Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 44± 193K
2: EX-10 Material Contract 2± 11K
3: EX-11 Statement re: Computation of Earnings Per Share 1 6K
4: EX-21 Subsidiaries of the Registrant 1 5K
5: EX-23 Exhibit 23.1 1 7K
6: EX-24 Exhibit 24.1 1 7K
7: EX-24 Exhibit 24.2 1 7K
8: EX-24 Exhibit 24.3 1 7K
9: EX-24 Exhibit 24.4 1 7K
10: EX-24 Exhibit 24.5 1 7K
11: EX-24 Exhibit 24.6 1 7K
12: EX-24 Exhibit 24.7 1 7K
13: EX-27 Financial Data Schedule (Pre-XBRL) 1 9K
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
____________________
Commission File Number: 0-13976
____________________
AKORN, INC.
(Name of small business issuer as specified in its charter)
LOUISIANA 72-0717400
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Akorn Drive, Abita Springs, Louisiana 70420
(Address of principal executive offices and zip code)
Issuer's telephone number: (504) 893-9300
____________________
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, No Par Value
(Title of Class)
____________________
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to
the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its fiscal year ended June 30, 1995 were $32,863,000.
The aggregate market value of the voting stock held by nonaffiliates
(affiliates being, for these purposes only, directors, executive officers
and holders of more than 5% of the Issuer's common stock) of the Issuer as
of September 8, 1995 was approximately $25,500,000.
The number of shares of the Issuer's common stock, no par value per share,
outstanding as of September 8, 1995 was 14,904,653.
____________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Issuer's Proxy Statement to be submitted to shareholders in
connection with their 1995 Annual Meeting are incorporated by reference
into Parts II and III of this Form 10-KSB.
Transitional Small Buisness Disclosure Format (check one): Yes No X
PART I
Item 1. Description of Business.
General Development of Business
Akorn, Inc. (Akorn or the Company) manufactures, markets and
distributes an extensive line of therapeutic, diagnostic and
surgical pharmaceutical and over-the-counter ophthalmic products.
In addition, through its wholly owned subsidiary Akorn
Manufacturing, Inc. (AMI), the Company provides sterile contract
manufacturing services to several large pharmaceutical companies.
Akorn, a Louisiana corporation founded in 1971, is headquartered
in Abita Springs, Louisiana, a suburb of New Orleans.
Prior to the fiscal year beginning July 1, 1989, the Company
purchased its entire ophthalmic product line on a contract basis
from several suppliers, who packaged and labeled the products
under the Company's name. In September 1989, in order to more
vertically integrate its operations, the Company acquired a
manufacturing facility in Los Angeles, California that was
capable of manufacturing sterile ophthalmic solutions,
suspensions, and human injectable products, among other products.
Until July 1991, the Company manufactured a substantial part of
its ophthalmic pharmaceutical product line at the Los Angeles
facility while continuing to have the balance supplied by outside
manufacturers. In September 1991, the Company decided to abandon
that facility due to the cost of bringing the facility into full
compliance with current "Good Manufacturing Practice" regulations
of the United States Food and Drug Administration (the FDA) and
to restructure its manufacturing operations by acquiring a
larger, more modern facility. Supply arrangements with other
manufacturers were renewed in order to maximize availability of
the Company's ophthalmic product line.
In January 1992, the Company acquired AMI, which at that time
was named Taylor Pharmacal Company, of Decatur, Illinois
(formerly Taylor Pharmacal Company) and began the process of
transferring to AMI the operations formerly conducted at the Los
Angeles facility while maintaining the sterile contract
manufacturing business conducted by AMI.
Ophthalmic Distribution Business
The Company distributes a complete line of therapeutic,
diagnostic and over-the-counter ophthalmic pharmaceutical
products as well as other surgical and office-based non-
pharmaceutical products. The Company's therapeutic ophthalmic
pharmaceutical product line is extensive and includes
antibiotics, anti-infectives, steroids, steroid combinations,
glaucoma medications, decongestants/antihistamines, and anti-
edema medications. Diagnostic products, primarily for use in
doctors' offices, include a complete line of mydriatics and
cycloplegics, anesthetics, topical stains, gonioscopic solutions
and others. Surgical products available from Akorn include
surgical knives and other surgical instruments, balanced salt
solution, post-operative kits, surgical tapes, eye shields, anti-
ultraviolet goggles, facial drape supports, and other supplies.
Ophthalmic over-the-counter products include various artificial
tear solutions, preservative-free lubricating ointments, lid
cleansers, vitamin supplements and contact lens accessories.
Contract Manufacturing Business
AMI manufactures sterile products, on a contract basis, for
third parties. The majority of AMI contracts are short-term in
nature and operate on the basis of signed purchase orders.
However, AMI is in the process of developing longer-term
contracts with minimum quantity requirements in order to
strengthen the commitments from its contract customers. Because
of the present nature of AMI contracts, its contract
manufacturing is more volatile than the ophthalmic distribution
segment, and given that sales to contract customers are large in
relations to the distribution segment sharp reduction in contract
manufacturing sales can occur should customers discontinue the
contract for any reason.
Sales and Marketing
While the Company's ophthalmic product line includes some
unique products, the majority are non-proprietary. As a result,
the Company relies on its expertise in marketing, distribution,
and support for products in order to maintain and increase market
share.
The Company maintains an efficient three-pronged ophthalmic
distribution sales effort. This effort includes 23 outside sales
representatives who, together with two district managers, make
personal calls on customers in the Northeast, Southeast, Midwest
and West regions of the country. In addition, the Company
maintains an in-house telemarketing and a customer service sales
group of 25 persons who operate at the Company's facilities in
Abita Springs. And finally, the Company also maintains a direct-
mail marketing effort.
The Company's ophthalmic distribution customers consist
primarily of ophthalmologists, optometrists, independent
pharmacies, and full-service wholesalers whose customers include
hospitals and other institutions.
The Company's sales and marketing efforts in the contract
manufacturing business have been limited to personal contact with
major pharmaceutical companies and limited trade journal
advertisements. Attendance at manufacturing trade shows will be
implemented in fiscal 1996. The Company's contract customers
include several large pharmaceutical companies.
The Company stresses its service and support as means to
attract and keep customers.
Research and Development
The acquisition of AMI provided the Company with resources to
begin its research and development program, which began in the
last quarter of fiscal 1992 and has since expanded. As of June
30, 1995 the Company had 4 new ANDAs on file with the FDA for
products which the Company has not previously manufactured. See
"Government Regulation." These products have a current aggregate
brand market of approximately $200 million. No assurance can be
given as to whether the Company will develop marketable products
based on these filings or as to the size of the market for any
such products.
The Company has plans to target its research and development
efforts on 20 to 30 additional products the patents on which have
expired or will expire in the near future. Production and
marketing of any products developed as a result of these efforts
are expected to take several years.
The Company also maintains an aggressive product licensing
effort. This effort has had the most immediate effect on
operating results because it allows the Company to use its
strength in marketing ophthalmic products. The Company also
anticipates manufacturing many of the licensed products.
At June 30, 1995, 21 full-time employees of the Company were
involved in research and development and product licensing. The
Company's research and development expenditures for 1995 and 1994
were $844,000 and $843,000, respectively.
The Company expects its research and development expenditures
to increase significantly in fiscal 1996.
Employee Relations
The Company has 331 full-time employees, of whom 65 are
employed in the Abita Springs facility, 241 are employed in
Decatur, Illinois and 25 are in outside sales. The Company
enjoys good relations with its employees, none of whom are
represented by a collective bargaining agent.
Competition
The manufacture and distribution of ophthalmic pharmaceutical
products is highly competitive, with many established
manufacturers, suppliers and distributors actively engaged in all
phases of the business. Most of the Company's competitors have
substantially larger financial and other resources, including a
larger volume of sales, more sales personnel and larger
facilities than the Company. The competitors which are dominant
in the ophthalmic distribution industry are Alcon Laboratories,
Inc., Allergan Pharmaceutical, Inc. and Bausch & Lomb, Inc. The
Company competes primarily on the basis of price and service.
The Company's principal supplier, Bausch & Lomb, Inc., is in
direct competition with the Company in several markets.
The manufacturing of sterile products must be performed under
the most rigorous FDA-mandated Good Manufacturing Practices.
Therefore the barriers to entry in the contract manufacturing of
sterile products are very high. The number of independent
contract manufacturers of sterile products continues to decline
as a result of these barriers. AMI's competitors in this area,
generally, are larger companies with greater financial and other
resources.
Product Supply
Since the acquisition of AMI in 1992, the Company has been
steadily regaining control of the supply of its ophthalmic
pharmaceutical products, which had been impacted by the closure
of the Los Angeles facility in 1991. During the fiscal year
ended June 30, 1995, approximately 52% of the Company's net
ophthalmic distribution sales were accounted for by products
manufactured at AMI and approximately 48% by unaffiliated
suppliers, the largest of which are Steris Laboratories, Inc. and
Bausch & Lomb, Inc. These companies supplied products accounting
for 15.1% and 14.2%, respectively, of the Company's net
ophthalmic distribution sales during fiscal 1995. No other
supplier supplied products accounting for more than 10% of the
Company's net ophthalmic distribution sales during fiscal 1995.
Government Regulation
All pharmaceutical manufacturers and distributors are subject
to extensive regulation by the federal government, principally by
the FDA and, to a lesser extent, by state governments. The
federal Food, Drug and Cosmetic Act (the FDA Act), the Controlled
Substance Act, and other federal statutes and regulations govern
or influence the development, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, pricing, advertising,
and promotion of products by the Company and its subsidiaries.
Included among the requirements of these statutes is that the
manufacturer's methods conform to current Good Manufacturing
Practices provided for in FDA regulations. Pursuant to its
powers under the FDA Act, the FDA inspects drug manufacturers and
storage facilities to determine compliance with its Good
Manufacturing Practice regulations, non-compliance with which can
result in fines, recall and seizure of products, total or partial
suspension of production, refusal of the government to approve
new drug applications, and criminal prosecution. The FDA also
has authority to revoke approval of drug products.
Except in the case of drugs in common usage before the FDA Act
became effective and in some other cases, FDA approval is
required before any drug can be manufactured and marketed. New
drugs require the filing of a New Drug Application (NDA) with the
FDA, which requires clinical studies demonstrating the safety and
efficacy of the drug and compliance with additional regulatory
requirements.
Abbreviated procedures are available for obtaining FDA
approval for those generic drugs which are equivalents of
existing brand name drugs, such as certain drugs that had been
manufactured at the Los Angeles facility and are expected to be
manufactured by AMI. In order to obtain approval of a new
generic drug, the Company files an Abbreviated New Drug
Application (ANDA) with the FDA. An ANDA is similar to a NDA,
except that the FDA waives the requirement of conducting clinical
studies of safety and efficacy. Instead, for drugs which contain
the same ingredients as drugs already approved for use in the
United States, the FDA ordinarily requires data showing that the
generic drug formulation is equivalent to the brand name drug and
that the product is stable in its formulation.
Over the past several years, the FDA has increased its
scrutiny of the operations of generic drug manufacturers like the
Company, and has increased the time required for its approval of
ANDAs and NDAs submitted by such companies. In addition, the
Office of Generic Drugs of the FDA, the division which monitors
and approves ANDAs, has increased its scrutiny regarding
concentrations of inactive ingredients for generic drugs as
compared to the innovator drug. This change has resulted in an
increase in the time spent on formulating ANDA products.
Item 1A. Executive Officers of the Registrant.
Certain information concerning each of the executive officers
of the Company is given below. Each executive officer of the
Company is a full time employee of the Company and serves in his
capacity at the pleasure of the Board of Directors.
Barry D. LeBlanc Mr. LeBlanc, age 40, was elected President,
Chief Executive Officer of the Company in December 1991. From
August 1987 to December 1991, Mr. LeBlanc served as a President
and Chief Operating Officer of the Company. He has also been a
director and member of the Executive Committee of the Company
since August 1987. Prior to 1987, Mr. LeBlanc was principally
employed as a practicing certified public accountant and served
as a financial consultant to the Company.
Harold O. Koch Mr. Koch, age 46, has served as Senior Vice
President since January 1995. From January 1993 to December
1994, he served as Vice President - Business Development. From
July 1991 to December 1992 Mr. Koch coordinated the
reorganization of the Company's manufacturing operations. From
November 1988 to June 1991, he acted as an independent consultant
in the area of biotechnology formulation, ophthalmic
manufacturing processes and ophthalmic marketing. From May 1987
to October 1988, he served as Vice President - Product
Development for The Cooper Company. Prior to this Mr. Koch
served as Director of Product Development for Cooper Vision
Ophthalmics.
Tim J. Toney Mr. Toney, age 53, has served as Vice President-
Manufacturing Operations since February 1993. Since the
Company's acquisition of AMI in January 1992 he has also served
as President of AMI. Prior thereto Mr. Toney had served as
Treasurer and Director of Sales and Marketing for AMI.
Eric M. Wingerter Mr. Wingerter, age 33, has served as Vice
President - Finance and Administration since July 1993 and as
Vice President - Finance from January 1993 through June 1993.
Since September 1988 Mr. Wingerter has been the Company's Chief
Financial Officer. From January 1984 to September 1988, he
practiced as a certified public accountant in the audit
department at Ernst & Young.
Item 2.Description of Property.
The Company's executive offices, sales and primary
distribution center are based in two adjacent buildings totalling
approximately 30,000 square feet located on ten acres of land in
Abita Springs, Louisiana. These buildings are believed adequate
for Akorn's present executive offices and sales and primary
warehousing and distribution activities. The land owned by the
Company in Abita Springs can accommodate growth in Company
executive and ophthalmic sales adn distribution operations for
the foreseeable future.
Through AMI, the Company owns a 76,000 square-foot facility
located on 15 acres of land in Decatur, Illinois. This facility
is currently used for packaging, distribution, warehousing and
office space. In addition, AMI owns a 55,000 square-foot
manufacturing facility, also in Decatur, Illinois. During the
fiscal year 1995, the Company substantially completed
construction related to the expansion of its ophthalmic
production facilities at AMI. The total cost of the expansion,
including capital equipment acquisitions, approximated $6
million.
Item 3. Legal Proceedings.
From time to time the Company becomes involved, in the
ordinary course of its business, in legal actions and claims.
The amount, if any, of ultimate liability with respect to such
matters cannot be determined. Management believes, however, that
any such liability will not have a material effect on the
Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company's shareholders was held on
October 29, 1994 (the "Meeting"). At the Meeting, all of the
nominees listed were elected, by the votes indicated below.
There were no broker non-votes with respect to any nominee. No
other directors have terms of office that continued after the
Meeting.
Nominee For Withheld
______________________ _____________ _____________
Daniel E. Bruhl, M.D. 12,778,433 22,462
J. Ed Campbell, M.D. 12,777,033 23,862
George S. Ellis, M.D. 12,777,033 23,862
Doyle S. Gaw 12,773,633 27,262
John N. Kapoor, Ph.D. 12,775,015 25,880
Barry D. LeBlanc 12,774,633 26,262
David H. Turner, M.D. 12,779,033 21,862
Lawrence A. Yannuzzi, M.D. 12,780,433 20,462
PART II
Item 5.Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the NASDAQ National
Market System under the symbol AKRN. On September 15, 1995, the
Company estimated that the number of holders of its Common Stock
was approximately 3,100, including record holders and individual
participants in security position listings.
High and low prices for the last two years were:
[Download Table]
1995 1994
_______________________________________________________________
Market Price<F1> Cash Market Price<F1> Cash
___________________ Dividends ________________ Dividends
Low High Declared Low High Declared
_______________________________________________________________
Declared
1st Quarter $2.38 $3.19 $ - $1.88 $2.75 $-
2nd Quarter 2.94 4.00 - 2.13 3.88 -
3rd Quarter 2.88 3.63 - 2.81 3.75 -
4th Quarter 2.25 3.31 - 2.63 3.38 -
<FN>
<F1> Per NASDAQ
</FN>
The Company's Board of Directors decided to suspend the payment of dividends
in the first fiscal quarter of 1992. Any such future payments will be, in part,
contingent upon the level of the Company's research and development efforts and
expansion of operations. The Company's loan agreement includes restrictions on
the payment of dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following table sets forth selected consolidated financial
information for Akorn, Inc. for the five years ended June 30, 1995.
[Enlarge/Download Table]
Years Ended June 30
1995<F1> 1994<F2> 1993<F3> 1992<F4> 1991<F5>
________________________________________________________________________________
PER SHARE
Equity $ 0.97 $ 0.81 $ 0.48 $ 0.36 $ 0.86
Net income (loss) $ 0.15 $ 0.18 $ 0.14 $ (0.55) $ (0.41)
Dividends - - $ - - $ .06
Price: High $ 4.00 $ 3.88 $ 3.13 $ 4.13 $ 4.38
Low $ 2.25 $ 1.88 $ 1.50 $ 1.25 $ 1.13
P/E: High 27x 22x 22x NM NM
Low 15x 10x 11x NM NM
Dividend yield NM NM NM NM 2.18%
INCOME DATA (000)
Net sales 32,863 28,403 20,893 18,456 19,348
Gross profit 13,220 11,853 8,065 6,611 7,622
Operating income (loss) 3,672 2,934 1,665 (7,276) (7,741)
Interest expense - (154) (271) (288) (374)
Pretax income (loss) 3,512 2,887 1,502 (7,407) (7,841)
Income taxes (benefit) 1,232 166 (259) (540) (2,739)
Net income (loss) 2,280 2,721 1,761 (6,867) (5,102)
Weighted average
shares outstanding 15,399 15,311 13,555 12,589 12,305
BALANCE SHEET (000)
Current assets 14,303 14,172 8,516 9,474 10,209
Net fixed assets 10,996 6,249 5,227 5,119 5,091
Total assets 26,256 21,221 14,218 15,122 18,335
Current liabilities 6,400 6,551 3,471 7,197 6,303
Long-term obligations 4,857 2,327 4,248 3,352 1,501
Shareholders' equity 14,998 12,343 6,499 4,573 10,531
FUNDS FLOW DATA (000)
From operations 792 2,665 (685) (333) 1,797
Dividends paid - - - - (965)
From investing (4,943) (3,710) (465) 2,239 (1,377)
From financing 3,004 2,003 (17) (1,012) (1,215)
Change in cash & equivalents (1,147) 958 (1,167) 894 (795)
RATIO ANALYSIS
Gross margin 40.2% 41.7% 38.6% 35.8% 39.4%
Operating margin 11.2% 10.3% 8.0% (39.4)% (40.0)%
Pretax margin 10.7% 10.2% 7.2% (40.1)% (40.5)%
Effective tax rate 35.1% 5.8% (17.3)% NM NM
Net margin 6.9% 9.6% 8.4% (37.2)% (26.4)%
Asset turnover 1.38 1.60 1.42 1.10 0.96
Return on assets 9.6% 15.4% 12.0% (41.0)% (25.2)%
Financial leverage 1.74 1.88 2.65 2.22 1.54
Return on equity 16.7% 28.9% 31.8% (90.9)% (38.9)%
Retention rate 100.0% 100.0% 100.0% 100.0% 115.2%
Implied growth rate 16.7% 28.9% 31.8% (90.9)% (44.8)%
All of the information shown in the table above for periods 1992 and prior has been restated to reflect the
combined operations of Akorn and Akorn Manufacturing, Inc. (AMI).
<FN>
<F1> Includes an unrealized loss on marketable equity securities ($.3 million) and the reduction in selling,
general and administrative expenses ($.3 million) related to a change in accounting estimate for aged customer
credits.
<F2> Includes the reversal of the valuation allowance for deferred tax assets ($0.4 million).
<F3> Includes the reversal of the provision for a litigation judgment ($0.7 million), the reduction of estimated
costs of reorganizing manufacturing operations ($0.4 million), and income tax benefits ($0.3 million).
<F4> Includes charges for the reorganization of manufacturing operations ($5.3 million), acquisition costs of
AMI ($1.3 million), and provision for a litigation judgment ($0.8 million).
<F5> Includes charges for the reorganization of manufacturing operations ($7.8 million) and other non-recurring
expenses ($1.1 million).
</FN>
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying financial
statements.
Results of Operations
Net Sales
The Company's consolidated net sales increased 16% to a record $32.9 million
in 1995 compared to the prior year. This follows a 36% increase in the prior
year as compared with 1993. The following table sets forth, for the periods
indicated, net sales by segment, excluding intersegment sales:
Years Ended June 30
In millions 1995 1994 1993
________________________________
Ophthalmic distribution $ 23.8 $ 20.7 $ 14.9
Contract manufacturing 9.1 7.7 6.0
________________________________
Total net sales $ 32.9 $ 28.4 $ 20.9
================================
Ophthalmic distribution sales include a broad range of therapeutic,
diagnostic, surgical and office-based products. Ophthalmic distribution
sales increased 15% in 1995 as compared to 1994 and 39% in 1994 as compared
to 1993. Sales in 1995 were enhanced by the introduction of several new
surgical products including new surgical instruments and surgical packs.
In addition, sales of the Company's therapeutic products increased as a
result of the Company's "Save With Akorn Therapeutics" (S.W.A.T.) program,
which focuses on educating doctors on the cost of ophthalmic medications.
Sales growth in this segment declined in the second half of 1995 as a
result of the loss of sales for AK-Con-A, Akorn's leading allergy product,
in October 1994. As previously announced, this product was converted to
over-the-counter status by the Food and Drug Administration (FDA), who
required the filing of a NDA. The Company is presently awaiting approval
of this NDA, which is presently anticipated for some time in fiscal 1996.
Upon receiving approval of this NDA, the new OTC version will be marketed
through a joint venture with Pfizer, Inc. (Pfizer), which should restore
profits on the product to previous levels. Sales of AK-Con-A were
approximately $2 million, $1.4 million, and $0.7 million for 1995, 1994 and
1993, respectively.
Sales in 1994 versus 1993 were enhanced primarily by product licensing
activities which accounted for approximately $4 million or nearly 70% of
the growth in ophthalmic distribution sales. In addition, the Company's
introduction of its S.W.A.T program contributed to sales growth in 1994.
Contract manufacturing sales increased 18% in 1995 as compared to 1994
and 28% in 1994 as compared to 1993. Both 1995 and 1994 contract sales
were enhanced by a new contract customer which increased sales
significantly beginning in the second half of fiscal 1994. This customer,
which accounted for 13% of consolidated net sales in 1995, has recently
notified the Company that it will be transferring the production of certain
products during fiscal 1996 and 1997 to its own facilities in Puerto Rico.
Such products accounted for $1.4 million in contract manufacturing sales
for 1995.
In addition, this customer has notified the Company that it will be
discontinuing the sale of two other products previously produced by AMI.
These products accounted for approximately $2.9 million in sales for AMI in
1995. The Company is presently in discussions with this customer to
acquire these injectable products. This would maintain current plant
throughout and provide an entre into the injectable distribution business,
which would be synergistic with the ophthalmic distribution business. It
is antipated that these products would be marketed through the Company's
current distribution system.
Income and Expenses
The following table sets forth the relationship to sales of various
income statement items:
Years Ended June 30
1995 1994 1993
_______________________________________
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 59.8 58.3 61.4
_______________________________________
Gross margin 40.2 41.7 38.6
Selling, general and
administrative expenses 26.5 28.4 33.7
Research and development 2.5 3.0 2.2
Costs of reorganizing
manufacturing operations (1.9)
Provision for litigation
judgment (3.4)
_______________________________________
Operating income 11.2 10.3 8.0
Interest and other income
(expense), net (.5) (1) (.8)
_______________________________________
Income before income taxes 10.7 10.2 7.2
Income taxes (benefit) 3.8 .6 (1.2)
_______________________________________
Net income 6.9% 9.6% 8.4%
=======================================
Gross Margins
The consolidated gross margin percentage declined by 1.5 percentage
points from 41.7% in 1994 to 40.2% in 1995. The decline in gross margin
percentage is primarily due to the effects of price increases from
manufacturers (primarily in the second half of the fiscal year), which were
not fully offset by price increases to customers. In addition, a shift in
the mix of lower margin catalog products added to the decline in gross
margin. The decline in gross margin has been more prevalent in the second
half of the fiscal year as a result of the loss of sales from AK-Con-A
discussed earlier. This was the Company's highest margin product at nearly
75%.
The gross margin percentage increased 3.1 percentage points from 38.6% in
1993 to 41.7% in 1994. This increase was primarily associated with the
shift in business to a larger percentage of sales to higher-margin
wholesalers associated with the Company's S.W.A.T. program. In addition,
sales of AK-Con-A were significantly greater in 1994 than 1993.
Gross margins in 1995 and 1994 were also positively affected by better
overhead absorption in contract manufacturing as a result of increased
volumes at the Decatur facilities. The Company anticipates that gross
margins in the short term will be relatively stable to slightly declining
as compared with 1995 given the current mix of products in its portfolio
and the loss of AK-Con-A sales.
Selling, General and Administrative Expense
Selling, general and administrative expense as a percentage of net sales
declined 1.9 percentage points from 28.4% in 1994 to 26.5% in 1995. The
decline in this percentage is primarily associated with the Company's
leveraging of its sales force efforts and the low amount of general and
administrative additions in 1995. In addition, during fiscal 1995, the
Company, based on evaluations made by management, changed the estimated
liability related to aged customer credits. This resulted in a reduction in
selling, general and administrative expense of approximately $330,000.
In response to a slowing in sales growth during the third quarter of
fiscal 1995, the Company took steps to eliminate approximately $1 million
to $1.5 million of selling, general and administrative expenses and other
manufacturing operating expenses. The reductions, which were accomplished
primarily through downsizing the work force, will be somewhat offset by
increases in depreciation and interest expense associated with the
Company's expanded manufacturing facilities. As a result of these
reductions and the operating leverage of the Company, it is anticipated
that selling, general and administrative expense as a percentage of sales
will continue to decline.
Selling, general and administrative expense as a percentage of net sales
declined 5.3 percentage points from 33.7% in 1993 to 28.4% in 1994
primarily due to the Company's operating leverage and the significant
increase in sales from 1993 to 1994.
Research and Development
Research and development expense remained stable from 1994 to 1995.
These expenses increased significantly in 1994 versus the 1993 amounts as a
result of expansion in this area in 1994. In 1995, the Company maintained
a stable mix of new ophthalmic Abbreviated New Drug Applications (ANDAs)
and site-transfers from its previous manufacturing facility in Los Angeles.
In addition, throughout 1995, the Company continued to work on its NDA for
the over-the-counter version of AK-Con-A in connection with the licensing
arrangement with Pfizer. Costs associated with this NDA are being
capitalized in connection with the long-term contract for manufacturing and
royalty rights. The Company also began work in 1995 on an NDA for the
ophthalmic non-steroidal anti-inflammatory drug Piroxicam licensed from
Pfizer. The first $1 million of costs associated with this NDA are offset
by funds obtained from Pfizer. Total cash expenditures for all research
and development activities were approximately $1,456,000, $1,368,000 and
$469,000 in 1995, 1994 and 1993, respectively.
The Company anticipates that research and development expenditures will
increase significantly in 1996 as it focuses on a broader mix of ANDA and
NDA steril pharmaceutical products. The level of research and development
expense will be dependent upon the relative mix of products in the R&D
portfolio between products for which costs have been previously accrued
(such as site transfer products) as compared to other new product
approvals.
Operating Income
Operating income in 1995 of $3.7 million or 11.1% of sales was 25%
greater than 1994 operating income of $2.9 million or 10.3% of sales. This
increase in 1995 operating income was primarily the result of increased
sales and operating leverage, coupled with stable research and development
expenses. The sales increase was somewhat offset by the decline in gross
margin resulting from cost increases of products distributed but not
manufactured and continued price sensitivity in the generic ophthalmic
pharmaceutical market.
Operating income in 1994 was $2.9 million or 10.3% of sales compared to
the 1993 amount of $1.7 million or 8.0% of sales. The increase in
operating income in 1994 was due primarily to the significant increase in
sales. In addition, the increase in gross margins associated with AK-Con-A
sales and sales to wholesalers and reduction in the percentage of selling,
general and administrative expenses as a percentage of sales enhanced the
growth in operating income. The increase in operating income in 1994 was
offset somewhat by the 1993 reversal of $400,000 in costs previously
accrued for the reorganization of manufacturing operations and $700,000 in
costs previously accrued for a litigation judgment from which the Company
was vindicated.
Interest and Other Income (Expense)
Net interest and other expense increased $113,000 from 1994 to 1995 in
spite of the capitalization of all interest expense in 1995 in connection
with construction at the Company's facilities in Decatur, Illinois. The
increase in 1995 is primarily due to a $308,000 decline in market value of
an equity investment that was determined to be other than temporary. This
determination was based on the significant deterioration in the value of
the investment since June 30, 1994 and the evaluation that a price recovery
was not imminent.
From 1993 to 1994 net interest and other expense declined $115,000 as
interest expense was reduced by the conversion to equity of $1.6 million of
debt in November 1993 in connection with the exercise of certain warrants
by the John N. Kapoor Trust, an affiliate of John N. Kapoor, the Company's
Chairman of the Board.
The Company anticipates that interest expense will increase significantly
in 1996 as a result of the new long-term debt and capital leases associated
with the Company's expansion. A portion of this interest will be
capitalized during 1996 until full validation and approval from the FDA is
obtained.
Income Taxes (Benefit)
The Company's consolidated effective income tax (benefit) rate was 35.1%,
5.8% and (17.3)% for 1995, 1994 and 1993, respectively. The effective rate
for 1994 varies from the statutory rates primarily due to the effects of
adoption of Statement of Financial Accounting Standards Board (SFAS) No.
109, "Accounting for Income Taxes," effective July 1, 1993. Under SFAS
109, the Company was able to recognize estimated future tax benefits
attributable to expenses recorded for book purposes but not currently
deductible for tax purposes. In July 1993, the Company recorded a net
deferred tax asset in the amount of $896,000 along with a 100% valuation
reserve to reflect the uncertainties surrounding the ultimate realization
of the benefits. In the fourth quarter of fiscal 1994, the Company decided
to reverse the entire remaining balance of the valuation reserve since
uncertainties regarding the ultimate realization of the benefits were no
longer material. This resulted in the recording of a $384,000 ($.03 cents
per share) benefit in the fourth quarter. The effective rate varied from
the statutory rate in 1993 due to the effects of recognized net operating
losses.
The Company has been in discussions with the Internal Revenue Service
(IRS) regarding the examination of tax returns for the periods of 1988
through 1993. The IRS has proposed adjustments to such returns, some of
which the Company has agreed to and some which the Company will appeal.
These adjustments primarily relate to the timing of deductions taken for
tax purposes in connection with the reorganization of its manufacturing
operations in 1991 and 1992. The agreed upon proposed adjustments would
result in additional interest and taxes currently due of approximately
$600,000. The Company had previously accrued the financial statement
effects of these proposed agreed upon adjustments; accordingly, no
significant financial statement impact of these adjustments was recorded in
1995.
Net Income
Net income declined $.4 million or $.03 cents per share from $2.7 million
or $.18 cents per share in 1994 to $2.3 million or $.15 cents per share in
1995. This decline, in spite of an increase in operating income in 1995,
is due to the significantly lower effective tax rate incurred in 1994 as a
result of the adoption of SFAS 109 and full realization of the benefit of
deferred tax assets.
Net income increased $.9 million or $.04 cents per from $1.8 million in
1993 or $.14 cents per share to $2.7 million or $.18 cents per share in
1994. The significant growth in sales was the primary contributing factor
to this growth. The growth in earnings per share from 1993 to 1994 was
somewhat offset by the increase of nearly 2 million weighted average shares
in 1994 resulting from the exercise of warrants.
Financial Condition and Liquidity
Management assesses the Company's liquidity by its ability to generate
cash to fund its operations. The significant components in managing
liquidity are: funds generated by operations; levels of working capital
items including accounts receivable, inventories and accounts payable;
capital expenditure and debt repayment requirements; adequacy of available
lines of credit; and availability of long-term capital at competitive
prices.
Exclusive of the payment of costs related to the reorganization of its
manufacturing operations in 1991, the Company traditionally has generated
cash from operations in excess of working capital requirements. The net
cash provided by operating activities was $792,000 in 1995 compared to $2.7
million in 1994. The decline in cash provided from operating activities in
1995 is primarily related to the increase in inventory associated with new
product additions coupled with a decrease in the average days outstanding
for payables. The decline in average days outstanding for payables is due
to more timely payments to vendors by the Company resulting from the
availability of working capital credit lines.
In 1996, the Company will continue to fund the payment of certain
previously accrued research and development activities including the site
transfer of ANDAs from the Company's Los Angeles facility and the
development of the NDA for Piroxicam discussed previously. Management
believes that cash flows from operations, funds received from Pfizer and
the available working capital line of credit are sufficient to handle these
short-term needs.
In addition to these short-term needs, the Company anticipates the
payment of additional interest and taxes in connection with the examination
by the IRS of tax returns for the periods of 1988 through 1993. The
proposed adjustments would result in additional interest and taxes
currently due of approximately $1.5 million. The agreed issues, resulting
in approximately $600,000 of current net taxes and interest due, are
expected to be paid over the next 10 months under an agreement with the IRS
or through arrangements with a commercial bank. Payment of the remaining
unsettled issues will be based on the timing of the appeals process and the
success of the Company in arguing its position with the IRS.
Under a previously announced cross-licensing agreement with Pfizer, the
Company is required to pay a performance penalty of $1,020,000 should it be
unsuccessful in obtaining approval, by December 31, 1996, of the NDA on the
OTC version of AK-Con A, licensed to Phizer. Given the current status of
the product, management believes the likelihood that approval will not be
obtained in this time frame is remote. Accordingly, no financial statement
reserves related to the potential penalty have been accrued.
Net cash utilized for investing activities in 1995 of $4.9 million
includes $4.8 million of property plant and equipment additions associated
with the expansion of the Company's Decatur facilities. In addition, 1995
net cash utilized for investing activities includes approximately $400,000
related to product licensing costs which were funded primarily through net
sales of investments of approximately $300,000. The Company has plans for
capital improvements of $2 million to $3 million in 1996. These
improvements are for both requirements to meet current FDA regulations as
well as enhancement and expansion of the injectable manufacturing
capabilities at AMI. These improvements are expected to be funded by a
draw of approximately $900,000 available under the bank credit facility
discussed below, operating cash flows and possibly some leasing
arrangements.
Net cash provided by financing activities of $3.0 million in 1995
primarily consists of the net increase in long-term debt of approximately
$3 million. On September 30, 1994, the Company entered into a $6.3 million
credit facility with a commercial bank. The credit facility includes the
following:
-a $1.3 million Term loan for the payout of existing debt and
reimbursement for the early payout of a capital lease on the AMI
manufacturing facility.
-a $3.5 million Revolver/Term construction loan to finance expansion of
the AMI facilities.
-a $1.5 million Line of Credit for working capital purposes.
The entire Term loan was drawn in October 1994 and, as of June 30, 1995,
$2.6 million has been drawn on the Revolver/Term construction loan. Of
these proceeds, approximately $900,000 was used to pay down existing debt.
As of June 30, 1995, no borrowings were outstanding under the Line of
Credit.
Fourth quarter 1995 Results
Net income for the fourth quarter of 1995 was $660,000 or $.04 cents per
share compared to net income of $1.5 million or $.10 cents per share in
1994. The 1994 net income figures include a one time tax benefit
adjustment of $384,000 ($.03 cents per share) as well as an effective tax
rate, excluding this adjustment, of 19% compared to 32% in 1995. The loss
of AK-Con-A sales also had a negative impact on net income for the fourth
quarter of 1995.
Item 7. Financial Statements.
The following financial statements are included in Part II, Item 7 of this
Form 10-KSB.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . 14
Consolidated Statements of Operations for the years ended
June 30, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . 17
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 18
Report of Deloitte & Touche
LLP
Independent Auditors
To the Board of Directors and Shareholders of
Akorn, Inc.
We have audited the accompanying consolidated balance sheets of Akorn, Inc.
and subsidiaries as of June 30, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material aspects, the financial position of Akorn, Inc. and
subsidiaries at June 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended June
30, 1995 in conformity with generally accepted accounting principles.
As discussed in Note L to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1994. Also,
as discussed in Note C to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New Orleans, Louisiana
September 1, 1995
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
June 30
1995 1994
______________________________________
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 767,286 $ 1,914,735
Short-term investments 1,568,793 1,735,040
Trade accounts receivable
(less allowances for uncollectibles
of $266,329 and $247,296 in 1995
and 1994, respectively) 4,918,753 4,793,522
Inventory 5,979,707 4,721,637
Deferred income taxes 708,963 550,715
Prepaid expenses and other assets 359,375 455,873
______________________________________
TOTAL CURRENT ASSETS 14,302,877 14,171,522
OTHER ASSETS
Intangibles, net 728,565 400,658
Other 228,534 399,709
______________________________________
TOTAL OTHER ASSETS 957,099 800,367
PROPERTY, PLANT AND EQUIPMENT, NET 10,995,945 6,249,322
______________________________________
TOTAL ASSETS $ 26,255,921 $21,221,211
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
long-term debt $ 492,640 $ 93,573
Current portion of capital
lease obligations 149,354 25,429
Current portion of pre-funded
development costs 667,000 100,000
Trade accounts payable 1,718,893 2,516,629
Income taxes payable 781,824 711,146
Accrued payroll and commissions 625,839 875,786
Accrued reorganization costs 727,423 933,836
Accrued royalties 339,247 332,592
Accrued expenses and other liabilities 897,985 961,723
TOTAL CURRENT LIABILITIES 6,400,205 6,550,714
LONG-TERM DEBT 3,320,688 746,764
CAPITAL LEASE OBLIGATIONS 579,701 52,132
PRE-FUNDED DEVELOPMENT COSTS 303,988 900,000
DEFERRED INCOME TAXES 327,218 166,417
OTHER LONG-TERM LIABILITIES 325,837 462,128
SHAREHOLDERS' EQUITY
Common stock, no par value--
authorized 20,000,000 shares;
issued 15,115,673 shares in 1995
and 1994; outstanding 14,904,653
shares in 1995 and 14,798,217
shares in 1994 13,701,845 13,701,845
Treasury stock, at cost-- 211,020
shares in 1995 and 317,456 shares
in 1994 (291,067) (503,939)
Retained earnings (deficit) 1,500,109 (822,806)
Unrealized gain (loss) on marketable
equity securities 87,397 (32,044)
_____________________________________
TOTAL SHAREHOLDERS' EQUITY 14,998,284 12,343,056
______________________________________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 26,255,921 $ 21,221,211
======================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30
1995 1994 1993
________________________________________________
Net sales $ 32,862,630 $ 28,403,464 $ 20,893,459
Cost of goods sold 19,642,837 16,550,158 12,828,425
________________________________________________
GROSS PROFIT 13,219,793 11,853,306 8,065,034
Selling, general and
administrative expenses 8,703,967 8,076,170 7,051,145
Research and development 843,590 842,695 453,011
Costs of reorganizing
manufacturing operations - - (403,740)
Provision for litigation
judgment - - (700,000)
________________________________________________
9,547,557 8,918,865 6,400,416
________________________________________________
OPERATING INCOME 3,672,236 2,934,441 1,664,618
Interest and other
income (expense):
Interest income 94,941 73,558 39,543
Interest expense - (153,801) (271,377)
Loss on marketable equity
securities (307,705) - -
Other income net 52,099 32,802 69,036
________________________________________________
(160,665) (47,441) (162,798)
________________________________________________
INCOME BEFORE INCOME TAXES 3,511,571 2,887,000 1,501,820
Income taxes (benefit) 1,231,790 166,303 (259,581)
________________________________________________
NET INCOME $ 2,279,781 $ 2,720,697 $ 1,761,401
================================================
NET INCOME PER SHARE $ .15 $ .18 $ .14
================================================
Weighted average shares
outstanding 15,399,350 15,310,885 13,554,865
================================================
See notes to consolidated financial statements.
[Enlarge/Download Table]
AKORN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Unrealized
_________________________ Retained Gain (Loss)
Shares Earnings Treasury on Marketable
Outstanding Amount (Deficit) Stock Equity Securities Total
______________________________________________________________________________________________
Balances at July 1, 1992 12,697,863 $10,701,845 $(5,325,239) $(803,465) $ - $4,573,141
Net income for 1993 1,761,401 1,761,401
Shares issued as compensation 25,000 11,266 44,984 56,250
Exercise of stock options 25,000 50,000 50,000
Treasury stock reissued 33,454 (9,196) 66,908 57,712
_____________________________________________________________________________________________
Balances at June 30, 1993 12,781,317 10,701,845 (3,561,768) (641,573) - 6,498,504
Net income for 1994 2,720,697 2,720,697
Exercise of stock options
and warrants 2,010,000 3,000,000 (700) 20,000 3,019,300
Cancellation of shares due
to resolution of manufacturing
pre-acquisition
contingencies (51,917) -
Unrealized loss on
marketable equity
securities (32,044) (32,044)
Treasury stock reissued 58,817 18,965 117,634 136,599
_____________________________________________________________________________________________
Balances at June 30, 1994 14,798,217 13,701,845 (822,806) (503,939) (32,044) 12,343,056
Net income for 1995 2,279,781 2,279,781
Exercise of stock options 34,917 8,824 69,834 78,658
Unrealized loss on
marketable equity
securities (275,661) (275,661)
Reversal of unrealized
loss on marketable
equity securities 307,705 307,705
Unrealized gain on
marketable equity
securities 87,397 87,397
Treasury stock reissued 71,519 34,310 143,038 177,348
______________________________________________________________________________________________
Balances at June 30, 1995 14,904,653 $13,701,845 $1,500,109 $(291,067) $ 87,397 $14,998,284
==============================================================================================
See notes to consolidated financial statements.
AKORN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Years Ended June 30
1995 1994 1993
_______________________________________________
OPERATING ACTIVITIES
Net income $2,279,781 $2,720,697 $1,761,401
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Costs of reorganizing manufacturing operations - - (403,740)
Provision for litigation judgment - - (700,000)
Depreciation and amortization 947,453 726,155 631,257
Loss on marketable equity securities 307,705 - -
Provision for losses on accounts
receivable and inventory 160,000 35,676 118,368
Deferred income taxes 2,553 (384,298) -
Other (30,277) 11,178 29,089
Changes in operating assets
and liabilities:
Accounts receivable (185,231) (2,126,242) (474,395)
Inventory, prepaid expenses
and other assets (1,313,420) (702,898) (606,420)
Refundable income taxes - 288,321 746,956
Trade accounts payable and
accrued expenses (1,447,470) 1,385,336 (1,787,311)
Income taxes payable 70,678 711,146 -
_______________________________________________
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 791,772 2,665,071 (684,795)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,818,132) (1,635,643) (649,676)
Product licensing costs (421,206) (432,358) -
Purchases of investments (2,022,826) (2,624,573) -
Sales of investments 2,318,765 982,606 184,947
_______________________________________________
NET CASH USED IN INVESTING ACTIVITIES (4,943,399) (3,709,968) (464,729)
FINANCING ACTIVITIES
Proceeds from sale of stock 256,006 1,555,899 107,712
Repayments of long-term debt (927,009) (89,857) (1,685,416)
Proceeds from issuance of long-term debt 3,900,000 - 1,600,000
Pre-funded development costs - 1,000,000 -
Principal payments under capital
lease obligations (54,483) (463,518) (39,367)
Debt acquisition costs (170,336) - -
_______________________________________________
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 3,004,178 2,002,524 (17,071)
_______________________________________________
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,147,449) 957,627 (1,166,595)
Cash and cash equivalents
at beginning of year 1,914,735 957,108 2,123,703
_______________________________________________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 767,286 $1,914,735 $957,108
===============================================
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Akorn, Inc.
June 30, 1995
Note A - Summary of Significant Accounting Policies
Consolidation: The accompanying consolidated financial statements
include the accounts of Akorn, Inc. (the Company) and its wholly
owned subsidiaries, Spectrum Scientific Pharmaceuticals, Inc.
(Spectrum), Walnut Pharmaceuticals, Inc. (Walnut) and Akorn
Manufacturing, Inc. (AMI, formerly Taylor Pharmacal Company).
Intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition: The Company recognizes sales upon the
shipment of goods.
Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less, when purchased,
to be cash equivalents.
Investments: Effective July 1, 1994, the Company adopted Statement
of Financial Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." The Company records
short-term and long-term investments under the provisions of this
Statement (See Note C).
Inventory: Inventory is stated at the lower of cost (average cost
method) or market (see Note D). Provision is made for slow-moving,
unsalable and obsolete items.
Intangibles: Intangibles consist primarily of product licensing
costs which are capitalized at cost and amortized on the straight-
line method over the life of the license period. Amortization
expense for the three years ended June 30, 1995 was $144,820, $82,143
and $67,862, respectively.
Property, Plant and Equipment: Property, plant and equipment are
stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method in amounts considered
sufficient to amortize the cost of the assets to operations over
their estimated service lives. The average estimated service life
of buildings and leasehold improvements, furniture and equipment, and
automobiles are approximately 30, 8, and 5, respectively.
Depreciation expense for the three years ended June 30, 1995 was
$776,182, $644,012 and $563,395, respectively.
Under an agreement with Pfizer, Inc. (See Note F) the Company has
received reimbursement for the purchase of certain equipment. As of
June 30, 1995, the total amount reimbursed was approximately
$593,000. The Company has accounted for these reimbursements by
reducing its carrying value of the associated equipment.
Interest Capitalization: The Company capitalizes interest during
periods of construction of qualifying assets. For the year ended June
30, 1995, the Company incurred interest costs of $282,007, all of
which was capitalized. No interest was capitalized during 1994 or
1993.
Stock Options: The Company records as an expense the difference,
if any, between the value of stock options granted with an exercise
price below the market value of the Company's stock and the then
market value of the Company's stock on the date the options are
granted.
Income Taxes: Effective July 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." In prior fiscal years, provision was made in the
consolidated financial statements for federal and state income taxes
in accordance with the provisions of FASB Statement Number 96.
Deferred taxes are provided for the differences in the accounting
treatment for certain expense items for financial reporting and
income tax purposes. Deferred taxes result primarily from the
difference between depreciation methods used for book and tax
purposes, provisions for bad debt and inventory reserves and accrued
costs associated with the reorganization of manufacturing operations,
recall of products and litigation.
Note B - Acquisition of Manufacturing Operations
On January 15, 1992, the Company acquired Akorn Manufacturing,
Inc., formerly Taylor Pharmacal Company, in a business combination
accounted for as a pooling of interests. AMI is a contract
manufacturer of sterile pharmaceuticals, which it produces and
delivers pursuant to contracts with third parties. Pursuant to the
merger agreement, the Company delivered 926,753 shares of its Common
Stock in exchange for all of the outstanding stock of AMI.
Of the total shares issued in the merger agreement, 922,500 shares
were held in escrow pending the settlement of a default judgment
against AMI entered on November 8, 1991 (see Note R). During fiscal
1993, a settlement between AMI's insurer and the plaintiffs was
reached. As a result, in 1993 the Company reduced its provision for
the judgment to $100,000, the approximate amount of expenses incurred
in defending the judgment. In accordance with the terms of the AMI
acquisition agreement, 51,917 shares valued at $2 per share were
forfeited and returned as treasury stock by the escrow agent during
fiscal 1994 in order to cover these expenses and finally resolve this
pre-acquisition contingency. The remaining shares held in escrow of
870,583 were distributed to the former AMI shareholders thereby
terminating the escrow agreement.
As part of the acquisition, the Company paid a finder's fee to an
affiliate of Dr. John N. Kapoor, Chairman of the Board (the
affiliate). This finder's fee was in the form of 250,000 shares of
Company Common Stock valued at $3.50 per share. Of the total shares
issued, 125,000 were subject to forfeiture if the market price of the
Company's Common Stock does not reach at least $5.00 per share by
January 15, 1996. In August 1995, the Company, the affiliate and Dr.
Kapoor entered into an agreement under which (i) the forfeiture
period was extended to January 15, 1998, (ii) forfeiture would not
occur in the event that persons unaffiliated with Dr. Kapoor acquire
beneficial ownership of more than 50% of the outstanding common stock
of the Company and (iii) Dr. Kapoor waived his right to receive
$40,000 otherwise payable to him by the Company for serving as
Chairman of the Board in fiscal 1996.
Note C - Investments
Effective July 1, 1994, the Company adopted Statement of Financial
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities". This Statement requires certain
securities to be classified into one of three reporting categories
(held-to-maturity, available-for-sale or trading). The Company has
completed a review of its securities relative to SFAS 115 and has
classified its investments in debt securities (consisting primarily
of U.S. Government securities and municipal bonds with a carrying
value of $1,136,010 and $303,092, respectively, at June 30, 1995 and
$1,718,483 and $0, respectively, at June 30, 1994) as held-to-
maturity. Therefore, in accordance with SFAS 115, these investments,
all of which have contractual maturities within one year, are being
reported at amortized cost, which approximates fair market value. The
Company has classified its investment in equity securities as
available-for-sale, requiring that they be carried at fair value with
any unrealized gain or loss reflected as a component of shareholders'
equity. Such investments had a fair market value of approximately
$130,000 at June 30, 1995. Prior to adopting SFAS 115, the Company
recorded investments at the lower of cost or market.
At June 30, 1994, the cost of the Company's noncurrent marketable
equity securities exceeded the market value by $32,044. Therefore, a
valuation allowance was established by a charge to shareholders'
equity representing the net unrealized loss. During fiscal 1995, this
allowance was increased by $275,661 due to the continuous decline in
market value. At March 31, 1995, management determined the loss to be
permanent given the significant decline in market value since June
30, 1994 and the unlikelihood of a recovery in value. Therefore, the
$307,705 unrealized loss previously charged to shareholders' equity
was accounted for as a realized loss in the 1995 statement of
operations. At June 30, 1995, the market value of the marketable
equity securities exceeded the adjusted cost, subsequent to the
write-down noted above, by $87,397; therefore, an unrealized gain was
recorded as a component of shareholders' equity to reflect this
increase in value.
Note D - Inventory
The components of inventory are as follows:
June 30
1995 1994
______________________________
Finished goods $ 3,742,411 $ 2,553,051
Work in process 1,042,922 883,152
Raw materials and supplies 1,194,374 1,285,434
______________________________
$ 5,979,707 $ 4,721,637
==============================
Inventory for 1995 and 1994 is reported net of reserves of $344,443
and $282,531, respectively, for slow-moving, unsalable and obsolete items.
Note E - Property, Plant and Equipment
Property, plant and equipment at June 30 consists of the following:
June 30
1995 1994
______________________________
Land $ 478,757 $ 478,757
Buildings and leasehold improvements 5,514,182 4,388,816
Furniture and equipment 7,736,891 6,794,435
Automobiles 90,305 90,305
______________________________
13,820,135 11,752,313
Accumulated depreciation (6,750,743) (5,982,874)
______________________________
7,069,392 5,769,439
Construction in progress 3,926,553 479,883
______________________________
$10,995,945 $ 6,249,322
==============================
The balance included in construction in progress consists of costs
related to the expansion of ophthalmic production facilities at AMI,
including capital equipment acquisitions. While construction was
substantially completed in fiscal 1995, certain steps required to
obtain FDA approval and allow for the commencement of production were
not yet completed. As of June 30, 1995, there were no significant
construction costs related to the expansion yet to be incurred.
Note F - Pre-Funded Development Costs
In April 1994, the Company entered into a series of agreements
with Pfizer Inc. (Pfizer) regarding the cross-licensing of several
ophthalmic pharmaceutical products. The arrangement involves Akorn
granting a license to Pfizer on an Akorn product under development
(the licensed product), along with providing manufacturing services
and marketing assistance for the licensed product. In exchange, Akorn
received (1) a royalty stream on sales of the licensed product, (2)
an exclusive, royalty-free license to manufacture and market a Pfizer
prescription ophthalmic non-steroidal anti-inflammatory drug (NSAID),
and (3) non-exclusive rights to market an existing Pfizer ophthalmic
antibiotic.
As part of this agreement, in fiscal 1994 Pfizer paid the Company
an advance of $1 million to be used to fund the costs of developing
the NSAID, which are estimated at $1.8 million. The Company intends
to recognize the pre-funded balance as an offset to development costs
as these expenses are incurred. During fiscal 1995, the Company
incurred $29,012 of development costs which were charged against the
pre-funded balance. The Company's current projections indicate that
these costs will be paid over the next 24 months. Accordingly,
$667,000 of the pre-funded balance has been classified as a current
liability at June 30, 1995.
In addition, the agreement stipulates that Pfizer will reimburse
Akorn for one-half of the costs to obtain FDA approval on the
licensed product, including the cost of certain agreed upon equipment
acquisitions required for the manufacturing of the licensed product.
In the event that Akorn fails to obtain FDA approval on the licensed
product by December 31, 1996, the Company is required to pay a
performance penalty of $1,020,000 to Pfizer. A New Drug Application
(NDA) was filed for the licensed product on June 8, 1994. Given the
current status of the NDA, it is management's opinion that payment of
the performance penalty is remote.
Note G - Financing Arrangements
Long-term debt at June 30 consists of:
[Enlarge/Download Table]
1995 1994
____________________________
Note payable to First National Bank of Commerce; due 1999;
interest at 3/4% over the bank's prime rate (10.75% at
June 30, 1995), payable in monthly installments of $45,329
commencing November 1995; secured by the Company's
receivables, inventory and property, plant and equipment $2,600,000 $ -
Note payable to First National Bank of Commerce; due 1999;
interest at 10.25%, payable in monthly installments of
$10,834 with a final installment of $649,960 due in 1999;
secured by the Company's receivables, inventory and property,
plant and equipment 1,213,328 -
Note payable to the First National Bank of Decatur; due 1995;
interest at 1% over prime rate (8% at June 30, 1994), payable
in monthly installments of $9,800 including interest;
secured by certain land, buildings and equipment of AMI - 749,965
Note payable to Decatur-Macon County Economic Development
Foundation; due 1997; interest at 7%, payable in monthly
installments of $3,019 including interest; secured by junior
mortgage on building - 90,372
____________________________
3,813,328 840,337
Deduct: Current installments payable within one year (492,640) (93,573)
____________________________
Portion payable after one year $ 3,320,688 $ 746,764
============================
Maturities of long-term debt are as follows:
Years ending June 30:
1996 $ 492,640
1997 673,956
1998 673,956
1999 673,956
2000 1,298,820
____________
Total $ 3,813,328
============
In September 1992, the Company entered into an agreement
to obtain up to $2.5 million of credit financing from the John N.
Kapoor Trust (the Trust), an affiliate of John N. Kapoor, Chairman of
the Board. Under the terms of the agreement, the Trust, which held
warrants to purchase 2 million shares of stock at prices ranging from
$1.50 to $2.00 through November 15, 1995, was required to exercise
1,666,667 of those warrants at $1.50 per share on or prior to
November 15, 1993. On that date, the Trust exercised the entire two
million warrants for a total of $3 million, of which $1.6 million was
used to repay bedt to the Trust and the remaining $1.4 million was
received in cash. Interest expense related to this indebtedness was
$61,334 and $129,540 in 1994 and 1993, respectively.
As part of the September 1992 arrangement, the Company
granted a new warrant to the Trust to purchase an additional 1
million shares at $2.00 per share, exercisable for five years. Upon
the issuance of this warrant, Dr. Kapoor because entitled to
designate an additional individual as a Director of the Company.
During fiscal 1995, the Company entered into a $6.3
million loan agreement with a commercial bank to obtain financing for
the expansion of its manufacturing facilities in Decatur, Illinois
and to refinance existing debt. This agreement made available to the
Company financing under a three-part credit facility: (1) $3.5
million Revolver/Term loan, (2) $1.3 million Term loan, and (3) $1.5
million Line of Credit. As of June 30, 1995, $2.6 million had been
drawn on the Revolver/Term loan. Borrowings outstanding under the
Line of Credit bear interest at the bank's prime rate; there were no
borrowings outstanding under the Line of Credit at year end. In
addition, at June 30, 1995 approximately $1.2 million was outstanding
under the $1.3 million Term loan.
Borrowings under the loan agreement are collateralized by
substantially all of the Company's receivables, inventory and
property, plant and equipment. In addition, the Company is required
to comply with specified loan covenants, including restrictions on
the payment of dividends.
Note H - Leasing Arrangements
Akorn leases certain data processing and telephone
equipment under capital leasing arrangements which expire during the
next three years. In June 1995 AMI began leasing certain equipment
under a capital lease agreement expiring during 2000. At fiscal year
end, this equipment was in the process of being installed; therefore,
the balance is included in construction in progress at June 30, 1995.
During 1993, AMI leased a portion of its manufacturing
facilities from the former president and majority shareholder of AMI
under a capital lease arrangement expiring in January 2002. The
Company paid out the balance of this capital lease during fiscal year
1994.
Property, plant and equipment at June 30 includes the
following amounts relating to such capital leases:
June 30
1995 1994
_______________________________________
Furniture and equipment $ 100,002 $ 100,002
Less accumulated
depreciation (52,996) (27,174)
_______________________________________
47,006 72,828
Construction in progress 705,977 -
_______________________________________
$ 752,983 $ 72,828
=======================================
Depreciation expense provided on these assets was $25,822, $18,833, and
$52,381 during 1995, 1994 and 1993, respectively.
The following is a schedule by years of future minimum lease payments
under these capital leases together with the present value of the net minimum
lease payments.
Years ending June 30:
1996 $ 203,271
1997 194,455
1998 177,271
1999 172,701
2000 129,526
______________
Total Minimum Lease Payments 877,224
Less: Amount Representing Interest (148,169)
Present Value of Net Minimum ______________
Lease Payments $ 729,055
==============
The Company leases real property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Payments under these leases were $112,553,
$140,800 and $186,873 in 1995, 1994 and 1993, respectively. Future
minimum lease payments under non-cancelable operating leases at June
30, 1995 are not material.
During fiscal 1993, the Company entered into a sublease
agreement for one of its leased facilities. Sublease rentals were
$113,326, $111,164 and $68,552, respectively, for fiscal years ended
June 30, 1995, 1994 and 1993. This agreement expired effective May
1995, in conjunction with the expiration of the primary lease.
Note I - Stock Option and Stock Purchase Plans
The Company has two stock option plans and one stock
purchase plan. The first stock option plan is the 1988 Incentive
Compensation Program (the Incentive Program). Under the Incentive
Program any officer or key employee of the Company is eligible to
receive options when designated by the Company's Board of Directors.
The number of shares of the Company's Common Stock which may be
issued under the Incentive Program upon the exercise of options may
not exceed 2,000,000 shares. The exercise price of the options
granted under the Incentive Program will be determined by the Board
of Directors but may not be less than 50% of the fair market value of
the shares subject to the option on the date of grant. All options
granted under the Incentive Program during fiscal 1995, 1994 and 1993
have exercise prices equivalent to the market value of the Company's
Common Stock on the date of grant.
The second stock option plan is the Akorn, Inc. Stock
Option Plan for Directors (the Directors' Plan). The Directors' Plan
provides for the grant of nonqualified options to persons elected as
directors of the Company at the fair market value of the shares
subject to option on the date of grant. The total number of shares of
the Company's Common Stock for which stock options may be granted
under the Directors' Plan may not exceed 500,000 shares.
All employees who have been employed by the Company for
twelve continuous months are eligible to participate in the Akorn,
Inc. Employee Stock Purchase Plan (the Purchase Plan). Participating
employees may elect to contribute up to 15% of their gross
compensation towards the purchase of Company's Common Stock. At the
end of each quarter, the amount contributed is applied to acquire, on
behalf of the participating employees, the Company's Common Stock at
a purchase price equal to 85% of the current market price. A maximum
of 1,000,000 shares of the Company's Common Stock may be acquired
under the terms of the Purchase Plan. Purchases were issued from
treasury stock under this plan and were insignificant in fiscal 1995,
1994 and 1993.
Note J - Stock Options and Warrants
The summary of activity in stock options and warrants for
each of the three years ended June 30, 1995 is as follows:
Outstanding at July 1, 1992 (at prices ranging from $1.50
to $3.88 per share) 3,351,386
Granted (at prices ranging from $2.00 to $2.25 per share) 1,215,000
Exercised (at $2.00 per share) (25,000)
Expired (at $2.63 per share) (300,000)
__________
Outstanding at June 30, 1993 (at prices ranging
from $1.50 to to $3.88 per share) 4,241,386
Granted (at prices ranging from $2.00 to $3.50 per share) 228,000
Exercised (at prices ranging from $1.50 to $1.94 per share) (2,010,000)
___________
Outstanding at June 30, 1994 (at prices ranging from $1.50 to
$3.88 per share) 2,459,386
Granted (at prices ranging from $2.81 to $3.50 per share) 238,000
Exercised (at prices ranging from $2.00 to $2.81 per share) (73,000)
__________
Outstanding at June 30, 1995 (at prices ranging from $1.50 to
$3.88 per share) 2,624,386
==========
The amount of options and warrants exercisable at year
end was 2,368,843, 2,236,762 and 4,098,886 for 1995, 1994 and 1993,
respectively. All of these options were exercisable at prices ranging
from $1.50 to $3.88 per share.
Note K - Earnings Per Share
Earnings per share is based upon the weighted average
number of common shares outstanding. The computation of the weighted
average number of shares outstanding for fiscal 1995 and 1994
includes the effect of dilutive stock options and warrants using the
treasury stock method. The computation for 1993 includes the effect
of dilutive stock options and warrants using the modified treasury
stock method. Net income for 1993 has been adjusted for interest
expense (net of tax) paid on debt assumed to be paid down by the
proceeds received upon the exercise of options in excess of 20% of
shares outstanding on June 30, 1993. The weighted average number of
shares outstanding used in the per share computations was 15,399,350
shares in 1995, 15,310,885 shares in 1994 and 13,554,865 shares in
1993.
Note L - Income Taxes
Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes." This standard requires recognition of future tax benefits,
attributable to deductible temporary differences between the
financial statement and income tax bases of assets and liabilities,
to the extent that realization of such benefits is more likely than
not. Financial statements of prior years have not been restated and
the cumulative effect of the accounting change was not material due
to the uncertainties that existed at July 1, 1993 concerning the
ultimate realization of future tax benefits. As indicated at Note T,
uncertainties regarding the ultimate realization of future tax
benefits were reduced to a relatively low level by the fourth quarter
of fiscal 1994, thereby justifying removal of the valuation allowance
applicable to the deferred tax asset.
The components of income tax expense (benefit) are as follows:
1995 1994 1993
_________________________________________________
Current:
Federal $1,049,834 $489,051 $ (253,937)
State 37,537 61,550 (5,644)
_________________________________________________
1,087,371 550,601 (259,581)
_________________________________________________
Deferred:
Federal 128,806 (342,752) -
State 15,613 (41,546) -
_________________________________________________
144,419 (384,298) -
_________________________________________________
$1,231,790 $166,303 $ (259,581)
=================================================
The following represents the composition of deferred tax expense as a
result of temporary differences arising in 1993:
1993
____________
Excess tax depreciation over book $ 46,665
Reorganization and other costs paid (accrued) 753,902
Excess book bad debt deduction over tax 38,774
Operating loss carryforward utilized (815,182)
Other, net (24,159)
____________
Deferred tax expense, net $ -
============
A reconciliation of income tax expense (benefit) at the federal statutory
rate to income tax expense (benefit) at the Company's effective rate is as
follows:
[Enlarge/Download Table]
1995 1994 1993
__________________________________________________
Computed tax expense (benefit) at
expected statutory rate $ 1,187,134 $ 981,580 $ 510,619
State income tax expense (benefit),
net of federal tax benefits 31,879 40,623 (3,725)
Change in valuation allowance
applicable to deferred tax assets - (896,000) -
Recognition of net operating loss - - (769,894)
Other 12,777 40,100 3,419
__________________________________________________
Income tax expense (benefit) $1,231,790 $ 166,303 $ (259,581)
__________________________________________________
Effective tax (benefit) rate 35.1% 5.8% (17.3)%
==================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of June 30, 1995 and
1994 are as follows:
1995 1994
________________________________
Deferred Tax Assets:
Reserves for reorganization costs
not currently deductible $ 375,746 $ 648,855
Other reserves not currently deductible 379,901 185,703
Difference between book and taxes bases
of intangible assets 43,119 -
Other 103,121 61,720
________________________________
Total 901,887 896,278
Deferred Tax Liabilities:
Difference between book and tax bases
of property, plant and equipment 367,542 473,515
Other 152,600 38,465
________________________________
Total 520,142 511,980
________________________________
Net deferred tax asset $ 381,745 $ 384,298
================================
The net deferred tax asset is classified
in the accompanying balance sheet
as follows:
Deferred income
tax asset-current $ 708,963 $ 550,715
Deferred income tax liability
non-current (327,218) (166,417)
________________________________
$ 381,745 $ 384,298
================================
Income taxes refunded during 1994 and 1993 were $282,641, and $1,003,090,
respectively.
The Company is currently in discussions with the Internal
Revenue Service (IRS) regarding the examination of tax returns for
years 1988 through 1993. The IRS has proposed adjustments to such
returns which would result in additional taxes and interest due of
approximately $1.5 million. Although the Company does agree with
approximately $600,000 of the proposed adjustments, the Company does
intend to appeal the remainder of the assessment. The Company does
not currently anticipate any adverse financial statement effect from
this proposed assessment as accruals for the financial statement
effects of these proposed adjustments have been previously recorded.
Note M - Change in Accounting Estimate
During the quarter ended March 31, 1995, an evaluation by
the Company resulted in a change in the estimated liability related
to aged customer credits. This change resulted in a reduction of
selling, general and administrative expenses of approximately
$330,000 ($.02 cent per share, net of tax).
Note N - Supplemental Disclosures of Cash Flow Information
The following is a summary of supplemental cash flow and
noncash investing and financing information for the years ended June
30:
1995 1994 1993
_____________________________________
Cash paid for:
Interest, net of amount capitalized $ - $ 148,649 $ 267,448
Income taxes 1,149,750 91,000 -
Noncash investing and financing
activities:
Conversion of debt to common stock - 1,600,000 -
Issuance of capital lease obligation 705,977 - -
Note O - Industry Segment Information
The Company classifies its operations into two core
business segments: (1) ophthalmic distribution and (2) contract
manufacturing. The ophthalmic distribution segment includes the
market and distribution of an extensive line of ophthalmic products,
including diagnostic and therapeutic pharmaceuticals, over-the-
counter products and surgical instruments and supplies. The contract
manufacturing segment consists of the manufacture of sterile
pharmaceuticals, including human injectable products and ophthalmic
solutions.
Selected financial information by industry segment for
fiscal years ended June 30 is presented as follows:
[Enlarge/Download Table]
1995 1994 1993
_________________________________________________________
NET SALES
Ophthalmic distribution $23,791,120 $20,694,134 $14,916,510
Contract manufacturing:
Sales to unaffiliated
customers 9,071,510 7,709,330 5,976,949
Sales to affiliated customer 2,521,392 1,666,263 885,132
_________________________________________________________
35,384,022 30,069,727 21,778,591
Eliminations (2,521,392) (1,666,263) (885,132)
_________________________________________________________
Total net sales $32,862,630 $28,403,464 $20,893,459
=========================================================
OPERATING INCOME
Ophthalmic distribution $ 3,775,332 $ 3,009,815 $ 1,349,672
Contract manufacturing 1,228,127 1,155,308 1,369,513
General corporate (1,331,223) (1,230,682) (1,054,567)
_________________________________________________________
Total operating income 3,672,236 2,934,441 1,664,618
Interest and other income
(expense), net (160,665) (47,441) (162,798)
_________________________________________________________
Income before income taxes $ 3,511,571 $ 2,887,000 $1,501,820
=========================================================
1995 1994 1993
_________________________________________________________
IDENTIFIABLE ASSETS
Ophthalmic distribution $12,881,150 $12,816,638 $ 7,686,291
Contract manufacturing 13,085,202 8,296,048 6,441,516
General corporate 127,428 108,525 89,882
_________________________________________________________
Total identifiable assets $26,093,780 $21,221,211 $14,217,689
=========================================================
DEPRECIATION AND
AMORTIZATION
Ophthalmic distribution $ 338,698 $ 286,575 $ 219,764
Contract manufacturing 552,083 432,635 406,911
General corporate 56,672 6,945 4,582
_________________________________________________________
Total depreciation
and amortization $947,453 $ 726,155 $ 631,257
==========================================================
CAPITAL ADDITIONS
Ophthalmic distribution $ 354,262 $ 465,341 $ 516,802
Contract manufacturing 5,162,177 1,215,633 175,540
General corporate 7,670 4,115 7,890
_________________________________________________________
Total capital additions $ 5,524,109 $ 1,685,089 $ 700,232
=========================================================
Fiscal 1995 operating income for the ophthalmic
distribution segment includes a reduction in selling, general and
administrative expense of approximately $330,000 related to a change
in accounting estimate for aged customer credits. Operating income
for 1993 includes a reduction in costs of reorganizing manufacturing
operations of approximately $400,000 in the ophthalmic distribution
segment and a $700,000 reversal of the provision for litigation
judgment in the contract manufacturing segment.
During fiscal 1995, the Company reported sales to one
customer which accounted for approximately 13% of consolidated net
sales. The net sales attributable to this customer were accounted for
in the contract manufacturing segment. This customer has notified the
Company that it will be transferring the production of certain
products to its own facilities in Puerto Rico during fiscal 1996 and
1997. Such products accounted for $1.4 million in contract
manufacturing sales for 1995. In addition, this customer has
notified the Company that it will be discontinuing the sale of two
other products previously produced by the contract manufacturing
segment. These products accounted for approximately $2.9 million in
sales during 1995. The Company is presently in discussions with this
customer to obtain a license to distribute these two injectable
products. During 1994 and 1993, the Company did not derive ten
percent or more of its revenues from any single customer.
The Company records sales between the segments at fully
absorbed cost.
Note P - Concentration of Credit Risk
The Company specializes in the manufacturing, marketing
and distribution of ophthalmic products to companies and doctors in
the healthcare industry. The Company performs periodic credit
evaluations of its customers' financial condition and generally does
not require collateral. Receivables are generally due within 60 days.
Credit losses have consistently been within management's
expectations.
Note Q - Defined Contribution Plan
The Company sponsors a qualified defined contribution
plan which was established under the provisions of Internal Revenue
Code Section 401(k). The plan covers all employees with six months of
employment and who are 21 years of age or older. The employees can
defer a portion of their compensation up to the maximum allowed by
the Internal Revenue Code regulations. The plan provides for
discretionary contributions by the Company on behalf of the
employees. Beginning January 1994, the Company has made a
discretionary matching contribution on a quarterly basis. During
fiscal years 1995, 1994 and 1993, the Company recorded expenses
related to the plan of $86,296, $12,274 and $63,366, respectively.
Note R - Litigation
On November 8, 1991, prior to the effective date of the
acquisition by Akorn, a default judgment was entered against AMI in
El Paso County, Colorado for approximately $1.8 million, including
accrued interest of $685,000, in a product liability suit that had
been pending since October 1985. This default judgment was the result
of AMI being improperly defended in the lawsuit. AMI received notice
of this default judgment in February 1992 and recorded a reserve for
this judgment of $1.8 million as of December 31, 1991. The reserve
was increased to $2.1 million as of March 31, 1992 for additional
accrued interest and accrued litigation costs.
AMI's insurer subsequently acknowledged coverage in the
amount of $1 million, plus post-judgment interest and reasonable
attorneys' fees. As a result, during the fourth quarter of fiscal
1992, the Company recorded a change in estimate of approximately $1.3
million ($0.10 per share, net of tax), reducing its estimated
liability for the judgment to $800,000.
During fiscal 1993, AMI's insurer and the plaintiffs
agreed to a settlement within the limits of insurance coverage.
Accordingly, during the quarter ended March 31, 1993, the Company
reduced the provision for the judgment by $700,000 ($.05 per share,
net of tax) to $100,000, the approximate amount of actual expenses
incurred by AMI in defending the judgment.
The Company is a party in legal proceedings and potential
claims arising in the ordinary course of its business. Management
does not believe these matters will materially effect the Company's
financial statements.
Note S - Reorganization of Manufacturing Operations
For the fiscal year ended June 30, 1991, the Company had
recorded $7.8 million in expenses associated with the reorganization
of its manufacturing operations, including the costs of discontinuing
operations at Walnut, then the Company's then only manufacturing
subsidiary, and estimated costs of product recalls then in progress.
Thereafter, the Company continued discussions with the
United States Food and Drug Administration (FDA) regarding the
closure of the facility and continued its review of manufacturing
practices which existed at the facility during its operations. As a
result of further reviews by Company personnel, consultants and the
FDA, the Company revised its estimate of costs of closure of the
facility and costs of potential product recalls in the third fiscal
quarter of 1992.
In addition, following the AMI acquisition in January
1992, the Company began the process of transferring the manufacture
of its product line to the AMI facility. At that time, the Company
determined the cost of completing the FDA approval process at AMI for
products previously manufactured at Walnut. The total of these
transfer costs, along with the revised estimates for closure costs at
Walnut and product recalls, was $5.3 million ($.38 per share, net of
tax) and was recorded as costs of reorganizing manufacturing
operations during the third quarter of fiscal 1992.
As a result of additional historical experience and
further evaluation, the Company reduced its estimated liability for
remaining reorganization costs during fiscal 1993. This change in
estimate totalled approximately $404,000 ($.03 per share, net of tax)
and is included as a reduction to reorganization costs. As of June
30, 1995 and 1994, the balance remaining in accrued reorganization
costs consists primarily of amounts necessary to complete the
transfer of product approvals for products previously manufactured at
the Walnut facility. It is anticipated that the filing of all such
product approvals will be completed by fiscal 1997.
Note T - Fourth Quarter Adjustments
As a consequence of sustained growth in sales and
profitability, in particular during the latter part of the year, the
Company recorded a reduction of $384,298 ($.03 per share, net of tax)
to its valuation allowance for deferred tax assets in the fourth
quarter of fiscal 1994.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
There was no change in the principal independent
accountant of the Company or any significant subsidiary of the
Company during the Company's fiscal years ended June 30, 1995 or June
30, 1994.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information called for by Item 9 will be included in
the Company's definitive Proxy Statement for its 1995 Annual Meeting
of Shareholders under the caption "Election of Directors" and is
incorporated herein by reference. In addition, certain information
concerning the Company's executive officers is included in Item 1A
(Executive Officers of the Registrant) of Part I hereof.
Item 10. Executive Compensation.
The information called for by Item 10 will be included in
the Company's definitive Proxy Statement for its 1995 Annual Meeting
of Shareholders under the caption "Executive Compensation" and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information called for by Item 11 will be included in
the Company's definitive Proxy Statement for its 1995 Annual Meeting
of Shareholders under the captions "Principal Shareholder" and
"Election of Directors" and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information called for by Item 12 will be included in
the Company's definitive Proxy Statement for its 1995 Annual Meeting
of Shareholders under the caption "Transactions with Shareholders and
Directors" and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Those exhibits marked with an asterisk (*) refer to
exhibits filed herewith and listed in the Exhibit Index which appears
immediately before the first such exhibit; the other exhibits are
incorporated herein by reference, as indicated in the following list.
(2.0) Agreement and Plan of Merger dated December 17, 1991, by and
among the Company, Aksub, Inc., Taylor Pharmacal Company ("Taylor,"
an Illinois corporation and wholly-owned subsidiary of the Company),
and certain shareholders of Taylor Pharmacal Company, incorporated by
reference to the Company's report on Form 8-K dated January 15, 1992.
(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) By-laws of the Company as amended and restated through July 23,
1993, incorporated herein by reference to Exhibit 3.2 to the
Company's report on Form 10-KSB for the fiscal year ended June 30,
1993.
(4.1) Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 to the Company's report on Form 10-K for the fiscal year
ended June 30, 1988.
(10.1) Akorn, Inc. Savings and Retirement Plan effective July 1, 1984,
incorporated by reference to Form 10-K for the fiscal year ended June
30, 1987.
(10.2) Stock Purchase Agreement dated November 15, 1990 by and between
the John N. Kapoor Trust dated September 20, 1989, and the Company,
incorporated by reference to Exhibit 10.21 to the Company's report on
Form 10-K for the fiscal year ended June 30, 1991.
(10.3) Common Stock Purchase Warrant dated November 15, 1990 between
the John N. Kapoor Trust dated September 20, 1989 and the Company,
incorporated by reference to Exhibit 10.22 to the Company's report on
Form 10-K for the fiscal year ended June 30, 1991.
(10.4) Consulting Agreement dated November 15, 1990 by and between E.
J. Financial Enterprises, Inc., a Delaware corporation, and the
Company, incorporated by reference to Exhibit 10.23 to the Company's
report on Form 10-K for the fiscal year ended June 30, 1991.
(10.5) Stock Registration Rights Agreement dated November 15, 1990 by
and between the John N. Kapoor Trust dated September 20, 1989 and the
Company, incorporated by reference to Exhibit 10.24 to the Company's
report on Form 10-K for the fiscal year ended June 30, 1991.
(10.6) Agreement dated February 15, 1991 amending Stock Purchase
Agreement dated November 15, 1990 by and between the John N. Kapoor
Trust dated September 20, 1989, and the Company, incorporated by
reference to Exhibit 10.25 to the Company's report on Form 10-K for
the fiscal year ended June 30, 1991.
(10.7) Akorn, Inc. Stock Option Plan for Directors, incorporated by
reference to Exhibit 4.4 to the Company's registration statement on
Form S-8, registration number 33-24970.
(10.8) Form of Akorn, Inc. Letter Agreement between the Company and
its directors under the Stock Option Plan for Directors, incorporated
by reference to Exhibit 4.5 to the Company's registration statement
on Form S-8, registration number 33-24970.
(10.9) Akorn, Inc. 1988 Incentive Compensation Program, incorporated
by reference to Exhibit 4.6 to the Company's registration statement
on Form S-8, registration number 33-24970.
(10.10) Form of Akorn, Inc., Letter Agreement between the Company and
its key employees and executives under the 1988 Incentive
Compensation Program, incorporated by reference to Exhibit 4.7 to the
Company's registration statement on Form S-8, registration number 33-
24970.
(10.11) Amended and Restated Akorn, Inc. 1988 Incentive Compensation
Program, incorporated by reference to Exhibit 10.32 to the Company's
report on Form 10-K for the fiscal year ended June 30, 1992.
(10.12) Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
Incentive Compensation Program, incorporated by reference to Exhibit
10.33 to the Company's report on Form 10-K for the fiscal year ended
June 30, 1992.
(10.13) Form of Stock Option Agreement under Amendment No. 1 to
Amended and Restated Incentive Compensation Program, incorporated
herein by reference to the Company's registration statement on Form
S-8, registration number 33-70686.
(10.14) 1991 Akorn, Inc. Stock Option Plan for Directors,
incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-8, registration number 33-44785.
(10.15) Form of Pledge Agreement between the Company and each
shareholder of Taylor, incorporated by reference to Exhibit 10.1 of
the Company's report on Form 8-K dated January 15, 1992.
(10.16) Form of Employment Agreement between Taylor and five key
employees, incorporated by reference to Exhibit 10.2 of the Company's
report on Form 8-K dated January 15, 1992.
(10.17) Agreement dated January 15, 1992 among the Company, the John
N. Kapoor Trust dated September 20, 1989, John N. Kapoor and EJ
Financial Enterprises, Inc., incorporated by reference to Exhibit
10.37 of the Company's report on Form 10-K for the fiscal year ended
June 30, 1992.
(10.18) Business Promissory Note of Taylor payable to First National
Bank of Decatur and Loan Modification Agreement dated January 15,
1992 by and between Taylor and First National Bank of Decatur,
incorporated by reference to Exhibit 10.4 of the Company's report on
Form 8-K dated January 15, 1992.
(10.19) Amendment and Restated Lease Agreement dated January 15, 1991
between Taylor Building Corporation as Landlord and Taylor as tenant,
incorporated by reference to Exhibit 10.5 of the Company's report on
Form 8-K dated January 15, 1992.
(10.20) Loan Agreement dated September 3, 1992, between the Company
and the John N. Kapoor Trust dated September 20, 1989, incorporated
by reference to Exhibit No. 6 to Amendment No. 3 to Schedule 13D
filed by John N. Kapoor and the John N. Kapoor Trust dated September
20, 1989, dated September 10, 1992.
(10.21) Common Stock Purchase Warrant dated September 3, 1992, issued
by the Company to the John N. Kapoor Trust dated September 20, 1989,
incorporated by reference to Exhibit No. 7 to Amendment No. 3 to
Schedule 13D, dated September 10, 1992, filed by John N. Kapoor and
the John N. Kapoor Trust dated September 20, 1989.
(10.22) Agreement, Waiver and Release, dated September 3, 1992,
between the Company and the John N. Kapoor Trust dated September 20,
1989, incorporated by reference to Exhibit 10.44 of the Company's
report on Form 10-K for the fiscal year ended June 30, 1992.
(10.23)* Amendment No. 1 to Agreement dated January 15, 1992 among
the Company, the John N. Kapoor Trust dated September 20, 1989, John
N. Kapoor and EJ Financial Enterprises, Inc.
(11.1)* Computation of Earnings Per Share.
(21.1)* Subsidiaries of the Company.
(23.1)* Consent of Deloitte & Touche LLP
(24.1)* Power of Attorney of Daniel E. Bruhl, M.D.
(24.2)* Power of Attorney of J. Ed Campbell, M.D.
(24.3)* Power of Attorney of George S. Ellis, M.D.
(24.4)* Power of Attorney of Doyle S. Gaw.
(24.5)* Power of Attorney of John N. Kapoor, Ph.D.
(24.6)* Power of Attorney of David H. Turner, M.D.
(24.7)* Power of Attorney of Lawrence A. Yannuzzi, M.D.
(b) Reports on Form 8-K.
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AKORN, INC.
By: /s/ Barry D. LeBlanc
____________________________
Barry D. LeBlanc
President and
Chief Executive Officer
Date: September 15, 1995
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/ Barry D. LeBlanc President, Chief September 15, 1995
________________________ Executive Officer and
Barry D. LeBlanc Director (Principal
Executive Officer)
/s/ Eric M. Wingerter Vice President - September 15, 1995
________________________ Finance and Administration
Eric M. Wingerter (Principal Financial
Officer and Prinicpal
Acounting Officer
*
________________________ Director September 15, 1995
Daniel E. Bruhl, M.D.
*
________________________ Director September 15, 1995
J. Ed Campbell, M.D.
*
________________________ Director September 15, 1995
George S. Ellis, M.D.
*
________________________ Director September 15, 1995
Doyle S. Gaw
*
_________________________ Director September 15, 1995
John N. Kapoor, M.D.
*
_________________________ Director September 15, 1995
David H. Turner, M.D.
*
_________________________ Director September 15, 1995
Lawrence A. Yannuzzi, M.D.
*By: /s/ Barry D. LeBlanc
_______________________
Barry D. LeBlanc
Attorney-in-fact
Dates Referenced Herein and Documents Incorporated by Reference
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