991 Akorn, Inc. Stock Option Plan for Directors,
incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-8, registration number
33-44785.
(10.4) Common Stock Purchase Warrant dated September 3, 1992,
issued by the Company to the John N. Kapoor Trust dated
September 20, 1989, incorporated by reference to Exhibit No.
7 to Amendment No. 3 to Schedule 13D, dated September 10,
1992, filed by John N. Kapoor and the John N. Kapoor Trust
dated September 20, 1989.
(10.5) Employment Agreement among Akorn, Inc., Taylor and Floyd
Benjamin dated May 31, 1996, incorporated by reference to
Exhibit 10.24 of the Company's report on Form 10-K for the
fiscal year ended June 30, 1996.
(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.
/s/ FLOYD BENJAMIN
By:
--------------------------------------
Floyd Benjamin
Chief Executive Officer
Date: March 10, 1999
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 10, 1999
- --------------------------------------------- (Principal Executive Officer)
Floyd Benjamin
/s/ RITA J. MCCONVILLE Chief Financial Officer March 10, 1999
- --------------------------------------------- (Principal Financial Officer and
Rita J. McConville Principal Accounting Officer)
/s/ JOHN N. KAPOOR, PH.D. Director March 10, 1999
- ---------------------------------------------
John N. Kapoor, Ph.D.
/s/ DANIEL E. BRUHL, M.D. Director March 10, 1999
- ---------------------------------------------
Daniel E. Bruhl, M.D.
/s/ DOYLE S. GAW Director March 10, 1999
- ---------------------------------------------
Doyle S. Gaw
34