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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission file number 1-9601
K-V PHARMACEUTICAL COMPANY
2503 SOUTH HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(314) 645-6600
Incorporated in Delaware I.R.S. Employer Identification No. 43-0618919
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock par value $.01 per share American Stock Exchange
Class B Common Stock par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
7% Cumulative Convertible Preferred, par value $.01 per share
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the 8,566,250 shares of Class A and
3,105,137 shares of Class B Common Stock held by nonaffiliates of the Registrant
as of April 30, 1998, was $185,245,156 and $67,536,730, respectively. As of
April 30, 1998, the Registrant had outstanding 11,733,323 and 6,404,877 shares
of Class A and Class B Common Stock, respectively, exclusive of treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 1998 Annual Meeting
of Shareholders, which involves the election of directors), are incorporated by
reference into Items 10, 11, 12 and 13 to the extent stated in such items.
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 1. Description of Business
(a) General Development of Business
K-V Pharmaceutical Company ("KV", or the "Company") was incorporated
under the laws of Delaware in 1971 as a successor to a business originally
founded in 1942. Victor M. Hermelin, KV's Chairman and founder, obtained initial
patents for early controlled release and enteric coated technologies in the
early 1950's.
KV is a pioneer in the area of advanced drug delivery technologies
which enhance the effectiveness of new therapeutic agents, existing
pharmaceutical products and nutritional supplements. The Company has developed a
diverse portfolio of sixteen technologies, including three oral controlled
release technologies, six site-specific oral and topical delivery technologies,
three tastemasking technologies and a quick dissolve tablet technology. These
technologies, which are used in the Company's products and the products of its
marketing licensees, are designed to improve and control the absorption and
utilization by the human body of active pharmaceutical compounds, allowing the
compounds to be administered less frequently with potentially reduced side
effects, improved drug efficacy and/or enhanced patient compliance.
Additionally, the Company continually applies its scientific expertise and
development experience to refine and enhance its existing drug delivery and
formulation technologies and to create new technologies that may be used in its
drug development programs.
KV licenses the marketing rights for products developed with these drug
delivery technologies to major domestic and international brand name
pharmaceutical marketers in return for license fees, milestone payments,
research reimbursement and manufacturing and royalty revenues.
In 1990, KV established a generic marketing capability through a
wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes KV one of the
only drug delivery research and development companies that also markets
"technology distinguished" generic products.
KV's other wholly-owned operating subsidiary, Particle Dynamics, Inc.
("PDI"), formerly known as Desmo Chemical Corporation, was incorporated in New
York in 1948 and acquired by KV in 1972. Through PDI, the Company develops and
markets specialty pharmaceutical compounds, including directly compressible and
microencapsulated ingredients used in pharmaceutical processing and tastemasked
vitamins and minerals for the pharmaceutical, nutritional and food industries.
(Hereinafter, KV, ETHEX and PDI are sometimes referred to collectively
as "KV" or the "Company").
(b) Industry Segments
The Company operates principally in one industry segment, consisting of
pharmaceutical development, manufacturing and marketing. Revenues are received
from customers for the development, manufacture and sale of drug products to
pharmaceutical marketers and from directly marketing its own technology
distinguished generic products. Revenues may be received in the form of
licensing revenues and/or royalty payments to KV based upon a percentage of the
licensee's sales of the product, in addition to manufacturing revenues, when
marketing rights to products using KV's advanced drug delivery technologies are
licensed.
(c) Narrative Description of Business
The Company's business is the formulation and commercialization of
pharmaceutical products, both prescription and over-the-counter, utilizing the
Company's proprietary drug delivery technologies.
An important profit center of the Company is the development of generic
drugs using its proprietary technologies that it markets and distributes through
its wholly-owned subsidiary, ETHEX Corporation. ETHEX currently sells 46
products, 22 of which were launched over the past two fiscal years and many of
which utilize KV's drug delivery systems. Approximately 8 to 10 additional
products are expected to be launched during fiscal 1999. ETHEX Corporation
distributes and markets these technology distinguished generic products directly
to various markets and classes of trade customers, including wholesalers,
chains, distributors, mail order houses, independent pharmacies, large HMOs and
PPOs. ETHEX has achieved 100% penetration in the 25 largest wholesalers and
chains. The development of generic versions of existing brand name products is
typically less costly and time consuming than the development of new drug
products, because generic drugs typically contain pharmaceutical compounds
previously approved by the FDA and generally qualify for the use of an
abbreviated testing and approval process.
The Company also enters into development and licensing arrangements
with companies that (i) hold patent or marketing exclusivity rights to existing
pharmaceutical products that may benefit from the application of KV's
proprietary drug delivery technologies, (ii) are developing new therapeutic
agents that require delivery technologies or formulation capabilities such as
those offered by the Company, and/or (iii) can market and sell the products
developed by the Company. To date, KV has entered into agreements with various
pharmaceutical marketers, including Roche Holding Ltd., Taisho Pharmaceutical
Ltd. of Japan, S.S. Pharmaceutical of Japan, J. Uriach of Spain and others.
Under these agreements, KV generally develops a product which utilizes its drug
delivery technologies in return for license fees, milestone payments, research
reimbursement and manufacturing and royalty revenues. The Company's licensee is
generally responsible for clinical trials, regulatory approvals and marketing
activities. In certain cases, the Company may develop a product, conduct
clinical trials and seek regulatory approval before entering into a licensing
arrangement.
Particle Dynamics, Inc. has developed and currently markets four
distinct lines of specialty raw material products to the pharmaceutical,
nutritional and food industries. DESCOTE(R) is a family of tastemasked vitamin
and mineral products particularly applicable to chewable children's vitamins.
DESTAB(TM) is a family of direct compression products which enable
pharmaceutical manufacturers to produce tablets and caplets in a more efficient
manner. DESTRIT(TM) is a family of low dose vitamin products for direct
compression into vitamin tablets and VITACOTE(TM) is a line of stabilized
vitamins for use in the pharmaceutical and food industries.
During the mid-1990's, the Company implemented an integrated business
strategy to commercialize its drug delivery technologies in a variety of ways,
principally by developing and marketing of both brand name and generic
pharmaceutical products, and by licensing marketing rights to products to
pharmaceutical clients. During fiscal 1998, 1997 and 1996, revenues from the
implementation of these strategies were approximately 95%, 91% and 90%,
respectively, of the Company's total net revenues.
The Company's strategy is to maintain its position as a leading
developer of innovative drug delivery technologies and to apply its technologies
to the formulation and commercialization of brand name and generic drugs and
specialty raw materials. This strategy is comprised of four main components:
The Development and Marketing of Technologically Distinguished Generic
Drugs. The Company has applied and continues to apply its drug delivery
technologies and formulation capabilities to develop and market technologically
distinguished generic drugs. The Company does so by (i) identifying and
replicating brand name drugs that are either off patent or are approaching
patent expiration and which require or can utilize advanced drug delivery
technologies, or (ii) applying the Company's tastemasking formulations to an off
patent drug in order to meaningfully increase patient compliance and the drug's
commercial appeal.
The Development and Marketing of Brand Name Pharmaceuticals. The
Company applies its proprietary drug delivery technologies in the formulation
and development of brand name prescription and OTC pharmaceutical products. The
Company also plans to directly market and distribute enhanced technology branded
products in specific niche therapeutic areas. The Company plans to continue to
enter into long term licensing agreements with pharmaceutical marketing
companies under which the Company develops products which utilize its drug
delivery technologies in return for license fees, milestone payments, research
reimbursement and manufacturing and royalty revenues on sales of the products.
Selective Acquisitions and In-Licensing Opportunities. The Company is
actively seeking opportunities to acquire additional products, product rights,
technologies and distribution channels that complement the Company's technology
base and business and which can be integrated into the Company's existing
research, manufacturing, marketing and distribution capabilities. The Company is
also evaluating the acquisition of individual branded products and/or companies
with branded products and marketing capability.
Development and Marketing of Technologically Differentiated Specialty
Raw Materials. The Company combines its advanced technologies with its expertise
in micro encapsulation and particle coating to strategically develop new
products that improve taste, tableting efficiencies and stability while reducing
manufacturing costs and increasing product quality.
DRUG DELIVERY TECHNOLOGIES
KV's proprietary drug delivery and formulation technologies enhance the
effectiveness of new therapeutic agents, existing pharmaceutical products and
nutritional supplements, such as vitamins and minerals. During the 1990's, KV
has continued to develop and introduce important new generations of technologies
which represent significant advancements in the field of drug delivery
technologies. These drug delivery technologies are generally organized in the
areas of "controlled release", "site release", "tastemasking", and "quick
dissolve" technologies. Many of these technologies have been used successfully
for the commercialization of products currently being marketed by the Company
and its pharmaceutical marketing licensees. The following describes the
Company's principal drug delivery technologies.
Oral Controlled Release Technologies
The Company has developed a number of controlled release drug delivery
technologies and formulation techniques that tailor the drug release profiles of
certain orally administered pharmaceuticals and nutritional supplements. These
technologies, which provide for a single oral dose that releases the active
ingredient over periods ranging from 12 to 24 hours, are designed to improve
patient compliance, improve drug effectiveness and reduce potential side
effects. These technologies have been used to formulate tablets, capsules and
caplets that deliver single therapeutic compounds, as well as multiple active
compounds, each requiring different release patterns within a single dosage
form.
KV/24(R) is a precisely controlled drug delivery technology that can be
taken orally once every 24 hours, affording the patient a reduced dosing regimen
and dramatically reducing commonly reported side effects. KV/24(R) is also a
multi-particulate technology that can combine several different drug compounds,
each requiring its own unique release profile, in a single dosage form. KV/24(R)
systems have been developed in capsule and tablet form for a number of
prescription and OTC products.
METER RELEASE(R) is a twice a day dosing, polymer-based drug delivery
system which offers different release characteristics than KV/24(R) and is used
for products that require a drug release rate of between eight and 12 hours.
METER RELEASE(R) systems have been developed in tablet, capsule and caplet form
and have been commercialized in the cardiovascular, gastrointestinal and upper
respiratory categories through products marketed by ETHEX Corporation and under
licensing agreements in various therapeutic categories.
SYMATRIX(TM) is a micro-particulate formulation that employs smaller
particles than KV/24(R) and METER RELEASE(R). SYMATRIX(TM) encapsulates
therapeutic agents which improve a drug's absorption in the body where precise
release profiles are less important. MICRO RELEASE(R) has been commercialized in
prescription and OTC nutritional products, including various prescription
prenatal vitamins marketed through ETHEX Corporation.
Site Release Technologies
KV's Site Release(R) technologies use advanced polyphasic principles
that result in a complex emulsion which adheres to the desired tissue and
controls the release of the drug. The Company has developed a number of site
specific technologies and formulations that it tailors to the desired route of
administration. To date, the Company has applied its site specific technologies
in cream, lotion, lozenge and suppository form to deliver therapeutic agents to
vaginal, rectal, oral, skin, pharyngeal and esophageal tissues.
VAGISITE(TM) is the subject of licensing and development agreements
with such companies as Roche Holding Ltd., Taisho Ltd. of Japan, J. Uriach & Cia
of Spain and others, to develop products for the treatment of topical and
vaginal fungal infections.
OraSite(R) is a controlled released mucoadhesive delivery system
administered orally in a solid or liquid form. A drug formulated with the
OraSite(R) technology may be formulated as a liquid or as a lozenge in which the
dosage form liquefies upon insertion and adheres to the mucosal surface of the
mouth, throat and esophagus. OraSite(R) possesses characteristics particularly
advantageous to therapeutic areas such as oral hygiene, sore throat and
periodontal and upper gastrointestinal tract disorders.
Trans-EP(TM) (for transesophageal) is a new and novel bioadhesive,
controlled release delivery technology which may permit oral delivery of
compounds that normally would be degraded if administered orally, such as growth
hormones, calcitonin and other protein/peptides and other complex compounds.
Trans-EP(TM) was specifically designed to provide an oral delivery alternative
for biotechnology and other compounds that currently are injected or infused.
BioSert(R) is a patented, bioadhesive, controlled release system which
at room temperature is a solid rectal or vaginal suppository that after
insertion becomes a bioadhesive long acting cream. BioSert(R) has particular
applications to therapeutic areas such as antifungals, narcotic analgesics and
anti-arthritics.
DermaSite(TM) is a semi-solid SITE RELEASE(R) configuration for topical
applications to the skin. The bioadhesive and controlled release properties of
the delivery platform have made possible the development of products requiring a
significantly reduced frequency of application.
Tastemasking Technologies
KV has been at the forefront in the development of pharmaceutical
formulations capable of improving the flavor of unpleasant tasting drugs. The
Company has developed numerous platforms for its tastemasking technologies,
including liquid, chewable and dry powder formulations.
FlavorTech(R) is a liquid formulation technology designed to reduce the
bad taste of therapeutic products. FlavorTech(R) has been commercialized in
cough/cold syrup products marketed through ETHEX Corporation and has special
application to other products, such as antibiotic, geriatric and pediatric
pharmaceuticals.
MICRO MASK(TM) is a tastemasking technology which incorporates a dry
powder, microparticulate approach to reducing objectionable tastes by
sequestering the unpleasant drug agent in a specialized matrix. The MICRO
MASK(TM) technology can be formulated into chewable tablets or into packets that
can be sprinkled on food, taken directly into the mouth, or stirred into water
or other liquid before swallowing. This formulation technique has the effect of
"shielding" the drug from the taste receptors without interfering with the
dissolution and ultimate absorption of the agent within the gastrointestinal
tract. MICRO MASK(TM) may be used in connection with such products as macrolide
antibiotics, amino acids, vitamins and other unpleasant tasting drug compounds.
LIQUETTE(R) is a tastemasking technology which incorporates unpleasant
tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress the
taste of a drug. This technology is used for mildly to moderately distasteful
drugs. The LIQUETTE(R) technology has been successfully commercialized in Japan
through a licensing agreement with SS Pharmaceutical.
COMPETITION
Competition in the development and marketing of pharmaceutical products
is intense and characterized by extensive research efforts and rapid
technological progress. Many companies, including those with financial and
marketing resources and development capabilities substantially greater than
those of the Company, are engaged in developing, marketing and selling products
that compete with those offered by the Company. There are also a few companies,
including KV, which specialize in drug delivery technology and the development
of products derived from those technologies for sale/licensing to pharmaceutical
marketers. The Company believes that its patents, proprietary trade secrets,
technological expertise and product development and manufacturing capabilities
position it to continue to develop products to compete effectively in the
marketplace and maintain a leadership position in the field of advanced drug
technologies.
The Company also markets, sells and distributes generic products
directly to various markets and classes of customers through ETHEX Corporation.
ETHEX is subject to active competition from numerous firms. The primary
competitive factors in this area are customer service, quality of products and
price. The nature and level of competition varies among products, markets and
classes of customers. The Company is subject to potential additional competition
from firms who are able to obtain the necessary governmental approvals to
manufacture and distribute similar products.
REGULATION
The design, development and marketing of pharmaceutical compounds are
intensively regulated by the Federal Food and Drug Administration ("FDA") and
comparable agencies in foreign countries. For example, The Federal Food, Drug
and Cosmetic Act, the Controlled Substances Act and other United States federal
statutes and regulations impose requirements on the testing, manufacturing and
approval of the Company's products before a drug can be marketed in the United
States. Obtaining FDA approval is a costly, time-consuming process and there is
no guarantee that such approval will be obtained with respect to an individual
product. All companies in the pharmaceutical industry are subject to FDA
inspections for compliance with current Good Manufacturing Practice ("cGMP"),
which encompasses all aspects of the production process as interpreted by the
FDA and involves changing and evolving standards. FDA inspections are a part of
a continuing effort by the FDA to oversee and upgrade the level of industry-wide
compliance with cGMP, with an emphasis on increased validation of products and
increased stringency of Standard Operating Procedures. The Company undergoes FDA
inspections at all of its facilities.
Since 1992, the Company has implemented new programs to ensure full
compliance with all of the FDA's regulatory requirements and their increasingly
vigorous interpretation by the agency. In addition, KV has agreed with the FDA
in a June 1993 Consent Decree to operate in compliance with FDA requirements
and, in the event of violations of FDA requirements, has agreed to certain
procedures with respect to corrective actions that may be warranted.
With respect to potential new products, there are two principal ways
for the Company to satisfy the FDA's safety and efficacy requirements for a new
drug product: a new drug application (an "NDA") and an abbreviated new drug
application (an "ANDA"). The Company does not disclose information on the
specific products covered by its FDA applications in order to protect the
confidentiality and competitive position of the Company and its customers with
respect to products which it has developed and expects to market in the future.
The Company was informed by the FDA on April 22, 1998 that it had
satisfied all of the requirements of the agency's "Application Integrity
Policy." This will now allow the FDA to process applications for new NDA's and
ANDA's that the Company may submit. As a consequence of the uncertainties
inherent in the drug approval process, an applicant is not in the position to
predict in advance all of the substantive and procedural requirements for FDA
approval of a particular product or to predict when or if any particular product
may be approved.
The Company cannot predict whether future legislative or regulatory
developments might have an adverse effect on the Company. It is the Company's
belief that generic drugs and drug delivery products can provide cost savings
opportunities which the Company could benefit from in ETHEX Corporation's growth
and in its drug delivery research business.
During fiscal 1998, the Company encountered no serious shortages of any
particular raw materials and has no indications that significant shortages will
occur. However, a serious shortage of certain raw materials could have a
material adverse effect upon the Company.
The Company regards its drug delivery technologies as proprietary and
maintains an extensive trade secret and patent protection program based on
patent laws, trade secret laws and restrictions on disclosure and
transferability contained in its product license agreements. Internal safeguards
incorporated in its technologies also serve to protect the proprietary nature of
its programs. In addition, employees with access to proprietary information and
potential customers who evaluate KV's products are required to execute
non-disclosure agreements. The Company intends to maintain and enforce the
proprietary nature of its technologies. In addition to its patent and trade
secret protection, KV believes that the collective knowledge and experience of
its management and personnel and their ability to develop and enhance drug
delivery technologies and products developed from such technologies are also of
competitive significance.
The Company presently owns 66 domestic and foreign patents expiring
through 2012 and 12 trademarks expiring through 2011 (which are renewable
assuming continuous use), none of which is considered material to the continuing
operations and success of the Company. The Company considers its proprietary
know-how and processing techniques to be of greater importance to its continuing
operations than such patents.
In order to protect its goodwill, the Company has applied for trademark
protection for its technology names such as SITE RELEASE(R), KV/24(R),
FlavorTech(TM), OraSite(R), METER RELEASE(R), SYMATRIX(TM), DESCOTE(R), and
others. The Company intends to continue to trademark new technology and product
names as they are developed.
The business of the Company is generally not seasonal, although a
number of cough/cold products marketed through ETHEX can be subject to seasonal
demand.
The nature of the Company's business does not involve unusual working
capital requirements. Inventories are maintained at sufficient levels to support
current production and sales levels.
Customers of the Company consist of large and small pharmaceutical
marketing companies, drug chains and wholesalers. During fiscal 1998 and 1997,
one unaffiliated customer, McKesson Drug Company, a wholesale distributor,
individually accounted for 12% and 15%, respectively, of the Company's
consolidated revenues.
The majority of the Company's sales are related to directly marketed
generic products through ETHEX Corporation where backlog measurements are not
meaningful, due to the short lead time required (days) in filling orders at any
point in time relative to sales or income for a full 12-month period.
Research and development spending for activities relating to the
development of new products or services or the improvement of existing products
or services was approximately $5,752,000 in fiscal 1998, $4,835,000 in fiscal
1997, and $4,559,000 in fiscal 1996.
Spending for research and development is funded internally from
operations and also by major pharmaceutical companies who have licensed
marketing rights to KV-developed products. KV's internally funded research and
development spending is approximately 6% of current revenues.
The Company does not expect that compliance with federal, state or
local provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment will have a material
effect on the Company's capital expenditures, earnings or competitive position.
As of April 26, 1998, the Company had 353 employees. The Company is
subject to a five year collective bargaining agreement which expires in July
2001 and covers 64 employees. The Company believes that its relations with its
employees are good.
The Company presently does not have material operations or sales in
foreign countries and its domestic sales are not subject to unusual geographic
concentration.
Item 2. Properties.
The Company's corporate headquarters is located at 2503 South Hanley
Road in St. Louis County, Missouri, and contains approximately 25,000 square
feet of floor space. The Company has a lease on the building for a period of ten
years expiring December 31, 2005, with one five-year option to renew.
In addition, the Company leases or owns the facilities shown in the
following table:
SQ FT LEASE RENEWAL
FACILITY USAGE LEASED EXPIRES OPTIONS
- -------- ----- ------ ------- -------
2629 S. Hanley Road Mfg. Oper. 18,000 09/30/02 5 years1
821 Hanley Industrial Court Mfg. Oper. 5,000 11/30/99 -
8046-50 Litzsinger Road Mfg. Oper. 17,000 10/31/01 5 years1
8056 Litzsinger Road Office/Maint. 3,000 10/31/01 5 years1
2635 S. Hanley Road Mfg. Oper. 12,150 09/30/02 5 years1
819 Hanley Industrial Court Mfg. Oper. 5,000 11/30/99 -
2525 S. Hanley Road Mfg. Oper. 16,800 06/30/02 5 years
8054 Litzsinger Road Office 3,000 10/31/01 5 years1
2601 S. Hanley Road PDI Office 1,480 09/30/02 5 years1
10888 Metro Court Office/Warehouse 81,810 Owned N/A
2303 Schuetz Road Mfg. Oper. 90,000 Owned N/A
10858 Metro Court Rental Property 40,540 Owned N/A
- ----------------------
1 Two five-year options.
Properties used in the Company's operations are considered suitable for
the purposes for which they are used and are believed to be adequate to meet the
Company's needs for the reasonably foreseeable future. However, the Company
considers leasing additional facilities from time to time when attractive
facilities appear to be available to accommodate the consolidation of certain
operations and to meet future expansion plans.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant1
The following is a list of the current executive officers of the
Company, their ages, their positions with the Company and their principal
occupations for at least the past five years.
NAME AGE POSITION HELD AND PAST EXPERIENCE
- ---- --- ---------------------------------
Victor M. Hermelin 84 Director, Chairman of the Board and
Treasurer of the Company.
Marc S. Hermelin 56 Director, Vice-Chairman of the Board and
Chief Executive Officer.2
Alan G. Johnson 63 Director and Secretary of the Company.
Attorney at Law and Member in the law firm
of Gallop, Johnson & Neuman, L.C. since
1976; Director of MRL, Inc. and Siboney
Corporation.
Garnet E. Peck, Ph.D. 67 Director of the Company since 1994.
Professor of Industrial Pharmacy and
Director of Industrial Pharmacy for Purdue
University School of Pharmacy and
Pharmacal Sciences since 1967.
Raymond F. Chiostri 64 Vice President and Group President of KV
since 1986 and Chief Executive Officer of
Particle Dynamics, Inc. since 1995.
President - Pharmaceutical Division of KV
1986 to 1995.
Gerald R. Mitchell 59 Vice President of Finance since 1981.
Mitchell I. Kirschner 52 Corporate Vice President of Business
Development since 1989.2
The term of office for each executive officer of the Company expires at
the next annual meeting of the directors or at such time as his successor has
been elected and qualified.
- -----------------------
1. This information is included in Part I as a separate item in accordance with
Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form
10-K.
2. Victor M. Hermelin is the father of Marc S. Hermelin and father-in-law of
Mitchell I. Kirschner.
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
a) Principal Market
The Company's Class A Common Stock and Class B Common Stock are traded
on the American Stock Exchange under the symbols KVA and KVB, respectively.
b) Stock Price and Dividend Information
High and low closing sales prices on the American Stock Exchange of the
Company's Class A and Class B Common Stock each quarter of fiscal 1998 and 1997
were as follows:
CLASS A COMMON STOCK
FISCAL 1998 FISCAL 1997
--------------------------- ---------------------------
QUARTER High Low High Low
------------- ---------- -------------- ------------- ----------
First 11 21/32 9 15/32 10 19/32 7 29/32
Second 15 3/4 9 29/32 9 19/32 5 3/32
Third 15 21/32 12 13/32 8 19/32 7 5/32
Fourth 18 25/32 13 3/32 14 3/32 7 3/4
CLASS B COMMON STOCK
FISCAL 1998 FISCAL 1997
---------------------------- --------------------------
QUARTER High Low High Low
-------------- ----------- ------------- ------------ ------------
First 11 3/4 9 1/2 10 1/2 8
Second 15 3/32 10 9 1/2 5
Third 15 5/8 12 27/32 8 1/2 7 5/32
Fourth 18 21/32 13 1/32 14 7 21/32
All per share data reflects the three-for-two stock split effected in
the form of a 50% stock dividend.
No cash dividends were paid on the Company's Class A or Class B Common
Stock in fiscal 1998 or 1997. Dividends on Preferred Stock in the amount of
$421,751 were paid during fiscal 1998, and $105,437 was paid during the fourth
quarter of 1997.
c) Approximate Number of Holders of Common Stock
The number of holders of record of the Company's Class A and Class B
Common Stock as of April 30, 1998 and June 6, 1997 was 1,241 and 1,310,
respectively (not separately counting shareholders whose shares are held in
"nominee" or "street" names, which are estimated to represent approximately
4,000 additional shareholders for each class of common stock).
Item 6. Selected Financial Data
($ in 000's, except per share data)
Years Ended March 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues $98,486 $57,891 $49,729 $39,743 $38,171
% Change 70.1 16.4 25.1 4.1 (12.2)
Net income
(loss) $11,304 $8,924 $ 4,043 $(5,375) $ (8,181)
Net income (loss) per
common share-diluted
(a) (b) $0.58 $0.47 $0.21 $(.35) $(.52)
BALANCE SHEET DATA:
Total assets $68,361 $41,362 $ 27,948 $ 27,975 $ 31,802
Long-term debt, deferred
taxes and other
liabilities $7,040 $3,071 $ 3,452 $ 12,153 $ 13,323
Shareholders' equity $44,164 $33,084 $20,550 $ 9,974 $ 13,343
NOTES:
(a) Dividends were paid on the Preferred Stock during fiscal 1998 in the amount
of $421,751 and in the fourth quarter of fiscal 1997 in the amount of
$105,437, but no other cash dividends were paid on any shares of Common or
Preferred Stock during the five years ended March 31, 1998.
(b) Fully diluted common shares were restated to reflect a 3 for 2 stock split
effected in the form of a 50% stock dividend, declared by the Board of
Directors on March 23, 1998 and distributed April 17, 1998 to shareholders
of record as of April 3, 1998. The Company adopted SFAS No. 128, "Earnings
Per Share" in fiscal 1998 and restated all prior-period earnings per share
data. (see Note 1).
Item 7. Management's Discussion and Analysis of Results of Operations, and
Liquidity and Capital Resources
(a) Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of revenues for fiscal years 1998, 1997 and 1996.
Fiscal Year Ended
1998 1997 1996
------------------ --------------------- -------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
ETHEX (generic products) $79,193 80% $40,225 69% $34,498 69%
KV (manufacturing and licensing) 8,290 9 8,978 16 7,370 15
PDI (pharmaceutical compounds) 11,003 11 8,688 15 7,861 16
-------- --- -------- --- -------- ----
Net revenues 98,486 100% 57,891 100% 49,729 100%
Costs and expenses:
Manufacturing costs 56,483 57% 29,478 51% 26,260 53%
Research and development 5,752 6 4,835 8 4,559 9
Selling and administrative 19,104 20 13,818 24 12,749 26
Other, net 156 - 453 1 2,028 4
-------- ----- --------- --- ------- ----
Total costs & expenses 81,495 83% 48,584 84% 45,596 92%
Income before income taxes 16,991 17 9,307 16 4,133 8
Net income $11,304 11% $8,924 15% $4,043 8%
======= === ====== === ====== ==
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Net revenues increased $40.6 million, or 70%, to $98.5
million during fiscal 1998 from $57.9 million in fiscal 1997. This sales growth
was primarily due to an increase in the volume of new and existing products sold
by ETHEX and Particle Dynamics, partially offset by lower contract services
sales. Net revenues from ETHEX increased $39 million, or 97%, to $79.2 million
during fiscal 1998 from $40.2 million in fiscal 1997. This increase was
primarily due to the launch of twelve new generic products during fiscal 1998,
in addition to increased sales of products introduced in prior years. Net
revenues derived from the sale of specialty pharmaceutical raw materials by PDI
increased $2.3 million, or 27%, to $11 million during fiscal 1998. This increase
was attributable to the increased sales volumes related to the introduction of
new products for the over-the-counter DESCOTE(R) and DESTAB(TM) product lines.
As expected, contract services revenues decreased $.7 million, or 8%, to $8.3
million in fiscal 1998 from $9 million in fiscal 1997 which is attributable to
reduced sales volume. While the Company anticipates continued growth in sales of
the products it markets, there are no assurances that the annual percentage rate
of sales growth will continue at past levels.
Costs and Expenses. Manufacturing costs increased $27 million, or 92%,
to $56.5 million during fiscal 1998 from $29.5 million in fiscal 1997 due to
increased volume. Manufacturing costs as a percentage of revenues increased to
57% from 51% primarily due to the change in the mix of products sold and the
effect of the competitive pricing in the generic pharmaceutical industry.
Research and development costs increased $.9 million, or 19%, to $5.8
million during fiscal 1998 from $4.8 million in fiscal 1997. This increase was
due to higher personnel, raw material and clinical costs. The Company expects to
continue spending for research and development in the future, emphasizing the
development of additional products for sale by ETHEX, new branded products and
new drug delivery technologies.
Selling and administrative expenses increased $5.3 million, or 38%, to
$19.1 million during fiscal 1998 from $13.8 million in fiscal 1997. As a
percentage of revenue, selling and administrative expenses decreased to 20% from
24%. The increase in selling and administrative expenses was primarily related
to the Company's selling and promotional activities associated with the
significant growth experienced in the sales of new and existing products
marketed by ETHEX and Particle Dynamics, and additional personnel to support the
Company's continued growth.
Income taxes were provided at an effective rate of 33.5% in fiscal 1998
compared to 4.1% in fiscal 1997. The increase is attributable to the utilization
of loss carry forwards generated in prior years during fiscal 1997. No loss
carryforwards were available in fiscal 1998.
Net Income. As a result of the factors described above, net income
improved $2.4 million, or 27%, to $11.3 million for fiscal 1998 from net income
of $8.9 million in 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Net revenues increased $8.2 million, or 16%, to $57.9 million
during fiscal 1997 from $49.7 million in fiscal 1996. This sales growth was
primarily due to an increase in the volume of new and existing generic products
sold by ETHEX, increased licensing revenues and volume in contract services and
Particle Dynamics. Net revenues from ETHEX increased $5.7 million, or 17%, to
$40.2 million during fiscal 1997 from $34.5 million in 1996. This increase was
primarily due to the launch of ten new generic products during fiscal 1997, in
addition to increased sales of products introduced in the prior year. Net
revenues derived from the sale of specialty pharmaceutical raw materials by PDI
increased $.8 million, or 11%, to $8.7 million during fiscal 1997. This increase
was attributable to the increased sales volumes related to the prior years'
introduction of new products for the over-the-counter DESCOTE(R) and DESTAB(TM)
product lines. Contract services and licensing revenues increased $1.6 million,
or 22%, to $9 million in fiscal 1997 from $7.4 million in fiscal 1996, primarily
due to increased licensing revenues from an agreement concluded with Roche
Holding, Ltd.
Costs and Expenses. Manufacturing costs increased $3.2 million, or 12%,
to $29.5 million during fiscal 1997 from $26.3 million in fiscal 1996.
Manufacturing costs as a percentage of revenues decreased to 51% from 53%. This
percentage decrease was primarily due to the continued growth in sales of higher
margin products by ETHEX and increased margins in the contract manufacturing
business.
Research and development costs increased $.2 million, or 6%, to $4.8
million during fiscal 1997 from $4.6 million in fiscal 1996. This increase was
due to higher personnel costs.
Selling and administrative expenses increased $1.1 million, or 8%, to
$13.8 million during fiscal 1997 from $12.7 million in fiscal 1996. However, as
a percentage of revenue, selling and administrative expenses decreased to 24%
from 26%. The increase in selling and administrative expenses was primarily
related to the Company's selling and promotional activities associated with the
significant growth experienced in the sales of new and existing generic products
marketed by ETHEX and additional personnel to support the Company's continued
growth.
Other, net decreased $1.5 million, or 75%, to $.5 million during fiscal
1997 from $2 million in fiscal 1996. This was primarily attributable to
increased interest income of $.1 million as a result of interest earned on
increased average daily cash balances, decreased interest expense of $1 million
as a result of lower effective interest rates as well as lower levels of average
borrowing and reduced amortization cost.
The tax provision of $383,000 for fiscal 1997 was for state income
taxes, while the $90,000 in 1996 was due to the effect of the alternative
minimum tax.
Net Income. As a result of the factors described above, net income
improved $4.9 million, or 121%, to $8.9 million for fiscal 1997 from $4 million
in fiscal 1996.
(b) Year 2000 Readiness
The Company's computer systems, software and related technologies are
affected by the Year 2000 compliance issue. The Company has been identifying and
correcting affected applications to ensure that all of its key computer systems
will be Year 2000 compliant by early 1999, and has also been working with its
vendors and suppliers to ensure their compliance. Costs to modify such
applications have been, and are estimated to remain, immaterial to the Company's
results of operations or financial condition.
(c) Liquidity and Capital Resources
The following table sets forth selected balance sheet data and ratios
for fiscal years 1998, 1997 and 1996.
At March 31,
($ in 000's)
------------
1998 1997 1996
---------- ---------- ----------
Working Capital Ratio 3.1 to 1 5.8 to 1 4.6 to 1
Quick Ratio 2.0 to 1 3.1 to 1 2.4 to 1
Debt to Debt Plus Equity .11 to 1 .07 to 1 .14 to 1
Total Liabilities to Equity .55 to 1 .25 to 1 .36 to 1
Cash and Cash Equivalents $ 18,158 $ 7,628 $ 2,038
Working Capital $ 35,403 $25,017 $14,053
Long-Term Liabilities $ 7,040 $ 3,071 $ 3,452
Shareholders' Equity $44,164 $33,084 $20,550
Working capital for fiscal 1998 increased $10.4 million, or 42%, to
$35.4 million due primarily to the Company's net income in 1998. Net cash
provided by operating activities for fiscal 1998 included increases in
receivables of $6.7 million and inventories and other current assets of $5.1
million to improve service levels, which resulted primarily from increased sales
volume of ETHEX products, and an increase in accounts payable and accrued
liabilities of $11.7 million. These changes in receivables, inventories and
payables of $1.2 million combined with net income and non-cash charges
aggregating $13.2 million, resulted in cash provided by operating activities of
$14.4 million for fiscal 1998, an improvement of $8.7 million or 155%.
At the end of fiscal 1998, the Company's "quick assets", (cash, cash
equivalents and accounts receivable) increased $17.3 million (106%) from the
prior year, while current liabilities increased $11.9 million (229%), resulting
in a "quick ratio" of 2 to 1 compared to 3.1 to 1 at the end of 1997. The
increase in current liabilities is due primarily to an increase in accounts
payable and accruals for salaries and benefits, income taxes and revenue
sharing, all associated with increased sales and earnings.
The debt to debt plus equity and total liabilities to equity ratios for
fiscal 1998 increased due to the addition of $3.5 million in debt used for the
purchase of a facility which was previously leased, and an adjacent facility.
Investing activities in fiscal 1998 reflected capital expenditures in
cash of $2.5 million excluding the facility purchase which was financed with
long-term debt, and net expenditures for other assets of $.6 million, which were
provided for through operations.
In January 1996, the Company concluded an agreement with a major
pharmaceutical marketer whereby the Company received $5 million ($1.7 million of
which was included in revenue) and certain other considerations, plus $5 million
for the sale of certain Class A Common Stock options exercisable in various
periods through September 1998 (See Notes 12 and 15). The transaction was
entered into between the parties in consideration for giving the marketing
company the right to explore the Company's drug delivery technologies and to
replace certain other product agreements and to provide royalties and product
opportunities.
In January 1997, the Company concluded a broad-based agreement with
Roche Holding Ltd. of Basel, Switzerland ("Roche") (See Notes 12 and 15). As
part of the agreement, Roche purchased 200,000 shares of Common Class A Stock
for $3.5 million. In addition, the agreement included cash payments of $3
million made in January 1997 and 1998, respectively, and one additional payment
to be received in January 1999, unless regulatory approval of a potential
follow-on product in the same therapeutic area is received prior to that date.
Such payments have been included in revenue, and the last payment will be
similarly treated when received. Upon marketing, KV would receive royalties on
sales of the follow-on product.
The Company's cash and cash equivalents on hand at year-end were $18.2
million. The Company had in place at March 31, 1998, an unsecured credit
facility aggregating $20 million with LaSalle National Bank. As of March 31,
1998, the Company had no cash borrowings, however, $2.2 million of open letters
of credit were issued under the facility. The Company's capital equipment
commitments at year-end totaled approximately $1.1 million.
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
materials 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 three years because the products, product formulas, product
mix and sources of raw materials have varied substantially.
The Company expects to continue a relatively high level of expenditures
and investment for research, clinical and regulatory efforts relating to the
development and commercialization of proprietary new products and advanced
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
short term needs.
(d) New Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 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 SFAS No. 128 requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires the reporting of comprehensive income and its components
in the 1998 financial statements. Comprehensive income is defined as the change
in equity from transactions and other events and circumstances from non-owner
sources, and excludes investments by and distributions to owners. Comprehensive
income includes net income and other items of comprehensive income meeting the
above criteria. There is no impact on the Company's financial statements due to
the issuance of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997 and requires reporting about operating
segments, products and services, geographic areas and major customers. Its
objective is to provide information about the different types of business
activities and economic environments in which businesses operate. The first
disclosures will be required in the Company's 1999 Annual Report. The Company
does not expect substantial changes in its definition of segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997, and requires comparative
information for earlier years to be restated, unless such information is not
readily available. The Company has no pensions or postretirement benefit plans
in place at this time. There is no impact on the Company's financial statements
due to the issuance of this statement.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of KV Pharmaceutical Company:
We have audited the consolidated balance sheets of KV Pharmaceutical
Company and Subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KV Pharmaceutical
Company and Subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 21, 1998
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
ASSETS 1998 1997
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 18,157,595 7,627,523
Receivables, less allowance for
doubtful accounts of $332,244 and
$129,054 in 1998 and 1997, respectively 15,304,340 8,579,598
Inventories 15,606,037 12,785,588
Deferred income taxes 2,949,434 890,000
Prepaid and other current assets 541,989 340,193
--------------- ---------------
Total Current Assets 52,559,395 30,222,902
--------------- ---------------
Net property and equipment 12,436,533 8,117,809
--------------- ---------------
Goodwill and other assets 3,364,899 3,021,009
=============== ===============
TOTAL ASSETS $ 68,360,827 $ 41,361,720
=============== ===============
LIABILITIES
Current Liabilities:
Accounts payable $ 4,280,492 $ 2,045,048
Accrued liabilities 12,317,432 2,809,571
Current maturities of long-term debt 558,333 351,316
--------------- ---------------
Total Current Liabilities 17,156,257 5,205,935
Long-term debt 4,902,222 2,158,025
Deferred income taxes 535,000 -
Other long-term liabilities 1,603,131 913,319
--------------- ---------------
TOTAL LIABILITIES 24,196,610 8,277,279
--------------- ---------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value;
$25.00 stated and liquidation value;
840,000 shares authorized; issued
and outstanding - 241,000 shares in
1998 and 1997 2,410 2,410
Class A and Class B Common Stock,
$.01 par value; 60,000,000 shares of each
authorized; Class A-issued 11,760,078 and
11,576,231 in 1998 and 1997 117,601 116,376
Class B-issued 6,442,914 and 6,564,855 in
1998 and 1997 64,429 65,242
Additional paid-in capital 34,042,044 33,844,685
Retained earnings (deficit) 9,992,686 (889,319)
Less: Treasury Stock, 35,619 shares each of
Class A and Class B Common Stock, at cost (54,953) (54,953)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 44,164,217 33,084,441
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 68,360,827 $ 41,361,720
============== ==============
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------- ------------
Net Revenues $ 98,486,060 $ 57,890,678 $ 49,729,046
Costs and Expenses:
Manufacturing costs 56,482,539 29,478,372 26,259,638
Research and development 5,751,995 4,835,478 4,559,360
Selling and administrative 19,104,051 13,817,802 12,748,726
Amortization of intangible
assets 254,261 187,758 710,647
------------- ---------- --------------
Total costs and expenses 81,592,846 48,319,410 44,278,371
------------- --------- --------------
Operating income 16,893,214 9,571,268 5,450,675
------------- ---------- --------------
Other income (expense):
Interest expense (452,262) (411,237) (1,377,604)
Interest and other income 550,186 146,481 59,589
------------- ----------- ------------
Total other income (expense) 97,924 (264,756) (1,318,015)
------------- ------------ -------------
Income before income tax 16,991,138 9,306,512 4,132,660
Provision for income taxes 5,687,382 383,000 90,000
------------- ----------- -------------
Net Income $ 11,303,756 $ 8,923,512 $ 4,042,660
============ ============ ============
Net Income per Common Share-Basic
(after deducting preferred
dividends of $421,751 in 1998,
1997 and 1996) $ 0.60 $ 0.48 $ 0.21
============ ========== ============
Net Income per Common
Share-Diluted $ 0.58 $ 0.47 $ 0.21
============ ========== ============
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1998, 1997 and 1996
Class A Class B Additional Retained Total
Preferred Common Common Paid-In Earnings Treasury Shareholders'
Stock Stock Stock Capital (Deficit) Stock Equity
---------- ---------- --------- ----------- ------------ ---------- ------------
Balance at March 31, 1995 $2,410 $67,629 $47,187 $23,706,723 $(13,794,814) $(54,953) $9,974,182
Stock Options issued - - - 5,000,000 - - 5,000,000
Stock Options exercised,
194,242 shares of Class A - 1,943 - 772,107 - - 774,050
192,122 shares of Class B - - 1,922 757,096 - - 759,018
Conversion of 163,475 shares of
Class B shares to Class A
shares - 1,635 (1,635) - - - -
Net Income for 1996 - - - - 4,042,660 - 4,042,660
----------- ------- --------- ---------- ----------- --------- ----------
Balance at March 31, 1996 2,410 71,207 47,474 30,235,926 (9,752,154) (54,953) 20,549,910
Sale of 200,000 Class A shares - 2,000 - 3,498,000 - - 3,500,000
Stock Options issued as
compensation - - - 114,300 - - 114,300
Stock Options exercised,
13,125 shares of Class A - 130 - 50,188 - - 50,318
13,195 shares of Class B - - 130 51,708 - - 51,838
Less 177 shares of each class
repurchased
Conversion of 383,925 shares of
Class B shares to Class A shares - 3,838 (3,838) - - - -
Dividends paid on preferred stock - - - (105,437) - - (105,437)
Net income for 1997 - - - - 8,923,512 - 8,923,512
---------- ------- --------- ----------- ---------- ---------- -----------
Balance at March 31, 1997 2,410 77,175 43,766 33,844,685 (828,642) (54,953) 33,084,441
Stock Options exercised,
24,165 shares of Class A - 240 - 127,930 - - 128,170
17,206 shares of Class B - - 172 69,429 - - 69,601
Conversion of 98,500 shares of -
Class B shares to Class A
shares - 985 (985) - - - -
Dividends paid on preferred stock - - - - (421,751) - (421,751)
Net income for 1998 - - - - 11,303,756 - 11,303,756
Three for two stock split effected
in the form of a
50% stock dividend - 39,201 21,476 - (60,677) - -
----------- -------- --------- ----------- ---------- ---------- -----------
Balance at March 31, 1998 $2,410 $117,601 $64,429 $34,042,044 $9,992,686 $(54,953) $44,164,217
========== ======== ======= =========== ========== ========== ===========
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net Income $11,303,756 $ 8,923,512 $ 4,042,660
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, amortization and other
non-cash charges 1,887,997 1,594,300 2,098,622
Stock options issued as compensation - 114,300 -
Changes in operating assets and liabilities:
Increase in receivables (6,724,742) (1,298,139) (440,836)
Increase in inventories and other current
assets (5,081,678) (5,336,261) (1,820,982)
Increase (decrease) in accounts payable and
accrued liabilities 11,743,305 1,620,848 (799,676)
Increase (decrease) other 1,224,811 2,089 (7,861)
----------- ---------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 14,353,449 5,620,649 3,071,927
------------ ----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (2,452,459) (1,903,134) (841,318)
Decrease in deferred improved drug entities - - 2,450,241
Other (598,153) (880,577) (457,006)
------------ ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (3,050,612) (2,783,711) 1,151,917
------------- ------------ -----------
FINANCING ACTIVITIES
Proceeds from credit facilities - - 28,311,372
Repayment of credit facilities - - (34,130,635)
Proceeds from term loan facility - - 6,820,189
Principal payments on long-term debt (548,785) (744,203) (10,795,482)
Proceeds from sale of Common Stock 3,500,000 -
Dividends paid on Preferred Stock (421,751) (105,437) -
Exercise of Common Stock options 197,771 102,156 1,533,068
Proceeds from sale of stock options - - 5,000,000
------------ ----------- ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (772,765) 2,752,516 (3,261,488)
------------- ---------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 10,530,072 5,589,454 962,356
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 7,627,523 2,038,069 1,075,713
------------ ---------- ----------
END OF YEAR $18,157,595 $ 7,627,523 $ 2,038,069
============ ============ ============
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of KV
Pharmaceutical Company (the "Company") and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents consist of highly liquid instruments that have an
original maturity of three months or less. Cash equivalents consist primarily of
government backed securities aggregating $10,000,000 at March 31, 1998 and $0 at
March 31, 1997.
Inventories
Inventories are stated at the lower of cost or market, with the cost
determined on the first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives using the straight line method.
Goodwill and Other Assets
The excess of cost of investment over the fair value of net assets of
the subsidiaries at the time of acquisition is being amortized on a straight
line basis over 40 years. All other deferred charges are being amortized over
periods varying from 5 to 17 years on a straight line basis. Management reviews
intangible assets for possible impairment if there is a significant event that
detrimentally effects operations. Impairment is measured using estimates of
non-discounted future earnings potential of the entity or assets acquired.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to its
customer. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized. The Company also enters into
long-term agreements under which it assigns marketing rights for the products it
has developed to pharmaceutical marketers. The Company recognizes royalties and
other payments specified in the agreements as income when the earnings process
is completed.
Earnings Per Share
Basic earnings per share is calculated by dividing net income for the
period by the weighted average number of shares of Common Stock outstanding
during the period. The assumed exercise of stock options and warrants is
included in the calculation of diluted earnings per share.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," was adopted in fiscal 1998 with all prior-period earnings per share
data restated. The statement requires dual presentation of basic earnings per
share and diluted earnings per share on the Consolidated Statements of Income
and other computational changes. The adoption of SFAS No. 128 did not have a
material effect on previously reported earnings per share.
Income Taxes
Income taxes are accounted for under the asset and liability method, in
which deferred income taxes are recognized as a result of temporary differences
between the financial reporting basis and tax basis of the assets and
liabilities.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price greater than or equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25"), "Accounting for Stock Issued to Employees". That Opinion requires that
compensation cost related to fixed stock option plans be recognized only to the
extent that the fair value of the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no compensation expense for its stock
option grants.
In October 1995, the Financial Accounting Standards Board, ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123
allows companies to continue to account for their stock option plans in
accordance with APB Opinion No. 25, but encourages the adoption of a new
accounting method based on the estimated fair value of employee stock options.
Pro forma net income and income per share, determined as if the Company had
applied the new method, are disclosed within Note 10.
Fair Value of Financial Instruments
The carrying amounts of all short-term asset and liability financial
instruments are reasonable estimates of their fair value because of the short
maturity of these items. The carrying amount of all long term financial
instruments approximates their fair value because their terms are similar to
those which can be obtained for similar financial instruments in the current
marketplace.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, which requires the
reporting of comprehensive income and its components in the 1998 financial
statements. Comprehensive income is defined as the change in equity from
transactions and other events and circumstances from non-owner sources, and
excludes investments by and distributions to owners. Comprehensive income
includes net income and other items of comprehensive income meeting the above
criteria. There is no impact on the Company's financial statements due to the
issuance of this statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which requires reporting about
operating segments, products and services, geographic areas and major customers.
Its objective is to provide information about the different types of business
activities and economic environments in which businesses operate. The first
disclosures will be required in the Company's 1999 Annual Report. The Company
does not expect substantial changes in its definition of segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. The Company has no pension or postretirement benefit plans in
place at this time. There is no impact on the Company's financial statements due
to the issuance of this statement.
Reclassifications
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year presentation.
2. Nature of Operations
The Company and its subsidiaries develop, manufacture and market
technology-distinguished pharmaceuticals and pharmaceutical compounds.
Prescription pharmaceuticals are sold primarily to domestic wholesalers,
drugstore chains, distributors and independent pharmacies nationwide. Contract
manufactured products and pharmaceutical compounds are sold to major domestic
drug, nutritional and food companies.
Sales to a single company aggregated 12% and 15% for the years ended
March 31, 1998 and 1997, respectively. In addition, the balance due from this
company represented approximately 18% and 23% of consolidated accounts
receivable as of March 31, 1998 and 1997, respectively. No single customer
accounted for 10% or more of consolidated revenues in fiscal 1996.
The Company extends unsecured credit to its customers.
3. Inventories
Inventories as of March 31, consist of:
1998 1997
---- ----
Finished goods $ 8,954,290 $ 6,941,864
Work-in-process 1,883,395 1,645,879
Raw materials 5,130,103 4,494,167
----------- -------------
15,967,788 13,081,910
Reserves for obsolescence (361,751) (296,322)
------------ --------------
$15,606,037 $12,785,588
=========== ===========
4. Property and Equipment
Property and equipment as of March 31, consist of:
1998 1997
---- ----
Land and improvements $ 1,490,567 $ 499,567
Building and building improvements 6,860,735 3,482,812
Machinery and equipment 13,267,562 11,792,688
Office furniture and equipment 3,323,955 3,403,378
Leasehold improvements 2,526,950 2,363,555
Construction-in-progress (estimated
costs to complete at
March 31, 1998 - $1,090,000) 600,618 1,114,837
---------- -----------
28,070,387 22,656,837
Less accumulated depreciation and
amortization
15,633,854 14,539,028
---------- -----------
Net property and equipment $12,436,533 $ 8,117,809
=========== ==============
Depreciation and amortization of property and equipment was $1,633,736,
$1,406,542 and $1,390,790 for 1998, 1997 and 1996, respectively.
5. Goodwill and Other Assets
Goodwill and other assets as of March 31, consist of:
1998 1997
---- ----
Goodwill $2,138,561 $2,138,561
Financing charges 586,656 370,934
cash surrender value of
life insurance and split-dollar
life insurance 850,989 759,624
Trademarks and patents 865,206 749,018
Deposits 446,807 448,899
Other 351,200 189,735
---------- ---------
5,239,419 4,656,771
Less accumulated amortization 1,874,520 1,635,762
---------- ---------
Net goodwill and other assets $3,364,899 $3,021,009
========== ==========
Amortization of goodwill is being charged to operations at $55,404 per
year. Amortization of all other deferred charges was $198,857, $132,354 and
$655,244 for 1998, 1997 and 1996, respectively.
6. Accrued Liabilities
Accrued liabilities as of March 31, consist of:
1998 1997
---- ----
Salaries, wages, incentives
and benefits $2,214,662 $ 1,522,951
Interest 72,999 85,777
Income taxes 2,884,522 476,000
Professional fees 875,891 273,464
Revenue sharing 4,911,634 -
Other 1,357,724 451,379
--------- -------
$12,317,432 $ 2,809,571
=========== ===========
7. Long-Term Debt
Long-term debt as of March 31, consists of:
1998 1997
---- ----
Industrial revenue bonds $2,155,000 $2,480,000
Building mortgage 3,305,555 -
Capital lease - 29,341
---------- ----------
5,460,555 2,509,341
Less current portion 558,333 351,316
---------- ----------
Long-term debt $4,902,222 $2,158,025
========== ==========
The industrial revenue bonds, which bear interest at 7.35% per annum,
mature serially through 2004 and are collateralized by certain property and
equipment, as well as through a letter of credit.
The building mortgage bears interest at 8.53% with monthly principal
payments of $19,444 plus interest through May 30, 2002, with a final payment of
the remaining principal balance outstanding plus accrued and unpaid interest due
on June 18, 2002.
The aggregate maturities of long-term debt as of March 31, 1998 are as
follows:
1999 $558,333
2000 558,333
2001 558,333
2002 558,332
2003 2,697,224
Later Years 530,000
----------
$5,460,555
==========
The Company paid interest of $465,040, $482,471, and $1,352,823 during
the years ended March 31, 1998, 1997 and 1996, respectively.
8. Commitments and Contingencies
Leases
The Company has non-cancelable commitments for rental of office space,
plant and warehouse facilities, transportation equipment and other personal
property under operating leases. Future minimum lease commitments under all
non-cancelable operating leases are as follows:
1999 $1,111,919
2000 1,024,129
2001 994,692
2002 989,856
2003 905,643
Later Years 1,012,937
---------
$6,039,176
==========
Total rent expense for the years ended March 31, 1998, 1997 and 1996
was $1,076,628, $1,189,349 and $1,229,881, respectively.
Contingencies
The Company currently carries product liability coverage of $10,000,000
per occurrence and $10,000,000 in the aggregate on a "claims made" basis. There
is no assurance that the Company's present insurance will cover any potential
claims that may be asserted in the future. In addition, the Company is subject
to legal proceedings and claims which arise in the ordinary course of business.
Employment Agreements
The Company has employment agreements with certain officers and key
employees which extend for one to five years. These agreements provide for base
levels of compensation and, in certain instances, also provide for incentive
bonuses and separation benefits. Also, the agreement with one officer contains
provisions for partial salary continuation under certain conditions contingent
upon noncompete restrictions and providing consulting services to the Company as
specified in the agreement. The Company expensed $839,812, $152,089 and $142,139
under this agreement in 1998, 1997 and 1996, respectively.
Credit Facility
As of March 31, 1998, the Company had a loan agreement expiring June
18, 2000 with LaSalle National Bank. The agreement provides for a revolving line
of credit for borrowing up to $20,000,000. The credit facility is unsecured and
interest is charged at the prime rate. As of March 31, 1998, the Company had no
cash borrowing, however, $2,248,202 in an open letter of credit was issued under
this facility. The agreement includes covenants that impose minimum levels of
tangible net worth and earnings before interest, taxes, depreciation and
amortization, set a maximum leverage ratio, and limit capital expenditures and
dividend payments.
9. Income Taxes
The fiscal 1998 provision was based on the estimated federal and state
taxable income using statutory rates, as well as utilization of the Company's
general business credit carry forwards generated in prior years, while the
fiscal 1997 provision was based on an estimate of state taxable income using
statutory rates. No loss carryforwards were available for fiscal 1998. For
fiscal 1996, $90,000 provision for income taxes was required due to the effect
of the alternative minimum tax.
The reasons for the differences between the provision for income taxes
and the expected federal income taxes at the statutory rate are as follows:
1998 1997 1996
---- ---- ----
Computed income tax expense
at statutory rate $5,947,000 $3,164,000 $1,536,211
Change in valuation allowance (1,568,000) (3,392,000) (1,596,200)
Alternative minimum tax - - 90,000
State income taxes, less
federal income tax benefit 696,000 383,000 -
Other 612,000 228,000 59,989
----------- ----------- -------------
Provision for income taxes $ 5,687,000 $ 383,000 $ 90,000
=========== =========== ============
As of March 31, 1998, and 1997, the tax effect of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amount are as follows:
1998 1998 1997 1997
Current Non-Current Current Non-Current
Fixed asset basis differences $ - $(1,136,000) $ - $(1,132,000)
Reserve for inventory and receivables 2,506,000 - 1,003,000 -
Vacation pay reserve 381,000 - 250,500 -
Deferred compensation - 601,000 - 290,000
Research and development credit - - - 958,000
Minimum tax credit - - - 963,000
Other 62,000 - 125,500 -
------------ ---------- ------------ ----------
Gross deferred tax asset (liability) 2,949,000 (535,000) 1,379,000 1,079,000
Valuation allowance - - (489,000) (1,079,000)
------------ ---------- ------------ ------------
Net deferred taxes $ 2,949,000 $ (535,000) $ 890,000 -
============ =========== ============== $===========
The components of deferred taxes are as follows as of March 31, 1998
and 1997:
1998 1997
---- ----
Deferred tax liability $(1,136,000) $(1,132,000)
Deferred tax asset 3,550,000 3,590,000
Valuation allowance - (1,568,000)
------------- ----------
$ 2,414,000 $ 890,000
============ ============
The Company paid income taxes of $4,754,088, $846,000 and $90,000
during the years ended March 31, 1998, 1997 and 1996, respectively.
10. Employee Benefits
Stock Option Plan
The Company established the KV Pharmaceutical Company Incentive Stock
Option Plan for key employees and reserved 2,947,500 shares of Common Stock for
such plan. Under the plan, the Stock Option Committee may grant stock options to
key employees at not less than one hundred percent (100%) of the fair market
value of the Company's Common Stock at the date of grant. The durations and
exercisability of the grants vary over a period of up to ten years from the date
of grant. During 1998, the Company granted options for 523,500 shares, but had
47,820 shares forfeited. As of March 31, 1998, options with remaining
contractual lives of up to ten years to purchase 1,655,754 shares at the fair
market value at the grant date were outstanding, 926,826 of which were
exercisable.
The following summary shows the transactions for the fiscal years 1998,
1997 and 1996 under option arrangements (as restated, see Note 12):
Options Outstanding Options Exercisable
-------------------- --------------------
Average Average
No. of Price Per No. of Price Per
Shares Share Shares Share
------- --------- ------- ---------
Balance, March 31, 1995 1,019,574 3.28 748,871 2.90
Options granted 359,738 4.86 - -
Options becoming exercisable - - 129,899 4.50
Options exercised (579,546) 2.65 (579,546) 2.65
Options canceled (36,048) 4.23 (16,160) 3.11
------- -------
Balance, March 31, 1996 763,718 4.47 283,064 4.17
Options granted 587,898 8.00 - -
Options becoming exercisable - - 308,294 7.06
Options exercised (39,660) 2.61 (39,660) 2.61
Options canceled (69,825) 5.44 (38,213) 5.26
------- -------
Balance, March 31, 1997 1,242,131 6.14 513,485 5.94
Options granted 523,500 11.59 - -
Options becoming exercisable - - 483,750 9.85
Options exercised (62,057) 3.21 (62,057) 3.21
Options canceled (47,820) 8.95 (8,352) 7.56
------- ------
Balance, March 31, 1998 1,655,754 7.89 926,826 8.15
========= =======
As discussed in the Summary of Accounting Policies, the Company applies
APB Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its incentive stock
option plan.
The weighted-average grant date fair value per share of stock options
granted during the year was $9.17 for A options, $5.29 for B options, $5.23 for
A options, $4.02 for B options, $2.79 for A options and $1.78 for B options in
1998, 1997 and 1996 respectively. The weighted-average significant assumptions
used to determine those values using the Black-Scholes option pricing model for
1998, 1997 and 1996, respectively, were: volatility of .6700, .6212 and .4972;
dividend yield of 0% in all three years; risk-free interest rate of return of
6.3%, 6.6% and 6.0%; expected option lives of 3, 5 or 10 years.
The following table summarizes information about stock options
outstanding at March 31, 1998:
Options Outstanding Options Exercisable
-------------------- --------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Life Average Exercisable Average
Prices at 3/31/98 Remaining Exercise Price at 3/31/98 Exercise Price
- ----------------------- ----------- --------------- -------------- ------------ --------------
$1.84 to $3.00 72,372 3 Years $2.23 47,900 $2.23
$3.01 to $6.00 537,494 4 Years $4.86 278,997 $4.83
$6.01 to $9.00 521,132 6 Years $8.04 268,298 $8.16
$9.01 to $12.00 465,543 4 Years $11.28 325,743 $11.75
$12.01 to $15.01 59,213 10 Years $14.03 5,888 $14.04
------ ------
1,655,754 926,826
========= =======
The fair market value of options granted during the years ended March
31, 1998, 1997, and 1996 was $3,286,000, $1,754,000 and $467,000, respectively.
The pro-forma effect on earnings for the year ended March 31, 1998,
1997 and 1996 of the method consistent with SFAS No. 123 would be to reduce
reported net income by approximately $2.2 million, $1.7 million and $.4 million
respectively, to approximately $9.1 million, $7.2 million and $3.6 million.
The pro-forma effect on fully diluted earnings per share for the years
ended March 31, 1998, 1997 and 1996 of this method would be to reduce net income
per share by $.12 per share, $.09 per share and $.03 per share, respectively, to
$.46 per share, $.38 per share and $.18 per share.
Profit Sharing Plan
The Company has a qualified trustee profit sharing plan (the "Plan")
covering substantially all non-union employees. The Company's annual
contribution to the Plan, as determined by the Board of Directors, is
discretionary and was $100,000 for fiscal 1998. The profit sharing contribution
for fiscal 1997 was $50,000. No contributions were made for fiscal 1996. The
Plan includes features as described under Section 401(k) of the Internal Revenue
Code.
The Plan was amended as of April 1, 1997, to change the Company's
contributions to the 401(k) investment funds to fifty percent (50%) of the first
7% of the salary contributed by each participant. Contributions to the 401(k)
investment funds of approximately $222,000, $78,000 and $71,000 were made in
1998, 1997 and 1996, respectively.
Contributions are also made to multi-employer defined benefit plans
administered by labor unions for certain union employees. Amounts charged to
pension expense and contributed to these plans were $79,560, $63,770 and $59,032
in 1998, 1997 and 1996, respectively.
Health and Medical Insurance Plan
The Company contributes to health and medical insurance programs for
its non-union and union employees. For non-union employees, the Company self
insures the first $50,000 of each employee's covered medical claims. The Company
has recorded $125,000 of accrued health insurance expense reserves as of March
31, 1998 and 1997, respectively and $90,000 as of March 31, 1996 for claims
incurred but not reported claims. For union employees, the Company participates
in a fully funded insurance plan sponsored by the union. Expenses related to
both plans charged to operations were approximately $1,180,000, $1,200,000, and
$1,058,000 in fiscal 1998, 1997 and 1996, respectively.
11. Related Party Transactions
A director of the Company is associated with a law firm that rendered
various legal services to the Company. The Company paid the firm approximately
$239,000, $257,000 and $243,000 during the years ended March 31, 1998, 1997 and
1996, respectively.
In addition, the Company currently leases certain real property from an
affiliated partnership of another director of the Company. Lease payments made
for this property during the years ended March 31, 1998, 1997 and 1996 totaled
$237,164, $231,885 and $222,910, respectively.
12. Equity Transactions
As of March 31, 1998, the Company has outstanding 241,000 shares of 7%
Cumulative Convertible Preferred Stock (par value $.01 per share) at a stated
value of $25 per share. The Preferred Stock is non-voting with dividends payable
quarterly. The Preferred Stock is redeemable at its stated value. Each share of
Preferred Stock is convertible into Class A Common Stock at a conversion price
of $6.67 per share. The Preferred Stock has a liquidation preference of $25 per
share plus all accrued but unpaid dividends prior to any liquidation
distributions to holders of Class A or Class B Common Stock. Undeclared and
unaccrued cumulative preferred dividends at both March 31, 1998 and 1997 were
$2,203,644.
Holders of Class A Common Stock are entitled to receive dividends per
share equal to 120% of the dividends per share paid on the Class B Common Stock
and have one-twentieth vote per share in the election of directors and one vote
per share on other matters. No dividends may be paid on Class A or Class B
Common Stock unless all dividends on the Convertible Preferred Stock have been
declared and paid.
Under the terms of the Company's current loan agreement (see Note 8),
the Company has limitations on paying dividends, except in stock, on its Class A
and B Common Stock. Payment of dividends may also be restricted under Delaware
Corporation law.
In connection with an agreement entered into in January 1996, (see Note
15), the Company received $5,000,000 for the sale of Class A Common Stock
options exercisable through September 29, 1998. At March 31, 1998, all options
had expired except an option valued at $1,300,000 to purchase Class A Common
Stock at a minimum price of $33.33 per share exercisable for a 30 day period
ending September 29, 1998. The actual exercise price and number of shares of
Class A Common Stock to be purchased are dependent on the fair market value of
the stock for a ten-day period prior to exercise.
In connection with an agreement entered into in January 1997 (see Note
15), the Company sold 200,000 shares of Class A Common Stock (par value $.01 per
share) in March of 1997 with proceeds aggregating $3,500,000.
On March 23, 1998, the Company's Board of Directors declared a
three-for-two stock split in the form of a 50% stock dividend of the Company's
Common Stock to shareholders of record on April 3, 1998, payable on April 17,
1998. Common Stock was credited and retained earnings was charged for the
aggregate par value of the shares issued. The stated par value of each share was
not changed from $.01.
All per share data in this report has been restated to reflect the
aforementioned three-for-two stock split in the form of a 50% stock dividend.
13. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
---- ---- ----
Numerator:
Net income $11,303,756 $ 8,923,512 $ 4,042,660
Preferred Stock dividends (421,751) (421,751) (421,751)
------------ -------------- ------------
Numerator for basic earnings per
share--income available to common
shareholders 10,882,005 8,501,761 3,620,909
Effect of dilutive securities:
Preferred Stock dividends 421,751 421,751 -
----------- ------------- --------------
Numerator for diluted earnings per
share-income available to
common shareholders after
assumed conversions $11,303,756 $ 8,923,512 $ 3,620,909
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,093,896 17,758,992 17,282,826
Effect of dilutive securities:
Employee stock options 642,912 359,055 214,361
Convertible Preferred Stock 903,750 903,750 -
----------- ------------- -------------
Dilutive potential Common Shares 1,546,662 1,262,805 214,361
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 19,640,558 19,021,797 17,497,187
========== ========== ==========
Basic Earnings per Share (1): $0.60 $0.48 $0.21
===== ===== =====
Diluted Earnings per Share (1), (2): $0.58 $0.47 $0.21
===== ===== =====
(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) The options to purchase Class A Common Stock sold in connection with an
agreement entered into in January 1996 (see Note 12) 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.
14. Litigation
In April 1995, the Company entered into a plea agreement with the U.S.
Department of Justice in which the Company agreed to plead guilty to certain
misdemeanor violations and to pay a fine of $500,000 and cost reimbursements of
$100,000, payable in eight semi-annual, interest-free installments of $75,000
beginning in July 1995. The costs associated with the agreement were recorded in
the Company's statement of income for fiscal year ended March 31, 1995.
From time to time, the Company becomes involved in various legal
matters which it considers to be in the ordinary course of business. While the
Company is not presently able to determine the potential liability, if any,
related to such matters, the Company believes none of the matters, individually
or in the aggregate, will have a material adverse effect on its financial
position.
15. Agreements
In January 1996, the Company received $5,000,000 ($1,700,000 of which
was allocated to licensing revenues, with the remaining $3,300,000 recorded
primarily as a reimbursement of capitalized charges) in consideration for giving
a marketing company the right to explore the Company's drug delivery
technologies with the possibility of entering into future individual product
agreements to replace certain other products, and to provide future royalties
and product opportunities. In connection with this agreement, the Company
received $5,000,000 for the sale of certain Class A Common Stock options
exercisable in various periods through September 1998 (see Note 12).
In January 1997, the Company concluded a broad-based agreement with
Roche Holding, Ltd. of Basel, Switzerland ("Roche"), which provides for the
marketing by Roche, or its licensee, of a prescription, one dose cure vaginal
antifungal product. The product received FDA approval in February 1997. The
agreement also gave KV the right to market the product in North America and the
exclusive right to market or license the prescription product in the rest of the
world.
The agreement included cash payments of $3,000,000 made in January 1997
and 1998, respectively, with one additional payment of $3,000,000 to be received
in January 1999, unless regulatory approval of a potential follow-on product in
the same therapeutic area is received prior to that date. Such payments received
have been included in revenue and the last payment will be similarly treated
when received. Upon marketing, KV will receive royalties on the sales of the
follow-on product. Under the agreement, KV also has the exclusive right to
market or license the follow-on product outside of North America.
Also, as part of the agreement, additional products are to be developed
for Roche using KV's proprietary drug delivery technologies. KV would receive
manufacturing revenues and royalties at the time the products are marketed under
separate agreements for each product.
As part of a further collaboration under the agreement, KV's
wholly-owned subsidiary, ETHEX Corporation, began marketing two of Roche's brand
name products generically under a revenue sharing arrangement in fiscal 1998.
16. Quarterly Financial Results (Unaudited)
($ in 000's, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
----------- ----------- ----------- ----------- ----
FISCAL 1998
Net Sales $18,202 $21,887 $28,434 $29,963 $98,486
Gross Profit $7,984 $9,459 $11,393 $13,167 $42,003
Pretax Income $2,761 $3,556 $ 4,030 $6,644 $16,991
Net Income $1,841 $2,182 $ 2,763 $4,518 $11,304
Earnings Per Share-Basic (a) $ 0.10 $ 0.11 $ 0.15 $ 0.24 $ 0.60
Earnings Per Share-Diluted (a) $ 0.09 $ 0.11 $ 0.14 $ 0.23 $ 0.58
FISCAL 1997
Net Sales $13,068 $13,094 $14,727 $17,002 $57,891
Gross Profit $5,930 $6,453 $6,546 $ 9,484 $28,413
Pretax Income $1,315 $1,628 $1,837 $ 4,527 $ 9,307
Net Income $1,285 $1,598 $1,807 $ 4,234 $ 8,924
Earnings Per Share-Basic (a) $ 0.07 $ 0.08 $ 0.10 $ 0.23 $ 0.48
Earnings Per Share-Diluted (a) $ 0.07 $ 0.08 $ 0.09 $ 0.22 $ 0.47
Note:
(a) All earnings per share amounts have been restated to reflect a 3 for 2
stock split in the form of a 50% stock dividend, declared by the Board of
Directors on March 23, 1998 and distributed April 17, 1998 to
shareholders of record as of April 3, 1998.
17. Industry Segments
The Company operates in one industry segment, "Pharmaceutical
Development, Manufacturing and Marketing."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information contained in Registrant's Report on [Form 8-K-A
(Amendment No. 1) filed June 18, 1996] under Item 4, entitled "Changes in
Registrant's Certified Accountant," is incorporated herein by this reference.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the caption "INFORMATION CONCERNING
NOMINEE AND DIRECTORS CONTINUING IN OFFICE" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1998 Annual
Meeting of Shareholders, which involves the election of a director, is
incorporated herein by this reference. Also see Item 4(a) of Part I hereof.
Item 11. Executive Compensation
The information contained under the captions "EXECUTIVE COMPENSATION"
and "INFORMATION AS TO STOCK OPTIONS" in the Company's definitive proxy
statement to be filed pursuant to Regulation 14(a) for the Company's 1998 Annual
Meeting of Shareholders, which involves the election of directors, is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the captions "SECURITY OWNERSHIP OF
PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to
be filed pursuant to Regulation 14(a) for the Company's 1998 Annual Meeting of
Shareholders, which involves the election of directors is incorporated herein by
this reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "TRANSACTIONS WITH ISSUER"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14(a) for the Company's 1998 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of the
Company are included in Part II, Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of
March 31, 1998 and 1997
Consolidated Statements of Income
for the Years Ended March 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1998, 1997 and 1996
Notes to Financial Statements
(a) 2. Financial Statement Schedule
The following consolidated financial statement schedule
of K-V Pharmaceutical Company and subsidiaries is included
in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits:
See Exhibit Index
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the fourth
quarter of the Registrant's fiscal year ended
March 31, 1998.
(c) Exhibits:
See Exhibit Index
(d) Financial Statement Schedules:
Schedule II
Valuation and Qualifying Accounts
Balance at Additions charged Amounts charged Balance
beginning to costs and to at end
of year expenses reserves of year
Year Ended March 31, 1996:
Allowance for doubtful accounts $ 169,187 $ 736,757 $ 335,446 $ 570,498
Inventory obsolescence 1,885,571 1,399,966 3,060,537 225,000
--------- --------- --------- --------
2,054,758 2,136,723 3,395,983 795,498
========= ========= ========= =======
Year Ended March 31, 1997:
Allowance for doubtful accounts 570,498 440,911 882,355 129,054
Inventory obsolescence 225,000 1,180,516 1,109,194 296,322
------- --------- --------- -------
795,498 1,621,427 1,991,549 425,376
======= ========= ========= =======
Year Ended March 31, 1998:
Allowance for doubtful accounts 129,054 1,086,961 883,771 332,244
Inventory obsolescence 296,322 1,363,908 1,298,479 361,751
------------- ----------- ------------ ----------
$ 425,376 $ 2,450,869 $2,182,250 $ 693,995
============ ========== =========== =========
Financial Statements of KV Pharmaceutical Company (separately) are omitted
because KV is primarily an operating company and its subsidiaries included in
the financial statements are wholly-owned and are not materially indebted to any
person other than through the ordinary course of business.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KV PHARMACEUTICAL COMPANY
Date: June 24, 1998 By /s/ Marc S. Hermelin
---------------------
Vice Chairman of the Board
(Principal Executive Officer)
Date: June 24, 1998 By /s/ Gerald R. Mitchell
-----------------------
Vice President, Finance
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the dates indicated by the following persons on behalf
of the Company and in their capacities as members of the Board of Directors of
the Company:
Date: June 24, 1998 By /s/ Marc S. Hermelin
---------------------
Marc S. Hermelin
Date: June 24, 1998 By /s/ Victor M. Hermelin
-----------------------
Victor M. Hermelin
Date: June 24, 1998 By /s/ Garnet E. Peck, Ph.D.
-------------------------
Garnet E. Peck, Ph.D.
Date: June 24, 1998 By /s/ Alan G. Johnson
--------------------
Alan G. Johnson
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3(a) The Company's Certificate of Incorporation, which was filed
as Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1981, is incorporated herein by
this reference.
3(b) Certificate of Amendment to Certificate of Incorporation of
the Company, effective March 7, 1983, which was filed as
Exhibit 3(c) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1983, is incorporated herein by this
reference.
3(c) Certificate of Amendment to Certificate of Incorporation of
the Company, effective June 9, 1987, which was filed as
Exhibit 3(d) to the Company's Annual Report on From 10-K for
the year ended March 31, 1987, is incorporated herein by this
reference.
3(d) Certificate of Amendment to Certificate of Incorporation of
the Company, effective September 24, 1987, which was filed as
Exhibit 3(f) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1988, is incorporated herein by this
reference.
3(e) Certificate of Amendment to Certificate of Incorporation of
the Company, which was filed as Exhibit 3(e) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1996,
is incorporated herein by this reference.
3(f) Certificate of Amendment to Certificate of Incorporation of
the Company, which was filed as Exhibit 3(f) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1996,
is incorporated herein by this reference.
3(g) Bylaws of the Company, as amended through November 18, 1982,
which was filed as Exhibit 3(e) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1993, is
incorporated hereby by this reference.
3(h) Amendment to Bylaws of the Company, which was filed as
Exhibit 3(h) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1996, is incorporated herein by this
reference.
4(a) Certificate of Designation of Rights and Preferences of 7%
Cumulative Convertible preferred stock of the Company,
effective June 9, 1987, and related Certificate of
Correction, dated June 17, 1987, which was filed as Exhibit
4(f) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1987, is incorporated herein by this
reference.
4(b) Loan Agreement dated as of November 1, 1989, with the
Industrial Development Authority of the County of St. Louis,
Missouri, regarding private activity refunding and revenue
bonds issued by such Authority, including form of Promissory
Note executed in connection therewith, which was filed as
Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1989, is incorporated
herein by this reference.
4(c) Loan Agreement dated June 18, 1997 between the Company and
its subsidiaries and LaSalle National Bank ("LaSalle"), which
was filed as Exhibit 4(i) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997, is incorporated
herein by this reference.
4(d) Revolving Note, dated June 18, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as Exhibit
4(j) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1997, is incorporated herein by this
reference.
4(e) Term Note, dated June 24, 1997, by the Company and its
subsidiaries in favor of LaSalle, which was filed as Exhibit
4(k) to the Company's Annual Report on Form 10-K for the year
ended March 31, 1997, is incorporated herein by this
reference.
4(f) Reimbursement Agreement dated as of October 16, 1997, between
the Company and LaSalle, filed herewith.
4(g) Deed of Trust and Security Agreement dated as of October 16,
1997, between the Company and LaSalle, filed herewith.
10(a)* Stock Option Agreement between the Company and Marc S.
Hermelin, Vice Chairman and Chief Executive Officer, dated
February 18, 1986, is incorporated herein by this reference.
10(b)* First Amendment to and Restatement of the KV Pharmaceutical
1981 Employee Incentive Stock Option Plan, dated March 9,
1987 (the "Restated 1981 Option Plan"), which as filed as
Exhibit 10(t) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1988, is incorporated herein by this
reference.
10(c)* Second Amendment to the Restated 1981 Option Plan, dated June
12, 1987, which was filed as Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1988,
is incorporated herein by this reference.
10(d)* Revised Form of Stock Option Agreement, effective June 12,
1987, for the Restated 1981 Option Plan, which was filed as
Exhibit 10(v) to the Company's Annual Report on From 10-K for
the year ended March 31, 1988, is incorporated herein by this
reference.
10(e)* Consulting Agreement between the Company and Victor M.
Hermelin, Chairman of the Board, dated October 30, 1978, as
amended October 30, 1982, and Employment Agreement dated
February 20, 1974, referred to therein (which was filed as
Exhibit 10(m) to the Company's Annual Report on From 10-K for
the year ended March 31, 1983) and subsequent Amendments
dated as of August 12, 1986, which was filed as Exhibit 10(f)
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1987, and dated as of September 15, 1987
(which was filed as Exhibit 10(s) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1988), and
dated October 25, 1988 (which was filed as Exhibit 10(n) to
the Company's Annual Report on Form 10-K for the year ended
March 31, 1989), and dated October 30, 1989 (which was filed
as Exhibit 10(n) to the Company's Annual Report on Form 10-K
for the year ended March 31, 1990), and dated October 30,
1990 (which was filed as Exhibit 10(n) to the Company's
Annual Report on Form 10-K for the year ended March 31,
1991), and dated as of October 30, 1991 (which was filed as
Exhibit 10(i) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1992), are incorporated herein by
this reference.
10(f)* Restated and Amended Employment Agreement between the Company
and Gerald R. Mitchell, Vice President, Finance, dated as of
March 31, 1994, is incorporated herein by this reference.
10(g)* Employment Agreement between the Company and Raymond F.
Chiostri, Corporate Vice-President and
President-Pharmaceutical Division, which was filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1992, is incorporated herein by this
reference.
10(h) Lease of the Company's facility at 2503 South Hanley Road,
St. Louis, Missouri, and amendment thereto, between the
Company as Lessee and Marc S. Hermelin as Lessor, which was
filed as Exhibit 10(n) to the Company's Annual Report on Form
10-K for the year ended March 31, 1983, is incorporated
herein by this reference.
10(i) Amendment to the Lease for the facility located at 2503 South
Hanley Road, St. Louis, Missouri, between the Company as
Lessee and Marc S. Hermelin as Lessor, which was filed as
Exhibit 10(p) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1992, is incorporated herein by this
reference.
10(j) Amendment to Lease Agreement, dated as of September 30, 1985,
between the Industrial Development Authority of the County of
St. Louis, Missouri, as Lessor and KV Pharmaceutical Company
as Lessee, regarding lease of facility located at 2303
Schuetz Road, St. Louis County, Missouri, which was filed as
Exhibit 10(q) to the Company's Report on Form 10-Q for the
quarter ended December 31, 1985, is incorporated herein by
this reference.
10(k)* KV Pharmaceutical Company Fourth Restated Profit Sharing Plan
and Trust Agreement dated September 18, 1990, which was filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-8 No. 33-36400, is incorporated herein by this
reference.
10(l)* First Amendment to the KV Pharmaceutical Company Fourth
Restated Profit Sharing Plan and Trust dated September 18,
1990, is incorporated herein by this reference.
10(m)* KV Pharmaceutical Company 1991 Incentive Stock Option Plan,
adopted as of October 7, 1991, which was filed as Exhibit 4
to the Company's Form S-8 Registration Statement No.
33-44927, filed January 6, 1992, is incorporated herein by
this reference.
10(n) Consent Decree and Civil Actions Nos. 4:93CV00918 and
4:93CV00919 filed June 14, 1993, in connection with Complaint
of Forfeiture on behalf of FDA, which was filed as Exhibit
10(s) to the Company's Annual Report on Form 10-K for the
year ended March 31, 1993, is incorporated herein by this
reference.
10(o) Modification of Consent Decree of Condemnation and Permanent
Injunction filed December 13, 1993, which was filed as
Exhibit 10(r) to the Company's Annual Report on From 10-K for
the year ended March 31, 1994, is incorporated herein by this
reference.
10(p) Second Modification of Consent Decree of Condemnation and
Permanent Injunction filed April 6, 1994, which was filed as
Exhibit 10(s) to the Company's Annual Report on Form 10-K for
the year ended March 31, 1994, is incorporated herein by this
reference.
10(q)* Employment Agreement between the Company and Marc S.
Hermelin, Vice-Chairman, dated November 15, 1993, which was
filed as Exhibit 10(u) to the Company's Annual Report on Form
10-K for the year ended March 31, 1994, is incorporated
herein by this reference.
10(r)* Amendment to Consulting Agreement between the Company and
Victor M. Hermelin, Chairman of the Board, dated October 30,
1978, which was filed as Exhibit 10(v) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1994,
is incorporated herein by this reference.
10(s)* Stock Option Agreement dated June 1, 1995, granting stock
option to Marc S. Hermelin, which was filed as Exhibit 10(w)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by this
reference.
10(t)* Second Amendment dated as of June 1, 1995, to Employment
Agreement between the Company and Marc S. Hermelin, which was
filed as Exhibit 10(x) to the Company's quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, is
incorporated herein by this reference.
10(u)* Amendment to and Restatement of the KV Pharmaceutical
Company's 1991 Incentive Stock Option Plan dated as of
November 1, 1995, which was filed as Exhibit 10(y) to the
Company's Annual Report on Form 10-K for the year ended March
31, 1996, is incorporated herein by this reference.
10(v)* Stock Option Agreement dated as of January 22, 1996, granting
stock options to MAC & Co., which was filed as Exhibit 10(z)
to the Company's Annual Report on Form 10-K for the year
ended March 31, 1996, is incorporated herein by this
reference.
10(w)* Third Amendment dated as of November 22, 1995, to Employment
Agreement between the Company and Marc S. Hermelin, which was
filed as Exhibit 10(aa) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is incorporated
herein by this reference.
10(x)* Stock Option Agreement dated as of November 22, 1995,
granting a stock option to Victor M. Hermelin, which was
filed as Exhibit 10(bb) to the Company's Annual Report on
Form 10-K for the year ended March 31, 1996, is incorporated
herein by this reference.
10(y)* Fourth Amendment to and Restatement, dated as of January 2,
1997, of the KV Pharmaceutical Company 1991 Incentive Stock
Option Plan, which was filed as Exhibit 10(y) to the
Company's Annual Report on Form 10-K for the year ended March
31, 1997, is incorporated herein by this reference.
10(z)* Agreement between the Company Marc S. Hermelin, Vice
Chairman, dated December 16, 1996, with supplemental letter
attached, which was filed as Exhibit 10(z) to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997,
is incorporated herein by this reference.
10(aa) Amendment to Lease dated February 17, 1997, for the facility
located at 2503 South Hanley Road, St. Louis, Missouri
between the Company as Lessee and Marc S. Hermelin as Lessor,
which was filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the year ended March 31, 1997, is
incorporated herein by this reference.
10(bb)* Stock Option Agreement dated as of January 3, 1997, granting
a stock option to Marc S. Hermelin, filed herewith.
10(cc)* Stock Option Agreement dated as of May 15, 1997, granting a
stock option to Marc S. Hermelin, filed herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, L.L.P., filed herewith.
27 Financial Data Schedule, filed herewith.
* Management contract or compensation plan.