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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 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
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(Exact name of registrant as specified in its charter)
DELAWARE 43-1229854
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1945 CRAIG ROAD, ST. LOUIS MISSOURI 63146
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 576-6100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.04 PAR VALUE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of February 26, 1999, is approximately $810
million. (This calculation is based on the closing price of the stock as quoted
on the NASDAQ National Market and excludes shares of stock held by directors and
officers of the Registrant.)
Number of shares outstanding of registrant's Common Stock as of February 26,
1999: 28,810,069.
Documents incorporated by reference: NONE.
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INTRODUCTORY NOTES
Tapazole(R), Levoxyl(R), Triostat(R), Cytomel(R), Thrombin-JMI(R),
Brevital(R)Sodium, Soloxine(R), Liqui-Char(R), Therevac(R) and Derma-Scrub(R)
are trademarks owned by or under license to the Company. All other trademarks
and registered trademarks used in this Form 10-K are the property of their
respective owner. Unless the context otherwise requires, references herein to:
(i) the "Company" refers to JONES PHARMA INCORPORATED and its subsidiaries; (ii)
"Daniels Acquisition" refers to the Company's acquisition of Galen Drugs of
Florida, Inc. ("Galen"), and Galen's subsidiaries, including Daniels
Pharmaceuticals, Inc. ("Daniels"), on August 30, 1996 in a transaction accounted
for as a pooling of interests; and (iii) "Abana Acquisition" refers to the
Company's acquisition of Abana Pharmaceuticals, Inc. ("Abana") on December 31,
1996.
The following discussion contains forward-looking statements that involve risks
and uncertainties. Certain of these risks and uncertainties are discussed below
in Item 1 as they relate to the Company's existing operations and strategies and
in Item 7 as they relate to the Company's results of operations and financial
condition. The Company's actual results in future periods may differ
significantly from the results discussed in or anticipated by such
forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
JONES PHARMA INCORPORATED manufactures, markets, distributes and sells
specialty pharmaceutical products under its own trademarks and tradenames. Prior
to the disposition of its nutritional supplements product line and contract
manufacturing operations in April, 1998, the Company was known as "Jones Medical
Industries, Inc." Information concerning the disposition of the Company's
nutritional supplements product line and contract manufacturing operations is
provided under the caption "Significant Operating Events during 1998" below.
BUSINESS STRATEGY
The Company's business strategy is to generate internal growth through the
targeted promotion of its portfolio of niche pharmaceutical products and to
acquire additional specialty pharmaceutical product lines or operations that
complement or expand the marketing or distribution of its existing product
lines. All of the Company's product lines have been acquired through a series of
acquisitions which have complemented or expanded its existing lines of business.
The Company intends to continue to leverage its existing marketing and sales
capabilities by expanding and increasing the penetration of its existing
customer base and through additional strategic acquisitions of complementary
pharmaceutical products or businesses. The key elements of the Company's
strategy include:
Leverage Established Pharmaceutical Marketing and Sales Efforts. The
Company intends to maximize productivity of its sales force through the targeted
promotion of promotion-sensitive, niche pharmaceutical products. In addition,
the Company intends to raise the awareness of selected products through targeted
sales efforts focused on hospital physicians, office-based physicians and other
health care professionals in the United States.
Maintain Strong Gross and Operating Margins Through Focus on High-Margin
Pharmaceutical Products and Cost Control. The Company continues to be successful
at increasing gross and operating margins by using sales personnel efficiently,
minimizing corporate overhead and focusing on high margin products. The Company
believes that by continuing its focus on a limited number of products, the
Company can increase both sales and margins by maximizing the productivity of
its sales force and controlling overhead costs.
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Acquire and Build Market Share in Specialty Pharmaceuticals. Since
inception, the Company has purchased domestic rights to certain specialty
pharmaceuticals addressing markets such as prescription treatments for thyroid
disorders and critical care treatments involving hemostasis and anesthesia. The
Company intends to continue to seek the rights to products that it believes can
benefit from focused marketing efforts.
SIGNIFICANT OPERATING EVENTS DURING 1998
On March 16, 1998, the Board of Directors of the Company approved a plan to
discontinue the Company's nutritional supplements product line and contract
manufacturing operations ("Discontinued Operations"). On April 30, 1998, the
Company sold substantially all of this business to certain operating
subsidiaries of Twinlab Corporation ("Twinlab") for $55 million cash. A gain on
this sale of approximately $17 million, net of approximately $13.5 million in
taxes, was recorded by the Company in 1998. Net sales associated with the
Discontinued Operations approximated $11.9 million for the period January 1,
1998 to April 30, 1998.
PRINCIPAL PRODUCTS
The Company's principal products serve the endocrine treatment and the
critical care segments of the health care industry as well as the companion
animal segment of the veterinary industry. The Company's principal products are
as follows:
Endocrine Pharmaceuticals.
Tapazole. Tapazole is an anti-thyroid product used for the treatment of
hyperthyroidism; the extreme form of hyperthyroidism is commonly known as
'Graves Disease.' Tapazole is prescribed to inhibit the synthesis and
production of natural thyroid hormones and to reduce the size of the goiter
(an abnormal growth resulting from overactivity of the thyroid gland).
Although the Company is not aware of any generic forms of Tapazole in the
marketplace, Tapazole faces competition from propylthiouracil ("PTU"). PTU
is manufactured by Lederle Labs ("Lederle"), a division of American
Cyanamid Company, which has greater financial resources than the Company,
and is marketed and distributed by a number of independent generic
pharmaceutical companies who acquire product from Lederle. During 1998, the
Company had net sales of $24.7 million relating to Tapazole, equal to 23.9%
of the Company's sales from continuing operations.
Levoxyl. Levoxyl is a synthetic thyroid hormone for the treatment of
hypothyroidism and is reported to be the second most widely prescribed
brand of levothyroxine in the United States. Levothyroxine pharmaceuticals
are used to supplement or enhance endocrine levels produced by underactive
thyroid glands. The U.S. domestic market for levothyroxine is estimated at
$390 million annually and is dominated by Synthroid(R) which is
manufactured by Knoll Pharmaceutical Company, a subsidiary of BASF Pharma,
which has substantially greater sales, marketing and financial resources
than the Company. New FDA requirements, effective August 14, 2000, mandate
that all orally administered drug products containing levothyroxine sodium,
including Levoxyl, receive new drug approval from the FDA. Information
concerning this new drug approval process for Levoxyl is provided under the
caption "Government Regulation" below. Competitive action in the marketing
and distribution of Synthroid(R) as well as the process of obtaining new
drug approval could disrupt the Company's strategies for market development
of Levoxyl and have a material adverse effect on the Company's business and
financial condition and its results of operations. During 1998, the Company
had net sales of $28.1 million relating to Levoxyl, equal to 27.2% of the
Company's sales from continuing operations.
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Triostat. Triostat is an injectable thyroid replacement hormone which
is used to treat acute thyroid disorders. Triostat is a synthetic form of a
naturally occurring hormone called triiodothyronine or T3. It is primarily
used for the treatment and management of myxedema coma and precoma. The
Company is not aware of any generic forms of Triostat in the marketplace.
However, other pharmaceutical companies may seek approval to market and
sell generic forms of injectable T3 which could lead to a decrease in the
price that customers may be willing to pay for Triostat. With respect to
Triostat, there can be no assurances that the Company will be able to
compete effectively with new market entrants, that additional competitors
will not enter the market or that competitive factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations. During 1998, the Company had net sales of $3.1
million relating to Triostat, equal to approximately 3.0% of the Company's
sales from continuing operations.
Cytomel. Cytomel is a thyroid replacement hormone in tablet form which
is used to treat chronic thyroid disorders. Like Triostat, it is a
synthetic form of T3. It is primarily used for replacement or supplemental
therapy for patients suffering from cretinism, myxedema and primary and
tertiary hypothyroidism. As with Triostat, the Company is not aware of any
generic forms of Cytomel in the marketplace. However, other pharmaceutical
companies may choose to market and sell generic forms of T3 which could
lead to a decrease in the price that customers may be willing to pay for
Cytomel. With respect to Cytomel, there can be no assurances that the
Company will be able to compete effectively with new market entrants, that
additional competitors will not enter the market or that competitive
factors will not have a material adverse effect on the Company's business,
financial condition and results of operations. During 1998, the Company had
net sales of $5.7 million relating to Cytomel, equal to approximately 5.5%
of the Company's sales from continuing operations.
Critical Care Pharmaceuticals.
Thrombin-JMI. During invasive surgical procedures, surgeons typically
limit bleeding in order to control blood loss and maintain visibility of
the surgical site. Surgeons may apply pressure bandages, suture severed
vessels and/or use a topical hemostatic agent to control bleeding within
the surgical site. In most cases, collagen, cellulose or thrombin-based
hemostatic agents are used because of their ability to rapidly begin the
clotting process. Thrombin-JMI is a thrombin-based topical hemostatic agent
derived from bovine blood. The Company's thrombin product offers advantages
over collagen and cellulose products because of faster activity at the
surgical site. Additionally, because of its physical characteristics,
Thrombin-JMI does not need to be removed from the surgical site prior to
closure, whereas non-thrombin competing products need to be removed, often
leading to recurrence of bleeding. The topical hemostat market was
estimated to be greater than $90 million in the United States in 1998. In
1998, thrombin products accounted for 21% of the United States topical
hemostat market. The Company has an approximate 95% share of the thrombin
products portion of the topical hemostat market with net sales of $17.8
million, equal to 17.2% of the Company's sales from continuing operations.
Brevital Sodium. The intravenous ("I.V.") anesthetic market is split
into segments based on type and length of therapeutic, diagnostic or
surgical procedures. Short-term general anesthesia is required when
performing minor surgical procedures such as dental surgery, cardioversion
and other brief ambulatory surgeries. Long-term general anesthesia is
required when more complex and invasive surgical procedures are performed.
In order to administer long-term general anesthesia, induction agents are
used to begin the anesthetic event and are subsequently followed by another
drug or gas to maintain the anesthesia. The Company's product, Brevital
Sodium ("Brevital"), is a general I.V. anesthetic agent that addresses both
the short-term and long-term anesthesia markets and was originally
introduced by Eli Lilly and Company ("Lilly") in 1961. Brevital is used in
both long-term and short-term procedures because of its rapid onset of
action and quicker recovery time. Brevital's rapid onset of action also
makes it a useful induction agent prior to the administration of another
agent to maintain the anesthesia. The I.V. anesthetic market in the
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United States is estimated to be $530 million. The Company acquired the
exclusive domestic perpetual license to distribute Brevital from Lilly in
August 1995. During 1998, the Company had net sales of $11.1 million
relating to Brevital, equal to 10.7% of the Company's sales from continuing
operations.
Veterinary Pharmaceuticals.
The Company also manufactures and distributes veterinary
pharmaceuticals, the most prominent of which are Soloxine, Tussigon and
Pancrezyme. Soloxine is used for the treatment of hypothyroidism in
companion animals. Tussigon is used for pain management and to treat kennel
cough. Pancrezyme is a small animal digestive aid. Veterinary
pharmaceuticals accounted for $9.1 million or 8.8% of the Company's 1998
sales from continuing operations.
MARKETING AND SALES
The Company markets and promotes its products primarily through a direct
sales force. The Company also attends major medical conventions and symposia and
utilizes advertising in trade publications. The Company maintains product line
sales staffs directed to the office-based physician and hospital markets
together with an internal marketing staff which provides marketing
administration and support and customer service.
The Company's marketing and sales staff consists of 115 field sales
personnel who call upon office-based physicians, out-patient surgery centers
and critical care hospitals under the direction of one field management team. In
addition, the Company has a sales staff of 3 that market and sell veterinary
pharmaceuticals.
The Company has recently evaluated its overall sales and marketing strategy
including an assessment of current competition, product pricing, opportunities
for expansion of distribution channels and overall effectiveness of the call
plans used by the field sales personnel. In connection with this evaluation, the
Company has begun in 1999 to evaluate its contract agreements with certain
hospital buying groups and to aggressively renegotiate the product pricing under
such agreements in those instances where the Company believes there is little or
no current competition. In addition, the Company has unified its field sales
force such that each of the 115 field sales personnel will focus on the
Company's key products that are currently subject to competition as well as
focus on the expansion of distribution channels.
Marketing activity for endocrine pharmaceuticals is focused on physicians
prescribing the Company's products and on retail pharmacies filling
prescriptions for the Company's products. In addition to selling efforts based
upon the merits and characteristics of its products, the Company provides
physicians with sample product packages for trial use by patients and to aid in
establishing dosage levels prior to the time at which prescriptions are written.
The cost of sampled products, including related packaging and recordkeeping
expense, is charged as a selling expense.
Sales activities for critical care pharmaceuticals are focused on major
hospitals and hospital buying groups which, in the aggregate, manage and
contract for a majority of the purchasing of pharmaceuticals for private sector
hospitals through bid and contract agreements. The Company presently has
contracts for one or more product lines with substantially all of the major
hospital buying groups. The Company's marketing efforts focus upon
hospital-based physicians in various departments including, operating rooms,
emergency rooms, anesthesiology and directors of pharmacy.
PRODUCT SOURCES AND MANUFACTURING
In 1998, approximately 55.0% of sales from continuing operations were from
products manufactured by the Company and the remaining 45.0% of the Company's
sales from continuing operations were from products manufactured for the Company
by third parties. The percentage of products manufactured is subject to
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variance from year to year based not only on the relative mix of the Company's
existing product lines, but also as a result of acquisition and disposition
activity. The Company manufactures pharmaceuticals at its facilities in St.
Petersburg, Florida, Middleton, Wisconsin, and St. Louis, Missouri, each of
which is registered with the FDA.
Products Manufactured by the Company. In 1996, in connection with the
Daniels Acquisition, the Company assumed operations of its St. Petersburg,
Florida facility. At this facility, the Company processes raw materials
purchased from outside sources to produce final products in compressed tablet
form. The most significant product manufactured at this facility is Levoxyl
which is produced within the guidelines of FDA regulations pertaining to
prescription drugs.
The Company's GenTrac facility which produces Thrombin-JMI, is licensed for
the production of thrombin United States Pharmacopoeia products and also acts as
the licensed manufacturer of Thrombogen(R), a line of proprietary thrombin
products manufactured for Johnson & Johnson Medical, Inc. ("Johnson & Johnson")
under a distribution and development agreement expiring in the year 2000. In
1998, there were no sales of thrombin products to Johnson & Johnson. The current
contract with Johnson & Johnson provides for Thrombogen(R) sales of
approximately $850,000 in 1999 and $6.5 million in 2000.
Products Manufactured by Others. Historically, the Company has relied on
third-party manufacturers to produce certain of its products. The most
significant products manufactured by third parties for the Company include
Brevital and Tapazole manufactured by Lilly, Triostat manufactured by SB Pharmco
Puerto Rico ("SB Pharmco") and Cytomel manufactured by Schering Canada, Inc.
("Schering"). With respect to such third-party manufacturing, there can be no
assurance that the Company will be able to obtain adequate supplies of products
so manufactured in a timely fashion, or at all. The Company also faces the risk
that upon expiration of the term of any third-party manufacturing agreement it
may not be able to renew or extend the agreement with the third-party
manufacturer, to obtain an alternative manufacturing source from other third
parties or develop internal manufacturing capabilities on commercially viable
terms, if at all. In such circumstances the Company may be unable to continue to
market its products as planned and could be required to abandon or divest itself
of a product line on terms which would materially adversely affect the Company's
business, financial condition and results of operations. The Company's principal
products which are currently manufactured by third parties are:
Brevital and Tapazole. Brevital and Tapazole are each manufactured for
the Company by Lilly from whom these product lines were acquired in 1995
and 1996, respectively. Pursuant to each such acquisition, the Company
obtained a perpetual, exclusive license to market and distribute the
product in the United States and entered into 10-year manufacturing
agreements with Lilly for supply of the products. As to either product, the
manufacturing agreement may be terminated by Lilly at any time after the
first five years by giving at least five years notice to the Company prior
to ceasing the manufacture of the product for the Company. In the event of
such termination, Lilly has agreed to use reasonable efforts to assist the
Company in obtaining all the necessary licenses and approvals to enable the
Company or an alternative manufacturer to manufacture either product.
Although Lilly continues to manufacture and distribute Brevital and
Tapazole for its own account in connection with foreign markets, there can
be no assurance that Lilly will continue to meet FDA or product
specification standards for Brevital or Tapazole or that the Company's
demands for these products can be met in a consistent and timely manner.
Lilly is the sole manufacturer of Brevital and Tapazole and any alternative
manufacturer would require regulatory change-in-site qualification to
manufacture these products. In the event of any interruption in the supply
of Brevital or Tapazole from Lilly due to regulatory or other causes, there
can be no assurance that the Company could make alternative manufacturing
arrangements on a timely basis, if at all. Such an interruption would have
a material adverse effect on the Company's business, financial condition
and results of operations.
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Triostat. Triostat is manufactured for the Company under a two (2) year
supply agreement commencing June 27, 1997 with SB Pharmco, an affiliate of
SmithKline. The Company has agreed to use its best efforts to transfer
manufacturing of Triostat to its own facility or that of a third party
within the 2-year term; however, if approval to transfer the manufacturing
is not received from the FDA within such term, the Company may at the end
of the 2-year term elect to extend such term for one (1) additional year.
The Company has identified an alternate third-party manufacturer and is
currently working with this third-party manufacturer to obtain FDA approval
in 1999. The existing supply of Triostat inventory maintained by the
Company is believed to be adequate to meet customer demands until such time
that the alternate third-party manufacturer is able to supply inventory to
the Company. The failure to successfully complete these alternative
manufacturing arrangements in a timely manner could have a material adverse
effect on the Company's business, financial condition and results of
operation.
Cytomel. Cytomel is manufactured for the Company by Schering under a
certain Third Party Manufacturing Agreement dated March 11, 1991, entered
into between a division of SmithKline and Schering, the rights and
obligations of which were respectively assigned to, and assumed by, the
Company in connection with the acquisition of Cytomel from SmithKline in
June 1997. The Third Party Manufacturing Agreement runs for a term of three
(3) years expiring March 2000 and provides for automatic renewal for
successive three (3) year terms unless either party provides eighteen (18)
month advance written notice of non-renewal prior to the end of any term.
The Company received non-renewal notification from Schering in 1998. As a
result, the Company is currently qualifying several alternative third-party
manufacturers in order to replace the Schering manufacturing agreement
prior to its termination in March 2000. The failure to make such
alternative manufacturing arrangements would have a material adverse effect
on the Company's business, financial condition and results of operations.
PRINCIPAL CUSTOMERS AND SUPPLIERS
The Company's principal customers are retail pharmacies and hospitals. The
Company's sales, however, are through wholesale drug distributors, who in turn
supply product to pharmacies, hospitals and physicians.
No one customer accounted for 10% or more of the Company's sales in 1998.
The Company has not experienced to date any significant shortages in
supplies of raw materials. The raw materials utilized by the Company in its
manufacturing operations are purchased from a variety of suppliers. The Company
endeavors to maintain multiple suppliers in order to minimize delays or cost
disparities in the event of supplier shortages.
With respect to the supply of finished goods from third-party
manufacturers, the Company has experienced temporary product shortages. The most
recent occurrence was in the second quarter of 1998 related to an approximate
$700,000 backorder of Brevital. This product shortage resulted from increased
demand for Brevital that Lilly was unable to supply due to production and
delivery delays. The Brevital backorders at June 30, 1998 were fulfilled during
the third quarter of 1998.
The Company's third-party manufacturers are reliant upon certain suppliers
of key raw materials to provide an adequate supply of such materials for
production of finished products. Certain materials are purchased from single
sources. In particular, (i) the manufacture of Brevital and Tapazole are each
dependent upon Lilly's ability to procure certain raw materials used in the
manufacture of such products; (ii) the manufacture of Triostat is dependent upon
SB Pharmco's ability to procure certain raw materials used in the manufacture of
such product; and (iii) the manufacture of Cytomel is dependent upon Schering's
ability to procure certain raw materials used in the manufacture of such
product. Although the Company has no reason to believe that Lilly, SB Pharmco,
Schering or any alternate third-party manufacturer will be unable to procure
adequate supplies of such raw materials on a timely basis, disruptions in
supplies of Brevital, Tapazole, Triostat or Cytomel, including distributions due
to the respective third-party manufacturer's inability to procure raw materials,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
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COMPETITION
The manufacture and sale of pharmaceuticals is highly competitive. Many of
the Company's competitors are large well-known pharmaceutical companies which
have considerably greater financial, sales, marketing and technical resources
than those of the Company. Additionally, many of the Company's present and
potential competitors have research and development capabilities that may allow
such competitors to develop new or improved products that may compete with the
Company's product lines. The pharmaceutical industry is characterized by rapid
product development and technological change. The Company's products could be
rendered obsolete or uneconomical by the development of new pharmaceuticals to
treat the conditions addressed by the Company's products or as the result of
technological advances affecting the cost of production, or as a result of
marketing or pricing action by one or more of the Company's competitors. The
Company's business, financial condition and results of operations could be
materially and adversely affected by any one or more of such developments.
Tapazole competes with PTU, a product manufactured by Lederle and sold by a
number of independent generic pharmaceutical companies. Levoxyl competes with
Synthroid(R), which is produced by Knoll Pharmaceutical Company, and with other
levothyroxine producers. Thrombin-JMI competes with those thrombin products
produced for and marketed by Johnson & Johnson as well as other products in the
topical hemostat market. Brevital faces competition in the I.V. anesthetic
market from other I.V. anesthetic products, including Diprivan, which is
produced by Zeneca, Inc., and Versed, produced and marketed by Roche Labs, a
division of Hoffmann-LaRoche, Inc. Each of the named competitors has
substantially greater marketing, sales and financial resources than the Company.
TRADEMARKS
The Company's products are sold under a variety of trademarks. While the
Company believes that it has valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the United States
government. The Company's licenses from Lilly for the Brevital and Tapazole
trademarks are limited to the United States.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling, storage,
promotion, distribution and advertising of the Company's products are subject to
extensive regulation by one or more federal agencies including the FDA, the Drug
Enforcement Administration ("DEA"), the Environmental Protection Agency ("EPA"),
the Federal Trade Commission ("FTC"), the Occupational Safety and Health
Administration, the Department of Agriculture, the Consumer Product Safety
Commission ("CPSC") and the United States Customs Service. These activities are
also regulated by various agencies of the states and localities in which the
Company's products are sold.
All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA. New drugs must be approved by the FDA before they may be
marketed, except for those prescription drugs about which the FDA has knowledge
but for which the FDA is not requiring applications either because of
'grandfather status' under 1938 legislation, Drug Effectiveness Study
Implementation (DESI status) under 1962 legislation, or for other reasons. The
FDA has the authority to revoke existing approvals, or to review the status of
currently exempt pharmaceuticals and require application and approval, of
prescription drugs if new information reveals that they are not safe or
effective. The FDA also regulates the advertising of prescription drugs.
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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 applications ("NDA"). After August 14, 2000, any
levothyroxine sodium product marketed without an approved NDA will be subject to
regulatory action. Levoxyl, since it was marketed prior to the date of this
notice will continue to be eligible for marketing until August 14, 2000. The
Company plans to dedicate significant resources to this NDA process during 1999
and 2000 and expects to incur costs in excess of $2 million to secure an
approved NDA for Levoxyl.
The Company's marketing of OTC drugs is affected by the establishment of
FDA monographs, a regulatory system arising under 1962 legislation. FDA
monographs effectively exempt from FDA approval OTC drugs which are produced and
labeled in accordance with the standards set forth in FDA regulations. The
rulemaking process to establish or revise an FDA monograph allows a 12 month
grace period to make appropriate formulation or label changes following
publication of the final monograph. The FTC also regulates all advertising of
drug products. Drug products must be manufactured, packaged, and labeled in
accordance with their approvals and in conformity with current good
manufacturing practice ("CGMP"). The Company is subject to periodic inspection
by the FDA to assure such compliance. Drugs must be distributed, sampled and
promoted in accordance with FDA requirements.
The Company also manufactures and sells drugs which are "controlled
substances" as defined in the Controlled Substances Act. The Company must comply
with the regulatory guidelines for this class of drugs. These include security
and recordkeeping requirements which are administered and audited by the DEA, a
division of the United States Department of Justice.
The FDA has extensive enforcement powers over the activities of
pharmaceutical manufacturers, including authority to seize and prohibit the sale
of unapproved or non-complying products, and to halt manufacturing operations
that are not in compliance with CGMP. Both the FDA and DEA may impose civil
penalties and seek criminal penalties arising from non-compliance with
applicable regulations. Any restriction or prohibition applicable to sales of
products marketed by the Company could materially adversely affect the Company's
business, financial condition, and results of operations.
The sampling of products to prescribing physicians is subject to the
Prescription Drug Marketing Act ("PDMA") which permits regulation of such
activities at both the federal and state levels. Under PDMA, states are
permitted to require registration of manufacturers and distributors and, in
addition, they are permitted to require registration of those who provide sample
pharmaceuticals even if such manufacturers or distributors have no place of
business within the state and states are permitted to adopt regulations limiting
the distribution of sample products to licensed practitioners. PDMA imposes
extensive recordkeeping and reporting requirements on the Company to prevent the
sale of sampled pharmaceutical products or other diversion from their intended
use.
ENVIRONMENTAL STANDARDS
The Company uses certain hazardous substances which require special
handling and disposal as dictated by the EPA. The Company believes that its
manufacturing operations are in compliance with environmental protection and
other government regulations.
EMPLOYEES
At February 1, 1999, the Company had 349 full-time employees: 81 in
manufacturing, 122 in pharmaceutical sales and marketing, 64 in finance and
administration, 44 in quality assurance, and 38 in distribution. The Company
believes that its relationship with its employees is good.
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ITEM 2. PROPERTIES
The Company's distribution operations, including warehousing and shipping
for the Company's branded products, are located in a 150,000 square foot
facility on a 15 acre site in St. Louis, Missouri which was acquired by the
Company in 1993. The 24,000 square feet of office space within the facility
permit it to serve as corporate headquarters and to house the Company's
administration, sales and marketing operations and certain laboratory and
quality assurance operations. Liquid products, including Liqui-Char and the
Derma-Scrub line, are also manufactured and packaged at this facility.
The Company owns a facility at St. Petersburg, Florida, where its
subsidiary, JMI-Daniels, manufactures and packages pharmaceuticals for the
Company. The facility consists of six buildings containing a total of
approximately 42,000 square feet providing manufacturing, laboratory, packaging,
warehouse and administrative space.
The Company manufactures thrombin products for the Company and Johnson &
Johnson in a 40,000 square foot FDA-licensed sterile fill facility owned by the
Company which is located on an eight acre site in Middleton, Wisconsin.
The Company owns a 25,000 square foot facility at Canton, Ohio where its
subsidiary, JMI Canton, warehouses and distributes the Company's controlled
substance products.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation in which it
believes an adverse outcome would materially adversely affect the Company's
business, financial condition or results of operations. However, the Company has
been involved in litigation and is subject to certain claims as set forth below.
The Company, as successor to Abana, and, to a more limited extent in its
own capacity, is a defendant in hundreds of multi-defendant lawsuits involving
the manufacture and sale of dexfenfluramine, fenfluramine and phentermine
(collectively, "Fen/Phen"). Although neither the Company nor Abana has at any
time manufactured dexfenfluramine, fenfluramine or phentermine, Abana (and the
Company, after the acquisition of Abana) was a distributor of Obenix, its
branded phentermine product. The plaintiffs in these cases claim injury as a
result of ingesting a combination of these weight-loss drugs. These suits have
been filed in various jurisdictions throughout the United States and in each of
these suits, the Company or Abana is one of many defendants, including
manufacturers and other distributors of these drugs. The Company denies any
liability incident to the distribution of Obenix and has tendered defense of
these lawsuits to its insurance carriers for handling. The lawsuits are in
various stages of litigation and it is too early to determine what, if any,
liability the Company will have with respect to the claims set forth in these
lawsuits. In the event that the Company's insurance coverage is inadequate to
satisfy any resulting liability, the Company will have to resume defense of
these lawsuits and be responsible for the damages, if any, that are awarded
against it. Management of the Company does not believe that the outcome of these
lawsuits will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of
security holders of the Company through the solicitation of proxies or
otherwise.
9
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is traded on the Nasdaq
National Market under the symbol "JMED". The following table sets forth the
splits-adjusted quarterly high and low sales prices for the Common Stock
reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
First Quarter $38.0000 $23.6250
Second Quarter $47.5000 $24.5000
Third Quarter $45.2500 $26.0000
Fourth Quarter $38.2500 $26.7500
1998
First Quarter $40.3750 $34.9375
Second Quarter $37.6250 $28.8750
Third Quarter $35.5625 $20.7500
Fourth Quarter $37.7500 $26.1250
</TABLE>
As of February 26, 1999, there were approximately 960 stockholders of
record and a total of 28,810,069 shares of Common Stock outstanding.
Approximately 24.4 million shares or 85% of the Company's outstanding
Common Stock are held in depository accounts representing "street name" or
similar nominee ownership. The Company believes that such shares are held for
more than 15,000 non-record beneficial holders' accounts.
During 1997 and 1998, cash dividends of $0.095 and $0.115 per share,
respectively, were declared with respect to the Common Stock.
The future declaration and payment of cash dividends is subject to the
discretion of the Board of Directors and will be dependent on many factors,
including the Company's earnings, financial condition and capital needs of the
Company and such other factors as are deemed relevant by the Company's Board of
Directors. The Company anticipates that it will continue to pay a dividend each
quarter; however, the Company's Board of Directors intends to review this policy
from time to time.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data of the Company which should be read in conjunction with the accompanying
consolidated financial statements of the Company and the notes thereto and which
has been restated to reflect Discontinued Operations. The financial data has
been derived from the audited consolidated financial statements of the Company.
In the opinion of management of the Company, all adjustments necessary for a
fair presentation of the restated results arising from the pooling of interest
of the Company and Galen as a result of the Daniels Acquisition are reflected.
In the following summary consolidated financial data, for 1995 and 1994, fiscal
years of Galen ending September 30 have been combined with the Company's
historical results for years ending December 31. Beginning in 1996, both the
Company and Galen were combined using a December 31 fiscal year end. See Note 1
of Notes to Consolidated Financial Statements appearing elsewhere in this
Report.
STATEMENT OF OPERATIONS DATA:
(In thousands of dollars except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales from continuing operations $41,154 $39,937 $64,181 $88,781 $103,414
Cost of sales 18,268 14,639 20,277 25,430 23,839
------- ------- ------ ------ ------
Gross profit 22,886 25,298 43,904 63,351 79,575
Selling, general and administrative expenses 14,485 16,426 20,166 25,271 29,141
Nonrecurring charges (1) - - 5,743 - 10,500
------- ------- ----- ----- -----
Operating income from continuing operations 8,401 8,872 17,995 38,080 39,934
Other income (expense) (486) (484) 1,755 2,315 4,883
------- ------- ----- ----- -----
Income before taxes from continuing
operations 7,915 8,388 19,750 40,395 44,817
Provision for taxes 3,008 3,074 8,232 15,351 21,250
----- ----- ----- ------ ------
Income from continuing operations 4,907 5,314 11,518 25,044 23,567
Income from discontinued operations 2,613 7,075 6,621 6,926 18,768
----- ----- ----- ----- ------
Net income $7,520 $12,389 $18,139 $31,970 $42,335
------ ------- ------- ------- -------
Earnings per share (2)
Basic: From continuing operations $0.21 $0.22 $0.43 $0.88 $0.82
From discontinued operations $0.11 $0.30 $0.24 $0.24 $0.65
----- ----- ----- ----- -----
Total $0.32 $0.52 $0.67 $1.12 $1.47
----- ----- ----- ----- -----
Diluted: From continuing operations $0.19 $0.21 $0.41 $0.85 $0.80
From discontinued operations $0.10 $0.29 $0.24 $0.24 $0.64
----- ----- ----- ----- -----
Total $0.29 $0.50 $0.65 $1.09 $1.44
----- ----- ----- ----- -----
Cash dividends declared per share $0.045 $0.05 $0.077 $0.095 $0.115
====== ===== ====== ====== ======
</TABLE>
11
<PAGE> 13
- ----------
Notes to Statement of Operations Data:
(1) The 1996 nonrecurring charge reflects nonrecurring expenses associated
with the Daniels Acquisition which was treated as a "pooling of
interests" for financial accounting and reporting purposes. In the
absence of such charges, operating income from continuing operations
and income from continuing operations for 1996 would have been $23.7
million and $15.8 million, respectively, and total diluted earnings per
share would have been $0.80.
The 1998 nonrecurring charge reflects a non-cash accounting charge
related to an impairment of certain under-performing long-lived assets.
Absent this charge, operating income from continuing operations and
income from continuing operations for 1998 would have been $50.4
million and $34.1, respectively, and total diluted earnings per share
would have been $1.79.
(2) Earnings per share amounts have been presented, and where appropriate,
restated to conform to FASB Statement No. 128, "Earnings Per Share"
which the Company adopted in 1997.
BALANCE SHEET DATA:
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $63,342 $86,238 $177,233 $203,729 $248,778
Current assets $26,385 $33,337 $80,551 $84,631 $153,977
Current liabilities $7,952 $14,405 $10,032 $6,081 $11,722
Working capital $18,433 $18,932 $70,519 $78,550 $142,255
Long-term debt $6,778 $11,420 $ -0- $ -0- $ -0-
Shareholders' equity $44,478 $55,939 $161,919 $191,726 $232,670
Per share book value (*) $1.84 $2.31 $5.69 $6.69 $8.08
Current ratio 3.3:1 2.3:1 8.0:1 13.9:1 13.1:1
</TABLE>
- ----------
Note to Balance Sheet Data:
(*) Per share book value is computed assuming conversion of
preferred stock outstanding in 1995 and earlier years.
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Certain factors which may impact results for future
periods are discussed below under the captions "Overview" and "Risks and
Uncertainties."
OVERVIEW
The Company manufactures, markets and distributes specialty
pharmaceutical products. The Company has achieved significant increases in sales
and net income through acquisitions of pharmaceutical products and businesses to
complement or expand the Company's business and to add selected manufacturing
capacity to support certain product lines.
In addition to the significant revenue growth derived from acquisition
activity, the Company has successfully generated internal growth through
targeted promotion of the acquired products. Sales from continuing operations
and income from continuing operations have increased from $36.1 million and $5.2
million in 1993, respectively, to $103.4 million and $23.6 million in 1998,
respectively, representing five-year compounded annual growth rates of
approximately 23.4% in sales from continuing operations and 35.3% in income from
continuing operations. Excluding nonrecurring charges, the five-year compounded
annual growth rate of income from continuing operations approximates 45.6%.
Sales from continuing operations are reported net of returns, rebates
and discounts during the period in which product is shipped. Product rebates and
discounts are incurred due to volume or other contractual allowances on certain
sales under contracts with hospitals, buying groups and managed care
organizations. As of December 31, 1997 and 1998, the Company maintained reserves
of $2.2 million and $3.2 million, respectively, for unclaimed but anticipated
rebates and discounts. The increase in the reserve results from increased sales
of products subject to contractual discounts and market share rebate
adjustments. Product returns, pursuant to operating policies with respect to
unused pharmaceuticals, are less than 2% of gross annual sales. Sales from
continuing operations are reflected prior to royalties due on sales of certain
pharmaceuticals arising from product line acquisitions. Such royalties are
recorded as a selling expense. Royalty arrangements typically extend for a fixed
period from the date of acquisition and do not require minimum payments to
maintain ownership or any rights to products.
During the year ending December 31, 1998, sales from continuing
operations were $103.4 million which were comprised of $58.0 million of
endocrine pharmaceuticals, $36.3 million of critical care pharmaceuticals, and
$9.1 million of veterinary pharmaceuticals. The increase in such sales has been
influenced by acquisition activity as well as by enhanced marketing activity,
customer demand and product availability. In August 1995 the Company acquired
domestic rights to the Brevital pharmaceutical line from Lilly for $14 million
and a 10-year royalty of 5% on net sales of Brevital. Sales from continuing
operations of Brevital represented approximately 10.2% of the Company's sales
from continuing operations in 1997 and approximately 10.7% in 1998. In March
1996 the Company acquired domestic rights to the Tapazole pharmaceutical line
from Lilly for $26 million and a 10-year royalty of 5% on net sales of Tapazole.
Sales from continuing operations of Tapazole represented approximately 20.6% of
the Company's sales from continuing operations in 1997 and approximately 23.9%
in 1998. Sales from continuing operations from Levoxyl, a key product acquired
in connection with the Daniels Acquisition in 1996, represented approximately
25.0% of the Company's sales from continuing operations in 1997 and has
increased to approximately 27.2% in 1998. In June 1997, the Company acquired
domestic, Puerto Rican and Canadian rights to Cytomel and Triostat from
SmithKline for $22.8 million.
13
<PAGE> 15
The Company's strategy for continued growth is dependent upon its
ability to increase sales of its existing product portfolio and to acquire, by
purchase or exclusive license arrangements, niche-market pharmaceuticals which
can be promoted through existing marketing and distribution channels.
The Company's ability to continue its internal growth within the
existing portfolio of products is dependent upon the continued effectiveness of
its sales force, the impact of competing products, and the Company's reliance
upon third-party manufacturers to produce certain key products. The Company's
operations and growth will also be influenced by regulatory and governmental
policies and by competitive forces within the pharmaceutical industry. In
particular, 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 NDA's. After August 14, 2000, any levothyroxine sodium
product marketed without an approved NDA will be subject to regulatory action.
Levoxyl, since it was marketed prior to the date of this notice will continue to
be eligible for marketing until August 14, 2000. The Company plans to dedicate
significant resources to this NDA process during 1999 and 2000 and expects to
incur costs in excess of $2 million to secure an approved NDA for Levoxyl.
In pursuing its acquisition strategy, the Company relies to a
significant degree upon the availability of product lines subject to divestiture
or sale by other manufacturers. There can be no assurance that the Company will
be able to acquire rights to additional products on acceptable terms, if at all,
and the failure to do so could have a material adverse effect upon the Company's
rate of growth and on its business and financial conditions and results of
operations. The Company has completed 16 acquisitions since its founding in
1981; however no acquisitions were made during 1998.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere in this report. The following table sets forth
certain data as a percentage of net sales from continuing operations for the
periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF SALES Year Ended December 31,
--------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Sales from continuing operations 100.0% 100.0% 100.0%
Cost of sales 31.6 28.6 23.1
---- ----- -----
Gross profit 68.4 71.4 76.9
Selling, general & administrative expenses 31.4 28.5 28.2
Nonrecurring charges(1) 9.0 -- 10.1
---- ----- -----
Operating income from continuing operations 28.0 42.9 38.6
Other income (expenses)
Interest income 3.7 2.9 4.9
Interest expense (0.9) (0.3) (0.2)
Other miscellaneous income (expenses) -- -- --
---- ----- -----
Income from continuing operations (before income tax) 30.8 45.5 43.3
Provision for income taxes 12.8 17.3 20.5
---- ----- -----
Income from continuing operations 18.0 28.2 22.8
Income from discontinued operations(2) 10.3 7.8 18.1
---- ----- -----
Net income 28.3% 36.0% 40.9%
==== ===== =====
</TABLE>
14
<PAGE> 16
- ------------------------------
Notes to Percentage of Sales:
(1) In 1996, the nonrecurring charge reflects transaction costs and other
nonrecurring expenses arising in connection with the Daniels Acquisition
and charged against operating income in accordance with "pooling of
interests" accounting treatment. In the absence of such charges, operating
income from continuing operations would have been 37.0% of net sales and
income from continuing operations (before income tax) would have increased
to 39.7%.
In 1998, the nonrecurring charge reflects a non-cash accounting charge
related to an impairment of certain under-performing long-lived assets. In
the absence of this charge, operating income from continuing operations
would have been 48.7% of net sales and income from continuing operations
(before income tax) would have increased to 53.4%.
(2) In 1998, the majority of the income from discontinued operations related to
the after-tax gain of approximately $17 million on the sale of the
Company's nutritional supplements product line and contract manufacturing
operations.
Sales From Continuing Operations
Sales from continuing operations for the year ended December 31, 1998,
increased 16.4% to $103.4 million from $88.8 million for the year ended December
31, 1997, following an increase in 1997 of 38.3% to $88.8 million from sales
from continuing operations of $64.2 million for the year ended December 31,
1996. In 1997 the Company's increase in sales from continuing operations
resulted from the acquisition of Brevital, the acquisition of Tapazole, the
acquisition of Triostat and Cytomel and internal sales growth in both unit and
dollar growth in the Company's primary products. In 1998, the increase in sales
from continuing operations resulted from the acquisition of Triostat and Cytomel
(June 1997) and to a greater extent, from internal sales growth in both units
and dollars of the Company's primary products including Levoxyl, Brevital and
Tapazole. The increase in 1998 sales from continuing operations occurred despite
the lack of thrombin contract sales to Johnson & Johnson which approximated $4.8
million in 1997. Excluding these thrombin contract sales from 1997, sales from
continuing operations in 1998 increased 23.1% over 1997.
Gross Profit
Gross profit during 1998 increased 25.6% or $16.2 million to $79.6
million from $63.4 million in 1997. As a percentage of sales from continuing
operations, margins increased to 76.9% in 1998 from 71.4% in 1997 due to the
continued sales growth of the Company's higher margin products and the lack of
the lower-margin thrombin contract sales to Johnson & Johnson.
Gross profit during 1997 increased 44.3% or $19.4 million to $63.4
million from $43.9 million in 1996. As a percentage of sales from continuing
operations, margins increased to 71.4% in 1997 from 68.4% in 1996 due to the
continued sales growth of the Company's higher margin products.
Selling, General and Administrative Expenses
Selling expenses increased 16.7% or approximately $2.4 million to $16.8
million in 1998 from $14.4 million in 1997 due to increases in sales
commissions, royalties, administrative fees to hospital buying groups and
increased sampling of products to physicians. As a percentage of sales from
continuing operations, selling expenses in 1998 remained relatively flat at
16.2% as compared to 1997.
Selling expenses increased 39.2% or approximately $4.0 million to $14.4
million in 1997 from $10.4 million in 1996 due to increased royalties, the
addition of 55 endocrine field sales personnel in December, 1996, increased
administrative fees to hospital buying groups and increased sampling of products
to physician prescribers. As a result of the addition of the sales and marketing
staff and the planned increase in sampling of products to physician prescribers
in 1997, it was expected that selling expenses would increase significantly
15
<PAGE> 17
in 1997; however, as a percentage of sales from continuing operations, the
Company was able to hold selling expenses flat at 16.2% of sales from continuing
operations in 1997 versus 16.1% of sales from continuing operations in 1996.
General and administrative expenses increased 13.8% or approximately
$1.0 million to $8.5 million in 1998 from $7.5 million in 1997 due to normal
salary increases and increases in bonuses, donations and medical insurance
claims. As a percentage of sales from continuing operations, general and
administrative expenses in 1998 declined to 8.2% as compared to 8.4% in 1997.
General and administrative expenses remained relatively flat in 1997 at
$7.5 million compared to $7.4 million in 1996 and as a percentage of sales from
continuing operations, declined from 11.5% in 1996 to 8.4% in 1997.
Research and development expenses in 1998 were $117,000 in 1998 as
compared to no research and development expenses in 1997 due to certain
non-capitalizable expenditures associated with the Levoxyl NDA and other product
improvement projects.
There were no research and development expenses in 1997 as compared to
$410,000 in 1996 due to the reduction of new product development at the
Company's wholly-owned subsidiary, JMI-Daniels.
Amortization expenses associated with intangible assets and included in
selling, general and administrative expenses increased 8.9% to $3.7 million in
1998 from $3.4 million in 1997 due to a full year of amortization expense
associated with the Cytomel and Triostat product line acquisitions in June 1997
offset by the reduction in amortization expense associated with the $10.5
million goodwill impairment write-off in 1998 discussed below. As a percentage
of sales from continuing operations, amortization expense decreased from 3.8% in
1997 to 3.5% in 1998.
Amortization expenses associated with intangible assets and included in
selling, general and administrative expenses increased 66.9% to $3.4 million in
1997 from $2.0 million in 1996 due to a full year of amortization expense
associated with the Tapazole product line acquired in March 1996, the Abana
Acquisition on December 31, 1996 and a half-year of amortization expense
associated with the acquisition of Cytomel and Triostat in June 1997. As a
percentage of sales from continuing operations, amortization expense increased
from 3.1% in 1996 to 3.8% in 1997.
A nonrecurring charge of $10.5 million was taken in 1998 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.
A nonrecurring charge of $5.7 million was taken in 1996 in conjunction
with certain costs and expenses associated with the Daniels Acquisition which
was treated as a 'pooling of interests' transaction. Approximately $3.5 million
of such charge related to compensation items directly or indirectly related to
the change of control of Daniels, including certain costs paid by shareholders,
and $1.8 million to financial advisory services incurred by Daniels (and its
parent, Galen). The remaining portion of such charge related primarily to
transaction expenses including the fees and expenses of counsel and accountants
for both Galen and the Company.
Operating Income From Continuing Operations
Operating income from continuing operations during 1998 increased 4.9%
or $1.9 million to $39.9 million from $38.1 million in 1997, and decreased as a
percentage of sales from continuing operations to
16
<PAGE> 18
38.6% in 1998 from 42.9% in 1997, as the result of the $10.5 million
nonrecurring charge in 1998. Excluding this charge, operation income from
continuing operations in 1998 was $50.4 million, representing a 32.3% increase
over the prior year.
Operating income from continuing operations during 1997 increased
111.6% or $20.1 million to $38.1 million from $18.0 million in 1996 and
increased as a percentage of sales from continuing operations to 42.9% in 1997
from 28.0% in 1996 as the result of higher overall gross profits and marginal
increases in operating expenses.
Other Income (Expense)
Interest income from investing activities increased to $5.1 million in
1998 from $2.6 million in 1997. Interest income from investing activities
increased to $2.6 million in 1997 from $2.3 million in 1996. Both the increase
in 1998 from 1997 and the increase in 1997 from 1996 were the result of higher
cash balances.
Interest expense of $215,000 in 1998 resulted from federal and state
taxing authority assessments related to tax audit settlements. The Company had
no outstanding debt during 1998. In 1997, interest expense of $238,000 related
to borrowings associated with the acquisition of the Brevital product line. Such
borrowings were repaid in the third quarter of 1997.
Income Taxes
The provision for income taxes in 1998 increased to 47.4% of pre-tax
income compared to 38.0% of pre-tax income in 1997, due to the nondeductibility
of the $10.5 million nonrecurring charge in 1998. Absent the effects of the
nonrecurring charge, the 1998 effective tax rate was 38.4%.
The provision for income taxes in 1997 decreased to 38.0% of pre-tax
income compared to 41.7% of pre-tax income in 1996, due to certain nonrecurring
merger expenses associated with the Daniels Acquisition in 1996 that were not
tax deductible.
Income From Continuing Operations
Income from continuing operations decreased 5.6% or $1.4 million to
$23.6 million in 1998 from $25.0 million in 1997, and decreased as a percentage
of sales from continuing operations to 22.8% in 1998 from 28.2% in 1997.
In 1997, income from continuing operations increased 117.4% or $13.5
million over 1996. As a percentage of sales from continuing operations, income
from continuing operations increased to 28.2% in 1997 from 18.0% in 1996.
Income From Discontinued Operations
Income from discontinued operations in 1998 reflects an approximate $17
million gain (net of tax) from the sale of the Company's nutritional supplements
product line and contract manufacturing operations to Twinlab on April 30, 1998.
In addition, income from discontinued operations includes the after-tax
operating results of the Company's nutritional supplements product line and
contract manufacturing operations prior to the sale to Twinlab on April 30,
1998.
Income from discontinued operations, net of taxes, remained relatively
unchanged at $6.6 million in 1996 and $6.9 million in 1997. As a percentage of
sales from continuing operations, income from discontinued operations decreased
from 10.3% of sales from continuing operations in 1996 to 7.8% in 1997.
17
<PAGE> 19
Net Income
Net income increased 32.4% or $10.4 million to $42.3 million in 1998
from $32.0 million in 1997, and increased as a percentage of sales from
continuing operations to 40.9% in 1998 from 36.0% in 1997.
Net income increased 76.3% or $13.8 million to $32.0 million in 1997
from $18.1 million in 1996, and increased as a percentage of sales from
continuing operations to 36.0% in 1997 from 28.3% in 1996.
Fourth Quarter - 1997 to 1998
Sales from continuing operations during the fourth quarter of 1998
increased $.6 million, or 2.4%, to $26.6 million from $26.0 million during the
fourth quarter of 1997. Income from continuing operations during the fourth
quarter of 1998 increased $2.0 million, or 26.3%, to $9.6 million from $7.6
million in the fourth quarter of 1997. Net income during the fourth quarter of
1998 increased $277,000, or 3.0%, to $9.6 million from $9.4 million during the
fourth quarter of 1997. Diluted earnings per share from continuing operations
were $.33 in the fourth quarter of 1998 compared to $.27 per share in the fourth
quarter of 1997. Diluted earnings per share including both continued operations
and discontinued operations during the fourth quarter of 1998 were $.33, with
29.5 million average shares outstanding, compared to $.32 per share, with 29.3
million average shares outstanding, during the fourth quarter of 1997. The 1998
increases resulted from increased sales of higher margin products and
effectively utilizing personnel to control overhead costs.
FINANCIAL CONDITION
Balance Sheet Information
The Company's current ratio decreased slightly to 13.1:1 as of December
31, 1998 from 13.9:1 as of December 31, 1997. Financing debt as a percentage of
equity was zero at both December 31, 1998 and December 31, 1997. Working capital
increased to $142.2 million as of December 31, 1998 from $78.5 million as of
December 31, 1997 as a result of the $41.5 million proceeds (net of $13.5
million in taxes) from the sale of the Company's nutritional supplements product
line and contract manufacturing operations to Twinlab, and positive cash flow
generated from operating activities.
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 December 31, 1998 and 1997,
the Company had cash and cash equivalents of $122.7 million and $49.9 million,
respectively. The net cash generated from operating activities of $21.9 million
in 1998 was used for capital improvements of $2.3 million and payment of
dividends to common stockholders of $3.3 million. The Company believes that
available resources and anticipated cash flows 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 $45.0 million to $248.8 million at December 31,
1998 from $203.7 million at December 31, 1997, and total liabilities increased
$4.1 million to $16.1 million at December 31, 1998 from $12.0 million at
December 31, 1997. Net intangible assets decreased $14.2 million to $66.3
million at December 31, 1998 from $80.4 million at December 31, 1997, due to the
$10.5 million non-cash accounting charge related to an impairment of certain
under-performing long-lived assets and $3.6 million of on-going amortization
expense. Intangible assets as a percent of shareholders' equity decreased from
42.0% at December 31, 1997 to 28.5% at December 31, 1998.
18
<PAGE> 20
Inventories increased $.2 million to $7.5 million at December 31, 1998,
from $7.3 million at December 31, 1997. Accounts receivable increased to $19.1
million at December 31, 1998 from $13.7 million at December 31, 1997, primarily
due to the increase in sales for the month of December 1998 as compared to
December 1997. In days outstanding, accounts receivable increased to 60 days at
December 31, 1998 from 54 days at December 31, 1997. Net property plant and
equipment increased by $395,000 to $23.7 million at December 31, 1998, from
$23.3 million at December 31, 1997, primarily due to the continued expansion of
the Company's pharmaceutical manufacturing facilities during 1998. Accounts
payable and accrued expenses increased from $4.6 million at December 31, 1997 to
$9.9 million at December 31, 1998 as a result of an increase in trade payables
due to the timing of inventory receipts and payments, an increase in accrued
sales discounts and rebates, an increase in accrued bonuses and the
establishment of reserves to satisfy anticipated future obligations associated
with the Company's Discontinued Operations.
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.
RISKS AND UNCERTAINTIES
The future results of operations, both annually and from
quarter-to-quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates. In addition to
factors discussed above and elsewhere in this report, the following should be
considered.
Sales and Marketing Strategic Changes. The Company's marketing and
sales staff consists of 115 field sales personnel who call upon office-based
physicians, out-patient surgery centers and critical care hospitals under the
direction of one field management team. In addition, the Company has a sales
staff of 3 that market and sell veterinary pharmaceuticals.
The Company has recently evaluated its overall sales and marketing
strategy including an assessment of current competition, product pricing,
opportunities for expansion of distribution channels and overall effectiveness
of the call plans used by the field sales personnel. In connection with this
evaluation, the Company has begun in 1999 to evaluate its contract agreements
with certain hospital buying groups and to aggressively renegotiate the product
pricing under such agreements in those instances where the Company believes
there is little or no current competition. In addition, the Company has unified
its field sales force such that each of the 115 field sales personnel will focus
on the Company's key products that are currently subject to competition as well
as focus on the expansion of distribution channels.
The Company believes the renegotiation of contract pricing will result
in a reduction in sales discounts, thereby increasing net sales from continuing
operations in 1999. Furthermore, the Company believes the unification of the
field sales force will result in increased sales and marketing coverage of those
products for which the greatest opportunity for growth exists and, in the
long-term, enhance the productivity and cost-effectiveness of its sales and
marketing effort. Costs associated with the unification plan, including the
Company's first annual field management and national sales meetings in the first
quarter of 1999, cross-training of sales personnel to increase the product
knowledge base and the development of additional training materials, product
literature and promotional materials are all expected to result in increased
selling expenses in 1999.
There can be no assurance that the renegotiated contract pricing or the
unification of the field sales force will not negatively impact sales volume in
1999. In addition, there may be quarterly volatility in net sales from
continuing operations and selling expenses in 1999 as a result of these sales
and marketing strategic changes.
19
<PAGE> 21
Dependence upon Key Products. The Company's continued growth in
revenues and earnings is primarily attributable to its acquisitions of a limited
number of key products with higher gross margins. During 1998, sales of
Tapazole, Levoxyl, Brevital and Thrombin-JMI represented, in the aggregate,
approximately 79.1% of total sales from continuing operations. Any factor
adversely affecting either the availability of, or the market for, any of such
products would have a material adverse effect upon the Company's business,
financial condition and results of operations.
Product Pricing Constraints and Adjustments. In addition to other
competitive factors, the ability of the Company to maintain or increase profit
margins for products depends in part on the availability of adequate
reimbursement to the Company's customers and patients from third-party health
care payors, such as governments, private insurers and managed care
organizations. Policies adopted by third-party payors influence the pricing of
medical services and products. There can be no assurance that reimbursement will
be available for the Company's products or that such third-party reimbursement
will be adequate. Moreover, under contracts with hospitals and buying groups
applicable to the sale of many of the Company's products, final sales prices to
distributors may be subject to retroactive adjustment based upon volume or other
contractual discounts provided by the Company. While the Company believes that
it has adequate reserves to cover such adjustments, there can be no assurance
that the Company will not experience price adjustments in the future that
significantly exceed such reserves.
Regulation and Product Risks. The manufacturing, processing,
formulation, packaging, labeling, advertising and sampling of the Company's
products are subject to extensive regulations by various federal and state
agencies, including the FDA, the FTC, the DEA, the CPSC, the Department of
Agriculture, and the EPA. In addition to other costs of compliance with such
regulations, the Company is subject to possible risks arising from changes in
such regulations or based upon alleged violations of regulations. Such risks
could render products unavailable or unmarketable or result in product recalls.
Any such development could materially and adversely affect the Company's
reputation, business, financial condition and results of operations. In
particular, 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 NDA's. After August 14, 2000, any levothyroxine sodium
product marketed without an approved NDA will be subject to regulatory action.
Levoxyl, since it was marketed prior to the date of this notice will continue to
be eligible for marketing until August 14, 2000. The Company plans to dedicate
significant resources to this NDA process during 1999 and 2000 and expects to
incur costs in excess of $2 million to secure an approved NDA for Levoxyl.
In addition to government regulation, the Company faces an inherent
risk of exposure to product liability claims in the event use of a product is
alleged to have resulted in adverse effects for a patient or consumer. Such risk
exists even with respect to those products which are manufactured in regulated
facilities or otherwise possess regulatory approval for commercial sale. While
the Company has taken, and continues to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The Company currently has product liability insurance in the
amount of $20 million per claim and $20 million in the aggregate and excess
coverage of $5 million through an "umbrella" policy; however, there can be no
assurance that such insurance would be sufficient to cover potential claims or
that such insurance coverage will be available in the future on commercially
reasonable terms, if at all. Specifically, in the event that the Company's
insurance coverage is inadequate to satisfy any resulting liability arising from
current Fen/Phen litigation in which the Company has been named as a defendant,
then the Company will have to resume defense of such lawsuits and be responsible
for the damages. Information regarding the claims related to Fen/Phen is
provided under the caption "Legal Proceedings" in Item 3 of Part I above.
Accordingly, product liability claims could materially and adversely affect the
Company's business, financial condition and results of operations.
20
<PAGE> 22
Reliance on Third-Party Manufacturers. The Company has historically
relied on third party manufacturers to produce many of its products and
currently relies upon third party manufacturers for production of Brevital,
Tapazole, Triostat and Cytomel, each of which is a key pharmaceutical. Although
such products are subject to manufacturing arrangements with reliable and
substantial entities, alternative sources are not readily available and there
can be no assurance that the Company will be able to obtain adequate supplies of
such products in a timely fashion, or at all.
The Company's agreement with SB Pharmco to manufacture Triostat
requires the Company to use its best efforts to transfer manufacturing of
Triostat to its own facility or that of a third-party prior to June 27, 1999,
the end of the 2-year term of the SB Pharmco manufacturing agreement. However,
the Company can elect at the end of such term to extend the SB Pharmco
manufacturing agreement for an additional one (1) year term. The Company has
identified an alternate third-party manufacturer and is currently working with
this third-party manufacturer to obtain FDA approval in 1999.
In addition, the Company received notification from Schering in 1998
that it would not be renewing the manufacturing agreement for Cytomel following
the end of its term in March 2000. As a result, the Company is currently
qualifying several alternative third-party manufacturers in order to replace the
Schering manufacturing agreement prior to its termination.
Disruption in the available supply of Brevital, Tapazole, Triostat or
Cytomel or the inability of the Company to obtain sources of supply upon the
expiration of current manufacturing arrangements would be materially adverse to
the business, financial condition and results of operations of the Company.
With respect to the supply of finished goods from third party manufacturers,
the Company has experienced temporary product shortages. The most recent
occurrence was in the second quarter of 1998 related to an approximate $700,000
backorder of Brevital. This product shortage resulted from increased demand for
Brevital that Lilly was unable to supply due to production and delivery delays.
The Brevital backorders at June 30, 1998 were fulfilled during the third
quarter of 1998.
Competition. Many of the Company's competitors have considerably
greater financial, sales, marketing and technical resources than those of the
Company. In addition, many of the Company's present competitors have extensive
research and development capabilities that may allow such competitors to develop
new or improved products that may compete with the Company's products.
Technological advances affecting the cost of production as well as marketing or
pricing action by one or more of the competitors could also materially and
adversely affect the Company's business, financial condition and results of
operations.
COMPLIANCE WITH YEAR 2000
The Year 2000 issue exists because many computer systems and
applications, including those embedded in equipment and facilities, use two
digit rather than four digit date fields to designate an applicable year. As a
result, the systems and applications may not properly recognize the year 2000 or
process data that includes it, potentially causing data miscalculations or
inaccuracies or operational malfunctions or failures. The inability to
accurately process date related information would have a material adverse impact
on the Company's business, financial condition and results of operations. To
mitigate the risks of a Year 2000 failure, a Year 2000 action plan (the "Plan")
has been developed and is currently being executed by the Company. The Plan is
directed and monitored by the Company's IS (Information Systems) Steering
Committee and is proceeding within the planned timetable. The Plan addresses the
Year 2000 risk presented by the following IS and non-IS elements of the
Company's operations:
Financial Systems. In 1998, the Company completed the
replacement of its software and systems in the normal course of
business. The financial system has been replaced with an Enterprise
Reporting System that the developer states is Year 2000 compliant.
21
<PAGE> 23
Other Date-Sensitive Systems and Equipment. Non-financial
systems used in the Company's manufacturing facilities are currently
being upgraded or replaced in connection with plant expansions and/or
on-going equipment validation procedures in the ordinary course of
business. The upgrade or replacement of other non-financial systems and
equipment relating to distribution, voice and data telecommunication,
laboratory testing, and security and environmental control is
substantially complete. For the remaining elements, assessment and
remediation measures, if necessary, will be initiated during the second
quarter of 1999. Other date-sensitive equipment is scheduled to be
assessed and remediation measures, if necessary, will be initiated
during the second quarter of 1999.
Third Party Relationships. The Company is highly dependent on
internal and third party computer systems to process its daily
transactions. The Company has commenced efforts to determine the extent
to which it may be impacted by Year 2000 issues of third-parties,
including suppliers, customers, and service providers. Contact with
major customers and suppliers has been initiated. To date, the Company
is not aware of any non-Year 2000 compliant third-party customers,
suppliers, or service providers that would materially impact the
Company's results of operations, liquidity or capital resources.
However, the Company has no means of ensuring these entities will be
Year 2000 ready. Furthermore, the Company has no means of ensuring that
the customers (e.g., hospital buying groups, hospitals, and pharmacies)
of its wholesale distributors will be Year 2000 ready. The inability of
third-parties to complete their Year 2000 programs in a timely manner
could materially and adversely impact the Company. The assessment of
risk related to third party relationships is expected to be completed
during the second quarter of 1999. Given the Company's reliance upon
third-party manufacturers for the supply of certain key products, the
Company has made arrangements to purchase 3 to 6 months supply of
Brevital, Tapazole and Cytomel in the fourth quarter of 1999.
The Company plans to test and validate identified financial systems,
other date-sensitive systems and equipment, and third party communications for
Year 2000 compliance. This testing will be initiated in the second quarter of
1999, and will be completed by December 31, 1999. Validation procedures will be
performed and managed by internal Company staff.
The costs associated with the Plan have, for the most part, been
planned capital expenditures and budgeted internal staffing expenses. The total
capital expenditures related to these system upgrades and/or replacements
approximate $1.5 million and have been capitalized as incurred in 1998.
Additional costs to be incurred to complete the Plan are not expected to be
significant and will relate to the ongoing capital expenditures and internal
staffing described above.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failure could materially and adversely impact the Company's
results of operations, liquidity and financial condition. Although the Company
has not yet developed a comprehensive contingency plan to address situations
that may result if the Company or any of the third parties upon which the
Company is dependent is unable to achieve Year 2000 readiness, a plan will be
completed by the fourth quarter of 1999 to address the most reasonably likely
worst case scenario with respect to potential Year 2000 compliance failures.
Based on the Company's progress to date and timeline to complete the Year 2000
Plan, the Company does not foresee significant financial or operational risks
associated with its compliance at this time. However, these expectations are
subject to uncertainties including, but not limited to, the readiness of
third-party customers, suppliers and service providers, failure to identify all
susceptible systems, and the availability and cost of personnel necessary to
address any unforeseen problems.
22
<PAGE> 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not involved in activities in derivative financial
instruments, other financial instruments and derivative commodity instruments
and, therefore, is not exposed to any market risk associated with such financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Reference is made to the Financial Statements contained in Part IV
hereof and to the Index to Consolidated Financial Statements on page 38.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Company's auditors, Ernst & Young LLP,
on any matters of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
23
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
DIRECTORS AND OFFICERS
The following table sets forth certain information as of March 1, 1999 with
respect to the directors and executive officers of the Company.
Name Age Position
---- --- --------
Dennis M. Jones (1) 60 Chairman of the Board, President, Chief
Executive Officer and Director
Judith A. Jones(1)(2) 58 Executive Vice President of Corporate
Affairs, Secretary, Treasurer and Director
Michael T. Bramblett 56 Executive Vice President of Business
Development and Director
G. Andrew Franz (3) 46 Executive Vice President of Operations and
Director
David A. McLaughlin 51 Senior Vice President of Operations and
Director
Tina A. Kaufman 39 Senior Vice President of Finance
Thomas G. Lewandowski 52 Senior Vice President of Sales
Edward A. Chod(4) 45 Director
Stanley L. Lopata(2)(4)(5) 84 Director
Thomas F. Patton(2)(4) 50 Director
L. John Polite, Jr. 77 Director
- -------------------------------------------------
(1) Dennis M. Jones and Judith A. Jones are husband and wife.
(2) Member of the Audit Committee of the Board of Directors.
(3) G. Andrew Franz is the son-in-law of Dennis M. and Judith A. Jones.
(4) Member of the Compensation Committee of the Board of Directors.
(5) Mr. Lopata will retire at the close of the Company's 1999 Annual
Meeting. The Company will present for election by its shareholders at
the 1999 Annual Meeting an independent outside nominee for Mr. Lopata's
seat.
Dennis M. Jones, the founder of the Company, has been the Company's
Chairman of the Board, President and Chief Executive Officer since its inception
in March 1981. Mr. Jones has been involved primarily in the pharmaceutical
industry since 1964 in various marketing, management and administrative
positions.
Judith A. Jones, a Director of the Company since 1981, and the
Secretary and Treasurer since April 1982, was in charge of the financial affairs
and books of the Company through June 1998. Effective July 1, 1998, Mrs. Jones
became the Executive Vice President of Corporate Affairs. Mrs. Jones served as
Vice President of the Company from March 1985 to February 1994 and has been
Executive Vice President of the Company since February 1994.
24
<PAGE> 26
Michael T. Bramblett, a Director of the Company since 1987, served as
Vice President - Marketing of the Company from January 1991 to February 1994 and
has served as Executive Vice President since February 1994. Effective July 1,
1998, Mr. Bramblett became the Executive Vice President of Business Development.
G. Andrew Franz, a Director of the Company since 1994, served as Senior
Vice President- Operations-Pharmaceuticals for the Company since February 1994.
Effective July 1, 1998, Mr. Franz became the Executive Vice President of
Operations. Mr. Franz has also served as the Vice President-Operations of
JMI-Canton since the facility was acquired by JMI-Canton from Bowman
Pharmaceuticals, Inc. in March 1984.
David A. McLaughlin, a Director of the Company since 1994, served as
Senior Vice President- Operations-Nutritionals in February 1994. Effective July
1, 1998, Mr. McLaughlin became Senior Vice President of Operations. Mr.
McLaughlin has served in various management and executive capacities with the
Company since 1986.
Tina A. Kaufman joined the Company in June 1997 as Senior Vice
President of Finance. Prior to joining the Company, Ms. Kaufman was a partner at
Ernst & Young LLP which has served as the Company's independent auditors since
December, 1995. Ms. Kaufman was a member of Ernst & Young's audit team that has
served the Company for the last 13 years.
Thomas G. Lewandowski became Senior Vice President of Sales for the
Company in May 1997. Mr. Lewandowski served as Western Regional Sales Manager
for Daniels Pharmaceuticals, Inc. from 1989 until that company merged with the
Company in 1996. Prior to joining Daniels, Mr. Lewandowski spent 17 years with
Pennwalt Corporation holding various management positions in both the hospital
and prescription products divisions.
Edward A. Chod has been a Director since 1991. Mr. Chod is an officer
and shareholder in the law firm of Greensfelder, Hemker & Gale, P.C. which he
joined in 1978 and which has served as counsel to the Company since 1982. Mr.
Chod also serves as the Assistant Secretary of the Company.
Stanley L. Lopata, a Director since 1988, is the President of Lopata
Research and Development Corp. and has served in that capacity since 1988. Prior
to 1988, Mr. Lopata was the Chairman of the Board of Directors and Chief
Executive Officer of Carboline Corporation, a manufacturer of specialty paint
and coating products, from 1960 through 1988.
Thomas F. Patton, Ph.D., a Director since 1995, is President of the St.
Louis College of Pharmacy and has served in that capacity since June 1994. From
April 1993 until January 1994 and from January 1994 until May 1994, Dr. Patton
served as Executive Director of Pharmaceutical Research and Development and as
Vice President of Pharmaceutical Research and Development, respectively, at
Dupont-Merck Pharmaceutical Co., a pharmaceutical company. Dr. Patton also
serves as a director of D&K Healthcare Resources, Inc., a drug wholesaler.
L. John Polite, Jr., a Director since 1989, is Chairman of Peridot (New
Jersey) Chemicals, Inc., and has served in that capacity since December 1989. He
was the Chairman of the Board, President and Chief Executive Officer of Essex
Chemical Corporation ("Essex") from April 1978 to October 1988. Mr. Polite also
serves as a director of Rotonics Manufacturing, Inc., a manufacturer of plastic
containers for commercial, pharmaceutical, refuse, marine, health care and
residential applications.
25
<PAGE> 27
Directors of the Company are elected by the Company's stockholders and
hold office until the next annual meeting of stockholders and until their
successors are elected and qualified, or until their earlier resignation or
removal. All executive officers are appointed by and serve at the discretion of
the Board of Directors.
No employee who is a director receives a director's fee for services
rendered as a director. However, each non-employee director receives
reimbursement for any expenses incurred in his capacity as a director of the
Company and $4,000 per meeting of the Board of Directors attended by such
non-employee director, subject to a minimum (as of December 31, 1998) of $10,000
per year. In addition, non-employee directors who are members of the Company's
compensation committee receive $500 per meeting of the compensation committee
attended by such non-employee directors. Finally, as set forth in the table
below, the present non-employee directors of the Company have been granted stock
options pursuant to the Company's 1994 Formula Stock Option Plan for Non-
Management Directors ("FSO Plan"). No additional options may be granted under
the FSO Plan after May 31, 1999. Due to forthcoming changes in accounting for
options granted to non-employees, the Company is reviewing compensation to
outside directors.
<TABLE>
<CAPTION>
Date of No. of Options Per Share Initial Expiration
------- -------------- --------- ------- ----------
Name Grant Granted Exercise Price Exercise Date Date
---- ----- ------- -------------- ------------- ----
<S> <C> <C> <C> <C> <C>
Stanley L. Lopata 6/1/94 11,250 $4.67 6/1/94 6/1/99
Stanley L. Lopata 7/1/98 11,250 $33.125 5/1/99 5/1/04
L. John Polite, Jr. 6/1/94 11,250 $4.67 6/1/94 6/1/99
L. John Polite, Jr. 7/1/98 11,250 $33.125 5/1/99 5/1/04
Edward A. Chod 6/1/94 11,250 $4.67 5/1/95 5/1/00
Thomas F. Patton 6/1/95 11,250 $4.45 5/1/96 5/1/01
</TABLE>
26
<PAGE> 28
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table. The table below sets forth all compensation
received in each of the three fiscal years ended December 31, 1998, 1997 and
1996 for services rendered in all capacities to the Company and its subsidiaries
by the Chief Executive Officer and the other four (4) highest-compensated
Executive Officers of the Company during the fiscal year ended December 31, 1998
(the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation ----------
------------------- Compensation
-------------
Awards
-------
Securities
----------
Other Annual Underlying All Other
------------ ---------- ---------
Name and Principal Position Year Salary Bonus Compensation (1) Options Compensation
- --------------------------- ---- ------ ----- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis M. Jones, Chairman 1998 $510,780 $100,000 0 0 $32,114(2)
of the Board, Director and
President and Chief 1997 $400,000 0 0 0 $29,864(2)
Executive Officer
1996 $360,000 $100,000 0 540,000 $17,599(2)
- ---------------------------------------------------------------------------------------------------------------------------
Judith A. Jones, Director, 1998 $251,575 $75,000 0 0 $14,812(3)
Executive Vice President of
Corporate Affairs, Secretary 1997 $220,000 $30,000 0 0 $ 9,500(3)
and Treasurer
1996 $180,000 $50,000 0 135,000 $ 7,518(3)
- ---------------------------------------------------------------------------------------------------------------------------
Michael T. Bramblett, 1998 $251,070 $75,000 0 0 $10,000(4)
Director and Executive Vice
President of Business 1997 $220,000 $30,000 0 0 $9,500(4)
Development
1996 $180,000 $50,000 0 63,000 $7,500(4)
- ---------------------------------------------------------------------------------------------------------------------------
G. Andrew Franz, Director 1998 $223,228 $75,000 0 50,000 $10,000(4)
and Executive Vice
President of Operations 1997 $175,000 $25,000 0 0 $9,500(4)
1996 $144,000 $40,000 0 0 $7,500(4)
- ---------------------------------------------------------------------------------------------------------------------------
David A. McLaughlin, 1998 $202,948 $50,000 0 25,000 $10,000(4)
Director and Senior Vice
President of Operations 1997 $175,000 $25,000 0 0 $9,500(4)
1996 $144,000 $40,000 0 0 $7,500(4)
</TABLE>
(1) No Named Executive received Other Annual Compensation which is required
to be reported in this column.
(2) Consists of a Company contribution to a 401(k) plan ($10,000 in 1998,
$9,500 in 1997 and $7,500 in 1996) and the dollar value of premiums
paid by the Company for a split-dollar life insurance policy on Mr.
Jones, of which $22,114, $17,780 and $10,099 constituted his reportable
economic benefit in the years 1998, 1997 and 1996, respectively. See
"Certain Relationships and Related Transactions" in Item 13 below
for additional information concerning insurance relationships.
(3) Consists of a Company contribution to a 401(k) plan ($10,000 in 1998,
$9,500 in 1997 and $4,375 in 1996) and the dollar value of premiums
paid by the Company for a split-dollar life insurance policy on Mrs.
Jones, of which $4,812, $4,603 and $3,143 constituted her reportable
economic benefit in the years 1998, 1997 and 1996, respectively. See
"Certain Relationships and Related Transactions" in Item 13 below
for additional information concerning insurance relationships.
(4) Consists of a Company contribution to a 401(k) plan.
27
<PAGE> 29
STOCK OPTIONS AND INCENTIVE AWARDS
Shareholders of the Company have approved the adoption of stock option
and incentive stock plans which are administered by the Compensation Committee
of the Board of Directors of the Company. At December 31, 1998, the Company had
outstanding stock options for an aggregate of 1,963,301 shares of Common Stock
at a weighted average price of $18.38 per share held by 216 employees (including
the options held by the Named Executives as described below) and the four (4)
non-management directors. The Company's stock option plans permit "exchange
exercises" in which an optionee is permitted to pay the exercise price of vested
options by surrendering previously owned shares of the Company's Common Stock
having a market value equal to the exercise price of the option being exercised.
Option/SAR Grants. Although permitted under certain of the stock option
and incentive stock plans, the Company did not issue or have outstanding in 1998
stock appreciation rights ("SARs") or restricted share grants to any Named
Executive. During 1998, the Company granted stock options to the Named
Executives as set forth in the table below.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------
Percent of
Total Shares Potential Realizable Value at
Number of Underlying Assumed Annual Rates of
Shares Options Stock Price
Underlying Granted Per Share Appreciation
Options to Employees Exercise Expiration -----------------------------
Name Granted in 1998 Price Date 5% 10%
- ---------------------- ----------- ------------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
G. Andrew Franz 28,110(1) 4.1% $20.00 9/1/2004 $228,872 $483,570
G. Andrew Franz 21,890(2) 3.2% $21.00 9/1/2004 $156,339 $354,679
David A. McLaughlin 25,000(3) 3.6% $20.00 10/8/2004 $203,550 $430,070
</TABLE>
(1) These options granted to Mr. Franz represent non-statutory options.
7,150 shares underlying the non-statutory options become exercisable on
September 1, 1999 with 5,240 share installments becoming exercisable on
September 1, 2000 and each year thereafter through 2003.
(2) These options granted to Mr. Franz are intended to qualify as
"incentive stock options" for federal income tax purposes. 2,850 shares
underlying the incentive stock options become exercisable September 1,
1999 with 4,760 share installments becoming exercisable on September 1,
2000 and each year thereafter through 2003.
(3) The non-statutory options granted to Mr. McLaughlin become exercisable
in 5,000 share installments on October 8, 1999 and each year thereafter
through 2003.
Aggregate Option Exercises during 1998 and Year End Option Values. The
following table provides information with respect to the stock options exercised
during the fiscal year ended December 31, 1998 and the value as of December 31,
1998 of unexercised in-the-money options held by the Named Executives. The value
realized on the exercise of options is calculated using the difference between
the option exercise price and the fair market value of the Company's stock on
the date of the exercise. The value of unexercised in-the-money options at
fiscal year end is calculated using the difference between the option exercise
price and the fair market value of the Company's stock at fiscal year end,
December 31, 1998.
28
<PAGE> 30
<TABLE>
<CAPTION>
Value of
Number of Unexercised In-the-
Shares Unexercised Options Money Options at
Acquired Value at December 31, 1998 December 31, 1998
on Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
------ ----- ----- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dennis M. Jones 0 $0 216,000/324,000 $5,579,280/$8,368,920
Judith A. Jones 0 $0 54,000/81,000 $1,394,820/$2,092,230
Michael T. Bramblett 0 $0 18,000/45,000 $464,940/$1,162,350
G. Andrew Franz 11,250 $409,950 11,250/61,250 $370,575/$1,173,685
David A. McLaughlin 22,500 $637,088 0/36,250 $0/$783,075
</TABLE>
Employee Profit-Sharing and 401(k) Plan. The Company maintains an
Employee Profit-Sharing and 401(k) Plan (the "401(k) Plan") which was originally
adopted as of January 1, 1987. The 401(k) Plan provides employees with a
convenient way to save on a regular and long-term basis and encourages employees
to make and continue careers with the Company.
To become eligible to participate in the 401(k) Plan, an employee must
have completed six months of service and have reached his or her eighteenth
birthday ("Eligible Employee"). Pursuant to the 401(k) Plan, an Eligible
Employee who participates ("Participant") may direct that a portion of his or
her compensation be contributed to the 401(k) Plan ("Elective Contributions").
Elective Contributions are treated as salary deferrals for federal income tax
purposes and under current federal tax law may not exceed $10,000 per year. The
amount of a Participant's Elective Contribution may also be limited under the
Employee Retirement Income Security Act in the case of highly-compensated
individuals, including the Named Executives. Participants are not allowed to
make any voluntary contributions to the 401(k) Plan, other than their Elective
Contributions.
Each year the Company may make contributions to match all or a portion
of Participants' Elective Contributions. The Company set the matching
contribution at six percent of Participants' compensation in 1998 and 1997, and
at five percent of Participants' compensation in 1996. In addition to matching
contributions, the Company may make a discretionary contribution which is
allocated among Participants' Accounts in proportion to compensation. No
discretionary contributions have been made in the last three years. The
Company's matching and discretionary contributions are collectively called
"Company Contributions".
A Participant's Account under the 401(k) Plan consists of the
Participant's Elective Contributions, the Company Contributions allocated to the
Participant and the earnings or investment performance arising from investment
of such funds. Generally a Participant may not make withdrawals from his 401(k)
Plan Account prior to age 59 1/2, retirement, termination of employment, or
other conditions specified in the 401(k) Plan without incurring tax penalties,
although the Plan permits a Participant to borrow up to 50% of his Elective
Contributions in certain hardship circumstances as provided in the Plan.
Elective Contributions are always 100% vested, however, Company Contributions
are subject to a vesting schedule described below.
<TABLE>
<CAPTION>
Years of Service Vested Percentage
<S> <C>
2 ...............................................20%
3................................................40%
4................................................60%
5................................................80%
6...............................................100%
</TABLE>
29
<PAGE> 31
Any unvested portion of Company Contributions allocated to a Participant at the
time of such Participant's termination of employment with the Company, other
than by retirement or death, is forfeited by the Participant. Forfeitures of
discretionary Company Contributions will be allocated to the accounts of other
Participants. Forfeitures of matching contributions are allocated in proportion
to matching contributions.
As of January 1, 1998, the Company had approximately 340 Eligible
Employees, including the Named Executives (Dennis M. Jones, Judith A. Jones,
Michael T. Bramblett, G. Andrew Franz and David A. McLaughlin). During 1998, the
Company made matching contributions to the 401(k) Plan aggregating $50,000 to
the accounts of the Named Executives and total matching contributions of
$690,971 to all Participants' Accounts.
Participants in the 401(k) Plan may direct investment of amounts
allocated to their respective accounts among various investment funds selected
by the Plan Administrator. Prior to January 1, 1997, investment of funds in the
401(k) was directed by the Trustees of the 401(k) Plan and a portion of Company
Contributions was, from time to time, invested in shares of the Common Stock of
the Company. The investment funds currently available under the 401(k) Plan do
not include a fund for investment in the Company's Common Stock for either
Elective Contributions or Company Contributions.
The Company is the 401(k) Plan Administrator and currently pays all
expenses of the 401(k) Plan other than audit fees, which are paid by the 401(k)
Plan. The Company has appointed Dennis M. Jones, Judith A. Jones and G. Andrew
Franz as Trustees of the 401(k) Plan and Smith Barney Corporate Trust Company is
an additional trustee with respect to the investment funds available to
Participants. The 401(k) Plan may be modified by the officers of the Company at
any time, provided that the aggregate additional annual cost to the Company of
any such modification does not exceed $500,000 and provided further that no
modification shall adversely affect the rights of the Participants or divert any
of the 401(k) Plan assets to purposes other than the benefit of the
Participants.
30
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the record and
beneficial ownership of the Common Stock of the Company on the indicated date
by: (i) each director or nominee for director and the Named Executives (as such
term is defined below in "Executive Compensation -- Summary Compensation Table")
of the Company; and (ii) all directors or nominees for director and executive
officers of the Company as a group:
BENEFICIAL OWNERSHIP AS OF FEBRUARY 26, 1999
<TABLE>
<CAPTION>
Name and Address of Percentage of Shares
Beneficial Owner (1) Shares Beneficially Owned (2) Beneficially Owned (3)
-------------------- ----------------------------- ----------------------
<S> <C> <C>
Dennis M. Jones 3,356,365 (4)(5) 11.5%
Chairman of the Board of Directors
and President
Judith A. Jones 1,101,937 (6) 3.8%
Executive Vice President of Corporate
Affairs, Secretary, Treasurer and
Director
Michael T. Bramblett 155,726 (7)(8) 0.5%
Executive Vice President of Business
Development and Director
G. Andrew Franz 372,252 (9) 1.3%
Executive Vice President of Operations
and Director
David A. McLaughlin 113,000 (10) *
Senior Vice President of Operations
and Director
Stanley Lopata 169,760 (11) 0.6%
Director
900 South Hanley Road
St. Louis, Missouri 63105
L. John Polite, Jr. 39,250(12) *
Director
211 Oldwoods Road
Franklin Lakes, New Jersey 07417
Edward A. Chod 26,825(13) *
Director and Assistant Secretary
10 South Broadway, Suite 2000
St. Louis, Missouri 63102
Thomas F. Patton, Ph.D. 9,000(14) *
Director
4588 Parkview Place
St. Louis, Missouri 63110
All Directors and Executive Officers 5,357,615 (15) 18.3%
as a Group
(consisting of eleven persons)
</TABLE>
* Less than one-half of one percent.
31
<PAGE> 33
(1) Except as otherwise indicated, the address for each individual named is
c/o JONES PHARMA INCORPORATED, 1945 Craig Road, St. Louis, Missouri
63146. Each beneficial owner has sole voting and investment power with
respect to the shares of Common Stock shown as beneficially owned except
that an individual may be deemed to have only indirect shared voting and
investment power with respect to shares held by the individual's spouse
as reflected in other footnotes.
(2) Includes shares deemed owned as a result of purchase options which are
presently or will become exercisable on or prior to June 1, 1999.
(3) The number of shares of Common Stock deemed outstanding as of February
26, 1999 includes: (i) 28,810,069 shares of Common Stock outstanding as
of such date, and (ii) shares of Common Stock issuable pursuant to
options held by the directors and executive officers that are currently
exercisable or will become exercisable on or before June 1, 1999, by the
person or group in question.
(4) Includes 324,000 shares under option rights issued by the Company and
held by Mr. Jones. Does not include 1,101,937 shares or options held by
his spouse, Judith A. Jones, with respect to which he disclaims
beneficial ownership.
(5) As a result of call options written and sold by Mr. Jones, an aggregate
of 200,000 of the shares reflected as owned by him are subject to
purchase by third parties at $32.50 per share under option rights
expiring on June 18, 1999.
(6) Includes 81,000 shares under option rights issued by the Company and held
by Mrs. Jones. Does not include 3,356,365 shares or options held by her
spouse, Dennis M. Jones, with respect to which she disclaims beneficial
ownership.
(7) Includes 18,461 shares held by Mr. Bramblett's wife with respect to which
he disclaims beneficial ownership. Also includes 27,000 shares under
option rights issued by the Company.
(8) As a result of call options written and sold by Mr. Bramblett, an
aggregate of: (i) 20,000 of the shares reflected as owned by him were
subject to purchase by third parties at $35 per share under option rights
expiring March 19, 1999; and (ii) 20,000 of the shares reflected as owned
by him are subject to purchase by third parties at $32.50 per share under
option rights expiring June 18, 1999.
(9) Includes 166,165 shares owned by Mr. Franz' wife, 42,840 shares held by
his spouse as custodian for their children, 27,886 shares held by his
wife as a co-trustee for the benefit of the Franz' children and 13,943
shares held by his wife as a co-trustee for the benefit of her nephew.
Mr. Franz disclaims beneficial ownership of all of the shares held by his
wife. Also includes 11,250 shares under option rights issued by the
Company.
(10) As a result of call options written and sold by Mr. McLaughlin, an
aggregate of 20,000 of the shares reflected as owned by him are subject
to purchase by third parties at $35.00 per share under option rights
expiring June 18, 1999.
(11) Includes 64,950 shares held in revocable trust created by Mr. Lopata's
wife and with respect to which he disclaims beneficial ownership. Also
includes 2,250 shares under vested and unexercised options. Mr. Lopata
will retire at the close of the Company's 1999 Annual Meeting.
(12) Includes 13,500 shares under option rights issued by the Company.
(13) Includes 11,250 shares under option rights issued by the Company.
(14) Includes 9,000 shares under option rights issued by the Company.
(15) Includes the shares listed as beneficially owned for each individual
included in the table as well as (i) 10,000 shares under option rights
issued by the Company and held by Tina A. Kaufman, Senior Vice President
of Finance; and 3,500 shares under option rights issued by the Company
and held by Thomas G. Lewandowski, Senior Vice President of Sales.
32
<PAGE> 34
Other Significant Shareholdings
Based upon filings with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934, as amended ("Exchange Act"), the
Company is advised that as of December 31, 1998, the following investment
advisor held discretionary authority over accounts holding, in the aggregate,
the indicated numbers of shares of the Company's Common Stock, in each case
representing 5% or more of the then outstanding shares of Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF INVESTMENT ADVISOR SHARES
-------------------------------------- ------
<S> <C>
AMVESCAP PLC 3,211,100 (11.17%)
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act, requires the Company's directors and
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Directors, officers and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such forms received by the Company and written representations from certain
reporting persons that no Forms 5 or other reports were required for those
persons, the Company believes that, during the fiscal year ended December 31,
1998, its directors, officers and greater than 10% beneficial owners complied
with all applicable filing requirements except as follows: Michael T. Bramblett,
Executive Vice President of Business Development, and G. Andrew Franz, Executive
Vice President of Operations, each filed a Form 4, one month late, with respect
to the expiration of call options they each wrote and sold in 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Life Insurance Relationships. Pursuant to agreements between the
Company and the trustees of irrevocable insurance trusts, the Company pays the
premiums associated with life insurance on the lives of Dennis M. Jones and
Judith A. Jones as "split-dollar" coverage. Under such agreements, the trusts
own the policies and the Company pays the premiums on the policies. Upon the
death of the insureds, or in the event of an earlier termination of the
policies, the Company is entitled to recover the aggregate amount of the
premiums paid and the Company holds security interests in such policies to the
extent of premiums paid. The insurance trusts may terminate the "split-dollar"
arrangement with respect to any policy at any time upon reimbursement to the
Company of the aggregate amount of premiums paid with respect to such policy. As
an inducement to the Company to provide such coverage under the policies issued
in 1997 and 1998, Mr. and Mrs. Jones or certain beneficiaries of the insurance
trusts have guaranteed to the Company that the Company will recover the full
amount of premiums paid with respect to such policies. The Company is prohibited
from borrowing against such policies without the consent of the insureds.
During 1998 the aggregate face amount of such "split-dollar" insurance
coverage was increased from $33,500,000 to $73,500,000 as the result of the
purchase of a "second to die" policy on the lives of Mr. and Mrs. Jones.
Aggregate premium expense during 1998 on such policies was $1,488,000; aggregate
premium expense to December 31, 1998 on all such policies was $2,463,000.
33
<PAGE> 35
In addition to such "split-dollar" insurance, during 1998 the Company
purchased "key employee" insurance policies on the joint lives of Mr. and Mrs.
Jones in policies having an aggregate death benefit of $40,000,000. The policies
represent a combination of term and whole life intended to provide for level
premium expense to the Company aggregating approximately $865,000 per year.
Contemporaneously with the purchase of these policies, the Company entered into
an agreement with Mr. and Mrs. Jones (individually and as the trustees of their
respective revocable trusts holding shares of the Company's Common Stock).
Pursuant to such agreement, at the time of the death of the second to die of Mr.
or Mrs. Jones, their estates or the successor trustees of their trusts or any
beneficiary of such trust receiving a distribution of shares of the Company's
Common Stock is given the option to require the Company to repurchase shares of
the Company's Common Stock. The purchase price applicable to any such repurchase
will equal the average closing price for such stock for the ten days preceding
the date of death giving rise to the option.
The option may only be exercised by notice given not earlier than seven
nor later than eight months after the date of death giving rise to the option
and any resulting repurchase shall be made within thirty days of such notice of
exercise. The agreement limits the Company's obligation to effect such
repurchases to the amount of the insurance proceeds received by the Company
pursuant to the policies, but provides that the Company may not borrow against
any cash values in the policies or cancel the insurance without the consent of
Mr. and Mrs. Jones. Mr. and Mrs. Jones have agreed with the Company that in the
event of any termination of the policies under circumstances in which the
Company does not recover in full its premium costs, they will reimburse such
unrecovered costs to the Company. The Company believes that such insurance and
the application of the proceeds to the repurchase of shares of the Company's
Common Stock as provided in the agreement, will work to reduce any negative
impact on the Company and the market for its Common Stock arising from the
deaths of Mr. and Mrs. Jones.
Related Party Transactions. Edward A. Chod, a director of the Company,
is a principal in the law firm of Greensfelder, Hemker & Gale, P.C., which firm
has served as counsel to the Company since 1982. The amount of legal fees paid
by the Company to Greensfelder, Hemker & Gale, P.C. during the fiscal year ended
December 31, 1998 did not exceed five percent (5%) of such firm's gross revenues
for its applicable fiscal year.
34
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements filed as part of this
report on Form 10-K are listed on the accompanying Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedule on page 38.
2. The consolidated financial statement schedule filed as part of
this report on Form 10-K is listed on the accompanying Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedule on page 38.
3. Exhibits:
(3.1) Amended and Restated Certificate of Incorporation of
the Company dated June 5, 1997 (incorporated
by reference from Exhibit 3.1 to Form 8-K dated
June 10, 1997).
(3.2) Certificate of Amendment to Restated Certificate of
Incorporation dated May 20, 1998 (incorporated by
reference from Exhibit 3(i) to Form 8-K dated May 20,
1998).
(3.3) Amended By-Laws of the Company as of June 14, 1988
(incorporated by reference from Exhibit 3.5 to Form
10-K for the year ended December 31, 1995).
(3.4) Amendment to Section 3.02 of By-Laws of the Company
as of April 1, 1992 (incorporated by reference from
Exhibit 3.6 to Form 10-K for the year ended December
31, 1995).
(10.1) The Company's 1989 Incentive Stock Option Plan
(incorporated by reference from Exhibit 10.1 to
Form 10-K for the year ended December 31, 1995).
(10.2) Employee Profit Sharing and 401(k) Plan as amended
and restated as of January 1, 1997 (incorporated by
reference from Exhibit 10.2 to Form 10-K for the year
ended December 31, 1996).
(10.3) The Company's 1994 Incentive Stock Plan effective
June 1, 1994 (incorporated by reference from the
Company's Proxy Statement dated April 21, 1995 for
the Annual Meeting of Stockholders held May 15,
1995).
(10.4) The Company's 1994 Formula Stock Option Plan for
Non-Management Directors effective May 25, 1994
(incorporated by reference from the Company's Proxy
Statement dated April 21, 1995 for the Annual Meeting
of Stockholders held May 15, 1995).
(10.5) Licensing Agreement dated August 31, 1995 between the
Company and Eli Lilly & Company is (incorporated by
reference from Exhibit 2.1 to Form 8-K dated
September 15, 1995).
(10.6) Manufacturing Agreement dated August 31, 1995 between
the Company and Eli Lilly & Company (incorporated by
reference from Exhibit 2.2 to Form 8-K dated
September 15, 1995).
35
<PAGE> 37
(10.7) License Agreement dated March 18, 1996, between the
Company and Eli Lilly and Company (incorporated by
reference from Exhibit 2.1 to Form 8-K dated March
18, 1996).
(10.8) Manufacturing Agreement dated March 18, 1996, between
the Company and Eli Lilly and Company (incorporated
by reference from Exhibit 2.2 to Form 8-K dated March
18, 1996).
(10.9) Plan of Reorganization and Agreement dated as of July
30, 1996, by and among Galen Drugs of Florida, Inc.,
Daniels Pharmaceuticals, Inc. and the Company
(incorporated by reference from Exhibit 2.1 to Form
8-K dated September 6, 1996).
(10.10) Plan of Reorganization and Agreement dated as of
October 24, 1996, by and among the Company, Abana
Pharmaceuticals, Inc., Dale E. Eads and Perry N. Cole
(incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration No.
333-15889) filed on November 8, 1996).
(10.11) The Company's 1997 Incentive Stock Plan (incorporated
by reference from the Company's Proxy Statement dated
April 10, 1997 for the Annual Meeting of Shareholders
held May 20, 1997).
(10.12) Asset Purchase Agreement dated as of June 27, 1997,
between the Company and SmithKline Beecham
Corporation (incorporated by reference from Exhibit
2.1 to Form 8-K dated July 8, 1997).
(10.13) Supply Agreement dated as of June 27, 1997, between
the Company and SB Pharmco Puerto Rico (incorporated
by reference from Exhibit 2.2 to Form 8-K dated July
8, 1997).
(10.14) Asset Purchase Agreement dated March 17, 1998 by and
among Twin Laboratories, Inc., Bronson Laboratories,
Inc., the Company and JMI-Phoenix (incorporated by
reference from Exhibit 2.1 to Form 8-K dated May 15,
1998).
(21.1) Subsidiaries of the Registrant (incorporated by
reference from Exhibit 21.1 to Form 10-K for the year
ended December 31, 1997).
(23.1) Consent of Ernst & Young LLP. (FILED HEREWITH)
(27.1) Financial Data Schedule. (FILED HEREWITH)
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report on Form 10-K.
36
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JONES MEDICAL INDUSTRIES, INC.
By: /s/ Dennis M. Jones
-----------------------------
Dennis M. Jones, President
DATE: MARCH 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Dennis M. Jones President, Chief Executive March 31, 1999
- --------------------------- Officer-and Director
Dennis M. Jones
/s/ Judith A. Jones Principal Financial and March 31, 1999
- --------------------------- Accounting Officer,
Judith A. Jones Executive Vice President,
Secretary, Treasurer and
Director
/s/ Michael T. Bramblett Executive Vice President March 31, 1999
- --------------------------- and-Director
Michael T. Bramblett
/s/ G. Andrew Franz Senior Vice President - March 31, 1999
- --------------------------- Operations -
G. Andrew Franz Pharmaceuticals and
Director
/s/ David A. McLaughlin Senior Vice President - March 31, 1999
- --------------------------- Operations -
David A. McLaughlin Nutritionals and Director
/s/ Edward A. Chod Director March 31, 1999
- ---------------------------
Edward A. Chod
/s/ Stanley Lopata Director March 31, 1999
- ---------------------------
Stanley Lopata
/s/ L. John Polite, Jr. Director March 31, 1999
- ---------------------------
L. John Polite, Jr.
/s/ Thomas F. Patton, Ph.D. Director March 31, 1999
- ---------------------------
Thomas F. Patton, Ph.D.
37
<PAGE> 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Ernst & Young LLP, independent auditors F-1
Consolidated balance sheets as of December 31, 1997 and 1998 F-2
Consolidated statements of income for the years ended
December 31, 1996, 1997 and 1998 F-3
Consolidated statements of stockholders' equity for the
years ended December 31, 1996, 1997 and 1998 F-4
Consolidated statements of cash flows for the years ended
December 31, 1996, 1997 and 1998 F-5
Notes to consolidated financial statements F-6
Consolidated schedule for the years ended December 31, 1996,
1997 and 1998:
II. Valuation and qualifying accounts F-25
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
38
<PAGE> 40
Report of Independent Auditors
The Board of Directors and Stockholders
JONES PHARMA INCORPORATED
We have audited the accompanying consolidated balance sheets of JONES PHARMA
INCORPORATED as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of JONES
PHARMA INCORPORATED at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 10, 1999
F-1
<PAGE> 41
JONES PHARMA INCORPORATED
Consolidated Balance Sheets
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $49,877 $122,745
Accounts receivable, less allowance for
doubtful accounts of $1,196 in 1997 and $977
in 1998 13,650 19,069
Inventories 7,299 7,492
Deferred income taxes 2,443 3,342
Other 479 1,329
Net assets of discontinued operations 10,883 -
--------------------------
Total current assets 84,631 153,977
Intangible assets:
Distribution systems, trademarks, and licenses 66,827 66,805
Restrictive covenants and other intangibles 7,624 7,647
Goodwill 14,534 4,034
---------------------------
88,985 78,486
Less accumulated amortization 8,503 12,160
---------------------------
Net intangible assets 80,482 66,326
Net property, plant, and equipment 23,297 23,692
Other assets 2,219 4,783
Net assets of discontinued operations 13,100 -
---------------------------
Total assets $203,729 $248,778
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,631 $9,951
Income taxes payable 1,450 1,771
---------------------------
Total current liabilities 6,081 11,722
Deferred income taxes 5,922 4,386
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
shares authorized, 28,798,978 issued and
outstanding in 1998; 28,647,300 issued and
outstanding in 1997 1,146 1,152
Contributed capital 109,129 111,039
Retained earnings 81,451 120,479
---------------------------
Total stockholders' equity 191,726 232,670
---------------------------
$203,729 $248,778
===========================
</TABLE>
See accompanying notes.
F-2
<PAGE> 42
JONES PHARMA INCORPORATED
Consolidated Statements of Income
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
Sales from continuing operations $64,181 $88,781 $103,414
Cost of sales 20,277 25,430 23,839
---------------------------------------------
Gross profit 43,904 63,351 79,575
Selling, general, and administrative
expenses:
Selling 10,356 14,415 16,825
General and administrative 7,389 7,499 8,534
Research and development 410 - 117
Amortization 2,011 3,357 3,665
Nonrecurring charges 5,743 - 10,500
---------------------------------------------
Total selling, general, and
administrative expenses 25,909 25,271 39,641
---------------------------------------------
Operating income from continuing
operations 17,995 38,080 39,934
Other income (expense):
Interest income 2,276 2,562 5,086
Interest expense (553) (238) (215)
Miscellaneous 32 (9) 12
---------------------------------------------
1,755 2,315 4,883
---------------------------------------------
Income before taxes from
continuing operations 19,750 40,395 44,817
Provision for income taxes 8,232 15,351 21,250
---------------------------------------------
Income from continuing operations 11,518 25,044 23,567
---------------------------------------------
Income from discontinued
operations (net of taxes) 6,621 6,926 18,768
---------------------------------------------
Net income $18,139 $31,970 $42,335
=============================================
Earnings per share:
Basic: Continuing operations $0.43 $0.88 $0.82
Discontinued operations 0.24 0.24 0.65
---------------------------------------------
$0.67 $1.12 $1.47
=============================================
Diluted: Continuing operations $0.41 $0.85 $0.80
Discontinued operations 0.24 0.24 0.64
=============================================
$0.65 $1.09 $1.44
=============================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 43
JONES PHARMA INCORPORATED
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 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, 1995 1,056 24,227,423 $ - $969 $19,590 $35,379 $55,938
Net proceeds from sale of
common stock - 3,450,000 - 138 75,084 - 75,222
Exercise of stock options - 333,397 - 13 787 - 800
Restricted stock:
Amortization of unearned
compensation - - - - 12 - 12
Tax benefits associated
with the exercise of
nonqualified stock
options - - - - 846 - 846
Adjustment to increase
pooled company's net
income to a 15-month
amount - - - - - 702 702
Costs paid by shareholders
on behalf of the Company - - - - 2,900 - 2,900
Redemption of dissenters'
shares - - - - (4,022) - (4,022)
Shares issued in
connection with the
Abana purchase - 420,553 - 17 13,875 - 13,892
Other - - - - (490) (490)
Conversion of preferred
stock (1,056) 4,078 - - - - -
Net income - - - - - 18,139 18,139
Cash dividend declared
common stock ($.0767 per
share) - - - - - (2,020) (2,020)
-------------------------------------------------------------------------------
Balance at December 31, 1996 - 28,435,451 $ - $1,137 $108,582 $52,200 $161,919
Exercise of stock options - 224,724 - 9 687 - 696
Shares tendered in payment
of option price - (10,182) - - (340) - (340)
Tax benefits associated
with the exercise of
nonqualified stock
options - - - - 287 - 287
Return of escrowed shares - (2,693) - - (87) - (87)
Net income - - - - - 31,970 31,970
Cash dividend declared -
common stock ($.095 per
share) - - - - - (2,719) (2,719)
-------------------------------------------------------------------------------
Balance at December 31, 1997 - 28,647,300 $ - $1,146 $109,129 $81,451 $191,726
Exercise of stock options - 155,941 - 6 1,557 - 1,563
Shares tendered in payment
of option price - (4,263) - - - - -
Tax benefits associated
with the exercise of
nonqualified stock
options - - - - 353 - 353
Net income - - - - - 42,335 42,335
Cash dividend declared
common stock ($.115 per
share) - - - - - (3,307) (3,307)
-------------------------------------------------------------------------------
Balance at December 31, 1998 - 28,798,978 $ - $1,152 $111,039 $120,479 $232,670
=================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 44
JONES PHARMA INCORPORATED
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $18,139 $31,970 $42,335
Adjustment to increase pooled
company's net income to a
15-month amount 702 - -
Noncash adjustments:
Costs paid by shareholders on
behalf of the Company 2,900 - -
Depreciation 1,363 2,148 1,938
Amortization 2,630 3,963 3,665
Provision for uncollectibles 200 809 (219)
Pretax gain on sale of
discontinued operations - - (30,616)
Nonrecurring charge - - 10,500
Deferred income taxes 527 43 (2,435)
Loss on sale of assets 101 31 -
Change in assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (1,406) (6,196) (5,200)
Inventories 868 (2,604) (193)
Other assets (1,603) 1,445 (3,474)
Accounts payable and
accrued expenses (1,119) (1,341) 5,320
Income taxes payable (2,635) 1,450 321
-------------------------------------------
Net cash from operating activities 20,667 31,718 21,942
INVESTING ACTIVITIES
Additions to property, plant, and
equipment (7,386) (5,566) ( 2,333)
Proceeds from sale of assets 408 276 3
Purchases of intangible assets in
product line acquisitions, net
of seller financing (8,757) (22,800) -
Proceeds from sale of discontinued
operations - - 55,000
Net decrease in note receivable
from related party 175 - -
-------------------------------------------
Net cash from (used for) investing (15,560) (28,090) 52,670
FINANCING ACTIVITIES
Net proceeds from sale of common
stock 75,222 - -
Proceeds from debt 8,700 - -
Repayment of long-term debt (37,758) (3,000) -
Purchase of dissenters' shares (4,022) - -
Repayment of note payable to
former stockholder of pooled
company (2,476) - -
Payments of cash dividends (1,743) (3,279) (3,307)
Proceeds from exercise of stock
options 800 356 1,563
-------------------------------------------
Net cash from (used for) financing 38,723 (5,923) (1,744)
-------------------------------------------
Increase (decrease) in cash and
cash equivalents 43,830 (2,295) 72,868
Cash and cash equivalents,
beginning of year 8,342 52,172 49,877
-------------------------------------------
Cash and cash equivalents, end of
year $52,172 $49,877 $122,745
============================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 45
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of dollars except share and per share amounts)
1. BASIS OF PRESENTATION
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
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 $11,901 for the period
January 1, 1998 to April 30, 1998 (the sale date). For the years ended December
31, 1997 and 1996, net sales associated with the discontinued operations
approximated $36,249 and $35,972, respectively.
DANIELS PHARMACEUTICALS, INC. POOLING OF INTERESTS
On August 30, 1996, JMED acquired Daniels Pharmaceuticals, Inc. ("Daniels"), a
Florida corporation, in a business combination accounted for as a pooling of
interests by way of a merger (the "Merger") among Daniels, Daniels' parent
entity, Galen Drugs of Florida, Inc. ("Galen"), a Florida corporation, and
JMED's wholly owned subsidiary, JGD Acquisition Corporation, a Florida
corporation. The accompanying financial statements are based on the assumption
that the two companies were combined at the beginning of 1996.
In connection with the Merger, JMED issued 2,910,474 shares of its common stock
and paid cash consideration of approximately $4,022 to dissenting shareholders.
In addition, JMED issued 49,750 shares of its common stock to Daniels
Enterprises, Inc. ("DEI"), an S-Corporation controlled by the principal
shareholders of Galen, to acquire the real estate associated with the business.
The book value of the real estate acquired was $892 at the consummation date of
the combination.
Nonrecurring charges related to this acquisition consisting of costs paid by
shareholders on behalf of the Company, investment banking and professional fees,
and severance costs totaled $5,743 and have been included in selling, general,
and administrative expenses in the accompanying 1996 consolidated statement of
income.
F-6
<PAGE> 46
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued) (In
thousands of dollars except share and per share amounts)
1. BASIS OF PRESENTATION (CONTINUED)
In connection with the Merger, Daniels changed its fiscal year-end in 1996 from
September 30 to December 31, to conform to JMED's year-end. The conformity of
Daniels' fiscal year-end was changed prospectively. Accordingly, Daniels' net
income for the three months ended December 31, 1995 has been added directly to
retained earnings of the combined Company. The consolidated statement of cash
flows for the year ended December 31, 1996 combines JMED's cash flows for that
period with the cash flows of Daniels for the period from October 1, 1995 to
December 31, 1996.
STOCK SPLITS
On February 7, 1996 and again on May 22, 1996, the Board of Directors declared
three-for-two stock splits effected in the form of stock dividends. The
financial statements, including stock options, share data, per share data, and
market prices, have been retroactively adjusted to reflect both of these stock
splits.
2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION
The Company is engaged in the manufacturing, marketing, and sale of
pharmaceuticals to retail pharmacies and hospitals. A significant portion of the
Company's sales are through wholesale drug distributors, which in turn supply
product to pharmacies and hospitals.
No one customer accounted for more than 10 percent of the Company's consolidated
sales in 1996, 1997, or 1998.
The Company's most significant products include:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------------ ---------------------
PRODUCT PERCENT PRODUCT PERCENT PRODUCT PERCENT
SALES OF SALES SALES OF SALES SALES OF SALES
------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Levoxyl $14,197 22% $22,272 25% $28,100 27%
Tapazole (acquired
March 18, 1996) $12,254 19% $18,313 21% $24,715 24%
Thrombin products $17,406 27% $19,387 22% $17,827 17%
Brevital $7,251 11% $9,187 10% $11,120 11%
</TABLE>
F-7
<PAGE> 47
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION (CONTINUED)
The Company's only source of supply for thrombin products is from GenTrac, Inc.,
a wholly owned subsidiary of the Company, and the only source of supply for
Levoxyl is from Daniels, Inc., a wholly owned subsidiary of the Company.
The Company currently relies on Eli Lilly and Company ("Lilly") for the
manufacture of Brevital and Tapazole. In connection with the acquisitions of
Brevital (on August 31, 1995) and Tapazole (on March 18, 1996), the Company
entered into ten-year manufacturing agreements with Lilly, which may be
terminated by Lilly at any time after the first five years by giving at least
five years' notice to the Company prior to ceasing the manufacture of the
related products. In the event of such termination, Lilly must use reasonable
efforts to assist the Company in obtaining all the necessary licenses and
approvals to enable the Company or an alternative manufacturer to manufacture
the products. Lilly is the sole manufacturer of both products, and any
alternative manufacturer would require regulatory change-in-site qualification
to manufacture the products. In the event of any interruption in the supply of
either product from Lilly due to regulatory or other causes, there can be no
assurance that the Company could make alternative manufacturing arrangements on
a timely basis, if at all. Such an interruption could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of JMED and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents in short-term money market accounts and other investments with
original maturities of less than three months are stated at cost plus accrued
interest and are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
the first-in, first-out basis.
F-8
<PAGE> 48
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation is computed by
the straight-line method over the useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CATEGORY USEFUL LIFE
- ---------------------------------------------- ---------------------------------
<S> <C>
Buildings and improvements 15-40 years
Equipment and furniture 5-15 years
Automobiles 5 years
</TABLE>
INTANGIBLE ASSETS
The cost of product line or business acquisitions accounted for using the
purchase method of accounting is allocated first to identifiable assets and
liabilities based on estimated fair values. The excess of cost over identifiable
assets and liabilities is recorded as goodwill.
Amortization is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CATEGORY USEFUL LIFE
- ---------------------------------------------------- ---------------------------
<S> <C>
Distribution systems, trademarks, and licenses 5-30 years
Restrictive covenants and other intangibles 5-10 years
Goodwill 25-40 years
</TABLE>
The Company continually reevaluates the propriety of the carrying amount of
goodwill and other intangibles as well as the related amortization period to
determine whether current events and circumstances warrant adjustments to the
carrying values and/or revised estimates of useful lives. This evaluation is
based on the Company's projection of the undiscounted operating income before
depreciation, amortization, and interest over the remaining lives of the
amortization periods of related goodwill and intangible assets. The projections
are based on the historical trend line of actual results since the date of
acquisition of the respective assets adjusted for expected changes in operating
results.
F-9
<PAGE> 49
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
To the extent such projections indicate that the undiscounted operating income
is not expected to be adequate to recover the carrying amounts of related
intangibles, such carrying amounts are written down by charges to expense in
amounts equal to the excess of the carrying amount of intangible assets over the
respective fair values.
In June 1998, the Company recorded a noncash 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 noncash, after-tax
charge of $10,500, or $.36 per share. This nonrecurring charge, which has been
included in selling, general, and administrative expenses in the accompanying
1998 consolidated statement of income, has no impact on the Company's 1998 cash
flow or its ability to generate cash flow in the future.
The Company believes the remaining carrying amounts of its intangible assets at
December 31, 1998 are recoverable and no reduction of the estimated useful lives
is warranted.
REVENUE RECOGNITION
Sales are reported net of rebates, returns, and discounts during the period in
which product is shipped. Product rebates and discounts are incurred due to
volume or other contractual allowances on certain pharmaceutical sales under
contracts with hospitals, buying groups, and managed care organizations. Product
returns are permitted in accordance with operating policies established with
respect to certain unused pharmaceuticals. At December 31, 1997 and 1998, the
Company maintained reserves of $2,215 and $3,150, respectively, for product
rebates, returns, and discounts.
F-10
<PAGE> 50
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, no compensation expense
is recognized because the exercise price of the Company's incentive stock
options equals the market price of the underlying stock on the date of grant.
In connection with various nonqualified stock option plans, certain options have
been granted at exercise prices below the fair market value of the common stock
at the grant date. Differences between the option prices and fair market values
at the dates of grant are charged to compensation expense ratably over the
future service vesting periods.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
4. ACQUISITIONS
CYTOMEL AND TRIOSTAT
On June 30, 1997, the Company acquired two products, Cytomel and Triostat, from
SmithKline Beecham Corporation (SKB) for a cash purchase price of $22,800. The
purchase price has been allocated to the acquired intangibles with amortizable
lives ranging from 10 to 25 years. In connection with the acquisition, the
Company entered into manufacturing agreements for the supply of both Cytomel and
Triostat.
F-11
<PAGE> 51
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
4. ACQUISITIONS (CONTINUED)
ABANA
Since June 1, 1992, the Company has owned an investment in Abana
Pharmaceuticals, Inc. ("Abana") equivalent to 16 percent of Abana's outstanding
common stock. In October 1996, the parties reached an agreement in principle
whereby the Company would acquire the remaining 84 percent of Abana's
outstanding common stock. On December 31, 1996, the consummation date of the
acquisition, the Company issued 420,553 shares of its common stock in exchange
for the remaining outstanding common stock of Abana. In addition, outstanding
Abana stock options were exchanged for approximately 40,000 of the Company's
stock options. The total purchase price of approximately $14,900, representing
the fair value of Company common stock given of approximately $13,900 and the
fair value of stock options given of approximately $1,000, has been allocated to
the fair value of assets acquired and liabilities assumed in accordance with the
purchase method of accounting. The excess of the purchase price over the fair
values of acquired assets and liabilities, totaling approximately $13,000, was
allocated to goodwill with an estimated economic life of 25 years. Pro forma
results of operations, assuming the acquisition of Abana had occurred on January
1, 1996, would not materially differ from the 1996 reported results of
operations.
TAPAZOLE
On March 18, 1996, the Company entered into a perpetual licensing agreement with
Lilly for the exclusive United States marketing rights to the Tapazole product
line. The purchase price of approximately $26,000 was financed with short-term
bank debt of $8,700 and Lilly financing of $17,300 for six months. Approximately
$24,000 was allocated to the perpetual license with an amortizable life of 30
years, and $2,000 was allocated to a restrictive covenant with an amortizable
life of 10 years.
BREVITAL
On August 31, 1995, the Company acquired a perpetual licensing agreement for the
exclusive United States marketing rights to the Brevital product line from
Lilly. The purchase price of approximately $14,000 was financed with bank debt
of $7,000 and Lilly financing of $7,000. Approximately $13,000 was allocated to
the perpetual license with an amortizable life of 30 years, and $1,000 was
allocated to a restrictive covenant with an amortizable life of 10 years.
F-12
<PAGE> 52
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
5. EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS 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 SFAS No. 128 requirements.
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Income from continuing operations $11,518 $25,044 $23,567
Income from discontinued operations 6,621 6,926 18,768
-----------------------------------------------
$18,139 $31,970 $42,335
Denominator:
Denominator for basic earnings per
share-weighted average shares 27,021,430 28,581,588 28,725,669
Effect of dilutive stock options 765,921 664,830 602,488
-----------------------------------------------
Denominator of diluted earnings per
share 27,787,351 29,246,418 29,328,157
===============================================
Earnings per share:
Basic: Continuing operations $0.43 $0.88 $0.82
Discontinued operations $0.24 $0.24 $0.65
-----------------------------------------------
$0.67 $1.12 $1.47
===============================================
Diluted: Continuing operations $0.41 $0.85 $0.80
Discontinued operations $0.24 $0.24 $0.64
-----------------------------------------------
$0.65 $1.09 $1.44
===============================================
</TABLE>
F-13
<PAGE> 53
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a summary of supplemental cash flow information:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
Interest paid $532 $259 $215
Income taxes paid $14,109 $15,998 $22,798
</TABLE>
7. INVENTORIES
Inventories at December 31, 1997 and 1998, are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
-------------------------------------
<S> <C> <C>
Raw materials $2,063 $2,239
Work-in-process 677 506
Finished goods 4,559 4,747
-------------------------------------
$7,299 $7,492
=====================================
</TABLE>
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
1997 1998
-------------------------------------
<S> <C> <C>
Land $2,068 $2,068
Buildings and improvements 11,298 11,608
Equipment and furniture 13,048 16,526
Automobiles 591 590
Projects in process 1,416 128
-------------------------------------
28,421 30,920
Less accumulated depreciation 5,124 7,228
-------------------------------------
$23,297 $23,692
=====================================
</TABLE>
F-14
<PAGE> 54
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
9. OFFICER'S LIFE INSURANCE
Included in Other Assets at December 31, 1997 and 1998 are amounts totaling $975
and $3,435, respectively related to life insurance policies on the lives of
certain key executive officers. The beneficiaries of the policies are the
Company or trusts created by the insureds. The Company pays the annual premiums
on these policies and has guarantees from the insureds (or the beneficiaries of
their trusts) to make the Company whole to the extent that the cash surrender
values of the policies are less than the aggregate premiums paid by the Company.
In connection with two of the life insurance policies with total insurance value
of $40,000, the Company has entered into a stock redemption agreement with the
insureds whereby, upon the death of both insureds, the Company may be required
to use the proceeds from the life insurance policies to purchase shares of the
insureds' Company common stock. The obligation to redeem the stock is at the
discretion of the then holders of the insureds common shares. The redemption
price is based on the average closing price of the shares on the last ten
trading days immediately preceding the death of the second to die.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1997 and 1998, are
comprised of the following:
<TABLE>
<CAPTION>
1997 1998
---------------------------------
<S> <C> <C>
Trade payables $741 $2,662
Sales rebates, returns, and discounts 2,215 3,150
Compensation 380 1,389
Reserves for discontinued operations - 1,266
Royalties 382 457
Site transfer costs 665 654
Other 248 373
---------------------------------
$4,631 $9,951
=================================
</TABLE>
F-15
<PAGE> 55
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
11. INCOME TAXES
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 December 31, 1997 and
1998, are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $5,922 $4,386
Deferred tax assets:
Accrued sales rebates, returns,
and discounts 1,220 1,499
Deferred compensation on stock options 87 87
Unicap adjustment on inventory 298 209
Allowance for doubtful accounts 436 353
Accrued expenses - 757
Other 402 437
------------------------------------
2,443 3,342
------------------------------------
Net deferred tax liabilities $3,479 $1,044
====================================
</TABLE>
Significant components of the provision for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $7,311 $14,206 $19,166
State 570 1,050 1,862
-----------------------------------------------------
Total current 7,881 15,256 21,028
Deferred:
Federal 325 93 202
State 26 2 20
-----------------------------------------------------
Total deferred 351 95 222
-----------------------------------------------------
$8,232 $15,351 $21,250
=====================================================
</TABLE>
F-16
<PAGE> 56
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
11. INCOME TAXES (CONTINUED)
The provision for income taxes from discontinued operations in 1996, 1997, and
1998 of $4,058, $4,244, and $13,537, respectively, has been netted against the
income from discontinued operations in the accompanying consolidated statements
of income.
A reconciliation of the difference between the United States federal statutory
tax rates and the effective income tax rate as a percentage of net income before
taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.0% 1.7% 2.6%
Other, net 3.7% 1.3% 9.8%
----------------------------------------------------
41.7% 38.0% 47.4%
====================================================
</TABLE>
The effective tax rates in 1996 and 1998 reflect the nondeductibility of certain
nonrecurring accounting charges.
12. PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
stockholders, from time to time, direct the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the rights,
preferences, and limitations of each series. The holders of preferred stock
would normally be entitled to receive a preference payment in the event of any
liquidation of the Company before any payment is made to the holders of the
common stock. As of December 31, 1997 and 1998, there were no shares of
preferred stock designated or outstanding.
F-17
<PAGE> 57
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
13. STOCK OPTION PLANS
The Company has various incentive stock plans for executives and employees. In
connection with the plans, options to purchase common stock are granted at
option prices not less than the fair market values of the common stock at the
time the options are granted and vest ratably over five- to ten-year periods
from the grant dates. At December 31, 1998, options for 602,610 shares of common
stock are available for future grant. A total of 1,963,301 options to purchase
common stock are outstanding under these plans at December 31, 1998, of which
401,886 are currently exercisable. Included in the outstanding options under
these plans are options to purchase 675,000 shares of common stock that have
been granted to certain officers of the Company under time accelerated stock
option agreements. The options become exercisable at the end of eight years from
the grant date; however, the options may become exercisable at earlier dates if
certain targeted common stock prices are attained.
The incentive stock plans allow for employee payment of option exercise prices
in the form of either cash or previously held common stock of the Company.
Shares tendered in payment of the option exercise price must be owned by the
employee making the tender for not less than six months prior to the date of
tender.
Option activity for 1996, 1997, and 1998, was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------------------
<S> <C> <C> <C>
Outstanding options, January 1 875,025 1,424,345 1,498,676
Exercised (333,397) (224,724) (154,240)
Granted 901,070 417,500 694,100
Cancelled (18,353) (118,445) (75,235)
------------------------------------------------
Outstanding options, December 31 1,424,345 1,498,676 1,963,301
================================================
Weighted average price of options
outstanding, January 1 $2.76 $9.65 $15.82
================================================
Weighted average price of options
exercised $2.41 $3.10 $6.93
================================================
Weighted average price of options
granted $13.24 $32.42 $22.57
================================================
Weighted average price of options
cancelled $3.35 $24.19 $29.38
================================================
Weighted average price of options
outstanding, December 31 $9.65 $15.82 $18.38
================================================
</TABLE>
F-18
<PAGE> 58
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
13. STOCK OPTION PLANS (CONTINUED)
Outstanding options at December 31, 1998 are exercisable as follows, assuming
the targeted common stock prices are attained with respect to the time
accelerated stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
NUMBER OPTION OPTION
OF SHARES PRICE PRICE
--------------------------------------------------
<S> <C> <C> <C>
Currently exercisable at
December 31, 1998: 401,886 $12.26 $2.89-$40.00
Outstanding options vesting
in:
1999 387,700 $16.40 $2.89-$40.00
2000 382,475 $17.76 $2.89-$40.00
2001 378,200 $20.28 $10.67-$40.00
2002 240,520 $25.89 $10.67-$36.25
2003 and thereafter 172,520 $23.84 $10.67-$36.25
=================
1,963,301
=================
</TABLE>
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a binomial option
pricing model with the following weighted average assumptions for 1996, 1997,
and 1998, respectively: risk-free interest rates of 6.36 percent, 5.52 percent,
and 5.21 percent; a dividend yield of .2 percent, .3 percent, and .35 percent;
volatility factors of the expected market price of the Company's common stock of
.516 percent, .610 percent, and .609 percent; and a weighted average expected
life of the options of five years.
The binomial option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-19
<PAGE> 59
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
13. STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------------------------
<S> <C> <C> <C>
Pro forma net income $17,511 $30,727 $40,873
================= ================= =================
Pro forma earnings per share -
diluted $.63 $1.05 $1.39
================= ================= =================
</TABLE>
14. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering substantially all
employees. The plan provides the Company may match 100 percent of the employee
voluntary contributions up to a maximum matching contribution of 6 percent of
the employee's compensation. Company contributions in 1996, 1997, and 1998 were
approximately $357, $614, and $669, respectively.
15. CONTINGENCIES AND COMMITMENTS
At December 31, 1998, the Company carried product liability coverage of $20,000
per occurrence and $20,000 in the aggregate on a "claims made" basis and carried
excess coverage of $5,000 through an 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 its business.
The Company is a defendant in hundreds of multi-defendant lawsuits involving the
manufacture and sale of dexfenfluramine, fenfluramine, and phentermine
(collectively, "Fen/Phen"). Although the Company has at no time manufactured
dexfenfluramine, fenfluramine, or phentermine, the Company was a distributor of
Obenix, its branded phentermine product. The plaintiffs in these cases claim
injury as a result of ingesting a combination of these weight-loss drugs. These
suits have been filed in various jurisdictions throughout the United States, and
in each of these suits, the Company is one of many defendants, including
manufacturers and other distributors of these drugs. The Company denies any
liability incident to the distribution of Obenix and has tendered defense of
these lawsuits to its insurance carriers for handling. The lawsuits are in
various stages of litigation, and it is too early to determine what, if any,
liability the
F-20
<PAGE> 60
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
15. CONTINGENCIES AND COMMITMENTS (CONTINUED)
Company will have with respect to the claims set forth in these lawsuits. In the
event that the Company's insurance coverage is inadequate to satisfy any
resulting liability, the Company will have to resume defense of these lawsuits
and be responsible for the damages, if any, that are awarded against it.
Management of the Company does not believe that the outcome of these lawsuits
will have a material adverse effect on the Company's business, financial
condition, or results of operations.
The Food and Drug Administration (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 applications (NDAs). After August 14,
2000, any levothyroxine sodium product marketed without an approved NDA will be
subject to regulatory action. Levoxyl, since it was marketed prior to the date
of this notice, will continue to be eligible for marketing until August 14,
2000. The Company plans to dedicate significant resources to this NDA process
during 1999 and 2000 and expects to incur costs in excess of $2 million to
secure an approved NDA for Levoxyl.
In connection with certain product line acquisitions, the Company is obligated
to pay royalties of up to 10 percent of certain product sales through 2008.
Total royalty expense in 1996, 1997, and 1998 was approximately $872, $1,358,
and $1,744, respectively.
F-21
<PAGE> 61
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales from continuing
operations $21,637 $18,999 $22,168 $25,977
Gross profit 16,791 11,936 16,053 18,571
Income from continuing operations 6,469 4,582 6,366 7,628
Income from discontinued operations 1,649 1,794 1,751 1,731
----------------------------------------------------
Net income $8,118 $6,376 $8,117 $9,359
Earnings per share:
Basic: Continuing operations $0.23 $0.16 $0.22 $0.27
Discontinued operations 0.06 0.06 0.06 0.06
----------------------------------------------------
$0.29 $0.22 $0.28 $0.33
Diluted: Continuing operations $0.22 $0.16 $0.22 $0.26
Discontinued operations 0.06 0.06 0.06 0.06
----------------------------------------------------
$0.28 $0.22 $0.28 $0.32
Stock prices:
High $38.00 $47.50 $45.25 $38.25
Low $23.63 $24.50 $26.00 $26.75
</TABLE>
<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH
----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales from continuing
operations $23,743 $26,675 $26,387 $26,609
Gross profit 18,071 20,304 20,362 20,838
Income from continuing operations 7,265 (1,986) 8,652 9,636
Income from discontinued operations 1,218 17,550 - -
----------------------------------------------------
Net income $8,483 $15,564 $8,652 $9,636
Earnings per share:
Basic: Continuing operations $0.25 $(0.07) $0.30 $0.33
Discontinued operations 0.05 0.61 - -
----------------------------------------------------
$0.30 $0.54 $0.30 $0.33
Diluted: Continuing operations $0.25 $(0.07) $0.30 $0.33
Discontinued operations 0.04 0.60 - -
----------------------------------------------------
$0.29 $0.53 $0.30 $0.33
Stock prices:
High $40.38 $37.63 $35.56 $37.75
Low $34.94 $28.88 $20.75 $26.13
</TABLE>
F-22
<PAGE> 62
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
17. YEAR 2000 UPDATE (UNAUDITED)
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the year 2000 or process data that
includes it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. The inability to accurately process date
related information would have a material impact on the Company's operations and
financial condition. To mitigate the risks of a Year 2000 failure, a Year 2000
action plan (the "Plan") has been developed and is currently being executed by
the Company. The Plan is directed and monitored by the Company's Information
Technology (IT) Steering Committee and is proceeding within the planned
timetable. The Plan addresses the Year 2000 risk presented by the following IT
and non-IT elements of the Company's operations:
Financial Systems
Over the past fifteen months, the Company has completed the replacement of
its software and systems in the normal course of business. The financial
system has been replaced with an Enterprise Reporting System that the
developer states is Year 2000 compliant.
Other Date-Sensitive Systems and Equipment
Nonfinancial systems used in the Company's manufacturing facilities are
currently being upgraded or replaced in connection with plant expansions
and/or ongoing equipment validation procedures in the ordinary course of
business. The upgrade or replacement of other nonfinancial systems and
equipment relating to distribution, voice and data telecommunication,
laboratory testing, and security and environmental control is substantially
complete. For the remaining elements, assessment and remediation measures,
if necessary, will be initiated during the second quarter of 1999. Other
date-sensitive equipment is scheduled to be assessed, and remediation
measures, if necessary, will be initiated during the second quarter of 1999.
Third-Party Relationships
The Company is highly dependent on internal and third-party computer systems
to process its daily transactions. The Company has commenced efforts to
determine the extent to which it may be impacted by Year 2000 issues of
third parties, including suppliers, customers, and service providers.
Contact with major customers and suppliers has been initiated. To date, the
Company is not aware of any non-Year 2000 compliant third-party customers,
suppliers, or service providers that would materially impact the Company's
results of operations, liquidity, or capital resources.
F-23
<PAGE> 63
JONES PHARMA INCORPORATED
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except share and per share amounts)
17. YEAR 2000 UPDATE (UNAUDITED) (CONTINUED)
However, the Company has no means of ensuring these entities will be
Year 2000-ready. Furthermore, the Company has no means of ensuring the
customers of its wholesale distributors (e.g., hospital buying groups,
hospitals, and pharmacies) will be Year 2000-ready. The inability of third
parties to complete their Year 2000 programs in a timely manner could
materially impact the Company. The assessment of risk related to
third-party relationships is expected to be completed during the second
quarter of 1999. Given the Company's reliance upon third-party
manufacturers for the supply of certain key products, the Company has made
arrangements to purchase 3 to 6 months supply of Brevital, Tapazole and
Cytomel in the fourth quarter of 1999.
The Company plans to test and validate identified financial systems, other
date-sensitive systems and equipment, and third-party communications for Year
2000 compliance. This testing will be initiated in the second quarter of 1999
and will be completed by December 31, 1999. Validation procedures will be
performed and managed by internal Company staff.
The costs associated with the Company's Year 2000 Plan have, for the most part,
been planned capital expenditures and budgeted internal staffing expenses. The
total capital expenditures related to these system upgrades and/or replacements
approximate $1.5 million and have been capitalized as incurred over the last
fifteen months. Additional costs to be incurred to complete the Plan are not
expected to be significant and will relate to the ongoing capital expenditures
and internal staffing described above.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failure could materially and adversely impact the Company's
results of operations, liquidity, and financial condition. Although the Company
has not yet developed a comprehensive contingency plan to address situations
that may result if the Company or any of the third parties upon which the
Company is dependent is unable to achieve Year 2000 readiness, a plan will be
completed by the fourth quarter of 1999 to address the most reasonably likely
worst-case scenario with respect to potential Year 2000 compliance failures.
Based on the Company's progress to date and timeline to complete the Year 2000
Plan, the Company does not foresee significant financial or operational risks
associated with its compliance at this time. However, these expectations are
subject to uncertainties including, but not limited to, the readiness of
third-party customers, suppliers and service providers, failure to identify all
susceptible systems, and the availability and cost of personnel necessary to
address any unforeseen problems.
F-24
<PAGE> 64
JONES PHARMA INCORPORATED
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS END OF PERIOD
-------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $1,196 $580 $(799) $977
=======================================================
Accumulated amortization of
intangibles $8,503 $3,665 $(8) $12,160
=======================================================
Year ended December 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $388 $891 $(83) $1,196
=======================================================
Accumulated amortization of
intangibles $5,175 $3,357 $(29) $8,503
=======================================================
Year ended December 31, 1996
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $187 $237 $(36) $388
=======================================================
Accumulated amortization of
intangibles $3,164 $2,011 $- $5,175
=======================================================
</TABLE>
F-25
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statements
(Form S-8, File No. 33-40184) pertaining to the 1982 Incentive Stock Option Plan
and the 1989 Incentive Stock Option Plan of Jones Pharma Incorporated (Form S-8,
File No. 333-15879) pertaining to the 1994 Formula Stock Option Plan for
Non-Management Directors and the 1994 Incentive Stock Plan of Jones Pharma
Incorporated of our report dated February 10, 1999, with respect to the
consolidated financial statements and schedule of Jones Pharma Incorporated
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JONES
PHARMA INCORPORATED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AS OF
DECEMBER 31, 1998, AND FOR THE TWELVE MONTH PERIOD THEN ENDED. THIS SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 122,745
<SECURITIES> 0
<RECEIVABLES> 20,046
<ALLOWANCES> 977
<INVENTORY> 7,492
<CURRENT-ASSETS> 153,977
<PP&E> 30,920
<DEPRECIATION> 7,228
<TOTAL-ASSETS> 248,778
<CURRENT-LIABILITIES> 11,722
<BONDS> 0
0
0
<COMMON> 1,152
<OTHER-SE> 231,518
<TOTAL-LIABILITY-AND-EQUITY> 248,778
<SALES> 103,414
<TOTAL-REVENUES> 103,414
<CGS> 23,839
<TOTAL-COSTS> 23,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (219)
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> 44,817
<INCOME-TAX> 21,250
<INCOME-CONTINUING> 23,567
<DISCONTINUED> 18,766
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,335
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.44
</TABLE>
