8/12/99 - 3:30 PM
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 June 30, 1999
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 11,906,157
Class B Common Stock, par value $.01 per share 6,489,561
1
<PAGE>
PART I
FINANCIAL INFORMATION
2
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 1999 and 1998
(Dollars in 000's except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Net Revenues $32,794 $25,670
Costs and Expenses:
Manufacturing costs and expenses 16,532 15,155
Research and development 1,828 1,643
Selling and administrative 8,046 4,857
Amortization of intangible assets 500 42
------- -------
Total costs and expenses 26,906 21,697
------- -------
Operating income 5,888 3,973
------- -------
Other income (expense):
Interest expense (581) (114)
Interest and other income 145 291
------- -------
Total other income (expense) (436) 177
------- -------
Income before income taxes 5,452 4,150
Provision for income taxes 2,073 1,580
------- -------
Net Income $ 3,379 $ 2,570
======= =======
Net Income per Common Share-Basic (after
deducting preferred dividends
of $105 in 1999 and 1998): $0.18 $0.14
===== =====
Net Income per Common Share-Diluted $0.17 $0.13
===== =====
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 (Unaudited) and March 31, 1999 (Audited)
(Dollars in 000's)
<TABLE>
<CAPTION>
06/30/99 03/31/99
-------- --------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 5,613 $ 2,617
Marketable securities, available-for-sale 4,966 7,523
Receivables, less allowance for doubtful accounts of
$1,017 and $631 at June 30, 1999 and March 31, 1999, respectively 21,488 18,988
Receivable, arbitration award - 13,253
Inventories 23,448 23,653
Deferred income taxes 3,404 3,379
Prepaid and other current assets 107 168
-------- --------
Total Current Assets 59,026 69,581
Property and equipment, less accumulated depreciation 20,702 18,967
Intangibles and other assets, net of amortization 39,354 39,442
-------- --------
TOTAL ASSETS $119,082 $127,990
======== ========
LIABILITIES
- -----------
Current Liabilities:
Accounts payable $ 7,035 $ 8,667
Accrued liabilities 10,964 17,090
Current maturities of long-term debt 712 712
-------- --------
Total Current Liabilities 18,711 26,469
Long-term debt 26,394 31,490
Deferred income taxes 379 379
Other long-term liabilities 2,168 2,104
-------- --------
TOTAL LIABILITIES 47,652 60,442
-------- --------
SHAREHOLDERS' EQUITY
- --------------------
7% Cumulative Convertible Preferred Stock, $.01 par value; $25.00 stated
and liquidation value; 840,000 shares authorized; issued and outstanding -
240,000 and 241,000 shares at June 30, 1999 and March 31, 1999, respectively 2 2
(convertible into Class A shares at a ratio of 3.75 to one)
Class A and Class B Common Stock, $.01 par value;
150,000,000 and 75,000,000 shares authorized, respectively;
Class A-issued 11,941,776 and 11,923,319 as of June 30, 1999 and March 31,
1999, respectively 120 120
Class B-issued 6,525,180 and 6,393,867 as of June 30, 1999 and March 31, 1999,
respectively (convertible into Class A shares on a one-for-one basis) 65 64
Additional paid-in capital 35,153 34,531
Retained earnings 36,185 32,911
Accumulated comprehensive loss, net (40) (25)
Less: Treasury stock, 35,619 shares each of
Class A and Class B Common Stock, at cost (55) (55)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 71,430 67,548
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $119,082 $127,990
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 1999 and 1998
(Dollars in 000's)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,379 $ 2,570
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 954 434
Changes in deferred taxes (24) -
Changes in deferred compensation 64 130
Changes in operating assets and liabilities:
(Increase) decrease in receivables (2,500) 3,318
Decrease in receivable arbitration award 13,253 -
Decrease (increase) in inventories 204 (350)
(Increase) decrease in prepaid and other assets (351) 4
Decrease in accounts payable and accrued liabilities (7,758) (1,721)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,221 4,385
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment, net (2,189) (544)
Sale of marketable securities 2,543 -
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 354 (544)
------- -------
FINANCING ACTIVITIES
Principal payments on long-term debt (5,097) (59)
Dividends paid on Preferred Stock (105) (105)
Exercise of Common Stock options 623 283
------- -------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (4,579) 119
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 2,996 3,960
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 2,617 18,158
------- -------
END OF PERIOD $ 5,613 $22,118
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<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, 1999 filed with
the Securities & 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.
6
<PAGE>
NOTE B - EARNINGS PER SHARE
The following table is presented in thousands and sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
Numerator: 1999 1998
---- ----
<S> <C> <C>
Net income $ 3,379 $ 2,570
Preferred Stock dividends (105) (105)
------- -------
Numerator for basic earnings per
share--income available to common
shareholders 3,274 2,465
Effect of dilutive securities:
Preferred Stock dividends 105 105
------- -------
Numerator for diluted earnings per
share-income available to
common shareholders after
assumed conversions $ 3,379 $ 2,570
======= =======
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,373 18,145
------- ------
Effect of dilutive securities:
Employee stock options 609 940
Convertible Preferred Stock 900 904
------- ------
Dilutive potential Common Shares 1,509 1,844
------- ------
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 19,882 19,989
======= =======
Basic Earnings per Share (1): $ 0.18 $ 0.14
====== ======
Diluted Earnings per Share (1) (2) (3): $ 0.17 $ 0.13
====== ======
</TABLE>
(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) Employee stock options to purchase 61,750 shares at June 30, 1999 and 750
shares at June 30, 1998 are not included in the computation of diluted
earnings per share because they are anti-dilutive. The exercise prices of
these options exceeded the average market prices of the shares under option
in each respective period.
(3) The options to purchase Class A Common Stock sold in connection with an
agreement entered into in January 1996 are 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. All options sold
under this agreement expired September 29, 1998.
7
<PAGE>
NOTE C - SEGMENT FINANCIAL INFORMATION
The reportable segments of the Company are specialty generics
and pharmaceutical services. Segment operating results are measured based on
income before taxes.
<TABLE>
<CAPTION>
Corporate
Specialty Pharmaceutical All Expenses and
June 30, 1999 ($ in 000's) Generics Services Other Eliminations Consolidated
- -------------------------------- -------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $25,389 $10,809 $ 6,769 $(10,173) $32,794
Depreciation and amortization 31 378 45 500 954
Income before income taxes 10,644 (169) 942 (5,965) 5,452
Total assets 138,615 42,448 8,504 (70,485) 119,082
Capital expenditures - 2,189 - - 2,189
June 30, 1998 ($ in 000's)
Revenues $20,653 $ 6,485 $ 3,776 $(5,244) $25,670
Depreciation and amortization 18 352 22 42 434
Income before income taxes 7,925 (105) 683 (4,353) 4,150
Total assets 101,412 42,727 15,769 (90,450) 69,458
Capital expenditures 9 535 - - 544
</TABLE>
NOTE D - SUBSEQUENT EVENT: PRODUCT ACQUISITION
On August 2, 1999, the Company acquired the worldwide rights and
trademark for the prescription prenatal product, PreCare(R), from UCB Pharma for
$8.5 million. The purchase price was funded by $4 million in cash payments and
$4 million in Class A Common Stock, which is guaranteed to have a market value
of not less than $4.5 million on August 2, 2000 and can be repurchased by KV for
the same amount.
The PreCare(R) product had net sales of $4.3 million in 1998
and competes in a total U.S. market of approximately $100 million for
prescription prenatal supplementation products. The Company plans to use the
PreCare(R) trade name as a brand franchise for other uniquely positioned, patent
protected women's healthcare products planned for introduction in fiscal 2000
and 2001. Profits from the addition of the PreCare(R) product are expected to
have an accretive earnings effect during the current fiscal year.
NOTE E - LONG-TERM DEBT
On June 22, 1999, the Company amended its "Revolving Note" Agreement
with LaSalle National Bank to extend the "Revolving Credit Maturity Date" from
June 15, 2000 to October 15, 2000. All other terms and conditions of the
agreement remained the same.
8
<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 any
revisions to these forward-looking statements 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 net revenues for the first quarter of fiscal
2000 ended June 30, 1999 increased $7.1 million, or 27.8%, to $32.8 million from
$25.7 million for the same period last year. The increase in revenues was due
primarily to higher sales of specialty generics and brand products.
Specialty generic sales through the Company's ETHEX subsidiary
increased $4.7 million, or 22.9%, during the quarter to $25.4 million due to net
volume increases across the majority of the product line ($3.7 million), and net
price increases ($1.0 million). The volume increase includes increases in market
share in cardiovascular and women's health categories ($5.2 million) and a full
quarter's impact of products introduced in the prior year ($2.1 million).
Brand product sales through the Company's Ther-Rx subsidiary represent
sales for the quarter of the Micro-K(R) product line ($2.7 million) acquired
from American Home Products in March 1999. The Company began promoting the
product through its detail sales force late in the first quarter and expects a
positive effect on revenues over the next several quarters as prescription
volume increases in response to this selling effort.
9
<PAGE>
Costs and Expenses. Manufacturing costs increased $1.4 million, or
9.1%, during the quarter to $16.5 million due to increased volume. Manufacturing
costs as a percent of revenues declined to 50.4% from 59.0% last year due to
favorable product mix and improved margins and pricing as shown in the following
table:
% Revenues
-----------
FY99 Manufacturing Costs 59.0%
Change due to:
Product mix (5.1)
Pricing (3.5)
FY00 Manufacturing Costs 50.4%
Research and development costs increased $.2 million, or 11.2%, to $1.8
million during the quarter from $1.6 million in last year's first quarter. The
increase was primarily due to higher personnel and related supplies ($126,000)
and higher levels of clinical testing ($42,000) to support increased activity in
the research and development of products. The Company expects research and
development expenses to continue to increase over the next two quarters to
support planned new product development.
Selling and administrative expenses increased $3.2 million, or 65.7%,
to $8.0 million during the quarter from $4.8 million in last year's first
quarter. As a percent of revenues, selling and administrative expenses increased
to 24.5% from 18.9% last year. The increase was due primarily to added expenses
in the sales, marketing and administrative areas of the Company to support
branded sales and marketing ($1.8 million), increased advertising and promotion
($.8 million) and additional personnel ($.5 million).
Amortization expense increased $.5 million related to the amortization
of acquired product rights.
Interest expense increased $.5 million during the quarter compared to
the same period last year due to increased debt incurred for a product
acquisition.
Net Income. As a result of the factors described above, net income
improved $.8 million, or 31.5%, to $3.4 million in the first quarter of fiscal
2000 from net income of $2.6 million in the first quarter of fiscal 1999.
10
<PAGE>
(b) Liquidity and Capital Resources
Cashflow. Cashflow from operations was $7.2 million for the first
quarter of fiscal 2000, an increase of $2.8 million, or 64.7%, over the first
quarter of last year. The increase in operating cash flow compared to last year
was due to higher net income before depreciation, amortization and other
non-cash charges ($1.2 million), the collection of an arbitration award ($13.3
million) and a decrease in inventory ($.5 million). The increases were partially
offset by an increase in trade accounts receivable ($5.8 million), a decrease in
accounts payable ($3 million) and a decrease in accrued liabilities ($3
million). The increase in trade accounts receivable reflects the increase in
sales and timing of customer orders for the quarter. The decrease in accounts
payable was due to a reduction in the purchase of raw material and packaging
inventories due to improved material requirements planning. The decrease in
accrued liabilities was due primarily to a decrease in accrued income taxes paid
in the quarter related to the arbitration award recorded in fiscal 1999.
Investing activities for the first quarter included capital
expenditures of $2.2 million, offset by the sale of $2.5 million of marketable
securities. Capital expenditures were primarily for production equipment,
laboratory improvements and the upgrade of the Company's business software and
network systems. Marketable securities were sold in anticipation of further
reductions in long term debt in the second quarter.
The Company paid down long-term debt associated with a product line
acquisition by $5.1 million using cash provided by operations during the
quarter.
The Company believes that existing cash and securities balances, cash
generated from operating activities and funds available under its credit
facility will be adequate to fund operating activities for the presently
foreseeable future including the payment of short term and long term debt
obligations, capital improvements, product development activities and expansion
of marketing capabilities for the branded pharmaceutical business.
11
<PAGE>
Balance Sheet and Ratios. The following table sets forth selected
balance sheet data and financial ratios at June 30 and year-end March 31, 1999:
($ in 000's)
6/30/99 3/31/99
------- --------
Working Capital 40,315 43,112
Working Capital Ratio 3.2 to 1 2.6 to 1
Quick Assets 32,067 42,381
Quick Ratio 1.7 to 1 1.1 to 1
Long-Term Debt 26,394 31,491
Stockholders' Equity 71,431 67,548
Long-Term Debt to Equity .37 to 1 .47 to 1
Working capital decreased $2.8 million during the first quarter,
compared to the balance at the end of fiscal 1999, as current assets decreased
$10.6 million, or 15.2 %, while current liabilities decreased $7.8 million, or
29.3%. The decrease in current assets was due primarily to the collection of the
$13.3 million arbitration receivable at year-end, the proceeds from which were
used to pay income taxes ($6.0 million), fund capital expenditures ($2.2
million) and pay down long-term debt ($5.1 million). Current liabilities
decreased primarily due to a $5.1 million decrease in accrued income taxes and a
$1.6 million reduction in accounts payable from lower inventory purchases. Quick
assets declined $10.3 million, or 24%, due primarily to the utilization of cash
for the aforementioned expenditures on taxes, capital expenditures and reduction
of long-term debt. The working capital ratio improved to 3.2 to 1 and the quick
ratio to 1.7 to 1 as current liabilities declined at a faster rate than current
assets and quick assets.
The debt to equity ratio improved during the quarter due to the pay
down of long-term debt and the increase in stockholders' equity attributable to
the Company's net income for the quarter.
Inflation. Although at reduced levels in recent years, inflation
continues to apply upward pressure on the cost of goods and services used by the
Company. However, the Company believes that the net effect of inflation on its
operations has been minimal during the current quarter and the prior year. In
addition, changes in the mix of products sold and the effect of competition has
made a comparison of changes in selling prices less meaningful relative to
changes in the overall rate of inflation during the quarter and prior year.
12
<PAGE>
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, validation, remediation
and implementation phases. The Company has completed the awareness, assessment
and validation phases and is very active in the remediation and implementation
phases.
The Company currently intends to complete the year 2000 project,
including the few testing and remediation tasks that remain, prior to September
30, 1999. The costs associated with the project are not expected to exceed
$766,000 (of which approximately $587,000 had been incurred as of June 30,
1999), 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 remaining 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 is finalizing formal communications with all of its
significant suppliers and critical business partners to determine year 2000
compliance of its dependents and has developed 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 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.
13
<PAGE>
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 finalizing the evaluation of vendor compliance and has developed contingency
plans, such as alternate vendor opportunities, in the event a vendor is not
available.
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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
(a) No Exhibits
(b) Reports on Form 8-K. A report on Form 8-K dated April 5,
1999 reporting KV Pharmaceutical Company's acquisition of the
world-wide rights and trademark to Micro-K(R) from Wyeth
Ayerst Laboratories, the pharmaceutical division of American
Home Products Corporation and a report on Form 8-K/A dated
June 2, 1999 amending Form 8-K filed on April 5,1999.
15
<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: August 13, 1999 /s/ Marc S. Hermelin
-------------------------------------
Marc S. Hermelin
Vice Chairman of the Board and
Chief Executive Officer
Date: August 13, 1999 /s/ Gerald R. Mitchell
-------------------------------------
Gerald R. Mitchell
Vice President - Finance
Chief Financial Officer
16
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<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000057055
<NAME> KV PHARMACEUTICAL
<MULTIPLIER> 1,000
<CURRENCY> U.S. dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-START> Apr-1-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 5,613
<SECURITIES> 4,966
<RECEIVABLES> 21,488
<ALLOWANCES> 0
<INVENTORY> 23,448
<CURRENT-ASSETS> 59,026
<PP&E> 20,702
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,082
<CURRENT-LIABILITIES> 18,711
<BONDS> 0
0
2
<COMMON> 120
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 119,082
<SALES> 32,794
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 16,532
<OTHER-EXPENSES> 10,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581
<INCOME-PRETAX> 5,452
<INCOME-TAX> 2,073
<INCOME-CONTINUING> 3,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379
<EPS-BASIC> .18
<EPS-DILUTED> .17
</TABLE>
