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, 1997
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
Common Stock Outstanding as of this Report Date
Class A Common Stock, par value $.01 per share 7,774,177
------------------
Class B Common Stock, par value $.01 per share 4,296,150
------------------
<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 1997 and 1996
(Unaudited)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
12/31/97 12/31/96 12/31/97 12/31/96
<S> <C> <C> <C> <C>
Revenues $28,433,858 $14,726,796 $68,525,787 $40,889,061
Costs and Expenses:
Manufacturing costs 17,040,869 8,180,977 39,590,928 21,960,539
Research and development 1,518,272 1,302,529 4,487,388 3,659,513
Selling and administrative 5,655,157 3,202,304 13,586,787 10,036,125
Interest expense 121,206 162,667 327,885 313,952
Amortization of intangible
assets 68,384 41,316 185,742 138,683
--------- --------- ------------ ------------
Total Costs and Expenses 24,403,888 12,889,793 58,178,730 36,108,812
---------- ---------- ------------ ------------
Income before income taxes 4,029,970 1,837,003 10,347,057 4,780,249
Provision for income taxes 1,266,584 30,000 3,560,672 90,000
--------- ---------- ----------- ------------
Net Income $ 2,763,386 $ 1,807,003 $ 6,786,385 $ 4,690,249
=========== =========== =========== ============
Net income per common share - $0.22 $0.14 $0.54 $0.37
===== ===== ===== =====
Net income per common share
assuming dilution $0.21 $0.14 $0.52 $0.36
===== ===== ===== =====
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1997
(Unaudited)
12/31/97 03/31/97
ASSETS
Current Assets:
Cash and equivalents $ 9,378,460 $ 7,627,523
Receivables 16,897,249 8,579,598
Inventories 16,446,844 12,785,588
Prepaid and other 1,572,666 1,230,193
------------- --------------
Total Current Assets 44,295,219 30,222,902
Net property and equipment 12,254,501 8,117,809
Goodwill and other 3,360,660 3,021,009
------------- -------------
TOTAL ASSETS $59,910,380 $41,361,720
=========== ===========
LIABILITIES
Current Liabilities:
Current maturities of long-term debt $ 565,955 $ 351,316
Accounts payable 4,631,167 2,045,048
Accrued liabilities 8,875,926 2,809,571
-------------- -------------
Total Current Liabilities 14,073,048 5,205,935
Long-term debt 4,960,556 2,158,025
Other 1,205,429 913,319
------------- --------------
Total Liabilities 20,239,033 8,277,279
------------ -------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
7% Cumulative convertible
preferred stock 2,410 2,410
Class A common stock 77,979 77,175
Class B common stock 43,199 43,766
Additional paid-in capital 33,961,283 33,844,685
Retained earnings (deficit) 5,641,429 (828,642)
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 39,671,347 33,084,441
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $59,910,380 $41,361,720
=========== ===========
See accompanying Notes to Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
-------- ------
OPERATING ACTIVITIES
Net Income $6,786,385 $ 4,690,249
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,404,449 1,217,877
Changes in operating assets and liabilities:
(Increase) in receivables (8,317,651) (856,420)
Net (increase) in inventories and
other current assets (4,003,729) (3,406,695)
Net increase in accounts payable and
accrued liabilities 8,652,474 1,588,829
Increase in other liabilities 292,112 39,067
-------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 4,814,040 3,272,907
------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (5,355,398) (991,021)
Other, net (525,397) (636,941)
-------------- -------------
NET CASH (USED IN) INVESTING
ACTIVITIES (5,880,795) (1,627,962)
------------ ------------
FINANCING ACTIVITIES
Proceeds from term loan facility 3,500,000 -
Principal payments on long-term debt (482,830) (686,484)
Dividends paid on preferred stock (316,314) -
Exercise of common stock options 116,836 34,919
------------ --------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,817,692 (651,565)
----------- -------------
INCREASE IN CASH
AND CASH EQUIVALENTS 1,750,937 993,380
Cash and cash equivalents
at beginning of year 7,627,523 2,038,069
----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $9,378,460 $ 3,031,449
========== ===========
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, 1997 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
NOTE C - INCOME TAXES
Decrease in the deferred tax asset valuation allowance resulted from
changes in management's estimates of the utilization of temporary differences
caused by the Company's improved operating results.
<PAGE>
NOTE D - 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 Nine Months Ended
Numerator: 12/31/97 12/31/96 12/31/97 12/31/96
<S> <C> <C> <C> <C>
Net income $ 2,763,386 $ 1,807,003 $ 6,786,385 $ 4,690,249
Preferred stock dividends (105,438) (105,438) (316,314) (316,314)
------------ ------------ ------------- -------------
Numerator for basic earnings per
share--income available to common
stockholders $ 2,657,948 $ 1,701,565 $ 6,470,071 $ 4,373,935
Effect of dilutive securities:
Preferred stock dividends 105,438 - - -
------------ -------------- ------------- -----------
Numerator for diluted earnings per
share-income available to
common stockholders after
assumed conversions $ 2,763,386 $ 1,701,565 $ 6,470,071 $ 4,373,935
Denominator:
Denominator for basic earnings per
share--weighted-average shares 12,068,399 11,828,548 12,056,124 11,826,058
Effect of dilutive securities:
Employee stock options 505,619 221,272 397,043 224,112
Convertible preferred stock 602,500 - - -
------------ -------------- ------------ ---------
Dilutive potential common shares 1,108,119 221,272 397,043 224,112
Denominator for diluted earnings
per share--adjusted weight-average
shares and assumed conversions 13,176,518 12,049,820 12,453,167 12,050,170
========== ========== ========== ==========
Basic Earnings per Share (1): $0.22 $0.14 $0.54 $0.37
===== ===== ===== =====
Diluted earnings per share (1): $0.21 $0.14 $0.52 $0.36
===== ===== ===== =====
<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>
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 third quarter of fiscal 1998 totaled
$28.4 million, compared to $14.7 million for the third quarter of fiscal 1997,
an increase of $13.7 million, or 93%, compared to the same period last year.
Year-to-date consolidated revenues were $68.5 million, an increase of $27.6
million, or 67%, 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 from sales of new and existing products.
ETHEX sales increased by $13.4 million, or 122%, in the third quarter and were
up $26.5 million, or 89%, for the year-to-date over the same periods of the
prior year. Particle Dynamics and Contract Services combined revenues increased
$.3 million, or 9%, in the third quarter and $1.1 million, or 10%, 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
revenues to 60% in the quarter ended December 31, 1997 from 56% in the same
period last year. Year-to-date manufacturing costs as a percent of net sales
increased to 58% from 54% for the nine months ended December 31, 1997 and 1996,
respectively. These increases were primarily attributable to changes in the mix
of products sold.
Research and development costs increased $.2 million or 17% for the
quarter ended December 31, 1997, compared to the same quarter of the prior year.
Year-to-date, these costs increased $.8 million, or 23%, compared to the same
period of the prior year. These increases are primarily due to increased
personnel, clinical studies and supply costs to support continuing research into
advanced drug delivery technologies and products.
<PAGE>
Selling and administrative expense increased $2.5 million, or 77%, for
the quarter ended December 31, 1997, compared to the same period of the prior
fiscal year but decreased to 20% of total revenues from 22% in the prior year.
Year-to-date selling and administrative expenses increased $3.6 million, or 35%,
over the same period last year but decreased to 20% from 25% as a percent of
total revenue compared to the prior year. Such increased expenditures were
primarily related to higher marketing, selling and administrative support costs
associated with new product introductions and expansion of existing business.
Pretax income for the quarter ended December 31, 1997 was $4.0 million compared
to $1.8 million in the prior year quarter, an increase of 122%. Year-to-date
pretax income was $10.3 million compared to $4.8 million for the prior year
period, an increase of 115%. These improvements were the result of continued
sales growth.
For the nine months ended December 31, 1997 and 1996, the Company had a
current provision for income taxes of $3,560,672 and $90,000, respectively. The
fiscal 1998 provision was based on the estimated federal and state statutory
rates as well as utilization of a part of the Company's deferred tax credits
realized from prior years, while the fiscal 1997 provision was based on the
alternative minimum tax, since no provision for income taxes was otherwise made
as a result of available net operating loss carryforwards. No loss carryforwards
are available for fiscal 1998. Decrease in the deferred tax asset valuation
allowance resulted from changes in management's estimates of the utilization of
temporary differences caused by the Company's improved operating results.
Net Income. As a result of the factors described above, net income
improved $1 million, or 53%, for the third quarter of fiscal 1998 and
year-to-date improved $2.1 million, or 45%, compared to the same periods of the
prior year.
<PAGE>
(b) Liquidity and Capital Resources.
The following table sets forth selected balance sheet ratios and
amounts at December 31, 1997, March 31, 1997 and December 31, 1996.
($ in 000's)
12/31/97 03/31/97 12/31/96
Working Capital Ratio 3.1 to 1 5.8 to 1 4.5 to 1
Quick Ratio 1.9 to 1 3.1 to 1 2.1 to 1
Debt to Debt Plus Equity .12 to 1 .07 to 1 .09 to 1
Total Liabilities to Equity .51 to 1 .25 to 1 .33 to 1
Cash and Equivalents $9,378 $7,628 $3,031
Working Capital 30,222 25,017 18,031
Long Term Debt 6,166 3,071 3,115
Stockholders' Equity 39,671 33,084 25,275
During the quarter ended December 31, 1997, working capital increased
$4.1 million, or 16%, to $30.2 million, while cash and cash equivalents
increased $5.7 million. Working capital for the nine months ended December 31,
1997 increased $5.2 million, or 21%, including an increase in accounts
receivable of $8.3 million, principally from increased sales volume and an
increase in inventories and other current assets of $4 million to support the
additional sales volume and seasonal business. Net cash provided from operations
was $4.8 million. Borrowings reflected a decrease of $.5 million, as a result of
scheduled payments on the Industrial Revenue Bond and building mortgage. The
ratio of current assets to current liabilities was 3.1 to 1 as of December 31,
1997, compared to 4.5 to 1 as of December 31, 1996.
The debt to debt-plus-equity and total liabilities to equity ratios for
the first nine months of fiscal 1998 increased primarily as a result of the debt
created to finance the purchase of a leased facility and increased accrued
liabilities related to the growth in sales.
Investing activities for fiscal 1998 reflected capital expenditures of
$5.4 million, primarily to finance the purchase of a leased facility, and net
expenditures for other assets of $.5 million, which funds were provided from
operations and long-term borrowings.
The Company's cash and cash equivalents on hand at December 31, 1997
were $9.4 million. In addition, the Company currently has in place a $20 million
credit facility with LaSalle National Bank. This credit facility consists of a
three year, unsecured revolving line of credit and letter of credit facility to
support the Company's 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 expects to continue to increase expenditures and investment
for research, clinical and regulatory efforts relating to the development and
commercialization of proprietary new products, advanced drug delivery technology
products and their approval for marketing.
The Company believes funds generated from operating activities and
existing cash, together with the funds available under its credit facility and
funds provided from licensing agreements, will be adequate to fund the Company's
current requirements arising from the continued sales growth being experienced.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
<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 13, 1998 /s/ Marc S. Hermelin
--------------------------- --------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: February 13, 1998 /s/ Gerald R. Mitchell
------------------------------- ----------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
