-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sthc4+II7IQg2uA+igZMCG6Gd4GHEueaC1xlEPP6O1Yick+Rh3/b6PmvzTLr5ImE 6tErDjTLuRXtB1ZO/Eknfw== 0000950124-97-001477.txt : 19970314 0000950124-97-001477.hdr.sgml : 19970314 ACCESSION NUMBER: 0000950124-97-001477 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JONES MEDICAL INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000793613 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 431229854 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15098 FILM NUMBER: 97555844 BUSINESS ADDRESS: STREET 1: P.O. BOX 46903 STREET 2: 1945 CRAIG RD CITY: ST LOUIS STATE: MO ZIP: 63146 BUSINESS PHONE: 3145766100 MAIL ADDRESS: STREET 1: 1945 CRAIG ROAD CITY: ST. LOUIS STATE: MO ZIP: 63146 10-K 1 10-K DATED DEC. 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 [ ] 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 MEDICAL INDUSTRIES, INC. (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, MO 63146 (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 Each Exchange on which Registered ------------------- ----------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.04 par value ---------------------------- (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 ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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 stock held by non-affiliates of the registrant as of March 3, 1997, is approximately $690.0 million. Number of shares outstanding of registrant's Common Stock as of March 3, 1997: 28,569,651. The following documents are incorporated by reference in Part III hereof: None 2 INTRODUCTORY NOTES All historical financial information appearing in this report has been restated for all prior periods to reflect (i) a three for two split of the Company's Common Stock effective March 1, 1996, and a second three for two split of the Company's Common Stock effective June 10, 1996, and (ii) the acquisition on August 30, 1996, of Galen Drugs of Florida, Inc. and its principal operating subsidiary (the "Daniels Acquisition") in a transaction treated as a "pooling of interests" for accounting and reporting purposes. As a "pooling of interests" transaction, the operations acquired as a result of the Daniels Acquisition are deemed to have been owned and conducted by the Company for all prior periods. Tapazole(R), Levoxyl(R), Thrombin-JMI(TM), Thrombinar(R), Brevital(R)Sodium, Bronson(TM), Bronson Pharmaceutical(TM), MD Pharmaceutical(TM), Liqui-Char(R), Therevac(R), Derma-Scrub(R), Soloxine(R), Nasabid(R), Vanex(TM), and Obenix(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 "JMI" or the "Company" refer to Jones Medical Industries, Inc. and its subsidiaries. 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 Medical Industries, Inc. is engaged in the manufacture, marketing and sale of pharmaceuticals and nutritional supplements. Founded in 1981, the Company markets a wide variety of pharmaceuticals and branded nutritional supplements under its own trademarks and tradenames. 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 leverage its existing marketing and sales capabilities through additional strategic acquisitions of complementary products and businesses, by expanding and increasing the penetration of its existing customer base, and through the introduction of new formats for pharmaceuticals and new formulations for nutritional supplements. During 1996, sales of pharmaceuticals and nutritional supplements accounted for approximately 68% and 32% of the Company's total sales, respectively. BUSINESS STRATEGY The Company's business strategy is to acquire specialty product lines or operations that complement or expand the marketing or distribution of existing product lines and to develop and apply marketing initiatives to such products. The key elements of the Company's strategy include: Acquire and Build Market Share in Specialty Pharmaceuticals. Since inception, the Company has purchased domestic rights to certain specialty pharmaceuticals addressing markets such as critical care treatments involving hemostasis and anesthesia and prescription treatments for thyroid disorders. JMI intends to continue to seek the rights to products that it believes can benefit from focused marketing efforts. 1 3 Leverage Established Pharmaceutical Marketing and Sales Efforts. JMI intends to maximize productivity of its sales force through replacement of existing, lower-volume products with new products with larger market opportunities. In addition, the Company intends to raise the awareness of selected products through targeted sales efforts focused on hospital pharmacists, prescribing physicians and other health care professionals in the United States. Improve Margins Through Focus on High-Margin Products and Cost Control. JMI intends to increase gross and operating margins by using sales personnel efficiently, minimizing corporate overhead and focusing on high margin products. The Company believes that by focusing on a limited number of products, the Company can increase sales by maximizing the productivity of its sales force and controlling overhead costs. SIGNIFICANT OPERATING EVENTS DURING 1996 As a result of two significant acquisitions completed in 1996, the Company currently derives a significant portion of its revenues from the sale of Tapazole and Levoxyl which are pharmaceutical products relating to the treatment of thyroid conditions. These pharmaceutical products represent new product lines in which the Company has only limited direct marketing experience to date. A substantial percentage of the prescriptions for pharmaceutical products used in the treatment of thyroid conditions has historically arisen from office-based endocrinologists and internal medicine specialists rather than through hospital pharmacies which have been the focus of the Company's marketing and sales of its critical care pharmaceuticals. During the course of 1996, the Company significantly expanded its sales and marketing staff to address this additional marketing focus and, on December 31, 1996, acquired Abana Pharmaceuticals, Inc., a company engaged in the marketing, distribution and sale of prescription pharmaceuticals. There can be no assurance that the Company will be successful in efforts to integrate and expand its sales and marketing efforts directed toward office-based physician prescribers. The failure successfully to market and sell the pharmaceutical product lines acquired during 1996 could have a material adverse effect on the Company's business, financial condition and results of operations. Acquisition of the Rights to Tapazole. On March 18, 1996, the Company acquired from Eli Lilly and Company ("Lilly") the exclusive perpetual domestic right to market and distribute Tapazole (methimazole, USP) in the United States. The purchase price for Tapazole was $26.0 million, of which one-third was paid in cash at closing and the remainder of which was paid, without interest, in installments in June and September, 1996. In addition to the purchase price, the Company will pay Lilly a royalty equal to 5% of the Company's net sales of Tapazole during the first 10 years following the acquisition. The Company also entered into a 10 year manufacturing agreement with Lilly pursuant to which Lilly will continue to manufacture Tapazole for the Company. The Daniels Acquisition. On August 30, 1996, the Company acquired Galen Drugs of Florida, Inc. and its principal operating subsidiary, Daniels Pharmaceuticals, Inc. ("Daniels"), and related assets in exchange for an aggregate of 2,960,224 shares of the Company's Common Stock and cash in the amount of $4.0 million. Daniels is a St. Petersburg, Florida, based manufacturer and distributor of prescription pharmaceutical products whose principal product is Levoxyl, a synthetic thyroid hormone for the treatment of hypothyroidism. Prior to its acquisition by the Company, Daniels maintained an in-house sales and marketing staff of 30 persons, focusing primarily on sales and promotion of its products to endocrinologists and other office-based physician prescribers. Acquisition of Abana Pharmaceuticals, Inc. Effective as of the close of business on December 31, 1996, the Company completed the acquisition of Abana Pharmaceuticals, Inc. ("Abana"), in which it previously owned an approximately 16% interest, in exchange for 420,553 shares of the Common Stock of 2 4 the Company. Abana, formed in 1988, was engaged in the marketing, distribution and sale of branded generic prescription pharmaceuticals under its own trademarks and tradenames and had net sales of approximately $6.0 million for its 1996 year. Its principal products are marketed to prescribing physicians under the Nasabid, Vanex and Obenix tradenames. Abana's sales and marketing organization included 55 sales representatives marketing products to physicians in 15 states. Sales of Abana's product lines are primarily to drug wholesale companies who provide pharmaceuticals to retail pharmacies filling individual prescriptions. PRINCIPAL PRODUCTS AND PRODUCT LINES Pharmaceuticals. The Company markets and distributes a variety of branded pharmaceuticals, which accounted for approximately 61% of the Company's sales in 1996. The Company's principal branded pharmaceuticals primarily serve the thyroid treatment and the critical care segments of the health care industry and are as follows: Thyroid Treatment 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 the generic pharmaceutical, 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 the period from the Company's acquisition of Tapazole on March 18, 1996 through December 31, 1996, the Company had net sales of $12.3 million relating to Tapazole, equal to 12.3% of the Company's 1996 sales. 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 $300 million annually and is dominated by Synthroid(R) which is manufactured by Knoll Pharmaceutical Company, a subsidiary of Boots Plc, which has substantially greater sales, marketing and financial resources than the Company. Competitive action in the marketing and distribution of Synthroid(R) 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. The Company's sales of Levoxyl were $14.2 million or approximately 14.2% of total 1996 sales. Critical Care Pharmaceuticals. Thrombin-JMI and Thrombinar. 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 maintain 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. The Company's products, Thrombin-JMI and Thrombinar, are thrombin-based topical hemostatic agents derived from bovine blood. The Company's thrombin products offer advantages over collagen and cellulose products because of faster activity in the surgical site. Additionally, because of their physical characteristics, JMI's thrombin products do not need to be removed from the surgical site prior to closure, whereas non-thrombin 3 5 competing products need to be removed, often leading to recurrence of bleeding. Thrombin-JMI was introduced in 1995 and differs from Thrombinar in that Thrombin-JMI does not require refrigeration, and is therefore more convenient in the operating room. The topical hemostat market was estimated to be greater than $90 million in the United States in 1996. The Company's branded thrombin products accounted for 15% of the United States topical hemostat market and 70% of the United States topical bovine thrombin market in 1996. Thrombin-JMI and Thrombinar accounted for 13.5% of total Company sales in 1996. The Company's first thrombin product, Thrombinar, was acquired by JMI from Armour Pharmaceuticals ("Armour") in 1989. Thrombin-JMI is manufactured at the Company's wholly-owned subsidiary GenTrac, Inc. ("GenTrac"). Thrombinar was manufactured by Armour for JMI until September 1995 when it was replaced by Thrombin-JMI. 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 Lilly in 1961. Brevital is used in short-term procedures because of its rapid onset of action and minimal recovery time. Brevital's rapid onset of action also makes it a useful induction agent for long-term general anesthesia prior to the administration of another agent to maintain the anesthesia. The I.V. anesthetic market in the United States is estimated to be $500 million. In August 1995 the Company acquired from Lilly an exclusive domestic perpetual license to distribute Brevital. During 1996, the Company had sales of Brevital of $7.2 million or 7.2% of total sales. Other Pharmaceuticals. The Company also manufactures and distributes other branded pharmaceuticals under numerous trademarks and tradenames, the most prominent of which are Liqui-Char, a toxin antidote, Therevac, a mini-enema for rehabilitation therapy, and the Derma-Scrub line of anti-micorbial soaps and lotions. In addition to Levoxyl, the Company also manufactures levothyroxine products for veterinary use in the treatment of hypothyroidism in pets under the name Soloxine. Combined, sales of all other branded pharmaceutical products accounted for approximately 14.0% of the Company's total sales in 1996, including approximately 3.5% of total sales which were directed to the veterinary market. As a result of the acquisition of Abana, the Company now also markets and distributes several product lines of branded generic pharmaceuticals, including Obenix, an orally effective appetite suppressant in capsule form, Nasabid, a long-acting, low-dose decongestant/expectorant tablet, and Vanex Forte, a long-acting antihistamine/decongestant. Nutritional Supplements. The Company markets and distributes a full line of branded nutritional supplements, which accounted for approximately 23.5% of the Company's total sales in 1996. The Company's branded nutritional supplements are marketed under the Bronson Pharmaceutical and MD Pharmaceutical tradenames. The Bronson Pharmaceutical product line consists of over 260 branded vitamin, mineral and herbal extract formulations. The products include multi-vitamins, mineral formulations, individual vitamins, antioxidants, herbal formulations and personal care products. The Bronson Pharmaceutical product line accounted for approximately 21.5% of the Company's total sales in 1996. Products bearing the MD Pharmaceutical tradename are sold exclusively through military base retail outlets and consist of a broad line of branded nutritional supplements which compete with national brands. 4 6 Sales of MD Pharmaceutical products have declined in recent years, primarily as the result of the reduced number of active duty military personnel and related reorganizations and cutbacks affecting the military commissary system. MARKETING AND SALES The Company markets and promotes its products primarily through a direct sales force and by direct mail. 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 physician, hospital and nutritional markets together with an internal marketing staff which provides marketing administration and support and customer service. The Company also utilizes independent sales representatives for marketing certain products. Pharmaceuticals. The Company's marketing and sales staff for pharmaceuticals and critical care products consists of 104 field sales personnel (including 10 managers, 77 field physician sales representatives and 17 hospital sales managers), 15 marketing and customer support specialists, a hospital group contract coordinator and a product manager. The pharmaceutical sales and marketing staffs are organized into separate groups for physician-oriented and hospital-oriented product lines, with each group reporting to a staff Vice President of Sales. Marketing activity for physician prescribed pharmaceuticals focuses upon inducing the physicians to prescribe the Company's products. Prescriptions for these products are filled by retail pharmacies, which purchase the products from wholesale drug distributors. 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 the Company's critical care pharmaceuticals are focused on major 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. Although the Company's marketing efforts focus upon individual hospitals' Directors of Pharmacy as the ultimate decision-maker, the Company presently has contracts for one or more product lines with substantially all of the major hospital buying groups. The Company distributes both its prescription and critical care pharmaceuticals through all major full-line wholesale drug distributors in the United States. Although one of such distributors accounted for approximately 8% of total sales (and approximately 11% of pharmaceutical sales) during 1996, the role of such distributors in the pharmaceutical market does not relate to the Company's marketing efforts to create or stimulate demand for products or to physician or consumer use or such products. Nutritional Supplements. The Company markets the Bronson Pharmaceutical product line directly to consumers and health care and nutritional professionals through catalogs and direct mailings to a database that includes health care and nutritional professionals as well as mail order and retail customers. The Company maintains a telemarketing sales force of 18 persons which processes orders. The majority of sales and shipments arise from prepaid telephone, facsimile or mail orders. Orders are processed and filled at the Company's distribution center in St. Louis, Missouri, usually within 24 hours of entry, and are shipped by United Parcel Service or parcel post with shipping and handling costs added to the price. In addition to direct mail sales, the Bronson Pharmaceutical product line is distributed through retail pharmacy and health food store accounts. The MD Pharmaceutical product line is marketed to military outlets by independent sales representatives. 5 7 MANUFACTURING The Company manufactures pharmaceuticals at its facilities in Canton, Ohio, St. Petersburg, Florida, Middleton, Wisconsin, and St. Louis, Missouri, each of which is registered with the United States Food and Drug Administration ("FDA"). The Company manufactures and formulates nutritional supplements at its facilities in Tempe, Arizona. The Company has manufactured pharmaceuticals at its Canton, Ohio, facility since March 1984. The Company's Daniels operations have manufactured pharmaceuticals at the St. Petersburg facility since 1975. At each of such facilities, the Company processes raw materials purchased from outside sources and produces products in tablet form. Content, shape and color of most such products are produced within the guidelines of FDA regulations pertaining to over-the-counter drugs or prescription drugs that were marketed prior to 1938. The St. Petersburg facility is also licensed by the FDA to produce "new drugs" introduced after 1938 and, as such, pharmaceuticals produced at that location are subject to more extensive regulatory controls. In 1991, in connection with the Company's acquisition of GenTrac, the Company assumed operations of the GenTrac facility located in Middleton, Wisconsin which is licensed by The Center for Biologics Evaluation and Research ("CBER"), a Division of the FDA, for the production of therapeutic and diagnostic thrombin products. Biological products such as Thrombin-JMI must be produced at a licensed biologic facility specifically licensed to manufacture that product. The Company's GenTrac facility, which produces Thrombin-JMI, is licensed for the production of thrombin United States Pharmacopoeia ("U.S.P.") products and also acts as a contract manufacturer of Thrombogen(R), a line of proprietary thrombin products manufactured for Johnson & Johnson Medical, Inc. ("Johnson & Johnson") under distribution and development agreements. Additions to the Gentrac facility have expanded production capacity to meet the Company's and Johnson & Johnson's combined product demand. Production of thrombin products for Johnson & Johnson respresented approximately 25% of GenTrac's total production for 1996 and approximately $4.0 million of the Company's 1996 total sales. A reduction in the volume of product sold to Johnson & Johnson, or a failure to continue production for it on terms satisfactory to the Company upon expiration of the current contract in the year 2000, could adversely affect overhead rates at the facility and have a material adverse effect upon the Company's operating results. Packaging, as well as warehousing and distribution, for certain pharmaceuticals and for nutritional supplements, is primarily conducted at the Company's distribution center and headquarters located in St. Louis, Missouri. The Company also formulates and produces liquid products such as Liqui-Char and the Derma-Scrub line at its St. Louis, Missouri facility. The Company has manufactured nutritional supplements at its facilities in Tempe, Arizona, since 1984. As in the case of pharmaceuticals, the Company processes raw materials purchased from outside sources and formulates them into final dosage form. Although, prior to the acquisition of Bronson Pharmaceuticals ("Bronson") by the Company in March 1993, Bronson functioned solely as a marketer and distributor of its product line, the Company now manufactures the majority of its Bronson products at its Tempe, Arizona facilities. The Company utilizes available excess capacity at its manufacturing facilities to produce pharmaceuticals and nutritional supplements for other branded and generic distributors, in bulk or packaged (private label) form. The Company's marketing efforts with respect to contract manufactured products are conducted both internally and through independent commissioned sales representatives. Contract manufacture, other than sales of thrombin products to Johnson & Johnson, relates primarily to nutritional supplements and represented approximately 10.5% of the Company's total sales during 1996. 6 8 With the exception of GenTrac's agreement with Johnson & Johnson, the Company does not have long-term manufacturing contracts with its customers for contract manufacturing but instead manufactures products pursuant to purchase orders as they are received. Contract manufacturing is performed primarily for generic and private label product distributors which are not involved in manufacturing and whose products primarily consist of basic generic ethical drugs, generic over-the-counter drugs and vitamins, and private formulations of vitamins, prescription and over-the-counter drugs. Notwithstanding the absence of long-term manufacturing agreements with its contract manufacturing customers, JMI has long-standing relationships with the majority of its customers for such products. There can be no assurance, however, that such relationships will continue in the future. In 1996, the Company manufactured approximately 75% of its total products sold and approximately 70% of its branded products sold. The percentage of products manufactured is subject to 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 activity. Accordingly, increases in percentage of in-house manufacturing arising from the Company's current production of JMI-Thrombin at its Gentrac facility and its production of Levoxyl and other products resulting from the Daniels Acquisition are offset by Lilly's contract manufacture of Brevital and Tapazole products for the Company. The Company has historically relied on third-party manufacturers to produce certain of its products. The Company typically does not enter into long-term manufacturing contracts with such third-party manufacturers, however, even when such contracts exist 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. For example, the Company's thrombin products were manufactured for the Company under a contract with Armour from whom the Thrombinar product line was acquired in 1989. During the fourth quarter of 1994 and first quarter of 1995, Armour was unable to fully meet the Company's requirements for thrombin products, resulting in the Company's inability to fill product orders from customers and the loss of sales and income. 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. Brevital and Tapazole are each manufactured for the Company by Lilly from whom these product lines were acquired. 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. The Brevital agreement was entered in August 1995 and the Tapazole agreement was entered in March 1996. 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 the 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 of Tapazole and any alternative manufacturer would require regulatory change-in-site qualification to manufacture the product. 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. 7 9 PRINCIPAL CUSTOMERS AND SUPPLIERS No one customer accounted for 10% or more of the Company's sales in 1996. 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. For the most part the Company's ability to manufacture products is not dependent on any particular raw material supplier except as to thyroid raw materials. The Company relies on 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, the manufacture of Brevital and of Tapazole are each dependent upon Lilly's ability to procure certain raw materials used in the manufacture of such products. Although the Company has no reason to believe that Lilly will be unable to procure adequate supplies of such raw materials on a timely basis, disruptions in supplies of Brevital or Tapazole, including delays due to Lilly's inability to procure raw materials, would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The manufacture and sale of pharmaceuticals is highly competitive. Many of the Company's competitors are large well-known pharmaceutical, chemical and health care 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 pharmaceuticals 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 generic pharmaceutical 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 a number of other synthetic thyroid hormones. The Company's thrombin product lines compete with those produced for and marketed by Johnson & Johnson and with thrombin products distributed by Parke-Davis, a division of the Warner-Lambert Company. The Company's thrombin products also compete with other hemostatic agents, including Gelfoam, manufactured by Pharmacia & Upjohn, Inc., and Surgicel, manufactured by Johnson & Johnson. Brevital faces competition in the I.V. anesthetic market from other I.V. anesthetic products, including Diprivan, which is produced by Stuart Pharmaceuticals, a business unit of Zeneca, Inc., and Versed, produced and marketed by Roche Labs, a division of Hoffmann-LaRoche, Inc. Each of these competitors has substantially greater marketing, sales and financial resources than the Company. Just as certain of the Company's pharmaceutical products face actual or potential competition from generic pharmaceuticals, the Company's lines of branded generic pharmaceuticals acquired as a result of the Abana acquisition face competition from both original branded formulations of the products and from unbranded generic equivalents of the products. Further, although the former Abana product lines are available 8 10 only by prescription, such products also compete with branded and generic over-the-counter product formulations for the treatment of similar ailments. The market for nutritional supplements is characterized by extensive competition, frequent new product introductions, short product life cycles and changing customer preferences. The Company is subject to competition from the retail market, as well as the mass-market, direct-mail market, for nutritional supplements, and there can be no assurance that the Company's targeted direct-market approach will remain a viable alternative within the industry or that other competitors may not enter the targeted direct-mail market and offer products similar to those offered by the Company. Many of the Company's existing and potential competitors in the nutritional supplements industry have greater financial, marketing and research capabilities than the Company. TRADEMARKS The branded products sold by the Company 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 and its right to utilize the MD Pharmaceutical brand name is restricted to the United States military and its outlets. 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 of 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 ("OSHA"), the Department of Agriculture ("USDA"), the Consumer Product Safety Commission ("CPC"), the United States Customs Service, and the United States Postal Service. These activities are also regulated by various agencies of the states and localities in which the Company's products are sold. Pharmaceuticals. 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, 'grandfather 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 and also regulates the advertising of prescription drugs. 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 regulates advertising of OTC 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, which establishes certain security and record keeping requirements administered by the DEA, a division of the 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 9 11 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 operation. The Company manufactures and distributes biological drugs, including thrombin, which are also regulated by the FDA. The Company's Thrombin-JMI line of products has been approved by the FDA, and the Company's GenTrac facility is licensed by the FDA to produce Thrombin-JMI and Thrombogen, a line of proprietary thrombin products manufactured for Johnson & Johnson. Under development and distribution agreements between GenTrac and Johnson & Johnson entered prior to the Company's acquisition of GenTrac, Johnson and Johnson has rights to certain new products and product enhancements which might be developed at GenTrac. The Company is not pursuing, and is not required to pursue, development of such products at this time and currently believes that there is insufficient market demand for alternative formulations of bovine thrombin hemostats. In connection with the use of sampling of pharmaceutical products in connection with marketing to prescribing physicians, the Company's activities are subject to the Prescription Drug Marketing Act ("PDMA") which permits regulation of such activities at both the federal and state level. Under PDMA, states are permitted to require registration of manufacturers and distributors who provide sample pharmaceuticals even if such manufacturers or distributors have no place of business within the state and states are also permitted to adopt regulations limiting the distribution of sample products to licensed practitioners. PDMA also imposes extensive recordkeeping, packaging, quantity and labelling requirements intended to prevent sale of sampled pharmaceutical products or other diversion from their intended use. Nutritional Supplements. Although the manufacturing and production of nutritional supplements has historically been subject to less intensive regulation than pharmaceutical products, government oversight in this area is currently increasing. Under the Dietary Supplement Health & Education Act of 1994, the FDA may exercise increased authority over the labeling and sales of vitamin and mineral supplements. In addition, the United States Postal Service and the FTC regulate advertising claims with respect to the Company's products sold by solicitation through the mail. The FDA and other federal authorities are reviewing alternative approaches to assure the safety of vitamins, minerals, herbals and other products sold as nutritional supplements. Increased regulatory oversight could subject the Company and other manufacturers of nutritional supplements to increased production and compliance costs and possibly require capital expenditures. Future regulation affecting nutritional supplements could result in a recall or discontinuance of certain products. Recent proposed regulations issued by the FDA require the relabeling of dietary supplements with regard to nutrition labeling ingredient information and nutrient content claims but have not become fully effective and may be modified prior to final adoption. FDA regulations applicable to the manufacture of nutritional supplements generally do not apply to formulations based upon ingredients which were marketed as dietary supplements prior to October 1994, although the FDA has recently given notice of proposed rulemaking which would apply CGMP standards to the formulation and manufacture of all nutritional supplements. With respect to formulations which include ingredients not marketed as or included in dietary supplements prior to October 1994, prior authorization from the FDA is now required. Applications for such authorization are required to be accompanied by studies concerning the safety and efficacy of the product or ingredient. The Company does not currently manufacture or market nutritional supplements which contain ingredients not used as dietary supplements prior to October 1994. Regulations applicable to the use of 10 12 formulations including new ingredients, and possible patent claims in respect of such formulations, may make it more difficult for manufacturers of nutritional supplements to replicate competitors formulations or variants thereof. The Company believes that it is in material compliance with applicable laws and regulations concerning nutritional supplements. Moreover, the Company believes that its experience in the manufacture and sale of pharmaceuticals, and its use of certain manufacturing processes and controls uniformly across all product lines, will enable the Company to comply with regulations, record keeping, testing and manufacturing standards which may be applied to nutritional supplements. On the other hand, current regulations with respect to product labelling and to advertising and marketing claims for nutritionals are complex and, in some cases, are subject to joint administration by the FDA and the FTC and the application and interpretation of certain requirements is not presently clear. 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, 1997, the Company had 508 full-time employees: 229 in manufacturing, 147 in sales, 55 in finance and administration, 49 in quality assurance, and 28 in distribution. The Company believes that its relationship with its employees is good. 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 mid-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, and telemarketing operations. The Company has centralized packaging operations for its branded nutritional supplements at this location in addition to certain laboratory and quality assurance facilities. Liquid products, including Liqui-Char and the Derma-Scrub line, are also manufactured and packaged at this facility. The Company owns a facility at Canton, Ohio where its subsidiary, JMI-Canton Pharmaceuticals, Inc. ("JMI-Canton"), manufactures and packages pharmaceuticals. The facility is a 25,000 square foot building containing manufacturing, laboratory and administrative space. The Company owns a facility at St. Petersburg, Florida, where its subsidiary, JMI-Daniels Pharmaceuticals, Inc., manufactures and packages pharmaceuticals. 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 hemostatic thrombin products 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's subsidiary, JMI Phoenix Laboratories, Inc. ("JMI Phoenix"), manufactures the Company's nutritional supplements in two adjacent buildings owned by the Company consisting of approximately 30,000 total square feet, located in Tempe, Arizona. 11 13 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. As previously reported, the Company is, and has in the past been, a defendant in lawsuits relating to the manufacture or distribution of L-Tryptophan, a nutritional supplement product distributed by the Company and Bronson prior to 1989. The manufacturer of L-Tryptophan, Showa Denko, has agreed to indemnify the Company (including Bronson) from all costs and damages with respect thereto to the extent that the product distributed by the Company was produced by Showa Denko. As a result of the indemnity, and the product liability insurance maintained by Bronson prior to its acquisition by the Company, the Company has not incurred any material expense or liability in respect of claims involving L-Tryptophan and does not anticipate that it will have any material liability arising from any remaining claims. The Company has also previously reported that under development and distribution agreements between GenTrac and entered into prior to the Company's acquisition of GenTrac, Johnson & Johnson acquired certain rights to new thrombin products and thrombin product improvements developed by GenTrac and had given notice to the Company claiming exclusive distribution rights for a liquid thrombin product previously under development at the GenTrac facility. The claim is not currently being pursued and the Company believes that the claim has been rendered moot since, for reasons unrelated to the claim, GenTrac is not pursuing further development of the liquid thrombin product. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1996 to a vote of security holders of the Company through the solicitation of proxies or otherwise. 12 14 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: High Low ---- --- 1995 First Quarter $4 $ 2 3/4 Second Quarter 5 1/3 3 5/8 Third Quarter 8 5 Fourth Quarter 11 7 1/8 1996 First Quarter 30 1/3 10 3/8 Second Quarter 39 1/2 25 2/3 Third Quarter 50 1/2 21 Fourth Quarter 48 5/8 32 1/2 As of March 3, 1997, there were approximately 825 stockholders of record and a total of 28,569,651 shares of Common Stock outstanding. Approximately 19.0 million shares or 67.0% 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 1995 and 1996, cash dividends of $0.05 and $0.077 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. At its next annual meeting of shareholders in May 1997 the Company intends to seek shareholder approval to increase its authorized Common Stock from 30.0 million shares to 75.0 million shares. 13 15 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. The financial data as of December 31, 1996, 1995 and 1994 and for the four years ended December 31, 1996 have been derived from the audited consolidated financial statements of the Company. The financial data as of December 31, 1993 and 1992 and for the year ended December 31, 1992, has been combined by the Company using the Company's audited historical financial statements for those periods and unaudited financial data concerning Galen Drugs of Florida, Inc. ("Galen") and Galen's subsidiairies including Daniels. 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 Acquisiton are reflected. In the following summary consolidated financial data, for 1995 and prior years, fiscal years of Galen ending September 30 have been combined with the Company's historical results for years ending December 31. In 1996, both the Company and Galen have been 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:
YEARS ENDED DECEMBER 31 --------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Sales $34,590,117 $55,620,958 $62,153,975 $74,791,815 $ 100,153,086 Cost of sales 17,501,215 26,500,879 29,502,923 32,754,390 39,825,723 ----------- ----------- ----------- ----------- ------------- Gross profit 17,088,902 29,120,079 32,651,052 42,037,425 60,327,363 Selling, general and administrative expenses 10,738,350 16,794,635 20,284,788 21,754,155 25,909,725 Non-recurring merger expense(1) - - - - 5,743,151 ----------- ------------ ----------- ----------- ------------- Operating income 6,350,552 12,325,444 12,366,264 20,283,270 28,674,487 Other income (expense) 821,467 (80,061) (486,198) (483,520) 1,754,251 ---------- ------------ ------------ ----------- ------------- Income before taxes 7,172,019 12,245,383 11,880,066 19,799,750 30,428,738 Provision for taxes 2,671,690 4,660,826 4,360,168 7,410,491 12,290,000 --------- ------------ ------------ ----------- ------------- Net income $ 4,500,329 $ 7,584,557(2) $ 7,519,898 $12,389,259 $ 18,138,738 =========== ============ =========== =========== ============= Weighted average 35,211,967(3) 35,228,601(3) 26,360,757 24,843,953 28,048,519 shares outstanding Earnings per common and common equivalent share $ 0.13 $ 0.22(2) $ 0.29 $ 0.50 $ 0.65 Cash dividends declared $ 0.033 $ 0.04 $ 0.045 $ 0.05 $ 0.077 per share(4) ============ ============ ============ =========== =============
14 16 Notes to Statement of Operations Data: (1) Reflects non-recurring 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 and net income for the 1996 year would have been $34.4 million and $22.4 million, respectively, and earnings per share would have been $0.80 (2) Net income and earnings per share in 1993 do not reflect cumulative effect of change in accounting principle of $207,100. (3) In a transaction in October 1993, Galen Drugs of Florida, Inc., Daniels' then parent, repurchased and retired approximately 78.6% of its then outstanding common stock in exchange for consideration consisting of $3.4 million in cash and debt. As a result of the Daniels Acquisition, an aggregate of 10.9 million shares of Common Stock of the Company were deemed to be outstanding prior to the date of this retirement. (4) Represents historical dividends declared per share of the Company's Common Stock. BALANCE SHEET DATA:
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Total assets $39,580,925 $58,112,520 $63,342,382 $86,238,408 $177,233,388 Current assets $22,743,724 $22,232,384 $26,384,883 $33,337,031 $ 80,550,805 Current liabilities $ 4,661,994 $ 7,823,121 $ 7,951,511 $14,405,444 $ 10,031,359 Working capital $18,081,730 $14,409,263 $18,433,372 $18,931,587 $ 70,519,446 Long-term debt $ 652,245 $ 5,399,986 $ 6,778,335 $11,420,362 $ -0- Shareholders' equity $33,396,344 $40,832,212 $44,477,800 $55,938,525 $161,919,722 Per share book value(*) $ 0.96 $ 1.17 $ 1.84 $ 2.31 $ 5.69 Current ratio 4.9:1 2.8:1 3.3:1 2.3:1 8.0:1
- ------------------------------- Note to Balance Sheet Data: (*) Per share book value is computed assuming conversion of the outstanding preferred stock. 15 17 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 was founded in 1981 to market and distribute specialty pharmaceuticals and nutritional supplements. The Company has achieved significant increases in sales and net income through acquisitions of products and businesses to complement or expand the Company's business and to add selected manufacturing capacity to support certain product lines. At December 31, 1996, the Company had completed 15 such acquisitions of which four were completed in the preceding 16 months, including the Daniels Acquisition in August 1996 which is treated as a "pooling of interests" for accounting and reporting purposes and the acquisition of Abana and the addition of its 55 person physician-oriented sales force on December 31, 1996. In addition to the significant revenue growth derived from acquisition activity, the Company pursues internal growth initiatives to develop marketing opportunities with respect to the acquired product lines and businesses. Sales and net income have increased from $29.1 million and $3.4 million in 1991, respectively, to $100.2 million and $18.1 million in 1996, respectively, representing five-year compounded annual growth rates of approximately 28.0% in sales and 40.0% in net income. Sales 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 pharmaceutical sales under contracts with hospitals, buying groups and managed care organizations. As of December 31, 1995 and 1996, the Company maintained reserves of $1.7 million for unclaimed but anticipated rebates and discounts. Product returns, pursuant to operating policies with respect to unused pharmaceuticals and pursuant to a limited money-back refund policy applicable to nutritional supplements sold to consumers, are less than 2% of gross annual sales. Return policies applicable to Daniels' products were revised effective December 31, 1996, to conform to other pharmaceuticals having lower rates of product return. Sales 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, 1996, sales were $100.2 million comprised of $68.0 million of pharmaceutical sales and $32.2 million of nutritional supplement sales. The relative contributions of pharmaceuticals and nutritional supplements to the Company's sales can be influenced by acquisition activity in each product category as well as by marketing activity, customer demand and product availability. In the fourth quarter of 1994 and first quarter of 1995, sales of certain of its thrombin-based hemostats were adversely impacted by supply difficulties. In August 1995 the Company acquired domestic rights to the Brevital pharmaceutical line for $14 million and a 10-year royalty of 5% on net sales of Brevital. Sales of Brevital represented approximately 3.2% of total Company sales during the last four months of 1995 and approximately 7.2% of 1996 sales. In March 1996 the Company acquired domestic rights to the Tapazole pharmaceutical line for $26 million and a 10-year royalty of 5% on net sales of Tapazole. Sales of Tapazole for periods subsequent to the date of acquisition represented approximately 12.3% of total Company sales for the full year. 16 18 The Company's strategy for continued growth is materially dependent upon its continued ability to acquire, by purchase or exclusive license arrangements, niche-market pharmaceuticals which can be promoted through existing marketing and distribution channels. The Company also intends to market aggressively the principal products in its current portfolio together with new formats or formulations of existing products and, when appropriate, to enhance its marketing and distribution channels. 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 success of the Company's efforts in managing its existing business is subject to a number of risks and uncertainties. Factors which may affect the Company include its dependence upon a limited number of key pharmaceuticals, the Company's ability to integrate new product acquisitions and to adapt and expand its marketing capabilities to the needs of such products, and its 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 and nutritional supplement industries. 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 herein. The following table sets forth certain data as a percentage of net sales for the periods indicated.
PERCENTAGE OF SALES Year Ended December 31, -------------------------------------------- 1994 1995 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 47.4 43.8 39.8 ----- ----- ---- Gross profit on sales 52.5 56.2 60.2 Selling, general & administrative expenses 32.6 29.1 25.9 Non-recurring merger expense - - - - 5.7* ----- ----- ----- Operating income 19.9 27.1 28.6 Other income (expenses) Interest income 0.2 0.4 2.3 Interest expense (1.1) (0.8) (0.5) Other miscellaneous income (expenses) 0.1 (0.2) - ----- ----- ----- Income before income tax 19.1 26.5 30.4 ----- ----- ----- Net income 12.1% 16.6% 18.1% ===== ===== =====
* Transaction costs and other non-recurring 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 would have been 34.3% of net sales and income before tax and net income would have increased to 36.1% and 22.4%, respectively. 17 19 Sales The following summarizes approximate sales activity by product categories:
SALES BY PRODUCT CATEGORY 1994 1995 1996 ------------------------ ---------------------- ------------------------- $ % $ % $ % - - - - - - Pharmaceuticals $36,530,000 58.8% $44,331,000 59.3% $ 67,984,000 67.9% Nutritional Supplements 25,624,000 41.2% 30,461,000 40.7% 32,169,000 32.1% ----------- ------ ----------- ----- ------------ ----- Total Sales $62,154,000 100% $74,792,000 100% $100,153,000 100% =========== ===== =========== ===== ============ =====
Sales for the year ended December 31, 1996, increased 33.9% to $100.2 million from $74.8 million for the year ended December 31, 1995, following an increase in the 1995 year of 20.3% to $74.8 million from sales of $62.2 million for the year ended December 31, 1994. In both 1995 and 1996 the Company's increases in sales were the result of both unit and dollar growth in the sales of both pharmaceuticals and nutritional supplements. Sales of pharmaceuticals in 1996 grew 53.4% to $68.0 million from $44.3 million in 1995 due primarily to increases in sales of the Company's Thrombin and Levothyroxine products together with the inclusion of a full twelve months of Brevital sales (versus four months in 1995) and due to nine months of sales of Tapazole, which was acquired in March 1996. Sales of nutritional supplements in 1996 grew 5.6% to $32.2 million from $30.5 million in 1995 due to a 25% increase in contract manufactured products and a 4% increase in Bronson product sales, offset in part by a $900,000 decline in sales of the MD Pharmaceutical product line offered through military commissaries. Sales of pharmaceuticals in 1995 grew 21.4% to $44.3 million from $36.5 million in 1994 due primarily to increases in sales of the Company's Thrombin and Levothyroxine products, and from the inclusion of four months of Brevital sales. Sales of nutritional supplements in 1995 grew 18.9% to $30.5 million from $25.6 million in 1994 due to a 14.5% increase in Bronson Pharmaceutical product sales and a 102.2% increase in sales of contract manufactured products, offset in part by a $1.2 million decline in sales of the MD Pharmaceutical products. Gross Profit Gross profit during 1996 increased 43.5% or $18.3 million to $60.3 million from $42.0 million in 1995. As a percentage of sales, margins increased to 60.2% in 1996 from 56.2% in 1995 as result of increased sales of higher margin products, price increases and greater manufacturing efficiencies. Gross profit during 1995 increased 28.7% or $9.4 million to $42.0 million from $32.6 million in 1994. As a percentage of sales, margins grew to 56.2% in 1995 from 52.5% in 1994 as a result of greater manufacturing efficiencies and sales increases in higher margin products. Selling, General and Administrative Expenses Selling expenses increased 20.1% or aproximately $2.5 million to $15.2 million in 1996 from $12.7 million in 1995 primarily as a result of increased royalties related to sales of Brevital and Tapazole in 1996 18 20 and to higher personnel costs due to 20 hospital sales representatives on staff throughout 1996 as compared to only 10 for most of 1995. Administrative fees due hospital buying groups also increased in 1996, primarily due to increased sales of Brevital and Thrombin products. As a percentage of sales, these expenses decreased to 15.2% in 1996 from 17.0% in 1995. As a result of the addition as of December 31, 1996, of the 55 person Abana sales and marketing staff and increased sampling of pharmaceuticals to physician prescribers, it is expected that selling expenses will increase significantly for 1997 in dollars and will also increase as a percentage of total sales. Selling expenses increased 6.0% or $722,000 to $12.7 million in 1995 from $12.0 million in 1994 primarily as a result of opening new sales territories in 1995 and due to higher direct marketing expenses associated with larger and more frequent mailings of the Bronson Pharmaceutical catalogue. As a percentage of sales, these expenses decreased to 17.0% in 1995 from 19.2% in 1994. General and administrative expenses in 1996 increased 6.3% or $456,000 to $7.6 million from $7.2 million in 1995 primarily as a result of higher salaries and overhead, but declined as a percentage of sales to 7.6% in 1996 from 9.6% in 1995. General and administrative expenses in 1995 increased 11.4% or $735,000 to $7.2 million from $6.5 million in 1994 primarily as a result of higher salaries and overhead, but declined as a percentage of sales to 9.6% in 1995 from 10.4% in 1994. Research and develoment expenses declined 9.3% in 1996 to $410,000 from $452,000 in 1995 primarily due to the reduction of ongoing expenses by Daniels in new product development. Research and development expenses declined 10.8% in 1995 to $452,000 from $507,000 in 1994 primarily due to the reduction of ongoing expenses by GenTrac related to development efforts for pre-mixed liquid thrombin formulations. Amortization expenses associated with intangible assets and included in selling, general and administrative expenses increased 83.0% to $2.6 million in 1996 from $1.4 million in 1995 due primarily to the acquisition of the Tapazole product line in March 1996 and to a full year of amortization associated with the Brevital product line acquired in August 1995. As a percentage of sales these expenses increased from 1.9% in 1995 to 2.6% in 1996. Amortization expenses remained essentially unchanged in 1995 as compared to 1994 at approximately $1.4 million, as the impact of the Brevital product line acquisition was substantially offset by declining amortization on other products. As a percentage of sales these expenses decreased to 1.9% in 1995 from 2.2% in 1994. A one time acquisition charge of $5.7 million was taken in 1996 in conjunction with certain costs and expenses associated with the Daniels Acquisition which is treated as a 'pooling of interests' transaction. Approximately $3.5 million of such charges 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. The remaining charges related primarily to transaction expenses including the fees and expenses of counsel and accountants for both Daniels (and its parent, Galen Drugs of Florida, Inc.) and the Company. 19 21 Operating Income Operating income during 1996 increased 41.4% or $8.4 million to $28.7 million from $20.3 million in 1995 and increased as a percentage of sales to 28.6% from 27.1% as a result of a greater increase in gross profits than in operating expenses. Operating income during 1995 increased 64.0% or $7.9 million to $20.3 million from $12.4 million in 1994, and increased as a percentage of sales to 27.1% from 19.9% in 1994, as the result of higher overall gross profits and marginal increases in operating expenses. Other Income (Expense) Interest income from investing activities increased sharply to $2.3 million in 1996 from $304,000 in 1995 as the result of the $75 million cash infusion from the April 1996 sale of additional common stock. Interest expense, primarily associated with borrowings related to the acquisition of the Brevital product line which were paid with a portion of the proceeds from the stock offering, decreased from $655,000 in 1995 to $553,000 in 1996. Other income during 1995 reflects a one time loss of $132,000 associated with the sale of certain real property which the Company was unable to use and the reduction in the associated rental income. Interest income from investing activities increased to $304,000 in 1995 from $144,000 in 1994 as a result of higher cash balances. Interest expense of $655,000 in 1995 was essentially unchanged from interest expense of $698,000 in 1994. Income Taxes The provision for income taxes increased to 40.4% of pre-tax income in 1996 compared to 37.4% in 1995 primarily because certain of the non-recurring merger expenses associated with the Daniels Acquisiton are not tax deductible. The provision for income taxes in 1995 increased to 37.4% of pre-tax income compared to 36.7% of pre-tax income in 1994, primarily as the result of a 1% higher federal tax rate on taxable income exceeding $10 million. Net Income Net income increased 46.4% or $5.7 million to $18.1 milllion in 1996 from $12.4 million in 1995, and increased as a percentage of sales to 18.1% in 1996 from 16.6% in 1995. Net income increased 64.8% or $4.9 million to $12.4 million in 1995 from $7.5 million in 1994, and increased as a percentage of sales to 16.6% in 1995 from 12.1% in 1994. Fourth Quarter - 1995 to 1996 Sales during the fourth quarter of 1996 increased 4.4 million, or 20.3%, to $26.3 million from $21.9 million during the fourth quarter of 1995. Net income during the fourth quarter of 1996 increased $2.9 million, or 73.9%, to $6.8 million from $3.9 million during the fourth quarter of 1995. Earnings per share during the fourth quarter of 1996 were $.24, with 28.8 million average shares outstanding, compared to $.16 per share, with 24.8 million average shares outstanding, during the fourth quarter of 1995. The 1996 increases 20 22 resulted from improved operations throughout 1996, increased sales of higher margin products and sales from the Tapazole product line which was not owned during the 1995 fourth quarter. FINANCIAL CONDITION Balance Sheet Information The Company's current ratio increased to 8.0:1 as of December 31, 1996 from 2.3:1 as of December 31, 1995, working capital increased to $70.5 million as of December 31, 1996 from $18.9 million as of December 31, 1995, and debt as a percentage of equity decreased to 1.8% as of December 31, 1996 from 30.8% as of December 31, 1995, primarily as a result of the April 1996 sale of common stock and positive cash flow from operations in 1996. 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. During 1996 the Company received net proceeds of approximately $75.0 million through an underwritten offering and sale of 3,450,000 shares of Common Stock to provide funding for debt repayment and acquisition purposes. Approximately $33.2 million of such proceeds remain available for acquisition and working capital purposes following debt retirement of $11.8 million, payment of $26.0 million in connection with the acquisition of Tapazole, and cash payments of approximatley $4.0 million in connection with dissenters' rights of minority holders in the Daniels Acquisition. Also during 1996, the Company issued approximately 2.9 million shares having a market value of approximately $113.0 million at date of issuance in connection with the Daniels Acquisition and approximately 420,000 shares having a market value of approximately $17.0 million at date of issuance in connection with the acquisition of Abana. At December 31, 1996 and 1995, respectively, the Company had cash and cash equivalents of $52.2 million and $8.3 million, respectively. The increase in cash and cash equivalents reflects the unapplied proceeds from the sale of additional stock and cash flow from operations, net of debt repayment and capital investments. The Company believes that available resources and anticipated cash flow from operations are adequate to meet currently anticipated operating needs and acquisition program. 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 $91.0 million to $177.2 million at December 31, 1996 from $86.2 million at December 31, 1995 and total liabilities decreased $15.0 million to $15.3 million at December 31, 1996 from $30.3 million at December 31, 1995. Intangible assets, principally licenses, trademarks and goodwill associated with acquired products, increased $36.9 million, net of amortization charges during the year, to $69.8 million at December 31, 1996, primarily as a result of the acquisition of the Tapazole rights in March 1996 and the acquistion of Abana on December 31, 1996. Intangible assets as a percent of shareholders' equity declined from 58.9% at December 31, 1995 to 43.1% at December 31, 1996. Inventories declined $261,000 to $12.8 million at December 31, 1996, from $13.0 million at December 31, 1995 as a result of higher inventory turns. Accounts receivable increased to $11.3 million at December 31, 1996, from $9.4 million at December 31, 1995, due to higher fourth quarter sale in 1996. In days outstanding, however, accounts receivable decreased to 39 days at December 31, 1996 from 46 days at December 31, 1995. Net property plant and equipment increased by $5.5 million to $24.2 million at December 31, 1996, from $18.7 million at December 31, 1995, primarily due to expansion of the Company's Gentrac and Daniels manufacturing capacities during 1996. 21 23 As of December 31, 1996, the Company is indebted to Lilly in the principal amount of $3.0 million bearing interest at 7.0%. This indebtedness, incurred in connection with the 1995 acquisition of the Brevital product line, is due in August 1997. 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 benefitted 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. RECENT ACCOUNTING PRONOUNCEMENTS During 1996 the Company adopted FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and FASB Statement No. 123, "Accounting for Stock Based Compensation." The adoption of these Statements did not have a material effect on the Company's consolidated financial statements or results of operations. 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. New Marketing Directions arising from Recent Acquisitions. As a result of the Company's acquisitions during 1996, it currently derives a significant portion of its revenues from the sale of pharmaceuticals which are marketed primarily by sales and promotional activities directed to office-based prescribing physicians. Prior to these developments, the Company's pharmaceutical marketing efforts focused on critical care products and were directed toward hospital pharmacies. The Company has significantly expanded its pharmaceutical marketing staff particularly as the result of the acquisition of Abana and its 55-person sales force at year end. The Company has only limited experience to date in the marketing of prescription oriented pharmaceuticals and its ability to maintain or increase sales levels for these products is materially dependent upon its ability to understand and adapt to the needs of this market and to integrate successfully the Abana sales force. Dependence upon Key Pharmaceutical Products. The Company's recent significant growth in revenues and earnings is primarily attributable to its acquisitions of a limited number of key pharmaceuticals with higher gross margins. During 1996 the sales of four products, Tapazole, Levoxyl, Brevital and JMI-Thrombin represented, in the aggregate, approximately 47.0% of total sales. 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 pharmaceuticals 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 insurors 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 pharmaceuticals, 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 22 24 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 Consumer Product Safety Commission, the Department of Agriculture, the United States Postal Service 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 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. A product liability claim could materially and adversely affect the Company's business, financial condition and results of operations. 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 and Tapazole, each of which is a key pharmaceutical. Although such products are subject to long-term 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. Disruption in the available supply of Brevital or of Tapazole or the inability of the Company to find obtain sources of supply upon the expiration of current contracts would be materially adverse to the business, financial condition and results of operations of the Company. Competition. Many of the Company's competitors, both in the manufacture and sale of pharmaceuticals and in the marketing and distribution of nutritional supplements, 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. 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 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, 1996 with respect to the directors and executive officers of the Company.
Name Age Position ---- --- -------- Dennis M. Jones 58 Chairman of the Board, President and Chief Executive Officer Judith A. Jones(1) 56 Executive Vice President, Secretary, Treasurer and Director Michael T. Bramblett 54 Executive Vice President and Director G. Andrew Franz 44 Senior Vice President-Operations-Pharmaceuticals and Director David A. McLaughlin 49 Senior Vice President-Operations-Nutritionals and Director Edward A. Chod(2) 43 Director Stanley L. Lopata(1)(2) 82 Director Thomas F. Patton(1)(2) 48 Director L. John Polite, Jr. 75 Director
(1) Member of the Audit Committee of the Board of Directors. (2) Member of the Compensation Committee of the Board of Directors. Dennis M. Jones and Judith A. Jones are husband and wife. G. Andrew Franz is the son-in-law of Dennis M. and Judith A. Jones. Dennis M. Jones, the founder of the Company, has been JMI'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. He was a co-founder of O'Neal, Jones and Feldman Pharmaceuticals, which was acquired by Chromalloy American Pharmaceuticals, Inc. in 1978 and subsequently acquired by Forest Laboratories, Inc., a specialty pharmaceutical company, in 1984. Mr. Jones has been a director of Mark Twain State Bank, a subsidiary of Mark Twain Bancshares, Inc., since 1988. Judith A. Jones joined the Company in October 1981 and has been in charge of the financial affairs and books of the Company since that time. Mrs. Jones has been a Director of the Company since December 1981, and the Secretary and Treasurer since April 1982. 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 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. From May 1988 through December 1990, Mr. Bramblett served as Marketing Director of Carlson Marketing Group, and from June 1987 until May 1988, he served as Corporate Vice President of S&H Motivation Company. G. Andrew Franz, a Director of the Company since 1994, became Senior Vice President-Operations-Pharmaceuticals for the Company in February 1994. He served as the Vice President-Operations of JMI-Canton since the facility was acquired by JMI-Canton from Bowman Pharmaceuticals, Inc. in March 1984 until February 1994. Prior to March 1984, Mr. Franz held various management positions for 14 years within Bowman Pharmaceuticals, Inc., including Chief Chemist and Vice President-Operations. David A. McLaughlin, a Director of the Company since 1994, became Senior Vice President-Operations-Nutritionals in February 1994. He served as the Vice President-Operations of JMI's subsidiary, American Vitamin Company from May 1988 until that company's merger into JMI Phoenix in 1993. From April 1986 to May 1988, Mr. McLaughlin was the Vice President-Sales and Marketing of JMI Phoenix. Prior to that time, Mr. McLaughlin served as an independent consultant to a number of health food, chemical and pharmaceutical companies, including JMI Phoenix. From May 1978 to January 1982 he was a supervisor of packaging and processing for the Searle Consumer Products Division of G.D. Searle & Company, a chemical company. 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. 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. Mr. Lopata has been a director of Boatmen's Trust Company, a subsidiary of Boatmen's Bancshares, Inc., since 1983. 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. From March 1990 through March 1993, Dr. Patton served as Director and Senior Director of Pharmaceutical Research and Development at Merck and Co., Inc., a pharmaceutical company. In 1993, Dr. Patton was President of the American Association of Pharmaceutical Scientists. Dr. Patton's 20 year career also includes tenures as Professor of Pharmaceutical Chemistry and Pharmacy Practice at the University of Kansas, Associate Director Control Development at the Upjohn Co., a pharmaceutical company, and Vice President of Operations at Oread Laboratories, Inc., a pharmaceutical company. 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 when Essex merged into Dow Chemical Company, a chemical company. Mr. Polite also serves as a director of Witco Corporation, a manufacturer and marketer of a wide range of specialty chemicals, petroleum products and engineered materials. 25 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 $3,000 per meeting of the Board of Directors attended by such non-employee director, subject to a minimum (as of December 31, 1996) of $7,500 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, 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, as set forth in the table below:
Date of No. of Options Per Share Initial Expiration ------- -------------- --------- ------- ---------- Name Grant Granted Exercise Price Exercise Date Date ---- ----- ------- -------------- ------------- ---- Stanley L. Lopata 6/1/94 11,250 $4.67 6/1/94 6/1/99 L. John Polite, Jr. 6/1/94 11,250 $4.67 6/1/94 6/1/99 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
26 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, 1994, 1995 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, 1996 (the "Named Executives"). SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term ------------------------------------------------- --------- Compensation ------------ Awards ------ Name and Principal Position Year Salary Bonus Other Annual Securities All Other --------------------------- ---- ------ ----- ------------ ---------- --------- Compensation (1) Underlying Compensation ---------------- ---------- ------------ Options ------- Dennis M. Jones, 1996 $360,000 $100,000 0 540,000 $17,599(2) Chairman of the Board, Director and President and Chief 1995 300,000 75,000 0 0 14,357(2) Executive Officer 1994 250,000 50,000 0 0 13,971(2) - ------------------------------------------------------------------------------------------------------------------------------------ Judith A. Jones, 1996 $180,000 $ 50,000 0 135,000 $ 7,518(3) Director, Executive Vice President, Secretary and Treasurer 1995 150,000 35,000 0 0 5,638(3) 1994 125,000 25,000 0 0 9,558(3) - ------------------------------------------------------------------------------------------------------------------------------------ Michael T. Bramblett, 1996 $180,000 $ 50,000 0 63,000 $ 7,500(4) Director and Executive Vice President 1995 150,000 35,000 0 0 6,771(4) 1994 125,000 25,000 0 0 5,990(4) - ------------------------------------------------------------------------------------------------------------------------------------ G. Andrew Franz, 1996 $144,000 $ 40,000 0 0 $ 7,500(4) Director and Senior Vice President - Operations - 1995 120,000 20,000 0 0 5,125(4) Pharmaceuticals 1994 90,000 10,000 0 56,250 4,813(4) - ------------------------------------------------------------------------------------------------------------------------------------ David A. McLaughlin, 1996 $144,000 $ 40,000 0 0 $ 7,500(4) Director and Senior Vice President - Operations - 1995 120,000 20,000 0 0 5,125(4) Nutritionals 1994 90,000 10,000 0 56,250 4,813(4)
(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 ($7,500 in 1996, $6,196 in 1995 and $6,264 in 1994) and the dollar value of premiums paid by the Company for a split-dollar life insurance policy on Mr. Jones, of which $10,099, $8,161 and $7,707 constituted his entire economic benefit in the years 1996, 1995 and 1994, respectively. (3) Consists of a Company contribution to a 401(k) plan ($4,375 in 1996, $2,696 in 1995 and $6,774 in 1994) and the dollar value of premiums paid by the Company for a split-dollar life insurance policy on Mrs. Jones, of which $3,143, $2,948 and $2,784 constituted her entire economic benefit in the years 1996, 1995 and 1994, respectively. (4) Consists of a Company contribution to a 401(k) plan. 27 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, 1996, the Company had outstanding stock options for an aggregate of 1,381,595 shares of Common Stock at a weighted average price of $9.65 per share held by 107 employees, including the options held by the Named Executives as described below. Although permitted under certain of the stock option and incentive stock plans, the Company did not issue or have outstanding in 1996 stock appreciation rights ("SARs") or restricted share grants to any Named Executive. In November 1996 the terms of the Company's stock option plans were amended by the Board of Directors of the Company to 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. Stock Option Grants. During 1996, the Company granted stock options to the Named Executives as set forth in the following table. Individual Grants -----------------------------------------
Percent of Total Shares Potential Realizable Value at Underlying Assumed Annual Rates of Number of Shares Options Stock Price Underlying Granted Per Share Appreciation (2) Options to Employees Exercise Expiration ----------------------------------- Name Granted in 1996(1) Price Date 5% 10% - ------------------ ----------- ---------- ----------- ---------- ----------- ------------- Dennis M. Jones 540,000(3) 59.9% $10.67 1/2/2005 $3,175,200 $7,824,600 Judith A. Jones 135,000(3) 15.0% $10.67 1/2/2005 $793,800 $1,956,150 Michael T. Bramblett 63,000(4) 7.0% $10.67 1/2/2004 $320,670 $768,600
(1) The total number of shares underlying options granted in 1996 of 901,070 includes 40,070 shares covered by options issued on December 31, 1996 in connection with the acquisition of Abana in conversion of options previously issued by Abana. (2) As reflected in the table appearing in the next section below, the values attributable to unexercised options based on the market value for the Common Stock at December 31, 1996, already exceed the assumed potential values reflected in this table. (3) The non-statutory options granted to each of Mr. and Mrs. Jones become exercisable on January 2, 2004, however the options include provisions which accelerate the exercisability of such options based upon the market price for the Company's Common Stock during certain periods. As a result of such provisions, 20% of each of such options became exercisable on January 2, 1997. An additional 20% will become exercisable on each succeeding January 2 through 2001 if the average closing market price for the 15 trading days preceding or following such dates is equal to or greater than $17.78 for 1998, $21.33 for 1999, $26.67 for 2000, and $33.33 for 2001. (4) The options granted to Mr. Bramblett are intended to qualify as an "incentive stock options" for tax purposes and become exercisable in 9,000 share installments on January 2, 1997 and each year thereafter through 2003. 28 30 Aggregate Option Exercises during 1996 and Year End Option Values. The following table provides information with respect to the stock options exercised during the fiscal year ended December 31, 1996 and the value as of December 31, 1996 of unexercised in-the-money options held by the Named Executives. The value realized on the exercise of options is calculated using the difference between the option exercise price and the fair market value of the Company's stock on the date of the exercise. The value of unexercised in-the-money options at fiscal year end is calculated using the difference between the option exercise price and the fair market value of the Company's stock at fiscal year end, December 31, 1996.
Value of Number of Unexercised In-the- Shares Unexercised Options Money Options at Acquired Value at December 31, 1996 December 31, 1996 on Exercise Realized (#) ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - -------------------- ----------- -------- ------------------------- ------------------------- Dennis M. Jones 0 0 0/540,000 $0/$14,015,700 Judith A. Jones 0 0 0/135,000 $0/$3,503,925 Michael T. Bramblett 112,500 $1,162,744 112,500/63,000 $3,820,275/$1,635,354 G. Andrew Franz 11,250 $ 203,738 11,250/33,750 $372,094/$1,116,281 David A. McLaughlin 22,500 $ 363,600 0/33,750 $0/$1,116,281
JMI's 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. The 401(k) Plan has been amended and restated from time to time, most recently as of January 1, 1997, to permit individual direction of investments and to facilitate the consolidation of the 401(k) Plan with similar employee plans maintained by Daniels Pharmaceuticals, Inc. and Abana Pharmaceuticals, Inc. 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 $9,500 per year. The amount of a Participant's Elective Contribution may also be limited under the Employee Retirement Income Security Act (ERISA) 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 makes contributions to match all or a portion of Participants' Elective Contributions. As to any Participant in any year, such matching contributions may not exceed the lesser of (i) a Participant's Elective Contributions for such year or (ii) a maximum matching percentage of Participants' compensation determined by the Company for such year. In each of the last three years, the Company has set the maximum permitted matching contribution at five percent of Participants' compensation. 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". 29 31 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 condition 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.
Years of Service Vested Percentage ---------------- ----------------- 2 . . . . . . . . . . . . . . . . . . . . . 20% 3 . . . . . . . . . . . . . . . . . . . . . . 40% 4 . . . . . . . . . . . . . . . . . . . . . . 60% 5 . . . . . . . . . . . . . . . . . . . . . . 80% 6 . . . . . . . . . . . . . . . . . . . . . . 100%
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, 1997, the Company had approximately 328 Eligible Employees, including the Named Executives (Dennis M. Jones, Judith A. Jones, Michael T. Bramblett, G. Andrew Franz and David A. McLaughlin). During 1996, the Company made matching contributions to the 401(k) Plan aggregating $34,375 to the accounts of the Named Executives and total matching contributions of $357,424 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 Company Common Stock Fund 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 and Judith A. Jones 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 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the record and beneficial ownership of the Common Stock of the Company on the indicated date by (i) each director and Named Executive (as such term is defined in "Executive Compensation -- Summary Compensation Table", above) of the Company, (ii) all directors and executive officers of the Company as a group, and (iii) each shareholder known to the Company to own, of record or beneficially, five percent (5%) or more of the outstanding Common Stock. BENEFICIAL OWNERSHIP AS OF MARCH 3, 1997
Name and Address of Percentage of Shares Beneficial Owner(1) Shares Beneficially Owned(2) Beneficially Owned(3) - ------------------------------ ----------------------------- --------------------- Dennis M. Jones 3,642,750(4)(5) 12.7% Chairman of the Board of Directors and President Judith A. Jones 1,047,937(6) 3.7% Executive Vice President, Secretary, Treasurer and Director Michael T. Bramblett 157,167(7) 0.5% Executive Vice President and Director G. Andrew Franz 434,157(8) 1.5% Senior Vice President - Operations Pharmaceuticals and Director David A. McLaughlin 112,500(9) * Senior Vice President - Operations Nutritionals and Director Stanley Lopata 174,250(9) 0.6% Director 900 South Hanley Rd. St. Louis, MO 63105 L. John Polite, Jr. 41,750(10) * Director 211 Oldwoods Rd. Franklin Lakes, NJ 07417 Edward A. Chod 25,375(11) * Director 10 South Broadway, Ste. 2000 St. Louis, MO 63102 Thomas F. Patton, Ph.D. 4,500(12) * Director All Directors and 5,640,386 19.6% Executive Officers as a Group (consisting of nine persons)
* Less than one-half of one percent. (1) Except as otherwise indicated, the address for each individual named is c/o Jones Medical Industries, Inc., 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. 31 33 (2) Includes shares deemed owned as a result of purchase options which are presently or will become exercisable on or prior to June 1, 1997. (3) The number of shares of Common Stock deemed outstanding as of March 3, 1997 includes (i) 28,569,651 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, 1997, by the person or group in question. (4) Includes 108,000 shares under option rights issued by the Company and held by Mr. Jones. Does not include 1,047,937 shares or options held by his spouse, with respect to which he disclaims beneficial ownership. (5) As a result of call options written and sold by Mr. Jones, an aggregate of 120,000 of the shares reflected as owned by him are subject to purchase by third parties at $40 per share under option rights expiring on March 21, 1997. (6) Includes 27,000 shares under option rights issued by the Company and held by Mrs. Jones. Does not include 3,642,750 shares or options held by her spouse, with respect to which she disclaims beneficial ownership. (7) Includes 1,318 shares held by Mr. Bramblett's wife with respect to which he disclaims beneficial ownership. Also includes 9,000 shares under option rights issued by the Company. (8) Includes 196,165 shares owned by Mr. Franz' wife, 51,840 shares held by his spouse as custodian for their children, 24,996 shares held by his wife as a co-trustee for the benefit of the Franz' children and 12,498 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. (9) 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 6,750 shares under vested and unexercised options. (10) Includes 9,000 shares under option rights issued by the Company. (11) Includes 6,750 shares under option rights issued by the Company. (12) Includes 4,500 shares under option rights issued by the Company. Other Significant Shareholdings Based upon filings with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company is advised that as of December 31, 1996 each of the following investment advisors held discretionary authority over accounts holding, in the aggregate, the indicated numbers of shares of the Common Stock, in each case representing approximately 5% of the then outstanding shares of Common Stock: Name & Address of Investment Advisor Shares - ------------------------------------ ------ American Century Companies, Inc. 1,661,300 (5.8%) American Century Investment Management, Inc. 4500 Main Street P.O. Box 418210 Kansas City, Missouri 64141-9210 Nicholas Applegate Capital Management 1,367,887 (4.9%) 600 West Broadway, 29th Floor San Diego, CA 92101 32 34 In addition, as of December 31, 1996, members of the Daniels family (the former principal owners of Galen Drugs of Florida, Inc. which was acquired by the Company on August 30, 1996 (the "Daniels Acquisition")), held beneficial ownership of an aggregate of 2,957,531 shares (10.4%) of the Common Stock. No individual member of the Daniels family held direct beneficial ownership of 5% or more of the outstanding stock and each member has severally advised the Company that they act independently with respect to voting and investment decisions with respect to such holdings. Pursuant to securities registration rights granted by the Company in connection with the Daniels Acquisition, a registration statement filed with the SEC under the Securities Act of 1933 covering an aggregate of 1,460,084 shares became effective on February 6, 1997. The Company is advised that as of March 10, 1997, all but 90,000 of the shares offered pursuant to such registration have either been sold and delivered or serve as collateral for "short against the box" sales effected for the accounts of the respective holders. Accordingly, the aggregate number of shares beneficially owned by the several members of the Daniels family as of such date is 1,587,447 or approximately 5.6% of the outstanding Common Stock. 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 class of the Company's equity securities registered under the Exhange Act, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company, including rights relating to the acquisition or disposition of any such securities. SEC regulations require such holders to furnish copies of such reports to the Company. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the fiscal year ended December 31, 1996 all Section 16(a) filing requirements applicable to the Company's directors, officers and greater than 10% beneficial owners were complied with except that L. John Polite, Jr., a director, (i) filed a Form 4 approximately thirty days after the required filing date with respect to a sale of 1,000 shares (2,250 shares as adjusted for subsequent splits) on January 17, 1996 and (ii) filed a Form 4 approximately sixty days after the required filing date with respect to a sale of 1,000 shares on December 5, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edward A. Chod, 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, 1996 did not exceed five percent (5%) of such firm's gross revenues for its applicable fiscal year. 33 35 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) Restated Certificate of Incorporation of the Company dated June 21, 1988 (incorporated by reference from Form 10-K for the year ended December 31, 1995). (3.2) Certificate of Amendment of the Certificate of Incorporation of the Company dated May 14, 1990 (incorporated by reference from Form 10-K for the year ended December 31, 1995). (3.3) Certificate of Amendment of the Certificate of Incorporation of the Company dated May 30, 1991 (incorporated by reference from Form 10-K for the year ended December 31, 1995). (3.5) Amended By-Laws of the Company as of June 14, 1988 (incorporated by reference from Form 10-K for the year ended December 31, 1995). (3.6) Amendment to Section 3.02 of By-Laws of the Company as of April 1, 1992 (incorporated by reference from Form 10-K for the year ended December 31, 1995). (10.1) The Company's 1989 Incentive Stock Option Plan (incorporated by reference from 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 (FILED HEREWITH). (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) Asset Purchase Agreement dated as of February 12, 1993, between the Company and Tsumura International, Inc. (incorporated by reference from Form 8-K dated February 18, 1993). 34 36 (10.6) Stock Purchase Agreement dated as of March 22, 1993, among the Company and each of the stockholders of Bronson Pharmaceuticals (incorporated by reference from Form 8-K dated April 7, 1993). (10.7) Licensing Agreement dated August 31, 1995 between the Company and Eli Lilly & Company (incorporated by reference from Form 8-K dated September 15, 1995). (10.8) Manufacturing Agreement dated August 31, 1995 between the Company and Eli Lilly & Company (incorporated by reference from Form 8-K dated September 15, 1995). (10.9) License Agreement dated March 18, 1996, between the Company and Eli Lilly and Company (incorporated by reference from Form 8-K dated March 18, 1996). (10.10) Manufacturing Agreement dated March 18, 1996, between the Company and Eli Lilly and Company (incorporated by reference from Form 8-K dated March 18, 1996). (10.11) 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 Form 8-K dated September 6, 1996). (10.12) 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). (11.1) Statement re: computation of per share earnings. (FILED HEREWITH) (21.1) Subsidiaries of the Registrant. (FILED HEREWITH) (23.1) Consent of Ernst & Young LLP. (FILED HEREWITH) (23.2) Consent of Hacker, Johnson, Cohen & Grieb. (FILED HEREWITH) (27.1) Financial Data Schedule. (FILED HEREWITH) (b) The following reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report: (1) Form 8-K dated October 24, 1996, announcing the signing of an agreement with Abana Pharmaceuticals, Inc. ("Abana") and the holders of a majority of Abana'soutstanding common stock to acquire Abana by means of a merger of Abana with and into a wholly- owned subsidiary of the Company; and (2) Form 8-K dated November 8, 1996, relating to the Company's acquisition of Galen Drugs of Florida, Inc. ("Galen"), including Galen's principal operating subsidiary, Daniels Pharmaceuticals, Inc. ("Daniels Acquisition") which was treated as a "pooling of interests" for financial reporting purposes, whereby the Company filed the following financial data: 35 37 (i) a restatement of the 5-year Selected Financial Data originally filed as Item 6 in the its Form 10-K Annual Report for the year ended December 31, 1995, to give effect to the three-for-two split of the Company's common stock effective June 10, 1996, and the restatement of such data arising from the Daniels Acquisition; (ii) a restatement of Management's Discussion and Analysis of Financial Condition and Results of Operation as originally filed as Item 7 in its Form 10-K Annual Report for the year ended December 31, 1995, to give effect to the restatement thereof arising from the Daniels Acquisition; and (iii) as an exhibit thereto, the Company's restated audited financial statements as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, reflecting the pooling of interests arising from the Daniels Acquisition. (3) Form 8-K dated December 31, 1996, announcing the closing of the acquisition of Abana. 36 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 10, 1997 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 10, 1997 --------------------------- Officer and Director Dennis M. Jones /s/ Judith A. Jones Principal Financial and March 10, 1997 --------------------------- Accounting Officer, Executive Judith A. Jones Vice President, Secretary, Treasurer and Director /s/ Michael T. Bramblett Executive Vice President and March 10, 1997 --------------------------- Director Michael T. Bramblett /s/ G. Andrew Franz Senior Vice President - March 10, 1997 --------------------------- Operations - Pharmaceuticals G. Andrew Franz and Director /s/ David A. McLaughlin Senior Vice President - March 10, 1997 --------------------------- Operations - Nutritionals and David A. McLaughlin Director /s/ Edward A. Chod --------------------------- Director March 10, 1997 Edward A. Chod /s/ Stanley Lopata Director March 10, 1997 --------------------------- Stanley Lopata /s/ L. John Polite, Jr. Director March 10, 1997 --------------------------- L. John Polite, Jr. /s/ Thomas F. Patton, Ph.D. Director March 10, 1997 --------------------------- Thomas F. Patton, Ph.D.
37 39 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page ---- Report of Ernst & Young LLP, independent auditors F-1 Report of Hacker, Johnson, Cohen & Grieb, independent auditors F-2 Consolidated balance sheets as of December 31, 1995 and 1996 F-3 Consolidated statements of income for the years ended December 31, 1994, 1995 and 1996 F-4 Consolidated statements of stockholders' equity for the years ended December 31, 1994, 1995 and 1996 F-5 Consolidated statements of cash flows for the years ended December 31, 1994, 1995 and 1996 F-6 Notes to consolidated financial statements F-7 Consolidated schedule for the years ended December 31, 1994, 1995 and 1996: II. Valuation and qualifying accounts F-22
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 40 Report of Independent Auditors The Board of Directors and Stockholders Jones Medical Industries, Inc. We have audited the accompanying consolidated balance sheets of Jones Medical Industries, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 did not audit the September 30, 1995 and 1994 consolidated financial statements of Galen Drugs of Florida, Inc. (acquired by the Company in a business combination accounted for as a pooling of interests, as described in Note 1 to the consolidated financial statements of Jones Medical Industries, Inc.), which statements reflect total assets of $10,649,322 as of September 30, 1995 and total revenues of $18,394,720 and $14,605,172 for the years ended September 30, 1995 and 1994, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Galen Drugs of Florida, Inc., as of September 30, 1995 and for each of the two years in the period then ended, is based solely upon the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jones Medical Industries, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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. ERNST & YOUNG LLP St. Louis, Missouri February 14, 1997 F-1 41 INDEPENDENT AUDITORS' REPORT The Board of Directors Galen Drugs of Florida, Inc. St. Petersburg, Florida: We have audited the accompanying consolidated balance sheets of Galen Drugs of Florida, Inc. and Subsidiaries (the "Company") as of September 30, 1995 and the related consolidated statements of income, stockholders' equity and cash flows for the years ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 financial position of the Company as of September 30, 1995 and the results of its operations and its cash flows for the years ended September 30, 1995 and 1994, in conformity with generally accepted accounting principles. HACKER, JOHNSON, COHEN & GRIEB Tampa, Florida April 25, 1996, except for Note 16 as to which the date is July 30, 1996. F-2 42 Jones Medical Industries, Inc. Consolidated Balance Sheets
DECEMBER 31 1995 1996 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 8,341,823 $ 52,171,684 Accounts receivable, less allowance for doubtful accounts of $187,484 in 1995 and $388,109 in 1996 9,438,107 11,301,251 Inventories 13,014,276 12,752,523 Note receivable 175,169 - Income taxes receivable - 1,763,864 Deferred income taxes 1,546,100 1,846,318 Other 821,556 715,165 ------------------------ Total current assets 33,337,031 80,550,805 Intangible assets: Customer lists 6,084,967 6,084,967 Distribution systems, trademarks, and licenses 24,336,110 48,409,609 Restrictive covenants and other intangibles 3,142,328 5,602,768 Goodwill 4,255,298 17,249,968 ------------------------ 37,818,703 77,347,312 Less accumulated amortization 4,883,538 7,500,072 ------------------------ Net intangible assets 32,935,165 69,847,240 Net property, plant and equipment 18,659,500 24,170,353 Other assets 1,306,712 2,664,990 ------------------------ Total assets $86,238,408 $177,233,388 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 7,436,964 $ 6,471,061 Current portion of long-term debt 5,813,474 3,000,000 Income taxes payable 871,401 - Dividends payable 283,605 560,298 ------------------------ Total current liabilities 14,405,444 10,031,359 Long-term debt 11,420,362 - Deferred income taxes 4,474,077 5,282,307 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, 1,056 shares issued and outstanding in 1995 and none in 1996 10 - Common stock, $.04 par value; 30,000,000 shares authorized, 24,227,423 shares issued and outstanding in 1995 and 28,435,451 in 1996 969,097 1,137,418 Contributed capital (including effects of unearned compensation and related amortization) 19,590,417 108,582,105 Retained earnings 35,379,001 52,200,199 ------------------------ Total stockholders' equity 55,938,525 161,919,722 ------------------------ $86,238,408 $177,233,388 ========================
See accompanying notes. F-3 43 Jones Medical Industries, Inc. Consolidated Statements of Income
YEAR ENDED DECEMBER 31 1994 1995 1996 ----------------------------------------- Sales $62,153,975 $74,791,815 $100,153,086 Cost of sales 29,502,923 32,754,390 39,825,723 ----------------------------------------- Gross profit on sales 32,651,052 42,037,425 60,327,363 Selling, general, and administrative expenses: Selling 11,956,990 12,679,189 15,233,406 General and administrative 6,457,842 7,192,877 7,649,007 Research and development 507,020 452,285 410,170 Amortization 1,362,936 1,429,804 2,617,142 Nonrecurring merger expenses - - 5,743,151 ----------------------------------------- Total selling, general, and administrative expenses 20,284,788 21,754,155 31,652,876 ----------------------------------------- Operating income 12,366,264 20,283,270 28,674,487 Other income (expense): Interest income 144,473 304,089 2,276,199 Interest expense (698,095) (655,003) (553,196) Miscellaneous 67,424 (132,606) 31,248 ----------------------------------------- Income before income taxes 11,880,066 19,799,750 30,428,738 Provision for income taxes 4,360,168 7,410,491 12,290,000 ----------------------------------------- Net income $ 7,519,898 $12,389,259 $ 18,138,738 ========================================= Earnings per common and common equivalent share $ 0.29 $ 0.50 $ 0.65 =========================================
See accompanying notes. F-4 44 Jones Medical Industries, Inc. Consolidated Statements of Stockholders' Equity Years ended December 31, 1994, 1995, and 1996 NUMBER OF SHARES ---------------------- PREFERRED COMMON CONTRIBUTED RETAINED PREFERRED COMMON STOCK STOCK CAPITAL EARNINGS TOTAL -------------------------------------------------------------------------------------- Balance at December 31, 1993 222,706 33,985,731 $2,227 $1,359,428 $ 19,208,372 $20,262,185 $ 40,832,212 Exercise of stock options - 144,225 - 5,769 415,156 - 420,925 Restricted stock: Amortization of unearned compensation - - - 30,470 - 30,470 Conversion of preferred stock (122,787) 483,465 (1,228) 19,339 (18,111) - - Net income - - - - - 7,519,898 7,519,898 Cash dividend declared - common stock ($.045 per historical JMED share) - - - - - (911,718) (911,718) Cash dividend declared - preferred stock ($.16 per share) - - - - - (24,930) (24,930) Adjustment for treasury stock activity in November 1993 - pooled company - (10,883,413) - (435,336) (128,611) (2,825,110) (3,389,057) -------------------------------------------------------------------------------------- Balance at December 31, 1994 99,919 23,730,008 999 949,200 19,507,276 24,020,325 44,477,800 Exercise of stock options - 281,565 - 11,263 433,192 - 444,455 Restricted stock: Amortization of unearned compensation - - - 29,544 - 29,544 Conversion of preferred stock (54,859) 215,850 (549) 8,634 (8,085) - - Return of escrowed preferred stock (44,004) - (440) - (380,836) - (381,276) Escrowed preferred dividend - - - - 9,326 - 9,326 Net income - - - - - 12,389,259 12,389,259 Cash dividend declared - common stock ($.05 per historical JMED share) - - - - - (1,026,401) (1,026,401) Cash dividend declared - preferred stock ($.16 per share) - - - - - (4,182) (4,182) -------------------------------------------------------------------------------------- Balance at December 31, 1995 1,056 24,227,423 10 969,097 19,590,417 35,379,001 55,938,525 Net proceeds from sale of common stock - 3,450,000 - 138,000 75,083,921 - 75,221,921 Exercise of stock options - 333,397 - 13,336 787,013 - 800,349 Restricted stock: Amortization of unearned compensation - - - - 12,500 - 12,500 Tax benefits associated with the exercise of nonqualified stock options - - - - 845,773 - 845,773 Adjustment to increase pooled company's net income to a 12-month amount - - - - - 701,925 701,925 Costs paid by shareholders on behalf of the Company - - - - 2,900,000 - 2,900,000 Redemption of dissenters' shares - - - - (4,022,411) - (4,022,411) Shares issued in connection with the Abana purchase - 420,553 - 16,823 13,875,085 - 13,891,908 Other - - - - (490,041) - (490,041) Conversion of preferred stock (1,056) 4,078 (10) 162 (152) - - Net income - - - - - 18,138,738 18,138,738 Cash dividend declared - common stock ($.0767 per share) - - - - - (2,019,453) (2,019,453) Cash dividend declared - preferred stock ($.04 per share) - - - - - (12) (12) -------------------------------------------------------------------------------------- Balance at December 31, 1996 - 28,435,451 $ - $1,137,418 $108,582,105 $52,200,199 $161,919,722 ======================================================================================
See accompanying notes. F-5 45 Jones Medical Industries, Inc. Consolidated Statements of Cash Flows YEAR ENDED DECEMBER 31 1994 1995 1996 ------------ ------------- ------------- OPERATING ACTIVITIES Net income $ 7,519,898 $ 12,389,259 $ 18,138,738 Adjustment to increase pooled company's net income above to a 15-month amount - - 701,925 Noncash adjustments: Costs paid by shareholders on behalf of the Company - - 2,900,000 Depreciation 912,348 1,109,480 1,362,780 Amortization 1,362,936 1,429,804 2,629,642 Provision for uncollectibles 7,212 63,918 200,625 Deferred income taxes (270,992) (8,141) 527,012 (Gain) loss on sale of assets (1,471) 126,060 101,359 Change in assets and liabilities, net of effects from acquisitions: Accounts receivable 584,430 (3,702,075) (1,406,010) Inventories 1,286,351 (2,726,213) 867,879 Other assets 282,857 (716,218) (1,603,162) Accounts payable and accrued expenses 273,752 1,867,195 (1,118,951) Income taxes payable 251,467 470,968 (2,635,265) ---------------------------------------- Net cash from operating activities 12,208,788 10,304,037 20,666,572 INVESTING ACTIVITIES Maturity (purchases) of certificates of deposit and U.S. government obligations 1,247,489 - - Sales of marketable equity securities 3,515 - - Additions to property, plant and equipment (3,688,322) (5,448,477) (7,386,159) Proceeds from sale of assets 268,938 766,108 408,073 Purchases of intangible assets in product line acquisitions, net of seller financing - (7,072,278) (8,757,057) Adjustment for treasury stock activity of pooled company (169,453) - - Net (increase) decrease in note receivable from related party (45,974) 80,188 175,169 ----------------------------------------- Net cash used for investing (2,383,807) (11,674,459) (15,559,974) FINANCING ACTIVITIES Net proceeds from sale of common stock - - 75,221,921 Proceeds from debt - 7,000,000 8,700,000 Repayment of long-term debt (2,134,295) (4,652,908) (37,758,316) Purchase of dissenters' shares - - (4,022,411) Repayment of note payable to former stockholder of pooled company (105,942) (638,142) (2,475,520) Payments of cash dividends (934,495) (983,917) (1,742,760) Proceeds from exercise of stock options 420,925 444,455 800,349 ----------------------------------------- Net cash from (used for) financing (2,753,807) 1,169,488 38,723,263 ----------------------------------------- Increase (decrease) in cash and cash equivalents 7,071,174 (200,934) 43,829,861 Cash and cash equivalents, beginning of year 1,471,583 8,542,757 8,341,823 ----------------------------------------- Cash and cash equivalents, end of year $ 8,542,757 $ 8,341,823 $ 52,171,684 =========================================
See accompanying notes. F-6 46 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements December 31, 1996 1. BASIS OF PRESENTATION On August 30, 1996, Jones Medical Industries, Inc. ("JMED" or the "Company") 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 the year, and all financial statements for prior periods presented have been restated to give effect to the combination. Earnings per share data reflects the shares issued in the merger for all periods presented. In connection with the Merger, JMED issued 2,910,474 shares of its common stock and paid cash consideration of approximately $4,022,000 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 $892,000 at the consummation date of the combination. Nonrecurring merger expenses related to this acquisition consisting of costs paid by shareholders on behalf of the Company, investment banking and professional fees, and severance costs total $5,743,151 and have been included in selling, general, and administrative expenses in the accompanying 1996 consolidated statement of income. In connection with the Merger, Daniels changed its fiscal year-end from September 30 to December 31, which conforms to JMED's year-end. The consolidated financial statements for all periods prior to 1996 have not been restated to reflect Daniels' change in fiscal year and include Daniels' results of operations on a September 30 fiscal year-end basis and JMED's on a December 31 calendar year basis. The accompanying 1996 financial statements combine both entities' results as of December 31, 1996 and for the 12 months then ended. Because the conformity of Daniels' fiscal year-end has been changed prospectively, Daniels' net income for the three months ended December 31, 1995 has been added directly to retained earnings of the combined Company. During the three months ended December 31, 1995, Daniels reported sales of $4,206,864 and F-7 47 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION (CONTINUED) net income of $701,925. 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. The separate components of the combined results of JMED and Daniels are presented below. Although the merger occurred on August 30, 1996, the separate components are presented through September 30, 1996, which is the date the Company merged the operating results of the two entities.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31 SEPTEMBER 30, 1994 1995 1996 --------------------------------------------------- Sales: JMED $47,548,803 $56,397,095 $60,738,148 Daniels 14,605,172 18,394,720 13,072,200 --------------------------------------------------- Combined $62,153,975 $74,791,815 $73,810,348 =================================================== Net income: JMED $ 5,739,507 $ 9,328,304 $10,322,802 Daniels 1,780,391 3,060,955 1,052,778 --------------------------------------------------- Combined $ 7,519,898 $12,389,259 $11,375,580 ===================================================
On February 7, 1996, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend to be paid on March 1, 1996 to holders of record on February 23, 1996. The financial statements, including stock options, share data, per share data, and market prices, have been retroactively adjusted to reflect the split. On May 22, 1996, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend to be paid on June 10, 1996 to holders of record on June 3, 1996. The financial statements, including stock options, share data, per share data, and market prices, have been retroactively adjusted to reflect the split. 2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION The Company is engaged in the manufacturing, marketing, and sale of pharmaceuticals and nutritional supplements. The Company's principal customers include consumers, retail pharmacies, hospitals (through wholesale drug distributors), physicians, and the United States government, of which sales to the United States government totaled approximately $4,500,000, $3,250,000, and $2,340,000 in 1994, 1995, and 1996, F-8 48 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 2. NATURE OF OPERATIONS AND CUSTOMER CONCENTRATION (CONTINUED) respectively. No one customer accounted for more than 10 percent of the Company's consolidated sales in 1994, 1995, or 1996. The Company's most significant products include:
1994 1995 1996 ------------------------------------------------------------------------------------------------------- PRODUCT SALES PRODUCT SALES PRODUCT SALES (000'S OMITTED) PERCENT OF SALES (000'S OMITTED) PERCENT OF SALES (000'S OMITTED) PERCENT OF SALES ------------------------------------------------------------------------------------------------------- Thrombin products $12,681 20% $14,573 19% $21,134 21% Levoxyl $ 8,736 14% $11,684 16% $14,197 14% Brevital (acquired August 31, 1995) $ - - $ 2,385 3% $ 7,251 7% Tapazole (acquired March 18, 1996) $ - - $ - - $12,254 12%
The Company's only source of supply for thrombin products is from GenTrac, 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. The Company has 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. F-9 49 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Jones Medical Industries, Inc. 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. 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:
ESTIMATED ASSET CATEGORY USEFUL LIFE -------------------------- ----------- Buildings and improvements 15-40 years Equipment and furniture 5-15 years Automobiles 5 years
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. F-10 50 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS (CONTINUED) Amortization is provided using the straight-line method over the estimated useful lives of the assets as follows:
ESTIMATED ASSET CATEGORY USEFUL LIFE --------------- ----------- Customer lists 20 years Distribution systems, trademarks, and licenses 5-30 years Restrictive covenants and other intangibles 5-10 years Goodwill 25-40 years
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 and adjusted for expected changes in operating results. To the extent such projections indicate that the undiscounted operating income (as defined above) 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. At this time, the Company believes that no significant impairment of the goodwill and other intangibles has occurred and that 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 unused pharmaceuticals and pursuant to a limited money-back refund policy applicable to mail-order and other consumer sales of nutritional supplements. At December 31, 1995 and 1996, the Company maintained reserves of $2,645,072 and $1,857,298, respectively, for product rebates, returns and discounts. The reserve decreased in 1996 due to a change in the Company's product return policy applicable to Daniels' product returns received after December 31, 1996. F-11 51 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year (26,360,757 in 1994, 24,843,953 in 1995, and 28,048,519 in 1996) after giving retroactive effect to the following: (i) a three-for-two stock split effected in the form of a stock dividend declared February 7, 1996, (ii) a three-for-two stock split effected in the form of a stock dividend declared May 22, 1996, and (iii) the shares issued to consummate the acquisition of Daniels. The computation assumes that outstanding stock options were exercised and the proceeds used to purchase common shares. Outstanding preferred stock was assumed to have been converted to common stock at the issuance date. 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 FASB Statement 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. DIRECT-RESPONSE ADVERTISING Costs associated with the production of the Company's direct-response mail order catalog are capitalized and amortized over the expected period of future benefit, which typically does not extend beyond six months. At December 31, 1995 and 1996, approximately $392,000 and $57,000, respectively, of capitalized catalog costs are included in the accompanying balance sheets. Advertising expense associated with the catalog in 1994, 1995, and 1996 totaled $902,000, $1,223,000, and $1,548,000, respectively. F-12 52 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. RECLASSIFICATIONS Certain reclassifications have been made to the 1994 and 1995 financial statements to conform to the 1996 presentation. 4. ACQUISITIONS 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 million was financed with short-term bank debt of $8.7 million and Lilly financing of $17.3 million for six months. Approximately $24 million was allocated to the perpetual license with an amortizable life of 30 years, and $2 million 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 million was financed with bank debt of $7 million and Lilly financing of $7 million. Approximately $13 million was allocated to the perpetual license with an amortizable life of 30 years, and $1 million was allocated to a restrictive covenant with an amortizable life of 10 years. F-13 53 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 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 $14.9 million, representing the fair value of Company common stock given of approximately $13.9 million and the fair value of stock options given of approximately $1 million, 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 million, has been allocated to goodwill with an estimated economic life of 25 years. Proforma results of operations, assuming the acquisition of Abana had occured on January 1, 1996, would not materially differ from the 1996 reported results of operations. 5. SUPPLEMENTAL CASH FLOW INFORMATION The following is a summary of supplemental cash flow information:
1994 1995 1996 ----------------------------------- Interest $ 685,345 $ 502,022 $ 532,012 Income taxes $4,333,298 $7,007,200 $14,109,483 Note payable issued in connection with repurchase of common stock of pooled company $3,219,604 $ - $ -
6. INVENTORIES Inventories at December 31, 1995 and 1996, are comprised of the following:
1995 1996 -------------------------- Raw materials $ 5,613,815 $ 4,766,356 Work-in-process 1,130,532 1,539,115 Finished goods 6,269,929 6,447,052 -------------------------- $13,014,276 $12,752,523 ==========================
F-14 54 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1995 and 1996, are as follows:
1995 1996 -------------------------- Land $ 2,397,755 $ 2,419,676 Buildings and improvements 9,617,331 11,710,066 Equipment and furniture 10,031,272 15,022,571 Automobiles 461,702 438,451 -------------------------- 22,508,060 29,590,764 Less accumulated depreciation 3,848,560 5,420,411 -------------------------- $18,659,500 $24,170,353 ==========================
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 1995 and 1996, are comprised of the following:
1995 1996 ---------------------- Trade payables $1,995,631 $1,116,267 Sales rebates, returns and discounts 2,645,072 1,857,298 Compensation 1,158,203 1,492,558 Taxes other than income 114,137 132,968 Interest 175,285 196,469 Royalties 174,276 285,180 Health insurance claims 198,060 130,722 Property and equipment purchases 203,762 39,056 Catalog expenses 163,418 72,118 Nonrecurring merger expenses - 177,862 Other 609,120 970,563 ---------------------- $7,436,964 $6,471,061 ======================
F-15 55 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 9. LONG-TERM DEBT Long-term debt at December 31, 1995 and 1996 consists of the following:
1995 1996 ---------------------- Note payable to bank at .5% below bank base rate (8.25% at December 31, 1995), secured by all corporate assets, payable $136,111 monthly plus interest; final payment due September 2000 $ 7,758,316 $ - Note payable to Lilly at 7%; payable in installments of $4,000,000 in August 1996 and $3,000,000 in August 1997 7,000,000 3,000,000 Note payable to former shareholder of pooled company at 6.81% 2,475,520 - ---------------------- 17,233,836 3,000,000 Less current maturities 5,813,474 3,000,000 ---------------------- $11,420,362 $ - ======================
10. 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, 1995 and 1996, are as follows:
1995 1996 ---------------------- Deferred tax liabilities: Depreciation and amortization $4,474,077 $5,282,307 Deferred tax assets: Accrued sales rebates, returns and discounts 992,026 1,068,770 Deferred compensation on stock options 85,870 85,870 Unicap adjustment on inventory 260,144 267,590 Allowance for doubtful accounts 70,300 128,549 Other 137,760 295,539 ---------------------- 1,546,100 1,846,318 ---------------------- Net deferred tax liabilities $2,927,977 $3,435,989 ======================
F-16 56 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 10. INCOME TAXES (CONTINUED) Significant components of the provision for income taxes are as follows:
1994 1995 1996 ------------------------------------- Current: Federal $4,145,121 $6,628,414 $10,912,000 State 485,883 790,082 851,000 ------------------------------------- Total current 4,631,004 7,418,496 11,763,000 Deferred: Federal (236,182) (7,804) 485,000 State (34,654) (201) 42,000 ------------------------------------- Total deferred (270,836) (8,005) 527,000 ------------------------------------- $4,360,168 $7,410,491 $12,290,000 =====================================
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 is as follows:
1994 1995 1996 -------------------- U.S. federal statutory tax rate 34.0% 35.0% 35.0% State income taxes, net of federal tax benefit 3.8% 4.0% 3.0% Other, net (1.1)% (1.6)% 2.3% -------------------- 36.7% 37.4% 40.3% ====================
11. 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, 1996, there were no shares of preferred stock currently designated or outstanding. F-17 57 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 11. PREFERRED STOCK (CONTINUED) During 1995, the Company reached a settlement regarding a portion of the contingent purchase price payable to the former stockholders of GenTrac, Inc. In connection with the settlement, 44,004 shares of the Company's preferred stock held in an escrow account, pending final dispute resolution, were released from escrow and returned to the Company. These shares of preferred stock with an original cost of $381,276 have been canceled by the Company. The accompanying 1995 financial statements reflect the resulting $381,276 reduction of goodwill associated with the contingent purchase price and reduction in preferred stock. 12. 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 eight-year periods from the grant dates. At December 31, 1996, options for 498,030 shares of common stock are available for future grant. A total of 1,381,595 options to purchase common stock are outstanding under these plans at December 31, 1996, of which 198,375 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. In November 1996, the Company amended the incentive stock plans to 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. In addition, the Company has nonqualified stock option (NSO) plans for its independent directors. Certain of these options offer exercise prices below the fair market value of the common stock at the date of grant. In accordance with APB 25, differences between the option prices and the fair market values at the dates of grant have been accrued ratably over the five-year vesting periods. Total compensation expense in 1994, 1995, and 1996 related to the NSO plans was $122,000, $123,500, and $12,500, respectively. At F-18 58 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 12. STOCK OPTION PLANS (CONTINUED) December 31, 1996, a total of 42,750 options to purchase common stock are outstanding under the NSO plans of which 18,000 are currently exercisable. Option activity for 1994, 1995, and 1996 was as follows:
1994 1995 1996 --------------------------------- Outstanding options, January 1 1,084,500 973,215 875,025 Exercised (144,225) (281,565) (333,397) Granted 196,875 194,625 901,070 Cancelled (163,935) (11,250) (18,353) --------------------------------- Outstanding options, December 31 973,215 875,025 1,424,345 ================================= Weighted average price of options outstanding, January 1 $ 2.52 $ 2.36 $ 2.76 ================================= Weighted average price of options exercised $ 1.99 $ 1.58 $ 2.41 ================================= Weighted average price of options granted $ 3.73 $ 3.67 $ 13.24 ================================= Weighted average price of options cancelled $ 5.37 $ 2.85 $ 3.35 ================================= Weighted average price of options outstanding, December 31 $ 2.36 $ 2.76 $ 9.65 =================================
Outstanding options at December 31, 1996 are exercisable as follows, assuming the targeted common stock prices are attained with respect to the time accelerated stock options:
WEIGHTED AVERAGE RANGE OF NUMBER OPTION OPTION OF SHARES PRICE PRICE ----------------------------------- Currently exercisable at December 31, 1996: 216,375 $ 3.21 $2.44 - $7.50 Outstanding options vesting in: 1997 284,640 $ 8.84 $ 2.33 - $40.00 1998 254,845 $ 9.30 $ 2.33 - $40.00 1999 241,195 $10.35 $ 2.89 - $40.00 2000 226,170 $11.80 $ 2.89 - $40.00 2001 and thereafter 201,120 $14.90 $10.67 - $40.00 ------------------- 1,424,345 $ 9.65 ========= ========
F-19 59 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 12. STOCK OPTION PLANS (CONTINUED) Pro forma information regarding net income and earnings per share is required by FASB Statement 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 1995 and 1996, respectively: risk-free interest rates of 6.26 percent and 6.36 percent; a dividend yield of .2 percent and .2 percent; volatility factors of the expected market price of the Company's common stock of .514 and .516; 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. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting periods. The Company's pro forma information follows:
1995 1996 ------------------------ Pro forma net income $12,345,765 $17,511,170 =========== =========== Pro forma earnings per common and common equivalent share $ .50 $ .62
=========== =========== 13. 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 5 percent of the employee's compensation. Company contributions in 1994, 1995, and 1996 were approximately $200,000, $224,000, and $357,000, respectively. F-20 60 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements 14. CONTINGENCIES AND COMMITMENTS At December 31, 1996, the Company carried product liability coverage of $20 million per occurrence and $20 million in the aggregate on a "claims made" basis and carried excess coverage of $5 million 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. In connection with certain product line acquisitions, the Company is obligated to pay royalties of up to 10 percent of certain product sales through 2006. Total royalty expense in 1994, 1995, and 1996 was approximately $636,000, $593,000, and $872,000, respectively. 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
1995 FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ----------- Net sales $15,506,275 $17,620,771 $19,765,990 $21,898,779 Gross profit $ 8,944,085 $ 9,561,901 $11,125,851 $12,405,588 Net income $ 2,588,149 $ 2,717,620 $ 3,194,763 $ 3,888,727 Earnings per share (a)(b) $ .10 $ .11 $ .13 $ .16 Stock prices: (a) High $ 4.04 $ 5.33 $ 8.04 $ 11.00 Low $ 2.79 $ 3.625 $ 4.96 $ 7.125 1996 Net sales $21,848,076 $25,737,906 $26,224,366 $26,342,738 Gross profit $12,447,137 $15,716,094 $15,341,781 $16,822,351 Net income $ 3,748,697 $ 5,838,204 $ 1,788,679 $ 6,763,158 Earnings per share (a)(b) $ .15 $ .20 $ .06 $ .24 Stock prices: (a) High $ 30.33 $ 39.50 $ 50.50 $ 48.625 Low $ 10.39 $ 25.67 $ 21.00 $ 32.50
(a) Retroactively adjusted to reflect the three-for-two stock split declared February 7, 1996 and the three-for-two stock split declared May 22, 1996. (b) Retroactively adjusted to reflect the shares issued in connection with the Daniels merger on August 30, 1996. F-21 61 Jones Medical Industries, Inc. Schedule II - Valuation and Qualifying Accounts BALANCE AT CHARGED TO BEGINNING COSTS AND DEDUCTIONS - BALANCE AT DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS END OF PERIOD Year ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 187,484 $ 236,803 $ (36,178) $ 388,109 =================================================== Accumulated amortization of intangibles $4,883,538 $2,617,142 $ (608) $7,500,072 =================================================== Year ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 111,347 $ 76,137 $ - $ 187,484 =================================================== Accumulated amortization of intangibles $4,092,394 $1,429,804 $(638,660)* $4,883,538 =================================================== Year ended December 31, 1994 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 79,646 $ 80,296 $ (48,595) $ 111,347 =================================================== Accumulated amortization of intangibles $3,653,028 $1,362,936 $(923,570)* $4,092,394 ===================================================
*Write-off of fully amortized intangibles in 1995 and 1994. F-22 62 Commission File No: 0-15098 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------- EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- JONES MEDICAL INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) 1945 Craig Road St. Louis, MO 63146 (Address of Registrant's principal offices) EX-10.2 2 EMPLOYEE PROFIT SHARING AND 401(K) PLAN 1 EXHIBIT 10.2 JMI'S EMPLOYEE PROFIT-SHARING AND 401(K) PLAN (AMENDED AND RESTATED AS OF JANUARY 1, 1997) WHEREAS, Jones Medical Industries, Inc. maintains an employee pension benefit plan known as JMI's Employee Profit-Sharing and 401(k) Plan, designed to comply with provisions of the United States Internal Revenue Code and the Employee Retirement Income Security Act of 1974 applicable to qualified employee plans and trusts; and WHEREAS, Jones Medical Industries, Inc. reserved to itself the right to amend the JMI's Employee Profit-Sharing and 401(k) Plan in Section 3.10.1 thereof; and WHEREAS, Jones Medical Industries, Inc. deems it necessary and desirable to amend and restate the JMI's Employee Profit-Sharing and 401(k) Plan in its entirety. AMENDMENT AND RESTATEMENT OF PLAN AND EFFECTIVE DATE Jones Medical Industries, Inc. does hereby adopt an amendment and restatement of the JMI's Employee Profit-Sharing and 401(k) Plan under the name of JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997), as set forth herein, effective from and after January 1, 1997, except as otherwise provided herein. Except as otherwise expressly provided in this instrument, the provisions of this amended and restated plan apply only to an Employee who terminates employment on or after January 1, 1997. 2 ARTICLE 1: DEFINITIONS As used in the Plan and the Trust, the words and phrases hereinafter set forth shall have the following meanings: ADMINISTRATOR: The person or persons appointed to administer the Plan under the provisions of Article 8. ANNUAL VALUATION DATE: The last day of each Plan Year. AUTHORIZED LEAVE OF ABSENCE: An absence of an Employee which is authorized by an Employer under its standard personnel practices, treating all persons under similar circumstances alike, and for a period not longer than two (2) years, provided that the Employee resumes active employment with the Employer within the period of authorized absence or the Employee's Retirement occurs within the period of authorized absence. Absence of an Employee due to service in the Armed Forces of the United States caused by war or other emergency or required under the laws of conscription in time of peace shall be deemed an Authorized Leave of Absence, provided that the Employee resumes active employment with an Employer within the period and under conditions required by the Veterans Reemployment Act or any successor law. BENEFICIARY: An individual or other legal entity designated by a Participant or Former Participant in the manner provided in Section 6.9 to receive any Benefit payable after his death on account of his Participation in the Plan; provided, if no designated Beneficiary survives the Former Participant, any Benefit remaining payable after his death shall be paid to his estate, subject to Sections 6.2(b) and 6.6(b). BENEFIT: The amount of a Former Participant's vested (nonforfeitable) interest in his Individual Account which becomes payable to him or to his Spouse or Beneficiary. CODE: The Internal Revenue Code of 1986, as amended. COMPENSATION: The amount paid by an Employer to a Participant during a Plan Year in consideration for services performed as an Employee, as defined for the Wages, Tips and Other Compensation Box on Form W-2, plus any amounts by which the Participant elects that his Compensation be reduced during the Plan Year under a plan maintained by the Employer which is designed to comply with Section 125 of the Code, plus any amounts the Participant elects to defer in accordance with Section 3.2 of this Plan with respect to the Plan Year; provided that annual Compensation shall be limited to no more than One Hundred Fifty Thousand Dollars ($150,000), as adjusted pursuant to Code Section 401(a)(17)(B). If a determination period consists of fewer than twelve (12) months,the annual compensation limit will be multiplied by a fraction, the numerator of which is the JMI s Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 1 3 number of months in the determination period, and the denominator of which is twelve (12). CONTROLLED GROUP MEMBER: Any entity which is: (a) a member of the controlled group of corporations which includes the Plan Sponsor or any Employer, as determined in accordance with Section 414(b) of the Code; or (b) a trade or business under common control with the Plan Sponsor or any Employer, as determined in accordance with Code Section 414(c); or (c) a member of an affiliated service group which includes the Plan Sponsor or any Employer, as determined in accordance with Code Section 414(m); or (d) any other entity required to be aggregated with the Plan Sponsor or any Employer pursuant to regulations promulgated under Code Section 414(o). DEATH BENEFIT: Any Benefit of a Former Participant which is paid after the Former Participant's death. DEFERRED RETIREMENT DATE: The Retirement Date of a Participant whose Participation continues after his Normal Retirement Date. DISABILITY RETIREMENT DATE: The date on which a Participant retires on account of a permanent disability, determined in accordance with Article 7. EARLY RETIREMENT DATE: The Last Day of the Plan Year in which a Participant attains age fifty-five (55) and has completed at least ten (10) Years of Vesting Service with an Employer or Controlled Group Member. EFFECTIVE DATE: January 1, 1997, except as otherwise provided herein. EMPLOYEE: Any person who renders services for which he is entitled to remuneration from an Employer or other Controlled Group Member, including Leased Employees but not including any independent contractor who is not a Leased Employee. EMPLOYER: Jones Medical Industries, Inc. and any Controlled Group Member which maintains this Plan from time to time. EMPLOYER MATCHING ACCOUNT: A sub-account of a Participant's or Former Participant's Individual Account representing the portion attributable to Employer matching contributions made pursuant to Section 3.3. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 2 4 EMPLOYER PROFIT-SHARING ACCOUNT: A sub-account of a Participant's or Former Participant's Individual Account representing the portion attributable to Employer profit-sharing contributions made pursuant to Section 3.4. EMPLOYER STOCK: The voting common stock of the Plan Sponsor, which shares constitute "qualifying employer securities" under Code Section 4975(e)(8). EMPLOYMENT COMMENCEMENT DATE: The first day as of which any Employee is or has been credited with an Hour of Service with any Employer or Controlled Group Member. ENTRY DATE: The first day of January and the first day of July of each Plan Year. ERISA: The Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829 as amended from time to time. FIDUCIARIES: The Plan Sponsor, the Employers, the Administrator, the Trustee, Smith Barney Corporate Trust Company, any Investment Manager and any insurance company investing assets of the Trust Fund, but only with respect to their respective specific responsibilities for Plan and Trust administration, all as assigned in Article 8 and throughout the Plan and the Trust and the Supplemental Trust or pursuant thereto, but none of them shall be a Fiduciary with respect to any responsibility not specifically and expressly assigned to it. FORFEITURE: The portion of a Former Participant's Employer Matching Account which is determined not to constitute a vested (nonforfeitable) Benefit in accordance with Section 5.3 or an amount treated as a Forfeiture in accordance with Sections 4.8 or 14.4. FORMER PARTICIPANT: A person who was a Participant and whose Participation has ended, as provided in Article 2. HIGHLY COMPENSATED EMPLOYEE: Any Employee who (a) was a five percent (5%) owner at any time during the Plan Year or the preceding Plan Year or (b) for the preceding Plan Year (i) had Compensation from an Employer in excess of Eighty Thousand Dollars ($80,000) [as adjusted pursuant to Code Section 4.14(q)(1)] and JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 3 5 (ii) if the Employer elects application of this paragraph (b) for such preceding year, was in the top-paid group of Employees as defined in Code Section 414(q)(4). HOUR OF SERVICE: (a) An Hour of Service is: (1) An hour for which an Employee is paid or entitled to payment from an Employer or Controlled Group Member for the performance of duties; or (2) An hour for which an Employee is paid or entitled to payment from an Employer or Controlled Group Member on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated), due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; or (3) An hour for which back pay has been awarded or agreed to by an Employer or Controlled Group Member with respect to an Employee, irrespective of mitigation of damages. (b) Solely for the purpose of determining a 1-Year Break in Service, in the case of an Employee who is absent from work by reason of the Employee's pregnancy, the birth of a child of the Employee, placement of a child with the Employee in connection with the adoption of such child by such Employee, or for purposes of caring for such child for a period beginning immediately following such birth or placement, Hours of Service which otherwise would normally have been credited to such Employee but for such absence shall be taken into account. Hours of Service credited hereunder shall be credited to the Plan Year in which the absence from work begins, if a Participant would be prevented from incurring a 1-Year Break in Service in such Plan Year solely because the period of absence is treated as Hours of Service, or in any other case, in the immediately following Plan Year. No credit for Hours of Service shall be given pursuant to this paragraph (b) unless the affected Employee furnishes such timely information to the Administrator as is reasonably required to establish that the absence from work is for reasons set forth in this paragraph (b) and the number of days of such absence. (c) Hours of Service required to be taken into account pursuant to paragraphs (a) and (b) of this definition shall be determined and credited to the Employee in a manner consistent with Code Sections 410(a)(5)(E) and 411(a)(6)(E) and Department of Labor Regulations Sections 2530.200b-2(b) and (c); provided: (1) an Employee shall not receive credit for the same hour under more than one of parts (1), (2) or (3) of paragraph (a) hereof; JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 4 6 (2) no more than five hundred one (501) Hours of Service shall be credited to an Employee under parts (2) or (3) of paragraph (a) on account of any single continuous period during which the Employee performs no duties, or under paragraph (b) on account of the birth, adoption or placement of a child; and (3) Hours of Service shall not be credited to an Employee on account of payments under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation or disability insurance laws, or payments which solely reimburse an Employee for medical or medically related expenses. (d) Notwithstanding any other provision of the Plan, no Employee shall be credited with any Hours of Service for any purpose under the Plan with respect to any period of employment with an Employer after it ceases to be a Controlled Group Member. (e) Nothing contained in this definition of Hour of Service shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation promulgated under any such law; nor as denying an Employee credit for an Hour of Service if credit is required by separate Federal law. INDIVIDUAL ACCOUNT: The separate account maintained for the share of each Participant and Former Participant in the Trust Fund, including one or more of the following sub-accounts: Employer Matching Account, Employer Profit-Sharing Account, Salary Deferral Account, Participant Rollover Account, Qualified Non-Elective Contribution Account and Transfer Account. INVESTMENT FUND: Any fund maintained by the Trustee for investment pursuant to Section 4.2 of the Plan, including those funds specified on Exhibit A attached hereto as amended by the officers of the Plan Sponsor from time to time. INVESTMENT MANAGER: Any person or entity appointed as Investment Manager by the Plan Sponsor in accordance with the provisions of the Plan and Trust. LEASED EMPLOYEE: Any person (other than a direct common law employee of a Controlled Group Member) who pursuant to an agreement between the Controlled Group Member and any other person ("leasing organization") has performed services for the Controlled Group Member (or for the Controlled Group Member and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one (1) year, which services are of a type historically performed by employees in the business field and are performed under the primary direction or control of the Controlled Group Member. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 5 7 performed for the Controlled Group Member shall be treated as provided by the Controlled Group Member. A Leased Employee shall not be considered an Employee if: (a) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (b) Leased Employees do not constitute more than 20 percent (20%) of the nonhighly compensated workforce of all Controlled Group Members and all organizations related to any Controlled Group Member pursuant to Section 414(n)(6) of the Code. NONHIGHLY COMPENSATED EMPLOYEE: Any Employee of a Controlled Group Member who is not a Highly Compensated Employee. NORMAL RETIREMENT AGE: The later of the date on which a Participant or Former Participant attains age sixty-five (65) or the fifth (5th) anniversary of the first day of the Plan Year in which the Participant or Former Participant commenced participation. 1-YEAR BREAK IN SERVICE: A calendar year with respect to which a Participant or Former Participant has been credited with five hundred (500) or fewer Hours of Service; provided that a Participant shall not incur a 1-Year Break in Service by reason of an Authorized Leave of Absence. PARTICIPANT: An Employee eligible to participate in the Plan in accordance with the provisions of Article 2. PARTICIPANT ROLLOVER ACCOUNT: A sub-account of a Participant's or Former Participant's Individual Account representing the portion attributable to amounts accepted by the Plan pursuant to Section 3.10. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 6 8 PARTICIPATION: The period commencing with the date an Employee becomes a Participant and ending on the date on which his status as a Participant ends, as determined pursuant to Article 2. PLAN: JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) (formerly known as JMI's Employee Retirement 401(k) Plan), the Plan set forth herein, as amended from time to time. PLAN SPONSOR: Jones Medical Industries, Inc. or any other entity which may succeed to the rights, powers, duties and liabilities of the Plan Sponsor under the Plan. PLAN YEAR: The period coinciding with the calendar year. QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT: A sub-account of a participant's or Former Participants Individual Account representing the portion attributable to Employer qualified non-elective contributions made pursuant to Section 3.5. RETIREMENT: Termination of a Participant's Participation on his Normal Retirement Age, Deferred Retirement Date or Disability Retirement Date. RETIREMENT BENEFIT: Any Benefit which is paid prior to a Former Participant's death on account of his Retirement. RETIREMENT DATE: The date of a Participant's Retirement, or in the case of a Former Participant whose Participation ended for reasons other than his Retirement or death, his Normal Retirement Age. SALARY DEFERRAL ACCOUNT: A sub-account of a Participant's or Former Participant's Individual Account representing the portion attributable to Employer contributions to the Plan pursuant to Section 3.2. SPOUSE: The individual to whom a Participant or Former Participant is married on the date his Benefit is paid or on the date of his death, whichever occurs first. SUPPLEMENTAL TRUST: The Smith Barney Corporate Trust Company Trust Agreement maintained as a supplement to the Trust. TERMINATION BENEFIT: Any Benefit which is paid prior to a Former Participant's death on account of termination of the Former Participant's Participation for reasons other than his Retirement. TRANSFER ACCOUNT: A sub-account of a Participant's or Former Participant's Individual Account representing the Participant's or Former Participant's share of the Trust JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 7 9 Fund attributable to amounts transferred to the Plan from the JMI-Daniels Pharmaceuticals, Inc. 401(k) Plan and earnings thereon. TRUST: JMI's Employee Profit-Sharing and 401(k) Trust, including the trust document and the Supplemental Trust maintained in accordance with the terms of the Trust instrument, as amended from time to time. TRUSTEE: The corporation, individual or individuals appointed by the Plan Sponsor from time to time to act as Trustee under the Trust. TRUST FUND: All monies and other property of the Trust and all investments and reinvestments made therefrom, less the payments which have been made by the Trustee as provided in the Plan, the Trust and/or the Supplemental Trust. VALUATION DATE: Each day when the New York Stock Exchange is open and any other date as of which the value of the Trust Fund is determined in accordance with Section 4.3. YEAR OF BENEFIT SERVICE: A Plan Year during which a Participant completes more than five hundred (500) Hours of Service or is employed on the last day of the Plan Year or dies, retires or becomes disabled during the Plan Year. YEAR OF ELIGIBILITY SERVICE: An Employee shall be credited with a "Year of Eligibility Service" on the earliest of the following dates: (a) The date of the Employee's completion of a period of six (6) consecutive months commencing on the Employee's Employment Commencement Date during which the Employee is credited with at least one (1) Hour of Service, or (b) The date of the Employee's completion of a period of twelve (12) months commencing on the Employee's Employment Commencement Date during which the Employee is credited with at least one thousand (1,000) Hours of Service, or (c) The last day of the first Plan Year commencing after the Employee's Employment Commencement date during which the Employee is credited with at least one thousand (1,000) Hours of Service. YEAR OF VESTING SERVICE: A calendar year with respect to which an Employee is credited with at least one thousand (1,000) Hours of Service, including any calendar year beginning before the Effective Date which is included in the Employee's most recent continuous period of employment with the Employer or Controlled Group Member which includes the Effective Date. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 8 10 ARTICLE 2: ELIGIBILITY AND PARTICIPATION 2.1 GENERAL ELIGIBILITY REQUIREMENTS. An Employee of an Employer who is eligible to participate in the JMI's Employee Profit-Sharing and 401(k) Plan as of December 31, 1996 shall be eligible to participate in this Plan on January 1, 1997. Any other Employee who is employed by an Employer shall become a Participant on the Entry Date next following the later of his attainment of age eighteen (18) or his completion of a Year of Eligibility Service. 2.2 EXCLUSIONS. (a) Notwithstanding any other provisions of the Plan, no Employee shall be a Participant while he is a member of a unit of Employees represented by a collective bargaining agreement if retirement benefits were the subject of good faith bargaining incident to such representation. (b) Notwithstanding any other provisions of the Plan, no Employee shall be a Participant while he is a Leased Employee. 2.3 TRANSFER. Upon transfer of a Participant to employment in a classification of Employees which is not eligible to participate in the Plan, his Participation shall end for all purposes other than: (a) determination of his Years of Vesting Service for purposes of Section 5.3; (b) selection of the Investment Funds in which his Individual Account is invested pursuant to Section 4.2; (c) Investment of a portion of his Individual Account in loans to himself pursuant to Section 4.10; and (d) distribution of his Benefit pursuant to Article 6. 2.4 TERMINATION OF PARTICIPATION. A Participant's Participation shall end for all purposes upon the occurrence of his Retirement, death, resignation or discharge from the employ of all Controlled Group Members, or upon the commencement of an absence without Compensation other than an Authorized Leave of Absence. 2.5 RESUMPTION OF PARTICIPATION. A Former Participant shall resume Participation on the date on which he resumes employment with an Employer in a classification of Employees eligible to participate in the Plan. An Employee who satisfies JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 9 11 the Plan's eligibility conditions but who terminates employment with the Employer prior to becoming a Participant shall become a Participant on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his re-employment. 2.6 DETERMINATION OF EMPLOYMENT CLASSIFICATIONS. An Employee's employment classification shall be determined for purposes of the Plan in accordance with his Employer's standard personnel practices, treating all individuals similarly situated alike. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 10 12 ARTICLE 3: CONTRIBUTIONS 3.1 APPLICATION OF CONTRIBUTIONS. All contributions under this Plan shall be paid to the Trustee and deposited in the Trust Fund. All assets of the Trust Fund, including investment income, shall be retained for the exclusive benefit of Participants, Former Participants and Beneficiaries and shall be used to pay Benefits to such persons or to pay administrative expenses of the Plan and Trust to the extent not paid by an Employer or any Participant, and assets of the Trust Fund shall not revert or inure to the benefit of any Employer, except as provided in the Plan or otherwise in accordance with applicable law. 3.2 SALARY DEFERRAL CONTRIBUTIONS. (a) (1) Effective as of the Entry Date on which an Employee becomes a Participant or as of any subsequent Entry Date occurring while he is a Participant, the Participant may elect to defer a portion of his Compensation equal to any whole percentage of his Compensation per paycheck, not in excess of fifteen percent (15%) of Compensation per paycheck, as the Participant may determine. A Participant's election pursuant to this Section 3.2(a)(1) shall continue in effect for all payroll payments made by his Employer until the earlier of the date as of which the Participant changes or discontinues his election in accordance with Section 3.2(a)(2) or (3), or until the date as of which his Participation ends. (2) Effective as of any Entry Date, a Participant may change his election regarding the percentage of his Compensation to be deferred from each paycheck to any other percentage permitted under Section 3.2(a)(1). (3) A Participant may elect to discontinue salary deferral contributions under the Plan as of any date and a Participant who so elects may resume salary deferral contributions effective as of the next Entry Date. (4) Any election pursuant to this Section 3.2(a) shall be made in written form prescribed by and delivered to the Administrator prior to the date on which such election is to be effective in accordance with the applicable provision of this Section 3.2(a). (b) A Participant's Employer shall make contributions to the Participant's Salary Deferral Account on behalf of the Participant in amounts by which the Participant's Compensation is reduced pursuant to his elections under Section 3.2(a). (c) The total amount of salary deferral contributions of any Participant for a Plan Year shall not exceed the amount determined pursuant to Code Section 402(g), adjusted at the same time and in the same manner as under Code Section 415(d). JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 11 13 (d) Amounts contributed in accordance with this Section 3.2 shall be allocated to the Salary Deferral Accounts of Participants pursuant to Section 4.4(b). (e) Excess Deferrals. Notwithstanding any other provisions of this Plan, a Participant may file a written claim with the Administrator stating that the Participant's salary deferral contributions under this Plan, and the Participant's elective contributions under any other plan or arrangement under Code Sections 401(k), 403(b), 408(k)(6) or 501(c)(18) are in excess of the applicable Code Section 402(g) limit, adjusted at the same time and in the same manner as under Code Section 415(d). Such claim shall request that the Administrator make a corrective distribution of a specified amount of excess deferrals. If the claimant is a Participant in more than one elective deferral arrangement described in this paragraph, such Participant may allocate the excess deferrals among such plans and shall notify the Administrator of such allocation. (1) Any claim pursuant to this Section 3.2(e) shall be in written form prescribed by and delivered to the Administrator not later than March 1 of the Participant's taxable year next following the year in which the excess deferrals were made. (2) The Administrator shall distribute to the Participant the amount of excess deferrals allocated to the Plan, plus any income attributable thereto not later than April 15 of the Participant's taxable year next following the year in which the excess deferrals were made. The income or loss attributable to a Participant's excess deferrals for the Plan Year shall be determined under the Plan's generally applicable accounting methods. (f) The Administrator shall monitor the Plan's compliance with the antidiscrimination tests of Section 401(k) of the Code as set forth in Section 4.6. The Administrator shall have the authority to take any action it deems appropriate to ensure compliance with the antidiscrimination tests including but not limited to (1) amending or revoking a salary deferral election of any Participant at any time, except that the Administrator may not increase the amount of contributions hereunder without a Participant's consent, (2) delaying or holding Employer contributions until it can be determined that no amount in excess of the limitations set forth in Section 4.6 will be contributed, (3) distributing amounts in excess of the limitations set forth in Section 4.6 and any income allocable thereto prior to the close of the next following Plan Year in accordance with Section 4.7. 3.3 MATCHING CONTRIBUTIONS. (a) For each Plan Year, the officers of the Plan Sponsor may direct the Employers to make a specified matching contribution on behalf of each of their Participants and Former Participants who make salary deferral contributions during such Plan Year. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 12 14 (b) Amounts contributed in accordance with this Section 3.3 shall be allocated to the Employer Matching Accounts of Participants and Former Participants pursuant to Section 4.4(c). 3.4 PROFIT-SHARING CONTRIBUTIONS. (a) For each Plan Year, the officers of the Plan Sponsor may direct the Employers to make a specified profit-sharing contribution on behalf of their Participants and Former Participants who have been credited with a Year of Benefit Service. (b) Employer profit-sharing contributions may be made in cash or in Employer Stock, as the Plan Sponsor shall determine in its sole discretion. (c) Amounts contributed in accordance with this Section 3.4 shall be allocated to the Employer Profit-Sharing Accounts of Participants and Former Participants pursuant to Section 4.4(d). 3.5 QUALIFIED NON-ELECTIVE CONTRIBUTIONS. (a) For each Plan Year, the officers of the Plan Sponsor may direct the Employers to make qualified non-elective contributions in cash on behalf of Participants and Former Participants who are Nonhighly Compensated Employees eligible to receive matching contributions in an amount sufficient to satisfy the special Code Section 401(k) and 401(m) provisions of Section 4.6. (b) Amounts contributed in accordance with this Section 3.5 shall be allocated to the Employer Profit-Sharing Accounts of Participants and Former Participants pursuant to Section 4.4(e). 3.6 TIME OF CONTRIBUTIONS. (a) Contributions authorized in accordance with Section 3.2 with respect to each calendar month shall be paid over by each Employer to the Trustee within a reasonable time after the end of such calendar month, but in any event, not later than the fifteenth (15th) business day of the month following the month in which such amounts would otherwise have been payable to the Participant in cash. (b) Contributions authorized in accordance with Sections 3.3, 3.4, and 3.5 with respect to a Plan Year shall be paid over by each Employer to the Trustee at such time or times as the officers of the Plan Sponsor shall determine, but in any event, not later than the date by which payment of contributions to a qualified profit-sharing trust must be made in order to be deductible by the Employers with respect to such Plan Year under the applicable Code provisions. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 13 15 (c) The Employers shall not be liable for interest on any contributions authorized under Sections 3.2, 3.3, 3.4 or 3.5. 3.7 CONTRIBUTIONS LIMITED TO DEDUCTIBLE AMOUNTS. An Employer's contributions for a Plan Year shall not exceed the maximum amount which may be deducted by the Employer for such Plan Year under the applicable Code provisions. 3.8 DETERMINATION OF EMPLOYER CONTRIBUTIONS. For purposes of this Article 3, determination of the amount of an Employer's contributions to the Plan shall be made by the chief accounting or other fiscal officer of the Employer in accordance with generally accepted accounting principles, and any determination made by such officer shall be final and conclusive and shall not be subject to any later adjustment. No Trustee, Participant, Former Participant, Employee or Beneficiary, or other person or entity shall have any right or duty to inquire into the amount of such contributions or the method used in determining Employer contributions. 3.9 PROFIT-SHARING PLAN. This Plan is designed to be a profit-sharing plan for purposes of Code Section 401(a)(27), whether or not any Employer has any current or accumulated profits from time to time when contributions are permitted or required hereunder, and the presence or absence of current or accumulated profits from time to time shall not limit an Employer's right or duty to make contributions in accordance with the remaining provisions of this Article 3. 3.10 ROLLOVER CONTRIBUTIONS. (a) This Plan and the Trust shall accept a rollover contribution from an Employee, provided that the rollover amount is derived from a tax-qualified plan or trust and such contribution is otherwise eligible for rollover treatment under the applicable provisions of the Code and such contribution is tendered to the Administrator within the period allowed therefor under the applicable Code provisions. (b) The Administrator shall establish a separate Participant Rollover Account for each Participant from whom the Plan and Trust accept a rollover contribution, as of the date of such acceptance. (c) The Administrator may establish such rules and regulations, to be applied on a uniform basis with regard to all persons similarly situated, as may be necessary or convenient to facilitate acceptance of rollover amounts. (d) The Participant shall be entitled to direct the investment of any amounts allocated to his Participant Rollover Account in accordance with the provisions of Section 4.2. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 14 16 ARTICLE 4: PARTICIPANTS' ACCOUNTS 4.1 MAINTENANCE OF INDIVIDUAL ACCOUNTS. The Administrator shall create and maintain adequate records to disclose the interest in the Trust Fund of each Participant, Former Participant, Spouse and Beneficiary. Such records shall be in the form of Individual Accounts and sub-accounts thereunder, including a Salary Deferral Account, an Employer Matching Account, an Employer Profit-Sharing Account, Participant Rollover Account and/or Transfer Account. The maintenance of Individual Accounts and sub-accounts is for accounting purposes only, and segregation of the assets of the Trust Fund shall not be required. 4.2 INVESTMENT OF INDIVIDUAL ACCOUNTS. (a) Subject to the restrictions respecting investment in the Employer Stock Fund provided in Section 4.2(e), each Participant or Former Participant shall be entitled to direct the investment of his Individual Account among the Investment Funds then available under the Plan in increments of any whole percentage. A Participant's initial investment direction shall be made in written form prescribed by and delivered to the Administrator prior to the Entry Date as of which his Participation begins. (b) Subject to the restrictions respecting investment in the Employer Stock Fund provided in Section 4.2(e), a Participant or Former Participant may elect to change his investment direction with respect to his Individual Account on any day. Any such change in investment direction shall be communicated by notice in written, telephonic or electronic mode prescribed by the Administrator prior to the date as of which such change is to be effective. (c) Such investment direction or change of investment direction shall be acknowledged in writing and shall be complied with, provided that no Fiduciary shall be obligated to comply with any direction or change of direction that (1) is not in accordance with the terms of this Plan and the Trust insofar as such documents are consistent with the provisions of Title I of ERISA; or (2) would cause a Fiduciary to maintain the indicia of ownership of any assets of the Plan outside the jurisdiction of the district courts of the United States other than as permitted by Section 404(b) of ERISA and 29 CFR 2550.404b-1; or (3) would jeopardize the Plan's tax-qualified status; or (4) could result in a loss in excess of the Participant's account balance; or JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 15 17 (5) would result in a direct or indirect sale, exchange, lease or loan as described in Regulation Section 2550.404c-1(d)(2)(ii)(E); or (6) would result in a prohibited transaction under ERISA Section 406 or Code Section 4975; or (7) would generate income that would be taxable to the Plan. (d) If a Participant fails to make an initial investment direction as provided for in Section 4.2(a), the Trustee shall direct investment of his Individual Account until such time as the Participant makes an initial investment direction in accordance with Section 4.2(a). (e) The President of the Plan Sponsor may determine that it is appropriate to establish the Employer Stock Fund. In the event such Employer Stock Fund is established, the following provisions shall apply. (1) No Participant shall be required to invest any portion of his Individual Account in the Employer Stock Fund. However, if the Participant elects to make such an investment, the following restrictions shall apply: (i) For each Plan Year, treating all similarly situated Participants alike, the Plan Administrator shall determine in its sole discretion a percentage or fixed dollar amount of the Employers' matching contributions which will be available for investment in the Employer Stock Fund. Only the amounts so designated may be invested in the Employer Stock Fund. If a Participant or Former Participant intends to invest these amounts credited to his Employer Matching Account in the Employer Stock Fund, he must make such an election at the time the amounts are credited to the Employer Matching Account before these amounts have been invested in any other Investment Fund. (ii) Amounts invested in any of the Investment Funds other than the Employer Stock Fund may not be transferred into the Employer Stock Fund. (iii) A Participant or Former Participant may transfer amounts from the Employer Stock Fund in accordance with the remaining provisions of this Section 4.2. (iv) The value of Employer Stock shall be determined under rules set forth in this paragraph (iv). JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 16 18 (A) If the Employer Stock is not publicly traded and if no market or an extremely thin market exists for the Employer Stock so that a reasonable valuation may not be obtained form the market place, then such Employer Stock must be valued at least annually by an independent appraiser who is not associated with the Employer, the Administrator, the Trustee or any person related to any fiduciary under the Plan. The independent appraiser may be associated with a person who is merely a contract administrator with respect to the Plan, but who exercises no discretionary authority and is not a Plan fiduciary. (B) If there is a public market for Employer Stock of the type held by the Plan, then the Administrator may use as the value of the shares the price at which such shares are traded in such market or an average of the bid and asked prices for such shares in such market, provided that such value is representative of the fair market value of such shares in the opinion of the Administrator. If the Employer Stock is not traded on the Annual Valuation Date or if the market is very thin on such date, then the Administrator may use the average of trade prices for a period of time ending on such date, provided that such value is representative of the fair market value of such shares in the opinion of the Administrator. (C) For purposes of determining the annual valuation of the Plan and for reporting to Participants and regulatory authorities, the assets of the Plan shall be valued at least annually on the Annual Valuation Date. The fair market value of Employer Stock shall be determined on the Annual Valuation Date. The average of the bid and asked prices of Employer Stock as of the date of the transaction shall apply for purposes of valuing distributions and other transactions of the Plan to the extent such value is representative of the fair market value of such shares in the opinion of the Administrator. (D) All purchases of Employer Stock shall be made at a price or prices which, in the judgment of the Administrator, do not exceed the fair market value of the Employer Stock. (v) If the Trustee acquires shares of Employer Stock by purchase from a disqualified person as defined in Code Section 4975(e)(2) in exchange for cash or other assets of the Trust, the terms of such purchase shall contain the provision that if there is a final determination by the Internal Revenue Service or court of competent jurisdiction that the fair market value of such shares of Employer Stock as of the date of purchase was less than JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 17 19 the purchase price paid by the Trustee, then the seller shall pay or transfer, as the case may be, to the Trustee an amount of cash, shares of Employer Stock, or any combination thereof equal in value to the difference between the purchase price and the fair market value for all such shares. If cash and/or shares of Employer Stock are paid and/or transferred to the Trustee under this provision, shares of Employer Stock shall be valued at their fair market value as of the date of said purchase, and the seller shall pay interest on the amount of cash paid at a reasonable rate from the date of purchase to the date of payment. (vi) The Administrator may direct the Trustee to sell, resell or otherwise dispose of Employer Stock to any person, including the Employer, provided that any such sales to any disqualified person, including the Employer, will be made at not less than the fair market value and no commission is charged. Any such sale shall be conform with Section 408(e) of ERISA. (vii) If the Administrator directs the Trustee to dispose of any Employer Stock held as Trust assets under circumstances which require registration and/or qualification of the securities under applicable federal or state securities laws, then the Employer at its own expense will take or cause to be taken any and all such action as may be necessary or appropriate to effect such registration and/or qualification. (viii) Participants who are directors, officers, ten percent (10%) stockholders of the Employer and other persons subject to Section 16 of the Securities Exchange Act of 1934 (the "1934 Act") will be permitted to change the level of investment in the Employer Stock Fund only once every six (6) months. Additionally, Participants who are directors, officers, ten percent (10%) stockholders of the Employer and other persons subject to Section 16 of the 1934 Act who cease to invest in the Employer Stock Fund or who reduce their investment in the Employer Stock Fund to a nominal level may not direct that investments be made on their behalf in the Employer Stock Fund again for at least six (6) months. Intra-plan transfer by such Participants between the Employer Stock Fund and other Investment Funds may only be made pursuant to an investment election made during the period beginning on the third business day following the release of annual or quarterly financial information by the Employer and ending on the twelfth business day following such date. Subject to certain limited exceptions, Participants who are directors, officers, ten percent (10%) stockholders of the Employer and other persons subject to Section 16 of the 1934 Act making withdrawals of investments in the Employer Stock Fund must cease further investment in the Employer Stock Fund for six (6) months. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 18 20 (ix) With respect to Participants who are directors, officers, ten percent (10%) stockholders of the Employer and other persons subject to the 1934 Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provisions of the Plan or any action by the Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Administrator. (f) Notwithstanding Section 4.2(b) or any other provision of the Plan or Trust, changes in investment direction may result in financial detriments or penalties to a Participant's or Former Participant's Individual Account. Also, the ability of a Participant or Former Participant to change investment direction may be limited by the Administrator so long as such limitations apply uniformly to all persons similarly situated and are communicated to affected Participants and Former Participants in advance. (g) Notwithstanding any other provision of the Plan or Trust, neither the Trustee nor the Administrator shall have any authority, discretion, responsibility or liability with respect to any Participant's or Former Participant's selection of or failure to select any Investment Fund in which any portion of his Individual Account shall be invested, the entire authority, discretion and responsibility for such selection or failure to select being that of the Participant or Former Participant. (h) All dividends, interest, gains and distributions of any nature received in respect of an Investment Fund shall be reinvested in that Fund until such time as a change is directed pursuant to Section 4.2(b). (i) Any investment direction by a Participant or Former Participant shall remain in effect until affirmatively changed by such person pursuant to Section 4.2(b). (j) This Plan is intended to comply with the provisions of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended. 4.3 DETERMINATION OF TRUST INCOME AND PROFITS. As of each Valuation Date, the Trustee shall determine the sum of: (a) The net investment income earned by each Individual Account since the next preceding Valuation Date, (b) The net profit or loss realized on the disposition of assets of each Individual Account since the next preceding Valuation Date, and JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 19 21 (c) The net unrealized profit or loss resulting from changes in the fair market value of assets of each Individual Account since the next preceding Valuation Date or since the date of the acquisition of such assets, if later. (d) The expenses charged to the Trust Fund since the next preceding Valuation Date. 4.4 ALLOCATIONS TO INDIVIDUAL ACCOUNTS. (a) As of each Valuation Date, the income, profits and expenses of each Individual Account determined as of such Valuation Date pursuant to Section 4.3 shall be allocated thereto, and the amount so allocated to each Individual Account shall be further allocated to the sub-accounts thereunder in the proportion which the amount of each such sub-account bears to the amount of the Individual Account, determined as of the next preceding Valuation Date. (b) The amount of salary deferral contributions paid to the Trust in accordance with each Participant's or Former Participant's elections pursuant to Section 3.2 shall be allocated to such Participant's or Former Participant's Salary Deferral Account. (c) The amount of Employer matching contributions paid over to the Trustee with respect to the Plan Year in accordance with Section 3.3 shall be allocated to the Employer Matching Accounts of Participants and Former Participants with respect to the Plan Year in proportion to the amounts added to their Salary Deferral Accounts for the Plan Year pursuant to Section 4.4(b). (d) As of the Annual Valuation Date of each Plan Year, Employer profit-sharing contributions pursuant to Section 3.4 with respect to the Plan Year shall be allocated to the Employer Profit-Sharing Accounts of Participants and Former Participants who are credited with a Year of Benefit Service for the Plan Year, in proportion to their Compensation for the Plan Year. (e) As of the Annual Valuation Date of each Plan Year, the amount of qualified non-elective contributions paid over to the Trustee with respect to the Plan Year in accordance with Section 3.5 shall be allocated among the Qualified Non-Elective Contribution Accounts of Participants and Former Participants who are Nonhighly Compensated Employees eligible to receive matching contributions in the proportion which the Compensation of each such eligible Employee bears to the Compensation of all such eligible Employees. (f) As of each Annual Valuation Date, any Forfeiture arising pursuant to Section 5.3 as of such Annual Valuation Date shall first be applied to reinstate forfeited account balances of Former Participants, if any, in accordance with Section 5.3(b)(5). The JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 20 22 remaining Forfeitures of matching contributions, if any, shall be allocated among the Employer Matching Accounts in proportion to matching contributions for the Plan Year, and the remaining Forfeitures of Employer profit-sharing contributions, if any, shall be allocated among the Employer Profit-Sharing Accounts as an additional profit-sharing contribution. (g) The amount transferred from the JMI-Daniels Pharmaceuticals, Inc. 401(k) Plan on behalf of each Participant or Former Participant shall be held in his Transfer Account. 4.5 LIMITATIONS ON ANNUAL ADDITIONS TO A PARTICIPANT'S ACCOUNT. (a) For purposes of this Section 4.5, (1) All Controlled Group Members [substituting the phrase "more than 50%" for the phrase "at least 80%" wherever it appears in Code Section 1563(a)(1)] of a controlled group which includes the Employer shall be considered as the Employer. (2) All defined contribution plans of the Employer shall be considered as one plan. (3) A Former Participant shall be considered a Participant. (4) The "Limitation Year" shall be the Plan Year. (5) "Annual Additions" means the sum of: (A) The Employer's contribution under all defined contribution plans of the Employer, including any amount attributable to medical benefits allocated to an account established on behalf of a key employee pursuant to Code Section 419A(d); (B) The Participant's contributions under all defined contribution plans of the Employer. (i) The Participant's contributions shall include both mandatory Employee contributions within the meaning of Code Section 411(c)(2)(C) and voluntary contributions. (ii) The Participant's contributions shall not include Employee rollover contributions, repayment of any loans made to the Participant from the Plan, repayment of amounts to a defined benefit or defined contribution plan in accordance with Code Section 411(a)(7)(C), direct JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 21 23 transfer of the Participant's Employee contributions from one plan to another or Employee contributions to a simplified employee pension which are excludable from income under Code Section 408(k)(6); and (C) Any forfeited amounts allocated to the Participant's Individual Account under all defined contribution plans of the Employer. (b) Notwithstanding any other provision of the Plan, the Annual Additions to the Individual Account of any Participant for any Limitation Year shall not exceed the lesser of: (1) Thirty Thousand Dollars ($30,000), as adjusted pursuant to Code Section 415(d) or (2) Twenty-five percent (25%) of the Participant's Compensation for the Plan Year, as determined in accordance with Treasury Regulation Section 1.415-2(d). (c) To the extent that the Annual Additions to the Individual Account of any Participant exceed the limitations set forth in Section 4.5(b), the excess Annual Additions shall be allocated and reallocated among the other Participants in the Plan. If such allocation and reallocation would cause the limitations of this Section 4.5 to be exceeded with respect to each Participant in the Plan, the remaining excess Annual Additions shall be held in an unallocated suspense account and shall be allocated and reallocated in succeeding Limitation Years before any additional Annual Additions may be made. (d) Notwithstanding the foregoing, the otherwise permissible Annual Additions for any Participant under this Plan may be further limited to the extent necessary, as determined by the Administrator, to prevent disqualification of the Plan under Code Section 415. The Administrator shall advise any affected Participant of any such additional limitation of his Annual Additions. 4.6 SPECIAL CODE SECTION 401(K) AND 401(M) LIMITATIONS. (a) Limitations on salary deferral contributions. (1) The "Actual Deferral Percentage" for the group of Participants who are Highly Compensated Employees shall not exceed the greater of: (A) The Actual Deferral Percentage for the group of Participants who are Nonhighly Compensated Employees multiplied by one and twenty-five one-hundredths (1.25), or JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 22 24 (B) The Actual Deferral Percentage for the group of Participants who are Nonhighly Compensated Employees multiplied by two (2), provided that the Actual Deferral Percentage for the group of Participants who are Highly Compensated Employees for the Plan Year does not exceed the Actual Deferral Percentage for the group of Participants who are Nonhighly Compensated Employees by more than two (2) percentage points. (2) For purposes of this Section 4.6, the Actual Deferral Percentage for the group of Highly Compensated Employees and for the group of Nonhighly Compensated Employees shall be determined in accordance with Code Section 401(k) and the applicable Regulations thereunder; provided however, that the Actual Deferral Percentage for any Employee shall not include salary deferral contributions which are distributed to such person in order to correct excess Annual Additions in accordance with Section 4.5(b). (b) Limitations on Employer matching contributions. (1) The "Average Contribution Percentage" for the group of Participants who are Highly Compensated Employees shall not exceed the greater of: (A) The Average Contribution Percentage for the group of Participants who are Nonhighly Compensated Employees multiplied by one and twenty-five one-hundredths (1.25), or (B) The Average Contribution Percentage for the group of Participants who are Nonhighly Compensated Employees multiplied by two (2), provided that the Average Contribution Percentage for the group of Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for the group of Participants who are Nonhighly Compensated Employees by more than two (2) percentage points. (2) For purposes of this Section 4.6, the Average Contribution Percentage for the group of Highly Compensated Employees and for the group of Nonhighly Compensated Employees shall be determined in accordance with Code Section 401(m) and the applicable Regulations thereunder. (c) Multiple use limitations. (1) If the Actual Deferral and Average Contribution Percentages for the group of Eligible Participants who are Highly Compensated Employees JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 23 25 exceed the limits set forth in Sections 4.6(a)(1)(A) and (b)(1)(A), respectively, the sum of such Actual Deferral and Average Contribution Percentages shall not exceed the "aggregate limit," as determined in accordance with Code Section 401(m) and the applicable Regulations thereunder. (2) If the aggregate limit is exceeded with respect to any Plan Year, the Actual Deferral Percentage for the group of Eligible Participants who are Highly Compensated Employees shall be reduced as required in the applicable Regulations promulgated under Code Sections 401(k) and (m), and the amount of such reduction shall be distributed to the Highly Compensated Employees whose Salary Deferral Accounts were reduced. 4.7 DISTRIBUTION OF EXCESS CONTRIBUTIONS. Notwithstanding any other provision of the Plan, if the aggregate amount of salary deferral contributions paid over to the Trustee on behalf of Highly Compensated Employees for the Plan Year exceeds the deferral limits of Section 4.6(a), such excess contributions plus earnings thereon shall be distributed to the Participants on whose behalf such excess contributions were made not later than the last day of the Plan Year next following the Plan Year during which such contributions were made, in accordance with Code Section 401(k)(8) and the applicable Regulations thereunder. The Employer shall be responsible for paying any excise tax assessed against excess contributions which are not distributed within two and a half (2 1/2) months after the close of the Plan Year in which the excess contributions were made. 4.8 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Notwithstanding any other provision of this Plan, if the aggregate amount of Employer matching contributions paid over to the Trustee on behalf of Highly Compensated Employees for the Plan Year exceeds the contribution limits of Section 4.6(b), such excess aggregate contributions which are vested plus earnings thereon shall be distributed to the Participants on whose behalf such excess aggregate contributions were made not later than the last day of the Plan Year next following the Plan Year during which such excess aggregate contributions were made, in accordance with Code Section 401(m)(6) and the applicable Regulations thereunder. Excess aggregate contributions which are not vested shall be treated as Forfeitures under Section 4.4. The Employer shall be responsible for paying any excise tax assessed against vested excess aggregate contributions which are not distributed within two and a half (2 1/2) months after the close of the Plan Year in which the excess aggregate contributions were made. 4.9 COORDINATION OF CORRECTIVE DISTRIBUTIONS. The determination of the amount of any excess aggregate contributions in accordance with Section 4.8 shall be made after first determining the amount, if any, of excess deferrals, provided that the Participant has filed a timely claim in accordance with Section 3.2(e), and after next determining the amount, if any of excess contributions in accordance with Section 4.7. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 24 26 4.10 INVESTMENT OF INDIVIDUAL ACCOUNTS IN LOANS TO PARTICIPANTS. (a) The Trustee may make loans to Participants for the purposes set forth below from amounts allocated to the Participant's Salary Deferral Account. Such loans shall be made available to all Participants on a reasonably equivalent and non-discriminatory basis; provided, that the Administrator may treat Participants differently on the basis of their creditworthiness. Loans shall be available only from amounts accrued under the Participant's or Former Participant's Salary Deferral Account. (b) A Participant may obtain a loan from his Salary Deferral Account only on account of economic hardship. An application for a loan pursuant to this Section 4.10 shall be approved only if the loan is on account of an immediate and heavy financial need of the Participant and only if the loan is necessary to satisfy such financial need. The following items are the only events which shall qualify as an immediate and heavy financial need: (1) Medical expenses described in Code Section 213(d) incurred by the Participant, his Spouse or any dependent, as defined in Code Section 152; or (2) Purchase of a principal residence for the Participant, excluding mortgage payments; or (3) Payment of tuition for the Participant, his Spouse, children or dependents for the next twelve (12) months of post-secondary education; or (4) Payments needed to prevent the eviction from or foreclosure on the Participant's principal residence; or (5) Such other events as the Commissioner of Internal Revenue may describe in published revenue rulings, notices, and other documents of general applicability. (c) The Administrator shall not authorize a loan in an amount smaller than One Thousand Dollars ($1,000). The outstanding balance of all such loans to any Participant under all tax-qualified employee plans maintained by all controlled group members shall never exceed the lesser of: (1) Fifty Thousand Dollars ($50,000) reduced by the excess (if any) of (i) the highest outstanding balance of loans from the Plan during the one (1) year period ending on the day before the date on which such loan was made, over JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 25 27 (ii) the outstanding balance of loans from the Plan on the date on which such loan was made, or (2) Fifty percent (50%) of the value of the Participant's Salary Deferral Account on the date of the loan. (d) Any loan to a Participant shall be evidenced by a loan agreement between the Trustee and the Participant and consented to by the Participant's spouse providing for: (1) An effective annual rate of interest which the Administrator determines is reasonable. The rate shall be equivalent to the rate charged by commercial lenders in the same geographical area for fixed rate loans of equivalent risk. In determining the interest rate, the Administrator shall not discriminate in favor of Highly Compensated Employees. (2) Repayment of interest and principal not later than five (5) years from the date of the loan in substantially equal installments not less frequent than monthly by payroll withholding; (3) Acceleration of the date of repayment of principal to the earlier of the date of default of any interest or principal payment by the Participant or the Valuation Date next following the termination of the Participant's Participation. In the event default occurs at a time when the Participant's Benefit could be distributed, the loan balance shall be offset as of the date of acceleration. (4) The Participant's pledge of such of his assets as the Trustee deems necessary as security for the debt; (5) In addition to the security required in accordance with Section 4.10(d)(4), the Participant's pledge of fifty percent (50%) of his then existing and after acquired accrued non-forfeitable interest in the Trust Fund as security in the event of insufficiency of the assets pledged by the Participant as security in accordance with Section 4.10(d)(4); and (e) A Participant shall be in default on any loan upon the earlier of the date he leaves the employment of the Employers or the date he fails to make a scheduled payment under the terms of the loan. (f) (1) In the event of default by a Participant or Former Participant under the terms of his loan agreement, and the insufficiency of the assets pledged by the Participant or Former Participant in accordance with Section 4.10(d)(4) to satisfy the amount of principal and interest then outstanding under his loan JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 26 28 agreement, the Trustee shall pursue any and all other remedies with respect to the deficiency which the Trustee deems prudent in its sole discretion and the Participant or Former Participant shall remain personally liable for the amount of any deficiency under his loan agreement. (2) The amount of any Benefit otherwise payable to a defaulting Participant or Former Participant or his spouse or Beneficiary shall be reduced by the total amount of principal and interest owed by the Participant or Former Participant under his loan agreement as of the date of commencement of payment of such Benefit; provided, however, that such reduction of such Benefit shall not extinguish the portion of a defaulting Participant's or Former Participant's then existing debt hereunder in excess of such Benefit, if any. (g) Notwithstanding anything herein, any loan made hereunder to a Participant shall be treated as a separate segregated investment of the Participant's Individual Account. At the time such loan transaction is consummated, each Investment Fund including assets of the Participant's Individual Account shall be reduced by an amount which shall bear the same ratio to the Investment Fund as the amount of the loan bears to the Participant's Individual Account. The amount of each interest and principal payment made by the Participant under the loan shall be added to each Investment Fund in accordance with the Participant's investment direction pursuant to Section 4.2 which provides for contributions made after the date of the election. (h) Each loan shall be applied against and reduce the Participant's Salary Deferral Account. Amounts of interest and principal paid by the Participant under the loan agreement shall be applied to the Participant's Salary Deferral Account. (i) The Individual Account of the Participant shall be charged with all expenses incurred in connection with the origination and administration of the loan. 4.11 IN-SERVICE WITHDRAWALS. (a) A Participant may obtain a withdrawal of his Participant Rollover Account at any time for any reason. A fully-vested participant may obtain a distribution of all or any portion of his Individual Account for any reason at any time after he has attained age fifty-nine and one-half (59 1/2). An Employee who was a participant in the JMI-Daniels Pharmaceuticals, Inc. 401(k) Plan on September 1, 1996 may obtain a distribution of the vested amount in his Transfer Account after he has attained age fifty-nine and one-half (59 1/2). (b) If the Plan Sponsor sells substantially all of the assets [within the meaning of Code Section 409(d)(2)] used in a trade or business or sells a subsidiary [within the meaning of Code Section 409(d)(3)], a Participant who continues employment JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 27 29 with the acquiring corporation is eligible for distribution from his Salary Deferral Account as if he had a separation from service. A distribution by reason of this paragraph (b) shall constitute a lump sum distribution in accordance with Code Section 401(k)(10) and applicable Treasury regulations. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 28 30 ARTICLE 5: DETERMINATION OF VESTED (NONFORFEITABLE) BENEFITS 5.1 NONFORFEITABLE BENEFITS UPON RETIREMENT. If a Participant's Participation ends by reason of his Retirement, his Individual Account shall be one hundred percent (100%) vested. 5.2 NONFORFEITABLE BENEFITS UPON DEATH OF PARTICIPANT. If a Participant's Participation ends by reason of his death, his Individual Account shall be one hundred percent (100%) vested. 5.3 OTHER PARTICIPANTS' NONFORFEITABLE BENEFITS. (a) If a Participant's Participation ends for any reason other than his Retirement or death and if he is then credited with at least six (6) Years of Vesting Service, his Individual Account shall be one hundred percent (100%) vested; provided any Employee who was a participant in the Abana Pharmaceuticals, Inc. 401(k) Plan on January 1, 1997 shall be one hundred percent (100%) vested on the earlier of his attainment of age fifty-nine and one-half (59 1/2) or completion of six (6) Years of Vesting Service; provided further, any Employee who was a participant in the JMI-Daniels Pharmaceuticals, Inc. 401(k) Plan (formerly known as Galen Drugs of Florida, Inc. 401(k) Plan) on September 1, 1996, shall be one hundred percent (100%) vested on the earlier of his attainment of age sixty-five (65) or completion of six (6) Years of Vesting Service. (b) If a Participant's Participation ends for any reason other than his Retirement or death and if he is then credited with fewer than six (6) Years of Vesting Service, (1) The entire amount of his Salary Deferral Account, Participant Rollover Account and/or Qualified Non-Elective Contribution Account shall be one hundred percent (100%) vested. (2) The vested and nonvested percentages of his Employer Matching Account and Employer Profit-Sharing Account shall be determined as of the Valuation Date next preceding payment of his Benefit in accordance with the following schedule:
YEARS OF VESTING VESTED NONVESTED SERVICE PERCENTAGE PERCENTAGE Less than 2 0% 100% 2 20% 80% 3 40% 60% 4 60% 40% 5 80% 20% 6 100% 0%
JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 29 31 (3) The amount equal to the nonvested percentage of his Employer Matching Account and Employer Profit-Sharing Account, determined as of the Annual Valuation Date coincident with his fifth consecutive 1-Year Break in Service shall constitute a Forfeiture which shall be allocated in accordance with Section 4.4(e) as of such Annual Valuation Date. (4) (A) Notwithstanding the foregoing, if distribution of the Former Participant's Benefit occurs before he has incurred five (5) consecutive 1-Year Breaks in Service, the amount equal to the nonvested percentage of his Employer Matching Account and his Employer Profit-Sharing Account, determined as of the Annual Valuation Date of the Plan Year in which payment of his Benefit occurs, shall constitute a Forfeiture which shall be allocated in accordance with Section 4.4(e) as of such Annual Valuation Date. (B) If a Former Participant's employment with an Employer terminates at a time when he is zero percent (0%) vested, he shall be deemed to have received a distribution on the date he separates from service. (5) (A) If a Former Participant who incurs a Forfeiture pursuant to Section 5.3(b)(4) resumes employment covered under the Plan prior to the time he would otherwise have incurred five (5) consecutive 1-Year Breaks in Service, he shall be given an opportunity to repay the full amount of his prior distribution within five (5) years following his resumption of employment. (B) If such repayment occurs, in addition to the amounts provided for in Article 3, the Employer by which he was employed at the time his prior period of Participation ended shall contribute an amount equal to the nonvested percentage of the Participant's Employer Matching Account and Employer Profit-Sharing Account as of the Valuation Date next preceding his prior distribution; and the amount so restored and the amount repaid by the Participant shall be reinstated to the Participant's Salary Deferral Account, Employer Matching Account and Employer Profit-Sharing Account as of the Annual Valuation Date of the Plan Year in which the repayment occurs, in addition to any amounts allocated thereto pursuant to Sections 4.4(b), (c) and (d) for such Plan Year. (C) The Administrator may promulgate rules consistent with applicable law regarding the time and methods for a Participant's repayment of amounts previously distributed hereunder. 5.4 BREAK IN SERVICE RULES. (a) A Participant's Years of Vesting Service credited subsequent to five (5) consecutive 1-Year Breaks in Service shall not be taken into account in determining the JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 30 32 vested (nonforfeitable) percentage of his Employer Matching Account and his Employer Profit-Sharing Account prior to such five (5) consecutive 1-Year Breaks in Service. (b) If a nonvested Participant incurs at least five (5) consecutive 1-Year Breaks in Service, the Participant's prior Years of Vesting Service shall be disregarded in determining the vested percentage of his Employer Matching Account and his Employer Profit-Sharing Account subsequent to such Breaks in Service. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 31 33 ARTICLE 6: PAYMENT OF BENEFITS 6.1 AMOUNT OF BENEFIT. A Former Participant's Benefit shall consist of the vested (nonforfeitable) amount of his Individual Account as of the Valuation Date next preceding the payment of his Benefit, subject to any changes in the amount of his Individual Account pursuant to Section 4.4. 6.2 FORMS OF RETIREMENT BENEFITS AND TERMINATION BENEFITS. (a) Unless a Former Participant, with the consent of his Spouse, elects an optional form of Benefit as provided in Section 6.2(b), a Former Participant's Retirement or Termination Benefit shall be paid as follows: (1) If the Former Participant is unmarried when payment begins, the normal form of distribution shall be a life annuity. (2) If a Former Participant is survived by his Spouse, one hundred percent (100%) of the Retirement Benefit or Termination Benefit of the Former Participant shall be applied to the purchase of a qualified joint and survivor annuity, unless he has elected to waive his right to a qualified joint and survivor annuity with the consent of his Spouse to his election and any Beneficiary designation he makes in connection with his election. For this purpose, a qualified joint and survivor annuity is a nontransferable annuity contract, purchased from a legal reserve life insurance company licensed to do business in more than one state, providing for an annuity payable to the Former Participant during the life of the Former Participant. If the Former Participant is married when payment begins, the annuity contract shall provide for an annuity payable to the Former Participant during the life of the Former Participant and a survivor annuity payable to his Spouse after the death of the Former Participant for the remaining life of the Spouse which is fifty percent (50%) of the amount of the annuity payable to the Former Participant, which is the actuarial equivalent of an annuity payable for the life of the Former Participant only, determined on the basis of actuarial tables the use of which has been approved by the Internal Revenue Service. In no event shall the cost of the annuity contract exceed the amount of the Former Participant's vested (nonforfeitable) Benefit as of the Annual Valuation Date next preceding purchase of the annuity contract. (b) Optional Forms. A Participant or Former Participant or, if applicable, the Spouse or Beneficiary may elect distribution in one of the following optional forms: (1) In a single sum JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 32 34 (2) In periodic installments payable monthly, quarterly, or annually for a specified number of years not in excess of the joint life expectancy of the Former Participant and any Beneficiary of the Former Participant, as determined not more frequently than annually under standard mortality tables whose use is approved by the Internal Revenue Service; provided: (i) if the Former Participant's Spouse is not the Beneficiary, the life expectancy of the Beneficiary shall be determined as of the date that payment of the Former Participant's Benefit commences and shall not be redetermined thereafter, and the present value of the Benefit expected to be paid to the Former Participant as of the date payment of the Benefit commences shall exceed fifty percent (50%) of the present value of the Benefit as of such date, all determined under standard mortality tables whose use is approved by the Internal Revenue Service; (ii) if the Beneficiary is a custodian or trustee for the benefit of any individual or individuals, the individual or individuals who are beneficiaries under the custodianship or trust shall be deemed to be the Beneficiary or Beneficiaries for the purpose of determining the maximum period of time over which payment of the Retirement Benefit or Termination Benefit may be made; (iii) the rate of payment after the death of the Former Participant shall not be slower than the rate of payment in effect at the time of the death of the Former Participant; (iv) the Administrator may cause the remaining balance of a Former Participant's Retirement Benefit or Termination Benefit to be distributed in a single sum at any time, giving due regard as to any portion of a Former Participant's Retirement Benefit or Termination Benefit remaining unpaid on the date of the Former Participant's death to any written statement of preference received by the Administrator from the Beneficiary prior to the first payment from the Plan after the Former Participant's death; and (v) in the event of the death of an individual Beneficiary after the death of the Former Participant, the remaining payments which would have been made to the Beneficiary but for his death shall be paid to his estate. (3) By the purchase of a single premium nontransferable annuity contract from a legal reserve life insurance company licensed to do business in more than one state, providing for substantially nonincreasing payments not less frequent than annual over a term of years not to exceed the limitations set forth in Section 6.2(b)(2). JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 33 35 (4) By the purchase of a joint and survivor annuity. The Participant may elect to receive an actuarially equivalent joint and survivor annuity with survivor benefits of fifty percent (50%), seventy-five percent (75%) or one hundred percent (100%) of the amounts payable to the Former Participant during his lifetime. 6.3 DISTRIBUTION OF RETIREMENT BENEFITS. (a) Generally. Distribution of a Former Participant's Retirement Benefit shall commence as soon as reasonable after any Valuation Date following the later of his Normal Retirement Age or Deferred Retirement Date. (b) Special Rule for Participants Who are Five Percent (5%) Owners and Who Have Attained Age Seventy and One-Half (70 1/2) . A Participant who is a five percent (5%) owner as defined in Code Section 416 and who remains an Employee during the calendar year commencing after his attainment of age seventy and one-half (70 1/2) or during any succeeding calendar year shall receive distributions under the Plan as follows: (1) Payment shall commence not later than April 1 of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70 1/2), and the amount distributed during that period shall be equal to the amount of his Individual Account as of the Annual Valuation Date prior to his attainment of age seventy and one-half (70 1/2), divided by the number of years remaining in the life expectancy or the joint life expectancy of the Participant or the Participant and his Beneficiary, as the case may be, as of such Annual Valuation Date, determined in accordance with Table V or VI promulgated under Treasury Regulation Section 1.72-9, subject to the maximum limitations set forth in proposed Treasury Regulation Section 1.401(a)(9)-2, Q&A-4 or Q&A-7, whichever is applicable, or any applicable successor provision thereto. (2) Prior to the end of each calendar year during which the Participant remains an Employee, the minimum distributions required under proposed Treasury Regulation Section 1.401(a)(9)-1 and 2, or any applicable successor provisions, shall be determined by recalculating the life expectancies (unless the Participant elects otherwise) and distributed to the Participant. (3) Upon termination of the Participant's Participation, his remaining benefit shall be distributed in the form elected by the Participant. 6.4 DISTRIBUTION OF RETIREMENT BENEFITS AFTER DISABILITY RETIREMENT DATE. In the event that a Former Participant has retired on account of a permanent disability, as determined in accordance with Article 7, the Administrator shall direct the Trustee to pay such Former Participant's Retirement Benefit as soon as reasonable after receipt of satisfactory proof that the Former Participant's permanent disability was the reason for termination of his Participation, provided that the time of distribution shall be JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 34 36 subject to the consent of the Former Participant, or at such time thereafter as the Former Participant may elect. 6.5 DISTRIBUTION OF TERMINATION BENEFITS. Subject to the provisions of Section 6.7, distribution of a Former Participant's Termination Benefit shall occur as soon as reasonable after the Valuation Date coincident with or next following the date his Participation ends, provided that the time of distribution shall be subject to the consent of the Former Participant, or at such time thereafter as the Former Participant may elect. 6.6 DEATH BENEFITS. (a) If a Former Participant has died before distribution of his Benefit has begun, then such Former Participant's Death Benefit shall be paid in accordance with his Beneficiary designation within ninety (90) days after the Former Participant's death. (b) Notwithstanding Section 6.6(a), (1) If a Participant or Former Participant who is married dies before the first day of the first period for which his Benefit is payable, the Participant's entire Individual Account shall be applied to purchase a qualified preretirement survivor annuity, unless the Participant or Former Participant has elected, with the consent of his Spouse, to waive the qualified preretirement survivor annuity or to name a Beneficiary other than the Spouse pursuant to the provisions of Section 6.9; provided, the surviving Spouse may elect any optional form of Benefit in lieu of a qualified preretirement survivor annuity. (2) Except as provided in Section 6.7, and subject to the consent requirements of Section 6.9, payment to a Former Participant's Spouse under this Section 6.6(b) shall commence within a reasonable period after the Former Participant's death, provided that the Spouse may not elect that payment commence later than sixty (60) days after the end of the Plan Year during which the Former Participant would have attained age sixty-five (65) if he had lived, and provided further that if the Spouse dies before commencement of payment, this subparagraph shall be applied as if the Spouse were the Former Participant. (3) For this purpose, a qualified preretirement survivor annuity is a nontransferable annuity contract purchased from a legal reserve life insurance company licensed to do business in more than one state, providing for an annuity payable to the Spouse for the life of the Spouse, determined in accordance with actuarial tables the use of which is approved by the Internal Revenue Service. 6.7 SMALL BENEFITS. Notwithstanding any other provision of the Plan, if the present value of a Former Participant's entire nonforfeitable Benefit does not exceed (and did not at the time of any prior distribution exceed) Three Thousand Five Hundred JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 35 37 Dollars ($3,500) as of the Valuation Date occurring next prior to the date of distribution provided for in this Section 6.7, his Benefit shall be paid in a single sum as soon as reasonable after the date his Participation ends. 6.8 NECESSARY DELAYS IN COMMENCEMENT OF BENEFIT PAYMENT. Notwithstanding any other provision of the Plan, if the amount of a Benefit payment cannot be determined on the date provided for pursuant to this Article 6, or if payment on such date is impossible because the whereabouts of a Former Participant or Beneficiary are unknown, a payment retroactive to such date may be made not later than sixty (60) days after the earliest date on which the amount of such payment can be ascertained under the Plan or on which the whereabouts of such Former Participant or Beneficiary are made known to the Administrator, as the case may be. 6.9 CONSENTS, BENEFICIARY DESIGNATIONS. (a) Except as provided in Section 6.7, as a condition precedent to the commencement of payment of his Retirement Benefit or Termination Benefit pursuant to Section 6.3, 6.4 or 6.5, each Former Participant shall have made an election to receive his Retirement Benefit or Termination Benefit in the form of a qualified joint and survivor annuity or to waive his right to receive his Retirement Benefit or Termination Benefit in the form of a qualified joint and survivor annuity as provided for in Section 6.2(b), if applicable, and shall have consented to the time of commencement of payment pursuant to Section 6.4 or 6.5, if applicable. (b) A Participant or Former Participant whose Death Benefit is subject to Section 6.6(b) may elect to waive the qualified preretirement survivor annuity form of Death Benefit, commencing on the date he separates from service or the first day of the Plan Year in which he attains age thirty-five (35), whichever is earlier. If the Participant makes a valid election but for the fact that the Participant has not attained age thirty-five (35), the election will be deemed valid for all purposes until the first day of the Plan Year in which the Participant attains age thirty-five (35). The Participant will then be required to make a new election in order to waive the qualified preretirement survivor annuity form. Any such election or consent by a Participant or Former Participant under the Plan shall be made in a writing in form prescribed by the Administrator and shall be effective upon its delivery to the Administrator prior to commencement of payment of his Retirement Benefit or Termination Benefit or prior to his death, as the case may be. A Participant or Former Participant may revoke, supersede, or reinstate any such election or consent by delivery of a writing providing therefor in form prescribed by the Administrator and delivered to the Administrator prior to commencement of payment of his Retirement Benefit or Termination Benefit or prior to his death, as the case may be. (c) Any Participant or Former Participant may designate one or more persons or entities as primary and/or contingent Beneficiary of his Death Benefit or any portion of his Retirement Benefit or Termination Benefit remaining unpaid on the date of his death. Any such Beneficiary designation by a Participant or Former Participant shall JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 36 38 be made in a writing in form prescribed by the Administrator and shall be effective upon its delivery to the Administrator prior to the date payment of his Retirement Benefit or Termination Benefit commences or prior to his death, as the case may be. A Participant or Former Participant may revoke, supersede or reinstate any such Beneficiary designation by delivery of a writing providing therefor in form prescribed by the Administrator and delivered to the Administrator prior to the date payment of his Retirement Benefit or Termination Benefit commences or prior to his death, as the case may be. (d) A Participant's or Former Participant's initial election respecting the form of payment of his Retirement Benefit, Termination Benefit or Death Benefit, his consent to the time of payment of his Retirement Benefit or Termination Benefit, his initial Beneficiary designation, and any revocation, supersession or reinstatement of such an election or Beneficiary designation in accordance with Section 6.9(a), (b) or (c) shall not require the consent of any other person, except as provided in Section 6.9(e). (e) (1) If the provisions of Section 6.2(b) or 6.6(b) apply to the Benefit payable to a Former Participant, any election to waive the right to the qualified joint and survivor annuity and any election to waive the right to the qualified preretirement survivor annuity and any Beneficiary designation by the Former Participant shall be subject to the consent of his Spouse in written form prescribed by and delivered to the Administrator prior to commencement of payment of the Former Participant's Retirement Benefit or Termination Benefit or prior to his death, as the case may be. Any such consent shall acknowledge that the effect of the consent is to give up the Spouse's right to the Spouse's benefit provided for in Section 6.2(b) or 6.6(b), as the case may be, and shall be witnessed by a Plan representative or a notary public. Any such consent shall be irrevocable by the consenting individual with respect to the election or Beneficiary designation to which it applies, but such a consent shall not be binding on the consenting individual with respect to any other election or Beneficiary designation by the consenting individual's spouse, nor shall such a consent be binding on anyone other than the consenting individual. (2) Except as provided in Section 6.7, as a condition precedent to commencement of payment of the Retirement Benefit or Termination Benefit of a then married Former Participant before his Normal Retirement Date in accordance with Section 6.4 or 6.5, his Spouse shall have consented to the time of commencement of payment in written form prescribed by the Administrator and delivered to the Administrator if the Spouse's consent is required under Section 6.4 or 6.5. (3) Except as provided in Section 6.7, as a condition precedent to the commencement of payment of any Benefit to the Spouse of a Former Participant in accordance with Section 6.6(b), the Spouse shall have made an election in written form prescribed by the Administrator and delivered to the Administrator prior to commencement of payment respecting the time and form of payment of such Benefit. The Spouse of a Former Participant shall be provided with the election forms prescribed by the Administrator as soon as administratively feasible following the date the Administrator receives acceptable proof of the death of the Former Participant. The Spouse may make JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 37 39 the election respecting the time and form of payment during the ninety (90) day period commencing on the date of delivery of the election forms. (4) Notwithstanding any other provision of the Plan, the consent of a Spouse shall not be required if it is established to the satisfaction of the Administrator that the consent may not be obtained because there is no Spouse or because the Spouse cannot be located or because of any other circumstance prescribed by any applicable Treasury regulation. (f) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distributions may commence less than thirty (30) days after the notice required under Section 1.411(a)(11)(C) of the Income Tax Regulations is given; provided that: (1) The Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution, and (2) The Participant after receiving the notice affirmatively elects a distribution. 6.10 ELIGIBLE ROLLOVER DISTRIBUTIONS. (a) Notwithstanding any other provision of the Plan to the contrary, a Participant, Former Participant, surviving Spouse or a former spouse who is an alternate payee pursuant to Article 13 ("Distributee") may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (b) For purposes of this Section 6.10, the following terms shall have the meaning set forth hereinafter: (1) Direct Rollover: A payment by the Plan to the Eligible Retirement Plan specified by the Distributee. (2) Eligible Rollover Distribution: Any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) Eligible Retirement Plan: An individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 38 40 ARTICLE 7: PERMANENT DISABILITY 7.1 DEFINITION OF PERMANENT DISABILITY. A permanent disability for purposes of the Plan is a mental or physical disability which causes the Participant to be unable to perform the duties of his customary position of employment (or unable to engage in any substantial gainful activity) for an indefinite period which the Administrator considers will be of long-continued duration. A Participant is also disabled if he incurs the permanent loss or use of a member or function of the body or is permanently disfigured and incurs a separation from service. 7.2 DETERMINATION OF PERMANENT DISABILITY. Any Former Participant who claims to have retired from employment with an Employer on account of a permanent disability shall be required to submit to examination by a physician or physicians selected by the Administrator in order for such physician or physicians to determine the Participant's or Former Participant's permanent disability. Any and all such determinations so made in good faith by any physician or physicians selected by the Administrator shall be conclusive and binding upon such Participant or Former Participant and all other parties in interest, if any. 7.3 NO RIGHT TO REEMPLOYMENT. A Former Participant whose permanent disability is determined to have ended shall have no right to require that he be reemployed by any Employer. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 39 41 ARTICLE 8: ADMINISTRATION 8.1 NAMED FIDUCIARIES. (a) The Plan Sponsor and the Administrator shall constitute named Fiduciaries of the Plan for purposes of ERISA. (b) A named Fiduciary may in writing appoint other persons or entities to perform any of its duties and responsibilities. Any such appointment shall be accepted by the appointee in writing and shall be effective upon such acceptance. 8.2 RULES RELATING TO FIDUCIARIES GENERALLY. (a) Fiduciaries shall have only those specific and express powers, duties, responsibilities and obligations as are specifically assigned them under this Plan or the Trust. It is intended under this Plan and the Trust that each Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under this Plan and the Trust and shall not be responsible for any act or failure to act of any other Fiduciary. (b) Each Fiduciary shall give directions, furnish information and take action only in accordance with the provisions of this Plan or the Trust, as the case may be, authorizing or providing for such directions, information or action. Each Fiduciary may rely upon any such directions, information or action of any other Fiduciary as proper under this Plan or the Trust, and no Fiduciary is required under this Plan or the Trust to inquire into the propriety of any such directions, information or action of any other Fiduciary. (c) No Fiduciary guarantees the Trust Fund in any manner against investment loss or depreciation in asset value, except as a Fiduciary may agree in a separate written instrument. (d) Each Fiduciary shall be entitled to such reasonable compensation for its Fiduciary services as such Fiduciary and the Plan Sponsor may agree, provided that no Fiduciary who receives full-time pay from an Employer for other services shall receive any remuneration as Fiduciary from the Plan or the Trust. (e) Any person or group of persons may serve in more than one Fiduciary capacity. 8.3 DUTIES OF TRUSTEE. The Trustee shall have responsibility for the administration of the Trust and the management of the assets held under the Trust, except to the extent such assets are managed by an Investment Manager or insurance company, all as specifically provided in the Trust. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 40 42 8.4 RIGHTS AND DUTIES OF PLAN SPONSOR GENERALLY. (a) The Plan Sponsor shall have the sole authority to appoint and remove any Trustee and any Investment Manager (if the Plan Sponsor elects to appoint an Investment Manager) in accordance with the provisions of the Trust, to direct the Trustee to invest all or a portion of the Trust Fund at the direction of an Investment Manager or with an insurance company or otherwise in accordance with the provisions of the Trust, and to amend or terminate, in whole or in part, this Plan or the Trust. (b) The Plan Sponsor shall designate an Administrator (which may be itself or another person or persons although referred to in the singular throughout this instrument) which shall serve at the pleasure of the Plan Sponsor. A new Administrator shall be designated as soon as is reasonably convenient if any Administrator is removed, resigns, dies or becomes incapacitated. 8.5 DUTIES OF EMPLOYERS GENERALLY. (a) Each Employer shall supply full and timely information to the Administrator on all matters relating to its Employees' Compensation, employment, Retirement, transfer, death or other termination of their status as Participants or Employees and such additional pertinent facts as are necessary to enable the Administrator to perform its functions. (b) Each Employer shall have the sole responsibility for making the contributions, if any, provided for in Sections 3.2, 3.3, 3.4, and 3.5. with respect to Participants who are its Employees. 8.6 DUTIES OF ADMINISTRATOR GENERALLY. (a) The Administrator shall have sole responsibility for the administration of the Plan, as expressly described in the Plan. (b) The Administrator shall provide each Participant and Former Participant with all notices and information required by law with respect to the distribution of Benefits. (c) The Administrator shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan. In its sole discretion, the Administrator shall interpret the Plan; shall determine all questions arising in the administration, interpretation, and application of the Plan; and shall construe any ambiguity, supply any omission, and reconcile any inconsistency in such manner and to such extent as the Administrator deems proper. Any interpretation or construction placed upon any term or provision of the Plan by the Administrator, any decisions and determinations of the Administrator arising under the Plan, including without limiting the generality of the foregoing, JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 41 43 (1) the eligibility of an Employee to become or remain a Participant and his status as such, his Years of Benefit Service and his Years of Vesting Service, (2) the allocation of contributions and any other amounts required to be allocated under the provisions of the Plan, (3) the time, method and amounts of payments payable under the Plan, and (4) the rights of Participants, Former Participants, Spouses and Beneficiaries, and any other action, determination or decision whatsoever taken or made by the Administrator in good faith shall be final, conclusive and binding upon all persons concerned, including but not limited to the Plan Sponsor, Employers, Employees, former Employees, Participants, Former Participants, Spouses and Beneficiaries. (d) The Administrator may adopt such rules as it deems necessary, desirable, or appropriate. All rules, decisions and determinations of the Administrator shall be uniformly and consistently applied. When making a determination or decision, the Administrator shall be entitled to rely upon information furnished by the Plan Sponsor or any Employer, Employee, Participant, Former Participant, Spouse, Beneficiary, or any Fiduciary. (e) Any person or entity other than the Plan Sponsor which is designated as Administrator shall signify acceptance by filing a written acceptance with the Plan Sponsor. The Administrator may employ accountants, counsel, specialists and other persons necessary to help carry out its duties and responsibilities under the Plan. The Administrator or any appointee shall be entitled to rely conclusively upon any opinions or reports which shall be furnished to it or him by such accountants, counsel, specialists and other persons. (f) The Administrator shall issue directions to the Trustee concerning all Benefits which are to be paid from the Trust Fund pursuant to provisions of the Plan. 8.7 FORMS AND PROOFS; ELECTIONS, CONSENTS, BENEFICIARY DESIGNATIONS AND CLAIMS. (a) Each Participant, Former Participant, Spouse and Beneficiary then eligible to receive any Benefit shall complete all forms and furnish all information, including his post office address and any changes thereof, and any other proofs, receipts and releases as may be required by the Trustee or Administrator. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 42 44 (b) Any communication, statement or notice addressed to any Participant, Former Participant, Spouse or Beneficiary then entitled to a Benefit at his last post office address filed with the Administrator shall be binding for all purposes of the Plan, and the Trustee and the Administrator shall not be obligated to search for or ascertain the whereabouts of any such person. (c) Any election, consent or Beneficiary designation permitted or required by the provisions of the Plan shall be valid only if made in accordance with the applicable procedures set forth in Section 6.9. (d) Claim Procedures. Any person may submit a written claim to the Administrator. The Administrator shall make all decisions and determinations respecting the right of any person to a Benefit under the Plan. Any decision by the Administrator denying a Benefit claim in whole or in part shall be stated in writing by the Administrator and delivered or mailed to the claimant within ninety (90) days after receipt of the claim by the Administrator unless special circumstances require an extension of time for processing, but in any event within one hundred eighty (180) days after such receipt. If such an extension of time is taken, the Administrator shall inform the claimant of the delay in writing before the expiration of the initial ninety (90) day period and shall state the reasons therefor and the date by which the Administrator expects to render a decision. Any written decision denying a claim shall set forth the specific reasons for the denial with specific references to Plan provisions on which the denial is based, a description of any additional material or information necessary to perfect the claim and the reasons therefor, and an explanation of the Plan's claim review procedure, all written in a manner calculated to be understood by the claimant. If the claimant does not receive written notice that the claim has been denied within the initial ninety (90) day period, or within the extended ninety (90) day period if applicable, the claim shall be deemed to have been denied. (e) Claim Review Procedures. Any claimant who makes a written request within sixty (60) days after his receipt of written notification of claim denial or within sixty (60) days after his claim is deemed denied, shall be entitled to a full and fair review of such denial by the Administrator, and the claimant or his authorized representative shall be entitled to inspect pertinent documents and to submit issues and comments in writing. The Administrator shall render a decision on review not later than sixty (60) days after the Administrator's receipt of a timely request for review unless special circumstances require an extension of time for processing, but in any event within one hundred twenty (120) days after such receipt. If such an extension of time is taken, the Administrator shall inform the claimant of the delay in writing before the expiration of the initial sixty (60) day period and shall state the date by which the Administrator expects to render a decision. The decision on review shall be stated in writing and shall be mailed or delivered to the claimant and shall include the specific reasons for the decision with specific references to Plan provisions upon which the decision is based, all written in a manner calculated to be understood by the claimant. If the claimant does not receive written notice that the claim has been denied on review within the initial sixty (60) day period or within the extended JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 43 45 sixty (60) day period if applicable, the claim shall be deemed to have been denied on review. 8.8 BOOKS AND RECORDS; DISCLOSURES. (a) The Administrator shall keep such books, records, and other data as it deems necessary for proper administration of the Plan, including but not limited to records of each Employee's Compensation, Years of Benefit Service and Years of Vesting Service. (b) The records of any Employer and the Administrator shall be conclusive on all persons unless proved incorrect to the satisfaction of the Employer or the Administrator furnishing the same. (c) The Administrator shall comply with all reporting and disclosure requirements of the law and shall maintain all records required by law. 8.9 LEGAL OR OTHER INCAPACITY OF RECIPIENT. Whenever, in the Administrator's opinion, a person entitled to receive any payment under the Plan is under a legal disability or is incapacitated in any way so that he is unable to manage his financial affairs, the Administrator may direct the Trustee to make payments to such person or to his legal representative or to a relative or friend of such person for his benefit, or the Administrator may direct the Trustee to apply the payment for the benefit of such person in such manner as the Administrator considers advisable. Any payment made in good faith in accordance with the provisions of this Section 8.9 shall be a complete discharge of any liability for the making of such payment under the provisions of this Plan. 8.10 ADMINISTRATIVE COMMITTEE. (a) If two or more persons are designated as Administrator by the Plan Sponsor, then they shall act as an administrative committee. Said administrative committee shall act as Administrator with respect to all duties and responsibilities hereunder, except that its members may allocate any of their duties and responsibilities among themselves by written instrument signed by each of them and filed with the Plan Sponsor. If duties and responsibilities are allocated among administrative committee members in accordance with the foregoing or are delegated to other persons by appointment in accordance with the Plan, then no administrative committee member shall be liable for the performance of duties and responsibilities allocated to any other administrative committee member or delegated by appointment to other persons except to the extent required by law. In the event that any member of the administrative committee resigns or otherwise terminates from the employ of all Controlled Group Members, his status as a member of the administrative committee shall automatically terminate. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 44 46 (b) Except as provided in Section 8.10(a), any and all acts and decisions of the administrative committee shall be by a majority of its members. Any third party may rely upon a representation by any administrative committee member that a decision or determination has been made by the administrative committee. (c) The administrative committee may designate any of its members as secretary of the administrative committee. In that event, the secretary of the administrative committee shall have authority to sign or execute any documents on behalf of the committee. The certificate of the administrative committee secretary that the committee has taken or authorized any action shall be conclusive. 8.11 PLAN AND TRUST EXPENSES. The Plan Sponsor and the Employers shall have discretion to pay or reimburse any reasonable costs and expenses of the Plan and the Trust, including but not limited to compensation of Fiduciaries and costs and expenses incurred by the Administrator as a result of the performance of its duties and responsibilities hereunder, such as, but not limited to fees to accountants, counsel, specialists and other persons employed or appointed to help the Administrator perform its duties and responsibilities hereunder, in such proportions as the Plan Sponsor may deem appropriate. Any reasonable costs and expenses of the Plan or the Trust not so paid or reimbursed shall be paid by the Plan. Notwithstanding anything contained herein to the contrary, no compensation shall be paid to any person otherwise receiving full-time pay from the Plan Sponsor or any Employer. 8.12 PLAN SPONSOR AND EMPLOYER ACTIONS. Except as otherwise expressly provided in the remaining provisions of this Plan, any action of the Plan Sponsor or any Employer under this Plan after initial adoption of this Plan shall be authorized by its Board of Directors. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 45 47 ARTICLE 9: EMPLOYERS OTHER THAN THE PLAN SPONSOR 9.1 ELIGIBILITY FOR EMPLOYER STATUS. Subject to the written consent of the Trustee and the Board of Directors or other governing body of the Plan Sponsor, a Controlled Group Member may become an Employer by submitting a certified copy of resolutions of its Board of Directors or other governing body evidencing its adoption of the Plan and the Trust for the benefit of its eligible Employees. 9.2 DELEGATION OF RIGHTS AND DUTIES TO PLAN SPONSOR. (a) Adoption of the Plan and the Trust by an Employer in accordance with Section 9.1 shall constitute the delegation by such Employer to the Plan Sponsor of full authority to amend the Plan and Trust, and to appoint the Trustee, the Administrator and any Investment Manager and to direct the Trustee in accordance with terms of the Trust. (b) Any amendment to the Plan or the Trust adopted by the Plan Sponsor in accordance with provisions of the Plan or Trust shall be binding upon and effective with respect to each Employer, and each Employer shall be deemed to have assented to any such amendment. 9.3 EMPLOYER RIGHT TO WITHDRAW. Each Employer reserves to itself the right to terminate its status as an Employer under the Plan, to terminate the Plan with respect to its Employees or to discontinue contributions to the Plan with respect to its Employees. If an Employer exercises any such right, the provisions of Article 12 of the Plan and Article 9 of the Trust shall apply to the portion of the Trust assets consisting of the Individual Accounts of the Participants and Former Participants of such Employer. 9.4 WITHDRAWAL FROM PLAN AND TRUST. (a) Any Employer other than the Plan Sponsor shall withdraw from the Plan and the Trust if it ceases to be a Controlled Group Member, effective as of the Valuation Date coincident with or next following the date on which it ceases to be a Controlled Group Member. (b) Any Employer other than the Plan Sponsor may withdraw from the Plan and the Trust without ceasing to be a Controlled Group Member effective as of any Valuation Date, by providing written notice to the Administrator and Trustee of its intent to withdraw at least thirty (30) days prior to such Valuation Date. (c) The Administrator shall certify to the Trustee the portion of the Trust Fund constituting the Individual Accounts of Employees and former Employees of a withdrawing Employer as of the Annual Valuation Date on which such Employer's JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 46 48 withdrawal is effective. The Trustee shall segregate such portion of the Trust Fund as of such Annual Valuation Date, and thereafter such portion of the Trust Fund shall be held in a separate trust, and shall be used and applied according to the provisions of this Plan and the Trust in the same manner as if this Plan and the Trust had been executed by and between the withdrawing Employer as Plan Sponsor and the Trustee or any other trustee designated in writing by the withdrawing Employer, without the execution of any other instruments. (d) The Trustee shall determine which assets of the Trust are to be set aside in accordance with Section 9.4(c), provided that no discrimination in value results therefrom. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 47 49 ARTICLE 10: AMENDMENTS 10.1 AMENDMENT AUTHORITY. The Plan Sponsor reserves the right to amend this Plan from time to time and hereby gives to its officers continuing authority to adopt such amendments as they deem necessary or desirable, provided, however: (a) As a condition precedent to the adoption of any proposed amendment, the officers shall make a good faith determination of the projected additional annual cost of such proposed amendment. (1) During any Plan Year the officers of the Plan Sponsor shall have the authority to approve and adopt one or more amendments which in the aggregate have a projected additional annual cost to the Employers not exceeding Five Hundred Thousand Dollars ($500,000). (2) If the projected additional annual cost of an amendment to the Employers, together with the projected additional annual cost of all other amendments adopted by the officers during the Plan Year, exceeds Five Hundred Thousand Dollars ($500,000), then such amendment shall be submitted to the Board of Directors of the Plan Sponsor. (b) Authority to make an amendment respecting the investment of Plan assets in Employer Stock shall be retained by the Plan Sponsor, and the officers shall have no authority to make such an amendment. (c) Such amendment shall be in writing executed by the proper officers of the Plan Sponsor. (d) The Plan Sponsor shall deliver a certified copy of each amendment to each Employer and the Trustee. 10.2 CONDITIONS. Each amendment shall be subject to the following: (a) The duties of the Trustee cannot be changed substantially without the Trustee's consent. (b) Except as provided in the Plan or otherwise in accordance with applicable law, any such amendment shall not result in or permit the return or repayment to the Plan Sponsor or any Employer of any portion of the Trust Fund or the income therefrom or result in or permit the distribution of the Trust Fund for the benefit of anyone other than Participants, Former Participants, Spouses and Beneficiaries. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 48 50 (c) Any such amendment shall not reduce a Participant's accrued Benefit to less than the Benefit to which he would have been entitled if he had separated from service with the Employer on the day prior to the effective date of such amendment. (d) Any amendment which would have the effect of disqualifying the Plan shall be void from its inception. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 49 51 ARTICLE 11: SUCCESSOR EMPLOYER AND MERGER OR CONSOLIDATION OF PLANS 11.1 CONTINUATION OF THE PLAN BY ANOTHER EMPLOYER. If any Participants become employed by an entity other than the Plan Sponsor or any Employer incident to the sale by the Plan Sponsor or Employer of all or substantially all of its operating assets to such entity or incident to a merger, consolidation or reorganization involving the Plan Sponsor or Employer and such entity, then the Plan Sponsor or Employer and such entity by resolutions of their respective Boards of Directors or other governing bodies may direct that the Plan and the Trust be continued by such entity; in that event, such entity shall be substituted for the Plan Sponsor or Employer under the Plan without the execution of any other instruments. The substitution of such entity shall constitute an assumption of Plan liabilities by such entity which shall have all of the powers, duties and responsibilities of the Plan Sponsor or Employer as applicable under the Plan, effective from and after the date specified in the foregoing resolutions without the execution of any other instruments. 11.2 PLAN MERGER, CONSOLIDATION OR ASSET TRANSFER. (a) This Plan and the Trust may accept assets transferred from any other tax-qualified profit-sharing plan and trust for employees; and the assets of this Plan and the Trust may be transferred to any other such plan and trust, all upon authorization by written resolutions of the Board of Directors or other governing body of the Plan Sponsor, and subject to any terms and conditions set forth in such resolutions. (b) In the event of any merger or consolidation of the Plan, or transfer of all or any portion of the assets and liabilities of the Trust Fund to another trust fund or custodial account or contract maintained under any other plan of deferred compensation either in existence or to be established for the benefit of some or all of the Participants under this Plan, the merger, consolidation or transfer of assets and liabilities of the Plan shall be consummated only if: (1) Each affected Participant would be entitled to receive a Benefit in the event of termination of the other plan immediately after the merger, consolidation or transfer in an amount not less than the Benefit he would have been entitled to receive in the event of termination of this Plan immediately before such merger, consolidation or transfer; (2) Resolutions of the Boards of Directors or other governing bodies of the Plan Sponsor and of any new or successor employer of the affected Participants, shall authorize such transfer of assets, and in the case of such new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new or successor employer's plan; and (3) Such other plan and trust, if any, are then qualified under the applicable provisions of the Code. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 50 52 ARTICLE 12: PLAN TERMINATION 12.1 TERMINATION OF PLAN. The Plan Sponsor has established the Plan and the Trust and has executed this instrument with the intention and expectation that it will be able to make contributions indefinitely, but the Plan Sponsor and each Employer shall not be under any obligation or liability whatsoever to maintain the Plan and the Trust for any length of time. In accordance with the procedures set forth in this Article 12, the Plan Sponsor may terminate the Plan at any time. The Plan will terminate thirty (30) days after the receipt by the Trustee of written notice of Plan termination from the Plan Sponsor, or if the Plan Sponsor is judicially declared bankrupt or insolvent. 12.2 SEGREGATION OF ASSETS ON PARTIAL TERMINATION OF PLAN. Upon a partial termination of the Plan with respect to a group of Participants and Former Participants, the Trustee shall in accordance with the directions of the Administrator allocate and segregate the proportionate interest of such Participants and Former Participants in the Trust Fund. The funds so allocated and segregated shall be used by the Trustee to pay Benefits to or on behalf of such Participants and Former Participants in accordance with Section 12.3. 12.3 COMPLETE DISCONTINUANCE OF CONTRIBUTIONS OR COMPLETE OR PARTIAL TERMINATION. (a) In the event of complete discontinuance of contributions by the Employers or upon termination or partial termination of the Plan, the Individual Accounts of all Participants and Former Participants affected thereby shall be nonforfeitable. (b) Subject to the provisions of Section 12.3(c), the Administrator shall direct the Trustee to distribute the assets of the Trust Fund to the persons entitled thereto. Distributions shall be made in cash. (c) The Plan Sponsor may elect to continue the Trust with respect to the Individual Accounts of Participants, Former Participants, Spouses and Beneficiaries affected by a complete discontinuance of contributions, or a complete or partial termination of the Plan until all of their Benefits have been distributed pursuant to Article 6 of the Plan. The Administrator shall continue to function in a manner consistent with the terms of the Plan, and the Trust Fund shall be continued only for the benefit of those Participants, Former Participants, Spouses and Beneficiaries with Individual Accounts from time to time. In the event of the death or resignation of the Administrator at a time when the Plan Sponsor is not in existence, the Trustee shall assume the duties and responsibilities of the Administrator until the termination of the Trust. Distributions under this Article 12 shall be made in cash. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 51 53 ARTICLE 13: QUALIFIED DOMESTIC RELATIONS ORDERS 13.1 IN GENERAL. Benefits of a Participant or Former Participant shall be paid to alternate payees pursuant to any qualified domestic relations order, as defined in Code Section 414(p). For this purpose, a qualified domestic relations order is an order, judgment or decree pursuant to a State domestic relations law (including community property law) which relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of the Participant or Former Participant. The order must specify the alternate payee's right to receive a portion of the Benefit payable under the Plan with respect to the Participant or Former Participant and must contain sufficient information to calculate the applicable payment and to contact the alternate payee. The order may not conflict with a previous qualified domestic relations order, require payment in a form not provided for by the Plan or require payment of increased Benefits under the Plan. 13.2 PLAN PROCEDURES. (a) The Administrator shall adopt procedures consistent with applicable law and regulations to verify whether any judgment, decree or order is a qualified domestic relations order. (b) Pending determination whether a judgment, decree or order is a qualified domestic relations order, the Administrator shall direct the Trustee to charge the Individual Account of the affected Participant or Former Participant with the total amount to be set aside for the benefit of each alternate payee pursuant to the judgment, decree or order, and to establish a segregated account in the Trust Fund on behalf of each alternate payee in the same amount. If the Individual Account of the Participant or Former Participant consists of two or more sub-accounts, the sub-accounts shall be charged in proportion to their respective amounts. Following a determination as to whether the judgment, decree or order is a qualified domestic relations order, the segregated accounts established on behalf of the alternate payees shall either become permanent, to be distributed in accordance with the qualified domestic relations order, or shall be terminated and the amounts thereof credited to the affected Participant's or Former Participant's Individual Account and the sub-accounts thereunder in proportion to their respective amounts, to be distributed in the manner provided for generally in the Plan, without regard to the judgment, decree or order. (c) If the judgment, decree or order applies to a Benefit otherwise in pay status, payment shall be suspended for a period sufficient for the Administrator to determine whether it is a qualified domestic relations order, but in any event, not longer than eighteen (18) months after the date specified for the payment to the alternate payee in the judgment, decree or order. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 52 54 (1) If the judgment, decree or order is determined to be a qualified domestic relations order within such period, the amount in the account established for the alternate payee shall be paid to the alternate payee in accordance with the qualified domestic relations order. (2) If no determination is made as to whether a judgment, decree or order relating to Benefits otherwise in pay status is a qualified domestic relations order within eighteen (18) months after the date specified for payment to the alternate payee, or if the judgment, decree or order is determined not to be a qualified domestic relations order before the expiration of such period, the segregated account shall be terminated, and the amounts thereof shall be credited to the affected Participant's or Former Participant's Individual Account and the sub-accounts thereunder in proportion to their respective amounts, and distribution of the Participant's or Former Participant's Benefit shall be made as generally provided for in the Plan, without regard to the judgment, decree or order. (3) If a judgment, decree or order relating to Benefits otherwise in pay status is determined to be a qualified domestic relations order more than eighteen (18) months after the date specified for payment to the alternate payee, the qualified domestic relations order shall be applied prospectively to the extent possible, but the Administrator shall have no duty to attempt to recover any distributions from an affected Participant's or Former Participant's Individual Account which occurred prior to the determination that the judgment, decree or order is a qualified domestic relations order. 13.3 TIME AND FORM OF PAYMENT. If a qualified domestic relations order so provides, distribution to the alternate payee thereunder shall occur as soon as may be practical after the Administrator verifies that the judgment, decree or order is a qualified domestic relations order. The Alternate Payee may elect that payment be made in any form available under the plan other than a Qualified Joint and Survivor Annuity. 13.4 AMOUNT OF BENEFIT. For purposes of determining the amount of the Benefit of a Participant or Former Participant from time to time for any purpose under the Plan, any permanent segregated account established with respect to an alternate payee related to such Participant or Former Participant and any distribution from the Plan to such an alternate payee shall be disregarded. 13.5 INVESTMENT OF SEGREGATED ACCOUNT. (a) During the period for which a segregated account established on behalf of an alternate payee remains in existence under the Plan, it shall be and remain a part of the Trust Fund. Regardless of whether the affected Participant or Former Participant is otherwise entitled to direct the investment of his Individual Account pursuant to the provisions of Article 4 of the Plan, the Participant or Former Participant shall have JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 53 55 no right to direct the investment of the segregated account established on behalf of the alternate payee. (b) If the domestic relations order does not provide for immediate distribution, the alternate payee shall be entitled to direct investment of the segregated account after the order is determined to be a Qualified Domestic Relations Order. The provisions of Section 4.2shall be applicable with respect to such segregated account of the alternate payee. 13.6 DEATH. In the event of the death of an alternate payee prior to the date an amount would otherwise have been paid to such alternate payee, no amount shall be paid to the estate or any Beneficiary of the alternate payee except as provided in the governing qualified domestic relations order. In the event of the death of the Participant or Former Participant prior to the date an amount would otherwise be payable to an alternate payee who is the former spouse of the Participant or Former Participant, the alternate payee shall not be treated as the Spouse of the Participant or Former Participant for purposes of the Plan except as provided in the governing qualified domestic relations order. 13.7 FORMS AND PROOFS. Each alternate payee shall have the sole responsibility for notifying the Administrator of any change in the alternate payee's name or address and for providing the Administrator with any additional information necessary to carry out the terms of a qualified domestic relations order. 13.8 AMOUNTS PAYABLE. Any amount to be determined pursuant to this Article 13 shall be determined as of the Valuation Date next preceding the date of such determination. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 54 56 ARTICLE 14: MISCELLANEOUS 14.1 TAX QUALIFICATION OF PLAN AND TRUST. The Plan Sponsor intends by the execution of this instrument that the Plan and the Trust will constitute a qualified plan and trust under the applicable provisions of the Code in order that the income of the Trust will be tax-exempt, and Employer contributions to the Trust in accordance with the provisions of the Plan will be tax deductible. Any modification or amendment of the Plan or the Trust which the Plan Sponsor may deem necessary or advisable in order that the Plan and the Trust constitute a qualified plan and trust may by its terms be made retroactive as permitted by law. 14.2 EMPLOYERS NOT PLAN BENEFICIARIES; RETURN OF CERTAIN EMPLOYER CONTRIBUTIONS. No Employer shall have any beneficial interest in the Trust Fund or any part thereof, and no part of the Trust Fund shall ever revert or be repaid to any Employer either directly or indirectly, except as follows: (a) Every contribution made by an Employer under the Plan by a mistake of fact shall be returned to the Employer within one (1) year after payment of the contribution; (b) Every contribution by an Employer under the Plan is conditioned upon the deductibility of the contribution under the applicable provisions of the Code, and, to the extent the deduction is disallowed, such contribution shall be returned to the Employer within one (1) year after disallowance of the deduction; and (c) As otherwise provided by law in the case of a plan and trust qualified under the applicable provisions of the Code. An affected Employer shall notify the Trustee in writing of any contribution that is to be returned to the Employer in accordance with this Section 14.2. 14.3 BENEFITS LIMITED TO TRUST ASSETS. No person shall have any right to or interest in any assets of the Trust Fund upon termination of his status as an Employee or otherwise, except as provided under this Plan, and then only to the extent of Benefits payable under the Plan out of the assets of the Trust Fund. All payments of Benefits provided for in this Plan shall be made solely out of the assets of the Trust Fund and none of the Fiduciaries shall be liable therefor except as required by law. 14.4 UNKNOWN WHEREABOUTS OF PERSONS ENTITLED TO BENEFITS. If the Administrator or Trustee notifies any Former Participant, Spouse or Beneficiary that he is entitled to a payment under the Plan and also notifies him of the provisions of this Section 14.4 and such person fails to claim his Benefit or make his whereabouts known to the Administrator or to the Trustee within the shorter of a period of seven (7) years thereafter, JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 55 57 or the period ending on the date of termination of the Trust, the amount held by the Trustee representing such Benefit shall be allocated as if it were a Forfeiture in the manner provided in Section 4.4(d) with respect to the Plan Year during which the expiration of such period occurs. If a person makes a claim for his Benefit after such allocation and before all assets of the Trust Fund have been distributed, the Administrator shall direct the Trustee to pay over to such person the amount of his Benefit as of the Valuation Date as of which the allocation occurred, and the amount so paid shall be treated as an expense of the Plan for the Plan Year during which it is paid. 14.5 MISTAKES IN BENEFIT PAYMENTS. In the event and to the extent that any Benefit payment to a Former Participant, Spouse or Beneficiary is determined by the Administrator to have been in error, the Administrator and the Trustee shall determine the extent of the error and shall take action to correct the error in an equitable manner as determined in the sole discretion of the Administrator, consistent with the following: (a) In the event that an amount paid in error is less than the amount which should have been paid, the Administrator shall direct the Trustee to distribute to the Former Participant, Spouse or Beneficiary the difference between the amount paid and the amount which should have been paid; (b) In the event that the amount paid in error exceeds the amount which should have been paid, the Administrator, to the extent possible, shall reduce any Benefit then remaining payable to the Former Participant, Spouse or Beneficiary by the excess of the amount paid over the amount which should have been paid and shall make other reasonable efforts to recover such excess from the Former Participant, Spouse or Beneficiary. If the Administrator is unable to recover such excess from such Former Participant, Spouse or Beneficiary, the Employer shall hold the Plan harmless and indemnify the Plan by paying over to the Plan the amount of such excess. (c) The Administrator shall equitably adjust the Individual Accounts of Participants, Former Participants, Spouses and Beneficiaries to reflect any amount paid from or received by the Plan in accordance with this Section 14.5. 14.6 SPENDTHRIFT CLAUSE. Except as provided by applicable law, Benefits payable under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary. Any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to Benefits payable hereunder shall be void, and the Trust Fund shall not in any manner be liable for, or subject to the debts, contracts, liabilities, engagements or torts of any Participant, Former Participant, Spouse or Beneficiary. 14.7 NO GUARANTEE OF EMPLOYMENT. Participation in the Plan shall not be construed as giving a Participant any right to continue in the employ of any Employer. Any JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 56 58 Employee shall remain subject to discharge by any Employer to the same extent as if this instrument had not been executed. 14.8 WAIVER OF NOTICE. Any notice required by the Plan or the Trust may be waived by the person entitled thereto. 14.9 PLAN PROVISIONS BINDING. The provisions of the Plan shall be binding upon all persons entitled to Benefits under the Plan and their respective heirs and legal representatives, upon the Plan Sponsor, Employers, their successors and assigns, upon the Trustee and the Trustee's successors and upon the Administrator. 14.10 CONSTRUCTION OF TERMS. Words of gender shall include persons and entities of any gender, the plural shall include the singular, and the singular shall include the plural. Section headings exist for reference purposes only, and shall not be construed as part of the Plan. 14.11 EXECUTION OF COUNTERPARTS. This Plan may be executed in two or more counterparts, any one of which shall constitute an original without reference to the others. 14.12 MISSOURI LAW CONTROLS. Except as otherwise provided by the Employee Retirement Income Security Act of 1974, this Plan, as amended from time to time shall be administered, construed and enforced according to the laws of the State of Missouri and in Courts situated in that State. 14.13 MINIMUM STANDARDS IN TOP-HEAVY PLAN YEARS. Notwithstanding any other provision of the Plan, the following provisions shall apply with respect to any Plan Year as to which the Plan is top-heavy. (a) The sum of all contributions which are allocated with respect to such Plan Year to the Individual Account of any Participant credited with at least one thousand (1,000) Hours of Service for such Plan Year and any other Employee who is a Participant on the last day of such Plan Year shall not be less than the lesser of three percent (3%) of his Compensation, or such smaller amount which bears the same ratio to the Compensation of the Participant as the highest such ratio determined with respect to any key employee for such Plan Year, provided in determining the amount of contributions allocated to the Individual Account of any key employee, salary deferral contributions and Employer matching contributions shall be taken into account, but salary deferral contributions and Employer matching contributions of non-key employees shall not be taken into account.. (b) In determining the percentage of Compensation allocated to the Individual Account of any Participant under Section 14.13(a), all defined contribution plans of the Plan Sponsor and any other Controlled Group Members shall be treated as one plan, and the Participant's Compensation from all Controlled Group Members shall be JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 57 59 taken into account. The Plan Sponsor shall direct the Employers to make such contributions under this Plan as the Plan Sponsor in its sole discretion may determine to satisfy the requirement of Section 14.13(a). (c) The vested percentage of the Employer Matching Account of each Participant who is a non-key employee and who is credited with at least one (1) Hour of Service with respect to such Plan Year shall be determined as of the last day of such Plan Year in accordance with the following schedule in lieu of any schedule set forth in Section 5.3:
YEARS OF VESTING VESTED PERCENTAGE NONVESTED SERVICE PERCENTAGE Less than 2 0% 100% 2 20% 80% 3 40% 60% 4 60% 40% 5 80% 20% 6 100% 0%
(d) In the event that the Plan is top-heavy in one or more Plan Years and is not top-heavy in a subsequent Plan Year, the vesting schedule described in Section 5.3 shall again be applied in determining a Participant's vested percentage in his Employer Matching Account; provided that (1) The nonforfeitable percentage of a Participant's accrued Benefit, as determined immediately before the time at which the Plan ceased to be top-heavy, shall not be reduced; and (2) A Participant who is credited with at least three (3) Years of Vesting Service shall be given the option to remain under the vesting schedule set forth in Section 14.13(c). (e) For purposes of this Section 14.13, (1) The Plan shall be top-heavy for any Plan Year if the aggregate of the Individual Accounts of all Participants and Former Participants who are key employees for such Plan Year exceeds sixty percent (60%) of the aggregate of the Individual Accounts of all Participants and Former Participants, determined as of the determination date for such Plan Year in accordance with Code Section 416(g) and applicable Treasury regulations; provided that the Individual Account of any Participant or Former Participant who has not performed at least one (1) Hour of Service for any Employer during the five (5) Year period ending on the determination date shall not be taken into account. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 58 60 (2) The phrase "key employee" shall have the meaning set forth in Code Section 416(i)(1), taking into account an individual's annual compensation from the Employer or other Controlled Group Member for the calendar year ending with or within the Plan Year; provided that the phrase "annual compensation" shall mean compensation as defined in Code Section 415(c)(3), but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Code Sections 125, 402(a)(8), 402(h) or 403(b). The phrase "non-key employee" shall mean any employee who is not a key employee. The phrase "determination date" shall mean the Annual Valuation Date of the next preceding Plan Year. (3) This Plan shall be aggregated with any and all other tax-qualified plans of any Controlled Group Member under which a key employee is a participant for such Plan Year, and with any and all other such plans which are aggregated with this Plan for purposes of Code Sections 401(a)(4) or 410 for such Plan Year. This Plan may be aggregated with any other tax-qualified plan of deferred compensation for employees pursuant to which the Employer or any other Controlled Group Member makes contributions for the benefit of Employees, as the Administrator may determine in its sole discretion. IN WITNESS WHEREOF, Jones Medical Industries, Inc., as Plan Sponsor, has caused this instrument to be executed this ________ day of ____________________________, 199____________. JONES MEDICAL INDUSTRIES, INC. By: ---------------------------------- Title: ------------------------------- ATTEST: - ---------------------------- JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 59 61 EXHIBIT A JMI'S EMPLOYEE PROFIT-SHARING AND 401(K) PLAN (AMENDED AND RESTATED AS OF JANUARY 1, 1997) INVESTMENT FUNDS LARGE CAPITALIZATION VALUE EQUITY INVESTMENTS is co-advised by Newbold's Asset Management, Inc. and Parametric Portfolio Associates, Inc. The objective of this fund is total return consisting of capital appreciation and dividend income by investing primarily in a diversified portfolio of highly liquid common stocks that have above average price appreciation potential at the time of purchase. The Portfolio's assets will be invested primarily in common stocks of issuers with total market capitalization of One Billion Dollars ($1,000,000,000) or greater at the time of purchase. LARGE CAPITALIZATION GROWTH EQUITY INVESTMENTS is co-advised by Provident Investment Counsel and Boston Structured Advisors. The objective of this fund is substantial capital appreciation by investing primarily in a diversified portfolio of common stocks that, in the advisor's opinion, are characterized by a growth of earnings at a rate faster than that of the Standard & Poor's 500. The Portfolio's assets will be invested primarily in common stocks of issuers with total market capitalization of One Billion Dollars ($1,000,000,000) or greater at the time of purchase. INTERNATIONAL EQUITY INVESTMENTS is co-advised by Oechsle International Advisors, L/P. and State Street Global Advisors. The objective of this fund is to achieve capital appreciation through investing primarily in equity securities of companies domiciled outside the United States. SMALL CAPITALIZATION GROWTH EQUITY INVESTMENTS is co-advised by Pilgrim Baxter & Associates, Ltd. and Mellon Capital Management Corporation. The objective of this fund is to achieve maximum capital appreciation through investing primarily in the common stock of "emerging growth" companies with total market capitalization of less than One Billion Dollars ($1,000,000,000). At least one-third (1/3) of the Portfolio's assets will be invested in common stocks of companies with total market capitalization of Five Hundred Fifty Million Dollars ($550,000,000) or less at the time of purchase. INTERMEDIATE FIXED INCOME INVESTMENTS is advised by Standish, Ayer & Wood, Inc. The objective of this fund is current income and reasonable stability of principal through investing primarily in high-quality fixed-income securities. GOVERNMENT MONEY INVESTMENTS is advised by Standish, Ayer & Wood, Inc. The objective of this fund is to provide maximum current income to the extent consistent with the maintenance of liquidity and preservation of capital by investing exclusively in short-term securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements with respect to those securities. JMI's Employee Profit-Sharing and 401(k) Plan (Amended and Restated as of January 1, 1997) Page 60 EX-11.1 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year ended December 31, (amounts in thousands, except per share data) --------------------------------------------- 1996 1995 1994 ---- ---- ---- PRIMARY Average shares outstanding 28,016 23,963 25,261 Net effect of dilutive stock options and warrants (1) 33 807 476 Assumed conversion of preferred stock -- 74 624 Total 28,049 24,844 26,631 ======== ======== ====== Net Income $ 18,139 $ 12,389 $ 7,520 ======== ======== ====== Earnings per common and common equivalent share $ 0.65 $ 0.50 $ 0.29 ======== ======== ====== FULLY DILUTED Average shares outstanding 28,016 23,963 25,261 Net effect of dilutive stock options and warrants (1) 33 807 476 Assumed conversion of preferred stock -- 74 624 Total 28,049 24,844 26,361 ======== ======== ====== Net income $ 18,139 $ 12,389 $ 7,520 ======== ======= ===== Earnings per common and common equivalent share $ 0.65 $ 0.50 $ 0.29 ======== ======== ======
(1) The impact on the computation of per share earnings between using the average market price for the primary computation and the year-end market price (if higher than average market price) for the fully diluted computation is less than 3% of the applicable outstanding shares. EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT (21.1) SUBSIDIARIES OF THE REGISTRANT ------------------------------ JMI Phoenix Laboratories, Inc. JMI-Canton Pharmaceuticals, Inc. GenTrac, Inc. JMI-Abana Pharmaceuticals, Inc.* JMI-Daniels Pharmaceuticals, Inc. *Merged into the Registrant effective January 2, 1997. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT (23.1) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3, File No. 333-20893) of Jones Medical Industries, Inc. and in the related Prospectus of our report dated February 14, 1997 with respect to the financial statements and schedule of Jones Medical Industries, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement (Form S-8, File No. 33-40184) pertaining to the 1982 Incentive Stock Option Plan and the 1989 Incentive Stock Option Plan of Jones Medical Industries, Inc. of our report dated February 14, 1997 with respect to the consolidated financial statements and schedule of Jones Medical Industries, Inc. in this Annual Report (Form 10-K) for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement (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 Medical Industries, Inc. of our report dated February 14, 1997, with respect to the consolidated financial statements and schedule of Jones Medical Industries, Inc. in this Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP St. Louis, Missouri March 10, 1997 EX-23.2 6 CONSENT OF HACKER, JOHNSON, COHEN & GRIEB 1 EXHIBIT (23.2) CONSENT OF HACKER, JOHNSON, COHEN & GRIEB, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3, File No. 333-20893) of Jones Medical Industries, Inc. and in the related Prospectus of our report dated April 25, 1996 (except for note 16 as to which the date is July 30, 1996) with respect to the consolidated balance sheets of Galen Drugs of Florida, Inc. and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended September 30, 1995 and 1994, which report is included in this Annual Report (Form 10-K) of Jones Medical Industries, Inc. for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement (Form S-8, File No. 33-40184) pertaining to the 1982 Incentive Stock Option Plan and the 1989 Incentive Stock Option Plan of Jones Medical Industries, Inc. of our report dated April 25, 1996 (except for note 16 as to which the date is July 30, 1996) with respect to the consolidated balance sheets of Galen Drugs of Florida, Inc. and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended September 30, 1995 and 1994, which report is included in this Annual Report (Form 10-K) of Jones Medical Industries, Inc. for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement (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 Medical Industries, Inc. of our report dated April 25, 1996 (except for note 16 as to which the date is July 30, 1996) with respect to the consolidated balance sheets of Galen Drugs of Florida, Inc. and subsidiaries as of September 30, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended September 30, 1995 and 1994, which report is included in this Annual Report (Form 10-K) of Jones Medical Industries, Inc. for the year ended December 31, 1996. HACKER, JOHNSON, COHEN & GRIEB Tampa, Florida March 10, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JONES MEDICAL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 52,171,684 120,000 11,689,360 388,109 12,752,523 80,550,805 29,590,764 5,420,411 177,233,388 10,031,359 0 0 0 1,137,419 160,782,303 177,233,388 100,153,086 100,153,086 39,825,723 39,825,723 0 200,625 553,196 30,428,738 12,290,000 18,138,738 0 0 0 18,138,738 .65 .65
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