-----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, GKOeLNcr04tI0TQu8sffbZdz6rcvxX0ksGaytz/uujXYMoIDBmLZ8KMa5MXjL0d5 EZvoe0uh+FNTLnbSE+l8Uw== 0000950124-98-001880.txt : 19980401 0000950124-98-001880.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950124-98-001880 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 000-15098 FILM NUMBER: 98582860 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 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 0-15098 JONES MEDICAL INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 43-1229854 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1945 CRAIG ROAD, ST. LOUIS MISSOURI 63146 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 576-6100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of 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 is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of February 27, 1998, is approximately $853 MILLION. (This calculation is based on the closing price of the stock as quoted on the NASDAQ National Market and excludes shares of stock held by directors and officers of the Registrant.) Number of shares outstanding of registrant's Common Stock as of February 27, 1998: 28,696,348. Documents incorporated by reference: NONE. 2 INTRODUCTORY NOTES Tapazole(R), Levoxyl(R), Thrombin-JMI(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), Obenix(R), Triostat(R) and Cytomel(R) are trademarks owned by or under license to the Company. All other trademarks and registered trademarks used in this Form 10-K are the property of their respective owner. Unless the context otherwise requires, references herein to: (i) "JMI" or the "Company" refer to Jones Medical Industries, Inc. and its subsidiaries; (ii)"JMI Canton" refers to the Company's wholly-owned subsidiary, JMI Canton Pharmaceuticals, Inc.; (iii)"GenTrac" refers to the Company's wholly-owned subsidiary, GenTrac, Inc.; (iv)"JMI-Daniels" refers to the Company's wholly-owned subsidiary, JMI-Daniels Pharmaceuticals, Inc.; (v)"JMI-Phoenix" refers to the Company's wholly-owned subsidiary, JMI-Phoenix Laboratories, Inc.; (vi) "Daniels Acquisition" refers to the Company's acquisition of Galen Drugs of Florida, Inc. ("Galen"), and Galen's subsidiaries, including Daniels Pharmaceuticals, Inc. ("Daniels"), on August 30, 1996 in a transaction accounted for as a pooling of interests; and (vii) "Abana Acquisition" refers to the Company's acquisition of Abana Pharmaceuticals, Inc. ("Abana") on December 31, 1996. In February, 1998, the Company's Board of Directors ("Board") authorized the Company to entertain offers to purchase the Company's nutritional supplements product line and contract manufacturing operations. On March 16, 1998, by unanimous written consent, the Board approved: (i) a plan to discontinue and dispose of the Company's nutritional supplements product line and contract manufacturing operations; and (ii) an agreement with certain operating subsidiaries of Twinlab Corporation ("Twinlab") to sell the Company's nutritional supplements product line and contract manufacturing operations conducted through its wholly-owned subsidiary, JMI-Phoenix, for $55 million in cash. The Company and Twinlab executed the agreement on March 17, 1998. The actions to be taken pursuant to the Board's March 16, 1998 plan represent 'discontinued operations' requiring a restatement of the Company's historical financial information under applicable accounting principles and regulations, and the operations to be discontinued are hereinafter collectively referred to as "Discontinued Operations." As a result of the Company's restatement of its historical financial information, the comparative dollar values and percentage amounts used throughout this report reflect this restatement and relate solely to the Company's continuing pharmaceutical operations, unless otherwise indicated. The following discussion contains forward-looking statements that involve risks and uncertainties. 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 Founded in 1981, Jones Medical Industries, Inc. manufactures, markets, distributes and sells specialty pharmaceutical products under its own trademarks and tradenames. As a result of the decision relating to the Discontinued Operations, the Company will cease to manufacture, market, distribute and sell nutritional supplements and cease contract manufacturing operations (See "Business--Discontinued Operations"). Subject to stockholder approval at the Company's Annual Meeting of Shareholders to be held on May 19, 1998, the name of the Company will be changed to 'JONES PHARMA INCORPORATED' to reflect the nature of the Company's continuing operations. 3 BUSINESS STRATEGY The Company's business strategy is to acquire specialty prescription pharmaceutical 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. 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 pharmaceutical products and businesses and by expanding and increasing the penetration of its existing customer base. 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 prescription treatments for thyroid disorders and critical care treatments involving hemostasis and anesthesia. The Company intends to continue to seek the rights to products that it believes can benefit from focused marketing efforts. Leverage Established Pharmaceutical Marketing and Sales Efforts. The Company 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 Pharmaceutical Products and Cost Control. The Company 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 1997 Acquisition of Triostat and Cytomel. On June 27, 1997, the Company acquired the products Triostat and Cytomel from SmithKline Beecham Corporation ("SmithKline") for $22.8 million in cash. Although the Company is not obligated to pay SmithKline royalties on future sales of Triostat and Cytomel, the agreement with SmithKline does provide that in the event that the Company files for and receives approval for any additional indications for Triostat from the United States Food and Drug Administration ("FDA"), the Company will be obligated to pay SmithKline a ten (10) year royalty equal to ten percent (10%) of the net incremental sales of Triostat resulting from such additional indications. Triostat is a relatively new drug, having received its new drug application from the FDA in 1991, whereas Cytomel is a relatively mature drug which had not been actively promoted in the past by SmithKline. While the Company plans to market Triostat and Cytomel through its hospital-based sales and marketing staff, there can be no assurance that the Company will be successful in its marketing and sales efforts, and failure to successfully market and sell Triostat and Cytomel could have a material adverse effect on the Company's business, financial condition and results of operations. PRINCIPAL PRODUCTS The Company's principal products primarily serve the endocrine treatment and the critical care segments of the health care industry as well as the companion animal segment of the veterinary industry. The Company's principal products are as follows: 2 4 Endocrine Pharmaceuticals. Tapazole. Tapazole is an anti-thyroid product used for the treatment of hyperthyroidism; the extreme form of hyperthyroidism is commonly known as 'Graves' Disease.' Tapazole is prescribed to inhibit the synthesis and production of natural thyroid hormones and to reduce the size of the goiter (an abnormal growth resulting from overactivity of the thyroid gland). Although the Company is not aware of any generic forms of Tapazole in the marketplace, Tapazole faces competition from propylthiouracil ("PTU"). PTU is manufactured by Lederle Labs ("Lederle"), a division of American Cyanamid Company, which has greater financial resources than the Company, and is marketed and distributed by a number of independent generic pharmaceutical companies who acquire product from Lederle. During 1997, the Company had net sales of $18.3 million relating to Tapazole, equal to 20.6% of the Company's 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 $330 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. New FDA requirements, effective August 14, 2000, mandate that Levoxyl receive new drug approval from the FDA (See "Business-- Government Regulation"). Competitive action in the marketing and distribution of Synthroid(R) as well as the process of obtaining new drug approval could disrupt the Company's strategies for market development of Levoxyl and have a material adverse effect on the Company's business and financial condition and its results of operations. During 1997, the Company had net sales of $22.2 million relating to Levoxyl, equal to 25.0% of the Company's sales. Triostat. Triostat is an injectable thyroid replacement hormone which is used to treat acute thyroid disorders. Triostat is a synthetic form of a naturally occurring hormone called triiodothyronine or T3. It is primarily used for the treatment and management of myxedema coma and precoma. The Company is not aware of any generic forms of Triostat in the market place and under current FDA regulations, no generic form of injectable T3 may be introduced prior to January 1, 1999. However, after that date, other pharmaceutical companies may seek approval to market and sell generic forms of injectable T3 which could lead to a decrease in the price that customers may be willing to pay for Triostat. With respect to Triostat, there can be no assurances that the Company will be able to compete effectively with new market entrants, that additional competitors will not enter the market or that competitive factors will not have a material adverse effect on the Company's business, financial condition and results of operations. During the period from the Company's acquisition of Triostat on June 27, 1997 through December 31, 1997, the Company had net sales of $1.8 million relating to Triostat, equal to approximately 2.0% of the Company's 1997 sales. Cytomel. Cytomel is a thyroid replacement hormone in tablet form which is used to treat chronic thyroid disorders. Like Triostat, it is a synthetic form of T3. It is primarily used for replacement or supplemental therapy for patients suffering from cretinism, myxedema and primary and tertiary hypothyroidism. As with Triostat, the Company is not aware of any generic forms of Cytomel in the market place. However, other pharmaceutical companies may choose to market and sell generic forms of T3 which could lead to a decrease in the price that customers may be willing to pay for Cytomel. With respect to Cytomel, there can be no assurances that the Company will be able to compete effectively with new market entrants, that additional competitors will not enter the market or that competitive factors will not have a material adverse effect on the Company's business, financial condition and results of operations. During the period from the Company's acquisition of Cytomel on June 27, 1997 through December 31, 1997, the Company had net sales of $2.6 million relating to Cytomel, equal to approximately 2.9% of the Company's 1997 sales. 3 5 Critical Care Pharmaceuticals. Thrombin-JMI. During invasive surgical procedures, surgeons typically limit bleeding in order to control blood loss and maintain visibility of the surgical site. Surgeons may apply pressure bandages, suture severed vessels and/or use a topical hemostatic agent to control bleeding within the surgical site. In most cases, collagen, cellulose or thrombin-based hemostatic agents are used because of their ability to rapidly begin the clotting process. Thrombin-JMI is a thrombin-based topical hemostatic agent derived from bovine blood. The Company's thrombin product offers advantages over collagen and cellulose products because of faster activity at the surgical site. Additionally, because of its physical characteristics, Thrombin-JMI does not need to be removed from the surgical site prior to closure, whereas non-thrombin competing products need to be removed, often leading to recurrence of bleeding. The topical hemostat market was estimated to be greater than $90 million in the United States in 1997. In 1997, thrombin products accounted for 23% of the United States topical hemostat market of which the Company has an approximate 95% share with sales of $19.4 million, equal to 21.8% of Company sales. Brevital Sodium. The intravenous ("I.V.") anesthetic market is split into segments based on type and length of therapeutic, diagnostic or surgical procedures. Short-term general anesthesia is required when performing minor surgical procedures such as dental surgery, cardioversion and other brief ambulatory surgeries. Long-term general anesthesia is required when more complex and invasive surgical procedures are performed. In order to administer long-term general anesthesia, induction agents are used to begin the anesthetic event and are subsequently followed by another drug or gas to maintain the anesthesia. The Company's product, Brevital Sodium ("Brevital"), is a general I.V. anesthetic agent that addresses both the short-term and long-term anesthesia markets and was originally introduced by Eli Lilly and Company ("Lilly") in 1961. Brevital is used in both long-term and short-term procedures because of its rapid onset of action and quicker recovery time. Brevital's rapid onset of action also makes it a useful induction agent prior to the administration of another agent to maintain the anesthesia. The I.V. anesthetic market in the United States is estimated to be $500 million. The Company acquired the exclusive domestic perpetual license to distribute Brevital from Lilly in August 1995. During 1997, the Company had net sales of $9.1 million relating to Brevital, equal to 10.2% of the Company's sales. Veterinary Pharmaceuticals. The Company also manufactures and distributes veterinary pharmaceuticals, the most prominent of which are Soloxine, Tussigon and Pancrezyme. Soloxine is used for the treatment of hypothyroidism in companion animals. Tussigon is used for pain management and to treat kennel cough. Pancrezyme is a small animal digestive aid. Veterinary pharmaceuticals accounted for $7.9 million or 8.9% of the Company's 1997 sales. MARKETING AND SALES The Company markets and promotes its products primarily through a direct sales force. The Company also attends major medical conventions and symposia and utilizes advertising in trade publications. The Company maintains product line sales staffs directed to the physician and hospital markets together with an internal marketing staff which provides marketing administration and support and customer service. The Company's marketing and sales staff consists of 103 field sales personnel of whom 83 market and sell endocrine pharmaceuticals, 17 market and sell critical care pharmaceuticals and 3 market and sell veterinary pharmaceuticals. 4 6 Marketing activity for endocrine pharmaceuticals is focused on physicians prescribing the Company's products and on retail pharmacies carrying the Company's products for prescription and branded generic use. In addition to selling efforts based upon the merits and characteristics of its products, the Company provides physicians with sample product packages for trial use by patients and to aid in establishing dosage levels prior to the time at which prescriptions are written. The cost of sampled products, including related packaging and recordkeeping expense, is charged as a selling expense. Sales activities for critical care pharmaceuticals are focused on major hospitals and hospital buying groups which, in the aggregate, manage and contract for a majority of the purchasing of pharmaceuticals for private sector hospitals through bid and contract agreements. The Company presently has contracts for one or more product lines with substantially all of the major hospital buying groups. The Company's marketing efforts focus upon hospital-based physicians in various departments including, operating rooms, emergency rooms, anesthesiology and directors of pharmacy. PRODUCT SOURCES AND MANUFACTURING In 1997, approximately 40.0% of the Company's sales were from products manufactured for the Company by third parties and the remaining 60.0% of sales were from products manufactured by the Company. 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 and disposition activity. The Company manufactures pharmaceuticals at its facilities in St. Petersburg, Florida, Middleton, Wisconsin, and St. Louis, Missouri, each of which is registered with the FDA. Products Manufactured by Others. Historically, the Company has relied on third-party manufacturers to produce certain of its products. As a result, increases in the percentage of in-house manufacturing arising from the Company's current production of Thrombin-JMI at its GenTrac facility in Middleton, Wisconsin, and its production of Levoxyl and other products at its facility in St. Petersburg, Florida, are more than offset by contract manufacturing for the Company of Brevital and Tapazole by Lilly, Triostat by SB Pharmco Puerto Rico ("SB Pharmco") and Cytomel by Schering Canada, Inc. ("Schering"). With respect to such third party manufacturing, there can be no assurance that the Company will be able to obtain adequate supplies of products so manufactured in a timely fashion, or at all. The Company also faces the risk that upon expiration of the term of any third-party manufacturing agreement it may not be able to renew or extend the agreement with the third-party manufacturer, to obtain an alternative manufacturing source from other third parties or develop internal manufacturing capabilities on commercially viable terms, if at all. In such circumstances the Company may be unable to continue to market its products as planned and could be required to abandon or divest itself of a product line on terms which would materially adversely affect the Company's business, financial condition and results of operations. The Company's principal products which are currently manufactured by third parties are: Brevital and Tapazole. Brevital and Tapazole are each manufactured for the Company by Lilly from whom these product lines were acquired in 1995 and 1996, respectively. Pursuant to each such acquisition, the Company obtained a perpetual, exclusive license to market and distribute the product in the United States and entered into 10-year manufacturing agreements with Lilly for supply of the products. As to either product, the manufacturing agreement may be terminated by Lilly at any time after the first five years by giving at least five years notice to the Company prior to ceasing the manufacture of the product for the Company. 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 either product. Although Lilly continues to manufacture and distribute Brevital and Tapazole for its own account in connection with foreign markets, there can be 5 7 no assurance that Lilly will continue to meet FDA or product specification standards for Brevital or Tapazole or that the Company's demands for these products can be met in a consistent and timely manner. Lilly is the sole manufacturer of Brevital and Tapazole and any alternative manufacturer would require regulatory change-in-site qualification to manufacture these products. In the event of any interruption in the supply of Brevital or Tapazole from Lilly due to regulatory or other causes, there can be no assurance that the Company could make alternative manufacturing arrangements on a timely basis, if at all. Such an interruption would have a material adverse effect on the Company's business, financial condition and results of operations. Triostat. Triostat is manufactured for the Company under a two (2) year supply agreement with SB Pharmco, an affiliate of SmithKline, from whom this product line was acquired in June 1997. The Company has agreed to use its best efforts to transfer manufacturing of Triostat to its own facility or that of a third party within the 2-year term; however, if approval to transfer the manufacturing is not received from the FDA within such term, the Company may extend the 2-year term for one (1) additional year. Upon termination of the supply agreement, there can be no assurance that the Company will have made alternative manufacturing arrangements on a timely basis, if at all. The failure to make such alternative manufacturing arrangements would have a material adverse effect on the Company's business, financial condition and results of operations. Cytomel. Cytomel is manufactured for the Company by Schering under a certain Third Party Manufacturing Agreement dated March 11, 1991, entered into between a division of SmithKline and Schering, the rights and obligations of which were respectively assigned to, and assumed by, the Company in connection with the acquisition of Cytomel from SmithKline in June 1997. The Third Party Manufacturing Agreement runs for a term of three (3) years and provides for automatic renewal for successive three (3) year terms unless either party provides eighteen (18) month advance written notice of non-renewal prior to the end of any term. While the Company has not received any non-renewal notice from Schering, in the event that such agreement is not renewed, there can be no assurance that the Company could make alternative manufacturing arrangements on a timely basis, if at all. The failure to make such alternative manufacturing arrangements would have a material adverse effect on the Company's business, financial condition and results of operations. Products Manufactured by the Company. In 1996, in connection with the Daniels Acquisition, the Company assumed operations of its St. Petersburg, Florida facility which has been manufacturing pharmaceuticals since 1975. At this facility, the Company processes raw materials purchased from outside sources to produce final products in compressed tablet form. Products are produced within the guidelines of FDA regulations pertaining to prescription drugs. 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 the licensed manufacturer of Thrombogen(R), a line of proprietary thrombin products manufactured for Johnson & Johnson Medical, Inc. ("Johnson & Johnson") under distribution and development agreements. 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. 6 8 PRINCIPAL CUSTOMERS AND SUPPLIERS The Company's principal customers are retail pharmacies and hospitals. The Company's sales, however, are through wholesale drug distributors, who in turn supply product to pharmacies, hospitals and physicians. No one customer accounted for 10% or more of the Company's sales in 1997. 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. 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, (i) the manufacture of Brevital and Tapazole are each dependent upon Lilly's ability to procure certain raw materials used in the manufacture of such products; (ii) the manufacture of Triostat is dependent upon SB Pharmco's ability to procure certain raw materials used in the manufacture of such product; and (iii) the manufacture of Cytomel is dependent upon Schering's ability to procure certain raw materials used in the manufacture of such product. Although the Company has no reason to believe that Lilly, SB Pharmco or Schering will be unable to procure adequate supplies of such raw materials on a timely basis, disruptions in supplies of Brevital, Tapazole, Triostat or Cytomel, including delays due to the respective third party manufacturer's inability to procure raw materials, would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The manufacture and sale of pharmaceuticals is highly competitive. Many of the Company's competitors are large well-known pharmaceutical companies which have considerably greater financial, sales, marketing and technical resources than those of the Company. Additionally, many of the Company's present and potential competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with the Company's product lines. The pharmaceutical industry is characterized by rapid product development and technological change. The Company's products could be rendered obsolete or uneconomical by the development of new pharmaceuticals to treat the conditions addressed by the Company's products or as the result of technological advances affecting the cost of production, or as a result of marketing or pricing action by one or more of the Company's competitors. The Company's business, financial condition and results of operations could be materially and adversely affected by any one or more of such developments. Tapazole competes with PTU, a product manufactured by Lederle and sold by a number of independent generic pharmaceutical companies. Levoxyl competes with Synthroid(R), which is produced by Knoll Pharmaceutical Company, and other levothyroxine producers. Thrombin-JMI competes with those thrombin products produced for and marketed 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 the named competitors has substantially greater marketing, sales and financial resources than the Company. 7 9 TRADEMARKS The Company's products are sold under a variety of trademarks. While the Company believes that it has valid proprietary interests in all currently used trademarks, only certain of the trademarks are registered with the United States government. The Company's licenses from Lilly for the Brevital and Tapazole trademarks are limited to the United States. GOVERNMENT REGULATION The manufacturing, processing, formulation, packaging, labeling, storage, promotion, distribution and advertising of the Company's products are subject to extensive regulation by one or more federal agencies including the FDA, the Drug Enforcement Administration ("DEA"), the Environmental Protection Agency ("EPA"), the Federal Trade Commission ("FTC"), the Occupational Safety and Health Administration, the Department of Agriculture, the Consumer Product Safety Commission ("CPSC") and the United States Customs Service. These activities are also regulated by various agencies of the states and localities in which the Company's products are sold. All pharmaceutical manufacturers, including the Company, are subject to regulation by the FDA. New drugs must be approved by the FDA before they may be marketed, except for those prescription drugs about which the FDA has knowledge but for which the FDA is not requiring applications either because of 'grandfather status' under 1938 legislation, '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. The FDA also regulates the advertising of prescription drugs. The FDA announced in an August 14, 1997, Federal Register Notice that orally administered drug products containing levothyroxine sodium are now classified as new drugs. Manufacturers who wish to continue to market these products must submit new drug applications ("NDA"). After August 14, 2000, any levothyroxine sodium product marketed without an approved NDA will be subject to regulatory action. Levoxyl, since it was marketed prior to the date of this notice will continue to be eligible for marketing until August 14, 2000. The FDA is allowing the Company and other current manufacturers three (3) years to obtain approved NDA's. The Company plans to dedicate significant resources to this NDA process during 1998 and 1999 and expects to incur costs in excess of $2 million to secure an approved NDA for Levoxyl. The Company's marketing of OTC drugs is affected by the establishment of FDA monographs, a regulatory system arising under 1962 legislation. FDA monographs effectively exempt from FDA approval OTC drugs which are produced and labeled in accordance with the standards set forth in FDA regulations. The rulemaking process to establish or revise an FDA monograph allows a 12 month grace period to make appropriate formulation or label changes following publication of the final monograph. The FTC also regulates 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. The Company must comply with the regulatory guidelines for this class of drugs. These include security and recordkeeping requirements which are administered and audited by the DEA, a division of the United States Department of Justice. 8 10 The FDA has extensive enforcement powers over the activities of pharmaceutical manufacturers, including authority to seize and prohibit the sale of unapproved or non-complying products, and to halt manufacturing operations that are not in compliance with CGMP. Both the FDA and DEA may impose civil penalties and seek criminal penalties arising from non-compliance with applicable regulations. Any restriction or prohibition applicable to sales of products marketed by the Company could materially adversely affect the Company's business, financial condition, and results of operations. The sampling of products to prescribing physicians is subject to the Prescription Drug Marketing Act ("PDMA") which permits regulation of such activities at both the federal and state 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 permitted to adopt regulations limiting the distribution of sample products to licensed practitioners. PDMA imposes extensive recordkeeping and reporting requirements on the Company to prevent the sale of sampled pharmaceutical products or other diversion from their intended use. ENVIRONMENTAL STANDARDS The Company uses certain hazardous substances which require special handling and disposal as dictated by the EPA. The Company believes that its manufacturing operations are in compliance with environmental protection and other government regulations. EMPLOYEES At February 1, 1998, the Company had 562 full-time employees: 288 in manufacturing, 127 in pharmaceutical sales and marketing, 47 in finance and administration, 71 in quality assurance, and 29 in distribution. The Company believes that its relationship with its employees is good. The Company estimates that in connection with disposition of the Discontinued Operations, there will be a reduction of approximately 200 employees. DISCONTINUED OPERATIONS The Company's Discontinued Operations involved the marketing and distribution of a full line of branded nutritional supplements (marketed under the Bronson Pharmaceutical and MD Pharmaceutical tradenames) and contract manufacturing. Prior to the restatement of its historical financial information to reflect Discontinued Operations, sales of nutritional supplements and contract manufacturing accounted for approximately 29% of the Company's total 1997 sales. The Bronson Pharmaceutical product line consists of over 260 branded vitamin, mineral and herbal extract formulations sold through catalogs and direct mailings to health care and nutritional professionals as well as mail order and retail customers. 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. The Company manufactures nutritional supplements through its subsidiary, JMI-Phoenix, at its facilities in Tempe, Arizona which are being sold as part of the Discontinued Operations. In addition, certain nutritional supplement and contract manufacturing has been conducted at the Company's Canton facility. 9 11 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 operations and certain laboratory and quality assurance operations. Liquid products, including Liqui-Char and the Derma-Scrub line, are also manufactured and packaged at this facility. The Company owns a facility at St. Petersburg, Florida, where its subsidiary, JMI-Daniels, manufactures and packages pharmaceuticals for the Company. The facility consists of six buildings containing a total of approximately 42,000 square feet providing manufacturing, laboratory, packaging, warehouse and administrative space. The Company manufactures thrombin products for the Company and Johnson & Johnson in a 40,000 square foot FDA-licensed sterile fill facility owned by the Company which is located on an eight acre site in Middleton, Wisconsin. The Company owns a 25,000 square foot facility at Canton, Ohio where its subsidiary, JMI Canton, warehouses, packages and distributes products. ITEM 3. LEGAL PROCEEDINGS The Company is not presently involved in any litigation in which it believes an adverse outcome would materially adversely affect the Company's business, financial condition or results of operations. However, the Company has been involved in litigation and is subject to certain claims as set forth below. The Company, as successor to Abana, is a defendant in a number of lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine and phentermine (collectively, "Fen/Phen"). The plaintiffs in these cases claim injury as a result of ingesting a combination of these weight-loss drugs. Abana was, and the Company now is, a distributor of Obenix, its branded phentermine product; however, neither the Company nor Abana has at any time manufactured Obenix or other Fen/Phen combinations. These suits have been filed in various jurisdictions throughout the United States and in each of these suits, the Company or Abana is one of many defendants. The Company denies any liability incident to its distribution of Obenix and has tendered defense of these lawsuits to its insurance carriers for handling. The lawsuits are in their preliminary stages and it is too early to determine what, if any, liability the Company will have with respect to the claims set forth in these lawsuits. In the event that the Company's insurance coverage is inadequate to satisfy any resulting liability, the Company will have to resume defense of these lawsuits and be responsible for the damages, if any, that are awarded against it. Management of the Company does not believe that the outcome of these lawsuits will have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1997 to a vote of security holders of the Company through the solicitation of proxies or otherwise. 10 12 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 ---- --- 1996(1) 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 1997 First Quarter 38 23 5/8 Second Quarter 47 1/2 24 1/2 Third Quarter 45 1/4 26 Fourth Quarter 38 1/4 26 3/4
As of February 27, 1998, there were approximately 931 stockholders of record and a total of 28,696,348 shares of Common Stock outstanding. Approximately 20 million shares or 70.0% 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 1996 and 1997, cash dividends of $0.077 and $0.095 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. - -------- (1) The quarterly high and low sale prices for the Common Stock in 1996 have been adjusted to reflect a three for two split of the Common Stock effective March 1, 1996, and a second three for two split of the Common Stock effective June 10, 1996. 11 13 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected consolidated financial data of the Company which should be read in conjunction with the accompanying consolidated financial statements of the Company and the notes thereto and which has been restated to reflect Discontinued Operations. The financial data as of December 31, 1997, 1996, 1995 and 1994 and for the four years ended December 31, 1997 have been derived from the audited consolidated financial statements of the Company. The financial data as of December 31, 1993 and for the year then ended has been combined by the Company using the Company's audited historical financial statements and audited financial data concerning Galen. In the opinion of management of the Company, all adjustments necessary for a fair presentation of the restated results arising from the pooling of interest of the Company and Galen as a result of the Daniels Acquisition are reflected. In the following summary consolidated financial data, for 1995 and prior years, fiscal years of Galen ending September 30 have been combined with the Company's historical results for years ending December 31. Beginning in 1996, both the Company and Galen were combined using a December 31 fiscal year end. See Note 1 of Notes to Consolidated Financial Statements appearing elsewhere in this Report. STATEMENT OF OPERATIONS DATA: (In thousands of dollars except per share data)
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Sales from continuing operations $ 36,121 $ 41,154 $ 39,937 $64,181 $88,781 Cost of sales 14,801 18,268 14,639 20,277 25,430 -------- -------- -------- ------- ------- Gross profit 21,320 22,886 25,298 43,904 63,351 Selling, general and administrative expenses 12,795 14,485 16,426 20,166 25,271 Non-recurring merger expense (1) -- -- -- 5,743 -- -------- -------- -------- ------- ------- Operating income from continuing operations 8,525 8,401 8,872 17,995 38,080 Other income (expense) (80) (486) (484) 1,755 2,315 -------- -------- -------- ------- ------- Income before taxes from continuing operations 8,445 7,915 8,388 19,750 40,395 Provision for taxes 3,210 3,008 3,074 8,232 15,351 -------- -------- -------- ------- ------- Income from continuing operations 5,235 4,907 5,314 11,518 25,044 Income from discontinued operations 2,349 2,613 7,075 6,621 6,926 -------- -------- -------- ------- ------- Net income $ 7,584(2) $ 7,520 $ 12,389 $18,139 $31,970 ========== ======== ======== ======= ======= Earnings per share (3) Basic: From continuing operations $ 0.17 $ 0.21 $ 0.22 $ 0.43 $ 0.88 From discontinued operations $ 0.07 $ 0.11 $ 0.30 $ 0.24 $ 0.24 -------- -------- -------- ------- ------- Total $ 0.24 $ 0.32 $ 0.52 $ 0.67 $ 1.12 ======== ======== ======== ======= ======= Diluted: From continuing operations $ 0.15 $ 0.19 $ 0.21 $ 0.41 $ 0.85 From discontinued operations $ 0.07 $ 0.10 $ 0.29 $ 0.24 $ 0.24 -------- -------- -------- ------- ------- Total $ 0.22 $ 0.29 $ 0.50 $ 0.65 $ 1.09 ======== ======== ======== ======= ======= Cash dividends declared per share $0 .04 $ 0.045 $ 0.05 $ 0.077 $ 0.095 ======== ======== ======== ======= =======
12 14 - ---------------- 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 from continuing operations and income from continuing operations for the 1996 year would have been $23.7 million and $15.8 million, respectively, and total diluted earnings per share would have been $0.80 (2) Net income and earnings per share in 1993 do not reflect the cumulative effect of a change in accounting principle of $207,100. (3) Earnings per share amounts have been presented, and where appropriate, restated to conform to FASB Statement No. 128, "Earnings Per Share" which the Company adopted in 1997. BALANCE SHEET DATA: (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31 ----------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Total assets $58,113 $63,342 $86,238 $177,233 $204,228 Current assets $22,232 $26,385 $33,337 $ 80,551 $ 85,113 Current liabilities $ 7,823 $ 7,952 $14,405 $ 10,032 $ 6,580 Working capital $14,409 $18,433 $18,932 $ 70,519 $ 78,533 Long-term debt $ 5,400 $ 6,778 $11,420 $ -0- $ -0- Shareholders' equity $40,832 $44,478 $55,939 $161,919 $191,726 Per share book value(*) $ 1.17 $ 1.84 $ 2.31 $ 5.69 $ 6.69 Current ratio 2.8:1 3.3:1 2.3:1 8.0:1 12.9:1
- ----------------------- Note to Balance Sheet Data: (*) Per share book value is computed assuming conversion of preferred stock outstanding in 1995 and earlier years. 13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's decision to dispose of its nutritional supplements product line and contract manufacturing operations requires a restatement of its historical financial information under applicable accounting principles and regulations to reflect such operations as 'discontinued operations' (See Introductory Note and Item 1 elsewhere in this report). As a result of the Company's restatement of its historical financial information, the comparative dollar values and percentage amounts used throughout Item 7 of this report reflect this restatement and relate solely to the Company's continuing pharmaceutical operations, unless otherwise indicated. The following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results in future periods may differ significantly from the results discussed in or anticipated by such forward-looking statements. Certain factors which may impact results for future periods are discussed below under the captions "Overview" and "Risks and Uncertainties." OVERVIEW Founded in 1981, the Company manufactures, markets and distributes specialty pharmaceutical products. The Company has achieved significant increases in sales and net income through acquisitions of pharmaceutical products and businesses to complement or expand the Company's business and to add selected manufacturing capacity to support certain product lines. At December 31, 1997, the Company had completed 16 such acquisitions of which five were completed in the preceding 28 months, including the acquisition of Cytomel and Triostat from SmithKline on June 27, 1997. 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 from continuing operations and income from continuing operations have increased from $36.1 million and $5.2 million in 1993, respectively, to $88.8 million and $25.0 million in 1997, respectively, representing four-year compounded annual growth rates of approximately 25.0% in sales from continuing operations and 48.0% in income from continuing operations. Sales from continuing operations are reported net of returns, rebates and discounts during the period in which product is shipped. Product rebates and discounts are incurred due to volume or other contractual allowances on certain sales under contracts with hospitals, buying groups and managed care organizations. As of December 31, 1996 and 1997, the Company maintained reserves of $1.9 million and $2.2 million, respectively, for unclaimed but anticipated rebates and discounts. Product returns, pursuant to operating policies with respect to unused pharmaceuticals, are less than 2% of gross annual sales. Return policies applicable to products acquired as a result of the Daniels Acquisition were revised effective December 31, 1996, to conform to other pharmaceuticals having lower rates of product return. Sales from continuing operations are reflected prior to royalties due on sales of certain pharmaceuticals arising from product line acquisitions. Such royalties are recorded as a selling expense. Royalty arrangements typically extend for a fixed period from the date of acquisition and do not require minimum payments to maintain ownership or any rights to products. During the year ending December 31, 1997, sales from continuing operations were $88.8 million comprised of $44.9 million of endocrine pharmaceuticals, $28.5 million of critical care pharmaceuticals, $7.9 million of veterinary pharmaceuticals and $7.5 million of other products. The increase in such sales has been influenced by acquisition activity as well as by enhanced marketing activity, customer demand and product availability. In August 1995 the Company acquired domestic rights to the Brevital pharmaceutical line from Lilly for $14 million and a 10-year royalty of 5% on net sales of Brevital. Sales of Brevital represented 14 16 approximately 11.0% of the Company's sales from continuing operations in 1996 and approximately 10% in 1997. In March 1996 the Company acquired domestic rights to the Tapazole pharmaceutical line from Lilly for $26 million and a 10-year royalty of 5% on net sales of Tapazole. Sales from continuing operations of Tapazole for periods after the 1996 acquisition represented approximately 19.0% of The Company's sales from continuing operations in 1996 and approximately 21.0% in 1997. Sales from Levoxyl, a key product acquired in connection with the Daniels Acquisition in 1996, represented approximately 22.0% of the Company's sales from continuing operations in 1996 and has increased to approximately 25.0% in 1997. In June 1997, the Company acquired domestic, Puerto Rican and Canadian rights to the Cytomel and Triostat pharmaceutical lines from SmithKline for $22.8 million. Although the Company is not obligated to pay SmithKline royalties on future sales of Cytomel and Triostat, the acquisition agreement does provide that in the event Triostat is approved by the FDA for any additional indications, the Company will be obligated to pay SmithKline a 10-year royalty of 10% on net incremental sales of Triostat resulting from such indications. Since their acquisition on June 27, 1997, combined sales from continuing operations of Cytomel and Triostat represented approximately 5.0% of such Company sales in 1997. 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 industry. In particular,the FDA announced in an August 14, 1997, Federal Register Notice that orally administered drug products containing levothyroxine sodium are now classified as new drugs. Manufacturers who wish to continue to market these products must submit NDA's. After August 14, 2000, any levothyroxine sodium product marketed without an approved NDA will be subject to regulatory action. Levoxyl, since it was marketed prior to the date of this notice will continue to be eligible for marketing until August 14, 2000. The FDA is allowing the Company and other current manufacturers three (3) years to obtain approved NDA's. The Company plans to dedicate significant resources to this NDA process during 1998 and 1999 and expects to incur costs in excess of $2 million to secure an approved NDA for Levoxyl. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere in this report. The following table sets forth certain data as a percentage of net sales from continuing operations for the periods indicated. 15 17
PERCENTAGE OF SALES Year Ended December 31, --------------------------------- 1995 1996 1997 ---- ---- ---- Sales from continuing operations 100.0% 100.0% 100.0% Cost of sales 36.7 31.6 28.6 ----- ----- ----- Gross profit 63.3 68.4 71.4 Selling, general & administrative expenses 41.1 31.4 28.5 Non-recurring merger expense -- 9.0* -- ----- ----- ----- Operating income from continuing operations 22.2 28.0 42.9 Other income (expenses) Interest income 0.7 3.7 2.9 Interest expense (1.6) (0.9) (0.3) Other miscellaneous income (expenses) (0.3) -- -- ----- ----- ----- Income from continuing operations (before income tax) 21.0 30.8 45.5 Provision for income taxes 7.7 12.8 17.3 ----- ----- ----- Income from continuing operations 13.3 18.0 28.2 Income from discontinued operations 17.7 10.3 7.8 ----- ----- ----- Net income 31.0% 28.3% 36.0% ===== ===== =====
- --------------------- * 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 from continuing operations would have been 37.0% of net sales and income from continuing operations (before income tax) would have increased to 39.7%. Sales From Continuing Operations Sales from continuing operations for the year ended December 31, 1997, increased 38.3% to $88.8 million from $64.2 million for the year ended December 31, 1996, following an increase in 1996 of 60.7% to $64.2 million from sales from continuing operations of $39.9 million for the year ended December 31, 1995. In both 1996 and 1997 the Company's increases in sales from continuing operations were the result of the acquisition of Brevital (August 1995), the acquisition of Tapazole (March 1996), the acquisition of Triostat and Cytomel (June 1997) and internal sales growth in both unit and dollar growth in the Company's primary products. Specifically, sales from continuing operations grew due to both unit and dollar sales growth of Thrombin-JMI, Levoxyl and Brevital, as well as a full twelve months of Tapazole sales (versus nine months in 1996) and six months of sales of Cytomel and Triostat. Sales from continuing operations in 1996 grew due to both unit and dollar sales growth of Thrombin-JMI and Levoxyl, as well as the inclusion of four additional months of Brevital sales in 1996, and the acquisition of Tapazole in March 1996. 16 18 Gross Profit Gross profit during 1997 increased 44.3% or $19.4 million to $63.4 million from $43.9 million in 1996. As a percentage of sales from continuing operations, margins increased to 71.4% in 1997 from 68.4% in 1996 due to the continued sales growth of the Company's higher margin products. Gross profit during 1996 increased 73.5% or $18.6 million to $43.9 million from $25.3 million in 1995. As a percentage of sales from continuing operations, margins grew to 68.4% in 1996 from 63.3% in 1995 as a result of greater manufacturing efficiencies and sales increases in the higher margin products. Selling, General and Administrative Expenses Selling expenses increased 39.2% or approximately $4.0 million to $14.4 million in 1997 from $10.4 million in 1996 due to increased royalties related to sales of Brevital and Tapazole in 1997, the addition of 55 endocrine field sales personnel in December, 1996, increased administrative fees to hospital buying groups resulting from sales increases in Thrombin-JMI and Levoxyl and increased sampling of products to physician prescribers. As a result of the addition of the sales and marketing staff and the planned increase in sampling of products to physician prescribers in 1997, it was expected that selling expenses would increase significantly in 1997; however, as a percentage of sales from continuing operations, the Company was able to hold selling expenses relatively flat at 16.2% of sales from continuing operations in 1997 versus 16.1% of sales from continuing operations in 1996. Selling expenses increased 26.0% or $2.2 million to $10.4 million in 1996 from $8.2 million in 1995 due to increased royalties, administrative fees and the increase in the endocrine sales staff from 10 persons in 1995 to 20 persons in 1996. As a percentage of sales from continuing operations, these expenses decreased to 16.1% in 1996 from 20.6% in 1995. General and administrative expenses remained relatively flat in 1997 at $7.5 million compared to $7.4 million in 1996 and as a percentage of sales from continuing operations, declined from 11.5% in 1996 to 8.4% in 1997. General and administrative expenses in 1996 increased 6.6% or $455,000 to $7.4 million from $6.9 million in 1995 primarily as a result of higher salaries and overhead, but declined as a percentage of sales from continuing operations to 11.5% in 1996 from 17.4% in 1995. There were no research and development expenses in 1997 as compared to $410,000 in 1996 due to the reduction of new product development at the Company's wholly-owned subsidiary, JMI-Daniels. Research and development expenses declined 9.3% in 1996 to $410,000 from $452,000 in 1995 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 66.9% to $3.4 million in 1997 from $2.0 million in 1996 due to a full year of amortization expense associated with the Tapazole product line acquired in March 1996, the Abana Acquisition on December 31, 1996 and a half-year of amortization expense associated with the acquisition of Cytomel and Triostat in June 1997. As a percentage of sales from continuing operations, amortization expense increased from 3.1% in 1996 to 3.8% in 1997. 17 19 Amortization expenses increased 144.1% to $2.0 million in 1996 from $0.8 million in 1995 due to the acquisition of the Tapazole product line in March 1996 and a full year of amortization expense associated with the Brevital product line acquired in August 1995. As a percentage of sales from continuing operations, these expenses increased from 2.1% in 1995 to 3.1% in 1996. 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 was 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) and the Company. Operating Income From Continuing Operations Operating income from continuing operations during 1997 increased 111.6% or $20.1 million to $38.1 million from $18.0 million in 1996, and increased as a percentage of sales from continuing operations to 42.9% in 1997 from 28.0% in 1996, as the result of higher overall gross profits and marginal increases in operating expenses. Operating income from continuing operations during 1996 increased 102.8% or $9.1 million to $18.0 million from $8.9 million in 1995 and increased as a percentage of sales from continuing operations to 28.0% in 1996 from 22.2% in 1995 as a result of a greater increase in gross profits offset partially by an increase in operating expenses. Other Income (Expense) Interest income from investing activities increased to $2.6 million in 1997 from $2.3 million in 1996 as a result of higher cash balances. Interest expense of $238,000 in 1997 was down from interest expense of $553,000 in 1996 due to the final payment in the third quarter of 1997 under the borrowings related to the acquisition of the Brevital product line. At December 31, 1997, the Company had no outstanding debt. 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. Income Taxes The provision for income taxes in 1997 decreased to 38.0% of pre-tax income compared to 41.7% of pre-tax income in 1996, due to certain non-recurring merger expenses associated with the Daniels Acquisition in 1996 that were not tax deductible. The provision for income taxes increased to 41.7% of pre-tax income in 1996 compared to 36.6% in 1995 due to the non-recurring merger expenses associated with the Daniels Acquisition discussed above. 18 20 Income From Continuing Operations Income from continuing operations increased 117.4% or $13.5 million to $25.0 million in 1997 from $11.5 million in 1996, and increased as a percentage of sales from continuing operations to 28.2% in 1997 from 18.0% in 1996. In 1996, income from continuing operations increased 116.7% or $6.2 million over 1995. As a percentage of sales from continuing operations, income from continuing operations increased to 18.0% in 1996 from 13.3% in 1995. Income From Discontinued Operations Income from discontinued operations, net of taxes, remained relatively unchanged at $7.1 million in 1995, $6.6 million in 1996 and $6.9 million in 1997. As a percentage of sales from continuing operations, income from discontinued operations decreased from 17.7% of sales from continuing operations in 1995 to 10.3% in 1996 and 7.8% in 1997. The decline in significance of the Discontinued Operations results from the Company's strategy to increase, both through acquisitions and internal growth, the sales of higher-margin products and to focus on its proprietary pharmaceutical operations. Net Income Net income increased 76.3% or $13.8 million to $32.0 million in 1997 from $18.1 million in 1996, and increased as a percentage of sales from continuing operations to 36.0% in 1997 from 28.3% in 1996. Net income increased 46.4% or $5.7 million to $18.1 million in 1996 from $12.4 million in 1995, and decreased as a percentage of sales from continuing operations to 28.3% in 1996 from 31.0% in 1995. Fourth Quarter - 1996 to 1997 Sales from continuing operations during the fourth quarter of 1997 increased $8.1 million, or 45.0%, to $26.0 million from $17.9 million during the fourth quarter of 1996. Income from continuing operations during the fourth quarter of 1997 increased $2.4 million, or 46.4%, to $7.6 million from $5.2 million in the fourth quarter of 1996. Net income during the fourth quarter of 1997 increased $2.6 million, or 38.2%, to $9.4 million from $6.8 million during the fourth quarter of 1996. Diluted earnings per share from continuing operations were $.26 in the fourth quarter of 1997 compared to $.18 per share in the fourth quarter of 1996. Total diluted earnings per share during the fourth quarter of 1997 were $.32, with 29.3 million average shares outstanding, compared to $.24 per share, with 28.6 million average shares outstanding, during the fourth quarter of 1996. The 1997 increases resulted from improved operations throughout 1997, increased sales of higher margin products, the addition of an endocrine sales force in December 1996, and the acquisition of Cytomel and Triostat on June 27, 1997. FINANCIAL CONDITION Balance Sheet Information The Company's current ratio increased to 12.9:1 as of December 31, 1997 from 8.0:1 as of December 31, 1996, working capital increased to $78.5 million as of December 31, 1997 from $70.5 million as of December 31, 1996, and financing debt as a percentage of equity was eliminated as of December 31, 1997 versus 1.8% as of December 31, 1996 due to the final payment in the third quarter of 1997 under the borrowings related to the acquisition of the Brevital product line. 19 21 Liquidity and Capital Resources Since inception the Company has financed its operations primarily through cash flow from operations, public and private sales of equity securities and borrowings under revolving credit facilities. At December 31, 1997 and 1996, the Company had cash and cash equivalents of $49.9 million and $52.2 million, respectively. The net cash generated from operating activities of $31.7 million in 1997 was used to fund the acquisition of Cytomel and Triostat for $22.8 million, capital improvements of $5.5 million, repayment of the remaining outstanding long-term debt of $3.0 million and payment of dividends to common stockholders of $3.3 million. The Company believes that available resources and anticipated cash flows from operations are adequate to meet currently anticipated operating needs and, together with the net proceeds to be derived from Discontinued Operations, to fund future acquisitions. While the Company does not maintain current lines of credit, it believes it has sufficient borrowing capacity in the event that acquisition opportunities cannot be funded from existing resources. Total assets increased $27.0 million to $204.2 million at December 31, 1997 from $177.2 million at December 31, 1996, and total liabilities decreased $2.8 million to $12.5 million at December 31, 1997 from $15.3 million at December 31, 1996. Intangible assets, principally licenses, trademarks and goodwill associated with acquired products, increased $19.5 million, net of amortization charges during the year, to $89.3 million at December 31, 1997, due to the acquisition of Cytomel and Triostat in June 1997. Intangible assets as a percent of shareholders' equity increased slightly from 43.1% at December 31, 1996 to 46.6% at December 31, 1997. Inventories increased $2.6 million to $15.4 million at December 31, 1997, from $12.8 million at December 31, 1996. This 20.4% inventory increase in 1997 compares favorably with the 25% sales growth in 1997 prior to the restatement for Discontinued Operations. Accounts receivable increased to $16.7 million at December 31, 1997 from $11.3 million at December 31, 1996, primarily due to a 45.0% increase in fourth quarter sales from continuing operations in 1997. In days outstanding, accounts receivable increased to 41 days at December 31, 1997 from 39 days at December 31, 1996. Net property plant and equipment increased by $3.4 million to $ 27.5 million at December 31, 1997, from $24.2 million at December 31, 1996, primarily due to the continued expansion of the Company's GenTrac and JMI-Daniels manufacturing facilities during 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 benefited from rapid sales growth, negating most inflationary pressures. The Company's manufacturing operations are not capital intensive and, as such, the impact of inflation on the property, plant and equipment and associated depreciation expense of the Company has been minimal. RECENT ACCOUNTING PRONOUNCEMENTS During 1997 the Company adopted FASB Statement No. 128, "Earnings Per Share." The adoption of this Statement did not have a material effect on the Company's consolidated financial statements or results of operations. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement's requirements. 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. 20 22 Dependence upon Key Products. The Company's continued growth in revenues and earnings is primarily attributable to its acquisitions of a limited number of key products with higher gross margins. During 1997, sales of Tapazole, Levoxyl, Brevital and Thrombin-JMI represented, in the aggregate, approximately 78.0% 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 products depends in part on the availability of adequate reimbursement to the Company's customers and patients from third-party health care payors, such as governments, private insurers and managed care organizations. Policies adopted by third-party payors influence the pricing of medical services and products. There can be no assurance that reimbursement will be available for the Company's products or that such third-party reimbursement will be adequate. Moreover, under contracts with hospitals and buying groups applicable to the sale of many of the Company's products, final sales prices to distributors may be subject to retroactive adjustment based upon volume or other contractual discounts provided by the Company. While the Company believes that it has adequate reserves to cover such adjustments, there can be no assurance that the Company will not experience price adjustments in the future that significantly exceed such reserves. Regulation and Product Risks. The manufacturing, processing, formulation, packaging, labeling, advertising and sampling of the Company's products are subject to extensive regulations by various federal and state agencies, including the FDA, the FTC, the DEA, the CPSC, the Department of Agriculture, and the EPA. In addition to other costs of compliance with such regulations, the Company is subject to possible risks arising from changes in such regulations or based upon alleged violations of regulations. Such risks could render products unavailable or unmarketable or result in product recalls. Any such development could materially and adversely affect the Company's reputation, business, financial condition and results of operations. In particular, the FDA announced in an August 14, 1997, Federal Register Notice that orally administered drug products containing levothyroxine sodium are now classified as new drugs. Manufacturers who wish to continue to market these products must submit NDA's. After August 14, 2000, any levothyroxine sodium product marketed without an approved NDA will be subject to regulatory action. Levoxyl, since it was marketed prior to the date of this notice will continue to be eligible for marketing until August 14, 2000. The FDA is allowing the Company and other current manufacturers three (3) years to obtain approved NDA's. The Company plans to dedicate significant resources to this NDA process during 1998 and 1999 and expects to incur costs in excess of $2 million to secure an approved NDA for Levoxyl. In addition to government regulation, the Company faces an inherent risk of exposure to product liability claims in the event use of a product is alleged to have resulted in adverse effects for a patient or consumer. Such risk exists even with respect to those products which are manufactured in regulated facilities or otherwise possess regulatory approval for commercial sale. While the Company has taken, and continues to take, what it believes are appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company currently has product liability insurance in the amount of $20 million per claim and $20 million in the aggregate and excess coverage of $5 million through an "umbrella" policy; however, there can be no assurance that such insurance would be sufficient to cover potential claims or that such insurance coverage will be available in the future on commercially reasonable terms, if at all. Specifically, in the event that the Company's insurance coverage is inadequate to satisfy any resulting liability arising from current litigation involving claims related to dexfenfluramine, fenfluramine and phentermine in which the Company has been named as a defendant, then the Company will have to resume defense of such lawsuits and be responsible for the damages (See "Legal Proceedings"). Accordingly, a product liability claim could materially and adversely affect the Company's business, financial condition and results of operations. 21 23 Reliance on Third-Party Manufacturers. The Company has historically relied on third party manufacturers to produce many of its products and currently relies upon third party manufacturers for production of Brevital, Tapazole, Triostat and Cytomel, each of which is a key pharmaceutical. Although such products are subject to manufacturing arrangements with reliable and substantial entities, alternative sources are not readily available and there can be no assurance that the Company will be able to obtain adequate supplies of such products in a timely fashion, or at all. Disruption in the available supply of Brevital, Tapazole, Triostat or Cytomel or the inability of the Company to obtain sources of supply upon the expiration of current manufacturing arrangements would be materially adverse to the business, financial condition and results of operations of the Company. Competition. Many of the Company's competitors have considerably greater financial, sales, marketing and technical resources than those of the Company. In addition, many of the Company's present competitors have extensive research and development capabilities that may allow such competitors to develop new or improved products that may compete with the Company's products. Technological advances affecting the cost of production as well as marketing or pricing action by one or more of the competitors could also materially and adversely affect the Company's business, financial condition and results of operations. COMPLIANCE WITH YEAR 2000 Historically, certain computer programs have been written using two digits rather than four to define the applicable year, which could result in such programs and/or a computer running such programs recognizing a date using "00" as the year 1900 rather than the year 2000. This, in turn, could result in major system failures or miscalculations, and is generally referred to as the "Year 2000" problem. The Company is currently in the process of upgrading and replacing its information technology systems in the normal course of its business. In connection with the upgrades and replacement systems, the new functionality will be compliant, in all material respects, with Year 2000 requirements. Accordingly, the Company does not expect the Year 2000 requirements to result in significant additional costs or to have a materially adverse effect on the Company's business, financial condition and results of operations; however, there can be no assurances that this will be the case. In addition, the ability of third parties with whom the Company transacts business adequately to address their Year 2000 issues is outside the Company's control. There can be no assurance that the failure of any third parties adequately to address their respective Year 2000 issues will not have a material adverse effect of the Company's business, financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is a non-bank and non-thrift institution with a market capitalization of less than $2.5 billion on January 28, 1997 and, therefore, is not currently required to provide disclosure pursuant to Item 7A of this report on Form 10-K. 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 35. 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. 22 24 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT DIRECTORS AND OFFICERS The following table sets forth certain information as of March 1, 1998 with respect to the directors and executive officers of the Company.
Name Age Position ---- --- -------- Dennis M. Jones 59 Chairman of the Board, President and Chief Executive Officer Judith A. Jones(1) 57 Executive Vice President, Secretary, Treasurer and Director Michael T. Bramblett 55 Executive Vice President and Director G. Andrew Franz 45 Senior Vice President-Operations-Pharmaceuticals and Director David A. McLaughlin 50 Senior Vice President-Operations-Nutritionals and Director Tina A. Kaufman 38 Senior Vice President-Finance Thomas G. Lewandowski 51 Senior Vice President-Sales Edward A. Chod(2) 44 Director Stanley L. Lopata(1)(2) 83 Director Thomas F. Patton(1)(2) 49 Director L. John Polite, Jr. 76 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 the Company's Chairman of the Board, President and Chief Executive Officer since its inception in March 1981. Mr. Jones has been involved primarily in the pharmaceutical industry since 1964 in various marketing, management and administrative positions. Judith A. Jones 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. 23 25 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. G. Andrew Franz, a Director of the Company since 1994, became Senior Vice President-Operations-Pharmaceuticals for the Company in February 1994. He has served as the Vice President-Operations of JMI-Canton since the facility was acquired by JMI-Canton from Bowman Pharmaceuticals, Inc. in March 1984. David A. McLaughlin, a Director of the Company since 1994, became Senior Vice President-Operations-Nutritionals in February 1994. Mr. McLaughlin has served in various management and executive capacities with the Company since 1986. Tina A. Kaufman joined the Company in June 1997 as Senior Vice President-Finance. Prior to joining the Company, Ms. Kaufman was a partner at Ernst & Young LLP which has served as the Company's independent auditors since December, 1995. Ms. Kaufman was a member of Ernst & Young's audit team that has served the Company for the last 12 years. Thomas G. Lewandowski became Senior Vice President-Sales for the Company in May 1997. Mr. Lewandowski served as Western Regional Sales Manager for Daniels Pharmaceuticals, Inc. from 1989 until that company merged with the Company in 1996. Prior to joining Daniels, Mr. Lewandowski spent 17 years with Pennwalt Corporation holding various management positions in both the hospital and prescription products divisions. Edward A. Chod has been a Director since 1991. Mr. Chod is an officer and shareholder in the law firm of Greensfelder, Hemker & Gale, P.C. which he joined in 1978 and which has served as counsel to the Company since 1982. Stanley L. Lopata, a Director since 1988, is the President of Lopata Research and Development Corp. and has served in that capacity since 1988. Prior to 1988, Mr. Lopata was the Chairman of the Board of Directors and Chief Executive Officer of Carboline Corporation, a manufacturer of specialty paint and coating products, from 1960 through 1988. Thomas F. Patton, Ph.D., a Director since 1995, is President of the St. Louis College of Pharmacy and has served in that capacity since June 1994. From April 1993 until January 1994 and from January 1994 until May 1994, Dr. Patton served as Executive Director of Pharmaceutical Research and Development and as Vice President of Pharmaceutical Research and Development, respectively, at Dupont-Merck Pharmaceutical Co., a pharmaceutical company. Dr. Patton also serves as a director of D&K Healthcare Resources, Inc., a drug wholesaler. L. John Polite, Jr., a Director since 1989, is Chairman of Peridot (New Jersey) Chemicals, Inc., and has served in that capacity since December 1989. He was the Chairman of the Board, President and Chief Executive Officer of Essex Chemical Corporation ("Essex") from April 1978 to October 1988. Mr. Polite also serves as a director of Rotonics Manufacturing, Inc., a manufacturer of plastic containers for commercial, pharmaceutical, refuse, marine, health care and residential applications. 24 26 Directors of the Company are elected by the Company's stockholders and hold office until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier resignation or removal. All executive officers are appointed by and serve at the discretion of the Board of Directors. No employee who is a director receives a director's fee for services rendered as a director. However, each non-employee director receives reimbursement for any expenses incurred in his capacity as a director of the Company and $4,000 per meeting of the Board of Directors attended by such non-employee director, subject to a minimum (as of December 31, 1997) of $10,000 per year. In addition, non-employee directors who are members of the Company's compensation committee receive $500 per meeting of the compensation committee attended by such non-employee directors. Finally, 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
25 27 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, 1997, 1996 and 1995 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, 1997 (the "Named Executives"). SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards Securities Name and Principal Position Year Salary Bonus Other Annual Underlying All Other - --------------------------- ---- ------ ----- ------------ ---------- --------- Compensation (1) Options Compensation ---------------- -------- ------------ Dennis M. Jones, Chairman 1997 $400,000 0 0 0 $29,864(2) of the Board, Director and President and Chief Executive Officer 1996 $360,000 $100,000 0 540,000 $17,599(2) 1995 $300,000 $75,000 0 0 $14,357(2) - ------------------------------------------------------------------------------------------------------------------------------------ Judith A. Jones, Director, 1997 $220,000 $30,000 0 0 $ 9,500(3) Executive Vice President, Secretary and Treasurer 1996 $180,000 $50,000 0 135,000 $ 7,518(3) 1995 $150,000 $35,000 0 0 $ 5,644(3) - ------------------------------------------------------------------------------------------------------------------------------------ Michael T. Bramblett, 1997 $220,000 $30,000 0 0 $ 9,500(4) Director and Executive Vice President 1996 $180,000 $50,000 0 63,000 $ 7,500(4) 1995 $150,000 $35,000 0 0 $ 6,771(4) - ------------------------------------------------------------------------------------------------------------------------------------ G. Andrew Franz, Director 1997 $175,000 $25,000 0 0 $ 9,500(4) and Senior Vice President - Operations - Pharmaceuticals 1996 $144,000 $40,000 0 0 $ 7,500(4) 1995 $120,000 $20,000 0 0 $ 5,125(4) - ------------------------------------------------------------------------------------------------------------------------------------ David A. McLaughlin, 1997 $175,000 $25,000 0 0 $ 9,500(4) Director and Senior Vice President - Operations - Nutritionals 1996 $144,000 $40,000 0 0 $ 7,500(4) 1995 $120,000 $20,000 0 0 $ 5,125(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 ($9,500 in 1997, $7,500 in 1996 and $6,196 in 1995) and the dollar value of premiums paid by the Company for a split-dollar life insurance policy on Mr. Jones, of which $20,184, $10,099 and $8,161 constituted his entire economic benefit in the years 1997, 1996 and 1995, respectively. (3) Consists of a Company contribution to a 401(k) plan ($9,500 in 1997, $4,375 in 1996 and $2,696 in 1995) and the dollar value of premiums paid by the Company for a split-dollar life insurance policy on Mrs. Jones, of which $3,143 and $2,948 constituted her entire economic benefit in the years 1996 and 1995, respectively. (4) Consists of a Company contribution to a 401(k) plan. 26 28 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, 1997, the Company had outstanding stock options for an aggregate of 1,498,676 shares of Common Stock at a weighted average price of $15.82 per share held by 192 employees (including the options held by the Named Executives as described below) and the four (4) non-management directors. The Company's stock option plans permit "exchange exercises" in which an optionee is permitted to pay the exercise price of vested options by surrendering previously owned shares of the Company's Common Stock having a market value equal to the exercise price of the option being exercised. Option/SAR Grants. Although permitted under certain of the stock option and incentive stock plans, the Company did not issue or have outstanding in 1997 stock appreciation rights ("SARs") or restricted share grants to any Named Executive. In addition, the Company did not grant stock options to the Named Executives during 1997. Aggregate Option Exercises during 1997 and Year End Option Values. The following table provides information with respect to the stock options exercised during the fiscal year ended December 31, 1997 and the value as of December 31, 1997 of unexercised in-the-money options held by the Named Executives. The value realized on the exercise of options is calculated using the difference between the option exercise price and the fair market value of the Company's stock on the date of the exercise. The value of unexercised in-the-money options at fiscal year end is calculated using the difference between the option exercise price and the fair market value of the Company's stock at fiscal year end, December 31, 1997.
Value of Number of Unexercised In-the- Shares Unexercised Options Money Options at Acquired Value at December 31, 1997 December 31, 1997 on Exercise Realized (#) ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable ------ ----- ----- ------------------------- ------------------------- Dennis M. Jones 0 $0 108,000/432,000 $2,978,640/$11,914,560 Judith A. Jones 0 $0 27,000/108,000 $744,660/$2,978,640 Michael T. Bramblett 112,500 $3,398,400 9,000/54,000 $248,220/$1,489,320 G. Andrew Franz 11,250 $387,563 11,250/22,500 $390,375/$780,750 David A. McLaughlin 0 $0 11,250/22,500 $390,375/$780,750
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. To become eligible to participate in the 401(k) Plan, an employee must have completed six months of service and have reached his or her eighteenth birthday ("Eligible Employee"). Pursuant to the 401(k) Plan, an Eligible Employee who participates ("Participant") may direct that a portion of his or her compensation be contributed to the 401(k) Plan ("Elective Contributions"). Elective Contributions are treated as salary deferrals for federal income tax purposes and under current federal tax law may not exceed $10,000 per year. The amount of a Participant's Elective Contribution may also be limited under the Employee Retirement Income Security Act in the case of highly-compensated individuals, including the Named Executives. Participants are not allowed to make any voluntary contributions to the 401(k) Plan, other than their Elective Contributions. 27 29 Each year the Company may make contributions to match all or a portion of Participants' Elective Contributions. For 1997, the matching contribution was raised by the Company to six percent of Participants' compensation. In each of 1995 and 1996, the Company set the 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". A Participant's Account under the 401(k) Plan consists of the Participant's Elective Contributions, the Company Contributions allocated to the Participant and the earnings or investment performance arising from investment of such funds. Generally a participant may not make withdrawals from his 401(k) Plan Account prior to age 59 1/2, retirement, termination of employment, or other conditions specified in the 401(k) Plan without incurring tax penalties, although the Plan permits a Participant to borrow up to 50% of his Elective Contributions in certain hardship circumstances as provided in the Plan. Elective Contributions are always 100% vested, however, Company Contributions are subject to a vesting schedule described below. 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, 1998, the Company had approximately 397 Eligible Employees, including the Named Executives (Dennis M. Jones, Judith A. Jones, Michael T. Bramblett, G. Andrew Franz and David A. McLaughlin). During 1997, the Company made matching contributions to the 401(k) Plan aggregating $47,500 to the accounts of the Named Executives and total matching contributions of $613,684 to all Participants' Accounts. Participants in the 401(k) Plan may direct investment of amounts allocated to their respective accounts among various investment funds selected by the Plan Administrator. Prior to January 1, 1997, investment of funds in the 401(k) was directed by the Trustees of the 401(k) Plan and a portion of Company Contributions was, from time to time, invested in shares of the Common Stock of the Company. The investment funds currently available under the 401(k) Plan do not include a fund for investment in the Company's Common Stock for either Elective Contributions or Company Contributions. The Company is the 401(k) Plan Administrator and currently pays all expenses of the 401(k) Plan other than audit fees, which are paid by the 401(k) Plan. The Company has appointed Dennis M. Jones 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. 28 30 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the record and beneficial ownership of the Common Stock of the Company on the indicated date by: (i) each director or nominee for director and the Named Executives (as such term is defined below in "Executive Compensation -- Summary Compensation Table") of the Company; and (ii) all directors or nominees for director and executive officers of the Company as a group: BENEFICIAL OWNERSHIP AS OF FEBRUARY 27, 1998
Name and Address of Percentage of Shares Beneficial Owner (1) Shares Beneficially Owned (2) Beneficially Owned (3) -------------------- ----------------------------- ---------------------- Dennis M. Jones 3,699,900 (4)(5) 12.8% Chairman of the Board of Directors and President Judith A. Jones 1,074,937 (6) 3.7% Executive Vice President, Secretary, Treasurer and Director Michael T. Bramblett 164,700(7)(8) 0.6% Executive Vice President and Director G. Andrew Franz 411,277(9)(10) 1.4% Senior Vice President-Operations- Pharmaceuticals and Director David A. McLaughlin 123,750 * Senior Vice President-Operations- Nutritionals and Director Stanley Lopata 176,500(11) 0.6% Director 900 South Hanley Road St. Louis, Missouri 63105 L. John Polite, Jr. 37,000(12) * Director 211 Oldwoods Road Franklin Lakes, New Jersey 07417 Edward A. Chod 27,625(13) * Director 10 South Broadway, Suite 2000 St. Louis, Missouri 63102 Thomas F. Patton, Ph.D. 6,750(14) * Director All Directors and Executive Officers 5,730,948(15) 19.7% as a Group (consisting of eleven persons)
* Less than one-half of one percent. 29 31 (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. (2) Includes shares deemed owned as a result of purchase options which are presently or will become exercisable on or prior to June 1, 1998. (3) The number of shares of Common Stock deemed outstanding as of February 27, 1998 includes: (i) 28,696,348 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, 1998, by the person or group in question. (4) Includes 216,000 shares under option rights issued by the Company and held by Mr. Jones. Does not include 1,074,937 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 300,000 of the shares reflected as owned by him were subject to purchase by third parties at $40 per share under option rights which expired on March 13, 1998, unexercised. (6) Includes 54,000 shares under option rights issued by the Company and held by Mrs. Jones. Does not include 3,699,900 shares or options held by her spouse, with respect to which she disclaims beneficial ownership. (7) Includes 18,461 shares held by Mr. Bramblett's wife with respect to which he disclaims beneficial ownership. Also includes 18,000 shares under option rights issued by the Company. (8) As a result of call options written and sold by Mr. Bramblett, an aggregate of 30,000 of the shares reflected as owned by him are subject to purchase by third parties at $35 per share under option rights expiring June 19, 1998. (9) Includes 191,165 shares owned by Mr. Franz' wife, 42,840 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. (10) As a result of call options written and sold by Mr. Franz, an aggregate of 50,000 of the shares reflected as owned by him are subject to purchase by third parties at $35 per share under option rights expiring June 19, 1998. (11) Includes 64,950 shares held in revocable trust created by Mr. Lopata's wife and with respect to which he disclaims beneficial ownership. Also includes 9,000 shares under vested and unexercised options. (12) Includes 11,250 shares under option rights issued by the Company. (13) Includes 9,000 shares under option rights issued by the Company. (14) Includes 6,750 shares under option rights issued by the Company. (15) Includes the shares listed as beneficially owned for each individual included in the table as well as (i) 5,000 shares under option rights issued by the Company and held by Tina A. Kaufman, Senior Vice President-Finance; and 3,500 shares under option rights issued by the Company and held by Thomas G. Lewandowski, Senior Vice President-Sales. 30 32 Other Significant Shareholdings Based upon filings with the Securities and Exchange Commission ("SEC") under the Exchange Act , the Company is advised that as of December 31, 1997, each of the following investment advisors held discretionary authority over accounts holding, in the aggregate, the indicated numbers of shares of the Company's Common Stock, in each case representing 5% or more of the then outstanding shares of Common Stock: NAME AND ADDRESS OF INVESTMENT ADVISOR SHARES -------------------------------------- ------ AMVESCAP PLC 1,722,700 (6.0%) 11 Devonshire Square London EC2M 4YR England Putnam Investments, Inc. 1,837,364 (6.5%) One Post Office Square Boston, Massachusetts 02109 Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), requires the Company's directors and officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the SEC and the National Association of Security Dealers, Inc. Directors, officers and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such forms received by the Company and written representations from certain reporting persons that no Forms 5 or other reports were required for those persons, the Company believes that, during the fiscal year ended December 31, 1997, its directors, officers and greater than 10% beneficial owners complied with all applicable filing requirements. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edward A. Chod, a director of the Company, is a principal in the law firm of Greensfelder, Hemker & Gale, P.C., which firm has served as counsel to the Company since 1982. The amount of legal fees paid by the Company to Greensfelder, Hemker & Gale, P.C. during the fiscal year ended December 31, 1997 did not exceed five percent (5%) of such firm's gross revenues for its applicable fiscal year. 31 33 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 35. 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 35. 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). (3.4) Amended and Restated Certificate of Incorporation of the Company dated June 5, 1997 (incorporated by reference from Form 8-K dated June 10, 1997). (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 (incorporated by reference from Form 10-K for the year ended December 31, 1996). (10.3) The Company's 1994 Incentive Stock Plan effective June 1, 1994 (incorporated by reference from the Company's Proxy Statement dated April 21, 1995 for the Annual Meeting of Stockholders held May 15, 1995). (10.4) The Company's 1994 Formula Stock Option Plan for Non-Management Directors effective May 25, 1994 (incorporated by reference from the Company's Proxy Statement dated April 21, 1995 for the Annual Meeting of Stockholders held May 15, 1995). (10.5) 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). 32 34 (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 is (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). (10.13) The Company's 1997 Incentive Stock Plan (incorporated by reference from the Company's Proxy Statement dated April 10, 1997 for the Annual Meeting of Shareholders held May 20, 1997). (10.14) Asset Purchase Agreement dated as of June 27, 1997, between the Company and SmithKline Beecham Corporation (incorporated by reference from Form 8-K dated July 8, 1997). (10.15) Supply Agreement dated as of June 27, 1997, between the Company and SB Pharmco Puerto Rico (incorporated by reference from Form 8-K dated July 8, 1997). (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 -- 1997 Year End and Quarterly Information. (FILED HEREWITH) (27.2) Financial Data Schedule -- 1996 Year End and Quarterly Information. (FILED HEREWITH) (27.3) Financial Data Schedule -- 1995 Year End Information. (FILED HEREWITH) (b) No reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report on Form 10-K. 33 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JONES MEDICAL INDUSTRIES, INC. By: /s/ Dennis M. Jones --------------------------- Dennis M. Jones, President DATE: MARCH 31, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ Dennis M. Jones President, Chief Executive March 31, 1998 - ------------------------ Officer and Director Dennis M. Jones /s/ Judith A. Jones Principal Financial and March 31, 1998 - ------------------------ Accounting Officer, Executive Judith A. Jones Vice President, Secretary, Treasurer and Director /s/ Michael T. Bramblett Executive Vice President and March 31, 1998 - ------------------------ Director Michael T. Bramblett /s/ G. Andrew Franz Senior Vice President - March 31, 1998 - ------------------------ Operations - Pharmaceuticals G. Andrew Franz and Director Senior Vice President - March 31, 1998 /s/ David A. McLaughlin Operations - - ------------------------- Nutritionals and Director David A. McLaughlin Director March 31, 1998 /s/ Edward A. Chod - ------------------------- Edward A. Chod /s/ Stanley Lopata Director March 31, 1998 - ------------------------- Stanley Lopata /s/ L. John Polite, Jr. Director March 31, 1998 - ------------------------- L. John Polite, Jr. Director March 31, 1998 /s/ Thomas F. Patton, Ph.D. - ------------------------- Thomas F. Patton, Ph.D.
34 36 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, 1996 and 1997 F-3 Consolidated statements of income for the years ended December 31, 1995, 1996 and 1997 F-4 Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1996 and 1997 F-5 Consolidated statements of cash flows for the years ended December 31, 1995, 1996 and 1997 F-6 Notes to consolidated financial statements F-7 Consolidated schedule for the years ended December 31, 1995, 1996 and 1997: II. Valuation and qualifying accounts F-25
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 35 37 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 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 revenues of $18,394,720 for the year ended September 30, 1995. 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 the year 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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. St. Louis, Missouri February 10, 1998, except for the ERNST & YOUNG LLP first paragraph of Note 1, as to which the date is March 17, 1998 F-1 38 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, 1994 and 1993 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. 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, 1994 and 1993 and the results of its operations and its cash flows for the years then ended, 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 39 Jones Medical Industries, Inc. Consolidated Balance Sheets (In thousands of dollars except per share amounts)
DECEMBER 31 1996 1997 ----------------------- ASSETS Current assets: Cash and cash equivalents $ 52,172 $ 49,877 Accounts receivable, less allowance for doubtful accounts of $388 in 1996 and $1,196 in 1997 11,301 16,689 Inventories 12,753 15,357 Income taxes receivable 1,764 -- Deferred income taxes 1,846 2,443 Other 715 747 ----------------------- Total current assets 80,551 85,113 Intangible assets: Customer lists 6,085 6,085 Distribution systems, trademarks, and licenses 48,409 69,403 Restrictive covenants and other intangibles 5,603 8,103 Goodwill 17,250 17,185 ----------------------- 77,347 100,776 Less accumulated amortization 7,500 11,434 ----------------------- Net intangible assets 69,847 89,342 Net property, plant, and equipment 24,170 27,543 Other assets 2,665 2,230 ----------------------- Total assets $177,233 $204,228 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 6,472 $ 5,130 Current portion of long-term debt 3,000 -- Income taxes payable -- 1,450 Dividends payable 560 -- ----------------------- Total current liabilities 10,032 6,580 Deferred income taxes 5,282 5,922 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized in 1996 and 5,000,000 shares authorized in 1997, no shares issued or outstanding -- -- Common stock, $.04 par value; 30,000,000 shares authorized, 28,435,451 shares issued and outstanding in 1996 and 75,000,000 authorized, 28,647,300 issued and outstanding in 1997 1,137 1,146 Contributed capital 108,582 109,129 Retained earnings 52,200 81,451 ----------------------- Total stockholders' equity 161,919 191,726 ----------------------- Total liabilities and stockholders' equity $177,233 $204,228 =======================
See accompanying notes. F-3 40 Jones Medical Industries, Inc. Consolidated Statements of Income (In thousands of dollars except per share amounts)
YEAR ENDED DECEMBER 31 1995 1996 1997 ---------------------------------------- Sales from continuing operations $ 39,937 $ 64,181 $ 88,781 Cost of sales 14,639 20,277 25,430 ---------------------------------------- Gross profit 25,298 43,904 63,351 Selling, general, and administrative expenses: Selling 8,216 10,356 14,415 General and administrative 6,934 7,389 7,499 Research and development 452 410 -- Amortization 824 2,011 3,357 Nonrecurring merger expenses -- 5,743 -- ---------------------------------------- Total selling, general, and administrative expenses 16,426 25,909 25,271 ---------------------------------------- Operating income from continuing operations 8,872 17,995 38,080 Other income (expense): Interest income 304 2,276 2,562 Interest expense (655) (553) (238) Miscellaneous (133) 32 (9) ---------------------------------------- (484) 1,755 2,315 ---------------------------------------- Income before taxes from continuing operations 8,388 19,750 40,395 Provision for income taxes 3,074 8,232 15,351 ---------------------------------------- Income from continuing operations 5,314 11,518 25,044 Income from discontinued operations (net of taxes) 7,075 6,621 6,926 ---------------------------------------- Net income $ 12,389 $ 18,139 $ 31,970 ======================================== Earnings per share: Basic: Continuing operations $ 0.22 $ 0.43 $ .88 Discontinued operations $ 0.30 $ 0.24 $ .24 ---------------------------------------- $ 0.52 $ 0.67 $ 1.12 ======================================== Diluted:Continuing operations $ 0.21 $ 0.41 $ 0.85 Discontinued operations $ 0.29 $ 0.24 $ 0.24 ---------------------------------------- $ 0.50 $ 0.65 $ 1.09 ========================================
See accompanying notes. F-4 41 Jones Medical Industries, Inc. Consolidated Statements of Stockholders' Equity Years ended December 31, 1995, 1996, and 1997 (In thousands of dollars except per share amounts)
NUMBER OF SHARES ----------------------------- PREFERRED COMMON CONTRIBUTED RETAINED PREFERRED COMMON STOCK STOCK CAPITAL EARNINGS TOTAL ------------------------------------------------------------------------------------------------- Balance at December 31, 1994 99,919 23,730,008 $ 1 $ 949 $ 19,507 $ 24,020 $ 44,477 Exercise of stock options -- 281,565 -- 11 433 -- 444 Restricted stock: Amortization of unearned compensation -- -- -- -- 30 -- 30 Conversion of preferred stock (54,859) 215,850 (1) 9 (8) -- -- Return of escrowed preferred stock (44,004) -- -- -- (381) -- (381) Escrowed preferred dividend -- -- -- -- 9 -- 9 Net income -- -- -- -- -- 12,389 12,389 Cash dividend declared - common stock ($.05 per historical JMED share) -- -- -- -- -- (1,026) (1,026) Cash dividend declared - preferred stock ($.16 per share) -- -- - -- -- (4) (4) ------------------------------------------------------------------------------------------------- Balance at December 31, 1995 1,056 24,227,423 - 969 19,590 35,379 55,938 Net proceeds from sale of common stock -- 3,450,000 - 138 75,084 -- 75,222 Exercise of stock options -- 333,397 - 13 787 -- 800 Restricted stock: Amortization of unearned compensation -- -- - -- 12 -- 12 Tax benefits associated with the exercise of nonqualified stock options -- -- - -- 846 -- 846 Adjustment to increase pooled company's net income to a 12-month amount -- -- - -- -- 702 702 Costs paid by shareholders on behalf of the Company -- -- - -- 2,900 -- 2,900 Redemption of dissenters' shares -- -- - -- (4,022) -- (4,022) Shares issued in connection with the Abana purchase -- 420,553 - 17 13,875 -- 13,892 Other -- -- - -- (490) (490) Conversion of preferred stock (1,056) 4,078 - -- -- -- -- Net income -- -- - -- -- 18,139 18,139 Cash dividend declared - common stock ($.0767 per share) -- -- - -- -- (2,020) (2,020) Cash dividend declared - preferred stock ($.04 per share) -- -- - -- -- -- -- ------------------------------------------------------------------------------------------------- Balance at December 31, 1996 -- 28,435,451 - 1,137 108,582 52,200 161,919 Exercise of stock options -- 224,724 - 9 687 -- 696 Shares tendered in payment of option price -- (10,182) - -- (340) -- (340) Tax benefits associated with the exercise of nonqualified stock options -- -- - -- 287 -- 287 Return of escrowed shares -- (2,693) - -- (87) -- (87) Net income -- -- - -- -- 31,970 31,970 Cash dividend declared - common stock ($.095 per share) -- -- - -- -- (2,719) (2,719) ------------------------------------------------------------------------------------------------- Balance at December 31, 1997 -- 28,647,300 $- $ 1,146 $ 109,129 $ 81,451 $ 191,726 =================================================================================================
See accompanying notes. F-5 42 Jones Medical Industries, Inc. Consolidated Statements of Cash Flows (In thousands of dollars)
YEAR ENDED DECEMBER 31 1995 1996 1997 -------------------------------------- OPERATING ACTIVITIES Net income $ 12,389 $ 18,139 $ 31,970 Adjustment to increase pooled company's net income above to a 15-month amount -- 702 -- Noncash adjustments: Costs paid by shareholders on behalf of the Company -- 2,900 -- Depreciation 1,109 1,363 2,148 Amortization 1,430 2,630 3,963 Provision for uncollectibles 64 200 809 Deferred income taxes (8) 527 43 Loss on sale of assets 126 101 31 Change in assets and liabilities, net of effects from acquisitions: Accounts receivable (3,702) (1,406) (6,196) Inventories (2,726) 868 (2,604) Other assets (716) (1,603) 1,445 Accounts payable and accrued expenses 1,867 (1,119) (1,341) Income taxes payable 471 (2,635) 1,450 -------------------------------------- Net cash from operating activities 10,304 20,667 31,718 INVESTING ACTIVITIES Additions to property, plant, and equipment (5,448) (7,386) (5,566) Proceeds from sale of assets 766 408 276 Purchases of intangible assets in product line acquisitions, net of seller financing (7,072) (8,757) (22,800) Net decrease in note receivable from related party 80 175 -- -------------------------------------- Net cash used for investing (11,674) (15,560) (28,090) FINANCING ACTIVITIES Net proceeds from sale of common stock -- 75,222 -- Proceeds from debt 7,000 8,700 -- Repayment of long-term debt (4,653) (37,758) (3,000) Purchase of dissenters' shares -- (4,022) -- Repayment of note payable to former stockholder of pooled company (638) (2,476) -- Payments of cash dividends (984) (1,743) (3,279) Proceeds from exercise of stock options 444 800 356 -------------------------------------- Net cash from (used for) financing 1,169 38,723 (5,923) -------------------------------------- Increase (decrease) in cash and cash equivalents (201) 43,830 (2,295) Cash and cash equivalents, beginning of year 8,543 8,342 52,172 -------------------------------------- Cash and cash equivalents, end of year $ 8,342 $ 52,172 $ 49,877 ======================================
See accompanying notes. F-6 43 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (Dollars in thousands except per share amounts) December 31, 1997 1. BASIS OF PRESENTATION DISCONTINUED OPERATIONS On March 16, 1998, the Board of Directors of Jones Medical Industries, Inc. ("JMED" or the "Company") approved a plan to discontinue the Company's nutritional supplements product line and contract manufacturing operations. On March 17, 1998, the Company signed a binding agreement with certain operating subsidiaries of Twinlab Corporation (Twin) to sell a portion of this business for $55 million cash at closing. The sale to Twin is subject to expiration or termination of applicable waiting periods under Federal antitrust regulations and other customary closing conditions with an anticipated closing date of mid-April, 1998. Gain on the subsequent sale is anticipated. The accompanying consolidated statements of income reflect the operating results, net of tax, of the Company's nutritional supplements product line and contract manufacturing operations as discontinued operations. Net assets associated with the discontinued operations at December 31, 1997 approximate $24,500, including approximately $3,000 of accounts receivable, $9,000 of inventory, $4,300 of property, plant, and equipment and $8,800 of intangibles. Net sales associated with the discontinued operations approximate $36,249, $35,972 and $34,855 for the years ended December 31, 1997, 1996 and 1995, respectively. DANIELS PHARMACEUTICALS, INC. POOLING OF INTERESTS On August 30, 1996, 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 1996, and 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 to dissenting shareholders. In addition, JMED issued 49,750 shares of its common stock to Daniels Enterprises, Inc. ("DEI"), an S-Corporation controlled by the principal shareholders of Galen, to acquire the real estate associated with the business. The book value of the real estate acquired was $892 at the consummation date of the combination. F-7 44 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 1. BASIS OF PRESENTATION (CONTINUED) DANIELS PHARMACEUTICALS, INC. POOLING OF INTERESTS (CONTINUED) 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 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 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 $4,207 and net income of $702. 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.
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------------------------------ Sales from continuing operations: JMED $21,542 $33,189 Daniels 18,395 13,072 ------------------------------------ Combined $39,937 $46,261 ==================================== Income from continuing operations: JMED $2,253 $5,253 Daniels 3,061 1,053 ----------------------------------- Combined $5,314 $6,306 =================================== Net income: JMED $ 9,328 $10,323 Daniels 3,061 1,053 ----------------------------------- Combined $12,389 $11,376 ===================================
F-8 45 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 1. BASIS OF PRESENTATION (CONTINUED) STOCK SPLITS 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 AND SUPPLIER CONCENTRATION The Company is engaged in the manufacturing, marketing, and sale of pharmaceuticals. The Company's principal customers are retail pharmacies and hospitals. The Company's sales are through wholesale drug distributors, who in turn supply product to pharmacies, hospitals and physicians. No one customer accounted for more than 10 percent of the Company's consolidated sales in 1995, 1996, or 1997. The Company's most significant products include:
1995 1996 1997 ---------------------------------------------------------------------------- PRODUCT PERCENT OF PRODUCT PERCENT OF PRODUCT PERCENT OF SALES SALES SALES SALES SALES SALES ---------------------------------------------------------------------------- Thrombin products $14,573 36% $17,406 27% $19,375 22% Levoxyl $11,684 29% $14,197 22% $22,273 25% Brevital (acquired August 31, 1995) $ 2,385 6% $ 7,251 11% $ 9,188 10% Tapazole (acquired March 18, 1996) $ -- -- $12,254 19% $18,314 21%
F-9 46 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 2. NATURE OF OPERATIONS AND CUSTOMER AND SUPPLIER CONCENTRATION (CONTINUED) 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. The Company also relies on SB Pharmco Puerto Rico (SB Pharmco), an affliate of SmithKline Beecham Corporation (SmithKline), for the manufacture of Triostat, and Schering Canada, Inc. (Schering) for the manufacture of Cytomel. The Company has entered into a two year supply agreement with SB Pharmco which may be extended for one additional year if the Company is not able to obtain Food and Drug Administration (FDA) approval to transfer the manufacturing of Triostat to the Company's own facility or that of a third party within the two year term. The Company has been assigned the rights, and has assumed the obligations, under an agreement entered into between a division of SmithKline and Schering pursuant to which Schering will manufacture Cytomel for a term of three years. The agreement also provides for automatic renewal unless either party provides eighteen months advance written notice of non-renewal prior to the end of any term. In the event of any interruption in the supply of Brevital, Tapazole, Triostat or Cytomel from Lilly, SB Pharmco or Schering due to regulatory or other causes, there can be no assurance that the Company could make alternative manufacturing arrangements on a timely basis, if at all. Such an interruption could have a material adverse effect on the Company's business, financial condition, and results of operations. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Jones Medical Industries, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. F-10 47 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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 F-11 48 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS (CONTINUED) 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. At December 31, 1996 and 1997, the Company maintained reserves of $1,857 and $2,215, respectively, for product rebates, returns, and discounts. 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. F-12 49 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK OPTIONS (CONTINUED) In connection with various nonqualified stock option plans, certain options have been granted at exercise prices below the fair market value of the common stock at the grant date. Differences between the option prices and fair market values at the dates of grant are charged to compensation expense ratably over the future service vesting periods. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 4. ACQUISITIONS CYTOMEL AND TRIOSTAT On June 27, 1997, the Company acquired two products, Cytomel and Triostat, from SmithKline Beecham Corporation (SKB) for a cash purchase price of $22,800. The purchase price has been allocated to the acquired intangibles with amortizable lives ranging from 10 to 25 years. In connection with the acquisition, the Company entered into manufacturing agreements for the future supply of both Cytomel and Triostat. The Company also purchased approximately $850 of SKB's related finished goods inventory that was on hand at the acquisition date. ABANA Since June 1, 1992, the Company has owned an investment in Abana Pharmaceuticals, Inc. (Abana) equivalent to 16 percent of Abana's outstanding common stock. In October 1996, the parties reached an agreement in principle whereby the Company would acquire the remaining 84 percent of Abana's outstanding common stock. On December 31, 1996, the consummation date of the acquisition, the Company issued 420,553 shares of its common stock in exchange for the remaining outstanding common stock of Abana. In addition, outstanding Abana stock options were exchanged for approximately 40,000 of the Company's stock options. The total purchase price of approximately $14,900, representing the fair value of Company common stock given of approximately $13,900 and the fair value of stock options given of approximately $1,000, has been allocated to the fair value of assets acquired and liabilities assumed in accordance with the purchase method of accounting. The excess of the purchase price over the fair values of acquired assets and liabilities, totaling F-13 50 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 4. ACQUISITIONS (CONTINUED) ABANA (CONTINUED) approximately $13,000, has been allocated to goodwill with an estimated economic life of 25 years. Pro forma results of operations, assuming the acquisition of Abana had occurred on January 1, 1996, would not materially differ from the 1996 reported results of operations. TAPAZOLE On March 18, 1996, the Company entered into a perpetual licensing agreement with Lilly for the exclusive United States marketing rights to the Tapazole product line. The purchase price of approximately $26,000 was financed with short-term bank debt of $8,700 and Lilly financing of $17,300 for six months. Approximately $24,000 was allocated to the perpetual license with an amortizable life of 30 years, and $2,000 was allocated to a restrictive covenant with an amortizable life of 10 years. BREVITAL On August 31, 1995, the Company acquired a perpetual licensing agreement for the exclusive United States marketing rights to the Brevital product line from Lilly. The purchase price of approximately $14,000 was financed with bank debt of $7,000 and Lilly financing of $7,000. Approximately $13,000 was allocated to the perpetual license with an amortizable life of 30 years, and $1,000 was allocated to a restrictive covenant with an amortizable life of 10 years. 5. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share are very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the Statement No. 128 requirements. F-14 51 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 5. EARNINGS PER SHARE (CONTINUED) The following table sets forth the computations of basic and diluted earnings per share:
1995 1996 1997 ------------------------------------------------------ Numerator for basic and diluted earnings per share: Income from continuing operations $ 5,314 $ 11,518 $ 25,044 Income from discontinued operations 7,075 6,621 6,926 ------------------------------------------------------ 12,389 18,139 31,970 Denominator: Denominator for basic earnings per share-weighted average shares 23,962,327 27,021,430 28,581,588 Effect of dilutive stock options 584,735 765,921 664,830 ------------------------------------------------------ Denominator of diluted earnings per share 24,547,062 27,787,351 29,246,418 ====================================================== Earnings per share: Basic: Continuing operations $0.22 $0.43 $0.88 Discontinued operations $0.30 $0.24 $0.24 ------------------------------------------------------ $0.52 $0.67 $1.12 ====================================================== Diluted: Continuing operations $0.21 $0.41 $0.85 Discontinued operations $0.29 $0.24 $0.24 ------------------------------------------------------ $0.50 $0.65 $1.09 ======================================================
6. SUPPLEMENTAL CASH FLOW INFORMATION The following is a summary of supplemental cash flow information:
1995 1996 1997 ------------------------------------------------------------ Interest paid $ 502 $ 532 $ 259 Income taxes paid $ 7,007 $ 14,109 $ 15,998
F-15 52 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 7. INVENTORIES Inventories at December 31, 1996 and 1997, are comprised of the following:
1996 1997 ----------------------------------- Raw materials $ 4,767 $ 6,724 Work-in-process 1,539 1,569 Finished goods 6,447 7,064 ----------------------------------- $ 12,753 $ 15,357 ===================================
8. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 1996 and 1997, are as follows:
1996 1997 ------------------------------------- Land $ 2,420 $ 2,420 Buildings and improvements 11,710 13,358 Equipment and furniture 15,023 17,238 Automobiles 438 615 Projects in process - 1,416 ------------------------------------- 29,591 35,047 Less accumulated depreciation 5,421 7,504 ------------------------------------- $24,170 $ 27,543 =====================================
F-16 53 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 1996 and 1997, are comprised of the following:
1996 1997 ------------------------------ Trade payables $1,227 $1,083 Sales rebates, returns, and discounts 1,857 2,215 Compensation 1,493 480 Taxes other than income 133 45 Interest 196 - Royalties 285 382 Health insurance claims 131 115 Nonrecurring merger expenses 178 - Other 972 810 ------------------------------ $6,472 $5,130 ==============================
10. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1997, consists of the following:
1996 1997 ---------------------------- Note payable to Lilly at 7%; payable in installments of $4,000 in August 1996 and $3,000 in August 1997 $ 3,000 $ - ---------------------------- 3,000 - Less current maturities 3,000 - ---------------------------- $ - $ - ============================
F-17 54 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 11. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1997, are as follows:
1996 1997 ----------------------------- Deferred tax liabilities: Depreciation and amortization $5,282 $5,922 Deferred tax assets: Accrued sales rebates, returns, and discounts 1,069 1,220 Deferred compensation on stock options 86 87 Unicap adjustment on inventory 267 298 Allowance for doubtful accounts 129 436 Other 295 402 ----------------------------- 1,846 2,443 ----------------------------- Net deferred tax liabilities $3,436 $3,479 =============================
Significant components of the provision for income taxes from continuing operations are as follows:
1995 1996 1997 ------------------------------------------------------------- Current: Federal $2,742 $7,311 $14,206 State 335 570 1,050 ------------------------------------------------------------- Total current 3,077 7,881 15,256 Deferred: Federal (3) 375 93 State - 26 2 ------------------------------------------------------------- Total deferred (3) 351 95 ------------------------------------------------------------- $3,074 $8,232 $15,351 =============================================================
F-18 55 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 11. INCOME TAXES (CONTINUED) The provision for income taxes from discontinued operations in 1995, 1996, and 1997 of $4,337, $4,058, and $4,244, respectively, has been netted against the income from discontinued operations in the accompanying consolidated statements of income. A reconciliation of the difference between the United States federal statutory tax rates and the effective income tax rate as a percentage of net income before taxes from continuing operations is as follows:
1995 1996 1997 -------------------------------------------- U.S. federal statutory tax rate 35.0 % 35.0% 35.0% State income taxes, net of federal tax benefit 4.0 % 3.0% 1.7% Other, net (2.4)% 3.7% 1.3% -------------------------------------------- 36.6 % 41.7% 38.0% ============================================
12. PREFERRED STOCK The Company's Board of Directors may without further action by the Company's stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences, and limitations of each series. The holders of preferred stock would normally be entitled to receive a preference payment in the event of any liquidation of the Company before any payment is made to the holders of the common stock. As of December 31, 1996 and 1997, there were no shares of preferred stock designated or outstanding. 13. STOCK OPTION PLANS The Company has various incentive stock plans for executives and employees. In connection with the plans, options to purchase common stock are granted at option prices not less than the fair market values of the common stock at the time the options are granted and vest ratably over five- to ten-year periods from the grant dates. At December 31, 1997, options for 1,266,655 shares of common stock are available for future grant. A total of 1,498,676 options to purchase common stock are outstanding under these plans at December 31, 1997, of which 247,431 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 F-19 56 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 13. STOCK OPTION PLANS (CONTINUED) 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. Option activity for 1995, 1996, and 1997 was as follows:
1995 1996 1997 ---------------------------------------------------------- Outstanding options, January 1 973,215 875,025 1,424,345 Exercised (281,565) (333,397) (224,724) Granted 194,625 901,070 417,500 Cancelled (11,250) (18,353) (118,445) ---------------------------------------------------------- Outstanding options, December 31 875,025 1,424,345 1,498,676 ========================================================== Weighted average price of options outstanding, January 1 $2.36 $ 2.76 $ 9.65 ========================================================== Weighted average price of options exercised $1.58 $ 2.41 $ 3.10 ========================================================== Weighted average price of options granted $3.67 $ 13.24 $ 32.42 ========================================================== Weighted average price of options cancelled $2.85 $ 3.35 $ 24.19 ========================================================== Weighted average price of options outstanding, December 31 $2.76 $ 9.65 $ 15.82 ==========================================================
F-20 57 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 13. STOCK OPTION PLANS (CONTINUED) Outstanding options at December 31, 1997 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, 1997: 247,431 $ 9.55 $ 2.44 - $40.00 Outstanding options vesting in: 1998 282,205 $11.92 $ 2.33 - $40.00 1999 281,855 $13.63 $ 2.89 - $40.00 2000 277,655 $15.76 $ 2.89 - $40.00 2001 263,630 $20.42 $ 10.67 - $40.00 2002 and thereafter 145,900 $30.01 $ 10.67 - $35.56 -------------------- 1,498,676 $15.82 ====================
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, 1996, and 1997, respectively: risk-free interest rates of 6.26 percent, 6.36 percent, and 5.52 percent; a dividend yield of 0.2 percent, 0.2 percent, and 0.3 percent; volatility factors of the expected market price of the Company's common stock of 0.514, 0.516, and 0.610 percent; and a weighted average expected life of the options of five years. The binomial option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-21 58 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 13. STOCK OPTION PLANS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:
1995 1996 1997 ----------------------------------------------------------- Pro forma net income $ 12,346 $ 17,511 $ 30,727 =========================================================== Pro forma earnings per share - diluted $ .50 $ .63 $ 1.05 ===========================================================
14. EMPLOYEE BENEFIT PLAN The Company has a defined contribution plan covering substantially all employees. The plan provides the Company may match 100 percent of the employee voluntary contributions up to a maximum matching contribution of 6 percent of the employee's compensation. Company contributions in 1995, 1996, and 1997 were approximately $224, $357, and $614, respectively, of which approximately $90 pertains to discontinued operations in each of the years. 15. 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. The Company is a defendant in a number of lawsuits involving the manufacture and sale of dexfenfluramine, fenfluramine, and phentermine (collectively, "Fen/Phen"). The Company distributes Obenix, its branded phentermine product; however, the Company does not manufacture Obenix or other Fen/Phen combinations. The lawsuits are in their preliminary stages and it is too early to determine what, if any, liability the Company may have with respect to the claims set forth in these lawsuits. Management of the Company believes that the outcome of these lawsuits will not have a material adverse effect on the Company's business, financial condition, and results of operations. F-22 59 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 15. CONTINGENCIES AND COMMITMENTS (CONTINUED) The FDA announced in an August 14, 1997, Federal Register Notice that orally administered drug products containing levothyroxine sodium are now classified as new drugs. Manufacturers who wish to continue to market these products must submit new drug applications (NDA). After August 14, 2000, any levothyroxine sodium product marketed without an approved NDA will be subject to regulatory action. Levoxyl, since it was marketed prior to the date of this notice, will continue to be eligible for marketing until August 14, 2000. The FDA is allowing the Company and other current manufacturers three (3) years to obtain approved NDA's. The Company plans to dedicate significant resources to this NDA process during 1998 and 1999 and expects to incur costs in excess of $2 million to secure an approved NDA for Levoxyl. In connection with certain product line acquisitions, the Company is obligated to pay royalties of up to 10 percent of certain product sales through 2008. Total royalty expense in 1995, 1996, and 1997 was approximately $593, $872, and $1,358, respectively. 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 FIRST SECOND THIRD FOURTH -------------------------------------------------------------- Net sales from continuing operations $12,321 $16,418 $17,522 $17,920 Gross profit 8,015 11,563 11,417 12,909 Income from continuing operations 1,925 4,249 132 5,212 Income from discontinued operations 1,824 1,589 1,657 1,551 -------------------------------------------------------------- Net income $ 3,749 $ 5,838 $ 1,789 $ 6,763 ============================================================== Earnings per share: (a)(b)(c) Basic: Continuing operations $0.08 $0.15 $0.00 $0.18 Discontinued operations $0.07 $0.06 $0.06 $0.06 -------------------------------------------------------------- $0.15 $0.21 $0.06 $0.24 ============================================================== Diluted:Continuing operations $0.08 $0.15 $0.00 $0.18 Discontinued operations $0.07 $0.05 $0.06 $0.06 -------------------------------------------------------------- $0.15 $0.20 $0.06 $0.24 ============================================================== Stock prices: (a) High $30.33 $39.50 $50.50 $48.63 Low $10.38 $25.67 $21.00 $32.50
F-23 60 Jones Medical Industries, Inc. Notes to Consolidated Financial Statements (continued) (Dollars in thousands except per share amounts) 16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
1997 FIRST SECOND THIRD FOURTH ----------------------------------------------------------------- Net sales from continuing operations $21,637 $18,999 $22,168 $25,977 Gross profit 16,791 11,936 16,053 18,571 Income from continuing operations 6,469 4,582 6,366 7,628 Income from discontinued operations 1,649 1,794 1,751 1,731 ----------------------------------------------------------------- Net income $ 8,118 $ 6,376 $ 8,117 $ 9,359 ================================================================= Earnings per share: Basic: Continuing operations $0.23 $0.16 $0.22 $0.27 Discontinued operations $0.06 $0.06 $0.06 $0.06 ----------------------------------------------------------------- $0.29 $0.22 $0.28 $0.33 ================================================================= Diluted:Continuing operations $0.22 $0.16 $0.22 $0.26 Discontinued operations $0.06 $0.06 $0.06 $0.06 ----------------------------------------------------------------- $0.28 $0.22 $0.28 $0.32 ================================================================= Stock prices: High $38.00 $47.50 $45.25 $38.25 Low $23.63 $24.50 $26.00 $26.75
(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. (c) Earnings per share from continuing operations in the third quarter of 1996 reflect $5,743 of non-recurring expenses associated with the Daniels acquisition. In the absence of such charges, basic and diluted earnings per share from continuing operations would have been $0.15. F-24 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(a) WRITE-OFFS END OF PERIOD ------------------------------------------------------------------ Year ended December 31, 1997 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 388 $ 891 $ (83) $ 1,196 ================================================================== Accumulated amortization of intangibles $ 7,500 $ 3,963 $ (29) $ 11,434 ================================================================== Year ended December 31, 1996 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 187 $ 237 $ (36) $ 388 ================================================================== Accumulated amortization of intangibles $ 4,883 $ 2,617 $ - $ 7,500 ================================================================== Year ended December 31, 1995 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts $ 111 $ 76 $ - $ 187 ================================================================== Accumulated amortization of intangibles $ 4,092 $ 1,430 $ (639)* $ 4,883 ==================================================================
*Write-off of fully amortized intangibles in 1995. (a) Includes items charged to both continuing and discontinued operations. F-25 EX-11.1 2 EXHIBIT 11.1 1 EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS See Footnote 5 included in the Notes to consolidated financial statements which begin at page F-7 of this report. EX-21.1 3 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT JMI Phoenix Laboratories, Inc. JMI-Canton Pharmaceuticals, Inc. GenTrac, Inc. JMI-Daniels Pharmaceuticals, Inc. EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statements (Form S-8, File No. 33-40184) pertaining to the 1982 Incentive Stock Option Plan and the 1989 Incentive Stock Option Plan of Jones Medical Industries, Inc. (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 10, 1998, except for the first paragraph of Note 1, as to which the date is March 17, 1998, 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, 1997. /s/ ERNST & YOUNG LLP St. Louis, Missouri March 27, 1998 EX-23.2 5 EXHIBIT 23.2 1 EXHIBIT 23.2 INDEPENDENT AUDITOR'S CONSENT The Board of Directors Jones Medical Industries, Inc. We consent to the use 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, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years then ended, which report appears in the Annual Report on Form 10-K of Jones Medical Industries, Inc. for the year ended December 31, 1997. HACKER, JOHNSON, COHEN & GRIEB Tampa, Florida March 27, 1998 EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM JONES MEDICAL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AS OF MARCH 31, 1997, JUNE 30, 1997, SEPTEMBER 30, 1997, AND FOR THE THREE, SIX AND NINE MONTH PERIODS THEN ENDED, AND AS OF DECEMBER 31, 1997, AND FOR THE TWELVE MONTH PERIOD THEN ENDED. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS YEAR DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 59,662 39,766 40,647 49,877 0 0 0 0 16,505 14,260 17,351 17,885 399 411 420 1,196 15,040 14,063 17,025 15,357 93,646 70,639 77,414 85,113 30,367 33,136 33,424 35,047 5,897 6,333 6,953 7,504 189,899 189,980 197,046 204,228 15,109 9,395 9,048 6,580 0 0 0 0 0 0 0 0 0 0 0 0 1,143 1,145 1,145 1,146 168,355 174,158 181,571 190,580 184,889 189,980 197,046 204,228 21,637 40,636 62,804 88,781 21,637 40,636 62,804 88,781 4,846 11,909 18,024 25,430 4,846 11,909 18,024 25,430 0 0 0 0 11 23 32 809 89 179 238 238 10,434 17,824 28,092 40,395 3,965 6,773 10,675 15,351 6,469 11,051 17,417 25,044 1,649 3,443 5,194 6,926 0 0 0 0 0 0 0 0 8,118 14,494 22,611 31,970 0.29 .51 .79 1.12 0.28 .50 .78 1.09
EX-27.2 7 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM JONES MEDICAL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AS OF MARCH 31, 1996, JUNE 30, 1996, SEPTEMBER 30, 1996, AND FOR THE THREE, SIX AND NINE MONTH PERIODS THEN ENDED, AND AS OF DECEMBER 31, 1996, AND FOR THE TWELVE MONTH PERIOD THEN ENDED. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 8,827 57,890 46,518 52,172 0 0 0 0 9,230 11,536 10,577 11,689 230 244 252 388 14,939 14,212 12,895 12,753 35,565 86,084 72,356 80,551 23,468 24,620 27,588 29,591 4,360 4,672 4,840 5,421 115,056 166,482 154,885 177,233 41,724 21,652 8,950 10,032 0 0 0 0 0 0 0 0 0 0 0 0 979 1,119 1,120 1,137 59,654 136,184 140,288 160,782 115,056 166,482 154,885 177,233 12,321 28,739 46,261 64,181 12,321 28,739 46,261 64,181 4,306 4,855 6,105 20,277 4,306 4,855 6,105 20,277 0 0 0 0 32 54 64 200 262 364 472 553 3,296 10,572 10,825 19,750 1,371 4,398 4,519 8,232 1,925 6,174 6,306 11,518 1,824 3,413 5,070 6,621 0 0 0 0 0 0 0 0 3,749 9,587 11,376 18,139 .15 .36 .42 0.67 .15 .35 .41 0.65
EX-27.3 8 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM JONES MEDICAL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AS OF DECEMBER 31, 1995 AND FOR THE TWELVE MONTH PERIOD THEN ENDED. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 8,342 0 9,125 187 13,014 33,337 22,508 3,849 86,238 14,405 0 0 0 969 54,970 86,238 39,937 39,937 14,639 14,639 0 64 655 8,388 3,074 5,314 7,075 0 0 12,389 .52 .50
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