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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------------------
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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COMMISSION FILE NUMBER 1-9601
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K-V PHARMACEUTICAL COMPANY
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0618919
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 645-6600
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934).
YES X NO
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TITLE OF CLASS NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 1, 2002
--------------- ----------------------------------
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE 23,650,612
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE 10,484,433
1
PART I. - FINANCIAL INFORMATION
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- -------- -------
Net revenues $60,482 $50,658 $109,709 $95,878
Cost of sales 23,481 21,250 42,559 38,825
------- ------- -------- -------
Gross profit 37,001 29,408 67,150 57,053
------- ------- -------- -------
Operating expenses:
Research and development 5,086 2,419 8,555 4,953
Selling and administrative 17,330 15,403 32,822 31,044
Amortization of intangible assets 579 590 1,162 1,180
Litigation (Notes D and H) 16,500 - 16,500 -
------- ------- -------- -------
Total operating expenses 39,495 18,412 59,039 37,177
------- ------- -------- -------
Operating income (loss) (2,494) 10,996 8,111 19,876
------- ------- -------- -------
Other income (expense):
Interest and other income 334 138 387 243
Interest expense (60) (107) (97) (210)
------- ------- -------- -------
Total other income, net 274 31 290 33
------- ------- -------- -------
Income (loss) before income taxes (2,220) 11,027 8,401 19,909
Provision (benefit) for income taxes (815) 3,997 3,083 7,217
------- ------- -------- -------
Net income (loss) $(1,405) $ 7,030 $ 5,318 $12,692
======= ======= ======== =======
Net income (loss) per common share - basic $(0.04) $0.23 $0.16 $0.42
====== ===== ===== =====
Net income (loss) per common share - diluted $(0.04) $0.22 $0.16 $0.40
====== ===== ===== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, 2002 MARCH 31, 2002
------------------ --------------
(UNAUDITED)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 96,351 $ 12,109
Receivables, less allowance for doubtful accounts of
$326 and $403 at September 30, 2002 and March 31, 2002, respectively 42,517 54,218
Inventories, net 41,543 35,097
Prepaid and other assets 2,934 2,102
Deferred tax asset, net 12,730 5,227
-------- --------
Total Current Assets 196,075 108,753
Property and equipment, less accumulated depreciation 48,590 41,224
Goodwill and other intangible assets, net 41,147 41,292
Other assets 4,419 3,923
-------- --------
TOTAL ASSETS $290,231 $195,192
======== ========
LIABILITIES
-----------
Current Liabilities:
Accounts payable $ 12,039 $ 10,312
Accrued liabilities 30,379 16,332
Current maturities of long-term debt 712 712
-------- --------
Total Current Liabilities 43,130 27,356
Long-term debt 4,167 4,387
Other long-term liabilities 2,842 2,717
Deferred tax liability, net 2,484 1,940
-------- --------
TOTAL LIABILITIES 52,623 36,400
-------- --------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
--------------------
7% Cumulative Convertible Preferred Stock, $.01 par value; $25.00 stated
and liquidation value; 840,000 shares authorized; issued and
outstanding - 40,000 shares at September 30, 2002 and March 31, 2002
(convertible into Class A shares at a ratio of 5.625-to-one) - -
Class A and Class B Common Stock, $.01 par value; 150,000,000 and
75,000,000 shares authorized, respectively;
Class A-issued 23,638,335 and 20,158,334 at September 30, 2002 and
March 31, 2002, respectively 236 201
Class B-issued 10,537,781 and 10,711,514 at September 30, 2002 and
March 31, 2002, respectively (convertible into Class A shares
on a one-for-one basis) 106 108
Additional paid-in capital 120,710 47,231
Retained earnings 116,584 111,301
Less: Treasury stock, 893 shares of Class A and 53,428 shares of Class B
Common Stock at September 30, 2002 and 40,493 shares of Class A and
53,428 shares of Class B Common Stock at March 31, 2002, at cost (28) (49)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 237,608 158,792
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $290,231 $195,192
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
K-V PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 5,318 $ 12,692
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and other non-cash charges 3,507 3,171
Change in deferred taxes (6,959) 74
Change in deferred compensation 125 150
Changes in operating assets and liabilities:
Decrease (increase) in receivables, net 11,701 (10,723)
(Increase) decrease in inventories, net (6,446) 1,776
Decrease in prepaid and other assets 654 775
Increase in accounts payable and accrued liabilities 15,774 8,739
-------- --------
Net cash provided by operating activities 23,674 16,654
-------- --------
INVESTING ACTIVITIES
Purchase of stock and other intangible assets (3,000) -
Purchase of property and equipment, net (9,710) (3,389)
-------- --------
Net cash used in investing activities (12,710) (3,389)
-------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt (220) (174)
Dividends paid on preferred stock (35) (35)
Proceeds from issuance of common stock 72,472 -
Sale of common stock to employee profit sharing plan 891 -
Exercise of common stock options 170 289
-------- --------
Net cash provided by financing activities 73,278 80
-------- --------
Increase in cash and cash equivalents 84,242 13,345
Cash and cash equivalents at:
Beginning of year 12,109 4,128
-------- --------
End of period $ 96,351 $ 17,473
======== ========
Supplemental information:
Income taxes paid $ 10,901 $ 1,201
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of K-V
Pharmaceutical Company ("KV" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
and six-month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
March 31, 2003. The interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2002. The balance sheet information as of March 31, 2002,
has been derived from the Company's audited consolidated balance sheet as of
that date.
NOTE B - INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 2002 MARCH 31, 2002
------------------ --------------
Finished goods $26,003 $18,600
Work-in-process 3,779 4,702
Raw materials 12,535 12,903
------- -------
42,317 36,205
Reserve for obsolescence (774) (1,108)
------- -------
$41,543 $35,097
======= =======
Reserves for potentially obsolete or slow moving inventory are established
by management based on evaluation of inventory levels, estimated time
required to sell such inventory, remaining shelf life, and current and
expected market conditions.
NOTE C - REVENUE RECOGNITION
Revenue is recognized at the time product is shipped to customers. Net
revenues consist of gross sales to customers less provisions for expected
customer returns, rebates, discounts, chargebacks, and other sales
allowances which are established by the Company concurrently with the
recognition of revenue. Sales provisions totaled $24,710 and $26,962 for the
three months ended September 30, 2002 and 2001, respectively, and $44,268
and $56,931 for the six months ended September 30, 2002 and 2001,
respectively. The reserve balances related to the sales provisions totaled
$24,182 and $18,958 at September 30, 2002 and March 31, 2002, respectively,
and are included in "Receivables, less allowance for doubtful accounts" in
the accompanying consolidated balance sheets.
5
NOTE D - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing net income (loss)
available to common shareholders for the period by the weighted average
number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average common shares and common share equivalents (based on the treasury
stock method) outstanding during the periods presented assuming the
conversion of preferred shares and the exercise of all in-the-money stock
options. Common share equivalents have been excluded from the computation of
diluted earnings per share where their inclusion would be anti-dilutive. The
following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income (loss) $(1,405) $7,030 $5,318 $12,692
Preferred stock dividends (17) (17) (35) (35)
------- ------ ------ -------
Numerator for basic earnings (loss) per
share - income (loss) available to common
shareholders (1,422) 7,013 5,283 12,657
Effect of dilutive securities:
Preferred stock dividends 17 17 35 35
------- ------ ------ -------
Numerator for diluted earnings (loss) per
share - income (loss) available to common
shareholders after assumed conversions $(1,405) $7,030 $5,318 $12,692
======= ====== ====== =======
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares 33,817 30,674 32,302 30,083
------- ------ ------ -------
Effect of dilutive securities:
Stock options - 1,345 1,024 1,276
Convertible preferred stock - 225 225 772
------- ------ ------ -------
Dilutive potential common shares - 1,570 1,249 2,048
------- ------ ------ -------
Denominator for diluted earnings (loss)
per share - adjusted weighted-average
shares and assumed conversions 33,817 32,244 33,551 32,131
======= ====== ====== =======
Basic earnings (loss) per share (1)(3): $(0.04) $0.23 $0.16 $0.42
====== ===== ===== =====
Diluted earnings (loss) per share (1)(2)(3): $(0.04) $0.22 $0.16 $0.40
====== ===== ===== =====
(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) For the quarter ended September 30, 2002, there were stock options to
purchase 2,301,087 shares of Class A and Class B Common Stock and
preferred shares convertible into 225,000 shares of Class A Common
Stock that were excluded from the computation of diluted loss per share
because their effect would have been anti-dilutive. Also, excluded from
the computation of diluted earnings per share are
6
outstanding stock options whose exercise prices are greater than the
average market price of the common shares for the period reported. For
the quarter ended September 30, 2001, stock options to purchase 250
Class A and Class B common shares were excluded from the computation.
For the six-month periods, excluded from the computation were stock
options to purchase 290,100 and 17,000 of Class A and Class B common
shares at September 30, 2002 and 2001, respectively.
(3) Net income (loss) for the three-month and six-month periods ended
September 30, 2002 includes a nonrecurring reserve of $16,500 for
potential damages associated with a lawsuit (see Note H). The impact of
the nonrecurring litigation reserve, net of the applicable tax effect,
is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Net income:
Net income without nonrecurring reserve $ 9,039 $ 7,030 $ 15,762 $12,692
Nonrecurring litigation reserve, net of tax (10,444) - (10,444) -
-------- ------- -------- -------
Total net income (loss) $ (1,405) $ 7,030 $ 5,318 $12,692
======== ======= ======== =======
Per basic share:
Net income without nonrecurring reserve $ 0.27 $ 0.23 $ 0.49 $ 0.42
Nonrecurring litigation reserve, net of tax (0.31) - (0.33) -
-------- ------- -------- -------
Total net income (loss) $ (0.04) $ 0.23 $ 0.16 $ 0.42
======== ======= ======== =======
Per diluted share (4):
Net income without nonrecurring reserve $ 0.26 $ 0.22 $ 0.47 $ 0.40
Nonrecurring litigation reserve, net of tax (0.30) - (0.31) -
-------- ------- -------- -------
Total net income (loss) $ (0.04) $ 0.22 $ 0.16 $ 0.40
======== ======= ======== =======
(4) The diluted earnings per share amounts, excluding the nonrecurring
litigation reserve, for the three-month and six-month periods ended
September 30, 2002 are based on weighted average shares outstanding of
34,887 and 33,551, respectively.
7
NOTE E - SEGMENT FINANCIAL INFORMATION
The reportable operating segments of the Company are branded products,
specialty generics and specialty materials. The operating segments are
distinguished by differences in products, marketing and regulatory approval.
Segment profits are measured based on income before taxes and are determined
based on each segment's direct revenues and expenses. The majority of
research and development expense, corporate general and administrative
expenses, amortization and interest expense, as well as interest and other
income, are not allocated to segments, but included in the "all other"
classification. Identifiable assets for the three reportable operating
segments primarily include receivables, inventory, and property and
equipment. For the "all other" classification, identifiable assets consist
of cash and cash equivalents, property and equipment, goodwill and other
intangible assets, other assets and all income tax related assets. The
accounting policies of the segments are the same as those described in the
Company's Annual Report on Form 10-K for the year ended March 31, 2002.
The following represents information for the Company's reportable operating
segments for the three and six months ended September 30, 2002 and 2001.
THREE MONTHS
ENDED BRANDED SPECIALTY SPECIALTY ALL
SEPTEMBER 30 PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- --------- ----- ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 2002 $11,286 $44,393 $4,377 $ 426 $ - $ 60,482
2001 8,312 36,070 5,635 641 - 50,658
- ---------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (1) 2002 1,702 23,579 616 (28,117) - (2,220)
2001 418 18,364 1,176 (8,931) - 11,027
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets 2002 9,828 53,023 9,377 219,161 (1,158) 290,231
2001 5,459 40,890 7,695 120,411 (1,158) 173,297
- ---------------------------------------------------------------------------------------------------------------------------
Property and 2002 612 2 38 4,597 - 5,249
equipment additions 2001 263 57 29 1,516 - 1,865
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and 2002 90 12 43 1,715 - 1,860
amortization 2001 17 21 37 1,522 - 1,597
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED BRANDED SPECIALTY SPECIALTY ALL
SEPTEMBER 30 PRODUCTS GENERICS MATERIALS OTHER ELIMINATIONS CONSOLIDATED
------------ -------- -------- --------- ----- ------------ ------------
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 2002 $18,420 $81,445 $8,916 $ 928 - $109,709
2001 17,023 67,633 9,854 1,368 - 95,878
- ---------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (1) 2002 1,086 43,405 1,453 (37,543) - 8,401
2001 930 35,067 1,985 (18,073) - 19,909
- ---------------------------------------------------------------------------------------------------------------------------
Property and 2002 625 20 71 8,994 - 9,710
equipment additions 2001 265 78 106 2,940 - 3,389
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and 2002 111 25 84 3,287 - 3,507
amortization 2001 33 42 74 3,022 - 3,171
- ---------------------------------------------------------------------------------------------------------------------------
(1) In the "all other" classification, segment profit (loss) for the
three-month and six-month periods ended September 30, 2002 includes
a nonrecurring litigation reserve of $16,500 for potential damages
associated with a lawsuit (see Note H). Excluding the effect of the
nonrecurring litigation reserve for potential legal damages,
segment profit on a consolidated basis was $9,039 and $15,762 and
segment loss for the "all other" classification was $(11,617) and
$(21,043) for the three and six months ended September 30, 2002,
respectively.
8
NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
(Including Goodwill no longer subject to amortization)
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
issued in June 2001. In accordance with SFAS 142, goodwill and
indefinite-lived intangible assets are no longer subject to amortization,
while the value of other identifiable intangible assets must be amortized
over their estimated useful life. SFAS 142 requires goodwill and
indefinite-lived intangible assets to be tested for impairment annually
using a two-step process, and written off when impaired. In addition,
goodwill and indefinite-lived intangible assets must be tested for
impairment as of the beginning of the fiscal year in which SFAS 142 is
adopted.
As of September 30, 2002, the net carrying amounts of goodwill and other
intangible assets were $556 and $40,591, respectively. With the adoption of
SFAS 142, the Company determined its other intangible assets had finite
useful lives and will continue to be amortized over their estimated useful
lives. Goodwill relates to the 1972 acquisition of the Company's specialty
materials segment. The Company's initial goodwill impairment test as of
April 1, 2002 for the applicable reporting unit resulted in no impairment of
goodwill. The adoption of SFAS 142 did not have a material effect on the
Company's financial condition or results of operations.
The following table reflects consolidated financial results adjusted as
though the adoption of SFAS 142 was applied retroactively:
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss):
As reported $(1,405) $7,030 $5,318 $12,692
Goodwill amortization - 14 - 28
------- ------ ------ -------
As adjusted $(1,405) $7,044 $5,318 $12,720
======= ====== ====== =======
The retroactive application of the statement had no impact on earnings per
share as previously reported.
The following table reflects the components of intangible assets as of
September 30, 2002:
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Product rights $44,573 $7,727
Trademarks and patents 4,012 267
Goodwill 2,138 1,582
------- ------
Total intangible assets $50,723 $9,576
======= ======
9
Amortization expense for the three and six months ended September 30, 2002
was $575 and $1,153, respectively. Estimated annual amortization expense for
each of the five succeeding fiscal years is as follows:
Fiscal Year Ending March 31: AMOUNT
- ---------------------------- ------
2003 $2,306
2004 2,306
2005 2,306
2006 2,306
2007 2,306
NOTE G - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2001, the Emerging Issues Task Force issued EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendor's Products. EITF 01-09 codified and reconciled the task
force's consensuses on prior issues and identified other issues related to
various aspects of the accounting for consideration given by a vendor to a
customer or a reseller of the vendor's products. EITF 01-09 requires certain
items previously reported as selling expenses to be reclassified as
reductions of net revenues in the income statement. EITF 01-09 was effective
for reporting periods beginning after December 15, 2001 and was adopted by
the Company for the fourth quarter of its fiscal year ended March 31, 2002.
In connection with the adoption and to conform to current period
presentation, the Company reclassified certain prior period items which had
been included in selling and administrative expenses to reduce net revenues.
However, the reclassification did not affect reported net income or net
sales growth rates.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement
is effective for fiscal years beginning after June 15, 2002. Management does
not believe the adoption of this statement will have a material impact on
the results of operations or financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of, and certain provisions of
Accounting Principles Board Opinion No. 30, Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS 144 establishes a single accounting model, based
on the framework established in SFAS 121, for long-lived assets to be
disposed of by sale and resolves other implementation issues related to SFAS
121. This statement was adopted by the Company effective April 1, 2002. The
adoption of SFAS 144 did not have a material impact on the Company's results
of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds, amends or makes various technical
corrections to certain existing authoritative pronouncements. Management
does not believe the adoption of this statement will have a material impact
on the results of operations or financial position of the Company.
10
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 addresses the recognition,
measurement, and reporting of costs associated with exit and disposal
activities, including costs related to terminating a contract that is not a
capital lease and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is
not an ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan, which is generally before an actual liability
has been incurred. This statement will be effective for exit or disposal
activities that are initiated after December 31, 2002. Management does not
believe the adoption of this statement will have a material impact on the
results of operations or financial position of the Company.
NOTE H - CONTINGENCIES - RESERVE FOR POTENTIAL LEGAL DAMAGES
ETHEX Corporation, a wholly-owned subsidiary of the Company, is a defendant
in a lawsuit styled, Healthpoint, Ltd. V. ETHEX Corporation. On September
28, 2001, the jury returned verdicts, in the form of answers to special
interrogatories, against ETHEX on certain false advertising, unfair
competition and misappropriation claims and awarded approximately $16.5
million in damages to Healthpoint. On October 1, 2002, the U.S. District
Court for the Western District of Texas denied the Company's motion to set
aside the jury's verdicts. The Company intends to vigorously appeal the
judgment entered by the court. The Company and its counsel believe that the
jury's recommended award is excessive and is not sufficiently supported by
the facts or the law. The Company and its legal counsel are not presently
able to predict the outcome of an appeal. However, as a result of the
court's decision, the Company's results of operations for the three and six
months ended September 30, 2002 include a reserve for potential damages of
$16,500, which is reflected in Accrued liabilities in the Company's
Consolidated Balance Sheet as of September 30, 2002.
From time to time, the Company becomes involved in various legal matters, in
addition to the above-described matters, that the Company considers to be in
the ordinary course of business. For additional information regarding legal
proceedings in which the Company or its subsidiaries are a party, see Item I
of Part II of this report. While the Company is not presently able to
determine the potential liability, if any, related to such matters, the
Company believes none of such matters, individually or in the aggregate,
will have a material adverse effect on the Company's financial position or
operations.
NOTE I - SECONDARY STOCK OFFERING
During July 2002, the Company completed a secondary public offering of
approximately 3.3 million shares of Class A Common Stock. Net proceeds to
the Company were $72,472, after deducting underwriting discounts,
commissions and offering expenses.
11
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The materials in this Form 10-Q may contain various forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Any statements about the Company's expectations, beliefs,
plans, objectives, assumptions or future events or performance are not
historical facts and may be forward-looking. These statements are often, but
not always, made through the use of words or phases such as "anticipate,"
"estimate," "plans," "projects," "continuing," "ongoing," "expects,"
"management believes," "the Company believes," "the Company intends" and
similar words or phrases. Accordingly, these statements involve estimates,
assumptions and uncertainties that could cause actual results to differ
materially from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed throughout
this Form 10-Q.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to, the following:
(1) the degree to which the Company is successful in developing new products
and commercializing products under development; (2) the degree to which the
Company is successful in acquiring new pharmaceutical products, drug
delivery technologies and/or companies that offer these properties; (3) the
difficulty of predicting FDA approvals; (4) acceptance and demand for new
pharmaceutical products; (5) the impact of competitive products and pricing;
(6) reliance on key strategic alliances; (7) the availability of raw
materials; (8) the regulatory environment; (9) fluctuations in operating
results; (10) the difficulty of predicting the pattern of inventory
movements by the Company's customers; (11) the impact of competitive
response to the Company's efforts to leverage its brand power with product
innovation, promotional programs, and new advertising; (12) the risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission; (13) the availability of third-party reimbursement for
the Company's products; and (14) the Company's dependence on sales to a
limited number of large pharmacy chains and wholesale drug distributors for
a large portion of its total net sales.
Because the factors referred to above, as well as the statements included
under the caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition," and elsewhere in this Form 10-Q, could
cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements made by the Company or on its behalf, you
should not place undue reliance on any forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which it is made
and, unless applicable law requires to the contrary, the Company undertakes
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect
the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for the Company to predict which factors will
arise, when they will arise and/or their effects. In addition, the Company
cannot assess the impact of each factor on its business or financial
condition or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Except for the historical information contained herein,
the following discussion contains forward-looking statements that are
subject to known and unknown risks, uncertainties, and other factors that
may cause the Company's actual results to differ materially from those
expressed or implied by those forward-looking statements. These risks,
uncertainties and other factors are discussed above under the caption
"Cautionary Statement Regarding Forward-Looking Information." In addition,
the following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, the related notes to consolidated financial statements and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2002, and the unaudited interim consolidated
financial statements and related notes to unaudited interim consolidated
financial statements included in Item 1 of this Quarterly Report on Form
10-Q.
RESULTS OF OPERATIONS
- ---------------------
REVENUES. Net revenues for the quarter ended September 30,
2002 increased $9.8 million, or 19.4%, to $60.5 million from $50.7 million
for the second quarter in the prior year. For the six months ended September
30, 2002, net revenues increased $13.8 million, or 14.4%, to $109.7 million
from $95.9 million for the corresponding period in the prior fiscal year.
The increase in net revenues for both the quarter and six-month periods was
due to higher sales of branded and specialty generic products.
Branded product sales increased $3.0 million, or 35.8%, to
$11.3 million for the quarter ended September 30, 2002 compared to $8.3
million for the second quarter last year. For the six months ended September
30, 2002, branded product sales increased $1.4 million, or 8.2%, to $18.4
million compared to $17.0 million for the same period last year. The
increase in branded product sales for both the quarter and six-month periods
was due to continued growth in the sales volume of the women's healthcare
family of products. Sales from this product line increased $3.2 million, or
54.1%, in the second quarter and $2.9 million, or 25.8%, for the six-month
period. Included in women's healthcare is the PreCare(R) family of prenatal
products, which contributed $2.1 million and $0.6 million of incremental
sales in the quarter and six-month periods, respectively, due primarily to
volume-related increases. During the quarter, the PreCare(R) product line
experienced growth in prescription volume of 27% compared to the same
quarter last year. For the six-month period, the sales growth experienced by
the PreCare(R) product line was partially impacted by a decline in first
quarter sales due to customer buy-ins at the end of fiscal 2002 before price
increases became effective. Sales of Gynazole-1(R) continued to grow in the
second quarter as its market share increased to 15.7% at the end of the
quarter, compared to 11.5% at the end of the second quarter of fiscal 2002.
Due to its continued growth in market share, sales of Gynazole-1(R)
increased $1.1 million, or 50.9%, over the second quarter of the prior year
and increased $2.2 million, or 57.7%, over the comparable six-month period.
Sales from the cardiovascular product line decreased $0.2 million and $1.5
million for the quarter and six-month periods, respectively. The decrease in
cardiovascular sales for both the quarter and six-month periods was due to
the impact of customer buying during the fourth quarter of the prior fiscal
year in anticipation of a year-end price increase.
Specialty generic product sales increased $8.3 million, or
23.1%, to $44.4 million for the quarter ended September 30, 2002 compared to
$36.1 million for the quarter ended September 30, 2001. For the six months
ended September 30, 2002, specialty generic product sales increased $13.8
million, or 20.4%, to $81.4 million compared to $67.6 million for the six
months ended September 30, 2001. Specialty generic product sales comprised
73.4% and 74.2% of the Company's total net revenues for the
13
quarter and six months ended September 30, 2002, respectively, compared to
71.2% and 70.5% for the corresponding prior year quarter and six-month
periods, respectively. The increases in sales for both the quarter and
six-month periods were primarily attributable to an increase in sales volume
across all of the specialty generic product lines. In addition, during the
first six months of fiscal 2003, the Company introduced six new products
into the specialty generic product line. The increase in sales volume for
the quarter was comprised of a $7.4 million increase in sales from existing
products coupled with $1.7 million of incremental sales from new products.
These increases were partially offset by $1.0 million of product price
erosion that resulted from normal and expected competitive pricing pressures
on certain products. For the six-month period, specialty generic sales were
favorably impacted by a $9.9 million increase in sales from existing
products coupled with $4.0 million of incremental sales from new products.
The volume growth experienced by specialty generics during the six months
ended September 30, 2002 was negligibly impacted by product price changes.
The cardiovascular product line, which comprised 49.4% and 47.2% of
specialty generic sales for the quarter and six-month periods, respectively,
accounted for $4.7 million and $7.0 million of the total sales growth for
the quarter and six-month periods, respectively. The sales volume growth
experienced by the cardiovascular product line was favorably impacted by the
April 2002 ANDA approval and subsequent launch of Potassium Chloride 20 mg.
tablets (generic equivalent to K-Dur(R)).
Net revenues from specialty raw material products
decreased $1.3 million, or 22.3%, to $4.4 million for the quarter ended
September 30, 2002 compared to $5.6 million for the corresponding fiscal
quarter in the prior year. For the six months ended September 30, 2002,
specialty raw material product sales decreased $0.9 million, or 9.5%, to
$8.9 million compared to $9.9 million for the first six months of fiscal
2002. The decreases in specialty raw material sales for both the quarter and
six-month periods were primarily due to the build-up of inventory levels of
some raw material products by certain customers during the latter part of
fiscal 2002 and early fiscal 2003, which led to a reduction in second
quarter orders for these products. The Company expects sales to return to
normal levels in the third quarter.
GROSS PROFIT. Gross profit increased $7.6 million, or
25.8%, to $37.0 million for the quarter ended September 30, 2002 compared to
$29.4 million for the quarter ended September 30, 2001. For the six months
ended September 30, 2002, gross profit increased $10.1 million, or 17.7%, to
$67.2 million compared to $57.1 million for the corresponding prior year
period. The increases in gross profit for both the quarter and six-month
periods were attributable to the increased level of branded and specialty
generic product sales. Gross profit as a percentage of net revenues
increased to 61.2% for both the quarter and six months ended September 30,
2002 compared to 58.1% and 59.5% for the corresponding prior year quarter
and six-month periods, respectively. The gross profit percentage for both
the quarter and six-month periods was favorably impacted by price increases
in the branded business, coupled with the shift in product mix toward higher
margin branded products and the introduction of new higher margin specialty
generic products.
OPERATING EXPENSES. Research and development expense
increased $2.7 million, or 110.3%, to $5.1 million for the quarter ended
September 30, 2002 compared to $2.4 million for the quarter ended September
30, 2001. For the six months ended September 30, 2002, research and
development expense increased $3.6 million, or 72.7%, to $8.6 million
compared to $5.0 million for the same period last year. The increases in
research and development expense for both the quarter and six-month periods
were due to an increase in costs associated with clinical testing related to
the Company's internal product development efforts, as well as costs related
to co-development projects. Research and development expense as a percentage
of net revenues increased to 8.4% and 7.8% for the quarter and six months
ended September 30, 2002, respectively, from 4.8% and 5.2% in the
corresponding prior year quarter and six-month periods, respectively. In
April 2002, the Company announced that it had received favorable results
from screening studies on a number of products utilizing one of its newest
drug delivery technologies, which, due to the significant revenue and profit
potential of these products, led to the initiation of phase III clinical
trials.
14
Selling and administrative expense increased $1.9 million,
or 12.5%, to $17.3 million for the quarter ended September 30, 2002 compared
to $15.4 million for the quarter ended September 30, 2001. For the six
months ended September 30, 2002, selling and administrative expense
increased $1.8 million, or 5.7%, to $32.8 million compared to $31.0 million
for the corresponding prior year period. The increases in selling and
administrative expense were primarily the result of an increase in selling
and marketing expenses, higher insurance costs and an increase in personnel
costs associated with branded marketing, partially offset by a reduction in
legal expenses. Selling and administrative expense as a percentage of net
revenues decreased to 28.7% and 29.9% for the quarter and six months ended
September 30, 2002, respectively, compared to 30.4% and 32.4% for the
corresponding prior year quarter and six-month periods, respectively.
During the quarter ended September 30, 2002, the Company
recorded a nonrecurring reserve of $16.5 million for potential damages
associated with the adverse decision made by a Texas court to uphold a
previously rendered jury verdict in a lawsuit against ETHEX Corporation, a
wholly-owned subsidiary of the Company (see Note H in the accompanying Notes
to Consolidated Financial Statements in this Quarterly Report). Excluding
the effect of this nonrecurring reserve, net income increased $2.0 million,
or 28.6%, to $9.0 million, or $0.26 per diluted share, for the quarter ended
September 30, 2002 and increased $3.1 million, or 24.2%, to $15.8 million,
or $0.47 per diluted share, for the six-month period.
OPERATING INCOME (LOSS). As a result of the factors
described above, the Company incurred an operating loss of $2.5 million for
the quarter ended September 30, 2002 compared to operating income of $11.0
million for the quarter ended September 30, 2001. For the six months ended
September 30, 2002, operating income decreased $11.8 million, or 59.2%, to
$8.1 million compared to $19.9 million for the same period last year.
Excluding the effect of the nonrecurring reserve for potential legal
damages, operating income increased $3.0 million, or 27.4%, to $14.0 million
for the quarter ended September 30, 2002 and increased $4.7 million, or
23.8%, to $24.6 million for the six-month period.
NET INCOME (LOSS). As a result of the factors described
above, the Company incurred a net loss of $1.4 million, or $(0.04) per
diluted share, for the quarter ended September 30, 2002 compared to net
income of $7.0 million, or $0.22 per diluted share, for the quarter ended
September 30, 2001. For the six months ended September 30, 2002, net income
decreased $7.4 million, or 58.1%, to $5.3 million, or $0.16 per diluted
share, compared to $12.7 million, or $0.40 per diluted share, for the
corresponding prior year period. Excluding the effect of the nonrecurring
reserve for potential legal damages, net income increased $2.0 million, or
28.6%, to $9.0 million, or $0.26 per diluted share, for the quarter ended
September 30, 2002 and increased $3.1 million, or 24.2%, to $15.8 million,
or $0.47 per diluted share, for the six-month period. Net income per diluted
share, excluding the effect of the nonrecurring reserve for potential legal
damages, increased 18.2% and 17.5% for the quarter and six-month periods,
respectively. The increases were partially impacted by an increase in
weighted average shares outstanding that resulted from the issuance of
approximately 3.3 million shares of Class A common stock in the secondary
public offering that was completed in July 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents and working
capital were $96.4 million and $152.9 million, respectively, at September
30, 2002, compared to $12.1 million and $81.4 million, respectively, at
March 31, 2002. Internally generated funds from product sales growth
continued to be the primary source of operating capital used to fund the
Company's businesses. The net cash flow from operating activities was $23.7
million for the six months ended September 30, 2002 compared to $16.7
million for the corresponding period in the prior year. The 42.2% increase
in operating cash flow resulted primarily from a decrease in receivables,
offset partially by an increase in inventories. The decrease in
15
receivables was primarily due to the receipt of certain delayed customer
payments, which were due as of March 31, 2002 and collected during the
quarter ended June 30, 2002. The increase in inventories primarily resulted
from increased production of specialty generic products in anticipation of
continued sales growth and to support seasonal demand of the cough/cold
product line.
The net cash flow used in investing activities was $12.7
million for the six months ended September 30, 2002 compared to $3.4 million
for the corresponding period in the prior year. Capital expenditures of $9.7
million for the six months ended September 30, 2002 were funded by net cash
flows from operating activities. The Company's investment in capital assets
was primarily for purchasing machinery and equipment to upgrade and expand
the Company's pharmaceutical manufacturing and distribution capabilities,
and for other building renovations. Investing activities for the period also
included $3.0 million related to the purchase of certain intangible rights
combined with an equity investment in a women's healthcare company.
Long-term debt decreased to $4.9 million at September 30,
2002 compared to $5.1 million at March 31, 2002. The decrease resulted from
principal payments made during the six months ended September 30, 2002.
During the prior year, the Company increased the borrowing
capacity of its revolving credit agreement to $60 million. The revised
agreement provided for the continuation of the Company's $40 million
unsecured revolving line of credit along with an unsecured supplemental
credit line of $20 million for financing acquisitions. These credit
facilities expire in October 2004 and December 2002, respectively. At
September 30, 2002, the Company had no cash borrowings under either credit
facility. The Company expects to renew the unsecured supplemental credit
line of $20 million that expires in December 2002.
During July 2002, the Company completed a secondary public
offering of approximately 3.3 million shares of Class A common stock. Net
proceeds to the Company were approximately $72.5 million, after deducting
underwriting discounts, commissions and offering expenses. The proceeds from
the offering will be used for general corporate purposes, including
potential acquisitions, research and development activities and working
capital. At September 30, 2002, the net proceeds were invested in
short-term, highly liquid instruments.
The Company believes its cash and cash equivalents
balance, cash flow from operations, funds available under its credit
facilities and proceeds received from its recently completed secondary
public offering of Class A common stock will be adequate to fund operating
activities for the presently foreseeable future, including the payment of
short-term and long-term debt obligations, capital improvements, product
development activities and expansion of marketing capabilities for the
branded pharmaceutical business. In addition, the Company continues to
examine opportunities to expand its business through the acquisition of or
investment in companies, technologies, product rights or other investments
that are compatible with its existing business. The Company intends to use
its available cash to help in funding any acquisitions or investments. As
such, cash has been invested in short-term, highly liquid instruments. The
Company may also use funds available under its credit facilities, or
financing sources that subsequently become available, including the issuance
of additional debt or equity securities, to fund such acquisitions or
investments. If the Company were to fund one or more such acquisitions or
investments, the Company's capital resources, financial condition and
results of operations could be materially impacted in future periods.
16
INFLATION
- ---------
Although at reduced levels in recent years, inflation
continues to apply upward pressure on the cost of goods and services used by
the Company. However, the Company believes that the net effect of inflation
on its operations has been minimal during the past three years. In addition,
changes in the mix of products sold and the effect of competition has made a
comparison of changes in selling prices less meaningful relative to changes
in the overall rate of inflation over the past three years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Company's consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on-going basis, the Company evaluates its
estimates including those related to the allowance for doubtful accounts
receivable, allowance for inventories, sales allowances and useful life or
impairment of other intangibles. The Company bases its estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis
of judgments regarding the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its unaudited consolidated financial statements.
ALLOWANCE FOR INVENTORIES. Inventories are stated at the
lower of cost or market, with cost determined on the first-in, first-out
basis. In evaluating whether inventory is stated at the lower of cost or
market, management considers such factors as the amount of inventory on hand
and in the distribution channel, estimated time required to sell such
inventory, remaining shelf life and current and expected market conditions,
including levels of competition. As appropriate, provisions are made to
reduce inventories to their net realizable value. As of September 30, 2002,
the Company had an inventory reserve of $0.8 million.
REVENUE RECOGNITION AND SALES ALLOWANCES. Revenue is
recognized at the time product is shipped to customers. Sales provisions for
estimated chargebacks, discounts, rebates, returns, pricing adjustments and
other sales allowances are established by the Company concurrently with the
recognition of revenue. The sales provisions are established based upon
consideration of a variety of factors, including but not limited to, actual
return and historical experience by product type, the number and timing of
competitive products approved for sale, the expected market for the product,
estimated customer inventory levels by product, price declines and current
and projected economic conditions and levels of competition. Actual product
returns, chargebacks and other sales allowances incurred are, however,
dependent upon future events. The Company continually monitors the factors
that influence sales allowance estimates and makes adjustments to these
provisions when management believes that actual product returns, chargebacks
and other sales allowances may differ from established allowances. As of
September 30, 2002, reserve balances related to the sales allowances totaled
$24.2 million.
OTHER INTANGIBLE ASSETS. Effective April 1, 2002, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, issued in June 2001. With the adoption
of SFAS 142, the Company determined its Other Intangible Assets had finite
useful lives and will continue to be amortized over their estimated useful
life. (See Note F - Goodwill And Other Intangible Assets - Adoption of SFAS
No. 142 above for a discussion on SFAS 142.) The adoption of SFAS 142 did
not have a material effect on the Company's financial condition or results
of operations.
17
Other Intangible Assets consist primarily of brand product
rights purchased from other pharmaceutical companies, all of which are being
amortized over 20-year periods. The amortization periods for product rights
are based on the Company's assessment of various factors impacting estimated
useful lives and cash flows of the acquired products. Such factors include
the product's position in its life cycle, competitive positioning, the
existence or absence of like products in the market and various competitive
and technical issues. Other Intangible Assets also consist of patents and
trademarks, which are being amortized over periods ranging from five to 17
years. As of September 30, 2002, the net carrying amount of Other
Intangibles Assets was $40.6 million. Amortization is calculated using the
straight-line method over the estimated useful life. Intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Advances to the Company under the Company's credit
facilities bear interest at a rate that varies consistent with increases or
decreases in the publicly-announced prime rate and/or the LIBOR rate with
respect to LIBOR-related loans, if any. A material increase in such rates
could significantly increase borrowing expenses. The Company did not have
any cash borrowings under the credit facilities at September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
240.13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of
1934) are sufficiently effective to ensure that the information required to
be disclosed by the Company in the reports it files under the Exchange Act
is gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness, based on an evaluation of such controls and procedures within
90 days prior to the date hereof.
(B) CHANGES IN INTERNAL CONTROLS. There have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation referred to above, nor were there any corrective actions with
regard to significant deficiencies or material weaknesses.
18
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ETHEX Corporation, a wholly-owned subsidiary of the
Company, is a defendant in a lawsuit styled, Healthpoint, Ltd. v. ETHEX
Corporation, pending in federal court in the Western District of Texas, San
Antonio Division. The suit was filed by Healthpoint on August 3, 2000, and
later was joined by companies affiliated with Healthpoint. In general, the
plaintiffs allege that ETHEX's promotion of its Ethezyme(TM) product as an
alternative to Healthpoint's Accuzyme(R) product resulted in false
advertising and misleading statements under various federal and state laws,
and unfair competition and misappropriation of trade secrets. In September
2001, the jury returned verdicts against ETHEX on certain false advertising,
unfair competition and misappropriation claims. The jury awarded
compensatory and punitive damages totaling $16.5 million. On October 1,
2002, the U.S. District Court for the Western District of Texas denied the
Company's motion to set aside the jury's verdicts. The Company intends to
vigorously appeal the judgment entered by the court. The Company and its
counsel believe that the jury's recommended award is excessive and is not
sufficiently supported by the facts or the law. The Company and its legal
counsel are not presently able to predict the outcome of an appeal, however,
as a result of the court's decision, the Company's results of operations for
the three and six months ended September 30, 2002 include a reserve for
potential damages of $16,500, which is reflected in Accrued liabilities in
the Company's Consolidated Balance Sheet as of September 30, 2002.
The Company previously manufactured two low-volume
pharmaceutical products that contained phenylpropanolamine, or PPA, that
were discontinued and/or reformulated to exclude PPA in 2000 and 2001,
respectively. The Company was named as one of several defendants in two
product liability lawsuits in federal courts involving PPA. These two
lawsuits have been transferred to the nationwide, multi-district litigation
for PPA claims now pending in the U.S District Court for the Western
District of Washington. Each lawsuit alleges bodily injury, wrongful death,
economic injury, punitive damages, loss of consortium and/or loss of
services from the use of pharmaceuticals containing PPA. Discovery in these
cases is ongoing. The Company believes that it has substantial defenses to
these claims, although the ultimate outcome of these cases and the potential
material effect on the Company cannot be determined.
The Company is being defended and indemnified in these two
PPA lawsuits by its primary commercial general liability insurer subject to
aggregate products-completed operations policy limits in the amount of $10
million and subject to a reservation of rights. The Company's product
liability-completed operations coverage was obtained on a claims made basis
and provides coverage for judgments, settlements and defense costs arising
from product liability claims. Although the Company renewed its product
liability coverage for a policy term of June 15, 2002 through June 15, 2003,
that renewal policy excludes future PPA claims in accordance with the
standard industry exclusion. Consequently, as of June 15, 2002, the Company
must provide for legal defense costs and indemnity payments involving PPA
claims made after June 14, 2002, should they occur.
From time to time, the Company becomes involved in various
legal matters, in addition to the above-described matters, that the Company
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 such matters, individually or in the
aggregate, will have a material adverse effect on the Company's financial
position.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on
August 30, 2002, the following proposals were set before the stockholders
for their vote:
PROPOSAL ONE: Election of Marc S. Hermelin and Kevin S. Carlie as Class A
Directors of the Company to hold office for three years and until their
respective successors have been duly elected and qualified:
DIRECTOR VOTES FOR VOTES WITHHELD ABSTENTIONS
-------- --------- -------------- -----------
Marc S. Hermelin 10,833,752 8,496 220,183
Kevin S. Carlie 10,825,571 16,677 220,183
PROPOSAL TWO: Approval of the K-V Pharmaceutical Company 2001 Incentive
Stock Option Plan:
Votes For 7,009,023
Votes Withheld 1,611,102
Abstentions 57,615
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits 99.1 and 99.2 - Certifications of Chief
Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K. The Company filed on October 8,
2002 a Current Report on Form 8-K to report that the
U.S District Court for the Western District of Texas
denied the motion of Ethex Corporation, a wholly-owned
subsidiary of the Company, that would have had the
effect of setting aside the September 2001 jury
verdict in the civil case of Healthpoint, Ltd. v.
Ethex Corporation.
20
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.
K-V PHARMACEUTICAL COMPANY
Date: November 14, 2002 By /s/ Marc S. Hermelin
-----------------------------------
Marc S. Hermelin
Vice Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 By /s/ Gerald R. Mitchell
-----------------------------------
Gerald R. Mitchell
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
CERTIFICATIONS
I, Marc S. Hermelin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of K-V
Pharmaceutical Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Marc S. Hermelin
-----------------------------------------
Marc S. Hermelin
Vice Chairman and Chief Executive Officer
22
I, Gerald R. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of K-V
Pharmaceutical Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Gerald R. Mitchell
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Gerald R. Mitchell
Vice President, Treasurer and Chief Financial Officer
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