SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(X) Quarterly report for the quarterly period ended September 30, 1996
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-0618919
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
(Address or principal executive offices)
(Zip Code)
(314) 645-6600
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of Shares
Title of Class of Outstanding as of
Common Stock this Report Date
------------ ----------------
Class A Common Stock, par value $.01 per share 7,311,956
Class B Common Stock, par value $.01 per share 4,516,379
<PAGE>
PART I
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
09/30/96 09/30/95 09/30/96 09/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $13,094,448 $11,207,601 $26,162,265 $23,427,704
----------- ----------- ----------- -----------
Costs and Expenses:
Manufacturing costs 6,641,286 5,571,139 13,779,562 12,228,762
Research and development 1,193,710 1,074,310 2,356,984 2,119,814
Selling and administrative 3,546,399 2,998,444 6,833,821 6,154,547
Interest expense 36,522 411,386 151,285 727,931
Amortization of intangible
assets 48,684 192,871 97,367 436,079
---------- ---------- ---------- ----------
Total Costs and Expenses 11,466,601 10,248,150 23,219,019 21,667,133
---------- ---------- ---------- ----------
Income before income
taxes 1,627,847 959,451 2,943,246 1,760,571
Provision for income taxes:
Current 30,000 30,000 60,000 60,000
Deferred - - - -
---------- ---------- ---------- ----------
Total 30,000 30,000 60,000 60,000
---------- ---------- ---------- ----------
Net Income $1,597,847 $ 929,451 $2,883,246 $1,700,571
========== ========== ========== ==========
Net Income per Common
Share (after deducting preferred
dividends: $105,438 for the three
months ended September 30, 1996 &
1995 and $210,876 for the six
months ended September 30, 1996
& 1995) $0.12 $0.07 $0.22 $0.13
===== ===== ===== =====
</TABLE>
See accompanying notes to Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and March 31, 1996
(Unaudited)
09/30/96 03/31/96
-------- --------
ASSETS
Current Assets:
Cash and equivalents $ 2,376,649 $ 2,038,069
Receivables 7,509,115 7,281,459
Inventories 10,141,961 8,450,162
Prepaid and other 248,207 229,358
----------- -----------
Total Current Assets 20,275,932 17,999,048
Net property and equipment 7,508,259 7,621,217
Goodwill and other 2,793,631 2,328,190
----------- -----------
TOTAL ASSETS $30,577,822 $27,948,455
=========== ===========
LIABILITIES
Current Liabilities:
Current maturities of long-term debt $ 512,284 $ 712,328
Accounts payable 1,947,632 2,068,265
Accrued liabilities 1,242,297 1,165,506
----------- -----------
Total Current Liabilities 3,702,213 3,946,099
Long-term debt 2,496,563 2,541,216
Other 912,275 911,230
----------- -----------
Total Liabilities 7,111,051 7,398,545
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock 2,410 2,410
Class A common stock 73,287 71,207
Class B common stock 45,471 47,474
Additional paid-in capital 30,269,464 30,235,926
Retained deficit (6,868,908) (9,752,154)
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 23,466,771 20,549,910
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,577,822 $27,948,455
=========== ===========
See accompanying notes Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended September 30, 1996 and 1995
(Unaudited)
1996 1995
-------- --------
OPERATING ACTIVITIES
Net Income $ 2,883,246 $ 1,700,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 792,467 1,122,917
Changes in operating assets and liabilities:
Increase in receivables (227,656) (1,147,030)
Net increase in inventories and
other current assets (1,710,648) (2,305,355)
Increase (decrease) in accounts payable and
accrued liabilities (43,842) 568,275
Increase in other 1,045 71,070
----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,694,612 10,448
----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (582,143) (413,002)
Other, net (562,807) (349,393)
----------- ------------
NET CASH USED IN INVESTING
ACTIVITIES (1,144,950) (762,395)
----------- ------------
FINANCING ACTIVITIES
Proceeds from credit facilities - 14,994,880
Repayment of credit facilities - (21,473,311)
Proceeds from term loan facility - 6,839,411
Principal payments on long-term debt (244,697) (664,917)
Exercise of common stock options 33,615 200,124
----------- ------------
NET CASH USED IN
FINANCING ACTIVITIES (211,082) (103,813)
----------- ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 338,580 (855,760)
Cash and cash equivalents
at beginning of year 2,038,069 1,075,713
----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,376,649 $ 219,953
=========== ============
See accompanying notes to Financial Statements
<PAGE>
NOTES TO SUMMARIZED FINANCIAL INFORMATION
NOTE A - BASIS OF PRESENTATION
The interim financial statements presented here have been prepared in
conformity with the accounting principles and practices and methods of applying
the same (including consolidating practices) reflected in the Annual Report of
the Company on Form 10-K for the year ended March 31, 1996 filed with the
Securities and Exchange Commission, except that detailed footnotes and schedules
are not included. Reference is hereby made to the footnotes and schedules
contained in the Annual Report. All significant intercompany balances and
transactions have been eliminated and, in the opinion of management, all
adjustments, which are of a normal recurring nature only, necessary to present a
fair statement of the results of the Company and its subsidiaries have been
made.
Certain reclassifications have been made to the March 31, 1996 financial
statements to conform to the September 30, 1996 financial statement
presentation. These reclassifications had no effect on net earnings.
NOTE B - EARNINGS PER SHARE
Net income per common share is computed by dividing net income, less
preferred dividends, by the weighted average number of common shares and common
share equivalents (if dilutive) outstanding during the period. Preferred
dividends used in this calculation for the three-month and six-month periods
ended September 30, 1996 and 1995 were $105,438 and $210,876, respectively.
Undeclared and unaccrued cumulative preferred dividends at September 30, 1996
and 1995 were $2,098,212 and $1,676,460, respectively. Common share equivalents
consist of those common shares that would be issued upon the exercise of
outstanding stock options. The weighted average number of shares used in the
computations were 12,034,886 and 11,740,305 for the quarters ended September 30,
1996 and 1995, respectively, and 12,060,398 and 11,682,632 for the six-month
periods ended September 30, 1996 and 1995, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations, and
Liquidity and Capital Resources
(a) Results of Operations
REVENUES. Consolidated revenues for the second quarter of fiscal 1997
totaled $13.1 million, compared to $11.2 million for the second quarter of
fiscal 1996, an increase of $1.9 million, or 17% greater than the same period
last year. Year-to-date consolidated revenues were $26.2 million, an increase of
$2.7 million or 12%, compared to the same period last year. The increase in
sales volume for both the quarter and year-to-date is primarily attributable to
continued growth being experienced by ETHEX from sales of new and existing
products. ETHEX sales increased by $1.1 million, or 13% in the second quarter
and were up $2.0 million, or 12% for the year-to-date over the same periods of
the prior year. ETHEX sales accounted for 70% of consolidated revenues in the
second quarter and have contributed 72% of total revenues for the year-to-date.
Particle Dynamics and Contract Services revenues increased $.6 million or 31%
and $.2 million or 19% respectively for the second quarter of fiscal 1997. These
increases are attributed to increased sales volume.
COSTS AND EXPENSES. Manufacturing costs increased as a percentage of net
sales to 51% in the quarter ended September 30, 1996 from 50% in the same period
last year. Year-to-date manufacturing costs as a percent of net sales increased
to 53% from 52% for the six months ended September 30, 1996 and 1995,
respectively. These increases were primarily attributable to changes in product
mix.
Research and development costs increased $.1 million or 11% for the quarter
ended September 30, 1996, compared to the same quarter of the prior year.
Year-to-date, these costs increased $.2 million, or 11%, compared to the same
period of the prior year. These increases are primarily due to increased
personnel and supply costs to support continuing research into advanced drug
delivery technologies.
Selling and administrative expense increased $.6 million, or 20% for the
quarter ended September 30, 1996, compared to the same period of the prior
fiscal year but remained constant at 27% as a percent of total revenues.
Year-to-date selling and administrative expenses increased $.7 million, or 12%,
over the same period last year but remained constant at 26% as a percent of
total revenues. Increased expenditures are primarily related to higher ETHEX
marketing, selling and administrative support costs associated with the new
product introductions and expansion of ETHEX.
<PAGE>
Interest expense decreased $.4 million for the second quarter and $.6
million for the six-month period ended September 30, 1996, compared to the same
period of the prior fiscal year. The decrease resulted from a lower level of
borrowing during the first two quarters of fiscal 1997.
Amortization of intangible assets decreased $.1 million, or 75%, for the
quarter ended September 30, 1996, compared to the same quarter of the prior
fiscal year. Year-to-date, these costs decreased $.3 million, or 78%, compared
to the same period of the prior fiscal year. These decreases are attributable to
reimbursements received in fiscal 1996 for intangible costs.
For the six months ended September 30, 1996 and 1995 the Company had a
current provision for income taxes of $60,000 based on the alternative minimum
tax, but otherwise made no provision for income taxes as a result of available
net operating loss carryforwards.
NET INCOME. As a result of the factors described above, net income improved
$.7 million, or 72% to $1.6 million for the second quarter of fiscal 1997 and
year-to-date net income improved $1.2 million, or 70% compared to the same
period of the prior year.
(b) Liquidity and Capital Resources
The following table sets forth selected balance sheet ratios at September
30, 1996, March 31, 1996 and September 30, 1995.
09/30/96 03/31/96 09/30/95
-------- -------- --------
Working Capital Ratio 5.5 to 1 4.6 to 1 2.8 to 1
Debt to Debt Plus Equity .11 to 1 .14 to 1 .52 to 1
Total Liabilities to Equity .30 to 1 .36 to 1 1.5 to 1
During the quarter ended September 30, 1996, working capital increased $1.5
million, or 10%, to $16.6 million while cash and cash equivalents increased $.8
million. Working capital for the six months ended September 30, 1996 increased
$2.5 million, or 18%. Net cash provided from operations of $1.7 million included
an increase in accounts receivables of $.2 million principally from increased
sales volume from ETHEX Corporation and an increase in inventories of $1.7
million to support the additional sales volume and seasonal business. Borrowings
reflected a decrease of $.2 million, resulting from the application of existing
cash and funds provided by profitable operations to indebtedness. The ratio of
current assets to current liabilities was 5.5 to 1 as of September 30, 1996,
compared to 2.8 to 1 as of September 30, 1995.
<PAGE>
The debt to debt-plus-equity and total liabilities to equity ratios for the
first six months of fiscal 1997 improved because of the impact of profitable
operations.
Investing activities for fiscal 1997 reflected capital expenditures of $.6
million and net expenditures for other assets of $.6 million, which funds were
provided from operations.
The Company's cash and cash equivalents on hand at September 30, 1996 were
$2.4 million. In addition, the Company currently has in place a credit facility
with Foothill Capital Corporation under which it has the ability to borrow up to
$17.5 million. This credit facility consists of a revolving loan, a term loan, a
capital equipment loan facility and letters of credit to support the Company's
outstanding industrial revenue bond and other requirements.
Although the Company generally has been able to pass along to its customers
at least a portion of cost increases in labor, manufacturing and raw material
costs under its agreements, in certain instances no increases have been effected
due to market conditions. It is not meaningful to compare changing prices over
the past several years because products, product formulas, product mix and
sources of raw materials have varied substantially.
The Company is continuing to transition its revenue base from one based on
lower margin, highly competitive, short-term contract manufacturing to one based
on higher margin, technology distinguished generic products, which it is
focusing on marketing through ETHEX Corporation, as well as advanced technology
drug delivery products to be marketed and co-marketed under long term marketing
agreements and ventures. These advanced technology products are the subject of a
number of long-term business arrangements and have differentiated and improved
benefits derived from KV's drug delivery system technologies. For the most part,
these products can be produced with existing manufacturing processes. The
Company expects to continue a relatively high level of expenditures and
investment for research, clinical and regulatory efforts relating to the
development and commercialization of proprietary new products and advanced
technology products and their approval for marketing.
The Company has and is continuing to implement strategies to introduce
additional products through its ETHEX subsidiary and de-emphasize contract
services. This move to directly market its own technology distinguished generics
has allowed the Company to rely less upon the dependence of its pharmaceutical
marketing clients for growth and to shift its revenue growth internally,
principally through ETHEX and the Company's licensing activities. The Company
believes funds generated from operating activities and existing cash, together
with the funds available under its credit facility, will be adequate to fund the
Company's requirements for short term needs due to the continued level of sales
growth being experienced.
<PAGE>
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
On August 20, 1996, at the annual meeting of shareholders of the Company,
the shareholders elected Marc S. Hermelin as a Class A Director for a three-year
term. The number of votes cast in favor of Marc S. Hermelin (taking into account
the fact that each share of Class A common stock has one-twentieth of a vote per
share and each share of Class B common stock has one vote per share) was
4,284,202. The number of votes as to which authority was withheld was 23,388.
The other directors of the Company whose terms of office as directors continued
after the meeting are: Victor M. Hermelin, Alan G. Johnson and Garnet E. Peck,
Ph.D.
The shareholders approved the KV Pharmaceutical Company Amended and
Restated 1991 Incentive Stock Option Plan by a vote of 3,118,706 for, 86,002
against, 27,971 abstaining and 950,805 broker non-votes.
Item 6: Exhibits and Reports on Form 8-K.
a) Exhibits - See Exhibit Index on page 11
b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KV PHARMACEUTICAL COMPANY
Date: November 13, 1996 /s/ Marc S. Hermelin
--------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: November 13, 1996 /s/ Gerald R. Mitchell
----------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
11 Computation of Earnings 12-13
Per Share Calculation. Filed
Herewith.
27 Financial Data Schedule
(filed in EDGAR version only)
EXHIBIT 11
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earning Per Share Calculation
Primary Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
09/30/96 09/30/95 09/30/96 09/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 1,597,847 $ 929,451 $ 2,883,246 $ 1,700,571
Less dividends on preferred stock (105,438) (105,438) (210,876) (210,876)
----------- ------------ ----------- -----------
Income Attributed to
Common Stock $ 1,492,409 $ 824,013 $ 2,672,370 $ 1,489,695
=========== =========== =========== ===========
Average Number of Common Shares
and Common Share Equivalents
Outstanding:
Average common shares
outstanding 11,825,999 11,457,512 11,824,814 11,445,814
Common share equivalents
(after application of
treasury stock method):
Shares issuable upon conversion
of stock options 208,887 282,793 235,584 236,818
----------- ----------- ----------- -----------
Average Common Shares and
Common Share Equivalents
Outstanding 12,034,886 11,740,305 12,060,398 11,682,632
=========== =========== =========== ==========
Primary Income per Share (1): $0.12 $0.07 $0.22 $0.13
===== ===== ===== =====
<FN>
(1) The two-class method for Class A and Class B common stock is not
presented because the earnings per share are equivalent to the if
converted method since dividends were not declared or paid and each class
of common stock has equal ownership of the Company.
</FN>
</TABLE>
<PAGE>
EXHIBIT 11
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earning Per Share Calculation
Fully-Diluted Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
09/30/96 09/30/95 09/30/96 09/30/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 1,597,847 $ 929,451 $ 2,883,246 $ 1,700,571
Less dividends on preferred stock (105,438) (105,438) (210,876) (210,876)
Plus dividends not payable due to
preferred stock conversion 105,438 105,438 210,876 210,876
----------- ----------- ----------- -----------
Income Attributed
to Common Stock $ 1,597,847 $ 929,451 $ 2,883,246 $ 1,700,571
=========== =========== =========== ===========
Average Number of Common Shares
Outstanding on a Fully-
Diluted Basis:
Average common shares
outstanding 11,825,999 11,457,512 11,824,814 11,445,814
Common share equivalents
(after application of
treasury stock method):
Shares issuable upon conversion
of stock options 223,296 301,476 246,208 296,908
Common equivalent shares for
preferred stock 301,250 301,250 301,250 301,250
------------ ------------ ------------ ------------
Average Number of Shares
Outstanding on a
Fully-Diluted Basis 12,350,545 12,060,238 12,372,272 12,043,972
============ ============ ============ ============
Fully-Diluted Income
per Share (1) (2) $ 0.13 $0.08 $0.23 $0.14
====== ===== ===== =====
<FN>
(1) The two-class method for Class A and Class B common stock is not
presented because the earnings per share are equivalent to the if
converted method since dividends were not declared or paid and each class
of common stock has equal ownership of the Company.
(2) This calculation is submitted although it is contrary to Paragraph 40 of
APB Opinion No. 15 as it produces an anti-dilutive result. Also, the
preferred stock would not qualify as a common share equivalent because
the cash yield at issuance was not less than 66 2/3% of the then current
average Aa corporate bond yield.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000057055
<NAME> gk@w2brr
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Mar-31-1997
<PERIOD-START> Apr-01-1996
<PERIOD-END> Sep-30-1996
<EXCHANGE-RATE> 1.00
<CASH> 2,376,649
<SECURITIES> 0
<RECEIVABLES> 7,509,115
<ALLOWANCES> 0
<INVENTORY> 10,141,961
<CURRENT-ASSETS> 20,275,932
<PP&E> 7,508,259
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,577,822
<CURRENT-LIABILITIES> 3,702,213
<BONDS> 2,496,563
0
2,410
<COMMON> 118,758
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,577,822
<SALES> 26,162,265
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 13,779,562
<OTHER-EXPENSES> 9,288,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,285
<INCOME-PRETAX> 2,943,246
<INCOME-TAX> 60,000
<INCOME-CONTINUING> 2,883,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,883,246
<EPS-PRIMARY> .22
<EPS-DILUTED> .23
</TABLE>
