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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, 1999 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 New York Stock Exchange
$.01 per share
Class B Common Stock par value New York Stock Exchange
$.01 per share
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 8,808,787 shares of Class A and 2,966,697
shares of Class B Common Stock held by nonaffiliates of the Registrant as of May
4, 1999, was $131,581,256 and $44,685,874, respectively. As of May 4, 1999, the
Registrant had outstanding 11,889,604 and 6,360,215 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 1999 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
KV 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 and patented a
wide variety of drug delivery and formulation technologies, including four
controlled release, eight oral and topical site-specific, one quick dissolving
tablet and three tastemasking systems. The Company uses these systems in the
development of the products KV markets as well as the products of its
pharmaceutical marketing licensees to improve and control the human body's
absorption and utilization of the active pharmaceutical compounds. This allows
the compounds to be administered less frequently with potentially reduced side
effects, improved drug efficacy and/or enhanced patient compliance.
In 1990, the Company established a generic marketing capability through a
wholly-owned subsidiary, ETHEX Corporation ("ETHEX"), which makes it one of the
only drug delivery research and development companies that also markets
"technology distinguished" generic products.
During fiscal 1999, the Company began the process of building the
infrastructure necessary to support its expansion into the branded
pharmaceuticals business with the establishment of Ther-Rx Corporation
("Ther-Rx"). Ther-Rx markets technology enhanced brand-name products directly to
physician specialists.
KV's wholly-owned operating subsidiary, Particle Dynamics, Inc. ("PDI"),
was incorporated in New York in 1948 and acquired by KV in 1972. Through PDI,
the Company develops and markets specialty value added raw materials, including
drugs, directly compressible and microencapsulated products, and other products
used in the pharmaceutical, nutritional, food, cosmetic, industrial and other
industries.
The Company also licenses the marketing rights for products developed with
KV 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.
(Hereinafter, KV, ETHEX, PDI and Ther-Rx are sometimes referred to
collectively as "KV" or the "Company".)
(b) Industry Segments
The Company operates principally in two industry segments, consisting of
pharmaceutical, manufacturing and marketing. Revenues are derived primarily from
directly marketing its own technology distinguished generic and brand-name
products. Revenues may also be received in the form of licensing revenues and/or
royalty payments based upon a percentage of the licensee's sales of the product,
in addition to manufacturing revenues, when marketing rights to products using
its advanced drug delivery technologies are licensed. (see Note 18 to the
Company's financial statements).
(c) Narrative Description of Business
For the fiscal year ended March 31, 1999, approximately 80% of the
Company's net revenues were derived from the sale of technology distinguished
generic products, approximately 7% from manufacturing and licensing, and
approximately 12% from the sale of specialty value added pharmaceutical raw
material compounds.
The Company established its Ther-Rx subsidiary during fiscal 1999 and
launched its first brand name prescription product with the acquisition of the
Micro-K(R) product line in March 1999. Ther-Rx expects to launch internally
developed products during fiscal 2000 that use the Company's proprietary drug
delivery technologies. The products the Company has targeted to launch will be
detailed to focused physician specialists through its own detail force.
The Company has also developed generic drugs using its proprietary
technologies. The Company markets and distributes its generic products under the
ETHEX label. The Company continues to apply its technologies in the development
of technologically distinguished generic pharmaceuticals and currently is
developing an additional 25 products of which 10 are planned for launch during
fiscal 2000. 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 that require FDA approval generally contain
pharmaceutical compounds previously approved by the FDA and qualify for the use
of an abbreviated testing and approval process.
The Company's Particle Dynamics subsidiary has developed and currently
markets lines of specialty value added raw material products to the
pharmaceutical, nutritional, food, cosmetic and other industries. Two main
franchises of Particle Dynamics are DESCOTE(R), which is a family of tastemasked
vitamin, mineral, and drug products; and DESTAB(TM), a family of direct
compression products which enable pharmaceutical manufacturers to produce
tablets and caplets in a more efficient manner.
The Company also develops pharmaceutical products for the prescription and
OTC markets that its pharmaceutical marketing company licensees commercialize.
Typically, the Company 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 its proprietary
drug delivery technologies, or (ii) are developing new therapeutic agents that
require delivery systems or formulation capabilities such as those the Company
offers to improve drug efficacy or enhance commercial value and (iii) can market
and sell the products that the Company develops. To date, the Company has
entered into agreements with various pharmaceutical marketers, including Pfizer
Canada, Inc., Taisho Pharmaceutical Ltd. of Japan, SS Pharmaceutical of Japan,
J. Uriach of Spain and others.
Strategy
The Company's strategy is to expand its position as a technology-driven
specialty pharmaceutical marketer of specialty value added raw materials and
finished dosage form drug products that are an outgrowth of its broad-based drug
delivery technologies. As a recognized leading developer of innovative drug
delivery technologies, the Company will continue to apply its technologies to
the development and commercialization of its brand name and generic drugs. These
products will be marketed through the broad pharmaceutical distribution system
established by ETHEX, the generic division, Ther-Rx, the brand division calling
on doctors, and Particle Dynamics, Inc., the special raw materials division. The
Company also markets other products through pharmaceutical marketing licensees.
Development of Brand Name Pharmaceuticals. The Company is applying its
proprietary drug delivery technologies in the development of brand name
prescription and OTC pharmaceutical products to improve the effectiveness,
safety or commercial appeal of the drug compound. These products are developed
for direct marketing by Ther-Rx (prescription only) or under license agreements
with other pharmaceutical marketers (prescription or OTC). Under a licensing
agreement, the Company generally applies drug delivery systems to the
development of a product 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.
Development and Marketing of Technologically Distinguished Generic Drugs.
The Company has successfully applied and will continue to apply its proprietary
drug delivery systems and formulation capabilities to develop technologically
distinguished generic drugs. The Company does this by (i) identifying and
replicating brand name drugs that are either off patent or are approaching
patent expiration and which require advanced drug delivery systems or (ii)
applying its tastemasking formulations to an off patent drug in order to
meaningfully increase patient compliance and the drug's commercial appeal. The
Company believes that the potential profitability of its technologically
distinguished generic drugs is higher than typical generic drugs because the
technologies employed by the brand name innovator and the Company create
barriers to entry for typical generic drug competitors. In addition, the
development of generic drugs generally is less costly and time consuming than
brand name drugs. A significant number of technologically distinguished brand
name drugs are off patent or are approaching patent expiration, which the
Company believes it is in a better position to market than generic
pharmaceutical companies who do not have a strong drug delivery system
technology base.
Selective Acquisitions and In-licensing Opportunities. The Company actively
seeks opportunities to acquire additional products, product rights, technologies
and distribution channels that are complementary to its business and can be
integrated into its research, manufacturing, marketing or distribution
operations, or that can provide it with additional products, technologies or
sales and marketing capabilities. In March 1999, the Company acquired the
Micro-K(R) prescription potassium supplement product line for $36 million from
American Home Product Corporation's Wyeth-Ayerst division. Micro-K(R) had
worldwide 1998 sales of approximately $18 million and competes in a U.S. market
for potassium supplements of approximately $315 million in annual sales.
Development and Marketing of Technologically Differentiated Specialty Raw
Materials. The Company combines its advanced technologies with its expertise in
microencapsulation and particle coating to strategically develop new products
that improve taste, tableting efficiencies and product stability, while reducing
manufacturing costs and increasing product quality.
The Company's Proprietary Drug Delivery Technologies
The Company is a pioneer in the development of proprietary drug delivery
systems and formulation technologies which enhance the effectiveness of new
therapeutic agents, existing pharmaceutical products and nutritional
supplements, such as vitamins and minerals. Many of these technologies have been
used successfully for the commercialization of products that the Company and its
pharmaceutical marketing company licensees are currently marketing.
Additionally, the Company continues to invest its resources in the development
of new technologies. 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
systems and formulation techniques that tailor the drug release profiles of
certain orally administered pharmaceuticals and nutritional supplements. These
systems, which provide for single oral doses that release the active ingredients
over periods ranging from 6 to 24 hours, are designed to improve patient
compliance, improve drug effectiveness and reduce potential side effects. The
Company's 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 patented, multi-particulate drug delivery system that
encapsulates one or more drug compounds into spherical particles which
release the active drug or drugs systemically over an 18 to 24 hour period,
permitting the development of once-a-day drug formulations. The Company
believes that its KV/24(R) oral dosing system is the only commercialized 24
hour oral controlled release system that successfully is able to
incorporate more than one active compound.
METER RELEASE(R) is a polymer-based drug delivery system that offers
different release characteristics than KV/24(R) and is used for products
that require drug release rates of between 8 to 12 hours. The Company has
developed METER RELEASE(R) systems in tablet, capsule and caplet form that
have been commercialized in the cardiovascular, gastrointestinal and upper
respiratory product categories.
MICRO RELEASE(R) is a microparticulate formulation that encapsulates
therapeutic agents employing smaller particles than KV/24(R) and METER
RELEASE(R). This system is used to extend the release of drugs in the body
where precise release profiles are less important. MICRO RELEASE(R) has
been commercialized in prescription products marketed by ETHEX as well as
OTC nutritional products.
SITE-RELEASE(R) Technologies
The Company's SITE-RELEASE(R) technologies are based on the concept that
isolating a drug in a specific location for an extended period of time offers
the opportunity to meaningfully increase the drug's efficacy. For example, a
vaginal yeast infection may be effectively treated using a single dose of an
anti-fungal medication by developing a drug formulation that will adhere the
anti-fungal compound to the infected area over a period of time sufficient to
maximize the drug's efficacy. The Company's site specific technologies use
advanced polyphasic (hydrophilic and lipophilic) 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 systems and
formulations that it tailors to the desired route of administration. Of these
technologies, only products using DermaSite(TM) technology are currently being
marketed. To date, the Company has applied its site-specific technologies in
cream, lotion, lozenge and suppository form to deliver therapeutic agents to
oral, skin, pharyngeal, esophageal, vaginal and rectal tissues.
VagiSite(TM) is a patented, controlled release bioadhesive delivery system
that incorporates advanced polyphasic principles to create a bio-emulsion
system capable of delivering therapeutic agents in oral, topical and
vaginal forms. VagiSite(TM) is the subject of licensing and development
agreements to develop products for the treatment of topical and vaginal
fungal infections.
OraSite(TM) is a controlled release mucoadhesive delivery system
administered orally in a solid or liquid form. A drug formulated with the
OraSite(TM) technology may be formulated as a liquid or as a lozenge in
which the dosage form liquifies upon insertion and adheres to the mucosal
surface of the mouth, throat and esophagus. OraSite(TM) possesses
characteristics particularly advantageous to therapeutic categories such as
oral hygiene, sore throat and periodontal and upper gastrointestinal tract
disorders. The Company has filed a patent application relating to its
OraSite(TM) technology.
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.
Trans-EP(TM) (trans esophageal) is a novel bio-adhesive, controlled release
delivery system that may permit oral delivery of compounds that normally
would be degraded if administered orally, such as growth hormones,
calcitonin, other protein/peptides and other complex compounds.
Trans esophageal(TM) was specifically designed to provide an oral delivery
alternative to biotechnology and other compounds that currently are
delivered as injections or infused. The Company has received a patent
relating to its Trans-EP(TM) technology.
Tastemasking Technologies
The Company is a leader in the development of pharmaceutical formulations
capable of improving the flavor of unpleasant tasting drugs. The Company first
introduced tastemasking technologies in 1991 and has employed them in the
formulation of five commercially available products. The Company has also
developed numerous platforms for its tastemasking technologies, including
liquid, chewable and dry powder formulations.
LIQUETTE(R) is a patented tastemasking system that incorporates unpleasant
tasting drugs into a hydrophilic and lipophilic polymer matrix to suppress
the taste of the drug. This technology is used for mildly to moderately
distasteful drugs where low manufacturing costs are particularly important.
FlavorTech(TM) is a liquid formulation technology designed to reduce the
objectionable taste of a wide variety of therapeutic products.
FlavorTech(TM) technology has been used in cough/cold syrup products sold
by ETHEX and has special application to other products, such as antibiotic,
geriatric and pediatric pharmaceuticals. The Company has received a patent
for its FlavorTech(TM) technology.
MicroMask(TM) is a patented tastemasking technology that incorporates a dry
powder, microparticulate approach to reducing objectionable tastes by
sequestering the unpleasant drug agent in a specialized matrix. 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. MicroMask(TM) is a more
potent tastemasking technology than LIQUETTE(R) and may be used in
connection with such products as macrolide antibiotics, amino acids,
vitamins and other unpleasant tasting drug compounds.
Marketing and Distribution
Through ETHEX, the Company directly markets and distributes its generic
products to national drug store chains, wholesalers and distributors, as well as
independent pharmacies and mail order firms. ETHEX's marketing strategy is to
provide its customers with quality products, a broad product line, competitive
prices and a high level of customer service. ETHEX's sales force targets
national and regional buyers of pharmaceutical products, while its inside sales
group targets the approximately 28,000 independent drug stores operating in the
United States. During fiscal 1999, 1998 and 1997, the Company's largest
customer, McKesson Drug Company, a wholesale distributor, accounted for 19%, 12%
and 15%, respectively of its total revenue.
The Company believes that industry trends favor generic product expansion
into the managed care, long-term care and government contract markets. The
Company further believes that its competitively priced, technologically
distinguished generic products can fulfill the increasing need of these markets
to contain costs and improve patient compliance. Accordingly, the Company
intends to devote significant marketing resources to the penetration of such
markets.
Ther-Rx has established a direct sales force dedicated to the marketing and
distribution of brand name products through selling efforts focused on physician
specialists.
The Company licenses the right to market and distribute brand name
pharmaceutical products incorporating its drug delivery technologies to
licensees in the U.S. and internationally. The Company has also executed several
agreements, and intends to pursue additional development and licensing
arrangements, under which it is granted the right to market and distribute such
products using its own marketing subsidiaries along with its licensee.
The Company currently does not have material operations or sales in foreign
countries and its sales are not subject to unusual geographic concentration.
Research and Development
The Company's research and development activities include the development
of new and next generation drug delivery technologies, the formulation of brand
name proprietary products and the development of technologically distinguished
generic versions of previously approved brand name pharmaceutical products.
In connection with proprietary products to be licensed to its corporate
marketing licensees, the Company develops the product utilizing its formulation
expertise and proprietary delivery systems, and the licensee is typically
responsible for the performance of any required clinical studies and the
submission of the product for governmental approval. However, the Company
participates in all phases of the development process. In general, corporate
licensees reimburse the Company for a portion of its development expenses
incurred in connection with the formulation, clinical supply and validation of
the technologically enhanced drug product.
In fiscal 1999, 1998 and 1997, total research and development expenses were
$6.9 million, $5.8 million and $4.8 million, respectively. Spending for research
and development is funded primarily from operations and was 6% of revenues
during fiscal 1999.
Patents and Proprietary Rights
The Company's policy is to file patent applications in appropriate
situations to protect and preserve, for its own use, technology, inventions and
improvements that the Company considers important to the development of its
business. The Company has been granted patent protection for certain of its
proprietary technologies and products in the United States, Europe and
Australia, and is currently seeking patent protection for certain of its
technologies and products in the United States, Canada, Europe, Australia, Japan
and South Korea. The Company currently holds 54 domestic and foreign issued
patents expiring through 2016 relating to its controlled release, site-specific,
quick dissolve and tastemasking technologies.
The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop and maintain its competitive
position. The Company enters into confidentiality agreements with each of its
employees and consultants upon the commencement of an employment or consulting
relationship. These agreements generally provide that all inventions, ideas,
discoveries, improvements and copyrightable material made or conceived by the
individual arising out of the employment or consulting relationship and all
confidential information developed or made known to the individual during the
term of the relationship are the Company's exclusive property. The Company
cannot guarantee, however, that others may not acquire or independently develop
similar technology or, if patents are not issued with respect to products
arising from research, that the Company will be able to retain information
pertinent to such research as proprietary technology or trade secrets.
The Company currently holds 27 trademarks expiring through 2017 (which are
renewable subject to continuous use) and has also applied for trademark
protection for the trade names of its proprietary controlled-release,
site-specific, quick dissolve and tastemasking technologies. The Company intends
to continue to trademark new technology and product names as they are developed.
Manufacturing and Facilities
The Company conducts its brand name, generic and raw material manufacturing
in an aggregate of 164,000 square feet of manufacturing space located on two St.
Louis area campuses. The Company manufactures drug products in liquid,
semi-solid, tablet, capsule and caplet forms for distribution by ETHEX, Ther-Rx
and its corporate licensees. The Company believes that all of its facilities
comply with applicable regulatory requirements.
The Company's business is generally not seasonal, although a number of
cough/cold products marketed through ETHEX can be subject to seasonal demand.
The nature of its business does not include unusual working capital
requirements. Inventories are maintained at sufficient levels to support current
production and sales levels. During fiscal 1999, the Company encountered no
serious shortage of any particular raw materials and has no indication that
significant shortages will occur.
The Company's administrative offices and research facilities occupy
approximately 57,612 square feet and an additional 142,207 square feet is
devoted to product warehousing. Other than four facilities totaling 299,000
square feet that the Company owns, all facilities are leased at pre-determined
annual rates under agreements expiring from November 30, 1999 through September
30, 2002 subject in most cases to renewal at its option.
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 the Company's, are
engaged in developing, marketing and selling products that compete with those
the Company offers. Competitors may develop their products more rapidly than the
Company does, and the selling prices of such products typically decline as
competition increases. Further, other products now in use or under development
by others may be more effective than its current or future products. The Company
believes that its patents, proprietary trade secrets, technological expertise,
product development and manufacturing capabilities position it to continue to
develop products to compete effectively in the marketplace and to maintain a
leadership position in the field of advanced drug delivery technologies.
Employees
As of March 31, 1999, the Company employed a total of 455 employees. The
Company is party to a collective bargaining agreement that expires in May 2001
and covers 80 employees. The Company believes that its relations with its
employees are good.
Environment
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 its capital expenditures, earnings or competitive position.
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 they 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.
With respect to potential new products, there are two principal ways the
Company can 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 its
competitive position and that of its customers with respect to products which
the Company 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." As a
result, the FDA will process the Company's applications for new NDA's and
ANDA's. The Company has regulatory submissions filed with the FDA for approval.
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 and branded drugs enhanced by drug delivery technologies can
provide cost savings opportunities for the consumer, which the Company could
benefit from through the growth of ETHEX and Ther-Rx and in its drug delivery
research business.
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 years(1)
821 Hanley Industrial Mfg. Oper. 5,000 11/30/99 2 years
Court
8046-50 Litzsinger Road Mfg. Oper. 17,000 10/31/01 5 years(1)
8056 Litzsinger Road Office/Maint. 3,000 10/31/01 5 years(1)
2635 S. Hanley Road Mfg. Oper. 12,150 09/30/02 5 years(1)
819 Hanley Industrial Mfg. Oper. 5,000 11/30/99 2 years
Court
2525 S. Hanley Road Mfg. Oper. 16,800 06/30/02 5 years
8054 Litzsinger Road Office 3,000 10/31/01 5 years(1)
2601 S. Hanley Road PDI Office 1,480 09/30/02 5 years(1)
10888 Metro Court Office/Warehouse 81,810 Owned N/A
2303 Schuetz Road Mfg. Oper. 90,000 Owned N/A
10850 Metro Court Rental Property 40,540 Owned N/A
13622 Lakefront Drive Office/Warehouse 87,020 Owned N/A
11880 Lackland Office/Warehouse 14,260 01/25/00 ---
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(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 will
consider leasing or purchasing additional facilities from time to time, when
attractive facilities become available, to accommodate the consolidation of
certain operations and to meet future expansion plans.
Item 3. Legal Proceedings
Under a contract that the Company has with a supplier, issues arose with
respect to the timing of supply of a product and the supplier's failure to
pursue another product. The terms of the contract provided for binding private
arbitration between the parties which resulted in the Company receiving notice
of an award in December, 1998 of $13,253,000. The Arbitration Panel subsequently
directed the parties to have further discussions including possible replacement
products. Payment of the award was deferred pending the outcome of these
discussions. Subsequent attempts to obtain replacement products were
unsuccessful and the Company expects to be paid the arbitration award on or
before June 15, 1999.
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 and directors 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 85 Director, Chairman of the Board and Treasurer
of the Company.2
Marc S. Hermelin 57 Director, Vice-Chairman of the Board and Chief
Executive Officer.2
Alan G. Johnson 64 Director and Secretary of the Company;
Attorney at Law and Chairman of Pauli,
Johnson Capital & Research Incorporated, an
investment banking and institutional research
boutique, since January, 1999; Member of the
law firm Gallop, Johnson & Neuman, L.C. 1976
to 1998; Director, Siboney Corporation.
Garnet E. Peck, Ph.D. 68 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.
Norman Schellenger 67 Director of the Company since November 1998;
Retired since January 1997; President of
Whitby Pharmaceuticals 1992 to 1997.
Raymond F. Chiostri 65 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 60 Vice President of Finance and Chief Financial
Officer since 1981.
Mitchell I. Kirschner 53 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.
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(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 New York Stock Exchange under the symbols KV.A and KV.B, respectively. The
Company's common stock moved to the New York Stock Exchange from the American
Stock Exchange on March 25, 1999.
b) Stock Price and Dividend Information
The high and low closing sales prices of the Company's Class A and Class B
Common Stock during each quarter of fiscal 1999 and 1998 were as follows:
CLASS A COMMON STOCK
FISCAL 1999 FISCAL 1998
--------------------------- ---------------------------------
QUARTER High Low High Low
- ----------- ---------- ------------- ------------- ----------------
First 22 3/4 17 3/16 11 21/32 9 15/32
Second 23 1/8 14 3/8 15 3/4 9 29/32
Third 23 1/8 17 1/4 15 21/32 12 13/32
Fourth 21 1/2 14 1/2 18 25/32 13 3/32
CLASS B COMMON STOCK
FISCAL 1999 FISCAL 1998
---------------------------- ---------------------------------
QUARTER High Low High Low
- ------------ ----------- ------------- ---------------- ------------
First 23 1/16 17 3/32 11 3/4 9 1/2
Second 23 5/16 14 1/2 15 3/32 10
Third 23 1/4 17 3/8 15 5/8 12 27/32
Fourth 21 5/16 14 18 21/32 13 1/32
All per share data reflects the three-for-two stock split effected in the
form of a 50% stock dividend to shareholders of record as of April 3, 1998.
No dividends may be paid on Class A or Class B Common Stock unless all
dividends on the Cumulative Convertible Preferred Stock have been declared and
paid. Undeclared and unaccrued cumulative preferred dividends at both March 31,
1999 and 1998 were $2,203,644 or $9.14 per share on 241,000 shares of Preferred
Stock. Also, under the terms of the Company's credit agreement, the Company may
not pay cash dividends in excess of 25% of the prior year's consolidated net
income. The Company historically has not paid cash dividends on common stock and
does not plan to do so in the near future. The Company intends to use cash
generated from operations to support future growth. Dividends on Convertible
Preferred Stock in the amount of $421,751 were paid during fiscal 1999 and 1998.
c) Approximate Number of Holders of Common Stock
The number of holders of record of Class A and Class B Common Stock as of
May 4, 1998 was 1,164 and 1,241, respectively (not separately counting
shareholders whose shares are held in "nominee" or "street" names, which are
estimated to represent approximately 6,000 additional shareholders for each
class of common stock).
Item 6. Selected Financial Data
($ in 000's, except per share data)
Years Ended March 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $ 127,990 $ 68,361 $ 41,362 $ 27,948 $27,975
Long-term debt $ 31,491 $ 4,902 $ 2,158 $ 2,541 $11,233
Shareholders' equity $ 67,548 $ 44,164 $ 33,084 $ 20,550 $ 9,974
INCOME STATEMENT DATA:
Revenues $ 114,860 $ 98,486 $ 57,891 $ 49,729 $39,743
% Change 16.6 70.1 16.4 25.1 4.1
Net income
(loss)(a) $ 23,340 $ 11,304 $ 8,924 $ 4,043 $(5,375)
Net income (loss) per
common share-diluted
(b) (c) $ 1.17 $ 0.58 $ 0.47 $ 0.21 $ (0.35)
(a) Net income in fiscal 1999 includes a non-recurring gain associated with a
$13.3 million arbitration award. The award net of related expenses of
$530,000 and net of applicable income taxes, represents $7.9 million in net
income or $.40 per common share on a diluted basis (see Note 19 of Notes to
Consolidated Financial Statements) as follows:
Per diluted
Net Income share
----------- -----------
KV net income without nonrecurring gain $15,384,633 $0.77
KV nonrecurring gain $ 7,955,568 $0.40
----------- -----
Total KV net income $23,340,201 $1.17
(b) Dividends were paid on the Preferred Stock during fiscal 1999 and 1998 in
the amount of $421,751 and $105,437 during the fourth quarter of fiscal
1997, but no other cash dividends were paid on any shares of Common or
Preferred Stock during the five years ended March 31, 1999.
(c) 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 Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" in fiscal 1998 and
restated all prior-period earnings per share data (see Note 1 of Notes to
Consolidated Financial Statements).
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 with revenue contribution by operating segment and consolidated costs
and expenses as a percent of total revenue. This information should be read in
conjunction with the Company's financial statements and related notes.
Fiscal Year Ended March 31,
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Net Revenues
Generic Products $ 91,833 80.0% $79,193 80.4% $40,225 69.5%
Brand Products 1,795 1.6 - - - -
Contract Services/Licenses 7,827 6.8 8,290 8.4 8,978 15.5
Specialty Materials 13,405 11.6 11,003 11.2 8,688 15.0
-------- ------ ------ ----- ------- ------
Total Net Revenues 114,860 100.0 98,486 100.0 57,891 100.0
======= ===== ====== ===== ====== =====
Costs and Expenses
Manufacturing Costs 61,415 53.5 56,483 57.3 29,478 50.9
Research and Development 6,884 6.0 5,752 5.8 4,835 8.3
Selling and Administrative 22,201 19.3 19,104 19.4 13,818 23.8
Other (Income) Expense, net (13,516) (11.8) (98) (0.1) 265 0.5
Amortization 244 0.2 254 0.3 188 0.4
-------- ----- -------- ----- -------- -----
Total Costs and Expenses 77,228 67.2 81,495 82.7 48,584 83.9
====== ==== ====== ==== ====== =====
Earnings before Taxes 37,632 32.8 16,991 17.3 9,307 16.1
Provision for Income Taxes 14,292 12.4 5,687 5.8 383 0.7
------ ---- ------- ----- ------ -----
Net Income 23,340 20.4 11,304 11.5 8,924 15.4
====== ==== ====== ==== ===== =====
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues. Net revenues increased $16.4 million, or 16.6%, during fiscal
1999. The increase in net sales is due to higher sales of generic products and
specialty materials, and brand product sales resulting from the acquisition of
the Micro-K(R) product line during the fourth quarter (see Note 2 of Notes to
Consolidated Financial Statements), which were partially offset by lower
contract services' sales and licensing revenues, as shown in the following table
($ in 000's):
Increase (Decrease)
vs Prior Year
-------------------
Amount Percent
------ -------
Generic Products $ 12,640 16.0%
Brand Products 1,795 nm
Specialty Materials 2,402 21.8
Contract Services/Licensing Revenues (463) (5.6)
--------
Total Increase $ 16,374 16.6%
========
Generic product sales increased $12.6 million, or 16%, during fiscal 1999
due to the introduction of 10 new products and higher sales volume across the
majority of the existing products. New products contributed $5.8 million (7%)
and existing products contributed $16.1 million (21%) of the increase; however,
such increases were partially offset by price declines of $9.3 million (12%)
against total sales for the prior year. The increase in sales on existing
products reflected increased market share on an expanded customer base,
increased generic substitution rates and a full year's sales impact of products
introduced in the prior year across several product categories. The price
decline was confined largely to a single product category where increased
competition on revenue sharing products (based on sales and gross margin)
adversely affected prices.
Brand name product sales represented a partial month's sales of the
Micro-K(R) product lines which was acquired from American Home Products in March
1999. The product line had annual sales of approximately $18.5 million at the
time of the acquisition and will be marketed by the Company's Ther-Rx
subsidiary. The Company is in the process of completing the building of the
sales, marketing and administrative infrastructure to support its direct
marketing of brand name products. This effort supports the Company's plan to
directly market and distribute technology enhanced, brand name pharmaceuticals
in specific niche therapeutic areas. Micro-K(R) is the first product to be
marketed in support of this strategy.
Sales of specialty materials increased $2.4 million, or 21.8%, during
fiscal 1999 due primarily to a full year's sales impact of two products
introduced in the prior year by the Company's Particle Dynamics subsidiary,
which contributed $2.1 million, or 19.1%, of the increase. Particle Dynamics
also increased its customer base during fiscal 1999, primarily for its line of
calcium carbonate products, which accounted for approximately 51% of total sales
for the fiscal year. Calcium carbonate sales were up 28.6% for the fiscal year.
Contract Services' and licensing revenues decreased $.5 million, or 5.6%,
due to lower volume, reflecting a smaller customer base as the Company
de-emphasized lower margin contract manufacturing in its business strategy.
While the Company anticipates continued overall growth in sales of the
products the Company markets, there are no assurances that the annual percentage
rate of sales growth will continue at past levels.
Costs and Expenses. Manufacturing costs increased $4.9 million, or 8.7%, to
$61.4 million during fiscal 1999 from $56.5 million in fiscal 1998 due to
increased volume. Manufacturing costs as a percentage of revenues declined to
53.5% from 57.3%, due primarily to a favorable shift in the mix of products sold
toward higher margin products, which was partially offset by lower average
pricing, as shown in the following table:
% Revenues
----------
FY 1998 Manufacturing Costs 57.3
Change due to:
Price decline 4.1
Product mix (7.9)
----
FY 1999 Manufacturing Costs 53.5
====
The price decline and improvement in product mix was due primarily to
changes in the generic business. Lower pricing due to increased competition
eroded margins on certain products. The improvement in product mix reflected a
decrease in volume on the lower margin business and increases in sales of higher
margin new products introduced in fiscal 1999 and 1998.
Research and development costs increased $1.1 million, or 19.7%, to $6.9
million during fiscal 1999 from $5.8 million in fiscal 1998. The increase was
due to higher personnel costs ($.4 million, or 7%), increased usage of R&D
materials and laboratory supplies ($.3 million, or 5%) and higher levels of
clinical testing ($.2 million, or 3%). The Company increased its R&D activity in
fiscal 1999 and is currently developing more than 25 drug compounds in its
development pipeline. The Company expects to continue a relatively high level of
expenditures and investment for research, clinical and regulatory efforts
relating to the development of proprietary new products and advanced technology
products and their approval for marketing.
Selling and administrative expenses increased $3.1 million, or 16.2%, to
$22.2 million during fiscal 1999 from $19.1 million in fiscal 1998. As a
percentage of revenues, selling and administrative expenses remained relatively
flat with the prior year, decreasing nominally to 19.3% from 19.4%. The increase
in expenses was related primarily to higher costs associated with additional
personnel to support the Company's continued growth ($1.3 million, or 7%), the
branded sales initiative ($.7 million, or 4%) and increased marketing activities
associated with sales of generic products ($1.1 million, or 6%).
Amortization expense decreased nominally in fiscal 1999 due primarily to
lower expense associated with amortization of financing fees ($.1 million),
partially offset by one-half month's amortization of the Micro-K(R) product
rights acquired near the end of the fourth quarter of fiscal 1999. The product
rights are being amortized over twenty years at an annual rate of $1.8 million.
Other income, net, increased $13.4 million to $13.5 million during fiscal
1999 due to a non-recurring gain related to an arbitration award of $13.3
million in connection with a supplier who was unable to supply product. (See
Note 19 of Notes to Consolidated Financial Statements.)
Income taxes were provided at an effective rate of 38.0% in fiscal 1999
compared to 33.5% in fiscal 1998. The lower effective rate in fiscal 1998
reflected the utilization of the deferred tax asset valuation reserve.
Net Income. As a result of the factors described above, net income improved
$12.0 million, or 106.5% to $23.3 million for fiscal 1999 from net income of
$11.3 million in fiscal 1998.
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 (64%) and existing (7%)
generic products sold by ETHEX and pharmaceutical compounds sold by Particle
Dynamics, partially offset by lower Contract Services sales (-1%). Net revenues
from ETHEX increased $39.0 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 which contributed $34.9
million of the sales increase. The remainder of the sales increase ($4.1
million) was due to higher volume across the existing ETHEX product line. Net
revenues derived from the sale of specialty pharmaceutical compounds increased
$2.3 million, or 27%, to $11 million during fiscal 1998. This increase was
attributable entirely to the increased sales volumes related to the introduction
of new products for the DESCOTE(R) and DESTAB(TM) product lines. Contract
Services revenues decreased $.5 million, or 10%, to $4.8 million in fiscal 1998
from $5.3 million in fiscal 1997 due to reduced sales volume.
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 an unfavorable change in the mix of products sold
and lower prices as shown in the following table:
% Revenues
----------
FY1997 Manufacturing Costs 50.9%
Change due to:
Lower prices 2.0
Product mix 4.4
-----
FY1998 Manufacturing Costs 57.3%
=====
Research and development costs increased $.9 million, or 19%, to $5.8
million during fiscal 1998 from $4.9 million in fiscal 1997. This increase was
due to higher personnel costs ($.4 million, or 9%), increased usage of R&D
materials ($.1 million, or 1%) and higher levels of clinical testing ($.4
million, or 9%).
Selling and administrative expenses increased $5.3 million, or 38%, to
$19.1 million during fiscal 1998 from $13.8 million in the same period in fiscal
1997. As a percentage of revenue, selling and administrative expenses decreased
to 19% from 24%. The increase in selling and administrative expenses was
primarily related to selling and promotional activities associated with the
significant growth experienced in the sales of new and existing generic products
marketed by ETHEX and Particle Dynamics ($.7 million, or 5%), higher outside
professional services ($1.8 million, or 13%) and additional personnel to support
its continued growth ($1.7 million, or 13%).
The income tax provision was $5.7 million for fiscal 1998, compared to $.4
million 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.
(b) Regarding Commodity Prices
The Company utilizes various raw materials in its manufacturing processes.
Although the Company historically has not encountered material fluctuations in
pricing of such commodities, there is no assurance that pricing of such
commodities will remain relatively constant, and the Company's manufacturing
costs could increase significantly if raw material commodity prices increase by
amounts substantially above current prices.
(c) Variable Rate Risks
Advances to the Company under the Company's credit facility bear interest
at a rate which varies consistent with increases or decreases in the
publicly-announced prime rate [and/or the LIBOR rate with respect to
LIBOR-related loans, if any]. These rates have remained relatively constant for
a substantial period of time. A material increase in such rates, however, could
significantly increase borrowing expenses. For example, an increase of 1% in the
prime rate would increase the borrowing expense to the Company by approximately
$250,000 annually on the principal balance of the Company's credit facility at
March 31, 1999.
(d) Year 2000 Project
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies include
both information technology in the form of hardware and software, as well as
embedded technology in the Company's facilities and equipment. Similar to most
companies, the Company must determine whether its systems are capable of
recognizing and processing date-sensitive information properly as the year 2000
("Y2K") approaches. The Company is utilizing a multi-phased concurrent approach
to address this issue. The phases included in its approach are the awareness,
assessment, remediation, validation and implementation phases. The Company has
completed the awareness and assessment phases and are very active in the
remediation phase.
The Company has initiated formal communications and has developed a
monitoring program with all of its significant suppliers and critical business
partners to determine Y2K compliance and is implementing contingency plans to
minimize interruptions in business in the event a third party is unable to
perform. An interruption of the Company's ability to conduct business due to a
Y2K readiness problem could have a material adverse effect on the Company. The
Company is continuing to assess such third-party risks. The Company is not
presently aware of any such significant exposure; but, there can be no guarantee
that the systems of third parties on which the Company relies will be converted
in a timely manner or that a failure to properly convert by another company
would not have a material adverse effect on the Company.
The Company currently intends to substantially complete the remaining
phases of the Y2K project, including the finalization of contingency plans in
the event of disruptions in obtaining needed supplies and services, prior to
June 30, 1999. The costs associated with the project are not expected to exceed
$766,000 (of which approximately $580,766 had been incurred as of March 31,
1999), and are not deemed to materially impact the Company's consolidated
financial position, results of operations or cash flows in future periods. The
Company is actively correcting and replacing the identified systems which are
not Y2K ready in order to ensure its ability to continue to meet its internal
needs and those of its customers and suppliers.
The Company believes that the most reasonably likely worst-case scenarios
that it might confront with respect to Y2K issues have to do with third parties
not being Y2K compliant. The Company has evaluated vendor and customer
compliance and will implement contingency plans, such as alternate vendor
opportunities, after examining compliance evaluations.
Based upon the planning and implementation completed to date, the Company
believes that, with modifications to existing software, conversions to new
software, and appropriate remediation of embedded chip equipment, the Y2K issue
is not reasonably likely to pose significant operational problems for the
Company's information technology systems and embedded chip equipment.
(e) Liquidity and Capital Resources
The following table lists selected cashflow and balance sheet data for
fiscal years 1999, 1998 and 1997:
($ in 000's) 1999 1998 1997
---------------------------------------
Cashflow from operations $ 9,499 $13,755 $ 4,740
Quick assets 42,381 33,462 16,207
Working Capital 43,112 35,403 25,017
Long-Term Liabilities 33,973 7,040 3,071
Shareholders' Equity 67,548 44,164 33,084
Cashflow from operations of $9.5 million for fiscal 1999 was primarily from
net income enhanced by an increase in accounts payable and accrued liabilities,
partially offset by increases in accounts receivable and inventories. The
increases in accounts payable and inventories are due to higher levels of raw
material and packaging inventories acquired to support increased sales of
generic products and higher finished goods inventories associated with the
acquisition of Micro-K(R). Receivables also increased due to the higher sales
and the $13.3 million arbitration award (See Note 19 of Notes to Consolidated
Financial Statements). Accrued liabilities increased due to an increase in
salaries, wages, benefits and income taxes. These changes in the components of
current assets and liabilities, partially offset by a decline in cash and
marketable securities, resulted in a $7.7 million increase in working capital in
fiscal 1999.
Long-term liabilities increased to $34 million in fiscal 1999 from $7
million as a result of $25 million in borrowings incurred to finance the
acquisition of the Micro-K(R) product line and the partial financing of the
purchase of a new facility of $2.3 million. The new facility was acquired to
provide additional distribution and office space for the Company's branded and
generic pharmaceutical businesses.
Investing activities for fiscal 1999 included capital expenditures of $5.8
million, the investment of $7.6 million of cash in marketable securities and a
cash payment of $11.1 million in connection with the acquisition of the
Micro-K(R) product line. Capital expenditures relate primarily to the
acquisition of the new facility and equipment to expand production capacity for
generic products. In addition, the Company had capital projects in progress at
March 31, 1999 that it estimates will require $1.3 million to complete in the
next fiscal year. The majority of this amount relates to the cost to complete
the upgrade of the Company's business software and network systems which is
estimated at $0.6 million.
The Company believes that existing cash and securities balances, cash
generated from operating activities and funds available under its credit
facility will be adequate to fund operating activities in the short and long
term, including near and long term debt obligations, capital improvements,
product development activities and expansion of marketing capabilities for the
branded pharmaceutical business for the presently foreseeable future. As of
March 31, 1999 the Company has a loan agreement expiring June 18, 2000 with
LaSalle National Bank. The agreement provides for a revolving line of credit for
borrowing up to $40 million. The Company had cash borrowing of $25 million and
$4.2 million in open letters of credit issued under this facility.
Ratios. The following table lists selected financial ratios for the fiscal
years 1999, 1998 and 1997:
1999 1998 1997
--------------- --------------- --------------
Working Capital Ratio 2.6 to 1 3.1 to 1 5.8 to 1
Quick Ratio 1.6 to 1 2.0 to 1 3.1 to 1
Debt to Equity .48 to 1 .12 to 1 .08 to 1
Total Liabilities to Equity .89 to 1 .55 to 1 .25 to 1
The Company's working capital ratio declined in fiscal 1999 as a result of
a decrease in the year end cash and marketable securities balance to $10.2
million from $18.2 million at the end of fiscal 1998. The decrease relates
primarily to the $11.1 million cash payment made in connection with the
acquisition of the Micro-K(R) product line.
The Company's debt to equity and total liabilities to equity ratios
increased due to the $25 million increase in long term debt associated with
increased borrowings from its credit facility to finance the Micro-K(R)
acquisition and $2.3 million in mortgage debt incurred to purchase the new
office and distribution facility.
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.
(f) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133 " Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on its results of operations, financial
position or cash flows.
SOP 98-5 "Reporting on the Costs of Start-up Activities," requires that
costs be expensed as incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company believes that the adoption of SOP 98-5 will have no material effect on
its financial statements.
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of KV Pharmaceutical Company:
We have audited the consolidated balance sheets of KV Pharmaceutical Company and
Subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted the 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 at March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 14, 1999
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
ASSETS 1999 1998
- ------ ---------------- ---------------
Current Assets:
Cash and cash equivalents $ 2,616,857 $ 18,157,595
Marketable securities,
available-for-sale 7,523,380 -
Receivables, less allowance for
doubtful accounts of $631,006
and $332,244 in 1999 and 1998,
respectively 18,988,162 15,304,340
Receivable, arbitration award 13,253,000 -
Inventories 23,652,712 15,606,037
Deferred income taxes 3,379,434 2,949,434
Prepaid and other current assets 167,736 541,989
--------------- ---------------
Total Current Assets 69,581,281 52,559,395
Property and equipment, less
accumulated depreciation 18,966,483 12,436,533
Intangibles and other assets,
net of amortization 39,442,396 3,364,899
=============== ===============
TOTAL ASSETS $127,990,160 $ 68,360,827
=============== ===============
LIABILITIES
Current Liabilities:
Accounts payable $ 8,667,394 $ 4,280,492
Accrued liabilities 17,090,215 12,317,432
Current maturities of long-term debt 711,669 558,333
--------------- ---------------
Total Current Liabilities 26,469,278 17,156,257
Long-term debt 31,490,553 4,902,222
Deferred income taxes 379,000 535,000
Other long-term liabilities 2,103,696 1,603,131
--------------- ---------------
TOTAL LIABILITIES 60,442,527 24,196,610
--------------- ---------------
SHAREHOLDERS' EQUITY
7% Cumulative Convertible
Preferred Stock, $.01 par value;
$25.00 stated and liquidation
value; 840,000 shares authorized;
issued and outstanding - 241,000
shares in 1999 and 1998 2,410 2,410
Class A and Class B Common Stock,
$.01 par value; 150,000,000 and
75,000,000 shares authorized,
respectively;
Class A-issued 11,923,319 and
11,760,078 in 1999 and 1998 119,233 117,601
Class B-issued 6,393,867 and
6,442,914 in 1999 and 1998 - 63,939 64,429
(convertible into Class A shares
on a one-for-one basis)
Additional paid-in capital 34,531,297 34,042,044
Retained earnings 32,910,844 9,992,686
Accumulated comprehensive
loss, net (25,137) -
Less: Treasury Stock, 35,619 shares
each of Class A and Class B Common
Stock, at cost (54,953) (54,953)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 67,547,633 44,164,217
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $127,990,160 $ 68,360,827
============== ==============
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
--------------------------------------------
Net Revenues $ 114,860,315 $ 98,486,060 $ 57,890,678
------------- ------------- ------------
Costs and Expenses:
Manufacturing costs 61,414,775 56,482,539 29,478,372
Research and development 6,883,642 5,751,995 4,835,478
Selling and administrative 22,201,114 19,104,051 13,817,802
Amortization of intangible
assets 243,550 254,261 187,758
------------- ------------- -------------
Total costs and expenses 90,743,081 81,592,846 48,319,410
------------- ------------- -------------
Operating income 24,117,234 16,893,214 9,571,268
------------- ------------- -------------
Other income (expense):
Arbitration award,
net of expenses 12,722,956 - -
Interest and other income 1,290,892 550,186 146,481
Interest expense (498,335) (452,262) (411,237)
------------- ------------- -------------
Total other income (expense) 13,515,513 97,924 (264,756)
------------- ------------- -------------
Income before income taxes 37,632,747 16,991,138 9,306,512
Provision for income taxes 14,292,546 5,687,382 383,000
------------- ------------- -------------
Net Income $ 23,340,201 $ 11,303,756 $ 8,923,512
============= ============= =============
Net Income per Common Share-Basic
(after deducting preferred
dividends of $421,751 in 1999,
1998 and 1997, respectively) $ 1.26 $ 0.60 $ 0.48
============= ============ =============
Net Income per Common
Share-Diluted $ 1.17 $ 0.58 $ 0.47
============= ============ =============
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended March 31, 1999, 1998 and 1997
Class A Class B Additional Retained Accumulated Total
Preferred Common Common Paid In Treasury Earnings Comprehensive Shareholders'
Stock Stock Stock Capital Stock (Deficit) Loss, Net Equity
---------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $2,410 $71,207 $47,474 $30,235,926 $(54,953) $(9,752,154) $ - $20,549,910
Net income - - - - - 8,923,512 - 8,923,512
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)
------------------------------------------------------------------------------------------------
Balance at March 31, 1997 2,410 77,175 43,766 33,844,685 (54,953) (828,642) - 33,084,441
Net income - - - - - 11,303,756 - 11,303,756
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)
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 (54,953) 9,992,686 - 44,164,217
Comprehensive income
Net income - - - - - 23,340,201 - 23,340,201
Other comprehensive loss,
net of tax:
Net unrealized loss on
available-for-sale
securities - - - - - - (25,137) (25,137)
-------- -----------
Total comprehensive income - - - - - - (25,137) 23,315,064
Dividends paid on preferred
stock - - - - - (421,751) - (421,751)
Conversion of 123,000
shares of Class B shares
to Class A shares - 1,231 (1,231) - - - - -
Stock Options exercised,
46,478 shares of Class A - 462 - 260,301 - - - 260,763
And 74,129 of Class B
Less 88 shares of Class A
repurchased - - 741 228,952 - - - 229,693
Class A shares canceled -
6,146 shares - (61) - - - - - (61)
Stock Split - payment of partial
shares from 1998 - - - - - (292) - (292)
------------------------------------------------------------------------------------------------
Balance at March 31, 1999 $2,410 $119,233 $63,939 $34,531,297 $(54,953) $32,910,844 $(25,137) $67,547,633
================================================================================================
See Accompanying Notes to Consolidated Financial Statements
KV PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net Income $23,340,201 $11,303,756 $ 8,923,512
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges 1,875,322 1,887,996 1,594,300
Stock options issued as compensation - - 114,300
Changes in deferred taxes (586,000) (1,524,434) (890,000)
Changes in deferred compensation 500,565 689,812 152,089
Changes in operating assets and liabilities:
Increase in receivables (3,683,822) (6,724,742) (1,298,139)
Increase in receivable arbitration award (13,253,000) - -
Increase in inventories (8,046,675) (2,820,449) (4,335,426)
Decrease (increase) in prepaid and other assets 193,206 (799,947) (991,412)
Increase in accounts payable and
accrued liabilities 9,159,685 11,743,305 1,470,848
------------------- ----------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,499,482 13,755,297 4,740,072
------------------- ----------------- ------------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (5,846,313) (2,452,459) (1,903,134)
Purchase of marketable securities (7,563,926) - -
Product acquisition (36,140,000) - -
------------------- ----------------- ------------------
NET CASH (USED IN) INVESTING ACTIVITIES (49,550,239) (2,452,459) (1,903,134)
------------------- ----------------- ------------------
FINANCING ACTIVITIES
Principal payments on long-term debt (558,333) (548,786) (744,203)
Proceeds from credit facility 25,000,000 - -
Proceeds from sale of Common Stock - - 3,500,000
Dividends paid on Preferred Stock (421,751) (421,751) (105,437)
Exercise of Common Stock options 490,103 197,771 102,156
------------------- ----------------- ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 24,510,019 (772,766) 2,752,516
------------------- ----------------- ------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,540,738) 10,530,072 5,589,454
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF YEAR 18,157,595 7,627,523 2,038,069
------------------- ----------------- ------------------
END OF YEAR $ 2,616,857 $18,157,595 $ 7,627,523
=================== ================= ==================
Non-cash investing and financing activities:
Portion of building acquired through proceeds
from a term loan $ 2,300,000 $ 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.
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.
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 $1,778,000 at March 31, 1999 and
$10,000,000 at March 31, 1998.
Accounts Receivable-Trade
The Company extends unsecured credit to its customers. Sales to a
single company aggregated 19%, 12% and 15% for the years ended March 31, 1999,
1998 and 1997, respectively. In addition, the balance due from this company
represented approximately 30% and 18% of consolidated accounts receivable as of
March 31, 1999 and 1998.
Marketable Securities
Marketable securities are stated at fair market value or historical
cost in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and consist
of investments in U.S. government agency securities and corporate bonds maturing
through 2001.
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future, are
valued at fair value. Realized gains and losses, based on the amortized cost of
the specific security, are included in other income as investment gains
(losses). Unrealized gains and losses are recorded, net of related income tax
effects, as a separate component of equity.
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 life using the straight line method.
Intangibles and Other Assets
The excess of cost over the fair value of the net assets of the
Company's Particle Dynamics subsidiary, at the time of acquisition is being
amortized on a straight line basis over 40 years. The Micro-K(R) product
acquisition is being amortized on a straight line basis over 20 years. All other
intangible assets and deferred charges are being amortized over periods varying
from 5 to 17 years on a straight line basis. The Company reviews intangible
assets for possible impairment if there is a significant event that
detrimentally effects operations. Impairment is assessed using estimates of the
non-discounted future earnings potential of the entity or assets acquired. The
Company has estimated that no impairment losses have occurred through March 31,
1999.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to its
customers. 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. Royalties are earned based on sale of
products. Other non-refundable payments specified in the agreements, for which
there are no future obligations, such as milestone payments and research and
development reimbursements, are recognized as income when due.
Research and Development
Research and development costs, including costs funded by third
parties, are expensed in the period incurred. Payments received from third
parties for research and development are offset against expenses when the
parties are billed.
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 the assumed
conversion of Preferred Stock are included in the calculation of diluted
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 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 has
applied the new method, are disclosed in Note 12.
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 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have significant impact on its results of operations, financial
position or cash flows.
SOP 98-5 "Reporting on the Costs of Start-up Activities," requires that
costs be expensed as incurred. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 1998. Management
believes that the adoption of SOP 98-5 will have no material effect on its
financial statements.
Reclassifications
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current year presentation.
2. Acquisition
In the fourth quarter of fiscal 1999, the Company acquired the
world-wide rights and trademark to Micro-K(R) from Wyeth-Ayerst Laboratories,
the pharmaceutical division of American Home Products Corporation for a cash
payment of $36 million, consisting of an $11 million payment from available cash
and $25 million drawn on its revolving line of credit. The intangible asset
(product rights) related to the acquisition is being amortized on the
straight-line basis over a period of 20 years.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition of Micro-K(R) had occurred on April 1, 1997,
after giving effect to certain adjustments for interest expense, amortization
and income taxes. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition been made on April 1, 1997, nor are they indicative of
future results. The Company intends to pursue a strategy designed to increase
sales of the Micro-K product line through promotion to physicians. In connection
with the implementation of such strategy, the Company expects to incur
additional selling and administrative costs, which cannot be included as "pro
forma" adjustments under Regulation S-X of the Securities Act because the amount
of these costs are not reliably determinable. As a result, the unaudited pro
forma net income and pro forma per share amounts do not purport to represent
what the Company's results of operations would have been if the acquisition of
the Micro-K product line had occurred on April 1, 1997, and is not intended to
project the Company's results of operations for any future period (in thousands,
except per share amounts):
Year Ended March 31,
1999 1998
---- ----
Total Revenues as reported $114,860 $ 98,486
Total Revenues - Pro forma (unaudited) 133,372 124,322
Net Income as reported 23,340 11,304
Net Income - Pro forma (unaudited) 26,591 18,437
Earnings Per Share:
Basic as reported $ 1.26 $ 0.60
====== ======
Diluted as reported $ 1.17 $ 0.58
====== ======
Basic - Pro forma (unaudited) $ 1.44 $ 1.00
====== ======
Diluted - Pro forma (unaudited) $ 1.33 $ 0.94
====== ======
3. Inventories
Inventories as of March 31, consist of:
1999 1998
---- ----
Finished goods $11,732,630 $ 8,954,290
Work-in-process 2,283,110 1,883,395
Raw materials 10,185,260 5,130,103
------------ ------------
24,201,000 15,967,788
Reserves for obsolescence (548,288) (361,751)
-------------- --------------
$23,652,712 $15,606,037
=========== ===========
4. Marketable Securities
The composition of the available-for-sale investments portfolio at
March 31, 1999 was:
Amortized Unrealized Market
Cost Losses Value
--------- ---------- ------
U.S. Government agency
securities $ 1,000,000 $(1,934) $ 998,066
Corporate bonds 6,563,926 (38,612) 6,525,314
------------ --------- -----------
$ 7,563,926 $(40,546) $7,523,380
=========== ========= ==========
All securities mature in one to three years. Management does not intend
to hold these securities to maturity and expects to liquidate them during fiscal
year 2000, accordingly they are classified as current assets. There were no
marketable securities in fiscal 1998.
5. Comprehensive Income
Effective April 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for reporting of all
changes in equity from non-shareholder sources. There was no effect on prior
year financial statements.
Changes in accumulated comprehensive loss for the year end March 31,
1999 are as follows:
Before-Tax Tax Net-of-Tax
Amount Benefit Amount
--------------------------------------
Unrealized losses on securities:
Unrealized losses arising
during the period $ (40,546) $ 15,409 $ (25,137)
Less: reclassification adjustment
for losses realized in net income - - -
---------- --------- ----------
Net unrealized losses $ (40,546) $ 15,409 $ (25,137)
========= ======== ==========
6. Property and Equipment
Property and equipment as of March 31, consist of:
1999 1998
---- ----
Land and improvements $ 2,055,567 $ 1,490,567
Building and building improvements 9,625,596 6,860,735
Machinery and equipment 14,989,656 13,267,562
Office furniture and equipment 3,830,360 3,323,955
Leasehold improvements 2,873,788 2,526,950
Construction-in-progress (estimated
costs to complete at
March 31, 1999 - $1,258,000) 2,840,330 600,618
------------ -----------
36,215,297 28,070,387
Less accumulated depreciation and
amortization (17,248,814) (15,633,854)
------------ -----------
Net property and equipment $18,966,483 $12,436,533
=========== ===========
Estimated useful lives:
Land improvements 10 years
Building 25 to 40 years
Building improvements 10 years
Machinery and equipment 3 to 15 years
Leasehold improvements Lease life plus renewal period,
or 10 years
Office furniture and equipment 3 to 10 years
Purchases of property and equipment were $8,146,313 and $5,952,459 for
fiscal years 1999 and 1998, respectively. Depreciation and amortization of
property and equipment was $1,616,363, $1,633,735 and $1,406,542 for 1999, 1998
and 1997, respectively.
7. Intangibles and Other Assets
Intangibles and other assets as of March 31, consist of:
1999 1998
---- ----
Goodwill $2,138,561 $2,138,561
Product rights 36,140,000 -
Financing charges 400,689 586,656
Cash surrender value of life
insurance and split-dollar
life insurance 942,787 850,989
Trademarks and patents 1,047,249 865,206
Deposits 341,015 446,807
Other 291,200 351,200
---------- ---------
41,301,501 5,239,419
Less accumulated amortization (1,859,105) (1,874,520)
---------- ----------
Net intangibles and other assets $39,442,396 $3,364,899
=========== ==========
Amortization of goodwill is being charged to operations at $55,404 per
year. Amortization of product rights and all other deferred charges was
$188,146, $198,857 and $132,354 for 1999, 1998 and 1997, respectively.
8. Accrued Liabilities
Accrued liabilities as of March 31, consist of:
1999 1998
---- ----
Salaries, wages, incentives
and benefits $3,481,503 $2,214,662
Interest 125,424 72,999
Income taxes 7,855,331 2,884,522
Professional fees 763,530 875,891
Revenue sharing (see Note 16) 3,300,000 4,911,634
Other 1,564,427 1,357,724
---------- -----------
$17,090,215 $12,317,432
9. Long-Term Debt
Long-term debt as of March 31, consists of:
1999 1998
---- ----
Revolving credit line $25,000,000 $ -
Industrial revenue bonds 1,830,000 2,155,000
Building mortgages 5,372,222 3,305,555
----------- -----------
32,202,222 5,460,555
Less current portion (711,669) (558,333)
----------- -----------
Long-term debt $31,490,553 $4,902,222
=========== ==========
As of March 31, 1999, the Company has a loan agreement expiring June
18, 2000 with LaSalle National Bank. The agreement provides for a revolving line
of credit for borrowing up to $40,000,000. The credit facility is unsecured and
interest is currently charged at the LIBOR rate of 4.94% plus 200 basis points
or 6.94% at March 31, 1999. At March 31, 1999, the Company had cash borrowing of
$25,000,000 and $4,149,746 in open letters of credit issued under this facility.
The agreement includes covenants that impose minimum levels of tangible net
worth and earnings before interest, taxes, depreciation and amortization, a
maximum leverage ratio, and limit capital expenditures and dividend payments.
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, which may only be accessed in
case of default on the bonds. The bonds do not allow the holder to require the
Company to redeem the bonds.
The building mortgages bear interest at 8.53% and 7.95% with monthly
principal payments of $19,444 and $12,778 plus interest through June 30, 2002
and March 11, 2004 with final payments of the remaining principal balances
outstanding plus accrued and unpaid interest due on June 18, 2002 and March 11,
2004, respectively.
The aggregate maturities of long-term debt as of March 31, 1999 are as
follows:
2000 $ 711,669
2001 25,711,669
2002 711,669
2003 2,850,559
2004 2,011,656
Later Years 205,000
-------------
$ 32,202,222
=============
The Company paid interest of $445,910, $465,040, and $482,471 during
the years ended March 31, 1999, 1998 and 1997, respectively.
10. 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:
2000 $ 1,264,269
2001 1,153,955
2002 1,123,391
2003 1,030,555
2004 993,728
Later Years 939,831
------------
$ 6,505,729
============
Total rent expense for the years ended March 31, 1999, 1998 and 1997
was $1,456,540, $1,076,628 and $1,189,349, 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 its present insurance will cover any potential claims that
may be asserted in the future.
The Company is subject to legal proceedings and claims which arise 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 or operations.
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 $500,565, $689,812 and $152,089
under this agreement in 1999, 1998 and 1997, respectively.
11. Income Taxes
The fiscal 1999 provision was based on the estimated federal and state
taxable income using the statutory rates. The fiscal 1998 provision was based on
the estimated federal and state taxable income using statutory rates, as well as
utilization of its 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 carry forwards were available for fiscal
1999 or 1998.
Years Ended March 31,
-------------------
1999 1998 1997
---- ---- ----
Provision
Current
Federal $ 13,373,000 $ 6,233,000 $ 804,000
State 1,506,000 978,000 469,000
------------ ----------- ----------
14,879,000 7,211,000 1,273,000
------------ ----------- ----------
Deferred
Federal (528,000) (1,365,000) (804,000)
State (58,000) (159,000) (86,000)
------------ ----------- ----------
(586,000) (1,524,000) (890,000)
------------ ----------- ----------
$14,293,000 $ 5,687,000 $ 383,000
============ =========== ==========
The reasons for the differences between the provision for income taxes
and the expected federal income taxes at the statutory rate are as follows:
1999 1998 1997
---- ---- ----
Computed income tax expense
at statutory rate $13,171,000 $5,947,000 $3,164,000
Change in valuation allowance - (1,568,000) (3,392,000)
State income taxes, less
federal income tax benefit 1,070,000 696,000 383,000
Other 52,000 612,000 228,000
----------- ---------- -----------
Provisions for income taxes $14,293,000 $5,687,000 $ 383,000
=========== ========== ===========
As of March 31, 1999, and 1998, the tax effect of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amount are as follows:
1999 1998
Current Non-Current Current Non-Current
------- ----------- ------- -----------
Fixed asset basis differences $ - $(1,167,000) $ - $(1,136,000)
Reserve for inventory and
receivables 2,281,000 - 2,506,000 -
Vacation pay reserve 469,000 - 381,000 -
Deferred compensation - 788,000 - 601,000
Other 629,000 - 62,000 -
---------- -------------- ------------ --------------
Net deferred tax asset
(liability) $3,379,000 $ (379,000) $ 2,949,000 $ (535,000)
========== ============= =========== =============
The Company paid income taxes of $9,213,000, $4,754,088 and $846,000
during the years ended March 31, 1999, 1998 and 1997, respectively.
12. Employee Benefits
Stock Option Plan
The Company established the KV Pharmaceutical Company Incentive Stock
Option Plan for key employees and reserved 3,000,000 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 its 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.
The following summary shows the transactions for the fiscal years 1999,
1998 and 1997 under option arrangements:
Options Outstanding Options Exercisable
-------------------- --------------------
Average Average
No. of Price Per No. of Price Per
Shares Share Shares Share
------ --------- ------ ---------
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
Options granted 423,398 15.77 - -
Options becoming exercisable - - 234,136 8.61
Options exercised (120,607) 5.22 (120,607) 5.22
Options canceled (103,370) 11.31 (19,946) 9.57
--------- ---------
Balance, March 31, 1999 1,855,175 $ 9.67 1,020,409 $ 8.58
========= =========
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 $3.48 for A options, $2.21 for B options, $9.17 for
A options, $5.29 for B options, $5.23 for A options and $4.02 for B options in
1999, 1998 and 1997, respectively. The weighted-average significant assumptions
used to determine those values using the Black-Scholes option pricing model for
1999, 1998 and 1997, respectively, were: volatility of .6630, .6700 and .6212;
dividend yield of 0% in all three years; average risk-free interest rate of
return of 5.0%, 6.3% and 6.6%; expected option lives ranging from 3 to 10 years.
The following table summarizes information about stock options
outstanding at March 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding Life Average Exercisable Average
Prices at 3/31/99 Remaining Exercise Price at 3/31/99 Exercise Price
- ------------------------------ ---------------------------------- --------------- -----------------
$ 1.84 - $ 3.00 52,667 2 Years $ 2.22 42,829 $ 2.21
$ 3.01 - $ 6.00 470,346 3 Years $ 4.88 300,223 $ 4.88
$ 6.01 - $ 9.00 465,545 5 Years $ 8.17 272,856 $ 8.37
$ 9.01 - $12.00 413,325 2 Years $11.47 339,150 $11.71
$12.01 - $20.88 452,938 9 Years $15.37 64,996 $15.32
The pro-forma effect on earnings for the year ended March 31, 1999,
1998 and 1997 of the method consistent with SFAS No. 123 would be to reduce
reported net income by approximately $0.8 million, $2.2 million and $1.7
million, respectively, to approximately $22.5 million, $9.1 million and $7.2
million.
The pro-forma effect on basic earnings per share for the years ended
March 31, 1999, 1998 and 1997 of this method would be to reduce net income per
share by $.05 per share, $.12 per share and $.10 per share, respectively, to
$1.21 per share, $.48 per share and $.38 per share.
The pro-forma effect on diluted earnings per share for the years ended
March 31, 1999, 1998 and 1997 of this method would be to reduce net income per
share by $.04 per share, $.12 per share and $.09 per share, respectively, to
$1.13 per share, $.46 per share and $.38 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 1999 and 1998 and $50,000 in 1997. 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 $421,000, $222,000 and $78,000 were made in
1999, 1998 and 1997, 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 $86,218, $79,560 and $63,770
in 1999, 1998 and 1997, 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 $225,000 of accrued health insurance expense reserves as of March
31, 1999 and $125,000 as of March 31, 1998, for claims incurred but not
reported. 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 $1,390,000, $1,095,000, and $1,090,000 in fiscal
1999, 1998 and 1997, respectively.
13. Related Party Transactions
A director of the Company was associated with a law firm that rendered
various legal services to the Company. The Company paid the firm approximately
$221,460, $239,000 and $257,000 during the years ended March 31, 1999, 1998 and
1997, 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, 1999, 1998 and 1997 totaled
$241,143, $237,164 and $231,885, respectively.
14. Equity Transactions
As of March 31, 1999, the Company had 241,000 shares of 7% Cumulative
Convertible Preferred Stock (par value $.01 per share) outstanding 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. No dividends may be
paid on Class A or Class B Common Stock unless all dividends on the Cumulative
Convertible Preferred Stock have been declared and paid. Undeclared and
unaccrued cumulative preferred dividends at both March 31, 1999 and 1998 were
$2,203,644 or $9.14 per share. Also, under the terms of its credit agreement,
the Company may not pay cash dividends in excess of 25% of the prior fiscal
year's consolidated net income.
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 on other
matters.
Under the terms of the Company's current loan agreement (see Note 9),
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.
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 its 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.
15. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---- ---- ----
Numerator:
Net income $23,340,201 $11,303,756 $ 8,923,512
Preferred Stock dividends (421,751) (421,751) (421,751)
------------- -------------- --------------
Numerator for basic earnings per
share--income available to common
shareholders 22,918,450 10,882,005 8,501,761
Effect of dilutive securities:
Preferred Stock dividends 421,751 421,751 421,751
------------- ------------- -------------
Numerator for diluted earnings per
share-income available to common share-
holders after assumed conversions $23,340,201 $11,303,756 $ 8,923,512
============ ============= ============
Denominator:
Denominator for basic earnings per
share--weighted-average shares 18,201,287 18,093,896 17,758,992
------------ ------------- -------------
Effect of dilutive securities:
Employee stock options 866,490 642,912 359,055
Convertible Preferred Stock 903,750 903,750 903,750
------------ ------------- -------------
Dilutive potential Common Shares 1,770,240 1,546,662 1,262,805
------------ ------------ -------------
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 19,971,527 19,640,558 19,021,797
=========== ============ ============
Basic Earnings per Share (1): $ 1.26 $ 0.60 $ 0.48
========== ========== ==========
Diluted Earnings per Share (1)(2) $ 1.17 $ 0.58 $ 0.47
========== ========== ==========
(1) The two-class method for Class A and Class B Common Stock is not presented
because the earnings per share are equivalent to the if converted method
since dividends were not declared or paid and each class of common stock
has equal ownership of the Company.
(2) Employee stock options to purchase 58,838 shares of Class A Common Stock at
March 31, 1998 and 28,350 shares of Class A Common Stock at March 31, 1997
are not presented because these options are anti-dilutive. The exercise
prices of these options exceeded the average market prices of the shares
under option in each respective period. There were no anti-dilutive
employee stock options as of March 31, 1999.
Options to purchase 500,000 shares of Class A Common Stock in each of the
three years ended March 31, 1999, sold in connection with an agreement
entered into in January 1996, are not presented because the minimum
exercise prices of these options exceeded the average market prices of the
shares under option in each respective period. As of March 31, 1999, all
options sold under this agreement had expired.
16. Agreements
In January 1997, the Company concluded a broad-based agreement with
Roche Holdings, 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 $3,000,000 to be made in
January 1997, 1998 and 1999, respectively. All of these non-refundable payments
were received and recorded as licensing revenue in the fourth quarter of each of
the respective fiscal years.
As part of a further collaboration under the agreement, KV's
wholly-owned subsidiary, ETHEX Corporation, began marketing in fiscal 1998 two
of Roche's brand name products generically under a revenue sharing arrangement
based on sales and gross margin.
17. Quarterly Financial Results (Unaudited)
($ in 000's, except per share data)
FISCAL 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
- ------------ ----------- ----------- ----------- ----------- ----
Net Sales $ 25,670 $ 26,406 $ 27,022 $ 35,762 $ 114,860
Gross Profit 10,515 11,759 13,517 17,655 53,446
Pretax Income (a) 4,150 4,956 6,454 22,073 37,633
Net Income (a) 2,570 3,062 4,020 13,688 23,340
Earnings Per Share-Basic (b) 0.14 0.16 0.21 0.75 1.26
Earnings Per Share-Diluted (b) 0.13 0.15 0.20 0.69 1.17
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 (a) 2,761 3,556 4,030 6,644 16,991
Net Income (a) 1,841 2,182 2,763 4,518 11,304
Earnings Per Share-Basic (b) 0.10 0.11 0.15 0.24 0.60
Earnings Per Share-Diluted (b) 0.09 0.11 0.14 0.23 0.58
Note:
- ----
(a) The fourth quarter of fiscal 1999 includes a non-recurring gain
associated with a $7.9 million arbitration award, net of expenses and
taxes (see Note 19) and a $3.0 million non-refundable payment associated
with an agreement with Roche Holdings, Ltd. (see Note 16). A $3.0 million
non-refundable payment was also received in the fourth quarter of fiscal
1998.
(b) 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.
18. Segment Reporting
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which revises reporting and
disclosure requirements for operating segments. The following information is
provided in accordance with the requirements of this statement.
The Company's operations are principally managed on a products and services
basis and are comprised of two reportable segments: Contract Services and
Generic Drugs. Contract Services sales are primarily inter-segment sales to the
Generic Drugs segment with sales to outside customers contributing 13% of its
revenues. The generic business sells prescription pharmaceuticals to major
wholesalers, chains and buying groups. All other includes the pharmaceutical
compound, licensing and branded businesses which do not meet the required
quantitative thresholds for reportability.
Segment profits are comprised of segment revenues less cost of
materials, production costs, depreciation and operating expenses. Only selling,
general and administrative expenses directly identifiable with a segment's
operations are included in profits. The majority of research and development,
general and administrative, amortization and interest expense, as well as
interest and other income, are not allocated to segments.
Revenues and profits for these segments are as follows:
Fiscal Year Corporate
Ended Contract Generic All Expenses and
March 31 Services Drugs Other Eliminations Consolidated
----------- -------- ------- ----- ------------ ------------
(Thousands of Dollars)
Total Revenues 1999 $33,234 $91,834 $18,970 $(29,178) $114,860
1998 27,063 79,193 20,096 (27,866) 98,486
1997 24,173 40,225 12,794 (19,301) 57,891
- ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ----------------
Segment Profits 1999 1,390 36,351 5,463 (5,571) 37,633
1998 817 25,090 9,142 (18,058) 16,991
1997 946 17,509 3,875 (13,023) 9,307
- ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ----------------
Identifiable Assets 1999 40,431 133,649 79,727 (125,817) 127,990
1998 37,193 95,152 21,940 (85,924) 68,361
1997 20,861 63,254 9,328 (52,081) 41,362
- ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ----------------
Property and
equipment additions 1999 4,433 93 498 3,122 8,146
1998 1,486 24 137 4,305 5,952
1997 1,640 227 73 - 1,940
- ---------------------------- ---------------- --------------- -------------- ---------------- ------------------ ----------------
Depreciation and
Amortization 1999 1,457 74 116 213 1,860
1998 1,479 78 104 227 1,888
1997 1,280 54 72 188 1,594
Elimination of intersegment revenues consists of revenues reported in
the internal management system which are not reportable as revenues under
generally accepted accounting principles. Consolidated revenues are principally
derived from customers in North America.
Property and equipment is all located in St. Louis, Missouri.
19. Nonrecurring Gain
Under a contract that the Company has with a supplier, issues arose
with respect to the timing of supply of a product and the supplier's failure to
pursue another product. The terms of the contract provided for binding private
arbitration between the parties which resulted in the Company receiving notice
of an award in December, 1998 of $13,253,000. The Arbitration Panel subsequently
directed the parties to have further discussions including possible replacement
products. Payment of the award was deferred pending the outcome of these
discussions. Subsequent attempts to obtain replacement products were
unsuccessful and the Company expects to be paid the arbitration award on or
before June 15, 1999. The award, net of related expenses of $530,000, is
reflected in Other Income in the Statement of Income and as an account
receivable in the Balance Sheet at March 31, 1999, and, net of applicable income
taxes, represents $.40 per common share on a diluted basis.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
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 its 1999 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 its 1999 Annual Meeting
of Shareholders, which involves the election of a director, is incorporated
herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "SECURITY OWNERSHIP OF
PRINCIPAL HOLDERS AND MANAGEMENT" in the Company's definitive proxy statement to
be filed pursuant to Regulation 14(a) for its 1999 Annual Meeting of
Shareholders, which involves the election of a director is incorporated herein
by this reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the caption "TRANSACTIONS WITH ISSUER"
in its definitive proxy statement to be filed pursuant to Regulation 14(a) for
its 1999 Annual Meeting of Shareholders, which involves the election of a
director, is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements: Page
The following consolidated financial statements
of the Company are included in Part II, Item 8:
Report of Independent Certified Public Accountants 36
Consolidated Balance Sheets as of
March 31, 1999 and 1998 18
Consolidated Statements of Income
for the Years Ended March 31, 1999, 1998 and 1997 19
Consolidated Statements of Shareholders'
Equity for the Years Ended March 31, 1999,
1998 and 1997 20
Consolidated Statements of Cash Flows
for the Years Ended March 31, 1999, 1998 and 1997 21
Notes to Financial Statements 22
2. Financial Statement Schedules:
Report of Independent Certified Public Accountants
regarding financial statement schedules
Schedule II - Valuation and Qualifying Account
(b) Reports on Form 8-K. A report on Form 8-K dated April 5,
1999 reporting KV Pharmaceutical Company's acquisition of
the world-wide rights and trademark to Micro-K(R) from
Wyeth Ayerst Laboratories, the pharmaceutical division of
American Home Products Corporation.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of KV Pharmaceutical Company:
The audits referred to in our report dated May 14, 1999 relating to the
consolidated financial statements of KV Pharmaceutical Company which is
contained in Item 8 of this Form 10-K included the audit of the financial
statement schedule listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based upon our
audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
St. Louis, Missouri
May 14, 1999
2. 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, 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
======= ========= ========= =========
Year Ended March 31, 1999:
Allowance for doubtful accounts $ 332,244 $ 412,566 $ 113,804 $ 631,006
Inventory obsolescence 361,751 1,031,569 845,032 548,288
------- --------- --------- ---------
$ 693,995 $ 1,444,135 $ 958,836 $ 1,179,294
======= ========= ========= =========
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.
3. Exhibits:
--------
See Exhibit Index on pages 47 through 52 of this Report. Management contracts
and compensatory plans are designated on the Exhibit Index.
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 4, 1999 By /s/ Marc S. Hermelin
----------------------------------
Vice Chairman of the Board
(Principal Executive Officer)
Date: June 4, 1999 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 4, 1999 By /s/ Marc S. Hermelin
---------------------------------
Marc S. Hermelin
Date: June 4, 1999 By /s/ Victor M. Hermelin
---------------------------------
Victor M. Hermelin
Date: By
---------------------------------
Garnet E. Peck, Ph.D.
Date: June 4, 1999 By /s/ Norman D. Schellenger
---------------------------------
Norman D. Schellenger
Date: June 4, 1999 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 Form 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, which was filed as Exhibit 4(f) to
the Company's Annual Report or Form 10-K for the year ended
March 31, 1998, is incorporated herein by this reference.
4(g) Deed of Trust and Security Agreement dated as of October 16,
1997, between the Company and LaSalle, which was filed as
Exhibit 4(g) to the Company's Annual Report or Form 10-K for
the year ended March 31, 1998, is incorporated herein by this
reference.
4(h) First Amendment, dated as of October 28, 1998, to Loan
Agreement between the Company and its subsidiaries and
LaSalle, filed herewith.
4(i) Second Amendment, dated as of March 11, 1999, to Loan
Agreement between the Company and its subsidiaries 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 Form 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 Form 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 Form 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 and 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.
10(dd) Asset Purchase Agreement by and between K-V Pharmaceutical
Company and American Home Products Corporation, acting
through its Wyeth-Ayerst Laboratories division, dated as of
February 11, 1999, which was filed as Exhibit 2.1 to the
Company's Report on Form 8-K filed April 5, 1999, is
incorporated herein by this reference.
10(ee)* Amendment, dated as of October 30, 1998, to Employment
Agreement between the Company and Marc S. Hermelin, Vice
Chairman, filed herewith.
10(ff) Exclusive License Agreement, dated as of April 1, 1999
between Victor M. Hermelin as licensor and the Company as
licensee, filed herewith.
21 List of Subsidiaries, filed herewith.
23 Consent of BDO Seidman, LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
* Management contract or compensation plan.