<PAGE> 1
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 December 31, 1995
--------------------------
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 of 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
-------- ---------
<TABLE>
<CAPTION>
Title of Class of Number of Shares
Common Stock Outstanding as of this Report Date
------------------ ----------------------------------
<S> <C>
Class A Common Stock, par value $.01 per share 6,892,654
Class B Common Stock, par value $.01 per share 4,668,817
</TABLE>
<PAGE> 2
PART I
FINANCIAL INFORMATION
2
<PAGE> 3
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 1995 and 1994
(Unaudited)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
-------------------------------- ---------------------------------
12/31/95 12/31/94 12/31/95 12/31/94
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $11,956,080 $11,545,515 $35,383,784 $27,757,028
Costs and Expenses:
Manufacturing costs 6,170,376 6,262,109 18,399,138 17,927,233
Research and development 1,098,420 1,042,553 3,218,234 3,408,214
Selling and administrative 2,915,350 3,131,357 9,069,897 8,867,396
Interest expense 361,925 344,063 1,089,856 906,272
Amortization of intangible
assets 210,923 162,966 647,002 488,651
----------- ----------- ----------- ------------
Total Costs & Expenses 10,756,994 10,943,048 32,424,127 31,597,766
----------- ----------- ----------- ------------
Income (Loss) before
income taxes 1,199,086 602,467 2,959,657 (3,840,738)
Provision for income taxes:
Current 30,000 - 90,000 -
Deferred - - - -
----------- ----------- ----------- ------------
Total 30,000 - 90,000 -
----------- ----------- ----------- ------------
Net Income (Loss) $ 1,169,086 $ 602,467 $ 2,869,657 $ (3,840,738)
=========== =========== =========== ============
Net Income (Loss) per Common
Share (after deducting
preferred dividends:
$105,438 for the three months
ended December 31, 1995 and
1994 and $316,314 for the
nine months ended December 31,
1995 and 1994). $ 0.09 $ 0.04 $0.22 $(0.37)
====== ====== ===== ======
See accompanying notes to financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and March 31, 1995
(Unaudited)
<CAPTION>
12/31/95 03/31/95
-------- --------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and equivalents $ 335,802 $ 1,075,713
Receivables 9,018,320 7,893,585
Inventories 9,317,952 6,591,587
Prepaid and other 247,024 266,951
----------- -----------
Total Current Assets 18,919,098 15,827,836
----------- -----------
Property and equipment 20,675,175 19,995,369
Less accumulated depreciation and amortization (12,866,581) (11,827,495)
----------- -----------
Net Property and Equipment 7,808,594 8,167,874
----------- -----------
Deferred Improved Drug Entities(TM) 2,450,241 2,962,827
Goodwill and other 2,393,677 2,069,245
----------- -----------
TOTAL ASSETS $31,571,610 $29,027,782
=========== ===========
LIABILITIES
- -----------
Current Liabilities:
Current maturities of long-term debt $ 1,875,487 $ 1,814,682
Accounts payable 2,001,706 2,565,247
Accrued liabilities 2,770,273 2,521,162
----------- -----------
Total Current Liabilities 6,647,466 6,901,091
----------- -----------
Long-term debt and other 10,827,254 11,233,418
Other long-term liabilities 950,695 919,091
----------- -----------
Total Liabilities 18,425,415 19,053,600
----------- -----------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock 2,410 2,410
Class A common stock 68,873 67,629
Class B common stock 46,742 47,187
Additional paid-in capital 24,008,280 23,706,723
Retained deficit (10,925,157) (13,794,814)
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 13,146,195 9,974,182
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $31,571,610 $29,027,782
=========== ===========
See accompanying notes to financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31, 1995 and 1994
(Unaudited)
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ 2,869,657 $(3,840,738)
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,686,048 1,423,591
Changes in operating assets and liabilities:
(Increase) decrease in receivables (1,124,735) (943,293)
Net (increase) decrease in inventories
and other current assets (2,706,438) 1,116,547
Increase (decrease) in accounts payable
and accrued liabilities (314,430) 2,212,311
Increase (decrease) in Other 31,604 -
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 441,706 (31,582)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment, net (679,806) (298,247)
Other, net (458,807) (147,701)
----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (1,138,613) (445,948)
----------- -----------
FINANCING ACTIVITIES
Proceeds from credit facilities 16,265,308 6,075,000
Repayment of credit facilities (22,014,700) (5,800,000)
Proceeds from term loan facility 6,839,411 -
Principal payments on long-term debt (1,435,378) (460,555)
Exercise (repurchase) of common stock options 302,355 (1,339)
Proceeds from sale of common stock - 1,349,062
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (43,004) 1,162,168
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (739,911) 684,638
Cash and cash equivalents at
beginning of year 1,075,713 506,982
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF QUARTER $ 335,802 $ 1,191,620
=========== ===========
See accompanying notes to financial statements.
</TABLE>
5
<PAGE> 6
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,
1995 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.
NOTE B -- EARNINGS PER SHARE
Net income (loss) per common share is computed by dividing net income
(loss), less/plus 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 nine-month periods ended December 31, 1995 and 1994 were $105,438 and
$316,314, respectively. Undeclared and unaccrued cumulative preferred
dividends at December 31, 1995 and 1994 were $1,781,898 and $1,360,146,
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 was 11,806,130 and
11,436,390 for the quarters ended December 31, 1995 and 1994, respectively,
and 11,723,797 and 11,106,320 for the nine-month periods ended December 31,
1995 and 1994, respectively. Primary and fully-diluted income (loss) per
share are the same for each of the periods presented.
6
<PAGE> 7
NOTE C - REGULATORY ACTIVITIES
During the third quarter, KV was notified by the FDA that the agency
considers KV to be in compliance with current good manufacturing practice
("cGMP") requirements.
NOTE D - SUBSEQUENT EVENT
In January, 1996, the Company concluded an agreement with a major drug
marketer to explore the development of products utilizing KV's drug delivery
technologies. The agreement requires KV to keep the identity of the other
company confidential. Under the agreement, KV received $10 million upon
signing of the agreement, as well as certain other considerations. Products
developed following such exploration would be subject to separate licensing
agreements and terms to be negotiated, including, among other items, royalties
payable to KV. The funds received from this Agreement will be used for
reducing indebtedness, funding the launch of new products, expanding the
Company's line of technology distinguished products and strengthening the
Company's financial position. The nature and treatment of the funds received,
for financial and accounting purposes, will be applied to reimburse KV for, and
eliminate from its balance sheet, approximately $2,500,000 of Improved Drug
Entities and to establish a reserve for the expenditure of approximately
$1,000,000 for similar purposes in the future. In addition, $650,000 will be
applied to eliminate from KV's balance sheet the amount previously expended and
carried for patents and trademarks related to KV Technologies. Also,
$3,000,000 of the funds received is allocable to an option to purchase
1,000,000 shares of KV's Class A common stock at a purchase price of $50 per
share, exercisable on or before March 31, 1997, and an additional $2,000,000 is
allocable to an option to purchase 1,000,000 shares of KV's Class A common
stock at a purchase price of $75 per share, exercisable on or before
March 31, 1998.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL
- -------------------------------------------------------------
RESOURCES AND RESULTS OF OPERATIONS
- -----------------------------------
(a) Liquidity and Capital Resources
-------------------------------
1. Working Capital:
---------------
During the quarter ended December 31, 1995, working capital increased
$1,450,431 or 13%, to $12,271,632, while cash increased $115,849. Net cash
used in operating activities for the nine months included an increase in
receivables of $1,124,735, principally from increased sales volume from ETHEX
Corporation, an increase in inventories of $2,726,365 as a result of the
increase in the number of products sold by ETHEX and in anticipation of
continued growth, and a decrease in accounts payable and accrued liabilities
of $314,430. These changes in receivables, inventories and payables were more
than offset by the net profit and non-cash charges aggregating $4,555,705.
Working capital for the nine months ended December 31, 1995, increased
$3,344,887, or 37%, due to current assets increasing $3,091,262, or 20%, while
current liabilities decreased $253,625, or 4%. The ratio of current assets to
current liabilities increased to 2.8 to 1 as of December 31, 1995, compared to
2.3 to 1 as of March 31, 1995. Capital expenditures of $679,806 were provided
by funds from available cash and funds provided by operating activities.
Financing activities reflect a decrease in borrowing after the application of
proceeds from the exercise of stock options. Subsequent to the end of the
quarter, the Company entered into an agreement under which it received $10
million upon signing, which enables the Company to reduce indebtedness and
fund product expansion (See Note D).
2. Profitability:
-------------
The net profit for the third quarter of fiscal 1996 was $1,169,086,
compared to $602,467 in the comparable three-month prior year period, an
improvement of $566,619, or 94%. Year-to-date, net profit for the first
nine months of fiscal 1996 was $2,869,657, compared to a loss of
$3,840,738 for the same period of the prior year, an improvement of
8
<PAGE> 9
$6,710,395. This improvement was due primarily to increased revenues on higher
margin products related to sales of new and existing products by KV's ETHEX
subsidiary and a reduction in the high level of costs associated with
regulatory matters incurred in the same period of the prior year.
3. Leverage:
--------
The ratio of total liabilities to equity improved to 1.40 to 1 from
1.91 to 1 at year-end, due primarily to an increase in equity of $3,172,013,
or 32%, the level of profitability experienced for the first nine
months and a reduction in total indebtedness.
b. Results of Operations
---------------------
1. Revenues:
--------
Consolidated revenues for the third quarter of fiscal 1996 totaled
$11,956,080, compared to $11,545,515 for the third quarter of fiscal 1995, an
increase of $410,565, or 4% greater than the same period last year. Year-to-date
consolidated revenues were $35,383,784, an increase of $7,626,756, or 27%,
compared to the same period last year. The increase in volume for both the
quarter and year-to-date is primarily attributable to the continued growth being
experienced by ETHEX from new and existing products. ETHEX revenues accounted
for 76% of consolidated revenues during the third quarter (compared to 66%
during the prior period) as ETHEX revenues increased by $1,474,803, or 19% over
the same period last year as a result of new products introduced in fiscal 1995
and the first nine months of fiscal 1996. ETHEX revenues accounted for 73% of
consolidated net sales, compared to 62% in the comparable prior year period.
Particle Dynamics also experienced a modest increase in revenues, while contract
manufacturing business declined as part of a planned de-emphasis due to the
lower margin nature of this business.
2. Costs and Expenses:
------------------
Manufacturing costs were 52% and 54% of net sales for the quarters
ended December 31, 1995 and 1994, respectively. Year-to-date manufacturing
costs as a percent of net sales were 52% and 65% for the nine months ended
December 31, 1995 and 1994, respectively. Manufacturing
9
<PAGE> 10
costs decreased as a percent of sales for the quarter and year-to-date due to
the continued growth in sales of higher margin new and existing ETHEX products.
Research and Development costs increased $55,867, or 5%, for the quarter
ended December 31, 1995, compared to the same quarter of the prior year.
Year-to-date, these costs decreased $189,980, or 6%, compared to the same
period of the prior year. These decreases were primarily due to a reduction
in validation costs.
Selling and administrative expenses decreased $216,007, or 7%, for the
quarter ended December 31, 1995, compared to the same period of the prior year
due to a decrease in professional, administrative and support costs which more
than offset higher marketing costs associated with ETHEX growth. Such costs
were 24% and 27% of total revenues for the respective third quarters of fiscal
1996 and 1995. Year-to-date selling and administrative expenses increased
$202,501, or 2%, over the same period last year and were 26% and 32% of total
revenues for the nine months ended December 31, 1995 and 1994, respectively.
Increased expenditures are related to higher ETHEX selling and promotion
expenses associated with the significant growth being experienced in new and
existing ETHEX products.
Interest expense increased $17,862 for the third quarter and $183,584
for the nine-month period ended December 31, 1995, compared to the same period
of the prior fiscal year. The increases resulted from higher effective
interest rates and levels of average borrowings to support present growth.
3. Income Taxes:
------------
For the nine-month period ended December 31, 1995, the Company had a
current provision for income taxes of $90,000 based on the alternative minimum
tax, but otherwise made no
10
<PAGE> 11
provision for income taxes due to a net operating loss carryforward position,
compared to no provision for income taxes in the prior year.
4. Inflation and Changing Trends:
-----------------------------
Although the Company generally has been able to pass along to its
customers a portion of cost increases in labor, manufacturing and raw
materials under its agreements, in certain instances no increases were
effected due to market conditions. However, it is not meaningful to compare
changing prices over the past three years because the 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 or co-marketed under long-term
marketing agreements and ventures. These advanced technology products
(Improved Drug Entities(TM)) 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.
The Company has implemented and is continuing to implement strategies
to introduce additional products through its ETHEX subsidiary and to
de-emphasize contract manufacturing services. This move to directly market
its own technology distinguished generics has allowed the Company to become
less dependent upon its pharmaceutical marketing clients for growth and to
shift its revenue growth internally, principally through the growth in the
number and level of sales of ETHEX Corporation products and the Company's
licensing activities. During fiscal 1995, ETHEX introduced ten new products,
and, thus far in fiscal 1996, it has also launched 10 new products.
Management believes funds generated from operating activities and increased
funds
11
<PAGE> 12
available from the Company's credit facility and a subsequent agreement
(see Note D) will be adequate to meet the Company's requirements.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
- ------ --------------------------------
a) Exhibits - See Exhibit Index on page 15.
b) The Company did not file any reports on Form 8-K during
the quarter ended December 31, 1995.
13
<PAGE> 14
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: February 12, 1996 /s/ Marc S. Hermelin
---------------------------------- -------------------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: February 12, 1996 /s/ Gerald R. Mitchell
---------------------------------- -------------------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Number Description PAGE
- -------------- ----------- ----
<C> <S> <C>
11 Computation of Earnings (Loss) 15-16
Per Share Calculation. Filed
Herewith.
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT 11
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earnings (Loss) Per Share Calculation
Primary Earnings (Loss) Per Share
For the Three Months Ended For the Nine Months Ended
12/31/95 12/31/94 12/31/95 12/31/94
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,169,086 $ 602,467 $ 2,869,657 $(3,840,738)
Less dividends on preferred stock (105,438) (105,438) (316,314) (316,314)
----------- ----------- ------------ -----------
Income (Loss) Attributed to
Common Stock $ 1,063,648 $ 497,029 $ 2,553,343 $(4,157,052)
=========== =========== ============ ===========
Average Number of Common Shares
and Common Share Equivalents
Outstanding:
Average common shares
outstanding 11,501,638 11,205,525 11,464,421 11,106,320
Common share equivalents
(after application of
treasury stock method):
Shares issuable upon conversion
of stock options 304,492 230,865 259,376 N/A
----------- ----------- ------------ -----------
Average Common Shares and
Common Share Equivalents
Outstanding 11,806,130 11,436,390 11,723,797 11,106,320
=========== =========== ============ ===========
Primary Income (Loss) per Share <F1>: $0.09 $0.04 $ 0.22 $(0.37)
===== ===== ====== ======
<FN>
<F1> The two-class method for Class A and Class B common stock is not
presented because the earnings (loss) 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.
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT 11
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earnings (Loss) Per Share Calculation
Fully-Diluted Earnings (Loss) Per Share
For the Three Months Ended For the Nine Months Ended
12/31/95 12/31/94 12/31/95 12/31/94
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,169,086 $ 602,467 $ 2,869,657 $(3,840,738)
Less dividends on preferred stock (105,438) (105,438) (316,314) (316,314)
Plus dividends not payable due to
preferred stock conversion 105,438 105,438 316,314 316,314
----------- ----------- ----------- ------------
Income (Loss) Attributed
to Common Stock $ 1,169,086 $ 602,467 $ 2,869,657 $ (3,840,738)
=========== =========== =========== ============
Average Number of Shares
Outstanding on a Fully-
Diluted Basis:
Average common shares
outstanding 11,501,638 11,205,525 11,464,421 11,106,320
Common share equivalents
(after application of treasury
stock method):
Shares issuable upon conversion
of stock options 430,143 170,740 341,320 254,500
Common equivalent shares for
preferred stock 301,250 301,250 301,250 301,250
----------- ----------- ----------- -----------
Average Number of Shares
Outstanding on a
Fully-Diluted Basis 12,233,031 11,677,515 12,106,991 11,662,070
=========== =========== =========== ===========
Fully-Diluted Income (Loss)
per Share <F1> <F2>: $ 0.10 $ 0.05 $ 0.24 $(0.33)
====== ====== ====== ======
<FN>
<F1> The two-class method for Class A and Class B common stock is not
presented because the earnings (loss) 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.
<F2> 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.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q for the quarterly period ended December 31, 1995, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 335,802
<SECURITIES> 0
<RECEIVABLES> 9,018,320
<ALLOWANCES> 0<F1>
<INVENTORY> 9,317,952
<CURRENT-ASSETS> 18,919,098
<PP&E> 20,675,175
<DEPRECIATION> (12,866,581)
<TOTAL-ASSETS> 31,571,610
<CURRENT-LIABILITIES> 6,647,466
<BONDS> 0
<COMMON> 115,615
0
2,410
<OTHER-SE> 13,028,170
<TOTAL-LIABILITY-AND-EQUITY> 31,571,610
<SALES> 35,383,784
<TOTAL-REVENUES> 35,383,784
<CGS> 18,399,138
<TOTAL-COSTS> 32,424,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,736,858
<INCOME-PRETAX> 2,959,657
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 2,869,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,869,657
<EPS-PRIMARY> .22
<EPS-DILUTED> .24
<FN>
<F1>Allowances are not reported as a separate item on interim statements.
</TABLE>
