<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---- ----
COMMISSION FILE NO. 0-15098
JONES PHARMA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1229854
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1945 CRAIG ROAD, ST. LOUIS, MISSOURI 63146
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 576-6100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ---
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF, OCTOBER 15,
1998: 28,748,423
Page 1 of 18
<PAGE> 2
JONES PHARMA INCORPORATED
INDEX
-----
<TABLE>
<CAPTION>
Part I - Financial Information PAGE
NUMBER
------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 3
Condensed Consolidated Statements of Income -
three months and nine months ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Stockholders'
Equity - nine months ended September 30, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1997 and 1998 6 - 7
Notes to Condensed Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 12 - 16
Part II - Other Information
Item 1. Legal Proceedings 17
Signatures 18
</TABLE>
2
<PAGE> 3
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 49,877 $ 115,189
Accounts receivable, less allowance for doubtful accounts of
$ 1,196 at December 31, 1997 and $ 951 at September 30, 1998 ............. 13,650 14,385
Inventories .............................................................. 7,299 6,791
Deferred income taxes .................................................... 2,443 3,200
Other .................................................................... 479 1,728
Net assets of discontinued operations .................................... 10,883 --
--------- ---------
Total current assets ............................................................ 84,631 141,293
Net property, plant and equipment ............................................... 23,297 23,728
Net intangible assets ........................................................... 80,482 67,208
Other assets .................................................................... 2,219 4,632
Net assets of discontinued operations ........................................... 13,100 --
--------- ---------
Total assets .................................................................... $ 203,729 $ 236,861
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................... $ 4,631 $ 10,174
Income taxes payable ..................................................... 1,450 (148)
--------- ---------
Total current liabilities ....................................................... 6,081 10,026
Deferred income taxes ........................................................... 5,922 3,516
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
issued or outstanding .................................................... -- --
Common stock, $.04 par value; 75,000,000 authorized, 28,647,300 issued and
outstanding at December 31, 1997 and 28,748,423 at September 30, 1998 .... 1,146 1,150
Contributed capital ...................................................... 109,129 110,474
Retained earnings ........................................................ 81,451 111,695
--------- ---------
Total stockholders' equity ...................................................... 191,726 223,319
--------- ---------
Total liabilities and stockholders' equity ...................................... $ 203,729 $ 236,861
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales from continuing operations ................................ $22,168 $26,387 $62,804 $76,806
Cost of sales ................................................... 6,115 6,025 18,024 18,069
------- ------- ------- -------
Gross profit .................................................... 16,053 20,362 44,780 58,737
Selling, general and administrative expenses:
Selling ....................................................... 3,312 4,302 10,290 12,641
General and administrative .................................... 1,784 2,084 5,469 6,753
Amortization................................................... 1,140 871 2,728 2,793
Nonrecurring charge ........................................... -- -- -- 10,500
------- ------- ------- -------
Total selling, general and administrative expenses .......... 6,236 7,257 18,487 32,687
------- ------- ------- -------
Operating income from continuing operations ..................... 9,817 13,105 26,293 26,050
Other income (expense):
Interest income ............................................... 522 1,284 1,876 3,502
Other ......................................................... (72) (1) (178) (32)
------- ------- ------- -------
Income before taxes from continuing operations .................. 10,267 14,388 27,991 29,520
Provision for income taxes ...................................... 3,901 5,736 10,574 15,601
------- ------- ------- -------
Income from continuing operations ............................... 6,366 8,652 17,417 13,919
Income from discontinued operations (net of taxes):
Gain on sale of discontinued operations ....................... -- -- -- 17,079
Income from discontinued operations ........................... 1,751 -- 5,194 1,689
------- ------- ------- -------
Income from discontinued operations ......................... 1,751 -- 5,194 18,768
------- ------- ------- -------
Net income ...................................................... $ 8,117 $ 8,652 $22,611 $32,687
======= ======= ======= =======
Earnings per share:
Basic: Continuing operations................................... $ .22 $ .30 $ .61 $ .48
Discontinued operations................................. .06 -- .18 .65
------- ------- ------ -------
$ .28 $ .30 $ .79 $ 1.13
======= ======= ====== =======
Diluted: Continuing operations................................. $ .22 $ .30 $ .60 $ .48
Discontinued operations............................... .06 -- .18 .64
------- ------- ------ -------
$ .28 $ .30 $ .78 $ 1.12
======= ======= ====== =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30, 1997 and 1998
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
Number of shares Preferred Common Contributed Retained
Preferred Common Stock Stock Capital Earnings Total
--------- ------ ----- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ... -- 28,435,451 $ -- $ 1,137 $ 108,582 $ 52,200 $ 161,919
Exercise of stock options ...... -- 201,749 -- 8 607 -- 615
Shares tendered in payment
of option exercise price ....... -- (10,182) -- -- (340) -- (340)
Return of escrowed shares ...... -- (2,693) -- -- (87) -- (87)
Net income ..................... -- -- -- -- -- 22,611 22,611
Cash dividend declared - common
stock ($.07 per share) ......... -- -- -- -- -- (2,002) (2,002)
--- ---------- ----- -------- ---------- ---------- ----------
Balance at September 30, 1997 .. -- 28,624,325 $ -- $ 1,145 $ 108,762 $ 72,809 $ 182,716
=== ========== ===== ======== ========== ========== ==========
Balance at December 31, 1997 ... -- 28,647,300 $ -- $ 1,146 $ 109,129 $ 81,451 $ 191,726
Exercise of stock options ...... -- 104,000 -- 4 1,345 -- 1,349
Shares tendered in payment of
option price ................... -- (2,877) -- -- -- -- --
Net income ..................... -- -- -- -- -- 32,687 32,687
Cash dividend declared - common
stock ($.085 per share) ........ -- -- -- -- -- (2,443) (2,443)
--- ---------- ----- -------- ---------- ---------- ----------
Balance at September 30, 1998 .. -- 28,748,423 $ -- $ 1,150 $ 110,474 $ 111,695 $ 223,319
=== ========== ===== ======== ========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------
1997 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ......................................................... $ 22,611 $ 32,687
Non-cash adjustments:
Depreciation and amortization .................................. 3,625 4,218
Provision for uncollectibles ................................... 31 342
Nonrecurring charge ............................................ -- 10,500
Pretax gain on sale of discontinued operations ................. -- (30,616)
Deferred income tax ............................................ -- ( 3,163)
Loss on asset sales ............................................ 44 --
Change in assets and liabilities:
Accounts receivable ............................................ (5,099) ( 491)
Income tax receivable .......................................... 1,764 --
Inventories .................................................... (2,944) 508
Other assets ................................................... (1,014) ( 3,685)
Accounts payable and accrued expenses .......................... 49 5,525
Income taxes payable ........................................... 1,472 ( 1,591)
Discontinued operations - non-cash charges and working capital.. ( 169) --
--------- ---------
Net cash from operating activities ........................ 20,370 14,234
--------- ---------
Cash flows from (used for) investing activities:
Proceeds from sale of assets ....................................... 256 3
Product acquisitions ............................................... (22,800) --
Additions to property, plant and equipment ......................... ( 3,668) ( 2,240)
Proceeds from sale of discontinued operations ...................... -- 55,000
Investing activities - discontinued operations ..................... ( 396) --
--------- ---------
Net cash from (used for) investing activities ............. (26,608) 52,763
Cash flows from (used for) financing activities:
Payment of dividends ............................................... ( 2,562) ( 2,440)
Payment of long term debt .......................................... ( 3,000) --
Proceeds from exercise of stock options ............................ 275 755
--------- ---------
Net cash from (used for) financing activities .................. ( 5,287) ( 1,685)
--------- ---------
Increase (decrease) in cash and cash equivalents ........................ (11,525) 65,312
Cash and cash equivalents, beginning of period .......................... 52,172 49,877
--------- ---------
Cash and cash equivalents, end of period ................................ $ 40,647 $ 115,189
========= =========
</TABLE>
See accompanying notes
6
<PAGE> 7
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T)
(UNAUDITED)
(In thousands of dollars)
Supplemental Disclosures of Cash Flow Information:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
Cash paid during the nine months for: 1997 1998
------ ------
<S> <C> <C>
Interest........................................ $ - $ -
======== ========
Income taxes.................................... $ 10,702 $ 34,292
======== ========
</TABLE>
See accompanying notes.
7
<PAGE> 8
JONES PHARMA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1998
(Dollars in thousands except share and per share amounts)
1. GENERAL
The unaudited interim financial information reflects all adjustments
(consisting only of normal recurring accruals) which management considers
necessary for a fair presentation of the results of operations for such
periods and is subject to year-end adjustments. Certain footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted from the unaudited interim financial information as
permitted by rules and regulations of the Securities and Exchange
Commission. Management believes that the disclosures made are adequate to
make the information presented not misleading. The results for the interim
periods are not necessarily indicative of results for the full year. It is
suggested that these financial statements be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997, included in the 1997 Annual Report.
2. DISCONTINUED OPERATIONS
On March 16, 1998, the Board of Directors of JONES PHARMA INCORPORATED
("JMED" or the "Company") approved a plan to discontinue the Company's
nutritional supplements product line and contract manufacturing operations.
On March 17, 1998, the Company signed a binding agreement with certain
operating subsidiaries of Twinlab Corporation (Twin) to sell a portion of
this business for $55,000 cash on the April 30, 1998 closing date. A gain
on the sale, of approximately $17,000, net of taxes of approximately
$13,500, has been recorded in the 1998 year-to-date results. The
accompanying consolidated statements of income reflect the operating
results, net of tax, of the Company's nutritional supplements product line
and contract manufacturing operations as discontinued operations. Net sales
associated with the discontinued operations approximate $26,508 for the
nine months ended September 30, 1997 and $11,901 for the period January 1,
1998 to April 30, 1998 (the sale date).
3. NONRECURRING CHARGE
In June 1998, the Company recorded a non-cash accounting charge related to
an impairment of certain under-performing long-lived assets. As a result of
the Company's strategic review process of its product lines and related
intangible assets, the Company determined that a portion of the goodwill
associated with certain lower-margin pharmaceutical products had been
impaired. The revised carrying value of the respective goodwill was
calculated on the basis of discounted estimated future cash flows and
resulted in a non-cash, after-tax charge of $10,500, or $.36 per share.
This nonrecurring charge has no impact on the Company's 1998 cash flow or
its ability to generate cash flow in the future. Future amortization
expense will be reduced (both pre-tax and after-tax) by approximately $420
per year.
8
<PAGE> 9
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share exclude
any dilutive effects of options, warrants, and convertible securities.
Diluted earnings per share are very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented and, where appropriate, restated to conform to
the Statement No. 128 requirements.
The following table sets forth the computations of basic and diluted
earnings per share for the three months and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
Numerator for basic and diluted
earnings per share:
<S> <C> <C> <C> <C>
Income from continuing operations $ 6,366 $ 8,652 $ 17,417 $ 13,919
Income from discontinued operations 1,751 - 5,194 18,768
---------- ---------- ---------- ----------
$ 8,117 $ 8,652 $ 22,611 $ 32,687
========== ========== ========== ==========
Denominator for basic earnings per
share-weighted average shares 28,609,000 28,751,000 28,537,000 28,736,000
Effect of dilutive stock options 594,000 515,000 441,000 540,000
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 29,203,000 29,266,000 28,978,000 29,276,000
========== ========== ========== ==========
Earnings per share:
Basic: Continuing operations $ .22 $ .30 $ .61 $ .48
Discontinued operations .06 - .18 .65
---------- ---------- ---------- ----------
$ .28 $ .30 $ .79 $ 1.13
========== ========== ========== ==========
Diluted: Continuing operations $ .22 $ .30 $ .60 $ .48
Discontinued operations .06 - .18 .64
---------- ---------- ---------- ----------
$ .28 $ .30 $ .78 $ 1.12
========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
5. INVENTORIES
Inventories are valued at the lower of cost on a first-in, first-out basis
or market. Inventories used in continuing operations are comprised as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
-------------- -------------
<S> <C> <C>
Raw material............................. $ 1,961 $ 2,743
Work-in-process.......................... 745 524
Finished goods........................... 4,593 3,524
-------------- -------------
$ 7,299 $ 6,791
============== =============
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment used in continuing operations are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Land................................................................. $ 2,059 $ 2,073
Building and improvements............................................ 11,298 11,557
Equipment and furniture.............................................. 13,057 15,425
Automobiles.......................................................... 591 591
Projects in process.................................................. 1,416 1,375
-------------- --------------
28,421 31,021
Less accumulated depreciation and amortization....................... (5,124) (7,293)
-------------- --------------
$ 23,297 $ 23,728
============== ==============
</TABLE>
10
<PAGE> 11
7. INTANGIBLE ASSETS
Intangible assets used in continuing operations are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Unaudited)
------------ -----------
<S> <C> <C>
Distribution systems, trademarks and licenses.......................... $ 66,827 $ 66,827
Restrictive covenants and other intangibles............................ 7,624 7,665
Goodwill............................................................... 14,534 4,034
-------------- --------------
88,985 78,526
Less accumulated amortization.......................................... (8,503) (11,318)
-------------- --------------
$ 80,482 $ 67,208
============== ==============
</TABLE>
8. INCOME TAXES
The provisions for income taxes for the three month and nine month periods
ended September 30, 1997 are based on estimated effective annual income tax
rates of 38.0% and 37.8%, respectively. For the three month period ended
September 30, 1998, the provision for income taxes is based on an estimated
effective income tax rate of 39.8%. The provision for the nine month period
ended September 30, 1998 reflects the nondeductibility of the $10,500
nonrecurring charge. Excluding the effects of the nonrecurring charge, the
estimated effective income tax rate in 1998 approximates 39.0%.
9. CONTINGENCIES
The Company currently carries product liability coverage of $25,000 per
occurrence and $25,000 in the aggregate on a "claims made" basis. In
addition to this policy, the Company carries a $5,000 umbrella policy.
There is no assurance that the Company's present insurance will cover any
potential claims that may be asserted in the future. In addition, the
Company is subject to legal proceedings and claims, which arise in the
ordinary course of business.
The Company is a defendant in a number of lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine, and phentermine
(collectively, "Fen/Phen"). The Company distributed Obenix, its branded
phentermine product; however, the Company does not, and did not
manufacture Obenix or other Fen/Phen combinations. The lawsuits are in
their preliminary stages and it is too early to determine what, if any,
liability the Company may have with respect to the claims set forth in
these lawsuits. Management of the Company believes that the outcome of
these lawsuits will not have a material adverse effect on the Company's
business, financial condition, and results of operations.
The FDA announced in an August 14, 1997, Federal Register Notice that
orally administered drug products containing levothyroxine sodium are now
classified as new drugs. Manufacturers, who wish to continue to market
these products, must submit new drug application (NDA). After August 14,
2000, any levothyroxine sodium product marketed without an approved NDA
will be subject to regulatory action. Levoxyl, with total sales of
approximately $14,800 for the nine months ended September 30, 1997 and
$21,650 for the nine months ended September 30, 1998, was marketed prior to
the date of the FDA notice and therefore will continue to be eligible for
marketing until August 14, 2000. The Company plans to dedicate significant
resources to this NDA process during 1998 and 1999 and expects to incur
costs in excess of $2,000 to secure an approved NDA for Levoxyl.
11
<PAGE> 12
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The Company's decision to dispose of its nutritional supplements product
line and contract manufacturing operations requires a restatement of its
historical financial information under applicable accounting principles and
regulations to reflect such operations as `discontinued operations' (See
Note 2 to the Condensed Consolidated Financial Statements elsewhere in this
report). As a result of the Company's restatement of its historical
financial information, the comparative dollar values and percentage amounts
used throughout Item 2 of this report reflect this restatement and relate
solely to the Company's continuing pharmaceutical operations, unless
otherwise indicated.
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results in future periods may
differ significantly from the results discussed in or anticipated by such
forward-looking statements.
********************************************
The following table sets forth, for the interim periods indicated, the
percentages which certain components of the Consolidated Statements of
Income bear to product net sales and the percentage change of such
components (based on aggregate dollars) as compared to the prior year.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
AGGREGATE
THREE MONTHS ENDED NINE MONTHS ENDED DOLLAR
September 30, September 30, AMOUNT
------------------ ---------------- ------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales from continuing operations 100.0% 100.0% 100.0% 100.0% 22.3%
Cost of sales 27.6 22.8 28.7 23.5 0.2
----- ----- ----- ----- -----
Gross profit 72.4 77.2 71.3 76.5 31.2
Selling, general and administrative expenses:
Selling 14.9 16.3 16.4 16.5 22.8
General and administrative 8.1 7.9 8.7 8.8 23.5
Amortization 5.1 3.3 4.3 3.6 2.4
Nonrecurring Charge 0.0 0.0 0.0 13.7 N/A
----- ----- ----- ----- -----
Total selling, general and
administrative expenses 28.1 27.5 29.4 42.6 76.8
----- ----- ----- ----- -----
Operating income from continuing operations 44.3 49.7 41.9 33.9 ( .1)
Interest income 2.4 4.9 3.0 4.6 86.7
Other income (expense) ( 0.3) 0.0 (0.3) 0.0 (82.0)
----- ----- ----- ----- -----
Income before taxes from continuing operations 46.4 54.6 44.6 38.5 5.5
Provision for income taxes 17.7 21.8 16.9 20.3 47.5
----- ----- ----- ----- -----
Income from continuing operations 28.7 32.8 27.7 18.2 (20.1)
Income from discontinued operations (net of tax) 7.9 0.0 8.3 24.4 261.3
----- ----- ----- ----- -----
Net income 36.6% 32.8% 36.0% 42.6% 44.6%
===== ===== ===== ===== =====
</TABLE>
12
<PAGE> 13
SALES FROM CONTINUING OPERATIONS
QUARTER ENDED SEPTEMBER 30:
Sales from continuing operations for the three months ended September 30, 1998
increased 19.0% to $26.3 million from $22.1 million for the three months ended
September 30, 1997. Endocrine product sales increased $3.2 million to $14.0
million in the third quarter of 1998 vs. $10.8 million in the third quarter of
1997. The 29.6% increase in endocrine product sales in the third quarter of 1998
results from the continued strong unit growth in both Levoxyl and Tapazole.
Critical Care product sales increased approximately 9.5% from $9.1 million in
the third quarter of 1997 to $10.0 million in the third quarter of 1998. The
third quarter increase in critical care product sales relates to the increase in
Brevital which was backordered at the end of the second quarter of 1998.
Veterinarian product sales remained relatively flat at $2.3 million in the third
quarter of 1998 as compared to $2.2 million in the third quarter of 1997. The
third quarter veterinarian product sales would have reflected a 22% increase
over the same quarter of 1997 except for a customer-requested delayed shipment
of Soloxine approximating $.4 million.
NINE MONTHS ENDED SEPTEMBER 30:
Sales from continuing operations for the nine months ended September 30, 1998
increased 22.3% over the same period of 1997, from $62.8 million to $76.8
million. The increase consists of a 37.9% increase in endocrine product sales
from $31.7 million to $43.7 million, a 4.0% increase in critical care product
sales from $25.0 million to $26.0 million, and a 15% increase in veterinarian
product sales from $6.0 million to $6.9 million.
The endocrine product sales increase results primarily from a $6.6 million
increase in Levoxyl, a $4.8 million increase in Tapazole, and the inclusion of a
full nine months of Cytomel representing $3.0 million of acquired Cytomel sales
in 1998.
The critical care product sales increased only $1.0 million in 1998 over 1997
due to the lack of Thrombin sales to Johnson & Johnson of approximately $2.4
million. Although contract manufacture of Thrombin products for Johnson &
Johnson is expected to resume in 1999, the absence of such sales during 1998 was
expected and has allowed the Company to dedicate the production capacity of its
Gentrac facility to the exclusive manufacture of JMI-Thrombin. The decline in
Thrombin contract sales was more than offset by a $1.1 million increase in
JMI-Thrombin product sales, a $1.4 million increase in Brevital product sales,
and the inclusion of a full nine months of Triostat.
The veterinarian product sales increase results from unit volume increases in
Soloxine and Tussigon.
13
<PAGE> 14
GROSS PROFIT
Gross profit during the three months ended September 30, 1998 increased 27% or
$4.3 million to $20.4 million from $16.1 million in the same period of 1997. As
a percentage of sales from continuing operations, margins increased from 72.4%
in the third quarter of 1997 to 77.2% in the third quarter of 1998. Year-to-date
gross margins increased to 76.5% compared to 71.3% in the prior year. The
improved gross margins for the quarter and year-to-date result from the decline
in the lower margin Thrombin contract sales to Johnson & Johnson coupled with
the increase in sales of the higher-margin products such as Brevital, Triostat,
Levoxyl, Tapazole, and Cytomel.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses increased 30.3% or $1.0 million to $4.3 million in the third
quarter of 1998 due to increases in sales commissions, bonuses, administrative
fees to hospital buying groups, royalties, and increased sampling of products to
physicians. As a percentage of sales from continuing operations, selling
expenses increased from 14.9% in the third quarter of 1997 to 16.3% in the third
quarter of 1998.
For the nine months ended September 30, 1998, selling expenses increased 22.8%
or $2.4 million to $12.6 million. The increase primarily results from increases
in sales commissions, administrative fees and increased sampling of products to
physicians. As a percentage of sales from continuing operations, selling
expenses remained relatively flat at 16.4% for both 1998 and 1997.
General and administrative expenses increased $.3 million to $2.1 million for
the third quarter of 1998. For the nine months ended September 30, 1998, general
and administrative expenses increased $1.3 million to $6.8 million, from $5.5
million in 1997. The increase in 1998 over 1997 results primarily from increases
in bonuses, donations, and medical insurance claims. As a percentage of sales
from continuing operations, general and administrative expenses remained
relatively unchanged at 8.7% in 1998 and 1997.
Amortization expense declined in the third quarter of 1998 as compared to the
third quarter of 1997 due to the $10.5 million write-off of intangibles recorded
in the second quarter of 1998. Year-to-date amortization expense is relatively
unchanged at $2.7 million which reflects the increased amortization associated
with the Cytomel and Triostat acquisition on June 27, 1998, offset by the
amortization expense reduction resulting from the $10.5 million write-off of
intangibles in the second quarter of 1998. This $10.5 million write-off of
intangibles is reflected as a nonrecurring charge in the 1998 year-to-date
results.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income from continuing operations during the third quarter of 1998
increased $3.3 million to $13.1 million from $9.8 million in 1997 primarily due
to the significant improvement in gross profit. Operating income from continuing
operations for the nine months ended September 30, 1998 decreased $.2 million as
compared to the same period of 1997, due to the $10.5 million nonrecurring
charge in 1998, discussed above, offset by the significant increase in gross
profit. Excluding the nonrecurring charge, operating income from continuing
operations in 1998 increased $10.3 million or 39% over the nine months ended
September 30, 1997.
14
<PAGE> 15
OTHER INCOME (EXPENSE)
Other income increased during the three months and nine months ended September
30, 1998 as compared to the same periods of 1997 primarily due to the increase
in interest income earned on the $55 million of proceeds from the sale of the
Company's Nutritional Business on April 30, 1998.
INCOME TAXES
The provisions for income taxes for the three month and nine month periods ended
September 30, 1997 are based on estimated effective annual income tax rates of
38.0% and 37.8%, respectively. For the three months ended September 30, 1998,
the provision for income taxes is based on an estimated effective annual income
tax rate of 39.8%. The effective income tax rate of 52.8% for the nine months
ended September 30, 1998 reflects the nondeductibility of the $10.5 million
nonrecurring charge. Excluding the effects of the nonrecurring charge, the
estimated effective income tax rate in 1998 approximates 39.0%.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the third quarter of 1998 increased $2.3
million to $8.7 million and for the nine months ended September 30, 1998,
decreased $3.5 million to $13.9 million, as a result of the $10.5 million
nonrecurring charge discussed above.
Excluding the nonrecurring charge, income from continuing operations for the
nine months ended September 30, 1998, increased $7.0 million or 40% as compared
to the nine months ended September 30, 1997.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 1998 reflects an approximate $17 million
(net of tax) gain from the sale of the Company's Nutritional Business on April
30, 1998. In addition, income from discontinued operations includes the
after-tax operating results of the Company's discontinued businesses prior to
the sale of the Nutritional Business on April 30, 1998.
NET INCOME
Net income for the three months ended September 30, 1998 increased $.5 million
over the same period of 1997 and for the nine months ended September 30, 1998
increased $10.1 million over the same period of 1997. The $17 million after-tax
gain from the sale of the Company's Nutritional Business, less the $10.5 million
after-tax nonrecurring charge accounts for $6.5 million of the year-over-year
net income increase.
EARNINGS PER SHARE
Diluted earnings per share from continuing operations increased 36.4% to $.30
for the three month period ended September 30, 1998 as compared to $.22 for the
three month period ended September 30, 1997. Year-to-date diluted earnings per
share from continuing operations decreased to $.48 in 1998 from $.61 in 1997.
Excluding the $10.5 million nonrecurring charge in 1998, the year-to-date
diluted earnings per share from continuing operations increased 36.1% to $.83 in
1998 as compared to $.61 in 1997 on weighted average shares of 29.3 million in
1998 vs. 29.0 million in 1997.
15
<PAGE> 16
BALANCE SHEET INFORMATION
The Company's current ratio increased from 13.9:1 at December 31, 1997 to 14.1:1
at September 30, 1998 and working capital increased to $131.3 million at
September 30, 1998 from $78.6 million at December 31, 1997. The increases in the
current ratio and working capital relate primarily to the increase in cash of
$65.3 million offset by the disposal of current assets of discontinued
operations totaling $10.9 million and an increase in current liabilities of $3.9
million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has financed its operations primarily through cash
flow from operations, public and private sales of equity securities and
borrowings under revolving credit facilities. At September 30, 1998 and December
31, 1997, the Company had cash and cash equivalents of $115.2 million and $49.9
million, respectively. The increase in cash during the nine months ended
September 30, 1998 of $65.3 million reflects the proceeds, net of tax, from the
sale of the Company's Nutritional Business and on-going positive cash flow from
operations. The Company believes that available resources and anticipated cash
flow from operations are adequate to meet currently anticipated operating needs
and to fund future acquisitions. While the Company does not maintain current
lines of credit, it believes it has sufficient borrowing capacity in the event
that acquisition opportunities cannot be funded from existing resources.
Total assets increased $33.1 million to $236.9 million at September 30, 1998
from $203.7 million at December 31, 1997 primarily due to the increase in cash
discussed above, offset by the disposal of assets of discontinued operations
totaling $10.9 million and the $10.5 million write-off of goodwill reflected as
a nonrecurring charge. Total liabilities increased $1.5 million to $13.5 million
at September 30, 1998 from $12.0 million at December 31, 1997 primarily due to
the increase in accrued liabilities associated with discontinued operations,
offset by a reduction in income taxes payable given the timing of estimated tax
payments.
Inventories decreased to $6.8 million at September 30, 1998 compared to $7.3
million at December 31, 1997. Accounts receivable increased to $14.4 million at
September 30, 1998 from $13.7 million at December 31, 1997 due to higher sales
levels in the third quarter of 1998 vs the fourth quarter of 1997, and due to
the determination of recoverability of certain excess cash discounts previously
taken by customers. In days outstanding, accounts receivable decreased from 54
days at December 31, 1997 to 48 days at September 30, 1998.
The Company has experienced only moderate raw material and labor price increases
in recent years. While the Company has passed some price increases along to
customers, the Company has primarily benefited from rapid sales growth, negating
most inflationary pressures. The Company's manufacturing operations are not
capital intensive and, as such, the impact of inflation on the property, plant,
and equipment and associated depreciation expense of the Company has been
minimal.
16
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed earlier this year in the Circuit
Court for the County of Macomb, Michigan and styled as Steadfast Insurance
Company vs.Camall Company, et.al., Cause No. 98-92 CK. Camall is the
manufacturer of the Company's phentermine product, Obenix, and Steadfast is
Camall's insurance carrier. Customers of Camall, of which the Company is one,
have made demand on Steadfast to defend them in the nationwide Fen/Phen
litigation pursuant to the vendor's endorsements issued with respect to Camall's
insurance policy. In this action, the plaintiff, Steadfast, is seeking, among
other things, declaratory relief in order to determine its rights and
obligations, and the rights and obligations of customers of Camall (and their
respective insurance carriers), with respect to providing defense of and
coverage for the customers of Camall in the Fen/Phen litigation. Management of
the Company does not believe that the outcome of this lawsuit will have a
material adverse effect on the Company's financial condition. The issues
arising in the lawsuit should not affect insurance coverage available to the
Company under its own product liability policies.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JONES PHARMA INCORPORATED
Date: November 13, 1998 By:/s/ Dennis M. Jones
----------------- -------------------------------------------
Dennis M. Jones, President
Date: November 13, 1998 By: /s/ Judith A. Jones
----------------- -------------------------------------------
Judith A. Jones
Executive Vice President and
Principal Financial and Accounting Officer
18
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