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, 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
Title of Class of Number of Shares Outstanding
Common Stock as of this Report Date
------------ ----------------------
Class A Common Stock, par value $.01 per share 7,312,621
------------------
Class B Common Stock, par value $.01 per share 4,516,044
------------------
<PAGE>
PART I
FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $14,726,796 $11,956,080 $40,889,061 $35,383,784
Costs and Expenses:
Manufacturing costs 8,180,977 6,170,376 21,960,539 18,399,138
Research and development 1,302,529 1,098,420 3,659,513 3,218,234
Selling and administrative 3,202,304 2,915,350 10,036,125 9,069,897
Interest expense 162,667 361,925 313,952 1,089,856
Amortization of intangible
assets 41,316 210,923 138,683 647,002
------ ------- ------- -------
Total Costs and Expenses 12,889,793 10,756,994 36,108,812 32,424,127
---------- ---------- ---------- ----------
Income before income
taxes 1,837,003 1,199,086 4,780,249 2,959,657
Provision for income taxes:
Current 30,000 30,000 90,000 90,000
Deferred - - - -
--------- --------- --------- ---------
Total 30,000 30,000 90,000 90,000
--------- --------- --------- ---------
Net Income $ 1,807,003 $ 1,169,086 $ 4,690,249 $ 2,869,657
=========== =========== =========== ===========
Net Income per Common
Share (after deducting preferred
dividends:
$105,438 for the three months
ended December 31, 1996 and 1995
and $316,314 for the nine
months ended December 31, 1996
and 1995) $0.14 $0.09 $0.36 $0.22
===== ===== ===== =====
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and March 31, 1996
(Unaudited)
12/31/96 03/31/96
-------- --------
ASSETS
Current Assets:
Cash and equivalents $ 3,031,449 $ 2,038,069
Receivables 8,137,879 7,281,459
Inventories 11,722,654 8,450,162
Prepaid and other 363,561 229,358
-------------- --------------
Total Current Assets 23,255,543 17,999,048
Net property and equipment 7,533,041 7,621,217
Goodwill and other 2,826,451 2,328,190
----------- -----------
TOTAL ASSETS $33,615,035 $27,948,455
=========== ===========
LIABILITIES
Current Liabilities:
Current maturities of long-term debt $ 402,163 $ 712,328
Accounts payable 3,133,317 2,068,265
Accrued liabilities 1,689,283 1,165,506
------------- -------------
Total Current Liabilities 5,224,763 3,946,099
Long-term debt 2,164,897 2,541,216
Other 950,297 911,230
-------------- -------------
Total Liabilities 8,339,957 7,398,545
-------------- -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred Stock 2,410 2,410
Class A common stock 73,364 71,207
Class B common stock 45,398 47,474
Additional paid-in capital 30,270,764 30,235,926
Retained deficit (5,061,905) (9,752,154)
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 25,275,078 20,549,910
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $33,615,035 $27,948,455
=========== ===========
See accompanying Notes to Financial Statements
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31, 1996 and 1995
(Unaudited)
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $4,690,249 $ 2,869,657
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,217,877 1,686,048
Changes in operating assets and liabilities:
(Increase) decrease in receivables (856,420) 221,660
Net increase in inventories and
other current assets (3,406,695) (2,706,438)
Increase (decrease) in accounts payable and
accrued liabilities 1,588,829 (1,660,825)
Increase in other 39,067 31,604
----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,272,907 441,706
----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (991,021) (679,806)
Other, net (636,941) (458,807)
----------- -------------
NET CASH USED IN INVESTING
ACTIVITIES (1,627,962) (1,138,613)
------------ -------------
FINANCING ACTIVITIES
Proceeds from credit facilities 16,265,308
Repayment of credit facilities (22,014,700)
Proceeds from term loan facility 6,839,411
Principal payments on long-term debt (686,484) (1,435,378)
Exercise of common stock options 34,919 302,355
----------- -------------
NET CASH USED IN
FINANCING ACTIVITIES (651,565) (43,004)
----------- -------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 993,380 (739,911)
Cash and cash equivalents
at beginning of year 2,038,069 1,075,713
----------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $3,031,449 $ 335,802
========== =============
</TABLE>
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 December 31, 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 nine-month periods
ended December 31, 1996 and 1995 were $105,438 and $316,314, respectively.
Undeclared and unaccrued cumulative preferred dividends at December 31, 1996 and
1995 were $2,203,650 and $1,781,898, 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 12,050,744 and 11,806,130 for the quarters ended December 31,
1996 and 1995, respectively, and 12,057,179 and 11,723,797 for the nine-month
periods ended December 31, 1996, and 1995, respectively.
<PAGE>
NOTE C - SUBSEQUENT EVENT
In January, 1997, the Company concluded a broad-based agreement with
Roche Holding, Ltd. of Basel, Switzerland.
The agreement provides for the marketing by Roche or its licensee of a
prescription one dose cure vaginal antifungal product, combining Roche's
proprietary butoconazole nitrate with KV's proprietary SITE RELEASE(R) drug
delivery technology. The product was originally developed by KV for Syntex
(U.S.A.), Inc., which was acquired by a Roche affiliate in 1995. The approval
process for the product is in an advanced stage although there is no assurance
as to when the approval will be received. KV will manufacture the product and
receive royalties once it is marketed. Under the agreement, KV also has the
right to market the product in North America and was also given the exclusive
right to market or license the prescription product in the rest of the world.
The agreement included an initial cash payment of $3 million on
January 1, 1997, with two additional payments of $3 million annually through
January 1, 1999, unless regulatory approval of a potential follow-on product in
the same therapeutic area is received prior to these dates. Upon approval, KV
will receive manufacturing revenues and royalties on product sales of the
follow-on product. Under the agreement, KV also has the exclusive right to
market or license the follow-on product outside of North America.
Also, as part of the agreement, KV will develop three additional
products for Roche using KV's proprietary drug delivery technologies. KV would
receive manufacturing revenues and royalties at the time the products are
marketed.
As part of a further collaboration under the agreement, KV's
wholly-owned subsidiary, ETHEX Corporation, will market two of Roche's brand
name products generically. In addition, Roche has committed to purchase $3.5
million of common stock from KV.
<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 third quarter of fiscal 1997
totaled $14.7 million, compared to $12 million for the third quarter of fiscal
1996, an increase of $2.7 million, or 23% greater than the same period last
year. Year-to-date consolidated revenues were $40.9 million, an increase of $5.5
million, or 16%, 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 $1.9 million, or 21% in the third quarter and
were up $4 million, or 15%, for the year-to-date over the same periods of the
prior year. ETHEX sales accounted for 75% of consolidated revenues in the third
quarter and have contributed 73% of total revenues for the year-to-date.
Combined, Particle Dynamics and Contract Services revenues increased $.8 million
or 29% in the third quarter and $1.5 million or 16% year-to-date over the
respective periods of the prior year. These increases are attributed to
increased sales volume.
Costs and Expenses. Manufacturing costs increased as a percentage of
net sales to 56% in the quarter ended December 31, 1996 from 52% in the same
period last year. Year-to-date manufacturing costs as a percent of net sales
increased to 54% from 52% for the nine months ended December 31, 1996 and 1995,
respectively. These increases were primarily attributable to changes in product
mix.
Research and development costs increased $.2 million or 19% for the
quarter ended December 31, 1996, compared to the same quarter of the prior year.
Year-to-date, these costs increased $.4 million, or 14%, 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.
<PAGE>
Selling and administrative expense increased $.3 million, or 10%, for
the quarter ended December 31, 1996, compared to the same period of the prior
fiscal year but decreased to 22% of total revenues from 24% in the prior year.
Year-to-date selling and administrative expenses increased $1 million, or 11%,
over the same period last year but decreased to 25% of total revenues from 26%
in the prior year. Increased expenditures are primarily related to higher ETHEX
marketing, selling and administrative support costs associated with the new
product introductions and expansion of ETHEX.
Interest expense decreased $.2 million for the third quarter and $.8
million for the nine-month period ended December 31, 1996, compared to the same
period of the prior fiscal year. The decreases resulted from a lower level of
borrowing during the first three quarters of fiscal 1997.
Amortization of intangible assets decreased $.2 million, or 80%, for
the quarter ended December 31, 1996, compared to the same quarter of the prior
fiscal year. Year-to-date, these costs decreased $.5 million, or 79%, 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 nine months ended December 31, 1996 and 1995 the Company had a
current provision for income taxes of $90,000 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 $.6 million, or 55% for the third quarter of fiscal 1997 and
year-to-date net income improved $1.8 million, or 63% compared to the same
period of the prior year.
<PAGE>
(b) Liquidity and Capital Resources
The following table sets forth selected balance sheet ratios and
amounts in thousands at December 31, 1996 and December 31, 1995.
12/31/96 12/31/95
-------- --------
Working Capital Ratio 4.5 to 1 3.3 to 1
Quick Ratio 2.1 to 1 1.5 to 1
Debt to Debt Plus Equity .09 to 1 .49 to 1
Total Liabilities to Equity .33 to 1 1.30 to 1
Cash and Equivalents $ 3,031 $ 336
Working Capital 18,031 12,272
Long Term Debt 3,115 11,778
Stockholders' Equity 25,275 13,146
During the quarter ended December 31, 1996, working capital increased
$1.5 million, or 9%, to $18 million while cash and cash equivalents increased
$.7 million. Working capital for the nine months ended December 31, 1996
increased $4 million, or 28%, including an increase in accounts receivables of
$.9 million principally from increased sales volume from ETHEX Corporation and
an increase in inventories of $3.4 million to support the additional sales
volume and seasonal business. Net cash provided from operations was $3.3
million. Borrowings reflected a decrease of $.7 million, from the application of
funds provided by profitable operations. The ratio of current assets to current
liabilities was 4.5 to 1 as of December 31, 1996, compared to 3.3 to 1 as of
December 31, 1995.
The debt to debt-plus-equity and total liabilities to equity ratios
continued to improve for the first nine months of fiscal 1997 due to the
positive impact of consistent profitability.
Investing activities for fiscal 1997 reflected capital expenditures of
$1 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 December 31, 1996
were $3 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. The
Company has no cash borrowings under the facility.
<PAGE>
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 has transitioned its revenue structure from one based on
lower margin, highly competitive, short-term contract manufacturing to focusing
on higher margin, drug delivery product marketing through ETHEX Corporation and
Particle Dynamics, Inc., its wholly-owned subsidiaries, as well as advanced
technology drug delivery products to be marketed and co-marketed under long term
licensing agreements. These advanced technology drug delivery products and
systems are the subject of a number of long-term business arrangements and
provide differentiated and/or improved benefits derived from incorporating 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 implementation of these strategies of focusing on drug delivery
technology distinguished product marketing capabilities through its ETHEX and
Particle Dynamics, Inc. subsidiaries and drug delivery licensing arrangements
with brand pharmaceutical marketing clients has allowed the Company to
de-emphasize contract services. Consequently, the Company has shifted its future
growth internally, with drug delivery product marketing capabilities and drug
delivery licensing activities constituting 89% of KV's total business.
The Company believes funds generated from operating activities and
existing cash, together with the funds available under its credit facility and
the funds provided from the subsequent agreement with Roche Holding, Ltd. (See
Note C), will be adequate to fund the Company's requirements for short term
needs due to the continued level of sales growth being experienced.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K.
a) Exhibits - See Exhibit Index on page 14
b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 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: February 5, 1997 /s/ Marc S. Hermelin
------------------ --------------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: February 5, 1997 /s/ Gerald R. Mitchell
------------------ --------------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
11 Computation of Earnings 15-16
Per Share Calculation. Filed
Herewith.
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earnings Per Share Calculation
Primary Earnings Per Share
<CAPTION>
For the Three Months Ended For the Nine Months Ended
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 1,807,003 $ 1,169,086 $ 4,690,249 $ 2,869,657
Less dividends on preferred stock (105,438) (105,438) (316,314) (316,314)
------------ ------------ ------------- -------------
Income Attributed to
Common Stock $ 1,701,565 $ 1,063,648 $ 4,373,935 $ 2,553,343
=========== =========== =========== ===========
Average Number of Common Shares
and Common Share Equivalents
Outstanding:
Average common shares
outstanding 11,828,548 11,501,638 11,826,058 11,464,421
Common share equivalents
(after application of
treasury stock method):
Shares issuable upon conversion
of stock options 222,196 304,492 231,121 259,376
------------ ------------ ------------ ------------
Average Common Shares and
Common Share Equivalents
Outstanding 12,050,744 11,806,130 12,057,179 11,723,797
========== ========== ========== ==========
Primary Income per Share (1): $0.14 $0.09 $0.36 $0.22
===== ===== ===== =====
<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>
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
Earnings Per Share Calculation
Fully-Diluted Earnings Per Share
<CAPTION>
For the Three Months Ended For the Nine Months Ended
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 1,807,003 $ 1,169,086 $ 4,690,249 $2,869,657
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 Attributed
to Common Stock $ 1,807,003 $ 1,169,086 $ 4,690,249 $2,869,657
=========== =========== =========== ==========
Average Number of Common Shares
Outstanding on a Fully-
Diluted Basis:
Average common shares
outstanding 11,828,548 11,501,638 11,826,058 11,464,421
Common share equivalents
(after application of
treasury stock method):
Shares issuable upon conversion
of stock options 220,847 430,143 237,754 341,320
Common equivalent shares for
preferred stock 602,500 602,500 602,500 602,500
----------- ----------- ----------- ----------
Average Number of Shares
Outstanding on a
Fully-Diluted Basis 12,651,895 12,534,281 12,666,312 12,408,241
========== ========== ========== ==========
Fully-Diluted Income
per Share (1) (2) $ 0.14 $0.09 $0.37 $0.23
====== ===== ===== =====
<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
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.00
<CASH> 3,031,449
<SECURITIES> 0
<RECEIVABLES> 8,137,879
<ALLOWANCES> 0
<INVENTORY> 11,722,654
<CURRENT-ASSETS> 23,255,543
<PP&E> 7,533,041
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,615,035
<CURRENT-LIABILITIES> 5,224,763
<BONDS> 2,164,897
0
2,410
<COMMON> 118,762
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 33,615,035
<SALES> 40,889,061
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 21,960,539
<OTHER-EXPENSES> 13,834,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 313,952
<INCOME-PRETAX> 4,780,249
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 4,690,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,690,249
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.37
</TABLE>
