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U.S. Securities and Exchange Commission

Before the

Release No. 48546 / September 25, 2003

Release No. 1873 / September 25, 2003

File No. 3-11272

In the Matter of
AKORN, INC.,     




The Securities and Exchange Commission ("Commission") deems it appropriate to institute public cease-and-desist proceedings against Akorn, Inc. ("Akorn" or the "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").

In anticipation of the institution of these administrative proceedings, Akorn has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that Respondent admits the jurisdiction of the Commission over it and over the matters set forth herein, Respondent has consented to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings and Imposing a Cease-and-Desist Order ("Order") as set forth below.


On the basis of this Order and the Offer submitted by Respondent, the Commission finds1 that:


1. Akorn, a Louisiana corporation headquartered in Buffalo Grove, Illinois, manufactures and markets diagnostic and therapeutic pharmaceuticals, surgical instruments and related products and provides contract manufacturing services. Akorn files reports with the Commission pursuant to Section 13(a) of the Exchange Act. During the relevant time period and through June 25, 2002, Akorn's stock traded on the Nasdaq National Market System ("Nasdaq").2


2. In its 2000 Form 10-K, Akorn issued audited financial statements that were not accurate or in accordance with generally accepted accounting principles. Specifically, Akorn carried on its books at least $7 million in accounts receivable which were impaired or uncollectable. Although Akorn subsequently created a reserve for these uncollectable accounts in its first quarter 2001, it claimed that the reserve was only the result of a "change in estimate" based on new information, rather than properly disclosing that the reserve was the result of ongoing, serious problems with the company's books and records and internal controls.

3. Beginning in at least 2000, Akorn failed to promptly and completely record and reconcile cash and credit remittances, including from its top five customers, to invoices posted in its accounts receivable sub-ledger. These top five customers, wholesale drug distributors, comprised forty-three percent of Akorn's sales and sixty percent of its accounts receivable during 2000. Akorn's problems resulted from numerous internal control and books and records deficiencies that prevented the company from accurately recording, reconciling and aging its receivables. Akorn's contractual relationships with its top five wholesale customers provided for an array of complicated credits in the form of rebates and chargebacks. The wholesaler's purchasing practices combined with Akorn's complicated credit system created a confusing accounting environment for Akorn. Often, the wholesalers deferred paying individual Akorn invoices upon receipt. Instead, the wholesalers periodically made lump-sum payments applicable to numerous invoices and simultaneously withheld claimed credits. In addition, when Akorn failed to timely act on credits to which customers thought they were entitled, the customers took the credit themselves and reduced payment on their next remittance to Akorn. Computer problems, rapid growth, heavy staff turnover, and unsupervised and inexperienced accounts receivable staff further contributed to Akorn's reconciliation difficulties. Accordingly, many remittances from Akorn's top five customers were not timely reconciled, i.e., payments and credits received were not timely applied to the corresponding, individual open invoices. Indeed, Akorn frequently recorded payments as a separate entry in its systems without making any offsetting entries with respect to the corresponding individual invoices. Akorn was also aware that problems with its computer systems often caused invoices that had been at least partially paid to be shown open in full.

4. At an April 20, 2000 meeting, Akorn's audit committee discussed that the company's accounts receivable aging had "deteriorated further" from the previous quarter. During the meeting, Akorn's auditors "noted that if substantial improvement is not seen over the course of the next quarter, the company will have to begin establishing a reserve for aged accounts." Shortly thereafter, Akorn's auditors reiterated their concern about Akorn's accounts receivable. In their management letter dated February 25, 2000, Akorn's auditors described management's failures during 1999 to review accounts receivable aging in detail, to reconcile accounts receivable timely, and to collect outstanding balances effectively and efficiently, and further noted the misapplication of credits and payments.

5. On October 20, 2000, the audit committee found that accounts receivable aging had slightly deteriorated again. In its last meeting of the year on November 30, 2000, the board of directors "expressed strong concern about the company's receivables...[and] discussed a number of exposure areas, including receivables."

6. During the latter part of 2000, Akorn undertook certain efforts to reconcile and collect aged open invoices from non-top five, end-use customers, mainly dated 1997 through 1999, but including some dated 1994. By January 2001, Akorn was able to collect only approximately $200,000 of the approximately $700,000 open invoices. Some customers refused to pay the remaining invoices because of the age of the invoices and Akorn's inability to provide proof of delivery. Subsequently, in a memo dated January 31, 2001, the accounts receivable manager concluded that Akorn's failure to reconcile invoices "significantly affected the accounts receivable collectibles." She concluded that, with respect to both wholesaler and end-use customer accounts, there was "no evidence indicating prior implementation regarding credit and collections efforts [had] been effective thus far."

7. By early 2001, Akorn began to have serious cash flow problems, and it violated certain loan covenants with its primary lender. As a result, the company thereafter focused on reconciling and collecting its accounts receivable balance. In late February 2001, two months before Akorn filed its 2000 Form 10-K, Akorn's auditors prepared a detailed summary of Akorn's unreconciled accounts receivable as of September 30, 2000, in furtherance of its end of the year audit for 2000. Using Akorn's accounts receivable data base, Akorn's auditors created an aging report that contained a category of unreconciled invoices dated prior to 1999. Akorn's auditor's aging report showed that Akorn's unreconciled accounts receivable from its top five customers included 1999 invoices totaling $3.2 million and pre-1999 invoices totaling $2.45 million, and that Akorn's accounts receivable from its remaining customers included 1999 invoices totaling $1 million and pre-1999 invoices totaling $.65 million. Thus, according to Akorn's auditor's analysis, of the roughly $26 million in gross accounts receivable, Akorn had approximately $7.23 million in purportedly open unreconciled invoices dated 1999 and older in its accounts receivable portfolio. Akorn's auditors recognized that some portion of these purportedly open invoices may in fact have been paid but not reconciled and closed out, however. Akorn's auditors discussed the results of the analysis with the company prior to Akorn's filing of its 2000 Form 10-K.

8. On March 7, 2001, Akorn's chairman of the board directed: "All receivables will be analyzed thoroughly and a determination will be made on accuracy and any write-offs necessary. . . . A report will be presented before the end of March on any potential write-offs."

9. On March 15, 2001, a consultant hired by Akorn drafted a report to the chairman of the board concluding that he could not determine the collectibility of Akorn's accounts receivable and the magnitude of a potential write-off:

Given the problems and issues involved, I regret that I cannot provide an assessment of what is collectible and what the magnitude of write-offs might be. A determination on the collectibility will require a substantial amount of time (months) and work. . . . One could easily jump to the conclusion that it should be relatively easy to collect on those five [top wholesaler] accounts and achieve the quick infusion of cash that we are looking for. However, the wholesaler accounts have never been worked. We are talking about an accumulation of problems over a 3 or 4 year period.... No management reports exist that trend sales, cash, A/R aging, reserves, unbilled or DSO. Therefore, the A/R could not have been properly monitored. (Emphasis in original.)

Akorn's accounts receivable consultant discussed the problems and issues raised in the memo with the company, including his belief that it was "likely" that some receivables would be written off.

10. By March 2001, Akorn was aware that there was a substantial discrepancy regarding the amount owed by its largest customer. In February, this customer provided Akorn with its accounts payable aging summary. Akorn's open accounts receivable balance showed that the customer owed Akorn approximately $4 million, while the customer's open accounts payable balance showed Akorn actually owed it approximately $800,000. Moreover, by mid March, Akorn learned that this customer had taken approximately $1 million in rebate credits that Akorn believed were improper, but to which the customer believed it was entitled.

11. By mid April, prior to Akorn's filing of its 2000 Form 10-K, Akorn had reconciled additional portions of its largest customer account sufficiently to send letters to the customer requesting payment on what it believed were unpaid open invoices for 2000 and 1999, totaling approximately $2 million.

12. On April 17, 2001, Akorn filed its Form 10-K for the year ended December 31, 2000, reporting annual net sales of $66.9 million and net income of $2.2 million or $0.11 per share. Akorn reported year end accounts receivable totaling $24.1 million, its largest asset. Despite its substantial problems with properly recording, reconciling and collecting its accounts receivable throughout 2000 and first quarter 2001, Akorn did not establish a reserve for any of its accounts receivable for its top five wholesale customers during fiscal year 2000, nor did it disclose any impairment of those receivables. Although Akorn did record $801,000 in its doubtful accounts reserve (roughly one fourth of which was carried over from 1999), that amount was comprised solely of accounts for its non-top five, end-use customers. Had Akorn appropriately recorded a reserve for its doubtful accounts, it would have posted a $2 million loss for its fiscal year ended December 31, 2000, rather than the $2 million profit it claimed in its 2000 Form 10-K.

13. On May 16, 2001, one month after filing its 2000 Form 10-K, Akorn issued a press release announcing that it was evaluating the extent to which it would need to make changes to its financial reserves, including its bad debt reserve, and that the changes would have a significant and adverse impact on earnings. The price of Akorn common stock dropped from $3.0937 to $1.7343 per share the day of the announcement, while the volume increased from an average of 70,280 shares per day in the prior five trading days to 1,092,500 shares on May 16, 2001.

14. In its first quarter Form 10-Q, filed on May 22, 2001, Akorn increased its reserve for doubtful accounts by $7.5 million or 10 percent of reported net sales for fiscal year 2000 and 126 percent of reported net sales for the first quarter 2001. The per share impact for the quarter was ($0.39). Following Akorn's filing, the price of Akorn's common stock declined further to close at $1.0937 on May 22, 2001, and $1.125 on May 23, 2001.3 Akorn explained the increase in its accounts receivable reserve as resulting from a change in estimate "[b]ased upon its recent unsuccessful efforts to collect past due balances." Akorn did not disclose anything about its lack of internal controls or its failure to accurately compute, age and monitor its accounts receivable.


15. As a result of the conduct described above, Akorn violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder which require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security, such quarterly and annual reports as the Commission may prescribe. Akorn's 2000 Form 10-K and first quarter 2001 Form 10-Q materially misstated its accounts receivable balance or, alternatively, failed to disclose the impairment to its accounts receivable. Akorn's first quarter 2001 Form 10-Q inaccurately attributed the increased accounts receivable reserve just to a change in estimate based on recent collection efforts, rather than an error caused in large part by books and records and internal control problems.

16. As a result of the conduct described above, Akorn violated Section 13(b)(2)(A) of the Exchange Act which requires public companies to make and keep books and records which accurately and fairly reflect its transactions and dispositions of assets. Akorn failed to keep accurate books and records regarding its accounts receivable.

17. As a result of the conduct described above, Akorn violated Section 13(b)(2)(B) of the Exchange Act which requires public companies to devise and maintain a system of adequate internal accounting controls sufficient to provide reasonable assurance that, among other things, transactions were recorded as necessary to permit preparation of financial statements in conformity with Generally Accepted Accounting Principles and to maintain accountability of assets. Akorn failed to devise and maintain a system of adequate internal accounting controls sufficient to ensure that its accounts receivable was properly recorded.

Remedial Acts

18. In determining to accept Akorn's offer, the Commission considered remedial acts promptly undertaken by Respondent.


19. Respondent has undertaken to:

A. Appoint a special committee comprised entirely of outside directors that, within 30 days after the entry of the Order, shall retain a qualified independent consultant ("Consultant") acceptable to the staff of the Commission to perform a review of Akorn's material internal accounting controls, practices, and policies related to accounts receivable. Within 180 days after appointment, the Consultant shall complete its review and submit to the committee a report fully documenting the findings of its review and recommending improvements or changes to Akorn's internal accounting controls practices, and policies. Within 20 days after receipt of the Consultant's report, the committee shall submit the report to Akorn's Board of Directors, as well as to the staff of the Commission to the attention of Katherine S. Addleman, Assistant Regional Director, Central Regional Office, U.S. Securities and Exchange Commission, 1801 California St., Suite 1500, Denver, CO 80202. Within 30 days of the receipt of the Consultant's report by the special committee, Akorn may propose to the Consultant alternative procedures designed to achieve the same purpose as any recommendation with which Akorn disagrees. The Consultant shall evaluate such alternative procedure. However, Akorn shall abide by the Consultant's final determination with regard thereto and adopt those recommendations that the Consultant determines are appropriate. Within 60 days after receipt of the Consultant's report by the special committee, the Board of Directors shall report to the Consultant and to the staff of the Commission the decisions made and/or taken as a result of the consultant's proposed recommendations.

B. Require the Independent Consultant to enter into an agreement that provides that for the period of the engagement and for a period of two (2) years from the completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Akorn, or any of their present or former affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement shall provide that any firm with which the Independent Consultant is affiliated or of which he or she is a member, and any person engaged to assist the Independent Consultant in the performance of his or her duties under the Order shall not, without prior written consent of the Commission's staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Akorn, or any of their present or former affiliates, directors, officers, employees, or agents in their capacity as such for the period of the engagement and for a period of two (2) years after the engagement.


In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Respondent. Accordingly, it is hereby ordered that:

A. Pursuant to Section 21C of the Exchange Act that Respondent cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.

B. Respondent shall comply with the undertakings enumerated in Section II. above.

By the Commission.

Jonathan G. Katz


1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

2 On June 25, 2002, Akorn's stock was delisted from Nasdaq based on the company's failure to provide audited financial statements in its 2001 Form10-K, filed on April 16, 2002.

3 Akorn did not disclose the composition of its reserve account in its Form 10-Q. The reserve was calculated based upon 100 percent of Akorn's entire accounts receivable for the years 1999 and prior and 50 percent of its entire accounts receivable for 2000.


Modified: 09/26/2003