Looking at the press release, it¡¦s noteworthy that the FCF for the first 6 months of 2003 is better by about 25% than the same period last year. I¡¦d have to check the 10Q (when it¡¦s filled) to confirm the FCF number. Historically the Q3 and Q4 are the best periods that KG generates lots of cash. If Q3 and Q4 of 2003 can beat previous year¡¦s estimates by just 5%, KG would then generate about $390 million in FCF by the end of 2003, and beat 2002 FCF numbers by 10%.Acquisition of Meridian Medical Technologies has generated about $60 million in revenue for the first 6 months of 2003 and should easily reach $100 million by the end of the year. It looks like the purchase of Meridian Medical Technologies was a smart move by KG.Of concern is the drop in sales of Levoxyl, the second largest revenue maker behind Altace. Levoxyl is also KG¡¦s highest gross margin product and sales have been disappointing up to 2Q 2003 of only $58.9 million. Hopefully sales of Levoxyl can pick up in the 3Q and 4Q of 2003. The overall gross margins are now in the mid-70s¡¦ and will probably be maintained going forward. This is about 5% lower than the same period last year and something to keep an eye on.It¡¦s disappointing to see that KG has swung from a net cash position to net debt. Due to the purchase of Sonata and Selaxin from Elan for $750 million, KG now has a negative net cash position of about -$480 million or under -$2 per share. I believe this is a minor issue as the cash from operations is significant enough to reduce the debt to zero by start of 4Q in 2004. This of course assumes that KG would not continue its¡¦ acquisition spree up to that time. I believe this to be unlikely as KG¡¦s business model is based on acquisitions. This being the case, investors should take note that the convertible debentures of $345 million can be put to KG at November 15 2006 if the share price is below $50.16.With the internal audit complete and KG admitting that it needs to pay back $46.5 million to Medicaid, the continuing SEC investigation is still a hurdle that management needs to overcome. Hopefully the SEC investigation can be wrapped up by the end of the year. I suspect the class action lawsuits are going to take years to resolve and will be a headache for management, not to mention a drain on resources due to legal bills. Regards,steveting
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