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, 2000
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
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(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
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(Address or principal executive offices)
(Zip Code)
(314) 645-6600
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(Registrant's telephone number, including area code)
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(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 12,257,351
Class B Common Stock, par value $.01 per share 6,945,500
1
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PART I
FINANCIAL INFORMATION
2
<PAGE>
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2000 and 1999
(In thousands, except per share data)
(Unaudited)
2000 1999
-------- --------
Net Revenues $ 38,810 $ 32,794
Costs and Expenses:
Manufacturing costs and expenses 16,195 16,532
Research and development 2,548 1,828
Selling and administrative 12,178 8,046
Amortization of intangible assets 599 500
-------- --------
Total costs and expenses 31,520 26,906
-------- --------
Operating income 7,290 5,888
-------- --------
Other income (expense):
Interest expense (350) (581)
Interest and other income 24 145
-------- --------
Total other income (expense) (326) (436)
-------- --------
Income before income taxes 6,964 5,452
Provision for income taxes 2,611 2,073
-------- --------
Net Income $ 4,353 $ 3,379
======== ========
Net Income per Common Share-Basic $ 0.22 $ 0.18
======== ========
Net Income per Common Share-Diluted $ 0.21 $ 0.17
======== ========
See Accompanying Notes to Consolidated Financial Statements
3
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KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2000 and 1999
(In thousands)
(Unaudited)
2000 1999
-------- ---------
Net income $ 4,353 $ 3,379
-------- ---------
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized losses arising
during period - (24)
Reclassification adjustment for
losses included in net income - 9
-------- ---------
Other comprehensive income - (15)
-------- ---------
Comprehensive Income $ 4,353 $ 3,364
======== =========
4
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KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 (Unaudited) and March 31, 2000 (Audited)
(In thousands, except share data)
06/30/00 03/31/00
ASSETS ---------- -----------
Current Assets:
Cash and cash equivalents $ 4,089 $ 3,443
Trade receivables, less allowance
for doubtful accounts of $622 and
$635 at June 30, 2000 and March 31,
2000, respectively 24,896 23,681
Other receivables 4,608 395
Inventories 31,189 30,114
Deferred income taxes 2,972 3,138
Prepaid and other current assets 373 242
---------- -----------
Total Current Assets 68,127 61,013
Property and equipment, less
accumulated depreciation of $19,579
and $19,422 at June 30 and March 31,
2000, respectively 33,049 32,173
Intangibles and other assets,
less accumulated amortization of
$4,563 and $4,087 at June 30 and
March 31, 2000, respectively 46,720 47,132
Deferred income taxes 90 67
---------- -----------
TOTAL ASSETS $ 147,986 $ 140,385
========== ===========
LIABILITIES
Current Liabilities:
Accounts payable $ 8,505 $ 10,843
Accrued liabilities 10,245 10,945
Current maturities of long-term debt 1,659 1,659
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Total Current Liabilities 20,409 23,447
Long-term debt 18,682 16,779
Other long-term liabilities 2,423 2,360
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TOTAL LIABILITIES 41,514 42,586
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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 shares
at June 30 and March 31 (convertible
into Class A shares at a ratio of 3.75 to one) 2 2
Class A and Class B Common Stock,
$.01 par value; 150,000,000 and 75,000,000
shares authorized, respectively; Class A-issued
12,292,970 and 12,261,999 as of June 30, 2000
and March 31, 2000, respectively 123 123
Class B-issued 6,981,119 and 6,607,112 as of
June 30, 2000 and March 31, 2000,
respectively (convertible into Class A
shares on a one-for-one basis) 70 66
Additional paid-in capital 45,285 40,864
Retained earnings 61,047 56,799
Less: Treasury stock, 35,619 shares each of
Class A and Class B Common Stock, at cost (55) (55)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 106,472 97,799
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 147,986 $ 140,385
========== ==========
See Accompanying Notes to Consolidated Financial Statements
5
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KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2000 and 1999
(In thousands)
(Unaudited)
2000 1999
------- --------
OPERATING ACTIVITIES
Net Income $ 4,353 $ 3,379
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,330 954
Change in deferred taxes 143 (24)
Change in deferred compensation 63 64
Changes in operating assets and liabilities:
Increase in trade receivables (1,215) (2,500)
Increase in other receivables (71) (307)
Decrease in receivable, arbitration award - 13,253
(Increase) decrease in inventories (1,075) 204
Increase in prepaid and other assets (318) (44)
Decrease in accounts payable and
accrued liabilities (3,038) (7,758)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 172 7,221
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INVESTING ACTIVITIES
Purchase of property and equipment, net (1,607) (2,189)
Sale of marketable securities - 2,543
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NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,607) 354
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FINANCING ACTIVITIES
Principal payments on long-term debt (97) (5,097)
Proceeds from credit facility 2,000 -
Dividends paid on Preferred Stock (105) (105)
Exercise of Common Stock options 283 623
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NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,081 (4,579)
------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 646 2,996
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 3,443 2,617
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END OF PERIOD $ 4,089 $ 5,613
======= ========
Non-cash financing activities
Notes receivable from exercise of
Common Stock options $ 4,142
See Accompanying Notes to Consolidated Financial Statements
6
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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, 2000 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 of a normal recurring nature, which are necessary to present a fair
statement of the results of the Company and its subsidiaries, have been made.
NOTE B - OTHER RECEIVABLES
Other receivables included $4.142 million of notes receivable, due on
demand, received in conjunction with the exercise of stock options. The notes
are collateralized by the related stock and were paid subsequent to June 30,
2000. Interest was payable at 6.25%.
NOTE C - INVENTORIES
Inventories consist of (in 000's):
June 30, 2000 March 31, 2000
------------- --------------
Finished goods $16,529 $15,990
Work-in-process 2,258 2,544
Raw materials and supplies 13,105 12,642
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31,892 31,176
Reserve for obsolescence (703) (1,062)
---- ------
$31,189 $30,114
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7
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NOTE D - EARNINGS PER SHARE
The following table is presented in thousands, except per share data,
and sets forth the computation of basic and diluted earnings per share:
For the Three Months Ended June 30,
Numerator: 2000 1999
--------- --------
Net income $ 4,353 $ 3,379
Preferred Stock dividends (105) (105)
-------- --------
Numerator for basic earnings per
share--income available to common
shareholders 4,248 3,274
Effect of dilutive securities:
Preferred Stock dividends 105 105
-------- --------
Numerator for diluted earnings per
share--income available to
common shareholders after
assumed conversions $ 4,353 $ 3,379
======== ========
Denominator:
Denominator for basic earnings per
Share--weighted-average shares 19,022 18,373
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Effect of dilutive securities:
Stock options 906 609
Convertible Preferred Stock 900 900
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Dilutive potential Common Shares 1,806 1,509
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Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 20,828 19,882
======== ========
Basic Earnings per Share (1): $ 0.22 $ 0.18
======== ========
Diluted Earnings per Share (1) (2): $ 0.21 $ 0.17
======== ========
(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 16,000 shares at June 30, 2000 and
61,750 shares at June 30, 1999 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.
8
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NOTE E - SEGMENT FINANCIAL INFORMATION
The reportable segments of the Company are branded products, specialty
generics, specialty materials and contract services. Segment operating results
are measured based on income before taxes and are determined based on each
segment's direct revenues and expenses. The majority of research and
development, corporate general and administrative expenses, amortization and
interest expense, as well as interest and other income, are not allocated to
segments.
<TABLE>
<CAPTION>
3 Months
ended Branded Specialty Specialty Contract All
($ in 000s) June 30 Products Generics Materials Services Other Consolidated
-------- --------- --------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues 2000 $ 3,892 $ 30,200 $ 3,823 $ 882 $ 13 $ 38,810
1999 2,648 25,389 4,094 573 90 32,794
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Income before taxes 2000 (2,372) 15,729 901 191 (7,485) 6,964
1999 99 10,644 843 (169) (5,965) 5,452
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Identifiable assets 2000 6,739 32,230 7,819 32,191 69,007 147,986
1999 3,175 26,901 6,890 18,319 63,797 119,082
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Property and 2000 95 -- 27 970 515 1,607
equipment additions 1999 -- -- -- 1,855 334 2,189
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Depreciation and 2000 26 30 38 592 644 1,330
amortization 1999 11 30 34 366 513 954
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</TABLE>
9
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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
Financial Condition
(a) Results of Operations
Revenues. Consolidated net revenues for the first quarter of fiscal
2001 ended June 30, 2000 increased $6 million, or 18.3%, to $38.8 million from
$32.8 million for the same period last year. The increase in revenues was due
primarily to higher sales of branded products and specialty generics.
Branded product sales by the Company's Ther-Rx subsidiary increased
$1.2 million, or 47%, during the quarter to $3.9 million from the marketing and
sales of new products launched since the first quarter of the prior year.
Ther-Rx introduced Gynazole-1(TM), a prescription product that is designed to
treat vaginal yeast infections with one dose, at the end of the first quarter.
Specialty generic sales by the Company's ETHEX subsidiary increased
$4.8 million, or 18.9%, during the quarter to $30.2 million due primarily to new
products added to the cardiovascular and women's health care categories ($3.6
million), increased volume on existing products in the cardiovascular and pain
management categories ($.8 million) and higher average pricing on existing
products in the cardiovascular category ($.4 million). ETHEX introduced three
new products during the first quarter including the generic alternative to
IMDUR(R) by Schering, for which the Company received ANDA approval in March
2000.
10
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Costs and Expenses. Manufacturing costs decreased slightly (2%) during
the quarter to $16.2 million from $16.5 million last year due to lower costs on
higher Ther-Rx sales volume, relatively flat costs on higher ETHEX sales volume
and lower costs reflecting lower sales volume in Particle Dynamics, the
Company's specialty materials subsidiary. Ther-Rx costs declined and ETHEX costs
remained relatively flat due to lower sales volume of higher cost outsourced
products. Manufacturing costs as a percent of revenues declined 8.7% to 41.7%
from 50.4% last year due to the effects of favorable product mix and pricing. Of
the 8.7% decrease, changes in product mix accounted for 8% and pricing accounted
for 0.7% of the change. The improvement in product mix reflects an increase in
the relative contribution of higher margin branded product sales and new generic
product introductions during the quarter.
Research and development costs increased $.7 million, or 39.4%, to $2.5
million during the quarter from $1.8 million in last year's first quarter. The
increase was primarily due to payments related to product co-development
arrangements.
Selling and administrative expenses increased $4.2 million, or 51.4%,
to $12.2 million during the quarter from $8 million in last year's first
quarter. As a percent of revenues, selling and administrative expenses increased
to 31.4% from 24.5% last year. The increase was due primarily to the Company's
investment in building the Ther-Rx sales force and marketing expenses related to
the expansion of its branded product line. Selling and marketing expenses
associated with this expansion increased $3.9 million over the same period last
year to $5.7 million for the quarter.
Amortization expense increased $.1 million related to the amortization
of the rights to the PreCare(R) product acquired from UCB Pharma in August 1999.
Interest expense decreased $.2 million during the quarter compared to
the same period last year due to reduction in long-term debt.
11
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Net Income. As a result of the factors described above, net income
improved $1.0 million, or 28.8%, to $4.4 million in the first quarter of fiscal
2001 from net income of $3.4 million in the first quarter of fiscal 2000.
(b) Liquidity and Capital Resources
Cashflow. Cash provided by operating activities was $.2 million for the
first quarter of fiscal 2001, a decrease of $7.1 million, or 97%, over the first
quarter of last year, primarily due to the collection of a non-recurring
arbitration award of $8.3 million (net of taxes) during the first quarter of the
prior fiscal year. This reduction in cashflow was partially offset by a $1.4
million increase in net income before depreciation and amortization. The
Company's working capital, adjusted for taxes of $5 million accrued for the
arbitration award, was substantially the same as last year, increasing by $.1
million to $5.6 million for the quarter.
Investing activities for the first quarter of fiscal 2001 included
capital expenditures of $1.6 million for the purchase of production equipment
and upgrading the Company's information systems.
Financing activities included reduction of long-term debt of $.1
million and additional borrowings of $2 million to fund working capital and
capital expenditures.
The Company believes that existing cash generated from operating
activities and funds available under its credit facility will be adequate to
fund operating activities for the presently foreseeable future including the
payment of short term and long term debt obligations, capital improvements,
product development activities and expansion of marketing capabilities for the
branded pharmaceutical business.
Balance Sheet and Ratios. The following table sets forth selected
balance sheet data and financial ratios at June 30 and year-end March 31, 2000:
($ in 000's)
------------------------------
6/30/00 3/31/00
------- -------
Working Capital $ 47,718 $37,566
Long-term debt 18,682 16,779
Shareholders' Equity 106,472 97,799
Working capital ratio 3.3 to 1 2.6 to 1
Long-term debt to equity .18 to 1 .17 to 1
12
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Working capital increased $10.2 million during the first quarter,
compared to the balance at the end of fiscal 2000, as current assets increased
$7.1 million, or 12 %, while current liabilities decreased $3.1 million, or 13%.
The increase in current assets was due primarily to higher accounts receivable
from increased sales in the specialty generics business and higher inventories
of branded products. Current liabilities decreased primarily due to a $2.2
million decrease in trade accounts payable from the timing of inventory
purchases.
The debt to equity ratio increased during the quarter due primarily to
a net increase of $1.9 million in long-term debt, partially offset by an
increase in shareholder's equity attributable to the Company's net income for
the period.
Inflation. 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 have
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.
Item 3. Variable Rate Risks
Advances to the Company under the Company's credit facility bear
interest at a rate which varies consistent with increases or decreases in the
publicly-announced prime rate [and/or the LIBOR rate with respect to LIBOR-
related loans, if any]. These rates have gradually increased over the past
several years. A material increase in such rates, however, could significantly
increase borrowing expenses. For example, an increase of 1% in the prime rate
would increase the borrowing expense to the Company by approximately $130,000
annually on the principal balance of the Company's credit facility at June 30,
2000.
13
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On May 10, 2000, the Company issued 300,000 shares of Class B Common
Stock upon the exercise of certain options. The aggregate exercise
price was $3,564,300. The issuance of such shares was exempt from
registration under Section 4(2) of the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the
quarter ended June 30, 2000.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27. Financial Data Schedule (Filed in EDGAR version only).
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended June 30, 2000.
14
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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 14, 2000 /s/ Marc S. Hermelin
----------------- ----------------------------------
Marc S. Hermelin
Vice Chairman of the Board and
Chief Executive Officer
Date: August 14, 2000 /s/ Gerald R. Mitchell
----------------- ----------------------------------
Gerald R. Mitchell
Vice President - Treasurer and
Chief Financial Officer
15
