<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-15098
JONES PHARMA INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1229854
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1945 CRAIG ROAD, ST. LOUIS, MISSOURI 63146
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 576-6100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
----- -----
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF OCTOBER 26,
1999: 43,353,162
PAGE 1 OF 18
<PAGE> 2
JONES PHARMA INCORPORATED
INDEX
-----
<TABLE>
<CAPTION>
Part I - Financial Information PAGE
NUMBER
------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Income -
three months and nine months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Stockholders'
Equity - nine months ended September 30, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 11-17
Part II - Other Information
None
Signatures 18
</TABLE>
2
<PAGE> 3
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents....................................................... $122,745 $161,558
Accounts receivable, less allowance for doubtful accounts of
$977 at December 31, 1998 and $1,461 at September 30, 1999...................... 19,069 11,010
Inventories..................................................................... 7,492 11,570
Deferred income taxes........................................................... 3,342 3,342
Other........................................................................... 1,329 1,991
-------- --------
Total current assets................................................................... 153,977 189,471
Net property, plant and equipment...................................................... 23,692 23,588
Net intangible assets.................................................................. 66,326 63,667
Other assets........................................................................... 4,783 6,374
-------- --------
Total assets........................................................................... $248,778 $283,100
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................... $ 9,951 $ 12,171
Income taxes payable............................................................ 1,771 2,178
-------- --------
Total current liabilities.............................................................. 11,722 14,349
Deferred income taxes.................................................................. 4,386 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 authorized, 43,198,467 issued and
outstanding at December 31, 1998 and 43,346,111 at September 30, 1999........... 1,727 1,731
Contributed capital............................................................. 110,464 111,202
Retained earnings............................................................... 120,479 151,432
-------- --------
Total stockholders' equity............................................................. 232,670 264,365
-------- --------
Total liabilities and stockholders' equity............................................. $248,778 $283,100
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales from continuing operations ........................ $ 26,387 $ 34,538 $ 76,806 $ 95,300
Cost of sales ........................................... 6,025 6,731 18,069 18,471
-------- -------- -------- --------
Gross profit ............................................ 20,362 27,807 58,737 76,829
Selling, general and administrative expenses:
Selling ............................................. 4,302 4,852 12,641 14,352
General and administrative .......................... 2,084 2,699 6,753 7,954
Research and development ............................ - 529 - 1,202
Amortization ........................................ 871 936 2,793 2,672
Nonrecurring charge ................................. - - 10,500 -
-------- -------- -------- --------
Total selling, general and administrative expenses.. 7,257 9,016 32,687 26,180
-------- -------- -------- --------
Operating income from continuing operations ............. 13,105 18,791 26,050 50,649
Other income (expense):
Interest income ..................................... 1,284 1,864 3,502 4,936
Other ............................................... (1) (86) (32) (124)
-------- -------- -------- --------
Income before taxes from continuing operations .......... 14,388 20,569 29,520 55,461
Provision for income taxes .............................. 5,736 8,022 15,601 21,551
-------- -------- -------- --------
Income from continuing operations ....................... 8,652 12,547 13,919 33,910
Income from discontinued operations (net of taxes):
Gain on sale of discontinued operations ............. - - 17,079 -
Income from discontinued operations ................. - - 1,689 -
-------- -------- -------- --------
Income from discontinued operations ............... - - 18,768 -
-------- -------- -------- --------
Net income .............................................. $ 8,652 $ 12,547 $ 32,687 $ 33,910
======== ======== ======== ========
Earnings per share:
Basic: Continuing operations...................... $ .20 $ .29 $ .32 $ .78
Discontinued operations.................... - - .44 -
-------- -------- -------- --------
$ .20 $ .29 $ .76 $ .78
======== ======== ======== ========
Diluted: Continuing operations...................... $ .20 $ .28 $ .32 $ .76
Discontinued operations.................... - - .43 -
-------- -------- -------- --------
$ .20 $ .28 $ .75 $ .76
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30, 1998 and 1999
(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, 1997.......... - 28,647,300 $ - $ 1,146 $109,129 $ 81,451 $191,726
Three-for-two stock split
declared July 13, 1999................ - 14,323,651 - 573 (573) - -
Exercise of stock options............. - 156,000 - 6 1,343 - 1,349
Shares tendered in payment of
option price.......................... - (4,316) - - - - -
Net income............................ - - - - - 32,687 32,687
Cash dividend declared - common
stock ($.057 per share)............... - - - - - (2,443) (2,443)
------- ---------- ------- -------- -------- -------- --------
Balance at September 30, 1998......... - 43,122,635 $ - $ 1,725 $109,899 $111,695 $223,319
======= ========== ======= ======== ======== ======== ========
Balance at December 31, 1998.......... - 43,198,467 $ - $ 1,727 $110,464 $120,479 $232,670
Exercise of stock options............. - 162,396 - 6 682 - 688
Shares tendered in payment
of option exercise price.............. - (14,752) - - - - -
Amortization of unearned
compensation.......................... - - - - 54 - 54
Net income............................ - - - - - 33,910 33,910
Cash dividend declared - common
stock ($.068 per share)............... - - - - - (2,957) (2,957)
------- ---------- ------- -------- -------- -------- --------
Balance at September 30, 1999......... - 43,346,111 $ - $ 1,733 $111,200 $151,432 $264,365
======= ========== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... 32,687 33,910
Non-cash adjustments:
Depreciation and amortization................................................ 4,218 4,250
Provision for uncollectibles................................................. 342 484
Nonrecurring charge.......................................................... 10,500 -
Pretax gain on sale of discontinued operations............................... (30,616) -
Deferred income tax.......................................................... (3,163) -
Loss on asset sales.......................................................... - 172
Change in assets and liabilities:
Accounts receivable.......................................................... (491) 7,575
Inventories.................................................................. 508 (4,078)
Other assets................................................................. (3,685) (2,253)
Accounts payable and accrued expenses........................................ 5,525 2,220
Income taxes payable......................................................... (1,591) 407
-------- --------
Net cash from operating activities...................................... 14,234 42,687
-------- --------
Cash flows from (used for) investing activities:
Additions to property, plant and equipment....................................... (2,237) (1,605)
Proceeds from sale of discontinued operations........................... 55,000 -
-------- --------
Net cash from (used for) investing activities........................... 52,763 (1,605)
-------- --------
Cash flows from (used for) financing activities:
Payment of dividends............................................................. (2,440) (2,957)
Proceeds from exercise of stock options.......................................... 755 688
-------- --------
Net cash from (used for) financing activities................................ (1,685) (2,269)
-------- --------
Increase in cash and cash equivalents................................................. 65,312 38,813
Cash and cash equivalents, beginning of period........................................ 49,877 122,745
-------- --------
Cash and cash equivalents, end of period.............................................. $115,189 $161,558
======== ========
</TABLE>
See accompanying notes.
6
<PAGE> 7
JONES PHARMA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
(Dollars in thousands except share and per share amounts)
1. GENERAL
The unaudited interim financial information reflects all adjustments
(consisting of normal recurring accruals) which management considers
necessary for a fair presentation of the results of operations for such
periods and is subject to year-end adjustments. Certain footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted from the unaudited interim financial information as
permitted by rules and regulations of the Securities and Exchange
Commission. Management believes that the disclosures made are adequate to
make the information presented not misleading. The results for the interim
periods are not necessarily indicative of results for the full year. It is
suggested that these financial statements be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1998, included in the 1998 Annual Report.
2. COMMON STOCK SPLIT
On July 13, 1999, the Board of Directors declared a three-for-two stock
split effected in the form of a fifty percent stock dividend paid on August
6, 1999 to holders of record as of July 26, 1999. The accompanying
historical financial statements, including stock option, share, and per
share data have been retroactively adjusted to reflect the split.
7
<PAGE> 8
3. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the three months and nine months ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1999 1998 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 8,652 $ 12,547 $ 13,919 $ 33,910
Income from discontinued operations - - 18,768 -
----------- ----------- ----------- -----------
$ 8,652 $ 12,547 $ 32,687 $ 33,910
=========== =========== =========== ===========
Denominator for basic earnings per
share-weighted average shares 43,127,000 43,332,000 43,104,000 43,256,000
Effect of dilutive stock options 772,000 1,177,000 810,000 1,082,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 43,899,000 44,509,000 43,914,000 44,338,000
=========== =========== =========== ===========
Earnings per share:
Basic: Continuing operations $ .20 $ .29 $ .32 $ .78
Discontinued operations - - .44 -
----------- ----------- ----------- -----------
$ .20 $ .29 $ .76 $ .78
=========== =========== =========== ===========
Diluted: Continuing operations $ .20 $ .28 $ .32 $ .76
Discontinued operations - - .43 -
----------- ----------- ------------ -----------
$ .20 $ .28 $ .75 $ .76
=========== =========== ============ ===========
</TABLE>
4. INVENTORIES
Inventories are valued at the lower of cost on a first-in, first-out basis or
market. Inventories are comprised as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(Unaudited)
------------ -------------
<S> <C> <C>
Raw material......................................................... $ 2,239 $ 2,772
Work-in-process...................................................... 506 1,115
Finished goods....................................................... 4,747 7,683
----------- ------------
$ 7,492 $ 11,570
=========== ============
</TABLE>
8
<PAGE> 9
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(Unaudited)
------------ -------------
<S> <C> <C>
Land................................................................. $ 2,068 $ 2,068
Building and improvements............................................ 11,608 10,775
Equipment and furniture.............................................. 16,526 17,516
Automobiles.......................................................... 590 656
Projects in process.................................................. 128 909
------------ -------------
30,920 31,924
Less accumulated depreciation and amortization....................... (7,228) (8,336)
------------ -------------
$ 23,692 $ 23,588
============ =============
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(Unaudited)
------------ -------------
<S> <C> <C>
Distribution systems, trademarks and licenses........................ $ 66,805 $ 66,577
Restrictive covenants and other intangibles.......................... 7,647 7,647
Goodwill............................................................. 4,034 4,034
------------ -------------
78,486 78,258
Less accumulated amortization........................................ (12,160) (14,591)
------------ -------------
$ 66,326 $ 63,667
============ =============
</TABLE>
7. INCOME TAXES
The provisions for income taxes for the three month and nine month periods
ended September 30, 1999 are based on estimated effective annual income tax
rates of approximately 39.0%. For the three month period ended September
30, 1998, the provision for income taxes is based on an estimated effective
income tax rate of approximately 39.0%. For the nine month period ended
September 30, 1998, the provision for income taxes reflects the
nondeductibility of the $10,500 nonrecurring charge. Excluding the effect of
the nonrecurring charge, the estimated effective income tax rate for the nine
months ended September 30, 1998 approximates 39.0%.
9
<PAGE> 10
8. CONTINGENCIES
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 a new drug application (NDA). After August 14, 2000, any
levothyroxine sodium product marketed without an approved NDA will be subject
to regulatory action. Levoxyl, with total sales of approximately $21,000 for
the nine months ended September 30 1998 and $26,000 for the nine months ended
September 30, 1999, was marketed prior to the date of the FDA notice and
therefore will continue to be eligible for marketing until August 14, 2000.
The Company plans to dedicate significant resources to this NDA process
during 1999 and 2000 and expects to incur costs in excess of $2,000 to secure
an approved NDA for Levoxyl.
The Company currently carries product liability coverage of $20,000 per
occurrence and $20,000 in the aggregate on a "claims made" basis. In
addition to this policy, the Company carries a $10,000 umbrella policy.
There is no assurance that the Company's present insurance will cover any
potential claims that may be asserted in the future. In addition, the
Company is subject to legal proceedings and claims, which arise in the
ordinary course of business.
The Company is a defendant in a number of lawsuits involving the manufacture
and sale of dexfenfluramine, fenfluramine, and phentermine (collectively,
"Fen/Phen"). The Company distributed Obenix, its branded phentermine product;
however, the Company did not and does not manufacture Obenix or other
Fen/Phen combinations. It is too early to determine what, if any, liability
the Company may have with respect to the claims set forth in these lawsuits.
Management of the Company believes that the outcome of these lawsuits will
not have a material adverse effect on the Company's business, financial
condition, and results of operations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Statements contained in this discussion which are not historical facts or
information are "forward-looking statements" as that term is used in the
Private Securities Litigation Reform Act of 1995. Words such as "believe,"
"expect," "intend," "will," "should" and other expressions that indicate
future events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties which could
cause the outcome to be materially different than stated. Such risks and
uncertainties include both general economic risks and product risks which
are discussed more fully in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The Company cautions that any
forward-looking statement reflects only the belief of the Company or its
management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove to be inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
********************************************
The following table sets forth, for the interim periods indicated, the
percentages which certain components of the Consolidated Statements of
Income bear to product net sales and the percentage change of such components
(based on aggregate dollars) as compared to the prior year.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
AGGREGATE AGGREGATE
THREE MONTHS ENDED DOLLAR NINE MONTHS ENDED DOLLAR
September 30, AMOUNT September 30, AMOUNT
------------------ ------ ----------------- ------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sales from continuing operations 100.0% 100.0% 30.9% 100.0% 100.0% 24.1%
Cost of sales 22.8 19.5 (11.7) 23.5 19.4 (2.2)
----- ----- ----- ----- ----- -----
Gross profit 77.2 80.5 36.6 76.5 80.6 30.8
Selling, general and
administrative expenses:
Selling 16.3 14.1 12.8 16.5 15.1 13.5
General and administrative 7.9 7.8 29.5 8.8 8.3 17.8
Research and development - 1.5 N/A - 1.3 N/A
Amortization 3.3 2.7 7.5 3.6 2.8 (4.3)
Nonrecurring Charge - - N/A 13.7 - N/A
----- ----- ----- ----- ----- -----
Total selling, general and
administrative expenses 27.5 26.1 24.2 42.6 27.5 18.0*
----- ----- ----- ----- ----- -----
Operating income from
continuing operations 49.7 54.4 43.4 33.9 53.1 38.6*
Interest income 4.9 5.3 45.2 4.6 5.2 40.9
Other income (expense) - (0.2) N/A - (0.1) N/A
----- ----- ----- ----- ----- -----
Income before taxes from
continuing operations 54.6 59.5 43.0 38.5 58.2 38.6*
Provision for income taxes 21.8 23.2 39.9 20.3 22.6 38.1*
----- ----- ----- ----- ----- -----
Income from continuing operations 32.8 36.3 45.0 18.2 35.6 38.9*
Income from discontinued
operations (net of tax) - - N/A 24.4 - N/A
----- ----- ----- ----- ----- -----
Net income 32.8% 36.3% N/A 42.6% 35.6% N/A
===== ===== ===== ===== ===== =====
</TABLE>
*Excludes effect of $10,500 nonrecurring charge in 1998.
11
<PAGE> 12
SALES FROM CONTINUING OPERATIONS
QUARTER ENDED SEPTEMBER 30:
Sales from continuing operations for the three months ended September 30, 1999
increased 30.9% to $34.5 million from $26.4 million for the three months ended
September 30, 1998.
Critical Care product sales were up approximately 19.0% from $10.2 million for
the three months ended September 30, 1998 to $12.1 million for the three months
ended September 30, 1999. Substantially all of this increase was attributable to
Thrombin-JMI with sales of $7.8 million in the third quarter of 1999 compared to
$5.4 million in 1998. Despite a 28% Thrombin-JMI unit volume decline, sales
increased due to the renegotiation of a majority of the Company's hospital
buying group contracts during the first quarter of 1999 resulting in a
significant reduction in Thrombin-JMI sales discounts in the third quarter of
1999. The Company believes the increase in the Thrombin-JMI net selling price
per unit will continue to result in an increase in total net sales, however,
there can be no assurance that the renegotiated contract pricing will not
negatively impact sales volume or result in volatility in net sales in future
quarters.
Endocrine product sales increased 44.5% to $20.2 million for the three months
ended September 30, 1999 from $14.0 million for the same period of 1998. Sales
of Levoxyl, the Company's leading Endocrine product, were up 61.2% from $6.5
million in the third quarter of 1998 to $10.4 million in the third quarter of
1999 with a 13.2% increase in unit volume. Industry market share data indicate
that total Levoxyl prescriptions dispensed have increased over 30% during the
three months ended September 30, 1999 as compared to the same period of 1998.
The Company's reported growth in net sales of Levoxyl may differ from industry
market share data based upon the buying patterns and inventory levels maintained
by the Company's wholesale distributors and the level of sales discounts offered
by the Company. Tapazole sales increased 34.1% from $6.1 million for the three
months ended September 30, 1998 to $8.2 million for the three months ended
September 30, 1999 and Cytomel sales were up 62.2% from $1.4 million in the
third quarter of 1998 to $2.3 million for the same period of 1999.
Veterinary product sales were relatively unchanged at $2.2 million in the third
quarters of both 1998 and 1999.
NINE MONTHS ENDED SEPTEMBER 30:
Sales from continuing operations for the nine months ended September 30, 1999
increased 24.1% from $76.8 million in 1998 to $95.3 million in 1999.
Year-to-date Critical Care product sales increased 39.6% from $26.2 million in
1998 to $36.6 million in 1999. The majority of this increase was due to
Thrombin-JMI with sales of $12.4 million for the nine months ended September 30,
1998 compared to $22.4 million for the same period of 1999. The increase in
Thrombin-JMI results from the renegotiated contract pricing, described above,
offset slightly by an 8% unit volume decrease.
Endocrine product sales increased 18.0% from $43.7 million for the nine months
ended September 30, 1998 to $51.5 million for the same period of 1999. Year-to
date Levoxyl sales increased 23.8% from $21.6 million in 1998 to $26.8 million
in 1999 with an 11% increase in unit volume. Tapazole sales increased 10.1% from
$17.8 million for the nine months ended September 30, 1998 to $19.6 million for
the nine months ended September 30, 1999 and Cytomel sales were up 62.4% from
$4.6 million for the nine months ended September 30, 1998 to $7.4 million for
the same period of 1999.
Year-to-date sales of veterinary products increased 4.3% from $6.9 million in
1998 to $7.2 million in 1999.
12
<PAGE> 13
GROSS PROFIT
Gross profit during the quarter ended September 30, 1999 increased 36.6% or $7.4
million to $27.8 million from $20.4 million for the same period of 1998. As a
percentage of sales from continuing operations, margins increased from 77.2% in
the third quarter of 1998 to 80.5% in the third quarter of 1999. The increase is
primarily due to the reduction in sales discounts associated with the
renegotiation of contracts relating to Thrombin-JMI pricing, discussed above and
more aggressive Levoxyl contract pricing.
Gross profit for the nine months ended September 30, 1999 increased 30.8% or
$18.1 million to $76.8 million from $58.7 million in 1998. As a percentage of
sales from continuing operations, margins increased from 76.5% in 1998 to 80.6%
in 1999. The year-over-year improvement in gross margin primarily resulted from
the Thrombin-JMI sales discount reduction, discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses increased 12.8% or $.6 million to $4.9 million in the third
quarter of 1999 from $4.3 million in 1998 due to a net increase of approximately
4 field sales representatives, normal salary increases and increases in sales
commissions. As a percentage of sales from continuing operations, selling
expenses declined from 16.3% in the third quarter of 1998 to 14.1% in 1999.
For the nine months ended September 30, 1999, selling expenses increased 13.5%
or $1.7 million to $14.4 million. The increase primarily resulted from a net
increase of approximately ten field sales representatives, normal salary
increases, increases in sales commissions, and the costs incurred in the first
quarter of 1999 related to the Company's first annual sales meeting. As a
percentage of sales from continuing operations, selling expenses declined from
16.5% for the nine months ended September 30, 1998 to 15.1% for the same period
of 1999.
General and administrative expenses increased $.6 million from $2.1 million in
the third quarter of 1998 to $2.7 million in the third quarter of 1999. As a
percentage of sales from continuing operations, general and administrative
expenses declined from 7.9% for the quarter ended September 30, 1998 to 7.8% in
1999. For the nine months ended September 30, 1999, general and administrative
expenses increased $1.2 million to $8.0 million from $6.8 million in 1998. As a
percentage of sales from continuing operations, general and administrative
expenses for the nine months ended decreased from 8.8% in 1998 to 8.3% in 1999.
The increases in aggregate dollars in 1999 over 1998 resulted from increases in
license fees, bonuses, and depreciation.
Research and development expenses for the three and nine months ended September
30, 1999 of $.5 million and $1.2 million, respectively, primarily relate to the
costs associated with the Levoxyl NDA.
The nonrecurring charge of $10.5 million in 1998 related to the write-down of
goodwill associated with certain lower-margin pharmaceutical products.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income from continuing operations increased $5.7 million or 43.4%
during the third quarter of 1999 as compared to the third quarter of 1998.
Excluding the effect of the $10.5 million nonrecurring charge in 1998, the
year-to-date operating income from continuing operations increased $14.1 million
or 38.6% in 1999 over the same period of 1998.
13
<PAGE> 14
INTEREST INCOME
Interest income increased during the three months ended September 30, 1999 as
compared to the same period of 1998 due to positive cash flow from operations.
Interest income increased during the nine months ended September 30, 1999 as
compared to the same period of 1998 due to positive cash flow from operations
and the additional invested cash balances generated from the $55 million of
proceeds from the sale of the Company's Nutritional Business on April 30, 1998.
INCOME TAXES
The provisions for income taxes for the three month and nine month periods ended
September 30, 1999 are based on estimated effective annual income tax rates of
approximately 39.0%. For the three month period ended September 30, 1998, the
estimated effective income tax rate approximated 39.0%. For the nine month
period ended September 30, 1998, the provision for income taxes reflected the
nondeductibility of the $10.5 million nonrecurring charge. Excluding the effect
of the nonrecurring charge in 1998, the estimated effective income tax rate
approximates 39.0%.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for the third quarter of 1999 increased $3.9
million to $12.5 million. For the nine months ended September 30, 1999, income
from continuing operations increased $9.5 million to $33.9 million, excluding
the effect of the nonrecurring charge in 1998.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 1998 includes an approximate $17 million
(net of tax) gain from the sale of the Company's Nutritional Business on April
30, 1998. In addition, income from discontinued operations includes the
after-tax operating results of the Company's discontinued businesses prior to
the sale of the Nutritional Business on April 30, 1998.
EARNINGS PER SHARE
Diluted earnings per share from continuing operations totaled $.28 and $.76 for
the quarter and nine months ended September 30, 1999 as compared to $.20 and
$.56 for the same periods of 1998, excluding the $10.5 million after-tax
nonrecurring charge. The earnings per share increases represent net income
growth computed on relatively flat average shares outstanding.
BALANCE SHEET INFORMATION
The Company's current ratio increased from 13.1:1 at December 31, 1998 to 13.2:1
at September 30, 1999 and working capital increased to $175.1 million at
September 30, 1999 from $142.3 million at December 31, 1998. The majority of the
increase in working capital results from the increase in cash generated from
positive operating cash flow.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has financed its operations primarily through cash
flow from operations, public and private sales of equity securities and
borrowings under revolving credit facilities. At September 30, 1999 and December
31, 1998, the Company had cash and cash equivalents of $161.6 million and $122.7
million, respectively, and no outstanding financing debt. 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 $34.3 million to $283.1 million at September 30, 1999
from $248.8 million at December 31, 1998 primarily due to the increase in cash
discussed above. Total liabilities increased $2.6 million to $18.7 million at
September 30, 1999 from $16.1 million at December 31, 1998 primarily due to
increases in accrued research and development expenses, accrued license fees and
income taxes payable.
Accounts receivable decreased to $11.0 million at September 30, 1999 from $19.1
million at December 31, 1998 due to higher sales levels in the month of December
1998 vs. the month of September 1999, and due to the Company's concentrated
effort on improving collections. In days outstanding, accounts receivable
decreased from 60 days at December 31, 1998 to 44 days at September 30, 1999.
Inventories increased to $11.6 million at September 30, 1999 compared to $7.5
million at December 31, 1998 due to planned quantity build-ups in order to meet
sales growth demand.
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.
YEAR 2000 UPDATE
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.
15
<PAGE> 16
Specifically, the Plan addresses Year 2000 issues in the following areas:
Information Technology Infrastructure
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. Assessment of all other hardware and software as well as
remediation and testing has been completed.
Business Infrastructure
The Company's review in this area includes such things as security,
utilities, environmental control systems, telephones, facsimile machines,
manufacturing, laboratory and shipping equipment. Efforts in this area,
including compliance validation with vendors, remediation and testing, are
substantially completed.
External Interfaces
This area of review includes all Company interfaces with external service
agencies such as purchased information sources, payroll processing,
benefits processing, insurance and investments, health claims and banking.
The Company is substantially complete with its efforts to secure third
party compliance statements in assessing the compliance status of its
external interfaces.
Supplier and Customer Readiness
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, and customers. Written
assurances in the affirmative have been received from the Company's key
customers and suppliers as to their readiness to deal with any Year 2000
issues. To date, the Company is not aware of any non-Year 2000 compliant
third-party customers or suppliers 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 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. 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 month supplies of Brevital, Tapazole and
Cytomel in the fourth quarter of 1999.
Contingency Plan
Contingency plans for the Company have been developed to minimize business
risks in case of local and/or regional Year 2000-related failures. The
Company has developed contingency plans for each of its manufacturing and
distribution facilities as well as the corporate operation.
16
<PAGE> 17
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. 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. 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.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JONES PHARMA INCORPORATED
Date: November 8, 1999 By:/s/ Dennis M. Jones
---------------------------- --------------------------------------
Dennis M. Jones, President
Date: November 8, 1999 By:/s/ Judith A. Jones
---------------------------- --------------------------------------
Judith A. Jones
Executive Vice President and Principal
Financial and Accounting Officer
18
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