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, 1998
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
incorporation or organization) Identification No.)
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
Common Stock Outstanding as of this Report Date
----------------- ----------------------------------
Class A Common Stock, par value
$.01 per share 11,816,681
Class B Common Stock, par value
$.01 per share 6,394,091
<PAGE>
PART 1
FINANCIAL INFORMATION
<TABLE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended September 30, 1998 and 1997
(Unaudited)
<CAPTION>
For the Three For the Six
Months Ended Months Ended
----------------------------- ----------------------------
09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues $26,405,634 $21,770,489 $52,075,305 $39,883,537
----------- ----------- ----------- -----------
Costs and Expenses:
Manufacturing costs and expenses 14,646,533 12,427,769 29,801,420 22,649,059
Research and development 1,662,020 1,461,396 3,305,472 2,969,117
Selling and administrative 5,329,972 4,243,114 10,186,481 7,832,632
Amortization of intangible assets 40,155 67,344 82,459 117,358
---------- ---------- ---------- -----------
Total costs and expenses 21,678,680 18,199,623 43,375,832 33,568,166
---------- ---------- ---------- ----------
Operating income 4,726,954 3,570,866 8,699,473 6,315,371
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (112,292) (131,724) (225,774) (206,676)
Interest and other income 341,250 116,578 632,133 208,392
---------- ---------- ---------- ----------
Total other income (expense) 228,958 (15,146) 406,359 1,716
---------- ---------- ---------- ----------
Income before income taxes 4,955,912 3,555,720 9,105,832 6,317,087
Provision for income taxes 1,894,000 1,373,588 3,473,500 2,294,088
---------- ---------- ---------- ----------
Net Income $ 3,061,912 $ 2,182,132 $ 5,632,332 $ 4,022,999
=========== =========== =========== ===========
Net Income per Common Share-Basic
(after deducting preferred dividends
of $105,438 in each of the three-
month periods and $210,876 in each
of the six-month periods of 1998 and
1997, respectively. $ 0.16 $ 0.11 $ 0.30 $ 0.21
===== ===== ===== =====
Net Income per Common Share-Diluted $ 0.15 $ 0.11 $ 0.28 $ 0.20
===== ===== ===== =====
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and March 31, 1998
(Unaudited)
09/30/98 03/31/98
-------- --------
ASSETS
- ------
Current Assets:
Cash and equivalents $24,612,361 $18,157,595
Receivables 12,729,437 15,304,340
Inventories 17,646,275 15,606,037
Deferred income taxes 2,949,434 2,949,434
Prepaid and other 303,130 541,989
-------------- ------------
Total Current Assets 58,240,637 52,559,395
Net property and equipment 13,558,406 12,436,533
Goodwill and Other 3,143,841 3,364,899
------------- ------------
TOTAL ASSETS $74,942,884 $68,360,827
=========== ===========
LIABILITIES
- -----------
Current Liabilities:
Accounts payable $ 7,361,746 $ 4,280,492
Accrued liabilities 9,819,117 12,317,432
Current maturities of long-term
debt 558,333 558,333
------------- ------------
Total Current Liabilities 17,739,196 17,156,257
Long-term debt 4,785,556 4,902,222
Deferred income taxes 535,000 535,000
Other long-term liabilities 1,862,409 1,603,131
------------ ------------
Total Liabilities 24,922,161 24,196,610
----------- ------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock 2,410 2,410
Class A common stock 118,484 117,601
Class B common stock 64,335 64,429
Additional paid-in capital 34,476,594 34,042,044
Retained earnings 15,413,853 9,992,686
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
------------ ------------
Total Shareholders' Equity 50,020,723 44,164,217
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $74,942,884 $68,360,827
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
--------- -----------
OPERATING ACTIVITIES
Net Income $5,632,332 $ 4,022,999
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 871,694 912,210
Changes in operating assets and liabilities:
Decrease (increase) in receivables 2,574,904 (6,994,574)
Net (increase) in inventories and other
current assets (1,801,905) (3,467,078)
Increase in accounts payable and
accrued liabilities 583,466 5,194,632
Increase in other liabilities 259,278 78,408
----------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 8,119,769 (253,403)
----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (1,911,107) (2,975,969)
Other, net 138,308 (460,480)
----------- ------------
NET CASH USED IN INVESTING
ACTIVITIES (1,772,799) (3,436,449)
----------- ------------
FINANCING ACTIVITIES
Principal payments on long-term debt (116,667) (92,036)
Dividends paid on Preferred Stock (210,876) (210,876)
Exercise of Common Stock options 435,339 77,824
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 107,796 (225,088)
----------- ------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 6,454,766 (3,914,940)
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 18,157,595 7,627,523
END OF PERIOD ----------- ------------
$24,612,361 $ 3,712,583
=========== ============
Non-cash investing and financing activities:
Portion of building acquired
through proceeds from a term loan $3,500,000
==========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO SUMMARIZED CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 filed with the
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. Earnings per share
amounts for all periods have been presented and, where necessary, restated to
conform to the requirements of Statement of Financial Accounting Standards No.
128.
<PAGE>
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended For The Six Months Ended
-------------------------------- -------------------------------
Numerator: 09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 3,061,912 $ 2,182,132 $ 5,632,332 $ 4,022,999
Preferred Stock dividends (105,438) (105,438) (210,876) (210,876)
------------ ------------ ------------ -----------
Numerator for basic earnings per
share--income available to common
shareholders 2,956,474 2,076,694 5,421,456 3,812,123
Effect of dilutive securities:
Preferred Stock dividends 105,438 - 210,876 -
------------ ----------- ------------ ----------
Numerator for diluted earnings per
share-income available to
common shareholders after
assumed conversions $3,061,912 $2,076,694 $5,632,332 $3,812,123
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,198,107 18,084,587 18,171,608 18,074,982
---------- ---------- ---------- -----------
Effect of dilutive securities:
Employee stock options 917,819 552,625 919,001 531,137
Convertible Preferred Stock 903,750 - 903,750 -
---------- ---------- ----------- -----------
Dilutive potential Common Shares 1,821,569 552,625 1,822,751 531,137
---------- ---------- ----------- -----------
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 20,019,676 18,637,212 19,994,359 18,606,119
========== ========== ========== ==========
Basic Earnings per Share (1): $0.16 $0.11 $0.30 $0.21
===== ===== ===== =====
Diluted Earnings per Share (1) (2): $0.15 $0.11 $0.28 $0.20
===== ===== ===== =====
<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) An option to purchase Class A Common Stock sold in connection with an
agreement entered into in January 1996 is not included in the computation
of diluted EPS because the options' minimum exercise price was greater than
the average market price of the Class A Common shares. This option expired
on 9/29/98.
</FN>
</TABLE>
<PAGE>
Any forward-looking statements set forth in this Report are necessarily
subject to significant uncertainties and risks. When used in this Report, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
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 1999
totaled $26.4 million compared to $21.8 million for the second quarter of fiscal
1998, an increase of $4.6 million, or 21%. Year-to-date consolidated revenues
were $52.1 million, an increase of $12.2 million, or 31%, compared to the same
period last year. The increase in revenues for both the quarter and year-to-date
is primarily attributable to new products and continued volume growth of
existing products. ETHEX sales increased by $4.4 million, or 25%, in the second
quarter and were up $11.1 million, or 35%, year-to-date over the same periods of
the prior year. Particle Dynamics and Contract Services combined revenues
increased $.2 million, or 5%, in the second quarter and were up $1.1 million, or
13%, year-to-date over the same periods of the prior year.
Costs and Expenses. Manufacturing costs decreased to 55% of net sales
in the quarter ended September 30, 1998 from 57% in the same period last year.
Year-to-date manufacturing costs remained constant at 57% of net sales in 1998
and 1997. These changes were primarily attributable to changes in the mix of
products sold.
Research and development costs increased $.2 million, or 14%, for the
quarter ended September 30, 1998, compared to the same quarter of the prior
year. Year-to-date, these costs increased $.3 million, or 11%, compared to the
same period of the prior year. These increases were primarily due to increased
personnel and supply costs to support higher levels of research activity and
expenditures for clinical studies in connection with new product development.
Selling and administrative expenses increased $1.1 million, or 26%, for
the quarter ended September 30, 1998, compared to the same period of the prior
fiscal year. Year-to-date selling and administrative expenses increased $2.4
million, or 30%, over the same period last year. Increased expenditures were
primarily related to higher marketing, selling and administrative costs
associated with new product introductions and planned expansion into marketing
of brand name products.
Income taxes were provided at an effective rate of 38% for the six
months ended September 30, 1998, compared to 36% for the same period last year.
The increase was attributable to the utilization of certain tax credits during
fiscal 1998 that are not available for fiscal 1999.
Net Income. As a result of the factors described above, net income
improved $.9 million, or 40%, for the second quarter of fiscal 1999 and $1.6
million, or 40% for the year-to-date, compared to the same periods of the prior
year.
(b) Liquidity and Capital Resources
-------------------------------
The following table sets forth selected balance sheet ratios at
September 30, 1998, March 31, 1998 and September 30, 1997.
($ in 000's)
------------
9/30/98 3/31/98 9/30/97
---------- ----------- -----------
Working Capital Ratio 3.3 to 1 3.1 to 1 3.5 to 1
Debt to Debt-Plus-Equity .10 to 1 .11 to 1 .14 to 1
Total Liabilities to Equity .50 to 1 .55 to 1 .46 to 1
Cash and Equivalents $24,612 $18,158 $ 3,713
Working Capital $40,501 $35,403 $26,147
Long-Term Liabilities $ 7,183 $ 7,040 $ 6,336
Stockholders' Equity $50,021 $44,164 $36,974
<PAGE>
Working capital for the six months ended September 30, 1998, increased
$5.1 million, or 14%, due primarily to an increase in current assets reflecting
higher inventories to support increased sales and seasonal business
requirements, a decrease in receivables and a $6.5 million increase in cash. The
increase in cash for the six month period is due primarily to the addition of
the Company's net income and a decrease in accounts receivable due to the timing
of sales and collections. This was partially offset by higher levels of
inventory and accounts payable related to increased purchases of raw and
packaging material to support planned production requirements.
These changes in the components of current assets and liabilities along
with the Company's net income resulted in cash provided by operations of $8.1
million for the first six months of fiscal 1999, compared to a $.3 million
deficit for the same period last year.
The debt to debt plus equity and total liabilities to equity ratios at
September 30, 1998, improved as a result of the company's net income.
Investing activities for the six months ended September 30, 1998,
reflected capital expenditures of $1.9 million, with funds being provided from
operations.
The Company has been able to pass along to its customers at least a
portion of cost increases in labor, manufacturing and raw material related to
operations, except where competitive conditions existing in the market place
have prevented it from passing along such cost increases to its customers. It is
not meaningful to compare changing prices because the products produced, product
mix sold and sources of raw materials have varied substantially.
The Company anticipates increasing expenditures for research, clinical,
regulatory and marketing efforts relating to the development and
commercialization of proprietary new products and advanced technology products
and their marketing.
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 short-term needs.
Year 2000 Project. The Company utilizes computer technologies
throughout its business to effectively carry out its day-to-day operations.
Computer technologies include both information technology in the form of
hardware and software, as well as embedded technology in the Company's
facilities and equipment. Similar to most companies, the Company must determine
whether its systems are capable of recognizing and processing date-sensitive
information properly as the year 2000 approaches. The Company is utilizing a
multi-phased concurrent approach to address this issue. The phases included in
the Company's approach are the awareness, assessment, remediation, validation
and implementation phases. The Company has completed the awareness phase and is
very active in the assessment and remediation phases.
The Company has initiated formal communications and has developed a
monitoring program with all of its significant suppliers and critical business
partners to determine year 2000 compliance of its dependents and will develop
appropriate contingency plans to minimize interrupts in business in the event a
third party is unable to perform. An interruption of the Company's ability to
conduct its business due to a year 2000 readiness problem could have a material
adverse effect on the Company. The Company is continuing to assess such
third-party risks. The Company is not presently aware of any such significant
exposure; however, there can be no guarantee that the systems of third parties
on which the Company relies will be converted in a timely manner or that a
failure to properly convert by another company would not have a material adverse
effect on the Company.
The Company currently intends to substantially complete the other
phases of the year 2000 project, including development of contingency plans in
the event of disruptions in obtaining needed supplies and services, prior to
June 30, 1999. The costs associated with the project are not expected to exceed
$700,000 (of which approximately $400,000 has been incurred as of September 30,
1998), and are not deemed to materially impact the Company's consolidated
financial position, results of operations or cash flows in future periods. The
Company is actively correcting and replacing the identified systems which are
not year 2000 ready in order to ensure the Company's ability to continue to meet
its internal needs and those of its customers and suppliers.
The Company presently believes that the most reasonably likely
worst-case scenarios that the Company might confront with respect to Year 2000
issues have to do with third parties not being Year 2000 compliant. The Company
is presently evaluating vendor and customer compliance and will develop
contingency plans, such as alternate vendor opportunities, after obtaining
compliance evaluations.
<PAGE>
Based upon the planning completed to date, the Company believes that,
with modifications to existing software, conversions to new software, and
appropriate remediation of embedded chip equipment, the Year 2000 issue is not
reasonably likely to pose significant operational problems for the Company's
information technology systems and embedded chip equipment as so modified and
converted.
PART II. OTHER INFORMATION
Item 5: Other Information
- --------------------------
On November 5, 1998, Norman D. Schellenger was appointed to the Board
of Directors of the Company for a term expiring in 2001. Mr. Schellenger brings
to KV's Board over 35 years of sales, marketing and general management
experience and expertise in the pharmaceutical industry including 28 years with
A.H. Robins, serving as General Manager of its prescription pharmaceutical
businesses and as president of Whitby Pharmaceuticals, building the sales force
to over 350 representatives. He retired in January 1997. Mr. Schellenger has
also been a member of the Board of Directors of the National Pharmaceutical
Council.
Item 6: Exhibits and Reports on Form 8-K.
- -----------------------------------------
None.
<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, 1998 By: /s/ Marc S. Hermelin
---------------------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: November 13, 1998 By: /s/ Gerald R. Mitchell
---------------------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,612,361
<SECURITIES> 0
<RECEIVABLES> 12,935,362
<ALLOWANCES> 205,925
<INVENTORY> 17,646,275
<CURRENT-ASSETS> 58,240,637
<PP&E> 29,981,494
<DEPRECIATION> (16,423,088)
<TOTAL-ASSETS> 74,942,884
<CURRENT-LIABILITIES> 17,739,196
<BONDS> 4,785,556
0
2,410
<COMMON> 182,819
<OTHER-SE> 49,835,494
<TOTAL-LIABILITY-AND-EQUITY> 74,942,884
<SALES> 52,075,305
<TOTAL-REVENUES> 52,707,438
<CGS> 29,801,420
<TOTAL-COSTS> 13,441,575
<OTHER-EXPENSES> 82,459
<LOSS-PROVISION> 50,378
<INTEREST-EXPENSE> 225,774
<INCOME-PRETAX> 9,105,832
<INCOME-TAX> 3,473,500
<INCOME-CONTINUING> 5,632,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,632,332
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
</TABLE>
