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, 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 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 11,863,770
------------------
Class B Common Stock, par value
$.01 per share 6,373,333
------------------
<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended December 31, 1998 and 1997
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
------------- ------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $27,021,942 $28,339,395 $79,097,246 $68,222,932
Costs and Expenses:
Manufacturing costs 13,505,016 17,040,869 43,306,435 39,590,928
Research and development 1,628,164 1,518,272 4,933,636 4,487,388
Selling and administrative 5,731,261 5,655,157 15,917,742 13,586,787
Amortization of intangible
assets 42,115 68,384 124,575 185,742
---------- ---------- ---------- ----------
Total Costs and Expenses 20,906,556 24,282,682 64,282,388 57,850,845
---------- ---------- ---------- ----------
Operating income 6,115,386 4,056,713 14,814,858 10,372,087
---------- ---------- ---------- ----------
Other income (expense):
Interest expense (106,084) (121,206) (331,857) (327,885)
Interest and other income 445,054 94,463 1,077,186 302,855
---------- ---------- ---------- ----------
Total other income (expense) 338,970 (26,743) 745,329 (25,030)
Income before income taxes 6,454,356 4,029,970 15,560,187 10,347,057
Provision for income taxes 2,434,000 1,266,584 5,907,500 3,560,672
---------- ---------- ---------- ----------
Net Income $ 4,020,356 $ 2,763,386 $ 9,652,687 $ 6,786,385
=========== =========== =========== ===========
Net income per Common Share-Basic
(after deducting preferred dividends
of $105,438 in each of the three-
month periods and $316,314 in
each of the nine-month periods of
1998 and 1997 respectively.) $ 0.21 $ 0.15 $ 0.51 $ 0.36
========== ========== =========== ==========
Net income per common share
assuming dilution $ 0.20 $ 0.14 $ 0.48 $ 0.35
========== ========== =========== ==========
</TABLE>
See accompanying Notes to Financial Statements
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1998
(Unaudited)
12/31/98 03/31/98
-------- --------
ASSETS
Current Assets:
Cash and equivalents $ 21,394,149 $ 18,157,595
Receivables 12,789,198 15,304,340
Inventories 22,079,932 15,606,037
Deferred income taxes 2,949,434 2,949,434
Prepaid and other 267,388 541,989
--------------- ---------------
Total Current Assets 59,480,101 52,559,395
Net property and equipment 15,161,542 12,436,533
Goodwill and other 3,315,220 3,364,899
------------- -------------
Total Assets $77,956,863 $68,360,827
=========== ===========
LIABILITIES
Current Liabilities:
Accounts payable $ 6,803,298 $ 4,280,492
Accrued liabilities 9,720,976 12,317,432
Current maturities of long-term debt 558,333 558,333
-------------- ---------------
Total Current Liabilities 17,082,607 17,156,257
Long-term debt 4,402,222 4,902,222
Deferred income taxes 535,000 535,000
Other long-term liabilities 1,992,048 1,603,131
-------------- --------------
Total Liabilities 24,011,877 24,196,610
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock 2,410 2,410
Class A common stock 118,993 117,601
Class B common stock 64,090 64,429
Additional paid-in capital 34,485,674 34,042,044
Retained earnings 19,328,772 9,992,686
Less cost of Class A and Class B
common stock in treasury (54,953) (54,953)
--------------- --------------
Total Shareholders' Equity 53,944,986 44,164,217
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $77,956,863 $68,360,827
=========== ===========
See accompanying Notes to Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net Income $9,652,687 $6,786,385
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,316,838 1,404,449
Changes in operating assets and liabilities:
Decrease (increase) in receivables 2,515,142 (8,317,651)
Net (increase) in inventories and
other current assets (6,199,294) (4,003,729)
Increase (decrease) in accounts payable and
accrued liabilities (73,650) 8,652,474
Increase in other liabilities 388,917 292,112
-------------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,600,640 4,814,040
------------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (3,917,272) (1,855,398)
Other, net (74,896) (525,397)
-------------- -------------
NET CASH USED IN INVESTING
ACTIVITIES (3,992,168) (2,380,795)
-------------- -------------
FINANCING ACTIVITIES
Principal payments on long-term debt (500,000) (482,830)
Dividends paid on Preferred Stock (316,314) (316,314)
Exercise of Common Stock options 444,396 116,836
-------------- -------------
NET CASH (USED IN)
FINANCING ACTIVITIES (371,918) (682,308)
-------------- -------------
INCREASE IN
CASH AND CASH EQUIVALENTS 3,236,554 1,750,937
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 18,157,595 7,627,523
------------- -------------
END OF PERIOD $ 21,394,149 $ 9,378,460
============= =============
Non-cash investing and financing activities:
Portion of building acquired
through proceeds from a term debt $ 3,500,000
=============
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, 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.
NOTE B - SUBSEQUENT EVENT: PRODUCT LINE ACQUISITION
On February 12, 1999, the Company signed a $36 million agreement with
Wyeth Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, to purchase the worldwide rights and trademark for the Micro-K(R)
product line. The agreement is contingent on routine government filings which
are anticipated to be completed within a few weeks.
The Micro-K(R) product line had combined worldwide net sales of over
$18.5 million in 1998 and competes in a total U.S. market of over $318 million
for prescription potassium supplementation products. The product will be
promoted by KV as part of a group of brand name products that KV is planning to
launch. Revenues generated by the addition of the Micro-K(R) line are expected
to have an accretive earnings effect during the fiscal year ending March 31,
2000.
<PAGE>
NOTE C - 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: 12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 4,020,356 $ 2,763,386 $ 9,652,687 $ 6,786,385
Preferred stock dividends (105,438) (105,438) (316,314) (316,314)
------------ ------------ ------------- -------------
Numerator for basic earnings per
share--income available to common
stockholders $ 3,914,918 $ 2,657,948 $ 9,336,373 $ 6,470,071
Effect of dilutive securities:
Preferred stock dividends 105,438 105,438 316,314 316,314
------------ ------------ ------------ ------------
Numerator for diluted earnings per
share-income available to
common stockholders after
assumed conversions $ 4,020,356 $ 2,763,386 $ 9,652,687 $ 6,786,385
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,219,579 18,102,599 18,187,598 18,084,188
Effect of dilutive securities:
Employee stock options 922,578 759,403 899,733 596,700
Convertible Preferred Stock 903,750 903,750 903,750 903,750
------------ ------------ ------------- ------------
Dilutive potential Common Shares 1,826,328 1,663,153 1,803,483 1,500,450
Denominator for diluted earnings
per share--adjusted weight-average
shares and assumed conversions 20,045,907 19,765,752 19,991,081 19,584,638
========== ========== ========== ==========
Basic Earnings per Share (1): $ 0.21 $ 0.15 $ 0.51 $ 0.36
========== ========== ========== ==========
Diluted earnings per share (1) (2): $ 0.20 $ 0.14 $ 0.48 $ 0.35
========== ========== ========== ==========
<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
Net Income. The Company's net income for the third quarter of fiscal
1999 ended December 31, 1998 increased 43% to $4 million from $2.8 million for
the comparable period of the prior year on sales of $27 million this quarter
versus $28.3 million last year. The increase in net income on slightly lower
sales for the quarter was due primarily to a change in the mix of products sold,
reflecting continued growth in sales of the Company's higher margin products
coincident with a decreased focus on certain lower-margin business. Net income
for the nine month period ended December 31, 1998 increased 43% to $9.7 million
from $6.8 million for the same period in fiscal 1998. The increase in net income
for the nine months was due primarily to the increase in net sales and an
improved product mix resulting in improved profitability.
Revenues. Consolidated revenues for the third quarter of fiscal 1999
ended December 31, 1998 were $27 million compared to $28.3 million for the same
period of the prior year. Lower sales for the quarter were primarily due to a
decline in volume resulting from a decreased focus on certain lower-margin
business, while experiencing growth in the cardiovascular, women's health and
cough/cold categories in both existing products and new product introductions.
Revenues for the nine month period increased $10.9 million, or 16%, to $79.1
million from $68.2 million for the same period last year. The continued focus of
our Ethex subsidiary on developing and marketing higher-margin, technology
enhanced pharmaceuticals was the primary factor in the sustained sales growth
reflected in the increased consolidated revenues for the nine months ended
December 31, 1998. The remaining growth was attributable to higher sales volume
in the Company's Particle Dynamics subsidiary. The Company plans to continue
focusing its efforts on product opportunities that provide meaningful growth and
improved profitability.
Costs and Expenses. Manufacturing costs decreased as a percentage of
revenues to 50% in the quarter ended December 31, 1998 from 60% in the same
period last year. This improvement in gross margin reflects the more favorable
mix of products. For the nine months ended December 31, 1998 manufacturing costs
as a percentage of revenues improved to 55% from 58% in the same period last
year, reflecting the improvement realized from a more profitable product sales
mix.
Research and development expenses increased $0.1 million, or 7.2% for
the quarter ended December 31, 1998 compared to the same period of the prior
year. Year-to-date these expenses increased $0.4 million, or 10%, compared to
the same period last year. As a percent of revenues, year-to-date expenses
decreased to 6.2% from 6.6% in the prior year. The dollar increases were due
primarily to increased personnel, clinical studies and consulting costs to
support research efforts on new products and advanced drug delivery
technologies.
Selling and administrative expenses increased slightly for the quarter,
up $0.1 million, or 1.3%, compared to the same period last year. As a percent of
revenues, these expenses increased to 21.2% from 20% in the prior year. The
dollar increase was due to higher personnel and marketing expenses associated
with marketing programs focused on expanding business. Year-to-date selling and
administrative expenses increased $2.3 million, or 17.2% over the same period
last year. As a percent of revenues, these expenses increased slightly to 20.1%
from 19.9% in the prior year, as sales growth kept pace with the rate of
increase in expenses. The dollar increase was due to higher personnel and
marketing expenses to support continued growth, new products and planned
expansion into the marketing of brand name products.
Income taxes were provided at an effective rate of 38% for the nine
months ended December 31, 1998, compared to 34% for the same period last year.
The increase was attributable to the utilization of certain tax credits during
fiscal 1998 that were not available during the current fiscal year.
<PAGE>
(b) Liquidity and Capital Resources
The following table sets forth selected balance sheet ratios and
amounts at December 31, 1999, March 31, 1998 and December 31, 1997.
($ in 000's)
------------
12/31/98 03/31/98 12/31/97
-------- -------- --------
Working Capital Ratio 3.5 to 1 3.1 to 1 3.1 to 1
Debt to Debt Plus Equity .08 to 1 .11 to 1 .12 to 1
Total Liabilities to Equity .45 to 1 .55 to 1 .51 to 1
Cash and Equivalents $21,394 $18,158 $9,378
Working Capital 42,397 35,403 30,222
Long-Term Debt 6,929 7,040 6,166
Stockholders' Equity 53,945 44,164 39,671
Working capital for the nine months ended December 31, 1998, increased
20% or $7.0 million, due primarily to an increase in current assets reflecting
higher inventories to support anticipated increased revenues and seasonal
business requirements, increased cash and a decrease in receivables. The
increase in cash for the nine month period was due primarily to the addition of
the Company's net income, a decrease in accounts receivable due to the timing of
sales and collections, and an increase in accounts payable for the purchase of
raw materials. This was partially offset by higher levels of inventory and a
reduction in accrued profit sharing resulting from lower sales.
These changes in the components of current assets and liabilities along
with the Company's net income resulted in cash provided by operations of $7.6
million for the first nine months of fiscal 1999, compared to $4.8 million for
the same period last year, an increase of $2.8 million, or 58%.
The debt to debt plus equity and total liabilities to equity ratios at
December 31, 1998, improved as a result of the Company's net income.
Investing activities for the nine months ended December 31, 1998,
reflected capital expenditures of $3.9 million, with funds being provided from
operations. Capital expenditures were primarily for production capacity
expansion and upgrading of the Company's information systems.
The Company has been able to pass along to its customers a portion of
cost increases in labor, manufacturing and raw material related to operations.
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.
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
contingency plans to minimize interruptions 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.
<PAGE>
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
$730,000 (of which approximately $481,000 had been incurred as of December 31,
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.
Based upon the planning and implementation 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.
<PAGE>
Item 3: 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, 1998.
<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 12, 1999 /s/ Marc S. Hermelin
------------------- ------------------------------------
Marc S. Hermelin
Vice Chairman of the Board
Date: February 12, 1999 /s/ Gerald R. Mitchell
------------------- ------------------------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,394,149
<SECURITIES> 0
<RECEIVABLES> 12,994,185
<ALLOWANCES> 204,987
<INVENTORY> 22,079,932
<CURRENT-ASSETS> 59,480,101
<PP&E> 31,987,659
<DEPRECIATION> (16,826,117)
<TOTAL-ASSETS> 77,956,863
<CURRENT-LIABILITIES> 17,082,607
<BONDS> 4,402,222
0
2,410
<COMMON> 183,083
<OTHER-SE> 53,759,493
<TOTAL-LIABILITY-AND-EQUITY> 77,956,863
<SALES> 79,097,246
<TOTAL-REVENUES> 80,174,432
<CGS> 43,306,435
<TOTAL-COSTS> 20,782,850
<OTHER-EXPENSES> 124,575
<LOSS-PROVISION> 68,528
<INTEREST-EXPENSE> 331,857
<INCOME-PRETAX> 15,560,187
<INCOME-TAX> 5,907,500
<INCOME-CONTINUING> 9,652,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,652,687
<EPS-PRIMARY> .51
<EPS-DILUTED> .48
</TABLE>
