<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 MARCH 31, 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 APRIL 29, 1999:
28,815,119
PAGE 1 OF 17
<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 March 31, 1999 3
Condensed Consolidated Statements of Income -
three months ended March 31, 1998 and 1999 4
Condensed Consolidated Statements of Stockholders'
Equity - three months ended March 31, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 10 - 15
Part II - Other Information
None 16
Signatures 17
</TABLE>
2
<PAGE> 3
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 122,745 $ 139,895
Accounts receivable, less allowance for doubtful accounts of
$977 at December 31, 1998 and $1,053 at March 31, 1999............................. 19,069 16,995
Inventories........................................................................ 7,492 8,507
Deferred income taxes.............................................................. 3,342 3,342
Other.............................................................................. 1,329 1,636
--------- ---------
Total current assets...................................................................... 153,977 170,375
Net property, plant and equipment......................................................... 23,692 23,341
Net intangible assets..................................................................... 66,326 65,470
Other assets.............................................................................. 4,783 5,471
--------- ---------
Total assets.............................................................................. $ 248,778 $ 264,657
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................................. $ 9,951 $ 10,759
Income taxes payable............................................................... 1,771 7,841
--------- ---------
Total current liabilities................................................................. 11,722 18,600
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, 28,798,978 issued and
outstanding at December 31, 1998 and 28,813,769 at March 31, 1999.................. 1,152 1,153
Contributed capital................................................................ 111,039 111,127
Retained earnings.................................................................. 120,479 129,391
--------- ---------
Total stockholders' equity................................................................ 232,670 241,671
--------- ---------
Total liabilities and stockholders' equity................................................ $ 248,778 $ 264,657
========= =========
</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
March 31,
1998 1999
---- ----
<S> <C> <C>
Sales from continuing operations............................................. $ 23,743 $ 29,477
Cost of sales................................................................ 5,672 6,584
---------- ----------
Gross profit................................................................. 18,071 22,893
Selling, general and administrative expenses:
Selling................................................................. 4,100 4,774
General and administrative.............................................. 2,035 2,527
Research and development................................................ - 239
Amortization............................................................ 977 869
---------- ----------
Total selling, general and administrative expenses................. 7,112 8,409
---------- ----------
Operating income from continuing operations.................................. 10,959 14,484
Other income (expense):
Interest income......................................................... 785 1,396
Other................................................................... (28) 17
---------- ----------
Total other income................................................. 757 1,413
Income before taxes from continuing operations............................... 11,716 15,897
Provision for income taxes................................................... 4,451 6,121
---------- ----------
Income from continuing operations............................................ 7,265 9,776
Income from discontinued operations (net of taxes)........................... 1,218 -
---------- ----------
Net income................................................................... $ 8,483 $ 9,776
========== ==========
Earnings per share:
Basic: Continuing operations......................................... $ .25 $ .34
Discontinued operations....................................... .05 -
---------- ----------
$ .30 $ .34
========== ==========
Diluted: Continuing operations........................................ $ .25 $ .33
Discontinued operations...................................... .04 -
---------- ----------
$ .29 $ .33
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Months Ended March 31, 1998 and 1999
(In thousands of dollars except 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
Exercise of stock options..... - 62,375 - 3 201 - 204
Shares tendered in payment
of option exercise price...... - (2,877) - - - - -
Net income.................... - - - - - 8,483 8,483
Cash dividend declared - common
stock ($.025 per share)....... - - - - - (718) (718)
-------- ---------- -------- -------- --------- ---------- ---------
Balance at March 31, 1998..... - 28,706,798 $ - $ 1,149 $ 109,330 $ 89,216 $ 199,695
======== ========== ======== ======== ========= ========== =========
Balance at December 31, 1998.. - 28,798,978 $ - $ 1,152 $ 111,039 $ 120,479 $ 232,670
Exercise of stock options..... - 15,075 - 1 88 - 89
Shares tendered in payment of
option price.................. - ( 284) - - - - -
Net income.................... - - - - - 9,776 9,776
Cash dividend declared - common
stock ($.030 per share)....... - - - - - (864) (864)
-------- ---------- -------- -------- --------- ---------- ---------
Balance at March 31, 1999..... - 28,813,769 $ - $ 1,153 $ 111,127 $ 129,391 $ 241,671
======== ========== ======== ======== ========= ========== =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
JONES PHARMA INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
Cash flows from operating activities: 1998 1999
---- ----
<S> <C> <C>
Net income...................................................................... $ 8,483 $ 9,776
Non-cash adjustments:
Depreciation and amortization.............................................. 1,439 1,344
Provision for uncollectibles............................................... (23) 76
Change in assets and liabilities:
Accounts receivable........................................................ (503) 1,998
Inventories................................................................ (92) (1,015)
Other assets............................................................... (738) (995)
Accounts payable and accrued expenses...................................... 1,936 808
Income taxes payable....................................................... 4,695 6,070
Discontinued operations - non cash charges and working capital............. 2,107 -
--------- --------
Net cash from operating activities.................................... 17,304 18,062
--------- --------
Cash flows used for investing activities:
Proceeds from sale of assets............................................... 3 -
Additions to property, plant and equipment................................. (440) (137)
Investing activities - discontinued operations............................. (42) -
--------- --------
Net cash used for investing activities................................ (479) (137)
Cash flows used for financing activities:
Payment of dividends....................................................... (718) (864)
Proceeds from exercise of stock options.................................... 204 89
--------- --------
Net cash used for financing activities................................ (514) (775)
--------- --------
Increase in cash and cash equivalents........................................... 16,311 17,150
Cash and cash equivalents, beginning of period.................................. 49,877 122,745
--------- --------
Cash and cash equivalents, end of period........................................ $ 66,188 $139,895
========= ========
</TABLE>
See accompanying notes.
6
<PAGE> 7
JONES PHARMA INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1999
---- ----
(Unaudited)
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 7,265 $ 9,776
Income from discontinued operations 1,218 -
----------- -----------
$ 8,483 $ 9,776
=========== ===========
Denominator for basic earnings per
share-weighted average shares 28,683,106 28,808,592
Effect of dilutive stock options 830,288 663,505
----------- -----------
Denominator for diluted earnings per share 29,513,394 29,472,097
========== ==========
Earning per share:
Basic: Continuing operations $ .25 $ .34
Discontinued operations .05 -
----------- -----------
$ .30 $ .34
=========== ===========
Diluted: Continuing operations $ .25 $ .33
Discontinued operations .04 -
----------- -----------
$ .29 $ .33
=========== ===========
</TABLE>
7
<PAGE> 8
3. INVENTORIES
Inventories are valued at the lower of cost on a first-in, first-out basis or
market.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(Unaudited)
---------- -----------
<S> <C> <C>
Raw material......................................................... $ 2,239 $ 2,265
Work-in-process...................................................... 506 835
Finished goods....................................................... 4,747 5,407
---------- -----------
$ 7,492 $ 8,507
========== ===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment include the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(Unaudited)
----------- -----------
<S> <C> <C>
Land................................................................. $ 2,068 $ 2,068
Building and improvements............................................ 11,608 11,617
Equipment and furniture.............................................. 16,526 16,598
Automobiles.......................................................... 590 590
Projects in process.................................................. 128 171
----------- ----------
30,920 31,044
Less accumulated depreciation........................................ 7,228 7,703
----------- ----------
$ 23,692 $ 23,341
=========== ==========
</TABLE>
8
<PAGE> 9
5. INTANGIBLE ASSETS
Intangible assets include the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(Unaudited)
----------- -----------
<S> <C> <C>
Distribution systems, trademarks and licenses....................... $ 66,805 $ 66,805
Restrictive covenants and other intangibles......................... 7,647 7,647
Goodwill............................................................ 4,034 4,034
-------------- --------------
78,486 78,486
Less accumulated amortization....................................... 12,160 13,016
-------------- --------------
$ 66,326 $ 65,470
============== ==============
</TABLE>
6. CONTINGENCIES
The Company carries product liability coverage of $20,000 per
occurrence and $20,000 in the aggregate on a "claims made" basis and
carries 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 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 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.
9
<PAGE> 10
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion contains forward-looking statements that involve risks
and uncertainties as further discussed in the Company's 1998 Annual Report filed
on Form 10K. The Company's actual results in future periods may differ
significantly from the results discussed in or anticipated by such
forward-looking statements.
********************************************
The following table sets forth, for the two interim periods indicated, the
percentages which certain components of the Consolidated Statements of Income
bear to product net sales and the percentage change of such components (based on
aggregate dollars) as compared to the prior year.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
AGGREGATE
THREE MONTHS ENDED DOLLAR
MARCH 31, AMOUNT
--------- ------
1998 1999
---- ----
<S> <C> <C> <C>
Sales from continuing operations 100.0% 100.0% 24.2%
Cost of sales 23.9 22.3 16.1
------ ------ ------
Gross profit 76.1 77.7 26.7
Selling, general and administrative expenses:
Selling 17.3 16.2 16.4
General and administrative 8.6 8.6 24.2
Research and development - 0.8 N/A
Amortization 4.1 2.9 (11.1)
------ ------ ------
Total selling, general and
administrative expenses 30.0 28.5 18.2
------ ------ ------
Operating income from continuing operations 46.1 49.2 32.2
Interest income 3.3 4.7 77.8
Other income (expense) (0.1) - -
------ ------ ------
Income before taxes from continuing operations 49.3 53.9 35.7
Provision for income taxes 18.8 20.7 37.5
------ ------ ------
Income from continuing operations 30.5 33.2 34.6
Income from discontinued operations (net of tax) 5.1 - N/A
------ ------ ------
Net income 35.6% 33.2% 15.2%
====== ====== ======
</TABLE>
10
<PAGE> 11
SALES FROM CONTINUING OPERATIONS
Sales from continuing operations for the three months ended March 31,
1999 increased 24.2% to $29.5 million from $23.7 million for the three
months ended March 31, 1998.
Sales of Critical Care products, including Thrombin-JMI, Brevital, and
Triostat, were up 35% to $12.5 million in the first quarter of 1999
versus $9.3 million in the first quarter of 1998. Thrombin-JMI
increased approximately 53% to $7.2 million, Brevital increased
approximately 12% to $3.0 million, and Triostat doubled from $.7
million in 1998 to $1.4 million in 1999. A portion of the increase in
sales of Thrombin-JMI relates to increased hospital demand in
anticipation of the Company's contract price increases effected at
various dates throughout the first quarter of 1999. The Company
believes the renegotiation of contract pricing will result in a
reduction in sales discounts, thereby increasing net sales in 1999,
however, there can be no assurance that the renegotiated contract
pricing will not negatively impact sales volume or result in quarterly
volatility in net sales in 1999.
Sales of Endocrine products, including Levoxyl, Tapazole, and Cytomel
were up 16% to $14.3 million in the first quarter of 1999 versus $12.2
million in the same period of 1998. Levoxyl increased approximately 14%
to $7.3 million, Tapazole increased 20% to $5.7 million, and Cytomel
increased 57% to $1.6 million.
Sales of Veterinarian products, including Soloxine and Tussigon were up
approximately 21% to $2.7 million in the first quarter of 1999 versus
$2.2 million in the first quarter of 1998.
GROSS PROFIT
Gross profit during the first quarter of 1999 increased 26.7% or $4.8
million to $22.9 million from $18.1 million in 1998. As a percentage of
sales from continuing operations, margins increased from 76.1% in 1998
to 77.7% in 1999. The increase results from increased sales volume of
the higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses increased 16.4% or $.7 million to $4.8 million for the
three months ended March 31, 1999 from $4.1 million in 1998 due to an
increase of 14 additional sales associates, approximately $.2 million
of costs associated with the Company's first annual national sales
meeting, and normal salary increases. As a percentage of sales from
continuing operations, selling expenses were down from 17.3% in the
first quarter of 1998 to 16.2% in the first quarter of 1999.
General and administrative expenses increased from $2.0 million in the
first quarter of 1998 to $2.5 million in the first quarter of 1999 due
to an increase in the accrual of anticipated 1999 year-end bonuses, an
increase in the accrual of user license fees associated with certain
products, and normal salary increases. As a percentage of sales from
continuing operations, general and administrative expenses remained
flat at 8.6% in both 1999 and 1998.
Research and development expenses in the first quarter of 1999 totaled
$0.2 million and relate to the Levoxyl NDA costs incurred in connection
with the FDA Federal Register Notice. Such costs will continue to be
incurred during 1999 and 2000 and are expected to exceed $2 million. A
portion of the NDA costs to be incurred will include facility
improvements and equipment that will be eligible for capitalization.
11
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
Amortization expenses associated with intangible assets decreased 11.1%
to $.9 million in the first quarter of 1999 from $1.0 million in the
first quarter of 1998 due the reduction in amortization associated with
the $10.5 million one-time write-off of intangible assets in the second
quarter of 1998. As a percentage of sales from continuing operations,
amortization expense decreased from 4.1% in 1998 to 2.9% in 1999.
OPERATING INCOME FROM CONTINUING OPERATIONS
Operating income from continuing operations during the first quarter of
1999 increased 32.2% or $3.5 million to $14.5 million from $11.0
million in 1998, and increased as a percentage of sales from continuing
operations to 49.2% in 1999 from 46.1% in 1998, as a result of improved
gross margins and lower operating expenses as a percentage of sales.
OTHER INCOME (EXPENSE)
Total other income increased $.7 million in the first quarter of 1999
compared to the first quarter of 1998 due primarily to the increase in
interest income from $.8 million in the first quarter of 1998 to $1.4
million in the first quarter of 1999. The increase in interest income
results from higher invested cash balances in 1999.
INCOME TAXES
The provision for income taxes in the first quarter of 1999 increased
slightly to 38.5% of pre-tax income as compared to 38.0% in the first
quarter of 1998.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased 34.6% or $2.5 million to
$9.8 million in the first quarter of 1999 from $7.3 million in the
first quarter of 1998 and increased as a percentage of sales from
continuing operations to 33.2% in 1999 from 30.5% in 1998.
INCOME FROM DISCONTINUED OPERATIONS
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
Corporation on April 30, 1998.
NET INCOME
Net income increased 15.2% or $1.3 million to $9.8 million in 1999 from
$8.5 million in 1998 and as a percentage of sales from continuing
operations, decreased to 33.2% in 1999 from 35.6% in 1998 due to the
decrease in income from discontinued operations.
EARNINGS PER SHARE
Diluted earnings per share from continuing operations increased 32.0%
to $.33 for the quarter ended March 31, 1999 as compared to $.25 for
the quarter ended March 31, 1998. The diluted weighted average shares
outstanding remained relatively flat at 29,472,097 during the first
quarter of 1999 as compared to 29,513,394 in the first quarter of 1998.
12
<PAGE> 13
FINANCIAL CONDITION
BALANCE SHEET INFORMATION
Working capital increased to $151.8 million as of March 31, 1999 from
$142.3 million as of December 31, 1998 primarily due to the increase in
cash of $17.2 million offset by the increase in current liabilities of
$6.9 million. The Company's current ratio decreased from 13.1:1 as of
December 31, 1998 to 9.2:1 as of March 31, 1999, primarily due to the
increase in income taxes payable at March 31, 1999.
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 March
31, 1999 and December 31, 1998, the Company had cash and cash
equivalents of $139.9 million and $122.7 million, respectively. The net
cash generated from operating activities of $18.1 million in the first
quarter of 1999 was primarily used to fund the payment of common stock
dividends of $.9 million, and increase the cash and cash equivalents
balance by $17.2 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 $15.9 million to $264.7 million at March 31,
1999 from $248.8 million at December 31, 1998 primarily due to the
increase in cash generated from operations. Total liabilities increased
$6.9 million to $18.6 million at March 31, 1999 from $11.7 million at
December 31, 1998 primarily due to the increase in income taxes
payable.
Inventories increased approximately $1.0 million to $8.5 million at
March 31, 1999 compared to $7.5 million at December 31, 1998 due to
planned increases in Levoxyl and JMI-Thrombin. Accounts receivable
decreased to $17.0 million at March 31, 1999 from $19.1 million at
December 31, 1998 due to a higher level of sales in the month of
December 1998 as compared to the month of March 1999. In days
outstanding, accounts receivable decreased from 60 days at December 31,
1998 to 55 days at March 31, 1999.
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.
13
<PAGE> 14
YEAR 2000 UPDATE (CONTINUED)
Financial Systems
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 is currently underway and remediation measures, if
necessary, will begin 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 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 month supplies 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. 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
14
<PAGE> 15
YEAR 2000 UPDATE (CONTINUED)
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.
15
<PAGE> 16
PART II - OTHER INFORMATION
None.
16
<PAGE> 17
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: May 13, 1999 By: /s/ Dennis M. Jones
-------------- -------------------------------------------
Dennis M. Jones, President
Date: May 13, 1999 By: /s/ Judith A. Jones
-------------- -------------------------------------------
Judith A. Jones
Executive Vice President and
Principal Financial and Accounting Officer
17
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